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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999.
OR
/ / TRANSITION REPORT PURSUANT TO THE SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT 1934
FROM THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 333-20307
POLAND COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
NEW YORK 06-1070447
(State or Other Jurisdiction of (IRS Employer
Incorporation of Organization) Identification No.)
ONE COMMERCIAL PLAZA
HARTFORD, CONNECTICUT 06103
(Address of Principal Executive Officers) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (860) 549-1674
Indicate by check (X) whether the registrant (1) has filed all reports required
to be fled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days Yes__X__ No
The number of shares outstanding of Poland Communications, Inc.'s common stock
as of March 31, 1999, was:
Common Stock 18,948
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1
POLAND COMMUNICATIONS, INC.
FORM 10-Q INDEX
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
PAGE
NO.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Poland Communications, Inc.
Consolidated Balance Sheets 3-4
Consolidated Statements of Operations 5
Consolidated Statements of Comprehensive Loss 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8
Poland Cablevision (Netherlands) B.V.
Consolidated Balance Sheets 9-10
Consolidated Statements of Operations 11
Consolidated Statements of Comprehensive Loss 12
Consolidated Statements of Cash Flows 13
Notes to Consolidated Financial Statements 14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-20
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 22
PART II OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
2
POLAND COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
1999 1998
------------ --------------
(unaudited)
(in thousands)
Current assets:
Cash and cash equivalents $ 1,897 $ 2,574
Accounts receivable, net of allowances for doubtful
accounts $1,193,000 in 1999 and $1,095,000 in 1998 2,856 2,770
Other current assets 1,496 1,362
----------- -----------
Total current assets 6,249 6,706
----------- -----------
Property, plant and equipment:
Cable television system assets 152,924 175,053
Construction in progress 3,306 1,665
Vehicles 1,707 2,096
Other 8,262 6,183
----------- -----------
166,199 184,997
Less accumulated depreciation (46,581) (48,129)
----------- -----------
Net property, plant and equipment 119,618 136,868
Inventories for construction 7,873 8,851
Intangibles, net 28,973 34,481
Notes receivable from affiliates 459 449
Other assets 6,168 6,430
----------- -----------
Total assets $ 169,340 $ 193,785
----------- -----------
----------- -----------
See accompanying notes to unaudited consolidated financial statements.
3
POLAND COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
March 31, December 31,
1999 1998
------------ ------------
(unaudited)
(in thousands)
Current liabilities:
Accounts payable and accrued expenses $ 7,288 $ 13,268
Accrued interest 5,349 2,140
Deferred revenue 1,036 1,207
Income taxes payable 3,794 3,794
Current portion of notes payable 6,500 6,500
--------- ---------
Total current liabilities 23,967 26,909
Due to affiliate 26,750 17,519
Notes payable, less current portion 131,574 131,941
--------- ---------
Total liabilities 182,291 176,369
--------- ---------
Redeemable preferred stock (liquidation value $60,000,000;
6,000 shares authorized, issued and outstanding) 31,868 30,977
Commitments and contingencies (note 4)
Stockholders' deficiency
Common stock, $.01 par value, 27,000 shares authorized;
18,948 shares issued and outstanding 1 1
Paid-in capital 77,489 78,380
Accumulated other comprehensive (loss)/income (20,274) 586
Accumulated deficit (102,035) (92,528)
--------- ---------
Total stockholders' deficiency (44,819) (13,561)
--------- ---------
Total liabilities and stockholders' deficiency $ 169,340 $ 193,785
--------- ---------
--------- ---------
See accompanying notes to unaudited consolidated financial statements.
4
POLAND COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Cable television revenue $ 14,783 $ 12,093
Operating expenses:
Direct operating expenses 10,102 3,742
Selling, general and administrative expenses 2,996 4,452
Depreciation and amortization 5,949 4,835
---------- ----------
Total operating expenses 19,047 13,029
---------- ----------
Operating loss (4,264) (936)
Interest and investment income 273 393
Interest expense (3,905) (3,532)
Foreign exchange (loss)/gain, net (1,592) 67
---------- ----------
Loss before income taxes and minority interest (9,488) (4,008)
Income tax expense (19) (333)
Minority interest -- (149)
---------- ----------
Net loss (9,507) (4,490)
Accretion of redeemable preferred stock (891) (1,159)
---------- ----------
Net loss applicable to holders of common stock $ (10,398) $ (5,649)
---------- ----------
---------- ----------
Basic and diluted loss per common share $ (548.77) $ (298.13)
---------- ----------
---------- ----------
See accompanying notes to unaudited consolidated financial statements.
5
POLAND COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
--------- ---------
(IN THOUSANDS)
Net loss............................................................... (9,507) (4,490)
Other comprehensive (loss)/income:
Cumulative translation adjustment.................................... (19,688) 2,617
--------- ---------
Comprehensive loss..................................................... (29,195) (1,873)
--------- ---------
--------- ---------
See accompanying notes to unaudited consolidated financial statements.
6
POLAND COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------------------
1999 1998
----------------- ------------------
(IN THOUSANDS)
Cash flows from operating activities:
Net loss $ (9,507) $ (4,490)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Minority interest
- 149
Depreciation and amortization
5,949 4,835
Amortization of notes payable discount and issue costs
262 41
Changes in operating assets and liabilities:
Accounts receivable
(86) (246)
Other current
assets (134) 893
Accounts payable
(5,243) 3,462
Income tax payable
- (377)
Accrued interest
3,210 3,210
Amounts due to affiliates
10,133 (141)
Deferred revenue
(19) (88)
Other current liabilities
- (515)
----------------- ------------------
Net cash provided by operating activities
4,565 6,733
----------------- ------------------
Cash flows from investing activities:
Construction and purchase of property, plant and equipment
(4,968) (11,795)
Notes receivable from affiliate
(10) -
Purchase of intangibles
(197) (230)
Purchase of subsidiaries, net of cash received
- (783)
----------------- ------------------
Net cash used in investing activities
(5,175) (12,808)
----------------- ------------------
Cash flows from financing activities:
Repayment of notes payable
(67) 37
----------------- ------------------
Net cash (used in)/provided by financing activities
(67) 37
----------------- ------------------
Net decrease in cash and cash equivalents
(677) (6,038)
Cash and cash equivalents at beginning of period
2,574 25,750
----------------- ------------------
Cash and cash equivalents at end of period $ 1,897 $ 19,712
----------------- ------------------
----------------- ------------------
Supplemental cash flow information:
Cash paid for $ 142 $ 25
interest
----------------- ------------------
----------------- ------------------
Cash paid for income taxes $ 37 $ 176
----------------- ------------------
----------------- ------------------
See accompanying notes to unaudited consolidated financial statements.
7
POLAND COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
1. BASIS OF PRESENTATION
The information furnished by Poland Communications, Inc. and its subsidiaries
("PCI" or the "Company") has been prepared in accordance with generally accepted
accounting principles in the United States ("U.S. GAAP") and the rules and
regulations of the Securities and Exchange Commission (the "SEC"). Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with U.S. GAAP have been condensed or omitted
pursuant to the rules and regulations. The accompanying consolidated balance
sheets, statements of operations, statements of comprehensive loss and
statements of cash flows are unaudited but in the opinion of management reflect
all adjustments (consisting only of items of a normal recurring nature) which
are necessary for a fair statement of the Company's consolidated results of
operations and cash flows for the interim periods and the Company's financial
position as of March 31, 1999. The accompanying unaudited consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and the notes thereto included in the Company's 1998 Annual Report on
Form 10-K filed with the SEC (the "1998 Annual Report"). The interim financial
results are not necessarily indicative of the results of the full year.
2. RECLASSIFICATIONS
Certain amounts have been reclassified in the prior period unaudited
consolidated financial statement to conform to the 1999 unaudited consolidated
financial statement presentation.
3. LOSS PER SHARE
As noted in the 1998 Annual Report, the Company adopted SFAS No. 128, "Earnings
Per Share". The statement required that all prior period earnings per share
calculations including interim financial statements be restated to conform to
the provisions of this statement. Basic and diluted loss per ordinary share is
based on the weighted average number of ordinary shares outstanding of 18,948
for both the three-month periods ended March 31, 1999 and 1998.
4. COMMITMENTS AND CONTINGENCIES
Programming Commitments
The Company has entered into programming agreements with certain third party
content providers. The programming agreements have terms which range from one to
five years and require that payments for programs be paid either at a fixed
amount or based upon the number of subscribers connected to the system each
month. At March 31, 1999, the Company had a minimum commitment under such
agreements of approximately $2,792,500 for the remainder of 1999, $3,784,100 in
2000, $4,470,700 in 2001, $4,872,300 in 2002, $5,077,600 in 2003 and $5,128,300
in 2004 and thereafter. For the three months ended March 31, 1999 and 1998 the
Company incurred programming fees of approximately $836,000 and $1,720,000
respectively, pursuant to these agreements.
Litigation and Claims
From time to time, the Company is subject to various claims and suits arising
out of the ordinary course of business. While the ultimate result of all such
matters is not presently determinable, based upon current knowledge and facts,
management does not expect that their resolution will have a material adverse
effect on the Company's consolidated financial position or results of
operations.
5. ACQUISITIONS
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.
8
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 31, DECEMBER 31,
1999 1998
--------------- ---------------
(UNAUDITED)
(IN THOUSANDS)
Current assets:
Cash $ 1,061 $ 1,463
Accounts receivable, net of allowances of $577,000 in 1999
and $708,000 in 1998
1,826 1,904
Other current assets
1,048 535
--------------- ---------------
Total current assets
3,935 3,902
--------------- ---------------
Property, plant and equipment:
Cable television system assets 120,009
136,833
Vehicles
1,374 1,704
Other
8,242 5,832
--------------- ---------------
129,625
144,369
Less accumulated depreciation (38,867)
(40,041)
--------------- ---------------
Net property, plant and equipment
90,758 104,328
Inventories for construction
5,913 6,638
Intangibles, net
11,734 13,711
--------------- ---------------
Total assets $ 112,340 $ 128,579
--------------- ---------------
--------------- ---------------
See accompanying notes to unaudited consolidated financial statements.
9
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
March 31, December 31,
1999 1998
--------- ---------
(unaudited)
(in thousands)
Current liabilities:
Accounts payable and accrued expenses $ 3,457 $ 7,809
Deferred revenue 433 565
--------- ---------
Total current liabilities 3,890 8,374
Due to affiliate 32,722 26,491
Notes payable to affiliates 165,352 160,830
--------- ---------
Total liabilities 201,964 195,695
--------- ---------
Stockholders' deficiency:
Capital stock par value, $0.50 par; 200,000 shares
authorized, issued and outstanding 100 100
Paid-in capital 14,589 14,589
Accumulated other comprehensive (loss)/income (14,335) 424
Accumulated deficit (89,978) (82,229)
--------- ---------
Total stockholders' deficiency (89,624) (67,116)
--------- ---------
Total liabilities and stockholders' deficiency $ 112,340 $ 128,579
--------- ---------
--------- ---------
See accompanying notes to unaudited consolidated financial statements.
10
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended March 31,
----------------------------
1999 1998
-------- --------
(in thousands)
Cable television revenue $ 10,210 $ 8,202
Operating expenses:
Direct operating expenses 6,923 2,541
Selling, general and administrative expenses 1,916 2,779
Depreciation and amortization 3,770 3,096
-------- --------
Total operating expenses 12,609 8,416
-------- --------
Operating loss (2,399) (214)
Interest income 11 28
Interest expense (3,384) (3,040)
Foreign exchange (loss)/gain, net (1,958) 50
-------- --------
Loss before income taxes and minority interest (7,730) (3,176)
Income tax expense (19) (102)
Minority interest -- 278
-------- --------
Net loss $ (7,749) $ (3,000)
-------- --------
-------- --------
Basic and diluted net loss per common share ($ 38.75) ($ 15.00)
-------- --------
-------- --------
See accompanying notes to unaudited consolidated financial statements.
11
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
THREE MONTHS ENDED MARCH
31,
---------------------------
1999 1998
------------ -------------
(IN THOUSANDS)
Net loss (7,749) (3,000)
Other comprehensive (loss) / income:
Cumulative translation adjustment (14,759) 2,042
------- -------
Comprehensive loss (22,508) (958)
------- -------
------- -------
See accompanying notes to unaudited consolidated financial statements.
12
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
---------------------------------------------
1999 1998
------------- -------------
(IN THOUSANDS)
Cash flows from operating activities:
Net loss $(7,749) $(3,000)
------- -------
Adjustments to reconcile net loss to
net cash provided by operating activities:
Minority interest -- (278)
Depreciation and amortization 3,770 3,096
Interest expense added to notes payable
to affiliates 3,382 3,040
Changes in operating assets and liabilities:
Accounts receivable 78 (15)
Other current assets (514) 512
Accounts payable (3,852) 2,794
Deferred revenue (61) (70)
Amounts due to affiliates 6,648 175
Other current liabilities -- 83
------- -------
Net cash provided by operating activities 1,702 6,337
------- -------
Cash flows from investing activities:
Construction and purchase of property, plant and equipment (3,123) (7,941)
Purchase of intangible assets (121) (230)
------- -------
Net cash used in investing activities (3,244) (8,171)
------- -------
Cash flows from financing activities:
Proceeds from borrowings from affiliates 1,140 --
Net cash provided by financing activities 1,140 --
------- -------
Net decrease in cash (402) (1,834)
Cash at beginning of the period 1,463 4,951
------- -------
Cash at end of the period $ 1,061 $ 3,117
------- -------
------- -------
Supplemental cash flow information:
Cash paid for interest $ -- $ --
------- -------
------- -------
Cash paid for income taxes $ 15 $ 56
------- -------
------- -------
See accompanying notes to unaudited consolidated financial statements.
13
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
1. BASIS OF PRESENTATION
Financial information is included for Poland Cablevision (Netherlands) B.V. and
its subsidiaries ("PCBV") as PCBV is a guarantor of PCI's 9 7/8% Senior Notes
due 2003 and 9 7/8% Series B Senior Notes due 2003, (collectively, the "PCI
Notes"). The information furnished by PCBV has been prepared in accordance with
generally accepted accounting principles in the United States ("U.S. GAAP") and
the rules and regulations of the Securities and Exchange Commission ("SEC").
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with U.S. GAAP have been condensed
or omitted pursuant to the rules and regulations. The accompanying consolidated
balance sheets, statements of operations, statements of comprehensive loss and
statements of cash flows are unaudited but in the opinion of management reflect
all adjustments (consisting only of items of a normal recurring nature) which
are necessary for a fair statement of PCBV's consolidated results of operations
and cash flows for the interim periods and PCBV's financial position as of March
31, 1999. The accompanying unaudited consolidated financial statements should be
read in conjunction with the audited consolidated financial statements of PCBV
and the notes thereto included in PCI's 1998 Annual Report on Form 10-K filed
with the SEC. The interim financial results are not necessarily indicative of
the results of the full year.
2. RECLASSIFICATIONS
Certain amounts have been reclassified in the prior period unaudited
consolidated financial statement to conform to the 1999 unaudited consolidated
financial statement presentation.
3. LOSS PER SHARE
As noted in the 1998 PCI Annual Report, PCBV adopted SFAS No. 128, "Earnings Per
Share". The statement required that all prior period earnings per share
calculations including interim financial statements be restated to conform to
the provisions of this statement. Basic and diluted loss per ordinary share is
based on the weighted average number of ordinary shares outstanding of 200,000
for the three-month periods ended March 31, 1999 and 1998.
4. LITIGATION AND CLAIMS
From time to time, PCBV is subject to various claims and suits arising out of
the ordinary course of business. While the ultimate result of all such matters
is not presently determinable, based upon current knowledge and facts,
management does not expect that their resolution will have a material adverse
effect on PCBV consolidated financial position or results of operations.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis provides information concerning the
results of operations and financial condition of the Company. Such discussion
and analysis should be read in conjunction with the accompanying unaudited
consolidated financial statements of the Company. Additionally, the following
discussion and analysis should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
audited consolidated financial statements included in Part II of the Company's
1998 Annual Report. The following discussion focuses on material trends, risks
and uncertainties affecting the results of operations and financial condition of
the Company.
Certain statements in this Quarterly Report on Form 10-Q constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, that are not historical facts but rather reflect
the Company's current expectations concerning future results and events. The
words "believes," "expects," "intends," "plans," "anticipates," "likely," "will"
"may", "shall" and similar expressions identify such forward-looking statements.
Such forward-looking statements involve known and unknown risks, uncertainties
and other important factors that could cause the actual results, performance or
achievements of the Company (or entities in which the Company has interests), or
industry results, to differ materially from future results, performance or
achievements expressed or implied by such forward-looking statements.
Readers are cautioned not to place undue reliance on these forward looking
statements which reflect management's view only as of the date of this Quarterly
Report on Form 10-Q. The Company undertakes no obligation to publicly release
the result of any revisions to these forward-looking statements which may be
made to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events, conditions or circumstances.
The risks, uncertainties and other factors that might cause such differences
include but are not limited to: (i) general economic conditions in Poland and in
the pay television business in Poland; (ii) changes in regulations the Company
operates under; (iii) uncertainties inherent in new business strategies,
including new product launches and development plans, which the Company has not
used before; (iv) rapid technology changes; (v) changes in, or failure or
inability to comply with government regulations; (vi) the development and
provision of programming for new television and telecommunications technologies;
(vii) the continued strength of competitors in the multichannel video
programming distribution industry and satellite services industry and the growth
of satellite delivered programming; (viii) future financial performance,
including availability, terms and deployment of capital; (ix) the ability of
vendors to deliver required equipment, software and services on schedule at the
budgeted cost; (x) the Company's ability to attract and hold qualified
personnel; (xi) changes in the nature of strategic relationships with joint
ventures; (xii) the overall market acceptance of those products and services,
including acceptance of the pricing of those products and services; (xiii) and
acquisition opportunities.
OVERVIEW
The Company operates the largest cable television system in Poland with
approximately 1,624,000 homes passed and approximately 948,200 total subscribers
as at March 31, 1999. The Company continues to realize subscriber growth through
a combination of increased penetration, new network build-out and acquisitions.
In addition, since the offering of the Wizja TV programming package on its cable
television networks beginning June 5, 1998, the Company has realized a 10.2%
increase in the number of subscribers.
Having established itself as the leading cable television service provider in
Poland, the Company continues to focus its efforts toward the strategic
objectives of increasing cash flow and enhancing the value of its cable
networks. To accomplish these objectives, the Company's business and operating
strategy in the cable television business is to (i) provide compelling
programming, (ii) increase pricing and maximize revenue per cable subscriber,
(iii) expand its regional clusters, (iv) increase subscriber penetration, and
(v) realize additional operating efficiencies.
During 1998 and the first quarter of 1999, management completed or is in the
process of completing several strategic actions in support of this business and
operating strategy. On June 5, 1998, the Company began providing the Wizja TV
programming package, with its initial 11 channel primarily Polish-language
programming, to its basic cable subscribers. Since that date, the Wizja TV
package has been expanded to 24 channels. Management believes that this
selection of high-quality Polish-language programming will provide it with a
significant competitive advantage in increasing its cable subscriber penetration
rates.
15
The Company has implemented a pricing strategy designed to increase revenue per
subscriber and to achieve real profit margin increases in U.S. dollar terms. The
Company has increased the monthly price for the "basic" package service to
reflect the increased channel availability, and premium channels such as the HBO
Poland service (a Polish-language version of HBO's premium movie channel) will
be offered to cable customers for an additional monthly charge. The Company
expects that it may continue to experience increases in its churn rate above
historical levels during the implementation of its current pricing strategy. For
the three months ended March 31, 1999, the Company's churn rate increased to
4.1%. For the three months ended March 31, 1999, the Company experienced churn
in the HBO Poland Service with penetration falling by 12,966 subscribers or
27.4% from March 31, 1998. The Company is planning to encrypt the HBO Poland
service on cable and install analog decoders for all premium channel subscribers
during 1999. However, management believes the Company will be able to
successfully command higher prices while maintaining relatively low annual cable
television churn rates as a result of its customer service standards, the
technical quality of its networks and the broad selection of quality
programming.
The Company continues to expand the coverage areas of its regional clusters,
through selected build-out and acquisitions. During the first quarter of 1999,
the Company focused its build-out primarily in areas where it could fill-in and
expand existing clusters. Additionally, the Company acquired assets from several
smaller cable television operators.
In support of its goal of realizing additional operating efficiencies, the
Company, during the first three months of 1999, continued a reorganization for
the purpose of streamlining the organizational structure according to
market-driven concepts. The Company expects to realize additional operating
efficiencies during 1999 through the centralization of subscriber management and
customer support services in the call center. The call center became operational
during the first six months of 1998 for cable customers in certain regional
clusters and will continue to become operational for other cable customers as
expansion of call center activities progresses. The Company is also in the
process of installing an integrated management information system for its
billing and has completed the installation of an integrated management
information system for accounting systems, which is designed to further improve
employee productivity and customer service for its cable business.
Historically, the cable networks the Company has acquired have had lower
operating margins than the Company's existing cable networks. Upon consummation
of an acquisition, the Company seeks to achieve operating efficiencies and
reduce operating costs by rationalizing the number of headends and reducing
headcount, among other things. The Company generally has been able to manage its
acquired cable television networks with experienced personnel from one of its
existing regional clusters. Management has also focused on reducing the number
of technical personnel necessary to operate acquired networks after connecting
the networks to the Company's existing headends, or, if required, rebuilding the
acquired networks to the Company's technical standards. In part due to these
efforts, the Company has generally been able to increase the operating margins
in its acquired systems, although there can be no assurance that it will be able
to continue to do so.
The Company's revenues have been and will continue to be derived primarily from
monthly subscription fees for cable television services and one-time
installation fees for connection to its cable television networks. The Company
charges cable subscribers fixed monthly fees for their choice of service
packages and for other services, such as premium channels, tuner rentals and
additional outlets, all of which are included in monthly subscription fees. The
Company currently offers broadcast, intermediate (in limited areas) and basic
packages of cable service. At March 31, 1999 approximately 74.5% of the
Company's subscribers received the Company's basic package. For the three months
ended March 31, 1999, approximately 97% of the Company's revenue was derived
from monthly subscription fees compared to approximately 92% during the three
months ended March 31, 1998. Revenue from installation fees is deferred to the
extent it exceeds direct selling costs and the amortized to income over the
estimated average period that new subscribers are expected to remain connected
to the Company's cable system. The Company's revenue performance during 1999 has
been generally strong with 22% growth in revenues for the three months ended
March 31, 1999 as compared to the three months ended March 31, 1998. This
increase was caused mainly by organic growth in subscribers via increased
penetration and build-out of existing networks, increases in subscription rates
and the introduction of an additional premium channel into the programming
offerings.
The Company divides operating expenses into (i) direct operating expenses, (ii)
selling, general and administrative expenses and (iii) depreciation and
amortization expenses. Direct operating expenses consist of programming
expenses, maintenance and related expenses necessary to service, maintain and
operate the Company's cable systems, billing and collection expenses and
customer service expenses. Selling, general and administrative expenses consist
principally of administrative costs, including office related expenses,
professional fees and salaries, wages and benefits of non-technical employees,
advertising and marketing expenses, bank fees and bad debt expense. Depreciation
and amortization expenses consist of depreciation of property, plant and
equipment and amortization of intangible assets. Although its revenue
performance was strong for the
16
three months ended March 31, 1999, the Company generated an operating loss of
$4.3 million for the three months ended, March 31, 1999, primarily due to
increased direct operating expenses related to the subscriber growth and
increased programming expense related to the purchase of the Wizja TV
programming package from an affiliated company as well as high depreciation
and amortization charges related to the expansion of the cable networks.
In addition to other operating statistics, the Company measures its financial
performance by EBITDA, an acronym for earnings before interest, taxes,
depreciation and amortization. The Company defines EBITDA to be net loss
adjusted for interest and investment income, depreciation and amortization,
interest expense, foreign currency gains and losses, income taxes, gains and
losses from the sale of assets other than in a normal course of business and
minority interest. The items excluded from EBITDA are significant components
in understanding and assessing the Company's financial performance. The
Company believes that EBITDA and related measures of cash flow from operating
activities serve as important financial indicators in measuring and comparing
the operating performance of media companies. EBITDA is not a U.S. GAAP
measure of loss or cash flow from operations and should not be considered as
an alternative to cash flows from operations as a measure of liquidity. The
Company reported EBITDA of $1.7 million for three months ended March 31, 1999
and $3.9 million for three months ended March 31, 1998.
An analysis of quarterly cable subscriber growth is presented in the table
below:
MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1999 1998 1998 1998 1998
--------- ------------ ------------- --------- ----------
Homes Passed 1,624,119 1,591,981 1,565,287 1,546,540 1,505,256
Basic Subscribers 706,179 698,342 658,584 660,067 627,713
Subscriber Growth (three month period)
Organic 38,226(1) 70,935 41,904 57,007 26,868
Through Acquisitions -- -- (10,245)(2) 1,363 16,360
Churn (30,389) (31,177) (33,142) (26,016) (22,145)
--------- --------- --------- --------- ---------
TOTAL NET GROWTH 7,837 39,758 (1,483) 32,354 21,083
--------- --------- --------- --------- ---------
Basic Penetration 43.5% 43.9% 42.1% 42.7% 41.7%
Intermediate subscribers 33,587 40,037 42,538 43,204 408,077
--------- --------- --------- --------- ---------
BASIC AND INTERMEDIATE SUBSCRIBERS 739,766 738,379 701,122 703,271 675,790
--------- --------- --------- --------- ---------
Broad subscribers 208,457 196,961 186,334 167,859 154,860
--------- --------- --------- --------- ---------
TOTAL SUBSCRIBERS 948,223 935,340 887,456 871,130 830,650
--------- --------- --------- --------- ---------
Premium subscribers-HBO 34,332 36,615 39,035 45,674 47,298
Premium penetration-HBO 4.9% 5.2% 5.9% 6.9% 7.5%
Basic revenue/basic sub./month $6.20 $5.69 $5.19 $4.99 $5.19
Total revenue/basic sub./month $6.97 $6.75 $6.42 $6.08 $6.42
1. The increase in basic subscribers for the three months ended March 1999
included 4,121 subscribers in Szczecin that switched from the
"intermediate" to the "basic" packages.
2. As part of the purchase of a minority interest in one of the Company's
cable system, the Company sold an isolated part of that system to the
previous owner.
17
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
CABLE TELEVISION REVENUE. Revenue increased $2.7 million or 22.3% from $12.1
million in the three months ended March 31, 1998 to $14.8 million in the three
months ended March 31, 1999. This increase was primarily attributable to a 9.5%
increase in the number of basic and intermediate subscribers from approximately
676,000 at March 31, 1998 to approximately 740,000 at March 31, 1999, as well as
an increase in monthly subscription rates. The increase in basic and
intermediate subscribers was primarily due to build-out of the Company's
existing cable networks.
Revenue from monthly subscription fees represented 91.6% and 97.2% of cable
television revenue for the three months ended March 31, 1998 and 1999,
respectively. During the three months ended March 31, 1999, the Company
generated approximately $0.6 million of premium subscription revenue as a result
of providing the HBO Poland service pay movie channel to cable subscribers as
compared to $0.8 million for the three months ended March 31, 1998.
DIRECT OPERATING EXPENSES. Direct operating expenses increased $6.4 million, or
173.0%, from $3.7 million for the three months ended March 31, 1998 to $10.1
million for the three months ended March 31, 1999, principally as a result of
the purchase of the Wizja TV programming package for approximately $5.1 million
from an affiliate of the Company as well as the increased size of the Company's
cable television system. Direct operating expenses increased from 30.6% of
revenues for the three months ended March 31, 1998 to 68.2% of revenues for the
three months ended March 31, 1999. However, without considering the
programming cost for the purchase of the Wizja programming package recorded
in 1999 the comparison would have been 30.6% and 33.8% for the three months
ended March 31, 1998 and 1999 respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $1.5 million or 33% from $4.5 million for the
three months ended March 31, 1998 to $3.0 million for the three months ended
March 31, 1999. This decrease was attributable to operating efficiencies
realized by the Company in the three months ended March 31, 1999, as
described in the overview section.
As a percentage of revenue, selling, general and administrative expenses
decreased from 37.2% for the three months ended March 31, 1998 to approximately
20.3% for the three months ended March 31, 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense rose $1.1
million, or 22.9%, from $4.8 million for the three months ended March 31, 1998
to $5.9 million for the three months ended March 31, 1999, principally as a
result of depreciation and amortization of additional cable television systems
and related goodwill acquired and the continued build-out of the Company's cable
networks. Depreciation and amortization expense as a percentage of revenues
increased from 40.0% for the three months ended March 31, 1998 to 40.2% for the
three months ended March 31, 1999.
INTEREST EXPENSE. Interest expense increased $0.4 million, or 11.4%, from $3.5
million for the three months ended March 31, 1998 to $3.9 million for the three
months ended March 31, 1999. The increase is a result of new loans assumed by
the Company from its acquisition of subsidiaries and an additional loan draw
down in June 1998.
INTEREST AND INVESTMENT INCOME. Interest and investment income decreased $0.1
million, or 25.0%, from $0.4 million for the three months ended March 31, 1998
to $0.3 million for the three months ended March 31, 1999, primarily due to the
reduction in the level of cash used to fund the Company's operations.
FOREIGN EXCHANGE (LOSS) / GAIN, NET. For the three months ended March 31,
1999, foreign exchange loss amounted to $1.6 million as compared to a foreign
exchange gain of $ 67,000 for the three months ended March 31, 1998,
primarily due to the 12.6% appreciation of the U.S. dollar against the Polish
zloty in the first quarter of 1999.
INCOME TAX / EXPENSE. The Company recorded $19,000 of income tax expense for the
three months ended March 31, 1999, as compared to $333,000 for the three months
ended March 31, 1998.
MINORITY INTEREST. No minority interest was recorded for the three months ended
March 31, 1999, compared to minority interest income of $149,000 for the three
months ended March 31, 1998. All minority interest was eliminated in 1998 as the
minority interest share of the losses exceeded the value of the minority
interest investments.
NET LOSS. For the three months ended March 31, 1998 and the three months ended
March 31, 1999, the Company had net losses of $4.5 million and $9.5 million,
respectively. These losses were the result of the factors discussed above.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS. Net loss applicable to common
stockholders increased from
18
$5.6 million for the three months ended March 31, 1998 to $10.4 million for the
three months ended March 31, 1999 due to the accretion of redeemable preferred
stock and the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has met its cash requirements in recent years primarily with (i)
capital contributions and loans from certain of the Company's former principal
stockholders, including Polish Investments Holding L.P. ("PIHLP"), the Cheryl
Anne Chase Marital Trust ("CAC Trust"), certain members of David T. Chase's
family and family trusts (the "Chase Family") (collectively the "Chase
Entities") and ECO Holdings III Limited Partnership ("ECO"), who became
principal stockholders of @ Entertainment, Inc. pursuant to the Reorganization
(as defined herein) (the "Former Principal Stockholders"), (ii) borrowings under
available credit facilities, (iii) cash flows from operations, and (iv) the sale
of $130 million aggregate principal amount of senior debt notes by the Company
(the "Notes"). The Company had positive cash flows from operating activities
1998 of $14.3 million, primarily due to the decrease of amounts due from
affiliates, increase in accounts payable and accrued expenses, and income tax
refunds received in 1998. The Company had positive cash flows from operating
activities for the three months ended March 31, 1998 and 1999 of $6.7 million
and $4.6 million respectively, due to an increase in monthly subscription rates,
increase in due to affiliate and operating efficiencies.
Cash used for the purchase and expansion of the Company's cable television
networks was $42.6 million, $11.8 million and $5.0 million in 1998, and the
three months ended March 31, 1998 and 1999, respectively. The decrease in the
first quarter of 1999 compared to the same period in 1998 is due to the
development of the Company's new build-out strategy and completion in 1998 of
upgrades of recently acquired networks and subsidiaries.
During 1996, the Company issued common and preferred stock to certain of the
Former Principal Stockholders for approximately $82 million. On March 29, 1996,
the Company consummated a transaction in which ECO purchased shares of common
and preferred stock of the Company for a price of $65 million. On March 29,
1996, PIHLP purchased additional shares of preferred and common stock of the
Company for an aggregate purchase price of approximately $17 million. The
Company applied approximately $55 million of the proceeds of these transactions
to repay indebtedness owed to Chase American Corporation, which is beneficially
owned by the Chase Family, and approximately $8.5 million to redeem preferred
stock held by PIHLP, which is beneficially owned by the Chase Family.
During 1996, the Company also entered into an agreement with American Bank in
Poland, S.A. ("AmerBank") which provides for a credit facility of approximately
$6.5 million. Interest, based on LIBOR plus 3%, is due quarterly. All advances
under the loan must be repaid by August 20, 1999. All amounts under this
facility were drawn in June 1998.
On October 31, 1996, the Company sold $130 million aggregate principal amount of
the PCI Notes to the initial purchaser pursuant to a purchase agreement. The
initial purchaser subsequently completed a private placement of the PCI Notes.
The PCI Notes were issued pursuant to an indenture.
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 issuance's and sales of capital stock of subsidiaries; (iv)
limitation on transactions with affiliates; (v) limitation on liens; (vi)
limitation on guarantees of indebtedness by subsidiaries; (vii) purchase of 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 sale of assets. The
Company is in compliance with these covenants. The PCI Indenture limits, but
does not prohibit, the payment of dividends by PCI and the ability of PCI to
incur additional indebtedness. PCI could not pay dividends to @Entertainment as
of December 31, 1998 because certain financial ratios did not meet the minimum
provided in the PCI indenture. Pursuant to the AmerBank credit facility, the
Company is subject to certain informational and notice requirements but is not
subject to restrictive covenants.
Since the commencement of its operations in 1990, the Company has required
external funds to finance the buildout of its existing networks and to finance
acquisitions of new cable television networks. The Company had relied on the
equity investments and loans from stockholders and their affiliates and
borrowings under available credit facilities to provide the funding for these
activities. The Company does not expect that its former stockholders and their
affiliates will continue to make capital contributions and loans to the Company.
19
The Company's current strategic objective is to increase cash flow and enhance
the value of its cable networks. To accomplish this objective, the Company's
business and operating strategy in the cable television business is to (i)
provide compelling programming, (ii) increase pricing and maximize revenue per
cable subscriber, (iii) expand its regional clusters, (iv) increase subscriber
penetration, and (v) realize additional operating efficiencies.
The Company is dependent on obtaining new financing to achieve this business
strategy. Future sources of financing for the Company could include public or
private debt offerings or bank financings or any combination thereof, subject to
the restrictions contained in the indentures governing the Company's and
@Entertainment's outstanding senior indebtedness. Moreover, if the Company's
plans or assumptions change, if its assumptions prove inaccurate, if it
consummates unanticipated investments in or acquisitions of other companies, if
it experiences unexpected costs or competitive pressures, or if existing cash,
and projected cash flow from operations prove to be insufficient, the Company
may need to obtain greater amounts of additional financing. While it is the
Company's intention to enter only into new financing or refinancings that it
considers advantageous, there can be no assurance that such sources of financing
would be available to the Company in the future, or, if available, that they
could be obtained on terms acceptable to the Company. The Company is also
dependent on its parent, @Entertainment, to provide financing to achieve the
Company's business strategy. @Entertainment has represented that it will make
such financing available to fund the Company's current business strategy for at
least the next twelve months.
YEAR 2000 COMPLIANCE
The Company is dependent upon computer systems and other technological devices
with imbedded microprocessor chips that are intended to utilize dates and
process data beyond December 31, 1999. In January 1997, the Company developed a
plan to address the impact that potential Y2K problems may have on Company
operations and to implement necessary changes to address such problems. During
the course of the development of its Y2K plan, the Company has identified
certain critical operations, which need to be Y2K compliant for the Company to
operate effectively. These critical operations include accounting and billing
systems, customer service and service delivery systems, and field and headend
devices.
Largely as a result of its high rate of growth over the past few years, the
Company has entered into an agreement to purchase a new system to replace its
current accounting system and an agreement to purchase specialized billing
software for the Company's new customer service and billing center. The vendors
of the new accounting system and of the billing software have confirmed to the
Company that these products are Y2K compliant. The Company has completed the
testing phase of the new accounting system, and the implementation phase was
substantially completed at the end of 1998. The Company expects implementation
of the billing software to be completed for the majority of its cable
subscribers by the end of 1999.
The Company believes that its most significant Y2K risk is its dependency upon
third party programming, software, services and equipment, because the Company
does not have the ability to control third parties in their assessment and
remediation procedures for potential Y2K problems. Should these parties not be
prepared for Y2K conversion, their products or services may fail and may cause
interruptions in, or limitations upon, the Company's provision of the full range
of its cable service to its customers. In an effort to prevent any such
interruptions or limitations, the Company is in the process of communicating
with each of its material third party suppliers of programming, software,
services and equipment to determine the status of their Y2K compliance programs.
The Company expects to complete this process by September 30, 1999, and it
anticipates that all phases of its Y2K plan will be completed by December 31,
1999.
The Company has not yet developed a contingency plan to address the situation
that may result if the Company or its third party suppliers are unable to
achieve Y2K compliance with regard to any products or services utilized in the
Company's operations. The Company does not intend to decide on the development
of such a contingency until it has gathered all of the relevant Y2K compliance
data from its third party suppliers. The Company has not yet determined the full
cost of its Y2K Plan and its related impact on the financial condition of the
Company. The Company has to date not incurred any replacement or remediation
costs for equipment or systems as a result of Y2K non-compliance. Rather, due to
the rapid growth and development of its cable system the Company has made
substantial capital investments in equipment and systems for reasons other than
Y2K concerns. The total cost of the Company's new accounting system and billing
software package is estimated to be approximately $2,400,000.
The Company believes that any Y2K compliance issues it may face can be remedied
without a material financial impact on the Company, but no assurance can be made
in this regard until all of the data has been gathered from the Company's third
20
party suppliers. At this date the Company cannot predict the financial impact on
its operations if Y2K problems are caused by products or services supplied to
the Company by such third parties.
Impact of New Accounting Standards Not Yet Adopted
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" which establishes
standards of accounting for these transactions. SFAS No. 133 is effective for
the Company beginning on July 1, 1999. The Company currently has no derivative
instruments or hedging activities.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risk (i.e., the risk of loss arising from adverse changes
in market rates and prices) to which the Company is exposed is foreign exchange
rate risk from fluctuations in the Polish zloty currency exchange rate. The
Company's long term debt is primarily subject to a fixed rate, and therefore
variations in the interest rate do not have a material impact on net interest
expense.
FOREIGN EXCHANGE AND OTHER INTERNATIONAL MARKET RISKS
Operating in international markets involves exposure to movements in currency
exchange rates. Currency exchange rate movements typically affect economic
growth, inflation, interest rates, governmental actions and other factors. These
changes, if material, can cause the Company to adjust its financing and
operating strategies. The discussion of changes in currency exchange rates below
does not incorporate these other important economic factors.
International operations constitute 100% of the Company's consolidated operating
loss for the quarter ended March 31, 1999. Some of the Company's operating
expenses and capital expenditures are expected to continue to be denominated in
or indexed in U.S. dollars. By contrast, substantially all of the Company's
revenues are denominated in zloty. Any devaluation of the zloty against the U.S.
dollar that the Company is unable to offset through price adjustments will
require it to use a larger portion of its revenue to service its U.S. dollar
denominated obligations and contractual commitments.
The Company estimates that a 10% change in foreign exchange rates would impact
reported operating loss by approximately $287,000. In other terms, a 10%
depreciation of the Polish zloty against the U.S. dollar, would result in a
$287,000 increase in the reported operating loss. This was estimated using 10%
of the Company's operating loss after adjusting for unusual impairment and other
items including U.S. dollar denominated or indexed expenses. The Company
believes that this quantitative measure has inherent limitations because, as
discussed in the first paragraph of this section, it does not take into account
any governmental actions or changes in either customer purchasing patterns or
the Company's financing or operating strategies.
The Company does not generally hedge translation risk. While the Company may
consider entering into transactions to hedge the risk of exchange rate
fluctuations, there is no assurance that it will be able to obtain hedging
arrangements on commercially satisfactory terms. Therefore, shifts in currency
exchange rates may have an adverse effect on the Company's financial results and
on its ability to meet its U.S. dollar denominated debt obligations and
contractual commitments.
Poland has historically experienced high levels of inflation and significant
fluctuations in the exchange rate for the zloty. The Polish government has
adopted policies that slowed the annual rate of inflation from approximately
250% in 1990 to approximately 20% in 1996, approximately 14.9% in 1997, and
approximately 11.8% in 1998. The rate of inflation for the three months period
ended March 31, 1999 was approximately 6.2%. The exchange rate for the zloty has
stabilized and the rate of devaluation of the zloty has generally decreased
since 1991 and the zloty has appreciated against the U.S. dollar by
approximately 0.4% for the year ended December 31, 1998. For the first quarter
of 1999 the zloty has depreciated against the U.S. dollar by approximately 13%.
Inflation and currency exchange fluctuations have had, and may continue to have,
a material adverse effect on the business, financial condition and results of
operations of the Company.
22
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION:
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 - Employment Agreement dated as of December 14, 1998, by and
between Warren L. Mobley, Jr. and PCI (Incorporated by reference to
Exhibit 10.41 to @Entertainment's Registration Statement on Form S-4,
Registration No. 333-72361.)
11 - Statement regarding computation of per share earnings (contained
in Note 3 to Unaudited Financial Statements in this Quarterly Report
in Form 10-Q)
27 - Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the first
quarter of 1999.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
POLAND COMMUNICATIONS, INC.
By: /s/ Robert E. Fowler, III
----------------------------------
Robert E. Fowler, III
Chairman of the Board of Directors
By: /s/ Piotr Majchrzak
----------------------------------
Piotr Majchrzak
Chief Financial Officer
Date: May 17, 1999
24