<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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
March 31, 2000, was:
Common Stock 1,000
<PAGE>
@ ENTERTAINMENT, INC.
FORM 10-Q INDEX
FOR QUARTERLY PERIOD ENDED MARCH 31, 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....................... 7-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 12-20
Item 3. Quantitative and Qualitative Disclosures
About Market Risk................................................ 20
PART II OTHER INFORMATION
Item 1. Legal Proceedings..................................................... 21
Item 2. Changes in Securities and Use of Proceeds............................. 21
Item 3. Defaults Upon Senior Securities....................................... 21
Item 4. Submission of Matters to a Vote of Security Holders................... 21
Item 5. Other Information..................................................... 21
Item 6. Exhibits and Reports on Form 8-K...................................... 21
</TABLE>
<PAGE>
@ ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 32,059 $ 35,520
Trade accounts receivable, net of allowance for doubtful accounts
of $3,361 in 2000 and $3,090 in 1999 10,807 12,808
Programming and broadcast rights 7,497 7,200
VAT recoverable 6,755 9,623
Prepayments 2,566 1,883
Other current assets 1,214 1,162
----------- -----------
Total current assets 60,898 68,196
----------- -----------
Property, plant and equipment:
Cable television systems assets 132,103 123,845
D-DTH, transmission and production equipment 114,085 82,327
Construction in progress 9,257 7,400
Vehicles 1,864 1,943
Other 17,101 15,871
----------- -----------
274,410 231,386
Less accumulated depreciation (22,589) (12,602)
----------- -----------
Net property, plant and equipment 251,821 218,784
Inventories for construction 4,438 5,511
Intangibles, net 892,136 906,987
Investments in affiliated companies 19,167 19,393
----------- -----------
Total assets $ 1,228,460 $ 1,218,871
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
<PAGE>
@ ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 81,739 $ 72,963
Accrued interest 608 243
Deferred revenue 5,919 4,009
----------- -----------
Total current liabilities 88,266 77,215
----------- -----------
Long-term liabilities:
Notes payable and accrued interest to UPC 272,992 220,149
Notes payable 324,417 314,547
----------- -----------
Total liabilities 685,675 611,911
----------- -----------
Commitments and contingencies (note 6)
Stockholder's equity:
Common stock, $.01 par value; 1,000 shares authorized, shares issued and
outstanding 1,000 as of March 31, 2000 and December 31, 1999 - -
Paid-in capital 812,549 812,549
Accumulated other comprehensive loss (62,048) (61,412)
Accumulated deficit (207,716) (144,177)
----------- -----------
Total stockholder's equity 542,785 606,960
----------- -----------
Total liabilities and stockholder's equity $ 1,228,460 $ 1,218,871
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
@ ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SUCCESSOR (NOTE 2) PREDECESSOR (NOTE 2)
------------------- --------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
------------------- --------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Revenues $ 27,324 $ 18,799
------------------- --------------------
Operating expenses:
Direct operating expenses 32,536 18,017
Selling, general and administrative expenses 12,560 15,620
Depreciation and amortization 26,046 9,405
------------------- --------------------
Total operating expenses 71,142 43,042
------------------- --------------------
Operating loss (43,818) (24,243)
Interest and investment income 319 1,494
Interest expense (16,329) (11,845)
Equity in profits /(losses) of affiliated companies (124) 1,025
Foreign exchange loss net (2,392) (1,038)
Non-operating expense (70) -
Impairment of D-DTH equipment (1,088) -
------------------- --------------------
Loss before income taxes and
minority interest (63,502) (34,607)
Income tax expense (37) (19)
------------------- --------------------
Net loss (63,539) (34,626)
Accretion of redeemable preferred stock - (791)
------------------- --------------------
Net loss applicable to holders of common stock $ (63,539) $ (35,417)
=================== ====================
Basic and diluted loss per common share N/A $ (1.06)
=================== ====================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
@ ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
SUCCESSOR (NOTE 2) PREDECESSOR (NOTE 2)
------------------ --------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999
------------------ --------------------
(IN THOUSANDS)
<S> <C> <C>
Net loss $ (63,539) $ (34,626)
------------------ --------------------
Other comprehensive loss:
Translation adjustment (636) (29,179)
------------------ --------------------
Comprehensive loss $ (64,175) $ (63,805)
================== ====================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
@ ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SUCCESSOR (NOTE 2) PREDECESSOR (NOTE 2)
------------------ --------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31 2000 MARCH 31, 1999
------------------ --------------------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (63,539) $ (34,626)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 26,046 9,405
Amortization of notes payable discount and issue costs 10,466 8,128
Equity in (profits)/losses of affiliated companies 124 (1,025)
Impairment of D-DTH equipment 1,088 -
Other (1,468) 1,006
Changes in operating assets and liabilities:
Accounts receivable 2,001 1,012
Other current assets 2,161 (1,187)
Programming and broadcast rights (297) (3,065)
Accounts payable (4,199) (5,292)
Accrued interest - 3,209
Deferred revenue 1,910 1,195
Interest payable to UPC 5,806 -
Other - -
------------------ --------------------
Net cash used in operating activities (19,901) (21,240)
------------------ --------------------
Cash flows from investing activities:
Construction and purchase of property, plant and equipment (30,361) (15,517)
Other investments - (1,753)
Purchase of intangibles - (196)
------------------ --------------------
Net cash used in investing activities (30,361) (17,466)
------------------ --------------------
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 - (4,397)
Proceeds from loans from UPC 47,037 -
Repayment of notes payable (230) -
------------------ --------------------
Net cash provided by financing activities 46,807 153,653
------------------ --------------------
Net increase/(decrease) in cash and cash equivalents (3,455) 114,947
Effect of exchange rates on cash and cash equivalents (6) -
Cash and cash equivalents at beginning of period 35,520 13,055
------------------ --------------------
Cash and cash equivalents at end of period $ 32,059 $ 128,002
================== ====================
Supplemental cash flow information:
Cash paid for interest $ 22 $ 142
================== ====================
Cash paid for income taxes $ 13 $ 37
================== ====================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE>
@ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 necessary for a fair
statement of the Company's consolidated results of operations and cash flows for
the interim periods and the Company's financial position as of March 31, 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 at August 5, 1999. On this 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 this 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. 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 acquisition.
The following pro forma condensed consolidated results for the three months
ended March 31, 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
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 2000 THREE MONTHS ENDED MARCH 31, 1999
(UNADITED) (UNADITED)
---------------------- ----------------------------------
HISTORICAL HISTORICAL PRO FORMA
<S> <C> <C> <C>
Service and other revenue $ 27,324 $ 18,799 $ 18,799
====================== ============= =============
Net loss $ (63,539) $ (34,626) $ (49,815)
====================== ============= =============
</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 and reception system for its 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 March 31, 2000, the Company has
negative working capital and significant commitments under non-cancelable
operating leases and 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-language
programming on a multi-channel basis. 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) control its management of
subscribers by using advanced integrated management information systems; and
(iv) 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, for the period at least through
January 31, 2001.
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. 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 months ended March 31, 2000.
5. 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 (NOTE 2) PREDECESSOR (NOTE 2)
------------------ --------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31 2000 MARCH 31, 1999
(UNAUDITED) (UNAUDITED)
------------------ --------------------
<S> <C> <C>
Net loss attributable to common stockholders (in thousands) $ (63,539) $ (35,417)
Basic weighted average number of common shares outstanding (in thousands) N/A 33,361
------------------ --------------------
Loss per share-basic and diluted N/A $ (1.06)
================== ====================
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
PROGRAMMING, BROADCAST AND EXHIBITION RIGHTS
The Company has entered into long-term programming agreements and agreements for
the purchase of certain exhibition or broadcast rights with a number of third
party content providers for its digital direct-to-home television ("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 March 31, 2000, the Company had an
aggregate minimum commitment in relation to these agreements of approximately
$202,496,000 over the next seven years, approximating $42,561,000 for the
remainder of 2000, $53,684,000 in 2001, $47,319,000 in 2002, $30,313,000 in
2003, $19,982,000 in 2004 and $8,637,000 in 2005 and thereafter.
PURCHASE COMMITMENTS
As of March 31, 2000, the Company had an aggregate minimum commitment toward the
purchase of the D-DTH reception systems from Philips Electronics B.V. of
approximately $31,735,000 through June 30, 2000.
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 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
9
<PAGE>
June 1999, and parties filed their post-hearing briefs in August and
September 1999. The Company believes that a decision may be rendered in June
or July 2000. 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 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, the Company 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
under which Wizja TV B.V., an affiliate of PCI, will purchase approximately
1.3% to approximately 1.7% of the outstanding shares of PCBV for a price of
approximately $2.2 million to approximately $2.7 million. The Court entered a
conditional order of dismissal on March 31, 2000 and an additional order on
May 1, 2000, extending the time of the conditional dismissal by 30 days. This
conditional order of dismissal is predicated upon the fulfillment of the
terms of the settlement agreement, which is expected to occur by June 1, 2000.
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.
7. 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 D-DTH operations into a distinct segments and present the Company's
operations in four business segments. Certain amounts have been reclassified in
the 1999 unaudited consolidated financial statements to conform to the
presentation of unaudited consolidation financial statements for the three
months ended March 31, 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
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.
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 MARCH 31, 2000
(Successor note 2)
Revenues from external customers $ 16,853 $ 9,385 $ 1,086 $ - $ 27,324
Intersegment revenues - - 12,818 - 12,818
Operating loss (10,457) (12,994) (20,051) (316) (43,818)
EBITDA 1,049 (4,238) (14,267) (316) (17,772)
Segment total assets 524,798 386,679 301,333 15,650 1,228,460
THREE MONTHS ENDED MARCH 31, 1999 (RESTATED)
(Predecessor note 2)
Revenues from external customers $ 14,783 $ 3,441 $ 575 $ - $ 18,799
Intersegment revenues - - 5,132 - 5,132
Operating loss (4,264) (10,514) (7,804) (1,661) (24,243)
EBITDA 1,685 (8,466) (6,399) (1,658) (14,838)
Segment total assets 169,711 44,968 94,421 138,440 447,540
</TABLE>
8. JOINT VENTURE WITH MTV
On March 1, 2000, UPC Programming B.V., an affiliate of the Company, entered
into joint a venture with MTV Network Europe for a 50% equity interest in MTV
Polska for the purpose of producing MTV and VH1 programming for distribution in
Poland. The Company has agreed to contribute certain assets of its subsidiary,
Ground Zero Media, to the joint venture. Wizja TV B.V. and MTV Polska entered
into a distribution agreement whereby MTV Polska will license its programming
for distribution throughout Poland.
9. SUBSEQUENT EVENTS
Subsequent to March 31, 2000, Polska Telewizja Cyfrowa Wizja TV Sp. z o.o.,
owned in part by 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 Wizja TV 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 party programming.
Therefore, given these filings, Polska Telewizja Cyfrowa Wizja TV Sp. z o.o.
would be deemed a broadcaster under the Polish law.
11
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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 $8.5 million or 45.2% from $18.8
million in the three months ended March 31, 1999 to $27.3 million in the three
months ended March 31, 2000. This increase was due primarly to internal growth
in subscribers through increased penetration and new network expansion,
increases in cable subscription rates, further development of the Wizja TV
programming package and advertising sales.
12
<PAGE>
Prior to June 1997, the Company's expenses were primarily incurred in connection
with its cable television business and programming related thereto. Since June
1997, the Company has been incurring, in addition to expenses related to its
cable television and programming businesses, expenses in connection with the
operation of its D-DTH business and Wizja TV.
The Company generated an operating loss of $43.8 million for the three months
ended March 31, 2000, primarily due to the significant costs associated with
development of the Company's D-DTH and programming businesses, promotion of
those businesses and the development, production and acquisition of programming
for Wizja TV.
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 D-DTH operations into a distinct segment and present the Company's
operations in four business segments. Certain amounts have been reclassified in
the 1999 unaudited consolidated financial statements to conform to the
presentation of unaudited consolidated financial statements for the three months
ended March 31, 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
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 three months ended March 31, 2000 and 1999.
13
<PAGE>
SEGMENT RESULTS OF OPERATIONS
(unaudited, in millions of U.S. dollars)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
(SUCCESSOR) (PREDECESSOR)
------------------ ------------------
<S> <C> <C>
REVENUES
Cable 16,853 14,783
D-DTH 9,385 3,441
Programming 13,904 5,707
Corporate and Other - -
Intersegment elimination (1) (12,818) (5,132)
------------------ ------------------
TOTAL 27,324 18,799
OPERATING LOSS
Cable (10,456) (4,264)
D-DTH (12,995) (10,514)
Programming (20,051) (7,804)
Corporate and Other (316) (1,661)
------------------ ------------------
TOTAL (43,818) (24,243)
EBITDA
Cable 1,049 1,685
D-DTH (4,238) (10,514)
Programming (14,267) (6,399)
Corporate and Other (316) (1,658)
------------------ ------------------
TOTAL (17,772) (16,886)
</TABLE>
(1) Comprised of Wizja programming costs charged to the cable segment and D-DTH
segment by the programming segment in the three months ended March 31, 2000 and
1999.
The Company for three months ended March 31, 1999 prior to the Acquisition is
herein referred to as "Predecessor" and the Company for the three months ended
March 31, 2000 after the Acquisition is herein referred to as "Successor".
CABLE SEGMENT OVERVIEW
The Company operates the largest cable television system in Poland with
approximately 1,768,000 homes passed and approximately 1,023,500 total
subscribers as at March 31, 2000. The Company continues to realize subscriber
growth through a combination of increased penetration, 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 March 31, 2000,
approximately 70.6% of the Company's cable subscribers received its basic
package. For the three months ended March 31, 2000, approximately 97.8% of the
Company's cable revenue was derived from monthly subscription fees compared to
approximately 97.2% for the three months ended March 31, 1999.
When the Company began operations in 1990, revenue from installation fees
exceeded revenue from monthly subscription fees because of the significant
number of new installations and the high amount of the installation fees
relative to the small existing subscriber base. As the Company's subscriber base
has grown, aggregate monthly subscription revenue has increased and
14
<PAGE>
installation fees, while currently increasing on an aggregate basis, have
declined as a percentage of total revenue. The Company expects that installation
fees will continue to constitute a declining portion of the Company's revenue.
During 1998 and 1999, management completed or was in the process of completing
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 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.
CABLE TELEVISION REVENUE. Revenue increased $2.1 million or 14.2% from $14.8
million in the three months ended March 31, 1999 to $16.9 million in the three
months ended March 31, 2000. This increase was primarily attributable to a 4.7%
increase in the number of basic and intermediate subscribers from approximately
740,000 at March 31, 1999 to approximately 774,700 at March 31, 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 97.8% and 97.2% of cable
television revenue for the three months ended March 31, 2000 and 1999,
respectively. During the three months ended March 31, 2000, the Company
generated approximately $0.9 million 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 $0.6 million for the three months ended March 31,
1999.
DIRECT OPERATING EXPENSES. Direct operating expenses increased $1.5 million, or
14.9%, from $10.1 million for the three months ended March 31, 1999 to $11.6
million for the three months ended March 31, 2000, principally as a result of
the purchase of additional Polish programming as well as the increased size of
the Company's cable television system. Direct operating expenses increased from
68.2% of revenues for the three months ended March 31, 1999 to 68.6% of revenues
for the three months ended March 31, 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 53.5% and 33.8% for the three
months ended March 31, 2000 and 1999, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1.2 million or 40.0% from $3.0 million for
the three months ended March 31, 1999 to $4.2 million for the three months ended
March 31, 2000. This increase was attributable mainly to the increased size of
the Company's cable television system.
As a percentage of revenue, selling, general and administrative expenses
increased from 20.3% for the three months ended March 31, 1999 to approximately
24.9% for the three months ended March 31, 2000.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense rose
$5.6 million, or 94.9%, from $5.9 million for the three months ended March
31, 1999 to $11.5 million for the three months ended March 31, 2000,
principally as a result of depreciation and amortization of additional
goodwill pushed down as a result of the Merger and the continued build-out of
the Company's cable networks. Depreciation and amortization expense as a
percentage of revenues increased from 39.9% for the three months ended March
31, 1999 to 68.0% for the three months ended March 31, 2000.
Each of these factors contributed to an operating loss of $10.5 million and $4.3
million for the three months ended March 31, 2000 and 1999, 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 March 31, 2000, the Company had approximately 303,700 D-DTH subscribers
as compared to 130,000 at March 31, 1999. In September 1998, the number of
Philips Electronics B.V. authorized electronics retailers distributing the
Wizja TV package increased from 70 to 550, and since November 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.
15
<PAGE>
At March 31, 2000 approximately 67.9% of D-DTH subscribers received premium
service as compared to approximately 45.2% at March 31, 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 $6.0 million or 176.5% from $3.4 million for
the three months ended March 31, 1999 to $9.4 million for three months ended
March 31, 2000. This increase was primarily due to an increased number of D-DTH
subscribers from 130,000 at March 31, 1999 to 303,700 at March 31, 2000.
During the three months ended March 31, 2000 the Company generated approximately
$2.2 million of premium subscription revenue as a result of providing the HBO
Poland service pay movie channel and Wizja Sport to its subscribers as compared
to $0.6 million for the three months ended March 31, 1999.
DIRECT OPERATING EXPENSES. Direct operating expenses increased $6.0 million, or
250.0%, from $2.4 million for the three months ended March 31, 1999 to $8.4
million for the three months ended March 31, 2000. These increases principally
were the result of a $4.2 million of Wizja TV programming purchased from
Programming segment for three months ended March 31, 2000 as compared to $0 for
the three months ended March 31, 1999 and increase in size of D-DTH operations.
Direct operating expenses amounted to 89.4% of revenues for the three months
ended March 31, 2000 compared to 70.6% revenues for the three months ended March
31, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $4.2 million or 44.2% from $9.5 million for
the three months ended March 31, 1999 to $5.3 million for the three months ended
March 31, 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 three months ended March 31, 1999 as compared to the three
months ended March 31, 2000. As a percentage of revenue, selling, general and
administrative expenses amounted to approximately 56.4% and 279.4% for the three
months ended March 31, 2000 and 1999, respectively.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $6.8
million or 340.0% from $2.0 million for the three months ended March 31, 1999 to
$8.8 million for the three months ended March 31, 2000, principally as a result
of additional goodwill pushed down as a result of the Merger and continued
growth in D-DTH subscribers' base. Depreciation and amortization expense as a
percentage of revenues amounted to 93.6% and 58.8% for the three months ended
March 31, 2000 and 1999, respectively.
Each of these factors contributed to an operating loss of $13.0 million for the
three months ended March 31, 2000, compared to an operating loss of $10.5
million for the three months ended March 31, 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 D-DTH and cable
television exhibition, 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 four channels, Atomic TV, Wizja
Jeden, Wizja Pogoda 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 and continues
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.
PROGRAMMING REVENUE. Revenue increased $8.2 million or 143.9% from $5.7 million
for the three months ended March 31, 1999 to $13.9 million for three months
ended March 31, 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 $12.8 million or 92.1% and $5.1 million or 89.5% for three
months ended March 31, 2000 and 1999, respectively.
16
<PAGE>
DIRECT OPERATING EXPENSES. Direct operating expenses increased $14.8 million, or
139.6%, from $10.6 million for the three months ended March 31, 1999 to $25.4
million for the three months ended March 31, 2000. These increases principally
were the result of a $15.3 million 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 182.7% of revenues for the three
months ended March 31, 2000 compared to 186.0% revenues for the three months
ended March 31, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1.3 million or 86.7% from $1.5 million for
the three months ended March 31, 1999 to $2.8 million for the three months ended
March 31, 2000. The increase in selling, general and administrative expenses
over the corresponding 1999 period was attributable mainly to increase 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 20.1% and 26.3% for the three
months ended March 31, 2000 and 1999, respectively.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization charges of D-DTH
tangible assets increased $4.4 million or 314.3% from $1.4 million for the three
months ended March 31, 1999 to $5.8 million for the three months ended March 31,
2000, principally as a result of amortization of additional goodwill pushed down
as a result of the Merger. Depreciation and amortization expense as a percentage
of revenues amounted to 41.7% and 24.6% for the three months ended March 31,
2000 and 1999, respectively. This primarily relates to D-DTH production
equipment and decoders leased to consumers.
Each of these factors contributed to an operating loss of $20.1 million for the
three months ended March 31, 2000, compared to an operating loss of $7.8 million
for the three months ended March 31, 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 for the
three months ended March 31, 2000 as compared to $1.7 million for the
corresponding period in 1999, the reduction being due to reduced activities of
@Entertainment as a corporate office.
NON-OPERATING RESULT
INTEREST EXPENSE. Interest expense increased $4.5 million, or 38.1%, from $11.8
million for the three months ended March 31, 1999 to $16.3 million for the three
months ended March 31, 2000. Interest expense increased mainly as a result of
the additional financing from UPC for the three months ended March 31, 2000.
INTEREST AND INVESTMENT INCOME. Interest and investment income decreased $1.2
million, or 80%, from $1.5 million for the three months ended March 31, 1999 to
$0.3 million for the three months ended March 31, 2000, primarily due to the
reduction in the level of cash used to fund the Company's operations.
EQUITY IN PROFITS OF AFFILIATED COMPANIES. The Company recorded $0.1 million of
equity in losses of affiliated companies for the three months ended March 31,
2000 compared to $1.0 of equity in profits of affiliated companies for the three
months ended March 31, 1999.
FOREIGN EXCHANGE LOSS, NET. For the three months ended March 31, 2000, foreign
exchange loss amounted to $2.4 million, as compared to $1.0 million for the
three months ended March 31, 1999.
INCOME TAX EXPENSE. The Company recorded $37,000 of income tax expense for the
three months ended March 31, 2000, as compared to $19,000 for the three months
ended March 31, 1999.
NET LOSS. For the three months ended March 31, 2000 and 1999, the Company had
net losses of $63.5 million and $34.6 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 increased from a loss of $35.4 million for the three months ended
March 31, 1999 to a loss of $63.5 million for the three months ended March 31,
2000 due to the factors in the four segments discussed above.
LIQUIDITY AND CAPITAL RESOURCES
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<PAGE>
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 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 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 of
@Entertainment's subsidiary Poland Communications, Inc. ("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 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 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
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 Offer, @Entertainment has 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 has purchased $113,237,000 aggregate
principal amount of PCI Notes for an aggregate price of $114,369,370.
18
<PAGE>
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.
On March 31, 2000, the Company had, on a consolidated basis, approximately
$597.4 million aggregate principal amount of indebtedness outstanding, of which
$273.0 million was owed to UPC.
The Company had negative cash flows from operating activities of $19.9 million
for the three months ended March 31, 2000 and $21.2 million for the three months
ended March 31, 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 $31.4 million in three
months ended March 31, 2000 and, $15.5 million in three months ended March 31,
1999. The quarter over quarter 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 March 31, 2000, the Company was committed to pay at least $408.3 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 $92.4 million was committed to be paid
by the end of 2000.
As of March 31, 2000, the Company has negative working capital and significant
commitments under non-cancelable operating leases and for programming rights.
The Company's cash on hand will be insufficient 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
equity, 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, for the
period at least through January 31, 2001.
YEAR 2000 COMPLIANCE
The Company has not experienced any problems with its computer systems relating
to distinguishing twenty-first century dates from twentieth century dates, which
generally are referred to as year 2000 problems. The Company is also not aware
of any material year 2000 problems with its clients or vendors. The Company has
not incurred material expenses or experienced any material operation disruptions
as a result of any year 2000 problems.
CURRENT OR ACCUMULATED EARNINGS AND PROFITS
For the three months ended March 31, 2000, the Company had no current or
accumulated earnings and profits. Therefore, none of the interest which
accreted during the three months ended March 31, 2000 with respect to the
Company's 14 1/2% Senior Discount Notes 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
The Financial Accounting Standards Board (`FASB') recently issued Statement of
Financial Accounting Standards No. 133, `Accounting for Derivative Instruments
and Hedging Activities' (`SFAS 133'), which requires that companies recognize
all derivatives as either assets or liabilities in the balance sheet at fair
value. Under this statement, accounting for changes in fair value of a
derivative depends on its intended use and designation. In June 1999, the FASB
approved Statement of Financial
19
<PAGE>
Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities Deferral of Effective Date of FASB Statement No. 133' (`SFAS 137').
SFAS 137 amends the effective date of SFAS 133, which will apply to the Company
as of the first quarter 2001. The Company is currently assessing the effect of
this new standard.
On December 3, 1999 the SEC Staff Accounting Bulletin No. 101 ("SAB 101") was
released and provides the staff's views in applying generally accepted
accounting principles to selected revenue recognition issues. On March 24, 2000
the staff issued the Staff Accounting Bulletin No. 101A to delay the
implementation date of SAB 101, which now will be implemented in our second
quarter of 2000, instead of needing to implement in our first quarter of 2000,
as originally provided in SAB 101. We are currently assessing the effect of this
new guidance.
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
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 quarter ended March 31, 2000. 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 reported operating loss by approximately $2.8 million. In other terms a
10% depreciation of the Polish zloty and British pound against the U.S. dollar,
would result in a $2.8 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 three month period ended March 31, 2000 was
approximately 3.6%. 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. For the first quarter of 2000 the zloty
remained stable against the U.S. Inflation and currency exchange fluctuations
may have, a material adverse effect on the business, financial condition and
results of operations of the Company.
20
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in litigation from time to time in the ordinary course
of business. In management's opinion, the litigation in which the Company is
currently involved, individually and in the aggregate, is not material to the
Company's business, financial condition or results of operations. See also Note
6 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.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
@ ENTERTAINMENT, Inc.
By: /s/ NIMROD J. KOVACS
------------------------------
Nimrod J. Kovacs
Chief Executive Officer
By: /s/ RAY D. SAMUELSON
------------------------------
Ray D. Samuelson
Chief Financial Officer,
(Principal Financial and Principal
Accounting Officer)
DATE: May 15, 2000
22
<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 March 31, 2000 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 32,059
<SECURITIES> 0
<RECEIVABLES> 14,168
<ALLOWANCES> (3,361)
<INVENTORY> 4,438
<CURRENT-ASSETS> 60,898
<PP&E> 274,410
<DEPRECIATION> (22,589)
<TOTAL-ASSETS> 1,228,460
<CURRENT-LIABILITIES> 88,266
<BONDS> 324,417
0
0
<COMMON> 0
<OTHER-SE> 542,785
<TOTAL-LIABILITY-AND-EQUITY> 1,228,460
<SALES> 0
<TOTAL-REVENUES> 27,324
<CGS> 0
<TOTAL-COSTS> 71,142
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (16,329)
<INCOME-PRETAX> (63,502)
<INCOME-TAX> (37)
<INCOME-CONTINUING> (63,539)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (63,539)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
