<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 JUNE 30, 1999.
OR
/ / TRANSITION REPORT PURSUANT TO THE SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT 1934
FROM THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 333-20307
POLAND COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
NEW YORK 06-1070447
(State or Other Jurisdiction of (IRS Employer
Incorporation of Organization) Identification No.)
ONE COMMERCIAL PLAZA
HARTFORD, CONNECTICUT 06103
(Address of Principal Executive Officers) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (860) 549-1674
Indicate by check (X) whether the registrant (1) has filed all reports required
to be fled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days Yes__X__ No __________
The number of shares outstanding of Poland Communications, Inc.'s common stock
as of June 30, 1999, was:
Common Stock 18,948
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1
<PAGE>
POLAND COMMUNICATIONS, INC.
FORM 10-Q INDEX
FOR THE QUARTERLY PERIOD ENDED JUNE 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
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17-23
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 24
PART II OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
</TABLE>
2
<PAGE>
POLAND COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------------- ----------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,352 $ 2,574
Accounts receivable, net of allowances for doubtful
accounts of $1,594,000 in 1999 and $1,095,000 in 1998 5,012 2,770
Due from affiliate 258 -
Other current assets 1,441 1,362
-------------- -------------------
Total current assets 10,063 6,706
-------------- -------------------
Property, plant and equipment:
Cable television system assets 164,198 175,053
Construction in progress 4,213 1,665
Vehicles 1,703 2,096
Other 5,766 6,183
-------------- -------------------
175,880 184,997
Less accumulated depreciation (52,075) (48,129)
-------------- -------------------
Net property, plant and equipment 123,805 136,868
Inventories for construction 6,395 8,851
Intangibles, net 27,893 34,481
Notes receivable from affiliates - 449
Other assets 5,907 6,430
-------------- -------------------
Total assets $ 174,063 $ 193,785
-------------- -------------------
-------------- -------------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
POLAND COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------------------- -------------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 6,613 $ 13,268
Accrued interest 2,140 2,140
Deferred revenue 1,901 1,207
Income taxes payable 3,879 3,794
Other current liabilities 107 -
Current position of note payable 6,500 6,500
------------- --------------
Total current liabilities 21,140 26,909
Due to affiliate 36,924 17,519
Notes payable, less current portion 131,465 131,941
------------- --------------
Total liabilities 189,529 176,369
------------- --------------
Redeemable preferred stock (liquidation value $60,000,000;
6,000 shares authorized, issued and outstanding) 32,784 30,977
Commitments and contingencies (note 4)
Stockholders' deficiency
Common stock, $.01 par value, 27,000 shares authorized; 18,948
shares issued and outstanding 1 1
Paid-in capital 83,604 78,380
Accumulated other comprehensive (loss) /income (17,136) 586
Accumulated deficit (114,719) (92,528)
------------- --------------
Total stockholders' deficiency (48,250) (13,561)
------------- --------------
Total liabilities and stockholders' deficiency $ 174,063 $ 193,785
------------- --------------
------------- --------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
POLAND COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Cable television revenue $ 15,481 $ 12,478 $ 30,264 $ 24,571
Operating expenses:
Direct operating expenses 10,508 5,791 20,610 9,533
Selling, general and administrative expenses 4,824 4,206 7,820 8,658
Depreciation and amortization 6,265 5,085 12,214 9,920
-------- -------- -------- --------
Total operating expenses 21,597 15,082 40,644 28,111
-------- -------- -------- --------
Operating loss (6,116) (2,604) (10,380) (3,540)
Interest and investment income -- 310 273 703
Interest expense (3,612) (3,538) (7,517) (7,070)
Foreign exchange gain / (loss), net 83 (301) (1,509) (234)
-------- -------- -------- --------
Loss before income taxes and
minority interest (9,645) (6,133) (19,133) (10,141)
Income tax expense (8) (229) (27) (562)
Minority interest -- (58) -- (207)
-------- -------- -------- --------
Net loss (9,653) (6,420) (19,160) (10,910)
Accretion of redeemable preferred stock (916) (1,159) (1,807) (2,318)
-------- -------- -------- --------
Net loss applicable to holders of common stock $(10,569) $ (7,579) $(20,967) $(13,228)
-------- -------- -------- --------
-------- -------- -------- --------
Basic and diluted net loss per common share (note 3) $(557.79) $(399.99) $(1,106.55) $(698.12)
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
POLAND COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
---------------- ----------------- ------------------ ------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net loss $ (9,653) $ (6,420) $ (19,160) $ (10,910)
Other comprehensive (loss) / income:
Translation adjustment
1,966 (1,266) (17,722) 1,351
---------------- ----------------- ------------------ ------------------
Comprehensive loss $ (7,687) $ (7,686) $ (36,882) $ (9,559)
---------------- ----------------- ------------------ ------------------
---------------- ----------------- ------------------ ------------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE>
POLAND COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 1998
-----------------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(19,160) $(10,910)
Adjustments to reconcile net loss to
net cash provided by /(used in) operating activities:
Minority interest -- 207
Depreciation and amortization 12,214 9,513
Amortization of notes payable discount and issue cost 523 407
Changes in operating assets and liabilities:
Accounts receivable (2,158) (634)
Other current assets (79) (5,852)
Accounts payable (5,110) 5,685
Income taxes payable -- 676
Amounts due to affiliates 19,147 (998)
Deferred revenue 825 (346)
Other current liabilities -- (345)
-------- --------
Net cash provided by /(used in) operating activities 6,202 (2,597)
-------- --------
Cash flows from investing activities:
Construction and purchase of property, plant and equipment (9,483) (24,497)
Other investments -- 21
Notes receivable from affiliate 449 (761)
Purchase of intangibles (145) (49)
Purchase of subsidiaries, net of cash received -- (783)
-------- --------
Net cash used in investing activities (9,179) (26,069)
-------- --------
Cash flows from financing activities:
Proceeds from notes payable -- 6,500
Repayment of notes payable (245) (32)
Capital increase 4,000 --
-------- --------
Net cash provided by financing activities 3,755 6,468
-------- --------
Net increase / (decrease) in cash and cash equivalents 778 (22,198)
Cash and cash equivalents at beginning of period 2,574 25,750
-------- --------
Cash and cash equivalents at end of period $ 3,352 $ 3,552
-------- --------
-------- --------
Supplemental cash flow information:
Cash paid for interest $ 7,159 $ 6,476
-------- --------
-------- --------
Cash paid for income taxes $ 53 $ 395
-------- --------
-------- --------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
7
<PAGE>
POLAND COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
1. BASIS OF PRESENTATION
The information furnished by Poland Communications, Inc. and its subsidiaries
("PCI" or the "Company") has been prepared in accordance with generally accepted
accounting principles in the United States ("U.S. GAAP") and the rules and
regulations of the Securities and Exchange Commission (the "SEC"). Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with U.S. GAAP have been condensed or omitted
pursuant to the rules and regulations. The accompanying consolidated balance
sheets, statements of operations, statements of comprehensive loss and
statements of cash flows are unaudited but in the opinion of management reflect
all adjustments (consisting only of items of a normal recurring nature) which
are necessary for a fair statement of the Company's consolidated results of
operations and cash flows for the interim periods and the Company's financial
position as of June 30, 1999. The accompanying unaudited consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and the notes thereto included in the Company's 1998 Annual Report on
Form 10-K filed with the SEC (the "1998 Annual Report"). The interim financial
results are not necessarily indicative of the results of the full year.
2. RECLASSIFICATIONS
Certain amounts have been reclassified in the prior period unaudited
consolidated financial statement to conform to the 1999 unaudited consolidated
financial statement presentation.
3. LOSS PER SHARE
As noted in the 1998 Annual Report, the Company adopted SFAS No. 128, "Earnings
Per Share". The statement required that all prior period earnings per share
calculations including interim financial statements be restated to conform to
the provisions of this statement. Basic and diluted loss per ordinary share is
based on the weighted average number of ordinary shares outstanding of 18,948
for both the six-month periods ended June 30, 1999 and 1998.
4. COMMITMENTS AND CONTINGENCIES
Programming Commitments
The Company has entered into programming agreements with certain third party
content providers. The programming agreements have terms which range from one to
five years and require that payments for programs be paid either at a fixed
amount or based upon the number of subscribers connected to the system each
month. At June 30, 1999, the Company had a minimum commitment under such
agreements of approximately $1,290,000 for the remainder of 1999, $3,784,100 in
2000, $4,470,700 in 2001, $4,872,300 in 2002, $5,077,600 in 2003 and $5,128,300
in 2004 and thereafter. For the six months ended June 30, 1999 and 1998, the
Company incurred programming fees of approximately $14,646,000 and $5,407,000
respectively, pursuant to these agreements.
Litigation and Claims
From time to time, the Company is subject to various claims and suits arising
out of the ordinary course of business. While the ultimate result of all such
matters is not presently determinable, based upon current knowledge and
facts, management does not expect that their resolution will have a material
adverse effect on the Company's consolidated financial position or results of
operations. (See also Note 6 Subsequent Events-PCBV Minority Stockholders'
Claim.)
5. MERGER AGREEMENT
On June 2, 1999, the Company's parent, @ Entertainment, Inc. entered into an
Agreement and Plan of Merger with United Pan-Europe Communications N.V.
("UPC"), whereby UPC and its wholly-owned subsidiary, Bison Acquisition Corp.
("Bison"), initiated a tender offer to purchase all of the outstanding shares
of @ Entertainment in an all cash transaction valuing @ Entertainment shares
of common stock at $19.00 per share (See also Note 6 Subsequent
Events--Consummation of UPC Tender Offer and Merger).
8
<PAGE>
6. SUBSEQUENT EVENTS
Subsequent to June 30, 1999, a subsidiary of the Company entered into an
agreement to acquire 100% of a cable television system for a total consideration
of approximately $7,330,000. The consummation of this transaction is pending
Ministry of Telecommunications approval. The acquisition will be accounted for
under the purchase method where the purchase price will be allocated to the
underlying assets and liabilities based upon their estimated fair values and any
excess to goodwill. The acquisition is not expected to have a material effect on
the Company's results of operations in 1999.
Subsequent to June 30, 1999 a subsidiary of the Company purchased all of the
assets and subscribers lists of a cable television system for a total
consideration of approximately $2,800,000. The purchase will be accounted for
under the purchase method where the purchase price will be allocated to the
underlying assets based upon their estimated fair values and any excess to
goodwill.
PCBV Minority Stockholders' Claim
On or about July 8, 1999, five minority shareholders (the "minority
shareholders") of Poland Cablevision (Netherlands) B.V. ("PCBV"), a subsidiary
of PCI, filed a lawsuit Civil Action No. C2-99-621, against the Company's
parent, @Entertainment, the Company, Advent Capital Corporation, Chase
Enterprises, Inc., Chase International Corporation, Goldman, Sachs & Co., UPC,
Cheryl Chase, and Arnold Chase, in the United States District Court for the
Southern District of Ohio, Eastern Division.
The relief sought by the minority shareholders includes: (1) unspecified damages
in excess of $75,000, (2) an order lifting the restrictions against transfer of
shares set forth in the Shareholders' Agreement among PCBV's shareholders, as
amended (the "Shareholders' Agreement"), so that the minority shareholders can
liquidate their shares in PCBV, (3) damages in the amount of 1.7 percent of the
anticipated payment by UPC for the shares of @Entertainment as set forth in the
Agreement and Plan of Merger between @Entertainment and UPC dated June 2, 1999,
(4) attorneys' fees and costs incurred in prosecuting the lawsuit; and such
other relief as the court deems just and proper.
The amended complaint sets forth eight claims for relief based on allegations
that the defendants, including @Entertainment and The Company, committed the
following wrongful acts: (1) breached a covenant not to compete contained in the
Shareholders' Agreement prohibiting any shareholders of PCBV from having any
direct or indirect interest in any aspect of the cable television business in
Poland, as a result of @Entertainment's and The Company's cable and D-DTH
operations in Poland, (2) breached a covenant in the Shareholders' Agreement
requiring that any contract entered into by PCBV with any other party affiliated
with The Company be commercially reasonable or be approved by certain of the
minority shareholders, by causing PCBV to enter into certain management and
service agreements that were allegedly not commercially reasonable and/or were
not approved by certain minority shareholders, (3) breached a provision in the
Shareholders' Agreement that allegedly required co-defendant Chase International
Corp. ("CIC") to offer the minority shareholders the right to participate in
certain sales of PCBV shares and that required CIC to give written notice of any
offer to purchase the minority shareholders' shares in PCBV, by failing to
provide the minority shareholders with the right to participate in or with
written notice of offers to purchase, (4) breached their fiduciary duty to the
minority shareholders by failing to provide them with written notice of any
offers to purchase PCBV's stock and with timely information and periodic reports
about the financial condition or business or operating results of PCBV, (5)
breached the agreement between PCBV and CIC, which allegedly limited the amount
of management fees that could be paid annually by PCBV to CIC to $250,000, by
causing PCBV to enter into management agreements with other subsidiaries of the
Company calling for payment of annual management fees in excess of $250,000, (6)
made false and misleading statements in (a) the Company's offering memorandum by
referring to negotiations between the Company and the minority shareholders and
to the Company's alleged offer to purchase their outstanding shares in PCBV,
which negotiations and offer allegedly never transpired, (b) @Entertainment's
offering memoranda by indicating that the Company agreed to share the profits of
its subsidiaries with the minority shareholders on a PRO RATA basis and to
purchase their outstanding shares in PCBV, which agreements allegedly were never
made and which negotiations allegedly never occurred, and (c) @Entertainment's
Forms 10-K by referring to a supplemental agreement under which the Company
agreed to share the profits of entities in which it has a direct or indirect
ownership interest with
9
<PAGE>
the minority shareholders on a PRO RATA basis and under which the Company agreed
to share 7.7 percent of the profits from competing endeavors with the minority
shareholders, which supplemental agreement allegedly was never made; (7)
colluding to defraud the minority shareholders by failing to make reference in
certain Forms 8-K, 8-KA and 14D-1 to the minority shareholders or their alleged
rights and claims, and (8) colluding to divert assets of PCBV to affiliates of
the Company and PCBV, including @Entertainment, that allegedly compete with the
Company and PCBV by failing to make reference in certain Forms 8-K, 8-K/A and
14D-1 to the minority shareholders or their alleged rights and claims and by
failing to provide any information to the minority shareholders so that they
could value their rights and claims.
The Company intends to defend the lawsuit vigorously. The Company has also
conducted negotiations to purchase the minority shareholders' outstanding
shares in PCBV and may engage in such negotiations in the future. If the
negotiations produce a sale by the minority shareholders of their shares in
PCBV to the Company, the lawsuit would most likely be terminated. The Company
is unable to predict the outcome of those negotiations.
CONSUMMATION OF THE UPC TENDER OFFER AND MERGER
The tender offer, initiated pursuant to the Agreement and Plan of Merger with
UPC and Bison, closed at 12:00 midnight on August 5, 1999. On August 6, 1999,
Bison reported that it had accepted for payment a total of 33,701,073 shares
of @Entertainment's common stock (including 31,208 shares tendered pursuant
to notices of guaranteed delivery) representing approximately 99% of
@Entertainment's outstanding shares of common stock. In addition, UPC has
acquired 100% of the outstanding Series A and Series B 12% Cumulative
Preference Shares of @Entertainment.
Also on August 6, 1999, Bison was merged with and into @Entertainment.
Accordingly, @Entertainment became a wholly-owned subsidiary of UPC.
UnitedGlobalCom, Inc., is a 62% stockholder of UPC.
These transactions constitute a "Change of Control" as that term is defined
in the indenture governing the Company's 9 7/8% Senior Notes due 2003 and 9
7/8% Series B Senior Notes due 2003 (the "PCI Notes"). In accordance with the
terms of the indenture governing the PCI Notes, PCI will be required to make
an offer to repurchase the PCI Notes at 101% of their principal amount plus
accrued and unpaid interest. Such an offer will only be made in an offer to
purchase.
10
<PAGE>
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash $ 2,487 $ 1,463
Accounts receivable, net of allowances for doubtful accounts
of $757,000 in 1999 and $708,000 in 1998 4,453 1,904
Other current assets 1,297 535
--------- ---------
Total current assets 8,237 3,902
--------- ---------
Property, plant and equipment:
Cable television system assets 129,339 136,833
Construction in progress 3,068 --
Vehicles 1,387 1,704
Other 4,310 5,832
--------- ---------
138,104 144,369
Less accumulated depreciation (42,570) (40,041)
--------- ---------
Net property, plant and equipment 95,534 104,328
Inventories for construction 5,098 6,638
Intangibles, net 11,586 13,711
--------- ---------
Total assets $ 120,455 $ 128,579
--------- ---------
--------- ---------
</TABLE>
11
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 3,358 $ 7,809
Deferred revenue 1,733 565
Other current liabilities 21 --
--------- ---------
Total current liabilities 5,112 8,374
Due to affiliate 39,277 26,491
Notes payable to affiliates 170,061 160,830
--------- ---------
Total liabilities 214,450 195,695
--------- ---------
Stockholders' deficiency:
Capital stock par value, $0.50 par; 200,000 shares
authorized, issued and outstanding 100 100
Paid-in capital 14,589 14,589
Accumulated other comprehensive (loss) / income (12,233) 424
Accumulated deficit (96,451) (82,229)
--------- ---------
Total stockholders' deficiency (93,995) (67,116)
--------- ---------
Total liabilities and stockholders' deficiency $ 120,455 $ 128,579
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
12
<PAGE>
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Cable television revenue $ 14,182 $ 8,525 $ 24,392 $ 16,727
Operating expenses:
Direct operating expenses 10,365 4,159 17,288 6,700
Selling, general and administrative expenses 3,626 3,715 5,542 6,494
Depreciation and amortization 3,491 3,218 7,261 6,314
-------- -------- -------- --------
Total operating expenses 17,482 11,092 30,091 19,508
-------- -------- -------- --------
Operating loss (3,300) (2,567) (5,699) (2,781)
Interest income 26 46 37 74
Interest expense (3,462) (3,204) (6,846) (6,244)
Foreign exchange gain / (loss), net 271 42 (1,687) 92
-------- -------- -------- --------
Loss before income taxes and minority interest (6,465) (5,683) (14,195) (8,859)
Income tax expense (8) (107) (27) (209)
Minority interest -- 928 -- 1,206
-------- -------- -------- --------
Net loss $ (6,473) $ (4,862) $(14,222) $ (7,862)
-------- -------- -------- --------
-------- -------- -------- --------
Basic and diluted net loss per common share (note 3) $ (32.37) $ (24.31) $ (71.11) $ (39.31)
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
13
<PAGE>
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------- ----------------- ---------------- --------------
1999 1998 1999 1998
---------------- ----------------- ---------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net loss $ (6,473) $ (4,862) $ (14,222) $ (7,862)
Other comprehensive (loss) / income:
Translation adjustment 2,102 (985) (12,657) 1,057
---------------- ----------------- ---------------- --------------
Comprehensive loss $ (4,371) $ (5,847) $ (26,879) $ (6,805)
---------------- ----------------- ---------------- --------------
---------------- ----------------- ---------------- --------------
See accompanying notes to unaudited consolidated financial statements.
14
<PAGE>
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 1998
-------- --------
(IN THOUSANDS)
Cash flows from operating activities:
Net loss $(14,222) $ (7,862)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Minority interest -- (1,206)
Depreciation and amortization 7,261 6,314
Interest expense added to notes payable
to affiliates 6,846 6,237
Changes in operating assets and liabilities:
Accounts receivable (2,549) (488)
Other current assets (202) 385
Accounts payable (4,030) 5,401
Deferred revenue 1,229 (207)
Amounts due to affiliates 12,614 2,488
Other current liabilities -- 270
-------- --------
Net cash provided by operating activities 6,947 11,332
-------- --------
Cash flows from investing activities:
Construction and purchase of property, plant and equipment (8,163) (18,713)
Purchase of intangible assets (145) (49)
-------- --------
Net cash used in investing activities (8,308) (18,762)
-------- --------
Cash flows from financing activities:
Proceeds from borrowings from affiliates 2,385 4,338
Dividend to parent -- (51)
-------- --------
Net cash provided by financing activities 2,385 4,287
-------- --------
Net increase / (decrease) in cash 1,024 (3,143)
Cash at beginning of the period 1,463 4,951
-------- --------
Cash at end of the period $ 2,487 $ 1,808
-------- --------
-------- --------
Supplemental cash flow information:
Cash paid for interest $ 400 $ 57
-------- --------
-------- --------
Cash paid for income taxes $ 16 $ 177
-------- --------
-------- --------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
15
<PAGE>
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
1. BASIS OF PRESENTATION
Financial information is included for Poland Cablevision (Netherlands) B.V. and
its subsidiaries ("PCBV") since PCBV is a guarantor of PCI's 9 7/8% Senior Notes
due 2003 and 9 7/8% Series B Senior Notes due 2003, (collectively, the "PCI
Notes"). The information furnished by PCBV has been prepared in accordance with
generally accepted accounting principles in the United States ("U.S. GAAP") and
the rules and regulations of the Securities and Exchange Commission ("SEC").
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with U.S. GAAP have been condensed
or omitted pursuant to the rules and regulations. The accompanying consolidated
balance sheets, statements of operations, statements of comprehensive loss and
statements of cash flows are unaudited but in the opinion of management reflect
all adjustments (consisting only of items of a normal recurring nature) which
are necessary for a fair statement of PCBV's consolidated results of operations
and cash flows for the interim periods and PCBV's financial position as of June
30, 1999. The accompanying unaudited consolidated financial statements should be
read in conjunction with the audited consolidated financial statements of PCBV
and the notes thereto included in PCI's 1998 Annual Report on Form 10-K filed
with the SEC. The interim financial results are not necessarily indicative of
the results of the full year.
2. RECLASSIFICATIONS
Certain amounts have been reclassified in the prior period unaudited
consolidated financial statement to conform to the 1999 unaudited consolidated
financial statement presentation.
3. LOSS PER SHARE
As noted in the 1998 PCI Annual Report, PCBV adopted SFAS No. 128, "Earnings Per
Share". The statement required that all prior period earnings per share
calculations including interim financial statements be restated to conform to
the provisions of this statement. Basic and diluted loss per ordinary share is
based on the weighted average number of ordinary shares outstanding of 200,000
for the six-month periods ended June 30, 1999 and 1998.
4. LITIGATION AND CLAIMS
From time to time, PCBV is subject to various claims and suits arising out of
the ordinary course of business. While the ultimate result of all such matters
is not presently determinable, based upon current knowledge and facts,
management does not expect that their resolution will have a material adverse
effect on PCBV's consolidated financial position or results of operations.
16
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis provides information concerning the
results of operations and financial condition of the Company. Such discussion
and analysis should be read in conjunction with the accompanying unaudited
consolidated financial statements of the Company. Additionally, the following
discussion and analysis should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
audited consolidated financial statements included in Part II of the Company's
1998 Annual Report. The following discussion focuses on material trends, risks
and uncertainties affecting the results of operations and financial condition of
the Company.
Certain statements in this Quarterly Report on Form 10-Q constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, that are not historical facts but rather reflect
the Company's current expectations concerning future results and events. The
words "believes," "expects," "intends," "plans," "anticipates," "likely," "will"
"may", "shall" and similar expressions identify such forward-looking statements.
Such forward-looking statements involve known and unknown risks, uncertainties
and other important factors that could cause the actual results, performance or
achievements of the Company (or entities in which the Company has interests), or
industry results, to differ materially from future results, performance or
achievements expressed or implied by such forward-looking statements.
Readers are cautioned not to place undue reliance on these forward looking
statements which reflect management's view only as of the date of this Quarterly
Report on Form 10-Q. The Company undertakes no obligation to publicly release
the result of any revisions to these forward-looking statements which may be
made to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events, conditions or circumstances.
The risks, uncertainties and other factors that might cause such differences
include but are not limited to: (i) general economic conditions in Poland and in
the pay television business in Poland; (ii) changes in regulations the Company
operates under; (iii) uncertainties inherent in new business strategies,
including new product launches and development plans, which the Company has not
used before; (iv) rapid technology changes; (v) changes in, or failure or
inability to comply with government regulations; (vi) the development and
provision of programming for new television and telecommunications technologies;
(vii) the continued strength of competitors in the multichannel video
programming distribution industry and satellite services industry and the growth
of satellite delivered programming; (viii) future financial performance,
including availability, terms and deployment of capital; (ix) the ability of
vendors to deliver required equipment, software and services on schedule at the
budgeted cost; (x) the Company's ability to attract and hold qualified
personnel; (xi) changes in the nature of strategic relationships with joint
ventures; (xii) the overall market acceptance of those products and services,
including acceptance of the pricing of those products and services; (xiii) and
acquisition opportunities; and (xiv) the new ownership structure of the
Company's parent, @Entertainment.
OVERVIEW
The Company operates the largest cable television system in Poland with
approximately 1,669,400 homes passed and approximately 966,800 total subscribers
as of June 30, 1999. The Company continues to realize subscriber growth through
a combination of increased penetration, new network build-out and acquisitions.
Since the offering of the Wizja TV programming package on its cable television
networks from June 5, 1998, the Company has realized a 9.6% increase in the
number of subscribers.
Having established itself as the leading cable television service provider in
Poland, the Company continues to focus its efforts toward the strategic
objectives of increasing cash flow and enhancing the value of its cable
networks. To accomplish these objectives, the Company's business and operating
strategy in the cable television business is to (i) provide compelling
programming, (ii) increase pricing and maximize revenue per cable subscriber,
(iii) expand its regional clusters, (iv) increase subscriber penetration, and
(v) realize additional operating efficiencies.
During 1998 and the first six months of 1999, management completed or was in the
process of completing several strategic actions in support of this business and
operating strategy. On June 5, 1998, the Company began providing the Wizja TV
programming package, with its initial 11 channels of primarily Polish-language
programming, to its basic cable subscribers. Since that date, the Wizja TV
package has been expanded to 24 channels. Management believes that this
selection of high-quality Polish-language programming will provide it with a
significant competitive advantage in increasing its cable subscriber penetration
rates.
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<PAGE>
The Company has implemented a pricing strategy designed to increase revenue per
subscriber and to achieve real profit margin increases in U.S. dollar terms. The
Company has increased the monthly price for the "basic" package service to
reflect the increased channel availability, and premium channels such as the HBO
Poland service (a Polish-language version of HBO's premium movie channel) will
be offered to cable customers for an additional monthly charge. The Company
expects that it may continue to experience increases in its churn rate above
historical levels during the implementation of its current pricing strategy. For
the six months ended June 30, 1999, the Company's churn rate increased to 8.9%.
For the six months ended June 30, 1999, the Company experienced churn in the HBO
Poland service with penetration falling by 12,890 subscribers or 28.2% from June
30, 1998. The Company is planning to encrypt the HBO Poland service on cable and
install analog decoders for all premium channel subscribers during 1999.
However, management believes the Company will be able to charge higher prices
while maintaining relatively low annual cable television churn rates as a result
of its customer service standards, the technical quality of its networks and the
broad selection of quality programming.
The Company continues to expand the coverage areas of its regional clusters,
through selected build-out and acquisitions. During the second quarter of 1999,
the Company focused its build-out primarily in areas where it could fill-in and
expand existing clusters.
In support of its goal of realizing additional operating efficiencies, the
Company, during the first half of 1999, continued a reorganization of its
organizational structure and certain departments. The Company expects to realize
additional operating efficiencies during 1999 through the centralization of
subscriber management and customer support services in the call center. The call
center became operational during the first six months of 1998 for cable
customers in certain regional clusters and will continue to become operational
for other cable customers as expansion of call center activities progresses. The
Company is also in the process of installing an integrated management
information system for its subscriber management and billing and has completed
the installation of an integrated management information system for accounting
systems, which is designed to further improve employee productivity and customer
service for its cable business.
Historically, the cable networks the Company has acquired have had lower
operating margins than the Company's existing cable networks. Upon consummation
of an acquisition, the Company seeks to achieve operating efficiencies and
reduce operating costs by rationalizing the number of headends and reducing
headcount, among other things. The Company generally has been able to manage its
acquired cable television networks with experienced personnel from one of its
existing regional clusters. Management has also focused on reducing the number
of technical personnel necessary to operate acquired networks after connecting
the networks to the Company's existing headends, or, if required, rebuilding the
acquired networks to the Company's technical standards. In part due to these
efforts, the Company has generally been able to increase the operating margins
in its acquired systems, although there can be no assurance that it will be able
to continue to do so.
The Company's revenues have been and will continue to be derived primarily from
monthly subscription fees for cable television services and one-time
installation fees for connection to its cable television networks. The Company
charges cable subscribers fixed monthly fees for their choice of service
packages and for other services, such as premium channels, tuner rentals and
additional outlets, all of which are included in monthly subscription fees. The
Company currently offers broadcast, intermediate (in limited areas) and basic
packages of cable service. At June 30, 1999 approximately 74% of the Company's
subscribers received the Company's basic package. For the six months ended June
30, 1999, approximately 98% of the Company's revenue was derived from monthly
subscription fees compared to approximately 93% during the six months ended June
30, 1998. Revenue from installation fees is deferred to the extent it exceeds
direct selling costs and then amortized to income over the estimated average
period that new subscribers are expected to remain connected to the Company's
cable system. The Company's revenue performance during 1999 has been generally
strong with 23% growth in revenues for the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. This increase was caused mainly
by organic growth in subscribers via increased penetration and build-out of
existing networks, increases in subscription rates and the introduction of an
additional premium channel into programming offerings.
The Company divides operating expenses into (i) direct operating expenses, (ii)
selling, general and administrative expenses and (iii) depreciation and
amortization expenses. Direct operating expenses consist of programming
expenses, maintenance and related expenses necessary to service, maintain and
operate the Company's cable systems, billing and collection expenses and
customer service expenses. Selling, general and administrative expenses consist
principally of administrative costs, including office related expenses,
professional fees and salaries, wages and benefits of non-technical employees,
advertising and marketing expenses, bank fees and bad debt expense. Depreciation
and amortization expenses consist of depreciation of property, plant and
equipment and amortization of intangible assets. Although its revenue
performance was strong for the six months ended June 30, 1999, the Company
generated an operating loss of $10.3 million for the six months ended June 30,
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<PAGE>
1999, primarily due to increased direct operating expenses related to the
subscriber growth and increased programming expense related to the purchase of
the Wizja TV programming package from an affiliated company as well as high
depreciation and amortization charges related to the expansion of the cable
networks.
In addition to other operating statistics, the Company measures its financial
performance by EBITDA, an acronym for earnings before interest, taxes,
depreciation and amortization. The Company defines EBITDA to be net loss
adjusted for interest and investment income, depreciation and amortization,
interest expense, foreign currency gains and losses, income taxes, gains and
losses from the sale of assets other than in a normal course of business and
minority interest. The items excluded from EBITDA are significant components in
understanding and assessing the Company's financial performance. The Company
believes that EBITDA and related measures of cash flow from operating activities
serve as important financial indicators in measuring and comparing the operating
performance of media companies. EBITDA is not a U.S. GAAP measure of loss or
cash flow from operations and should not be considered as an alternative to cash
flows from operations as a measure of liquidity. The Company reported EBITDA of
$1.8 million for six months ended June 30, 1999 and $6.4 million for six months
ended June 30, 1998.
An analysis of quarterly cable subscriber growth is presented in the table
below:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30,
1999 1999 1998 1998 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Homes Passed 1,669,384 1,624,119 1,591,981 1,565,287 1,546,540
Basic Subscribers 715,474 706,179 698,342 658,584 660,067
Subscriber Growth (three month period)
Organic 45,646 38,226(1) 70,935 41,904 57,007
Through Acquisitions -- -- -- (10,245)(2) 1,363
Churn (36,351) (30,389) (31,177) (33,142) (26,016)
----------
---------- ---------- ---------- ---------- ----------
TOTAL NET GROWTH 9,295 7,837 39,758 (1,483) 32,354
---------- ---------- ---------- ---------- ----------
Basic penetration 42.9% 43.5% 43.9% 42.1% 42.7%
Intermediate subscribers 32,128 33,587 40,037 42,538 43,204
---------- ---------- ---------- ---------- ----------
BASIC AND INTERMEDIATE SUBSCRIBERS 747,602 739,766 738,379 701,122 703,271
---------- ---------- ---------- ---------- ----------
Broadcast subscribers 219,165 208,457 196,961 186,334 167,859
---------- ---------- ---------- ---------- ----------
TOTAL SUBSCRIBERS 996,767 948,223 935,340 887,456 871,130
---------- ---------- ---------- ---------- ----------
Premium subscribers - HBO 32,784 34,332 36,615 39,035 45,674
Premium penetration - HBO 4.6% 4.9% 5.2% 5.9% 6.9%
Basic revenue / basicsub. / month $ 6.35 $ 6.20 $ 5.69 $ 5.19 $ 4.99
Total revenue / basicsub. / month $ 7.13 $ 6.97 $ 6.75 $ 6.42 $ 6.08
</TABLE>
(1) The increase in basic subscribers for the three months ended March 1999
included 4,121 subscribers in Szczecin that switched from the "intermediate"
to the "basic" package.
(2) As part of the purchase of a minority interest in one of the Company's cable
systems, the Company sold an isolated part of that system to the previous
owner.
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<PAGE>
THREE AND SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE AND SIX MONTHS ENDED
JUNE 30, 1999
CABLE TELEVISION REVENUE. Revenue increased $3.0 million or 24.0% from $12.5
million in the three months ended June 30, 1998 to $15.5 million in the three
months ended June 30, 1999 and $5.7 million or 23.2 % from $24.6 million in the
first six months of 1998 to $30.3 million in the first six months ended June 30,
1999. These increases were primarily attributable to a 6.3% increase in the
number of basic subscribers from approximately 703,300 at June 30, 1998 to
approximately 747,600 at June 30, 1999, as well as an increase in monthly
subscription rates.
Revenue from monthly subscription fees represented 94.6% of cable television
revenue for both of the three months ended June 30, 1998 and 1999, respectively.
Monthly subscription revenue constituted 93.3% and 98.2% of cable television
revenue for the six months ended June 30, 1998 and 1999, respectively. During
the three months ended June 30, 1999, the Company generated approximately $0.5
million of additional premium subscription revenue as compared to $0.8 million
from the corresponding period in 1998 as a result of providing the HBO Poland
service pay movie channel to cable subscribers. For the six months ended June
30, 1998 and 1999 premium subscription revenue was $1.6 million and $1.1 million
respectively.
DIRECT OPERATING EXPENSES. Direct operating expenses increased $4.7 million, or
81.0%, from $5.8 million for the three months ended June 30, 1998 to $10.5
million for the three months ended June 30, 1999 and $11.1 million, or 116.8%,
from $9.5 million for the six months ended June 30, 1998 to $20.6 million for
the six months ended June 30, 1999, principally as a result of the purchase of
the Wizja TV programming package for approximately $10.3 million from an
affiliate of the Company as well as the increased size of the Company's cable
television system. Direct operating expenses increased from 46.4% of revenues
for the three months ended June 30, 1998 to 67.7% of revenues for the three
months ended June 30, 1999 and increased from 38.6% of revenues for the six
months ended June 30, 1998 to 68.0% of revenues for the six months ended June
30, 1999. However, without considering the programming cost for the purchase of
the Wizja programming package recorded in June 1998 and for the six months ended
June 30, 1999 the comparison would have been 31.7% and 34.0% for the six months
ended June 30, 1998 and 1999, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.6 million or 14.3% from $4.2 million for
the three months ended June 30, 1998 to $4.8 million for the three months ended
June 30, 1999 and decreased $0.9 million or 10.3% from $8.7 million for the six
months ended June 30, 1998 to $7.8 million for the six months ended June 30,
1999. This decrease was attributable to operating efficiencies realized by the
Company in the six months ended June 30, 1999, as described in the overview
section.
As a percentage of revenue, selling, general and administrative expenses
decreased from 33.6% for the three months ended June 30, 1998 to approximately
31.0% for the three months ended June 30, 1999 and from 35.4% for the six months
ended June 30, 1998 to 25.7% for the six months ended June 30, 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense rose
$1.2 million, or 23.5%, from $5.1 million for the three months ended June 30,
1998 to $6.3 million for the three months ended June 30, 1999 and $2.3
million, or 23.2%, from $9.9 million for the six months ended June 30, 1998
to $12.2 million for the six months ended June 30, 1999 principally as a
result of depreciation and amortization of additional cable television
systems and related goodwill acquired and the continued build-out of the
Company's cable networks. Depreciation and amortization expense as a
percentage of revenues decreased from 40.8% for the three months ended June
30, 1998 to 40.6% for the three months ended June 30, 1999 and increased from
40.2% for the six months ended June 30, 1998 to 40.3% for the six months
period ended June 30, 1999.
INTEREST EXPENSE. Interest expense increased $0.1 million, or 2.9%, from $3.5
million for the three months ended June 30, 1998 to $3.6 million for the three
months ended June 30, 1999 and increased $0.5 million, from $7.0 million for the
six months ended June 30, 1998 to $7.5 million for the six months ended June 30,
1999. These increases are a result of loans assumed by the Company in its
acquisition of subsidiaries and an additional loan draw down in June 1998.
INTEREST AND INVESTMENT INCOME. Interest and investment income decreased $0.3
million, or 100%, from $0.3 million for the three months ended June 30, 1998 to
none for the three months ended June 30, 1999 and $0.4 million, or 57.1%, from
$0.7 million for the six months ended June 30, 1998 to $0.3 million for the six
months ended June 30, 1999 primarily due to the reduction in the level of cash
used to fund the Company's operations.
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<PAGE>
FOREIGN EXCHANGE GAIN/(LOSS), NET. For the three months ended June 30, 1999,
foreign exchange gain amounted to $83,000 as compared to a foreign exchange loss
of $0.3 million for the three months ended June 30, 1998. For the six months
ended June 30, 1999, foreign exchange loss was $1.5 million compared to a
foreign exchange loss of $0.2 million for the six months ended June 30, 1998.
This is primarily due to the 10.8% appreciation of the U.S. dollar against the
Polish zloty in the six months ended June 30, 1999.
MINORITY INTEREST. No minority interest was recorded for the three and six
months ended June 30, 1999 compared to minority interest income of $58,000 and
$207,000 for the corresponding periods in 1998. All minority interest was
eliminated in 1998 as the minority interest share of the losses in subsidiaries
exceeded the value of minority interest investments.
NET LOSS. For the three months ended June 30, 1998 and the three months ended
June 30, 1999, the Company had net losses of $6.4 million and $9.6 million,
respectively and for the six months ended June 30, 1998 and the six months ended
June 30, 1999, the Company had net losses of $10.9 million and $19.1 million,
respectively. These losses were the result of the factors discussed above.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS. Net loss applicable to common
stockholders increased from $7.6 million for the three months ended June 30,
1998 to $10.6 million for the three months ended June 30, 1999 and from $13.2
million for the six months ended June 30, 1998 to $21.0 million for the six
months ended June 30, 1999 due to the accretion of redeemable preferred stock
and the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has met its cash requirements in recent years primarily with (i)
capital contributions and loans from certain of the Company's former principal
stockholders, including Polish Investments Holding L.P. ("PIHLP"), the Cheryl
Anne Chase Marital Trust ("CAC Trust"), certain members of David T. Chase's
family and family trusts (the "Chase Family") (collectively the "Chase
Entities") and ECO Holdings III Limited Partnership ("ECO"), who became
principal stockholders of @ Entertainment, Inc. pursuant to the Reorganization
(as defined herein) (the "Former Principal Stockholders"), (ii) borrowings under
available credit facilities, (iii) cash flows from operations, and (iv) the sale
of $130 million aggregate principal amount of senior debt notes by the Company
(the "Notes"). The Company had positive cash flows from operating activities in
1998 of $14.3 million, primarily due to the decrease of amounts due from
affiliates, increase in accounts payable and accrued expenses, and income tax
refunds received in 1998. The Company had negative cash flows from operating
activities for the six months ended June 30, 1998 of $2.6 million and had
positive cash flows from operating activities for six months ended June 30, 1999
of $6.2 million, due to an increase in monthly subscription rates, an increase
in the amount due to an affiliate and operating efficiencies.
Cash used for the purchase and expansion of the Company's cable television
networks was $24.5 million and $9.5 million for the six months ended June 30,
1998 and 1999, respectively. The decrease in the first six months of 1999
compared to the same period in 1998 is due to the development of the Company's
new build-out strategy and completion in 1998 of upgrades of recently acquired
networks and subsidiaries.
During 1996, the Company issued common and preferred stock to certain of the
Former Principal Stockholders for approximately $82 million. On March 29, 1996,
the Company consummated a transaction in which ECO purchased shares of common
and preferred stock of the Company for a price of $65 million. On March 29,
1996, PIHLP purchased additional shares of preferred and common stock of the
Company for an aggregate purchase price of approximately $17 million. The
Company applied approximately $55 million of the proceeds of these transactions
to repay indebtedness owed to Chase American Corporation, which is beneficially
owned by the Chase Family, and approximately $8.5 million to redeem preferred
stock held by PIHLP, which is beneficially owned by the Chase Family.
During 1996, the Company also entered into an agreement with American Bank in
Poland, S.A. ("AmerBank") which provides for a credit facility of approximately
$6.5 million. Interest, based on LIBOR plus 3%, is due quarterly. All advances
under the loan must be repaid by August 20, 1999. All amounts under this
facility were drawn in June 1998.
On October 31, 1996, the Company sold $130 million aggregate principal amount of
the PCI Notes to the initial purchaser pursuant to a purchase agreement. The
initial purchaser subsequently completed a private placement of the PCI Notes.
The PCI Notes were issued pursuant to an indenture.
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<PAGE>
Pursuant to the indenture governing the Notes (the "PCI Indenture"), the Company
is subject to certain restrictions and covenants, including, without limitation,
covenants with respect to the following matters: (i) limitation on additional
indebtedness; (ii) limitation on restricted payments; (iii) limitation on
issuance's and sales of capital stock of subsidiaries; (iv) limitation on
transactions with affiliates; (v) limitation on liens; (vi) limitation on
guarantees of indebtedness by subsidiaries; (vii) purchase of the Notes upon a
change of control; (viii) limitation on sale of assets; (ix) limitation on
dividends and other payment restrictions affecting subsidiaries; (x) limitation
on investments in unrestricted subsidiaries; (xi) limitation on lines of
business; and (xii) consolidations, mergers and sale of assets. The Company is
in compliance with these covenants. The PCI Indenture limits, but does not
prohibit, the payment of dividends by PCI and the ability of PCI to incur
additional indebtedness. PCI could not pay dividends to @Entertainment as of
December 31, 1998 because certain financial ratios did not meet the minimum
provided in the PCI indenture. Pursuant to the AmerBank credit facility, the
Company is subject to certain informational and notice requirements but is not
subject to restrictive covenants.
For purpose of the PCI Indenture, the consummation of UPC's tender offer on
August 5, 1999 resulted in a change in control of the Company, and as a result,
the Company will be obligated to offer to repurchase any of the Notes that the
note holders put to the Company. The Company will be required to offer to
purchase the Notes at 101% of their principal amount, plus accrued and unpaid
interest. If all of the note holders of the Notes were to put their Notes, the
Company would be required to pay approximately $135,000,000 to repurchase the
Notes, if such repurchase is consummated in mid-September 1999.
Since the commencement of its operations in 1990, the Company has required
external funds to finance the buildout of its existing networks and to finance
acquisitions of new cable television networks. The Company had relied on the
equity investments and loans from stockholders and their affiliates and
borrowings under available credit facilities to provide the funding for these
activities. The Company does not expect that its former stockholders and their
affiliates will continue to make capital contributions and loans to the Company.
The Company's current strategic objective is to increase cash flow and enhance
the value of its cable networks. To accomplish this objective, the Company's
business and operating strategy in the cable television business is to (i)
provide compelling programming, (ii) increase pricing and maximize revenue per
cable subscriber, (iii) expand its regional clusters, (iv) increase subscriber
penetration, and (v) realize additional operating efficiencies.
The Company is dependent on obtaining new financing to achieve this business
strategy. Future sources of financing for the Company could include public or
private debt offerings or bank financings or any combination thereof, subject
to the restrictions contained in the indentures governing the Company's and
@Entertainment's outstanding senior indebtedness. Moreover, if the Company's
plans or assumptions change, if its assumptions prove inaccurate, if it
consummates unanticipated investments in or acquisitions of other companies,
if it experiences unexpected costs or competitive pressures, or if existing
cash, and projected cash flow from operations prove to be insufficient, the
Company may need to obtain greater amounts of additional financing. While it
is the Company's intention to enter only into new financing or refinancings
that it considers advantageous, there can be no assurance that such sources
of financing would be available to the Company in the future, or, if
available, that they could be obtained on terms acceptable to the Company.
The Company is also dependent on its parent, @Entertainment, and @
Entertainment's parent, United Pan-Europe Communications N.V. ("UPC"), to
provide financing to achieve the Company's business strategy. @Entertainment
has represented that it will make such financing available to fund the
Company's current business strategy for at least the next twelve months.
However, there is no obligation from @Entertainment or UPC, contractually or
otherwise, to make such financing available to the Company.
YEAR 2000 COMPLIANCE
The Company's operations are dependent upon computer systems and other
technological devices with imbedded microprocessor chips that are intended to
utilize dates and process data beyond December 31, 1999. In January 1997, the
Company developed a plan to address the impact that potential Y2K problems may
have on Company operations and to implement necessary changes to address such
problems. During the course of the development of its Y2K plan, the Company has
identified certain critical operations, which need to be Y2K compliant for the
Company to operate effectively. These
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<PAGE>
critical operations include accounting and billing systems, customer service
and service delivery systems, and field and headend devices.
Largely as a result of its high rate of growth over the past few years, the
Company has entered into an agreement to purchase a new system to replace its
current accounting system and an agreement to purchase billing software for the
Company's new customer service and billing center. The vendors of the new
accounting system and billing software have confirmed to the Company that these
products are Y2K compliant. The Company has completed the testing phase of the
new accounting system, and the implementation phase was substantially completed
at the end of 1998. The Company expects implementation of the billing software
to be completed for the majority of its cable subscribers by the end of 1999.
The Company believes that its most significant Y2K risk is its dependency upon
third party programming, software, services and equipment, because the Company
does not have the ability to control third parties in their assessment and
remediation procedures for potential Y2K problems. Should these parties not be
prepared for Y2K conversion, their products or services may fail and may cause
interruptions in, or limitations upon, the Company's provision of its cable
service to its customers. In an effort to prevent any such interruptions or
limitations, the Company is in the process of communicating with each of its
material third party suppliers of programming, software, services and equipment
to determine the status of their Y2K compliance programs. The Company expects to
complete this process by September 30, 1999, and it anticipates that all phases
of its Y2K plan will be completed by December 31, 1999.
The Company has not yet developed a contingency plan to address the situation
that may result if the Company or its third party suppliers are unable to
achieve Y2K compliance with regard to any products or services utilized in the
Company's operations. The Company does not intend to decide on the development
of such a contingency until it has gathered all of the relevant Y2K compliance
data from its third party suppliers. The Company has not yet determined the full
cost of its Y2K Plan and its related impact on the financial condition of the
Company. The Company has to date not incurred any replacement or remediation
costs for equipment or systems as a result of Y2K non-compliance. Rather, due to
the rapid growth and development of its cable system the Company has made
substantial capital investments in equipment and systems for reasons other than
Y2K concerns. The total cost of the Company's new accounting system and billing
software package is estimated to be approximately $3,000,000.
The Company believes that any Y2K compliance issues it may face can be remedied
without a material financial impact on the Company, but no assurance can be made
in this regard until all of the data has been gathered from the Company's third
party suppliers. At this date the Company cannot predict the financial impact on
its operations if Y2K problems are caused by products or services supplied to
the Company by such third parties.
Impact of New Accounting Standards Not Yet Adopted
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" which establishes
standards of accounting for these transactions. SFAS No. 133 is effective for
the Company beginning on July 1, 2000. The Company currently has no derivative
instruments or hedging activities.
23
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risk (i.e., the risk of loss arising from adverse changes
in market rates and prices) to which the Company is exposed is foreign exchange
rate risk from fluctuations in the Polish zloty currency exchange rate. The
Company's long term debt is primarily subject to a fixed rate, and therefore
variations in the interest rate do not have a material impact on net interest
expense.
FOREIGN EXCHANGE AND OTHER INTERNATIONAL MARKET RISKS
Operating in international markets involves exposure to movements in currency
exchange rates. Currency exchange rate movements typically affect economic
growth, inflation, interest rates, governmental actions and other factors. These
changes, if material, can cause the Company to adjust its financing and
operating strategies. The discussion of changes in currency exchange rates below
does not incorporate these other important economic factors.
International operations constitute 100% of the Company's consolidated operating
loss for the quarter ended June 30, 1999. Some of the Company's operating
expenses and capital expenditures are expected to continue to be denominated in
or indexed in U.S. dollars. By contrast, substantially all of the Company's
revenues are denominated in zloty. Any devaluation of the zloty against the U.S.
dollar that the Company is unable to offset through price adjustments will
require it to use a larger portion of its revenue to service its U.S. dollar
denominated obligations and contractual commitments.
The Company estimates that a 10% change in foreign exchange rates would impact
reported operating loss by approximately $427,000. In other terms, a 10%
depreciation of the Polish zloty against the U.S. dollar, would result in a
$427,000 increase in the reported operating loss. This was estimated using 10%
of the Company's operating loss after adjusting for unusual impairment and other
items including U.S. dollar denominated or indexed expenses. The Company
believes that this quantitative measure has inherent limitations because, as
discussed in the first paragraph of this section, it does not take into account
any governmental actions or changes in either customer purchasing patterns or
the Company's financing or operating strategies.
The Company does not generally hedge currency translation risk. While the
Company may consider entering into transactions to hedge the risk of exchange
rate fluctuations, there is no assurance that it will be able to obtain hedging
arrangements on commercially satisfactory terms. Therefore, shifts in currency
exchange rates may have an adverse effect on the Company's financial results and
on its ability to meet its U.S. dollar denominated debt obligations and
contractual commitments.
Poland has historically experienced high levels of inflation and significant
fluctuations in the exchange rate for the zloty. The Polish government has
adopted policies that slowed the annual rate of inflation from approximately
250% in 1990 to approximately 20% in 1996, approximately 14.9% in 1997, and
approximately 11.8% in 1998. The rate of inflation for the three months period
ended June 30, 1999 was approximately 6.5%. The exchange rate for the zloty has
stabilized and the rate of devaluation of the zloty has generally decreased
since 1991 and the zloty has appreciated against the U.S. dollar by
approximately 0.4% for the year ended December 31, 1998. For the six months of
1999 the zloty has depreciated against the U.S. dollar by approximately 10.8%.
Inflation and currency exchange fluctuations have had, and may continue to have,
a material adverse effect on the business, financial condition and results of
operations of the Company.
24
<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
None.
ITEM 5. OTHER INFORMATION:
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 11 - Statement regarding computation of per share earnings (contained
in Note 3 to Unaudited Financial Statements in this Quarterly Report in
Form 10-Q)
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the second
quarter of 1999.
25
<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/Warren Mobley
---------------------------------------
Warren Mobley
Chief Operating Officer, Vice President
By: /s/Piotr Majchrzak
---------------------------------------
Piotr Majchrzak
Chief Financial Officer
Date: August 13, 1999
26
<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 six
months ended June 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> JUN-30-1999
<CASH> 3,352
<SECURITIES> 0
<RECEIVABLES> 6,606
<ALLOWANCES> 1,594
<INVENTORY> 6,395
<CURRENT-ASSETS> 10,063
<PP&E> 175,880
<DEPRECIATION> (52,075)
<TOTAL-ASSETS> 174,063
<CURRENT-LIABILITIES> 21,140
<BONDS> 131,465
32,784
0
<COMMON> 1
<OTHER-SE> (48,250)
<TOTAL-LIABILITY-AND-EQUITY> 174,063
<SALES> 0
<TOTAL-REVENUES> 30,264
<CGS> 0
<TOTAL-COSTS> 40,644
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,517
<INCOME-PRETAX> (19,133)
<INCOME-TAX> 27
<INCOME-CONTINUING> (19,160)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (1,807)
<NET-INCOME> (20,967)
<EPS-BASIC> (1,106.55)
<EPS-DILUTED> 0
</TABLE>
