<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 MARCH 31, 2000.
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.)
4643 ULSTER STREET
SUITE 1300
DENVER, COLORADO 80237
(Address of Principal Executive Officers) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (303) 770-4001
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 March 31, 2000, was:
Common Stock 18,948
===============================================================================
<PAGE>
POLAND COMMUNICATIONS, INC.
FORM 10-Q INDEX
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
<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
Poland Cablevision (Netherlands) B.V.
Consolidated Balance Sheets 12-13
Consolidated Statements of Operations 14
Consolidated Statements of Comprehensive Loss 15
Consolidated Statements of Cash Flows 16
Notes to Consolidated Financial Statements 17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 20-24
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 25
PART II OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
</TABLE>
2
<PAGE>
POLAND COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,660 $ 3,374
Trade accounts receivable, net of allowance for doubtful accounts
of $2,322 in 2000 and $2,419 in 1999 5,809 6,156
VAT recoverable 497 1,243
Prepayments 455 890
Other current assets 515 298
--------- ---------
Total current assets 13,936 11,961
--------- ---------
Property, plant and equipment:
Cable television systems assets 132,103 123,845
Construction in progress 7,102 6,382
Vehicles 652 741
Other 7,001 6,120
--------- ---------
146,858 137,088
Less accumulated depreciation (12,231) (7,478)
--------- ---------
Net property, plant and equipment 134,627 129,610
Inventories for construction 4,391 5,373
Intangibles, net 371,703 377,846
Other assets 141 141
--------- ---------
Total assets $ 524,798 $ 524,931
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
POLAND COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 21,531 $ 23,438
Accrued interest 608 243
Deferred revenue 986 759
--------- ---------
Total current liabilities 23,125 24,440
--------- ---------
Long-term liabilities:
Due to affiliate 37,218 25,434
Notes payable to parent 7,992 7,763
Notes payable 16,226 16,456
--------- ---------
Total liabilities 84,561 74,093
--------- ---------
Redeemable preferred stock (liquidation value $60,000,000;
6,000 shares authorized, issued and outstanding) 35,692 34,695
Mandatorily Redeemable Debenture Stock, 30,000 shares
authorized; 14,000 shares issued and outstanding
(including accrued dividend) 145,833 142,333
Commitments and contingencies (note 6)
Stockholder's equity:
Common stock, $.01 par value; 27,000 shares authorized,
18,948 shares issued and outstanding 1 1
Paid-in capital 337,817 342,315
Accumulated other comprehensive loss (34,526) (35,376)
Accumulated deficit (44,580) (33,130)
--------- ---------
Total stockholder's equity 258,712 273,810
--------- ---------
Total liabilities and stockholder's equity $ 524,798 $ 524,931
========= =========
</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)
-------------------------- -------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------------------- -------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Cable television revenue $ 16,853 $ 14,783
Operating expenses:
Direct operating expenses 11,585 10,102
Selling, general and administrative expenses 4,220 2,996
Depreciation and amortization 11,505 5,949
--------- ---------
Total operating expenses 27,310 19,047
--------- ---------
Operating loss (10,457) (4,264)
Interest and investment income 67 273
Interest expense (612) (3,905)
Foreign exchange loss, net (430) (1,592)
--------- ---------
Loss before income taxes (11,432) (9,488)
Income tax expense (18) (19)
--------- ---------
Net loss (11,450) (9,507)
Accretion of redeemable preferred stock (997) (891)
Accrued dividend on Mandatorily Redeemable
Debenture Stock (3,500) --
Net loss applicable to holders of common stock $ (15,947) $ (10,398)
========= =========
Basic and diluted loss per common share $ (841.62) $ (548.77)
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
POLAND COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
SUCCESSOR (NOTE 2) PREDECESSOR (NOTE 2)
-------------------------- -------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------------------- -------------------------
(IN THOUSANDS)
<S> <C> <C>
Net loss $ (11,450) $ (9,507)
Other comprehensive (loss) / income:
Translation adjustment 850 (19,688)
--------- ---------
Comprehensive loss $ (10,600) $ (29,195)
========= =========
</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)
-------------------------- -------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------------------- -------------------------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (11,450) $ (9,507)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 11,505 5,949
Amortization of notes payable discount and issue costs -- 262
Unrealized foreign exchange (loss) / gain -- --
Other -- --
Changes in operating assets and liabilities:
Accounts receivable 347 (86)
Other current assets 964 (134)
Accounts payable (6,699) (5,243)
Accrued interest 365 3,210
Amounts due to affiliate 4,770 7,008
Deferred revenue 226 (19)
--------- ---------
Net cash provided by operating activities 28 1,440
--------- ---------
Cash flows from investing activities:
Construction and purchase of property, plant and equipment (3,753) (4,968)
Notes receivable from affiliate -- (10)
Purchase of intangibles -- (197)
--------- ---------
Net cash used in investing activities (3,753) (5,175)
--------- ---------
Cash flows from financing activities:
Proceeds from parent 7,243 3,125
Repayment of notes payable (230) (67)
--------- ---------
Net cash (used in)/provided by financing activities 7,013 3,058
--------- ---------
Net increase/ (decrease) in cash and cash equivalents 3,288 (677)
Effect of exchange rates on cash and cash equivalents (2) --
Cash and cash equivalents at beginning of period 3,374 2,574
--------- ---------
Cash and cash equivalents at end of period $ 6,660 $ 1,897
========= =========
Supplemental cash flow information:
Cash paid for interest $ 22 $ 142
========= =========
Cash paid for income taxes $ 13 $ 37
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
7
<PAGE>
POLAND COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
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 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 March 31, 2000. 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 1999 Annual Report on Form 10-K filed with the SEC (the "1999
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, @Entertainment, Inc., the Company's parent, entered into an
Agreement and Plan of Merger (the "Merger Agreement") 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's shares of common stock at $19.00 per share.
The tender offer, initiated pursuant to the Merger Agreement, 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 and stock options.
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. The Company
believes that a Change of Control (as defined in the indentures governing the
@Entertainment and PCI notes) occurred on August 6, 1999 as a result of the
Acquisition and Merger. @Entertainment 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. @Entertainment
restated some of its assets and liabilities at August 5, 1999. At this date,
the notes of @Entertainment and PCI were restated reflect the market value
and as a result were increased by $61.9 million and deferred financing costs
of $16.1 million and deferred revenues of $2.0 million were written down to
zero. The consideration paid by UPC for all outstanding shares, warrants and
options totaled $812.5 million. At this time @Entertainment had negative net
assets of approximately $53.3 million and existing goodwill at net book value
of $37.5 million, which was realized on previous transactions. As a result of
the above considerations, UPC realized goodwill of approximately $979.3
million. As a result of the Acquisition, UPC pushed down its basis to
@Entertainment 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 acquisition. The Company was allocated
approximately $412.0 million of goodwill.
8
<PAGE>
The following pro forma condensed consolidated results for the three months
ended March 31, 2000 and 1999, 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 the assumptions
that the goodwill and the amortization thereon would be pushed down as if the
transaction had occurred at the beginning the period presented. Additionally,
interest expense related to the deferred financing costs was removed for each of
the periods presented. There was no tax effect from these adjustments because of
the significant net losses.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, 1999
MARCH 31, 2000
(UNAUDITED) (UNAUDITED)
-------------------------- --------------------------------------
HISTORICAL HISTORICAL PRO FORMA
<S> <C> <C> <C>
Service and other revenue $ 16,853 $ 14,783 $ 14,783
======== ======== ========
Net loss $ (11,450) $ (9,507) $ (15,649)
========= ======== =========
</TABLE>
3. FINANCIAL POSITION AND BASIS OF ACCOUNTING
These consolidated financial statements have been prepared on a going
concern basis which contemplates the continuation and expansion of trading
activities as well as the realization of assets and liquidation of liabilities
in the ordinary course of business. Cable television operators typically
experience losses and negative cash flow in their initial years of operation due
to the large capital investment required for the construction or acquisition of
their cable networks and the administrative costs associated with commencing
operations. Consistent with this pattern, the Company has incurred substantial
operating losses since inception. As of March 31, 2000, the Company had negative
working capital. Additionally, the Company is currently and is expected to
continue to be highly leveraged. The ability of the Company to meet its debt
service obligations will depend on the future operating performance and
financial results of the Company as well as its ability to obtain additional
third party financing to support the planned expansion, as well as obtaining
additional financing from its ultimate parent, UPC. The Company's current cash
on hand will be insufficient to satisfy all of its commitments and to complete
its current business plan.
Management of the Company believes that significant opportunities exist for
pay television providers capable of delivering high quality, Polish-language
programming on a multi-channel basis and other services on cable (i.e. data and
telephones). As such, the Company has focused its financial and business efforts
toward its position in the cable market. The Company's business strategy is
designed to increase its market share and subscriber base and to maximize
revenue per subscriber. To accomplish its objectives and to capitalize on its
competitive advantages, the Company intends to (i) develop and control the
content of programming on its cable systems; (ii) increase its distribution
capabilities through integral growth and through acquisitions; and (iii) control
its management of subscribers by using advanced integrated management
information systems. 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 refinancing 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
its parent UPC, to provide financing to achieve the Company's business strategy.
UPC has declared that it will continue to financially support PCI and its
subsidiaries as a going concern, and accordingly enable the Company and its
subsidiaries to meet their financial obligations if and when needed, for the
period at least through January 31, 2001. Several of the Company's Polish
subsidiaries have statutory shareholders' equity less than the legally
prescribed limits because of accumulated losses. The managmement of these
companies will have to make decisions on how to increase the shareholders'
equity to be in compliance with the Polish Commercial Code. The Company is
currently considering several alternatives, including the conversion of
intercompany debt into equity, in order to resolve these deficiencies.
9
<PAGE>
4. RECLASSIFICATIONS
Certain amounts have been reclassified in the correspondiong period's unaudited
consolidated financial statement to conform to the unaudited consolidated
financial statement presentation for the three months ended March 31, 2000.
5. LOSS PER SHARE
Basic and diluted loss per ordinary share is based on the weighted average
number of ordinary shares outstanding of 18,948 for three month periods ended
March 31, 2000 and 1999.
6. 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 March 31, 2000, the Company had a minimum commitment under such
agreements of approximately $28,215,000 over the next five years approximating $
7,868,000 for the remainder of 2000, $5,269,000 in 2001, $4,872,000 in 2002,
$5,078,000 in 2003 and $5,128,000 in 2004. For the three months ended March 31,
2000 and 1999, the Company incurred programming fees of approximately $1,177,000
and $836,000 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.
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, @Entertainment, and
certain other defendants, in United States District Court, Southern District
of Ohio, Eastern Division, Civil Action No. C2-99-621. The relief sought by
the minority shareholders included: (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 could
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 set 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 PCI 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 PCI and PCBV, including @Entertainment, that allegedly
compete with PCI and PCBV.
On or about March 31, 2000, the parties to the lawsuit reached a settlement
under which Wizja TV B.V., an affiliate of PCI, will purchase approximately
1.3% to approximately 1.7% of the outstanding shares of PCBV for a price of
approximately $2.2 million to approximately $2.7 million. The Court entered a
conditional order of dismissal on
10
<PAGE>
March 31, 2000 and an additional order on May 1, 2000, extending the time of the
conditional dismissal by 30 days. This conditional order of dismissal is
predicated upon the fulfillment of the terms of the settlement agreement, which
is expected to occur by June 1, 2000.
In addition to the Ohio lawsuit, other minority shareholders of PCBV
(representing an additional approximately 6% of the shares of PCBV) have
asserted similar claims against the Company but have not yet filed suit. The
aforementioned settlement does not include the remaining minority
shareholders.
11
<PAGE>
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,505 $ 2,838
Trade accounts receivable, net of allowances of $1,944 in 2000
and $1,568 in 1999 5,632 5,909
VAT recoverable 487 1,285
Prepayments 411 568
Other current assets 372 350
--------- ---------
Total current assets 10,407 10,950
--------- ---------
Property, plant and equipment:
Cable television system assets 100,498 92,535
Construction in progress 6,257 5,632
Vehicles 410 498
Other 7,188 6,288
--------- ---------
114,353 104,953
Less accumulated depreciation (9,738) (6,067)
--------- ---------
Net property, plant and equipment 104,615 98,886
Inventories for construction 3,433 4,453
Intangibles, net 333,087 338,771
--------- ---------
Total assets $ 451,542 $ 453,060
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
12
<PAGE>
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 16,781 $ 18,825
Deferred revenue 820 594
--------- ---------
Total current liabilities 17,601 19,419
--------- ---------
Long-term liabilities:
Due to affiliate 56,731 52,358
Notes payable to PCI 184,132 176,815
--------- ---------
Total liabilities 258,464 248,592
--------- ---------
Commitments and contingencies (note 6)
Stockholders' equity:
Capital stock par value, $0.50 par; 200,000 shares
authorized, issued and outstanding 100 100
Paid-in capital 267,564 267,564
Accumulated other comprehensive loss (30,210) (30,950)
Accumulated deficit (44,376) (32,246)
--------- ---------
Total stockholders' equity 193,078 204,468
--------- ---------
Total liabilities and stockholders' equity $ 451,542 $ 453,060
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
13
<PAGE>
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SUCCESSOR (NOTE 2) PREDECESSOR (NOTE 2)
------------------ --------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
------------------ --------------------
(IN THOUSANDS)
<S> <C> <C>
Cable television revenue $ 15,924 $ 10,210
Operating expenses:
Direct operating expenses 11,507 6,923
Selling, general and administrative expenses 2,787 1,916
Depreciation and amortization 9,892 3,770
-------- --------
Total operating expenses 24,186 12,609
-------- --------
Operating loss (8,262) (2,399)
Interest income 66 11
Interest expense (3,516) (3,384)
Foreign exchange loss, net (402) (1,958)
-------- --------
Loss before income taxes (12,114) (7,730)
Income tax expense (16) (19)
Net loss $(12,130) $ (7,749)
======== ========
Basic and diluted net loss per common share $ (60.65) $ (38.75)
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
14
<PAGE>
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
SUCCESSOR (NOTE 2) PREDECESSOR (NOTE 2)
------------------ --------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
------------------ --------------------
(IN THOUSANDS)
<S> <C> <C>
Net loss (12,130) (7,749)
Other comprehensive (loss) / income:
Cumulative translation adjustment 740 (14,759)
------- -------
Comprehensive loss (11,390) (22,508)
======= =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
15
<PAGE>
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SUCCESSOR (NOTE 2) PREDECESSOR (NOTE 2)
------------------ --------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
------------------ --------------------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (12,130) $ (7,749)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 9,892 3,770
Interest expense added to notes payable to PCI 3,516 3,382
Changes in operating assets and liabilities:
Accounts receivable 277 78
Other current assets 933 (514)
Accounts payable (6,836) (3,852)
Deferred revenue 225 (61)
Amounts due to affiliates 4,373 6,648
Other -- --
--------- ---------
Net cash provided by operating activities 250 1,702
--------- ---------
Cash flows from investing activities:
Construction and purchase of property, plant and equipment (3,381) (3,123)
Purchase of intangible assets -- (121)
--------- ---------
Net cash used in investing activities (3,381) (3,244)
--------- ---------
Cash flows from financing activities:
Proceeds from borrowings from affiliates 3,800 1,140
--------- ---------
Net cash provided by financing activities 3,800 1,140
--------- ---------
Net increase/(decrease) in cash 669 (402)
Effect of exchange rates on cash and cash equivalents (2) --
Cash and cash equivalents at beginning of the period 2,838 1,463
--------- ---------
Cash and cash equivalents at end of the period $ 3,505 $ 1,061
========= =========
Supplemental cash flow information:
Cash paid for interest $ -- $ --
========= =========
Cash paid for income taxes $ 6 $ 15
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
16
<PAGE>
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
1. BASIS OF PRESENTATION
Financial information is included for Poland Cablevision (Netherlands) B.V. and
its subsidiaries ("PCBV") as 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 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 March 31, 2000. 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 1999 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. CONSUMMATION OF UPC TENDER OFFER AND MERGER
On June 2, 1999, @Entertainment entered into an Agreement and Plan of Merger
(the "Merger Agreement") 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's shares of
common stock at $19.00 per share.
The tender offer, initiated pursuant to the Merger Agreement, 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 and stock options.
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. The Company believes
that a Change of Control (as defined in the indentures governing the
@Entertainment and PCI notes) 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. @Entertainment restated some of its
assets and liabilities at August 5, 1999. At this date, the notes of
@Entertainment and PCI were restated reflect the market value and as a result
were increased by $61.9 million and deferred financing costs of $16.1 million
and deferred revenues of $2.0 million were written down to zero. The
consideration paid by UPC for all outstanding shares, warrants and options
totaled $812.5 million. At this time @Entertainment had negative net assets of
approximately $53.3 million and existing goodwill at net book value of $37.5
million which was realized on previous transactions. As a result of the above
considerations, UPC realized goodwill of approximately $979.3 million. As a
result of the Acquisition, UPC pushed down its basis to @Entertainment
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 acquisition. PCBV was allocated approximately $354.0
million of goodwill.
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The following pro forma condensed consolidated results for the three months
ended March 31, 1999 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 the assumptions
that the goodwill and the amortization thereon would be pushed down as if the
transaction had occurred at the beginning of each period presented. There was no
tax effect from these adjustments because of the significant net losses.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, 1999
MARCH 31, 2000
(UNAUDITED) (UNAUDITED)
-------------------------- --------------------------------------
HISTORICAL HISTORICAL PRO FORMA
<S> <C> <C> <C>
Service and other revenue $ 15,924 $ 10,210 $ 10,210
======== ======== ========
Net loss $ (12,130) $ (7,749) $ (13,650)
======== ======== ========
</TABLE>
3. FINANCIAL POSITION AND BASIS OF ACCOUNTING
These consolidated financial statements have been prepared on a going
concern basis which contemplates the continuation and expansion of trading
activities as well as the realization of assets and liquidation of liabilities
in the ordinary course of business. Cable television operators typically
experience losses and negative cash flow in their initial years of operation due
to the large capital investment required for the construction or acquisition of
their cable networks and the administrative costs associated with commencing
operations. Consistent with this pattern, the Company has incurred substantial
operating losses since inception. As of March 31, 2000, the Company had negative
working capital. Additionally, the Company is currently and is expected to
continue to be highly leveraged. The ability of the Company to meet its debt
service obligations will depend on the future operating performance and
financial results of the Company as well as its ability to obtain additional
third party financing to support the planned expansion, as well as obtaining
additional financing from its ultimate parent, UPC. The Company's current cash
on hand will be insufficient to satisfy all of its commitments and to complete
its current business plan.
Management of the Company believes that significant opportunities exist for
pay television providers capable of delivering high quality, Polish-language
programming on a multi-channel basis and other services on cable (i.e. data and
telephones). As such, the Company has focused its financial and business efforts
toward its position in the cable market. The Company's business strategy is
designed to increase its market share and subscriber base and to maximize
revenue per subscriber. To accomplish its objectives and to capitalize on its
competitive advantages, the Company intends to (i) develop and control the
content of programming on its cable systems; (ii) increase its distribution
capabilities through its internal growth and through acquisitions; and (iii)
control its management of subscribers by using advanced integrated management
information systems. 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 refinancing 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 PCI, PCI's parent, @Entertainment and
@Entertainment's parent UPC, to provide financing to achieve the Company's
business strategy. UPC has declared that it will continue to financially support
PCBV and its subsidiaries as a going concern, and accordingly enable the Company
and its subsidiaries to meet their financial obligations if and when needed, for
the period at least through January 31, 2001. Several of the Company's Polish
subsidiaries have statutory shareholders' equity less than the legally
prescribed limits because of accumulated losses. The
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management of these companies will have to make decisions on how to increase the
shareholders' equity to be in compliance with the Polish Commercial Code. The
Company is currently considering several alternatives, including the conversion
of intercompany debt into equity, in order to resolve these deficiencies.
4. RECLASSIFICATIONS
Certain amounts have been reclassified in the corresponding period's unaudited
consolidated financial statement to conform to the unaudited consolidated
financial statement presentation for the three months ended March 31, 2000.
5. LOSS PER SHARE
Basic and diluted loss per ordinary share is based on the weighted average
number of ordinary shares outstanding of 200,000 for the three month periods
ended March 31, 2000 and 1999.
6. COMMITMENTS AND CONTINGENCIES
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 consolidated financial position or results of operations.
PCBV MINORITY STOCKHOLDER'S CLAIM
On or about July 8, 1999, certain minority shareholders ("the minority
shareholders") of the Company filed a lawsuit against PCI, @Entertainment and
certain other defendants, in United States District Court, Southern District of
Ohio, Eastern Division, Civil Action No. C2-99-621. The relief sought by the
minority shareholders included: (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 the Company's shareholders, as amended (the
"Shareholders' Agreement") so that the minority shareholders could liquidate
their shares in the Company, (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 set forth eight claims for relief based on allegations
that the defendants, including @Entertainment and PCI, committed the following
wrongful acts: (1) breached a covenant not to compete contained in the
Shareholders' Agreement relating to the shareholders of the Company, (2)
breached a covenant in the Shareholders' Agreement requiring that any contract
entered into by the Company with any other party affiliated with PCI 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 the Company's shares
and that required CIC to give written notice of any offer to purchase the
minority shareholders' shares in the Company, (4) breached their fiduciary
duties to the minority shareholders, (5) breached the agreement between the
Company and CIC, which allegedly limited the amount of management fees that
could be paid annually by the Company, (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 the Company to affiliates of
PCI and the Company, including @Entertainment, that allegedly compete with PCI
and the Company.
On or about March 31, 2000, the parties to the lawsuit reached a settlement
under which Wizja TV B.V., an affiliate of PCI, will purchase approximately
1.3% to appxoximately 1.7% of the outstanding shares of the Company for a
price of approximately $2.2 million to approximately $2.7 million. The Court
entered a conditional order of dismissal on March 31, 2000 and an additional
order on May 1, 2000, extending the time of the conditional dismissal by 30
days. This conditional order of dismissal is predicated upon the fulfillment
of the terms of the settlement agreement, which is expected to occur by June
1, 2000.
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In addition to the Ohio lawsuit, other minority shareholders of the Company
(representing an additional approximately 6% of the shares of the Company)
have asserted similar claims against PCI but have not yet filed suit. The
aforementioned settlement does not include the remaining minority
shareholders.
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 Poland Communication, Inc.
("PCI" or 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 1999 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 Company's new ownership structure.
OVERVIEW
The Company operates the largest cable television system in Poland with
approximately 1,768,000 homes passed and approximately 1,023,500 total
subscribers as at March 31, 2000. The Company continues to realize subscriber
growth through a combination of increased penetration, new network build-out and
acquisitions.
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 its 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 March 31, 2000, approximately 70.6% of the Company's
subscribers received its basic package. For the three months ended March 31,
2000, approximately 97.8% of
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the Company's cable revenue was derived from monthly subscription fees compared
to approximately 97.2% for the three months ended March 31, 1999.
When the Company began operations in 1990, revenue from installation fees
exceeded revenue from monthly subscription fees because of the significant
number of new installations and the high amount of the installation fees
relative to the small existing subscriber base. As the Company's subscriber base
has grown, aggregate monthly subscription revenue has increased and installation
fees, while currently increasing on an aggregate basis, have declined as a
percentage of total revenue. The Company expects that installation fees will
continue to constitute a declining portion of the Company's revenue.
During 1998 and 1999, management completed or was in the process of completing
several strategic actions in support of its business and operating strategy. On
June 5, 1998, the Company began providing the Wizja TV programming package, with
its initial 11 channels of primarily Polish-language programming, to its basic
subscribers. Since that date, the basic 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 primarily Polish-language programming will provide it with a significant
competitive advantage in increasing its cable subscriber penetration rates.
The Company divides operating expenses into (i) direct operating expenses, (ii)
selling, general and administrative expenses and (iii) depreciation and
amortization expenses. Direct operating expenses consist of programming
expenses, maintenance and related expenses necessary to service, maintain and
operate the Company's cable systems, billing and collection expenses and
customer service expenses. Selling, general and administrative expenses consist
principally of administrative costs, including office related expenses,
professional fees and salaries, wages and benefits of non-technical employees,
advertising and marketing expenses, bank fees and bad debt expense. Depreciation
and amortization expenses consist of depreciation of property, plant and
equipment and amortization of intangible assets. The Company generated an
operating loss of $10.5 million for the three months ended, March 31, 2000,
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, additional Polish programming
from Polsat TV as well as high depreciation and amortization charges related to
additional goodwill pushed down as a result of @Entertainment's Merger and 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 positive
EBITDA of $1.0 million for three months ended March 31, 2000 and positive EBIDTA
of $1.7 million for three months ended March 31, 1999.
CABLE TELEVISION REVENUE. Revenue increased $2.1 million or 14.2% from $14.8
million in the three months ended March 31, 1999 to $16.9 million in the three
months ended March 31, 2000. This increase was primarily attributable to a 4.7%
increase in the number of basic and intermediate subscribers from approximately
740,000 at March 31, 1999 to approximately 774,700 at March 31, 2000, as well as
an increase in monthly subscription rates. The increase in basic and
intermediate subscribers was primarily due to build-out of the Company's
existing cable networks.
Revenue from monthly subscription fees represented 97.8% and 97.2% of cable
television revenue for the three months ended March 31, 2000 and 1999,
respectively. During the three months ended March 31, 2000, the Company
generated approximately $0.9 million of premium subscription revenue as a result
of providing the HBO Poland service pay movie channel and Wizja Sport to cable
subscribers as compared to $0.6 million for the three months ended March 31,
1999.
DIRECT OPERATING EXPENSES. Direct operating expenses increased $1.5 million, or
14.9%, from $10.1 million for the three months ended March 31, 1999 to $11.6
million for the three months ended March 31, 2000, principally as a result of
the purchase of additional Polish programming as well as the increased size of
the Company's cable television system. Direct operating expenses increased from
68.2% of revenues for the three months ended March 31, 1999 to 68.6% of revenues
for the three months ended March 31, 2000. However, without considering the
programming cost for the purchase of the Wizja programming package recorded in
2000 and 1999 the comparison would have been 53.5% and 33.8% for the three
months ended March 31, 2000 and 1999 respectively.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1.2 million or 40.0% from $3.0 million for
the three months ended March 31, 1999 to $4.2 million for the three months ended
March 31, 2000. This increase was attributable mainly to increased size of the
Company's cable television system.
As a percentage of revenue, selling, general and administrative expenses
increased from 20.3% for the three months ended March 31, 1999 to approximately
24.9% for the three months ended March 31, 2000.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense rose $5.6
million, or 94.9%, from $5.9 million for the three months ended March 31, 1999
to $11.5 million for the three months ended March 31, 2000, principally as a
result of depreciation and amortization of additional goodwill pushed down as a
result of the Merger and the continued build-out of the Company's cable
networks. Depreciation and amortization expense as a percentage of revenues
increased from 39.9% for the three months ended March 31, 1999 to 68.0% for the
three months ended March 31, 2000.
INTEREST EXPENSE. Interest expense decreased $3.3 million, or 84.6%, from $3.9
million for the three months ended March 31, 1999 to $0.6 million for the three
months ended March 31, 2000. The decrease is a result of repurchase of its 9
7/8% Senior Notes due 2002 in November and December 1999.
INTEREST AND INVESTMENT INCOME. Interest and investment income decreased $0.2
million, or 66.7%, from $0.3 million for the three months ended March 31, 1999
to $0.1 million for the three months ended March 31, 2000, primarily due to the
reduction in the level of cash used to fund the Company's operations.
FOREIGN EXCHANGE LOSS, NET. For the three months ended March 31, 2000,
foreign exchange loss amounted to $0.4 million as compared to a foreign exchange
loss of $1.6 million for the three months ended March 31, 1999.
INCOME TAX EXPENSE. The Company recorded $18,000 of income tax expense for the
three months ended March 31, 2000, as compared to $19,000 for the three months
ended March 31, 1999.
NET LOSS. For the three months ended March 31, 2000 and the three months ended
March 31, 1999, the Company had net losses of $11.5 million and $9.5 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 $10.4 million for the three months ended March 31,
1999 to $15.9 million for the three months ended March 31, 2000 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 @Entertainment, (ii) borrowings under
available credit facilities, (iii) cash flows from operations, and (iv) the
sale of $130 million aggregate principal amount of the Company's 9 7/8%
Senior Notes due 2003 ("PCI Notes"). The Company had positive cash flows from
operating activities of $28,000 and $1.4 million for three months ended March
31, 2000 and 1999, respectively, due to increase in amounts due to affiliates.
Since the acquisition of all of the outstanding stock of the Company's parent,
@Entertainment, by UPC on August 6, 1999, the Company has met its capital
requirements primarily through the sale of its Debenture Stock for $140 million
to @Entertainment.
Cash used for the purchase and expansion of the Company's cable television
networks was $3.8 million and $5.0 million for three months ended March 31,
2000 and 1999, respectively.
Pursuant to the indenture governing the PCI Notes (the "PCI Indenture"), the
Company is subject to certain restrictions and covenants, including, without
limitation, covenants with respect to the following matters: (i) limitation on
additional indebtedness; (ii) limitation on restricted payments;
(iii) limitation on issuances and sales of capital stock of restricted
subsidiaries; (iv) limitation on transactions with affiliates; (v) limitation on
liens; (vi) limitation on guarantees of indebtedness by subsidiaries;
(vii) purchase of PCI Notes upon a change of control; (viii) limitation on sale
of assets; (ix) limitation on dividends and other payment restrictions affecting
subsidiaries; (x) limitation on investments in unrestricted
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subsidiaries; (xi) limitation on lines of business; (xii) consolidations,
mergers and sale of assets; and (xiii) provision of financial statements and
reports. The Company is in compliance with these covenants.
The Company has pledged to State Street Bank and Trust Company, the trustee for
the PCI Notes (for the benefit of the holders of the PCI Notes) intercompany
notes issued by PCBV, of a minimum aggregate principal amount (together with
cash and cash equivalents of the Company), equal to at least 110% of the
outstanding principal amount of the PCI Notes, and that, in the aggregate,
provide cash collateral or bear interest and provide for principal repayments,
as the case may be, in amounts sufficient to pay interest on the PCI Notes.
Notes payable from PCBV to the Company were $176,815,000, $160,830,000 and
$134,509,000 at December 31, 1999, 1998 and 1997, respectively.
The indentures covering the PCI Notes provide that, following a Change of
Control (as defined therein), each noteholder had the right, at such holder's
option, to require the respective issuer to offer to repurchase all or a portion
of such holder's PCI Notes at the repurchase prices, described below. The
Company believes that the August 6, 1999 acquisition by UPC of Entertainment
constituted a Change of Control. Accordingly, PCI made offers to repurchase (the
"Offers") from the holders of the PCI Notes. The Offers expired at 12:01 PM, New
York City time, on November 2, 1999.
In accordance with the terms of the indentures governing the PCI Notes, the
Company was required to offer to repurchase the PCI Notes at the purchase price
101% of principal. As of August 5, 1999, the Company had $129,668,000 aggregate
principal amount at maturity of PCI Notes outstanding. Pursuant to the Offer,
the Company has purchased $113,237,000 aggregate principal amount of PCI Notes
for an aggregate price of $114,369,370.
To fund the repurchase of the PCI Notes and operations, as of November 3, 1999,
PCI sold @Entertainment 14,000 shares of its Debenture Stock for a total of $140
million on an as-issued basis. The Debenture Stock will be redeemed on December
31, 2003 for a price of $10,000 per share plus interest at 10% annum from
November 3, 1999 to the date of redemption, compounded annually. UPC funded
@Entertainment's purchase of the Mandatorily Redeemable Debenture Stock. The
Company will pledge to @Entertainment intercompany notes issued by PCBV in an
aggregated principal amount of $176,815,000. The PCI Noteholders will be equally
and ratably secured by the pledge.
The Company's cash on hand will be insufficient to complete its current
business plan. UPC and @Entertainment are evaluating various alternatives to
meet the Company's capital needs. Future sources of financing for the Company
could include public or private equity, debt or bank financing or any
combination thereof, subject to the restrictions contained in the indentures
governing the outstanding senior indebtedness of the Company, @Entertainment,
UPC, and United GlobalCom, 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 refinancing
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. UPC has declared that it will continue to financially
support PCI and its subsidiaries as a going concern and accordingly enable
the Company and its subsidiaries to meet their financial obligations if and
when needed, for the period at least through January 31, 2001.
YEAR 2000 COMPLIANCE
The Company has not experienced any problems with its computer systems relating
to distinguishing twenty-first century dates from twentieth century dates, which
generally are referred to as year 2000 problems. The Company is also not aware
of any material year 2000 problems with its clients or vendors. The Company has
not incurred material expenses or experienced any material operation disruptions
as a result of any year 2000 problems.
Impact of New Accounting Standards Not Yet Adopted
NEW ACCOUNTING PRINCIPLES
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The Financial Accounting Standards Board ("FASB") recently issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), which requires that companies recognize
all derivatives as either assets or liabilities in the balance sheet at fair
value. Under this statement, accounting for changes in fair value of a
derivative depends on its intended use and designation. In June 1999, the FASB
approved Statement of Financial Accounting Standards No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of Effective Date of
FASB Statement No. 133" ("SFAS 137"). SFAS 137 amends the effective date of SFAS
133, which will apply to the Company as of the first quarter 2001. The Company
is currently assessing the effect of this new standard.
On December 3, 1999 the SEC Staff Accounting Bulletin No. 101 ("SAB 101") was
released and provides the staff's views in applying generally accepted
accounting principles to selected revenue recognition issues. On March 24, 2000
the staff issued the Staff Accounting Bulletin No. 101A to delay the
implementation date of SAB 101, which now will be implemented in our second
quarter of 2000, instead of needing to implement in our first quarter of 2000,
as originally provided in SAB 101. We are currently assessing the effect of this
new guidance.
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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 March 31, 2000. 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 $0.3 million. In other terms,
a 10% depreciation of the Polish zloty against the U.S. dollar, would result
in a $0.3 million decrease in the reported operating loss. This was estimated
using 10% of the Company's operating loss after adjusting for unusual
impairment and other items including U.S. dollar denominated or indexed
expenses. The Company believes that this quantitative measure has inherent
limitations because, as discussed in the first paragraph of this section, it
does not take into account any governmental actions or changes in either
customer purchasing patterns or the Company's financing or operating
strategies.
The Company does not generally hedge translation risk. While the Company may
consider entering into transactions to hedge the risk of exchange rate
fluctuations, there is no assurance that it will be able to obtain hedging
arrangements on commercially satisfactory terms. Therefore, shifts in currency
exchange rates may have an adverse effect on the Company's financial results and
on its ability to meet its U.S. dollar denominated debt obligations and
contractual commitments.
Poland has historically experienced high levels of inflation and significant
fluctuations in the exchange rate for the zloty. The Polish government has
adopted policies that slowed the annual rate of inflation from approximately
250% in 1990 to approximately 14.9% in 1997, and approximately 7.3% in 1999. The
rate of inflation for the three month period ended March 31, 2000 was
approximately 3.6%. 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
depreciated against the U.S. dollar by approximately 17.4% for the year ended
December 31, 1999. For the first quarter of 2000 the zloty has remained stable
against the U.S. dollar. 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.
25
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in litigation from time to time in the ordinary cause 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 financial condition or results of operations. See also Note 6 to the
Company's unaudited consolidated financial statements for a description of the
PCBV minority shareholder 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) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the first
quarter of 2000.
26
<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/ Nimrod J. Kovacs
---------------------------------
Nimrod J. Kovacs
Chairman of the Board of Directors
By: /s/ Ray D. Samuelson
---------------------------------
Ray D. Samuelson
Chief Financial Officer
Date: May 15, 2000
<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 three
months ended March 31, 2000 and is qualified in its entirety by reference to
such financial statement.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 6,600
<SECURITIES> 0
<RECEIVABLES> 8,131
<ALLOWANCES> (2,322)
<INVENTORY> 4,391
<CURRENT-ASSETS> 13,936
<PP&E> 146,858
<DEPRECIATION> (12,231)
<TOTAL-ASSETS> 524,798
<CURRENT-LIABILITIES> 23,125
<BONDS> 14,899
145,833
35,692
<COMMON> 1
<OTHER-SE> 258,711
<TOTAL-LIABILITY-AND-EQUITY> 524,798
<SALES> 0
<TOTAL-REVENUES> 16,853
<CGS> 0
<TOTAL-COSTS> 27,310
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (612)
<INCOME-PRETAX> (11,432)
<INCOME-TAX> (18)
<INCOME-CONTINUING> (11,450)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,450)
<EPS-BASIC> (841.62)
<EPS-DILUTED> 0
</TABLE>
