-----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, R99gU9YOyjbesswP3qKcmT0cJpsdCSjlxeKGGl2RLc2zvjPjJF/Ooo4I6/pr5zYN eiJZ1BwyzvHVqcMUkGpouQ== 0000912057-01-516142.txt : 20010516 0000912057-01-516142.hdr.sgml : 20010516 ACCESSION NUMBER: 0000912057-01-516142 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 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-Q SEC ACT: SEC FILE NUMBER: 333-20307 FILM NUMBER: 1639366 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-Q 1 a2048728z10-q.txt 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------------ FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001. OR / / TRANSITION REPORT PURSUANT TO THE SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 1934
FROM THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER 333-20307 ------------------------ POLAND COMMUNICATIONS, INC. (Exact Name of Registrant as Specified in Its Charter) NEW YORK 06-1070447 (State or Other Jurisdiction of (IRS Employer Incorporation of Organization) Identification No.) 4643 ULSTER STREET SUITE 1300 DENVER, COLORADO 80237 (Address of Principal Executive (Zip Code) Officers)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (303) 770-4001 Indicate by check (X) whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes /X/ No / / The number of shares outstanding of Poland Communications, Inc.'s common stock as of March 31, 2001, was: Common Stock 18,948 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- POLAND COMMUNICATIONS, INC. FORM 10-Q INDEX FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
PAGE NO. -------- PART I FINANCIAL INFORMATION Item 1. Financial Statements Poland Communications, Inc. Consolidated Balance Sheets....................... 3-4 Consolidated Statements of Operations............. 5 Consolidated Statements of Comprehensive Loss..... 6 Consolidated Statements of Cash Flows............. 7 Notes to Consolidated Financial Statements........ 8 Poland Cablevision (Netherlands) B.V. Consolidated Balance Sheets....................... 13-14 Consolidated Statements of Operations............. 15 Consolidated Statements of Comprehensive Loss..... 16 Consolidated Statements of Cash Flows............. 17 Notes to Consolidated Financial Statements........ 18 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................... 24-29 Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................. 29 PART II OTHER INFORMATION Item 1. Legal Proceedings................................. 31 Item 2. Changes in Securities and Use of Proceeds......... 31 Item 3. Defaults Upon Senior Securities................... 31 Item 4. Submission of Matters to a Vote of Security Holders................................................. 31 Item 5. Other Information................................. 31 Item 6. Exhibits and Reports on Form 8-K.................. 31
POLAND COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS ASSETS
MARCH 31, DECEMBER 31, 2001 2000 ----------- ------------ (UNAUDITED) (IN THOUSANDS) Current assets: Cash and cash equivalents................................. $ 2,339 $ 1,442 Trade accounts receivable, net of allowance for doubtful accounts of $5,714 in 2001 and $4,937 in 2000........... 7,218 8,968 VAT recoverable........................................... -- 241 Prepayments............................................... 672 510 Due from UPC affiliates................................... 513 -- Other current assets...................................... 332 192 -------- -------- Total current assets.................................. 11,074 11,353 -------- -------- Property, plant and equipment: Cable television systems assets........................... 155,712 151,417 Construction in progress.................................. 6,962 6,179 Vehicles.................................................. 757 707 Other..................................................... 11,403 12,109 -------- -------- 174,834 170,412 Less accumulated depreciation............................. (34,368) (28,147) -------- -------- Net property, plant and equipment..................... 140,466 142,265 Inventories for construction................................ 6,310 5,686 Intangibles, net............................................ 358,743 359,568 -------- -------- Total assets.......................................... $516,593 $518,872 ======== ========
See accompanying notes to unaudited consolidated financial statements. 3 POLAND COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) LIABILITIES AND STOCKHOLDER'S EQUITY
MARCH 31, DECEMBER 31, 2001 2000 ----------- ------------ (UNAUDITED) (IN THOUSANDS) Current liabilities: Accounts payable and accrued expenses..................... $ 20,687 $ 28,343 Accrued interest.......................................... 591 236 Deferred revenue.......................................... 2,256 2,182 Due to affiliates and parent.............................. 43,492 38,316 -------- -------- Total current liabilities............................. 67,026 69,077 -------- -------- Long-term liabilities: Notes payable and other payables to parent................ 22,812 23,269 Notes payable............................................. 15,209 15,344 -------- -------- Total liabilities..................................... 105,047 107,690 -------- -------- Redeemable preferred stock (liquidation value $60,000,000; 6,000 shares authorized, issued and outstanding).......... 39,975 38,858 Mandatorily Redeemable Debenture Stock, 30,000 shares authorized; 14,000 shares issued and outstanding (including accrued dividend).............................. 160,480 156,566 Commitments and contingencies (note 7) Stockholder's equity: Common stock, $.01 par value; 27,000 shares authorized, 18,948 shares issued and outstanding.................... 1 1 Paid-in capital........................................... 336,527 332,579 Accumulated other comprehensive loss...................... (32,653) (37,182) Accumulated deficit....................................... (92,784) (79,640) -------- -------- Total stockholder's equity............................ 211,091 215,758 -------- -------- Total liabilities and stockholder's equity............ $516,593 $518,872 ======== ========
See accompanying notes to unaudited consolidated financial statements. 4 POLAND COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, 2001 MARCH 31, 2000 ------------------ ------------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Cable television revenue.................................. $ 18,728 $ 16,853 Operating expenses: Direct operating expenses charged by third parties...... 5,884 5,516 Direct operating expenses charged by affiliate.......... 6,476 6,069 Selling, general and administrative expenses............ 6,616 4,220 Depreciation and amortization........................... 13,112 11,505 -------- -------- Total operating expenses.................................. 32,088 27,310 -------- -------- Operating loss.......................................... (13,360) (10,457) Interest and investment income............................ 57 67 Interest expense.......................................... (607) (612) Non operating expense..................................... (205) -- Foreign exchange gain/(loss), net......................... 1,007 (430) -------- -------- Loss before income taxes................................ (13,108) (11,432) Income tax expense........................................ (36) (18) -------- -------- Net loss................................................ (13,144) (11,450) Accretion of redeemable preferred stock................. (1,117) (997) Accrued dividend on Mandatorily Redeemable Debenture Stock......................................... (3,914) (3,500) -------- -------- Net loss applicable to holder of common stock............. $(18,175) $(15,947) ======== ======== Basic and diluted loss per common share................... $(959.20) $(841.62) ======== ========
See accompanying notes to unaudited consolidated financial statements. 5 POLAND COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, 2001 MARCH 31, 2000 ------------------ ------------------ (IN THOUSANDS) Net loss.................................................. $(13,144) $(11,450) Other comprehensive income: Translation adjustment.................................... 4,529 850 -------- -------- Comprehensive loss........................................ $ (8,615) $(10,600) ======== ========
See accompanying notes to unaudited consolidated financial statements. 6 POLAND COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, 2001 MARCH 31, 2000 ------------------ ------------------ (IN THOUSANDS) Cash flows from operating activities: Net loss................................................ $(13,144) $(11,450) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization......................... 13,112 11,505 Other................................................. (311) -- Changes in operating assets and liabilities: Accounts receivable................................. 1,750 347 Other current assets................................ (804) 964 Accounts payable.................................... (1,947) (6,699) Accrued interest.................................... 355 365 Amounts due to affiliates........................... 7,015 4,770 Amounts due from UPC affiliates..................... (513) -- Deferred revenue.................................... 74 226 -------- -------- Net cash provided by operating activities......... 5,587 28 Cash flows from investing activities: Construction and purchase of property, plant and equipment............................................. (8,989) (3,753) Notes receivable from affiliate......................... -- -- Purchase of intangibles................................. -- -- -------- -------- Net cash used in investing activities............. (8,989) (3,753) Cash flows from financing activities: Proceeds from parent.................................... 4,352 7,243 Repayment of notes payable.............................. (109) (230) -------- -------- Net cash provided by financing activities......... 4,243 7,013 Net increase in cash and cash equivalents......... 841 3,288 Effect of exchange rates on cash and cash equivalents..... 56 (2) Cash and cash equivalents at beginning of period.......... 1,442 3,374 -------- -------- Cash and cash equivalents at end of period................ $ 2,339 $ 6,660 ======== ======== Supplemental cash flow information: Cash paid for interest.................................. $ 99 $ 22 ======== ======== Cash paid for income taxes.............................. $ 36 $ 13 ======== ========
See accompanying notes to unaudited consolidated financial statements. 7 POLAND COMMUNICATIONS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 AND 2000 1. BASIS OF PRESENTATION The information furnished by Poland Communications, Inc. and its subsidiaries ("PCI" or the "Company") has been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP") and the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations. The accompanying consolidated balance sheets, statements of operations, statements of comprehensive loss and statements of cash flows are unaudited but in the opinion of management reflect all adjustments which are necessary for a fair statement of the Company's consolidated results of operations and cash flows for the interim periods and the Company's financial position as of March 31, 2001. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company's 2000 Annual Report on Form 10-K filed with the SEC (the "2000 Annual Report"). The interim financial results are not necessarily indicative of the results of the full year. 2. CONSUMMATION OF UPC TENDER OFFER AND MERGER On June 2, 1999, UPC Polska, Inc. (formerly @ Entertainment, Inc.), the Company's parent, entered into an Agreement and Plan of Merger (the "Merger Agreement") 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's shares of common stock at $19.00 per share. The tender offer, initiated pursuant to the Merger Agreement, 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 (as defined in the indentures governing the UPC Polska and PCI notes) occurred on August 6, 1999 as a result of the Acquisition and Merger. 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 and deferred financing costs of $16.1 million and deferred revenues of $2.0 million were written down to zero. The consideration paid by UPC for all outstanding shares, 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 transactions. As a result of the above considerations, UPC realized goodwill of approximately $979.3 million. As a result of the Acquisition, UPC pushed down its basis to UPC Polska establishing a new basis of accounting as of the acquisition date. During 8 POLAND COMMUNICATIONS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2001 AND 2000 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. 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 March 31, 2001, the Company had negative working capital. Additionally, the Company is currently and is expected to continue to be highly leveraged. The ability of the Company to meet its debt service obligations will depend on the future operating performance and financial results of the Company as well as its ability to obtain additional third party financing to support the planned expansion, as well as obtaining additional financing from its ultimate parent, UPC. The Company's current cash on hand will be insufficient to satisfy all of its commitments and to complete its current business plan. Management of the Company believes that significant opportunities exist for pay television providers capable of delivering high quality, Polish-language programming on a multi-channel basis and other services on cable (i.e. data and telephones). As such, the Company has focused its financial and business efforts toward its position in the cable market. The Company's business strategy is designed to increase its market share and subscriber base and to maximize revenue per subscriber. To accomplish its objectives and to capitalize on its competitive advantages, the Company intends to (i) develop and control the content of programming on its cable systems; (ii) increase its distribution capabilities through internal growth and through acquisitions; and (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 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. 9 POLAND COMMUNICATIONS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2001 AND 2000 4. IMPACT OF A NEW ACCOUNTING STANDARD ADOPTION Effective January 1, 2001, the Company adopted SFAS 133, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. The adoption of SFAS 133 on January 1, 2001, resulted in no impact to income. The Company's debt is all fixed rate and denominated in Euros or U.S. dollars. The Company does not use derivative instruments to manage exposures to foreign currency or interest rate risks. 5. RECLASSIFICATIONS Certain amounts have been reclassified in the corresponding period's unaudited consolidated financial statement to conform to the unaudited consolidated financial statement presentation for the three months ended March 31, 2001. 6. LOSS PER SHARE Basic and diluted loss per ordinary share is based on the weighted average number of ordinary shares outstanding of 18,948 for three month periods ended March 31, 2001 and 2000. 7. COMMITMENTS AND CONTINGENCIES 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 and 2002 only. The future minimum lease commitments related to these building leases approximates $550,000 in 2001 and $11,000 in 2002 as of March 31, 2001. 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 March 31, 2001 are $309,000 in 2001, $360,000 in 2002 and $7,000 in 2003. CONDUIT LEASES The Company also leases space within various telephone duct systems from the Polish national telephone company (known in the Polish telecommunication industry as "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. 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 and 2002 only, as all leases are cancelable in accordance with the aforementioned terms. The future minimum lease commitments related to these conduit leases approximates $756,000 as of March 31, 2001. 10 POLAND COMMUNICATIONS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2001 AND 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 March 31, 2001, the Company had an aggregate minimum commitment in relation to these agreements of approximately $88,886,000 over the next six years, approximating $20,250,000 in 2001, $27,247,000 in 2002, $20,736,000 in 2003, $12,741,000 in 2004 and $7,912,000 in 2005 and thereafter. REGULATORY APPROVALS The Company is in the process of obtaining permits from the Chairman of the Office for Telecommunication Regulation ("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. The Chairman had 21 days to respond to the Company's notification. Since no response was received from the Chairman of URT, it is assumed that the Company is legally entitled to provide the data transmission services and access to the Internet as described in the notification. 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 March 31, 2001 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's subsidiary Poland Cablevision (Netherlands) B.V. ("PCBV"), filed a lawsuit against PCI and 11 POLAND COMMUNICATIONS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2001 AND 2000 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 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 of PCBV. 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. 12 POLAND CABLEVISION (NETHERLANDS) B.V. CONSOLIDATED BALANCE SHEETS ASSETS
MARCH 31, DECEMBER 31, 2001 2000 ----------- ------------ (UNAUDITED) (IN THOUSANDS) Current assets: Cash and cash equivalents................................. $ 1,917 $ 1,159 Trade accounts receivable, net of allowance for doubtful accounts of $5,258 in 2001 and $4,392 in 2000........... 7,147 8,549 VAT recoverable........................................... -- 295 Prepayments............................................... 540 510 Due from UPC affiliates................................... 513 -- Other current assets...................................... 250 159 -------- -------- Total current assets.................................. 10,367 10,672 -------- -------- Property, plant and equipment: Cable television systems assets........................... 121,113 117,307 Construction in progress.................................. 6,756 6,050 Vehicles.................................................. 520 473 Other..................................................... 11,355 11,967 -------- -------- 139,744 135,797 Less accumulated depreciation............................. (27,377) (22,412) -------- -------- Net property, plant and equipment..................... 112,367 113,385 Inventories for construction................................ 6,039 5,400 Intangibles, net............................................ 313,101 315,923 -------- -------- Total assets.......................................... $441,874 $445,380 ======== ========
See accompanying notes to unaudited consolidated financial statements. 13 POLAND CABLEVISION (NETHERLANDS) B.V. CONSOLIDATED BALANCE SHEETS (CONTINUED) LIABILITIES AND STOCKHOLDERS' EQUITY
MARCH 31, DECEMBER 31, 2001 2000 ----------- ------------ (UNAUDITED) (IN THOUSANDS) Current liabilities: Accounts payable and accrued expenses..................... $ 17,275 $ 26,359 VAT payable............................................... 1,184 -- Deferred revenue.......................................... 2,109 2,182 Due to affiliate.......................................... 27,185 22,864 --------- -------- Total current liabilities............................. 47,753 51,405 --------- -------- Long-term liabilities: Notes payable and other payables to PCI................... 260,279 248,524 --------- -------- Total liabilities..................................... 308,032 299,929 --------- -------- Commitments and contingencies (note 7) Minority Interest......................................... 287 281 Stockholders' equity: Capital stock par value, $0.50 par; 200,000 shares authorized, issued and outstanding.................................. 100 100 Paid-in capital........................................... 267,564 267,564 Accumulated other comprehensive loss...................... (29,111) (33,077) Accumulated deficit....................................... (104,998) (89,417) --------- -------- Total stockholders' equity............................ 133,555 145,170 --------- -------- Total liabilities and stockholders' equity............ $ 441,874 $445,380 ========= ========
See accompanying notes to unaudited consolidated financial statements. 14 POLAND CABLEVISION (NETHERLANDS) B.V. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, 2001 MARCH 31, 2000 ------------------ ------------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Cable television revenue.................................. $ 17,653 $ 15,924 Operating expenses: Direct operating expenses charged by third parties...... 5,592 4,787 Direct operating expenses charged by affiliate.......... 7,028 6,720 Selling, general and administrative expenses............ 6,190 2,787 Depreciation and amortization........................... 11,042 9,892 -------- -------- Total operating expenses............................ 29,852 24,186 -------- -------- Operating loss...................................... (12,199) (8,262) Interest income........................................... 53 66 Interest expense.......................................... (4,213) (3,516) Foreign exchange gain/(loss), net......................... 804 (402) -------- -------- Loss before income taxes............................ (15,555) (12,114) Minority interest in subsidiary loss...................... (6) -- Income tax expense........................................ (20) (16) -------- -------- Net loss............................................ $(15,581) $(12,130) ======== ======== Basic and diluted net loss per common share......... $ (77.91) $ (60.65) ======== ========
See accompanying notes to unaudited consolidated financial statements. 15 POLAND CABLEVISION (NETHERLANDS) B.V. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, 2001 MARCH 31, 2000 ------------------ ------------------ (IN THOUSANDS) Net loss.................................................. $(15,581) $(12,130) Other comprehensive income: Cumulative translation adjustment....................... 3,966 740 -------- -------- Comprehensive loss........................................ $(11,615) $(11,390) ======== ========
See accompanying notes to unaudited consolidated financial statements. 16 POLAND CABLEVISION (NETHERLANDS) B.V. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, 2001 MARCH 31, 2000 ------------------ ------------------ (IN THOUSANDS) Cash flows from operating activities: Net loss................................................ $(15,581) $(12,130) Adjustments to reconcile net loss to net cash provided by operating activities: Minority interest..................................... 6 -- Depreciation and amortization......................... 11,042 9,892 Interest expense added to notes payable to PCI........ 4,213 3,516 Changes in operating assets and liabilities: Accounts receivable................................. 1,402 277 Other current assets................................ (465) 933 Accounts payable.................................... (2,191) (6,836) Deferred revenue.................................... (73) 225 Amounts due to affiliates........................... 4,321 4,373 Amounts due from UPC affiliates..................... (513) -- Other............................................... (105) -- -------- -------- Net cash provided by operating activities......... 2,056 250 -------- -------- Cash flows from investing activities: Construction and purchase of property, plant and equipment............................................. (8,891) (3,381) Purchase of intangible assets........................... -- -- -------- -------- Net cash used in investing activities............. (8,891) (3,381) -------- -------- Cash flows from financing activities: Proceeds from borrowings from affiliates................ 7,542 3,800 -------- -------- Net cash provided by financing activities......... 7,542 3,800 -------- -------- Net increase in cash.............................. 707 669 Effect of exchange rates on cash and cash equivalents..... 51 (2) Cash and cash equivalents at beginning of the period...... 1,159 2,838 -------- -------- Cash and cash equivalents at end of the period............ $ 1,917 $ 3,505 ======== ======== Supplemental cash flow information: Cash paid for interest.................................. $ 28 $ -- ======== ======== Cash paid for income taxes.............................. $ 21 $ 6 ======== ========
See accompanying notes to unaudited consolidated financial statements. 17 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 AND 2000 1. BASIS OF PRESENTATION Financial information is included for Poland Cablevision (Netherlands) B.V. and its subsidiaries ("PCBV") as PCBV is a guarantor of PCI's 9 7/8% Senior Notes due 2003 and 9 7/8% Series B Senior Notes due 2003, (collectively, the "PCI Notes"). The information furnished by PCBV has been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP") and the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations. The accompanying consolidated balance sheets, statements of operations, statements of comprehensive loss and statements of cash flows are unaudited but in the opinion of management reflect all adjustments which are necessary for a fair statement of PCBV's consolidated results of operations and cash flows for the interim periods and PCBV's financial position as of March 31, 2001. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of PCBV and the notes thereto included in PCI's 2000 Annual Report on Form 10-K filed with the SEC. The interim financial results are not necessarily indicative of the results of the full year. 2. CONSUMMATION OF UPC TENDER OFFER AND MERGER On June 2, 1999, UPC Polska entered into an Agreement and Plan of Merger (the "Merger Agreement") 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's shares of common stock at $19.00 per share. The tender offer, initiated pursuant to the Merger Agreement, 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 (as defined in the indentures governing the UPC Polska and PCI notes) occurred on August 6, 1999 as a result of the Acquisition and Merger. 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 and deferred financing costs of $16.1 million and deferred revenues of $2.0 million were written down to zero. The consideration paid by UPC for all outstanding shares, warrants and options totaled $812.5 million. At this time UPC 18 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2001 AND 2000 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 transactions. As a result of the above considerations, UPC realized goodwill of approximately $979.3 million. As a result of the Acquisition, UPC pushed down its basis to 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. UPC Polska allocated goodwill between the business segments based on the investment model used for acquisition. PCBV was allocated approximately $354.0 million of goodwill. 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 March 31, 2001, the Company had negative working capital. Additionally, the Company is currently and is expected to continue to be highly leveraged. The ability of the Company to meet its debt service obligations will depend on the future operating performance and financial results of the Company as well as its ability to obtain additional third party financing to support the planned expansion, as well as obtaining additional financing from its ultimate parent, UPC. The Company's current cash on hand will be insufficient to satisfy all of its commitments and to complete its current business plan. Management of the Company believes that significant opportunities exist for pay television providers capable of delivering high quality, Polish-language programming on a multi-channel basis and other services on cable (i.e. data and telephones). As such, the Company has focused its financial and business efforts toward its position in the cable market. The Company's business strategy is designed to increase its market share and subscriber base and to maximize revenue per subscriber. To accomplish its objectives and to capitalize on its competitive advantages, the Company intends to (i) develop and control the content of programming on its cable systems; (ii) increase its distribution capabilities through its internal growth and through acquisitions; (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 19 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2001 AND 2000 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. 4. IMPACT OF A NEW ACCOUNTING STANDARD ADOPTION Effective January 1, 2001, the Company adopted SFAS 133, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. The adoption of SFAS 133 on January 1, 2001, resulted in no impact to income. The Company's debt is all fixed rate and denominated in Euros or U.S. dollars. The Company does not use derivative instruments to manage exposures to foreign currency or interest rate risks. 5. RECLASSIFICATIONS Certain amounts have been reclassified in the corresponding period's unaudited consolidated financial statements to conform to the unaudited consolidated financial statement presentation for the three months ended March 31, 2001. 6. LOSS PER SHARE Basic and diluted loss per ordinary share is based on the weighted average number of ordinary shares outstanding of 200,000 for the three month periods ended March 31, 2001 and 2000. 7. COMMITMENTS AND CONTINGENCIES 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 and 2002 only. The future minimum lease commitments related to these building leases approximates $497,000 in 2001 and $11,000 in 2002 as of March 31, 2001. 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 March 31, 2001 are $309,000 in 2001, $360,000 in 2002 and $7,000 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. 20 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2001 AND 2000 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 and 2002 only, as all leases are cancelable in accordance with the aforementioned terms. The future minimum lease commitments related to these conduit leases approximates $698,000 as of March 31, 2001. 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 March 31, 2001, the Company had an aggregate minimum commitment in relation to these agreements of approximately $84,928,000 over the next six years, approximating $19,350,000 in 2001, $26,043,000 in 2002, $19,823,000 in 2003, $12,188,000 in 2004 and $7,524,000 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. The Chairman had 21 days to respond to the Company's notification. As no response have been received from the Chairman of URT, it is assumed that the Company is legally entitled to provide the data transmission services and access to the Internet as described in the notification. 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 21 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2001 AND 2000 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 March 31, 2001 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 of PCBV. 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 22 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2001 AND 2000 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. 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis provides information concerning the results of operations and financial condition of Poland Communication, Inc. ("PCI" or the "Company"). Such discussion and analysis should be read in conjunction with the accompanying unaudited consolidated financial statements of the Company. Additionally, the following discussion and analysis should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the audited consolidated financial statements included in Part II of the Company's 2000 Annual Report. The following discussion focuses on material trends, risks and uncertainties affecting the results of operations and financial condition of the Company. Certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, that are not historical facts but rather reflect the Company's current expectations concerning future results and events. The words "believes," "expects," "intends," "plans," "anticipates," "likely," "will" "may", "shall" and similar expressions identify such forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company (or entities in which the Company has interests), or industry results, to differ materially from future results, performance or achievements expressed or implied by such forward-looking statements. Readers are cautioned not to place undue reliance on these forward looking statements which reflect management's view only as of the date of this Quarterly Report on Form 10-Q. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, conditions or circumstances. The risks, uncertainties and other factors that might cause such differences include but are not limited to: (i) general economic conditions in Poland and in the pay television business in Poland; (ii) changes in regulations the Company operates under; (iii) uncertainties inherent in new business strategies, including new product launches and development plans, which the Company has not used before; (iv) rapid technology changes; (v) changes in, or failure or inability to comply with government regulations; (vi) the development and provision of programming for new television and telecommunications technologies; (vii) the continued strength of competitors in the multichannel video programming distribution industry and satellite services industry and the growth of satellite delivered programming; (viii) future financial performance, including availability, terms and deployment of capital; (ix) the ability of vendors to deliver required equipment, software and services on schedule at the budgeted cost; (x) the Company's ability to attract and hold qualified personnel; (xi) changes in the nature of strategic relationships with joint ventures; (xii) the overall market acceptance of those products and services, including acceptance of the pricing of those products and services; (xiii) and acquisition opportunities and (xiv) the Company's new ownership structure. OVERVIEW The Company operates the largest cable television system in Poland with approximately 1,855,000 homes passed and approximately 1,045,500 total subscribers as at March 31, 2001. The Company continues to realize subscriber growth through a combination of increased penetration, new network build-out and acquisition. The Company's revenues have been and will continue to be derived primarily from monthly subscription fees for cable television services and one-time installation fees for connection to its cable television networks. The Company charges its subscribers fixed monthly fees for their choice of service packages and for other services, such as premium channels, tuner rentals and additional outlets, all of 24 which are included in monthly subscription fees. The Company currently offers broadcast, intermediate (in limited areas) and basic packages of cable service. At March 31, 2001, approximately 68.7% of the Company's subscribers received its basic package. For the three months ended March 31, 2001, approximately 97.7% of the Company's cable revenue was derived from monthly subscription fees compared to approximately 97.8% for the three months ended March 31, 2000. When the Company began operations in 1990, revenue from installation fees exceeded revenue from monthly subscription fees because of the significant number of new installations and the high amount of the installation fees relative to the small existing subscriber base. As the Company's subscriber base has grown, aggregate monthly subscription revenue has increased and installation fees, while currently increasing on an aggregate basis, have declined as a percentage of total revenue. 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 approximately $38 and $51, respectively. The standard installation fee is approximately $60 for buildings with multiple apartments and approximately $122 for single family dwellings. The Company divides operating expenses into (i) direct operating expenses, (ii) selling, general and administrative expenses and (iii) depreciation and amortization expenses. Direct operating expenses consist of programming expenses, maintenance and related expenses necessary to service, maintain and operate the Company's cable systems, billing and collection expenses and customer service expenses. Selling, general and administrative expenses consist principally of administrative costs, including office related expenses, professional fees and salaries, wages and benefits of non-technical employees, advertising and marketing expenses, bank fees and bad debt expense. Depreciation and amortization expenses consist of depreciation of property, plant and equipment and amortization of intangible assets. The Company 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 an operating loss of $13.4 million for the three months ended, March 31, 2001, due to programming expense related to the purchase of the Wizja TV programming package from an affiliated company, additional Polish programming from Polsat TV as well as high depreciation and amortization charges related to additional goodwill pushed down as a result of UPC Polska's 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 expenses 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 negative EBITDA of $0.2 million for three months ended March 31, 2001 and positive EBIDTA of $1.0 million for three months ended March 31, 2000. 25 CABLE TELEVISION REVENUE. Revenue increased $1.8 million or 10.7% from $16.9 million in the three months ended March 31, 2000 to $18.7 million in the three months ended March 31, 2001. This increase was primarily attributable to the appreciation of Polish zloty against US dollar as well as to an increase in monthly subscription rates. Revenue from monthly subscription fees represented 97.7% and 97.8% of cable television revenue for the three months ended March 31, 2001 and 2000, respectively. During the three months ended March 31, 2001, the Company generated approximately $1.2 million of premium subscription revenue as a result of providing the HBO Poland service pay movie channel and Wizja Sport channel to cable subscribers as compared to $0.9 million for the three months ended March 31, 2000, although the Wizja Sport was expanded to the basic package as of March 24, 2001. DIRECT OPERATING EXPENSES. Direct operating expenses increased $0.8 million, or 6.9%, from $11.6 million for the three months ended March 31, 2000 to $12.4 million for the three months ended March 31, 2001, principally as a result of the increased size of the Company's cable television system. Direct operating expenses decreased from 68.6% of revenues for the three months ended March 31, 2000 to 66.3% of revenues for the three months ended March 31, 2001. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $2.4 million or 57.1% from $4.2 million for the three months ended March 31, 2000 to $6.6 million for the three months ended March 31, 2001. This increase was attributable mainly to increase in marketing and information technology related expenses. As a percentage of revenue, selling, general and administrative expenses increased from 24.9% for the three months ended March 31, 2000 to approximately 35.3% for the three months ended March 31, 2001. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense rose $1.6 million, or 13.9%, from $11.5 million for the three months ended March 31, 2000 to $13.1 million for the three months ended March 31, 2001, principally as a result of depreciation and amortization of additional investments in Company's cable networks. Depreciation and amortization expense as a percentage of revenues increased from 68.0% for the three months ended March 31, 2000 to 70.1% for the three months ended March 31, 2001. INTEREST EXPENSE. Interest expense was on the same level both corresponding periods and amounted to $0.6 million for the three months ended March 31, 2000 and 2001. INTEREST AND INVESTMENT INCOME. The Company recorded $0.1 million of interest and investment income for the three months ended March 31, 2000 and 2001. FOREIGN EXCHANGE GAIN/LOSS, NET. For the three months ended March 31, 2001, foreign exchange gain amounted to $1.0 million as compared to a foreign exchange loss of $0.4 million for the three months ended March 31, 2000. INCOME TAX EXPENSE. The Company recorded $36,000 of income tax expense for the three months ended March 31, 2001, as compared to $18,000 for the three months ended March 31, 2000. NET LOSS. For the three months ended March 31, 2001 and the three months ended March 31, 2000, the Company had net losses of $13.1 million and $11.5 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 $15.9 million for the three months ended March 31, 2000 to $18.2 million for the three months ended March 31, 2001 due to the accretion of redeemable preferred stock, accrued dividend on mandatorily redeemable debenture stock and the factors discussed above. 26 LIQUIDITY AND CAPITAL RESOURCES The Company has met its cash requirements in recent years primarily with (i) capital contributions, debentures and 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 2003 ("PCI Notes"). The Company had positive cash flows from operating activities of $5,587,000 and $28,000 for three months ended March 31, 2001 and 2000, respectively, due to increase in amounts due to affiliates. 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, and increases in paid in capital from UPC Polska. Cash used for the purchase and expansion of the Company's cable television networks was $9.0 million and $3.8 million for three months ended March 31, 2001 and 2000, respectively. On March 31, 2001, the Company was committed to pay at least $91.0 million in guaranteed payments (including but not limited to payments for programming and rights) over the next eight years of which at least approximately $21.9 million was committed through the end of 2001. 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 has 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 (the "Expiration Date"). 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 of 101% of the principal amount owed on the Expiration Date. 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 UPC Polska 14,000 shares of its Debenture Stock for a total of $140 million on an as-issued basis. The 27 Debenture Stock will be redeemed on December 31, 2003 for a price of $10,000 per share plus interest at 10% annum from November 3, 1999 to the date of redemption, compounded annually. UPC funded UPC Polska's purchase of the Mandatorily Redeemable Debenture Stock. To secure its obligation under the Mandatorily Redeemable Debenture Stock the Company has pledged 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 equity, debt or bank financing or any combination thereof, subject to the restrictions contained in the indentures governing the outstanding senior indebtedness of the Company, 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 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. 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. Effective January 1, 2001, the Company adopted SFAS 133, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. The adoption of SFAS 133 on January 1, 2001, resulted in no impact to income. The Company's debt is all fixed rate and 28 denominated in Euros or U.S. dollars. The Company does not use derivative instruments to manage exposures to foreign currency or interest rate risks. 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 was the quarter ended December 31, 2000. SAB 101 permitted 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 D-DTH 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The principal market risk (i.e., the risk of loss arising from adverse changes in market rates and prices) to which the Company is exposed is foreign exchange rate risk from fluctuations in the Polish zloty currency exchange rate. The Company's long term debt is primarily subject to a fixed rate, and therefore variations in the interest rate do not have a material impact on net interest expense. FOREIGN EXCHANGE AND OTHER INTERNATIONAL MARKET RISKS Operating in international markets involves exposure to movements in currency exchange rates. Currency exchange rate movements typically affect economic growth, inflation, interest rates, governmental actions and other factors. These changes, if material, can cause the Company to adjust its financing and operating strategies. The discussion of changes in currency exchange rates below does not incorporate these other important economic factors. International operations constitute 100% of the Company's consolidated operating loss for the quarter ended March 31, 2001. 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 by approximately $0.4 million. In other terms, a 10% depreciation of the Polish zloty against the U.S. dollar, would result in a $0.4 million decrease in the reported operating loss. This was estimated using 10% of the Company's operating loss after adjusting for unusual impairment and other items including U.S. dollar denominated or indexed expenses. The Company believes that this quantitative measure has inherent limitations because, as discussed in the first paragraph of this section, it does not take into account any governmental actions or changes in either customer purchasing patterns or the Company's financing or operating strategies. The Company does not generally hedge translation risk. While the Company may consider entering into transactions to hedge the risk of exchange rate fluctuations, there is no assurance that it will be 29 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 approximately 10.1% in 2000. The rate of inflation for the three month period ended March 31, 2001 was approximately 1.4%. The exchange rate for the zloty has stabilized and the rate of evaluation of the zloty has generally decreased since 1991. The zloty fluctuated against the U.S. dollar during 2000 and the first quarter of 2001 but the actual exchange rates as of January 1, 2000, December 31, 2000 and March 31, 2001 remained substantially unchanged. Inflation and currency exchange fluctuations may have, a material adverse effect on the business, financial condition and results of operations of the Company. 30 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is involved in litigation from time to time in the ordinary cause of business. In management's opinion, such litigation in which the Company is currently involved, individually and in the aggregate, is not material to the Company's financial condition or results of operations. See also Note 6 to the Company's unaudited consolidated financial statements for a description of the proceeding relating to HBO Polska and of the PCBV minority shareholder claim. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION: Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Reports on Form 8-K The company filed the following Report on Form 8-K during the quarter ended March 31, 2001: Report on Form 8-K, filed on January 26, 2001, regarding the Company's consent solicitation in connection with the proposed transaction among UnitedGlobalCom, Inc., Liberty Media International, Inc., Liberty Media Corporation, and UPC. 31 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. POLAND COMMUNICATIONS, INC. By: /s/ SIMON BOYD ----------------------------------------- Simon Boyd Chief Financial Officer
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