-----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, KY1nFYf5y+WbWwcT//LgzXOJVyx8ipZtfJAl3WCLErLfvyjLkVCbKMH5DvHCYyYZ /e11eguFfxBVwsOA1Mb1TQ== 0001047469-99-031887.txt : 19990816 0001047469-99-031887.hdr.sgml : 19990816 ACCESSION NUMBER: 0001047469-99-031887 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: POLAND COMMUNICATIONS INC CENTRAL INDEX KEY: 0001031232 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 061070447 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-20307 FILM NUMBER: 99688566 BUSINESS ADDRESS: STREET 1: ONE COMMERCE PLZ CITY: HARTFORD STATE: CT ZIP: 06103-3585 BUSINESS PHONE: 8605491679 MAIL ADDRESS: STREET 1: ONE COMMERCE PLZ CITY: HARTFORD STATE: CT ZIP: 06103-3585 10-Q 1 FORM 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999. OR / / TRANSITION REPORT PURSUANT TO THE SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT 1934 FROM THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER 333-20307 POLAND COMMUNICATIONS, INC. (Exact Name of Registrant as Specified in Its Charter) NEW YORK 06-1070447 (State or Other Jurisdiction of (IRS Employer Incorporation of Organization) Identification No.) ONE COMMERCIAL PLAZA HARTFORD, CONNECTICUT 06103 (Address of Principal Executive Officers) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (860) 549-1674 Indicate by check (X) whether the registrant (1) has filed all reports required to be fled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes__X__ No __________ The number of shares outstanding of Poland Communications, Inc.'s common stock as of June 30, 1999, was: Common Stock 18,948 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1 POLAND COMMUNICATIONS, INC. FORM 10-Q INDEX FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
PAGE NO. PART I FINANCIAL INFORMATION Item 1. Financial Statements Poland Communications, Inc. Consolidated Balance Sheets 3-4 Consolidated Statements of Operations 5 Consolidated Statements of Comprehensive Loss 6 Consolidated Statements of Cash Flows 7 Notes to Consolidated Financial Statements 8-10 Poland Cablevision (Netherlands) B.V. Consolidated Balance Sheets 11-12 Consolidated Statements of Operations 13 Consolidated Statements of Comprehensive Loss 14 Consolidated Statements of Cash Flows 15 Notes to Consolidated Financial Statements 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17-23 Item 3. Quantitative and Qualitative Disclosures About Market Risk 24 PART II OTHER INFORMATION Item 1. Legal Proceedings 25 Item 2. Changes in Securities and Use of Proceeds 25 Item 3. Defaults Upon Senior Securities 25 Item 4. Submission of Matters to a Vote of Security Holders 25 Item 5. Other Information 25 Item 6. Exhibits and Reports on Form 8-K 25
2 POLAND COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS ASSETS
JUNE 30, DECEMBER 31, 1999 1998 -------------- ---------------- (UNAUDITED) (IN THOUSANDS) Current assets: Cash and cash equivalents $ 3,352 $ 2,574 Accounts receivable, net of allowances for doubtful accounts of $1,594,000 in 1999 and $1,095,000 in 1998 5,012 2,770 Due from affiliate 258 - Other current assets 1,441 1,362 -------------- ------------------- Total current assets 10,063 6,706 -------------- ------------------- Property, plant and equipment: Cable television system assets 164,198 175,053 Construction in progress 4,213 1,665 Vehicles 1,703 2,096 Other 5,766 6,183 -------------- ------------------- 175,880 184,997 Less accumulated depreciation (52,075) (48,129) -------------- ------------------- Net property, plant and equipment 123,805 136,868 Inventories for construction 6,395 8,851 Intangibles, net 27,893 34,481 Notes receivable from affiliates - 449 Other assets 5,907 6,430 -------------- ------------------- Total assets $ 174,063 $ 193,785 -------------- ------------------- -------------- -------------------
See accompanying notes to unaudited consolidated financial statements. 3 POLAND COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) LIABILITIES AND STOCKHOLDERS' DEFICIENCY
JUNE 30, DECEMBER 31, 1999 1998 ------------------------- ------------------- (UNAUDITED) (IN THOUSANDS) Current liabilities: Accounts payable and accrued expenses $ 6,613 $ 13,268 Accrued interest 2,140 2,140 Deferred revenue 1,901 1,207 Income taxes payable 3,879 3,794 Other current liabilities 107 - Current position of note payable 6,500 6,500 ------------- -------------- Total current liabilities 21,140 26,909 Due to affiliate 36,924 17,519 Notes payable, less current portion 131,465 131,941 ------------- -------------- Total liabilities 189,529 176,369 ------------- -------------- Redeemable preferred stock (liquidation value $60,000,000; 6,000 shares authorized, issued and outstanding) 32,784 30,977 Commitments and contingencies (note 4) Stockholders' deficiency Common stock, $.01 par value, 27,000 shares authorized; 18,948 shares issued and outstanding 1 1 Paid-in capital 83,604 78,380 Accumulated other comprehensive (loss) /income (17,136) 586 Accumulated deficit (114,719) (92,528) ------------- -------------- Total stockholders' deficiency (48,250) (13,561) ------------- -------------- Total liabilities and stockholders' deficiency $ 174,063 $ 193,785 ------------- -------------- ------------- --------------
See accompanying notes to unaudited consolidated financial statements. 4 POLAND COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 1999 1998 1999 1998 -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Cable television revenue $ 15,481 $ 12,478 $ 30,264 $ 24,571 Operating expenses: Direct operating expenses 10,508 5,791 20,610 9,533 Selling, general and administrative expenses 4,824 4,206 7,820 8,658 Depreciation and amortization 6,265 5,085 12,214 9,920 -------- -------- -------- -------- Total operating expenses 21,597 15,082 40,644 28,111 -------- -------- -------- -------- Operating loss (6,116) (2,604) (10,380) (3,540) Interest and investment income -- 310 273 703 Interest expense (3,612) (3,538) (7,517) (7,070) Foreign exchange gain / (loss), net 83 (301) (1,509) (234) -------- -------- -------- -------- Loss before income taxes and minority interest (9,645) (6,133) (19,133) (10,141) Income tax expense (8) (229) (27) (562) Minority interest -- (58) -- (207) -------- -------- -------- -------- Net loss (9,653) (6,420) (19,160) (10,910) Accretion of redeemable preferred stock (916) (1,159) (1,807) (2,318) -------- -------- -------- -------- Net loss applicable to holders of common stock $(10,569) $ (7,579) $(20,967) $(13,228) -------- -------- -------- -------- -------- -------- -------- -------- Basic and diluted net loss per common share (note 3) $(557.79) $(399.99) $(1,106.55) $(698.12) -------- -------- -------- -------- -------- -------- -------- --------
See accompanying notes to unaudited consolidated financial statements. 5 POLAND COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 1999 1998 1999 1998 ---------------- ----------------- ------------------ ------------------ (IN THOUSANDS) Net loss $ (9,653) $ (6,420) $ (19,160) $ (10,910) Other comprehensive (loss) / income: Translation adjustment 1,966 (1,266) (17,722) 1,351 ---------------- ----------------- ------------------ ------------------ Comprehensive loss $ (7,687) $ (7,686) $ (36,882) $ (9,559) ---------------- ----------------- ------------------ ------------------ ---------------- ----------------- ------------------ ------------------
See accompanying notes to unaudited consolidated financial statements. 6 POLAND COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------------- 1999 1998 ----------------- (IN THOUSANDS) Cash flows from operating activities: Net loss $(19,160) $(10,910) Adjustments to reconcile net loss to net cash provided by /(used in) operating activities: Minority interest -- 207 Depreciation and amortization 12,214 9,513 Amortization of notes payable discount and issue cost 523 407 Changes in operating assets and liabilities: Accounts receivable (2,158) (634) Other current assets (79) (5,852) Accounts payable (5,110) 5,685 Income taxes payable -- 676 Amounts due to affiliates 19,147 (998) Deferred revenue 825 (346) Other current liabilities -- (345) -------- -------- Net cash provided by /(used in) operating activities 6,202 (2,597) -------- -------- Cash flows from investing activities: Construction and purchase of property, plant and equipment (9,483) (24,497) Other investments -- 21 Notes receivable from affiliate 449 (761) Purchase of intangibles (145) (49) Purchase of subsidiaries, net of cash received -- (783) -------- -------- Net cash used in investing activities (9,179) (26,069) -------- -------- Cash flows from financing activities: Proceeds from notes payable -- 6,500 Repayment of notes payable (245) (32) Capital increase 4,000 -- -------- -------- Net cash provided by financing activities 3,755 6,468 -------- -------- Net increase / (decrease) in cash and cash equivalents 778 (22,198) Cash and cash equivalents at beginning of period 2,574 25,750 -------- -------- Cash and cash equivalents at end of period $ 3,352 $ 3,552 -------- -------- -------- -------- Supplemental cash flow information: Cash paid for interest $ 7,159 $ 6,476 -------- -------- -------- -------- Cash paid for income taxes $ 53 $ 395 -------- -------- -------- --------
See accompanying notes to unaudited consolidated financial statements. 7 POLAND COMMUNICATIONS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 AND 1998 1. BASIS OF PRESENTATION The information furnished by Poland Communications, Inc. and its subsidiaries ("PCI" or the "Company") has been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP") and the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations. The accompanying consolidated balance sheets, statements of operations, statements of comprehensive loss and statements of cash flows are unaudited but in the opinion of management reflect all adjustments (consisting only of items of a normal recurring nature) which are necessary for a fair statement of the Company's consolidated results of operations and cash flows for the interim periods and the Company's financial position as of June 30, 1999. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company's 1998 Annual Report on Form 10-K filed with the SEC (the "1998 Annual Report"). The interim financial results are not necessarily indicative of the results of the full year. 2. RECLASSIFICATIONS Certain amounts have been reclassified in the prior period unaudited consolidated financial statement to conform to the 1999 unaudited consolidated financial statement presentation. 3. LOSS PER SHARE As noted in the 1998 Annual Report, the Company adopted SFAS No. 128, "Earnings Per Share". The statement required that all prior period earnings per share calculations including interim financial statements be restated to conform to the provisions of this statement. Basic and diluted loss per ordinary share is based on the weighted average number of ordinary shares outstanding of 18,948 for both the six-month periods ended June 30, 1999 and 1998. 4. COMMITMENTS AND CONTINGENCIES Programming Commitments The Company has entered into programming agreements with certain third party content providers. The programming agreements have terms which range from one to five years and require that payments for programs be paid either at a fixed amount or based upon the number of subscribers connected to the system each month. At June 30, 1999, the Company had a minimum commitment under such agreements of approximately $1,290,000 for the remainder of 1999, $3,784,100 in 2000, $4,470,700 in 2001, $4,872,300 in 2002, $5,077,600 in 2003 and $5,128,300 in 2004 and thereafter. For the six months ended June 30, 1999 and 1998, the Company incurred programming fees of approximately $14,646,000 and $5,407,000 respectively, pursuant to these agreements. Litigation and Claims From time to time, the Company is subject to various claims and suits arising out of the ordinary course of business. While the ultimate result of all such matters is not presently determinable, based upon current knowledge and facts, management does not expect that their resolution will have a material adverse effect on the Company's consolidated financial position or results of operations. (See also Note 6 Subsequent Events-PCBV Minority Stockholders' Claim.) 5. MERGER AGREEMENT On June 2, 1999, the Company's parent, @ Entertainment, Inc. entered into an Agreement and Plan of Merger with United Pan-Europe Communications N.V. ("UPC"), whereby UPC and its wholly-owned subsidiary, Bison Acquisition Corp. ("Bison"), initiated a tender offer to purchase all of the outstanding shares of @ Entertainment in an all cash transaction valuing @ Entertainment shares of common stock at $19.00 per share (See also Note 6 Subsequent Events--Consummation of UPC Tender Offer and Merger). 8 6. SUBSEQUENT EVENTS Subsequent to June 30, 1999, a subsidiary of the Company entered into an agreement to acquire 100% of a cable television system for a total consideration of approximately $7,330,000. The consummation of this transaction is pending Ministry of Telecommunications approval. The acquisition will be accounted for under the purchase method where the purchase price will be allocated to the underlying assets and liabilities based upon their estimated fair values and any excess to goodwill. The acquisition is not expected to have a material effect on the Company's results of operations in 1999. Subsequent to June 30, 1999 a subsidiary of the Company purchased all of the assets and subscribers lists of a cable television system for a total consideration of approximately $2,800,000. The purchase will be accounted for under the purchase method where the purchase price will be allocated to the underlying assets based upon their estimated fair values and any excess to goodwill. PCBV Minority Stockholders' Claim On or about July 8, 1999, five minority shareholders (the "minority shareholders") of Poland Cablevision (Netherlands) B.V. ("PCBV"), a subsidiary of PCI, filed a lawsuit Civil Action No. C2-99-621, against the Company's parent, @Entertainment, the Company, Advent Capital Corporation, Chase Enterprises, Inc., Chase International Corporation, Goldman, Sachs & Co., UPC, Cheryl Chase, and Arnold Chase, in the United States District Court for the Southern District of Ohio, Eastern Division. The relief sought by the minority shareholders includes: (1) unspecified damages in excess of $75,000, (2) an order lifting the restrictions against transfer of shares set forth in the Shareholders' Agreement among PCBV's shareholders, as amended (the "Shareholders' Agreement"), so that the minority shareholders can liquidate their shares in PCBV, (3) damages in the amount of 1.7 percent of the anticipated payment by UPC for the shares of @Entertainment as set forth in the Agreement and Plan of Merger between @Entertainment and UPC dated June 2, 1999, (4) attorneys' fees and costs incurred in prosecuting the lawsuit; and such other relief as the court deems just and proper. The amended complaint sets forth eight claims for relief based on allegations that the defendants, including @Entertainment and The Company, committed the following wrongful acts: (1) breached a covenant not to compete contained in the Shareholders' Agreement prohibiting any shareholders of PCBV from having any direct or indirect interest in any aspect of the cable television business in Poland, as a result of @Entertainment's and The Company's cable and D-DTH operations in Poland, (2) breached a covenant in the Shareholders' Agreement requiring that any contract entered into by PCBV with any other party affiliated with The Company be commercially reasonable or be approved by certain of the minority shareholders, by causing PCBV to enter into certain management and service agreements that were allegedly not commercially reasonable and/or were not approved by certain minority shareholders, (3) breached a provision in the Shareholders' Agreement that allegedly required co-defendant Chase International Corp. ("CIC") to offer the minority shareholders the right to participate in certain sales of PCBV shares and that required CIC to give written notice of any offer to purchase the minority shareholders' shares in PCBV, by failing to provide the minority shareholders with the right to participate in or with written notice of offers to purchase, (4) breached their fiduciary duty to the minority shareholders by failing to provide them with written notice of any offers to purchase PCBV's stock and with timely information and periodic reports about the financial condition or business or operating results of PCBV, (5) breached the agreement between PCBV and CIC, which allegedly limited the amount of management fees that could be paid annually by PCBV to CIC to $250,000, by causing PCBV to enter into management agreements with other subsidiaries of the Company calling for payment of annual management fees in excess of $250,000, (6) made false and misleading statements in (a) the Company's offering memorandum by referring to negotiations between the Company and the minority shareholders and to the Company's alleged offer to purchase their outstanding shares in PCBV, which negotiations and offer allegedly never transpired, (b) @Entertainment's offering memoranda by indicating that the Company agreed to share the profits of its subsidiaries with the minority shareholders on a PRO RATA basis and to purchase their outstanding shares in PCBV, which agreements allegedly were never made and which negotiations allegedly never occurred, and (c) @Entertainment's Forms 10-K by referring to a supplemental agreement under which the Company agreed to share the profits of entities in which it has a direct or indirect ownership interest with 9 the minority shareholders on a PRO RATA basis and under which the Company agreed to share 7.7 percent of the profits from competing endeavors with the minority shareholders, which supplemental agreement allegedly was never made; (7) colluding to defraud the minority shareholders by failing to make reference in certain Forms 8-K, 8-KA and 14D-1 to the minority shareholders or their alleged rights and claims, and (8) colluding to divert assets of PCBV to affiliates of the Company and PCBV, including @Entertainment, that allegedly compete with the Company and PCBV by failing to make reference in certain Forms 8-K, 8-K/A and 14D-1 to the minority shareholders or their alleged rights and claims and by failing to provide any information to the minority shareholders so that they could value their rights and claims. The Company intends to defend the lawsuit vigorously. The Company has also conducted negotiations to purchase the minority shareholders' outstanding shares in PCBV and may engage in such negotiations in the future. If the negotiations produce a sale by the minority shareholders of their shares in PCBV to the Company, the lawsuit would most likely be terminated. The Company is unable to predict the outcome of those negotiations. CONSUMMATION OF THE UPC TENDER OFFER AND MERGER The tender offer, initiated pursuant to the Agreement and Plan of Merger with UPC and Bison, closed at 12:00 midnight on August 5, 1999. On August 6, 1999, Bison reported that it had accepted for payment a total of 33,701,073 shares of @Entertainment's common stock (including 31,208 shares tendered pursuant to notices of guaranteed delivery) representing approximately 99% of @Entertainment's outstanding shares of common stock. In addition, UPC has acquired 100% of the outstanding Series A and Series B 12% Cumulative Preference Shares of @Entertainment. Also on August 6, 1999, Bison was merged with and into @Entertainment. Accordingly, @Entertainment became a wholly-owned subsidiary of UPC. UnitedGlobalCom, Inc., is a 62% stockholder of UPC. These transactions constitute a "Change of Control" as that term is defined in the indenture governing the Company's 9 7/8% Senior Notes due 2003 and 9 7/8% Series B Senior Notes due 2003 (the "PCI Notes"). In accordance with the terms of the indenture governing the PCI Notes, PCI will be required to make an offer to repurchase the PCI Notes at 101% of their principal amount plus accrued and unpaid interest. Such an offer will only be made in an offer to purchase. 10 POLAND CABLEVISION (NETHERLANDS) B.V. CONSOLIDATED BALANCE SHEETS ASSETS
JUNE 30, DECEMBER 31, 1999 1998 --------- ------------- (UNAUDITED) (IN THOUSANDS) Current assets: Cash $ 2,487 $ 1,463 Accounts receivable, net of allowances for doubtful accounts of $757,000 in 1999 and $708,000 in 1998 4,453 1,904 Other current assets 1,297 535 --------- --------- Total current assets 8,237 3,902 --------- --------- Property, plant and equipment: Cable television system assets 129,339 136,833 Construction in progress 3,068 -- Vehicles 1,387 1,704 Other 4,310 5,832 --------- --------- 138,104 144,369 Less accumulated depreciation (42,570) (40,041) --------- --------- Net property, plant and equipment 95,534 104,328 Inventories for construction 5,098 6,638 Intangibles, net 11,586 13,711 --------- --------- Total assets $ 120,455 $ 128,579 --------- --------- --------- ---------
11 See accompanying notes to unaudited consolidated financial statements. POLAND CABLEVISION (NETHERLANDS) B.V. CONSOLIDATED BALANCE SHEETS (CONTINUED) LIABILITIES AND STOCKHOLDERS' DEFICIENCY
JUNE 30, DECEMBER 31, 1999 1998 --------- --------- (UNAUDITED) (IN THOUSANDS) Current liabilities: Accounts payable and accrued expenses $ 3,358 $ 7,809 Deferred revenue 1,733 565 Other current liabilities 21 -- --------- --------- Total current liabilities 5,112 8,374 Due to affiliate 39,277 26,491 Notes payable to affiliates 170,061 160,830 --------- --------- Total liabilities 214,450 195,695 --------- --------- Stockholders' deficiency: Capital stock par value, $0.50 par; 200,000 shares authorized, issued and outstanding 100 100 Paid-in capital 14,589 14,589 Accumulated other comprehensive (loss) / income (12,233) 424 Accumulated deficit (96,451) (82,229) --------- --------- Total stockholders' deficiency (93,995) (67,116) --------- --------- Total liabilities and stockholders' deficiency $ 120,455 $ 128,579 --------- --------- --------- ---------
See accompanying notes to unaudited consolidated financial statements. 12 POLAND CABLEVISION (NETHERLANDS) B.V. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 1999 1998 1999 1998 -------- -------- -------- -------- (IN THOUSANDS) (IN THOUSANDS) Cable television revenue $ 14,182 $ 8,525 $ 24,392 $ 16,727 Operating expenses: Direct operating expenses 10,365 4,159 17,288 6,700 Selling, general and administrative expenses 3,626 3,715 5,542 6,494 Depreciation and amortization 3,491 3,218 7,261 6,314 -------- -------- -------- -------- Total operating expenses 17,482 11,092 30,091 19,508 -------- -------- -------- -------- Operating loss (3,300) (2,567) (5,699) (2,781) Interest income 26 46 37 74 Interest expense (3,462) (3,204) (6,846) (6,244) Foreign exchange gain / (loss), net 271 42 (1,687) 92 -------- -------- -------- -------- Loss before income taxes and minority interest (6,465) (5,683) (14,195) (8,859) Income tax expense (8) (107) (27) (209) Minority interest -- 928 -- 1,206 -------- -------- -------- -------- Net loss $ (6,473) $ (4,862) $(14,222) $ (7,862) -------- -------- -------- -------- -------- -------- -------- -------- Basic and diluted net loss per common share (note 3) $ (32.37) $ (24.31) $ (71.11) $ (39.31) -------- -------- -------- -------- -------- -------- -------- --------
See accompanying notes to unaudited consolidated financial statements. 13 POLAND CABLEVISION (NETHERLANDS) B.V. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ---------------- ----------------- ---------------- -------------- 1999 1998 1999 1998 ---------------- ----------------- ---------------- -------------- (IN THOUSANDS) Net loss $ (6,473) $ (4,862) $ (14,222) $ (7,862) Other comprehensive (loss) / income: Translation adjustment 2,102 (985) (12,657) 1,057 ---------------- ----------------- ---------------- -------------- Comprehensive loss $ (4,371) $ (5,847) $ (26,879) $ (6,805) ---------------- ----------------- ---------------- -------------- ---------------- ----------------- ---------------- -------------- See accompanying notes to unaudited consolidated financial statements. 14 POLAND CABLEVISION (NETHERLANDS) B.V. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED JUNE 30, ------------------------- 1999 1998 -------- -------- (IN THOUSANDS) Cash flows from operating activities: Net loss $(14,222) $ (7,862) Adjustments to reconcile net loss to net cash provided by operating activities: Minority interest -- (1,206) Depreciation and amortization 7,261 6,314 Interest expense added to notes payable to affiliates 6,846 6,237 Changes in operating assets and liabilities: Accounts receivable (2,549) (488) Other current assets (202) 385 Accounts payable (4,030) 5,401 Deferred revenue 1,229 (207) Amounts due to affiliates 12,614 2,488 Other current liabilities -- 270 -------- -------- Net cash provided by operating activities 6,947 11,332 -------- -------- Cash flows from investing activities: Construction and purchase of property, plant and equipment (8,163) (18,713) Purchase of intangible assets (145) (49) -------- -------- Net cash used in investing activities (8,308) (18,762) -------- -------- Cash flows from financing activities: Proceeds from borrowings from affiliates 2,385 4,338 Dividend to parent -- (51) -------- -------- Net cash provided by financing activities 2,385 4,287 -------- -------- Net increase / (decrease) in cash 1,024 (3,143) Cash at beginning of the period 1,463 4,951 -------- -------- Cash at end of the period $ 2,487 $ 1,808 -------- -------- -------- -------- Supplemental cash flow information: Cash paid for interest $ 400 $ 57 -------- -------- -------- -------- Cash paid for income taxes $ 16 $ 177 -------- -------- -------- --------
See accompanying notes to unaudited consolidated financial statements. 15 POLAND CABLEVISION (NETHERLANDS) B.V. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 AND 1998 1. BASIS OF PRESENTATION Financial information is included for Poland Cablevision (Netherlands) B.V. and its subsidiaries ("PCBV") since PCBV is a guarantor of PCI's 9 7/8% Senior Notes due 2003 and 9 7/8% Series B Senior Notes due 2003, (collectively, the "PCI Notes"). The information furnished by PCBV has been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP") and the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations. The accompanying consolidated balance sheets, statements of operations, statements of comprehensive loss and statements of cash flows are unaudited but in the opinion of management reflect all adjustments (consisting only of items of a normal recurring nature) which are necessary for a fair statement of PCBV's consolidated results of operations and cash flows for the interim periods and PCBV's financial position as of June 30, 1999. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of PCBV and the notes thereto included in PCI's 1998 Annual Report on Form 10-K filed with the SEC. The interim financial results are not necessarily indicative of the results of the full year. 2. RECLASSIFICATIONS Certain amounts have been reclassified in the prior period unaudited consolidated financial statement to conform to the 1999 unaudited consolidated financial statement presentation. 3. LOSS PER SHARE As noted in the 1998 PCI Annual Report, PCBV adopted SFAS No. 128, "Earnings Per Share". The statement required that all prior period earnings per share calculations including interim financial statements be restated to conform to the provisions of this statement. Basic and diluted loss per ordinary share is based on the weighted average number of ordinary shares outstanding of 200,000 for the six-month periods ended June 30, 1999 and 1998. 4. LITIGATION AND CLAIMS From time to time, PCBV is subject to various claims and suits arising out of the ordinary course of business. While the ultimate result of all such matters is not presently determinable, based upon current knowledge and facts, management does not expect that their resolution will have a material adverse effect on PCBV's consolidated financial position or results of operations. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis provides information concerning the results of operations and financial condition of the Company. Such discussion and analysis should be read in conjunction with the accompanying unaudited consolidated financial statements of the Company. Additionally, the following discussion and analysis should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the audited consolidated financial statements included in Part II of the Company's 1998 Annual Report. The following discussion focuses on material trends, risks and uncertainties affecting the results of operations and financial condition of the Company. Certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, that are not historical facts but rather reflect the Company's current expectations concerning future results and events. The words "believes," "expects," "intends," "plans," "anticipates," "likely," "will" "may", "shall" and similar expressions identify such forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company (or entities in which the Company has interests), or industry results, to differ materially from future results, performance or achievements expressed or implied by such forward-looking statements. Readers are cautioned not to place undue reliance on these forward looking statements which reflect management's view only as of the date of this Quarterly Report on Form 10-Q. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, conditions or circumstances. The risks, uncertainties and other factors that might cause such differences include but are not limited to: (i) general economic conditions in Poland and in the pay television business in Poland; (ii) changes in regulations the Company operates under; (iii) uncertainties inherent in new business strategies, including new product launches and development plans, which the Company has not used before; (iv) rapid technology changes; (v) changes in, or failure or inability to comply with government regulations; (vi) the development and provision of programming for new television and telecommunications technologies; (vii) the continued strength of competitors in the multichannel video programming distribution industry and satellite services industry and the growth of satellite delivered programming; (viii) future financial performance, including availability, terms and deployment of capital; (ix) the ability of vendors to deliver required equipment, software and services on schedule at the budgeted cost; (x) the Company's ability to attract and hold qualified personnel; (xi) changes in the nature of strategic relationships with joint ventures; (xii) the overall market acceptance of those products and services, including acceptance of the pricing of those products and services; (xiii) and acquisition opportunities; and (xiv) the new ownership structure of the Company's parent, @Entertainment. OVERVIEW The Company operates the largest cable television system in Poland with approximately 1,669,400 homes passed and approximately 966,800 total subscribers as of June 30, 1999. The Company continues to realize subscriber growth through a combination of increased penetration, new network build-out and acquisitions. Since the offering of the Wizja TV programming package on its cable television networks from June 5, 1998, the Company has realized a 9.6% increase in the number of subscribers. Having established itself as the leading cable television service provider in Poland, the Company continues to focus its efforts toward the strategic objectives of increasing cash flow and enhancing the value of its cable networks. To accomplish these objectives, 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. During 1998 and the first six months of 1999, management completed or was in the process of completing several strategic actions in support of this business and operating strategy. On June 5, 1998, the Company began providing the Wizja TV programming package, with its initial 11 channels of primarily Polish-language programming, to its basic cable subscribers. Since that date, the Wizja TV package has been expanded to 24 channels. Management believes that this selection of high-quality Polish-language programming will provide it with a significant competitive advantage in increasing its cable subscriber penetration rates. 17 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 the HBO Poland service (a Polish-language version of HBO's premium movie channel) will be 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 six months ended June 30, 1999, the Company's churn rate increased to 8.9%. For the six months ended June 30, 1999, the Company experienced churn in the HBO Poland service with penetration falling by 12,890 subscribers or 28.2% from June 30, 1998. The Company is planning to encrypt the HBO Poland service on cable and install analog decoders for all premium channel subscribers during 1999. However, management believes the Company will be able to charge higher prices while maintaining relatively low annual cable television churn rates as a result of its customer service standards, the technical quality of its networks and the broad selection of quality programming. The Company continues to expand the coverage areas of its regional clusters, through selected build-out and acquisitions. During the second quarter of 1999, the Company focused its build-out primarily in areas where it could fill-in and expand existing clusters. In support of its goal of realizing additional operating efficiencies, the Company, during the first half of 1999, continued a reorganization of its organizational structure and certain departments. The Company expects to realize additional operating efficiencies during 1999 through the centralization of subscriber management and customer support services in the call center. The call center became operational during the first six months of 1998 for cable customers in certain regional clusters and will continue to become operational for other cable customers as expansion of call center activities progresses. The Company is also in the process of installing an integrated management information system for its subscriber management and billing and has completed the installation of an integrated management information system for accounting systems, which is designed to further improve employee productivity and customer service for its cable business. Historically, the cable networks the Company has acquired have had lower operating margins than the Company's existing cable networks. Upon consummation of an acquisition, the Company seeks to achieve operating efficiencies and reduce operating costs by rationalizing the number of headends and reducing headcount, among other things. The Company generally has been able to manage its acquired cable television networks with experienced personnel from one of its existing regional clusters. Management has also focused on reducing the number of technical personnel necessary to operate acquired networks after connecting the networks to the Company's existing headends, or, if required, rebuilding the acquired networks to the Company's technical standards. In part due to these efforts, the Company has generally been able to increase the operating margins in its acquired systems, although there can be no assurance that it will be able to continue to do so. The Company's revenues have been and will continue to be derived primarily from monthly subscription fees for cable television services and one-time installation fees for connection to its cable television networks. The Company charges cable subscribers fixed monthly fees for their choice of service packages and for other services, such as premium channels, tuner rentals and additional outlets, all of which are included in monthly subscription fees. The Company currently offers broadcast, intermediate (in limited areas) and basic packages of cable service. At June 30, 1999 approximately 74% of the Company's subscribers received the Company's basic package. For the six months ended June 30, 1999, approximately 98% of the Company's revenue was derived from monthly subscription fees compared to approximately 93% during the six months ended June 30, 1998. Revenue from installation fees is deferred to the extent it exceeds direct selling costs and then amortized to income over the estimated average period that new subscribers are expected to remain connected to the Company's cable system. The Company's revenue performance during 1999 has been generally strong with 23% growth in revenues for the six months ended June 30, 1999 as compared to the six months ended June 30, 1998. This increase was caused mainly by organic growth in subscribers via increased penetration and build-out of existing networks, increases in subscription rates and the introduction of an additional premium channel into programming offerings. 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. Although its revenue performance was strong for the six months ended June 30, 1999, the Company generated an operating loss of $10.3 million for the six months ended June 30, 18 1999, primarily due to increased direct operating expenses related to the subscriber growth and increased programming expense related to the purchase of the Wizja TV programming package from an affiliated company as well as high depreciation and amortization charges related to the expansion of the cable networks. In addition to other operating statistics, the Company measures its financial performance by EBITDA, an acronym for earnings before interest, taxes, depreciation and amortization. The Company defines EBITDA to be net loss adjusted for interest and investment income, depreciation and amortization, interest expense, foreign currency gains and losses, income taxes, gains and losses from the sale of assets other than in a normal course of business and minority interest. The items excluded from EBITDA are significant components in understanding and assessing the Company's financial performance. The Company believes that EBITDA and related measures of cash flow from operating activities serve as important financial indicators in measuring and comparing the operating performance of media companies. EBITDA is not a U.S. GAAP measure of loss or cash flow from operations and should not be considered as an alternative to cash flows from operations as a measure of liquidity. The Company reported EBITDA of $1.8 million for six months ended June 30, 1999 and $6.4 million for six months ended June 30, 1998. An analysis of quarterly cable subscriber growth is presented in the table below:
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, 1999 1999 1998 1998 1998 --------- --------- --------- --------- --------- Homes Passed 1,669,384 1,624,119 1,591,981 1,565,287 1,546,540 Basic Subscribers 715,474 706,179 698,342 658,584 660,067 Subscriber Growth (three month period) Organic 45,646 38,226(1) 70,935 41,904 57,007 Through Acquisitions -- -- -- (10,245)(2) 1,363 Churn (36,351) (30,389) (31,177) (33,142) (26,016) ---------- ---------- ---------- ---------- ---------- ---------- TOTAL NET GROWTH 9,295 7,837 39,758 (1,483) 32,354 ---------- ---------- ---------- ---------- ---------- Basic penetration 42.9% 43.5% 43.9% 42.1% 42.7% Intermediate subscribers 32,128 33,587 40,037 42,538 43,204 ---------- ---------- ---------- ---------- ---------- BASIC AND INTERMEDIATE SUBSCRIBERS 747,602 739,766 738,379 701,122 703,271 ---------- ---------- ---------- ---------- ---------- Broadcast subscribers 219,165 208,457 196,961 186,334 167,859 ---------- ---------- ---------- ---------- ---------- TOTAL SUBSCRIBERS 996,767 948,223 935,340 887,456 871,130 ---------- ---------- ---------- ---------- ---------- Premium subscribers - HBO 32,784 34,332 36,615 39,035 45,674 Premium penetration - HBO 4.6% 4.9% 5.2% 5.9% 6.9% Basic revenue / basicsub. / month $ 6.35 $ 6.20 $ 5.69 $ 5.19 $ 4.99 Total revenue / basicsub. / month $ 7.13 $ 6.97 $ 6.75 $ 6.42 $ 6.08
(1) The increase in basic subscribers for the three months ended March 1999 included 4,121 subscribers in Szczecin that switched from the "intermediate" to the "basic" package. (2) As part of the purchase of a minority interest in one of the Company's cable systems, the Company sold an isolated part of that system to the previous owner. 19 THREE AND SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE AND SIX MONTHS ENDED JUNE 30, 1999 CABLE TELEVISION REVENUE. Revenue increased $3.0 million or 24.0% from $12.5 million in the three months ended June 30, 1998 to $15.5 million in the three months ended June 30, 1999 and $5.7 million or 23.2 % from $24.6 million in the first six months of 1998 to $30.3 million in the first six months ended June 30, 1999. These increases were primarily attributable to a 6.3% increase in the number of basic subscribers from approximately 703,300 at June 30, 1998 to approximately 747,600 at June 30, 1999, as well as an increase in monthly subscription rates. Revenue from monthly subscription fees represented 94.6% of cable television revenue for both of the three months ended June 30, 1998 and 1999, respectively. Monthly subscription revenue constituted 93.3% and 98.2% of cable television revenue for the six months ended June 30, 1998 and 1999, respectively. During the three months ended June 30, 1999, the Company generated approximately $0.5 million of additional premium subscription revenue as compared to $0.8 million from the corresponding period in 1998 as a result of providing the HBO Poland service pay movie channel to cable subscribers. For the six months ended June 30, 1998 and 1999 premium subscription revenue was $1.6 million and $1.1 million respectively. DIRECT OPERATING EXPENSES. Direct operating expenses increased $4.7 million, or 81.0%, from $5.8 million for the three months ended June 30, 1998 to $10.5 million for the three months ended June 30, 1999 and $11.1 million, or 116.8%, from $9.5 million for the six months ended June 30, 1998 to $20.6 million for the six months ended June 30, 1999, principally as a result of the purchase of the Wizja TV programming package for approximately $10.3 million from an affiliate of the Company as well as the increased size of the Company's cable television system. Direct operating expenses increased from 46.4% of revenues for the three months ended June 30, 1998 to 67.7% of revenues for the three months ended June 30, 1999 and increased from 38.6% of revenues for the six months ended June 30, 1998 to 68.0% of revenues for the six months ended June 30, 1999. However, without considering the programming cost for the purchase of the Wizja programming package recorded in June 1998 and for the six months ended June 30, 1999 the comparison would have been 31.7% and 34.0% for the six months ended June 30, 1998 and 1999, respectively. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $0.6 million or 14.3% from $4.2 million for the three months ended June 30, 1998 to $4.8 million for the three months ended June 30, 1999 and decreased $0.9 million or 10.3% from $8.7 million for the six months ended June 30, 1998 to $7.8 million for the six months ended June 30, 1999. This decrease was attributable to operating efficiencies realized by the Company in the six months ended June 30, 1999, as described in the overview section. As a percentage of revenue, selling, general and administrative expenses decreased from 33.6% for the three months ended June 30, 1998 to approximately 31.0% for the three months ended June 30, 1999 and from 35.4% for the six months ended June 30, 1998 to 25.7% for the six months ended June 30, 1999. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense rose $1.2 million, or 23.5%, from $5.1 million for the three months ended June 30, 1998 to $6.3 million for the three months ended June 30, 1999 and $2.3 million, or 23.2%, from $9.9 million for the six months ended June 30, 1998 to $12.2 million for the six months ended June 30, 1999 principally as a result of depreciation and amortization of additional cable television systems and related goodwill acquired and the continued build-out of the Company's cable networks. Depreciation and amortization expense as a percentage of revenues decreased from 40.8% for the three months ended June 30, 1998 to 40.6% for the three months ended June 30, 1999 and increased from 40.2% for the six months ended June 30, 1998 to 40.3% for the six months period ended June 30, 1999. INTEREST EXPENSE. Interest expense increased $0.1 million, or 2.9%, from $3.5 million for the three months ended June 30, 1998 to $3.6 million for the three months ended June 30, 1999 and increased $0.5 million, from $7.0 million for the six months ended June 30, 1998 to $7.5 million for the six months ended June 30, 1999. These increases are a result of loans assumed by the Company in its acquisition of subsidiaries and an additional loan draw down in June 1998. INTEREST AND INVESTMENT INCOME. Interest and investment income decreased $0.3 million, or 100%, from $0.3 million for the three months ended June 30, 1998 to none for the three months ended June 30, 1999 and $0.4 million, or 57.1%, from $0.7 million for the six months ended June 30, 1998 to $0.3 million for the six months ended June 30, 1999 primarily due to the reduction in the level of cash used to fund the Company's operations. 20 FOREIGN EXCHANGE GAIN/(LOSS), NET. For the three months ended June 30, 1999, foreign exchange gain amounted to $83,000 as compared to a foreign exchange loss of $0.3 million for the three months ended June 30, 1998. For the six months ended June 30, 1999, foreign exchange loss was $1.5 million compared to a foreign exchange loss of $0.2 million for the six months ended June 30, 1998. This is primarily due to the 10.8% appreciation of the U.S. dollar against the Polish zloty in the six months ended June 30, 1999. MINORITY INTEREST. No minority interest was recorded for the three and six months ended June 30, 1999 compared to minority interest income of $58,000 and $207,000 for the corresponding periods in 1998. All minority interest was eliminated in 1998 as the minority interest share of the losses in subsidiaries exceeded the value of minority interest investments. NET LOSS. For the three months ended June 30, 1998 and the three months ended June 30, 1999, the Company had net losses of $6.4 million and $9.6 million, respectively and for the six months ended June 30, 1998 and the six months ended June 30, 1999, the Company had net losses of $10.9 million and $19.1 million, respectively. These losses were the result of the factors discussed above. NET LOSS APPLICABLE TO COMMON STOCKHOLDERS. Net loss applicable to common stockholders increased from $7.6 million for the three months ended June 30, 1998 to $10.6 million for the three months ended June 30, 1999 and from $13.2 million for the six months ended June 30, 1998 to $21.0 million for the six months ended June 30, 1999 due to the 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 the Reorganization (as defined herein) (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 senior debt notes by the Company (the "Notes"). The Company had positive cash flows from operating activities in 1998 of $14.3 million, primarily due to 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 the six months ended June 30, 1998 of $2.6 million and had positive cash flows from operating activities for six months ended June 30, 1999 of $6.2 million, due to an increase in monthly subscription rates, an increase in the amount due to an affiliate and operating efficiencies. Cash used for the purchase and expansion of the Company's cable television networks was $24.5 million and $9.5 million for the six months ended June 30, 1998 and 1999, respectively. The decrease in the first six months of 1999 compared to the same period in 1998 is due to the development of the Company's new build-out strategy and completion in 1998 of upgrades of recently acquired networks and subsidiaries. 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, the Company sold $130 million aggregate principal amount of the PCI Notes 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. 21 Pursuant to the indenture governing the 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 issuance's 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 the 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 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 minimum provided in the PCI indenture. Pursuant to the AmerBank credit facility, the Company is subject to certain informational and notice requirements but is not subject to restrictive covenants. For purpose of the PCI Indenture, the consummation of UPC's tender offer on August 5, 1999 resulted in a change in control of the Company, and as a result, the Company will be obligated to offer to repurchase any of the Notes that the note holders put to the Company. The Company will be required to offer to purchase the Notes at 101% of their principal amount, plus accrued and unpaid interest. If all of the note holders of the Notes were to put their Notes, the Company would be required to pay approximately $135,000,000 to repurchase the Notes, if such repurchase is consummated in mid-September 1999. 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. 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, and @ Entertainment's parent, United Pan-Europe Communications N.V. ("UPC"), 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 at least the next twelve months. However, there is no obligation from @Entertainment or UPC, contractually or otherwise, to make such financing available to the Company. YEAR 2000 COMPLIANCE The Company's operations are 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 22 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 billing software for the Company's new customer service and billing center. The vendors of the new accounting system and 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. 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 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 $3,000,000. 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. 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, 2000. The Company currently has no derivative instruments or hedging activities. 23 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The principal market risk (i.e., the risk of loss arising from adverse changes in market rates and prices) to which the Company is exposed is foreign exchange rate risk from fluctuations in the Polish zloty currency exchange rate. The Company's long term debt is primarily subject to a fixed rate, and therefore variations in the interest rate do not have a material impact on net interest expense. FOREIGN EXCHANGE AND OTHER INTERNATIONAL MARKET RISKS Operating in international markets involves exposure to movements in currency exchange rates. Currency exchange rate movements typically affect economic growth, inflation, interest rates, governmental actions and other factors. These changes, if material, can cause the Company to adjust its financing and operating strategies. The discussion of changes in currency exchange rates below does not incorporate these other important economic factors. International operations constitute 100% of the Company's consolidated operating loss for the quarter ended June 30, 1999. 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 $427,000. In other terms, a 10% depreciation of the Polish zloty against the U.S. dollar, would result in a $427,000 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 currency 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 rate of inflation for the three months period ended June 30, 1999 was approximately 6.5%. 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 0.4% for the year ended December 31, 1998. For the six months of 1999 the zloty has depreciated against the U.S. dollar by approximately 10.8%. 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. 24 PART II OTHER INFORMATION ITEM 1. 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. See also Note 6 to the unaudited consolidated financial statements, for a description of the PCBV Minority Stockholders' Claim. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION: Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) 11 - Statement regarding computation of per share earnings (contained in Note 3 to Unaudited Financial Statements in this Quarterly Report in Form 10-Q) Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the second quarter of 1999. 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. POLAND COMMUNICATIONS, INC. By: /s/Warren Mobley --------------------------------------- Warren Mobley Chief Operating Officer, Vice President By: /s/Piotr Majchrzak --------------------------------------- Piotr Majchrzak Chief Financial Officer Date: August 13, 1999 26 EX-27 2 EXHIBIT 27(FDS)
5 This schedule contains summary financial information extracted from financial statements included in the Company's quarterly report on form 10-q for the six months ended June 30, 1999 and is qualified in its entirety by reference to such financial statement. 3-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 3,352 0 6,606 1,594 6,395 10,063 175,880 (52,075) 174,063 21,140 131,465 32,784 0 1 (48,250) 174,063 0 30,264 0 40,644 0 0 7,517 (19,133) 27 (19,160) 0 0 (1,807) (20,967) (1,106.55) 0
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