<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 MARCH 31, 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
March 31, 1998, was:
Common Stock 33,310,000
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@ ENTERTAINMENT, INC.
FORM 10-Q INDEX
FOR QUARTERLY PERIOD ENDED MARCH 31, 1998
PAGE NO.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
@ Entertainment
Consolidated Balance Sheets........................ 4-5
Consolidated Statements of Operations.............. 6
Consolidated Statements of Cash Flows.............. 7
Notes to Consolidated Financial Statements......... 12-16
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...... 11-16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.................................. 17
PART II OTHER INFORMATION
Item 1. Legal Proceedings....................................... 17
Item 2. Changes in Securities and Use of Proceeds............... 17
Item 3. Defaults Upon Senior Securities......................... 17
Item 4. Submission of Matters to a Vote of Security Holders..... 18
Item 5. Other Information....................................... 18
Item 6. Exhibits and reports on Form 8-K........................ 19
Signature Page.......................................................... 20
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@ ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
March 31, December 31,
1998 1997
---- ----
(in thousands)
Current Assets:
Cash and cash equivalents $58,589 $105,691
Accounts receivable, net of allowance
for doubtful accounts of $732,000 in 1998
and $766,000 in 1997 4,152 4,544
Other current assets 10,084 4,998
------- -------
Total current assets 72,825 115,233
------- -------
Property, plant and equipment:
Cable television system assets 147,893 134,469
Construction in progress 19,956 6,276
Vehicles 2,103 2,047
Other 7,107 7,940
------- -------
177,059 150,732
Less accumulated depreciation (37,828) (33,153)
------- -------
Net property, plant and equipment 139,231 117,579
Inventories for construction 10,471 8,153
Intangibles, net (note 6) 44,593 33,440
Notes receivable from affiliates -- 691
Investments in affiliated companies 21,976 21,800
Other assets (note 7) 14,698 10,200
------- -------
Total assets $303,794 $307,096
========= =========
See accompanying notes to unaudited consolidated financial statements.
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@ ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
1998 1997
---- ----
(in thousands)
Current liabilities:
Accounts payable and accrued expenses $20,626 $13,781
Accrued interest 5,492 2,175
Deferred revenue 1,189 1,257
Income taxes payable 1,388 1,765
Other current liabilities 114 940
------- -------
Total current liabilities 28,809 19,918
------- -------
Notes payable 132,297 130,110
------- -------
Total liabilities 161,106 150,028
------- -------
Minority interest 4,862 4,713
Commitments and contingencies (note 8)
Stockholders' equity:
Preferred stock, $.01 par value; 20,000,000
shares authorized; no shares issued and
outstanding -- --
Common stock, $.01 par value; 50,000,000
shares authorized, 33,310,000 shares
issued and outstanding 333 333
Paid-in capital 230,339 230,339
Cumulative translation adjustment 2,549 (218)
Accumulated deficit (95,395) (78,099)
------- -------
Total stockholders' equity 137,826 152,355
------- -------
Total liabilities and stockholders'
equity $303,794 $307,096
========= =========
See accompanying notes to unaudited consolidated financial statements.
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@ ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended March 31,
----------------------------
1998 1997
---- ----
(in thousands, except per share data)
Cable television revenue $12,686 $7,508
Operating expenses:
Direct operating expenses 8,648 2,100
Selling, general and administrative
expenses 13,447 2,974
Depreciation and amortization 4,949 3,450
------- -------
Total operating expenses 27,044 8,524
------- -------
Operating loss (14,358) (1,016)
Interest and investment income 850 750
Interest expense (3,649) (3,205)
Equity in losses of affiliated companies 270 --
Foreign exchange gain (loss) 73 (305)
------- -------
Loss before income taxes and
minority interest (16,814) (3,776)
Income tax expense (333) (271)
Minority interest (149) 476
------- -------
Net loss (17,296) (3,571)
Accretion of redeemable preferred stock -- (980)
------- -------
Net loss applicable to holders of common stock $(17,296) $(4,551)
========= =========
Basic and diluted loss per common share $(0.52) $(0.24)
========= =========
See accompanying notes to unaudited consolidated financial statements.
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@ ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended March 31,
----------------------------
1998 1997
---- ----
(in thousands)
Cash flows from operating activities:
Net loss $(17,296) $(3,571)
Adjustments to reconcile net loss to
net cash used in operating activities:
Minority interest 149 (476)
Depreciation and amortization 4,949 3,450
Other 1,338 204
Changes in operating assets and liabilities:
Accounts receivable (911) (15)
Other current assets (5,006) (696)
Other assets (2,937) --
Accounts payable 5,856 (2,498)
Income taxes payable (377) (749)
Accrued interest 3,317 3,209
Deferred revenue (88) 35
Other current liabilities (826) (549)
--------- ---------
Net cash used in operating activities (11,832) (1,656)
--------- ---------
Cash flows from investing activities:
Construction and purchase of property,
plant and equipment (23,085) (4,867)
Repayment/(issuance)of notes receivable
from affiliates 779 (2,412)
Investment in affiliated companies (176) --
Other investments (2,072) (383)
Purchase of intangibles (230) --
Purchase of subsidiaries, net of cash
received (10,523) --
--------- ---------
Net cash used by investing activities (35,307) (7,662)
--------- ---------
Cash flows from financing activities:
Costs to obtain loans -- (107)
Repayment of notes payable 37 (550)
--------- ---------
Net cash provided by/(used in)
financing activities 37 (657)
--------- ---------
Net decrease in cash and cash
equivalents (47,102) (9,975)
Cash and cash equivalents at beginning of period 105,691 68,483
--------- ---------
Cash and cash equivalents at end of period $58,589 $58,508
========= =========
Supplemental cash flow information:
Cash paid for interest $25 $3
========= =========
Cash paid for income taxes $176 $1,005
========= =========
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 March 31, 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 three-month periods ended March 31, 1998 and 1997
was approximately $14,747,000 and $4,769,000, respectively.
4. FOREIGN CURRENCY TRANSLATION
Effective January 1, 1998, Poland was no longer deemed to be 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 nonmonetary items into the local
currency at current exchange rates.
5. 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 the three-month periods ended March 31, 1998 and
1997, respectively.
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6. ACQUISITIONS
During February 1998, Poland Communications, Inc. ("PCI"), the Company's
subsidiary, acquired approximately 95% of Szczecinska Telewizja Kablowa Sp. z
o.o.'s cable television system assets and subscriber lists for an aggregate
consideration of approximately $1,574,000. The acquisition was accounted for
using the purchase method with the purchase price allocated among the assets
and liabilities acquired based upon their fair values at the date of
acquisition and any excess to goodwill. The purchase price exceeded the fair
value of the net liabilities acquired by approximately $2,041,000. In
association with this acquisition, the Company assumed a $2,150,000 loan from
Polski Bank Rozwoju S.A. Interest is based on LIBOR for monthly DEM deposits
plus 2.5% and is due monthly. The loan is secured by a pledge on real estate
owned by two housing cooperatives, their bank accounts and insurance policies.
The cooperatives' pledge is secured by a claim on PTK Szczecin Sp. z o.o.
shares. All advances under the loan must be repaid by December 27, 2002.
In February and March 1998, the Company acquired the remaining interest in
Ground Zero Media Sp. z o.o. from the other remaining stockholders for
approximately $9,389,000. The acquisition was accounted for under the purchase
method, whereby the purchase price was allocated to the underlying assets and
liabilities based upon their proportionate share of fair values at the date of
acquisition and any excess to goodwill. The purchase price exceeded the fair
value of the net liabilities acquired by approximately $9,945,000.
7. WORLD SHOPPING NETWORK INVESTMENT
Included in other non-current assets at December 31, 1997 was a prepayment of
approximately $1,200,000 toward the formation of a programming-related joint
venture with World Shopping Network Plc. Subsequent to December 31, 1997, the
Company decided not to complete the investment in the joint venture with World
Shopping Network. As a result, the prepayment was expensed in the first quarter
of 1998.
8. COMMITMENTS AND CONTINGENCIES
Broadcast/Exhibition Right Commitments
The Company has entered into long-term contracts for the purchase of certain
exhibition or broadcast rights for its digital direct-to-home ("D-DTH") and
cable systems. The contracts have terms which range from one to five years and
require that the license fees be paid based upon a fixed amount. The Company
has an aggregate minimum commitment of approximately $25,177,000 over the next
5 years, approximating $10,148,000 for the remainder of 1998, $4,864,000 in
1999, $5,133,000 in 2000, $2,531,000 in 2001 and $2,501,000 in 2002. For the
periods ended March 31, 1998 and 1997 the Company did not incur any
amortization expense relating to these broadcast/exhibition rights pursuant to
these agreements as such rights were not available for broadcast.
Programming Commitments
The Company has entered into long-term programming agreements with a number of
third party content providers for its D-DTH and cable systems. The programming
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. The Company has an aggregate minimum commitment of
approximately $57,329,000 over the next 5 years, approximating $9,477,000 for
the remainder of 1998, $10,514,000 in 1999, $11,867,000 in 2000, $12,855,000 in
2001 and $12,616,000 in 2002 and thereafter. For the period ended March 31,
1998, the Company incurred programming fees of approximately $55,000. The
Company incurred no programming fees pursuant to these agreements for the
period ended March 31, 1997.
Capital Commitments
As of March 31, 1998, the Company had entered into agreements to purchase
capital assets including certain technical equipment associated with
establishing its D-DTH facilities, for approximately $2,281,000.
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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.
9. STOCK OPTIONS
On January 26, 1998, certain employees were granted options to purchase 150,000
shares of common stock (subject to stockholder approval) at a price of $12.2375
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.
10. SUBSEQUENT EVENTS
Investment in TKP (Canal+)
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 proposed transaction
is subject to regulatory approvals by Polish governmental agencies and the
execution of certain definitive agreements.
Under the terms of the agreement, DTC Productions Sp. z o.o. ("DTC"), a Polish
subsidiary of @ Entertainment, will purchase a 40% fully diluted ownership
interest in TKP for approximately $112,000,000. Concurrently, TKP will purchase
substantially all of the D-DTH assets of @ Entertainment for approximately
$38,000,000 and will assume substantially all of @ Entertainment's contracts and
obligations related to its D-DTH operations. At closing, DTC and Canal+ S.A.
would each own 40% of TKP, which would own the new digital platform
and Canal+ Polska, and the remaining 20% would be held by third parties.
The letter of intent stipulates a standstill agreement whereby neither party
may, for a period of 45 days after the execution of the agreement, launch any
digital pay television service. Pursuant to this agreement, @ Entertainment
postponed its planned launch of Wizja TV in April 1998. Both parties intend to
reschedule the launch of a combined D-DTH service for September 1998 under the
Wizja+ brand name.
In the event the transaction is consummated, the Company intends to account for
(i) the purchase of its 40% interest in TKP, (ii) the sale of substantially all
of its D-DTH assets to TKP and (iii) TKP's assumption of substantially all of
the Company's contracts and obligations related to its D-DTH operations in the
aggregate using the purchase method of accounting. The excess of the fair value
of consideration paid over the Company's proportionate share of the fair value
of assets and liabilities acquired will be assigned to goodwill and amortized
over 10 years. The Company's 40% investment in TKP will be accounted for under
the equity method.
Subsequent to March 31, 1998 and in connection with this transaction and the
related launch delay, the Company has incurred and will continue to incur
certain costs for which limited future economic benefit may be realized by the
Company should this transaction be consummated. Due to the uncertainties
involved, an estimation of such costs is not yet available and therefore, has
not been recorded in the accompanying unaudited consolidated financial
statements. There can be no assurance that the effects of these costs would not
have a material adverse effect on the Company's operations and financial
condition.
@ Entertainment has entered into an agreement with East Services S.A. ("East
Services") under which @ Entertainment 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
@ Entertainment 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
percent of the aggregate amount of the transactions or investments involved in
such acquisition, merger or combination. In the event this transaction is
consummated, the Company intends to account for these payments as part of the
overall purchase price.
Acquisition
Subsequent to March 31, 1998, the Company entered into agreements to purchase
during 1998 certain cable television systems or system assets for an aggregate
purchase price of approximately $11,572,000. The acquisitions will be accounted
for under the purchase method, whereby the purchase price will be allocated to
the underlying assets and liabilities based upon their estimated fair values
and any excess to goodwill. The acquisitions are not expected to have a
material effect on the Company's results of operations in 1998.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
unaudited consolidated financial statements of the Company. The following
discussion contains certain forward looking statements that involve risks and
uncertainties including without limitation those related to the timing, costs
and revenues of establishing and marketing the Company's planned digital
satellite direct-to-home ("D-DTH") broadcasting platform, those relating to
pending and future acquisitions and those relating to regulatory approvals, the
execution of definitive agreements and other variables concerning the
consummation of the joint venture with TKP, and the timing of the launch of the
joint venture services. The Company's actual future results could defer
materially from those discussed herein.
OVERVIEW
The Company is the largest provider of pay television in Poland. Through its
subsidiary, Poland Communications, Inc. ("PCI"), the Company owns and operates
the largest network of cable television systems in the Polish market with
830,650 total subscribers as of March 31, 1998.
The Company's revenues have been derived entirely from its cable television
business and programming related thereto. 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 programming service ("Wizja TV") which was
originally scheduled for launch on April 18, 1998. 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 D-DTH television service
in Poland. The transactions described in the letter of intent (the "LOI") are
subject to regulatory approvals by Polish governmental agencies as well as the
execution of certain definitive agreements. The LOI contains a standstill
provision whereby neither party may, for a period of 45 days after the
execution of the LOI, launch any digital pay television service. Pursuant to
the LOI, @ Entertainment postponed its launch of Wizja TV, which originally was
scheduled to occur in April 1998, and parties intend to schedule the launch of
a combined D-DTH Service for September 1998 under the Wizja+ brand name.
Under the terms of the LOI, DTC Productions Sp. z o.o. ("DTC") a Polish
subsidiary of @ Entertainment, will purchase a 40% fully diluted ownership
interest in TKP for approximately $112,000,000. Concurrently, TKP will purchase
substantially all of the D-DTH assets of @ Entertainment for approximately
$38,000,000 and will assume substantially all of @ Entertainment's contracts
and obligations related to its D-DTH operations. At closing, DTC and Canal+
S.A. would each own 40% of TKP, which would own the new digital platform and
Canal+ Polska, and the remaining 20% would be held by third parties (the "joint
venture transaction"). The Company will retain ownership of 100% of its cable
business as well as 100% ownership of certain of its programming assets.
The Company generated operating losses of $1.0 million and $14.4 million for
the three months ended March 31, 1997 and 1998, respectively.
CABLE OVERVIEW
Substantially all of the Company's revenue has been derived from monthly
subscription fees for cable television services and one-time installation fees
for connection to its cable television networks. The Company charges cable
subscribers fixed monthly fees for their choice of service 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, intermediate (in limited areas) and basic tiers of cable
service. At March 31, 1998 approximately 76% of the Company's subscribers
received the Company's basic tier. During the three months ended March 31,
1998, approximately 93% of the Company's revenue was derived from monthly
subscription fees compared to 85% in the corresponding period in 1997.
When the Company began operations in 1990, revenue from installation fees
exceeded revenue from monthly subscription fees because of the significant
number of new installations and the high amount of the installation fees
relative to the small existing subscriber base. As the Company's cable
subscriber base has grown, aggregate monthly subscription revenue has increased
and installation fees, have declined as a percentage of total revenue.
The Company expects that installation fees will continue to constitute a
declining portion of the Company's revenue.
<PAGE>
The Company has experienced low churn rates since its inception. The Company's
annual churn rates have historically averaged less than 10%. The Company's
churn rates for the three months ended March 31, 1997 and 1998 were 2.3% and
3.3%, respectively. 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.
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, which commenced in January 1997 and is designed to increase revenue
per subscriber and to achieve real profit margin increases in U.S. Dollar
terms. Upon consummation of the joint venture transaction and the proposed
launch of Wizja +, the price for the Basic Tier service will be increased, and
premium channels such as HBO and Canal+ will each be offered to cable customers
for an additional monthly charge.
The Company divides operating expenses into (i) direct operating expenses, (ii)
selling, general and administrative expenses and (iii) depreciation and
amortization expenses. Direct operating expenses consist of programming
expenses, maintenance and related expenses necessary to service, maintain and
operate the Company's cable systems, billing and collection expenses and
customer service expenses. Selling, general and administrative expenses consist
principally of administrative costs, including office related expenses,
professional fees and salaries, wages and benefits of non-technical employees,
advertising and marketing expenses, bank fees and bad debt expense.
Depreciation and amortization expenses consist of depreciation of property,
plant and equipment and amortization of intangible assets.
D-DTH OVERVIEW
Prior to signing the LOI with TKP, the Company had intended to expand its
distribution capacity by launching on April 18, 1998 a complementary D-DTH
broadcasting service for Poland. The programming for the Company's planned
D-DTH service was to be distributed under the brand name Wizja TV, and the
service was to be broadcast to Poland from Maidstone, United Kingdom. At March
31, 1998, the Company had incurred operating expenses of $26.6 million related
to the anticipated launch of Wizja TV and the Company's D-DTH broadcasting
service. Certain costs related to the anticipated launch of Wizja TV and the
Company's D-DTH broadcasting service included transponder lease costs,
the establishment of the satellite up-link facility in Maidstone, professional
fees associated with obtaining long-term programming contracts and broadcast
exhibition rights, and marketing fees.
The LOI contains a standstill provision whereby neither @Entertainment nor
TKP may, for a period of 45 days after the execution of the LOI, launch any
digital pay television service. Pursuant to the LOI, @Entertainment has
postponed its launch of Wizja TV and its D-DTH service. Subject to the
consummation of the joint venture transaction, @Entertainment and TKP intend
to schedule the launch of a combined D-DTH service for September 1998 under the
Wizja+ brand name. If the joint venture transaction is not consummated, the
Company intends to launch Wizja TV and its D-DTH service independently and will
operate them as wholly owned businesses.
PROGRAMMING OVERVIEW
The Company, both directly and through other 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, of which three channels are owned and produced by the Company.
Pursuant to the LOI, upon consummation of the joint venture transaction, TKP
will assume substantially all of @ Entertainment's contracts and obligations
related to its D-DTH pay television operations. However, the Company's
proprietary channels and their programming content, as well as other proprietary
programming produced by the Company (collectively, the "Proprietary
Programming"), are excluded from the assets which are to be transferred to TKP
upon consummation of the joint venture transaction. The Company expects to
continue to expand its in-house programming production and to seek out and
participate in other programming related ventures. Costs related to the
Company's programming business include costs to acquire programming produced
by third parties, in-house production costs, selling costs, facilities costs,
and personnel costs.
The Company intends to distribute its Proprietary Programming across its cable
networks. The Company's distribution of its Proprietary Programming will
provide two sources of revenue for the Company, in the form of subscriber fees
and advertising revenue. The Company also intends to distribute its Proprietary
Programming to other cable operators in Poland for a per-subscriber fee. 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.
In addition, subject to the consummation of the joint venture transaction, the
Company's Proprietary Programming would be distributed across the proposed
Wizja+ programming platform. In the event that the joint venture transaction is
not consummated, the Company will distribute its Proprietary Programming across
its own D-DTH broadcasting service as part of the Company's programming
platform.
<PAGE>
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
CABLE TELEVISION REVENUE. Revenue increased $5.2 million or 69.3% from $7.5
million for the three months ended March 31, 1997 to $12.7 million for the same
period in 1998. This increase was primarily attributable to a 39.7% increase in
the number of basic subscribers from approximately 484,000 at March 31, 1997 to
approximately 676,000 at March 31, 1998, as well as an increase in monthly
subscription rates. Approximately 68% 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 85.4% and 93.3% of cable
television revenue for the three months ended March 31, 1997 and 1998,
respectively. Installation fee revenue for the three months ended March 31,
1998 decreased by 41.1% compared to corresponding period in 1997, from $776,000
to $457,000. During the three months ended March 31, 1998, the Company
generated approximately $0.8 million of additional premium subscription revenue
and approximately $20,000 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 $6.5 million, or
309.5%, from $2.1 million for three months ended March 31, 1997 to $8.6 million
for the three months ended March 31, 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, and costs associated with the lease of three transponders on
the Astra satellites which will 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 28% of revenues for the three months
ended March 31, 1997 to 68% of revenues for the three months ended March 31,
1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $10.4 million or 346.7% from $3.0 million for
the three months ended March 31, 1997 to $13.4 million for the three months
ended March 31, 1998. A portion of this increase was attributable to a $2.5
million increase in sales and marketing expenses incurred in preparation for
the planned launch of the D-DTH service and Wizja TV programming platform,
general and administrative costs associated with newly acquired subsidiaries
and cable networks, costs associated with an agreement relating to the sale of
advertising on Atomic TV, an increase in the number of administrative staff
associated with the establishment of the Maidstone facility and Wizja TV
programming platform, as well as an increase in professional fees associated
with obtaining long-term programming contracts and broadcast/exhibition rights.
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 revenue, selling, general and administrative expenses
increased from 40% for the three months ended March 31, 1997 to approximately
106% for the corresponding period in 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses rose $1.4
million, or 40%, from $3.5 million for the three months ended March 31, 1997 to
$4.9 million for the three months ended March 31, 1998, principally as a result
of depreciation of 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 decreased from 46.70% in the
three months ended March 31, 1997 to 38.6% in the three months ended
March 31, 1998.
<PAGE>
INTEREST EXPENSE. Interest expense increased $0.4 million, or 12.5%, from $3.2
million for the three months ended March 31, 1997 to $3.6 million for the three
months ended March 31, 1998. The increase in interest expense is mainly
attributable to new loans assumed by the Company in connection with its
acquisition of two subsidiaries subsequent to March 31, 1997.
INTEREST AND INVESTMENT INCOME. Interest and investment income increased $0.1
million, or 12.5%, from $0.8 million for the three months ended March 31, 1997
to $0.9 million for the three months ended March 31, 1998, primarily due to the
income derived from the investment of a portion of the net proceeds from PCI's
senior debt offering in October 1996 (the "PCI Notes") and from the Company's
initial public equity offering in August 1997.
FOREIGN EXCHANGE GAIN (LOSS). For the three months ended March 31, 1998,
foreign exchange gain amounted to $0.1 million as compared to a $0.3 million
loss for the corresponding period in 1997 as a result of the devaluation of the
U.S. dollar against the Polish zloty during the three months ended March 31,
1998.
MINORITY INTEREST. Minority interest in subsidiary gain was $0.1 million for
the first three months of 1998, compared to minority interest in loss of $0.5
million for the compared period in 1997.
NET LOSS. For the three months ended March 31, 1997 and 1998, the Company had
net losses of $3.6 million and $17.3 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 $4.6 million for the three months ended
March 31, 1997 to a loss of $17.3 million for the three months ended March 31,
1998 due to the factors discussed above. For the three months ended March 31,
1997, net loss applicable to common stockholders included $1.0 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 Polish Investments Holding L.P.
("PIHLP"), the Cheryl Anne Chase Marital Trust ("CAC Trust") certain members of
David T. Chase's family and family trusts (the "Chase Family") (collectively
the "Chase Entities") and ECO Holdings III Limited Partnership ("ECO", and
together with the Chase Entities, the "Principal Stockholders"), (ii)
borrowings under available credit facilities, (iii) cash flows from operations,
(iv) the sale of $130 million aggregate principal amount of 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 three months ended March 31, 1998 of $18.8
million and $11.8 million, respectively, due to the significant operating
costs associated with the development of its D-DTH service and Wizja
programming platform.
Cash used for the purchase and build-out of the Company's cable television
networks was $16.7 million, $26.6 million, $42.5 million, $23.1 million and
$4.9 million in 1995, 1996, 1997 and the three months ended March 31, 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 Wizja 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 three months ended March 31, 1998, respectively. The Company spent
approximately $1.2 million, $3.9 million, and $5.9 million and $0.6 million in
1995, 1996, 1997 and the three months ended March 31, 1998, respectively, to
upgrade major acquired networks to meet PCI's technical standards.
<PAGE>
The Company entered into agreements subsequent to March 31, 1998 to purchase
certain cable television networks or network assets for an aggregate purchase
price of approximately $11.6 million.
Some of the Company's programming and sports rights agreements require payments
based on a guaranteed minimum number of subscribers and some required payments
at the time of execution. As of March 31, 1998, the Company was committed to
pay approximately $84.8 million in guaranteed minimum payments over the next
five years, of which approximately $35.0 million was committed through the end
of 1999. In connection with the Company's D-DTH business, the Company has
entered into contracts to acquire technical equipment and services necessary
for the installation of the digital transmission facility and uplink site in
its Maidstone facility, with an aggregate commitment of approximately $2.3
million in 1998. Under the terms of the LOI, the majority of the aforementioned
commitments will be transferred to TKP. Management is currently analyzing the
commitments which are likely to remain with the Company in the event that the
joint venture transaction is consummated to determine the costs if any,
associated with invoking any cancellation rights under such agreements. Due to
the uncertainties involved, an estimation of such costs is not yet available.
There can be no assurance that the effects of those costs would not have a
material adverse effect on the Company's operations and financial condition.
The Company has entered into contracts with Societe European des Satellites
("SES"), for the lease of three transponders on two satellites, Astra 1F and
1G. Aggregate charges for each transponder are capped at $6.75 million per year
for each transponder and $200 million for all three transponders through the
scheduled termination of the contract in 2007. In the event that the
transaction with TKP is consummated, this commitment will be transferred to
TKP.
The Company is dependent on obtaining new financing to fund its acquisition of
a 40% interest in TKP (or to fund the independent development of its D-DTH
business in the event the joint venture transaction is not consummated) and to
achieve its business strategy, and it is currently exploring methods of
raising additional capital. If not successful, the Company will be required
to reduce the scope of its presently anticipated expansion of operations,
reduce capital and operating expenditures, including invoking cancellation
rights under certain agreements, and as a result the business, results of
operations and prospects of the Company could be adversely affected.
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. 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 March 31, 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 complaint. 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 complaint.
<PAGE>
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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS:
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company issued an information statement to shareholders pursuant to
Section 14(c) of the Securities Exchange Act of 1934, as amended, (the
"information statement") in connection with the submission of matters to a vote
of shareholders to approve the following actions:
Amending the @ Entertainment, Inc. 1997 Stock Option Plan (the "1997 Plan")
for the purpose of (1) increasing to 4,436,000 the number of shares
of Common Stock reserved for issuance pursuant to the 1997 Plan, (2)
including Directors as eligible optionees, and (3) permitting transfers of
options to family members of optionees under certain circumstances.
The information statement, which was filed with the Securities and Exchange
Commission on Schedule 14C, is incorporated by reference into this quarterly
report on Form 10-Q.
ITEM 5. OTHER INFORMATION:
None.
<PAGE>
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 March 19, 1998 reporting
on @Entertainment, Inc.'s earnings which included the Company's
Consolidated Balance Sheets (unaudited), and Consolidated Statements
of Operations (unaudited) for the year ended December 31, 1997.
<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/ John S. Frelas
----------------------------
John S. Frelas
Chief Financial Officer,
Vice President and Treasurer
DATE: May 15, 1998
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