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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 000-22877
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UPC POLSKA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1487156
(State or Other Jurisdiction (I.R.S. Employer of Identification No.)
Incorporation or Organization)
4643 ULSTER STREET 80237
SUITE 1300 (Zip Code)
Denver, Colorado
(Address of Principal Executive Offices)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (303) 770-4001
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NOT APPLICABLE
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(Title of Class)
Indicate by check mark (X) whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the common equity was sold, or the
average bid and asked prices of such common equity, as of a specified date
within 60 days prior to the date of filing. (See definition of affiliate in
Rule 405.) ZERO
The number of shares outstanding of UPC Polska, Inc.'s common stock as of
December 31, 2000, was:
COMMON STOCK 1,000
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
The Registrant meets the conditions set forth in General Instructions
(I)(1)(a) and (b) of Form 10-K and is therefore filing this Form with the
reduced disclosure format.
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UPC POLSKA, INC.
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
PAGE NUMBER
-----------
PART I
ITEM 1. Business.................................................... 3
ITEM 2. Properties.................................................. 23
ITEM 3. Legal Proceedings........................................... 24
PART II
ITEM 5. Market for Company's Common Equity and Related Stockholder
Matters..................................................... 26
ITEM 6. Selected Financial Data..................................... 26
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 27
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk... 40
ITEM 8. Financial Statements and Supplementary Data................. 42
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 82
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 83
1
PART I
UPC Polska, Inc. (previously @Entertainment, Inc.), a Delaware corporation
which is wholly-owned by United Pan-Europe Communications N.V. ("UPC"), was
established in May 1997. References to the "Company" mean UPC Polska, Inc. and
its consolidated subsidiaries, including Poland Communications, Inc. ("PCI"),
UPC Broadcast Centre Limited (previously At Entertainment Limited then Wizja TV
Limited) ("UPC Broadcast Centre Ltd"), Medialne Towarzystwo Akcyjne S.A., Wizja
TV B.V. (previously Sereke Holding B.V.) ("Wizja TV B.V."), Wizja TV
Sp. z o.o. ("Wizja TV Sp. z o.o."), Atomic TV Sp. z o.o. (previously Ground Zero
Media Sp. z o.o.) ("Atomic TV"), At Media Sp. z o.o. ("At Media"), and
@Entertainment Programming, Inc. ("@EP").
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, that are not historical facts but rather reflect
the Company's current expectations concerning future results and events. The
words "believes," "expects," "intends," "plans," "anticipates," "likely,"
"will," "may," "shall" and similar expressions identify such forward-looking
statements. Such forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause the actual results,
performance or achievements of the Company (or entities in which the Company has
interests), or industry results, to differ materially from future results,
performance or achievements expressed or implied by such forward-looking
statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements which reflect management's view only as of the date of this Annual
Report on Form 10-K. The Company undertakes no obligation to publicly release
the result of any revisions to these forward-looking statements which may be
made to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events, conditions or circumstances.
The risks, uncertainties and other factors that might cause such differences
include, but are not limited to: (i) general economic conditions in Poland and
in the pay television business in Poland; (ii) changes in regulations the
Company operates under; (iii) uncertainties inherent in new business strategies,
including the Company's satellite television business, new product launches and
development plans, which the Company has not used before; (iv) rapid technology
changes; (v) changes in, or failure or inability to comply with government
regulations; (vi) the development and provision of programming for new
television and telecommunications technologies; (vii) the continued strength of
competitors in the multichannel video programming distribution industry and
satellite services industry and the growth of satellite delivered programming;
(viii) future financial performance, including availability, terms and
deployment of capital; (ix) the ability of vendors to deliver required
equipment, software and services on schedule at the budgeted cost; (x) the
Company's ability to and hold and attract qualified personnel; (xi) changes in
the nature of strategic relationships with joint ventures; (xii) the overall
market acceptance of those products and services, including acceptance of the
pricing of those products and services; (xiii) possible interference by
satellites in adjacent orbital positions with the satellites currently being
used for the Company's satellite television business; (xiv) acquisition
opportunities; and (xv) the Company's new ownership structure.
EXCHANGE RATE
In this Annual Report on Form 10-K, references to "U.S. dollars" or "$" are
to U.S. currency, references to "Deutsche-Marks" or "DM" are to German currency,
references to "Euros" or "EUR" are to EU currency, references to "French francs"
or "FF" are to French currency and references to "zloty" or "PLN" are to Polish
currency. The Company has presented its primary consolidated financial
statements in accordance with generally accepted accounting principles in the
U.S. in U.S. dollars. Amounts originally measured in zloty for all periods
presented have been translated into U.S. dollars.
2
For your convenience, this Annual Report contains certain zloty, Euro and
Deutsche-Mark amounts not derived from the consolidated financial statements
which have been translated into U.S. dollars. Readers should not assume that the
zloty, Euro, and Deutsche-Mark amounts actually represent such U.S. dollar
amounts or could be, or could have been, converted into U.S. dollars at the
rates indicated or at any other rate. Unless otherwise stated, such U.S. dollar
amounts have been derived by converting from zloty to U.S. dollars at the rate
of PLN 4.1432 = $1.00, the exchange rate quoted by the National Bank of Poland
at noon on December 29, 2000, and by converting from Euro to U.S. dollars at the
rate of EUR 1.156 = $1.00, the exchange rate quoted by OANDA.com on
December 29, 2000, and by converting from Deutsche-Marks to U.S. dollars at the
rate of DM 2.1024 = $1.00, the exchange rate quoted by the National Bank of
Poland at noon on December 29, 2001. These rates may differ from the actual
rates in effect during the periods covered by the financial information
discussed herein. The Federal Reserve Bank of New York does not certify for
customs purposes a noon buying rate for zloty.
ITEM 1. BUSINESS
BUSINESS
GENERAL
The Company is the leading provider of pay television in Poland and is
engaged principally in the provision of cable television services and in the
development, packaging and delivery of high-quality programming. Over the past
four years, the Company has experienced rapid growth in revenues and
subscribers, through acquisitions, through expansion of its own cable and
digital satellite direct-to-home ("D-DTH") networks, resulting in an average
increase in revenues of 52% and total subscribers of 29% per year. The Company
has also increased its average revenue per subscriber by 18% per year during the
past four years.
The Company has an agreement with Philips Business Electronic B.V. to supply
the reception systems which include a satellite dish, digital set top box and
related hardware, and to distribute the Company's D-DTH service through the
Philips retail network in Poland.
The Company transmits its Wizja TV programming package, which currently
consists of 28 channels (of which 25 are primarily Polish language), on both its
D-DTH system and its cable networks. The Company believes that Wizja TV has
provided it with a significant competitive advantage for attracting new
subscribers and increasing revenue per subscriber. During the fourth quarter of
the year 2000, the Company began providing Internet services to its cable and
D-DTH customers.
During the year 2000, UPC Broadcast Centre began providing D-DTH
transmission services and purchased and sold programming rights to other
subsidiaries of UPC in Hungary, the Czech Republic and Slovakia.
BUSINESS STRATEGY
The Company's principal objective is to enhance its position as the leading
provider of pay television in Poland by capitalizing on favorable opportunities
that it believes exist in Poland in the cable television, D-DTH and programming
markets.
The Company's business strategy is designed to increase its market share and
subscriber base and to maximize revenue per subscriber. To accomplish its goals,
the Company intends to do the following:
- Develop and control the content of its programming;
- Increase its distribution capabilities through internal growth and through
acquisitions;
- Control its management of subscribers by using advanced information
systems;
- Establish Wizja TV as the leading brand name in the Polish pay television
industry; and
- Provide additional revenue generating services to its customers.
3
CABLE TELEVISION
The Company operates the largest cable television system in Poland with
approximately 1,851,000 homes passed and approximately 1,064,000 total
subscribers as of December 31, 2000. The Company's cable subscribers are located
in regional clusters encompassing eight of the ten largest cities in Poland,
including those cities which the Company believes provide the most favorable
demographics for cable television in the country. The Company's cable television
networks have been constructed with the flexibility and capacity to be
cost-effectively reconfigured to offer an array of interactive and integrated
entertainment, telecommunications and information service.
REGIONAL CLUSTERS
The Company has established five regional clusters for its cable television
business encompassing eight of the ten largest cities in Poland, which the
Company believes, are among those with the strongest economies and most
favorable demographics for cable television in the country. The following table
illustrates certain operating data of each of the Company's existing regional
clusters.
OVERVIEW OF THE COMPANY'S EXISTING CABLE SYSTEMS (1)
AVERAGE
MONTHLY
SUBSCRIPTION
REVENUE PER
BASIC AND BASIC AND BASIC AND
TOTAL INTERMEDIATE INTERMEDIATE INTERMEDIATE
REGION TOTAL HOMES HOMES PASSED SUBSCRIBERS SUBSCRIBERS PENETRATION SUBSCRIBER (2)
- ------ ----------- ------------ ----------- ------------ ------------ --------------
North......................... 574,000 441,041 302,285 229,926 52.13% 6.00
South......................... 400,000 237,172 119,536 97,370 41.05% 8.10
Central....................... 920,000 447,596 254,328 168,429 37.63% 9.28
West.......................... 624,000 246,068 131,459 115,432 46.91% 6.58
Katowice...................... 1,200,000 478,815 256,662 187,075 39.07% 7.18
--------- --------- --------- ------- ------ ----
TOTAL................... 3,718,000 1,850,692 1,064,270 798,232 43.13% 7.31
========= ========= ========= ======= ====== ====
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(1) All data at or for the year ended December 31, 2000.
(2) Represents a weighted average for the Company based on the total number of
basic subscribers at December 31, 2000.
ACQUISITIONS
The Company regularly evaluates potential acquisitions of cable networks.
The Company currently has no definitive agreement with respect to any material
acquisition, although from time to time it has discussions with other companies
and assesses opportunities on an ongoing basis. The Company may be required to
apply for the approval of the Polish Anti-Monopoly Office with respect to any
acquisitions it wishes to consummate. The Company's ability to enter into
definitive agreements relating to material acquisitions and their potential
terms, as well as its ability to obtain the necessary anti-monopoly approvals,
cannot be assured.
SERVICES AND FEES
The Company charges cable television subscribers an initial installation fee
and fixed monthly fees for their choice of service packages and for other
services such as premium channels and rental of remote control devices.
Throughout its cable television systems, the Company currently offers three
packages of cable television service: basic ("basic package"), broadcast
("broadcast package") and
4
intermediate ("intermediate package") packages of service in selected areas of
Poland. On December 31, 2000, approximately 752,900 or 70.7% of the Company's
subscribers received the basic package, approximately 45,400 or 4.3% received
the intermediate package and approximately 266,000 or 25.0% received the
broadcast package of service.
During the fourth quarter of the year 2000, the Company began providing
Internet services to its cable television customers and has been upgrading its
network to provide this service. Individual and home office Internet subscribers
are charged a monthly subscription fee of $48.00 and $60.00, respectively. The
standard installation fee is approximately $59.00 for buildings with multiple
apartments and approximately $120.00 for single family dwellings.
BASIC PACKAGE. The basic package includes approximately 32 to 70 channels.
This package generally includes all Polish terrestrial broadcast channels, most
major European satellite programming legally available in Poland, regional and
local programming and Wizja TV. The Company's basic package offerings vary by
location. All of the Wizja TV programming is part of the basic package except
for the HBO Poland service, a Polish-language premium movie channel owned in
part by Home Box Office, and Wizja Sport, a Polish-language premium sport
channel. However, as of March 24, 2001, the Wizja Sport channel was expanded
into the basic package.
INTERMEDIATE PACKAGE. The intermediate package includes approximately 19 to
34 channels. This package is offered for monthly fees equal to approximately
one-half of the amount charged for the basic package. The intermediate package
is designed to compete with small cable operators on a basis of price, using a
limited programming offering. The Company's intermediate package offerings vary
by location.
BROADCAST PACKAGE. The broadcast package includes 5 to 14 broadcast
channels with clear reception for monthly fees, which are substantially less
than the amounts charged for the intermediate package.
PREMIUM AND OTHER SERVICES. For an additional monthly charge, certain of
the Company's cable networks have offered two premium television services--the
HBO Poland service and Wizja Sport, although Wizja Sport was expanded into the
basic package as of March 24, 2001.
Other optional services include additional outlets and stereo service, which
enable a subscriber to receive from 4 to 28 radio channels in stereo. Cable
television subscribers who require the use of a tuner to receive certain of the
Company's cable services are charged an additional fee of approximately $1.10
per month. Installation fees vary according to the type of connection required
by a cable television subscriber. The standard initial installation fee is
approximately $24, but such fee may be subject to reductions as a result of
promotional campaigns.
PRICING STRATEGY. Prior to 1999, the Company experienced annual churn rates
of less than 10%, and was able to pass on the effects of inflation through price
increases. For the years ended December 31, 2000 and 1999, the churn rate was
21.5%. This pricing strategy of passing on the effects of inflation through
price increases commenced in January 1997 and is designed to increase revenue
per subscriber and to achieve real profit margin increases in U.S. dollar terms.
The Company expects that it will continue to experience churn rates above
historical levels during the implementation of its current pricing strategy. The
Company expects to offer promotional incentives in certain areas of the country
from time to time in connection with its marketing.
Cable television subscribers are billed monthly in advance and, as is
customary in Poland, most of the Company's customers pay their bills through
their local post office or bank. The Company has strict enforcement policies to
encourage timely payment. Such policies include notices of late payment, visits
from service personnel, and ultimately, disconnection for nonpaying customers 90
days after a bill becomes past due. The Company's system architecture in most
networks enables it to promptly shut off
5
service to nonpaying customers and is designed to reduce non-authorized use of
its cable systems. The Company's bad debts expense has averaged 4.75% and 3.84%
of revenue for the years 2000 and 1999, respectively.
TECHNOLOGY AND INFRASTRUCTURE
The Company believes the fiber-optic cable television networks that it has
constructed, which serve approximately 877,000 of its subscribers, are among the
most technologically advanced in Poland and are comparable to modern cable
television networks in the U.S. All of the Company's networks that have been
constructed by the Company have bandwidths of at least 550 MHz. New portions of
the networks, which have recently been constructed, are being designed to have
minimum bandwidths of 860 MHz. The Company's goal is to upgrade any portions of
its cable television networks that have bandwidths below 550 MHz (generally
acquired from other entities) to at least 860 MHz in an effort to reduce the
number of satellite receivers and parts inventory required in the networks. The
Company uses fiber-optic and coaxial cables, electronic components and
connectors supplied by leading Western firms in its cable television networks.
The Company has been able to avoid constructing its own underground conduits
in certain areas by entering into a series of agreements with regional and local
branches of the Polish national telephone company (known in the Polish
telecommunications industry as "TPSA") which permit the Company to use TPSA's
conduit infrastructure for an indefinite period of time or for fixed periods up
to 20 years. The Company also has agreements to undertake joint construction
with another company for new conduits in certain areas. These agreements
represent a major advantage to the Company since they permit the Company to
minimize the costly and time-consuming process of building new conduit
infrastructure where TPSA conduit infrastructure exists. As of December 31,
2000, approximately 74.5% of the Company's cable television plant had been
constructed utilizing pre-existing conduits of TPSA. A substantial portion of
the Company's contracts with TPSA allows for termination by TPSA without penalty
at any time either immediately upon the occurrence of certain conditions or upon
provision of three to six months' notice without cause.
Generally speaking, TPSA may terminate a conduit agreement immediately (and
without penalty) if:
- the Company does not have a valid permit from the Chairman of the Office
for Telecommunication Regulation ("URT") (which replaced the Polish State
Agency of Radio Communications as of January 1, 2001) authorizing the
construction and operation of a cable television network in a specified
geographic area covering the subscribers to which the conduit delivers the
signal;
- the Company's cable network serviced by the conduit does not meet the
technical specifications required by the New Telecommunication Law
(formerly the Polish Telecommunication Act of 1990);
- the Company does not have a contract with the cooperative authority
allowing for the installation of the cable network; or
- the Company does not pay the rent required under the conduit agreement.
The Company is in compliance with all of the conditions of the TPSA
agreements. However, any termination by TPSA of such contracts could result in
the Company losing its permits, termination of agreements with co-op authorities
and programmers, and an inability to service customers with respect to areas
where its networks utilize the conduits that were the subject of such TPSA
contracts.
In addition, some conduit agreements with TPSA provide that cables can be
installed in the conduit only for the use of cable television. If the Company
uses the cables for a purpose other than
6
cable television, such as data transmission, telephone, or Internet access, such
use could be considered a violation of the terms of certain conduit agreements,
unless this use is expressly authorized by TPSA. There is no guarantee that TPSA
would give its approval to permit other uses of the conduits. The Company is
currently in the process of introducing Internet services to its cable and D-DTH
customers and renegotiating certain conduit agreements with TPSA.
D-DTH
The Company's multi-channel Polish-language D-DTH service, which was the
first D-DTH service available in Poland, is being broadcast to Poland from its
transmission facilities in Maidstone, U.K. The programming provided is Wizja TV.
During the year 2000, the Company distributed to Philips' authorized retailers
approximately 265,000 D-DTH packages and sold and installed approximately
252,000 of these packages to consumers.
SERVICES AND FEES
The Company currently charges its D-DTH subscribers a monthly fee of
approximately $13 for all channels (other than any premium channels).
Subscribers to the Company's premium channels pay $5.31 per month for the HBO
Poland service or Wizja Sport (although Wizja Sport was expanded into the basic
package as of March 24, 2001).
During the fourth quarter of the year 2000, the Company began providing
Internet services to its D-DTH customers. Internet subscribers are charged a
subscription fee of $29.00 per month. The standard activation and installation
fees are approximately $72.00 and $96.00, respectively.
TECHNOLOGY AND INFRASTRUCTURE
The Company's D-DTH service is encoded, processed, compressed, encrypted,
multiplexed (i.e., combined with other channels), modulated (i.e., applied to
the designated carrier frequency for transmission to satellite) and broadcast
from Maidstone, U.K. to Astra satellites in geosynchronous orbits ("uplinked").
The satellites receive, convert and amplify the digital signals and retransmit
them to earth in a manner that allows individual subscribers to receive and be
billed for the particular program services to which they subscribe.
TRANSMISSION AND UPLINK FACILITIES. The channels available on the Company's
D-DTH service include the Company's own proprietary channels and channels from
third parties originating from a number of sources in Poland, the U.K. and
elsewhere. Most of the tailoring of programs for the local market
("localization") to be undertaken by the Company, which will principally consist
of adding voice or dubbing into Polish for the Company's proprietary channels on
Wizja TV, will occur in Poland. For most of the channels on Wizja TV,
localization, editorial control and program packaging will be the responsibility
and at the cost of the channel supplier. The channels provided by third parties
will be delivered in tape format, through a landline or will be backhauled
(i.e., transmitted via satellite or other medium) to the Company's transmission
facility in Maidstone for broadcasting to Poland.
The Company has an 8-year contract with British Telecommunications plc
("BT") for the provision and maintenance of uplink equipment at Maidstone. Other
than the BT uplink equipment, the Company owns all the required broadcasting
equipment at its facility in Maidstone. The Company's programming is currently
transmitted to the Company's transponders on Astra 1F and 1G.
The Company's D-DTH signal is beamed by these satellites back to earth and
may be received in Poland by those who have the appropriate dedicated satellite
reception equipment and who have been connected by the Company to its D-DTH
service as subscribers. The signal is currently received by the Company's own
cable networks, and will also be received by the cable networks of other cable
operators, if any, having distribution agreements with the Company. Once the
D-DTH signal has been received at the cable networks, the signal is transmitted
by cable to those who have been connected by the Company to its cable service as
subscribers or connected by such other cable operators, if any, to their own
cable systems.
7
Philips provides the following critical components and services used in the
Company's D-DTH satellite transmission system and is the primary point of
contact for subscribers to the Company's D-DTH service:
- the Philips' digital integrated receiver decoders ("IRDs");
- a smartcard-based proprietary conditional access system which uses Philips
CryptoWorks-Registered Trademark- technology;
- a satellite receiving dish and related equipment;
- installation; and
- support services.
The Company's agreement with Philips provides for the following:
- Philips is the exclusive supplier of the first 500,000 D-DTH reception
systems in connection with the launch of the Company's D-DTH business in
Poland.
- Philips has granted the Company an exclusive license of its
CryptoWorks-Registered Trademark- technology in Poland for the term of the
agreement, which may be terminated or renegotiated when the Company has
purchased 500,000 D-DTH reception systems from Philips. The Company had
purchased more than 500,000 D-DTH reception systems from Philips as of the
end of the year 2000. The Company and Philips are currently negotiating a
variation to the agreement.
The delivery of subscription programming requires the use of encryption
technology to prevent signal theft or "piracy." Although the Company expects its
conditional access system, subscriber management system and smartcard system to
adequately prevent unauthorized access to programming, there can be no assurance
that the encryption technology to be utilized in connection with the Company's
D-DTH system will remain effective. The Company and Philips are actively
cooperating in combatting piracy issues.
The Company believes that the Astra satellites,
CryptoWorks-Registered Trademark- encryption technology and the integrated
receiver decoder together constitute a reliable, end-to-end cost-effective D-DTH
system. However, certain other large European providers of D-DTH services have
selected different satellites, encryption technology and decoders.
SATELLITES. The Company currently broadcasts and expects to broadcast all
of its proprietary programming and that of most of third party programmers from
its transmission facility in the U.K. by cable to an earth station transmitting
antenna, located at its Maidstone site. The uplink facility transmits the
Company's programming signal via 4 Astra transponders to the cable system
receiving antenna and also to D-DTH subscribers' reception equipment throughout
Poland. The Company has been studying and discussing with relevant Polish
authorities the feasibility of locating its uplink and production facilities in
Poland. In November 2000, one of the Company's subsidiaries was issued a
satellite platform license which will enable the Company to begin uplinking
certain programming in Poland.
In March 1997, the Company entered into contracts with Societe Europeenne
des Satellites S.A. ("SES") for the lease of three transponders on two
satellites, Astra 1E and 1F. The leases for the one transponder on the Astra 1E,
which is operationally activated on the Astra 1G satellite, and two transponders
on the Astra 1F satellite will expire in 2009. All three transponders are
currently operational and available to the Company. Aggregate charges for each
transponder are capped at $5.68 million per year for each transponder and
approximately $153.3 million for all three transponders for the remaining term
of the contracts remaining after December 31, 2000.
8
In July 2000, the Company entered into another contract with SES for the
lease of a fourth transponder on Astra 1G. The lease will expire in 2010.
Aggregate charges for the fourth transponder are capped at $5.68 million per
annum and approximately $54.9 million for the remaining term of the contract
remaining after December 31, 2000. The Company's transponder leases provide that
the Company's rights are subject to termination in the event that SES's
franchise is withdrawn by the Luxembourg Government.
The Company has been designated a "non-pre-emptible customer" under each of
its relevant transponder leases. As a result, in the event of satellite or
transponder malfunction, the Company's use of its transponders cannot be
suspended or terminated by a broadcaster which has pre-emption rights permitting
it to gain access to additional transponders in preference to certain other
Astra customers. The Company does not, however, have the right to pre-empt other
customers if its transponders stop working. A "protected customer" has
pre-emption rights if its transponders stop working and its service would be
moved on to the transponder carrying a pre-emptible customer's service.
PROGRAMMING
The Company believes that there is unsatisfied demand in the Polish market
for high-quality Polish-language programming and that the quality and variety of
Polish-language programming offered is a critical factor in building and
maintaining successful multi-channel pay television systems in Poland. The
principal programming objective of the Company is to develop and acquire
high-quality Polish-language programming that can be commercially exploited
throughout Poland through D-DTH and cable television exhibition and advertising
sales. The Company intends to use Wizja TV to increase the penetration rate for
its cable television networks and its D-DTH system and to increase per
subscriber revenue from its cable systems.
During the year 2000, UPC Broadcast Centre began providing D-DTH
transmission services and purchased and sold programming rights to other
subsidiaries of UPC in Hungary, the Czech Republic and Slovakia.
WIZJA TV PROGRAMMING PACKAGE
Wizja Sport provides approximately 10 hours of local and international
sporting events per day. The Company believes that Wizja Sport is the first
channel in the Polish market principally dedicated to Polish sports programming.
The Company's ability to broadcast certain of these sporting events on an
exclusive basis may be limited by the provisions of the Polish Radio and
Television Act of 1992.
Several of the sports rights contracts give the Company the ability to
obtain additional seasons of those sports events, either by way of a right of
first refusal or a right of first offer. Most of the sports rights agreements
grant the Company exclusive rights to broadcast the sports events live in
Poland. The exclusivity in some cases is subject to the ability of the rights
owner to grant limited rights to other broadcasters to show the events on a
delayed or highlights basis. The Company is currently in negotiations with other
sports rights holders to purchase the rights to additional local and
international sports events.
The Company has purchased exclusive rights from third parties for
programming on 7 of the current 28 channels on Wizja TV. In some of the
agreements, however, the channel supplier may terminate the agreement and/or
eliminate the exclusivity rights if the Company does not achieve specified
milestones for subscriber numbers by certain specified dates. In addition, most
of the agreements impose certain restrictions on the tiering of the particular
channel, which will limit the flexibility of the Company in determining program
tiering in the future, and also include provisions whereby the Company agrees to
indemnify the channel supplier against any claims, including claims made by
governmental authorities, resulting from the exclusive nature of the rights
granted or from the tiering restrictions. Some of the agreements require
payments based on a guaranteed minimum number
9
of subscribers, and some require payments at the time of execution. On December
31, 2000, the Company was committed to pay approximately $267.8 million in
guaranteed minimum payments in respect of broadcasting and programming
agreements, of which approximately $65.2 million was committed through the end
of 2001. In addition, the Company is continuing to negotiate additional
agreements with channel and program suppliers and sports rights organizations,
which agreements if consummated may require the Company to pay additional
guaranteed minimum payments and/or payments at the time of execution. In most of
the Company's programming agreements, the channel supplier, at its own expense,
must localize its programming into the Polish language prior to the launch on
Wizja TV platform. In most of its programming agreements, the Company is
required to make payments to the channel supplier on a monthly basis based on
the number of subscribers to whom the programming is made available.
In addition, some of the agreements impose certain limitations, including:
- the channel must be received by 100% of subscribers to the Company's D-DTH
service and by all "basic package" subscribers of the Company's cable
system or by most of its cable subscribers;
- the channel must be provided, under certain restricted circumstances, on a
stand alone basis as well as part of a package of programming in certain
situations;
- the programming the Company may purchase for Wizja TV may be restricted;
- distribution of other channels as part of the Company's programming
package may be limited (consequently, the consummation of an agreement
with one channel supplier has had, and will in the future continue to
have, the effect of precluding the Company from entering into agreements
with other potential channel suppliers);
- suppliers of programming to a channel supplier may require the Company to
assume the channel supplier's obligations to license the programming on
financial terms which are more favorable to the program provider than
those under the Company's existing agreement with the channel supplier;
- the Company may be required to install encryption decoder-based technology
in homes of cable subscribers receiving premium services; and
- if the Company undertakes certain investments or enters into certain
transactions, certain minimum guarantees payable under the agreement would
increase and the Company would lose certain rights.
The terms of the Company's agreements with third parties for programming on
Wizja TV range from 2 to 7 years.
PROPRIETARY PROGRAMMING
Wizja TV contains three channels, Wizja Jeden, Wizja Pogoda and Wizja Sport,
that are owned and operated by the Company, although the Company intends to
discontinue Wizja Jeden as of April 2001. The Company has established and
intends to continue to establish entities to engage in the production of
programming either to be included on the Company's proprietary channels, or to
be licensed to the Company for distribution as part of the Wizja TV line-up.
In addition, the Company has developed Wizja Pogoda as the weather channel,
and Wizja Sport as the sports channel for its programming platform. Wizja Jeden
is a Polish-language general entertainment channel. Wizja Sport offers a wide
range of international and Polish sports events.
In November 1997, the Company purchased 50% of WPTS Sp. z o.o. ("Twoj
Styl"), a Polish company producing, among others, the leading Polish lifestyle
magazine. The Company outsourced the
10
publishing of a TV guide for its subscribers to Twoj Styl. During the year 2000,
the Company decided to discontinue the TV guide service and consequently has
terminated the arrangement with Twoj Styl for publishing the TV guide.
On March 1, 2000, UPC Programming B.V., an affiliate of the Company, entered
into joint a venture with MTV Networks B.V. for a 50% equity interest in MTV
Polska for the purpose of producing a localized Polish MTV programming channel
for distribution in Poland. The Company has agreed to sell certain assets of its
subsidiary, Atomic TV, to UPC Programming B.V., which would in turn contribute
these assets to the joint venture. As a result of the joint venture, MTV Polska
has licensed the right to distribute the MTV Polska and VH1 programming channels
in Poland to UPC Programming B.V. In turn, UPC Programming B.V. intends to
novate such rights to Wizja TV B.V. Those carriage rights are used by UPC
Telewizja Kablowa (previously Polska Telewizja Kablowa) and UPC Broadcast Centre
Limited for distribution in Poland. As a result of the joint venture with MTV,
the Atomic TV channel was discontinued as of July 2000.
PREMIUM TELEVISION CHANNELS. The Company has introduced its own premium
channel, Wizja Sport (although Wizja Sport was expanded into the basic package
as of March 24, 2001), as well as premium channels supplied by third parties.
The Company has also introduced a Polish-language version of premium movie
channels to its cable subscribers for an additional monthly fee. Currently, two
premium movie channels are available in Poland, Canal+ and the HBO Poland
service. Both feature movies and also carry, or will carry, live sports and
other entertainment. The Company has distributed Canal+ on a non-exclusive basis
on some of its cable networks since entering into a preliminary distribution
agreement with Canal+ in October 1995.
The Company has signed agreements for the exclusive distribution on its
D-DTH system, and non-exclusive distribution across its cable networks, for the
HBO Poland service, a Polish-language premium movie channel owned in part by
Home Box Office. HBO currently has exclusive rights in Poland to movies from
Warner Bros., Columbia TriStar International Television and Buena Vista
International.
The Company offers the HBO Poland service on a promotional basis to D-DTH
subscribers for a period of one to three months and offers the HBO Poland
service to its cable subscribers through promotional campaigns. However, after
this promotional period, the Company charges approximately $5.31 per month for
this service. Only a limited number of subscribers continue the HBO Poland
service past the expiration of the promotional period.
ADVERTISING
At Media, a wholly-owned subsidiary established to develop advertising
opportunities for the Wizja TV programming package, currently offers commercial
airtime on 14 of the Company's 28 channels on Wizja TV to major advertising
agencies and advertisers in the Polish market.
COMPETITION
The multi-channel pay television industry in Poland has been, and is
expected to remain, highly competitive. The Company competes with other cable
television operators, as well as with companies employing numerous other methods
of delivering television signals to subscribers. The extent to which the
Company's multi-channel pay television services are competitive with alternative
delivery systems depends, in part, upon the Company's ability to provide a
greater variety of Polish-language programming at a more reasonable price than
the programming and prices available through alternative delivery systems.
Pay television services also face competition from a variety of other
sources of news, information and entertainment such as newspapers, cinemas, live
sporting events, interactive computer programs and home video products such as
videocassette recorders. The extent of this type of competition
11
depends upon, among other things, the price, variety and quality of programming
offered by pay television services and the popularity of television itself.
CABLE TELEVISION. In the cable television industry, the Company believes
that competition for subscribers is primarily based on price, program offerings,
customer service, and quality and reliability of cable networks.
Operators of small cable networks, which are active throughout Poland, pose
a competitive threat to the Company because they often incur lower capital
expenditures and operating costs and therefore have the ability to charge lower
fees to subscribers than does the Company. While these operators often do not
meet the technical standards for cable systems under Polish law, enforcement of
regulations governing technical standards has historically been poor. Regardless
of the enforcement of these laws and regulations, the Company expects that
operators of small cable networks will continue to remain a competitive force in
Poland.
In addition, certain of the Company's competitors or their affiliates have
substantial experience in the cable television industry and have significant
resources (including financial resources and access to international programming
sources). The largest competitors of the Company in Poland include Elektrim
S.A., which owns at least two cable systems (including Aster City Cable
Sp. z o.o.) and Multimedia Polska S.A., a Polish entity.
The Company's cable television business also competes with companies
employing other methods of delivering television signals to the subscribers,
such as terrestrial broadcast television signals and analog-direct to home
("A-DTH") television services, and with a multi-channel multi-point distribution
system and D-DTH services (including the Company's own D-DTH service).
D-DTH. The Company's D-DTH business competes with traditional third party
cable systems, and terrestrial broadcast and A-DTH services as well as other
potential D-DTH and MMDS services. TKP, which is partially owned by Canal+ S.A.,
currently offers a single channel Polish-language pay television service
(including A-DTH). TKP operates a multi-channel D-DTH service in Poland under
the name Cyfra+. In addition to this, Polsat S.A. (a Polish private broadcaster)
launched its own D-DTH service in autumn 2000.
The Company cannot predict whether other European or Polish broadcasters,
such as BSkyB, Bertelsmann or Kirch, will choose to enter the Polish D-DTH
market. Some of the Company's current and potential competitors, either alone or
in joint ventures with other competitors, have either launched or announced
plans to launch D-DTH systems for other European countries. Many of the
Company's current and potential competitors may have greater financial,
managerial and operational resources and more experience in the DTH business
than the Company.
PROGRAMMING. In the programming business, the Company competes with other
television companies, both free (broadcast) television and pay television
(including Canal + and HBO), for the acquisition of sports rights and most other
programming, including the rights to feature films and television series and the
right to participate in joint ventures with other creators of programming. The
Company also competes with other programming creators for the hiring of
personnel with creative and production talent for the development of
programming.
TRADEMARKS
The Company, either itself, through its subsidiaries or its parent, has
filed or is in the process of filing for registration of its various trademarks.
The PTK logo was registered for use in connection with television and
programming services in July 1997. Variations of PTK, Wizja, and Wizja TV have
been registered in Poland, including but not limited to Wizja Kids, Wizja Sport
and Wizja Movies. Also, numerous trademark applications have been filed in
Poland for the various other Wizja trademarks.
12
Trademarks for UPC have been registered internationally. Additional applications
for other Wizja trademarks and related trademarks will be filed in Poland in the
near future.
EMPLOYEES
At December 31, 2000, the Company had approximately 1,647 permanent
full-time employees and approximately 42 part-time employees. In addition, as of
that date the Company employed approximately 90 salesmen, some of whom may have
received both commissions and a nominal salary, and from time to time the
Company employs additional salesmen on an as needed, commission only basis. In a
division of one of the Company's subsidiaries, a trade union, which has
approximately 3 members, was formed in mid-1999. The Company believes that its
relations with its employees are good.
REGULATION
The Company is subject to regulation in Poland, the U.K. and the European
Union
POLAND
GENERAL
In connection with negotiating its membership in the EU, Poland has started
to adjust its legal system to EU requirements and currently is in the process of
revising its telecommunications, broadcasting and copyright regulation. On July
21, 2000 the Polish Parliament passed the new Telecommunications Law (the "NTL")
which changed the regulatory framework of telecommunications activities in
Poland. The NTL replaced the Communications Act of 1990 (the "Communications
Act") and became effective as of January 1, 2001.
Until the end of the year 2000, the operation of cable and D-DTH television
systems was regulated primarily by the Communications Act. As of January 1,
2001, the operation of those television systems has been regulated by the NTL.
Operators are also subject to the provisions of the Polish Radio and Television
Act of 1992 (the "Television Act").
Currently the Polish telecommunications and media sector is regulated by:
- The Polish Minister of Communications;
- The Chairman of the Office for Telecommunications Regulation ("URT")
(which replaced the Polish State Agency of Radiocommunications ("PAR"),
established under the Communications Act); and
- The Polish National Radio and Television Council (the "Council").
Cable television operators in Poland are required to obtain permits from the
Chairman of the URT to operate public radio and television networks and must
register certain programming that they transmit over their networks with the
Council.
Neither the Minister of Communications nor the Chairman of the URT currently
has the authority to regulate the rates charged by operators of cable television
and D-DTH services. However, excessive rates could be challenged by the Polish
Anti-Monopoly Office should they be deemed to constitute monopolistic or other
anti-competitive practices. The cable television and D-DTH operators in Poland
are also subject to the Law on Copyright and Neighboring Rights of 1994 (the
"Copyright Act") which provides intellectual property rights protection to
authors and producers of programming. Under the terms of the Television Act,
broadcasters in Poland are regulated by, and must obtain a broadcasting license
from the Council.
13
All of the Wizja proprietary channels and all channels on the Wizja platform
are currently licensed in the United Kingdom by the Independent Television
Commission as satellite television services. As such, they are then
retransmitted under the European Convention on Transfrontier Broadcasting to
Poland and then distributed via cable and D-DTH in Poland. As its regulatory
regime develops, Poland may seek to regulate the reception of D-DTH signals.
Poland's regulatory environment is undergoing constant change. The Company does
not know how such change will impact its business.
COMMUNICATIONS ACT
PERMITS. Until the end of the year 2000, the cable television operators
were required to obtain permits from PAR to install and operate cable television
systems. The Communications Act and the required permits issued by PAR had set
forth the terms and conditions for providing cable television services.
If a cable operator breached the terms of its permits or the provisions of
the Communications Act, or if such operator has failed to acquire permits
covering areas serviced by its networks, PAR could impose penalties on such
operator, including:
- fines;
- the revocation of all permits covering the cable networks where such
breach occurred; and
- the forfeiture of the cable operator's cable networks.
In addition, the Communications Act provided that PAR may not grant a new
permit to, or renew an expiring permit held by, any applicant that has had, or
that was controlled by an entity that has had, a permit revoked within the
previous five years.
On July 26, 2000, the Polish Ministry of Telecommunication issued a 15-year
data transmission license to a subsidiary of the Company, authorizing that
company to provide data transmission service to its customers throughout the
territory of Poland, using its own networks and those leased from other licensed
operators. This license allowed that subsidiary to provide Internet services to
its customers. This license expired automatically with the entry of the NTL into
force, i.e. as of January 1, 2001. The subsidiary may continue the provision of
the services covered by the license. It must, however, notify the Chairman of
the URT about the provision of the data transmission services by the end of
March 2001 as described below. In certain cases listed below, the Chairman of
the URT may object to the provision of the services by the subsidiary. In March
2001, the Company's subsidiary notified the Chairman of the URT of its
activities concerning the provision of data transmission services and access to
Internet.
As of December 31, 2000, approximately 74.5% of the Company's cable plant
runs through conduits leased from the Polish national telephone company
("TPSA"). If the Company uses the cables for a purpose other than cable
television, such as data transmission, telephone, or Internet access, such use
could be considered a violation of the terms of certain conduit agreements,
unless this use is expressly authorized by TPSA There is no guarantee that TPSA
would give its approval to permit other uses of the conduits. The Company is
currently in the process of introducing Internet services to its cable and D-DTH
customers and renegotiating certain conduit agreements with TPSA.
FOREIGN OWNERSHIP RESTRICTIONS. The Communications Act, which was in effect
until January 1, 2001, provided that permits may only be issued to and held by
Polish citizens, or companies in which foreign persons held no more than 49% of
the share capital, ownership interests and voting rights. In addition, a
majority of the management and supervisory board of any cable television
operator holding permits must have been comprised of Polish citizens residing in
Poland. These restrictions did not apply to any permits issued prior to July 7,
1995.
14
THE COMPANY'S PERMITS AND NEW CORPORATE ORGANIZATIONAL STRUCTURE.
To comply with the foreign ownership requirements discussed above, the
Company restructured UPC Telewizja Kablowa Sp. z o.o. (formerly Polska Telewizja
Kablowa Sp. z o.o.) ("UPC TK"), which operates most of the Company's cable
networks. UPC TK owns many of the cable networks but certain networks are owned
by UPC TK's affiliates and leased to UPC TK. The Company's subsidiary holds a
47% ownership stake in UPC TK while the remaining 53% are held by a Polish
entity. PCI in turn, holds 49% of the Polish entity, and the remaining 51%
interest in the Polish entity is owned by a Polish company. The Company believes
that this ownership and operating structure complies with the requirements of
Polish law. PAR has granted permits to the Company and its competitors, based on
the lease of assets, for networks using an ownership and operating structure
substantially similar to the one described above.
Specifically, subsidiaries of the Company have received approximately 99
permits from PAR, covering all of the Company's basic subscribers at December
31, 2000, including subscribers for whom the Company's permits are deemed
extended under Polish law pending the authority's response to the Company's
permit renewal applications.
NEW TELECOMMUNICATION LAW
Since January 1, 2001, the operation of cable and other television systems
in Poland has been regulated under the NTL, which replaced the Communications
Act.
The NTL changes the licensing regime and the competency of telecommunication
authorities. The NTL introduces a new authority--the Chairman of the URT. The
Chairman of the URT has assumed most of the administration tasks previously
performed by the Polish Minister of Communications and PAR. The Chairman of the
URT is responsible for regulating telecommunication activities, including
exercising control over operators and managing frequencies. The duties of the
Minister of Communications are limited primarily to issuing secondary
regulations. PAR along with the Polish State Telecommunications and Postal
Inspection (PITiP) were liquidated as of January 1, 2001.
Under the NTL, cable television operators are required to obtain a permit
from the Chairman of the URT to operate public radio and television networks.
The Chairman of the URT shall grant the permit to any interested entity
authorized to do business in Poland and which complies with the conditions set
forth in the NTL. Applications for renewals of permits may be refused only if
during the validity of the permit there have been circumstances justifying the
refusal, revocation or limitation of the scope of the permit.
Under the NTL, an NTL permit must be revoked if:
- a final court order prohibits the operator from conducting the business
covered by the permit;
- the operator fails to meet the legal requirements for the grant of the
permit; or
- the operator has failed to remedy a violation of the law within the
designated time limit.
The NTL permit may be revoked, if the operator breaches the provisions of
the NTL, the permit or other decisions issued under the NTL in any way, does not
pay the required fees, or a decision on the liquidation or declaration of
bankruptcy of the operator has been made.
Except for the operation of radio and television networks and public
telephone networks, the performance of all other telecommunications activities
requires only notification to the Chairman of the URT. The Chairman of the URT
may disallow the performance of such activities within 21 days of the receipt of
the notification if:
- the notification violates the NTL;
15
- the notification is incomplete; or
- the information provided in the notification is false.
Permits issued under the Communications Act are automatically transformed
into NTL permits, if such permits are still required under the NTL. Thus, the
permits for the installation and operation of cable television systems, granted
to the Company's subsidiaries will become NTL permits. This rule does not apply
to the provisions of the permits issued under the Communications Act, the
exercise of which would constitute a violation of the NTL. All other licences,
authorizations and assignments expired by force of the law as of January 1,
2001.
Operators, who had obtained rights expiring automatically under the NTL may
continue their telecommunications activities within their current scope,
provided that they apply for NTL permits by the end of 2001, if these activities
require an NTL permit. For telecommunications activities that only require
notification, such as data transmission, operators may continue to provide these
services, provided that they notify the Chairman of the URT by the end of March
2001, and the Chairman does not object.
The NTL has eliminated most of the foreign ownership restrictions relating
to telecommunications. However, the NTL does prohibit the provision of
international telecommunications services using networks operated by foreign
entities or companies with participation of foreign entities until December 31,
2002. Until this date, UPC TK will be subject to this restriction. UPC TK may,
however, provide international telecommunication services using the networks of
other authorized Polish operators. It may also provide these services, with the
exception of international telephony services, by using its own
radiocommunication networks. Such services may, until December 31, 2002, only be
provided by TPSA.
Under the NTL all operators are required to make their networks available to
users who intend to commercially gather, process, storage, use or grant access
to information for others.
Operators that perform their activities on the basis of an NTL permit are
required to allow other operators operating public networks to use their
buildings, lines, conduits, poles, towers and masts, in particular, allowing
them to use telecommunications equipment, where these activities would be
impossible without such infrastructure sharing or would involve a significant
cost. Operators are required to specify the conditions of the joint use in an
agreement. If the parties cannot agree to specific conditions, either party may
request the Chairman of the URT to issue a decision on joint use.
TELEVISION ACT
THE POLISH NATIONAL RADIO AND TELEVISION COUNCIL. The Council, an
independent agency of the Polish government, was created under the Television
Act to regulate broadcasting in Poland. The Council has regulatory authority
over both the programming that cable television operators transmit over their
networks and the broadcasting operations of broadcasters.
REGISTRATION OF PROGRAMMING. Under the Television Act, cable television
operators must register each channel and the programming, which will be aired on
that channel with the Chairman of the Council prior to transmission. The
Company's subsidiaries have registered most of the programming that they
transmit on their cable networks, except programming transmitted on networks for
which they do not have permits. The Chairman of the Council may revoke the
registration of any of the Company's programming, or may not register all
additional programming that the Company desires to transmit over the Company's
networks. In addition, the Council may take action regarding unregistered
programming that the Company transmits over cable networks for which the Company
does not yet have NTL permits. This pertains to areas for which permit
applications cannot be made until all permit requirements are satisfied
(including obtaining agreements with the cooperative authorities, upgrading of
the acquired networks to meet technical standards where necessary and satisfying
foreign ownership
16
limitations). Such actions could include the levying of monetary fines against
the Company, and the seizure of equipment involved in transmitting such
unregistered programming as well as criminal sanctions against the Company's
subsidiaries' management. These actions could have a material adverse effect on
the Company's business, financial condition and results of operations.
RESTRICTIONS ON FOREIGN OWNERSHIP OF POLISH BROADCASTERS. The Television
Act provides that programming may be broadcast in Poland only by Polish entities
in which foreign persons hold no more than 33% of the share capital, ownership
interest and voting rights. In addition, the Television Act provides that the
majority of the management and supervisory boards of any company holding a
broadcasting license must be comprised of Polish citizens residing in Poland.
Companies that engage in broadcasting in Poland are required to obtain a
broadcasting license from the Chairman of the Council under the Television Act.
The Council may revoke a broadcasting license for, among other things:
- violations of the Television Act;
- violations of the terms of the broadcasting license; or
- violations of restrictions on foreign ownership of broadcasters.
REQUIREMENTS CONCERNING PROGRAMS BROADCAST FROM OUTSIDE OF POLAND.
The Television Act does not include regulations directly applicable to the
broadcasting of programs being broadcast from abroad and received in Poland.
Specifically, there are no regulations in force concerning satellite
broadcasting of a program directed to a Polish audience if the transmission to
the satellite for the broadcasting of such program is made by a foreign
broadcaster from outside of Poland. The Company believes that the Television Act
does not apply to such broadcasting and that such activity is not subject to
Polish broadcasting requirements. A subsidiary of Canal + has filed suit against
HBO Polska Sp. z o.o. and certain Polish cable operators (including the
Company's subsidiaries) alleging violations of the Television Act in connections
with HBO's broadcasting activity from outside of Poland.
The Company has established and intends to continue to establish entities to
engage in the development and production of Polish-language thematic television
programming outside of Poland. While all of the content and programs which the
Company distributes across its cable networks and its D-DTH system are
distributed via satellite systems which are located outside of Poland, much of
the programming is produced or assembled entirely in Poland. The Company
believes that the ownership structure of its entities, as well as its operating
strategy, are not subject to Poland's regulatory restrictions on foreign
ownership, licensing requirements, restrictions and regulations on the operation
of cable networks and the broadcasting of programming.
If the Polish regulatory authorities determine otherwise, the Company would
be required to:
- secure additional licenses from the Chairman of the Council and permits
from URT;
- modify the nature and content of its programming;
- pay fines or other penalties for lack of compliance with these
regulations; and
- comply with Polish regulations governing ownership structure and the
production and transmission of programming across a D-DTH system.
REQUIREMENTS CONCERNING PROGRAMS BROADCAST FROM POLAND
The Television Act requires broadcasters intending to broadcast TV programs
from Poland to obtain a broadcast license. The licenses are granted by the
Chairman of the Council. The applicant in
17
order to obtain such a license must be, inter alia, in compliance with the above
foreign ownership restrictions. The broadcaster shall comply with the
requirements of the Television Act regarding the programming, inter alia,
pertaining to Polish productions, commercials, and others.
The acquisition or take over of the licenced broadcaster's shares or rights
thereof by a foreign entity or a dependent entity thereof requires the consent
of the Chairman of the Council. An acquisition or take over executed without the
necessary approval is invalid.
In November 2000, Polska Telewizja Cyfrowa Sp. z o.o., owned in part by a
subsidiary of the Company, was issued broadcasting licenses for Wizja Sport and
Wizja Jeden by the National Broadcast Council. The National Broadcast Council
has also issued a satellite platform license to Polska Telewizja Cyfrowa
Sp. z o.o. for Wizja Sport, Wizja Jeden and certain third party programming.
Polska Telewizja Cyfrowa Sp. z o.o. is considered to be a broadcaster under the
Polish law, although these licenses have not yet been used.
COPYRIGHT PROTECTION
Television operators, including cable and D-DTH operators, in Poland are
subject to the provisions of the Polish Copyright Act, which governs the
enforcement of intellectual property rights. In general, the holder of a Polish
copyright for a program transmitted over the cable networks of a cable
television operator or the system of a D-DTH operator has a right to receive
compensation from such operator or to prevent transmission of the program. A
bill currently pending in the Parliament regarding copyrights, if adopted, would
abolish the statutory license for cable operators for simultaneous transmissions
of programs broadcasted by other broadcasters. The new act is expected to be
passed by the Parliament by the end of the year 2001. The adoption of this act
may result in an increase of the fees paid by cable operators.
The rights of Polish copyright holders are generally enforced by
organizations for collective copyright administration and protection such as
Zwiazek Autorow i Kompozytorow Scenicznych ("ZAIKS") and Zwiazek Artystow Scen
Polskich ("ZASP"), and can also be enforced by the holders themselves. Most of
the Company's cable subsidiaries operate under a contract with ZASP and all of
its cable subsidiaries operate under a contract with ZAIKS. A violation of the
Copyright Act by a cable television operator also constitutes a violation of the
Communications Act and of the operator's permits. See "--Television Act" for a
discussion of the penalties and consequences associated with violations of the
Television Act and "--Communications Act" and "--New Telecommunications Law" for
a discussion of the penalties and consequences associated with violations of the
Communications Act or the New Telecommunications Law and of a television
operator's permits.
ANTI-MONOPOLY ACT
EXCLUSIVE PROGRAMMING AGREEMENTS. Some of the programming agreements that
the Company has entered into for its cable networks and its D-DTH service
contain exclusivity clauses which restrict or prohibit the provider of such
programming from providing such programming to other cable or D-DTH operators.
Although such exclusivity clauses are not specifically prohibited under the
Anti-Monopoly Act, such agreements may be found unlawful, and therefore
unenforceable, if they restrict or hinder competition or otherwise involve the
abuse of a dominant position. A decision by the Anti-Monopoly Office to deem one
or more of these programming agreements as void due to the fact that it contains
an illegal exclusivity clause could have a material adverse effect on the
Company's business and financial results in that such a decision would
potentially reduce the commercial value of these contracts and could reduce the
consumer of appeal of the programming offered on the Company's cable networks
and its D-DTH system.
MARKET DOMINANCE. Companies that obtain control of 40% or more of the
relevant market and do not encounter significant competition may be deemed to
have market dominance, and therefore face greater scrutiny from the
Anti-Monopoly Office.
18
From time to time, the Company receives inquiries from and are subject to
review by various divisions of the Anti-Monopoly Office.
RECENT ANTI-MONOPOLY OFFICE FINDINGS WITH RESPECT TO THE COMPANY AND ITS
SUBSIDIARIES.
The Anti-Monopoly Office issued a decision that PCI had achieved a dominant
position and abused that dominant position by: (1) failing to create a uniform
system for customer complaints, (2) increasing rates without providing
subscribers a detailed basis for the price increases, and (3) changing the
programming line-up without sufficient notice to subscribers. The Anti-Monopoly
Office did not impose a fine in connection with its decision. The Company
appealed both the finding of dominance and the finding that it acted improperly
in its relations with subscribers. In another decision, the Anti-Monopoly Court
agreed with the Company's position and overturned the Anti-Monopoly Office's
decision. The Anti-Monopoly Office is appealing the Anti-Monopoly Court's
decision.
In another market, the Anti-Monopoly issued a decision that PCI had achieved
a dominant position and abused that dominant position by: increasing rates
without providing subscribers a detailed basis for the price increases; and
changing the programming offer. The Anti-Monopoly Office imposed a fine of
50,000 zloty (the equivalent of $12,068). The Company is appealing both the
finding of dominance and the finding that it acted improperly in its relations
with subscribers.
UNITED KINGDOM
BROADCASTING REGULATION
Most of the channels in the Company's D-DTH service are regulated by U.K.
authorities (primarily the Independent Television Commission) as satellite
television services ("STS"). Under the U.K. Broadcasting Act 1990 (the
"Broadcasting Act") (as amended), satellite broadcasters established in the U.K.
are required to obtain an STS license. UPC Broadcast Centre has received an STS
license for Atomic TV (discontinued as of July, 2000), Wizja Jeden (to be
discontinued as of April 2001), Wizja Sport, and Wizja Pogoda (although only the
licenses for Wizja Jeden, Wizja Sport and Wizja Pogoda are being used). For most
of the other channels on Wizja TV, the relevant channel supplier is required to
obtain an STS license from the Independent Television Commission or another
competent authority. The Independent Television Commission has wide discretion
to vary the conditions of licenses issued under the Broadcasting Act or amend
its codes (including codes on electronic programming guides, advertising
sponsorship and content) to which U.K.-licensed broadcasters are subject. Under
the terms of its Astra transponder agreements, the Company cannot carry
programming if the channel supplier does not have a valid broadcast license for
that programming from a competent authority. An STS license is issued for an
initial period of 10 years but can be renewed.
The Broadcasting Act classifies some persons as "disqualified persons" who
are not permitted to hold STS licenses, including (A) any bodies whose objects
are wholly or mainly of a political or religious nature and advertising
agencies, or (B) any person owned by more than 5% by a disqualified person or
otherwise associated with a disqualified person in any manner specified in the
relevant provisions of the Broadcasting Act. There are no foreign ownership
restrictions which apply to STS licensees. If any person with an interest in
excess of 5% of the Company's issued capital stock is or becomes a disqualified
person or is or becomes associated with such a disqualified person, or if the
Company or any person with an interest in the Company's capital stock does or
were to fall within the scope of the restriction, then the Company may not be
entitled to hold STS licenses.
In issuing STS licenses, the Independent Television Commission follows the
"establishment" test set out in the EU's Television Without Frontiers Directive
which provides that each (European Union "EU") broadcaster should be regulated
primarily by the authorities in the member state of the EU where that
broadcaster is established, without regard to the country or countries within
the EU in which its transmits signal is received. Meanwhile, the 1989 European
Convention on Transfrontier Television currently provides that the country in
which a broadcaster transmits its programming to a
19
satellite (or the country which grants the broadcast frequency or satellite
capacity) has jurisdiction over that broadcaster. However, the 1989 European
Convention on Transfrontier Television was recently amended and if this
amendment is implemented, the 1989 European Convention on Transfrontier
Television would conform to the "establishment" test and authorities in a
receiving state should have less right to seek to regulate a broadcaster whose
services are intended to be received in that state. In the event of
inconsistency between the Television Without Frontiers Directive and the 1989
European Convention of Transfrontier Television, the provisions of the directive
apply in member states of the EU (e.g. the U.K.).
REGULATION OF COMPETITION
In the U.K., the Competition Act 1998 ("CA 1998") came into force on March
1, 2000 and repeals the Respective Trade Practices Acts 1976 and 1977, the
Resale Prices Act 1976 and certain parts of the Competition Act 1980. It
introduces into U.K. law a system of controls based on EC competition law.
Anti-competitive agreements and conduct amounting to the abuse of a dominant
position are prohibited (closely following Articles 81 and 82).
The CA 1998 provides the Director General of Fair Trading ("DGFT") with
enhanced powers to investigate potential anti-competitive agreements and
conduct, including the power to require the production of any document or other
information which the DGFT considers relevant to the investigation and wide
powers of entry and search. The DGFT can impose fines for the infringement of
the CA of up to 10 per cent of U.K. turnover per annum for each year of
infringement, up to a maximum of three years. Competition rulings made by the
DGFT are subject to appeal to the Competition Commission and Restrictive
Practices Court. UPC Broadcast Centre is not involved in any current proceedings
relating to competition law before the U.K. courts nor are any investigations
which involve the Company underway before any authority exercising powers under
the CA 1998. For a more detailed description of Articles 81 and 82, see the
discussion in "--European Union--Regulation of Competition".
EUROPEAN UNION
BROADCASTING REGULATION
TELEVISION WITHOUT FRONTIERS DIRECTIVE. The Television Without Frontiers
Directive sets forth the following basic principles for the regulation of
broadcasting activity in the EU:
- Each EU broadcasting service should be regulated by the authorities of one
member state (the "home member state") and some minimum standards should
be required by each member state of all broadcasting services which that
state's authorities regulate. (The U.K., which is regarded as the
Company's "home member state" for the purposes of its D-DTH services
because UPC Broadcast Centre is established in the U.K. and is the
licensed broadcaster of its proprietary channels, has adopted a variety of
statutory and administrative measures based on the Directive to give
effect to the requirements of the Directive.)
- Each member state is required to ensure "where practicable and by
appropriate means" that broadcasters reserve "a majority proportion of
their transmission time" for European works (excluding time covering news,
sports events, games, advertising, teleshopping and teletext services).
The Directive does not define the term "where practicable and by
appropriate means" and its precise ambit is unclear.
- Each member states is required to ensure "where practicable and by
appropriate means" that broadcasters reserve at least 10% of their
transmission time (excluding time covering news, sports events, games,
advertising, teleshopping and teletext services) or, at the option of the
member state, 10% of their programming budget, for European works created
by producers who are independent of broadcasters. An adequate proportion
of the relevant works should be recent works. (Polish-language programming
the Company produces or commissions will be counted for
20
the purposes of determining whether any service broadcast by the Company
complies with these quotas.)
- There are restrictions on advertising including restrictions on the timing
of commercial breaks, restrictions on the content of advertising,
limitations or prohibitions on tobacco, non-prescription drug and alcohol
advertising and restrictions limiting commercials to a maximum of 20% of
transmission time per hour, subject to an overall limit of 15% per day.
- There are restrictions on the content of programs to the extent necessary
(A) to protect minors and (B) to prevent the incitement of hatred on he
grounds of race, sex, religion or nationality.
1989 EUROPEAN CONVENTION ON TRANSFRONTIER TELEVISION. The 1989 European
Convention on Transfrontier Television is the other primary source of European
regulation affecting television broadcasting in Europe. The 1989 European
Convention on Transfrontier Television contains provisions that are
substantially similar to the Television Without Frontiers Directive. The 1989
European Convention on Transfrontier Television is effective in those countries
which have ratified it. Both the U.K. and Poland have ratified the 1989 European
Convention on Transfrontier Television. The 1989 European Convention on
Transfrontier Television currently provides that the country in which a
broadcaster transmits its programming to the satellite (or, if this is not the
case, the country which grants the broadcast frequency or satellite capacity to
the broadcaster) has jurisdiction over that broadcaster. Neither the Television
Without Frontiers Directive nor the 1989 European Convention on Transfrontier
Television contains any requirements or restrictions regarding foreign ownership
of broadcasters.
A change to the 1989 European Convention on Transfrontier Television was
agreed on September 9, 1998. This amendment would have been effective if and
when all member states have signed the amendment or automatically on October 1,
2000, unless a member state objects to such amendment coming into force.
Following the France objection this amendment has not yet entered into force.
This amendment, if it becomes effective, would have three significant effects:
- First, it would bring the 1989 European Convention on Transfrontier
Television into conformity with the Television Without Frontiers
Directive's "establishment" test, providing that a broadcaster should be
regulated primarily by the authorities in the 1989 European Convention on
Transfrontier Television country in which the broadcaster is established.
- Second, this amendment would provide that when a broadcaster engages in
conduct that constitutes an "abuse of rights", the broadcaster would
become subject to the laws of the country of reception. Under this
amendment, an "abuse of rights" would occur when a broadcaster's channel
is wholly or principally directed at a country, other than that where it
is established, for the purpose of evading the laws of that country in the
areas covered by the 1989 European Convention on Transfrontier Television.
The Company believes that its broadcasting into Poland from the U.K. would
not constitute an "abuse of rights" under this amendment because it has
valid business reasons for broadcasting from the U.K. and it has not
established its broadcasting facilities in the U.K. in order to evade
Polish laws in the areas covered by the 1989 European Convention on
Transfrontier Television. An adverse decision on this issue, if this
amendment becomes effective and Poland decides to invoke it against the
Company's broadcasts emanating from the U.K. could prevent the Company
from broadcasting its programming package.
- Third, this amendment would allow parties to the 1989 European Convention
on Transfrontier Television to designate that certain important events
(e.g., major sporting events) cannot be broadcast exclusively by a single
television station so as to deprive a large proportion of the public of
that 1989 European Convention on Transfrontier Television country from
seeing the event live or on a deferred coverage basis on free (broadcast)
television, and also to ensure that broadcasters under the jurisdiction of
one 1989 European Convention on Transfrontier
21
Television country cannot purchase exclusive rights to major events
specified by another 1989 European Convention on Transfrontier Television
country which would deprive a large proportion of the public in such
member countries of the 1989 European Convention on Transfrontier
Television from seeing the specified event on a live or deferred coverage
basis on free (broadcast) television. (If this amendment becomes effective
and if it were applied to the Polish pay television rights to certain
sporting events purchased on an exclusive basis by us, the Company may
lose the right to broadcast such events in Poland on an exclusive basis
and may not be able to acquire the exclusive Polish pay television rights
to such events and to similar events in the future.)
The 1989 European Convention on Transfrontier Television provides that where
a broadcaster under the jurisdiction of one member country of the 1989 European
Convention on Transfrontier Television transmits advertisements which are
directed specifically at audiences in another member country of the 1989
European Convention on Transfrontier Television, such advertisements must comply
with the advertising rules of the receiving member state. This rule requires
that advertisements inserted in the channels the Company distributes comply with
both Polish advertising rules as well as the rules applicable in the
jurisdiction in which the broadcaster is licensed.
REGULATION OF COMPETITION
EC competition law governs agreements which prevent, restrict or distort
competition and prohibits the abuse of dominant market positions through
Articles 81 and 82 of the EC Treaty.
Article 81 (1) renders unlawful agreements and concerted practices which may
affect trade between member states and which have as their object or effect the
prevention, restriction or distortion of competition within the member states of
the European Community/European Economic Area. Article 81 (2) voids the
offending provision or the entire agreement, if the offending parts are not
severable. Article 81 (3) allows for exemption from the provisions of Articles
81 (1) and 81 (2) for agreements whose beneficial effects in improving
production or distribution or promoting technical or economic progress outweigh
their restrictive effects, provided that consumers receive a fair share of the
benefit, that competition will not be eliminated and that no unnecessary
restrictions are accepted. Such an exemption may only be granted by the European
Commission. Article 82 prohibits undertakings from abuse of a dominant market
position in the EC or a substantial part of it, in so far as the abuse may
affect trade between member states. A company may be dominant in several member
states or part of a single member state. A company enjoys a dominant position
whenever it possesses such market strength that it can act to an appreciable
extent independently of its competitors and customers. Generally speaking, a
market share of as little as 40% can raise concern that a firm may be dominant.
However, dominance is not unlawful per se; only the abuse of a dominant position
is prohibited by Article 82. Any action that is designed to, or could, seriously
injure competitors, suppliers, distributors, or consumers is likely to raise
issues under Article 82.
The European Commission has the power to fine heavily (up to 10% of a
group's annual worldwide turnover) in relation to a breach of Article 81 or in
relation to abusive conduct under Article 82. Agreements or practice that breach
these provisions will be void and unenforceable in national courts and third
parties that suffer loss as a result of a breach of Article 81 or Article 82 can
sue for damages and/or seek injunctive relief. The Company does not believe that
any of its current agreements infringe Article 81(1) or Article 82 and therefore
does not intend to bring them to the attention of the European Commission. If
the European Commission were to find the agreements infringed Article 81(1) or
Article 82, the agreements would be void and unenforceable. The parties could
also be fined and liable to damages to third parties.
POLAND'S EU MEMBERSHIP APPLICATION
In 1994 Poland made an official application for membership of the EU.
Negotiations on the terms of Poland's proposed admission to the EU commenced in
March 1998. Poland has announced 2006 as a
22
target date for accession. If Poland joins the EU, it would be required to
implement and obey all of the laws and regulations emanating from the European
Commission, including the Television Without Frontiers Directive and EC
competition law in their then current versions.
ITEM 2. PROPERTIES
On December 31, 2000, the Company owned equipment used for its cable
television business, including 93 headends for cable networks, and approximately
4,924 kilometers of cable plant. The Company has approximately 179 lease
agreements for offices, storage spaces and land adjacent to the buildings. The
total area leased amounts to approximately 34,000 square meters. The areas
leased by the Company range from 1.25 square meters up to 6,582 square meters.
The agreements are for specified and unspecified periods of time and those for
an unspecified period may be terminated with relatively short notice periods by
either party, usually three months.
The Company has entered into conduit leases with TPSA (the Polish national
telephone company) and, in certain cases, with other entities. The majority of
the TPSA leases require the Company to bear the costs of the maintenance of the
cable. The Company may not sublease the conduit or cables or allow a third party
to use the conduits or cables free of charge without TPSA's consent. The rental
charge for the conduit is usually determined on each 100 meters of conduit
occupied. The agreements also contain indexation clauses for rent adjustment
purposes (based on the change of U.S. dollar exchange rates or on the increase
of real maintenance costs). A substantial portion of the Company's contracts
with TPSA for the use of such conduits permit termination by TPSA without
penalty at any time either immediately upon the occurrence of certain conditions
or upon provision of three to six months' notice without cause. Any termination
by TPSA of such contracts could result in the Company losing its permits, the
termination of agreements with cooperative authorities and programmers, and an
inability to service customers with respect to the areas where its networks
utilize the conduits that were the subject of such TPSA contracts. For a list of
the reasons for which TPSA can terminate a conduit agreement, the proportion of
the Company's cable subscribers serviced by conduits leases subject to immediate
termination and the consequences to the Company of the loss of those conduit
leases, see "Business--Cable Television--Technology and Infrastructure."
During 2000, the Company entered into a 5 year office lease for a new head
office in Warsaw. The Company's cable operations and main headend have been
located in this space as of February 2001.
The Company believes that its existing owned properties, lease agreements
and conduit agreements are adequate for purposes of the Company's cable
television operations, although additional space and conduits will be needed in
the future if the Company acquires other cable television networks.
In connection with its D-DTH service and the development of its programming
business, the Company has leased office space and premises providing satellite
receiving (to receive programs from suppliers), production, post-production and
program packaging facilities. This space is in aggregate approximately 1,637
square meters and is located in Maidstone, U.K.
The Company believes that its existing owned properties, lease agreements
and conduit agreements are adequate for the Company's D-DTH and programming
operations, although additional space may be needed in the future for the
Company's programming production activities.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in litigation from time to time in the ordinary
course of business. In management's opinion, the litigation in which the Company
is currently involved, individually and in the aggregate, is not material to the
Company's business financial condition or results of operations.
Two of the Company's cable television subsidiaries, Telewizja Kablowa
Gosat-Service Sp. z o.o. and PTK S.A., and four unrelated Polish cable operators
and HBO Polska Sp. z o.o. ("HBO Polska") have been made defendants in a lawsuit
instituted by Polska Korporacja Telewizyjna Sp. z o.o., an indirect
23
partially-owned subsidiary of Canal+ S.A. The lawsuit was filed in the
Provincial Court in Warsaw, XX Economic Division (Sad Wojewodzki w Warszawie,
Wydzial XX Gospodarczy) (the "Court"). The main defendant in the proceedings is
HBO Polska which is accused of broadcasting HBO television programming in Poland
without a license from the Polish National Radio and Television Council as
required by the Polish Television Act and thereby undertaking an activity
constituting an act of unfair competition. The plaintiff has asked the Court to
order HBO Polska to cease broadcasting of its programming in Poland until it has
received a broadcasting license from the Polish National Radio and Television
Council, and that the defendant cable operators be ordered (i) to cease carrying
the HBO Polska programming on their cable networks in Poland until HBO Polska
has received a broadcasting license from the Polish National Radio and
Television Council, (ii) not to use their current filters for the purpose of
unscrambling the HBO Polska programming, and (iii) in the future, to use
effective encoding systems and systems of controlled access to the HBO Polska
programming. The Company does not believe that the lawsuit will have a material
adverse effect on its business operations.
On April 17, 1998, the Company signed a binding letter of intent with
Telewizyna Korporacja Partycypacyjna ("TKP"), the parent company of Canal+
Polska, which provided for bringing together the Company's Wizja TV programming
platform and the Canal+ Polska premium pay television channel and for the joint
development and operation of a D-DTH service in Poland. The establishment of the
joint venture was subject to the execution of definitive agreements, regulatory
approvals and certain other closing conditions.
The definitive agreements were not agreed and executed by the parties by the
date set forth in the letter of intent (the "Signature Date"). Therefore, the
Company terminated the letter of intent on June 1, 1998. TKP and its
shareholders have informed the Company that they believe the Company did not
have the right to terminate the letter of intent.
Under the terms of the letter of intent, TKP was obligated to pay the
Company a $5 million break-up fee within 10 days of the Signature Date if the
definitive agreements were not executed by the Signature Date, unless the
failure to obtain such execution was caused by the Company's breach of any of
its obligations under the letter of intent. If there was any such breach by the
Company, the Company would be obligated to pay TKP $10 million. However, if any
breach of the letter of intent by TKP caused the definitive agreements not to be
executed, TKP would be obligated to pay the Company a total of $10 million
(including the $5 million break-up fee).
The Company demanded monies from TKP as a result of the failure to execute
the definitive agreements by the Signature Date. While the Company was waiting
for the expiration of the 10-day period for payment of the break-up fee, TKP
initiated arbitration proceedings before a three member-arbitration panel in
Geneva, Switzerland. In their claim, TKP and its shareholders alleged that the
Company breached its obligation to negotiate in good faith and to use its best
efforts to agree and execute the definitive agreements and claimed the Company
was obligated to pay TKP $10 million pursuant to the letter of intent. The
Company answered and brought counterclaims against TKP and its shareholders. The
arbitration hearings were conducted in Geneva in June 1999. On June 26, 2000,
the arbitration tribunal awarded TKP $10 million plus interest and costs and
dismissed the Company's request for damages against TKP and its shareholders.
Following the award, the Company decided not to appeal. During the second
quarter of the year 2000, the Company accrued $12.0 million related to the
arbitration. The award of $12,218,100 was paid on October 27, 2000.
24
On or about July 8, 1999, certain minority shareholders ("the minority
shareholders") of Poland Cablevision (Netherlands) B.V. (PCBV), an indirect
subsidiary of the Company, filed a lawsuit against the Company, Poland
Communications, Inc. ("PCI") and certain other defendants, in United States
District Court, Southern District of Ohio, Eastern Division, Civil Action No.
C2-99-621.
The relief sought by the minority shareholders includes: (1) unspecified
damages in excess of $75,000, (2) an order lifting the restrictions against
transfer of shares set forth in the Shareholders' Agreement among PCBV's
shareholders, as amended (the "Shareholders' Agreement") so that the minority
shareholders can liquidate their shares in PCBV, (3) damages in the amount of
1.7 percent of the payment made by UPC for the shares of the Company as set
forth in the Agreement and Plan of Merger between the Company and UPC dated June
2, 1999, and (4) attorneys' fees and costs incurred in prosecuting the lawsuit.
The amended complaint sets forth eight claims for relief based on
allegations that the defendants, including the Company and PCI, committed the
following wrongful acts: (1) breached a covenant not to compete contained in the
Shareholders' Agreement relating to the shareholders of PCBV, (2) breached a
covenant in the Shareholders' Agreement requiring that any contract entered into
by PCBV with any other party affiliated with PCI be commercially reasonable or
be approved by certain of the minority shareholders, (3) breached a provision in
the Shareholders' Agreement that allegedly required co-defendant Chase
International Corp. ("CIC") to offer the minority shareholders the right to
participate in certain sales of PCBV shares and that required CIC to give
written notice of any offer to purchase the minority shareholders' shares in
PCBV, (4) breached their fiduciary duties to the minority shareholders, (5)
breached the agreement between PCBV and CIC, which allegedly limited the amount
of management fees that could be paid annually by PCBV, (6) made false and
misleading statements in various documents filed with the Securities and
Exchange Commission, (7) colluded to defraud the minority shareholders by
failing to make reference in certain Forms 8-K, 8-KA and 14D-1 to the minority
shareholders or their alleged rights and claims, (8) colluded to divert assets
of PCBV to affiliates of PCI and PCBV, including the Company, that allegedly
compete with PCI and PCBV.
On or about March 31, 2000 the parties to the lawsuit reached a settlement.
In accordance with the settlement, on June 2, 2000 Wizja TV B.V., an affiliate
of PCI, purchased approximately 1.4% of the outstanding shares of PCBV for a
price of approximately $2.2 million. The case has been dismissed and releases
exchanged. The aforementioned settlement does not include the remaining minority
shareholders.
In addition to the Ohio lawsuit, other minority shareholders of PCBV
(representing an additional approximately 6% of the shares of PCBV, hereinafter
the "Reece Group") have asserted claims against the past and present directors
or officers of, or members of the Board of Managers of, PCI, PCBV and the
Company or one or more controlling shareholders of the Company but have not yet
filed suit.
The claims by the Reece Group consist of allegations previously made by
Reece Communications, Inc. ("RCI"). RCI's allegations were premised on, among
other things, alleged acts, errors, omissions, misstatements, misleading
statements or breaches of duty by the aforementioned officers, directors, or
controlling shareholders. Although the Company has defenses to the Reece Group's
allegations, the Company is presently attempting to negotiate a settlement of
those claims and a simultaneous purchase of the Reece Group's PCBV shares.
On January 27, 2000, the Groupe Jean-Claude Darmon ("Darmon"), a French
company, commenced legal proceedings against Wizja TV Sp. z o.o., a subsidiary
of the Company, and SPN Widzew SSA Sportowa Spolka Akcyjna (Lodz Football Club)
in the Paris Commercial Court ("Tribunal de Commerce de Paris").
Wizja TV Sp. z o.o. has been accused of infringing broadcast and advertising
rights which Darmon purports to hold. Darmon has accused Wizja TV Sp. z o.o. of
interrupting the broadcast signal of the UEFA Cup match on October 21, 1999
between Lodz Football Club and AS Monaco. Darmon seeks damages in the amount of
13,025,000 French francs (approximately $1,760,674) from Wizja Sp. z o.o. The
Company is unable to predict the outcome of this case.
25
For a discussion of certain Anti-Monopoly Office's findings relating to the
Company, see "Business--Regulation--Poland--Anti-Monopoly Act."
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
UPC Polska, Inc.'s common stock is owned by UPC and is not traded on any
public trading market.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below are selected consolidated financial data of the Company for
each of the periods in the five years period ended December 31, 2000. The
Company for the three years ended December 31, 1998 and the period from January
1, 1999 through August 5, 1999 prior to the Company's acquisition by UPC
("Acquisition"), is herein referred to as "Predecessor" and the Company from
August 6, 1999 through December 31, 1999 and the year ended December 31, 2000
after Acquisition is referred to as the "Successor". The selected consolidated
financial data set forth below have been derived from the consolidated financial
statements of the Company and the notes thereto prepared in conformity with
generally accepted accounting principles as applied in the United States, which
have been audited by the Company's independent accountants (the "Consolidated
Financial Statements") during the respective periods. The selected consolidated
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included herein:
PREDECESSOR SUCCESSOR
------------------------------------------------ -----------------------------
PERIOD FROM PERIOD FROM
JANUARY 1, AUGUST 6, 1999
YEAR ENDED DECEMBER 31, 1999 THROUGH THROUGH YEAR ENDED
--------------------------------- AUGUST 5, DECEMBER 31, DECEMBER 31,
1996 1997 1998 1999 1999 2000
-------- --------- ---------- ------------ -------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Revenues................................ $ 24,923 $ 38,138 $ 61,859 $ 46,940 $ 38,018 $ 133,583
Operating expenses:
Direct operating expenses............. (7,193) (14,621) (61,874) (70,778) (69,351) (132,154)
Selling, general and administrative
expenses (1) ....................... (9,289) (49,893) (74,494) (51,034) (46,874) (63,156)
Depreciation and amortization......... (9,788) (16,294) (26,304) (23,927) (40,189) (109,503)
-------- --------- ---------- ---------- ---------- ----------
Operating loss.......................... (1,347) (42,670) (100,813) (98,799) (118,396) (171,230)
Interest and investment income.......... 1,274 5,754 3,355 2,823 731 1,329
Interest expense........................ (4,687) (13,902) (21,957) (28,818) (24,459) (73,984)
Equity in losses of affiliated
companies............................. -- (368) (6,310) (1,004) (291) (895)
Foreign exchange gain / (loss), net..... (761) (1,027) (130) (2,188) (2,637) 3,397
Non-operating income.................... -- -- -- -- 1,977 591
Impairment.............................. -- -- -- -- (1,091) (7,734)
Loss before income taxes, minority
interest and extraordinary item....... (5,521) (52,213) (125,855) (127,986) (144,166) (248,526)
Income tax (expense)/ benefit........... (1,273) 975 (210) (30) (11) (285)
Minority interest....................... 1,890 (3,586) -- -- -- --
-------- --------- ---------- ---------- ---------- ----------
Loss before extraordinary item.......... (4,904) (54,824) (126,065) (128,016) (144,177) (248,811)
Extraordinary item - loss on early
extinguishment of debt................ (1,713) -- -- -- -- --
-------- --------- ---------- ---------- ---------- ----------
Net loss.............................. (6,617) (54,824) (126,065) (128,016) (144,177) (248,811)
Accretion of redeemable preferred
stock................................. (2,870) (2,436) -- (2,436) -- --
Preferred stock dividend................ (1,738) -- -- -- -- --
(Excess)/deficit carrying value of
preferred stock (over)/under
consideration paid (2)................ 3,549 (33,806) -- -- -- --
-------- --------- ---------- ---------- ---------- ----------
Net loss applicable to holders of common
stock................................. $ (7,676) $ (91,066) $ (126,065) $ (130,452) $ (144,177) $ (248,811)
======== ========= ========== ========== ========== ==========
Basic and diluted loss per common
share................................. $ (0.44) $ (3.68) $ (3.78) $ (3.90) N/A N/A
======== ========= ========== ========== ========== ==========
26
PREDECESSOR SUCCESSOR
------------------------------- ---------------------------
AS OF AS OF
DECEMBER 31, DECEMBER 31,
1996 1997 1998 1999 2000
-------- --------- -------- ------------ ------------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents.......... $ 68,483 $105,691 $ 13,055 $ 35,520 $ 8,879
Property, plant and equipment,
net.............................. 84,833 117,579 213,054 218,784 291,512
Total assets....................... 217,537 307,096 348,374 1,218,871 1,235,154
Total notes payable................ 130,074 130,110 263,954 534,696 721,442
Redeemable preferred stock......... 34,955 -- -- -- --
Total stockholders' equity......... 31,048 152,355 33,656 606,960 403,222
- ------------------------
(1) The year ended December 31, 1997 includes a non-cash compensation expense of
$18,102,000 relating to the granting of certain management stock options.
See note 17 to the Consolidated Financial Statements.
(2) Represents the amount paid to preferred stockholders in excess of or less
than the carrying value of such shares.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
On August 6, 1999, Bison Acquisition Corp., UPC's wholly-owned subsidiary,
was merged with and into the Company with the Company continuing as the
surviving corporation (the "Merger"). Accordingly, the Company became a
wholly-owned subsidiary of UPC. UnitedGlobalCom, Inc. is the majority
stockholder of UPC.
Until the limited launch of the Company's D-DTH business on July 1, 1998 and
subsequent full-scale launch on September 18, 1998, the Company's revenues were
derived entirely from its cable television business and programming related
thereto. The Company's revenue has increased 57.2% from $85.0 million in the
year ended December 31, 1999 to $133.6 million in the year ended December 31,
2000. This increase was due primarly to internal growth in subscribers through
increased penetration, increases in subscription rates, further development of
the Wizja TV programming package, sales of programming and up link services, and
advertising sales.
Prior to June 1997, the Company's expenses were primarily incurred in
connection with its cable television business and programming related thereto.
Since June 1997, the Company has been incurring, in addition to expenses related
to its cable television and programming businesses, expenses in connection with
the operation of its D-DTH business and Wizja TV.
The Company generated an operating loss of $171.2 million for the year ended
December 31, 2000, primarily due to the significant costs associated with the
development of the Company's D-DTH and programming businesses, promotion of
those businesses, the development, production and acquisition of programming for
Wizja TV, the amortization of additional goodwill pushed down to the Company as
a result of the Merger and fees paid for services in connection with the
acquisition by UPC.
The Company divides operating expenses into (i) direct operating expenses,
(ii) selling, general and administrative expenses, and (iii) depreciation and
amortization expenses. Direct operating expenses consist of programming
expenses, maintenance and related expenses necessary to service, maintain and
operate the Company's cable systems, and D-DTH programming platform, billing and
collection expenses and customer service expenses. Selling, general and
administrative expenses consist principally of administrative costs, including
office related expenses, professional fees and salaries, wages and benefits of
non-technical employees, advertising and marketing expenses, bank fees and bad
debt
27
expense. Depreciation and amortization expenses consist of depreciation of
property, plant and equipment and amortization of intangible assets.
SEGMENT RESULTS OF OPERATIONS
The Company classifies its business into four segments: (1) cable
television, (2) D-DTH television, (3) programming, and (4) corporate.
Information about the operations of the Company in these different business
segments is set forth below based on the nature of the services offered.
During 1999 and in prior years, the Company presented its operations in
three business segments: (1) cable television, (2) D-DTH television and
programming, and (3) corporate. Due to the increasing size of the D-DTH segment,
in January 2000, management decided to separate its D-DTH operations into two
distinct segments, satellite television and programming.
In addition to other operating statistics, the Company measures its
financial performance by EBITDA, an acronym for earnings before interest, taxes,
depreciation and amortization. The Company defines EBITDA to be net loss
adjusted for interest and investment income, depreciation and amortization,
interest expense, foreign currency gains and losses, equity in losses of
affiliated companies, income taxes, gains and losses of fixed assets disposals
and impairment results, and minority interest. The items excluded from EBITDA
are significant components in understanding and assessing the Company's
financial performance. The Company believes that EBITDA and related measures of
cash flow from operating activities serve as important financial indicators in
measuring and comparing the operating performance of media companies. EBITDA is
not a U.S. GAAP measure of profit and loss or cash flow from operations and
should not be considered as an alternative to cash flows from operations as a
measure of liquidity.
The following table presents an aggregation of the Company's segment results
of operations for the year ended December 31, 2000 with comparatives for the
seven and five months of 1999, aggregate year ended December 31, 1999 and year
ended December 31, 1998.
28
SEGMENT RESULTS OF OPERATIONS
SUCCESSOR PREDECESSOR
-------------------------- ------------------------------------------
AGGREGATE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, FIVE MONTHS SEVEN MONTHS DECEMBER 31, DECEMBER 31,
2000 OF 1999 OF 1999 1999 1998
------------ ----------- ------------ ------------ ------------
REVENUES
Cable............................ 68,781 27,027 35,434 62,461 52,971
D-DTH............................ 51,239 8,230 10,675 18,905 9,048
Programming...................... 68,697 14,910 15,926 30,836 13,819
Corporate and Other.............. -- -- -- -- --
Intersegment elimination......... (55,134) (12,149) (15,095) (27,244) (13,979)
--------- --------- -------- --------- ---------
TOTAL............................ 133,583 38,018 46,940 84,958 61,859
OPERATING LOSS
Cable............................ (44,581) (26,923) (11,936) (38,859) (23,066)
D-DTH............................ (47,284) (40,846) (44,832) (85,678) (35,247)
Programming...................... (71,858) (45,859) (28,094) (73,953) (33,800)
Corporate and Other.............. (7,507) (4,768) (13,937) (18,705) (8,700)
--------- --------- -------- --------- ---------
TOTAL............................ (171,230) (118,396) (98,799) (217,195) (100,813)
EBITDA
Cable............................ 1,203 (8,765) 1,883 (6,882) (1,431)
D-DTH............................ (6,932) (28,184) (37,753) (65,937) (34,012)
Programming...................... (48,491) (36,507) (25,083) (61,590) (30,366)
Corporate and Other.............. (7,507) (4,751) (13,919) (18,670) (8,700)
--------- --------- -------- --------- ---------
TOTAL............................ (61,727) (78,207) (74,872) (153,079) (74,509)
The period from January 1, 1999 through August 5, 1999 and the period from
August 6, 1999 through December 31, 1999 are referred to herein as the "seven
months of 1999" and "five months of 1999", respectively. All other references to
the period ended July 31, 1999 or balances as of July 31, 1999 should be
construed as relating to the period from January 1, 1999 through August 5, 1999
or August 5, 1999, respectively. All other references to the period ended
December 31, 1999 should be construed as relating to the period from August 6,
1999 through December 31, 1999.
All references to the year ended December 31, 1999 herein represent an
aggregation of the seven months of 1999 and the five months of 1999. No
adjustments have been made to the seven months of 1999 for the effect of the
Merger.
CABLE SEGMENT OVERVIEW
The Company's revenues in its cable segment have been and will continue to
be derived primarily from monthly subscription fees for cable television
services and one-time installation fees for connection to its cable television
networks. The Company charges cable subscribers fixed monthly fees for their
choice of service packages and for other services, such as premium channels,
tuner rentals and additional outlets, all of which are included in monthly
subscription fees. Through its cable segment, the Company currently offers
broadcast, intermediate (in limited areas) and basic packages of cable service.
At December 31, 2000, approximately 70.7% of the Company's cable subscribers
received its basic package compared to 71.6% for the year ended December 31,
1999. For the year ended December 31, 2000, approximately 97.3% of the Company's
cable revenue was derived from monthly subscription fees compared to
approximately 94.0% for the year ended December 31, 1999.
When the Company began operations in 1990, revenue from installation fees
exceeded revenue from monthly subscription fees because of the significant
number of new installations and the high amount of the installation fees
relative to the small existing subscriber base. As the Company's cable
29
subscriber base has grown, aggregate monthly subscription revenue has increased
and installation fees, while currently increasing on an aggregate basis, have
declined as a percentage of total revenue.
During 1999 and 2000, management completed or was in the process of
completing several strategic actions in support of its cable business and
operating strategy. On June 5, 1998, the Company began providing the Wizja TV
programming package, with its initial 11 channels of primarily Polish-language
programming, to its basic cable subscribers. Since that date, the basic Wizja TV
package has been expanded to 28 channels. Management believes that this
selection of high quality primarily Polish-language programming will provide it
with a significant competitive advantage in increasing its cable subscriber
penetration rates. The Company has continued to invest in upgrading its networks
in order to provide additional revenue generating services to its customers and
continue to improve the security of that network.
During the fourth quarter of the year 2000, the Company began providing
Internet services to its cable television customers and has been investing in
upgrading its network to provide this service. Individual and home office
Internet subscribers are charged a monthly subscription fee of $48.00 and
$60.00, respectively. The standard installation fee is approximately $59.00 for
buildings with multiple apartments and approximately $120.00 for single family
dwellings.
The Company has implemented a pricing strategy designed to increase revenue
per cable subscriber and its profit margin. The Company has increased the
monthly price for the "basic" package to reflect the increased channel
availability, and the premium channels, the HBO Poland service and Wizja Sport,
have been offered to cable customers for an additional monthly charge. However,
as of March 24, 2001, Wizja Sport is no longer a premium channel, but has been
expanded to the basic package. The Company is in the process of encrypting the
HBO Poland service on cable for all premium channel subscribers. This encryption
and installation process is completed in all major systems and is expected to be
rolled out in the remaining Company's systems in 2001.
The cable segment generated operating losses of $44.6 million for 2000,
$38.9 million for aggregated 1999 and $23.1 million for 1998 primarily due to
the purchase of Wizja TV programming for $24.4 million, $21.0 million and $12.9
million in 2000, 1999 and 1998, respectively and the amortization of a goodwill
pushed down to the Company as a result of the Merger.
D-DTH SEGMENT OVERVIEW
The Company continues to distribute D-DTH reception systems through the
network of Philips' authorized retailers as well as a separate direct sales
force. During the year the Company increased its subscriber base from
approximately 254,000 to approximately 415,000. In addition, it also managed to
increase the number of premium subscriptions purchased from its basic customers
from approximately 220,000 to approximately 370,000.
During the year 2000, the Company has focused on continuing to expand its
D-DTH subscriber base, increase the revenues generated per subscriber and reduce
its operating costs.
During the fourth quarter of the year 2000, the Company began providing
Internet services to its D-DTH customers. Internet subscribers are charged a
subscription fee of $29.00 per month. The standard activation and installation
fees are approximately $72.00 and $96.00, respectively.
The Company expects to continue to incur operating losses and negative cash
flows related to its D-DTH business at least for the next year while it develops
and expands its D-DTH subscriber base. The Company's D-DTH business plan
requires the funding of substantial capital expenditures and promotional
incentives in order to expand its D-DTH business.
30
PROGRAMMING SEGMENT OVERVIEW
The principal objective of the Company for the programming segment is to
develop, acquire and distribute high quality programming that can be
commercially exploited throughout Poland through its D-DTH and cable television
systems, and to develop and maximize advertising sales.
PROGRAMMING. The Company, both directly and through joint ventures,
produces television programming for distribution. The Company has developed a
multi-channel, primarily Polish-language programming platform under the brand
name Wizja TV. Wizja TV's current channel line-up includes three channels, Wizja
Jeden, Wizja Pogoda and Wizja Sport, that are owned and operated by the Company,
and 25 channels that are produced by third parties, 8 of which are broadcast
under exclusive agreements for pay television in Poland. The Company intends to
discontinue Wizja Jeden as of April 2001.
During the year 2000, UPC Broadcast Centre began providing D-DTH
transmission services and purchased and sold programming rights to other
subsidiaries of UPC in Hungary, the Czech Republic and Slovakia.
2000 COMPARED WITH 1999
CABLE SEGMENT
CABLE TELEVISION REVENUE. Revenue increased $6.3 million or 10.1% from
$62.5 million in the year ended December 31, 1999 to $68.8 million in the year
ended December 31, 2000. This increase was primarily attributable to a 1.9%
increase in the number of basic and intermediate subscribers from approximately
783,000 at December 31, 1999 to approximately 798,000 at December 31, 2000, as
well as an increase in monthly subscription rates.
Revenue from monthly subscription fees represented 94.0% of cable television
revenue for the year ended December 31, 1999 and 97.3% for the year ended
December 31, 2000. During the year ended December 31, 2000, the Company
generated approximately $4.5 million of additional premium subscription revenue
as a result of providing the HBO Poland and Wizja Sport channels to cable
subscribers as compared to $2.1 million for the year ended December 31, 1999
(although the Company expanded Wizja Sport into its basic package as of
March 24, 2001).
DIRECT OPERATING EXPENSES. Direct operating expenses decreased $0.7 million
or 1.5%, from $45.8 million for the year ended December 31, 1999 to $45.1
million for the year ended December 31, 2000, principally as a result of
restructuring programming agreements with Wizja TV B.V., a subsidiary of the
company in the programming segment. Direct operating expenses decreased from
73.3% of revenues for the year ended December 31, 1999 to 65.6% of revenues for
the year ended December 31, 2000. However, without considering the intersegment
charge for Wizja TV programming package, direct operating expenses as a
percentage of revenue would have been 30% and 39.7% in the year ended December
31, 2000 and 1999, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $1.0 million or 4.3% from $23.5 million for
the year ended December 31, 1999 to $22.5 million for the year ended December
31, 2000, principally as a result of decreases in administrative expenses.
Selling, general and administrative expenses decreased from 37.6% of revenues
for the year ended December 31, 1999 to 32.7% for the year ended December 31,
2000.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense rose
$13.8 million, or 43.1%, from $32.0 million for the year ended December 31, 1999
to $45.8 million for the year ended December 31, 2000 principally as a result of
depreciation and amortization of additional goodwill pushed down as a result of
the merger with UPC and the continued build-out of the Company's cable networks.
Depreciation and amortization expense as a percentage of revenues increased from
51.2% for the year ended December 31, 1999 to 66.6% for the year ended December
31, 2000.
OPERATING LOSS. Each of these factors contributed to an operating loss of
$44.6 million for the year ended December 31, 2000 and $38.9 million for the
year ended December 31, 1999.
31
D-DTH SEGMENT
D-DTH REVENUE. D-DTH revenue increased $32.3 million or 170.9% from $18.9
million for the year ended December 31, 1999 to $51.2 million for the year ended
December 31, 2000. This increase is primarily due to the increase in subscribers
from 254,092 as at the end of 1999 to 414,692 as at the end of 2000.
DIRECT OPERATING EXPENSES. Direct operating expenses decreased $12.9
million or 26.3% from $49.0 million for the year ended December 31, 1999 to
$36.1 million for the year ended December 31, 2000. These decreases principally
were the net result of: the $31.7 million cost related to D-DTH reception
systems sold below cost and the write down of D-DTH reception systems included
in inventory from April 1, 1999 to November 8, 1999 to net realizable value, and
increase in programming cost of $20.4 million from $10.7 million in 1999 to
$31.1 million in 2000.
Direct operating expenses decreased from 259.3% of revenue for the year
ended December 31, 1999 to 70.5% for the year ended December 31, 2000. Excluding
the write down of D-DTH reception systems to net realizable value and cost
related to DDTH reception systems sold below cost, direct operating expenses as
a percentage of revenue would have been 91.5% in 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $13.8 million or 38.4% from $35.9 million for
the year ended December 31, 1999 to $22.1 million for the year ended
December 31, 2000. As a percentage of revenue, selling, general and
administrative expenses amounted to approximately 189.9% and 43.2% for the years
ended December 31, 1999 and 2000, respectively. The decrease in selling, general
and administrative expenses was attributable mainly to decrease in sales and
marketing expenses associated with promotion of the Company's D-DTH service and
Wizja TV programming platform.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization charges
increased $20.7 million or 105.1% from $19.7 million for the year ended
December 31, 1999 to $40.4 million for the year ended December 31, 2000,
principally as a result of additional goodwill pushed down as a result of the
Merger with UPC and an increased number of D-DTH decoders. Depreciation and
amortization expense as a percentage of revenues decreased from 104.2% for the
year ended December 31, 1999 to 78.9% for the year ended December 31, 2000.
OPERATING LOSS. Each of these factors contributed to an operating loss of
$85.7 million for the year ended December 31, 1999 compared to an operating loss
of $47.3 million for the year ended December 31, 2000.
PROGRAMMING SEGMENT
PROGRAMMING REVENUE. Programming revenue increased $37.9 million or 123.1%
from $30.8 million for the year ended December 31, 1999 to $68.7 million for the
year ended December 31, 2000. Revenue from the provision of the Wizja TV
programming package to the Company's cable and DTH systems, which was eliminated
as a result of the consolidation of the Company's financial results, represented
$27.2 million and $55.1 million or 88.3% and 80.2% of programming revenue for
the year ended December 31, 1999 and 2000, respectively.
DIRECT OPERATING EXPENSES. Direct operating expenses increased $32.3
million or 44.5% from $72.6 million for the year ended December 31, 1999 to
$104.9 million for the year ended December 31, 2000. These increases principally
were the result of a $16.6 million increase in programming costs in the year
ended December 31, 2000, and costs associated with the lease of four
transponders on the Astra satellites which provide the capability to deliver the
Company's Polish-language programming platform to cable and D-DTH customers in
Poland. Direct operating expenses decreased from 235.7% of revenue for the year
ended December 31, 1999 to 152.7% for the year ended December 31, 2000.
32
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $7.6 million or 38.2% from $19.9 million for
the year ended December 31, 1999 to $12.3 million for the year ended
December 31, 2000. As a percentage of revenue, selling, general and
administrative expenses amounted to approximately 64.6% and 17.9% for the years
ended December 31, 1999 and 2000, respectively. The decrease in selling, general
and administrative expenses was attributable to a decrease in professional fees
associated with obtaining long-term programming contracts and
broadcast/exhibition rights.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization charges
increased $11.0 million or 88.7% from $12.4 million for the year ended
December 31, 1999 to $23.4 million for the year ended December 31, 2000,
principally as a result of additional goodwill pushed down as a result of the
Merger with UPC. Depreciation and amortization expense as a percentage of
revenues decreased from 40.3% for the year ended December 31, 1999 to 34.1% for
the year ended December 31, 2000.
OPERATING LOSS. Each of these factors contributed to an operating loss of
$74.0 million for the year ended December 31, 1999 compared to an operating loss
of $71.8 million for the year ended December 31, 2000.
CORPORATE AND OTHER SEGMENT
Corporate and other segment consists of corporate overhead costs. The
Company continues to evaluate opportunities for improving its operations and
reducing its cost structure. Corporate net expenses amounted to $7.5 million for
the year ended December 31, 2000 as compared to $18.7 million for the
corresponding period in 1999. This decrease is the result of the $9.1 million
administration cost incurred in 1999 with relation to the Merger.
NON OPERATING RESULTS
INTEREST EXPENSE. Interest expense increased $20.7 million, or 38.8%, from
$53.3 million for the year ended December 31, 1999 to $74.0 million for the year
ended December 31, 2000 mainly as a result of the accretion of interest of the
$252 million aggregate principal amount at maturity of the Company's 14 1/2%
Senior Discount Notes due 2009, which were issued on January 22, 1999 and Series
C Senior Discount Notes due 2008, which were issued on January 20, 1999.
INTEREST AND INVESTMENT INCOME. Interest and investment income decreased
$2.3 million, or 63.9%, from $3.6 million for the year ended December 31, 1999
to $1.3 million for the year ended December 31, 2000, primarily due to reduction
of cash balances hold in investment founds and decrease in interest rates.
EQUITY IN LOSSES OF AFFILIATED COMPANIES. The Company recorded $1.3 million
of equity in losses of affiliated companies for the year ended December 31, 1999
and $0.9 million for the year ended December 31, 2000. This equity in losses
resulted from the Company's 50% investment in Twoj Styl, a publishing company
and 20% investment in Fox Kids Poland, a channel content provider and 30%
investment in Mazowiecki Klub Sportowy Sportowa Spolka Akcyjna, a Polish
basketball team.
FOREIGN EXCHANGE GAINS AND LOSSES, NET. For the year ended December 31,
2000 foreign exchange gain amounted to $3.4 million. For the year ended December
31, 1999 foreign exchange loss amounted to $4.8 million.
NET LOSS. For the years ended December 31, 1999 and 2000, the Company had
net losses of $272.2 million and $248.8 million, respectively. These losses were
the result of the factors discussed above.
33
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS. Net loss applicable to common
stockholders decreased from a loss of $274.6 million for the year ended
December 31, 1999 to a loss of $248.8 million for the year ended December 31,
2000 due to the factors discussed above.
1999 COMPARED WITH 1998
CABLE SEGMENT
CABLE TELEVISION REVENUE. Revenue increased $9.5 million or 17.9% from
$53.0 million in the year ended December 31, 1998 to $ 62.5 million in the year
ended December 31, 1999. This increase was primarily attributable to a 6.0%
increase in the number of basic and intermediate subscribers from approximately
738,000 at December 31, 1998 to approximately 783,000 at December 31, 1999, as
well as an increase in monthly subscription rates. The Company introduced the
Wizja TV programming package on its cable systems for basic subscribers on June
5, 1998, and after an initial free period, increased prices significantly in
September 1998. Approximately 28.2% of the net increase in basic subscribers was
the result of build-out of the Company's existing cable networks and the
remainder was due to acquisitions.
Revenue from monthly subscription fees represented 88.9% of cable television
revenue for the year ended December 31, 1998 and 94.0% for the year ended
December 31, 1999. During the year ended December 31, 1999, the Company
generated approximately $2.1 million of additional premium subscription revenue
as a result of providing the HBO Poland service pay movie channels to cable
subscribers as compared to $3.1 million for the year ended December 31, 1998.
DIRECT OPERATING EXPENSES. Direct operating expenses increased $11.0
million or 31.6%, from $34.8 million for the year ended December 31, 1998 to
$45.8 million for the year ended December 31, 1999, principally as a result of
the purchase of the Wizja TV programming package from the Company's Programming
segment and higher levels of technical personnel and increased maintenance
expenses associated with recently acquired networks as well as the increased
size of the Company's cable television system.
Direct operating expenses increased from 65.7 % of revenues for the year
ended December 31, 1998 to 73.3% of revenues for the year ended December 31,
1999. However, without considering the intersegment charge for Wizja TV
programming package, direct operating expenses as a percentage of revenue would
have been 39.7% and 40.4% in the year ended December 31, 1999 and 1998,
respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $3.9 million or 19.9% from $19.6 million for
the year ended December 31, 1998 to $23.5 million for the year ended December
31, 1999, principally as a result of increases in sales and marketing expenses
incurred in newly acquired networks to support our pricing strategy, extensive
country-wide Autumn marketing campaign and general growth of the business.
Selling, general and administrative expenses increased from 37.0% of
revenues for the year ended December 31, 1998 to 37.6% for the year ended
December 31, 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense rose
$10.4 million, or 48.1%, from $21.6 million for the year ended December 31, 1998
to $32.0 million for the year ended December 31, 1999 principally as a result of
depreciation and amortization of additional goodwill pushed down as a result of
the merger with UPC and the continued build-out of the Company's cable networks.
Depreciation and amortization expense as a percentage of revenues increased from
40.8% for the year ended December 31, 1998 to 51.2% for the year ended
December 31, 1999.
OPERATING LOSS. Each of these factors contributed to an operating loss of
$38.9 million for the year ended December 31, 1999 and $23.1 million for the
year ended December 31, 1998.
34
D-DTH SEGMENT
D-DTH REVENUE. D-DTH revenue increased $9.9 million or 110.0% from $9.0
million for the year ended December 31, 1998 to $18.9 million for the year ended
December 31, 1999. Revenue from subscription fees, represented $8.5 million and
$16.7 million or 94.4% and 88.4% of D-DTH revenue for the year ended December
31, 1998 and 1999, respectively.
Revenue from other operating activity, which was eliminated as a result of
the consolidation of the Company's financial results, represented $0.4 million
and $0 or 4.4% and 0% of DTH revenue for the year ended December 31, 1998 and
1999, respectively.
Other revenue after elimination for the year ended December 31, 1998 and
1999 represented 1.2% and 11.6%, respectively of D-DTH revenue.
DIRECT OPERATING EXPENSES. Direct operating expenses increased $43.1
million, or 730.5% from $5.9 million for the year ended December 31, 1998 to
$49.0 million for the year ended December 31, 1999. These increases principally
were the result of: the $31.7 million cost related to D-DTH reception systems
sold below cost and the write down of D-DTH reception systems included in
inventory from April 1, 1999 to November 8, 1999 to net realizable value and a $
10.2 million increase in programming costs in the year ended December 31, 1999.
Direct operating expenses increased from 65.6% of revenue for the year ended
December 31, 1998 to 259.3% for the year ended December 31, 1999. Excluding the
write down of D-DTH reception systems to net realizable value, direct operating
expenses as a percentage of revenue would have been 91.5% in 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $1.3 million or 3.5% from $37.2 million for
the year ended December 31, 1998 to $35.9 million for the year ended
December 31, 1999. As a percentage of revenue, selling, general and
administrative expenses amounted to approximately 413.3% and 189.9% for the
years ended December 31, 1998 and 1999, respectively. The decrease in selling,
general and administrative expenses was attributable mainly to sales and
marketing expenses associated with promotion of the Company's D-DTH service and
Wizja TV programming platform and the preparation for the launch and operation
of the Company's proprietary premium sports channel called Wizja Sport. The
increase in selling, general and administrative expenses was also attributable
to the installation and distribution costs associated with the sale of Wizja TV
programming packages and an increase in the number of Sales and Call Center
staff associated with the Wizja TV programming package.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization charges
increased $18.5 million, or 1,541.7% from $1.2 million for the year ended
December 31, 1998 to $19.7 million for the year ended December 31, 1999,
principally as a result of additional goodwill pushed down as a result of the
merger with UPC and an increased number of D-DTH decoders. Depreciation and
amortization expense as a percentage of revenues increased from 13.3% for the
year ended December 31, 1998 to 104.2% for the year ended December 31, 1999.
OPERATING LOSS. Each of these factors contributed to an operating loss of
$35.2 million for the year ended December 31, 1998 compared to an operating loss
of $85.7 million for the year ended December 31, 1999.
PROGRAMMING SEGMENT
PROGRAMMING REVENUE. Programming revenue increased $17.0 million or 123.2%
from $13.8 million for the year ended December 31, 1998 to $30.8 million for the
year ended December 31, 1999. Revenue from the provision of the Wizja TV
programming package to the Company's cable and DTH systems, which was eliminated
as a result of the consolidation of the Company's financial results,
35
represented $13.5 million and $27.2 million or 97.8% and 88.3% of programming
revenue for the year ended December 31, 1998 and 1999, respectively.
Other revenue, after elimination of revenue from the cable and DTH segments
represented 2.2% of programming revenue for the year ended December 31, 1998 and
11.7% for the year ended December 31, 1999.
DIRECT OPERATING EXPENSES. Direct operating expenses increased $38.0
million, or 109.8% from $34.6 million for the year ended December 31, 1998 to
$72.6 million for the year ended December 31, 1999. These increases principally
were the result of the increase in programming costs in the year ended
December 31, 1999, and costs associated with the lease of three transponders on
the Astra satellites which provide the capability to deliver the Company's
Polish-language programming platform to cable and D-DTH customers in Poland.
Direct operating expenses decreased from 250.7% of revenue for the year ended
December 31, 1998 to 235.7% for the year ended December 31, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $10.3 million or 107.3% from $9.6 million for
the year ended December 31, 1998 to $19.9 million for the year ended
December 31, 1999. As a percentage of revenue, selling, general and
administrative expenses amounted to approximately 69.6% and 64.6% for the years
ended December 31, 1998 and 1999, respectively. The increase in selling, general
and administrative expenses was attributable to an increase in professional fees
associated with obtaining long-term programming contracts and
broadcast/exhibition rights.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization charges
increased $9.0 million, or 264.7% from $3.4 million for the year ended
December 31, 1998 to $12.4 million for the year ended December 31, 1999,
principally as a result of additional goodwill pushed down as a result of the
merger with UPC. Depreciation and amortization expense as a percentage of
revenues increased from 24.6% for the year ended December 31, 1998 to 40.3% for
the year ended December 31, 1999.
OPERATING LOSS. Each of these factors contributed to an operating loss of
$33.8 million for the year ended December 31, 1998 compared to an operating loss
of $74.0 million for the year ended December 31, 1999.
CORPORATE AND OTHER SEGMENT
Corporate and other segment consists of corporate overhead costs. The
Company continues to evaluate opportunities for improving its operations and
reducing its cost structure. Corporate net expenses amounted to $18.7 million
for the year ended December 31, 1999 as compared to $8.7 million for the
corresponding period in 1998. Corporate expenses for the year ended
December 31, 1999 included a non-recurring expense of $9.1 million related to
fees paid to Goldman Sachs for its services in connection with the acquisition
by UPC.
NON OPERATING RESULTS
INTEREST EXPENSE. Interest expense increased $31.3 million, or 142.3%, from
$22.0 million for the year ended December 31, 1998 to $53.3 million for the year
ended December 31, 1999 mainly as a result of the accretion of interest of the
$252 million aggregate principal amount at maturity of the Company's 14 1/2%
Senior Discount Notes due 2009, which were issued on January 22, 1999 and Series
C Senior Discount Notes due 2008, which were issued on January 20, 1999.
INTEREST AND INVESTMENT INCOME. Interest and investment income increased
$0.2 million, or 5.9%, from $3.4 million for the year ended December 31, 1998 to
$3.6 million for the year ended December 31, 1999, primarily due to increase in
cash balances resulting from the issuance of the above mentioned Discount Notes
and an increase in interest rates.
36
EQUITY IN LOSSES OF AFFILIATED COMPANIES. The Company recorded $6.3 million
of equity in losses of affiliated companies for the year ended December 31, 1998
and $1.3 million for the year ended December 31, 1999. This equity in losses
resulted from the Company's 50% investment in Twoj Styl, a publishing company
and 20% investment in Fox Kids Poland, a channel content provider and 30%
investment in Mazowiecki Klub Sportowy Sportowa Spolka Akcyjna, a Polish
basketball team.
FOREIGN EXCHANGE LOSS, NET. For the year ended December 31, 1999 foreign
exchange loss amounted to $4.8 million. For the year ended December 31, 1998
foreign exchange loss amounted to $0.1 million.
NET LOSS. For the years ended December 31, 1998 and 1999, the Company had
net losses of $126.1 million and $272.2 million, respectively. These losses were
the result of the factors discussed above.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS. Net loss applicable to common
stockholders increased from a loss of $126.1 million for the year ended
December 31, 1998 to a loss of $274.6 million for the year ended December 31,
1999 due to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has met its cash requirements in recent years primarily with
(i) capital contributions and loans from certain of the Company's principal
stockholders, (ii) borrowings under available credit facilities, (iii) cash
flows from operations, (iv) the sale of approximately $200 million of common
stock through the Company's initial public equity offering in August 1997, (v)
the sale of $252 million aggregate principal amount at the maturity of the
14 1/2% Senior Discount Notes ("UPC Polska Notes") in July 1998 with gross
proceeds of approximately $125 million, (vi) the sale of $36,001,321 principal
amount at maturity of its Series C Discount Notes ("Series C Notes") in January
1999 with gross proceeds of $9.8 million, (vii) the sale of its 14 1/2% Senior
Discount Notes ("Discount Notes") in January 1999 with gross proceeds of $96.1
million, and (viii) the sale of the Series A 12% Cumulative Preference Shares,
the Series B 12% Cumulative Preference Shares and Warrants in January 1999 with
gross proceeds of $48.2 million.
Since the acquisition of all of the outstanding stock of the Company by UPC
on August 6, 1999, the Company has met its capital requirements primarily
through capital contributions and loans from UPC.
Pursuant to the indentures governing the 9 7/8% Senior Notes sold by PCI in
October 1996 ("PCI Notes"), the UPC Polska Notes, the Series C Notes, and the
Discount Notes, the Company is subject to certain restrictions and covenants,
including, without limitation, covenants with respect to the following matters:
a. limitation on indebtedness;
b. limitation on restricted payments;
c. limitation on issuances and sales of capital stock of restricted
subsidiaries;
d. limitation on transactions with affiliates;
e. limitation on liens;
f. limitation on guarantees of indebtedness by subsidiaries;
g. purchase of the notes upon a change of control;
h. limitation on sale of assets;
i. limitation on dividends and other payment restrictions affecting
restricted subsidiaries;
j. limitation on investments in unrestricted subsidiaries;
k. consolidations, mergers, and sale of assets;
l. limitation on lines of business; and
m. provision of financial statements and reports
37
The Company is in compliance with these covenants.
The indentures covering each of the UPC Polska Notes, Series C Notes,
Discount Notes and the PCI Notes provide that, following a Change of Control (as
defined therein), each noteholder had the right, at such holder's option, to
require the respective issuer to offer to repurchase all or a portion of such
holder's notes at the repurchase prices, described below. The Company believes
that the August 6, 1999 acquisition by UPC of the Company constituted a Change
of Control. Accordingly, UPC Polska and PCI made offers to repurchase (the
"Offers") from the holders the UPC Polska Notes, Series C Notes, Discount Notes
and the PCI Notes. The Offers expired at 12:01 PM, New York City time, on
November 2, 1999.
In accordance with the terms of the indentures governing the UPC Polska
Notes, Series C Notes, Discount Notes and the PCI Notes, UPC Polska was required
to offer to repurchase the UPC Polska Notes, Series C Notes, Discount Notes at
101% of their accreted value at maturity on the expiration date plus accrued and
unpaid interest and PCI was required to offer to repurchase the PCI Notes at the
purchase price 101% of principal. As of August 5, 1999, UPC Polska had
$376,943,000 aggregate principal amount at maturity of UPC Polska Notes, Series
C Notes, Discount Notes outstanding and PCI had $129,668,000 aggregate principal
amount at maturity of PCI Notes outstanding. Pursuant to the Offer, UPC Polska
has purchased $49,139,000 aggregate principal amount of UPC Polska Notes, Series
C Notes, Discount Notes for an aggregate price of $26,455,014 and PCI has
purchased $113,237,000 aggregate principal amount of PCI Notes for an aggregate
price of $114,369,370.
UPC financed the repurchase of the UPC Polska Notes, Series C Notes,
Discount Notes and PCI Notes and the Company's operating activities by making
loans of $217.3 million to UPC Polska in the fourth quarter of 1999.
In 2000, UPC made a capital contribution of $50.6 million and additional
loans of $115.1 million to the Company. On December 31, 2000, the Company had,
on a consolidated basis, approximately $721.4 million aggregate principal amount
of indebtedness outstanding, of which $365.5 million was owed to UPC. All of the
loans from UPC to UPC Polska bear interest at 9.75% per annum payable at
maturity, and mature in 2009. Loans from UPC with an aggregate principal amount
of $150.0 million have been subordinated to the UPC Polska Notes, the Series C
Notes and Discount Notes.
The Company purchased 14,000 shares of Debenture Stock issued by PCI for
$140 million to fund PCI's purchase of PCI Notes and operations. The Company
used a portion of the proceeds of the loans from UPC to purchase the Debenture
Stock. The Debenture Stock is redeemable on December 31, 2003 at the issue price
plus interest of 10% per annum compounded annually. To secure its obligations
under the Debenture Stock, PCI will pledge to the Company notes issued to it by
its subsidiary PCBV with an aggregate principal amount of $176,815,000. The PCI
Noteholders will be equally and ratably secured by the pledge in accordance with
the terms of the PCI Indenture.
The Company had negative cash flows from operating activities of $62.3
million for the year ended December 31, 2000, $143.4 million for the year ended
December 31, 1999 and $70.7 million for the year ended December 31, 1998,
primarily due to the significant operating costs associated with the development
and launch of its D-DTH service and the Wizja TV programming platform.
Cash used for the purchase and build-out of the Company's cable television
networks, purchase of D-DTH equipment including set top decoders, and the
purchase of other property, plant, and equipment was $124.2 million in 2000,
$51.0 million in 1999 and $115.0 million in 1998. The decrease in 1999 is
partially related to the fact that a significant portion of the D-DTH boxes were
sold as opposed to leased in 2000 and 1998. The 2000 increase primarily relates
to the Company's acquisition of additional cable networks' assets and the
development of its D-DTH service and Wizja TV.
On December 31, 2000, the Company was committed to pay at least $511.1
million in guaranteed payments (including but not limited to payments for D-DTH
reception systems and payments of
38
guaranteed minimum amounts due under programming agreements and satellite
transponder leases) over the next eight years of which at least approximately
$97.2 million was committed through the end of 2001.
Cash used for the acquisition of subsidiaries, net of cash received, $7.9
million in 1999 and $27.0 million in 1998.
The loans from UPC were used primarily for the repurchase of the PCI Notes,
to fund capital expenditures, operating losses and working capital primarily
related to the development and operation of its D-DTH business, and for general
corporate purposes and certain other investments, including the possible
acquisition of cable television networks and certain minority interests in our
subsidiaries which are held by unaffiliated third parties.
As of December 31, 2000, the Company has negative working capital and
significant commitments under non-cancelable operating leases and for
programming rights.
The Company's cash on hand will be insufficient to satisfy all of its
obligations related to its offer to repurchase its and its subsidiary's
outstanding senior notes and to complete its current business plan for its D-DTH
and programming businesses. UPC and the Company are evaluating various
alternatives to meet the Company's capital needs. Future sources of financing
for the Company could include public or private debt or bank financing or any
combination thereof, subject to the restrictions contained in the indentures
governing the outstanding senior indebtedness of the Company, UPC, and United
GlobalCom, Inc., UPC's parent. Moreover, if the Company's plans or assumptions
change, if its assumptions prove inaccurate, if it consummates unanticipated
investments in or acquisitions of other companies, if it experiences unexpected
costs or competitive pressures, or if existing cash, and projected cash flow
from operations prove to be insufficient, the Company may need to obtain greater
amounts of additional financing. While it is the Company's intention to enter
only into new financing or refinancings that it considers advantageous, there
can be no assurance that such sources of financing would be available to the
Company in the future, or, if available, that they could be obtained on terms
acceptable to the Company. The Company is also dependent on its parent, UPC, to
provide financing to achieve the Company's business strategy. UPC has declared
that it will continue to financially support the Company and its subsidiaries as
a going concern, and accordingly enable the Company and its subsidiaries to meet
their financial obligations if and when needed, for the period at least through
January 31, 2002.
CURRENT OR ACCUMULATED EARNINGS AND PROFITS
For the fiscal year ended December 31, 2000, the Company had no current or
accumulated earnings and profits. Therefore, none of the interest which accreted
during the fiscal year ended December 31, 2000 with respect to the Company's
14 1/2% Senior Discount Notes due 2008, 14 1/2% Series B Discount Notes due
2008, 14 1/2% Senior Discount Notes due 2009, 14 1/2% Series B Discount Notes
due 2009 and its Series C Senior Discount Notes will be deemed to be a "Dividend
Equivalent Portion" as such term is defined in Section 163(e)(5)(B) of the
Internal Revenue Code, as amended.
IMPLEMENTATION OF A NEW ACCOUNTING STANDARDS
SAB 101 permits the effects of the changes to be recorded as a cumulative
effect of a change in accounting principle during the quarter ended
December 31, 2000. As the Company's accounting policies for its cable television
and DDTH services are still accounted for under SFAS 51, FINANCIAL REPORTING BY
CABLE TELEVISION COMPANIES, there was no immediate effect on the Company.
However, with the introduction of Internet services in the fourth quarter of
2000, revenue recognition for Internet related services has been and will be
reported in accordance with SAB 101.
39
IMPACT OF NEW ACCOUNTING STANDARDS
NEW ACCOUNTING PRINCIPLES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES, SFAS 133 establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded on the balance sheet as
either an asset or liability measured at its fair value. The statement requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific accounting criteria are met. If a derivative instrument
qualifies for hedge accounting, the gains or losses from the derivative may
offset results from the hedged item in the statement of operations or other
comprehensive income, depending on the type of hedge. To adopt hedge accounting,
a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting.
In June 2000, the Financial Accounting Standards Board issued SFAS 138,
ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES.
This statement addresses a limited number of issues causing implementation
difficulties for numerous entities that apply SFAS 133 and this statement amends
the accounting and reporting standards of SFAS 133 for certain derivative
instruments and certain hedging accounting.
SFAS 137 delayed the effective date of SFAS 133 to fiscal years beginning
after June 15, 2000. A company may implement the statements as of the beginning
of any fiscal quarter after issuance; however, SFAS 133 cannot be applied
retroactively.
The Company expects that the adoption of SFAS 133, SFAS 137, and SFAS 138 in
2001 will not have a material impact on the financial position or the results of
operations of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS
(SAB 101). SAB 101 outlines the SEC's views on applying generally accepted
accounting principles to revenue recognition in financial statements.
Specifically, the bulletin provides both general and specific guidance as to the
periods in which companies should recognize revenues. In addition, SAB 101 also
highlights factors to be considered when determining whether to recognize
revenues on a gross or net basis. SAB 101, as amended by SAB 101/A and SAB
101/B, was effective beginning no later than their fourth fiscal quarter of the
fiscal year beginning after December 15, 1999; as the Company is a calendar
year-end company, this would be the quarter ending December 31, 2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
The principal market risk (i.e., the risk of loss arising from adverse
changes in market rates and prices) to which the Company is exposed is foreign
exchange rate risk from fluctuations in the Polish zloty currency exchange rate.
The Company's long term debt is primarily subject to a fixed rate, and therefore
variations in the interest rate do not have a material impact on net interest
expense.
FOREIGN EXCHANGE AND OTHER INTERNATIONAL MARKET RISKS.
Operating in international markets involves exposure to movements in
currency exchange rates. Currency exchange rate movements typically affect
economic growth, inflation, interest rates, governmental actions and other
factors. These changes, if material, can cause the Company to adjust its
financing and operating strategies. The discussion of changes in currency
exchange rates below does not incorporate these other important economic
factors.
International operations constitute 100% of the Company's 2000 consolidated
operating loss. Some of the Company's operating expenses and capital
expenditures are expected to continue to be
40
denominated in or indexed in U.S. dollars. By contrast, substantially all of the
Company's revenues are denominated in zloty. Therefore, any devaluation of the
zloty against the U.S. dollar that the Company is unable to offset through price
adjustments will require it to use a larger portion of its revenue to service
its U.S. dollar denominated obligations and contractual commitments.
The Company estimates that a further 10% change in foreign exchange rates
would impact operating loss by approximately $12.5 million. In other terms a 10%
depreciation of the Polish zloty against the U.S. dollar, would result in a
$12.5 million decrease in the reported operating loss for the year ended
December 31, 2000. The Company believes that this quantitative measure has
inherent limitations because, as discussed in the first paragraph of this
section, it does not take into account any governmental actions or changes in
either customer purchasing patterns or the Company's financing or operating
strategies.
The Company does not generally hedge currency translation risk. While the
Company may consider entering into transactions to hedge the risk of exchange
rate fluctuations, there is no assurance that it will be able to obtain hedging
arrangements on commercially satisfactory terms. Therefore, shifts in currency
exchange rates may have an adverse effect on the Company's financial results and
on its ability to meet its U.S. dollar denominated debt obligations and
contractual commitments.
Poland has historically experienced high levels of inflation and significant
fluctuations in the exchange rate for the zloty. The Polish government has
adopted policies that slowed the annual rate of inflation from approximately
250% in 1990 to approximately 11.8% in 1998, approximately 7.3% in 1999 and
10.1% in 2000. The exchange rate for the zloty has stabilized and the rate of
devaluation of the zloty has generally decreased since 1991. The zloty
depreciated against the U.S. dollar by approximately 17.4% for the year ended
December 31, 1999. However for the year ended December 31, 2000, the zloty
appreciated against the U.S. dollar by approximately 0.12%. Inflation and
currency exchange fluctuations may have a material adverse effect on the
business, financial condition and results of operations of the Company.
41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholder of UPC Polska, Inc.:
We have audited the accompanying consolidated balance sheets of UPC
Polska, Inc. and its subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of operations, comprehensive loss, changes in
stockholder's equity and cash flows for the year ended December 31, 2000 and for
the periods from January 1, 1999 through August 5, 1999 and from August 6, 1999
through December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of UPC
Polska, Inc. and its subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for the year ended
December 31, 2000 and for the periods from January 1, 1999 through August 5,
1999 and from August 6, 1999 through December 31, 1999, in conformity with
generally accepted accounting principles in the United States of America.
Arthur Andersen Sp. z o.o.
Warsaw, Poland
March 28, 2001
42
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
UPC Polska, Inc (formerly @Entertainment, Inc.):
We have audited the accompanying consolidated statements of operations,
comprehensive loss, changes in stockholders' equity and cash flows of UPC
Polska, Inc. (formerly @Entertainment, Inc.) and subsidiaries for the year ended
December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of UPC Polska Inc. (formerly @Entertainment, Inc.) and subsidiaries for
the year ended December 31, 1998, in conformity with generally accepted
accounting principles in the United States of America.
KPMG
Warsaw, Poland
March 29, 1999
43
UPC POLSKA, INC.
CONSOLIDATED BALANCE SHEETS
SUCCESSOR (NOTE 2) SUCCESSOR (NOTE 2)
DECEMBER 31, DECEMBER 31,
2000 1999
------------------ ------------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 8,879 $ 35,520
Trade accounts receivable, net of allowance for doubtful
accounts of $8,685 in 2000 and $3,090 in 1999 (note
5)...................................................... 18,627 12,808
Programming and broadcast rights (note 9)................. 10,317 7,200
VAT recoverable........................................... 1,625 9,623
Prepayments............................................... 5,354 1,883
Due from UPC affiliates................................... 12,469 333
Other current assets...................................... 1,430 829
---------- ----------
Total current assets.................................... 58,701 68,196
---------- ----------
Property, plant and equipment (note 7):
Cable television systems assets........................... 151,417 123,845
D-DTH equipment........................................... 165,369 82,327
Construction in progress.................................. 11,730 7,400
Vehicles.................................................. 2,081 1,943
Other..................................................... 23,157 15,871
---------- ----------
353,754 231,386
Less accumulated depreciation............................. (62,242) (12,602)
---------- ----------
Net property, plant and equipment....................... 291,512 218,784
Inventories for construction................................ 6,596 5,511
Intangible assets, net (note 8)............................. 862,116 906,987
Investment in affiliated companies (note 10)................ 16,229 19,393
---------- ----------
Total assets............................................ $1,235,154 $1,218,871
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 95,631 $ 71,757
Due to UPC................................................ 5,190 1,206
Accrued interest.......................................... 236 243
Deferred revenue.......................................... 7,964 4,009
---------- ----------
Total current liabilities............................... 109,021 77,215
---------- ----------
Long-term liabilities:
Notes payable and accrued interest to UPC (note 12)....... 365,497 220,149
Notes payable (note 12)................................... 355,945 314,547
Other long term liabilities............................... 1,469 --
---------- ----------
Total liabilities....................................... 831,932 611,911
---------- ----------
Commitments and contingencies (notes 18 and 24)
Stockholder's equity (note 1):
Common stock, $.01 par value; 1,000 shares authorized,
issued and outstanding as in 2000 and in 1999........... -- --
Paid-in capital........................................... 863,111 812,549
Accumulated other comprehensive loss...................... (66,901) (61,412)
Accumulated deficit....................................... (392,988) (144,177)
---------- ----------
Total stockholder's equity........................ 403,222 606,960
---------- ----------
Total liabilities and stockholder's equity........ $1,235,154 $1,218,871
========== ==========
See accompanying notes to consolidated financial statements.
44
UPC POLSKA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
SUCCESSOR (NOTE 2) PREDECESSOR (NOTE 2)
----------------------------- ------------------------------
PERIOD FROM PERIOD FROM
AUGUST 6, 1999 JANUARY 1, 1999
YEAR ENDED THROUGH THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31, AUGUST 5, DECEMBER 31,
2000 1999 1999 1998
------------ -------------- --------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues....................................... $ 133,583 $ 38,018 $ 46,940 $ 61,859
Operating expenses:
Direct operating expenses.................... 132,154 69,351 70,778 61,874
Selling, general and administrative
expenses................................... 63,156 46,874 51,034 74,494
Depreciation and amortization................ 109,503 40,189 23,927 26,304
---------- ---------- ---------- ----------
Total operating expenses....................... 304,813 156,414 145,739 162,672
Operating loss............................... (171,230) (118,396) (98,799) (100,813)
Interest and investment income................. 1,329 731 2,823 3,355
Interest expense............................... (73,984) (24,459) (28,818) (21,957)
Equity in losses of affiliated companies....... (895) (291) (1,004) (6,310)
Foreign exchange gain / (loss), net............ 3,397 (2,637) (2,188) (130)
Non-operating income........................... 591 1,977 -- --
Impairment of D-DTH equipment (note 7)......... (7,734) (1,091) -- --
---------- ---------- ---------- ----------
Loss before income taxes and minority
interest and extraordinary items........... (248,526) (144,166) (127,986) (125,855)
Income tax expense (note 11)................... (285) (11) (30) (210)
Minority interest.............................. -- -- -- --
Net loss..................................... (248,811) (144,177) (128,016) (126,065)
Accretion of redeemable preferred stock...... -- -- (2,436) --
---------- ---------- ---------- ----------
Net loss applicable to holders of common
stock........................................ $ (248,811) $ (144,177) $ (130,452) $ (126,065)
========== ========== ========== ==========
Basic and diluted net loss per common share
(note 15).................................... N/A N/A $ (3.90) $ (3.78)
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
45
UPC POLSKA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
SUCCESSOR (NOTE 2) PREDECESSOR (NOTE 2)
------------------------------ ------------------------------
PERIOD FROM PERIOD FROM
AUGUST 6, 1999 JANUARY 1, 1999
YEAR ENDED THROUGH THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31, AUGUST 5, DECEMBER 31,
2000 1999 1999 1998
------------- -------------- --------------- ------------
(IN THOUSANDS)
Net loss.................................. $ (248,811) $ (144,177) $ (128,016) $ (126,065)
Other comprehensive loss:
Translation adjustment................ (5,489) (61,412) (21,327) (249)
---------- ---------- ---------- ----------
Comprehensive loss........................ $ (254,300) $ (205,589) $ (149,343) $ (126,314)
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
46
UPC POLSKA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY/(DEFICIENCY)
ACCUMULATED
PREFERRED STOCK COMMON STOCK OTHER
------------------- ---------------------- PAID-IN COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL LOSS DEFICIT TOTAL
-------- -------- ----------- -------- -------- ------------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Balance January 1, 1998... -- $ -- 33,310,000 $ 333 $230,339 $ (218) $ (78,099) $ 152,355
Translation adjustment.... -- -- -- -- -- (249) -- (249)
Net loss.................. -- -- -- -- -- -- (126,065) (126,065)
Warrants attached to
Senior Discount Note
(note 12)............... -- -- -- -- 7,615 -- -- 7,615
------ -------- ----------- ----- -------- -------- --------- ---------
Balance December 31,
1998.................... -- -- 33,310,000 333 237,954 (467) (204,164) 33,656
Proceeds from issuance of
preferred stock......... 5,000 28,812 -- -- 19,483 -- -- 48,295
Accretion of redeemable
preferred stock......... -- 2,436 -- -- (2,436) -- -- --
Warrants attached to
Senior Discount Notes... -- -- -- -- 7,452 -- -- 7,452
Proceeds from issuance of
common stock............ -- -- 96,000 1 195 -- -- 196
Proceeds from exercise of
warrants................ -- -- 538,616 5 6,441 -- -- 6,446
Translation adjustment.... -- -- -- -- -- (21,327) -- (21,327)
Net loss.................. -- -- -- -- -- -- (128,016) (128,016)
------ -------- ----------- ----- -------- -------- --------- ---------
Balance August 5, 1999,
Predecessor (note 2).... 5,000 31,248 33,944,616 339 269,089 (21,794) (332,180) (53,298)
------ -------- ----------- ----- -------- -------- --------- ---------
Warrants exercise......... -- -- -- -- 146 -- -- 146
Issuance of common
stock................... -- -- 1,000 -- -- -- -- --
Purchase accounting
adjustments............. (5,000) (31,248) (33,944,616) (339) 543,314 21,794 332,180 865,701
------ -------- ----------- ----- -------- -------- --------- ---------
Balance August 6, 1999,
Successor............... -- -- 1,000 -- 812,549 -- -- 812,549
Translation adjustment.... -- -- -- -- -- (61,412) -- (61,412)
Net loss.................. -- -- -- -- -- -- (144,177) (144,177)
------ -------- ----------- ----- -------- -------- --------- ---------
Balance December 31, 1999,
Successor (note 2)...... -- -- 1,000 -- 812,549 (61,412) (144,177) 606,960
Translation adjustment.... -- -- -- -- -- (5,489) -- (5,489)
Net loss.................. -- -- -- -- -- -- (248,811) (248,811)
Additional paid in capital
from UPC................ -- -- -- -- 50,562 -- -- 50,562
------ -------- ----------- ----- -------- -------- --------- ---------
Balance December 31, 2000,
Successor (note 2)...... -- $ -- 1,000 $ -- $863,111 $(66,901) $(392,988) $ 403,222
====== ======== =========== ===== ======== ======== ========= =========
See accompanying notes to consolidated financial statements.
47
UPC POLSKA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUCCESSOR (NOTE 2) PREDECESSOR (NOTE 2)
---------------------------------- -----------------------------------
PERIOD FROM
AUGUST 6, 1999 PERIOD FROM
THROUGH JANUARY 1, 1999
YEAR ENDED DECEMBER 31, THROUGH YEAR ENDED
DECEMBER 31, 2000 1999 AUGUST 5, 1999 DECEMBER 31, 1998
----------------- -------------- --------------- -----------------
(IN THOUSANDS)
Cash flows from operating activities:
Net loss............................................. $(248,811) $(144,177) $(128,016) $(126,065)
Adjustments to reconcile net loss to net cash used in
operating activities:
Minority interest.................................. -- -- -- --
Depreciation and amortization...................... 109,503 40,189 23,927 26,304
Amortization of notes payable discount and issue
costs............................................ 42,510 16,838 19,209 9,182
Equity in loss of affiliated companies............. 895 291 1,004 6,310
Impairment of D-DTH equipment...................... 7,734 1,091 -- --
Unrealized foreign exchange gains and losses....... (4,447) 3,939 -- --
Arbitration settlement............................. (12,350) -- -- --
Other.............................................. (2,144) (2,200) 619 2,196
Changes in operating assets and liabilities:
Accounts receivable.............................. (4,407) (3,746) (2,651) (2,780)
Other current assets............................. 4,394 1,647 6,985 (7,959)
Programming and broadcast rights................. (3,117) 5,208 (3,378) (8,136)
Accounts payable................................. 20,140 6,688 403 25,185
Income taxes payable............................. -- (85) 85 2,026
Accrued interest................................. -- -- -- (35)
Deferred revenue................................. 3,955 1,125 1,103 3,104
Trade accounts receivable from UPC affiliates.... (12,136) -- -- --
Trade accounts payable to UPC.................... 5,190 1,206 -- --
Interest payable to UPC.......................... 29,268 2,804 -- --
Other............................................ 1,537 3,211 3,468 --
--------- --------- --------- ---------
Net cash used in operating activities........ (62,286) (65,971) (77,242) (70,668)
--------- --------- --------- ---------
Cash flows from investing activities:
Construction and purchase of property, plant and
equipment...................................... (124,180) (27,021) (24,034) (114,992)
Investment in affiliated companies............... -- -- -- (5,228)
Acquisition of minority shares................... (2,206) -- -- --
Other investments................................ -- (237) (1,753) --
Purchase of intangibles.......................... (2,401) (308) -- --
Purchase of subsidiaries, net of cash received... -- (954) (6,860) (26,990)
--------- --------- --------- ---------
Net cash used in investing activities........ (128,787) (28,520) (32,647) (147,210)
--------- --------- --------- ---------
Cash flows from financing activities:
Net proceeds from issuance of stock and exercise
of warrants.................................... -- 146 6,447 --
Redemption of notes.............................. (1,048) -- -- --
Proceeds from issuance of notes payable.......... -- -- 109,755 123,985
Proceeds from loans from parent (UPC)............ 115,068 217,012 -- --
UPC capital increase............................. 50,562 -- -- --
Proceeds from issuance of preferred stock and
warrants....................................... -- -- 48,295 7,615
Repayment of bonds payables...................... -- (149,395) (5,156) (5,960)
Repayment of notes payable....................... -- -- -- (398)
--------- --------- --------- ---------
Net cash provided by financing activities.... 164,582 67,763 159,341 125,242
--------- --------- --------- ---------
Net increase/(decrease) in cash and cash
equivalents................................ (26,491) (26,728) 49,452 (92,636)
Effect of exchange rates on cash and cash
equivalents................................ (150) (259) -- --
Cash and cash equivalents at beginning of period....... 35,520 62,507 13,055 105,691
--------- --------- --------- ---------
Cash and cash equivalents at end of period............. $ 8,879 $ 35,520 $ 62,507 $ 13,055
========= ========= ========= =========
Supplemental cash flow information:
Cash paid for interest........................... $ 2,026 $ 6,270 $ 7,304 $ 13,014
Cash paid for income taxes....................... $ 102 $ 37 $ 47 $ 589
========= ========= ========= =========
See accompanying notes to consolidated financial statements
48
UPC POLSKA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
1. ORGANIZATION AND FORMATION OF HOLDING COMPANY
UPC Polska, Inc. (previously @Entertainment, Inc.), a Delaware corporation
and wholly-owned subsidiary of United Pan-Europe Communications N.V. ("UPC") was
established in May 1997. UPC Polska, Inc. succeeded Poland Communications, Inc.
("PCI") as the group holding company to facilitate an initial public offering of
stock in the United States and internationally (the "IPO"). PCI was founded in
1990 by David T. Chase, a Polish-born investor. On August 6, 1999, United
Pan-Europe Communications N.V. ("UPC") through its wholly-owned subsidiary,
Bison Acquisition Corporation ("Bison") acquired all of the outstanding shares
of the Company. The period from January 1, 1999 through August 5, 1999 and the
period from August 6, 1999 through December 31, 1999 are referred to herein as
the "seven months of 1999" and "five months of 1999", respectively.
UPC Polska, Inc. and its subsidiaries (the "Company") offer pay television
services to business and residential customers in Poland. Its revenues are
derived primarily from monthly basic and premium service fees for cable and
digital satellite direct-to-home ("D-DTH") television services provided
primarily to residential, rather than business, customers. In September 1998,
the Company launched its D-DTH broadcasting service throughout Poland. In
addition to developing and acquiring programming for distribution on its cable
and D-DTH television networks, the Company commenced distribution of a branded
digital encrypted platform of Polish-language programming under the brand name
Wizja TV in June and September 1998 on its cable and D-DTH television networks,
respectively.
At December 31, 2000, UPC Polska, Inc.'s consolidated financial statements
include wholly-owned PCI, @Entertainment Programming, Inc. ("@EPI")--United
States corporations, UPC Broadcast Centre Limited (previously At Entertainment
Limited then Wizja TV Limited) ("UPC Broadcast Centre Ltd"), At Entertainment
Services Limited ("@ES")--United Kingdom corporations, Wizja TV B.V. (previously
Sereke Holding B.V. ("Wizja TV BV"))--a Netherlands corporation and Wizja TV
Sp. z o.o., Atomic TV Sp. z o.o. (previously Ground Zero Media Sp. z o.o.)
("Atomic TV") and Wizja TV Spolka Produkcyjna Sp. z o.o., which are Polish
corporations. PCI owns 92.3% of the capital stock of Poland Cablevision
(Netherlands) B.V. ("PCBV"), a Netherlands corporation and first-tier subsidiary
of PCI. In addition, during the second quarter of 2000, Wizja TV B.V. purchased
1.4% of the capital stock of PCBV. UPC Polska, PCI and PCBV are holding
companies that directly or indirectly hold controlling interests in a number of
Polish cable television companies, collectively referred to as the "UPC TK
Companies". As of December 31, 2000, substantially all of the assets and
operating activities of the Company were located in Poland and the United
Kingdom.
2. CONSUMMATION OF UPC TENDER OFFER AND MERGER
On June 2, 1999, the Company entered into an Agreement and Plan of Merger
with United Pan-Europe Communications N.V. ("UPC"), whereby UPC and its
wholly-owned subsidiary, Bison Acquisition Corp. ("Bison"), initiated a tender
offer to purchase all of the outstanding shares of the Company in an all cash
transaction valuing the Company's shares of common stock at $19.00 per share.
The tender offer, initiated pursuant to the Agreement and Plan of Merger
with UPC and Bison, closed at 12:00 midnight on August 5, 1999. On August 6,
1999, Bison reported that it had accepted for payment a total of 33,701,073
shares of the Company's common stock (including 31,208 shares tendered pursuant
to notices of guaranteed delivery) representing approximately 99% of the
Company's outstanding shares of common stock (the "Acquisition"). In addition
UPC acquired 100% of the outstanding Series A and Series B 12% Cumulative
Preference Shares of the Company and acquired all of the outstanding warrants
and stock options.
49
Also on August 6, 1999, Bison was merged with and into the Company with the
Company continuing as the surviving corporation (the "Merger"). Accordingly, the
Company became a wholly-owned subsidiary of UPC. UnitedGlobalCom, Inc. is the
majority stockholder of UPC. The Company believes that a Change of Control
occurred on August 6, 1999 as a result of the Acquisition and Merger. UPC
Polska, Inc. prior to the Acquisition, is herein referred to as the
"Predecessor" while the Company after the Acquisition is referred to as the
"Successor".
The Acquisition was accounted for under the purchase method of accounting,
with all of the purchase accounting adjustments "pushed-down" to the
consolidated financial statements of UPC Polska, Inc. Accordingly, the purchase
price was allocated to the underlying assets and liabilities based upon their
estimated fair values and any excess to goodwill. The Company restated some of
its assets and liabilities at August 5, 1999. At this date the Notes of the
Company and Poland Communications, Inc. ("PCI") were restated to reflect the
market value and as a result were increased by $61.9 million and deferred
financing costs of $16.1 million and deferred revenues of $2.0 million were
written down to zero. The consideration paid by UPC for all shares outstanding,
warrants and options totalled $812.5 million. At this time the Company had
negative net assets of approximately $53.3 million and existing goodwill at net
book value of $37.5 million which was realized on previous transactions. As a
result of the above considerations, UPC recognized goodwill of approximately
$979.3 million. During the year ended December 31, 2000 this figure increased by
$12.3 million to $991.6 million mainly due to the results of an arbitration
settlement between the Company and Telewizyjna Korporacja Partycypacyjna
("TKP"). As a result of the Acquisition, UPC pushed down its basis to the
Company establishing a new basis of accounting as of the acquisition date.
The following pro forma condensed consolidated results for the seven months
of 1999 and the year ended December 31, 1998 give effect to the Acquisition of
UPC Polska, Inc. as if it had occurred at the beginning of the periods
presented. This pro forma condensed consolidated financial information does not
purport to represent what the Company's results would actually have been if such
transaction had in fact occurred on such date. The pro forma adjustments are
based upon the assumptions that goodwill and the amortization thereon would be
pushed down as if the transaction had occurred at the beginning of each period
presented. Additionally, interest expense related to the deferred financing
costs was removed for each of the periods presented. There was no tax effect
from these adjustments because of the significant net losses.
YEAR ENDED
DECEMBER 31, FIVE MONTHS YEAR ENDED
2000 OF 1999 SEVEN MONTHS OF 1999 DECEMBER 31, 1998
------------ ----------- ---------------------- ----------------------
HISTORICAL HISTORICAL HISTORICAL PRO FORMA HISTORICAL PRO FORMA
------------ ----------- ---------- --------- ---------- ---------
UNAUDITED
Service and other
revenue................. $ 133,583 $ 38,018 $ 46,940 $ 46,940 $ 61,859 $ 61,859
========= ========= ========= ========= ========= =========
Net loss.................. $(248,811) $(144,177) $(128,016) $(163,421) $(126,065) $(187,509)
========= ========= ========= ========= ========= =========
3. FINANCIAL POSITION AND BASIS OF ACCOUNTING
These consolidated financial statements have been prepared on a going
concern basis which contemplates the continuation and expansion of trading
activities as well as the realization of assets and liquidation of liabilities
in the ordinary course of business. Pay television operators typically
experience losses and negative cash flow in their initial years of operation due
to the large capital investment required for the construction or acquisition of
their cable networks, acquisition of programming rights and reception system for
its D-DTH business and the administrative costs associated with commencing
operations. Consistent with this pattern, the Company has incurred substantial
operating losses since inception (1990). The Company expects to experience
substantial operating losses and negative cash flows for at least the next year
in association with the expansion of the D-DTH and programming
50
businesses. As of December 31, 2000, the Company has negative working capital
and significant commitments under non-cancelable operating leases and for
programming rights. Additionally, the Company is currently and is expected to
continue to be highly leveraged. The ability of the Company to meet its debt
service obligations will depend on the future operating performance and
financial results of the Company as well as its ability to obtain additional
third party financing to support the planned expansion, as well as obtaining
additional financing from its parent, UPC. The Company's current cash on hand
will be insufficient to satisfy all of its commitments and to complete its
current business plan for its D-DTH, cable and programming business.
Management of the Company believes that significant opportunities exist for
pay television providers capable of delivering high quality, Polish-language
programming on a multi-channel basis and other services on cable (i.e. data and
telephones). As such, the Company has focused its financial and business efforts
toward its position in the cable, 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 objectives and to
capitalize on its competitive advantages, the Company intends to (i) develop and
control the content of its programming; (ii) increase its distribution
capabilities through internal growth and through acquisitions; (iii) control its
management of subscribers by using advanced information systems; (iv) establish
Wizja TV as the leading brand name in the Polish pay television industry; and
(v) provide additional revenue generating services to it customers. If the
Company's plans or assumptions change, if its assumptions prove inaccurate, if
it consummates unanticipated investments in or acquisitions of other companies,
if it experiences unexpected costs or competitive pressures, or if existing
cash, and projected cash flow from operations prove to be insufficient, the
Company may need to obtain greater amounts of additional financing. While it is
the Company's intention to enter only into new financing or refinancing that it
considers advantageous, there can be no assurance that such sources of financing
would be available to the Company in the future, or, if available, that they
could be obtained on terms acceptable to the Company. The Company is solely
dependent on its parent, UPC, to provide financing to achieve the Company's
business strategy. UPC has declared that it will continue to financially support
UPC Polska, Inc. and its subsidiaries as a going concern, and accordingly enable
UPC Polska, Inc. and its subsidiaries to meet their financial obligations if and
when needed, for the period at least through January 31, 2002.
Several of the Company's Polish subsidiaries have statutory shareholders'
equity less than the legally prescribed limits because of accumulated losses. As
required by Polish law, the management of these companies will have to make
decisions on how to increase the shareholders' equity to be in compliance with
the Polish Commercial Code. The Company is currently considering several
alternatives, including the conversion of intercompany debt into equity, in
order to resolve these deficiencies.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United States of
America ("U.S. GAAP").
The Company maintains its books of account in Poland and in the UK in
accordance with accounting standards in the respective countries. These
financial statements include certain adjustments not reflected in the Company's
statutory books to present these statements in accordance with U.S. GAAP.
The consolidated financial statements include the financial statements of
UPC Polska, Inc. and its wholly owned and majority owned subsidiaries. All
intercompany balances and transactions have been eliminated in consolidation.
51
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and other short-term investments
with original maturities of less than three months.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with U.S. GAAP. Actual results could differ from those estimates.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is based upon the Company's assessment
of probable loss related to overdue accounts receivable.
REVENUE RECOGNITION
CABLE TELEVISION REVENUES:
Cable television revenues are recognized in accordance with SFAS 51
FINANCIAL REPORTING BY CABLE TELEVISION COMPANIES. Revenue from subscription
fees is recognized on a monthly basis as the service is provided.
Installation fee revenue for connection to the Company's cable television
system, is recognized to the extent of direct selling costs and the balance
is deferred and amortized to income over the estimated average period that
new subscribers are expected to remain connected to the systems.
D-DTH SUBSCRIPTION REVENUES:
D-DTH subscription revenues are recognized in accordance with SFAS 51
FINANCIAL REPORTING BY CABLE TELEVISION COMPANIES. Until April 1, 1999 the
Company provided its Wizja TV package (consisting of a one-year rental of a
D-DTH reception system, installation and a one-year subscription to the
Company's D-DTH service) to retail customers for one up-front payment at the
time of installation. The Company recognized subscription revenues at the
time of installation to the extent of direct selling costs incurred, and the
balance is deferred and amortized to income over the remaining term of the
subscription. There were no revenues derived from D-DTH subscription
revenues prior to 1998. Since April 1, 1999 the Company has no longer
provided its Wizja TV package based on up-front one year payment for
installation and subscription. As a result the Company recognizes revenue
from subscription fees on a monthly basis as the service is provided.
INTERNET SERVICE REVENUES:
During the fourth quarter of the year 2000, the Company began providing
Internet services to its D-DTH and cable television customers. Revenue from
subscription is recognized on a monthly basis as the service is provided.
Installation fee revenue is deferred and amortized to income over the
estimated average period that new subscribers are expected to remain
connected to the system in accordance with SAB 101 REVENUE RECOGNITION IN
FINANCIAL STATEMENTS.
OTHER REVENUES:
Advertising revenues are recognized when advertisements are aired under
broadcast contracts.
52
TAXATION
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.
U.S. TAXATION:
The Company and PCI are subject to U.S. federal income taxation on their
worldwide income. The Polish corporations are not engaged in a trade or
business within the U.S. or do not derive income from U.S. sources and
accordingly, are not subject to U.S. income tax.
FOREIGN TAXATION:
The Polish companies are subject to corporate income taxes, value added tax
(VAT) and various local taxes within Poland, as well as import duties on
materials imported by them into Poland.
The foreign companies' income tax is calculated in accordance with foreign
tax regulations. Due to differences between accounting practices under
foreign tax regulations and those required by U.S. GAAP, certain income and
expense items are recognized in different periods for financial reporting
purposes and income tax reporting purposes which may result in deferred
income tax assets and liabilities.
Effective January 1998, the Company adopted EITF 92-8 - "Accounting for the
Income Tax Effects under FASB Statement No. 109 of a Change in Functional
Currency When an Economy Ceases to Be Considered Highly Inflationary". As a
result of adopting EITF 92-4, "Accounting for a Change in Functional Currency
When the Economy Ceases to Be Considered Highly Inflationary," the Company's
functional currency bases exceeded the local currency tax bases of non-monetary
items. The difference between the new functional currency and the tax bases have
been recognized as temporary differences in accordance with EITF 92-8.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment includes assets used in the development and
operation of the Company's D-DTH and cable television systems and set-top boxes.
During the period of construction, plant costs and a portion of design,
development and related overhead costs are capitalized as a component of the
Company's investment in D-DTH and cable television systems. When material, the
Company capitalizes interest costs incurred during the period of construction in
accordance with SFAS No. 34, "Capitalization of Interest Cost". Interest is not
capitalized for short-term construction projects. During 1998, the Company
capitalized approximately $664,000 of interest related to required up-front
payments to Philips for D-DTH reception systems. During the year 2000, the five
months of 1999 and seven months of 1999, no interest costs were capitalized.
Cable and D-DTH subscriber related costs and general and administrative
expenses are charged to operations when incurred.
53
Depreciation is computed for financial reporting purposes using the
straight-line method over the following estimated useful lives:
Cable television system assets.............................. 10 years
D-DTH system assets......................................... 5 years
Set-top boxes............................................... 5 years
Vehicles.................................................... 5 years
Other property, plant and equipment......................... 5-10 years
INVENTORIES FOR CONSTRUCTION
Inventories for construction are stated at the lower of cost, determined by
the average cost method, or net realizable value. Inventories are principally
related to cable television systems. Cost of inventory includes purchase price,
transportation, customs and other direct costs.
GOODWILL AND OTHER INTANGIBLES
Prior to the Merger, goodwill, which represents the excess of purchase price
over fair value of net assets acquired, was amortized on a straight-line basis
over the expected periods to be benefited, generally ten years, with the
exception of amounts paid relating to non-compete agreements. The portion of the
purchase price relating to the non-compete agreements was amortized over the
term of the underlying agreements, generally five years.
Effective as of the Merger Date, the Company revalued all its goodwill,
including amounts related to non-compete agreements that related to transactions
completed prior to the Merger. The goodwill that was pushed down to the Company
is amortized using straight-line basis over the expected periods to be
benefited, which is fifteen years.
Through its subsidiaries, the Company has entered into lease agreements with
the Polish national telephone company ("TPSA"), for the use of underground
telephone conduits for cable wiring. Costs related to obtaining conduit and
franchise agreements with housing cooperatives and governmental authorities are
capitalized and amortized generally over a period of ten years. In the event the
Company does not proceed to develop cable systems within designated cities,
costs previously capitalized will be charged to expense.
PROGRAMMING AND BROADCAST RIGHTS
The Company enters into contracts for the purchase of certain exhibition or
broadcast rights. Broadcast or exhibition rights consist principally of rights
to broadcast syndicated programs, sports and feature films and are accounted for
as a purchase of rights by the licensee. The asset and liability for the rights
acquired and obligations incurred under a license agreement are reported by the
Company, at the gross amount of the liability, when the license period begins
and certain specified conditions have been met, in accordance with the
guidelines established within SFAS No. 63, "Financial Reporting By
Broadcasters".
DEFERRED FINANCING COSTS
Costs incurred to obtain financing have been deferred and amortized as
interest expense over the life of the related loan using the effective interest
method. Such costs were included at the Merger as part of the purchase
accounting adjustment in 1999.
54
INVESTMENTS IN AFFILIATED COMPANIES
Investments in affiliated companies are accounted for using the equity
method. Where the purchase price exceeds the fair value of the Company's
percentage of net assets acquired, the difference is amortized over the expected
period to be benefited as a charge to equity in profits of affiliated companies.
Where the expected period to be benefited is limited by licensing agreements,
the difference is amortized over the term of the licensing agreement.
MINORITY INTEREST
Recognition of the minority interests' share of losses of consolidated
subsidiaries is limited to the amount of such minority interests' allocable
portion of the equity of those consolidated subsidiaries.
STOCK-BASED COMPENSATION
The Company has adopted SFAS No. 123, "Accounting For Stock-Based
Compensation", which gives companies the option to adopt the fair value based
method for expense recognition of employee stock options and other stock-based
awards or to account for such items using the intrinsic value method as outlined
under APB Opinion No. 25, "Accounting For Stock Issued To Employees", with pro
forma disclosure of net loss and loss per share as if the fair value method had
been applied. The Company has elected to apply APB Opinion No. 25 and related
interpretations for stock options and other stock-based awards.
FOREIGN CURRENCIES
Foreign currency transactions are recorded at the exchange rate prevailing
at the date of the transactions. Assets and liabilities denominated in foreign
currencies are translated at rates of exchange at balance sheet date. Gains and
losses on foreign currency transactions are included in the consolidated
statement of operations.
The financial statements of foreign subsidiaries are translated to U.S.
dollars using (i) exchange rates in effect at period end for assets and
liabilities, and (ii) average exchange rates during the period for results of
operations. Adjustments resulting from translation of financial statements are
reflected in accumulated other comprehensive loss as a separate component of
stockholder's equity. The Company considers all of its intercompany loans to its
Polish subsidiaries to be of a long-term investment nature. As a result, any
foreign exchange gains or losses resulting from the intercompany loans are
reported in accumulated other comprehensive loss.
Effective January 1, 1998, Poland is no longer deemed to be a highly
inflationary economy. In accordance with this change, the Company established a
new functional currency basis for non-monetary items of its Polish subsidiaries
in accordance with guidelines established within EITF Issue 92-4, "Accounting
For A Change In Functional Currency When An Economy Ceases To Be Considered
Highly Inflationary". That basis is computed by translating the historical
reporting currency amounts of non-monetary items into the local currency at
current exchange rates. As a result of this change, the Company's functional
currency bases exceeded the local currency tax bases of nonmonetary items. The
difference between the new functional currency and the tax bases have been
recognized as temporary differences.
Prior to January 1, 1998 the financial statements of foreign subsidiaries
were translated into U.S. dollars using (i) exchange rates in effect at period
end for monetary assets and liabilities, (ii) exchange rates in effect at
transaction dates (historical rates) for non monetary assets and liabilities,
and (iii) average exchange rates during the period for revenues and expenses,
other than those revenues and expenses that related to non monetary assets and
liabilities (primarily amortization of fixed assets and intangibles) which were
translated using the historical exchange rates applicable to those non
55
monetary assets and liabilities. Adjustments resulting from translation of
financial statements prior to the year 1998 were reflected as foreign exchange
gains or losses in the consolidated statements of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value Of Financial Instruments"
requires the Company to make disclosures of fair value information of all
financial instruments, whether or not recognized on the consolidated balance
sheets, for which it is practicable to estimate fair value.
The Company's financial instruments include cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses and notes payable.
At December 31, 2000 and 1999, the carrying value of cash and cash
equivalents, accounts receivable, and accounts payable and accrued expenses on
the accompanying consolidated balance sheets approximates fair value due to the
short maturity of these instruments.
At December 31, 2000 and 1999, the fair value of the Company's notes payable
balance approximates $205,900,000 and $320,635,000, respectively, based on the
last trading price of the notes payable in the respective years. It was not
practical to estimate the fair value due to affiliate and notes receivable from
affiliates due to the nature of these instruments, the circumstances surrounding
their issuance, and the absence of quoted market prices for similar financial
instruments.
At the date of the Merger, the Company's and PCI Notes were restated to
their fair market value at this date. The resulting $61.9 million increase was
recorded in the pushed-down purchase accounting entries.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses the recoverability of long-lived assets (mainly
property, plant and equipment, intangibles, and certain other assets) by
determining whether the carrying value of the assets can be recovered over the
remaining lives through projected undiscounted future operating cash flows,
expected to be generated by such assets. If an impairment in value is estimated
to have occurred, the assets carrying value is reduced to its estimated fair
value. The assessment of the recoverability of long-lived assets will be
impacted if estimated future operating cash flows are not achieved. As noted in
note 3, the Company's existing liquidity problems may result in future
impairments of long-lived assets if the Company does not have adequate financing
available to execute its business strategy. Additionally if the Company's plans
or assumptions change, if its assumptions prove inaccurate, if it consummates
unanticipated investments in or acquisitions of other companies, if it
experiences unexpected costs or competitive pressures, or if existing cash, and
projected cash flow from operations prove to be insufficient, the Company may
need to impair certain of its long-lived assets.
ADVERTISING COSTS
All advertising costs of the Company are expensed as incurred. For the year
ended December 31, 2000, five months and seven months of 1999 the Company
incurred advertising costs of approximately $14,217,000, $9,552,000 and
$11,655,000, respectively.
RECLASSIFICATIONS
Certain amounts have been reclassified in the prior year consolidated
financial statements to conform to the presentation contained in the 2000
periods.
56
NEW ACCOUNTING PRINCIPLES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES, SFAS 133 establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded on the balance sheet as
either an asset or liability measured at its fair value. The statement requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific accounting criteria are met. If a derivative instrument
qualifies for hedge accounting, the gains or losses from the derivative may
offset results from the hedged item in the statement of operations or other
comprehensive income, depending on the type of hedge. To adopt hedge accounting,
a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting.
In June 2000, the Financial Accounting Standards Board issued SFAS 138,
ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES.
This statement addresses a limited number of issues causing implementation
difficulties for numerous entities that apply SFAS 133 and this statement amends
the accounting and reporting standards of SFAS 133 for certain derivative
instruments and certain hedging accounting.
SFAS 137 delayed the effective date of SFAS 133 to fiscal years beginning
after June 15, 2000. A company may implement the statements as of the beginning
of any fiscal quarter after issuance; however, SFAS 133 cannot be applied
retroactively.
The Company expects that the adoption of SFAS 133, SFAS 137, and SFAS 138 in
2001 will not have a material impact on the financial position or the results of
operations of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS
(SAB 101). SAB 101 outlines the SEC's views on applying generally accepted
accounting principles to revenue recognition in financial statements.
Specifically, the bulletin provides both general and specific guidance as to the
periods in which companies should recognize revenues. In addition, SAB 101 also
highlights factors to be considered when determining whether to recognize
revenues on a gross or net basis. SAB 101, as amended by SAB 101/A and SAB
101/B, was effective beginning no later than their fourth fiscal quarter of the
fiscal year beginning after December 15, 1999; as the Company is a calendar
year-end company, this would be the quarter ended December 31, 2000.
SAB 101 permits the effects of the changes to be recorded as a cumulative
effect of a change in accounting principle during the quarter ended December 31,
2000. As the Company's accounting policies for its cable television and D-DTH
services are still accounted for under SFAS 51, FINANCIAL REPORTING BY CABLE
TELEVISION COMPANIES, there was no immediate effect on the Company. However,
with the introduction of Internet services in the fourth quarter of 2000,
revenue recognition for Internet related services has been and will be reported
in accordance with SAB 101.
5. VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT
THE
BALANCE AT THE ADDITIONS END OF
BEGINNING OF THE CHARGED TO AMOUNTS THE
PERIOD EXPENSE WRITTEN OFF PERIOD
---------------- ---------- ----------- ----------
(IN THOUSANDS)
1998 Allowance for Doubtful Accounts $ 766 $1,383 $1,054 $1,095
SEVEN MONTHS OF 1999 Allowance for Doubtful Accounts $1,095 $ 740 $ 223 $1,612
FIVE MONTHS OF 1999 Allowance for Doubtful Accounts $1,612 $2,331 $ 853 $3,090
2000 Allowance for Doubtful Accounts $3,090 $6,346 $ 751 $8,685
57
6. ACQUISITIONS
On June 2, 2000, Wizja TV B.V. acquired 1.4% of the outstanding capital
stock of PCBV from a minority shareholder of PCBV.
The Company made several acquisitions in 1998 and 1999 of which details
follow. In each case, the acquisition was accounted for using the purchase
method, whereby the purchase price was allocated to the underlying assets and
liabilities based on their proportionate share of fair values on the date of
acquisition and any excess to goodwill. The results of operations of each of the
businesses acquired are included in the Company's consolidated financial
statements since the date of acquisition. In each case the goodwill life was 10
years. However, as discussed in Note 4, the revalued goodwill resulting from the
Merger is being amortized over 15 years.
On February 25, 1999, UPC Polska, Inc. purchased for approximately $1.8
million a 30% interest in Mazowiecki Klub Sportowy Sportowa Spolka Akcyjna, a
joint stock company which owns Hoop Pekaes Pruszkow, a Polish basketball club.
In connection with this purchase UPC Polska, Inc. has agreed to act as a sponsor
for Hoop Pekaes Pruszkow. As of December 31, 2000 the Company through its
subsidiaries committed to pay an additional $0.8 million for the sponsorship of
this basketball club (refer to note 24) and $2.4 million to secure future
programming rights.
On March 31, 1999, a subsidiary of PCI purchased certain cable television
system assets for an aggregate consideration of approximately $509,000. The
acquisition was accounted for using the purchase method, whereby the purchase
price was allocated among the fixed assets acquired based on their fair value on
the date of acquisition and any excess to goodwill. The purchase price exceeded
fair value of the assets acquired by approximately $108,000.
On July 9, 1999, a subsidiary of the Company entered into an agreement to
acquire 100% of a cable television system for total consideration of
approximately $7,500,000. The acquisition has been accounted for under the
purchase method where the purchase price was allocated to the underlying assets
and liabilities based upon their estimated fair values and any excess to
goodwill. The acquisition did not have a material effect on the Company's
results of operations in 1999. The purchase price exceeded fair value of the
assets acquired by approximately $5,336,000.
On July 26, 1999, a subsidiary of the Company entered into an agreement to
purchase all of the assets and subscriber lists of a cable television system for
total consideration of approximately $2,800,000. The purchase was accounted for
under the purchase method where the purchase price was allocated to the
underlying assets based upon their estimated fair values and the excess to
goodwill. The purchase price did not materially exceed the value of the assets
acquired.
In February 1998, PCI acquired substantially all of the assets and
liabilities of a cable television business for an aggregate consideration of
approximately $1,574,000. The purchase price exceeded the fair value of the net
liabilities acquired by approximately $2,041,000. In association with this
acquisition, the Company assumed a $2,150,000 loan from Bank Rozwoju Exportu
S.A. (refer to note 12).
In February and March 1998, the Company acquired the remaining 55% equity
interest in an affiliated company for approximately $9,389,000. The purchase
price exceeded the fair value of the net liabilities acquired by approximately
$9,945,000.
On July 16, 1998, the Company purchased the remaining 45.25% interest in a
subsidiary of the Company which was held by unaffiliated third parties for an
aggregate purchase price of approximately $10,655,000, of which approximately
$9,490,000 relates to non-compete agreements. The purchase price, excluding the
amount paid relating to the non-compete agreements, exceeded the fair value of
the assets acquired by $604,000. The portion of the purchase price relating to
the non-compete agreements was to be amortized over the five-year term of the
agreements.
58
On August 15, 1998, a subsidiary of the Company purchased the remaining
approximately 50% minority interest in another subsidiary of the Company which
was held by unaffiliated third parties for aggregate consideration of
approximately $5,372,000. The purchase price exceeded the fair value of the
assets acquired by $1,104,000.
Additionally, during 1998 PCI acquired certain cable television system
assets and subscriber lists for aggregate consideration of approximately
$2,000,000. The purchase price did not materially exceed the fair value of the
assets acquired.
Had these acquisitions occurred at the beginning of the respective periods,
the Company's pro-forma consolidated results for the years ended December 31,
1999 and 1998, would not be materially different from those presented in the
Consolidated Statements of Operations.
7. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31 DECEMBER 31,
2000 1999
------------ -------------
(IN THOUSANDS)
Property, plant and equipment:
Cable television systems assets............... 151,417 123,845
D-DTH equipment............................... 165,369 82,327
Construction in progress...................... 11,730 7,400
Vehicles...................................... 2,081 1,943
Other......................................... 23,157 15,871
-------- --------
353,754 231,386
Less accumulated depreciation................. (62,242) (12,602)
-------- --------
Net property, plant and equipment......... 291,512 218,784
Between April 1, and November 8, 1999 the Company was selling D-DTH
reception systems to customers. Prior to April 1, 1999, the systems were leased
to customers, classified as fixed assets and depreciated over 5 years. Due to
this change in 1999, the Company classified reception systems as inventory. As a
result, the Company wrote down the value of all reception systems acquired after
April 1, 1999 and before November 8, 1999 to their net realizable value. The
effect of the change was to increase operating loss by approximately $8,852,000,
and $19,891,000 for the five months of 1999 and seven months of 1999,
respectively. Due to the change of ownership of the Company in connection with
the Merger, beginning November 8, 1999 the Company returned to leasing its D-DTH
reception systems and as a result there was no similar one off cost in 2000. The
Company has impaired the value of D-DTH boxes leased to customers, that have
been disconnected and where it is unlikely for the Company to recover the value
of the boxes. The amount of impairment in 2000 and five months of 1999 was
$7,734,000 and $1,091,000, respectively.
The Company incurred depreciation charges for tangible fixed assets of
$48,052,000, $14,079,000, $19,733,000 and $19,864,000 for the year ended
December 31, 2000, five months of 1999, seven months of 1999 and for year ended
December 31, 1998, respectively.
59
8. INTANGIBLE ASSETS
Intangible assets consist of the following:
SUCCESSOR
-----------------------------
DECEMBER 31, DECEMBER 31,
2000 1999
------------- -------------
(IN THOUSANDS)
Conduit, franchise agreements and other............. $ 7,323 $ 4,334
Goodwill............................................ 943,910 928,763
-------- --------
951,233 933,097
Less accumulated amortization....................... (89,117) (26,110)
-------- --------
Net intangible assets............................... $862,116 $906,987
======== ========
The Acquisition was accounted for under the purchase method of accounting,
with all of the purchase accounting adjustments "pushed-down" to the
consolidated financial statements of UPC Polska, Inc. Accordingly, the purchase
price was allocated to the underlying assets and liabilities based upon their
estimated fair values and any excess to goodwill. The Company restated some of
its assets and liabilities at August 5, 1999. At this date the Notes of the
Company and PCI were restated by $61.9 million and deferred financing costs of
$16.1 million and deferred revenue of $2.0 million were written down to zero.
The consideration paid by UPC for all shares outstanding, warrants and options
totalled $812.5 million. At this time the Company had negative net assets of
approximately $53.3 million and existing goodwill at net book value of $37.5
million which was realized on previous transactions.
As a result of the above considerations, UPC recognized goodwill of
approximately $979.3 million for the year ended December 31, 1999. During the
year ended December 31, 2000 this figure increased by $12.3 million to $991.6
million mainly due to the results of an arbitration between the Company and
Telewizyjna Korporacja Partycypacyjna ("TKP"). As a result of the Acquisition,
UPC pushed down its basis to the Company establishing a new basis of accounting
as of the acquisition date. The Company incurred amortization charges for
intangible assets of $61,451,000, $26,110,000, $4,194,000 and $6,440,000 for the
year ended December 31, 2000, five and seven months of 1999 and the year ended
December 31, 1998, respectively.
9. PROGRAMMING AND BROADCAST RIGHTS
Programming and broadcast rights include approximately $10,317,000 and
$7,200,000 paid for certain broadcast rights purchased as of December 31, 2000
and 1999, respectively, but not yet available for viewing.
10. INVESTMENTS IN AFFILIATED COMPANIES
Investment in affiliated companies at December 31, 2000 and 1999 consist of
30% of common Stock of Mazowiecki Klub Sportowy Sportowa Spolka Akcyjna, 20% of
the common stock of Fox Kids Poland Ltd. ("FKP") and 50% of the common stock of
Twoj Styl Sp. z o.o. ("Twoj Styl").
On February 25, 1999, UPC Polska, Inc. purchased for approximately $1.8
million a 30% interest in Mazowiecki Klub Sportowy Sportowa Spolka Akcyjna, a
joint stock company which owns Hoop Pekaes Pruszkow, a Polish basketball team.
In connection with this purchase UPC Polska, Inc. has agreed to act as a sponsor
for Hoop Pekaes Pruszkow.
For the period of one year ended December 31, 2000 and for five and seven
months of 1999 the Company recorded a loss related to this investment of
$380,000, $325,000 and $473,000, respectively.
60
In December 1997, the Company acquired a 20% interest in FKP, a joint
venture formed to provide programming to the Company for an aggregate purchase
price of approximately $10,000,000. The purchase price exceeded the fair value
of the Company's ownership percentage of net assets by approximately
$10,000,000. During 1998, the Company contributed an additional $4,926,000 to
the joint venture which was accounted for as an additional investment in
affiliated companies. These differences are being amortized over five years as a
charge to equity in profits of affiliated companies.
For the year ended December 31, 2000, for the five months of 1999, seven
months of 1999 and the year ended December 31, 1998, the Company recorded losses
related to this investment of $1,000,000, $333,000, $445,000 and $6,343,000,
respectively.
In December 1997, the Company acquired a 50% interest in Twoj Styl, a
magazine publishing company for an aggregate purchase price of approximately
$11,100,000. In 1998, the Company paid approximately $302,000 for stamp duty and
professional fees, which was added to the cost of the investment. The purchase
price exceeded the fair value of the Company's ownership percentage of net
assets by approximately $9,600,000. This difference is being amortized over
fifteen years as a charge to equity in income of affiliated companies. For the
year ended December 31, 2000, five months of 1999, seven months of 1999 and the
year ended December 31, 1998, the Company recorded a (loss)/profit related to
this investment of $485,000, $367,000, $(86,000) and $(181,000), respectively.
In addition, the Company agreed to provide additional future financing to Twoj
Styl, either debt or equity, of up to $7,700,000 to develop Polish-language
programming and ancillary services. As of December 31, 2000, no additional
financing had been provided.
It was not practical to estimate the market value of the investments in
affiliated companies due to the nature of these investments, the relatively
short existence of the affiliated companies and the absence of quoted market
price for the affiliated companies. Because these acquisitions occurred only
shortly before the Acquisition, the historical investments costs were assessed
as the fair values.
61
11. INCOME TAXES
Income tax (expense)/benefit consists of:
CURRENT DEFERRED TOTAL
-------- -------- --------
(IN THOUSANDS)
Year ended December 31, 2000:
U.S. Federal.................................... $ -- $ -- $ --
State and local................................. -- -- --
Foreign......................................... (285) -- (285)
----- ----- -----
$(285) $ -- $(285)
===== ===== =====
Five months ended December 31, 1999
U.S. Federal.................................... $ -- $ -- $ --
State and local................................. -- -- --
Foreign......................................... (11) -- (11)
----- ----- -----
$ (11) $ -- $ (11)
===== ===== =====
Seven months ended July 31, 1999
U.S. Federal.................................... $ -- $ -- $ --
State and local................................. -- -- --
Foreign......................................... (30) -- (30)
----- ----- -----
$ (30) $ -- $ (30)
===== ===== =====
Year ended December 31, 1998:
U.S. Federal.................................... $ -- $ -- $ --
State and local................................. -- -- --
Foreign......................................... (210) -- (210)
----- ----- -----
$(210) $ -- $(210)
===== ===== =====
Sources of loss before income taxes and minority interest are presented as
follows:
SUCCESSOR PREDECESSOR
----------------------------- ---------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, FIVE MONTHS OF SEVEN MONTHS DECEMBER 31,
2000 1999 OF 1999 1998
------------ -------------- ------------ ------------
(IN THOUSANDS)
Domestic loss.............................. $ (30,019) $ (85,831) $ (53,786) $ (52,341)
Foreign loss............................... (218,507) (58,335) (74,200) (73,514)
--------- --------- --------- ---------
$(248,526) $(144,166) $(127,986) $(125,855)
========= ========= ========= =========
62
Income tax expense for the year ended December 31, 2000, and for five months
of 1999, seven months of 1999 and the year ended December 31, 1998 differed from
the amounts computed by applying the U.S. federal income tax rate of 34 percent
to pre-tax loss as a result of the following:
SUCCESSOR PREDECESSOR
------------------------ -------------------------
YEAR ENDED FIVE SEVEN YEAR ENDED
DECEMBER 31, MONTHS MONTHS DECEMBER 31,
2000 OF 1999 OF 1999 1998
------------ --------- ---------- ------------
(IN THOUSANDS)
Computed "expected" tax benefit.............. $ 84,499 $ 49,016 $ 43,515 $ 43,061
Non-deductible expenses...................... (22,640) (5,973) (5,330) (1,635)
Change in valuation allowance................ (25,353) (33,722) (29,932) (30,299)
Adjustment for adoption of EITF 92-8......... -- -- -- (11,311)
Expiration of Foreign NOL's.................. (7,268) -- -- --
Adjustment to deferred tax asset for enacted
changes in tax rates....................... (17,343) (9,332) (8,283) (695)
Foreign tax rate differences................. (5,299) -- -- 606
Other........................................ (6,881) -- -- 63
-------- -------- -------- --------
$ (285) $ (11) $ (30) $ (210)
======== ======== ======== ========
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities are presented below:
DECEMBER 31,
---------------------
2000 1999
--------- ---------
(IN THOUSANDS)
Deferred tax assets:
Foreign net operating loss carry forward................ $ 40,289 $ 35,181
Domestic net operating loss carry forward............... 47,051 39,326
Service revenue......................................... 2,512 2,351
Accrued liabilities..................................... 14,196 4,176
Deferred costs.......................................... -- 4,570
Bad debt provision...................................... 1,910 927
Deferred revenue........................................ -- 1,203
Accrued interest........................................ 37,408 14,420
Unrealized foreign exchange losses...................... 3,723 23,112
Other................................................... 3,433 1,237
--------- ---------
Total gross deferred tax assets............................. 150,522 126,503
Less valuation allowance.................................... (143,339) (117,986)
--------- ---------
Net deferred tax assets..................................... $ 7,183 $ 8,517
========= =========
Deferred tax liabilities:
Excess of book value over tax basis of fixed assets
resulting from conversion off hyperinflation.......... $ (4,922) $ (5,614)
Accelerated fixed assets depreciation................... (2,261) (2,337)
Other................................................... (566)
--------- ---------
Total gross deferred tax liabilities.................... $ (7,183) $ (8,517)
--------- ---------
Net deferred tax liability.............................. $ -- $ --
========= =========
63
The net increase in the valuation allowance for the year ended December 31,
2000, five and seven months of 1999 and the year ended December 31, 1998 was
$25,353,000, $33,722,000, $29,932,000 and $30,299,000, respectively. In
assessing the realiability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers
projected future taxable income and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and projections
for future taxable income over the periods which the deferred tax assets are
deductible, management believes it is more likely than not the Company will
realize the benefits of these deductible differences, net of the existing
valuation allowances at December 31, 2000.
As each of the Polish, Netherlands and UK subsidiaries of the Company are
not subject to group taxation, the deferred tax assets and liabilities in the
individual companies must be evaluated on a stand-alone basis. The reported
foreign net operating losses are presented on an aggregate basis and are not
necessarily indicative of the actual losses available to the individual
companies. As a result, some of the foreign subsidiaries may have no losses or
other deferred tax assets available to them individually.
Prior to 1999, foreign losses carryforwards can be offset against Polish
subsidiaries taxable income and utilized at rate of one-third per year in each
of the three years subsequent to the year of loss. If there is no taxable income
in a given year during the carryforward period, the portion of the loss
carryforward to be utilized is permanently forfeited. Foreign loss carryforwards
starting from 1999 can be offset against the Polish subsidiaries taxable income
and utilized during each of the five years subsequent to the year of the loss
with no more than 50% of the loss in one given year. For losses incurred in U.S.
taxable years prior to 1998, loss carryforwards can be applied against taxable
income three years retroactively and fifteen years into the future. For losses
incurred in U.S. taxable years from 1998, loss carryforwards can be applied
against taxable income two years retroactively and twenty years into the future.
As of December 31, 2000, the Company has approximately $138 million of U.S. net
operating loss carryforwards.
At December 31, 2000, the Company has foreign net operating loss
carryforwards of approximately $179,348,000 which will expire as follows:
YEAR ENDING DECEMBER 31, (IN THOUSAND)
- ------------------------ -------------
2001........................................................ $ 10,195
2002........................................................ --
2003........................................................ 47,253
2004........................................................ 84,581
2005 and thereafter......................................... 37,319
--------
$179,348
========
64
12. NOTES PAYABLE AND OFFER TO REPURCHASE NOTES
Notes payable excluding amounts due to UPC consist of the following:
DECEMBER 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
UPC Polska Senior Discount Notes due 2008, net of
discount.............................................. $164,741 $144,442
UPC Polska Senior Discount Notes due 2009, net of
discount.............................................. 161,777 141,807
UPC Polska Series C Senior Discount Notes due 2008, net
of discount........................................... 14,083 11,841
PCI Notes, net of discount.............................. 14,509 14,899
Bank Rozwoju Exportu S.A. Deutsche - Mark facility...... 835 1,286
Other................................................... -- 272
-------- --------
Total notes payable..................................... $355,945 $314,547
======== ========
UPC POLSKA, INC. NOTES
On January 22, 1999, the Company sold 256,800 units (collectively, the
"Units") to two initial purchasers pursuant to a purchase agreement, each Unit
consisting of $1,000 principal amount at maturity of 14 1/2% Senior Discount
Notes (the "Notes") due 2009 and four warrants (each a "Warrant"), each
initially entitling the holder thereof to purchase 1.7656 shares of common
stock, par value $0.01per share at an exercise price of $9.125 per share,
subject to adjustment. The Notes were issued at a discount to their aggregate
principal amount at maturity and, together with the Warrants generated gross
proceeds to the Company of approximately $100,003,000, of which $92,551,000 has
been allocated to the initial accreted value of the Notes and approximately $
7,452,000 has been allocated to the Warrants.
The Notes are unsubordinated and unsecured obligations. Cash interest on the
Notes will not accrue prior to February 1, 2004. Thereafter cash interest will
accrue at a rate of 14.5% per annum on the principal amount and will be payable
semiannually in arrears on August 1 and February 1 of each year, commencing
August 1, 2004. The Notes will mature on February 1, 2009. At any time prior to
February 1, 2002, the Company may redeem up to a maximum of 35% of the
originally issued aggregate principal amount at maturity of the Notes at a
redemption price equal to 117.5% of the accreted value thereof at the redemption
date, plus accrued and unpaid interest, if any, to the date of redemption with
some or all of the net cash proceeds of one or more public equity offerings;
provided, however, that not less than 65% of the originally issued aggregate
principal amount at maturity of the Notes remain outstanding immediately after
giving effect to such redemption.
The Warrants initially entitled the holders thereof to purchase 1,813,665
shares of common stock, representing, in the aggregate, approximately 5% of the
outstanding common stock on a fully-diluted basis (using the treasury stock
method) immediately after giving effect to the Units offering and the Company's
offering of Series A 12% Cumulative Preference Shares and Series B 12%
Cumulative Preference Shares. In July and August 1999 certain warrant holders
executed their right to purchase common stock (see note 13). The remaining
unexercised Warrants were redeemed in connection with the Merger.
On January 20, 1999, the Company sold $36,001,000 aggregate principal amount
at maturity of Series C Senior Discount Notes (collectively the "Series C
Notes") due 2008. The Series C Notes are senior unsecured obligations of the
Company ranking PARI PASSU in right of payment with all other existing and
future unsubordinated obligations of the Company. The Series C Notes were issued
at a discount to their aggregate principal amount at maturity and generated
gross proceeds to the Company
65
of approximately $9,815,000. Cash interest on the Series C Notes will not accrue
prior to July 15, 2004. Thereafter cash interest will accrue at a rate of 7.0%
per annum on the principal amount at maturity, and will be payable semiannually
in arrears on July 15 and January 15 of each year commencing January 15, 2005.
The Series C Notes will mature on July 15, 2008.
On July 14, 1998, the Company sold 252,000 units (collectively, the "Units")
to two initial purchasers pursuant to a purchase agreement, each Unit consisting
of $1,000 principal amount at maturity of 14 1/2% Senior Discount Notes (the
"Discount Notes") due 2008 and four warrants (each a "Warrant"), each initially
entitling the holder thereof to purchase 1.81 shares of common stock, par value
$0.01 per share (the "Common Stock") at an exercise price of $13.20 per share,
subject to adjustment.
The Discount Notes were issued at a discount to their aggregate principal
amount at maturity and, together with the Warrants generated gross proceeds to
the Company of approximately $125,100,000 of which $117,485,000 has been
allocated to the initial accreted value of the Discount Notes and approximately
$7,615,000 has been allocated to the Warrants. The portion of the proceeds that
is allocable to the Warrants was accounted for as part of paid-in capital. The
allocation was made based on the relative fair values of the two securities at
the time of issuance. Net proceeds to the Company after deducting initial
purchasers' discount and offering expenses were approximately $118,972,000.
The Discount Notes are unsubordinated and unsecured obligations. Cash
interest on the Discount Notes will not accrue prior to July 15, 2003.
Thereafter cash interest will accrue at a rate of 14.5% per annum and will be
payable semiannually in arrears on January 15 and July 15 of each year,
commencing January 15, 2004. The Discount Notes will mature on July 15, 2008. At
any time prior to July 15, 2001, the Company may redeem up to a maximum of 25%
of the originally issued aggregate principal amount at maturity of the Discount
Notes at a redemption price equal to 114.5% of the accreted value thereof at the
redemption date, plus accrued and unpaid interest, if any, to the date of
redemption with some or all of the net cash proceeds of one or more public
equity offerings; provided, however, that not less than 75% of the originally
issued aggregate principal amount at maturity of the Discount Notes remains
outstanding immediately after giving effect to such redemption. The effective
interest rate of the Discount Notes is approximately 16.5%.
The Warrants initially entitled the holders thereof to purchase 1,824,514
shares of Common Stock, representing, in the aggregate, approximately 5% of the
outstanding Common Stock on a fully-diluted basis immediately after giving
effect to the sale of the Units. The Warrants were exercisable at any time and
will expire on July 15, 2008. The remaining unexercised Warrants were redeemed
in connection with the Merger.
Pursuant to the Indenture governing the Notes, Series C Notes, and the
Discount Notes (the "Indenture"), the Company is subject to certain restrictions
and covenants, including, without limitation, covenants with respect to the
following matters: (i) limitation on additional indebtedness; (ii) limitation on
restricted payments; (iii) limitation on issuance and sales of capital stock of
restricted subsidiaries; (iv) limitation on transactions with affiliates; (v)
limitation on liens; (vi) limitation on guarantees of indebtedness by restricted
subsidiaries; (vii) purchase of Notes upon a change of control; (viii)
limitation on sale of assets; (ix) limitation on dividends and other payment
restrictions affecting restricted subsidiaries; (x) limitation on investments in
unrestricted subsidiaries; (xi) consolidations, mergers, and sale of assets;
(xii) limitation on lines of business; and (xiii) provision of financial
statements and reports. As of December 31, 2000 the Company is in compliance
with these covenants.
PCI NOTES
On October 31, 1996, PCI sold $130,000,000 aggregate principal amount of
Senior Notes ("PCI Notes") to an initial purchaser pursuant to a purchase
agreement. The initial purchaser subsequently
66
completed a private placement of the PCI Notes. In June 1997, substantially all
of the outstanding PCI Notes were exchanged for an equal aggregate principal
amount of publicly-registered PCI Notes.
The PCI Notes have an interest rate of 9 7/8% and a maturity date of
November 1, 2003. Interest is paid on the PCI Notes on May 1 and November 1 of
each year. As of December 31, 2000 and 1999 PCI accrued interest expense of
$236,000 and $243,000, respectively. Prior to November 1, 1999, PCI could have
redeemed up to a maximum of 33% of the initially outstanding aggregate principal
amount of the PCI Notes with some or all of the net proceeds of one or more
public equity offerings at a redemption price equal to 109.875% of the principal
amount thereof, plus accrued and unpaid interest, if any, to the date of
redemption; provided that immediately after giving effect to such redemption, at
least $87 million aggregate principal amount of the PCI Notes remains
outstanding.
PCI has pledged to State Street Bank and Trust Company, the trustee for the
PCI Notes (for the benefit of the holders of the PCI Notes) intercompany notes
issued by PCBV, of a minimum aggregate principal amount (together with cash and
cash equivalents of PCI), equal to at least 110% of the outstanding principal
amount of the PCI Notes, and that, in the aggregate, provide cash collateral or
bear interest and provide for principal repayments, as the case may be, in
amounts sufficient to pay interest on the PCI Notes. Notes payable from PCBV to
PCI were $210,530,000 and $176,398,000 at December 31, 2000 and 1999,
respectively.
Pursuant to the PCI Indenture, PCI is subject to certain restrictions and
covenants, including, without limitation, covenants with respect to the
following matters: (i) limitation on additional indebtedness; (ii) limitation on
restricted payments; (iii) limitation on issuances and sales of capital stock of
restricted subsidiaries; (iv) limitation on transactions with affiliates;
(v) limitation on liens; (vi) limitation on guarantees of indebtedness by
subsidiaries; (vii) purchase of PCI Notes upon a change of control; (viii)
limitation on sale of assets; (ix) limitation on dividends and other payment
restrictions affecting subsidiaries; (x) limitation on investments in
unrestricted subsidiaries; (xi) consolidations, mergers and sale of assets;
(xii) limitation on lines of business; and (xiii) provision of financial
statements and reports. As of December 31, 2000, the Company was in compliance
with such covenants.
Pursuant to the terms of the indentures covering each of the UPC Polska
Notes and the PCI Notes (as defined hereinafter), which provided that, following
a Change of Control (as defined therein), each holder of UPC Polska Notes and
PCI Notes had the right, at such holder's option, to require the Company and
PCI, respectively to offer to repurchase all or a portion of such holder's UPC
Polska Notes and PCI Notes at the Repurchase Price. UPC Polska and PCI made
offers to repurchase (the "Offers") from the holders of the Notes UPC Polska's
14 1/2% Series B Senior Discount Notes due 2008, 14 1/2% Senior Discount Notes
due 2008, Series C Senior Discount Notes due 2008, 14 1/2% Series B Senior
Discount Notes due 2009, and 14 1/2% Senior Discount Notes due 2009
(collectively, the "UPC Polska Notes") and PCI's 9 7/8% Series B Senior Notes
Due 2003 and 9 7/8% Senior Notes Due 2003 (collectively, the "PCI Notes").The
Offers expired at 12:01 PM, New York City time, on November 2, 1999.
The Company was required to offer to repurchase the UPC Polska Notes at 101%
of their accreted value per $1,000 principal amount of UPC Polska Notes at
maturity on the Expiration Date plus accrued and unpaid interest and PCI was
required to offer to repurchase the PCI Notes at their purchase price of $1,010
per $1,000 principal amount of the PCI Notes, which is 101% per $1,000 principal
amount of the PCI. As of August 5, 1999, the Company had $376,943,000 aggregate
principal amount at maturity of UPC Polska Notes outstanding and PCI had
$130,000,000 aggregate principal amount at maturity of PCI Notes outstanding.
Pursuant to its repurchase offer, the Company has purchased $49,139,000
aggregate principal amount of UPC Polska Notes for an aggregate price of
$26,455,014, and PCI has purchased $113,237,000 aggregate principal amount of
PCI Notes for an aggregate price of $114,369,370. In December 1999 and March
2000, PCI repurchased an additional
67
$2,000,000 and $390,000, respectively, aggregate principal amount of PCI Notes
for an aggregate price of $2,040,024 and $402,944, respectively. PCI's
repurchases were funded by the sale of 14,000 shares of PCI's Mandatorily
Redeemable Debenture Stock to the Company for $140 million. To secure its
obligations under the Debenture Stock, PCI will pledge to the Company notes
issued by its subsidiary PCBV with an aggregate principal amount of
$176,815,000. The PCI Noteholders will be equally and ratably secured by the
pledge in accordance with the terms of the PCI Indenture.
NOTES PAYABLE TO UPC
As of December 31, 2000 and 1999, the Company had a loan payable to UPC of
approximately $365,497,000 and $220,149,000, respectively. The amounts include
accrued interest of approximately $32,055,000 and $2,804,000 as of the year
ended December 31, 2000 and 1999, respectively. All of the interest was accrued
in the year 2000 and in the five months of 1999. The loan bears interest at a
rate of 9.75% per annum and has no defined repayment terms.
AMERICAN BANK IN POLAND S.A. REVOLVING CREDIT LOAN
The revolving credit loan allowing the Company to borrow up to a maximum
principal amount of $6,500,000 on or before December 31, 1998, was fully drawn
as of December 31, 1998. The facility bore interest at LIBOR plus 3.0% (8.0% as
at December 31, 1998), was repaid in full on November 20, 1999, and was secured
by promissory notes en blanc from certain of the Company's subsidiaries, and
pledges of the shares of certain of the Company's subsidiaries.
BANK ROZWOJU EKSPORTU S.A. DEUTSCHE-MARK FACILITY
The Deutsche--Mark facility represents a credit facility of DM 3,948,615 of
which approximately DM 1,702,500 was outstanding at December 31, 2000. The
facility bears interest at LIBOR plus 2.0% (6.85% as at December 31, 2000), is
repayable in full on December 27, 2002, and is ultimately secured by a pledge of
the common shares of one of the Company's subsidiaries.
Interest expense relating to notes payable was in the aggregate
approximately $73,984,000, $24,459,000, $28,818,000 and $21,535,000 for the year
2000, for the five months of 1999, the seven months of 1999 and for the year
ended December 31, 1998, respectively.
13. PREFERENCE OFFERINGS
On January 22, 1999 the Company sold 50,000 (45,000 Series A and 5,000
Series B) 12% Cumulative Redeemable Preference Shares (collectively "the
Preference Shares") and 50,000 Warrants (each a "Preference Warrant") each
Preference Warrant initially entitling the holders thereof to purchase 110
shares of common stock, par value $0.01 per share, of the Company at an exercise
price of $10.00 per share, subject to adjustment. The Preference Shares together
with the Preference Warrants generated gross proceeds to the Company of
$50,000,000 of which approximately $28,812,000 has been allocated to the initial
unaccreted value of the Preference Shares (net of commissions and offering costs
payable by the Company of approximately $1,700,000), and approximately
$19,483,000 has been allocated to the Preference Warrants.
The Series A 12% Cumulative Redeemable Preference Shares, the Series A 12%
Cumulative Redeemable Preference Shares and the Preference Warrants issued in
the Preference offering were registered on a registration statement on Form S-3.
This registration statement was declared effective on July 2, 1999.
In the Tender Offer, initiated pursuant to the Agreement and Plan of Merger
with UPC and Bison, UPC acquired 100% of the outstanding Series A and Series B
12% Cumulative Redeemable Preference Shares, and the Preference Warrants.
68
14. RELATED PARTY TRANSACTIONS
During the ordinary course of business, the Company enters into transactions
with related parties. The principal related party transactions are described
below.
PROGRAMMING
Programming is provided to the Company by certain of its affiliates. The
Company incurred programming fees from these affiliates of $1,800,000 for the
year ended December 31, 2000, $1,745,000, $1,025,000 for five and seven months
of 1999, respectively and $418,000 for the year ended December 31, 1998.
PRINT MEDIA SERVICES
An affiliate of the Company provides print media services to the Company.
The Company incurred operating costs related to these services of $3,763,000,
$2,849,000, $3,863,000 and $4,355,000 for the year ended December 31, 2000, five
months of 1999, seven months of 1999 and the year ended December 31, 1998,
respectively.
UPC
As discussed in the note 12, the Company has $365,497,000 of notes payable
to UPC, additionally the Company has $5,190,000 of trade payables related to
management fees charged for the period of one year ended December 31, 2000 and
$12,469,000 of trade receivables related to programming and transmission
services sold to UPC.
15. PER SHARE INFORMATION
Basic loss per share has been computed by dividing net loss attributable to
common stockholders by the weighted average number of common shares outstanding
during the year. The effect of potential common shares (stock options and
warrants outstanding) is antidilutive, accordingly, dilutive loss per share is
the same as basic loss per share. As of August 5, 1999 and December 31, 1998
options for 3,904,250 and 3,924,000 shares, respectively were excluded from the
calculation of earnings per share.
The following table provides a reconciliation of the numerator and
denominator in the loss per share calculation:
SUCCESSOR (NOTE 2) PREDECESSOR (NOTE 2)
------------------------- --------------------------
YEAR ENDED FIVE SEVEN YEAR ENDED
DECEMBER 31, MONTHS MONTHS DECEMBER 31,
2000 OF 1999 OF 1999 1998
------------- --------- ---------- -------------
Net loss attributable to common stockholders
(in thousands)............................. $(248,811) $(144,177) $(130,452) $(126,065)
Basic weighted average number of common
shares outstanding (in thousands).......... N/A N/A 33,459 33,310
--------- --------- --------- ---------
Net loss per share-basic and diluted......... N/A N/A $ (3.90) $ (3.78)
========= ========= ========= =========
16. CAPITAL CONTRIBUTION
During the period of twelve months ended December 31, 2000, UPC made a
capital contribution of $50.6 million.
69
17. STOCK OPTION PLANS
UPC POLSKA, INC. (FORMERLY @ENTERTAINMENT, INC.) STOCK OPTION PLAN
On June 22, 1997, the Company adopted its own stock option plan (the "1997
Plan") pursuant to which the Company's Board of Directors may grant stock
options to officers, key employees and consultants of the Company. The 1997 Plan
authorizes grants of options to purchase up to 4,436,000 shares, subject to
adjustment in accordance with the 1997 Plan. At December 31, 1998, options for
3,924,000 shares had been granted. Of this amount, 1,671,000 options became
exercisable upon the IPO but could not be sold for a period of two years from
July 30, 1997.
The Company granted 1,671,000 stock options in January 1997 at a price
substantially below the IPO price of $21.00 per share. Such options vested in
full upon the completion of the IPO. In accordance with generally accepted
accounting principles, the Company recognized approximately $18,102,000 of
compensation expense included in selling, general, and administrative expenses
for these options in 1997 representing the difference between the exercise price
of the options and the fair market value of the shares on the date of grant.
Future stock options were granted with an exercise price that must be at
least equal to the stock's fair market value at the date of grant. With respect
to any participant who owns stock possessing more than 10% of the voting power
of all classes of stock of the Company, the exercise price of any incentive
stock option granted must equal at least 110% of the fair market value on the
grant date and the maximum term of an incentive stock option must not exceed
five years. The term of all other options granted under the 1997 Plan may not
exceed ten years. Options become exercisable at such times as determined by the
Board of Directors and as set forth in the individual stock option agreements.
Generally, all stock options vest ratably over 2 to 5 years commencing one year
after the date of grant.
In February 1999 a number of the Company's employees were granted options
under this plan to purchase 700,000 shares of common stock at a price of $14.30
per share, vesting ratably over a three-year period starting from January 1,
2000. The exercise price of such options exceeded the quoted market price for
the Company's shares on the date of grant. All stock options were cancelled and
paid in cash in full in connection with the Merger.
Stock option activity during the periods indicated is as follows:
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE
---------------- ----------------
Balance at January 1, 1998 (none exercisable)............... 2,324,000 $ 5.57
Granted..................................................... 1,600,000 $ 12.31
---------- -------
Balance at December 31, 1998 (2,643,000 exercisable)........ 3,924,000 $ 8.32
Granted..................................................... 700,000 $ 14.30
Forfeited................................................... (623,750) $ (4.55)
Exercised................................................... (96,000) $ (1.99)
Acquired as part of Merger and cancelled.................... (3,904,250) $(10.16)
---------- -------
Balance at August 5, 1999................................... -- $ --
Transactions during five months of 1999..................... -- $ --
---------- -------
Balance at December 31, 1999................................ -- $ --
Transactions during year 2000............................... -- $ --
---------- -------
Balance at December 31, 2000................................ -- $ --
========== =======
The per share weighted-average fair value of stock options granted during
1999 and 1998 was $2.82 and $4.22, respectively, on the date of grant using the
Black Scholes option-pricing model. The following weighted-average assumptions
were used; expected volatility of 53% and 43.0%, expected
70
dividend yield 0.0%, risk-free interest rate of 4.78% and 5.72%, and an expected
life of 4 years, respectively for 1999 and 1998.
UPC STOCK OPTION PLAN
In June 1996, UPC Polska Inc.'s parent company, UPC, adopted a stock option
plan (the "Plan") for certain of its employees and those of its subsidiaries.
During 2000, management of UPC Polska Inc. were granted options by the parent
company under this plan.
There are 18,000,000 total shares available for the granting of options
under the Plan, which are held by the Stichting Administratiekantoor UPC (the
"Foundation"), which administers the Plan. Each option represents the right to
acquire from the Foundation a certificate representing the economic value of one
share. The options are granted at fair market value determined by UPC's
Supervisory Board at the time of the grant. The maximum term that the options
can be exercised is five years from the date of the grant. The vesting period
for grants of options is four years, vesting in equal monthly increments. Upon
termination of an employee (except in the case of death, disability or the
like), vested options must be exercised, within 30 days of the termination date.
The Supervisory Board of UPC may alter these vesting schedules at its
discretion. An employee has the right at any time to put his certificates or
shares from exercised vested options to the Foundation at a price equal to the
fair market value. The Company can also call such certificates or shares for a
cash payment upon termination in order to avoid dilution, except for certain
awards, which can not be called by the Company until expiration of the
underlying options. The Plan also contains anti-dilution protection and provides
that, in the case of change of control, the acquiring company has the right to
require UPC to acquire all of the options outstanding at the per share value
determined in the transaction giving rise to the change of control.
For purposes of the proforma disclosures presented below, UPC, and
consequently UPC Polska Inc., have computed the fair values of all options
granted during the year ended December 31, 2000 using the Black-Scholes
multiple-option pricing model and the following weighted-average assumptions:
Risk-free interest rate..................................... 4.60%
Expected life regular options............................... 5 years
Expected volatility......................................... 74.14%
Expected dividend yield..................................... 0%.
Based upon Black-Scholes multiple option model, the total fair value of
options granted was approximately $1.0 million for the year ended December 31,
2000. This amount is amortized using the straight-line method over the vesting
period of the options. Cumulative compensation expense recognized in pro forma
net income, with respect to options that are forfeited prior to vesting, is
adjusted as a reduction of pro forma compensation expense in the period of
forfeiture. For the year ended December 31, 2000, stock-based compensation, net
of the effect of forfeitures and net of actual compensation expense recorded in
the statement of operations was zero. This stock-based compensation had the
following proforma effect on net income (in thousands):
YEAR ENDED
YEAR ENDED FIVE MONTHS SEVEN MONTHS DECEMBER 31,
DECEMBER 31, 2000 OF 1999 OF 1999 1998
----------------- ----------- ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net loss--as reported................ $(248,811) $(144,177) $(128,689) $(126,065)
Net loss--pro forma.................. $(249,003) $(144,177) $(128,016) $(131,511)
Basic and diluted net loss per
share--as reported................. N/A N/A $ (3.90) $ (3.78)
Basic and diluted loss per share--pro
forma.............................. N/A N/A $ (3.92) $ (3.95)
71
A summary of stock option activity for the Company's employees participating
in the Plan is as follows:
FOR THE YEAR ENDED
DECEMBER 31, 2000
---------------------------------
WEIGHTED-
AVERAGE
NUMBER OF SHARES EXERCISE PRICE
---------------- --------------
(EUROS)
Outstanding at the beginning of period........ -- --
Granted during period......................... 41,949 44.22(1)
Cancelled during period....................... -- --
Exercised during period....................... -- --
------ -----
Outstanding at end of period.................. 41,949 44.22(1)
====== =====
Exercisable at end of period (1) ............. 6,985 44.22(1)
====== =====
- ------------------------
(1) The Weighted Average Exercise Price translated into US dollars at the rate
as at December 31, 2000 amounts to $38.25.
The combined weighted-average fair values and weighted-average exercise
prices of options granted are as follows:
FOR THE YEAR ENDED DECEMBER 31, 2000
-----------------------------------------------
EXERCISE PRICE NUMBER OF OPTIONS FAIR VALUE EXERCISE PRICE
- -------------- ----------------- ---------- --------------
(EUROS)
----------
Less than market price................................ 4,733 31.62 44.22(1)
Equal to market price................................. 37,216 28.20 44.22(1)
------ ----- -----
Total............................................... 41,949 28.59 44.22(1)
====== ===== =====
- ------------------------
(1) The Weighted Average Exercise Price translated into US dollars at the rate
as at December 31, 2000 amounts to $38.25.
The following table summarizes information about stock options outstanding,
vested and exercisable as of December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ----------------------------
WEIGHTED-AVERAGE
NUMBER OF REMAINING WEIGHTED- NUMBER OF WEIGHTED-
OPTIONS CONTRACTUAL AVERAGE OPTIONS AVERAGE
EXERCISE PRICE (EUROS) OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ---------------------- ----------- ---------------- --------------- ----------- --------------
(EUROS) (EUROS)
44.22 41,949 3.25 44.22 6,985 44.22(1)
====== ==== ===== ===== =====
- ------------------------
(1) The Weighted Average Exercise Price translated into US dollars at the rate
as at December 31, 2000 amounts to $38.25.
This Plan has been accounted for as a fixed plan. Compensation expense of
zero was recognized for the year ended December 31, 2000.
72
18. LEASES
Total rental expense associated with the operating leases mentioned below
for the year ended December 31, 2000, five months of 1999, seven months of 1999
and the year ended December 31, 1998 was $14,745,000, $3,827,000, $5,358,000 and
$10,521,000, respectively.
BUILDING LEASES
The Company leases several offices and warehouses within Poland under
cancelable and non cancelable operating leases. The Company has also a non
cancelable operating lease for a building in the United Kingdom which houses the
majority of its technical equipment relating to the D-DTH network. The non
cancelable lease for the building in the United Kingdom expires in 2002, and
contains a renewal option for an additional five years. The non cancelable
operating lease for offices in Poland expires in 2005 and contains a renewal
option for an additional five years. Future minimum lease payments as of
December 31, 2000 are $5,095,000 in 2001, $4,423,000 in 2002 and $4,462,000 in
2003, $4,473,000 in 2004 and $7,630,000 in 2005 and thereafter.
D-DTH TECHNICAL EQUIPMENT LEASE
The Company has an eight year agreement with British Telecommunications plc
("BT") for the lease and maintenance of certain satellite uplink equipment. The
agreement requires the payment of equal monthly installments of approximately
$45,000 approximating future minimum commitments of $538,000 in 2001, $538,000
in 2002, $538,000 in 2003, $538,000 in 2004 and $672,000 in 2005 and thereafter.
Other than the BT uplink equipment, the Company owns all of the required
broadcasting equipment at its transmission facility in the United Kingdom.
CONDUIT LEASES
The Company leases space within various telephone duct systems from TPSA
under cancelable operating leases. The TPSA leases expire at various times, and
a substantial portion of the Company's contracts with TPSA permit termination by
TPSA without penalty at any time either immediately upon the occurrence of
certain conditions or upon provision of three to six months notice without
cause. Refer to note 24 for further detail. All of the agreements provide that
TPSA is the manager of the telephone duct system and will lease space within the
ducts to the Company for installation of cable and equipment for the cable
television systems. The lease agreements provide for monthly lease payments that
are adjusted quarterly or annually, except for the Gdansk lease agreement which
provides for an annual adjustment after the sixth year and then remains fixed
through the tenth year of the lease.
Minimum future lease commitments for the aforementioned conduit leases
relate to 2001 only, as all leases are cancelable in accordance with the
aforementioned terms. The future minimum lease commitments related to these
conduit leases approximates $498,000 as of the year ended December 31, 2000.
TRANSPONDER LEASES
During 1997 and 2000, the Company entered into certain operating leases
pursuant to which the Company is liable for charges associated with each of its
four transponders on the Astra satellites, which can amount to a maximum of
$5,676,000 per year for each transponder and up to $208,120,000 for all four
transponders for the term of their leases. The future maximum lease payments
applicable to the transponders approximate $22,704,000 in 2001, $22,704,000 in
2002, $22,704,000 in 2003, $22,704,000 in 2004 and $117,304,000 in 2005 and
thereafter. The leases for the two transponders on the Astra 1F satellite and
the transponder on the Astra 1E satellite will expire in 2009. The lease for the
fourth transponder on the Astra 1G satellite will expire in 2010. The Company's
transponder leases
73
provide that the Company's rights are subject to termination in the event that
the lessor's franchise is withdrawn by the Luxembourg Government.
CAR LEASES
The Company has operating car leases with various leasing companies in
Poland. Minimum future lease commitments for the aforementioned car leases as of
December 31, 2000 are $516,000 in 2001, $439,000 in 2002 and $37,000 in 2003.
19. QUARTERLY FINANCIAL STATEMENTS (UNAUDITED)
OPERATING OPERATING
OPERATING LOSS AS LOSS NET LOSS AS NET LOSS
REVENUES REPORTED ADJUSTMENT ADJUSTED REPORTED ADJUSTMENT ADJUSTED
--------- --------- ---------- --------- ----------- ---------- --------
2000
First Quarter..................... 27,324 (43,818) (1,297) (45,115) (63,539) (1,297) (64,836)
Second Quarter.................... 30,116 (39,723) (1,297) (41,020) (67,410) (1,297) (68,707)
Third Quarter..................... 31,843 (39,173) (1,298) (40,471) (63,727) (1,298) (65,025)
Fourth Quarter.................... 44,300 (48,516) 3,892 (44,624) (54,135) 3,892 (50,243)
1999
First Quarter..................... 18,799 (24,243) -- (24,243) (34,626) -- (34,626)
Second Quarter.................... 21,056 (54,811) -- (54,811) (68,938) -- (68,938)
Third Quarter..................... 21,827 (57,240) -- (57,240) (72,895) -- (72,895)
Fourth Quarter.................... 23,276 (80,901) -- (80,901) (95,734) -- (95,734)
During the fourth quarter of the year 2000, the Company was invoiced of
$5,190,000 (equivalent of EUR 6,000,000) for general management services ("GSA")
from UPC. The above presented adjustment allocates the GSA expense evenly into
each quarter of the year 2000.
20. SEGMENT INFORMATION
UPC Polska, Inc. and its subsidiaries operate in four business segments,
cable television, digital direct-to-home television, programming, and corporate
functions. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. The Company
evaluates performance based on profit or loss from operations before income
taxes not including nonrecurring items and foreign exchange gains and loss. The
Company accounts for intersegment sales and transfers as if the sales or
transfers were to third parties, that is, at current market prices.
The Company classifies its business into four segments: (1) cable
television, (2) D-DTH television, (3) programming, and (4) corporate.
Information about the operations of the Company in these different business
segments is set forth below based on the nature of the services offered. During
1999 and in prior years, the Company presented its operations in three business
segments: (1) cable television, (2) D-DTH television and programming, and (3)
corporate. Due to the increasing size of the D-DTH segment, in January 2000,
management decided to separate its D-DTH operations into two distinct segments,
satellite television and programming. In addition to other operating statistics,
the Company measures its financial performance by EBITDA, an acronym for
earnings before interest, taxes, depreciation and amortization. The Company
defines EBITDA to be net loss adjusted for interest and investment income,
depreciation and amortization, interest expense, foreign currency gains and
losses, equity in losses of affiliated companies, income taxes and minority
interest. The items excluded from EBITDA are significant components in
understanding and assessing the Company's financial performance. The Company
believes that EBITDA and related measures of cash flow from operating activities
serve as important financial indicators in measuring and comparing the operating
performance of media companies.
74
EBITDA is not a U.S. GAAP measure of profit and loss or cash flow from
operations and should not be considered as an alternative to cash flows from
operations as a measure of liquidity.
CABLE D-DTH PROGRAMMING CORPORATE TOTAL
-------- -------- ----------- --------- ---------
2000
Revenues from external customers........ $ 68,781 $ 51,239 $ 13,563 $ - $ 133,583
Intersegment revenues................... - - 55,134 - 55,134
Operating loss.......................... (44,581) (47,284) (71,858) (7,507) (171,230)
EBITDA.................................. 1,203 (6,932) (48,491) (7,507) (61,727)
Depreciation and amortization........... (45,784) (40,352) (23,367) - (109,503)
Net loss................................ (46,510) (74,377) (87,994) (39,930) (248,811)
Segment assets.......................... 518,872 402,609 301,522 12,151 1,235,154
FIVE MONTHS OF 1999
Revenues from external customers........ $ 27,027 $ 8,230 $ 2,761 $ -- $ 38,018
Intersegment revenues................... -- -- 12,149 -- 12,149
Operating loss.......................... (26,923) (40,846) (45,859) (4,768) (118,396)
EBITDA.................................. (8,765) (28,184) (36,507) (4,751) (78,207)
Depreciation and amortization........... (18,158) (12,662) (9,352) (17) (40,189)
Net loss................................ (33,130) (49,939) (47,714) (13,394) (144,177)
Segment assets.......................... 524,931 367,347 311,241 15,352 1,218,871
SEVEN MONTHS OF 1999
Revenues from external customers........ $ 35,434 $ 10,675 $ 831 $ -- $ 46,940
Intersegment revenues................... -- -- 15,095 -- 15,095
Operating loss.......................... (11,936) (44,832) (28,094) (13,937) (98,799)
EBITDA.................................. 1,883 (37,753) (25,083) (13,919) (74,872)
Depreciation and amortization........... (13,819) (7,079) (3,011) (18) (23,927)
Net loss................................ (20,672) (50,641) (34,717) (21,986) (128,016)
Segment assets.......................... 186,941 58,239 68,672 69,164 383,016
1998
Revenues from external customers........ $ 52,971 $ 8,613 $ 275 $ -- $ 61,859
Intersegment revenues................... -- 435 13,544 -- 13,979
Operating loss.......................... (23,066) (35,247) (33,800) (8,700) (100,813)
EBITDA.................................. (1,431) (34,012) (30,366) (8,700) (74,509)
Depreciation and amortization........... (21,635) (1,235) (3,434) -- (26,304)
Net loss................................ (37,193) (38,716) (41,161) (8,995) (126,065)
Segment assets.......................... 193,785 78,952 54,046 21,591 348,374
75
Total long-lived assets as of December 31, 2000 and 1999 and total revenues
for the year 2000, five and seven months of 1999, and year ended December 31,
1998 analyzed by geographical location are as follows:
TOTAL REVENUES LONG-LIVED ASSETS
------------------------------------------------------ -------------------
FIVE MONTHS OF SEVEN MONTHS OF
2000 1999 1999 1998 2000 1999
-------- -------------- --------------- -------- -------- --------
(IN THOUSAND) (IN THOUSAND)
Poland........................ 121,650 38,018 46,940 61,859 285,803 206,442
United Kingdom................ -- -- -- -- 17,546 21,493
Other......................... 11,933 -- -- -- 438 514
------- ------ ------ ------ ------- -------
Total......................... 133,583 38,018 46,940 61,859 303,787 228,449
======= ====== ====== ====== ======= =======
During the year 2000, UPC Broadcast Centre began providing D-DTH
transmission services and purchased and sold programming rights to other
subsidiaries of UPC in Hungary, the Czech Republic and Slovakia.
All of the Company's revenue is derived from activities carried out in
Poland and other countries in Europe. Long-lived assets consist of property,
plant, and equipment, inventories for construction and intangible assets other
than goodwill and other assets.
21. JOINT VENTURE WITH MTV
On March 1, 2000, UPC Programming B.V., an affiliate of the Company, entered
into joint a venture with MTV Networks B.V. for a 50% equity interest in MTV
Polska for the purpose of producing a localized Polish MTV programming channel
for distribution in Poland. The Company has agreed to sell certain assets of its
subsidiary, Atomic TV, to UPC Programming B.V., which will in turn contribute
these assets to the joint venture. As a result of the joint venture, MTV Polska
has licensed the right to distribute the MTV Polska and VH1 programming channels
in Poland to UPC Programming B.V. In turn, UPC Programming B.V. intends to
novate such rights to Wizja TV B.V. Those carriage rights are used by UPC
Telewizja Kablowa (previously Polska Telewizja Kablowa) and UPC Broadcast Centre
Limited for distribution in Poland. As a result of the joint venture with MTV,
the Atomic TV channel was discontinued as of July 2000.
22. BROADCASTING LICENSE
In November 2000, Polska Telewizja Cyfrowa Sp. z o.o., owned in part by a
subsidiary of the Company, was issued broadcasting licenses for Wizja Sport and
Wizja Jeden by the National Broadcast Council. The National Broadcast Council
has also issued a satellite platform license to Polska Telewizja Cyfrowa
Sp. z o.o. for Wizja Sport, Wizja Jeden and certain third party programming.
Polska Telewizja Cyfrowa Sp. z o.o. is considered to be a broadcaster under the
Polish law, although these licenses have not yet been used.
23. DATA TRANSMISSION LICENSE
On July 26, 2000, the Polish Ministry of Telecommunication issued a 15-year
data transmission license to a subsidiary of the Company, authorizing that
company to provide data transmission service to its customers throughout the
territory of Poland, using its own networks and those leased from other licensed
operators. This license allowed that subsidiary to provide Internet services to
its customers. This license expired automatically with the entry of the NTL into
force, i.e. as of January 1, 2001. The subsidiary may continue the provision of
the services covered by the license. It must, however, notify the Chairman of
the URT about the provision of the data transmission services by the end of
March
76
2001 as described below. In certain cases listed below, the Chairman of the URT
may object to the provision of the services by the subsidiary.
As of December 31, 2000, approximately 74.5% of the Company's cable plant
runs through conduits leased from the Polish national telephone company
("TPSA"). If the Company uses the cables for a purpose other than cable
television, such as data transmission, telephone, or Internet access, such use
could be considered a violation of the terms of certain conduit agreements,
unless this use is expressly authorized by TPSA. There is no guarantee that TPSA
would give its approval to permit other uses of the conduits. The Company is
currently in the process of introducing Internet services to its customers and
renegotiating certain conduit agreements with TPSA.
24. COMMITMENTS AND CONTINGENCIES
In addition to lease commitments presented in note 18 the Company has the
following commitments and contingencies:
PURCHASE COMMITMENTS
The Company has concluded an agreement with Philips, whereby Philips
supplies Reception Systems, as well as retail, installation and support services
in connection with the launch of the Company's D-DTH Business in Poland. Philips
was the exclusive supplier to the Company of the first 500,000 D-DTH Reception
Systems. The Company purchased more than 500,000 D-DTH reception systems from
Philips as of the end of the year 2000. Philips has granted the Company an
exclusive license of its CryptoWorks-Registered Trademark- technology in Poland
for the term of the agreement, which may be terminated or renegotiated when the
Company has purchased 500,000 D-DTH reception systems from Philips. The Company
and Philips are currently negotiating a variation to the agreement.
PROGRAMMING, BROADCAST AND EXHIBITION RIGHT COMMITMENTS
The Company has entered into long-term programming agreements and agreements
for the purchase of certain exhibition or broadcast rights with a number of
third party content providers for its D-DTH and cable systems. The agreements
have terms which range from one to seven years and require that the license fees
be paid either at a fixed amount payable at the time of execution or based upon
a guaranteed minimum number of subscribers connected to the system each month.
At December 31, 2000, the Company had an aggregate minimum commitment in
relation to these agreements of approximately $267,847,000 over the next seven
years, approximating $65,225,000 in 2001, $54,319,000 in 2002, $34,967,000 in
2003, $21,086,000 in 2004 and $92,250,000 in 2005 and thereafter.
SPONSORSHIP COMMITMENTS
As of the year ended December 31, 2000, the Company through its subsidiaries
committed to pay approximately $0.8 million for the sponsorship of the Hoop
Pekaes Pruszkow basketball club.
REGULATORY APPROVALS
The Company is in the process of obtaining permits from the Chairman of URT
for several of its cable television systems. If these permits are not obtained,
URT could impose penalties such as fines or in severe cases, revocation of all
permits held by an operator or the forfeiture of the operator's cable networks.
Management of the Company does not believe that these pending approvals result
in a significant risk to the Company. Additionally, in March 2001, the Company's
subsidiary notified the Chairman of the URT of its activities concerning the
provision of data transmission services and access to Internet.
77
LITIGATION AND CLAIMS
From time to time, the Company is subject to various claims and suits
arising out of the ordinary course of business. While the ultimate result of all
such matters is not presently determinable, based upon current knowledge and
facts, management does not expect that their resolution will have a material
adverse effect on the Company's consolidated financial position or results of
operations.
PROCEEDING RELATING TO HBO POLSKA
Two of the Company's cable television subsidiaries and four other unrelated
Polish cable operators and HBO Polska Sp. z o.o., have been made defendants in a
lawsuit instituted by Polska Korporacja Telewizyjna Sp. z o.o., a subsidiary of
Canal+. The primary defendant in the proceedings is HBO Polska Sp. z o.o. which
is accused of broadcasting the HBO television program in Poland without a
license from the Council as required by the Radio and Television Act of 1992, as
amended, and thereby undertaking an activity constituting an act of unfair
competition. The Company does not believe that the final disposition of the
lawsuit will have a material adverse effect on its consolidated financial
position or results of operations.
ARBITRATION RELATING TO TELEWIZYJNA KORPORACJA PARTYCYPACYJNA
On April 17, 1998, the Company signed a binding letter of intent with
Telewizyna Korporacja Partycypacyjna ("TKP"), the parent company of Canal+
Polska, which provided for bringing together the Company's Wizja TV programming
platform and the Canal+ Polska premium pay television channel and for the joint
development and operation of a D-DTH service in Poland. The establishment of the
joint venture was subject to the execution of definitive agreements, regulatory
approvals and certain other closing conditions.
The definitive agreements were not agreed and executed by the parties by the
date set forth in the letter of intent (the "Signature Date"). Therefore, the
Company terminated the letter of intent on June 1, 1998. TKP and its
shareholders have informed the Company that they believe the Company did not
have the right to terminate the letter of intent.
Under the terms of the letter of intent, TKP is obligated to pay the Company
a $5 million break-up fee within 10 days of the Signature Date if the definitive
agreements were not executed by the Signature Date, unless the failure to obtain
such execution was caused by the Company's breach of any of its obligations
under the letter of intent. If there was any such breach by the Company, the
Company would be obligated to pay TKP $10 million. However, if any breach of the
letter of intent by TKP caused the definitive agreements not to be executed, TKP
would be obligated to pay the Company a total of $10 million (including the $5
million break-up fee). In the event that TKP fails to pay the Company any of the
above-referenced amounts owed to the Company, TKP's shareholders are responsible
for the payment of such amounts.
The Company demanded monies from TKP as a result of the failure to execute
the definitive agreements by the Signature Date. While the Company was waiting
for the expiration of the 10-day period for payment of the break-up fee, TKP
initiated arbitration proceedings before a three member-arbitration panel in
Geneva, Switzerland. In their claim, TKP and its shareholders alleged that the
Company breached its obligation to negotiate in good faith and to use its best
efforts to agree and execute the definitive agreements and claimed the Company
is obligated to pay TKP $10 million pursuant to the letter of intent. The
Company answered and brought counterclaims against TKP and its shareholders. The
arbitration hearings were conducted in Geneva in June 1999. On June 26, 2000,
the arbitration tribunal awarded TKP $10 million plus interest and costs and
dismissed the Company's request for damages against TKP and its shareholders.
Following the award, the Company decided not to appeal. During the second
quarter of the year 2000, the Company accrued $12.0 million related to
78
the arbitration accounted for as adjustment to goodwill. The award of
$12,218,100 was paid on October 27, 2000.
PCBV MINORITY STOCKHOLDER'S CLAIM
On or about July 8, 1999, certain minority shareholders ("the minority
shareholders") of Poland Cablevision (Netherlands) B.V. (PCBV), an indirect
subsidiary of the Company, filed a lawsuit against the Company, Poland
Communications, Inc. ("PCI") and certain other defendants, in United States
District Court, Southern District of Ohio, Eastern Division, Civil Action No.
C2-99-621.
The relief sought by the minority shareholders includes: (1) unspecified
damages in excess of $75,000, (2) an order lifting the restrictions against
transfer of shares set forth in the Shareholders' Agreement among PCBV's
shareholders, as amended (the "Shareholders' Agreement") so that the minority
shareholders can liquidate their shares in PCBV, (3) damages in the amount of
1.7 percent of the payment made by UPC for the shares of the Company as set
forth in the Agreement and Plan of Merger between the Company and UPC dated June
2, 1999, and (4) attorneys' fees and costs incurred in prosecuting the lawsuit.
The amended complaint sets forth eight claims for relief based on
allegations that the defendants, including the Company and PCI, committed the
following wrongful acts: (1) breached a covenant not to compete contained in the
Shareholders' Agreement relating to the shareholders of PCBV, (2) breached a
covenant in the Shareholders' Agreement requiring that any contract entered into
by PCBV with any other party affiliated with PCI be commercially reasonable or
be approved by certain of the minority shareholders, (3) breached a provision in
the Shareholders' Agreement that allegedly required co-defendant Chase
International Corp. ("CIC") to offer the minority shareholders the right to
participate in certain sales of PCBV shares and that required CIC to give
written notice of any offer to purchase the minority shareholders' shares in
PCBV, (4) breached their fiduciary duties to the minority shareholders, (5)
breached the agreement between PCBV and CIC, which allegedly limited the amount
of management fees that could be paid annually by PCBV, (6) made false and
misleading statements in various documents filed with the Securities and
Exchange Commission, (7) colluded to defraud the minority shareholders by
failing to make reference in certain Forms 8-K, 8-KA and 14D-1 to the minority
shareholders or their alleged rights and claims, (8) colluded to divert assets
of PCBV to affiliates of PCI and PCBV, including the Company, that allegedly
compete with PCI and PCBV.
On or about March 31, 2000 the parties to the lawsuit reached a settlement.
In accordance with the settlement, on June 2, 2000, Wizja TV B.V., an affiliate
of PCI, purchased approximately 1.4% of the outstanding shares of PCBV for a
price of approximately $2.2 million. The case has been dismissed and releases
exchanged. The aforementioned settlement does not include the remaining minority
shareholders.
In addition to the Ohio lawsuit, other minority shareholders of PCBV
(representing an additional approximately 6% of the shares of PCBV, hereinafter
the "Reece Group") have asserted claims against the past and present directors
or officers of, or members of the Board of Managers of, PCI, PCBV and the
Company or one or more controlling shareholders of the Company but have not yet
filed suit.
The claims by the Reece Group consist of allegations previously made by
Reece Communications, Inc. ("RCI"). RCI's allegations were premised on, among
other things, alleged acts, errors, omissions, misstatements, misleading
statements or breaches of duty by the aforementioned officers, directors, or
controlling shareholders. Although the Company has defenses to the Reece Group's
allegations, the Company is presently attempting to negotiate a settlement of
those claims and a simultaneous purchase of the Reece Group's PCBV shares.
79
THE GROUPE JEAN-CLAUDE DARMON PROCEEDING AGAINST WIZJA TV SP. Z O.O.
On January 27, 2000, the Groupe Jean-Claude Darmon ("Darmon"), a French
company, commenced legal proceedings against Wizja TV Sp. z o.o., a subsidiary
of the Company, and SPN Widzew SSA Sportowa Spolka Akeyjna (Lodz Football Club)
in the Paris Commercial Court ("Tribunal de Commerce de Paris").
Wizja TV Sp. z o.o. has been accused of infringing broadcast and advertising
rights which Darmon purports to hold. Darmon has accused Wizja TV Sp. z o.o. of
interrupting the broadcast signal of the UEFA Cup match on October 21, 1999
between Lodz Club and AS Monaco. Darmon seeks damages in the amount of
13,025,000 French francs (approximately $1,760,674) from Wizja Sp. z o.o. The
Company is unable to predict the outcome of this case.
DIVIDEND RESTRICTIONS
The Company's Polish subsidiaries are only able to distribute dividends to
the extent of accounting profit determined in accordance with Polish Accounting
Principles. As of December 31, 2000, the Company's Polish subsidiaries have no
profit available for distribution as dividends.
25. CONCENTRATIONS OF BUSINESS AND CREDIT RISK
D-DTH BUSINESS
The Company expects to experience substantial operating losses and negative
free cash flows for at least the next year due to (i) the large investments
required for the acquisition of equipment and facilities for its D-DTH business,
and (ii) the large investments required to develop, produce and acquire the
programming for Wizja TV. There can be no assurance that the Company will be
able to generate operating income or positive cash flows in the future or that
its operating losses and negative cash flows will not increase.
SUPPLIER AGREEMENT
Certain critical components and services used in the Company's D-DTH
satellite transmission system, including the D-DTH Reception System, as well as
retail, installation and support services, are initially to be provided
exclusively by Philips. The Company concluded an agreement with Philips
providing for Philips to be the exclusive supplier to the Company of the first
500,000 D-DTH Reception Systems in connection with the launch of the Company's
D-DTH business in Poland. Philips granted the Company an exclusive license of
its CryptoWorks-Registered Trademark- technology in Poland for the term of the
agreement. The Company had purchased more than 500,000 D-DTH reception systems
from Philips as of the end of the year 2000. The Company and Philips are
currently negotiating a variation into the agreement.
The failure of Philips to deliver D-DTH Reception Systems on schedule, or at
all, would delay or interrupt the development and operation of the Company's
D-DTH service and thereby could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's agreement with Philips provides for full distribution,
installation and servicing through more than 1,200 Philips authorized
electronics retailers located throughout Poland. Philips has agreed to
distribute a complete subscription package, comprising the D-DTH Reception
System, as well as the necessary installation and support services through
Philips' retail network in Poland, and will therefore be the primary point of
contact for subscribers to the Company's D-DTH service. Failure by Philips'
retail network to provide the desired levels of service, quality and expertise
(which are outside the control of the Company) could have a material adverse
impact on the Company's operations and financial condition.
80
PIRACY
The delivery of subscription programming requires the use of encryption
technology to prevent signal theft or "piracy." Historically, piracy in the
cable television and European A-DTH industries has been widely reported. The
Company's IRDs incorporate Philips' CryptoWorks-Registered Trademark-
proprietary encryption technology as part of its conditional access system.
These IRDs use smartcard technology, making it possible to change the
conditional access system in the event of a security breach either through over-
the-air methods such as issuing new electronic decryption "keys" over-the-air as
part of the Company's regular D-DTH broadcasts or by issuing new smartcards. To
the extent that a breach occurs, the Company will take countermeasures,
including over-the-air measures and, if necessary, the replacement of
smartcards. Although the Company expects its conditional access system,
subscriber management system and smartcard system to adequately prevent
unauthorized access to programming, there can be no assurance that the
encryption technology to be utilized in connection with the Company's D-DTH
system will remain effective. The Company and Philips are actively cooperating
in combating privacy issues.
USE OF TPSA CONDUITS
The Company's ability to build out its existing cable television networks
and to integrate acquired systems into its cable television networks depends on,
among other things, the Company's continued ability to design and obtain access
to network routes, and to secure other construction resources, all at reasonable
costs and on satisfactory terms and conditions. Many of such factors are beyond
the control of the Company. In addition, at December 31, 2000, approximately
74.5% of the Company's cable television plant had been constructed utilizing
pre-existing conduits of TPSA. A substantial portion of the Company's contracts
with TPSA allows for termination by TPSA without penalty at any time either
immediately upon the occurrence of certain conditions or upon provision of three
to six months' notice without cause.
In addition, some conduit agreements with TPSA provide that cables can be
installed in the conduit only for the use of cable television. If the Company
uses the cables for a purpose other than cable television, such as data
transmission, telephone, or Internet access, such use could be considered a
violation of the terms of certain conduit agreements, unless this use is
expressly authorized by TPSA. There is no guarantee that TPSA would give its
approval to permit other uses of the conduits. The Company is currently in the
process of introducing Internet services to its cable and D-DTH customers and
renegotiating certain conduit agreements with TPSA.
LIMITED INSURANCE COVERAGE
While the Company carries general liability insurance on its properties,
like many other operators of cable television systems it does not insure the
underground portion of its cable television networks. Due to the high cost of
insurance policies relating to satellite operations, the Company does not insure
against possible interruption of access to the transponders leased by it for
satellite transmission of its broadcasting. Accordingly, any catastrophe
affecting a significant portion of the Company's cable television networks or
disrupting its access to its leased satellite transponders could result in
substantial uninsured losses and could have a material adverse effect on the
Company.
CREDIT WORTHINESS
All of the Company's customers are located in Poland. As is typical in this
industry, no single customer accounted for more than five percent of the
Company's sales in 2000 or 1999. The Company estimates an allowance for doubtful
accounts based on the credit worthiness of its customers as well as general
economic conditions. Consequently, an adverse change in those factors could
effect the Company's estimate of its bad debts.
81
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
(a) Previous independent accountant:
(i) On November 17, 1999, the Company notified KPMG Polska Sp. z o.o.
("KPMG") by telephone of its intent to dismiss KPMG as its independent
accountants, and on the same date KPMG sent a letter to the the Company,
with a copy to the Chief Accountant at the Securities and Exchange
Commission, acknowledging such dismissal. On November 26, 1999, the
Company sent a letter to KPMG formally dismissing KPMG as its
independent accountants.
(ii) The report of KPMG Polska Sp. z o.o. on the Company's financial
statements for the fiscal year ended December 31, 1998 contained no
adverse opinion or disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope or accounting principle.
(iii) The Company's Board of Directors participated in and approved the
decision to change independent accountants.
(iv) In connection with its audits for the fiscal year ended December 31,
1998 and the relationship through the date of the dismissal, there have
been no disagreements with KPMG on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of
KPMG would have caused them to make reference thereto in their report
on the financial statements for such fiscal year.
(v) In a letter dated March 31, 1999 to the Company's Board of Directors
following its 1998 audit, KPMG commented on certain matters involving
the internal control structure and operation of the Company, including:
(i) the need for more experience and resources in the financial
reporting area;
(ii) the need for an effective internal audit department;
(iii) problems in the translation of Polish zloty balances and
transactions into U.S. dollars;
(iv) problems with financial statements of certain subsidiaries and
affiliates presented for consolidation; and
(v) other control weaknesses involving currency translations, monthly
reconciliations and other matters that should have been resolved
prior to being presented for consolidation and audit purposes.
Certain members of management, including a member of the Company's Board of
Directors, discussed the subject matter of certain of these issues with KPMG.
The Company intends to continue addressing these issues, and the Company has
authorized KPMG to respond fully to the inquiries of the successor accountant
concerning such events.
(vi) The Company requested that KPMG furnish it with a letter addressed
to the Securities and Exchange Commission stating whether or not it
agrees with the above statements. A copy of such letter, dated
December 2, 1999, is incorporated by reference to this Form 10-K.
(b) New independent accountant:
(i) The Company engaged Arthur Andersen Sp. z o.o. ("Arthur Andersen") as
its new independent accountant as of November 30, 1999. During the two
most recent fiscal years and through November 26, 1999, the Company has
not consulted with Arthur Andersen regarding
82
either (i) the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion
that might be rendered on the Company's financial statements (and no
written report or oral advice has been provided to the Company by Arthur
Andersen on an accounting, auditing or financial reporting issue); or
(ii) any matter that was either the subject of a disagreement, as that
term is defined in Item 304(a)(1)(iv) of Regulation S-K and the related
instructions to Item 304 of Regulation S-K, or a reportable event, as
that term is defined in Item 304(a)(1)(v) of Regulation S-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS AND SCHEDULES.
The financial statements as set forth under Item 8 of this report on Form
10-K are incorporated herein by reference. Financial statement schedules have
been omitted since they are either not required, not applicable, or the
information is otherwise included.
(B) REPORTS ON FORM 8-K
The Company filed the following Reports on Form 8-K during the quarter ended
December 31, 2000:
Report on Form 8-K, filed on December 12, 2000, relating to the Company's
name change.
(C) EXHIBIT LISTING
EXHIBIT
NUMBER
- ---------------------
3(i) Amended and Restated Certificate of Incorporation of UPC
Polska, Inc. dated December 11, 2000.
3(ii) Amended and Restated By-Laws of UPC Polska, Inc., dated
January 2000.
4.1 Form of Indenture dated as of January 20, 1999 between UPC
Polska, Inc. and Bankers Trust Company relating to UPC
Polska, Inc. Series C Senior Discount Notes due 2008.
4.2 Form of Indenture dated as of January 27, 1999 between UPC
Polska, Inc. and Bankers Trust Company relating to UPC
Polska, Inc. 14 1/2% Senior Discount Notes due 2009 and its
14 1/2% Series B Senior Discount Notes due 2009.
10.1 Agreement for Digital Transmission on the Astra Satellite
System between Societe Europeenne des Satellites S.A.
("SES") and UPC Broadcast Centre Ltd. ("UPC Broadcast")
(ASTRA 1G Satellite, Transponder 73) dated July 10, 2000.+
10.2 Amendment No. 1 to the Agreements for Digital Transmission
on the Astra System dated March 26 and 27, 1997 referring to
Transponders 79, 95 and 99, dated July 10, 2000, between
SES, At Entertainment Ltd., and UPC Broadcast.
11 Statement re computation of per share earnings (contained in
Note 15 to Financial Statements in this Annual Report on
Form 10-K)
99.1 Letter from KPMG, dated December 2, 1999. (Incorporated by
reference to UPC Polska, Inc. Form 8-K, filed in December 2,
1999)
- ------------------------
+ Confidential treatment has been requested with respect to portions of this
Exhibit. Such portions have been omitted and filed separately with the
Securities and Exchange Commission.
83
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UPC POLSKA, INC.
By: /s/ SIMON BOYD
-----------------------------------------
Simon Boyd
CHIEF FINANCIAL OFFICER (PRINCIPAL
FINANCIAL AND PRINCIPAL ACCOUNTING
OFFICER)
In accordance with the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates stated.
NAME TITLE DATE
---- ----- ----
/s/ BRUCE MASSEY
------------------------------------------- President and Chief Executive April 2, 2001
Bruce Massey Officer
/s/ SIMON BOYD Chief Financial Officer
------------------------------------------- (Principal Financial and April 2, 2001
Simon Boyd Principal Accounting Officer)
/s/ WALTER EUGENE MUSSELMAN
------------------------------------------- Director April 2, 2001
Walter Eugene Musselman
/s/ MARK L. SCHNEIDER
------------------------------------------- Chairman of the Board of April 2, 2001
Mark L. Schneider Directors
/s/ ANTON TUIJTEN
------------------------------------------- Director April 2, 2001
Anton Tuijten
/s/ SIMON OAKES
------------------------------------------- Director April 2, 2001
Simon Oakes
/s/ ROBERT DUNN
------------------------------------------- Director April 2, 2001
Robert Dunn
/s/ NIMROD J. KOVACS
------------------------------------------- Director April 2, 2001
Nimrod J. Kovacs
84