-----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, KpwsKnfXaowyhJ1QTFanBiUMz2HosttaRfRbGvq0khmZ+O1Nno19GPgntc52UI+4 uuGSEtgSfpLLORhU61gvDg== 0000950123-97-007111.txt : 19970820 0000950123-97-007111.hdr.sgml : 19970820 ACCESSION NUMBER: 0000950123-97-007111 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970819 SROS: NONE 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: 1934 Act SEC FILE NUMBER: 333-20307 FILM NUMBER: 97666617 BUSINESS ADDRESS: STREET 1: ONE COMMERCE PLZ CITY: HARTFORD STATE: CT ZIP: 06103-3585 BUSINESS PHONE: 8605491679 MAIL ADDRESS: STREET 1: ONE COMMERCE PLZ CITY: HARTFORD STATE: CT ZIP: 06103-3585 10-Q 1 POLAND COMMUNICATONS, INC. 1 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 JUNE 30, 1997. 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 (I.R.S. Employer Incorporation of Organization) Identification No.) ONE COMMERCIAL PLAZA 06103-3585 HARTFORD, CONNECTICUT (Address of Principal Executive Officers) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (860) 549-1674 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 --------- ---------- The number of shares outstanding of Poland Communications, Inc.'s common stock as of June 30, 1997, was: Common Stock 18,948 shares 2 POLAND COMMUNICATIONS, INC. FORM 10-Q INDEX FOR QUARTERLY PERIOD ENDED JUNE 30, 1997
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 Stockholders' Equity...................................... 6 Consolidated Statements of Cash Flows......... 7 Notes to Consolidated Financial Statements.... 8-9 Poland Cablevision (Netherlands) B.V. Consolidated Balance Sheets................... 10-11 Consolidated Statements of Operations......... 12 Consolidated Statements of Stockholders' Equity...................................... 13 Consolidated Statements of Cash Flows......... 14 Notes to Consolidated Financial Statements.... 15 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition... 16 Item 3. Quantitative and Qualitative Disclosures About Market Risk............................... 23 PART II OTHER INFORMATION Item 5. Other Information............................... 23 Item 6. Exhibits and Reports on Form 8-K................ 24 Signature Page...................................................... 25
2 3 POLAND COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS June 30, 1997 and December 31, 1996 (Amounts in thousands of U.S. dollars) (Unaudited) Assets ------
June 30 December 31, 1997 1996 ------------ ----------- (Unaudited) Current assets: Cash and cash equivalents $ 56,385 $ 68,483 Investment securities 25,115 Accounts receivable, net of allowances of $612 in 1997 -- and $545 in 1996 1,989 1,215 Due from affiliates 168 - Other current assets 2,199 2,247 --------- --------- Total current assets 60,741 97,060 --------- --------- Investment in cable television systems, at cost : Property, plant and equipment: Cable television system assets 114,909 98,291 Construction in progress 1,127 410 Vehicles 1,475 1,199 Other 3,630 2,667 --------- --------- Total property, plant and equipment 121,141 102,567 Less accumulated depreciation (27,866) (19,143) --------- --------- Net property, plant and equipment 93,275 83,424 Inventories for construction 8,798 7,913 Intangibles, net 22,313 12,133 --------- --------- Net investment in cable television systems 124,386 103,470 --------- --------- Notes receivable from affiliates 11,801 8,491 Other investments 2,239 2,157 Other intangibles, net 7,199 6,359 --------- --------- Total assets $ 206,366 $ 217,537 ========= =========
See accompanying notes to consolidated financial statements. 3 4 POLAND COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS, CONTINUED June 30, 1997 and December 31, 1996 (Amounts in thousands of U.S. dollars) (Unaudited) Liabilities and Stockholders' Equity
June 30 December 31 1997 1996 ---- ---- (Unaudited) Current liabilities: Accounts payable $ 11,843 $ 6,281 Accrued interest 3,245 2,175 Deferred revenue 879 1,102 Accrued income taxes 3,501 4,472 Other current liabilities 1,141 2,175 --------- --------- Total current liabilities 20,609 16,205 Notes payable 130,261 130,074 --------- --------- Total liabilities 150,870 146,279 --------- --------- Minority interest 3,061 5,255 Redeemable preferred stock (liquidation value $85,000) (8,500 shares authorized, issued and outstanding) 36,983 34,955 Stockholders' equity : Common stock ($.01 par, 24,051 shares authorized, 18,948 shares issued and outstanding) 1 1 Paid-in capital 52,294 54,322 Cumulative translation adjustment (584) (162) Accumulated deficit (36,259) (23,113) --------- --------- Total stockholders' equity 15,452 31,048 --------- --------- Total liabilities and stockholders' equity $ 206,366 $ 217,537 ========= =========
See accompanying notes to consolidated financial statements. 4 5 POLAND COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the three months ended June 30, 1997 and 1996 and six months ended June 30, 1997 and 1996 (Amounts in thousands of U.S. dollars except share and per share amounts) (Unaudited)
three months ended six months ended June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996 ------------ ------------ ------------- ------------ Cable television revenue 8,903 6,604 16,411 12,025 Operating expenses: Direct operating expenses 3,028 1,730 5,128 3,244 Selling, general and administrative 11,951 1,232 14,925 2,865 Depreciation and amortization 3,073 1,821 6,523 3,550 -------- ------- -------- ------- Total operating expenses 18,052 4,783 26,576 9,659 -------- ------- -------- ------- Operating (loss) income (9,149) 1,621 (10,165) 2,366 Interest and investment income 1,369 180 2,119 223 Interest expense (4,382) (281) (7,587) (1,885) Foreign currency translation loss (117) 34 (422) (60) -------- ------- -------- ------- Income (loss) before income taxes and minority interest (12,279) 1,554 (16,055) 644 Income tax expense 159 (948) (112) (1,453) Minority interest in subsidiary (income) loss 2,123 69 2,599 20 -------- ------- -------- ------- Net earnings (loss) (9,997) 675 (13,568) (789) Preferred stock dividend - - - (1,738) Excess of carrying amount of preferred stock over fair value of consideration transferred - - - 3,549 Accretion of redeemable preferred stock (1,048) (957) (2,028) (957) -------- ------- -------- ------- Net gain (loss) applicable to holders of common stock $(11,045) (282) $(15,596) 65 ======== ======= ======== ======= Net earnings (loss) per share $(582.91) (14.88) $(823.09) 3.53 ======== ======= ======== ======= Weighted average number of common and common equivalent shares outstanding 18,948 18,948 18,948 18,433 ======== ======= ======== =======
See accompanying notes to consolidated financial statements. 5 6 POLAND COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the six months ended June 30, 1997 and 1996 (Amounts in thousands of U.S. dollars) (Unaudited)
Cumulative Preferred Common Paid-In Translation Accumulated Stock Stock Capital Adjustment Deficit Total --------- ------ ------- ----------- ------------ ----- Balance January 1, 1996 $10,311 4,993 1,544 599 (17,257) 190 Translation adjustment -- -- -- (60) 60 -- Net loss -- -- -- -- (789) (789) Stock dividend 1,738 -- (1,738) -- -- -- Issuance of stock -- (4,992) 50,298 -- -- 45,306 Preferred stock redemption (12,049) -- 3,549 -- -- (8,500) Accretion of redeemable Preferred stock (957) (957) -------- ------- ------ ---- ------ ------ Balance June 30, 1996 $ -- 1 52,696 539 (7,986) (35,250) ======== ======= ====== ==== ====== ====== Balance January 1, 1997 $ -- 1 54,322 (162) (23,113) (31,048) Translation adjustment -- -- -- (422) 422 -- Net loss -- -- -- -- (13,568) (13,568) Accretion of redeemable Preferred stock -- -- (2,028) -- -- (2,028) -------- ------- ------ ---- ------ ------ Balance June 30, 1997 $ -- 1 52,294 (584) (36,259) 15,452 ======== ======= ====== ==== ====== ====== See accompanying notes to consolidated financial statements
6 7 POLAND COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the six months ended June 30, 1997 and 1996 (Amounts in thousands of U.S. dollars) (Unaudited)
1997 1996 ---- ---- Cash flows from operating activities: Net loss $(13,568) $ (789) Adjustments to reconcile net loss to net cash (used) provided by operating activities: Minority interest in subsidiary income (loss) (2,599) (20) Depreciation and amortization 6,523 3,550 Deferred income tax - 797 Other 7,444 43 Other-allowance for bad debts (67) - Interest income added to notes payable to affiliates (81) - Changes in operating assets and liabilities: Accounts receivable (579) (227) Other current assets 1,343 (875) Accounts payable (1,820) 1,057 Accrued interest 1,070 - Amounts due to affiliate (165) - Deferred revenue (223) (183) Accrued income taxes (971) - Other current liabilities (1,133) (1,359) -------- -------- Net cash (used) provided by operating activities (4,826) 1,994 -------- -------- Cash flows from investing activities: Construction of cable television systems (14,400) (13,347) Purchase of other capital assets (871) (386) Proceeds from sale of investment securities 25,669 - Other investments (1,221) (4,177) Note receivable from affiliates (9,060) - Purchase of subsidiaries, net of cash received (10,976) (1,267) -------- -------- Net cash used by investing activities (10,859) (19,177) -------- -------- Cash flows from financing activities: Net proceeds from issuance of stock - 72,450 Proceeds from notes payable 2,200 - Costs to obtain loans (1,275) (80) Repayment of notes payable (562) (12,257) Repayments to affiliates 3,224 (38,920) -------- -------- Net cash (used) provided by financing activities 3,587 21,193 -------- -------- Net (decrease) increase in cash and cash equivalents (12,098) 4,010 Cash and cash equivalents at beginning of period 68,483 2,343 -------- -------- Cash and cash equivalents at end of period $ 56,385 $ 6,353 ======== ======== Interest paid during the period $ 6,619 6,067 Income taxes paid during the period 1,132 199 Supplemental cash flow information:
See accompanying notes to consolidated financial statements. 7 8 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 (unaudited) The information furnished by Poland Communications, Inc. ("PCI" or the "Company") in the accompanying unaudited Consolidated Balance Sheets, Statements of Operations, Statements of Stockholders' Equity and Statements of Cash Flows reflects all adjustments (consisting only of items of a normal recurring nature) which are, in the opinion of management, necessary for a fair statement of the Company's results of operations and financial position for the interim periods. The financial statements should be read in conjunction with the audited financial statements and notes for the year ended December 31, 1996. The interim financial results are not necessarily indicative of results of the full year. 1. THE REORGANIZATION The Company's parent, @Entertainment, Inc., completed an initial public offering of stock in the United States and internationally (the "Offerings") which closed on August 5, 1997. Prior to the Offerings, all the holders of shares of PCI's common stock and @Entertainment entered into a Contribution Agreement dated as of June 22, 1997 (the "Contribution Agreement"). Pursuant to the Contribution Agreement, each holder of shares of PCI's common stock transferred all shares of PCI's common stock owned by it to @Entertainment, Inc. In addition, ECO Holdings III Limited Partnership ("ECO") transferred all of the outstanding shares of PCI's voting Series B Preferred Stock (the "PCI Series B Preferred Stock") to @Entertainment, Inc. All of these transfers were designed to qualify as a tax-free exchange under section 351 of the Internal Revenue Code of 1986, as amended (the "Share Exchange"). Each holder of PCI's common stock received 1,000 shares of common stock of @Entertainment, Inc. in exchange for each share of PCI's common stock transferred by it (the "Capital Adjustment"). ECO also received an equivalent number of shares of @Entertainment, Inc.'s Series B Preferred Stock ("@Entertainment Series B Preferred Stock) in exchange for its series of PCI Series B Preferred Stock. The @Entertainment Series B Preferred Stock has identical rights and preferences to those of the PCI Series B Preferred Stock, except that the ratio for conversion of such shares into common stock increased from 1:1.9448 to 1:1,944.8 in order to reflect the Capital Adjustment. The 2,500 outstanding shares of @Entertainment Series B Preferred Stock automatically converted into 4,862,000 shares of Common Stock of @Entertainment, Inc. upon the closing of the Offerings (the "Automatic Conversion"). On June 20, 1997, Polish Investments Holding L.P. ("PIHL") transferred all of the outstanding shares of PCI's Series C Preferred Stock to an entity owned by certain of the beneficial owners of PIHL and members of their families (the "Chase Entity"). The Chase Entity, ECO and @Entertainment, Inc. entered into a Purchase Agreement dated as of June 22, 1997 (the "Purchase Agreement"). Among other matters, the Purchase Agreement obligated @Entertainment, Inc. to purchase all of the outstanding shares of PCI's Series A Preferred Stock and Series C Preferred Stock for cash from ECO and the Chase Entity, respectively, at the closing of the Offerings (the "Cash Purchase"). The aggregate purchase price of $ 60.0 million for PCI's Series A Preferred Stock and Series C Preferred Stock equals the aggregate redemption price of such shares as set forth in PCI's certificate of incorporation. The Cash Purchase occurred shortly after the closing of the Offerings and was funded with a portion of the net proceeds of the Offerings. In June 1997, certain employment agreements for the executive officers of @Entertainment, Inc. who were employed by PCI and PCI's employee stock option plans were assigned to @Entertainment, Inc. by PCI (the "Assignment"). As part of the Assignment and the Capital Adjustment, the employment agreements and employee stock option plans were amended to provide that each option to purchase a share of PCI's common stock was exchanged for an option for 1,000 shares of @Entertainment, Inc.'s Common Stock, with a proportionate reduction in the per share exercise price. The Share Exchange, the Capital Adjustment and the Assignment are collectively referred to as the "Reorganization". As a result of the Reorganization, @Entertainment, Inc. owns all of the outstanding shares of voting stock of PCI. 8 9 2. ACQUISITION On June 11, 1997, the Company purchased approximately 60% of a cable television system company ("Gosat") that services approximately 70,000 subscribers in several cities and towns in western Poland for approximately $10.9 million. The purchase price represents an approximately $1.4 million payment for shares of Gosat, an approximately $9.4 million payment for non-compete agreements, and the remainder for costs of the acquisition. In addition, the Company has committed to loan an additional $7.0 million to the newly acquired company. This loan, which will be advanced in installments until March 31, 1998, has no set repayment terms, and is interest free until January 31, 2000. Subsequent to January 31, 2000, the loan bears interest at LIBOR plus 2%, and is due on demand. The results of the acquired company have been included in the Company's results since June 11, 1997. Had the June 1997 acquisition occurred on January 1, 1996, the Company's pro forma consolidated results for the six months ended June 30, 1996 and six months ended June 30, 1997 would have been as follows:
June 30, 1997 June 30, 1996 ------------- ------------- (unaudited) Revenue . . . . . . . . . . . . . . . . . . . . 17,935 13,816 Income (loss) before income taxes and minority interest . . . . . . . . . . . . . . (15,890) 694 Net income (loss) . . . . . . . . . . . . . . . (13,538) (806) Net income (loss) applicable to holders of common stock . . . . . . . . . . . . . . . . . (15,566) 48 Net income (loss) per share . . . . . . . . . $(821.51) $2.60
3. COMMITMENTS In April 1997, the Company reached an agreement in principle with Ground Zero Media Sp. z o.o. ("GZM"), a joint venture with Polygram, the recording company, Atomic Entertainment LLP, and Planet 24 Production Limited, an independent production company, whereby the Company will assume responsibility for selling all advertising to be shown on Atomic TV for a period of one year, and will gain the right to retain all of the revenue from such advertising. Atomic TV began satellite broadcasting to Poland on April 7, 1997. In exchange for such rights the Company will pay GZM $4.95 million over the one year period. The Company expects such agreement in principle to be formalized in a written contract. The Company, through a wholly-owned subsidiary, owns 45% of GZM. 4. OTHER On April 11, 1997 Poland Cablevision B.V. ("PCBV"), a subsidiary of the Company elected to be treated as a partnership for United States federal income tax purposes instead of a corporation. The deemed conversion from the status of corporation to partnership was effective as of January 29, 1997. Although PCBV has made this election, it will continue in existence in its present legal form under Dutch Company Law, and will not make any actual liquidating distributions to its stockholders. 9 10 POLAND CABLEVISION (NETHERLANDS) B.V. CONSOLIDATED BALANCE SHEETS June 30, 1997 and December 31, 1996 (Amounts in thousands of U.S. dollars) (Unaudited)
Assets June 30, December 31, 1997 1996 -------- -------- (Unaudited) Current assets: Cash and cash equivalents $ 3,904 $ 7,015 Accounts receivable, net of allowances of $496 in 1997 and $437 in 1996 713 706 Other current assets 1,398 1,282 -------- -------- Total current assets 6,015 9,003 -------- -------- Investment in cable television systems, at cost: Property, plant and equipment: Cable television system assets 94,819 84,511 Construction in progress 152 9 Vehicles 1,319 1,095 Other 2,777 2,519 -------- -------- Total property, plant and equipment 99,067 88,134 Less accumulated depreciation (23,112) (18,779) -------- -------- Net property, plant and equipment 75,955 69,355 Inventories for construction 6,167 4,974 Intangibles, net 9,948 10,534 -------- -------- Net investment in cable television systems 92,070 84,863 -------- -------- Other investments 1,409 1,409 -------- -------- Total assets $ 99,494 $ 95,275 ======== ========
See accompanying notes to consolidated financial statements. 10 11 POLAND CABLEVISION (NETHERLANDS) B.V. CONSOLIDATED BALANCE SHEETS, CONTINUED June 30, 1997 and December 31, 1996 (Amounts in thousands of U.S. dollars) (Unaudited) Liabilities and Stockholders' Equity
June 30 December 31 1997 1996 ---- ---- (Unaudited) Current liabilities: Accounts payable $ 2,452 $ 2,685 Deferred revenue 416 823 Other current liabilities 89 9 --------- --------- Total current liabilities 2,957 3,517 Due to affiliate 17,471 11,159 Notes payable to affiliate 115,487 107,891 --------- --------- Total liabilities 135,915 122,567 --------- --------- Minority interest 2,555 2,920 Stockholders' equity : Common stock ($.50 par, 200,000 shares authorized, issued and outstanding) 100 100 Cumulative translation adjustment (1,119) (344) Accumulated deficit (37,957) (29,968) --------- --------- Total stockholders' equity (38,976) (30,212) --------- --------- Total liabilities and stockholders' equity $ 99,494 $ 95,275 ========= =========
See accompanying notes to consolidated financial statements. 11 12 POLAND CABLEVISION (NETHERLANDS) B.V. CONSOLIDATED STATEMENTS OF OPERATIONS For the three months ended June 30, 1997 and 1996 and six months ended June 30, 1997 and 1996 (Amounts in thousands of U.S. dollars except per share amounts) (Unaudited)
three months ended six months ended June 30/97 June 30/96 June 30/97 June30/96 Cable television revenue 7,101 6,018 13,380 11,517 Operating expenses: Direct operating expenses 1,813 1,604 3,535 3,070 Selling, general and administrative 6,097 1,011 8,249 2,710 Depreciation and amortization 2,205 1,799 4,921 3,486 -------- -------- ------- ------- Total operating expenses 10,115 4,414 16,705 9,266 -------- -------- ------- ------- Operating income (loss) (3,014) 1,604 (3,325) 2,251 Interest and investment income 33 52 90 87 Interest expense (2,711) (2,471) (5,410) (4,704) Foreign currency translation loss (315) 80 (775) (59) -------- -------- ------- ------- Loss before income taxes and minority interest (6,007) (735) (9,420) (2,425) Income tax expense (56) (163) (105) (163) Minority interest in subsidiary (income) loss 539 (43) 761 (237) -------- -------- ------- ------- Net loss (5,524) (941) (8,764) (2,825) -------- -------- ------- ------- Net loss per share $ (27.62) $ (4.71) $(43.82) $(14.19) ======== ======== ======= ======= Weighted average number of common and common equivalent shares outstanding 200,000 200,000 200,000 200,000 ======== ======== ======= =======
See accompanying notes to consolidated financial statements. 12 13 POLAND CABLEVISION (NETHERLANDS) B.V. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the six months ended June 30, 1997 and 1996 (Amounts in thousands of U.S. dollars) (Unaudited)
Cumulative Common Translation Accumulated Stock Adjustment Deficit Total ----------------------------------------------- Balance January 1, 1996 $100 594 (18,914) (18,220) Translation adjustment -- -- -- -- Net loss -- (2,825) (2,825) ---- ------ ------- ------- Balance June 30, 1996 $100 594 (21,739) (21,045) ---- ------ ------- ------- Balance January 1, 1997 $100 (344) (29,968) (30,212) Translation adjustment -- (775) 775 -- Net loss -- -- (8,764) (8,764) ---- ------ ------- ------- Balance June 30, 1997 $100 (1,119) (37,957) (38,976) ==== ====== ======= =======
See accompanying notes to consolidated financial statements. 13 14 POLAND CABLEVISION (NETHERLANDS) B.V. CONSOLIDATED STATEMENTS OF CASH FLOWS For the six months ended June 30, 1997 and 1996 (Amounts in thousands of U.S. dollars) (Unaudited)
1997 1996 ---- ---- Cash flows from operating activities: Net loss $ (8,764) $ (2,825) Adjustments to reconcile net loss to net cash provided by operating activities: Minority interest in subsidiary income (loss) (761) 237 Depreciation and amortization 4,921 3,486 Bad debt provision (90) - Other 57 (597) Interest expense added to notes payable to affiliate 5,438 2,990 Changes in operating assets and liabilities: Accounts receivable 83 (126) Other current assets (116) (397) Accounts payable (233) (331) Amounts due to affiliate 7,389 - Deferred revenue (407) (328) Other current liabilities 80 (3,912) -------- -------- Net cash provided by operating activities 7,597 (1,803) -------- -------- Cash flows from investing activities: Construction of cable television systems (12,102) (10,836) Purchase of other capital assets (691) (341) Purchase of subsidiaries net of cash received - (1,227) Other investments (115) (4,330) -------- -------- Net cash used by investing activities (12,908) (16,734) -------- -------- Cash flows from financing activities: Repayment of notes payable -- (614) Borrowings from affiliates 2,200 19,372 -------- -------- Net cash provided by financing activities 2,200 18,758 -------- -------- Net decrease in cash and cash equivalents (3,111) 221 Cash and cash equivalents at beginning of period 7,015 2,278 -------- -------- Cash and cash equivalents at end of period $ 3,904 $ 2,499 ======== ======== Supplemental cash flow information: Cash paid for interest $ 140 5,930 Cash paid for income taxes $ 104 69
See accompanying notes to consolidated financial statements. 14 15 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 (unaudited) The information furnished by Poland Cablevision (Netherlands) B.V. ("PCBV") in the accompanying unaudited Consolidated Balance sheets, Statements of Operations, Statements of Stockholders' Equity and Statements of Cash Flows reflects all adjustments (consisting only of items of a normal recurring nature) which are, in the opinion of management, necessary for a fair statement of PCBV's results of operations and financial position for the interim periods. The financial statements should be read in conjunction with the audited financial statements and notes of PCBV for the year ended December 31, 1996. The interim financial results are not necessarily indicative of results for the full year. 1. NET LOSS PER SHARE The computation of net loss per share is based on the weighted average number of shares in common stock outstanding. 2. SUBSEQUENT EVENTS On April 11, 1997, PCBV was elected to be treated as a partnership for United States federal income tax purposes instead of a corporation. The deemed conversion from the status of corporation to partnership was effective as of January 29, 1997. Although PCBV has made this election, it will continue in existence in its present legal form under Dutch Company Law, and will not make any actual liquidating distributions to its stockholders 15 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the consolidated financial statements of the Company, including the notes thereto, included herein. The following discussion contains certain forward-looking statements that involve risks and uncertainties. The Company's actual future results could differ materially from those discussed herein. OVERVIEW The Company is organized based upon its two principal lines of business: operation of cable television systems in Poland and the creation, production, development and acquisition of Polish language programming. Substantially all of the Company's revenue is derived from monthly subscription fees for cable television services and one-time installation fees for connection to its cable television networks. The Company charges subscribers fixed monthly fees for their choice of service tiers 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 tiers of service. At June 30, 1997, the Company had approximately 1,300,000 homes passed and approximately 690,000 cable television subscribers of which approximately 79.1% received basic service. The Company has experienced low churn rates during all years of its operations. The Company's annual churn rates for 1994, 1995, 1996 and the first six months of 1997 were 9.1%, 9.2%, 7.8% and 8.6%, respectively. The Company's annual churn rates have historically averaged less than 10%. The Company believes that its churn rates are low because of the Company's customer care program, the high technical quality of its networks and desirable program offerings. In addition, the Company benefits from a shortage of housing in Poland that results in low move-related churn. These churn rates also reflect a pricing strategy that was designed to keep the Company's profit margin relatively constant in U.S. Dollar terms in more mature systems and to increase rates in more recently acquired or rebuilt systems. Since the beginning of 1997, the Company has adopted a new cable television pricing strategy designed to maximize revenue per subscriber and achieve real profit margin increases in U.S. Dollar terms. As a result, the Company expects that it may experience increases in its churn rate above historical levels during the implementation of its new pricing strategy across its cable networks. The Company currently creates, produces, develops and acquires programming for its two proprietary Polish language channels for distribution across its cable networks. The Company has also set up a wholly owned subsidiary, Mozaic Entertainment, Inc., to develop proprietary programming, either directly or through joint ventures. 16 17 ACQUISITIONS The Company is currently negotiating to acquire two cable television systems in Poland, as well as a 50% equity position in a Polish publishing company with which it intends to develop programming and ancillary services (the "Acquisitions"). The aggregate consideration to be paid by the Company in connection with the Acquisitions is expected to be approximately $29.2 million. The cable systems expected to be acquired serve approximately 60,000 subscribers, and approximately 100,000 homes passed. The consummation of the Acquisitions will result in the expansion of the Company's cable operations within its existing regional clusters. PCI intends to use a portion of the net proceeds of the offering of its 9-7/8% Senior Notes Due 2003 (the "Old Notes") issued in October 1996 to consummate these Acquisitions, although there can be no assurance as to the timing of closing of any of the pending Acquisitions or that the pending Acquisitions will actually be consummated. If all of the Acquisitions are consummated, the Company estimates that it will spend approximately $5.5 million within 12 months of the consummation of the Acquisition to upgrade the acquired networks to meet the Company's technical standards. Such upgrading would enable the Company to increase the number of programs offered, the quality of the transmissions and the operating cost effectiveness of the acquired networks. However the Company believes that the networks to be acquired in the Acquisitions currently meet Polish State Agency of Radio Communications ("PAR") standards and, accordingly, that the timing and extent of such upgrades would be subject to the Company's discretion. 17 18 FIRST SIX MONTHS OF 1997 COMPARED TO FIRST SIX MONTHS OF 1996 CABLE TELEVISION REVENUE. Revenue increased $2.3 million or 34.9% from $6.6 million in three months ended June 30, 1996 to $8.9 million in three months ended June 30, 1997 and $4.4 million or 36.5% from $12.0 million in the first six months of 1996 to $16.4 million in the first six months of 1997. This increase was primarily attributable to a 72.8% increase in the number of basic subscribers from approximately 316,000 as of June 30, 1996 to approximately 546,000 as of June 30, 1997. Approximately 75% of this increase in basic subscribers were the result of acquisitions and the reminder was due to build-out of the Company's existing cable networks. Approximately 70,000 of these new subscribers were acquired in June 1997 and, as a result, they had a minimal impact on the Company's revenues for this period. Revenue from monthly subscription fees represented 73.6% of cable television revenues for the three months ended June 30, 1996 and 79.0% for the first six months of 1996. Monthly subscription revenue for the three months ended June 30, 1997 constituted 87.4% of total revenue, while for the six months ended June 30, 1997 the percentage was 86.5%. Installation fee revenue for the three months ended June 30, 1997 decreased by 23.8% compared to the corresponding quarter in 1996 from $0.9 million to $0.7 and decreased by 15.0% from $1.7 million in the first six months of 1996 to $1.5 million in the first six months of 1997. The Company expects that installation fees related to new non-premium subscribers will continue to constitute a declining part of the Company's revenue. During the three months ended June 30, 1997, the Company generated approximately $66,000 of additional premium subscription revenue and approximately $150,000 of additional premium channel installation revenue as a result of launching HBO in two regional clusters. DIRECT OPERATING EXPENSES. Direct operating expenses increased $1.3 million, or 75.0%, from $1.7 million during the three months ended June 30, 1996 compared to $3.0 million in the three months ended June 30, 1997 and increased $1.9 million, or 58.1%, from $3.2 million in the first six months of 1996 to $5.1 million in the first six months of 1997, principally as a result of higher levels of technical personnel and increased maintenance expenses associated with recently acquired networks which have not yet been integrated within the Company's systems and standards as well as the increased size of the Company's cable television system, and costs associated with the lease of three transponders on the Astra II-E and II-F satellites which will provide the capability to deliver the Company's Polish language programming platform to Polish customers through the Company's cable television systems and through @Entertainment, Inc.'s planned the direct-to-home satellite broadcast system. Direct operating expenses increased from 26.2% of revenues in the three months ended June 30, 1996 to 34.0% in the three months ended June 30, 1997 and from 27.0% of revenues for the first six months of 1996 to 31.2% of revenues for the first six months of 1997. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased $10.7 million from $ 1.2 million in three months ended June 30, 1996 to $11.9 million in three months ended June 30, 1997 and increased $12.1 million from $2.9 million in the first six months of 1996 to $14.9 million in the first six months of 1997, in part as a result of an increase in sales and marketing expenses incurred in newly acquired networks, costs associated with the agreement relating to sale of advertising on Atomic TV described in Note 3 to the Company's consolidated financial statements and costs of launching the distribution of the HBO premium pay movie channel in Poland. In addition, compensation expense was recorded in the three months ended June 30, 1997 of approximately $7.3 million for options to purchase shares granted to two key executives. (Such options have been transferred to the Company's parent, @ Entertainment, Inc., as described in Item 5.) Compensation expense also increased as the Company has established a management team of senior executives who have significant experience in the cable television and programming business. As a percentage of revenue, selling, general and administrative expenses increased from 19.9% for the three months ended June 30, 1996 to approximately 134.2% for the three months ended June 30, 1997 and 23.8% for the first six months of 1996 to approximately 90.9% for the first six months of 1997. However, without considering the non-cash compensation expense related to the stock options described above, selling, general and administrative expenses as a percentage of revenues would have been 52.5% in the three months ended June 30, 1997 and 46.6% in the first six months of 1997. 18 19 DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses rose $1.3 million, or 68.8%, from $1.8 million to $3.1 million in the three months ended June 30, 1996 and 1997, respectively, and $3.0 million, or 83.7%, from $3.6 million in the first six months of 1996 to $6.5 million in the first six months of 1997, principally as a result of depreciation of additional cable television assets acquired in connection with the build-out of the Company's networks and acquisitions. Depreciation and amortization expenses as a percentage of revenues increased from 27.6% in the three months ended June 30, 1996 to 34.5% in corresponding period in 1997 and from 29.5% in the first six months of 1996 to 39.7% in the first six months of 1997. INTEREST EXPENSE. Interest expense increased $4.1 million from $0.3 million in the three months ended June 30, 1996 to $4.4 million in the three months ended June 30, 1997 and $5.7 million from $1.9 million in the first six months of 1996 to $7.6 million in the first six months in 1997 primarily due to the issuance of $130 million aggregate principal amount of Old Notes in October 1996. INTEREST AND INVESTMENT INCOME. Interest and investment income increased $1.9 million from $0.2 million in the first six months of 1996 to $2.1 million in the first six months of 1997, primarily due to the interest and investment income derived from the investment of a portion of the proceeds from the issuance of Old Notes in October 1996. FOREIGN CURRENCY TRANSLATION LOSS. Foreign currency translation loss increased $151,000, from a $34,000 gain in the three months ended June 30, 1996 to a $(117,000) loss in the three months ended June 30, 1997 and $362,000, from a $(60,000) loss in the first six months of 1996 to a $(422,000) loss in the first six months of 1997, primarily due to increased assets subject to translation during the period resulting from the growth of the Company and less favorable exchange rate fluctuations. MINORITY INTEREST IN SUBSIDIARY INCOME (LOSS). Minority interest in subsidiary loss was $2.1 million for the three months ended June 30, 1997 and $2.6 million for the first six months of 1997, resulting from loss incurred in two minority-owned subsidiaries, compared to minority interest in subsidiary loss of $69,000 for the three months ended June 30, 1996 and $20,000 for the first six months of 1996. NET LOSS. During the three months ended June 30, 1996, the Company earned net income of $0.7 million compared to net loss of $(10.0) million incurred during the three months ended June 30, 1997. For the first six months of 1996 and 1997, the Company had net losses of $(0.8) million and $(13.6) million, respectively. These losses and income were the result of the factors discussed above. EBITDA. EBITDA decreased by $2.6 million, from $6.2 million for the first six months of 1996 to $3.6 million for the first six months of 1997. EBITDA consists of net income (loss) as measured by U.S. GAAP adjusted for interest and investment income, depreciation and amortization, interest expense, foreign currency translation gains and losses, income taxes, extraordinary items, non-recurring items, gains and losses from the sale of assets other than in the normal course of business and minority interest in subsidiary income and loss. 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 cable television companies. EBITDA is not intended to represent cash flow from operations under U.S. GAAP and should not be considered as an alternative to net income (loss) as an indicator of the Company's operating performance or cash flows from operations as a measure of liquidity. The Company treats the $7.3 million non-cash compensation expense relating to the grant of stock options in the first half of 1997 as a non-recurring item as such options were transferred to its parent and it expects that future grants of stock options will not give rise to compensation expense. 19 20 LIQUIDITY AND CAPITAL RESOURCES The Company has met its cash requirements in recent years primarily with (i) capital contributions and loans from equity investors, (ii) borrowings under available credit facilities and (iii) cash flow from operations. In addition, in October 1996 PCI sold the Old Notes. The Company had negative cash flow from operating activities for the first six months of 1997 of $(4.8) million due to the Company's net loss. PCI has entered into an agreement with Amerbank, which provides for a credit facility of approximately $6.5 million. Funds are available under the credit agreement through December 31, 1998 and interest, based on LIBOR plus 3%, is due quarterly. All advances under the loan must be repaid by August 20, 1999. As of the date hereof, there is no amount outstanding under this facility. PCI will be able to utilize this facility for future borrowings. On October 31, 1996, $130 million aggregate principal amount of Old Notes were sold by PCI to the initial purchaser pursuant to a purchase agreement. The initial purchaser subsequently completed a private placement of the Old Notes. In June 1997 substantially all of the outstanding Old Notes were exchanged for an equal aggregate principal amount of publicly-registered notes. Both the Old Notes and the publicly-registered notes were issued pursuant to the Indenture dated as of October 31, 1997 between PCI and State Street Bank & Trust Company, trustee (the "Indenture"). Pursuant to the Indenture, PCI is subject to certain covenants, including without limitation, covenants with respect to the following matters: (i) limitation on additional indebtedness; (ii) limitation on restricted payments; (iii) limitation on issuance and sales of capital stock and subsidiaries; (iv) limitation on transactions with affiliates; (v) limitation on liens; (vi) limitation on guarantees of indebtedness by subsidiaries; (vii) purchase of Notes upon a change of control; (viii) limitation on sales and assets; (ix) limitation on dividends and other payment restrictions affecting subsidiaries; (x) limitation on investments in unrestricted subsidiaries; (xi) limitations on lines of business; and (xii) provision of financial statements and reports. Pursuant to the AmerBank credit facility, PCI is subject to certain informational and notice requirements but is not subject to restrictive covenants. PCI is in compliance with all covenants in the Indenture and the AmerBank credit facility. As a result of the offering of the Old Notes, the Company incurred substantial debt. At June 30, 1997, the Company had, on consolidated basis, approximately $130.3 million in principal amount of indebtedness outstanding, net of discount. Since the commencement of its operations in 1990, the Company has required external funds to finance the build-out of its existing networks and to finance acquisitions of new cable television networks. Prior to the Reorganization described in Item 5, the Company had relied on the equity investments and loans from stockholders and their affiliates and borrowings under available credit facilities to provide the funding for these activities. The Company does not expect that its former stockholders and their affiliates will continue to make capital contributions and loans to the Company. There can be no assurance that the Company's parent, @Entertainment, Inc., will make capital contributions and loans to the Company. 20 21 Cash used for the build-out of the Company's cable television networks was $14.4 million in the first six months of 1997. In 1997, the Company also expects to spend an additional approximately $27.5 million building-out and upgrading existing cable television networks. Approximately $7.5 million of such expenditure relates to the upgrading of the networks in the Katowice regional cluster to meet PAR and Company standards. The rest of such expenditure for new construction and upgrading is discretionary. The Company expects that the rebuild program for Katowice regional cluster will be completed in 1997 at a total cost of approximately $10 million. Aside from the Katowice upgrade, the Company is not obligated to make any system upgrades in 1997 or in 1998. However, the Company intends to continue to acquire additional cable systems, upgrade its cable networks and increase its programming capacity. Since March 31, 1997, the Company has acquired all or a substantial portion of the capital stock or assets of three cable television systems in Poland for aggregate consideration of $11.0 million. The Company is currently negotiating to acquire two cable television systems in Poland, as well as a 50% equity position in a Polish publishing company with which it intends to develop programming and ancillary services (the "Acquisitions"). The aggregate consideration to be paid by the Company in connection with the Acquisitions is expected to be approximately $29.2 million. The cable systems expected to be acquired serve approximately 60,000 subscribers, and approximately 100,000 homes passed. The consummation of the Acquisitions will result in the expansion of the Company's cable operations within its existing regional clusters. PCI intends to use a portion of the net proceeds of the offering of the Old Notes issued in October 1996 to consummate these Acquisitions, although there can be no assurance as to the timing of closing of any of the pending Acquisitions or that the pending Acquisitions will actually be consummated. If all of the Acquisitions are consummated, the Company estimates that it will spend approximately $5.5 million within 12 months of the consummation of the Acquisitions to upgrade the acquired networks to meet the Company's technical standards. Such upgrading would enable the Company to increase the number of programs offered, the quality of the transmissions and the operating cost effectiveness of the acquired networks. However the Company believes that the networks to be acquired in the Acquisitions currently meet PAR standards and, accordingly, that the timing and extent of such upgrades would be subject to the Company's discretion. 21 22 INFLATION AND CURRENCY EXCHANGE FLUCTUATIONS Since the fall of Communist rule in 1989, Poland has experienced high levels of inflation and significant fluctuation in the exchange rate for the zloty. The Polish government has adopted policies that slowed the annual rate of inflation from approximately 250% in 1990 to approximately 20% in 1996. A substantial portion of the Company's operating expenses and capital expenditures are, and are expected to be, denominated in zloty and tend to increase with inflation. The exchange rate for the zloty has stabilized and the rate of devaluation of the zloty has decreased since 1991. However, the zloty exchange rate and rate of devaluation have increased in the first six months of 1997. In the first six months of 1997, Poland had inflation of 6.6%. The Zloty per U.S. Dollar exchange rate quoted at noon by the National Bank of Poland was 2.8750, 3.0760 and 3.2860 for December 31, 1996, March 31, 1997 and June 30, 1997 respectively. Inflation and currency exchange fluctuations have had, and may continue to have, an effect on the financial condition and results of operations of the Company. Substantially all of the Company's debt obligations and certain of the Company's operating expenses and capital expenditure are, and are expected to continue to be, denominated in or indexed to 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 the Company to use a larger portion of its revenues to service its U.S. Dollar-denomination obligations. While the Company may consider entering into transactions to hedge the risk of exchange rate fluctuations, it is unlikely that the Company will be able to obtain hedging arrangements on commercially satisfactory terms. Accordingly, shifts in currency exchange rates may have an adverse effect on the ability of the Company to service its U.S. Dollar-denomination obligations and, thus, on the Company's financial condition and results of operations. IMPACT OF NEW ACCOUNTING STANDARD NOT YET ADOPTED In February 1997, the Financial Accounting Board issues its Statement No. 128, "Earnings per Share". Among other provisions, SFAS No. 128 simplifies the standards for computing earnings per share. The Company does not expect the adoption of SFAS No. 128 to have material impact on its financial statements. 22 23 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK NOT APPLICABLE PART II OTHER INFORMATION ITEM 5. OTHER INFORMATION: The Company's parent, @Entertainment, Inc., completed an initial public offering of stock in the United states and internationally (the "Offerings") which closed on August 5, 1997. Prior to the Offerings, all the holders of shares of PCI's common stock and @Entertainment entered into a Contribution Agreement dated as of June 22, 1997 (the "Contribution Agreement"). Pursuant to the Contribution Agreement, each holder of shares of PCI's common stock transferred all shares of PCI's common stock owned by it to @Entertainment, Inc. In addition, ECO Holdings III Limited Partnership ("ECO") transferred all of the outstanding shares of PCI's voting Series B Preferred Stock (the "PCI Series B Preferred Stock") to @Entertainment, Inc. All of these transfers were designed to qualify as a tax-free exchange under section 351 of the Internal Revenue Code of 1986, as amended (the "Share Exchange"). Each holder of PCI's common stock received 1,000 shares of common stock of @Entertainment, Inc. in exchange for each share of PCI's common stock transferred by it (the "Capital Adjustment"). ECO also received an equivalent number of shares of @Entertainment, Inc.'s Series B Preferred Stock ("@Entertainment Series B Preferred Stock) in exchange for its series of PCI Series B Preferred Stock. The @Entertainment Series B Preferred Stock has identical rights and preferences to those of the PCI Series B Preferred Stock, except that the ratio for conversion of such shares into common stock increased from 1:1.9448 to 1:1,944.8 in order to reflect the Capital Adjustment. The 2,500 outstanding shares of @Entertainment Series B Preferred Stock automatically converted into 4,862,000 shares of Common Stock of @Entertainment, Inc. upon the closing of the Offerings (the "Automatic Conversion"). On June 20, 1997, Polish Investments Holding L.P. ("PIHL") transferred all of the outstanding shares of PCI's Series C Preferred Stock to an entity owned by certain of the beneficial owners of PIHL and members of their families (the "Chase Entity"). The Chase Entity, ECO and @Entertainment, Inc. entered into a Purchase Agreement dated as of June 22, 1997 (the "Purchase Agreement"). Among other matters, the Purchase Agreement obligated @Entertainment, Inc. to purchase all of the outstanding shares of PCI's Series A Preferred Stock and Series C Preferred Stock for cash from ECO and the Chase Entity, respectively, at the closing of the Offerings (the "Cash Purchase"). The aggregate purchase price of $60.0 million for PCI's Series A Preferred Stock and Series C Preferred Stock equals the aggregate redemption price of such shares as set forth in PCI's certificate of incorporation. The Cash Purchase occurred shortly after the closing of the Offerings and was funded with a portion of the net proceeds of the Offerings. In June 1997, certain employment agreements for the executive officers of @Entertainment, Inc. who were employed by PCI and PCI's employee stock option plans were assigned to @Entertainment, Inc. by PCI (the "Assignment"). As part of the Assignment and the Capital Adjustment, the employment agreements and employee stock option plans were amended to provide that each option to purchase a share of PCI's common stock was exchanged for an option for 1,000 shares of @Entertainment, Inc.'s Common Stock, with a proportionate reduction in the per share exercise price. The Share Exchange, the Capital Adjustment and the Assignment are collectively referred to as the "Reorganization". As a result of the Reorganization, @Entertainment, Inc. owns all of the outstanding shares of voting stock of PCI. 23 24 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the second quarter of 1997. 24 25 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/ Robert W. Fowler III -------------------------------------- Robert W. Fowler III Chief Executive Officer By: /s/ John Frelas -------------------------------------- John Frelas Chief Financial Officer and Treasurer Date: August 18, 1997 25 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 56,385 0 1,989 612 8,798 60,741 121,141 (27,866) 206,366 20,609 130,261 36,983 0 1 15,452 206,366 0 16,411 0 (26,509) 0 67 7,587 (16,055) (112) (13,568) 0 0 (2,028) (15,596) (823.09) 0
-----END PRIVACY-ENHANCED MESSAGE-----