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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, 1999.
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, 1999, was:
Common Stock 1,000
================================================================================
<PAGE>
@ ENTERTAINMENT, INC.
FORM 10-Q INDEX
FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PAGE NO.
PART I FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
@ Entertainment
Consolidated Balance Sheets....................................... 3-4
Consolidated Statements of Operations.............................. 5
Consolidated Statements of Comprehensive Loss...................... 6
Consolidated Statements of Cash Flows.............................. 7
Notes to Consolidated Financial Statements........................ 8-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................... 15-26
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.................................................. 26-27
PART II OTHER INFORMATION
Item 1. Legal Proceedings..................................................... 27
Item 2. Changes in Securities and Use of Proceeds............................. 27-28
Item 3. Defaults Upon Senior Securities....................................... 28
Item 4. Submission of Matters to a Vote of Security Holders................... 28
Item 5. Other Information..................................................... 29
Item 6. Exhibits and Reports on Form 8-K...................................... 29
</TABLE>
<PAGE>
@ ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
(NOTE 2) (NOTE 2)
------------------ ---------------
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------------ ---------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 23,809 $ 13,055
Accounts receivable, net of allowance for doubtful accounts
of $2,703,000 in 1999 and $1,095,000 in 1998 9,690 7,408
Programming and broadcast rights 15,598 9,030
Other current assets 17,507 21,063
------------------ ---------------
Total current assets 66,604 50,556
------------------ ---------------
Property, plant and equipment:
Cable television systems assets 115,945 175,053
D-DTH equipment 52,659 68,419
Construction in progress 5,918 2,739
Vehicles 1,917 2,792
Other 11,815 16,119
------------------ ---------------
188,254 265,122
Less accumulated depreciation (4,687) (52,068)
------------------ ---------------
Net property, plant and equipment 183,567 213,054
Inventories 6,129 8,869
Intangibles, net (note 2) 932,056 43,652
Investments in affiliated companies 20,033 19,956
Other assets - 12,287
------------------ ---------------
Total assets $ 1,208,389 $ 348,374
================== ===============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
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@ ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
(NOTE 2) (NOTE 2)
------------------ ----------------
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------------ ----------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 29,393 $ 40,464
Accrued interest 5,348 2,140
Deferred revenue 3,058 4,366
Income taxes payable 3,795 3,794
Current portion of notes payable 150,638 6,500
------------------ ----------------
Total current liabilities 192,232 57,264
------------------ ----------------
Notes payable (notes 2 and 7) 306,999 257,454
------------------ ----------------
Total liabilities 499,231 314,718
------------------ ----------------
Commitments and contingencies (notes 8 and 9)
Stockholder's equity:
Common stock, $.01 par value; 70,000,000 shares authorized,
shares issued and outstanding 1,000 in 1999
and 33,310,000 in 1998 (note 2) - 333
Paid-in capital (note 2) 811,282 237,954
Accumulated other comprehensive loss (53,681) (467)
Accumulated deficit (48,443) (204,164)
------------------ ----------------
Total stockholders' equity 709,158 33,656
------------------ ----------------
Total liabilities and stockholders' equity $ 1,208,389 $ 348,374
================== ================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
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@ ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR (NOTE 2)
(NOTE 2)
---------------- ----------------------------------------------------------------
TWO MONTHS THREE MONTHS NINE MONTHS
ENDED ONE MONTH ENDED SEVEN MONTHS ENDED
SEPTEMBER 30, ENDED JULY 31, SEPTEMBER 30 ENDED JULY 31, SEPTEMBER 30,
1999 1999 1998 1999 1998
---------------- ------------------ --------------- -------------- ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues $ 14,742 $ 7,085 $ 13,400 $ 46,940 $ 38,877
Operating expenses:
Direct operating expenses 18,277 11,777 18,178 70,778 46,435
Selling, general and administrative expenses 13,018 13,825 10,971 51,034 39,998
Depreciation and amortization 20,942 1,228 6,857 23,927 17,786
---------------- ---------------- ---------------- ------------- -------------
Total operating expenses 52,237 26,830 36,006 145,739 104,219
Operating loss (37,495) (19,745) (22,606) (98,799) (65,342)
Interest and investment income 323 410 1,266 2,823 2,811
Interest expense (9,490) (4,441) (6,812) (28,818) (13,814)
Equity in profits/(losses) of affiliated
companies 577 (474) 911 (1,004) 1,632
Foreign exchange loss, net (2,355) (199) (351) (2,188) (399)
---------------- ---------------- ---------------- ------------- -------------
Loss before income taxes and
minority interest (48,440) (24,449) (27,592) (127,986) (75,112)
Income tax expense (3) (3) 66 (30) (496)
Minority interest - - 90 - (117)
---------------- ---------------- ---------------- ------------- -------------
Net loss (48,443) (24,452) (27,436) (128,016) (75,725)
Accretion of redeemable preferred stock - (418) - (2,436) -
---------------- ---------------- ----------------- ------------- -------------
Net loss applicable to holders of common stock $ (48,443) $ (24,870) $ (27,436) $ (130,452) $ (75,725)
================ ================ ================= ============= =============
Basic and diluted net loss per common share
(note 5) N/A $ (0.73) $ (0.82) $ (3.90) $ (2.27)
================ ================ ================= ============= =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
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@ ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR (NOTE 2)
(NOTE 2)
--------------- ---------------------------------------------------------------------------
TWO MONTHS THREE MONTHS NINE MONTHS
ENDED ONE MONTH ENDED SEVEN MONTHS ENDED
SEPTEMBER 30, ENDED JULY 31, SEPTEMBER 30, ENDED JULY 31, SEPTEMBER
1999 1999 1998 1999 30, 1998
----------------- ------------------ ------------------ ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Net loss $ (48,443) $ (24,452) $ (27,436) $ (128,016) $ (75,725)
Other comprehensive income/(loss):
Translation adjustment $ (53,681) $ 2,136 $ (4,771) $ (23,819) $ (3,436)
----------------- ------------------ ------------------ ---------------- ----------------
Comprehensive loss $(102,124) $ (22,316) $ (32,207) $ (151,835) $ (79,161)
================= ================== ================== ================ ================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
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@ ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR (NOTE 2)
(NOTE 2)
------------- ----------------------------------------
TWO MONTHS NINE MONTHS
ENDED SEVEN MONTHS ENDED
SEPTEMBER 30, ENDED JULY 31, SEPTEMBER 30,
1999 1999 1998
------------- ------------------ -------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (48,443) $ (128,016) $ (75,725)
Adjustments to reconcile net loss to
net cash used in operating activities:
Minority interest - - 117
Depreciation and amortization 20,942 23,927 17,786
Amortization of notes payable discount and issue costs 6,892 19,209 3,252
Equity in (profits) / losses of affiliated companies (577) 1,004 (1,632)
Other (269) 619 1,338
Changes in operating assets and liabilities:
Accounts receivable 285 (2,651) (7,280)
Other current assets (3,429) 6,985 (1,348)
Programming and broadcast rights (3,191) (3,378) (7,017)
Accounts payable (6,192) 403 9,267
Income taxes payable - 85 677
Amounts due to affiliates - - 691
Deferred revenue (504) 1,103 2,008
Other current liabilities (260) 3,468 2,455
---------------- --------------- ---------------------
Net cash used in operating activities (34,746) (77,242) (55,411)
---------------- --------------- ---------------------
Cash flows from investing activities:
Construction and purchase of property, plant and
equipment (3,716) (24,034) (67,871)
Other investments (237) (1,753) (13,483)
Purchase of intangibles (145) - (40)
Purchase of subsidiaries, net of cash received - (6,860) (26,637)
---------------- --------------- ---------------------
Net cash used in investing activities (4,098) (32,647) (108,031)
---------------- --------------- ---------------------
Cash flows from financing activities:
Proceeds from issuance of notes payable - 109,755 131,600
Proceeds from issuance of preferred stock and
warrants - 48,295 -
Proceeds from issuance of common stock 146 6,447 -
Costs to obtain loans - (5,156) (5,961)
---------------- --------------- ---------------------
Net cash provided by financing activities 146 159,341 125,639
---------------- --------------- ---------------------
Net (decrease)/increase in cash and cash
equivalents (38,698) 49,452 (37,803)
Cash and cash equivalents at beginning of period 62,507 13,055 105,691
---------------- --------------- ---------------------
Cash and cash equivalents at end of period $ 23,809 $ 62,507 $ 67,888
================ =============== =====================
Supplemental cash flow information:
Cash paid for interest $ 365 $ 7,304 $ 6,573
================ =============== =====================
Cash paid for income taxes $ 53 $ 47 $ 511
================ =============== =====================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
7
<PAGE>
@ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
1. BASIS OF PRESENTATION
The information furnished by @Entertainment, Inc. and its subsidiaries
("@Entertainment" or the "Company") has been prepared in accordance with United
States generally accepted accounting principles ("U.S. GAAP") 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, statements
of comprehensive loss 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, 1999. 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 1998 Annual Report on Form 10-K filed with the
SEC (the "1998 Annual Report"). The interim financial results are not
necessarily indicative of the results of the full year.
2. CONSUMMATION OF UPC TENDER OFFER AND MERGER
On June 2, 1999, the Company entered into an Agreement and Plan of Merger with
United Pan-Europe Communications N.V. ("UPC"), whereby UPC and its wholly-owned
subsidiary, Bison Acquisition Corp. ("Bison"), initiated a tender offer to
purchase all of the outstanding shares of the Company in an all cash transaction
valuing the Company's shares of common stock at $19.00 per share.
The tender offer, initiated pursuant to the Agreement and Plan of Merger with
UPC and Bison, closed at 12:00 midnight on August 5, 1999. On August 6, 1999,
Bison reported that it had accepted for payment a total of 33,701,073 shares
of the Company's common stock (including 31,208 shares tendered pursuant to
notices of guaranteed delivery) representing approximately 99% of the
Company's outstanding shares of common stock (the "Acquisition"). In addition
UPC acquired 100% of the outstanding Series A and Series B 12% Cumulative
Preference Shares of the Company and acquired all of the outstanding warrants.
Also on August 6, 1999, Bison was merged with and into the Company with the
Company continuing as the surviving corporation (the "Merger"). Accordingly,
the Company became a wholly-owned subsidiary of UPC. UnitedGlobalCom, Inc. is
the majority stockholder of UPC. The Company believes that a Change of
Control occurred on August 6, 1999 as a result of the Acquisition and Merger.
@Entertainment prior to the Acquisition, is herein referred to as the
"Predecessor" while the Company after the Acquisition is referred to as the
"Successor".
The Acquisition was accounted for under the purchase method of accounting,
with all of the purchase accounting adjustments "pushed-down" to the
consolidated financial statements of @ Entertainment. Accordingly, the
purchase price was allocated to the underlying assets and liabilities based
upon their estimated fair values and any excess to goodwill. The Company
restated some of its assets and liabilities at August 1, 1999, the date
closest to the date of the effective merger. At this date the Notes of the
Company and Poland Communications, Inc. ("PCI") were restated by $65.5
million and deferred financing costs of $10.3 million were written down to
zero. The consideration paid by UPC for all shares outstanding, warrants and
options totaled $811.3 million. At this time the Company had negative net
assets of approximately $51.3 million. As a result of the above
considerations, UPC realized goodwill of approximately $938.8 million. As a
result of the Acquisition, UPC pushed down its basis to the Company
establishing a new basis of accounting as of the acquisition date.
The following pro forma condensed consolidated results for the nine months ended
September 30, 1999 and 1998 give effect to the Acquisition of @ Entertainment as
if it had occurred at the beginning of the periods presented. This pro forma
condensed consolidated financial information does not purport to represent what
the Company's results would actually have been if such transaction had in fact
occurred on such date. The pro forma adjustments are based upon currently
available information and upon certain assumptions that management believes are
reasonable.
8
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<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
-----------------------------------------------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
<S> <C> <C> <C> <C>
Service and other revenue $ 61,682 $ 61,682 $ 38,877 $ 38,877
================= =============== =============== ==============
================= =============== =============== ==============
Net loss $ (176,459) $ (205,033) $ (75,725) $(120,587)
================= =============== =============== ==============
</TABLE>
Pursuant to the Certificate of Ownership and Merger filed by UPC with the
Secretary of State of Delaware on August 6, 1999, the Certificate of
Incorporation of @ Entertainment, Inc. was amended and restated such that the
total authorized capital stock of @ Entertainment, Inc. is 1,000 shares of
common stock, par value $ .01 per share.
3. OFFER TO REPURCHASE NOTES
Pursuant to the terms of the indentures covering each of the @Entertainment
Notes and the Poland Communications, Inc. ("PCI") Notes (as defined
hereinafter), which provided that, following a Change of Control (as defined
therein), each holder of @Entertainment Notes and PCI Notes had the right, at
such holder's option, to require the Company and PCI, respectively to offer
to repurchase all or a portion of such holder's @Entertainment Notes and PCI
Notes at the Repurchase Price. @Entertainment and PCI made offers to
repurchase (the "Offers") from the holders of the Notes @Entertainment's
14 1/2% Series B Senior Discount Notes due 2008, 14 1/2% Senior Discount Notes
due 2008, Series C Senior Discount Notes due 2008, 14 1/2% Series B Senior
Discount Notes due 2009, and 14 1/2% Senior Discount Notes due 2009
(collectively, the "@Entertainment Notes") and PCI's 9 7/8% Series B Senior
Notes Due 2003 and 9 7/8% Senior Notes Due 2003 (collectively, the "PCI
Notes").The Offers expired at 12:01 PM, New York City time, on November 2,
1999.
The Company was required to offer to repurchase the @Entertainment Notes at
101% of their accreted value per $1,000 principal amount of @Entertainment
Notes at maturity on the Expiration Date plus accrued and unpaid interest and
PCI was required to offer to repurchase the PCI Notes at their purchase price
of $1,010 per $1,000 principal amount of the PCI Notes, which is 101% per
$1,000 principal amount of the PCI. As of August 1, 1999, the Company had
$376,943,000 aggregate principal amount at maturity of @Entertainment Notes
outstanding and PCI had $129,668,000 aggregate principal amount at maturity
of PCI Notes outstanding. Pursuant to its repurchase offer, the Company has
purchased $49,139,000 aggregate principal amount of @Entertainment Notes for
an aggregate price of $26,455,014, and PCI has purchased $113,237,000
aggregate principal amount of PCI Notes for an aggregate price of
$114,369,370.
4. RECLASSIFICATIONS
Certain amounts have been reclassified in the prior period unaudited
consolidated financial statements to conform to the 1999 unaudited consolidated
financial statement presentation.
5. PER SHARE INFORMATION
Basic net loss per share has been computed by dividing net loss attributable to
common stockholders by the weighted average number of common shares outstanding
during the period. The effect of potential common shares (stock options and
warrants outstanding) is antidilutive; accordingly, dilutive net loss per share
is the same as basic net loss per share.
The following table provides a reconciliation of the numerator and denominator
in the net loss per share calculation:
9
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<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR (NOTE 2)
(NOTE 2)
------------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
TWO MONTHS ENDED SEVEN MONTHS ENDED
ENDED SEPTEMBER ONE MONTH ENDED SEPTEMBER 30, ENDED JULY 31, SEPTEMBER 30,
30, 1999 JULY 31, 1999 1998 1999 1998
------------------------------------------------------------------------------
---------------- --------------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Net loss attributable to common stockholders
(in thousands) $ (48,443) $ (24,870) $ (27,436) $ (130,452) $ (75,725)
Basic weighted average number of common shares
outstanding (in thousands) N/A 33,889 33,310 33,459 33,310
Net loss per share-basic and diluted $ N/A $ (0.73) $ (0.82) $ (3.90) $ (2.27)
================ =============== =============== ============== =============
</TABLE>
6. D-DTH RECEPTION SYSTEMS
Between April 1, and November 8, 1999 the Company was selling digital
direct-to-home ("D-DTH") reception systems to customers. Prior to April 1,
1999, the systems were leased to customers, classified as fixed assets and
depreciated over 5 years. Due to this change, the Company classified
reception systems as inventory. As a result of the change the Company wrote
down the value of all reception systems acquired after April 1, 1999 to their
net realizable value. The effect of the change was to increase operating loss
by approximately $2,987,000, and $660,000 for the two months ended September
30, 1999 and one month ended July 31, 1999, respectively and approximately
$22,878,000 for the seven months ended September 30, 1999. Due to the change
of ownership of the Company in connection with the merger, beginning November
8, 1999 the Company returned to leasing its D-DTH reception systems.
7. THE JANUARY 1999 OFFERINGS
On January 22, 1999, the Company sold 256,800 units (collectively, the "Units")
to two initial purchasers pursuant to a purchase agreement, each Unit consisting
of $1,000 principal amount at maturity of 14 1/2% Senior Discount Notes (the
"Notes") due 2009 and four warrants (each a "Warrant"), each initially entitling
the holder thereof to purchase 1.7656 shares of common stock, par value $0.01
per share at an exercise price of $9.125 per share, subject to adjustment. The
Notes were issued at a discount to their aggregate principal amount at maturity
and, together with the Warrants generated gross proceeds to the Company of
approximately $100,003,000.
The Notes are unsubordinated and unsecured obligations. Cash interest on the
Notes will not accrue prior to February 1, 2004. Thereafter cash interest will
accrue at a rate of 14.5% per annum on the principal amount and will be payable
semiannually in arrears on August 1 and February 1 of each year, commencing
August 1, 2004. The Notes will mature on February 1, 2009. At any time prior to
February 1, 2002, the Company may redeem up to a maximum of 35% of the
originally issued aggregate principal amount at maturity of the Notes at a
redemption price equal to 117.5% of the accreted value thereof at the redemption
date, plus accrued and unpaid interest, if any, to the date of redemption with
some or all of the net cash proceeds of one or more public equity offerings;
provided, however, that not less than 65% of the originally issued aggregate
principal amount at maturity of the Notes remain outstanding immediately after
giving effect to such redemption.
The Warrants initially entitled the holders thereof to purchase 1,813,665 shares
of common stock, representing, in the aggregate, approximately 5% of the
outstanding common stock on a fully-diluted basis (using the treasury stock
method) immediately after giving effect to the Units offering and the Company's
offering of Series A 12% Cumulative Preference Shares and Series B 12%
Cumulative Preference Shares. In July and August 1999 certain warrant holders
executed their right to purchase common stock (see note 11). The remaining
unexercised Warrants were redeemed in connection with the Merger.
On January 20, 1999, the Company sold $36,001,000 aggregate principal amount at
maturity of Series C Notes (collectively the "Series C Notes") due 2008. The
Series C Notes are senior unsecured obligations of the Company ranking PARI
PASSU in right of payment with all other existing and future unsubordinated
obligations of the Company. The Series C Notes were issued at a discount to
their aggregate principal amount at maturity and generated gross proceeds to the
Company of approximately $9,815,000. Cash interest on the Series C Notes will
not accrue prior to July 15, 2004. Thereafter cash interest will accrue at a
rate of 7.0% per annum on the principal amount at maturity, and will be payable
semiannually in arrears on July 15 and January 15 of each year commencing
January 15, 2005. The Series C Notes will mature on July 15, 2008.
Pursuant to the Indentures governing the Notes and Series C Notes, 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 issuance of
10
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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) consolidations, mergers and sales of assets. The
Company is in compliance with these covenants.
The Company filed a registration statement on Form S-4 with the SEC in
connection with an offer to exchange the Notes for 14 1/2% Series B Senior
Discount Notes due 2009 (the "Exchange Notes"). The registration statement was
declared effective on May 13, 1999. The Warrants and shares of common stock
underlying the Warrants issued in the Units offering were registered on a
registration statement on Form S-3. This registration statement was declared
effective on July 2, 1999.
On January 22, 1999, the Company sold 50,000 (45,000 Series A and 5,000 Series
B) 12% Cumulative Redeemable Preference Shares (collectively the "Preference
Shares") and 50,000 Warrants (each a "Preference Warrant") each Preference
Warrant initially entitling the holders thereof to purchase 110 shares of common
stock, par value $0.01 per share, of the Company at an exercise price of $10.00
per share, subject to adjustment. The Preference Shares together with the
Preference Warrants generated gross proceeds to the Company of $50,000,000.
The Series A 12% Cumulative Redeemable Preference Shares, the Series A 12%
Cumulative Redeemable Preference Shares and the Preference Warrants issued in
the Preference offering were registered on a registration statement on Form S-3.
This registration statement was declared effective on July 2, 1999.
In the Tender Offer, initiated pursuant to the Agreement and Plan of Merger with
UPC and Bison, UPC acquired 100% of the outstanding Series A and Series B 12%
Cumulative Preference Shares, and the Preference Warrants were redeemed in
connection with the Merger.
8. 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 D-DTH and cable systems. The agreements have
terms which range from one to seven years and require that the license fees be
paid either at a fixed amount payable at the time of execution or based upon a
guaranteed minimum number of subscribers connected to the system each month. At
September 30, 1999, the Company had an aggregate minimum commitment in relation
to these agreements of approximately $238,837,000 over the next seven years,
approximating $15,612,000 for the remainder of 1999, $58,753,000 in 2000,
$57,377,000 in 2001, $47,852,000 in 2002, $30,707,000 in 2003 and $28,536,000 in
2004 and thereafter.
PURCHASE COMMITMENTS
As of September 30, 1999, the Company had an aggregate minimum commitment toward
the purchase of the D-DTH reception systems from Philips Business Electronics
B.V. of approximately $88,576,000 by June 30, 2000.
9. 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.
ARBITRATION RELATING TO TELEWIZYJNA KORPORACJA PARTYCYPACYJNA
On April 17, 1998, the Company signed a binding letter of intent with Telewizyna
Korporacja Partycypacyjna ("TKP"), the parent company of Canal+ Polska, which
provided for bringing together the Company's Wizja TV programming platform and
the Canal+ Polska premium pay television channel and for the joint development
and operation of a D-DTH service in Poland. The establishment of the joint
venture was subject to the execution of definitive agreements, regulatory
approvals and certain other closing conditions.
The definitive agreements were not agreed and executed by the parties by the
date set forth in the letter of intent (the "Signature Date"). Therefore, the
Company terminated the letter of intent on June 1, 1998. TKP and its
shareholders have informed the Company that they believe the Company did not
have the right to terminate the letter of intent.
Under the terms of the letter of intent, TKP is obligated to pay the Company a
$5 million break-up fee within 10 days of
11
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the Signature Date if the definitive agreements were not executed by the
Signature Date, unless the failure to obtain such execution was caused by the
Company's breach of any of its obligations under the letter of intent. If there
was any such breach by the Company, the Company would be obligated to pay TKP
$10 million. However, if any breach of the letter of intent by TKP caused the
definitive agreements not to be executed, TKP would be obligated to pay the
Company a total of $10 million (including the $5 million break-up fee). In the
event that TKP fails to pay the Company any of the above-referenced amounts owed
to the Company, TKP's shareholders are responsible for the payment of such
amounts.
The Company has demanded monies from TKP as a result of the failure to execute
the definitive agreements by the Signature Date. While the Company was waiting
for the expiration of the 10-day period for payment of the break-up fee, TKP
initiated arbitration proceedings before a three member-arbitration panel in
Geneva, Switzerland. In their claim, TKP and its shareholders have alleged that
the Company breached its obligation to negotiate in good faith and to use its
best efforts to agree and execute the definitive agreements and claimed the
Company is obligated to pay TKP $10 million pursuant to the letter of intent.
The Company has answered and brought counterclaims against TKP and its
shareholders. The arbitration hearings were conducted in Geneva in June 1999,
and parties filed their post-hearing briefs in August and September 1999. The
Company believes that a decision may be rendered by the end of 1999. 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.
PCBV MINORITY STOCKHOLDERS' CLAIM
On or about July 8, 1999, certain minority shareholders ("the minority
shareholders") of Poland Cablevision (Netherlands) B.V. (PCBV), an indirect
subsidiary of the Company, filed a lawsuit against the Company, Poland
Communications, Inc. ("PCI") and certain other defendants, in United States
District Court, Southern District of Ohio, Eastern Division, Civil Action No.
C2-99-621.
The relief sought by the minority shareholders includes: (1) unspecified damages
in excess of $75,000, (2) an order lifting the restrictions against transfer of
shares set forth in the Shareholders' Agreement among PCBV's shareholders, as
amended (the "Shareholders' Agreement") so that the minority shareholders can
liquidate their shares in PCBV, (3) damages in the amount of 1.7 percent of the
payment made by UPC for the shares of the Company as set forth in the Agreement
and Plan of Merger between the Company and UPC dated June 2, 1999, and (4)
attorneys' fees and costs incurred in prosecuting the lawsuit.
The amended complaint sets forth eight claims for relief based on allegations
that the defendants, including @Entertainment and PCI, committed the following
wrongful acts: (1) breached a covenant not to compete contained in the
Shareholders' Agreement relating to the shareholders of PCBV, (2) breached a
covenant in the Shareholders' Agreement requiring that any contract entered into
by PCBV with any other party affiliated with PCI be commercially reasonable or
be approved by certain of the minority shareholders, (3) breached a provision in
the Shareholders' Agreement that allegedly required co-defendant Chase
International Corp. ("CIC") to offer the minority shareholders the right to
participate in certain sales of PCBV shares and that required CIC to give
written notice of any offer to purchase the minority shareholders' shares in
PCBV, (4) breached their fiduciary duties to the minority shareholders, (5)
breached the agreement between PCBV and CIC, which allegedly limited the amount
of management fees that could be paid annually by PCBV, (6) made false and
misleading statements in various documents filed with the Securities and
Exchange Commission, (7) colluded to defraud the minority shareholders by
failing to make reference in certain Forms 8-K, 8-KA and 14D-1 to the minority
shareholders or their alleged rights and claims, (8) colluded to divert assets
of PCBV to affiliates of PCI and PCBV, including the Company, that allegedly
compete with PCI and PCBV.
The minority shareholders also seek damages in the amount of 1.7 percent of the
payment made by UPC for the shares of the Company, although the amended
complaint does not contain a separate claim for relief seeking that amount.
The Company intends to defend the lawsuit vigorously. The Company has also
conducted negotiations to purchase the minority shareholders' outstanding shares
in PCBV. If the negotiations produce a sale by the minority shareholders of
their shares in PCBV to the Company, the lawsuit would most likely be
terminated. The Company is unable to predict the outcome of those negotiations.
In the event that the lawsuit is not terminated, its status is as follows: The
time for the Company and PCI to respond to the amended complaint has not yet
expired. Discovery has not yet commenced. At this early stage of the
proceedings, the Company is unable to predict the probable outcome of the
lawsuit or the Company's ultimate exposure in connection therewith.
In addition to the Ohio lawsuit, the other minority shareholders of PCBV
(representing an additional 6% of PCBV) have asserted similar claims for
compensation, but have not filed suit.
12
<PAGE>
10. SEGMENT INFORMATION
The Company operates in three business segments: (1) cable television, (2) D-DTH
television and programming, and (3) corporate. The Company accounts for
intersegment sales and transfers as if the sales or transfers were to third
parties, that is, at current market prices. In addition to other operating
statistics, the Company measures its financial performance by EBITDA, an acronym
for earnings before interest, taxes, depreciation and amortization. The Company
defines EBITDA to be net loss adjusted for interest and investment income,
depreciation and amortization, interest expense, foreign currency gains and
losses, equity in losses of affiliated companies, income taxes and minority
interest. The items excluded from EBITDA are significant components in
understanding and assessing the Company's financial performance. The Company
believes that EBITDA and related measures of cash flow from operating activities
serve as important financial indicators in measuring and comparing the operating
performance of media companies. 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.
SELECTED SEGMENT DATA
(UNAUDITED IN THOUSANDS OF US DOLLARS)
<TABLE>
<CAPTION>
D-DTH AND
CABLE PROGRAMMING CORPORATE TOTAL
----------- ----------- --------- -----------
<S> <C> <C> <C> <C>
SUCCESSOR
TWO MONTHS ENDED SEPTEMBER 30, 1999
Revenues from external customers $ 10,687 $ 4,055 $ -- $ 14,742
Intersegment revenues -- 3,522 -- 3,522
Operating loss (8,871) (26,851) (1,773) (37,495)
EBITDA (994) (13,793) (1,766) (16,553)
Segment total assets 525,744 655,242 27,403 1,208,389
PREDECESSOR
ONE MONTH ENDED JULY 31, 1999
Revenues from external customers $ 5,170 $ 1,915 $ -- $ 7,085
Intersegment revenues -- 1,777 -- 1,777
Operating loss (1,556) (9,014) (9,175) (19,745)
EBITDA 49 (9,401) (9,165) (18,517)
Segment total assets 186,941 126,911 69,164 383,016
THREE MONTHS ENDED SEPTEMBER 30, 1998
Revenues from external customers $ 13,265 $ 135 $ -- $ 13,400
Intersegment revenues -- 6,413 -- 6,413
Operating loss (8,520) (11,961) (2,125) (22,606)
EBITDA (3,121) (11,036) (1,592) (15,749)
Segment total assets 178,663 103,245 93,083 374,991
SEVEN MONTHS ENDED JULY 31, 1999
Revenues from external customers $ 35,434 $ 11,506 $ -- $ 46,940
Intersegment revenues -- 12,127 -- 12,127
Operating loss (11,936) (72,926) (13,937) (98,799)
EBITDA 1,883 (62,836) (13,919) (74,872)
Segment total assets 186,941 126,911 69,164 383,016
NINE MONTHS ENDED SEPTEMBER 30, 1998
Revenues from external customers $ 37,836 $ 1,041 $ -- $ 38,877
Intersegment revenues -- 8,138 -- 8,138
Operating loss (12,060) (46,080) (7,202) (65,342)
EBITDA 3,259 (44,470) (6,345) (47,556)
Segment total assets 178,663 103,245 93,083 374,991
</TABLE>
13
<PAGE>
11. EXERCISE OF WARRANTS
In July and August 1999, certain warrant holders exercised their right to
purchase shares of common stock of the Company. The warrant holders exercised a
total of 203,800 and 7,600 warrants issued with the 14 1/2% Senior Discount
Notes due 2008 and 14 1/2% Senior Discount Notes due 2009, respectively. In
connection with the exercise of these warrants, the Company issued 382,296
shares of common stock for total cash proceeds of approximately $4,992,000. In
connection with the Acquisition UPC acquired all remaining outstanding warrants.
12. ACQUISITIONS
On July 9, 1999, a subsidiary of the Company entered into an agreement to
acquire 100% of a cable television system for total consideration of
approximately $7,500,000. The consummation of this transaction is subject to
Polish Ministry of Telecommunications approval. The acquisition has been
accounted for under the purchase method where the purchase price was
allocated to the underlying assets and liabilities based upon their estimated
fair values and any excess to goodwill. The acquisition is not expected to have
a material effect on the Company's results of operations in 1999.
On July 26, 1999, a subsidiary of the Company entered into an agreement to
purchase all of the assets and subscriber lists of a cable television system
for total consideration of approximately $2,800,000. The purchase will be
accounted for under the purchase method where the purchase price is allocated
to the underlying assets based upon their estimated fair values and the
excess to goodwill.
14
<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
1998 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", "may", "shall" and similar expressions identify such forward-looking
statements. Such forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause the actual results,
performance or achievements of the Company (or entities in which the Company has
interests), or industry results, to differ materially from future results,
performance or achievements expressed or implied by such forward-looking
statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements which reflect management's view only as of the date of this 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.
The risks, uncertainties and other factors that might cause such differences
include but are not limited to: (i) general economic conditions in Poland and in
the pay television business in Poland; (ii) changes in regulations the Company
operates under; (iii) uncertainties inherent in new business strategies,
including the Company's satellite television business, new product launches and
development plans, which the Company has not used before; (iv) rapid technology
changes; (v) changes in, or failure or inability to comply with government
regulations; (vi) the development and provision of programming for new
television and telecommunications technologies; (vii) the continued strength of
competitors in the multichannel video programming distribution industry and
satellite services industry and the growth of satellite delivered programming;
(viii) future financial performance, including availability, terms and
deployment of capital; (ix) the ability of vendors to deliver required
equipment, software and services on schedule at the budgeted cost; (x) the
Company's ability to attract and hold qualified personnel; (xi) changes in the
nature of strategic relationships with joint ventures; (xii) the overall market
acceptance of those products and services, including acceptance of the pricing
of those products and services; (xiii) possible interference by satellites in
adjacent orbital positions with the satellites currently being used for the
Company's satellite television business; (xiv) acquisition opportunities; and
(xv) the Company's new ownership structure.
OVERVIEW
On August 6, 1999, Bison Acquisition Corp., UPC's wholly-owned subsidiary,
was merged with and into the Company with the Company continuing as the
surviving corporation. Accordingly, the Company became a wholly-owned
subsidiary of UPC. UnitedGlobalCom, Inc. is the majority stockholder of UPC.
Until the limited launch of the Company's D-DTH business on July 1, 1998 and
subsequent full-scale launch on September 18, 1998, the Company's revenues were
derived entirely from its cable television business and programming related
thereto.
The Company divides operating expenses into (i) direct operating expenses, (ii)
selling, general and administrative expenses, and (iii) depreciation and
amortization. Direct operating expenses consist of programming expenses,
maintenance and related expenses necessary to service, maintain and operate the
Company's cable systems and D-DTH programming platform, billing and collection
expenses and customer service expenses. Selling, general and administrative
expenses consist principally of administrative costs, including office related
expenses, professional fees and salaries, wages and benefits of non-technical
employees, advertising and marketing expenses, bank fees and bad debt expense.
Depreciation and amortization consist of depreciation of property, plant and
equipment and amortization of intangible assets.
SEGMENT RESULTS OF OPERATIONS
The Company classifies its business into three segments: (1) cable television,
(2) D-DTH television and programming, and (3) corporate. Information about the
operations of the Company in these different business segments is set forth
below based on the nature of the services offered. In addition to other
operating statistics, the Company measures its financial performance by EBITDA,
an acronym for earnings before interest, taxes, depreciation and amortization.
The Company defines EBITDA to be net loss adjusted for interest and investment
income, depreciation and amortization, interest expense, foreign currency gains
and losses, equity in losses of affiliated companies, income taxes and minority
15
<PAGE>
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.
The following table presents an aggregation of the Company's segment results of
operations for the one month ended July 31, 1999 and two months ended September
30, 1999 with comparatives for the three months ended September 30, 1998 and an
aggregation of the seven months ended July 31, 1999 and two months ended
September 30, 1999 with comparatives for the nine months ended September 30,
1998.
SEGMENT RESULTS OF OPERATIONS
(unaudited, in thousands of U.S. dollars)
<TABLE>
<CAPTION>
AGGREGATE
ONE MONTH ENDED TWO MONTHS ENDED THREE MONTHS ENDED THREE MONTHS ENDED
JULY 31, 1999 SEPTEMBER 30, 1999 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
--------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
REVENUES
Cable 5,170 10,687 15,857 13,265
D-DTH and programming 3,692 7,577 11,269 6,548
Corporate and Other -- -- -- --
Intersegment elimination (1,777) (3,522) (5,299) (6,413)
------- ------- ------- -------
TOTAL 7,085 14,742 21,827 13,400
OPERATING LOSS
Cable (1,556) (8,871) (10,427) (8,520)
D-DTH and programming (9,014) (26,851) (35,865) (11,961)
Corporate and Other (9,175) (1,773) (10,948) (2,125)
------- ------- ------- -------
TOTAL (19,745) (37,495) (57,240) (22,606)
EBITDA
Cable 49 (994) (945) (3,121)
D-DTH and programming (9,401) (13,793) (23,194) (11,036)
Corporate and Other (9,165) (1,766) (10,931) (1,592)
------- ------- ------- -------
TOTAL (18,517) (16,553) (35,070) (15,749)
</TABLE>
<TABLE>
<CAPTION>
AGGREGATE
SEVEN MONTHS ENDED TWO MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
JULY 31, 1999 SEPTEMBER 30, 1999 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
REVENUES
Cable 35,434 10,687 46,121 37,836
D-DTH and programming 23,633 7,577 31,210 9,179
Corporate and Other -- -- -- --
Intersegment elimination (12,127) (3,522) (15,649) (8,138)
------- ------- ------- -------
TOTAL 46,940 14,742 61,682 38,877
OPERATING LOSS
Cable (11,936) (8,871) (20,807) (12,060)
D-DTH and programming (72,927) (26,851) (99,778) (46,080)
Corporate and Other (13,936) (1,773) (15,709) (7,202)
------- ------- ------- -------
TOTAL (98,799) (37,495) (136,294) (65,342)
EBITDA
Cable 1,883 (994) 889 3,259
D-DTH and programming (62,837) (13,793) (76,630) (44,470)
Corporate and Other (13,918) (1,766) (15,684) (6,345)
------- ------- ------- -------
TOTAL (74,872) (16,553) (91,425) (47,556)
</TABLE>
All references to the three and nine month periods ended September 30, 1999
herein represent an aggregation of the one month period ended July 31, 1999
and two month period ended September 30, 1999, and the seven month period
ended July 31, 1999 and the two month period ended September 30, 1999,
respectively, as illustrated in the tables above.
16
<PAGE>
CABLE SEGMENT OVERVIEW
The Company's revenues in its cable segment have been and will continue to be
derived primarily from monthly subscription fees for cable television services
and one-time installation fees for connection to its cable television networks.
The Company charges cable subscribers fixed monthly fees for their choice of
service packages and for other services, such as premium channels, tuner rentals
and additional outlets, all of which are included in monthly subscription fees.
Through its cable segment, the Company currently offers broadcast, intermediate
(in limited areas) and basic packages of cable service. At September 30, 1999,
approximately 72.3% of the Company's cable subscribers received its basic
package. For the nine months ended September 30, 1999, approximately 98% of the
Company's cable revenue was derived from monthly subscription fees compared to
approximately 95% for the nine months ended September 30, 1998.
During 1998 and the first three quarters of 1999, management completed or was in
the process of completing several strategic actions in support of its cable
business and operating strategy. On June 5, 1998, the Company began providing
the Wizja TV programming package, with its initial 11 channels of primarily
Polish-language programming, to its basic cable subscribers. Since that date,
the basic Wizja TV package has been expanded to 24 channels. On September 18,
1999, the Company launched a proprietary premium channel called Wizja Sport.
Management believes that this selection of high quality primarily
Polish-language programming will provide it with a significant competitive
advantage in increasing its cable subscriber penetration rates.
The Company has implemented a pricing strategy designed to increase revenue
per cable subscriber and its profit margin. The Company has increased the
monthly price for the "basic" package to reflect the increased channel
availability, and premium channels such as the HBO Poland service (a
Polish-language version of HBO's premium movie channel) are 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. For the nine
months ended September 30, 1999, the Company's churn rate increased to 5.4%.
For the nine months ended September 30, 1999, the Company experienced churn
in the HBO Poland service with penetration falling by 7,003 subscribers or
17.9% from September 30, 1998. The Company is planning to encrypt the HBO
Poland service on cable and install analog decoders for all premium channel
subscribers in its two major clusters during 1999. This encryption and
installation process is expected to be rolled out in all major systems in
2000.
An analysis of quarterly cable subscriber growth is presented in the table
below:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1999 1999 1999 1998 1998 1998 1998
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Homes Passed 1,705,569 1,669,384 1,624,119 1,591,981 1,565,287 1,546,540 1,505,256
Basic Subscribers 711,263 715,474 706,179 698,342 658,584 660,067 627,713
Subscriber Growth (three
month period)
Organic 24,619 45,646 38,226(1) 70,935 41,904 57,007 26,868
Through Acquisitions 11,118 -- -- -- (10,245)(2) 1,363 16,360
Churn (39,948) (36,351) (30,389) (31,177) (33,142) (26,016) (22,145)
---------- ---------- ---------- ---------- ---------- ---------- ----------
TOTAL NET GROWTH (4,211) 9,295 7,837 39,758 (1,483) 32,354 21,083
---------- ---------- ---------- ---------- ---------- ---------- ----------
Basic penetration 41.7% 42.9% 43.5% 43.9% 42.1% 42.7% 41.7%
Intermediate subscribers 32,032 32,128 33,587 40,037 42,538 43,204 48,077
---------- ---------- ---------- ---------- ---------- ---------- ----------
BASIC AND INTERMEDIATE SUBSCRIBERS 743,295 747,602 739,766 738,379 701,122 703,271 675,790
---------- ---------- ---------- ---------- ---------- ---------- ----------
Broadcast subscribers 240,652 219,165 208,457 196,961 186,334 167,859 154,860
---------- ---------- ---------- ---------- ---------- ---------- ----------
TOTAL SUBSCRIBERS 983,947 966,767 948,223 935,340 887,456 871,130 830,650
---------- ---------- ---------- ---------- ---------- ---------- ----------
Premium subscribers - HBO 32,032 32,784 34,332 36,615 39,035 45,674 47,298
Premium penetration - HBO 4.5% 4.6% 4.9% 5.2% 5.9% 6.9% 7.5%
Basic revenue / basic sub./month $ 6.47 $ 6.35 $ 6.20 $ 5.69 $ 5.19 $ 4.99 $ 5.19
Total revenue/ basic sub./month $ 7.19 $ 7.13 $ 6.97 $ 6.75 $ 6.42 $ 6.08 $ 6.42
</TABLE>
- -----------------------
(1) The increase in basic subscribers for the three months ended March 31, 1999
included 4,121 subscribers in Szczecin that switched from the
"intermediate" to the "basic" package.
(2) As part of the purchase of a minority interest in one of the Company's
cable systems, the
17
<PAGE>
Company sold an isolated part of that system to the
previous owner.
CABLE TELEVISION REVENUE. Revenue increased $2.6 million or 19.5% from $13.3
million in the three months ended September 30, 1998 to $15.9 million in the
three months ended September 30, 1999 and $8.3 million or 22.0% from $37.8
million in the first nine months of 1998 to $46.1 million in the first nine
months ended September 30, 1999. These increases were primarily attributable to
a 8.0% increase in the number of basic subscribers from approximately 658,600 at
September 30, 1998 to approximately 711,300 at September 30, 1999, as well as an
increase in monthly subscription rates.
Revenue from monthly subscription fees represented 97.2% and 98.8% of cable
television revenue for the three months ended September 30, 1998 and 1999,
respectively. Monthly subscription revenue constituted 94.6% and 97.7% of cable
television revenue for the nine months ended September 30, 1998 and 1999,
respectively. During the three months ended September 30, 1999, the Company
generated approximately $0.5 million of additional premium subscription revenue
as compared to $0.7 million from the corresponding period in 1998 as a result of
providing the HBO Poland service pay movie channel to cable subscribers. For the
nine months ended September 30, 1998 and 1999 premium subscription revenue was
$2.4 million and $1.6 million respectively.
DIRECT OPERATING EXPENSES. Direct operating expenses decreased $1.9 million,
or 14.6%, from $13.0 million for the three months ended September 30, 1998 to
$11.1 million for the three months ended September 30, 1999 but increased
$9.1 million, or 40.3%, from $22.6 million for the nine months ended
September 30, 1998 to $31.7 million for the nine months ended September 30,
1999. This decrease was primarily due to a reduction in intercompany
programming charges. This increase was principally as a result of the
purchase of the Wizja TV programming package for approximately $15.6 million
from an affiliate of the Company as well as the increased size of the
Company's cable television system. Direct operating expenses decreased from
97.7% of revenues for the three months ended September 30, 1998 to 69.8% of
revenues for the three months ended September 30, 1999 and increased from
59.8% of revenues for the nine months ended September 30, 1998 to 68.8% of
revenues for the nine months ended September 30, 1999. However, without
considering the programming cost for the purchase of the Wizja programming
package recorded in September 1998 and for the nine months ended September
30, 1999 the comparison would have been 38.1% and 34.9% for the nine months
ended September 30, 1998 and 1999, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $2.3 million, or 67.6%, from $3.4 million for
the three months ended September 30, 1998 to $5.7 million for the three months
ended September 30, 1999 and increased $1.5 million, or 12.5%, from $12.0
million for the nine months ended September 30, 1998 to $13.5 million for the
nine months ended September 30, 1999. This increase was mainly attributable to
expanded operations of cable business and extensive marketing campaigns.
As a percentage of revenue, selling, general and administrative expenses
increased from 25.6% for the three months ended September 30, 1998 to
approximately 35.8% for the three months ended September 30, 1999 and decreased
from 31.7% for the nine months ended September 30, 1998 to 29.3% for the nine
months ended September 30, 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense rose
$4.1 million, or 75.9%, from $5.4 million for the three months ended
September 30, 1998 to $9.5 million for the three months ended September 30,
1999 and $6.4 million, or 41.8%, from $15.3 million for the nine months ended
September 30, 1998 to $21.7 million for the nine months ended September 30,
1999 principally as a result of depreciation and amortization of additional
goodwill pushed down as a result of the merger with UPC and the continued
build-out of the Company's cable networks. Depreciation and amortization
expense as a percentage of revenues increased from 40.6% for the three months
ended September 30, 1998 to 59.7% for the three months ended September 30,
1999 and from 40.5% for the nine months ended September 30, 1998 to 47.1% for
the nine month period ended September 30, 1999.
Each of these factors contributed to an operating loss of $10.4 million and
$20.8 million for the three months and the nine months ended September 30, 1999,
respectively, compared to an operating loss of $8.5 million and $12.1 million
for the three and the nine months ended September 30, 1998, respectively.
D-DTH AND PROGRAMMING SEGMENT OVERVIEW
D-DTH. 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's D-DTH roll-out strategy was to lease D-DTH reception systems to
up to 380,000 initial subscribers at promotional prices in the start-up phase
of its D-DTH service. The launch of its D-DTH service has been supported by
18
<PAGE>
the Company's development of the Wizja TV programming package, which the Company
believes addresses the demand for high-quality Polish-language programming in
Poland.
Between April, 1999 and November 7, 1999, the Company switched its policy
from leasing to selling DTH reception systems and sold such systems to
customers at a price substantially reduced by promotional incentives.
Beginning on November 8, 1999, the Company returned to leasing the DTH
reception systems to its customers.
As of September 30, 1999, the Company had sold to Philips' authorized retailers
approximately 200,000 D-DTH packages, which include the rental of the D-DTH
reception system, installation and a one-year subscription to the Company's
D-DTH service. As of September 30, 1999, Philips had sold and installed
approximately 186,000 of these packages to customers. In September 1998, the
number of Philips authorized electronics retailers distributing the Wizja TV
package increased from 70 to 550, and since November 1998 more than 1,200
retailers 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. Installation personnel are also trained to complete each
customer's installation within 48 hours of order placement.
PROGRAMMING. 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. Wizja TV's current channel line-up includes five channels, Atomic
TV, Wizja 1, Wizja Pogoda, Twoja Wizja and Wizja Sport, that are owned and
operated by the Company, and 20 channels that are produced by third parties, 11
of which are broadcast under exclusive agreements for pay television in Poland.
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. The Company exchanged letters of intent and is
continuing negotiations with two major cable associations in Poland,
representing an aggregate of approximately 2.6 million subscribers (including
the Company's cable subscribers), with the objective of making the Wizja TV
programming package available for distribution within the cable networks of
other providers which are members of the associations.
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. 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 D-DTH business. The Company's business plan anticipates spending up
to approximately $150 million to provide D-DTH reception systems to the 380,000
initial subscribers at a price that is significantly decreased by promotional
incentives in order to increase the number of subscribers. An analysis of D-DTH
subscribers is presented in the table below:
@ ENTERTAINMENT, INC.
Summary of Selected Operating Statistics
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
D-DTH 1999 1999 1999 1998 1998
------------- -------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Satellite receiver packages sold to dealers 199,287 159,827 137,629 125,167 34,699
Installed subscribers 185,950 146,095 130,000 95,378 23,390
Churn 4,393 -- -- -- --
TOTAL SUBSCRIBERS 181,557 146,095 130,000 95,378 23,390
Premium subscribers - HBO - promotional(1) 13,975 16,755 56,162 76,633 23,390
Premium subscribers - HBO - paying 94,383 76,179 58,705 15,555 --
Sport - promotional 35,061
Sport - paying --
HBO churn(2) 47,219 29,738 15,133 3,190 --
HBO churn 50% 39.0% 25.8% 20.5% --
</TABLE>
- ----------
(1) From July 5, 1998 to March 31, 1999, the Company offered a three-month
trial period of the HBO Poland service to each new D-DTH subscriber. From
April 1, 1999, this was changed to a one-month trial period of the HBO
Poland service for each new D-DTH subscriber.
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<PAGE>
(2) The churn figures relate only to paying subscribers and include only those
subscribers who chose to continue their premium channel subscription
following the promotional period.
D-DTH AND PROGRAMMING REVENUE. D-DTH and programming revenue was $6.5 million
and $11.3 million for the three months ended September 30, 1998 and 1999,
respectively, and $9.2 million and $31.2 million for the nine months ended
September 30, 1998 and 1999, respectively. The Company commenced the broadcast
of its Wizja TV programming package over its cable systems on June 5, 1998 and
on its D-DTH service in July 1998.
Revenue from monthly subscription fees, from third parties, represented 37.1%
of D-DTH and programming revenue for the three months ended September 30,
1999 and 38.4% for the nine months ended September 30, 1999. Advertising
revenue for the three and the nine months ended September 30, 1999
represented respectively 2.4% and 2.9% of D-DTH and programming 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 $5.3 million and
$15.6 million of D-DTH and programming revenue for the three and the nine months
ended September 30, 1999, respectively.
DIRECT OPERATING EXPENSES. Direct operating expenses increased $12.6 million, or
108.6%, from $11.6 million for the three months ended September 30, 1998 to
$24.2 million for the three months ended September 30, 1999 and increased $41.0
million, or 128.1%, from $32.0 million for the nine months ended September 30,
1998 to $73.0 million for the nine months ended September 30, 1999. These
increases principally were the result of: the $22.9 million cost related to
D-DTH reception systems sold below cost and the write down of D-DTH reception
systems included in inventory from April 1, 1999 to net realizable value, a
$16.8 million increase in programming costs in the nine months ended September
30, 1999, and costs associated with the lease of three transponders on the Astra
satellites which provide the capability to deliver the Company's Polish-language
programming platform to cable and D-DTH customers in Poland. Direct operating
expenses amounted to 214.2% and 234.0% of revenues for the three and the nine
months ended September 30, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $5.2 million or 104.0%, from $5.0 million for
the three months ended September 30, 1998 to $10.2 million for the three months
ended September 30, 1999 and increased $13.3 million or 61.6% from $21.6 million
for the nine months ended September 30, 1998 to $34.9 million for the nine
months ended September 30, 1999. As a percentage of revenue, selling, general
and administrative expenses amounted to approximately 90.3% and 111.9% for the
three and the nine months ended September 30, 1999, respectively. The increase
in selling, general and administrative expenses over the corresponding 1998
periods was attributable mainly to sales and marketing expenses associated with
promotion 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 and
broadcast/exhibition rights.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization charges of D-DTH
assets increased $12.1 million from $0.6 million for the three months ended
September 30, 1998 to $12.7 million for the three months ended September 30,
1999 and increased $21.5 million from $1.6 million for the nine months ended
September 30, 1998 to $23.1 million for the nine months ended September 30, 1999
principally as a result of depreciation and amortization of additional goodwill
as a result of the merger with UPC. Depreciation and amortization expense as a
percentage of revenues amounted to 112.4% and 74.0% for the three and the nine
months ended September 30, 1999, respectively.
Each of these factors contributed to an operating loss of $35.9 million and
$99.8 million for the three and the nine months ended September 30, 1999,
respectively, compared to an operating loss of $12.0 million and $46.1 million
for the three and the nine months ended September 30, 1998, respectively.
CORPORATE SEGMENT OVERVIEW
Corporate segment consists of corporate overhead costs. The Company continues to
evaluate opportunities for improving its operations and reducing its cost
structure. Corporate expenses amounted to $10.9 million and $15.7 million for
the three and the nine months ended September 30, 1999, respectively, as
compared to $3.4 million and $7.2 million for the corresponding periods in
1998. The increase was mainly due to fees paid to Goldman Sachs for
its services in connection with the acquisition by UPC.
20
<PAGE>
NON-OPERATING RESULT
INTEREST EXPENSE. Interest expense increased $7.1 million, or 104.4%, from $6.8
million for the three months ended September 30, 1998 to $13.9 million for the
three months ended September 30, 1999 and increased $24.5 million, or 177.5%,
from $13.8 million for the nine months ended September 30, 1998 to $38.3 million
for the nine months ended September 30, 1999. Interest expense increased mainly
as a result of the accretion of interest on: (i) $256.8 million aggregate
principal amount at maturity of the Company's 14 1/2% Senior Discount Notes due
2009, which were issued on January 22, 1999, and (ii) $36.0 million aggregate
principal amount at maturity of the Company's Series C Senior Discount Notes due
2008 issued on January 20, 1999. In addition, the increase is a result of loans
assumed by the Company on its acquisition of subsidiaries and an additional loan
drawdown in June 1998.
INTEREST AND INVESTMENT INCOME. Interest and investment income decreased $0.6
million, or 46.2%, from $1.3 million for the three months ended September 30,
1998 to $0.7 million for the three months ended September 30, 1999 and increased
$0.3 million, or 10.7%, from $2.8 million for the nine months ended September
30, 1998 to $3.1 million for the nine months ended September 30, 1999, primarily
due to investment of part of the proceeds from the notes and preferred stock
issuances.
EQUITY IN PROFITS/LOSSES OF AFFILIATED COMPANIES. The Company recorded $0.1
million of equity in profits and $0.4 million of equity in losses of affiliated
companies for the three months and the nine months ended September 30, 1999,
respectively compared to $0.9 million and $1.6 million of equity in profits of
affiliated companies for the three months and the nine months ended September
30, 1998, respectively. The loss for the nine months ended September 30, 1999
relates to amortization of goodwill on the Company's 50% investment in Twoj
Styl, a publishing company and 20% investment in Fox Kids Poland.
FOREIGN EXCHANGE LOSS, NET. For the three months and the nine months ended
September 30, 1999, foreign exchange losses amounted to $2.6 million and $4.5
million, respectively, primarily due to the 17.5% appreciation of the U.S.
dollar against the Polish zloty during the nine months ended September 30, 1999.
MINORITY INTEREST. No minority interest was recorded for the three months or the
nine months ended September 30, 1999 compared to minority interest income of
$90,000 and loss of $117,000 for the corresponding periods in 1998. All minority
interest was eliminated in 1998 as the minority interest share of the losses in
subsidiaries exceeded the value of minority interest investments.
NET LOSS. For the three months ended September 30, 1998 and 1999, the Company
had net losses of $27.4 million and $72.9 million, respectively. For the nine
months ended September 30, 1998 and 1999, the Company had net losses of $75.7
million and $176.5 million, respectively. These losses were the result of the
factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has met its cash requirements in recent years primarily with (i)
capital contributions and loans from certain of the Company's principal
stockholders, (ii) borrowings under available credit facilities, (iii) cash
flows from operations, (iv) the sale 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"), (v) the sale of approximately $200 million of common stock through the
Company's initial public equity offering in August 1997 and (vi) the sale in
July 1998 and January 1999 of $230.8 million gross proceeds of 14 1/2% Series B
Senior Discount Notes due 2008, 14 1/2% Senior Discount Notes due 2008, Series C
Senior Discount Notes due 2008, 14 1/2% Series B Senior Discount Notes due 2009,
and 14 1/2% Senior Discount Notes due 2009 (collectively, the "@Entertainment
Notes"), (vii) the sale on January 22, 1999, of Series A 12% Cumulative
Preference Shares, Series B 12% Cumulative Preference Shares and Warrants for
gross proceeds of approximately $48.2 million.
Pursuant to the indentures governing the PCI Notes and the @Entertainment Notes,
the Company is subject to certain restrictions and covenants, including, without
limitation, covenants with respect to the following matters:
a. limitation on indebtedness;
b. limitation on restricted payments;
c. limitation on issuances and saleS of capital stock of restricted
subsidiaries;
d. limitation on transactions with affiliates;
e. limitation on liens;
f. limitation of guarantees of indebtedness by subsidiaries;
g. purchase of the notes upon a change of control;
h. limitation on sale of assets;
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<PAGE>
i. limitation on dividends and other payment restrictions affecting restricted
subsidiaries;
j. limitation on investments in unrestricted subsidiaries;
k. consolidations, mergers, and sale of assets; and
l. limitation on lines of business.
The Company is in compliance with these covenants.
The indentures covering each of the @Entertainment Notes and the PCI Notes
provide that, following a Change of Control (as defined therein), each
noteholder had the right, at such holder's option, to require the respective
issuer to offer to repurchase all or a portion of such holder's
@Entertainment Notes or PCI Notes at the repurchase prices, described below.
The Company believes that the August 6, 1999 acquisition by UPC of the
Company constituted a Change of Control. Accordingly, @Entertainment and PCI
made offers to repurchase (the "Offers") from the holders the @Entertainment
Notes and the PCI Notes. The Offers expired at 12:01 PM, New York City time,
on November 2, 1999.
In accordance with the terms of the indentures governing the @Entertainment
Notes and the PCI Notes, @Entertainment was required to offer to repurchase
the @Entertainment Notes at 101% of their accreted value at maturity on the
Expiration Date plus accrued and unpaid interest and PCI was required to
offer to repurchase the PCI Notes at the purchase price 101% of principal. As
of August 1, 1999, @Entertainment had $376,943,000 aggregate principal amount
at maturity of @Entertainment Notes outstanding and PCI had $ 129,668,000
aggregate principal amount at maturity of PCI Notes outstanding. Pursuant to
the Offer, @Entertainment has purchased $49,139,000 aggregate principal
amount of @Entertainment Notes for an aggregate price of $26,455,014 and PCI
has purchased $113,237,000 aggregate principal amount of PCI Notes for an
aggregate price of $114,369,370. Subsequent to November 2, 1999, UPC financed
the repurchase of the @Entertainment Notes and PCI Notes.
The Company had negative cash flows from operating activities for the nine
months ended September 30, 1998 and 1999 of $29.7 million and $112.0 million,
respectively, due to the significant operating costs associated with the
promotion and operation of its D-DTH service and the Wizja TV programming
package.
Cash used for the purchase and expansion of the Company's cable television
networks, D-DTH equipment and the purchase of other property, plant and
equipment was $27.8 million in the nine months ended September 30, 1999 and
$45.5 million in the corresponding period in 1998. The decrease primarily
relates to the purchase of fixed assets related to the development of the
Maidstone uplink facility for the three months ended September 30, 1998. Cash
used for the acquisition of subsidiaries, net of cash received, was $6.9
million and $10.6 million for the nine months ended September 30, 1999 and
1998, respectively.
At September 30, 1999, the Company was committed to pay at least $515.3
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 nine
years, of which at least approximately $192.0 million was committed through
the end of 2000. These payments may increase if the Company enters into
additional programming agreements.
The Company's cash on hand will be insufficient to satisfy all of its
obligations related to its offer to repurchase its and its subsidiary's
outstanding senior notes and to complete its current business plan for its
D-DTH and programming businesses based on its past operations. UPC and the
Company are evaluating various alternatives to meet the Company's capital
needs. Future sources of financing for the Company could include public or
private debt or bank financing or any combination thereof, subject to the
restrictions contained in the indentures governing the outstanding senior
indebtedness of the Company, UPC, and United GlobalCom, Inc., UPC's parent.
Moreover, if the Company's plans or assumptions change, if its assumptions
prove inaccurate, if it consummates unanticipated investments in or
acquisitions of other companies, if it experiences unexpected costs or
competitive pressures, or if existing cash, and projected cash flow from
operations prove to be insufficient, the Company may need to obtain greater
amounts of additional financing. While it is the Company's intention to enter
only into new financing or refinancings that it considers advantageous, there
can be no assurance that such sources of financing would be available to the
Company in the future, or, if available, that they could be obtained on terms
acceptable to the Company. The Company is also dependent on its parent, UPC,
to provide financing to achieve the Company's business strategy. There is no
obligation from UPC, contractually or otherwise, to make such financing
available to the Company.
22
<PAGE>
YEAR 2000 COMPLIANCE
The Company's cable television, programming and DTH operations are heavily
dependent upon computer systems and other technological devices with imbedded
chips. Such computer systems and other technological devices may not be
capable of accurately recognizing dates beginning on January 1, 2000. This
problem could cause miscalculations, resulting in the Company's cable
television, programming or DTH services malfunctioning or failing to operate.
YEAR 2000 COMPLIANCE PROGRAM
In response to possible Year 2000 problems, the Board of Directors of United
GlobalCom ("United") established a task force to assess the impact that
potential Year 2000 problems may have on company-wide operations, including
the Company and its operating companies, and to implement necessary changes
to address such problems. The task force includes the Company's staff,
external consultants and subcommittees at the operating company levels, as
well as staff from United that reports directly to the United Board. In
creating a program to minimize Year 2000 problems, the task force identified
certain critical operations of the Company's business. These critical
operations are service delivery systems, field and headend devices, customer
service and billing systems, and corporate management and administrative
operations such as cash flow, accounts payable and accounts receivable,
payroll and building operations.
The task force has established a three-phase program to address potential Year
2000 problems:
- -- Identification Phase: identify and evaluate computer systems and other
devices (e.g., headend devices, switches and set top boxes) on a system by
system basis for Year 2000 compliance.
- -- Implementation Phase: establish a database and evaluate the information
obtained in the Identification Phase, determine priorities, implement
corrective procedures, define costs and ensure adequate funding.
- -- Testing Phase: test the corrective procedures to verify that all
material compliance problems will operate on and after January 1, 2000,
and develop, as necessary, contingency plans for material operations.
In August 1999, UPC completed the acquisition of the Company. During the
third quarter of 1999, UPC initiated a priority level review of the Year 2000
programs existing in the Company. UPC requested that the Company complete a
Year 2000 due diligence form and is in the process of reviewing the Company's
response in order to determine the Company's Year 2000 readiness. These
forms, which have been completed by the Company's Y2K managers, have provided
the Company with a very detailed view of the Year 2000 status for the
Company. UPC is currently implementing the necessary steps to assure
compliance of the mission critical systems and other date related equipment.
However, there can be no assurance that UPC will be successful in this
endeavour.
Currently, the assessment of the Year 2000 program at the Company is behind
schedule and incomplete. To date only approximately 50% of all equipment with
date related issues have been inventoried and research on compliance is
ongoing. Customer care, billing and subscriber management systems are
considered mission critical systems and have been researched with
unsatisfactory results. None of these systems are Y2K compliant. UPC is
working to upgrade and patch the systems to Y2K compliant versions. Both
vendors and consultants have committed to compliance by December 31, 1999.
However, the Company cannot be sure that the deadline will be met. Testing of
the mission critical systems commenced in November and will be completed in
December of 1999. UPC has hired several third party Year 2000 firms to
administer and assist the Company in the project in an effort to be ready for
the millennium at the end of December.
23
<PAGE>
The United Year 2000 task force will continue to evaluate the need for
external resources to complete the Identification Phase and the
Implementation Phase and implement the Testing Phase. UPC has remained
committed to the securing the resources necessary to complete its Year 2000
program, and when necessary has hired outside experienced resources to help
the Company solve Year 2000 issues.
In addition to its Year 2000 task force, United is a member of a Year 2000
working group, which has 12 cable television companies and meets under the
auspices of Cable Labs. The dialogue with the other cable operators has
assisted United in developing its Year 2000 program. Part of the agenda of
the working group is to develop test procedures and contingency plans for
critical components of operating systems for the benefit of all its members.
The test procedures were made available to members, including United, during
the second quarter of 1999.
THIRD-PARTY DEPENDENCE
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 its service to its D-DTH and/or cable 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.
To date, responses by vendors to such communications have been limited. The
responses received usually state only that the party is working on Year 2000
issues and does not have a definitive position at this time. As a result, the
Company is unable to assess the risk posed by its dependence upon such third
parties' systems. The Company, therefore, cannot give any assurances concerning
equipment's Year 2000 compliance.
The task force is working closely with the manufacturers of the Company's
headend devices to remedy any Year 2000 problems assessed in the headend
equipment. Recent information from the two primary manufacturers of such
equipment indicate that most of the equipment used in the Company's operating
systems should not be date-sensitive. Where such equipment needs to be
upgraded for Year 2000 issues, such vendors are upgrading without charge.
These upgrades are expected to be completed before year-end 1999, but this
process is not within the Company's control. Approximately 98.0% of the
headend controllers, which are considered the most critical component of the
headend devices, have been upgraded.
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 the new accounting system and 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 was substantially completed at 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 is not able
to replace billing systems covering approximately 400,000 cable subscribers
prior to the end of 1999. This software is not currently Year 2000 compliant.
The Company is upgrading this software, but may not have this software fully
compliant by the end of 1999.
24
<PAGE>
CONTINGENCY PLAN
The Company has considered certain limited contingency plans, including
preparing back-up programming and stand-by power generators. Based on these
considerations, the Company has received from the task force a contingency
plan to its operating system, which sets forth preparation procedures and
recovery solutions. With respect to other third-party systems, the Company is
responsible for inquiring of its vendors and other entities with which it
does business (e.g., utility companies, financial institutions and facility
owners) as to such entities' Year 2000 compliance programs. The Company has
begun this process and to assist in this process, the Company has hired Year
2000 consultants. The consultants are visiting each operating company and
working with them to identify and report to the Company any remaining
potential Year 2000 compliance problems. These consultants are also
contacting third-party vendors regarding their Year 2000 compliance measures.
Audit teams will be ready to follow up on the initial research and continue
to review the contingency and year-end plans.
In addition UPC has organized a European Year 2000 conference to discuss with
all of its managers the risks at years end and their contingency plans.
Business continuity plans have been documented and will be discussed at the
conference.
COST OF COMPLIANCE
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 $3.2 million. The Company has
recently estimated the cost of upgrading some of its billing systems to be
approximately $0.4 million and the infrastructure upgrade, including
installation, project management and consultancy to be approximately $2.4
million. Although no assurance can be made, the Company believes that the
known Year 2000 compliance issues can be remedied without a material
financial impact on us. No assurance can be made, however, as to the total
cost for the Year 2000 program until all of the data has been gathered. In
addition, the Company cannot predict the financial impact it will experience
if Year 2000 problems are caused by third parties upon which its systems are
dependent or experienced by entities in which the Company holds investments.
The failure of any one of these parties to implement Year 2000 procedures
could have a material adverse impact on the Company's operations and
financial condition.
CURRENT OR ACCUMULATED EARNINGS AND PROFITS
For the nine months ended September 30, 1999, the Company had no current or
accumulated earnings and profits. Therefore, none of the interest which accreted
during the nine months ended September 30, 1999 with respect to the Company's 14
1/2% Senior Discount Notes due 2008 and its 14 1/2% Series B Discount Notes due
2008, will be deemed to be a "Dividend Equivalent Portion" as such term is
defined in Section 163(e)(5)(B) of the Internal Revenue Code, as amended.
25
<PAGE>
IMPACT OF NEW ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board 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 January 1, 2001. The Company currently has no
derivative instruments or hedging activities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
The principal market risk (i.e., the risk of loss arising from adverse changes
in market rates and prices) to which the Company is exposed is foreign exchange
rate risk from fluctuations in the Polish zloty currency exchange rate. The
Company's long term debt is primarily subject to a fixed rate, and therefore
variations in the interest rate do not have a material impact on net interest
expense.
26
<PAGE>
FOREIGN EXCHANGE AND OTHER INTERNATIONAL MARKET RISKS
Operating in international markets involves exposure to movements in currency
exchange rates. Currency exchange rate movements typically affect economic
growth, inflation, interest rates, governmental actions and other factors. These
changes, if material, can cause the Company to adjust its financing and
operating strategies. The discussion of changes in currency exchange rates below
does not incorporate these other important economic factors.
International operations constitute 100% of the Company's consolidated operating
loss for the nine months ended September 30, 1999. Some of the Company's
operating expenses and capital expenditures are expected to continue to be
denominated in or indexed in U.S. dollars. By contrast, substantially all of the
Company's revenues are denominated in zloty. Therefore, any devaluation of the
zloty against the U.S. dollar that the Company is unable to offset through price
adjustments will require it to use a larger portion of its revenue to service
its U.S. dollar denominated obligations and contractual commitments.
The Company estimates that a further 10% change in foreign exchange rates
would impact operating loss by approximately $7.4 million. In other terms a
10% depreciation of the Polish zloty and British pound against the U.S.
dollar, would result in a $7.4 million decrease in the operating loss for the
nine months ended September 30, 1999. The Company believes that this
quantitative measure has inherent limitations because, as discussed in the
first paragraph of this section, it does not take into account any
governmental actions or changes in either customer purchasing patterns or the
Company's financing or operating strategies.
The Company does not generally hedge currency translation risk. While the
Company may consider entering into transactions to hedge the risk of exchange
rate fluctuations, there is no assurance that it will be able to obtain hedging
arrangements on commercially satisfactory terms. Therefore, shifts in currency
exchange rates may have an adverse effect on the Company's financial results and
on its ability to meet its U.S. dollar denominated debt obligations and
contractual commitments.
Poland has historically experienced high levels of inflation and significant
fluctuations in the exchange rate for the zloty. The Polish government has
adopted policies that slowed the annual rate of inflation from approximately
250% in 1990 to approximately 20% in 1996, approximately 14.9% in 1997, and
approximately 11.8% in 1998. The rate of inflation for the nine months ended
September 30, 1999 was approximately 6.5%. The exchange rate for the zloty has
stabilized and the rate of devaluation of the zloty has generally decreased
since 1991. The zloty appreciated against the U.S. dollar by approximately 0.4%
for the year ended December 31, 1998. For the first nine months of 1999 the
zloty has depreciated against the U.S. dollar by approximately 17.4%. Inflation
and currency exchange fluctuations may have a material adverse effect on the
business, financial condition and results of operations of the Company.
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. See also Notes
11 and 15 to the unaudited consolidated financial statements for a description
of the Company's arbitration relating to TKP and the PCBV minority stockholders'
claim.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS:
On January 22, 1999, the Company also sold 45,000 Series A 12% Cumulative
Preference Shares, $0.01 par value, 5,000 Series B 12% Cumulative Preference
Shares, $0.01 par value, and warrants, each warrant entitling the holder thereof
to purchase 110 shares of common stock, par value $0.01, at an exercise price of
$10 per share to Morgan Grenfell Private Equity Ltd. and certain members of the
Chase Family, with gross proceeds of approximately $50.0 million (the
"Preference Offering"). Net proceeds to the Company after deducting the initial
purchaser's discount was approximately $48.2 million.
The warrants and shares of common stock underlying the warrants issued in the
Units Offering and the warrants and Series A 12% Cumulative Preference Shares
and Series B 12% Cumulative Preference Shares issued in the Preference Offering
were registered on a registration statement on Form S-3. This registration
statement was declared effective on July 2, 1999.
27
<PAGE>
These securities (other than the Exchange Notes) were sold to the initial
purchasers pursuant to Section 4(2) of the Securities Act and subsequent sales
of the securities were made pursuant to Rule 144A of the Securities Act.
The Company intends to use:
- - the net proceeds of its sale of the 14 1/2% Senior Discount Notes due 2009,
which was approximately $96.0 million (after deducting offering expenses
and the initial purchasers' discount),
- - the net proceeds of the sale of the Series A 12% Cumulative Preference
Shares, the Series B 12% Cumulative Preference Shares and Warrants, which
was approximately $48.2 million (after deducting offering expenses and
commissions), and
- - the net proceeds of the sale of the Series C Senior Discount Notes, which
was approximately $9.5 million (after deducting offering expenses and the
initial purchaser's discount)
for the following purposes:
- - to fund capital expenditures, operating losses and working capital
primarily related to the development and operation of its D-DTH business,
and
- - for general corporate purposes and certain other investments, including the
possible acquisition of cable television networks and certain minority
interests in subsidiaries which are held by unaffiliated third parties.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ON SEPTEMBER 3, 1999, UPC, THE SOLE STOCKHOLDER OF THE COMPANY, ACTING BY
UNANIMOUS WRITTEN CONSENT IN LIEU OF A SPECIAL MEETING, APPROVED THE NOMINATION
AND APPOINTMENT OF THE FOLLOWING INDIVIDUALS TO SERVE AS MEMBERS OF THE BOARD OF
DIRECTORS OF THE COMPANY: MARK L. SCHNEIDER; NIMROD J. KOVACS; GENE MUSSELMAN;
RAY SAMUELSON; ANTON TUIJTEN; AND SIMON OAKES.
28
<PAGE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3(i) Certificate of Ownership and Merger Merging Bison Acquisition Corp. Into
@ Entertainment.
11 Statement re computation of per share earnings (See Note to unaudited
financial statements)
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed the following Reports on Form 8-K during the quarter ended
September 30, 1999:
Report on Form 8-K, filed on July 8, 1999, regarding a press release dated
July 7, 1999, relating to the extension of the expiration date of United
Pan-Europe Communications N.V.'s tender offer until midnight on Thursday,
August 5.
Report on Form 8-K, filed on August 3, 1999, regarding completion of debt
offering for financing of United Pan-Europe Communications N.V.'s tender offer.
Report on Form 8-K, filed on August 9, 1999, relating to the termination of
United Pan-Europe Communications N.V.'s tender offer.
Report on Form 8-K filed on August 23,1999, relating to a change in control of
@ Entertainment, Inc. pursuant to the Merger Agreement with United Pan-Europe
Communications N.V.
Report on Form 8-K, filed on September 20, 1999, relating to @ Entertainment's
Offer to Repurchase Notes due to a change in control.
Report on Form 8-K, filed on November 3, 1999, relating to the expiration of
@ Entertainment's Offer to Repurchase Notes due to a change in control.
29
<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.
/s/ Ray D. Samuelson
----------------------------------------
Ray D. Samuelson
Director of Finance
And Accounting, Chief Financial Officer,
and Director.
DATE: November 15, 1999
<PAGE>
Exhibit 3(i)
CERTIFICATE OF OWNERSHIP AND MERGER
MERGING
BISON ACQUISITION CORP.
INTO
@ ENTERTAINMENT, INC.
* * * * *
Bison Acquisition Corp. ("Bison"), a corporation organized and existing
under the laws of Delaware, DOES HEREBY CERTIFY pursuant to Section 253 of the
General Corporation Law of the State of Delaware (the "DGCL"):
FIRST: That Bison was incorporated on the twenty-eighth day of May,
1999, pursuant to the DGCL.
SECOND: That Bison owns (i) at least ninety percent of the outstanding
shares of the common stock, par value $0.01 per share (the "Common Stock"), (ii)
all of the Series A Cumulative Preference Shares, par value $0.01 per share (the
"Series A Preference Shares"), and (iii) all of the Series B Cumulative
Preference Shares, par value $0.01 per share (the "Series B Preference Shares"),
of @ Entertainment ("@ Entertainment"), a corporation incorporated on the
twenty-seventh day of May, 1997, pursuant to the DGCL, and that no other class
of capital stock is currently issued and outstanding.
THIRD: That Bison, by the following resolutions of its Board of
Directors, duly adopted by unanimous written consent, filed with the minutes of
the Board of Directors on the sixth day of August, 1999, determined to merge
itself into @ Entertainment:
RESOLVED, that Bison merge itself into @ Entertainment, and @
Entertainment shall assume all of Bison's obligations (the "Merger");
and it is further
RESOLVED, that @ Entertainment shall be the surviving corporation (the
"Surviving Corporation") of the Merger; and it is further
<PAGE>
RESOLVED, that the Merger shall be effective upon filing the Delaware
Merger Certificate with the Secretary of State of Delaware; and it is
further
RESOLVED, that the name of the Surviving Corporation shall be "@
Entertainment, Inc." And the certificate of incorporation of the
Surviving Corporation shall be amended in its entirety as follows:
FIRST: The name of the Corporation is @ ENTERTAINMENT, INC.
SECOND: The registered office of the Corporation in the State
of Delaware is located at 30 Old Rudnick Lane, Suite 100, Dover, County of Kent.
The name of its registered agent in the State of Delaware at such address is
Lexis Document Services, Inc.
THIRD: The purpose of the Corporation is to engage, directly
or indirectly, in any lawful act or activity for which corporations may be
organized under the General Corporation Law of the State of Delaware as from
time to time in effect.
FOURTH: The total authorized capital stock of the Corporation
shall be 1,000 shares of Common Stock, par value $0.01 per share.
FIFTH: The business of the Corporation shall be managed under
the direction of the Board of Directors except as otherwise provided by law. The
number of Directors of the Corporation shall be fixed from time to time by, or
in the manner provided in, the By-Laws. Election of Directors need not be by
written ballot unless the By-Laws of the Corporation shall so provide.
SIXTH: The Board of Directors may make, alter or repeal the
By-Laws of the Corporation except as otherwise provided in the By-Laws adopted
by the Corporation's stockholders.
2
<PAGE>
SEVENTH: The Directors of the Corporation shall be protected
from personal liability, through indemnification or otherwise, to the fullest
extent permitted under the General Corporation Law of the State of Delaware as
from time to time in effect.
1. A Director of the Corporation shall under no circumstances
have any personal liability to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a Director except for those breaches and
acts or omissions with respect to which the General Corporation Law of the State
of Delaware, as from time to time amended, expressly provides that this
provision shall not eliminate or limit such personal liability of Directors.
Neither the modification or repeal of this paragraph 1 of Article SEVENTH nor
any amendment to said General Corporation Law that does not have retroactive
application shall limit the right of Directors hereunder to exculpation from
personal liability for any act or omission occurring prior to such amendment,
modification or repeal.
2. The Corporation shall indemnify each Director and Officer
of the Corporation to the fullest extent permitted by applicable law, except as
may be otherwise provided in the Corporation's By-Laws, and in furtherance
hereof the Board of Directors is expressly authorized to amend the Corporation's
By-Laws from time to time to give full effect hereto, notwithstanding possible
self interest of the Directors in the action being taken. Neither the
modification or repeal of this paragraph 2 of Article SEVENTH nor any amendment
to the General Corporation Law of the State of Delaware that does not have
retroactive application shall limit the right of Directors and Officers to
indemnification hereunder with respect to any act or omission occurring prior to
such modification, amendment or repeal.
EIGHTH: The Corporation reserves the right to amend, alter,
change or repeal any provision contained in this Certificate of Incorporation in
the manner now or hereafter
3
<PAGE>
prescribed by statute, and all rights conferred upon stockholders herein are
granted subject to this reservation.
; and it is further
RESOLVED, that at the Effective Time, each share of Common Stock issued
and outstanding immediately prior to the Effective Time (other than (i)
any shares of Common Stock which are held by any subsidiary or in the
treasury of @ Entertainment, or which are held, directly or indirectly,
by United Pan-Europe Communications N.V., ("Parent"), a corporation
organized under the laws of the Netherlands and the parent of Bison, or
any direct or indirect subsidiary of Parent (including Bison), all of
which shall cease to be outstanding and be canceled and retired and
none of which shall receive any payment with respect thereto and (ii)
any shares of Common Stock held by dissenting stockholders) and all
rights in respect thereof shall, by virtue of the Merger and without
any action on the part of the holder thereof, forthwith cease to exist
and be converted into and represent the right to receive an amount in
cash equal to $19.00, without interest, and each of the Series A
Preference Shares and the Series B Preference Shares shall be cancelled
and no further consideration shall be payable in respect thereof; and
it is further
RESOLVED, that at the Effective Time, each share of common stock, no
par value, of Bison then issued and outstanding shall, by virtue of the
Merger and without any action on the part of the holder thereof, become
one fully paid and nonassessable share of common stock, par value $0.01
per share, of the Surviving Corporation; and it is further
RESOLVED, that the By-Laws of @ Entertainment as they exist at the
Effective Time shall be the By-laws of Bison until the same shall be
altered, amended or repealed as therein provided; and it is further
RESOLVED, that each of the officers of @ Entertainment as they exist at
the Effective Time shall, subject to the applicable provisions of the
Certificate of Incorporation and By-Laws of the Surviving Corporation,
be and remain officers of the Surviving Corporation until his or her
respective successor shall have been duly elected or appointed and
qualified; and it is further
RESOLVED, that the number of directors of the Surviving Corporation
shall be reduced from eight (8) to two (2) and further that the
directors of Bison as they exist on the effective date of the Merger
shall be the directors of the Surviving Corporation, each such director
to hold office, subject to the applicable provisions of the Certificate
of Incorporation and By-Laws of the Surviving Corporation, until the
next annual stockholder's meeting of the Surviving Corporation and
until his or her respective successor shall have been duly elected or
appointed and qualified; and it is further
4
<PAGE>
RESOLVED, that if, at any time after the Effective Time, the Surviving
Corporation shall consider or be advised that any deeds, bills of sale,
assignments, assurances or any other actions or things are necessary or
desirable to continue in, vest, perfect or confirm of record or
otherwise in the Surviving Corporation's right, title or interest in,
to or under any of the rights, properties, privileges, franchises or
assets of either of its constituent corporations acquired or to be
acquired by the Surviving Corporation as a result of, or in connection
with, the Merger, or otherwise to effect the transactions contemplated
by the Merger Agreement, the officers and directors of the Surviving
Corporation shall be authorized to execute and deliver, in the name and
on behalf of either of the constituent corporations of the Merger, all
such deeds, bills of sale, assignments and assurances and to take and
do, in the name and on behalf of each of such corporations or
otherwise, all such other actions and things as may be necessary or
desirable to vest, perfect or confirm any and all right, title and
interest in, to and under such rights, properties, privileges,
franchises or assets in the Surviving Corporation or otherwise to carry
out the intent of the Merger Agreement; and it is further
RESOLVED, that each officer of Bison be, and each is, hereby directed
to make and execute such documentation as may be necessary to
effectuate the Merger, including the Delaware Merger Certificate, and
to cause the Delaware Merger Certificate to be filed with the Secretary
of State of Delaware and to do all acts and things whatsoever, whether
within or without the State of Delaware, which may be in any way
necessary or proper to effect the Merger; and it is further
RESOLVED, that each officer of Bison be, and each is, hereby
authorized, in the name and on behalf of Bison, to take all such other
actions, including executing and delivering such agreements, documents,
certificates, instruments and filings as may be necessary or
appropriate (such necessity or appropriateness to be conclusively
evidenced by the execution and delivery thereof) to effectuate or carry
out the purposes and intent of the foregoing resolutions and for the
performance of Bison's obligations under the Delaware Merger
Certificate and otherwise to consummate the transactions contemplated
by the Delaware Merger Certificate; and it is further
RESOLVED, that all actions and deeds heretofore taken by any officer of
Bison in connection with the transactions contemplated by the Delaware
Merger Certificate or any of the other transactions contemplated by
these resolutions are hereby approved, ratified and confirmed in all
respects.
FOURTH: That the Merger was approved by the written consent of the
sole stockholder of Bison on the sixth day of August, 1999.
5
<PAGE>
IN WITNESS WHEREOF, Bison Acquisition Corp. has caused this
Certificate to be signed by Charles H. R. Bracken, its vice president, as of the
sixth day of August, 1999.
By: /s/ Charles H. R. Bracken
-------------------------
Name: Charles H. R. Bracken
Title: Vice President
6
<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 three
months ended September 30, 1999 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 23,809
<SECURITIES> 0
<RECEIVABLES> 12,393
<ALLOWANCES> 2,703
<INVENTORY> 6,129
<CURRENT-ASSETS> 66,604
<PP&E> 188,254
<DEPRECIATION> (4,687)
<TOTAL-ASSETS> 1,208,389
<CURRENT-LIABILITIES> 192,232
<BONDS> 306,999
0
0
<COMMON> 0
<OTHER-SE> 709,158
<TOTAL-LIABILITY-AND-EQUITY> 1,208,389
<SALES> 0
<TOTAL-REVENUES> 61,682
<CGS> 0
<TOTAL-COSTS> 197,976
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (38,308)
<INCOME-PRETAX> (176,626)
<INCOME-TAX> (33)
<INCOME-CONTINUING> (176,459)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (2,436)
<NET-INCOME> (178,895)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
