<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999.
OR
/ / TRANSITION REPORT PURSUANT TO THE SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT 1934
FROM THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 333-20307
POLAND COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
NEW YORK 06-1070447
(State or Other Jurisdiction of (IRS Employer
Incorporation of Organization) Identification No.)
ONE COMMERCIAL PLAZA
HARTFORD, CONNECTICUT 06103
(Address of Principal Executive Officers) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (860) 549-1674
Indicate by check (X) whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days Yes__X__ No __________
The number of shares outstanding of Poland Communications, Inc.'s common stock
as of September 30, 1999, was:
Common Stock 18,948
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1
<PAGE>
POLAND COMMUNICATIONS, INC.
FORM 10-Q INDEX
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Poland Communications, Inc.
Consolidated Balance Sheets 3-4
Consolidated Statements of Operations 5
Consolidated Statements of Comprehensive Loss 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8-10
Poland Cablevision (Netherlands) B.V.
Consolidated Balance Sheets 11-12
Consolidated Statements of Operations 13
Consolidated Statements of Comprehensive Loss 14
Consolidated Statements of Cash Flows 15
Notes to Consolidated Financial Statements 16-17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18-26
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 27
PART II OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Changes in Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
</TABLE>
2
<PAGE>
POLAND COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
(NOTE 2) (NOTE 2)
------------------ ----------------
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------------ ----------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,472 $ 2,574
Accounts receivable, net of allowances for doubtful
accounts of $2,703,000 in 1999 and $1,095,000 in 1998 4,470 2,770
Due from affiliate 160 -
Other current assets 2,555 1,362
------------------ ----------------
Total current assets 11,657 6,706
------------------ ----------------
Property, plant and equipment:
Cable television system assets 115,945 175,053
Construction in progress 5,053 1,665
Vehicles 733 2,096
Other 3,963 6,183
------------------ ----------------
125,694 184,997
Less accumulated depreciation (3,263) (48,129)
------------------ ----------------
Net property, plant and equipment 122,431 136,868
Inventories for construction 5,957 8,851
Intangibles, net (note 2) 385,718 34,481
Notes receivable from affiliates - 449
Other assets 141 6,430
------------------ ----------------
Total assets $ 525,904 $ 193,785
================== ================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
POLAND COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY / (DEFICIENCY)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
(NOTE 2) (NOTE 2)
------------------ ----------------
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------------ ----------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 6,927 $ 13,268
Accrued interest 5,348 2,140
Deferred revenue 243 1,207
Income taxes payable 3,794 3,794
Current portion of notes payable (note 2) 120,869 6,500
--------------------- --------------------
Total current liabilities 137,181 26,909
Due to affiliate 51,890 17,519
Notes payable, less current portion (note 2) 18,668 131,941
--------------------- --------------------
Total liabilities 207,739 176,369
--------------------- --------------------
Redeemable preferred stock (liquidation value $60,000,000;
6,000 shares authorized, issued and outstanding) 33,703 30,977
Commitments and contingencies (notes 5 and 6)
Stockholders' equity / (deficiency):
Common stock, $.01 par value, 27,000 shares authorized; 18,948
shares issued and outstanding 1 1
Paid-in capital 329,374 78,380
Accumulated other comprehensive (loss) / income (31,528) 586
Accumulated deficit (13,385) (92,528)
--------------------- --------------------
Total stockholders' equity / (deficiency) 284,462 (13,561)
--------------------- --------------------
Total liabilities and stockholders' equity / (deficiency) $ 525,904 $ 193,785
===================== ====================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
POLAND COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SUCCESSOR
(NOTE 2) PREDECESSOR (NOTE 2)
------------ -----------------------------------------------------------
TWO MONTHS THREE MONTHS NINE MONTHS
ENDED ONE MONTH ENDED ENDED SEVEN MONTHS ENDED
SEPTEMBER 30, JULY 31, SEPTEMBER 30, ENDED JULY 31, SEPTEMBER 30,
1999 1999 1998 1999 1998
------------- ------------ ------------ ------------- -------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues $ 10,687 $ 5,170 $ 13,265 $ 35,434 $ 37,836
Operating expenses:
Direct operating expenses 7,454 3,660 13,030 24,270 22,563
Selling, general and administrative expenses 4,227 1,461 3,356 9,281 12,014
Depreciation and amortization 7,877 1,605 5,399 13,819 15,319
------------- ------------ ------------ ------------- -------------
Total operating expenses 19,558 6,726 21,785 47,370 49,896
Operating loss (8,871) (1,556) (8,520) (11,936) (12,060)
Interest and investment (loss)/income, net (68) (106) 135 167 838
Interest expense (2,588) (1,061) (3,481) (8,578) (10,551)
Foreign exchange (loss)/gain, net (1,855) 1,214 (388) (295) (622)
------------- ------------ ------------ ------------- -------------
Loss before income taxes and
minority interest (13,382) (1,509) (12,254) (20,642) (22,395)
Income tax (expense)/benefit (3) (3) 66 (30) (496)
Minority interest - - 624 - 417
------------- ------------ ------------ ------------- -------------
Net loss (13,385) (1,512) (11,564) (20,672) (22,474)
Accretion of redeemable preferred stock (613) (306) (1,192) (2,113) (3,510)
------------- ------------ ------------ ------------- -------------
Net loss applicable to holders of common stock $ (13,998) $ (1,818) $ (12,756) $ (22,785) $ (25,984)
------------- ------------ ------------ ------------- -------------
------------- ------------ ------------ ------------- -------------
Basic and diluted net loss per common share $ (738.76) $ (95.95) $ (673.21) $ (1,202.50) $ (1,371.33)
------------- ------------ ------------ ------------- -------------
------------- ------------ ------------ ------------- -------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
POLAND COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
SUCCESSOR
(NOTE 2) PREDECESSOR (NOTE 2)
------------------- -------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
TWO MONTHS ENDED ONE MONTH ENDED SEVEN MONTHS ENDED
SEPTEMBER 30, ENDED JULY 31, SEPTEMBER 30, ENDED JULY 31, SEPTEMBER 30,
1999 1999 1998 1999 1998
------------------- ---------------- ----------------- ----------------- ----------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net loss $ (13,385) $ (1,512) $ (11,564) $ (20,672) $ (22,474)
Other comprehensive (loss) / income:
Translation adjustment (31,528) 1,775 (3,822) (15,947) (2,471)
=================== ================ ================= ================= ================
Comprehensive (loss) / income $ (44,913) $ 263 $ (15,386) $ (36,619) $ (24,945)
=================== ================ ================= ================= ================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE>
POLAND COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SUCCESSOR
(NOTE 2) PREDECESSOR (NOTE 2)
--------------------- -------------------------------------
SEVEN MONTHS NINE MONTHS
TWO MONTHS ENDED ENDED JULY 31, ENDED SEPTEMBER 30,
SEPTEMBER 30, 1999 1999 1998
--------------------- -------------- -------------------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (13,385) $ (20,672) $ (22,474)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Minority interest - - (417)
Depreciation and amortization 7,877 13,819 15,319
Changes in operating assets and liabilities:
Accounts receivable 700 (2,400) (783)
Other current assets (827) 2,138 456
Accounts payable 1,047 (5,566) 3,524
Accrued interest 2,442 767 3,352
Amounts due to affiliates 4,584 21,913 5,374
Deferred revenue 243 879 (114)
Accrued income taxes - - 677
Other current liabilities - - (653)
--------------------- ------------------ -----------------
Net cash provided by operating activities 2,681 10,878 4,261
--------------------- ------------------ -----------------
Cash flows from investing activities:
Construction and purchase of property, plant and equipment (4,398) (13,025) (31,868)
Other investments - - 20
Notes receivable from affiliate - 449 6,034
Purchase of intangibles (194) (1,036) (40)
Purchase of subsidiaries, net of cash received - (6,860) (6,289)
--------------------- ------------------ -----------------
Net cash used in investing activities (4,592) (20,472) (32,143)
--------------------- ------------------ -----------------
Cash flows from financing activities:
Proceeds from notes payable - 7,713 6,500
Repayment of notes payable 135 (445) (365)
Capital increase - 6,000 -
--------------------- ------------------ -----------------
Net cash provided by financing activities 135 13,403 6,135
--------------------- ------------------ -----------------
Net (decrease)/increase in cash and cash equivalents (1,776) 3,674 (21,747)
Cash and cash equivalents at beginning of period 6,248 2,574 25,750
--------------------- ------------------ -----------------
Cash and cash equivalents at end of period $ 4,472 $ 6,248 $ 4,003
--------------------- ------------------ -----------------
--------------------- ------------------ -----------------
Supplemental cash flow information:
Cash paid for interest $ 365 $ 7,304 $ 6,573
--------------------- ------------------ -----------------
--------------------- ------------------ -----------------
Cash paid for income taxes $ 53 $ 47 $ 511
--------------------- ------------------ -----------------
--------------------- ------------------ -----------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
7
<PAGE>
POLAND COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
1. BASIS OF PRESENTATION
The information furnished by Poland Communications, Inc. and its subsidiaries
("PCI" or the "Company") has been prepared in accordance with generally accepted
accounting principles in the United States ("U.S. GAAP") and the rules and
regulations of the Securities and Exchange Commission (the "SEC"). Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with U.S. GAAP have been condensed or omitted
pursuant to the rules and regulations. The accompanying consolidated balance
sheets, statements of operations, statements of comprehensive loss and
statements of cash flows are unaudited but in the opinion of management reflect
all adjustments (consisting only of items of a normal recurring nature) which
are necessary for a fair statement of the Company's consolidated results of
operations and cash flows for the interim periods and the Company's financial
position as of September 30, 1999. The accompanying unaudited consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and the notes thereto included in the Company's 1998 Annual
Report on Form 10-K filed with the SEC (the "1998 Annual Report"). The interim
financial results are not necessarily indicative of the results of the full
year.
2. CONSUMMATION OF UPC TENDER OFFER AND MERGER
On June 2, 1999, the Company's parent, @ Entertainment, entered into an
Agreement and Plan of Merger with United Pan-Europe Communications N.V. ("UPC"),
whereby UPC and its wholly-owned subsidiary, Bison Acquisition Corp. ("Bison"),
initiated a tender offer to purchase all of the outstanding shares of
@ Entertainment in an all cash transaction valuing @ Entertainment shares of
common stock at $19.00 per share.
The tender offer, initiated pursuant to the Agreement and Plan of Merger with
UPC and Bison, closed at 12:00 midnight on August 5, 1999. On August 6, 1999,
Bison reported that it had accepted for payment a total of 33,701,073 shares
of @ Entertainment's common stock (including 31,208 shares tendered pursuant
to notices of guaranteed delivery) representing approximately 99% of @
Entertainment's outstanding shares of common stock (the "Acquisition"). In
addition, UPC acquired 100% of the outstanding Series A and Series B 12%
Cumulative Preference Shares of @ Entertainment and acquired all of the
outstanding warrants.
Also on August 6, 1999, Bison was merged with and into @ Entertainment with
@Entertainment continuing as the surviving corporation (the "Merger").
Accordingly, @ Entertainment became a wholly-owned subsidiary of UPC.
UnitedGlobalCom, Inc. is the majority stockholder of UPC.
@Entertainment and the Company believe that a Change of Control occurred on
August 6, 1999 as a result of the Acquisition and Merger. PCI prior to the
Acquisition is herein referred to as the "Predecessor" while the Company after
the Acquisition is referred to as the "Successor".
The Acquisition was accounted for under the purchase method of accounting,
with all of the purchase accounting adjustments "pushed-down" to the
consolidated financial statements of @ Entertainment. Accordingly, the
purchase price was allocated to the underlying assets and liabilities based
upon their estimated fair values and any excess to goodwill. The Company
restated some of its assets and liabilities at August 1, 1999, the date
closest to the date of the effective merger. At this date the Notes of the
Company were restated by $1.6 million. The consideration paid by UPC for all
shares outstanding, warrants and options totaled $811.3 million. At this time
@Entertainment had negative net assets of approximately $51.3 million. As a
result of the above considerations, UPC realized goodwill of approximately
$938.8 million. As a result of the Acquisition, UPC pushed down its basis to
the Company establishing a new basis of accounting as of the acquisition
date. @ Entertainment allocated goodwill between the business segments based
on the investment model used for the acquisition. PCI was allocated
approximately $376 million of goodwill.
The following pro forma condensed consolidated results for the nine months ended
September 30, 1999 and 1998 give effect to the Acquisition of @ Entertainment as
if it had occurred at the beginning of the periods presented. This pro forma
condensed consolidated financial information does not purport to represent what
the Company's results would actually have
8
<PAGE>
been if such transaction had in fact occurred on such date. The pro forma
adjustments are based upon currently available information and upon certain
assumptions that management believes are reasonable.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, FOR THE NINE MONTHS ENDED
1999 SEPTEMBER 30, 1998
--------------------------------------- ----------------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
<S> <C> <C> <C> <C>
Service and other revenue $ 46,121 $ 46,121 $ 37,836 $ 37,836
================== ================== ================= ================
Net loss $ (34,057) $ (48,679) $ (22,474) $ (41,274)
================== ================== ================= ================
</TABLE>
3. OFFER TO REPURCHASE NOTES
Pursuant to the terms of the indenture covering the Poland Communications,
Inc. ("PCI") Notes (as defined hereafter), which provided that, following a
Change of Control (as defined therein), each holder of PCI Notes had the
right, at such holder's option, to require PCI to offer to repurchase all or
a portion of such holder's PCI Notes at the Repurchase Price. PCI made an
offer to repurchase (the "Offer") from the holders of the PCI's 9 7/8% Series
B Senior Notes Due 2003 and 9 7/8% Senior Notes Due 2003 (collectively, the
"PCI Notes").The Offer expired at 12:01 PM, New York City time, on November
2, 1999.
PCI was required to offer to repurchase the PCI Notes at their purchase price
of $1,010 per $1,000 principal amount of the PCI Notes, which is 101% per
$1,000 principal amount of the PCI. As of August 1, 1999, the Company had
$129,668,000 aggregate principal amount at maturity of the PCI Notes
outstanding. Pursuant to its repurchase offer, PCI has purchased $113,237,000
aggregate principal amount of PCI Notes for an aggregate price of
$114,369,370.
4. RECLASSIFICATIONS
Certain amounts have been reclassified in the prior period unaudited
consolidated financial statement to conform to the 1999 unaudited consolidated
financial statement presentation.
5. COMMITMENTS AND CONTINGENCIES
Programming Commitments
The Company has entered into programming agreements with certain third party
content providers. The programming agreements have terms which range from one to
five years and require that payments for programs be paid either at a fixed
amount or based upon the number of subscribers connected to the system each
month. At September 30, 1999, the Company had a minimum commitment under such
agreements of approximately $2,223,000 for the remainder of 1999, $16,564,000 in
2000, $7,646,000 in 2001, $4,872,323 in 2002, $5,078,000 in 2003 and $5,128,000
in 2004 and thereafter.
6. LITIGATION AND CLAIMS
From time to time, the Company is subject to various claims and suits arising
out of the ordinary course of business. While the ultimate result of all such
matters is not presently determinable, based upon current knowledge and facts,
management does not expect that their resolution will have a material adverse
effect on the Company's consolidated financial position or results of
operations.
PCBV minority stockholders' claim
On or about July 8, 1999, certain minority shareholders ("the minority
shareholders") of Poland Cablevision (Netherlands) B.V. ("PCBV"), a subsidiary
of the Company, filed a lawsuit against the Company's parent @Entertainment, the
Company, and certain other defendants, in United States District Court, Southern
District of Ohio, Eastern Division, Civil Action No. C2-99-621.
9
<PAGE>
The relief sought by the minority shareholders includes: (1) unspecified
damages in excess of $75,000, (2) an order lifting the restrictions against
transfer of shares set forth in the Shareholders' Agreement among PCBV's
shareholders, as amended ("the Shareholders' Agreement") so that the minority
shareholders can liquidate their shares in PCBV, (3) damages in the amount of
1.7 percent of the payment made by UPC for the shares of @ Entertainment as
set forth in the Agreement and Plan of Merger between @ Entertainment and UPC
dated June 2, 1999, and (4) attorneys' fees and costs incurred in prosecuting
the lawsuit.
The amended complaint sets forth eight claims for relief based on allegations
that the defendants, including @Entertainment and the Company, committed the
following wrongful acts: (1) breached a covenant not to compete contained in the
Shareholders' Agreement relating to the shareholders of PCBV, (2) breached a
covenant in the Shareholders' Agreement requiring that any contract entered into
by PCBV with any other party affiliated with the Company be commercially
reasonable or be approved by certain of the minority shareholders, (3) breached
a provision in the Shareholders' Agreement that allegedly required co-defendant
Chase International Corp. ("CIC") to offer the minority shareholders the right
to participate in certain sales of PCBV shares and that required CIC to give
written notice of any offer to purchase the minority shareholders' shares in
PCBV, (4) breached their fiduciary duties to the minority shareholders, (5)
breached the agreement between PCBV and CIC, which allegedly limited the amount
of management fees that could be paid annually by PCBV, (6) made false and
misleading statements in various documents filed with the Securities and
Exchange Commission, (7) colluded to defraud the minority shareholders by
failing to make reference in certain Forms 8-K, 8-KA and 14D-1 to the minority
shareholders or their alleged rights and claims, (8) colluded to divert assets
of PCBV to affiliates of the Company and PCBV, including @Entertainment, that
allegedly compete with the Company and PCBV.
The minority shareholders also seek damages in the amount of 1.7 percent of the
payment made by UPC for the shares of @Entertainment, although the amended
complaint does not contain a separate claim for relief seeking that amount.
The Company intends to defend the lawsuit vigorously. The Company has also
conducted negotiations to purchase the minority shareholders' outstanding
shares in PCBV. If the negotiations produce a sale by the minority
shareholders of their shares in PCBV to @Entertainment, the lawsuit would
most likely be terminated. The Company is unable to predict the outcome of
those negotiations.
In the event that the lawsuit is not terminated, its status is as follows:
The time for @Entertainment and the Company to respond to the amended
complaint has not yet expired. Discovery has not yet commenced. At this early
stage of the proceedings, the Company is unable to predict the probable
outcome of the lawsuit or the Company's ultimate exposure in connection
therewith.
In addition to the Ohio lawsuit, the other minority shareholders of PCBV
(representing an additional 6% of PCBV) have asserted similar claims for
compensation, but have not filed suit.
7. ACQUISITIONS
On July 9, 1999 a subsidiary of the Company entered into an agreement to
acquire 100% of a cable television system for total consideration of
approximately $7,500,000. The consummation of this transaction is subject to
Polish Ministry of Telecommunications approval. The acquisition has been
accounted for under the purchase method where the purchase price was
allocated to the underlying assets and liabilities based upon their estimated
fair values and any excess to goodwill. The acquisition is not expected to
have a material effect on the Company's results of operations in 1999.
On July 26, 1999 a subsidiary of the Company entered into an agreement to
purchase all of the assets and subscriber lists of a cable television system
for total consideration of approximately $2,800,000. The purchase will be
accounted for under the purchase method where the purchase price is allocated
to the underlying assets based upon their estimated fair values and any
excess to goodwill.
10
<PAGE>
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
(NOTE 2) (NOTE 2)
-------------------- --------------------
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------------- --------------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,069 $ 1,463
Accounts receivable, net of allowances for doubtful accounts
of $1,777,000 in 1999 and $708,000 in 1998 4,168 1,904
Due from affiliate 172 -
Other current assets 1,642 535
-------------------- --------------------
Total current assets 9,051 3,902
-------------------- --------------------
Property, plant and equipment:
Cable television system assets 85,715 136,833
Construction in progress 3,904 -
Vehicles 567 1,704
Other 4,202 5,832
-------------------- --------------------
94,388 144,369
Less accumulated depreciation (2,770) (40,041)
-------------------- --------------------
Net property, plant and equipment 91,618 104,328
Inventories for construction 4,654 6,638
Intangibles, net (note 2) 339,816 13,711
-------------------- --------------------
Total assets $ 445,139 $ 128,579
==================== ====================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
11
<PAGE>
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY / (DEFICIENCY)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
(NOTE 2) (NOTE 2)
----------------- ---------------------
SEPTEMBER 30, DECEMBER 31,
1999 1998
----------------- --------------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 2,263 $ 7,809
Deferred revenue 62 565
Other current liabilities 1,456 -
------------------ --------------------
Total current liabilities 3,781 8,374
Due to affiliate 45,924 26,491
Notes payable to affiliates 173,521 160,830
------------------ --------------------
Total liabilities 223,226 195,695
------------------ --------------------
Stockholders' equity / (deficiency):
Capital stock par value, $0.50 par; 200,000 shares
authorized, issued and outstanding 100 100
Paid-in capital (note 2) 261,884 14,589
Accumulated other comprehensive (loss) / income (27,297) 424
Accumulated deficit (12,774) (82,229)
------------------ --------------------
Total stockholders' equity / (deficiency) 221,913 (67,116)
------------------ --------------------
Total liabilities and stockholders' equity / (deficiency) $ 445,139 $ 128,579
================== ====================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
12
<PAGE>
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SUCCESSOR
(NOTE 2) PREDECESSOR (NOTE 2)
------------ -----------------------------------------------------------
TWO MONTHS THREE MONTHS NINE MONTHS
ENDED ONE MONTH ENDED SEVEN MONTHS ENDED
SEPTEMBER 30, ENDED JULY 31, SEPTEMBER 30, ENDED JULY 31, SEPTEMBER 30,
1999 1999 1998 1999 1998
------------- ------------- ----------- ------------- -----------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues $ 10,008 $ 5,143 $ 8,955 $ 29,535 $ 25,682
Operating expenses:
Direct operating expenses 7,609 3,700 9,022 20,988 15,722
Selling, general and administrative expenses 3,685 1,405 1,908 6,947 8,402
Depreciation and amortization 6,300 1,465 3,501 8,726 9,815
------------------------- ------------ ------------- ---------------
Total operating expenses 17,594 6,570 14,431 36,661 33,939
Operating loss (7,586) (1,427) (5,476) (7,126) (8,257)
Interest and investment income 10 22 43 59 117
Interest expense (2,327) (1,183) (3,294) (8,029) (9,538)
Foreign exchange (loss)/gain, net (2,868) 1,468 (587) (219) (495)
------------------------- ------------ ------------- ---------------
Loss before income taxes and
minority interest (12,771) (1,120) (9,314) (15,315) (18,173)
Income tax (3) (3) (12) (30) (221)
Minority interest - - 1,319 - 2,525
------------------------- ------------ ------------- ---------------
Net loss (12,774) (1,123) (8,007) (15,345) (15,869)
----------- ------------ ------------ ----------------- ----------------
Basic and diluted net loss per common share $(63.87) $ (5.62) $ (40.04) $(76.73) $ (79.35)
=========== ============ ============ ================= ================
</TABLE>
13
<PAGE>
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
SUCCESSOR
(NOTE 2) PREDECESSOR (NOTE 2)
------------------- ------------------------------------------------------------------------
TWO MONTHS THREE MONTHS NINE MONTHS
ENDED SEPTEMBER ONE MONTH ENDED SEVEN MONTHS ENDED
30, ENDED JULY 31, SEPTEMBER 30, ENDED JULY 31, SEPTEMBER 30,
1999 1999 1998 1999 1998
------------------- ---------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
Net loss $ (12,774) $ (1,123) $ (8,007) $ (15,345) $ (15,869)
Other comprehensive (loss) / income:
Translation adjustment (27,297) 843 (2,830) (11,814) (1,773)
=================== ================ ================ ================= ================
Comprehensive loss $ (40,071) $ (280) $ (10,837) $ (27,159) $ (17,642)
=================== ================ ================ ================= ================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
14
<PAGE>
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SUCCESSOR (NOTE 2) PREDECESSOR (NOTE 2)
--------------------- ---------------------------------------
NINE MONTHS
TWO MONTHS ENDED SEVEN MONTHS ENDED
SEPTEMBER 30, 1999 ENDED JULY 31, SEPTEMBER 30, 1998
--------------------- ---------------- ------------------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (12,774) $ (15,345) $ (15,869)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Minority interest - - (2,525)
Depreciation and amortization 6,300 8,726 9,815
Interest expense added to notes payable
to affiliates - 10,356 9,500
Changes in operating assets and liabilities:
Accounts receivable 452 (2,716) (663)
Other current assets (497) (263) 802
Accounts payable 1,227 (4,586) 3,176
Deferred revenue 162 937 (100)
Amounts due to affiliates 4,408 14,853 7,666
Other current liabilities - - (18)
--------------------- ---------------- ----------------
Net cash (used in) / provided by operating activities (722) 11,962 11,784
--------------------- ---------------- ----------------
Cash flows from investing activities:
Construction and purchase of property, plant and equipment (1,560) (10,263) (24,922)
Purchase of intangible assets - (145) 3
--------------------- ---------------- ----------------
Net cash used in investing activities (1,560) (10,408) (24,919)
--------------------- ---------------- ----------------
Cash flows from financing activities:
Proceeds from borrowings from affiliates 2,278 57 9,871
Dividend to parent - - (51)
--------------------- ---------------- ----------------
Net cash provided by financing activities 2,278 57 9,820
--------------------- ---------------- ----------------
Net (decrease) / increase in cash (4) 1,611 (3,315)
Cash at beginning of the period 3,073 1,463 4,951
--------------------- ---------------- ----------------
Cash at end of the period $ 3,069 $ 3,074 $ 1,636
===================== ================ ================
Supplemental cash flow information:
Cash paid for interest $ 276 $ 400 $ 57
===================== ================ ================
Cash paid for income taxes $ 44 $ 17 $ 222
===================== ================ ================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
15
<PAGE>
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
1. BASIS OF PRESENTATION
Financial information is included for Poland Cablevision (Netherlands) B.V. and
its subsidiaries ("PCBV") since PCBV is a guarantor of PCI's 9 7/8% Senior Notes
due 2003 and 9 7/8% Series B Senior Notes due 2003, (collectively, the "PCI
Notes"). The information furnished by PCBV has been prepared in accordance with
generally accepted accounting principles in the United States ("U.S. GAAP") and
the rules and regulations of the Securities and Exchange Commission ("SEC").
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with U.S. GAAP have been condensed
or omitted pursuant to the rules and regulations. The accompanying consolidated
balance sheets, statements of operations, statements of comprehensive loss and
statements of cash flows are unaudited but in the opinion of management reflect
all adjustments (consisting only of items of a normal recurring nature) which
are necessary for a fair statement of PCBV's consolidated results of operations
and cash flows for the interim periods and PCBV's financial position as of
September 30, 1999. The accompanying unaudited consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
of PCBV and the notes thereto included in PCI's 1998 Annual Report on Form 10-K
filed with the SEC. The interim financial results are not necessarily indicative
of the results of the full year.
2. CONSUMATION OF UPC TENDER OFFER AND MERGER
On June 2, 1999, the Company's parent, @ Entertainment, entered into an
Agreement and Plan of Merger with United Pan-Europe Communications N.V.
("UPC"), whereby UPC and its wholly-owned subsidiary, Bison Acquisition Corp.
("Bison"), initiated a tender offer to purchase all of the outstanding shares
of @ Entertainment in an all cash transaction valuing @ Entertainment shares
of common stock at $19.00 per share.
The tender offer, initiated pursuant to the Agreement and Plan of Merger with
UPC and Bison, closed at 12:00 midnight on August 5, 1999. On August 6, 1999,
Bison reported that it had accepted for payment a total of 33,701,073 shares
of @ Entertainment's common stock (including 31,208 shares tendered pursuant
to notices of guaranteed delivery) representing approximately 99% of @
Entertainment's outstanding shares of common stock (the "Acquisition"). In
addition, UPC acquired 100% of the outstanding Series A and Series B 12%
Cumulative Preference Shares of @ Entertainment and all of the outstanding
warrants.
Also on August 6, 1999, Bison was merged with and into @ Entertainment with
@Entertainment continuing as the surviving corporation (the "Merger").
Accordingly, @ Entertainment became a wholly-owned subsidiary of UPC.
UnitedGlobalCom, Inc. is the majority stockholder of UPC.
@Entertainment and Poland Communications, Inc. ("PCI") believe that a Change
of Control occurred on August 6, 1999 as a result of the Acquisition and
Merger. PCBV prior to the Acquisition is herein referred to as the
"Predecessor" while the Company after the Acquisition is referred to as the
"Successor".
The Acquisition was accounted for under the purchase method of accounting,
with all of the purchase accounting adjustments "pushed-down" to the
consolidated financial statements of @ Entertainment. Accordingly, the
purchase price was allocated to the underlying assets and liabilities based
upon their estimated fair values and any excess to goodwill. The Company
restated some of its assets and liabilities at August 1, 1999, the date
closest to the date of the effective merger. The consideration paid by UPC
for all shares outstanding, warrants and options totaled $811.3 million. At
this time the Company had negative net assets of approximately $51.3 million.
As a result of the above considerations, UPC realized goodwill of
approximately $938.8 million. As a result of the Acquisition, UPC pushed down
its basis to the Company establishing a new basis of accounting as of the
acquisition date. PCI pushed down allocated goodwill to its subsidiaries
based on basic subscribers at the acquisition data. PCBV was allocated $354.7
million of goodwill.
16
<PAGE>
The following pro forma condensed consolidated results for the nine months ended
September 30, 1999 and 1998 give effect to the acquisition of @ Entertainment as
if it had occurred at the beginning of the periods presented. This pro forma
condensed consolidated financial information does not purport to represent what
the Company's results would actually have been if such transaction had in fact
occurred on such date. The pro forma adjustments are based upon currently
available information and upon certain assumptions that management believes are
reasonable.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
--------------------------------- ------------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
<S> <C> <C> <C> <C>
Service and other revenue $ 39,543 $ 39,543 $ 25,682 $ 25,682
================= =============== =============== ==============
Net loss $ (28,119) $ (41,899) $ (15,869) $ (33,606)
================= =============== =============== ==============
</TABLE>
3. RECLASSIFICATIONS
Certain amounts have been reclassified in the prior period unaudited
consolidated financial statement to conform to the 1999 unaudited consolidated
financial statement presentation.
4. LITIGATION AND CLAIMS
From time to time, PCBV is subject to various claims and suits arising out of
the ordinary course of business. While the ultimate result of all such matters
is not presently determinable, based upon current knowledge and facts,
management does not expect that their resolution will have a material adverse
effect on PCBV's consolidated financial position or results of operations.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis provides information concerning the
results of operations and financial condition of the Company. Such discussion
and analysis should be read in conjunction with the accompanying unaudited
consolidated financial statements of the Company. Additionally, the following
discussion and analysis should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
audited consolidated financial statements included in Part II of the Company's
1998 Annual Report. The following discussion focuses on material trends, risks
and uncertainties affecting the results of operations and financial condition of
the Company.
Certain statements in this Quarterly Report on Form 10-Q constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, that are not historical facts but rather reflect
the Company's current expectations concerning future results and events. The
words "believes," "expects," "intends," "plans," "anticipates," "likely," "will"
"may", "shall" and similar expressions identify such forward-looking statements.
Such forward-looking statements involve known and unknown risks, uncertainties
and other important factors that could cause the actual results, performance or
achievements of the Company (or entities in which the Company has interests), or
industry results, to differ materially from future results, performance or
achievements expressed or implied by such forward-looking statements.
Readers are cautioned not to place undue reliance on these forward looking
statements which reflect management's view only as of the date of this Quarterly
Report on Form 10-Q. The Company undertakes no obligation to publicly release
the result of any revisions to these forward-looking statements which may be
made to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events, conditions or circumstances.
The risks, uncertainties and other factors that might cause such differences
include but are not limited to: (i) general economic conditions in Poland and in
the pay television business in Poland; (ii) changes in regulations the Company
operates under; (iii) uncertainties inherent in new business strategies,
including new product launches and development plans, which the Company has not
used before; (iv) rapid technology changes; (v) changes in, or failure or
inability to comply with government regulations; (vi) the development and
provision of programming for new television and telecommunications technologies;
(vii) the continued strength of competitors in the multichannel video
programming distribution industry and satellite services industry and the growth
of satellite delivered programming; (viii) future financial performance,
including availability, terms and deployment of capital; (ix) the ability of
vendors to deliver required equipment, software and services on schedule at the
budgeted cost; (x) the Company's ability to attract and hold qualified
personnel; (xi) changes in the nature of strategic relationships with joint
ventures; (xii) the overall market acceptance of those products and services,
including acceptance of the pricing of those products and services; (xiii)
acquisition opportunities; and (xiv) the ownership structure of the Company's
parent.
All references to the three and nine months ended September 30, 1999 herein
represent aggregation of the one month ended July 31, 1999 and two months ended
September 30, 1999, and the seven months ended July 31, 1999 and the two months
ended September 30, 1999, respectively as illustrated in the tables above.
OVERVIEW
On August 6, 1999, Bison Acquisition Corp., UPC's wholly-owned subsidiary,
was mergerd with and into @Entertainment, the Company's parent, with
@Entertainment continuing as the surviving corporation. Accordingly,
@Entertainment became a wholly-owned subsidiary of UPC. UnitedGlobalCom, Inc.
is the majority stockholder of UPC.
The Company operates the largest cable television system in Poland with
approximately 1,705,600 homes passed and approximately 984,000 total subscribers
as of September 30, 1999. The number of subscribers have grown historically
through a combination of increased penetration, new network build-out and
acquisitions.
Having established itself as the leading cable television service provider in
Poland, the Company continues to focus its efforts toward the strategic
objectives of increasing cash flow and enhancing the value of its cable
networks. To accomplish these objectives, the Company's business and operating
strategy in the cable television business is to (i) provide compelling
programming, (ii) increase pricing and maximize revenue per cable subscriber,
(iii) expand its regional clusters, (iv) increase subscriber penetration, and
(v) realize additional operating efficiencies.
18
<PAGE>
During 1998 and the first nine months of 1999, management completed or was in
the process of completing several strategic actions in support of this
business and operating strategy. On June 5, 1998, the Company began providing
the Wizja TV programming package, with its initial 11 channels of primarily
Polish-language programming, to its basic cable subscribers. Since that date,
the Wizja TV package has been expanded to 24 channels. On September 18, 1999,
the Company launched a proprietary premium channel called Wizja Sport.
Management believes that this selection of high-quality Polish-language
programming will provide it with a significant competitive advantage in
increasing its cable subscriber penetration rates.
The Company has implemented a pricing strategy designed to increase revenue
per subscriber and its profit margin. The Company has increased the monthly
price for the "basic" package service to reflect the increased channel
availability, and premium channels such as the HBO Poland service (a
Polish-language version of HBO's premium movie channel) are offered to cable
customers for an additional monthly charge. The Company expects that it may
continue to experience increases in its churn rate above historical levels
during the implementation of its current pricing strategy. For the nine
months ended September 30, 1999, the Company experienced churn in the HBO
Poland service of 5.4% with penetration falling by 7,003 subscribers or 17.9%
from September 30, 1998. The Company is planning to encrypt the HBO Poland
service on cable and install analog decoders for all premium channel
subscribers in its two major regional clusters during 1999. This encryption
and installation process is expected to be rolled out in all major systems in
2000.
The Company continues to expand the coverage areas of its regional clusters,
through selected build-out and acquisitions. During the third quarter of 1999,
the Company focused its building-out primarily in areas where it could fill-in
and expand existing clusters.
The Company, during the first nine months of 1999, continued a reorganization
of its organizational structure and certain departments. The Company's
centralized call center became operational during the first six months of
1998 for cable customers in certain regional clusters and will continue to
become operational for other cable customers as expansion of call center
activities progresses. The Company is also in the process of installing an
integrated management information system for its subscriber management and
billing and has completed the installation of an integrated management
information system for accounting systems. As it has acquired existing cable
television systems, the Company has tried to consolidate operations and
reduce equipment and personnel redundancies to achieve operating efficiencies
and reduce operation costs.
The Company's revenues have been and will continue to be derived primarily from
monthly subscription fees for cable television services and one-time
installation fees for connection to its cable television networks. The Company
charges cable subscribers fixed monthly fees for their choice of service
packages and for other services, such as premium channels, tuner rentals and
additional outlets, all of which are included in monthly subscription fees. The
Company currently offers broadcast, intermediate (in limited areas) and basic
packages of cable service. At September 30, 1999, approximately 72.3% of the
Company's subscribers received the Company's basic package. For the nine months
ended September 30, 1999, approximately 98% of the Company's revenue was derived
from monthly subscription fees compared to approximately 95% during the nine
months ended September 30, 1998. Revenue from installation fees is deferred to
the extent it exceeds direct selling costs and then amortized to income over the
estimated average period that new subscribers are expected to remain connected
to the Company's cable system.
The Company 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.
In addition to other operating statistics, the Company measures its financial
performance by EBITDA, an acronym for earnings before interest, taxes,
depreciation and amortization. The Company defines EBITDA to be net loss
adjusted for interest and investment income, depreciation and amortization,
interest expense, foreign currency gains and losses, income taxes, gains and
losses from the sale of assets other than in a normal course of business and
minority interest. The items excluded from EBITDA are significant components in
understanding and assessing the Company's financial performance. The Company
believes that EBITDA and related measures of cash flow from operating activities
serve as important financial indicators in measuring and comparing the operating
performance of media companies. EBITDA is not a U.S. GAAP
19
<PAGE>
measure of loss or cash flow from operations and should not be considered as an
alternative to cash flows from operations as a measure of liquidity. The Company
reported a positive EBITDA of $0.9 million for nine months ended September 30,
1999 and a positive of $3.3 million for nine months ended September 30, 1998.
Quarterly cable subscriber statistics are presented in the table below:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30,
1999 1999 1999 1998 1998 1998
----------- ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Homes Passed 1,705,569 1,669,384 1,624,119 1,591,981 1,565,287 1,546,540
Basic Subscribers 711,263 715,474 706,179 698,342 658,584 660,067
Subscriber Growth (three month period)
Organic 24,619 45,646 38,226(1) 70,935 41,904 57,007
Through Acquisitions 11,118 - - - (10,245)(2) 1,363
Churn (39,948) (36,351) (30,389) (31,177) (33,142) (26,016)
----------- ----------- ------------ ----------- ------------ -----------
TOTAL NET GROWTH (4,211) 9,295 7,837 39,758 (1,483) 32,354
----------- ----------- ------------ ----------- ------------ -----------
Basic penetration 41.7% 42.9% 43.5% 43.9% 42.1% 42.7%
Intermediate subscribers 32,032 32,128 33,587 40,037 42,538 43,204
----------- ----------- ------------ ----------- ------------ -----------
BASIC AND INTERMEDIATE SUBSCRIBERS 743,295 747,602 739,766 738,379 701,122 703,271
----------- ----------- ------------ ----------- ------------ -----------
Broadcast subscribers 240,652 219,165 208,457 196,961 186,334 167,859
----------- ----------- ------------ ----------- ------------ -----------
TOTAL SUBSCRIBERS 983,947 966,767 948,223 935,340 887,456 871,130
----------- ----------- ------------ ----------- ------------ -----------
Premium subscribers - HBO 32,032 32,784 34,332 36,615 39,035 45,674
Premium penetration - HBO 4.5% 4.6% 4.9% 5.2% 5.9% 6.9%
Basic revenue / basicsub. / month $6.47 $6.35 $6.20 $5.69 $5.19 $4.99
Total revenue / basicsub. / month $7.19 $7.13 $6.97 $6.75 $6.42 $6.08
</TABLE>
(1) The increase in basic subscribers for the three months ended March 31,
1999, included 4,121 subscribers in Szczecin that switched from the
"intermediate" to the "basic" package.
(2) As part of the purchase of a minority interest in one of the Company's
cable systems, the Company sold an isolated part of that system to the
previous owner.
20
<PAGE>
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 1998
CABLE TELEVISION REVENUE. Revenue increased $2.6 million or 19.5% from $13.3
million for the three months ended September 30, 1998 to $15.9 million for the
three months ended September 30, 1999 and $8.3 million or 22.0% from $37.8
million for the first nine months of 1998 to $46.1 million for the first nine
months ended September 30, 1999. These increases were primarily attributable to
an 8.0% increase in the number of basic subscribers from approximately 658,600
at September 30, 1998 to approximately 711,300 at September 30, 1999, as well as
an increase in monthly subscription rates.
Revenue from monthly subscription fees represented 97.2% and 98.8% of cable
television revenue for the three months ended September 30, 1998 and 1999,
respectively. Monthly subscription revenue constituted 94.6% and 97.7% of cable
television revenue for the nine months ended September 30, 1998 and 1999,
respectively. During the three months ended September 30, 1999, the Company
generated approximately $0.5 million of additional premium subscription revenue
as compared to $0.7 million from the corresponding period in 1998 as a result of
providing the HBO Poland service pay movie channel to cable subscribers. For the
nine months ended September 30, 1998 and 1999 premium subscription revenue was
$2.4 million and $1.6 million respectively.
DIRECT OPERATING EXPENSES. Direct operating expenses decreased $1.9 million,
or 14.6%, from $13.0 million for the three months ended September 30, 1998 to
$11.1 million for the three months ended September 30, 1999 but increased
$9.1 million, or 40.3%, from $22.6 million for the nine months ended
September 30, 1998 to $31.7 million for the nine months ended September 30,
1999. This decrease was primarily due to a reduction in intercompany
programming charges. This increase was principally as a result of the purchase
of the Wizja TV programming package for approximately $15.6 million from an
affiliate of the Company as well as the increased size of the Company's cable
television system. Direct operating expenses decreased from 97.7% of revenues
for the three months ended September 30, 1998 to 69.8% of revenues for the
three months ended September 30, 1999 and increased from 59.8% of revenues
for the nine months ended September 30, 1998 to 68.8% of revenues for the
nine months ended September 30, 1999. However, without considering the
programming cost for the purchase of the Wizja programming package recorded
in September 1998 and for the nine months ended September 30, 1999 the
comparison would have been 38.1% and 34.9% for the nine months ended
September 30, 1998 and 1999, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $2.3 million, or 67.6%, from $3.4 million
for the three months ended September 30, 1998 to $5.7 million for the three
months ended September 30, 1999 and increased $1.5 million, or 12.5%, from
$12.0 million for the nine months ended September 30, 1998 to $13.5 million
for the nine months ended September 30, 1999. This increase was attributable
to expanding operations of the cable business and extensive marketing
campaigns.
As a percentage of revenue, selling, general and administrative expenses
increased from 25.6% for the three months ended September 30, 1998 to
approximately 35.8% for the three months ended September 30, 1999 and decreased
from 31.7% for the nine months ended September 30, 1998 to 29.3% for the nine
months ended September 30, 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense rose
$4.1 million, or 75.9%, from $5.4 million for the three months ended
September 30, 1998 to $9.5 million for the three months ended September 30,
1999 and $6.4 million, or 41.8%, from $15.3 million for the nine months ended
September 30, 1998 to $21.7 million for the nine months ended September 30,
1999, principally as a result of depreciation and amortization of additional
goodwill pushed down as a result of the merger with UPC and the continued
build-out of the Company's cable networks. Depreciation and amortization
expense as a percentage of revenues increased from 40.6% for the three months
ended September 30, 1998 to 59.7% for the three months ended September 30,
1999 and from 40.5% for the nine months ended September 30, 1998 to 47.1% for
the six months period ended September 30, 1999.
INTEREST EXPENSE. Interest expense increased $0.1 million, or 2.9%, from $3.5
million for the three months ended September 30, 1998 to $3.6 million for the
three months ended September 30, 1999 and increased $0.6 million, or 5.7%, from
$10.6 million for the nine months ended September 30, 1998 to $11.2 million for
the nine months ended September 30, 1999. These increases are a result of loans
assumed by the Company in its acquisition of subsidiaries and an additional loan
drawn down in June 1998.
INTEREST AND INVESTMENT (LOSS) / INCOME, NET. Interest and investment income
decreased $0.3 million, or 300%, from $0.1 million of income for the three
months ended September 30, 1998 to $0.2 million of loss for the three
21
<PAGE>
months ended September 30, 1999 and $0.7 million, or 87.5%, from $0.8 million
of income for the nine months ended September 30, 1998 to $0.1 million of
income for the nine months ended September 30, 1999 primarily due to the
reduction in the level of cash used to fund the Company's operations.
FOREIGN EXCHANGE (LOSS)/GAIN, NET. For the three months ended September 30,
1999, foreign exchange loss amounted to $0.6 million as compared to a foreign
exchange loss of $0.4 million for the three months ended September 30, 1998.
For the nine months ended September 30, 1999, foreign exchange loss was $2.2
million compared to a foreign exchange loss of $0.6 million for the nine
months ended September 30, 1998. This is primarily due to the 17.5%
appreciation of the U.S. dollar against the Polish zloty in the nine months
ended September 30, 1999.
MINORITY INTEREST. No minority interest was recorded for the three months or
nine months ended September 30, 1999 compared to minority interest income of
$0.6 million and $0.4 million for the corresponding periods in 1998. All
minority interest was eliminated in 1998 as the minority interest share of
the losses in subsidiaries exceeded the value of minority interest
investments.
NET LOSS. For the three months ended September 30, 1998 and the three months
ended September 30, 1999, the Company had net losses of $11.6 million and $14.9
million, respectively and for the nine months ended September 30, 1998 and the
nine months ended September 30, 1999, the Company had net losses of $22.5
million and $34.1 million, respectively. These losses were the 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 senior debt notes by the Company
(the "Notes").
The Company had positive cash flows from operating activities in 1998 of
$14.3 million, primarily due to the decrease of amounts due from affiliates,
increase in accounts payable and accrued expenses, and income tax refunds
received in 1998. The Company had positive cash flows from operating
activities for the nine months ended September 30, 1998 of $4.3 million and
had positive cash flows from operating activities for nine months ended
September 30, 1999 of $13.6 million, due to an increase in monthly
subscription rates, an increase in the amount due to an affiliate and
operating efficiencies.
Cash used for the purchase and expansion of the Company's cable television
networks was $31.9 million and $17.4 million for the nine months ended September
30, 1998 and 1999, respectively. The decrease in the first nine months of 1999
compared to the same period in 1998 is due to the development of the Company's
new build-out strategy and completion in 1998 of upgrades of recently acquired
networks and subsidiaries.
During 1996, the Company also entered into an agreement with American Bank in
Poland, S.A. ("AmerBank") which provides for a credit facility of approximately
$6.5 million. Interest, based on LIBOR plus 3%, is due quarterly. All advances
under the loan must be repaid by November 20, 1999. All amounts under this
facility were drawn in June 1998.
On October 31, 1996, the Company sold $130 million aggregate principal amount of
the PCI Notes. Pursuant to the indenture governing the Notes (the "PCI
Indenture"), the Company is subject to certain restrictions and covenants,
including, without limitation, covenants with respect to the following matters:
(i) limitation on additional indebtedness; (ii) limitation on restricted
payments; (iii) limitation on issuance's and sales of capital stock of
subsidiaries; (iv) limitation on transactions with affiliates; (v) limitation on
liens; (vi) limitation on guarantees of indebtedness by subsidiaries; (vii)
purchase of the Notes upon a change of control; (viii) limitation on sale of
assets; (ix) limitation on dividends and other payment restrictions affecting
subsidiaries; (x) limitation on investments in unrestricted subsidiaries; (xi)
limitation on lines of business; and (xii) consolidations, mergers and sale of
assets. The Company is in compliance with these covenants. The PCI Indenture
limits, but does not prohibit, the payment of dividends by PCI and the ability
of PCI to incur additional indebtedness. PCI could not pay dividends to
@Entertainment as of December 31, 1998 because certain financial ratios did not
meet the minimum
22
<PAGE>
provided in the PCI indenture. Pursuant to the AmerBank credit facility, the
Company is subject to certain informational and notice requirements but is not
subject to restrictive covenants.
The PCI Indenture provides that, following a Change of Control (as defined
therein), each noteholder had the right, at such holder's option, to require
the issuer to offer to repurchase all or a portion of such holder's PCI Notes
at the repurchase price, described below. The Company believes that the
August 6, 1999 acquisition by UPC of the Company constituted a Change of
Control. Accordingly, PCI made an offer to repurchase (the "Offer") from the
holders the PCI Notes. The Offer expired at 12:01 PM, New York City time, on
November 2, 1999.
In accordance with the terms of the PCI Indenture, PCI was required to offer
to repurchase the PCI Notes at the purchase price 101% of principal. As of
August 1, 1999, PCI had $ 129,668,000 aggregate principal amount at maturity
of PCI Notes outstanding. Pursuant to the Offer, PCI has purchased
$113,237,000 aggregate principal amount of PCI Notes for an aggregate price
of $114,369,370. Subsequent to November 2, 1999 UPC financed the repurchase
of the PCI Notes.
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 its business
strategy. Future sources of financing for the Company could include public or
private debt offerings or bank financings or any combination thereof, subject
to the restrictions contained in the indentures governing the outstanding
senior indebtedness of the Company, @Entertainment, UPC and UnitedGlobalCom,
Inc., UPC's parent. Moreover, if the Company's plans or assumptions change,
if its assumptions prove inaccurate, if it consummates unanticipated
investments in or acquisitions of other companies, if it experiences
unexpected costs or competitive pressures, or if existing cash, and projected
cash flow from operations prove to be insufficient, the Company may need to
obtain greater amounts of additional financing. While it is the Company's
intention to enter only into new financing or refinancings that it considers
advantageous, there can be no assurance that such sources of financing would
be available to the Company in the future, or, if available, that they could
be obtained on terms acceptable to the Company. The Company is also dependent
on its parent, @Entertainment, and @ Entertainment's parent, UPC, to provide
financing to achieve the Company's business strategy. There is no obligation
from UPC, contractually or otherwise, to make such financing available to the
Company.
YEAR 2000 COMPLIANCE
The Company's operations are heavily dependent upon computer systems and
other technological devices with imbedded chips. Such computer systems and
other technological devices may not be capable of accurately recognizing
dates beginning on January 1, 2000. This problem could cause miscalculations,
resulting in the Company's cable television services malfunctioning or
failing to operate.
YEAR 2000 COMPLIANCE PROGRAM
In response to possible Year 2000 problems, the Board of Directors of United
GlobalCom ("United") established a task force to assess the impact that
potential Year 2000 problems may have on company-wide operations, including
the Company and its operating companies, and to implement necessary changes
to address such problems. The task force includes the Company's and
@Entertainment's staff, external consultants and subcommittees at the
operating company levels, as well as staff from United that reports directly
to the United Board. In creating a program to minimize Year 2000 problems,
the task force identified certain critical operations of the Company's
business. These critical operations are service delivery systems, field and
headend devices, customer service and billing systems, and corporate
management and administrative operations such as cash flow, accounts payable
and accounts receivable, payroll and building operations.
The task force has established a three-phase program to address potential Year
2000 problems:
23
<PAGE>
- - Identification Phase: identify and evaluate computer systems and
other devices (e.g., headend devices, switches and set top boxes) on a
system by system basis for Year 2000 compliance.
- - Implementation Phase: establish a database and evaluate the information
obtained in the Identification Phase, determine priorities, implement
corrective procedures, define costs and ensure adequate funding.
- - Testing Phase: test the corrective procedures to verify that all material
compliance problems will operate on and after January 1, 2000, and
develop, as necessary, contingency plans for material operations.
In August 1999, UPC completed the acquisition of @Entertainment, the
Company's parent. During the third quarter of 1999 UPC initiated a priority
level review of the Year 2000 programs existing in @Entertainment and the
Company. UPC requested the Company to complete a Year 2000 due diligence form
and is in the process of reviewing the Company's response in order to
determine the Company's Year 2000 readiness. These forms, which have been
completed by the Company's Y2K managers, have provided the Company with a
very detailed view of the Year 2000 status for the Company. UPC is currently
implementing the necessary steps to assure compliance of the mission critical
systems and other date related equipment. However, there can be no assurance
that UPC will be successful in this endeavour.
Currently, the assessment of the Year 2000 program at the Company is behind
schedule and incomplete. To date only approximately 50% of all equipment with
date related issues have been inventoried and research on compliance is on
going. Customer care, billing and subscriber management systems are
considered mission critical systems and have been researched with
unsatisfactory results. None of these systems are Y2K compliant. UPC is
working to upgrade and patch the systems to Y2K compliant versions. Both
vendors and consultants have committed to compliance by the December 31,
1999. However the Company cannot be sure that the deadline will be met.
Testing of the mission critical systems commenced in November and will be
completed in December of 1999. UPC has hired several third party Year 2000
firms to administer and assist in the project in an effort to be ready for
the millennium at the end of December.
The United task force will continue to evaluate the need for external
resources to complete the Identification Phase and the Implementation Phase
and implement the Testing Phase. UPC has remained committed to the securing
the resources necessary to complete its Year 2000 program, and when necessary
has hired outside experienced resources to solve Year 2000 issues.
In addition to its Year 2000 task force United is a member of a Year 2000
working group, which has 12 cable television companies and meets under the
auspices of Cable Labs. The dialogue with the other cable operators has
assisted United in developing its Year 2000 program. Part of the agenda of
the working group is to develop test procedures and contingency plans for
critical components of operating systems for the benefit of all its members.
The test procedures were made available to members, including United, during
the second quarter of 1999.
THIRD-PARTY DEPENDENCE
The Company believes that its most significant Year 2000 risk is its dependency
upon third party programming, software, services and equipment, because the
Company does not have the ability to control third parties in their assessment
and remediation procedures for potential Year 2000 problems. Should these
parties not be prepared for year 2000 conversion,
24
<PAGE>
their products or services may fail and may cause interruptions in, or
limitations upon, the Company's provision of its service to its cable
customers. In an effort to prevent any such interruptions or limitations, the
Company is in the process of communicating with each of its material third
party suppliers of programming, software, services and equipment to determine
the status of their Year 2000 compliance programs.
To date, responses by vendors to such communications have been limited. The
responses received state only that the party is working on Year 2000 issues
and does not have a definitive position at this time. As a result, the
Company is unable to assess the risk posed by its dependence upon such third
parties' systems. The Company cannot give any assurances concerning such
equipment's Year 2000 Compliance.
The task force is working closely with the manufacturers of the Company's
headend devices to remedy any Year 2000 problems assessed in the headend
equipment. Recent information from the two primary manufacturers of such
equipment indicate that most of the equipment used in the Company's operating
systems is not date-sensitive. Where such equipment needs to be upgraded for
Year 2000 issues, such vendors are upgrading without charge. These upgrades
are expected to be completed before year-end 1999, but this process is not
entirely within the Company's control. Approximately 98.0% of the headend
controllers, which are considered the most critical component of the headend
devices, have been upgraded.
Largely as a result of its high rate of growth over the past few
years, the Company has entered into an agreement to purchase a new system to
replace its current accounting system and an agreement to purchase
specialized billing software for the Company's new customer service and
billing center. The vendors of the new accounting system and billing software
have confirmed to the Company that these products are year 2000 compliant.
The Company has completed the testing phase of the new accounting system, and
the implementation phase was substantially completed at the end of 1998. The
Company expects implementation of the billing software to be completed for
the majority of its cable subscribers by the end of 1999. The Company is not
able to replace billing systems covering approximately 400,000 cable
subscribers prior to the end of 1999. This software is not currently Year
2000 compliant. The Company is upgrading this software, but may not have this
software fully compliant by the end of 1999.
CONTINGENCY PLAN
The Company has considered certain limited contingency plans, including
preparing back-up programming and stand-by power generators. Based on these
considerations, the Company has received from the task force a contingency
plan to the Company's operating system, which sets forth preparation
procedures and recovery solutions. With respect to other third-party systems,
the Company is responsible for inquiring of its vendors and other entities
with which it does business (e.g., utility companies, financial institutions
and facility owners) as to such entities' Year 2000 compliance programs. The
Company has begun this process and to assist the Company in this process,
Year 2000 consultants have been hired. The consultants are visiting each
operating company and working with them to identify and report to the Company
any remaining potential Year 2000 compliance problems. These consultants are
also contacting third-party vendors regarding their Year 2000 compliance
measures. Audit teams will be ready to follow up on the initial research and
continue to review the contingency and year-end plans.
In addition UPC has organized a European Year 2000 conference to discuss with
all of its managers the risks at years end and their contingency plans.
Business continuity plans have been documented and will be discussed at the
conference.
COST OF COMPLIANCE
The Company has not yet determined the full cost of its Y2K Plan and its
related impact on the financial condition of the Company. The Company has to
date not incurred any replacement and remediation costs for equipment or
systems as a result of Year 2000 non-compliance. Rather, due to the rapid
growth and development of its cable system, the Company has made substantial
capital investments in equipment and systems for reasons other than Year 2000
concerns.
The total cost of the Company's new accounting system and billing software
package is estimated to be approximately $3.2 million. The Company has
recently estimated the cost of upgrading some of the billing systems to be
approximately $0.4 million and the infrastructure upgrade, including
installation, project management and consultancy to be approximately $2.4
million. Although no assurance can be made, the Company believes that the
known Year 2000 compliance issues can be remedied without a material
financial impact on the Company. No assurance can be made, however, as to the
total cost for the Year 2000 program until all of the data has been gathered.
In addition, the Company cannot predict the financial impact it will
experience if Year 2000 problems are caused by third parties upon which the
Company's systems are dependent or experienced by entities in which the
Company holds investments. The failure of any one of these parties to
implement Year 2000 procedures could have a material adverse impact on the
Company's operations and financial condition.
25
<PAGE>
Impact of New Accounting Standards Not Yet Adopted
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" which establishes
standards of accounting for these transactions. SFAS No. 133 is effective for
the Company beginning on January 1, 2001. The Company currently has no
derivative instruments or hedging activities.
26
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risk (i.e., the risk of loss arising from adverse changes
in market rates and prices) to which the Company is exposed is foreign exchange
rate risk from fluctuations in the Polish zloty currency exchange rate. The
Company's long term debt is primarily subject to a fixed rate, and therefore
variations in the interest rate do not have a material impact on net interest
expense.
FOREIGN EXCHANGE AND OTHER INTERNATIONAL MARKET RISKS
Operating in international markets involves exposure to movements in currency
exchange rates. Currency exchange rate movements typically affect economic
growth, inflation, interest rates, governmental actions and other factors. These
changes, if material, can cause the Company to adjust its financing and
operating strategies. The discussion of changes in currency exchange rates below
does not incorporate these other important economic factors.
International operations constitute 100% of the Company's consolidated operating
loss for the quarter ended September 30, 1999. Some of the Company's operating
expenses and capital expenditures are expected to continue to be denominated in
or indexed in U.S. dollars. By contrast, substantially all of the Company's
revenues are denominated in zloty. Any devaluation of the zloty against the U.S.
dollar that the Company is unable to offset through price adjustments will
require it to use a larger portion of its revenue to service its U.S. dollar
denominated obligations and contractual commitments.
The Company estimates that a 10% change in foreign exchange rates would
impact reported operating loss by approximately $136,000. In other terms, a
10% depreciation of the Polish zloty against the U.S. dollar, would result in
a $136,000 increase in the operating loss for the nine months ended September
30, 1999. This was estimated using 10% of the Company's operating loss after
adjusting for unusual impairment and other items including U.S. dollar
denominated or indexed expenses. The Company believes that this quantitative
measure has inherent limitations because, as discussed in the first paragraph
of this section, it does not take into account any governmental actions or
changes in either customer purchasing patterns or the Company's financing or
operating strategies.
The Company does not generally hedge currency translation risk. While the
Company may consider entering into transactions to hedge the risk of exchange
rate fluctuations, there is no assurance that it will be able to obtain hedging
arrangements on commercially satisfactory terms. Therefore, shifts in currency
exchange rates may have an adverse effect on the Company's financial results and
on its ability to meet its U.S. dollar denominated debt obligations and
contractual commitments.
Poland has historically experienced high levels of inflation and significant
fluctuations in the exchange rate for the zloty. The Polish government has
adopted policies that slowed the annual rate of inflation from approximately
250% in 1990 to approximately 20% in 1996, approximately 14.9% in 1997, and
approximately 11.8% in 1998. The rate of inflation for the three months period
ended September 30, 1999 was approximately 6.5%. The exchange rate for the zloty
has stabilized and the rate of devaluation of the zloty has generally decreased
since 1991 and the zloty has appreciated against the U.S. dollar by
approximately 0.4% for the year ended December 31, 1998. For the nine months of
1999 the zloty has depreciated against the U.S. dollar by approximately 17.4%.
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.
27
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in litigation from time to time in the ordinary course
of business. In management's opinion, the litigation in which the Company is
currently involved, individually and in the aggregate, is not material to the
Company's business, financial condition or results of operations. See also Note
6 to the unaudited consolidated financial statements, for a description of the
PCBV Minority Stockholders' Claim.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 3, 1999, @ Entertainment, the sole stockholder of the Company,
acting by unanimous written consent in lieu of a special meeting, approved
the nomination and appointment of the following individuals to serve as
members of the Board of Directors of the Company: Nimrod J. Kovacs; Gene
Musselman; Ray Samuelson; Anton Tuijten; Simon Oakes; Przemyslaw Szmyt; and
Dorothy Hansberry.
ITEM 5. OTHER INFORMATION:
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 11 - Statement regarding computation of per share earnings
(contained in Note 3 to Unaudited Financial Statements in this
Quarterly Report in Form 10-Q)
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
Report on Form 8-K, filed on September 20, 1999, regarding a press release dated
September 20, 1999, relating to the announcement of the Offer to Repurchase
PCI's 9 7/8 % Series B Senior Notes Due 2003 and 9 7/8% Senior Notes Due 2003.
Report on Form 8-K, filed on November 3, 1999, regarding a press release dated
November 3, 1999, relating to the expiration of the Offer to Repurchase PCI's
9 7/8 % Series B Senior Notes Due 2003 and 9 7/8% Senior Notes Due 2003.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
POLAND COMMUNICATIONS, INC.
By: /s/ Ray Samuelson
Ray Samuelson
Director of Finance and Accounting and Treasurer
Date: November 15, 1999
29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS INCLUDED IN THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,472
<SECURITIES> 0
<RECEIVABLES> 7,173
<ALLOWANCES> 2,703
<INVENTORY> 5,957
<CURRENT-ASSETS> 11,657
<PP&E> 125,694
<DEPRECIATION> (3,263)
<TOTAL-ASSETS> 525,904
<CURRENT-LIABILITIES> 137,181
<BONDS> 18,668
33,703
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<COMMON> 1
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<TOTAL-LIABILITY-AND-EQUITY> 525,904
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<CGS> 0
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<INCOME-PRETAX> (34,024)
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