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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, 2000.
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.)
4643 ULSTER STREET
SUITE 1300
DENVER, COLORADO 80237
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (303)770-4001
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, 2000, was:
Common Stock 1,000
<PAGE>
@ ENTERTAINMENT, INC.
FORM 10-Q INDEX
FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
@ Entertainment
Consolidated Balance Sheets....................................... 2-3
Consolidated Statements of Operations.............................. 4
Consolidated Statements of Comprehensive Loss...................... 5
Consolidated Statements of Cash Flows.............................. 6
Notes to Consolidated Financial Statements........................ 7-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................... 13-21
Item 3. Quantitative and Qualitative Disclosures About Market Risk............. 21
PART II OTHER INFORMATION
Item 1. Legal Proceedings..................................................... 22
Item 2. Changes in Securities and Use of Proceeds............................. 22
Item 3. Defaults Upon Senior Securities....................................... 22
Item 4. Submission of Matters to a Vote of Security Holders................... 22
Item 5. Other Information..................................................... 22
Item 6. Exhibits and Reports on Form 8-K...................................... 22
</TABLE>
1
<PAGE>
@ ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
(unaudited)
(in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 17,326 $ 35,520
Trade accounts receivable, net of allowance for doubtful accounts
of $6,538 in 2000 and $3,090 in 1999 14,456 12,808
Programming and broadcast rights 17,105 7,200
VAT recoverable 990 9,623
Prepayments 6,530 1,883
Other current assets 1,111 1,162
----------- -----------
Total current assets 57,518 68,196
----------- -----------
Property, plant and equipment:
Cable television systems assets 124,803 123,845
D-DTH, transmission and production equipment 136,697 82,327
Construction in progress 10,782 7,400
Vehicles 1,700 1,943
Other 17,423 15,871
----------- -----------
291,405 231,386
Less accumulated depreciation (43,732) (12,602)
----------- -----------
Net property, plant and equipment 247,673 218,784
Inventories for construction 7,746 5,511
Intangibles, net of accumulated amortization of $70,751
in 2000 and $26,110 in 1999 819,878 906,987
Investments in affiliated companies 14,421 19,393
----------- -----------
Total assets $ 1,147,236 $ 1,218,871
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
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@ ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------- -----------
(unaudited)
(in thousands)
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 82,651 $ 72,963
Accrued interest 591 243
Deferred revenue 6,903 4,009
----------- -----------
Total current liabilities 90,145 77,215
----------- -----------
Long-term liabilities:
Notes payable and accrued interest to UPC 337,702 220,149
Notes payable 345,098 314,547
----------- -----------
Total liabilities 772,945 611,911
----------- -----------
Commitments and contingencies (note 7) -- --
Stockholder's equity:
Common stock, $.01 par value; 1,000 shares authorized, issued
and outstanding as of September 30, 2000 and December 31, 1999 -- --
Paid-in capital 847,236 812,549
Accumulated other comprehensive loss (134,092) (61,412)
Accumulated deficit (338,853) (144,177)
----------- -----------
Total stockholder's equity 374,291 606,960
----------- -----------
Total liabilities and stockholder's equity $ 1,147,236 $ 1,218,871
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
@ ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Successor Successor | Predecessor Successor Predecessor
(note 2) (note 2) | (note 2) (note 2) (note 2)
--------- --------- | --------- --------- ---------
|
Three months Two months | One month Nine months Seven months
ended ended | ended ended ended
September 30, September 30,| July 31, September 30, July 31,
2000 1999 | 1999 2000 1999
--------- --------- | --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues $ 31,843 $ 14,742 | $ 7,085 $ 88,633 $ 46,940
|
Operating expenses: |
Direct operating expenses 29,148 18,277 | 11,777 87,035 70,778
Selling, general and administrative expenses 14,051 13,018 | 13,825 44,031 51,034
Depreciation and amortization 27,817 20,942 | 1,228 80,281 23,927
--------- --------- | --------- --------- ---------
Total operating expenses 71,016 52,237 | 26,830 211,347 145,739
--------- --------- | --------- --------- ---------
|
Operating loss (39,173) (37,495) | (19,745) (122,714) (98,799)
|
Interest and investment income, net 325 323 | 410 965 2,823
Interest expense (18,550) (9,490) | (4,441) (53,087) (28,818)
Equity in (losses)/profits of affiliated companies (625) 577 | (474) (587) (1,004)
Foreign exchange loss, net (3,839) (2,355) | (199) (13,456) (2,188)
Non-operating expense/(income) 296 -- | -- 98 --
Impairment of D-DTH equipment (2,117) -- | -- (5,811) --
--------- --------- | --------- --------- ---------
|
|
|
Loss before income taxes (63,683) (48,440) | (24,449) (194,592) (127,986)
|
Income tax expense (44) (3) | (3) (84) (30)
--------- --------- | --------- --------- ---------
|
Net loss (63,727) (48,443) | (24,452) (194,676) (128,016)
|
Accretion of redeemable preferred stock -- -- | (418) -- (2,436)
========= ========= | ========= ========= =========
|
Net loss applicable to holders of common stock $ (63,727) $ (48,443) | $ (24,870) $(194,676) $(130,452)
========= ========= | ========= ========= =========
|
Basic and diluted loss per common share $ N/A $ N/A | $ (0.73) $ N/A $ (3.90)
========= ========= | ========= ========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
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@ ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
Successor Successor | Predecessor Successor Predecessor
(note 2) (note 2) | (note 2) (note 2) (note 2)
--------- --------- | --------- --------- ---------
Three months Two months | One month Nine months Seven months
ended ended | ended ended ended
September 30, September 30, | July 31, 1999 September 30, July 31, 1999
2000 1999 | 2000
--------- --------- | --------- --------- ---------
(in thousands) | (in thousands)
|
<S> <C> <C> | <C> <C> <C>
Net loss $ (63,727) $ (48,443) | $ (24,452) $(194,676) $(128,016)
Other comprehensive income / (loss): |
Translation adjustment (29,116) (53,681) | 2,136 (72,680) (23,819)
--------- --------- | --------- --------- ---------
Comprehensive loss $ (92,843) $(102,124) | $ (22,316) $(267,356) $(151,835)
========= ========= | ========= ========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
5
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@ ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Successor Successor | Predecessor
(note 2) (note 2) | (note 2)
--------- --------- | ---------
Nine months ended Two months ended |Seven months ended
September 30, 2000 September 30, 1999 | July 31, 1999
------------------ ------------------ | -------------------
(in thousands) |
<S> <C> <C> | <C>
Cash flows from operating activities: |
Net loss $(194,676) $ (48,443) | $(128,016)
Adjustments to reconcile net loss to |
net cash used in operating activities: |
Depreciation and amortization 80,281 20,942 | 23,927
Amortization of notes payable discount and issue costs 31,343 6,892 | 19,209
Equity in (profits)/losses of affiliated companies (587) (577) | 1,004
Impairment of D-DTH equipment 5,811 -- | --
Unrealized foreign exchange losses 12,583 -- | --
Other -- (269) | 619
Changes in operating assets and liabilities: |
Accounts receivable (2,767) 285 | (2,651)
Other current assets 4,143 (3,429) | 6,985
Programming and broadcast rights (9,905) (3,191) | (3,378)
Accounts payable (13,865) (6,192) | 488
Deferred revenue 3,244 (504) | 1,103
Interest payable to UPC 20,533 -- | --
Other -- (260) | 3,468
--------- --------- | ---------
Net cash used in operating activities (63,862) (34,746) | (77,242)
--------- --------- | ---------
Cash flows from investing activities: |
Construction and purchase of property, plant and equipment (80,542) (3,716) | (24,034)
Other investments -- (237) | (1,753)
Purchase of intangibles (3,506) (145) | --
Purchase of subsidiaries, net of cash received -- -- | (6,860)
--------- --------- | ---------
Net cash used in investing activities (84,048) (4,098) | (32,647)
--------- --------- | ---------
Cash flows from financing activities: |
Proceeds from issuance of notes and warrants -- -- | 109,755
Proceeds from issuance of preferred stock and warrants -- -- | 48,295
Costs to obtain loans -- -- | (5,156)
Proceeds from loans from UPC 96,411 -- | --
Capital increase from UPC 34,687 -- | --
Repayment of notes payable (840) -- | --
Proceeds from issuance of common stock -- 146 | 6,447
--------- --------- | ---------
Net cash provided by financing activities 130,258 146 | 159,341
--------- --------- | ---------
Net increase/(decrease) in cash and cash equivalents (17,652) (38,698) | 49,452
Effect of exchange rates on cash and cash equivalents (542) -- | --
|
Cash and cash equivalents at beginning of period 35,520 62,507 | 13,055
--------- --------- | ---------
Cash and cash equivalents at end of period $ 17,326 $ 23,809 | $ 62,507
========= ========= | =========
Supplemental cash flow information: |
Cash paid for interest $ 1,218 $ 365 | $ 7,304
========= ========= | =========
Cash paid for income taxes $ 97 $ 53 | $ 47
========= ========= | =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE>
@ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
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 which are solely of a recurring nature and 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, 2000. 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 1999
Annual Report on Form 10-K filed with the SEC (the "1999 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 (the
"Merger Agreement") 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 Merger Agreement, 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 and stock options.
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 (as
defined in the indentures governing the @Entertainment and Poland
Communications, Inc. ("PCI") notes) occurred on August 6, 1999 as a result of
the Acquisition and Merger.
The Company 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 on August 5, 1999. At that date, the notes of the Company and
PCI were restated to reflect the market value and as a result were increased by
$61.9 million and deferred financing costs of $16.1 million and deferred
revenues of $2.0 million were written down to zero. The consideration paid by
UPC for all outstanding shares, warrants and options totalled $812.5 million. At
that time the Company had negative net assets of approximately $53.3 million and
existing goodwill at net book value of $37.5 million, which was realized on
previous transactions. As a result of the above considerations, UPC realized
goodwill of approximately $979.3 million. During the nine months period ended
September 30, 2000 this figure increased by $12.3 million to $991.6 million
mainly due to the results of an arbitration between the Company and Telewizyjna
Korporacja Partycypacyjna ("TKP"). See Note 7 Commitments and Contingencies for
a discussion of this arbitration. 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. @Entertainment allocated goodwill between the business
segments based on the investment model used for the acquisition.
The following pro forma condensed consolidated results for the nine months ended
September 30, 1999, give effect to the Acquisition as if it had occurred at the
beginning of the period 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 the assumptions that goodwill and the
amortization thereon would be pushed down as if the transactions had occurred at
the beginning of the period presented. Additionally, interest expense related to
the deferred financing costs was removed for each of the periods presented.
There was no tax effect from these adjustments because of the significant net
losses.
7
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<TABLE>
<CAPTION>
Nine months ended Nine months ended September 30, 1999
September 30, 2000 (unaudited)
(unaudited)
--------- --------- ---------
Historical Historical Pro Forma
<S> <C> <C> <C>
Service and other revenue $ 88,633 $ 61,682 $ 61,682
========= ========= =========
Net loss $(194,676) $(176,459) $(205,033)
--------- --------- ---------
</TABLE>
3. FINANCIAL POSITION AND BASIS OF ACCOUNTING
These consolidated financial statements have been prepared on a going concern
basis which contemplates the continuation and expansion of trading activities as
well as the realization of assets and liquidation of liabilities in the ordinary
course of business. Pay television operators typically experience losses and
negative cash flow in their initial years of operation due to the large capital
investment required for the construction or acquisition of their cable networks,
acquisition of programming rights, acquisition of reception systems for digital
direct-to-home satellite broadcast ("D-DTH") business and the administrative
costs associated with commencing operations. Consistent with this pattern, the
Company has incurred substantial operating losses since inception. The Company
expects to experience substantial operating losses and negative cash flows for
at least the next year in association with the expansion of the D-DTH and
programming businesses. As of September 30, 2000, the Company has negative
working capital and significant commitments under non-cancelable operating
leases and contracts for programming rights. Additionally, the Company is
currently and is expected to continue to be highly leveraged. The ability of the
Company to meet its debt service obligations will depend on the future operating
performance and financial results of the Company as well as its ability to
obtain additional third party financing to support the planned expansion, as
well as obtaining additional financing from its parent, UPC. The Company's
current cash on hand will be insufficient to satisfy all of its commitments and
to complete its current business plan for its D-DTH, cable and programming
business.
Management of the Company believes that significant opportunities exist for
pay television providers capable of delivering high quality, Polish and other
languages programming on a multi-channel basis and other services (i.e. data and
voice). As such, the Company has focused its financial and business efforts
toward its position in the cable, D-DTH and programming markets. The Company's
business strategy is designed to increase its market share and subscriber base
and to maximize revenue per subscriber. To accomplish its objectives and to
capitalize on its competitive advantages, the Company intends to (i) develop and
control the content of programming on its cable and D-DTH systems; (ii) increase
its distribution capabilities through internal growth and through acquisitions;
(iii) implement additional revenue generating services over its cable and DTH
systems; (iv) control its management of subscribers by using advanced integrated
management information systems;(v) establish Wizja TV as the leading brand name
in the Polish pay television industry. 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 refinancing 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. UPC has declared that it
will continue to financially support @ Entertainment and its subsidiaries as a
going concern, and accordingly enable @ Entertainment and its subsidiaries to
meet their financial obligations if and when needed.
Several of the Company's Polish subsidiaries have statutory shareholders' equity
less than the legally prescribed limits because of accumulated losses. The
management of these companies will have to make decisions on how to increase the
shareholders' equity to be in compliance with the Polish Commercial Code. The
Company is currently considering several alternatives, including the conversion
of intercompany debt into equity, in order to resolve these deficiencies.
4. CAPITAL CONTRIBUTIONS
During the period of nine months ended September 30, 2000, UPC made a capital
contribution of $34.7 million and additional loans of $96.4 million to the
Company to fund the Company's activities. On September 30, 2000, the Company
had, on a consolidated basis, approximately $682.8 million aggregate principal
amount of indebtedness outstanding, of which approximately $337.7 million was
owed to UPC. All of the loans from UPC to @Entertainment bear interest at 9.75%
per annum and mature in 2029. Loans from UPC with an aggregate principal amount
of $150.0 million have been subordinated to the Company's Senior Discount Notes
due 2008, Series C Senior Discount Notes and Senior Discount Notes due 2009.
5. RECLASSIFICATIONS
Certain amounts have been reclassified in the corresponding period's unaudited
consolidated financial statements to conform to the unaudited consolidated
financial statement presentation for the three and nine months ended September
30, 2000.
6. PER SHARE INFORMATION
Basic 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) on earnings per share, i.e. dilutive loss per share is the
same as basic loss per share.
The following table provides a reconciliation of the numerator and denominator
in the loss per share calculation:
8
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<TABLE>
<CAPTION>
Successor Successor | Predecessor Successor Predecessor
(note 2) (note 2) | (note 2) (note 2) (note 2)
-------------------------- | --------------------------------------------
Threes Two months | One month Nine months Seven
months ended | ended ended months
September September | July September ended July
30, 2000 30, 1999 | 31, 1999 30, 2000 31, 1999
(unaudited) (unaudited) | (unaudited) (unaudited) (unaudited)
---------------------------- | ---------------------------------------------
|
|
<S> <C> <C> | <C> <C> <C>
Net loss attributable to common |
stockholders (in thousands) $ (63.727) $(48.443) | (24.870) $(194.676) $ (130.452)
|
Basic weighted average number of common shares |
outstanding (in thousands) N/A N/A | $ 33.889 N/A $ 33.459
--------- -------- | ----------- --------- -----------
Loss per share-basic and diluted N/A N/A | $ (0.73) N/A $ 3.90
========= ======== =========== ========= ===========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
PROGRAMMING, BROADCAST AND EXHIBITION RIGHTS
The Company has entered into long-term programming agreements and agreements for
the purchase of certain exhibition or broadcast rights with a number of third
party content providers for its 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, 2000, the Company had an aggregate minimum commitment in relation
to these agreements of approximately $197,864,000 over the next seven years,
approximating $14,653,000 for the remainder of 2000, $65,277,000 in 2001,
$51,620,000 in 2002, $34,288,000 in 2003, $22,686,000 in 2004 and $9,340,000 in
2005 and thereafter.
PURCHASE COMMITMENTS
As of September 30, 2000, the Company had an aggregate minimum commitment toward
the purchase of the D-DTH reception systems from Philips Electronics B.V. of
approximately $43,625,000 over the next two years, approximating $26,400,000 for
the remainder of 2000 and $17,225,000 in 2001.
LEASES
The Company leases transponders on the Astra satellites, D-DTH technical
equipment, conduits and several offices and warehouses. At September 30, 2000
the Company had an aggregate minimum commitment in relation to those leases of
approximately $246,681,000 over the next seven years, approximately $10,430,000
for the remainder of 2000, $34,173,000 in 2001, $32,878,000 in 2002, $32,698,000
in 2003, $32,427,000 in 2004 and $104,075,000 in 2005 and thereafter.
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 not yet settled, 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 ("TKP")
On April 17, 1998, the Company signed a binding letter of intent with 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 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 was obligated to pay the Company a
$5 million break-up fee within 10 days of the Signature Date if the definitive
agreements were not executed by the Signature Date, unless the failure to obtain
such execution was caused by the Company's breach of any of its obligations
under the letter of intent. If there was any such breach by the Company, the
Company was obligated to pay TKP $10 million. However, if any breach of the
letter of intent by TKP caused
9
<PAGE>
the definitive agreements not to be executed, TKP was obligated to pay the
Company a total of $10 million (including the $5 million break-up fee).
The Company 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
tribunal in Geneva, Switzerland. In their claim, TKP and its shareholders
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 answered and brought counterclaims against TKP
and its shareholders. The arbitration hearings were conducted in Geneva in
June 1999. On June 26, 2000, the arbitration tribunal awarded TKP $10 million
plus interest and costs and dismissed the Company's request for damages
against TKP and its shareholders. Following the award, the Company decided
not to appeal. During the second quarter of the year 2000, the Company
accrued $12.0 million related to the arbitration. The payment of the awarded
amount of $12,218,100 was made on October 27, 2000
PCBV MINORITY STOCKHOLDER'S CLAIM
On or about July 8, 1999, certain minority shareholders ("the minority
shareholders") of Poland Cablevision (Netherlands) B.V. ("PCBV"), a subsidiary
of PCI, filed a lawsuit against PCI, @Entertainment, 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 included: (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 could 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 set forth eight claims for relief based on allegations
that the defendants, including the Company 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.
On or about March 31, 2000 the parties to the lawsuit reached a settlement. In
accordance with the settlement, on June 2, 2000, Wizja TV B.V., an affiliate of
PCI, purchased approximately 1.4% of the outstanding shares of PCBV for a price
of approximately $2.2 million. The case has been dismissed and releases
exchanged.
In addition to the Ohio lawsuit, other minority shareholders of PCBV
(representing an additional approximately 6% of the shares of PCBV) have
asserted similar claims against PCI but have not yet filed suit. The
aforementioned settlement does not include the remaining minority shareholders.
8. SEGMENT INFORMATION
The Company and its subsidiaries operate in four business segments: (1) cable
television, (2) D-DTH television, (3) programming, and (4) 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. During
1999 and in prior years, the Company presented its operations in three
business segments: (1) cable television, (2) D-DTH television and
programming, and (3) corporate. Due to the increasing size of the D-DTH
segment, in January 2000, management decided to separate its D-DTH operations
into two distinct segments, satellite television and programming. Certain
amounts have been reclassified in the 1999 unaudited consolidated financial
statements to conform to the presentation of unaudited consolidation
financial statements for the nine months ended September 30, 2000.
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 profits and
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.
10
<PAGE>
SELECTED SEGMENT DATA
(UNAUDITED IN THOUSANDS OF US DOLLARS)
<TABLE>
<CAPTION>
CABLE D-DTH PROGRAMMING CORPORATE TOTAL
----- ----- ----------- --------- -----
<S> <C> <C> <C> <C> <C>
Three months ended September 30, 2000
-------------------------------------
(Successor note 2)
Revenues from external customers $ 17,094 $ 14,507 $ 242 $ -- $ 31,843
Intersegment revenues -- -- 14,560 -- 14,560
Operating loss (11,269) (11,495) (16,060) (349) (39,173)
EBITDA 156 (886) (10,277) (349) (11,356)
Segment total assets 474,939 359,064 300,358 12,875 1,147,236
Two months ended September 30, 1999 (Restated)
----------------------------------------------
(Successor note 2)
Revenues from external customers $ 10,687 $ 3,763 $ 292 $ -- $ 14,742
Intersegment revenues -- -- 4,657 -- 4,657
Operating loss (8,871) (13,009) (13,842) (1,773) (37,495)
EBITDA (994) (4,091) (9,702) (1,766) (16,553)
Segment total assets 525,744 335,200 320,042 27,403 1,208,389
One month ended July 31, 1999
-----------------------------
(Predecessor note 2)
Revenues from external customers $ 5,170 $ 1,828 $ 87 $ -- $ 7,085
Intersegment revenues -- -- 2,290 -- 2,290
Operating loss (1,556) (4,466) (4,548) (9,175) (19,745)
EBITDA 49 (5,306) (4,095) (9,165) (18,517)
Segment total assets 186,941 58,239 68,672 69,164 383,016
Nine months ended September 30, 2000
------------------------------------
(Successor note 2)
Revenues from external customers $ 51,124 $ 36,145 $ 1,364 $ -- $ 88,633
Intersegment revenues -- -- 40,144 -- 40,144
Operating loss (32,442) (35,200) (53,579) (1,493) (122,714)
EBITDA 1,586 (6,236) (36,290) (1,493) (42,433)
Segment total assets 474,939 359,064 300,358 12,875 1,147,236
Seven months ended July 31, 1999 (Restated)
-------------------------------------------
(Predecessor note 2)
Revenues from external customers $ 35,434 $ 10,675 $ 831 $ -- $ 46,940
Intersegment revenues -- -- 15,095 -- 15,095
Operating loss (11,936) (44,833) (28,094) (13,936) (98,799)
EBITDA 1,883 (37,754) (25,083) (13,918) (74,872)
Segment total assets 186,941 58,239 68,672 69,164 383,016
</TABLE>
9. JOINT VENTURE WITH MTV
On March 1, 2000, UPC Programming B.V., an affiliate of the Company, entered
into joint a venture with MTV Networks B.V. for a 50% equity interest in MTV
Polska for the purpose of producing a localized Polish MTV programming
channel for distribution in Poland. The Company has agreed to sell certain
assets of its subsidiary, Ground Zero Media, to UPC Programming B.V., which
will in turn contribute these assets to the joint venture. As a result of the
joint venture, MTV Polska has licensed the right to distribute the MTV Polska
and VH1 programming channels in Poland to UPC Programming B.V. In turn, UPC
Programming B.V. intends to novate such rights to Wizja TV B.V. Those
carriage rights are used by UPC Telewizja Kablowa (previously Polska
Telewizja Kablowa) and UPC Broadcast Centre Limited in respect of
distribution in Poland.
11
<PAGE>
10. BROADCASTING LICENSE
On April 7, 2000, Polska Telewizja Cyfrowa Sp. z o.o., owned in part by a
subsidiary of the Company, filed applications with the National Broadcast
Council for broadcasting licences for Wizja Sport and Wizja Jeden. At the same
time Polska Telewizja Cyfrowa Sp. z o.o. filed another application with the
National Broadcast Council for a satellite platform license for Wizja Sport,
Wizja Jeden and certain third part programming. The license has been approved by
the National Broadcast Council but not yet issued. Upon issuance, Polska
Telewizja Cyfrowa Sp. z o.o. will be a broadcaster under the Polish law.
11. DATA TRANSMISSION LICENSE
On July 26, 2000 the Polish Ministry of Telecommunication issued a 15-year
data transmission license to a subsidiary of the Company, authorizing that
company to provide data transmission service to its customers throughout the
territory of Poland, using its own networks and those leased from other
licensed operators. This license will allow that subsidiary to provide
broadband internet services to its customers.
As of September 30, 2000, approximately 75% of the Company's cable plant runs
through conduits leased from the Polish national telephone company ("TP
S.A."). If the Company uses the cables for a purpose other than cable
television, such as data transmission, telephone, or Internet access, such
use could be considered a violation of the terms of certain conduit
agreements, unless this use is expressly authorized by TP S.A. There is no
guarantee that TP S.A. would give its approval to permit other uses of the
conduits. The Company is currently in the process of introducing Internet
services to its customers and renegotiating certain conduit agreements with
TP S.A..
12
<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
1999 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 June 2, 1999, the Company entered into an Agreement and Plan of Merger (the
"Merger Agreement") 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 Merger Agreement, 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 and stock options.
On August 6, 1999, Bison, UPC's wholly-owned subsidiary, 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.
Until the limited launch of the Company's D-DTH business on July 1, 1998 and
subsequent full-scale launch on September 18, 1998, the Company's revenues were
derived entirely from its cable television business and programming related
thereto. The Company's revenue has increased $10.0 million or 45.9% from $21.8
million in the three months ended September 30, 1999 to $31.8 million in the
three months ended September 30, 2000 and $26.9 million or 43.6% from $61.7
million in the nine months ended September 30, 1999 to $88.6 million in the nine
months ended September 30, 2000. This increase was due primarily to internal
growth in subscribers
13
<PAGE>
through new network expansion, increases in cable subscription rates, further
development of the Wizja TV programming package and advertising sales.
The Company generated an operating loss of $39.2 million for the three months
ended September 30, 2000 and $122.7 million for the nine months ended
September 30, 2000, primarily due to amortization charges related to goodwill
pushed down as a result of the Acquisition of @Entertainment, the significant
costs associated with development of the Company's D-DTH and programming
businesses, promotion of those businesses and the development, the expansion
of the Company's cable networks, production and acquisition of programming
for Wizja TV and introduction of internet services.
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 four segments: (1) cable television,
(2) D-DTH television, (3) programming, and (4) 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. During 1999 and in
the prior years, the Company presented its operations in three business
segments: (1) cable television, (2) D-DTH television and programming, and (3)
corporate. Due to the increasing size of the D-DTH segment, in January 2000,
management decided to separate its D-DTH operations into two distinct segments,
satellite television and programming . Certain amounts have been reclassified
in the 1999 unaudited consolidated financial statements to conform to the
presentation of unaudited consolidated financial statements for the nine
months ended September 30, 2000.
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 profits and
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. presentation of 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 the segment results of the Company's operations for
the nine months ended September 30, 2000 and 1999.
14
<PAGE>
SEGMENT RESULTS OF OPERATIONS
(UNAUDITED, IN MILLIONS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS TWO MONTHS | ONE MONTH NINE MONTHS SEVEN MONTHS
ENDED ENDED | ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, | JULY 31, SEPTEMBER 30, JULY 31, 1999
2000 1999 | 1999 2000
(SUCCESSOR) (SUCCESSOR) | (PREDECESSOR) (SUCCESSOR) (PREDECESSOR)
----------------- -----------------| --------------- --------------- ---------------
|
<S> <C> <C> | <C> <C> <C>
REVENUES |
Cable 17,094 10,687 | 5,170 51,124 35,434
D-DTH 14,507 3,763 | 1,828 36,145 10,675
Programming 14,802 4,949 | 2,377 41,508 15,926
Corporate and Other - - | - - -
Intersegment elimination (1) (14,560) (4,657)| (2,290) (40,144) (15,095)
----------------- -----------------| --------------- --------------- ---------------
TOTAL 31,843 14,742 | 7,085 88,633 46,940
|
|
OPERATING LOSS |
Cable (11,269) (8,871)| (1,556) (32,442) (11,936)
D-DTH (11,495) (13,009)| (4,466) (35,200) (44,833)
Programming (16,060) (13,842)| (4,548) (53,579) (28,094)
Corporate and Other (349) (1,773)| (9,175) (1,493) (13,936)
----------------- -----------------| --------------- --------------- ---------------
TOTAL (39,173) (37,495)| (19,745) (122,714) (98,799)
|
|
EBITDA |
Cable 156 (994)| 49 1,586 1,883
D-DTH (886) (4,091)| (5,306) (6,236) (37,754)
Programming (10,277) (9,702)| (4,095) (36,290) (25,083)
Corporate and Other (349) (1,766)| (9,165) (1,493) (13,918)
----------------- -----------------| --------------- --------------- ---------------
TOTAL (11,356) (16,553)| (18,517) (42,433) (74,872)
</TABLE>
(1) Comprised of Wizja TV programming costs charged to the cable segment and
D-DTH segment by the programming segment in the nine months ended September 30,
2000 and 1999.
The Company for seven and one months ended July 31, 1999 prior to the
Acquisition is herein referred to as "Predecessor" and the Company for the nine
months ended September 30, 2000 and two months ended September 30, 1999 after
the Acquisition is herein referred to as "Successor".
CABLE SEGMENT OVERVIEW
The Company operates the largest cable television system in Poland with
approximately 1,811,300 homes passed and approximately 1,042,500 total
subscribers as at September 30, 2000. The Company continues to realize
subscriber growth mainly through a combination of new network build-out and
acquisitions.
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, 2000,
approximately 70.7% of the Company's cable subscribers received its basic
package. Currently, almost all of the Company's cable revenue is derived from
monthly subscription fees.
During 1998 and 1999, management completed several strategic actions in support
of its 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 subscribers. Since that
date, the basic Wizja TV package has been expanded to 26 channels. On September
18, 1999, the Company launched a proprietary premium channel called Wizja Sport.
The Company is
15
<PAGE>
planning to launch internet services in the last quarter of the year 2000 on
certain of its cable networks and has been investing in upgrading its networks
to provide this service.
As of September 30, 2000, approximately 75% of the Company's cable plant runs
through conduits leased from the Polish national telephone company ("TP
S.A."). If the Company uses the cables for a purpose other than cable
television, such as data transmission, telephone, or Internet access, such
use could be considered a violation of the terms of certain conduit
agreements, unless this use is expressly authorized by TP S.A. There is no
guarantee that TP S.A. would give its approval to permit other uses of the
conduits. The Company is currently in the process of introducing Internet
services to its customers and renegotiating certain conduit agreements with
TP S.A..
CABLE TELEVISION REVENUE. Revenue increased $1.2 million or 7.5% from $15.9
million in the three months ended September 30, 1999 to $17.1 million in the
three months ended September 30, 2000 and increased $5.0 million or 10.8% from
$46.1 million in the nine months ended September 30, 1999 to $51.1 million in
the nine months ended September 30, 2000. This increase was primarily
attributable to a 5.5% increase in the number of basic and intermediate
subscribers from approximately 743,300 at September 30, 1999 to approximately
784,300 at September 30, 2000, as well as an increase in monthly subscription
rates. The increase in basic and intermediate subscribers was primarily due to
build-out of the Company's existing cable networks.
Revenue from monthly subscription fees represented almost all of the Company's
cable television revenue for the three and nine months ended September 30, 2000
and 1999. During the three and nine months ended September 30, 2000, the Company
generated approximately $1.2 million and $3.3 million, respectively, of premium
subscription revenue as a result of providing the HBO Poland service pay movie
channel and Wizja Sport to cable subscribers as compared to $0.5 million and
$1.6 million for the same periods in 1999.
DIRECT OPERATING EXPENSES. Direct operating expenses for the three months
ended September 30, 2000 amounted to $11.1 million and remain the same as for
the three months ended September 30, 1999, and decreased $0.7 million or 2.2%
from $31.7 million in the nine months ended September 30, 1999 to $31.0 in
the nine months ended September 30, 2000, principally as a result of
restructuring programming agreements with Wizja TV, a subsidiary of the
Company in the programming segment. Direct operating expenses decreased from
69.8% of revenues for the three months ended September 30, 1999 to 64.9% of
revenues for the three months ended September 30, 2000 and decreased from
68.8% of revenues in the nine months ended September 30, 1999 to 60.7% of
revenues in the nine months ended September 30, 2000. However, without
considering the programming cost for the purchase of the Wizja programming
package recorded in 2000 and 1999 the comparison would have been 22.1% and
34.9% for the nine months ended September 30, 2000 and 1999, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.1 million or 1.8% from $5.7 million for the
three months ended September 30, 1999 to $5.8 million for the three months ended
September 30, 2000 and increased $5.1 million or 37.8% from $13.5 million in the
nine months ended September 30, 1999 to $18.6 million in the nine months ended
September 30, 2000. This increase was attributable mainly due to increased
selling and marketing activities compared to the previous year.
As a percentage of revenue, selling, general and administrative expenses
decreased from 35.8% for the three months ended September 30, 1999 to
approximately 33.9% for the three months ended September 30, 2000 and
increased from 29.3% of revenue for the nine months ended September 30, 1999
to 36.4% for the nine months ended September 30, 2000.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense rose
$1.9 million, or 20.0%, from $9.5 million for the three months ended
September 30, 1999 to $11.4 million for the three months ended September 30,
2000 and increased $12.3 million or 56.7% from $21.7 million for the nine
months ended September 30, 1999 to $34.0 million for the nine months ended
September 30, 2000, principally as a result of depreciation and amortization
of additional goodwill pushed down as a result of the Acquisition and the
continued build-out of the Company's cable networks. Depreciation and
amortization expense as a percentage of revenues increased from 59.7% for the
three months ended September 30, 1999 to 66.7% for the three months ended
September 30, 2000 and increased from 47.1% in the nine months ended
September 30, 1999 to 66.5% in the nine months ended September 30, 2000.
Each of these factors contributed to an operating loss of $10.4 million, $11.3
million, for the three months ended September 30, 1999 and 2000, respectively,
and $20.8 million and $32.4 million for the nine months ended September 30, 1999
and 2000, respectively.
D-DTH SEGMENT OVERVIEW
The Company's D-DTH roll-out strategy was to lease D-DTH reception systems 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 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, 2000, the Company had approximately 383,200 D-DTH
subscribers as compared to 181,600 at September 30, 1999. The number of Philips
Electronics B.V. authorized electronics retailers distributing the Wizja TV
package increased from 1,215 as of September 30, 1999 to 1,297 as of September
30, 2000.
The Company is planning to launch internet services in the last quarter of the
year 2000 to its D-DTH subscribers and has been investing in upgrading its D-DTH
transmission and production equipment.
At September 30, 2000 approximately 58.3% of D-DTH subscribers received premium
service as compared to approximately 52.0% at September 30, 1999. The Company
currently provides two premium channels (1) HBO Poland Service, a
Polish-language version of HBO's premium movie channel and (2) Wizja Sport, the
Company's proprietary sport channel.
D-DTH REVENUE. Revenue increased $8.9 million or 158.9% from $5.6 million for
the three months ended September 30, 1999 to $14.5 million for three months
ended September 30, 2000 and increased $21.7 million or 150.7% from $14.4
million in the nine months ended
16
<PAGE>
September 30, 1999 to $36.1 in the nine months ended September 30, 2000. This
increase was primarily due to an increased number of D-DTH subscribers from
181,557 at September 30, 1999 to 383,237 at September 30, 2000.
During the three and nine months ended September 30, 2000 the Company generated
approximately $3.3 million and $8.4 million of premium subscription revenue,
respectively, as a result of providing the HBO Poland service pay movie channel
and Wizja Sport to its subscribers, as compared to $1.2 million and $ 2.9
million for the three and nine months ended September 30, 1999, respectively.
DIRECT OPERATING EXPENSES. Direct operating expenses increased $1.1 million, or
11.8%, from $9.3 million for the three months ended September 30, 1999 to $10.4
million for the three months ended September 30, 2000 and decreased $6.4 million
or 18.6% from $34.4 million in the nine months ended September 30, 1999 to $28.0
million in the nine months ended September 30, 2000. These decreases principally
resulted from the Company switching its policy from selling to leasing its D-DTH
reception systems. Between April 1, 1999 and November 8, 1999 the Company was
selling its reception systems to customers. Beginning November 8, 1999 the
Company returned to leasing its reception systems. As the reception systems were
sold on a promotional basis the Company recognized a loss of $3.7 and $22.9
million in the three and nine months ended September 30, 1999. Direct operating
expenses amounted to 71.7% and 77.6% of revenues for the three and nine months
ended September 30, 2000, respectively, compared to 166.1% and 238.9% of
revenues for the three and nine months ended September 30, 1999, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $0.8 million or 14.0% from $5.7 million for
the three months ended September 30, 1999 to $4.9 million for the three months
ended September 30, 2000 and decreased $7.6 million or 34.7% from $21.9 million
in the nine months ended September 30, 1999 to $14.3 million in the nine months
ended September 30, 2000. The decrease in selling, general and administrative
expenses over the corresponding 1999 period was attributable mainly to sales and
marketing expenses associated with aggressive promotion of the Company's D-DTH
service during the nine months ended September 30, 1999 as compared to the nine
months ended September 30, 2000. As a percentage of revenue, selling, general
and administrative expenses amounted to approximately 101.8% and 33.8% for the
three months ended September 30, 1999 and 2000, respectively and 152.1% and
39.6% for the nine months ended September 30, 1999 and 2000, respectively.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $2.5
million or 30.9% from $8.1 million for the three months ended September 30, 1999
to $10.6 million for the three months ended September 30, 2000 and increased
$13.0 million or 81.3% from $16.0 million in the nine months ended September 30,
1999 to $29.0 million in the nine months ended September 30, 2000, principally
as a result of additional goodwill pushed down as a result of the Acquisition
and continued growth in D-DTH subscribers' base. Depreciation and amortization
expense as a percentage of revenues amounted to 144.6% and 73.1% for the three
months ended September 30, 1999 and 2000, respectively and 111.1% and 80.3% for
the nine months ended September 30, 1999 and 2000, respectively.
Each of these factors contributed to an operating loss of $11.5 million and
$35.2 million for the three and nine months ended September 30, 2000,
respectively, compared to an operating loss of $17.5 million and $57.8 million
for the three and nine months ended September 30, 1999.
PROGRAMMING SEGMENT OVERVIEW
The principal objectives of the Company for the programming segment is to
develop, acquire and distribute high-quality Polish-language programming that
can be commercially exploited throughout Poland through its D-DTH and cable
television systems, and to develop and maximize advertising sales.
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 three channels, Wizja Jeden, Wizja
Pogoda and Wizja Sport, that are owned and operated by the Company, two
channels, MTV Polska and VHI, that are operated as a joint venture with MTV
Networks B.V. and 20 channels that are produced by third parties, 11 of which
are broadcast under exclusive agreements for pay television in Poland.
PROGRAMMING REVENUE. Revenue increased $7.5 million or 102.7% from $7.3 million
for the three months ended September 30, 1999 to $14.8 million for three months
ended September 30, 2000 and increased $20.6 million or 98.6% from $20.9 million
in the nine months ended September 30, 1999 to $41.5 million in the nine months
ended September 30, 2000.
The programming segment generates most of its revenue from the cable and D-DTH
segments through providing its Wizja TV programming package. The intersegment
revenue represented $6.9 million or 94.5% and $14.6 million or 98.6% for the
three
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months ended September 30, 1999 and 2000, respectively, and $19.8 million or
94.7% and $40.1 million or 96.6% for the nine months ended September 30, 1999
and 2000, respectively.
DIRECT OPERATING EXPENSES. Direct operating expenses increased $5.6 million, or
33.7%, from $16.6 million for the three months ended September 30, 1999 to $22.2
million for the three months ended September 30, 2000 and increased $25.5
million or 59.7% from $42.7 million in the nine months ended September 30, 1999
to $68.2 million in the nine months ended September 30, 2000. These increases
principally were the result of increase in programming costs and maintenance
expenses associated with the satellite up-link and studio facility located in
Maidstone, United Kingdom, 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 150.0% of revenues and 164.3% of
revenue for the three and nine months ended September 30, 2000, respectively,
compared to 227.4% and 204.3% of revenue for the three and nine months ended
September 30, 1999, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $1.7 million or 37.0% from $4.6 million for
the three months ended September 30, 1999 to $2.9 million for the three months
ended September 30, 2000 and decreased $3.3 million or 25.6% from $12.9 million
in the nine months ended September 30, 1999 to $9.6 million in the nine months
ended September 30, 2000. The decrease in selling, general and administrative
expenses over the corresponding 1999 period was attributable mainly to decrease
in professional fees associated with obtaining long-term programming contracts
and broadcast/exhibition rights. As a percentage of revenue, selling, general
and administrative expenses amounted to approximately 63.0% and 19.6% for the
three months ended September 30, 1999 and 2000 and 61.7% and 23.1% for the nine
months ended September 30, 1999 and 2000, respectively.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization charges increased
$1.2 million or 26.1% from $4.6 million for the three months ended September 30,
1999 to $5.8 million for the three months ended September 30, 2000 and increased
$10.1 million or 140.3% from $7.2 million for the nine months ended September
30, 1999 to $17.3 million for the nine months ended September 30, 2000,
principally as a result of amortization of additional goodwill pushed down as a
result of the Acquisition. Depreciation and amortization expense as a percentage
of revenues amounted to 63.0% and 39.2% respectively for the three months ended
September 30, 1999 and 2000 and 34.4% and 41.7% for the nine months ended
September 30, 1999 and 2000, respectively.
Each of these factors contributed to an operating loss of $16.1 million and
$53.6 million for the three and nine months ended September 30, 2000,
respectively, compared to an operating loss of $18.4 million and $41.9 million
for the three and nine months ended September 30, 1999.
CORPORATE SEGMENT OVERVIEW
The Company's 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 $0.3 million and
$1.5 million for the three and nine months ended September 30, 2000,
respectively as compared to $10.9 million and $15.7 million for the
corresponding periods in 1999. This reduction was primarily due to reduced
activities of @Entertainment as a corporate office as a result of the
Acquisition.
NON-OPERATING RESULT
INTEREST EXPENSE. Interest expense increased $4.7 million, or 33.8%, from $13.9
million for the three months ended September 30, 1999 to $18.6 million for the
three months ended September 30, 2000 and increased $14.8 million or 38.6% from
$38.3 million in the nine months ended September 30, 1999 to $53.1 million in
the nine months ended September 30, 2000. Interest expense increased mainly as a
result of the additional financing from UPC for the nine months ended September
30, 2000.
INTEREST AND INVESTMENT INCOME, NET. Interest and investment income decreased
$0.4 million, or 57.1%, from $0.7 million for the three months ended
September 30, 1999 to $0.3 million for the three months ended September 30,
2000 and decreased $2.1 million or 67.7% from $3.1 million in the nine months
ended September 30, 1999 to $1.0 in the nine months ended September 30, 2000,
primarily due to the reduction in the level of cash used to fund the
Company's operations.
EQUITY IN PROFITS/LOSSES OF AFFILIATED COMPANIES. The Company recorded $0.6
million of equity in losses of affiliated companies for the three months
ended September 30, 2000 compared to $0.1 million of equity in profits of
affiliated companies for the three months ended September 30, 1999 and $0.6
million of equity in losses of affiliated companies for the nine months ended
September 30, 2000 compared to $0.4 million of equity in losses of affiliated
companies for the nine months ended September 30, 1999.
FOREIGN EXCHANGE LOSS, NET. For the three months ended September 30, 2000,
foreign exchange loss amounted to $3.8 million, as compared to $2.6 million for
the three months ended September 30, 1999. For the nine months ended September
30, 2000, foreign exchange loss amounted to $13.5 million, as compared to $4.5
million for the nine months ended September 30, 1999. Increase in foreign
exchange loss primarily due to fluctuation of the Polish currency during the
nine months ended September 30, 2000.
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NET LOSS. For the three months ended September 30, 1999 and 2000, the Company
had net losses of $72.9 million and $63.7 million, respectively. For the nine
months ended September 30, 1999 and 2000, the Company had net losses of $176.5
million and $194.7 million, respectively. These losses were the result of the
factors in the four segments discussed above.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS. Net loss applicable to common
stockholders decreased from a loss of $73.3 million for the three months ended
September 30, 1999 to a loss of $63.7 million for the three months ended
September 30, 2000 and increased from a loss of $178.9 million for the nine
months ended September 30, 1999 to a loss of $194.7 million for the nine months
ended September 30, 2000 due to the factors in the four segments 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 of approximately $200 million of common
stock through the Company's initial public equity offering in August 1997, (v)
the sale of $252 million aggregate principal amount at the maturity of the 14
1/2% Senior Discount Notes in July 1998 with gross proceeds of approximately
$125 million, ("@Entertainment Notes"), (vi) the sale of $36,001,321 principal
amount at maturity of its Series C Senior Discount Notes in January 1999 with
gross proceeds of $9.8 million, ("Series C Notes"), (vii) the sale of its 14
1/2% Senior Discount Notes and Warrants in January 1999 with gross proceeds of
$96.1 million, ("Discount Notes") and (viii) the sale of the Series A 12%
Cumulative Preference Shares, the Series B 12% Cumulative Preference Shares and
Warrants in January 1999 with gross proceeds of $48.2 million.
Since the acquisition of all of the outstanding stock of the Company by UPC on
August 6, 1999, the Company has met its capital requirements primarily through
capital contributions and loans from UPC.
Pursuant to the indentures governing the 9 7/8% Senior Notes due 2003 ("PCI
Notes"), the @Entertainment Notes, the Series C Notes, and the Discount 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 on guarantees of indebtedness by subsidiaries;
g. purchase of the notes upon a change of control;
h. limitation on sale of assets;
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;
l. limitation on lines of business; and
m. provision of financial statements and reports.
The Company is in compliance with these covenants.
The indentures covering each of the @Entertainment Notes, Series C Notes,
Discount 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 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, Series C
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Notes, Discount 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, Series C Notes, Discount Notes and the PCI Notes, @Entertainment was
required to offer to repurchase the @Entertainment Notes, Series C Notes,
Discount Notes at 101% of their accreted value 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 5, 1999,
@Entertainment had $376,943,000 aggregate principal amount at maturity of
@Entertainment Notes, Series C Notes, Discount Notes outstanding and PCI had
$129,668,000 aggregate principal amount at maturity of PCI Notes outstanding.
Pursuant to the Offers, @Entertainment purchased $49,139,000 aggregate principal
amount of @Entertainment Notes, Series C Notes, Discount Notes for an aggregate
price of $26,455,014 and PCI purchased $113,237,000 aggregate principal amount
of PCI Notes for an aggregate price of $114,369,370.
UPC financed the repurchase of the @Entertainment Notes, Series C Notes,
Discount Notes and PCI Notes and the Company's operating activities by making
loans of $217.3 million to @Entertainment in the fourth quarter of 1999.
In the first nine months of 2000, UPC made a capital contribution of $34.7
million and additional loans of $96.4 million. On September 30, 2000, the
Company had, on a consolidated basis, approximately $682.8 million aggregate
principal amount of indebtedness outstanding, of which $337.7 million was owed
to UPC. All of the loans from UPC to @Entertainment bear interest at 9.75% per
annum payable at maturity, and mature in 2029. Loans from UPC with an aggregate
principal amount of $150.0 million have been subordinated to the @Entertainment
Notes, the Series C Notes and the Discount Notes.
The Company had negative cash flows from operating activities of $63.9 million
for the nine months ended September 30, 2000 and $112.0 million for the nine
months ended September 30, 1999, primarily due to the significant operating
costs associated with the development and launch of its D-DTH service and the
Wizja TV programming platform and due to the operating loss for the respective
quarters.
Cash used for the purchase and build-out of the Company's cable television
networks, purchase of D-DTH equipment including set top decoders, and the
purchase of other property, plant, and equipment was $80.5 million in nine
months ended September 30, 2000 and, $27.7 million in nine months ended
September 30, 1999. The nine months over nine months increase primarily relates
to the Company's capital expenditures associated with the expansion of its
existing cable networks and the development of its D-DTH service.
On September 30, 2000, the Company was committed to pay at least
$488.2 million in guaranteed payments (including but not limited to payments
for D-DTH reception systems and payments of guaranteed minimum amounts due
under programming agreements and satellite transponder leases) over the next
eight years of which at least approximately $51.5 million was committed
through the end of 2000.
As of September 30, 2000, the Company has negative working capital and
significant commitments under non-cancelable operating leases and contracts for
programming rights.
The Company's cash on hand will be insufficient to satisfy all of its
commitments and to complete its current business plan for its D-DTH and
programming businesses. 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. UPC has declared
that it will continue to financially support the Company and its subsidiaries as
a going concern, and accordingly enable the Company and its subsidiaries to meet
their financial obligations if and when needed.
CURRENT OR ACCUMULATED EARNINGS AND PROFITS
For the nine months ended September 30, 2000, the Company had no current or
accumulated earnings and profits. Therefore, none of the interest which accreted
during the nine months ended September 30, 2000 with respect to the Company's 14
1/2% Senior Discount Notes
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due 2008, 14 1/2% Series B Discount Notes due 2008, 14 1/2% Senior Discount
Notes due 2009, 14 1/2% Series B Discount Notes due 2009 and its Series C Senior
Discount Notes 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.
IMPACT OF NEW ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded on
the balance sheet as either an asset or liability measured at its fair value.
The statement requires that changes in the derivative's fair value be
recognized currently in earnings unless specific accounting criteria are met.
If a derivative instrument qualifies for hedge accounting, the gains or
losses from the derivative may offset results from the hedged item in the
statement of operations or other comprehensive income, depending on the type
of hedge. To adopt hedge accounting, a company must formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting.
In June 2000, the Financial Accounting Standards Board issued SFAS 138,
ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES.
This statement addresses a limited number of issues causing implementation
difficulties for numerous entities that apply SFAS 133 and this statement
amends the accounting and reporting standards of SFAS 133 for certain
derivative instruments and certain hedging accounting.
SFAS 137 delayed the effective date of SFAS 133 to fiscal years beginning
after June 15, 2000. A company may implement the statements as of the
beginning of any fiscal quarter after issuance; however, SFAS 133 cannot be
applied retroactively.
The Company expects that the adoption of SFAS 133, SFAS 137, and SFAS 138 will
not have a material impact on the financial position or the results of
oprations of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS (SAB
101). SAB 101 outlines the SEC's views on applying generally accepted
accounting principles to revenue recognition in financial statements.
Specifically, the bulletin provides both general and specific guidance as to
the periods in which companies should recognize revenues. In addition,
SAB 101 also highlights factors to be considered when determining whether to
recognize revenues on a gross or net basis. SAB 101, as amended by SAB 101/A
and SAB 101/B, is effective beginning no later than their fourth fiscal
quarter of the fiscal year beginning after December 15, 1999; as the Company
is a calendar year-end company, this would be the quarter ending December 31,
2000.
SAB 101 permits the effects of the changes to be recorded as a cumulative
effect of a change in accounting principle during the quarter ended December
31, 2000. The Company expects that historically reported net income under
U.S. GAAP will not materially differ from the reported amounts.
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.
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 and
financing 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, 2000. Some of the Company's
operating and financing 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 reported operating loss by approximately $4.1 million. In other terms a
10% depreciation of the Polish zloty and British pound against the U.S. dollar,
would result in a $4.1 million decrease in the reported operating loss. This was
estimated using 10% of the Company's operating loss after adjusting for unusual
impairment and other items including U.S. dollar denominated or indexed
expenses. 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 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 approximately 11.8% in 1998 and approximately 7.3% in 1999. The
rate of inflation for the nine months ended September 30, 2000 was approximately
7.9%. The exchange rate for the zloty has stabilized and the rate of devaluation
of the zloty has generally decreased since 1991 and the zloty has depreciated
against the U.S. dollar by approximately 17.4% for the year ended December 31,
1999 and 9.6% in the first nine months of 2000. The Polish zloty was released to
float freely against the U.S. dollar in April 2000. Inflation and currency
exchange fluctuations may have, a material adverse effect on the business,
financial condition and results of operations of the Company.
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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, and which has not been settled, individually and in the
aggregate, is not material to the Company's business, financial condition or
results of operations. See also Note 7 to the unaudited consolidated financial
statements, for a description of the Company's arbitration relating to TKP and
PCBV minority stockholders' claim.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS:
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION:
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Statement re computation of per share earnings (contained in Note 5 to
Unaudited Financial Statements in this Quarterly Report on Form 10-Q)
Exhibit 27 - FINANCIAL DATA SCHEDULE
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
@ ENTERTAINMENT, Inc.
By: /s/ Nimrod J. Kovacs
-------------------------
Nimrod J. Kovacs
Chief Executive Officer
By: /s/ Simon Boyd
------------------------
Simon Boyd
Chief Financial Officer,
(Principal Financial and
Principal Accounting Officer)
DATE: November 14, 2000
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