-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V3i+iW65dLXyCromFthPb7pKKqNP5WJR3HBQ1cj/5OEmZUIum1/YLJUWYoEvrmlU ozQx3mHl88vu35/OtNZHTA== 0000912057-00-015428.txt : 20000403 0000912057-00-015428.hdr.sgml : 20000403 ACCESSION NUMBER: 0000912057-00-015428 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: POLAND COMMUNICATIONS INC CENTRAL INDEX KEY: 0001031232 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 061070447 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-20307 FILM NUMBER: 589834 BUSINESS ADDRESS: STREET 1: ONE COMMERCE PLZ CITY: HARTFORD STATE: CT ZIP: 06103-3585 BUSINESS PHONE: 8605491679 MAIL ADDRESS: STREET 1: ONE COMMERCE PLZ CITY: HARTFORD STATE: CT ZIP: 06103-3585 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------------ (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER 333-20307 ------------------------ POLAND COMMUNICATIONS, INC. (Exact name of registrant as specified in its charter) NEW YORK 06-1070447 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 4643 ULSTER STREET 80237 SUITE 1300 (Zip Code) DENVER, COLORADO
(Address of Principal Executive Offices) ------------------------ Registrant's telephone number, including area code (303) 770-4001 Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON WHICH TITLE OF EACH CLASS REGISTERED None None
Securities registered pursuant to Section 12(g) of the Act: Not Applicable Indicate by check mark (X) whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of a specified date within 60 days prior to the date of filing. (See definition of affiliate in Rule 405.) Zero The number of shares outstanding of Poland Communications, Inc.'s common stock as of December 31, 1999 was: Common Stock 18,948 DOCUMENTS INCORPORATED BY REFERENCE None. The Registrant meets the conditions set forth in General Instruction (I) (1) (a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- POLAND COMMUNICATIONS, INC. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 TABLE OF CONTENTS
PAGE NUMBER ----------- PART I ITEM 1. Business.................................................... 4 ITEM 2. Properties.................................................. 11 ITEM 3. Legal Proceedings........................................... 12 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 14 ITEM 6. Selected Financial Data..................................... 18 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 20 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk........................................................ 25 ITEM 8. Financial Statements and Supplementary Data................. 27 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 83 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................................... 85
2 PART I Poland Communications, Inc. ("PCI"), is a New York corporation which is wholly-owned subsidiary of @ Entertainment, Inc. ("@ Entertainment"), a Delaware corporation which is wholly-owned by United Pan-Europe Communications N.V. ("UPC"). References to the "Company" mean PCI and its subsidiaries. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements in this Annual Report on Form 10-K constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, that are not historical facts but rather reflect the Company's current expectations concerning future results and events. The words as "believes," "expects," "intends," "plans," "anticipates," "likely," "will", "may", "shall", and similar expressions are intended to identify such forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company (or entities in which the Company has interests), or industry results, to differ materially from future results, performance or achievements expressed or implied by such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking Statements which reflect management's view only as of the date of this Annual Report on Form 10-K. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the Occurrence of unanticipated events, conditions or circumstances. The risks, uncertainties and other factors that might cause such differences include, but are not limited to: (i) general economic conditions in Poland and in the pay television business in Poland; (ii) changes in regulations the Company operates under; (iii) uncertainties inherent in new business strategies, including the Company's satellite television business, new product launches and development plans, which the Company has not used before; (iv) rapid technology changes; (v) changes in, or failure or inability to comply with government regulations; (vi) the development and provision of programming for new television and telecommunications technologies; (vii) the continued strength of competitors in the multichannel video programming distribution industry; (viii) future financial performance, including availability, terms and deployment of capital; (ix) the ability of vendors to deliver required equipment, software and services on schedule at the budgeted cost; (x) the Company's ability to and hold and attract qualified personnel; (xi) changes in the nature of strategic relationships with joint ventures; (xii) the overall market acceptance of those products and services, including acceptance of the pricing of those products and services; (xiii) acquisition opportunities and (xiv) the Company's new ownership structure. EXCHANGE RATE In this Annual Report on Form 10-K, references to "U.S. dollars" or "$" are to U.S. currency, references to "Deutsche-Marks" or "DM" are to German currency, and references to "zloty" or "PLN" are to Polish currency. The Company has presented its primary consolidated financial statements in accordance with generally accepted accounting principles in the U.S. in U.S. dollars. Amounts originally measured in zloty for all periods presented have been translated into U.S. dollars. For your convenience, this Annual Report contains certain zloty amounts not derived from the consolidated financial statements which have been translated into U.S. dollars. Readers should not assume that the zloty amounts actually represent such U.S. dollar amounts or could be, or could have been, converted into U.S. dollars at the rates indicated or at any other rate. Unless otherwise stated, such U.S. dollar amounts have been derived by converting from zloty to U.S. dollars at the rate of PLN 4.1483 = $1.00, the exchange rate quoted by the National Bank of Poland at noon on December 31, 1999. This rate may differ from the actual rates in effect during the periods covered by the financial information discussed herein. The Federal Reserve Bank of New York does not certify for customs purposes a noon buying rate for zloty. 3 ITEM 1. BUSINESS GENERAL The Company operates the largest cable television system in Poland with approximately 1,756,000 homes passed and approximately 1,024,000 total subscribers as of December 31, 1999. The Company's cable subscribers are located in regional clusters encompassing eight of the ten largest cities in Poland, including those cities which the Company believes provide the most favorable demographics for cable television in the country. The Company believes that additional subscriber growth can be achieved through a combination of increased penetration, new network expansion and acquisitions. The Company's cable television networks have been constructed with the flexibility and capacity to be cost-effectively reconfigured to offer an array of interactive and integrated entertainment, telecommunications and information service. REGIONAL CLUSTERS The Company has established five regional clusters for its cable television business encompassing eight of the ten largest cities in Poland, which the Company believes, are among those with the strongest economies and most favorable demographics for cable television in the country. The following table illustrates certain operating data of each of the Company's existing regional clusters. OVERVIEW OF THE COMPANY'S EXISTING CABLE SYSTEMS(1)
AVERAGE MONTHLY SUBSCRIPTION REVENUE PER BASIC AND BASIC AND BASIC TOTAL HOMES TOTAL INTERMEDIATE INTERMEDIATE SUBSCRIBER REGION HOMES PASSED SUBSCRIBERS SUBSCRIBERS PENETRATION (USD) (2) - ------ --------- --------- ----------- ------------ ------------ ------------ North............................ 574,000 420,890 295,053 228,943 54.39% 6.98 South............................ 400,000 181,890 86,989 74,757 41.10% 7.50 Central.......................... 920,000 425,248 242,963 164,852 38.77% 7.74 West............................. 624,000 234,315 123,934 111,421 47.55% 6.15 Katowice......................... 1,200,000 493,255 274,884 203,001 41.16% 7.14 --------- --------- --------- ------- ----- ---- TOTAL........................ 3,718,000 1,755,598 1,023,823 782,974 44.60% 6.68 ========= ========= ========= ======= ===== ====
- ------------------------ (1) All data at or for the year ended December 31, 1999. (2) Represents a weighted average for the Company based on the total number of basic subscribers at December 31, 1999. ACQUISITIONS The Company regularly evaluates potential acquisitions of cable networks. The Company currently has no definitive agreement with respect to any material acquisition, although from time to time it has discussions with other companies and assesses opportunities on an ongoing basis. The Company may be required to apply for the approval of the Polish Anti-Monopoly Office with respect to any acquisitions it wishes to consummate. The Company's ability to enter into definitive agreements relating to material acquisitions, and their potential terms as well as its ability to obtain the necessary anti-monopoly approvals, cannot be assured. SERVICES AND FEES The Company charges cable television subscribers an initial installation fee and fixed monthly fees for their choice of service packages and for other services such as premium channels and rental of remote 4 control devices. The Company currently offers three packages of cable television service: basic ("basic package"), broadcast ("broadcast package") and intermediate ("intermediate package") packages of service in selected areas of Poland. On December 31, 1999, approximately 732,800 or 71.6% of the Company's subscribers received the basic package, approximately 50,200 or 4.9% received the intermediate package and approximately 240,800 or 23.5% received the broadcast package. BASIC PACKAGE. The basic package includes approximately 30 to 70 channels. This package generally includes all Polish terrestrial broadcast channels, most major European satellite programming legally available in Poland, regional and local programming and, on most of its cable networks, Wizja TV programming package, including the Company's proprietary Polish-language channel, Atomic TV. The Company's basic package offerings vary by location. With the launch of Wizja TV across the Company's cable networks on June 5, 1998, all of the Wizja TV programming became part of the basic package except for the HBO Poland service, a Polish-language premium movie channel owned in part by Home Box Office and, since September 18, 1999, Wizja Sport, a Polish-language premium sport channel. INTERMEDIATE PACKAGE. The intermediate package includes approximately 17 to 24 channels. This package is offered for monthly fees equal to approximately one-half of the amount charged for the basic package. The intermediate package is designed to compete with small cable operators on a basis of price, using a limited programming offering. The Company's intermediate package offerings vary by location. BROADCAST PACKAGE. The broadcast package includes 6 to 12 broadcast channels with clear reception for monthly fees, which are substantially less than the amounts charged for the intermediate package. PREMIUM AND OTHER SERVICES. For an additional monthly charge, certain of the Company's cable networks currently offer two premium television services--the HBO Poland service (a Polish-language premium movie channel owned in part by Home Box Office) and, since September 18, 1999, Wizja Sport, a Polish-language premium sport channel in certain of the Company's cable system. The Company plans to create additional pay-per-view channels that will also be offered to cable customers for an additional charge. Other optional services include additional outlets and stereo service, which enables a subscriber to receive 12 or more radio channels in stereo. Cable television subscribers who require the use of a tuner to receive certain of the Company's cable services are charged an additional fee of approximately $1.10 per month. Installation fees vary according to the type of connection required by a cable television subscriber. The standard initial installation fee is approximately $21 for buildings with multiple apartments and approximately $42 for single family dwellings, but such fees may be subject to reductions as a result of promotional campaigns. PRICING STRATEGY. Prior to December 1996, the Company's cable television pricing strategy was designed to keep its profit margin relatively constant in U.S. dollar terms in more mature systems and to increase rates in more recently acquired or rebuilt systems. The Company has historically experienced annual churn rates of less than 10%, and has been able to pass on the effects of inflation through price increases. For the year ended December 31, 1999, the churn rate was 21.5%, though it would have been 18.5% had the Company not decided to reclassify another 20,556 subscribers to the intermediate tier. This pricing strategy commenced in January 1997 and is designed to increase revenue per subscriber and to achieve real profit margin increases in U.S. dollar terms. The Company expects that it will continue to experience churn rates above historical levels during the implementation of its current strategy. The Company expects to offer promotional incentives in certain areas of the country from time to time in connection with its marketing. Cable television subscribers are billed monthly in advance and, as is customary in Poland, most of the Company's customers pay their bills through their local post office or bank. The Company has strict enforcement policies to encourage timely payment. Such policies include notices of late payment, visits from service personnel, and ultimately, disconnection for nonpaying customers 60 days after a bill becomes past due. The Company's system architecture in most networks enables it to promptly shut off service to 5 nonpaying customers and is designed to reduce non-authorized use of its cable systems. The Company's bad debts expense has historically averaged approximately 2.7% of revenue. TECHNOLOGY AND INFRASTRUCTURE The Company believes the fiber-optic cable television networks that it has constructed, which serve approximately 692,000 of its subscribers, are among the most technologically advanced in Poland and are comparable to modern cable television networks in the U.S. All of the Company's networks that have been constructed by the Company have bandwidths of at least 550 MHz. New portions of the networks, which are currently being constructed, are being designed to have minimum bandwidths of 860 MHz. The Company's goal is to upgrade any portions of its cable television networks that have bandwidths below 550 MHz (generally acquired from other entities) to at least 860 MHz in an effort to reduce the number of satellite receivers and parts inventory required in the networks by the end of 2000. The Company uses fiber-optic and coaxial cables, electronic components and connectors supplied by leading Western firms in its cable television networks. The Company's cable television networks have been constructed with the flexibility and capacity to be cost-effectively reconfigured to offer an array of interactive and integrated entertainment telecommunications and information service. The Company's systems provide excess channel capacity and are designed to maximize reliability. Most of the Company's cable networks currently have the ability to carry 40 to 70 television channels. The Company operates its systems at approximately 49% to 69% of channel/ bandwidth capacity. Two-way capability can be added to most of the Company's networks at limited cost to provide addressable and interactive services in the future. The cable television networks constructed by the Company meet or exceed the technical standards established by Polish regulatory authorities, and the Company's policy is to upgrade as rapidly as possible substandard cable television networks obtained in acquisitions. The Company has been able to avoid constructing its own underground conduits in certain areas by entering into a series of agreements with regional and local branches of the Polish national telephone company (known in the Polish telecommunications industry as "TPSA") which permit the Company to use TPSA's conduit infrastructure for an indefinite period of time or for fixed periods up to 20 years. The Company also has agreements to undertake joint construction with another company for new conduits in certain areas. These agreements represent a major advantage to the Company since they permit the Company to minimize the costly and time-consuming process of building new conduit infrastructure where TPSA conduit infrastructure exists and provide for joint construction with TPSA and other utilities of conduit infrastructure where none currently exists. As of December 31, 1999, approximately 81.0% of the Company's cable television plant had been constructed utilizing pre-existing conduits of TPSA. A substantial portion of the Company's contracts with TPSA allows for 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. Generally speaking, TPSA may terminate a conduit agreement immediately (and without penalty) if: - the Company does not have a valid permit from the Polish State Agency of Radio Communications authorizing the construction and operation of a cable television network in a specified geographic area covering the subscribers to which the conduit delivers the signal; - the Company's cable network serviced by the conduit does not meet the technical specifications required by the Polish Communications Act of 1990; - the Company does not have a contract with the cooperative authority allowing for the installation of the cable network; or - the Company does not pay the rent required under the conduit agreement. As of December 31, 1999, TPSA was legally entitled to terminate conduit agreements covering approximately less than 1% of the Company's subscribers as a result of the Company's failure to comply 6 with certain terms of its conduit agreements with TPSA. Any termination by TPSA of such contracts could result in the Company losing its permits, the termination of agreements with co-op authorities and programmers, and in inability to service customer with respect to areas where its networks utilize the conduits that were the subject of such TPSA contracts. In addition, some conduit agreements with TPSA provide that cables can be installed in the conduit only for the use of cable television. If the Company uses the cables for a purpose other than cable television, such as data transmission, telephone, or Internet access, such use could be considered a violation of the terms of certain conduit agreements, unless this use is expressly authorized by TPSA. There is no guarantee that TPSA would give its approval to permit other uses of the conduits. COMPETITION In the cable television industry, the Company believes that competition for subscribers is primarily based on price, program offerings, customer service, and quality and reliability of cable networks. Operators of small cable networks, which are active throughout Poland, pose a competitive threat to the Company because they often incur lower capital expenditures and operating costs and therefore have the ability to charge lower fees to subscribers than does the Company. While these operators often do not meet the technical standards for cable systems under Polish law, enforcement of regulations governing technical standards has historically been poor. Regardless of the enforcement of these laws and regulations, the Company expects that operators of small cable networks will continue to remain a competitive force in Poland. In addition, certain of the Company's competitors or their affiliates have greater experience in the cable television industry and have significantly greater resources (including financial resources and access to international programming sources) than the Company. The largest competitors of the Company in Poland include Elektrim S.A., which owns at least two cable systems (including Aster City Cable Sp. z o.o.) and Multimedia Polska S.A., a Polish entity. In addition, the Company understands that a number of cable operators in Poland (led by Bresnan Communications) have formed, or are in the process of forming, a consortium for the joint creation and production of Polish-language programming. The Company's cable television business also competes with companies employing other methods of delivering television signals to the subscribers, such as terrestrial broadcast television signals and A-DTH television services, and with a multi-channel multi-point distribution system and D-DTH services (including the Company's own D-DTH service). TRADEMARKS The Company, either itself or through its subsidiaries, has filed or is in the process of filing for registration of its various trademarks. The PTK logo was registered for use in connection with television and programming services in July 1997. Trademark applications are pending in Poland for other variations of PTK trademarks. EMPLOYEES At December 31, 1999, the Company had approximately 994 permanent full-time employees and approximately 47 part-time employees. In addition, as of that date the Company employed approximately 11 salesmen who received both commissions and a nominal salary, and from time to time the Company employs additional salesmen on an as needed, commission only basis. In a division of one of the Company's subsidiaries, a trade union, which has approximately 7 members, was formed in mid-1999. The Company believes that its relations with its employees are good. 7 REGULATION GENERAL The operation of cable television systems in Poland is regulated under the Polish Communications Act of 1990 (the "Communications Act") and the Polish Radio and Television Act of 1992 (the "Television Act"). These are regulated by: --The Polish Minister of Communications; --The Polish State Agency of Radio Communications ("PAR"); and --The Polish National Radio and Television Council (the "Council"). Cable television operators in Poland are required to obtain permits from PAR to install and operate cable television systems and must register certain programming that they transmit over their networks with the Council. Neither the Minister of Communications nor PAR currently has the authority to regulate the rates charged by operators of cable television. However, excessive rates could be challenged by the Polish Anti-Monopoly Office should they be deemed to constitute monopolistic or other anti-competitive practices. Cable television operators in Poland also are subject to the Law on Copyright and Neighboring Rights of 1994 (the "Copyright Act") which provides intellectual property rights protection to authors and producers of programming. Under the terms of the Television Act, broadcasters in Poland are regulated by, and must obtain a broadcasting license from the Council. Poland is in the process of negotiating its membership in the EU. In connection with this process, Poland has started to adjust its legal system to EU requirements and currently is in the process of revising its telecommunications, broadcasting and copyright regulation. Proposed legislation regarding those regulations is currently being discussed in the Polish Parliament. With one exception, all of the Wizja proprietary channels and all channels on the Wizja platform are currently licensed in the United Kingdom by the Independent Television Commission as satellite television services. As such, they are then retransmitted under the European Convention on Transfrontier Broadcasting to Poland and then distributed via cable in Poland. Poland's regulatory environment is undergoing constant change. The Company does not know how such change will impact its business. COMMUNICATIONS ACT PERMITS. The Communications Act and the required permits issued by PAR set forth the terms and conditions for providing cable television services. If a cable operator breaches the terms of its permits or the provisions of the Communications Act, or if such operator fails to acquire permits covering areas serviced by its networks, PAR can impose penalties on such operator, including: --fines; --the revocation of all permits covering the cable networks where such breach occurred; and --the forfeiture of the cable operator's cable networks. In addition, the Communications Act provides that PAR may not grant a new permit to, or renew an expiring permit held by, any applicant that has had, or that is controlled by an entity that has had, a permit revoked within the previous five years. The Company will be required to obtain additional permits from the Minister of Communications to offer other telecommunications services such as internet access or broadband transmission services. 8 FOREIGN OWNERSHIP RESTRICTIONS. The Communications Act provides that permits may only be issued to and held by Polish citizens, or companies in which foreign persons hold no more than 49% of the share capital, ownership interests and voting rights. In addition, a majority of the management and supervisory board of any cable television operator holding permits must be comprised of Polish citizens residing in Poland. These restrictions do not apply to any permits issued prior to July 7, 1995. If the Polish regulatory authorities were to conclude that the Company's ownership or distribution structure is not in compliance with Poland's regulatory restrictions on foreign ownership, the Company could be forced to incur significant costs in order to bring its ownership structure and distribution system into compliance with the applicable regulations and the Company may be forced to dispose of its ownership interests in various entities. THE COMPANY'S PERMITS AND NEW CORPORATE ORGANIZATIONAL STRUCTURE. Prior to the creation of PAR and the permit system, one of the Company's subsidiaries, Polska Telewizja Kablowa S.A. ("PTK S.A."), received a license to operate cable television systems in Warsaw, Krakow and the areas surrounding these cities under the Polish Foreign Commercial Activity Act. To comply with the foreign ownership requirements discussed above in areas that are not covered by the licenses currently held by PTK S.A., the Company is in the process of creating a new entity, Polska Telewizja Kablowa Operator Sp. z o.o. ("PTK Operator"), which will own and/or operate the Company's new or existing cable networks whose permits are subject to the foreign ownership restrictions discussed above. The Company will hold a 47% ownership stake in PTK Operator while the remaining 53% will be held by a Polish entity. The Company will, in turn, hold 49% of the Polish entity, and the remaining 51% interest in the Polish entity is expected to be owned by a Polish company. The Company believes that this ownership and operating structure complies with the requirements of Polish law. PAR has granted permits to the Company and its competitors, based on the lease of assets, for networks using an ownership and operating structure substantially similar to the one described above. Specifically, subsidiaries of the Company have received approximately 106 permits from PAR, covering approximately 674,200 of the Company's approximately 738,000 basic subscribers at December 31, 1999, including approximately 11,700 subscribers for whom the Company's permits are deemed extended under Polish law pending PAR's response to the Company's permit renewal applications. However, certain subsidiaries of the Company do not have valid permits covering certain of the areas in which it operates cable networks. Of the approximately 64,200 basic subscribers at December 31, 1999 located in areas for which subsidiaries of the Company do not currently have valid permits, approximately 78% are located in areas serviced by recently acquired or constructed cable networks for which permit applications cannot be made until all permit requirements are satisfied (including obtaining agreements with cooperative authorities and the upgrade of the acquired network to meet technical standards where necessary and satisfying foreign ownership limitations), and approximately 22% are located in areas serviced by networks for which subsidiaries of the Company have permit applications pending. These subsidiaries of the Company have 9 permit applications pending. There can be no assurance that PAR will issue any or all of the Permits for which such subsidiaries have applied. The Company may be subject to penalties if PAR or other Polish regulatory authorities determine that all or part of the Company's ownership and operating structure violates Polish regulatory restrictions on foreign ownership. The Company would also be subject to penalties if PAR chooses to take action against it for operating cable television networks in areas not covered by valid permits. Any such actions by PAR or other Polish regulatory authorities would have a material adverse effect on the Company's business, financial condition and results of operations. TELEVISION ACT THE POLISH NATIONAL RADIO AND TELEVISION COUNCIL. The Council, an independent agency of the Polish government, was created under the Television Act to regulate broadcasting in Poland. The Council has 9 regulatory authority over both the programming that cable television operators transmit over their networks and the broadcasting operations of broadcasters. REGISTRATION OF PROGRAMMING. Under the Television Act, cable television operators must register each channel and the programming, which will be aired on that channel with the Chairman of the Council prior to transmission. The Company's subsidiaries have registered most of the programming that they transmit on their cable networks, except programming transmitted on networks for which they do not have permits. The Chairman of the Council may revoke the registration of any of the Company's programming, or may not register all additional programming that the Company desires to transmit over the Company's networks. In addition, the Council may take action regarding unregistered programming that the Company transmits over cable networks for which the Company does not yet have PAR permits. This pertains to areas for which permit applications cannot be made until all permit requirements are satisfied (including obtaining agreements with the cooperative authorities, upgrading of the acquired networks to meet technical standards where necessary and satisfying foreign ownership limitations). Such actions could include the levying of monetary fines against the Company, and the seizure of equipment involved in transmitting such unregistered programming as well as criminal sanctions against the Company's subsidiaries' management. These actions could have a material adverse effect on the Company's business, financial condition and results of operations. COPYRIGHT PROTECTION Cable television operators in Poland are subject to the provisions of the Polish Copyright Act, which governs the enforcement of intellectual property rights. In general, the holder of a Polish copyright for a program transmitted over the cable networks of a cable television operator has a right to receive compensation from such operator or to prevent transmission of the program. The rights of Polish copyright holders are generally enforced by organizations for collective copyright administration and protection such as Zwiazek Autorow i Kompozytorow Scenicznych ("ZAIKS") and Zwiazek Artystow Scen Polskich ("ZASP"), and can also be enforced by the holders themselves. Most of the Company's cable subsidiaries operate under a contract with ZASP and all of its cable subsidiaries operate under a contract with ZAIKS. A violation of the Copyright Act by a cable television operator also constitutes a violation of the Communications Act and of the operator's permits. See "--Television Act" for a discussion of the penalties and consequences associated with violations of the Television Act and "--Communications Act" for a discussion of the penalties and consequences associated with violations of the Communications Act and of a television operator's permits. In addition, currently proposed legislation regarding copyrights may increase the rights of organizations for collective administration of copyrights. Adoption of the amendments in the proposed version could potentially lead to a significant increase of fees to be paid by broadcaster to authors and performers. ANTI-MONOPOLY ACT MARKET DOMINANCE. Companies that obtain control of 40% or more of the relevant market and do not encounter signifcant competition may be deemed to have market dominance, and therefore face greater scrutiny from the Anti-Monopoly Office. From time to time, the Company receives inquiries from and are subject to review by various divisions of the Anti-Monopoly Office. RECENT ANTI-MONOPOLY OFFICE FINDINGS WITH RESPECT TO THE COMPANY AND ITS SUBSIDIARIES. In mid 1998, the Anti-Monopoly Office issued a decision that the Company had achieved a dominant position and abused that dominant position in one of the areas in which it operates by moving certain satellite channels to a different frequency. A number of the Company's subscribers, whose television sets are not equipped to receive the new frequency, received several different channels to replace the channels which had been moved. The Company appealed both the finding of dominance and the finding that the Company acted 10 improperly by moving certain channels to the new frequency. In late 1998, the Anti-Monopoly Court modified the Anti-Monopoly Office's decision by ruling that the Company had abused its dominant position by moving certain channels to the new frequency without termination of its agreements with subscribers whose television sets are not equipped to receive the new frequency. The Anti-Monopoly Court did not impose a fine on the Company or its subsidiaries. The Company estimates that less than 1% of its subscribers in the area under review have such television sets and would be affected by the ruling if, in the future, the Company finds it necessary for technical reasons to move channels to another frequency. The Company is appealing both the finding of dominance and the finding that the Company must terminate some of its agreements with certain subscribers before moving channels to another frequency. In another market, the Anti-Monopoly Office recently issued a decision that the Company had achieved a dominant position and abused that dominant position by: (1) failing to create a uniform system for customer complaints, (2) increasing rates without providing subscribers a detailed basis for the price increases, and (3) changing the programming line-up without sufficient notice to subscribers. The Anti-Monopoly Office did not impose a fine in connection with its decision. The Company appealed both the finding of dominance and the finding that it acted improperly in its relations with subscribers. In a recent decision, the Anti-Monopoly Court agreed the Company's position and overturned the Anti-Monopoly Office's decision. The Anti-Monopoly Office is appealing the Anti-Monopoly Court's decision. In another market, the Anti-Monopoly Office recently issued a decision that the Company had achieved a dominant position and abused that dominant position by issuing an offer for the extended basic package in a certain form. The Anti-Monopoly Office imposed a fine of 26,700 zloty (the equivalent of $6,436). The Company appealed both the finding of dominance and finding that the form of its offer to subscribers was improper. The case is suspended pending the outcome of the Polish Supreme Court's ruling on the Anti-Monopoly Office's appeal in another case. In another market, the Anti-Monopoly Office issued a decision that the Company had achieved a dominant position and abused that dominant position by: increasing rates without providing subscribers a detailed basis for the price increases; and changing the programming offer. The Anti-Monopoly Office imposed a line of 50,000 zloty (the equivalent of $12,053). The Company is appealing both the finding of dominance and the finding that it acted improperly in its relations with subscribers. POLAND'S EU MEMBERSHIP APPLICATIONS In 1994 Poland made an official application for membership of the European Union ("EU"). Negotiations on the terms of Poland's proposed admission to the commenced in the March 1998. Poland has announced 2003 as a target date for accession. If Poland joins the EU, it would be required to implement and obey all of the laws and regulations emanating from the European Commission, including the Television Without Frontiers Directive and EC competition law in their then current versions. ITEM 2. PROPERTIES On December 31, 1999, the Company owned equipment used for its cable television business, including 99 head ends, and approximately 4,664 kilometers of cable plant. The Company has approximately 202 lease agreements for offices, storage spaces and land adjacent to the buildings. The total area leased amounts to approximately 25,900 square meters (most of which is land adjacent to buildings). The areas leased by the Company range from approximately 10 square meters up to more than 2,660 square meters. The agreements are for specified and unspecified periods of time and those for an unspecified period may be terminated with relatively short notice periods by either party, usually three months. The Company has entered into conduit leases with the TPSA (the Polish national telephone company) and, in certain cases, with other entities. The majority of the TPSA leases require the Company to bear the costs of the maintenance of the cables. The Company may not sublease the conduit or cables or allow a 11 third party to use the conduits or cables free of charge without TPSA's consent. The rental charge for the conduit is usually determined on each 100 meters of conduit occupied. The agreements also contain indexation clauses for rent adjustment purposes based on the change of U.S. dollar exchange rates or on the increase of real maintenance costs. A substantial portion of the Company's contracts with TPSA for the use of such conduits 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. Any termination by TPSA of such contracts could result in the Company losing its permits, the termination of agreements with cooperative authorities and programmers, and an inability to service customers with respect to the areas where its networks utilize the conduits that were the subject of such TPSA contracts. For a list of the reasons for which TPSA can terminate a conduit agreement, the proportion of the Company's cable subscribers serviced by conduit leases subject to immediate termination and the consequences to the Company of the loss to those conduit leases, see "Business--Cable Operations--Technology and Infrastructure." The Company believes that its existing owned properties, lease agreements and conduit agreements are adequate for purposes of the Company's cable television operations, although additional space and conduits will be needed in the future if the Company consummates further acquisitions of cable television networks. ITEM 3. LEGAL PROCEEDINGS The Company is involved in litigation from time to time in the ordinary course of business. In management's opinion, the litigation in which the Company is currently involved, individually and in the aggregate, is not material to the Company's business financial condition or results of operations. Two of the Company's cable television subsidiaries, Telewizja Kablowa Gosat-Service Sp. z o.o. and PTK, S.A., and four unrelated Polish cable operators and HBO Polska Sp. z o.o. ("HBO Polska") have been made defendants in a lawsuit instituted by Polska Korporacja Telewizyjna Sp. z o.o., an indirect partially-owned subsidiary of Canal + S.A. The lawsuit was filed in the Provincial Court in Warsaw, XX Economic Division (Sad Wojewodzki w Warszawie, Wydzial XX Gospodarczy) (the "Court"). The main defendant in the proceedings is HBO Polska which is accused of broadcasting the HBO television program in Poland without a license from the Council as required by the Television Act and thereby undertaking an activity constituting an act of unfair competition. The plaintiff has asked the Court to order HBO Polska to cease broadcasting of its programming in Poland until it has received a broadcasting license from the Polish National Radio and Television Council, and that the defendant cable operators be ordered (i) to cease carrying the HBO Polska programming on their cable networks in Poland until HBO Polska has received a broadcasting license from the Polish National Radio and Television Council, (ii) not to use their current filters for the purpose of unscrambling the HBO Polska programming, and (iii) in the future, to use effective encoding systems and systems of controlled access to the HBO Polska programming. The Company does not believe that the lawsuit will have a material adverse effect on its business operations. On or about July 8, 1999, certain minority shareholders ("the minority shareholders") of Poland Cablevision (Netherlands) B.V. (PCBV), subsidiary of the Company, filed a lawsuit against the Company, @Entertainment, Inc. and certain other defendants, in United States District Court, Southern District of Ohio, Eastern Division, Civil Action No. C2-99-621. The relief sought by the minority shareholders includes: (1) unspecified damages in excess of $75,000, (2) an order lifting the restrictions against transfer of shares set forth in the Shareholders' Agreement among PCBV's shareholders, as amended (the "Shareholders' Agreement") so that the minority shareholders can liquidate their shares in PCBV, (3) damages in the amount of 1.7 percent of the payment made by UPC for the shares of the Company as set forth in the Agreement and Plan of Merger between @Entertainment and UPC dated June 2, 1999, and (4) attorneys' fees and costs incurred in prosecuting the lawsuit. 12 The amended complaint sets forth eight claims for relief based on allegations that the defendants, including @Entertainment and the Company, committed the following wrongful acts: (1) breached a covenant not to compete contained in the Shareholders' Agreement relating to the shareholders of PCBV, (2) breached a covenant in the Shareholders' Agreement requiring that any contract entered into by PCBV with any other party affiliated with PCI be commercially reasonable or be approved by certain of the minority shareholders, (3) breached a provision in the Shareholders' Agreement that allegedly required co-defendant Chase International Corp. ("CIC") to offer the minority shareholders the right to participate in certain sales of PCBV shares and that required CIC to give written notice of any offer to purchase the minority shareholders' shares in PCBV, (4) breached their fiduciary duties to the minority shareholders, (5) breached the agreement between PCBV and CIC, which allegedly limited the amount of management fees that could be paid annually by PCBV, (6) made false and misleading statements in various documents filed with the Securities and Exchange Commission, (7) colluded to defraud the minority shareholders by failing to make reference in certain Forms 8-K, 8-KA and 14D-1 to the minority shareholders or their alleged rights and claims, (8) colluded to divert assets of PCBV to affiliates of PCI and PCBV, including the Company, that allegedly compete with PCI and PCBV. The minority shareholders also seek damages in the amount of 1.7 percent of the payment made by UPC for the shares of the Company, although the amended complaint does not contain a separate claim for relief seeking that amount. The Company intends to defend the lawsuit vigorously. The Company has also conducted negotiations to purchase the minority shareholders' outstanding shares in PCBV. If the negotiations produce a sale by the minority shareholders of their shares in PCBV to the Company, the lawsuit would most likely be terminated. The Company is unable to predict the outcome of those negotiations. In the event that the lawsuit is not terminated, its status is as follows: The time for the Company to respond to the amended complaint has not yet expired. Discovery has not yet commenced. At this early stage of the proceedings, the Company is unable to predict the probable outcome of the lawsuit or the Company's ultimate exposure in connection therewith. In addition to the Ohio lawsuit, the other minority shareholders of PCBV (representing an additional 6% of PCBV) have asserted similar claims for compensation, but have not filed suit. For a discussion of certain Anti-Monopoly Office's findings relating to the Company, see "Regulation--Anti-Monopoly Act." 13 PART II ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS DESCRIPTION OF CAPITAL STOCK Set forth below is certain information concerning the Company's capital stock and a brief summary of the material provisions of the Company's capital stock, Certificate of Incorporation and By-Laws. This description does not purport to be complete and is qualified in its entirety by reference to the Company's Certificate of Incorporation and By-Laws. GENERAL At March 26, 2000, the Company had authorized stock of 63,000 shares, of which (i) 27,000 shares are common stock, par value $0.01 per share ("Common Stock"), (ii) 4,000 shares are Series A Preferred Stock, par value of $1.00 per share ("Series A Preferred Stock"), (iii) 2,000 shares are Series C Preferred Stock, par value of $0.01 per share ("Series C Preferred Stock") and (iv) 30,000 shares are Debenture Stock, par value $0.0001 ("Debenture Stock"). At March 26, 2000 there were (i) 18,948 shares of Common Stock, (ii) 4,000 shares of Series A Preferred Stock, (iii) 2,000 shares of Series C Preferred Stock, and (iv) 14,000 shares of Debenture Stock issued, outstanding and fully paid. COMMON STOCK DIVIDENDS. Holders of Common Stock are entitled to dividends when, as and if declared by the Board of Directors. VOTING RIGHTS. Holders of Common Stock are entitled to one vote per share on all matters submitted to the shareholders of the Company. Except as otherwise required by law, the shares of Series B Preferred Stock are entitled to vote on an equal basis together with the shares of Common Stock at any annual or special meeting of the stockholders of the Company, or may act by written consent in the same manner as the holders of Common Stock. Under New York law, the affirmative vote of the holders of a majority of the outstanding shares of Common Stock is required to approve, among other things, a change in the designations, preferences or limitations of the shares of Common Stock. LIQUIDATION RIGHTS. Upon liquidation, dissolution or winding-up of the Company, the holders of Common Stock are entitled to share ratably all assets available for distribution after payment in full of, or provision for the payment in full of, debts and other liabilities of the Company and payment of distributions to preferred shareholders. SERIES A PREFERRED STOCK DIVIDENDS. The holders of Series A Preferred Stock are not entitled to receive dividends. VOTING RIGHTS. The holders of Series A Preferred Stock are not entitled to vote on any matters submitted to the shareholders of the Company, except as otherwise required by applicable law. REDEMPTION. The Company is required on October 31, 2004 (the "Redemption Date"), to redeem the Series A Preferred Stock. At the option of the Company, the Series A Preferred Stock may be redeemed at any prior time, in whole or in part. The redemption price per share of Series A Preferred Stock is $10,000. Any shares of Series A Preferred Stock that have at any time been redeemed or 14 repurchased by the Company will, after such redemption or repurchase, be cancelled by the Company and will not be available for reissue. LIQUIDATION. Upon liquidation, dissolution or winding up of the Company, after payment in full of, or provision for the payment of, the debts and other liabilities of the Company and the Debenture Stock, the remaining assets available for distribution to shareholders will be distributed first to the holders of the Series A Preferred Stock, to the extent available, in an amount equal to $10,000 per share, but if the funds available therefor are insufficient, then to the holders of Series A Preferred Stock on a PRO RATA basis in accordance with the number of shares of Series A Preferred Stock held by each holder. SERIES B PREFERRED STOCK Prior to August 6, 1999, @Entertainment held all of the issued and outstanding shares of the Company's Series B Preferred Stock. On August 6, 1999, @Entertainment consented to the cancellation of all of the issued and outstanding shares of the Company's Series B Preferred Stock. The accreted value of these shares was reclassified as paid-in capital. No shares of the Company's Series B Preferred Stock are authorized or available for reissuance. SERIES C PREFERRED STOCK DIVIDENDS. The holders of Series C Preferred Stock are not entitled to receive dividends. VOTING RIGHTS. The holders of Series C Preferred Stock are not entitled to vote on any matters submitted to the shareholders of the Company, except as otherwise required by applicable law. REDEMPTION. On the Redemption Date, the Company is required to redeem the Series C Preferred Stock. At the option of the Company, the Series C Preferred Stock may be redeemed at any time, in whole or in part. The redemption price per share of Series C Preferred Stock is $10,000. From and after the close of business on the Redemption Date, unless there has been a default in the payment of the redemption price, all rights of holders of shares of Series C Preferred Stock which shares have been redeemed cease and thereafter such shares will not be deemed to be outstanding for any purposes whatsoever. Any shares of Series C Preferred Stock that have at any time been redeemed or repurchased by the Company will, after such redemption or repurchase, be cancelled by the Company and will not be available for reissuance. LIQUIDATION. Upon liquidation, dissolution or winding up of the affairs of the Company, after payment or provisions for the payment of the debts and other liabilities of the Company and the Debenture Stock, the assets then available for distribution to the shareholders will be distributed first to the holders of the Series A Preferred Stock, to the extent available, in an amount equal to $10,000 per share, second to the holders of the Series B Preferred Stock, to the extent available, in an amount equal to $10,000 per share, and third to the holders of the Series C Preferred Stock, to the extent available, in an amount equal to $10,000 per share, but if the funds available thereafter are insufficient, then to the holders of Series C Preferred Stock on a PRO RATA basis in accordance with the number of shares held by each holder of Series C Preferred Stock. SERIES D PREFERRED STOCK All of the authorized shares of Series D Preferred Stock were redeemed on March 29, 1996 and no such shares are available for reissuance. DEBENTURE STOCK DIVIDENDS. The holders of Debenture Stock are not entitled to receive dividends. 15 VOTING RIGHTS. The holders of Debenture Stock are not entitled to vote on any matters submitted to the shareholders of the Company, except as otherwise required by applicable law. REDEMPTION. On December 31, 2003, the Company is required to redeem the Debenture Stock. The redemption price per share of Debenture Stock is $10,000 plus interest at 10% per annum compounded annually from November 3, 1999 to the date of redemption. From and after the close of business on the redemption date, unless there has been a default in the payment of the redemption price, all rights of holders of shares of Debenture Stock which shares have been redeemed cease and thereafter such shares will not be deemed to be outstanding for any purposes whatsoever. Any shares of Debenture Stock that have at any time been redeemed or repurchased by the Company will, after such redemption or repurchase, be cancelled by the Company and will not be available for reissuance. LIQUIDATION. Upon liquidation, dissolution or winding up of the affairs of the Company, after payment or provisions for the payment of the debts and other liabilities of the Company, the assets then available for distribution to the shareholders will be distributed first to the holders of the Debenture Stock, to the extent available, in an amount equal to $10,000 per share, but if the funds available thereafter are insufficient, then to the holders of Debenture Stock on a PRO RATA basis in accordance with the number of shares held by each holder of Debenture Stock. SECURITY. The Company has agreed to pledge PCBV Notes with an aggregate principal amount of $176,815,000 million to secure the redemption of the Debenture Stock. The holders of PCI Notes will be equally and ratably secured by the pledge. ITEMS REQUIRING SUPERMAJORITY VOTE UNDER THE CERTIFICATE OF INCORPORATION The following actions require (i) the affirmative vote of at least four directors, followed by the affirmative vote of the percentage of issued and outstanding capital stock entitled to vote thereon at a meeting of the shareholders as required under the New York Business Corporation Law ("NYBCL"), if such action is required to be submitted to the shareholders under the NYBCL, or (ii) if any such action is not approved by at least four directors, then any such action will require the affirmative vote of at least 61% of the total voting power of the capital stock issued and outstanding and entitled to vote thereon, provided however that if board approval of such action is required under the NYBCL, the action will also require the approval of the Board of Directors at a special meeting of the Board of Directors (and for no purposes other than the approval of actions taken pursuant to this subsection (ii)) for which two-fifths of the total number of directors constitutes a quorum: A. A fundamental change in the business of the Company or any subsidiary; B. The adoption of, and approval of any modification to, the annual budget of the Company for each fiscal year; C. An expenditure, not accounted for in the budget during any fiscal year, in excess of $5 million; D. A merger or other business combination or the sale, lease, transfer or other disposition of all or any material portion of the assets; E. Certain encumbrances; F. Related-party transactions; G. The issuance by the Company of third-party debt which causes the aggregate of all third party debt to exceed $25 million; H. Certain issuances of capital stock; I. The declaration of dividends or other distributions; 16 J. The repurchase or optional redemption of any capital; K. The dissolution or liquidation or voluntary winding-up of the Company; L. Amending the Company's Certificate of Incorporation or By-Laws; M. The giving of certain guarantees or indemnities; N. The election or removal of the Chief Executive Officer or the Chairman of the Board; O. Entering into or modifying a material employment contract; P. A change in the auditors or fiscal year-end of the Company; Q. Settling or resolving tax claims in excess of $250,000; R. Commencement, prosecution or compromise of material litigation or arbitration proceedings; and S. Taking steps to wind-up, dissolve or voluntarily seek the protection of bankruptcy laws. 17 ITEM 6. SELECTED FINANCIAL DATA Set forth below are selected consolidated financial data of the Company for each of the periods in the five-years period ended December 31, 1999. The Company for the four years ended December 31, 1998 and the period from January 1, 1999 through August 5, 1999 prior to the Acquisition, is herein referred to as "Predecessor" and the Company from August 6, 1999 through December 31, 1999 after Acquisition is referred to as the "Successor". The selected consolidated financial data set forth below have been derived from the consolidated financial statements of the Company and the notes thereto prepared in conformity with generally accepted accounting principles as applied in the United States, which have been audited by the Company's independent public accountants (the "Consolidated Financial Statements"). The selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operation" included herein: PREDECESSOR ------------------------------------------------------------ SUCCESSOR PERIOD FROM -------------- JANUARY 1, PERIOD FROM 1999 AUGUST 6, 1999 YEAR ENDED DECEMBER 31, THROUGH THROUGH --------------------------------------------- AUGUST 5, DECEMBER 31, 1995 1996 1997 1998 1999 1999 -------- -------- ---------- ---------- ------------ -------------- CONSOLIDATED STATEMENTS OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA) Cable television revenue....... $18,557 $ 24,923 $ 37,575 $ 52,971 $ 35,434 $ 27,027 Operating expenses: Direct operating expenses.... (5,129) (7,193) (11,416) (34,843) (24,270) (21,546) Selling, general and administrative expenses(1)................ (4,684) (9,289) (28,165) (19,559) (9,281) (14,246) Depreciation and amortization............... (5,199) (9,788) (16,231) (21,635) (13,819) (18,158) ------- -------- ---------- ---------- ---------- ---------- Operating (loss) income.... 3,545 (1,347) (18,237) (23,066) (11,936) (26,923) Interest and investment income..................... 174 1,274 3,176 1,020 167 (11) Interest expense............. (4,373) (4,687) (13,281) (14,320) (8,578) (4,253) Foreign exchange loss........ (17) (761) (1,107) (617) (295) (3,909) Non-operating expense........ -- -- -- -- -- 1,977 ------- -------- ---------- ---------- ---------- ---------- Loss before income taxes, minority interest and extraordinary item......... (671) (5,521) (29,449) (36,983) (20,642) (33,119) Income tax (expense) benefit.................... (600) (1,273) 975 (210) (30) (11) Minority interest............ (18) 1,890 (3,586) -- -- -- ------- -------- ---------- ---------- ---------- ---------- Loss before extraordinary item..................... (1,289) (4,904) (32,060) (37,193) (20,672) (33,130) Extraordinary item--loss on early extinguishment of debt....................... -- (1,713) -- -- -- -- Net loss................... (1,289) (6,617) (32,060) (37,193) (20,672) (33,130) Accretion of redeemable preferred stock............ -- (2,870) (4,194) (4,106) (1,807) (1,911) Preferred stock dividends.... -- (1,738) -- -- -- -- Excess of carrying value of preferred stock over consideration paid(2)...... -- 3,549 -- -- -- -- ------- -------- ---------- ---------- ---------- ---------- Accrued Dividend on Mandatorily Redeemable Debenture Stock............ -- -- -- -- -- $ (2,333) Net loss applicable to holders of Common Stock.... $(1,289) $ (7,676) $ (36,254) $ (41,299) $ (22,479) $ (37,374) ======= ======== ========== ========== ========== ========== Basic and diluted net loss per common share........... $(95.67) $(435.72) $(1,913.34) $(2,179.60) $(1,186.52) $(1,972.45) ------- -------- ---------- ---------- ---------- ----------
18 PREDECESSOR --------------------------------------------- SUCCESSOR ---------- AS OF DECEMBER 31, AS OF --------------------------------------------- DECEMBER 1995 1996 1997 1998 31, 1999 -------- -------- ---------- ---------- ---------- CONSOLIDATED BALANCE SHEETS DATA: (IN THOUSANDS) Cash and cash equivalents............ $ 2,343 $ 68,483 $ 25,750 $ 2,574 $ 3,374 Property, plant and equipment, net... 52,320 84,833 109,090 136,868 129,610 Total assets......................... 68,058 217,537 189,783 193,785 524,931 Total notes payable.................. 59,405 130,074 130,110 138,441 24,219 Redeemable preferred stock........... -- 34,955 39,149 30,977 34,695 Mandatorily Redeemable Debenture Stock.............................. -- -- -- -- $ 142,333 Total stockholder's equity/(deficiency)................ 190 31,048 4,219 (13,561) 416,143
- ------------------------ (1) The year ended December 31, 1997 includes a non-cash compensation expense of $9,425,000 relating to the granting of certain management stock options. See "Management's Discussion and Analysis of Financial Condition and Results of Operations' and Note 14 to the Consolidated Financial Statements. (2) Represents the amount paid to preferred stockholders in excess of or less than the carrying value of such shares. 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company's revenues have been and will continue to be derived primarily from monthly subscription fees for cable television services and one-time installation fees for connection to its cable television networks. The Company charges its subscribers fixed monthly fees for their choice of service packages and for other services, such as premium channels, tuner rentals and additional outlets, all of which are included in monthly subscription fees. The Company currently offers broadcast, intermediate (in limited areas) and basic packages of cable service. At December 31, 1999, approximately 71.6% of the Company's subscribers received its basic package. For the year ended December 31, 1999, approximately 94.0% of the Company's cable revenue was derived from monthly subscription fees compared to approximately 88.9% for the year ended December 31, 1998. When the Company began operations in 1990, revenue from installation fees exceeded revenue from monthly subscription fees because of the significant number of new installations and the high amount of the installation fees relative to the small existing subscriber base. As the Company's subscriber base has grown, aggregate monthly subscription revenue has increased and installation fees, while currently increasing on an aggregate basis, have declined as a percentage of total revenue. The Company expects that installation fees will continue to constitute a declining portion of the Company's revenue. During 1998 and 1999, management completed or was in the process of completing several strategic actions in support of its business and operating strategy. On June 5, 1998, the Company began providing the Wizja TV programming package, with its initial 11 channels of primarily Polish-language programming, to its basic subscribers. Since that date, the basic Wizja TV package has been expanded to 24 channels. On September 18, 1999, the Company launched a proprietary premium channel called Wizja Sport. Management believes that this selection of high quality primarily Polish-language programming will provide it with a significant competitive advantage in increasing its cable subscriber penetration rates. The Company generated operating losses of $38.9 million for 1999, $ 23.1 million for 1998 and $18.2 million for 1997 primarily due to the purchase of Wizja TV programming for $21.0 million and $13.4 million in 1999 and 1998, respectively, and the increased levels of acquisition and related costs. In addition, for the year ended December 31, 1997, the Company recorded a one time charge for non-cash compensation related to stock options of $9.4 million. 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. GAAP measure of profit and loss or cash flow from operations and should not be considered as an alternative to cash flows from operations as a measure of liquidity. The Company reported EBITDA of negative $6.9 million for 1999, negative $1.4 million for 1998 and $7.4 million for 1997. 1999 COMPARED WITH 1998 CABLE TELEVISION REVENUE. Revenue increased $9.5 million or 17.9% from $53.0 million in the year ended December 31, 1998 to $ 62.5 million in the year ended December 31, 1999. This increase was 20 primarily attributable to a 6.0% increase in the number of basic and intermediate subscribers from approximately 738,000 at December 31, 1998 to approximately 783,000 at December 31, 1999, as well as an increase in monthly subscription rates. The Company introduced the Wizja TV programming package on its systems for basic subscribers on June 5, 1998, and after an initial free period, increased prices significantly in September 1998. Approximately 28.2% of the net increase in basic subscribers was the result of build-out of the Company's existing cable networks and the remainder was due to acquisitions. Revenue from monthly subscription fees represented 88.9% of cable television revenue for the year ended December 31, 1998 and 94.0% for the year ended December 31, 1999. During the year ended December 31, 1999, the Company generated approximately $2.1 million of additional premium subscription revenue as a result of providing the HBO Poland service pay movie channels to cable subscribers as compared to $3.1 million for the year ended December 31, 1998. DIRECT OPERATING EXPENSES. Direct operating expenses increased $11.0 million or 31.6%, from $34.8 million for the year ended December 31, 1998 to $45.8 million for the year ended December 31, 1999, principally as a result of the purchase of the Wizja TV programming package from @Entertainment D-DTH and programming segment and higher levels of technical personnel and increased maintenance expenses associated with recently acquired networks as well as the increased size of the Company's cable television system. Direct operating expenses increased from 65.7% of revenues for the year ended December 31, 1998 to 73.3% of revenues for the year ended December 31, 1999. However, without considering the affiliate charge for Wizja TV programming package, direct operating expenses as a percentage of revenue would have been 39.7% and 40.4% in the year ended December 31, 1999 and 1998, respectively. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $3.9 million or 19.9% from $19.6 million for the year ended December 31, 1998 to $23.5 million for the year ended December 31, 1999, principally as a result of increase in sales and marketing expenses incurred in newly acquired networks in connection with the Company's pricing strategy, extensive country--wide fall marketing campaign and general growth of the business. Selling, general and administrative expenses increased from 36.9% of revenues for the year ended December 31, 1998 to 37.6% for the year ended December 31, 1999. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense rose $10.4 million, or 48.1%, from $21.6 million for the year ended December 31, 1998 to $32.0 million for the year ended December 31, 1999 principally as a result of depreciation and amortization of additional goodwill pushed down as a result of @Entertainment's merger with UPC and the continued build-out of the Company's cable networks. Depreciation and amortization expense as a percentage of revenues increased from 40.8% for the year ended December 31, 1998 to 51.2% for the year ended December 31, 1999. OPERATING LOSS. Each of these factors contributed to an operating loss of $23.1 million for the year ended December 31, 1998 and $38.9 million for the year ended December 31, 1999. INTEREST EXPENSE. Interest expense decreased $1.5 million, or 10.5%, from $14.3 million in 1998 to $12.8 million in 1999 as a result of repurchase of approximately 87% of the Company's 9 7/8% Senior Notes due 2003 (the "PCI Notes") on November 2, 1999 and pay back of $6.5 million of Amerbank loan on November 20, 1999. INTEREST AND INVESTMENT INCOME. Interest and investment income decreased $0.8 million, or 80%, from $1.0 million in 1998 to $0.2 million in 1999, primarily due to the reduction in the level of cash available for investment in 1999. FOREIGN EXCHANGE LOSS, NET. Foreign exchange loss increased $3.6 million from $0.6 million in 1998 to $4.2 million in 1999, primarily due to unfavorable exchange rate fluctuations. 21 NET LOSS. For 1998 and 1999, the Company had net losses of $37.2 million and $53.8 million, respectively. These losses were the result of the factors discussed above. NET LOSS APPLICABLE TO COMMON STOCKHOLDERS. Net loss applicable to common stockholders increased from $41.3 million in 1998 to $59.9 million in 1999 due to the current year accretion of redeemable preferred stock and accrued dividend on mandatorily redeemable debenture stock as well as the factors discussed above. 1998 COMPARED TO 1997 CABLE TELEVISION REVENUE. Revenue increased $15.4 million or 41.0% from $37.6 million in 1997 to $53.0 million in 1998. This increase was primarily attributable to a 16.0% increase in the number of basic and intermediate subscribers from approximately 636,000 at December 31, 1997 to approximately 738,000 at December 31, 1998, as well as an increase in monthly subscription rates. The Company introduced the Wizja TV programming package on the Company's cable systems for basic subscribers on June 5, 1998, and after an initial free period, significantly increased prices in September 1998. Approximately 91.9% of the increase in basic subscribers was the result of expansion of the Company's existing cable networks and the remainder was due to acquisitions. Revenue from monthly subscription fees represented 85.2% of the Company's revenue for the year ended December 31, 1997 and 88.9% for the year ended December 31, 1998. Installation fee revenue for 1998 decreased by 66.7% compared to 1997, from $3.1 million to $1.0 million. During 1998, the Company generated approximately $3.1 million of additional premium channel subscription revenue as a result of providing the HBO Poland service and Canal + premium movie channels to cable subscribers as compared to $1.0 million for the year ended December 31, 1997. DIRECT OPERATING EXPENSES. Direct operating expenses increased $23.4 million, or 205.3%, from $11.4 million in 1997 to $34.8 million in 1998, principally as a result of higher programming expenses related to the newly introduced Wizja TV programming package from @Entertainment's D-DTH and programming segment, higher levels of technical personnel and increased maintenance expenses associated with recently acquired networks which have not yet been integrated within the Company's networks and standards as well as the increased size of the Company's cable television system. The Company incurred $13.4 million in programming costs for the purchase of the Wizja TV programming package from an affiliate of the Company. Direct operating expenses increased from 30.4% of revenues for 1997 to 65.7% of revenues for 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased $8.6 million or 30.4% from $28.2 million in 1997 to $19.6 million in 1998. A portion of this decrease was due to non-cash non-recurring compensation expense of $9.4 million in the year ended December 31, 1997 in connection with stock options granted to certain key executives. As a percentage of revenue, selling, general and administrative expenses decreased from 75.0% for 1997 to approximately 36.9% for 1998. However, without considering the non-cash compensation expense related to the stock options described above, selling, general and administrative expenses as a percentage of revenues would have been 50.0% in 1997. This percentage decrease was attributable to operating efficiencies realized by the Company in 1998. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense rose $5.4 million, or 33.3%, from $16.2 million in 1997 to $21.6 million in 1998, principally as a result of depreciation of additional cable television networks and the continued build-out of the Company's cable networks and amortization of goodwill from acquisition. Depreciation and amortization expense as a percentage of revenues decreased from 43.2% in 1997 to 40.8% in 1998. OPERATING LOSS. Each of the factors contributed to an operating loss of $23.1 million for the year ended December 31, 1998 compared to an operating loss of $18.2 million for the year ended December 31, 1997. 22 INTEREST EXPENSE. Interest expense increased $1.0 million, or 7.5%, from $13.3 million in 1997 to $14.3 million in 1998 as a result of interest paid on loans assumed in acquisitions of subsidiaries and an additional loan draw down in June 1998. INTEREST AND INVESTMENT INCOME. Interest and investment income decreased $2.2 million, or 68.7%, from $3.2 million in 1997 to $1.0 million in 1998, primarily due to the reduction in the level of cash available for investment in 1998 as the proceeds from the Company's 9 7/8% Senior Notes due 2003 (the "PCI Notes") issued in 1996 were used to fund network expansion and operating losses. FOREIGN EXCHANGE LOSS, NET. Foreign exchange loss decreased $0.5 million or 45.4% from $1.1 million in 1997 to $0.6 million in 1998, primarily due to more favorable exchange rate fluctuations. MINORITY INTEREST. No minority interest was recorded for the year ended December 31, 1998, compared to a minority interest expense of $3.6 million for the corresponding period in 1997. The 1997 expense represents a fourth quarter adjustment to write off certain receivable balances that were not recoverable. All minority interests were eliminated in 1998 as the minority interest share of the losses exceeded the value of the minority interest investments. NET LOSS. For 1997 and 1998, the Company had net losses of $32.1 million and $37.2 million, respectively. These losses were the result of the factors discussed above. NET LOSS APPLICABLE TO COMMON STOCKHOLDERS. Net loss applicable to common stockholders increased from $36.3 million in 1997 to $41.3 million in 1998 due to the current year accretion of redeemable preferred stock and the factors discussed above. LIQUIDITY AND CAPITAL RESOURCES The Company has met its cash requirements in recent years primarily with (i) capital contributions and loans from @Entertainment, (ii) borrowings under available credit facilities, (iii) cash flows from operations, and (iv) the sale of $130 million aggregate principal amount of the Company's 9 7/8% Senior Notes due to 2003 ("PCI Notes"). The Company had positive cash flows from operating activities in 1998 of $14.3 million, primarily due to the increase of accounts payable and accrued expenses funds received from affiliates, and income tax refunds received in 1998. The Company had negative cash flows from operating activities of $15.5 million and $9.6 million for 1999 and 1997, respectively due to the Company's net loss. Since the acquisition of all of the outstanding stock of the Company's parent, @Entertainment, by UPC on August 6, 1999, the Company has met its capital requirements primarily through the sale of its Debenture Stock for $140 million to @Entertainment. Cash used for the purchase and expansion of the Company's cable television networks was $22.1 million, $42.6 million and $33.8 million in 1999, 1998 and 1997 respectively. During 1996, the Company also entered into an agreement with American Bank in Poland, S.A. ("AmerBank") which provides for a credit facility of approximately $6.5 million. Interest, based on LIBOR plus 3%, is due quarterly. All advances under the loan were drawn in June 1998 and repaid on November 20, 1999. On October 31, 1996, $130 million aggregate principal amount of the PCI Notes were sold by the Company to the initial purchaser pursuant to a purchase agreement. The initial purchaser subsequently completed a private placement of the PCI Notes. The PCI Notes were issued pursuant to an indenture. Pursuant to the indenture governing the PCI Notes (the "PCI 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 issuances and sales of capital stock of restricted subsidiaries; (iv) limitation on transactions with affiliates; 23 (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 subsidiaries; (x) limitation on investments in unrestricted subsidiaries; (xi) limitation on lines of business; (xii) consolidations, mergers and sale of assets; and (xiii) provision of financial statements and reports. The Company is in compliance with these covenants. The Company 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 the Company), 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 the Company were $176,815,000, $160,830,000 and $134,509,000 at December 31, 1999, 1998 and 1997, respectively. The indentures covering the PCI Notes provide that, following a Change of Control (as defined therein), each noteholder had the right, at such holder's option, to require the respective issuer to offer to repurchase all or a portion of such holder's PCI Notes at the repurchase prices, described below. The Company believes that the August 6, 1999 acquisition by UPC of @Entertainment constituted a Change of Control. Accordingly, PCI made offers to repurchase (the "Offers") from the holders of the PCI Notes. The Offers expired at 12:01 PM, New York City time, on November 2, 1999. In accordance with the terms of the indentures governing the PCI Notes, the Company was required to offer to repurchase the PCI Notes at the purchase price 101% of principal. As of August 5, 1999, the Company had $129,668,000 aggregate principal amount at maturity of PCI Notes outstanding. Pursuant to the Offer, the Company has purchased $113,237,000 aggregate principal amount of PCI Notes for an aggregate price of $114,369,370. UPC financed the repurchase of the PCI Notes. To fund the repurchase of the PCI Notes and operations, as of November 3, 1999, PCI sold @Entertainment 14,000 shares of its Debenture Stock for a total of $140 million on an as-issued basis. The Debenture Stock will be redeemed on December 31, 2003 for a price of $10,000 per share plus interest at 10% per annum from November 3, 1999 to the date of redemption, compounded annually. UPC funded @Entertainment's purchase of the Mandatorily Redeemable Debenture Stock. To secure its obligations under the Mandatorily Redeemable Debenture Stock, the Company will pledge to @Entertainment intercompany notes issued by PCBV in an aggregated principal amount of $176,815,000. The PCI Noteholders will be equally and ratably secured by the pledge. The Company's cash on hand will be insufficient to satisfy all of its obligations related to its offer to repurchase its outstanding senior notes and to complete its current business plan. UPC and @Entertainment are evaluating various alternatives to meet the Company's capital needs. Future sources of financing for the Company could include public or private debt or bank financing or any combination thereof, subject to the restrictions contained in the indentures governing the outstanding senior indebtedness of the Company, @Entertainment, UPC, and United GlobalCom, Inc., UPC's parent. Moreover, if the Company's plans or assumptions change, if its assumptions prove inaccurate, if it consummates unanticipated investments in or acquisitions of other companies, if it experiences unexpected costs or competitive pressures, or if existing cash, and projected cash flow from operations prove to be insufficient, the Company may need to obtain greater amounts of additional financing. While it is the Company's intention to enter only into new financing or refinancing that it considers advantageous, there can be no assurance that such sources of financing would be available to the Company in the future, or, if available, that they could be obtained on terms acceptable to the Company. The Company is also dependent on its parent, @Entertainment and @Entertainment's parent UPC, to provide financing to achieve the Company's business strategy. UPC has declared that it will continue to financially support PCI and its subsidiaries as a going concern and accordingly enable the Company and its subsidiaries to meet their financial obligations if and when needed, for the period at least through January 31, 2001. 24 YEAR 2000 COMPLIANCE The Company has not experienced any problems with its computer systems relating to distinguishing twenty-first century dates from twentieth century dates, which generally are referred to as year 2000 problems. The Company is also not aware of any material year 2000 problems with its clients or vendors. The Company did not and does not anticipate incurring material expenses or experiencing any material operation disruptions as a result of any year 2000 problems. IMPLEMENTATION OF NEW ACCOUNTING STANDARDS None. IMPACT OF NEW ACCOUNTING STANDARDS NOT YET ADOPTED NEW ACCOUNTING PRINCIPLES The Financial Accounting Standards Board ("FASB") recently issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which requires that companies recognize all derivatives as either assets or liabilities in the balance sheet at fair value. Under this statement, accounting for changes in fair value of a derivative depends on its intended use and designation. In June 1999, the FASB approved Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of Effective Date of FASB Statement No. 133" ("SFAS 137"). SFAS 137 amends the effective date of SFAS 133, which will now be effective for our first quarter 2001. We are currently assessing the effect of this new standard. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The principal market risk (i.e. the risk of loss arising from adverse changes in market rates and prices) to which the Company is exposed is foreign exchange rate risk from fluctuations in the Polish zloty currency exchange rate. The Company's long term debt is primarily subject to a fixed rate, and therefore variations in the interest rate do not have a material impact on net interest expense. FOREIGN EXCHANGE AND OTHER INTERNATIONAL MARKET RISKS Operating in international markets involves exposure to movements in currency exchange rates. Currency exchange rate movements typically affect economic growth, inflation, interest rates, governmental actions and other factors. These changes, if material, can cause the Company to adjust its financing and operating strategies. The discussion of changes in currency exchange rates below does not incorporate these other important economic factors. International operations constitute 100% of the Company's 1999 consolidated operating loss. Some of the Company's operating expenses and capital expenditures are expected to continue to be denominated in or indexed in U.S. dollars. By contrast, substantially all of the Company's revenues are denominated in zloty. Any devaluation of the zloty against the U.S. dollar that the Company is unable to offset through price adjustments will require it to use a larger portion of its revenue to service its U.S. dollar denominated obligations and contractual commitments. The Company estimates that a 10% change in foreign exchange rates would impact reported operating loss for the year ended December 31, 1999 by approximately $671,000. In other terms, a 10% depreciation of the Polish zloty against the U.S. dollar, would result in a $671,000 decrease in the reported operating loss for the year ended December 31, 1999. This was estimated using 10% of the Company's operating loss after adjusting for unusual impairment and other items including U.S. dollar denominated or indexed expenses. The Company believes that this quantitative measure has inherent limitations because, as discussed in the first paragraph of this section, it does not take into account any governmental 25 actions or changes in either customer purchasing patterns or the Company's financing or operating strategies. The Company does not generally hedge translation risk. While the Company may consider entering into transactions to hedge the risk of exchange rate fluctuations, there is no assurance that it will be able to obtain hedging arrangements on commercially satisfactory terms. Therefore, shifts in currency exchange rates may have an adverse effect on the Company's financial results and on its ability to meet its U.S. dollar denominated debt obligations and contractual commitments. Poland has historically experienced high levels of inflation and significant fluctuations in the exchange rate for the zloty. The Polish government has adopted policies that slowed the annual rate of inflation from approximately 250% in 1990 to approximately 20% in 1996, approximately 14.9% in 1997, approximately 11.8% in 1998 and approximately 7.3% in 1999. The exchange rate for the zloty has stabilized and the rate of devaluation of the zloty has generally decreased since 1991. The zloty appreciated against the U.S. dollar by approximately 0.4% for the year ended December 31, 1998, respectively. However for the year ended December 31, 1999 the zloty has depreciated against the U.S. dollar by approximately 17.4%. Inflation and currency exchange fluctuations may have a material adverse effect on the business, financial condition and results of operations of the Company. 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors of Poland Communications, Inc.: We have audited the accompanying consolidated balance sheet of Poland Communications, Inc. and its subsidiaries as of December 31, 1999 and the related consolidated statements of operations, comprehensive loss, changes in stockholder's equity and cash flows for the period from January 1, 1999 to August 5, 1999 and the period from August 6, 1999 to December 31, 1999. 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 audit. We conducted our audit 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 audit provides 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 Poland Communications, Inc. and its subsidiaries as of December 31, 1999 and the results of their operations and their cash flows for the period from January 1, 1999 to August 5, 1999 and the period from August 6, 1999 to December 31, 1999 in conformity with generally accepted accounting principles in the United States of America. Arthur Andersen Warsaw, Poland March 29, 2000 27 INDEPENDENT AUDITORS' REPORT The Board of Directors Poland Communications, Inc.: We have audited the accompanying consolidated balance sheet of Poland Communications, Inc. and subsidiaries as of December 31, 1998, and the related consolidated statements of operations, comprehensive loss, changes in stockholders' equity/(deficiency) and cash flows for the years ended December 31, 1998 and 1997. 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 Poland Communications, Inc. and subsidiaries as of December 31, 1998, and the results of their operations and their cash flows for the years ended December 31, 1998 and 1997, in conformity with generally accepted accounting principles in the United States of America. KPMG Warsaw, Poland March 29, 1999 28 POLAND COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------ SUCCESSOR PREDECESSOR (NOTE 2) (NOTE 2) ------------ ------------ (IN THOUSANDS) Current assets: Cash and cash equivalents................................. $ 3,374 $ 2,574 Trade accounts receivable, net of allowances for doubtful accounts of $2,419 in 1999 and $1,095 in 1998 (note 5)...................................................... 6,156 2,770 VAT recoverable........................................... 1,243 612 Prepayments............................................... 890 560 Other current assets...................................... 298 190 -------- -------- Total current assets.................................... 11,961 6,706 -------- -------- Property, plant and equipment (note 8): Cable television system assets.......................... 123,845 175,053 Construction in progress................................ 6,382 1,665 Vehicles................................................ 741 2,096 Other................................................... 6,120 6,183 -------- -------- 137,088 184,997 Less accumulated depreciation........................... (7,478) (48,129) -------- -------- Net property, plant and equipment................... 129,610 136,868 Inventories for construction................................ 5,373 8,851 Intangible assets, net (note 9)............................. 377,846 34,481 Notes receivable from affiliates............................ -- 449 Other assets................................................ 141 6,430 -------- -------- Total assets........................................ $524,931 $193,785 ======== ========
See accompanying notes to consolidated financial statements. 29 POLAND COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) LIABILITIES AND STOCKHOLDER'S (DEFICIENCY) / EQUITY
SUCCESSOR PREDECESSOR (NOTE 2) (NOTE 2) ---------- ----------- DECEMBER DECEMBER 31, 31, 1999 1998 ---------- ----------- (IN THOUSANDS) Current liabilities: Accounts payable and accrued expenses..................... $ 23,438 $ 17,062 Accrued interest.......................................... 243 2,140 Deferred revenue.......................................... 759 1,207 Current portion of notes payable (note 11)................ -- 6,500 -------- -------- Total current liabilities............................... 24,440 26,909 Long term liabilities: Due to affiliate.......................................... 25,434 17,519 Notes payable to parent................................... 7,763 -- Notes payable, less current portion (note 11)............. 16,456 131,941 -------- -------- Total liabilities....................................... 74,093 176,369 -------- -------- Redeemable preferred stock (liquidation value $60,000,000; 6,000 shares authorized, issued and outstanding).......... 34,695 30,977 Mandatorily Redeemable Debenture stock, 30,000 shares authorized; 14,000 shares issued and outstanding (including accrued dividend).............................. 142,333 -- Commitments and contingencies (note 16) Stockholder's equity / (deficiency): Common stock, $.01 par value, 27,000 shares authorized; 18,948 shares issued and outstanding.................... 1 1 Paid-in capital........................................... 342,315 78,380 Accumulated other comprehensive (loss) / income........... (35,376) 586 Accumulated deficit....................................... (33,130) (92,528) -------- -------- Total stockholder's equity / (deficiency)............... 273,810 (13,561) -------- -------- Total liabilities and stockholder's equity / (deficiency).......................................... $524,931 $193,785 -------- --------
See accompanying notes to consolidated financial statements. 30 POLAND COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS PREDECESSOR (NOTE 2) SUCCESSOR -------------------------------------- (NOTE 2) PERIOD FROM PERIOD FROM JANUARY 1, AUGUST 6, 1999 1999 THROUGH THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, AUGUST 5, ----------------------- 1999 1999 1998 1997 -------------- ------------ ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues................................ $ 27,027 $ 35,434 $ 52,971 $ 37,575 Operating expenses: Direct operating expenses............. 21,546 24,270 34,843 11,416 Selling, general and administrative expenses............................ 14,246 9,281 19,559 28,165 Depreciation and amortization......... 18,158 13,819 21,635 16,231 ---------- ---------- ---------- ---------- Total operating expenses................ 53,950 47,370 76,037 55,812 Operating loss........................ (26,923) (11,936) (23,066) (18,237) Interest and investment (loss)/income, net................................... (11) 167 1,020 3,176 Interest expense........................ (4,253) (8,578) (14,320) (13,281) Foreign exchange loss, net.............. (3,909) (295) (617) (1,107) Non-operating (expenses)/income, net.... 1,977 -- -- -- ---------- ---------- ---------- ---------- Loss before income taxes and minority interest............................ (33,119) (20,642) (36,983) (29,449) Income tax (expense)/benefit (note 10)................................... (11) (30) (210) 975 Minority interest....................... -- -- -- (3,586) ---------- ---------- ---------- ---------- Net loss.............................. (33,130) (20,672) (37,193) (32,060) Accretion of redeemable preferred stock (note 13)..................... (1,911) (1,807) (4,106) (4,194) Accrued dividend on Mandatorily Redeemable Debenture stock.......... (2,333) -- -- -- ---------- ---------- ---------- ---------- Net loss applicable to holders of common stock................................. (37,374) (22,479) (41,299) (36,254) ========== ========== ========== ========== Basic and diluted net loss per common share (note 12)....................... $(1,972.45) $(1,186.35) $(2,179.60) $(1,913.34)
See accompanying notes to consolidated financial statements. 31 POLAND COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS SUCCESSOR (NOTE 2) PREDECESSOR (NOTE 2) ---------------- ----------------------------------------- PERIOD FROM PERIOD FROM AUGUST 6, 1999 JANUARY 1, 1999 YEAR ENDED DECEMBER THROUGH DECEMBER THROUGH AUGUST 31, 31, 5, ---------------------- 1999 1999 1998 1997 ---------------- ---------------- -------- -------- (IN THOUSANDS) Net loss........................... $(33,130) $(20,672) $(37,193) $(32,060) Other comprehensive (loss) / income: Translation adjustment........... (35,376) (15,947) 586 -- -------- -------- -------- -------- Comprehensive loss................. $(68,506) $(36,619) $(36,607) $(32,060) ======== ======== ======== ========
See accompanying notes to consolidated financial statements. 32 POLAND COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY / (DEFICIENCY)
ACCUMULATED COMMON STOCK OTHER -------------------- PAID IN COMPREHENSIVE ACCUMULATED SHARES AMOUNT AMOUNT INCOME DEFICIT TOTAL -------- --------- --------- -------------- ------------ -------- Balance at January 1, 1997.......................... 18,948 1 54,322 -- (23,275) 31,048 Net loss.......................................... -- -- -- -- (32,060) (32,060) Accretion of redeemable preferred stock........... -- (note 13)......................................... -- -- (4,194) -- -- (4,194) Stock option compensation expense................. -- (note 15)......................................... -- -- 9,425 -- -- 9,425 ------ --------- --------- ------- -------- -------- Balance December 31, 1997........................... 18,948 1 59,553 -- (55,335) 4,219 Net loss.......................................... -- -- -- -- (37,193) (37,193) Cumulative Translation Adjustment................. -- -- -- 586 -- 586 Capital Contribution.............................. -- -- 10,655 -- -- 10,655 Cancellation of Series B redeemable............... -- -- -- -- -- -- preferred stock................................... -- -- 12,278 -- -- 12,278 Accretion of redeemable preferred stock (note 13)............................................. -- -- (4,106) -- -- (4,106) ------ --------- --------- ------- -------- -------- Balance December 31, 1998........................... 18,948 1 78,380 586 (92,528) (13,561) ------ --------- --------- ------- -------- -------- Net loss for seven months of 1999................. -- -- -- -- (20,672) (20,672) Cumulative Translation Adjustment................. -- -- -- (15,947) -- (15,947) Capital Contribution.............................. -- -- 6,000 -- -- 6,000 Accretion of redeemable preferred stock............. -- -- -- -- -- -- (note 13)........................................... -- -- (1,807) -- -- (1,807) ------ --------- --------- ------- -------- -------- Balance August 5, 1999 (predecessor)................ 18,948 1 82,573 (15,361) (113,200) (45,987) ------ --------- --------- ------- -------- -------- Purchase accounting............................... 248,986 15,361 113,200 377,547 ------ --------- --------- ------- -------- -------- Balance August 6, 1999 (successor)................ 18,948 1 331,559 -- -- 331,560 ------ --------- --------- ------- -------- -------- Capital Contribution.............................. -- -- 15,000 -- -- 15,000 Accretion of redeemable preferred stock (note 13)............................................. -- -- (1,911) -- -- (1,911) Accretion of redeemable debenture stock........... -- -- (2,333) -- -- (2,333) Net loss for five months of 1999.................. -- -- -- -- (33,130) (33,130) Cumulative Translation Adjustment................. -- -- -- (35,376) -- (35,376) ------ --------- --------- ------- -------- -------- Balance December 31, 1999 (successor)............... 18,948 1 342,315 (35,376) (33,130) 273,810 ====== ========= ========= ======= ======== ========
See accompanying notes to consolidated financial statements. 33 POLAND COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
SUCCESSOR (NOTE 2) PREDECESSOR (NOTE 2) ----------------------- ------------------------------------------------ PERIOD FROM AUGUST, YEAR ENDED 1999 PERIOD FROM JANUARY 1, DECEMBER 31, THROUGH DECEMBER 1999 ------------------- 31, 1999 THROUGH AUGUST 5, 1999 1998 1997 ----------------------- -------------------------- -------- -------- (IN THOUSANDS) Cash flows from operating activities: Net loss............................... $(33,130) $(20,672) $(37,193) $(32,060) Adjustments to reconcile net loss to net cash provided by operating activities: Minority interest.................... -- -- -- 3,586 Depreciation and amortization........ 18,158 13,819 21,635 16,231 Amortization of notes payable discount and issue cost.......... 895 -- 881 1,040 Gain on sale of investment securities....................... -- -- -- (358) Non-cash stock option compensation expense.......................... -- -- -- 9,425 Unrealized foreign exchange loss... 3,742 -- -- -- Other.............................. (2,200) -- 496 -- Changes in operating assets and liabilities: Accounts receivable................ (986) (2,400) (650) 433 Other current assets............... (3,048) 2,138 1,015 (101) Accounts payable................... 6,641 (5,566) 6,289 (2,584) Accrued interest................... -- 767 (35) -- Amounts due to parent.............. (13,998) 21,913 19,872 (2,626) Deferred revenue................... (1,140) 879 (55) 155 Accrued income taxes............... -- -- 2,029 (2,707) Other.............................. (1,305) -- -- -- -------- -------- -------- -------- Net cash provided by operating activities..................... (26,371) 10,878 14,284 (9,566) -------- -------- -------- -------- Cash flows from investing activities: Construction and purchase of property, plant and equipment.... (9,084) (13,025) (42,639) (33,786) Other investments.................. -- -- -- (1,144) Notes receivable from affiliate.... -- 449 6,023 1,800 Proceeds from maturity of investment securities............ -- -- -- 25,473 Purchase of intangibles............ (308) (1,036) -- -- Purchase of subsidiaries, net of cash received.................... (954) (6,860) (17,601) (18,041) -------- -------- -------- -------- Net cash used in investing activities..................... (10,346) (20,472) (54,217) (25,698) -------- -------- -------- -------- Cash flows from financing activities: Proceeds from notes payable........ 50 7,713 6,500 -- Repayment of notes payable......... (122,959) (445) (398) (720) Proceeds from issuance of Mandatorily Redeemable Debenture stock............................ 140,000 -- -- -- Costs to obtain loans.............. -- -- -- (1,749) Capital contribution............... 16,907 6,000 10,655 -- -------- -------- -------- -------- Net cash provided by financing activities..................... 33,998 13,268 16,757 (2,469) -------- -------- -------- -------- Net (decrease)/increase in cash and cash equivalents........... (2,719) 3,674 (23,176) (37,733) Effect of exchange rates on cash......... (155) -- -- -- Cash and cash equivalents at beginning of period................................. 6,248 2,574 25,750 63,483 -------- -------- -------- -------- Cash and cash equivalents at end of period................................. $ 3,374 $ 6,248 $ 2,574 $ 25,750 ======== ======== ======== ======== Supplemental cash flow information: Cash paid for interest............. $ 6,270 $ 7,304 $ 13,014 $ 12,873 ======== ======== ======== ======== Cash paid for income taxes......... $ 37 $ 47 $ 589 $ 1,732 ======== ======== ======== ========
See accompanying notes to consolidated financial statements. 34 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 1. REPORTING ENTITY Poland Communications, Inc. ("PCI"), is a New York corporation and was founded in 1990 by David T. Chase, a Polish-born investor. PCI is a wholly-owned subsidiary of @Entertainment, Inc. ("@ Entertainment"), a Delaware corporation which is wholly-owned subsidiary of United Pan-Europe Communications N.V. ("UPC"). PCI owns 92.3% of the capital stock of Poland Cablevision (Netherlands) B.V. ("PCBV"), a Netherlands corporation and first-tier subsidiary of PCI. PCI and PCBV are holding companies that hold controlling interests in a number of Polish cable television companies, collectively referred to as the "PTK Companies". All significant assets and operating activities of PCI and subsidiaries (the "Company") are located in Poland. The period from January 1, 1999 through August 5, 1999 and the period from August 6, 1999 through December 31, 1999 are referred to herein as the "seven months of 1999" and "five months of 1999", respectively. The Company offers pay television services to business and residential customers in Poland. Its revenues are derived primarily from installation fees and monthly basic and premium service fees for cable television services. PCBV STOCKHOLDERS' AGREEMENT The following is a summary of certain aspects of the PCBV Stockholders' Agreement entered into by PCI, PCBV and PCBV's minority stockholders on March 8, 1990. The minority stockholders own the 7.7% of outstanding PCBV capital stock that is not owned by PCI. The PCBV Stockholders' Agreement protects shareholdings of each minority stockholder from dilution, by requiring that the PCBV shares of each minority stockholder must continue to represent a constant percentage of the total equity in PCBV and of the total votes to be cast by the PCBV stockholders on any subject, regardless of changes to the capital structure of PCBV and regardless of any additional equity funds that may be contributed to PCBV by PCI. The PCBV Stockholders' Agreement contains restrictions on the PCBV stockholders' ability to sell, pledge, hypothecate or otherwise transfer or encumber their PCBV shares. In addition, PCBV stockholders have the right of first refusal to purchase PCBV shares upon the death of an individual PCBV stockholder, and upon the liquidation, dissolution or other termination of a corporate PCBV stockholder. Furthermore, PCI has the right of first refusal to purchase PCBV shares from minority stockholders, and the minority stockholders have the right of first refusal to purchase PCBV shares from PCI, before such shares can be sold to a third party. Under the PCBV Stockholder's Agreement, PCI has the option to purchase the PCBV shares owned by the minority stockholders upon the satisfaction of certain conditions. The PCBV Stockholders' Agreement also includes covenants against competition that limit the ability of each PCBV stockholder to engage directly or indirectly in any aspect of the cable television business in Poland for a period ending ten years after such PCBV stockholder ceases to be a PCBV stockholder. PCI has direct or indirect ownership interests in a number of entities that engage in certain aspects of the cable television business in Poland. Under the PCBV Stockholders' Agreement, the minority stockholders have a claim against 7.7% of the profits and equity of such entities and, under a supplemental agreement, PCI has agreed to share the profits of these entities with the minority stockholders on a pro rata basis. On or about July 8, 1999 certain minority shareholders of PCBV filed a lawsuit against the Company and @Entertainment, Inc. and certain other parties, (see note 16). 35 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 2. CONSUMMATION OF UPC TENDER OFFER AND MERGER On June 2, 1999, @Entertainment entered into an Agreement and Plan of Merger with United Pan-Europe Communications N.V. ("UPC"), whereby UPC and its wholly-owned subsidiary, Bison Acquisition Corp. ("Bison"), initiated a tender offer to purchase all of the outstanding shares of @Entertainment in an all cash transaction valuing @Entertainment's shares of common stock at $19.00 per share. The tender offer, initiated pursuant to the Agreement and Plan of Merger with UPC and Bison, closed at 12:00 midnight on August 5, 1999. On August 6, 1999, Bison reported that it had accepted for payment a total of 33,701,073 shares of @Entertainment's common stock (including 31,208 shares tendered pursuant to notices of guaranteed delivery) representing approximately 99% of @Entertainment's outstanding shares of common stock (the "Acquisition"). In addition UPC acquired 100% of the outstanding Series A and Series B 12% Cumulative Preference Shares of @Entertainment and acquired all of the outstanding warrants and stock options. Also on August 6, 1999, Bison was merged with and into @Entertainment with @Entertainment continuing as the surviving corporation (the "Merger"). Accordingly, @Entertainment became a wholly-owned subsidiary of UPC. UnitedGlobalCom, Inc. is the majority stockholder of UPC. The Company believes that a Change of Control occurred on August 6, 1999 as a result of the Acquisition and Merger. PCI prior to the Acquisition, is herein referred to as the "Predecessor" while the Company after the Acquisition is referred to as the "Successor". The Acquisition was accounted for under the purchase method of accounting, with all of the purchase accounting adjustments "pushed-down" to the consolidated financial statements of @Entertainment. Accordingly, the purchase price was allocated to the underlying assets and liabilities based upon their estimated fair values and any excess to goodwill. @Entertainment restated some of its assets and liabilities at August 5, 1999. At this date the Notes of @Entertainment and the Company were restated to reflect the market value and as a result were increased by $61.9 million, deferred financing costs of $16.1 million and deferred revenues of $2.0 million were written down to zero. The consideration paid by UPC for all shares outstanding, warrants and options totaled $812.5 million. At this time @Entertainment had negative net assets of approximately $53.3 million and existing goodwill at net book value of $37.5 million which was realized on previous transaction. As a result of the above considerations, UPC realized goodwill of approximately $979.3 million. As a result of the Acquisition, UPC pushed down its basis to @Entertainment establishing a new basis of accounting as of the acquisition date. @Entertainment allocated goodwill between the business segments based on the investment model used for acquisition. The Company was allocated approximately $412.0 million of goodwill. The following pro forma condensed consolidated results for seven months of 1999, and years ended December 31, 1998 and 1997 give effect to the Acquisition of @ Entertainment as if it had occurred at the beginning of the periods presented. This pro forma condensed consolidated financial information does not purport to represent what the Company's results would actually have been if such transaction had in fact occurred on such date. The pro forma adjustments are based upon the assumptions that goodwill and the amortization thereon would be pushed down as if the transaction had occurred at the beginning of each period presented. Additionally, interest expense related to the deferred financing costs was removed for 36 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 2. CONSUMMATION OF UPC TENDER OFFER AND MERGER (CONTINUED) each of the periods presented. There was no tax effect from these adjustments because of the significant net operating losses.
FIVE MONTHS SEVEN MONTHS YEAR ENDED YEAR ENDED OF 1999 OF 1999 DECEMBER 31, 1998 DECEMBER 31, 1997 ---------- ---------------------- ---------------------- ---------------------- HISTORICAL PRO FORMA HISTORICAL PRO FORMA HISTORICAL PRO FORMA HISTORICAL ---------- --------- ---------- --------- ---------- --------- ---------- Service and other revenue....... $ 27,027 $ 35,434 $ 35,434 $ 52,971 $ 52,971 $ 37,575 $ 37,575 ======== ======== ======== ======== ======== ======== ======== Net loss........................ $(33,130) $(34,794) $(20,672) $(61,761) $(37,193) $(56,628) $(32,060) ======== ======== ======== ======== ======== ======== ========
3. FINANCIAL POSITION AND BASIS OF ACCOUNTING These consolidated financial statements have been prepared on a going concern basis which contemplates the continuation and expansion of trading activities as well as the realization of assets and liquidation of liabilities in the ordinary course of business. Cable television operators typically experience losses and negative cash flow in their initial years of operation due to the large capital investment required for the construction or acquisition of their cable networks and the administrative costs associated with commencing operations. Consistent with this pattern, the Company has incurred substantial operating losses since inception. As of December 31, 1999, the Company had negative working capital. Additionally, the Company is currently and is expected to continue to be highly leveraged. The ability of the Company to meet its debt service obligations will depend on the future operating performance and financial results of the Company as well as its ability to obtain additional third party financing to support the planned expansion, as well as obtaining additional financing from its ultimate parent, UPC. The Company's current cash on hand will be insufficient to satisfy all of its commitments and to complete its current business plan. Management of the Company believes that significant opportunities exist for pay television providers capable of delivering high quality, Polish-language programming on a multi-channel basis and other services on cable (i.e. data and telephones). As such, the Company has focused its financial and business efforts toward its position in the cable market. The Company's business strategy is designed to increase its market share and subscriber base and to maximize revenue per subscriber. To accomplish its objectives and to capitalize on its competitive advantages, the Company intends to (i) develop and control the content of programming on its cable systems; (ii) increase its distribution capabilities through integral growth and through acquisitions; and (iii) control its management of subscribers by using advanced integrated management information systems. If the Company's plans or assumptions change, if its assumptions prove inaccurate, if it consummates unanticipated investments in or acquisitions of other companies, if it experiences unexpected costs or competitive pressures, or if existing cash, and projected cash flow from operations prove to be insufficient, the Company may need to obtain greater amounts of additional financing. While it is the Company's intention to enter only into new financing or refinancing that it considers advantageous, there can be no assurance that such sources of financing would be available to the Company in the future, or, if available, that they could be obtained on terms acceptable to the Company. The Company is also dependent on its parent, @Entertainment and its parent UPC, to provide financing to achieve the Company's business strategy. UPC has declared that it will continue to financially support PCI and its subsidiaries as a going concern, and accordingly enable the Company and its subsidiaries to meet their financial obligations if and when needed, for the period at least through January 31, 2001. 37 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 3. FINANCIAL POSITION AND BASIS OF ACCOUNTING (CONTINUED) Several of the Company's Polish subsidiaries have statutory shareholders' equity less than the legally prescribed limits because of accumulated losses. The managmement of these companies will have to make decisions on how to increase the shareholders' equity to be in compliance with the Polish Commercial Code. The Company is currently considering several alternatives, including the conversion of intercompany debt into equity, in order to resolve these deficiencies. 4. 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 Company maintains its books of accounts in Poland in accordance with local accounting standards. These financial statements include certain adjustments not reflected in the Company's statutory books, to present these statements in accordance with U.S. GAAP. The consolidated financial statements include the financial statements of Poland Communications, 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 maturities of three months or less. 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. ALLOWANCE FOR DOUBTFUL ACCOUNTS The allowance for doubtful accounts is based upon the Company's assessment of probable loss related to overdue accounts receivable. REVENUE RECOGNITION Revenue is primarily derived from the sale of cable television services to retail customers in Poland. 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 systems, is recognized to the extent of direct selling costs and the balance is deferred and amortized into income over the estimated average period that new subscribers are expected to remain connected to the systems. 38 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 carry forwards. 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 PCI is subject to U.S. Federal taxation of its worldwide income. The Polish corporations are not engaged in a trade or business within the U.S. or do not derive income from U.S. sources and accordingly, are not subject to U.S. income tax. FOREIGN TAXATION The PTK 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 PTK Companies are exempt from import duties on certain in-kind capital contributions. The PTK 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. Effective January 1998, the Company adopted EITF 92-8--"Accounting for the Income Tax Effects under FASB Statement No. 109 of a Change in Functional Currency When an Economy Ceases to Be Considered Highly Inflationary". As a result of adopting EITF 92-4, "Accounting for a Change in Functional Currency When the Economy Ceases to Be Considered Highly Inflationary." 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 in accordance with EITF 92-8. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment includes assets used in the development and operation of the various cable television systems. 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 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 five months of 1999, seven months of 1999 and years ended December 31, 1998, and 1997, no interest costs were capitalized. Cable subscriber related costs and general and administrative expenses are charged to operations when incurred. 39 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Depreciation is computed for financial reporting purposes using the straight-line method over the following estimated useful lives: Cable television system assets.............................. 10 years Set-top boxes............................................... 5 years Vehicles.................................................... 5 years Other property, plant and equipment......................... 5-10 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 cable television systems. Cost of inventory includes purchase price, transportation, customs and other direct costs. GOODWILL AND OTHER INTANGIBLES Prior to the merger, goodwill, which represents the excess of purchase price over fair value of net assets acquired, was 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 non-compete agreements was amortized over the term of the underlying agreements, generally five years. Effective as of the Merger Date, the Company revalued all its goodwill, including amounts related to non-compete agreements, that related to transactions completed prior to the Merger. The goodwill, that was pushed down to the Company is amortized using straight-line basis over the expected periods to be benefited, which is fifteen years. 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 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. DEFERRED FINANCING COSTS Costs incurred to obtain financing have been deferred and amortized over the life of the loan using the effective interest method. Such costs were written off in 1999 at the Merger as part of the purchase accounting adjustment. INVESTMENT 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. 40 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 the consolidated 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 into 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/(loss) as a separate component of stockholder's equity. The Company considers all of its intercompany loans to its Polish subsidiaries to be of a long-term investment nature. As a result, any foreign exchange gains or losses resulting from the intercompany loans are reported in accumulated other comprehensive loss. 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 bases for nonmonetary items 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. 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 are reflected as foreign exchange gains or losses in the consolidated statements of operations. 41 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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, notes receivable from affiliates, accounts payable and accrued expenses, due to affiliates, other current liabilities, notes payable and redeemable preferred stock. At December 31, 1999 and 1998, the carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, and other current liabilities on the accompanying consolidated balance sheets approximates fair value due to the short maturity of these instruments. At December 31, 1999 and 1998, the carrying value of the redeemable preferred stock has been determined based upon the amount of future cash flows discounted using the Company's estimated borrowing rate for similar instruments. It was not practicable to estimate the fair value of the redeemable preferred stock due to the fact that the instruments are wholly owned by the Company's parent. At December 31, 1999 and 1998 the fair value of the Company's notes payable balance approximated $14,837,000 and $119,314,000, respectively based on the last trading price of the notes in 1999 and 1998. It was not practical to estimate the fair value of due to affiliate and notes receivable from affiliates due to the nature of these instruments, the circumstances surrounding their issuance, and the absence of quoted market prices for similar financial instruments. At the date of the Merger PCI Notes were restated to their fair market value at this date. The resulting $1.6 million increase was recorded in the pushed-down purchased accounting entries. 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. BUSINESS SEGMENT INFORMATION On January 1, 1998, the Company adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." SFAS No. 131 established standards for the reporting of information relating to operating segments in annual financial statements. This statement supersedes SFAS No. 14, "Financial Reporting for Segment of a Business Enterprise," which requires reporting segment information by industry and geographic area (industry approach). Under SFAS No. 131, operating segments are defined as components of a company for which separate financial information is available and used by management to allocate resources and assess performance (management approach). The Company operates in one business segment, providing cable television services. 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. 42 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ADVERTISING COSTS All advertising costs of the Company are expensed as incurred. RECLASSIFICATIONS Certain amounts have been reclassified in the prior years consolidated financial statements to conform to the presentation contained in the 1999 periods. NEW ACCOUNTING PRINCIPLES The Financial Accounting Standards Board ("FASB") recently issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which requires that companies recognize all derivatives as either assets or liabilities in the balance sheet at fair value. Under this statement, accounting for changes in fair value of a derivative depends on its intended use and designation. In June 1999, the FASB approved Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of Effective Date of FASB Statement No. 133" ("SFAS 137"). SFAS 137 amends the effective date of SFAS 133, which will now be effective for our first quarter 2001. We are currently assessing the effect of this new standard. 5. VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT THE ADDITIONS BALANCE BEGINNING CHARGED AMOUNTS AT THE END OF OF PERIOD EXPENSE WRITTEN OFF PERIOD --------- --------- ----------- ------------- (IN THOUSANDS) 1997 Allowance for Doubtful Accounts $ 545 $ 494 $ 273 $ 766 1998 Allowance for Doubtful Accounts $ 766 $1,383 $1,054 $1,095 Seven months of 1999 Allowance for Doubtful Accounts $1,095 $ 740 $ 223 $1,612 Five months of 1999 Allowance for Doubtful Accounts $1,612 $1,660 $ 853 $2,419
6. ACQUISITIONS During 1999, 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 business acquired are included in the Company's consolidated financial statements since the date of acquisition. In each case the goodwill life was 10 years. However, as discussed in Note 4, the revalued goodwill resulting from the Merger is being amortized over 15 years. 43 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 6. ACQUISITIONS (CONTINUED) On March 31, 1999, a subsidiary of the Company 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. On July 9, 1999, the Company entered into an agreement to acquire 100% of a cable television system for total consideration of approximately $7,500,000. The consummation of this transaction is subject to Polish Ministry of Telecommunications approval. The acquisition has been accounted for under the purchase method where the purchase price was allocated to the underlying assets and liabilities based upon their estimated fair values and any excess to goodwill. The acquisition did not have a material effect on the Company's results of operations in 1999. The purchase price exceeded fair value of the assets acquired by approximately $5,336,000. On July 26, 1999, the Company entered into an agreement to purchase all of the assets and subscriber lists of a cable television system for total consideration of approximately $2,800,000. The purchase was accounted for under the purchase method where the purchase price was allocated to the underlying assets based upon their estimated fair values and the excess to goodwill. The purchase price did not materially exceeded the value of the assets acquired. Had these acquisitions occurred on January 1, 1998, the Company's pro-forma consolidated results for the years ended December 31, 1999 and 1998 would not be materially different from those presented in the Consolidated Statements of Operations. In February 1998, the Company acquired substantially all of the asets and liabilities of a cable television business for 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. (See Note 11). On August 15, 1998, the Company purchased the remaining approximately 50% interest in one subsidiary company which was held by unaffiliated third parties for aggregate consideration of approximately $5,372,000. The purchase price exceed the fair value of the assets acquired by approximately $1,104,000. On July 16, 1998 the Company's parent, @ Entertainment, Inc. 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 Company has applied push-down accounting to this transaction on the date of purchase and therefore the transaction has been recognized in the Company's consolidated financial statements. The purchase price paid by the Company's parent has been treated as a capital contribution to the Company. The purchase price, excluding the amount paid relating to the non-compete agreements, exceeded the fair value of the assets acquired by approximately $604,000. The portion of the purchase price relating to the non-compete agreements will be amortized over the five years term of the agreements. Additionally, during 1998 the Company acquired certain cable television system assets and subscriber lists for aggregate consideration of approximately $2,000,000. The purchase prices did not materially exceed the fair value of the assets acquired. 44 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 6. ACQUISITIONS (CONTINUED) Effective January 1, 1997, the Company acquired the remaining 51% of a subsidiary company for aggregate consideration of approximately $9,927,000. The acquisition was 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 purchase price exceeded the fair value of the net assets acquired by approximately $5,556,000. In May 1997, the Company acquired a 54.75% ownership interest in a cable television company for aggregate consideration of approximately $10,925,000. The acquisition was 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. During 1997 the Company and its subsidiaries acquired certain cable television system assets and subscriber lists for aggregate consideration of approximately $3,200,000. The acquisitions were accounted for as a purchase 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. 7. DIVESTITURE OF SUBSIDIARY During February 1998, @ Entertainment, Inc., the Company's parent, purchased substantially all of the assets and liabilities of one of the Company's subsidiaries, including a note payable to the Company for $6,527,000, for consideration of $100. The transfer was accounted for at historical cost in a manner similar to a pooling of interests. The difference between the amount of cash disbursed and the fair value of the liabilities assumed and the historical cost of the net assets acquired, of approximately $3,031,000, was accounted for as a reduction of the accumulated deficit. Prior period financial statements have been restated to reflect the transfer. 45 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 8. PROPERTY, PLANT AND EQUIPMENT As part of the accounting for the Merger, the Company recorded its fixed asset fair values and re-set accumulated depreciation to zero. The following pro forma consolidated tangible fixed assets balances for the year ended December 31, 1999 and 1998 give effect of the Acquisition of @Entertainment as it had occurred on December 31, 1998.
PRO FORMA DECEMBER DECEMBER 31, 31, 1999 1998 ---------- ---------- (IN THOUSANDS) Property, plant and equipment: Cable television systems assets................... 123,845 129,625 Construction in progress.......................... 6,382 1,665 Vehicles.......................................... 741 1,268 Other............................................. 6,120 4,310 ------- ------- 137,088 136,868 Less accumulated depreciation..................... (7,478) -- ------- ------- Net property, plant and equipment............... 129,610 136,868
The Company incurred depreciation charges for property, plant and equipment of $7,211,000, $10,192,000, $16,005,000 and $14,428,000 for the five months of 1999, seven months of 1999 and for years ended December 31, 1998 and 1997, respectively. 9. INTANGIBLE ASSETS Intangible assets consist of the following:
SUCCESSOR PREDECESSOR ---------- ---------- DECEMBER DECEMBER 31, 31, 1999 1998 ---------- ---------- (IN THOUSANDS) Conduit, franchise agreements and other............. $ 4,334 $ 6,745 Goodwill............................................ 384,459 17,527 Non-compete agreements.............................. -- 19,006 -------- ------- 388,793 43,278 Less accumulated amortization....................... (10,947) (8,797) -------- ------- Net intangible assets............................... $377,846 $34,481 ======== =======
The Acquisition was accounted for under the purchase method of accounting, with all of the purchase accounting adjustments "pushed-down" to the consolidated financial statements of @ Entertainment and the Company. Accordingly, the purchase price was allocated to the underlying assets and liabilities based upon their estimated fair values and any excess to goodwill. @ Entertainment restated some of its assets and liabilities at August 5, 1999. At this date the Notes of @ Entertainment and the Company were restated by $61.9 million and deferred financing costs of $16.1 million and deferred revenue of $2.0 million were written down to zero. The consideration paid by UPC for all shares outstanding, warrants and options totaled $812.5 million. At this time @ Entertainment had negative net assets of approximately $53.3 million and existing goodwill at net book value of $37.5 million which was realized on previous transactions. 46 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 9. INTANGIBLE ASSETS (CONTINUED) As a result of the above considerations, UPC recognized goodwill of approximately $979.3 million. As a result of the Acquisition, UPC pushed down its basis to @ Entertainment establishing a new basis of accounting as of the acquisition date. @ Entertainment allocated goodwill between the business segments based on the investment model used for acquisition. The Company was allocated approximately $412.0 million of goodwill. The Company incurred amortization charges for intangible assets of $10,947,000, $3,627,000, $5,630,000 and $1,803,000 for five and seven months of 1999 and years ended December 31, 1998 and 1997, respectively. 10. INCOME TAXES Income tax (expense)/benefit consists of:
CURRENT DEFERRED TOTAL -------- -------- -------- (IN THOUSANDS) Five months of 1999 U.S. Federal..................................... $ -- $ -- $ -- State and local.................................. -- -- -- Foreign.......................................... (11) -- (11) ------ ------ ------ $ (11) $ -- $ (11) ====== ====== ====== Seven months of 1999 U.S. Federal..................................... $ -- $ -- $ -- State and local.................................. -- -- -- Foreign.......................................... (30) -- (30) ------ ------ ------ (30) -- (30) ====== ====== ====== 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 ====== ====== ======
Sources of loss before income taxes and minority interest are as follows: YEAR ENDED FIVE SEVEN DECEMBER 31, MONTHS MONTHS ------------------- OF 1999 OF 1999 1998 1997 ---------- ---------- -------- -------- (IN THOUSANDS) Domestic loss................... (3,318) (3,895) $ (6,138) $ (9,913) Foreign loss.................... (29,801) (16,747) (30,845) (19,536) -------- -------- -------- -------- (33,119) (20,642) $(36,983) $(29,449) ======== ======== ======== ========
47 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 10. INCOME TAXES (CONTINUED) Income tax (expense)/benefit was $(11,000), $(30,000), $(210,000) and $975,000 for the five months of 1999, seven months of 1999 and for the year ended December 31, 1998 and 1997, respectively, and 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:
YEAR ENDED DECEMBER 31, FIVE MONTHS SEVEN MONTHS ------------------- OF 1999 OF 1999 1998 1997 ------------ ------------ -------- -------- (IN THOUSANDS) Computed "expected" tax benefit...................... 11,260 7,018 $ 12,574 $10,013 Non-deductible expenses........ (2,326) (1,473) 2,911 962 Change in valuation allowance.................... (6,263) (3,903) (4,358) (8,748) Adjustment for adoption of EITF 92-8.................... -- -- (11,311) -- Adjustment to deferred tax asset for enacted changes in tax rates.................... (2,682) (1,672) (695) (789) Foreign tax rate differences... -- -- 606 (463) Other.......................... -- -- 63 -- ------- ------- -------- ------- (11) (30) $ (210) $ 975 ======= ======= ======== =======
The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities are presented below:
DECEMBER 31, ------------------- 1999 1998 -------- -------- (IN THOUSANDS) Deferred tax assets: Foreign net operating loss carryforward................ $13,163 $ 13,883 Domestic net operating loss carry forward.............. -- 1,842 Interest income........................................ 2,793 2,650 Service revenue........................................ 2,351 2,101 Accrued liabilities.................................... 748 3,608 Deferred costs......................................... -- -- Bad debt............................................... 726 -- Deferred revenue....................................... 228 -- Accrued interest....................................... 84 -- Unrealized foreign exchange losses..................... 17,403 9,066 Other.................................................. -- -- ------- -------- Total gross deferred tax assets.......................... 37,496 33,150 Less valuation allowance................................. (31,882) (21,715) ------- -------- Net deferred tax assets.................................. 5,614 $ 11,435 ======= ========
48 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 10. INCOME TAXES (CONTINUED)
DECEMBER 31, ------------------- 1999 1998 -------- -------- (IN THOUSANDS) Deferred tax liabilities: Excess of book value over tax basis of fixed assets resulting from conversion from hyperinflation........ $(5,614) $(11,311) Other.................................................. -- $ (124) ------- -------- Total gross deferred tax liabilities................... $(5,614) $(11,435) ------- -------- Net deferred tax liability............................. $ -- $ -- ======= ========
The net increase in the valuation allowance for five months of 1999, seven months of 1999 and for the years ended December 31, 1998 and 1997 was $6,263,000, $3,903,000, $4,358,000 and $8,748,000, respectively. In assessing the realizability 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, 1999. Subsequently recognized tax benefits relating to the valuation allowance for deferred tax assets as of December 31, 1999 will be reported in the consolidated statement of operations. As each of the Polish subsidiaries and Netherland subsidiary of the Company are not subject to group taxation, the deferred tax assets and liabilities in the individual companies must be evaluated on a stand-alone basis. The reported foreign net operating losses are presented on an aggregate basis and are not necessarily indicative of the actual losses available to the individual companies. As a result, some of the foreign entities may have no losses or other deferred tax assets available to them individually. Prior to 1999, foreign tax 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. Starting from 1999 foreign loss carryforwards can be offset against PTK Companies' taxable income and utilized during each of the five years subsequent to the year of the loss with no more than 50% of the loss in one given year. 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 the 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 the U.S. from 1998, loss carry forwards can be applied against taxable income two years retroactively and twenty years into the future. 49 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 10. INCOME TAXES (CONTINUED) At December 31, 1999, the Company has foreign net operating loss carryforwards of approximately $51,523,000, which expire as follows:
YEAR ENDED DECEMBER 31 (IN THOUSAND) - ---------------------- ------------- 2000........................................................ $11,890 2001........................................................ 9,615 2002........................................................ -- 2003........................................................ 15,009 2004........................................................ 15,009 ------- $51,523
11. NOTES PAYABLE Notes payable consist of the following:
DECEMBER 31, ------------------- 1999 1998 -------- -------- (IN THOUSANDS) PCI Notes, net of discount............................... 14,899 129,627 American Bank in Poland S.A. ("AmerBank") revolving credit loan............................................ -- 6,500 Bank Rozwoju Exportu S.A. Deutsche--Mark facility........ 1,286 1,912 Other.................................................... 271 402 ------- -------- Total notes payable...................................... $16,456 $138,441 ------- --------
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, 1999 and 1998, the Company accrued interest expense of $243,000 and $2,140,000, respectively. 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. 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 50 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 11. NOTES PAYABLE (CONTINUED) 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 $176,815,000, $160,830,000 and $134,509,000 at December 31, 1999, 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 subsidiaries; (x) limitation on investments in unrestricted subsidiaries; (xi) limitation on lines of business; and (xii) provision of financial statements and reports. As of December 31, 1999, the Company was in compliance with such covenants. Pursuant to the terms of the indentures covering the PCI Notes (as defined hereinafter), which provided that, following a Change of Control (as defined therein), each holder PCI Notes had the right, at such holder's option, to require the Company to offer to repurchase all or a portion of such holder's PCI Notes at the Repurchase Price. PCI made offer to repurchase (the "Offers") from the holders of the Notes PCI's 9 7/8% Series B Senior Notes Due 2003 and 9 7/8% Senior Notes Due 2003 (collectively, the "PCI Notes").The Offers expired at 12:01 PM, New York City time, on November 2, 1999. The Company was required to offer to repurchase the PCI Notes at their purchase price of $1,010 per $1,000 principal amount of the PCI Notes, which is 101% per $1,000 principal amount of the PCI. As of August 6, 1999, the Company had $130,000,000 aggregate principal amount at maturity of PCI Notes outstanding. Pursuant to its repurchase offer, the Company has purchased $113,237,000 aggregate principal amount of PCI Notes for an aggregate price of $114,369,370. The repurchase was funded by the sale of 14,000 shares of the Company's Debenture Stock to @Entertainment for $140 million. See Note 14. In December 1999 the Company repurchased an additional $2,000,000 aggregate principal amount of PCI notes for an aggregate price of $2,040,024. 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), was repaid in full on November 20, 1999, and was 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. DEUTCHE-MARK FACILITY The Deutsche-Mark facility represents a credit facility of DM 3,948,615 of which approximately DM 2,503,000 was outstanding at December 31, 1999. The facility bears interest at LIBOR plus 2.0% (5.5% as at December 31, 1999), 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. 51 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 11. NOTES PAYABLE (CONTINUED) Interest expense relating to notes payable was in the aggregate approximately $4,253,000 for five months of 1999, $8,578,000 for seven months of 1999, $14,320,000 and $13,281,000 for the years ended December 31, 1998 and 1997, respectively. 12. 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 following table provides a reconciliation of the numerator and denominator in the loss per share calculation:
SUCCESSOR PREDECESSOR -------------------------------- ----------------------- YEAR ENDED DECEMBER 31, FIVE MONTHS OF SEVEN MONTHS OF ----------------------- 1999 1999 1998 1997 -------------- --------------- ---------- ---------- Net loss attributable to common stockholders (in thousands)............. $ (37,374) $ (22,479) $ (41,299) $ (36,254) ---------- ---------- ---------- ---------- Weighted average number of common shares outstanding............................. 18,948 18,948 18,948 18,948 ---------- ---------- ---------- ---------- Basic weighted average number of common shares outstanding...................... 18,948 18,948 18,948 18,948 ========== ========== ========== ========== Loss per share-basic and diluted.......... $(1,972.45) $(1,186.35) (2,179.60) (1,913.34)
13. REDEEMABLE PREFERRED STOCK The 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 series A, series B and series C preferred stock may be redeemed at any time in whole or in part. The redemption price per share of the series A, series B and series C preferred stock is $10,000. The preferred stock has been recorded at its mandatory redemption value on October 31, 2004 discounted at 12% to December 31, 1998. The Company periodically accretes from paid-in capital an amount that will provide for the redemption value at October 31, 2004. On August 6, 1999, the Company's parent, @Entertainment, Inc., consented to the cancellation of its 2,500 Series B redeemable preference shares. The accreted value of those shares at that time, approximately $12,278,000 was reclassified to paid-in capital. The total amount recorded for accretion for five months of 1999, seven months of 1999 and for the years ended December 31, 1998 and 1997 was $1,911,000, $1,807,000, $4,106,000 and $4,194,000, respectively. 52 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 14. RELATED PARTY TRANSACTIONS During the ordinary course of business, the Company enters into transactions with related parties. The principal related party transactions are described below. DUE TO PARENT Amounts due to parent primarily represent advances and payments made on behalf of the Company by its parent @Entertainment. STOCK OPTION COMPENSATION EXPENSE Included in selling, general and administrative expense in 1997 is approximately $9,425,000 of compensation expense related to the difference between the exercise price of certain options issued by @ Entertainment, Inc. and their fair market value on the date of grant. Since the executives, to whom the options were issued, spent a portion of their time providing services to the Company, management allocated a portion of the costs to the Company using what management believes is a reasonable method of allocation. PRINT MEDIA SERVICES An affiliate of the Company provides print media services to the Company. The Company incurred operating costs related to those services of $0, $295,927 and $4,355,000, for five months of 1999, seven months of 1999 and for the year ended December 31, 1998, respectively. The Company did not incur any costs from this affiliate prior to 1998. Included in accounts payable at December 31, 1999, 1998 is $0, $1,114,000, respectively due to this affiliate. PROGRAMMING Affiliates of the Company provide programming to PCI and its subsidiaries. The Company incurred programming fees from these affiliates of $9,931,061, $13,337,901, $12,831,000, $559,000, for five months of 1999, seven months of 1999 and for the years ended December 31, 1998 and 1997, respectively. MANDATORILY REDEEMABLE DEBENTURE STOCK To fund the repurchase of the PCI Notes and operations, as of November 3, 1999, the Company sold @Entertainment 14,000 shares of its Mandatorily Redeemable Debenture stock ("Debenture Stock") for a total of $140 million on an as-issued basis. The debenture stock will be redeemed on December 31, 2003 for a price of $10,000 per share plus interest at 10% per annum from November 3, 1999 to the date of redemption, compounded annually. For five months of 1999 the Company accrued dividend of $2,333,000 on Debenture Stock. UPC funded @Entertainment's purchase of the debenture stock. The Company will pledge notes payable from PCBV to the Company in the amount of $176,815,000 to secure the payment of the redemption amount of the debenture stock. The PCI Noteholders will be equally and ratably secured by this lien. 15. STOCK OPTION PLAN On June 22, 1997, the Company's parent adopted a stock option plan (the "1997 Plan") pursuant to which @Entertainment's Board of Directors may grant stock options to officers, key employees and 53 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 15. STOCK OPTION PLAN (CONTINUED) 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. The Company recognized approximately $9,425,000 of non-cash compensation expense included in selling, general, and admistrative expenses during 1997 related to stock options representing a portion of difference between the exercise prices of the options and their fair market value on the date of grant. 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 @Entertainment, 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 @Entertainment 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. During 1998, there were 250,000 stock options granted to employees of PCI at an exercise price of $12.00 per share and a remaining contractual life of 9.2 years. Of this amount, 125,000 options are exercisable as of December 31, 1998. No options were exercised or forfeited during 1998. During 1999, there were 375,000 stock options granted to PCI employees at an exercise price of $14.30 per share and a remaining contractual life of three years. During 1999, 478,750 stock options of PCI employees were forfeited. All other stock options were cancelled and paid in cash in full in connection with the Merger. 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:
FIVE MONTHS SEVEN MONTHS OF OF 1999 1999 1998 ----------- --------------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net loss--as reported................................ (33,130) (20,672) (37,193) Net loss--pro forma.................................. -- (21,101) (37,965) Basic and diluted net loss per share--as reported.... $(1,748.47) $(1,090.99) (2,179.60) Basic and diluted loss per share--pro forma.......... -- $(1,113.63) (2,220.34)
16. COMMITMENTS AND CONTINGENCIES LEASES Total rental expense associated with the operating leases mentioned below for five months of 1999, seven months of 1999 and for the years ended December 31, 1998 and 1997 was $969,469, $692,478, $2,446,000 and $1,423,000, respectively, related to these leases. The Company leases several offices and warehouses within Poland under cancelable operating lease terms. 54 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 16. COMMITMENTS AND CONTINGENCIES (CONTINUED) 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 17 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 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 2000 only, as all leases are cancelable in accordance with the aforementioned terms. The future minimum lease commitments related to these conduit leases approximates $255,800 as of December 31, 1999. PROGRAMMING 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 and affiliated content providers for its cable systems. The agreements have terms which range from one to five 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, 1999, the Company had an aggregate minimum commitment in relation to these agreements of approximately $30,893,000 over the next seven years, approximating $10,279,000 in 2000, $5,536,000 in 2001, $4,872,000 in 2002, $5,078,000 in 2003 and $5,128,000 in 2004 and thereafter. REGULATORY APPROVALS The Company is in the process of obtaining 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 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 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. 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 55 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 16. COMMITMENTS AND CONTINGENCIES (CONTINUED) 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. DIVIDEND RESTRICTIONS The Company's Polish subsidiaries are only able to distribute dividends to the extent of accounting profit determined in accordance with Polish accounting principles. As of December 31, 1999 the Company's Polish subsidiaries have no profit available for distribution as dividends. PCBV MINORITY STOCKHOLDER'S CLAIM On or about July 8, 1999, certain minority shareholders ("the minority shareholders") of PCBV, filed a lawsuit against PCI and certain other defendants, in United States District Court, Southern District of Ohio, Eastern Division, Civil Action No. C2-99-621. The relief sought by the minority shareholders includes: (1) unspecified damages in excess of $75,000, (2) an order lifting the restrictions against transfer of shares set forth in the Shareholders' Agreement among PCBV's shareholders, as amended (the "Shareholders' Agreement") so that the minority shareholders can liquidate their shares in PCBV, (3) damages in the amount of 1.7 percent of the payment made by UPC for the shares of the Company as set forth in the Agreement and Plan of Merger between @Entertainment and UPC dated June 2, 1999, and (4) attorneys' fees and costs incurred in prosecuting the lawsuit. The amended complaint sets forth eight claims for relief based on allegations that the defendants, including @Entertainment and the Company, committed the following wrongful acts: (1) breached a covenant not to compete contained in the Shareholders' Agreement relating to the shareholders of PCBV, (2) breached a covenant in the Shareholders' Agreement requiring that any contract entered into by PCBV with any other party affiliated with PCI be commercially reasonable or be approved by certain of the minority shareholders, (3) breached a provision in the Shareholders' Agreement that allegedly required co-defendant Chase International Corp. ("CIC") to offer the minority shareholders the right to participate in certain sales of PCBV shares and that required CIC to give written notice of any offer to purchase the minority shareholders' shares in PCBV, (4) breached their fiduciary duties to the minority shareholders, (5) breached the agreement between PCBV and CIC, which allegedly limited the amount of management fees that could be paid annually by PCBV, (6) made false and misleading statements in various documents filed with the Securities and Exchange Commission, (7) colluded to defraud the minority shareholders by failing to make reference in certain Forms 8-K, 8-KA and 14D-1 to the minority shareholders or their alleged rights and claims, (8) colluded to divert assets of PCBV to affiliates of PCI and PCBV, including the Company, that allegedly compete with PCI and PCBV. The minority shareholders also seek damages in the amount of 1.7 percent of the payment made by UPC for the shares of @Entertainment, although the amended complaint does not contain a separate claim for relief seeking that amount. The Company intends to defend the lawsuit vigorously. The Company has also conducted negotiations to purchase the minority shareholders' outstanding shares in PCBV. If the negotiations produce a sale by 56 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 16. COMMITMENTS AND CONTINGENCIES (CONTINUED) the minority shareholders of their shares in PCBV to the Company, the lawsuit would most likely be terminated. The Company is unable to predict the outcome of those negotiations. In the event that the lawsuit is not terminated, its status is as follows: The time for the Company to respond to the amended complaint has not yet expired. Discovery has not yet commenced. At this early stage of the proceedings, the Company is unable to predict the probable outcome of the lawsuit or the Company's ultimate exposure in connection therewith. In addition to the Ohio lawsuit, the other minority shareholders of PCBV (representing an additional 6% of PCBV) have asserted similar claims for compensation, but have not filed suit. 17. CONCENTRATIONS OF BUSINESS AND CREDIT RISK USE OF TPSA CONDUIT 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 81% 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. The Company expects to renew these leases on or before the expiration dates. 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 televisions networks. Accordingly, any catastrophe affecting a significant portion of the Company's cable television networks could result in substantial uninsured losses and could have a material adverse effect on the Company. YEAR 2000 The Company has not experienced any problems with its computer systems relating to distinguishing twenty-first century dates from twentieth century dates, which generally are referred to as year 2000 problems. The Company is also not aware of any material year 2000 problems with its clients or vendors. The Company did not and does not anticipate increasing material expenses or experiencing any material operation disruptions as a result of any year 2000 problems. CREDITWORTHINESS 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 1999, 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. 57 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors of Poland Cablevision (Netherlands) B.V.: We have audited the accompanying consolidated balance sheet of Poland Cablevision (Netherlands) B.V. and its subsidiaries as of December 31, 1999 and the related consolidated statements of operations, comprehensive loss, changes in stockholders' equity and cash flows for the periods from January 1, 1999 to August 5, 1999 and August 6, 1999 to December 31, 1999. 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 audit. We conducted our audit 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 audit provides 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 Poland Cablevision (Netherlands) B.V. and its subsidiaries as of December 31, 1999 and the results of their operations and their cash flows for the period from January 1, 1999 to August 5, 1999 and August 6, 1999 to December 31, 1999 in conformity with generally accepted accounting principles in the United States of America. Arthur Andersen Warsaw, Poland March 29, 2000 58 INDEPENDENT AUDITORS' REPORT The Board of Directors Poland Cablevision (Netherlands) B.V.: We have audited the accompanying consolidated balance sheet of Poland Cablevision (Netherlands) B.V. and subsidiaries as of December 31, 1998, and the related consolidated statements of operations, comprehensive loss, changes in stockholders' deficiency and cash flows for the years ended December 31, 1998 and 1997. 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 Poland Cablevision (Netherlands) B.V. and its subsidiaries as of December 31, 1998, and the results of their operations and their cash flows for the years ended December 31, 1998 and 1997, in conformity with generally accepted accounting principles in the United States of America. KPMG Warsaw, Poland March 29, 1999 59 POLAND CABLEVISION (NETHERLANDS) B.V. CONSOLIDATED BALANCE SHEETS
DECEMBER DECEMBER 31, 31, 1999 1998 -------- -------- SUCCESSOR PREDECESSOR (NOTE 2) (NOTE 2) ----------- ----------- (UNAUDITED) (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents................................. $ 2,838 $ 1,463 Accounts receivable, net of allowances for doubtful accounts of $1,568 in 1999 and $708 in 1998 (note 5).... 5,909 1,904 VAT recoverable........................................... 1,285 483 Prepayments............................................... 568 52 Other current assets...................................... 350 -- -------- -------- Total current assets.................................... 10,950 3,902 -------- -------- Property, plant and equipment: Cable television system assets.......................... 92,535 136,833 Construction in progress................................ 5,632 -- Vehicles................................................ 498 1,704 Other................................................... 6,288 5,832 -------- -------- 104,953 144,369 Less accumulated depreciation......................... (6,067) (40,041) -------- -------- Net property, plant and equipment..................... 98,886 104,328 Inventories for construction.............................. 4,453 6,638 Intangible assets, net (note 2 and 8)..................... 338,771 13,711 -------- -------- Total assets........................................ $453,060 $128,579 ======== ======== LIABILITIES AND STOCKHOLDERS' (DEFICIENCY)/EQUITY Current liabilities: Accounts payable and accrued expenses..................... $ 18,706 $ 7,809 Deferred revenue.......................................... 594 565 Other liabilities......................................... 119 -- -------- -------- Total current liabilities............................... 19,419 8,374 Long term liabilities: Due to affiliate.......................................... 52,358 26,491 Notes payable to PCI........................................ 176,815 160,830 -------- -------- Total liabilities....................................... 248,592 195,695 -------- -------- Commitments and contingencies (note 11) Stockholders' equity/(deficiency): Common stock, $0.50 par value, 200,000 shares authorized,; issued and outstanding.................................. 100 100 Paid-in capital........................................... 267,564 14,589 Accumulated other comprehensive (loss)/income............. (30,950) 424 Accumulated deficit....................................... (32,246) (82,229) -------- -------- Total stockholders' equity/(deficiency)................. 204,468 (67,116) -------- -------- Total liabilities and stockholders' equity/(deficiency)................................... $453,060 $128,579 ======== ========
See accompanying notes to consolidated financial statements. 60 POLAND CABLEVISION (NETHERLANDS) B.V. CONSOLIDATED STATEMENTS OF OPERATIONS SUCCESSOR (NOTE 2) ---------- PERIOD FROM ----------- PREDECESSOR (NOTE 2) AUGUST 6, PERIOD FROM --------------------- 1999 JANUARY 1, THROUGH 1999 YEAR ENDED DECEMBER THROUGH DECEMBER 31, 31, AUGUST 5, --------------------- 1999 1999 1998 1997 ---------- ----------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues......................... $ 25,386 $ 29,535 $ 36,038 $ 28,818 Operating expenses: Direct operating expenses...... 21,681 20,988 23,705 8,215 Selling, general and administrative expenses...... 11,104 6,947 14,349 16,007 Depreciation and amortization................. 14,481 8,726 15,033 12,770 -------- -------- -------- -------- Total operating expenses......... 47,266 36,661 53,087 36,992 Operating loss................. (21,880) (7,126) (17,049) (8,174) Interest and investment income, net............................ 71 59 130 186 Interest expense................. (5,900) (8,029) (12,975) (11,253) Foreign exchange loss, net....... (3,228) (219) (78) (1,425) Non-operating expenses........... (1,300) -- -- -- -------- -------- -------- -------- Loss before income taxes and minority interest............ (32,237) (15,315) (29,972) (20,666) Income tax expense............... (9) (30) (52) (175) Minority interest................ -- -- (1,846) 794 -------- -------- -------- -------- Net loss....................... (32,246) (15,345) (31,870) (20,047) -------- -------- -------- -------- Net loss applicable to holders of common stock................... (32,246) (15,345) (31,870) (20,047) ======== ======== ======== ======== Basic and diluted net loss per common share................... $(161.23) $ (76.73) $(159.35) $(100.24)
See accompanying notes to consolidated financial statements. 61 POLAND CABLEVISION (NETHERLANDS) B.V. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
SUCCESSOR (NOTE 2) PREDECESSOR (NOTE 2) ----------------- ----------------------------------------- PERIOD FROM PERIOD FROM AUGUST 6, 1999 JANUARY 1, 1999 YEAR ENDED DECEMBER 31, THROUGH THROUGH ----------------------- DECEMBER 31, 1999 AUGUST 5, 1999 1998 1997 ----------------- --------------- -------- -------- (IN THOUSANDS) Net loss................................ $(32,246) $(15,345) $(31,870) $(20,047) Other comprehensive (loss) / income: Translation adjustment................ (30,950) (11,814) 424 -- -------- -------- -------- -------- Comprehensive loss...................... $(63,196) $(27,159) $(31,446) $(20,047) ======== ======== ======== ========
See accompanying notes to consolidated financial statements. 62 POLAND CABLEVISION (NETHERLANDS) B.V. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY/(DEFICIENCY)
ACCUMULATED CAPITAL STOCK OTHER PAR PAID-IN COMPREHENSIVE ACCUMULATED VALUE CAPITAL INCOME DEFICIT TOTAL ------------- -------- -------------- ----------- -------- (IN THOUSANDS) Balance January 1, 1997............. 100 -- -- (30,312) (30,212) Net loss.......................... -- -- -- (20,047) (20,047) Stock option compensation expense......................... -- 4,713 -- -- 4,713 --- -------- ------- -------- -------- Balance December 31, 1997........... 100 4,713 -- (50,359) (45,546) Net loss.......................... -- -- -- (31,870) (31,870) Capital contribution.............. -- 9,876 -- -- 9,876 Cumulative Translation Adjustment...................... -- -- 424 -- 424 --- -------- ------- -------- -------- Balance December 31, 1998........... 100 14,589 424 (82,229) (67,116) --- -------- ------- -------- -------- Net loss.......................... -- -- -- (15,345) (15,345) Cumulative Translation Adjustment...................... (11,814) (11,814) --- -------- ------- -------- -------- Balance August 5, 1999.............. 100 14,589 (11,390) (97,574) (94,275) --- -------- ------- -------- -------- Purchase accounting............... -- 252,975 11,390 97,574 361,939 --- -------- ------- -------- -------- Balance August 6, 1999.............. 100 267,564 -- -- 267,664 Net loss.......................... -- -- -- (32,246) (32,246) Cumulative Translation Adjustment...................... -- -- (30,950) -- (30,950) --- -------- ------- -------- -------- Balance December 31, 1999........... 100 267,564 (30,950) (32,246) 204,468 === ======== ======= ======== ========
See accompanying notes to consolidated financial statements. 63 POLAND CABLEVISION (NETHERLANDS) B.V. CONSOLIDATED STATEMENTS OF CASH FLOWS
SUCCESSOR (NOTE 2) PREDECESSOR (NOTE 2) -------------- ---------------------------------- PERIOD FROM PERIOD FROM AUGUST 6, 1999 JANUARY 1, 1999 YEAR ENDED THROUGH THROUGH DECEMBER 31, DECEMBER 31, AUGUST 5, ------------------- 1999 1999 1998 1997 -------------- ------------ -------- -------- (IN THOUSANDS) Cash flows from operating activities: Net loss................................. $(32,246) $(15,345) $(31,870) $(20,047) Adjustments to reconcile net loss to net cash provided by operating activities: Minority interest...................... -- -- 1,846 (794) Depreciation and amortization.......... 14,481 8,726 15,033 12,770 Interest expense added to notes payable to PCI............................... 3,571 10,356 12,921 11,253 Non-cash stock option compensation expense.............................. -- -- -- 4,713 Other.................................. 1,300 -- 496 -- Changes in operating assets and liabilities: Accounts receivable.................. (1,289) (2,716) (682) (507) Other current assets................. (1,066) (263) 753 396 Accounts payable..................... 10,385 (4,586) 5,205 (111) Amounts due to affiliates............ 11,014 14,853 11,986 3,346 Deferred revenue..................... 853 937 (46) (214) -------- -------- -------- -------- Net cash provided by operating activities....................... 7,003 11,962 15,642 10,805 -------- -------- -------- -------- Cash flows from investing activities: Construction and purchase of property, plant and equipment...... (8,777) (10,263) (32,530) (27,734) Purchase of intangibles.............. (308) (145) -- (500) Purchase of subsidiaries, net of cash received........................... -- -- (9,876) -- -------- -------- -------- -------- Net cash used in investing activities....................... (9,085) (10,408) (42,406) (28,234) -------- -------- -------- -------- Cash flows from financing activities: Proceeds from notes payable.......... 2,001 57 13,400 15,365 Capital contribution................. -- -- 9,876 -- -------- -------- -------- -------- Net cash provided by financing activities....................... 2,001 57 23,276 15,365 -------- -------- -------- -------- Net (decrease)/increase in cash and cash equivalents................. (81) 1,611 (3,488) (2,064) Effect of exchange rates on cash........... (155) -- -- -- Cash and cash equivalents at beginning of period................................... 3,074 1,463 4,951 7,015 -------- -------- -------- -------- Cash and cash equivalents at end of period................................... $ 2,838 $ 3,074 $ 1,463 $ 4,951 ======== ======== ======== ======== Supplemental cash flow information: Cash paid for interest............... $ -- $ 400 $ -- $ -- ======== ======== ======== ======== Cash paid for income taxes........... $ 12 $ 17 $ 231 $ 175 ======== ======== ======== ========
See accompanying notes to consolidated financial statements. 64 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 1. REPORTING ENTITY Poland Cablevision (Netherlands) B.V. ("PCBV"), a Netherlands corporation, is a holding company that holds a controlling interest in several Polish cable television operators (collectively referred to as the "PTK Companies"). Poland Cablevision (Netherlands) B.V. and subsidiaries (the "Company") is 92.3% owned by Poland Communications, Inc. ("PCI"), who is in turn, owned 100% by @Entertainment, Inc. a Delaware corporation which is a wholly--owned subsidiary of United Pan-Europe Communications N.V. ("UPC"). The Company offers cable television services to residential and business customers in Poland. All significant assets and operating activities of the Company are located in Poland. 2. CONSUMMATION OF UPC TENDER OFFER AND MERGER On June 2, 1999, @Entertainment entered into an Agreement and Plan of Merger with United Pan-Europe Communications N.V. ("UPC"), whereby UPC and its wholly-owned subsidiary, Bison Acquisition Corp. ("Bison"), initiated a tender offer to purchase all of the outstanding shares of @Entertainment in an all cash transaction valuing @Entertainment's shares of common stock at $19.00 per share. The tender offer, initiated pursuant to the Agreement and Plan of Merger with UPC and Bison, closed at 12:00 midnight on August 5, 1999. On August 6, 1999, Bison reported that it had accepted for payment a total of 33,701,073 shares of @Entertainment's common stock (including 31,208 shares tendered pursuant to notices of guaranteed delivery) representing approximately 99% of @Entertainment's outstanding shares of common stock (the "Acquisition"). In addition UPC acquired 100% of the outstanding Series A and Series B 12% Cumulative Preference Shares of @Entertainment and acquired all of the outstanding warrants and stock options. Also on August 6, 1999, Bison was merged with and into @Entertainment with @Entertainment continuing as the surviving corporation (the "Merger"). Accordingly, @Entertainment became a wholly-owned subsidiary of UPC. UnitedGlobalCom, Inc. is the majority stockholder of UPC. The Company believes that a Change of Control occurred on August 6, 1999 as a result of the Acquisition and Merger. PCBV prior to the Acquisition, is herein referred to as the "Predecessor" while the Company after the Acquisition is referred to as the "Successor". The period from January 1, 1999 through August 5, 1999 and the period from August 6, 1999 through December 31, 1999 are referred to herein as the "seven months of 1999" and "five months of 1999," respectively. The Acquisition was accounted for under the purchase method of accounting, with all of the purchase accounting adjustments "pushed-down" to the consolidated financial statements of @ Entertainment. Accordingly, the purchase price was allocated to the underlying assets and liabilities based upon their estimated fair values and any excess to goodwill. @Entertainment restated some of its assets and liabilities at August 5, 1999. At this date the Notes of @Entertainment and PCI were restated reflect the market value and as a result were increased by $61.9 million and deferred financing costs of $16.1 million and deferred revenues of $2.0 million were written down to zero. The consideration paid by UPC for all shares outstanding, warrants and options totaled $812.5 million. At this time @Entertainment had negative net assets of approximately $53.3 million and existing goodwill at net book value of $37.5 million which was realized on previous transactions. As a result of the above considerations, UPC realized goodwill of approximately $979.3 million. As a result of the Acquisition, UPC pushed down its basis to @Entertainment establishing a new basis of accounting as of the acquisition date. @Entertainment allocated goodwill between the business segments based on the investment model used for acquisition. PCBV was allocated approximately $354 million of goodwill. 65 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 2. CONSUMMATION OF UPC TENDER OFFER AND MERGER (CONTINUED) The following pro forma condensed consolidated results for seven months of 1999 and the years ended December 31, 1998 and 1997 give effect to the Acquisition of @ Entertainment as if it had occurred at the beginning of the periods presented. This pro forma condensed consolidated financial information does not purport to represent what the Company's results would actually have been if such transaction had in fact occurred on such date. The pro forma adjustments are based upon the assumptions that the goodwill and the amortization thereon would be pushed down as if the transaction had occurred at the beginning of each period presented. There was no tax effect from these adjustments because of the significant net losses.
FIVE MONTHS SEVEN MONTHS YEAR ENDED YEAR ENDED OF 1999 OF 1999 DECEMBER 31, 1998 DECEMBER 31, 1997 ----------- --------------------- --------------------- --------------------- PRO PRO PRO HISTORICAL HISTORICAL FORMA HISTORICAL FORMA HISTORICAL FORMA ----------- ---------- -------- ---------- -------- ---------- -------- Service and other revenue..... $ 25,386 $ 29,535 $ 54,921 $ 36,038 $ 36,038 $ 28,818 $ 28,818 ======== ======== ======== ======== ======== ======== ======== Net loss...................... $(32,246) $(15,345) $(29,111) $(31,870) $(55,474) $(20,047) $(43,651) ======== ======== ======== ======== ======== ======== ========
3. FINANCIAL POSITION AND BASIS OF ACCOUNTING These consolidated financial statements have been prepared on a going concern basis which contemplates the continuation and expansion of trading activities as well as the realization of assets and liquidation of liabilities in the ordinary course of business. Cable television operators typically experience losses and negative cash flow in their initial years of operation due to the large capital investment required for the construction or acquisition of their cable networks and the administrative costs associated with commencing operations. Consistent with this pattern, the Company has incurred substantial operating losses since inception (1990). As of December 31, 1999, the Company had negative working capital. Additionally, the Company is currently and is expected to continue to be highly leveraged. The ability of the Company to meet its debt service obligations will depend on the future operating performance and financial results of the Company as well as its ability to obtain additional third party financing to support the planned expansion, as well as obtaining additional financing from its ultimate parent, UPC. The Company's current cash on hand will be insufficient to satisfy all of its commitments and to complete its current business plan. Management of the Company believes that significant opportunities exist for pay television providers capable of delivering high quality, Polish-language programming on a multi-channel basis and other services on cable (i.e. data and telephones). As such, the Company has focused its financial and business efforts toward its position in the cable market. The Company's business strategy is designed to increase its market share and subscriber base and to maximize revenue per subscriber. To accomplish its objectives and to capitalize on its competitive advantages, the Company intends to (i) develop and control the content of programming on its cable systems; (ii) increase its distribution capabilities through its internal growth and through acquisitions; and (iii) control its management of subscribers by using advanced integrated management information systems. If the Company's plans or assumptions change, if its assumptions prove inaccurate, if it consummates unanticipated investments in or acquisitions of other companies, if it experiences unexpected costs or competitive pressures, or if existing cash, and projected cash flow from operations prove to be insufficient, the Company may need to obtain greater amounts of additional financing. While it is the Company's intention to enter only into new financing or refinancing that it considers advantageous, there can be no assurance that such sources of financing would be available to the Company in the future, or, if available, that they could be obtained on terms acceptable to the Company. 66 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 3. FINANCIAL POSITION AND BASIS OF ACCOUNTING (CONTINUED) The Company is also dependent on PCI, PCI's parent, @Entertainment and @Entertainment's parent UPC, to provide financing to achieve the Company's business strategy. UPC has declared that it will continue to financially support PCBV and its subsidiaries as a going concern, and accordingly enable the Company and its subsidiaries to meet their financial obligations if and when needed, for the period at least through January 31, 2001. Several of the Company's Polish subsidiaries have statutory shareholders' equity less than the legally prescribed limits because of accumulated losses. The management of these companies will have to make decisions on how to increase the shareholders' equity to be in compliance with the Polish Commercial Code. The Company is currently considering several alternatives, including the conversion of intercompany debt into equity, in order to resolve these deficiencies. 4. 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 Company maintains its books of accounts in Poland in accordance with local accounting standards. These financial statements include certain adjustments not reflected in the Company's statutory books to present these statements in accordance with U.S. GAAP. The consolidated financial statements include the financial statements of PCBV 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 maturities of three months or less. 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. ALLOWANCE FOR DOUBTFUL ACCOUNTS The allowance for doubtful accounts is based upon the Company's assessment of probable loss related to overdue accounts receivable. REVENUE RECOGNITION Revenue is primarily derived from the sale of cable television services to retail customers in Poland. 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 systems, is recognized to the extent of direct 67 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) selling costs and the balance is deferred and amortized into income over the estimated average period that new subscribers are expected to remain connected to the systems. 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 carry forwards. 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. NETHERLANDS TAXATION The income tax treaty currently in force between the Netherlands and the United States provides that the Netherlands may impose a withholding tax at a maximum rate of 5% on dividends paid by PCBV to its stockholders. FOREIGN TAXATION The PTK 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 PTK Companies are exempt from import duties on certain in-kind capital contributions. The PTK 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 various cable television systems. 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 cable television systems. When material, the Company capitalizes interest costs incurred during construction in accordance with SFAS No. 34, "Capitalization of Interest Cost". During five months of 1999 and seven months of 1999 and years 1998, and 1997, no interest costs were capitalized. Cable 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 Set-top boxes............................................... 5 years Vehicles.................................................... 5 years Other property, plant and equipment......................... 5-10 years
68 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 cable television systems. Cost of inventories include purchase price, transportation, customs and other direct costs. GOODWILL AND OTHER INTANGIBLES Prior to the merger, goodwill, which represents the excess of purchase price over fair value of net assets acquired, was 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 non-compete agreements was amortized over the term of the underlying agreements, generally five years. Effective as of the Merger Date the Company revalued all its goodwill including amounts related to non-compete agreements, that related to transactions completed prior to the Merger. The goodwill that was pushed down to the Company is amortized using straight-line basis over the expected periods to be benefited, which is fifteen years. 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 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. INVESTMENT 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. 69 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 the consolidated 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 into 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. The Company considers all of its intercompany loans to its Polish subsidiaries to be of a long-term investment nature. As a result, any foreign exchange gains or losses resulting from the intercompany loans are reported in accumulated other comprehensive loss. 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 bases for nonmonetary items 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. 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 are 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, notes receivable from affiliates, accounts payable and accrued expenses, due to affiliates, other current liabilities, notes payable and redeemable preferred stock. At December 31, 1999 and 1998, the carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, and other current liabilities on the accompanying consolidated balance sheets approximates fair value due to the short maturity of these instruments. 70 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. BUSINESS SEGMENT INFORMATION On January 1, 1998, the Company adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." SFAS No. 131 established standards for the reporting of information relating to operating segments in annual financial statements. This statement supersedes SFAS No. 14, "Financial Reporting for Segment of a Business Enterprise," which requires reporting segment information by industry and geographic area (industry approach). Under SFAS No. 131, operating segments are defined as components of a company for which separate financial information is available and used by management to allocate resources and assess performance (management approach). The Company operates in one business segment, providing cable television services. 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. RECLASSIFICATIONS Certain amounts have been reclassified in the prior years consolidated financial statements to conform to the presentation contained in the 1999 periods. NEW ACCOUNTING PRINCIPLES The Financial Accounting Standards Board ("FASB") recently issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which requires that companies recognize all derivatives as either assets or liabilities in the balance sheet at fair value. Under this statement, accounting for changes in fair value of a derivative depends on its intended use and designation. In June 1999, the FASB approved Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of Effective Date of FASB Statement No. 133" ("SFAS 137"). SFAS 137 amends the effective date of SFAS 133, which will now be effective for our first quarter 2001. We are currently assessing the effect of this new standard. 71 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 5. VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT ADDITIONS BALANCE AT THE BEGINNING CHARGED TO AMOUNTS THE END OF OF THE PERIOD EXPENSE WRITTEN OFF THE PERIOD ------------- ----------- ----------- ---------- (IN THOUSANDS) 1997..................... Allowance for Doubtful $ 437 $ 442 $ 271 $ 608 Accounts 1998..................... Allowance for Doubtful $ 608 $ 742 $ 642 $ 708 Accounts Seven months of 1999..... Allowance for Doubtful $ 708 $ 213 $ 162 $ 759 Accounts Five months of 1999...... Allowance for Doubtful $ 759 $1,287 $ 478 $1,568 Accounts
6. ACQUISITIONS During 1999 the Company did not make any acquisition of cable television system assets. Effective January 1, 1998, the Company has applied push-down accounting to the 1997 acquisition by the Company's parent, Poland Communications, Inc., of the remaining 51% of a subsidiary of the 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 consideration paid by the Company's parent has been treated as a January 1, 1998 capital contribution to the Company. The purchase price exceeded the fair value of the net assets acquired by approximately $5,556,000. Prior period financial statements have not been restated to reflect the push-down accounting of this transaction on the date of acquisition. During 1998, the Company acquired certain cable television assets and subscriber list for aggregate consideration of approximately $1,400,000. The acquisitions have been accounted for as purchases with the purchase price allocated among the fixed assets acquired based upon their fair values at date of acquisition and any excess to goodwill. The purchase prices did not materially exceed the fair value of the assets acquired. During 1997, the Company acquired certain cable television system assets and subscriber lists for aggregate consideration of approximately $2,500,000. The acquisitions have been accounted for as purchases with the purchase price allocated among the fixed assets acquired based upon their fair values at date of acquisition and any excess to goodwill. The purchase prices exceeded the fair value of the assets acquired by approximately $500,000. 7. PROPERTY, PLANT AND EQUIPMENT As part of the accounting for the Merger the Company recorded its fixed asset fair values and re-set accumulated depreciation to zero. The following pro forma consolidated tangible fixed assets balances for 72 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 7. PROPERTY, PLANT AND EQUIPMENT (CONTINUED) the year ended December 31, 1999 and 1998 give effect of the Acquisition of @Entertainment as it had occurred on December 31, 1998.
PRO FORMA DECEMBER 31, DECEMBER 31 1999 1998 ------------ ----------- (IN THOUSANDS) Property, plant and equipment: Cable television systems assets................... 92,535 99,062 Construction in progress.......................... 5,632 -- Vehicles.......................................... 498 1,024 Other............................................. 6,288 4,242 ------- ------- 104,953 104,328 Less accumulated depreciation..................... (6,067) -- ------- ------- Net property, plant and equipment............... 98,886 104,328
The Company incurred depreciation charges for property, plant and equipment of $5,846,000, $7,416,000, $13,264,000 and $11,575,000 for five months of 1999, seven months of 1999 and for years ended December 31, 1998 and 1997, respectively. 8. INTANGIBLES Intangible assets are carried at cost and consist of the following:
SUCCESSOR PREDECESSOR ---------- ----------- (IN THOUSANDS) Conduit and franchise agreements and other......... $ 4,156 $ 5,437 Goodwill........................................... 343,250 12,081 -------- ------- 347,406 17,518 Less accumulated amortization...................... (8,635) (3,807) -------- ------- Net intangible assets.............................. $338,771 $13,711 ======== =======
The Acquisition was accounted for under the purchase method of accounting, with all of the purchase accounting adjustments "pushed-down" to the consolidated financial statements of @ Entertainment. Accordingly, the purchase price was allocated to the underlying assets and liabilities based upon their estimated fair values and any excess to goodwill. The Company restated some of its assets and liabilities at August 5, 1999. At this date the Notes of the Company and PCI were restated by $61.9 million and deferred financing costs of $16.1 million and deferred revenue of $2.0 million were written down to zero. The consideration paid by UPC for all shares outstanding, warrants and options totalled $812.5 million. At this time the Company had negative net assets of approximately $53.3 million and existing goodwill at net book value of $37.5 million which was realized on previous transactions. As a result of the above considerations, UPC recognized goodwill of approximately $979.3 million. As a result of the Acquisition, UPC pushed down its basis to the Company establishing a new basis of accounting as of the acquisition date. The Company incurred amortization charge for intangible assets of $8,635,000, $1,310,000, 73 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 8. INTANGIBLES (CONTINUED) $1,769,000, and $1,195,000 for five and seven months of 1999 and the years ended December 31, 1998 and 1997, respectively. 9. INCOME TAXES PCBV is required to file a separate Netherlands tax return which does not include the operating results of the PTK Companies. Income tax expense consisted of the following: Income tax (expense)/benefit consists of:
CURRENT DEFERRED TOTAL -------- ----------- -------- (IN THOUSANDS) Five months of 1999 Netherlands.................................. $ -- $ -- $ -- State and local.............................. -- -- -- Foreign...................................... (9) -- (9) ------ ------ ------ $ (9) $ -- $ (9) ====== ====== ====== Seven months of 1999 Netherlands.................................. $ -- $ -- $ -- State and local.............................. -- -- -- Foreign...................................... (30) -- (30) ------ ------ ------ $ (30) (30) ====== ====== ====== Year ended December 31, 1998: Netherlands.................................. $ -- $ -- $ -- State and local.............................. -- -- -- Foreign...................................... (52) -- (52) ------ ------ ------ $ (52) $ -- $ (52) ====== ====== ====== Year ended December 31, 1997: Netherlands.................................. $ (38) $ -- $ (38) State and local.............................. -- -- -- Foreign...................................... (137) -- (137) ------ ------ ------ $ (175) $ -- $ (175) ====== ====== ======
Income tax expense was $9,000, $30,000, $52,000 and $175,000 for five months of 1999, seven months of 1999 and the years ended December 31, 1998 and 1997, respectively, and differed from the amounts 74 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 9. INCOME TAXES (CONTINUED) computed by applying the U.S. federal income tax rate of 34 percent to pretax loss as a result of the following: SUCCESSOR PREDECESSOR --------- --------------------- FIVE SEVEN YEAR ENDED MONTHS MONTHS DECEMBER 31, OF OF ------------------- 1999 1999 1998 1997 --------- ---------- -------- -------- (IN THOUSANDS) Computed "expected" tax benefit... 10,960 5,207 $ 10,190 $ 7,026 Non-deductible expenses........... (1,465) (722) 842 (3,522) Change in valuation allowance..... (7,238) (3,439) (2,918) (4,000) Adjustment for change in functional currency bases losses.......................... -- -- (8,287) -- Adjustment to deferred tax asset for enacted changes in tax rates........................... (2,266) (1,076) (478) (92) Foreign tax rate differences...... -- -- 599 413 Other............................. -- -- -- -- ------- ------- -------- ------- (9) (30) $ (52) $ (175) ======= ======= ======== =======
The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities are presented below:
DECEMBER 31, ------------------- 1999 1998 -------- -------- (IN THOUSANDS) Deferred tax assets: Unrealized foreign exchange losses........................ $ 15,166 $ 8,445 Accrued Liabilities....................................... 426 -- Bad debt.................................................. 470 -- Other..................................................... 381 1,393 Tax loss carryforwards.................................... 9,865 9,967 -------- -------- Total gross deferred tax assets............................. 26,308 19,805 Less valuation allowance.................................... (22,195) (11,518) -------- -------- Net deferred tax assets..................................... 4,113 $ 8,287 ======== ======== Deferred tax liabilities: Excess of book value of fixed assets resulting from conversion from hyperinflation.......................... (4,113) (8,287) -------- -------- Total gross deferred tax liabilities...................... $ (4,113) $ (8,287) -------- -------- Net deferred tax liability................................ $ -- $ -- ======== ========
75 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 9. INCOME TAXES (CONTINUED) The net increase in the valuation allowance for five months of 1999, seven months of 1999 and for the years ended December 31, 1998 and 1997 was $7,238,000, $3,439,000, $2,918,000 and $4,000,000, respectively. In assessing the realizability 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, 1999 will be reported in the consolidated statement of operations. Prior to 1999 foreign tax loss carryforwards can be offset against the 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. Starting from 1999 foreign loss carryforwards can be offset against taxable income and utilized during each of the five years subsequent to the year of the loss with no more than 50% of the loss in one given year. 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. At December 31, 1999, the PTK Companies had net operating loss carry forward of approximately $38,845,000, which will expire as follows:
YEAR ENDED DECEMBER 31 (IN THOUSAND) - ---------------------- ------------- 2000........................................................ $ 8,383 2001........................................................ 6,882 2002........................................................ -- 2003........................................................ 11,790 2004........................................................ 11,790 ------- $38,845
10. RELATED PARTY TRANSACTIONS During the ordinary course of business, the Company enters into transactions with related parties. The principal related party transactions are described below. NOTES PAYABLE TO PCI Notes payable to PCI of $176,815,000 and $160,830,000 at December 31, 1999 and 1998, respectively, consists of an unsecured demand note and unpaid interest due to PCI. The notes between PCI and PCBV are revolving credit facilities which call for the borrower to pay 10% interest, payable monthly, on the outstanding principal amount and contain standard events of default for related-party indebtedness. All of these notes become due on June 30, 2001. 76 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 10. RELATED PARTY TRANSACTIONS (CONTINUED) Interest expense of $5,900,000, $8,029,000, $12,975,000 and $11,253,000 was incurred by the Company in connection with affiliate borrowings for five months of 1999, seven months of 1999 and the years ended December 31, 1998 and 1997, respectively. Of this expense, $5,900,000, $12,974,000 and $11,253,000 has been added to the loan balance for five months of 1999, seven months of 1999 and the years ended December 31, 1998 and 1997, respectively. Using the funds provided in the aforementioned notes between PCI and PCBV, PCBV has entered into a series of 10% grid notes with certain of its subsidiaries. PCBV's intercompany notes have been pledged for the benefit of holders of the publicly-registered PCI notes. Pursuant to the PCI Indenture, PCBV is subject to certain restriction, including, without limitation, restriction 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 subsidiaries; (x) limitation on investments in unrestricted subsidiaries; (xi) limitation on lines of business; and (xii) consolidations, mergers and sales of assets. PCI's present intention is to convert aforementioned affiliate notes payable to equity in the underlying Companies. DUE TO AFFILIATE AND PARENT Amounts due to affiliate and parent of $52,358,000 and $26,491,000 at December 31, 1999 and 1998, respectively, are non-interest bearing and primarily represent amounts owed to PCI for management fees, purchases and services and to Wizja TV BV for Wizja programming. Payment of management consulting fees are contingent until such time as net income of the PTK Companies' is sufficient to service the fee. SERVICE AND OVERHEAD ALLOCATION AGREEMENTS PCI entered into service agreements with PCBV and other of its direct and indirect subsidiaries pursuant to which PCI provides various services, including administrative, technical, managerial, financial, operational and marketing services to each of the subsidiaries and PCBV serves as PCI's agent. PCI also entered into a service agreement, dated December 31, 1995, with PCBV and ETV, whereby PCBV is the principal service provider and PCI acts as agent to PCBV. The Service Agreements also typically require the subsidiaries to reimburse PCBV for any reasonable out-of-pocket expenses incurred by PCBV or PCI, acting as agent for PCBV, including salaries and benefits, housing allowances, travel expenses, and equipment supply or other goods costs. The agreements expired on December 31, 1997, but were automatically extended for successive one-year periods unless a party gives notice on or before January 31, in which case the agreement will terminate at the end of the calendar year during which such notice was provided. PCI entered into a Corporate Overhead Allocation Agreement dated January 1, 1996 (the "Allocation Agreement") with certain of its direct or indirect subsidiaries, including PCBV. The Allocation Agreement provides that costs incurred by PCI or PCBV, acting as PCI's agent, with regard to the Service Agreements 77 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 10. RELATED PARTY TRANSACTIONS (CONTINUED) and as otherwise requested by the PTK Companies shall be allocated and charged to particular PTK Companies in the event they are directly attributable to such subsidiaries, and shall otherwise be allocated equally among each of the PTK Companies. With regard to services rendered and costs incurred by subsidiaries for the benefit of some or all of the PTK Companies, which include costs associated with maintaining a central office in Warsaw, legal expenses, expenses relating to governmental relationships and approvals, programming services, accounting, management information systems services, and salaries associated with personnel whose duties clearly benefit other PTK Companies, the Allocation Agreement provides that such expenses shall be allocated between the PTK Companies. The Allocation Agreement terminates on December 31, 1997, but is automatically renewed for successive one-year periods unless at least thirty days written notice of termination is provided by PCI or PCBV or any subsidiary, with respect to itself. Pursuant to guidance within SFAS No. 51, "FINANCIAL REPORTING BY CABLE TELEVISION COMPANIES", certain reimbursed overhead costs of $0, for five months of 1999, seven months of 1999 and $152,000 and $637,000 at December 31, 1998 and 1997, respectively, have been capitalized and are included in investment in cable television system assets. The remaining overhead costs allocated to the Company of $749,174, $1,361,192, $1,477,000 and $1,470,000 during five months of 1999, seven months of 1999 and the years ended December 31, 1998 and 1997, respectively, are included in corporate administration and operating expenses. STOCK OPTION COMPENSATION EXPENSE Included in selling, general and administrative expense in 1997 is approximately $4,713,000 of compensation expense related to the difference between the exercise price of certain options issued by @Entertainment, Inc. and their fair market value on the date of grant. Since the executives, to whom the options were issued, spent a portion of their time providing services to the Company, management allocated a portion of the costs to the Company using what management believes is a reasonable method of allocation. MANAGEMENT AGREEMENT The PTK Companies entered into management consulting agreements with PCI to recommend, advise, and consult the PTK Companies as to design, construction, development, and operation of the cable television systems. The agreements typically provide that the subsidiary will pay to PCI an annual consulting fee of $320,000 when and to the extent that the subsidiary's net income exceeds zero. These contingent management consulting fees payable to PCI are reflected in amounts "due to affiliate" in the accompanying consolidated balance sheets. The management agreements also provide for an initial term ending as of the end of the calendar year during which they became effective, and provide for successive renewals for one-year periods unless the agreement is terminated in writing with at least thirty days notice by either party. Management consulting fees charged to corporate administration expense were $0 for five and seven months of 1999 and $1,440,000 and $1,440,000 for the years ended December 31, 1998 and 1997, respectively. 78 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 10. RELATED PARTY TRANSACTIONS (CONTINUED) PRINT MEDIA SERVICES An affiliate of the Company provides print media services to the Company. The Company incurred operating costs related to those services of $0, $296,000 and $2,943,000 for five months of 1999, seven months of 1999 and the year ended December, 31, 1998, respectively. During 1997 the Company did not incur any such costs from this affiliate prior to 1998. Included in accounts payable at December 31, 1999 and 1998 is $0, $1,114,000 due to this affiliate. The Company did not incur any costs from this affiliate in prior years. PROGRAMMING Affiliates of PCI provides programming to the PTK Companies. The Company incurred programming fees from this affiliate of $9,588,000, $12,729,000, $8,651,000 and $500,000 for five months of 1999, seven months of 1999 and the years ended December 31, 1998 and 1997, respectively. 11. COMMITMENTS AND CONTINGENCIES LEASES Total rental expense associated with the operating leases mentioned below for five months of 1999, seven months of 1999 and for the years ended December 31, 1998 and 1997 was $969,000, $692,000, $2,446,000 and $1,423,000, respectively, related to these leases. The Company leases several offices and warehouses within Poland under cancelable operating lease terms. 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 17 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 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 2000 only, as all leases are cancelable in accordance with the aforementioned terms. The future minimum lease commitments related to these conduit leases approximates $256,000 as of December 31, 1999. PROGRAMMING 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 and affiliated content providers for its cable systems. The agreements have terms which range from one to five 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 79 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 11. COMMITMENTS AND CONTINGENCIES (CONTINUED) minimum number of subscribers connected to the system each month. At December 31, 1999, the Company had an aggregate minimum commitment in relation to these agreements of approximately $30,893,000 over the next seven years, approximating $10,279,000 in 2000, $5,536,000 in 2001, $4,872,000 in 2002, $5,078,000 in 2003 and $5,128,000 in 2004 and thereafter. REGULATORY APPROVALS The Company is in the process of obtaining 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 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 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. 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. DIVIDEND RESTRICTIONS The Company's Polish subsidiaries are only able to distribute dividends to the extent of accounting profit determined in accordance with Polish accounting principles. As of December 31, 1999 the Company's Polish subsidiaries have no profit available for distribution as dividends. PCBV MINORITY STOCKHOLDER'S CLAIM On or about July 8, 1999, certain minority shareholders ("the minority shareholders") of the Company, filed a lawsuit against PCI and certain other defendants, in United States District Court, Southern District of Ohio, Eastern Division, Civil Action No. C2-99-621. The relief sought by the minority shareholders includes: (1) unspecified damages in excess of $75,000, (2) an order lifting the restrictions against transfer of shares set forth in the Shareholders' Agreement among PCBV's shareholders, as amended (the "Shareholders' Agreement") so that the minority shareholders can liquidate their shares in the Company, (3) damages in the amount of 1.7 percent of the payment made by UPC for the shares of the Company as set forth in the Agreement and Plan of Merger 80 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 11. COMMITMENTS AND CONTINGENCIES (CONTINUED) between @Entertainment and UPC dated June 2, 1999, and (4) attorneys' fees and costs incurred in prosecuting the lawsuit. The amended complaint sets forth eight claims for relief based on allegations that the defendants, including @Entertainment and PCI, committed the following wrongful acts: (1) breached a covenant not to compete contained in the Shareholders' Agreement relating to the shareholders of the Company, (2) breached a covenant in the Shareholders' Agreement requiring that any contract entered into by the Company with any other party affiliated with PCI be commercially reasonable or be approved by certain of the minority shareholders, (3) breached a provision in the Shareholders' Agreement that allegedly required co-defendant Chase International Corp. ("CIC") to offer the minority shareholders the right to participate in certain sales of the Company shares and that required CIC to give written notice of any offer to purchase the minority shareholders' shares in the Company, (4) breached their fiduciary duties to the minority shareholders, (5) breached the agreement between the Company and CIC, which allegedly limited the amount of management fees that could be paid annually by the Company, (6) made false and misleading statements in various documents filed with the Securities and Exchange Commission, (7) colluded to defraud the minority shareholders by failing to make reference in certain Forms 8-K, 8-KA and 14D-1 to the minority shareholders or their alleged rights and claims, (8) colluded to divert assets of PCBV to affiliates of PCI and the Company, including the Company, that allegedly compete with PCI and the Company. The minority shareholders also seek damages in the amount of 1.7 percent of the payment made by UPC for the shares of @Entertainment, although the amended complaint does not contain a separate claim for relief seeking that amount. PCI intends to defend the lawsuit vigorously. PCI has also conducted negotiations to purchase the minority shareholders' outstanding shares in the Company. If the negotiations produce a sale by the minority shareholders of their shares in the Company to PCI, the lawsuit would most likely be terminated. PCI is unable to predict the outcome of those negotiations. In the event that the lawsuit is not terminated, its status is as follows: The time for PCI to respond to the amended complaint has not yet expired. Discovery has not yet commenced. At this early stage of the proceedings, PCI is unable to predict the probable outcome of the lawsuit or PCI's ultimate exposure in connection therewith. In addition to the Ohio lawsuit, the other minority shareholders of the Company (representing an additional 6% of the Company) have asserted similar claims for compensation, but have not filed suit. 12. CONCENTRATIONS OF BUSINESS AND CREDIT RISK USE OF TPSA CONDUIT 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 81% of the Company's cable plant had been constructed utilizing pre-existing conduits of TPSA. A substantial portion of the Company's contracts with 81 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999, 1998 AND 1997 12. CONCENTRATIONS OF BUSINESS AND CREDIT RISK (CONTINUED) 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. The Company expects to renew these leases on or before the expiration dates. 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 televisions networks. Accordingly, any catastrophe affecting a significant portion of the Company's cable television networks could result in substantial uninsured losses and could have a material adverse effect on the Company. YEAR 2000 The Company has not experienced any problems with its computer systems relating to distinguishing twenty-first century dates from twentieth century dates, which generally are referred to as year 2000 problems. The Company is also not aware of any material year 2000 problems with its clients or vendors. The Company did not and does not anticipate increasing material expenses or experiencing any material operation disruptions as a result of any year 2000 problems. CREDITWORTHINESS 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 1999, 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. 82 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE (a) Previous independent accountant: (i) On November 17, 1999, the Company notified KPMG Polska Sp. z.o.o. ("KPMG") by telephone of its intent to dismiss KPMG as its independent accountants, and on the same date, KPMG sent a letter to the Company, with a copy to the Chief Accountant at the Securities and Exchange Commission, acknowledging such dismissal. On November 26, 1999, the Company sent a letter to KMPG formally dismissing KPMG as its independent accountants. (ii) The reports of KPMG on the financial statements for the Company and the Company's majority-owned subsidiary Poland Cablevision (Netherlands) B.V. for the fiscal years ended December 31, 1997 and 1998 contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle. (iii) The Company's Board of Directors participated in and approved the decision to change independent accountants. (iv) In connection with its audits for the fiscal years ended December 31, 1997 and 1998 and the relationship through the date of the dismissal, there have been no disagreements with KPMG on any matter of accounting principles of practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of KPMG would have caused them to make reference thereto in their report on the financial statements for such fiscal years. (v) In a letter dated March 31, 1999, to the Company's Board of Directors following its 1998 audit, KPMG commented on certain matters involving the internal control structure and operation of the Company, including: (i) the need for more experience and resources in the financial reporting area; (ii) the need for an effective internal audit department; (iii) problems in the translation of Polish Zloty balances and transactions into U.S. dollars; (iv) problems with financial statements of certain subsidiaries presented for consolidation; and (v) other control weaknesses involving currency translations, monthly reconciliations and other matters that should have been resolved prior to being presented for consolidation and audit purposes. Certain members of management, including a member of the Company's Board of Directors, discussed the subject matter of certain of these issues with KPMG. The Company intends to continue addressing these issues, and the Company has authorized KPMG to respond fully to the inquiries of the successor accountant concerning such events. (vi) The Company has requested that KPMG furnish it with a letter addressed to the Securities and Exchange Commission stating whether or not it agrees with the above statements. A copy of such letter, dated December 2, 1999, is incorporated by reference to this Form 10-K. (b) New independent accountant: The Company engaged Arthur Andersen Sp. z o.o. ("Arthur Andersen") as its new independent accountant as of November 30, 1999. During the two most recent fiscal years and through November 26, 1999, the Company has not consulted with Arthur Andersen regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that right be rendered on the Company's financial statements (and no written report or oral advice has been provided to the Company by Arthur Andersen on an accounting, auditing or financial reporting 83 issue); or (ii) any matter that was either the subject of a disagreement, as that term is defined in Item 304(a)(1)(iv) or Regulation S-K and the related instructions to item 304 or Regulation S-K, or a reportable event, as that term is defined in Item 304(a)(1)(v) or Regulation S-K. 84 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements and Schedules The financial statements as set forth under Item 8 of this report on Form 10-K are incorporated herein by reference. Financial statement schedules have been omitted since they are either not required, not applicable, or the information is otherwise included. (b) Reports on Form 8-K The Company filed the following Reports on Form 8-K during the quarter ended December 31, 1999. Report on Form 8-K, filed on November 3, 1999, relating to the expiration of Offer to Repurchase Notes due to change in control. Report on Form 8-K, filed on December 2, 1999, relating to change in the Company's certified accountant. (c) Exhibit Listing 3.1(a) Restated Certificate of Incorporation of Poland Communications, Inc. as amended through August 1998. 3.1(b) Certificate of Amendment of Certificate of Incorporation of Poland Communications, Inc. dated March 20, 2000. 3.2 By-Laws of PCI as amended through March 1998. (Incorporated by reference to PCI's Form 10-K, filed March 30, 1999.) 4.1 Indenture dated as at October 31, 1996 between PCI and State Street Bank and Trust Company relating to PCI's 9 7/8% Senior Notes due 2003 and its 9 7/8% Series B Senior Notes due 2003 (Incorporated by reference to Exhibit 4.11 of PCI's Registration Statement on Form S-4, Registration No. 333-20307). 10.4 Purchase Agreement dated October 24, 1996 between PCI and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated relating to $130,000,000 aggregate principal amount of PCI's 9 7/8% Senior Notes due 2003 (Incorporated by reference to Exhibit 1.1 of PCI's Registation Statement on Form S-4, Registration No. 333-20307). 21 Subsidiaries of PCI 27 Financial Data Schedule 99.1 Letter from KPMG dated December 2, 1999. (Incorporated by reference to PCI's Form 8-K filed on December 2, 1999) 85 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. POLAND COMMUNICATIONS, INC. By: /s/ RAY SAMUELSON ----------------------------------------- Ray Samuelson DIRECTOR OF FINANCE AND ACCOUNTING AND TREASURER AND DIRECTOR
In accordance with the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates stated.
SIGNATURE TITLE DATE --------- ----- ---- Chairman of the Board and Director -------------------------------------- Nimrod Kovacs /s/ RAY D. SAMUELSON Director of Finance and Accounting, -------------------------------------- Treasurer and Director March 30, 2000 Ray D. Samuelson /s/ GENE MUSSELMAN Chief Executive Officer and -------------------------------------- President and Director March 30, 2000 Gene Musselman /s/ ANTON TUIJTEN Director -------------------------------------- March 30, 2000 Anton Tuijten /s/ SIMON OAKES Director -------------------------------------- March 30, 2000 Simon Oakes /s/ DOROTHY HANSBERRY Vice President, General Counsel and -------------------------------------- Secretary and Director March 30, 2000 Dorothy Hansberry /s/ BRUCE MASSEY Director -------------------------------------- March 30, 2000 Bruce Massey
86 EX-3.1(A) 2 EXHIBIT 3.1(A) Exhibit 3.1(a) RESTATED CERTIFICATE OF INCORPORATION OF POLAND COMMUNICATIONS, INC. (Pursuant to Section 807 of the New York Business Corporation Law) IT IS HEREBY CERTIFIED THAT: FIRST: The name of the Corporation is: POLAND COMMUNICATIONS, INC. (hereinafter the `Corporation'). The name under which the Corporation was formed is Servus Management Corporation of New York. SECOND: The original Certificate of Incorporation was filed by the Department of State on August 27, 1982. THIRD: The following amended and restated Certificate of Incorporation amends the following Articles of the Corporation's original Certificate of Incorporation as modified by the first amended Certificate, which was filed with the Secretary of State of New York on January 25, 1985, the restated Certificate which was filed with the Secretary of State of New York on April 17, 1991, the amended Certificate which was filed with the Secretary of State of New York on June 24, 1991, the restated Certificate which was filed with the Secretary of State of New York on March 27, 1996, the amended Certificate which was filed with the Secretary of State of New York on October 23, 1996, the amended Certificate which was filed with the Secretary of State of New York on May 13, 1997, and the Certificate of Amendment which was filed with the Secretary of State of New York on December 31, 1997: Article IV is amended to delete Series B Preferred Stock and Series D Preferred Stock; Article V is amended to change the registered agent of the Corporation and to change the name and address of the person to whom the Secretary of State, as agent for service of process, will mail a copy of the process; and Article VIII, which addressed actions which required approval of certain matters by a super majority of the votes, is deleted. These changes are made to reflect: a reorganization of the Corporation under which all of the Common Stock, all of the Series A Preferred Stock and all of the Series C Preferred Stock was acquired by @Entertainment, Inc.; an exchange of all of the Series B Preferred Stock for Series B Preferred Stock of @Entertainment, Inc.; a redemption of the Series D Preferred Stock; and a change in the registered agent of the Corporation and a change in the name and address of the person to whom the Secretary of State, as agent for service of process, will mail a copy of the process. FOURTH: The restatement of the Certificate of Incorporation herein provided for was authorized, pursuant to sections 803 and 615(a) of the New York Business Corporation Law, by the unanimous written consent of the Board of Directors of the Corporation, followed by the unanimous written consent, setting forth the action so taken, signed by the holders of all outstanding shares entitled to vote thereon. FIFTH: This amendment provides for a change as to 2,500 authorized and issued shares, par value one cent ($.01) per share, of the Series B Preferred Stock (none of which shares are outstanding), and 1,151 authorized and issued shares, par value one cent ($.01) per share, of the Series D Preferred Stock (none of which shares are outstanding). Resulting from the change are no authorized and issued shares of the Series B Preferred Stock and no authorized and issued shares of the Series D Preferred Stock. The terms of the change are to remove 2,500 shares (none of which are outstanding) from the authorized and issued shares, par value one cent ($.01) per share, of the Series B Preferred Stock and 1,151 shares (none of which are outstanding) from the authorized and issued shares, par value one cent ($.01) per share, of the Series D Preferred Stock. The Series A Preferred Stock, Series C Preferred Stock, and Common Stock are not changed. SIXTH: This amendment reduces the stated capital of the Corporation by removing from the authorized and issued shares of the Corporation 2,500 issued shares of Series B Preferred Stock of the par value of one cent ($.01) per share and 1,151 issued shares of Series D Preferred Stock of the par value of one cent ($.01) per share, all of which have been reacquired and cancelled by the Corporation. The stated capital of the Corporation is reduced from two hundred eighty five dollars and ninety nine cents ($285.99) to two hundred forty nine dollars and forty eight cents ($249.48), a reduction of thirty six dollars and fifty one cents ($36.51), which amount represents the aggregate par value of the cancelled reacquired shares removed from authorized status. SEVENTH: To accomplish the amendments described above, (i) Section 1 of Article IV is hereby amended to read as set forth in the same numbered Article of the Certificate of Incorporation of the Corporation as hereafter restated; (ii) Sections 4 and 6 of Article IV have been deleted and Sections 5 and 7 of Article IV are renumbered as Sections 4 and 5, respectively; (iii) Section 5 of Article IV is hereby amended to read as set forth in new Section 4 of Article IV of the Certificate of Incorporation of the Corporation as hereafter restated; (iv) Section 7 of Article IV is hereby amended to read as set forth in new Section 5 of Article IV of the Certificate of Incorporation of the Corporation as hereafter restated; (v) Article V is amended to read as set forth in the same numbered Article of the Certificate of Incorporation of the Corporation as hereafter restated; (vi) Article VIII is deleted; and (vii) Articles IX and X are renumbered as Articles VIII and IX, respectively. EIGHTH: The text of the Certificate of Incorporation of the Corporation is hereby restated as further amended or changed herein to read as follows: 2 ARTICLE I NAME OF CORPORATION The name of the Corporation is Poland Communications, Inc. ARTICLE II PURPOSE To engage in any lawful act or activity for which Corporations may be organized under the Business Corporation Law, provided that the Corporation is not formed to engage in any act or activity requiring the consent or approval of any state official, department, board, agency or other body without such consent or approval first being obtained. ARTICLE III CORPORATE OFFICE The office of the Corporation is to be located in the County of Albany, State of New York. ARTICLE IV AUTHORIZED SHARES SECTION 1. AUTHORIZED. The aggregate number of shares which the Corporation is authorized to issue is thirty three thousand (33,000), of which twenty seven thousand (27,000) shares are authorized for common stock, par value one cent (U.S. $0.01) per share (`Common Stock'), four thousand (4,000) shares are authorized for Series A Preferred Stock, par value of one cent (U.S. $0.01) per share, and two thousand (2,000) shares are authorized for Series C Preferred Stock, par value of one cent (U.S. $0.01) per share. The Common Stock and the two series of preferred stock shall have the voting rights, designations, preferences, qualifications, privileges, limitations, options and other rights as follows: SECTION 2. COMMON STOCK. A. VOTING RIGHTS. The holders of Common Stock shall be entitled to one (1) vote per share on all matters submitted to the shareholders of the Corporation. B. DIVIDEND PROVISIONS. The holders of shares of Common Stock shall be entitled to receive dividends when, as and if declared by the Board of Directors. SECTION 3. SERIES A PREFERRED STOCK. A. VOTING RIGHTS. The holders of Series A Preferred Stock shall not be entitled to vote on any matters submitted to the shareholders of the Corporation, except as otherwise required by applicable law. B. DIVIDEND PROVISIONS. The holders of shares of Series A Preferred Stock shall not be entitled to receive dividends. 3 C. REDEMPTION. (1) Mandatory Redemption. On September 30, 2004, the Corporation shall be required to redeem the Series A Preferred Stock (the `Series A Redemption Date'). (2) Optional Redemption. At the option of the Corporation, the Series A Preferred Stock may be redeemed at any time, in whole or in part. The Corporation may exercise said option by providing notice of redemption in accordance with Article IV, Section 3(C)(4). (3) Redemption Price. The redemption price per share of Series A Preferred Stock to be paid upon a redemption under this Section 3(C) shall be ten thousand dollars (U.S. $10,000) (the `Series A Redemption Price'). The Series A Redemption Price shall be adjusted proportionately in the event the Series A Preferred Stock is adjusted into a lesser number of shares or subdivided into a greater number of shares. (4) Redemption Notice. Notice of any redemption pursuant to this Section 3(C) shall be given by the Corporation by mailing notice (the `Series A Redemption Notice'), via registered or certified mail, postage prepaid, or by hand delivery to the holders of record of the Series A Preferred Stock (as of the close of business on the business day next preceding the day on which the Series A Redemption Notice is given) at their respective addresses as the same shall appear on the stock books of the Corporation, not less than 30 days nor more than 60 days prior to the date of such redemption and the Series A Redemption Notice shall state the time and place fixed for such redemption. (5) Surrender of Certificates. Upon surrender of a certificate or certificates representing shares to be redeemed pursuant to this Section 3(C), the Corporation shall remit an amount equal to the product of (i) the Series A Redemption Price, times (ii) the number of shares of Series A Preferred Stock to be redeemed. If fewer than all of the shares represented by any such certificate or certificates presented for redemption are to be redeemed, a new certificate shall be issued representing the unredeemed shares without cost to the holder. If so required by the Corporation, any certificate for Series A Preferred Stock surrendered for redemption shall be accompanied by instruments of transfer, duly executed by the holder of such Series A Preferred Stock or his duly authorized representative. (6) Rights After the Series A Redemption Date. From and after the close of business on the Series A Redemption Date, unless there shall have been a default in the payment of the redemption price, all rights of holders of shares of Series A Preferred Stock redeemed pursuant to Section 3(C) shall cease with respect to such shares, and thereafter such shares shall not be deemed to be outstanding for any purposes whatsoever. (7) Cancellation of Redeemed Shares. Any shares of Series A Preferred Stock that shall at any time have been redeemed or repurchased by the Corporation shall, after such redemption or repurchase, be cancelled by the Corporation and shall not be available for reissuance. 4 SECTION 4. SERIES C PREFERRED STOCK. A. VOTING RIGHTS. The holders of Series C Preferred Stock shall not be entitled to vote on any matters submitted to the shareholders of the Corporation, except as otherwise required by applicable law. B. DIVIDEND PROVISIONS. The holders of shares of Series C Preferred Stock shall not be entitled to receive dividends. C. MANDATORY REDEMPTION. (1) Mandatory Redemption. On September 30, 2004, the Corporation shall be required to redeem the Series C Preferred Stock (the `Series C Redemption Date'). Prior to the mandatory redemption of the Series C Preferred Stock, if no IPO Closing has occurred by such date, all of the Series A Preferred Stock shall have been exchanged, repurchased or redeemed in full or otherwise cancelled. The `IPO Closing' shall mean the closing of an underwritten public offering of shares to be listed on the New York Stock Exchange or the American Stock Exchange, or to be quoted on the National Association of Securities Dealers Automated Quotation System or the National Market System of the National Association of Securities Dealers pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale to the public of at least twenty percent (20%) of the Common Stock of the Corporation outstanding immediately after the IPO Closing or (ii) immediately prior to the closing of a merger or consolidation of the Corporation with or into another corporation or entity which is not an affiliate of the Corporation. For purposes of this Section 4(C)(1), `affiliate of the Corporation' shall mean any person or entity that controls, is controlled by or is under common control with the Corporation. (2) Optional Redemption. At the option of the Corporation, the Series C Preferred Stock may be redeemed at any time, in whole or in part, provided that before any shares of Series C Preferred Stock may be redeemed, the Series A Preferred Stock shall have been exchanged, repurchased or redeemed in full or otherwise cancelled. The Corporation shall exercise said option by providing notice of redemption in accordance with Section 4(C)(4). (3) Redemption Price. The redemption price per share of Series C Preferred Stock to be paid upon a redemption under this Section 4(C) shall be equal to ten thousand dollars (U.S. $10,000) (the `Series C Redemption Price'). The Series C Redemption Price shall be adjusted proportionately in the event the Series C Preferred Stock is adjusted into a lesser number of shares or subdivided into a greater number of shares. (4) Redemption Notice. Notice of any redemption pursuant to this Section 4(C) shall be given by the Corporation by mailing notice (the `Series C Redemption Notice'), via registered or certified mail, postage prepaid, or by hand delivery to the holders of record of the Series C Preferred Stock (as of the close of business on the business day next preceding the day on which the Series C Redemption Notice is given) at their respective addresses as the same shall appear on the stock books of the Corporation, not less than 30 days nor more than 60 days prior to the date of such redemption and the Series C Redemption Notice shall state the time and place fixed for such redemption. (5) Surrender of Certificates. Upon surrender of certificate or certificates representing shares to be redeemed pursuant to this Section 4(C), the Corporation shall remit an amount equal to the product of, (i) the Series C Redemption Price, times (ii) the number of shares of the Series C Preferred Stock to be redeemed. If fewer than all of the shares represented by any such certificate or certificates presented for redemption are to be redeemed, a new certificate shall be issued representing the unredeemed shares without cost to the holder. If so required by the Corporation, any certificate for Series C Preferred Stock surrendered for redemption shall be accompanied by instruments of transfer, duly executed by the holder of such Series C Preferred Stock or his duly authorized representative. 5 (6) Rights After the Series C Redemption Date. From and after the close of business on the Series C Redemption Date, unless there shall have been a default in the payment of the redemption price, all rights of holders of shares of Series C Preferred Stock redeemed pursuant to Section 4(C) shall cease with respect to such shares, and thereafter such shares shall not be deemed to be outstanding for any purposes whatsoever. (7) Cancellation of Redeemed Shares. Any shares of Series C Preferred Stock that shall at any time have been redeemed or repurchased by the Corporation shall, after such redemption or repurchase, be cancelled by the Corporation and shall not be available for reissuance. SECTION 5. LIQUIDATION PREFERENCES OF PREFERRED STOCK. A. Subject to Section 5(B), upon the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, after payment or provisions for the payment of the debts and other liabilities of the Corporation, the assets then available for distribution to the shareholders shall be distributed as follows: (1) First to the holders of the Series A Preferred Stock, to the extent available, in an amount equal to $10,000.00 per share (the `Series A Liquidation Preference'), but if the funds available therefor are insufficient, then to the holders of Series A Preferred Stock on a pro rata basis in accordance with the number of shares held by each holder. (2) Second to the holders of the Series C Preferred Stock, to the extent available, in an amount equal to $10,000.00 per share (the `Series C Liquidation Preference'), but if the funds available therefor are insufficient, then to the holders of Series C Preferred Stock on a pro-rata basis in accordance with the number of shares held by each holder. (4) After distribution in accordance with clauses (1) and (2) above, all remaining assets available for distribution to the shareholders shall be distributed to the holders of shares of the outstanding Common Stock on a pro rata basis in accordance with the number of shares held by each holder. B. Upon the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation that occurs after the IPO Closing, after payment or provisions for the payment of the debts and other liabilities of the Corporation, the assets then available for distribution to the shareholders shall be distributed as follows: first, an amount equal to the aggregate Series A Liquidation Preference and Series C Liquidation Preference for all outstanding shares of Series A Preferred Stock and Series C Preferred Stock, respectively, shall be distributed pro rata among all holders of the Series A Preferred Stock and the Series C Preferred Stock based on the number of shares held by each holder; second, all remaining assets available for distribution to the shareholders shall be distributed to the holders of the outstanding Common Stock on a pro rata basis in accordance with the number of shares held by each holder. C. Notwithstanding the foregoing, the Series A Liquidation Preference or the Series C Liquidation Preference, as the case may be, shall be adjusted proportionately in the event that the number of shares of such series of preferred stock is adjusted into a lesser number of shares or adjusted into a greater number of shares. 6 ARTICLE V AGENT FOR SERVICE OF PROCESS; REGISTERED AGENT The Secretary of State is designated as agent of the Corporation upon whom process against it may be served. The post office address to which the Secretary of State shall mail a copy of any process against the Corporation served upon him is: Corporation Service Company 80 State Street 6th Floor Albany, New York 12207 Corporation Service Company is hereby designated as the Corporation's Registered Agent, the agent upon whom process may be served. Corporation Service Company's post office address is: 80 State Street 6th Floor Albany, New York 12207 ARTICLE VI PREEMPTIVE RIGHTS No shareholder of the Corporation shall have preemptive rights to acquire shares of the Corporation, and such rights are specifically denied by this Article VI. ARTICLE VII DIRECTORS The Board of Directors of the Corporation shall consist of seven (7) directors, unless a different number shall be established by amendment to this Certificate of Incorporation. ARTICLE VIII LIMITED LIABILITY OF DIRECTORS No director of the Corporation shall have liability for monetary damages for breach of duty as a director if such breach did not (A) involve a knowing and culpable violation of law by the director; (B) enable the director or an Associate (as defined herein) to receive an improper personal economic gain; (C) show a lack of good faith and a conscious disregard for the duty of the director to the Corporation under circumstances in which the director was aware that his conduct or omission created an unjustifiable risk of serious injury to the Corporation; (D) constitute a sustained and unexcused pattern of inattention that amounted to an abdication of the director's duty to the Corporation; or (E) create liability under an applicable provision of the laws of the State of New York which cannot be limited or made inapplicable by this Article. For purposes hereof, `Associate' of a director means (A) any corporation or organization of which such person is an officer or partner or is, directly or indirectly, the beneficial owner of ten percent or more of any class of voting stock; (B) any trust or other estate in which such person has at least a ten percent beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity; and (C) any relative or spouse of such person, or any relative of such spouse, who has the same home as such person. 7 ARTICLE IX INDEMNIFICATION SECTION 1. DEFINITIONS. As used in this Article IX: A. `Agent' means any person who is or was an agent of the Corporation and any person who, while an agent of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another Enterprise. B. `Corporation' includes any domestic or foreign predecessor entity of the Corporation in a merger, consolidation or other transaction in which the predecessor's existence ceased upon consummation of such transaction. C. `Director' means any person who is or was a director of the Corporation and who, while a director of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another Enterprise or as a fiduciary of an employee benefit plan or trust maintained for the benefit of employees of the Corporation or employees of any other Enterprise. D. `Eligible Outside Party' means any person who, although not a shareholder, director, officer, employee or agent of the Corporation, is or was serving solely at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another Enterprise. E. `Employee' means any person who is or was an employee of the Corporation and any person who, while an employee of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another Enterprise or as a fiduciary of an employee benefit plan or trust maintained for the benefit of employees of the Corporation or employees of any other Enterprise. F. `Enterprise' means any other foreign or domestic Corporation, partnership, joint venture, trust or other enterprise, other than an employee benefit plan or trust. G. `Expenses' include attorneys' fees. H. `Officer' means any person who is or was an officer of the Corporation and any person who, while an officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another Enterprise or as a fiduciary of an employee benefit plan or trust maintained for the benefit of employees of the Corporation or employees of any other Enterprise. I. `Party' includes a person who was, is, or is threatened to be made, a defendant or respondent in a proceeding. J. `Proceeding' means any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, and shall include any appeal therein. K. `Shareholder' means any person who is or was a shareholder of the Corporation and any person who, while a shareholder of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another Enterprise. 8 SECTION 2. SCOPE OF INDEMNIFICATION. A. Except as otherwise provided in this Article IX or in the laws of the State of New York, the Corporation shall indemnify any person made a Party to any Proceeding, other than an action by or in the right of the Corporation, by reason of the fact that he, or the person whose legal representative he is, is or was a shareholder, director, officer, employee or agent of the Corporation, or an Eligible Outside Party, against judgments, fines, penalties, amounts paid in settlement and reasonable Expenses actually incurred by him, and the person whose legal representative he is, in connection with such Proceeding. The Corporation shall not so indemnify any such person unless (1) such person, and the person whose legal representative he is, was successful on the merits in the defense of any proceeding referred to in this subsection, or (2) it shall be concluded as provided in subsection C of this Section 2 that such person, and the person whose legal representative he is, acted in good faith and in a manner he reasonably believed to be in the best interests of the Corporation, or in the case of a person serving as a fiduciary of an employee benefit plan or trust, either in the best interests of the Corporation or in the best interests of the participants and beneficiaries of such employee benefit plan or trust and consistent with the provisions of such employee benefit plan or trust and, with respect to any criminal action or proceeding, that they had no reasonable cause to believe his conduct was unlawful, or (3) the court, on application as provided in subsection D of this Section 2, shall have determined that in view of all circumstances such person is fairly and reasonably entitled to be indemnified, and then for such amount as the court shall determine; except that, in connection with an alleged claim based upon his purchase or sale of securities of the Corporation or another Enterprise, which he serves or served at the request of the Corporation, the Corporation shall only indemnify such person after the court shall have determined, on application as provided in subsection D of this Section 2, that in view of all the circumstances such person is fairly and reasonably entitled to be indemnified, and then for such amount as the court shall determine. The termination of any Proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith or in a manner which he did not reasonably believe to be in the best interests of the Corporation or of the participants and beneficiaries of such employee benefit plan or trust and consistent with the provisions of such employee benefit plan or trust, or, with respect to any criminal action or proceeding, that he had reasonable cause to believe that his conduct was unlawful. B. Except as otherwise provided in this Article IX or in the laws of the State of New York, the Corporation shall indemnify any person made a Party to any Proceeding, by or in the right of the Corporation, to procure a judgment in its favor by reason of the fact that he, or the person whose legal representative he is, is or was a Shareholder, director, officer, employee or agent of the Corporation, or an Eligible Outside Party, against reasonable Expenses actually incurred by him in connection with such proceeding in relation to matters as to which such person, or the person whose legal representative he is, is finally adjudged not to have breached his duty to the Corporation, or where the court, on application as provided in subsection D of this Section 2, shall have determined that in view of all the circumstances such person is fairly and reasonably entitled to be indemnified, and then for such amount as the court shall determine. The Corporation shall not so indemnify any such person for amounts paid to the Corporation, to a plaintiff or to counsel for a plaintiff in settling or otherwise disposing of a Proceeding which is settled or otherwise disposed of without court approval. C. The conclusion provided for in subsection A of this Section 2 may be reached by any one of the following: (1) The Board of Directors of the Corporation by a consent in writing signed by a majority of those directors who were not Parties to such Proceeding; (2) independent legal counsel selected by a consent in writing signed by a majority of those directors who were not Parties to such Proceeding; (3) in the case of any Employee or Agent who is not an officer or Director of the Corporation, the Corporation's general counsel with respect to any matter for which the amount to be indemnified hereunder is less than $100,000; or (4) the shareholders of the Corporation by the affirmative vote of at least fifty-five percent (55%) of the voting power of shares not owned by Parties to such Proceeding, represented at an annual or special meeting of Shareholders, duly called with notice of such purpose stated. Such person shall also be entitled to apply to a court for such conclusion, upon application as provided in subsection D, even though the conclusion reached by any of the foregoing shall have been adverse to him or to the person whose legal representative he is. 9 D. Where an application for indemnification or for a conclusion as provided in this Section 2 is made to a court, it shall be made to the court for the judicial district where the principal office of the Corporation is located. The application shall be made in such manner and form as any be required by the applicable rules of the court, or in the absence thereof, by direction of the court. The court may also direct that notice be given in such manner as it may require at the expense of the Corporation to the Shareholders of the Corporation and to such other persons as the court may designate. In the case of an application to a court in which a Proceeding is pending in which the person seeking indemnification is a Party by reason of the fact that he, or the person whose legal representative he is, is or was serving at the request of the Corporation as a Director, partner, trustee, Officer, Employee or Agent of another Enterprise, or as a fiduciary of an employee benefit plan or trust maintained for the benefit of employees of any other enterprise, timely notice of such application shall be given by such person to the Corporation. E. Expenses which may be indemnifiable under this section incurred in defending a proceeding may be paid by the Corporation in advance of the final disposition of such proceeding as authorized by the Board of Directors upon agreement by or on behalf of the Shareholder, Director, Officer, Employee, Agent or Eligible Outside Party, or his legal representative, to repay such amount if he is later found not to be entitled to indemnification by the Corporation as authorized in this Article IX. F. The Corporation shall not indemnify any Shareholder, Director, Officer, Employee, Agent or Eligible Outside Party, other than a Shareholder, Director, Officer, Employee, Agent or Eligible Outside Party who is or was serving at the request of the Corporation as a Director, Officer, partner, trustee, Employee or Agent of another enterprise, against judgments, fines, penalties, amounts paid in settlement and expenses to an extent either greater or less than that authorized in this Article IX. Notwithstanding the foregoing, except as otherwise provided in the laws of the State of New York, the Corporation may procure insurance providing greater indemnification and may share the premium cost with any Shareholder, Director, Officer, Employee, Agent or Eligible Outside Party on such basis as may be agreed upon. SECTION 3. VALIDITY. If this Article IX or any portion thereof shall be invalidated on any grounds by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each Director, Officer, Employee, Agent and Shareholder of the Corporation as to expenses (including attorneys' fees), judgments, fines and amounts paid in settlement with respect to any action, suit or proceeding, whether civil, criminal, administrative or investigative, including, without limitation, a grand jury proceeding any action, suit or proceeding by or in the right of the Corporation, to the fullest extent permitted by any applicable portion of this Article IX that shall not have been invalidated, by the Business Corporation Law of New York or by any other applicable law. 10 IN WITNESS WHEREOF, we have subscribed this document as the date set forth below and do hereby affirm, under the penalties of perjury, that the statements contained therein have been examined by us and are true and correct. April 15, 1998 /s/ Robert E. Fowler, III ------------------------- Robert E. Fowler, III Chairman of the Board /s/ Cheryl A. Chen ------------------------- Cheryl A. Chen Secretary 11 EX-3.1(B) 3 EXHIBIT 3.1(B) EXHIBIT 3.1(b) CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF POLAND COMMUNICATIONS, INC. UNDER SECTION 805 OF THE BUSINESS CORPORATION LAW The undersigned, being the Managing Director, Finance and Accounting of Poland Communications, Inc, hereby certifies: 1. The name of the corporation is Poland Communications, Inc. The name under which the corporation was originally formed is Servus Management Corporation of New York. 2. The Certificate of Incorporation of the corporation was filed by the Department of State on the 27th day of August, 1982. 3. The Certificate of Incorporation is hereby amended to increase the authorized capital of the Corporation to create a Debenture Stock, par value one-hundredth of a cent (U.S. $0.0001) per share. Accordingly, ARTICLE IV, Section 1, of the Corporation's Restated Certificate of Incorporation is amended by adding to the end of the first sentence thereof the following: "and thirty thousand (30,000) shares are authorized for debenture stock par value of U.S. $0.0001 per share." ARTICLE IV, Section 1, is further amended by striking in the first sentence thereof the word "and" immediately preceding the phrase "two thousand (2,000) share are authorized". ARTICLE IV, Section 1, is further amended by striking the words "and the two series of preferred stock" following the phrase "The Common Stock" and replacing the same with a comma (",") and by adding the phrase "the outstanding preferred stock and the debenture stock" immediately hereafter. 4. The Certificate of Incorporation is hereby further amended by renumbering ARTICLE IV, Section 5, to ARTICLE IV, Section 6 and by striking the reference to "Section 5(B)" in the first sentence thereof and replacing the same with the phrase "Section 6(B) and Section 5(B)". Former ARTICLE IV, Section 5(B), is hereby further amended by adding to the first sentence the phrase "subject to Section 5(B)" after the phrase "shall be distributed" and prior to the phrase "as follows:". 5. The Certificate of Incorporation is hereby further amended by adding a new ARTICLE IV, Section 5, that reads in its entirety as follows: "SECTION 5 DEBENTURE STOCK. A. NUMBER AND DESIGNATION. Thirty thousand (30,000) shares of the preferred stock of the Corporation shall be designated as Debenture Stock (the "DEBENTURE STOCK"). B. RANK. The Debenture Stock will rank (i) senior to the common stock of the Corporation (the "COMMON STOCK") and to all other classes of capital stock of the Corporation, including the Corporation's shares of preferred stock outstanding and including those classes of capital stock established after the date hereof, the terms of which expressly provide that such class or series will rank junior as to dividend distributions and distributions upon the liquidation, winding-up and dissolution of the Corporation (collectively referred to with the Common Stock and the Series C Preferred Stock as "JUNIOR SECURITIES"); (ii) on a parity with each other class of capital stock or series of preferred stock issued by the Corporation the terms of which expressly provide that such class or series will rank on a parity with the Debenture Stock as to dividend distributions and distributions upon the liquidation, winding-up and dissolution of the Corporation (collectively referred to as "PARITY SECURITIES"); and (iii) junior to any classes of capital stock of the Corporation established after the date hereof, the terms of which expressly provide that such class or series will rank senior to the Debenture Stock as to dividend distributions and distributions upon the liquidation, winding up and dissolution of the Corporation (the "SENIOR SECURITIES"). The respective definitions of Junior Securities, Parity Securities and Senior Securities shall also include any rights or options exercisable for or convertible into any of the Junior Securities, Parity Securities or Senior Securities, as the case may be. The Debenture Stock shall be subject to the issuance of Junior Securities and Parity Securities, but no Senior Securities will be issued by the Corporation without the approval of all the holders of the Debenture Stock. C. REDEMPTION. (i) On December 31, 2003 (the "MANDATORY REDEMPTION DATE"), the Corporation will be required, to the extent the Corporation shall have funds legally available for such payment, to redeem all outstanding Debenture Stock at a Redemption Price equal to the sum of (x) 100% of the issue price of the Debenture Stock and (y) interest of 10% per annum from November 3, 1999, to the date of redemption, compounded annually (the "Redemption Price"). The Corporation will not be required to make sinking fund payments with respect to the Debenture Stock. (ii) Debenture Stock which has been issued and reacquired in any manner, including shares purchased or redeemed, shall (upon compliance with any applicable provisions of the laws of the State of New York) have the status of unauthorized and unissued shares of the class of preferred stock undesignated as to series and may be redesignated and reissued as part of any series of the preferred stock; PROVIDED that no such issued and reacquired shares of preferred stock shall be reissued or sold with the same rights as the Debenture Stock, expect in compliance with the provisions hereof. (iii) If the Corporation is unable or shall fail to discharge its obligation to redeem all outstanding shares of Debenture Stock pursuant to paragraph 3(a) (the "MANDATORY REDEMPTION OBLIGATION"), the Mandatory Redemption Obligation shall be discharged as soon as the Corporation is able to discharge such Mandatory Redemption Obligation. If and so long as any Mandatory Redemption Obligation with respect to the Debenture Stock shall not be fully discharged, the Corporation shall not (a) directly or indirectly, redeem, purchase, or otherwise acquire any Parity Security or discharge any mandatory or optional redemption, sinking fund or other similar obligation in respect of any Parity Securities (except in connection with a redemption, sinking fund or other similar obligation to be satisfied PRO RATA with the Debenture Stock) or (b) declare or make any distribution on any Junior Securities, or, directly or indirectly, discharge any mandatory or optional redemption, sinking fund or other similar obligation in respect of the Junior Securities. Interest shall accrue on the unpaid Redemption Price, or any portion thereof, at 10% per annum. D. PROCEDURE FOR REDEMPTION. (i) In the event that fewer than all the outstanding shares of Debenture Stock are to be redeemed, the number of shares to be redeemed shall be determined by the Board and the shares to be redeemed shall be selected by lot or PRO RATA (with any fractional shares being rounded to the nearest whole share) as may be determined by the Board. (ii) In the event the Corporation shall redeem Debenture Stock, notice of such redemption shall be given by first class mail, postage prepaid, mailed not less than 30 days nor more than 60 days prior to the redemption date, to each holder of record of the shares to be redeemed at such holder's address as the same appears on the stock register of the Corporation on the date of such mailing; PROVIDED that neither the failure to give such notice nor any defect therein shall affect the validity of the giving of notice for the redemption of any of the Debenture Stock to be redeemed except as to the holder to whom the Corporation has failed to give said notice or except as to the holder whose notice was defective. Each such notice shall state: (x) the redemption date; (y) the number of shares of Debenture Stock to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, the number of shares to be redeemed from such holder; (z) the redemption price; and (aa) the place or places where certificates for such shares are to be surrendered for payment of the redemption price. (iii) Notice having been mailed as aforesaid, from and after the redemption date (unless the Corporation defaults in the payment of the redemption price of the shares called for redemption), all rights of the holders of such Debenture Stock (except the right to receive from the Corporation the redemption price) shall cease. Upon surrender in accordance with said notice of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Board of the Corporation shall so require and the notice shall so state), such shares shall be redeemed by the Corporation at the Redemption Price aforesaid. In case fewer than all the shares represented by any such certificate are redeemed, a new certificate shall be issued, representing the unredeemed shares, without cost to the holder thereof. E. VOTING RIGHTS. The holders of Debenture Stock shall not be entitled to any voting rights, except as provided by law; provided, however, that no Senior Securities shall be issued by the Corporation, and no debts for borrowed money shall be created or established by the Corporation, without the approval of all of the holders of the Debenture Stock. F. OTHER REMEDIES FOR DEFAULT. If the Corporation fails to redeem the Debenture Stock on any scheduled redemption date, holders thereof shall be entitled to any and all other customary creditors' rights available under New York law. G. GENERAL PROVISIONS. (i) The term "OUTSTANDING", when used with reference to shares of stock, shall mean issued shares, excluding shares held by the Corporation or a subsidiary of the Corporation. (ii) The headings of the paragraphs, subparagraphs, clauses and subclauses of this Certificate of Designations are for convenience of reference only and shall not define, limit or affect any of the provisions hereof. (iii) Each holder of Debenture Stock, by acceptance thereof, acknowledges and agrees that payments of the Redemption Price and repurchase of such securities by the Corporation are subject to restrictions on the Corporation contained in certain credit and financing agreements." H. COLLATERAL. In order to secure the due and punctual payment of the Redemption Price on the Debenture Stock when and as the same shall be due and payable, as well as performance of all other obligations of the Company to the holders of the Debenture Stock, the Company will, pursuant to a Pledge Agreement to be entered into between the Company and the holders of Debenture Stock make an assignment of its right, title and interest in and to the Pledged Collateral (as such term is defined in such Pledge Agreement) to the holders of Debenture Stock and to the extent therein provided. Each holder of Debenture Stock, by its acceptance of Debenture Stock, consents, agrees to and becomes a party to the terms of the Pledge Agreement (including, without limitation, the provisions providing for foreclosure and release of Pledged Collateral) as the same may be in effect or may be amended from time to time in accordance with the terms thereof and hereof. The Company (a) will forever warrant and defend the title to the Pledged Collateral against the claims of all persons whatsoever, (b) will execute, acknowledge and deliver to the holders of Debenture Stock such further assignments, transfers, assurances or other instruments, and (c) will do or cause to be done all such acts and things as may be necessary or proper, in each case to assure and confirm to the holders the security interest in the Pledged Collateral contemplated hereby and by the Pledge Agreement or any part thereof, as from time to time constituted, so as to render the same available for the security and benefit of the Debenture Stock secured hereby, according to the intent and purposes herein expressed. The Company shall take, or cause Poland Cablevision (Netherlands) B.V. to take, any and all actions reasonably required to cause the Pledge Agreement to create and maintain, as security for the obligations of the Company arising under the Debenture Stock and the Pledge Agreement, a valid and enforceable first priority lien in and on the Pledged Collateral, in favor of the holders, subject only to the holders of the Company's outstanding 9 7/8% Senior Notes and 9 7/8% Series B Senior Notes being equally and ratably secured herewith. The above and foregoing amendments to the Corporation's Certificate of Incorporation were authorized by the unanimous written consent of the Board of Directors and the unanimous written consent of the sole shareholder of the Corporation. IN WITNESS WHEREOF, the undersigned has executed this Certificate of Amendment of the Certificate of Incorporation this 20th day of March, 2000. /s/ Ray Samuelson -------------------------------------- Name: Ray Samuelson Title: Managing Director, Finance & Accounting EX-21 4 EXHIBIT 21 EXHIBIT 21 LIST OF SUBSIDIARIES
COMPANY JURISDICTION Poland Communications, Inc. New York Poland Cablevision (Netherlands) B.V. Netherlands Czestochowska TK Sp. z o.o. Poland (in liquidation) ETV Sp. z o.o. Poland Gosat-Service Sp. z o.o. Poland Kolor-Sat Sp. z o.o. Poland Mazurska Telewizja Kablowa Sp. z o.o. Poland Opolskie TTT S.A. Poland Polska Telewizja Kablowa Krakow S.A. Poland Polska Telewizja Kablowa Lublin S.A. Poland Polska Telewizja Kablowa Operator Sp. z o.o. Poland Polska Telewizja Kablowa S.A. Poland Polska Telewizja Kablowa Szczecin Sp. z o.o. Poland Polska Telewizja Kablowa Warszawa S.A. Poland Poltelkab Sp. z o.o. Poland Szczecinska Telewizja Kablowa Sp. z o.o. Poland Telkat Sp. z o.o. Poland TV Kabel Sp. z o.o. Poland TV-SAT Ursus Sp. z o.o. Poland (in liquidation) Otwocka Telewizja Kablowa Sp. z o.o. Poland (in liquidation) Synergy Investment Sp z o.o. Poland KTK Sp. z o.o. Poland
EX-27 5 EXHIBIT 27
5 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 2,574 0 3,865 1,095 8,851 6,706 184,997 (48,129) 193,785 26,909 138,441 0 0 1 (26,469) 193,785 0 52,971 0 76,037 0 0 14,320 (35,983) 210 (37,193) 0 0 (4,735) (4,928) (2,212.79) (2,212.79)
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