SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: June 28, 1999
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.
- ----------------------------------------------
BUSINESS ACQUIRED
- -----------------
On February 17, 1999, United Pan-Europe Communications N.V. ("UPC"), a
wholly-owned subsidiary of the Registrant, acquired the remaining 49% of United
Telekabel Holding N.V. ("UTH") that it did not own (the "NUON Transaction"). UPC
purchased this 49% interest in UTH from NUON for euro235.1 million ($265.7
million). The Registrant filed a Form 8-K dated February 17, 1999 (amended with
an 8-K/A-1 filed on March 12, 1999) related to the NUON Transaction. This
transaction completed the purchase of a 100% interest in N.V. TeleKabel Beheer
from N.V. Nuon Energie-Onderneming voor Gelderland, Friesland en Flevoland
("NUON") in which a 51% interest was initially acquired in connection with the
formation of UTH on August 6, 1998 (the "UTH Transaction"). In addition, UPC
repaid NUON and assumed from NUON a euro15.1 million ($17.1 million)
subordinated loan, including accrued interest, owed by UTH to NUON. Following
the acquisition, UPC indirectly owns 100% of UTH which in turn owns 100% of N.V.
TeleKabel Beheer. UTH owns and operates cable-based communications networks in
The Netherlands.
BUSINESSES TO BE ACQUIRED
- -------------------------
On June 2, 1999, UPC announced that it had signed a definitive agreement to
acquire @Entertainment, Inc. (a Delaware corporation), a provider of cable
television, direct-to-home multi-channel television and programming in Poland
(the "@Entertainment Acquisition"). On June 8, 1999, a tender offer was
commenced to acquire all of the outstanding shares of @Entertainment's common
stock. Concurrent with the execution of the merger agreement, certain holders of
common stock, warrants, and options of @Entertainment representing 49% of the
issued and outstanding common stock and 51% of the common stock on a fully
diluted basis have entered into agreements to tender all of their equity
interest in @Entertainment. Based upon the merger agreement, the purchase price
is expected to be approximately $881.0 million based on a value of $19 per
@Entertainment share. UPC expects to fund the purchase through new financing.
UPC will also assume debt in the amount of approximately $430.0 million.
UPC has agreed to acquire the 50% interest in A2000 Holding N.V. ("A2000") that
it does not already own for approximately $229.0 million (the "A2000
Acquisition"). The acquisition, which is subject to regulatory approval, is
expected to close by the end of 1999. Following this acquisition, UPC will
consolidate A2000's long-term debt, which is approximately $223.4 million as of
March 31, 1999.
UPC has agreed to acquire 97% of Kabel Plus, a.s. and subsidiaries ("Kabel
Plus"), which owns and operates cable television and telephone systems in the
Czech and Slovak Republics (the "Kabel Plus Acquisition"). The purchase price is
approximately $150.0 million and UPC will assume approximately $27.0 million of
Kabel Plus debt. The acquisition is expected to close by the end of 1999,
following regulatory approval.
This Form 8-K filing updates the pro forma statement of operations data through
the Registrant's fiscal year end (December 31, 1998) and for the quarter ended
March 31, 1999 in order to bring such information current under the requirements
of the Securities Act of 1993.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
- -------------------------------------------
(a) FINANCIAL STATEMENTS
The historical financial statements of N.V. TeleKabel Beheer for the year ended
December 31, 1998 are included herein. The historical financial statements of
United TeleKabel Holding N.V. for the period from commencement of operations
(August 6, 1998) to December 31, 1998 are included in the Registrant's
previously filed Form 10-K as of and for the ten months ended December 31, 1998.
2
<PAGE>
<TABLE>
<CAPTION>
(i) Financial statements of business acquired - N.V. Telekabel Beheer.
Page
----
<S> <C>
Report of Independent Accountants.................................... F-1
Consolidated Balance Sheet as of December 31, 1998................... F-2
Consolidated Statement of Operations for the Year Ended
December 31, 1998.................................................. F-3
Consolidated Statement of Cash Flows for the Year Ended
December 31, 1998.................................................. F-4
Consolidated Statement of Changes in Shareholder's Equity............ F-5
Notes to Consolidated Financial Statements........................... F-6
(ii) Financial statements of business to be acquired - A2000 Holding N.V.
Report of Independent Accountants.................................... F-14
Consolidated Balance Sheets as of March 31, 1999 (unaudited),
December 31, 1998 and 1997......................................... F-15
Shareholders' Equity and Liabilities for the Three Months Ended
March 31, 1999 (unaudited) and for the Years Ended
December 31, 1998 and 1997......................................... F-16
Consolidated Statements of Income for the Three Months Ended
March 31, 1999 and 1998 (unaudited) and for the Years Ended
December 31, 1998 and 1997......................................... F-17
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1999 and 1998 (unaudited) and for the Years Ended
December 31, 1998 and 1997......................................... F-18
Notes to Consolidated Financial Statements........................... F-19
(iii) Financial statements of business to be acquired - @Entertainment, Inc.
and Subsidiaries.
Independent Auditors' Report......................................... F-35
Consolidated Balance Sheets as of December 31, 1998 and 1997......... F-36
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996................................... F-38
Consolidated Statements of Comprehensive Loss for the Years Ended
December 31, 1998, 1997 and 1996................................... F-39
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996....................... F-40
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996................................... F-41
Notes to Consolidated Financial Statements........................... F-42
Consolidated Balance Sheets as of March 31, 1999 (unaudited) and
December 31, 1998.................................................. F-75
Consolidated Statements of Operations for the Three Months Ended
March 31, 1999 and 1998 (unaudited)................................ F-77
Consolidated Statements of Comprehensive Loss for the Three Months
Ended March 31, 1999 and 1998 (unaudited).......................... F-78
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1999 and 1998 (unaudited)................................ F-79
Notes to Consolidated Financial Statements........................... F-80
3
<PAGE>
(iv) Financial statements of business to be acquired - Kabel Plus, a.s.
and subsidiaries.
Report of Independent Public Accountants............................. F-85
Consolidated Balance Sheets as of March 31, 1999 and 1998 (unaudited)
and December 31, 1998 and 1997..................................... F-86
Consolidated Statements of Operations for the Three Months Ended
March 31, 1999 and 1998 (unaudited) and for the Years Ended
December 31, 1998 and 1997......................................... F-87
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1999 and 1998 (unaudited) and for the Years Ended
December 31, 1998 and 1997......................................... F-88
Consolidated Statements of Shareholders' Equity for the Three Months
Ended March 31, 1999 and 1998 (unaudited) and for the Years Ended
December 31, 1998 and 1997......................................... F-89
Notes to Consolidated Financial Statements........................... F-90
</TABLE>
(b) PRO FORMA FINANCIAL INFORMATION
In August 1998, UPC and a Dutch energy company, NUON, created UTH by
contributing each of their interests in various Dutch cable television
systems to the new company (UTH). The creation of UTH is referred to
as the "UTH Transaction". UPC contributed its 100% interest in CNBH
which in turn owned a 50% interest in A2000. NUON contributed its 100%
interest in N.V. TeleKabel Beheer. UPC held 51% of UTH, with NUON
owning the remaining 49%. Effective August 1998, UPC deconsolidated
its assets contributed to UTH and accounted for its interest in UTH
under the equity method. On February 17, 1999, UPC purchased NUON's
49% ownership interest in UTH, increasing its ownership of UTH to
100%. The purchase of NUON's 49% interest in UTH is referred to as the
"NUON Transaction". This transaction completed the purchase of a 100%
interest in N.V. TeleKabel Beheer from NUON in which a 51% interest
was initially acquired in connection with the formation of UTH on
August 6, 1998. Effective February 1, 1999, UPC consolidates 100% of
the results of UTH. Accordingly, the Registrant's historical balance
sheet as of March 31, 1999, reflects the acquisition of NUON's 49%
interest in UTH and the consolidation of UTH.
The following unaudited Registrant pro forma consolidated condensed
balance sheet gives effect to the @Entertainment Acquisition, the
A2000 Acquisition and the Kabel Plus Acquisition as if they had
occurred on March 31, 1999. The unaudited pro forma effects on the
balance sheet assume (1) 100% of the outstanding stock of
@Entertainment was acquired by UPC, (2) the @Entertainment Acquisition
was funded entirely through debt, (3) the consolidation of
@Entertainment's balance sheet at March 31, 1999, (4) the remaining
50% of A2000 that UPC does not own was acquired by UPC, (5) the A2000
Acquisition was funded entirely through debt, (6) the consolidation of
A2000's balance sheet at March 31, 1999, (7) 100% of Kabel Plus was
acquired by UPC, (8) the Kabel Plus Acquisition was funded entirely
through debt and (9) the consolidation of Kabel Plus' balance sheet at
March 31, 1999.
The following unaudited pro forma consolidated condensed balance sheet
and statements of operations and notes thereto set forth below do not
purport to represent what the Registrant's financial condition would
actually have been if such transactions 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 respective
acquisition dates. The unaudited pro forma consolidated condensed
balance sheet 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.
4
<PAGE>
<TABLE>
<CAPTION>
As of March 31, 1999
---------------------------------------------------------------------
A2000 Kabel Plus @Entertainment
Historical Acquistion(1) Acquisition(5) Acquisition(8) Pro Forma
---------- ------------- -------------- -------------- -----------
(United States dollars, in thousands)
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents................................... $ 607,490 $ 121 $ 2,660 $ 128,002 $ 738,273
Restricted cash............................................. 41,450 - - - 41,450
Short-term liquid investments............................... 47,141 - - - 49,966
Subscriber receivables, net................................. 28,007 12,781 2,825 6,396 47,184
Costs to be reimbursed by affiliated companies, net......... 20,915 - - - 20,915
Other current assets, net................................... 72,118 8,499 4,074 34,345 119,036
---------- -------- -------- ---------- ----------
Total current assets...................................... 817,121 21,401 9,559 168,743 1,016,824
Investments in and advances to affiliated
companies, accounted for under the equity
method, net............................................... 358,808 (78,616)(2) 707 21,879 302,778
Property, plant and equipment, net.......................... 898,251 177,753 82,330 195,783 1,354,117
Goodwill and other intangible assets, net................... 768,371 398,423 (3) 85,856(6) 891,953(9) 2,144,603
Deferred financing costs, net............................... 46,255 - - - 46,255
Non-current restricted cash and other assets, net........... 5,618 - - 24,390 30,008
---------- -------- -------- ---------- ----------
Total assets.............................................. $2,894,424 $518,961 $178,452 $1,302,748 $4,894,585
========== ======== ======== ========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Accounts payable, accrued liabilities and
other current liabilities................................. $ 237,969 $ 44,927 $ 5,968 $ 48,079 $ 336,943
Short-term debt............................................. 96,131 21,619 - - 117,750
Current portion of senior discount notes and
other long term debt...................................... 2,170 - - 6,500 8,670
---------- -------- -------- ---------- ----------
Total current liabilities................................. 336,270 66,546 5,968 54,579 463,363
Senior discount notes and other long term debt.............. 1,980,351 452,415 (4) 172,484(7) 1,248,169(10) 3,853,419
Deferred taxes and other long term liabilities.............. 29,037 - - - 29,037
---------- -------- -------- ---------- ----------
Total liabilities......................................... 2,345,658 518,961 178,452 1,302,748 4,345,819
Minority interest in subsidiaries........................... 608,213 - - - 608,213
Preferred stock ............................................ 37,064 - - - 37,064
Stockholders' deficit....................................... (96,511) - - - (96,511)
---------- -------- -------- ---------- ----------
Total liabilities and stockholders' deficit.............. . $2,894,424 $518,961 $178,452 $1,302,748 $4,894,585
========== ======== ======== ========== ==========
(1) Represents the historical amounts included in A2000's
consolidated balance sheet as of March 31, 1999, except for the
adjustments discussed in (2), (3) and (4) below.
(2) Represents the elimination of UPC's historical net investment in
A2000 as of March 31, 1999.
(3) Represents the pro forma increase in goodwill as a result of the
A2000 Acquisition:
Consolidation of historical A2000 goodwill............................ $ 53,663
Goodwill related to existing 50% equity method investment in
A2000 prior to acquisition, previously included in
investment in affiliates............................................. 103,383
Additional pro forma goodwill due to acquisition........................ 241,377
----------
$ 398,423
==========
(4) Represents the pro forma increase in long-term debt as a result
of the A2000 Acquisition:
Consolidation of historical A2000 long-term debt........................ $ 223,415
New debt to finance acquisition......................................... 229,000
----------
$ 452,415
==========
(5) Represents the historical amounts included in Kabel Plus'
consolidated balance sheet as of March 31, 1999, except for the
adjustments discussed in (6) and (7) below.
5
<PAGE>
(6) Represents the pro forma increase in goodwill as a result of the
Kabel Plus Acquisition:
Consolidation of historical Kabel Plus goodwill......................... $ 489
Additional pro forma goodwill due to acquisition........................ 85,367
----------
$ 85,856
==========
(7) Represents the pro forma increase in long-term debt as a result
of the Kabel Plus Acquisition:
Consolidation of historical Kabel Plus long-term debt................... $ 22,484
New debt to finance acquisition......................................... 150,000
----------
$ 172,484
==========
(8) Represents the historical amounts included in @Entertainment's
consolidated balance sheet as of March 31, 1999, except for the
adjustments discussed in (9) and (10) below.
(9) Represents the pro forma increase in goodwill as a result of the
@Entertainment Acquisition:
Consolidation of historical @Entertainment goodwill..................... $ 36,745
Additional pro forma goodwill due to acquisition........................ 855,208
----------
$ 891,953
==========
(10) Represents the pro forma increase in long-term debt as a result
of the @Entertainment Acquisition:
Consolidation of historical @Entertaiment long-term debt................ $ 367,169
New long-term debt to fund acquisition.................................. 881,000
----------
$1,248,169
==========
</TABLE>
The unaudited pro forma consolidated condensed statements of
operations and notes thereto set forth below for the three months
ended March 31, 1999 and for the ten months ended December 31, 1998
present the pro forma results of operations of the Registrant assuming
the NUON and UTH Transactions, and the A2000, @Entertainment and Kabel
Plus Acquisitions all had occurred on March 1, 1998. Accordingly, the
unaudited pro forma statements of operations presented below do not
purport to represent what the Registrant's results of operations would
actually have been if such transactions had in fact occurred on such
date. The pro forma adjustments are based upon currently available
information and upon certain assumptions that the Registrant believes
are reasonable. The unaudited pro forma consolidated condensed
statements 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.
The following unaudited pro forma consolidated condensed statement of
operations for the three months ended March 31, 1999 gives effect to
the NUON Transaction, the A2000 Acquisition, the Kabel Plus
Acquisition and the @Entertainment Acquisition as if each had occurred
March 1, 1998.
The column titled "NUON Transaction" gives pro forma effect to (1) the
consolidation of the results of operations of UTH for the one month
ended January 30, 1999, (2) additional amortization as a result of the
step-up in basis of UTH recorded under purchase accounting, (3)
additional interest expense as a result of the debt assumed incurred
by UPC for the acquisition of NUON's interest in UTH, and (4)
elimination of the historical share in results of UTH for the one
month ended January 31, 1999.
6
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended March 31, 1999
-------------------------------------------------------------------------------------------
UIH NUON A2000 Kabel Plus @Entertainment
Historical Transaction(1) Acquisition(5) Acquistion(9) Acquisition(12) Pro Forma
------------ -------------- -------------- ------------- --------------- -----------
(United States dollars, in thousands except share and per share data)
<S> <C> <C> <C> <C> <C> <C>
Condensed Consolidated Statement
of Operations:
Total Revenue.......................... $ 107,918 $10,117 $ 18,344 $ 6,732 $ 18,799 $ 161,910
Operating expense...................... (55,165) (6,439) (5,304) (1,889) (18,017) (86,814)
Selling, general and
administrative expense................ (67,672) - (7,752) (3,631) (15,620) (94,675)
Depreciation and amortization.......... (57,398) (5,398)(2) (13,530)(6) (3,563)(10) (21,478)(13) (101,367)
---------- ------- -------- ------- -------- ----------
Net operating loss..................... (72,317) (1,720) (8,242) (2,351) (36,316) (120,946)
Gain on issuance of securities
by subsidiary......................... 825,196 - - - - 825,196
Interest income........................ 3,910 - 53 17 1,494 5,474
Interest expense....................... (56,623) (3,698)(3) (8,318)(7) (4,583)(11) (29,866)(14) (103,088)
Provision for losses on marketable
equity securities and investment
related costs......................... 7,456 - - - - 7,456
Other expense, net..................... (11,465) - (1,520) (43) (1,038) (14,066)
---------- ------- -------- ------- -------- ----------
Net income (loss) before other items... 696,157 (5,418) (18,027) (6,960) (65,726) 600,026
Share in results of affiliated
companies, net....................... (20,562) 45 (4) 6,101 (8) - 1,025 (13,391)
Minority interest in subsidiaries...... 12,756 11 2,443 (15) 1,392 (15) 13,102 (15) 29,704
Income taxes........................... - 123 - - (19) 104
---------- ------- -------- ------- -------- ----------
Net income (loss)...................... $ 688,351 $(5,239) $ (9,483) $(5,568) $(51,618) $ 616,443
========== ======= ======== ======= ======== ==========
Net income per common share(16):
Basic.............................. $ 16.47 $ 14.75
========== ==========
Diluted............................ $ 15.33 $ 13.73
========== ==========
Weighted-average number of common
shares outstanding
Basic.............................. 41,752,543 41,752,543
========== ==========
Diluted............................ 44,911,765 44,911,765
========== ==========
(1) Represents the consolidation of the historical results of
operations of UTH for the one month ended January 30, 1999,
except for the adjustments discussed in (2), (3) and (4) below.
(2) Represents additional depreciation and amortization expense as a
result of the NUON Transaction:
Consolidation of UTH historical results for one month ended
January 31, 1999.......................................................... $ (4,621)
Additional amortization of the step-up in basis recorded
under purshase accounting................................................. (777)
--------
$ (5,398)
========
(3) Represents additional interest expense assumed incurred by UPC
effective March 1, 1998 as a result of the NUON Transaction:
Consolidation of UTH historical results for one month
ended January 31, 1999.................................................... $ (2,442)
Additional interest expense as a result of the
debt incurred by UPC for the acquisition of NUON's
interest in UTH (interest rate at 5.5%).................................... (1,256)
--------
$ (3,698)
========
(4) Represents net increase in share in results of affiliated
companies as a result of the NUON Transaction:
Consolidation of UTH historical equity results in A2000
and other investees for the one month ended
January 31, 1999.......................................................... $ (2,636)
Elimination of UPC's historical share in results of
UTH for the one month ended January 31,1999............................... 2,681
--------
$ 45
========
7
.0<PAGE>
(5) Represents the consolidation of historical results of operations
of A2000 for the three months ended March 31, 1999, except for
the adjustments discussed in (6), (7) and (8) below.
(6) Represents pro forma depreciation and amortization expense as a
result of the A2000 Acquisition:
Consolidation of historical results for the three months
ended March 31, 1999...................................................... $ (7,370)
Additional amortization of the step-up in basis recorded
under purshase accounting................................................. (6,160)
--------
$(13,530)
========
(7) Represents pro forma interest expense as a result of the A2000
Acquisition:
Consolidation of historical results for the three months
ended March 31, 1999...................................................... $ (3,634)
Pro forma interst expense on new debt associated with
acquisition (interest rate at approximately 8.2%)......................... (4,684)
--------
$ (8,318)
========
(8) Elimination of UPC's historical share in results of A2000 for the
three months ended March 31, 1999.
(9) Represents the consolidation of the historical results of
operations of Kabel Plus for the three months ended March 31,
1999, except for the adjustments discussed in (10) and (11)
below.
(10) Represents pro forma depreciation and amortization expense as a
result of the Kabel Plus Acquisition:
Consolidation of historical results for the three months
ended March 31, 1999...................................................... $ (2,570)
Additional amortization of the step-up in basis recorded
under purshase accounting................................................. (993)
--------
$ (3,563)
========
(11) Represents pro forma interest expense as a result of the Kabel
Plus Acquisition:
Consolidation of historical results for the three months
ended March 31, 1999...................................................... $ (1,514)
Pro forma interst expense on new debt associated with
acquisition (interest rate at approximately 8.2%)......................... (3,069)
--------
$ (4,583)
========
(12) Represents the consolidation of the historical results of
operations of @Entertainment for the three months ended March 31,
1999, except for the adjustments discussed in (13) and (14)
below.
(13) Represents pro forma depreciation and amortization expense as a
result of the @Entertainment Acquisition:
Consolidation of historical results for the three months
ended March 31, 1999...................................................... $ (9,405)
Additional amortization of the step-up in basis recorded
under purchase accounting................................................. (12,073)
--------
$(21,478)
========
(14) Represents pro forma interest expense as a result of the
@Entertainment Acquisition:
Consolidation of historical results for the three months
ended March 31, 1999...................................................... $(11,845)
Pro forma interst expense on bridge financing associated
with acquisition (interest rate at approximately 8.2%).................... (18,021)
--------
$(29,866)
========
</TABLE>
(15) Represents pro forma allocation of minority interest in losses
from the acquisition of A2000, Kabel Plus and @Entertainment as a
result of UPC's IPO in February 1999.
(16) "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.
The following unaudited pro forma consolidated condensed statement of
operations for the ten months ended December 31, 1998 gives effect to
the UTH Transaction, the NUON Transaction, the A2000 Acquisition, the
8
<PAGE>
Kabel Plus Acquisition and the @Entertainment Acquisition as if each
had occurred as of March 1, 1998.
The column titled "NUON Transaction" gives pro forma effect to (1) the
consolidation of the results of operations of N.V. TeleKabel Beheer
for the five months ended July 31, 1998, (2) the consolidation of the
results of operations for UTH for the period from August 1, 1998 to
December 31, 1998, (3) additional amortization as a result of the
step-up in basis of N.V. TeleKabel Beheer recorded under purchase
accounting, (4) additional interest expense as a result of the debt
assumed incurred by UPC for the acquisition of NUON's interest in UTH,
and (5) elimination of UPC's share in results of UTH for the five
months ended December 31, 1998.
<TABLE>
<CAPTION>
For the Ten Months Ended December 31, 1998
-------------------------------------------------------------------------------------------
UIH NUON A2000 Kabel Plus @Entertainment
Historical Transaction(1) Acquisition(2) Acquistion(6) Acquisition(9) Pro Forma
------------ -------------- -------------- ------------- --------------- -----------
(United States dollars, in thousands except share and per share data)
<S> <C> <C> <C> <C> <C> <C>
Condensed Consolidated Statement
of Operations:
Total revenue.......................... $ 254,068 $ 81,008 $ 51,996 $ 19,908 $ 53,402 $ 460,382
Operating expense...................... (122,811) (27,129) (13,364) (6,281) (56,109) (225,694)
Selling, general and
administrative expense................ (299,993) (26,071) (25,868) (12,105) (65,529) (429,567)
Depreciation and amortization.......... (159,045) (37,575) (50,915)(3) (11,815)(7) (62,671)(10) (322,020)
---------- -------- -------- -------- --------- ----------
Net operating loss..................... (327,781) (9,767) (38,151) (10,293) (130,907) (516,899)
Interest income........................ 10,464 - 282 - 2,788 13,534
Interest expense....................... (163,227) (28,573) (25,868)(4) (22,622)(8) (78,732)(11) (319,022)
Provision for losses on marketable
equity securities and investment
related costs......................... (9,686) - - - - (9,686)
Other expense, net..................... (2,546) 609 466 (2,532) (167) (4,170)
---------- -------- -------- -------- --------- ----------
Net loss before other items............ (492,776) (37,731) (63,271) (35,447) (207,018) (836,243)
Share in results of affiliated
companies, net........................ (54,166) 1,757 21,077 (5) 52 (6,490) (37,770)
Minority interest in subsidiaries...... 1,410 118 - - (199) 1,329
---------- -------- -------- -------- --------- ----------
Net loss............................... $ (545,532) $(35,856) $(42,194) $(35,395) $(213,707) $ (872,684)
========== ======== ======== ======== ========= ==========
Basic and diluted net loss
per common share(12).................. $ (13.71) $ (21.91)
========== =========
Weighted-average number of common
shares outstanding................ 39,919,887 39,919,887
========== ==========
</TABLE>
(1) The NUON Transaction column is comprised of the following:
<TABLE>
<CAPTION>
For the Ten Months Ended December 31, 1998
-----------------------------------------------------------
Telekabel
Beheer UTH Pro Forma NUON
Historical(a) Historical(b) Adjustments Transaction
------------- ------------- ----------- -----------
(United States dollars, in thousands)
<S> <C> <C> <C> <C>
Condensed Consolidated Statement of
Operations:
Total revenue....................................... $31,198 $ 49,810 $ -- $ 81,008
Operating expense................................... (10,460) (16,669) -- (27,129)
Selling, general and administrative expense......... (7,932) (18,139) -- (26,071)
Depreciation and amortization....................... (11,532) (17,778) (8,265)(c) (37,575)
------- -------- -------- --------
Net operating income (loss)......................... 1,274 (2,776) (8,265) (9,767)
Interest income..................................... -- -- -- --
Interest expense.................................... (7,619) (8,391) (12,563)(d) (28,573)
Other expense, net.................................. -- 609 -- 609
------- -------- -------- --------
Net loss before other items......................... (6,345) (10,558) (20,828) (37,731)
Share in results of affiliated companies, net....... 2,239 (11,929) 11,447 (e) 1,757
Minority interests in subsidiaries.................. -- 118 -- 118
------- -------- -------- --------
Net loss............................................ $(4,106) $(22,369) $ (9,381) $(35,856)
======= ======== ======== ========
9
<PAGE>
(a) Represents the historical results of TeleKabel Beheer for
the five months ended July 31, 1998.
(b) Represents the historical results of UTH for the five months
ended December 31, 1998.
(c) Represents additional amortization as a result of the
step-up in basis of TeleKabel Beheer recorded under purchase
accounting.
(d) Represents additional interest expense assumed incurred by
UPC effective March 1, 1998 as a result of UPC's acquisition
of NUON's interest in UTH (interest rate at 5.5%).
(e) Represents the elimination of UPC's share in results of UTH
for the five months ended December 31, 1998.
(2) Represents the consolidation of the estimated historical results
of operations of A2000 for the ten months ended December 31,
1998, except for the adjustments discussed in (3), (4) and (5)
below.
(3) Represents pro forma depreciation and amortization expense as a
result of the A2000 Acquisition:
Consolidation of historical results for the ten months ended
December 31, 1998......................................................... $(30,676)
Additional amortization of the step-up in basis recorded
under purshase accounting................................................. (20,239)
--------
$(50,915)
========
(4) Represents pro forma interest expense as a result of the A2000
Acquisition:
Consolidation of historical results for the ten months ended
December 31, 1998......................................................... $(10,478)
Pro forma interest expense on new debt associated with
acquisition (interest rate at approximately 8.2%)......................... (15,390)
--------
$(25,868)
========
(5) Elimination of UPC's historical share in results of A2000 for the
ten months ended December 31, 1998.
(6) Represents the consolidation of the estimated historical results
of operations of Kabel Plus for the ten months ended December 31,
1998, except for the adjustments discussed in (7) and (8) below.
(7) Represents pro forma depreciation and amortization expense as a
result of the Kabel Plus Acquisition:
Consolidation of historical results for the ten months ended
December 31, 1998......................................................... $ (8,553)
Additional amortization of the step-up in basis recorded
under purshase accounting................................................. (3,262)
--------
$(11,815)
========
(8) Represents pro forma interest expense as a result of the Kabel
Plus Acquisition:
Consolidation of historical results for the ten months ended
December 31, 1998......................................................... $(12,542)
Pro forma interst expense on new debt associated with
acquisition (interest rate at approximately 8.2%)......................... (10,080)
--------
$(22,622)
========
(9) 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 (10) and (11)
below.
(10) Represents pro forma depreciation and amortization expense as a
result of the @Entertainment Acquisition:
Consolidation of historical results for the ten months ended
December 31, 1998......................................................... $(23,005)
Additional amortization of the step-up in basis recorded
under purshase accounting................................................. (39,666)
--------
$(62,671)
========
(11) Represents pro forma interest expense as a result of the
@Entertainment Acquisition:
Consolidation of historical results for the ten months ended
December 31, 1998......................................................... $(19,524)
Pro forma interest expense on bridge financing associated
with acquisition (interest rate at approximately 8.2%).................... (59,208)
--------
$(78,732)
========
</TABLE>
10
<PAGE>
(12) "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.
(c) EXHIBITS
23.1 Consent of Arthur Andersen, Independent Accountants.
23.2 Consent of Arthur Andersen, Independent Accountants.
23.3 Consent of Arthur Andersen s.r.o., Independent Accountants.
23.4 Consent of KPMG, Independent Auditors.
11
<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.
UNITED INTERNATIONAL HOLDINGS, INC.
DATE: June 28, 1999 By: /S/ Valerie L. Cover
---------------------------------
Valerie L. Cover
Vice President and Controller
(a Duly Authorized Officer and
Principal Financial Officer)
12
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder of N.V. TeleKabel Beheer
We have audited the accompanying consolidated balance sheet of N.V.
TeleKabel Beheer, ("TeleKabel" or the "Company"), as of December 31, 1998 and
the related consolidated statement of operations, shareholder's equity and cash
flow for the year 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 financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in The Netherlands, which are substantially the same as those generally
accepted 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 financial statements referred to above present fairly,
in all material respects, the financial position of N.V. TeleKabel Beheer as of
December 31, 1998 and the results of its operations and its cash flows for the
year ended December 31, 1998 in conformity with accounting principles generally
accepted in The Netherlands.
Accounting principles generally accepted in The Netherlands vary in
certain significant respects from generally accepted accounting principles in
the United States of America. The application of the latter would have affected
the determination of consolidated results for the year in the period ended
December 31, 1998 and shareholders' equity as of December 31, 1998 to the extent
summarized in note 15 to the consolidated financial statements.
ARTHUR ANDERSEN
Amstelveen, The Netherlands,
February 26, 1999.
F-1
<PAGE>
<TABLE>
<CAPTION>
N.V. TELEKABEL BEHEER
CONSOLIDATED BALANCE SHEET
December 31, 1998
(in thousands of Dutch guilders, except per share data)
December 31,
Note 1998
ASSETS ---- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................... 23,533
Subscriber receivables, net.................................................. 4 14,463
Related party receivables.................................................... 4,604
Other receivables............................................................ 5 4,219
Inventory.................................................................... 3,274
Investments.................................................................. 6 -
-------
Total current assets......................................................... 50,093
Tangible fixed assets, net................................................... 7 650,401
Intangible assets, net....................................................... 8 261,671
Long term investments........................................................ 6 1,304
-------
Total assets............................................................ 963,469
=======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable............................................................. 34,157
Payable to banks............................................................. 11,896
Deferred income.............................................................. 9 7,488
Short-term debt payable to group companies................................... 10 667,879
Other payables and accrued expenses.......................................... 20,880
-------
Total current liabilities............................................... 742,300
=======
Minority interest in subsidiaries............................................ 11 -
Commitments and contingencies................................................ 12 -
Shareholder's equity:
Common stock, NLG 10 par value, 100,000 shares authorized and issued......... 1,000
Additional paid-in capital................................................... 251,354
Accumulated deficit.......................................................... (31,185)
-------
Total shareholder's equity.............................................. 221,169
-------
Total liabilities and shareholder's equity......................... 963,469
=======
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
F-2
<PAGE>
N.V. TELEKABEL BEHEER
CONSOLIDATED STATEMENT OF OPERATIONS
For the year ended December 31, 1998
(in thousands of Dutch guilders)
Year ended
December 31,
1998
------------
Service and other revenue................................... 153,662
Operating expenses:
Purchases relating to sales................................. (23,449)
Personnel expenses.......................................... (22,373)
Depreciation and amortization............................... (56,109)
Other operating expenses.................................... (45,816)
-------
Net operating (loss) income................................. 5,915
Equity results in associates................................ (90)
Interest expense, related parties........................... (32,598)
Other income/(expense), net................................. -
-------
Income/(loss) before and after income taxes................. (26,773)
Minority interests in subsidiaries.......................... -
-------
Net income/(loss)........................................... (26,773)
=======
The accompanying notes are an integral part of these consolidated
financial statements
F-3
<PAGE>
<TABLE>
<CAPTION>
N.V. TELEKABEL BEHEER
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended December 31, 1998
(in thousands of Dutch guilders)
Year ended
December 31,
1998
------------
<S> <C>
Cash flows from operating activities:
Net income/(loss)............................................................. (26,773)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation and amortization................................................. 56,109
Share in results of affiliated companies...................................... 90
Provision for doubtfull accounts receivable................................... 263
Changes in operating assets and liabilities:
Decrease in receivables....................................................... 6,529
Decrease in inventories....................................................... 556
Increase in other current liabilities......................................... 8,306
-----
Net cash flows from operating activities...................................... 45,080
------
Cash flows from investing activities:
Sale of unlisted securities................................................... 16,250
Capital expenditures.......................................................... (222,450)
Net cash flows from investing activities...................................... (206,200)
--------
Cash flows from financing activities:
Proceeds from short-term debt to group companies.............................. 167,188
Capital contribution.......................................................... -
-------
Net cash flows from financing activities...................................... 167,188
-------
Net increase (decrease) in cash and cash equivalents.......................... 6,068
Cash and cash equivalents at beginning of period.............................. 17,465
-------
Cash and cash equivalents at end of period.................................... 23,533
=======
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
N.V. TELEKABEL BEHEER
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
for the year ended December 31, 1998
(in thousands of Dutch guilders)
Issued and
fully paid Share Other
capital premium reserves Total
---------- ------- -------- -------
<S> <C> <C> <C> <C>
Balance as of December 31, 1997....... 1,000 251,354 (4,412) 247,942
Net income............................ - - (26,773) (26,773)
----- ------- ------- -------
Balance as of December 31, 1998....... 1,000 251,354 (31,185) 221,169
===== ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
F-5
<PAGE>
N.V. TELEKABEL BEHEER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Dutch guilders)
1. ORGANIZATION AND NATURE OF OPERATIONS
In 1998 NV TeleKabel Beheer was contributed to United Telekabel Holding NV
("UTH"), a legally formed company in May 1998. UTH was formed as a joint-venture
between United Pan-Europe Communications NV ("UPC") and N.V. NUON
Energie-Onderneming voor Gelderland, Friesland en Flevoland ("NUON"). UPC became
a 51% shareholder and NUON a 49% shareholder. UTH was formed for the purpose of
offering cable-based communications through its networks in the Netherlands. UTH
currently offers cable television services and is further developing and
upgrading its network to provide digital video, voice and internet/data services
in its Dutch markets.
UTH commenced operations on August 6, 1998 when both shareholders
contributed their interests in Dutch cable television operating companies to
UTH. NUON contributed its interest in NV TeleKabel Beheer ("Telekabel") and UPC
contributed its interest in Cable Network Brabant Holding BV ("CNBH") and 50% of
the shares in A2000 Holding NV ("A2000").
N.V. TeleKabel Beheer and its subsidiaries (TeleKabel or the Company) of
Arnhem was a wholly owned subsidiary of NUON, a local government owned company,
before the contribution to UTH. NUON's main activity is the provision of energy
to the provinces of Gelderland, Friesland and Flevoland.
TeleKabel was incorporated in The Netherlands by NUON on August 22, 1995.
Effective January 1, 1996, NUON contributed all of its cable television networks
to the Company in exchange for its equity interest in the Company. TeleKabel and
its subsidiaries main activities comprise investments in and management of cable
television network and related infrastructures, as well as developing and
rendering information, communication and transaction services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements of the Company have been prepared in
accordance with generally accepted accounting principles in The Netherlands
("Dutch GAAP"). The consolidated financial statements are prepared under the
historical cost convention. The preparation of financial statements in
conformity with Dutch GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
Subsidiary undertakings, which are those companies in which the Company,
directly or indirectly, has an interest of more than one half of the voting
rights or otherwise has power to exercise control over the operations, have been
consolidated. Subsidiaries are consolidated from the date on which effective
interest is transferred to the Company and are no longer consolidated from the
date of disposal. All intercompany transactions, balances and unrealised
surpluses and deficits on transactions between group companies have been
eliminated. Where necessary, accounting policies for subsidiaries have been
changed to ensure consistency with the policies adopted by the Company. Separate
disclosure is made of minority interests.
The following subsidiaries are included in the consolidation as of
December 31, 1998. The subsidiaries are wholly-owned, unless indicated
otherwise.
F-6
<PAGE>
N.V. TELEKABEL BEHEER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands of Dutch guilders)
N.V. Telekabel (1) Arnhem
TeleKabel Omroep Facilitair Bedrijf B.V. Arnhem
Maxinetwerken B.V. Ede
CAI-Buren B.V.(2) Veenendaal
CAI-Druten B.V. (2) Druten
CAI-Geldermalsen B.V(2) Veenendaal
CAI-Lingewaal B.V.(2) Lingewaal
CAI-Neerijnen-West B.V. (2) Neerijnen
CAI-Tiel B.V.(2) Tiel
CAI-Wychen B.V.(2) Wychen
CAI-Dodewaard B.V (2) Dodewaard
CAI-Almere B.V. (2) Almere
CAI-Dronten B.V (2) Dronten
CAI-Lelystad B.V (2) Lelystad
CAI Over-Betuwe B.V. (1)(2) Utrecht
CAI Heteren B.V. (1)(2) Heteren
CAI Gendt B.V. (1)(2) Gendt
CAI Elst B.V. (1)(2) Elst
CAI Bemmel B.V. (1)(2) Bemmel
CAI Valburg B.V. (1)(2) Andelst
CAI Wageningen B.V. (1)(2) Wageningen
Kabelexploitatiemaatschappij CAI Renkum B.V. (1)(2) Utrecht
CAI-NKM Nijmegen B.V. (1)(2) Nijmegen
CAI Midden-Betuwe B.V. (1)(2) Veenendaal
(1) Statements of joint and several liability pursuant to Article 403, Book 2
of the Dutch Civil Code were issued for these companies.
(2) Cable Networks were acquired through an exchange transaction with Casema as
described in note 3.
CASH AND CASH EQUIVALENTS
For the purposes of the cash flow statement, cash and cash equivalents
comprise cash in hand, deposits held at call with banks, and investments in
money market instruments.
INVESTMENTS IN AFFILIATED COMPANIES
Investments in affiliated companies are accounted for by the equity method
of accounting. These are investments in which the Company has between 20% and
50% of the voting rights, and over which the Company exercises significant
influence, unless such influence is temporary, in which case the investment is
recorded at cost. Provisions are recorded for long-term impairment in value.
Equity accounting involves recognizing in the income statement the
Company's share of the affiliate's profit or loss for the year. The Company's
interest in the affiliate is carried in the balance sheet at an amount that
reflects its share of the fair value of the net assets of the affiliate. The
excess of the consideration over the Company's share of fair value of the
affiliate's net assets is recorded as goodwill and amortized over its expected
useful life.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Additions, replacements
and major improvements are capitalized, and costs for normal repair and
maintenance of property, plant and equipment are charged to expense as incurred.
Assets constructed by the Company incorporate interest charges incurred during
the period of construction, and investment subsidies are deducted. Starting in
1998 Telekabel's depreciation is calculated using the straight-line method over
the economic life of the asset, taking into account the residual value, to come
in line with the depreciation method used in the Group. Before 1998 Telekabel
used the annuity method which is a compounded interest method whereby the
depreciation is calculated based on the assumption that depreciation plus the
normal cost of capital to finance the assets are constant over the life of the
assets. This resulted in lower depreciation charges in the earlier years of the
assets life and higher charges in the later years. Would Telekabel have kept the
annuity method in place, the depreciation costs in 1998 would have been some NLG
12 million less. Upon disconnection of a subscriber, the remaining book value of
the subscriber equipment, excluding converters which are recovered upon
disconnection, and the capitalized labor are written off and accounted for as an
operating cost.
F-7
<PAGE>
N.V. TELEKABEL BEHEER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands of Dutch guilders)
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is the excess of investments in consolidated subsidiaries and
affiliated companies over the fair value of the net tangible fixed asset value
at acquisition and is amortized on a straight line basis over its expected
usefull life.
RECOVERABILITY OF TANGIBLE AND INTANGIBLE ASSETS
The Company evaluates the carrying value of all tangible and intangible
fixed assets whenever events or circumstances indicate the carrying value of
assets may exceed their recoverable amounts. An impairment loss is recognized
when the estimated future cash flows (undiscounted and without interest)
expected to result from the use of an asset are less than the carrying amount of
the asset. Measurement of an impairment loss is based on fair value of the asset
computed using discounted cash flows if the asset is expected to be held and
used. Measurement of an impairment loss for an asset held for sale would be
based on fair market value less estimated costs to sell.
REVENUE RECOGNITION
Revenue is primarily derived from the sale of cable television services to
subscribers and is recognized in the period the related services are provided.
Initial installation fees are recognized as revenue in the period in which the
installation occurs, to the extent installation fees are equal to or less than
direct selling costs, with any excess costs deferred and amortized over the
average subscriber period. To the extent installation fees exceed direct selling
costs, the excess fees would be deferred and amortized over the average contract
period. All installation fees and related costs with respect to reconnections
are recognized in the period in which the reconnection occurs.
INCOME TAXES
The Company accounts for income taxes under the asset and liability method
which requires recognition of deferred tax assets and liabilities for the
expected future income tax consequences of transactions which have been included
in the financial statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based on the difference between the
financial statement and income tax basis of assets, liabilities and loss
carryforwards using enacted tax rates in effect for the year in which the
differences are expected to reverse. Net deferred tax assets are only recorded
if management believes it is more likely than not they will be realized.
3. SIGNIFICANT ACQUISITIONS AND DIVESTITURES
In April 1997 the Company entered into an agreement with Casema to
exchange its cable network interest in TeleKabel Oosterhout B.V., TeleKabel De
Bilt-Bilthoven B.V., TeleKabel Zoetermeer B.V. and Kabelexploitatie Maatschappij
Rijnland B.V. for 100% of the shares of CAI-OverBetuwe B.V., CAI-Bemmel B.V.,
CAI-Elst B.V., CAI-Gendt B.V., CAI-Heteren B.V., CAI-Valburg B.V.,
CAI-Midden-Betuwe B.V., Kabelexploitatie Maatschappij CAI-Renkum B.V., CAI-Buren
B.V., CAI-Druten B.V., CAI-Geldermalsen B.V., CAI-Lingewaal B.V.,
CAI-NKM-Nijmegen B.V., CAI-Neerijnen-West B.V., CAI-Tiel B.V., CAI-Wageningen
B.V., CAI-Wychen B.V., CAI-Dodewaard B.V and cable network assets in the cities
of Dronten and Lelystad.
The exchange of cable networks was based on the number of subscriber
connections exchanged, measured as of January 1, 1997. Casema and TeleKabel
agreed that a compensation of NLG 1,200 (guilders) per subscriber would be paid
for any differences in the number of subscribers exchanged.
Additionally the agreement specified that TeleKabel was to acquire
CAI-Almere B.V. for a consideration of NLG 1,500 (guilders) per subscriber,
based on the number of subscribers at the date of the share transfer.
The transaction with Casema was originally scheduled to be completed as of
December 31, 1997. As of December 31, 1997, TeleKabel transferred its interest
in TeleKabel Oosterhout B.V., TeleKabel De Bilt-Bilthoven B.V. and 47.5% of its
interest in Kabelexploitatie Maatschappij Rijnland B.V. to Casema and received
the interest in the cable networks specified in note 2.
During 1998 the Company surrendered its interest in TeleKabel Zoetermeer
B.V. and the remaining 52.5% share in Kabelexploitatie Maatschappij Rijnland
B.V.in exchange for shares in CAI-Buren B.V., CAI-Druten B.V., CAI-Geldermalsen
B.V., CAI-Lingewaal B.V., CAI-Neerijnen-West B.V., CAI-Tiel B.V., CAI-Wychen
F-8
<PAGE>
N.V. TELEKABEL BEHEER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands of Dutch guilders)
B.V., CAI-Dodewaard B.V., CAI-Dronten B.V., and CAI-Lelystad B.V. as part of the
Casema transaction., and bought the shares in CAI-Almere B.V.
The acquired cable networks were recorded in the books of the Company at
fair value of the cable networks at the date of the exchange.
4. SUBSCRIBER RECEIVABLES
Subscriber receivables are stated net of an allowance for doubtful
accounts of NLG 1,280 as of December 31, 1998.
5. Other receivables
Other receivables can be specified as follows:
As of
December 31,
1998
------------
Prepayments and accrued income.......... 333
Taxes and social security premiums...... 580
Other receivables....................... 3,306
-----
4,219
=====
6. INVESTMENTS IN AFFILIATED COMPANIES AND UNLISTED SECURITIES
Movements in investments in and advances to affiliated companies can be
summarized as follows:
<TABLE>
<CAPTION>
Affiliated Unlisted
companies securities Total
---------- ---------- -------
<S> <C> <C> <C>
Book value as of January 1, 1998...................... 1,222 16,413 17,635
Additions........................................ 9 - 9
Sale............................................. - (16,250) (16,250)
Write off of investment in unlisted securities... - - -
Share in income of affiliated companies.......... (90) - (90)
Other............................................ - - -
----- ------- -------
Book value as of December 31, 1998.................... 1,141 163 1,304
===== ======= =======
</TABLE>
As of December 31, 1998 investment in affiliated companies relate to a
33.3% interest in Interway Holding B.V.
7. Property, plant and equipment
Tangible fixed assets can be summarized as follows:
<TABLE>
<CAPTION>
Other Assets
Land & Cable fixed under
buildings Networks assets construction Total
--------- -------- ------ ------------ -------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998
Net book value as of January 1, 1998......... 6,237 496,788 13,726 36,748 553,499
Additions.................................... 184 185,285 716 83,038 269,223
Disposals.................................... (44) (96,872) (3,081) (36,748) (136,745)
Depreciation................................. (341) (32,908) (2,327) - (35,576)
----- ------- ------ ------ -------
Net book value as of December 31, 1998....... 6,036 552,293 9,034 83,038 650,401
===== ======= ====== ====== =======
Balance as of December 31, 1998
Historical cost.............................. 7,017 608,889 13,632 83,038 712,576
Accumulated depreciation..................... (981) (56,596) (4,598) - (62,175)
----- ------- ------ ------ -------
Net book value............................... 6,036 552,293 9,034 83,038 650,401
====== ======= ===== ====== =======
</TABLE>
F-9
<PAGE>
N.V. TELEKABEL BEHEER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands of Dutch guilders)
Estimated useful lives and the depreciation method used for tangible fixed
assets are as follows:
Useful life Depreciation
(years) Methodology
----------- ------------
Land and buildings........... 40 Straight line
Cable networks:
Active parts (25%)..... 7 Straight line
Passive parts (75%).... 20 Straight line
Other fixed assets.......... 3-5 Straight line
During 1995, 1996 and 1997, TeleKabel acquired, exchanged and received
cable networks as a capital contribution from NUON (see notes 1 and 3). The
Company analyzed the value of its complete network in order to record its cable
networks on a consistent basis under fixed assets. All cable network connections
were analysed on a cost per connection basis and compared to the current cost of
a technologically up to date connection. All connections were valued at the cost
of establishing a new and technologically up to date connection, minus the cost
to upgrade the existing connection to the most current technology, referred to
the "current replacement value". The net difference between the book value and
the current replacement value was reclassified to intangible fixed assets, with
similar useful lives.
8. INTANGIBLE FIXED ASSETS
Intangible fixed assets movements and balances can be summarized as
follows:
Year ended December 31, 1998
Book value as of January 1, 1998............. 194,562
Additions.................................... 130,327
Disposals.................................... (42,685)
Amortization................................. (20,533)
-------
Net book value as of December 31, 1998....... 261,671
Balance as of December 31, 1998
Historical cost.............................. 300,001
Accumulated amortization..................... (38,330)
-------
Net book value............................... 261,671
=======
F-10
<PAGE>
N.V. TELEKABEL BEHEER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands of Dutch guilders)
As described in Note 2 TeleKabel has recorded any differences between the
"current replacement value" of the tangible fixed assets and the book value of
the cable networks on the date of acquisition, contribution or exchange as
goodwill. Such goodwill is amortized on a straight line basis over the estimated
useful life of the cable network (15 years). Goodwill paid on the acquisition of
other types of businesses is amortized over 5-10 years depending on the nature
of the business.
9. DEFERRED INCOME
Deferred income relates to connection fees charged to customers in excess
of the normal cost of creating a connection. Deferred income is released to
income over the expected life of the cable connection.
December 31,
1998
------------
Balance as of January 1................................ 6,341
Addition: connection charges received from clients..... 1,559
Less: release to income statement...................... (412)
-----
Balance end of period.................................. 7,488
=====
10. SHORT TERM DEBT PAYABLE TO GROUP COMPANIES
Short term debt payable to group companies relates to loans provided by
both NUON and UPC for financing fixed assets. The interest rate charged by NUON
in 1998 was 6.65% through November and 8.15% for December. The interest rate
charged by UPC was 6.65%. In December 1998 Telekabel entered into a subordinated
loan agreement with UTH for an amount of NLG 33.0 million. The interest payable
is 5.5% on an annual basis. This subordinated loan was entered into for purposes
of continuing funding of incurred losses and capital expenditures.
11. MINORITY INTEREST IN SUBSIDIARIES
Due to the sale/swap of the related shares in the Casema transaction there
is no longer a minority interest.
12. COMMITMENTS AND CONTINGENCIES
LEASES
TeleKabel has commitments for leasing of company cars amounting to NLG 938
yearly as per December 31, 1998. Maximum maturity period of the lease agreements
is four years.
RENTAL AGREEMENTS
TeleKabel entered into rental agreements for an amount of NLG 950 in 1999.
STATEMENT OF LIABILITY
TeleKabel and some subsidiaries can be held liable to a number of group
companies included in the consolidation, as meant by Article 403, Part 9, Book 2
of the Dutch Civil Code. As partner in a partnership firm, one of the group
companies can be held liable for the commitments of this firm. The maximum risk
amounts to NLG 100.
LEGAL
The Company is not a party to any material legal proceedings, nor is it
currently aware of any material legal proceedings. From time to time, the
Company may become involved in litigation relating to claims arising out of its
operations in the normal course of its business.
F-11
<PAGE>
N.V. TELEKABEL BEHEER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands of Dutch guilders)
13. INCOME TAXES
Until October of 1996 the Company did not have an obligation to pay income
taxes, as it was a wholly owned subsidiary of a Dutch local government
institution. As a result of changed shareholders of TeleKabel's parent company,
in Dutch tax laws the Company is subject to Dutch income taxes since October 10,
of 1996. The Company is in discussion with the Dutch tax authorities regarding
the tax basis of its assets and liabilites. Based on current best estimates of
the outcome of these discussions the Company believes that the tax basis of the
Company's assets and liabilities will not differ significantly from their
bookvalues.
14. SUBSEQUENT EVENTS
SUBORDINATED LOAN
Telekabel entered into a subordianted loan with UTH in March 1999 for an
amount of NLG 119 million. The interest is payable on an annual basis. This
subordinated loan was entered into for purposes of continuing funding of
incurred losses and capital expenditures
NUON SHARE PURCHASE AGREEMENT
On February 17, 1999, UPC acquired the remaining 49% of UTH, increasing
its ownership in UTH to 100%.
REFINANCING
Subsequent to December 31, 1998, Telekabel replaced their existing NLG 690
million facility (through NUON) with a senior facility and additional
shareholder loans. The senior facility consists of a Euro 340 million (NLG 750
million) revolving facility that will convert to a term facility on December 31,
2001. Euro 5 million of this facility will be in the form of an overdraft
facility that will be available until December 31, 2007. This existing facility
will be used to repay a portion of the UTH facility and for capital
expenditures. The new facility will bear interest at the Euro Interbank Offered
Rate plus a margin between 0.75% and 2.00% based on the leverage multiples tied
to Telekabel's net operating income. The new facility will be secured by, among
other things, a pledge over shares held by the borrower and will restrict
Telekabel's ability to incur additional debt.
15. DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE
NETHERLANDS AND THE UNITED STATES
The Company's consolidated financial statements are prepared in accordance
with Dutch GAAP, which differs in certain respects from accounting principles
generally accepted in the United States ("US GAAP"). The material differences as
they apply to the Company are summarized below:
(a) DEPRECIATION OF FIXED ASSETS
Under Dutch GAAP the Company depreciated through 1997 its cable network
assets using the annuity method of depreciation. Starting 1998 the Company
changed the depreciation method into straight-line depreciation. Under US GAAP
cable network assets are depreciated on a straight-line basis.
F-12
<PAGE>
N.V. TELEKABEL BEHEER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands of Dutch guilders)
(b) ACCOUNTING FOR INVESTMENTS IN AFFILIATES
Under Dutch GAAP the Company records certain of its investments in
affiliates in which it holds an interest of 20% to 50% at the historical cost of
the investment (see Note 2). Under US GAAP these investments are accounted for
using the equity method of accounting.
Reconciliation of net (loss)/profit (in thousands of Dutch guilders):
Year ended
December 31,
1998
------------
Net income/(loss) under Dutch GAAP.............. (26,773)
US GAAP adjustment:
Depreciation on a straight line basis........... 1,385
Equity accounting for affiliates................ 6,290
Accrued subscriber fees:
Goodwill amortization........................... (172)
Release of subscriber accrual................... 516
Income tax effect of US GAAP adjustments........ (605)
-------
Net income/(loss) under US GAAP................. (19,359)
-------
December 31,
1998
------------
Reconciliation of shareholder's equity:
Total shareholders' equity under Dutch GAAP....... 221,169
US GAAP adjustment:
Depreciation on a straight line basis............. (13,723)
Equity accounting for affiliates.................. -
Income tax effect of US GAAP adjustments.......... 4,803
-------
Total shareholder's equity under US GAAP.......... 212,249
=======
F-13
<PAGE>
AUDITORS' REPORT
Introduction
We have audited the consolidated balance sheets of A2000 Holding N.V.,
Eindhoven, The Netherlands, as of December 31, 1997 and 1998 and the related
consolidated statements of income and shareholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
SCOPE
We conducted our audit in accordance with auditing standards generally accepted
in The Netherlands, which are substantially the same as those generally accepted
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 audit provides a
reasonable basis for our opinion.
OPINION
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of A2000 Holding N.V. as of
December 31, 1997 and 1998 and of the results of its operations and its cash
flows for the years then ended in accordance with accounting principles
generally accepted in The Netherlands.
Generally accepted accounting principles in The Netherlands vary in certain
significant respects from generally accepted accounting principles in the United
States. Application of generally accepted accounting principles in the United
States would have affected total assets, results of operations and shareholders'
equity as at and for the years ended December 31, 1997 and 1998 to the extent
summarized in Note 21 to the consolidated financial statements.
ARTHUR ANDERSEN
Amstelveen, The Netherlands,
March 9, 1999
F-14
<PAGE>
<TABLE>
<CAPTION>
A2000 HOLDING N.V.
(Before allocation of net loss)
(Currency - Thousands of Dutch guilders)
A S S E T S
-----------
March 31,
1999
Unaudited 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
FIXED ASSETS:
Intangible fixed assets............................. f 110,568 f 113,362 f 123,307
Tangible fixed assets............................... 364,394 356,623 309,292
Financial fixed assets.............................. 325 325 325
------------ ----------- ------------
Total fixed assets........................ 475,287 470,310 432,924
------------ ----------- ------------
CURRENT ASSETS:
Inventory........................................... 14,460 15,932 9,496
Prepaid on inventory................................ - - 2,980
------------ ----------- ------------
14,460 15,932 12,476
------------ ----------- ------------
Accounts receivable-
Trade............................................ 26,202 19,484 20,194
Other receivables and prepaid expenses........... 1,862 2,075 2,818
------------ ----------- ------------
28,064 21,559 23,012
------------ ----------- ------------
Securities.......................................... 218 218 218
Cash................................................ 249 369 6,868
------------ ----------- ------------
Total current assets...................... 42,991 38,078 42,574
------------ ----------- ------------
Total assets.............................. f 518,278 f 508,388 f 475,498
============ =========== ============
</TABLE>
F-15
<PAGE>
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY AND LIABILITIES
------------------------------------
March 31,
1999
Unaudited 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
SHAREHOLDERS' EQUITY.................................... f (100,338) f (86,248) f (20,240)
PROVISIONS.............................................. 1,581 1,610 319
---------- ---------- ----------
LONG-TERM LOANS......................................... 458,000 458,000 426,000
---------- ---------- ----------
SHORT-TERM LIABILITIES:
Bank................................................ 44,318 48,183 -
Suppliers........................................... 25,013 30,098 41,541
Shareholders........................................ 47,231 23,248 4,792
Affiliated companies................................ 675 886 466
Taxes and social security contributions............. 7,454 5,907 2,436
Other debts and accrued liabilities................. 34,344 26,704 20,184
------------ ---------- ----------
Total short-term liabilities..................... 159,035 135,026 69,419
------------ ---------- ----------
Total shareholders' equity and liabilities....... f 518,278 f 508,388 f 475,498
============ ========== ==========
</TABLE>
F-16
<PAGE>
<TABLE>
<CAPTION>
A2000 HOLDING N.V.
CONSOLIDATED STATEMENT OF INCOME
(Currency - Thousands of Dutch guilders)
March 31, March 31,
1999 1998
Unaudited Unaudited 1998 1997
------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUES........................................ f 35,979 f 29,428 f 124,167 f 100,677
----------- ---------- ---------- ----------
COST OF OPERATING EXPENSES:
Wages and salaries.......................... 7,760 5,460 29,290 21,205
Depreciation/amortization...................
of (in)tangible fixed assets............. 14,455 16,064 73,254 49,478
Loss on disposal of assets.................. 502 (12) 85 1,443
Other operating expenses.................... 17,345 17,818 64,312 46,222
----------- --------- ---------- ----------
40,062 39,330 166,941 118,348
----------- --------- ---------- ----------
Operating result......................... (4,083) (9,902) (42,774) (17,671)
----------- --------- ---------- ----------
FINANCIAL INCOME AND EXPENSE:
Currency exchange gain/(loss)............... (2,982) (473) 1,100 (364)
Interest income............................. 103 355 674 523
Interest expense............................ (7,128) (5,221) (25,021) (16,444)
----------- --------- ---------- ----------
10,007) (5,339) (23,247) (16,285)
----------- --------- ---------- ----------
Result before credit from income taxes... (14,090) (15,241) (66,021) (33,956)
----------- --------- ---------- ----------
CREDIT FROM INCOME TAXES........................ 0 0 13 9,826
----------- ---------- ---------- ----------
Net loss.................................. f (14,090) f (15,241) f (66,008) f (24,130)
=========== =========== ========== ==========
</TABLE>
F-17
<PAGE>
<TABLE>
<CAPTION>
A2000 HOLDING N.V.
CONSOLIDATED CASH FLOW STATEMENT
(Currency - Thousands of Dutch Guilders)
March 31, March 31,
1999 1998
Unaudited Unaudited 1998 1997
------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss f (14,090) f (15,241) f (66,008) f (24,130)
---------- ---------- ---------- ----------
Depreciation of tangible fixed assets 11,661 13,660 63,193 39,739
Amortization of intangible fixed assets 2,794 2,404 10,061 9,739
In (decrease) provisions (29) 1,384 1,291 (10,425)
---------- ---------- ---------- ----------
14,426 17,448 74,545 39,053
---------- ---------- ---------- ----------
Decrease (increase) inventory 1,472 (16,182) (3,456) (3,772)
Decrease (increase) in receivables (6,505) 3,729 1,453 (5,744)
Increase in short-term liabilities
other than loans 3,330 8,482 874 27,897
---------- ---------- ---------- ----------
Change in working capital (1,703) (3,971) (1,129) 18,381
---------- ---------- ---------- ----------
Net cash from operating activities (1,367) (1,764) 7,408 33,304
---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to tangible fixed assets, net (19,432) (17,778) (110,524) (118,498)
Additions to intangible fixed assets - - (116) (1,326)
---------- ---------- ---------- ----------
Net cash used in investing activities (19,432) (17,778) (110,640) (119,824)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term loans - 12,000 32,000 60,000
Proceeds from short-term loans 20,679 - 64,733 -
---------- ---------- ---------- ----------
Net cash from financing activities 20,679 12,000 96,733 60,000
---------- ---------- ---------- ----------
Net decrease in cash f (120) f (7,542) f (6,499) f (26,520)
========== ========== ========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest , net f (6,281) f (2,235) f (23,635) f (18,701)
</TABLE>
F-18
<PAGE>
A2000 HOLDING N.V.
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Currency - Thousands of Dutch guilders)
1. General
-------
(a) Activities
----------
A2000 Holding N.V. ("the Company"), having its legal seat in
Eindhoven, is engaged in the holding of subsidiaries. The subsidiaries
are engaged in the construction, maintenance and exploitation of cable
related infrastructure with the purpose of passing on radio- and
television signals and to provide data and telecommunication services.
(b) Shareholders
------------
The company is equally owned by the following shareholders (50%):
- MediaOne International B.V. ("MediaOne"), formerly US West
International B.V., legally seated in Eindhoven
- United Telekabel Holding N.V. ("UTH"), legally seated in
Amsterdam
During 1998, the former direct shareholder United Pan-European
Communications B.V. ("UPC"), contributed its share in the company into
UTH, which is held for 51% by UPC at December 31, 1998.
(c) Parent companies related transactions
-------------------------------------
The company is charged by the parent companies for services supplied
and interest. In 1998 UPC charged an amount of f2,187 for interest,
salaries and related costs for employees seconded to A2000. The
charges from MediaOne in 1998 relate to interest and salaries of
f2,206.
(d) Comparative financial statements
--------------------------------
Certain reclassifications have been made to the December 31, 1977
financial statements for comparative purposes.
F-19
<PAGE>
(e) Interim Financial Statements
----------------------------
The interim financial statements as of March 31, 1999 and for the
three months ended March 31, 1998 and 1999 are unaudited. In
management's opinion, the unaudited financial statements as of March
31, 1999 and for the three months ended March 31, 1998 and 1999
include all adjustments necessary for fair presentation. Such
adjustments were of a normal recurring nature.
(f) Use of estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles require management to make estimates
and assumptions that effect amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results may differ from the
estimates.
2. Principles of Consolidation
---------------------------
All significant intercompany balances and transactions are eliminated in
consolidation. The consolidated financial statements include the financial
statements of the company and the following wholly owned subsidiaries, all
having their legal seat in Amsterdam:
- Kabeltelevisie Amsterdam B.V. ("KTA")
- A2000 Hilversum B.V.
3. Accounting Principles
---------------------
(a) General
-------
Assets and liabilities are stated at face value unless indicated
otherwise.
Assets and liabilities denominated in foreign currencies are
translated into Dutch guilders at the yearend exchange rate.
Transactions in foreign currencies are translated at the exchange rate
in effect at the time of the transaction. The exchange results are
recorded under financial income and expense in the statement of
income.
(b) Intangible fixed assets
-----------------------
Costs in connection with the financing are capitalized and amortized
over the duration of the underlying loan.
Costs in connection with the launch of new services are capitalized
and amortized on a straight-line basis over a period of 5 years.
F-20
<PAGE>
The intangible fixed assets originating from the acquisition of the
Purmerend, Ouderkerk aan de Amstel and Hilversum networks represent
the difference of the acquisition cost and the purchase price of the
tangible fixed assets at the time of the acquisition.
The intangible fixed assets originating from the acquisition of KTA
and the cable networks of Zaanstad and Landsmeer represent the
difference of the net asset value and the acquisition cost of the
investment at the time of the acquisition. The net asset value is
determined by taking the fair value of the tangible fixed assets on
the acquisition date into account.
The intangible fixed assets are amortized on a straight-line basis
over a period of 15 years.
(c) Tangible fixed assets
---------------------
Tangible fixed assets are stated at the acquisition cost, less
straight-line depreciation. The depreciation is calculated on the
basis of acquisition cost less residual value and the estimated useful
life of the related asset. The estimated useful lives are:
Buildings 25 years
Networks 8 - 15 years
Other tangible fixed assets 3 - 10 years
The acquisition cost of the tangible fixed assets of newly acquired
subsidiaries is based on the fair value of these tangible fixed assets
at the time of acquisition.
(d) Financial Fixed Assets
----------------------
The investments in other subsidiaries are stated at acquisition cost
or, in case of permanent impairment of the value of the subsidiaries,
at lower equity value as determined on the basis of the financial
statements of the subsidiary.
Receivables are stated at face value, unless indicated otherwise.
(e) Inventory
---------
Inventory is stated at the lower of (first-in, first-out) cost or
market value.
(f) Accounts receivable
-------------------
Accounts receivable are stated at face value, less an allowance for
possible uncollectable accounts.
(g) Securities
----------
Securities are stated at the lower of purchase price or market value.
F-21
<PAGE>
(h) Provisions
----------
Provisions represent the present value of personnel reorganization
commitments (calculated at an interest rate of 7%) and a provision for
voluntary early retirement of certain employees of the company. The
voluntary early retirement provision is calculated by an independent
actuary, using an interest rate of 4%.
(i) Recognition of income
---------------------
Net sales are determined on the basis of the value (excluding taxes)
of the subscriptions, usage, signal deliveries and program suppliers
invoiced.
Other revenues and expenses are recorded in the period in which they
originate.
(j) Recoverability of Tangible and Intangible Assets
------------------------------------------------
The company evaluates the carrying value of all tangible and
intangible fixed assets whenever events or circumstances indicate the
carrying value of assets may exceed their recoverable amounts. An
impairment loss is recognized when the estimated future cash flows
(undiscounted and without interest) expected to result from the use of
an asset are less than the carrying amount of the asset. Measurement
of an impairment loss is based on fair value of the asset computed
using discounted cash flows if the asset is expected to be held and
used. Measurement of an impairment loss for an asset held for sale
would be based on fair market value less estimated costs to sell.
(k) Concentration of credit risk
----------------------------
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade
receivables. Concentrations of credit risk with respect to trade
receivables are limited due to the Company's large number of customers
and their dispersion across many different countries in Europe.
(l) New Accounting Principles
-------------------------
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS 131"), which requires
that a public business enterprise report certain financial and
descriptive information about its reportable segments. The Company
adopted SFAS 131 for the year ended December 31, 1998 and March 31,
1999.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP
98-1"), which provides guidance on accounting for the costs of
computer software developed or obtained for internal use. SOP 98-1
identifies the characteristics of internal-use software and provides
examples to assist in determining when computer software is for
internal use. SOP 98-1 is effective for financial statements for
F-22
<PAGE>
fiscal years beginning after December 15, 1998, for projects in
progress and prospectively, with earlier application encouraged. The
company has adopted the principles of this statement in the
accompanying financial statements.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which requires that
companies recognize all derivatives as either assets or liabilities in
the balance sheet at fair value. Under SFAS 133, accounting for
changes in fair value of a derivative depends on its intended use and
designation. SFAS 133 is effective for fiscal years beginning after
June 15, 1999. The Company is currently assessing the effect of this
new standard.
4. Intangible Fixed Assets
-----------------------
The movement in intangible fixed assets is as follows:
<TABLE>
<CAPTION>
Book Value Additions Amortization Book Value
January 1, 1998 December 31
---------------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Goodwill and licenses f 118,380 f - f (9,284) f 109,096
Financing Cost 3,764 65 (462) 3,367
Start-up Cost 1,163 51 (315) 899
----------- ----------- ---------- -----------
f 123,307 f 116 f (10,061) f 113,362
=========== =========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
Book Value Additions Amortization Book Value
December 31, March 31, 1999
1998 Unaudited Unaudited Unaudited
---------------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
Goodwill and licenses f 109,096 f - f (2,321) f 106,775
Financing Cost 3,367 - (132) 3,235
Start-up Cost 899 - (341) 558
----------- ----------- ---------- -----------
f 113,362 f - f (2,794) f 110,568
=========== =========== ========== ===========
</TABLE>
The composition of intangible fixed assets as of December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
Book Value
Historical Accumulated December 31,
Cost Amortization 1997
---------- ------------ -----------
<S> <C> <C> <C>
Goodwill f 139,245 f (20,865) f 118,380
Financing Cost 4,588 (824) 3,764
Start-up Cost 1,163 - 1,163
---------- ---------- ----------
f 144,996 f (21,689) f 123,307
========== ========== ==========
</TABLE>
F-23
<PAGE>
The composition of intangible fixed assets as of December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
Book Value
Historical Accumulated December 31,
Cost Amortization 1998
---------- ------------ -----------
<S> <C> <C> <C>
Goodwill f 139,245 f (30,149) f 109,096
Financing Cost 4,653 (1,286) 3,367
Start-up Cost 1,214 (315) 899
---------- ---------- ----------
f 145,112 f (31,750) f 113,362
========== =========== ==========
</TABLE>
The composition of intangible fixed assets as of March 31, 1999 is as
follows:
<TABLE>
<CAPTION>
Historical Accumulated Book Value
Cost Amortization March 31, 1999
Unaudited Unaudited Unaudited
---------- ------------ --------------
<S> <C> <C> <C>
Goodwill f 139,245 f (32,470) f 106,775
Financing Cost 4,653 (1,418) 3,235
Start-up Cost 1,214 (656) 558
---------- ---------- ----------
f 145,112 f (34,544) f 110,568
========== ========== ==========
</TABLE>
5. Tangible Fixed Assets
---------------------
The movement in tangible fixed assets is as follows:
<TABLE>
<CAPTION>
Book Value Reclassifi- Additions Movement
January 1, 1998 cations in projects
--------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Land and buildings f 29,614 f 1,020 f 8,918 f -
Networks 253,451 622 99,710 -
Other tangible
fixed assets 9,397 (1,642) 4,290 -
Tangible fixed assets
under construction 16,830 - - 1,328
---------- --------- ---------- ----------
f 309,292 f - f 112,918 f 1,328
========== ========= ========== =========
</TABLE>
<TABLE>
Retirements Deprecia- Book Value
tion December 31
----------- ------------ -----------
<S> <C> <C> <C>
Land and buildings f (3,653) f (2,220) f 33,679
Networks - (57,099) 296,684
Other tangible
fixed assets (69) (3,874) 8,102
Tangible fixed assets
under construction - - 18,158
----------- ---------- -----------
f (3,722) f (63,193) f 356,623
=========== ========== ===========
</TABLE>
F-24
<PAGE>
<TABLE>
<CAPTION>
Book Value Reclassifi- Additions Movement
December 31, cations in projects
1998 Unaudited Unaudited Unaudited
---------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Land and buildings f 33,679 f - f 2,023 f -
Networks 296,684 - 12,236 -
Other tangible
fixed assets 8,102 - 1,657 -
Tangible fixed assets
under construction 18,158 - - 4,018
----------- ---------- ---------- ----------
f 356,623 f - f 15,916 f 4,018
=========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Retirements Deprecia- Book Value
tion March 31, 1999
Unaudited Unaudited Unaudited
----------- ----------- ---------------
<S> <C> <C> <C>
Land and buildings f (502) f (391) f 34,809
Networks - (9,955) 298,965
Other tangible
fixed assets - (1,315) 8,444
Tangible fixed assets
under construction - - 22,176
---------- ----------- -----------
f (502) f (11,661) f 364,394
========== =========== ===========
</TABLE>
The composition of tangible fixed assets as of December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
Book Value
Historical Accumulated December 31,
Cost Amortization 1997
---------- ------------ -----------
<S> <C> <C> <C>
Land and buildings f 33,095 f (3,481) f 29,614
Networks 325,296 (71,845) 253,451
Other tangible fixed assets 18,118 (8,721) 9,397
Tangible fixed assets
under construction 16,830 - 16,830
---------- ----------- ----------
f 393,339 f (84,047) f 309,292
========== =========== ==========
</TABLE>
F-25
<PAGE>
The composition of tangible fixed assets as of December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
Book Value
Historical Accumulated December 31,
Cost Amortization 1998
---------- ------------ -----------
<S> <C> <C> <C>
Land and buildings f 37,504 f (3,825) f 33,679
Networks 423,853 (127,169) 296,684
Other tangible fixed assets 21,866 (13,764) 8,102
Tangible fixed assets
under construction 18,158 - 18,158
---------- ----------- ----------
f 501,381 f (144,758) f 356,623
========== =========== ==========
</TABLE>
The composition of tangible fixed assets as of March 31, 1999 is as
follows:
<TABLE>
<CAPTION>
Historical Accumulated Book Value
Cost Depreciation March 31, 1999
Unaudited Unaudited Unaudited
---------- ------------ --------------
<S> <C> <C> <C>
Land and buildings f 38,123 f (3,314) f 34,809
Networks 436,089 (137,124) 298,965
Other tangible fixed assets 23,523 (15,079) 8,444
Tangible fixed assets
under construction 22,176 - 22,176
---------- ---------- ----------
f 519,911 f (155,517) f 364,394
========== ========== ==========
</TABLE>
6. Financial Fixed Assets
----------------------
The composition of financial fixed assets is as follows:
<TABLE>
<CAPTION>
Unaudited
December 31, March 31,
1998 1999
------------ ----------
<S> <C> <C>
Investment in affiliated company f 65 f 65
Subordinated loan to affiliated company 260 260
----------- ----------
f 325 f 325
=========== ==========
</TABLE>
On August 15, 1996 the company acquired 25% in the share capital of Media
Groep West B.V., having its legal seat in Amsterdam, for an amount of f65.
At December 31, 1998 the equity value of the company's interest in Media
Groep West B.V. is lower than its acquisition cost. However, in the opinion
of management the value of the investment is not permanently impaired and
therefore the carrying value of the company's interest in Media Groep West
B.V. has not been written down to the lower equity value.
F-26
<PAGE>
According to the provisions of the Dutch Civil Code the equity value and
net result for the year of Media Groep West B.V. are not disclosed.
The subordinated loan granted bears an interest of 7% per year and is
redeemable on August 15, 2006.
7. Accounts Receivable
-------------------
Accounts receivable as presented under current assets mature within one
year. As of December 31, 1998 the amount trade receivable is after
deduction of an allowance for doubtful amounts of f11,081 (1997 - f10,042).
8. Securities
----------
This relates to certificates in Stichting Vecaitex, having its legal seat
in Dordrecht and to certificates in the Amsterdam Arena in Amsterdam, The
Netherlands.
9. Cash
----
No restrictions on usage of cash exist. Cash has original maturities of
less than three months.
10. Shareholders' Equity
--------------------
The movement in shareholders' equity is as follows:
<TABLE>
<CAPTION>
Issued and Additional
Paid-in Paid-in
Capital Capital
---------- -----------
<S> <C> <C>
Balance January 1, 1997 f 200 f 26,000
Allocation of 1996 net loss - -
Net loss - -
---------- ----------
Balance January 1, 1998 200 26,000
Allocation of 1997 net loss - -
Net loss - -
---------- ----------
Balance December 31, 1998 200 26,000
Allocation of 1998 net loss (Unaudited) - -
Net loss (Unaudited) - -
---------- ----------
Balance March 31, 1999 (Unaudited) f 200 f 26,000
========== ==========
</TABLE>
F-27
<PAGE>
<TABLE>
<CAPTION>
Other Net Loss Total
reserves
(deficit)
----------- ----------- -----------
<S> <C> <C> <C>
Balance January 1, 1997 f (7,623) f (14,687) f 3,890
Allocation of 1996 net loss (14,687) 14,687 -
Net loss - (24,130) (24,130)
----------- ----------- ----------
Balance January 1, 1998 (22,310) (24,130) (20,240)
Allocation of 1997 net loss (24,130) 24,130 -
Net loss - (66,008) (66,008)
----------- ----------- ----------
Balance December 31, 1998 (46,440) (66,008) (86,248)
Allocation of 1998 loss (Unaudited) (66,008) 66,008 -
Net loss (Unaudited) - (14,090) (14,090)
----------- ----------- ----------
Balance March 31, 1999 (Unaudited) f (112,448) f (14,090) f (100,338)
=========== =========== ==========
</TABLE>
11. Provisions
----------
The movement in provisions is as follows:
<TABLE>
<CAPTION>
Unaudited
March 31,
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Balance January 1 f 1,610 f 319 f 943
Addition - 1,414 -
Release (29) (123) (624)
----------- ----------- ----------
Balance f 1,581 f 1,610 f 319
============ =========== ==========
</TABLE>
12. Long-Term Loans
---------------
The company and its subsidiary KTA entered into a long-term loan agreement
with ABN AMRO BANK N.V. on February 16, 1996. The total facility amounts to
f465,000. KTA's facility amounts to f375,000, consisting of f250,000
long-term debt, f75,000 `construction loan facility' and f50,000 `working
capital facility'. The company's facility amounts to f90,000. The interest
rate is variable and based on Aibor + 0.75%.
A2000 Hilversum B.V. entered into a long-term loan agreement with ABN AMRO
BANK N.V. on October 16, 1996. The total facility amounts to f45,000,
consisting of f26,000 long-term loan, f17,000 `construction loan facility'
and f2,000 `working capital facility'. The interest is variable and based
on Aibor + 0.7%.
At March 31, 1999 these facilities have been used for an amount of
approximately f502,318 (1998 - f506,183).
F-28
<PAGE>
Long-term liabilities at December 31, 1998 will be payable as follows:
Year Loans
---------- -----------
1999 f -
2000 27,000
2001 52,500
2002 54,500
2003 100,000
thereafter 224,000
----------
f 458,000
==========
The Company's facilities are secured by mortgages and pledges, including
pledges on KTA's and A2000 Hilversum's shares and their assets. The loan
agreement restricts the borrowers from incurring additional indebtedness,
subject to certain exceptions.
13. Short-term liabilities to shareholders
--------------------------------------
The shareholders granted to the company a subordinated loan amounting to a
maximum of USD30,000. At December 31, 1998, the facility has been used for
an amount of USD8,750. The loan will be repaid to the shareholders after
completion of the refinancing. The interest rate is variable and based on
Libor +1%.
14. Income taxes
------------
The company and its Dutch fully owned subsidiaries constitute a fiscal
entity as of January 1, 1996. The tax loss carry-forwards of the fiscal
entity are available for an unlimited period of time to reduce future tax
liabilities. The company and its Dutch fully owned subsidiaries have pre
fiscal unity tax loss carry-forwards that are available for an unlimited
period of time to reduce future tax liabilities. Currently, the actual tax
loss carry-forward is not known, given certain discussions with the tax
authorities. Management is convinced that the outcome will be favorable for
the Company. Given the Company's tax loss carry-forward position the
provision for deferred taxes has been released in 1997 to the statement of
income.
The difference between the income tax benefit and the actual income tax
benefit are as follows:
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
"Expected" income tax benefit at the
Dutch statutory rate of 35% f (23,103) f (11,885)
Tax effect of permanent and other differences:
Change in valuation allowance 18,038 6,925
Non-deductible expenses 5,065 4,960
Release deferred tax 0 (9,500)
Other (13) (326)
------------ -----------
Total income tax benefit f (13) f (9,826)
============ ===========
</TABLE>
F-29
<PAGE>
The net deferred tax liability of A2000 consists of the following:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Deferred tax assets:
Tax net operating loss carryforward f 37,810 f 19,772
Valuation allowance (29,498) (10,272)
----------- -----------
Deferred tax assets, net of valuation
allowance 8,312 9,500
----------- -----------
Deferred tax liabilities:
Property, plant and equipment (8,312) (9,500)
----------- -----------
Deferred tax liabilities, net f - f -
=========== ============
</TABLE>
15. Commitments
-----------
(a) Rent and operating leases
-------------------------
Long-term commitments in connection with rent and lease agreements
amount to approximately f4,360 and terminate in 2007. The terms of the
agreements call for future minimum payments as of December 31, 1998 as
follows:
1999 f 1,546
2000 1,352
2001 621
2002 178
thereafter 663
----------
f 4,360
==========
(b) Purchase commitments
--------------------
Purchase commitments outstanding as of December 31, 1998 amount to
approximately f3,200.
(c) Commitments to broadcasting companies
-------------------------------------
At the sale of the shares of KTA, the Municipality of Amsterdam
stipulated a yearly compensation of f3,700 payable by KTA to certain
television- and radio broadcasters. This amount is subject to yearly
indexation based on the price index of consumption. This commitment
will expire in 2005.
(d) Interest hedges
---------------
In April 1997, the Company entered into an interest cap at 5.68% which
matures in May 2002. The principal amount is f90,000. Furthermore, in
1997 the Company bought an interest floor at 5.68%, which matures in
May 2002. The principal amount is f45,000.
F-30
<PAGE>
A2000 HOLDING N.V.
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------------------
(Currency - Thousands of Dutch guilders)
As per May 18, 1998, the Company entered into an interest swap, with a
principal amount of f 250,000, at 5.72% interest per annum, which
matures at February 18, 2002. Since June 18, 1998 the company holds an
interest swap, fixing a principal amount of f 43,000 at 5.50% per
annum, which matures at December 31, 2003.
The fair values of the financial instruments are based on market
prices for the same and similar issues. The fair value of the
financial instruments approximates the book value.
16. Segment and Geographic Information
----------------------------------
On December 31, 1998 the Company adopted Statement of Financial Accounting
Standards No. 131 "Disclosure about Segments of an Enterprise and Related
Information" ("SFAS 131"). The new rules establish revised standard for
public companies relating to the reporting of financial information about
operating segments. The adoption of SFAS 131 did not have a material effect
on the Company's consolidated financial statements but did affect the
Company's segment information disclosure.
Revenues are generated in The Netherlands. During 1997, the Company
introduced internet/date and telephony in several of its systems.
The key operating performance criteria used in this evaluation includes
revenue growth, operating income before depreciation and amortization
("Adjusted EBITDA"), and capital expenditures. The Company does not view
segment results below Adjusted EBITDA, therefore net interest expense,
foreign exchange gain (loss), share in results of affiliated companies,
minority interests in subsidiaries and income tax expense are not broken
out by segment below.
A summary of the segment information is as follows:
<TABLE>
<CAPTION>
Revenues
----------------------------------------------------------
March 31, March 31,
1999 1998
Unaudited Unaudited 1998 1997
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Cable f 26,742 f 27,769 f 106,160 f 96,406
Telephony 6,269 1,245 12,898 1,115
Internet 2,790 277 4,393 33
Other 178 137 716 3,123
------------ ----------- ----------- ------------
Total f 35,979 f 29,428 f 124,167 f 100,677
============ =========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
Adjusted EBITDA
----------------------------------------------------------
March 31, March 31,
1999 1998
Unaudited Unaudited 1998 1997
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cable f 14,614 f 10,832 f 45,213 f 28,180
Telephony (2,850) (3,505) (12,137) 583
Internet (1,570) (1,302) (3,312) (79)
Other 178 137 716 3,123
----------- ---------- ----------- -----------
Total f 10,372 f 6,162 f 30,480 f 31,807
=========== ========== =========== ===========
</TABLE>
F-31
<PAGE>
Following is a reconciliation of Adjusted EBITDA to A2000's net loss before
income taxes:
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
Unaudited Unaudited 1998 1997
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Adjusted EBITDA f 10,372 f 6,162 f 30,480 f 31,807
Depreciation and amortization (14,455) (16,064) (73,254) (49,478)
------------ ----------- ----------- -----------
Operating result (4,083) (9,902) (42,773) (17,671)
Interest income 103 355 674 523
Interest expense (7,128) (5,221) (25,021) (16,444)
Foreign exchange (loss) gain and other expense (2,982) (473) 1,100 (364)
------------ ----------- ----------- -----------
Net loss before income taxes f (14,090) f (15,241) f (66,021) f (33,956)
============ =========== =========== ===========
</TABLE>
17. Personnel
---------
<TABLE>
<CAPTION>
Labor cost is specified as follows: 1998 1997
------------ -----------
<S> <C> <C>
Salaries and wages f 23,900 f 19,561
Pension cost and early retirement 2,308 691
Other social security contributions 3,082 953
------------ -----------
f 29,290 f 21,205
============ ===========
</TABLE>
The average number of (full-time) personnel during the year was 286 (1997 -
247) employed in the following functional areas:
<TABLE>
<CAPTION>
Average Average
1998 1997
------- -------
<S> <C> <C>
Management 2 2
Technical personnel 103 89
Supportive and administrative personnel 95 99
Commercial personnel 86 57
--- ---
286 247
=== ===
</TABLE>
18. Depreciation/amortization of (in)tangible fixed assets
------------------------------------------------------
The depreciation/amortization of (in)tangible fixed assets is specified as
follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Depreciation tangible fixed assets f 63,193 f 39,739
Amortization intangible fixed assets 10,061 9,739
---------- ----------
f 73,254 f 49,478
========== ==========
</TABLE>
F-32
<PAGE>
19. Financial Income and Expense
----------------------------
The financial income and expense are specified as follows:
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
Unaudited Unaudited 1998 1997
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Interest income -
Affiliated company f 14 f - f 18 f 27
Other 89 355 656 496
---------- --------- --------- ----------
f 103 f 355 f 674 f 523
========== ========= ========= ==========
Interest expense -
Shareholders f (487) f - f (73) f -
Other (6,641) (5,221) (24,948) (16,444)
--------- --------- --------- ----------
f (7,128) f (5,221) f (25,021) f (16,444)
========= ========= ========= ==========
</TABLE>
20. Financial situation
-------------------
As a result of the investments in the new infrastructure and the start up
of new services the company has a negative cash flow and a negative equity.
Based on this situation the shareholders provided the company an USD30,000
loan facility of which USD8,750 was drawn on December 31, 1998. Based on
this situation and the outcome of the negotiations of the contract with the
municipality of Amsterdam and others and the launch, on a large scale, of
digital set top boxes, the Company has further reassessed its financial
needs on the long term. Accordingly, the Company has requested several
banks to put in a bridge loan before July 1, 1999, in order to allow the
Company time to create a definitive finance structure while maintaining
normal activities and finishing the upgrade of the network.
One of the shareholders has confirmed that they will provide adequate
funding to the Company and its subsidiaries. When required they will
contribute the necessary equity and/or funding and intend to continue
operating the Company and its subsidiaries as a going concern, for the 18
months period subsequent to December 31, 1998.
21. US GAAP
-------
The accounting policies followed in preparation for the consolidated
financial statements differ in some respect to the generally accepted
accounting principles in the United States.
In 1998 and 1997 there were no material differences. The 1999 difference,
which has a material effect on net loss, shareholders' equity and total
assets results from the following:
The American Institute of Certified Public Accountants recently issued
Statement of Position 98-5, "Reporting on the Costs of start-up Activities
("SOP 98-5"), which is required to be adopted by affected companies for
fiscal years beginning after December 15, 1998. SOP 98-5 defines start-up
and organization costs existing as of January 1, 1999 must be written-off
and accounted for as a cumulative effect of an accounting change.
F-33
<PAGE>
The calculation of net loss, shareholders' equity and total assets
substantially in accordance with US GAAP, is as follows:
<TABLE>
<CAPTION>
Unaudited
3 months
ended
March 31,
1999
------------
<S> <C>
Net loss under Dutch GAAP f (14,090)
US GAAP adjustment:
(Retroactive) expensing of start-up cost
and relating amortization effect (558)
------------
Net loss under US GAAP f (14,648)
============
</TABLE>
<TABLE>
<CAPTION>
Unaudited
3 months
ended
March 31,
1999
-------------
<S> <C>
Total shareholders' equity under
Dutch GAAP f (100,338)
US GAAP adjustment:
(Retroactive) expensing of start-up cost
and relating amortization effect (558)
-------------
Total shareholders' equity under US GAAP f (100,896)
=============
Total assets under Dutch GAAP f 518,278
US GAAP adjustment:
(Retroactive) expensing of start-up cost
and relating amortization effect (558)
-------------
Total assets under US GAAP f 517,720
=============
</TABLE>
F-34
<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-35
<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-36
<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-37
<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-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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-44
<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-45
<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-46
<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-47
<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-48
<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-49
<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-50
<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-51
<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-52
<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-53
<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-54
<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-55
<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-56
<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-57
<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-58
<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-59
<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-60
<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-61
<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-62
<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-63
<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-64
<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-65
<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-66
<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-67
<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-68
<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-69
<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-70
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@ 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-71
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@ 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-72
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@ 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-73
<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-74
<PAGE>
@ ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
(unaudited)
(in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 128,002 $ 13,055
Accounts receivable, net of allowance for doubtful accounts
of $1,193,000 in 1999 and $1,095,000 in 1998 6,396 7,408
Programming and broadcast rights 12,095 9,030
Other current assets 22,250 21,063
--------- ---------
Total current assets 168,743 50,556
--------- ---------
Property, plant and equipment:
Cable television systems assets 152,924 175,053
D-DTH equipment 71,977 68,419
Construction in progress 4,394 2,739
Vehicles 2,323 2,792
Other 17,637 16,119
--------- ---------
249,255 265,122
Less accumulated depreciation (53,472) (52,068)
--------- ---------
Net property, plant and equipment 195,783 213,054
Inventories for construction 7,906 8,869
Intangibles, net 36,745 43,652
Investments in affiliated companies 21,879 19,956
Other assets 16,484 12,287
--------- ---------
Total assets $ 447,540 $ 348,374
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-75
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@ ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY)/EQUITY
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
(unaudited)
(in thousands)
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 33,925 $ 40,464
Accrued interest 5,349 2,140
Deferred revenue 5,011 4,366
Income taxes payable 3,794 3,794
Current portion of notes payable 6,500 6,500
--------- ---------
Total current liabilities 54,579 57,264
--------- ---------
Notes payable (notes 4 and 5) 367,169 257,454
--------- ---------
Total liabilities 421,748 314,718
--------- ---------
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 6) 29,603 --
Commitments and contingencies (note 9)
Stockholders' (deficiency)/equity:
Common stock, $.01 par value; 70,000,000 shares authorized,
shares issued and outstanding 33,406,000 in 1999
and 33,310,000 in 1998 334 333
Paid-in capital (notes 4 and 6) 264,291 237,954
Accumulated other comprehensive loss (29,646) (467)
Accumulated deficit (238,790) (204,164)
--------- ---------
Total stockholders' (deficiency)/equity (3,811) 33,656
--------- ---------
Total liabilities and stockholders' (deficiency)/equity $ 447,540 $ 348,374
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-76
<PAGE>
@ ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31,
-------------------------------------
1999 1998
-------- --------
(in thousands, except per share data)
<S> <C> <C>
Revenues $ 18,799 $ 12,686
Operating expenses:
Direct operating expenses 18,017 8,648
Selling, general and administrative expenses 15,620 13,447
Depreciation and amortization 9,405 4,949
Total operating expenses 43,042 27,044
-------- --------
Operating loss (24,243) (14,358)
Interest and investment income 1,494 850
Interest expense (11,845) (3,649)
Equity in profits of affiliated companies 1,025 270
Foreign exchange (loss)/gain, net (1,038) 73
-------- --------
Loss before income taxes and
minority interest (34,607) (16,814)
Income tax expense (19) (333)
Minority interest -- (149)
-------- --------
Net loss (34,626) (17,296)
Accretion of redeemable preferred stock (791) --
-------- --------
Net loss applicable to holders of common stock $(35,417) $(17,296)
======== ========
Basic and diluted loss per common share $ (1.06) $ (0.52)
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-77
<PAGE>
@ ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net loss $(34,626) $(17,296)
Other comprehensive (loss)/income:
Translation adjustment (29,179) 2,549
-------- --------
Comprehensive loss $(63,805) $(14,747)
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
F-78
<PAGE>
@ ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1999 1998
---------- ----------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (34,626) $ (17,296)
Adjustments to reconcile net loss to
net cash used in operating activities:
Minority interest -- 149
Depreciation and amortization 9,405 4,949
Amortizaion of notes payable discount and issue costs 8,128 --
Equity in profits of affiliated companies (1,025) --
Other 1,006 1,338
Changes in operating assets and liabilities:
Accounts receivable 1,012 (911)
Other current assets (1,187) (5,006)
Programming and broadcast rights (3,065) --
Other assets -- (2,937)
Accounts payable (5,292) 5,856
Income taxes payable -- (377)
Accrued interest 3,209 3,317
Deferred revenue 1,195 (88)
Other current liabilities -- (826)
--------- ---------
Net cash used in operating activities (21,240) (11,832)
--------- ---------
Cash flows from investing activities:
Construction and purchase of property, plant and equipment (15,517) (23,085)
Issuance of notes receivable from affiliates -- 779
Other investments (1,753) (2,248)
Purchase of intangibles (196) (230)
Purchase of subsidiaries, net of cash received -- (10,523)
--------- ---------
Net cash used in investing activities (17,466) (35,307)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of notes and warrants 109,755 --
Proceeds from issuance of preferred stock and warrants 48,295 --
Costs to obtain loans (4,397) --
Repayment of notes payable -- 37
--------- ---------
Net cash provided by financing activities 153,653 37
--------- ---------
Net increase in cash and cash equivalents 114,947 (47,102)
Cash and cash equivalents at beginning of period 13,055 105,691
--------- ---------
Cash and cash equivalents at end of period $ 128,002 $ 58,589
========= =========
Supplemental cash flow information:
Cash paid for interest $ 142 $ 25
========= =========
Cash paid for income taxes $ 37 $ 176
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-79
<PAGE>
@ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 March 31, 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 loss per share has been computed by dividing net loss attributable to
common stockholders by the weighted average number of common shares outstanding
during the period. The effect of potential common shares (stock options and
warrants outstanding) on earnings per share, i.e. dilutive loss per share is the
same as basic loss per share.
The following table provides a reconciliation of the numerator and denominator
in the loss per share calculation:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
-------- --------
<S> <C> <C>
Net loss attributable to common stockholders (in thousands) $(35,417) $(17,296)
Basic weighted average number of common shares outstanding (in
thousands) 33,361 33,310
Loss per share-basic and diluted $ (1.06) $ (0.52)
</TABLE>
F-80
<PAGE>
@ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999 AND 1998
4. 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 $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 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 $3,875,000, 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 6 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.
F-81
<PAGE>
@ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999 AND 1998
5. 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.
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.
6. 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 its redemption value on January 30, 2010
discounted at approximately 17.6% to March 31, 1999. The Company periodically
accretes from paid-in capital an amount that will provide for the redemption
value at January 30, 2010.
F-82
<PAGE>
@ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999 AND 1998
7. ACQUISITIONS
On February 25, 1999, @ Entertainment purchased for approximately $1.8 million a
30% interest in Mazowiecki Klub Sportowy Sportowa Spolka Akcyjna, a joint stock
company which owns Hoop Pekaes Pruszkow, a Polish basketball team. In connection
with this purchase @ Entertainment has agreed to act as a sponsor for Hoop
Pekaes Pruszkow.
On March 31, 1999, a subsidiary of PCI purchased certain cable television system
assets for an aggregate consideration of approximately $509,000. The acquisition
was accounted for using the purchase method, whereby the purchase price was
allocated among the fixed assets acquired based on their fair value on the date
of acquisition and any excess to goodwill. The purchase price exceeded fair
value of the assets acquired by approximately $108,000.
8. STOCK OPTIONS
In February 1999 a number of the Company's employees were granted options to
purchase 750,000 shares of common stock at a price of $14.30 per share, vesting
ratably over a three-year period starting from January 1, 2000. The exercise
price of such options exceeded the quoted market price for the Company's shares
on the date of grant.
In February 1999, a former employee of the Company exercised his options to buy
96,000 shares of common stock at $1.99 per share.
9. COMMITMENTS AND CONTINGENCIES
PROGRAMMING, BROADCAST AND EXHIBITION RIGHTS
The Company has entered into long-term programming agreements and agreements for
the purchase of certain exhibition or broadcast rights with a number of third
party content providers for its digital direct-to-home ("D-DTH") and cable
systems. The agreements have terms which range from one to seven years and
require that the license fees be paid either at a fixed amount payable at the
time of execution or based upon a guaranteed minimum number of subscribers
connected to the system each month. At March 31, 1999, the Company had an
aggregate minimum commitment in relation to these agreements of approximately
$212,360,000 over the next seven years, approximating $37,547,000 for the
remainder of 1999, $35,231,000 in 2000, $38,816,000 in 2001, $41,703,000 in
2002, $30,753,000 in 2003 and $28,310,000 in 2004 and thereafter.
PURCHASE COMMITMENTS
As of March 31, 1999, the Company had an aggregate minimum commitment toward the
purchase of the Reception Systems from Philips of approximately $106,236,000 up
to 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 10 ARBITRATION RELATING TO TELEWIZYJNA KORPORACJA
PARTYCYPACYJNA)
10. ARBITRATION RELATING TO TELEWIZYJNA KORPORACJA PARTYCYPACYJNA
On April 17, 1998, the Company signed a binding letter of intent with Telewizyna
Korporacja Partycypacyjna ("TKP"), the parent company of Canal+ Polska, to form
a joint venture for the purpose of bringing together @ Entertainment's Wizja TV
programming service and the Canal+ Polska premium pay-television channel and
providing for the joint development and operation of a digital direct-to-home
television service in Poland.
The 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
F-83
<PAGE>
@ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 1999 AND 1998
executed, TKP would be obligated to pay the Company a total of $10,000,000
(including the $5,000,000 break-up fee). In the event that TKP fails to pay the
Company any of the above-referenced amounts owed to the Company, TKP's
shareholders are responsible for the payment of such amounts.
The Company has demanded monies from TKP as a result of the failure to execute
the definitive agreements by the Signature Date. While the Company was waiting
for the expiration of the 10-day period for payment of the break-up fee, TKP
initiated arbitration proceedings before a three-member arbitration panel in
Geneva, Switzerland. In their claim, TKP and its shareholders have alleged that
the Company breached its obligations to negotiate in good faith and to use its
best efforts to agree and execute the definitive agreements and claimed the
Company is obligated to pay TKP $10,000,000 pursuant to the letter of intent.
The Company has submitted its answer and counterclaims against TKP and its
shareholders. The Company does not believe that the outcome of the arbitration
proceedings will have a material adverse effect on the Company's business,
financial condition or results of operations.
11. SEGMENT INFORMATION
The Company and its subsidiaries operate in three business segments: (1) cable
television, (2) digital direct-to-home television and programming, and (3)
corporate. The Company accounts for intersegment sales and transfers as if the
sales or transfers were to third parties, that is, at current market prices. In
addition to other operating statistics, the Company measures its financial
performance by EBITDA, an acronym for earnings before interest, taxes,
depreciation and amortization. The Company defines EBITDA to be net loss
adjusted for interest and investment income, depreciation and amortization,
interest expense, foreign currency gains and losses, equity in losses of
affiliated companies, income taxes and minority interest. The items excluded
from EBITDA are significant components in understanding and assessing the
Company's financial performance. The Company believes that EBITDA and related
measures of cash flow from operating activities serve as important financial
indicators in measuring and comparing the operating performance of media
companies. EBITDA is not a U.S.GAAP measure of loss or cash flow from operations
and should not be considered as an alternative to cash flows from operations as
a measure of liquidity.
SELECTED SEGMENT DATA
(UNAUDITED IN THOUSANDS OF US DOLLARS)
<TABLE>
<CAPTION>
D-DTH AND
CABLE PROGRAMMING CORPORATE TOTAL
----- ----------- --------- -----
THREE MONTHS ENDED MARCH 31, 1999
<S> <C> <C> <C> <C>
Revenues from external customers $ 14,783 $ 4,016 $ -- $ 18,799
Intersegment revenues -- 5,132 -- 5,132
Operating loss (4,264) (18,318) (1,661) (24,243)
EBITDA 1,685 (14,865) (1,658) (14,838)
Segment total assets 169,711 139,389 138,440 447,540
THREE MONTHS ENDED MARCH 31, 1998
Revenues from external customers $ 12,093 $ 593 $ -- $ 12,686
Intersegment revenues -- -- -- --
Operating loss (936) (10,634) (2,788) (14,358)
EBITDA 3,899 (10,520) (2,788) (9,409)
Segment total assets 196,789 60,607 46,401 303,797
</TABLE>
F-84
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Kabel Plus, a. s. and subsidiaries:
We have audited the accompanying consolidated balance sheets of Kabel Plus,
a. s. (a Czech joint stock company) and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of operations, cash
flows and shareholders' equity for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Kabel Plus, a. s. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles in the United States.
ARTHUR ANDERSEN s.r.o.
Prague, Czech Republic
June 18, 1999
Except for Note 15, as to which the date is
June 22, 1999
F-85
<PAGE>
<TABLE>
<CAPTION>
KABEL PLUS, a. s. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997
(Czech Crowns - Kc in Thousands)
March 31, March 31,
1999 1998
(unaudited) 1998 (unaudited) 1997
----------- ---------- ----------- ----------
ASSETS
- ------
<S> <C> <C> <C> <C>
Current assets
Cash and cash equivalents.................................................... 75,406 84,139 135,091 258,428
Restricted cash.............................................................. 19,716 27,334 18,524 12,302
Accounts receivable, net of allowances for doubtful accounts
of 239,563; 231,787; 233,142 and 225,976, respectively.................... 101,009 95,537 106,353 89,723
Inventory.................................................................... 120,275 115,912 120,254 115,503
Prepaid expenses............................................................. 19,859 20,896 26,643 22,145
Other current assets......................................................... 5,500 7,414 1,893 4,410
---------- ---------- ---------- ----------
Total current assets......................................................... 341,765 351,232 408,758 502,511
---------- ---------- ---------- ----------
Intangible assets, net of accumulated amortization of
47,358; 44,253; 34,936 and 33,999, respectively........................... 17,487 18,407 15,493 9,591
Property, plant and equipment, net of accumulated depreciation
of 1,211,009; 1,127,078; 897,961 and 826,997, respectively................ 2,943,525 3,005,067 3,174,336 3,197,853
Investments in affiliates.................................................... 25,264 25,264 75,415 78,446
---------- ---------- ---------- ----------
Total assets.............................................................. 3,328,041 3,399,970 3,674,002 3,788,401
========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities
Accounts payable............................................................. 166,695 174,733 287,842 346,558
Accrued liabilities.......................................................... 46,719 71,719 78,101 55,092
Short-term bank debt......................................................... - - 564,534 562,811
---------- ---------- ---------- ----------
Total current liabilities.................................................... 213,414 246,452 930,477 964,461
---------- ---------- ---------- ----------
Long-term bank debt.......................................................... 804,841 784,686 - -
Due to parent................................................................ 909,159 879,153 3,087,604 2,977,222
---------- ---------- ---------- ----------
Total liabilities......................................................... 1,927,414 1,910,291 4,018,081 3,941,683
---------- ---------- ---------- ----------
Share capital consisting as of March 31, 1999 and December 31, 1998
of 15,052 shares per Kc 100 and 1,792 shares per Kc 1,000 and
as of March 31, 1998 and December 31, 1997 of 15,052 shares per
Kc 100 and 435 shares per Kc 1,000........................................ 3,297,200 3,297,200 1,940,200 1,940,200
Less: Receivables for subscriptions.......................................... (3,700) (3,700) (3,700) (3,700)
Share premium and reserve fund............................................... 3,045,439 3,045,439 1,894,371 1,894,371
Other cumulative comprehensive income (loss)................................. (5,525) (12,200) 850 (1,988)
Accumulated deficit.......................................................... (4,932,787) (4,837,060) (4,175,800) (3,982,165)
---------- ---------- ---------- ----------
Total liabilities and shareholders' equity................................ 3,328,041 3,399,970 3,674,002 3,788,401
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-86
<PAGE>
<TABLE>
<CAPTION>
KABEL PLUS, a. s. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(Czech Crowns - Kc in Thousands)
March 31, March 31,
1999 1998
(unaudited) 1998 (unaudited) 1997
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues............................................................. 222,296 770,382 196,745 641,721
------- --------- -------- ---------
Operating costs and expenses:
Operating......................................................... 62,380 243,069 58,974 485,787
Services from MediaOne............................................ 19,154 69,505 9,209 34,645
General and administrative........................................ 100,756 398,939 125,702 262,457
Depreciation and amortization..................................... 84,851 330,959 73,886 263,091
------- --------- -------- ---------
267,141 1,042,472 267,771 1,045,980
------- --------- -------- ---------
Loss from operations................................................. (44,845) (272,090) (71,026) (404,259)
------- --------- -------- ---------
Other (income) expense:
Interest expense on loan from parent.............................. 30,006 429,998 106,568 404,738
Other interest expense, net....................................... 19,446 55,324 19,030 67,528
Foreign exchange (gains) losses, net.............................. (2,449) 2,975 (6,216) (63,418)
Other............................................................. 3,879 95,040 4,267 66,896
------- --------- -------- ---------
Net loss before equity in net income from affiliates................. (95,727) (855,427) (194,675) (880,003)
Equity in net income (loss) from affiliates.......................... - 2,000 1,040 (1,383)
------- --------- -------- ---------
Net loss............................................................. (95,727) (853,427) (193,635) (881,386)
======= ========= ======== =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-87
<PAGE>
<TABLE>
<CAPTION>
KABEL PLUS, a. s. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(Czech Crowns - Kc in thousands)
March 31, March 31,
1999 1998
(unaudited) 1998 (unaudited) 1997
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss (95,727) (853,427) (193,635) (881,386)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization........................................... 84,851 330,959 73,886 263,091
Provision for doubtful accounts......................................... 7,776 5,811 7,166 67,044
Provision against financial investments................................. - 51,182 - -
Accrued interest and currency differences............................... 36,681 398,319 113,220 429,099
(Income) loss from sales of fixed assets................................ - (698) - 973
Equity in net income of affiliates...................................... - 2,000 - 1,382
Changes in working capital:
Increase in receivables, prepaid expenses and other assets, net...... (14,660) (13,789) (30,528) (100,325)
Decrease in accounts payable and accrued liabilities, net............ (42,883) (155,198) (35,707) (43,474)
------- -------- --------- ----------
Net cash (used in) operating activities................................. (23,962) (234,841) (65,598) (263,596)
Cash flows from investing activities:
Increase (decrease) in investments in affiliates............................ - - 3,031 (8,172)
Purchases of property, plant and equipment.................................. (22,389) (148,480) (56,271) (576,490)
Proceeds from sales of fixed assets......................................... - 2,189 - 49,931
------- -------- --------- ----------
Net cash (used in) investing activities................................ (22,389) (146,291) (53,240) (534,731)
Cash flows from financing activities:
Proceeds from parent........................................................ - - - 160,953
Amounts drawn down from banks............................................... 30,000 221,875 1,723 562,811
Payments of long-term debt.................................................. - - - (2,159,844)
Increase in share capital................................................... - - - 417,000
Increase in share premium and legal reserve fund............................ - - - 1,742,844
------- -------- -------- ----------
Net cash provided by financing activities............................... 30,000 221,875 1,723 723,764
------- -------- -------- ----------
Net increase in cash............................................................ (16,351) (159,257) (117,115) (74,563)
Cash at beginning of year ...................................................... 111,473 270,730 270,730 345,293
------- -------- --------- ----------
Cash at end of year............................................................. 95,122 111,473 153,615 270,730
======= ======== ========= ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-88
<PAGE>
<TABLE>
<CAPTION>
KABEL PLUS, a. s. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(Czech Crowns - Kc in Thousands)
Share
Receivables Premium Other Total
Share for and Reserve Accumulated Comprehensive Comprehensive
Capital Subscriptions Fund Deficit Income Income
---------- ------------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1996.............. 1,523,200 (3,700) 156,301 (3,100,779) - -
Net loss................................. - - - (881,386) - (881,386)
Cumulative translation adjustment........ - - - - (1,988) (1,988)
--------
Total Comprehensive income (loss)........ - - - - - (883,374)
========
Increase in share capital................ 417,000 - 1,742,844 - -
Other.................................... - - (4,774) - -
--------- ------ --------- ---------- -------
Balances, December 31, 1997.............. 1,940,200 (3,700) 1,894,371 (3,982,165) (1,988)
========= ====== ========= ========== =======
Net loss................................. - - - (853,427) - (853,427)
Cumulative translation adjustment........ - - - - (10,212) (10,212)
--------
Total Comprehensive income (loss)........ - - - - - (863,639)
========
Increase in share capital................ 1,357,000 - 1,149,600 - -
Other.................................... - - 1,468 (1,468) -
--------- ------ --------- ---------- -------
Balances, December 31, 1998.............. 3,297,200 (3,700) 3,045,439 (4,837,060) (12,200)
========= ====== ========= ========== =======
Balances, December 31, 1997.............. 1,940,200 (3,700) 1,894,371 (3,982,165) (1,988)
========= ====== ========= ========== =======
Net loss (unaudited)..................... - - - (193,635) - (193,635)
Cumulative translation adjustment
(unaudited).............................. - - - - 850 850
--------
Total comprehensive income (loss)
(unaudited).............................. - - - - - (192,785)
--------- ------ --------- ---------- ------- ========
Balances, March 31, 1998 (unaudited)..... 1,940,200 (3,700) 1,894,371 (4,175,800) (1,138)
========= ====== ========= ========== =======
Balances, December 31, 1998.............. 3,297,200 (3,700) 3,045,439 (4,837,060) (12,200)
========= ====== ========= ========== =======
Net loss (unaudited)..................... - - - (95,727) - (95,727)
Cumulative translation adjustment
(unaudited).............................. - - - - 6,675 6,675
--------
Total comprehensive income (loss)
(unaudited).............................. - - - - - (89,052)
--------- ------ --------- ---------- ------- ========
Balances, March 31, 1999 (unaudited)..... 3,297,200 (3,700) 3,045,439 (4,932,787) (5,525)
========= ====== ========= ========== =======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-89
<PAGE>
KABEL PLUS, a.s. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
as of December 31, 1998 and 1997
(Czech Crowns - Kc in Thousands)
1. ORGANIZATION AND OPERATIONS
Kabel Plus, a. s. (the Company) is a joint stock company incorporated in
1990 under the laws of the Czech Republic. The Company was formed for the
purpose of establishing, constructing and operating cable television and
telephony networks, developing programming for, and broadcasting of, Kabel
Plus film channel in the territory of the Czech and Slovak Republics.
The shareholders of the Company as of March 31, 1999 and December 31, 1998
are as follows:
MediaOne Czech Cable Company (MCCC) 97.09%
JUDr. Petr Siroky 2.88%
Other 0.03%
The following table summarizes the subsidiaries which make up the
consolidated group. The financial statements as of and for the three months
ended, March 31, 1999 and as of and for the year ended, December 31, 1998
of each subsidiary have been used in the preparation of these consolidated
financial statements. The structure of the consolidated group has not
changed since December 31, 1997.
Ownership
---------
Foreign subsidiaries
--------------------
Kabel Plus Banska Bystrica, a. s. 100%
Kabel Plus Bratislava, a. s. 100%
Czech subsidiaries
------------------
Kabel Plus Praha, a.s. 100%
Kabel Plus Jizni Morava, a.s. 100%
Kabel Plus Severni Morava, a.s. 100%
Kabel Plus Stredni Morava, a.s. 100%
Kabel Plus Vychodni Eechy, a.s. 100%
Kabel Plus Severni Eechy, a.s. 100%
Kabel Plus Ceske Budijovice, a.s. 100%
Kabel Plus Tel, a.s. 100%
Trade & Technology, a.s. 100%
Czech Link, s.r.o. 50%
Sat Net, s.r.o. 100%
F-90
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General Accounting Principles
-----------------------------
The consolidated financial statements have been prepared from records
originating and maintained in the Czech and Slovak Republics, the countries
in which the Company and its subsidiaries are incorporated. The accounting
principles followed in these records are those required by Czech and Slovak
law. The accompanying consolidated financial statements have been prepared
in conformity with generally accepted accounting principles in the United
States of America (U.S. GAAP). They have been prepared by restating the
Company's local consolidated financial statements, as of and for the three
months ended, March, 31, 1999 (unaudited) and 1998 (unaudited) and as of
and for the years ended, December 31, 1998 and 1997.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Company
and all of its wholly and majority owned subsidiaries except for Kabel Plus
Rodina, Triton and BESY Praha (see Note 4). These companies are not
included in the consolidation due to the fact that their financial
statements, taken individually and/or in total, are not material to the
consolidated group.
Companies owned more than 20% but less than 50% with the exception of Kabel
Plus Vychodne Slovensko a. s. (See Note 4) are accounted for using the
equity method.
All significant intercompany accounts and transactions have been
eliminated.
Estimates
---------
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses
during the year. Actual results could differ from those estimates.
Fair Value of Financial Instruments
-----------------------------------
Management believes that the carrying value of the Company's financial
instruments approximates fair value.
Concentration of Credit Risk
----------------------------
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.
Concentrations of credit risks with respect to trade receivables are
limited due to the Company's large number of customers and their dispersion
across the Czech and Slovak Republics.
Statement of Cash Flows
-----------------------
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. Income taxes and
interest paid during the three months ended March 31, 1999 and 1998 and
during the years 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
(unaudited) 1998 (unaudited) 1997
-------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Income taxes - - - -
Interest 20,638 112,823 21,875 18,547
</TABLE>
Restricted Cash
---------------
Amounts of cash pledged as customs guarantees were classified as restricted
cash on the balance sheet.
F-91
<PAGE>
Revenue Recognition
-------------------
Subscription revenue is recognized monthly in accordance with contracts
signed with the cable TV and telephony subscribers. Installation revenue is
recognized in the period when the installation occurs. Telephony
subscribers are billed monthly in arrears based on usage.
Allowance for Doubtful Accounts
-------------------------------
The allowance for doubtful accounts is based upon the Company's assessment
of probable loss related to overdue accounts receivable.
Intangible Assets, net
----------------------
Intangible assets are primarily composed of licenses and are carried at
acquisition and related costs and amortized over five years.
Property, Plant and Equipment
-----------------------------
Property, plant and equipment is stated at cost less accumulated
depreciation. Betterments and improvements on property, plant and equipment
are capitalized at cost. Repairs and maintenance are expensed as incurred.
Upon sale or retirement of property, plant and equipment, the cost and
related accumulated depreciation are eliminated from the accounts.
Depreciation is calculated using the straight-line method over the
following estimated useful lives:
Years
-----
Buildings 45
Machinery and equipment 8 - 15
Vehicles and furniture and fixtures 4 - 8
Cable Networks:
Stations including serial systems 8
Cable network equipment 18 - 20
Primary and secondary network equipment 8
Tercial networks 20
Software and other 4
Inventory
---------
Inventory is stated at the lower of cost or market. Inventory costs have
been determined by the weighted-average method. Costs of purchased
inventory include external costs and internal transit costs.
F-92
<PAGE>
Taxes
-----
Corporate income tax is calculated in accordance with the Czech and Slovak
tax regulations at a rate of 35% and 40%, respectively. Certain items of
income and expense are recognized in different periods for tax and
financial accounting purposes. The differences relate primarily to
depreciation, bad debt provision and obsolete inventory provision.
See Note 9 for further discussion of taxes. Net tax operating losses can be
carried forward for seven and five years to offset taxable income in the
Czech and Slovak Republics, respectively.
Translation of Foreign Currency Transactions
--------------------------------------------
Foreign currency transactions are recorded at the exchange rate in effect
on the date of the transaction. Assets and liabilities denominated in
foreign currencies at December 31, 1998 and 1997 are translated to Czech
crowns at the exchange rate in effect on that date. At March 31, 1999 and
1998 the assets and liabilities denominated in foreign currencies are not
restated at the exchange rate in effect on that date, however, the impact
on the financial statements of not translating is immaterial.
Exchange rate differences arising on settlement of transactions or on
reporting foreign currency transactions at rates different from those at
which they were originally recorded are included in the statement of
operations as they occur.
Comprehensive Income
--------------------
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income," (SFAS No. 130), which requires
companies to report all changes in equity during a period, except those
resulting from investment by owners and distribution to owners, in the
financial statement for the period in which they are recognized. The
Company has chosen to disclose Comprehensive Income, which encompasses net
income (loss) and foreign currency translation adjustments, in the
Consolidated Statement of Changes in Equity. Prior years have been restated
to conform to the SFAS No. 130 requirements.
New Accounting Principle
------------------------
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133), which requires that
companies recognize all derivatives as either assets or liabilities in the
balance sheet at fair value. Under SFAS 133, accounting for changes in fair
value of a derivative depends on its intended use and designation. SFAS 133
is effective for fiscal years beginning after June 15, 1999. The Company
does not expect that the adoption of SFAS 133 will have a material impact
on the consolidated financial statements of the Company since it does not
hold derivative instruments.
F-93
<PAGE>
3. PROPERTY, PLANT AND EQUIPMENT
The composition of property, plant and equipment at March 31, 1999,
December 31, 1998, March 31, 1998 and December 31, 1997 is as follows:
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
Name (unaudited) 1998 (unaudited) 1997
---------------------------------- -------------- --------- -------------- ----------
<S> <C> <C> <C> <C>
Land 13,650 13,643 13,665 13,670
Buildings and cable networks 2,509,859 2,501,419 2,465,541 2,415,584
Machinery and equipment 1,353,646 1,315,363 1,271,671 1,158,934
Other tangible assets 89,620 109,798 126,047 126,913
Construction in progress 187,759 191,922 195,373 309,749
---------- ---------- --------- ---------
Total 4,154,534 4,132,145 4,072,297 4,024,850
Accumulated depreciation (1,211,009) (1,127,078) (897,961) (826,997)
---------- ---------- --------- ---------
Property, plant and equipment, net 2,943,525 3,005,067 3,174,336 3,197,853
========== ========== ========= =========
</TABLE>
Amortization and depreciation expense for the three months ended March 31,
1999 and 1998 was Kc 84,851 (unaudited) and Kc 64,740 (unaudited),
respectively, and for 1998 and 1997 was Kc 330,959 and Kc 263,091,
respectively.
4. INVESTMENTS
Investments by the Company, net, in other companies not included in the
consolidation as of March 31, 1999, December 31, 1998, March 31, 1998 and
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
Name Ownership (unaudited) 1998 (unaudited) 1997
-------------------------------- --------- -------------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Kabel Plus Vychodne
Slovensko a.s. 48.00% 63,252 63,252 64,903 67,934
Kabel Plus Sport a.s. 40.00% 8,451 8,451 6,451 6,451
Genus TV, a.s. 40.75% 4,011 4,011 4,011 4,011
Other 50 50 50 50
Provision for diminution in value (50,500) (50,500) - -
------- ------- ------ ------
Total 25,264 25,264 75,415 78,446
======= ======= ====== ======
</TABLE>
The above is a list of companies where the Company holds more than, or
equal to a 20% share of their basic capital. Kabel Plus Sport a. s. has
been accounted for using the equity method, as explained in Note 2. The
remaining companies are accounted for at cost for financial reporting
purposes as their financial statements, taken individually and/or in total,
are not material to the consolidated group.
Kabel Plus Vychodne Slovensko a.s. constructs and operates cable television
networks in Eastern Slovakia. In 1998 Kabel Plus recognized a 80% provision
for permanent diminution of its investment in Kabel Plus Vychodne Slovensko
a.s. due to lack of control over the Company and resulting low value of the
investment.
F-94
<PAGE>
Kabel Plus Sport, a.s. produces TV game show programs and sporting events.
Genus TV, a.s. was organized for the purpose of operating local studios.
The major components (unaudited) of the equity method investee, Kabel Plus
Sport a. s., financial position and results of operations as of March 31,
1999, December 31, 1998, March 31, 1998 and December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
(unaudited) 1998 (unaudited) 1997
-------------- -------- -------------- --------
<S> <C> <C> <C> <C>
Property, plant and equipment 5,411 6,901 7,567 9,234
Total assets 33,055 31,329 28,302 27,063
Total liabilities 9,913 9,913 11,336 11,336
Equity 23,142 21,194 16,766 15,587
Revenues 12,372 52,274 12,090 48,344
Depreciation and amortization 1,490 5,927 1,667 8,415
Earnings before interest, taxes, 3,245 12,656 2,895 4,365
depreciation & amortization
Net income 1,726 5,609 1,039 (3,214)
</TABLE>
5. DEBT
On December 18, 1996, the Company entered into a revolving credit facility
in the amount of Kc 1,345,350 and an overdraft facility in the amount of Kc
134,535 with a group of banks. This arrangement was designed to subordinate
the existing loans with USWCC (see Note 6 for further information). The
interest rate on the revolving credit facility was PRIBOR (Prague Interbank
Offer Rate) plus 1% per annum. The interest rate on the overdraft facility
was the rate as advised by the bank or alternatively the average daily
PRIBOR rate plus 1% per annum. The due date on both facilities was December
1, 1998.
On November 30, 1998, the Company extended the above revolving credit
facility and overdraft facility for the same amounts as indicated above but
at different interest rates. The interest rate on the revolving credit
facility is PRIBOR plus 1.25% per annum. The interest rate on the overdraft
facility is the rate as advised by the bank or alternatively the average
daily PRIBOR plus 1.25% per annum. As of the date of this report, the
interest rate on the overdraft facility was 10% per annum. The due date on
both facilities is June 30, 2000.
These loan agreements include various covenants and restrictions with which
the Company must comply. Some of the major covenants pertain to the average
number of subscribers and earnings before interest, taxes, depreciation and
amortization. At March 31, 1999 (unaudited) and 1998 (unaudited) and
December 31, 1998 and 1997, the Company was in compliance with all such
covenants.
F-95
<PAGE>
As of March 31, 1999 and December 31, 1998, the Company had drawn Kc
804,841 (unaudited) and Kc 774,840, respectively, of the revolving credit
facility. Interest accrued through March 31, 1999 and December 31, 1998
amounted to Kc 6,809 (unaudited) and Kc 5,869, respectively. As of March
31, 1999 (unaudited) and December 31, 1998, there was no balance on the
overdraft facility.
6. DUE TO PARENT
At March 31, 1999, December 31, 1998, March 31, 1998 and December 31, 1997,
the Company had the following outstanding debt with its parent, MediaOne
Czech Cable Company (MCCC), formerly US West Czech Cable Company (USWCCC):
<TABLE>
<CAPTION>
Amount in Kc Amount in Kc
Date of Interest at 3/31/99 Amount in Kc at 3/31/98 Amount in Kc
Facility Maturity Rate (unaudited) at 12/31/98 (unaudited) at 12/31/97
------------ -------- -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Kc 2,708,961 12/31/2011 13.5% 909,159 879,153 3,087,604 2,977,222
======= ======= ========= =========
</TABLE>
In December 1998, MCCC capitalized Kc 2,506,600 of its loan into equity
(see Note 7 for further information). The balance outstanding as of March
31, 1999 (unaudited) and December 31, 1998 consists of the interest accrued
on the original loan. These amounts of interest remain to be subject to
further interest charges at the same rate as the original loan of 13.5%.
The outstanding balance as of March 31, 1998 and December 31, 1997 of the
facility of Kc 3,087,604 (unaudited) and Kc 2,977,222, respectively,
included accrued interest of Kc 581,004 (unaudited) and Kc 477,633,
respectively.
7. SHARE CAPITAL
At March 31, 1999 (unaudited) and December 31, 1998, the Company's share
capital consisted of 15,052 shares at Kc 100 per share and 1,792 shares at
Kc 1,000 per share, totaling Kc 3,297,200. Share capital of Kc 3,700
remains unpaid at March 31, 1999 (unaudited), December 31, 1998, March 31,
1998 (unaudited) and December 31, 1997 (37 shares at Kc 100 per share).
On December 30, 1998, MCCC increased the share capital of Kabel Plus, a. s.
by issuing 1,357 shares at Kc 1,000 per share. These shares were acquired
by MCCC through the conversion of its loan outstanding of Kc 2,506,600 (see
Note 6). Out of this amount, Kc 1,357,000 was recorded to share capital and
Kc 1,149,600 was recorded to share premium.
At March 31, 1998 (unaudited) and at December 31, 1997, the Company's share
capital consisted of 15,052 shares at Kc 100 per share and 435 shares at Kc
1,000 per share, totaling Kc 1,940,200.
F-96
<PAGE>
8. RESERVE FUND
Czech regulations require joint stock companies to establish a reserve fund
for contingencies against future losses and other events. Contributions
must be a minimum of 20% of after-tax profit in the first year in which
profits are made and 5% of profit each year thereafter, until the fund
reaches at least 20% of capital. Approximately Kc 126,485 (unaudited), Kc
126,485, Kc 83,400 (unaudited) and Kc 83,400, respectively, in the
statutory reserve fund is included in share premium and reserve fund in the
accompanying consolidated balance sheet as of March 31, 1999, December 31,
1998, March 31, 1998 and December 31, 1997.
9. INCOME TAXES
Czech and Slovak laws do not permit consolidated tax returns, therefore
income taxes are calculated on an individual company basis. The primary
differences between taxable loss and net accounting loss relate to the
recognition of depreciation, bad debt provision and provision for obsolete
inventory. In 1998 and 1999, the corporate income tax rate for the Czech
and Slovak Republics was 35% and 40%, respectively.
Taxable losses in the Czech and Slovak Republics may be carried forward up
to seven and five years, respectively, to reduce taxable income in future
years. At December 31, 1998, the Company had net operating loss
carryforwards for income tax purposes aggregating approximately Kc
2,625,419, which expire in varying amounts through 2005. There is a plan
for merger of the Czech wholly owned subsidiaries into Kabel Plus, a. s.
Under this plan, approximately Kc 537,000 of net operating loss
carryforwards would be lost during the merger process.
As the Company has incurred losses since inception, the Company has not
formally adopted the accounting for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109 (SFAS 109) "Accounting
for Income Taxes". SFAS 109 requires recognition of deferred tax assets and
liabilities for the expected future income tax consequences of events which
have been included in the financial statements or tax returns. The
determination of deferred tax assets and liabilities under SFAS 109 is
based on the differences between the financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse.
Had the Company adopted SFAS 109, deferred tax assets (before valuation
allowances) would have been approximately Kc 1,307,513 (unaudited), Kc
1,250,456, Kc 996,791 (unaudited) and Kc 910,426, respectively, as of March
31, 1999, December 31, 1998, March 31, 1998 and December 31, 1997. As
realization of deferred tax assets is dependent upon sufficient future
taxable income during the period that temporary differences and
carryforwards are expected to be available to reduce taxable income,
Management would have elected to record a valuation allowance for the
entire amount of deferred tax assets. As a result, Management believes net
deferred tax assets would have been nil as of March 31, 1999 and 1998 and
December 31, 1998 and 1997. The most significant deferred tax asset results
from the Company's net operating loss carryforwards for income tax
purposes.
F-97
<PAGE>
10. TRANSACTIONS WITH RELATED PARTIES
The Company has a secondment agreement with MediaOne, in which MediaOne
provides certain personnel and other services to the Company. The agreement
requires the Company to reimburse MediaOne for one hundred percent of these
costs. For the three months ended March 31, 1999 and 1998, these costs were
Kc 19,154 and Kc 9,209, respectively, and in 1998 and 1997, they were Kc
72,557 and Kc 87,128, respectively.
The Company also has certain loan agreements with MediaOne Czech Cable
Company as explained in Note 6.
11. COMMITMENTS AND CONTINGENCIES
Property Swap
-------------
In 1996, Kabel Plus, a. s. entered into a letter of intent with United and
Philips Communications ("UPC") to swap certain of their cable properties in
the Czech and Slovak Republics in 1997. This transaction was terminated in
the first half of 1998 and there are currently no plans for a similar
transaction.
Licenses
--------
The Company has been granted three telephony licenses in the Czech Republic
and numerous cable television licenses throughout the Czech and Slovak
Republics. Some of the cable television licenses have provisions that
require the Company to provide cable service to the residents of the
licensed areas within certain time frames. To date, the Company has been
able to meet its obligations resulting from these transactions.
Land and Building Dispute
-------------------------
During 1998, the former owners of the land and building located in Prague
filed a lawsuit contesting ownership of the building and land by the
Company. In case that Kabel Plus, a. s. should lose this lawsuit it would
have to pay rent for the land retroactively since 1993.
Nortel Equipment
----------------
The Company purchased telephone equipment in 1995 designed to operate on a
certain frequency. The Czech Telecommunication Office changed in 1999 its
frequency plan, which does not allow the existing equipment to be used
after December 31, 1999. This would cause a loss to the Company of
approximately Kc 25 million. Management is currently in negotiations with
the Czech Telecommunication Office to obtain an exception to the frequency
plan for another three years. Management believes that these negotiations
will be successful and as a result no adjustments to the accompanying
financial statements have been made.
F-98
<PAGE>
Tax Legislation
---------------
The Czech and Slovak Republics currently have a number of laws related to
various taxes imposed by both federal and regional governmental
authorities. Applicable taxes include value added tax, corporate tax, and
payroll (social) taxes, together with others. In addition, laws related to
these taxes have not been in force for significant periods, in contrast to
more developed market economies; therefore, implementing regulations are
often unclear or nonexistent. Accordingly, few precedents with regard to
issues have been established. Often, differing opinions regarding legal
interpretations exist both among and within government ministries and
organizations; thus, creating uncertainties and areas of conflict. Tax
declarations, together with other legal compliance areas (as examples,
customs and currency control matters) are subject to review and
investigation by a number of authorities, who are enabled by law to impose
extremely severe fines, penalties and interest charges. These facts create
tax risks in the Czech and Slovak Republics substantially more significant
than typically found in countries with more developed tax systems.
Management believes that it has adequately provided for tax liabilities in
the accompanying financial statements; however, the risk remains that
relevant authorities could take differing positions with regard to
interpretive issues and the effect could be significant.
Operating Leases
----------------
The Company has entered into leases for a variety of items, including
office space, automobiles, cable networks and various types of equipment.
As of December 31, 1998 the Company has future operating lease commitments
as follows:
Year Amount
---- ------
1999 9,742
2000 9,239
2001 9,077
2002 8,635
2003 8,363
2004 7,346
Year 2000 (unaudited)
---------------------
The operations of the Company could be adversely affected by the Year 2000
problem as the Company significantly relies on information systems in its
business. As a result, management established and charged a project team
with the task of identifying potential problems arising from systems and
products unable to function as a result of the inability of many computer
systems to recognize dates for the year 2000 and afterward. Systems that
use only two digits to record a year (e.g., 2000 is entered as 00), can
malfunction when dates are used in processing. The systems potentially
affected include, but are not limited to, accounting, subscriber, inventory
and vendor management systems. The Company is currently testing these
systems to determine whether they will be "Year 2000" compliant. The
Company is replacing or upgrading systems that are not Year 2000 compliant.
In addition, the Company has completed its contingency plans for the
systems identified as critical to the Company's operations.
The Company estimated a cost of Kc 10 million that will need to be spent
during 1999 to remediate its Year 2000 problem. The failure to adapt the
Company's systems to Year 2000 compliance and uncertainty as to the
compliance of systems used by its suppliers and customers may have a
significant negative impact on the Company's financial performance and its
intended level of operations. However, due to the nature of the problem,
the level of potential loss cannot be quantified with certainty.
F-99
<PAGE>
12. REVENUES
For the three months ended March 31, 1999 and 1998 and for the years ended
December 31, 1998 and December 31, 1997, revenues of the Company consisted
of the following:
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
(unaudited) 1998 (unaudited) 1997
-------------- -------- -------------- --------
<S> <C> <C> <C> <C>
Average number of subscribers 379,500 373,533 382,745 375,631
------- ------- ------- -------
Subscriber revenue
Mini 84,825 281,397 66,697 195,191
Klasik 48,064 144,193 36,364 130,021
Premium 26,122 78,605 20,089 9,852
------- ------- ------- -------
Subtotal 159,011 504,195 123,150 335,064
Installation revenue 9,197 22,341 7,271 40,746
Non-cable revenue (inventory sales,
telephony)
54,088 243,846 66,324 265,911
------- ------- ------- -------
Total revenue 222,296 770,382 196,745 641,721
======= ======= ======= =======
</TABLE>
13. MANAGEMENT'S PLAN FOR COMPANY
The Company has incurred losses since inception, including losses of Kc
95,727 (unaudited) and Kc 193,635 (unaudited), respectively, for the three
months ended March 31, 1999 and 1998 and Kc 853,427 and Kc 881,386,
respectively, for the years ended December 31, 1998 and December 31, 1997.
In 1996, management prepared, and the shareholders approved, a
restructuring plan for the Company. Under this plan, the Company increased
its share capital by Kc 417,000 by subscribing for 4,170 shares with a
nominal value of Kc 100 at a price of Kc 498 per share. The difference
between the nominal value (Kc 417,000) and the subscription value (Kc
2,076,643) amounting to Kc 1,659,643 was recorded as share premium. The
proceeds from issuance of share capital were used to repay the USD 30,000
and USD 40,000 loans due to parent. The difference between the Kc
equivalent of the amount at which these loans were repaid, Kc 2,159,844 and
the subscription value of the share capital, Kc 2,076,643, amounting to Kc
83,201, was recorded as share premium.
In December 1998 the shareholders approved a further restructuring plan by
converting the principal amount of the loan from MCCC to equity. This
resulted in an increase in share capital of Kc 1,357,000 and in share
premium of Kc 1,149,600 (See Note 7).
F-100
<PAGE>
Since MCCC acquired a controlling interest in the Company, several steps
have been taken to improve its financial stability. As discussed in Note 5,
the Company was extended a revolving credit facility that will provide the
Company with adequate funds to meet its operating and capital expenditure
needs through June 2000. In addition, MediaOne has increased its management
presence in the Company and is in the process of restructuring the Company
and its subsidiaries in order to make the Company more profitable. Thus
far, the Company and its subsidiaries have increased the rates charged to
subscribers and taken steps to reduce operating costs, specifically in the
areas of programming and personnel, and improve the security of its plant
in order to reduce theft of service and bad debt. In addition, the Company
has taken, and continues to take, steps to improve the programming it
provides to customers, as well as centralize systems and processes to
maximize efficiencies and control.
The Company reached a milestone in 1998 when the subsidiaries reached
positive EBITDA for the first time (EBITDA is defined as net loss plus
depreciation and amortization, net interest, net other financial and income
tax expenses less equity in net income from affiliates). The operating
strategies the Company has put in place are yielding positive financial
results which is expected to continue into the future.
14. RECONCILIATION OF ACCUMULATED DEFICIT AND CURRENT YEAR NET LOSS
The following table summarizes the differences in accumulated deficit and
net loss between Company's statutory accounts and U.S. GAAP:
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
(unaudited) 1998 (unaudited) 1997
-------------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
Accumulated deficit per statutory (4,849,533) (4,753,806) (4,092,546) (3,898,911)
accounts
Adjustments required by U.S. GAAP:
Foreign exchange losses (83,254) (83,254) (83,254) (83,254)
---------- ---------- ---------- ----------
U.S. GAAP accumulated deficit (4,932,787) (4,837,060) (4,175,800) (3,982,165)
========== ========== ========== ==========
Net loss per statutory accounts (95,727) (853,427) (193,635) (853,893)
Adjustment required by U.S. GAAP: - - - -
Foreign exchange losses - - - (27,493)
---------- ---------- ---------- ----------
U.S. GAAP net loss (95,727) (853,427) (193,635) (881,386)
========== ========== ========== ==========
</TABLE>
15. SUBSEQUENT EVENT
During a general meeting of the shareholders on June 22, 1999, the
shareholders approved the conversion of outstanding accrued interest due to
the Company's parent (MCCC) totaling Kc 938,000 (as of June 22, 1999). Out
of this amount, Kc 508,000 will be recorded as share capital and the
remaining Kc 430,000 will be recorded as share premium. The change has not
been registered with the Czech courts to date.
F-101
Exhibit 23.1
CONSENT OF ARTHUR ANDERSEN, INDEPENDENT ACCOUNTANTS
---------------------------------------------------
The Board of Directors
N.V. TeleKabel Beheer
We consent to the incorporation by reference in the:
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; and
registration statement (No. 333 - 71963) on Form S-8
of United International Holdings, Inc. (d/b/a UnitedGlobalCom) of our report
dated February 26, 1999, with respect to the consolidated balance sheets of N.V.
TeleKabel Beheer as of December 31, 1998 and 1997, and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
each of the years in the two-year period ended December 31, 1998, which report
appears in the Form 8-K of United International Holdings, Inc. (d/b/a
UnitedGlobalCom) dated June 28, 1999.
ARTHUR ANDERSEN
Amstelveen, The Netherlands
June 28, 1999
Exhibit 23.2
CONSENT OF ARTHUR ANDERSEN, INDEPENDENT ACCOUNTANTS
---------------------------------------------------
The Board of Directors
A2000 Holding N.V.
We consent to the incorporation by reference in the:
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; and
registration statement (No. 333 - 71963) on Form S-8
of United International Holdings, Inc. (d/b/a UnitedGlobalCom) of our report
dated March 9, 1999, with respect to the consolidated balance sheets of A2000
N.V. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the years in the two-year period ended December 31, 1998,
which report appears in the Form 8-K of United International Holdings, Inc.
(d/b/a UnitedGlobalCom) dated June 28, 1999.
ARTHUR ANDERSEN
Amstelveen, The Netherlands
June 28, 1999
Exhibit 23.3
CONSENT OF ARTHUR ANDERSON s.r.o., INDEPENDENT AUDITORS
-------------------------------------------------------
The Board of Directors
Kabel Plus, a.s.
We consent to the incorporation by reference in the:
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; and
registration statement (No. 333 - 71963) on Form S-8
of United International Holdings, Inc. (d/b/a UnitedGlobalCom) of our report
dated June 18, 1999 (except for Note 15, as to which the date is June 22, 1999),
with respect to the consolidated balance sheets of Kabel Plus, a.s. and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
each of the years in the two-year period ended December 31, 1998, which report
appears in the Form 8-K of United International Holdings, Inc. (d/b/a
UnitedGlobalCom) dated June 28, 1999.
ARTHUR ANDERSEN s.r.o.
Prague, Czech Republic
June 28, 1999
Exhibit 23.4
CONSENT OF KPMG, INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------------
The Board of Directors
@Entertainment, Inc.
We consent to the incorporation by reference in the:
1. registration statement (No. 33 - 81876) on Form S-8;
2. registration statement (No. 33 - 87326) on Form S-3;
3. registration statement (No. 333 - 00226) on Form S-8;
4. registration statement (No. 333 - 68641) on Form S-8; and
5. registration statement (No. 333 - 71963) on Form S-8
of United International Holdings, Inc. (d/b/a UnitedGlobalCom) 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 of United
International Holdings, Inc. (d/b/a UnitedGlobalCom) dated June 28, 1999.
KPMG
Warsaw, Poland
June 28, 1999
