<PAGE>
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, 1998.
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 000-22877
@ ENTERTAINMENT, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 06-1487156
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation of Organization) Identification No.)
ONE COMMERCIAL PLAZA
HARTFORD, CONNECTICUT 06103
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (860) 549-1674
Indicate by check (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 -----
The number of shares outstanding of @ Entertainment, Inc.'s common stock as of
June 30, 1998, was:
Common Stock 33,310,000
<PAGE>
@ ENTERTAINMENT, INC.
FORM 10-Q INDEX
FOR QUARTERLY PERIOD ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
@ Entertainment
Consolidated Balance Sheets ....................... 3-4
Consolidated Statements of Operations ............. 5
Consolidated Statements of Cash Flows ............. 6
Notes to Consolidated Financial Statements ........ 7 - 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ..... 11-18
Item 3. Quantitative and Qualitative Disclosures
About Market Risk ................................. 22
PART II OTHER INFORMATION
Item 1. Legal Proceedings .................................... 22
Item 2. Changes in Securities and Use of Proceeds ............ 22
Item 3. Defaults Upon Senior Securities ...................... 22
Item 4. Submission of Matters to a Vote of Security Holders .. 23
Item 5. Other Information .................................... 23
Item 6. Exhibits and reports on Form 8-K ..................... 23
Signature Page ............................................................ 24
</TABLE>
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@ ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
--------- ------------
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 24,006 $ 105,691
Accounts receivable, net of allowance for doubtful
accounts of $1,153,000 in 1998 and $766,000 in 1997..... 3,211 4,544
Programming and broadcast rights current.................. 5,699 --
Other current assets...................................... 8,161 4,998
--------- ---------
Total current assets.................................... 41,077 115,233
Property, plant and equipment:
Cable television systems assets........................... 155,132 134,469
D-DTH equipment........................................... 19,574 --
Construction in progress.................................. 5,435 6,276
Vehicles.................................................. 3,101 2,047
Other..................................................... 13,872 7,940
--------- ---------
197,114 150,732
Less acccumulated depreciation............................ (41,500) (33,153)
--------- ---------
Net property, plant and equipment....................... 155,614 117,579
Inventories for construction................................ 10,704 8,153
Intangibles, net............................................ 42,381 33,440
Notes receivable from affiliates............................ -- 691
Investments in affiliated companies......................... 22,528 21,800
Other assets................................................ 12,454 10,200
--------- ---------
Total assets............................................ $ 284,758 $ 307,096
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
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@ ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------------- -----------------
(in thousands)
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 29,449 $ 13,781
Accrued interest 2,175 2,175
Deferred revenue 925 1,257
Income taxes payable 2,441 1,765
Other current liabilities 719 940
--------------- -----------------
Total current liabilities 35,709 19,918
--------------- -----------------
Notes payable 138,728 130,110
--------------- -----------------
Total liabilities 174,437 150,028
--------------- -----------------
Minority interest 4,920 4,713
Commitments and contingencies (notes 7 and 10)
Stockholders' equity:
Preferred stock, $.01 par value; 20,002,500 shares authorized;
no shares issued and outstanding -- --
Common stock, $.01 par value; 70,000,000 shares authorized,
33,310,000 shares issued and outstanding 333 333
Paid-in capital 230,339 230,339
Cumulative translation adjustment 1,117 (218)
Accumulated deficit (126,388) (78,099)
-------------- ----------------
Total stockholders' equity 105,401 152,355
-------------- ----------------
Total liabilities and stockholders' equity $ 284,758 $ 307,096
-------------- ----------------
-------------- ----------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
@ ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
------------- ------------- ------------ ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Cable television revenue............................................... $ 12,791 $ 8,903 $ 25,477 $ 16,411
Operating expenses:
Direct operating expenses............................................ 18,025 3,028 26,673 5,128
Selling, general administrative expenses............................. 15,580 15,119 29,027 18,093
Depreciation and amortization........................................ 5,980 3,073 10,929 6,523
Amortization of sports rights........................................ 1,584 -- 1,584 --
------------- ------------- ------------ ------------
Total operating expenses............................................... 41,169 21,220 68,213 29,744
------------- ------------- ------------ ------------
Operating loss....................................................... (28,378) (12,317) (42,736) (13,333)
Interest and investment income......................................... 695 1,369 1,545 2,119
Interest expense....................................................... (3,353) (4,382) (7,002) (7,587)
Equity in profits of affiliated companies.............................. 451 -- 721 --
Foreign exchange loss.................................................. (121) (117) (48) (422)
------------- ------------- ------------ ------------
Loss before income taxes and minority interest....................... (30,706) (15,447) (47,520) (19,223)
Income tax benefit (expense)........................................... (229) 159 (562) (112)
Minority interest...................................................... (58) 2,123 (207) 2,599
------------- ------------- ------------ ------------
Net loss............................................................. (30,993) (13,165) (48,289) (16,736)
Accretion of redeemable preferred stock................................ -- (1,048) -- (2,028)
------------- ------------- ------------ ------------
Net loss applicable to holders of common stock......................... $ (30,933) $ (14,213) $ (48,289) $ (18,764)
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
Basic and diluted loss per common share................................ $ (0.93) $ (0.75) $ (1.45) $ (0.99)
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
@ ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
1998 1997
----- ----
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $ (48,289) $ (16,736)
Adjustments to reconcile net loss to
net cash used in operating activities:
Minority interest............................... 207 (2,599)
Depreciation and amortization................... 10,929 6,523
Amortization of sports rights................... 1,584 -
Non-cash stock option compensation expense...... - 10,169
Equity in profits of affiliated companies....... (721) -
Other........................................... 1,338 167
Changes in operating assets and liabilities:
Accounts receivable........................... (5) (579)
Other current assets.......................... (3,344) 1,362
Sports rights................................. (7,283) -
Accounts payable.............................. 15,076 (1,726)
Income taxes payable.......................... 676 (971)
Accrued interest.............................. - 1,070
Amounts due to affiliates..................... 691 89
Deferred revenue.............................. (346) (223)
Other current liabilities..................... (221) (1,133)
---------- ---------
Net cash used in operating activities....... (29,708) (4,587)
---------- ---------
Cash flows from investing activities:
Construction and purchase of property, plant
and equipment................................ (45,539) (15,271)
Proceeds from sale of investment securities... - 25,669
Issuance of notes receivable from affiliates.. - (9,060)
Other investments............................. - (1,252)
Purchase of intangibles....................... (345) -
Purchase of subsidiaries, net of cash received (10,559) (10,976)
---------- ---------
Net cash used in investing activities....... (56,443) (10,890)
---------- ---------
Cash flows from financing activities:
Proceeds from notes payable................... 6,468 2,200
Costs to obtain loans......................... (2,002) (1,275)
Repayment of notes payable.................... - (562)
Repayments to affiliates...................... - 3,224
---------- ---------
Net cash provided by financing activities... 4,466 3,587
---------- ---------
Net decrease in cash and cash equivalents... (81,685) (11,890)
Cash and cash equivalents at beginning of period.... 105,691 68,483
---------- ---------
Cash and cash equivalents at end of period.......... $ 24,006 $ 56,593
---------- ---------
---------- ---------
Supplemental cash flow information:
Cash paid for interest........................ $ 6,476 $ 6,619
---------- ---------
---------- ---------
Cash paid for income taxes.................... $ 395 1,132
---------- ---------
---------- ---------
</TABLE>
See accompanying notes to unaudited consolidation financial statements.
6
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
The information furnished by @Entertainment, Inc. and subsidiaries
("@Entertainment" or the "Company") has been prepared in accordance with
United States generally accepted accounting principles and the rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to these rules and
regulations. The accompanying consolidated balance sheets, statements of
operations and statements of cash flows are unaudited but in the opinion of
management reflect all adjustments (consisting only of items of a normal
recurring nature) which are necessary for a fair statement of the Company's
consolidated results of operations and cash flows for the interim periods and
the Company's financial position as of June 30, 1998. The accompanying
unaudited consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and the notes thereto
included in the Company's 1997 Annual Report on Form 10-K filed with the SEC
(the "1997 Annual Report"). The interim financial results are not necessarily
indicative of the results of the full year.
2. RECLASSIFICATIONS
Certain amounts have been reclassified in the prior period unaudited
consolidated financial statements to conform to the 1998 unaudited consolidated
financial statement presentation.
3. ADOPTION OF NEW ACCOUNTING STANDARD
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income", which establishes standards for the
reporting and presentation of comprehensive income and its components in a full
set of financial statements. Comprehensive income/(loss) generally encompasses
all changes in stockholders' equity (except those arising from transactions with
owners) and includes net income/(loss), net unrealized capital gains or losses
on available for sale securities and foreign currency translation adjustments.
The Company's comprehensive loss differs from net loss applicable to common
stockholders only by the amount of the foreign currency translation adjustment
charged to stockholders' equity for the period. Comprehensive loss for the
six-month periods ended June 30, 1998 and 1997 was approximately $46,954,000 and
$18,764,000, respectively.
4. LOSS PER SHARE
As noted in the 1997 Annual Report, the Company adopted the provision of SFAS
No. 128, "Earnings Per Share". The statement required that all prior period
earnings per share calculations including interim financial statements be
restated to conform with the provisions of this statement. The previously
reported 1997 loss per ordinary share has been restated to comply with the
provisions of this new standard. Basic and diluted loss per ordinary share is
based on the weighted average number of ordinary shares outstanding of
33,310,000 and 18,948,000 for both the three-month and the six-month periods
ended June 30, 1998 and 1997, respectively.
5. FOREIGN CURRENCY TRANSLATION
Effective January 1, 1998, Poland was no longer deemed to have a highly
inflationary economy. In accordance with this change, the Company established a
new functional currency basis for its Polish subsidiaries for non-monetary items
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.
6. ACQUISITION
On April 6, 1998, a subsidiary of the Company, acquired certain cable television
assets of Tekaso Telewizja Kablowa for an aggregate consideration of
approximately $972,000. The acquisition was accounted for using the purchase
method with the purchase price allocated among the assets acquired based upon
their fair values at the date of acquisition and any excess to goodwill. The
purchase price did not materially exceed the fair value of the assets acquired.
7
<PAGE>
7. COMMITMENTS AND CONTINGENCIES
Programming, Broadcast and Exhibition Rights
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 digital direct-to-home ("D-DTH") and cable
systems. The agreements have terms which range from one to five 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 June 30, 1998, the Company had an
aggregate minimum commitment in relation to these agreements of approximately
$84,403,000 over the next five years, approximating $16,903,000 for the
remainder of 1998, $15,886,000 in 1999, $17,597,000 in 2000, $15,532,000 in
2001, $14,271,000 in 2002 and $4,214,000 in 2003 and thereafter.
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". As at
June 30, 1998, the Company had recorded a gross liability and corresponding
asset of approximately $7,283,000. These obligations are included in the
calculation of aggregate minimum commitments in the preceding paragraph.
Broadcast rights that have limited showings are amortized using an accelerated
method as programs are aired based on the estimated number of showings.
Capitalized costs relating to broadcast rights with unlimited showings will be
amortized on a straight-line basis over the contract period. The Company
incurred amortization charges related to capitalized broadcasting rights of
approximately $1,584,000 and $0 for the six-month periods ended June 30, 1998
and 1997 respectively.
Subsequent to June 30, 1998, the Company entered into additional long-term
programming agreements with third party content providers for its D-DTH and
cable systems which require that license fees be paid based upon a guaranteed
minimum number of subscribers connected to the system each month. The Company
has aggregate minimum commitments related to these additional agreements of
approximately $71,725,000 over the next seven years, approximating $1,652,000
for the remainder of 1998, $4,919,000 in 1999, $7,956,000 in 2000, $10,854,000
in 2001, $12,891,000 in 2002 and $33,453,000 in 2003 and thereafter.
Capital Commitments
As of June 30, 1998, the Company had entered into agreements to purchase capital
assets including certain technical equipment associated with establishing its
D-DTH facilities, for approximately $2,825,000.
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. (See also note 10 ARBITRATION RELATING TO TELEWIZYJNA KORPORACJA
PARTYCYPACYJNA)
8. STOCK OPTIONS
On June 8, 1998 an employee was granted options to purchase 200,000 shares of
common stock at a price of $14.30 per share, vesting ratably over a three-year
period. The exercise price of such options exceeded the quoted market price for
the Company's shares on the date of grant.
9. CREDIT FACILITY
On June 9, 1998, a subsidiary of the Company, Poland Communications, Inc.
("PCI"), drew down on its credit facility with American Bank in Poland S.A. (
the "AmerBank Credit Facility") in the full amount of $6,500,000. The AmerBank
Credit Facility is secured by a pledge of the shares of certain subsidiaries of
the Company and all advances must be repaid by August 30, 1999. Interest is
based on LIBOR plus 3% and is due quarterly.
8
<PAGE>
10. 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, to form
a joint venture for the purpose of bringing together @ Entertainment's Wizja TV
programming service and the Canal+ Polska premium pay-television channel and
providing for the joint development and operation of a digital direct-to-home
television service in Poland.
The letter of intent called for the Company to invest approximately $112,000,000
in cash and shareholder loans in TKP, and to sell substantially all of the
Company's D-DTH and programming assets to TKP for approximately $42,000,000. The
TKP joint venture was to be owned 40% by the Company, 40% by Canal+ S.A., 10% by
Agora S.A. and 10% by PolCom Invest S.A.
The letter of intent also contained a standstill provision whereby neither the
Company nor TKP could, for a period of 45 days after the execution of the letter
of intent, launch any digital pay television service. As a result, @
Entertainment postponed its planned launch of the Wizja TV programming platform
and its D-DTH service, which was originally scheduled for April 18, 1998. The
establishment of the joint venture was subject to the execution of definitive
agreements, regulatory approvals and certain other closing conditions.
The definitive agreements were not agreed and executed by the parties by the
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
$5,000,000 break-up fee if the definitive agreements were not executed by the
Signature Date, unless failure to obtain such execution was caused by the
Company's breach of any of its obligations under the letter of intent. If there
were any such breach by the Company, the Company would be obligated to pay TKP
$10,000,000. 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 $10,000,000 (including the $5,000,000 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 has 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 have alleged that
the Company breached its obligations 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 has submitted its answer and counterclaims against TKP and its
shareholders. The Company does not believe that the arbitration proceedings will
have a material adverse effect on the Company's business, financial condition or
results of operations.
The Company began broadcasting to Poland from its transmission facilities in
Maidstone, United Kingdom and retransmitting the Wizja TV programming platform,
which currently consists of 15 channels of primarily Polish-language
programming, across its cable networks on June 5, 1998 and on a full-scale basis
starting in September 1998. The Company estimates that the delay of its planned
April 1998 Wizja TV launch resulted in approximately $7,200,000 of additional
out-of-pocket expenditures as of June 30, 1998, including a $5,000,000 payment
to Philips Business Electronics B.V. ("Philips"), the supplier of the Company's
satellite dishes, digital set top boxes and related hardware (the "D-DTH
Reception Systems") to compensate it for costs it incurred as a result of the
suspension of the production process for the D-DTH Reception Systems.
The Company has entered into an agreement with East Services S.A. ("East
Services") under which it paid $1,000,000 for investment banking services and
will further be obligated to pay to East Services, contingent upon the
consummation of an acquisition, merger or combination between the Company and
Canal+ S.A. or one of its affiliates, $9,998,000 in exchange for a claim held by
an East Services affiliate against subsidiaries of TKP (which claim is itself
contingent upon such subsidiaries satisfying certain operational performance
criteria), and an additional amount equaling 2.5% of the aggregate amount of the
transactions or investments involved in such acquisition, merger or combination.
As the letter of intent with TKP was terminated on June 1, 1998, the Company
believes it has no current obligation to East Services under the aforementioned
agreement.
9
<PAGE>
11. SUBSEQUENT EVENTS
Units Offering
On July 14, 1998, the Company sold 252,000 units (collectively, the "Units") to
two initial purchasers pursuant to a purchase agreement, each consisting of
$1,000 principal amount at maturity of 14 1/2% Senior Discount Notes (the
"Notes") due 2008 and four warrants (each a "Warrant"), each initially entitling
the holder thereof to purchase 1.81 shares of common stock, par value $0.01 per
share (the "Common Stock") at an exercise price of $13.20 per share, subject to
adjustment.
The Notes were issued at a discount to their aggregate principal amount at
maturity and, together with the Warrants generated gross proceeds to the Company
of approximately $125,100,000 of which $117,500,000 has been allocated to the
initial accreted value of the Notes and approximately $7,600,000 has been
allocated to the Warrants. The portion of the proceeds that is allocable to the
Warrants will be accounted for as part of stockholders' equity. The allocation
has been 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 $ 120,000,000.
The Notes are unsubordinated and unsecured obligations. Cash interest on the
Notes will not accrue prior to July 15, 2003. Thereafter cash interest will
accrue at a rate of 14.5% per annum and will be payable semiannually in arrears
on January 15 and July 15 of each year, commencing January 15, 2004. The Notes
will mature on July 15, 2008. At any time prior to July 15, 2001, the Company
may redeem up to a maximum of 25% of the originally issued aggregate principal
amount at maturity of the Notes at a redemption price equal to 114.5% of the
accreted value thereof at the redemption date, plus accrued and unpaid interest,
if any, to the date of redemption with some or all of the net cash proceeds of
one or more public equity offerings; provided, however, that not less than 75%
of the originally issued aggregate principal amount at maturity of the Notes
remains outstanding immediately after giving effect to such redemption.
The Warrants initially entitle 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 are exercisable at any time on or
after the exercise date, which will be no later than November 16, 1998, and will
expire on July 15, 2008.
Pursuant to the Indenture governing the Notes (the "Indenture"), the Company is
subject to certain restrictions and covenants, including, without limitation,
covenants with respect to the following matters: (i) limitation on additional
indebtedness; (ii) limitation on restricted payments; (iii) limitation on
issuance and sales of capital stock of restricted subsidiaries; (iv) limitation
on transactions with affiliates; (v) limitation on liens; (vi) limitation on
guarantees of indebtedness by restricted subsidiaries; (vii) purchase of Notes
upon a change of control; (viii) limitation on sale of assets; (ix) limitation
on dividends and other payment restrictions affecting restricted subsidiaries;
(x) limitation on investments in unrestricted subsidiaries; (xi) limitation on
lines of business; and (xii) provision of financial statements and reports.
The Notes will be recorded net of unamortized discount and any incremental costs
associated with the bond offering will be capitalized and amortized over the
term of the Notes.
Acquisitions
Subsequent to June 30, 1998, the Company purchased the remaining minority
interest in one subsidiary of the Company which was held by unaffiliated third
parties for an aggregate purchase price of approximately $10,600,000, of which
approximately $9,490,000 relates to non-compete agreements. The acquisition will
be accounted for under the purchase method, whereby the purchase price, with the
exception of the amount paid relating to the non-compete agreements, will be
allocated to the underlying assets and liabilities based upon their estimated
fair values and any excess to goodwill. The portion of the purchase price
relating to the non-compete agreements will be amortized over the five-year term
of the agreements. The acquisition is not expected to have a material effect on
the Company's results of operations in 1998.
D-DTH launch
On July 1, 1998 the Company launched its D-DTH service including Wizja TV on a
limited basis to approximately 250 reception systems. As of July 31, 1998, 8,600
D-DTH subscribers had placed orders for decoders.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis provides information concerning the
results of operations and financial condition of the Company. Such discussion
and analysis should be read in conjunction with the accompanying unaudited
consolidated financial statements of the Company. Additionally, the following
discussion and analysis should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
audited consolidated financial statements included in Part II of the Company's
1997 Annual Report. The following discussion focuses on material trends, risks
and uncertainties affecting the results of operations and financial condition of
the Company.
Certain statements in this Quarterly Report on Form 10-Q 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"
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.
Such risks, uncertainties and other factors include, among others: general
economic and business conditions and industry trends; the regulatory and
competitive environment of the industries in which the Company, and the entities
in which the Company has interests, operate; uncertainties inherent in new
business strategies, new product launches and development plans; rapid
technological changes; the acquisition, development and/or financing of
telecommunications networks and services; the development and provision of
programming for new television and telecommunications technologies; the
continued strength of the multichannel video programming distribution industry
and the satellite services industry and the growth of satellite delivered
television programming; future financial performance, including availability,
terms and deployment of capital; the ability of vendors to deliver required
equipment, software and services; availability of qualified personnel; changes
in, or failure or inability to comply with, government regulations; changes in
the nature of key strategic relationships with joint venturers; competitor
responses to the Company's products and services; the overall market acceptance
of such products and services, including acceptance of the pricing of such
products and services; possible interference by satellites in adjacent orbital
positions with the satellites currently being used for the Company's satellite
television business; acquisition opportunities; and other factors.
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 Quarterly
Report on Form 10-Q. 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.
OVERVIEW
The Company's revenues have been, and until the limited launch of the Company's
D-DTH business on July 1, 1998, were derived entirely from its cable television
business and programming related thereto. The Company's revenue performance in
the first half of 1998 was generally strong with a 55.2% growth in revenues for
the six months ended June 30, 1998 as compared to the six months ended June 30,
1997. This increase was caused mainly by organic growth in subscribers via
increased penetration and build-out of existing networks, increase in
subscription rates and the introduction of an additional premium channel into
the programming offer.
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
development of its D-DTH business and Wizja TV. The Company started to transmit
Wizja TV across its cable networks on June 5, 1998 and on its D-DTH system on a
limited basis on July 1, 1998.
Although the Company's revenue performance was strong during the first half of
1998, the Company generated an operating loss of $42.7 million for the six
months ended June 30, 1998, primarily due to the significant costs associated
with the development of the Company's D-DTH and programming businesses,
promotion of those businesses and the development, production and acquisition of
programming for Wizja TV.
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CABLE OVERVIEW
The Company continues to operate the largest cable television system in Poland
with approximately 1,547,000 homes passed and approximately 871,000 total
subscribers as at June 30, 1998. The Company continues to realize subscriber
growth through a combination of increased penetration, build-out of its existing
networks and acquisitions. The Company believes that the offering of Wizja TV on
its cable networks will attract additional subscribers.
Having established itself as the leading cable television service provider in
Poland, the Company continues to focus its efforts toward its strategic
objectives of increasing cash flow and enhancing the value of its cable
networks. To accomplish this objective, the Company's business and operating
strategy in the cable television business is to (i) provide compelling
programming, (ii) increase pricing and maximize revenue per cable subscriber,
(iii) expand its regional clusters, (iv) increase subscriber penetration, and
(v) realize additional operating efficiencies.
During the first half of 1998, management has completed or is in the process of
completing several strategic actions in support of this business and operating
strategy. On June 5, 1998, the Company began broadcasting Wizja TV from its
transmission facilities in Maidstone, United Kingdom across its cable networks
in Poland. Management believes that this selection of high-quality
Polish-language programming will provide it with a significant competitive
advantage in increasing its cable subscriber penetration rates. The Company has
implemented a pricing strategy designed to increase revenue per subscriber and
to achieve real profit margin increases in U.S. dollar terms. The Company
intends to increase the monthly price for the Basic Tier service twice in the
next six months and premium channels such as Wizja 1, HBO Poland service (a
Polish-language version of HBO's premium movie channel) and Canal+ will each be
offered to cable customers for an additional monthly charge. The Company expects
that it may continue to experience increases in its churn rate above historical
levels during the implementation of its current pricing strategy, however,
management believes the Company will be able to successfully command higher
prices while maintaining relatively low annual cable television churn rates as a
result of its customer service standards, the technical quality of its networks
and the broad selection of quality programming.
The Company continues to expand the coverage areas of its regional clusters,
both through selected build-out and acquisitions. During the first half of 1998,
the Company focused its build-out primarily in areas where it could fill-in and
expand existing clusters.
The Company has been able to realize additional operating efficiencies during
the first half of 1998 through the centralization of subscriber management and
customer support services in the Call Center. The Call Center became operational
during the first six months of 1998 for cable customers in the Katowice regional
cluster and is expected to be operational for all cable and D-DTH customers by
the end of 1998. The Company is also in the process of installing an integrated
management information system for both its billing and accounting systems, which
is designed to further improve employee productivity and customer service for
both its cable and D-DTH businesses.
Historically, the cable networks the Company has acquired have had lower
operating margins than the Company's existing operations. Upon consummation of
an acquisition, the Company seeks to achieve operating efficiencies and reduce
operating costs by rationalizing the number of headends and reducing headcount,
among other things. The Company generally has been able to manage its acquired
cable television networks with experienced personnel from one of its existing
regional clusters and reduce the technical personnel necessary to operate
acquired networks after connecting the networks to the Company's existing
headends, or, if required, rebuilding the acquired networks to the required
technical standards. In part due to these efforts, the Company has generally
been able to increase the operating margins in its acquired systems, although
there can be no assurance that it will be able to continue to do so.
D-DTH OVERVIEW
The Company intends to expand its distribution capacity by launching in
September 1998 a complementary D-DTH broadcasting service for Poland, including
the Wizja TV programming service, targeted at homes that are not subscribers to
the Company's cable service. The Company's D-DTH roll out strategy is to lease
D-DTH Reception Systems to up to 500,000 targeted initial subscribers at a price
significantly decreased by promotional incentives. The launch of the D-DTH
service will be supported by the Company's development of Wizja TV, which the
Company believes will address the strong demand for high-quality Polish-language
programming in Poland.
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The Company's D-DTH service was originally scheduled for launch on April 18,
1998. On April 17, 1998, the Company signed a letter of intent with Telewizyna
Korporacja Partycypacyjna ("TKP"), the parent company of Canal+ Polska, and its
shareholders to form a joint venture for bringing together the Company's Wizja
TV programming platform and the Canal+ Polska premium pay television channel and
for the joint development and operation of a D-DTH service in Poland. The letter
of intent contained, among other things, a standstill provision whereby neither
the Company nor TKP could, for a period of 45 days after the execution of the
letter of intent, launch any digital pay television service. As a result, the
Company postponed its launch of the Wizja TV programming platform and its D-DTH
service. The Company estimates that the delay of its planned April 1998 Wizja TV
launch has resulted in approximately $7.2 million of additional out-of-pocket
expenditures as of June 30, 1998, including a $5 million payment made to Philips
Business Electronics, B.V., the supplier of the Company's satellite dishes,
digital set top boxes and related hardware (the "D-DTH Reception Systems"), to
compensate it for costs it incurred as a result of the suspension of the
production process for such items.
After the letter of intent with TKP and its shareholders was terminated, the
Company completed the testing of its production and transmission facility and
undertook a limited launch of its D-DTH service, including Wizja TV, to
approximately 250 reception systems on July 1, 1998. As of July 31, 1998, 8,600
D-DTH subscribers had placed orders for decoders. The Company believes that its
multi-channel Polish-language D-DTH service, which is broadcast to Poland from
its transmission facilities in Maidstone, United Kingdom, is the first D-DTH
service available in Poland.
The Company expects to incur substantial operating losses and negative cash
flows related to the launch of its D-DTH business for at least the next two
years while it develops and expands its D-DTH subscriber base. To date, the
Company has relied primarily on funds raised in the Initial Public Equity
Offering to fund the development of its D-DTH business. The Company's D-DTH
business plan requires substantial capital expenditures to fund, among other
things, the promotional incentives that are anticipated to be required to expand
its business. The Company's business plan anticipates spending up to
approximately $200 million to provide D-DTH Reception Systems to the targeted
500,000 initial subscribers at a price that is significantly decreased by
promotional incentives, in order to drive subscriber penetration.
PROGRAMMING OVERVIEW
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, 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.
The Company began broadcasting to Poland from its transmission facilities in
Maidstone, United Kingdom and retransmitting Wizja TV across its cable
television networks on June 5, 1998. @ Entertainment commenced transmission of
Wizja TV on its D-DTH system on a limited basis in July 1998 and plans to
transmit on a full-scale basis starting in September 1998. To promote Wizja TV,
the Company will launch a $20 million nationwide marketing campaign which the
Company believes will be the largest single-year product launch expenditure to
date in Poland.
At June 30, 1998 Wizja TV's channel line-up included one channel, Atomic TV,
that is owned and operated by the Company, and ten channels that are produced by
third parties, nine of which are broadcast under exclusive agreements for pay
television in Poland. Subsequently the Company has added its proprietary Wizja 1
channel as a premium general entertainment channel and its proprietary Wizja
Pogoda channel as a weather channel, has signed a license agreement for the
exclusive distribution on D-DTH of HBO Poland service (a Polish-language version
of HBO's premium movie channel), and has entered into a binding heads of
agreement for the exclusive distribution on D-DTH of MTV and the non-exclusive
distribution across its cable networks of VH-1. The Company expects to expand
Wizja TV's channel line-up to include additional basic and premium channels,
including the Company's proprietary Wizja Sport channel, and eventually to
introduce tiered packages containing a variety of combinations of 21 or more
channels.
The Company currently distributes Atomic TV and intends to distribute Wizja 1,
Wizja Pogoda and Wizja Sport to other cable operators in Poland for a
per-subscriber fee basis. Such distribution agreements would likely include
provisions which would entitle the Company to share in advertising revenue
earned from the transmission of the Company's proprietary programming across
cable networks owned by other cable operators in Poland. The Company expects to
continue to expand its in-house programming production and to seek out and
participate in other programming related ventures.
During the last quarter of 1997 and the first half of 1998, the Company secured
certain exclusive Polish pay television rights to channels and events covering
what it believes are important programming genres to viewers in the Polish
market, including movies, sports, children's programming, documentaries and
music.
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THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
CABLE TELEVISION REVENUE. Revenue increased $3.9 million or 43.8% from $8.9
million for the three months ended June 30, 1997 to $12.8 million for the same
period in 1998. This increase was primarily attributable to a 21.2% increase in
the number of basic subscribers from approximately 580,200 at June 30, 1997 to
approximately 703,300 at June 30, 1998, as well as an increase in monthly
subscription rates.
Revenue from monthly subscription fees represented 86.3% and 85.4% of cable
television revenue for the three months ended June 30, 1997 and 1998,
respectively. Installation fee revenue for the three months ended June 30, 1998
decreased by 81.8% compared to the corresponding period in 1997, from $747,000
to $136,000. During the three months ended June 30, 1998, the Company generated
approximately $0.9 million of additional premium subscription revenue and
approximately $5,000 of additional premium channel installation revenue as a
result of providing the HBO Poland service pay movie channel to cable
subscribers.
DIRECT OPERATING EXPENSES. Direct operating expenses increased $15.0 million, or
500%, from $3.0 million for the three months ended June 30, 1997 to $18.0
million for the three months ended June 30, 1998, principally as a result of the
following: higher levels of technical personnel and increased maintenance
expenses associated with the establishment of a satellite up-link and studio
facility located in Maidstone, United Kingdom (the "Maidstone facility"),
recently acquired cable networks which have not yet been integrated within the
Company's cable system and standards, the increased size of the Company's cable
television system, the $5 million payment to Philips Business Electronics B.V.
to compensate it for costs incurred as a result of suspension of the production
process for the D-DTH Reception Systems 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 increased from 33.7% of revenues
for the three months ended June 30, 1997 to 140.6% of revenues for the three
months ended June 30, 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.5 million or 3.3% from $15.1 million for
the three months ended June 30, 1997 to $15.6 million for the three months ended
June 30, 1998. For the three months ended June 30, 1997 the Company recorded a
non-recurring, non-cash compensation expense of $10.2 million in connection with
stock options granted to certain employees. As a percentage of revenue, selling,
general and administrative expenses decreased from 169.7% for the three months
ended June 30, 1997 to approximately 121.9% for the corresponding period in
1998. However without considering this non-cash compensation expense in 1997 the
selling, general and administrative expenses would have been $15.6 million and
$4.9 million for the three months ended June 30, 1998 and 1997, respectively.
This increase over the corresponding 1997 period was attributable mainly to an
increase in sales and marketing expenses incurred in preparation for launch of
the Company's D-DTH service and Wizja TV programming platform, an increase in
the number of administrative staff associated with the Maidstone facility and
the Wizja TV programming platform, as well as an increase in professional fees
associated with obtaining long-term programming contracts, broadcast/exhibition
rights and negotiations with Telewizyjna Korporacja Partycypacyjna.
DEPRECIATION AND AMORTIZATION. Depreciation expenses rose $2.9 million, or
93.5%, from $3.1 million for the three months ended June 30, 1997 to $6.0
million for the three months ended June 30, 1998, principally as a result of
depreciation of Maidstone facility assets and secondly due to additional cable
television networks acquired and the continued build-out of the Company's
existing cable networks. Depreciation and amortization expense as a percentage
of revenues increased from 34.8% in the three months ended June 30, 1997 to
46.9% in the three months ended June 30, 1998.
AMORTIZATION OF SPORTS RIGHTS. The Company incurred $1.6 million and $0 of
amortization charges of capitalized sports rights for the three months ended
June 30, 1998 and 1997.
INTEREST EXPENSE. Interest expense decreased $1.0 million, or 22.7%, from $4.4
million for the three months ended June 30, 1997 to $3.4 million for the three
months ended June 30, 1998.
INTEREST AND INVESTMENT INCOME. Interest and investment income decreased $0.7
million, or 50%, from $1.4 million for the three months ended June 30, 1997 to
$0.7 million for the three months ended June 30, 1998, primarily due to
reduction of cash balances resulting from the increased payments and expenses
described above during the second quarter of 1998.
FOREIGN EXCHANGE LOSS. For the three months ended June 30, 1998 and 1997,
foreign exchange loss amounted to $0.1 million in each such period.
MINORITY INTEREST. Minority interest in subsidiary gain was $0.1 million for the
three months ended June 30, 1998, compared to minority interest in subsidiary
loss of $2.1 million for the corresponding period in 1997.
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NET LOSS. For the three months ended June 30, 1997 and 1998, the Company had net
losses of $13.1 million and $31.0 million, respectively. These losses were the
result of the factors discussed above.
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NET LOSS APPLICABLE TO COMMON STOCKHOLDERS. Net loss applicable to common
stockholders increased from a loss of $14.1 million for the three months ended
June 30, 1997 to a loss of $31.0 million for the three months ended June 30,
1998 due to the factors discussed above. For the three months ended June 30,
1997, net loss applicable to common stockholders included $1.0 million related
to the accretion of redeemable preferred stock.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
CABLE TELEVISION REVENUE. Revenue increased $9.1 million or 55.5% from $16.4
million for the six months ended June 30, 1997 to $25.5 million for the same
period in 1998. This increase was primarily attributable to a 21.2% increase in
the number of basic subscribers from approximately 580,200 at June 30, 1997 to
approximately 703,300 at June 30, 1998, as well as an increase in monthly
subscription rates. Approximately 51% of this increase in basic subscribers was
the result of acquisitions and the remainder was due to build-out of the
Company's existing cable networks.
Revenue from monthly subscription fees represented 85.7% and 83.3% of cable
television revenue for the six months ended June 30, 1997 and 1998,
respectively. Installation fee revenue for the six months ended June 30, 1998
decreased by 59.7% compared to the corresponding period in 1997, from $1,470,000
to $593,000. During the six months ended June 30, 1998, the Company generated
approximately $1.7 million of additional premium subscription revenue and
approximately $22,000 of additional premium channel installation revenue as a
result of providing the HBO pay movie channel to cable subscribers.
DIRECT OPERATING EXPENSES. Direct operating expenses increased $21.6 million, or
423.5%, from $5.1 million for the six months ended June 30, 1997 to $26.7
million for the six months ended June 30, 1998, principally as a result of the
following: higher levels of technical personnel and increased maintenance
expenses associated with the establishment of the Maidstone facility, recently
acquired cable networks which have not yet been integrated within the Company's
cable system and standards, the increased size of the Company's cable television
system, the $5 million payment to Philips Business Electronics B.V. to
compensate it for costs incurred as a result of suspension of the production
process for the D-DTH Reception Systems 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 increased from 31.1% of revenues
for the six months ended June 30, 1997 to 104.7% of revenues for the six months
ended June 30, 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $10.9 million or 60.2% from $18.1 million for
the six months ended June 30, 1997 to $29.0 million for the six months ended
June 30, 1998. For the six months ended June 30, 1997 the Company recorded a
non-recurring, non-cash compensation expense of $10.2 million in connection with
stock options granted to certain employees. As a percentage of revenue, selling,
general and administrative expenses increased from 110.4% for the six months
ended June 30, 1997 to approximately 113.7% for the corresponding period in
1998. However without considering this non-cash compensation expense in 1997 the
selling, general and administrative expenses would have been $29.0 million and
$7.9 million for the six months ended June 30, 1998 and 1997, respectively. This
increase over the corresponding 1997 period was attributable mainly to an
increase in sales and marketing expenses incurred in preparation for launch of
the Company's D-DTH service and Wizja TV programming platform, an increase in
the number of administrative staff associated with the Maidstone facility and
the Wizja TV programming platform, as well as an increase in professional fees
associated with obtaining long-term programming contracts, broadcast/exhibition
rights and negotiations with Telewizyjna Korporacja Partycypacyjna.
DEPRECIATION AND AMORTIZATION. Depreciation expenses rose $4.4 million, or
67.7%, from $6.5 million for the six months ended June 30, 1997 to $10.9 million
for the six months ended June 30, 1998, principally as a result of depreciation
of Maidstone facility assets and secondly due to additional cable television
networks acquired and the continued build-out of the Company's existing cable
networks. Depreciation and amortization expense as a percentage of revenues
increased from 39.6% in the six months ended June 30, 1997 to 42.7% in the six
months ended June 30, 1998.
AMORTIZATION OF SPORTS RIGHTS. The Company incurred $1.6 million and $0 of
amortization charges of capitalized sports rights for the six months ended June
30, 1998 and 1997.
INTEREST EXPENSE. Interest expense decreased $0.6 million, or 7.9%, from $7.6
million for the six months ended June 30, 1997 to $7.0 million for the six
months ended June 30, 1998.
INTEREST AND INVESTMENT INCOME. Interest and investment income decreased $0.6
million, or 28.6%, from $2.1 million for the six months ended June 30, 1997 to
$1.5 million for the six months ended June 30, 1998, primarily due to reduction
of cash balances resulting from the increased payments and expenses described
above during the second quarter of 1998.
FOREIGN EXCHANGE LOSS. For the six months ended June 30, 1997 and 1998, foreign
exchange loss amounted to $0.4 million and
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$0, respectively.
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MINORITY INTEREST. Minority interest in subsidiary gain was $0.2 million for the
six months ended June 30, 1998, compared to minority interest in subsidiary loss
of $2.6 million for the corresponding period in 1997.
NET LOSS. For the six months ended June 30, 1997 and 1998, the Company had net
losses of $16.7 million and $48.3 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 $18.7 million for the six months ended
June 30, 1997 to a loss of $48.3 million for the six months ended June 30, 1998
due to the factors discussed above. For the six months ended June 30, 1997, net
loss applicable to common stockholders included $2.0 million related to the
accretion of redeemable preferred stock.
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 by PCI of $130 million of 9 7/8% Senior
Notes due 2003 and 9 7/8% Series B Senior Notes due 2003 (collectively, the
"PCI Notes") and (v) the sale of approximately $200 million of common stock
through the Company's initial public equity offering in August 1997.
The Company had negative cash flows from operating activities for the year ended
December 31, 1997 and the six months ended June 30, 1998 of $18.8 million and
$81.7 million, respectively, due to the significant operating costs associated
with the development of its D-DTH service and the Wizja TV programming platform.
Cash used for the purchase and build-out of the Company's cable television
networks and the purchase of other property, plant and equipment was $16.7
million, $26.6 million, $42.5 million, $14.4 million and $26.0 million in 1995,
1996, 1997 and the six months ended June 30, 1998 and 1997, respectively. The
increase primarily relates to the Company's acquisition of additional cable
networks and capital expenditures associated with the build out of its existing
cable networks and the development of its planned D-DTH service and the Wizja TV
programming platform.
Cash used for the acquisition of subsidiaries, net of cash received, was $4.1
million, $13.3 million, $18.0 million and $10.5 million in 1995, 1996, 1997 and
the six months ended June 30, 1998, respectively. The Company spent
approximately $1.2 million, $3.9 million, and $5.9 million and $2.0 million in
1995, 1996, 1997 and the six months ended June 30, 1998, respectively, to
upgrade major acquired networks to meet PCI's technical standards.
Subsequent to June 30, 1998, the Company purchased certain cable television
network assets for approximately $1.0 million, and entered into an agreement to
purchase, for approximately $10.6 million, certain remaining minority interests
in a subsidiary of the Company held by unaffiliated third parties.
At June 30, 1998, the Company was committed to pay at least approximately $328
million in guaranteed payments (including but not limited to payments for the
D-DTH Reception Systems and payments of guaranteed minimum amounts due under
programming agreements and satellite transponder leases) over the next seven
years, of which at least approximately $228 million was committed through the
end of 1999. Subsequent to June 30, 1998, the Company entered into additional
long-term programming agreements with third party content providers for its
D-DTH and cable systems which require that license fees be paid based upon a
guaranteed minimum number of subscribers connected to the system each month. The
Company was committed to pay at least approximately $72 million in guaranteed
payments over the next seven years, of which at least approximately $7 million
was committed through the end of 1999 in respect of these additional agreements.
These payments may increase if the Company enters into additional programming
agreements. If the Company is unable to make these payments, it will have a
material adverse effect on the Company's business, financial condition and
results of operations.
On July 8, 1998, the Company sold approximately $252 million aggregate principal
amount at maturity of Senior Discount Notes and warrants to purchase shares of
the Company's common stock to two initial purchasers pursuant to a purchase
agreement with gross proceeds to the Company of approximately $125 million. It
is anticipated that the additional financing provided by these Senior Discount
Notes will fund, among other things, the development of the Company's D-DTH
business. Other plans to raise additional financing in the future are currently
under review.
Pursuant to the indentures governing the Notes and the PCI Notes, @Entertainment
and PCI are subject to certain restrictions and covenants, including, without
limitation, covenants with respect to the following matters: (i) limitation on
additional indebtedness; (ii) limitation on restricted payments; (iii)
limitation on issuances and sales of capital stock of subsidiaries; (iv)
limitation on transactions with affiliates; (v) limitation on liens; (vi)
limitation on guarantees of indebtedness by subsidiaries; (vii) purchase of
notes upon a change
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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) limitation on lines of business;
and (xii) consolidations, mergers, and sale of assets.
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The Company believes that, in addition to the net proceeds from the sale of the
Notes, cash on hand and cash from operations, it will need additional funding of
at least $150 million to fulfill its current business development plan through
the end of 1999. This additional financing will be required to fund ongoing
development and expansion of the Company's D-DTH business and its programming
business, and such businesses are expected to incur operating losses and
negative cash flow for at least the next two years. The Company expects that it
will also require additional external funding for its business development plan
in years subsequent to 1999 if the Company continues to provide promotional
incentives to subscribers (other than the 500,000 initial subscribers) with
respect to the D-DTH Reception Systems. Future sources of financing for the
Company could include public or private debt or equity offerings or bank
financings or a combination thereof, subject to the restrictions contained in
the indentures governing the Notes and the PCI Notes. 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 the net proceeds
from the sale of the Notes, 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 financings 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. @Entertainment is currently negotiating to enter into
an agreement with one or more banks to provide a larger liquidity facility.
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 27% in 1995, approximately 20%
in 1996, approximately 14.9% in 1997 and approximately 6.9% in the first six
months of 1998. The exchange rate for the zloty has stabilized and the rate of
devaluation of the zloty has generally decreased since 1991, although the
zloty/dollar exchange rate has increased in the three months ended June 30,
1998. Inflation and currency exchange fluctuations have had, and may continue to
have, a material adverse effect on the business, 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 expenditures 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.
YEAR 2000 COMPLIANCE
In January 1997, the Company developed a plan to deal with the Year 2000 problem
and to make its computer systems Year 2000 compliant. The Company's plan
provides for the Year 2000 related efforts to be completed by the end of 1998.
Largely as a result of its high rate of growth over the past few years, the
Company has entered into an agreement to purchase a new system to replace its
current accounting computer system and an agreement to purchase specialized
billing software for the Company's new customer service and billing center. The
Company has no other significant computer systems. The total cost of the
purchases is estimated to be approximately $2,400,000. The Company has obtained
confirmations from the vendors of the systems indicating that such systems are
Year 2000 compliant. The Company has completed testing phase of the new
accounting computer software and the implementation phase is planned to be
completed by the end of 1998. The Company capitalized approximately $356,000 in
regarding to the new accounting software. The billing software has been
successfully implemented for D-DTH subscribers and will be implemented for all
cable subscribers by the end of 1998. The Company expensed approximately
$250,000, capitalized approximately $128,000 and prepaid approximately $630,000
in relation to the new billing software.
IMPACT OF NEW ACCOUNTING STANDARDS NOT YET ADOPTED
SFAS 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 SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise," which required reporting segment information
by industry and geographic area (industry approach). Under SFAS No. 131,
operating segments are defined as components of a company for which separate
financial information is available and used by management to allocate resources
and assess performance (management approach). This statement is effective for
year-end 1998 financial statements. Interim financial
20
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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.
21
<PAGE>
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which establishes standards of accounting
for these transactions. SFAS No. 133 is effective for the Company beginning on
July 1, 1999. The Company currently has no derivative instruments or hedging
activities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
Not Applicable.
PART II OTHER INFORMATION
ITEM 1. 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.
On April 17, 1998, the Company signed a letter of intent with Telewizyjna
Korporacja Partycypacyjna S.A. ("TKP"), a Polish company that currently operates
an A-DTH and terrestrial single channel premium pay television service in
Poland, and the shareholders of TKP, namely, Canal+ S.A., Agora S.A., and PolCom
Invest S.A. The letter of intent provided for bringing together the Company's
Wizja TV programming platform and the Canal+ Polska premium pay television
channel and for the joint development and operation of a D-DTH service in
Poland. The letter of intent called for the Company to invest approximately $112
million in TKP, and to sell substantially all of the Company's D-DTH and
programming assets to TKP for approximately $42 million. The TKP joint venture
was to be owned 40% by the Company, 40% by Canal+ S.A., 10% by Agora S.A. and
10% by PolCom Invest S.A. The letter of intent also contained a standstill
provision whereby neither the Company nor TKP could, for a period of 45 days
after the execution of the letter of intent, launch any digital pay television
service. As a result, the Company postponed its launch of the Wizja TV
programming platform and its D-DTH service, which was originally scheduled for
April 18, 1998. The establishment of the joint venture was subject to the
execution of definitive agreements, regulatory approvals and certain other
closing conditions.
The definitive agreements were not agreed and executed by the parties
by the 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 has 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 have alleged that
the Company breached its obligations 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 has submitted its answer and counterclaims against TKP and its
shareholders. The Company does not believe that the arbitration proceedings will
have a material adverse effect on the Company's business, financial condition or
results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS:
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
22
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION:
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - FINANCIAL DATA SCHEDULE
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on April 17, 1998 reporting the
execution of the letter of intent (subject to the satisfaction of
certain specified contingencies) with TKP and its shareholders.
The Company filed a report on Form 8-K on June 1, 1998 reporting the
termination of the letter of intent with TKP and its shareholders.
The Company filed a report on Form 8-K on June 11, 1998 reporting its
intent to undertake a debt offering pursuant to exemptions from the
Securities Act of 1933, its estimate of costs incurred as a result of
the delay of the planned April 18, 1998 launch of its Wizja TV
programming platform and D-DTH service, and the initiation of
arbitration proceedings by TKP against the Company before an
arbitration panel in Geneva, Switzerland.
23
<PAGE>
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/ Donald Miller-Jones
------------------------------
Donald Miller-Jones
Chief Financial Officer,
Vice President and Treasurer
DATE: August 14, 1998
24
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