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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
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(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, 1997
/ / 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
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POLAND COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
NEW YORK 06-1070447
(State or Other Jurisdiction (I.R.S. Employer
of Identification No.)
Incorporation or Organization)
ONE COMMERCIAL PLAZA
HARTFORD, CONNECTICUT 06103
(Address of Principal (Zip Code)
Executive Offices)
</TABLE>
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Registrant's telephone number, including area code (860) 549-1674
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
</TABLE>
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.)
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
ITEM 1. BUSINESS
GENERAL
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.
The Company operates the largest cable television system in Poland with
approximately 1,408,100 homes passed and approximately 768,900 total
subscribers. 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 build-out and acquisitions. In addition, the Company intends to drive
subscriber growth, as well as increase revenue per subscriber, by introducing,
in connection with @ Entertainment, a branded platform of Polish-language
programming (the "Programming Platform") under the brand name Wizja TV on its
cable networks on April 18, 1998. @Entertainment and the Company anticipate that
at its launch Wizja TV will consist of 15 channels of primarily Polish-language
programming to be distributed over the Company's cable networks. @Entertainment
has secured and is in the process of securing certain exclusive Polish pay
television rights to channels and events covering what it believes are the most
important programming genres to viewers in the Polish market, including movies,
sports, children's programming, documentaries and music. The Company has
invested more than $102 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 United States. 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.
OPERATING STRATEGY
With the fall of Communist rule in 1989, the Company believed that
significant market advantages could be gained 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
(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.
PROVIDE COMPELLING PROGRAMMING. The Company currently provides to its cable
subscribers nine primarily Polish-language channels not available on terrestrial
frequencies. The Company believes that the introduction of Wizja TV, with its
initial 15 channel primarily Polish-language programming platform, will augment
the attractiveness of the Company's 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.
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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 may continue to experience increases in churn rate 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 satellite master antenna television
("SMATV") 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 churn rates. 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.
EXPAND REGIONAL CLUSTERS. The Company's strategy is to continue to expand
the coverage areas of its regional clusters, both through selected build-out 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 build-out 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 overbuild
certain weaker competitors 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 build-out 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 incremental multiple dwelling unit ("MDU") subscriber 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 subscriber penetration in its regional
clusters. Once a MDU building is passed by the Company's networks, the Company
can add subscribers who generate average annual subscription fees of
approximately $65 in return for an average capital investment of approximately
$20 per MDU subscriber. The Company plans to increase subscriber penetration by
(i) 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, (ii) continuing to
enhance the Company's program offerings, particularly through the introduction
of Wizja TV for distribution across its cable networks, and (iii) 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, rationalizing headends, 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 headends or, if required, rebuilding them to the Company's
standards. The Company also intends to reduce headcount through consolidation of
its existing clusters of regional operations from eight to four, and through the
centralization of subscriber management and customer support services in its new
subscription management call center (the "Call Center"). The Call Center is
currently operational for cable customers in the Katowice regional cluster and
is expected to be operational for all cable customers by the end of 1998. 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
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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 for its cable businesses. The Company believes that its
size and market share give it a competitive advantage by creating economies of
scale, including reduced build-out and 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, which economies of scale should
continue to improve as its subscriber base increases.
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.
OVERVIEW OF THE COMPANY'S EXISTING CABLE SYSTEMS(1)
<TABLE>
<CAPTION>
AVERAGE
MONTHLY
SUBSCRIPTION
REVENUE PER
TOTAL HOMES TOTAL BASIC BASIC BASIC
REGION HOMES PASSED SUBSCRIBERS SUBSCRIBERS(2) PENETRATION(2) SUBSCRIBER
- ------------------------------------ ---------- ---------- ----------- ------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Gdansk.............................. 280,000 228,512 140,822 115,494 50.54% $ 5.89
Szczecin............................ 160,000 44,874 36,337 19,780 44.08% 4.55
Katowice............................ 1,200,000 446,030 186,546 175,312 39.30% 5.78
Krakow.............................. 400,000 149,906 83,204 73,237 48.86% 5.32
Warsaw(3)........................... 800,000 197,493 103,826 87,656 44.38% 6.01
Lublin.............................. 120,000 71,173 62,066 32,254 45.32% 4.03
Wroclaw............................. 624,000 185,420 107,486 86,519 46.66% 4.17
Bydgoszcz........................... 134,000 84,691 48,614 46,031 54.35% 3.60
---------- ---------- ----------- ------------- ----- -----
Total........................... 3,718,000 1,408,099 768,901 636,283 45.19% 5.12(4)
---------- ---------- ----------- ------------- ----- -----
---------- ---------- ----------- ------------- ----- -----
</TABLE>
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(1) All data at, or for the twelve months ended December 31, 1997.
(2) Includes only subscribers to the Company's package with the largest number
of non-premium channels (the "Basic Tier") and the Company's package with
more limited programming offerings of 17 to 24 channels (the "Intermediate
Tier").
(3) The Warsaw region included approximately 5,323 homes passed and
approximately 2,279 basic subscribers of the Otwock System where the Company
has a less than 50% ownership interest.
(4) Represents a weighted average for the Company based on the total number of
basic subscribers for the twelve months ended December 31, 1997.
OVERVIEW
The Company has organized its eight regional clusters into four geographic
operating divisions--the Northern, Southern, Central, and National Divisions.
The Northern Division encompasses the Gdansk and Szczecin regional clusters, the
Southern Division encompasses the Katowice and Krakow regional clusters, and the
Central Division encompasses the Warsaw and Lublin regional clusters. The
National Division is comprised of certain of the Company's smaller cable
systems, which are generally under technological development or are not
affiliated with a specific regional cluster. The National Division also contains
the
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Company's cable operations in which the Company has minority shareholders. Each
operating division has its own management team which is responsible for the
profitability of its respective division. This management structure is designed
to create a goal-oriented culture and to increase efficiency and productivity in
the Company's cable business at the divisional level. The Northern, Southern,
and Central Divisions are managed from the Gdansk, Katowice, and Warsaw regional
clusters, respectively, where there are the largest concentrations of the
Company's cable subscribers.
The following provides certain information regarding the regional clusters
in which the Company's cable television business operates. Population figures
presented herein are for the primary counties in each of the Company's eight
regional clusters. The Company's regional clusters may extend into more than one
county or may not cover all of the population in the primary county. Population
figures are provided for illustrative purposes only and may not be
representative of the actual population the Company intends to service with its
cable networks.
NORTHERN DIVISION
GDANSK. The Gdansk regional cluster is located primarily in the county of
Gdansk on the north coast of Poland. The population of the county of Gdansk is
approximately 1.5 million. The Gdansk regional cluster accounted for
approximately 25% and 24% of the Company's revenue in 1996 and 1997,
respectively. The Gdansk regional cluster is generally characterized by small,
highly fragmented SMATV systems, many of which the Company expects to either
acquire or overbuild in time. The Company believes that the Gdansk system, which
was first constructed in 1990 and is the oldest and most mature of the Company's
systems, illustrates the significant operating margins available in clustered
operating systems in Poland.
The Company is expanding in the Gdansk regional cluster primarily through
the continued build-out of MDUs and single family households, and into
contiguous areas. The Company is focusing its marketing efforts in the Gdansk
regional cluster on increasing penetration through remarketing campaigns. The
Gdansk system possesses a number of exclusive agreements with co-operative
housing authorities ("co-op authorities"), and the Company expects to expand the
number of such agreements through the development of its package with the
smallest number of non-premium channels ("Broadcast Tier"), which the Company
often offers on favorable terms in exchange for an exclusive agreement with
co-op authorities to provide cable services to their residents.
SZCZECIN. The Szczecin regional cluster is primarily located in the county
of Szczecin in the northwest corner of Poland. The population of the county of
Szczecin is approximately 1.0 million. There is currently no significant
competition in the Szczecin market other than several co-op authority owned
systems. The Company commenced operations in the Szczecin regional cluster in
1995 with the acquisition of a cable system with approximately 4,500 subscribers
and the exclusive right to build-out approximately 55,000 apartments in MDUs
owned by the Szczecin municipal authorities.
SOUTHERN DIVISION
KATOWICE. The Katowice regional cluster is located primarily in the county
of Katowice in the south of Poland. The population of the county of Katowice is
approximately 3.9 million. The Katowice regional cluster accounted for
approximately 32% and 31% of the Company's revenue in 1996 and 1997,
respectively. The Katowice regional cluster is characterized by numerous cities
and towns with significant populations and high density housing. There are many
small and medium size operators throughout the region, creating an opportunity
to expand by acquisition. The Company began operations in Katowice in 1991, and
in January 1995 tripled its number of basic subscribers in the region by merging
its operations with those of a competitor, PPHEI-Ryntronik.
The Katowice regional cluster, with a housing density of over 500 homes per
kilometer of cable plant in some areas, is the most densely populated region of
Poland. The Company believes that, as one of the
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largest potential multi-channel pay television markets in Poland, the Katowice
regional cluster offers the Company significant growth prospects.
KRAKOW. The Krakow regional cluster is located primarily in the county of
Krakow in the south of Poland. The population of the county of Krakow is
approximately 1.2 million. The Company commenced operations in Krakow in late
1993. The Krakow regional cluster accounted for approximately 12% of the
Company's revenue in both 1996 and 1997.
The Company believes that the majority of the MDUs in the city of Krakow
have been built-out by the Company and other cable system operators.
Accordingly, the Company believes that future expansion in the Krakow regional
cluster will consist of build-out of (i) newly constructed, single family homes,
(ii) historical preservation areas (which are subject to a more extensive permit
process), (iii) towns surrounding the city of Krakow, and (iv) over-building the
systems of competitors.
CENTRAL DIVISION
WARSAW. The Warsaw regional cluster is located primarily in the county of
Warsaw in the center of Poland. The population of the county of Warsaw is
approximately 2.4 million. The Warsaw regional cluster accounted for
approximately 15% of the Company's revenue in both 1996 and 1997. The Company
began operations in the Warsaw regional cluster in 1991.
Warsaw is the most competitive operating environment in Poland because of
its size and population density. The Warsaw market is characterized by several
large cable television operators and several small operators. The Company, which
currently is one of the two largest cable television operators in Warsaw based
on number of subscribers, has operating clusters in Warsaw that are located in
what the Company believes are the most demographically desirable parts of the
city (the southeast and the northwest sectors). The Company intends to grow its
Warsaw network by building-out single family housing areas in Warsaw, extending
its network into the suburbs and surrounding towns and by continuing to
overbuild a competitor's system in several MDU areas that are adjacent to the
Company's operating areas.
LUBLIN. The Lublin regional cluster is primarily located in the county of
Lublin in the east of Poland. The population of the county of Lublin is
approximately 1.0 million. The Lublin regional cluster is characterized by a few
small, cooperative-owned SMATV systems. The Company commenced operations in the
Lublin regional cluster in mid-1995 with the acquisition of several agreements
with co-op authorities related to approximately 50,000 homes passed. In the
Lublin regional cluster, the Company has constructed a cable network that has a
bandwidth of 1GHz.
In its agreements with co-op authorities in the Lublin regional cluster the
Company is obligated to provide its Broadcast Tier service to every home in an
MDU in exchange for the MDU paying a fixed monthly fee of approximately $.40 to
the Company for each apartment. The customer relationships created by nearly all
homes in the market receiving Broadcast Tier service from the Company provide a
marketing opportunity to encourage customers to upgrade their service. In
addition, although the agreements with co-op authorities in Lublin generally do
not provide for exclusivity, the Company believes that the customer
relationships created by its Broadcast Tier arrangements will discourage
competitors from entering the Lublin regional cluster.
NATIONAL DIVISION
WROCLAW. The Wroclaw regional cluster is located primarily in and around
the county of Wroclaw in the south-west of Poland. The population of the county
of Wroclaw is approximately 1.1 million. The Company commenced operations in the
Wroclaw regional cluster in May 1997 with an acquisition of a small local
operator, followed in June 1997 with the acquisition of a 61% interest in a
cable system with approximately 98,000 total subscribers in approximately twenty
locations throughout the region.
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The Company believes that Wroclaw offers considerable build-out
opportunities, as it has remained largely undeveloped in terms of professional
cable television service, with competition limited to smaller local operators.
In addition to gaining access to the city of Wroclaw, the acquisitions provided
the Company with a number of other locations in southwest and central Poland,
with combined potential of approximately 624,000 television homes.
BYDGOSZCZ. The Bydgoszcz regional cluster is located primarily in the
county of Bydgoszcz, northwest of the center of Poland. The population of the
county of Bydgoszcz is approximately 1.1 million. The Company commenced
operations in the Bydgoszcz regional cluster in December 1996 with the
acquisition of a 51% interest in a cable system with approximately 37,000
subscribers. There are currently only a few competitors in the Bydgoszcz market,
including several co-op authority owned systems and a local operator.
By acquiring a controlling interest in the market's largest cable operator,
the Company has gained access to an additional market which has a number of
build-out and acquisition opportunities.
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 (the "Anti-Monopoly
Office") with respect to any acquisitions it wishes to consummate. There can be
no assurance as to whether or on what terms definitive agreements with respect
to any material acquisition can be reached or necessary Anti-Monopoly Office
approvals can be obtained.
SERVICES AND FEES
The Company charges cable television subscribers an initial installation fee
and fixed monthly fees for their choice of service tiers and for other services
such as premium channels and rental of remote control devices. The Company
currently offers three tiers of cable television service: a Basic Tier
throughout the Company's cable television systems, and Broadcast and
Intermediary Tiers in selected areas of Poland. At December 31, 1997,
approximately 79% of the Company's subscribers received the Basic Tier,
approximately 4% received the Intermediate Tier and approximately 17% received
the Broadcast Tier of service.
BASIC TIER. The Company currently delivers approximately 18 to 45 channels
to its cable television subscribers on its Basic Tier, which generally include
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, its proprietary Polish-language channel, Atomic TV.
The Basic Tier costs approximately $3.42 to $6.01 per month (excluding charges
for premium channels) depending on location. The channels currently offered or
proposed to be offered by the Company to its Basic Tier subscribers vary by
location and in most of the Company's major markets include twelve
Polish-language channels (including Atomic TV), eleven English-language
channels, ten German-language channels, five French-language channels, two
Spanish-language channels, one Italian-language channel, one Russian-language
channel, and one Swedish-language channel (though the Company intends to close
some of these channels with the launch of Wizja TV across its cable networks) as
follows:
<TABLE>
<CAPTION>
CHANNEL DESCRIPTION LANGUAGE
- --------------------------- ------------------------------------------------------ ---------------------------
<S> <C> <C>
Wizja TV(1) Programming platform Polish
TVP1 State-owned terrestrial general entertainment Polish
TVP2 State-owned terrestrial general entertainment Polish
</TABLE>
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<TABLE>
<CAPTION>
CHANNEL DESCRIPTION LANGUAGE
- --------------------------- ------------------------------------------------------ ---------------------------
<S> <C> <C>
Formula 11 Regional state-owned terrestrial general entertainment Polish
TV POLONIA State-owned satellite general entertainment Polish
Polsat Terrestrial and satellite general entertainment Polish
TVN Terrestrial and satellite general entertainment Polish
Nasza TV Terrestrial and satellite general entertainment Polish
PTK 1(2) Cable information Polish
PTK 2(2) Cable general entertainment Polish
Atomic(3) Satellite music Polish
RTL7 Satellite general entertainment Polish
Eurosport Satellite sports English/Polish(4)
Polonia 1 Satellite general entertainment Polish
Discovery(5) Satellite documentaries English/Polish(6)
Planete Satellite documentaries French/Polish(4)
CNBC Satellite general entertainment English
ONYX Satellite music German
TNT/Cartoon Network Satellite general entertainment and cartoons English
MTV(5) Satellite music English
NBC/Super Channel Satellite general entertainment English
CNN Satellite news and information English
CMT-Europe(2)(5) Satellite country music English
Euronews Satellite news English
BBC World Satellite news and information English
BBC Prime(5) Satellite general entertainment English
ARD 1 Satellite general entertainment German
SAT 1 Satellite general entertainment German
RTL 2 Satellite general entertainment German
3SAT Satellite general entertainment German
PRO 7 Satellite general entertainment German
n-TV Satellite news and information German
Deutsche Welle Satellite news and information German
DSF Satellite sports German
VIVA Satellite music German
M6 Satellite general entertainment French
TV 5 Satellite general entertainment French
MCM Satellite music French(4)
Muzzik Satellite music French(4)
Galavision Satellite general entertainment Spanish
</TABLE>
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<TABLE>
<CAPTION>
CHANNEL DESCRIPTION LANGUAGE
- --------------------------- ------------------------------------------------------ ---------------------------
<S> <C> <C>
TVE Satellite general entertainment Spanish
RAI UNO Satellite general entertainment Italian
Ostankino Satellite general entertainment Russian
FEM Satellite general entertainment Swedish
</TABLE>
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(1) The channels offered on Wizja TV, which will include both basic and premium,
will become available to the Company's cable subscribers beginning April 18,
1998.
(2) The Company plans to close these channels subsequent to the launch of Wizja
TV.
(3) Atomic TV became available as a separate digitally delivered satellite
channel during the second quarter of 1997.
(4) Limited amount (at least three hours per day) of Polish-language commentary,
with audio encryptions.
(5) Encrypted signal.
(6) Limited amounts of Polish subtitles.
With the launch of Wizja TV on April 18, 1998, all of the Wizja TV
programming, except for premium channels such as Wizja 1 and HBO, will become
part of the Basic Tier. The monthly price for the Basic Tier will increase in
amounts varying from region to region, ranging from approximately $1 to
approximately $2 per month. The Company intends to close some of the channels
that are currently offered by the Company to its Basic Tier subscribers
subsequent to the launch of Wizja TV.
INTERMEDIATE TIER. The Intermediate Tier offers approximately 17 to 24
channels for monthly fees of approximately $1.32 to $3.40. The Intermediate Tier
is designed to compete with SMATV operators on a basis of price, using a limited
programming offering. The channels currently offered by the Company to its
Intermediate Tier subscribers vary by location.
BROADCAST TIER. The Broadcast Tier offers 4 to 6 terrestrial broadcast
channels with clear reception for monthly fees of up to approximately $0.86.
Receiving a high-quality signal over the air can be a problem in Poland and many
cable television subscribers would otherwise have to depend on antenna broadcast
reception, which tends to have poor signal quality and considerable outages
caused by neglect and equipment age. The Broadcast Tier is often used by the
Company to establish a relationship with co-op authorities. In some cases, the
Company will offer the Broadcast Tier at a nominal monthly charge to all
residents within a co-op authority's jurisdiction in return for a long-term
exclusive contract to provide cable services. In such cases, the Broadcast Tier
is utilized as a marketing vehicle to attract subscribers to the Company's cable
systems and subsequently to convert them to higher-tier subscribers. Polish
regulations regarding the order in which channels can be added to cable systems
mean that most Broadcast Tiers only broadcast public television programs, which
are required by Polish law to be the first channels carried on any Polish cable
television system.
PREMIUM AND OTHER SERVICES. For an additional monthly charge, certain of
the Company's cable networks currently offer two premium television
services--HBO and Canal+--to customers on a monthly basis. With the launch of
Wizja TV, the premium channels, such as Wizja 1, HBO, and Canal+, will each be
offered to cable customers for an additional monthly charge. 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.
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The standard initial installation fee is approximately $28 to $35 in MDUs and
approximately $91 to $75 for single family dwellings.
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 rebuilt networks. 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,
which commenced in January 1997 and is designed to increase revenue per
subscriber and to achieve real profit margin increases in U.S. Dollar terms.
With the launch of Wizja TV on April 18, 1998, all of the Wizja TV programming,
except for premium channels such as Wizja 1 and HBO, will become part of the
Basic Tier. The monthly price for the Basic Tier will increase in amounts
varying from region to region, ranging from approximately $1 to approximately $2
per month. The Company intends to close some of the channels that are currently
offered by the Company to its Basic Tier subscribers subsequent to the launch of
Wizja TV.
The Company generally receives a premium for its cable television services
over the prices charged by its competitors, particularly poor-quality SMATV
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 churn rates. 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. Although poor-quality SMATV operators
often offer services at lower prices than the Company, the Company believes that
the enforcement of technical standards and of copyright laws in Poland will
require such operators to rebuild or upgrade their systems as necessary to
comply with technical standards and pay for programming that is currently being
obtained free of charge. The Company believes that these trends will improve its
competitive position by forcing poorly capitalized competitors to sell their
networks to better capitalized competitors such as the Company or cease
operations altogether.
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 60
days after a bill becomes past due. The Company's system architecture in most
networks enables it to promptly shut off service to nonpaying customers and is
designed to reduce non-authorized use of its cable systems. The Company does not
consider bad debt to be material to its operations. The Company's bad debt
expense has historically averaged 1.3% of revenue.
SALES AND MARKETING
As an early entrant in the post-Communist market in Poland, the Company has
had over seven years of experience in introducing, developing and refining
marketing, sales and customer service practices in the diverse and rapidly
developing Polish economy, which it believes is a competitive advantage in
attracting and retaining cable subscribers. The Company's sales and marketing
process is divided into four segments: 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 co-op authorities rather than upon the issuance of an operating
area development permit for a region by the government. The co-op authorities
make decisions on behalf of the residents, including decisions as to the
carriers of cable television. The Company's
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operating area development process begins with targeting an MDU, is followed by
negotiations with the relevant co-op authority, and ultimately involves reaching
an agreement with the co-op authority to allow construction and installation of
the cable television network. The Company's strategy is to identify those
geographic areas and housing estates 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 co-op 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, co-op 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 persons 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. The Company is in the process of establishing a customer service
facility within the Call Center for its cable business. The Call Center will
provide telemarketing and sales and service support and will include a
specialized billing software with on-line real time access to customer accounts,
designed to provide better access to customer information and improve customer
service. The Call Center is currently operational for cable customers in the
Katowice regional cluster and is expected to be operational for all cable
customers by the end of 1998.
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 60% of its homes passed, are among the
most technologically advanced in Poland and are comparable to modern cable
television networks in the United States. 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 portions of its cable television networks that
have bandwidths below 550 MHz (generally acquired from other entities) to at
least 860
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MHz in an effort to reduce the number of headends 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
hybrid-fiber-coax, 500 home node design. 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's cable television networks were constructed with the
flexibility and capacity to be cost-effectively 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 has been able to avoid constructing its own underground conduit
in certain areas by entering into a series of agreements with regional and local
branches of the Polish national telephone Company ("TPSA") which permit the
Company to use TPSA's conduit infrastructure for an indefinite period of time or
for periods up to 20 years. The Company also has agreements to undertake joint
construction with TPSA and other utilities for new conduits in certain areas.
These agreements represent a major advantage to the Company since they permit
the Company to minimize the costly and time-consuming process of building new
conduit infrastructure where TPSA conduit infrastructure exists and provide for
joint construction with TPSA and other utilities of conduit infrastructure where
none currently exists. At December 31, 1997, approximately 60% 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 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. Generally speaking, TPSA may terminate a
conduit agreement immediately if: (i) the Company does not have a valid permit
("Permit") from Polish State Agency of Radio Communications ("PAR") 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; (ii) the Company's cable television network serviced by the conduit does
not meet the technical specifications required by the Communications Act of
1990, as amended (the "Communications Act"); (iii) the Company does not have a
contract with the co-op authority allowing for the installation of the cable
network; or (iv) the Company fails to pay the rent required under the conduit
agreement. At December 31, 1997, approximately 75,000, or 10%, of the Company's
total subscribers were serviced by conduits leased from TPSA for which one or
more of these provisions were applicable, so TPSA was legally entitled to
terminate the conduit agreements covering these subscribers immediately. Any
termination by TPSA of such contracts could result in the Company losing its
Permits, the termination of agreements with co-op authorities and programmers,
and an inability to service customers with respect to the areas where its
networks utilize the conduits that were the subject of such contracts.
The Company estimates that at the end of December 1997 it had over 3,536
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
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capital needed for the incremental addition of new MDUs and cable television
subscribers to its existing networks for the build-out 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 MDU or additional
MDU subscribers to existing networks averages approximately $200 per MDU
subscriber. (MDU subscribers represent more than 95% 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 the home. 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. In
addition, advances in communications technology as well as changes in the
marketplace and the regulatory environment are constantly occurring. It is not
possible to predict the effect that ongoing or future developments might have on
the multi-channel pay television industry in Poland.
The Company believes that competition in the cable television industry is
primarily based upon price, program offerings, customer service, and quality and
reliability of cable networks. Small SMATV operators are active throughout
Poland, and they pose a competitive threat to the Company because they often
incur lower capital expenditures and operating costs and therefore have the
ability to charge lower fees to subscribers than does the Company. While such
operators often do not meet the technical standards for cable systems under
Polish law, enforcement of regulations governing technical standards has
historically been poor. Although Polish regulatory authorities have recently
attempted to improve the enforcement of such laws and regulations, there can be
no assurance that they will be enforced. If such laws and regulations are not
enforced, these SMATV operators will be able to continue operating with a lower
cost structure than that of the Company and thus charge lower fees to
subscribers, which may have an adverse effect on the Company's business, results
of operations and financial condition. Regardless of the enforcement of these
laws and regulations, the Company expects that SMATV operators 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 Aster City, a joint venture
between, among others, certain Polish persons, Bresnan Communications, TCI
Communications Inc. and certain financial investors, with an estimated 300,000
subscribers, and Multimedia, a Polish entity, with an estimated 110,000
subscribers.
The Company's cable television business also competes with companies
employing other methods of delivering television signals to the home, such as
terrestrial broadcast television signals and analog direct-to-home ("A-DTH")
television services, and may in the future compete with multi-channel
multi-point distribution system ("MMDs") systems and digital direct-to-home
("D-DTH") services (including @ Entertainment's D-DTH service).
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 such competition depends upon, among
other things, the price, variety and quality of programming offered by pay
television services and the popularity of television itself.
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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 trademark
PTK 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, 1997, the Company had approximately 831 permanent full-time
employees and approximately 76 part-time employees. In addition, as of such date
the Company employed approximately 56 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.
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REGULATION
GENERAL
The operation of cable systems in Poland is regulated under the
Communications Act by the Ministry of Communications ("MOC") and PAR and under
the Radio and Television Act of 1992, as amended (the "Television Act") by the
National Radio and Television Council (the "Council"). Cable television
operators in Poland are required to obtain Permits from PAR to operate cable
television systems and must register certain programming that they transmit over
their networks with the Council. Poland is a party to the provisions of the 1989
European Convention on Transfrontier Television (the "Convention") that regulate
international transmission and retransmission of television programs.
In contrast to cable television regulatory schemes in the United States and
in certain other Western nations, neither the MOC nor PAR currently has the
authority to regulate the rates charged by operators for cable television;
however, excessive rates could be challenged by the Polish Anti-Monopoly Office
(the "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. Broadcasters in Poland are regulated by the Council
under the Television Act and must obtain a broadcasting license from the
Council.
POLAND
COMMUNICATIONS ACT
GENERAL. From the fall of the Communist government in 1989 through 1992,
the Polish cable television industry was essentially unregulated. Although the
Communications Act was enacted in 1990, the MOC and PAR did not begin
promulgating and enforcing regulations implementing the Communications Act until
1992. In 1993, to improve the quality of Poland's cable television systems, the
MOC and PAR began to implement technical and licensing standards for cable
operators that established requirements for such items as signal quality and
radio frequency leakage. In the same year, the MOC and PAR began to monitor
compliance with regulations requiring all cable operators to obtain Permits and,
more recently, has begun to enforce such requirements. In 1995, the
Communications Act was amended to create restrictions on foreign ownership
within the cable television industry.
PERMITS. The Communications Act and the Permits set forth the terms and
conditions for providing cable television services. A Permit authorizes the
construction and operation of a cable television network in a specified
geographic area. Permits do not give exclusive rights to construct and operate a
cable network within an area, and usually do not include build-out milestone
requirements.
To obtain a Permit, an operator must file an application with PAR. A Permit
application must be accompanied by evidence demonstrating that the applicant's
network will be constructed of components approved by, and meeting the technical
specifications set forth by PAR and the MOC, and that co-op authorities or other
property owners in the area that the Permit will cover have agreed to allow the
applicant access to their property to install the cable network. PAR will refuse
to grant a Permit if, among other things, the applicant fails to submit the
evidence described above or if the applicant's cable network fails to comply
with the technical requirements established by PAR and the MOC including minimum
standards for signal quality and radio frequency leakage.
Permits have an initial term of one year and if renewed are generally
renewed for up to five years. Renewal applications must be submitted to PAR at
least one month prior to the end of a Permit's term. If a renewal decision from
PAR is pending at the expiration of a Permit's term, as is usually the case, the
term is deemed to be extended until the renewal decision is made. PAR generally
renews Permits as a matter of course if the terms and conditions of the Permit
and the requirements of the Communications Act, including the technical
requirements for cable networks established by PAR and the MOC, have been met
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by the holder of the Permit. The Communications Act also requires that operators
of cable television systems comply with Polish laws, including copyright laws.
If a cable television operator breaches the terms or conditions of its
Permits or the Communications Act, or 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 the
breach occurred or the forfeiture of the 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. In many
instances, where a violation of the terms or conditions of a Permit or the
Communications Act have occurred, PAR is required by law to give the cable
television operator an opportunity to rectify the violation.
NON-TRANSFERABILITY OF PERMITS. A cable television operator who acquires a
cable network from another operator must apply for a Permit covering the area in
which the acquired network is located, unless the acquiring operator already has
a valid Permit covering the area. However, subject to the restrictions on
foreign ownership of cable television operators described below, to
anti-monopoly restrictions and to any restrictions contained in a specific
Permit or related to the foreign ownership of real estate, shares of cable
television operators holding Permits are freely transferrable.
FOREIGN OWNERSHIP RESTRICTIONS. The Communications Act and applicable
Polish regulatory restrictions provide that Permits may only be issued to and
held by Polish individuals, corporations that have their registered offices in
Poland or other companies formed under the laws of Poland in which foreign
persons hold no more than 49% of the share capital, ownership interests and
voting rights. In addition, the Communications Act and applicable Polish
regulatory restrictions provide that the majority of the management and
supervisory board of any cable television operator holding Permits be comprised
of Polish citizens residing in Poland. These restrictions do not apply to any
Permits issued prior to July 7, 1995.
At December 31, 1997, approximately 35% of the Company's basic subscribers
were covered by Permits issued prior to July 1, 1997 ("Grandfathered Permits")
that are not subject to foreign ownership restrictions. Enforcement of Poland's
regulatory restrictions on foreign ownership of cable television operators is
the responsibility of PAR. Applications for Permits, and for renewals thereof,
require disclosure of the applicant's ownership structure, stockholders and
management and supervisory boards. A violation of these regulatory restrictions
constitutes a violation of the Communications Act, and can lead to revocation of
all Permits held by the entity committing the violation.
Polska Telewizja Kablowa, S.A. ("PTK, S.A.") will own all cable network
assets and operate in the areas covered by Grandfathered Permits. To comply with
foreign ownership requirements for Permits for networks not covered by
Grandfathered Permits, the Company intends to enter into contractual
arrangements with Polska Telewizja Kablowa Operator Sp. z o.o. (formerly PTK
Ryntronik, S.A.) ("PTK Operator") a Polish entity of which 49% is expected to be
owned by PCI and the remaining 51% is expected to be owned by a Polish entity of
which 49% is expected to be owned by PCI and the remaining 51% is expected to be
owned by a Polish financial institution. In the case of existing cable networks
not covered by Grandfathered Permits or the acquisition or construction of cable
networks not covered by Grandfathered Permits, the Company intends to own,
through PTK, S.A., all of the cable network assets and intends to lease the
assets to PTK Operator, which is expected to operate the networks. In the
Company's contemplated leasing arrangements with PTK Operator, it is expected
that PTK Operator will hold the Permits to operate the cable networks, receive
all of the revenues from subscribers, pay all operating expenses relating to the
operation of the networks, and through the lease arrangements pay PTK, S.A. rent
equal to substantially all of the cash flow generated by the networks. The
Company believes that this ownership and operating structure does not contradict
the requirements of Polish law. PAR has granted several permits to the Company
and the Company's competitors, based on the lease of assets, for
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networks using an ownership and operating structure substantially similar to the
one described above. There can be no assurance that Polish regulatory
authorities will not determine that all or part of this ownership and operating
structure, or any other ownership and operating structure that may be utilized
by the Company, violates Polish regulatory restrictions on foreign ownership or
that such restrictions will not be amended or interpreted in a different manner
in the future, including the restrictions applicable to Grandfathered Permits.
Any such adverse determination or any such amendment or interpretation could
adversely affect the ability of the Company's subsidiaries to acquire Permits to
operate cable television networks and could result in the denial or loss of
Permits applied for or held by certain subsidiaries of the Company, which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
THE COMPANY'S PERMITS. Subsidiaries of the Company have received
approximately 109 Permits from PAR, covering approximately 671,900 of the
Company's approximately 768,900 basic subscribers at December 31, 1997,
including approximately 23,700 subscribers for whom the Company's Permits are
deemed extended under Polish law pending PAR's response to the Company's Permit
renewal applications (collectively, "Valid Permits"). However, certain
subsidiaries of the Company do not have Valid Permits covering certain of the
areas in which it operates cable networks. Of the approximately 97,000 basic
subscribers at December 31, 1997 located in areas for which subsidiaries of the
Company do not currently have Valid Permits, approximately 76% 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 co-op authorities and the upgrade of the
acquired network to meet technical standards where necessary and satisfying
foreign ownership limitations), and approximately 24% 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.
There can be no assurance that PAR will not take action against the Company
for operating cable television networks in areas not covered by valid Permits,
including assessing fines, revoking Permits held by the Company or seizing the
Company's cable networks. Furthermore, there can be no assurance that the
Company's subsidiaries will be able to receive Permits in the future permitting
it to operate any other networks that they may acquire. Any action by PAR to
restrict or revoke the Permits of, or to refuse to grant Permits to, such
subsidiaries or similar action by PAR would have a material adverse effect on
the Company's business, financial condition and results of operations.
TELEVISION ACT
THE 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. Cable television operators generally are not considered
broadcasters under the Television Act unless they meet certain criteria
specified therein, including but not limited to, making modifications, such as
inserting commercials, to programming transmitted over their networks or failing
to retransmit programming simultaneously with their receipt thereof.
REGISTRATION OF PROGRAMMING. Under the Television Act, cable television
operators must register each channel and the programming with the Chairman of
the Council prior to transmitting it over their cable networks. An exception to
this registration requirement exists for programming that is broadcast by public
broadcasters and programming that is broadcast by other domestic broadcasters
and is generally available over the air for receipt by the public in the area
where the network is located.
The application to register programming with the Chairman of the Council
must include specification of the programming to be transmitted and the
broadcaster of the programming, and evidence that the applicant has a Permit
covering the cable networks on which the programming will be transmitted.
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Registration of programming occurs automatically if the Chairman of the Council
does not reject an application within two months of its submission.
In general, the Chairman of the Council will refuse registration of
programming if (i) the applicant is not legally entitled to use the cable
network over which the programming will be distributed (i.e., does not have a
Permit covering the network), (ii) 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 (iii) the transmission of
the programming over the cable network would violate Polish law, including the
Television Act.
Once programming is registered with the Chairman of the Council by a cable
television operator, it remains registered with respect to such operator until
the term, if any, requested in the application for registration expires or until
the Chairman of the Council revokes the registration. Applications to renew the
registration of programming are usually filed two months prior to the end of the
term of the registration thereof and will usually only be rejected for the
reasons described above. The Chairman of the Council is authorized to revoke
registration of a program for any of the same reasons for which it is entitled
to refuse to register programming, or if the cable television operator violates
the "must carry" provisions of the Television Act that require cable operators
to transmit programming broadcast by public broadcasters nationwide or
regionally.
The relevant subsidiaries of the Company 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. There can be no
assurance that the Chairman of the Council will not revoke the registration of
any of the Company's programming, or that the Chairman of the Council will
register all additional programming that the Company desires to transmit over
its networks (including the programming that the Company intends to transmit on
Wizja TV, the initial programming for which an application for registration has
been filed) or that the Council will not take action regarding unregistered
programming the Company transmits over its cable networks which do not have
permits. Such actions could include the levy of monetary fines against the
Company and the seizure of Company equipment involved in transmitting such
unregistered programming as well as criminal sanctions against the Company's
management. Any such action could have a material adverse effect on the
Company's business, financial condition and results of operations.
BROADCASTING LICENSES. Companies that engage in broadcasting in Poland must
receive a broadcasting license from the Chairman of the Council under the
Television Act. Broadcasting is defined under the Television Act to include the
wireless emission of a program for the purpose of simultaneous and general
reception and the introduction of a program or channel into a cable television
network. In determining whether to grant a broadcasting license, the Council
considers factors including, but not limited to, whether the planned
broadcasting activity by the applicant will serve to provide information,
facilitate access to culture and art or provide entertainment, and minimum
Polish and European content, and whether the applicant will be able to secure
the required investments and financing for the planned broadcasting operations.
In November 1997 the Council issued a regulation, effective January 1, 1998,
requiring the share of European works, excluding certain types of programs, in
the broadcast of Polish broadcasters to be not less than 50% of the yearly
broadcast.
Broadcasting licenses, unless revoked by the Council, have a term of between
three and ten years. The Television Act is silent as to the possibility of
license renewal and, to the extent applicable, upon termination of a license, a
new application or submission of a tender might be required. The Council may
revoke a broadcasting license for, among other things, violations of the
Television Act, of the terms the broadcasting license or of the restrictions on
foreign ownership of broadcasters described below.
RESTRICTIONS ON FOREIGN OWNERSHIP OF BROADCASTERS. Under the Television Act
and applicable regulations, a broadcasting license may be granted only to Polish
citizens domiciled in Poland or to Polish companies in which foreign persons
hold no more than 33% of the share capital, ownership interests and
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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. In December 1997 the Polish government
proposed an amendment to the Television Act by which the maximum foreign
ownership interest in a Polish broadcasting company would be increased to 49%,
but there can be no assurance that the Polish parliament will accept this
proposal.
REQUIREMENTS CONCERNING PROGRAMS BROADCAST FROM OUTSIDE OF POLAND. The
Television Act authorizes the Council to adopt regulations specifying
requirements for Polish or European content of programs of non-Polish
broadcasters to be distributed through cable networks in Poland. The adoption of
such regulations could influence the ability of Polish cable television
operators to register programs with the Council. Such a registration is required
for a lawful distribution of programs on cable networks. The Council has not
issued any regulations that would be applicable to Wizja TV programming
broadcast from outside of Poland (though it has issued regulations relating to
Polish broadcasters), but there can be no assurance that it will not do so in
the future or that @Entertainment or the Company would be able to comply with
any such future regulations. The burden of complying with any such future
regulations or any failure to so comply could have a material adverse effect on
the Company.
COPYRIGHT PROTECTION
PROTECTION OF RIGHTS OF POLISH AUTHORS AND PRODUCERS OF PROGRAMMING. Cable
television operators in Poland are subject to the provisions of the Copyright
Act, which governs, inter alia, 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") (collectively, "Rights Organizations"), 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 a Rights Organization and
the individual cable television operator. Most of the Company's cable
subsidiaries operate under a contract with ZASP and all of them under a contract
with ZAIKS. In the event that a cable operator transmits programming in
violation of a Polish copyright, the Rights Organization or the copyright holder
may sue the operator for an injunction preventing further violations or an
accounting for profits or damages, which may include, in certain circumstances,
a sum equal to three times the amount of compensation the copyright holder could
have obtained if it had entered into a contract with the operator. 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.
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 or
is 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. In addition, foreign programming producers receive Polish
copyright protection under the Rome Convention.
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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 such payments, such as CNN, Eurosport and the Cartoon Network.
ANTI-MONOPOLY ACT
Competition in Poland is governed by the Anti-Monopoly Act which established
the Anti-Monopoly Office to regulate monopolistic and other anti-competitive
practices. The current Polish anti-monopoly body of law with respect to the
cable and programming industries is not well established, and the Anti-Monopoly
Office has not articulated comprehensive standards that may be applied in an
antitrust review in such industries.
As a general rule, companies that obtain control of 40% or more of their
market face greater scrutiny from the Anti-Monopoly Office. Additionally,
several types of concentrations between undertakings, including acquisitions of
privately held stock and also stock that is traded on a stock exchange, under
circumstances specified in the Anti-Monopoly Act require prior notification to
the Anti-Monopoly Office. Sanctions for failure to notify include fines imposed
on parties to the transaction and members of their governing bodies. The Company
believes that it may be required to obtain the Anti-Monopoly Office's approval
for future acquisitions. In addition, the Anti-Monopoly Office can review a
company's past and present activities, including its pricing policies, for
potential anti-competitive behavior. The Company receives inquiries from and is
subject to review by various divisions of the Anti-Monopoly Office from time to
time. 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. There can be no
assurance that the Anti-Monopoly Office will approve the Company's future
acquisitions and dispositions or that a review of the Company's past, present or
future operations and acquisitions will not otherwise adversely impact the
Company's business, strategy, financial condition or results of operations.
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
European Community ("EC") are currently scheduled to commence in the first half
of 1998. If Poland joins the EC, it would be required to implement and obey all
of the laws and regulations emanating from the EC, including the Directive and
EC competition law in their then current versions. There can be no assurance
that the Company would be able to comply with any such laws and regulations. The
burden of complying with any such laws and regulations or any failure to so
comply could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the EC Merger Regulation (the
"Regulation") contains a mandatory regime regulating certain large scale
mergers, joint ventures, strategic alliances and minority holdings which confer
control over an enterprise for the purposes of the EC Merger Regulation and
which meet the turnover thresholds specified in the Regulation. The European
Commission reviews such transactions under the Regulation to determine whether
they are "compatible with the common market" and may attach conditions and
obligations to its decisions.
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ITEM 2. PROPERTIES
At December 31, 1997, the Company owned equipment used for its cable
television business, including 122 headends, and approximately 3,536 kilometers
of cable plant. The Company has approximately 89 lease agreements for offices,
storage spaces and land adjacent to the buildings. The total area leased amounts
to approximately 30,100 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 12,500 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 (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 cable. 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 co-op 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.
The Company believes that its existing owned properties, lease agreements
and conduit agreements are adequate for purposes of the Company's cable
television operations, although additional space and conduits will be needed in
the future if the Company consummates further acquisitions of cable television
networks.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in litigation from time to time in the ordinary
course of business. In management's opinion, the litigation in which the Company
is currently involved, individually and in the aggregate, is not material to the
Company's business financial condition or results of operations.
Two of the Company's cable television subsidiaries, Telewizja Kablowa
Gosat-Service Sp. z o.o. and PTK, S.A., and four unrelated Polish cable
operators and HBO Polska Sp. z o.o. ("HBO Polska") have been made defendants in
a lawsuit instituted by Polska Korporacja Telewizyjna Sp. z o.o., a subsidiary
of Canal +. 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 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
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.
Several of the minority stockholders of Poland Cablevision (Netherlands)
B.V. ("PCBV") have claimed that the behavior of PCBV and its majority
stockholder, PCI, have prejudiced them, and that PCI has (through its direct and
indirect ownership interests in a number of entities that engage in certain
aspects of the cable television business in Poland) violated certain covenants
against competition in the PCBV Stockholders' Agreement (as defined herein), and
that under the circumstances, they can no longer
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be expected to remain shareholders of PCBV. The PCBV Stockholders' Agreement
includes certain covenants against competition that limit the ability of each
shareholder to engage directly or indirectly in any aspect of the cable
television business in Poland for a period ending ten years after such
stockholder ceases to be a 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 of PCBV have a claim against 7.7% of the profits and
equity of such entities. Under a supplemental agreement, PCI has agreed to share
the profits of these entities on a pro rata basis. As of December 31, 1997, no
amounts have been incurred.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
@Entertainment, the Company's sole stockholder, approved an amendment to the
Company's Certificate of Incorporation on December 31, 1997 to increase the
number of the Company's directors from five to seven. A copy of the Amendment to
the Certificate of Incorporation is attached herein as Exhibit 3.3.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Not Applicable.
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, 1997. The selected
consolidated financial data set forth below have been derived from the
consolidated financial statements of the Company and the notes thereto prepared
in conformity with generally accepted accounting principles as applied in the
United States, which have been audited by the Company's independent 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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Cable television revenue...................................... $ 6,562 $ 8,776 $ 18,557 $ 24,923 $ 38,138
Operating expenses:
Direct operating expenses................................... (1,481) (2,119) (5,129) (7,193) (11,783)
Selling, general and administrative expenses(1)............. (4,029) (2,818) (4,684) (9,289) (30,393)
Depreciation and amortization............................... (2,257) (3,459) (5,199) (9,788) (16,270)
--------- --------- --------- --------- -----------
Operating (loss) income................................... (1,205) 380 3,545 (1,347) (20,308)
Interest and investment income.............................. 65 78 174 1,274 3,355
Interest expense............................................ (116) (2,327) (4,373) (4,687) (13,900)
Equity in losses of affiliated companies.................... -- -- -- -- (520)
Foreign exchange loss....................................... (315) (27) (17) (761) (1,107)
--------- --------- --------- --------- -----------
Loss before income taxes, minority interest and
extraordinary item........................................ (1,571) (1,896) (671) (5,521) (32,480)
Income tax (expense) benefit................................ (976) (803) (600) (1,273) 975
Minority interest........................................... 205 316 (18) 1,890 (3,586)
--------- --------- --------- --------- -----------
Loss before extraordinary item............................ (2,342) (2,383) (1,289) (4,904) (35,091)
Extraordinary item--loss on early extinguishment of
debt(2)................................................... -- -- -- (1,713) --
--------- --------- --------- --------- -----------
Net loss.................................................. (2,342) (2,383) (1,289) (6,617) (35,091)
Accretion of redeemable preferred stock..................... -- -- -- (2,870) (4,194)
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.............. $ (2,342) $ (4,194) $ (1,289) $ (7,676) $ (39,285)
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Basic and diluted net loss per common share................. $ (201.46) $ (310.51) $ (95.67) $ (435.72) $(2,073.31)
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
</TABLE>
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<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents..................................... $ 549 $ 2,493 $ 2,343 $ 68,483 $ 26,080
Property, plant and equipment, net............................ 26,828 33,235 52,320 84,833 109,649
Total assets.................................................. 34,165 47,376 68,058 217,537 187,449
Total notes payable........................................... 20,073 35,988 59,405 130,074 130,110
Redeemable preferred stock.................................... -- -- -- 34,955 39,149
Total stockholders' equity.................................... 3,250 1,479 190 31,048 1,188
</TABLE>
- ------------------------
(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 14 to the Consolidated Financial Statements.
(2) See Note 12 to the Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements of the Company. The following discussion
contains certain forward-looking statements that involve risks and uncertainties
including without limitation those related to the consummation of pending and
future acquisitions. The Company's actual future results could differ materially
from those discussed herein.
OVERVIEW
The Company is organized based primarily upon the operation of its cable
television systems in Poland, and to a lesser extent upon the creation,
production, development and acquisition of Polish-language programming.
Substantially all of the Company's revenue is derived from monthly
subscription fees for cable television services and one-time installation fees
for connection to its cable television networks. The Company charges cable
subscribers fixed monthly fees for their choice of service tiers and for other
services, such as premium channels, tuner rentals and additional outlets, all of
which are included in monthly subscription fees. The Company currently offers
Broadcast, Intermediate (in limited areas) and Basic Tiers of cable service. At
December 31, 1997, approximately 79% of the Company's subscribers received the
Company's Basic Tier. In 1997, approximately 90% 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 the deferred revenue
is 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 aggregate 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.
The Company has experienced low churn rates since its inception. The
Company's annual churn rates have historically averaged less than 10%. The
Company's annual churn rates for 1995 and 1996 were 9.2% and 7.8%, respectively.
The Company believes that its churn rates are low because of the Company's
customer care program, the high technical quality of its networks and desirable
program offerings. In addition, the Company benefits from a shortage of housing
in Poland that results in low move-related churn. 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 rebuilt
networks. The Company expects that it may continue to experience increases in
its churn rate above historical levels during the
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implementation of its current pricing strategy, which commenced in January 1997
and is designed to increase revenue per subscriber and to achieve real profit
margin increases in U.S. Dollar terms. With the launch of Wizja TV, the cost of
the Basic Tier service will be increased, and premium channels such as Wizja 1,
HBO and Canal+, will each be offered to cable customers for an additional
monthly charge.
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 income of $3.5 million, in 1995 but had
operating losses of $1.3 million and $20.3 million for 1996 and 1997,
respectively, primarily due to the increased levels of acquisitions and related
costs and non-cash compensation expense related to stock options.
1997 COMPARED TO 1996
CABLE TELEVISION REVENUE. Revenue increased $13.2 million or 53.0% from
$24.9 million in 1996 to $38.1 million in 1997. This increase was primarily
attributable to a 42.6% increase in the number of basic subscribers from
approximately 446,000 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% and 90.1% of cable
television revenue in 1996 and 1997, respectively. Installation fee revenue for
1997 decreased by 6.3% compared to 1996, from $3.2 million to $3.0 million.
During 1997, 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 pay movie channel to cable
subscribers.
DIRECT OPERATING EXPENSES. Direct operating expenses increased $4.6
million, or 63.9%, from $7.2 million in 1996 to $11.8 million in 1997,
principally as a result of higher levels of technical personnel and increased
maintenance expenses associated with recently acquired networks which have not
yet been integrated within the Company's networks and standards as well as the
increased size of the Company's cable television system. Direct operating
expenses increased from 28.9% of revenues for 1996 to 30.9% of revenues for
1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $21.1 million or 226.9% from $9.3 million in
1996 to $30.4 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, described in Note 9 to the Company's Consolidated Financial
Statements included herein, and costs of launching the distribution of the HBO
premium pay movie channel in Poland. Compensation expense also increased as the
Company has established a management team of senior executives who have
significant experience in the cable television and programming businesses.
As a percentage of revenue, selling, general and administrative expenses
increased from 37.3% for 1996 to approximately 79.7% 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 55.0% in 1997.
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DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense rose
$6.5 million, or 66.3%, from $9.8 million in 1996 to $16.3 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% in 1996 to
42.7% in 1997.
INTEREST EXPENSE. Interest expense increased $9.2 million, or 195.7%, from
$4.7 million in 1996 to $13.9 million in 1997 primarily due to the inclusion of
a full year's interest on PCI's 9 7/8% Senior Notes due 2003 (the "PCI Notes")
which were issued in October 1996.
INTEREST AND INVESTMENT INCOME. Interest and investment income increased
$2.1 million, or 161.5%, from $1.3 million in 1996 to $3.4 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. For 1997, foreign exchange loss amounted to $1.1
million as compared to $761,000 for 1996, primarily due to less favorable
exchange rate fluctuations.
MINORITY INTEREST. Minority interest expense was $3.6 million for 1997,
resulting from a fourth quarter adjustment to write off certain receivable
balances that were not recoverable, compared to minority interest income of $1.9
million for 1996.
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
$35.1 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 $7.7 million in 1996 to $39.3 million due to the
accretion of redeemable preferred stock and the factors discussed above.
1996 COMPARED TO 1995
CABLE TELEVISION REVENUE. Revenue increased $6.3 million, or 33.9%, from
$18.6 million in 1995 to $24.9 million in 1996. This increase was primarily
attributable to a 70% increase in the number of basic subscribers from
approximately 262,000 at December 31, 1995 to approximately 446,000 at December
31, 1996. (Such subscriber numbers do not include approximately 15,000
subscribers served by a cable system the Company acquired on January 1, 1997).
Approximately 44.6% of this increase in basic subscribers was due to build-out
of the Company's existing cable networks and the remainder was the result of
acquisitions. Revenue from monthly subscription fees represented approximately
87.2% of cable television revenue in 1996. Installation fee revenue increased by
37.0% from $2.3 million in 1995 to approximately $3.2 million in 1996, primarily
as a result of several remarketing campaigns implemented throughout 1996, which
led to increased penetration. In addition, the Company experienced an increase
in subscriber installations as a result of the continued build-out of the
Company's networks.
DIRECT OPERATING EXPENSES. Direct operating expenses increased $2.1
million, or 41.2%, from $5.1 million in 1995 to $7.2 million in 1996,
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 systems. Direct operating
expenses increased from 27.6% of revenue in 1995 to 28.9% of revenue in 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $4.6 million, or 97.9%, from $4.7 million in
1995 to $9.3 million in 1996, primarily as a result of an increase
24
<PAGE>
in sales and marketing expenses incurred in newly acquired networks, the
introduction of several remarketing campaigns throughout the areas covered by
the Company's networks, and increased compensation and 1996 bonuses. Selling,
general and administrative expenses increased from 25.2% of revenue in 1995 to
37.3% of revenue in 1996.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses rose
$4.6 million, or 88.5%, from $5.2 million in 1995 to $9.8 million in 1996,
principally as a result of depreciation of additional cable television assets
acquired in connection with the build-out of the Company's network. Also, during
1996, all of the prematurity periods expired and therefore the entire balance of
investment in cable television system assets was subject to depreciation.
Depreciation and amortization expenses as a percentage of revenue increased from
28.0% in 1995 to 39.3% in 1996.
INTEREST EXPENSE. Interest expense increased $0.3 million, or 6.8%, from
$4.4 million in 1995 to $4.7 million in 1996, primarily due to increased
interest expense resulting from the issuance of $130 million of PCI Notes
partially offset by a reduction in interest expense as a result of the repayment
of $55 million of indebtedness with a portion of the proceeds from PCI's sale of
equity securities in March 1996.
INTEREST AND INVESTMENT INCOME. Interest and investment income increased by
$1.1 million from $0.2 million in 1995 to $1.3 million in 1996. This increase
was primarily attributable to a positive cash position in 1996 resulting from
the issuance of PCI shares and the PCI Notes.
FOREIGN EXCHANGE LOSS. Foreign exchange loss increased from $17,000 in 1995
to $761,000 in 1996, primarily due to less favorable exchange rate fluctuations.
MINORITY INTEREST. Minority interest in subsidiaries' loss was $1.9 million
in 1996 resulting from losses incurred in two minority owned subsidiaries
compared to minority interest in subsidiaries' income of $18,000 in 1995. During
1996 the Company completed partial acquisitions which gave rise to the increase
in minority interest in subsidiaries' losses.
EXTRAORDINARY ITEM. During 1996 the Company prepaid a loan from 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. Net loss increased from a loss of $1.3 million in 1995 to a loss
of $6.6 million in 1996 as a result of the factors discussed above.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS. Net loss applicable to common
stockholders increased from $1.3 million in 1995 to $7.7 million in 1996 due to
the accretion of redeemable preferred stock and the payment of a preferred stock
dividend, which was more than offset by the excess of the carrying amount of
preferred stock over the consideration transferred for such stock, as well as a
result of 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 PCI Notes. The Company had
positive cash flows from operating activities in 1995 and 1996 of $3.8 million
and $6.1 million, respectively, primarily due to the increase of cash received
from
25
<PAGE>
subscribers and the deferral of the payment of interest expense. The Company had
negative cash flows from operating activities for 1997 of $13.3 million, due to
the Company's net loss.
Cash used for the purchase and build-out of the Company's cable television
networks was $16.7 million, $26.6 million and $34.4 million in 1995, 1996 and
1997, respectively.
Cash used for the acquisition of subsidiaries, net of cash received, was
$4.1 million, $13.3 million, and $18.0 million in 1995, 1996, and 1997,
respectively. The Company spent approximately $1.2 million, $3.9 million, and
$5.9 million in 1995, 1996, and 1997, respectively, to upgrade major acquired
networks to meet PCI's technical standards.
The Company entered into agreements subsequent to December 31, 1997 to
purchase during 1998 certain cable television system assets for approximately
$783,000, and 94.74% of a cable television Company for approximately $770,000.
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, the Chase Family 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 AmerBank in
Poland, S.A. ("AmerBank") which provides for a credit facility of approximately
$6.5 million. Funds are available under the credit agreement through December
31, 1998 and interest, based on LIBOR plus 3%, is due quarterly. All advances
under the loan must be repaid by August 20, 1999. At December 31, 1997, there
were no outstanding amounts under this facility. The Company will be able to
utilize this facility for future borrowings.
On October 31, 1996, $130 million aggregate principal amount of the Company
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 the PCI 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) provision of financial statements and reports.
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, Inc., will
make capital contributions and loans to the Company.
26
<PAGE>
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. If @Entertainment is not successful in obtaining additional financing
or does not make such financing available to the Company, the Company will be
required to reduce the scope of its presently anticipated expansion of
operations, reduce capital and operating expenditures and as a result the
business results of operations and prospects of the Company could be adversely
affected. Management believes that cash on hand and cash from operations will be
sufficient to fund its reduced plan for the next twelve months assuming the
Company is not successful in receiving additional funds and, accordingly,
consider it appropriate to prepare the consolidated financial statements on a
going concern basis.
INFLATION AND CURRENCY EXCHANGE FLUCTUATIONS
Since the fall of Communist rule in 1989, Poland has experienced high levels
of inflation and significant fluctuation in the exchange rate for the z$loty.
The Polish government has adopted policies that slowed the annual rate of
inflation from approximately 250% in 1990 to approximately 27% in 1995,
approximately 20% in 1996 and to approximately 14.9% in 1997. The exchange rate
for the z$loty has stabilized and the rate of devaluation of the z$loty has
generally decreased since 1991. However, the z$loty exchange rate has increased
in 1997. Inflation and currency exchange fluctuations have had, and may continue
to have, a material adverse effect on the business, financial condition and
results of operations of the Company.
Substantially all of the Company's debt obligations and certain of the
Company's operating expenses and capital expenditures are denominated in or
indexed to U.S. Dollars. By contrast, substantially all of the Company's
revenues are denominated in z$loty. Any devaluation of the z$loty against the
U.S. Dollar that the Company is unable to offset through price adjustments will
require the Company to use a larger portion of its revenues to service its U.S.
Dollar-denominated obligations. While the Company may consider entering into
transactions to hedge the risk of exchange rate fluctuations, it is unlikely
that the Company will be able to obtain hedging arrangements on commercially
satisfactory terms. Accordingly, shifts in currency exchange rates may have an
adverse effect on the ability of the Company to service its U.S.
Dollar-denominated obligations and, thus, on the Company's financial condition
and results of operations.
YEAR 2000 COMPLIANCE
In January 1997, the Company developed a plan to deal with the Year 2000
problem and to make its computer systems Year 2000 complaint. The Company's plan
provides for the Year 2000 related efforts to be completed by the end of 1998.
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 computer system and an agreement to purchase specialized
billing software for the Company's new customer service and billing center. The
Company has no other significant computer systems. The total cost of the
purchases for @Entertainment, PCI and their subsidiaries is estimated to be
approximately $2,400,000. The Company has obtained confirmations from the
vendors of the systems indicating that such systems are Year 2000 complaint.
IMPLEMENTATION OF NEW ACCOUNTING STANDARDS
The Company, effective for the year ended December 31, 1997, has adopted
Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings Per
Share." Pursuant to the provisions of the
27
<PAGE>
Statement, 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 stock
(stock options outstanding) is anti-dilutive. Accordingly, dilutive loss per
share does not assume the exercise of stock options outstanding.
IMPACT OF NEW ACCOUNTING STANDARDS NOT YET ADOPTED
SFAS No. 130, "Reporting Comprehensive Income," was issued in June 1997 and
establishes 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 will not affect the Company's financial position or
results of operations. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997, with earlier application permitted. The Company is
currently evaluating the presentation alternatives permitted by the statement.
SFAS No. 131, "Disclosures about Segment of an Enterprise and Related
Information," was issued in June 1997 and establishes 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). This statement is effective for
year-end 1998 financial statements. Interim financial information will be
required beginning in 1999 (with comparative 1998 information). The Company does
not anticipate that this standard will significantly impact the composition of
its current operating segments, which are consistent with the management
approach.
28
<PAGE>
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, 1997 and 1996, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1997. 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles in the United States of America.
KPMG Polska Sp. z o.o.
Warsaw, Poland
March 19, 1998
29
<PAGE>
POLAND COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1997 1996
---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................... $ 26,080 $ 68,483
Investment securities (note 4).......................................................... -- 25,115
Accounts receivable, net of allowances for doubtful accounts of $766,000 in 1997 and
$545,000 in 1996...................................................................... 2,387 1,215
Due from affiliate (note 16)............................................................ 2,626 --
Other current assets (note 8)........................................................... 2,675 2,247
---------- ----------
Total current assets.................................................................. 33,768 97,060
---------- ----------
Property, plant and equipment:
Cable television system assets.......................................................... 134,469 99,700
Construction in progress................................................................ 1,904 410
Vehicles................................................................................ 2,032 1,199
Other................................................................................... 4,380 2,667
---------- ----------
142,785 103,976
Less accumulated depreciation........................................................... (33,136) (19,143)
---------- ----------
Net property, plant and equipment..................................................... 109,649 84,833
Inventories for construction.............................................................. 8,153 7,913
Intangibles, net (note 7)................................................................. 33,440 18,492
Notes receivable from affiliates (note 16)................................................ 691 2,491
Investment in affiliated companies (note 9)............................................... 548 748
Other assets (note 8)..................................................................... 1,200 6,000
---------- ----------
Total assets.......................................................................... $ 187,449 $ 217,537
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
POLAND COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1997 1996
---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................................. $ 6,337 $ 6,281
Accrued interest (note 12)............................................ 2,175 2,175
Deferred revenue...................................................... 1,257 1,102
Income taxes payable.................................................. 1,765 4,472
Other current liabilities (note 11)................................... 755 2,175
--------- ---------
Total current liabilities........................................... 12,289 16,205
Notes payable (note 12)................................................. 130,110 130,074
--------- ---------
Total liabilities................................................... 142,399 146,279
--------- ---------
Minority interest....................................................... 4,713 5,255
Redeemable preferred stock (liquidation value $85,000,000; 8,500 shares
authorized, issued and outstanding) (note 15)......................... 39,149 34,955
Commitments and contingencies (notes 17 and 18)
Stockholders' equity (note 14):
Common stock, $.01 par value, Authorized 24,051 shares, 18,948 shares
issued and outstanding................................................ 1 1
Paid-in capital......................................................... 59,553 54,322
Accumulated deficit..................................................... (58,366) (23,275)
--------- ---------
Total stockholders' equity.......................................... 1,188 31,048
--------- ---------
Total liabilities and stockholders' equity.......................... $ 187,449 $ 217,537
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
POLAND COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
<S> <C> <C> <C>
1997 1996 1995
----------- ----------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Cable television revenue.................................................... $ 38,138 $ 24,923 $ 18,557
Operating expenses:
Direct operating expenses................................................. 11,783 7,193 5,129
Selling, general and administrative expenses (notes 9 and 14)............. 30,393 9,289 4,684
Depreciation and amortization............................................. 16,270 9,788 5,199
----------- ----------- ---------
Total operating expenses.................................................. 58,446 26,270 15,012
----------- ----------- ---------
Operating (loss)/income................................................. (20,308) (1,347) 3,545
Interest and investment income.............................................. 3,355 1,274 174
Interest expense (note 12).................................................. (13,900) (4,687) (4,373)
Equity in losses of affiliated companies.................................... (520) -- --
Foreign exchange loss....................................................... (1,107) (761) (17)
----------- ----------- ---------
Loss before income taxes, minority interest and extraordinary item........ (32,480) (5,521) (671)
Income tax benefit/(expense) (note 10)...................................... 975 (1,273) (600)
Minority interest........................................................... (3,586) 1,890 (18)
----------- ----------- ---------
Loss before extraordinary item............................................ (35,091) (4,904) (1,289)
Extraordinary item-loss on early extinguishment of debt (note 12)........... -- (1,713) --
----------- ----------- ---------
Net loss.................................................................. (35,091) (6,617) (1,289)
Accretion of redeemable preferred stock (note 15)........................... (4,194) (2,870) --
Preferred stock dividends (note 14)......................................... -- (1,738) --
Excess of carrying value of preferred stock over consideration paid (note
14)....................................................................... -- 3,549 --
----------- ----------- ---------
Net loss applicable to holders of common stock............................ $ (39,285) $ (7,676) $ (1,289)
----------- ----------- ---------
----------- ----------- ---------
Basic and diluted loss per common share:
Loss before extraordinary item............................................ $ (2,073.31) $ (338.48) $ (95.67)
Extraordinary item........................................................ -- (97.24) --
----------- ----------- ---------
Net loss (note 3)......................................................... $ (2,073.31) $ (435.72) $ (95.67)
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
POLAND COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
-------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PAID IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPTIAL DEFICIT TOTAL
--------- --------- --------- --------- --------- ------------ ---------
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE
AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance January 1, 1995...................... 985 $ 10,311 11,037 $ 4,993 $ 1,544 $ (15,369) $ 1,479
Net loss................................... -- -- -- -- -- (1,289) (1,289)
--------- --------- --------- --------- --------- ------------ ---------
Balance December 31, 1995.................... 985 10,311 11,037 4,993 1,544 (16,658) 190
Net loss................................... -- -- -- -- -- (6,617) (6,617)
Stock dividend............................. 166 1,738 -- -- (1,738) -- --
Proceeds from issuance of common and
preferred stock (note 14)................ -- -- 7,911 (4,992) 87,021 -- 82,029
Cost of issuance (note 14)................. -- -- -- -- (1,028) -- (1,028)
Allocation of proceeds to preferred stock
(note 14)................................ -- -- -- -- (32,156) -- (32,156)
Preferred stock redemption (note 14)....... (1,151) (12,049) -- -- 3,549 -- (8,500)
Accretion of redeemable preferred stock
(note 15)................................ -- -- -- -- (2,870) -- (2,870)
--------- --------- --------- --------- --------- ------------ ---------
Balance December 31, 1996.................... -- -- 18,948 1 54,322 (23,275) 31,048
Net loss................................... -- -- -- -- -- (35,091) (35,091)
Accretion of redeemable preferred stock
(note 15)................................ -- -- -- -- (4,194) -- (4,194)
Stock option compensation expense
(note 14)................................ -- -- -- -- 9,425 -- 9,425
--------- --------- --------- --------- --------- ------------ ---------
Balance December 31, 1997.................... -- $ -- 18,948 $ 1 $ 59,553 $ (58,366) $ 1,188
--------- --------- --------- --------- --------- ------------ ---------
--------- --------- --------- --------- --------- ------------ ---------
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
POLAND COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
<S> <C> <C> <C>
1997 1996 1995
----------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................................................... $ (35,091) $ (6,617) $ (1,289)
Adjustments to reconcile net loss to net cash (used in)/provided by operating
activities:
Minority interest........................................................... 3,586 (1,890) 18
Depreciation and amortization............................................... 16,270 9,788 5,199
Amortization of notes payable discount and issue costs...................... 1,040 166 --
Non-cash portion of extraordinary item...................................... -- 1,566 --
Gain on sale of investment securities....................................... (358) -- --
Equity losses in affiliated companies....................................... 520 -- --
Non-cash stock option compensation expense.................................. 9,425 -- --
Interest expense added to notes payable to affiliates....................... -- -- 2,379
Changes in operating assets and liabilities:
Accounts receivable....................................................... (1,034) (796) (785)
Due from affiliate........................................................ (2,626) -- --
Other current assets...................................................... (574) (1,862) 6
Accounts payable and accrued expenses..................................... (353) 3,186 1,003
Income taxes payable...................................................... (2,707) 334 600
Accrued interest.......................................................... -- 2,175 --
Deferred revenue.......................................................... 155 (131) 152
Other current liabilities................................................. (1,519) 193 (3,444)
----------- --------- ---------
Net cash (used in)/provided by operating activities..................... (13,266) 6,112 3,839
----------- --------- ---------
Cash flows from investing activities:
Construction and purchase of property, plant, and equipment................... (34,380) (26,581) (16,715)
Repayment of notes receivable from affiliates................................. 2,521 -- --
Issuance of notes receivable from affiliates.................................. (721) (2,491) --
Purchase of investment securities............................................. -- (25,940) (1,207)
Proceeds from maturity of investment securities............................... 25,473 -- --
Purchase of other assets...................................................... (1,200) (6,000) --
Investmenst in affiliated companies........................................... (320) (580) --
Purchase of subsidiaries, net of cash received................................ (18,041) (13,269) (4,063)
----------- --------- ---------
Net cash used in investing activities................................... (26,668) (74,861) (21,985)
----------- --------- ---------
Cash flows from financing activities:
Net proceeds from issuance of stock........................................... -- 81,001 --
Redemption of preferred stock................................................. -- (8,500) --
Costs to obtain loans......................................................... (1,749) (6,513) (1,036)
Proceeds from notes payable................................................... -- 136,074 14,533
Repayment of notes payable.................................................... (720) (27,893) --
Borrowings from/(repayments to) affiliates.................................... -- (39,280) 4,499
----------- --------- ---------
Net cash (used in)/provided by financing activities..................... (2,469) 134,889 17,996
----------- --------- ---------
Net increase/(decrease) in cash and cash equivalents.................... (42,403) 66,140 (150)
Cash and cash equivalents at beginning of year.................................. 68,483 2,343 2,493
----------- --------- ---------
Cash and cash equivalents at end of year........................................ $ 26,080 $ 68,483 $ 2,343
----------- --------- ---------
----------- --------- ---------
Supplemental cash flow information:
Cash paid for interest........................................................ $ 12,873 $ 2,338 $ 1,992
----------- --------- ---------
----------- --------- ---------
Cash paid for income taxes.................................................... $ 1,732 $ 1,184 $ --
----------- --------- ---------
----------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE>
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
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 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
35
<PAGE>
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
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
36
<PAGE>
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
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 obtaining new financing to
achieve this business strategy. If @Entertainment is not successful in obtaining
additional financing or does not make such financing available to the Company,
the Company will be required to reduce the scope of its presently anticipated
expansion of operations, reduce capital and operating expenditures and as a
result the business results of operations and prospects of the Company could be
adversely affected. Management believes that cash on hand and cash from
operations will be sufficient to fund its reduced plan for the next twelve
months assuming the Company is not successful in receiving additional funds and,
accordingly, 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.
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 generally accepted accounting principles. Actual results could
differ from those estimates.
37
<PAGE>
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
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 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 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.
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.
INVESTMENT SECURITIES
Investment securities outstanding at December 31, 1996, consist of
short-term investments with original maturities ranging from four to six months.
In accordance with Statement of Financial Accounting
38
<PAGE>
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities,", the Company has classified all securities as held to
maturity. Securities held to maturity are limited to securities for which the
Company has the positive intent and the ability to hold to maturity. Held to
maturity securities are carried at amortized cost on the consolidated balance
sheet.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment includes assets used in the development and
operation of the various cable television systems. During the period of
construction, plant costs and a portion of design, development and related
overhead costs are capitalized as a component of the Company's investment in
cable television systems. When material, the Company capitalizes interest costs
incurred during the period of construction in accordance with SFAS No. 34,
"Capitalization of Interest Cost". Interest is not capitalized for short-term
construction projects. During 1997, 1996, and 1995, 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:
<TABLE>
<S> <C>
Cable television system assets................................ 10 years
Vehicles...................................................... 5 years
Other property, plant and equipment........................... 5-10 years
</TABLE>
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
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.
INTANGIBLES
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.
Costs incurred to obtain financing have been deferred and amortized over the
life of the loan using the effective interest method.
39
<PAGE>
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
INVESTMENTS IN AFFILIATED COMPANIES AND JOINT VENTURES RELATING TO THIRD
PARTY PROGRAMMING
In some instances, the Company purchases equity interests in certain
programming it distributes, typically by investing in the entity which produces
that particular programming for distribution in Poland, and by sharing the costs
and expenses incurred in the creation of the Polish-language version of that
particular programming. In these cases, the investment will be accounted for
under the equity method in accordance with guidance established within
Accounting Principles Board ("APB") Opinion No. 18.
MINORITY INTEREST
Recognition of the minority interests' share of losses of consolidated
subsidiaries is limited to the amount of such minority interests' allocable
portion of the equity of those consolidated subsidiaries.
STOCK-BASED COMPENSATION
The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation", which gives companies the option to adopt the fair value based
method for expense recognition of employee stock options and other stock-based
awards or to account for such items using the intrinsic value method as outlined
under APB Opinion No. 25, "Accounting for Stock Issued to Employees", with pro
forma disclosure of net income/(loss) and earnings/(loss) per share as if the
fair value method had been applied. The Company has elected to apply APB Opinion
No. 25 and related interpretations for stock options and other stock-based
awards.
FOREIGN CURRENCIES
Foreign currency transactions are recorded at the exchange rate prevailing
at the date of the transactions. Assets and liabilities denominated in foreign
currencies are remeasured at rates of exchange at the consolidated balance sheet
date. Gains and losses on foreign currency transactions are included in the
consolidated statement of operations.
Translation of the financial statements of the Polish subsidiaries into U.S.
dollars has been performed in accordance with SFAS No. 52, "Foreign Currency
Translation". This standard requires that entities operating in countries with
economies deemed to be highly inflationary translate all monetary assets and
liabilities into U.S. dollars at the exchange rate in effect at year end and
non-monetary assets and liabilities at historical or transaction date rates.
Revenues and expenses are translated at the average exchange rate over the
reporting period. For 1996, 1995 and 1994 inflation was 19.9%, 26.8% and 33.3%,
respectively, yielding a three year cumulative inflation rate of 102.7 %.
Effective January 1, 1998, Poland is no longer deemed to be a highly
inflationary economy. In accordance with this change, the Company will establish
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 amounts of nonmonetary items into the local currency at current
exchange rates.
40
<PAGE>
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
BASIC AND DILUTED NET LOSS PER SHARE
The Company, effective for the year ended December 31, 1997, adopted SFAS
No. 128 "Earnings per Share". Accordingly, 1996 and 1995 per share calculations
have been restated to conform with this Statement. Pursuant to the provisions of
the Statement, 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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net loss attributable to common stockholders
(in thousands).............................. $ (39,285) $ (7,676) $ (1,289)
--------- --------- ---------
--------- --------- ---------
Weighted average number of common shares
outstanding................................. 18,948 17,271 11,037
Nominal issuance.............................. -- 346 2,437
--------- --------- ---------
Basic weighted average number of common shares
outstanding................................. 18,948 17,617 13,474
--------- --------- ---------
--------- --------- ---------
Loss per share--basic and diluted............. $(2,073.31) $ (435.72) $ (95.67)
--------- --------- ---------
--------- --------- ---------
</TABLE>
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, due from affiliate, notes receivable from affiliates,
accounts payable and accrued expenses, other current liabilities, notes payable
and redeemable preferred stock.
At December 31, 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, 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 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, 1997, the fair value of the Company's notes payable balance
approximates $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 from affiliate or notes
receivable from affiliates due to the nature of these instruments, the
41
<PAGE>
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
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) 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 year consolidated
financial statements to conform to the 1997 consolidated financial statement
presentation.
IMPACT OF NEW ACCOUNTING STANDARDS NOT YET ADOPTED
SFAS No. 130, "Reporting Comprehensive Income," was issued in June 1997 and
establishes 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 will not affect the Company's financial position or
results of operations. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997, with earlier application permitted. The Company is
currently evaluating the presentation alternatives permitted by the statement.
SFAS No. 131, "Disclosures about a Segment of an Enterprise and Related
Information," was issued in June 1997 and establishes 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). This statement is effective for
year end 1998 financial statements. Interim financial
42
<PAGE>
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
information will be required beginning in 1999 (with comparative 1998
information). The Company does not anticipate that this standard will
significantly impact the composition of its current operating segments, which
are consistent with the management approach.
4. INVESTMENT SECURITIES
At December 31, 1996, investment securities consisted of short-term
corporate bonds with original maturities ranging from four to six months. As of
December 31, 1996, the aggregate securities balance consisted of securities with
an amortized cost of $25,115,000, unrealized holding gains of $227,000, and a
fair value of $25,342,000. All such investment securities matured during 1997,
and as of December 31, 1997, certain amounts previously invested in investment
securities are invested in cash and cash equivalents.
5. VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS AMOUNTS
BALANCE AT CHARGED TO WRITTEN BALANCE AT
JANUARY 1 EXPENSE OFF DECEMBER 31
----------- ----------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1995
Allowance for Doubtful Accounts..... $ 132 $ 385 $ 7 $ 510
----- ----- ----- -----
----- ----- ----- -----
1996
Allowance for Doubtful Accounts..... $ 510 $ 358 $ 323 $ 545
----- ----- ----- -----
----- ----- ----- -----
1997
Allowance for Doubtful Accounts..... $ 545 $ 494 $ 273 $ 766
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
6. ACQUISITIONS
Effective January 1, 1997, the Company acquired the remaining 51% of a
subsidiary 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 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 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 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.
43
<PAGE>
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
6. ACQUISITIONS (CONTINUED)
Had these acquisitions occurred on January 1, 1996, the Company's pro-forma
consolidated results for the years ended December 31, 1997 and 1996, would have
been as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(UNAUDITED)
(IN THOUSANDS,
EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenue................................................ $ 40,550 $ 29,750
Net loss............................................... (35,180) (7,614)
Net loss applicable to holders of common stock......... (39,375) (8,673)
Net loss per share..................................... $(2,078.06) $ (492.31)
</TABLE>
Additionally, during 1997 the Company acquired certain cable television
system assets and subscriber lists for aggregate consideration of approximately
$3,200,000. The acquisitions have been accounted for as fixed asset purchases
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 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 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.
During December 1996, the Company entered into a purchase agreement for a
cable television system operating in the Opole area for approximately $1,400,000
which is included in property, plant and equipment in the accompanying
consolidated balance sheet at December 31, 1996.
During 1995, the Company acquired four cable television companies for
aggregate consideration of approximately $4,075,000. 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 date of
acquisition and any excess as goodwill. The results of the acquired companies
have been included in the Company's results since January 1, 1995. The purchase
prices approximated the fair value of the net assets acquired.
44
<PAGE>
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
7. INTANGIBLES
Intangible assets are carried at cost and consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Conduit and franchise agreements.......................... $ 5,391 $ 5,391
Goodwill.................................................. 22,744 6,730
Deferred financing costs.................................. 8,212 6,463
Other..................................................... 1,543 1,262
--------- ---------
37,890 19,846
Less accumulated amortization............................. (4,450) (1,354)
--------- ---------
Net intangible assets..................................... $ 33,440 $ 18,492
--------- ---------
--------- ---------
</TABLE>
8. OTHER CURRENT AND NON-CURRENT ASSETS
Included in other current assets are $1,322,000 and $1,203,000 of VAT
receivables as of December 31, 1997 and 1996, respectively.
Included in other non-current assets at December 31, 1997 is a prepayment of
approximately $1,200,000 toward the formation of a programming-related joint
venture with World Shopping Network PLC. Although the agreement has not yet been
finalized, the Company's intent is to invest in a news joint venture created to
produce shopping television network programming for distribution in Poland, and
share the costs and expenses incurred in the creation of the Polish language
version of that particular programming. There can be no assurance that the
agreement with the World Shopping Network will be finalized, in which case the
$1,200,000 payment will be expensed.
Included in other non-current assets at December 31, 1996 is a prepayment of
approximately $6,000,000 to the 51% shareholder of one of the PTK Companies
pursuant to an agreement for the purchase of his interest in the PTK Company.
This prepayment was subsequently offset against the purchase price upon the
transfer of all of his 51% interest in the PTK Company to PCI effective January
1, 1997.
9. INVESTMENTS IN AFFILIATED COMPANIES
Investments in affiliated companies consist of 33% of the common stock of
ProCable Sp. z o.o. and 45% of the common stock of Ground Zero Media Sp. z o.o.
("GZM"), both of which are accounted for using the equity method.
In April 1997, PCI reached an agreement in principle with GZM whereby PCI
assumed responsibility for selling all advertising to be aired on Atomic TV for
a period of one year commencing April 1997. Atomic TV is a Polish-language music
television channel owned by GZM, which to be broadcast to Poland on April 7,
1997. Under the terms of the agreement, PCI has the right to receive all of the
funds generated from advertising sales, and in exchange, PCI pays GZM
$4,950,000. During 1997, $3,700,000 was charged to selling, general and
administrative expenses with respect to this contract of which $450,000 is
accrued at December 31, 1997. The fees charged to the Company for these rights
are set at the level of fees that GZM
45
<PAGE>
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
9. INVESTMENTS IN AFFILIATED COMPANIES (CONTINUED)
would charge to unrelated parties. Subsequent to year end, the Company's parent,
@Entertainment acquired the remaining shares of GZM.
It was not practicable to estimate the market value of the investments in
affiliate companies due to the nature of these investments, the relatively short
existence of the investee companies, and the absence of quoted market prices for
the investee companies.
10. INCOME TAXES
Income tax benefit/(expense) consists of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
U.S. Federal............................................... $ 1,438 $ (714) $ (587)
State and local............................................ -- (531) (13)
Foreign.................................................... (463) (28) --
---------- --------- ---------
$ 975 $ (1,273) $ (600)
---------- --------- ---------
---------- --------- ---------
</TABLE>
Sources of (loss)/income before income taxes and minority interest are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic loss.................................... $ (9,913) $ (2,602) $ (1,115)
Foreign income loss.............................. (22,567) (4,632) 444
--------- --------- ---------
$ (32,480) $ (7,234) $ (671)
--------- --------- ---------
--------- --------- ---------
</TABLE>
Income tax benefit/(expense) was $975,000, $(1,273,000), and $(600,000) for
the years ended December 31, 1997, 1996, and 1995 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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed "expected" tax benefit.................... $ 11,043 $ 2,460 $ 228
Non-deductible expenses............................ (68) (17) (69)
Change in valuation allowance...................... (8,748) (3,504) (667)
Adjustment to deferred tax asset for enacted
changes in tax rates............................. (789) -- --
Foreign tax rate differences....................... (463) (184) (65)
Other.............................................. -- (28) (27)
--------- --------- ---------
$ 975 $ (1,273) $ (600)
--------- --------- ---------
--------- --------- ---------
</TABLE>
46
<PAGE>
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
10. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Deferred compensation.................................................. $ -- $ 377
Foreign net operating loss carryforwards............................... 4,135 2,015
Interest income........................................................ 1,946 1,867
Service revenue........................................................ 1,948 2,368
Accrued liabilities.................................................... 2,537 1,935
Deferred costs......................................................... 903 --
Unrealized foreign exchange losses..................................... 5,614 --
Other.................................................................. 274 104
--------- ---------
Total gross deferred tax assets.......................................... 17,357 8,666
Less valuation allowance................................................. (17,357) (8,609)
--------- ---------
Net deferred tax assets.................................................. $ -- $ 57
--------- ---------
--------- ---------
Deferred tax liabilities:
Prepaid expenses....................................................... $ -- $ (57)
--------- ---------
Total gross deferred liabilities......................................... $ -- $ (57)
--------- ---------
Net deferred tax liability............................................... $ -- $ --
--------- ---------
--------- ---------
</TABLE>
The net increase in the valuation allowance for the years ended December 31,
1997, 1996 and 1995 was $8,748,000, $3,504,000, and $667,000, respectively. In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers
projected future taxable income and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and projections
for future taxable income over the periods which the deferred tax assets are
deductible, management believes it is more likely than not the Company will not
realize the benefits of these deductible differences, net of the existing
valuation allowances at December 31, 1997.
Subsequently recognized tax benefits relating to the valuation allowance for
deferred tax assets as of December 31, 1997 will be reported in the consolidated
statement of operations.
Foreign 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.
47
<PAGE>
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
10. INCOME TAXES (CONTINUED)
At December 31, 1997, the Company has foreign net operating loss
carryforwards of approximately $11,485,000, which expire as follows:
<TABLE>
<CAPTION>
(IN
YEAR ENDING DECEMBER 31, THOUSANDS)
- --------------------------------------------------------------------------------------------------- -------------
<S> <C>
1998............................................................................................... $ 4,677
1999............................................................................................... 4,030
2000 and thereafter................................................................................ 2,778
-------------
$ 11,485
-------------
-------------
</TABLE>
11. OTHER CURRENT LIABILITIES
Included in other current liabilities at December 31, 1997 and 1996 is
approximately $577,000 and $726,000, respectively, related to accrued
programming fees.
During 1996, the Company had compensation agreements with certain employees
to defer a portion of their annual bonus and salary. The deferred compensation
liability associated with these agreements was approximately $922,000 as of
December 31, 1996, and the deferred compensation expense associated with these
agreements was $357,000 for the year ended December 31, 1996. The Company had no
such agreements in 1997.
12. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
PCI notes, net of discount.............................................. $ 129,578 $ 129,524
American Bank in Poland S.A. ("AmerBank") revolving credit loan......... -- 550
$1,200,000 note payable to Polski Bank Rozwoju S.A. ("PBR")............. 32 --
$500,000 note payable PBR............................................... 500 --
--------- ---------
Total notes payable..................................................... $ 130,110 $ 130,074
--------- ---------
--------- ---------
</TABLE>
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, 1997 and 1996, the Company accrued interest
expense of $2,175,000 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
48
<PAGE>
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
12. NOTES PAYABLE (CONTINUED)
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
$87,000,000 aggregate principal amount of the PCI Notes remains outstanding.
The PCI Notes are net of unamortized discount of $422,000 and $476,000 at
December 31, 1997 and 1996, respectively. At December 31, 1997, the effective
interest rate was 11.44%.
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 were
$134,509,000 and $107,891,000 at December 31, 1997 and 1996, 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
subsidiaries; (x) limitation on investments in unrestricted subsidiaries; (xi)
limitation on lines of business; and (xii) provision of financial statements and
reports. As of December 31, 1997, the Company was in compliance with such
covenants.
Condensed parent only financial statements of Poland Communication, Inc. are
provided in Note 13, in compliance with the requirements of Rule 5-04 and 12-04
of the Securities and Exchange Commission's Regulation S-X.
PBR
A subsidiary of the Company, which was acquired during 1997, entered into
two agreements with PBR for loans of approximately $500,000 and $1,200,000.
Interest is based on LIBOR plus 2.5% (8.31% in aggregate at December 31, 1997)
and LIBOR plus 4% (9.81% in aggregate at December 31, 1997), respectively, and
is due monthly. The loans are secured by the subsidiary's cable television
networks up to a value of approximately PLN 3.5 million (approximately $995,000
at December 31, 1997). All advances under the $500,000 loan must be repaid by
December 10, 2000, and all advances under the $1,200,000 loan must be repaid by
January 10, 1998. Subsequent to year end, the $32,000 remaining balance of the
$1,200,000 loan was repaid.
AMERBANK
In October 1995, the Company entered into an agreement with AmerBank for a
Polish currency denominated revolving credit loan and a U.S. dollar denominated
promissory note, of which approximately $2,482,000 was outstanding at December
31, 1995. These loans were repaid in full during 1996.
49
<PAGE>
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
12. NOTES PAYABLE (CONTINUED)
In August 1996, the Company entered into a $6,500,000 revolving credit loan
agreement with AmerBank of which $550,000 was outstanding at December 31, 1996.
This balance was repaid during 1997. Funds are available under the credit
agreement through December 31, 1998 and interest is based on LIBOR plus 3%
(8.60% in aggregate at December 31, 1996) and is due quarterly. All advances
under the loan must be repaid by August 20, 1999.
OVERSEAS PRIVATE INVESTMENT CORPORATION
In January 1994, the Company signed a $13,500,000 financing agreement with
Overseas Private Investment Corporation ("OPIC") of which $8,600,000 was
outstanding at December 31, 1995. The loan was repaid in full during 1996.
Accordingly, the Company recorded an extraordinary loss of $1,713,000 related to
the early retirement of such debt. The extraordinary loss was comprised of a
$147,000 prepayment penalty and $1,566,000 relating to the write-off of deferred
financing costs. There was no tax effect of this transaction due to foreign
jurisdiction net operating loss carryforwards.
BANK OF BOSTON CONNECTICUT
During August 1995, the Company entered into a $10,000,000 loan agreement
with the Bank of Boston Connecticut, which was subsequently repaid in February
1996.
Interest expense relating to the aforementioned notes payable was
approximately $13,900,000, $4,687,000 and $4,373,000 for the years ended
December 31, 1997, 1996 and 1995, respectively
13. CONDENSED PARENT ONLY FINANCIAL INFORMATION OF PCI
The following parent only condensed financial statements were prepared in
accordance with generally accepted accounting principles in the United States of
America 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
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Operating costs and expenses:
Selling, general and administrative expenses.......................... $ 3,250 $ 1,061
--------- ---------
Operating loss........................................................ (3,250) (1,061)
Interest and investment income.......................................... 2,619 1,076
Interest expense........................................................ (13,879) (2,612)
Equity in losses of affiliated companies................................ (22,019) (2,775)
--------- ---------
Loss before income taxes.............................................. (36,529) (5,372)
Income tax benefit/(expense)............................................ 1,438 (1,245)
--------- ---------
Net loss.............................................................. (35,091) (6,617)
Accretion of redeemable preferred stock................................. (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 holders of common stock........................ $ (39,285) $ (7,676)
--------- ---------
--------- ---------
</TABLE>
50
<PAGE>
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
13. CONDENSED PARENT ONLY FINANCIAL INFORMATION OF PCI (CONTINUED)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents............................................... $ 18,214 $ 55,044
Investment securities................................................... -- 25,115
Accounts receivable, net................................................ 290 148
Other current assets.................................................... 74 188
--------- ---------
Total current assets.................................................... 18,578 80,495
Intangibles, net........................................................ 6,892 6,361
Other assets............................................................ -- 6,000
Net investment in restricted net assets of wholly-owned subsidiaries.... 121,977 89,821
Net investment in unrestricted net assets of wholly-owned
subsidiaries.......................................................... 29,646 22,486
--------- ---------
Total assets............................................................ $ 177,093 $ 205,163
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses................................... $ 1,125 $ 2,989
Accrued interest........................................................ 2,175 2,175
Income taxes payable.................................................... 3,878 4,472
Notes payable........................................................... 129,578 129,524
--------- ---------
Total liabilities....................................................... 136,756 139,160
Redeemable preferred stock (liquidation value $85,000,000; 8,500
authorized, issued and outstanding in 1996)........................... 39,149 34,955
Stockholders' equity:
Common stock, $.01 par value; authorized 24,051 shares, 18,948
shares issued and outstanding..................................... 1 1
Paid-in capital..................................................... 59,553 54,322
Accumulated deficit................................................. (58,366) (23,275)
--------- ---------
Total stockholders' equity.............................................. 1,188 31,048
--------- ---------
Total liabilities and stockholders' equity.............................. $ 177,093 $ 205,163
--------- ---------
--------- ---------
</TABLE>
51
<PAGE>
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
13. CONDENSED PARENT ONLY FINANCIAL INFORMATION OF PCI (CONTINUED)
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
-------------------- -------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPTIAL DEFICIT TOTAL
--------- --------- --------- --------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Balance January 1, 1996........................ 985 $ 10,311 11,037 $ 4,993 $ 1,544 $ (16,658) $ 190
Net loss..................................... -- -- -- -- -- (6,617) (6,617)
Stock dividend............................... 166 1,738 -- -- (1,738) -- --
Proceeds from issuance of common and
preferred stock............................ -- -- 7,911 (4,992) 87,021 -- 82,029
Cost of issuance............................. -- -- -- -- (1,028) -- (1,028)
Allocation of proceeds to preferred.......... -- -- -- -- (32,156) -- (32,156)
Preferred stock redemption................... (1,151) (12,049) -- -- 3,549 -- (8,500)
Accretion of redeemable preferred stock...... -- -- -- -- (2,870) -- (2,870)
--------- --------- --------- --------- ---------- ------------ ---------
Balance December 31, 1996...................... -- -- 18,948 1 54,322 (23,275) 31,048
Net loss..................................... -- -- -- -- -- (35,091) (35,091)
Accretion of redeemable preferred stock...... -- -- -- -- (4,194) -- (4,194)
Stock option compensation expense............ -- -- -- -- 9,425 -- 9,425
--------- --------- --------- --------- ---------- ------------ ---------
Balance December 31, 1997...................... -- $ -- 18,948 $ 1 $ 59,553 $ (58,366) $ 1,188
--------- --------- --------- --------- ---------- ------------ ---------
--------- --------- --------- --------- ---------- ------------ ---------
</TABLE>
52
<PAGE>
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
13. CONDENSED PARENT ONLY FINANCIAL INFORMATION OF PCI (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
<S> <C> <C>
1997 1996
---------- -----------
(IN THOUSANDS)
Cash flows from operating activities:
Net loss............................................................................... $ (35,091) $ (6,617)
Adjustments to reconcile net loss to net cash (used in)/provided by operating
activities:
Amortization of notes payable discount and issue costs............................... 1,040 164
Gain on sale of investment securities................................................ (358) --
Non-cash stock option compensation expense........................................... 9,425 --
Equity in losses of affiliated companies............................................. 22,019 12,862
Changes in operating assets and liabilities:
Accounts receivable.................................................................. (142) (35)
Other current assets................................................................. 346 (1,300)
Accounts payable and accrued expenses................................................ (1,864) 3,900
Income taxes payable................................................................. (594) 4,472
Other current liabilities............................................................ -- (1,045)
---------- -----------
Net cash (used in)/provided by operating activities.................................. (5,219) 12,401
---------- -----------
Cash flows from investing activities:
Proceeds from maturity of investment securities........................................ 25,473 (25,115)
Purchase of other assets............................................................... 8,491 (8,200)
Investment in, and loans and advances to affiliated companies.......................... (63,826) (122,337)
---------- -----------
Net cash used in investing activities................................................ (29,862) (155,652)
---------- -----------
Cash flows from financing activities
Net proceeds from issuance of stock.................................................... -- 81,001
Redemption of preferred stock.......................................................... -- (8,500)
Cost to obtain loans................................................................... (1,749) (6,513)
Proceeds from notes payable............................................................ -- 136,074
Repayment of notes payable............................................................. -- (10,000)
---------- -----------
Net cash (used in)/provided by financing activities.................................. (1,749) 192,062
---------- -----------
Net (decrease)/increase in cash and cash equivalents................................. (36,830) 48,811
Cash and cash equivalents at beginning of year........................................... 55,044 6,233
---------- -----------
Cash and cash equivalents at end of year................................................. $ 18,214 $ 55,044
---------- -----------
---------- -----------
Supplemental cash flow information:
Cash paid for interest................................................................. $ 12,873 $ 2,338
---------- -----------
---------- -----------
Cash paid for income taxes............................................................. $ 1,271 $ 1,184
---------- -----------
---------- -----------
</TABLE>
53
<PAGE>
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995 (CONTINUED)
14. 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.
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 converted into 4,862 shares of common 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.
15. 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
54
<PAGE>
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995 (CONTINUED)
15. REDEEMABLE PREFERRED STOCK (CONTINUED)
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, 1997. The Company
periodically accretes from paid-in capital an amount that will provide for the
redemption value at October 31, 2004. The total amount recorded for accretion
for the years ended December 31, 1997 and 1996 was $4,194,000 and $2,870,000,
respectively.
16. 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 FROM AFFILIATE
Amounts due from affiliate primarily represent advances and payments made on
behalf of a company affiliated with the Company but not consolidated as of year
end.
NOTES RECEIVABLE FROM AFFILIATES
The Company loaned $2,491,000 to Pro Cable Sp. z o.o., which is 33% owned by
PCI, in December 1996. Under terms of the demand note, interest accrued at 10%
per annum beginning January 1, 1997. The loan was repaid during 1997.
The Company signed an agreement to loan up to $750,000 to GZM to cover
certain operating and capital expenses. Under the terms of the loan, interest is
accrued at 10% per annum. The loan was due June 30, 1997, but under the terms of
the agreement, the Company has agreed not to seek current repayment of the
balance until GZM generates sufficient cash flow or liquidity to support such
repayment.
The Company incurred advertising costs associated with a separate agreement
with GZM. Refer to Note 9 for further detail.
PROGRAMMING
An affiliate of the Company provides programming to PCI and its
subsidiaries. The Company incurred programming fees from this affiliate of
$559,000, $412,000 and $186,000 for the years ended December 31, 1997, 1996 and
1995, respectively.
17. 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
55
<PAGE>
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995 (CONTINUED)
17. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Note 18 for further detail. All of the agreements provide that TPSA is the
manager of the telephone duct system and will lease space within the ducts to
the Company for installation of cable and equipment for the cable television
systems. The lease agreements provide for monthly lease payments that are
adjusted quarterly or annually, except for the Gdansk lease agreement which
provides for an annual adjustment after the sixth year and then remains fixed
through the tenth year of the lease.
Minimum future lease commitments for the aforementioned conduit leases
relate to 1998 only, as all leases are cancelable in accordance with the
aforementioned terms. The future minimum lease commitments related to these
conduit leases approximates $466,000 for the first six months of 1998.
Total rental expense associated with the aforementioned operating leases for
the years ended December 31, 1997, 1996 and 1995 was $1,423,000, $984,000 and
$669,000, 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 $480,000 in 1998, $576,000 in 1999, $576,000 in
2000, and $96,000 in 2001. For the years ended December 31, 1997, 1996 and 1995,
the Company incurred programming fees of approximately $1,782,000, $1,758,000
and $1,318,000, 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.
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, 1997 conversion rate). The capital increases were
rejected by the relevant Registration Court, and the court's decision was upheld
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. The Company has not recorded any
amounts related to this in the accompanying consolidated financial statements
due to the tax net operating loss and uncertainties involved.
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
56
<PAGE>
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995 (CONTINUED)
17. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
Several of the minority stockholders of PCBV have claimed that the behavior
of PCBV and its majority stockholder, PCI, have prejudiced them, and that PCI
has (through its direct and indirect ownership interests in a number of entities
that engage in certain aspects of the cable television business in Poland)
violated certain covenants against competition in the PCBV Stockholders'
Agreement, and that under the circumstances, they can no longer be expected to
remain shareholders of PCBV. The PCBV Stockholders' Agreement includes certain
covenants against competition that limit the ability of each shareholder to
engage directly or indirectly in any aspect of the cable television business in
Poland for a period ending ten years after such stockholder ceases to be a
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 Stockholders' Agreement, the minority stockholders of PCBV
have a claim against 7.7% of the profits and equity of such entities. Under a
supplemental agreement, PCI has agreed to share the profits of these entities on
a pro rata basis. As of December 31, 1997, no amounts have been incurred.
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.
18. 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, 1997, approximately 60%
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.
LIMITED INSURANCE COVERAGE
While the Company carries general liability insurance on its properties,
like many other operators of cable television systems it does not insure the
underground portion of its cable televisions networks. Accordingly, any
catastrophe affecting a significant portion of the Company's cable television
networks could result in substantial uninsured losses and could have a material
adverse effect on the Company.
57
<PAGE>
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995 (CONTINUED)
18. CONCENTRATIONS OF BUSINESS AND CREDIT RISK (CONTINUED)
YEAR 2000
In January 1997, the Company developed a plan to deal with the Year 2000
problem to make its computer systems Year 2000 compliant. The plan provides for
the Year 2000 related efforts to be completed by the end of 1998. 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 computer system and an agreement to purchase specialized billing
software for the Company's new customer service and billing center. The Company
has no other significant computer systems. The total cost of the purchases for
@Entertainment, PCI and their subsidiaries is estimated to be approximately
$2,400,000. The Company has obtained confirmations from the vendors of the
systems indicating that such systems are Year 2000 compliant.
CREDIT WORTHINESS
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.
19. FOURTH QUARTER RESULTS
During the fourth quarter of 1997 circumstances came to the attention of
management which led to the determination that certain receivable balances from
minority interests were not recoverable. The Company has recorded an adjustment
to minority interest of approximately $5,800,000 relating to this write-off, of
which approximately $3,300,000 related to prior years.
20. SUBSEQUENT EVENTS (UNAUDITED)
The Company entered into agreements subsequent to December 31, 1997 to
purchase during 1998 certain cable television system assets for approximately
$783,000, and 94.74% of a cable television company for approximately $770,000.
The acquisition of the fixed assets will be accounted for as fixed asset
purchases 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 acquisition of the Company will be accounted for under the
purchase method, whereby the purchase price will be allocated to the underlying
assets and liabilities based upon their estimated fair values and any excess to
goodwill. The acquisitions are not expected to have a material effect on the
Company's results of operations in 1998.
Subsequent to year end, @Entertainment, the Company's parent, purchased
substantially all of the assets and certain liabilities of one of the Company's
subsidiaries for consideration of $100 which approximates the book value of the
purchased net assets. The transaction will be accounted for at historical cost
in a manner similar to a pooling of interests.
58
<PAGE>
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, 1997 and
1996, and the related consolidated statements of operations, changes in
stockholders' deficiency and cash flows for each of the years in the three-year
period ended December 31, 1997. 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, 1997 and
1996, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1997, in conformity with
generally accepted accounting principles in the United States of America.
KPMG Polska Sp. z o.o.
Warsaw, Poland
March 19, 1998
59
<PAGE>
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 4,951 $ 7,015
Accounts receivable, net of allowances for doubtful accounts of $608,000 in 1997 and
$437,000 in 1996...................................................................... 1,222 706
Other current assets (note 6)........................................................... 1,283 1,282
---------- ----------
Total current assets................................................................ 7,456 9,003
---------- ----------
Property, plant and equipment:
Cable television system assets.......................................................... 108,475 85,920
Vehicles................................................................................ 1,619 1,095
Other................................................................................... 3,246 2,528
---------- ----------
113,340 89,543
Less accumulated depreciation........................................................... (27,378) (18,779)
---------- ----------
Net property, plant and equipment..................................................... 85,962 70,764
Inventories for construction.............................................................. 5,887 4,974
Intangibles, net (note 5)................................................................. 9,887 10,534
---------- ----------
Total assets........................................................................ $ 109,192 $ 95,275
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable and accrued expenses................................................... $ 2,574 $ 2,685
Deferred revenue........................................................................ 609 823
Other current liabilities............................................................... 18 9
---------- ----------
Total current liabilities........................................................... 3,201 3,517
---------- ----------
Due to affiliate (note 9)................................................................. 14,505 11,159
Notes payable to affiliate (note 9)....................................................... 134,509 107,891
---------- ----------
Total liabilities................................................................... 152,215 122,567
---------- ----------
Minority interest......................................................................... 2,523 2,920
Commitments and contingencies (notes 10 and 11)
Stockholders' deficiency:
Capital stock, $0.50 par value; 200,000 shares authorized, issued and outstanding....... 100 100
Paid-in capital......................................................................... 4,713 --
Accumulated deficit..................................................................... (50,359) (30,312)
---------- ----------
Total stockholders' deficiency...................................................... (45,546) (30,212)
---------- ----------
Total liabilities and stockholders' deficiency...................................... $ 109,192 $ 95,275
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
60
<PAGE>
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
<S> <C> <C> <C>
1997 1996 1995
---------- ---------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Cable television revenue.................................................... $ 28,818 $ 22,882 $ 18,156
Operating expenses:
Direct operating expenses................................................. 8,215 6,427 4,986
Selling, general and administrative expenses (note 9)..................... 16,007 7,885 5,542
Depreciation and amortization............................................. 12,770 9,003 5,229
---------- ---------- ---------
Total operating expenses.................................................... 36,992 23,315 15,757
---------- ---------- ---------
Operating (loss)/income................................................... (8,174) (433) 2,399
Interest income............................................................. 186 183 99
Interest expense (notes 8 and 9)............................................ (11,253) (10,058) (6,534)
Foreign exchange loss....................................................... (1,425) (938) (22)
---------- ---------- ---------
Loss before income taxes, minority interest and extraordinary item........ (20,666) (11,246) (4,058)
Income tax expense (note 7)................................................. (175) (21) --
Minority interest........................................................... 794 988 41
---------- ---------- ---------
Loss before extraordinary item............................................ (20,047) (10,279) (4,017)
Extraordinary item-loss on early extinguishment of debt (note 8)............ -- (1,713) --
---------- ---------- ---------
Net loss.................................................................. $ (20,047) $ (11,992) $ (4,017)
---------- ---------- ---------
---------- ---------- ---------
Basic and diluted loss per common share:
Loss before extraordinary item............................................ $ (100.24) $ (51.39) $ (20.09)
Extraordinary item........................................................ -- (8.57) --
---------- ---------- ---------
Net loss.................................................................. $ (100.24) $ (59.96) $ (20.09)
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
61
<PAGE>
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
<TABLE>
<CAPTION>
CAPITAL STOCK
PAR PAID-IN ACCUMULATED
VALUE CAPITAL DEFICIT TOTAL
--------------- --------- ------------ ----------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Balance January 1, 1995........................................ $ 100 $ -- $ (14,303) $ (14,203)
Net loss..................................................... -- -- (4,017) (4,017)
----- --------- ------------ ----------
Balance December 31, 1995...................................... 100 -- (18,320) (18,220)
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 (note 9)................... -- 4,713 -- 4,713
----- --------- ------------ ----------
Balance December 31, 1997...................................... $ 100 $ 4,713 $ (50,359) $ (45,546)
----- --------- ------------ ----------
----- --------- ------------ ----------
</TABLE>
See accompanying notes to consolidated financial statements.
62
<PAGE>
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
<S> <C> <C> <C>
1997 1996 1995
---------- ---------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
$ (11,992)
Net loss...................................................................... $ (20,047) 17)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Minority interest........................................................... (794) (988) (41)
Depreciation and amortization............................................... 12,770 9,003 5,229
Non-cash portion of extraordinary item...................................... -- 1,566 --
Interest expense added to notes payable to affiliate........................ 11,253 7,844 5,139
Non-cash stock option compensation expense.................................. 4,713 -- --
Changes in operating assets and liabilities:
Accounts receivable....................................................... (516) (439) (723)
Other current assets...................................................... 396 (328) 93
Accounts payable and accrued expenses..................................... (111) (246) 1,349
Deferred revenue.......................................................... (214) (310) 52
Amounts due to affiliates................................................. 3,346 8,589 (4,918)
Other current liabilities................................................. 9 (201) (203)
---------- ---------- ---------
Net cash provided by operating activities............................... 10,805 12,498 1,960
---------- ---------- ---------
Cash flows from investing activities:
Construction and purchase of property, plant and equipment.................... (27,734) (21,065) (15,788)
Purchase of intangible assets................................................. (500) -- --
Other investments............................................................. -- 171 (1,686)
Purchase of subsidiaries, net of cash received................................ -- (7,657) (3,104)
---------- ---------- ---------
Net cash used in investing activities................................... (28,234) (28,551) (20,578)
---------- ---------- ---------
Cash flows from financing activities:
Costs to obtain loans......................................................... -- -- (956)
Repayment of notes payable.................................................... -- (11,670) --
Proceeds from notes payable................................................... -- -- 4,590
Proceeds from borrowings from affiliates...................................... 15,365 32,460 14,770
---------- ---------- ---------
Net cash provided by financing activities............................... 15,365 20,790 18,404
---------- ---------- ---------
Net (decrease)/increase in cash and cash equivalents............................ (2,064) 4,737 (214)
Cash and cash equivalents at beginning of year.................................. 7,015 2,278 2,492
---------- ---------- ---------
Cash and cash equivalents at end of year........................................ $ 4,951 $ 7,015 $ 2,278
---------- ---------- ---------
---------- ---------- ---------
Supplemental cash flow information:
Cash paid for interest...................................................... $ -- $ 2,067 $ 1,120
---------- ---------- ---------
---------- ---------- ---------
Cash paid for income taxes.................................................. $ 175 $ 282 $ --
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
63
<PAGE>
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
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. Also
consolidated is a 46.8% owned subsidiary for which the Company maintains control
of operating activities and has the right to control the appointment of members
to the Managing Board. 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 generally accepted accounting principles. 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
64
<PAGE>
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled.
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". Interest is not capitalized for short-term construction projects. During
1997, 1996 and 1995, no interest costs were capitalized.
Depreciation is calculated for financial reporting purposes using the
straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Cable television system assets................................. 10 years
Vehicles....................................................... 5 years
Other property, plant and equipment............................ 5--10 years
</TABLE>
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.
65
<PAGE>
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
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 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.
MINORITY INTEREST
Recognition of the minority interests' share of losses of consolidated
subsidiaries is limited to the amount of such minority interests' allocable
portion of the equity of those consolidated subsidiaries.
STOCK-BASED COMPENSATION
The Company has adopted SFAS No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION", which gives companies the option to adopt the fair value based
method for expense recognition of employee stock options and other stock-based
awards or to account for such items using the intrinsic value method as outlined
under APB Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES", with pro
forma disclosure of net income/(loss) and earnings/(loss) per share as if the
fair value method had been applied. The Company has elected to apply APB Opinion
No. 25 and related interpretations for stock options and other stock-based
awards.
FOREIGN CURRENCIES
Foreign currency transactions are recorded at the exchange rate prevailing
at the date of the transactions. Assets and liabilities denominated in foreign
currencies are remeasured at rates of exchange at the balance sheet date. Gains
and losses on foreign currency transactions are included in the statement of
operations.
Translation of the financial statements of the Polish subsidiaries into U.S.
dollars has been performed in accordance with SFAS No. 52, "FOREIGN CURRENCY
TRANSLATION". This standard requires that entities operating in countries with
economies deemed to be highly inflationary translate all monetary assets and
liabilities into U.S. dollars at the exchange rate in effect at year end and
non-monetary assets and liabilities at historical or transaction date rates.
Revenues and expenses are translated at the average exchange rate over the
reporting period. For 1996, 1995 and 1994 inflation was 19.9%, 26.8% and 33.3%,
respectively yielding a three-year cumulative inflation rate of 102.7%.
Effective January 1, 1998, Poland is no longer deemed to be a highly
inflationary economy. In accordance with this change, the Company will establish
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 amounts of nonmonetary items into the local currency at current
exchange rates.
66
<PAGE>
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
BASIC AND DILUTED NET LOSS PER SHARE
The Company, effective for the year ended December 31, 1997, adopted SFAS
No. 128 "EARNINGS PER SHARE". Pursuant to the provisions of the statement, 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. The application of
SFAS No. 128 resulted in no changes to the original calculations of basic and
diluted net loss per share for the years ended December 31, 1996 or 1995.
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.
As of December 31, 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) 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.
67
<PAGE>
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
RECLASSIFICATIONS
Certain amounts have been reclassified in the prior consolidated financial
statements to conform to the 1997 consolidated financial statement presentation.
IMPACT OF NEW ACCOUNTING STANDARDS NOT YET ADOPTED
SFAS No. 130, "REPORTING COMPREHENSIVE INCOME", was issued in June 1997 and
establishes 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 will not affect the Company's financial position or
results of operations. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997, with earlier application permitted. The Company is
currently evaluating the presentation alternatives permitted by the statement.
SFAS No. 131, "DISCLOSURES ABOUT A SEGMENT OF AN ENTERPRISE AND RELATED
INFORMATION", was issued in June 1997 and establishes 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). This statement is effective for
year end 1998 financial statements. Interim financial information will be
required beginning in 1999 (with comparative 1998 information). The Company does
not anticipate that this standard will significantly impact the composition of
its current operating segments, which are consistent with the management
approach.
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 9.
68
<PAGE>
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
3. VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS AMOUNTS
----------------------------------------------------------
BALANCE AT CHARGED TO WRITTEN BALANCE AT
JANUARY 1 EXPENSE OFF DECEMBER 31
------------- ------------- ----------- ---------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
1995
Allowance for Doubtful Accounts................................. $ 132 $ 385 $ 7 $ 510
----- ----- ----- -----
----- ----- ----- -----
1996
Allowance for Doubtful Accounts................................. $ 510 $ 240 $ 313 $ 437
----- ----- ----- -----
----- ----- ----- -----
1997
Allowance for Doubtful Accounts................................. $ 437 $ 442 $ 271 $ 608
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
4. ACQUISITIONS
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 fixed asset 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.
During December 1996, the Company entered into a preliminary purchase
agreement for a cable television system assets in the Opole area and prepaid the
approximate $1,400,000 purchase price, which was included in property, plant and
equipment in the accompanying consolidated balance sheet at December 31, 1996.
During 1995, the Company acquired two cable television companies for
aggregate consideration of $3,200,000. 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 January 1, 1995. The purchase prices approximated the fair value of the
net assets acquired.
69
<PAGE>
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
5. INTANGIBLES
Intangible assets are carried at cost and consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Conduit and franchise agreements............................................................. $ 4,418 $ 4,418
Goodwill..................................................................................... 6,499 5,999
Other........................................................................................ 997 1,098
--------- ---------
11,914 11,515
Less accumulated amortization................................................................ (2,027) (981)
--------- ---------
Net intangible assets........................................................................ $ 9,887 $ 10,534
--------- ---------
--------- ---------
</TABLE>
6. OTHER CURRENT ASSETS
Included in other current assets is $914,000 and $822,000 of VAT receivables
as of December 31, 1997 and 1996, respectively.
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- ----- -----
<S> <C> <C> <C>
(IN THOUSANDS)
Netherlands income tax expense..................................................... $ 38 $ 9 $ --
Foreign jurisdictions.............................................................. 137 12 --
--------- --- ---
Income tax expense................................................................. $ 175 $ 21 $ --
--------- --- ---
--------- --- ---
</TABLE>
The majority of the 1997 income tax expense is applicable to one Polish
subsidiary which cannot, under Polish tax regulations, utilize the benefit of
other subsidiaries' tax loss carryforwards.
70
<PAGE>
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
7. INCOME TAXES (CONTINUED)
The tax effect of temporary differences and carryforwards which give rise to
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Deferred tax assets:
Unrealized foreign exchange losses........................................................... $ 4,800 $ 3,300
Accrued expenses............................................................................. 800 300
Tax loss carryforwards....................................................................... 3,000 1,000
--------- ---------
Total deferred tax asset....................................................................... 8,600 4,600
Less valuation allowance..................................................................... (8,600) (4,600)
--------- ---------
Net deferred tax assets........................................................................ $ -- $ --
--------- ---------
--------- ---------
</TABLE>
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
not realize the benefits of these deductible differences, net of the existing
valuation allowance at December 31, 1997.
Subsequently recognized tax benefits relating to the valuation allowance for
deferred tax assets as of December 31, 1997 will be reported in the consolidated
statement of operations.
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 1997, approximately $1,400,000 of net
operating loss carryforwards available to the PTK Companies expired.
At December 31, 1997, the PTK Companies had net operating loss carryforwards
of approximately $8,400,000 as of December 31, 1997, which will expire as
follows:
<TABLE>
<CAPTION>
(IN
YEARS ENDING DECEMBER 31, THOUSANDS)
- ------------------------------------------------------------------------------- -------------
<S> <C>
1998........................................................................... $ 3,700
1999........................................................................... 3,000
2000 and thereafter............................................................ 1,700
------
$ 8,400
------
------
</TABLE>
71
<PAGE>
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
8. NOTES PAYABLE
In January 1994, the Company signed a $13,500,000 financing agreement with
Overseas Private Investment Corporation ("OPIC") of which $8,600,000 was
outstanding at December 31, 1995. The loan was repaid in full in 1996.
Accordingly, in 1996, the Company recorded an extraordinary loss of $1,713,000
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. There was no tax effect of this transaction due to foreign jurisdiction
net operating loss carryforwards.
During 1995, the Company entered into agreements with certain banks for
revolving credit loans which were repaid in full during 1996. As at December 31,
1995, $3,070,000 was outstanding under such loans.
Interest expense relating to these loans was $992,000 and $654,000 for the
years ended December 31, 1996 and 1995, respectively.
9. 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 $134,509,000 and $107,891,000 at December 31,
1997 and 1996, 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. One of these notes becomes due on June 10, 1998, the
other is due on June 30, 1999.
Interest expense of $11,253,000, $7,844,000 and $5,777,000 was incurred by
the Company in connection with affiliate borrowings during the years ended
December 31, 1997, 1996 and 1995, respectively. Of this expense, $11,253,000,
$7,844,000, and $5,139,000 has been added to the loan balance for the years
ended December 31, 1997, 1996 and 1995, 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; and
(xi) limitation on lines of business.
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.
72
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POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
9. RELATED PARTY TRANSACTIONS (CONTINUED)
DUE TO AFFILIATE
Amounts due to affiliate of $14,505,000 and $11,159,000 at December 31, 1997
and 1996, 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 expire
December 31, 1998, but will automatically be 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, 1998, 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 $637,000 and
$950,000 at December 31, 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 $1,470,000, $1,162,000 and $395,000
during the years ended December 31, 1997, 1996 and 1995, respectively, are
included in corporate administration and operating expenses.
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POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
9. RELATED PARTY TRANSACTIONS (CONTINUED)
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 @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, $1,520,000 and
$1,280,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
PROGRAMMING
An affiliate of PCI provides programming to the PTK Companies. The Company
incurred programming fees from this affiliate of $500,000, $412,000 and $186,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
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 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.
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POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Minimum future lease commitments for the aforementioned leases relate to
1998 only, as all leases are cancelable in accordance with the aforementioned
terms. The future minimum lease commitments related to these conduit leases
approximates $340,000 for the first six months of 1998.
Total rental expense associated with the aforementioned operating leases for
the years ended December 31, 1997, 1996 and 1995 was $1,094,000, $864,000 and
$655,000, 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, 1997, no future
minimum commitment lies with the Company. For the years ended December 31, 1997,
1996 and 1995, the Company incurred programming fees of approximately
$1,546,000, $1,685,000 and $1,298,000, 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, 1997 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.
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
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POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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
In January 1997, the Company's parent developed a plan to deal with the Year
2000 problem to make its computer systems Year 2000 compliant. The plan provides
for the Year 2000 related efforts to be completed by the end of 1998. Largely as
a result of its high rate of growth over the past few years, the Company,
through PCI and @Entertainment has entered into an agreement to purchase a new
system to replace its current accounting computer system and an agreement to
purchase specialized billing software, for approximately $2,400,000, for the
Company's new customer service and billing center. Upon commencement of the
installation, management will allocate a portion of the cost of the new system
to the Company. The Company has no other significant computer systems. The
Company has obtained confirmations from the vendors of the systems indicating
that such systems are Year 2000 compliant.
CREDIT WORTHINESS
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.
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POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
12. FOURTH QUARTER RESULTS
During the fourth quarter of 1997 circumstances came to the attention of
management which led to the determination that certain receivable balances from
minority interests were not recoverable. The Company has recorded an adjustment
to minority interest of approximately $1,284,000 which all related to prior
years.
13. SUBSEQUENT EVENTS (UNAUDITED)
The Company entered into an agreement subsequent to December 31, 1997 to
purchase during 1998 certain cable television system assets for approximately
$783,000. The acquisition of the fixed assets will be accounted for as fixed
asset purchases with the purchase price allocated among the fixed assets
acquired based upon their fair values at the dates of acquisition and any excess
to goodwill. The acquisition is not expected to have a material effect on the
Company's results of operations in 1998.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The current directors and executive officers of the Company are:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------- --------- -----------------------------------------------------------
<S> <C> <C>
David T. Chase............................... 69 Director
Robert E. Fowler, III........................ 39 Chairman of the Board of Directors
Arnold L. Chase.............................. 46 Director
Scott A. Lanphere............................ 32 Director
Jerzy Z. Swirski............................. 41 Director
Przemys$law A. Szmyt......................... 35 Director
John S. Frelas............................... 47 Chief Financial Officer, Vice President and Treasurer
Dorothy E. Hansberry......................... 45 Vice President and General Counsel of the Company
David Keefe.................................. 48 Chief Executive Officer of the Company, Director
George Makowski.............................. 43 Chief Operating Officer--Cable Operations of the Company
</TABLE>
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.
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. Mr. Chase has also been on the Supervisory Boards of PTK,
S.A., PTK-Warszawa S.A. ("PTK-Warsaw") and PTK-Krakow S.A. ("PTK-Krakow") since
December 1992, October 1993, and October 1993, respectively. He is also a
director of ACCEL International Corporation ("ACCEL"), an insurance holding
company.
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. Mr. Fowler has served as director of Mozaic Entertainment,
Inc. (formerly PCI Programming, Inc.) ("Mozaic") since July 1996, and as
Chairman of its Board of Directors since December 1996. From July 1996 to
December 1996, Mr. Fowler also served as Vice President and Treasurer of Mozaic.
From March 1995 to late 1996, Mr. Fowler served as a director of ACCEL. Mr.
Fowler has been a Managing Director of PCBV since 1997. Mr. Fowler devoted
approximately 35% of his working time to PCI and approximately 65% of his
working time to companies that are affiliated with PCI.
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
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director of @Entertainment since May 1997. Mr. Chase served as President of the
Management Board of PTK-Krakow and PTK-Ryntronik from October 1993 to May 1995,
and from October 1993 to December 1994, respectively. 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 was
Managing Director of PCBV from March 1990 to May 1996 and President of the
Management Board of PTK, S.A., from December 1992 to August 1996. He previously
served as Chairman of the Supervisory Board of PTK, S.A. from August 1990 to
December 1992. From April 1991 to October 1992, Mr. Chase served as Executive
Vice President of PCI. 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 been a Director of Investments for Advent International plc since December
1994, 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.
JOHN S. FRELAS has been the Chief Financial Officer of PCI since September
1996, the Treasurer of PCI since December 1996. Mr. Frelas has served as Chief
Financial Officer, Treasurer and Vice President of @Entertainment since May
1997. Mr. Frelas has been the Treasurer of Mozaic since December 1996. From 1995
to 1996, Mr. Frelas was the Chief Financial Officer of Eurofund Management
Polska. During 1995, he served as a consultant to the Polish-American Enterprise
Fund. From 1972 to 1994, Mr. Frelas worked for PepsiCo Foods International and
certain of its subsidiaries, most recently as a Corporate Planning Manager for
Hostess Frito-Lay Canada during 1994 and as a Corporate Controller for Wedel
from 1992 to 1993.
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.
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.
GEORGE MAKOWSKI has served as the Chief Operating Officer--Cable Operations
of PCI since January 1997. From August 1993 to January 1997, Mr. Makowski was
Vice President of Marketing for Ameritech International, Inc. ("Ameritech").
During this time Mr. Makowski also served as Sales and Marketing Director of
Centertel, S.A., a division of Ameritech. From 1986 to 1993, Mr. Makowski held
various senior management roles within Groupe Bull, S.A.
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PRZEMYS$LAW A. SZMYT served as a director of PCI since December 1997 and as
a Vice President and General Counsel of PCI from February 1997 until December
1997. Mr. Szmyt has served as Vice President, General Counsel and Secretary of
@Entertainment since May 1997. Mr Szmyt has served as a Managing Director of
Sereke Holding B.V. since November 1997 and as a Managing Director of PCBV since
November 1997. 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. From
November 1995 to July 1996, Mr. Szmyt served as a director of the Management
Board of MeesPierson EurAmerica Sp. z o.o.
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.
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. A fundamental change in the business of the Company or any subsidiary;
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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.
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 certain other executive officers of the Company who earned over
$100,000 in fiscal 1997, and a former executive officer who would have been one
of the most highly compensated executive officers at the end of the fiscal year
1997 (collectively, the "Named Executive Officers") for services rendered in all
capacities to the Company for the last three fiscal years, to the extent that
those officers were in the employ of the Company. Columns relating to long-term
compensation have been omitted from the table as the Company did not have
capital stock-related award plans and there has been no compensation arising
from long-term incentive plans during the years reflected in the table.
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<TABLE>
<CAPTION>
SECURITIES ALL OTHER
SALARY BONUS OTHER ANNUAL UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($) COMPENSATION($) OPTIONS/SAR ($)
- ------------------------------- --------- ------------ ----------- ---------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Robert E. Fowler, III ......... 1997 337,500 381,250 25,872(3) 1,268,000 --
Chairman of the Board(2) 1996 66,000 66,000 -- -- --
1995 66,000 66,000 -- -- --
Richard B. Steele(4)........... 1997 207,595 -- -- -- 156,000(5)
1996 356,000 250,000 -- -- 5,000(6)
1995 356,000 -- -- -- 7,500(6)
John S. Frelas ................ 1997 155,746 350,000(7) 39,000(8) -- --
Chief Financial Officer, Vice 1996 46,153(9) -- 6,000(8) 241,000 --
President, Treasurer 1995 -- -- -- -- --
George Z. Makowski ............ 1997 156,000 175,000(7) 68,400(10) 385,000 --
Chief Operating Officer-Cable 1996 -- -- -- -- --
1995 -- -- -- -- --
Przemys$law Szmyt ............. 1997 146,667 70,000(7) -- 131,000 --
Director(11) 1996 -- -- -- -- --
1995 -- -- -- -- --
</TABLE>
- ------------------------
(1) Includes compensation paid by the Company, and in some instances @
Entertainment.
(2) Mr. Fowler served as Chief Executive Officer of the Company until December
1997. David Keefe became Chief Executive Officer of the Company as of
January 1998.
(3) Represents amounts paid or reimbursed by the Company for personal travel
related expenses.
(4) Mr. Steele was the President of PCI. He resigned on June 23, 1997.
(5) Represents amounts earned as deferred compensation.
(6) Represents portion of 401(k) plan paid pursuant to matching contribution.
(7) Represents one-time bonus paid upon completion of @Entertainment's Initial
Public Equity Offering.
(8) Represents amounts paid pursuant to housing allowance.
(9) Represents compensation for partial year of service beginning in September
1996.
(10) Represents amounts paid pursuant to housing and tuition allowances.
(11) Mr. Szmyt served as Vice President and General Counsel of the Company until
Decemer 1997. Dorothy Hansberry became Vice President and General Counsel of
the Company effective January 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Poland Communication, 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.
THE REORGANIZATION
In June 1997, the Company effected a reorganization (the "Reorganization")
to facilitate the development of its D-DTH business and the expansion of its
cable television and programming businesses. All the holders of shares of PCI's
common stock and @Entertainment entered into a Contribution
82
<PAGE>
Agreement dated at June 22, 1997 (the "Contribution Agreement"). Pursuant to the
Contribution Agreement, each holder of shares of PCI's common stock transferred
all shares of PCI common stock owned by it to @Entertainment. In addition, ECO
transferred all of the outstanding shares of PCI's voting Series B Preferred
Stock (the "PCI 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 Code. 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 shares of PCI Series B Preferred Stock. The 2,500 outstanding
shares of Series B Preferred Stock automatically converted into 4,862,000 shares
of Common Stock of @Entertainment upon the closing of the Initial Public Equity
Offering (the "Automatic Conversion").
On June 20, 1997, PIHLP transferred all the outstanding shares of PCI's
Series C Preferred Stock to the Chase Entity. The Chase Entity, ECO and
@Entertainment entered into the Purchase Agreement. Pursuant to the Purchase
Agreement, @Entertainment purchased 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 Initial Public Equity Offering
(the "Cash Purchases"). The aggregate purchase price of $60.0 million ($40.0
million to ECO and $20.0 million to the Chase Entity) for PCI's Series A
Preferred Stock and Series C Preferred Stock equaled the aggregate redemption
price of such shares as set forth in PCI's certificate of incorporation. The
Cash Purchases were funded with a portion of the net proceeds of the Initial
Public Equity Offering.
In June 1997, certain employment agreements for the executive officers of
@Entertainment who were employed by PCI and their employee stock option
agreement were assigned to @Entertainment by PCI (the "Assignment"). As part of
the Assignment and the Capital Adjustment, the agreements were amended to
provide that each option for a share of PCI's common stock was exchanged for an
option for 1,000 shares of Common Stock with a proportionate reduction in the
exercise price.
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.
83
<PAGE>
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 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.
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 expire on December 31, 1998, but will automatically
be 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.
84
<PAGE>
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 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 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, 1998, 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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------
<S> <C>
3.1 Certificate of Incorporation of Poland Communications, Inc. (1)
3.2 By-Laws of Poland Communications, Inc. (1)
3.3 Amendment to the Certificate of Incorporation of Poland Communications, Inc., filed on
December 31, 1997.
21 Subsidiaries of the Company
27 Financial Data Schedule
</TABLE>
- --------------------------
(1) Incorporated by reference into this document from the Exhibits filed with
Registration Statement on Form S-4, Registration No. 333-20307.
85
<PAGE>
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.
<TABLE>
<S> <C> <C>
POLAND COMMUNICATIONS, INC.
By: /s/ DAVID KEEFE
-----------------------------------------
David Keefe
CHIEF EXECUTIVE OFFICER AND DIRECTOR
</TABLE>
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ DAVID KEEFE
- ------------------------------ Chief Executive Officer March 31, 1998
David Keefe and Director
Chief Financial Officer
/s/ JOHN S. FRELAS (Principal Financial and
- ------------------------------ Principal Accounting March 31, 1998
John S. Frelas Officer)
/s/ ROBERT E. FOWLER III
- ------------------------------ Chairman of the Board of March 31, 1998
Robert E. Fowler III Directors
/s/ ARNOLD L. CHASE
- ------------------------------ Director March 31, 1998
Arnold L. Chase
/s/ DAVID T. CHASE
- ------------------------------ Director March 31, 1998
David T. Chase
/s/ SCOTT A. LANPHERE
- ------------------------------ Director March 31, 1998
Scott A. Lanphere
/s/ JERZY Z. SWIRSKI
- ------------------------------ Director March 31, 1998
Jerzy Z. Swirski
/s/ PREMYSLAW A. SZMYT
- ------------------------------ Director March 31, 1998
Premyslaw A. Szmyt
86
<PAGE>
CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION
OF
POLAND COMMUNICATIONS, INC.
(under section 805 of the 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 Certificate modifies Article VII of the
Corporation's Restated Certificate of Incorporation, dated March 25,
1996, and filed by the Department of State on March 27, 1996, as
modified by the amended Certificate dated October 18, 1996, which
Certificate was filed with the Department of State on October 23,
1996, and the amended Certificate dated May 12, 1997, which Certificate
was filed with the Department of State on May 15, 1997 (collectively
hereinafter the "Certificate of Incorporation"). This Certificate
amends Article VII so that the number of directors constituting the
Board of Directors is increased from five (5) to seven (7). The full
text of the provision to be substituted is set forth in Article
Fifth of this Certificate of Amendment.
FOURTH: The amendment of the Certificate of Incorporation herein provided for
was authorized by the unanimous written consent of the Board of
Directors of the Corporation and by the unanimous written consent of
holders of one hundred percent (100%) of the outstanding shares
entitled to vote thereon, all in accordance with Sections 803 and
804 of the Business Corporation Law.
FIFTH: Article VII of the Certificate of Incorporation is hereby amended to
read as follows:
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.
<PAGE>
IN WITNESS WHEREOF, we have subscribed this Certificate of Amendment as
of the 31st day of December 1997, and do hereby affirm, under the penalties
of perjury, that the statements contained herein have been examined by us and
are true and correct.
/s/ David Chase
----------------------------------
David Chase, Chairman of the Board of Directors,
Poland Communications, Inc.
/s/ Cheryl Anne Chase
---------------------------------
Cheryl Anne Chase, Secretary, Poland
Communications, Inc.
2
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------
COMPANY JURISDICTION
Poland Cablevision (Netherlands) B.V. Netherlands
- -------------------------------------------------------------------------------
Czestochowska TK Sp. zo.o. Poland
- -------------------------------------------------------------------------------
ETV Sp. zo.o. Poland
- -------------------------------------------------------------------------------
Gosat-Service Sp.zo.o. Poland
- -------------------------------------------------------------------------------
Jednostki Innowacyjno-Wdrozeniowe Poland
- -------------------------------------------------------------------------------
Politechniki Warzawskiej "Profile" S.A. Poland
- -------------------------------------------------------------------------------
Kolor-Sat Sp. zo.o. Poland
- -------------------------------------------------------------------------------
Mazurska Telewizja Kablowa Sp. zo.o. Poland
- -------------------------------------------------------------------------------
Opolskie TTT S.A. Poland
- -------------------------------------------------------------------------------
Otwocka Telewizja Kablowa Sp. zo.o. Poland
- -------------------------------------------------------------------------------
Polska Telewizja Kablowa Krakow S.A. Poland
- -------------------------------------------------------------------------------
Polska Telewizja Kablowa Lublin S.A. Poland
- -------------------------------------------------------------------------------
Polska Telewizja Kablowa Operator Sp. zo.o. Poland
- -------------------------------------------------------------------------------
Polska Telewizja Kablowa S.A. Poland
- -------------------------------------------------------------------------------
Polska Telewizja Kablowa Szczecin Sp. zo.o. Poland
- -------------------------------------------------------------------------------
Polska Telewizja Kablowa Warszawa S.A. Poland
- -------------------------------------------------------------------------------
Polskie Media S.A. Poland
- -------------------------------------------------------------------------------
Poltelkab Sp. zo.o. Poland
- -------------------------------------------------------------------------------
ProCable Sp. zo.o. Poland
- -------------------------------------------------------------------------------
Szczecinska Telewizja Kablowa Sp. zo.o. Poland
- -------------------------------------------------------------------------------
Telkat Sp. zo.o. Poland
- -------------------------------------------------------------------------------
TV Kabel Sp. zo.o. Poland
- -------------------------------------------------------------------------------
TV-SAT Ursus Sp. zo.o. Poland
- -------------------------------------------------------------------------------
Mozaic Entertainment, Inc. Delaware
- -------------------------------------------------------------------------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 26,080
<SECURITIES> 0
<RECEIVABLES> 2,387
<ALLOWANCES> 766
<INVENTORY> 8,153
<CURRENT-ASSETS> 33,768
<PP&E> 142,785
<DEPRECIATION> (33,136)
<TOTAL-ASSETS> 187,449
<CURRENT-LIABILITIES> 12,289
<BONDS> 130,110
0
0
<COMMON> 1
<OTHER-SE> 1,188
<TOTAL-LIABILITY-AND-EQUITY> 187,449
<SALES> 0
<TOTAL-REVENUES> 38,138
<CGS> 0
<TOTAL-COSTS> 58,225
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 221
<INTEREST-EXPENSE> 13,900
<INCOME-PRETAX> (32,480)
<INCOME-TAX> (975)
<INCOME-CONTINUING> (35,091)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (35,091)
<EPS-PRIMARY> (2,073.31)
<EPS-DILUTED> (2,073.31)
</TABLE>
