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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
---------------- ----------------
COMMISSION FILE NUMBER 333-20307
--------------------------
POLAND COMMUNICATIONS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW YORK 06-1070447
(State or Other Jurisdiction (I.R.S. Employer of Identification No.)
Incorporation or Organization)
4643 ULSTER STREET 80237
SUITE 1300 (Zip Code)
DENVER, COLORADO
(Address of Principal Executive Offices)
--------------------------
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (303) 770-4001
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None None
Securities registered pursuant to Section 12(g) of the Act:
NOT APPLICABLE
--------------
(Title of Class)
Indicate by check mark (X) whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the common equity was sold, or the
average bid and asked prices of such common equity, as of a specified date
within 60 days prior to the date of filing. (See definition of affiliate in Rule
405.)
ZERO
The number of shares outstanding of Poland Communications, Inc.'s
common stock as of December 31, 2000, was:
COMMON STOCK 18,948
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
The Registrant meets the conditions set forth in General Instructions (I) (1)
(a) and (b) of Form 10-K and is therefore filing this Form with the reduced
disclosure format.
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1
POLAND COMMUNICATIONS, INC.
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
PAGE NUMBER
-----------
PART I
ITEM 1. Business................................................................... 4
ITEM 2. Properties................................................................. 11
ITEM 3. Legal Proceedings.......................................................... 12
PART II
ITEM 5. Market for Company's Common Equity and Related
Stockholder Matters........................................................ 13
ITEM 6. Selected Financial Data.................................................... 16
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................... 18
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk.................. 23
ITEM 8. Financial Statements and Supplementary Data................................ 24
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure....................................................... 83
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............ 84
2
PART I
Poland Communications, Inc. ("PCI"), is a New York corporation which is
wholly-owned subsidiary of UPC Polska, Inc., formerly @Entertainment, Inc.,
("UPC Polska"), a Delaware corporation which is wholly-owned by United
Pan-Europe Communications N.V. ("UPC"). References to the "Company" mean PCI
and its subsidiaries.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K 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 as "believes," "expects," "intends," "plans," "anticipates," "likely,"
"will", "may", "shall", and similar expressions are intended to 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 Annual
Report on Form 10-K. 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, 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; (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
and hold and attract qualified personnel; (xi) changes in the nature of
strategic relationships with joint ventures; (xii) the overall market
acceptance of those products and services, including acceptance of the
pricing of those products and services; (xiii) acquisition opportunities; and
(xiv) the Company's new ownership structure.
EXCHANGE RATE
In this Annual Report on Form 10-K, references to "U.S. dollars" or "$"
are to U.S. currency, references to "Deutsche-Marks" or "DM" are to German
currency, references to "Euros" or "EUR" are to EU currency, and references
to "zloty" or "PLN" are to Polish currency. The Company has presented its
primary consolidated financial statements in accordance with generally
accepted accounting principles in the U.S. in U.S. dollars. Amounts
originally measured in zloty for all periods presented have been translated
into U.S. dollars.
For your convenience, this Annual Report contains certain zloty, Euro and
Deutsche-Mark amounts not derived from the consolidated financial statements
which have been translated into U.S. dollars. Readers should not assume that
the zloty, Euro, and Deutsche-Mark amounts actually represent such U.S.
dollar amounts or could be, or could have been, converted into U.S. dollars
at the rates indicated or at any other rate. Unless otherwise stated, such
U.S. dollar amounts have been derived by converting from zloty to U.S.
dollars at the rate of PLN 4.1432 = $1.00, the exchange rate quoted by the
National Bank of Poland at noon on December 29, 2000, and by converting from
Euro to U.S. dollars at the rate of EUR 1.156 = $1.00, the exchange rate
quoted by OANDA.com on December 29, 2000, and by converting from
Deutsche-Mark to U.S. dollars at the rate of DM 2.1024 = $1.00, the exchange
rate quoted by the National Bank of Poland at noon on December 29, 2000.
These rates may differ from the actual rates in effect during the periods
covered by the financial information discussed herein. The Federal Reserve
Bank of New York does not certify for customs purposes a noon buying rate for
zloty.
3
ITEM 1. BUSINESS
GENERAL
The Company operates the largest cable television system in Poland with
approximately 1,851,000 homes passed and approximately 1,064,000 total
subscribers as of December 31, 2000. The Company's cable subscribers are
located in regional clusters encompassing eight of the ten largest cities in
Poland, including those cities which the Company believes provide the most
favorable demographics for cable television in the country. The Company's
cable television networks have been constructed with the flexibility and
capacity to be cost-effectively reconfigured to offer an array of interactive
and integrated entertainment, telecommunications and information service.
REGIONAL CLUSTERS
The Company has established five regional clusters for its cable television
business encompassing eight of the ten largest cities in Poland, which the
Company believes, are among those with the strongest economies and most
favorable demographics for cable television in the country. The following table
illustrates certain operating data of each of the Company's existing regional
clusters.
OVERVIEW OF THE COMPANY'S EXISTING CABLE SYSTEMS (1)
AVERAGE MONTHLY
SUBSCRIPTION
BASIC AND BASIC AND REVENUE PER BASIC
TOTAL HOMES TOTAL INTERMEDIATE INTERMEDIATE AND INTERMEDIATE
REGION HOMES PASSED SUBSCRIBERS SUBSCRIBERS PENETRATION SUBSCRIBER (2)
------ ----- ------ ----------- ----------- ----------- --------------
North 574,000 441,041 302,285 229,926 52.13% 6.00
South 400,000 237,172 119,536 97,370 41.05% 8.10
Central 920,000 447,596 254,328 168,429 37.63% 9.28
West 624,000 246,068 131,459 115,432 46.91% 6.58
Katowice 1,200,000 478,815 256,662 187,075 39.07% 7.18
------------ ------------ ------------- ---------------- ---------------- -----------------
TOTAL 3,718,000 1,850,692 1,064,270 798,232 43.13% 7.31
============ ============ ============= ================ ================ =================
- ----------------------------------------------
(1) All data at or for the year ended December 31, 2000.
(2) Represents a weighted average for the Company based on the total number of
basic subscribers at December 31, 2000.
ACQUISITIONS
The Company regularly evaluates potential acquisitions of cable networks.
The Company currently has no definitive agreement with respect to any material
acquisition, although from time to time it has discussions with other companies
and assesses opportunities on an ongoing basis. The Company may be required to
apply for the approval of the Polish Anti-Monopoly Office with respect to any
acquisitions it wishes to consummate. The Company's ability to enter into
definitive agreements relating to material acquisitions and their potential
terms, as well as its ability to obtain the necessary anti-monopoly approvals,
cannot be assured.
SERVICES AND FEES
The Company charges cable television subscribers an initial installation
fee and fixed monthly fees for their choice of service packages and for other
services such as premium channels and rental of remote control devices.
Throughout its cable television systems, the Company currently offers three
packages of cable television service: basic ("basic package"), broadcast
("broadcast package") and intermediate ("intermediate package") packages of
service in selected areas of Poland. On December 31, 2000, approximately
752,900
4
or 70.7% of the Company's subscribers received the basic package, approximately
45,400 or 4.3% received the intermediate package and approximately 266,000 or
25.0% received the broadcast package of service.
During the fourth quarter of the year 2000, the Company began providing
Internet services to its cable television customers and has been upgrading
its network to provide this service. Individual and home office Internet
subscribers are charged a monthly subscription fee of $48.00 and $60.00,
respectively. The standard installation fee is approximately $59.00 for
buildings with multiple apartments and approximately $120.00 for single
family dwellings.
BASIC PACKAGE. The basic package includes approximately 32 to 70
channels. This package generally includes all Polish terrestrial broadcast
channels, most major European satellite programming legally available in
Poland, regional and local programming and, Wizja TV. The Company's basic
package offerings vary by location. All of the Wizja TV programming is part
of the basic package except for the HBO Poland service, a Polish-language
premium movie channel owned in part by Home Box Office, and Wizja Sport, a
Polish-language premium sport channel. However, as of March 24, 2001, the
Wizja Sport channel was expanded into the basic package.
INTERMEDIATE PACKAGE. The intermediate package includes approximately 19 to
34 channels. This package is offered for monthly fees equal to approximately
one-half of the amount charged for the basic package. The intermediate package
is designed to compete with small cable operators on a basis of price, using a
limited programming offering. The Company's intermediate package offerings vary
by location.
BROADCAST PACKAGE. The broadcast package includes 5 to 14 broadcast
channels with clear reception for monthly fees, which are substantially less
than the amounts charged for the intermediate package.
PREMIUM AND OTHER SERVICES. For an additional monthly charge, certain of
the Company's cable networks have offered two premium television services -
the HBO Poland service and Wizja Sport, although Wizja Sport was expanded
into basic package as of March 24, 2001.
Other optional services include additional outlets and stereo service,
which enable a subscriber to receive from 4 to 28 radio channels in stereo.
Cable television subscribers who require the use of a tuner to receive
certain of the Company's cable services are charged an additional fee of
approximately $1.10 per month. Installation fees vary according to the type
of connection required by a cable television subscriber. The standard initial
installation fee is approximately $24, but such fee may be subject to
reductions as a result of promotional campaigns.
PRICING STRATEGY. Prior to 1999, the Company experienced annual churn
rates of less than 10%, and was able to pass on the effects of inflation
through price increases. For the years ended December 31, 2000 and 1999, the
churn rate was 21.5%. This pricing strategy of passing on the effects of
inflation through price increase commenced in January 1997 and is designed to
increase revenue per subscriber and to achieve real profit margin increases
in U.S. dollar terms.
The Company expects that it will continue to experience churn rates above
historical levels during the implementation of its current pricing strategy. The
Company expects to offer promotional incentives in certain areas of the country
from time to time in connection with its marketing.
Cable television subscribers are billed monthly in advance and, as is
customary in Poland, most of the Company's customers pay their bills through
their local post office or bank. The Company has strict enforcement policies
to encourage timely payment. Such policies include notices of late payment,
visits from service personnel, and ultimately, disconnection for nonpaying
customers 90 days after a bill becomes past due. The Company's system
architecture in most networks enables it to promptly shut off service to
nonpaying customers and is designed to reduce non-authorized use of its cable
systems. The Company's bad debts expense has averaged 4.75% and 3.84% of
revenue for the years 2000 and 1999, respectively.
TECHNOLOGY AND INFRASTRUCTURE
The Company believes the fiber-optic cable television networks that it
has constructed, which serve approximately 877,000 of its subscribers, are
among the most technologically advanced in Poland and are comparable to
modern cable television networks in the U.S. All of the Company's networks
that have been constructed by the Company have bandwidths of at least 550
MHz. New portions of the networks, which have recently been constructed, are
being designed to have minimum bandwidths of 860 MHz. The Company's goal is
to upgrade any portions of its cable television networks that have bandwidths
below 550 MHz (generally acquired from other
5
entities) to at least 860 MHz in an effort to reduce the number of satellite
receivers and parts inventory required in the networks. The Company uses
fiber-optic and coaxial cables, electronic components and connectors supplied
by leading Western firms in its cable television networks.
The Company has been able to avoid constructing its own underground conduits
in certain areas by entering into a series of agreements with regional and local
branches of the Polish national telephone company (known in the Polish
telecommunications industry as "TPSA") which permit the Company to use TPSA's
conduit infrastructure for an indefinite period of time or for fixed periods up
to 20 years. The Company also has agreements to undertake joint construction
with another company for new conduits in certain areas. These agreements
represent a major advantage to the Company since they permit the Company to
minimize the costly and time-consuming process of building new conduit
infrastructure where TPSA conduit infrastructure exists and provide for joint
construction with TPSA and other utilities of conduit infrastructure where none
currently exists. As of December 31, 2000, approximately 74.5% of the Company's
cable television plant had been constructed utilizing pre-existing conduits of
TPSA. A substantial portion of the Company's contracts with TPSA allows for
termination by TPSA without penalty at any time either immediately upon the
occurrence of certain conditions or upon provision of three to six months'
notice without cause.
Generally speaking, TPSA may terminate a conduit agreement immediately (and
without penalty) if:
- the Company does not have a valid permit from the Chairman of the
office for Telecommunication Regulation ("URT") (which replaced the
Polish State Agency of Radio Communications as of January 1, 2001)
authorizing the construction and operation of a cable television
network in a specified geographic area covering the subscribers to
which the conduit delivers the signal;
- the Company's cable network serviced by the conduit does not meet the
technical specifications required by the New Telecommunication Law
(formerly the Polish Telecommunication Act of 1990);
- the Company does not have a contract with the cooperative authority
allowing for the installation of the cable network; or
- the Company does not pay the rent required under the conduit agreement.
The Company is in compliance with all conditions of the TPSA agreements.
However, any termination by TPSA of such contracts could result in the
Company losing its permits, the termination of agreements with co-op
authorities and programmers, and an inability to service customer with
respect to areas where its networks utilize the conduits that were the
subject of such TPSA contracts.
In addition, some conduit agreements with TPSA provide that cables can be
installed in the conduit only for the use of cable television. If the Company
uses the cables for a purpose other than cable television, such as data
transmission, telephone, or Internet access, such use could be considered a
violation of the terms of certain conduit agreements, unless this use is
expressly authorized by TPSA. There is no guarantee that TPSA would give its
approval to permit other uses of the conduits. The Company is currently in
the process of introducing Internet services to its customers and
renegotiating certain conduit agreements with TPSA.
COMPETITION
In the cable television industry, the Company believes that competition
for subscribers is primarily based on price, program offerings, customer
service, and quality and reliability of cable networks. Operators of small
cable networks, which are active throughout Poland, pose a competitive threat
to the Company because they often incur lower capital expenditures and
operating costs and therefore have the ability to charge lower fees to
subscribers than does the Company. While these operators often do not meet
the technical standards for cable systems under Polish law, enforcement of
regulations governing technical standards has historically been poor.
Regardless of the enforcement of these laws and regulations, the Company
expects that operators of small cable networks will continue to remain a
competitive force in Poland.
In addition, certain of the Company's competitors or their affiliates
have substantial experience in the cable television industry and have
significant resources (including financial resources and access to
international programming sources). The largest competitors of the Company in
Poland include Elektrim S.A., which owns at least two cable systems
(including Aster City Cable Sp. z o.o.) and Multimedia Polska S.A., a Polish
entity.
The Company's cable television business also competes with companies
employing other methods of delivering television signals to the subscribers,
such as terrestrial broadcast television signals and analog-direct to home
("A-DTH") television services, and with a multi-channel multi-point
distribution system and D-DTH services (including UPC Polska's own D-DTH
service).
6
TRADEMARKS
The Company, either itself, through its subsidiaries or its parent, has
filed or is in the process of filing for registration of its various
trademarks. The PTK logo was registered for use in connection with television
and programming services in July 1997. Variations of "PTK" have been
registered in Poland. Trademarks for UPC have been registered internationally.
EMPLOYEES
At December 31, 2000, the Company had approximately 969 permanent
full-time employees and approximately 35 part-time employees. In addition, as
of that date the Company employed approximately 90 salesmen, some of whom may
have received both commissions and a nominal salary, and from time to time
the Company employs additional salesmen on an as needed, commission only
basis. In a division of one of the Company's subsidiaries, a trade union,
which has approximately 3 members, was formed in mid-1999. The Company
believes that its relations with its employees are good.
REGULATION
GENERAL
In connection with negotiating its membership in the EU, Poland has
started to adjust its legal system to EU requirements and currently is in the
process of revising its telecommunications, broadcasting and copyright
regulation. On July 21, 2000 the Polish Parliament passed the new
Telecommunications Law (the "NTL") which changed the regulatory framework of
telecommunications activities in Poland. The NTL replaced the Communication
Act of 1990 (the "Communications Act") and became effective as of January 1,
2001.
Until the end of the year 2000, the operation of cable television systems
was regulated primarily by the Communications Act. As of January 1, 2001, the
operation of those television systems has been regulated under the NTL.
Operators are also subject to the provisions of the Polish Radio and
Television Act of 1992 (the "Television Act").
Currently the Polish telecommunications and media sector is regulated by:
- The Polish Minister of Communications;
- The Chairman of the Office for Telecommunications Regulation ("URT")
(which replaced the Polish State Agency of Radiocommunications ("PAR"),
established under the Communications Act); and
- The Polish National Radio and Television Council (the "Council").
Cable television operators in Poland are required to obtain permits from the
Chairman of the URT to operate public radio and television networks and must
register certain programming that they transmit over their networks with the
Council.
Neither the Minister of Communications nor the Chairman of the URT
currently has the authority to regulate the rates charged by operators of
cable television. However, excessive rates could be challenged by the Polish
Anti-Monopoly Office should they be deemed to constitute monopolistic or
other anti-competitive practices. The cable television operators in Poland
are also subject to the Law on Copyright and Neighboring Rights of 1994 (the
"Copyright Act") which provides intellectual property rights protection to
authors and producers of programming. Under the terms of the Television Act,
broadcasters in Poland are regulated by, and must obtain a broadcasting
license from the Council.
Poland's regulatory environment is undergoing constant change. The Company
does not know how such change will impact its business.
COMMUNICATIONS ACT
PERMITS. Until the end of the year 2000, the cable television operators were
required to obtain permits from PAR to install and operate cable television
systems. The Communications Act and the required permits issued by PAR had set
forth the terms and conditions for providing cable television services.
7
If a cable operator breached the terms of its permits or the provisions of
the Communications Act, or if such operator has failed to acquire permits
covering areas serviced by its networks, PAR could impose penalties on such
operator, including:
- fines;
- the revocation of all permits covering the cable networks where such
breach occurred; and
- the forfeiture of the cable operator's cable networks.
In addition, the Communications Act provided that PAR may not grant a new
permit to, or renew an expiring permit held by, any applicant that has had, or
that was controlled by an entity that has had, a permit revoked within the
previous five years.
On July 26, 2000, the Polish Ministry of Telecommunication issued a
15-year data transmission license to a subsidiary of the Company, authorizing
that company to provide data transmission service to its customers throughout
the territory of Poland, using its own networks and those leased from other
licensed operators. This license allowed that subsidiary to provide Internet
services to its customers. This license expired automatically with the entry
of the NTL into force, i.e. as of January 1, 2001. The subsidiary may
continue the provision of the services covered by the license. It must,
however, notify the Chairman of the URT about the provision of the data
transmission services by the end of March 2001 as described below. In certain
cases, listed below, the Chairman of the URT may object to the provision of
the services by the subsidiary. In March 2001, the Company's subsidiary
notified the Chairman of the URT of its activities concerning the provision
of data transmission services and access to the Internet.
As of December 31, 2000, approximately 74.5% of the Company's cable plant
runs through conduits leased from the Polish national telephone company
("TPSA"). If the Company uses the cables for a purpose other than cable
television, such as data transmission, telephone, or Internet access, such
use could be considered a violation of the terms of certain conduit
agreements, unless this use is expressly authorized by TPSA. There is no
guarantee that TPSA would give its approval to permit other uses of the
conduits. The Company is currently in the process of introducing Internet
services to its customers and renegotiating certain conduit agreements with
TPSA.
FOREIGN OWNERSHIP RESTRICTIONS. The Communications Act which was in
effect until January 1, 2001, provided that permits may only be issued to and
held by Polish citizens, or companies in which foreign persons held no more
than 49% of the share capital, ownership interests and voting rights. In
addition, a majority of the management and supervisory board of any cable
television operator holding permits must have been comprised of Polish
citizens residing in Poland. These restrictions did not apply to any permits
issued prior to July 7, 1995.
THE COMPANY'S PERMITS AND NEW CORPORATE ORGANIZATIONAL STRUCTURE.
To comply with the foreign ownership requirements discussed above, the
Company restructured UPC Telewizja Kablowa Sp. z o.o. (formerly Polska
Telewizja Kablowa Sp. z o.o.) ("UPC TK"), which operates most of the Company's
cable networks. UPC TK owns many of the cable networks but certain networks
are owned by UPC TK's affiliate and leased to UPC TK. The Company's
subsidiary holds a 47% ownership stake in UPC TK while the remaining 53% are
held by a Polish entity. PCI in turn, holds 49% of the Polish entity, and the
remaining 51% interest in the Polish entity is owned by a Polish company. The
Company believes that this ownership and operating structure complies with
the requirements of Polish law. PAR has granted permits to the Company and
its competitors, based on the lease of assets, for networks using an
ownership and operating structure substantially similar to the one described
above.
Specifically, subsidiaries of the Company have received approximately 99
permits from PAR, covering all of the Company's basic subscribers at December
31, 2000, including subscribers for whom the Company's permits are deemed
extended under Polish law pending the authority's response to the Company's
permit renewal applications.
NEW TELECOMMUNICATION LAW
Since January 1, 2001, the operation of cable and other television
systems in Poland has been regulated under the NTL, which replaces the
Communications Act.
The NTL changes the licensing regime and the competency of telecommunication
authorities. The NTL introduces a new authority - the Chairman of the URT.
The Chairman of the URT has assumed most of the administration tasks
previously performed by the Polish Minister of
8
Communications and PAR. The Chairman of the URT is responsible for regulating
telecommunication activities, including exercising control over operators and
managing frequencies. The duties of the Minister of Communications are
limited primarily to issuing secondary regulations. PAR along with the Polish
State Telecommunications and Postal Inspection (PITiP) were liquidated as of
January 1, 2001.
Under the NTL, cable television operators are required to obtain a permit
from the Chairman of the URT to operate public radio and television networks.
The Chairman of the URT shall grant the permit to any interested entity
authorized to do business in Poland and which complies with the conditions set
forth in the NTL. Applications for renewals of permits may be refused only if
during the validity of the permit there have been circumstances justifying the
refusal, revocation or limitation of the scope of the permit.
Under the NTL, an NTL permit must be revoked if:
- a final court order prohibits the operator from conducting the business
covered by the permit;
- the operator fails to meet the legal requirements for the grant of the
permit; or
- the operator has failed to remedy a violation of the law within the
designated time limit.
The NTL permit may be revoked, if the operator breaches the provisions of the
NTL, the permit or other decisions issued under the NTL in any way, does not pay
the required fees, or a decision on the liquidation or declaration of bankruptcy
of the operator has been made.
Except for the operation of radio and television networks and public
telephone networks, the performance of all other telecommunications activities
requires only notification to the Chairman of the URT. The Chairman may disallow
the performance of such activities within 21 days of the receipt of the
notification if:
- the notification violates the NTL;
- the notification is incomplete; or
- the information provided in the notification is false.
Permits issued under the Communications Act are automatically transformed
into NTL permits, if such permits are still required under the NTL. Thus, the
permits for the installation and operation of cable television systems, granted
to the Company's subsidiaries will become NTL permits. This rule does not apply
to the provisions of the permits issued under Communications Act, the exercise
of which would constitute a violation of the NTL. All other licences,
authorizations and assignments expired by force of the law as of January 1,
2001.
Operators, who had obtained rights expiring automatically under the NTL
may continue their telecommunications activities within their current scope,
provided that they apply for NTL permits by the end of 2001, if these
activities require an NTL permit. For telecommunications activities that only
require notification, such as data transmission, operators may continue to
provide these services, provided that they notify the Chairman of the URT by
the end of March 2001, and the Chairman does not object.
The NTL has eliminated most of the foreign ownership restrictions relating
to telecommunications. However, the NTL does prohibit the provision of
international telecommunications services using networks operated by foreign
entities or companies with participation of foreign entities until December
31, 2002. Until this date, UPC TK will be subject to this restriction. UPC TK
may, however, provide international telecommunication services using the
networks of other authorized Polish operators. It may also provide these
services with the exception of international telephony services, by using its
own radiocommunication networks. Such services may, until December 31, 2002,
only be provided by TPSA.
Under the NTL all operators are required to make their networks available
to users who intend to commercially gather, process, store, use or grant
access to information for others.
Operators that perform their activities on the basis of an NTL permit are
required to allow other operators operating public networks to use their
buildings, lines, conduits, poles, towers and masts, in particular, allowing
them to use telecommunications equipment, where these activities would be
impossible without such infrastructure sharing or would involve significant
cost. Operators are required to specify the conditions of the joint use in an
agreement. If the parties cannot agree to specific conditions, either party
may request the Chairman of the URT to issue a decision on joint use.
9
TELEVISION ACT
THE POLISH NATIONAL RADIO AND TELEVISION COUNCIL. The Council, an
independent agency of the Polish government, was created under the Television
Act to regulate broadcasting in Poland. The Council has regulatory authority
over both the programming that cable television operators transmit over their
networks and the broadcasting operations of broadcasters.
REGISTRATION OF PROGRAMMING. Under the Television Act, cable television
operators must register each channel and the programming, which will be aired on
that channel with the Chairman of the Council prior to transmission. The
Company's subsidiaries have registered most of the programming that they
transmit on their cable networks, except programming transmitted on networks for
which they do not have permits. The Chairman of the Council may revoke the
registration of any of the Company's programming, or may not register all
additional programming that the Company desires to transmit over the Company's
networks. In addition, the Council may take action regarding unregistered
programming that the Company transmits over cable networks for which the
Company does not yet have NTL permits. This pertains to areas for which permit
applications cannot be made until all permit requirements are satisfied
(including obtaining agreements with the cooperative authorities, upgrading of
the acquired networks to meet technical standards where necessary and satisfying
foreign ownership limitations). Such actions could include the levying of
monetary fines against the Company, and the seizure of equipment involved in
transmitting such unregistered programming as well as criminal sanctions against
the Company's subsidiaries' management. These actions could have a material
adverse effect on the Company's business, financial condition and results of
operations.
RESTRICTIONS ON FOREIGN OWNERSHIP OF POLISH BROADCASTERS. The Television Act
provides that programming may be broadcast in Poland only by Polish entities in
which foreign persons hold no more than 33% of the share capital, ownership
interest and voting rights. In addition, the Television Act provides that the
majority of the management and supervisory boards of any company holding a
broadcasting license must be comprised of Polish citizens residing in Poland.
Companies that engage in broadcasting in Poland are required to obtain a
broadcasting license from the Chairman of the Council under the Television Act.
The Council may revoke a broadcasting license for, among other things:
- violations of the Television Act;
- violations of the terms of the broadcasting license; or
- violations of restrictions on foreign ownership of broadcasters.
COPYRIGHT PROTECTION
Cable television operators in Poland are subject to the provisions of
the Polish Copyright Act, which governs the enforcement of intellectual
property rights. In general, the holder of a Polish copyright for a program
transmitted over the cable networks of a cable television operator has a
right to receive compensation from such operator or to prevent transmission
of the program. A bill currently pending in the Parliament regarding
copyrights is going to abolish the statutory license for cable operators for
simultaneous transmissions of programs broadcasted by another broadcasters.
The new act is expected to be passed by the Parliament by the end of the year
2001. The adoption of this act may result in an increase of the fees paid by
cable operators.
The rights of Polish copyright holders are generally enforced by
organizations for collective copyright administration and protection such as
Zwiazek Autorow i Kompozytorow Scenicznych ("ZAIKS") and Zwiazek Artystow
Scen Polskich ("ZASP"), and can also be enforced by the holders themselves.
Most of the Company's cable subsidiaries operate under a contract with ZASP
and all of its cable subsidiaries operate under a contract with ZAIKS. A
violation of the Copyright Act by a cable television operator also
constitutes a violation of the Communications Act and of the operator's
permits. See "--Television Act" for a discussion of the penalties and
consequences associated with violations of the Television Act and
"--Communications Act" and "--New Telecommunications Law" for a discussion of
the penalties and consequences associated with violations of the
Communications Act or the New Telecommunications Law and of a television
operator's permits.
10
ANTI-MONOPOLY ACT
EXCLUSIVE PROGRAMMING AGREEMENTS. Some of the programming agreements that
the Company has entered into for its cable networks contain exclusivity clauses
which restrict or prohibit the provider of such programming from providing such
programming to other cable operators. Although such exclusivity clauses are not
specifically prohibited under the Anti-Monopoly Act, such agreements may be
found unlawful, and therefore unenforceable, if they restrict or hinder
competition or otherwise involve the abuse of a dominant position. A decision by
the Anti-Monopoly Office to deem one or more of these programming agreements as
void due to the fact that it contains an illegal exclusivity clause could have a
material adverse effect on the Company's business and financial results in that
such a decision would potentially reduce the commercial value of these contracts
and could reduce the consumer of appeal of the programming offered on the
Company's cable networks.
MARKET DOMINANCE. Companies that obtain control of 40% or more of the
relevant market and do not encounter significant competition may be deemed to
have market dominance, and therefore face greater scrutiny from the
Anti-Monopoly Office.
From time to time, the Company receives inquiries from and are subject to
review by various divisions of the Anti-Monopoly Office.
RECENT ANTI-MONOPOLY OFFICE FINDINGS WITH RESPECT TO THE COMPANY AND ITS
SUBSIDIARIES.
The Anti-Monopoly Office issued a decision that PCI had achieved a
dominant position and abused that dominant position by: (1) failing to create
a uniform system for customer complaints, (2) increasing rates without
providing subscribers a detailed basis for the price increases, and (3)
changing the programming line-up without sufficient notice to subscribers.
The Anti-Monopoly Office did not impose a fine in connection with its
decision. The Company appealed both the finding of dominance and the finding
that it acted improperly in its relations with subscribers. In another
decision, the Anti-Monopoly Court agreed with the Company's position and
overturned the Anti-Monopoly Office's decision. The Anti-Monopoly Office is
appealing the Anti-Monopoly Court's decision.
In another market, the Anti-Monopoly issued a decision that PCI had achieved
a dominant position and abused that dominant position by: increasing rates
without providing subscribers a detailed basis for the price increases; and
changing the programming offer. The Anti-Monopoly Office imposed a fine of
50,000 zloty (the equivalent of $12,068). The Company is appealing both the
finding of dominance and the finding that it acted improperly in its relations
with subscribers.
POLAND'S EU MEMBERSHIP APPLICATIONS
In 1994 Poland made an official application for membership in the EU.
Negotiations on the terms of Poland's proposed admission to the EU commenced
in the March 1998. Poland has announced 2006 as a target date for accession.
If Poland joins the EU, it would be required to implement and obey all of the
laws and regulations emanating from the European Commission, including the
Television Without Frontiers Directive and EC competition law in their then
current versions.
ITEM 2. PROPERTIES
On December 31, 2000, the Company owned equipment used for its cable
television business, including 93 head ends, and approximately 4,924
kilometers of cable plant. The Company has 168 lease agreements for offices,
storage spaces and land adjacent to the buildings. The total area leased
amounts to approximately 24,016 square meters (most of which is land adjacent
to buildings). The areas leased by the Company range from 1.25 square meters
up to more than 3,140 square meters. The agreements are for specified and
unspecified periods of time and those for an unspecified period may be
terminated with relatively short notice periods by either party, usually
three months.
The Company has entered into conduit leases with the TPSA (the Polish
national telephone company) and, in certain cases, with other entities. The
majority of the TPSA leases require the Company to bear the costs of the
maintenance of the cables. The Company may not sublease the conduit or cables or
allow a third party to use the conduits or cables free of charge without TPSA's
consent. The rental charge for the conduit is usually determined on each 100
meters of conduit occupied. The agreements also contain indexation clauses for
rent adjustment purposes based on the change of U.S. dollar exchange rates or on
the increase of real maintenance costs. A substantial portion of the Company's
contracts with TPSA for the use of such conduits permit termination by TPSA
without penalty at any time either immediately upon the occurrence of certain
conditions or upon provision of three to six months' notice without cause. Any
termination by TPSA of such contracts could result in the Company losing its
permits, the termination of agreements with cooperative authorities and
programmers, and an inability to service customers with respect to the areas
where its networks utilize the conduits that were the subject of such TPSA
contracts. For a list of the reasons for which TPSA can terminate a conduit
agreement, the
11
proportion of the Company's cable subscribers serviced by conduit leases
subject to immediate termination and the consequences to the Company of the
loss to those conduit leases, see "Business - Technology and Infrastructure."
During 2000, a subsidiary of UPC Polska entered into a 5 year office
lease for a new head office in Warsaw. The Company's operations and main
headend have been located in this space as of February 2001.
The Company believes that its existing owned properties, lease agreements
and conduit agreements are adequate for purposes of the Company's cable
television operations, although additional space and conduits will be needed in
the future if the Company consummates further acquisitions of cable television
networks.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in litigation from time to time in the ordinary
course of business. In management's opinion, the litigation in which the Company
is currently involved, individually and in the aggregate, is not material to the
Company's business financial condition or results of operations.
Two of the Company's cable television subsidiaries, Telewizja Kablowa
Gosat-Service Sp. z o.o. and PTK, S.A., and four unrelated Polish cable
operators and HBO Polska Sp. z o.o. ("HBO Polska") have been made defendants
in a lawsuit instituted by Polska Korporacja Telewizyjna Sp. z o.o., an
indirect partially-owned subsidiary of Canal + S.A. The lawsuit was filed in
the Provincial Court in Warsaw, XX Economic Division (Sad Wojewodzki w
Warszawie, Wydzial XX Gospodarczy) (the "Court"). The main defendant in the
proceedings is HBO Polska which is accused of broadcasting the HBO television
program in Poland without a license from the Polish National Radio and
Television Council as required by the Polish Television Act and thereby
undertaking an activity constituting an act of unfair competition. The
plaintiff has asked the Court to order HBO Polska to cease broadcasting of
its programming in Poland until it has received a broadcasting license from
the Polish National Radio and Television Council, and that the defendant
cable operators be ordered (i) to cease carrying the HBO Polska programming
on their cable networks in Poland until HBO Polska has received a
broadcasting license from the Polish National Radio and Television Council,
(ii) not to use their current filters for the purpose of unscrambling the HBO
Polska programming, and (iii) in the future, to use effective encoding
systems and systems of controlled access to the HBO Polska programming. The
Company does not believe that the lawsuit will have a material adverse effect
on its business operations.
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, UPC Polska, 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 includes: (1) unspecified
damages in excess of $75,000, (2) an order lifting the restrictions against
transfer of shares set forth in the Shareholders' Agreement among PCBV's
shareholders, as amended (the "Shareholders' Agreement") so that the minority
shareholders can liquidate their shares in PCBV, (3) damages in the amount of
1.7 percent of the payment made by UPC for the shares of the Company as set
forth in the Agreement and Plan of Merger between UPC Polska and UPC dated June
2, 1999, and (4) attorneys' fees and costs incurred in prosecuting the lawsuit.
The amended complaint sets forth eight claims for relief based on
allegations that the defendants, including UPC Polska 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 the Company, that allegedly
compete with PCI and PCBV.
On or about March 31, 2000 the parties to the lawsuit reached a
settlement. In accordance with the settlement, on June 2, 2000 Wizja TV B.V.,
an affiliate of PCI, purchased approximately 1.4% of the outstanding shares
of PCBV for a price of approximately $2.2 million. The case has been
dismissed and releases exchanged. The aforementioned settlement does not
include the remaining minority shareholders.
In addition to the Ohio lawsuit, other minority shareholders of PCBV
(representing an additional approximately 6% of the shares of PCBV,
hereinafter the "Reece Group") have asserted claims against the past and
present directors or officers of, or members of the Board of Managers of, the
Company, PCBV and UPC Polska or one or more controlling shareholders of UPC
Polska but have not yet filed suit.
The claims by the Reece Group consist of allegations previously made by
Reece Communications, Inc. ("RCI"). RCI's allegations were premised on, among
other things, alleged acts, errors, omissions, misstatements, misleading
statements or breaches of duty by the aforementioned officers, directors, or
controlling shareholders. Although the Company has defenses to the Reece
Group's allegations, UPC Polska is presently attempting to negotiate a
settlement of those claims and a simultaneous purchase of the Reece Group's
PCBV shares.
For a discussion of certain Anti-Monopoly Office's findings relating to the
Company, see "Business--Regulation--Anti-Monopoly Act."
12
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
DESCRIPTION OF CAPITAL STOCK
Set forth below is certain information concerning the Company's capital
stock and a brief summary of the material provisions of the Company's capital
stock, Certificate of Incorporation and By-Laws. This description does not
purport to be complete and is qualified in its entirety by reference to the
Company's Certificate of Incorporation and By-Laws.
GENERAL
At March 30, 2001, the Company had authorized stock of 63,000 shares, of
which (i) 27,000 shares are common stock, par value $0.01 per share ("Common
Stock"), (ii) 4,000 shares are Series A Preferred Stock, par value of $1.00 per
share ("Series A Preferred Stock"), (iii) 2,000 shares are Series C Preferred
Stock, par value of $0.01 per share ("Series C Preferred Stock") and (iv) 30,000
shares are Debenture Stock, par value $0.0001 ("Debenture Stock").
At March 30, 2001, there were (i) 18,948 shares of Common Stock, (ii) 4,000
shares of Series A Preferred Stock, (iii) 2,000 shares of Series C Preferred
Stock, and (iv) 14,000 shares of Debenture Stock issued, outstanding and fully
paid.
COMMON STOCK
DIVIDENDS. Holders of Common Stock are entitled to dividends when, as and if
declared by the Board of Directors.
VOTING RIGHTS. Holders of Common Stock are entitled to one vote per share on
all matters submitted to the shareholders of the Company.
Under New York law, the affirmative vote of the holders of a majority of the
outstanding shares of Common Stock is required to approve, among other things, a
change in the designations, preferences or limitations of the shares of Common
Stock.
LIQUIDATION RIGHTS. Upon liquidation, dissolution or winding-up of the
Company, the holders of Common Stock are entitled to share ratably all assets
available for distribution after payment in full of, or provision for the
payment in full of, debts and other liabilities of the Company and payment of
distributions to preferred shareholders.
SERIES A PREFERRED STOCK
DIVIDENDS. The holders of Series A Preferred Stock are not entitled to
receive dividends.
VOTING RIGHTS. The holders of Series A Preferred Stock are not entitled to
vote on any matters submitted to the shareholders of the Company, except as
otherwise required by applicable law.
REDEMPTION. The Company is required on October 31, 2004 (the "Redemption
Date"), to redeem the Series A Preferred Stock. At the option of the Company,
the Series A Preferred Stock may be redeemed at any prior time, in whole or in
part. The redemption price per share of Series A Preferred Stock is $10,000. Any
shares of Series A Preferred Stock that have at any time been redeemed or
repurchased by the Company will, after such redemption or repurchase, be
cancelled by the Company and will not be available for reissue.
LIQUIDATION. Upon liquidation, dissolution or winding up of the Company,
after payment in full of, or provision for the payment of, the debts and other
liabilities of the Company and the Debenture Stock, the remaining assets
available for distribution to shareholders will be distributed first to the
holders of the Series A Preferred Stock, to the extent available, in an amount
equal to $10,000 per share, but if the funds available therefor are
insufficient, then to the holders of Series A Preferred Stock on a PRO RATA
basis in accordance with the number of shares of Series A Preferred Stock held
by each holder.
13
SERIES C PREFERRED STOCK
DIVIDENDS. The holders of Series C Preferred Stock are not entitled to
receive dividends.
VOTING RIGHTS. The holders of Series C Preferred Stock are not entitled to
vote on any matters submitted to the shareholders of the Company, except as
otherwise required by applicable law.
REDEMPTION. On the Redemption Date, the Company is required to redeem the
Series C Preferred Stock. At the option of the Company, the Series C Preferred
Stock may be redeemed at any time, in whole or in part. The redemption price per
share of Series C Preferred Stock is $10,000. From and after the close of
business on the Redemption Date, unless there has been a default in the payment
of the redemption price, all rights of holders of shares of Series C Preferred
Stock which shares have been redeemed cease and thereafter such shares will not
be deemed to be outstanding for any purposes whatsoever. Any shares of Series C
Preferred Stock that have at any time been redeemed or repurchased by the
Company will, after such redemption or repurchase, be cancelled by the Company
and will not be available for reissuance.
LIQUIDATION. Upon liquidation, dissolution or winding up of the affairs of
the Company, after payment or provisions for the payment of the debts and other
liabilities of the Company and the Debenture Stock, the assets then available
for distribution to the shareholders will be distributed first to the holders of
the Series A Preferred Stock, to the extent available, in an amount equal to
$10,000 per share, then, to the holders of the Series C Preferred Stock, to the
extent available, in an amount equal to $10,000 per share, but if the funds
available thereafter are insufficient, then to the holders of Series C Preferred
Stock on a PRO RATA basis in accordance with the number of shares held by each
holder of Series C Preferred Stock.
DEBENTURE STOCK
DIVIDENDS. The holders of Debenture Stock are not entitled to receive
dividends.
VOTING RIGHTS. The holders of Debenture Stock are not entitled to vote on
any matters submitted to the shareholders of the Company, except as otherwise
required by applicable law.
REDEMPTION. On December 31, 2003, the Company is required to redeem the
Debenture Stock. The redemption price per share of Debenture Stock is $10,000
plus interest at 10% per annum compounded annually from November 3, 1999 to the
date of redemption. From and after the close of business on the redemption date,
unless there has been a default in the payment of the redemption price, all
rights of holders of shares of Debenture Stock which shares have been redeemed
cease and thereafter such shares will not be deemed to be outstanding for any
purposes whatsoever. Any shares of Debenture Stock that have at any time been
redeemed or repurchased by the Company will, after such redemption or
repurchase, be cancelled by the Company and will not be available for
reissuance.
LIQUIDATION. Upon liquidation, dissolution or winding up of the affairs of
the Company, after payment or provisions for the payment of the debts and other
liabilities of the Company, the assets then available for distribution to the
shareholders will be distributed first to the holders of the Debenture Stock, to
the extent available, in an amount equal to $10,000 per share, but if the funds
available thereafter are insufficient, then to the holders of Debenture Stock on
a PRO RATA basis in accordance with the number of shares held by each holder of
Debenture Stock.
SECURITY. The Company has agreed to pledge PCBV Notes with an aggregate
principal amount of $176,815,000 million to secure the redemption of the
Debenture Stock. The holders of PCI Notes will be equally and ratably secured by
the pledge.
14
ITEMS REQUIRING SUPERMAJORITY VOTE UNDER THE CERTIFICATE OF INCORPORATION
The following actions require (i) the affirmative vote of at least four
directors, followed by the affirmative vote of the percentage of issued and
outstanding capital stock entitled to vote thereon at a meeting of the
shareholders as required under the New York Business Corporation Law ("NYBCL"),
if such action is required to be submitted to the shareholders under the NYBCL,
or (ii) if any such action is not approved by at least four directors, then any
such action will require the affirmative vote of at least 61% of the total
voting power of the capital stock issued and outstanding and entitled to vote
thereon, provided however that if board approval of such action is required
under the NYBCL, the action will also require the approval of the Board of
Directors at a special meeting of the Board of Directors (and for no purposes
other than the approval of actions taken pursuant to this subsection (ii)) for
which two-fifths of the total number of directors constitutes a quorum:
a) a fundamental change in the business of the Company or any subsidiary;
b) the adoption of, and approval of any modification to, the annual budget
of the Company for each fiscal year;
c) an expenditure, not accounted for in the budget during any fiscal year,
in excess of $5 million;
d) a merger or other business combination or the sale, lease, transfer or
other disposition of all or any material portion of the assets;
e) certain encumbrances;
f) related-party transactions;
g) the issuance by the Company of third-party debt which causes the
aggregate of all third party debt to exceed $25 million;
h) certain issuances of capital stock;
i) the declaration of dividends or other distributions;
j) the repurchase or optional redemption of any capital;
k) the dissolution or liquidation or voluntary winding-up of the Company;
l) amending the Company's Certificate of Incorporation or By-Laws;
m) the giving of certain guarantees or indemnities;
n) the election or removal of the Chief Executive Officer or the Chairman
of the Board;
o) entering into or modifying a material employment contract;
p) a change in the auditors or fiscal year-end of the Company;
q) settling or resolving tax claims in excess of $250,000;
r) commencement, prosecution or compromise of material litigation or
arbitration proceedings; and
s) taking steps to wind-up, dissolve or voluntarily seek the protection of
bankruptcy laws.
15
ITEM 6. SELECTED FINANCIAL DATA
Set forth below are selected consolidated financial data of the Company
for the three years ended December 31, 1998, the period from January 1, 1999
through August 5, 1999, the period from August 6, 1999 through December 31,
1999 and for the year ended December 31, 2000. The Company prior to the
Acquisition, is herein referred to as the "Predecessor" and the Company
after Acquisition is referred to as the "Successor". The selected
consolidated financial data set forth below have been derived from the
consolidated financial statements of the Company and the notes thereto
prepared in conformity with generally accepted accounting principles as
applied in the United States, which have been audited by the Company's
independent accountants (the "Consolidated Financial Statements"),
during the respective periods. The selected consolidated financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included herein:
PREDECESSOR
--------------------------------------------------------------
PERIOD FROM
JANUARY 1,
YEAR ENDED DECEMBER 31, 1999 THROUGH
1996 1997 1998 AUGUST 5, 1999
---------------- ------------- --------------- ----------------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Cable television revenue $ 24,923 $ 37,575 $ 52,971 $ 35,434
Operating expenses:
Direct operating expenses (7,193) (11,416) (34,843) (24,270)
Selling, general and administrative expenses(1) (9,289) (28,165) (19,559) (9,281)
Depreciation and amortization (9,788) (16,231) (21,635) (13,819)
---------- ----------- ----------- ------------
Operating loss (1,347) (18,237) (23,066) (11,936)
Interest and investment income/(loss) 1,274 3,176 1,020 167
Interest expense (4,687) (13,281) (14,320) (8,578)
Foreign exchange gain/(loss) (761) (1,107) (617) (295)
Non-operating income - - - -
---------- ----------- ----------- ------------
Loss before income taxes, minority interest and
extraordinary item (5,521) (29,449) (36,983) (20,642)
Income tax (expense)/benefit (1,273) 975 (210) (30)
Minority interest 1,890 (3,586) - -
---------- ----------- ----------- ------------
Loss before extraordinary item (4,904) (32,060) (37,193) (20,672)
Extraordinary item--loss on early
extinguishment of debt (1,713) - - -
---------- ----------- ----------- ------------
Net loss (6,617) (32,060) (37,193) (20,672)
Accretion of redeemable preferred stock (2,870) (4,194) (4,106) (1,807)
Preferred stock dividends (1,738) - - -
Excess of carrying value of preferred stock
over consideration paid (2) 3,549 - - -
Accrued Dividend on Mandatorily Redeemable
Debenture Stock - - - -
---------- ----------- ----------- ------------
Net loss applicable to holders of common stock $ (7,676) $ (36,254) $ (41,299) $ (22,479)
========== =========== =========== ============
Basic and diluted net loss per common share $ (435.72) $(1,913.34) $(2,179.60) $ (1,186.52)
========== =========== =========== ============
SUCCESSOR
--------------------------------
PERIOD FROM
AUGUST 6,
1999 THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1999 2000
---------------- ---------------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Cable television revenue $ 27,027 $ 68,781
Operating expenses:
Direct operating expenses (21,546) (45,083)
Selling, general and administrative expenses(1) (14,246) (22,495)
Depreciation and amortization (18,158) (45,784)
----------- ----------
Operating loss (26,923) (44,581)
Interest and investment income (11) 257
Interest expense (4,253) (2,458)
Foreign exchange loss (3,909) 374
Non-operating expense 1,977 -
----------- ----------
Loss before income taxes, minority interest and
extraordinary item (33,119) (46,408)
Income tax (expense) benefit (11) (102)
Minority interest -
----------- ----------
Loss before extraordinary item (33,130) (46,510)
Extraordinary item--loss on early
extinguishment of debt - -
----------- ----------
Net loss (33,130) (46,510)
Accretion of redeemable preferred stock (1,911) (4,163)
Preferred stock dividends - -
Excess of carrying value of preferred stock
over consideration paid (2) - -
Accrued Dividend on Mandatorily Redeemable
Debenture Stock $ (2,333) $ (14,233)
----------- ----------
Net loss applicable to holders of Common Stock $ (37,374) $ (64,906)
=========== ==========
Basic and diluted net loss per common share $ (1,972.45) $(3,425.48)
=========== ==========
16
PREDECESSOR SUCCESSOR
-------------------------------------------- ------------------------------
AS OF DECEMBER 31, AS OF AS OF
DECEMBER DECEMBER
1996 1997 1998 31, 1999 31, 2000
---- ---- ---- -------- --------
CONSOLIDATED BALANCE SHEETS DATA:
(IN THOUSANDS)
Cash and cash equivalents $ 68,483 $ 25,750 $ 2,574 $ 3,374 1,442
Property, plant and equipment, net 84,833 109,090 136,868 129,610 142,265
Total assets 217,537 189,783 193,785 524,931 518,872
Total notes payable 130,074 130,110 138,441 24,219 24,083
Redeemable preferred stock 34,955 39,149 30,977 34,695 38,858
Mandatorily Redeemable Debenture Stock 142,333 156,566
Total stockholders' equity / (deficiency) 31,048 4,219 (13,561) 273,810 215,758
------------------------------------
(1) The year ended December 31, 1997 includes a non-cash compensation
expense of $9,425,000 relating to the granting of certain management
stock options. See Note 15 to the Consolidated Financial Statements.
(2) Represents the amount paid to preferred stockholders in excess of or
less than the carrying value of such shares.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
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 December 31, 2000, approximately 70.7% of the
Company's subscribers received its basic package compared to 71.6% for the year
ended December 31, 1999. For the year ended December 31, 2000, approximately
97.3% of the Company's revenue was derived from monthly subscription fees
compared to approximately 94.0% for the year ended December 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 cable
subscriber base has grown, aggregate monthly subscription revenue has
increased and installation fees, while currently increasing on an aggregate
basis, have declined as a percentage of total revenue.
During 1999 and 2000, management completed or was in the process of
completing several strategic actions in support of its cable 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 basic Wizja TV package has been expanded to 28 channels. 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 has continued
to invest in upgrading its network in order to provide additional revenue
generating services to its customers and continue to improve the security of
the network.
During the fourth quarter of the year 2000, the Company began providing
Internet services to its cable television customers and has been investing in
upgrading its network to provide this service. Individual and home office
Internet subscribers are charged a monthly subscription fee of $48.00 and
$60.00, respectively. The standard installation fee is approximately $59.00
for buildings with multiple apartments and approximately $120.00 for single
family dwellings.
The Company has implemented a pricing staretgy designed to increase
revenue per cable subscriber and its profit margin. The Company has increased
the monthly price for the "basic" package to reflect the increased channel
availability, and the premium channels, the HBO Poland service and Wizja
Sport have been offered to cable customers for an additional monthly charge.
However, as of March 24, 2001, Wizja Sport is no longer a premium channel,
but has been expanded to the basic package. The Company is in the process of
encrypting the HBO Poland service on cable for all premium channel
subscribers. This encryption and installation process is completed in all
major systems and is expected to be rolled out in the remaining Company's
systems in 2001.
The Company generated operating losses of $44.6 million for 2000, $38.9
million for aggregated 1999 and $23.1 million for 1998 primarily due to the
purchase of Wizja TV programming for $24.4 million, $21.0 million and $12.9
million in 2000, 1999 and 1998, respectively and the amortization of goodwill
pushed down to the Company as a result of the Merger.
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, equity in
losses of affiliated companies, income taxes, extraordinary items,
non-recurring items (e.g., compensation expense related to stock options),
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 profit and 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 positive $ 1.2
million for 2000, negative $6.9 million for 1999 and negative $1.4 million
for 1998.
2000 COMPARED WITH 1999
REVENUE. Revenue increased $6.3 million or 10.1% from $62.5 million in the
year ended December 31, 1999 to $68.8 million in the year ended December 31,
2000. This increase was primarily attributable to a 1.9% increase in the number
of basic and intermediate
18
subscribers from approximately 783,000 at December 31, 1999 to approximately
798,000 at December 31, 2000, as well as an increase in monthly subscription
rates.
Revenue from monthly subscription fees represented 94.0% of cable
television revenue for the year ended December 31, 1999 and 97.3% for the
year ended December 31, 2000. During the year ended December 31, 2000, the
Company generated approximately $4.5 million of additional premium
subscription revenue as a result of providing the HBO Poland and Wizja Sport
premium channels to cable subscribers as compared to $2.1 million for the
year ended December 31, 1999 (although the Company expanded Wizja Sport into
its basic package as of March 24, 2001).
DIRECT OPERATING EXPENSES. Direct operating expenses decreased $0.7
million or 1.5%, from $45.8 million for the year ended December 31, 1999 to
$45.1 million for the year ended December 31, 2000, principally as a result
of restructuring programming agreements with Wizja TV B.V., a subsidiary of
the Company's parent. Direct operating expenses decreased from 73.3% of
revenues for the year ended December 31, 1999 to 65.6% of revenues for the
year ended December 31, 2000. However, without considering the intercompany
charge for Wizja TV programming package, direct operating expenses as a
percentage of revenue would have been 30.0% and 39.7% in the year ended
December 31, 2000 and 1999, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $1.0 million or 4.3% from $23.5 million for
the year ended December 31, 1999 to $22.5 million for the year ended December
31, 2000, principally as a result of decreases in other administrative
expenses. Selling, general and administrative expenses decreased from 37.6%
of revenues for the year ended December 31, 1999 to 32.7% for the year ended
December 31, 2000.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense rose
$13.8 million, or 43.1%, from $32.0 million for the year ended December 31, 1999
to $45.8 million for the year ended December 31, 2000 principally as a result of
depreciation and amortization of additional goodwill pushed down as a result of
the merger with UPC and the continued build-out of the Company's cable networks.
Depreciation and amortization expense as a percentage of revenues increased from
51.2% for the year ended December 31, 1999 to 66.6% for the year ended December
31, 2000.
OPERATING LOSS. Each of these factors contributed to an operating loss of
$44.6 million for the year ended December 31, 2000 and $38.9 million for the
year ended December 31, 1999.
INTEREST EXPENSE. Interest expense decreased $10.3 million, or 80.5%, from
$12.8 million in 1999 to $2.5 million in 2000 as a result of repurchase of
approximately 87% of the Company's 9 7/8% Senior Notes due 2003 (the "PCI
Notes") on November 2, 1999 and pay back of $6.5 million of Amerbank loan on
November 20, 1999.
INTEREST AND INVESTMENT INCOME. Interest and investment income increased
$0.1 million, or 50%, from $0.2 million in 1999 to $0.3 million in 2000,
primarily due to increase in interest income earned from cash held at banks.
FOREIGN EXCHANGE GAIN/(LOSS), NET. Foreign exchange differences increased
$4.6 million from negative $4.2 million in 1999 to positive $0.4 million in
2000, primarily due to favorable exchange rate fluctuations.
NET LOSS. For 1999 and 2000, the Company had net losses of $53.8 million and
$46.5 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 $59.8 million in 1999 to $64.9 million in 2000 due
to the current year accretion of redeemable preferred stock and accrued dividend
on mandatory redeemable debenture stock as well as the factors discussed above.
1999 COMPARED WITH 1998
REVENUE. Revenue increased $9.5 million or 17.9% from $53.0 million in the
year ended December 31, 1998 to $ 62.5 million in the year ended December 31,
1999. This increase was primarily attributable to a 6.0% increase in the number
of basic and intermediate subscribers from approximately 738,000 at December 31,
1998 to approximately 783,000 at December 31, 1999, as well as an increase in
monthly subscription rates. The Company introduced the Wizja TV programming
package on its systems for basic subscribers on June 5, 1998, and after an
initial free period, increased prices significantly in September 1998.
Approximately 28.2% of the net increase in basic subscribers was the result of
build-out of the Company's existing cable networks and the remainder was due to
acquisitions.
19
Revenue from monthly subscription fees represented 88.9% of cable television
revenue for the year ended December 31, 1998 and 94.0% for the year ended
December 31, 1999. During the year ended December 31, 1999, the Company
generated approximately $2.1 million of additional premium subscription revenue
as a result of providing the HBO Poland service pay movie channels to cable
subscribers as compared to $3.1 million for the year ended December 31, 1998.
DIRECT OPERATING EXPENSES. Direct operating expenses increased $11.0 million
or 31.6%, from $34.8 million for the year ended December 31, 1998 to $45.8
million for the year ended December 31, 1999, principally as a result of the
purchase of the Wizja TV programming package from UPC Polska's programming
segment and higher levels of technical personnel and increased maintenance
expenses associated with recently acquired networks as well as the increased
size of the Company's cable television system. Direct operating expenses
increased from 65.7% of revenues for the year ended December 31, 1998 to
73.3% of revenues for the year ended December 31, 1999. However, without
considering the affiliate charge for Wizja TV programming package, direct
operating expenses as a percentage of revenue would have been 39.7% and 40.4%
in the year ended December 31, 1999 and 1998, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $3.9 million or 19.9% from $19.6 million
for the year ended December 31, 1998 to $23.5 million for the year ended
December 31, 1999, principally as a result of increase in sales and marketing
expenses incurred in newly acquired networks to support new pricing strategy,
extensive country-wide Autumn marketing campaign and general growth of the
business. Selling, general and administrative expenses increased from 37.0%
of revenues for the year ended December 31, 1998 to 37.6% for the year ended
December 31, 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense rose
$10.4 million, or 48.1%, from $21.6 million for the year ended December 31,
1998 to $32.0 million for the year ended December 31, 1999 principally as a
result of depreciation and amortization of additional goodwill pushed down as
a result of UPC Polska's merger with UPC and the continued build-out of the
Company's cable networks. Depreciation and amortization expense as a
percentage of revenues increased from 40.8% for the year ended December 31,
1998 to 51.2% for the year ended December 31, 1999.
OPERATING LOSS. Each of these factors contributed to an operating loss of
$23.1 million for the year ended December 31, 1998 and $38.9 million for the
year ended December 31, 1999.
INTEREST EXPENSE. Interest expense decreased $1.5 million, or 10.5%, from
$14.3 million in 1998 to $12.8 million in 1999 as a result of repurchase of
approximately 87% of the Company's 9 7/8% Senior Notes due 2003 (the "PCI
Notes") on November 2, 1999 and pay back of $6.5 million of Amerbank loan on
November 20, 1999.
INTEREST AND INVESTMENT INCOME. Interest and investment income decreased
$0.8 million, or 80%, from $1.0 million in 1998 to $0.2 million in 1999,
primarily due to the reduction in the level of cash available for investment in
1999.
FOREIGN EXCHANGE LOSS, NET. Foreign exchange loss increased $3.6 million
from $0.6 million in 1998 to $4.2 million in 1999, primarily due to unfavorable
exchange rate fluctuations.
NET LOSS. For 1998 and 1999, the Company had net losses of $37.2 million and
$53.8 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 $41.3 million in 1998 to $59.9 million in 1999 due
to the current year accretion of redeemable preferred stock and accrued dividend
on mandatorily redeemable debenture stock as well as the factors discussed
above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has met its cash requirements in recent years primarily with (i)
capital contributions, debentures, preferred stock and loans from UPC Polska,
(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 to 2003 ("PCI Notes"). The Company had
positive cash flows from operating activities in 1998 of $14.3 million,
primarily due to the increase of accounts payable and accrued expenses funds
received from affiliates, and income tax refunds received in 1998. The Company
had positive cash flows from operating activities of $12.8 million for 2000 and
negative cash flow of $15.5 million for 1999 due to the Company's net loss, and
positive cash flow from operating activities of $14.3 million in 1998.
20
Since the acquisition of all of the outstanding stock of the Company's
parent, UPC Polska, 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 UPC Polska.
Cash used for the purchase and expansion of the Company's cable television
networks was $30.4 million, $22.1 million and $42.6 million in 2000, 1999 and
1998 respectively.
On December 31, 2000, the Company was committed to pay at least $72.8
million in guaranteed payments (including but not limited to payments for
programming and rights) over the next eight years of which at least
approximately $25.5 million was committed through the end of 2001.
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 were drawn in June 1998 and repaid on November 20,
1999.
On October 31, 1996, $130 million aggregate principal amount of the PCI
Notes were sold by the Company to the initial purchaser pursuant to a purchase
agreement. The initial purchaser subsequently completed a private placement of
the PCI Notes. The PCI Notes were issued pursuant to an indenture.
Pursuant to the indenture governing the PCI Notes (the "PCI Indenture"), the
Company is subject to certain restrictions and covenants, including, without
limitation, covenants with respect to the following matters: (i) limitation on
additional indebtedness; (ii) limitation on restricted payments; (iii)
limitation on issuances and sales of capital stock of 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 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 $210,530,000, $176,815,000 and
$160,830,000 at December 31, 2000, 1999 and 1998, 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 UPC Polska
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. UPC financed the repurchase of the PCI
Notes.
To fund the repurchase of the PCI Notes and operations, as of November 3,
1999, PCI sold to UPC Polska 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%
per annum from November 3, 1999 to the date of redemption, compounded
annually. UPC funded UPC Polska's purchase of the Mandatorily Redeemable
Debenture Stock. To secure its obligations under the Mandatorily Redeemable
Debenture Stock, the Company will pledge to UPC Polska 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 UPC Polska are evaluating various alternatives to meet
the Company's capital needs. Future sources of financing for the Company could
include public or private debt or bank financing or any combination thereof,
subject to the restrictions contained in the indentures governing the
outstanding senior indebtedness of the Company, UPC Polska, 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, UPC Polska and UPC
Polska's parent UPC, to provide financing to achieve the Company's
21
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, 2002.
IMPLEMENTATION OF A NEW ACCOUNTING STANDARD
SAB 101 permits the effects of the changes to be recorded as a cumulative
effect of a change in accounting principle during the quarter ended
December 31, 2000. As the Company's accounting policies for its cable
television and DDTH services are still accounted for under SFAS 51, FINANCIAL
REPORTING BY CABLE TELEVISION COMPANIES, there was no immediate effect on the
Company. However, with the introduction of Internet services in the fourth
quarter of 2000, revenue recognition for Internet related services has been and
will be reported in accordance with SAB 101.
IMPACT OF NEW ACCOUNTING STANDARDS
NEW ACCOUNTING PRINCIPLES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES, SFAS 133 establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded on the balance sheet as
either an asset or liability measured at its fair value. The statement requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific accounting criteria are met. If a derivative instrument
qualifies for hedge accounting, the gains or losses from the derivative may
offset results from the hedged item in the statement of operations or other
comprehensive income, depending on the type of hedge. To adopt hedge accounting,
a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting.
In June 2000, the Financial Accounting Standards Board issued SFAS 138,
ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES.
This statement addresses a limited number of issues causing implementation
difficulties for numerous entities that apply SFAS 133 and this statement amends
the accounting and reporting standards of SFAS 133 for certain derivative
instruments and certain hedging accounting.
SFAS 137 delayed the effective date of SFAS 133 to fiscal years beginning
after June 15, 2000. A company may implement the statements as of the beginning
of any fiscal quarter after issuance; however, SFAS 133 cannot be applied
retroactively.
The Company expects that the adoption of SFAS 133, SFAS 137, and SFAS 138 in
2001 will not have a material impact on the financial position or the results of
operations of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS (SAB
101). SAB 101 outlines the SEC's views on applying generally accepted accounting
principles to revenue recognition in financial statements. Specifically, the
bulletin provides both general and specific guidance as to the periods in which
companies should recognize revenues. In addition, SAB 101 also highlights
factors to be considered when determining whether to recognize revenues on a
gross or net basis. SAB 101, as amended by SAB 101/A and SAB 101/B, was
effective beginning no later than their fourth fiscal quarter of the fiscal year
beginning after December 15, 1999; as the Company is a calendar year-end
company, this would be the quarter ended December 31, 2000.
22
ITEM 7A. 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 2000 consolidated
operating loss. 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 for the year ended December 31, 2000 by
approximately $1.8 million. In other terms, a 10% depreciation of the Polish
zloty against the U.S. dollar, would result in a $1.8 million decrease in the
reported operating loss for the year ended December 31, 2000. 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 11.8% in 1998, approximately 7.3%
in 1999 and 10.1% in 2000. The exchange rate for the zloty has stabilized and
the rate of devaluation of the zloty has generally decreased since 1991. The
zloty depreciated against the U.S. dollar by approximately 17.4% for the year
ended December 31, 1999. However for the year ended December 31, 2000, the
zloty has appreciated against the U.S. dollar by approximately 0.12%.
Inflation and currency exchange fluctuations may have a material adverse
effect on the business, financial condition and results of operations of the
Company.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholder of Poland Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Poland
Communications, Inc. and its subsidiaries as of December 31, 2000 and 1999 and
the related consolidated statements of operations, comprehensive loss, changes
in stockholder's equity and cash flows for the year ended December 31, 2000 and
for the periods from January 1, 1999 through August 5, 1999 and from August 6,
1999 through December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Poland
Communications, Inc. and its subsidiaries as of December 31, 2000 and 1999 and
the results of their operations and their cash flows for the year ended December
31, 2000 and for the periods from January 1, 1999 through August 5, 1999 and
from August 6, 1999 through December 31, 1999, in conformity with generally
accepted accounting principles in the United States of America.
Arthur Andersen Sp. z o.o.
Warsaw, Poland
March 28, 2001
24
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Poland Communications, Inc.:
We have audited the accompanying consolidated statements of operations,
comprehensive loss, changes in stockholder's deficiency and cash flows of
Poland Communications, Inc. and subsidiaries for the year ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Poland Communications, Inc. and subsidiaries for the year ended December 31,
1998, in conformity with generally accepted accounting principles in the United
States of America.
KPMG
Warsaw, Poland
March 29, 1999
25
POLAND COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
SUCCESSOR (NOTE 2)
-------------------------------------
DECEMBER 31, DECEMBER 31,
2000 1999
------------------ -----------------
(IN THOUSANDS)
Current assets:
Cash and cash equivalents $ 1,442 $ 3,374
Trade accounts receivable, net of allowances for doubtful
accounts of $4,937 in 2000 and $2,419 in 1999 (note 5) 8,968 6,156
VAT recoverable 241 1,243
Prepayments 510 890
Other current assets 192 298
------------------ -----------------
Total current assets 11,353 11,961
------------------ -----------------
Property, plant and equipment (note 8):
Cable television system assets 151,417 123,845
Construction in progress 6,179 6,382
Vehicles 707 741
Other 12,109 6,120
------------------ -----------------
170,412 137,088
Less accumulated depreciation (28,147) (7,478)
------------------ -----------------
Net property, plant and equipment 142,265 129,610
Inventories for construction 5,686 5,373
Intangible assets, net (note 9) 359,568 377,846
Other assets - 141
------------------ -----------------
Total assets $ 518,872 $ 524,931
================== =================
See accompanying notes to consolidated financial statements.
26
POLAND COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDER'S EQUITY
SUCCESSOR (NOTE 2)
---------------------------------------------
DECEMBER 31, DECEMBER 31,
2000 1999
--------------------- ---------------------
(IN THOUSANDS)
Current liabilities:
Accounts payable and accrued expenses $ 28,343 $ 23,438
Accrued interest 236 243
Deferred revenue 2,182 759
Due to affiliates and parent 38,316 25,434
--------------------- ---------------------
Total current liabilities 69,077 49,874
Long term liabilities:
Notes payable and other payables to parent (note 14) 23,269 7,763
Notes payable (note 11) 15,344 16,456
--------------------- ---------------------
Total liabilities 107,690 74,093
--------------------- ---------------------
Redeemable preferred stock (liquidation value $60,000,000;
6,000 shares authorized, issued and outstanding) 38,858 34,695
Mandatorily Redeemable Debenture stock 30,000 authorized; 14,000 shares issued
and outstanding (including accrued dividend) 156,566 142,333
Commitments and contingencies (note 18)
Stockholder's equity (note 1):
Common stock, $.01 par value, 27,000 shares authorized; 18,948
shares issued and outstanding 1 1
Paid-in capital 332,579 342,315
Accumulated other comprehensive loss (37,182) (35,376)
Accumulated deficit (79,640) (33,130)
--------------------- ---------------------
Total stockholder's equity 215,758 273,810
--------------------- ---------------------
Total liabilities and stockholder's equity $ 518,872 $ 524,931
===================== =====================
See accompanying notes to consolidated financial statements.
27
POLAND COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
SUCCESSOR (NOTE 2) PREDECESSOR (NOTE 2)
-------------------------------------- -----------------------------------
PERIOD FROM AUGUST PERIOD FROM
YEAR ENDED 6, 1999 THROUGH JANUARY 1, 1999 YEAR ENDED
DECEMBER 31, DECEMBER 31, THROUGH DECEMBER 31,
2000 1999 AUGUST 5, 1999 1998
---- ---- -------------- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues $ 68,781 $ 27,027 $ 35,434 $ 52,971
Operating expenses:
Direct operating charged by third parties 18,150 11,615 10,636 17,657
Direct operating charged by affiliate 26,933 9,931 13,634 17,186
Selling, general and administrative expenses 22,495 14,246 9,281 19,559
Depreciation and amortization 45,784 18,158 13,819 21,635
----------------- ---------------- ---------------- ------------------
Total operating expenses 113,362 53,950 47,370 76,037
Operating loss (44,581) (26,923) (11,936) (23,066)
Interest and investment income/(loss), net 257 (11) 167 1,020
Interest expense (2,458) (4,253) (8,578) (14,320)
Foreign exchange gain/(loss), net 374 (3,909) (295) (617)
Non-operating income, net - 1,977 - -
----------------- ---------------- ---------------- ------------------
Loss before income taxes and
minority interest (46,408) (33,119) (20,642) (36,983)
Income tax expense (note 10) (102) (11) (30) (210)
Minority interest - - - -
----------------- ---------------- ---------------- ------------------
Net loss (46,510) (33,130) (20,672) (37,193)
Accretion of redeemable preferred stock (note 13) (4,163) (1,911) (1,807) (4,106)
Accrued dividend on Mandatorily Redeemable
Debenture stock (note 14) (14,233) (2,333) - -
----------------- ---------------- ---------------- ------------------
Net loss applicable to holders of common stock (64,906) (37,374) (22,479) (41,299)
================= ================ ================ ==================
Basic and diluted net loss per common share
(note 12) $ (3,425.48) $ (1,972.45) $ (1,186.35) $ (2,179.60)
See accompanying notes to consolidated financial statements.
28
POLAND COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
SUCCESSOR (NOTE 2) PREDECESSOR (NOTE 2)
-----------------------------------------------------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED AUGUST 6, 1999 JANUARY 1, 1999 YEAR ENDED
DECEMBER 31, THROUGH THROUGH DECEMBER 31,
2000 DECEMBER 31, 1999 AUGUST 5, 1999 1998
----------------- ---------------- ------------------ ------------------
(IN THOUSANDS)
Net loss $ (46,510) $ (33,130) $ (20,672) $ (37,193)
Other comprehensive income/(loss):
Translation adjustment (1,806) (35,376) (15,947) 586
----------------- ---------------- ------------------ ------------------
Comprehensive loss (48,316) (68,506) (36,619) (36,607)
================= ================ ================== ==================
See accompanying notes to consolidated financial statements.
29
POLAND COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY / (DEFICIENCY)
COMMON STOCK ACCUMULATED
------------------------- OTHER
PAID IN COMPREHENSIVE
SHARES AMOUNT AMOUNT INCOME/(LOSS)
------------ ----------- -------------- ------------------
Balance at January 1, 1998 18,948 $ 1 $ 59,553 $ -
Net loss - - - -
Cumulative Translation Adjustment - - - 586
Capital Contribution - - 10,655 -
Cancellation of Series B redeemable
preferred stock - - 12,278 -
Accretion of redeemable preferred stock
(note 13) - (4,106) -
------------ ----------- -------------- ------------------
Balance December 31, 1998 18,948 1 78,380 586
------------ ----------- -------------- ------------------
Net loss for seven months of 1999 - - - -
Cumulative Translation Adjustment - - - (15,947)
Capital Contribution - - 6,000 -
Accretion of redeemable preferred stock
(note 13) - - (1,807) -
------------ ----------- -------------- ------------------
Balance August 5, 1999 (predecessor) 18,948 1 82,573 (15,361)
------------ ----------- -------------- ------------------
Purchase accounting 248,986 15,361
------------ ----------- -------------- ------------------
Balance August 6, 1999 (successor) 18,948 1 331,559 -
------------ ----------- -------------- ------------------
Net loss for five months of 1999 - - - -
Cumulative Translation Adjustment - - - (35,376)
Capital Contribution - - 15,000 -
Accretion of redeemable preferred stock
(note 13) - - (1,911) -
Accretion of redeemable debenture stock - - (2,333) -
------------ ----------- -------------- ------------------
Balance December 31, 1999 (successor) 18,948 1 342,315 (35,376)
------------ ----------- -------------- ------------------
Net loss - - - -
Cumulative Translation Adjustment - - - (1,806)
Capital Contribution - - 3,860 -
Purchase accounting - - 4,800 -
Accretion redeemable preferred
stock (note 13) - - (4,163) -
Accretion of redeemable debenture stock - - (14,233) -
------------ ----------- -------------- ------------------
Balance December 31, 2000 (successor) 18,948 $ 1 $332,579 $(37,182)
============ =========== ============== ==================
ACCUMULATED
DEFICIT TOTAL
---------------- --------------
Balance at January 1, 1998 $ (55,335) $ 4,219
Net loss (37,193) (37,193)
Cumulative Translation Adjustment - 586
Capital Contribution - 10,655
Cancellation of Series B redeemable
preferred stock - 12,278
Accretion of redeemable preferred stock
(note 13) - (4,106)
---------------- --------------
Balance December 31, 1998 (92,528) (13,561)
---------------- --------------
Net loss for seven months of 1999 (20,672) (20,672)
Cumulative Translation Adjustment - (15,947)
Capital Contribution - 6,000
Accretion of redeemable preferred stock
(note 13) - (1,807)
---------------- --------------
Balance August 5, 1999 (predecessor) (113,200) (45,987)
---------------- --------------
Purchase accounting 113,200 377,547
---------------- --------------
Balance August 6, 1999 (successor) - 331,560
---------------- --------------
Net loss for five months of 1999 (33,130) (33,130)
Cumulative Translation Adjustment - (35,376)
Capital Contribution - 15,000
Accretion of redeemable preferred stock
(note 13) - (1,911)
Accretion of redeemable debenture stock - (2,333)
---------------- --------------
Balance December 31, 1999 (successor) (33,130) 273,810
---------------- --------------
Net loss (46,510) (46,510)
Cumulative Translation Adjustment - (1,806)
Capital Contribution - 3,860
Purchase accounting - 4,800
Accretion redeemable preferred
stock (note 13) - (4,163)
Accretion of redeemable debenture stock - (14,233)
---------------- --------------
Balance December 31, 2000 (successor) $ (79,640) $ 215,758
================ ==============
See accompanying notes to consolidated financial statements.
30
POLAND COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUCCESSOR (NOTE 2) PREDECESSOR (NOTE 2)
------------------------------ -------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED AUGUST 6, 1999 JANUARY 1, 1999 YEAR ENDED
DECEMBER 31, THROUGH THROUGH DECEMBER 31,
2000 DECEMBER 31, 1999 AUGUST 5, 1999 1998
------------- ----------------- -------------- -----------
(IN THOUSANDS)
Cash flows from operating activities:
Net loss $ (46,510) $ (33,130) $(20,672) $ (37,193)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 45,784 18,158 13,819 21,635
Amortization of notes payable discount and issue cost - 895 - 881
Unrealized foreign exchange (gain)/loss (956) 3,742 - -
Other (57) (2,200) - 496
Changes in operating assets and liabilities:
Accounts receivable (2,607) (986) (2,400) (650)
Other current assets 1,129 (3,048) 2,138 1,015
Accounts payable 1,929 6,641 (5,566) 6,289
Accrued interest 914 - 767 (35)
Amounts due to affiliate and parent 11,802 (13,998) 21,913 19,872
Deferred revenue 1,422 (1,140) 879 (55)
Accrued income taxes - - - 2,029
Other - (1,305) - -
-------- --------- -------- --------
Net cash provided by operating activities 12,850 (26,371) 10,878 14,284
-------- --------- -------- --------
Cash flows from investing activities:
Construction and purchase of property, plant and equipment (30,451) (9,084) (13,025) (42,639)
Notes receivable from affiliate - - 449 6,023
Purchase of intangibles (2,074) (308) (1,036) -
Purchase of subsidiaries, net of cash received - (954) (6,860) (17,601)
-------- --------- -------- --------
Net cash used in investing activities (32,525) (10,346) (20,472) (54,217)
-------- --------- -------- --------
Cash flows from financing activities:
Proceeds from notes payable - 50 7,713 6,500
Repayment of notes payable (1,048) (122,959) (445) (398)
Proceeds from issuance of Mandatorily Redeemable
Debenture stock - 140,000 - -
Proceeds from
Parent 14,933 - - -
Capital contribution 3,860 16,907 6,000 10,655
-------- --------- -------- --------
Net cash provided by financing activities 17,745 33,998 13,268 16,757
-------- --------- -------- --------
Net (decrease)/increase in cash and cash equivalents (1,930) (2,719) 3,674 (23,176)
Effect of exchange rates on cash (2) (155)
Cash and cash equivalents at beginning of period 3,374 6,248 2,574 25,750
-------- --------- -------- --------
Cash and cash equivalents at end of period $ 1,442 $ 3,374 $ 6,248 $ 2,574
======== ========= ======== ========
Supplemental cash flow information:
Cash paid for interest $ 1,577 $ 6,270 $ 7,304 $ 13,014
======== ========= ======== ========
Cash paid for income taxes $ 102 $ 37 $ 47 $ 589
======== ========= ======== ========
See accompanying notes to consolidated financial statements.
31
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
1. REPORTING ENTITY
Poland Communications, Inc. ("PCI"), is a New York corporation and was
founded in 1990 by David T. Chase, a Polish-born investor. PCI is a
wholly-owned subsidiary of UPC Polska, Inc., formerly @Entertainment, Inc.
("UPC Polska"), a Delaware corporation which is wholly-owned subsidiary of
United Pan-Europe Communications N.V. ("UPC"). PCI owns 92.3% of the capital
stock of Poland Cablevision (Netherlands) B.V. ("PCBV"), a Netherlands
corporation and first-tier subsidiary of PCI. PCI and PCBV are holding
companies that hold controlling interests in a number of Polish cable
television companies, collectively referred to as the "UPC TK Companies". All
significant assets and operating activities of PCI and subsidiaries (the
"Company") are located in Poland.
The period from January 1, 1999 through August 5, 1999 and the period from
August 6, 1999 through December 31, 1999 are referred to herein as the "seven
months of 1999" and "five months of 1999", respectively.
The Company offers pay television services to business and residential
customers in Poland. Its revenues are derived primarily from installation fees
and monthly basic and premium service fees for cable television services.
PCBV STOCKHOLDERS' AGREEMENT
The following is a summary of certain aspects of the PCBV Stockholders'
Agreement entered into by PCI, PCBV and PCBV's minority stockholders on March 8,
1990. The minority stockholders own the 7.7% of outstanding PCBV capital stock
that is not owned by PCI.
The PCBV Stockholders' Agreement protects shareholdings of each minority
stockholder from dilution, by requiring that the PCBV shares of each minority
stockholder must continue to represent a constant percentage of the total equity
in PCBV and of the total votes to be cast by the PCBV stockholders on any
subject, regardless of changes to the capital structure of PCBV and regardless
of any additional equity funds that may be contributed to PCBV by PCI.
The PCBV Stockholders' Agreement contains restrictions on the PCBV
stockholders' ability to sell, pledge, hypothecate or otherwise transfer or
encumber their PCBV shares. In addition, PCBV stockholders have the right of
first refusal to purchase PCBV shares upon the death of an individual PCBV
stockholder, and upon the liquidation, dissolution or other termination of a
corporate PCBV stockholder. Furthermore, PCI has, in certain instances, the
right of first refusal to purchase PCBV shares from minority stockholders,
and the minority stockholders have the right of first refusal to purchase
PCBV shares from PCI, before such shares can be sold to a third party.
Under the PCBV Stockholder's Agreement, PCI has the option to purchase the
PCBV shares owned by the minority stockholders upon the satisfaction of certain
conditions.
The PCBV Stockholders' Agreement also includes covenants against competition
that limit the ability of each PCBV stockholder to engage directly or indirectly
in any aspect of the cable television business in Poland for a period ending ten
years after such PCBV stockholder ceases to be a PCBV stockholder. PCI has
direct or indirect ownership interests in a number of entities that engage in
certain aspects of the cable television business in Poland. Under the PCBV
Stockholders' Agreement, the minority stockholders have a claim against 7.7% of
the profits and equity of such entities and, under a supplemental agreement, PCI
has agreed to share the profits of these entities with the minority stockholders
on a pro rata basis. On or about July 8, 1999 certain minority shareholders of
PCBV filed a lawsuit against the Company and UPC Polska and certain other
parties, (see note 18).
2. CONSUMMATION OF UPC TENDER OFFER AND MERGER
On June 2, 1999, UPC Polska 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 UPC Polska in an all cash
transaction valuing UPC Polska shares of common stock at $19.00 per share.
32
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
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 UPC Polska common stock (including 31,208 shares tendered pursuant to
notices of guaranteed delivery) representing approximately 99% of UPC Polska
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 UPC Polska and acquired all of the outstanding warrants and stock options.
Also on August 6, 1999, Bison was merged with and into UPC Polska with UPC
Polska continuing as the surviving corporation (the "Merger"). Accordingly, UPC
Polska became a wholly-owned subsidiary of UPC. UnitedGlobalCom, Inc. is the
majority stockholder of UPC. The Company believes that a Change of Control
occurred on August 6, 1999 as a result of the Acquisition and Merger. PCI prior
to the Acquisition, is herein referred to as the "Predecessor" while the Company
after the Acquisition is referred to as the "Successor".
The Acquisition was accounted for under the purchase method of
accounting, with all of the purchase accounting adjustments "pushed-down" to
the consolidated financial statements of UPC Polska. Accordingly, the
purchase price was allocated to the underlying assets and liabilities based
upon their estimated fair values and any excess to goodwill. UPC Polska
restated some of its assets and liabilities at August 5, 1999. At this date
the Notes of UPC Polska and the Company were restated to reflect the market
value and as a result were increased by $61.9 million, 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 shares outstanding,
warrants and options totaled $812.5 million. At this time UPC Polska 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 transaction.
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 UPC Polska establishing a new basis of accounting as of the
acquisition date. During the year ended December 31, 2000 this figure
increased by $12.3 million to $991.6 million mainly due to the results of an
arbitration between UPC Polska and Telewizyjna Korporacja Partycypacyjna
("TKP"). UPC Polska allocated goodwill between the business segments based on
the investment model used for acquisition. The Company was allocated
approximately $417.1 million of goodwill
The following pro forma condensed consolidated results for seven months of
1999 and year ended December 31, 1998 give effect to the Acquisition of UPC
Polska 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 goodwill and the amortization thereon would be pushed down as
if the transaction had occurred at the beginning of each 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 operating losses.
YEAR ENDED FIVE MONTHS SEVEN MONTHS OF 1999 YEAR ENDED
DECEMBER 31, 2000 OF 1999 DECEMBER 31, 1998
------------------------------------------------------------------ -------------------------------
------------------------------------------------------------------ ------------------------------
HISTORICAL HISTORICAL PRO FORMA HISTORICAL PRO FORMA HISTORICAL
UNAUDITED
Service and other revenue $ 68,781 $ 27,027 $ 35,434 $ 35,434 $ 52,971 $ 52,971
================= ============== ============== ================ ============ ==========
Net loss $ (46,510) $ (33,130) $(34,794) $ (20,672) $(61,761) $(37,193)
================= ============== ============== ================ ============ ==========
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
33
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
operations. Consistent with this pattern, the Company has incurred
substantial operating losses since inception (1990). As of December 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 its programming; (ii)
increase its distribution capabilities through internal growth and through
acquisitions; (iii) control its management of subscribers by using advanced
information systems; and (iv) provide additional revenue generating services
to its customers. 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 solely dependent on its ultimate
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, 2002.
Several of the Company's Polish subsidiaries have statutory shareholders'
equity less than the legally prescribed limits because of accumulated losses.
As required by Polish law, 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.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United States of
America ("U.S. GAAP").
The Company maintains its books of accounts in Poland in accordance with
local accounting standards. These financial statements include certain
adjustments not reflected in the Company's statutory books, to present these
statements in accordance with U.S. GAAP.
The consolidated financial statements include the financial statements of
Poland Communications, Inc. and its wholly owned and majority owned
subsidiaries. All significant intercompany balances and transactions have
been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and other short-term investments
with original maturities of three months or less.
34
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with U.S. GAAP. Actual results could differ from those estimates.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is based upon the Company's assessment
of probable loss related to overdue accounts receivable.
REVENUE RECOGNITION
CABLE TELEVISION REVENUE:
Cable television revenues are recognized in accordance with SFAS 51
FINANCIAL REPORTING BY CABLE TELEVISION COMPANIES. Revenue from subscription
fees is recognized on a monthly basis as the service is provided.
Installation fee revenue, for connection to the Company's cable television
systems, is recognized to the extent of direct selling costs and the balance
is deferred and amortized into income over the estimated average period that
new subscribers are expected to remain connected to the systems.
INTERNET SERVICE REVENUES:
During the fourth quarter of the year 2000 the Company began providing
Internet services to its cable television customers. Revenue from
subscription is recognized on a monthly basis as the service is provided.
Installation fee revenue is deferred and amortized to income over the
estimated average period that new subscribers are expected to remain
connected to the system in accordance with SAB 101 REVENUE RECOGNITION IN
FINANCIAL STATEMENTS.
TAXATION
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled.
U.S. TAXATION
PCI is subject to U.S. Federal taxation on its worldwide income. The
Polish corporations are not engaged in a trade or business within the U.S. or
do not derive income from U.S. sources and accordingly, are not subject to
U.S. income tax.
FOREIGN TAXATION
The UPC TK Companies are subject to corporate income taxes, value added
tax (VAT) and various local taxes within Poland, as well as import duties on
materials imported by them into Poland.
The UPC TK Companies' income tax is calculated in accordance with Polish
tax regulations. Due to differences between accounting practices under Polish
tax regulations and those required by U.S. GAAP, certain income and expense
items are recognized in different periods for financial reporting purposes
and income tax reporting purposes which may result in deferred income tax
assets and liabilities.
Effective January 1998, the Company adopted EITF 92-8--"Accounting for the
Income Tax Effects under FASB Statement No. 109
35
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
of a Change in Functional Currency When an Economy Ceases to Be Considered
Highly Inflationary". As a result of adopting EITF 92-4, "Accounting for a
Change in Functional Currency When the Economy Ceases to Be Considered Highly
Inflationary." the Company's functional currency bases exceeded the local
currency tax bases of nonmonetary items. The difference between the new
functional currency and the tax bases have been recognized as temporary
differences in accordance with EITF 92-8.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment includes assets used in the development and
operation of the various cable television systems. During the period of
construction, plant costs and a portion of design, development and related
overhead costs are capitalized as a component of the Company's investment in
cable television systems. When material, the Company capitalizes interest
costs incurred during the period of construction in accordance with SFAS No.
34, "Capitalization of Interest Cost". Interest is not capitalized for
short-term construction projects. During year ended December 31, 2000, five
months of 1999, seven months of 1999 and year ended December 31, 1998 no
interest costs were capitalized.
Cable subscriber related costs and general and administrative expenses are
charged to operations when incurred.
Depreciation is computed for financial reporting purposes using the
straight-line method over the following estimated useful lives:
Cable television system assets................................. 10 years
Set-top boxes.................................................. 5 years
Vehicles...................................................... 5 years
Other property, plant and equipment........................... 5-10 years
INVENTORIES FOR CONSTRUCTION
Inventories for construction are stated at the lower of cost, determined by
the average cost method, or net realizable value. Inventories are principally
related to cable television systems. Cost of inventory includes purchase price,
transportation, customs and other direct costs.
GOODWILL AND OTHER INTANGIBLES
Prior to the Merger, goodwill, which represents the excess of purchase price
over fair value of net assets acquired, was amortized on a straight-line basis
over the expected periods to be benefited, generally ten years, with the
exception of amounts paid relating to non-compete agreements. The portion of the
purchase price relating to non-compete agreements was amortized over the term of
the underlying agreements, generally five years.
Effective as of the Merger Date, the Company revalued all its goodwill,
including amounts related to non-compete agreements, that related to
transactions completed prior to the Merger. The goodwill, that was pushed down
to the Company is amortized using straight-line basis over the expected periods
to be benefited, which is fifteen years.
The Company has entered into lease agreements with the Polish national
telephone company ("TPSA"), for the use of underground telephone conduits for
cable wiring. Costs related to obtaining conduit and franchise agreements with
housing cooperatives and governmental authorities are capitalized generally over
a period of ten years. In the event the Company does not proceed to develop
cable systems within designated cities, costs previously capitalized will be
charged to expense.
DEFERRED FINANCING COSTS
Costs incurred to obtain financing have been deferred and amortized as
interest expense over the life of the loan using the effective interest
method. Such costs were included at the Merger as part of the purchase
accounting adjustment in 1999.
36
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
INVESTMENT IN AFFILIATED COMPANIES
Investments in affiliated companies are accounted for using the equity
method. Where the purchase price exceeds the fair value of the Company's
percentage of net assets acquired, the difference is amortized over the expected
period to be benefited as a charge to equity in profits of affiliated companies.
Where the expected period to be benefited is limited by licensing agreements,
the difference is amortized over the term of the licensing agreement.
MINORITY INTEREST
Recognition of the minority interests' share of losses of consolidated
subsidiaries is limited to the amount of such minority interests' allocable
portion of the equity of those consolidated subsidiaries.
STOCK - BASED COMPENSATION
The Company has adopted SFAS No. 123, "ACCOUNTING FOR STOCK - BASED
COMPENSATION", which gives companies the option to adopt the fair value based
method for expense recognition of employee stock options and other stock-based
awards or to account for such items using the intrinsic value method as outlined
under APB Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES", with pro
forma disclosure of net loss and loss per share as if the fair value method had
been applied. The Company has elected to apply APB Opinion No. 25 and related
interpretations for stock options and other stock-based awards.
FOREIGN CURRENCIES
Foreign currency transactions are recorded at the exchange rate prevailing
at the date of the transactions. Assets and liabilities denominated in foreign
currencies are remeasured at the rates of exchange at balance sheet date. Gains
and losses on foreign currency transactions are included in the consolidated
statement of operations.
The financial statements of foreign subsidiaries are translated into U.S.
dollars using (i) exchange rates in effect at period end for assets and
liabilities, and (ii) average exchange rates during the period for results of
operations. Adjustments resulting from translation of financial statements are
reflected in accumulated other comprehensive income/(loss) as a separate
component of stockholder's equity. The Company considers all of its intercompany
loans to its Polish subsidiaries to be of a long-term investment nature. As a
result, any foreign exchange gains or losses resulting from the intercompany
loans are reported in accumulated other comprehensive loss.
Effective January 1, 1998, Poland is no longer deemed to be a highly
inflationary economy. In accordance with this change, the Company established a
new functional currency bases for nonmonetary items in accordance with
guidelines established within EITF Issue 92-4, "ACCOUNTING FOR A CHANGE IN
FUNCTIONAL CURRENCY WHEN AN ECONOMY CEASES TO BE CONSIDERED HIGHLY
INFLATIONARY." That basis is computed by translating the historical reporting
currency amounts of non-monetary items into the local currency at current
exchange rates. As a result of this change, the Company's functional currency
bases exceeded the local currency tax bases of nonmonetary items. The difference
between the new functional currency and the tax bases have been recognized as
temporary differences.
Prior to January 1, 1998 the financial statements of foreign subsidiaries
were translated into U.S. dollars using (i) exchange rates in effect at period
end for monetary assets and liabilities, (ii) exchange rates in effect at
transaction dates (historical rates) for non-monetary assets and liabilities,
and (iii) average exchange rates during the period for revenues and expenses,
other than those revenues and expenses that relate to non-monetary assets and
liabilities (primarily amortization of fixed assets and intangibles) which are
translated using the historical exchange rates applicable to those non-monetary
assets and liabilities. Adjustments resulting from translation of financial
statements are reflected as foreign exchange gains or losses in the consolidated
statements of operations.
37
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires the Company to make disclosures of fair value information of all
financial instruments, whether or not recognized on the consolidated balance
sheets, for which it is practicable to estimate fair value.
The Company's financial instruments include cash and cash equivalents,
accounts receivable, notes receivable from affiliates, accounts payable and
accrued expenses, due to affiliates, other current liabilities, notes payable
and redeemable preferred stock.
At December 31, 2000 and 1999, the carrying value of cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses, and
other current liabilities on the accompanying consolidated balance sheets
approximates fair value due to the short maturity of these instruments.
At December 31, 2000 and 1999, the carrying value of the redeemable
preferred stock has been determined based upon the amount of future cash flows
discounted using the Company's estimated borrowing rate for similar instruments.
It was not practicable to estimate the fair value of the redeemable preferred
stock due to the fact that the instruments are wholly owned by the Company's
parent.
At December 31, 2000 and 1999 the fair value of the Company's notes
payable balance approximated $13,737,000 and $14,837,000, respectively based
on the last trading price of the notes in 2000 and 1999. It was not practical
to estimate the fair value due to affiliate and notes receivable from
affiliates due to the nature of these instruments, the circumstances
surrounding their issuance, and the absence of quoted market prices for
similar financial instruments. At the date of the Merger PCI Notes were
restated to their fair market value at this date. The resulting $1.6 million
increase was recorded in the pushed-down purchased accounting entries.
IMPAIRMENT OF LONG - LIVED ASSETS
The Company assesses the recoverability of long-lived assets (mainly
property, plant and equipment, intangibles, and certain other assets) on a
regular basis by determining whether the carrying value of the assets can be
recovered over the remaining lives through projected undiscounted future
operating cash flows, expected to be generated by such assets. If an
impairment in value is estimated to have occurred, the assets carrying value
is reduced to its estimated fair value. The assessment of the recoverability
of long-lived assets will be impacted if estimated future operating cash
flows are not achieved. As noted in Note 3, the Company's existing liquidity
problems may result in future impairments of long-lived assets if the
Company does not have adequate financing available to execute its business
strategy. Additionally, 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 impair certain
of its long-lived assets.
BUSINESS SEGMENT INFORMATION
The Company operates in one business segment, providing cable television
services.
ADVERTISING COSTS
All advertising costs of the Company are expensed as incurred. For the
year ended December 31, 2000, five months and seven months of 1999 the
Company incurred advertising costs of approximately $2,016,000, $584,000 and
$267,000, respectively.
38
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
RECLASSIFICATIONS
Certain amounts have been reclassified in the prior years consolidated
financial statements to conform to the presentation contained in the 2000
periods.
NEW ACCOUNTING PRINCIPLES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES, SFAS 133 establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded on the balance sheet as
either an asset or liability measured at its fair value. The statement requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific accounting criteria are met. If a derivative instrument
qualifies for hedge accounting, the gains or losses from the derivative may
offset results from the hedged item in the statement of operations or other
comprehensive income, depending on the type of hedge. To adopt hedge accounting,
a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting.
In June 2000, the Financial Accounting Standards Board issued SFAS 138,
ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES.
This statement addresses a limited number of issues causing implementation
difficulties for numerous entities that apply SFAS 133 and this statement amends
the accounting and reporting standards of SFAS 133 for certain derivative
instruments and certain hedging accounting.
SFAS 137 delayed the effective date of SFAS 133 to fiscal years beginning
after June 15, 2000. A company may implement the statements as of the beginning
of any fiscal quarter after issuance; however, SFAS 133 cannot be applied
retroactively.
The Company expects that the adoption of SFAS 133, SFAS 137, and SFAS 138 in
2001 will not have a material impact on the financial position or the results of
operations of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS (SAB
101). SAB 101 outlines the SEC's views on applying generally accepted accounting
principles to revenue recognition in financial statements. Specifically, the
bulletin provides both general and specific guidance as to the periods in which
companies should recognize revenues. In addition, SAB 101 also highlights
factors to be considered when determining whether to recognize revenues on a
gross or net basis. SAB 101, as amended by SAB 101/A and SAB 101/B, was
effective beginning no later than their fourth fiscal quarter of the fiscal year
beginning after December 15, 1999; as the Company is a calendar year-end
company, this would be the quarter ended December 31, 2000.
SAB 101 permits the effects of the changes to be recorded as a cumulative
effect of a change in accounting principle during the quarter ended December
31, 2000. As the Company's accounting policies for its cable television
services are still accounted for under SFAS 51, FINANCIAL REPORTING BY CABLE
TELEVISION COMPANIES, there was no immediate effect on the Company. However,
with the introduction of Internet services in the fourth quarter of 2000,
revenue recognition for Internet related services has been and will be
reported in accordance with SAB 101.
39
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
5. VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
BALANCE AT THE CHARGED TO AMOUNTS BALANCE AT THE
BEGINNING OF PERIOD EXPENSE WRITTEN OFF END OF PERIOD
------------------- ---------- ------------- --------------
(IN THOUSANDS)
1998 Allowance for Doubtful Accounts $ 766 $ 1,383 $ 1,054 $ 1,095
SEVEN MONTHS OF 1999 Allowance for Doubtful Accounts $ 1,095 $ 740 $ 223 $ 1,612
FIVE MONTHS OF 1999 Allowance for Doubtful Accounts $ 1,612 $ 1,660 $ 853 $ 2,419
2000 Allowance for Doubtful Accounts $ 2,419 $ 3,269 $ 751 $ 4,937
6. ACQUISITIONS
On June 2, 2000 Wizja TV B.V. acquired 1.4% of the outstanding capital
stock of PCBV from a minority shareholder of PCBV.
During 1999 and 1998, the Company made several acquisitions of which details
follow. In each case, the acquisition was accounted for using the purchase
method, whereby the purchase price was allocated to the underlying assets and
liabilities based on their proportionate share of fair values on the date of
acquisition and any excess to goodwill. The results of operations of each of the
business acquired are included in the Company's consolidated financial
statements since the date of acquisition. In each case the goodwill life was 10
years. However, as discussed in Note 4, the revalued goodwill resulting from the
Merger is being amortized over 15 years.
On March 31, 1999, a subsidiary of the Company purchased certain cable
television system assets for an aggregate consideration of approximately
$509,000. The acquisition was accounted for using the purchase method, whereby
the purchase price was allocated among the fixed assets acquired based on their
fair value on the date of acquisition and any excess to goodwill. The purchase
price exceeded fair value of the assets acquired by approximately $108,000.
On July 9, 1999, the Company entered into an agreement to acquire 100% of a
cable television system for total consideration of approximately $7,500,000. The
acquisition has been accounted for under the purchase method where the purchase
price was allocated to the underlying assets and liabilities based upon their
estimated fair values and any excess to goodwill. The acquisition did not have a
material effect on the Company's results of operations in 1999. The purchase
price exceeded fair value of the assets acquired by approximately $5,336,000.
On July 26, 1999, the Company entered into an agreement to purchase all of
the assets and subscriber lists of a cable television system for total
consideration of approximately $2,800,000. The purchase was accounted for under
the purchase method where the
40
purchase price was allocated to the underlying assets based upon their estimated
fair values and the excess to goodwill. The purchase price did not materially
exceeded the value of the assets acquired.
In February 1998, the Company acquired substantially all of the assets and
liabilities of a cable television business for aggregate consideration of
approximately $1,574,000. The purchase price exceeded the fair value of the net
liabilities acquired by approximately $2,041,000. In association with this
acquisition, the Company assumed a $2,150,000 loan from Bank Rozwoju Exportu
S.A. (See Note 11).
41
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
On August 15, 1998, the Company purchased the remaining approximately 50%
interest in one subsidiary company which was held by unaffiliated third parties
for aggregate consideration of approximately $5,372,000. The purchase price
exceed the fair value of the assets acquired by approximately $1,104,000.
On July 16, 1998 the Company's parent, UPC Polska, Inc. purchased the
remaining 45.25% interest in a subsidiary of the Company which was held by
unaffiliated third parties for an aggregate purchase price of approximately
$10,655,000 of which approximately $9,490,000 relates to non-compete agreements.
The Company has applied push-down accounting to this transaction on the date of
purchase and therefore the transaction has been recognized in the Company's
consolidated financial statements. The purchase price paid by the Company's
parent has been treated as a capital contribution to the Company. The purchase
price, excluding the amount paid relating to the non-compete agreements,
exceeded the fair value of the assets acquired by approximately $604,000. The
portion of the purchase price relating to the non-compete agreements will be
amortized over the five years term of the agreements.
Additionally, during 1998 the Company acquired certain cable television
system assets and subscriber lists for aggregate consideration of approximately
$2,000,000. The purchase prices did not materially exceed the fair value of the
assets acquired.
Had these acquisitions occurred at the beginning of the respective
periods, the Company's pro-forma consolidated results for the years ended
December 31, 1999 and 1998 would not be materially different from those
presented in the Consolidated Statements of Operations.
7. DIVESTITURE OF SUBSIDIARY
During February 1998, UPC Polska, Inc., the Company's parent, purchased
substantially all of the assets and liabilities of one of the Company's
subsidiaries, including a note payable to the Company for $6,527,000, for
consideration of $100. The transfer was accounted for at historical cost in a
manner similar to a pooling of interests. The difference between the amount of
cash disbursed and the fair value of the liabilities assumed and the historical
cost of the net assets acquired, of approximately $3,031,000, was accounted for
as a reduction of the accumulated deficit. Prior period financial statements
have been restated to reflect the transfer.
8. PROPERTY, PLANT AND EQUIPMENT
SUCCESSOR
----------------------------------
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
(IN THOUSANDS)
Property, plant and equipment:
Cable television systems assets 151,417 123,845
Construction in progress 6,179 6,382
Vehicles 707 741
Other 12,109 6,120
----------- -----------
170,412 137,088
Less accumulated depreciation (28,147) (7,478)
----------- -----------
Net property, plant and equipment 142,265 129,610
42
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
The Company incurred depreciation charges for property, plant and equipment
of $20,129,000, $7,211,000, $10,192,000 and $16,005,000 for year ended December
31, 2000, five months of 1999, seven months of 1999 and for year ended December
31, 1998, respectively.
9. INTANGIBLE ASSETS
Intangible assets consist of the following:
SUCCESSOR
----------------------------------------
DECEMBER 31, DECEMBER 31,
2000 1999
----------------------------------------
(IN THOUSANDS)
Conduit, franchise agreements and other $ 7,323 $ 4,334
Goodwill 390,398 384,459
Non-compete agreements -
------------------- -----------------
397,721 388,793
Less accumulated amortization (38,153) (10,947)
------------------- -----------------
Net intangible assets $359,568 $377,846
=================== =================
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 UPC Polska.
Accordingly, the purchase price was allocated to the underlying assets
and liabilities based upon their estimated fair values and any excess to
goodwill. UPC Polska restated some of its assets and liabilities at August 5,
1999. At this date the Notes of UPC Polska and the Company were restated to
reflect the market value and as a result were increased by $61.9 million,
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
shares outstanding, warrants and options totaled $812.5 million. At this time
UPC Polska 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 transaction. 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 UPC Polska establishing a new basis of accounting as
of the acquisition date. During the year ended December 31, 2000 this figure
increased by $12.3 million to $991.6 million mainly due to the results of an
arbitration between UPC Polska and Telewizyjna Korporacja Partycypacyjna
("TKP"). UPC Polska allocated goodwill between the business segments based on
the investment model used for acquisition. The Company was allocated
approximately $417.2 million of goodwill. The Company incurred amortization
charges for intangible assets of $25,655,000, $10,947,000, $3,627,000 and
$5,630,000 for the year ended December 31, 2000, five and seven months of
1999 and year ended December 31, 1998, respectively.
43
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
10. INCOME TAXES
Income tax expense consists of:
CURRENT DEFERRED TOTAL
------- --------- -----
(IN THOUSANDS)
Year ended December 31, 2000:
U.S. Federal $-- $ -- $--
State and local -- -- --
Foreign (102) -- (102)
----- ----------- -----
$(102) $ -- $(102)
===== =========== =====
Five months of 1999:
U.S. Federal $-- $ -- $--
State and local -- -- --
Foreign (11) -- (11)
----- ----------- -----
$ (11) $ -- $ (11)
===== =========== =====
Seven months of 1999:
U.S. Federal $-- $ -- $--
State and local -- -- --
Foreign (30) -- (30)
----- ----------- -----
$ (30) -- $ (30)
===== =========== =====
Year ended December 31, 1998:
U.S. Federal $-- $ -- $--
State and local -- -- --
Foreign (210) -- (210)
----- ----------- -----
$(210) $ -- $(210)
===== =========== =====
44
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
Sources of loss before income taxes and minority interest are as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, FIVE MONTHS OF SEVEN MONTHS OF DECEMBER 31,
2000 1999 1999 1998
--------------- -------------------- -------------------- -------------------
(IN THOUSANDS)
Domestic gain/(loss) $ 9,913 $ (3,318) $ (3,895) $ (6,138)
Foreign loss (56,321) (29,801) (16,747) (30,845)
-------- -------- -------- --------
$(46,408) $(33,119) $(20,642) $(36,983)
======== ======== ======== ========
Income tax expense was $(102,000), $(11,000), $(30,000) and $(210,000) for
the year ended December 31, 2000, five months of 1999, seven months of 1999 and
for the year ended December 31, 1998, respectively, and differed from the
amounts computed by applying the U.S. federal income tax rate of 34 percent to
pretax loss as a result of the following:
45
YEAR ENDED YEAR ENDED
DECEMBER 31, FIVE MONTHS OF SEVEN MONTHS OF DECEMBER 31,
---------------- ------------------- --------------- -----------------
2000 1999 1999 1998
---------------- ------------------- ---------------- -----------------
(IN THOUSANDS)
Computed "expected" tax benefit $ 15,779 $ 11,260 $ 7,018 $ 12,574
Non-deductible expenses (7,445) (2,326) (1,473) 2,911
Change in valuation allowance 8,895 (6,263) (3,903) (4,358)
Adjustment for adoption of EITF 92-8 -- -- -- (11,311)
Adjustment to deferred tax asset for enacted changes
in tax rates (7,980) (2,682) (1,672) (695)
Foreign tax rate differences (2,324) -- -- 606
Expiration of NOL's (4,988) -- -- --
Other (2,039) -- -- 63
-------- -------- -------- --------
$ (102) $ (11) $ (30) $ (210)
======== ======== ======== ========
46
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities are presented below:
DECEMBER 31,
---------------------------------
2000 1999
--------------- --------------
(IN THOUSANDS)
Deferred tax assets:
Foreign net operating loss carryforward $ 20,391 $ 13,163
Domestic net operating loss carry forward -- --
Accrued interest 2,008 2,877
Accrued liabilities 3,446 3,099
Bad debt 1,086 726
Deferred revenue -- 228
Unrealized foreign exchange losses 2,758 17,403
Other (1,780) --
-------- --------
Total gross deferred tax assets 27,909 37,496
Less valuation allowance (22,987) (31,882)
-------- --------
Net deferred tax assets $ 4,922 $ 5,614
======== ========
Deferred tax liabilities:
Excess of book value over tax basis of fixed assets resulting
from conversion from hyperinflation
(4,922) $ (5,614)
Other -- --
-------- --------
Total gross deferred tax liabilities $ (4,922) $ (5,614)
-------- --------
Net deferred tax liability $ -- $ --
======== ========
The net increase/(decrease) in the valuation allowance for the year ended
December 31, 2000, five months of 1999, seven months of 1999 and for the year
ended December 31, 1998 was $(8,895,000), $6,263,000, $3,903,000 and $4,358,000,
respectively. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers projected future taxable income and tax planning strategies in making
this assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods which the deferred tax
assets are deductible, management believes it is more likely than not the
Company will realize the benefits of these deductible differences, net of the
existing valuation allowances at December 31, 2000.
As each of the Polish subsidiaries and Netherland subsidiary of the Company
are not subject to group taxation, the deferred tax assets and liabilities in
the individual companies must be evaluated on a stand-alone basis. The reported
foreign net operating losses are presented on an aggregate basis and are not
necessarily indicative of the actual losses available to the individual
companies. As a result, some of the foreign entities may have no losses or other
deferred tax assets available to them individually.
Prior to 1999, foreign tax loss carryforwards can be offset against the
UPC TK Companies' taxable income and utilized at a rate of one-third per year
in each of the three years subsequent to the year of the loss. If there is no
taxable income in a given year during the carryforward period, the portion of
the loss carryforward to be utilized is permanently forfeited. Starting from
1999 foreign loss
47
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
carryforwards can be offset against UPC TK Companies' taxable income and
utilized during each of the five years subsequent to the year of the loss
with no more than 50% of the loss in one given year. If there is no taxable
income in a given year during the carryforward period, the portion of the
loss carryforward to be utilized is permanently forfeited. For losses
incurred in the U.S. taxable years prior to 1998, loss carryforwards can be
applied against taxable income three years retroactively and fifteen years
into the future. For losses incurred in the U.S. from 1998, loss carry
forwards can be applied against taxable income two years retroactively and
twenty years into the future.
At December 31, 2000, the Company has foreign net operating loss
carryforwards of approximately $88,904,000, which expire as follows:
YEAR ENDED DECEMBER 31, (IN THOUSANDS)
- ------------------------------------------------------------------------ ---------------------
2001 $ 3,784
2002 -
2003 13,449
2004 42,560
2005 29,111
---------------------
$ 88,904
=====================
11. NOTES PAYABLE
Notes payable consist of the following:
DECEMBER 31,
----------------------------
2000 1999
-------- ---------
(IN THOUSANDS)
PCI Notes, net of discount $14,509 $14,899
American Bank in Poland S.A. ("AmerBank") revolving credit loan -- --
Bank Rozwoju Exportu S.A. Deutsche - Mark facility 835 1,286
Other -- 271
------- -------
TOTAL NOTES PAYABLE $15,344 $16,456
======= =======
48
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
PCI NOTES
On October 31, 1996, PCI sold $130,000,000 aggregate principal amount of
Senior Notes ("PCI Notes") to an initial purchaser pursuant to a purchase
agreement. The initial purchaser subsequently completed a private placement of
the PCI Notes. In June 1997, substantially all of the outstanding PCI Notes were
exchanged for an equal aggregate principal amount of publicly-registered PCI
Notes.
The PCI Notes have an interest rate of 9 7/8% and a maturity date of
November 1, 2003. Interest is paid on the PCI Notes on May 1 and November 1
of each year. As of December 31, 2000 and 1999 the Company accrued interest
expense of $236,000 and $243,000, respectively. Prior to November 1, 1999,
PCI could have redeemed up to a maximum of 33% of the initially outstanding
aggregate principal amount of the PCI Notes with some or all of the net
proceeds of one or more public equity offerings at a redemption price equal
to 109.875% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the date of redemption; provided that immediately after
giving effect to such redemption, at least $87 million aggregate principal
amount of the PCI Notes remains outstanding.
PCI has pledged to State Street Bank and Trust Company, the trustee for the
PCI Notes (for the benefit of the holders of the PCI Notes) intercompany notes
issued by PCBV, of a minimum aggregate principal amount (together with cash and
cash equivalents of PCI), equal to at least 110% of the outstanding principal
amount of the PCI Notes, and 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
PCI were $210,530,000 and $176,398,000 at December 31, 2000 and 1999,
respectively.
Pursuant to the PCI Indenture, PCI is subject to certain restrictions and
covenants, including, without limitation, covenants with respect to the
following matters: (i) limitation on additional indebtedness; (ii) limitation on
restricted payments; (iii) limitation on issuances and sales of capital stock of
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 subsidiaries; (xi) consolidations, mergers and sale of assets;
(xii) limitation on lines of business; and (xiii) provision of financial
statements and reports. As of December 31, 2000, the Company was in compliance
with such covenants.
Pursuant to the terms of the indentures covering each of the UPC Polska's
Notes and the PCI Notes (as defined hereinafter), which provided that,
following a Change of Control (as defined therein), each holder of UPC
Polska's Notes and PCI Notes had the right, at such holder's option, to
require the Company and PCI, respectively to offer to repurchase all or a
portion of such holder's UPC Polska Notes and PCI Notes at the Repurchase
Price. UPC Polska and PCI made offers to repurchase (the "Offers") from the
holders of the Notes UPC Polska's 14 1/2% Series B Senior Discount Notes due
2008, 14 1/2% Senior Discount Notes due 2008, Series C Senior Discount Notes
due 2008, 14 1/2% Series B Senior Discount Notes due 2009, and 14 1/2% Senior
Discount Notes due 2009 (collectively, the "UPC Polska Notes") and PCI's 9
7/8% Series B Senior Notes Due 2003 and 9 7/8% Senior Notes Due 2003
(collectively, the "PCI Notes").The Offers expired at 12:01 PM, New York City
time, on November 2, 1999.
PCI was required to offer to repurchase the PCI Notes at their purchase
price of $1,010 per $1,000 principal amount of the PCI Notes, which is 101% per
$1,000 principal amount of the PCI. As of August 5, 1999, PCI had $130,000,000
aggregate principal amount at maturity of PCI Notes outstanding. Pursuant to its
repurchase offer, PCI has purchased $113,237,000 aggregate principal amount of
PCI Notes for an aggregate price of $114,369,370. In December 1999 and March
2000, PCI repurchased an additional $2,000,000 and $390,000, respectively,
aggregate principal amount of PCI Notes for an aggregate price of $2,040,024 and
$402,944, respectively. PCI's repurchases were funded by the sale of 14,000
shares of PCI's Mandatorily Redeemable Debenture Stock to the UPC Polska for
$140 million. To secure its obligations under the Debenture Stock, PCI will
pledge to the UPC Polska notes issued by its subsidiary PCBV with an aggregate
principal amount of $176,815,000. The PCI Noteholders will be equally and
ratably secured by the pledge in accordance with the terms of the PCI Indenture.
49
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
AMERICAN BANK IN POLAND S.A. REVOLVING CREDIT LOAN
The revolving credit loan allowing the Company to borrow up to a maximum
principal amount of $6,500,000 on or before December 31, 1998, was fully drawn
as of December 31, 1998. The facility bears interest at LIBOR plus 3.0% (8.0% as
at December 31, 1998), was repaid in full on November 20, 1999, and was secured
by promissory notes en blanc from certain of the Company's subsidiaries, and
pledges of the shares of certain of the Company's subsidiaries.
BANK ROZWOJU EKSPORTU S.A. DEUTCHE-MARK FACILITY
The Deutsche-Mark facility represents a credit facility of DM 3,948,615 of
which approximately DM 1,702,500 was outstanding at December 31, 2000. The
facility bears interest at LIBOR plus 2.0% (6.85% as at December 31, 2000), is
repayable in full on December 27, 2002, and is ultimately secured by a pledge of
the common shares of one of the Company's subsidiaries.
Interest expense relating to notes payable was in the aggregate
approximately $2,458,000 for the year ended December 31, 2000, $4,253,000 for
five months of 1999, $8,578,000 for seven months of 1999 and $14,320,000 for the
years ended December 31, 1998, respectively.
12. PER SHARE INFORMATION
Basic loss per share has been computed by dividing net loss attributable to
common stockholders by the weighted average number of common shares outstanding
during the year. The effect of potential common shares (stock options and
warrants outstanding) is antidilutive, accordingly, dilutive loss per share is
the same as basic loss per share.
The following table provides a reconciliation of the numerator and
denominator in the loss per share calculation:
SUCCESSOR PREDECESSOR
--------------------------------------- --------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, FIVE MONTHS OF SEVEN MONTHS OF DECEMBER 31,
2000 1999 1999 1998
----------------- -------------------- ---------------------- -------------
Net loss attributable to common
stockholders (in thousands) $ (64,906) $ (37,374) $ (22,479) $ (41,299)
---------- ---------- ---------- ----------
Weighted average number of common shares
outstanding 18,948 18,948 18,948 18,948
---------- ---------- ---------- ----------
Basic weighted average number of common shares
outstanding $ 18,948 $ 18,948 $ 18,948 $ 18,948
========== ========== ========== ==========
Loss per share-basic an diluted $(3,425.48) $(1,972.45) $(1,186.35) $(2,179.60)
50
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
13. REDEEMABLE PREFERRED STOCK
The series A and series C preferred stock have a mandatory redemption
date of October 31, 2004. At the option of the Company, the series A, series
B and series C preferred stock may be redeemed at any time in whole or in
part. The redemption price per share of the series A and series C preferred
stock is $10,000.
The preferred stock has been recorded at its mandatory redemption value on
October 31, 2004 discounted at 12% to December 31, 1998. The Company
periodically accretes from paid-in capital an amount that will provide for the
redemption value at October 31, 2004. On August 6, 1999, the Company's parent,
UPC Polska, Inc., consented to the cancellation of its 2,500 Series B redeemable
preference shares. The accreted value of those shares at that time,
approximately $12,278,000 was reclassified to paid-in capital. The total amount
recorded for accretion for the year ended December 31, 2000, for five months of
1999, seven months of 1999 and for the year ended December 31, 1998 was
$4,163,000, $1,911,000, $1,807,000, and $4,106,000, respectively.
14. RELATED PARTY TRANSACTIONS
During the ordinary course of business, the Company enters into transactions
with related parties. The principal related party transactions are described
below.
NOTES PAYABLE AND OTHER PAYABLES TO PARENT
Amounts due to parent represent notes payable to UPC Polska, advances and
payments made on behalf of the PCI by its parent UPC Polska.
NOTES PAYABLE TO UPC POLSKA
As of December 31, 2000 and 1999, the Company had a loan payable to UPC
Polska of approximately $8,739,000 and $7,763,000, respectively. The amounts
include accrued interest of approximately $1,184,000 and $263,000 as of the
year ended December 31, 2000 and 1999, respectively.
PRINT MEDIA SERVICES
An affiliate of the Company's Parent provides print media services to the
Company. The Company incurred operating costs related to those services of
$2,523,000, $0, $296,000 and $4,355,000, for the year ended December 31,
2000, five months of 1999, seven months of 1999 and for the year ended December
31, 1998, respectively. The Company did not incur any costs from this affiliate
prior to 1998. Included in accounts payable at December 31, 2000, 1999, 1998 is
$55,000, $0 and $1,114,000, respectively due to this affiliate.
PROGRAMMING
Affiliates of the Company provide programming to PCI and its subsidiaries.
The Company incurred programming fees from these affiliates of $24,410,000,
$9,931,061, $13,337,901 and $12,831,000, for the year ended December 31, 2000,
five months of 1999, seven months of 1999 and for the year ended December 31,
1998, respectively.
MANDATORILY REDEEMABLE DEBENTURE STOCK
To fund the repurchase of the PCI Notes and operations, as of November 3,
1999, the Company sold UPC Polska 14,000 shares of its Mandatorily Redeemable
Debenture stock ("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% per annum from November 3, 1999 to the
date of redemption, compounded annually. The Company accrued dividend on
Debenture Stock of $14,233,000 and $2,333,000 for the
51
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
year ended December 31, 2000 and five months of 1999. The Company will pledge
notes payable from PCBV to the Company in the amount of $176,815,000 to secure
the payment of the redemption amount of the debenture stock. The PCI Noteholders
will be equally and ratably secured by this lien.
15. STOCK OPTION PLANS
UPC POLSKA, INC. (FORMERLY @ENTERTAINMENT, INC.) STOCK OPTION PLAN
On June 22, 1997, the Company's parent adopted a stock option plan (the
"1997 Plan") pursuant to which UPC Polska's Board of Directors could have
granted stock options to officers, key employees and consultants of the Company.
The 1997 Plan authorized grants of options to purchase up to 4,436,000 shares,
subject to adjustment in accordance with the 1997 Plan.
Stock options are granted with an exercise price that must be at least equal
to the stock's fair market value at the date of grant. With respect to any
participant who owns stock possessing more than 10% of the voting power of all
classes of stock of UPC Polska, the exercise price of any incentive stock option
granted must equal at least 110% of the fair market value on the grant date and
the maximum term of an incentive stock option must not exceed five years. The
term of all other options granted under the 1997 Plan may not exceed ten years.
Options became exercisable at such times as determined by UPC Polska Board of
Directors and as set forth in the individual stock option agreements. Generally,
all stock options vested ratably over 2 to 5 years commencing one year after the
date of grant.
During 1998, there were 250,000 stock options granted to employees of PCI at
an exercise price of $12.00 per share and a remaining contractual life of 9.2
years. Of this amount, 125,000 options were exercisable as of December 31, 1998.
No options were exercised or forfeited during 1998.
During 1999, there were 375,000 stock options granted to PCI employees at an
exercise price of $14.30 per share and a remaining contractual life of three
years. During 1999, 478,750 stock options of PCI employees were forfeited. All
other stock options were cancelled and paid in cash in full in connection with
the Merger.
52
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
UPC STOCK OPTION PLAN
In June 1996, UPC Polska Inc.'s parent company, UPC, adopted a stock
option plan (the "Plan") for certain of its employees and those of its
subsidiaries. During 2000, management of UPC Polska Inc. and PCI were granted
options by the parent company under this plan.
There are 18,000,000 total shares available for the granting of options under
the Plan, which are held by the Stichting Administratiekantoor UPC (the
"Foundation"), which administers the Plan. Each option represents the right
to acquire from the Foundation a certificate representing the economic value
of one share. The options are granted at fair market value determined by
UPC's Supervisory Board at the time of the grant. The maximum term that the
options can be exercised is five years from the date of the grant. The
vesting period for grants of options is four years, vesting in equal monthly
increments. Upon termination of an employee (except in the case of death,
disability or the like), vested options must be exercised, within 30 days of
the termination date. The Supervisory Board of UPC may alter these vesting
schedules at its discretion. An employee has the right at any time to put his
certificates or shares from exercised vested options to the Foundation at a
price equal to the fair market value. The Company can also call such
certificates or shares for a cash payment upon termination in order to avoid
dilution, except for certain awards, which can not be called by the Company
until expiration of the underlying options. The Plan also contains
anti-dilution protection and provides that, in the case of change of control,
the acquiring company has the right to require UPC to acquire all of the
options outstanding at the per share value determined in the transaction
giving rise to the change of control.
For purposes of the proforma disclosures presented below, UPC, and
consequently UPC Polska Inc., have computed the fair values of all options
granted during the year ended December 31, 2000 using the Black-Scholes
multiple-option pricing model and the following weighted-average assumptions:
Risk-free interest rate...................................... 4.60%
Expected life regular options................................ 5 years
Expected volatility.......................................... 74.14%
Expected dividend yield...................................... 0%.
Based upon Black-Scholes multiple option model, the total fair value of
options granted was approximately $0.8 million for the year ended December
31, 2000. This amount is amortized using the straight-line method over the
vesting period of the options. Cumulative compensation expense recognized in
pro forma net income, with respect to options that are forfeited prior to
vesting, is adjusted as a reduction of pro forma compensation expense in the
period of forfeiture. For the year ended December 31, 2000, stock-based
compensation, net of the effect of forfeitures and net of actual compensation
expense recorded in the statement of operations was zero. This stock-based
compensation had the following proforma effect on net income (in thousands):
SUCCESSOR PREDECESSOR
-------------------------------------- -------------------------------------
YEAR ENDED FIVE MONTHS OF SEVEN MONTHS OF YEAR ENDED
DECEMBER 31, 2000 1999 1999 DECEMBER 31, 1998
----------------- --------------- --------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net loss - as reported $ (46,510) $ (33,130) $ (20,672) $ (37,193)
Net loss - pro forma $ (46,659) $ (33,130) $ (21,101) $ (37,965)
Basic and diluted net
loss per share - as reported $ (2,454.61) $ (1,748.47) $ (1,090.99) $ (2,179.60)
Basic and diluted loss
per share - pro forma $ (2,462.48) $ (1,748.47) $ (1,113.63) $ (2,220.34)
53
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
A summary of stock option activity for the Company's employees participating
in the Plan is as follows:
FOR THE YEAR ENDED DECEMBER 31, 2000
--------------------------------------------
WEIGHTED-AVERAGE
NUMBER OF SHARES EXERCISE PRICE
---------------- -----------------
(EUROS)
Outstanding at the beginning of
period.............................. -- --
Granted during period................ 32,031 44.22(1)
Cancelled during period.............. -- --
Exercised during period.............. -- --
------ -----
Outstanding at end of period......... 32,031 44.22(1)
====== =====
Exercisable at end of period (1)..... 5,333 44.22(1)
====== =====
- ----------------
(1) The Weighted Average Exercise Price translated into US dollars at the
rate as at December 31, 2000 amounts to $38.25.
The combined weighted-average fair values and weighted-average exercise
prices of options granted are as follows:
FOR THE YEAR ENDED DECEMBER 31, 2000
--------------------------------------------------------------
EXERCISE PRICE NUMBER OF OPTIONS FAIR VALUE EXERCISE PRICE
- ---------------------- ------------------- --------------------- -------------------
(EUROS)
Less than market price 4,733 31.62 44.22(1)
Equal to market price 27,298 28.20 44.22(1)
------------------- --------------------- -------------------
Total 32,031 28.71 44.22(1)
=================== ===================== ===================
- ----------------
(1) The Weighted Average Exercise Price translated into US dollars at the
rate as at December 31, 2000 amounts to $38.25.
The following table summarizes information about stock options
outstanding, vested and exercisable as of December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ------------------------------
WEIGHTED-AVERAGE
NUMBER OF REMAINING WEIGHTED- NUMBER OF WEIGHTED-
OPTIONS CONTRACTUAL AVERAGE OPTIONS AVERAGE
EXERCISE PRICE (EUROS) OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------------- ----------- ---------------- -------------- ----------- ---------------
(EUROS) (EUROS)
44.22 32,031 3.25 44.22 5,333 44.22(1)
===== ====== ==== ===== =====
- ----------------
(1) The Weighted Average Exercise Price translated into US dollars at the
rate as at December 31, 2000 amounts to $38.25.
This Plan has been accounted for as a fixed plan. Compensation expense of
zero was recognized for the year ended December 31, 2000.
54
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
16. QUARTERLY FINANCIAL STATEMENTS (UNAUDITED)
OPERATING OPERATING
REVENUES LOSS NET LOSS
-------------- ------------- ------------
2000
First Quarter 16,853 (10,457) (11,450)
Second Quarter 17,177 (10,704) (16,054)
Third Quarter 17,094 (11,233) (14,613)
Fourth Quarter 17,657 (12,187) (4,393)
1999
First Quarter 14,783 (4,264) (9,507)
Second Quarter 15,481 (6,116) (9,653)
Third Quarter 15,857 (10,427) (14,897)
Fourth Quarter 16,340 (18,052) (19,745)
17. DATA TRANSMISSION LICENSE
On July 26, 2000 the Polish Ministry of Telecommunication issued a
15-year data transmission license to a subsidiary of the Company, authorizing
that company to provide data transmission service to its customers throughout
the territory of Poland, using its own networks and those leased from other
licensed operators. This license allows that subsidiary to provide Internet
services to its customers. This license expired automatically with the entry
of the NTL into force, i.e. as of January 1, 2001. The subsidiary may
continue the provision of the services covered by the license. It must,
however, notify the Chairman of the URT about the provision of the data
transmission services by the end of March 2001 as described below. In certain
cases listed below, the Chairman of the URT may object to the provision of
the services by the subsidiary.
As of December 31, 2000, approximately 74.5% of the Company's cable plant
runs through conduits leased from the Polish national telephone company
("TPSA"). If the Company uses the cables for a purpose other than cable
television, such as data transmission, telephone, or internet access, such
use could be considered a violation of the terms of certain conduit
agreements, unless this use is expressly authorized by TPSA. There is no
guarantee that TPSA would give its approval to permit other uses of the
conduits. The Company is currently in the process of introducing Internet
services to its customers and renegotiating certain conduit agreements with
TPSA.
18. COMMITMENTS AND CONTINGENCIES
LEASES
Total rental expense associated with the operating leases mentioned below
for the year ended December 31, 2000, five months of 1999, seven months of 1999
and for the year ended December 31, 1998 was $3,119,000, $969,469, $692,478 and
$2,446,000, respectively, related to these leases.
BUILDING LEASE
The Company leases several offices and warehouses within Poland under
cancelable operating lease terms. Minimum future lease commitments for the
aforementioned building leases relate to 2001 only. The future minimum lease
commitments related to these building leases approximates $710,000 as of
December 31, 2000.
CAR LEASES
The Company has operating car leases with various leasing companies in
Poland. Minimum future lease commitments for the aforementioned car leases as of
December 31, 2000 are $455,000 in 2001, $403,000 in 2002 and $37,000 in 2003.
CONDUIT LEASES
The Company also leases space within various telephone duct systems from
TPSA under cancelable operating leases. The TPSA leases expire at various times,
and a substantial portion of the Company's contracts with TPSA permit
termination by TPSA without penalty at any time either immediately upon the
occurrence of certain conditions or upon provision of three to six months notice
without cause. Refer to Note 19 for further detail.
All of the agreements provide that TPSA is the manager of the telephone duct
system and will lease space within the ducts to the
55
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
Company for installation of cable and equipment for the cable television
systems. The lease agreements provide for monthly lease payments that are
adjusted quarterly or annually, except for the Gdansk lease agreement which
provides for an annual adjustment after the sixth year and then remains fixed
through the tenth year of the lease.
Minimum future lease commitments for the aforementioned conduit leases
relate to 2001 only, as all leases are cancelable in accordance with the
aforementioned terms. The future minimum lease commitments related to these
conduit leases approximates $498,000 as of December 31, 2000.
PROGRAMMING COMMITMENTS
The Company has entered into long-term programming agreements and agreements
for the purchase of certain exhibition or broadcast rights with a number of
third party and affiliated content providers for its cable systems. The
agreements have terms which range from one to five years and require that the
license fees be paid either at a fixed amount payable at the time of execution
or based upon a guaranteed minimum number of subscribers connected to the system
each month. At December 31, 2000, the Company had an aggregate minimum
commitment in relation to these agreements of approximately $70,653,000 over the
next seven years, approximating $23,711,000 in 2001, $21,641,000 in 2002,
$14,819,000 in 2003, $8,280,000 in 2004 and $2,202,000 in 2005 and thereafter.
REGULATORY APPROVALS
The Company is in the process of obtaining permits from the Chairman of
URT for several of its cable television systems. If these permits are not
obtained, URT could impose penalties such as fines or in severe cases,
revocation of all permits held by an operator or the forfeiture of the
operator's cable networks. Management of the Company does not believe that
these pending approvals result in a significant risk to the Company.
Additionally, in March 2001, PCI's subsidiary notified the Chairman of the
URT of its activities concerning the provision of data transmission service
and access to the Internet.
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.
PROCEEDING RELATING TO HBO POLSKA
Two of the Company's cable television subsidiaries and four other unrelated
Polish cable operators and HBO Polska Sp. z o.o., have been made defendants in a
lawsuit instituted by Polska Korporacja Telewizyjna Sp. z o.o., a subsidiary of
Canal+. The primary defendant in the proceedings is HBO Polska Sp. z o.o. which
is accused of broadcasting the HBO television program in Poland without a
license from the Council as required by the Radio and Television Act of 1992, as
amended, and thereby undertaking an activity constituting an act of unfair
competition. The Company does not believe that the final disposition of the
lawsuit will have a material adverse effect on its consolidated financial
position or results of operations.
DIVIDEND RESTRICTIONS
The Company's Polish subsidiaries are only able to distribute dividends to
the extent of accounting profit determined in accordance with Polish accounting
principles. As of December 31, 2000 the Company's Polish subsidiaries have no
profit available for distribution as dividends.
PCBV MINORITY STOCKHOLDER'S CLAIM
On or about July 8, 1999, certain minority shareholders ("the minority
shareholders") of PCBV, filed a lawsuit against PCI and certain other
defendants, in United States District Court, Southern District of Ohio, Eastern
Division, Civil Action No. C2-99-621.
56
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
The relief sought by the minority shareholders includes: (1) unspecified
damages in excess of $75,000, (2) an order lifting the restrictions against
transfer of shares set forth in the Shareholders' Agreement among PCBV's
shareholders, as amended (the "Shareholders' Agreement") so that the minority
shareholders can liquidate their shares in PCBV, (3) damages in the amount of
1.7 percent of the payment made by UPC for the shares of the Company as set
forth in the Agreement and Plan of Merger between UPC Polska and UPC dated June
2, 1999, and (4) attorneys' fees and costs incurred in prosecuting the lawsuit.
The amended complaint sets forth eight claims for relief based on
allegations that the defendants, including UPC Polska 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 the Company, that allegedly
compete with PCI and PCBV.
On or about March 31, 2000 the parties to the lawsuit reached a
settlement. In accordance with the settlement, on June 2, 2000, Wizja TV
B.V., an affiliate of Company's Parent, purchased approximately 1.4% of the
outstanding shares of PCBV for a price of approximately $2.2 million. The
case has been dismissed and releases exchanged.
The aforementioned settlement does not include the remaining minority
shareholders.
In addition to the Ohio lawsuit, other minority shareholders of PCBV
(representing an additional approximately 6% of the shares of PCBV,
hereinafter the "Reece Group") have asserted claims against the past and
present directors or officers of, or members of the Board of Managers of, the
Company, PCBV and UPC Polska or one or more controlling shareholders of UPC
Polska but have not yet filed suit.
The claims by the Reece Group consist of allegations previously made by
Reece Communications, Inc. ("RCI"). RCI's allegations were premised on, among
other things, alleged acts, errors, omissions, misstatements, misleading
statements or breaches of duty by the aforementioned officers, directors, or
controlling shareholders. Although the Company has defenses to the Reese
Group's allegations, UPC Polska is presently attempting to negotiate a
settlement of those claims and a simultaneous purchase of the Reece Group's
PCBV shares.
19. CONCENTRATIONS OF BUSINESS AND CREDIT RISK
USE OF TPSA CONDUIT
The Company's ability to build out its existing cable television networks
and to integrate acquired systems into its cable television networks depends on,
among other things, the Company's continued ability to design and obtain access
to network routes, and to secure other construction resources, all at reasonable
costs and on satisfactory terms and conditions. Many of such factors are beyond
the control of the Company. In addition, at December 31, 2000, approximately
74.5% of the Company's cable plant had been constructed utilizing pre-existing
conduits of TPSA. A substantial portion of the Company's contracts with TPSA for
the use of such conduits permits termination by TPSA without penalty at any time
either immediately upon the occurrence of certain conditions or upon provision
of three to six months' notice without cause.
In addition, some conduit agreements with TPSA provide that cables can be
installed in the conduit only for the use of cable television. If the Company
uses the cables for a purpose other than cable television, such as data
transmission, telephone, or Internet access, such use could be considered a
violation of the terms of certain conduit agreements, unless this use is
expressly authorized by TPSA. There is no guarantee that TPSA would give its
approval to permit other uses of the conduits. The Company is currently in
the process of introducing Internet services to its customers and
renegotiating certain conduct agreements with TPSA.
LIMITED INSURANCE COVERAGE
While the Company carries general liability insurance on its properties,
like many other operators of cable television systems it does not insure the
underground portion of its cable televisions networks. Accordingly, any
catastrophe affecting a significant portion of the Company's cable television
networks could result in substantial uninsured losses and could have a material
adverse effect on the Company.
57
POLAND COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
CREDITWORTHINESS
All of the Company's customers are located in Poland. As is typical in
this industry, no single customer accounted for more than five percent of the
Company's sales in 2000 or 1999. The Company estimates an allowance for
doubtful accounts based on the credit worthiness of its customers as well as
general economic conditions. Consequently, an adverse change in those factors
could effect the Company's estimate of its bad debts.
58
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of Poland Cablevision (Netherlands) B.V.
We have audited the accompanying consolidated balance sheets of Poland
Cablevision (Netherlands)B.V.. and its subsidiaries as of December 31, 2000 and
1999 and the related consolidated statements of operations, comprehensive loss,
changes in stockholders' equity and cash flows for the year ended December 31,
2000 and for the periods from January 1, 1999 through August 5, 1999 and from
August 6, 1999 through December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Poland
Cablevision (Netherlands)B.V. and its subsidiaries as of December 31, 2000 and
1999 and the results of their operations and their cash flows for the year ended
December 31, 2000 and for the periods from January 1, 1999 through August 5,
1999 and from August 6, 1999 through December 31, 1999, in conformity with
generally accepted accounting principles in the United States of America.
Arthur Andersen Sp. z o.o.
Warsaw, Poland
March 28, 2001
59
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Poland Cablevision (Netherlands) B.V.:
We have audited the accompanying consolidated statements of operations,
comprehensive loss, changes in stockholders' deficiency and cash flows of Poland
Cablevision (Netherlands) B.V. and subsidiaries for the year ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Poland Cablevision (Netherlands) B.V. and subsidiaries for the year ended
December 31, 1998, in conformity with generally accepted accounting principles
in the United States of America.
KPMG
Warsaw, Poland
March 29, 1999
60
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED BALANCE SHEETS
SUCCESSOR (NOTE 2)
----------------------------------------------
DECEMBER 31, 2000 DECEMBER 31, 1999
---------------------- ----------------------
ASSETS (IN THOUSANDS)
Current assets:
Cash and cash equivalents $ 1,159 $ 2,838
Accounts receivable, net of allowances for doubtful accounts
of $4,392 in 2000 and $1,568 in 1999 (note 5) 8,549 5,909
VAT recoverable 295 1,285
Prepayments 510 568
Other current assets 159 350
--------- ---------
Total current assets 10,672 10,950
--------- ---------
Property, plant and equipment (note 7):
Cable television system assets 117,307 92,535
Construction in progress 6,050 5,632
Vehicles 473 498
Other 11,967 6,288
--------- ---------
135,797 104,953
Less accumulated depreciation (22,412) (6,067)
--------- ---------
Net property, plant and equipment 113,385 98,886
Inventories for construction 5,400 4,453
Intangible assets, net (note 2 and 8) 315,923 338,771
--------- ---------
Total assets $ 445,380 $ 453,060
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 26,359 $ 18,706
Deferred revenue 2,182 594
Due to affiliate (note 10) 22,864 13,464
Other liabilities -- 119
--------- ---------
Total current liabilities 51,405 32,883
Long term liabilities:
Notes payable and other payables to PCI (note 10) 248,524 215,709
--------- ---------
Total liabilities 299,929 248,592
--------- ---------
Commitments and contingencies (note 13)
Minority interest 281 --
Stockholders' equity:
Common stock, $0.50 par value, 200,000 shares authorized;
issued and outstanding 100 100
Paid-in capital 267,564 267,564
Accumulated other comprehensive loss (33,077) (30,950)
Accumulated deficit (89,417) (32,246)
--------- ---------
Total stockholders' equity 145,170 204,468
--------- ---------
Total liabilities and stockholders' equity $ 445,380 $ 453,060
========= =========
See accompanying notes to consolidated financial statements.
61
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
SUCCESSOR (NOTE 2) PREDECESSOR (NOTE 2)
-------------------------------- --------------------------------
PERIOD FROM PERIOD FROM
AUGUST 6, JANUARY 1,
1999 1999
YEAR ENDED THROUGH THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31, AUGUST 5, DECEMBER 31,
2000 1999 1999 1998
------------- ---------------- -------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues $ 64,738 $ 25,386 $ 29,535 $ 36,038
Operating expenses:
Direct operating expenses charged by
third parties 20,753 12,093 7,963 12,111
Direct operating expenses charged
by affiliates 25,884 9,588 13,025 11,594
Selling, general and administrative expenses 21,036 11,104 6,947 14,349
Depreciation and amortization 40,511 14,481 8,726 15,033
--------- --------- --------- ---------
Total operating expenses 108,184 47,266 36,661 53,087
Operating loss (43,446) (21,880) (7,126) (17,049)
Interest and investment income, net 207 71 59 130
Interest expense charged by parent (15,201) (5,900) (8,029) (12,975)
Foreign exchange gain/(loss), net 337 (3,228) (219) (78)
Non-operating expenses
-- (1,300) -- --
--------- --------- --------- ---------
Loss before income taxes and
minority interest (58,103) (32,237) (15,315) (29,972)
Income tax expense (76) (9) (30) (52)
Minority interest 1,008 -- -- (1,846)
--------- --------- --------- ---------
Net loss (57,171) (32,246) (15,345) (31,870)
--------- --------- --------- ---------
Net loss applicable to holders of common stock (57,171) (32,246) (15,345) (31,870)
========= ========= ========= =========
Basic and diluted net loss per common share $ (285.85) $ (161.23) $ (76.73) $ (159.35)
See accompanying notes to consolidated financial statements.
62
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
SUCCESSOR (NOTE 2) PREDECESSOR (NOTE 2)
-------------------------------- --------------------------------
PERIOD FROM PERIOD FROM
AUGUST 6, JANUARY 1,
1999 1999
YEAR ENDED THROUGH THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31, AUGUST 5, DECEMBER 31,
2000 1999 1999 1998
------------- ---------------- -------------- ---------------
(IN THOUSANDS)
Net loss $(57,171) $(32,246) $(15,345) $(31,870)
Other comprehensive (loss)/income:
Translation adjustment (2,127) (30,950) (11,814) 424
-------- -------- -------- --------
Comprehensive loss $(59,298) $(63,196) $(27,159) $(31,446)
======== ======== ======== =========
See accompanying notes to consolidated financial statements.
63
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY/(DEFICIENCY)
ACCUMULATED
OTHER
PAID-IN COMPREHENSIVE ACCUMULATED
COMMON STOCK CAPITAL INCOME/(LOSS) DEFICIT TOTAL
---------------- ------------ ----------------- ---------------- -------------
(IN THOUSANDS)
Balance January 1, 1998 (Predecessor) 100 $ 4,713 $ -- $(50,359) $ (45,546)
Net loss -- -- -- (31,870) (31,870)
Capital contribution -- 9,876 -- -- 9,876
Cumulative Translation Adjustment -- -- 424 -- 424
-------- -------- -------- -------- --------
Balance December 31, 1998 (Predecessor) 100 14,589 424 (82,229) (67,116)
-------- -------- -------- -------- --------
Net loss -- -- -- (15,345) (15,345)
Cumulative Translation Adjustment -- -- (11,814) -- (11,814)
-------- -------- -------- -------- --------
Balance August 5, 1999 (Predecessor) 100 14,589 (11,390) (97,574) (94,275)
-------- -------- -------- -------- --------
Purchase accounting -- 252,975 11,390 97,574 361,939
-------- -------- -------- -------- --------
Balance August 6, 1999 (Successor) 100 267,564 -- -- 267,664
-------- -------- -------- -------- --------
Net loss -- -- -- (32,246) (32,246)
Cumulative Translation Adjustment -- -- (30,950) -- (30,950)
-------- -------- -------- -------- --------
Balance December 31, 1999 (Successor) 100 267,564 (30,950) (32,246) 204,468
-------- -------- -------- -------- --------
Net loss -- -- -- (57,171) (57,171)
Cumulative Translation Adjustment -- -- (2,127) -- (2,127)
-------- -------- -------- -------- --------
Balance December 31, 2000 (Successor) 100 $267,564 $(33,077) $(89,417) $145,170
======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
64
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUCCESSOR (NOTE 2) PREDECESSOR (NOTE 2)
-------------------------------- -------------------------------
PERIOD FROM PERIOD FROM
AUGUST 6, JANUARY 1,
1999 1999
YEAR ENDED THROUGH THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31, AUGUST 5, DECEMBER 31,
2000 1999 1999 1998
------------- ---------------- -------------- -------------
(IN THOUSANDS)
Cash flows from operating activities:
Net loss $(57,171) $(32,246) $(15,345) $(31,870)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Minority interest (1,008) -- -- 1,846
Depreciation and amortization 40,511 14,481 8,726 15,033
Interest expense added to notes payable to PCI 3,571 10,356 12,921
Unrealized foreign (gain)/loss (891) -- -- --
Other -- 1,300 -- 496
Changes in operating assets and liabilities:
Accounts receivable (1,132) (1,289) (2,716) (682)
Other current assets 595 (1,066) (263) 753
Accounts payable 3,058 10,385 (4,586) 5,205
Interest added to notes to parent 15,201 -- -- --
Amounts due to affiliates 7,823 11,014 14,853 11,986
Deferred revenue 1,587 853 937 (46)
-------- -------- -------- --------
Net cash provided by operating activities 8,573 7,003 11,962 15,642
-------- -------- -------- --------
Cash flows from investing activities:
Construction and purchase of property, plant and equipment (28,133) (8,777) (10,263) (32,530)
Purchase of intangibles (1,998) (308) (145) --
Purchase of subsidiaries, net of cash received -- -- -- (9,876)
-------- -------- -------- --------
Net cash used in investing activities (30,131) (9,085) (10,408) (42,406)
-------- -------- -------- --------
Cash flows from financing activities:
Proceeds from notes payable 19,877 2,001 57 13,400
Capital contribution -- -- -- 9,876
-------- -------- -------- --------
Net cash provided by financing activities 19,877 2,001 57 23,276
-------- -------- -------- --------
Net (decrease)/increase in cash and cash equivalents (1,681) (81) 1,611 (3,488)
Effect of exchange rates on cash 2 (155) -- --
Cash and cash equivalents at beginning of period 2,838 3,074 1,463 4,951
-------- -------- -------- --------
Cash and cash equivalents at end of period $ 1,159 $ 2,838 $ 3,074 $ 1,463
======== ======== ======== ========
Supplemental cash flow information:
Cash paid for interest $ 1,432 $ -- $ 400 $ --
======== ======== ======== ========
Cash paid for income taxes $ 76 $ 12 $ 17 $ 231
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
65
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
1. REPORTING ENTITY
Poland Cablevision (Netherlands) B.V. ("PCBV"), a Netherlands
corporation, is a holding company that holds a controlling interest in
several Polish cable television operators (collectively referred to as the
"UPC TK Companies"). Poland Cablevision (Netherlands) B.V. and subsidiaries
(the "Company") is 92.3% owned by Poland Communications, Inc. ("PCI"), who is
in turn, owned 100% by UPC Polska, Inc., formerly @Entertainment, Inc, ("UPC
Polska"). a Delaware corporation which is a wholly--owned subsidiary of
United Pan-Europe Communications N.V. ("UPC").
The Company offers cable television services to residential and business
customers in Poland. All significant assets and operating activities of the
Company are located in Poland.
2. CONSUMMATION OF UPC TENDER OFFER AND MERGER
On June 2, 1999, UPC Polska 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 UPC Polska in an all cash
transaction valuing UPC Polska shares of common stock at $19.00 per share.
The tender offer, initiated pursuant to the Agreement and Plan of Merger
with UPC and Bison, closed at 12:00 midnight on August 5, 1999. On August 6,
1999, Bison reported that it had accepted for payment a total of 33,701,073
shares of UPC Polska's common stock (including 31,208 shares tendered pursuant
to notices of guaranteed delivery) representing approximately 99% of UPC
Polska'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 UPC Polska and acquired all of the outstanding warrants and stock
options.
Also on August 6, 1999, Bison was merged with and into UPC Polska with UPC
Polska continuing as the surviving corporation (the "Merger"). Accordingly, UPC
Polska became a wholly-owned subsidiary of UPC. UnitedGlobalCom, Inc. is the
majority stockholder of UPC. The Company believes that a Change of Control
occurred on August 6, 1999 as a result of the Acquisition and Merger. PCBV prior
to the Acquisition, is herein referred to as the "Predecessor" while the Company
after the Acquisition is referred to as the "Successor". The period from January
1, 1999 through August 5, 1999 and the period from August 6, 1999 through
December 31, 1999 are referred to herein as the "seven months of 1999" and "five
months of 1999," respectively.
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 UPC Polska. Accordingly, the
purchase price was allocated to the underlying assets and liabilities based
upon their estimated fair values and any excess to goodwill. UPC Polska
restated some of its assets and liabilities at August 5, 1999. At this date
the Notes of UPC Polska and PCI were restated to reflect the market value and
as a result were increased by $61.9 million, 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 shares outstanding, warrants and
options totaled $812.5 million. At this time UPC Polska 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 transaction. 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 UPC
Polska establishing a new basis of accounting as of the acquisition date.
During the year ended December 31, 2000 this figure increased by $12.3
million to $991.6 million mainly due to the results of an arbitration between
UPC Polska and Telewizyjna Korporacja Partycypacyjna ("TKP"). UPC Polska
allocated goodwill between the business segments based on the investment
model used for acquisition. The Company was allocated approximately $354.0
million of goodwill
The following pro forma condensed consolidated results for seven months of
1999 and the year ended December 31, 1998 give effect to the Acquisition of UPC
Polska 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.
66
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
YEAR ENDED
DECEMBER 31, FIVE MONTHS YEAR ENDED
2000 OF 1999 SEVEN MONTHS OF 1999 DECEMBER 31, 1998
--------------- -------------- --------------------------------- -------------------------------
HISTORICAL HISTORICAL HISTORICAL PRO FORMA HISTORICAL PRO FORMA
UNAUDITED
Service and other revenue $ 64,738 $ 25,386 $ 29,535 $ 54,921 $ 36,038 $ 36,038
======== ======== ======== ======== ======== ========
Net loss $(57,171) $(32,246) $(15,345) $(29,111) $(31,870) $(55,474)
======== ======== ======== ======== ======== ========
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 (1990). As of December 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 its programming; (ii)
increase its distribution capabilities through its internal growth and
through acquisitions; (iii) control its management of subscribers by using
advanced information systems; and (iv) provide additional revenue generating
services to its customers. 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 solely dependent on its ultimate 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, 2002. Several of the Company's Polish subsidiaries have
statutory shareholders' equity less than the legally prescribed limits
because of accumulated losses. As required by Polish law, the 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.
67
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United States of
America ("U.S. GAAP").
The Company maintains its books of accounts in Poland in accordance with
local accounting standards. These financial statements include certain
adjustments not reflected in the Company's statutory books to present these
statements in accordance with U.S. GAAP.
The consolidated financial statements include the financial statements of
PCBV and its wholly owned and majority owned subsidiaries. Also consolidated is
a 46.8% owned subsidiary for which the Company maintains control of operating
activities and has the ability to influence the appointment of members to the
Managing Board. All significant intercompany balances and transactions have been
eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and other short-term investments
with original maturities of three months or less.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with U.S. GAAP. Actual results could differ from those estimates.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is based upon the Company's assessment
of probable loss related to overdue accounts receivable.
REVENUE RECOGNITION
CABLE TELEVISION REVENUE:
Cable television revenues are recognized in accordance with SFAS 51
FINANCIAL REPORTING BY CABLE TELEVISION COMPANIES. Revenue from subscription
fees is recognized on a monthly basis as the service is provided.
Installation fee revenue, for connection to the Company's cable television
systems, is recognized to the extent of direct selling costs and the balance
is deferred and amortized into income over the estimated average period that
new subscribers are expected to remain connected to the systems.
INTERNET SERVICE REVENUES:
During the fourth quarter of the year 2000 the Company began providing
Internet services to its cable television customers. Revenue from
subscription is recognized on a monthly basis as the service is provided.
Installation fee revenue is deferred and amortized to income over the
estimated average period that new subscribers are expected to remain
connected to the system in accordance with SAB 101 REVENUE RECOGNITION IN
FINANCIAL STATEMENTS.
TAXATION
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.
68
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
NETHERLANDS TAXATION
The income tax treaty currently in force between the Netherlands and the
United States provides that the Netherlands may impose a withholding tax at a
maximum rate of 5% on dividends paid by PCBV to its stockholders.
FOREIGN TAXATION
The UPC TK Companies are subject to corporate income taxes, value added
tax (VAT) and various local taxes within Poland, as well as import duties on
materials imported by them into Poland.
The UPC TK Companies' income tax is calculated in accordance with Polish
tax regulations. Due to differences between accounting practices under Polish
tax regulations and those required by U.S. GAAP, certain income and expense
items are recognized in different periods for financial reporting purposes
and income tax reporting purposes which may result in deferred income tax
assets and liabilities. Effective January 1998, the Company adopted EITF
92-8--"Accounting for the Income Tax Effects under FASB Statement No. 109 of
a Change in Functional Currency When an Economy Ceases to Be Considered
Highly Inflationary". As a result of adopting EITF 92-4, "Accounting for a
Change in Functional Currency When the Economy Ceases to Be Considered Highly
Inflationary." the Company's functional currency bases exceeded the local
currency tax bases of nonmonetary items. The difference between the new
functional currency and the tax bases have been recognized as temporary
differences in accordance with EITF 92-8.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment includes assets used in the development and
operation of the various cable television systems. During the period of
construction, plant costs and a portion of design, development and related
overhead costs are capitalized as a component of the Company's investment in
cable television systems. When material, the Company capitalizes interest costs
incurred during construction in accordance with SFAS No. 34, "Capitalization of
Interest Cost". Interest is not capitalized for short-term construction
projects. During the year ended December 31, 2000, five months of 1999,
seven months of 1999 and year 1998, no interest costs were capitalized.
Cable subscriber related costs and general and administrative expenses are
charged to operations when incurred.
Depreciation is computed for financial reporting purposes using the
straight-line method over the following estimated useful lives:
Cable television system assets...........................10 years
Set-top boxes............................................5 years
Vehicles.................................................5 years
Other property, plant and equipment......................5-10 years
INVENTORIES FOR CONSTRUCTION
Inventories for construction are stated at the lower of cost, determined by
the average cost method, or net realizable value. Inventories are principally
related to cable television systems. Cost of inventories include purchase price,
transportation, customs and other direct costs.
GOODWILL AND OTHER INTANGIBLES
Prior to the merger, goodwill, which represents the excess of purchase price
over fair value of net assets acquired, was amortized on a straight-line basis
over the expected periods to be benefited, generally ten years, with the
exception of amounts paid relating to non-compete agreements. The portion of the
purchase price relating to non-compete agreements was amortized over the term of
the underlying agreements, generally five years.
Effective as of the Merger Date the Company revalued all its goodwill
including amounts related to non-compete agreements, that related to
transactions completed prior to the Merger. The goodwill that was pushed down to
the Company is amortized using straight-line basis over the expected periods to
be benefited, which is fifteen years.
69
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
The Company has entered into lease agreements with the Polish national
telephone company ("TPSA"), for the use of underground telephone conduits for
cable wiring. Costs related to obtaining conduit and franchise agreements with
housing cooperatives and governmental authorities are capitalized generally over
a period of ten years. In the event the Company does not proceed to develop
cable systems within designated cities, costs previously capitalized will be
charged to expense.
INVESTMENT IN AFFILIATED COMPANIES
Investments in affiliated companies are accounted for using the equity
method. Where the purchase price exceeds the fair value of the Company's
percentage of net assets acquired, the difference is amortized over the expected
period to be benefited as a charge to equity in profits of affiliated companies.
Where the expected period to be benefited is limited by licensing agreements,
the difference is amortized over the term of the licensing agreement.
MINORITY INTEREST
Recognition of the minority interests' share of losses of consolidated
subsidiaries is limited to the amount of such minority interests' allocable
portion of the equity of those consolidated subsidiaries.
STOCK - BASED COMPENSATION
The Company has adopted SFAS No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION", which gives companies the option to adopt the fair value based
method for expense recognition of employee stock options and other stock-based
awards or to account for such items using the intrinsic value method as outlined
under APB Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES", with pro
forma disclosure of net loss and loss per share as if the fair value method had
been applied. The Company has elected to apply APB Opinion No. 25 and related
interpretations for stock options and other stock-based awards.
FOREIGN CURRENCIES
Foreign currency transactions are recorded at the exchange rate prevailing
at the date of the transactions. Assets and liabilities denominated in foreign
currencies are remeasured at the rates of exchange at the consolidated balance
sheet date. Gains and losses on foreign currency transactions are included in
the consolidated statement of operations.
The financial statements of foreign subsidiaries are translated into U.S.
dollars using (i) exchange rates in effect at period end for assets and
liabilities, and (ii) average exchange rates during the period for results of
operations. Adjustments resulting from translation of financial statements are
reflected in accumulated other comprehensive income as a separate component of
stockholders' equity.
The Company considers all of its intercompany loans to its Polish
subsidiaries to be of a long-term investment nature. As a result, any foreign
exchange gains or losses resulting from the intercompany loans are reported in
accumulated other comprehensive loss.
Effective January 1, 1998, Poland is no longer deemed to be a highly
inflationary economy. In accordance with this change, the Company established a
new functional currency bases for nonmonetary items in accordance with
guidelines established within EITF Issue 92-4, "ACCOUNTING FOR A CHANGE IN
FUNCTIONAL CURRENCY WHEN AN ECONOMY CEASES TO BE CONSIDERED HIGHLY
INFLATIONARY." That basis is computed by translating the historical reporting
currency amounts of non-monetary items into the local currency at current
exchange rates. As a result of this change, the Company's functional currency
bases exceeded the local currency tax bases of nonmonetary items. The difference
between the new functional currency and the tax bases have been recognized as
temporary differences.
70
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
Prior to January 1, 1998 the financial statements of foreign subsidiaries
were translated into U.S. dollars using (i) exchange rates in effect at
period end for monetary assets and liabilities, (ii) exchange rates in effect
at transaction dates (historical rates) for non-monetary assets and
liabilities, and (iii) average exchange rates during the period for revenues
and expenses, other than those revenues and expenses that relate to
non-monetary assets and liabilities (primarily amortization of fixed assets
and intangibles) which are translated using the historical exchange rates
applicable to those non-monetary assets and liabilities. Adjustments
resulting from translation of financial statements are reflected as foreign
exchange gains or losses in the consolidated statements of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires the Company to make disclosures of fair value information of all
financial instruments, whether or not recognized on the consolidated balance
sheets, for which it is practicable to estimate fair value.
The Company's financial instruments include cash and cash equivalents,
accounts receivable, notes receivable from affiliates, accounts payable and
accrued expenses, due to affiliates, other current liabilities, notes payable
and redeemable preferred stock.
At December 31, 2000 and 1999, the carrying value of cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses, and
other current liabilities on the accompanying consolidated balance sheets
approximates fair value due to the short maturity of these instruments.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses the recoverability of long-lived assets (mainly
property, plant and equipment, intangibles, and certain other assets) on a
regular basis by determining whether the carrying value of the assets can be
recovered over the remaining lives through projected undiscounted future
operating cash flows, expected to be generated by such assets. If an
impairment in value is estimated to have occurred, the assets carrying value
is reduced to its estimated fair value. The assessment of the recoverability
of long-lived assets will be impacted if estimated future operating cash
flows are not achieved. As noted in Note 3, the Company's existing liquidity
problems may result in future impairments of long-lived assets if the Company
does not have adequate financing available to execute its business strategy.
Additionally, 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, of if existing cash, and projected cash flow from
operations prove to be insufficient, the Company may need to impair certain
of its long-lived assets.
BUSINESS SEGMENT INFORMATION
The Company operates in one business segment, providing cable television
services.
COMMITMENTS AND CONTINGENCIES
Liabilities for loss contingencies arising from claims, assessments,
litigation, fines and penalties, and other sources are recorded when it is
probable that a liability has been incurred and the amount of the assessment can
be reasonably estimated.
ADVERTISING COSTS
All advertising costs of the Company are expensed as incurred. For the
year ended December 31, 2000, five months and seven months of 1999 the
Company incurred advertising costs of approximately $1,966,000, $573,000 and
$263,000, respectively.
RECLASSIFICATIONS
Certain amounts have been reclassified in the prior years consolidated
financial statements to conform to the presentation contained in the 2000.
71
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
NEW ACCOUNTING PRINCIPLES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES, SFAS 133 establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded on the balance sheet as
either an asset or liability measured at its fair value. The statement requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific accounting criteria are met. If a derivative instrument
qualifies for hedge accounting, the gains or losses from the derivative may
offset results from the hedged item in the statement of operations or other
comprehensive income, depending on the type of hedge. To adopt hedge accounting,
a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting.
In June 2000, the Financial Accounting Standards Board issued SFAS 138,
ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES.
This statement addresses a limited number of issues causing implementation
difficulties for numerous entities that apply SFAS 133 and this statement amends
the accounting and reporting standards of SFAS 133 for certain derivative
instruments and certain hedging accounting.
SFAS 137 delayed the effective date of SFAS 133 to fiscal years beginning
after June 15, 2000. A company may implement the statements as of the beginning
of any fiscal quarter after issuance; however, SFAS 133 cannot be applied
retroactively.
The Company expects that the adoption of SFAS 133, SFAS 137, and SFAS 138 in
2001 will not have a material impact on the financial position or the results of
operations of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS (SAB
101). SAB 101 outlines the SEC's views on applying generally accepted accounting
principles to revenue recognition in financial statements. Specifically, the
bulletin provides both general and specific guidance as to the periods in which
companies should recognize revenues. In addition, SAB 101 also highlights
factors to be considered when determining whether to recognize revenues on a
gross or net basis. SAB 101, as amended by SAB 101/A and SAB 101/B, was
effective beginning no later than their fourth fiscal quarter of the fiscal year
beginning after December 15, 1999; as the Company is a calendar year-end
company, this would be the quarter ended December 31, 2000.
SAB 101 permits the effects of the changes to be recorded as a cumulative
effect of a change in accounting principle during the quarter ended December
31, 2000. As the Company's accounting policies for its cable television
services are still accounted for under SFAS 51, FINANCIAL REPORTING BY CABLE
TELEVISION COMPANIES, there was no immediate effect on the Company. However,
with the introduction of internet services in the fourth quarter of 2000,
revenue recognition for Internet related services has been and will be
reported in accordance with SAB 101.
72
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
5. VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT THE ADDITIONS BALANCE AT THE
BEGINNING OF THE CHARGED TO AMOUNTS END OF THE
PERIOD EXPENSE WRITTEN OFF PERIOD
----------------- ------------- ------------- --------------
(IN THOUSANDS)
1998 Allowance for Doubtful $ 608 $ 742 $ 642 $ 708
Accounts
SEVEN MONTHS OF 1999 Allowance for Doubtful $ 708 $ 213 $ 162 $ 759
Accounts
FIVE MONTHS OF 1999 Allowance for Doubtful $ 759 $ 1,287 $ 478 $ 1,568
Accounts
2000 Allowance for Doubtful $ 1,568 $ 3,468 $ 644 $ 4,392
Accounts
6. ACQUISITIONS
During 2000 and 1999 the Company did not make any acquisition of cable
television system assets.
Effective January 1, 1998, the Company has applied push-down accounting to
the 1997 acquisition by the Company's parent, Poland Communications, Inc., of
the remaining 51% of a subsidiary of the Company for aggregate consideration of
approximately $9,927,000. The acquisition has been accounted for as a purchase
with the purchase price allocated among the assets acquired and liabilities
assumed based upon the fair values at the date of acquisition and any excess to
goodwill. The consideration paid by the Company's parent has been treated as a
January 1, 1998 capital contribution to the Company. The purchase price exceeded
the fair value of the net assets acquired by approximately $5,556,000. Prior
period financial statements have not been restated to reflect the push-down
accounting of this transaction on the date of acquisition.
During 1998, the Company acquired certain cable television assets and
subscriber list for aggregate consideration of approximately $1,400,000. The
acquisitions have been accounted for as purchases with the purchase price
allocated among the fixed assets acquired based upon their fair values at date
of acquisition and any excess to goodwill. The purchase prices did not
materially exceed the fair value of the assets acquired.
Had these acquisitions occurred on January 1, 1998, the Company's pro-forma
consolidated results for the years ended December 31, 1999 and 1998 would not be
materially different from those presented in the Consolidated Statements of
Operations.
73
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
7. PROPERTY, PLANT AND EQUIPMENT
SUCCESSOR
-----------------------------------------------
DECEMBER 31,
2000 1999
---------------------- ----------------------
(IN THOUSANDS)
Property, plant and equipment:
Cable television systems assets 117,307 92,535
Construction in progress 6,050 5,632
Vehicles 473 498
Other 11,967 6,288
---------------------- ----------------------
135,797 104,953
Less accumulated depreciation (22,412) (6,067)
---------------------- ----------------------
Net property, plant and equipment 113,385 98,886
The Company incurred depreciation charges for property, plant and equipment
of $16,023,000, $5,846,000, $7,416,000 and $13,264,000 for the year ended
December 31, 2000, five months of 1999, seven months of 1999 and for year ended
December 31, 1998, respectively.
8. INTANGIBLES
Intangible assets are carried at cost and consist of the following:
SUCCESSOR
--------------------------------------
DECEMBER 31, DECEMBER 31,
2000 1999
------------------ ------------------
(IN THOUSANDS)
Conduit, franchise agreements and other $ 7,323 $ 4,156
Goodwill 343,408 343,250
------------------ ------------------
350,731 347,406
Less accumulated amortization (34,808) (8,635)
------------------ ------------------
Net intangible assets $ 315,923 $ 338,771
================== ==================
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 UPC Polska. Accordingly, the purchase price
was allocated to the underlying assets and liabilities based upon their
estimated fair values and any excess to goodwill. UPC Polska restated some of
its assets and liabilities at August 5, 1999. At this date the Notes of UPC
Polska and the Company were restated to reflect the market value and as a result
were increased by $61.9 million, 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 shares outstanding, warrants and options totaled $812.5
million. At this time UPC Polska had negative net assets of approximately $53.3
million and existing goodwill at net book value of $37.5 million which was
74
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
realized on previous transaction. 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 UPC Polska establishing a new basis
of accounting as of the acquisition date. During the year ended December 31,
2000 this figure increased by $12.3 million to $991.6 million mainly due to
the results of an arbitration between the Company and Telewizyjna Korporacja
Partycypacyjna ("TKP"). UPC Polska allocated goodwill between the business
segments based on the investment model used for acquisition. The Company was
allocated approximately $354.0 million of goodwill. The Company incurred
amortization charge for intangible assets of $24,488,000, $8,635,000,
$1,310,000 and $1,769,000, for the year ended December 31, 2000, five and
seven months of 1999 and the year ended December 31, 1998, respectively.
9. INCOME TAXES
PCBV is required to file a separate Netherlands tax return which does not
include the operating results of the PTK Companies. Income tax expense consisted
of the following:
Income tax (expense)/benefit consists of:
CURRENT DEFERRED TOTAL
------- -------- -----
(IN THOUSANDS)
Year ended December 31, 2000:
U.S. Federal $ - $ - $ -
State and local - - -
Foreign (76) - (76)
------------ ------------ ------------
$ (76) $ - $ (76)
============ ============ ============
Five months of 1999:
U.S. Federal $ - $ - $ -
State and local - - -
Foreign (9) - (9)
------------ ------------ ------------
$ (9) $ - $ (9)
============ ============ ============
Seven months of 1999:
U.S. Federal $ - $ - $ -
State and local - - -
Foreign (30) - (30)
------------ ------------ ------------
$ (30) $ - $ (30)
============ ============ ============
Year ended December 31, 1998:
U.S. Federal $ - $ - $ -
State and local - - -
Foreign (52) - (52)
------------ ------------ ------------
$ (52) $ - $ (52)
============ ============ ============
Income tax expense was $76,000, $9,000, $30,000 and $52,000 for the year
ended December 31, 2000, five months of 1999, seven months of 1999 and the year
ended December 31, 1998, respectively, and differed from the amounts computed by
applying the U.S. federal income tax rate of 34 percent to pretax loss as a
result of the following:
75
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
SUCCESSOR PREDECESSOR
--------------------------------- ---------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, FIVE MONTHS OF SEVEN MONTHS OF DECEMBER 31,
2000 1999 1999 1998
----------------- -------------- ---------------- --------------
(IN THOUSANDS)
Computed "expected" tax benefit $ 19,755 $ 10,960 $ 5,207 $ 10,190
Non-deductible expenses (8,731) (1,465) (722) 842
Change in valuation allowance 751 (7,238) (3,439) (2,918)
Adjustment for change in functional
currency bases losses -- -- -- (8,287)
Adjustment to deferred tax asset for
enacted changes in tax rates (6,523) (2,266) (1,076) (478)
Foreign tax rate differences (2,324) -- -- 599
Expiration of NOL's (3,778) -- -- --
Other 774 -- -- --
---------- -------- -------- --------
$ (76) $ (9) $ (30) $ (52)
========== ======== ======== ========
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities are presented below:
DECEMBER 31,
----------------------------------
2000 1999
---------------- ---------------
(IN THOUSANDS)
Deferred tax assets:
Unrealized foreign exchange losses $ 2,900 $ 15,166
Accrued liabilities 3,278 426
Bad debt provision 1,054 470
Other (120) 381
Foreign tax loss carryforwards 17,938 9,865
-------- --------
Total gross deferred tax assets 25,050 26,308
Less valuation allowance (21,444) (22,195)
-------- --------
Net deferred tax assets $ 3,606 $ 4,113
======== ========
Deferred tax liabilities:
Excess of book value of fixed assets resulting from
conversion from hyperinflation (3,606) (4,113)
-------- --------
Total gross deferred tax liabilities $ (3,606) $ (4,113)
-------- --------
Net deferred tax liability $ -- $ --
======== ========
The net (increase)/decrease in the valuation allowance for the year ended
December 31, 2000, five months of 1999, seven months of 1999 and for the year
ended December 31, 1998 was $751,000, $(7,238,000), $(3,439,000) and
$(2,918,000), respectively. In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the
76
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
periods in which those temporary differences become deductible. Management
considers projected future taxable income and tax planning strategies in
making this assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods which the deferred tax
assets are deductible, management believes it is more likely than not the
Company will realize the benefits of these deductible differences, net of the
existing valuation allowances at December 31, 2000. As the Polish companies
are not entitled to group taxation, current year operations and net operating
loss carryforwards may not be available for offset. As a result, some of the
Polish companies could be in a tax-paying situation, now or in the future,
despite the availability of net operating loss carryforwards available in
others.
Subsequently recognized tax benefits relating to the valuation allowance for
deferred tax assets as of December 31, 2000 will be reported in the consolidated
statement of operations.
Prior to 1999 foreign tax loss carryforwards can be offset against the
taxable income and utilized at a rate of one-third per year in each of the three
years subsequent to the year of the loss. Starting from 1999 foreign loss
carryforwards can be offset against taxable income and utilized during each of
the five years subsequent to the year of the loss with no more than 50% of the
loss in one given year. If there is no taxable income in a given year during the
carryforward period, the portion of the loss carryforward to be utilized is
permanently forfeited.
At December 31, 2000, the UPC TK Companies had Polish net operating loss
carry forward of approximately $81,536,000, which will expire as follows:
YEAR ENDED DECEMBER 31, (IN THOUSAND)
- ------------------------------------------------------------------------ ---------------------
2001 $ 5,936
2002 --
2003 10,573
2004 37,800
2005 27,227
---------------------
$ 81,536
=====================
10. RELATED PARTY TRANSACTIONS.
During the ordinary course of business, the Company enters into transactions
with related parties. The principal related party transactions are described
below.
NOTES PAYABLE AND OTHER PAYABLES TO PCI
Amounts due to parent represent notes payable to PCI, advances and payments
made on behalf of the Company by its parent PCI. Notes payable to PCI of
$210,530,000 and $176,815,000 at December 31, 2000 and 1999, respectively,
consists of an unsecured demand note and unpaid interest due to PCI. The notes
between PCI and PCBV are revolving credit facilities which call for the borrower
to pay 10% interest, payable monthly, on the outstanding principal amount and
contain standard events of default for related-party indebtedness. All of these
notes become due on June 30, 2001.
Interest expense of $15,201,000, $5,900,000, $8,029,000 and $12,975,000 was
incurred by the Company, primarily in connection with borrowings from PCI for
the year ended December 31, 2000, five months of 1999, seven months of 1999 and
the year ended December 31, 1998, respectively. Of this expense, $15,201,000,
$5,900,000, $8,029,000 and $12,975,000 has been added to the loan balance for
the year ended December 31, 2000, five months of 1999, seven months of 1999 and
the year ended December 31, 1998, respectively.
Using the funds provided in the aforementioned notes between PCI and PCBV,
PCBV has entered into a series of 10% grid notes with certain of its
subsidiaries. PCBV's intercompany notes have been pledged for the benefit of
holders of the publicly-registered PCI notes.
77
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
Pursuant to the PCI Indenture, PCBV is subject to certain restriction,
including, without limitation, restriction with respect to the following
matters: (i) limitation on additional indebtedness; (ii) limitation on
restricted payments; (iii) limitation on issuances and sales of capital stock of
subsidiaries; (iv) limitation on transactions with affiliates; (v) limitation on
liens; (vi) limitation on guarantees of indebtedness by subsidiaries; (vii)
purchase of PCI Notes upon a change of control; (viii) limitation on sale of
assets; (ix) limitation on dividends and other payment restrictions affecting
subsidiaries; (x) limitation on investments in unrestricted subsidiaries; (xi)
limitation on lines of business; and (xii) consolidations, mergers and sales of
assets.
PCI's present intention is to convert aforementioned affiliate notes payable
to equity in the underlying Companies.
DUE TO AFFILIATE
Amounts due to affiliate of $22,864,000 and $13,464,000 at December 31,
2000 and 1999, respectively, are non-interest bearing and primarily represent
amounts owed to Wizja TV BV for Wizja programming.
SERVICE AND OVERHEAD ALLOCATION AGREEMENTS
PCI entered into service agreements with PCBV and other of its direct and
indirect subsidiaries pursuant to which PCI provides various services, including
administrative, technical, managerial, financial, operational and marketing
services to each of the subsidiaries and PCBV serves as PCI's agent. PCI also
entered into a service agreement, dated December 31, 1995, with PCBV and ETV,
whereby PCBV is the principal service provider and PCI acts as agent to PCBV.
The Service Agreements also typically require the subsidiaries to reimburse
PCBV for any reasonable out-of-pocket expenses incurred by PCBV or PCI, acting
as agent for PCBV, including salaries and benefits, housing allowances, travel
expenses, and equipment supply or other goods costs. The agreements expired on
December 31, 1997, but were automatically extended for successive one-year
periods unless a party gives notice on or before January 31, in which case the
agreement will terminate at the end of the calendar year during which such
notice was provided.
PCI entered into a Corporate Overhead Allocation Agreement dated January
1, 1996 (the "Allocation Agreement") with certain of its direct or indirect
subsidiaries, including PCBV. The Allocation Agreement provides that costs
incurred by PCI or PCBV, acting as PCI's agent, with regard to the Service
Agreements and as otherwise requested by the UPC TK Companies shall be
allocated and charged to particular UPC TK Companies in the event they are
directly attributable to such subsidiaries, and shall otherwise be allocated
equally among each of the UPC TK Companies. With regard to services rendered
and costs incurred by subsidiaries for the benefit of some or all of the UPC
TK Companies, which include costs associated with maintaining a central
office in Warsaw, legal expenses, expenses relating to governmental
relationships and approvals, programming services, accounting, management
information systems services, and salaries associated with personnel whose
duties clearly benefit other UPC TK Companies, the Allocation Agreement
provides that such expenses shall be allocated between the UPC TK Companies.
The Allocation Agreement terminates on December 31, 1997, but is
automatically renewed for successive one-year periods unless at least thirty
days written notice of termination is provided by PCI or PCBV or any
subsidiary, with respect to itself.
Pursuant to guidance within SFAS No. 51, "FINANCIAL REPORTING BY CABLE
TELEVISION COMPANIES", certain reimbursed overhead costs of $0 for the year
ended December 31, 2000, $0, for five months of 1999, seven months of 1999 and
$152,000 at December 31, 1998, respectively, have been capitalized and are
included in investment in cable television system assets. The remaining overhead
costs allocated to the Company of $0, $749,174, $1,361,192 and $1,477,000 during
the year ended December 31, 2000, five months of 1999, seven months of 1999 and
the year ended December 31, 1998, respectively, are included in corporate
administration and operating expenses.
78
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
MANAGEMENT AGREEMENT
The UPC TK Companies entered into management consulting agreements with
PCI to recommend, advise, and consult the UPC TK Companies as to design,
construction, development, and operation of the cable television systems. The
agreements typically provide that the subsidiary will pay to PCI an annual
consulting fee of $320,000 when and to the extent that the subsidiary's net
income exceeds zero. These contingent management consulting fees payable to
PCI are reflected in amounts "due to affiliate" in the accompanying
consolidated balance sheets. The management agreements also provide for an
initial term ending as of the end of the calendar year during which they
became effective, and provide for successive renewals for one-year periods
unless the agreement is terminated in writing with at least thirty days
notice by either party. Management consulting fees charged to corporate
administration expense were $0 for the year ended December 31, 2000, $0 for
five and seven months of 1999 and $1,440,000 for the year ended December 31,
1998, respectively.
PRINT MEDIA SERVICES
An affiliate of the Company provides print media services to the Company.
The Company incurred operating costs related to those services of $2,523,000,
$0, $296,000 and $2,943,000 for the year ended December 31, 2000, five months
of 1999, seven months of 1999 and the year ended December, 31, 1998,
respectively. Included in accounts payable at December 31, 2000, 1999 and
1998 is $55,000, $0 and $1,114,000 due to this affiliate.
PROGRAMMING
Affiliates of PCI provide programming to the UPC TK Companies. The
Company incurred programming fees from these affiliates of $23,361,000,
$9,588,000, $12,729,000 and $8,651,000 for the year ended December 31, 2000,
five months of 1999, seven months of 1999 and the year ended December 31,
1998, respectively.
11. QUARTERLY FINANCIAL STATEMENTS (UNAUDITED)
Operating Operating
Revenues Loss Net Loss
---------- --------- -------------
2000
First Quarter 15,924 (8,262) (12,130)
Second Quarter 16,185 (10,853) (18,884)
Third Quarter 16,152 (10,539) (16,260)
Fourth Quarter 16,477 (13,792) (9,897)
1999
First Quarter 10,210 (2,399) (7,749)
Second Quarter 14,182 (3,300) (6,473)
Third Quarter 15,151 (9,013) (13,897)
Fourth Quarter 15,378 (14,294) (19,472)
79
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
12. DATA TRANSMISSION LICENSE
On July 26, 2000 the Polish Ministry of Telecommunication issued a
15-year data transmission license to a subsidiary of the Company, authorizing
that company to provide data transmission service to its customers throughout
the territory of Poland, using its own networks and those leased from other
licensed operators. This license allows that subsidiary to provide Internet
services to its customers. This license expired automatically with the entry
of the NTL into force, i.e. as of January 1, 2001. The subsidiary may
continue the provision of the services covered by the license. It must,
however, notify the Chairman of the URT about the provision of the data
transmission services by the end of March 2001 as described below. In certain
cases listed below, the Chairman of the URT may object to the provision of
the services by the subsidiary.
As of December 31, 2000, approximately 74.5% of the Company's cable plant
runs through conduits leased from the Polish national telephone company
("TPSA"). If the Company uses the cables for a purpose other than cable
television, such as data transmission, telephone, or internet access, such
use could be considered a violation of the terms of certain conduit
agreements, unless this use is expressly authorized by TPSA. There is no
guarantee that TPSA would give its approval to permit other uses of the
conduits. The Company is currently in the process of introducing Internet
services to its customers and renegotiating certain conduit agreements with
TPSA.
13. COMMITMENTS AND CONTINGENCIES
LEASES
Total rental expense associated with the operating leases mentioned below
for the year ended December 31, 2000, five months of 1999, seven months of 1999
and for the year ended December 31, 1998 was $2,968,000, $969,000, $692,000 and
$2,446,000, respectively, related to these leases.
BUILDING LEASE
The Company leases several offices and warehouses within Poland under
cancelable operating lease terms.
The Company also leases space within various telephone duct systems from
TPSA under cancelable operating leases. The TPSA leases expire at various times,
and a substantial portion of the Company's contracts with TPSA permit
termination by TPSA without penalty at any time either immediately upon the
occurrence of certain conditions or upon provision of three to six months notice
without cause. Refer to Note 14 for further detail.
All of the agreements provide that TPSA is the manager of the telephone duct
system and will lease space within the ducts to the Company for installation of
cable and equipment for the cable television systems. The lease agreements
provide for monthly lease payments that are adjusted quarterly or annually,
except for the Gdansk lease agreement which provides for an annual adjustment
after the sixth year and then remains fixed through the tenth year of the lease.
Minimum future lease commitments for the aforementioned conduit leases
relate to 2001 only, as all leases are cancelable in accordance with the
aforementioned terms. The future minimum lease commitments related to these
conduit leases approximates $438,000 as of December 31, 2000.
PROGRAMMING COMMITMENTS
The Company has entered into long-term programming agreements and agreements
for the purchase of certain exhibition or broadcast rights with a number of
third party and affiliated content providers for its cable systems. The
agreements have terms which range from one to five years and require that the
license fees be paid either at a fixed amount payable at the time of execution
or based upon a guaranteed minimum number of subscribers connected to the system
each month. At December 31, 2000, the Company had an aggregate minimum
commitment in relation to these agreements of approximately $68,209,000 over the
next seven years, approximating $22,884,000 in 2001, $20,830,000 in 2002,
$14,257,000 in 2003, $8,131,000 in 2004 and $2,107,000 in 2005 and thereafter.
REGULATORY APPROVALS
The Company is in the process of obtaining permits from the Chairman of
URT for several of its cable television systems. If these permits are not
obtained, URT could impose penalties such as fines or in severe cases,
revocation of all permits held by an operator or the forfeiture of the
operator's cable networks. Management of the Company does not believe that
these pending approvals result in a significant risk to the Company.
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.
PROCEEDING RELATING TO HBO POLSKA
Two of the Company's cable television subsidiaries and four other unrelated
Polish cable operators and HBO Polska Sp. z o.o., have been made defendants in a
lawsuit instituted by Polska Korporacja Telewizyjna Sp. z o.o., a subsidiary of
Canal+. The primary
80
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
defendant in the proceedings is HBO Polska Sp. z o.o. which is accused of
broadcasting the HBO television program in Poland without a license from the
Council as required by the Radio and Television Act of 1992, as amended, and
thereby undertaking an activity constituting an act of unfair competition. The
Company does not believe that the final disposition of the lawsuit will have a
material adverse effect on its consolidated financial position or results of
operations.
DIVIDEND RESTRICTIONS
The Company's Polish subsidiaries are only able to distribute dividends to
the extent of accounting profit determined in accordance with Polish accounting
principles. As of December 31, 2000 the Company's Polish subsidiaries have no
profit available for distribution as dividends.
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 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 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 the Company, (3) damages in the
amount of 1.7 percent of the payment made by UPC for the shares of the Company
as set forth in the Agreement and Plan of Merger between UPC Polska and UPC
dated June 2, 1999, and (4) attorneys' fees and costs incurred in prosecuting
the lawsuit.
The amended complaint sets forth eight claims for relief based on
allegations that the defendants, including UPC Polska 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 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 PCBV to affiliates of PCI and the
Company, including the Company, that allegedly compete with PCI and the Company.
On or about March 31, 2000 the parties to the lawsuit reached a settlement.
In accordance with the settlement, on June 2, 2000, Wizja TV B.V., an affiliate
of Company's Parent, purchased approximately 1.4% of the outstanding shares of
PCBV for a price of approximately $2.2 million. The case has been dismissed and
releases exchanged. The aforementioned settlement does not include the
remaining minority shareholders.
In addition to the Ohio lawsuit, other minority shareholders of the
Company (representing an additional approximately 6% of the shares of the
Company, hereinafter the "Reece Group") have asserted claims against the past
and present directors or officers of, or members of the Board of Managers of,
PCI, the Company and UPC Polska or one or more controlling shareholders of
UPC Polska but have not yet filed suit.
The claims by the Reece Group consist of allegations previously made by
Reece Communications, Inc. ("RCI"). RCI's allegations were premised on, among
other things, alleged acts, errors, omissions, misstatements, misleading
statements or breaches of duty by the aforementioned officers, directors, or
controlling shareholders. Although the Company has defenses to the Reece
Group's allegations, UPC Polska is presently attempting to negotiate a
settlement of those claims and a simultaneous purchase of the Reece Group's
the Company shares.
14. CONCENTRATIONS OF BUSINESS AND CREDIT RISK
USE OF TPSA CONDUIT
The Company's ability to build out its existing cable television networks
and to integrate acquired systems into its cable television networks depends on,
among other things, the Company's continued ability to design and obtain access
to network routes, and to secure other construction resources, all at reasonable
costs and on satisfactory terms and conditions. Many of such factors are beyond
the
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POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
control of the Company. In addition, at December 31, 2000, approximately 74.5%
of the Company's cable plant had been constructed utilizing pre-existing
conduits of TPSA. A substantial portion of the Company's contracts with TPSA for
the use of such conduits permits termination by TPSA without penalty at any time
either immediately upon the occurrence of certain conditions or upon provision
of three to six months' notice without cause.
In addition, some conduit agreements with TPSA provide that cables can be
installed in the conduit only for the use of cable television. If the Company
uses the cables for a purpose other than cable television, such as data
transmission, telephone, or Internet access, such use could be considered a
violation of the terms of certain conduit agreements, unless this use is
expressly authorized by TPSA. There is no guarantee that TPSA would give its
approval to permit other uses of the conduits. The Company is currently in
the process of introducing Internet services to its customers and
renegotiating certain conduit agreements with TPSA.
LIMITED INSURANCE COVERAGE
While the Company carries general liability insurance on its properties,
like many other operators of cable television systems it does not insure the
underground portion of its cable televisions networks. Accordingly, any
catastrophe affecting a significant portion of the Company's cable television
networks could result in substantial uninsured losses and could have a material
adverse effect on the Company.
CREDITWORTHINESS
All of the Company's customers are located in Poland. As is typical in
this industry, no single customer accounted for more than five percent of the
Company's sales in 2000 or 1999. The Company estimates an allowance for
doubtful accounts based on the credit worthiness of its customers as well as
general economic conditions. Consequently, an adverse change in those factors
could effect the Company's estimate of its bad debts.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
(a) Previous independent accountant:
(i) On November 17, 1999, the Company notified KPMG Polska Sp. z.o.o. ("KPMG")
by telephone of its intent to dismiss KPMG as its independent accountants,
and on the same date, KPMG sent a letter to the Company, with a copy to
the Chief Accountant at the Securities and Exchange Commission,
acknowledging such dismissal. On November 26, 1999, the Company sent a
letter to KMPG formally dismissing KPMG as its independent accountants.
(ii) The reports of KPMG on the financial statements for the Company and the
Company's majority-owned subsidiary Poland Cablevision (Netherlands) B.V.
for the fiscal year ended December 31, 1998 contained no adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principle.
(iii) The Company's Board of Directors participated in and approved the decision
to change independent accountants.
(iv) In connection with its audits for the fiscal year ended December 31,
1998 and the relationship through the date of the dismissal,
there have been no disagreements with KPMG on any matter of accounting
principles of practices, financial statement disclosure, or auditing
scope or procedure, which disagreements if not resolved to the
satisfaction of KPMG would have caused them to make reference thereto
in their report on the financial statements for such fiscal year.
(v) In a letter dated March 31, 1999, to the Company's Board of Directors
following its 1998 audit, KPMG commented on certain matters involving the
internal control structure and operation of the Company, including:
(i) the need for more experience and resources in the financial
reporting area;
(ii) the need for an effective internal audit department;
(iii) problems in the translation of Polish Zloty balances and
transactions into U.S. dollars;
(iv) problems with financial statements of certain subsidiaries
presented for consolidation; and
(v) other control weaknesses involving currency translations, monthly
reconciliations and other matters that should have been resolved
prior to being presented for consolidation and audit purposes.
Certain members of management, including a member of the Company's Board of
Directors, discussed the subject matter of certain of these issues with KPMG.
The Company intends to continue addressing these issues, and the Company has
authorized KPMG to respond fully to the inquiries of the successor accountant
concerning such events.
(vi) The Company has requested that KPMG furnish it with a letter addressed to
the Securities and Exchange Commission stating whether or not it agrees
with the above statements. A copy of such letter, dated December 2, 1999,
is incorporated by reference to this Form 10-K.
(b) New independent accountant:
The Company engaged Arthur Andersen Sp. z o.o. ("Arthur Andersen") as its new
independent accountant as of November 30, 1999. During the two most recent
fiscal years and through November 26, 1999, the Company has not consulted with
Arthur Andersen regarding either (i) the application of accounting principles to
a specified transaction, either completed or proposed, or the type of audit
opinion that right be rendered on the Company's financial statements (and no
written report or oral advice has been provided to the Company by Arthur
Andersen on an accounting, auditing or financial reporting issue); or (ii) any
matter that was either the subject of a disagreement, as that term is defined in
Item 304(a)(1)(iv) or Regulation S-K and the related instructions to item 304 or
Regulation S-K, or a reportable event, as that term is defined in Item
304(a)(1)(v) or Regulation S-K.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
The financial statements as set forth under Item 8 of this report on Form
10-K are incorporated herein by reference. Financial statement schedules have
been omitted since they are either not required, not applicable, or the
information is otherwise included.
(b) Reports on Form 8-K
The Company did not file any Reports on Form 8-K during the quarter ended
December 31, 2000.
(c) Exhibit Listing
3.1(a) Restated Certificate of Incorporation of Poland Communications, Inc.
as amended through August 1998. (Incorporated by reference to PCI's Form
10-K, filed March 31, 2000.)
3.1(b) Certificate of Amendment of Certificate of Incorporation of Poland
Communications, Inc. dated March 20, 2000. (Incorporated by reference to
PCI's Form 10-K, filed March 31, 2000.)
3.2 By-Laws of PCI as amended through March 1998. (Incorporated by reference
to PCI's Form 10-K, filed March 30, 1999.)
4.1 Indenture dated as at October 31, 1996 between PCI and State Street Bank
and Trust Company relating to PCI's 9 7/8% Senior Notes due 2003 and its 9
7/8% Series B Senior Notes due 2003 (Incorporated by reference to Exhibit
4.11 of PCI's Registration Statement on Form S-4, Registration No.
333-20307).
10.4 Purchase Agreement dated October 24, 1996 between PCI and Merrill Lynch
& Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated relating to
$130,000,000 aggregate principal amount of PCI's 9 7/8% Senior Notes due
2003 (Incorporated by reference to Exhibit 1.1 of PCI's Registration
Statement on Form S-4, Registration No. 333-20307).
99.1 Letter from KPMG dated December 2, 1999. (Incorporated by reference to
PCI's Form 8-K filed on December 2, 1999)
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
POLAND COMMUNICATIONS, INC.
By: /s/ Simon Boyd
------------------------
Simon Boyd
CHIEF FINANCIAL OFFICER
In accordance with the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates stated.
SIGNATURE TITLE DATE
--------- ------- -----
/s/ Bruce Massey Chief Executive Officer and
_____________________________ President and Director April 2, 2001
Bruce Massey
/s/ Simon Boyd Chief Financial Officer
______________________________ April 2, 2001
Simon Boyd
/s/ Nimrod Kovacs Chairman of the Board of Directors
_______________________________ April 2, 2001
Nimrod Kovacs
/s/ Walter Eugene Musselman Director
_______________________________ April 2, 2001
Walter Eugene Musselman
/s/ Anton Tuijten Director
_______________________________ April 2, 2001
Anton Tuijten
/s/ Simon Oakes Director
_______________________________ April 2, 2001
Simon Oakes
/s/ Dorothy Hansberry-Biegunska Vice President, General Counsel and
_______________________________ Secretary and Director April 2, 2001
Dorothy Hansberry-Biegunska
85