-----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, SCdns0dyB1On+9zFT/l4LC7NLkyHnYRu/dRjTBni7O9bqdB02NB25JLBG7poZs6m mIyFiy174cGevj/vL5crNw== 0000912057-01-506568.txt : 20010409 0000912057-01-506568.hdr.sgml : 20010409 ACCESSION NUMBER: 0000912057-01-506568 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 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-K405 SEC ACT: SEC FILE NUMBER: 333-20307 FILM NUMBER: 1592297 BUSINESS ADDRESS: STREET 1: 4643 SOUTH ULSTER STREET STREET 2: STE 1300 CITY: DENVER STATE: CO ZIP: 80237 BUSINESS PHONE: 8605491679 MAIL ADDRESS: STREET 1: 4643 SOUTH ULSTER STREET STE 1300 CITY: DENVER STATE: CO ZIP: 80237 10-K405 1 a2043386z10-k405.txt 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, 2000 / / 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 (I.R.S. Employer of Identification No.) Incorporation or Organization) 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: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED None None Securities registered pursuant to Section 12(g) of the Act: NOT APPLICABLE -------------- (Title of Class) 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, 2000, was: COMMON STOCK 18,948 DOCUMENTS INCORPORATED BY REFERENCE NONE. The Registrant meets the conditions set forth in General Instructions (I) (1) (a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format. - -------------------------------------------------------------------------------- 1 POLAND COMMUNICATIONS, INC. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000 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 Company's Common Equity and Related Stockholder Matters........................................................ 13 ITEM 6. Selected Financial Data.................................................... 16 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................................... 18 ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk.................. 23 ITEM 8. Financial Statements and Supplementary Data................................ 24 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............ 84
2 PART I Poland Communications, Inc. ("PCI"), is a New York corporation which is wholly-owned subsidiary of UPC Polska, Inc., formerly @Entertainment, Inc., ("UPC Polska"), 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, 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, references to "Euros" or "EUR" are to EU 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, Euro and Deutsche-Mark amounts not derived from the consolidated financial statements which have been translated into U.S. dollars. Readers should not assume that the zloty, Euro, and Deutsche-Mark 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 4.1432 = $1.00, the exchange rate quoted by the National Bank of Poland at noon on December 29, 2000, and by converting from Euro to U.S. dollars at the rate of EUR 1.156 = $1.00, the exchange rate quoted by OANDA.com on December 29, 2000, and by converting from Deutsche-Mark to U.S. dollars at the rate of DM 2.1024 = $1.00, the exchange rate quoted by the National Bank of Poland at noon on December 29, 2000. These rates 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 1,851,000 homes passed and approximately 1,064,000 total subscribers as of December 31, 2000. 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'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 BASIC AND BASIC AND REVENUE PER BASIC TOTAL HOMES TOTAL INTERMEDIATE INTERMEDIATE AND INTERMEDIATE REGION HOMES PASSED SUBSCRIBERS SUBSCRIBERS PENETRATION SUBSCRIBER (2) ------ ----- ------ ----------- ----------- ----------- -------------- North 574,000 441,041 302,285 229,926 52.13% 6.00 South 400,000 237,172 119,536 97,370 41.05% 8.10 Central 920,000 447,596 254,328 168,429 37.63% 9.28 West 624,000 246,068 131,459 115,432 46.91% 6.58 Katowice 1,200,000 478,815 256,662 187,075 39.07% 7.18 ------------ ------------ ------------- ---------------- ---------------- ----------------- TOTAL 3,718,000 1,850,692 1,064,270 798,232 43.13% 7.31 ============ ============ ============= ================ ================ =================
- ---------------------------------------------- (1) All data at or for the year ended December 31, 2000. (2) Represents a weighted average for the Company based on the total number of basic subscribers at December 31, 2000. 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 control devices. Throughout its cable television systems, 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, 2000, approximately 752,900 4 or 70.7% of the Company's subscribers received the basic package, approximately 45,400 or 4.3% received the intermediate package and approximately 266,000 or 25.0% received the broadcast package of service. During the fourth quarter of the year 2000, the Company began providing Internet services to its cable television customers and has been upgrading its network to provide this service. Individual and home office Internet subscribers are charged a monthly subscription fee of $48.00 and $60.00, respectively. The standard installation fee is approximately $59.00 for buildings with multiple apartments and approximately $120.00 for single family dwellings. BASIC PACKAGE. The basic package includes approximately 32 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, Wizja TV. The Company's basic package offerings vary by location. All of the Wizja TV programming is 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 Wizja Sport, a Polish-language premium sport channel. However, as of March 24, 2001, the Wizja Sport channel was expanded into the basic package. INTERMEDIATE PACKAGE. The intermediate package includes approximately 19 to 34 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 5 to 14 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 have offered two premium television services - the HBO Poland service and Wizja Sport, although Wizja Sport was expanded into basic package as of March 24, 2001. Other optional services include additional outlets and stereo service, which enable a subscriber to receive from 4 to 28 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 $24, but such fee may be subject to reductions as a result of promotional campaigns. PRICING STRATEGY. Prior to 1999, the Company experienced annual churn rates of less than 10%, and was able to pass on the effects of inflation through price increases. For the years ended December 31, 2000 and 1999, the churn rate was 21.5%. This pricing strategy of passing on the effects of inflation through price increase 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 pricing 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 90 days after a bill becomes past due. The Company's system architecture in most networks enables it to promptly shut off service to nonpaying customers and is designed to reduce non-authorized use of its cable systems. The Company's bad debts expense has averaged 4.75% and 3.84% of revenue for the years 2000 and 1999, respectively. TECHNOLOGY AND INFRASTRUCTURE The Company believes the fiber-optic cable television networks that it has constructed, which serve approximately 877,000 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 have recently been 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 5 entities) to at least 860 MHz in an effort to reduce the number of satellite receivers and parts inventory required in the networks. The Company uses fiber-optic and coaxial cables, electronic components and connectors supplied by leading Western firms in its cable television networks. 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, 2000, approximately 74.5% 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 Chairman of the office for Telecommunication Regulation ("URT") (which replaced the Polish State Agency of Radio Communications as of January 1, 2001) 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 New Telecommunication Law (formerly the Polish Telecommunication 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. The Company is in compliance with all conditions of the TPSA agreements. However, 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 an 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. The Company is currently in the process of introducing Internet services to its customers and renegotiating certain conduit agreements with TPSA. 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 substantial experience in the cable television industry and have significant resources (including financial resources and access to international programming sources). 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. 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 analog-direct to home ("A-DTH") television services, and with a multi-channel multi-point distribution system and D-DTH services (including UPC Polska's own D-DTH service). 6 TRADEMARKS The Company, either itself, through its subsidiaries or its parent, 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. Variations of "PTK" have been registered in Poland. Trademarks for UPC have been registered internationally. EMPLOYEES At December 31, 2000, the Company had approximately 969 permanent full-time employees and approximately 35 part-time employees. In addition, as of that date the Company employed approximately 90 salesmen, some of whom may have 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 3 members, was formed in mid-1999. The Company believes that its relations with its employees are good. REGULATION GENERAL In connection with negotiating its membership in the EU, 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. On July 21, 2000 the Polish Parliament passed the new Telecommunications Law (the "NTL") which changed the regulatory framework of telecommunications activities in Poland. The NTL replaced the Communication Act of 1990 (the "Communications Act") and became effective as of January 1, 2001. Until the end of the year 2000, the operation of cable television systems was regulated primarily by the Communications Act. As of January 1, 2001, the operation of those television systems has been regulated under the NTL. Operators are also subject to the provisions of the Polish Radio and Television Act of 1992 (the "Television Act"). Currently the Polish telecommunications and media sector is regulated by: - The Polish Minister of Communications; - The Chairman of the Office for Telecommunications Regulation ("URT") (which replaced the Polish State Agency of Radiocommunications ("PAR"), established under the Communications Act); and - The Polish National Radio and Television Council (the "Council"). Cable television operators in Poland are required to obtain permits from the Chairman of the URT to operate public radio and television networks and must register certain programming that they transmit over their networks with the Council. Neither the Minister of Communications nor the Chairman of the URT 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. The cable television operators in Poland are also 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's regulatory environment is undergoing constant change. The Company does not know how such change will impact its business. COMMUNICATIONS ACT PERMITS. Until the end of the year 2000, the cable television operators were required to obtain permits from PAR to install and operate cable television systems. The Communications Act and the required permits issued by PAR had set forth the terms and conditions for providing cable television services. 7 If a cable operator breached the terms of its permits or the provisions of the Communications Act, or if such operator has failed to acquire permits covering areas serviced by its networks, PAR could 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 provided that PAR may not grant a new permit to, or renew an expiring permit held by, any applicant that has had, or that was controlled by an entity that has had, a permit revoked within the previous five years. On July 26, 2000, the Polish Ministry of Telecommunication issued a 15-year data transmission license to a subsidiary of the Company, 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 allowed that subsidiary to provide Internet services to its customers. This license expired automatically with the entry of the NTL into force, i.e. as of January 1, 2001. The subsidiary may continue the provision of the services covered by the license. It must, however, notify the Chairman of the URT about the provision of the data transmission services by the end of March 2001 as described below. In certain cases, listed below, the Chairman of the URT may object to the provision of the services by the subsidiary. In March 2001, the Company's subsidiary notified the Chairman of the URT of its activities concerning the provision of data transmission services and access to the Internet. As of December 31, 2000, approximately 74.5% of the Company's cable plant runs through conduits leased from the Polish national telephone company ("TPSA"). 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. The Company is currently in the process of introducing Internet services to its customers and renegotiating certain conduit agreements with TPSA. FOREIGN OWNERSHIP RESTRICTIONS. The Communications Act which was in effect until January 1, 2001, provided that permits may only be issued to and held by Polish citizens, or companies in which foreign persons held 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 have been comprised of Polish citizens residing in Poland. These restrictions did not apply to any permits issued prior to July 7, 1995. THE COMPANY'S PERMITS AND NEW CORPORATE ORGANIZATIONAL STRUCTURE. To comply with the foreign ownership requirements discussed above, the Company restructured UPC Telewizja Kablowa Sp. z o.o. (formerly Polska Telewizja Kablowa Sp. z o.o.) ("UPC TK"), which operates most of the Company's cable networks. UPC TK owns many of the cable networks but certain networks are owned by UPC TK's affiliate and leased to UPC TK. The Company's subsidiary holds a 47% ownership stake in UPC TK while the remaining 53% are held by a Polish entity. PCI in turn, holds 49% of the Polish entity, and the remaining 51% interest in the Polish entity is 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 99 permits from PAR, covering all of the Company's basic subscribers at December 31, 2000, including subscribers for whom the Company's permits are deemed extended under Polish law pending the authority's response to the Company's permit renewal applications. NEW TELECOMMUNICATION LAW Since January 1, 2001, the operation of cable and other television systems in Poland has been regulated under the NTL, which replaces the Communications Act. The NTL changes the licensing regime and the competency of telecommunication authorities. The NTL introduces a new authority - the Chairman of the URT. The Chairman of the URT has assumed most of the administration tasks previously performed by the Polish Minister of 8 Communications and PAR. The Chairman of the URT is responsible for regulating telecommunication activities, including exercising control over operators and managing frequencies. The duties of the Minister of Communications are limited primarily to issuing secondary regulations. PAR along with the Polish State Telecommunications and Postal Inspection (PITiP) were liquidated as of January 1, 2001. Under the NTL, cable television operators are required to obtain a permit from the Chairman of the URT to operate public radio and television networks. The Chairman of the URT shall grant the permit to any interested entity authorized to do business in Poland and which complies with the conditions set forth in the NTL. Applications for renewals of permits may be refused only if during the validity of the permit there have been circumstances justifying the refusal, revocation or limitation of the scope of the permit. Under the NTL, an NTL permit must be revoked if: - a final court order prohibits the operator from conducting the business covered by the permit; - the operator fails to meet the legal requirements for the grant of the permit; or - the operator has failed to remedy a violation of the law within the designated time limit. The NTL permit may be revoked, if the operator breaches the provisions of the NTL, the permit or other decisions issued under the NTL in any way, does not pay the required fees, or a decision on the liquidation or declaration of bankruptcy of the operator has been made. Except for the operation of radio and television networks and public telephone networks, the performance of all other telecommunications activities requires only notification to the Chairman of the URT. The Chairman may disallow the performance of such activities within 21 days of the receipt of the notification if: - the notification violates the NTL; - the notification is incomplete; or - the information provided in the notification is false. Permits issued under the Communications Act are automatically transformed into NTL permits, if such permits are still required under the NTL. Thus, the permits for the installation and operation of cable television systems, granted to the Company's subsidiaries will become NTL permits. This rule does not apply to the provisions of the permits issued under Communications Act, the exercise of which would constitute a violation of the NTL. All other licences, authorizations and assignments expired by force of the law as of January 1, 2001. Operators, who had obtained rights expiring automatically under the NTL may continue their telecommunications activities within their current scope, provided that they apply for NTL permits by the end of 2001, if these activities require an NTL permit. For telecommunications activities that only require notification, such as data transmission, operators may continue to provide these services, provided that they notify the Chairman of the URT by the end of March 2001, and the Chairman does not object. The NTL has eliminated most of the foreign ownership restrictions relating to telecommunications. However, the NTL does prohibit the provision of international telecommunications services using networks operated by foreign entities or companies with participation of foreign entities until December 31, 2002. Until this date, UPC TK will be subject to this restriction. UPC TK may, however, provide international telecommunication services using the networks of other authorized Polish operators. It may also provide these services with the exception of international telephony services, by using its own radiocommunication networks. Such services may, until December 31, 2002, only be provided by TPSA. Under the NTL all operators are required to make their networks available to users who intend to commercially gather, process, store, use or grant access to information for others. Operators that perform their activities on the basis of an NTL permit are required to allow other operators operating public networks to use their buildings, lines, conduits, poles, towers and masts, in particular, allowing them to use telecommunications equipment, where these activities would be impossible without such infrastructure sharing or would involve significant cost. Operators are required to specify the conditions of the joint use in an agreement. If the parties cannot agree to specific conditions, either party may request the Chairman of the URT to issue a decision on joint use. 9 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 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 NTL 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. RESTRICTIONS ON FOREIGN OWNERSHIP OF POLISH BROADCASTERS. The Television Act provides that programming may be broadcast in Poland only by Polish entities in which foreign persons hold no more than 33% of the share capital, ownership interest and voting rights. In addition, the Television Act provides that the majority of the management and supervisory boards of any company holding a broadcasting license must be comprised of Polish citizens residing in Poland. Companies that engage in broadcasting in Poland are required to obtain a broadcasting license from the Chairman of the Council under the Television Act. The Council may revoke a broadcasting license for, among other things: - violations of the Television Act; - violations of the terms of the broadcasting license; or - violations of restrictions on foreign ownership of broadcasters. 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. A bill currently pending in the Parliament regarding copyrights is going to abolish the statutory license for cable operators for simultaneous transmissions of programs broadcasted by another broadcasters. The new act is expected to be passed by the Parliament by the end of the year 2001. The adoption of this act may result in an increase of the fees paid by cable operators. 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" and "--New Telecommunications Law" for a discussion of the penalties and consequences associated with violations of the Communications Act or the New Telecommunications Law and of a television operator's permits. 10 ANTI-MONOPOLY ACT EXCLUSIVE PROGRAMMING AGREEMENTS. Some of the programming agreements that the Company has entered into for its cable networks contain exclusivity clauses which restrict or prohibit the provider of such programming from providing such programming to other cable operators. Although such exclusivity clauses are not specifically prohibited under the Anti-Monopoly Act, such agreements may be found unlawful, and therefore unenforceable, if they restrict or hinder competition or otherwise involve the abuse of a dominant position. A decision by the Anti-Monopoly Office to deem one or more of these programming agreements as void due to the fact that it contains an illegal exclusivity clause could have a material adverse effect on the Company's business and financial results in that such a decision would potentially reduce the commercial value of these contracts and could reduce the consumer of appeal of the programming offered on the Company's cable networks. MARKET DOMINANCE. Companies that obtain control of 40% or more of the relevant market and do not encounter significant 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. The Anti-Monopoly Office issued a decision that PCI 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 another decision, the Anti-Monopoly Court agreed with 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 issued a decision that PCI 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 fine of 50,000 zloty (the equivalent of $12,068). 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 in the EU. Negotiations on the terms of Poland's proposed admission to the EU commenced in the March 1998. Poland has announced 2006 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, 2000, the Company owned equipment used for its cable television business, including 93 head ends, and approximately 4,924 kilometers of cable plant. The Company has 168 lease agreements for offices, storage spaces and land adjacent to the buildings. The total area leased amounts to approximately 24,016 square meters (most of which is land adjacent to buildings). The areas leased by the Company range from 1.25 square meters up to more than 3,140 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 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 11 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 - Technology and Infrastructure." During 2000, a subsidiary of UPC Polska entered into a 5 year office lease for a new head office in Warsaw. The Company's operations and main headend have been located in this space as of February 2001. 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 Polish National Radio and Television Council as required by the Polish 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), a subsidiary of the Company, filed a lawsuit against the Company, UPC Polska, 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 UPC Polska 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 UPC Polska 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. 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. The aforementioned settlement does not include the remaining minority shareholders. In addition to the Ohio lawsuit, other minority shareholders of PCBV (representing an additional approximately 6% of the shares of PCBV, hereinafter the "Reece Group") have asserted claims against the past and present directors or officers of, or members of the Board of Managers of, the Company, PCBV and UPC Polska or one or more controlling shareholders of UPC Polska but have not yet filed suit. The claims by the Reece Group consist of allegations previously made by Reece Communications, Inc. ("RCI"). RCI's allegations were premised on, among other things, alleged acts, errors, omissions, misstatements, misleading statements or breaches of duty by the aforementioned officers, directors, or controlling shareholders. Although the Company has defenses to the Reece Group's allegations, UPC Polska is presently attempting to negotiate a settlement of those claims and a simultaneous purchase of the Reece Group's PCBV shares. For a discussion of certain Anti-Monopoly Office's findings relating to the Company, see "Business--Regulation--Anti-Monopoly Act." 12 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 30, 2001, 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 30, 2001, 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. 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 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. 13 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, then, 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. DEBENTURE STOCK DIVIDENDS. The holders of Debenture Stock are not entitled to receive dividends. 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. 14 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; 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. 15 ITEM 6. SELECTED FINANCIAL DATA Set forth below are selected consolidated financial data of the Company for the three years ended December 31, 1998, the period from January 1, 1999 through August 5, 1999, the period from August 6, 1999 through December 31, 1999 and for the year ended December 31, 2000. The Company prior to the Acquisition, is herein referred to as the "Predecessor" and the Company 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 accountants (the "Consolidated Financial Statements"), during the respective periods. The selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included herein:
PREDECESSOR -------------------------------------------------------------- PERIOD FROM JANUARY 1, YEAR ENDED DECEMBER 31, 1999 THROUGH 1996 1997 1998 AUGUST 5, 1999 ---------------- ------------- --------------- ---------------- CONSOLIDATED STATEMENTS OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA) Cable television revenue $ 24,923 $ 37,575 $ 52,971 $ 35,434 Operating expenses: Direct operating expenses (7,193) (11,416) (34,843) (24,270) Selling, general and administrative expenses(1) (9,289) (28,165) (19,559) (9,281) Depreciation and amortization (9,788) (16,231) (21,635) (13,819) ---------- ----------- ----------- ------------ Operating loss (1,347) (18,237) (23,066) (11,936) Interest and investment income/(loss) 1,274 3,176 1,020 167 Interest expense (4,687) (13,281) (14,320) (8,578) Foreign exchange gain/(loss) (761) (1,107) (617) (295) Non-operating income - - - - ---------- ----------- ----------- ------------ Loss before income taxes, minority interest and extraordinary item (5,521) (29,449) (36,983) (20,642) Income tax (expense)/benefit (1,273) 975 (210) (30) Minority interest 1,890 (3,586) - - ---------- ----------- ----------- ------------ Loss before extraordinary item (4,904) (32,060) (37,193) (20,672) Extraordinary item--loss on early extinguishment of debt (1,713) - - - ---------- ----------- ----------- ------------ Net loss (6,617) (32,060) (37,193) (20,672) Accretion of redeemable preferred stock (2,870) (4,194) (4,106) (1,807) 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 - - - - ---------- ----------- ----------- ------------ Net loss applicable to holders of common stock $ (7,676) $ (36,254) $ (41,299) $ (22,479) ========== =========== =========== ============ Basic and diluted net loss per common share $ (435.72) $(1,913.34) $(2,179.60) $ (1,186.52) ========== =========== =========== ============
SUCCESSOR -------------------------------- PERIOD FROM AUGUST 6, 1999 THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, 1999 2000 ---------------- --------------- CONSOLIDATED STATEMENTS OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA) Cable television revenue $ 27,027 $ 68,781 Operating expenses: Direct operating expenses (21,546) (45,083) Selling, general and administrative expenses(1) (14,246) (22,495) Depreciation and amortization (18,158) (45,784) ----------- ---------- Operating loss (26,923) (44,581) Interest and investment income (11) 257 Interest expense (4,253) (2,458) Foreign exchange loss (3,909) 374 Non-operating expense 1,977 - ----------- ---------- Loss before income taxes, minority interest and extraordinary item (33,119) (46,408) Income tax (expense) benefit (11) (102) Minority interest - ----------- ---------- Loss before extraordinary item (33,130) (46,510) Extraordinary item--loss on early extinguishment of debt - - ----------- ---------- Net loss (33,130) (46,510) Accretion of redeemable preferred stock (1,911) (4,163) Preferred stock dividends - - Excess of carrying value of preferred stock over consideration paid (2) - - Accrued Dividend on Mandatorily Redeemable Debenture Stock $ (2,333) $ (14,233) ----------- ---------- Net loss applicable to holders of Common Stock $ (37,374) $ (64,906) =========== ========== Basic and diluted net loss per common share $ (1,972.45) $(3,425.48) =========== ==========
16
PREDECESSOR SUCCESSOR -------------------------------------------- ------------------------------ AS OF DECEMBER 31, AS OF AS OF DECEMBER DECEMBER 1996 1997 1998 31, 1999 31, 2000 ---- ---- ---- -------- -------- CONSOLIDATED BALANCE SHEETS DATA: (IN THOUSANDS) Cash and cash equivalents $ 68,483 $ 25,750 $ 2,574 $ 3,374 1,442 Property, plant and equipment, net 84,833 109,090 136,868 129,610 142,265 Total assets 217,537 189,783 193,785 524,931 518,872 Total notes payable 130,074 130,110 138,441 24,219 24,083 Redeemable preferred stock 34,955 39,149 30,977 34,695 38,858 Mandatorily Redeemable Debenture Stock 142,333 156,566 Total stockholders' equity / (deficiency) 31,048 4,219 (13,561) 273,810 215,758
------------------------------------ (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 Note 15 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. 17 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 cable subscribers fixed monthly fees for their choice of service packages and for other services, such as premium channels, tuner rentals and additional outlets, all of which are included in monthly subscription fees. The Company currently offers broadcast, intermediate (in limited areas) and basic packages of cable service. At December 31, 2000, approximately 70.7% of the Company's subscribers received its basic package compared to 71.6% for the year ended December 31, 1999. For the year ended December 31, 2000, approximately 97.3% of the Company's revenue was derived from monthly subscription fees compared to approximately 94.0% for the year ended December 31, 1999. When the Company began operations in 1990, revenue from installation fees exceeded revenue from monthly subscription fees because of the significant number of new installations and the high amount of the installation fees relative to the small existing subscriber base. As the Company's cable 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. During 1999 and 2000, management completed or was in the process of completing several strategic actions in support of its cable 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 cable subscribers. Since that date, the basic Wizja TV package has been expanded to 28 channels. 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 has continued to invest in upgrading its network in order to provide additional revenue generating services to its customers and continue to improve the security of the network. During the fourth quarter of the year 2000, the Company began providing Internet services to its cable television customers and has been investing in upgrading its network to provide this service. Individual and home office Internet subscribers are charged a monthly subscription fee of $48.00 and $60.00, respectively. The standard installation fee is approximately $59.00 for buildings with multiple apartments and approximately $120.00 for single family dwellings. The Company has implemented a pricing staretgy designed to increase revenue per cable subscriber and its profit margin. The Company has increased the monthly price for the "basic" package to reflect the increased channel availability, and the premium channels, the HBO Poland service and Wizja Sport have been offered to cable customers for an additional monthly charge. However, as of March 24, 2001, Wizja Sport is no longer a premium channel, but has been expanded to the basic package. The Company is in the process of encrypting the HBO Poland service on cable for all premium channel subscribers. This encryption and installation process is completed in all major systems and is expected to be rolled out in the remaining Company's systems in 2001. The Company generated operating losses of $44.6 million for 2000, $38.9 million for aggregated 1999 and $23.1 million for 1998 primarily due to the purchase of Wizja TV programming for $24.4 million, $21.0 million and $12.9 million in 2000, 1999 and 1998, respectively and the amortization of goodwill pushed down to the Company as a result of the Merger. 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 positive $ 1.2 million for 2000, negative $6.9 million for 1999 and negative $1.4 million for 1998. 2000 COMPARED WITH 1999 REVENUE. Revenue increased $6.3 million or 10.1% from $62.5 million in the year ended December 31, 1999 to $68.8 million in the year ended December 31, 2000. This increase was primarily attributable to a 1.9% increase in the number of basic and intermediate 18 subscribers from approximately 783,000 at December 31, 1999 to approximately 798,000 at December 31, 2000, as well as an increase in monthly subscription rates. Revenue from monthly subscription fees represented 94.0% of cable television revenue for the year ended December 31, 1999 and 97.3% for the year ended December 31, 2000. During the year ended December 31, 2000, the Company generated approximately $4.5 million of additional premium subscription revenue as a result of providing the HBO Poland and Wizja Sport premium channels to cable subscribers as compared to $2.1 million for the year ended December 31, 1999 (although the Company expanded Wizja Sport into its basic package as of March 24, 2001). DIRECT OPERATING EXPENSES. Direct operating expenses decreased $0.7 million or 1.5%, from $45.8 million for the year ended December 31, 1999 to $45.1 million for the year ended December 31, 2000, principally as a result of restructuring programming agreements with Wizja TV B.V., a subsidiary of the Company's parent. Direct operating expenses decreased from 73.3% of revenues for the year ended December 31, 1999 to 65.6% of revenues for the year ended December 31, 2000. However, without considering the intercompany charge for Wizja TV programming package, direct operating expenses as a percentage of revenue would have been 30.0% and 39.7% in the year ended December 31, 2000 and 1999, respectively. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased $1.0 million or 4.3% from $23.5 million for the year ended December 31, 1999 to $22.5 million for the year ended December 31, 2000, principally as a result of decreases in other administrative expenses. Selling, general and administrative expenses decreased from 37.6% of revenues for the year ended December 31, 1999 to 32.7% for the year ended December 31, 2000. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense rose $13.8 million, or 43.1%, from $32.0 million for the year ended December 31, 1999 to $45.8 million for the year ended December 31, 2000 principally as a result of depreciation and amortization of additional goodwill pushed down as a result of the 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 51.2% for the year ended December 31, 1999 to 66.6% for the year ended December 31, 2000. OPERATING LOSS. Each of these factors contributed to an operating loss of $44.6 million for the year ended December 31, 2000 and $38.9 million for the year ended December 31, 1999. INTEREST EXPENSE. Interest expense decreased $10.3 million, or 80.5%, from $12.8 million in 1999 to $2.5 million in 2000 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 increased $0.1 million, or 50%, from $0.2 million in 1999 to $0.3 million in 2000, primarily due to increase in interest income earned from cash held at banks. FOREIGN EXCHANGE GAIN/(LOSS), NET. Foreign exchange differences increased $4.6 million from negative $4.2 million in 1999 to positive $0.4 million in 2000, primarily due to favorable exchange rate fluctuations. NET LOSS. For 1999 and 2000, the Company had net losses of $53.8 million and $46.5 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 $59.8 million in 1999 to $64.9 million in 2000 due to the current year accretion of redeemable preferred stock and accrued dividend on mandatory redeemable debenture stock as well as the factors discussed above. 1999 COMPARED WITH 1998 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 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. 19 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 UPC Polska's 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 to support new pricing strategy, extensive country-wide Autumn marketing campaign and general growth of the business. Selling, general and administrative expenses increased from 37.0% 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 UPC Polska'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. 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. LIQUIDITY AND CAPITAL RESOURCES The Company has met its cash requirements in recent years primarily with (i) capital contributions, debentures, preferred stock and loans from UPC Polska, (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 positive cash flows from operating activities of $12.8 million for 2000 and negative cash flow of $15.5 million for 1999 due to the Company's net loss, and positive cash flow from operating activities of $14.3 million in 1998. 20 Since the acquisition of all of the outstanding stock of the Company's parent, UPC Polska, 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 UPC Polska. Cash used for the purchase and expansion of the Company's cable television networks was $30.4 million, $22.1 million and $42.6 million in 2000, 1999 and 1998 respectively. On December 31, 2000, the Company was committed to pay at least $72.8 million in guaranteed payments (including but not limited to payments for programming and rights) over the next eight years of which at least approximately $25.5 million was committed through the end of 2001. 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; (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 $210,530,000, $176,815,000 and $160,830,000 at December 31, 2000, 1999 and 1998, 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 UPC Polska 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 to UPC Polska 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 UPC Polska's purchase of the Mandatorily Redeemable Debenture Stock. To secure its obligations under the Mandatorily Redeemable Debenture Stock, the Company will pledge to UPC Polska 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 complete its current business plan. UPC and UPC Polska 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, UPC Polska, 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, UPC Polska and UPC Polska's parent UPC, to provide financing to achieve the Company's 21 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, 2002. IMPLEMENTATION OF A NEW ACCOUNTING STANDARD 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. As the Company's accounting policies for its cable television and DDTH services are still accounted for under SFAS 51, FINANCIAL REPORTING BY CABLE TELEVISION COMPANIES, there was no immediate effect on the Company. However, with the introduction of Internet services in the fourth quarter of 2000, revenue recognition for Internet related services has been and will be reported in accordance with SAB 101. IMPACT OF NEW ACCOUNTING STANDARDS NEW ACCOUNTING PRINCIPLES 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 accounting. 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 in 2001 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, was 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 ended December 31, 2000. 22 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 2000 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, 2000 by approximately $1.8 million. In other terms, a 10% depreciation of the Polish zloty against the U.S. dollar, would result in a $1.8 million decrease in the reported operating loss for the year ended December 31, 2000. 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 11.8% in 1998, approximately 7.3% in 1999 and 10.1% in 2000. The exchange rate for the zloty has stabilized and the rate of devaluation of the zloty has generally decreased since 1991. The zloty depreciated against the U.S. dollar by approximately 17.4% for the year ended December 31, 1999. However for the year ended December 31, 2000, the zloty has appreciated against the U.S. dollar by approximately 0.12%. Inflation and currency exchange fluctuations may have a material adverse effect on the business, financial condition and results of operations of the Company. 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors and Stockholder of Poland Communications, Inc.: We have audited the accompanying consolidated balance sheets of Poland Communications, Inc. and its subsidiaries as of December 31, 2000 and 1999 and the related consolidated statements of operations, comprehensive loss, changes in stockholder's equity and cash flows for the year ended December 31, 2000 and for the periods from January 1, 1999 through August 5, 1999 and from August 6, 1999 through 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 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 its subsidiaries as of December 31, 2000 and 1999 and the results of their operations and their cash flows for the year ended December 31, 2000 and for the periods from January 1, 1999 through August 5, 1999 and from August 6, 1999 through December 31, 1999, in conformity with generally accepted accounting principles in the United States of America. Arthur Andersen Sp. z o.o. Warsaw, Poland March 28, 2001 24 INDEPENDENT AUDITORS' REPORT The Board of Directors Poland Communications, Inc.: We have audited the accompanying consolidated statements of operations, comprehensive loss, changes in stockholder's deficiency and cash flows of Poland Communications, Inc. and subsidiaries for the year ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 results of operations and cash flows of Poland Communications, Inc. and subsidiaries for the year ended December 31, 1998, in conformity with generally accepted accounting principles in the United States of America. KPMG Warsaw, Poland March 29, 1999 25 POLAND COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS ASSETS
SUCCESSOR (NOTE 2) ------------------------------------- DECEMBER 31, DECEMBER 31, 2000 1999 ------------------ ----------------- (IN THOUSANDS) Current assets: Cash and cash equivalents $ 1,442 $ 3,374 Trade accounts receivable, net of allowances for doubtful accounts of $4,937 in 2000 and $2,419 in 1999 (note 5) 8,968 6,156 VAT recoverable 241 1,243 Prepayments 510 890 Other current assets 192 298 ------------------ ----------------- Total current assets 11,353 11,961 ------------------ ----------------- Property, plant and equipment (note 8): Cable television system assets 151,417 123,845 Construction in progress 6,179 6,382 Vehicles 707 741 Other 12,109 6,120 ------------------ ----------------- 170,412 137,088 Less accumulated depreciation (28,147) (7,478) ------------------ ----------------- Net property, plant and equipment 142,265 129,610 Inventories for construction 5,686 5,373 Intangible assets, net (note 9) 359,568 377,846 Other assets - 141 ------------------ ----------------- Total assets $ 518,872 $ 524,931 ================== =================
See accompanying notes to consolidated financial statements. 26 POLAND COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) LIABILITIES AND STOCKHOLDER'S EQUITY
SUCCESSOR (NOTE 2) --------------------------------------------- DECEMBER 31, DECEMBER 31, 2000 1999 --------------------- --------------------- (IN THOUSANDS) Current liabilities: Accounts payable and accrued expenses $ 28,343 $ 23,438 Accrued interest 236 243 Deferred revenue 2,182 759 Due to affiliates and parent 38,316 25,434 --------------------- --------------------- Total current liabilities 69,077 49,874 Long term liabilities: Notes payable and other payables to parent (note 14) 23,269 7,763 Notes payable (note 11) 15,344 16,456 --------------------- --------------------- Total liabilities 107,690 74,093 --------------------- --------------------- Redeemable preferred stock (liquidation value $60,000,000; 6,000 shares authorized, issued and outstanding) 38,858 34,695 Mandatorily Redeemable Debenture stock 30,000 authorized; 14,000 shares issued and outstanding (including accrued dividend) 156,566 142,333 Commitments and contingencies (note 18) Stockholder's equity (note 1): Common stock, $.01 par value, 27,000 shares authorized; 18,948 shares issued and outstanding 1 1 Paid-in capital 332,579 342,315 Accumulated other comprehensive loss (37,182) (35,376) Accumulated deficit (79,640) (33,130) --------------------- --------------------- Total stockholder's equity 215,758 273,810 --------------------- --------------------- Total liabilities and stockholder's equity $ 518,872 $ 524,931 ===================== =====================
See accompanying notes to consolidated financial statements. 27 POLAND COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
SUCCESSOR (NOTE 2) PREDECESSOR (NOTE 2) -------------------------------------- ----------------------------------- PERIOD FROM AUGUST PERIOD FROM YEAR ENDED 6, 1999 THROUGH JANUARY 1, 1999 YEAR ENDED DECEMBER 31, DECEMBER 31, THROUGH DECEMBER 31, 2000 1999 AUGUST 5, 1999 1998 ---- ---- -------------- ---- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues $ 68,781 $ 27,027 $ 35,434 $ 52,971 Operating expenses: Direct operating charged by third parties 18,150 11,615 10,636 17,657 Direct operating charged by affiliate 26,933 9,931 13,634 17,186 Selling, general and administrative expenses 22,495 14,246 9,281 19,559 Depreciation and amortization 45,784 18,158 13,819 21,635 ----------------- ---------------- ---------------- ------------------ Total operating expenses 113,362 53,950 47,370 76,037 Operating loss (44,581) (26,923) (11,936) (23,066) Interest and investment income/(loss), net 257 (11) 167 1,020 Interest expense (2,458) (4,253) (8,578) (14,320) Foreign exchange gain/(loss), net 374 (3,909) (295) (617) Non-operating income, net - 1,977 - - ----------------- ---------------- ---------------- ------------------ Loss before income taxes and minority interest (46,408) (33,119) (20,642) (36,983) Income tax expense (note 10) (102) (11) (30) (210) Minority interest - - - - ----------------- ---------------- ---------------- ------------------ Net loss (46,510) (33,130) (20,672) (37,193) Accretion of redeemable preferred stock (note 13) (4,163) (1,911) (1,807) (4,106) Accrued dividend on Mandatorily Redeemable Debenture stock (note 14) (14,233) (2,333) - - ----------------- ---------------- ---------------- ------------------ Net loss applicable to holders of common stock (64,906) (37,374) (22,479) (41,299) ================= ================ ================ ================== Basic and diluted net loss per common share (note 12) $ (3,425.48) $ (1,972.45) $ (1,186.35) $ (2,179.60)
See accompanying notes to consolidated financial statements. 28 POLAND COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
SUCCESSOR (NOTE 2) PREDECESSOR (NOTE 2) ----------------------------------------------------------------------------- PERIOD FROM PERIOD FROM YEAR ENDED AUGUST 6, 1999 JANUARY 1, 1999 YEAR ENDED DECEMBER 31, THROUGH THROUGH DECEMBER 31, 2000 DECEMBER 31, 1999 AUGUST 5, 1999 1998 ----------------- ---------------- ------------------ ------------------ (IN THOUSANDS) Net loss $ (46,510) $ (33,130) $ (20,672) $ (37,193) Other comprehensive income/(loss): Translation adjustment (1,806) (35,376) (15,947) 586 ----------------- ---------------- ------------------ ------------------ Comprehensive loss (48,316) (68,506) (36,619) (36,607) ================= ================ ================== ==================
See accompanying notes to consolidated financial statements. 29 POLAND COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY / (DEFICIENCY)
COMMON STOCK ACCUMULATED ------------------------- OTHER PAID IN COMPREHENSIVE SHARES AMOUNT AMOUNT INCOME/(LOSS) ------------ ----------- -------------- ------------------ Balance at January 1, 1998 18,948 $ 1 $ 59,553 $ - Net loss - - - - Cumulative Translation Adjustment - - - 586 Capital Contribution - - 10,655 - Cancellation of Series B redeemable preferred stock - - 12,278 - Accretion of redeemable preferred stock (note 13) - (4,106) - ------------ ----------- -------------- ------------------ Balance December 31, 1998 18,948 1 78,380 586 ------------ ----------- -------------- ------------------ Net loss for seven months of 1999 - - - - Cumulative Translation Adjustment - - - (15,947) Capital Contribution - - 6,000 - Accretion of redeemable preferred stock (note 13) - - (1,807) - ------------ ----------- -------------- ------------------ Balance August 5, 1999 (predecessor) 18,948 1 82,573 (15,361) ------------ ----------- -------------- ------------------ Purchase accounting 248,986 15,361 ------------ ----------- -------------- ------------------ Balance August 6, 1999 (successor) 18,948 1 331,559 - ------------ ----------- -------------- ------------------ Net loss for five months of 1999 - - - - Cumulative Translation Adjustment - - - (35,376) Capital Contribution - - 15,000 - Accretion of redeemable preferred stock (note 13) - - (1,911) - Accretion of redeemable debenture stock - - (2,333) - ------------ ----------- -------------- ------------------ Balance December 31, 1999 (successor) 18,948 1 342,315 (35,376) ------------ ----------- -------------- ------------------ Net loss - - - - Cumulative Translation Adjustment - - - (1,806) Capital Contribution - - 3,860 - Purchase accounting - - 4,800 - Accretion redeemable preferred stock (note 13) - - (4,163) - Accretion of redeemable debenture stock - - (14,233) - ------------ ----------- -------------- ------------------ Balance December 31, 2000 (successor) 18,948 $ 1 $332,579 $(37,182) ============ =========== ============== ==================
ACCUMULATED DEFICIT TOTAL ---------------- -------------- Balance at January 1, 1998 $ (55,335) $ 4,219 Net loss (37,193) (37,193) Cumulative Translation Adjustment - 586 Capital Contribution - 10,655 Cancellation of Series B redeemable preferred stock - 12,278 Accretion of redeemable preferred stock (note 13) - (4,106) ---------------- -------------- Balance December 31, 1998 (92,528) (13,561) ---------------- -------------- Net loss for seven months of 1999 (20,672) (20,672) Cumulative Translation Adjustment - (15,947) Capital Contribution - 6,000 Accretion of redeemable preferred stock (note 13) - (1,807) ---------------- -------------- Balance August 5, 1999 (predecessor) (113,200) (45,987) ---------------- -------------- Purchase accounting 113,200 377,547 ---------------- -------------- Balance August 6, 1999 (successor) - 331,560 ---------------- -------------- Net loss for five months of 1999 (33,130) (33,130) Cumulative Translation Adjustment - (35,376) Capital Contribution - 15,000 Accretion of redeemable preferred stock (note 13) - (1,911) Accretion of redeemable debenture stock - (2,333) ---------------- -------------- Balance December 31, 1999 (successor) (33,130) 273,810 ---------------- -------------- Net loss (46,510) (46,510) Cumulative Translation Adjustment - (1,806) Capital Contribution - 3,860 Purchase accounting - 4,800 Accretion redeemable preferred stock (note 13) - (4,163) Accretion of redeemable debenture stock - (14,233) ---------------- -------------- Balance December 31, 2000 (successor) $ (79,640) $ 215,758 ================ ==============
See accompanying notes to consolidated financial statements. 30 POLAND COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
SUCCESSOR (NOTE 2) PREDECESSOR (NOTE 2) ------------------------------ ------------------------------- PERIOD FROM PERIOD FROM YEAR ENDED AUGUST 6, 1999 JANUARY 1, 1999 YEAR ENDED DECEMBER 31, THROUGH THROUGH DECEMBER 31, 2000 DECEMBER 31, 1999 AUGUST 5, 1999 1998 ------------- ----------------- -------------- ----------- (IN THOUSANDS) Cash flows from operating activities: Net loss $ (46,510) $ (33,130) $(20,672) $ (37,193) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 45,784 18,158 13,819 21,635 Amortization of notes payable discount and issue cost - 895 - 881 Unrealized foreign exchange (gain)/loss (956) 3,742 - - Other (57) (2,200) - 496 Changes in operating assets and liabilities: Accounts receivable (2,607) (986) (2,400) (650) Other current assets 1,129 (3,048) 2,138 1,015 Accounts payable 1,929 6,641 (5,566) 6,289 Accrued interest 914 - 767 (35) Amounts due to affiliate and parent 11,802 (13,998) 21,913 19,872 Deferred revenue 1,422 (1,140) 879 (55) Accrued income taxes - - - 2,029 Other - (1,305) - - -------- --------- -------- -------- Net cash provided by operating activities 12,850 (26,371) 10,878 14,284 -------- --------- -------- -------- Cash flows from investing activities: Construction and purchase of property, plant and equipment (30,451) (9,084) (13,025) (42,639) Notes receivable from affiliate - - 449 6,023 Purchase of intangibles (2,074) (308) (1,036) - Purchase of subsidiaries, net of cash received - (954) (6,860) (17,601) -------- --------- -------- -------- Net cash used in investing activities (32,525) (10,346) (20,472) (54,217) -------- --------- -------- -------- Cash flows from financing activities: Proceeds from notes payable - 50 7,713 6,500 Repayment of notes payable (1,048) (122,959) (445) (398) Proceeds from issuance of Mandatorily Redeemable Debenture stock - 140,000 - - Proceeds from Parent 14,933 - - - Capital contribution 3,860 16,907 6,000 10,655 -------- --------- -------- -------- Net cash provided by financing activities 17,745 33,998 13,268 16,757 -------- --------- -------- -------- Net (decrease)/increase in cash and cash equivalents (1,930) (2,719) 3,674 (23,176) Effect of exchange rates on cash (2) (155) Cash and cash equivalents at beginning of period 3,374 6,248 2,574 25,750 -------- --------- -------- -------- Cash and cash equivalents at end of period $ 1,442 $ 3,374 $ 6,248 $ 2,574 ======== ========= ======== ======== Supplemental cash flow information: Cash paid for interest $ 1,577 $ 6,270 $ 7,304 $ 13,014 ======== ========= ======== ======== Cash paid for income taxes $ 102 $ 37 $ 47 $ 589 ======== ========= ======== ========
See accompanying notes to consolidated financial statements. 31 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 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 UPC Polska, Inc., formerly @Entertainment, Inc. ("UPC Polska"), 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 "UPC TK 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, in certain instances, 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 UPC Polska and certain other parties, (see note 18). 2. CONSUMMATION OF UPC TENDER OFFER AND MERGER On June 2, 1999, UPC Polska 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 UPC Polska in an all cash transaction valuing UPC Polska shares of common stock at $19.00 per share. 32 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 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 UPC Polska common stock (including 31,208 shares tendered pursuant to notices of guaranteed delivery) representing approximately 99% of UPC Polska 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 UPC Polska and acquired all of the outstanding warrants and stock options. Also on August 6, 1999, Bison was merged with and into UPC Polska with UPC Polska continuing as the surviving corporation (the "Merger"). Accordingly, UPC Polska 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 UPC Polska. Accordingly, the purchase price was allocated to the underlying assets and liabilities based upon their estimated fair values and any excess to goodwill. UPC Polska restated some of its assets and liabilities at August 5, 1999. At this date the Notes of UPC Polska 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 UPC Polska 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 UPC Polska establishing a new basis of accounting as of the acquisition date. During the year ended December 31, 2000 this figure increased by $12.3 million to $991.6 million mainly due to the results of an arbitration between UPC Polska and Telewizyjna Korporacja Partycypacyjna ("TKP"). UPC Polska allocated goodwill between the business segments based on the investment model used for acquisition. The Company was allocated approximately $417.1 million of goodwill The following pro forma condensed consolidated results for seven months of 1999 and year ended December 31, 1998 give effect to the Acquisition of UPC Polska 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 each of the periods presented. There was no tax effect from these adjustments because of the significant net operating losses.
YEAR ENDED FIVE MONTHS SEVEN MONTHS OF 1999 YEAR ENDED DECEMBER 31, 2000 OF 1999 DECEMBER 31, 1998 ------------------------------------------------------------------ ------------------------------- ------------------------------------------------------------------ ------------------------------ HISTORICAL HISTORICAL PRO FORMA HISTORICAL PRO FORMA HISTORICAL UNAUDITED Service and other revenue $ 68,781 $ 27,027 $ 35,434 $ 35,434 $ 52,971 $ 52,971 ================= ============== ============== ================ ============ ========== Net loss $ (46,510) $ (33,130) $(34,794) $ (20,672) $(61,761) $(37,193) ================= ============== ============== ================ ============ ==========
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 33 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 operations. Consistent with this pattern, the Company has incurred substantial operating losses since inception (1990). As of December 31, 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-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 its programming; (ii) increase its distribution capabilities through internal growth and through acquisitions; (iii) control its management of subscribers by using advanced information systems; and (iv) provide additional revenue generating services to its customers. 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 solely dependent on its ultimate 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, 2002. Several of the Company's Polish subsidiaries have statutory shareholders' equity less than the legally prescribed limits because of accumulated losses. As required by Polish law, 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. 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. 34 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 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 CABLE TELEVISION REVENUE: Cable television revenues are recognized in accordance with SFAS 51 FINANCIAL REPORTING BY CABLE TELEVISION COMPANIES. 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. INTERNET SERVICE REVENUES: During the fourth quarter of the year 2000 the Company began providing Internet services to its cable television customers. Revenue from subscription is recognized on a monthly basis as the service is provided. Installation fee revenue is deferred and amortized to income over the estimated average period that new subscribers are expected to remain connected to the system in accordance with SAB 101 REVENUE RECOGNITION IN FINANCIAL STATEMENTS. 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 on 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 UPC TK 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. The UPC TK 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 35 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 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". Interest is not capitalized for short-term construction projects. During year ended December 31, 2000, five months of 1999, seven months of 1999 and year ended December 31, 1998 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
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 as interest expense over the life of the loan using the effective interest method. Such costs were included at the Merger as part of the purchase accounting adjustment in 1999. 36 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 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. FOREIGN CURRENCIES Foreign currency transactions are recorded at the exchange rate prevailing at the date of the transactions. Assets and liabilities denominated in foreign currencies are remeasured at the rates of exchange at balance sheet date. Gains and losses on foreign currency transactions are included in the consolidated statement of operations. The financial statements of foreign subsidiaries are translated 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. 37 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 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, 2000 and 1999, 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, 2000 and 1999, 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, 2000 and 1999 the fair value of the Company's notes payable balance approximated $13,737,000 and $14,837,000, respectively based on the last trading price of the notes in 2000 and 1999. It was not practical to estimate the fair value 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. As noted in Note 3, the Company's existing liquidity problems may result in future impairments of long-lived assets if the Company does not have adequate financing available to execute its business strategy. Additionally, 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 impair certain of its long-lived assets. BUSINESS SEGMENT INFORMATION The Company operates in one business segment, providing cable television services. ADVERTISING COSTS All advertising costs of the Company are expensed as incurred. For the year ended December 31, 2000, five months and seven months of 1999 the Company incurred advertising costs of approximately $2,016,000, $584,000 and $267,000, respectively. 38 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 RECLASSIFICATIONS Certain amounts have been reclassified in the prior years consolidated financial statements to conform to the presentation contained in the 2000 periods. NEW ACCOUNTING PRINCIPLES 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 accounting. 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 in 2001 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, was 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 ended 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. As the Company's accounting policies for its cable television services are still accounted for under SFAS 51, FINANCIAL REPORTING BY CABLE TELEVISION COMPANIES, there was no immediate effect on the Company. However, with the introduction of Internet services in the fourth quarter of 2000, revenue recognition for Internet related services has been and will be reported in accordance with SAB 101. 39 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 5. VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS BALANCE AT THE CHARGED TO AMOUNTS BALANCE AT THE BEGINNING OF PERIOD EXPENSE WRITTEN OFF END OF PERIOD ------------------- ---------- ------------- -------------- (IN THOUSANDS) 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 2000 Allowance for Doubtful Accounts $ 2,419 $ 3,269 $ 751 $ 4,937
6. ACQUISITIONS On June 2, 2000 Wizja TV B.V. acquired 1.4% of the outstanding capital stock of PCBV from a minority shareholder of PCBV. During 1999 and 1998, the Company made several acquisitions of which details follow. In each case, the acquisition was accounted for using the purchase method, whereby the purchase price was allocated to the underlying assets and liabilities based on their proportionate share of fair values on the date of acquisition and any excess to goodwill. The results of operations of each of the 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. 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 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 40 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. In February 1998, the Company acquired substantially all of the assets 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). 41 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 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, UPC Polska, 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. Had these acquisitions occurred at the beginning of the respective periods, 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. 7. DIVESTITURE OF SUBSIDIARY During February 1998, UPC Polska, 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. 8. PROPERTY, PLANT AND EQUIPMENT
SUCCESSOR ---------------------------------- DECEMBER 31, DECEMBER 31, 2000 1999 ------------ ------------ (IN THOUSANDS) Property, plant and equipment: Cable television systems assets 151,417 123,845 Construction in progress 6,179 6,382 Vehicles 707 741 Other 12,109 6,120 ----------- ----------- 170,412 137,088 Less accumulated depreciation (28,147) (7,478) ----------- ----------- Net property, plant and equipment 142,265 129,610
42 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 The Company incurred depreciation charges for property, plant and equipment of $20,129,000, $7,211,000, $10,192,000 and $16,005,000 for year ended December 31, 2000, five months of 1999, seven months of 1999 and for year ended December 31, 1998, respectively. 9. INTANGIBLE ASSETS Intangible assets consist of the following:
SUCCESSOR ---------------------------------------- DECEMBER 31, DECEMBER 31, 2000 1999 ---------------------------------------- (IN THOUSANDS) Conduit, franchise agreements and other $ 7,323 $ 4,334 Goodwill 390,398 384,459 Non-compete agreements - ------------------- ----------------- 397,721 388,793 Less accumulated amortization (38,153) (10,947) ------------------- ----------------- Net intangible assets $359,568 $377,846 =================== =================
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 UPC Polska. Accordingly, the purchase price was allocated to the underlying assets and liabilities based upon their estimated fair values and any excess to goodwill. UPC Polska restated some of its assets and liabilities at August 5, 1999. At this date the Notes of UPC Polska 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 UPC Polska 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 UPC Polska establishing a new basis of accounting as of the acquisition date. During the year ended December 31, 2000 this figure increased by $12.3 million to $991.6 million mainly due to the results of an arbitration between UPC Polska and Telewizyjna Korporacja Partycypacyjna ("TKP"). UPC Polska allocated goodwill between the business segments based on the investment model used for acquisition. The Company was allocated approximately $417.2 million of goodwill. The Company incurred amortization charges for intangible assets of $25,655,000, $10,947,000, $3,627,000 and $5,630,000 for the year ended December 31, 2000, five and seven months of 1999 and year ended December 31, 1998, respectively. 43 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 10. INCOME TAXES Income tax expense consists of:
CURRENT DEFERRED TOTAL ------- --------- ----- (IN THOUSANDS) Year ended December 31, 2000: U.S. Federal $-- $ -- $-- State and local -- -- -- Foreign (102) -- (102) ----- ----------- ----- $(102) $ -- $(102) ===== =========== ===== 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) ===== =========== =====
44 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 Sources of loss before income taxes and minority interest are as follows:
YEAR ENDED YEAR ENDED DECEMBER 31, FIVE MONTHS OF SEVEN MONTHS OF DECEMBER 31, 2000 1999 1999 1998 --------------- -------------------- -------------------- ------------------- (IN THOUSANDS) Domestic gain/(loss) $ 9,913 $ (3,318) $ (3,895) $ (6,138) Foreign loss (56,321) (29,801) (16,747) (30,845) -------- -------- -------- -------- $(46,408) $(33,119) $(20,642) $(36,983) ======== ======== ======== ========
Income tax expense was $(102,000), $(11,000), $(30,000) and $(210,000) for the year ended December 31, 2000, five months of 1999, seven months of 1999 and for the year ended December 31, 1998, 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: 45
YEAR ENDED YEAR ENDED DECEMBER 31, FIVE MONTHS OF SEVEN MONTHS OF DECEMBER 31, ---------------- ------------------- --------------- ----------------- 2000 1999 1999 1998 ---------------- ------------------- ---------------- ----------------- (IN THOUSANDS) Computed "expected" tax benefit $ 15,779 $ 11,260 $ 7,018 $ 12,574 Non-deductible expenses (7,445) (2,326) (1,473) 2,911 Change in valuation allowance 8,895 (6,263) (3,903) (4,358) Adjustment for adoption of EITF 92-8 -- -- -- (11,311) Adjustment to deferred tax asset for enacted changes in tax rates (7,980) (2,682) (1,672) (695) Foreign tax rate differences (2,324) -- -- 606 Expiration of NOL's (4,988) -- -- -- Other (2,039) -- -- 63 -------- -------- -------- -------- $ (102) $ (11) $ (30) $ (210) ======== ======== ======== ========
46 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities are presented below:
DECEMBER 31, --------------------------------- 2000 1999 --------------- -------------- (IN THOUSANDS) Deferred tax assets: Foreign net operating loss carryforward $ 20,391 $ 13,163 Domestic net operating loss carry forward -- -- Accrued interest 2,008 2,877 Accrued liabilities 3,446 3,099 Bad debt 1,086 726 Deferred revenue -- 228 Unrealized foreign exchange losses 2,758 17,403 Other (1,780) -- -------- -------- Total gross deferred tax assets 27,909 37,496 Less valuation allowance (22,987) (31,882) -------- -------- Net deferred tax assets $ 4,922 $ 5,614 ======== ======== Deferred tax liabilities: Excess of book value over tax basis of fixed assets resulting from conversion from hyperinflation (4,922) $ (5,614) Other -- -- -------- -------- Total gross deferred tax liabilities $ (4,922) $ (5,614) -------- -------- Net deferred tax liability $ -- $ -- ======== ========
The net increase/(decrease) in the valuation allowance for the year ended December 31, 2000, five months of 1999, seven months of 1999 and for the year ended December 31, 1998 was $(8,895,000), $6,263,000, $3,903,000 and $4,358,000, 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, 2000. 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 UPC TK 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 47 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 carryforwards can be offset against UPC TK 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. At December 31, 2000, the Company has foreign net operating loss carryforwards of approximately $88,904,000, which expire as follows:
YEAR ENDED DECEMBER 31, (IN THOUSANDS) - ------------------------------------------------------------------------ --------------------- 2001 $ 3,784 2002 - 2003 13,449 2004 42,560 2005 29,111 --------------------- $ 88,904 =====================
11. NOTES PAYABLE Notes payable consist of the following:
DECEMBER 31, ---------------------------- 2000 1999 -------- --------- (IN THOUSANDS) PCI Notes, net of discount $14,509 $14,899 American Bank in Poland S.A. ("AmerBank") revolving credit loan -- -- Bank Rozwoju Exportu S.A. Deutsche - Mark facility 835 1,286 Other -- 271 ------- ------- TOTAL NOTES PAYABLE $15,344 $16,456 ======= =======
48 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 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, 2000 and 1999 the Company accrued interest expense of $236,000 and $243,000, respectively. Prior to November 1, 1999, PCI could have redeemed 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 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 $210,530,000 and $176,398,000 at December 31, 2000 and 1999, 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 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) consolidations, mergers and sale of assets; (xii) limitation on lines of business; and (xiii) provision of financial statements and reports. As of December 31, 2000, the Company was in compliance with such covenants. Pursuant to the terms of the indentures covering each of the UPC Polska's Notes and the PCI Notes (as defined hereinafter), which provided that, following a Change of Control (as defined therein), each holder of UPC Polska's Notes and PCI Notes had the right, at such holder's option, to require the Company and PCI, respectively to offer to repurchase all or a portion of such holder's UPC Polska Notes and PCI Notes at the Repurchase Price. UPC Polska and PCI made offers to repurchase (the "Offers") from the holders of the Notes UPC Polska's 14 1/2% Series B Senior Discount Notes due 2008, 14 1/2% Senior Discount Notes due 2008, Series C Senior Discount Notes due 2008, 14 1/2% Series B Senior Discount Notes due 2009, and 14 1/2% Senior Discount Notes due 2009 (collectively, the "UPC Polska Notes") and 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. PCI 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 5, 1999, PCI had $130,000,000 aggregate principal amount at maturity of PCI Notes outstanding. Pursuant to its repurchase offer, PCI has purchased $113,237,000 aggregate principal amount of PCI Notes for an aggregate price of $114,369,370. In December 1999 and March 2000, PCI repurchased an additional $2,000,000 and $390,000, respectively, aggregate principal amount of PCI Notes for an aggregate price of $2,040,024 and $402,944, respectively. PCI's repurchases were funded by the sale of 14,000 shares of PCI's Mandatorily Redeemable Debenture Stock to the UPC Polska for $140 million. To secure its obligations under the Debenture Stock, PCI will pledge to the UPC Polska notes issued by its subsidiary PCBV with an aggregate principal amount of $176,815,000. The PCI Noteholders will be equally and ratably secured by the pledge in accordance with the terms of the PCI Indenture. 49 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 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 1,702,500 was outstanding at December 31, 2000. The facility bears interest at LIBOR plus 2.0% (6.85% as at December 31, 2000), is repayable in full on December 27, 2002, and is ultimately secured by a pledge of the common shares of one of the Company's subsidiaries. Interest expense relating to notes payable was in the aggregate approximately $2,458,000 for the year ended December 31, 2000, $4,253,000 for five months of 1999, $8,578,000 for seven months of 1999 and $14,320,000 for the years ended December 31, 1998, 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 YEAR ENDED DECEMBER 31, FIVE MONTHS OF SEVEN MONTHS OF DECEMBER 31, 2000 1999 1999 1998 ----------------- -------------------- ---------------------- ------------- Net loss attributable to common stockholders (in thousands) $ (64,906) $ (37,374) $ (22,479) $ (41,299) ---------- ---------- ---------- ---------- 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 an diluted $(3,425.48) $(1,972.45) $(1,186.35) $(2,179.60)
50 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 13. REDEEMABLE PREFERRED STOCK The series A 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 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, UPC Polska, 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 the year ended December 31, 2000, for five months of 1999, seven months of 1999 and for the year ended December 31, 1998 was $4,163,000, $1,911,000, $1,807,000, and $4,106,000, respectively. 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. NOTES PAYABLE AND OTHER PAYABLES TO PARENT Amounts due to parent represent notes payable to UPC Polska, advances and payments made on behalf of the PCI by its parent UPC Polska. NOTES PAYABLE TO UPC POLSKA As of December 31, 2000 and 1999, the Company had a loan payable to UPC Polska of approximately $8,739,000 and $7,763,000, respectively. The amounts include accrued interest of approximately $1,184,000 and $263,000 as of the year ended December 31, 2000 and 1999, respectively. PRINT MEDIA SERVICES An affiliate of the Company's Parent provides print media services to the Company. The Company incurred operating costs related to those services of $2,523,000, $0, $296,000 and $4,355,000, for the year ended December 31, 2000, 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, 2000, 1999, 1998 is $55,000, $0 and $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 $24,410,000, $9,931,061, $13,337,901 and $12,831,000, for the year ended December 31, 2000, five months of 1999, seven months of 1999 and for the year ended December 31, 1998, respectively. MANDATORILY REDEEMABLE DEBENTURE STOCK To fund the repurchase of the PCI Notes and operations, as of November 3, 1999, the Company sold UPC Polska 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. The Company accrued dividend on Debenture Stock of $14,233,000 and $2,333,000 for the 51 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 year ended December 31, 2000 and five months of 1999. 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 PLANS UPC POLSKA, INC. (FORMERLY @ENTERTAINMENT, INC.) STOCK OPTION PLAN On June 22, 1997, the Company's parent adopted a stock option plan (the "1997 Plan") pursuant to which UPC Polska's Board of Directors could have granted stock options to officers, key employees and consultants of the Company. The 1997 Plan authorized grants of options to purchase up to 4,436,000 shares, subject to adjustment in accordance with the 1997 Plan. 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 UPC Polska, 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 became exercisable at such times as determined by UPC Polska Board of Directors and as set forth in the individual stock option agreements. Generally, all stock options vested 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 were 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. 52 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 UPC STOCK OPTION PLAN In June 1996, UPC Polska Inc.'s parent company, UPC, adopted a stock option plan (the "Plan") for certain of its employees and those of its subsidiaries. During 2000, management of UPC Polska Inc. and PCI were granted options by the parent company under this plan. There are 18,000,000 total shares available for the granting of options under the Plan, which are held by the Stichting Administratiekantoor UPC (the "Foundation"), which administers the Plan. Each option represents the right to acquire from the Foundation a certificate representing the economic value of one share. The options are granted at fair market value determined by UPC's Supervisory Board at the time of the grant. The maximum term that the options can be exercised is five years from the date of the grant. The vesting period for grants of options is four years, vesting in equal monthly increments. Upon termination of an employee (except in the case of death, disability or the like), vested options must be exercised, within 30 days of the termination date. The Supervisory Board of UPC may alter these vesting schedules at its discretion. An employee has the right at any time to put his certificates or shares from exercised vested options to the Foundation at a price equal to the fair market value. The Company can also call such certificates or shares for a cash payment upon termination in order to avoid dilution, except for certain awards, which can not be called by the Company until expiration of the underlying options. The Plan also contains anti-dilution protection and provides that, in the case of change of control, the acquiring company has the right to require UPC to acquire all of the options outstanding at the per share value determined in the transaction giving rise to the change of control. For purposes of the proforma disclosures presented below, UPC, and consequently UPC Polska Inc., have computed the fair values of all options granted during the year ended December 31, 2000 using the Black-Scholes multiple-option pricing model and the following weighted-average assumptions: Risk-free interest rate...................................... 4.60% Expected life regular options................................ 5 years Expected volatility.......................................... 74.14% Expected dividend yield...................................... 0%.
Based upon Black-Scholes multiple option model, the total fair value of options granted was approximately $0.8 million for the year ended December 31, 2000. This amount is amortized using the straight-line method over the vesting period of the options. Cumulative compensation expense recognized in pro forma net income, with respect to options that are forfeited prior to vesting, is adjusted as a reduction of pro forma compensation expense in the period of forfeiture. For the year ended December 31, 2000, stock-based compensation, net of the effect of forfeitures and net of actual compensation expense recorded in the statement of operations was zero. This stock-based compensation had the following proforma effect on net income (in thousands):
SUCCESSOR PREDECESSOR -------------------------------------- ------------------------------------- YEAR ENDED FIVE MONTHS OF SEVEN MONTHS OF YEAR ENDED DECEMBER 31, 2000 1999 1999 DECEMBER 31, 1998 ----------------- --------------- --------------- ----------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net loss - as reported $ (46,510) $ (33,130) $ (20,672) $ (37,193) Net loss - pro forma $ (46,659) $ (33,130) $ (21,101) $ (37,965) Basic and diluted net loss per share - as reported $ (2,454.61) $ (1,748.47) $ (1,090.99) $ (2,179.60) Basic and diluted loss per share - pro forma $ (2,462.48) $ (1,748.47) $ (1,113.63) $ (2,220.34)
53 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 A summary of stock option activity for the Company's employees participating in the Plan is as follows:
FOR THE YEAR ENDED DECEMBER 31, 2000 -------------------------------------------- WEIGHTED-AVERAGE NUMBER OF SHARES EXERCISE PRICE ---------------- ----------------- (EUROS) Outstanding at the beginning of period.............................. -- -- Granted during period................ 32,031 44.22(1) Cancelled during period.............. -- -- Exercised during period.............. -- -- ------ ----- Outstanding at end of period......... 32,031 44.22(1) ====== ===== Exercisable at end of period (1)..... 5,333 44.22(1) ====== =====
- ---------------- (1) The Weighted Average Exercise Price translated into US dollars at the rate as at December 31, 2000 amounts to $38.25. The combined weighted-average fair values and weighted-average exercise prices of options granted are as follows:
FOR THE YEAR ENDED DECEMBER 31, 2000 -------------------------------------------------------------- EXERCISE PRICE NUMBER OF OPTIONS FAIR VALUE EXERCISE PRICE - ---------------------- ------------------- --------------------- ------------------- (EUROS) Less than market price 4,733 31.62 44.22(1) Equal to market price 27,298 28.20 44.22(1) ------------------- --------------------- ------------------- Total 32,031 28.71 44.22(1) =================== ===================== ===================
- ---------------- (1) The Weighted Average Exercise Price translated into US dollars at the rate as at December 31, 2000 amounts to $38.25. The following table summarizes information about stock options outstanding, vested and exercisable as of December 31, 2000: OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------------------- ------------------------------ WEIGHTED-AVERAGE NUMBER OF REMAINING WEIGHTED- NUMBER OF WEIGHTED- OPTIONS CONTRACTUAL AVERAGE OPTIONS AVERAGE EXERCISE PRICE (EUROS) OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE - --------------------- ----------- ---------------- -------------- ----------- --------------- (EUROS) (EUROS) 44.22 32,031 3.25 44.22 5,333 44.22(1) ===== ====== ==== ===== =====
- ---------------- (1) The Weighted Average Exercise Price translated into US dollars at the rate as at December 31, 2000 amounts to $38.25. This Plan has been accounted for as a fixed plan. Compensation expense of zero was recognized for the year ended December 31, 2000. 54 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 16. QUARTERLY FINANCIAL STATEMENTS (UNAUDITED)
OPERATING OPERATING REVENUES LOSS NET LOSS -------------- ------------- ------------ 2000 First Quarter 16,853 (10,457) (11,450) Second Quarter 17,177 (10,704) (16,054) Third Quarter 17,094 (11,233) (14,613) Fourth Quarter 17,657 (12,187) (4,393) 1999 First Quarter 14,783 (4,264) (9,507) Second Quarter 15,481 (6,116) (9,653) Third Quarter 15,857 (10,427) (14,897) Fourth Quarter 16,340 (18,052) (19,745)
17. DATA TRANSMISSION LICENSE On July 26, 2000 the Polish Ministry of Telecommunication issued a 15-year data transmission license to a subsidiary of the Company, 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 allows that subsidiary to provide Internet services to its customers. This license expired automatically with the entry of the NTL into force, i.e. as of January 1, 2001. The subsidiary may continue the provision of the services covered by the license. It must, however, notify the Chairman of the URT about the provision of the data transmission services by the end of March 2001 as described below. In certain cases listed below, the Chairman of the URT may object to the provision of the services by the subsidiary. As of December 31, 2000, approximately 74.5% of the Company's cable plant runs through conduits leased from the Polish national telephone company ("TPSA"). 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. The Company is currently in the process of introducing Internet services to its customers and renegotiating certain conduit agreements with TPSA. 18. COMMITMENTS AND CONTINGENCIES LEASES Total rental expense associated with the operating leases mentioned below for the year ended December 31, 2000, five months of 1999, seven months of 1999 and for the year ended December 31, 1998 was $3,119,000, $969,469, $692,478 and $2,446,000, respectively, related to these leases. BUILDING LEASE The Company leases several offices and warehouses within Poland under cancelable operating lease terms. Minimum future lease commitments for the aforementioned building leases relate to 2001 only. The future minimum lease commitments related to these building leases approximates $710,000 as of December 31, 2000. CAR LEASES The Company has operating car leases with various leasing companies in Poland. Minimum future lease commitments for the aforementioned car leases as of December 31, 2000 are $455,000 in 2001, $403,000 in 2002 and $37,000 in 2003. CONDUIT LEASES The Company also leases space within various telephone duct systems from TPSA under cancelable operating leases. The TPSA leases expire at various times, and a substantial portion of the Company's contracts with TPSA permit termination by TPSA without penalty at any time either immediately upon the occurrence of certain conditions or upon provision of three to six months notice without cause. Refer to Note 19 for further detail. All of the agreements provide that TPSA is the manager of the telephone duct system and will lease space within the ducts to the 55 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 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 2001 only, as all leases are cancelable in accordance with the aforementioned terms. The future minimum lease commitments related to these conduit leases approximates $498,000 as of December 31, 2000. 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, 2000, the Company had an aggregate minimum commitment in relation to these agreements of approximately $70,653,000 over the next seven years, approximating $23,711,000 in 2001, $21,641,000 in 2002, $14,819,000 in 2003, $8,280,000 in 2004 and $2,202,000 in 2005 and thereafter. REGULATORY APPROVALS The Company is in the process of obtaining permits from the Chairman of URT for several of its cable television systems. If these permits are not obtained, URT 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. Additionally, in March 2001, PCI's subsidiary notified the Chairman of the URT of its activities concerning the provision of data transmission service and access to the Internet. 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. PROCEEDING RELATING TO HBO POLSKA 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, 2000 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. 56 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 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 UPC Polska 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 UPC Polska 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. 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 Company's Parent, 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. The aforementioned settlement does not include the remaining minority shareholders. In addition to the Ohio lawsuit, other minority shareholders of PCBV (representing an additional approximately 6% of the shares of PCBV, hereinafter the "Reece Group") have asserted claims against the past and present directors or officers of, or members of the Board of Managers of, the Company, PCBV and UPC Polska or one or more controlling shareholders of UPC Polska but have not yet filed suit. The claims by the Reece Group consist of allegations previously made by Reece Communications, Inc. ("RCI"). RCI's allegations were premised on, among other things, alleged acts, errors, omissions, misstatements, misleading statements or breaches of duty by the aforementioned officers, directors, or controlling shareholders. Although the Company has defenses to the Reese Group's allegations, UPC Polska is presently attempting to negotiate a settlement of those claims and a simultaneous purchase of the Reece Group's PCBV shares. 19. 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, 2000, approximately 74.5% of the Company's cable plant had been constructed utilizing pre-existing conduits of TPSA. A substantial portion of the Company's contracts with TPSA for the use of such conduits permits termination by TPSA without penalty at any time either immediately upon the occurrence of certain conditions or upon provision of three to six months' notice without cause. 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. The Company is currently in the process of introducing Internet services to its customers and renegotiating certain conduct agreements with TPSA. 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. 57 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 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 2000 or 1999. 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. 58 REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors and Stockholders of Poland Cablevision (Netherlands) B.V. We have audited the accompanying consolidated balance sheets of Poland Cablevision (Netherlands)B.V.. and its subsidiaries as of December 31, 2000 and 1999 and the related consolidated statements of operations, comprehensive loss, changes in stockholders' equity and cash flows for the year ended December 31, 2000 and for the periods from January 1, 1999 through August 5, 1999 and from August 6, 1999 through 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 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, 2000 and 1999 and the results of their operations and their cash flows for the year ended December 31, 2000 and for the periods from January 1, 1999 through August 5, 1999 and from August 6, 1999 through December 31, 1999, in conformity with generally accepted accounting principles in the United States of America. Arthur Andersen Sp. z o.o. Warsaw, Poland March 28, 2001 59 INDEPENDENT AUDITORS' REPORT The Board of Directors Poland Cablevision (Netherlands) B.V.: We have audited the accompanying consolidated statements of operations, comprehensive loss, changes in stockholders' deficiency and cash flows of Poland Cablevision (Netherlands) B.V. and subsidiaries for the year ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 results of operations and cash flows of Poland Cablevision (Netherlands) B.V. and subsidiaries for the year ended December 31, 1998, in conformity with generally accepted accounting principles in the United States of America. KPMG Warsaw, Poland March 29, 1999 60 POLAND CABLEVISION (NETHERLANDS) B.V. CONSOLIDATED BALANCE SHEETS
SUCCESSOR (NOTE 2) ---------------------------------------------- DECEMBER 31, 2000 DECEMBER 31, 1999 ---------------------- ---------------------- ASSETS (IN THOUSANDS) Current assets: Cash and cash equivalents $ 1,159 $ 2,838 Accounts receivable, net of allowances for doubtful accounts of $4,392 in 2000 and $1,568 in 1999 (note 5) 8,549 5,909 VAT recoverable 295 1,285 Prepayments 510 568 Other current assets 159 350 --------- --------- Total current assets 10,672 10,950 --------- --------- Property, plant and equipment (note 7): Cable television system assets 117,307 92,535 Construction in progress 6,050 5,632 Vehicles 473 498 Other 11,967 6,288 --------- --------- 135,797 104,953 Less accumulated depreciation (22,412) (6,067) --------- --------- Net property, plant and equipment 113,385 98,886 Inventories for construction 5,400 4,453 Intangible assets, net (note 2 and 8) 315,923 338,771 --------- --------- Total assets $ 445,380 $ 453,060 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 26,359 $ 18,706 Deferred revenue 2,182 594 Due to affiliate (note 10) 22,864 13,464 Other liabilities -- 119 --------- --------- Total current liabilities 51,405 32,883 Long term liabilities: Notes payable and other payables to PCI (note 10) 248,524 215,709 --------- --------- Total liabilities 299,929 248,592 --------- --------- Commitments and contingencies (note 13) Minority interest 281 -- Stockholders' equity: Common stock, $0.50 par value, 200,000 shares authorized; issued and outstanding 100 100 Paid-in capital 267,564 267,564 Accumulated other comprehensive loss (33,077) (30,950) Accumulated deficit (89,417) (32,246) --------- --------- Total stockholders' equity 145,170 204,468 --------- --------- Total liabilities and stockholders' equity $ 445,380 $ 453,060 ========= =========
See accompanying notes to consolidated financial statements. 61 POLAND CABLEVISION (NETHERLANDS) B.V. CONSOLIDATED STATEMENTS OF OPERATIONS
SUCCESSOR (NOTE 2) PREDECESSOR (NOTE 2) -------------------------------- -------------------------------- PERIOD FROM PERIOD FROM AUGUST 6, JANUARY 1, 1999 1999 YEAR ENDED THROUGH THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, AUGUST 5, DECEMBER 31, 2000 1999 1999 1998 ------------- ---------------- -------------- --------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues $ 64,738 $ 25,386 $ 29,535 $ 36,038 Operating expenses: Direct operating expenses charged by third parties 20,753 12,093 7,963 12,111 Direct operating expenses charged by affiliates 25,884 9,588 13,025 11,594 Selling, general and administrative expenses 21,036 11,104 6,947 14,349 Depreciation and amortization 40,511 14,481 8,726 15,033 --------- --------- --------- --------- Total operating expenses 108,184 47,266 36,661 53,087 Operating loss (43,446) (21,880) (7,126) (17,049) Interest and investment income, net 207 71 59 130 Interest expense charged by parent (15,201) (5,900) (8,029) (12,975) Foreign exchange gain/(loss), net 337 (3,228) (219) (78) Non-operating expenses -- (1,300) -- -- --------- --------- --------- --------- Loss before income taxes and minority interest (58,103) (32,237) (15,315) (29,972) Income tax expense (76) (9) (30) (52) Minority interest 1,008 -- -- (1,846) --------- --------- --------- --------- Net loss (57,171) (32,246) (15,345) (31,870) --------- --------- --------- --------- Net loss applicable to holders of common stock (57,171) (32,246) (15,345) (31,870) ========= ========= ========= ========= Basic and diluted net loss per common share $ (285.85) $ (161.23) $ (76.73) $ (159.35)
See accompanying notes to consolidated financial statements. 62 POLAND CABLEVISION (NETHERLANDS) B.V. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
SUCCESSOR (NOTE 2) PREDECESSOR (NOTE 2) -------------------------------- -------------------------------- PERIOD FROM PERIOD FROM AUGUST 6, JANUARY 1, 1999 1999 YEAR ENDED THROUGH THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, AUGUST 5, DECEMBER 31, 2000 1999 1999 1998 ------------- ---------------- -------------- --------------- (IN THOUSANDS) Net loss $(57,171) $(32,246) $(15,345) $(31,870) Other comprehensive (loss)/income: Translation adjustment (2,127) (30,950) (11,814) 424 -------- -------- -------- -------- Comprehensive loss $(59,298) $(63,196) $(27,159) $(31,446) ======== ======== ======== =========
See accompanying notes to consolidated financial statements. 63 POLAND CABLEVISION (NETHERLANDS) B.V. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY/(DEFICIENCY)
ACCUMULATED OTHER PAID-IN COMPREHENSIVE ACCUMULATED COMMON STOCK CAPITAL INCOME/(LOSS) DEFICIT TOTAL ---------------- ------------ ----------------- ---------------- ------------- (IN THOUSANDS) Balance January 1, 1998 (Predecessor) 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 (Predecessor) 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 (Predecessor) 100 14,589 (11,390) (97,574) (94,275) -------- -------- -------- -------- -------- Purchase accounting -- 252,975 11,390 97,574 361,939 -------- -------- -------- -------- -------- Balance August 6, 1999 (Successor) 100 267,564 -- -- 267,664 -------- -------- -------- -------- -------- Net loss -- -- -- (32,246) (32,246) Cumulative Translation Adjustment -- -- (30,950) -- (30,950) -------- -------- -------- -------- -------- Balance December 31, 1999 (Successor) 100 267,564 (30,950) (32,246) 204,468 -------- -------- -------- -------- -------- Net loss -- -- -- (57,171) (57,171) Cumulative Translation Adjustment -- -- (2,127) -- (2,127) -------- -------- -------- -------- -------- Balance December 31, 2000 (Successor) 100 $267,564 $(33,077) $(89,417) $145,170 ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements. 64 POLAND CABLEVISION (NETHERLANDS) B.V. CONSOLIDATED STATEMENTS OF CASH FLOWS
SUCCESSOR (NOTE 2) PREDECESSOR (NOTE 2) -------------------------------- ------------------------------- PERIOD FROM PERIOD FROM AUGUST 6, JANUARY 1, 1999 1999 YEAR ENDED THROUGH THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, AUGUST 5, DECEMBER 31, 2000 1999 1999 1998 ------------- ---------------- -------------- ------------- (IN THOUSANDS) Cash flows from operating activities: Net loss $(57,171) $(32,246) $(15,345) $(31,870) Adjustments to reconcile net loss to net cash provided by operating activities: Minority interest (1,008) -- -- 1,846 Depreciation and amortization 40,511 14,481 8,726 15,033 Interest expense added to notes payable to PCI 3,571 10,356 12,921 Unrealized foreign (gain)/loss (891) -- -- -- Other -- 1,300 -- 496 Changes in operating assets and liabilities: Accounts receivable (1,132) (1,289) (2,716) (682) Other current assets 595 (1,066) (263) 753 Accounts payable 3,058 10,385 (4,586) 5,205 Interest added to notes to parent 15,201 -- -- -- Amounts due to affiliates 7,823 11,014 14,853 11,986 Deferred revenue 1,587 853 937 (46) -------- -------- -------- -------- Net cash provided by operating activities 8,573 7,003 11,962 15,642 -------- -------- -------- -------- Cash flows from investing activities: Construction and purchase of property, plant and equipment (28,133) (8,777) (10,263) (32,530) Purchase of intangibles (1,998) (308) (145) -- Purchase of subsidiaries, net of cash received -- -- -- (9,876) -------- -------- -------- -------- Net cash used in investing activities (30,131) (9,085) (10,408) (42,406) -------- -------- -------- -------- Cash flows from financing activities: Proceeds from notes payable 19,877 2,001 57 13,400 Capital contribution -- -- -- 9,876 -------- -------- -------- -------- Net cash provided by financing activities 19,877 2,001 57 23,276 -------- -------- -------- -------- Net (decrease)/increase in cash and cash equivalents (1,681) (81) 1,611 (3,488) Effect of exchange rates on cash 2 (155) -- -- Cash and cash equivalents at beginning of period 2,838 3,074 1,463 4,951 -------- -------- -------- -------- Cash and cash equivalents at end of period $ 1,159 $ 2,838 $ 3,074 $ 1,463 ======== ======== ======== ======== Supplemental cash flow information: Cash paid for interest $ 1,432 $ -- $ 400 $ -- ======== ======== ======== ======== Cash paid for income taxes $ 76 $ 12 $ 17 $ 231 ======== ======== ======== ========
See accompanying notes to consolidated financial statements. 65 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 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 "UPC TK 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 UPC Polska, Inc., formerly @Entertainment, Inc, ("UPC Polska"). 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, UPC Polska 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 UPC Polska in an all cash transaction valuing UPC Polska 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 UPC Polska's common stock (including 31,208 shares tendered pursuant to notices of guaranteed delivery) representing approximately 99% of UPC Polska'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 UPC Polska and acquired all of the outstanding warrants and stock options. Also on August 6, 1999, Bison was merged with and into UPC Polska with UPC Polska continuing as the surviving corporation (the "Merger"). Accordingly, UPC Polska 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 UPC Polska. Accordingly, the purchase price was allocated to the underlying assets and liabilities based upon their estimated fair values and any excess to goodwill. UPC Polska restated some of its assets and liabilities at August 5, 1999. At this date the Notes of UPC Polska and PCI 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 UPC Polska 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 UPC Polska establishing a new basis of accounting as of the acquisition date. During the year ended December 31, 2000 this figure increased by $12.3 million to $991.6 million mainly due to the results of an arbitration between UPC Polska and Telewizyjna Korporacja Partycypacyjna ("TKP"). UPC Polska allocated goodwill between the business segments based on the investment model used for acquisition. The Company was allocated approximately $354.0 million of goodwill The following pro forma condensed consolidated results for seven months of 1999 and the year ended December 31, 1998 give effect to the Acquisition of UPC Polska 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. 66 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998
YEAR ENDED DECEMBER 31, FIVE MONTHS YEAR ENDED 2000 OF 1999 SEVEN MONTHS OF 1999 DECEMBER 31, 1998 --------------- -------------- --------------------------------- ------------------------------- HISTORICAL HISTORICAL HISTORICAL PRO FORMA HISTORICAL PRO FORMA UNAUDITED Service and other revenue $ 64,738 $ 25,386 $ 29,535 $ 54,921 $ 36,038 $ 36,038 ======== ======== ======== ======== ======== ======== Net loss $(57,171) $(32,246) $(15,345) $(29,111) $(31,870) $(55,474) ======== ======== ======== ======== ======== ========
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, 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-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 its programming; (ii) increase its distribution capabilities through its internal growth and through acquisitions; (iii) control its management of subscribers by using advanced information systems; and (iv) provide additional revenue generating services to its customers. 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 solely dependent on its ultimate 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, 2002. Several of the Company's Polish subsidiaries have statutory shareholders' equity less than the legally prescribed limits because of accumulated losses. As required by Polish law, 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. 67 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 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 46.8% 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 CABLE TELEVISION REVENUE: Cable television revenues are recognized in accordance with SFAS 51 FINANCIAL REPORTING BY CABLE TELEVISION COMPANIES. 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. INTERNET SERVICE REVENUES: During the fourth quarter of the year 2000 the Company began providing Internet services to its cable television customers. Revenue from subscription is recognized on a monthly basis as the service is provided. Installation fee revenue is deferred and amortized to income over the estimated average period that new subscribers are expected to remain connected to the system in accordance with SAB 101 REVENUE RECOGNITION IN FINANCIAL STATEMENTS. 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. 68 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 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 UPC TK 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. The UPC TK 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 construction in accordance with SFAS No. 34, "Capitalization of Interest Cost". Interest is not capitalized for short-term construction projects. During the year ended December 31, 2000, five months of 1999, seven months of 1999 and year 1998, 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
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. 69 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 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. 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. 70 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 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, 2000 and 1999, 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. 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. As noted in Note 3, the Company's existing liquidity problems may result in future impairments of long-lived assets if the Company does not have adequate financing available to execute its business strategy. Additionally, 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, of if existing cash, and projected cash flow from operations prove to be insufficient, the Company may need to impair certain of its long-lived assets. BUSINESS SEGMENT INFORMATION 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. For the year ended December 31, 2000, five months and seven months of 1999 the Company incurred advertising costs of approximately $1,966,000, $573,000 and $263,000, respectively. RECLASSIFICATIONS Certain amounts have been reclassified in the prior years consolidated financial statements to conform to the presentation contained in the 2000. 71 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 NEW ACCOUNTING PRINCIPLES 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 accounting. 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 in 2001 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, was 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 ended 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. As the Company's accounting policies for its cable television services are still accounted for under SFAS 51, FINANCIAL REPORTING BY CABLE TELEVISION COMPANIES, there was no immediate effect on the Company. However, with the introduction of internet services in the fourth quarter of 2000, revenue recognition for Internet related services has been and will be reported in accordance with SAB 101. 72 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 5. VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT THE ADDITIONS BALANCE AT THE BEGINNING OF THE CHARGED TO AMOUNTS END OF THE PERIOD EXPENSE WRITTEN OFF PERIOD ----------------- ------------- ------------- -------------- (IN THOUSANDS) 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 2000 Allowance for Doubtful $ 1,568 $ 3,468 $ 644 $ 4,392 Accounts
6. ACQUISITIONS During 2000 and 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. 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. 73 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 7. PROPERTY, PLANT AND EQUIPMENT
SUCCESSOR ----------------------------------------------- DECEMBER 31, 2000 1999 ---------------------- ---------------------- (IN THOUSANDS) Property, plant and equipment: Cable television systems assets 117,307 92,535 Construction in progress 6,050 5,632 Vehicles 473 498 Other 11,967 6,288 ---------------------- ---------------------- 135,797 104,953 Less accumulated depreciation (22,412) (6,067) ---------------------- ---------------------- Net property, plant and equipment 113,385 98,886
The Company incurred depreciation charges for property, plant and equipment of $16,023,000, $5,846,000, $7,416,000 and $13,264,000 for the year ended December 31, 2000, five months of 1999, seven months of 1999 and for year ended December 31, 1998, respectively. 8. INTANGIBLES Intangible assets are carried at cost and consist of the following:
SUCCESSOR -------------------------------------- DECEMBER 31, DECEMBER 31, 2000 1999 ------------------ ------------------ (IN THOUSANDS) Conduit, franchise agreements and other $ 7,323 $ 4,156 Goodwill 343,408 343,250 ------------------ ------------------ 350,731 347,406 Less accumulated amortization (34,808) (8,635) ------------------ ------------------ Net intangible assets $ 315,923 $ 338,771 ================== ==================
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 UPC Polska. Accordingly, the purchase price was allocated to the underlying assets and liabilities based upon their estimated fair values and any excess to goodwill. UPC Polska restated some of its assets and liabilities at August 5, 1999. At this date the Notes of UPC Polska 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 UPC Polska had negative net assets of approximately $53.3 million and existing goodwill at net book value of $37.5 million which was 74 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 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 UPC Polska establishing a new basis of accounting as of the acquisition date. During the year ended December 31, 2000 this figure increased by $12.3 million to $991.6 million mainly due to the results of an arbitration between the Company and Telewizyjna Korporacja Partycypacyjna ("TKP"). UPC Polska allocated goodwill between the business segments based on the investment model used for acquisition. The Company was allocated approximately $354.0 million of goodwill. The Company incurred amortization charge for intangible assets of $24,488,000, $8,635,000, $1,310,000 and $1,769,000, for the year ended December 31, 2000, five and seven months of 1999 and the year ended December 31, 1998, 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) Year ended December 31, 2000: U.S. Federal $ - $ - $ - State and local - - - Foreign (76) - (76) ------------ ------------ ------------ $ (76) $ - $ (76) ============ ============ ============ Five months of 1999: U.S. Federal $ - $ - $ - State and local - - - Foreign (9) - (9) ------------ ------------ ------------ $ (9) $ - $ (9) ============ ============ ============ 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 (52) - (52) ------------ ------------ ------------ $ (52) $ - $ (52) ============ ============ ============
Income tax expense was $76,000, $9,000, $30,000 and $52,000 for the year ended December 31, 2000, five months of 1999, seven months of 1999 and the year ended December 31, 1998, 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: 75 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998
SUCCESSOR PREDECESSOR --------------------------------- --------------------------------- YEAR ENDED YEAR ENDED DECEMBER 31, FIVE MONTHS OF SEVEN MONTHS OF DECEMBER 31, 2000 1999 1999 1998 ----------------- -------------- ---------------- -------------- (IN THOUSANDS) Computed "expected" tax benefit $ 19,755 $ 10,960 $ 5,207 $ 10,190 Non-deductible expenses (8,731) (1,465) (722) 842 Change in valuation allowance 751 (7,238) (3,439) (2,918) Adjustment for change in functional currency bases losses -- -- -- (8,287) Adjustment to deferred tax asset for enacted changes in tax rates (6,523) (2,266) (1,076) (478) Foreign tax rate differences (2,324) -- -- 599 Expiration of NOL's (3,778) -- -- -- Other 774 -- -- -- ---------- -------- -------- -------- $ (76) $ (9) $ (30) $ (52) ========== ======== ======== ========
The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities are presented below:
DECEMBER 31, ---------------------------------- 2000 1999 ---------------- --------------- (IN THOUSANDS) Deferred tax assets: Unrealized foreign exchange losses $ 2,900 $ 15,166 Accrued liabilities 3,278 426 Bad debt provision 1,054 470 Other (120) 381 Foreign tax loss carryforwards 17,938 9,865 -------- -------- Total gross deferred tax assets 25,050 26,308 Less valuation allowance (21,444) (22,195) -------- -------- Net deferred tax assets $ 3,606 $ 4,113 ======== ======== Deferred tax liabilities: Excess of book value of fixed assets resulting from conversion from hyperinflation (3,606) (4,113) -------- -------- Total gross deferred tax liabilities $ (3,606) $ (4,113) -------- -------- Net deferred tax liability $ -- $ -- ======== ========
The net (increase)/decrease in the valuation allowance for the year ended December 31, 2000, five months of 1999, seven months of 1999 and for the year ended December 31, 1998 was $751,000, $(7,238,000), $(3,439,000) and $(2,918,000), 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 76 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 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, 2000. As the Polish companies are not entitled to group taxation, current year operations and net operating loss carryforwards may not be available for offset. As a result, some of the Polish companies could be in a tax-paying situation, now or in the future, despite the availability of net operating loss carryforwards available in others. Subsequently recognized tax benefits relating to the valuation allowance for deferred tax assets as of December 31, 2000 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, 2000, the UPC TK Companies had Polish net operating loss carry forward of approximately $81,536,000, which will expire as follows:
YEAR ENDED DECEMBER 31, (IN THOUSAND) - ------------------------------------------------------------------------ --------------------- 2001 $ 5,936 2002 -- 2003 10,573 2004 37,800 2005 27,227 --------------------- $ 81,536 =====================
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 AND OTHER PAYABLES TO PCI Amounts due to parent represent notes payable to PCI, advances and payments made on behalf of the Company by its parent PCI. Notes payable to PCI of $210,530,000 and $176,815,000 at December 31, 2000 and 1999, 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. Interest expense of $15,201,000, $5,900,000, $8,029,000 and $12,975,000 was incurred by the Company, primarily in connection with borrowings from PCI for the year ended December 31, 2000, five months of 1999, seven months of 1999 and the year ended December 31, 1998, respectively. Of this expense, $15,201,000, $5,900,000, $8,029,000 and $12,975,000 has been added to the loan balance for the year ended December 31, 2000, five months of 1999, seven months of 1999 and the year ended December 31, 1998, 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. 77 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 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 Amounts due to affiliate of $22,864,000 and $13,464,000 at December 31, 2000 and 1999, respectively, are non-interest bearing and primarily represent amounts owed to Wizja TV BV for Wizja programming. 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 and as otherwise requested by the UPC TK Companies shall be allocated and charged to particular UPC TK Companies in the event they are directly attributable to such subsidiaries, and shall otherwise be allocated equally among each of the UPC TK Companies. With regard to services rendered and costs incurred by subsidiaries for the benefit of some or all of the UPC TK 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 UPC TK Companies, the Allocation Agreement provides that such expenses shall be allocated between the UPC TK 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 the year ended December 31, 2000, $0, for five months of 1999, seven months of 1999 and $152,000 at December 31, 1998, respectively, have been capitalized and are included in investment in cable television system assets. The remaining overhead costs allocated to the Company of $0, $749,174, $1,361,192 and $1,477,000 during the year ended December 31, 2000, five months of 1999, seven months of 1999 and the year ended December 31, 1998, respectively, are included in corporate administration and operating expenses. 78 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 MANAGEMENT AGREEMENT The UPC TK Companies entered into management consulting agreements with PCI to recommend, advise, and consult the UPC TK 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 the year ended December 31, 2000, $0 for five and seven months of 1999 and $1,440,000 for the year ended December 31, 1998, respectively. 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 $2,523,000, $0, $296,000 and $2,943,000 for the year ended December 31, 2000, five months of 1999, seven months of 1999 and the year ended December, 31, 1998, respectively. Included in accounts payable at December 31, 2000, 1999 and 1998 is $55,000, $0 and $1,114,000 due to this affiliate. PROGRAMMING Affiliates of PCI provide programming to the UPC TK Companies. The Company incurred programming fees from these affiliates of $23,361,000, $9,588,000, $12,729,000 and $8,651,000 for the year ended December 31, 2000, five months of 1999, seven months of 1999 and the year ended December 31, 1998, respectively. 11. QUARTERLY FINANCIAL STATEMENTS (UNAUDITED)
Operating Operating Revenues Loss Net Loss ---------- --------- ------------- 2000 First Quarter 15,924 (8,262) (12,130) Second Quarter 16,185 (10,853) (18,884) Third Quarter 16,152 (10,539) (16,260) Fourth Quarter 16,477 (13,792) (9,897) 1999 First Quarter 10,210 (2,399) (7,749) Second Quarter 14,182 (3,300) (6,473) Third Quarter 15,151 (9,013) (13,897) Fourth Quarter 15,378 (14,294) (19,472)
79 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 12. DATA TRANSMISSION LICENSE On July 26, 2000 the Polish Ministry of Telecommunication issued a 15-year data transmission license to a subsidiary of the Company, 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 allows that subsidiary to provide Internet services to its customers. This license expired automatically with the entry of the NTL into force, i.e. as of January 1, 2001. The subsidiary may continue the provision of the services covered by the license. It must, however, notify the Chairman of the URT about the provision of the data transmission services by the end of March 2001 as described below. In certain cases listed below, the Chairman of the URT may object to the provision of the services by the subsidiary. As of December 31, 2000, approximately 74.5% of the Company's cable plant runs through conduits leased from the Polish national telephone company ("TPSA"). 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. The Company is currently in the process of introducing Internet services to its customers and renegotiating certain conduit agreements with TPSA. 13. COMMITMENTS AND CONTINGENCIES LEASES Total rental expense associated with the operating leases mentioned below for the year ended December 31, 2000, five months of 1999, seven months of 1999 and for the year ended December 31, 1998 was $2,968,000, $969,000, $692,000 and $2,446,000, respectively, related to these leases. BUILDING LEASE 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 14 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 2001 only, as all leases are cancelable in accordance with the aforementioned terms. The future minimum lease commitments related to these conduit leases approximates $438,000 as of December 31, 2000. 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, 2000, the Company had an aggregate minimum commitment in relation to these agreements of approximately $68,209,000 over the next seven years, approximating $22,884,000 in 2001, $20,830,000 in 2002, $14,257,000 in 2003, $8,131,000 in 2004 and $2,107,000 in 2005 and thereafter. REGULATORY APPROVALS The Company is in the process of obtaining permits from the Chairman of URT for several of its cable television systems. If these permits are not obtained, URT 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. PROCEEDING RELATING TO HBO POLSKA 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 80 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 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, 2000 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 between UPC Polska 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 UPC Polska 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. 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 Company's Parent, 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. The aforementioned settlement does not include the remaining minority shareholders. In addition to the Ohio lawsuit, other minority shareholders of the Company (representing an additional approximately 6% of the shares of the Company, hereinafter the "Reece Group") have asserted claims against the past and present directors or officers of, or members of the Board of Managers of, PCI, the Company and UPC Polska or one or more controlling shareholders of UPC Polska but have not yet filed suit. The claims by the Reece Group consist of allegations previously made by Reece Communications, Inc. ("RCI"). RCI's allegations were premised on, among other things, alleged acts, errors, omissions, misstatements, misleading statements or breaches of duty by the aforementioned officers, directors, or controlling shareholders. Although the Company has defenses to the Reece Group's allegations, UPC Polska is presently attempting to negotiate a settlement of those claims and a simultaneous purchase of the Reece Group's the Company shares. 14. 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 81 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 control of the Company. In addition, at December 31, 2000, approximately 74.5% of the Company's cable plant had been constructed utilizing pre-existing conduits of TPSA. A substantial portion of the Company's contracts with TPSA for the use of such conduits permits termination by TPSA without penalty at any time either immediately upon the occurrence of certain conditions or upon provision of three to six months' notice without cause. 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. The Company is currently in the process of introducing Internet services to its customers and renegotiating certain conduit agreements with TPSA. 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. 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 2000 or 1999. 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 year ended December 31, 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 year ended December 31, 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 year. (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 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. 83 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 did not file any Reports on Form 8-K during the quarter ended December 31, 2000. (c) Exhibit Listing 3.1(a) Restated Certificate of Incorporation of Poland Communications, Inc. as amended through August 1998. (Incorporated by reference to PCI's Form 10-K, filed March 31, 2000.) 3.1(b) Certificate of Amendment of Certificate of Incorporation of Poland Communications, Inc. dated March 20, 2000. (Incorporated by reference to PCI's Form 10-K, filed March 31, 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 Registration Statement on Form S-4, Registration No. 333-20307). 99.1 Letter from KPMG dated December 2, 1999. (Incorporated by reference to PCI's Form 8-K filed on December 2, 1999) 84 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/ Simon Boyd ------------------------ Simon Boyd CHIEF FINANCIAL OFFICER 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 --------- ------- ----- /s/ Bruce Massey Chief Executive Officer and _____________________________ President and Director April 2, 2001 Bruce Massey /s/ Simon Boyd Chief Financial Officer ______________________________ April 2, 2001 Simon Boyd /s/ Nimrod Kovacs Chairman of the Board of Directors _______________________________ April 2, 2001 Nimrod Kovacs /s/ Walter Eugene Musselman Director _______________________________ April 2, 2001 Walter Eugene Musselman /s/ Anton Tuijten Director _______________________________ April 2, 2001 Anton Tuijten /s/ Simon Oakes Director _______________________________ April 2, 2001 Simon Oakes /s/ Dorothy Hansberry-Biegunska Vice President, General Counsel and _______________________________ Secretary and Director April 2, 2001 Dorothy Hansberry-Biegunska
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