SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A-1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: July 30, 1999
UnitedGlobalCom, Inc.
(formerly known as United International Holdings, Inc.)
(Exact Name of Registrant as Specified in Charter)
Delaware 0-21974 84-1116217
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification #)
incorporation)
4643 South Ulster Street, Suite 1300, Denver, CO 80237
(Address of Principal Executive Office)
(303) 770-4001
(Registrant's telephone number, including area code)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
- ---------------------------------------------
On August 6, 1999, the Registrant's 62.2% owned subsidiary, United Pan-Europe
Communications N.V. ("UPC"), through its wholly-owned subsidiary, Bison
Acquisition Corp., completed a tender offer for all outstanding shares of the
common stock of @Entertainment, Inc. (Nasdaq: ATEN) at a price of $19.00 per
common share in cash (the "@Entertainment Acquisition"). Approximately
33,944,616 shares were tendered pursuant to the offer, which expired at 12:00
midnight, New York City time, on Thursday, August 5, 1999. On August 9, 1999,
UPC merged Bison Acquisition Corp. into @Entertainment and disbursed $19.00 per
share in cash to the remaining @Entertainment stockholders. Including
unexercised options, warrants, and cumulative preferred shares, the purchase
price for @Entertainment totaled approximately $807.0 million. It will be
accounted for using the purchase method of accounting. The purchase price was
provided by the closing of the sale of UPC's Senior Notes and Senior Discount
Notes due 2009 on July 30, 1999.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
- ------------------------------------------
<TABLE>
<CAPTION>
(a) FINANCIAL STATEMENTS
Page
Financial statements of business acquired - @Entertainment, Inc. and Subsidiaries ----
<S> <C>
Independent Auditors' Report................................................................ F-1
Consolidated Balance Sheets as of December 31, 1998 and 1997................................ F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996.......................................................... F-4
Consolidated Statements of Comprehensive Loss for the Years Ended
December 31, 1998, 1997 and 1996.......................................................... F-5
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1998, 1997 and 1996.................................................... F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996.......................................................... F-7
Notes to Consolidated Financial Statements.................................................. F-8
Consolidated Balance Sheets as of June 30, 1999 (unaudited) and
December 31, 1998......................................................................... F-41
Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 1999 and 1998 (unaudited)........................................................ F-43
Consolidated Statements of Comprehensive Loss for the Three and Six Months
Ended June 30, 1999 and 1998 (unaudited).................................................. F-44
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1999 and 1998 (unaudited)........................................................ F-45
Notes to Consolidated Financial Statements.................................................. F-46
</TABLE>
(b) PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma consolidated condensed balance sheet and
statements of operations and notes thereto do not purport to represent what
the Registrant's financial condition would actually have been if such
transaction had in fact occurred on such dates. The pro forma adjustments
are based on currently available information and upon certain assumptions
that the Registrant believes are reasonable. Accordingly, the purchase
price allocations and the financing assumptions used in these pro formas
are subject to change based on the facts and circumstances existing on the
actual acquisition date. The unaudited pro forma consolidated condensed
balance sheet, statement of operations and accompanying notes should be
read in conjunction with the Registrant's audited consolidated financial
statements and the notes thereto, and other financial information
pertaining to the Registrant, previously filed with the Securities and
Exchange Commission and the historical financial statements included
herein.
2
<PAGE>
BALANCE SHEET
The following unaudited Registrant pro forma consolidated condensed balance
sheet gives effect to the @Entertainment Acquisition as if it had occurred on
June 30, 1999. The unaudited pro forma effects on the balance sheet assume 100%
of the outstanding stock of @Entertainment was acquired by UPC, the
@Entertainment Acquisition was funded entirely through debt issued by UPC and
the consolidation of @Entertainment's balance sheet as of June 30, 1999.
<TABLE>
<CAPTION>
As of June 30, 1999
----------------------------------------------------------
UPC
@Entertainment Offering
ASSETS: Historical Acquisition (a) Costs (d) Pro Forma
---------- --------------- --------- ---------
<S> <C> <C> <C> <C>
Cash and cash equivalents.............................. $ 252,107 $ 74,284 $ - $ 326,391
Restricted cash........................................ 12,459 - - 12,459
Short-term liquid investments.......................... 41,030 - - 41,030
Subscriber receivables, net ........................... 40,662 7,609 - 48,271
Costs to be reimbursed by affiliated companies, net.... 21,519 - - 21,519
Other current assets, net.............................. 133,801 40,411 - 174,212
---------- ---------- ------- ----------
Total current assets.............................. 501,578 122,304 - 623,882
Investments in and advances to affiliated companies,
accounted for under the equity method, net........... 293,913 22,027 - 315,940
Property, plant and equipment, net .................... 1,261,210 189,695 - 1,450,905
Goodwill and other intangible assets, net ............. 1,032,495 880,880 (b) - 1,913,375
Deferred financing costs, net ......................... 66,649 - 19,977 86,626
Non-current restricted cash and other assets, net...... 51,867 16,620 - 68,487
---------- ---------- ------- ----------
Total assets...................................... $3,207,712 $1,231,526 $19,977 $4,459,215
========== ========== ======= ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Accounts payable, accrued liabilities and other
current liabilities.................................. $ 283,906 $ 41,959 $ - $ 325,865
Short-term debt........................................ 9,978 - - 9,978
Current portion of senior discount notes and
other long-term debt................................. 8,100 6,500 - 14,600
---------- ---------- ------- ----------
Total current liabilities......................... 301,984 48,459 - 350,443
Senior discount notes and other long-term debt......... 2,543,615 1,183,067 (c) 19,977 3,746,659
Deferred taxes and other long-term liabilities......... 53,238 - - 53,238
---------- ---------- ------- ----------
Total liabilities................................. 2,898,837 1,231,526 19,977 4,150,340
Minority interests in subsidiaries..................... 514,366 - - 514,366
Preferred stock........................................ 35,615 - - 35,615
Stockholders' deficit.................................. (241,106) - - (241,106)
---------- ---------- ------- ----------
Total liabilities and stockholders' deficit....... $3,207,712 $1,231,526 $19,977 $4,459,215
========== ========== ======= ==========
(a) Represents the historical amounts included in @Entertainment's consolidated
balance sheet as of June 30, 1999, except for the adjustments discussed in
(b) and (c) below.
(b) Represents the pro forma increase in goodwill and other intangibles as a
result of the @Entertainment Acquisition:
Consolidation of historical @Entertainment goodwill and other intangibles................... $ 35,530
Additional pro forma goodwill and other intangibles due to the acquisition:
Historical shareholders' deficit, including 12.0% cumulative redeemable preferred stock
acquired by UPC...................................................................... 38,321
Purchase price.............................................................................. 807,029
---------
845,350
----------
$ 880,880
==========
(c) Represents the pro forma increase in long-term debt as a result of the
@Entertainment Acquisition:
Consolidation of historical @Entertainment long-term debt $ 376,038
New long-term debt to finance acquisition................................................... 807,029
----------
$1,183,067
==========
</TABLE>
(d) Represents the estimated offering costs related to the issuance of UPC's
senior notes to finance the @Entertainment Acquisition, and the associated
proceeds from UPC's senior notes used to pay these estimated offering
costs.
3
<PAGE>
STATEMENTS OF OPERATIONS
The unaudited pro forma consolidated condensed statements of operations and
notes thereto set forth below for the six months ended June 30, 1999 and for the
ten months ended December 31, 1998 present the pro forma results of operations
of the Registrant assuming the @Entertainment Acquisition occurred on March 1,
1998.
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1999
---------------------------------------------------------
UPC
@Entertainment Offering
Historical Acquisition (a) Costs (e) Pro Forma
---------- ----------------- ----------- ---------
(United States dollars, in thousands, except share and per share data)
<S> <C> <C> <C> <C>
Condensed Consolidated Statement of Operations:
Revenue.............................................. $ 253,914 $ 39,855 $ - $ 293,769
Operating expense.................................... (130,912) (59,001) - (189,913)
Selling, general and administrative expense.......... (184,816) (37,209) - (222,025)
Depreciation and amortization........................ (133,077) (44,521)(b) - (177,598)
---------- --------- ------- ----------
Net operating loss.............................. (194,891) (100,876) - (295,767)
Gain on issuance of securities by subsidiary......... 822,067 - - 822,067
Interest income...................................... 9,407 2,413 - 11,820
Interest expense..................................... (118,457) (65,858)(c) (2,025) (186,340)
Gain on sale of investment in affiliate.............. 7,456 - - 7,456
Other expense, net................................... (27,049) (1,989) - (29,038)
---------- --------- ------- ----------
Net income (loss) before other items............ 498,533 (166,310) (2,025) 330,198
Share in results of affiliated companies, net........ (31,608) (530) - (32,138)
Minority interest in subsidiaries.................... 74,938 47,307 (d) - 122,245
Income taxes......................................... - (27) - (27)
---------- --------- ------- ----------
Net income (loss)............................... $ 541,863 $(119,560) $(2,025) $ 420,278
========== ========= ======= ==========
Net income per common share (f):
Basic................................................ $ 13.61 $ 10.55
========== ==========
Diluted.............................................. $ 12.63 $ 9.80
========== ==========
Weighted-average number of common shares outstanding:
Basic................................................ 39,732,277 39,732,277
========== ==========
Diluted.............................................. 42,894,811 42,894,811
========== ==========
(a) Represents the consolidation of the historical results of operations of
@Entertainment for the six months ended June 30, 1999, except for the
adjustments discussed in (b), (c) and (d) below.
(b) Represents pro forma depreciation and amortization expense as a result of
the @Entertainment Acquisition:
Consolidation of historical results of @Entertainment for the six months ended June 30, 1999..... $ (22,699)
Amortization of the step-up in basis recorded under purchase accounting, using a 15 year life,
for the six months ended June 30, 1999......................................................... (21,822)
----------
$ (44,521)
==========
(c) Represents pro forma interest expense as a result of the @Entertainment
Acquisition:
Consolidation of historical results of @Entertainment for the six months ended June 30, 1999..... $ (24,377)
Additional interest expense on new debt incurred for the @Entertainment Acquisition for the
six months ended June 30, 1999 at a blended weighted average interest rate of 10.3%............ (41,481)
----------
$ (65,858)
==========
</TABLE>
(d) Represents pro forma allocation of minority interest in losses from the
acquisition of @Entertainment as a result of UPC's IPO in February 1999.
(e) Represents amortization of deferred finance costs related to UPC's senior
notes offering, plus additional interest expense related to the offering
proceeds used for these finance costs, at an initial blended weighted
average interest rate of 10.3%.
(f) "Basic and diluted net income" per common share is determined by dividing
net income available to common stockholders by the weighted-average number
of common shares outstanding during each period. Net income available to
common stockholders has been reduced by the accrual of dividends on
convertible preferred stock which is charged directly to additional paid-in
capital.
4
<PAGE>
<TABLE>
<CAPTION>
For the Ten Months Ended December 31, 1998
---------------------------------------------------------
UPC
@Entertainment Offering
Historical Acquisition (a) Costs (d) Pro Forma
---------- ----------------- ----------- ---------
(United States dollars, in thousands, except share and per share data)
<S> <C> <C> <C> <C>
Condensed Consolidated Statement of Operations:
Revenue.............................................. $ 254,068 $ 53,402 $ - $ 307,470
Operating expense.................................... (122,811) (56,109) - (178,920)
Selling, general and administrative expense.......... (299,993) (65,529) - (365,522)
Depreciation and amortization........................ (159,045) (59,375)(b) - (218,420)
---------- --------- ------- ----------
Net operating loss.............................. (327,781) (127,611) - (455,392)
Interest income...................................... 10,464 2,788 - 13,252
Interest expense..................................... (163,227) (86,030)(c) (3,311) (252,568)
Provision for losses on marketable equity
securities and investment related costs............ (9,686) - - (9,686)
Other expense, net................................... (2,546) (167) - (2,713)
---------- --------- ------- ----------
Net loss before other items..................... (492,776) (211,020) (3,311) (707,107)
Share in results of affiliated companies, net........ (54,166) (6,490) - (60,656)
Minority interest in subsidiaries.................... 1,410 (199) - 1,211
---------- --------- ------- ----------
Net loss........................................ $ (545,532) $(217,709) $(3,311) $ (766,552)
========== ========= ======= ==========
Basic and diluted net loss per common share (e)...... $ (13.71) $ (19.24)
========== ==========
Weighted-average number of common
shares outstanding................................. 39,919,887 39,919,887
========== ==========
(a) Represents the consolidation of the estimated historical results of
operations of @Entertainment for the ten months ended December 31, 1998,
except for the adjustments discussed in (b) and (c) below.
(b) Represents pro forma depreciation and amortization expense as a result of
the @Entertainment Acquisition:
Consolidation of historical results of @Entertainment for the ten months ended December 31, 1998....... $ (23,005)
Amortization of the step-up in basis recorded under purchase accounting, using a 15 year life,
for the ten months ended December 31, 1998........................................................... (36,370)
----------
$ (59,375)
==========
(c) Represents pro forma interest expense as a result of the @Entertainment
Acquisition:
Consolidation of historical results of @Entertainment for the ten months ended
December 31, 1998.................................................................................... $ (19,524)
Pro forma interest expense on new debt incurred for the @Entertainment Acquisition for the ten months
ended December 31, 1998, at a blended weighted average interest rate of 9.9%......................... (66,506)
----------
$ (86,030)
==========
</TABLE>
(d) Represents amortization of deferred finance costs related to UPC's senior
notes offering, plus additional interest expense related to the offering
proceeds used for these finance costs, at an initial blended weighted
average interest rate of 9.9%.
(e) "Basic and diluted net loss" per common share is determined by dividing net
loss available to common stockholders by the weighted-average number of
common shares outstanding during each period. Net loss available to common
stockholders has been increased by the accrual of dividends on convertible
preferred stock which is charged directly to additional paid-in capital.
5
<PAGE>
(c) EXHIBITS
23.1 Consent of KPMG, Independent Auditors.
6
<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.
UnitedGlobalCom, Inc.
DATE: August 30, 1999 By: /S/ Valerie L. Cover
---------------------------------
Valerie L. Cover
Vice President and Controller
(a Duly Authorized Officer and
Principal Financial Officer)
7
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
@ Entertainment, Inc.:
We have audited the accompanying consolidated balance sheets of @
Entertainment, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, comprehensive loss, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of @
Entertainment, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles in the United States of America.
KPMG
Warsaw, Poland
March 29, 1999
F-1
<PAGE>
<TABLE>
<CAPTION>
@ ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................... $ 13,055 $ 105,691
Accounts receivable, net of allowance for doubtful accounts of $1,095,000 in 1998 and
$766,000 in 1997 (note 4)............................................................. 7,408 4,544
Programming and broadcast rights (note 6)............................................... 9,030 894
Other current assets (note 7)........................................................... 21,063 13,104
---------- ----------
Total current assets................................................................ 50,556 124,233
---------- ----------
Property, plant and equipment:
Cable television systems assets......................................................... 175,053 134,469
D-DTH equipment......................................................................... 68,419 --
Construction in progress................................................................ 2,739 6,276
Vehicles................................................................................ 2,792 2,047
Other................................................................................... 16,119 7,940
---------- ----------
265,122 150,732
Less accumulated depreciation........................................................... (52,068) (33,153)
---------- ----------
Net property, plant and equipment................................................... 213,054 117,579
Inventories for construction.............................................................. 8,869 8,153
Intangible assets, net (note 8)........................................................... 43,652 26,318
Notes receivable from affiliates.......................................................... -- 691
Investment in affiliated companies (note 9)............................................... 19,956 21,628
Other assets, net (note 7)................................................................ 12,287 8,494
---------- ----------
Total assets.............................................................................. $ 348,374 $ 307,096
========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
@ ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses................................................... $ 40,464 $ 14,721
Accrued interest (note 11).............................................................. 2,140 2,175
Deferred revenue........................................................................ 4,366 1,257
Income taxes payable.................................................................... 3,794 1,765
Current portion of notes payable (note 11).............................................. 6,500 --
---------- ----------
Total current liabilities............................................................. 57,264 19,918
---------- ----------
Notes payable, less current portion (note 11)............................................. 257,454 130,110
---------- ----------
Total liabilities..................................................................... 314,718 150,028
---------- ----------
Minority interest......................................................................... -- 4,713
Commitments and contingencies (notes 18 and 19)
Stockholders' equity (note 1):
Preferred stock, $.01 par value; Authorized 20,000,000 shares; none issued and
outstanding........................................................................... -- --
Common stock, $.01 par value; Authorized 70,000,000 shares in 1998 and 1997; issued and
outstanding 33,310,000 shares in 1998 and 1997........................................ 333 333
Paid-in capital......................................................................... 237,954 230,339
Accumulated other comprehensive income.................................................. (467) (218)
Accumulated deficit..................................................................... (204,164) (78,099)
---------- ----------
Total stockholders' equity............................................................ 33,656 152,355
---------- ----------
Total liabilities and stockholders' equity............................................ $ 348,374 $ 307,096
========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
F-3
<PAGE>
@ ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
----------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Revenues...................................................................... $ 61,859 $ 38,138 $ 24,923
Operating expenses:
Direct operating expenses (note 13)......................................... 61,874 14,621 7,193
Selling, general and administrative expenses (note 15)...................... 74,494 49,893 9,289
Depreciation and amortization............................................... 26,304 16,294 9,788
----------- ---------- ---------
Total operating expenses...................................................... 162,672 80,808 26,270
----------- ---------- ---------
Operating loss.............................................................. (100,813) (42,670) (1,347)
Interest and investment income................................................ 3,355 5,754 1,274
Interest expense (note 11).................................................... (21,957) (13,902) (4,687)
Equity in losses of affiliated companies...................................... (6,310) (368) --
Foreign exchange loss, net.................................................... (130) (1,027) (761)
----------- ---------- ---------
Loss before income taxes, minority interest and
extraordinary item........................................................... (125,855) (52,213) (5,521)
Income tax (expense)/benefit (note 10)........................................ (210) 975 (1,273)
Minority interest............................................................. -- (3,586) 1,890
----------- ---------- ---------
Loss before extraordinary item................................................ (126,065) (54,824) (4,904)
Extraordinary item-loss on early extinguishment of debt (note 11)............. -- -- (1,713)
----------- ---------- ---------
Net loss.................................................................... (126,065) (54,824) (6,617)
Accretion of redeemable preferred stock....................................... -- (2,436) (2,870)
Preferred stock dividends (note 1)............................................ -- -- (1,738)
(Excess)/deficit of consideration paid for preferred stock (over)/under
carrying amount (note 1).................................................... -- (33,806) 3,549
----------- ---------- ---------
Net loss applicable to holders of common stock................................ $ (126,065) $ (91,066) $ (7,676)
=========== ========== =========
Basic and diluted loss per common share:
Loss before extraordinary item.............................................. $ (3.78) $ (3.68) $ (0.34)
Extraordinary item.......................................................... -- -- (0.10)
----------- ---------- ---------
Net loss (note 14).......................................................... $ (3.78) $ (3.68) $ (0.44)
=========== ========== =========
See accompanying notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
@ ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
----------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net loss...................................................................... $ (126,065) $ (54,824) $ (6,617)
Other comprehensive income:
Translation adjustment...................................................... (249) (218) --
----------- ---------- ---------
Comprehensive loss............................................................ $ (126,314) $ (55,042) $ (6,617)
=========== ========== =========
See accompanying notes to consolidated financial statements.
</TABLE>
F-5
<PAGE><TABLE><CAPTION> @ ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
ACCUMULATED
PREFERRED STOCK COMMON STOCK OTHER
------------------------ ---------------------- PAID-IN COMPREHENSIVE ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPTIAL INCOME DEFICIT
----------- ----------- --------- ----------- --------- ----------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Balance January 1, 1996............... 985 $ 10,311 11,037 $ 4,993 $ 1,544 $ -- $ (16,658)
Net loss............................ -- -- -- -- -- (6,617)
Stock dividend...................... 166 1,738 -- -- (1,738) -- --
Proceeds from issuance of common and
preferred stock (note 1).......... -- -- 7,911 (4,992) 87,021 -- --
Cost of issuance (note 1)........... -- -- -- -- (1,028) -- --
Allocation of proceeds to preferred
(note 1).......................... -- -- -- -- (32,156) -- --
Preferred stock redemption (note
1)................................ (1,151) (12,049) -- -- 3,549 -- --
Accretion of redeemable preferred
stock (note 1).................... -- -- -- -- (2,870) -- --
Reorganization (note 1)............. -- -- 18,929,052 188 (188) --
---------- ---------- ---------- --------- --------- --------- -----------
Balance December 31, 1996............. -- -- 18,948,000 189 54,134 -- (23,275)
Translation adjustment.............. -- -- -- -- -- (218) --
Net loss............................ -- -- -- -- -- -- (54,824)
Net proceeds from initial public
offering (note 1)................. -- -- 9,500,000 95 183,197 -- --
Purchase of PCI series A and C
redeemable preferred stock (note
1)................................ -- -- -- -- (33,806) -- --
Accretion of redeemable preferred
stock (note 1).................... -- -- -- -- (2,436) -- --
Conversion of series B redeemable
preferred stock (note 1).......... -- -- 4,862,000 49 11,148 -- --
Stock option compensation expense
(note 15)......................... -- -- -- -- 18,102 -- --
---------- ---------- --------- --------- --------- --------- -----------
Balance December 31, 1997............. -- -- 33,310,000 333 230,339 (218) (78,099)
Translation adjustment.............. -- -- -- -- -- (249) --
Net loss............................ -- -- -- -- -- -- (126,065)
Warrants attached to Senior Discount
Notes (note 11)................... -- -- -- -- 7,615 -- --
---------- ---------- --------- --------- --------- --------- -----------
Balance December 31, 1998............. -- $ -- 33,310,000 $ 333 $ 237,954 $ (467) $ (204,164)
========== ========== ========== ========= ========= ========= ==========
TOTAL
---------
Balance January 1, 1996............... $ 190
Net loss............................ (6,617)
Stock dividend...................... --
Proceeds from issuance of common and
preferred stock (note 1).......... 82,029
Cost of issuance (note 1)........... (1,028)
Allocation of proceeds to preferred
(note 1).......................... (32,156)
Preferred stock redemption (note
1)................................ (8,500)
Accretion of redeemable preferred
stock (note 1).................... (2,870)
Reorganization (note 1)............. --
---------
Balance December 31, 1996............. 31,048
Translation adjustment.............. (218)
Net loss............................ (54,824)
Net proceeds from initial public
offering (note 1)................. 183,292
Purchase of PCI series A and C
redeemable preferred stock (note
1)................................ (33,806)
Accretion of redeemable preferred
stock (note 1).................... (2,436)
Conversion of series B redeemable
preferred stock (note 1).......... 11,197
Stock option compensation expense
(note 15)......................... 18,102
---------
Balance December 31, 1997............. 152,355
Translation adjustment.............. (249)
Net loss............................ (126,065)
Warrants attached to Senior Discount
Notes (note 11)................... 7,615
---------
Balance December 31, 1998............. $ 33,656
=========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
@ ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................................................... $ (126,065) $ (54,824) $ (6,617)
Adjustments to reconcile net loss to net cash (used in)/ provided by
operating activities:
Minority interest.......................................................... -- 3,586 (1,890)
Depreciation and amortization.............................................. 26,304 16,294 9,788
Amortization of notes payable discount and issue costs..................... 9,182 1,040 166
Non-cash portion of extraordinary item..................................... -- -- 1,566
Gain on sale of investment securities...................................... -- (358) --
Non-cash stock option compensation expense................................. -- 18,102 --
Equity in profits of affiliated companies.................................. 6,310 368 --
Other...................................................................... 2,196 -- --
Changes in operating assets and liabilities:
Accounts receivable...................................................... (2,780) (3,191) (796)
Other current assets..................................................... (7,959) (2,101) (1,862)
Programming and broadcast rights......................................... (8,136) (894) --
Accounts payable and accrued expenses.................................... 25,185 5,757 3,379
Income taxes payable..................................................... 2,026 (2,707) 334
Accrued interest......................................................... (35) -- 2,175
Deferred revenue......................................................... 3,104 155 (131)
---------- --------- ---------
Net cash (used in)/ provided by operating activities................... (70,668) (18,773) 6,112
---------- --------- ---------
Cash flows from investing activities:
Construction and purchase of property, plant and equipment............... (114,992) (39,643) (26,581)
Repayment of notes receivable from affiliates............................ -- 2,521 --
Issuance of notes receivable from affiliates............................. -- (721) (2,491)
Purchase of investment securities........................................ -- -- (25,940)
Proceeds from maturity of investment securities.......................... -- 25,473 --
Purchase of other assets................................................. -- (10,200) (6,000)
Investments in affiliated companies...................................... (5,228) (21,420) (580)
Purchase of subsidiaries, net of cash received (note 5).................. (26,990) (20,852) (13,269)
---------- --------- ---------
Net cash used in investing activities.................................. (147,210) (64,842) (74,861)
---------- --------- ---------
Cash flows from financing activities:
Net proceeds from issuance of stock...................................... -- 183,292 81,001
Redemption of preferred stock............................................ -- (60,000) (8,500)
Costs to obtain loans.................................................... (5,960) (1,749) (6,513)
Proceeds from issuance of notes payable.................................. 123,985 -- 136,074
Repayment of notes payable............................................... (398) (720) (27,893)
Proceeds from issuance of warrants....................................... 7,615 -- --
Repayments to affiliates................................................. -- -- (39,280)
---------- --------- ---------
Net cash provided by financing activities.............................. 125,242 120,823 134,889
---------- --------- ---------
Net (decrease)/increase in cash and cash equivalents................... (92,636) 37,208 66,140
Cash and cash equivalents at beginning of year................................. 105,691 68,483 2,343
---------- --------- ---------
Cash and cash equivalents at end of year....................................... $ 13,055 $ 105,691 $ 68,483
========== ========= =========
Supplemental cash flow information:
Cash paid for interest....................................................... $ 13,014 $ 12,873 $ 2,338
---------- --------- ---------
Cash paid for income taxes................................................... $ 589 $ 1,732 $ 1,184
========== ========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
F-7
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
1. ORGANIZATION AND FORMATION OF HOLDING COMPANY
@ Entertainment, Inc. ("@ Entertainment") was established as a Delaware
corporation in May 1997. @ Entertainment succeeded Poland Communications, Inc.
("PCI") as the group holding company to facilitate an initial public offering of
stock in the United States and internationally. PCI was founded in 1990 by David
T. Chase, a Polish-born investor.
@ Entertainment, Inc. and its subsidiaries (the "Company") offer pay
television services to business and residential customers in Poland. Its
revenues are derived primarily from monthly basic and premium service fees for
cable and digital satellite direct-to-home ("D-DTH") television services
provided primarily to residential, rather than business, customers. In September
1998, the Company launched its D-DTH broadcasting service throughout Poland. In
addition to developing and acquiring programming for distribution on its cable
and D-DTH television networks, the Company commenced distribution of a branded
digital encrypted package of Polish-language programming under the brand name,
Wizja TV in June and September 1998 on its cable and D-DTH television networks,
respectively.
At December 31, 1998, @ Entertainment wholly owned PCI, @ Entertainment
Programming, Inc. ("@EPI")--United States corporations, At Entertainment Limited
("@EL"), At Entertainment Services Limited ("@ES")--United Kingdom corporations,
Sereke Holding B.V. ("Sereke")--a Netherlands corporation and Wizja TV Sp. z
o.o., Gound Zero Media Sp. z o.o. ("GZM") and Wizja TV Spoka Produkcyjna Sp. z
o.o., which are Polish corporations. PCI owns 92.3% of the capital stock of
Poland Cablevision (Netherlands) B.V. ("PCBV"), a Netherlands corporation and
first-tier subsidiary of PCI. @ Entertainment, PCI and PCBV are holding
companies that directly or indirectly hold controlling interests in a number of
Polish cable television companies, collectively referred to as the "PTK
Companies". As of December 31, 1998, substantially all of the assets and
operating activities of the Company were located in Poland and the United
Kingdom.
The following is a description of the events leading up to the formation of
@Entertainment.
PCI had outstanding at December 31, 1995, 985 shares of preferred stock,
which were convertible into 812 shares of Class A common stock. PCI had the
option of redeeming the preferred stock in whole or in part from January 1, 1996
through December 31, 2002. However, as discussed below, the preferred stock was
exchanged for new series D preferred stock during March 1996.
During February 1996, PCI issued to certain stockholders an additional
2,437 shares of Class A common stock in accordance with the provisions of the
Shareholder Agreement dated June 27, 1991. The shares were issued at a nominal
value of $.01 each. Also during February 1996, PCI issued a stock dividend of
166 shares of series A preferred stock to the preferred stock stockholder.
During March 1996, PCI completed several transactions including restating
its certificate of incorporation, issuing new shares of stock, redeeming
preferred stock, and the repayment of affiliate debt. The restated certificate
of incorporation of PCI authorized a new class of $.01 par common stock, $1 par
series A preferred stock, $.01 par series B preferred stock, $.01 par series C
preferred stock, and $.01 par series D preferred stock. All shares of Class A
and Class B common stock previously issued and outstanding were exchanged for
new common stock. All issued and outstanding shares of preferred stock were
exchanged for new series D preferred stock, which were subsequently redeemed for
$8,500,000. Only common stock and series B preferred stock retained voting
rights and only holders of common stock were entitled to receive dividends. Each
series of preferred stock had redemption provisions; the series B preferred
stock were also convertible into common stock.
F-8
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
1. ORGANIZATION AND FORMATION OF HOLDING COMPANY (CONTINUED)
During March 1996, PCI issued 4,662 shares of common stock, 4,000 shares of
series A preferred stock, and 2,500 shares of series B preferred stock to ECO
Holdings III Limited Partnership ("ECO") in exchange for $65,000,000; and 2,000
shares of series C preferred stock and 812 shares of common stock were issued to
Polish Investments Holding Limited Partnership ("PIHLP") in exchange for
$17,029,000.
The PCI series A, series B and series C preferred stock have a mandatory
redemption date of October 31, 2004. At the option of the Company, the PCI
series A, series B and series C preferred stock may be redeemed at any time in
whole or in part at a redemption price per share of $10,000. Prior to the
mandatory redemption of the PCI series B preferred stock, the holders of any
shares of PCI series B preferred stock had the option to convert their shares to
4,862 shares of PCI common stock. The preferred stock was recorded at its
mandatory redemption value on October 31, 2004, discounted at 12%, of
$32,156,000.
On June 22, 1997, all the holders of shares of PCI's common stock and
@Entertainment entered into a Contribution Agreement. Pursuant to the
Contribution Agreement, each holder of shares of PCI's common stock transferred
all shares of PCI common stock owned by it to @Entertainment. In addition, ECO
transferred all of the outstanding shares of PCI's series B preferred stock to
@Entertainment. All of these transfers (the "Share Exchange") were designed to
qualify as a tax-free exchange under section 351 of the Internal Revenue Code of
1986, as amended. Each holder of PCI's common stock received 1,000 shares of
common stock of @Entertainment in exchange for each share of PCI's common stock
transferred by it (the "Capital Adjustment"). ECO also received an equivalent
number of shares of @Entertainment's series B preferred stock in exchange for
its shares of PCI's series B preferred stock. @Entertainment's series B
preferred stock has identical rights and preferences to those of PCI's series B
preferred stock, except that the ratio for conversion of such shares into common
stock increased from 1:1.9448 to 1:1,944.80 in order to reflect the Capital
Adjustment. The 2,500 outstanding shares of @Entertainment's series B preferred
stock automatically converted into 4,862,000 shares of common stock of
@Entertainment upon the closing of the initial public offering. The formation of
@Entertainment has been accounted for at historical cost in a manner similar to
pooling of interest accounting.
On June 20, 1997, PIHLP transferred all of the outstanding shares of PCI's
series C preferred stock to an entity owned by certain of the beneficial owners
of PIHLP and members of their families (the "Chase Entity"). The Chase Entity,
ECO and @Entertainment entered into a Purchase Agreement dated June 22, 1997
(the "Purchase Agreement"). Among other matters, the Purchase Agreement
obligated @Entertainment to purchase all of the outstanding shares of PCI's
series A preferred stock and series C preferred stock for cash from ECO and the
Chase Entity, respectively, at the closing of the IPO. The aggregate purchase
price of $60,000,000 for PCI's series A preferred stock and series C preferred
stock equaled the aggregate redemption price of such shares as set forth in
PCI's certificate of incorporation. The purchase resulted in a loss applicable
to common stockholders of $33,806,000 representing the excess of the
consideration paid for the preferred stock over the carrying amount of those
shares as of the date of the Reorganization (as defined hereinafter). The
aforementioned purchase was funded with a portion of the net proceeds of the
IPO.
The Company periodically accreted, until the date of the purchases
described above, from paid-in capital an amount that would provide for the
redemption value of the PCI series A, B and C preferred shares at October 31,
2004. The total amounts recorded for accretion for the years ended December 31,
1996 and 1997 were $2,870,000 and $2,436,000, respectively.
F-9
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
1. ORGANIZATION AND FORMATION OF HOLDING COMPANY (CONTINUED)
In June 1997, @Entertainment acquired all of the outstanding stock of @EL,
a new corporation organized under the laws of England and Wales (the "@EL
Incorporation").
In June 1997, certain employment agreements for the executive officers of
@Entertainment who were employed by PCI and their employee stock option
agreements were assigned to @Entertainment by PCI (the "Assignment"). As part of
the Assignment and the Capital Adjustment, the employment agreements were
amended to provide that each option to purchase a share of PCI's common stock
was exchanged for an option to purchase 1,000 shares of @Entertainment's common
stock with a proportionate reduction in the per share exercise price.
The Share Exchange, Capital Adjustment, @EL Incorporation and the
Assignment are collectively referred to as the "Reorganization". As a result of
the Reorganization, @Entertainment owns 100% of the outstanding shares of common
stock and preferred stock of PCI and 100% of @EL.
On August 5, 1997, the Company consummated an initial public offering of
9,500,000 shares of common stock at a price of $21 per share. Net proceeds to
the Company were approximately $183,292,000 after deduction of the underwriting
discount and other expenses of the offering.
2. FINANCIAL POSITION AND BASIS OF ACCOUNTING
The Company generated an operating loss of $100,813,000 and negative cash
flows from operations of $70,668,000 for the year ended December 31, 1998,
primarily due to the significant costs associated with the development and
launch of the Company's D-DTH and programming businesses, promotion of those
businesses, and the development, production and acquisition of programming for
Wizja TV. Furthermore, the Company expects to experience substantial operating
losses and negative cash flows for at least the next two years in association
with the expansion of the D-DTH and programming businesses, and the continued
development of the cable business. As at December 31, 1998, the Company was
committed to pay at least $550,100,000 in guaranteed payments over the next nine
years of which at least approximately $254,200,000 million was committed through
the end of 2000. As at December 31, 1998 the Company had cash of $13,055,000.
Given the above noted factors at December 31, 1998, management planned and
successfully completed debt and equity offerings in January, 1999 which
generated net proceeds to the Company of approximately $154,000,000 (see note
20). The Company believes that the net proceeds of these three recent offerings
and cash on hand will provide the Company with sufficient capital to fulfill its
current business plan and to fund guaranteed payments until it achieves positive
cash flow from operations. The Company's current business plan include the
following key assumptions:
(a) achieve rapid penetration of the Polish market by distributing D-DTH
Reception Units to 380,000 initial subscribers at prices significantly
decreased by promotional incentives. The Company continues to review its
business plan with respect to the level of promotional incentives it will
provide. During 1998 the Company reduced its plans with respect to the
initial subscribers receiving significant promotional incentives from
500,000 to 380,000.
(b) the requirement to purchase 500,000 D-DTH Reception Units from Philips
prior to June 30, 2000. The Company continues to re-negotiate the terms of
their agreement with Philips, and during 1998 negotiated an extension of
the date by which the 500,000 Reception Units must be purchased, from
December 31, 1999 to June 30, 2000.
F-10
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
2. FINANCIAL POSITION AND BASIS OF ACCOUNTING (CONTINUED)
(c) a change in the cable strategy focus from acquisition and build-out of
cable networks to increased subscriber penetration in existing networks.
While the Company still plans build-out of the cable network in strategic
areas, the Company believes the most profitable means of expanding its
cable television business is to leverage its investment in its cable
networks by increasing the percentage of homes passed which subscribe in
its regional clusters.
Should management decide to change their business plan, including changes
in the above noted assumptions, they are confident that they can raise
additional financing. Future sources of financing for the Company could include
public or private debt or equity offerings or bank financing or any combination
thereof, subject to the restrictions contained in the indentures governing the
Company's senior outstanding indebtedness. However, there can be no assurance
that the Company will be able to do so on satisfactory terms, if at all.
Based on the above noted financial position and business plans, management
is confident that they will be able to continue as a going concern through June
30, 2000. Accordingly, 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.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United States of
America ("U.S. GAAP").
The consolidated financial statements include the financial statements of @
Entertainment, Inc. and its wholly owned and majority owned subsidiaries. Also
consolidated is a 49% owned subsidiary for which the Company maintains control
of operating activities and has the ability to influence the appointment of
members to the Managing Board. All significant intercompany balances and
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and other short-term investments
with original maturates of less than three months.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with U.S. GAAP. Actual results could differ from those estimates.
REVENUE RECOGNITION
CABLE TELEVISION REVENUES:
Revenue from subscription fees is recognized on a monthly basis as the
service is provided. Installation fee revenue for connection to the Company's
cable television system, is recognized to the extent of direct selling costs and
F-11
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the balance is deferred and amortized to income over the estimated average
period that new subscribers are expected to remain connected to the systems.
D-DTH SUBSCRIPTION REVENUES:
During 1998, the Company commenced sale of its Wizja TV Package (consisting
of a one-year rental of a D-DTH reception system, installation and a one-year
subscription to the Company's D-DTH service) to retail customers for one
up-front payment at the time of installation. The Company recognizes
subscription revenues at the time of installation to the extent of direct
selling costs incurred, and the balance is deferred and amortized to income over
the remaining term of the subscription.
OTHER REVENUES:
Advertising revenues are recognized when advertisements are aired under
broadcast contracts.
TAXATION
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.
U.S. TAXATION:
The Company and PCI are subject to U.S. federal income taxation on their
worldwide income. The Polish, United Kingdom and Netherlands corporations are
foreign corporations which are not expected to be engaged in a trade or business
within the U.S. or to derive income from U.S. sources and accordingly, are not
subject to U.S. income tax.
FOREIGN TAXATION:
The Polish companies are subject to corporate income taxes, value added tax
(VAT) and various local taxes within Poland, as well as import duties on
materials imported by them into Poland. Under Polish law, the Polish companies
are exempt from import duties on certain in-kind capital contributions.
The Polish companies' income tax is calculated in accordance with Polish
tax regulations. Due to differences between accounting practices under Polish
tax regulations and those required by U.S. GAAP, certain income and expense
items are recognized in different periods for financial reporting purposes and
income tax reporting purposes which may result in deferred income tax assets and
liabilities.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment includes assets used in the development and
operation of the Company's D-DTH and cable television systems and set-top boxes.
During the period of construction, plant costs and a portion of design,
development and related overhead costs are capitalized as a component of the
Company's investment in D-DTH and cable television systems. When material, the
Company capitalizes interest costs incurred during the period of construction in
accordance with SFAS No. 34, "CAPITALIZATION OF INTEREST COST". During 1998, the
F-12
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company capitalized approximately $664,000 in interest. During 1997 and 1996, no
interest costs were capitalized.
Cable and D-DTH subscriber related costs and general and administrative
expenses are charged to operations when incurred.
Depreciation is computed for financial reporting purposes using the
straight-line method over the following estimated useful lives:
Cable television system assets................................... 10 years
D-DTH system assets.............................................. 5 years
Settop boxes..................................................... 5 years
Vehicles......................................................... 5 years
5-10
Other property, plant and equipment.............................. years
INVENTORIES FOR CONSTRUCTION
Inventories for construction are stated at the lower of cost, determined by
the average cost method, or net realizable value. Inventories are principally
related to construction in the various cable television systems.
GOODWILL AND OTHER INTANGIBLES
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, generally ten years, with the exception of amounts paid
relating to non-compete agreements. The portion of the purchase price relating
to the non-compete agreements is amortized over the term of the underlying
agreements, generally five years.
Through its subsidiaries, the Company has entered into lease agreements
with the Polish national telephone company ("TPSA"), for the use of underground
telephone conduits for cable wiring. Costs related to obtaining conduit and
franchise agreements with housing cooperatives and governmental authorities are
capitalized and amortized generally over a period of ten years. In the event the
Company does not proceed to develop cable systems within designated cities,
costs previously capitalized will be charged to expense.
PROGRAMMING AND BROADCAST RIGHTS
During 1997 and 1998, the Company entered into contracts for the purchase
of certain exhibition or broadcast rights. Broadcast or exhibition rights
consist principally of rights to broadcast syndicated programs, sports and
feature films and are accounted for as a purchase of rights by the licensee. The
asset and liability for the rights acquired and obligations incurred under a
license agreement are reported by the Company, at the gross amount of the
liability, when the license period begins and certain specified conditions have
been met, in accordance with the guidelines established within SFAS No. 63,
"FINANCIAL REPORTING BY BROADCASTERS".
F-13
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED FINANCING COSTS
Costs incurred to obtain financing have been deferred and amortized over
the life of the loan using the effective interest method. The amortization of
deferred financing costs is included in interest expense.
INVESTMENTS IN AFFILIATED COMPANIES
Investments in affiliated companies are accounted for using the equity
method. Where the purchase price exceeds the fair value of the Company's
percentage of net assets acquired, the difference is amortized over the expected
period to be benefited as a charge to equity in profits of affiliated companies.
Where the expected period to be benefited is limited by licensing agreements,
the difference is amortized over the term of the licensing agreement.
MINORITY INTEREST
Recognition of the minority interests' share of losses of consolidated
subsidiaries is limited to the amount of such minority interests' allocable
portion of the equity of those consolidated subsidiaries.
STOCK-BASED COMPENSATION
The Company has adopted SFAS No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION", which gives companies the option to adopt the fair value based
method for expense recognition of employee stock options and other stock-based
awards or to account for such items using the intrinsic value method as outlined
under APB Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES", with pro
forma disclosure of net loss and loss per share as if the fair value method had
been applied. The Company has elected to apply APB Opinion No. 25 and related
interpretations for stock options and other stock-based awards.
FOREIGN CURRENCIES
Foreign currency transactions are recorded at the exchange rate prevailing
at the date of the transactions. Assets and liabilities denominated in foreign
currencies are remeasured at the rates of exchange at balance sheet date. Gains
and losses on foreign currency transactions are included in the consolidated
statement of operations.
The financial statements of foreign subsidiaries are translated to U.S.
dollars using (i) exchange rates in effect at period end for assets and
liabilities, and (ii) average exchange rates during the period for results of
operations. Adjustments resulting from translation of financial statements are
reflected in accumulated other comprehensive income as a separate component of
stockholders' equity.
Effective January 1, 1998, Poland is no longer deemed to be a highly
inflationary economy. In accordance with this change, the Company established a
new functional currency basis for non-monetary items of its Polish subsidiaries
in accordance with guidelines established within EITF Issue 92-4, "ACCOUNTING
FOR A CHANGE IN FUNCTIONAL CURRENCY WHEN AN ECONOMY CEASES TO BE CONSIDERED
HIGHLY INFLATIONARY". That basis is computed by translating the historical
reporting currency amounts of non-monetary items into the local currency at
current exchange rates. As a result of this change, the Company's functional
currency bases exceeded the local currency tax bases of nonmonetary items. The
difference between the new functional currency and the tax bases have been
recognized as temporary differences.
F-14
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Prior to January 1, 1998 the financial statements of foreign subsidiaries
were translated into U.S. dollars using (i) exchange rates in effect at period
end for monetary assets and liabilities, (ii) exchange rates in effect at
transaction dates (historical rates) for non monetary assets and liabilities,
and (iii) average exchange rates during the period for revenues and expenses,
other than those revenues and expenses that relate to non monetary assets and
liabilities (primarily amortization of fixed assets and intangibles) which are
translated using the historical exchange rates applicable to those non monetary
assets and liabilities. Adjustments resulting from translation of financial
statements were reflected as foreign exchange gains or losses in the
consolidated statements of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value Of Financial Instruments"
requires the Company to make disclosures of fair value information of all
financial instruments, whether or not recognized on the consolidated balance
sheets, for which it is practicable to estimate fair value.
The Company's financial instruments include cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses and notes payable.
At December 31, 1998 and 1997, the carrying value of cash and cash
equivalents, accounts receivable, and accounts payable and accrued expenses on
the accompanying consolidated balance sheets approximates fair value due to the
short maturity of these instruments.
At December 31, 1998, the fair value of the Company's notes payable balance
approximates $230,194,000 based on the last trading price of the notes payable
in 1998.
At December 31, 1997, the fair value of the Company's notes payable
approximated $128,420,000 based on the last trading price of the notes payable
in 1997.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses the recoverability of long-lived assets (mainly
property, plant and equipment, intangibles and certain other assets) on a
regular basis by determining whether the carrying value of the assets can be
recovered over the remaining lives through projected undiscounted future
operating cash flows, expected to be generated by such assets. If an impairment
in value is estimated to have occurred, the assets carrying value is reduced to
its estimated fair value. The assessment of the recoverability of long-lived
assets will be impacted if estimated future operating cash flows are not
achieved.
COMMITMENTS AND CONTINGENCIES
Liabilities for loss contingencies arising from claims, assessments,
litigation, fines and penalties, and other sources are recorded when it is
probable that a liability has been incurred and the amount of the assessment can
be reasonably estimated.
ADVERTISING COSTS
All advertising costs of the Company are expensed as incurred.
F-15
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain amounts have been reclassified in the prior year consolidated
financial statements to conform to the 1998 consolidated financial statement
presentation.
4. VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO AMOUNTS BALANCE AT
JANUARY 1 EXPENSE WRITTEN OFF DECEMBER 31
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
1996
Allowance for Doubtful Accounts........... $ 510 $ 358 $ 323 $ 545
1997
Allowance for Doubtful Accounts........... $ 545 $ 494 $ 273 $ 766
1998
Allowance for Doubtful Accounts........... $ 766 $ 1,383 $ 1,054 $ 1,095
</TABLE>
5. ACQUISITIONS
During 1998, the Company made several acquisitions of which details follow.
In each case, the acquisition was accounted for using the purchase method,
whereby the purchase price was allocated to the underlying assets and
liabilities based on their proportionate share of fair values on the date of
acquisition and any excess to goodwill. The results of operations of each of the
businesses acquired are included in the Company's consolidated financial
statements since the date of acquisition.
In February 1998, PCI acquired a cable television business for an aggregate
consideration of approximately $1,574,000. The purchase price exceeded the fair
value of the net liabilities acquired by approximately $2,041,000. In
association with this acquisition, the Company assumed a $2,150,000 loan from
Bank Rozwoju Exportu S.A. (refer to note 11).
In February and March 1998, the Company acquired the remaining 55% equity
interest in an affiliated company for approximately $9,389,000. The purchase
price exceeded the fair value of the net liabilities acquired by approximately
$9,945,000.
On July 16, 1998, the Company purchased the remaining 45.25% interest in a
subsidiary of the Company which was held by unaffiliated third parties for an
aggregate purchase price of approximately $10,655,000, of which approximately
$9,490,000 relates to non-compete agreements. The purchase price, excluding the
amount paid relating to the non-compete agreements, exceeded the fair value of
the assets acquired by $604,000. The portion of the purchase price relating to
the non-compete agreements will be amortized over the five-year term of the
agreements.
On August 15, 1998, PCI purchased the remaining approximately 50% minority
interest in a subsidiary of the Company which was held by unaffiliated third
parties for aggregate consideration of approximately $5,372,000. The purchase
price exceeded the fair value of the assets acquired by $1,104,000.
Additionally, during 1998 the Company acquired certain cable television
system assets and subscriber lists for aggregate consideration of approximately
$2,000,000. The purchase price did not materially exceed the fair value of the
assets acquired.
F-16
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
5. ACQUISITIONS (CONTINUED)
Had these acquisitions occurred on January 1, 1997, the Company's pro-forma
consolidated results for the years ended December 31, 1998 and 1997, would not
be materially different from those presented in the consolidated statements of
operations.
Effective January 1, 1997, PCI acquired the remaining 51% of a subsidiary
company for aggregate consideration of approximately $9,927,000. The acquisition
has been accounted for as a purchase with the purchase price allocated among the
assets acquired and liabilities assumed based upon the fair values at the date
of acquisition and any excess to goodwill. The purchase price exceeded the fair
value of the net assets acquired by approximately $5,556,000.
In May 1997, PCI acquired a 54.75% ownership interest in a cable television
company for aggregate consideration of approximately $10,925,000. The
acquisition has been accounted for as a purchase with the purchase price
allocated among the assets acquired and liabilities assumed based upon the fair
values at the date of acquisition and any excess as goodwill. The results of the
acquired company have been included with the Company's results since the date of
acquisition. The purchase price exceeded the fair value of the net assets
acquired by approximately $9,910,000. Included in minority interest at December
31, 1997 is approximately $450,000 relating to the acquisition of this
subsidiary.
During 1997, the Company acquired certain cable television system assets
and subscriber lists for aggregate consideration of approximately $3,200,000.
The acquisitions have been accounted for as fixed asset purchases with the
purchase price allocated among the fixed assets acquired based upon their fair
values at the dates of acquisition and any excess to goodwill. The purchase
prices exceeded the fair value of the assets acquired by approximately $548,000.
During 1996, the Company acquired substantially all of the cable television
system assets of twenty-six cable television companies for aggregate
consideration of approximately $15,600,000. The acquisitions have been accounted
for as purchases with the purchase price allocated among the assets acquired and
liabilities assumed based upon their fair values at the date of acquisition and
any excess as goodwill. The results of the acquired companies have been included
with the Company's results since their dates of acquisition. The purchase prices
exceeded the fair value of the net assets acquired by approximately $5,800,000.
6. PROGRAMMING AND BROADCAST RIGHTS
Programming and broadcast rights include approximately $9,030,000 and
$894,000 related to certain broadcast rights purchased as of December 31, 1998
and 1997, respectively, but not yet available for viewing.
7. OTHER CURRENT AND NON-CURRENT ASSETS
Included in other current assets are $8,785,000 and $1,322,000 of VAT
receivables as of December 31, 1998 and 1997, respectively.
Also included in other current assets at December 31, 1998 and 1997 are
prepayments of $8,300,000 and $9,000,000, respectively, to Philips Business
Electronics B.V. ("Philips") toward the supply of decoders, satellite dishes and
services used in the Company's D-DTH satellite transmission system ("Reception
Systems").
F-17
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
7. OTHER CURRENT AND NON-CURRENT ASSETS (CONTINUED)
Included in other non-current assets at December 31, 1998 and 1997 are
deferred financing costs of $12,146,000 and $7,122,000, respectively relating to
the Company's notes payable (refer to note 11).
Included in other non-current assets at December 31, 1997 is a prepayment
of approximately $1,200,000 toward the formation of a programming related joint
venture with World Shopping Network Plc. As a final agreement was never
consummated, the amount was expensed in 1998.
8. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Conduit and franchise agreements........................................ $ 5,409 $ 5,391
Goodwill................................................................ 27,510 13,338
Non-compete agreements.................................................. 19,006 9,406
Other................................................................... 1,336 1,543
--------- ---------
53,261 29,678
Less accumulated amortization........................................... (9,609) (3,360)
--------- ---------
Net intangible assets................................................... $ 43,652 $ 26,318
========= =========
</TABLE>
9. INVESTMENTS IN AFFILIATED COMPANIES
Investment in affiliated companies at December 31, 1998 consist of 20% of
the common stock of Fox Kids Poland Ltd. ("FKP") and 50% of the common stock of
Twoj Styl Sp. z o.o. ("Twoj Styl"). At December 31, 1997 investments in
affiliated companies also included 45% of the common stock of GZM. During 1998,
the Company acquired the remaining interest in GZM (refer to note 5).
In December 1997, the Company acquired a 20% interest in FKP, a joint
venture formed to provide programming to the Company for an aggregate purchase
price of approximately $10,000,000. The purchase price exceeded the fair value
of the Company's ownership percentage of net assets by approximately
$10,000,000. This difference is being amortized over five years as a charge to
equity in profits of affiliated companies. During 1998, the Company contributed
an additional $4,926,000 to the joint venture which was accounted for as an
additional investment in affiliated companies. For the years ended December 31,
1998 and 1997, the Company recorded losses related to this investment of
$6,343,000 and $0, respectively.
In December 1997, the Company acquired a 50% interest in Twoj Styl, a
magazine publishing company for an aggregate purchase price of approximately
$11,100,000. In 1998, the Company paid approximately $302,000 for stamp duty and
professional fees, which was added to the cost of the investment. The purchase
price exceeded the fair value of the Company's ownership percentage of net
assets by approximately $9,600,000. This difference is being amortized over ten
years as a charge to equity in profits of affiliated companies. For the years
ended December 31, 1998 and 1997, the Company recorded a (loss)/profit related
to this investment of $(181,000) and $152,000, respectively. In addition, the
Company agreed to provide additional future financing to Twoj Styl, either debt
or equity, of up to $7,700,000 to develop Polish-language programming and
F-18
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
9. INVESTMENTS IN AFFILIATED COMPANIES (CONTINUED)
ancillary services. As of December 31, 1998, no additional financing had been
provided.
It was not practicable to estimate the market value of the investments in
affiliated companies due to the nature of these investments, the relatively
short existence of the affiliated companies and the absence of quoted market
price for the affiliated companies.
10. INCOME TAXES
Income tax (expense)/benefit consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
--------- ---------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Year ended December 31, 1998:
U.S. Federal............................................... $ -- $ -- $ --
State and local............................................ -- -- --
Foreign.................................................... (210) -- (210)
--------- ---------- ---------
$ (210) $ -- $ (210)
========= ========== =========
Year ended December 31, 1997:
U.S. Federal............................................... $ 1,438 $ -- $ 1,438
State and local............................................ -- -- --
Foreign.................................................... (463) -- (463)
--------- ---------- ---------
$ 975 $ -- $ 975
========= ========== =========
Year ended December 31, 1996:
U.S. Federal............................................... $ (714) $ -- $ (714)
State and local............................................ (531) -- (531)
Foreign.................................................... (28) -- (28)
--------- ---------- ---------
$ (1,273) $ -- $ (1,273)
========= ========== =========
</TABLE>
Sources of loss before income taxes and minority interest are presented as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
----------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic loss............................................. $ (52,341) $ (20,628) $ (2,602)
Foreign loss.............................................. (73,154) (31,585) (4,632)
----------- ---------- ---------
$ (125,855) $ (52,213) $ (7,234)
=========== ========== =========
</TABLE>
F-19
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
10. INCOME TAXES (CONTINUED)
Income tax (expense)/benefit for the years ended December 31, 1998, 1997,
and 1996 differed from the amounts computed by applying the U.S. federal income
tax rate of 34 percent to pretax loss as a result of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed "expected" tax benefit............................. $ 43,061 $ 17,752 $ 2,460
Non-deductible expenses..................................... (1,635) (101) (17)
Change in valuation allowance............................... (30,299) (15,424) (3,504)
Adjustment for change in functional currency bases.......... (11,311) -- --
Adjustment to deferred tax asset
for enacted changes in tax rates.......................... (695) (789) --
Foreign tax rate differences................................ 606 (463) (184)
Other....................................................... 63 -- (28)
---------- ---------- ---------
$ (210) $ 975 $ (1,273)
========== ========== =========
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1997
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Foreign net operating loss carryforward............................... $ 27,930 $ 6,471
Domestic net operating loss carry forward............................. 7,459 --
Interest income....................................................... 2,650 1,946
Service revenue....................................................... 2,101 1,948
Accrued liabilities................................................... 4,061 2,964
Deferred costs........................................................ 6,447 2,001
Stock options......................................................... 2,950 2,950
Deferred interest..................................................... 2,183 --
Unrealized foreign exchange losses.................................... 9,066 5,614
Other................................................................. 1,393 139
---------- ---------
Total gross deferred tax assets......................................... 66,240 24,033
Less valuation allowance................................................ (54,332) (24,033)
---------- ---------
Net deferred tax assets................................................. $ 11,908 $ --
========== =========
Deferred tax liabilities:
Fixed assets depreciation............................................. $ (11,786) $ --
Other................................................................. (122) --
---------- ---------
Total gross deferred tax liabilities.................................. $ (11,908) $ --
========== =========
Net deferred tax liability............................................ $ -- $ --
========== =========
</TABLE>
F-20
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
10. INCOME TAXES (CONTINUED)
The net increase in the valuation allowance for the years ended December
31, 1998, 1997 and 1996 was $30,299,000, $3,504,000 and $667,000, respectively.
In assessing the realiability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers
projected future taxable income and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and projections
for future taxable income over the periods which the deferred tax assets are
deductible, management believes it is more likely than not the Company will
realize the benefits of these deductible differences, net of the existing
valuation allowances at December 31, 1998.
Subsequently recognized tax benefits relating to the valuation allowance
for deferred tax assets as of December 31, 1998 will be reported in the
consolidated statement of operations.
Foreign loss carryforwards can be offset against the PTK Companies' taxable
income and utilized at a rate of one-third per year in each of the three years
subsequent to the year of the loss. If there is no taxable income in a given
year during the carryforward period, the portion of the loss carryforward to be
utilized is permanently forfeited. For losses incurred in U.S. taxable years
prior to 1998, loss carryforwards can be applied against taxable income three
years retroactively and fifteen years into the future. For losses incurred in
U.S. taxable years from 1998, loss carryforwards can be applied against taxable
income two years retroactively and twenty years into the future.
At December 31, 1998, the Company has foreign net operating loss
carryforwards of approximately $104,087,000, which will expire as follows:
<TABLE>
<CAPTION>
(IN
YEAR ENDING DECEMBER 31, THOUSANDS)
- ----------------------------------------------------------------------------------- -------------
<S> <C>
1999............................................................................... $ 28,066
2000............................................................................... 26,814
2001 and thereafter................................................................ 49,207
-------------
$ 104,087
===========
</TABLE>
11. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
@ Entertainment Notes, net of discount....................................................... $ 125,513 $ --
PCI Notes, net of discount................................................................... 129,627 129,578
American Bank in Poland S.A. ("AmerBank") revolving credit loan.............................. 6,500 --
Bank Rozwoju Exportu S.A. Deutsche--Mark facility............................................ 1,912 --
Other........................................................................................ 402 532
--------- ---------
263,954 130,110
less: current portion........................................................................ 6,500 --
Notes payable, net of current portion........................................................ $ 257,454 $ 130,110
========= =========
</TABLE>
F-21
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
@ ENTERTAINMENT NOTES
On July 14, 1998, the Company sold 252,000 units (collectively, the
"Units") to two initial purchasers pursuant to a purchase agreement, each Unit
consisting of $1,000 principal amount at maturity of 14 1/2% Senior Discount
Notes (the "Notes") due 2008 and four warrants (each a "Warrant"), each
initially entitling the holder thereof to purchase 1.81 shares of common stock,
par value $0.01 per share (the "Common Stock") at an exercise price of $13.20
per share, subject to adjustment.
The Notes were issued at a discount to their aggregate principal amount at
maturity and, together with the Warrants generated gross proceeds to the Company
of approximately $125,100,000 of which $117,485,000 has been allocated to the
initial accreted value of the Notes and approximately $7,615,000 has been
allocated to the Warrants. The portion of the proceeds that is allocable to the
Warrants was accounted for as part of paid-in capital. The allocation was made
based on the relative fair values of the two securities at the time of issuance.
Net proceeds to the Company after deducting initial purchasers' discount and
offering expenses were approximately $118,972,000.
The Notes are unsubordinated and unsecured obligations. Cash interest on
the Notes will not accrue prior to July 15, 2003. Thereafter cash interest will
accrue at a rate of 14.5% per annum and will be payable semiannually in arrears
on January 15 and July 15 of each year, commencing January 15, 2004. The Notes
will mature on July 15, 2008. At any time prior to July 15, 2001, the Company
may redeem up to a maximum of 25% of the originally issued aggregate principal
amount at maturity of the Notes at a redemption price equal to 114.5% of the
accreted value thereof at the redemption date, plus accrued and unpaid interest,
if any, to the date of redemption with some or all of the net cash proceeds of
one or more public equity offerings; provided, however, that not less than 75%
of the originally issued aggregate principal amount at maturity of the Notes
remains outstanding immediately after giving effect to such redemption. The
effective interest rate of the Notes is approximately 16.5%.
The Warrants initially entitle the holders thereof to purchase an aggregate
of 1,824,514 shares of Common Stock, representing, in the aggregate,
approximately 5% of the outstanding Common Stock on a fully-diluted basis
immediately after giving effect to the sale of the Units. The Warrants are
exercisable at any time and will expire on July 15, 2008.
Pursuant to the Indenture governing the Notes (the "Indenture"), the
Company is subject to certain restrictions and covenants, including, without
limitation, covenants with respect to the following matters: (i) limitation on
additional indebtedness; (ii) limitation on restricted payments; (iii)
limitation on issuance and sales of capital stock of restricted subsidiaries;
(iv) limitation on transactions with affiliates; (v) limitation on liens; (vi)
limitation on guarantees of indebtedness by restricted subsidiaries; (vii)
purchase of Notes upon a change of control; (viii) limitation on sale of assets;
(ix) limitation on dividends and other payment restrictions affecting restricted
subsidiaries; (x) limitation on investments in unrestricted subsidiaries; (xi)
limitation on lines of business; and (xii) consolidations, mergers and sales of
assets. The Company is in compliance with these covenants.
PCI NOTES
On October 31, 1996, PCI sold $130,000,000 aggregate principal amount of
Senior Notes ("PCI Notes") to an initial purchaser pursuant to a purchase
agreement. The initial purchaser subsequently completed a private placement of
the PCI Notes. In June 1997, substantially all of the outstanding PCI Notes were
exchanged for an equal aggregate principal amount of publicly-registered PCI
Notes.
The PCI Notes have an interest rate of 9 7/8% and a maturity date of
November 1, 2003. Interest is paid on the PCI Notes on May 1 and November 1 of
each year. As of December 31, 1998 and 1997 the Company accrued interest expense
of $2,140,000 and $2,175,000, respectively.
F-22
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
Prior to November 1, 1999, PCI may redeem up to a maximum of 33% of the
initially outstanding aggregate principal amount of the PCI Notes with some or
all of the net proceeds of one or more public equity offerings at a redemption
price equal to 109.875% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the date of redemption; provided that immediately after
giving effect to such redemption, at least $87 million aggregate principal
amount of the PCI Notes remains outstanding.
The PCI Notes are net of unamortized discount of $373,000 and $422,000 at
December 31, 1998 and 1997, respectively. The effective interest rate of the PCI
Notes is approximately 11.3%.
PCI has pledged to State Street Bank and Trust Company, the trustee for the
PCI Notes (for the benefit of the holders of the PCI Notes) intercompany notes
issued by PCBV, of a minimum aggregate principal amount (together with cash and
cash equivalents of PCI), equal to at least 110% of the outstanding principal
amount of the PCI Notes, and that, in the aggregate, provide cash collateral or
bear interest and provide for principal repayments, as the case may be, in
amounts sufficient to pay interest on the PCI Notes. Notes payable from PCBV to
PCI were $160,450,000 and $134,509,000 at December 31, 1998 and 1997,
respectively.
Pursuant to the PCI Indenture, PCI is subject to certain restrictions and
covenants, including, without limitation, covenants with respect to the
following matters: (i) limitation on additional indebtedness; (ii) limitation on
restricted payments; (iii) limitation on issuances and sales of capital stock of
subsidiaries; (iv) limitation on transactions with affiliates; (v) limitation on
liens; (vi) limitation on guarantees of indebtedness by subsidiaries; (vii)
purchase of PCI Notes upon a change of control; (viii) limitation on sale of
assets; (ix) limitation on dividends and other payment restrictions affecting
restricted subsidiaries; (x) limitation on investments in unrestricted
subsidiaries; (xi) limitation on lines of business; and (xii) consolidations,
mergers and sales of assets. The Company is in compliance with these covenants.
Condensed parent only financial statements of @ Entertainment, Inc. are
provided in Note 12 in compliance with the requirements of Rules 5-04 and 12-04
of the Securities and Exchange Commission's Regulation S-X.
AMERICAN BANK IN POLAND S.A. REVOLVING CREDIT LOAN
The revolving credit loan allowing the Company to borrow up to a maximum
principal amount of $6,500,000 on or before December 31, 1998, was fully drawn
as of December 31, 1998. The facility bears interest at LIBOR plus 3.0% (8.0% as
at December 31, 1998), is repayable in full on August 20, 1999, and is secured
by promissory notes en blanc from certain of the Company's subsidiaries, and
pledges of the shares of certain of the Company's subsidiaries.
BANK ROZWOJU EKSPORTU S.A. DEUTSCHE-MARK FACILITY
The Deutsche-Mark facility represents a credit facility of DM 3,948,615 of
which approximately DM 3,204,000 was outstanding at December 31, 1998. The
facility bears interest at LIBOR plus 2.0% (5.3% as at December 31, 1998), is
repayable in full on December 27, 2002, and is ultimately secured by a pledge of
the common shares of one of the Company's subsidiaries.
Interest expense relating to notes payable was in the aggregate
approximately $21,535,000, $13,902,000 and $4,687,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
During 1996, the Company recorded an extraordinary loss related to the
early retirement of debt. The extraordinary loss was comprised of a $147,000
prepayment penalty and a $1,566,000 write-off of deferred financing costs.
F-23
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
12. CONDENSED PARENT ONLY FINANCIAL INFORMATION OF @ ENTERTAINMENT
The following parent only condensed financial statements were prepared in
accordance with generally accepted accounting principles in the United States of
America in a manner consistent with the consolidated financial statements except
that all subsidiaries have been accounted for under the equity method. The
parent only condensed financial statements as of and for periods prior to the
Reorganization represent those of PCI.
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
--------- ------------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Operating costs and expenses:
Selling, general and administrative expenses................................... $ 8,700 $ 14,662 $ 1,061
--------- ------------- ---------
Operating loss................................................................. (8,700) (14,662) (1,061)
Interest and investment income................................................. 8,458 2,489 1,076
Interest expense............................................................... (8,608) -- (2,612)
Foreign exchange gain, net..................................................... 36 -- --
Equity in losses of affiliated companies....................................... (117,251) (42,651) (2,775)
--------- ------------- ---------
Loss before income taxes....................................................... (126,065) (54,824) (5,372)
Income tax expense............................................................. -- -- (1,245)
--------- ------------- ---------
Net loss....................................................................... (126,065) (54,824) (6,617)
Accretion of redeemable preferred stock........................................ -- (2,436) (2,870)
Preferred stock dividend....................................................... -- -- (1,738)
(Excess)/ deficit of carrying value of preferred
stock (over)/ under consideration paid....................................... -- (33,806) 3,549
--------- ------------- ---------
Net loss applicable to holders of common stock................................. $(126,065) $ (91,066) $ (7,676)
========= ========= =========
</TABLE>
CONDENSED STATEMENTS OF COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net loss......................................................................... $(126,065) $ (54,824) $ (6,617)
Other comprehensive income:
Translation adjustment......................................................... (249) (218) --
--------- --------- ---------
$(126,314) $ (55,042) $ (6,617)
========= ========= =========
</TABLE>
F-24
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
CONDENSED BALANCE SHEETS
12. CONDENSED PARENT ONLY FINANCIAL INFORMATION OF @ENTERTAINMENT (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
----------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................................................ $ 3,070 $ 71,565
Accounts receivable, net................................................................. 168 290
Other current assets..................................................................... 1,123 74
----------- ----------
Total current assets................................................................. 4,361 71,929
Other assets............................................................................. 17,230 11,252
Net investment in restricted net assets of wholly-owned subsidiaries..................... 102,344 121,977
Net investment in unrestricted net assets of wholly-owned subsidiaries................... 37,312 (51,822)
----------- ----------
Total assets............................................................................. $ 161,247 $ 153,336
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses.................................................... $ 2,078 $ 981
Notes payable............................................................................ 125,513 --
----------- ----------
Total liabilities........................................................................ 127,591 981
Stockholders' equity:
Preferred stock, $0.01 par value; Authorized 20,000,000 shares; none issued and
outstanding.......................................................................... -- --
Common stock, $.01 par value; Authorized 70,000,000 shares in 1998 and 1997; issued and
outstanding 33,310,000 shares in 1998 and 1997....................................... 333 333
Paid-in capital........................................................................ 237,954 230,339
Accumulated other comprehensive income................................................. (467) (218)
Accumulated deficit.................................................................... (204,164) (78,099)
----------- ----------
Total stockholders' equity............................................................... 33,656 152,355
----------- ----------
Total liabilities and stockholders' equity............................................... $ 161,247 $ 153,336
=========== ==========
</TABLE>
F-25
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
12. CONDENSED PARENT ONLY FINANCIAL INFORMATION OF @ENTERTAINMENT (CONTINUED)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ACCUMULATED OTHER
---------------------- ---------------------- PAID-IN COMPREHENSIVE ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL INCOME DEFICIT TOTAL
----------- --------- --------- ----------- --------- ----------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Balance January 1,
1996................. 985 $ 10,311 11,037 $ 4,993 $ 1,544 $ -- $ (16,658) $ 190
Net loss........... -- -- -- -- -- -- (6,617) (6,617)
Stock dividend..... 166 1,738 -- -- (1,738) -- -- --
Issuance of
stock............ -- -- 7,911 (4,992) 53,837 -- -- 48,845
Preferred stock
redemption....... (1,151) (12,049) -- -- 3,549 -- -- (8,500)
Accretion of
redeemable
preferred
stock............ -- -- -- -- (2,870) -- -- (2,870)
Reorganization..... -- -- 18,929,052 188 (188) -- -- --
---------- --------- ---------- --------- --------- --------- ---------- ---------
Balance January 1,
1997................. -- $ -- 18,948,000 $ 189 $ 54,134 $ -- $ (23,275) $ 31,048
Net loss........... -- -- -- -- -- -- (54,824) (54,824)
Translation
adjustment....... -- -- -- -- -- (218) -- (218)
Net proceeds from
initial public
offering......... -- -- 9,500,000 95 183,197 -- -- 183,292
Purchase of PCI
series A and C
redeemable
preferred
stock............ -- -- -- -- (33,806) -- -- (33,806)
Accretion of
redeemable
preferred
stock............ -- -- -- -- (2,436) -- -- (2,436)
Conversion of
series B
redeemable
preferred
stock............ -- -- 4,862,000 49 11,148 -- -- 11,197
Stock option
compensation
expense.......... -- -- -- -- 18,102 -- -- 18,102
---------- --------- ---------- --------- --------- --------- ---------- ---------
Balance December 31,
1997................. -- $ -- 33,310,000 $ 333 $ 230,339 $ (218) $ (78,099) $ 152,573
Net loss........... -- -- -- -- -- -- (126,065) (126,065)
Translation
adjustment....... -- -- -- -- -- (249) -- (249)
Warrants attached
to Senior
Discount Notes... -- -- -- -- 7,615 -- -- 7,615
---------- --------- ---------- --------- --------- --------- ---------- ---------
Balance December 31,
1998................. -- $ -- 33,310,000 $ 333 $ 237,954 $ (467) $ (204,164) $ 34,123
========== ========= ========== ========= ========= ========= ========== =========
</TABLE>
F-26
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
12. CONDENSED PARENT ONLY FINANCIAL INFORMATION OF @ ENTERTAINMENT (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
----------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................................. $ (126,065) $ (54,824) (6,617)
Adjustments to reconcile net loss to
net cash (used in) provided by operating activities:
Amortization of notes payable discount and issue costs.................. 8,301 1,040 164
Loss of subsidiaries.................................................... 117,070 42,651 12,862
Gain on sale of investment securities................................... -- (358) --
Non-cash stock option compensation expense.............................. -- 8,677 --
Equity in losses of affiliated companies................................ (181) -- --
Changes in operating assets and liabilities:
Accounts receivable................................................... 122 (142) (35)
Other current assets.................................................. (1,049) 114 (1,300)
Other assets.......................................................... (121) -- --
Accounts payable and accrued expenses................................. 1,097 (2,008) 2,855
Income taxes payable.................................................. -- (4,472) 4,472
----------- ---------- -----------
Net cash (used in)/provided by operating activities................. (826) (9,322) 12,401
----------- ---------- -----------
Cash flows from investing activities:
Proceeds from maturity of investment securities....................... -- 25,473 (25,115)
Investment in, and loans and advances to affiliated companies......... (186,809) (111,670) (122,337)
Purchase of other assets.............................................. -- (11,252) (8,200)
----------- ---------- -----------
Net cash used in investing activities............................... (186,809) (97,449) (155,652)
----------- ---------- -----------
Cash flows from financing activities:
Net proceeds from issuance of stock................................... -- 183,292 81,001
Redemption of preferred stock......................................... -- (60,000) (8,500)
Costs to obtain loans................................................. (5,960) -- (6,513)
Proceeds from issuance of notes payable............................... 117,485 -- 136,074
Proceeds from issuance of warrants.................................... 7,615 -- --
Repayment of notes payable............................................ -- -- (10,000)
----------- ---------- -----------
Net cash provided by financing activities........................... 119,140 123,292 192,062
----------- ---------- -----------
Net (decrease)/increase in cash and cash equivalents................ (68,495) 16,521 48,811
Cash and cash equivalents at beginning of year.............................. 71,565 55,044 6,233
----------- ---------- -----------
Cash and cash equivalents at end of period.................................. $ 3,070 $ 71,565 55,044
=========== ========== ===========
Supplemental cash flow information:
Cash paid for interest................................................ $ -- $ -- $ 2,338
=========== ========== ===========
Cash paid for income taxes............................................ $ -- $ -- $ 1,184
=========== ========== ===========
</TABLE>
F-27
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
13. RELATED PARTY TRANSACTIONS
During the ordinary course of business, the Company enters into
transactions with affiliated parties. The principal related party transactions
are described below.
PROGRAMMING
Programming is provided to the Company by certain of its affiliates. The
Company incurred programming fees from these affiliates of $418,000, $559,000
and $ 412,000 for the years ended December 31, 1998, 1997 and 1996.
PRINT MEDIA SERVICES
An affiliate of the Company provides print media services to the Company.
The Company incurred operating costs related to these services of $4,355,000 for
the year ended December 31, 1998. The Company did not incur any costs from this
affiliate prior to 1998.
14. 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 year. The effect of potential common shares (stock options and
warrants outstanding) is antidilutive, accordingly, dilutive loss per share is
the same as basic loss per share.
The Company has presented historical loss per common share information
assuming the common stock exchange of 1 to 1,000 shares occurred on January 1,
1995.
The following table provides a reconciliation of the numerator and
denominator in the loss per share calculation:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
<S> <C> <C> <C>
1998 1997 1996
----------- ---------- ----------
Net loss attributable to common stockholders (in thousands).................. $ (126,065) $ (91,066) $ (7,676)
=========== ========== ==========
Weighted average number of common shares outstanding (in thousands).......... 33,310 24,771 17,271
Nominal issuance (in thousands).............................................. -- -- 346
----------- ---------- ----------
Basic weighted average number of common shares outstanding (in thousands).... 33,310 24,771 17,617
=========== ========== ==========
Loss per share-basic and diluted............................................. $ (3.78) $ (3.68) $ (0.44)
=========== ========== ==========
</TABLE>
15. STOCK OPTION PLAN
On June 22, 1997, the Company adopted a stock option plan (the "1997 Plan")
pursuant to which the Company's Board of Directors may grant stock options to
officers, key employees and consultants of the Company. The 1997 Plan authorizes
grants of options to purchase up to 4,436,000 shares, subject to adjustment in
accordance with the 1997 Plan. At December 31, 1998, options for 3,924,000
F-28
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
15. STOCK OPTION PLAN (CONTINUED)
shares had been granted. Of this amount, 1,671,000 options became exercisable
upon the IPO but cannot be sold for a period of two years from July 30, 1997.
The Company granted 1,671,000 stock options in January 1997 at a price
substantially below the IPO price of $21.00 per share. Such options vested in
full upon the completion of the IPO. In accordance with generally accepted
accounting principles, the Company recognized approximately $18,102,000 of
compensation expense included in selling, general, and administrative expenses
for these options in 1997 representing the difference between the exercise price
of the options and the fair market value of the shares on the date of grant. All
other stock options were granted with exercise prices at or below the fair
market value of the shares on the date of grant.
Future stock options are granted with an exercise price that must be at
least equal to the stock's fair market value at the date of grant. With respect
to any participant who owns stock possessing more than 10% of the voting power
of all classes of stock of the Company, the exercise price of any incentive
stock option granted must equal at least 110% of the fair market value on the
grant date and the maximum term of an incentive stock option must not exceed
five years. The term of all other options granted under the 1997 Plan may not
exceed ten years. Options become exercisable at such times as determined by the
Board of Directors and as set forth in the individual stock option agreements.
Generally, all stock options vest ratably over 2 to 5 years commencing one year
after the date of grant.
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------------ -----------------
<S> <C> <C>
Balance at January 1, 1996........................................................ -- $ --
Granted........................................................................... 241,000 $ 1.99
------------ ---------
Balance at December 31, 1996 (none exercisable)................................... 241,000 $ 1.99
Granted........................................................................... 2,083,000 $ 5.98
------------ ---------
Balance at December 31, 1997 (none exercisable)................................... 2,324,000 $ 5.57
Granted........................................................................... 1,600,000 $ 12.31
------------ ---------
Balance at December 31, 1998 (2,643,000 exercisable).............................. 3,924,000 $ 8.32
------------ ---------
</TABLE>
No options were exercised or forfeited during 1998.
At December 31, 1998 the range of exercise prices, weighted-average
remaining contractual life and number exercisable of outstanding options was as
follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
WEIGHTED- CONTRACTUAL WEIGHTED-
RANGE OF NUMBER OF AVERAGE REMAINING LIFE NUMBER AVERAGE
EXERCISE PRICES SHARES EXERCISE PRICE (YEARS) EXERCISABLE EXERCISE PRICE
- ----------------------------------------- ---------- --------------- ----------------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
1.99-3.79................................ 1,912,000 3.51 5.44 1,912,000 3.51
12.00-15.24.............................. 2,012,000 12.89 8.98 731,900 12.46
---------- ----------
3,924,000 8.32 2,643,900 5.98
========== ==========
</TABLE>
F-29
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
15. STOCK OPTION PLAN (CONTINUED)
The per share weighted-average fair value of stock options granted during
1998 was $4.22 on the date of grant using the Black Scholes option-pricing model
with the following weighted-average assumptions: expected volatility 43.0%,
expected dividend yield 0.0%, risk-free interest rate of 5.72%, and an expected
life of 4 years.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Company's net loss and
net loss per share would have increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ---------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
Net loss-as reported...................................................... $ (126,065) $ (54,824) $ (6,617)
Net loss-pro forma........................................................ $ (131,511) $ (56,607) $ (6,617)
Basic and diluted net loss per share--as reported......................... $ (3.78) $ (3.68) $ (0.44)
Basic and diluted loss per share-pro forma................................ $ (3.95) $ (3.75) $ (0.44)
</TABLE>
16. LEASES
BUILDING LEASES
The Company leases several offices and warehouses within Poland under
cancelable operating leases. The Company has a noncancelable operating lease for
a building in the United Kingdom which houses the majority of its technical
equipment relating to the D-DTH network. The noncancelable lease expires in
2002, and contains a renewal option for an additional five years. Future minimum
lease payments as of December 31, 1998 are $2,725,000 in 1999, $2,806,000 in
2000, $2,890,000 in 2001 and $2,977,000 in 2002.
D-DTH TECHNICAL EQUIPMENT LEASE
The Company has an eight year agreement with British Telecommunications plc
("BT") for the lease and maintenance of certain satellite uplink equipment. The
agreement requires the payment of equal monthly installments of $50,000
approximating future minimum commitments of $600,000 in 1999, $576,000 in 2000,
$576,000 in 2001, $576,000 in 2002 and $1,728,000 in 2003 and thereafter. Other
than the BT uplink equipment, the Company owns all of the required broadcasting
equipment at its transmission facility in the United Kingdom.
CONDUIT LEASES
The Company also leases space within various telephone duct systems from
TPSA under cancelable operating leases. The TPSA leases expire at various times,
and a substantial portion of the Company's contracts with TPSA permit
termination by TPSA without penalty at any time either immediately upon the
occurrence of certain conditions or upon provision of three to six months notice
without cause. Refer to note 19 for further detail.
All of the agreements provide that TPSA is the manager of the telephone
duct system and will lease space within the ducts to the Company for
installation of cable and equipment for the cable television systems. The lease
agreements provide for monthly lease payments that are adjusted quarterly or
F-30
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
16. LEASES (CONTINUED)
annually, except for the Gdansk lease agreement which provides for an annual
adjustment after the sixth year and then remains fixed through the tenth year of
the lease.
Minimum future lease commitments for the aforementioned conduit leases
relate to 1999 only, as all leases are cancelable in accordance with the
aforementioned terms. The future minimum lease commitments related to these
conduit leases approximates $622,000 for the six months ending June 30, 1999.
TRANSPONDER LEASES
During 1997, the Company entered into certain operating leases pursuant to
which the Company is liable for charges associated with each of its three
transponders on the Astra satellites, which can amount to a maximum of
$6,750,000 per year for each transponder and up to $182 million for all three
transponders for the term of their leases. The future minimum lease payments
applicable to the transponders approximate $20,250,000 in 1999, $20,250,000 in
2000, $20,250,000 in 2001, $20,250,000 in 2002 and $101,250,000 in 2003 and
thereafter. The leases for the two transponders on the Astra 1F satellite and
the transponder on the Astra 1G satellite will expire in 2007. The Company's
transponder leases provide that the Company's rights are subject to termination
in the event that the lessor's franchise is withdrawn by the Luxembourg
Government.
Total rental expense associated with the aforementioned operating leases
for the years ended December 31, 1998, 1997 and 1996 was $10,521,000, $3,696,000
and $892,000, respectively.
17. SEGMENT INFORMATION
@Entertainment and its subsidiaries operate in three business segments: (1)
cable television, (2) digital direct-to-home television and programming, and (3)
corporate functions. The accounting policies of the segments are the same as
those described in the summary of significant accounting policies. The Company
accounts for intersegment sales and transfers as if the sales or transfers were
to third parties, that is, at current market prices. In addition to other
operating statistics, the Company measures its financial performance by EBITDA,
an acronym for earnings before interest, taxes depreciation and amortization.
The Company defines EBITDA to be net loss adjusted for interest and investment
income, depreciation and amortization, interest expense, foreign currency gains
and losses, equity in losses of affiliated companies, income taxes,
extraordinary items, non-recurring items (e.g., compensation expense related to
stock options), gains and losses from the sale of assets other than in a normal
course of business and minority interest. The items excluded from EBITDA are
significant components in understanding and assessing the Company's financial
performance. The Company believes that EBITDA and related measures of cash flow
from operating activities serve as important financial indicators in measuring
and comparing the operating performance of media companies. EBITDA is not a U.S.
F-31
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
17. SEGMENT INFORMATION (CONTINUED)
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.
<TABLE>
<CAPTION>
D-DTH AND
1998 CABLE PROGRAMMING CORPORATE TOTAL
- --------------------------------------------------------------- --------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Revenues from external customers............................... $ 52,971 $ 8,888 $ -- $ 61,859
Intersegment revenues.......................................... -- 13,432 -- 13,432
Operating loss................................................. (23,066) (69,047) (8,700) (100,813)
EBITDA......................................................... (1,431) (64,378) (8,700) (74,509)
Depreciation and amortization.................................. (21,635) (4,669) -- (26,304)
Investment in equity method investees.......................... -- 8,533 11,373 19,956
Segment total assets........................................... 193,785 132,998 21,591 348,374
Expenditures for segment assets................................ 42,639 72,353 -- 114,992
1997
- ---------------------------------------------------------------
Revenues from external customers............................... $ 38,138 $ -- $ -- $ 38,138
Intersegment revenues.......................................... -- -- -- --
Operating loss................................................. (20,308) (10,210) (12,152) (42,670)
EBITDA......................................................... 5,387 (10,186) (3,475) (8,274)
Net loss....................................................... (35,087) (7,668) (12,069) (54,824)
Significant non-cash items:
Stock option compensation expense.............................. 9,425 -- 8,677 18,102
Investment in equity method investees.......................... -- 10,876 11,252 21,628
Segment total assets........................................... 187,449 36,466 83,181 307,096
Expenditures for segment assets................................ 33,786 5,857 -- 39,643
</TABLE>
In 1997, the cable segment includes the activities of Mozaic Entertainment,
Inc., a subsidiary which provided programming content for the cable business. In
1998, the Company's programming activity related solely to the development of
the Wizja TV platform and has been included in the D-DTH and programming
segment. For the year ended December 31, 1997, Mozaic Entertainment, Inc.
revenues and operating loss were $563,000 and $2,071,000, respectively. For the
year ended December 31, 1998, Mozaic Entertainment, Inc. was dormant. During
1996 the Company operated in one business segment (cable).
Total long-lived assets for the years ended December 31, 1998 and 1997 for
the Company analyzed by geographical location is as follows:
<TABLE>
<CAPTION>
TOTAL REVENUES LONG-LIVED ASSETS
------------------------------- ----------------------
1998 1997 1996 1998 1997
--------- --------- --------- ---------- ----------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Poland.................................................. $ 61,859 $ 38,138 $ 24,923 $ 257,625 $ 152,614
United Kingdom.......................................... -- -- -- 20,208 7,930
Other................................................... -- -- -- 29 --
--------- --------- --------- ---------- ----------
Total................................................... $ 61,859 $ 38,138 $ 24,923 $ 277,862 $ 160,544
========= ========= ========= ========== ==========
</TABLE>
F-32
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
17. SEGMENT INFORMATION (CONTINUED)
All of the Company's revenue is derived from activities carried out in
Poland. Long-lived assets consist of property, plant, and equipment, inventories
for construction, intangible assets, and other assets.
18. COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
The Company has concluded an agreement with Philips, whereby Philips will
supply reception systems, as well as retail, installation and support services
in connection with the launch of the Company's D-DTH business in Poland. Philips
will be the exclusive supplier to the Company of the first 500,000 D-DTH
reception systems and will not distribute any other digital integrated receiver
decoders under the Philips trademark in Poland until December 31, 1999 or any
earlier date on which the Company has secured 500,000 initial subscribers to its
D-DTH service in Poland. Philips has granted the Company an exclusive license of
its CryptoWorks(-Registered Trademark-) technology in Poland for the term of the
agreement, which will terminate when the Company has purchased 500,000 D-DTH
reception systems from Philips, unless terminated earlier in accordance with the
terms of the agreement or extended by mutual consent of Philips and the Company.
As of December 31, 1998, the Company had an aggregate minimum commitment toward
the purchase of the Reception Systems of approximately $129,213,000 up to June
30, 2000.
PROGRAMMING, BROADCAST AND EXHIBITION RIGHT COMMITMENTS
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 December 31, 1998, the Company had an aggregate minimum
commitment in relation to these agreements of approximately $214,299,000 over
the next seven years, approximating $37,198,000 in 1999, $38,428,000 in 2000,
$40,627,000 in 2001, $44,837,000 in 2002 and $53,209,000 in 2003 and thereafter.
CONSULTING AGREEMENTS
The Company has entered into a two-year consultancy arrangement with Samuel
Chisholm and David Chance (each individually a "Consultant"), pursuant to which
the Company will pay to a Consultant a fee of $10,000 per consultancy day, based
on a minimum, on average over each 12 month period, of a total of 4 Consultancy
Days per month, and the Company will pay an additional fee of $10,000 to a
Consultant for any additional days in any month on which a Consultant provides
consulting services to the Company. The consultancy agreement is not subject to
cancellation by either party except as a result of a breach of the consultancy
agreement.
REGULATORY APPROVALS
The Company is in the process of permits from the Polish State Agency for
Radiocommunications ("PAR") for several of its cable television systems. If
these permits are not obtained, PAR could impose penalties such as fines or in
severe cases, revocation of all permits held by an operator or the forfeiture of
F-33
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
18. COMMITMENTS AND CONTINGENCIES (CONTINUED)
the operator's cable networks. Management of the Company does not believe that
these pending approvals result in a significant risk to the Company.
LITIGATION AND CLAIMS
On April 17, 1998, the Company signed a letter of intent with Telewizyjna
Korporacja Partycypacyjna S.A. ("TKP") and the shareholders of TKP, namely,
Canal+ S.A., Agora S.A., and PolCom Invest S.A. 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 letter of intent called for the Company to invest
approximately $112 million in TKP, and to sell substantially all of the
Company's D-DTH and programming assets to TKP for approximately $42 million. The
TKP joint venture was to be owned 40% by the Company, 40% by Canal+ S.A., 10% by
Agora S.A. and 10% by PolCom Invest S.A, The letter of intend contained a
standstill provision whereby neither the Company nor TKP could, for a period of
45 days after the execution of the letter of intent, launch any digital pay
television service. As a result, the Company postponed its launch of the Wizja
TV programming package and its D-DTH service which was originally scheduled for
April 18, 1998. The establishment of the joint venture was subject to the
execution of definitive agreements, regulatory approvals and certain other
closing conditions.
The definitive agreements were not agreed and executed by the parties by
the date set forth in the letter of intent (the "Signature Date"). Therefore,
the Company terminated the letter of intent on June 1, 1998. TKP and its
shareholders have informed the Company that they believe the Company did not
have the right to terminate the letter of intent.
Under the terms of the letter of intent, TKP is obligated to pay the
Company a $5 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 TKP to pay the Company the $5 million break-up fee
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 the arbitration
proceedings TKP and its shareholders contend that the Company breached the
letter of intent, that such breach was the cause of the parties' failure to
agree and execute the definitive agreements, and that the Company is therefore
liable for $10 million in damages under the letter of intent. In its response
the Company denies these allegations and claims that TKP is liable for at least
$15 million in damages pursuant to the letter of intent.
This $15 million figure is composed of a claim for a $5 million break-up
fee, $5 million in damages due to the claim that TKP and its shareholders
breached the letter of intent, thereby causing the parties' failure to agree and
execute the definitive agreements, and at least $5 million as an indemnification
for liabilities incurred by the Company as a result of certain actions taken
with respect to assets to be acquired or contracts to be assumed by TKP. The
F-34
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
18. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Company does not believe that the arbitration proceedings will have a material
adverse effect on its business, financial condition or results of operations.
Two of the Company's cable television subsidiaries and four other unrelated
Polish cable operators and HBO Polska Sp. z o.o., have been made defendants in a
lawsuit instituted by Polska Korporacja Telewizyjna Sp. z o.o., a subsidiary of
Canal+. The primary defendant in the proceedings is HBO Polska Sp. z o.o. which
is accused of broadcasting the HBO television program in Poland without a
license from the Council as required by the Radio and Television Act of 1992, as
amended, and thereby undertaking an activity constituting an act of unfair
competition. The Company does not believe that the final disposition of the
lawsuit will have a material adverse effect on its consolidated financial
position or results of operations.
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.
19. CONCENTRATIONS OF BUSINESS AND CREDIT RISK
D-DTH BUSINESS
The Company expects to experience substantial operating losses and negative
free cash flows for at least the next two years due to (i) the large investments
required for the acquisition of equipment and facilities for its D-DTH business,
including providing D-DTH reception systems to 380,000 initial subscribers at a
price significantly decreased by promotional incentives pursuant to the
Company's business strategy, and the administrative costs required in connection
with commencing its D-DTH business operations and (ii) the large investments
required to develop, produce and acquire the programming for Wizja TV. There can
be no assurance that the Company will be able to generate operating income or
positive cash flows in the future or that its operating losses and negative cash
flows will not increase.
SUPPLIER AGREEMENT
Certain critical components and services used in the Company's D-DTH
satellite transmission system, including the D-DTH reception system, as well as
retail, installation and support services, are initially to be provided
exclusively by Philips. The Company has concluded an agreement with Philips
providing for Philips to be the exclusive supplier to the Company of the first
500,000 D-DTH reception systems in connection with the launch of the Company's
D-DTH business in Poland. Philips has granted the Company an exclusive license
of its CryptoWorks-Registered Trademark- technology in Poland for the term of
the agreement, which will terminate when the Company has purchased 500,000 D-DTH
reception systems from Philips, unless terminated earlier in accordance with the
terms of the agreement or extended by mutual consent of Philips and the Company.
Philips has agreed not to distribute any other IRDs under the Philips' trademark
in Poland until December 31, 1999 or any earlier date on which the Company has
secured 500,000 initial subscribers to its D-DTH service in Poland. The
Company's agreement with Philips provides that after such period the Company may
license one or two suppliers of IRDs in addition to Philips and Philips shall
license its CryptoWorks-Registered Trademark-technology to such additional
suppliers for the Polish market. Although the agreement with Philips provides a
F-35
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
19. CONCENTRATIONS OF BUSINESS AND CREDIT RISK (CONTINUED)
means by which the Company could obtain a second and third supplier for all or
part of its future requirements for D-DTH reception systems, there can be no
assurance that the Company will be able to secure such additional suppliers.
The failure of Philips to deliver D-DTH reception systems on schedule, or
at all, would delay or interrupt the development and operation of the Company's
D-DTH service and thereby could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's agreement with Philips provides for full distribution,
installation and servicing through more than 1,200 Philips authorized
electronics retailers located throughout Poland. Philips has agreed to
distribute a complete subscription package, comprising the D-DTH reception
system, as well as the necessary installation and support services through
Philips' retail network in Poland, and will therefore be the primary point of
contact for subscribers to the Company's D-DTH service. Failure by Philips'
retail network to provide the desired levels of service, quality and expertise
(which are outside the control of the Company) could have a material adverse
impact on the Company's operations and financial condition.
PIRACY
The delivery of subscription programming requires the use of encryption
technology to prevent signal theft or "piracy." Historically, piracy in the
cable television and European A-DTH industries has been widely reported. The
Company's IRDs incorporate Philips' CryptoWorks-Registered Trademark-
proprietary encryption technology as part of its conditional access system.
These IRDs use smartcard technology, making it possible to change the
conditional access system in the event of a security breach either through
over-the-air methods such as issuing new electronic decryption "keys"
over-the-air as part of the Company's regular D-DTH broadcasts or by issuing new
smartcards. To the Company's knowledge, there has not been a breach of
CryptoWorks-Registered Trademark- since its introduction in Malaysia in 1996. To
the extent a breach occurs, the Company will take countermeasures, including
over-the-air measures and, if necessary, the replacement of smartcards. Although
the Company expects its conditional access system, subscriber management system
and smartcard system to adequately prevent unauthorized access to programming,
there can be no assurance that the encryption technology to be utilized in
connection with the Company's D-DTH system will remain effective. If the
encryption technology is compromised in a manner which is not promptly
corrected, the Company's revenue and its ability to contract or maintain
contracts for programming services from unrelated third parties would be
adversely affected.
USE OF TPSA CONDUITS
The Company's ability to build out its existing cable television networks
and to integrate acquired systems into its cable television networks depends on,
among other things, the Company's continued ability to design and obtain access
to network routes, and to secure other construction resources, all at reasonable
costs and on satisfactory terms and conditions. Many of such factors are beyond
the control of the Company. In addition, at December 31, 1998, approximately
56.5% of the Company's cable plant had been constructed utilizing pre-existing
conduits of TPSA. A substantial portion of the Company's contracts with TPSA for
the use of such conduits permits termination by TPSA without penalty at any time
either immediately upon the occurrence of certain conditions or upon provision
of three to six months' notice without cause.
F-36
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
19. CONCENTRATIONS OF BUSINESS AND CREDIT RISK (CONTINUED)
LIMITED INSURANCE COVERAGE
While the Company carries general liability insurance on its properties,
like many other operators of cable television systems it does not insure the
underground portion of its cable television networks. Due to the high cost of
insurance policies relating to satellite operations, the Company does not insure
against possible interruption of access to the transponders leased by it for
satellite transmission of its broadcasting. Accordingly, any catastrophe
affecting a significant portion of the Company's cable television networks or
disrupting its access to its leased satellite transponders could result in
substantial uninsured losses and could have a material adverse effect on the
Company.
YEAR 2000
The Company's cable television, D-DTH and programming operations are
dependent upon computer systems and other technological devices with imbedded
microprocessor chips that are intended to utilize dates and process data beyond
December 31, 1999. In January 1997, the Company developed a plan to address the
impact that potential year 2000 problems may have on Company operations and to
implement necessary changes to address such problems (the "Y2K Plan"). During
the course of the development of its Y2K Plan, the Company has identified
certain critical operations, which need to be year 2000 compliant for the
Company to operate effectively. These critical operations include accounting and
billing systems, customer service and service delivery systems, and field and
headend devices.
Largely as a result of its high rate of growth over the past few years, the
Company has entered into an agreement to purchase a new system to replace its
current accounting system and an agreement to purchase specialized billing
software for the Company's new customer service and billing center. The vendors
of the new accounting system and of the billing software have confirmed to the
Company that these products are year 2000 compliant. The Company has completed
the testing phase of the new accounting system, and the implementation phase was
substantially completed at the end of 1998. The Company has implemented the new
billing software for D-DTH subscribers and expects implementation of the billing
software to be completed for the majority of its cable subscribers by the end of
1999.
The Company believes that its most significant year 2000 risk is its
dependency upon third party programming, software, services and equipment,
because the Company does not have the ability to control third parties in their
assessment and remediation procedures for potential year 2000 problems. Should
these parties not be prepared for year 2000 conversion, their products or
services may fail and may cause interruptions in, or limitations upon, the
Company's provision of the full range of its D-DTH and/or cable service to its
customers. In an effort to prevent any such interruptions or limitations, the
Company is in the process of communicating with each of its material third party
suppliers of programming, software, services and equipment to determine the
status of their year 2000 compliance programs. The Company expects to complete
this process by September 30, 1999, and it anticipates that all phases of its
Y2K Plan will be completed by December 31, 1999.
The Company has not yet developed a contingency plan to address the
situation that may result if the Company or its third party suppliers are unable
to achieve year 2000 compliance with regard to any products or services utilized
in the Company's operations. The Company does not intend to decide on the
development of such a contingency until it has gathered all of the relevant Year
2000 compliance data from its third party suppliers.
F-37
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
19. CONCENTRATIONS OF BUSINESS AND CREDIT RISK (CONTINUED)
The Company has not yet determined the full cost of its Y2K Plan and its
related impact on the financial condition of the Company. The Company has to
date not incurred any replacement or remediation costs for equipment or systems
as a result of year 2000 non-compliance. Rather, due to the rapid growth and
development of its cable system and its D-DTH service, the Company had made
substantial capital investments in equipment and systems for reasons other than
year 2000 concerns. The total cost of the Company's new accounting system and
billing software package is estimated to be approximately $2,400,000.
The Company believes that any year 2000 compliance issues it may face can
be remedied without a material financial impact on the Company, but no assurance
can be made in this regard until all of the data has been gathered from the
Company's third party suppliers. At this date the Company cannot predict the
financial impact on its operations if year 2000 problems are caused by products
or services supplied to the Company by such third parties.
CREDIT WORTHINESS
All of the Company's customers are located in Poland. As is typical in this
industry, no single customer accounted for more than five percent of the
Company's sales in 1998 or 1997. The Company estimates an allowance for doubtful
accounts based on the credit worthiness of its customers as well as general
economic conditions. Consequently, an adverse change in those factors could
effect the Company's estimate of its bad debts.
20. SUBSEQUENT EVENTS
UNITS OFFERING
On January 22, 1999, the Company sold 256,800 Units to two initial
purchasers pursuant to a purchase agreement, each Unit consisting of $1,000
principal amount at maturity of 14 1/2% Senior Discount Notes due 2009 and four
warrants, each initially entitling the holder thereof to purchase 1.7656 shares
of common stock, par value $0.01 per share at an exercise price of $19.125 per
share, subject to adjustment.
The Notes were issued at a discount to their aggregate principal amount at
maturity and, together with the Warrants generated gross proceeds to the Company
of approximately $100,003,000 of which $92,551,000 has been allocated to the
initial accreted value of the Notes and approximately $7,452,000 has been
allocated to the Warrants. The portion of the proceeds that is allocable to the
Warrants will be accounted for as part of paid-in capital. The allocation was
made based on the relative fair values of the two securities at the time of
issuance. Net proceeds to the Company after deducting initial purchasers'
discount and offering expenses were approximately $96,000,000.
The Notes are unsubordinated and unsecured obligations. Cash interest on
the Notes will not accrue prior to February 1, 2004. Thereafter cash interest
will accrue at a rate of 14.5% per annum and will be payable semiannually in
arrears on August 1 of each year and February 1 of each year, commencing August
1, 2004. The Notes will mature on February 1, 2009. At any time prior to
February 1, 2002, the Company may redeem up to a maximum of 35% of the
originally issued aggregate principal amount at maturity of the Notes at a
redemption price equal to 117.5% of the accreted value thereof at the redemption
date, plus accrued and unpaid interest, if any, to the date of redemption with
some or all of the net cash proceeds of one or more public equity offerings;
provided, however, that not less than 65% of the originally issued aggregate
F-38
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
20. SUBSEQUENT EVENTS (CONTINUED)
principal amount at maturity of the Notes remains outstanding immediately after
giving effect to such redemption.
The Warrants initially entitle the holders thereof to purchase 1,813,665
shares of Common Stock, representing, in the aggregate, approximately 5% of the
outstanding Common Stock on a fully-diluted basis (using the treasury stock
method) immediately after giving effect to the offering and Preference Offering.
The Warrants are exercisable at any time and will expire on February 1, 2009.
Pursuant to the Indenture governing the Notes, the Company is subject to
certain restrictions and covenants, including, without limitation, covenants
with respect to the following matters: (i) limitation on additional
indebtedness; (ii) limitation on restricted payments; (iii) limitation on
issuance and sales of capital stock of restricted subsidiaries; (iv) limitation
on transactions with affiliates; (v) limitation on liens; (vi) limitation on
issuance of guarantees of indebtedness by restricted subsidiaries; (vii)
purchase of Notes upon a change of control; (viii) limitation on sale of assets;
(ix) limitation on dividends and other payment restrictions affecting restricted
subsidiaries; (x) limitation on investments in unrestricted subsidiaries; (xi)
limitation on lines of business; and (xii) consolidations, mergers and sales of
assets. The Company is in compliance with these covenants.
Costs associated with the Notes offering of approximately $3,875,000,
including the initial purchasers' discount will be capitalized and amortized
over the term of the Notes.
Also on January 22, 1999 @Entertainment sold Series A 12% Cumulative
Preference Shares and Series B 12% Cumulative Preference Shares (collectively,
the "Cumulative Preference Shares") and warrants (each a "Preference Warrant")
for total gross proceeds of $50 million (before deducting commissions and
offering costs of approximately $1.8 million). Dividends (whether or not earned
or declared) will cumulate on a daily basis from the original issue date and
will be payable semi-annually in arrears on March 31, and September 30 of each
year, commencing on March 31, 1999 (each a "Dividend Payment Date") to holders
of record on the fifteenth day immediately preceding the relevant Dividend
Payment Date. The Company at its option may, but shall not be required to,
redeem in US Dollars for cash the Cumulative Preference Shares, including any
Series B Cumulative Preference Shares, at any time on or after March 31, 2000,
in whole or in part, at the redemption price of 112% of the sum of (i) the
Initial Liquidation Preference ($50 million in the aggregate) and (ii)
accumulated and unpaid dividends, if any, to the date of redemption. On January
30, 2010, the Company will be required (subject to contractual and other
restrictions on the ability to redeem capital stock) to redeem all outstanding
Cumulative Preference Shares, including any Series B Cumulative Preference
Shares, at a price in US Dollars equal to the Initial Liquidation Preference
thereof plus all accumulated and unpaid dividends thereon (if any) to the date
of redemption. The Company will not be required to make sinking fund payments
with respect to the Cumulative Preference Shares. The Preference Warrants
initially entitle the holders thereof to purchase an aggregate of 5.5 million
shares of Common Stock at an exercise price of $10.00 per share. The preferred
shares will be classified outside of stockholders' equity.
SERIES C NOTES OFFERING
On January 20, 1999, the Company sold $36,001,321 aggregate principal
amount at maturity of its Series C Notes due 2008. The Series C Notes are senior
unsecured obligations of the Company ranking PARI PASSU in right of payment with
all other existing and future unsubordinated obligations of the Company. The
Series C Notes were issued at a discount to their aggregate principal amount at
F-39
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
20. SUBSEQUENT EVENTS (CONTINUED)
maturity and generated gross proceeds to the Company of approximately $9.8
million. Net proceeds to the Company after deducting the initial purchaser's
discount and offering expenses were approximately $9.4 million. The original
issue discount will accrete from January 20, 1999 until the stated maturity of
the Series C Notes on July 15, 2008. In addition, cash interest on the Series C
Notes will accrue from July 15, 2004 at a rate of 7.0% per annum on the
principal amount at maturity, and will be payable semiannually in arrears on
July 15 and January 15 of each year commencing January 15, 2005. Prior to July
15, 2004 there will be no accrual of cash interest on the Series C Notes. The
Series C Notes will mature on July 15, 2008.
Pursuant to the Series C Indenture, the Company is subject to certain
restrictions and covenants, including, without limitation, covenants with
respect to the following matters: (i) limitation on additional indebtedness;
(ii) limitation on restricted payments; (iii) limitation on issuance and sales
of capital stock of restricted subsidiaries; (iv) limitation on transactions
with affiliates; (v) limitation on liens; (vi) limitation on guarantees of
indebtedness by restricted subsidiaries; (vii) purchase of Notes upon a change
of control; (viii) limitation on sale of assets; (ix) limitation on dividends
and other payment restrictions affecting restricted subsidiaries; (x) limitation
on investments in unrestricted subsidiaries; (xi) limitation on lines of
business; and (xii) consolidations, mergers and sales of assets. The Company is
in compliance with these covenents.
F-40
<PAGE>
@ ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
1999 1998
----------- ------------
(unaudited)
(in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 74,284 $ 13,055
Accounts receivable, net of allowance for doubtful accounts
of $1,594,000 in 1999 and $1,095,000 in 1998 7,609 7,408
Programming and broadcast rights 12,694 9,030
Other current assets 20,086 21,063
-------- --------
Total current assets 114,673 50,556
-------- --------
Property, plant and equipment:
Cable television systems assets 159,378 175,053
D-DTH equipment 66,111 68,419
Construction in progress 4,312 2,739
Vehicles 3,094 2,792
Other 19,740 16,119
-------- --------
252,635 265,122
Less accumulated depreciation (62,940) (52,068)
Net property, plant and equipment 189,695 213,054
Inventories 7,631 8,869
Intangibles, net 35,530 43,652
Investments in affiliated companies 22,027 19,956
Other assets 16,620 12,287
-------- --------
Total assets $386,176 $348,374
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-41
<PAGE>
@ ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY)/EQUITY
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
(unaudited)
(in thousands)
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 30,296 $ 40,464
Accrued interest 2,140 2,140
Deferred revenue 5,729 4,366
Income taxes payable 3,794 3,794
Current portion of notes payable 6,500 6,500
-------- -------------
Total current liabilities 48,459 57,264
Notes payable (notes 6 and 7) 376,038 257,454
-------- -------------
Total liabilities 424,497 314,718
12% cumulative redeemable preferred stock (liquidation value
$50,000,000 plus accrued and unpaid dividends;
20,002,500 preferred shares authorized;
45,000 Series A and 5,000 Series B outstanding) (note 8) 30,830 --
Commitments and contingencies (note 10)
Stockholders' (deficiency)/equity:
Common stock, $.01 par value; 70,000,000 shares authorized,
shares issued and outstanding 33,562,320 in 1999
and 33,310,000 in 1998 336 333
Paid-in capital (notes 6 and 8) 264,664 237,954
Accumulated other comprehensive loss (26,422) (467)
Accumulated deficit (307,729) (204,164)
-------- --------
Total stockholders' (deficiency)/equity (69,151) 33,656
-------- --------
Total liabilities and stockholders' (deficiency)/equity $386,176 $348,374
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-42
<PAGE>
@ ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
---------------------------- --------------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues $ 21,056 $ 12,791 $ 39,855 $ 25,477
Operating expenses:
Direct operating expenses (note 5) 40,984 19,609 59,001 28,257
Selling, general and administrative expenses 21,589 15,580 37,209 29,027
Depreciation and amortization 13,294 5,980 22,699 10,929
-------- -------- --------- --------
Total operating expenses 75,867 41,169 118,909 68,213
-------- -------- --------- --------
Operating loss (54,811) (28,378) (79,054) (42,736)
Interest and investment income 919 695 2,413 1,545
Interest expense (12,532) (3,353) (24,377) (7,002)
Equity in (losses)/profits of affiliated companies (1,555) 451 (530) 721
Foreign exchange loss, net (951) (121) (1,989) (48)
-------- -------- --------- --------
Loss before income taxes and minority interest (68,930) (30,706) (103,537) (47,520)
Income tax expense (8) (229) (27) (562)
Minority interest -- (58) -- (207)
-------- -------- --------- --------
Net loss (68,938) (30,993) (103,564) (48,289)
Accretion of redeemable preferred stock (1,227) -- (2,018) --
-------- -------- --------- --------
Net loss applicable to holders of common stock $(70,165) $(30,993) $(105,582) $(48,289)
======== ======== ========= ========
Basic and diluted net loss per common share (note 3) $ (2.10) $ (0.93) $ (3.16) $ (1.45)
======== ======== ========= ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-43
<PAGE>
@ ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------------- ---------------------------------
1999 1998 1999 1998
-------- --------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Net loss $(68,938) $(30,993) $(103,564) $(48,289)
Other comprehensive income/(loss):
Translation adjustment $ 3,224 $ (1,432) $ (25,955) $ 1,335
--------- --------- ---------- ---------
Comprehensive loss $(65,714) $(32,425) $(129,519) $(46,954)
======== ======== ========= ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
F-44
<PAGE>
@ ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended June 30,
------------------------------
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(103,564) $(48,289)
Adjustments to reconcile net loss to
net cash used in operating activities:
Minority interest -- 207
Depreciation and amortization 22,699 10,929
Amortization of notes payable discount and issue costs 16,707 --
Equity in losses of affiliated companies (530) (721)
Other 473 1,338
Changes in operating assets and liabilities:
Accounts receivable (201) (5)
Other current assets 977 (3,344)
Programming and broadcast rights (3,664) (5,699)
Accounts payable (5,789) 15,076
Income taxes payable -- 676
Amounts due to affiliates -- 691
Deferred revenue 1,836 (346)
Other current liabilities -- (221)
--------- --------
Net cash used in operating activities (71,056) (29,708)
--------- --------
Cash flows from investing activities:
Construction and purchase of property, plant and equipment (20,311) (45,539)
Other investments (1,753) --
Purchase of intangibles (145) (345)
Purchase of subsidiaries, net of cash received -- (10,559)
--------- --------
Net cash used in investing activities (22,209) (56,443)
--------- --------
Cash flows from financing activities:
Proceeds from issuance of notes payable 109,755 6,468
Proceeds from issuance of preferred stock and warrants 48,295 --
Proceeds from issuance of common stock 1,601 --
Costs to obtain loans (5,156) (2,002)
--------- --------
Net cash provided by financing activities 154,495 4,466
--------- --------
Net increase/(decrease) in cash and cash equivalents 61,230 (81,685)
Cash and cash equivalents at beginning of period 13,055 105,691
--------- --------
Cash and cash equivalents at end of period $ 74,285 $ 24,006
========= ========
Supplemental cash flow information:
Cash paid for interest $ 7,159 $ 6,476
========= ========
Cash paid for income taxes $ 53 $ 395
========= ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-45
<PAGE>
@ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
1. BASIS OF PRESENTATION
The information furnished by @Entertainment, Inc. and its subsidiaries
("@Entertainment" or the "Company") has been prepared in accordance with United
States generally accepted accounting principles ("U.S. GAAP") and the rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to these rules and regulations. The
accompanying consolidated balance sheets, statements of operations, statements
of comprehensive loss and statements of cash flows are unaudited but in the
opinion of management reflect all adjustments (consisting only of items of a
normal recurring nature) which are necessary for a fair statement of the
Company's consolidated results of operations and cash flows for the interim
periods and the Company's financial position as of June 30, 1999. The
accompanying unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and the notes
thereto included in the Company's 1998 Annual Report on Form 10-K filed with the
SEC (the "1998 Annual Report"). The interim financial results are not
necessarily indicative of the results of the full year.
2. RECLASSIFICATIONS
Certain amounts have been reclassified in the prior period unaudited
consolidated financial statements to conform to the 1999 unaudited consolidated
financial statement presentation.
3. PER SHARE INFORMATION
Basic net loss per share has been computed by dividing net loss attributable to
common stockholders by the weighted average number of common shares outstanding
during the period. The effect of potential common shares (stock options and
warrants outstanding) is antidilutive; accordingly, dilutive net loss per share
is the same as basic net loss per share.
The following table provides a reconciliation of the numerator and denominator
in the net loss per share calculation:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss attributable to common stockholders (in thousands) $(70,165) $(30,993) $(105,582) $(48,289)
Basic weighted average number of common shares outstanding (in
thousands) 33,408 33,310 33,385 33,310
Net loss per share-basic and diluted $ (2.10) $ (0.93) $ (3.16) $ (1.45)
</TABLE>
4. MERGER AGREEMENT
On June 2, 1999, the Company entered into an Agreement and Plan of Merger with
United Pan-Europe Communications N.V. ("UPC"), whereby UPC and its wholly-owned
subsidiary, Bison Acquisition Corp. ("Bison"), initiated a tender offer to
purchase all of the outstanding shares of the Company in an all cash transaction
valuing the Company's shares of common stock at $19.00 per share (see note 13
SUBSEQUENT EVENTS--Consummation of UPC Tender Offer and Merger).
5. D-DTH RECEPTION SYSTEMS
On April 1, 1999, the Company began selling digital direct-to-home ("D-DTH")
reception systems to customers. Prior to April 1, 1999, the systems were leased
to customers, classified as fixed assets and depreciated over 5 years. Due to
this change, the Company now classifies reception systems as inventory. In the
three months ended June 30, 1999 the Company wrote down the value of all
reception systems--both those acquired in the three months ended June 30, 1999
and those held unsold prior to April 1, 1999 to the net realizable value. The
effect of the change was to increase operating loss by approximately $22,218,000
or $0.67 per share for the three and six months ended June 30, 1999.
F-46
<PAGE>
6. UNITS OFFERING
On January 22, 1999, the Company sold 256,800 units (collectively, the "Units")
to two initial purchasers pursuant to a purchase agreement, each Unit consisting
of $1,000 principal amount at maturity of 14 1/2% Senior Discount Notes (the
"Notes") due 2009 and four warrants (each a "Warrant"), each initially entitling
the holder thereof to purchase 1.7656 shares of common stock, par value $0.01
per share at an exercise price of $9.125 per share, subject to adjustment.
The Notes were issued at a discount to their aggregate principal amount at
maturity and, together with the Warrants generated gross proceeds to the Company
of approximately $100,003,000 of which $92,551,000 has been allocated to the
initial accreted value of the Notes and approximately $7,452,000 has been
allocated to the Warrants. The portion of the proceeds that is allocable to the
Warrants was accounted for as part of paid-in capital. The allocation was made
based on the relative fair values of the two securities at the time of issuance.
Costs associated with the Units offering of approximately $4,937,268, including
the initial purchasers' discount were capitalized and are being amortized over
the term of the Notes using the interest method. Net proceeds to the Company
after deducting initial purchasers' discount and offering expenses were
approximately $96,000,000.
The Notes are unsubordinated and unsecured obligations. Cash interest on the
Notes will not accrue prior to February 1, 2004. Thereafter cash interest will
accrue at a rate of 14.5% per annum on the principal amount and will be payable
semiannually in arrears on August 1 and February 1 of each year, commencing
August 1, 2004. The Notes will mature on February 1, 2009. At any time prior to
February 1, 2002, the Company may redeem up to a maximum of 35% of the
originally issued aggregate principal amount at maturity of the Notes at a
redemption price equal to 117.5% of the accreted value thereof at the redemption
date, plus accrued and unpaid interest, if any, to the date of redemption with
some or all of the net cash proceeds of one or more public equity offerings;
provided, however, that not less than 65% of the originally issued aggregate
principal amount at maturity of the Notes remain outstanding immediately after
giving effect to such redemption.
The Warrants initially entitle the holders thereof to purchase 1,813,665 shares
of common stock, representing, in the aggregate, approximately 5% of the
outstanding common stock on a fully-diluted basis (using the treasury stock
method) immediately after giving effect to the Units offering and the Company's
offering of Series A 12% Cumulative Preference Shares and Series B 12%
Cumulative Preference Shares (see note 8 PREFERENCE OFFERINGS). The Warrants are
exercisable at any time and will expire on February 1, 2009.
Pursuant to the Indenture governing the Notes, the Company is subject to certain
restrictions and covenants, including, without limitation, covenants with
respect to the following matters: (i) limitation on additional indebtedness;
(ii) limitation on restricted payments; (iii) limitation on issuance and sales
of capital stock of restricted subsidiaries; (iv) limitation on transactions
with affiliates; (v) limitation on liens; (vi) limitation on issuance of
guarantees of indebtedness by restricted subsidiaries; (vii) purchase of Notes
upon a change of control; (viii) limitation on sale of assets; (ix) limitation
on dividends and other payment restrictions affecting restricted subsidiaries;
(x) limitation on investments in unrestricted subsidiaries; (xi) limitation on
lines of business; and (xii) consolidations, mergers and sales of assets. The
Company is in compliance with these covenants.
The Company filed a registration statement on Form S-4 with the SEC in
connection with an offer to exchange the Notes for 14 1/2% Series B Senior
Discount Notes due 2009 (the "Exchange Notes"). The registration statement was
declared effective on May 13, 1999. The Warrants and shares of common stock
underlying the Warrants issued in the Units offering were registered on a
registration statement on Form S-3. This registration statement was declared
effective on July 2, 1999.
7. SERIES C NOTES OFFERING
On January 20, 1999, the Company sold $36,001,000 aggregate principal amount at
maturity of Series C Notes (collectively the "Series C Notes") due 2008. The
Series C Notes are senior unsecured obligations of the Company ranking PARI
PASSU in right of payment with all other existing and future unsubordinated
obligations of the Company. The Series C Notes were issued at a discount to
their aggregate principal amount at maturity and generated gross proceeds to the
Company of approximately $9,815,000. Net proceeds to the Company after deducting
the initial purchaser's discount and offering expenses were approximately
$9,500,000. Cash interest on the Series C Notes will not accrue prior to July
15, 2004. Thereafter cash interest will accrue at a rate of 7.0% per annum on
the principal amount at maturity, and will be payable semiannually in arrears on
July 15 and January 15 of each year commencing January 15, 2005. The Series C
Notes will mature on July 15, 2008.
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Pursuant to the Series C Indenture governing the Series C Notes, the Company is
subject to certain restrictions and covenants, including, without limitation,
covenants with respect to the following matters: (i) limitation on additional
indebtedness; (ii) limitation on restricted payments; (iii) limitation on
issuance and sales of capital stock of restricted subsidiaries; (iv) limitation
on transactions with affiliates; (v) limitation on liens; (vi) limitation on
guarantees of indebtedness by restricted subsidiaries; (vii) purchase of Notes
upon a change of control; (viii) limitation on sale of assets; (ix) limitation
on dividends and other payment restrictions affecting restricted subsidiaries;
(x) limitation on investments in unrestricted subsidiaries; (xi) limitation on
lines of business; and (xii) consolidations, mergers and sales of assets. The
Company is in compliance with these covenants.
Costs associated with the Series C Notes offering of approximately $319,000 were
capitalized and are being amortized over the term of the Series C Notes using
the interest method.
8. PREFERENCE OFFERINGS
On January 22, 1999, the Company sold 50,000 (45,000 Series A and 5,000 Series
B) 12% Cumulative Redeemable Preference Shares (collectively the "Preference
Shares") and 50,000 Warrants (each a "Preference Warrant") each Preference
Warrant initially entitling the holders thereof to purchase 110 shares of common
stock, par value $0.01 per share, of the Company at an exercise price of $10.00
per share, subject to adjustment. The Preference Shares together with the
Preference Warrants generated gross proceeds to the Company of $50,000,000 of
which approximately $28,812,000 has been allocated to the initial unaccreted
value of the Preference Shares (net of commissions and offering costs payable by
the Company of approximately $1,700,000), and approximately $19,483,000 has been
allocated to the Preference Warrants. Dividends (whether or not earned or
declared) will cumulate on a daily basis from the original issue date and will
be payable semi-annually in arrears on March 31 and September 30 of each year,
commencing on March 31, 1999 (each a "Dividend Payment Date") to holders of
record on the fifteenth day immediately preceding the relevant Dividend Payment
Date. The Company at its option may, but shall not be required to, redeem in
U.S. dollars for cash the Preference Shares, at any time on or after March 31,
2000, in whole or in part, at the redemption price of 112% of the sum of (i) the
Initial Liquidation Preference ($50,000,000 in the aggregate) and (ii)
accumulated and unpaid dividends, if any, to the date of redemption. On January
30, 2010, the Company will be required (subject to contractual and other
restrictions on the ability to redeem capital stock) to redeem all outstanding
Cumulative Preference Shares, at a price in U.S. dollars equal to the Initial
Liquidation Preference thereof plus all accumulated and unpaid dividends thereon
(if any) to the date of redemption. The Company will not be required to make
sinking fund payments with respect to the Cumulative Preference Shares. The
Preference Shares have been recorded at their redemption value on January 30,
2010 discounted at approximately 17.6% to June 30, 1999. The Company
periodically accretes from paid-in capital an amount that will provide for the
redemption value at January 30, 2010.
The Series A 12% Cumulative Redeemable Preference Shares, the Series A 12%
Cumulative Redeemable Preference Shares, and the Preference Warrants issued in
the Preference offering were registered on a registration statement on Form S-3.
This registration statement was declared effective on July 2, 1999.
9. EXERCISE OF WARRANTS
In June 1999, certain holders of warrants exercised their right to purchase
shares of common stock of the Company. The warrant holders exercised a total of
87,940 warrants of which 64,200 related to the 14 1/2% Senior Discount Notes due
2009 and 23,740 related to the 14 1/2% Senior Discount Notes due 2008. The
Company issued 156,320 shares of common stock for total cash proceeds of
$1,601,000.
10. COMMITMENTS AND CONTINGENCIES
PROGRAMMING, BROADCAST AND EXHIBITION RIGHTS
The Company has entered into long-term programming agreements and agreements for
the purchase of certain exhibition or broadcast rights with a number of third
party content providers for its digital direct-to-home ("D-DTH") and cable
systems. The agreements have terms which range from one to 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 June 30, 1999, the Company had an
aggregate minimum commitment in relation to these agreements of approximately
$202,024,000 over the next seven years, approximating $29,872,000 for the
remainder of 1999, $35,356,000 in 2000, $38,453,000 in 2001, $40,589,000 in
2002, $29,218,000 in 2003 and $28,536,000 in 2004 and thereafter.
F-48
<PAGE>
PURCHASE COMMITMENTS
As of June 30, 1999, the Company had an aggregate minimum commitment toward the
purchase of the D-DTH reception systems from Philips Business Electronics B.V.
("Philips") of approximately $87,730,000 by 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. (See also note 11 ARBITRATION RELATING TO TELEWIZYJNA KORPORACJA
PARTYCYPACYJNA and note 13 SUBSEQUENT EVENTS - PCBV Minority Stockholders'
Claim)
11. ARBITRATION RELATING TO TELEWIZYJNA KORPORACJA PARTYCYPACYJNA
On April 17, 1998, the Company signed a binding letter of intent with Telewizyna
Korporacja Partycypacyjna ("TKP"), the parent company of Canal+ Polska, to form
a joint venture for the purpose of bringing together @ Entertainment's Wizja TV
programming service and the Canal+ Polska premium pay-television channel and
providing for the joint development and operation of a digital direct-to-home
television service in Poland.
The definitive agreements were not agreed and executed by the parties by the
date set forth in the letter of intent (the "Signature Date"). Therefore, the
Company terminated the letter of intent on June 1, 1998. TKP and its
shareholders have informed the Company that they believe the Company did not
have the right to terminate the letter of intent. Under the terms of the letter
of intent, TKP is obligated to pay the Company a $5,000,000 break-up fee if the
definitive agreements were not executed by the Signature Date, unless failure to
obtain such execution was caused by the Company's breach of any of its
obligations under the letter of intent. If there were any such breach by the
Company, the Company would be obligated to pay TKP $10,000,000. However, if any
breach of the letter of intent by TKP caused the definitive agreements not to be
executed, TKP would be obligated to pay the Company a total of $10,000,000
(including the $5,000,000 break-up fee). In the event that TKP fails to pay the
Company any of the above-referenced amounts owed to the Company, TKP's
shareholders are responsible for the payment of such amounts.
The Company has demanded monies from TKP as a result of the failure to execute
the definitive agreements by the Signature Date. While the Company was waiting
for the expiration of the 10-day period for payment of the break-up fee, TKP
initiated arbitration proceedings before a three-member arbitration panel in
Geneva, Switzerland. In their claim, TKP and its shareholders have alleged that
the Company breached its obligations to negotiate in good faith and to use its
best efforts to agree and execute the definitive agreements and claimed the
Company is obligated to pay TKP $10,000,000 pursuant to the letter of intent.
The Company has answered and brought counterclaims against TKP and its
shareholders. The arbitration hearings were conducted in Geneva in June 1999. A
decision is expected to be rendered by the end of 1999. The Company does not
believe that the outcome of the arbitration proceedings will have a material
adverse effect on the Company's business, financial condition or results of
operations.
12. SEGMENT INFORMATION
The Company operates in three business segments: (1) cable television, (2) D-DTH
television and programming, and (3) corporate. The Company accounts for
intersegment sales and transfers as if the sales or transfers were to third
parties, that is, at current market prices. In addition to other operating
statistics, the Company measures its financial performance by EBITDA, an acronym
for earnings before interest, taxes, depreciation and amortization. The Company
defines EBITDA to be net loss adjusted for interest and investment income,
depreciation and amortization, interest expense, foreign currency gains and
losses, equity in losses of affiliated companies, income taxes and minority
interest. The items excluded from EBITDA are significant components in
understanding and assessing the Company's financial performance. The Company
believes that EBITDA and related measures of cash flow from operating activities
serve as important financial indicators in measuring and comparing the
F-49
<PAGE>
operating performance of media companies. EBITDA is not a U.S.GAAP measure of
loss or cash flow from operations and should not be considered as an alternative
to cash flows from operations as a measure of liquidity.
SELECTED SEGMENT DATA
(unaudited in thousands of US dollars)
<TABLE>
<CAPTION>
D-DTH and
Cable Programming Corporate Total
--------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 1999
Revenues from external customers $ 15,481 $ 5,575 $ -- $ 21,056
Intersegment revenues -- 5,218 -- 5,218
Operating loss (6,116) (45,595) (3,100) (54,811)
EBITDA 149 (38,571) (3,095) (41,517)
Segment total assets 174,063 143,416 68,697 386,176
THREE MONTHS ENDED JUNE 30, 1998
Revenues from external customers $ 12,478 $ 313 $ -- $ 12,791
Intersegment revenues -- -- -- --
Operating loss (2,604) (23,732) (2,042) (28,378)
EBITDA 2,481 (22,837) (2,042) (22,398)
Segment total assets 195,326 77,471 11,961 284,758
SIX MONTHS ENDED JUNE 30, 1999
Revenues from external customers $ 30,264 $ 9,591 $ -- $ 39,855
Intersegment revenues -- 10,350 -- 10,350
Operating loss (10,380) (63,913) (4,761) (79,054)
EBITDA 1,834 (53,436) (4,753) (56,355)
Segment total assets 174,063 143,416 68,697 386,176
SIX MONTHS ENDED JUNE 30, 1998
Revenues from external customers $ 24,571 $ 906 $ -- $ 25,477
Intersegment revenues -- -- -- --
Operating loss (3,540) (35,416) (3,780) (42,736)
EBITDA 6,380 (34,407) (3,780) (31,807)
Segment total assets 195,326 77,471 11,961 284,758
</TABLE>
13. SUBSEQUENT EVENTS
EXERCISE OF WARRANTS
In July and August 1999, certain warrant holders exercised their right to
purchase shares of common stock of the Company. The warrant holders exercised a
total of 203,800 and 7,600 warrants issued with the 14 1/2% Senior Discount
Notes due 2008 and 14 1/2% Senior Discount Notes due 2009, respectively. In
connection with the exercise of these warrants, the Company issued 382,296
shares of common stock for total cash proceeds of approximately $4,992,000.
F-50
<PAGE>
ACQUISITIONS
Subsequent to June 30, 1999, a subsidiary of the Company entered into an
agreement to acquire 100% of a cable television system for a total consideration
of approximately $7,330,000. The consummation of this transaction is subject to
Polish Ministry of Telecommunications approval. The acquisition will be
accounted for under the purchase method where the purchase price will be
allocated to the underlying assets and liabilities based upon their estimated
fair values and any excess to goodwill. The acquisition is not expected to have
a material effect on the Company's results of operations in 1999.
Subsequent to June 30, 1999, a subsidiary of the Company purchased all of the
assets and subscriber lists of a cable television system for a total
consideration of approximately $2,800,000. The purchase will be accounted for
under the purchase method where the purchase price will be allocated to the
underlying assets based upon their estimated fair values and any excess to
goodwill.
CONSUMMATION OF UPC TENDER OFFER AND MERGER
The tender offer, initiated pursuant to the Agreement and Plan of Merger with
UPC and Bison, closed at 12:00 midnight on August 5, 1999. On August 6, 1999,
Bison reported that it had accepted for payment a total of 33,701,073 shares of
the Company's common stock (including 31,208 shares tendered pursuant to notices
of guaranteed delivery) representing approximately 99% of the Company's
outstanding shares of common stock. In addition UPC has acquired 100% of the
outstanding Series A and Series B 12% Cumulative Preference Shares of the
Company.
Also on August 6, 1999, Bison was merged with and into the Company. Accordingly,
the Company became a wholly-owned subsidiary of UPC. UnitedGlobalCom, Inc. is a
62% stockholder of UPC.
These transactions constitute a "Change of Control" as that term is defined in
the indentures governing the Company's 14 1/2% Series B Senior Discount Notes
due 2008, 14 1/2% Senior Discount Notes due 2008, Series C Senior Discount Notes
due 2008, 14 1/2% Series B Senior Discount Notes due 2009, and 14 1/2% Senior
Discount Notes due 2009 (collectively, the "Notes") and the 9 7/8% Senior Notes
due 2003 and 9 7/8% Series B Senior Notes due 2003 of PCI, the Company's
indirect subsidiary (collectively, the "PCI" Notes"). In accordance with the
terms of the indentures governing the Notes, the Company will be required to
make an offer to repurchase the Notes at 101% of their accreted value plus
accrued and unpaid interest. In accordance with the terms of the indenture
governing the PCI Notes, PCI will be required to make an offer to repurchase the
PCI Notes at 101% of their principal amount plus accrued and unpaid interest.
Such an offer will only be made in an offer to purchase.
PCBV MINORITY STOCKHOLDERS' CLAIM
On or about July 8, 1999, five minority shareholders (the "minority
shareholders") of Poland Cablevision (Netherlands) B.V. ("PCBV"), an indirect
subsidiary of the Company, filed a lawsuit, Civil Action No. C2-99-621, against
the Company, Poland Communications, Inc. ("PCI"), Advent Capital Corporation,
Chase Enterprises, Inc., Chase International Corporation, Goldman, Sachs & Co.,
UPC, Cheryl Chase, and Arnold Chase, in the United States District Court, for
the Southern District of Ohio, Eastern Division.
The relief sought by the minority shareholders includes: (1) unspecified damages
in excess of $75,000, (2) an order lifting the restrictions against transfer of
shares set forth in the Shareholders' Agreement among PCBV's shareholders, as
amended (the "Shareholders' Agreement"), so that the minority shareholders can
liquidate their shares in PCBV, (3) damages in the amount of 1.7 percent of the
anticipated payment 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; and such
other relief as the Court deems just and proper.
The amended complaint sets 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 prohibiting any shareholders of PCBV from having any
direct or indirect interest in any aspect of the cable television business in
Poland, as a result of the Company's and PCI's cable and D-DTH operations in
Poland, (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,
by causing PCBV to enter into certain management and service agreements that
were allegedly not commercially reasonable and/or were not approved by certain
minority shareholders, (3) breached a provision in the Shareholders' Agreement
F-51
<PAGE>
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, by failing to provide the minority
shareholders with the right to participate in or with written notice of offers
to purchase, (4) breached their fiduciary duty to the minority shareholders by
failing to provide them with written notice of any offers to purchase PCBV's
stock and with timely information and periodic reports about the financial
condition or business or operating results of PCBV, (5) breached the agreement
between PCBV and CIC, which allegedly limited the amount of management fees that
could be paid annually by PCBV to CIC to $250,000, by causing PCBV to enter into
management agreements with other subsidiaries of PCI calling for payment of
annual management fees in excess of $250,000, (6) made false and misleading
statements in (a) PCI's offering memorandum by referring to negotiations between
PCI and the minority shareholders and to PCI's alleged offer to purchase their
outstanding shares in PCBV, which negotiations and offer allegedly never
transpired, (b) the Company's offering memoranda by indicating that PCI agreed
to share the profits of its subsidiaries with the minority shareholders on a PRO
RATA basis and to purchase their outstanding shares in PCBV, which agreements
allegedly were never made and which negotiations allegedly never occurred, and
(c) the Company's Forms 10-K by referring to a supplemental agreement under
which PCI agreed to share the profits of entities in which it has a direct or
indirect ownership interest with the minority shareholders on a PRO RATA basis
and under which PCI agreed to share 7.7 percent of the profits from competing
endeavors with the minority shareholders, which supplemental agreement allegedly
was never made; (7) colluding to defraud the minority shareholders by failing to
make reference in certain Forms 8-K, 8-K/A and 14D-1 to the minority
shareholders or their alleged rights and claims, and (8) colluding to divert
assets of PCBV to affiliates of PCI and PCBV, including the Company, that
allegedly compete with PCI and PCBV by failing to make reference in certain
Forms 8-K, 8-K/A and 14D-1 to the minority shareholders or their alleged rights
and claims and by failing to provide any information to the minority
shareholders so that they could value their rights and claims.
The Company intends to defend the lawsuit vigorously. The Company has also
conducted negotiations to purchase the minority shareholders' outstanding shares
in PCBV and may engage in such negotiations in the future. If the negotiations
produce a sale by the minority shareholders of their shares in PCBV to the
Company, the lawsuit would most likely be terminated. The Company is unable to
predict the outcome of those negotiations.
F-52
Exhibit 23.1
Consent of KPMG, Independent Auditors
The Board of Directors
@Entertainment, Inc.
We consent to the incorporation by reference in the following registration
statements of UnitedGlobalCom, Inc.
Registration Statement No. 33-81876 on Form S-8
Registration Statement No. 33-87326 on Form S-3
Registration Statement No. 333-00226 on Form S-8
Registration Statement No. 333-68641 on Form S-8
Registration Statement No. 333-71963 on Form S-8
of our report dated March 29, 1999, with respect to the consolidated balance
sheets of @Entertainment, Inc. and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of operations, comprehensive loss,
changes in stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1998, which report appears in the Form
8-K/A-1 of UnitedGlobalCom, Inc. dated July 30, 1999.
/s/ KPMG
Warsaw, Poland
August 30, 1999
