<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[ X ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997.
OR
[ ]TRANSITION REPORT PURSUANT TO THE SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT 1934
From the transition period from ______________ to ______________
Commission file number 0-22877
@ENTERTAINMENT, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
DELAWARE 06-1487156
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation of Organization) Identification No.)
UL. PAWINSKIEGO 5a 02-106
WARSAW, POLAND
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 48 22 608 98 22
Indicate by check mark (X) whether the registrant: (1) has filed all reports
required to be fled 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 No X
--------- -------
The number of shares outstanding of @Entertainment, Inc.'s common stock as of
June 30, 1997, was:
Common Stock 18,948,000
1
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@ ENTERTAINMENT, INC.
FORM 10-Q INDEX
FOR QUARTERLY PERIOD ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
PAGE NO.
PART I FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets.................................3 - 4
Consolidated Statements of Operations...........................5
Consolidated Statements of Cash Flows...........................6
Notes to Consolidated Financial Statements..................7 - 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..................................10 - 17
Item 3. Quantitative and Qualitative Disclosures
About Market Risk................................................18
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds........................18
Item 5. Other Information................................................18
Item 6. Exhibits and reports on Form 8-K.................................19
Signature Page...................................................................20
</TABLE>
2
<PAGE> 3
@ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 1997 and December 31, 1996
(Amounts in thousands of U.S. dollars)
(Unaudited)
Assets
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $56,426 $68,483
Investment securities -- 25,115
Accounts receivable, net of allowances of $612 in 1997
and $545 in 1996 1,903 1,215
Other current assets 2,199 2,247
-------- --------
Total current assets 60,528 97,060
-------- --------
Investment in cable television systems, at cost :
Property, plant and equipment:
Cable television system assets 114,909 98,291
Construction in progress 1,127 410
Vehicles 1,475 1,199
Other 3,661 2,667
-------- --------
Total property, plant and equipment 121,172 102,567
Less accumulated depreciation (27,866) (19,143)
-------- --------
Net property, plant and equipment 93,306 83,424
Inventories for construction 8,798 7,913
Intangibles, net 22,313 12,133
-------- --------
Net investment in cable television systems 124,417 103,470
-------- --------
Notes receivable from affiliates 11,801 8,491
Other investments 2,239 2,157
Other intangibles, net 7,199 6,359
-------- --------
Total assets $206,184 $217,537
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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@ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS, CONTINUED
June 30, 1997 and December 31, 1996
(Amounts in thousands of U.S. dollars)
(Unaudited)
Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- --------
<S> <C> <C>
Current liabilities:
Accounts payable $ 14,829 $6,281
Accrued interest 3,245 2,175
Deferred revenue 879 1,102
Accrued income taxes 3,501 4,472
Other current liabilities 1,141 2,175
-------- --------
Total current liabilities 23,595 16,205
Notes payable 130,261 130,074
-------- --------
Total liabilities 153,856 146,279
-------- --------
Minority interest 3,061 5,255
Redeemable preferred stock (liquidation
value $85,000) (8,500 shares authorized, issued and outstanding) 36,983 34,955
Stockholders' equity :
Common stock ($.01 par, 50,000,000 shares authorized, 18,948,000
shares issued and outstanding) 189 189
Paid-in capital 52,106 54,134
Cumulative translation adjustment (584) (162)
Accumulated deficit (39,427) (23,113)
-------- --------
Total stockholders' equity 12,284 31,048
-------- --------
Total liabilities and stockholders' equity $206,184 $217,537
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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@ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended June 30, 1997 and 1996
(Amounts in thousands of U.S. dollars except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cable television revenue 8,903 6,604 16,411 12,025
Operating expenses:
Direct operating expenses 3,028 1,730 5,128 3,244
Selling, general and administrative 15,119 1,232 18,093 2,865
Depreciation and amortization 3,073 1,821 6,523 3,550
---------- ---------- ---------- ----------
Total operating expenses 21,220 4,783 29,744 9,659
---------- ---------- ---------- ----------
Operating (loss) income (12,317) 1,821 (13,333) 2,366
Interest and investment income 1,369 180 2,119 223
Interest expense (4,382) (281) (7,587) (1,885)
Foreign currency translation gain (loss) (117) 34 (422) (60)
---------- ---------- ---------- ----------
Income (loss) before income taxes and
minority interest (15,447) 1,754 (19,223) 644
Income tax benefit (expense) 159 (948) (112) (1,453)
Minority interest in subsidiary loss 2,123 69 2,599 20
---------- ---------- ---------- ----------
Net income (loss) (13,165) 875 (16,736) (789)
Preferred stock dividend -- -- -- (1,738)
Excess of carrying amount of preferred stock
over fair value of consideration transferred -- -- -- 3,549
Accretion of redeemable preferred stock (1,048) (957) (2,028) (957)
---------- ---------- ---------- ----------
Net income (loss) applicable to common shareholders $(14,213) (82) $(18,764) 65
---------- ---------- ---------- ----------
Net earnings (loss) per share $(0.75) 0.00 $(0.99) 0.00
---------- ---------- ---------- ----------
Weighted average number of common
and common equivalent shares outstanding 18,948,000 18,948,000 18,948,000 18,433,000
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
@ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 1997 and 1996
(Amounts in thousands of U.S. dollars)
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(16,736) $ (789)
Adjustments to reconcile net loss to
net cash (used) provided by operating activities:
Minority interest in subsidiary loss (2,599) (20)
Depreciation and amortization 6,523 3,550
Deferred income tax 797
Compensation expense 10,169 --
--------------------
Other 167 43
Allowance for bad debts (67) -
Interest income added to notes payable to affiliates (81) -
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable (579) (227)
Other current assets 1,343 (875)
Accounts payable (1,726) 1,057
Accrued interest 1,070 --
Amounts due to affiliates 89 --
Deferred revenue (223) (183)
Accrued income taxes (971)
Other current liabilities (1,133) (1,359)
------- ------
Net cash (used) provided by operating activities (4,754) 1,994
------- ------
Cash flows from investing activities:
Construction of cable television systems (14,400) (13,347)
Purchase of other capital assets (871) (386)
Proceeds from sale of investment securities 25,669 --
Other investments (1,252) (4,177)
Notes receivable from affiliates (9,060) --
Purchase of subsidiaries, net of cash received (10,976) (1,267)
------- ------
Net cash used by investing activities (10,890) (19,177)
------- ------
Cash flows from financing activities:
Net proceeds from issuance of stock -- 72,450
Proceeds from notes payable 2,200 --
Costs to obtain loans (1,275) (80)
Repayment of notes payable (562) (12,257)
Repayments to affiliates 3,224 (38,920)
------- ------
Net cash provided by financing activities 3,587 21,193
------- ------
Net (decrease) increase in cash and cash equivalents (12,057) 4,010
Cash and cash equivalents at beginning of period 68,483 2,343
------- ------
Cash and cash equivalents at end of period $56,426 $6,353
======= ======
Supplemental cash flow information:
Interest paid during the period $6,619 $6,067
Income taxes paid during the period $1,132 $199
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
The information furnished by @Entertainment, Inc. ("@Entertainment" or
the "Company") in the accompanying unaudited Consolidated Balance Sheets,
Statements of Operations, and Statements of Cash Flows reflects all adjustments
(consisting only of items of a normal recurring nature) which are, in the
opinion of management, necessary for a fair statement of the Company's results
of operations and financial position for the interim periods. The financial
statements should be read in conjunction with the audited financial statements
and notes for the year ended December 31, 1996. The interim financial results
are not necessarily indicative of results for the full year.
@Entertainment was formed in May 1997. On June 22, 1997 the common
stockholders of Poland Communications, Inc. ("PCI") exchanged each of their
shares of common stock of PCI for 1,000 shares of common stock of @Entertainment
in a transaction accounted for in a manner similar to a pooling of interests.
@Entertainment had no prior operations. All shares and per share data have been
revised to reflect the new capital structure.
1. THE REORGANIZATION
The Company completed an initial public offering of stock in the United
States and internationally (the "Offerings") which closed on August 5, 1997.
Prior to the Offerings, all the holders of shares of PCI's common stock and
@Entertainment entered into a Contribution Agreement dated as of June 22, 1997
(the "Contribution Agreement"). Pursuant to the Contribution Agreement, each
holder of shares of PCI's common stock transferred all shares of PCI's common
stock owned by it to @Entertainment. In addition, ECO Holdings III Limited
Partnership ("ECO") transferred all of the outstanding shares of PCI's voting
Series B Preferred Stock (the "PCI Series B Preferred Stock") to
@Entertainment. All of these transfers were designed to qualify as a tax-free
exchange under section 351 of the Internal Revenue Code of 1986, as amended
(the "Share Exchange"). Each holder of PCI's common stock received 1,000 shares
of common stock of @Entertainment in exchange for each share of PCI's common
stock transferred by it (the "Capital Adjustment"). ECO also received an
equivalent number of shares of @Entertainment's Series B Preferred Stock
("@Entertainment Series B Preferred Stock") in exchange for its shares of PCI
Series B Preferred Stock. The @Entertainment Series B Preferred Stock has
identical rights and preferences to those of the PCI Series B Preferred Stock,
except that the ratio for conversion of such shares into common stock increased
from 1:1.9448 to 1:1,944.8 in order to reflect the Capital Adjustment. The
2,500 outstanding shares of @Entertainment Series B Preferred Stock were
automatically converted into 4,862,000 shares of Common Stock of @Entertainment
upon the closing of the Offerings (the "Automatic Conversion").
On June 20, 1997, Polish Investments Holding L.P. ("PIHL") transferred
all of the outstanding shares of PCI's Series C Preferred Stock to an entity
owned by certain of the beneficial owners of PIHL and members of their families
(the "Chase Entity"). The Chase Entity, ECO and @Entertainment entered into a
Purchase Agreement dated as of June 22, 1997 (the "Purchase Agreement"). Among
other matters, the Purchase Agreement obligated @Entertainment to purchase all
of the outstanding shares of PCI's Series A Preferred Stock and Series C
Preferred Stock for cash from ECO and the Chase Entity, respectively, at the
closing of the Offerings (the "Cash Purchase"). The aggregate purchase price of
$ 60.0 million for PCI's Series A Preferred Stock and Series C Preferred Stock
equaled the aggregate redemption price of such shares as set forth in PCI's
certificate of incorporation. The Cash Purchase occurred shortly after the
closing of the Offerings and was funded with a portion of the net proceeds of
the Offerings.
7
<PAGE> 8
In June 1997, certain employment agreements for the executive officers of
@Entertainment who were employed by PCI and PCI's employee stock option plans
were assigned to @Entertainment by PCI (the "Assignment"). As part of the
Assignment and the Capital Adjustment, the employment agreements and employee
stock option plans were amended to provide that each option to purchase a share
of PCI's common stock was exchanged for an option for 1,000 shares of
@Entertainment's Common Stock, with a proportionate reduction in the per share
exercise price.
The Share Exchange, the Capital Adjustment and the Assignment are
collectively referred to as the "Reorganization". As a result of the
Reorganization, @Entertainment owns all of the outstanding shares of
voting stock of PCI.
2. AT ENTERTAINMENT, LIMITED
In June 1997, @Entertainment formed At Entertainment, Limited ("@EL"), a
corporation organized under the laws of England and Wales, as a wholly-owned
subsidiary. @EL will be responsible for the Company's digital satellite direct -
to - home ("D-DTH") broadcasting business.
3. ACQUISITION
On June 11, 1997, PCI, a wholly-owned subsidiary of @Entertainment,
purchased approximately 60% of a cable television system company called
Telewizja Kablowa GOSAT-Service Sp. z o.o. ("Gosat") that services
approximately 70,000 subscribers in several cities and towns in western Poland
for approximately $10.9 million. The purchase price represents an approximately
$1.4 million payment for shares of Gosat, an approximately $9.4 million payment
for non-compete agreements, and the remainder for costs of the acquisition. In
addition, the Company has committed to loan an additional $7.0 million to the
newly acquired company. This loan, which will be advanced in installments until
March 31, 1998, has no set repayment terms, and is interest free until January
31, 2000. Subsequent to January 31, 2000, the loan bears interest at LIBOR plus
2% and is due on demand. The results of the acquired company have been included
in the Company's results since June 11, 1997. Had the acquisition of Gosat
occurred on January 1, 1996, the Company's pro forma consolidated results for
the six months ended June 30, 1996 and six months ended June 30, 1997 would have
been as follows:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
------------- -------------
(unaudited)
-----------
<S> <C> <C>
Revenue 17,935 13,816
Income (loss) before income taxes and minority interest (19,058) 694
Net income (loss) (16,706) (806)
Net income (loss) applicable to holders of common stock (18,734) 48
Net income (loss) per share $(0.99) $0.00
</TABLE>
8
<PAGE> 9
4. COMMITMENTS
In April 1997, Mozaic Entertainment, Inc.("Mozaic"), a wholly-owned
indirect subsidiary of @Entertainment reached an agreement in principle with
Ground Zero Media Sp. z o.o. ("GZM"), a joint venture with Polygram, the
recording company, Atomic Entertainment LLP, and Planet 24 Production Limited,
an independent production company, whereby Mozaic will assume responsibility for
selling all advertising to be shown on Atomic TV for a period of one year, and
will gain the right to retain all of the revenue from such advertising. Atomic
TV is a Polish language music television channel which began satellite
broadcasting to Poland on April 7, 1997. In exchange for such rights Mozaic is
paying GZM $4.95 million over the one year period. Mozaic owns 45% of GZM.
5. STOCK OPTIONS
@Entertainment's 1997 Stock Option Plan (the "1997 Plan") was adopted on
June 22, 1997 and approved by stockholders as of June 22, 1997. The 1997 Plan
provides for the grant to employees of the Company (including officers and
employee directors) of incentive stock options within the meaning of Section 422
of the Code, and for the grant of qualified stock options to employees and
consultants of the Company (collectively the "Options"). The 1997 Plan is to be
administered by a Stock Option Committee appointed by The Board of Directors
(the "Stock Option Committee"), which selects the options (from among those
eligible), determines the number of shares to be subject to each Option and
determines the exercise price of each Option. The maximum number of shares of
Common Stock of @Entertainment that may be subject to Options under the 1997
Plan is 2,436,000 shares, subject to adjustment in accordance with the terms of
the 1997 Plan. As of June 30, 1997, Options for 2,174,000 shares were
outstanding, and 262,000 shares remained available for future grants. The
Company granted Options in January, April and June of 1997. The exercise prices
for these Options were substantially below the initial public offering price of
$21 per share. Most of the Options vested in full upon the completion of the
Offerings. The Company has recognized approximately $10.2 million of
compensation expense during the three months ended June 30, 1997 related to
these Options. The compensation expense relates to the difference between the
exercise price of the Options and their fair market value on the date of grant.
6. OTHER
On April 11, 1997 Poland Cablevision B.V. ("PCBV"), a subsidiary of the
Company, elected to be treated as a partnership for United States federal income
tax purposes instead of a corporation. The deemed conversion from the status of
corporation to partnership was effective as of January 29, 1997. Although PCBV
has made this election, it will continue in existence in its present legal form
under Dutch Company Law, and will not make any actual liquidating distributions
to its stockholders. Approval of this election by the Internal Revenue Service
is pending.
7. SUBSEQUENT EVENTS
In August 1997, @EL, a wholly-owned subsidiary of @Entertainment,
signed a binding Memorandum of Understanding ("MOU") with Philips Business
Electronics B.V ("Philips"), whereby @EL agreed in principle to purchase from
Philips 500,000 decoders and accompanying smart cards and outdoor units
(collectively, "Decoders") in connection with the Company's D-DTH business. The
purchase is subject to the negotiation of a definitive Purchase and Sale
Agreement ("P&S Agreement"), as well as a definitive Commercial Cooperation
Agreement ("CCA"). It is the intention of the parties that the CCA will define
their responsibilities with respect to the marketing, distribution, sale,
installation, repair and support of the Decoders. The MOU provides for Philips
to initiate preparations for its expected performance of the P&S Agreement and
CCA pending the negotiation and anticipated finalization thereof and for @EL to
make phased payments to Philips of $9 million, of which $8 million has been
paid to Philips and $1 million has been paid to a third party in escrow pending
agreement between the parties on specifications for the Decoders. Philips has
commenced development and design of the Decoders to be used in the Company's
D-DTH business.
On September 4, 1997 the Company signed an investment agreement with the
shareholders of TWOJ STYL Publishing House ("TWOJ STYL") by virtue of which the
Company will purchase 50% of TWOJ STYL for a consideration of $11.1 million.
TWOJ STYL publishes a Polish-language lifestyle magazine. In addition, the
Company undertook to provide additional financing to TWOJ STYL, either debt or
equity, of up to $7.7 million to develop Polish-language programming and
ancillary services.
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements of @Entertainment, Inc. ("@Entertainment"
or "the Company"), including the notes thereto, included herein. The following
discussion contains certain forward-looking statements that involve risks and
uncertainties, including without limitation those related to the timing and
costs of setting up the Company's digital satellite direct-to-home ("D-DTH")
broadcast service and to the consummation of pending and future acquisitions.
The Company's actual future results could differ materially from those discussed
herein.
OVERVIEW
The Company is organized based upon its three principal lines of
business: operation of cable television systems in Poland, the creation,
production, development and acquisition of Polish-language programming and the
planned provision of D-DTH broadcasting services. The Company expects to launch
its full D-DTH service in the first half of 1998.
Currently, substantially all of the Company's revenue is derived from
monthly subscription fees for cable television services and one-time
installation fees for connection to its cable television networks. The Company
charges subscribers fixed monthly fees for their choice of service tiers and for
other services, such as premium channels, tuner rentals and additional outlets,
all of which are included in monthly subscription fees. The Company currently
offers broadcast and intermediate tiers of cable television service in selected
areas, and also a basic tier of cable television service throughout the
Company's cable systems. At June 30, 1997 the Company's systems passed
approximately 1,300,000 homes and had approximately 690,000 cable television
subscribers of which approximately 79.1% received basic service.
The Company has experienced low churn rates during all years of its
operations. The Company's annual churn rates for 1994, 1995, 1996 and the first
six months of 1997 were 9.1%, 9.2%, 7.8% and 8.6%, respectively. The Company's
annual churn rates have historically averaged less than 10%. The Company
believes that its churn rates are low because of the Company's customer care
program, the high technical quality of its networks and desirable program
offerings. In addition, the Company benefits from a shortage of housing in
Poland that results in low move-related churn. These churn rates also reflect a
pricing strategy that was designed to keep the Company's profit margin
relatively constant in U.S. Dollar terms in more mature systems and to increase
rates in more recently acquired or rebuilt systems. Since the beginning of 1997,
the Company has adopted a new cable television pricing strategy designed to
maximize revenue per subscriber and achieve real profit margin increases in U.S.
Dollar terms. As a result, the Company expects that it may experience increases
in its churn rate above historical levels during the implementation of its new
pricing strategy across its cable networks.
The Company currently creates, produces, develops and acquires
programming for its two proprietary Polish-language channels, for distribution
across its cable networks. The Company has also set up an indirect wholly-owned
subsidiary, Mozaic Entertainment, Inc., to develop proprietary Polish-language
programming, either directly or through joint ventures.
10
<PAGE> 11
ACQUISITIONS
One of the Company's wholly-owned subsidiaries, Poland Communications,
Inc. ("PCI"), is currently negotiating to acquire two cable television systems
in Poland (the "Acquisitions"). The aggregate consideration to be paid by PCI in
connection with the Acquisitions is expected to be approximately $18.1 million.
The cable systems expected to be acquired serve approximately 60,000 subscribers
and approximately 100,000 homes passed. The consummation of the Acquisitions
will result in the expansion of the Company's cable operations within its
existing regional clusters. PCI intends to use a portion of the net proceeds of
the sale of its 9-7/8% Senior Notes Due 2003 (the "Old Notes") issued in October
1996 to consummate these Acquisitions, although there can be no assurance as to
the timing of closing of any of the pending Acquisitions or that the pending
Acquisitions will actually be consummated. If all of the Acquisitions are
consummated, the Company estimates that it will spend approximately $5.5 million
within 12 months of the consummation of the Acquisitions to upgrade the acquired
networks to meet PCI's technical standards. Such upgrading would enable PCI to
increase the number of programs offered, the quality of the transmissions and
the operating cost effectiveness of the acquired networks. However the Company
believes that the networks to be acquired in the Acquisitions currently meet
Polish State Agency of Radio Communications ("PAR") standards and, accordingly,
that the timing and extent of such upgrades would be subject to the Company's
discretion.
On September 4, 1997 the Company signed an investment agreement with the
shareholders of TWOJ STYL Publishing House ("TWOJ STYL") by virtue of which the
Company will purchase 50% of TWOJ STYL for a consideration of $11.1 million.
TWOJ STYL publishes a Polish-language lifestyle magazine. In addition, the
Company undertook to provide additional financing to TWOJ STYL, either debt or
equity, of up to $7.7 million to develop Polish-language programming and
ancillary services.
11
<PAGE> 12
THREE AND SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE AND SIX MONTHS
ENDED JUNE 30, 1996
CABLE TELEVISION REVENUE. Revenue increased $2.3 million or 34.8 % from $6.6
million in the three months ended June 30, 1996 to $8.9 million in the three
months ended June 30, 1997 and increased $4.4 million or 36.5% from $12.0
million in the first six months of 1996 to $16.4 million in the first six months
of 1997. These increases were primarily attributable to a 72.8% increase in the
number of basic subscribers from approximately 316,000 as of June 30, 1996 to
approximately 546,000 as of June 30, 1997. Approximately 75% of the increase in
basic subscribers was the result of acquisitions and the remainder was due to
the build-out of the Company's existing cable networks. Approximately 70,000 of
these new subscribers were acquired in June 1997, and as a result, revenues from
these subscribers had a minimal impact on the Company's revenues for this
period.
Revenues from monthly cable television subscription fees represented
approximately 73.6% of total revenues for the three months ended June 30, 1996
and 79.0% for the first six months of 1996. Monthly subscription revenue for the
three months ended June 30, 1997 constituted 87.4% of total revenue, while for
the six months ended June 30, 1997 the percentage was 86.5%. Installation fee
revenue for the three months ended June 30, 1997 decreased by 23.8% compared to
the corresponding quarter in 1996 from $0.9 million to $0.7 million and
decreased by 15.0% from $1.7 million in the first six months of 1996 to $1.5
million in the first six months of 1997. The Company expects that installation
fees related to new non-premium subscribers will continue to constitute a
declining portion of the Company's revenue. During the three months ended June
30, 1997 the Company has generated approximately $66,000 of additional premium
subscription revenue and approximately $150,000 of additional premium channel
installation revenue as a result of launching the distribution of the HBO
premium pay movie channel in two regional clusters.
DIRECT OPERATING EXPENSES. Direct operating expenses increased $1.3 million, or
75.0% from $ 1.7 million during the three months ended June 30, 1996 compared to
$3.0 million in the three months ended June 30, 1997 and increased $1.9 million,
or 58.1%, from $3.2 million in the first six months of 1996 to $5.1 million in
the first six months of 1997. These increases are principally as a result of
higher levels of technical personnel and increased maintenance expenses
associated with recently acquired networks which have not yet been integrated
within the Company's systems and standards as well as the increased size of the
Company's cable television system, and costs associated with the lease of three
transponders on the Astra IE and IF satellites. The use of the satellites will
provide the capability to deliver the Company's Polish-language programming
platform to Polish customers through the Company's cable television systems and
its planned D-DTH broadcast system. Direct operating expenses increased from
26.2% of revenues in the three months ended June 30, 1996 to 34.0% in the three
months ended June 30, 1997 and from 27.0% of revenues for the first six months
of 1996 to 31.2% of revenues for the first six months of 1997.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased $13.9 million from $ 1.2 million in the three months ended
June 30, 1996 to $15.1 million in the three months ended June 30, 1997 and
increased $15.2 million from $2.9 million in the first six months of 1996 to
$18.1 million in the first six months of 1997. The majority of this increase is
due to compensation expense of approximately $10.2 million which was recorded in
the three months ended June 30, 1997 related to options to purchase shares
granted to key executives. Additionally, the increases are attributable to an
increase in sales and marketing expenses incurred in newly acquired networks,
costs associated with the agreement relating to sale of advertising on Atomic
T.V. described in Note 4 to the Company's consolidated financial statements and
costs of launching the distribution of the HBO premium pay movie channel in
Poland. Compensation expense also increased as the Company has established a
management team of senior executives who have significant experience in the
cable television, programming and satellite broadcasting businesses. As a
percentage of revenues, selling, general and administrative expenses increased
from 18.7 % for the three months ended June 30, 1996 to 169.8 % for the three
months ended June 30, 1997, and 23.8% for the first six months of 1996 to 110.3%
for the first six months of 1997. However, without considering the non-cash
compensation expense related to the stock options described above, selling,
general and administrative expenses as a percentage of revenues would have been
55.3% in the three months ended June 30, 1997 and 48.1% in the first six months
of 1997.
12
<PAGE> 13
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses rose $1.3
million, or 68.8%, from $1.8 million to $3.1 million in the three months ended
June 30, 1996 and 1997, respectively, and $3.0 million, or 83.7%, from $3.5
million in the first six months of 1996 to $6.5 million in the first six months
of 1997. The increases are principally as a result of depreciation of additional
cable television assets acquired in connection with the build-out of the
Company's networks and acquisitions. Depreciation and amortization expenses as a
percentage of revenues increased from 27.6% in the three months ended June 30,
1996 to 34.5% in the corresponding period in 1997 and from 29.5% in the first
six months of 1996 to 39.8% in the first six months of 1997.
INTEREST EXPENSE. Interest expense increased $4.1 million from $0.3 million in
the three months ended June 30, 1996 to $4.4 million in the three months ended
June 30, 1997, and $5.7 million from $1.9 million in the first six months of
1996 to $7.6 million in the first six months in 1997, primarily due to the
issuance of $130 million aggregate principal amount of Old Notes in October
1996.
INTEREST AND INVESTMENT INCOME. Interest and investment income increased $1.9
million from $0.2 million in the first six months of 1996 to $2.1 million in the
first six months of 1997, primarily due to the interest and investment income
derived from the investment of a portion of the proceeds from the issuance of
Old Notes in October 1996.
FOREIGN CURRENCY TRANSLATION LOSS. Foreign currency translation loss increased
$151,000, from a $34,000 gain in the three months ended June 30, 1996 to a
$117,000 loss in the three months ended June 30, 1997 and increased $362,000,
from a $60,000 loss in the first six months of 1996 to a $422,000 loss in the
first six months of 1997, primarily due to increased assets subject to
translation during the period resulting from the growth of the Company and less
favorable exchange rate fluctuations.
MINORITY INTEREST IN SUBSIDIARY LOSS. Minority interest in subsidiary loss was
$2.1 million for the three months ended June 30, 1997 and $2.6 million for the
first six months of 1997, resulting from the losses incurred in two subsidiaries
with minority interests, compared to minority interest in subsidiary loss of
$69,000 for the three months ended June 30, 1996 and $20,000 for the first six
months of 1996.
NET LOSS. During the three months ended June 30, 1996 the Company earned net
income of $0.9 million compared to net loss of $13.2 million incurred during the
three months ended June 30, 1997. For the first six months of 1996 and 1997 the
Company had net losses of $0.8 million and $16.7 million, respectively. These
losses and income were the result of the factors discussed above.
EBIDTA. EBIDTA decreased by $2.9 million, from $6.2 million for the first six
months of 1996 to $3.4 million for the first six months of 1997. EBITDA consists
of net income (loss) as measured by U.S. GAAP adjusted for interest and
investment income, depreciation and amortization, interest expense, foreign
currency translation gains and losses, income taxes, extraordinary items,
non-recurring items, gains and losses from the sale of assets other than in the
normal course of business and minority interest in subsidiary income and loss.
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 cable television companies. EBITDA is not
intended to represent cash flow from operations under U.S. GAAP and should not
be considered as an alternative to net income (loss) as an indicator of the
company's operating performance or cash flows from operations as a measure of
liquidity. The Company treats the $10.2 million non-cash compensation expense
relating to the grant of stock options in the first half of 1997 as a
non-recurring item and it expects that future grants of stock options will not
give rise to compensation expense.
13
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
The Company has met its cash requirements in recent years primarily with
(i) capital contributions and loans from equity investors, (ii) borrowings
under available credit facilities and (iii) cash flow from operations. In
addition, in October 1996 PCI sold $130 million of Old Notes and in August 1997
the Company raised approximately $200 million through an initial public
offering of Common Stock. The Company had negative cash flow from operating
activities for the first six months of 1997 of $(4.8) million due to the
Company's net loss.
PCI has entered into an agreement with Amerbank, which provides for a
credit facility of approximately $6.5 million. Funds are available under the
credit agreement through December 31, 1998 and interest, based on LIBOR plus 3%,
is due quarterly. All advances under the loan must be repaid by August 20, 1999.
As of the date hereof, there is no amount outstanding under this facility. PCI
will be able to utilize this facility for future borrowings.
On October 31, 1996, $130 million aggregate principal amount of Old
Notes were sold by PCI to the initial purchaser pursuant to a purchase
agreement. The initial purchaser subsequently completed a private placement of
the Old Notes. In June 1997 substantially all of the outstanding Old Notes were
exchanged for an equal aggregate principal amount of publicly-registered notes.
Both the Old Notes and the publicly-registered notes (collectively, the
"Notes") were issued pursuant to the Indenture dated as of October 31, 1996
between PCI and State Street Bank & Trust Company, trustee (the "Indenture").
Pursuant to the Indenture, PCI is subject to certain covenants, including
without limitation, covenants with respect to the following matters: (i)
limitation on additional indebtedness; (ii) limitation on restricted payments;
(iii) limitation on issuance and sales of capital stock and subsidiaries; (iv)
limitation on transactions with affiliates; (v) limitation on liens; (vi)
limitation on guarantees of indebtedness by subsidiaries; (vii) purchase of
Notes upon a change of control; (viii) limitation on sales and assets; (ix)
limitation on dividends and other payment restrictions affecting subsidiaries;
(x) limitation on investments in unrestricted subsidiaries; (xi) limitations on
lines of business; and (xii) provision of financial statements and reports.
Pursuant to the AmerBank credit facility, PCI is subject to certain
informational and notice requirements but is not subject to restrictive
covenants. PCI is in compliance with all covenants in the Indenture and the
AmerBank credit facility.
As a result of the offering of the Old Notes, the Company incurred
substantial debt. At June 30, 1997, the Company had, on a consolidated basis,
approximately $130.3 million in principal amount of indebtedness outstanding,
net of discount.
14
<PAGE> 15
Cash used for the build-out of the Company's cable television networks
was $14.4 million in the first six months of 1997. In 1997, the Company also
expects to spend an additional approximately $27.5 million building-out and
upgrading existing cable television networks. Approximately $7.5 million of such
expenditure relates to the upgrading of the networks in the Katowice regional
cluster to meet PAR and Company standards. The rest of such expenditures for new
construction and upgrading is discretionary. The Company expects that the
rebuild program for Katowice regional cluster will be completed in 1997 at a
total cost of approximately $10 million. Other than the Katowice upgrade, the
Company is not obligated to make any system upgrades in 1997 or in 1998.
However, the Company intends to continue to acquire additional cable systems,
upgrade its cable networks and increase its programming capacity.
Since March 31, 1997, the Company has acquired all or a substantial
portion of the capital stock or assets of three cable television systems in
Poland for aggregate consideration of $11.0 million.
One of the Company's wholly-owned subsidiaries, PCI, is currently
negotiating to acquire two cable television systems in Poland (the
"Acquisitions"). The aggregate consideration to be paid by the Company in
connection with the Acquisitions is expected to be approximately $18.1 million.
The cable system expected to be acquired serve approximately 60,000 subscribers
and approximately 100,000 homes passed. The consummation of the Acquisitions
will result of the expansion of the Company's cable operations within its
existing regional clusters. PCI intends to use a portion of the net proceeds of
the sale of the Old Notes issued in October 1996 to consummate these
Acquisitions, although there can be no assurance as to the timing of closing of
any of the pending Acquisitions or that the pending Acquisitions will actually
be consummated. If all the Acquisitions are consummated, the Company estimates
that it will spend approximately $5.5 million within 12 months of the
consummation of the Acquisitions to upgrade the acquired networks to meet the
Company's technical standards. Such upgrading would enable the Company to
increase the number of programs offered, the quality of transmissions and the
operating costs effectiveness of the acquired networks. However, the Company
believes that the cable systems expected to be acquired in the Acquisitions
currently meet PAR standards and, accordingly, that the timing and extent of
such upgrades would be subject to the Company's discretion.
On September 4, 1997 the Company signed an investment agreement with the
shareholders of TWOJ STYL Publishing House ("TWOJ STYL") by virtue of which the
Company will purchase 50% of TWOJ STYL for a consideration of $11.1 million.
TWOJ STYL publishes a Polish-language lifestyle magazine. In addition, the
Company undertook to provide additional financing to TWOJ STYL, either debt or
equity, of up to $7.7 million to develop Polish-language programming and
ancillary services.
Since the commencement of its operations in 1990, the Company has
required external funds to finance the build-out of its existing networks and
to finance acquisitions of new cable television networks. Prior to the
Reorganization described in Item 5, the Company relied on the equity
investments and loans, from stockholders and their affiliates and borrowings
under available credit facilities to provide the funding for these activities.
The Company does not expect that its stockholders and their affiliates will
continue to make capital contributions and loans to the Company.
The Company believes that, in addition to the remaining net proceeds from
the initial public offering, remaining funds from the offering of the Old Notes
and cash from operations, it will need additional funding of approximately $100
million to fulfill its current business development plans through the end of
1998. There can be no assurance that the Company will be able to borrow funds
under any credit facilities or that suitable debt or equity financing will be
available to the Company or, if available, that the terms thereof will be
attractive to the Company. While the pace and amount of the Company's
expenditures for the above purposes are largely discretionary, if for any reason
additional financing is not available to the Company when required, or is only
available on less than favorable terms, it may be required to reduce the scope
of its presently anticipated expansion of its operations, reduce capital
expenditures (including expenditures related to acquisitions), slow the
development of its D-DTH business and/or refinance all or a portion of its
existing indebtedness (including the Notes), and as a result the business,
results of operations and prospects of the Company could be adversely affected.
To the extent that the Company is unable to raise additional financing, it
intends to concentrate its available funds on, in order of priority, the
development of its D-DTH business and its programming platform, the build-out
of its cable networks and the acquisition of additional cable systems.
15
<PAGE> 16
INFLATION AND CURRENCY EXCHANGE FLUCTUATIONS
Since the fall of Communist rule in 1989, Poland has experienced high
levels of inflation and significant fluctuation 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 19% in 1996. In the
first six months of 1997, Poland had inflation of 6.6%. A substantial portion of
the Company's operating expenses and capital expenditures are, and are expected
to be, denominated in zloty and tend to increase with inflation. The exchange
rate for the zloty has stabilized and the rate of devaluation of the zloty has
decreased since 1991. However, the zloty exchange rate and rate of devaluation
have increased in the first six months of 1997. The zloty per U.S Dollar
exchange rate quoted at noon by the National Bank of Poland was 2.8755, 3.0760
and 3.2860 for December 31, 1996, March 31, 1997 and June 30, 1997,
respectively. Inflation and currency exchange fluctuations have had, and may
continue to have, an effect on the financial condition and results of operations
of the Company.
Substantially all of the Company's debt obligations and certain of the
Company's operating expenses and capital expenditure are, and are expected to
continue to be, denominated in or indexed to U.S. Dollars. By contrast,
substantially all of the Company's revenues are denominated in zloty. Any
devaluation of the zloty against the U.S. Dollar that the Company is unable to
offset through price adjustments will require the Company to use a larger
portion of its revenues to service its U.S. Dollar-denominated obligations.
While the Company may consider entering into transactions to hedge the risk of
exchange rate fluctuations, it is unlikely that the Company will be able to
obtain hedging arrangements on commercially satisfactory terms. Accordingly,
shifts in currency exchange rates may have an adverse effect on the ability of
the Company to service its U.S. Dollar-denominated obligations and, thus, on the
Company's financial condition and results of operations.
16
<PAGE> 17
IMPACT OF NEW ACCOUNTING STANDARDS NOT YET ADOPTED
FINANCIAL ACCOUNTING STANDARD No. 128 This statement provides new accounting and
reporting standards for earnings per share. It will replace the currently used
primary and fully diluted earnings per share with basic and diluted earnings per
share. Basic earnings per share excludes dilution and is computed by dividing
income available to common shareholders by weighted average number of common
shares outstanding for the period. Diluted earnings per share represents the
potential dilution that could occur if all stock options and other stock-based
awards, as well as convertible securities, were exercised and converted into
common stock if their effect is dilutive. This statement, effective for year-end
1997 financial statements, requires that prior period earnings per share data be
restated. The Company does not expect adoption of this statement to have a
material impact on earnings per common share amounts.
FINANCIAL ACCOUNTING STANDARD No. 130 Reporting Comprehensive Income, was issued
in June 1997 and establishes standards for the reporting and presentation of
comprehensive income and its components in a full set of financial statements.
Comprehensive income encompasses all changes in shareholders' equity (except
those arising from transactions with owners) and includes net income, net
unrealized capital gains or losses on available for sale securities and foreign
currency translation adjustments. As this new standard only requires additional
information in financial statements, it will not affect the Company's financial
position or results of operations. FAS No. 130 is effective for fiscal years
beginning after December 15, 1997, with earlier application permitted. The
Company is currently evaluating the presentation alternatives permitted by the
statement.
FINANCIAL ACCOUNTING STANDARD No. 131 Disclosures about Segment of an Enterprise
and Related information, was issued in June 1997 and establishes standards for
the reporting of information relating to operating segments in annual financial
statements, as well as disclosure of selected information in interim financial
reports. This statement supersedes FAS No. 14, Financial Reporting for Segments
of a Business Enterprise, which requires reporting segment information by
industry and geographic area (industry approach). Under FAS No. 131, operating
segments are defined as components of a company for which separate financial
information is available and used by management to allocate resources and assess
performance (management approach). This statement is effective for year-end 1998
financial statements. Interim financial information will be required beginning
in 1999 (with comparative 1998 information). The Company does not anticipate
that this standard will significantly impact the composition of its current
operating segments, which are consistent with the management approach.
17
<PAGE> 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
Not Applicable.
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS:
The Company completed an initial public offering of common stock in the
United States and internationally (the "Offerings"). The registration statement
for the Offerings (file no. 333-2986) became effective on July 30, 1997. The
Offerings began on July 30, 1997, and closed on August 5, 1997. Of the
10,925,000 shares of common stock registered (at a proposed maximum aggregate
offering price of $240,350,000), 9,500,000 were sold (at an aggregate sales
price of $199,500,000), and the over-allotment option granted to the
underwriters to purchase an additional 1,425,000 shares of common stock expired
unexercised. The managing underwriter for the Offerings was Goldman Sachs & Co.
for the shares sold in the United States and Goldman Sachs International for the
shares sold outside the United States. The co-lead underwriter was Merrill
Lynch, Peirce, Fenner & Smith Incorporated for the shares sold in the United
States and Merrill Lynch International for the shares sold outside the United
States.
During the period from July 30, 1997 through September 11, 1997,
@Entertainment paid a total of $14,432,086 in expenses in connection with the
Offerings, including $13,566,000 for underwriters' commissions and discounts,
$500,000 for underwriters' expenses, and $366,086 for other expenses. None
of these expenses were paid, directly or indirectly, to directors, officers, 10%
shareholders or affiliates of the Company or their associates.
The net proceeds received by the Company from the Offerings, after
deducting the expenses referred to above, were $185,067,914. During the period
from July 30, 1997 through September 11, 1997, @Entertainment utilized
$71,324,528 of the proceeds from the Offerings. Of this amount, $60,000,000 was
used to purchase shares of Series A Preferred Stock of PCI and Series C
Preferred Stock of PCI from shareholders of @Entertainment and their affiliates;
$962,775 was used to pay management bonuses to officers of @Entertainment;
$8,000,000 was paid to Philips Business Electronics B.V. ("Philips"), and an
additional $1,000,000 was paid to a third party in escrow for the benefit of
Philips, pursuant to the Memorandum of Understanding described in Note 7 to the
Company's consolidated financial statements, whereby the Company agreed in
principle to purchase from Philips 500,000 decoders and accompanying smart
cards and outdoor units in connection with the Company's D-DTH business; and
$1,279,003 was used for working capital.
ITEM 5. OTHER INFORMATION:
The Company completed the Offerings in the United States and
internationally on August 5, 1997. Prior to the Offerings, all the holders of
shares of PCI's common stock and the Company entered into a Contribution
Agreement dated as of June 22, 1997 (the "Contribution Agreement"). Pursuant to
the Contribution Agreement, each holder of shares of PCI's common stock
transferred all shares of PCI's common stock owned by it to the Company. In
addition, ECO Holdings III Limited Partnership ("ECO") transferred all of the
outstanding shares of PCI's voting Series B Preferred Stock (the "PCI Series B
Preferred Stock") to @Entertainment. All of these transfers were designed to
qualify as a tax-free exchange under section 351 of the Internal Revenue Code
of 1986, as amended (the "Share Exchange"). Each holder of PCI's common stock
received 1,000 shares of common stock of @Entertainment in exchange for each
share of PCI's common stock transferred by it (the "Capital Adjustment"). ECO
also received an equivalent number of shares of @Entertainment's Series B
Preferred Stock ("@Entertainment Series B Preferred Stock) in exchange for its
series of PCI Series B Preferred Stock. The @Entertainment Series B Preferred
Stock has identical rights and preferences to those of the PCI Series B
Preferred Stock, except that the ratio for conversion of such shares into
common stock increased from 1:1.9448 to 1:1,944.8 in order to reflect the
Capital Adjustment. The 2,500 outstanding shares of @Entertainment Series B
Preferred Stock were automatically converted into 4,862,000 shares of Common
Stock of @Entertainment upon the closing of the Offerings (the "Automatic
Conversion").
On June 20, 1997, Polish Investments Holding L.P. ("PIHL"), transferred
all of the outstanding shares of PCI's Series C Preferred Stock to an entity
owned by certain of the beneficial owners of PIHL and members of their families
(the "Chase Entity"). The Chase Entity, ECO and the Company entered into a
Purchase Agreement dated as of June 22, 1997 (the "Purchase Agreement"). Among
other matters, the Purchase Agreement obligated the Company to purchase all of
the outstanding shares of PCI's Series A Preferred Stock and Series C Preferred
Stock for cash from ECO and the Chase Entity, respectively, at the closing of
the Offerings (the "Cash Purchase"). The aggregate purchase price of $ 60.0
million for PCI's Series A Preferred Stock and Series C Preferred Stock equaled
the aggregate redemption price of such shares as set forth in PCI's certificate
of incorporation. The Cash Purchase occurred shortly after the closing of the
Offerings and was funded with a portion of the net proceeds of the Offerings.
In June 1997, certain employment agreements for the executive officers of
the Company who were employed by PCI and PCI's employee stock option plans were
assigned to @Entertainment by PCI (the "Assignment"). As part of the Assignment
and the Capital Adjustment, the employment agreements and employee stock option
plans were amended to provide that each option to purchase a share of PCI's
common stock was exchanged for an option for 1,000 shares of @Entertainment's
Common Stock, with a proportionate reduction in the per share exercise price.
The Share Exchange, Capital Adjustment and the Assignment are
collectively referred to as the "Reorganization". As a result of the
Reorganization, @Entertainment owns all of the outstanding shares of voting
stock of PCI.
18
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the second
quarter of 1997.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements 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.
@ ENTERTAINMENT, Inc.
By: /s/ Robert E. Fowler III
---------------------------------
Robert E. Fowler III
Chief Executive Officer
By: /s/ John S.Frelas
---------------------------------
John S.Frelas
Vice President, Chief Financial Officer and Treasurer
Date: September 12, 1997
20
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