<PAGE>
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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 SEPTEMBER 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
September 30, 1998, was:
Common Stock 33,310,000
- --------------------------------------------------------------------------------
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<PAGE>
@ENTERTAINMENT, INC.
FORM 10-Q INDEX
FOR QUARTERLY PERIOD ENDED SEPTEMBER 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........................ 7-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................... 12-23
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.................................................. 23
PART II OTHER INFORMATION
Item 1. Legal Proceedings..................................................... 24
Item 2. Changes in Securities and Use of Proceeds............................. 25
Item 3. Defaults Upon Senior Securities....................................... 25
Item 4. Submission of Matters to a Vote of Security Holders................... 25
Item 5. Other Information..................................................... 25
Item 6. Exhibits and reports on Form 8-K...................................... 26
Signature Page............................................................................. 27
Financial Data Schedule.................................................................... 28
</TABLE>
2
<PAGE>
@ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------------------- ---------------------
(unaudited)
(in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 67,888 $ 105,691
Accounts receivable, net of allowance for doubtful accounts
of $1,657,000 in 1998 and $766,000 in 1997 3,022 4,544
Programming and broadcast rights current 7,017 -
Other current assets 9,035 4,998
--------------------- ---------------------
Total current assets 86,962 115,233
--------------------- ---------------------
Property, plant and equipment:
Cable television systems assets 160,619 134,469
D-DTH equipment 33,452 -
Construction in progress 4,502 6,276
Vehicles 3,350 2,047
Other 13,262 7,940
--------------------- ---------------------
215,185 150,732
Less accumulated depreciation (45,467) (33,153)
--------------------- ---------------------
Net property, plant and equipment 169,718 117,579
Inventories for construction 9,530 8,153
Intangibles, net 57,597 33,440
Notes receivable from affiliates - 691
Investments in affiliated companies 23,122 21,800
Other assets 28,062 10,200
--------------------- ---------------------
Total assets $ 374,991 $ 307,096
--------------------- ---------------------
--------------------- ---------------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
@ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------------------- ---------------------
(unaudited)
(in thousands)
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 23,385 $ 13,781
Accrued interest 5,527 2,175
Deferred revenue 3,261 1,257
Income taxes payable 2,442 1,765
Other current liabilities 43 940
----------------------- ---------------------
Total current liabilities 34,658 19,918
----------------------- ---------------------
Notes payable (note 7) 259,497 130,110
----------------------- ---------------------
Total liabilities 294,155 150,028
----------------------- ---------------------
Minority interest 29 4,713
Commitments and contingencies (note 9)
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 (note 7) 237,954 230,339
Cumulative translation adjustment (3,654) (218)
Accumulated deficit (153,826) (78,099)
Total stockholders' equity 80,807 152,355
----------------------- ---------------------
Total liabilities and stockholders' equity $ 374,991 $ 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 September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
--------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues $ 13,400 $ 10,390 $ 38,877 $ 26,801
Operating expenses:
Direct operating expenses 16,399 3,801 43,072 8,929
Selling, general and administrative expenses 10,971 17,459 39,998 35,552
Depreciation and amortization 6,857 4,423 17,786 10,946
Amortization of programming and broadcast rights 1,779 - 3,363 -
--------- -------- -------- --------
Total operating expenses 36,006 25,683 104,219 55,427
--------- -------- -------- --------
Operating loss (22,606) (15,293) (65,342) (28,626)
Interest and investment income 1,266 1,760 2,811 3,879
Interest expense (6,812) (2,293) (13,814) (9,880)
Equity in profits of affiliated companies 911 - 1,632 -
Foreign exchange loss, net (351) (429) (399) (851)
--------- -------- -------- --------
Loss before income taxes and
minority interest (27,592) (16,255) (75,112) (35,478)
Income tax benefit (expense) 66 (246) (496) (358)
Minority interest 90 (343) (117) 2,256
--------- -------- -------- --------
Net loss (27,436) (16,844) (75,725) (33,580)
Accretion of redeemable preferred stock - 2,028 - -
Excess of consideration paid for preferred
stock over carrying value - (33,806) - (33,806)
Net loss applicable to holders of common stock $ (27,436) $ (48,622) $ (75,725) $(67,386)
--------- -------- -------- --------
--------- -------- -------- --------
Basic and diluted loss per common share $ (0.82) $ (1.75) $ (2.27) $ (3.05)
--------- -------- -------- --------
--------- -------- -------- --------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
@ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended September 30,
-----------------------------------------
1998 1997
------------------- ----------------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (75,725) $ (33,580)
Adjustments to reconcile net loss to
net cash used in operating activities:
Minority interest 117 (2,256)
Depreciation and amortization 17,786 10,946
Accretion of discount on notes payable 3,252 -
Amortization of programming and broadcast rights 3,363 -
Equity in profits of affiliated companies (1,632) -
Non-cash stock option compensation expense - 18,483
Other 1,338 195
Changes in operating assets and liabilities:
Accounts receivable (7,280) (2,143)
Other current assets 3,515 (10,277)
Programming and broadcast rights (10,380) -
Other assets (4,863) -
Accounts payable 9,267 1,702
Income taxes payable 677 (930)
Accrued interest 3,352 3,281
Amounts due from affiliates 691 -
Deferred revenue 2,008 (102)
Other current liabilities (897) (1,147)
------------------- ----------------
Net cash used in operating activities (55,411) (15,828)
------------------- ----------------
Cash flows from investing activities:
Construction and purchase of property, plant and equipment (67,871) (26,472)
Prepayments to Philips (13,483) -
Proceeds from sale of investment securities - 25,115
Issuance of notes receivable from affiliates - (4,288)
Other investments - 1,388
Purchase of intangibles (40) (267)
Purchase of subsidiaries, net of cash received (26,637) (10,834)
------------------- ----------------
Net cash used in investing activities (108,031) (15,358)
------------------- ----------------
Cash flows from financing activities:
Net proceeds from issuance of stock - 183,333
Purchase of preferred stock of subsidiary (60,000)
Proceeds from issuance of notes and warrants 125,100 -
Proceeds from notes payable 6,500 -
Costs to obtain loans (5,961) (1,306)
Repayment of notes payable - (750)
------------------- ----------------
Net cash provided by financing activities 125,639 121,277
------------------- ----------------
Net increase in cash and cash equivalents (37,803) 90,091
Cash and cash equivalents at beginning of period 105,691 68,483
------------------- ----------------
Cash and cash equivalents at end of period $ 67,888 $ 158,574
------------------- ----------------
------------------- ----------------
Supplemental cash flow information:
Cash paid for interest $6,573 $6,653
------------------- ----------------
------------------- ----------------
Cash paid for income taxes $511 $1,589
------------------- ----------------
------------------- ----------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE>
@ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 and 1997
(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 September 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 only by the amount of the foreign currency translation adjustment
charged to stockholders' equity for the period. Comprehensive loss for the
nine-month periods ended September 30, 1998 and 1997 was approximately
$79,161,000 and $34,431,000, respectively.
4. ADOPTION OF NEW ACCOUNTING POLICY
Property, plant and equipment includes assets in the development and operation
of the Company's D-DTH systems and set-top boxes. Depreciation is computed for
financial reporting purposes using the stright-line method over the following
estimated useful lives:
D-DTH system assets 5 years
Set-top boxes 5 years
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 both the three-month and the nine-month periods
ended September 30, 1998 and 1997, respectively. The effect of potential common
shares (stock options and warrants outstanding) is antidilutive. Accordingly,
dilutive loss per share does not assume the exercise of stock options and
warrants outstanding.
7
<PAGE>
6. 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.
7. 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 Unit 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 $117,485,000 has been
allocated to the initial accreted value of the Notes and approximately
$7,615,000 has been allocated to the Warrants. The portion of the proceeds
that is allocable to the Warrants was accounted for as part of paid-in
capital. The allocation was made based on the relative fair values of the two
securities at the time of issuance. Net proceeds to the Company after
deducting initial purchasers' discount and offering expenses were
approximately $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 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
Company is in compliance with these covenants.
Costs associated with the Notes offering of $5,961,000, including the initial
purchasers' discount were capitalized and will be amortized over the term of the
Notes.
8
<PAGE>
8. ACQUISITIONS
On July 16, 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 $10,628,000, of which approximately
$9,490,000 relates to non-compete agreements. The acquisition was accounted for
under the purchase method, whereby the purchase price, with the exception of the
amount paid relating to the non-compete agreements, was 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.
On August 15, 1998, a subsidiary of the Company purchased the remaining minority
interest in another subsidiary of the Company which was held by unaffiliated
third parties for an aggregate purchase price of approximately $5,372,000. The
acquisition was accounted for using the purchase method with the purchase price
allocated among the assets acquired and liabilities assumed based upon their
fair values at the date of acquisition and any excess to goodwill. The purchase
price exceeded the fair value of the assets acquired by $1,104,000. The
acquisition is not expected to have a material effect on the Company's results
of operations in 1998.
9. 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 September 30, 1998, the Company had an
aggregate minimum commitment in relation to these agreements of approximately
$174,494,000 over the next seven years, approximating $9,611,000 for the
remainder of 1998, $26,522,000 in 1999, $30,649,000 in 2000, $30,547,000 in
2001, $32,753,000 in 2002 and $44,412,000 in 2003 and thereafter.
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 $3,363,000 and $0 for the nine-month periods ended September 30,
1998 and 1997, respectively.
Subsequent to September 30, 1998, the Company entered into an additional
long-term programming agreement with Eurosport for its D-DTH system which
requires that license fees be paid based upon a guaranteed minimum number of
subscribers connected to the Company's system each month. The Company has
aggregate minimum commitments related to this additional agreement of
approximating $4,653,000 over the next six years, with $406,600 in 1999,
$726,000 in 2000, $985,400 in 2001, $1,186,600 in 2002 and $1,350,000 in 2003.
Capital Commitments
As of September 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 $728,000.
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)
9
<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
package 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 $10,000,000 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 outcome of 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 package,
which currently consists of 19 channels of primarily Polish-language
programming, across its cable networks on June 5, 1998 and on a full-scale basis
on its D-DTH system 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 September 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 equal to the higher of: (i) 2.5% of the
aggregate amount of the transactions or investments involved in such
acquisition, merger or combination, or (ii) $2,750,000. 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.
10
<PAGE>
11. SUBSEQUENT EVENTS
Subsequent to September 30, 1998 the Company signed letters of intent with two
major cable associations in Poland, representing approximately 2.6 million
subscribers, for distribution of the Wizja TV programming package within the
cable networks of providers who are members of the associations. The Company
expects that the final agreements may be concluded by the year-end 1998.
11
<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
Until the limited launch of the Company's D-DTH business on July 1, 1998 and
subsequent full-scale launch on September 18, 1998, the Company's revenues
were derived entirely from its cable television business and programming
related thereto. The Company's revenue performance in the first nine months
of 1998 was generally strong with a 45% growth in revenues for the nine
months ended September 30, 1998 as compared to the nine months ended
September 30, 1997. This increase was caused mainly by organic growth in
subscribers via increased penetration and new network build-out, increases in
cable subscription rates, the launch of the Wizja TV programming package and
advertising sales.
Prior to June 1997, the Company's expenses were primarily incurred in
connection with its cable television business and programming related
thereto. Since June 1997, the Company has been incurring, in addition to
expenses related to its cable television and programming businesses, expenses
in connection with the operation of its D-DTH business and Wizja TV. The
Company commenced transmission of Wizja TV across its cable networks on June
5, 1998 and on its D-DTH system on a limited basis on July 1, 1998 and on a
full-scale basis on September 18, 1998.
12
<PAGE>
Although the Company's revenue performance was strong during the first nine
months of 1998, the Company generated an operating loss of $65.3 million for the
nine months ended September 30, 1998, primarily due to the significant costs
associated with the development and launch of the Company's D-DTH and
programming businesses, promotion of those businesses, and the development,
production and acquisition of programming for Wizja TV.
The Company divides operating expenses into (i) direct operating expenses, (ii)
selling, general and administrative expenses, (iii) depreciation and
amortization expenses and (iv) amortization of programming and broadcast rights.
Direct operating expenses consist of programming expenses, maintenance and
related expenses necessary to service, maintain and operate the Company's cable
systems, D-DTH programming platform, billing and collection expenses and
customer service expenses. Selling, general and administrative expenses consist
principally of administrative costs, including office related expenses,
professional fees and salaries, wages and benefits of non-technical employees,
advertising and marketing expenses, bank fees and bad debt expense. Depreciation
and amortization expenses consist of depreciation of property, plant and
equipment and amortization of intangible assets.
SEGMENT RESULTS OF OPERATIONS
The Company classifies its business into three fundamental areas: cable
television, digital direct-to-home television and programming, and corporate.
Information as to the operations of the Company in different business
segments is set forth below based on the nature of the services offered.
Although the D-DTH and Programming segment was not operational during 1997,
prior year financial data is exhibited for comparative purposes.
The following table presents the segment results of the Company's operations
for the three and nine months ended September 30, 1998 and 1997. In addition
to other operating statistics, the Company measures its financial performance
by EBITDA. The Company defines EBITDA to be net loss adjusted for interest
and investment income, depreciation and amortization, interest expense,
foreign currency gains and losses, equity in losses of affiliated companies,
income taxes, extraordinary items, non-recurring items (e.g., compensation
expense related to stock options), gains and losses from the sale of assets
other than in a normal course of business and minority interest. The items
excluded from EBITDA are significant components in understanding and
assessing the Company's financial performance. The Company believes that
EBITDA and related measures of cash flow from operating activities serve as
important financial indicators in measuring and comparing the operating
performance of media companies. EBITDA is not a U.S. GAAP measure of loss or
cash flow from operations and should not be considered as an alternative to
cash flows from operations as a measure of liquidity.
13
<PAGE>
SEGMENT RESULTS OF OPERATIONS
(unaudited, in thousands of USD)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Revenues Operating Loss EBITDA
- -------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 1998 1997 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cable.......................... 37,836 26,801 (12,060) (14,394) 3,259 (3,447)
D-DTH and Programming.......... 9,179 -- (46,080) (3,105) (44,470) (3,106)
Corporate and Other............ -- -- (7,202) (11,127) (6,345) (11,127)
Inter Segment Elimination(1)... (8,138) -- -- -- -- --
- -------------------------------------------------------------------------------------------------
Total.......................... 38,877 26,801 (65,342) (28,626) (47,556) (17,680)
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Revenues Operating Loss EBITDA
- -------------------------------------------------------------------------------------------------
Three Months Ended September 30, 1998 1997 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cable.......................... 13,265 10,390 (8,520) (4,229) (3,121) 195
D-DTH and Programming.......... 6,548 -- (11,961) (2,915) (11,036) (2,916)
Corporate and Other............ -- -- (2,125) (8,149) (1,592) (8,149)
Inter Segment Elimination(1)... (6,413) -- -- -- -- --
- -------------------------------------------------------------------------------------------------
Total.......................... 13,400 10,390 (22,606) (15,293) (15,749) (10,870)
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes $7,726 and $6,001 of Wizja programming charged to the Cable Segment
by the D-DTH and Programming Segment in the nine and three months ended
September 30, 1998, respectively.
Unless otherwise indicated, the separate business discussions that follow
provide comparisons of actual 1998 results with the actual results for 1997.
Cable
The Company operates the largest cable television system in Poland with
approximately 1,565,000 homes passed and approximately 887,000 total subscribers
as at September 30, 1998. The Company continues to realize subscriber growth
through a combination of increased penetration, new network build-out and
acquisitions. In addition, since the offering of the Wizja TV programming
package on its cable television networks beginning June 5, 1998, the Company has
realized a 1.9% increase in the number of cable 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 these objectives, 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 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 providing the Wizja TV programming
package, with its initial eleven channel primarily Polish-language
programming, to its cable subscribers. Since that date, the package has been
expanded to nineteen channels, seventeen of which are in the Polish language
and seventeen of which are exclusive to the Wizja TV package. Management
believes that this selection of high-quality primarily Polish-language
programming will provide it with a significant competitive advantage in
increasing its cable subscriber penetration rates.
14
<PAGE>
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 has increased the monthly price for the Basic Tier service to reflect
the increased channel availability, and premium channels such as Wizja 1 (which
is owned by the Company) and the HBO Poland service (a Polish-language version
of HBO's premium movie channel) 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 1998, the Company
focused its build-out primarily in areas where it could fill-in and expand
existing clusters. Additionally, the Company acquired several smaller cable
television operators.
The Company expects to realize additional operating efficiencies during 1998
and 1999 through the centralization of subscriber management and customer
support services in its Call Center. The Call Center became operational
during the first six months of 1998 for cable customers in certain regional
clusters and will continue to become operational for other cable customers as
expansion progresses. 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 its cable business.
Historically, the cable networks the Company has acquired have had lower
operating margins than the Company's existing cable networks. 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 necessary, rebuilding the acquired networks to the
Company's 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.
15
<PAGE>
An analysis of cable subscriber growth is presented in the table below:
<TABLE>
<CAPTION>
September 30, June 30, March 31, December 31, September 30,
1998 1998 1998 1997 1997
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Homes Passed 1,565,287 1,546,540 1,505,256 1,408,099 1,355,456
Basic Subscribers 658,584 660,067 627,713 606,630 566,246
Subscriber Growth (three month period)
Organic 64,049 57,007 26,868 50,487 32,298
Through Acquisitions (10,245)(1) 1,363 16,360 18,098 0
Chum (55,287)(2) (26,016) (22,145) (28,201) (12,130)
------------- ------------- ------------- ------------- -------------
Total net growth (1,483) 32,354 21,083 40,384 20,168
------------- ------------- ------------- ------------- -------------
Basic penetration 42.1% 42.7% 41.7% 43.1% 41.8%
Intermediate subscribers 42,538 43,204 48,077 29,653 26,732
------------- ------------- ------------- ------------- -------------
Basic and intermediate subscribers 701,122 703,271 675,790 636,283 592,978
Broadcast subscribers 186,334 167,859 154,860 132,618 124,934
------------- ------------- ------------- ------------- -------------
Total subscribers 887,456 871,130 830,650 768,901 717,912
------------- ------------- ------------- ------------- -------------
Premium subscribers - HBO 39,035 45,674 47,298 45,079 27,773
Premium penetration - HBO 5.9% 6.9% 7.5% 7.4% 4.9%
Basic revenue/basic sub/month $ 5.78 $ 5.29 $ 5.19 $ 4.99 $ 4.82
Total revenue/basic sub/month $ 6.70 $ 6.47 $ 6.42 $ 6.08 $ 5.79
</TABLE>
- -------------------------
(1) As part of the purchase of a minority interest in one of the
Company's cable systems, an isolated part of that
system was sold back to the previous owner.
(2) The increase in churn was mainly due to: increase in subscription
rates, seasonality and disconnecting non-paying customers.
CABLE TELEVISION REVENUE. Revenue increased $2.9 million or 27.9 % from $10.4
million in the three months ended September 30, 1997 to $13.3 million in the
three months ended September 30, 1998 and $11.0 million or 41.0% from $26.8
million in the first nine months of 1997 to $37.8 million in the first nine
months of 1998. This increase was primarily attributable to a 16.4% increase in
the number of basic subscribers from approximately 566,000 at September 30, 1997
to approximately 659,000 at September 30, 1998, as well as an increase in
monthly subscription rates. Approximately 27.7% of the increase in basic
subscribers was the result of acquisitions and new network build-out.
Revenue from monthly subscription fees represented 82.6% and 91.6% of cable
television revenue for the three months ended September 30, 1997 and 1998,
respectively. Monthly subscription revenue constituted 85.0% and 88.2% of cable
television revenue for the nine months ended September 30, 1997 and 1998,
respectively. Installation fee revenue for the three months ended September 30,
1998 decreased by 66.7%, from $0.6 million to $0.2 million and decreased by
57.9% for the nine months ended September 30, 1998, from $1.9 million to $0.8
million compared to the corresponding period in 1997. During the three months
ended September 30, 1998, the Company generated approximately $0.7 million of
additional premium subscription revenue as a result of providing the HBO Poland
service pay movie channel to cable subscribers as compared to $0.3 million for
the three months ended September 30, 1997. For the nine months ended September
30, 1997 and 1998 premium subscription revenue was $0.4 million and $2.4
million respectively.
16
<PAGE>
DIRECT OPERATING EXPENSES. Direct operating expenses increased $10.6 million,
or 441.7%, from $2.4 million for the three months ended September 30, 1997 to
$13.0 million for the three months ended September 30, 1998 and $15.1
million, or 201.3%, from $7.5 million for the nine months ended September 30,
1997 to $22.6 million for the nine months ended September 30, 1998,
principally as a result of the purchase of the Wizja TV programming package
from the Company's D-DTH and Programming segment and higher levels of
technical personnel and increased maintenance expenses associated with
recently acquired networks as well as the increased size of the Company's
cable television system. Direct operating expenses increased from 23.1% of
revenues for the three months ended September 30, 1997 to 98.2% of revenues
for the three months ended September 30, 1998 and increased from 28.0% of
revenues for the nine months ended September 30, 1997 to 59.7% of revenues
for the nine months ended September 30, 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $4.4 million or 56.4% from $7.8 million for
the three months ended September 30, 1997 to $3.4 million for the three months
ended September 30, 1998 and decreased $10.7 million or 47.1% from $22.7 million
for the nine months ended September 30, 1997 to $12.0 million for the nine
months ended September 30, 1998. A portion of this decrease was attributable to
non-recurring, non-cash compensation expense of approximately $2.1 million
recorded in the three months ended September 30, 1997 and approximately $9.4
million recorded in the nine months ended September 30, 1997 in connection with
stock options granted to certain employees.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense rose $1.0
million, or 22.7%, from $4.4 million for the three months ended September 30,
1997 to $5.4 million for the three months ended September 30, 1998 and $4.4
million, or 40.3%, from $10.9 million for the nine months ended September 30,
1997 to $15.3 million for the nine months ended September 30, 1998 principally
as a result of depreciation and amortization of additional cable television
systems and related goodwill acquired and the continued build-out of the
Company's cable networks. Depreciation and amortization expense as a percentage
of revenues decreased from 42.3% for the three months ended September 30, 1997
to 40.7% for the three months ended September 30, 1998 and from 40.7% for the
nine months ended September 30, 1997 to 40.5% for the nine months period ended
September 30, 1998.
Each of these factors contributed to an operating loss of $8.5 million and
$12.1 million for the three and the nine months ended September 30, 1998,
respectively compared to an operating loss of $4.2 million and $14.4 million
for the three and nine months ended September 30, 1997.
D-DTH and Programming
The principal objectives of the Company for the D-DTH and Programming segment
is to develop, acquire and distribute high-quality Polish-language
programming that can be commercially exploited throughout Poland through
D-DTH and cable television exhibition, and to develop and maximize
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 package under the brand name Wizja TV.
The Company began broadcasting to Poland, via the Astra satellite from its
transmission facilities in Maidstone, United Kingdom and retransmitting Wizja TV
across its cable television networks on June 5, 1998. The Company expanded its
distribution capacity by launching on July 1, 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. To
promote Wizja TV, the Company has launched a $20 million nationwide marketing
campaign which the Company believes is the largest single-year product launch
expenditure to date in Poland.
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 its D-DTH service has been supported
by the Company's development of Wizja TV, which the Company believes
addresses the strong demand for high-quality Polish-language programming in
Poland.
17
<PAGE>
The Wizja TV programming package includes 19 channels, of which 17 are
exclusive to the service and 17 are primarily in the Polish language, with
additional access to nearly 40 television channels and over 30 radio
channels. In September and October, the Company obtained the exclusive D-DTH
rights to offer the Discovery Channel, Animal Planet and Eurosport as part of
Wizja TV. Wizja TV's channel line-up also includes Atomic TV, a music video
channel owned and operated by the Company, the proprietary Wizja 1 channel (a
premium general entertainment channel), and the proprietary Wizja Pogoda
channel (a weather channel). The Company has signed a license agreement for
the exclusive distribution on D-DTH of the 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, which is under development, and eventually to introduce tiered
packages containing a variety of combinations of 21 or more channels.
Since the limited D-DTH launch of Wizja TV on July 1, 1998, demand for the
service has been strong with approximately 61,000 (as at November 3, 1998)
packages sold to retailers, exceeding the Company's expectations. At the same
date, the Company has installed 34,157 D-DTH subscribers. In September 1998,
the number of Philips outlets distributing the Wizja TV package increased
from 70 to 550 stores, and since November, approximately 1,224 such stores
have been distributing the Wizja TV package. Each store is staffed with
personnel specifically trained by the Company to provide information on the
Wizja TV packages offered by the Company. Installation personnel are also
trained to complete each customer's installation within 48 hours of order
placement.
The Company's Call Center has experienced a significant increase in activity
since the launch of Wizja TV. Calls to the center have reached and continue to
approximate 50,000 per day as compared to 50,000 per week prior to the launch.
In support of the Company's customer service goals, the response rate for calls
to the Call Center continues to approximate nine seconds, even with the increase
in the number of calls to the center. Management believes the customer
responsive training the Company has invested in the 150 Call Center personnel
contributes to the success of the Call Center and the D-DTH launch.
The Company currently distributes Atomic TV and intends to distribute the Wizja
TV programming package to third party cable operators in Poland on a
per-subscriber fee basis. Subsequent to September 30, 1998 the Company signed
letters of intent with two major cable associations in Poland, representing an
aggregate of approximately 2.6 million subscribers, for distribution of the
Wizja TV programming package within the cable networks to providers who are
members of the associations. The Company expects that the final agreement is to
be concluded by the year-end 1998. 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.
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 its initial public equity
offering and its July 1998 Notes 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 consumer price that is significantly decreased by promotional
incentives, in order to drive subscriber penetration.
D-DTH AND PROGRAMMING REVENUE. D-DTH and programming revenue amounted to $6.5
million and $9.2 million for the three and nine months ended September 30,
1998, respectively. Since the Company only commenced the broadcast of its
Wizja TV programming package over its cable systems on June 5, 1998 and
through its D-DTH service in July 1998, no revenue related to this segment
existed in 1997.
18
<PAGE>
Revenue from monthly subscription fees, after elimination of inter-segment
revenue from Poland Communications, Inc., a wholly owned subsidiary of the
Company ("PCI"), represented 29.8% of D-DTH revenue for the nine months ended
September 30, 1998. Advertising revenue for the nine months ended September
30, 1998 represented 5.8% of D-DTH revenue after the inter-segment
elimination.
Revenue from the supply of the Wizja TV programming package to the Company's
cable systems, which eliminates on consolidation, represented 97.9% and 88.7% of
D-DTH revenue for the three months and the nine months ended September 30, 1998,
respectively.
DIRECT OPERATING EXPENSES. Direct operating expenses increased $2.0 million,
or 142.9%, from $1.4 million for the three months ended September 30,1997 to
$3.4 million for the three months ended September 30,1998, and increased
$19.1 million, or 1,364.3% from $1.4 million to $20.5 million for the nine
months ended September 30, 1997 and 1998, respectively. These increases
principally were the 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"), the $5 million payment
to Philips Business Electronics B.V. to compensate it for costs incurred as a
result of the temporary 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 amounted to 52.3% of revenues for the three months
ended September 30, 1998 and to 222.8% of revenues for the nine months ended
September 30, 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $4.5 million or 300.0% from $1.5 million for
the three months ended September 30, 1997 to $6.0 million for the three months
ended September 30, 1998 and increased $19.9 million, or 1,170.6% from $1.7
million to $21.6 million for the nine months ended September 30, 1997 and 1998,
respectively. As a percentage of revenue, selling, general and administrative
expenses amounted to 92.3% for the three months ended September 30,1998 and to
approximately 234.8% for the nine months ended September 30, 1998. The increase
in selling, general and administrative expenses over the corresponding 1997
period was attributable mainly to an increase in sales and marketing expenses
incurred in preparation for launch and operation 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. The Company incurred $0.7 million and $1.6
million of depreciation and amortization charges of D-DTH tangible assets in the
three and nine months ended September 30, 1998. Depreciation and amortization
expense as a percentage of revenues amounted to 10.8% in the three months and to
24.6% in the nine months ended September 30, 1998.
AMORTIZATION OF PROGRAMMING AND BROADCAST RIGHTS. The Company incurred $1.8
million and $3.4 million of amortization charges of capitalized programming and
broadcast rights for the three and nine months ended September 30, 1998.
Amortization of programming and broadcast rights as a percentage of revenue
amounted to 27.7% and 52.3% in the three and nine months ended September 30,
1998.
Each of these factors contributed to an operating loss which amounted to
$12.0 million and $46.1 million for the three and the nine months ended
September 30, 1998, respectively compared to an operating loss of $2.9
million and $3.1 million for the three and nine months ended September 30,
1997.
Corporate and Other
Corporate and Other consists of corporate overhead costs. The Company continues
to evaluate opportunities for improving its operations and reducing its cost
structure. Corporate expenses amounted to $7.2 million and $2.1 million in the
nine and three months ended September 30, 1998 as compared to $ 11.1 million and
$8.1 million in corresponding periods in 1997. Corporate expenses for the nine
months ended September 30, 1997 included a portion of the non-cash compensation
expense of $5.8 million and $8.7 million, respectively related to the options to
purchase shares granted to key executives. Corporate expenses for the nine
months ended September 30, 1998 included $4.1 million costs paid for Wizja TV
brand name consulting and legal fees and salaries.
19
<PAGE>
NON-OPERATING RESULT
INTEREST EXPENSE. Interest expense increased $4.5 million, or 196%, from $2.3
million for the three months ended September 30, 1997 to $6.8 million for the
three months ended September 30, 1998. Interest expense increased $3.9
million, or 39.4%, from $9.9 million for the nine months ended September 30,
1997 to $13.8 million for the nine months ended September 30, 1998 mainly as
a result of the accretion of interest of the $252 million aggregate principal
amount at maturity of the Company's 14 1/2% Senior Discount Notes due 2008,
which were issued on July 14, 1998 (the "Notes").
INTEREST AND INVESTMENT INCOME. Interest and investment income decreased $0.5
million, or 27.8%, from $1.8 million for the three months ended September
30,1997 to $1.3 million for the three months ended September 30, 1998 and
decreased $1.1 million or 28.2%, from $3.9 million to $2.8 million for the nine
months ended September 30, 1998, primarily due to reduction of cash balances
resulting from the increased payments and expenses described above.
EQUITY IN PROFITS OF AFFILIATED COMPANIES. The Company recorded $0.9 million
and $1.6 million of equity in profits of affiliated companies for the three
and nine months ended September 30, 1998. The profit relates to the Company's
50% investment in Twoj Styl, a publishing company.
FOREIGN EXCHANGE LOSS, NET. For the three months ended September 30, 1998 and
1997, foreign exchange loss amounted to $0.4 million. For the nine months ended
September 30, 1998 and 1997 foreign exchange loss amounted to $0.4 million and
to $0.9 million, respectively.
MINORITY INTEREST. Minority interest in subsidiary loss was $0.1 million for the
three months ended September 30, 1998, compared to minority interest in
subsidiary income of $0.3 million for the corresponding period in 1997.
NET LOSS. For the three months ended September 30, 1997 and 1998, the Company
had net losses of $16.8 million and $27.4 million, respectively. For the nine
months ended September 30, 1997 and 1998, the Company had net losses of $33.6
million and $75.7 million. These losses were the result of the factors discussed
above.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS. Net loss applicable to common
stockholders decreased from a loss of $48.6 million for the three months ended
September 30, 1997 to a loss of $27.4 million for the three months ended
September 30,1998 due to the excess of consideration paid for preferred stock
over the carrying amount of those shares of $33.8 million and the factors
discussed above. For the three months ended September 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.
On July 14, 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 is funding, 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 by management.
The Company had negative cash flows from operating activities for the nine
months ended September 30, 1997 and 1998 of $15.8 million and $55.4 million,
respectively, due to the significant operating costs associated with the
development and launch of its D-DTH service and the Wizja TV programming
package.
20
<PAGE>
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 $67.9
million and $22.4 million in the nine months and the three months ended
September 30, 1998 and $26.5 million and $11.2 million in the corresponding
periods in 1997. 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 purchase of fixed assets related to the
development and launch of its D-DTH service and the Wizja TV programming
package.
Cash used for the acquisition of subsidiaries, net of cash received, was $26.6
million and $10.8 million for the nine months ended September 30, 1998 and 1997,
respectively. The Company spent approximately $4.8 million and $5.8 million and
in the nine months ended September 30, 1997 and 1998, respectively, to upgrade
major acquired networks to meet PCI's technical standards.
At September 30, 1998, the Company was committed to pay at least approximately
$388 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 $217 million was committed through the
end of 1999. Subsequent to September 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 $4.7 million in
guaranteed payments over the next seven years. These payments may increase if
the Company enters into additional programming agreements.
Pursuant to the indentures governing the Senior Discount 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 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. The Company is in compliance
with these covenants.
The Company believes that, in addition to the net proceeds from the sale of
the Senior Discount 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 associated programming package which 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 Senior
Discount 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.
21
<PAGE>
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 rate of inflation for the nine months
period ended September 30, 1998 was 6.7%. The exchange rate for the zloty has
stabilized and the rate of devaluation of the zloty has generally decreased
since 1991. 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
The Company's cable television, D-DTH and programming operations are dependent
upon computer systems and other technological devices with imbedded
microprocessor chips that are intended to utilize dates and process data beyond
December 31, 1999. In January 1997, the Company developed a plan to address the
impact that potential year 2000 problems may have on Company operations and to
implement necessary changes to address such problems (the "Y2K Plan"). During
the course of the development of its Y2K Plan, the Company has identified
certain critical operations, which need to be year 2000 compliant for the
Company to operate effectively. These critical operations include accounting and
billing systems, customer service and service delivery systems, and field and
headend devices.
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 system and an agreement to purchase specialized billing
software for the Company's new customer service and billing center. The vendors
of new accounting system and of the billing software have confirmed to the
Company that these products are year 2000 compliant. The Company has completed
the testing phase of the new accounting system, and the implementation phase is
planned to be completed by the end of 1998. The Company has implemented the new
billing software for D-DTH subscribers and expects implementation of the billing
software to be completed for the majority of its cable subscribers by the end of
1999.
The Company believes that its most significant year 2000 risk is its dependency
upon third party programming, software, services and equipment, because the
Company does not have the ability to control third parties in their assessment
and remediation procedures for potential year 2000 problems. Should these
parties not be prepared for year 2000 conversion, their products or services may
fail and may cause interruptions in, or limitations upon, the Company's
provision of the full range of its D-DTH and/or cable service to its customers.
In an effort to prevent any such interruptions or limitations, the Company is in
the process of communicating with each of its material third party suppliers of
programming, software, services and equipment to determine the status of their
year 2000 compliance programs. The Company expects to complete this process by
30 September 1999, and it anticipates that all phases of its Y2K Plan will be
completed by 31 December 1999.
The Company has not yet developed a contingency plan to address the situation
that may result in the Company or its third party suppliers are unable to
achieve year 2000 compliance with regard to any products or services utilized in
the Company's operations. The Company does not intend to decide on the
development of such a contingency until has gathered all of the relevant Year
2000 compliance data from its third party suppliers.
22
<PAGE>
The Company has not yet determined the full cost of its Y2K Plan and its related
impact on the financial condition of the Company. The Company has to date not
incurred any replacement and remediation costs for equipment or systems as a
result of year 2000 non-compliance. Rather, due to the rapid growth and
development of its cable system and its D-DTH service, the Company had made
substantial capital investments in equipment and systems for reasons other than
year 2000 concerns. The total cost of the Company's new accounting system and
billing software package is estimated to be approximately $2,400,000.
The Company believes that any year 2000 compliance issues it may face can be
remedied without a material financial impact on the Company, but no assurance
can be made in this regard until all of the data has been gathered from the
Company's third party suppliers. At this date the Company cannot predict the
financial impact on its operations if year 2000 problems are caused by products
or services supplied to the Company by such third parties.
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 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.
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.
23
<PAGE>
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.
24
<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS:
On July 14, 1998, the Company sold 252,000 Units to qualified institutional
buyers pursuant to an exemption under Rule 144A under the Securities Act of
1933, as amended (the "Securities Act"). Each Unit consisted of $1,000 principal
amount at maturity of the Company's 14 1/2 % Senior Discount Notes due 2008
(each a "Note") and four warrants (each a "Warrant"). Each Warrant initially
entitles the holder thereof to purchase 1.81 shares of the Company's common
stock ("Warrant Shares"), 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. Net proceeds to the Company after
deducting initial purchasers' discount and offering expenses were approximately
$120,000,000.
The Company subsequently completed an exchange offer whereby the Company offered
to exchange its 14 1/2 % Series B Senior Discount Notes due 2008 (each an
"Exchange Note") for each of its outstanding Notes. The form and terms of the
Exchange Notes are substantially the same as the form and terms of the Notes
except that the Exchange Notes have been registered under the Securities Act.
The Exchange Notes were registered under the Securities Act on a registration
statement on Form S-4, which registration statement was declared effective on
August 11, 1998. The Company also registered the Warrant and the Warrant Shares
under the Securities Act on a registration statement on form S-3, which
registration statement was declared effective on October 9, 1998.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION:
None.
25
<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 July 15, 1998, reporting completion of
a debt offering to qualified institutional buyers with gross proceeds of
approximately $125 million, pursuant to Rule 144A of the Securities Act of 1993.
The Company filed a report on Form 8-K on August 10, 1998 reporting its
unaudited financial results for 1998's second quarter.
The Company filed a report on Form 8-K on September 21, 1998 reporting extension
of its offer to exchange its 14 1/2 % Series B Senior Discount Notes Due 2008,
which have been registered under the Securities Act of 1933, as amended.
26
<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: November 16, 1998
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS INCLUDED IN THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 67,888
<SECURITIES> 0
<RECEIVABLES> 12,143
<ALLOWANCES> 1,657
<INVENTORY> 9,530
<CURRENT-ASSETS> 86,962
<PP&E> 215,185
<DEPRECIATION> 45,467
<TOTAL-ASSETS> 374,991
<CURRENT-LIABILITIES> 34,658
<BONDS> 259,497
0
0
<COMMON> 333
<OTHER-SE> 80,474
<TOTAL-LIABILITY-AND-EQUITY> 374,991
<SALES> 0
<TOTAL-REVENUES> 38,877
<CGS> 0
<TOTAL-COSTS> 104,219
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (891)
<INTEREST-EXPENSE> 13,814
<INCOME-PRETAX> (75,229)
<INCOME-TAX> 496
<INCOME-CONTINUING> (75,725)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (75,725)
<EPS-PRIMARY> (2.27)
<EPS-DILUTED> (2.27)
</TABLE>
