-----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, L61wpJ66KBB3914jefwjk7z/ASEY76om/4VsuTpjlN6oEhwd4uInfxD4K0lgZcQp H9E+SjG5pQcqhvQVP7ycFQ== 0001047469-99-012403.txt : 19990331 0001047469-99-012403.hdr.sgml : 19990331 ACCESSION NUMBER: 0001047469-99-012403 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: POLAND COMMUNICATIONS INC CENTRAL INDEX KEY: 0001031232 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 061070447 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-20307 FILM NUMBER: 99578472 BUSINESS ADDRESS: STREET 1: ONE COMMERCE PLZ CITY: HARTFORD STATE: CT ZIP: 06103-3585 BUSINESS PHONE: 8605491679 MAIL ADDRESS: STREET 1: ONE COMMERCE PLZ CITY: HARTFORD STATE: CT ZIP: 06103-3585 10-K 1 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 --------------------- (Mark One) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 333-20307 ------------------------ POLAND COMMUNICATIONS, INC. (Exact name of registrant as specified in its charter)
NEW YORK 06-1070447 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) ONE COMMERCIAL PLAZA 06103 HARTFORD, CONNECTICUT (Zip Code) (Address of Principal Executive Offices)
------------------------ Registrant's telephone number, including area code (860) 549-1674 Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED None None Securities registered pursuant to Section 12(g) of the Act: Not Applicable Indicate by check mark (X) whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of a specified date within 60 days prior to the date of filing. (See definition of affiliate in Rule 405.) Zero The number of shares outstanding of Poland Communications, Inc.'s common stock as of December 31, 1998 was: Common Stock 18,948 DOCUMENTS INCORPORATED BY REFERENCE None. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I Poland Communications, Inc. ("PCI") is a New York corporation and wholly-owned subsidiary of @ Entertainment, Inc. ("@ Entertainment"), a Delaware corporation whose common stock is listed on the National Association of Securities Dealers Automated Quotation System ("Nasdaq") National Market and traded under the symbol ATEN. References to the "Company" mean PCI and its subsidiaries. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements in this Annual Report on Form 10-K constitutes 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. Words such as "believes," "expects," "intends," "plans," "anticipates," "likely," "will", "may", "shall", and similar expressions are intended to identify such forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company (or entities in which the Company has interests), or industry results, to differ materially from future results, performance or achievements expressed or implied by such forward-looking statements. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS WHICH REFLECT MANAGEMENT'S VIEW ONLY AS OF THE DATE OF THIS ANNUAL REPORT ON FORM 10-K. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULT OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS, CONDITIONS OR CIRCUMSTANCES. The risks, uncertainties and other factors that might cause such differences include, but are not limited to: (i) general economic conditions in Poland and in the pay television business in Poland; (ii) changes in regulations the Company operates under; (iii) uncertainties inherent in new business strategies, including 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. EXCHANGE RATE In this Annual Report on Form 10-K, references to "U.S. dollars" or "$" are to U.S. currency, references to "Deutsche-Marks" or "DM" are to German currency, and references to "zloty" or "PLN" are to Polish currency. The Company has presented its primary consolidated financial statements in accordance with generally accepted accounting principles in the U.S. in U.S. dollars. Amounts originally measured in zloty for all periods presented have been translated into U.S. dollars. For your convenience, this Annual Report contains certain zloty amounts not derived from the consolidated financial statements which have been translated into U.S. dollars. Readers should not assume that the zloty amounts actually represent such U.S. dollar amounts or could be, or could have been, converted into U.S. dollars at the rates indicated or at any other rate. Unless otherwise stated, such U.S. dollar amounts have been derived by converting from zloty to U.S. dollars at the rate of PLN 3.504 = $1.00, the exchange rate quoted by the National Bank of Poland at noon on December 31, 1998. This rate may differ from the actual rates in effect during the periods covered by the financial information discussed 1 herein. The Federal Reserve Bank of New York does not certify for customs purposes a noon buying rate for zloty. ITEM 1. BUSINESS GENERAL The Company operates the largest cable television system in Poland with approximately 1,592,000 homes passed and approximately 935,300 total subscribers as of December 31, 1998. The Company's cable subscribers are located in regional clusters encompassing eight of the ten largest cities in Poland, including those cities which the Company believes provide the most favorable demographics for cable television in the country. The Company believes that additional subscriber growth can be achieved through a combination of increased penetration, new network expansion and acquisitions. As at December 31, 1998 the Company had invested more than $144 million to construct fiber-optic cable networkS which it believes are among the most technologically advanced in Poland and are comparable to modern cable networks in the U. S. The networks constructed by the Company provide excess channel capacity and are designed to maximize reliability. It is the Company's policy to upgrade as rapidly as possible substandard networks that it has acquired. Over the past three years, the Company has experienced rapid growth in revenues and subscribers, both through acquisitions and through expansions of its own cable networks, resulting in an average increase in revenues of 42% and total cable subscribers of 33% per year. OPERATING STRATEGY With the fall of Communist rule in 1989, the Company believed that it could gain significant market advantages by becoming one of the first cable operators to establish a high-quality cable television system in Poland. The Company believes that it has achieved its initial goals of rapidly increasing its coverage areas, establishing its business reputation, and providing a high-quality signal, wide channel offerings and quality of service comparable to that provided by world-class cable operators. Having established itself as the leading cable television service provider in Poland, the Company's current strategic objective is to increase cash flow and enhance the value of its cable networks. To accomplish this objective, the Company's business and operating strategy in the cable television business is to: PROVIDE COMPELLING PROGRAMMING. The Company currently provides the Wizja TV programming package, which currently consists of 19 television channels of primarily Polish-language programming, to its cable subscribers. The Company believes that this selection of high-quality Polish-language programming will provide it with a significant competitive advantage in increasing its cable subscriber base. INCREASE PRICING AND MAXIMIZE REVENUE PER CABLE SUBSCRIBER. The Company has implemented a pricing strategy designed to increase revenue per subscriber and to achieve real profit margin increases in U.S. dollar terms. In connection with this pricing strategy, the Company intends to continue to introduce new program offerings and to improve its services. As a result, the Company has experienced and expects that it will continue to experience subscriber termination rates above historical levels resulting from the implementation of its pricing strategy. The Company generally receives a premium for its cable television services over the prices charged by its competitors, particularly poor-quality small operators. Despite its generally higher price levels, the Company has achieved significant growth in penetration and market share while maintaining relatively low annual cable television subscriber termination rates (also known in the cable television industry as "churn"). The Company believes its ability to successfully command higher prices reflects its higher levels of customer service, broader selection of quality programming and the greater technical quality of its cable television networks. 2 EXPAND REGIONAL CLUSTERS. The Company's strategy is to continue to expand the coverage areas of its regional clusters, both through selected building of its existing networks and acquisitions. The Company intends to expand primarily in areas where it can fill-in existing regional clusters and into cities and towns adjacent to its regional clusters through the continued building of its existing networks. The Company also plans to expand its regional clusters through the continued acquisition of smaller cable television operators. In addition, in markets where the Company has established operations, it intends to selectively build its system in parallel to competitors ("overbuild") in an effort to consolidate the market. By implementing this strategy for expanding its regional clusters, the Company believes it can limit its per-subscriber building costs and realize significant synergies from leveraging its existing infrastructure and asset base, both in terms of personnel and in terms of capital costs. Because the Company has a management structure and operating systems in place in each of its regional clusters, it is able to realize significant cash flow margins from each dollar of revenue generated through the addition of subscribers to its existing regional clusters. INCREASE SUBSCRIBER PENETRATION. The Company believes the most profitable means of expanding its cable television business is to leverage its investment in its cable networks by increasing the percentage of homes passed which subscribe ("subscriber penetration") in its regional clusters. Once a building with multiple apartment units is passed by the Company's cable television networks, the Company can add subscribers who generate average annual subscription revenue of approximately $80 in return for an average capital investment of approximately $20 per subscriber. The Company plans to increase subscriber penetration by (A) executing an aggressive sales, marketing and promotional strategy using the Company's highly-trained and commissioned Polish sales force, with particular emphasis on Company-wide quarterly remarketing campaigns, (B) continuing to enhance the Company's program offerings, particularly through expanding Wizja TV's channel line-up, and (C) applying prompt, courteous and professional customer service standards. REALIZE ADDITIONAL OPERATING EFFICIENCIES. The Company aggressively seeks to realize operating efficiencies in both its acquired as well as its existing cable networks by, among other things, eliminating redundant satellite signal receivers, combining customer service offices and reducing administrative personnel. The Company generally has been able to eliminate personnel in its acquired cable television systems by managing the systems with experienced personnel from one of its existing regional clusters. The Company can also generally reduce the technical personnel necessary to operate acquired systems after connecting them to the Company's existing satellite signal receivers or, if required, rebuilding them to the Company's standards. The Company also intends to reduce the number of employees through consolidation of its existing clusters of regional operations from eight to four, and through centralizing its subscriber management and customer support services in the call center. The call center is operational for cable customers in the Katowice regional cluster and is expected to be operational for all cable customers by the end of 1999. The call center will also be used by @ Entertainment for servicing its D-DTH customers. The call center is located in Katowice, a low cost area of Poland, and will consolidate the functions of the Company's existing regional customer service centers. Moreover, the Company believes the centralization of service functions will improve the general level of customer service available to subscribers. The Company is also in the process of installing an integrated management information system for both its billing and accounting systems, which is designed to further improve employee productivity and customer service. The Company believes that its size and market share give it a competitive advantage by creating economies of scale, including minimized building and reduced operating costs per subscriber and volume price discounts for programming and construction expenditures. The Company's size also provides it with the operating leverage to spread certain expenses (such as promotional materials, advertisements, local programming and sales materials) over its large number of subscribers. These economies of scale should continue to improve as its subscriber base increases. 3 REGIONAL CLUSTERS The Company has established eight regional clusters for its cable television business encompassing eight of the ten largest cities in Poland, which the Company believes, are among those with the strongest economies and most favorable demographics for cable television in the country. The following table illustrates certain operating data of each of the Company's existing regional clusters. The Company is planning to consolidate its existing eight clusters down to four. OVERVIEW OF THE COMPANY'S EXISTING CABLE SYSTEMS (1)
AVERAGE MONTHLY SUBSCRIPTION REVENUE PER BASIC TOTAL HOMES TOTAL BASIC BASIC SUBSCRIBER REGION HOMES PASSED SUBSCRIBERS SUBSCRIION(2) PENETRAT (2) - -------------------------------------------- ---------- ---------- ----------- ------------ ----------- ------------- Gdansk...................................... 280,000 239,856 154,315 121,846 50.80% $ 7.80 Szczecin.................................... 160,000 76,050 64,714 48,639 63.96% 5.90 Katowice.................................... 1,200,000 498,903 252,954 204,249 40.94% 6.61 Krakow...................................... 400,000 144,114 71,866 62,179 43.15% 7.41 Warsaw...................................... 800,000 259,050 127,485 103,536 39.97% 7.63 Lublin...................................... 120,000 90,244 74,160 38,536 42.70% 7.25 Wroclaw..................................... 624,000 222,300 145,698 119,239 53.64% 5.05 Bydgoszcz................................... 134,000 61,464 44,148 40,155 65.33% 4.90 ---------- ---------- ----------- ------------ ----- ------ Total....................................... 3,718,000 1,591,981 935,340 738,379 46.38% 6.68(3) ---------- ---------- ----------- ------------ ----------- ------------- ---------- ---------- ----------- ------------ ----------- -------------
- ------------------------ (1) All data at, or for the year ended December 31, 1998. (2) Includes "basic" and "intermediate" packages. For a description of these packages, see the section entitled "Service and Fees" that follows. (3) Represents a weighted average for the Company based on the total number of basic subscribers at December 31, 1998. ACQUISITIONS The Company regularly evaluates potential acquisitions of cable networks. The Company currently has no definitive agreement with respect to any material acquisition, although from time to time it has discussions with other companies and assesses opportunities on an ongoing basis. The Company may be required to apply for the approval of the Polish Anti-Monopoly Office with respect to any acquisitions it wishes to consummate. SERVICES AND FEES The Company charges cable television subscribers an initial installation fee and fixed monthly fees for their choice of service packages and for other services such as premium channels and rental of remote control devices. The Company currently offers three packages of cable television service: a "basic package" throughout the Company's cable television systems, and "broadcast" and "intermediate" packages in selected areas of Poland. On December 31, 1998, approximately 74.7% of the Company's subscribers received the "basic package", approximately 4.3% received the "intermediate package" and approximately 21.0% received the "broadcast package" of service. 4 BASIC PACKAGE. The "basic package" includes approximately 30 to 70 channels. This package generally includes all Polish terrestrial broadcast channels, most major European satellite programming legally available in Poland, regional and local programming and, on most of its cable networks, Wizja TV, including @ Entertainment's proprietary Polish-language channel, Atomic TV. The Company's "basic package" offerings vary by location. With the launch of Wizja TV across the Company's cable networks on June 5, 1998, all of the Wizja TV programming, other than Wizja 1 and the HBO Poland Service, a Polish-language premium movie channel owned in part by Home Box Office, became part of the "basic package." INTERMEDIATE PACKAGE. The "intermediate package" includes approximately 17 to 24 channels. This package is offered for monthly fees equal to approximately one-half of the amount charged for the "basic package." The "intermediate package" is designed to compete with small cable operators on a basis of price, using a limited programming offering. The Company's "intermediate package" offerings vary by location. BROADCAST PACKAGE. The "broadcast package" includes 6 to 12 broadcast channels with clear reception for monthly fees which are substantially less than the amounts charged for the "intermediate package." PREMIUM AND OTHER SERVICES. For an additional monthly charge, certain of the Company's cable networks currently offer three premium television services--Wizja 1, HBO Poland service (a Polish-language premium movie channel owned in part by Home Box Office) and Canal+ Polska--to customers on a monthly basis. For 1998, the Company experienced churn in premium services with penetration falling by 8,464 subscribers or 18.8% from 1997. The Company is planning to encrypt the HBO service on cable and install analog decoders for all premium channel subscribers during 1999. The Company plans to create additional premium channels that will also be offered to cable customers for an additional charge. Other optional services include additional outlets and stereo service, which enables a subscriber to receive 12 or more radio channels in stereo. Cable television subscribers who require the use of a tuner to receive certain of the Company's cable services are charged an additional fee of approximately $1.10 per month. Installation fees vary according to the type of connection required by a cable television subscriber. The standard initial installation fee is currently approximately $21 for building with multiple apartments and approximately $42 for single family dwellings, but such fees may be subject to reductions as a result of promotional campaigns. PRICING STRATEGY. Prior to December 1996, the Company's cable television pricing strategy was designed to keep its profit margin relatively constant in U.S. dollar terms in more mature systems and to increase rates in more recently acquired or rebuilt systems. The Company has historically experienced annual churn rates of less than 10%, and has been able to pass on the effects of inflation through price increases. In 1997, the churn rate increased to 12.2%, though it would have been 9.8% had the Company not disconnected approximately 17,000 non-paying subscribers in one of its acquired and rebuilt networks. For the year ended December 31, 1998, the Company's churn rate was 15.25% due primarily to the implementation of its current pricing strategy. This pricing strategy commenced in January 1997 and is designed to increase revenue per subscriber and to achieve real profit margin increases in U.S. dollar terms. The Company expects that it will continue to experience churn rates above historical levels during the implementation of its current pricing strategy. The Company expects to offer promotional incentives in certain areas of the country from time to time in connection with its marketing. Cable television subscribers are billed monthly in advance and, as is customary in Poland, most of the Company's customers pay their bills through their local post office or bank. The Company has strict enforcement policies to encourage timely payment. Such policies include notices of late payment, visits from service personnel, and ultimately, disconnection for nonpaying customers 90 days after a bill becomes due. The Company's system architecture in most networks enables it to promptly shut off service to nonpaying customers and is designed to reduce non-authorized use of its cable systems. The Company 5 does not consider bad debt to be material to its operations. The Company's bad debt expense has historically averaged approximately 1.3% of revenue. SALES AND MARKETING The Company's sales and marketing process is divided into four parts: - operating area development; - new market sales; - remarketing sales and - customer service. OPERATING AREA DEVELOPMENT. The operating area development process in Poland is very different from that in Western cable television markets because a Polish cable operator's geographic build is dependent on reaching agreements with individual cooperative authorities rather than upon the issuance of an operating area development permit for a region by the government. The cooperative authorities make decisions on behalf of the residents, including decisions as to the carriers of cable television. The Company's operating area development process begins with targeting a multiple apartment complex, followed by negotiations with the relevant cooperative authority, and ultimately involves reaching an agreement with the cooperative authority to allow construction and installation of the cable television network. The Company's strategy is to identify those geographic areas and apartment complexes with the most favorable demographic characteristics, highest population densities and lowest levels of competition from other cable operators. NEW MARKET SALES. After an agreement with a cooperative authority has been reached and construction of the cable network infrastructure has been completed, the Company focuses its efforts on direct, door-to-door sales to individual households. While the Company utilizes advertising in a variety of media (including television, radio, newspapers, magazines, cooperative and association publications, billboards, bus shelter posters and taxi placards) to build general awareness and recognition of the advantages of its cable television services, direct sales is the primary focus of the Company's marketing efforts. The distribution of promotional materials (via direct mail, leaflets and door hangers) begins several days in advance of the arrival of the Company's sales force. The materials provide for telephone and mail response, but are designed so that the potential customer expects a direct sales visit. The Company's sales force consists of native Poles who are trained in professional sales skills, personal interaction, product knowledge and appearance. All sales persons are compensated by direct sales commissions and incentive bonuses. Such employees are hired, trained and managed by Company managers whose incentive compensation is tied directly to sales results. New market sales tend to be highly seasonal, with the fourth calendar quarter being the most active sales period. REMARKETING SALES. After new areas have been marketed, Company remarketing efforts focus on attracting new subscribers and selling additional products and services, such as premium channels and stereo services, to existing subscribers. Direct door-to-door remarketing sales are enhanced through advertising on the Company's proprietary channels, bill inserts, door hangers, coupons, prizes and contests, as well as advertising in other media accessible to the general public. Company-wide remarketing campaigns are conducted quarterly and seasonal promotions coincide with holidays and cultural events. Sales people are entitled to additional incentive commissions for remarketing sales. CUSTOMER SERVICE. By implementing a Western-style customer care program that includes such features as courteous customer service representatives, prompt responses to service calls and overall reliability, the Company has introduced a quality of service generally not found in Polish consumer markets. The Company generally guarantees service within 24 hours of a subscriber request. @ Entertainment has established a customer service facility within the call center for both the cable and digital satellite 6 direct-to-home ("D-DTH") businesses. The call center provides telemarketing and sales and service support and includes specialized billing software with on-line real time access to customer accounts, designed to provide better access to customer information and to improve customer service. The call center is operational for cable customers in the Katowice regional cluster and D-DTH customers and is expected to be operational for all cable customers by the end of 1999. The Company believes that its customer care program gives it a distinct competitive advantage over other cable providers in the Polish market, has contributed to the Company's low churn rate and has been a primary motivation for consumers to select the Company as their cable television provider when provided with a choice. TECHNOLOGY AND INFRASTRUCTURE The Company believes the fiber-optic cable television networks that it has constructed, which serve approximately 67% of its subscribers, are among the most technologically advanced in Poland and are comparable to modern cable television networks in the U.S. All of the Company's networks that have been constructed by the Company have bandwidths of at least 550 MHz, with one network as high as 1 GHz. New portions of the networks which are currently being constructed are being designed to have minimum bandwidths of 860 MHz. The Company's goal is to upgrade any portion of its cable television networks that have bandwidths below 550 MHz (generally acquired from other entities) to at least 860MHz in an effort to reduce the number of satellite receivers and parts inventory required in the networks. The Company uses fiber-optic and coaxial cables, electronic components and connectors supplied by leading Western firms in its cable television networks. The Company's cable television networks, in most cases, use a combination of fiber optic and coaxial cables in groups of 2,000 homes. The Company uses a "switched-star" configuration for its cable television networks by installing a discreet drop cable which runs from a secure lockbox to each home (as opposed to a loop system which feeds multiple homes from a single cable), allowing the Company to more efficiently disconnect non-paying customers, add or remove service options to individual homes and audit its systems to detect theft of signal. Where required, high-quality tuners are used in cable television subscriber homes. The Company intends to introduce set-top decoders for all premium channel subscribers during 1999, allowing premium channel signals to be encrypted for increased security. The Company's cable television networks were constructed with the flexibility and capacity to be cost-effectively reconfigured. These networks could be reconfigured to offer an array of interactive and integrated entertainment, telecommunications and information services, including combined telephone and cable television services and digital data transmission, if the Company decides to pursue such ancillary sources of revenue in the future. The Company's systems provide excess channel capacity and are designed to maximize reliability. Most of the Company's cable networks currently have the ability to carry 40 to 60 television channels. The Company operates its systems at approximately 49% to 69% of channel/ bandwidth capacity. Two-way capability can be added to most of the Company's networks at limited cost to provide addressable and interactive services in the future. The cable television networks constructed by the Company meet or exceed the technical standards established by Polish regulatory authorities, and the Company's policy is to upgrade as rapidly as possible substandard cable television networks obtained in acquisitions. The Company is considering teaming arrangements with certain Western telecommunication companies in order to create one or more consortia to bid on regional telephone licenses, utilizing excess capacity from the Company's cable networks. The Company has been able to avoid constructing its own underground conduits in certain areas by entering into a series of agreements with regional and local branches of the Polish national telephone company (known in the Polish telecommunications industry as "TPSA") which permit the Company to use TPSA's conduit infrastructure for an indefinite period of time or for fixed periods up to 20 years. The Company also has agreements to undertake joint construction with TPSA and other utilities for new 7 conduits in certain areas. These agreements represent a major advantage to the Company since they permit the Company to minimize the costly and time-consuming process of building new conduit infrastructure where TPSA conduit infrastructure exists and provide for joint construction with TPSA and other utilities of conduit infrastructure where none currently exists. At December 31, 1998, approximately 56.5% of the Company's cable television plant had been constructed utilizing pre-existing conduits of TPSA. A substantial portion of the Company's contracts with TPSA 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. Generally speaking, TPSA may terminate a conduit agreement immediately (and without penalty) if: - The Company does not have a valid permit from the Polish State Agency of Radio Communications authorizing the construction and operation of a cable television network in a specified geographic area covering the subscribers to which the conduit delivers the signal; - the Company's cable network serviced by the conduit does not meet the technical specifications required by the Polish Communications Act of 1990; - the Company does not have a contract with the cooperative authority allowing for the installation of the cable network; or - the Company does not pay the rent required under the conduit agreement. As of December 31, 1998, TPSA was legally entitled to terminate conduit agreements covering approximately 74,000 or 8% of the Company's subscribers. The Company estimates that at the end of December 1998 it had over 4,378 kilometers of cable television plant constructed and that the fiber-optic backbone of its networks was substantially complete. The Company expects that its future capital expenditures for the cable business will consist primarily of capital needed for the incremental addition of new buildings with multiple apartment units and cable television subscribers to its existing networks for building or rebuilding associated with the acquisition of new cable television systems, and for other capital costs in connection with such acquisitions. From its existing infrastructure base, the Company's incremental build cost to add an adjacent apartment building or additional subscribers in buildings with multiple apartments to existing networks averages approximately $200 per subscriber (subscribers in apartment buildings represent more than 96% of the Company's total subscribers). The Company believes that several primary factors contribute to its favorable cost structure. The significant density of homes per kilometer of cable plant in the Company's core markets and the Company's conduit agreements substantially reduce its build costs. Moreover, the Company believes that the size of its construction program allows it to negotiate attractive construction labor contracts and discounts on materials. COMPETITION The multi-channel pay television industry in Poland has been, and is expected to remain, highly competitive. The Company competes with other cable television operators as well as with companies employing numerous other methods of delivering television signals to subscribers. The extent to which the Company's multi-channel pay television services are competitive with alternative delivery systems depends, in part, upon the Company's ability to provide a greater variety of Polish-language programming at a reasonable price than the programming and prices available through alternative delivery systems. The Company believes that competition in the cable television industry is primarily based upon price, program offerings, customer service, and the quality and reliability of cable networks. Operators of small cable networks, which are active throughout Poland, pose a competitive threat to the Company because they often incur lower capital expenditures and operating costs and therefore have the ability to charge lower fees to subscribers than the Company. While these operators often do not meet the technical 8 standards for cable systems under Polish law, enforcement of regulations governing technical standards has historically been poor. Regardless of the enforcement of these laws and regulations, the Company expects that operators of small cable networks will continue to remain a competitive force in Poland. In addition, certain of the Company's competitors or their affiliates have greater experience in the cable television industry and have significantly greater resources (including financial resources and access to international programming sources) than the Company. The largest competitors of the Company in Poland include. Bresnan Communications, which owns at least three cable systems (including Aster City Cable Sp. z o.o.) and Multimedia Polska S.A., a Polish entity. In addition, the Company understands that a number of cable operators in Poland (led by Bresnan Communications) have formed, or are in the process of forming, a consortium for the joint creation and production of Polish-language programming. The Company's cable television business also competes with companies employing other methods of delivering television signals to subscribers, such as terrestrial broadcast television signals and analog direct-to-home ("A-DTH") television services, digital direct-to-home ("D-DTH") services (including @ Entertainment's D-DTH service) and multi-channel multi-point distribution systems ("MMDS"). Pay television services also face competition from a variety of other sources of news, information and entertainment such as newspapers, cinemas, live sporting events, interactive computer programs and home video products such as video cassette recorders. The extent of this type of competition depends upon, among other things, the price, variety and quality of programming offered by pay television services and the popularity of television itself. TRADEMARKS The Company, either itself or through its subsidiaries, has filed or is in the process of filing for registration of its various trademarks. The PTK logo was registered for use in connection with television and programming services in July 1997. Trademark applications are pending in Poland for other variations of PTK trademarks. EMPLOYEES At December 31, 1998, the Company had approximately 950 permanent full-time employees and approximately 45 part-time employees. In addition, as of that date the Company employed approximately 68 salesmen who received both commissions and a nominal salary, and from time to time the Company employs additional salesmen on an as needed, commission only basis. None of the Company's employees are unionized. The Company believes that its relations with its employees are good. 9 REGULATION GENERAL The operation of cable television systems in Poland is regulated under the Polish Communications Act of 1990 (the "Communications Act") and the Polish Radio and Television Act of 1992 (the "Television Act"). These are administered by: - The Polish Minister of Communications; - The Polish State Agency of Radio Communications ("PAR"); - The Polish National Radio and Television Council (the "Council"); and Cable television operators in Poland are required to obtain permits from PAR to install and operate cable television systems and must register certain programming that they transmit over their networks with the Council. In contrast to cable television regulatory schemes in the U.S. and in certain other Western nations, neither the Minister of Communications nor PAR currently has the authority to regulate the rates charged by operators of cable television. However, excessive rates could be challenged by the Polish Anti-Monopoly Office should they be deemed to constitute monopolistic or other anti-competitive practices. Cable television operators in Poland also are subject to the Law on Copyright and Neighboring Rights of 1994 (the "Copyright Act") which provides intellectual property rights protection to authors and producers of programming. Under the terms of the Television Act, broadcasters in Poland are regulated by, and must obtain a broadcasting license from the Council. COMMUNICATIONS ACT PERMITS. The Communications Act and the required permits issued by PAR set forth the terms and conditions for providing cable television services, including: - the terms of the permits; - the area covered by the permits; - technological requirements for cable television networks; and - restrictions on ownership of cable television operators. If a cable operator breaches the terms of its permits or the provisions of the Communications Act, or if such operator fails to acquire permits covering areas serviced by its networks, PAR can impose penalties on such operator, including: - fines; - the revocation of all permits covering the cable networks where such breach occurred; or - the forfeiture of the cable operator's cable networks. In addition, the Communications Act provides that PAR may not grant a new permit to, or renew an expiring permit held by, any applicant that has had, or that is controlled by an entity that has had, a permit revoked within the previous five years. FOREIGN OWNERSHIP RESTRICTIONS. The Communications Act and applicable Polish regulatory restrictions provide that permits may only be issued to and held by Polish citizens, or companies in which foreign persons hold no more than 49% of the share capital, ownership interests and voting rights. In addition, a majority of the management and supervisory board of any cable television operator holding permits must be comprised of Polish citizens residing in Poland. These restrictions do not apply to any permits issued prior to July 7, 1995. 10 THE COMPANY'S PERMITS AND NEW CORPORATE ORGANIZATIONAL STRUCTURE. Prior to the creation of PAR and the permit system, one of the Company's subsidiaries, Polska Telewizja Kablowa S.A. ("PTK S.A."), received a license to operate cable television systems in Warsaw, Krakow and the areas surrounding these cities under the Polish Foreign Commercial Activity Act. To comply with the foreign ownership requirements discussed above, the Company created a new entity, Polska Telewizja Kablowa Operator Sp. z o.o. ("PTK Operator"), which does and will and operate the Company's new or existing cable networks whose permits are subject to the foreign ownership restrictions discussed above. PCI will hold a 49% ownership stake in PTK Operator while the remaining 51% will be held by a Polish entity. PCI will, in turn, hold 49% of the Polish entity, and the remaining 51% interest in the Polish entity is expected to be owned in part by a Polish financial company. The Company believes that this ownership and operating structure complies with the requirements of Polish law. PAR has granted several permits to the Company and its competitors, based on the lease of assets, for networks using an ownership and operating structure substantially similar to the one described above. Specifically, subsidiaries of the Company have received approximately 106 permits from PAR, covering approximately 674,200 of the Company's approximately 738,400 basic and intermediate subscribers at December 31, 1998, including approximately 11,701 subscribers for whom the Company's permits are deemed extended under Polish law pending PAR's response to the Company's permit renewal applications. However, certain subsidiaries of the Company do not have valid permits covering certain of the areas in which they operate cable networks. Of the approximately 64,200 basic and intermediate subscribers at December 31, 1998 located in areas for which subsidiaries of the Company do not currently have valid permits, approximately 78% are located in areas serviced by recently acquired or constructed cable networks for which permit applications cannot be made until all permit requirements are satisfied (including obtaining agreements with cooperative authorities and the upgrade of the acquired network to meet technical standards where necessary and satisfying foreign ownership limitations), and approximately 22% are located in areas serviced by networks for which subsidiaries of the Company have permit applications pending. These subsidiaries of the Company have 9 permit applications pending. There can be no assurance that PAR will issue any or all of the permits for which such subsidiaries have applied. The Company may be subject to penalties if PAR or other Polish regulatory authorities determine that all or part of the Company's ownership and operating structure violates Polish regulatory restrictions on foreign ownership. The Company would also be subject to penalties if PAR chooses to take action against it for operating cable television networks in areas not covered by valid permits. Any such actions by PAR or other Polish regulatory authorities would have a material adverse effect on the Company's business, financial condition and results of operations. TELEVISION ACT THE POLISH NATIONAL RADIO AND TELEVISION COUNCIL. The Council, an independent agency of the Polish government, was created under the Television Act to regulate broadcasting in Poland. The Council has regulatory authority over both the programming that cable television operators transmit over their networks and the broadcasting operations of broadcasters. REGISTRATION OF PROGRAMMING. Under the Television Act, cable television operators must register each channel and the programming which will be aired on that channel with the Chairman of the Council prior to transmission. In general, the Chairman of the Council will refuse registration of programming if: - the applicant is not legally entitled to use the cable network over which the programming will be distributed (I.E., does not have a PAR permit covering the network); - the broadcasting of the programming in Poland would violate Polish law, including provisions of the Television Act governing sponsorship, advertising and minimum Polish and European content requirements for programming broadcast by Polish broadcasters; or 11 - the transmission of the programming over the cable network would violate the Television Act or other provisions of applicable Polish law. The Company's subsidiaries have registered most of the programming that they transmit on their cable networks, except programming transmitted on networks for which they do not have permits. The Chairman of the Council may revoke the registration of any of the Company's programming, or may not register all additional programming that the Company desires to transmit over the Company's networks. In addition, the Council may take action regarding unregistered programming that the Company transmits over cable networks for which the Company does not yet have PAR permits. Such actions could include the levying of monetary fines against the Company, and the seizure of equipment involved in transmitting such unregistered programming as well as criminal sanctions against the Company's management. These actions could have a material adverse effect on the Company's business, financial condition and results of operations. RESTRICTIONS ON FOREIGN OWNERSHIP OF POLISH BROADCASTERS. The Television Act provides that programming may be broadcast in Poland only by Polish entities in which foreign persons hold no more than 33% of the share capital, ownership interest and voting rights. In addition, the Television Act and applicable Polish regulatory restrictions provide that the majority of the management and supervisory boards of any broadcaster company holding a broadcasting license must be comprised of Polish citizens residing in Poland. Companies that engage in broadcasting in Poland are required to obtain a broadcasting license from the Chairman of the Council under the Television Act. The Council may revoke a broadcasting license for, among other things: - violations of the Television Act; - violations of the terms of the broadcasting license; or - violations of restrictions on foreign ownership of broadcasters. If the Polish regulatory authorities were to conclude that the Company's ownership or distribution structure is not to in compliance with Poland's regulatory restrictions on foreign ownership, the Company could be forced to incur significant costs in order to bring its ownership structure and distribution system into compliance with the applicable regulations and the Company may be forced to dispose of its ownership interests in various entities. These regulatory restrictions may materially adversely affect the Company's ability to enter into relationships with other entities that produce, broadcast and distribute programming in Poland, which in turn would have a material adverse effect on the Company's business, results of operations and financial condition. REQUIREMENTS CONCERNING PROGRAMS BROADCAST FROM OUTSIDE OF POLAND AND THEIR POSSIBLE IMPACT ON THE COMPANY. The Television Act does not include regulations directly applicable to the broadcasting of programs being broadcast from abroad and received in Poland. Specifically, there are no regulations in force concerning satellite broadcasting of a program directed to a Polish audience if the transmission to the satellite for the broadcasting of such program is made by a foreign broadcaster from outside of Poland. The Company believes that the Television Act does not apply to such broadcasting and that such activity is not subject to Polish broadcasting requirements. The Council has not officially adopted an interpretation of this issue. While there have been no court rulings on this issue, a subsidiary of Canal+ has filed suit against HBO Polska Sp. z o.o. and certain Polish cable operators (including subsidiaries of the Company) alleging violations of the Television Act. See "Item 3. Legal Proceedings." The Company could become subject to restrictions with respect to its business in the event that the Polish regulatory authorities were to determine that an entity which produces or assembles programming entirely in Poland, and which provides such programming to a third-party for transmission from abroad is a broadcaster for purposes of the Television Act. The burden of complying with any such future regulations or any failure to so comply could have a material adverse effect on the Company's business, results of operations and financial conditions. 12 COPYRIGHT PROTECTION PROTECTION OF RIGHTS OF POLISH AUTHORS AND PRODUCERS OF PROGRAMMING. Television operators, including cable operators, in Poland are subject to the provisions of the Polish Copyright Act, which governs the enforcement of intellectual property rights. Polish copyright law distinguishes between authors, who are the creators of programming, and producers, who acquire intellectual property rights in programs created by others. In general, the holder of a Polish copyright for a program transmitted over the cable networks of a cable television operator has a right to receive compensation from such operator or to prevent transmission of the program. The rights of Polish copyright holders are generally enforced by organizations for collective copyright administration and protection such as Zwiazek Autorow i Kompozytorow Scenicznych ("ZAIKS") and Zwiazek Artystow Scen Polskich ("ZASP"), and can also be enforced by the holders themselves. In practice, the compensation paid to the holder of a Polish copyright on programming that is transmitted over a cable television system is usually set by contract between collective rights organizations such as ZAIKS and ZASP and the individual cable television operator. Most of the Company's cable subsidiaries operate under a contract with ZASP and all of its cable subsidiaries operate under a contract with ZAIKS. In the event that a cable operator transmits programming in violation of a Polish copyright, either the copyright holder or the collective rights organization which the copyright holder is a member of may sue the cable operator for an injunction preventing further violations or an accounting for profits or damages. In addition, a violation of the Copyright Act by a cable television operator also constitutes a violation of the Communications Act and of the operator's permits. See "--Communications Act" for a discussion of the penalties and consequences associated with violations of the Communications Act and of a television operator's permits. PROTECTION OF RIGHTS OF FOREIGN AUTHORS AND PRODUCERS OF PROGRAMMING. Foreign authors of programming receive protection under the Copyright Act for programming that is either: - originally published in Poland; - originally published simultaneously in Poland and abroad; or - originally published in Polish-language form. In addition, foreign authors of programming receive Polish copyright protection under the terms of the Berne Convention of 1886 as amended in Paris in 1971 (the "Berne Convention"), which was adopted by Poland in 1994. Under the Berne Convention, authors of programming located in other signatory countries must be extended the same copyright protection over their programming that Polish authors receive under the Copyright Act. Polish cable television operators must thus make copyright payments to foreign authors holding copyrights in programming that is transmitted over the cable networks of such operators. The Berne Convention, however, does not grant any protection to foreign producers of programming. Poland has adopted the Rome Convention, which extends copyright protection to programs of foreign producers. Poland became bound by its terms on June 13, 1997. The Company currently makes copyright payments to the foreign programmers requiring these types of payments, such as CNN, Eurosport and the Cartoon Network. ANTI-MONOPOLY ACT Competition in Poland is governed by the Anti-Monopoly Act. The Anti-Monopoly Act established the Anti-Monopoly Office which is responsible for the detection and regulation of monopolistic and other anti-competitive practices. The current Polish anti-monopoly laws with respect to the cable and programming industries are not well established, and the Anti-Monopoly Office has not articulated comprehensive 13 standards that may be applied in an antitrust review in such industries. In general, the Anti-Monopoly Act prohibits such anti-competitive arrangements and practices as: - monopolistic agreements; - abuse of dominant market position; - price-fixing arrangements; - division of market arrangements; and - creation of market entry barriers. If detected, the Anti-Monopoly Office may deem agreements which embody or employ such practices, as null and void. A finding by the Anti-Monopoly Office that the Company's past, present or future operations, agreements or strategic actions constituted violations of the anti-monopoly laws could adversely impact its business, strategy, financial condition or results of operations. MARKET DOMINANCE. Although the Anti-Monopoly Act does not preclude an enterprise from occupying a dominant market position, any activities by such enterprise is subject to detailed scrutiny by the Anti-Monopoly Office. Market dominance is often defined as a company's ability to act independently of competitors, contractors, and consumers. Companies that have 40% or more of the market share of the relevant market and do not face significant competition are usually deemed to have market dominance, and therefore face greater scrutiny from the Anti-Monopoly Office. The Anti-Monopoly Office has been granted the power to review a company's past and present activities, including its pricing policies, for potential anti-competitive behavior. PRE-NOTIFICATION OF TRANSACTIONS. The Anti-Monopoly Act requires parties to certain types of transactions to notify the Anti-Monopoly Office prior to the consummation of the proposed transaction. Pursuant to the current interpretation of the Anti-Monopoly Office, transactions between non-Polish parties affecting market conditions in Poland may also require notification to the Anti-Monopoly Office. Sanctions for failure to notify the Anti-Monopoly office include the imposition of fines on parties to the transaction at issue. The Company believes that it may be required to obtain the Anti-Monopoly Office's approval for future acquisitions, but the Anti-Monopoly Office may not approve the Company's future acquisitions and dispositions. RECENT ANTI-MONOPOLY OFFICE FINDINGS WITH RESPECT TO THE COMPANY AND ITS SUBSIDIARIES. From time to time, the Company receives inquiries from and is subject to review by various divisions of the Anti-Monopoly Office. The Anti-Monopoly Office recently issued a decision that PCI had achieved a dominant position and abused that dominant position in one of the areas in which it operates by moving certain satellite channels to a different frequency. A number of PCI's subscribers, whose television sets are not equipped to receive the new frequency, received several different channels to replace the channels which had been moved. The Company appealed both the finding of dominance and the finding that PCI acted improperly by moving certain channels to the new frequency. The Anti-Monopoly Court modified the Anti-Monopoly Office's decision by ruling that PCI had abused its dominant position by moving certain channels to another frequency without termination of its agreements with subscribers whose television sets are not equipped to receive the new frequency. The Anti-Monopoly Court did not impose a fine on the Company or its subsidiaries. The Company estimates that less than 1% of its subscribers in the area under review have such television sets and would be affected by the ruling if, in the future, the Company finds it necessary for technical reasons to move channels to another frequency. The Company is appealing both the finding of dominance and the finding that the Company must terminate some of its agreements with certain subscribers before moving channels to another frequency. In another market, the Anti-Monopoly Office recently issued a decision that PCI had achieved a dominant position and abused that dominant position by: (1) failing to create a uniform system for customer complaints, (2) increasing rates without providing subscribers a detailed basis for the price 14 increases, and (3) changing the programming line-up without sufficient notice to subscribers. The Anti-Monopoly Office did not impose a fine in connection with its decision. The Company is appealing both the finding of dominance and the finding that it acted improperly in its relations with subscribers. In another market, the Anti-Monopoly Office recently issued a decision that PCI had achieved a dominant position and abused that dominant position by issuing an offer to subscribers for the extended basic package in a certain form. The Anti-Monopoly Office imposed a fine of 26,700 zloty (approximately $7,600 at, the December 31, 1998 conversion date). The Company is appealing the fine, the finding of dominance and the finding that the form of its offer to subscribers was improper. POLAND'S EU MEMBERSHIP APPLICATION In 1994 Poland made an official application for membership of the European Union ("EU"). Negotiations on the terms of Poland's proposed admission to the commenced in the March 1998. If Poland joins the EU, it would be required to implement and obey all of the laws and regulations emanating from the European Commission, including the Television Without Frontiers Directive and EC competition law in their then current versions. ITEM 2. PROPERTIES On December 31, 1998, the Company owned equipment used for its cable television business, including 108 satellite receivers, and approximately 4,378 kilometers of cable plant. The Company has approximately 206 lease agreements for offices, storage spaces and land adjacent to the buildings. The total area leased amounts to approximately 26,300 square meters (most of which is land adjacent to buildings). The areas leased by the Company range from approximately 10 square meters up to more than 1,600 square meters. The agreements are for specified and unspecified periods of time and those for an unspecified period may be terminated with relatively short notice periods by either party, usually three months. The Company has entered into conduit leases with the TPSA (the Polish national telephone company) and, in certain cases, with other entities. The majority of the TPSA leases require the Company to bear the costs of the maintenance of the cables. The Company may not sublease the conduit or cables or allow a third party to use the conduits or cables free of charge without TPSA's consent. The rental charge for the conduit is usually determined on each 100 meters of conduit occupied. The agreements also contain indexation clauses for rent adjustment purposes based on the change of U.S. dollar exchange rates or on the increase of real maintenance costs. A substantial portion of the Company's contracts with TPSA for the use of such conduits permit termination by TPSA without penalty at any time either immediately upon the occurrence of certain conditions or upon provision of three to six months' notice without cause. Any termination by TPSA of such contracts could result in the Company losing its permits, the termination of agreements with cooperative authorities and programmers, and an inability to service customers with respect to the areas where its networks utilize the conduits that were the subject of such TPSA contracts. For a list of the reasons for which TPSA can terminate a conduit agreement, the proportion of the Company's cable subscribers serviced by conduit leases subject to immediate termination and the consequences to the Company of the loss to those conduit leases, see "Business--Cable Operations--Technology and Infrastructure." The Company believes that its existing owned properties, lease agreements and conduit agreements are adequate for purposes of the Company's cable television operations, although additional space and conduits will be needed in the future if the Company consummates further acquisitions of cable television networks. 15 ITEM 3. LEGAL PROCEEDINGS The Company is involved in litigation from time to time in the ordinary course of business. In management's opinion, the litigation in which the Company is currently involved, individually and in the aggregate, is not material to the Company's business financial condition or results of operations. Two of the Company's cable television subsidiaries, Telewizja Kablowa Gosat-Service Sp. z o.o. and PTK, S.A., and four unrelated Polish cable operators and HBO Polska Sp. z o.o. ("HBO Polska") have been made defendants in a lawsuit instituted by Polska Korporacja Telewizyjna Sp. z o.o., an indirect partially-owned subsidiary of Canal + S.A. The lawsuit was filed in the Provincial Court in Warsaw, XX Economic Division (Sad Wojewodzki w Warszawie, Wydzial XX Gospodarczy) (the "Court"). The main defendant in the proceedings is HBO Polska which is accused of broadcasting the HBO television program in Poland without a license from the Council as required by the Television Act and thereby undertaking an activity constituting an act of unfair competition. The plaintiff has asked the Court to order HBO Polska to cease broadcasting of its programming in Poland until it has received a broadcasting license from the Polish National Radio and Television Council, and that the defendant cable operators be ordered (i) to cease carrying the HBO Polska programming on their cable networks in Poland until HBO Polska has received a broadcasting license from the Polish National Radio and Television Council, (ii) not to use their current filters for the purpose of unscrambling the HBO Polska programming, and (iii) in the future, to use effective encoding systems and systems of controlled access to the HBO Polska programming. The Company does not believe that the lawsuit will have a material adverse effect on its business operations. For a discussion of certain Anti-Monopoly Office's findings relating to the Company, see "Regulation--Anti-Monopoly Act." ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NONE. 16 PART II ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS DESCRIPTION OF CAPITAL STOCK Set forth below is certain information concerning the Company's capital stock and a brief summary of the material provisions of the Company's capital stock, Certificate of Incorporation and By-Laws. This description does not purport to be complete and is qualified in its entirety by reference to the Company's Certificate of Incorporation and By-Laws. GENERAL At March 18, 1999, the Company has authorized stock of 33,000 shares, of which (i) 27,000 shares are common stock, par value $0.01 per share ("Common Stock"), (ii) 4,000 shares are Series A Preferred Stock, par value of $1.00 per share ("Series A Preferred Stock"), and (iii) 2,000 shares are Series C Preferred Stock, par value of $0.01 per share ("Series C Preferred Stock"). At March 18, 1999 there were (i) 18,948 shares of Common Stock, (ii) 4,000 shares of Series A Preferred Stock, and (iii) 2,000 shares of Series C Preferred Stock issued, outstanding and fully paid. COMMON STOCK DIVIDENDS. Holders of Common Stock are entitled to dividends when, as and if declared by the Board of Directors. VOTING RIGHTS. Holders of Common Stock are entitled to one vote per share on all matters submitted to the shareholders of the Company. Except as otherwise required by law, the shares of Series B Preferred Stock are entitled to vote on an equal basis together with the shares of Common Stock at any annual or special meeting of the stockholders of the Company, or may act by written consent in the same manner as the holders of Common Stock. Under New York law, the affirmative vote of the holders of a majority of the outstanding shares of Common Stock is required to approve, among other things, a change in the designations, preferences or limitations of the shares of Common Stock. LIQUIDATION RIGHTS. Upon liquidation, dissolution or winding-up of the Company, the holders of Common Stock are entitled to share ratably all assets available for distribution after payment in full of, or provision for the payment in full of, debts and other liabilities of the Company and payment of distributions to preferred shareholders. SERIES A PREFERRED STOCK DIVIDENDS. The holders of Series A Preferred Stock are not entitled to receive dividends. VOTING RIGHTS. The holders of Series A Preferred Stock are not entitled to vote on any matters submitted to the shareholders of the Company, except as otherwise required by applicable law. REDEMPTION. The Company is required on October 31, 2004 (the "Redemption Date"), to redeem the Series A Preferred Stock. At the option of the Company, the Series A Preferred Stock may be redeemed at any prior time, in whole or in part. The redemption price per share of Series A Preferred Stock is $10,000. Any shares of Series A Preferred Stock that have at any time been redeemed or repurchased by the Company will, after such redemption or repurchase, be cancelled by the Company and will not be available for reissue. 17 LIQUIDATION. Upon liquidation, dissolution or winding up of the Company, after payment in full of, or provision for the payment of, the debts and other liabilities of the Company, the remaining assets available for distribution to shareholders will be distributed first to the holders of the Series A Preferred Stock, to the extent available, in an amount equal to $10,000 per share, but if the funds available therefor are insufficient, then to the holders of Series A Preferred Stock on a PRO RATA basis in accordance with the number of shares of Series A Preferred Stock held by each holder. SERIES B PREFERRED STOCK Prior to August 6, 1998, @Entertainment held all of the issued and outstanding shares of the Company's Series B Preferred Stock. On August 6, 1998, @Entertainment consented to the cancellation of all of the issued and outstanding shares of the Company's Series B Preferred Stock. The accreted value of these shares was reclassified as paid-in capital. No shares of the Company's Series B Preferred Stock are authorized or available for reissuance. SERIES C PREFERRED STOCK DIVIDENDS. The holders of Series C Preferred Stock are not entitled to receive dividends. VOTING RIGHTS. The holders of Series C Preferred Stock are not entitled to vote on any matters submitted to the shareholders of the Company, except as otherwise required by applicable law. REDEMPTION. On the Redemption Date, the Company is required to redeem the Series C Preferred Stock. At the option of the Company, the Series C Preferred Stock may be redeemed at any time, in whole or in part. The redemption price per share of Series C Preferred Stock is $10,000. From and after the close of business on the Redemption Date, unless there has been a default in the payment of the redemption price, all rights of holders of shares of Series C Preferred Stock which shares have been redeemed cease and thereafter such shares will not be deemed to be outstanding for any purposes whatsoever. Any shares of Series C Preferred Stock that have at any time been redeemed or repurchased by the Company will, after such redemption or repurchase, be cancelled by the Company and will not be available for reissuance. LIQUIDATION. Upon liquidation, dissolution or winding up of the affairs of the Company, after payment or provisions for the payment of the debts and other liabilities of the Company, the assets then available for distribution to the shareholders will be distributed first to the holders of the Series A Preferred Stock, to the extent available, in an amount equal to $10,000 per share, second to the holders of the Series B Preferred Stock, to the extent available, in an amount equal to $10,000 per share, and third to the holders of the Series C Preferred Stock, to the extent available, in an amount equal to $10,000 per share, but if the funds available thereafter are insufficient, then to the holders of Series C Preferred Stock on a PRO RATA basis in accordance with the number of shares held by each holder of Series C Preferred Stock. SERIES D PREFERRED STOCK All of the authorized shares of Series D Preferred Stock were redeemed on March 29, 1996 and no such shares are available for reissuance. ITEMS REQUIRING SUPERMAJORITY VOTE UNDER THE CERTIFICATE OF INCORPORATION The following actions require (i) the affirmative vote of at least four directors, followed by the affirmative vote of the percentage of issued and outstanding capital stock entitled to vote thereon at a meeting of the shareholders as required under the New York Business Corporation Law ("NYBCL"), if such action is required to be submitted to the shareholders under the NYBCL, or (ii) if any such action is not approved by at least four directors, then any such action will require the affirmative vote of at least 61% of the total voting power of the capital stock issued and outstanding and entitled to vote thereon, 18 provided however that if board approval of such action is required under the NYBCL, the action will also require the approval of the Board of Directors at a special meeting of the Board of Directors (and for no purposes other than the approval of actions taken pursuant to this subsection (ii)) for which two-fifths of the total number of directors constitutes a quorum: A. A fundamental change in the business of the Company or any subsidiary; B. The adoption of, and approval of any modification to, the annual budget of the Company for each fiscal year; C. An expenditure, not accounted for in the budget during any fiscal year, in excess of $5 million; D. A merger or other business combination or the sale, lease, transfer or other disposition of all or any material portion of the assets; E. Certain encumbrances; F. Related-party transactions; G. The issuance by the Company of third-party debt which causes the aggregate of all third party debt to exceed $25 million; H. Certain issuances of capital stock; I. The declaration of dividends or other distributions; J. The repurchase or optional redemption of any capital; K. The dissolution or liquidation or voluntary winding-up of the Company; L. Amending the Company's Certificate of Incorporation or By-Laws; M. The giving of certain guarantees or indemnities; N. The election or removal of the Chief Executive Officer or the Chairman of the Board; O. Entering into or modifying a material employment contract; P. A change in the auditors or fiscal year-end of the Company; Q. Settling or resolving tax claims in excess of $250,000; R. Commencement, prosecution or compromise of material litigation or arbitration proceedings; and S. Taking steps to wind-up, dissolve or voluntarily seek the protection of bankruptcy laws. 19 ITEM 6. SELECTED FINANCIAL DATA Set forth below are selected consolidated financial data of the Company for each of the years in the five-year period ended December 31, 1998. The selected consolidated financial data set forth below has been derived from the consolidated financial statements of the Company and the notes thereto prepared in conformity with generally accepted accounting principles as applied in the United States, which have been audited by the Company's independent public accountants (the "Consolidated Financial Statements"). The selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included herein.
YEAR ENDED DECEMBER 31, --------------------------------------------------------------- 1994 1995 1996 1997 1998 ---------- ---------- ----------- ----------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Cable television revenue....................... $ 8,776 $ 18,557 $ 24,923 $ 37,575 $ 52,971 Operating expenses: Direct operating expenses.................... (2,119) (5,129) (7,193) (11,416) (34,843) Selling, general and administrative expenses(1)................................ (2,818) (4,684) (9,289) (28,165) (19,559) Depreciation and amortization................ (3,459) (5,199) (9,788) (16,231) (21,635) ---------- ---------- ----------- ----------- ------------- Operating (loss)/income........................ 380 3,545 (1,347) (18,237) (23,066) Interest and investment income................. 78 174 1,274 3,176 1,020 Interest expense............................... (2,327) (4,373) (4,687) (13,281) (14,320) Foreign exchange loss, net..................... (27) (17) (761) (1,107) (617) ---------- ---------- ----------- ----------- ------------- Loss before income taxes, minority interest and extraordinary item........................... (1,896) (671) (5,521) (29,449) (36,983) Income tax (expense)/benefit................... (803) (600) (1,273) 975 (210) Minority interest.............................. 316 (18) 1,890 (3,586) -- ---------- ---------- ----------- ----------- ------------- Loss before extraordinary item............... (2,383) (1,289) (4,904) (32,060) (37,193) Extraordinary item--loss on early extinguishment of debt(2).................... -- -- (1,713) -- -- ---------- ---------- ----------- ----------- ------------- Net loss..................................... (2,383) (1,289) (6,617) (32,060) (37,193) Accretion of redeemable preferred stock........ -- -- (2,870) (4,194) (4,106) Preferred stock dividends...................... (1,811) -- (1,738) -- -- Excess of carrying value of preferred stock over consideration paid...................... -- -- 3,549 -- -- ---------- ---------- ----------- ----------- ------------- Net loss applicable to holders of common stock........................................ $ (4,194) $ (1,289) $ (7,676) $ (36,254) $ (41,299) ---------- ---------- ----------- ----------- ------------- ---------- ---------- ----------- ----------- ------------- Basic and diluted net loss per common share.... $ (310.51) $ (95.67) $ (435.72) $ (1,913.34) $ (2,179.60) ---------- ---------- ----------- ----------- ------------- ---------- ---------- ----------- ----------- -------------
20
AS OF DECEMBER 31, -------------------------------------------------------- 1994 1995 1996 1997 1998 --------- --------- ---------- ---------- ---------- (IN THOUSANDS) Consolidated Balance Sheets Data: Cash and cash equivalents............................ $ 2,493 $ 2,343 $ 68,483 $ 25,750 $ 2,574 Property, plant and equipment, net................... 33,235 52,320 84,833 109,090 136,868 Total assets......................................... 47,376 68,058 217,537 189,783 193,785 Total notes payable.................................. 35,988 59,405 130,074 130,110 138,441 Redeemable preferred stock........................... -- -- 34,955 39,149 30,977 Total stockholders' equity........................... 1,479 190 31,048 4,219 (13,561)
- ------------------------ (1) The year ended December 31, 1997 includes a non-cash compensation expense of $9,425,000 relating to the granting of certain management stock options. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 12 to the Consolidated Financial Statements. (2) See Note 10 to the Consolidated Financial Statements. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company's business consists primarily of the operations of its cable television systems in Poland. The Company's revenues have been and will continue to be derived primarily from monthly subscription fees for cable television services and one-time installation fees for connection to its cable television networks. The Company charges cable subscribers fixed monthly fees for their choice of service package and for other services, such as premium channels, tuner rentals and additional outlets, all of which are included in monthly subscription fees. The Company currently offers "broadcast", "intermediate" (in limited areas) and basic packages of cable service. At December 31, 1998, approximately 75% of the Company's subscribers received its "basic" package. For the year ended December 31, 1998, approximately 89% of the Company's revenue was derived from monthly subscription fees. Revenue from installation fees is deferred to the extent it exceeds direct selling costs and amortized to income over the estimated average period that new subscribers are expected to remain connected to the Company's cable system. When the Company began operations in 1990, revenue from installation fees exceeded revenue from monthly subscription fees because of the significant number of new installations and the high amount of the installation fees relative to the small existing subscriber base. As the Company's cable subscriber base has grown, aggregate monthly subscription revenue has increased and installation fees, while currently increasing on an absolute basis, have declined as a percentage of total revenue. The Company expects that installation fees will continue to constitute a declining portion of the Company's revenue. During 1998, management completed several strategic actions in support of its business and operating strategy. On June 5, 1998, the Company began providing the Wizja TV programming package, with its initial 11 channel primarily Polish-language programming, to its basic cable subscribers. Since that date, the basic Wizja TV package has been expanded to 19 channels. Management believes that this selection of high-quality primarily Polish-language programming will provide it with a significant competitive advantage in increasing its cable subscriber penetration rates. The Company has implemented a pricing strategy designed to increase revenue per subscriber and to achieve real profit margin increases in U.S. dollar terms. The Company has increased the monthly price for the basic package service to reflect the increased channel availability, and premium channels such as Wizja 1 (which is owned by @ Entertainment) and HBO Poland service (a Polish-language premium movie 21 channel owned in part by Home Box Office) are each offered to cable customers for an additional monthly charge. The Company expects that it may continue to experience increases in its churn rate above historical levels during the implementation of its current pricing strategy. For the year ended December 31, 1998, the Company's overall churn rate increased to 15.25%, and it experienced churn in premium services with penetration falling by 8,494 subscribers or 18.8% from December 31, 1997. The Company is planning to encrypt the HBO Poland service and install analog decoders for all premium subscribers during 1999. The Company divides operating expenses into (i) direct operating expenses, (ii) selling, general and administrative expenses and (iii) depreciation and amortization expenses. Direct operating expenses consist of programming expenses, maintenance and related expenses necessary to service, maintain and operate the Company's cable systems, billing and collection expenses and customer service expenses. Selling, general and administrative expenses consist principally of administrative costs, including office related expenses, professional fees and salaries, wages and benefits of non-technical employees, advertising and marketing expenses, bank fees and bad debt expense. Depreciation and amortization expenses consist of depreciation of property, plant and equipment and amortization of intangible assets. The Company generated operating losses of $1.3 million for 1996, $18.2 million for 1997 and $23.1 million for 1998, primarily due to the purchase of Wizja TV programming in 1998 for $12.9 million, increased levels of acquisitions and related costs, and increases in depreciation and amortization due to growth in cable systems and goodwill from acquisitions. In addition, for the year ended December 31, 1997 the Company recorded a one-time charge for non-cash compensation related to stock options of $9.4 million. In addition to other operating statistics, the Company measures its financial performance by EBITDA, an acronym for earnings before interest, taxes, depreciation and amortization. The Company defines EBITDA to be net loss adjusted for interest and investment income, depreciation and amortization, interest expense, foreign currency gains and losses, equity in losses of affiliated companies, income taxes, extraordinary items, non-recurring items (e.g., compensation expense related to stock options), gains and losses from the sale of assets other than in a normal course of business and minority interest. The items excluded from EBITDA are significant components in understanding and assessing the Company's financial performance. The Company believes that EBITDA and related measures of cash flow from operating activities serve as important financial indicators in measuring and comparing the operating performance of media companies. EBITDA is not a U.S. GAAP measure of loss or cash flow from operations and should not be considered as an alternative to cash flows from operations as a measure of liquidity. The Company reported EBITDA of $8.4 million for 1996, $7.4 million for 1997 and negative $1.4 million for 1998. 22 An analysis of cable subscriber growth is presented in the table below:
DECEMBER 31, ---------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Homes passed.......................................................... 1,591,981 1,408,099 1,088,540 Basic subscribers..................................................... 698,342 606,630 437,999 Subscriber growth Organic........................................................... 196,714 135,019 98,213 Through acquisitions.............................................. 7,478 110,919 108,657 Churn............................................................. (112,480)(1) (77,307)(1) (25,747) ------------ ------------ ------------ Total net growth.................................................. 91,712 168,631 181,123 ------------ ------------ ------------ Basic penetration..................................................... 43.9% 43.1% 40.2% Intermediate subscribers.............................................. 40,037 29,653 22,626 ------------ ------------ ------------ Basic and intermediate subscribers.................................... 738,379 636,283 460,625 ------------ ------------ ------------ Broadcast subscribers................................................. 196,961 132,618 78,717 ------------ ------------ ------------ Total subscribers..................................................... 935,340 768,901 539,342 ------------ ------------ ------------ Premium subscribers--HBO.............................................. 36,615 45,109 -- Premium penetration--HBO.............................................. 5.2% 7.4% 0.0% Basic revenue / basic subscriber/month................................ $ 5.69 $ 4.99 $ 4.36 Total revenue/ basic subscriber/month................................. $ 6.75 $ 6.08 $ 6.35
- ------------------------ (1) The increases in churn were mainly due to increases in subscription rates and the disconnection of non-paying customers. 1998 COMPARED TO 1997 CABLE TELEVISION REVENUE. Revenue increased $15.4 million or 41.0% from $37.6 million in 1997 to $53.0 million in 1998. This increase was primarily attributable to a 16.0% increase in the number of basic and intermediate subscribers from approximately 636,000 at December 31, 1997 to approximately 738,000 at December 31, 1998, as well as an increase in monthly subscription rates. The Company introduced the Wizja TV programming package on the Company's cable systems for basic subscribers on June 5, 1998, and after an initial free period, significantly increased prices in September 1998. Approximately 91.85% of the increase in basic subscribers was the result of expansion of the Company's existing cable networks and the remainder was due to acquisitions. Revenue from monthly subscription fees represented 85.2% of cable television revenue for the year ended December 31, 1997 and 88.9% for the year ended December 31, 1998. Installation fee revenue for 1998 decreased by 66.7% compared to 1997, from $3.1 million to $1.0 million. During 1998, the Company generated approximately $3.1 million of additional premium channel subscription revenue as a result of providing the HBO Poland service and Canal + premium movie channels to cable subscribers as compared to $1.0 million for the year ended December 31, 1997. DIRECT OPERATING EXPENSES. Direct operating expenses increased $23.4 million, or 205.3%, from $11.4 million in 1997 to $34.8 million in 1998, principally as a result of higher programming expenses related to the newly introduced Wizja TV programming package, higher levels of technical personnel and increased maintenance expenses associated with recently acquired networks which have not yet been integrated within the Company's networks and standards as well as the increased size of the Company's cable television system. The Company incurred $12.9 million in programming costs for the purchase of the Wizja TV programming package from an affiliate of the Company. Direct operating expenses increased from 30.4% of revenues for 1997 to 65.7% of revenues for 1998. 23 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased $8.6 million or 30.4% from $28.2 million in 1997 to $19.6 million in 1998. A portion of this decrease was due to non-cash non-recurring compensation expense of $9.4 million in the year ended December 31, 1997 in connection with stock options granted to certain key executives. As a percentage of revenue, selling, general and administrative expenses decreased from 75.0% for 1997 to approximately 36.9% for 1998. However, without considering the non-cash compensation expense related to the stock options described above, selling, general and administrative expenses as a percentage of revenues would have been 50.0% in 1997. This percentage decrease was attributable to operating efficiencies realized by the Company in 1998. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense rose $5.4 million, or 33.3%, from $16.2 million in 1997 to $21.6 million in 1998, principally as a result of depreciation of additional cable television networks and the continued build-out of the Company's cable networks and amortization of goodwill from acquisition. Depreciation and amortization expense as a percentage of revenues decreased from 43.2% in 1997 to 40.8% in 1998. INTEREST EXPENSE. Interest expense increased $1.0 million, or 7.5%, from $13.3 million in 1997 to $14.3 million in 1998 as a result of interest paid on loans assumed in acquisitions of subsidiaries and an additional loan draw down in June 1998. INTEREST AND INVESTMENT INCOME. Interest and investment income decreased $2.2 million, or 68.7%, from $3.2 million in 1997 to $1.0 million in 1998, primarily due to the reduction in the level of cash available for investment in 1998 as the proceeds from the Company's 9 7/8% Senior Notes due 2003 (the "PCI Notes") issued in 1996 were used to fund network expansion and operating losses. FOREIGN EXCHANGE LOSS, NET. Foreign exchange loss decreased $0.5 million or 45.4% from $1.1 million in 1997 to $0.6 million in 1998, primarily due to more favorable exchange rate fluctuations. MINORITY INTEREST. No minority interest was recorded for the year ended December 31, 1998, compared to a minority interest expense of $3.6 million for the corresponding period in 1997. The 1997 expense represents a fourth quarter adjustment to write off certain receivable balances that were not recoverable. All minority interests were eliminated in 1998 as the minority interest share of the losses exceeded the value of the minority interest investments. NET LOSS. For 1997 and 1998, the Company had net losses of $32.1 million and $37.2 million, respectively. These losses were the result of the factors discussed above. NET LOSS APPLICABLE TO COMMON STOCKHOLDERS. Net loss applicable to common stockholders increased from $36.3 million in 1997 to $41.3 million in 1998 due to the current year accretion of redeemable preferred stock and the factors discussed above. 1997 COMPARED TO 1996 CABLE TELEVISION REVENUE. Revenue increased $12.7 million or 51.0% from $24.9 million in 1996 to $37.6 million in 1997. This increase was primarily attributable to a 45.2% increase in the number of basic and intermediate subscribers from approximately 460,000 at December 31, 1996 to approximately 636,000 at December 31, 1997, as well as an increase in monthly subscription rates. Approximately 69.3% of the increase in basic subscribers was the result of acquisitions and the remainder was due to build-out of the Company's existing cable networks. Revenue from monthly subscription fees represented 87.2% of cable television revenue for the year ended December 31, 1996 and 90.1% of cable television revenue for the year ended December 31, 1997. Installation fee revenue for the year ended December 31, 1997 decreased by 6.3% compared to the year ended December 31, 1996, from $3.2 million to $3.0 million. During the year ended December 31, 1997, 24 the Company generated approximately $56,000 of additional premium subscription revenue and approximately $941,000 of additional premium channel installation revenue as a result of providing the HBO Poland service pay movie channel to cable subscribers. DIRECT OPERATING EXPENSES. Direct operating expenses increased $4.2 million, or 58.3%, from $7.2 million in 1996 to $11.4 million in 1997, principally as a result of higher levels of technical personnel and increased maintenance expenses associated with recently acquired networks as well as the increased size of the Company's cable television system. Direct operating expenses increased from 28.9% of revenues for the year ended December 31, 1996 to 30.4% of revenues for 1997. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $18.9 million or 203.2% from $9.3 million in 1996 to $28.2 million in 1997. A portion of this increase was due to non-cash compensation expense of $9.4 million in 1997 related to options to purchase shares granted to key executives. The remainder of the increase was attributable to 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, and costs of launching the distribution of the HBO Poland service premium pay movie channel. Compensation expense also increased as the Company established in 1997 a management team of senior executives who have significant experience in the cable television and programming businesses. As a percentage of revenue, selling, general and administrative expenses increased from 37.3% for 1996 to approximately 75.0% for 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 50.0% in 1997. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense rose $6.4 million, or 65.3%, from $9.8 million in 1996 to $16.2 million in 1997, principally as a result of depreciation of additional cable television systems acquired and the continued build-out of the Company's networks. Depreciation and amortization expense as a percentage of revenues increased from 39.3% for the year ended December 31, 1996 to 43.2% for the year ended December 31, 1997. INTEREST EXPENSE. Interest expense increased $8.6 million, or 182.8%, from $4.7 million in 1996 to $13.3 million in 1997 primarily due to the inclusion of a full year's interest on PCI Notes, which were issued in October 1996. INTEREST AND INVESTMENT INCOME. Interest and investment income increased $1.9 million, or 146.2%, from $1.3 million in 1996 to $3.2 million in 1997, primarily due to the income derived from the investment of a portion of the net proceeds from the issuance of PCI Notes in October 1996. FOREIGN EXCHANGE LOSS. Foreign exchange loss increased from $0.8 million in 1996, to $1.1 million in 1997 primarily due to less favorable exchange rate fluctuations. MINORITY INTEREST. Minority interest income was $1.9 million in 1996 compared to minority interest expense of $3.6 million in 1997, resulting from a fourth quarter adjustment to write off certain receivable balances that were not recoverable. EXTRAORDINARY ITEM. During 1996 the Company prepaid a loan from the Overseas Private Investment Corporation ("OPIC"), resulting in an extraordinary loss of $1.7 million, consisting of a prepayment penalty of $147,000 and a non-cash charge of $1,566,000 to write off deferred financing costs. NET LOSS. For 1996 and 1997, the Company had net losses of $6.6 million and $32.1 million, respectively. These losses were the result of the factors discussed above. 25 NET LOSS APPLICABLE TO COMMON STOCKHOLDERS. Net loss applicable to common stockholders increased from $7.7 million in 1996 to $36.3 in 1997 million due to the $2.4 million accretion of redeemable preferred stock and the factors discussed above. LIQUIDITY AND CAPITAL RESOURCES The Company has met its cash requirements in recent years primarily with (i) capital contributions and loans from certain of the Company's former principal stockholders, including Polish Investments Holding L.P. ("PIHLP"), the Cheryl Anne Chase Marital Trust ("CAC Trust"), certain members of David T. Chase's family and family trusts (the "Chase Family") (collectively the "Chase Entities") and ECO Holdings III Limited Partnership ("ECO"), who became principal stockholders of @ Entertainment, Inc. pursuant to a reorganization (the "Former Principal Stockholders"), (ii) borrowings under available credit facilities, (iii) cash flows from operations, and (iv) the sale of $130 million aggregate principal amount of PCI's 9 7/8% Senior Notes due to 2003 ("PCI Notes"). The Company had positive cash flows from operating activities in 1996 and 1998 of $6.1 million and $14.3 million, respectively, primarily due to the increase of accounts payable and accrued expenses and the deferral of the payment of interest expense in 1996, and the decrease of amounts due from affiliates, increase in accounts payable and accrued expenses, and income tax refunds received in 1998. The Company had negative cash flows from operating activities for 1997 of $9.6 million, due to the Company's net loss. Cash used for the purchase and expansion of the Company's cable television networks was $26.6 million, $33.8 million and $42.6 million in 1996, 1997 and 1998, respectively. Cash used for the acquisition of subsidiaries, net of cash received, was $13.3 million, $18.0 million and $17.6 million in 1996, 1997 and 1998, respectively. The Company spent approximately $3.9 million, $5.9 million and $8.1 million in 1996, 1997 and 1998, respectively, to upgrade major acquired networks to meet the Company's technical standards. During 1996, the Company issued common and preferred stock to certain of the Former Principal Stockholders for approximately $82 million. On March 29, 1996, the Company consummated a transaction in which ECO purchased shares of common and preferred stock of the Company for a price of $65 million. On March 29, 1996, PIHLP purchased additional shares of preferred and common stock of the Company for an aggregate purchase price of approximately $17 million. The Company applied approximately $55 million of the proceeds of these transactions to repay indebtedness owed to Chase American Corporation, which is beneficially owned by the Chase Family, and approximately $8.5 million to redeem preferred stock held by PIHLP, which is beneficially owned by the Chase Family. During 1996, the Company also entered into an agreement with American Bank in Poland, S.A. ("AmerBank") which provides for a credit facility of approximately $6.5 million. Interest, based on LIBOR plus 3%, is due quarterly. All advances under the loan must be repaid by August 20, 1999. All amounts under this facility were drawn in June 1998. On October 31, 1996, $130 million aggregate principal amount of the PCI Notes were sold by the Company to the initial purchaser pursuant to a purchase agreement. The initial purchaser subsequently completed a private placement of the PCI Notes. The PCI Notes were issued pursuant to an indenture. Pursuant to the indenture governing the PCI Notes (the "PCI Indenture"), the Company is subject to certain restrictions and covenants, including, without limitation, covenants with respect to the following matters: (i) limitation on additional indebtedness; (ii) limitation on restricted payments; (iii) limitation on issuances and sales of capital stock of subsidiaries; (iv) limitation on transactions with affiliates; (v) limitation on liens; (vi) limitation on guarantees of indebtedness by subsidiaries; (vii) purchase of PCI Notes upon a change of control; (viii) limitation on sale of assets; (ix) limitation on dividends and other payment restrictions affecting subsidiaries; (x) limitation on investments in unrestricted subsidiaries; (xi) limitation on lines of business; and (xii) consolidations, mergers and sale of assets. The Company is in 26 compliance with these covenants. The PCI Indenture limits, but does not prohibit, the payment of dividends by PCI and the ability of PCI to incur additional indebtedness. PCI could not pay dividends to @Entertainment as of December 31, 1998 because certain financial ratios did not meet the minimums provided in the PCI's indenture. Pursuant to the AmerBank credit facility, the Company is subject to certain informational and notice requirements but is not subject to restrictive covenants. Since the commencement of its operations in 1990, the Company has required external funds to finance the buildout of its existing networks and to finance acquisitions of new cable television networks. 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, will make capital contributions and loans to the Company. The Company's current strategic objective is to increase cash flow and enhance the value of its cable networks. To accomplish this objective, the Company's business and operating strategy in the cable television business is to (i) provide compelling programming, (ii) increase pricing and maximize revenue per cable subscriber, (iii) expand its regional clusters, (iv) increase subscriber penetration, and (v) realize additional operating efficiencies. The Company is dependent on obtaining new financing to achieve this business strategy. Future sources of financing for the Company could include public or private debt offerings or bank financings or any combination thereof, subject to the restrictions contained in the indentures governing the Company's and @Entertainment's outstanding senior indebtedness. 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 refinancings that it considers advantageous, there can be no assurance that such sources of financing would be available to the Company in the future, or, if available, that they could be obtained on terms acceptable to the Company. The Company is also dependent on its parent, @Entertainment, to provide financing to achieve the Company's business strategy. @Entertainment has represented that it will make such financing available to fund the Company's current business strategy for the next twelve months. YEAR 2000 COMPLIANCE The Company is dependent upon computer systems and other technological devices with imbedded microprocessor chips that are intended to utilize dates and process data beyond December 31, 1999. In January 1997, the Company developed a plan to address the impact that potential Y2K problems may have on Company operations and to implement necessary changes to address such problems. During the course of the development of its Y2K plan, the Company has identified certain critical operations, which need to be Y2K compliant for the Company to operate effectively. These critical operations include accounting and billing systems, customer service and service delivery systems, and field and headend devices. Largely as a result of its high rate of growth over the past few years, the Company has entered into an agreement to purchase a new system to replace its current accounting system and an agreement to purchase specialized billing software for the Company's new customer service and billing center. The vendors of the new accounting system and of the billing software have confirmed to the Company that these products are Y2K compliant. The Company has completed the testing phase of the new accounting system, and the implementation phase was substantially completed at the end of 1998. The Company expects implementation of the billing software to be completed for the majority of its cable subscribers by the end of 1999. 27 The Company believes that its most significant Y2K risk is its dependency upon third party programming, software, services and equipment, because the Company does not have the ability to control third parties in their assessment and remediation procedures for potential Y2K problems. Should these parties not be prepared for Y2K conversion, their products or services may fail and may cause interruptions in, or limitations upon, the Company's provision of the full range of its cable service to its customers. In an effort to prevent any such interruptions or limitations, the Company is in the process of communicating with each of its material third party suppliers of programming, software, services and equipment to determine the status of their Y2K compliance programs. The Company expects to complete this process by September 30, 1999, and it anticipates that all phases of its Y2K plan will be completed by December 31, 1999. The Company has not yet developed a contingency plan to address the situation that may result if the Company or its third party suppliers are unable to achieve Y2K compliance with regard to any products or services utilized in the Company's operations. The Company does not intend to decide on the development of such a contingency until it has gathered all of the relevant Y2K compliance data from its third party suppliers. The Company has not yet determined the full cost of its Y2K Plan and its related impact on the financial condition of the Company. The Company has to date not incurred any replacement or remediation costs for equipment or systems as a result of Y2K non-compliance. Rather, due to the rapid growth and development of its cable system the Company has made substantial capital investments in equipment and systems for reasons other than Y2K concerns. The total cost of the Company's new accounting system and billing software package is estimated to be approximately $2,400,000. The Company believes that any Y2K compliance issues it may face can be remedied without a material financial impact on the Company, but no assurance can be made in this regard until all of the data has been gathered from the Company's third party suppliers. At this date the Company cannot predict the financial impact on its operations if Y2K problems are caused by products or services supplied to the Company by such third parties. IMPLEMENTATION OF NEW ACCOUNTING STANDARDS SFAS No. 130, "Reporting Comprehensive Income," established standards for the reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income encompasses all changes in stockholders' equity (except those arising from transactions with owners) and includes net income, net unrealized capital gains or losses on available for sale securities and foreign currency translation adjustments. As this new standard only requires additional information in financial statements, it does not affect the Company's financial position or results of operations. SFAS No. 131, "Disclosures about Segment of an Enterprise and Related Information," established standards for the reporting of information relating to operating segments in annual financial statements, as well as disclosure of selected information in interim financial reports. This statement supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," which requires reporting segment information by industry and geographic area (industry approach). Under SFAS No. 131, operating segments are defined as components of a company for which separate financial information is available and used by management to allocate resources and assess performance (management approach). IMPACT OF NEW ACCOUNTING STANDARDS NOT YET ADOPTED In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" which establishes standards of accounting for these transactions. SFAS No. 133 is effective for the Company beginning on July 1, 1999. The Company currently has no derivative instruments or hedging activities. 28 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The principal market risk (I.E., the risk of loss arising from adverse changes in market rates and prices) to which the Company is exposed is foreign exchange rate risk from fluctuations in the Polish zloty currency exchange rate. The Company's long term debt is primarily subject to a fixed rate, and therefore variations in the interest rate do not have a material impact on net interest expense. FOREIGN EXCHANGE AND OTHER INTERNATIONAL MARKET RISKS Operating in international markets involves exposure to movements in currency exchange rates. Currency exchange rate movements typically affect economic growth, inflation, interest rates, governmental actions and other factors. These changes, if material, can cause the Company to adjust its financing and operating strategies. The discussion of changes in currency exchange rates below does not incorporate these other important economic factors. International operations constitute 100% of the Company's 1998 consolidated operating loss. Some of the Company's operating expenses and capital expenditures are expected to continue to be denominated in or indexed in U.S. dollars. By contrast, substantially all of the Company's revenues are denominated in zloty. Any devaluation of the zloty against the U.S. dollar that the Company is unable to offset through price adjustments will require it to use a larger portion of its revenue to service its U.S. dollar denominated obligations and contractual commitments. The Company estimates that a 10% change in foreign exchange rates would impact reported operating loss by approximately $193,000. In other terms, a 10% depreciation of the Polish zloty against the U.S. dollar, would result in a $193,000 increase in the reported operating loss. This was estimated using 10% of the Company's operating loss after adjusting for unusual impairment and other items including U.S. dollar denominated or indexed expenses. The Company believes that this quantitative measure has inherent limitations because, as discussed in the first paragraph of this section, it does not take into account any governmental actions or changes in either customer purchasing patterns or the Company's financing or operating strategies. The Company does not generally hedge translation risk. While the Company may consider entering into transactions to hedge the risk of exchange rate fluctuations, there is no assurance that it will be able to obtain hedging arrangements on commercially satisfactory terms. Therefore, shifts in currency exchange rates may have an adverse effect on the Company's financial results and on its ability to meet its U.S. dollar denominated debt obligations and contractual commitments. Poland has historically experienced high levels of inflation and significant fluctuations in the exchange rate for the zloty. The Polish government has adopted policies that slowed the annual rate of inflation from approximately 250% in 1990 to approximately 20% in 1996, approximately 14.9% in 1997, and approximately 11.8% in 1998. The exchange rate for the zloty has stabilized and the rate of devaluation of the zloty has generally decreased since 1991 and the zloty has appreciated against the U.S. dollar by approximately 0.9% for the year ended December 31, 1998. For the first quarter of 1999 the zloty has depreciated against the U.S. dollar by approximately 13%. Inflation and currency exchange fluctuations have had, and may continue to have, a material adverse effect on the business, financial condition and results of operations of the Company. 29 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEPENDENT AUDITORS' REPORT The Board of Directors Poland Communications, Inc.: We have audited the accompanying consolidated balance sheets of Poland Communications, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, comprehensive loss, changes in stockholders' (deficiency)/equity and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Poland Communications, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles in the United States of America. KPMG Warsaw, Poland March 29, 1999 30 POLAND COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER, 31 ---------------------- 1998 1997 ---------- ---------- (IN THOUSANDS) Current assets: Cash and cash equivalents............................................................... $ 2,574 $ 25,750 Accounts receivable, net of allowances for doubtful accounts of $1,095,000 in 1998 and $766,000 in 1997...................................................................... 2,770 2,120 Due from affiliate...................................................................... -- 2,353 Other current assets (note 8)........................................................... 1,362 2,233 ---------- ---------- Total current assets.................................................................. 6,706 32,456 ---------- ---------- Property, plant and equipment: Cable television system assets........................................................ 175,053 134,469 Construction in progress.............................................................. 1,665 1,904 Vehicles.............................................................................. 2,096 2,032 Other................................................................................. 6,183 3,784 ---------- ---------- 184,997 142,189 Less accumulated depreciation....................................................... (48,129) (33,099) ---------- ---------- Net property, plant and equipment................................................... 136,868 109,090 Inventories for construction............................................................ 8,851 8,153 Intangibles, net (note 7)............................................................... 34,481 26,318 Notes receivable from affiliates (note 14).............................................. 449 6,472 Other assets, net (note 8).............................................................. 6,430 7,294 ---------- ---------- Total assets........................................................................ $ 193,785 $ 189,783 ---------- ---------- ---------- ----------
See accompanying notes to consolidated financial statements. 31 POLAND COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) / EQUITY
DECEMBER, 31 ---------------------- 1998 1997 ---------- ---------- (IN THOUSANDS) Current liabilities: Accounts payable and accrued expenses................................................. $ 13,268 $ 6,395 Current portion of notes payable (note 10)............................................ 6,500 -- Accrued interest (note 10)............................................................ 2,140 2,175 Deferred revenue...................................................................... 1,207 1,257 Income taxes payable.................................................................. 3,794 1,765 ---------- ---------- Total current liabilities........................................................... 26,909 11,592 Due to affiliate (note 14)................................................................ 17,519 -- Notes payable, less current portion (note 10)............................................. 131,941 130,110 ---------- ---------- Total liabilities................................................................... 176,369 141,702 ---------- ---------- Minority interest......................................................................... -- 4,713 Redeemable preferred stock (liquidation value $60,000,000; 6,000 shares authorized, issued and outstanding) (note 13).............................................................. 30,977 39,149 Commitments and contingencies (note 16) Stockholders' (deficiency)/equity (note 12): Common stock, $.01 par value, 27,000 shares authorized; 18,948 shares issued and outstanding......................................................................... 1 1 Paid-in capital....................................................................... 78,380 59,553 Accumulated other comprehensive income................................................ 586 -- Accumulated deficit................................................................... (92,528) (55,335) ---------- ---------- Total stockholders' (deficiency)/equity............................................. (13,561) 4,219 ---------- ---------- Total liabilities and stockholders' (deficiency)/equity............................. $ 193,785 $ 189,783 ---------- ---------- ---------- ----------
See accompanying notes to consolidated financial statements. 32 POLAND COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------------------ 1998 1997 1996 ----------- ----------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Cable television revenue................................................... $ 52,971 $ 37,575 $ 24,923 Operating expenses: Direct operating expenses (note 14)...................................... 34,843 11,416 7,193 Selling, general and administrative expenses (note 12)................... 19,559 28,165 9,289 Depreciation and amortization............................................ 21,635 16,231 9,788 ----------- ----------- ---------- Total operating expenses............................................... 76,037 55,812 26,270 ----------- ----------- ---------- Operating loss......................................................... (23,066) (18,237) (1,347) Interest and investment income............................................. 1,020 3,176 1,274 Interest expense (note 10)................................................. (14,320) (13,281) (4,687) Foreign exchange loss, net................................................. (617) (1,107) (761) ----------- ----------- ---------- Loss before income taxes, minority interest and extraordinary items...... (36,983) (29,449) (5,521) Income tax (expense)/benefit (note 9)...................................... (210) 975 (1,273) Minority interest.......................................................... -- (3,586) 1,890 ----------- ----------- ---------- Loss before extraordinary item........................................... (37,193) (32,060) (4,904) Extraordinary item-loss on early extinguishment of debt (note 10).......... -- -- (1,713) ----------- ----------- ---------- Net loss................................................................... (37,193) (32,060) (6,617) Accretion of redeemable preferred stock (note 13).......................... (4,106) (4,194) (2,870) Preferred stock dividends (note 12)........................................ -- -- (1,738) Excess of carrying value of preferred stock over consideration paid (note 12)...................................................................... -- -- 3,549 ----------- ----------- ---------- Net loss applicable to holders of common stock............................. $ (41,299) $ (36,254) $ (7,676) ----------- ----------- ---------- ----------- ----------- ---------- Basic and diluted loss per common share: Loss before extraordinary item........................................... $ (2,179.60) $ (1,913.34) $ (338.48) Extraordinary item....................................................... -- -- (97.24) ----------- ----------- ---------- Net loss (note 3).......................................................... $ (2,179.60) $ (1,913.34) $ (435.72) ----------- ----------- ---------- ----------- ----------- ----------
See accompanying notes to consolidated financial statements. 33 POLAND COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
YEAR ENDED DECEMBER 31, --------------------------------- 1998 1997 1996 ---------- ---------- --------- (IN THOUSANDS) Net loss........................................................................ $ (37,193) $ (32,060) $ (6,617) Other comprehensive income: Translation adjustment........................................................ 586 -- -- ---------- ---------- --------- Comprehensive loss.............................................................. $ (36,607) $ (32,060) $ (6,617) ---------- ---------- --------- ---------- ---------- ---------
See accompanying notes to consolidated financial statements. 34 POLAND COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY / (DEFICIENCY)
ACCUMULATED PREFERRED STOCK COMMON STOCK OTHER ------------------------ ------------------------ PAID-IN COMPREHENSIVE SHARES AMOUNT SHARES AMOUNT CAPITAL INCOME ----------- ----------- ----------- ----------- --------- ----------------- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) Balance January 1, 1996............... 985 $ 10,311 11,037 $ 4,993 $ 1,544 $ -- Net loss............................ -- -- -- -- -- -- Stock dividend...................... 166 1,738 -- -- (1,738) -- Proceeds from issuance of common and preferred stock (note 12)......... -- -- 7,911 (4,992) 87,021 -- Cost of issuance (note 12).......... -- -- -- -- (1,028) -- Allocation of proceeds to preferred stock (note 12)................... -- -- -- -- (32,156) -- Preferred stock redemption (note 12)............................... (1,151) (12,049) -- -- 3,549 -- Accretion of redeemable preferred stock (note 13)................... -- -- -- -- (2,870) -- ----------- ----------- ----------- ----------- --------- ----- Balance December 31, 1996............. -- -- 18,948 1 54,322 -- Net loss............................ -- -- -- -- -- -- Accretion of redeemable preferred stock (note 13)................... -- -- -- -- (4,194) -- ----------- ----------- ----------- ----------- --------- ----- Stock option compensation expense (note 12)......................... -- -- -- -- 9,425 -- ----------- ----------- ----------- ----------- --------- ----- Balance December 31, 1997............. -- -- 18,948 1 59,553 -- Net loss............................ -- -- -- -- -- -- Translation adjustment.............. 586 Capital contribution (note 5)....... -- -- -- -- 10,655 -- Cancellation of Series B redeemable preferred stock (note 13)......... -- -- -- -- 12,278 -- Accretion of redeemable preferred stock (note 13)................... -- -- -- -- (4,106) -- ----------- ----------- ----------- ----------- --------- ----- Balance December 31, 1998............. -- $ -- 18,948 $ 1 $ 78,380 $ 586 ----------- ----------- ----------- ----------- --------- ----- ----------- ----------- ----------- ----------- --------- ----- ACCUMULATED DEFICIT TOTAL ------------ --------- Balance January 1, 1996............... $ (16,658) $ 190 Net loss............................ (6,617) (6,617) Stock dividend...................... -- -- Proceeds from issuance of common and preferred stock (note 12)......... -- 82,029 Cost of issuance (note 12).......... -- (1,028) Allocation of proceeds to preferred stock (note 12)................... -- (32,156) Preferred stock redemption (note 12)............................... -- (8,500) Accretion of redeemable preferred stock (note 13)................... -- (2,870) ------------ --------- Balance December 31, 1996............. (23,275) 31,048 Net loss............................ (32,060) (32,060) Accretion of redeemable preferred stock (note 13)................... -- (4,194) ------------ --------- Stock option compensation expense (note 12)......................... -- 9,425 ------------ --------- Balance December 31, 1997............. (55,335) 4,219 Net loss............................ (37,193) (37,193) Translation adjustment.............. -- 586 Capital contribution (note 5)....... -- 10,655 Cancellation of Series B redeemable preferred stock (note 13)......... -- 12,278 Accretion of redeemable preferred stock (note 13)................... -- (4,106) ------------ --------- Balance December 31, 1998............. $ (92,528) $ (13,561) ------------ --------- ------------ ---------
See accompanying notes to consolidated financial statements. 35 POLAND COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ---------------------------------- 1998 1997 1996 ---------- ---------- ---------- (IN THOUSANDS) Cash flows from operating activities: Net loss.................................................................... $ (37,193) $ (32,060) $ (6,617) Adjustments to reconcile net loss to net cash provided by /(used in) operating activities: Minority interest......................................................... -- 3,586 (1,890) Depreciation and amortization............................................. 21,635 16,231 9,788 Amortization of notes payable discount and issue costs.................... 881 1,040 166 Non-cash portion of extraordinary item.................................... -- -- 1,566 Gain on sale of investment securities..................................... -- (358) -- Non-cash stock option compensation expense................................ -- 9,425 -- Other..................................................................... 496 -- -- Changes in operating assets and liabilities: Accounts receivable..................................................... (650) 433 (796) Due from affiliate...................................................... 19,872 (2,626) -- Other current assets.................................................... 1,015 (101) (1,862) Accounts payable and accrued expenses................................... 6,289 (2,584) 3,379 Income tax payable...................................................... 2,029 (2,707) 334 Accrued interest........................................................ (35) -- 2,175 Deferred revenue........................................................ (55) 155 (131) ---------- ---------- ---------- Net cash provided by /(used in) operating activities.................. 14,284 (9,566) 6,112 ---------- ---------- ---------- Cash flows from investing activities: Construction and purchase of property, plant and equipment.............. (42,639) (33,786) (26,581) Repayment of notes receivable from affiliattes.......................... 6,023 2,521 -- Issuance of notes receivable from affiliates............................ -- (721) (2,491) Purchase of investment securities....................................... -- -- (25,940) Proceeds from maturity of investment securities......................... -- 25,473 -- Other investments....................................................... -- (1,200) (6,000) Investments in affiliated companies..................................... -- 56 (580) Purchase of subsidiaries, net of cash received.......................... (17,601) (18,041) (13,269) ---------- ---------- ---------- Net cash used in investing activities................................. (54,217) (25,698) (74,861) ---------- ---------- ---------- Cash flows from financing activities: Capital contribution.................................................... 10,655 -- -- Net proceeds from issuance of stock..................................... -- -- 81,001 Redemption of preferred stock........................................... -- -- (8,500) Costs to obtain loans................................................... -- (1,749) (6,513) Proceeds from issuance of notes payable................................. 6,500 -- 136,074 Repayment of notes payable.............................................. (398) (720) (27,893) Repayments to affiliates................................................ -- -- (39,280) ---------- ---------- ---------- Net cash provided by/ (used in) financing activities.................. 16,757 (2,469) 134,889 ---------- ---------- ---------- Net decrease in cash and cash equivalents............................. (23,176) (37,733) 66,140 Cash and cash equivalents at beginning of year................................ 25,750 63,483 2,343 ---------- ---------- ---------- Cash and cash equivalents at end of year...................................... $ 2,574 $ 25,750 $ 68,483 ---------- ---------- ---------- ---------- ---------- ---------- Supplemental cash flow information: Cash paid for interest.................................................. $ 13,014 $ 12,873 $ 2,338 ---------- ---------- ---------- ---------- ---------- ---------- Cash paid for income taxes.............................................. $ 589 $ 1,732 $ 1,184 ---------- ---------- ---------- ---------- ---------- ----------
See accompanying notes to consolidated financial statements. 36 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 1. REPORTING ENTITY Poland Communications, Inc. ("PCI"), is a New York corporation and was founded in 1990 by David T. Chase, a Polish-born investor. PCI is a wholly-owned subsidiary of @Entertainment, Inc. ("@ Entertainment"), a Delaware corporation which is a publicly listed company in the United States. PCI owns 92.3% of the capital stock of Poland Cablevision (Netherlands) B.V. ("PCBV"), a Netherlands corporation and first-tier subsidiary of PCI. PCI and PCBV are holding companies that hold controlling interests in a number of Polish cable television companies, collectively referred to as the "PTK Companies". All significant assets and operating activities of PCI and subsidiaries (the "Company") are located in Poland. The Company offers pay television services to business and residential customers in Poland. Its revenues are derived primarily from installation fees and monthly basic and premium service fees for cable television services. THE REORGANIZATION In June 1997, @Entertainment was formed as the parent of PCI to facilitate an initial public offering of stock in the United States and internationally (the "IPO"). Before the IPO, all the holders of shares of PCI's common stock and @Entertainment entered into a Contribution Agreement dated as of June 22, 1997 pursuant to which each holder of shares of PCI's common stock transferred all shares of PCI common stock owned by it to @Entertainment. In addition, ECO Holding III Limited ("ECO") transferred all of the outstanding shares of PCI's series B preferred stock to @Entertainment. All of these transfers (the "Share Exchange") were designed to qualify as a tax-free exchange under section 351 of the Internal Revenue Code of 1986, as amended. Each holder of PCI's common stock received 1,000 shares of common stock of @Entertainment 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's series B preferred stock in exchange for its 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 1:1,944.80 in order to reflect the Capital Adjustment. The 2,500 outstanding shares of @Entertainment's series B preferred stock automatically converted into 4,862,000 shares of common stock of @Entertainment upon the closing of the IPO (the "Automatic Conversion"). On June 20, 1997, Polish Investments Holding LP ("PIHLP"), transferred all of the outstanding shares of PCI's series C preferred stock to an entity owned by certain of the beneficial owners of PIHLP and members of their families (the "Chase Entity"). The Chase Entity, ECO and @Entertainment entered into a Purchase Agreement dated as of June 22, 1997 (the "Purchase Agreement"). Among other matters, the Purchase Agreement obligated @Entertainment 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 IPO. The aggregate purchase price of $60 million for PCI's series A preferred stock and series C preferred stock equaled the aggregate purchase price of such shares as set forth in PCI's certificate of incorporation. In June 1997, certain employment agreements for the executive officers of @Entertainment who were employed by PCI and their employee stock option agreements were assigned to @Entertainment by PCI (the "Assignment"). As part of the Assignment and the Capital Adjustment, the employment agreements were amended to provide that each option to purchase a share of PCI's common stock was exchanged for 37 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 1. REPORTING ENTITY (CONTINUED) an option to purchase 1,000 shares of @Entertainment's common stock with a proportionate reduction in the per share exercise price. The Share Exchange, Capital Adjustment, and the Assignment are collectively referred to as the "Reorganization". As a result of the Reorganization, @Entertainment owns all of the outstanding shares of common and redeemable preferred stock of PCI. PCI's consolidated assets and liabilities were transferred to @Entertainment, Inc. using PCI's historical cost. PCBV STOCKHOLDERS' AGREEMENT The following is a summary of certain aspects of the PCBV Stockholders' Agreement entered into by PCI, PCBV and PCBV's minority stockholders on March 8, 1990. The minority stockholders own the 7.7% of outstanding PCBV capital stock that is not owned by PCI. The PCBV Stockholders' Agreement protects shareholdings of each minority stockholder from dilution, by requiring that the PCBV shares of each minority stockholder must continue to represent a constant percentage of the total equity in PCBV and of the total votes to be cast by the PCBV stockholders on any subject, regardless of changes to the capital structure of PCBV and regardless of any additional equity funds that may be contributed to PCBV by PCI. The PCBV Stockholders' Agreement contains restrictions on the PCBV stockholders' ability to sell, pledge, hypothecate or otherwise transfer or encumber their PCBV shares. In addition, PCBV stockholders have the right of first refusal to purchase PCBV shares upon the death of an individual PCBV stockholder, and upon the liquidation, dissolution or other termination of a corporate PCBV stockholder. Furthermore, PCI has the right of first refusal to purchase PCBV shares from minority stockholders, and the minority stockholders have the right of first refusal to purchase PCBV shares from PCI, before such shares can be sold to a third party. Under the PCBV Stockholder's Agreement, PCI has the option to purchase the PCBV shares owned by the minority stockholders upon the satisfaction of certain conditions. The PCBV Stockholders' Agreement also includes covenants against competition that limit the ability of each PCBV stockholder to engage directly or indirectly in any aspect of the cable television business in Poland for a period ending ten years after such PCBV stockholder ceases to be a PCBV stockholder. PCI has direct or indirect ownership interests in a number of entities that engage in certain aspects of the cable television business in Poland. Under the PCBV Stockholders' Agreement, the minority stockholders have a claim again 7.7% of the profits and equity of such entities and, under a supplemental agreement, PCI has agreed to share the profits of these entities with the minority stockholders on a pro rata basis. In addition, PCI is negotiating to buy, and has made an offer to buy, the outstanding PCBV shares held by the minority stockholders. 2. 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 38 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 2. FINANCIAL POSITION AND BASIS OF ACCOUNTING (CONTINUED) 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. 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 financing to support the planned expansion. The Company's current strategic objective is to increase cash flow and enhance the value of its cable networks. To accomplish this objective, the Company's business and operating strategy in the cable television business is to (i) provide compelling programming, (ii) increase pricing and maximize revenue per cable subscriber, (iii) expand its regional clusters, (iv) increase subscriber penetration, and (v) realize additional operating efficiencies. The Company is dependent on its parent, @Entertainment to provide financing to achieve this business strategy. @ Entertainment has represented that it will make such financing available to fund the current business strategy for the next twelve months and accordingly, management consider it appropriate to prepare the consolidated financial statements on a going concern basis. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP"). The consolidated financial statements include the financial statements of Poland Communications, Inc. and its wholly owned and majority owned subsidiaries. Also consolidated is a 49% owned subsidiary for which the Company maintains control of operating activities and has the ability to influence the appointment of members to the Managing Board. All significant intercompany balances and transactions have been eliminated in consolidation. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash and other short-term investments with original maturities of three months or less. USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with U.S. GAAP. Actual results could differ from those estimates. REVENUE RECOGNITION Revenue is primarily derived from the sale of cable television services to retail customers in Poland. Revenue from subscription fees is recognized on a monthly basis as the service is provided. Installation fee revenue, for connection to the Company's cable television systems, is recognized to the extent of direct 39 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED) selling costs and the balance is deferred and amortized into income over the estimated average period that new subscribers are expected to remain connected to the systems. TAXATION Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. U.S. TAXATION: PCI is subject to U.S. Federal taxation of its worldwide income. The PTK Companies and PCBV are foreign corporations, which are not expected to be engaged in a trade or business within the U.S. or to derive income from U.S. sources and accordingly, are not subject to U.S. income tax. FOREIGN TAXATION: The PTK Companies are subject to corporate income taxes, value added tax (VAT) and various local taxes within Poland, as well as import duties on materials imported by them into Poland. Under Polish law, the PTK Companies are exempt from import duties on certain in-kind capital contributions. The PTK Companies' income tax is calculated in accordance with Polish tax regulations. Due to differences between accounting practices under Polish tax regulations and those required by U.S. GAAP, certain income and expense items are recognized in different periods for financial reporting purposes and income tax reporting purposes which may result in deferred income tax assets and liabilities. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment includes assets used in the development and operation of the various cable television systems. During the period of construction, plant costs and a portion of design, development and related overhead costs are capitalized as a component of the Company's investment in cable television systems. When material, the Company capitalizes interest costs incurred during the period of construction in accordance with SFAS No. 34, "CAPITALIZATION OF INTEREST COST". During 1998, 1997 and 1996, no interest costs were capitalized. Cable subscriber related costs and general and administrative expenses are charged to operations when incurred. Depreciation is computed for financial reporting purposes using the straight-line method over the following estimated useful lives: Cable television system assets................................... 10 years Vehicles......................................................... 5 years 5-10 Other property, plant and equipment.............................. years
40 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED) INVENTORIES FOR CONSTRUCTION Inventories for construction are stated at the lower of cost, determined by the average cost method, or net realizable value. Inventories are principally related to construction in the various cable television systems. GOODWILL AND OTHER INTANGIBLES Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over the expected periods to be benefited, generally ten years, with the exception of amounts paid relating to non-compete agreements. The portion of the purchase price relating to non-compete agreements is amortized over the term of the underlying agreements, generally five years. The Company has entered into lease agreements with the Polish national telephone company ("TPSA"), for the use of underground telephone conduits for cable wiring. Costs related to obtaining conduit and franchise agreements with housing cooperatives and governmental authorities are capitalized generally over a period of ten years. In the event the Company does not proceed to develop cable systems within designated cities, costs previously capitalized will be charged to expense. DEFERRED FINANCING COSTS The costs of obtaining long-term debt are deferred and amortized on an effective interest basis over the term of the debt. The amortization of these charges is included in interest on long-term debt. MINORITY INTEREST Recognition of the minority interests' share of losses of consolidated subsidiaries is limited to the amount of such minority interests' allocable portion of the equity of those consolidated subsidiaries. FOREIGN CURRENCIES Foreign currency transactions are recorded at the exchange rate prevailing at the date of the transactions. Assets and liabilities denominated in foreign currencies are remeasured at the rates of exchange at the consolidated balance sheet date. Gains and losses on foreign currency transactions are included in the consolidated statement of operations. The financial statements of foreign subsidiaries are translated into U.S. dollars using (i) exchange rates in effect at period end for assets and liabilities, and (ii) average exchange rates during the period for results of operations. Adjustments resulting from translation of financial statements are reflected in accumulated other comprehensive income as a separate component of stockholders' equity. Effective January 1, 1998, Poland is no longer deemed to be a highly inflationary economy. In accordance with this change, the Company established a new functional currency bases for nonmonetary items in accordance with guidelines established within EITF Issue 92-4, "ACCOUNTING FOR A CHANGE IN FUNCTIONAL CURRENCY WHEN AN ECONOMY CEASES TO BE CONSIDERED HIGHLY INFLATIONARY." That basis is computed by translating the historical reporting currency amounts of non-monetary items into the local currency at current exchange rates. As a result of this change, the Company's functional currency bases 41 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED) exceeded the local currency tax bases of nonmonetary items. The difference between the new functional currency and the tax bases have been recognized as temporary differences. Prior to January 1, 1998 the financial statements of foreign subsidiaries were translated into U.S. dollars using (i) exchange rates in effect at period end for monetary assets and liabilities, (ii) exchange rates in effect at transaction dates (historical rates) for non-monetary assets and liabilities, and (iii) average exchange rates during the period for revenues and expenses, other than those revenues and expenses that relate to non-monetary assets and liabilities (primarily amortization of fixed assets and intangibles) which are translated using the historical exchange rates applicable to those non-monetary assets and liabilities. Adjustments resulting from translation of financial statements are reflected as foreign exchange gains or losses in the consolidated statements of operations. BASIC AND DILUTED NET LOSS PER SHARE Basic loss per share has been computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. The effect of potential common shares is antidilutive, accordingly, dilutive loss per share is the same as basic loss per share. The following table provides a reconciliation of the numerator and denominator in the loss per share calculation:
YEAR ENDED DECEMBER 31, ------------------------------------ 1998 1997 1996 ----------- ----------- ---------- Net loss attributable to common stockholders (in thousands)................ $ (41,299) $ (36,254) $ (7,676) ----------- ----------- ---------- ----------- ----------- ---------- Weighted average number of common shares outstanding....................... 18,948 18,948 17,271 Nominal issuance........................................................... -- -- 346 ----------- ----------- ---------- Basic weighted average number of common shares outstanding................. 18,948 18,948 17,617 ----------- ----------- ---------- ----------- ----------- ---------- Loss per share-basic and diluted........................................... $ (2,179.60) $ (1,913.34) $ (435.72) ----------- ----------- ---------- ----------- ----------- ----------
FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" requires the Company to make disclosures of fair value information of all financial instruments, whether or not recognized on the consolidated balance sheets, for which it is practicable to estimate fair value. The Company's financial instruments include cash and cash equivalents, accounts receivable, notes receivable from affiliates, accounts payable and accrued expenses, due to affiliates, other current liabilities, notes payable and redeemable preferred stock. At December 31, 1998 and 1997, the carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, and other current liabilities on the accompanying consolidated balance sheets approximates fair value due to the short maturity of these instruments. At December 31, 1998 and 1997, the carrying value of the redeemable preferred stock has been determined based upon the amount of future cash flows discounted using the Company's estimated 42 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED) borrowing rate for similar instruments. It was not practicable to estimate the fair value of the redeemable preferred stock due to the fact that the instruments are wholly owned by the Company's parent. At December 31, 1998, the fair value of the Company's notes payable balance approximated $119,314,000 based on the last trading price of the notes in 1998. At December 31, 1997, the fair value of the Company's notes payable balance approximated $128,420,000 based on the last trading price of the notes in 1997. It was not practicable to estimate the fair value of due to affiliate and notes receivable from affiliates due to the nature of these instruments, the circumstances surrounding their issuance, and the absence of quoted market prices for similar financial instruments. IMPAIRMENT OF LONG-LIVED ASSETS The Company assesses the recoverability of long-lived assets (mainly property, plant and equipment, intangibles, and certain other assets) on a regular basis by determining whether the carrying value of the assets can be recovered over the remaining lives through projected undiscounted future operating cash flows, expected to be generated by such assets. If an impairment in value is estimated to have occurred, the assets carrying value is reduced to its estimated fair value. The assessment of the recoverability of long-lived assets will be impacted if estimated future operating cash flows are not achieved. BUSINESS SEGMENT INFORMATION On January 1, 1998, the Company adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." SFAS No. 131 established standards for the reporting of information relating to operating segments in annual financial statements. This statement supersedes SFAS No. 14, "Financial Reporting for Segment of a Business Enterprise," which requires reporting segment information by industry and geographic area (industry approach). Under SFAS No. 131, operating segments are defined as components of a company for which separate financial information is available and used by management to allocate resources and assess performance (management approach). The Company operates in one business segment, providing cable television services. COMMITMENTS AND CONTINGENCIES Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. ADVERTISING COSTS All advertising costs of the Company are expensed as incurred. RECLASSIFICATIONS Certain amounts have been reclassified in the prior year consolidated financial statements to conform to the 1998 consolidated financial statement presentation. 43 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 4. VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS BALANCE AT CHARGED TO AMOUNTS BALANCE AT JANUARY 1 EXPENSE WRITTEN OFF DECEMBER 31 ----------- ----------- ----------- ------------- (IN THOUSANDS) 1996 Allowance for Doubtful Accounts................................ $ 510 $ 358 $ 323 $ 545 1997 Allowance for Doubtful Accounts................................ $ 545 $ 494 $ 273 $ 766 1998 Allowance for Doubtful Accounts................................ $ 766 $ 1,383 $ 1,054 $ 1,095
5. ACQUISITIONS During 1998, the Company made several acquisitions of which details follow. In each case, the acquisition was accounted for using the purchase method, whereby the purchase price was allocated to the underlying assets and liabilities based on their proportionate share of fair values on the date of acquisition and any excess to goodwill. The results of operations of each of the business acquired are included in the Company's consolidated financial statements since the date of acquisition. In February 1998, the Company acquired a cable television business for aggregate consideration of approximately $1,574,000. The purchase price exceeded the fair value of the net liabilities acquired by approximately $2,041,000. In association with this acquisition, the Company assumed a $2,150,000 loan from Bank Rozwoju Exportu S.A. (See Note 10). On August 15, 1998, the Company purchased the remaining approximately 50% interest in one subsidiary company which was held by unaffiliated third parties for aggregate consideration of approximately $5,372,000. The purchase price exceed the fair value of the assets acquired by approximately $1,104,000. On July 16, 1998 the Company's parent, @ Entertainment, Inc. purchased the remaining 45.25% interest in a subsidiary of the Company which was held by unaffiliated third parties for an aggregate purchase price of approximately $10,655,000 of which approximately $9,490,000 relates to non-compete agreements. The Company has applied push-down accounting to this transaction on the date of purchase and therefore the transaction has been recognized in the Company's consolidated financial statements. The purchase price paid by the Company's parent has been treated as a capital contribution to the Company. The purchase price, excluding the amount paid relating to the non-compete agreements, exceeded the fair value of the assets acquired by approximately $604,000. The portion of the purchase price relating to the non-compete agreements will be amortized over the five years term of the agreements. Additionally, during 1998 the Company acquired certain cable television system assets and subscriber lists for aggregate consideration of approximately $2,000,000. The purchase prices did not materially exceed the fair value of the assets acquired. Had these acquisitions occurred on January 1, 1997, the Company's pro-forma consolidated results for the years ended December 31, 1998 and 1997 would not be materially different from those presented in the consolidated statements of operations. 44 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 5. ACQUISITIONS (CONTINUED) Effective January 1, 1997, the Company acquired the remaining 51% of a subsidiary company for aggregate consideration of approximately $9,927,000. The acquisition was accounted for as a purchase with the purchase price allocated among the assets acquired and liabilities assumed based upon the fair values at the date of acquisition and any excess as goodwill. The purchase price exceeded the fair value of the net assets acquired by approximately $5,556,000. In May 1997, the Company acquired a 54.75% ownership interest in a cable television company for aggregate consideration of approximately $10,925,000. The acquisition was accounted for as a purchase with the purchase price allocated among the assets acquired and liabilities assumed based upon the fair values at the date of acquisition and any excess as goodwill. The results of the acquired company have been included with the Company's results since the date of acquisition. The purchase price exceeded the fair value of the net assets acquired by approximately $9,910,000. Included in minority interest at December 31, 1997 is approximately $450,000 relating to the acquisition of this subsidiary. During 1997 the Company acquired certain cable television system assets and subscriber lists for aggregate consideration of approximately $3,200,000. The acquisitions were accounted for as a purchase with the purchase price allocated among the fixed assets acquired based upon their fair values at the dates of acquisition and any excess to goodwill. The purchase prices exceeded the fair value of the assets acquired by approximately $548,000. During 1996, the Company acquired substantially all of the cable television system assets of twenty-six cable television companies for aggregate consideration of approximately $15,600,000. The acquisitions were accounted for as purchases with the purchase price allocated among the assets acquired and liabilities assumed based upon their fair values at the date of acquisition and any excess as goodwill. The results of the acquired companies have been included with the Company's results since their dates of acquisition. The purchase prices exceeded the fair value of the net assets acquired by approximately $5,800,000. 6. DIVESTITURE OF SUBSIDIARY During February 1998, @ Entertainment, Inc., the Company's parent, purchased substantially all of the assets and liabilities of one of the Company's subsidiaries, including a note payable to the Company for $6,527,000, for consideration of $100. The transfer was accounted for at historical cost in a manner similar to a pooling of interests. The difference between the amount of cash disbursed and the fair value of the liabilities assumed and the historical cost of the net assets acquired, of approximately $3,031,000, was accounted for as a reduction of the accumulated deficit. Prior period financial statements have been restated to reflect the transfer. 45 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 7. INTANGIBLES Intangible assets consist of the following:
DECEMBER 31, -------------------- 1998 1997 --------- --------- (IN THOUSANDS) Conduit and franchise agreements........................................ $ 5,409 $ 5,391 Goodwill................................................................ 17,527 13,338 Non-compete agreements.................................................. 19,006 9,406 Other................................................................... 1,336 1,543 --------- --------- 43,278 29,678 Less accumulated amortization........................................... (8,797) (3,360) --------- --------- Net intangible assets................................................... $ 34,481 $ 26,318 --------- --------- --------- ---------
8. OTHER CURRENT AND NON-CURRENT ASSETS Included in other current assets is $0 and $1,322,000 of VAT receivables as of December 31, 1998 and 1997, respectively. Included in other non-current assets at December 31, 1998 and 1997 are deferred financing costs of $6,289,000 and $7,127,000, respectively relating to the PCI notes (refer to note 10). 9. INCOME TAXES Income tax (expense)/benefit consists of:
YEAR ENDED DECEMBER 31, ------------------------------- 1998 1997 1996 --------- --------- --------- (IN THOUSANDS) Current: U.S. Federal................................................... $ -- $ 1,438 $ (714) State and local................................................ -- -- (531) Foreign........................................................ (210) (463) (28) --------- --------- --------- $ (210) $ 975 $ (1,273) --------- --------- --------- --------- --------- ---------
Sources of loss before income taxes and minority interest are as follows:
YEAR ENDED DECEMBER 31, --------------------------------- 1998 1997 1996 ---------- ---------- --------- (IN THOUSANDS) Domestic loss............................................... $ (6,138) $ (9,913) $ (2,602) Foreign income loss......................................... (30,845) (19,536) (4,632) ---------- ---------- --------- $ (36,983) $ (29,449) $ (7,234) ---------- ---------- --------- ---------- ---------- ---------
46 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 9. INCOME TAXES (CONTINUED) Income tax (expense)/benefit was $(210,000), $975,000 and $(1,273,000) for the years ended December 31, 1998, 1997, and 1996, respectively, and differed from the amounts computed by applying the U.S. federal income tax rate of 34 percent to pretax loss as a result of the following:
YEAR ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 ---------- --------- --------- (IN THOUSANDS) Computed "expected" tax benefit................................................. $ 12,574 $ 10,013 $ 2,460 Non-deductible expenses and other permanent differences......................... 2,911 962 (17) Change in valuation allowance................................................... (4,358) (8,748) (3,504) Adjustment for change in functional currency bases.............................. (11,311) -- -- Adjustment to deferred tax asset for enacted changes in tax rates............... (695) (789) -- Foreign tax rate differences.................................................... 606 (463) (184) Other........................................................................... 63 -- (28) ---------- --------- --------- $ (210) $ 975 $ (1,273) ---------- --------- --------- ---------- --------- ---------
The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities are presented below:
DECEMBER 31, --------------------- 1998 1997 ---------- --------- (IN THOUSANDS) Deferred tax assets: Foreign net operating loss carryforwards.................................................. $ 13,883 $ 4,135 Domestic net operating loss carry forwards................................................ 1,842 -- Interest income........................................................................... 2,650 1,946 Service revenue........................................................................... 2,101 1,948 Accrued liabilities....................................................................... 3,608 2,537 Deferred costs............................................................................ -- 903 Unrealized foreign exchange losses........................................................ 9,066 5,614 Other..................................................................................... -- 274 ---------- --------- Total gross deferred tax assets............................................................. 33,150 17,357 Less valuation allowance.................................................................... (21,715) (17,357) ---------- --------- Net deferred tax assets..................................................................... $ 11,435 $ -- ---------- --------- ---------- --------- Deferred tax liabilities: Fixed assets depreciation................................................................. $ (11,311) $ -- Other..................................................................................... (124) -- ---------- --------- ---------- --------- Total gross deferred tax liabilities........................................................ $ (11,435) $ -- ---------- --------- ---------- --------- Net deferred tax liability.................................................................. $ -- $ -- ---------- --------- ---------- ---------
The net increase in the valuation allowance for the years ended December 31, 1998, 1997 and 1996 was $4,358,000, $8,748,000 and $3,504,000, respectively. In assessing the realizability of deferred tax assets, 47 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 9. INCOME TAXES (CONTINUED) management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at December 31, 1998. Subsequently recognized tax benefits relating to the valuation allowance for deferred tax assets as of December 31, 1998 will be reported in the consolidated statement of operations. Foreign tax loss carryforwards can be offset against the PTK Companies' taxable income and utilized at a rate of one-third per year in each of the three years subsequent to the year of the loss. If there is no taxable income in a given year during the carryforward period, the portion of the loss carryforward to be utilized is permanently forfeited. For losses incurred in the U.S. taxable years prior to 1998, loss carryforwards can be applied against taxable income three years retroactively and fifteen years into the future. For losses incurred in the U.S. from 1998, loss carry forwards can be applied against taxable income two years retroactively and twenty years into the future. At December 31, 1998, the Company has foreign net operating loss carryforwards of approximately $46,250,000, which expire as follows:
(IN YEAR ENDING DECEMBER 31, THOUSANDS) - ------------------------------------------------------------------------------- ------------- 1999........................................................................... $ 15,344 2000........................................................................... 14,092 2001........................................................................... 16,814 ------------- $ 46,250 ------------- -------------
10. NOTES PAYABLE Notes payable consist of the following:
DECEMBER 31, ---------------------- 1998 1997 ---------- ---------- (IN THOUSANDS) PCI notes, net of discount............................................ $ 129,627 $ 129,578 American Bank in Poland S.A. revolving credit loan.................... 6,500 -- Bank Rozwoju Exportu S.A. Deutsche-Mark ("DM") facility............... 1,912 -- Other................................................................. 402 532 ---------- ---------- Total notes payable................................................... 138,441 130,110 Less: current portion............................................... (6,500) -- ---------- ---------- Notes payable, net of current portion................................. $ 131,941 $ 130,110 ---------- ---------- ---------- ----------
48 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 10. NOTES PAYABLE (CONTINUED) PCI NOTES On October 31, 1996, PCI sold $130,000,000 aggregate principal amount of Senior Notes ("PCI Notes") to an initial purchaser pursuant to a purchase agreement. The initial purchaser subsequently completed a private placement of the PCI Notes. In June, 1997, substantially all of the outstanding PCI Notes were exchanged for an equal aggregate principal amount of publicly-registered PCI Notes. The PCI Notes have an interest rate of 9 7/8% and have a maturity date of November 1, 2003. Interest is paid on the PCI Notes on May 1 and November 1 of each year. As of December 31, 1998 and 1997, the Company accrued interest expense of $2,140,000 and $2,175,000, respectively. Prior to November 1, 1999, PCI may redeem up to a maximum of 33% of the initially outstanding aggregate principal amount of the PCI Notes with some or all of the net proceeds of one or more public equity offerings at a redemption price equal to 109.875% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of redemption; provided that immediately after giving effect to such redemption, at least $87 million aggregate principal amount of the PCI Notes remains outstanding. The PCI Notes are net of unamortized discount of $373,000 and $422,000 at December 31, 1998 and 1997, respectively. The effective interest rate of the PCI Notes is approximately 11.3%. PCI has pledged to State Street Bank and Trust Company, the trustee for the PCI Notes (for the benefit of the holders of the PCI Notes) intercompany notes issued by PCBV, of a minimum aggregate principal amount (together with cash and cash equivalents of PCI), equal to at least 110% of the outstanding principal amount of the PCI Notes, and in the aggregate, provide cash collateral or bear interest and provide for principal repayments, as the case may be, in amounts sufficient to pay interest on the PCI Notes. Notes payable from PCBV to PCI are $160,450,000 and $134,509,000 at December 31, 1998 and 1997, respectively. Pursuant to the PCI Indenture, PCI is subject to certain restrictions and covenants, including, without limitation, covenants with respect to the following matters: (i) limitation on additional indebtedness; (ii) limitation on restricted payments; (iii) limitation on issuances and sales of capital stock of subsidiaries; (iv) limitation on transactions with affiliates; (v) limitation on liens; (vi) limitation on guarantees of indebtedness by subsidiaries; (vii) purchase of PCI Notes upon a change of control; (viii) limitation on sale of assets; (ix) limitation on dividends and other payment restrictions affecting restricted subsidiaries; (x) limitation on investments in unrestricted subsidiaries; (xi) limitation on lines of business; and (xii) consolidations, mergers and sales of assets. As of December 31, 1998, the Company was in compliance with such covenants. Condensed parent only financial statements of Poland Communication, Inc. are provided in Note 11, in compliance with the requirements of Rule 5-04 and 12-04 of the Securities and Exchange Commission's Regulation S-X. AMERICAN BANK IN POLAND S.A. REVOLVING LOAN FACILITY The revolving loan facility allowing the Company to borrow up to a maximum principal amount of $6,500,000 on or before December 31, 1998, was fully drawn as at December 31, 1998. The facility bears interest at LIBOR plus 3.0% (8.03% as at December 31, 1998), is repayable in full on August 20, 1999, and is secured by promissory notes en blanc from certain of the Company's subsidiaries, and pledges of the shares of certain of the Company's subsidiaries. 49 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 10. NOTES PAYABLE (CONTINUED) BANK ROZWOJU EKSPORTU S.A DEUTSCHE-MARK FACILITY The Deutsche-Mark facility represents a credit facility of DM 3,948,615 of which approximately DM 3,204,000 was outstanding at December 31, 1998. The facility bears interest at LIBOR plus 2.0% (5.25% as at December 31, 1998), is repayable in full on December 27, 2002, and is ultimately secured by a pledge of the common shares of one of the Company's subsidiaries. Interest expense relating to notes payable was approximately $14,320,000, $13,281,000, and $4,687,000 for the years ended December 31, 1998, 1997 and 1996, respectively. In 1996, the Company recorded an extraordinary loss related to the early retirement of debt. The extraordinary loss was comprised of a $147,000 prepayment penalty and a $1,566,000 write-off of deferred financing costs. 11. CONDENSED PARENT ONLY FINANCIAL INFORMATION OF PCI The following parent only condensed financial statements were prepared in accordance with U.S. GAAP in a manner consistent with the consolidated financial statements except that all subsidiaries have been accounted for under the equity method. CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, --------------------------------- 1998 1997 1996 ---------- ---------- --------- (IN THOUSANDS) Operating costs and expenses: Selling, general and administrative........................................... $ 1,498 $ 3,250 $ 1,061 ---------- ---------- --------- Operating loss................................................................ (1,498) (3,250) (1,061) ---------- ---------- --------- Interest and investment income.................................................. 415 2,619 1,076 Interest expense................................................................ (14,320) (13,879) (2,612) Loss of subsidiaries............................................................ (21,790) (18,988) (2,775) ---------- ---------- --------- Loss before income taxes........................................................ (37,193) (33,498) (5,372) Income tax benefit/(expense).................................................... -- 1,438 (1,245) ---------- ---------- --------- Net loss...................................................................... (37,193) (32,060) (6,617) Accretion of redeemable preferred stock......................................... (4,106) (4,194) (2,870) Preferred stock dividends....................................................... -- -- (1,738) Excess of carrying value of preferred stock over consideration paid............. -- -- 3,549 ---------- ---------- --------- Net loss applicable to common stockholders...................................... $ (41,299) $ (36,254) $ (7,676) ---------- ---------- --------- ---------- ---------- ---------
CONDENSED STATEMENTS OF COMPREHENSIVE LOSS
YEAR ENDED DECEMBER 31, --------------------------------- 1998 1997 1996 ---------- ---------- --------- (IN THOUSANDS) Net Loss........................................................................ $ (37,193) $ (32,060) $ (6,617) Other comprehensive income: Translation adjustment........................................................ 586 -- -- ---------- ---------- --------- Comprehensive loss.............................................................. $ (36,607) $ (32,060) $ (6,617) ---------- ---------- --------- ---------- ---------- ---------
50 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 11. CONDENSED PARENT ONLY FINANCIAL INFORMATION OF PCI (CONTINUED) CONDENSED BALANCE SHEETS
DECEMBER 31, ---------------------- 1998 1997 ---------- ---------- (IN THOUSANDS) ASSETS Cash and cash equivalents................................................................. $ 160 $ 18,214 Investment securities..................................................................... -- -- Accounts receivable, net.................................................................. 60 290 Other current assets...................................................................... 148 74 ---------- ---------- Total current assets...................................................................... 368 18,578 Other assets.............................................................................. 6,289 6,906 Net investment in restricted net assets of wholly-owned subsidiaries...................... 102,344 121,977 Net investment in unrestricted net assets of wholly-owned subsidiaries.................... 52,032 32,677 Notes receivable from affiliates.......................................................... 449 -- ---------- ---------- Total assets.............................................................................. $ 161,482 $ 180,138 ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' (DEFICIENCY)/EQUITY Accounts payable and accrued expenses..................................................... $ 2,382 $ 1,125 Accrued interest.......................................................................... 2,140 2,175 Income taxes payable...................................................................... 3,417 3,878 Notes payable............................................................................. 136,127 129,592 ---------- ---------- Total liabilities......................................................................... 144,066 136,770 Redeemable preferred stock................................................................ 30,977 39,149 Stockholders' (deficiency)/equity: Common stock, $.01 par value; 27,000 shares authorized, 18,948 shares issued and outstanding........................................................................... 1 1 Paid-in capital......................................................................... 78,380 59,553 Accumulated other comprehensive income.................................................... 586 -- Accumulated deficit..................................................................... (92,528) (55,335) ---------- ---------- Total stockholders' (deficiency)/equity................................................... (13,561) 4,219 ---------- ---------- Total liabilities and stockholders' (deficiency)/equity................................... $ 161,482 $ 180,138 ---------- ---------- ---------- ----------
51 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 11. CONDENSED PARENT ONLY FINANCIAL INFORMATION OF PCI (CONTINUED) CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY/(DEFICIENCY)
REDEEMABLE ACCUMULATED OTHER PREFERRED COMMON PAID-IN COMPREHENSIVE ACCUMULATED STOCK STOCK CAPITAL INCOME DEFICIT TOTAL ----------- ----------- --------- ----------------- ------------ ---------- (IN THOUSANDS) Balance at January 1, 1996........... $ 10,311 $ 4,993 $ 1,544 $ -- $ (16,658) $ 190 Net loss........................... -- -- -- -- (6,617) (6,617) Stock dividend..................... 1,738 -- (1,738) -- -- -- Issuance of stock.................. -- (4,992) 53,837 -- -- 48,845 Preferred stock redemption......... (12,049) -- 3,549 -- -- (8,500) Accretion of redeemable preferred stock............................ -- -- (2,870) -- -- (2,870) ----------- ----------- --------- ----- ------------ ---------- Balance at December 31, 1996......... -- 1 54,322 -- (23,275) 31,048 Net loss........................... -- -- -- -- (32,060) (32,060) Stock option compensation expense.......................... -- -- 9,425 -- -- 9,425 Accretion of redeemable preferred stock............................ -- -- (4,194) -- -- (4,194) ----------- ----------- --------- ----- ------------ ---------- Balance at December 31, 1997......... $ -- $ 1 $ 59,553 -- $ (55,335) $ 4,219 Net loss........................... -- -- -- -- (37,193) (37,193) Translation adjustment............. -- -- -- 586 -- 586 Capital contribution............... -- -- 10,655 -- -- 10,655 Cancellation of Series B redeemable preferred stock............................ -- -- 12,278 -- -- 12,278 Accretion of redeemable preferred stock............................ -- -- (4,106) -- -- (4,106) ----------- ----------- --------- ----- ------------ ---------- Balance at December 31, 1998......... $ -- $ 1 $ 78,380 $ 586 $ (92,528) $ (13,561) ----------- ----------- --------- ----- ------------ ---------- ----------- ----------- --------- ----- ------------ ----------
52 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 11. CONDENSED PARENT ONLY FINANCIAL INFORMATION OF PCI (CONTINUED) CONDENSED STATEMENTS OF CASH FLOWS
DECEMBER 31, ----------------------------------- 1998 1997 1996 ---------- ---------- ----------- Cash flows from operating activities: Net loss................................................................... $ (37,193) $ (32,060) $ (6,617) Adjustments to reconcile net loss to net cash (used in)/ provided by operating activities: Amortization of notes payable discount and issue costs................... 882 1,040 164 Gain on sale of investment securities.................................... -- (358) -- Non-cash stock option compensation....................................... -- 9,425 -- Loss in subsidiaries..................................................... 21,790 18,988 12,862 Changes in operating assets and liabilities: Accounts receivable...................................................... 230 (142) (35) Other current assets..................................................... (74) 346 (1,300) Accounts payable......................................................... 1,257 (1,864) 3,900 Income taxes payable..................................................... (461) (594) 4,472 Other current liabilities................................................ -- -- (1,045) ---------- ---------- ----------- Net cash (used in)/ provided by operating activities................... (13,569) (5,219) 12,401 ---------- ---------- ----------- Cash flows from investing activities: Proceeds from maturity of investment securities............................ -- 25,473 (25,115) Notes receivable from affiliate............................................ (449) 8,491 (8,200) Investment in, and loans and advances to subsidiaries...................... (21,013) (63,826) (122,337) ---------- ---------- ----------- Net cash provided by investing activities.............................. (21,462) (29,862) (155,652) ---------- ---------- ----------- Cash flows from financing activities Proceeds from notes payables............................................... 6,500 -- 81,001 Increase in paid-in capital................................................ 10,655 -- -- Proceeds from notes payables............................................... -- -- 136,074 Repayment of notes payables................................................ (176) -- (10,000) Cost to obtain loans....................................................... -- (1,749) (15,013) ---------- ---------- ----------- Net cash provided by/(used in) financing activities.................... 16,977 (1,749) 192,062 ---------- ---------- ----------- Net (decrease) / increase in cash and cash equivalents................. (18,054) (36,830) 48,811 Cash and cash equivalents at beginning of year............................... 18,214 55,044 6,233 ---------- ---------- ----------- Cash and cash equivalents at end of year..................................... $ 160 $ 18,214 $ 55,044 ---------- ---------- ----------- ---------- ---------- -----------
12. STOCKHOLDERS' EQUITY The Company had outstanding at December 31, 1995, 985 shares of preferred stock, which was convertible into 812 shares of class A common stock. The Company had the option of redeeming the preferred stock in whole or in part from January 1, 1996 through December 31, 2002. However, as discussed below, the preferred stock was exchanged for new series D preferred stock during March 1996. 53 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 12. STOCKHOLDERS' EQUITY (CONTINUED) During February 1996, the Company issued to certain stockholders an additional 2,437 shares of class A common stock in accordance with the provisions of the Shareholder Agreement dated June 27, 1991. The shares were issued at a nominal value of $.01 each. Also during February 1996, the Company issued a stock dividend of 166 shares of series A preferred stock to the preferred stock stockholder. During March 1996, the Company completed several transactions including restating its certificate of incorporation, issuing new shares of stock, redeeming preferred stock, and the repayment of affiliate debt. The restated certificate of incorporation of the Company authorized a new class of $.01 par common stock, $1 par series A preferred stock, $.01 par series B preferred stock, $.01 par series C preferred stock, and $.01 par series D preferred stock. All shares of class A and class B common stock previously issued and outstanding were exchanged for new common stock. All issued and outstanding shares of preferred stock were exchanged for new series D preferred stock, which was subsequently redeemed for $8,500,000. Only common stock and series B preferred stock retained voting rights and only holders of common stock were entitled to receive dividends. Each series of preferred stock has redemption provisions; the series B preferred stock was also convertible into common stock. During March 1996, the Company issued 4,662 shares of common stock, 4,000 shares of series A preferred stock, and 2,500 shares of series B preferred stock to ECO in exchange for $65,000,000; and 2,000 shares of series C preferred stock and 812 shares of common stock were issued to PIHLP in exchange for $17,029,000. The total cost associated with the issuance of such stock was $1,028,000 resulting in net proceeds to the Company of $81,001,000. Of this amount, $32,156,000 was allocated as the value of the preferred stock representing its mandatory redemption value on October 31, 2004 discounted at 12%. As discussed in Note 1, the series A preferred stock and series C preferred stock were subsequently purchased by the Company's parent, @Entertainment and the Series B preferred stock was transferred to @Entertainment in exchange for @Entertainment Series B preferred stock. As part of the Assignment and the Capital Adjustment discussed in Note 1, the stock options granted to certain PCI executive officers in January, April and June of 1997 were amended to provide that each option to purchase a share of PCI's common stock was exchanged for an option to purchase 1,000 shares of @Entertainment's common stock, with a proportionate reduction in the per share exercise price. The exercise prices for certain of these options were substantially below the IPO price of $21 per share for @Entertainment's common stock. Accordingly, the Company has recognized approximately $9,425,000 of non-cash compensation expense included in selling, general, and administrative expenses during 1997 related to these options representing a portion of difference between the exercise prices of the options and their fair market value on the date of grant. 13. REDEEMABLE PREFERRED STOCK The series A, series B and series C preferred stock have a mandatory redemption date of October 31, 2004. At the option of the Company, the series A, series B and series C preferred stock may be redeemed at any time in whole or in part. The redemption price per share of the series A, series B and series C preferred stock is $10,000. The preferred stock has been recorded at its mandatory redemption value on October 31, 2004 discounted at 12% to December 31, 1998. The Company periodically accretes from paid-in capital an amount that will provide for the redemption value at October 31, 2004. On August 6, 1998, the Company's 54 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 13. REDEEMABLE PREFERRED STOCK (CONTINUED) parent, @Entertainment, Inc., consented to the cancellation of its 2,500 Series B redeemable preference shares. The accreted value of those shares at that time, approximately $12,278,000 was reclassified to paid-in capital. The total amount recorded for accretion for the years ended December 31, 1998, 1997 and 1996 was $4,106,000, $4,194,000 and $2,870,000, respectively. 14. RELATED PARTY TRANSACTIONS During the ordinary course of business, the Company enters into transactions with affiliated parties. The principal related party transactions are described below. DUE TO AFFILIATE Amounts due to affiliate primarily represent advances and payments made on behalf of the Company by its parent @ Entertainment. STOCK OPTION COMPENSATION EXPENSE Included in selling, general and administrative expense in 1997 is approximately $9,425,000 of compensation expense related to the difference between the exercise price of certain options issued by @ Entertainment, Inc. and their fair market value on the date of grant. Since the executives, to whom the options were issued, spent a portion of their time providing services to the Company, management allocated a portion of the costs to the Company using what management believes is a reasonable method of allocation. PRINT MEDIA SERVICES An affiliate of the Company provides print media services to the Company. The Company incurred operating costs related to those services of $4,355,000, for the year ended December 1998. The Company did not incur any costs from this affiliate in prior years. Included in accounts payable at December 31, 1998 is $1,114,000 due to this affiliate. PROGRAMMING Affiliates of the Company provide programming to PCI and its subsidiaries. The Company incurred programming fees from these affiliates of $12,831,000, $559,000 and $412,000 for the years ended December 31, 1998, 1997 and 1996, respectively. 15. STOCK OPTION PLAN On June 22, 1997, the Company's parent adopted a stock option plan (the "1997 Plan") pursuant to which @Entertainment's Board of Directors may grant stock options to officers, key employees and consultants of the Company. The 1997 Plan authorizes grants of options to purchase up to 4,436,000 shares, subject to adjustment in accordance with the 1997 Plan. At December 31, 1998, options for 250,000 shares have been granted to employees of PCI. Stock options are granted with an exercise price that must be at least equal to the stock's fair market value at the date of grant. With respect to any participant who owns stock possessing more than 10% of the 55 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 15. STOCK OPTION PLAN (CONTINUED) voting power of all classes of stock of the Company, the exercise price of any incentive stock option granted must equal at least 110% of the fair market value on the grant date and the maximum term of an incentive stock option must not exceed five years. The term of all other options granted under the 1997 Plan may not exceed ten years. Options become exercisable at such times as determined by the Board of Directors and as set forth in the individual stock option agreements. Generally, all stock options vest ratably over 2 to 5 years commencing one year after the date of grant. During 1998, there were 250,000 stock options granted to employees of PCI at an exercise price of $12.00 per share and a remaining contractual life of 9 years. Of this amount, 125,000 options are exercisable as of December 31, 1998. No options were exercised or forfeited during 1998. The per share weighted-average fair value of stock options granted during 1998 was $4.12 on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: expected volatility 43.0%, expected dividend yield 0.0%, risk-free interest rate of 5.77%, and an expected life of 4 years. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net loss and net loss per share would have increased to the pro forma amounts indicated below:
1998 ------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net loss--as reported........................................................................ (37,193) Net loss--pro forma.......................................................................... (37,965) Basic and diluted net loss per share--as reported............................................ (2,179.60) Basic and diluted loss per share--pro forma.................................................. (2,220.34)
16. COMMITMENTS AND CONTINGENCIES LEASES The Company leases several offices and warehouses within Poland under cancelable operating lease terms. The Company also leases space within various telephone duct systems from TPSA under cancelable operating leases. The TPSA leases expire at various times, and a substantial portion of the Company's contracts with TPSA permit termination by TPSA without penalty at any time either immediately upon the occurrence of certain conditions or upon provision of three to six months notice without cause. Refer to Note 16 for further detail. All of the agreements provide that TPSA is the manager of the telephone duct system and will lease space within the ducts to the Company for installation of cable and equipment for the cable television systems. The lease agreements provide for monthly lease payments that are adjusted quarterly or annually, except for the Gdansk lease agreement which provides for an annual adjustment after the sixth year and then remains fixed through the tenth year of the lease. 56 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 16. COMMITMENTS AND CONTINGENCIES (CONTINUED) Minimum future lease commitments for the aforementioned conduit leases relate to 1999 only, as all leases are cancelable in accordance with the aforementioned terms. The future minimum lease commitments related to these conduit leases approximates $622,000 for the first six months of 1999. Total rental expense associated with the aforementioned operating leases for the years ended December 31, 1998, 1997 and 1996 was $2,446,000, $1,423,000 and $984,000, respectively, related to these leases. PROGRAMMING COMMITMENTS The Company has entered into programming agreements with certain third party content providers. The programming agreements have terms which range from one to five years and require that payments for programs be paid either at a fixed amount or based upon the number of subscribers connected to the system each month. Through the end of the agreement terms, the Company has a minimum commitment of approximately $2,792,500 in 1999, $3,784,130 in 2000, $4,470,7000 in 2001, $4,872,323 in 2002, $5,077,575 in 2003 and $5,128,250 in 2004. For the years ended December 31, 1998, 1997 and 1996, the Company incurred programming fees of approximately $1,320,000, $1,782,000 and $1,758,000, respectively, pursuant to these agreements. REGULATORY APPROVALS The Company is in the process of obtaining permits from the Polish State Agency for Radiocommunications ("PAR") for several of its cable television systems. If these permits are not obtained, PAR could impose penalties such as fines or in severe cases, revocation of all permits held by an operator or the forfeiture of the operator's cable networks. Management of the Company does not believe that these pending approvals result in a significant risk to the Company. LITIGATION AND CLAIMS 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. 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. 57 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 17. CONCENTRATIONS OF BUSINESS AND CREDIT RISK USE OF TPSA CONDUITS The Company's ability to build out its existing cable television networks and to integrate acquired systems into its cable television networks depends on, among other things, the Company's continued ability to design and obtain access to network routes, and to secure other construction resources, all at reasonable costs and on satisfactory terms and conditions. Many of such factors are beyond the control of the Company. In addition, at December 31, 1998, approximately 56.5% of the Company's cable plant had been constructed utilizing pre-existing conduits of TPSA. A substantial portion of the Company's contracts with TPSA for the use of such conduits permits termination by TPSA without penalty at any time either immediately upon the occurrence of certain conditions or upon provision of three to six months' notice without cause. The Company expects to renew these leases on or before the expiration dates. LIMITED INSURANCE COVERAGE While the Company carries general liability insurance on its properties, like many other operators of cable television systems it does not insure the underground portion of its cable televisions networks. Accordingly, any catastrophe affecting a significant portion of the Company's cable television networks could result in substantial uninsured losses and could have a material adverse effect on the Company. YEAR 2000 The Company is dependent upon computer systems and other technological devices with imbedded microprocessor chips that are intended to utilize dates and process data beyond December 31, 1999. In January 1997, the Company developed a plan to address the impact that potential year 2000 problems may have on Company operations and to implement necessary changes to address such problems (the "Y2K Plan"). During the course of the development of its Y2K Plan, the Company has identified certain critical operations, which need to be year 2000 compliant for the Company to operate effectively. These critical operations include accounting and billing systems, customer service and service delivery systems, and field and headend devices. Largely as a result of its high rate of growth over the past few years, the Company has entered into an agreement to purchase a new system to replace its current accounting system and an agreement to purchase specialized billing software for the Company's new customer service and billing center. The vendors of the new accounting system and of the billing software have confirmed to the Company that these products are year 2000 compliant. The Company has completed the testing phase of the new accounting system, and the implementation phase was substantially completed at the end of 1998. The Company expects implementation of the billing software to be completed for the majority of its cable subscribers by the end of 1999. The Company believes that its most significant year 2000 risk is its dependency upon third party programming, software, services and equipment, because the Company does not have the ability to control third parties in their assessment and remediation procedures for potential year 2000 problems. Should these parties not be prepared for year 2000 conversion, their products or services may fail and may cause interruptions in, or limitations upon, the Company's provision of the full range of its cable service to its customers. In an effort to prevent any such interruptions or limitations, the Company is in the process of communicating with each of its material third party suppliers of programming, software, services and 58 POLAND COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 17. CONCENTRATIONS OF BUSINESS AND CREDIT RISK (CONTINUED) equipment to determine the status of their year 2000 compliance programs. The Company expects to complete this process by September 30, 1999, and it anticipates that all phases of its Y2K Plan will be completed by December 31, 1999. The Company has not yet developed a contingency plan to address the situation that may result if the Company or its third party suppliers are unable to achieve year 2000 compliance with regard to any products or services utilized in the Company's operations. The Company does not intend to decide on the development of such a contingency until it has gathered all of the relevant Year 2000 compliance data from its third party suppliers. The Company has not yet determined the full cost of its Y2K Plan and its related impact on the financial condition of the Company. The Company has to date not incurred any replacement or remediation costs for equipment or systems as a result of year 2000 non-compliance. Rather, due to the rapid growth and development of its cable system the Company has made substantial capital investments in equipment and systems for reasons other than year 2000 concerns. The total cost of the Company's new accounting system and billing software package is estimated to be approximately $2,400,000. The Company believes that any year 2000 compliance issues it may face can be remedied without a material financial impact on the Company, but no assurance can be made in this regard until all of the data has been gathered from the Company's third party suppliers. At this date the Company cannot predict the financial impact on its operations if year 2000 problems are caused by products or services supplied to the Company by such third parties. CREDITWORTHINESS All of the Company's customers are located in Poland. As is typical in this industry, no single customer accounted for more than five percent of the Company's sales in 1998 or 1997. The Company estimates an allowance for doubtful accounts based on the credit worthiness of its customers as well as general economic conditions. Consequently, an adverse change in those factors could effect the Company's estimate of its bad debts. 59 INDEPENDENT AUDITORS' REPORT The Board of Directors Poland Cablevision (Netherlands) B.V.: We have audited the accompanying consolidated balance sheets of Poland Cablevision (Netherlands) B.V. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, comprehensive loss, changes in stockholders' deficiency and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Poland Cablevision (Netherlands) B.V. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles in the United States of America. KPMG Warsaw, Poland March 29, 1999 60 POLAND CABLEVISION (NETHERLANDS) B.V. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ---------------------- 1998 1997 ---------- ---------- (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents............................................................... $ 1,463 $ 4,951 Accounts receivable, net of allowances for doubtful accounts of $708,000 in 1998 and $608,000 in 1997...................................................................... 1,904 1,222 Other current assets (note 6)........................................................... 535 1,283 ---------- ---------- Total current assets.................................................................. 3,902 7,456 ---------- ---------- Property, plant and equipment: Cable television system assets.......................................................... 136,833 108,475 Vehicles................................................................................ 1,704 1,619 Other................................................................................... 5,832 3,246 ---------- ---------- 144,369 113,340 Less accumulated depreciation....................................................... (40,041) (27,378) ---------- ---------- Net property, plant and equipment....................................................... 104,328 85,962 Inventories for construction.............................................................. 6,638 5,887 Intangibles, net (note 6)................................................................. 13,711 9,887 ---------- ---------- Total assets........................................................................ $ 128,579 $ 109,192 ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities: Accounts payable and accrued expenses................................................... $ 7,809 $ 2,592 Deferred revenue........................................................................ 565 609 ---------- ---------- Total current liabilities............................................................. 8,374 3,201 ---------- ---------- Due to affiliate (note 8)................................................................. 26,491 14,505 Notes payable to affiliates (note 8)...................................................... 160,830 134,509 ---------- ---------- Total liabilities..................................................................... 195,695 152,215 ---------- ---------- Minority interest......................................................................... -- 2,523 Commitments and contingencies (notes 10 and 11) Stockholders' deficiency: Capital stock par value, $0.50 par; 200,000 shares authorized, issued and outstanding... 100 100 Paid-in capital......................................................................... 14,589 4,713 Accumulated other comprehensive income.................................................. 424 -- Accumulated deficit..................................................................... (82,229) (50,359) ---------- ---------- Total stockholders' deficiency........................................................ (67,116) (45,546) ---------- ---------- Total liabilities and stockholders' deficiency........................................ $ 128,579 $ 109,192 ---------- ---------- ---------- ----------
See accompanying notes to consolidated financial statements. 61 POLAND CABLEVISION (NETHERLANDS) B.V. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ---------------------------------- 1998 1997 1996 ---------- ---------- ---------- (IN THOUSANDS) Cable television revenue...................................................... $ 36,038 $ 28,818 $ 22,882 Operating expenses: Direct operating expenses (note 8).......................................... 23,705 8,215 6,427 Selling, general and administrative expenses (note 8)....................... 14,349 16,007 7,885 Depreciation and amortization............................................... 15,033 12,770 9,003 ---------- ---------- ---------- Total operating expenses.................................................. 53,087 36,992 23,315 ---------- ---------- ---------- Operating loss............................................................ (17,049) (8,174) (433) Interest income............................................................... 130 186 183 Interest expense (note 8)..................................................... (12,975) (11,253) (10,058) Foreign exchange loss, net.................................................... (78) (1,425) (938) ---------- ---------- ---------- Loss before income taxes and minority interest.............................. (29,972) (20,666) (11,246) Income tax expense (note 7)................................................... (52) (175) (21) Minority interest............................................................. (1,846) 794 988 ---------- ---------- ---------- Loss before extraordinary item.............................................. (31,870) (20,047) (10,279) Extraordinary item-loss on early extinguishment of debt (note 9).............. -- -- (1,713) ---------- ---------- ---------- Net loss.................................................................... $ (31,870) $ (20,047) $ (11,992) ---------- ---------- ---------- ---------- ---------- ---------- Basic and diluted net loss per common share: Loss before extraordinary item............................................ ($ 159.35) ($ 100.24) ($ 51.39) Extraordinary item........................................................ -- -- (8.57) ---------- ---------- ---------- Net loss.................................................................. $ (159.35) $ (100.24) $ (59.96) ---------- ---------- ---------- ---------- ---------- ----------
See accompanying notes to consolidated financial statements. 62 POLAND CABLEVISION (NETHERLANDS) B.V. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
YEAR ENDED DECEMBER 31, ---------------------------------- 1998 1997 1996 ---------- ---------- ---------- (IN THOUSANDS) Net loss...................................................................... $ (31,870) $ (20,047) $ (11,992) Other comprehensive income: Translation adjustment...................................................... 424 -- -- ---------- ---------- ---------- Comprehensive loss............................................................ $ (31,446) $ (20,047) $ (11,992) ---------- ---------- ---------- ---------- ---------- ----------
See accompanying notes to consolidated financial statements. 63 POLAND CABLEVISION (NETHERLANDS) B.V. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
ACCUMULATED CAPITAL STOCK OTHER PAR PAID-IN ACCUMULATED COMPREHENSIVE VALUE CAPITAL DEFICIT INCOME TOTAL --------------- --------- ------------ --------------- ---------- (IN THOUSANDS) Balance January 1, 1996....................... $ 100 $ -- $ (18,320) $ -- $ (18,320) Net loss.................................... -- -- (11,992) -- (11,992) ----- --------- ------------ ----- ---------- Balance December 31, 1996..................... 100 -- (30,312) -- (30,212) Net loss.................................... -- -- (20,047) -- (20,047) Stock option compensation expense........... -- 4,713 -- 4,713 -- ----- --------- ------------ ----- ---------- Balance December 31, 1997..................... 100 4,713 (50,359) -- (45,546) Net loss.................................... -- -- (31,870) -- (31,870) Capital contribution (note 4)............... -- 9,876 -- -- 9,876 Translation adjustment...................... -- -- -- 424 424 ----- --------- ------------ ----- ---------- Balance December 31, 1998..................... $ 100 $ 14,589 $ (82,229) $ 424 $ (67,116) ----- --------- ------------ ----- ---------- ----- --------- ------------ ----- ----------
See accompanying notes to consolidated financial statements. 64 POLAND CABLEVISION (NETHERLANDS) B.V. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ---------------------------------- 1998 1997 1996 ---------- ---------- ---------- (IN THOUSANDS) Cash flows from operating activities: Net loss.................................................................... $ (31,870) $ (20,047) $ (11,992) Adjustments to reconcile net loss to net cash provided by operating activities: Minority interest......................................................... 1,846 (794) (988) Depreciation and amortization............................................. 15,033 12,770 9,003 Non-cash portion of extraordinary item.................................... -- -- 1,566 Interest expense added to notes payable to affiliates..................... 12,921 11,253 7,844 Non-cash stock option compensation expense................................ -- 4,713 -- Other..................................................................... 496 -- -- Changes in operating assets and liabilities: Accounts receivable..................................................... (682) (507) (439) Other current assets.................................................... 753 396 (328) Accounts payable and accrued expenses................................... 5,205 (111) (447) Deferred revenue........................................................ (46) (214) (310) Amounts due to affiliates............................................... 11,986 3,346 8,589 ---------- ---------- ---------- Net cash provided by operating activities............................. 15,642 10,805 12,498 ---------- ---------- ---------- Cash flows from investing activities: Construction and purchase of property, plant and equipment.............. (32,530) (27,734) (21,065) Purchase of intagible assets............................................ -- (500) -- Other investments....................................................... -- -- 171 Purchase of subsidiaries, net of cash received.......................... (9,876) -- (7,657) ---------- ---------- ---------- Net cash used in investing activities................................. (42,406) (28,234) (28,551) ---------- ---------- ---------- Cash flows from financing activities: Repayment of notes payable.............................................. -- -- (11,670) Capital contribution.................................................... 9,876 -- -- Proceds from borrowings from affiliates................................. 13,400 15,365 32,460 ---------- ---------- ---------- Net cash provided by financing activities............................. 23,276 15,365 20,790 ---------- ---------- ---------- Net (decrease)/increase in cash and cash equivalents.......................... (3,488) (2,064) 4,737 Cash and cash equivalents at beginning of year................................ 4,951 7,015 2,278 ---------- ---------- ---------- Cash and cash equivalents at end of year...................................... $ 1,463 $ 4,951 $ 7,015 ---------- ---------- ---------- ---------- ---------- ---------- Supplemental cash flow information: Cash paid for interest................................................ $ -- $ -- $ 2,067 ---------- ---------- ---------- ---------- ---------- ---------- Cash paid for income taxes............................................ $ 231 $ 175 $ 282 ---------- ---------- ---------- ---------- ---------- ----------
See accompanying notes to consolidated financial statements. 65 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES REPORTING ENTITY AND DESCRIPTION OF BUSINESS Poland Cablevision (Netherlands) B.V. ("PCBV"), a Netherlands corporation, is a holding company that holds a controlling interest in several Polish cable television operators (collectively referred to as the "PTK Companies"). Poland Cablevision (Netherlands) B.V. and subsidiaries (the "Company") is 92.3% owned by Poland Communications, Inc. ("PCI"), who is in turn, owned 100% by @Entertainment, Inc. a Delaware corporation which is a publicly listed company in the United States. The Company offers cable television services to residential and business customers in Poland. All significant assets and operating activities of the Company are located in Poland. BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America. The consolidated financial statements include the financial statements of the Company and its wholly owned and majority owned foreign subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. CASH EQUIVALENTS For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investment balances with original maturities of three months or less to be cash equivalents. USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with U.S. GAAP. Actual results could differ from those estimates. REVENUE RECOGNITION Revenue is primarily derived from the sale of cable television services to retail customers in Poland. Revenue from subscription fees is recognized on a monthly basis, as the service is provided. Installation fee revenue, for connection to the Company's cable television systems, is recognized to the extent of direct selling costs and the balance is deferred and amortized into income over the estimated average period that new subscribers are expected to remain connected to the system. TAXATION Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. 66 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED) NETHERLANDS TAXATION: The income tax treaty currently in force between the Netherlands and the United States provides that the Netherlands may impose a withholding tax at a maximum rate of 5% on dividends paid by PCBV to its stockholders. FOREIGN TAXATION: The PTK Companies are subject to corporate income taxes, value added tax (VAT) and various local taxes within Poland, as well as import duties on materials imported by them into Poland. Under Polish law, the PTK Companies are exempt from import duties on certain in-kind capital contributions. The PTK Companies' income tax is calculated in accordance with Polish tax regulations. Due to differences between accounting practices under Polish tax regulations and those required by U.S. GAAP, certain income and expense items are recognized in different periods for financial reporting purposes and income tax reporting purposes which may result in deferred income tax assets and liabilities. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment includes assets used in the development and operation of the various cable television systems. During the period of construction, plant costs and a portion of design, development and related overhead costs are capitalized as a component of the Company's investment in cable television systems. When material, the Company capitalizes interest costs incurred during the period of construction in accordance with Statement of Financial Accounting Standards ("SFAS") No. 34, "CAPITALIZATION OF INTEREST COST". During 1998, 1997 and 1996, no interest costs were capitalized. Depreciation is calculated for financial reporting purposes using the straight-line method over the following estimated useful lives: Cable television system assets................................... 10 years Vehicles......................................................... 5 years 5-10 Other property, plant and equipment.............................. years
INVENTORIES FOR CONSTRUCTION Inventories for construction are stated at the lower of cost, determined by the average cost method, or net realizable value. Inventories are principally related to work-in-progress in the various cable television systems. GOODWILL AND OTHER INTANGIBLES Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over the expected periods to be benefited, generally ten years. The Company has entered into lease agreements with the Polish national telephone company ("TPSA"), for the use of underground telephone conduits for cable wiring. Costs related to obtaining conduit and franchise agreements with housing cooperatives and governmental authorities are capitalized and amortized generally over a period of ten years. In the event the Company does not proceed to develop cable systems within designated cities, costs previously capitalized will be charged to expense. 67 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED) MINORITY INTEREST Recognition of the minority interests' share of losses of consolidated subsidiaries is limited to the amount of such minority interests' allocable portion of the equity of those consolidated subsidiaries. FOREIGN CURRENCIES Foreign currency transactions are recorded at the exchange rate prevailing at the date of the transactions. Assets and liabilities denominated in foreign currencies are remeasured at the rates of exchange at the consolidated balance sheet date. Gains and losses on foreign currency transactions are included in the consolidated statement of operation. The financial statements of foreign subsidiaries are translated into U.S. dollars using (i) exchange rates in effect at period end for assets and liabilities, and (ii) average exchange rates during the period for results of operations. Adjustments resulting from translation of financial statements are reflected in accumulated other comprehensive income as a separate component of stockholders' equity. Effective January 1, 1998, Poland is on longer deemed to be a highly inflationary economy. In accordance with this change, the Company established a new functional currency basis for nonmonetary items in accordance with guidelines established within EITF Issue 92-4, "ACCOUNTING FOR A CHANGE IN FUNCTIONAL CURRENCY WHEN AN ECONOMY CEASES TO BE CONSIDERED HIGHLY INFLATIONARY." That basis is computed by translating the historical reporting currency amount of non-monetary items into the local currency at current exchange rates. As a result of this change, the Company's functional currency bases exceeded the local currency tax bases of non-monetary items. The difference between the new functional currency and the tax bases have been recognized as temporary differences. Prior to January 1, 1998 the financial statements of foreign subsidiaries were translated into U.S. dollars using (i) exchange rates in effect at period end for monetary assets and liabilities, (ii) exchange rates in effect at transaction dates (historical rates) for non-monetary assets and liabilities, and (iii) average exchange rates during the period for revenues and expenses, other than those revenues and expenses that relate to non-monetary assets and liabilities (primarily amortization of fixed assets and intangibles) which are translating using the historical exchange rates applicable to those non-monetary assets and liabilities. Adjustments resulting from translation of financial statements are reflected as foreign exchange gains or losses in the consolidated statements of operations. BASIC AND DILUTED NET LOSS PER SHARE Basic loss per share has been computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. The Company does not have any potential common shares, accordingly, dilutive loss per share is the same as basic loss per share. FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS" requires the Company to make disclosures of fair value information of all financial instruments, whether or not recognized on the consolidated balance sheets, for which it is practicable to estimate fair value. The Company's financial instruments include cash and cash equivalents, accounts receivable, other current assets, accounts payable and accrued expenses, due to affiliates and notes payable to affiliate. 68 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED) As of December 31, 1998 and 1997, the carrying value of the cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, and the other current assets on the consolidated balance sheets approximates fair value due to the short maturity of these instruments. It was not practicable to estimate the fair value of amounts due to or from affiliates and notes payable to affiliate due to the nature of these instruments, the circumstances surrounding their issuance, and the absence of quoted market prices for similar financial instruments. IMPAIRMENT OF LONG-LIVED ASSETS PCBV assesses the recoverability of long-lived assets (mainly property, plant and equipment and intangibles) on a regular basis by determining whether the carrying value of the assets can be recovered over the remaining lives through projected undiscounted future operating cash flows expected to be generated by such assets. If an impairment in value is estimated to have occurred, the assets carrying value is reduced to its estimated fair value. The assessment of the recoverability of long-lived assets will be impacted if estimated future operating cash flows are not achieved. COMMITMENTS AND CONTINGENCIES Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. ADVERTISING COSTS All advertising costs of the Company are expensed as incurred. RECLASSIFICATIONS Certain amounts have been reclassified in the prior consolidated financial statements to conform to the 1998 consolidated financial statement presentation. 2. 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. Additionally, the Company is currently and is expected to continue to be highly leveraged. The Company's continuation as a going concern is dependent on its ability to generate sufficient cash flows to meet its obligations on a timely basis and its parent's continued support through the provision of financing. The present intention of PCI, the Company's parent, is not to seek repayment of the notes payable by the Company to PCI until the Company generates sufficient cash flow or liquidity to support such repayments. (See note 8). 69 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 3. VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS BALANCE AT CHARGED TO AMOUNTS BALANCE AT JANUARY 1 EXPENSE WRITTEN OFF DECEMBER 31 ------------- ------------- ------------- --------------- (IN THOUSANDS) 1996 Allowance for Doubtful Accounts............................... $ 510 $ 240 $ 313 $ 437 1997 Allowance for Doubtful Accounts............................... $ 437 $ 442 $ 271 $ 608 1998 Allowance for Doubtful Accounts............................... $ 608 $ 742 $ 642 $ 708
4. ACQUISITIONS Effective January 1, 1998, the Company has applied push-down accounting to the 1997 acquisition by the Company's parent, Poland Communications, Inc., of the remaining 51% of a subsidiary of the Company for aggregate consideration of approximately $9,927,000. The acquisition has been accounted for as a purchase with the purchase price allocated among the assets acquired and liabilities assumed based upon the fair values at the date of acquisition and any excess to goodwill. The consideration paid by the Company's parent has been treated as a January 1, 1998 capital contribution to the Company. The purchase price exceeded the fair value of the net assets acquired by approximately $5,556,000. Prior period financial statements have not been restated to reflect the push-down accounting of this transaction on the date of acquisition. During 1998, the Company acquired certain cable television assets and subscriber list for aggregate consideration of approximately $1,400,000. The acquisitions have been accounted for as purchases with the purchase price allocated among the fixed assets acquired based upon their fair values at date of acquisition and any excess to goodwill. The purchase prices did not materially exceed the fair value of the assets acquired. During 1997, the Company acquired certain cable television system assets and subscriber lists for aggregate consideration of approximately $2,500,000. The acquisitions have been accounted for as purchases with the purchase price allocated among the fixed assets acquired based upon their fair values at date of acquisition and any excess to goodwill. The purchase prices exceeded the fair value of the assets acquired by approximately $500,000. During 1996, the Company acquired substantially all of the cable television assets of eighteen cable television companies for aggregate consideration of approximately $9,400,000. The acquisitions have been accounted for as purchases with the purchase price allocated among the assets acquired and liabilities assumed based upon their fair values at the date of acquisition. The results of the acquired companies have been included in the Company's results since their dates of acquisition. The purchase prices exceeded the fair value of the net assets acquired by approximately $5,800,000. 5. OTHER CURRENT ASSETS Included in other current assets is $0 and $914,000 of VAT receivables as of December 31, 1998 and 1997, respectively. 70 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 6. INTANGIBLES Intangible assets are carried at cost and consist of the following:
DECEMBER 31, -------------------- 1998 1997 --------- --------- (IN THOUSANDS) Conduit and franchise agreements........................................ $ 4,436 $ 4,418 Goodwill................................................................ 12,081 6,499 Other................................................................... 1,001 997 --------- --------- 17,518 11,914 Less accumulated amortization........................................... (3,807) (2,027) --------- --------- Net intangible assets................................................... $ 13,711 $ 9,887 --------- --------- --------- ---------
7. INCOME TAXES PCBV is required to file a separate Netherlands tax return which does not include the operating results of the PTK Companies. Income tax expense consisted of the following:
YEAR ENDED DECEMBER 31, ------------------------------- 1998 1997 1996 --------- --------- --------- (IN THOUSANDS) Current: Netherlands.......................................................... $ -- $ (38) $ (9) Foreign jurisdictions................................................ (52) (137) (12) --------- --------- --- $ (52) $ (175) $ (21) --------- --------- --- --------- --------- ---
The majority of the 1998 income tax expense is applicable to one Polish subsidiary which cannot, under Polish tax regulations, utilize the benefit of other subsidiaries' tax loss carryforwards. Income tax expense was $(52,000), $(175,000) and $(21,000) for the years ended December 31, 1998, 1997 and 1996, respectively, and differed from the amounts computed by applying the U.S. federal income tax rate of 34 percent to pretax loss as a result of the following:
YEAR ENDED DECEMBER 31, ------------------------------- 1998 1997 1996 --------- --------- --------- (IN THOUSANDS) Computed "expected" tax benefit................................................... $ 10,190 $ 7,026 $ 3,824 Non-deductible expenses and other permanent differences........................... 841 (3,522) (434) Change in valuation allowance..................................................... (2,918) (4,000) (3,636) Adjustment for change in functional currency bases................................ 8,287 -- -- Adjustment to deferred tax asset for enacted changes in tax rates................. (478) (92) -- Foreign tax rate differences...................................................... 599 413 225 --------- --------- --------- $ (52) $ (175) $ (21) --------- --------- --------- --------- --------- ---------
71 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 7. INCOME TAXES (CONTINUED) The tax effect of temporary differences and carryforwards which give rise to deferred tax assets and liabilities are as follows:
DECEMBER 31, --------------------- 1998 1997 ---------- --------- (IN THOUSANDS) Deferred tax assets: Unrealized foreign exchange losses.................................... $ 8,445 $ 4,800 Accrued expenses...................................................... 1,393 800 Tax loss carryforwards................................................ 9,967 3,000 ---------- --------- Total deferred tax asset................................................ 19,805 8,600 Less valuation allowance.............................................. (11,518) (8,600) ---------- --------- Net deferred tax assets................................................. $ 8,287 $ -- ---------- --------- ---------- --------- Deferred tax liabilities: Fixed assets depreciation............................................... $ (8,287) $ -- ---------- --------- Total gross deferred tax liabilities.................................... $ (8,287) $ -- ---------- --------- ---------- --------- Net deferred tax liability.............................................. $ -- $ -- ---------- --------- ---------- ---------
In assessing the recoverability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes that it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowance at December 31, 1998. Subsequently recognized tax benefits relating to the valuation allowance for deferred tax assets as of December 31, 1998 will be reported in the consolidated statement of operations. Foreign tax loss carryforwards can be offset against the PTK Companies' taxable income and utilized at a rate of one-third per year in each of the three years subsequent to the year of the loss. If there is no taxable income in a given year during the carryforward period, the portion of the loss carryforward to be utilized is permanently forfeited. During 1998, approximately $3,700,000 of net operating loss carryforwards available to the PTK Companies forfeited. 72 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 7. INCOME TAXES (CONTINUED) At December 31, 1998, the PTK Companies had net operating loss carryforwards of approximately $29,269,000, which will expire as follows:
YEARS ENDING DECEMBER 31, (IN THOUSANDS) - ------------------------------------------------------------------------------ 1999.......................................................................... $ 11,176 2000.......................................................................... 9,936 2001.......................................................................... 8,157 ------- $ 29,269 ------- -------
8. RELATED PARTY TRANSACTIONS During the ordinary course of business, the Company enters into transactions with entities under common control of the stockholders and affiliated parties. The principal related party transactions are described below. NOTES PAYABLE TO AFFILIATE Notes payable to affiliate of $160,830,000 and $134,509,000 at December 31, 1998 and 1997, respectively, consists of an unsecured demand note and unpaid interest due to PCI. The notes between PCI and PCBV are revolving credit facilities which call for the borrower to pay 10% interest, payable monthly, on the outstanding principal amount and contain standard events of default for related-party indebtedness. All of these notes become due on June 30, 2001. Interest expense of $12,974,000, $11,253,000 and $7,844,000 was incurred by the Company in connection with affiliate borrowings during the years ended December 31, 1998, 1997 and 1996, respectively. Of this expense, $12,974,000, $11,253,000 and $7,844,000, has been added to the loan balance for the years ended December 31, 1998, 1997 and 1996, respectively. Using the funds provided in the aforementioned notes between PCI and PCBV, PCBV has entered into a series of 10% grid notes with certain of its subsidiaries. PCBV's intercompany notes have been pledged for the benefit of holders of the publicly-registered PCI notes. Pursuant to the PCI Indenture, PCBV is subject to certain restriction, including, without limitation, restriction with respect to the following matters: (i) limitation on additional indebtedness; (ii) limitation on restricted payments; (iii) limitation on issuances and sales of capital stock of subsidiaries; (iv) limitation on transactions with affiliates; (v) limitation on liens; (vi) limitation on guarantees of indebtedness by subsidiaries; (vii) purchase of PCI Notes upon a change of control; (viii) limitation on sale of assets; (ix) limitation on dividends and other payment restrictions affecting subsidiaries; (x) limitation on investments in unrestricted subsidiaries; (xi) limitation on lines of business; and (xii) consolidations, mergers and sales of assets. PCI's present intention is not to seek repayment of the aforementioned affiliate notes payable until the Company generates sufficient cash flow or liquidity to support such repayments. 73 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 8. RELATED PARTY TRANSACTIONS (CONTINUED) DUE TO AFFILIATE Amounts due to affiliate of $26,491,000 and $14,505,000 at December 31, 1998 and 1997, respectively, are non-interest bearing and primarily represent amounts owed to PCI for management fees, purchases and services. Payment of management consulting fees are contingent until such time as net income of the PTK Companies' is sufficient to service the fee. SERVICE AND OVERHEAD ALLOCATION AGREEMENTS PCI entered into service agreements with PCBV and other of its direct and indirect subsidiaries pursuant to which PCI provides various services, including administrative, technical, managerial, financial, operational and marketing services to each of the subsidiaries and PCBV serves as PCI's agent. PCI also entered into a service agreement, dated December 31, 1995, with PCBV and ETV, whereby PCBV is the principal service provider and PCI acts as agent to PCBV. The Service Agreements also typically require the subsidiaries to reimburse PCBV for any reasonable out-of-pocket expenses incurred by PCBV or PCI, acting as agent for PCBV, including salaries and benefits, housing allowances, travel expenses, and equipment supply or other goods costs. The agreements expired on December 31, 1997, but were automatically extended for successive one-year periods unless a party gives notice on or before January 31, in which case the agreement will terminate at the end of the calendar year during which such notice was provided. PCI entered into a Corporate Overhead Allocation Agreement dated January 1, 1996 (the "Allocation Agreement") with certain of its direct or indirect subsidiaries, including PCBV. The Allocation Agreement provides that costs incurred by PCI or PCBV, acting as PCI's agent, with regard to the Service Agreements and as otherwise requested by the PTK Companies shall be allocated and charged to particular PTK Companies in the event they are directly attributable to such subsidiaries, and shall otherwise be allocated equally among each of the PTK Companies. With regard to services rendered and costs incurred by subsidiaries for the benefit of some or all of the PTK Companies, which include costs associated with maintaining a central office in Warsaw, legal expenses, expenses relating to governmental relationships and approvals, programming services, accounting, management information systems services, and salaries associated with personnel whose duties clearly benefit other PTK Companies, the Allocation Agreement provides that such expenses shall be allocated between the PTK Companies. The Allocation Agreement terminates on December 31, 1997, but is automatically renewed for successive one-year periods unless at least thirty days written notice of termination is provided by PCI or PCBV or any subsidiary, with respect to itself. Pursuant to guidance within SFAS No. 51, "FINANCIAL REPORTING BY CABLE TELEVISION COMPANIES", certain reimbursed overhead costs of $152,000, $637,000 and $950,000 at December 31, 1998, 1997 and 1996, respectively, have been capitalized and are included in investment in cable television system assets. The remaining overhead costs allocated to the Company of $1,477,000, $1,470,000 and $1,162,000 during the years ended December 31, 1998, 1997 and 1996, respectively, are included in corporate administration and operating expenses. STOCK OPTION COMPENSATION EXPENSE Included in selling, general and administrative expense in 1997 is approximately $4,713,000 of compensation expense related to the difference between the exercise price of certain options issued by 74 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 8. RELATED PARTY TRANSACTIONS (CONTINUED) @Entertainment, Inc. and their fair market value on the date of grant. Since the executives, to whom the options were issued, spent a portion of their time providing services to the Company, management allocated a portion of the costs to the Company using what management believes is a reasonable method of allocation. MANAGEMENT AGREEMENT The PTK Companies entered into management consulting agreements with PCI to recommend, advise, and consult the PTK Companies as to design, construction, development, and operation of the cable television systems. The agreements typically provide that the subsidiary will pay to PCI an annual consulting fee of $320,000 when and to the extent that the subsidiary's net income exceeds zero. These contingent management consulting fees payable to PCI are reflected in amounts "due to affiliate" in the accompanying consolidated balance sheets. The management agreements also provide for an initial term ending as of the end of the calendar year during which they became effective, and provide for successive renewals for one-year periods unless the agreement is terminated in writing with at least thirty days notice by either party. Management consulting fees charged to corporate administration expense were $1,440,000, $1,440,000 and $1,520,000 for the years ended December 31, 1998, 1997 and 1996, respectively. PRINT MEDIA SERVICES An affiliate of the Company provides print media services to the Company. The Company incurred operating costs related to those services of $2,943,000 for the year ended December 1998. The Company did not incur any costs from this affiliate in prior years. Included in accounts payable at December 31, 1998 is $1,114,000 due to this affiliate. The Company did not incur any costs from this affiliate in prior years. PROGRAMMING Affiliates of PCI provides programming to the PTK Companies. The Company incurred programming fees from this affiliate of $8,651,000, $500,000 and $412,000 for the years ended December 31, 1998, 1997 and 1996, respectively. 9. EXTRAORDINARY ITEM In 1996 the Company recorded an extraordinary loss related to the early retirement of debt. The extraordinary loss was comprised of a $147,000 prepayment penalty and a $1,566,000 write-off of deferred financing costs. 10. COMMITMENTS AND CONTINGENCIES LEASES The Company leases several offices and warehouses within Poland under cancelable operating lease terms. The Company also leases space within various telephone duct systems from TPSA under cancelable operating leases. The TPSA leases expire at various times, and a substantial portion of the Company's contracts with TPSA permit termination by TPSA without penalty at any time either immediately upon the occurrence of certain conditions or upon provision of three to six months notice without cause. All of the agreements provide that TPSA is the manager of the telephone duct system and will lease space within the 75 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) 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. See Note 11 for further detail. Minimum future lease commitments for the aforementioned leases relate to 1999 only, as all leases are cancelable in accordance with the aforementioned terms. The future minimum lease commitments related to these conduit leases approximates $423,000 for the first six months of 1999. The Company expects to renew these leases on or before the expiration dates. Total rental expense associated with the aforementioned operating leases for the years ended December 31, 1998, 1997 and 1996 was $1,828,000, $1,094,000 and $864,000, respectively. PROGRAMMING COMMITMENTS The Company's parent, PCI, has entered into programming agreements with certain third party content providers. The programming agreements have terms which range from one to five years and require that the license fees be paid either at a fixed amount or based upon the number of subscribers connected to the system each month. All programming agreements are signed between PCI and the third-party programming suppliers, therefore, at December 31, 1998, no future minimum commitment lies with the Company. For the years ended December 31, 1998, 1997 and 1996, the Company incurred programming fees of approximately $2,579,000, $1,546,000 and $1,685,000, respectively, pursuant to these agreements, which are allocated to the Company based on the number of subscribers connected to the system each month. REGULATORY APPROVALS The Company is in the process of obtaining permits from the Polish State Agency for Radiocommunications ("PAR") for several of its cable television systems. If these permits are not obtained, PAR could impose penalties such as fines or in severe cases, revocation of all permits held by an operator or the forfeiture of the operator's cable networks. Management of the Company does not believe that these pending approvals result in a significant risk to the Company. One of the PTK Companies was not able to register several capital increases that were filed in 1995, for an aggregate amount of PLN 2,000,000 (approximately $569,000 at the December 31, 1998 conversion rate). The capital increases were rejected by the relevant Registration Court, and the court's decision was lost on appeal. Since the PTK Company received an in-kind contribution of equipment in respect of the proposed capital increases, the non-recognition of the capital increases by the Polish courts means that the contribution could be treated as income in the hands of the PTK Company. As a result, part or all of the contribution could be subject to corporate income tax of 40%. The PTK Company had enough tax net operating loss in 1995 to offset any additional taxable income resulting from an unfavorable treatment. PCBV has not recorded any amounts related to this in the accompanying consolidated financial statements due to the tax net operating loss and management's belief that this issue will be resolved with no material effect on the consolidated financial position or results of operations of the Company. 76 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) LITIGATION AND CLAIMS One 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. 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. 11. CONCENTRATIONS OF BUSINESS AND CREDIT RISK USE OF TPSA CONDUITS The Company's ability to build out its existing cable television networks and to integrate acquired systems into its cable television networks depends on, among other things, the Company's continued ability to design and obtain access to network routes, and to secure other construction resources, all at reasonable costs and on satisfactory terms and conditions. Many of such factors are beyond the control of the Company. A substantial portion of the Company's contracts with TPSA for the use of such conduits permits termination by TPSA without penalty at any time either immediately upon the occurrence of certain conditions or upon provision of three to six months' notice without cause. LIMITED INSURANCE COVERAGE While the Company carries general liability insurance on its properties, like many other operators of cable television systems it does not insure the underground portion of its cable televisions networks. Accordingly, any catastrophe affecting a significant portion of the Company's cable television networks could result in substantial uninsured losses and could have a material adverse effect on the Company. YEAR 2000 The Company is dependent upon computer systems and other technological devices with imbedded microprocessor chips that are intended to utilize dates and process data beyond December 31, 1999. In January 1997, the Company developed a plan to address the impact that potential year 2000 problems may have on Company operations and to implement necessary changes to address such problems (the "Y2K Plan"). During the course of the development of its Y2K Plan, the Company has identified certain critical operations, which need to be year 2000 compliant for the Company to operate effectively. These critical operations include accounting and billing systems, customer service and service delivery systems, and field and headend devices. Largely as a result of its high rate of growth over the past few years, the Company has entered into an agreement to purchase a new system to replace its current accounting system and an agreement to 77 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998, 1997 AND 1996 11. CONCENTRATIONS OF BUSINESS AND CREDIT RISK (CONTINUED) purchase specialized billing software for the Company's new customer service and billing center. The vendors of the new accounting system and of the billing software have confirmed to the Company that these products are year 2000 compliant. The Company has completed the testing phase of the new accounting system, and the implementation phase was substantially completed at the end of 1998. The Company expects implementation of the billing software to be completed for the majority of its cable subscribers by the end of 1999. The Company believes that its most significant year 2000 risk is its dependency upon third party programming, software, services and equipment, because the Company does not have the ability to control third parties in their assessment and remediation procedures for potential year 2000 problems. Should these parties not be prepared for year 2000 conversion, their products or services may fail and may cause interruptions in, or limitations upon, the Company's provision of the full range of its cable service to its customers. In an effort to prevent any such interruptions or limitations, the Company is in the process of communicating with each of its material third party suppliers of programming, software, services and equipment to determine the status of their year 2000 compliance programs. The Company expects to complete this process by September 30, 1999, and it anticipates that all phases of its Y2K Plan will be completed by December 31, 1999. The Company has not yet developed a contingency plan to address the situation that may result if the Company or its third party suppliers are unable to achieve year 2000 compliance with regard to any products or services utilized in the Company's operations. The Company does not intend to decide on the development of such a contingency until it has gathered all of the relevant Year 2000 compliance data from its third party suppliers. The Company has not yet determined the full cost of its Y2K Plan and its related impact on the financial condition of the Company. The Company has to date not incurred any replacement or remediation costs for equipment or systems as a result of year 2000 non-compliance. Rather, due to the rapid growth and development of its cable system the Company had made substantial capital investments in equipment and systems for reasons other than year 2000 concerns. The total cost of the Company's new accounting system and billing software package is estimated to be approximately $2,400,000. The Company believes that any year 2000 compliance issues it may face can be remedied without a material financial impact on the Company, but no assurance can be made in this regard until all of the data has been gathered from the Company's third party suppliers. At this date the Company cannot predict the financial impact on its operations if year 2000 problems are caused by products or services supplied to the Company by such third parties. CREDITWORTHINESS All of the Company's customers are located in Poland. As is typical in this industry, no single customer accounted for more than five percent of the Company's sales in 1997 or 1996. The Company estimates an allowance for doubtful accounts based on the credit worthiness of its customers as well as general economic conditions. Consequently, an adverse change in those factors could effect the Company's estimate of its bad debts. 78 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The current directors and executive officers of the Company are:
NAME AGE POSITION - ----------------------------------------------------- --- ----------------------------------------------------- Robert E. Fowler, III 40 Chairman of the Board of Directors David T. Chase 69 Director Arnold L. Chase 47 Director Scott A. Lanphere 33 Director Jerzy Z. Swirski 41 Director Przemyslaw A. Szmyt 36 Director David Keefe 49 Chief Executive Officer, Director Dorothy E. Hansberry 46 Vice President and General Counsel Warren L. Mobley, Jr 50 Chief Operating Officer and Execuitve Vice President of Marketing and Sales Piotr M. Majchrzak 31 Chief Financial Officer
CERTAIN INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS Information with respect to the business experience and affiliations for the past five years of the current directors and executive officers of the Company is set forth below. ROBERT E. FOWLER, III has served as Chairman of the Board of Directors of PCI since December 1997, and he served as its Chief Executive Officer from December 1996 to December 1997, its Vice President from August 1993 to December 1996 and its Treasurer from April 1991 to December 1996. Mr. Fowler has served as Chief Executive Officer and as a director of @Entertainment since May 1997. From December 1993 to February 1997, he served as Vice President of D.T. Chase Enterprises, Inc. From March 1995 to late 1996, Mr. Fowler served as a director of ACCEL. Since April 1, 1998, Mr. Fowler has served on the Supervisory Board of Twoj Styl. Mr. Fowler devoted approximately 35% of his working time to PCI and approximately 65% of his working time to companies that were affiliated with PCI. DAVID T. CHASE has been a director of PCI since its inception in 1990, and was the Chairman of the Board of Directors of PCI from March 1996 until December 1997. Mr. Chase has served as Chairman of the Board of Directors of @Entertainment since May 1997. Since January 1990, Mr. Chase has been a director and President of D. T. Chase Enterprises, Inc. and David T. Chase Enterprises, Inc., a diversified conglomerate with extensive holdings in real estate and previously in media. He is also a director of ACCEL International Corporation ("ACCEL"), an insurance holding company. ARNOLD L. CHASE has served as a director of PCI since December 1996. Mr. Chase served as President of the Managing Board of PTK-Warsaw from October, 1993 to September, 1996. Mr. Chase has served as a director of @Entertainment since May 1997. Mr. Chase has also served as director and Executive Vice President and as Treasurer of D.T. Chase Enterprises, Inc. since December 1990 and October 1992, respectively. Mr. Chase served PCI as Co-Chairman of the Board of Directors from April 1991 to March 1996 and as its President from October 1992 to March 1996. Mr. Chase has been a director of International Bancorp, Inc. (the parent company of First National Bank of New England) since 1985, and has been a director of First National Bank of New England since 1972. SCOTT A. LANPHERE has served as a director of PCI since March 1996. He served as a Managing Director of PCBV from May 1996 to October 1997. Mr. Lanphere has served as a director of @Entertainment since May 1997. Mr. Lanphere has served as a Director at Morgan Grenfell Private Equity Ltd. since 79 October 1998. Mr. Lanphere served as a Director of Investments for Advent International plc from December 1994 to October 1998, and from May 1991 to December 1994 served as an Investment Manager of Advent International plc. JERZY Z. SWIRSKI has served as a director of PCI since October 1996. Mr. Swirski has served as a director of @Entertainment since May 1997. Mr. Swirski has served as an Investment Director for Advent International plc since July 1995. From January 1995 to July 1995, Mr. Swirski was a consultant to Enterprise Investors, a Polish equity firm. From 1991 to 1994, he was an officer of E. Wedel S.A., a Polish subsidiary of PepsiCo Foods, International ("Wedel"), and General Manager of Frito-Lay, Poland. PRZEMYSLAW A. SZMYT served as a director of PCI since December 1997 and served as a Vice President and General Counsel of PCI from February 1997 until December 1997. Mr. Szmyt has served as Senior Vice President of Business Development since January 1999 and as Vice President, General Counsel and Secretary of @Entertainment since May 1997. Mr Szmyt has served as a Managing Director of PCBV since November 1997 and as a member of the Supervisory Board of Twoj Styl since April 1998. Since January 1998, Mr. Szmyt has served as a member of the Management Board of DTC Productions Sp. z o.o. Since December 1997, he has served as a member of the Management Board of Wizja TV Sp. z o.o. From September 1995 to February 1997, Mr. Szmyt was a director for Poland of MeesPierson EurAmerica, an investment banking firm and affiliate of MeesPierson N.V., a Dutch merchant bank. From early 1992 to August 1995, Mr. Szmyt was a senior associate at Soltysinski, Kawecki & Szlezak, a law firm in Warsaw. From October 1994 to late 1996, Mr. Szmyt served on the Management Board of Telewizyjna Korporacja Partycypacyjna S.A., a holding company of Canal + Polska. Mr. Szmyt is also a Board Member of United Way Poland and of Litewska Childrens' Hospital Fundation. DAVID KEEFE has served as Chief Executive Officer and director of PCI since January 1998. From December 1995 to December 1997, Mr. Keefe was Chief Executive Officer of Kabelkom Hungary, a Hungarian cable company. From January 1994 to December 1995, Mr. Keefe served as Cable Operations Director and a member of the Board of Directors of Wharf Cable, a cable company in Hong Kong. DOROTHY E. HANSBERRY has served as Vice President and General Counsel of PCI since January 1998. Since May 1996, Ms. Hansberry has served as the President of Hansberry Consultants, Inc. From July 1997 to January 1998, she worked as an attorney at Dewey Ballantine Sp. z o.o., a Warsaw law firm. From May 1996 to July 1997, Ms. Hansberry was an attorney at Beata Gessel and Partners, a Warsaw law firm, and was of-counsel to Bondurant, Mixson & Elmore, an Atlanta, Georgia law firm. From December 1991 to October 1996, she served as legal advisor to Eastern European anti-monopoly offices. From March 1994 to August 1995, Ms. Hansberry acted as resident legal advisor to the Polish Anti-Monopoly Office. From October 1980 to May 1996, she worked as a senior trial attorney in the Antitrust Division of the U.S. Department of Justice. WARREN L. MOBLEY, JR. has served as Chief Operating Officer of PCI since December 1998, and has served as Executive Vice President of Marketing and Sales since May 1998. From March 1997 to May 1998 Mr. Mobley served as President of World Channel Ltd. From March 1993 to February 1997, Mr. Mobley served as Vice President of Development of United International Holdings Asia. PIOTR M. MAJCHRZAK has served as Chief Financial Officer of PCI since July 1998. From April 1997 to June 1998, Mr. Majchrzak was Director of Finance and Corporate Controller of the Company. From September 1992 to March 1997, Mr. Majchrzak worked for Philip Morris Poland and ZPTK S.A., Polish subsidiaries of Philip Morris International, most recently as Manager Financial Systems and Accounting of ZPTK S.A. BOARD OF DIRECTORS The Company's Certificate of Incorporation, as amended (the "Certificate of Incorporation"), provides that seven individuals shall comprise the Board of Directors. 80 The By-Laws of the Company (the "By-Laws") provide that, in the absence of their earlier resignation or removal, all Directors will serve until the next annual meeting of shareholders (held the second Wednesday of August of each year) following their election. The By-Laws provide that directors may resign or may be removed (with or without cause) by the vote of stockholders representing at least 61% of the total outstanding voting power. The By-Laws further provide that, except as otherwise required by the laws of the State of New York or the Certificate of Incorporation, vacancies in the Board of Directors shall be filled by the vote of stockholders representing at least 61% of the total outstanding voting power. The By-Laws provide that a majority of the entire board, determined without respect to vacancies, constitutes a quorum of the Board of Directors. The By-Laws further provide that the act of a majority of all of the Directors present at a meeting for which there is a quorum shall be the act of the Board of Directors, except as otherwise provided in the By-Laws, in the Certificate of Incorporation or by the New York Business Corporation Law. Without limiting the generality of the foregoing sentence, the By-Laws provide that the affirmative action of four Directors shall be required to approve certain transactions including the Company's annual budget, related party transactions and certain extraordinary transactions. There are no standing committees of the Board of Directors. The By-Laws provide for an annual meeting of the Board of Directors immediately following the annual meeting of the shareholders of the Company. Special meetings of the Board of Directors may be called by the Chief Executive Officer, a Vice President or any two directors then in office. ITEMS REQUIRING SUPERMAJORITY VOTE UNDER THE CERTIFICATE OF INCORPORATION The following actions require (i) the affirmative vote of at least six directors, followed by the affirmative vote of the percentage of issued and outstanding capital stock entitled to vote thereon at a meeting of the shareholders as required under the New York Business Corporation Law ("NYBCL"), if such action is required to be submitted to the shareholders under the NYBCL, or (ii) if any such action is not approved by at least six directors, then any such action will require the affirmative vote of at least 65% of the total voting power of the capital stock issued and outstanding and entitled to vote thereon, provided however that if board approval of such action is required under the NYBCL, the action will also require the approval of the Board of Directors at a special meeting of the Board of Directors (and for no purposes other than the approval of actions taken pursuant to this subsection (ii)) for which two-fifths of the total number of directors constitutes a quorum. A. fundamental change in the business of the Company or any subsidiary; B. The adoption of, and approval of any modification to, the annual budget of the Company for each fiscal year; C. An expenditure, not accounted for in the budget during any fiscal year, in excess of $5 million; D. A merger or other business combination or the sale, lease, transfer or other disposition of all or any material portion of the assets; E. Certain encumbrances; F. Related-party transactions; G. The issuance by the Company of third-party debt which causes the aggregate of all third party debt to exceed $25 million; H. Certain issuances of capital stock; I. The declaration of dividends or other distributions; J. The repurchase or optional redemption of any capital; K. The dissolution or liquidation or voluntary winding-up of the Company; L. Amending the Company's Certificate of Incorporation or By-Laws; M. The giving of certain guarantees or indemnities; 81 N. The election or removal of the Chief Executive Officer or the Chairman of the Board; O. Entering into or modifying a material employment contract; P. A change in the auditors or fiscal year-end of the Company; Q. Settling or resolving tax claims in excess of $250,000; R. Commencement, prosecution or compromise of material litigation or arbitration proceedings; and S. Taking steps to wind-up, dissolve or voluntarily seek the protection of bankruptcy laws. REMUNERATION OF DIRECTORS Directors receive no compensation for attending meetings of the Board of Directors or for serving as a director. Pursuant to the By-Laws, however, Directors are entitled to receive reasonable reimbursement of expenses incidental to attendance at such meetings. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth certain information regarding all compensation awarded to, earned by or paid to the Company's Chief Executive Officer and each of the other three most highly compensated executive officers of the Company who earned over, and a former executive officer who would have been one of the most highly compensated executive officers at the end of the fiscal year 1998 (collectively, the "Named Executive Officers") for services rendered in all capacities to the Company for the last three fiscal years, to the extent that those officers were in the employ of the Company. Columns relating to long-term compensation have been omitted from the table as the Company did not have capital stock-related award plans and there has been no compensation arising from long-term incentive plans during the years reflected in the table.
SECURITIES OTHER ANNUAL UNDERLYING NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS/SAR - -------------------------------------------------- --------- ----------- ----------- ----------------- ------------ David Keefe....................................... 1998 220,000 200,000 68,175(1) 250,000 Chief Executive Officer 1997 -- -- -- -- 1996 -- -- -- -- George Z. Makowski (2)............................ 1998 169,770 60,000 34,300(3) 385,000 1997 156,000 175,000(4) 68,400(5) -- 1996 -- -- -- Warren L. Mobley, Jr.............................. 1998 112,084 -- 18,000(6) -- Chief Operating Officer and Executive Vice 1997 -- -- -- -- President of Marketing and Sales 1996 -- -- -- -- Dorothy E. Hansberry.............................. 1998 150,000 10,000 -- -- Vice President and General Counsel 1997 -- -- -- -- 1996 -- -- -- -- Piotr M. Majchrzak................................ 1998 75,000 10,000 -- -- Chief Financial Officer 1997 42,500 10,500 -- -- 1996 -- -- -- --
(1) Includes amounts paid pursuant to housing allowance (2) Mr. Makowski was the Chief Operating Officer of PCI. Mr. Makowski's employment with PCI was terminated effective as of May 1998. (3) Represents amounts paid pursuant to housing allowance (4) Represents one-time bonus paid upon completion of @Entertainment's initial public equity offering (5) Represents amounts paid pursuant to housing and tuition allowances (6) Represents amounts paid pursuant to housing allowance 82 COMPENSATION PLANS EMPLOYMENT AGREEMENTS The Company has employment agreements with each of Mr. Keefe, Ms. Hansberry, Mr. Mobley and Mr. Majchrzak. Mr. Keefe entered into a two-year employment agreement with PCI effective at January 1, 1998. Pursuant to such agreement, Mr. Keefe serves as the Chief Executive Officer of PCI. Mr. Keefe receives a base annual salary of approximately $220,000, a monthly allowance for additional housing and cost of living expenses of $5,000, an allowance for relocation expenses of up to $20,000, and reimbursement of educational and tax planning expenses of up to an aggregate amount of $23,000 per year. Mr. Keefe also receives a guaranteed bonus of $100,000 in the first year of his employment and unspecified incentive bonuses thereafter. He received an additional bonus of $200,000 upon the signing of the employment agreement. Mr. Keefe may terminate the employment agreement at any time upon three months' written notice, and PCI may terminate the agreement at any time upon one month's written notice (with an obligation to pay Mr. Keefe an additional five months' salary). In addition, PCI may terminate the agreement immediately without further obligation to Mr. Keefe for cause (as defined in the employment agreement). Ms. Hansberry entered into a two-year employment agreement with PCI effective at January 1, 1998. Pursuant to such agreement, Ms. Hansberry serves as Vice President and General Counsel of PCI and receives an annual remuneration totaling $150,000. She is eligible to receive annual performance-based bonuses of up to $40,000 per year. Ms. Hansberry's initial year bonus of $40,000 is guaranteed. Ms. Hansberry or PCI may terminate the agreement at any time upon six months' written notice. In addition, PCI may terminate the agreement without further obligation to Ms. Hansberry for cause (as defined in the agreement). Mr. Majchrzak entered into agreement with PCI effective at April 14, 1997, which was amended effective January 1, 1998. Pursuant to such agreement, Mr. Majchrzak serves as Chief Financial Officer of PCI. Pursuant to an employment agreement with PTK Warszawa S.A. and services agreement with PCI, Mr. Majchrzak receives annual remuneration totaling $75,000. He is eligible to receive an annual performance-based bonus of up to $26,000 per year. Mr. Majchrzak may terminate his contract with PCI at any time upon three months' written notice and PCI may terminate the contract with Mr. Majchrzak at any time upon three months' written notice. In addition, PCI may terminate the contract without further obligation to Mr. Majchrzak for cause (as defined in the agreement). Mr. Majchrzak's employment agreement with PTK Warszawa S.A. may be terminated by either party upon one month's written notice. 83 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Poland Communications, Inc. is a wholly owned subsidiary of @ Entertainment, Inc. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS CERTAIN RELATIONSHIPS David T. Chase, a director of the Company, is the father of Arnold L. Chase, a director of the Company. No other family relationship exists between any of the directors and executive officers of the Company. PCBV STOCKHOLDERS' AGREEMENT PCI holds 92.3% of the issued and outstanding capital stock of PCBV which owns 100% of the issued and outstanding capital stock of each of PTK-Krakow, PTK-Warsaw, and 46.8% of the issued and outstanding capital stock of PTK Operator, as well as approximately 98% of the issued and outstanding capital stock of PTK, S.A. The following is a summary of the stockholders' agreement (the "PCBV Stockholders' Agreement") entered into by and among Frank N. Cooper, Reece Communications, Inc., Rutter-Dunn Communications, Inc., and Poland Cablevision U.S.A., Inc. (collectively, the "Minority Stockholders"), PCI, and PCBV on March 8, 1990, as amended. The Minority Stockholders own the 7.7% of outstanding PCBV capital stock that is not owned by PCI. The following summary does not purport to be complete, and it is qualified in its entirety by reference to the PCBV Stockholders' Agreement. The parties to the PCBV Stockholders' Agreement other than PCBV are hereinafter referred to as the "PCBV Stockholders." Shares of the capital stock of PCBV are hereinafter referred to as "PCBV shares." The PCBV Stockholders' Agreement protects shareholdings of each Minority Stockholder from dilution, by requiring that the PCBV shares of each Minority Stockholder must continue to represent a constant percentage of the total equity in PCBV and of the total votes to be cast by the PCBV Stockholders on any subject, regardless of changes to the capital structure of PCBV and regardless of any additional equity funds that may be contributed to PCBV by PCI. The PCBV Stockholders' Agreement contains restrictions on the PCBV Stockholders' ability to sell, pledge, hypothecate or otherwise transfer or encumber their PCBV shares. In addition, PCBV Stockholders have the right of first refusal to purchase PCBV shares upon the death of an individual PCBV Stockholder, and upon the liquidation, dissolution or other termination of a corporate PCBV Stockholder. Furthermore, PCI has the right of first refusal to purchase PCBV shares from Minority Stockholders, and the Minority Stockholders have the right of first refusal to purchase PCBV shares from PCI, before such shares can be sold to a third party. The PCBV Stockholders' Agreement includes certain limitations on payments that can be paid by PCBV to the PCBV Stockholders. If the managing board of PCBV solicits and receives loans from any of the PCBV Stockholders, the loans cannot bear interest at a rate exceeding 10% per annum. Under the PCBV Stockholders' Agreement, PCI has the option to purchase the PCBV shares owned by the Minority Stockholders upon the satisfaction of certain conditions. These conditions involve the number of subscribers obtained by PTK, S.A. in nine specified cities in Poland. On each occasion when the subscriber count in one of these specified cities reaches the number prescribed in the PCBV Stockholders' Agreement, one-ninth of the Minority Stockholders' PCBV shares become available for purchase by PCI for a period of approximately 60 to 90 days. The option periods have expired with respect to a number of the specified cities. The PCBV Stockholders' Agreement also includes covenants against competition that limit the ability of each PCBV Stockholder to engage directly or indirectly in any aspect of the cable television business in Poland for a period ending ten years after such PCBV Stockholder ceases to be a PCBV Stockholder. PCI has direct or indirect ownership interests in a number of entities that engage in certain aspects of the cable 84 television business in Poland. Under the PCBV Stockholders' Agreement, the Minority Stockholders have a claim against 7.7% of the profits and equity of such entities and, under a supplemental agreement, PCI has agreed to share the profits of these entities with the Minority Stockholders on a pro rata basis. In addition, PCI is negotiating to buy, and has made an offer to buy, the outstanding PCBV shares held by the Minority Stockholders, though there can be no assurance that an agreement can be reached with any of the Minority Stockholders on satisfactory terms. SERVICE AGREEMENTS PCI has entered into service agreements with PCBV and other of its direct and indirect subsidiaries (the "Service Agreements"), including Poltelkab Sp. z o.o. ("Poltelkab"), Telkat Sp. z o.o. ("Telkat"), PTK-Szczecin Sp. z o.o. ("PTK-Szczecin"), PTK-Lublin S.A. ("PTK-Lublin"), ETV Sp. z o.o. ("ETV"), PTK, S.A., PTK-Operator, PTK-Warsaw, and PTK-Krakow, pursuant to which PCI provides various services, including administrative, technical, managerial, financial, operational and marketing services to each of the subsidiaries and PCBV serves as PCI's agent. PCI also entered into a service agreement, dated August 31, 1995, with PCBV and ETV, whereby PCBV is the principal service provider and PCI acts as agent to PCBV (the "ETV Service Agreement"). The services provided under these agreements are intended to enable the subsidiaries to construct, develop, operate and manage cable television systems throughout Poland. Except for the ETV Service Agreement, which requires ETV to pay $18,740 per calendar quarter to PCBV, the Service Agreements provide that the subsidiaries will each pay to PCI or PCBV, as the case may be, a fee of $10,000 per calendar quarter for performing general administrative services, and a commercially reasonable rate for legal, financial and other specific professional services. With the exception of the ETV Service Agreement, if a subsidiary is obligated to pay fees to PCI pursuant to a management agreement (described below), any fee payable under the Service Agreements is waived. The Service Agreements also typically require the subsidiaries to reimburse PCBV for any reasonable out-of-pocket expenses incurred by PCBV or PCI, acting as agent for PCBV, including salaries and benefits, housing allowances, travel expenses, and equipment supply or other goods costs. The agreements were due to expire on December 31, 1997, but were automatically extended for successive one-year periods as no party gave notice on or before January 31, 1999. MANAGEMENT AGREEMENTS PCI entered into management agreements with certain of its direct or indirect subsidiaries, namely Poltelkab, Telkat, PTK-Szczecin, PTK-Lublin, ETV, PTK, S.A., PTK-Operator, PTK-Warsaw, and PTK-Krakow. The agreements typically provide that the subsidiary will pay to PCI an annual consulting fee of $320,000 when and to the extent that the subsidiary's net income exceeds zero and in exchange for organizational and consulting services rendered by PCI. Telkat pays to PCI an annual consulting fee of $160,000. The management agreements also provide for an initial term ending as of the end of the calendar year during which they became effective, and provide for successive renewals for one-year periods unless the agreement is terminated in writing with at least thirty days notice by either party. CORPORATE OVERHEAD ALLOCATION AGREEMENT PCI entered into a Corporate Overhead Allocation Agreement, dated January 1, 1996 (the "Allocation Agreement"), with certain of its direct or indirect subsidiaries, namely PTK S.A., PTK-Warsaw, PTK-Operator, PTK-Krakow, PTK-Szczecin, PTK-Lublin, ETV, Telkat, TV Kabel, TK Gosat and Poltelkab (collectively the "PTK Companies"), and PCBV. The Allocation Agreement provides that costs incurred by PCI or PCBV, acting as PCI's agent, with regard to the Service Agreements and as otherwise requested by the PTK Companies shall be allocated and charged to particular PTK Companies in the event they are directly attributable to such subsidiaries, and shall otherwise be allocated equally among each of the PTK Companies. With regard to services rendered and costs incurred by subsidiaries for the benefit of some or all of the PTK Companies, which include costs associated with maintaining a central office in Warsaw, legal 85 expenses, expenses relating to governmental relationships and approvals, programming services, accounting, management information systems services, and salaries associated with personnel whose duties clearly benefit other PTK Companies, the Allocation Agreement provides that such expenses shall be allocated between the PTK Companies. The Allocation Agreement was due to terminate on December 31, 1997, but was automatically renewed for successive one-year periods as no written notice of termination was provided by PCI or PCBV or any subsidiary, with respect to itself. LICENSE AGREEMENT PTK S.A., a subsidiary of PCI entered into a License Agreement, dated January 7, 1999 (the "License Agreement") with an affiliate of the Company, Sereke Holding B.V. ("Sereke"). The License Agreement provides that Sereke grants PTK the non-exclusive right to distribute channels from the Wizja TV programming package to the Company's subscribers for a fee as described on the Company's rate card. The subscriber fee per month was $3.50 until September 30, 1998 and since October 1, 1998 the fee has been $2.50. The total cost for the Company under this License Agreement was approximately $12,473,000 in 1998. This Agreement will expire on the fifth anniversary of the effective date, which was June 5, 1998. Management believes that the terms of the License Agreement are no less favorable than those that could have been obtained from an unaffiliated third party. SALE OF ASSETS AND LIABILITIES OF A SUBSIDIARY During February 1998, @Entertainment, Inc., the Company's parent, purchased substantially all of the assets and liabilities of Mozaic Entertainment, Inc., one of the Company's subsidiaries, including a note payable to the Company for $6,527,000, for consideration of $100. This transfer was made in order to consolidate the D-DTH and programming businesses of @Entertainment. The transfer was accounted for at historical cost in a manner similar to a pooling of interests. The difference between the amount of cash disbursed and the fair value of the liabilities assumed and the historical cost of the net assets acquired, of approximately $3,031,000 was accounted for as a reduction of the accumulated deficit. PURCHASE OF PRINT MEDIA SERVICES During 1998 PCI purchased print media services from an affiliate of the Company, Wydawnictwo Prasawe Twoj Styl Sp. z o.o. ("WPTS"). The total cost for the Company for these services was approximately $4,355,000 in 1998. Management believes that the terms of the agreement relating to print media services are no less favorable than those that could have been obtained from an unaffiliated third party. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) FINANCIAL STATEMENTS AND SCHEDULES. The financial statements as set forth under Item 8 of this report on Form 10-K are incorporated herein by reference. Financial statement schedules have been omitted since they are either not required, not applicable, or the information is otherwise included. (b) Reports on Form 8-K No reports on Form 8-K were filed during the last quarter of the year ended December 31, 1998. (c) Exhibit Listing 86
NUMBER - ----------- 3.1 Restated Certificate of Incorporation of Poland Communications, Inc. as amended through August 1998. 3.2 By-Laws of PCI as amended through March 1998. 4.1 Indenture dated as at October 31, 1996 between PCI and State Street Bank and Trust Company relating to PCI's 9 7/8% Senior Notes due 2003 and its 9 7/8% Series B Senior Notes due 2003 (Incorporated by reference to Exhibit 4.11 of PCI's Registration Statement on Form S-4, Registration No. 333-20307). 10.1 Employment Agreement dated as of January 1, 1998, between PCI and Dorothy Hansberry. (Incorporated by reference to Exhibit 10.19 of @Entertainment's Registration Statement on Form S-4, Registration No. 333-60659) 10.2 Employment Agreement, dated January 1, 1998 between PCI and David Keefe. (Incorporated by reference to Exhibit 10.17 of @Entertainment's Registration Statement on Form S-4, Registration No. 333-20307) 10.3 Stock Option Agreement, dated as of January 1, 1998, beteen @Entertainment and David Keefe. (Incorporated by reference to Exhibit 10.18 of @Entertainment's Registration Statement on Form S-4, Registration No. 333-20307) 10.4 Form of Indemnification Agreement between @Entertainment and its executive officers and directors. 10.5 Purchase Agreement dated October 24, 1996 between PCI and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated relating to $130,000,000 aggregate principal amount of PCI's 9 7/8% Senior Notes due 2003 (Incorporated by reference to Exhibit 1.1 of PCI's Registation Statement on Form S-4, Registration No. 333-20307). 21 Subsidiaries of PCI 27 Financial Data Schedule
87 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. POLAND COMMUNICATIONS, INC. BY: /S/ DAVID KEEFE --------------------------- David Keefe CHIEF EXECUTIVE OFFICER AND DIRECTOR In accordance with the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates stated.
SIGNATURE TITLE DATE - ---------------------------------------------- ---------------------------------------------- ----------------- /s/ DAVID KEEFE Chief Executive Officer and Director March 30, 1999 - ------------------------------------ David Keefe /s/ PIOTR M. MAJCHRZAK Chief Financial Officer March 30, 1999 - ------------------------------------ (Principal Financial and Principal Accounting Piotr M. Majchrzak Officer) /s/ ROBERT E. FOWLER III Chairman of the Board of Director March 30, 1999 - ------------------------------------ Robert E. Fowler III /s/ ARNOLD L. CHASE Director March 30, 1999 - ------------------------------------ Arnold L. Chase /s/ DAVID T. CHASE Director March 30, 1999 - ------------------------------------ David T. Chase Director - ------------------------------------ Scott A. Lanphere /s/ JERZY Z. SWIRSKI Director March 30, 1999 - ------------------------------------ Jerzy Z. Swirski /s/ PRZEMYSLAW A. SZMYT Director March 30, 1999 - ------------------------------------ Przemyslaw A. Szmyt
88 EX-3.1 2 EXHIBIT 3.1 EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION OF POLAND COMMUNICATIONS, INC. (Pursuant to Section 807 of the New York Business Corporation Law) IT IS HEREBY CERTIFIED THAT: FIRST: The name of the Corporation is: POLAND COMMUNICATIONS, INC. (hereinafter the "Corporation"). The name under which the Corporation was formed is Servus Management Corporation of New York. SECOND: The original Certificate of Incorporation was filed by the Department of State on August 27, 1982. THIRD: The following amended and restated Certificate of Incorporation amends the following Articles of the Corporation's original Certificate of Incorporation as modified by the first amended Certificate, which was filed with the Secretary of State of New York on January 25, 1985, the restated Certificate which was filed with the Secretary of State of New York on April 17, 1991, the amended Certificate which was filed with the Secretary of State of New York on June 24, 1991, the restated Certificate which was filed with the Secretary of State of New York on March 27, 1996, the amended Certificate which was filed with the Secretary of State of New York on October 23, 1996, the amended Certificate which was filed with the Secretary of State of New York on May 13, 1997, and the Certificate of Amendment which was filed with the Secretary of State of New York on December 31, 1997: Article IV is amended to delete Series B Preferred Stock and Series D Preferred Stock; Article V is I:\CORP\RES\PUBL\2030801.7 amended to change the registered agent of the Corporation and to change the name and address of the person to whom the Secretary of State, as agent for service of process, will mail a copy of the process; and Article VIII, which addressed actions which required approval of certain matters by a super majority of the votes, is deleted. These changes are made to reflect: a reorganization of the Corporation under which all of the Common Stock, all of the Series A Preferred Stock and all of the Series C Preferred Stock was acquired by @Entertainment, Inc.; an exchange of all of the Series B Preferred Stock for Series B Preferred Stock of @Entertainment, Inc.; a redemption of the Series D Preferred Stock; and a change in the registered agent of the Corporation and a change in the name and address of the person to whom the Secretary of State, as agent for service of process, will mail a copy of the process. FOURTH: The restatement of the Certificate of Incorporation herein provided for was authorized, pursuant to sections 803 and 615(a) of the New York Business Corporation Law, by the unanimous written consent of the Board of Directors of the Corporation, followed by the unanimous written consent, setting forth the action so taken, signed by the holders of all outstanding shares entitled to vote thereon. FIFTH: This amendment provides for a change as to 2,500 authorized and issued shares, par value one cent ($.01) per share, of the Series B Preferred Stock (none of which shares are outstanding), and 1,151 authorized and issued shares, par value one cent ($.01) per share, of the Series D Preferred Stock (none of which shares are outstanding). Resulting from the change are no authorized and issued shares of the Series B Preferred Stock and no authorized and issued shares of the Series D Preferred Stock. The terms of the change are to remove 2,500 shares (none of which are outstanding) from the authorized and issued shares, par value one cent ($.01) per share, of the Series B Preferred Stock and 1,151 shares (none of which are outstanding) from the authorized and issued shares, par value one cent ($.01) per share, of the Series D Preferred Stock. The Series A Preferred Stock, Series C Preferred Stock, and Common Stock are not changed. SIXTH: This amendment reduces the stated capital of the Corporation by removing from the authorized and issued shares of the Corporation I:\CORP\RES\PUBL\2030801.7 2 2,500 issued shares of Series B Preferred Stock of the par value of one cent ($.01) per share and 1,151 issued shares of Series D Preferred Stock of the par value of one cent ($.01) per share, all of which have been reacquired and cancelled by the Corporation. The stated capital of the Corporation is reduced from two hundred eighty five dollars and ninety nine cents ($285.99) to two hundred forty nine dollars and forty eight cents ($249.48), a reduction of thirty six dollars and fifty one cents ($36.51), which amount represents the aggregate par value of the cancelled reacquired shares removed from authorized status. SEVENTH: To accomplish the amendments described above, (i) Section 1 of Article IV is hereby amended to read as set forth in the same numbered Article of the Certificate of Incorporation of the Corporation as hereafter restated; (ii) Sections 4 and 6 of Article IV have been deleted and Sections 5 and 7 of Article IV are renumbered as Sections 4 and 5, respectively; (iii) Section 5 of Article IV is hereby amended to read as set forth in new Section 4 of Article IV of the Certificate of Incorporation of the Corporation as hereafter restated; (iv) Section 7 of Article IV is hereby amended to read as set forth in new Section 5 of Article IV of the Certificate of Incorporation of the Corporation as hereafter restated; (v) Article V is amended to read as set forth in the same numbered Article of the Certificate of Incorporation of the Corporation as hereafter restated; (vi) Article VIII is deleted; and (vii) Articles IX and X are renumbered as Articles VIII and IX, respectively. EIGHTH: The text of the Certificate of Incorporation of the Corporation is hereby restated as further amended or changed herein to read as follows: ARTICLE I NAME OF CORPORATION The name of the Corporation is Poland Communications, Inc. I:\CORP\RES\PUBL\2030801.7 3 ARTICLE II PURPOSE To engage in any lawful act or activity for which Corporations may be organized under the Business Corporation Law, provided that the Corporation is not formed to engage in any act or activity requiring the consent or approval of any state official, department, board, agency or other body without such consent or approval first being obtained. ARTICLE III CORPORATE OFFICE The office of the Corporation is to be located in the County of Albany, State of New York. ARTICLE IV AUTHORIZED SHARES SECTION 1. AUTHORIZED. The aggregate number of shares which the Corporation is authorized to issue is thirty three thousand (33,000), of which twenty seven thousand (27,000) shares are authorized for common stock, par value one cent (U.S. $0.01) per share ("Common Stock"), four thousand (4,000) shares are authorized for Series A Preferred Stock, par value of one cent (U.S. $0.01) per share, and two thousand (2,000) shares are authorized for Series C Preferred Stock, par value of one cent (U.S. $0.01) per share. The Common Stock and the two series of preferred stock shall have the voting rights, designations, preferences, qualifications, privileges, limitations, options and other rights as follows: SECTION 2. COMMON STOCK. A. VOTING RIGHTS. The holders of Common Stock shall be entitled to one (1) vote per share on all matters submitted to the shareholders of the Corporation. I:\CORP\RES\PUBL\2030801.7 4 B. DIVIDEND PROVISIONS. The holders of shares of Common Stock shall be entitled to receive dividends when, as and if declared by the Board of Directors. SECTION 3. SERIES A PREFERRED STOCK. A. VOTING RIGHTS. The holders of Series A Preferred Stock shall not be entitled to vote on any matters submitted to the shareholders of the Corporation, except as otherwise required by applicable law. B. DIVIDEND PROVISIONS. The holders of shares of Series A Preferred Stock shall not be entitled to receive dividends. C. REDEMPTION. (1) Mandatory Redemption. On September 30, 2004, the Corporation shall be required to redeem the Series A Preferred Stock (the "Series A Redemption Date"). (2) Optional Redemption. At the option of the Corporation, the Series A Preferred Stock may be redeemed at any time, in whole or in part. The Corporation may exercise said option by providing notice of redemption in accordance with Article IV, Section 3(C)(4). (3) Redemption Price. The redemption price per share of Series A Preferred Stock to be paid upon a redemption under this Section 3(C) shall be ten thousand dollars (U.S. $10,000) (the "Series A Redemption Price"). The Series A Redemption Price shall be adjusted proportionately in the event the Series A Preferred Stock is adjusted into a lesser number of shares or subdivided into a greater number of shares. (4) Redemption Notice. Notice of any redemption pursuant to this Section 3(C) shall be given by the Corporation by mailing notice (the "Series A Redemption Notice"), via registered or certified mail, postage prepaid, or by hand delivery to the holders of record of the Series A Preferred Stock (as of the close of business on the business day next preceding the day on which the Series A Redemption Notice is given) at their respective addresses as the same shall appear on the I:\CORP\RES\PUBL\2030801.7 5 stock books of the Corporation, not less than 30 days nor more than 60 days prior to the date of such redemption and the Series A Redemption Notice shall state the time and place fixed for such redemption. (5) Surrender of Certificates. Upon surrender of a certificate or certificates representing shares to be redeemed pursuant to this Section 3(C), the Corporation shall remit an amount equal to the product of (i) the Series A Redemption Price, times (ii) the number of shares of Series A Preferred Stock to be redeemed. If fewer than all of the shares represented by any such certificate or certificates presented for redemption are to be redeemed, a new certificate shall be issued representing the unredeemed shares without cost to the holder. If so required by the Corporation, any certificate for Series A Preferred Stock surrendered for redemption shall be accompanied by instruments of transfer, duly executed by the holder of such Series A Preferred Stock or his duly authorized representative. (6) Rights After the Series A Redemption Date. From and after the close of business on the Series A Redemption Date, unless there shall have been a default in the payment of the redemption price, all rights of holders of shares of Series A Preferred Stock redeemed pursuant to Section 3(C) shall cease with respect to such shares, and thereafter such shares shall not be deemed to be outstanding for any purposes whatsoever. (7) Cancellation of Redeemed Shares. Any shares of Series A Preferred Stock that shall at any time have been redeemed or repurchased by the Corporation shall, after such redemption or repurchase, be cancelled by the Corporation and shall not be available for reissuance. SECTION 4. SERIES C PREFERRED STOCK. A. VOTING RIGHTS. The holders of Series C Preferred Stock shall not be entitled to vote on any matters submitted to the shareholders of the Corporation, except as otherwise required by applicable law. I:\CORP\RES\PUBL\2030801.7 6 B. DIVIDEND PROVISIONS. The holders of shares of Series C Preferred Stock shall not be entitled to receive dividends. C. MANDATORY REDEMPTION. (1) Mandatory Redemption. On September 30, 2004, the Corporation shall be required to redeem the Series C Preferred Stock (the "Series C Redemption Date"). Prior to the mandatory redemption of the Series C Preferred Stock, if no IPO Closing has occurred by such date, all of the Series A Preferred Stock shall have been exchanged, repurchased or redeemed in full or otherwise cancelled. The "IPO Closing" shall mean the closing of an underwritten public offering of shares to be listed on the New York Stock Exchange or the American Stock Exchange, or to be quoted on the National Association of Securities Dealers Automated Quotation System or the National Market System of the National Association of Securities Dealers pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale to the public of at least twenty percent (20%) of the Common Stock of the Corporation outstanding immediately after the IPO Closing or (ii) immediately prior to the closing of a merger or consolidation of the Corporation with or into another corporation or entity which is not an affiliate of the Corporation. For purposes of this Section 4(C)(1), "affiliate of the Corporation" shall mean any person or entity that controls, is controlled by or is under common control with the Corporation. (2) Optional Redemption. At the option of the Corporation, the Series C Preferred Stock may be redeemed at any time, in whole or in part, provided that before any shares of Series C Preferred Stock may be redeemed, the Series A Preferred Stock shall have been exchanged, repurchased or redeemed in full or otherwise cancelled. The Corporation shall exercise said option by providing notice of redemption in accordance with Section 4(C)(4). (3) Redemption Price. The redemption price per share of Series C Preferred Stock to be paid upon a redemption under this Section 4(C) shall be equal to ten thousand dollars (U.S. $10,000) (the "Series C Redemption Price"). The Series C Redemption Price shall be I:\CORP\RES\PUBL\2030801.7 7 adjusted proportionately in the event the Series C Preferred Stock is adjusted into a lesser number of shares or subdivided into a greater number of shares. (4) Redemption Notice. Notice of any redemption pursuant to this Section 4(C) shall be given by the Corporation by mailing notice (the "Series C Redemption Notice"), via registered or certified mail, postage prepaid, or by hand delivery to the holders of record of the Series C Preferred Stock (as of the close of business on the business day next preceding the day on which the Series C Redemption Notice is given) at their respective addresses as the same shall appear on the stock books of the Corporation, not less than 30 days nor more than 60 days prior to the date of such redemption and the Series C Redemption Notice shall state the time and place fixed for such redemption. (5) Surrender of Certificates. Upon surrender of certificate or certificates representing shares to be redeemed pursuant to this Section 4(C), the Corporation shall remit an amount equal to the product of, (i) the Series C Redemption Price, times (ii) the number of shares of the Series C Preferred Stock to be redeemed. If fewer than all of the shares represented by any such certificate or certificates presented for redemption are to be redeemed, a new certificate shall be issued representing the unredeemed shares without cost to the holder. If so required by the Corporation, any certificate for Series C Preferred Stock surrendered for redemption shall be accompanied by instruments of transfer, duly executed by the holder of such Series C Preferred Stock or his duly authorized representative. (6) Rights After the Series C Redemption Date. From and after the close of business on the Series C Redemption Date, unless there shall have been a default in the payment of the redemption price, all rights of holders of shares of Series C Preferred Stock redeemed pursuant to Section 4(C) shall cease with respect to such shares, and thereafter such shares shall not be deemed to be outstanding for any purposes whatsoever. I:\CORP\RES\PUBL\2030801.7 8 (7) Cancellation of Redeemed Shares. Any shares of Series C Preferred Stock that shall at any time have been redeemed or repurchased by the Corporation shall, after such redemption or repurchase, be cancelled by the Corporation and shall not be available for reissuance. SECTION 5. LIQUIDATION PREFERENCES OF PREFERRED STOCK. A. Subject to Section 5(B), upon the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, after payment or provisions for the payment of the debts and other liabilities of the Corporation, the assets then available for distribution to the shareholders shall be distributed as follows: (1) First to the holders of the Series A Preferred Stock, to the extent available, in an amount equal to $10,000.00 per share (the "Series A Liquidation Preference"), but if the funds available therefor are insufficient, then to the holders of Series A Preferred Stock on a pro rata basis in accordance with the number of shares held by each holder. (2) Second to the holders of the Series C Preferred Stock, to the extent available, in an amount equal to $10,000.00 per share (the "Series C Liquidation Preference"), but if the funds available therefor are insufficient, then to the holders of Series C Preferred Stock on a pro-rata basis in accordance with the number of shares held by each holder. (4) After distribution in accordance with clauses (1) and (2) above, all remaining assets available for distribution to the shareholders shall be distributed to the holders of shares of the outstanding Common Stock on a pro rata basis in accordance with the number of shares held by each holder. B. Upon the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation that occurs after the IPO Closing, after payment or provisions for the payment of the debts and other liabilities of the Corporation, the assets then available for distribution to the shareholders shall be distributed as follows: first, an I:\CORP\RES\PUBL\2030801.7 9 amount equal to the aggregate Series A Liquidation Preference and Series C Liquidation Preference for all outstanding shares of Series A Preferred Stock and Series C Preferred Stock, respectively, shall be distributed pro rata among all holders of the Series A Preferred Stock and the Series C Preferred Stock based on the number of shares held by each holder; second, all remaining assets available for distribution to the shareholders shall be distributed to the holders of the outstanding Common Stock on a pro rata basis in accordance with the number of shares held by each holder. C. Notwithstanding the foregoing, the Series A Liquidation Preference or the Series C Liquidation Preference, as the case may be, shall be adjusted proportionately in the event that the number of shares of such series of preferred stock is adjusted into a lesser number of shares or adjusted into a greater number of shares. ARTICLE V AGENT FOR SERVICE OF PROCESS; REGISTERED AGENT The Secretary of State is designated as agent of the Corporation upon whom process against it may be served. The post office address to which the Secretary of State shall mail a copy of any process against the Corporation served upon him is: Corporation Service Company 80 State Street 6th Floor Albany, New York 12207 Corporation Service Company is hereby designated as the Corporation's Registered Agent, the agent upon whom process may be served. Corporation Service Company's post office address is: 80 State Street 6th Floor Albany, New York 12207 I:\CORP\RES\PUBL\2030801.7 10 ARTICLE VI PREEMPTIVE RIGHTS No shareholder of the Corporation shall have preemptive rights to acquire shares of the Corporation, and such rights are specifically denied by this Article VI. ARTICLE VII DIRECTORS The Board of Directors of the Corporation shall consist of seven (7) directors, unless a different number shall be established by amendment to this Certificate of Incorporation. ARTICLE VIII LIMITED LIABILITY OF DIRECTORS No director of the Corporation shall have liability for monetary damages for breach of duty as a director if such breach did not (A) involve a knowing and culpable violation of law by the director; (B) enable the director or an Associate (as defined herein) to receive an improper personal economic gain; (C) show a lack of good faith and a conscious disregard for the duty of the director to the Corporation under circumstances in which the director was aware that his conduct or omission created an unjustifiable risk of serious injury to the Corporation; (D) constitute a sustained and unexcused pattern of inattention that amounted to an abdication of the director's duty to the Corporation; or (E) create liability under an applicable provision of the laws of the State of New York which cannot be limited or made inapplicable by this Article. For purposes hereof, "Associate" of a director means (A) any corporation or organization of which such person is an officer or partner or is, directly or indirectly, the beneficial owner of ten percent or more of any class of voting stock; (B) any trust or other estate in which such person has at least a ten percent beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity; and (C) any relative or spouse of such person, or any relative of such spouse, who has the same home as such person. I:\CORP\RES\PUBL\2030801.7 11 ARTICLE IX INDEMNIFICATION SECTION 1. DEFINITIONS. As used in this Article IX: A. "Agent" means any person who is or was an agent of the Corporation and any person who, while an agent of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another Enterprise. B. "Corporation" includes any domestic or foreign predecessor entity of the Corporation in a merger, consolidation or other transaction in which the predecessor's existence ceased upon consummation of such transaction. C. "Director" means any person who is or was a director of the Corporation and who, while a director of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another Enterprise or as a fiduciary of an employee benefit plan or trust maintained for the benefit of employees of the Corporation or employees of any other Enterprise. D. "Eligible Outside Party" means any person who, although not a shareholder, director, officer, employee or agent of the Corporation, is or was serving solely at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another Enterprise. E. "Employee" means any person who is or was an employee of the Corporation and any person who, while an employee of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another Enterprise or as a fiduciary of an employee benefit plan or trust maintained for the benefit of employees of the Corporation or employees of any other Enterprise. F. "Enterprise" means any other foreign or domestic Corporation, partnership, joint venture, trust or other enterprise, other than an employee benefit plan or trust. G. "Expenses" include attorneys' fees. I:\CORP\RES\PUBL\2030801.7 12 H. "Officer" means any person who is or was an officer of the Corporation and any person who, while an officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another Enterprise or as a fiduciary of an employee benefit plan or trust maintained for the benefit of employees of the Corporation or employees of any other Enterprise. I. "Party" includes a person who was, is, or is threatened to be made, a defendant or respondent in a proceeding. J. "Proceeding" means any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, and shall include any appeal therein. K. "Shareholder" means any person who is or was a shareholder of the Corporation and any person who, while a shareholder of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another Enterprise. SECTION 2. SCOPE OF INDEMNIFICATION. A. Except as otherwise provided in this Article IX or in the laws of the State of New York, the Corporation shall indemnify any person made a Party to any Proceeding, other than an action by or in the right of the Corporation, by reason of the fact that he, or the person whose legal representative he is, is or was a shareholder, director, officer, employee or agent of the Corporation, or an Eligible Outside Party, against judgments, fines, penalties, amounts paid in settlement and reasonable Expenses actually incurred by him, and the person whose legal representative he is, in connection with such Proceeding. The Corporation shall not so indemnify any such person unless (1) such person, and the person whose legal representative he is, was successful on the merits in the defense of any proceeding referred to in this subsection, or (2) it shall be concluded as provided in subsection C of this Section 2 that such person, and the person whose legal representative he is, acted in good faith and in a manner he reasonably believed to be in the best interests of the Corporation, or in the case of a person serving as a fiduciary of an employee benefit plan or trust, either in the best interests of the Corporation or in the best interests of the participants and beneficiaries of such employee benefit plan or trust and consistent with the provisions of such employee benefit plan or trust and, with respect to any criminal action or proceeding, that they had no reasonable I:\CORP\RES\PUBL\2030801.7 13 cause to believe his conduct was unlawful, or (3) the court, on application as provided in subsection D of this Section 2, shall have determined that in view of all circumstances such person is fairly and reasonably entitled to be indemnified, and then for such amount as the court shall determine; except that, in connection with an alleged claim based upon his purchase or sale of securities of the Corporation or another Enterprise, which he serves or served at the request of the Corporation, the Corporation shall only indemnify such person after the court shall have determined, on application as provided in subsection D of this Section 2, that in view of all the circumstances such person is fairly and reasonably entitled to be indemnified, and then for such amount as the court shall determine. The termination of any Proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith or in a manner which he did not reasonably believe to be in the best interests of the Corporation or of the participants and beneficiaries of such employee benefit plan or trust and consistent with the provisions of such employee benefit plan or trust, or, with respect to any criminal action or proceeding, that he had reasonable cause to believe that his conduct was unlawful. B. Except as otherwise provided in this Article IX or in the laws of the State of New York, the Corporation shall indemnify any person made a Party to any Proceeding, by or in the right of the Corporation, to procure a judgment in its favor by reason of the fact that he, or the person whose legal representative he is, is or was a Shareholder, director, officer, employee or agent of the Corporation, or an Eligible Outside Party, against reasonable Expenses actually incurred by him in connection with such proceeding in relation to matters as to which such person, or the person whose legal representative he is, is finally adjudged not to have breached his duty to the Corporation, or where the court, on application as provided in subsection D of this Section 2, shall have determined that in view of all the circumstances such person is fairly and reasonably entitled to be indemnified, and then for such amount as the court shall determine. The Corporation shall not so indemnify any such person for amounts paid to the Corporation, to a plaintiff or to counsel for a plaintiff in settling or otherwise disposing of a Proceeding which is settled or otherwise disposed of without court approval. C. The conclusion provided for in subsection A of this Section 2 may be reached by any one of the following: (1) The Board of Directors of the Corporation by a consent in writing signed by a majority of those directors who were not Parties to such Proceeding; (2) independent legal counsel selected by a consent in writing signed by a majority of those directors who were not Parties to such Proceeding; I:\CORP\RES\PUBL\2030801.7 14 (3) in the case of any Employee or Agent who is not an officer or Director of the Corporation, the Corporation's general counsel with respect to any matter for which the amount to be indemnified hereunder is less than $100,000; or (4) the shareholders of the Corporation by the affirmative vote of at least fifty-five percent (55%) of the voting power of shares not owned by Parties to such Proceeding, represented at an annual or special meeting of Shareholders, duly called with notice of such purpose stated. Such person shall also be entitled to apply to a court for such conclusion, upon application as provided in subsection D, even though the conclusion reached by any of the foregoing shall have been adverse to him or to the person whose legal representative he is. D. Where an application for indemnification or for a conclusion as provided in this Section 2 is made to a court, it shall be made to the court for the judicial district where the principal office of the Corporation is located. The application shall be made in such manner and form as any be required by the applicable rules of the court, or in the absence thereof, by direction of the court. The court may also direct that notice be given in such manner as it may require at the expense of the Corporation to the Shareholders of the Corporation and to such other persons as the court may designate. In the case of an application to a court in which a Proceeding is pending in which the person seeking indemnification is a Party by reason of the fact that he, or the person whose legal representative he is, is or was serving at the request of the Corporation as a Director, partner, trustee, Officer, Employee or Agent of another Enterprise, or as a fiduciary of an employee benefit plan or trust maintained for the benefit of employees of any other enterprise, timely notice of such application shall be given by such person to the Corporation. E. Expenses which may be indemnifiable under this section incurred in defending a proceeding may be paid by the Corporation in advance of the final disposition of such proceeding as authorized by the Board of Directors upon agreement by or on behalf of the Shareholder, Director, Officer, Employee, Agent or Eligible Outside Party, or his legal representative, to repay such amount if he is later found not to be entitled to indemnification by the Corporation as authorized in this Article IX. F. The Corporation shall not indemnify any Shareholder, Director, Officer, Employee, Agent or Eligible Outside Party, other than a Shareholder, Director, Officer, Employee, Agent or Eligible Outside Party who is or was serving at the request of the Corporation as a Director, Officer, partner, trustee, Employee or Agent of another enterprise, against judgments, fines, penalties, amounts paid I:\CORP\RES\PUBL\2030801.7 15 in settlement and expenses to an extent either greater or less than that authorized in this Article IX. Notwithstanding the foregoing, except as otherwise provided in the laws of the State of New York, the Corporation may procure insurance providing greater indemnification and may share the premium cost with any Shareholder, Director, Officer, Employee, Agent or Eligible Outside Party on such basis as may be agreed upon. SECTION 3. VALIDITY. If this Article IX or any portion thereof shall be invalidated on any grounds by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each Director, Officer, Employee, Agent and Shareholder of the Corporation as to expenses (including attorneys' fees), judgments, fines and amounts paid in settlement with respect to any action, suit or proceeding, whether civil, criminal, administrative or investigative, including, without limitation, a grand jury proceeding any action, suit or proceeding by or in the right of the Corporation, to the fullest extent permitted by any applicable portion of this Article IX that shall not have been invalidated, by the Business Corporation Law of New York or by any other applicable law. I:\CORP\RES\PUBL\2030801.7 16 IN WITNESS WHEREOF, we have subscribed this document as the date set forth below and do hereby affirm, under the penalties of perjury, that the statements contained therein have been examined by us and are true and correct. April 15, 1998 /s/Robert E. Fowler, III ------------------------ Robert E. Fowler, III Chairman of the Board /s/Cheryl A. Chen ------------------------ Cheryl A. Chen Secretary I:\CORP\RES\PUBL\2030801.7 17 EX-3.2 3 EXHIBIT 3.2 EXHIBIT 3.2 AMENDED AND RESTATED (A/O 4/--/98) BY-LAWS OF POLAND COMMUNICATIONS, INC. (a New York corporation) ARTICLE I SHAREHOLDERS Section 1.1. ANNUAL MEETING. The annual meeting of shareholders for the election of directors and the transaction of such other business as may properly come before such meeting shall be held on the second Wednesday of August of each year at such time and place, within or without the State of New York, as shall be determined by resolution of the Board of Directors. If the day fixed for the annual meeting is a legal holiday, such meeting shall be held on the next succeeding business day. If the election of directors shall not be held on the day designated herein for the annual meeting of shareholders, or at any adjournment thereof, the Board of Directors shall cause such election to be held at a special meeting of shareholders to be called as soon thereafter as is convenient. Section 1.2. SPECIAL MEETINGS. Special meetings of shareholders may be called by the Chairman of the Board of Directors, the Board of Directors, or the Chief Executive Officer and shall be called by the Chief Executive Officer or the Secretary at the request in writing, stating the purpose or purposes thereof, of holders of not less than twenty percent of the Voting Power (as defined hereinafter). If the Chief Executive Officer or the Secretary shall not, within fifteen (15) days after the receipt of such shareholders' request, so call such meeting, such shareholders may call the same. Special meetings of shareholders may be held at such time and place, within or without the State of New York, as shall be determined by resolution of the Board of Directors or as may be specified in the call of any such special meeting. If not otherwise designated, the place of any special meeting shall be the principal office of the Corporation in the County of Albany, State of New York. Section 1.3. NOTICE OF MEETINGS AND ADJOURNED MEETINGS. Written notice of every meeting of shareholders, stating the place, date, time and purposes thereof, shall, except when otherwise required by the Certificate of Incorporation, as amended and restated from time to time, of the Corporation (the "Certificate of Incorporation") or the laws of the State of New York, be given at least 10 but not more than 60 days prior to such meeting to each shareholder - 1 - of record entitled to vote thereat, in the manner set forth in Section 9.1 of these By-Laws, by or at the direction of the Chief Executive Officer or the Secretary or the persons calling such meeting. Any meeting at which a quorum of shareholders is present, in person or by proxy, may be adjourned from time to time without notice, other than announcement at such meeting, until its business shall be completed. At such adjourned meeting, any business may be transacted which might have been transacted at the original meeting. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, written notice of the adjourned meeting shall be given to each shareholder of record entitled to vote thereat as above provided. Section 1.4. QUORUM. The holders of a majority of the Voting Power (as defined hereinafter), which holders may vote in person or be represented by proxy, shall constitute a quorum at all meetings of the shareholders for the transaction of business. For the purposes of these By-Laws, the term "Voting Power" means, with respect to any shares of stock issued and outstanding and entitled to vote at a meeting of the shareholders, the total number of votes represented by such shares. If, however, such quorum shall not be present or represented at any meeting of the shareholders, the shareholders entitled to vote thereat, present in person or represented by proxy, shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally notified. When a quorum is present at any meeting, the vote of the holders of a majority of the Voting Power shall decide any question brought before such meeting, unless the question is one upon which by express provision of the New York Business Corporation Law or by express provision of the Certificate of Incorporation a different vote is required, in which case such express provision shall govern and control the decision of such question. Section 1.5. PROXIES. At every meeting of shareholders, each shareholder having the right to vote thereat shall be entitled to vote in person or by proxy. Such proxy shall be filed with the Secretary before or at the time of the meeting. No proxy shall be valid after eleven months from its date, unless such proxy provides for a longer period or limits its use to a particular meeting not yet held. No proxy shall be valid after ten years from its date of execution, unless such proxy is irrevocable, in which case such irrevocable proxy shall be governed by the applicable provisions of the laws of the State of New York. A shareholder may authorize another person or persons to act for such shareholder as proxy (i) by executing a writing authorizing such person or persons to act as such, which execution may be accomplished by such shareholder or such shareholder's authorized officer, director, employee or agent signing such writing or causing his or her signature to be affixed to such writing by any reasonable means, including, but not limited to, facsimile signature, or (ii) by transmitting or authorizing the transmission of a telegram, cablegram wireless or other - 2 - similar transmission (a "Transmission") to the person who will be the holder of the proxy or to a proxy solicitation firm, proxy support service organization or like agent duly authorized by the person who will be the holder of the proxy to receive such Transmission; provided, however, that any such Transmission must either set forth or be submitted with information from which it can be determined that such Transmission was authorized by such shareholder. The Secretary or such other person or persons as shall be appointed from time to time by the Board of Directors shall examine Transmissions to determine if they are valid. If it is determined that a Transmission is valid, the person or persons making that determination shall specify the information upon which such person or persons relied. Any copy, facsimile telecommunication or other reliable reproduction of such a writing or such a Transmission may be substituted or used in lieu of the original writing or Transmission for any and all purposes for which the original writing or Transmission could be used; provided, however, that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or Transmission. Section 1.6. FIXING DATE FOR DETERMINATION OF SHAREHOLDERS OF RECORD. (a) In order that the Corporation may determine the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing such record date shall be adopted by the Board of Directors, and which record date shall not be more than 60 nor less than 10 days before the date of such meeting. If no such record date shall have been fixed by the Board of Directors, such record date shall be at the close of business on the day next preceding the day on which such notice is given or, if such notice is waived or is not required by these By-Laws, at the close of business on the day next preceding the day on which such meeting shall be held. A determination of shareholders of record entitled to notice of or to vote at any meeting of shareholders shall apply to any adjournment of such meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. (b) In order that the Corporation may determine the shareholders entitled to receive payment of any dividend or other distribution or any allotment of any rights or the shareholders entitled to exercise any rights in respect of any change, conversion or exchange of any capital stock, or for the purpose of any other lawful action (other than as set forth in subsection (a)), the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing such record date shall be adopted by the Board of Directors, and which record date shall not be more than 60 days prior to such payment, allotment or other action. If no such record date shall have been fixed, such record date shall be at the close of business on the day on which the Board of Directors shall adopt the resolution relating to such payment, allotment or other action. Section 1.7. SHAREHOLDER LIST. The Secretary or any other officer who has charge of the share transfer books of the Corporation shall prepare, at least 5 days before every meeting of shareholders, a complete list of the shareholders as of the record date entitled to vote at such - 3 - meeting, arranged in alphabetical order, and showing the address of each shareholder and the number and class of shares registered in the name of each shareholder. Such list shall be open to the examination of any shareholder during usual business hours for a period of at least 5 days prior to such meeting, either at the principal office of the Corporation or at the office or place of business of a transfer agent in the State of New York, for any proper purpose in the interest of the shareholder as such or of the corporation and not for speculative of trading purposes or for any purpose inimical to the interest of the corporation or of its shareholders. The list shall also be produced and kept at the time and place of such meeting during the whole time thereof, and may be inspected for any such proper purpose by any shareholder who is present. The original share transfer book shall be prima facie evidence as to who are the shareholders entitled to examine such list or other equivalent record. Section 1.8. VOTING OF SHARES BY CERTAIN HOLDERS. Shares of capital stock of the Corporation standing in the name of a deceased person, a minor, an incompetent or a corporation declared bankrupt and entitled to vote may be voted by an administrator, executor, guardian, conservator or trustee, as the case may be, in person, by proxy, or by written consent, without transfer of such shares into the name of the official so voting. A shareholder whose shares of capital stock of the Corporation are pledged shall be entitled to vote such shares unless on the transfer books of the Corporation the pledgor has expressly empowered the pledgee to vote such shares, in which case only the pledgee, or such pledgee's proxy, may represent such shares and vote thereon. Shares of capital stock of the Corporation, the voting rights of which are held in escrow or in a voting trust, or the voting of which is directed or controlled by a voting agreement, in each case pursuant to the terms of agreement between or among shareholders, may be voted (in person, by proxy, or by written consent) only by the person or entity having the right under such agreement to vote such shares, without any transfer of such shares into the name of the person or entity so voting being necessary. Shares of capital stock of the Corporation belonging to the Corporation, or to another corporation if a majority of the shares entitled to vote in the election of directors of such other corporation shall be held by the Corporation, shall not be voted at any meeting of shareholders and shall not be counted in determining the total number of outstanding shares for the purpose of determining whether a quorum is present. Nothing in this Section 1.8 shall be construed to limit the right of the Corporation to vote shares of capital stock of the Corporation held by it in a fiduciary capacity. Section 1.9. ACTION WITHOUT MEETING. Any action required or permitted to be taken at any annual or special meeting of stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of all outstanding stock having the right to vote upon such action at a meeting at which all the shares entitled to vote thereon were present and voted. In addition, to - 4 - the extent permitted by the laws of the State of New York, any action required or permitted to be taken at any annual or special meeting of stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all the shares entitled to vote thereon were present and voted, provided that prompt notice of such action shall be given to those stockholders who have not so consented in writing to such action without a meeting. ARTICLE II DIRECTORS Section 2.1. GENERAL POWERS. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. Section 2.2. QUORUM. At all meetings of the Board of Directors, a majority of the "entire board" shall constitute a quorum for the transaction of business. If, however, such quorum shall not be present, the directors present thereat shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Minutes shall be maintained of all regular and special meetings, and copies of the minutes of every meeting shall be furnished as soon as practicable to each director regardless of whether or not the director was present at the meeting. For purposes of these By-Laws, the "entire board" means the total number of directors which the Corporation would have if there are no vacancies. The act of a majority of all of the directors present at a meeting for which there is a quorum shall be the act of the Board of Directors, except as otherwise provided in these By-Laws, in the Certificate of Incorporation, or by the New York Business Corporation Law. Section 2.3. RESIGNATION OR REMOVAL. Any director may resign by giving written notice to the Board of Directors or the Chief Executive Officer. Any such resignation shall take effect at the time of receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, acceptance of such resignation shall not be necessary to make it effective. Except as otherwise required by the laws of the State of New York or the Certificate of Incorporation, any director may be removed, with or without cause, by the affirmative vote or written consent of a majority of the Voting Power. Section 2.4. VACANCIES. Except as otherwise required by the laws of the State of New York or the Certificate of Incorporation, vacancies in the Board of Directors shall be filled by the affirmative vote or written consent of a majority of the Voting Power. - 5 - Section 2.5. PLACE OF MEETINGS. Meetings of the Board of Directors may be held at such places, within or without the State of New York, as the Board of Directors may from time to time determine or as may be specified in the call of any such meeting. Section 2.6. REGULAR MEETINGS. A regular annual meeting of the Board of Directors shall be held, without call or notice, immediately after and at the same place as the annual meeting of shareholders, for the purpose of organizing the Board of Directors, electing officers and transacting any other business that may properly come before such meeting. Additional regular meetings of the Board of Directors may be held without call or notice at such times as shall be fixed by resolution of the Board of Directors. Section 2.7. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by the Chairman of the Board of Directors, the Chief Executive Officer, a Vice President or any two directors then in office. Notice of each special meeting shall be made orally or in writing by the Secretary to each director at least five days before such meeting. Such notice shall set forth the date, time and place of such meeting but need not, unless otherwise required by the laws of the State of New York, state the purpose of such meeting. Section 2.8. TELEPHONIC PARTICIPATION IN MEETINGS. Members of the Board of Directors may participate in a meeting of the Board of Directors through conference telephone or similar communications equipment by means of which all persons participating in such meeting can hear each other, and participation in any meeting conducted pursuant to this Section 2.8 shall constitute presence in person at such meeting. Section 2.9. ACTION WITHOUT MEETING. Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting if all members of the Board consent thereto in writing and such written consent is filed with the minutes of proceedings of the Board . Section 2.10. COMPENSATION. Unless otherwise restricted by the Certificate of Incorporation, the directors shall be paid their reasonable expenses, if any, of attendance at each meeting of the Board of Directors. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Section 2.11. PRESUMPTION OF ASSENT. Unless otherwise provided by the laws of the State of New York, a director who is present at a meeting of the Board of Directors at which action is taken on any corporate matter shall be presumed to have assented to the action taken unless his or her dissent shall be entered in the minutes of such meeting or unless he or she shall file his or her written dissent to such action with the person acting as secretary of such meeting before the adjournment thereof or shall forward such dissent by registered mail to the Secretary immediately after the adjournment of such meeting. Such right to dissent shall not apply to a director who voted in favor of such action. - 6 - Section 2.12. PRESIDING OFFICER. The presiding officer at any meeting of the Board of Directors shall be the Chairman or, in his or her absence, the Chief Executive Officer or, in his or her absence, any other director elected chairman for the meeting by vote of two thirds of the directors present at such meeting. Section 2.13. RELIANCE UPON RECORDS. In performing his or her duties, a director shall be entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, prepared or presented by (1) one or more officers or employees of the Corporation whom the director reasonably believes to be reliable and competent in the matters presented, and (2) counsel, public accountants or other persons as to matters which the director reasonably believes to be within such person's professional or expert competence, but he or she shall not be considered to be acting in good faith if he or she has knowledge concerning the matter in question that causes such reliance to be unwarranted. Section 2.14. INTERESTED DIRECTORS. The presence of a director who is directly or indirectly a party to a contract or transaction with the Corporation, or between the Corporation and any other corporation, partnership, association or other organization in which such director is a director, officer or employee or has a financial interest, may be counted in determining whether a quorum is present at any meeting of the Board of Directors at which such contract or transaction is discussed or authorized, and such director may participate in such meeting to the extent permitted by applicable law. ARTICLE III OFFICERS Section 3.1. NUMBER AND DESIGNATION. The officers of the Corporation shall be the Chairman of the Board of Directors, the Chief Executive Officer, one or more Vice Presidents, a Secretary and a Treasurer, and such other officers as may be elected or appointed by the Board of Directors. Any two or more offices may be held by the same person unless the Certificate of Incorporation or these By-Laws provide otherwise. Section 3.2. ELECTION AND TERM OF OFFICE. The officers of the Corporation shall be elected annually by the Board of Directors at the first meeting of the Board of Directors held after the election of directors. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as may be convenient. Vacancies may be filled or new offices created and filled at any meeting of the Board of Directors by the Board of Directors. Each officer shall hold office until his or her successor shall have been duly elected and shall have qualified or until his or her earlier death, resignation or removal. Section 3.3. REMOVAL AND RESIGNATION. Any officer elected or appointed by the Board of Directors may be removed by the Board of Directors whenever in its judgment the best - 7 - interests of the Corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Any officer may resign at any time, subject to such officer's contract obligations to the Corporation, by giving written notice to the Board of Directors, the Chief Executive Officer or the Secretary. Subject to such officer's contract obligations to the Corporation, any such resignation shall take effect at the time of receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, acceptance of such resignation shall not be necessary to make it effective. Section 3.4. VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification or otherwise may be filled by the Board of Directors for the unexpired portion of the term. Section 3.5. CHAIRMAN. The Board of Directors may elect a member of the Board to be Chairman of the Board of Directors. The Chairman of the Board of Directors, if so elected, shall preside at all meetings of the Board of Directors, and he or she shall have and perform such other duties as from time to time may be assigned to him by the Board of Directors. Section 3.6. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall have overall supervisory powers in overseeing the business and affairs of the Corporation, subject to the direction of the Chairman of the Board of Directors; shall be empowered to sign or countersign all certificates, contracts or other instruments; and shall perform any and all duties assigned to him by the Board of Directors or as are incident to the office of the Chief Executive Officer of a corporation. The Chief Executive Officer shall in general supervise and control all of the day-to-day business and affairs of the Corporation and may execute, alone or with the Secretary or any other officer of the Corporation authorized by the Board of Directors, any documents which the Board of Directors has authorized to be executed or in the ordinary course of business of the Corporation, except in cases where the execution thereof shall be expressly delegated by the Board of Directors or by these By-Laws to some other officer or agent of the Corporation, or shall be required by law to be otherwise executed. Section 3.7. THE VICE PRESIDENTS. In the absence of the Chief Executive Officer or in the event of his or her inability or refusal to act, the Vice President (or in the event there shall be more than one Vice President, the Vice Presidents in the order determined by the Board of Directors or, if there shall have been no such determination, then in the order of their election) shall perform the duties of the Chief Executive Officer and, when so acting, shall have all the powers of and be subject to all the restrictions upon the Chief Executive Officer. The Board of Directors may also designate certain Vice Presidents as being in charge of designated divisions, facilities or functions of the Corporation's business and add appropriate descriptions to their titles. In addition, any Vice President shall perform such duties as from time to time may be assigned to him or her by the Board of Directors. Section 3.8. THE SECRETARY. The Secretary shall (a) keep the minutes of proceedings of the shareholders and of the Board of Directors in one or more books provided for that purpose; - 8 - (b) see that all notices are duly given in accordance with the provisions of these By-Laws or as required by law; (c) be custodian of the corporate records and of the seal of the Corporation; (d) affix the seal of the Corporation or a facsimile thereof, or cause it to be affixed, and, when so affixed, attest the seal by his or her signature, to all certificates for shares of capital stock of the Corporation prior to the issue thereof and to all other documents the execution of which on behalf of the Corporation under its seal is duly authorized by the Board of Directors or otherwise in accordance with the provisions of these By-Laws; (e) keep a register of the post office address of each shareholder or director which shall be furnished to the Secretary by such shareholder or director; (f) have general charge of the stock transfer books of the Corporation; and (g) in general perform all duties incident to the office of Secretary and such other duties as from time to time may be assigned to him or her by the Chief Executive Officer or the Board of Directors. Section 3.9. THE TREASURER. The Treasurer shall have charge and custody of and be responsible for all funds and securities of the Corporation, receive and give receipts for moneys due and payable to the Corporation from any source whatsoever, deposit all such moneys in the name of the Corporation in such banks, trust companies or other depositories as shall be selected in accordance with the provisions of Article IV of these By-Laws, disburse the funds of the Corporation as ordered by the Board of Directors or the Chief Executive Officer or as otherwise required in the conduct of the business of the Corporation and render to the Chief Executive Officer or the Board of Directors, upon request, an accounting of all his or her transactions as Treasurer and a report on the financial condition of the Corporation. The Treasurer shall in general perform all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him or her by the Chief Executive Officer or the Board of Directors. If required by the Board of Directors, the Treasurer shall give a bond which shall be renewed regularly, in such sum and with such surety or sureties as the Board of Directors shall determine, for the faithful discharge of his or her duties and for the restoration to the Corporation, in case of his or her death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his or her possession or under his or her control belonging to the Corporation. Section 3.10. ASSISTANT TREASURERS AND SECRETARIES. In the absence of the Secretary or the Treasurer, as the case may be, or in the event of his or her inability or refusal to act, the Assistant Secretaries and the Assistant Treasurers, respectively, if any have been elected or appointed, in the order determined by the Board of Directors (or if there shall have been no such determination, then in the order of their election), shall perform the duties and exercise the powers of the Secretary or the Treasurer, as the case may be. In addition. the Assistant Secretaries and the Assistant Treasurers shall, in general, perform such duties as may be assigned to them by the Chief Executive Officer, the Secretary, the Treasurer or the Board of Directors. Each Assistant Treasurer shall, if required by the Board of Directors, give a bond (which shall be renewed regularly), in such sum and with such surety or sureties as the Board of Directors shall determine, for the faithful discharge of his or her duties. - 9 - Section 3.11. SALARIES. The salaries of the officers of the Corporation shall be fixed from time to time by the Board of Directors. No officer shall be prevented from receiving such salary by reason of the fact that he or she is also a director of the Corporation. ARTICLE IV CONTRACTS, LOANS, CHECKS, AND DEPOSITS Section 4.1. CONTRACTS. Notwithstanding anything herein to the contrary, the Board of Directors may authorize any officer or officers, or agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances. Section 4.2. LOANS. No loans shall be contracted on behalf of the Corporation and no evidences of indebtedness or security instruments shall be issued in the name of the Corporation unless authorized by or pursuant to a resolution adopted by the Board of Directors. Such authority may be general or confined to specific instances. Section 4.3. CHECKS, DRAFTS, ETC, All checks, drafts or other orders for payment of money issued in the name of the Corporation shall be signed by such officers, employees or agents of the Corporation as shall from time to time be designated by the Board of Directors, the Chairman of the Board of Directors, the Chief Executive Officer or the Treasurer. Section 4.4. DEPOSITS. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositories as shall be designated from time to time by the Board of Directors, the Chairman of the Board of Directors, the Chief Executive Officer or the Treasurer; and such officers may designate any type of depository arrangement (including, but not limited to, depository arrangements resulting in net debits against the Corporation) as may from time to time be offered or made available. ARTICLE V SHARE CERTIFICATES AND THEIR TRANSFER Section 5.1. SHARE CERTIFICATES. Shares of capital stock of the Corporation shall be represented by certificates which shall be in such form as may be determined by the Board of Directors, shall be numbered and shall be entered on the books of the Corporation as they are issued. Such certificates shall comply with the requirements of the New York Business Corporation Law, or any successor provision, and shall be signed by (a) the Chairman of the Board of Directors, the Chief Executive Officer or a Vice President and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, or (b) any two officers of the - 10 - Corporation so authorized to sign by a resolution of the Board of Directors. If any share certificate shall be manually signed by a transfer agent, transfer clerk acting on behalf of the Corporation or registrar, the signature of any officer of the Corporation may be a facsimile. In case any such officer whose facsimile signature has been used on any such share certificate shall cease to be such officer, whether because of death, resignation, removal or otherwise, before such share certificate shall have been delivered by the Corporation, such share certificate may nevertheless be delivered by the Corporation as though the person whose facsimile signature has been used thereon had not ceased to be such officer. Section 5.2. LOST, STOLEN OR DESTROYED CERTIFICATES. The Board of Directors in individual cases, or by general resolution or by delegation to the transfer agent for the Corporation, may direct that a new share certificate or certificates for shares of capital stock of the Corporation be issued in place of any share certificate or certificates theretofore issued by the Corporation claimed to have been lost, stolen or destroyed, upon the filing of an affidavit to that effect by the person claiming such loss, theft or destruction. When authorizing such an issuance of a new share certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to such issuance, require the owner of such lost, stolen or destroyed share certificate or certificates to advertise the case in such manner as the Corporation shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the share certificate or certificates claimed to have been lost, stolen or destroyed. Section 5.3. TRANSFERS OF SHARES. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares of capital stock of the Corporation duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer or, if the relevant certificate for shares of capital stock of the Corporation is claimed to have been lost, stolen or destroyed, upon compliance with the provisions of Section 5.2 of these By-Laws, and upon payment of applicable taxes with respect to such transfer, and in compliance with any restrictions on transfer applicable to such share certificate or the shares represented thereby of which the Corporation shall have notice and subject to such rules and regulations as the Board of Directors may from time to time deem advisable concerning the transfer and registration of share certificates for shares of capital stock of the Corporation, the Corporation shall issue a new share certificate or certificates for such shares to the person entitled thereto, cancel the old share certificate and record the transaction upon its books. Transfers of shares shall be made only on the books of the Corporation by the registered holder thereof or by such holder's attorney or successor duly authorized as evidenced by documents filed with the Secretary or transfer agent of the Corporation. Whenever any transfer of shares of capital stock of the Corporation shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of transfer if, when the share certificate or certificates representing such shares are presented to the Corporation for transfer, both the transferor and transferee request the Corporation to do so. - 11 - Section 5.4. SHAREHOLDERS OF RECORD. The Corporation shall be entitled to treat the holder of record of any share of capital stock of the Corporation as the holder thereof and shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of New York. ARTICLE VI GENERAL PROVISIONS Section 6.1. FISCAL YEAR. The fiscal year of the Corporation shall be the calendar year, unless otherwise specified by the Board of Directors. Section 6.2. SEAL. The corporate seal of the Corporation shall have inscribed thereon the name of the Corporation and the words "SEAL" and "NEW YORK"; and it shall otherwise be in the form approved by the Board of Directors. Such seal may be used by causing it, or a facsimile thereof, to be impressed or affixed or otherwise reproduced. ARTICLE VII OFFICES Section 7.1. PRINCIPAL OFFICE. The principal office of the Corporation shall be in the County of Albany, State of New York, or such other place as the Board of Directors may from time to time designate. Section 7.2. OTHER OFFICES. The Corporation may have offices at such other places, both within or without the State of New York, as shall be determined from time to time by the Board of Directors or as the business of the Corporation may require. ARTICLE VIII INSURANCE Section 8.1. INSURANCE. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability - 12 - asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such. ARTICLE IX NOTICES Section 9.1. MANNER OF NOTICE. Except as otherwise provided by law, whenever under the provisions of the laws of the State of New York, the Certificate of Incorporation or these By-Laws notice is required to be given to any shareholder or director, such notice may be given by personal delivery or by depositing it, in a sealed envelope, in the United States mail, air mail or first class, postage prepaid, addressed to such shareholder, director or member either at the address of such shareholder, director or member as it appears on the books of the Corporation or, in the case of such a director or member, at his or her business address; and such notice shall be deemed to be given at the time when it is thus personally delivered or deposited, as the case may be. Such requirement for notice shall also be deemed satisfied, except in the case of shareholder meetings with respect to which written notice is required by law, if actual notice is received orally or by other writing by the person entitled thereto as far in advance of the event with respect to which notice is being given as the minimum notice period required by the laws of the State of New York or these By-Laws. Notwithstanding any provision of this Section 9.1 to the contrary, any shareholder or director may, by written request provided to the Secretary of the Corporation, require that notice to such shareholder or director shall be made exclusively by personal delivery or certified mail, return receipt requested, and to require that such notice shall be made to such shareholder or director at two separate addresses (and that, with respect to either or both of such separate address, such notice be in care of a specific person). Section 9.2. COMPUTATION OF NOTICE PERIOD. In computing the period of time of any notice required or permitted to be given by law, or under the provisions of the Certificate of Incorporation or By-Laws or of a resolution of shareholders or directors, the day on which the notice is given shall be included, and the day on which the matter noticed is to occur shall be included, in the absence of a contrary provision. Section 9.3. WAIVER OF NOTICE. Whenever any notice is required to be given under any provision of the laws of the State of New York, the Certificate of Incorporation or these By-Laws, a written waiver thereof, signed by the person or persons entitled to such notice, whether before or after the time stated therein. shall be deemed equivalent to such notice. Attendance by a person at a meeting shall constitute a waiver of notice of such meeting, except when such person attends such meeting for the express purpose of objecting, prior to or at the commencement of such meeting, to the transaction of any business because such meeting has not been lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of shareholders or the Board of Directors need be specified - 13 - in any written waiver of notice unless so required by the laws of the State of New York, the Certificate of Incorporation or these By-Laws. ARTICLE X DIVIDENDS The Board of Directors may from time to time declare, and the Corporation may pay, dividends, in cash, in property or in shares of capital stock of the Corporation, on its outstanding shares of capital stock in the manner and upon the terms and conditions provided by law and by the Certificate of Incorporation. ARTICLE XI AMENDMENTS Except to the extent otherwise provided in the Certificate of Incorporation or these By-Laws, these By-Laws shall be subject to alteration, amendment or repeal, and new By-Laws may be adopted, by the Board of Directors, but any By-Law(s) adopted by the Board of Directors may be amended or repealed at any time by the holders of a majority of the Voting Power. - 14 - EX-10.4 4 EXHIBIT 10.4 Exhibit 10.4 INDEMNIFICATION AGREEMENT This INDEMNIFICATION AGREEMENT (this "AGREEMENT") is made and entered into as of this _______________ day of ___________, by and between @Entertainment, Inc., a Delaware corporation (the "Company"), and [ NAME ] ("Indemnitee"). WHEREAS, highly competent persons have become more reluctant to serve publicly-held corporations as directors or in other capacities unless they are provided with adequate protection through insurance and adequate indemnification against inordinate risks of claims and actions against them arising out of their service to and activities on behalf of the corporation; WHEREAS, the Board has determined that the increased difficulty in attracting and retaining such persons is detrimental to the best interests of the Company's stockholders and that the Company should act to assure such persons that there will be increased certainty of such protection in the future; WHEREAS, it is reasonable, prudent and necessary for the Company contractually to obligate itself to indemnify such persons to the fullest extent permitted by applicable law so that they will serve or continue to serve the Company free from undue concern that they will not be so indemnified; and WHEREAS, Indemnitee is willing to serve, continue to serve and to take on additional service for or on behalf of the Company on the condition that he be so indemnified; NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and Indemnitee, intending to be legally bound, do hereby covenant and agree as follows: SECTION 1. DEFINITIONS. For purposes of this Agreement: (a) "BOARD" means the board of directors of the Company. (b) "CHANGE IN CONTROL" means a change in control of the Company occurring after the Effective Date of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not the Company is then subject to such reporting requirement; PROVIDED, HOWEVER, that, without limitation, such a Change in Control shall be deemed to have occurred if after the Effective Date: (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company's then outstanding securities without the prior approval of at least two-thirds of the members of the Board in office immediately prior to such person attaining such percentage interest; (ii) there occurs a proxy contest, or the Company is a party to a merger, consolidation, sale of assets, plan of liquidation or other reorganization not approved by at least two-thirds of the members of the Board then in office, as a consequence of which members of the Board in office immediately prior to such transaction or event constitute less than a majority of the Board thereafter; or (iii) during any period of two consecutive years, other than as a result of an event described in clause (b)(ii) of this Section 1, individuals who at the beginning of such period constituted the Board (including for this purpose any new director whose election or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board. (c) "CORPORATE STATUS" describes the status of a person who is or was a director, officer, employee or agent of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person is or was serving at the request of the Company. (d) "DISINTERESTED DIRECTOR" means a director of the Company who is not and was not a party to a Proceeding in respect of which indemnification is sought by Indemnitee. (e) "EFFECTIVE DATE" means _________________________. (f) "EXPENSES" shall include all reasonable attorneys' fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other reasonable disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in, or otherwise participating in, a Proceeding. (g) "INDEPENDENT COUNSEL" means a law firm, or a member of a law firm, that is experienced in matters of corporate law and neither presently is, nor in the past five (5) years has been, retained to represent: (i) the Company or Indemnitee in any matter material to either such party; or (ii) any other party to a Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person, who, under the applicable standards of professional conduct 2 then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee's rights under this Agreement. (h) "PROCEEDING" includes any action, suit, arbitration, alternate dispute resolution mechanism, investigation, administrative hearing or any other proceeding, whether civil, criminal, administrative or investigative, except one (i) initiated by Indemnitee pursuant to Section 11 of this Agreement to enforce his rights under this Agreement or (ii) pending on or before the Effective Date. SECTION 2. SERVICES BY INDEMNITEE. Indemnitee agrees to serve as a director, officer, employee or agent of the Company. Indemnitee may, at any time and for any reason, resign from such position (subject to any other contractual obligation or any obligation imposed by operation of law), in which event the Company shall have no obligation under this Agreement to continue Indemnitee in such position. This Agreement shall not be deemed an employment contract between the Company (or any of its subsidiaries) and Indemnitee. Indemnitee specifically acknowledges that Indemnitee's employment with the Company (or any of its subsidiaries), if any, is at will, and the Indemnitee may be discharged at any time for any reason, with or without cause, except as may be otherwise provided in any written employment contract between Indemnitee and the Company (or any of its subsidiaries), other applicable formal severance policies duly adopted by the Board, or, with respect to service as a director of the Company, by the Company's Certificate of Incorporation, Bylaws, and the General Corporation Law of the State of Delaware. The foregoing notwithstanding, this Agreement shall continue in force after Indemnitee has ceased to serve as an officer, director, agent or employee of the Company. SECTION 3. INDEMNIFICATION - GENERAL. The Company shall indemnify, and advance Expenses to, Indemnitee (a) as provided in this Agreement and (b) (subject to the provisions of this Agreement) to the fullest extent permitted by applicable law in effect on the date hereof and as amended from time to time. The rights of Indemnitee provided under the preceding sentence shall include, but shall not be limited to, the rights set forth in the other sections of this Agreement. SECTION 4. PROCEEDINGS OTHER THAN PROCEEDINGS BY OR IN THE RIGHT OF THE COMPANY. Indemnitee shall be entitled to the rights of indemnification provided in this Section 4 if, by reason of his Corporate Status, he is, or is threatened to be made, a party to or a participant in any threatened, pending or completed Proceeding, other than a Proceeding by or in the right of the Company. Pursuant to this Section 4, Indemnitee shall be indemnified against all Expenses, judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such Proceeding or any claim, issue or matter therein, if he acted in good faith and in a manner he reasonably believed to 3 be in or not opposed to the best interests of the Company and, with respect to any criminal Proceeding, had no reasonable cause to believe his conduct was unlawful. SECTION 5. PROCEEDINGS BY OR IN THE RIGHT OF THE COMPANY. Indemnitee shall be entitled to the rights of indemnification provided in this Section 5 if, by reason of his Corporate Status, he is, or is threatened to be made, a party to or a participant in any threatened, pending or completed Proceeding brought by or in the right of the Company to procure a judgment in its favor. Pursuant to this Section 5, Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection with such Proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company; PROVIDED, HOWEVER, that, if applicable law so provides, no indemnification against such Expenses shall be made in respect of any claim, issue or matter in such Proceeding as to which Indemnitee shall have been adjudged to be liable to the Company unless and to the extent that the court in which such Proceeding shall have been brought or is pending shall determine that such indemnification may be made. SECTION 6. INDEMNIFICATION FOR EXPENSES OF A PARTY WHO IS WHOLLY OR PARTLY SUCCESSFUL. In addition to indemnification authorized under any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a party to (or a participant in) and is successful, on the merits or otherwise, in defense of any Proceeding, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. If Indemnitee is not wholly successful in defense of such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or on his behalf in connection with each successfully resolved claim, issue or matter. The parties hereto shall make a reasonable allocation of those Expenses that relate to each such claim, issue or matter. For purposes of this section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter. SECTION 7. INDEMNIFICATION FOR EXPENSES OF A WITNESS. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a witness in any Proceeding to which Indemnitee is not a party, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. SECTION 8. ADVANCEMENT OF EXPENSES. The Company shall advance all reasonable Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding within ten (10) days after the receipt by the Company of a statement or statements from Indemnitee 4 requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall evidence the Expenses reasonably incurred by Indemnitee and shall include or be preceded or accompanied by an undertaking by or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately be determined that Indemnitee is not entitled to be indemnified against such Expenses. SECTION 9. PROCEDURE FOR DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION. (a) To obtain indemnification under this Agreement, Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. (b) Upon written request by Indemnitee for indemnification pursuant to the first sentence of Section 9(a) hereof, a determination, if required by applicable law, with respect to Indemnitee's entitlement thereto shall be made in the specific case: (i) if a Change in Control shall have occurred, by Independent Counsel in a written opinion to the Board, a copy of which shall be delivered to Indemnitee; or (ii) if a Change of Control shall not have occurred, (A) by a majority vote of the Disinterested Directors, even though less than a quorum of the Board, or (B) if there are no such Disinterested Directors or, if such Disinterested Directors so direct, by Independent Counsel in a written opinion to the Board, a copy of which shall be delivered to Indemnitee or (C) if so directed by the Board, by the stockholders of the Company; and, if it is so determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten (10) days after such determination. Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee's entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Such determination shall be made as promptly as is reasonably practicable, taking into account all facts and circumstances. Any reasonable costs or expenses (including reasonable attorneys' fees and disbursements) actually incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee's entitlement to indemnification) and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom. (c) In the event the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 9(b) hereof, the Independent Counsel shall be selected as provided in this Section 9(c). If a Change of Control shall not have occurred, the 5 Independent Counsel shall be selected by the Board, and the Company shall give written notice to Indemnitee advising him of the identity of the Independent Counsel so selected. If a Change of Control shall have occurred, the Independent Counsel shall be selected by Indemnitee (unless Indemnitee shall request that such selection be made by the Board, in which event the preceding sentence shall apply), and Indemnitee shall give written notice to the Company advising it of the identity of the Independent Counsel so selected. In either event, Indemnitee or the Company, as the case may be, may, within ten (10) days after such written notice of selection shall have been given, deliver to the Company or to Indemnitee, as the case may be, a written objection to such selection; PROVIDED, HOWEVER, that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of "Independent Counsel" as defined in Section 1 of this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. If such written objection is so made and substantiated, the Independent Counsel so selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit. If, within thirty (30) days after submission by Indemnitee of a written request for indemnification pursuant to Section 9(a) hereof, no Independent Counsel shall have been selected and not objected to, either the Company or Indemnitee may petition any court of competent jurisdiction for resolution of any objection which shall have been made by the Company or Indemnitee to the other's selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the court or by such other person as the court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel under Section 9(b) hereof. The Company shall pay any and all reasonable fees and Expenses of Independent Counsel incurred by such Independent Counsel in connection with acting pursuant to Section 9(b) hereof, and the Company shall pay all reasonable fees and Expenses incident to the procedures of this Section 9(c), regardless of the manner in which such Independent Counsel was selected or appointed. Upon the due commencement of any judicial proceeding or arbitration pursuant to Section 11(a)(iii) of this Agreement, Independent Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing). SECTION 10. PRESUMPTIONS AND EFFECT OF CERTAIN PROCEEDINGS. If a Change of Control shall have occurred, in making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 9(a) of this Agreement, and the Company shall have the burden of proof to overcome that presumption in connection with the making by any person, persons or entity of any determination contrary to that presumption. 6 The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of NOLO CONTENDERE or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful. SECTION 11. REMEDIES OF INDEMNITEE. (a) In the event that (i) a determination is made pursuant to Section 9 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 8 of this Agreement, (iii) no determination of entitlement to indemnification shall have been made pursuant to Section 9(b) of this Agreement within 90 days after receipt of the Company of the request for indemnification, (iv) payment of indemnification is not made pursuant to Section 6 or 7 of this Agreement within ten (10) days after receipt by the Company of a written request therefor or (v) payment of indemnification is not made within ten (10) days after a determination has been made that Indemnitee is entitled to indemnification, Indemnitee shall be entitled to an adjudication by a court of competent jurisdiction of his entitlement to such indemnification or advancement of Expenses. Alternatively, Indemnitee, at his option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association. Indemnitee shall commence such proceeding seeking an adjudication or an award in arbitration within one hundred eighty (180) days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 11(a); PROVIDED, HOWEVER, that the foregoing clause shall not apply in respect of a proceeding brought by Indemnitee to enforce his rights under Section 6 of this Agreement. (b) In the event that a determination shall have been made pursuant to Section 9(b) of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Section 11 shall be conducted in all respects as a DE NOVO trial, or arbitration, on the merits and the Indemnitee shall not be prejudiced by reason of that adverse determination. If a Change of Control shall have occurred, in any judicial proceeding or arbitration commenced pursuant to this Section 11 the Company shall have the burden of proving that Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be. (c) If a determination shall have been made pursuant to Section 9(b) of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this 7 Section 11, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee's statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law. (d) In the event that Indemnitee, pursuant to this Section 11, seeks a judicial adjudication of or an award in arbitration to enforce his rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from the Company, and shall be indemnified by the Company against, any and all Expenses actually and reasonably incurred by him in such judicial adjudication or arbitration, but only if he prevails therein. If it shall be determined in said judicial adjudication or arbitration that Indemnitee is entitled to receive part but not all of the indemnification or advancement of Expenses sought, the Expenses incurred by Indemnitee in connection with such judicial adjudication or arbitration shall be appropriately prorated. SECTION 12. SELECTION OF COUNSEL. In the event the Company shall be obligated under this Agreement to pay the Expenses of any Proceeding against Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such Proceeding, with counsel approved by Indemnitee, which approval shall not be unreasonably withheld, upon the delivery to Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same proceeding, provided that (i) Indemnitee shall have the right to employ his counsel in any such proceeding at Indemnitee's expense; and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense or (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and Expenses of Indemnitee counsel shall be at the expense of the Company. SECTION 13. MUTUAL ACKNOWLEDGMENT. Both the Company and Indemnitee acknowledge that in certain instances Federal law or applicable public policy may prohibit the Company from indemnifying its directors and officers under this Agreement or otherwise. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. 8 SECTION 14. NON-EXCLUSIVITY; SURVIVAL OF RIGHTS; INSURANCE; SUBROGATION. (a) The rights of indemnification and to receive advancement of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Certificate of Incorporation, the Bylaws, any agreement, a vote of stockholders or a resolution of directors, or otherwise. No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under this Agreement or of any provision hereof in respect of any action taken or omitted by such Indemnitee in his Corporate Status prior to such amendment, alteration or repeal. (b) To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers, employees or agents of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person serves at the request of the Company, Indemnitee shall have the status as an insured under such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any such director, officer, employee or agent under such policy or policies. (c) In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all actions necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights. (d) The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise. (e) The Company's obligation to indemnify or advance Expenses hereunder to Indemnitee who is or was serving at the request of the Company as a director, officer, employee or agent of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise shall be reduced by any amount Indemnitee has actually received as indemnification or advancement of Expenses from such other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise. SECTION 15. DURATION OF AGREEMENT. This Agreement shall continue until and terminate upon the later of: (a) ten (10) years after the date that Indemnitee shall have ceased to serve as a director, officer, employee or agent of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which Indemnitee 9 served at the request of the Company (the "ANNIVERSARY DATE"); or (b) the final termination of any Proceeding then pending on the Anniversary Date in respect of which Indemnitee is granted rights of indemnification or advancement of Expenses hereunder and of any proceeding commenced by Indemnitee pursuant to Section 11 of this Agreement relating thereto. This Agreement shall be binding upon the Company and its successors and assigns and shall inure to the benefit of Indemnitee and his heirs, executors and administrators. SECTION 16. SEVERABILITY. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including, without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; (b) such provision or provisions shall be deemed reformed to the extent necessary to conform to applicable law and to give the maximum effect to the intent of the parties hereto; and (c) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested thereby. SECTION 17. EXCEPTION TO RIGHT OF INDEMNIFICATION OR ADVANCEMENT OF EXPENSES. Notwithstanding any other provision of this Agreement, Indemnitee shall not be entitled to indemnification or advancement of Expenses under this Agreement with respect to any Proceeding brought by Indemnitee, or any claim therein prior to a Change in Control, unless the bringing of such Proceeding or making of such claim shall have been approved by the Board. SECTION 18. IDENTICAL COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement. SECTION 19. HEADINGS. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof. SECTION 20. MODIFICATION AND WAIVER. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a 10 waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. SECTION 21. NOTICE BY INDEMNITEE. Indemnitee agrees to notify promptly the Company in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification or advancement of Expenses covered hereunder. SECTION 22. NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered by hand or air courier and receipted for by the party to whom said notice or other communication shall have been directed or (ii) mailed by certified or registered mail, with postage prepaid, on the fifth (5th) business day after the date on which it is so mailed: If to Indemnitee, to: Name Street Address City, State, Zip Code If to the Company, to: or to such other address as may have been furnished to Indemnitee by the Company or to the Company by Indemnitee, as the case may be, in accordance with the foregoing requirements. SECTION 23. CONTRIBUTION. To the fullest extent permissible under the applicable law, if the indemnification provided for in this Agreement is unavailable to Indemnitee for any reason whatsoever, the Company, in lieu of indemnifying Indemnitee, shall contribute to the amount incurred by Indemnitee, whether for judgments, fines, penalties, excise taxes, amounts paid or to be paid in settlement and/or for Expenses, in connection with any claim relating to an indemnifiable event under this Agreement, in such proportion as is deemed fair and reasonable in light of all of the circumstances of such Proceeding in order to reflect (i) the relative benefits received by the Company and Indemnitee as a result of the event(s) and/or transaction(s) giving cause to such Proceeding, and /or (ii) the relative fault of the Company (and its directors, officers, employees and agents) and Indemnitee in connection with such event(s) and/or transaction(s). SECTION 24. GOVERNING LAW. This Agreement and the legal relations among the parties shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without regard to its conflict of laws rules. 11 SECTION 25. MISCELLANEOUS. Use of the masculine pronoun shall be deemed to include usage of the feminine pronoun where appropriate. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written. INDEMNITEE: ----------------------------------------- COMPANY: By: --------------------------------------- Its: -------------------------------------- 12 EX-21 5 EXHIBIT 21 EXHIBIT 21 LIST OF SUBSIDIARIES COMPANY JURISDICTION Poland Communications, Inc. New York At Entertainment Limited United Kingdom Wizja TV Sp. z o.o. Poland Poland Cablevision (Netherlands) B.V. Netherlands Sereke Holding B.V. Netherlands @Entertainment Programming, Inc. Delaware Czestochowska TK Sp. z o.o. Poland (in liquidation) Wizja TV Spoka Produkcyjna Sp. z o.o Poland ETV Sp. z o.o. Poland Gosat-Service Sp. z o.o. Poland Ground Zero Media Sp. z o.o. Poland At Media Sp. z o.o. Poland At Entertainment Services Limited United Kingdom Kolor-Sat Sp. z o.o. Poland Mazurska Telewizja Kablowa Sp. z o.o. Poland Opolskie TTT S.A. Poland Mozaic Entertainment, Inc. Delaware Polska Telewizja Kablowa Krakow S.A. Poland Polska Telewizja Kablowa Lublin S.A. Poland Polska Telewizja Kablowa Operator Sp. z o.o. Poland Polska Telewizja Kablowa S.A. Poland Polska Telewizja Kablowa Szczecin Sp. z o.o. Poland Polska Telewizja Kablowa Warszawa S.A. Poland Poltelkab Sp. z o.o. Poland Szczecinska Telewizja Kablowa Sp. z o.o. Poland Telkat Sp. z o.o. Poland TV Kabel Sp. z o.o. Poland TV-SAT Ursus Sp. z o.o. Poland (in liquidation) EX-27 6 EXHIBIT 27
5 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 2,574 0 3,865 1,095 8,851 6,706 184,997 (48,129) 193,785 26,909 138,441 0 0 1 (26,469) 193,785 0 52,971 0 76,037 0 0 14,320 (36,983) 210 (37,193) 0 0 (4,735) (41,928) (2,212.79) (2,212.79)
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