-----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, HZ3F7nGnFD7iXnyxdt5Un9JmubvV4NLEAdZ24iJq/9qP3Ga3VUhFy+/CF5Gdvmhk hSf7bSJqBy4JIfY5HotN/w== /in/edgar/work/0000912057-00-049952/0000912057-00-049952.txt : 20001115 0000912057-00-049952.hdr.sgml : 20001115 ACCESSION NUMBER: 0000912057-00-049952 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: POLAND COMMUNICATIONS INC CENTRAL INDEX KEY: 0001031232 STANDARD INDUSTRIAL CLASSIFICATION: [4841 ] IRS NUMBER: 061070447 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-20307 FILM NUMBER: 766903 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-Q 1 a2030243z10-q.txt 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000. OR / / TRANSITION REPORT PURSUANT TO THE SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT 1934 FROM THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER 333-20307 POLAND COMMUNICATIONS, INC. (Exact Name of Registrant as Specified in Its Charter) NEW YORK 06-1070447 (State or Other Jurisdiction of (IRS Employer Incorporation of Organization) Identification No.) 4643 ULSTER STREET SUITE 1300 DENVER, COLORADO 80237 (Address of Principal Executive Officers) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (303)770-4001 Indicate by check (X) whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes X No ----- ----- The number of shares outstanding of Poland Communications, Inc.'s common stock as of September 30, 2000, was: Common Stock 18,948 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1 POLAND COMMUNICATIONS, INC. FORM 10-Q INDEX FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
PAGE NO. PART I FINANCIAL INFORMATION Item 1. Financial Statements Poland Communications, Inc. Consolidated Balance Sheets 3-4 Consolidated Statements of Operations 5 Consolidated Statements of Comprehensive Loss 6 Consolidated Statements of Cash Flows 7 Notes to Consolidated Financial Statements 8-12 Poland Cablevision (Netherlands) B.V. Consolidated Balance Sheets 13-14 Consolidated Statements of Operations 15 Consolidated Statements of Comprehensive Loss 16 Consolidated Statements of Cash Flows 17 Notes to Consolidated Financial Statements 18-21 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 22-26 Item 3. Quantitative and Qualitative Disclosures About Market Risk 27 PART II OTHER INFORMATION Item 1. Legal Proceedings 28 Item 2. Changes in Securities and Use of Proceeds 28 Item 3. Defaults Upon Senior Securities 28 Item 4. Submission of Matters to a Vote of Security Holders 28 Item 5. Other Information 28 Item 6. Exhibits and Reports on Form 8-K 28
2 POLAND COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS ASSETS
September 30, December 31, 2000 1999 --------- --------- (unaudited) (in thousands) Current assets: Cash and cash equivalents $ 2,955 $ 3,374 Trade accounts receivable, net of allowance for doubtful accounts of $4,007 in 2000 and $2,419 in 1999 7,332 6,156 VAT recoverable -- 1,243 Prepayments 442 890 Other current assets 313 298 --------- --------- Total current assets 11,042 11,961 --------- --------- Property, plant and equipment: Cable television systems assets 124,803 123,845 Construction in progress 9,554 6,382 Vehicles 609 741 Other 7,482 6,120 --------- --------- 142,448 137,088 Less accumulated depreciation (20,449) (7,478) --------- --------- Net property, plant and equipment 121,999 129,610 Inventories for construction 7,721 5,373 Intangibles, net of accumulated amortization of $28,645 in 2000 and $10,947 in 1999 332,656 377,846 Other assets 2 141 --------- --------- Total assets $ 473,420 $ 524,931 ========= =========
See accompanying notes to unaudited consolidated financial statements. 3 POLAND COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) LIABILITIES AND STOCKHOLDER'S EQUITY
September 30, December 31, 2000 1999 --------- --------- (unaudited) (in thousands) Current liabilities: Accounts payable and accrued expenses $ 20,281 $ 23,438 Accrued interest 591 243 Deferred revenue 2,168 759 --------- --------- Total current liabilities 23,040 24,440 --------- --------- Long-term liabilities: Due to affiliate 46,311 25,434 Notes payable to parent 8,503 7,763 Notes payable 15,664 16,456 --------- --------- Total liabilities 93,518 74,093 --------- --------- Redeemable preferred stock (liquidation value $60,000,000; 6,000 shares authorized, issued and outstanding) 37,773 34,695 Mandatorily Redeemable Debenture Stock, 30,000 shares authorized; 14,000 shares issued and outstanding (including accrued dividend) 152,833 142,333 Commitments and contingencies (note 6) -- -- Stockholder's equity: Common stock, $.01 par value; 27,000 shares authorized, 18,948 shares issued and outstanding 1 1 Paid-in capital 337,396 342,315 Accumulated other comprehensive loss (72,854) (35,376) Accumulated deficit (75,247) (33,130) --------- --------- Total stockholder's equity 189,296 273,810 --------- --------- Total liabilities and stockholder's equity $ 473,420 $ 524,931 ========= =========
See accompanying notes to unaudited consolidated financial statements. 4 POLAND COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Successor Successor | Predecessor Successor Predecessor (note 2) (note 2) | (note 2) (note 2) (note 2) | -------- -------- | -------- -------- -------- | Nine months Three months Two months | One month ended Seven months ended September ended September | ended July 31, September 30, ended July 31, 30, 2000 30, 1999 | 1999 2000 1999 -------- -------- | -------- -------- -------- (in thousands, except per share data) | Cable television revenue $ 17,094 $ 10,687 | $ 5,170 $ 51,124 $ 35,434 | Operating expenses: | Direct operating expenses 11,092 7,454 | 3,660 30,981 24,270 Selling, general and administrative expenses 5,846 4,227 | 1,461 18,557 9,281 Depreciation and amortization 11,389 7,877 | 1,605 33,980 13,819 -------- -------- | -------- -------- -------- Total operating expenses 28,327 19,558 | 6,726 83,518 47,370 -------- -------- | -------- -------- -------- | Operating loss (11,233) (8,871) | (1,556) (32,394) (11,936) | Interest and investment income / (loss), net 66 (68) | (106) 171 167 Interest expense (602) (2,588) | (1,061) (1,900) (8,578) Foreign exchange gain / (loss), net (2,800) (1,855) | 1,214 (7,910) (295) -------- -------- | -------- -------- -------- | | Loss before income taxes (14,569) (13,382) | (1,509) (42,033) (20,642) | Income tax expense (44) (3) | (3) (84) (30) -------- -------- | -------- -------- -------- | | Net loss (14,613) (13,385) | (1,512) (42,117) (20,672) | Accretion of redeemable preferred stock (1,055) (613) | (306) (3,078) (2,113) Accrued dividend on Mandatorily Redeemable | Debenture Stock (3,500) -- | -- (10,500) -- | Net loss applicable to holders of common stock $ (19,168) $ (13,998) | $ (1,818) $ (55,695) $ (22,785) ========== ========= | ======== ========== ========== | Basic and diluted loss per common share $(1,011.61) $ (738.76) | $ (95.95) $(2,939.36) $(1,202.50) ========== ========= | ======== ========== ==========
See accompanying notes to unaudited consolidated financial statements. 5 POLAND COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
Successor Successor | Predecessor Successor Predecessor (note 2) (note 2) | (note 2) (note 2) (note 2) -------- -------- | -------- -------- -------- Three months Two months ended | One month Nine months ended Seven months ended September September 30, | ended July 31, September 30, ended July 31, 30, 2000 1999 | 1999 2000 1999 -------- -------- | -------- -------- -------- (in thousands) | Net loss $(14,613) $(13,385) | $ (1,512) $(42,117) $(20,672) Other comprehensive (loss) / income: | Translation adjustment (13,983) (31,528) | 1,775 (37,478) (15,947) | -------- -------- | -------- -------- -------- Comprehensive loss $(28,596) $(44,913) | $ 263 $(79,595) $(36,619) ======== ======== | ======== ======== ========
See accompanying notes to unaudited consolidated financial statements. 6 POLAND COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Successor Successor | Predecessor (note 2) (note 2) | (note 2) -------- -------- | -------- Nine months Two months | Seven months ended ended | ended September 30, September 30,| July 31, 2000 1999 | 1999 -------- -------- | -------- (in thousands) | Cash flows from operating activities: | Net loss $(42,117) $(13,385) | $(20,672) Adjustments to reconcile net loss to | net cash provided by operating activities: | Depreciation and amortization 33,980 7,877 | 13,819 Unrealized foreign exchange loss 6,874 -- | -- Changes in operating assets and liabilities: | Accounts receivable (1,714) 700 | (2,400) Other current assets (1,338) (827) | 2,138 Accounts payable (4,429) 1,047 | (5,566) Accrued interest 348 2,442 | 767 Amounts due to affiliate 7,926 3,312 | 12,996 Deferred revenue 1,475 243 | 879 -------- -------- | -------- Net cash provided by operating activities 1,005 1,409 | 1,961 -------- -------- | -------- Cash flows from investing activities: | Construction and purchase of property, | plant and equipment (16,672) (4,398) | (13,025) Notes receivable from affiliate -- -- | 449 Purchase of intangibles (1,333) (194) | (1,036) Purchase of subsidiaries net of cash received -- -- | (6,860) -------- -------- | -------- Net cash used in investing activities (18,005) (4,592) | (20,472) -------- -------- | -------- Cash flows from financing activities: | Proceeds from notes payable -- -- | 7,713 Proceeds from parent 13,691 1,272 | 8,917 Capital increase 3,860 -- | 6,000 Repayment of notes payable (840) 135 | (445) -------- -------- | -------- Net cash provided by financing activities 16,711 1,407 | 22,185 -------- -------- | -------- Net increase/ (decrease) in cash and | cash equivalents (289) (1,776) | 3,674 | Effect of exchange rates on cash and cash equivalents (130) -- | -- Cash and cash equivalents at beginning of period 3,374 6,248 | 2,574 -------- -------- | -------- Cash and cash equivalents at end of period $ 2,955 $ 4,472 | $ 6,248 ======== ======== | ======== Supplemental cash flow information: | Cash paid for interest $ 895 $ 365 | $ 7,304 ======== ======== | ======== Cash paid for income taxes $ 97 $ 53 | $ 47 ======== ======== | ========
See accompanying notes to unaudited consolidated financial statements. 7 POLAND COMMUNICATIONS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2000 AND 1999 1. BASIS OF PRESENTATION The information furnished by Poland Communications, Inc. and its subsidiaries("PCI" or the "Company") has been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP") and the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations. The accompanying consolidated balance sheets, statements of operations, statements of comprehensive loss and statements of cash flows are unaudited but in the opinion of management reflect all adjustments (consisting only of items of a normal recurring nature) which are necessary for a fair statement of the Company's consolidated results of operations and cash flows for the interim periods and the Company's financial position as of September 30, 2000. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company's 1999 Annual Report on Form 10-K filed with the SEC (the "1999 Annual Report"). The interim financial results are not necessarily indicative of the results of the full year. 2. CONSUMMATION OF UPC TENDER OFFER AND MERGER On June 2, 1999, @Entertainment Inc., the Company's parent ("@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. The Company, prior to the Acquisition, is herein referred to as the 'Predecessor' while the Company after the Acquisition is referred to as the 'Successor'. The Acquisition was accounted for under the purchase method of accounting, with all of the purchase accounting adjustments 'pushed-down' to the consolidated financial statements of @Entertainment. Accordingly, the purchase price was allocated to the underlying assets and liabilities based upon their estimated fair values and any excess to goodwill. @Entertainment 8 restated some of its assets and liabilities on August 5, 1999. At that date the Notes of @Entertainment and PCI were restated to reflect the market value and as a result were increased by $61.9 million and deferred financing costs of $16.1 million and deferred revenues of $2.0 million were written down to zero. The consideration paid by UPC for all shares outstanding, warrants and options totaled $812.5 million. At that 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 $979.3 million. During the period of nine months ended September 30, 2000, this figure increased by $12.3 million to $991.6 mainly due to the results of an arbitration between @Entertainment and another party. 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 $417.1 million of goodwill of which $4.8 million is related to the arbitration described above. The following pro forma condensed consolidated results for the nine months ended September 30, 1999, 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 transactions had occurred at the beginning of the period presented. Additionally, interest expense related to the deferred financing costs was removed for each of the periods presented. There was no tax effect from these adjustments because of the significant net losses.
Nine months ended September 30, 2000 Nine months ended September 30, 1999 (unaudited) (unaudited) -------- -------------------------------- Historical Historical Pro Forma Service and other revenue $ 51,124 $ 46,121 $ 46,121 ======== ======== ======== Net loss $(42,117) $(34,057) $(48,679) ======== ======== ========
9 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 September 30, 2000 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 and other languages programming on a multi-channel basis and other services on cable (i.e. data and voice). 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 internal growth and through acquisitions; (iii) implement additional revenue generating services; and (iv) 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 @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. Several of the Company's Polish subsidiaries have statutory shareholders' equity less than the legally prescribed limits because of accumulated losses. The management of these companies will have to make decisions on how to increase the shareholders' equity to be in compliance with the Polish Commercial Code. The Company is currently considering several alternatives, including the conversion of intercompany debt into equity, in order to resolve these deficiencies. 4. RECLASSIFICATIONS Certain amounts have been reclassified in the corresponding period's unaudited consolidated financial statement to conform to the unaudited consolidated financial statement presentation for the nine months ended September 30, 2000. 5. LOSS PER SHARE Basic and diluted loss per ordinary share is based on the weighted average number of ordinary shares outstanding of 18,948 for each period. The Company has redeemable preferred stock outstanding that has a mandatory redemption date October 31, 2004. The Company had accretion of redeemable preferred stock of $1,055,000, $613,000, $306,000 for three months ended September 30, 1999, two months ended September 30, 1999 and one month ended July 31, 1999, respectively and $3,078,000, $2,113,000 for nine months ended September 30, 2000 and seven months ended July 31, 1999, respectively. The Company also has Mandatorily Redeemable Debenture stock, which will be redeemed on December 31, 2003. The Company accrued dividend of $3,500,000 and $10,500,000 on debenture stock for three months ended September 30, 2000 and nine months ended September 30, 2000, respectively. 6. COMMITMENTS AND CONTINGENCIES 10 Programming Commitments The Company has entered into programming agreements with certain third party content providers. The programming agreements have terms which range from one to five years and require that payments for programs be paid either at a fixed amount or based upon the number of subscribers connected to the system each month. At September 30, 2000, the Company had a minimum commitment under such agreements of approximately $28,307,000 over the next five years approximating $2,940,000 for the remainder of 2000, $9,267,000 in 2001, $5,186,000 in 2002, $5,427,000 in 2003 and $5,487,000 in 2004. For the nine months ended September 30, 2000 and 1999, the Company incurred programming fees of approximately $18,028,000 and $21,255,000, respectively. 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. PCBV minority stockholders' claim On or about July 8, 1999, certain minority shareholders ("the minority shareholders") of Poland Cablevision (Netherlands) B.V. (PCBV), a subsidiary of the Company, filed a lawsuit against the Company, @Entertainment, and certain other defendants, in United States District Court, Southern District of Ohio, Eastern Division, Civil Action No. C2-99-621. The relief sought by the minority shareholders included: (1) unspecified damages in excess of $75,000, (2) an order lifting the restrictions against transfer of shares set forth in the Shareholders' Agreement among PCBV's shareholders, as amended (the "Shareholders' Agreement") so that the minority shareholders could liquidate their shares in PCBV, (3) damages in the amount of 1.7 percent of the payment made by UPC for the shares of @Entertainment 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 set 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 @Entertainment, that allegedly compete with PCI and PCBV. On or about March 31, 2000 the parties to the lawsuit reached a settlement. In accordance with the settlement, on June 2, 2000 Wizja TV B.V., an affiliate of PCI, purchased approximately 1.4% of the outstanding shares of PCBV for a price of approximately $2.2 million. The case has been dismissed and releases exchanged. In addition to the Ohio lawsuit, other minority shareholders of PCBV (representing an additional approximately 6% of the shares of PCBV) have asserted similar claims against the Company but have not yet filed suit. The aforementioned settlement does not include the remaining minority shareholders. 7. DATA TRANSMISSION LICENSE 11 On July 26, 2000 the Polish Ministry of Telecommunication issued a 15-year data transmission license to a subsidiary of @Entertainment, authorizing that company to provide data transmission service to its customers throughout the territory of Poland, using its own networks and those leased from other licensed operators. This license will allow that subsidiary to provide broadband internet services to its customers. As of September 30, 2000 approximately 75% of the Company's cable plant runs through conduits leased from the Polish national telephone company ("TP S.A."). If the Company uses the cables for a purpose other than cable television, such as data transmission, telephone, or Internet access, such use could be considered a violation of the terms of certain conduit agreements, unless this use is expressly authorized by TP S.A. There is no guarantee that TP S.A. would give its approval to permit other uses of the conduits. The Company is currently in the process of introducing Internet services to its customers and renegotiating certain conduit agreements with TP S.A.. 12 POLAND CABLEVISION (NETHERLANDS) B.V. CONSOLIDATED BALANCE SHEETS ASSETS
September 30, December 31, 2000 1999 ---------------- ---------------- (unaudited) (in thousands) Current assets: Cash and cash equivalents $ 2,643 $ 2,838 Trade accounts receivable, net of allowances of 3,667 in 2000 and $1,568 in 1999 7,141 5,909 VAT recoverable - 1,285 Prepayments - 568 Other current assets 561 350 ---------------- ---------------- Total current assets 10,345 10,950 ---------------- ---------------- Property, plant and equipment: Cable television system assets 95,542 92,535 Construction in progress 8,426 5,632 Vehicles 391 498 Other 7,673 6,288 ---------------- ---------------- 112,032 104,953 Less accumulated depreciation (16,645) (6,067) ---------------- ---------------- Net property, plant and equipment 95,387 98,886 Inventories for construction 7,192 4,453 Intangibles, net of accumulated amortization of $26,257 in 2000 and $8,635 in 1999 292,546 338,771 ---------------- ---------------- Total assets $ 405,470 $ 453,060 ================ ================
See accompanying notes to unaudited consolidated financial statements. 13 POLAND CABLEVISION (NETHERLANDS) B.V. CONSOLIDATED BALANCE SHEETS (CONTINUED) LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31, 2000 1999 --------------- ------------------ (unaudited) (in thousands) Current liabilities: Accounts payable and accrued expenses $ 16,121 $ 18,825 Deferred revenue 1,999 594 --------------- ------------------ Total current liabilities 18,120 19,419 --------------- ------------------ Long-term liabilities: Due to affiliate 57,377 52,358 Notes payable to PCI 206,034 176,815 --------------- ------------------ Total liabilities 281,531 248,592 --------------- ------------------ Commitments and contingencies (note 6) - - Stockholders' equity: Capital stock par value, $0.50 par; 200,000 shares authorized, issued and outstanding 100 100 Paid-in capital 267,564 267,564 Accumulated other comprehensive loss (64,205) (30,950) Accumulated deficit (79,520) (32,246) --------------- ------------------ Total stockholders' equity 123,939 204,468 --------------- ------------------ Total liabilities and stockholders' equity $ 405,470 $ 453,060 =============== ==================
See accompanying notes to unaudited consolidated financial statements. 14 POLAND CABLEVISION (NETHERLANDS) B.V. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Successor Successor | Predecessor Successor Predecessor (note 2) (note 2) | (note 2) (note 2) (note 2) -------- -------- | -------- -------- -------- Three months Two months | One month Nine months Seven months ended September ended September| ended July ended September ended July 30, 2000 30, 1999 | 31, 1999 30, 2000 31, 1999 -------- -------- | -------- -------- -------- (in thousands, except per share data) Cable television revenue $ 16,152 $ 10,008 | $ 5,143 $ 48,261 $ 29,535 | Operating expenses: | Direct operating expenses 11,699 7,609 | 3,700 34,652 20,988 Selling, general and administrative expenses 5,186 3,685 | 1,405 12,975 6,947 Depreciation and amortization 9,806 6,300 | 1,465 30,288 8,726 --------------- --------------- | ------------- --------------- -------------- Total operating expenses 26,691 17,594 | 6,570 77,915 36,661 --------------- --------------- | ------------- --------------- -------------- | Operating loss (10,539) (7,586) | (1,427) (29,654) (7,126) | Interest and investment income, net 62 10 | 22 167 59 Interest expense (3,901) (2,327) | (1,183) (11,202) (8,029) Foreign exchange gain / (loss), net (1,840) (2,868) | 1,468 (6,519) (219) --------------- --------------- | ------------- --------------- -------------- | Loss before income taxes (16,218) (12,771) | (1,120) (47,208) (15,315) | Income tax expense (42) (3) | (3) (66) (30) | Net loss $ (16,260) $ (12,774) | $ (1,123) $ (47,274) $ (15,345) =============== =============== | ============= =============== ============== | Basic and diluted net loss per common share $ (81.30) $ (63.87) | $ (5.62) $ (236.37) $ (76.73) =============== =============== | ============= =============== ==============
See accompanying notes to unaudited consolidated financial statements. 15 POLAND CABLEVISION (NETHERLANDS) B.V. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
Successor Successor | Predecessor Successor Predecessor (note 2) (note 2) | (note 2) (note 2) (note 2) -------- -------- | -------- -------- -------- Three months Two months | One month Nine months Seven months ended September ended September | ended July ended September ended July 30, 2000 30, 1999 | 31, 1999 30, 2000 31, 1999 -------- -------- -------- -------- -------- (in thousands) Net loss $(16,260) $(12,774) | $(1,123) $(47,274) $(15,345) | Other comprehensive (loss) / income: | Translation adjustment (12,620) (27,297) | 843 (33,255) (11,814) ----------- ----------- | ---------- ----------- ----------- | Comprehensive loss $(28,880) $(40,071) | $ (280) $(80,529) $(27,159) =========== =========== | =========== =========== ===========
See accompanying notes to unaudited consolidated financial statements. 16 POLAND CABLEVISION (NETHERLANDS) B.V. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Successor Successor | Predecessor (note 2) (note 2) | (note 2) -------- -------- | -------- Nine months Two months | Seven months ended September ended September | ended July 30, 2000 30, 1999 | 31, 1999 -------- -------- -------- (in thousands) Cash flows from operating activities: | Net loss $ (47,274) $ (12,774) | $ (15,345) Adjustments to reconcile net loss to | net cash provided by operating activities: | Depreciation and amortization 30,288 6,300 | 8,726 Interest expense added to notes payable | to PCI 11,131 2,278 | 10,356 Unrealized foreign exchange losses 4,647 - | - Changes in operating assets and liabilities: | Accounts receivable (1,748) 452 | (2,716) Other current assets (1,678) (497) | (263) Accounts payable (1,059) 1,227 | (4,586) Deferred revenue 1,457 162 | 937 Amounts due to affiliates 5,019 4,408 | 14,853 Other - - | - ----------------- ----------------- | ------------ Net cash provided by operating activities 783 1,556 | 11,962 ----------------- ----------------- | ------------ | Cash flows from investing activities: | Construction and purchase of property, plant and equipment (17,776) (1,560) | (10,263) Purchase of intangible assets (1,181) - | (145) ----------------- ----------------- | ------------ Net cash used in investing activities (18,957) (1,560) | (10,408) ----------------- ----------------- | ------------ | Cash flows from financing activities: | Proceeds from borrowings from affiliates 18,088 - | 57 ----------------- ----------------- | ------------ Net cash provided by financing activities 18,088 - | 57 ----------------- ----------------- | ------------ Net increase/(decrease) in cash (86) (4) | 1,611 | Effect of exchange rates on cash and cash equivalents (109) - | - Cash and cash equivalents at beginning of the period 2,838 3,073 | 1,463 ----------------- ----------------- | ------------ | Cash and cash equivalents at end of the period $ 2,643 $ 3,069 | $ 3,074 ================= ================= | ============ | Supplemental cash flow information: | Cash paid for interest $ 730 $ 276 | $ 400 ================= ================= | =========== Cash paid for income taxes $ 62 $ 44 | $ 17 ================= ================= | ===========
See accompanying notes to unaudited consolidated financial statements. 17 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2000 AND 1999 1. BASIS OF PRESENTATION Financial information is included for Poland Cablevision (Netherlands) B.V. and its subsidiaries ("PCBV") as PCBV is a guarantor of PCI's 9 7/8% Senior Notes due 2003 and 9 7/8% Series B Senior Notes due 2003, (collectively, the "PCI Notes"). The information furnished by PCBV has been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP") and the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations. The accompanying consolidated balance sheets, statements of operations, statements of comprehensive loss and statements of cash flows are unaudited but in the opinion of management reflect all adjustments (consisting only of items of a normal recurring nature) which are necessary for a fair statement of PCBV's consolidated results of operations and cash flows for the interim periods and PCBV's financial position as of September 30, 2000. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of PCBV and the notes thereto included in PCI's 1999 Annual Report on Form 10-K filed with the SEC. The interim financial results are not necessarily indicative of the results of the full year. 2. CONSUMMATION OF UPC TENDER OFFER AND MERGER On June 2, 1999, PCBV's indirect parent @Entertainment, Inc. ("@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 PCBV 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 18 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 on August 5, 1999. At that date the Notes of @Entertainment and PCI were restated to reflect the market value and as a result were increased by $61.9 million and deferred financing costs of $16.1 million and deferred revenues of $2.0 million were written down to zero. The consideration paid by UPC for all shares outstanding, warrants and options totaled $812.5 million. At that 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 $979.3 million. During the period of nine months ended September 30, 2000, this figure increased by $12.3 million to $991.6 due to the results of an arbitration between @Entertainment and another party. 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 $354.0 million of goodwill. The following pro forma condensed consolidated results for the nine months ended September 30, 1999, 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.
Nine months ended Nine months ended September 30, 1999 September 30, 2000 (unaudited) (unaudited) ----------- ----------- Historical Historical Pro Forma Service and other revenue $ 48,261 $ 39,543 $ 39,543 ======== ======== ======== Net loss $(47,274) $(28,119) $(41,899) ======== ======== ========
19 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, PCBV has incurred substantial operating losses since inception. As of September 30, 2000, PCBV had negative working capital. Additionally, PCBV is currently and is expected to continue to be highly leveraged. The ability of PCBV to meet its debt service obligations will depend on the future operating performance and financial results of PCBV 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. PCBV's current cash on hand will be insufficient to satisfy all of its commitments and to complete its current business plan. Management of PCBV believes that significant opportunities exist for pay television providers capable of delivering high quality, Polish and other language programming on a multi-channel basis and other services on cable (i.e. data and voice). As such, PCBV has focused its financial and business efforts toward its position in the cable market. PCBV'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, PCBV 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; (iii) implement additional revenue generating services; and (iv) control its management of subscribers by using advanced integrated management information systems. If PCBV'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, PCBV may need to obtain greater amounts of additional financing. While it is PCBV'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 PCBV in the future, or, if available, that they could be obtained on terms acceptable to PCBV. PCBV is also dependent on PCI, PCI's parent, @Entertainment, and @Entertainment's parent, UPC, to provide financing to achieve PCBV's business strategy. UPC has declared that it will continue to financially support PCBV and its subsidiaries as a going concern, and accordingly enable PCBV and its subsidiaries to meet their financial obligations if and when needed. Several of the PCBV'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. PCBV is currently considering several alternatives, including the conversion of intercompany debt into equity, in order to resolve these deficiencies. 4. RECLASSIFICATIONS Certain amounts have been reclassified in the corresponding period's unaudited consolidated financial statement to conform to the unaudited consolidated financial statement presentation for the nine months ended September 30, 2000. 5. LOSS PER SHARE Basic and diluted loss per ordinary share is based on the weighted average number of ordinary shares outstanding of 200,000 for each period. 6. LITIGATION AND CLAIMS 20 From time to time, PCBV 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 PCBV consolidated financial position or results of operations. 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, @Entertainment and certain other defendants, in United States District Court, Southern District of Ohio, Eastern Division, Civil Action No. C2-99-621. The relief sought by the minority shareholders included: (1) unspecified damages in excess of $75,000, (2) an order lifting the restrictions against transfer of shares set forth in the Shareholders' Agreement among the Company's shareholders, as amended (the "Shareholders' Agreement") so that the minority shareholders could 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 @Entertainment 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 set 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's 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 the Company to affiliates of PCI and the Company, including @Entertainment, that allegedly compete with PCI and the Company. On or about March 31, 2000 the parties to the lawsuit reached a settlement. In accordance with the settlement, in June 2, 2000, Wizja TV B.V., an affiliate of PCI, purchased approximately 1.4% of the outstanding shares of the Company for a price of approximately $2.2 million. The case has been dismissed and releases exchanged. In addition to the Ohio lawsuit, other minority shareholders of PCBV (representing an additional approximately 6% of the shares of PCBV) have asserted similar claims against PCI but have not yet filed suit. The aforementioned settlement does not include the remaining minority shareholders. 7. DATA TRANSMISSION LICENSE On July 26, 2000 the Polish Ministry of Telecommunication issued a 15-year data transmission license to a subsidiary of @Entertainment, authorizing that company to provide data transmission service to its customers throughout the territory of Poland, using its own networks and those leased from other licensed operators. This license will allow that subsidiary to provide broadband internet services to its customers. As of September 30, 2000, approximately 75% of the Company's cable plant runs through conduits leased from the Polish national telephone company ("TP S.A."). If the Company uses the cables for a purpose other than cable television, such as data transmission, telephone, or Internet access, such use could be considered a violation of the terms of certain conduit agreements, unless this use is expressly authorized by TP S.A. There is no guarantee that TP S.A. would give its approval to permit other uses of the conduits. The Company is currently in the process of introducing Internet services to its customers and renegotiating certain conduit agreements with TP S.A. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis provides information concerning the results of operations and financial condition of the Company. Such discussion and analysis should be read in conjunction with the accompanying unaudited consolidated financial statements of the Company. Additionally, the following discussion and analysis should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the audited consolidated financial statements included in Part II of the Company's 1999 Annual Report. The following discussion focuses on material trends, risks and uncertainties affecting the results of operations and financial condition of the Company. Certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, that are not historical facts but rather reflect the Company's current expectations concerning future results and events. The words "believes," "expects," "intends," "plans," "anticipates," "likely," "will" "may", "shall" and similar expressions identify such forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company (or entities in which the Company has interests), or industry results, to differ materially from future results, performance or achievements expressed or implied by such forward-looking statements. Readers are cautioned not to place undue reliance on these forward looking statements which reflect management's view only as of the date of this Quarterly Report on Form 10-Q. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, conditions or circumstances. The risks, uncertainties and other factors that might cause such differences include but are not limited to: (i) general economic conditions in Poland and in the pay television business in Poland; (ii) changes in regulations the Company operates under; (iii) uncertainties inherent in new business strategies, including new product launches and development plans, which the Company has not used before; (iv) rapid technology changes; (v) changes in, or failure or inability to comply with, government regulations; (vi) the development and provision of programming for new television and telecommunications technologies; (vii) the continued strength of competitors in the multichannel video programming distribution industry and satellite services industry and the growth of satellite delivered programming; (viii) future financial performance, including availability, terms and deployment of capital; (ix) the ability of vendors to deliver required equipment, software and services on schedule at the budgeted cost; (x) the Company's ability to attract and hold qualified personnel; (xi) changes in the nature of strategic relationships with joint ventures; (xii) the overall market acceptance of those products and services, including acceptance of the pricing of those products and services; (xiii) and acquisition opportunities and (xiv) the Company's new ownership structure. OVERVIEW The Company operates the largest cable television system in Poland with approximately 1,811,300 homes passed and approximately 1,042,500 total subscribers as at September 30, 2000. The Company continues to realize subscriber growth mainly through a combination of new network build-out and acquisitions. The Company's revenues 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 September 30, 22 2000, approximately 70.7% of the Company's subscribers received its basic package. Currently, almost all of the Company's cable revenues are derived from monthly subscription fees. During 1998 and 1999, management completed several strategic actions in support of its business and operating strategy. On June 5, 1998, the Company began providing the Wizja TV programming package, with its initial 11 channels of primarily Polish-language programming, to its basic subscribers. Since that date, the basic Wizja TV package has been expanded to 26 channels. On September 18, 1999, the Company launched a proprietary premium channel called Wizja Sport. The Company is planning to launch internet services in the last quarter of the year 2000 on certain of its cable networks in the coming months and has been investing in upgrading its network to provide this service. As of September 30, 2000, approximately 75% of the Company's cable plant runs through conduits leased from the Polish national telephone company ("TP S.A."). If the Company uses the cables for a purpose other than cable television, such as data transmission, telephone, or Internet access, such use could be considered a violation of the terms of certain conduit agreements, unless this use is expressly authorized by TP S.A. There is no guarantee that TP S.A. would give its approval to permit other uses of the conduits. The Company is currently in the process of introducing Internet services to its customers and renegotiating certain conduit agreements with TP S.A. The Company divides operating expenses into (i) direct operating expenses, (ii) selling, general and administrative expenses and (iii) depreciation and amortization expenses. Direct operating expenses consist of programming expenses, maintenance and related expenses necessary to service, maintain and operate the Company's cable systems, billing and collection expenses and customer service expenses. Selling, general and administrative expenses consist principally of administrative costs, including office related expenses, professional fees and salaries, wages and benefits of non-technical employees, advertising and marketing expenses, bank fees and bad debt expense. Depreciation and amortization expenses consist of depreciation of property, plant and equipment and amortization of intangible assets. The Company generated an operating loss of $32.4 million for the nine months ended September 30, 2000, by comparison to $20.8 million for the nine months ended September 30, 1999, primarily due to amortization charges related to goodwill pushed down as a result of the Acquisition of @Entertainment, the expansion of the Company's cable networks and introduction of internet services. 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, income taxes, 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 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 positive EBITDA of $0.2 million for the three months ended September 30, 2000 and negative EBITDA of $0.9 million for the three months ended September 30, 1999, and positive EBITDA of $1.6 million and $0.9 million for nine months ended September 30, 2000 and 1999 respectively. CABLE TELEVISION REVENUE. Revenue increased $1.2 million or 7.5% from $15.9 million in the three months ended September 30,1999 to $17.1 million in the three months ended September 30, 2000 and $5.0 million or 10.8% from $46.1 million in the nine months ended September 30, 1999 to $51.1 million in the nine months ended September 30, 2000. This increase was primarily attributable to a 5.5% increase in the number of basic and intermediate subscribers from approximately 743,300 at September 30, 1999 to approximately 784,300 at September 30, 2000, as well as an increase in monthly subscription rates. The increase in basic and intermediate subscribers was primarily due to build-out of the Company's existing cable networks. Revenue from monthly subscription fees represented almost all of the Company's revenue for the three and nine months ended September 30, 2000 and 1999. During the three and nine months ended September 30, 2000, the Company generated approximately $1.2 million and $3.3 million, respectively, of premium subscription revenue as a result of providing the HBO Poland service pay movie channel and Wizja Sport to subscribers as compared to $0.5 million and $1.6 million for the same periods in 1999. 23 DIRECT OPERATING EXPENSES. Direct operating expenses for the three months ended September 30, 2000 amounted to $11.1 million and remain the same as for three months ended September 30, 1999 and decreased $0.7 million, or 2.2% from $31.7 million for the nine months ended September 30, 1999 to $31.0 million for the nine months ended September 30, 2000, principally as a result of restructuring programming agreements with Wizja TV, an affiliate of the Company. Direct operating expenses decreased from 69.8% of revenues for the three months ended September 30, 1999 to 64.9% of revenues for the three months ended September 30, 2000 and decreased from 68.8% of revenues for the nine months ended September 30, 1999 to 60.7% of revenues for the nine months ended September 30, 2000. However, without considering the programming cost for the purchase of the Wizja programming package recorded in 2000 and 1999 the comparison would have been 22.1% and 34.9% for the nine months ended September 30, 2000 and 1999 respectively. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $0.1 million or 1.8% from $5.7 million for the three months ended September 30, 1999 to $5.8 million for the three months ended September 30, 2000 and increased $5.1 million or 37.8% from $13.5 million for the nine months ended September 30, 1999 to $18.6 million for the nine months ended September 30, 2000. This increase was mainly due to increased selling and marketing activity compared to the previous year. As a percentage of revenue, selling, general and administrative expenses decreased from 35.8% for the three months ended September 30, 1999 to approximately 33.9% for the three months ended September 30, 2000 and increased from 29.3% for the nine months ended September 30, 1999 to approximately 36.4% for the nine months ended September 30, 2000. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense rose $1.9 million, or 20.0%, from $9.5 million for the three months ended September 30, 1999 to $11.4 million for the three months ended September 30, 2000 and $12.3 million, or 56.7%, from $21.7 million for the nine months ended September 30, 1999 to $34.0 million for the nine months ended September 30, 2000, principally as a result of depreciation and amortization of additional goodwill pushed down as a result of the Acquisition and the continued build-out of the Company's cable networks. Depreciation and amortization expense as a percentage of revenues increased from 59.7% for the three months ended September 30, 1999 to 66.7% for the three months ended September 30, 2000 and from 47.1% for the nine months ended September 30, 1999 to 66.5% for the nine months ended September 30, 2000. INTEREST EXPENSE. Interest expense decreased $3.0 million, or 83.3%, from $3.6 million for the three months ended September 30, 1999 to $0.6 million for the three months ended September 30, 2000 and decreased $9.3 million, or 83.0%, from $11.2 million for the nine months ended September 30, 1999 to $1.9 million for the nine months ended September 30, 2000. The decrease is a result of repurchase of most of its 9 7/8% Senior Notes due 2003 in the fourth quarter of 1999. INTEREST AND INVESTMENT INCOME/LOSS, NET. Interest and investment income increased $240,000, or 137.9%, from loss of $174,000 for the three months ended September 30, 1999 to gain of $66,000 for the three months ended September 30, 2000 and increased $72,000, or 72.7%, from $99,000 for the nine months ended September 30, 1999 to $171,000 for the nine months ended September 30, 2000, primarily due to the reduction in the level of cash used to fund the Company's operations. FOREIGN EXCHANGE LOSS, NET. For the three months ended September 30, 2000, foreign exchange loss amounted to $2.8 million as compared to a foreign exchange loss of $0.6 million for the three months ended September 30, 1999 and for the nine months ended September 30, 2000, foreign exchange loss amounted to $7.9 million as compared to a foreign exchange loss of $2.2 million for the nine months ended September 30, 1999. 24 INCOME TAX / EXPENSE. The Company recorded $44,000 of income tax expense for the three months ended September 30, 2000, as compared to $6,000 for the three months ended September 30, 1999 and $84,000 of income tax expense for the nine months ended September 30, 2000, as compared to $33,000 for the nine months ended September 30, 1999. NET LOSS. For the three months ended September 30, 2000 and the three months ended September 30, 1999, the Company had net losses of $14.6 million and $14.9 million, respectively, and for the nine months ended September 30, 2000 and the nine months ended September 30, 1999, the Company had net losses of $42.1 million and $34.1 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 $15.8 million for the three months ended September 30, 1999 to $19.2 million for the three months ended September 30, 2000 and from $36.8 million for the nine months ended September 30, 1999 to $55.7 million for the nine months ended September 30, 2000 due to the accretion of redeemable preferred stock and debenture 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 2003 ("PCI Notes"). The Company had positive cash flows from operating activities of $1.0 and $3.4 million for nine months ended September 30, 2000 and 1999, respectively, due to increase in amounts due to affiliates. 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 Manditorily Redeemable Debenture Stock for $140.0 million to @Entertainment and an additional debt and capital contribution from @Entertainment. Cash used for the purchase and expansion of the Company's cable television networks was $16.7 million and $17.4 million for nine months ended September 30, 2000 and 1999, respectively. 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; (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 $206,034,000 at September 30, 2000 and $176,815,000, $160,830,000 and $134,509,000 at December 31, 1999, 1998 and 1997, respectively. 25 The indenture 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 an offer to repurchase (the "Offer") from the holders of the PCI Notes. The Offer expired at 12:01 PM, New York City time, on November 2, 1999. In accordance with the terms of the indenture 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. To fund the repurchase of the PCI Notes and operations, as of November 3, 1999, PCI sold @Entertainment 14,000 shares of its Mandatorily Redeemable Debenture Stock for a total of $140.0 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% annum from November 3, 1999 to the date of redemption, compounded annually. UPC funded @Entertainment's purchase of 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 its commitments 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 equity, debt or bank financing or any combination thereof, subject to the restrictions contained in the indentures governing the outstanding senior indebtedness of the Company, @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. IMPACT OF NEW ACCOUNTING STANDARDS NOT YET ADOPTED In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific accounting criteria are met. If a derivative instrument qualifies for hedge accounting, the gains or losses from the derivative may offset results from the hedged item in the statement of operations or other comprehensive income, depending on the type of hedge. To adopt hedge accounting, a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. In June 2000, the Financial Accounting Standards Board issued SFAS 138, ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES. This statement addresses a limited number of issues causing implementation difficulties for numerous entities that apply SFAS 133 and this statement amends the accounting and reporting standards of SFAS 133 for certain derivative instruments and certain hedging activities. SFAS 137 delayed the effective date of SFAS 133 to fiscal years beginning after June 15, 2000. A company may implement the statements as of the beginning of any fiscal quarter after issuance; however, SFAS 133 cannot be applied retroactively. The Company expects that the adoption of SFAS 133, SFAS 137, and SFAS 138 will not have a material impact on the financial position or the results of operations of the Company. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS (SAB 101). SAB 101 outlines the SEC's views on applying generally accepted accounting principles to revenue recognition in financial statements. Specifically, the bulletin provides both general and specific guidance as to the periods in which companies should recognize revenues. In addition, SAB 101 also highlights factors to be considered when determining whether to recognize revenues on a gross or net basis. SAB 101, as amended by SAB 101/A and SAB 101/B, is effective beginning no later than their fourth fiscal quarter of the fiscal year beginning after December 15, 1999; as the Company is a calendar year-end company, this would be the quarter ending December 31, 2000. SAB 101 permits the effects of the changes to be recorded as a cumulative effect of a change in accounting principle during the quarter ended December 31, 2000. The Company expects that historically reported net income under U.S. GAAP will not materially differ from the reported amounts. 26 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The principal market risk (i.e., the risk of loss arising from adverse changes in market rates and prices) to which the Company is exposed is foreign exchange rate risk from fluctuations in the Polish zloty currency exchange rate. The Company's long term debt is primarily subject to a fixed rate, and therefore variations in the interest rate do not have a material impact on net interest expense. FOREIGN EXCHANGE AND OTHER INTERNATIONAL MARKET RISKS Operating in international markets involves exposure to movements in currency exchange rates. Currency exchange rate movements typically affect economic growth, inflation, interest rates, governmental actions and other factors. These changes, if material, can cause the Company to adjust its financing and operating strategies. The discussion of changes in currency exchange rates below does not incorporate these other important economic factors. International operations constitute 100% of the Company's consolidated operating loss for the nine months ended September 30, 2000. Some of the Company's operating and financing expenses and capital expenditures are expected to continue to be denominated in or indexed in U.S. dollars. By contrast, substantially all of the Company's revenues are denominated in zloty. 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 10% change in foreign exchange rates would impact reported operating loss by approximately $2.1 million. In other terms, a 10% depreciation of the Polish zloty against the U.S. dollar, would result in a $2.1 million decrease in the reported operating loss. This was estimated using 10% of the Company's operating loss after adjusting for unusual impairment and other items including U.S. dollar denominated or indexed expenses. The Company believes that this quantitative measure has inherent limitations because, as discussed in the first paragraph of this section, it does not take into account any governmental actions or changes in either customer purchasing patterns or the Company's financing or operating strategies. The Company does not generally hedge translation risk. While the Company may consider entering into transactions to hedge the risk of exchange rate fluctuations, there is no assurance that it will be able to obtain hedging arrangements on commercially satisfactory terms. Therefore, shifts in currency exchange rates may have an adverse effect on the Company's financial results and on its ability to meet its U.S. dollar denominated debt obligations and contractual commitments. Poland has historically experienced high levels of inflation and significant fluctuations in the exchange rate for the zloty. The Polish government has adopted policies that slowed the annual rate of inflation from approximately 250% in 1990 to approximately 14.9% in 1997, and approximately 7.3% in 1999. The rate of inflation for the nine month period ended September 30, 2000 was approximately 7.9%. The exchange rate for the zloty has stabilized and the rate of devaluation of the zloty has generally decreased since 1991 and the zloty has depreciated against the U.S. dollar by approximately 17.4% for the year ended December 31, 1999 and 9.6% in the first nine months of 2000. The Polish zloty was released to float freely against the U.S. dollar in April 2000. Inflation and currency exchange fluctuations have had, and may continue to have, a material adverse effect on the business, financial condition and results of operations of the Company. 27 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is involved in litigation from time to time in the ordinary cause 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 financial condition or results of operations. See also Note 6 to the Company's unaudited consolidated financial statements for a description of the PCBV minority shareholder claim. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION: Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the third quarter of 2000. 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. POLAND COMMUNICATIONS, INC. By: /s/ Nimrod J. Kovacs --------------------------------- Nimrod J. Kovacs Chairman of the Board of Directors By: /s/ Simon Boyd --------------------------------- Simon Boyd Chief Financial Officer Date: November 14, 2000 29 EX-27 2 a2030243zex-27.txt EX-27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 2,955 0 11,339 (4,007) 7,721 11,042 142,448 (20,449) 473,420 23,040 15,664 152,833 37,773 1 189,295 473,420 0 51,124 0 83,518 0 0 (1,900) (42,033) (84) (42,117) 0 0 0 (42,117) (2,939.36) 0
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