SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
/ / 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 0-24796
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
(Exact name of registrant as specified in its charter)
BERMUDA N/A
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Clarendon House, Church Street, Hamilton HM CX Bermuda
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 441-296-1431
Indicate by check mark whether 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 each 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of May 5, 2000
- ----- -----------------------------
Class A Common Stock, par value $.08 2,313,346
Class B Common Stock, par value $.08 991,842
PART 1
FINANCIAL INFORMATION
Item 1. Financial Statements
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONSOLIDATED BALANCE SHEETS AS AT
March 31, 2000 and December 31, 1999
(US$000s, except per share data)
ASSETS
March 31, December 31,
2000 1999
------------ ---------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents ........................................................ $ 26,644 $ 36,990
Restricted cash .................................................................. 4,848 4,784
Accounts receivable (net of allowances of $2,131, $2,597) ........................ 11,706 15,099
Program rights costs ............................................................. 9,686 9,883
Advances to affiliates ........................................................... 20,416 20,507
Income taxes receivable .......................................................... 7,380 7,640
Other current assets ............................................................. 6,165 8,167
--------- ---------
Total current assets ............................................................. 86,845 103,070
Investments in unconsolidated affiliates ......................................... 21,843 23,095
Loans to affiliates .............................................................. 4,363 4,863
Property, plant and equipment (net of depreciation of $58,297, $56,292) .......... 44,217 48,471
Program rights costs ............................................................. 8,037 8,911
License costs and other intangibles (net of amortization of $9,468, $10,376) ..... 2,547 2,912
Goodwill (net of amortization of $78,431, $79,263) ............................... 18,531 19,393
Note receivable .................................................................. 20,071 20,071
Deferred tax asset ............................................................... 138 138
Other assets ..................................................................... 5,014 5,263
--------- ---------
Total assets ..................................................................... $ 211,606 $ 236,187
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities ......................................... $ 46,911 $ 51,504
Duties and other taxes payable ................................................... 10,506 11,678
Income taxes payable ............................................................. 1,022 864
Current portion of credit facilities and obligations under capital leases......... 5,632 6,409
Dividends payable ................................................................ 138 --
Investments payable .............................................................. 5,188 5,188
Advances from affiliates ......................................................... 811 1,028
--------- ---------
Total current liabilities ........................................................ 70,208 76,671
Long-term portion of credit facilities and obligations under capital leases....... 13,228 15,115
$100,000,000 9 3/8 % Senior Notes due 2004 ....................................... 99,903 99,897
DM 140,000,000 8 1/8 % Senior Notes due 2004 ..................................... 68,287 71,519
Other liabilities ................................................................ 7,511 7,843
Minority interests in consolidated subsidiaries .................................. 183 378
Commitments and Contingencies
SHAREHOLDERS' DEFICIT:
Class A Common Stock, $0.08 par value: authorized:
100,000,000 shares at March 31, 2000 and December 31, 1999; issued and
outstanding; 2,313,346 at March 31, 2000 and at December 31, 1999 ................ 185 185
Class B Common Stock, $0.08 par value: authorized:
15,000,000 shares at March 31, 2000 and December 31, 1999; issued and outstanding;
991,842 at March 31, 2000 and December 31, 1999 .................................. 79 79
Additional paid-in capital ....................................................... 356,385 356,385
Accumulated deficit .............................................................. (391,887) (378,218)
Accumulated other comprehensive loss ............................................. (12,476) (13,667)
--------- ---------
Total shareholders' deficit ...................................................... (47,714) (35,236)
--------- ---------
Total liabilities and shareholders' equity ....................................... $ 211,606 $ 236,187
========= =========
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(US$000s, except share and per share data)
(Unaudited)
For the three months
ended March 31,
----------------------------
2000 1999
Gross revenues ............................................................................. $ 18,647 $ 43,980
Discounts and agency commissions ........................................................... (3,277) (8,474)
-------- --------
Net revenues ............................................................................... 15,370 35,506
STATION EXPENSES:
Other operating costs and expenses ......................................................... 8,780 18,944
Amortization of programming rights ......................................................... 4,423 8,281
Depreciation of station fixed assets and other intangibles ................................. 4,811 4,380
-------- --------
Total station operating costs and expenses ................................................. 18,014 31,605
Selling, general and administrative expenses ............................................... 4,348 5,846
CORPORATE EXPENSES:
Corporate operating costs and development expenses ......................................... 2,322 5,830
Amortization of goodwill and allowance for development costs ............................... 418 3,397
-------- --------
2,740 9,227
Operating loss ............................................................................. (9,732) (11,172)
Equity in loss of unconsolidated affiliates (Note 3) ....................................... (1,231) (4,044)
Net interest and other expense ............................................................. (3,704) (3,693)
Foreign currency exchange gain, net ........................................................ 958 9,749
Gain on sale of investment ................................................................. -- 25,870
-------- --------
(Loss)/income before provision for income taxes, minority interest and
discontinued operations .................................................................... (13,709) 16,710
Benefit/(Provision) for income taxes ....................................................... 18 (1,649)
-------- --------
(Loss)/income before minority interest and discontinued operations ......................... (13,691) 15,061
Minority interest in loss/(income) of consolidated subsidiaries ............................ 22 (22)
-------- --------
(Loss)/income from continuing operations ................................................... (13,669) 15,039
DISCONTINUED OPERATIONS:
Operating loss of discontinued operations (Hungary) ........................................ -- (2,951)
-------- --------
Net (loss)/income .......................................................................... $(13,669) $ 12,088
======== ========
PER SHARE DATA:
Net (loss)/income per share (Note 5):
Continuing operations - Basic and diluted .................................................. $ (4.14) $ 4.69
Discontinued operations - Basic and diluted ................................................ -- (0.92)
-------- --------
Total ...................................................................................... $ (4.14) $ 3.77
======== ========
Weighted average common shares used in computing per share amounts:
Basic ...................................................................................... 3,305 3,207
======== ========
Diluted .................................................................................... 3,305 3,208
======== ========
Page 3
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
For the period from December 31, 1999 to March 31, 2000
(US$000s)
(Unaudited)
Accumulated
Comprehensive Class A Class B Other Total
Income Common Common Capital Accumulated Comprehensive Shareholders'
(loss) Stock Stock Surplus (Deficit) Income/(Loss) (Deficit)
(a) (b)
--------------- ----------- ----------- -------- -------------- ---------------- ------------
BALANCE, December 31, 1999 ....... 185 79 356,385 (378,218) (13,667) (35,236)
Comprehensive income/(loss):
Net loss ...................... (13,669) (13,669) (13,669)
Other comprehensive
income/(loss):
Unrealized translation ...... 1,191 1,191 1,191
adjustments
-------
Comprehensive loss ............ (12,478)
=======
------- ------- -------- -------- ------------ ---------
BALANCE, March 31, 2000 .......... 185 79 356,385 (391,887) (12,476) (47,714)
======= ======= ======== ======== ============ =========
(a) Of the accumulated deficit of $391,887 at March 31, 2000, $97,416
represents accumulated losses in unconsolidated affiliates.
(b) Represents foreign currency translation adjustments.
Page 4
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the three months ended March 31, 2000 and 1999
(US$000s)
(Unaudited)
For the three months
ended March 31,
---------------------
2000 1999
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income................................. .......................... $(13,669) $12,088
Adjustments to reconcile net loss to net cash used in operating activites:
Equity in loss of unconsolidated affiliates ............................... 1,231 4,044
Depreciation and amortization (excluding amortization of barter programs .. 10,089 16,304
Discontinued operations.................................................... - 2,951
Gain on disposal of investment ............................................ - (25,870)
Minority interest in (loss) income of consolidated subsidiaries ........... (22) 22
Foreign currency exchange gain, net ....................................... (958) (9,749)
Accounts receivable............................. .......................... 2,838 10,142
Cash paid for program rights .............................................. (4,067) (10,872)
Advances to affiliates .................................................... 375 (538)
Other short-term assets ................................................... (963) (868)
Accounts payable and accrued liabilities .................................. (5,640) (5,427)
Income and other taxes payable ............................................ (1,224) (1,471)
---------- ----------
Net cash used in operating activities ................................... (12,010) (9,244)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Other investments............................... .......................... (24) (6,056)
Investments in discontinued operations .................................... - (1,215)
Cash proceeds from disposal of discontinued operators ..................... 4,416 39,260
Restricted cash................................. .......................... (112) (13)
Acquisition of fixed assets ............................................... (131) (3,210)
Loans and advances to affiliates .......................................... 150 259
Payments for license costs, other assets and intangibles .................. (53) 63
---------- ----------
Net cash provided by investing activities ............................... 4,246 29,088
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Credit facilities and payments under capital leases ....................... (1,890) 472
Capital contributed by shareholders ....................................... - 7
Other long-term liabilities ............................................... 3 (144)
---------- ----------
Net cash (used in) provided by financing activities ..................... (1,887) 335
---------- ----------
IMPACT OF EXCHANGE RATE FLUCTUATIONS ON CASH ................................ (695) (1,410)
---------- ----------
Net (decrease) increase in cash and cash equivalents ...................... (10,346) 18,769
CASH AND CASH EQUIVALENTS, beginning of period .............................. 36,990 43,354
---------- ----------
CASH AND CASH EQUIVALENTS, end of period .................................... $26,644 $62,123
========== ==========
Supplemental information:
Cash paid for interest .................................................... $9,172 $9,825
========== ==========
Income taxes............................................................... $0 $3,690
========== ==========
Supplemental disclosures of noncash financing transactions:
As part of the February 21, 2000 sale of substantially all of its Hungarian
operations to SBS, programming rights valued at $12,700 and associated
liabilites of $12,195 were transferred to SBS. The difference of $505 was or
will be paid in cash.
Page 5
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
Notes to Consolidated Financial Statements
March 31, 2000
1. Organization and Business
Central European Media Enterprises Ltd. ("CME") is a Bermuda
corporation. All references to the "Company" include CME and its direct and
indirect Subsidiaries, and all references to "Subsidiaries" include each
corporation or partnership in which CME has a direct or indirect equity or
voting interest. The Company invests in, develops and operates national and
regional commercial television stations and networks in Central and Eastern
Europe.
Status of Nova TV Dispute
The Company owns a 99% voting and economic interest in Ceska nezavisla
televizni spolecnost, spol. s.r.o. ("CNTS"). CET 21, spol. s.r.o. ("CET") holds
a terrestrial television broadcast license in the Czech Republic that expires in
January 2005. Beginning in 1994, CNTS provided television programming and other
services to CET, which broadcasts the Nova TV signal, and Nova TV became one of
the most successful television stations in Europe. Pursuant to a Services
Agreement with CET dated May 21, 1997 (the "Services Agreement"), CNTS provided
substantially all of the television and programming services to Nova TV, and in
consideration therefor, CNTS collected all of Nova TV's advertising and other
revenues, and retained as compensation for its services the balance of those
revenues net of Nova TV's operating expenses less Kc 100,000 ($2,800) per month
payable to CET.
On August 5, 1999, CET pre-empted CNTS's transmission and began
broadcasting a substitute signal for Nova TV from a site other than CNTS's
studios. In addition, on the same day, CNTS received notification from CET that
CET was withdrawing from the Services Agreement allegedly due to CNTS's failure
to supply CET with the daily program log for Nova TV on August 4, 1999. CET
representatives also stated publicly that CET would not utilize the services of
CNTS for Nova TV in the future. CET has continued to pre-empt all of CNTS's
programming for Nova TV. CNTS believes that CET's withdrawal from the Services
Agreement was not legally effective since CNTS did not materially breach the
Services Agreement and that the Services Agreement therefore remains in effect.
CNTS filed a request for a preliminary injunction with the Regional Commercial
Court in Prague to enjoin CET from entering into service relationships with
other companies and requested the court to declare the Services Agreement to be
in full force and effect, which was denied. On May 4, 2000, the Regional
Commercial Court in Prague issued a ruling (which is not yet legally
enforceable) in favor of CNTS's request to confirm the validity of the Services
Agreement. According to this ruling, CET is obliged to broadcast NOVA TV
exclusively in cooperation with CNTS, its contractual service organiazation. See
Part II, Item 1, "Legal Proceedings."
Page 6
As a result of CET's actions, CNTS has been unable to generate revenues
and its operations have been suspended. On September 9, 1999, the Company
announced the suspension of technical and production operations at CNTS and CNTS
has since dismissed 265 employees.
CNTS is governed by a Memorandum of Association and Investment
Agreement (the "Memorandum of Association"). The Company believes that the
Memorandum of Association, the Services Agreement and course of dealing over the
life of Nova TV establish that CNTS is legally entitled to be the exclusive
provider of television and related services to CET for Nova TV.
On April 19, 1999, CNTS dismissed Dr. Vladimir Zelezny from his
position as Executive and General Director of CNTS, for taking actions that
exceeded his authority, that breached his fiduciary duties and that were against
the interests of CNTS. After an internal investigation, it was learned that Dr.
Zelezny had executed an unlimited CNTS guarantee for the liabilities of a Czech
television program acquisition company, AQS a.s. ("AQS"), without any
authorization. The investigation also indicated that Dr. Zelezny had reassigned
the program acquisition department of CNTS to AQS, notified international
providers of television programming that AQS would replace CNTS as the program
service provider to Nova TV, and taken other actions contrary to the interests
of CNTS.
On April 26, 1999, a wholly-owned subsidiary of the Company filed an
arbitration claim against Dr. Zelezny before the International Chamber of
Commerce Court of Arbitration in Paris, France. The Company seeks the return of
$23,350,000 paid to Dr. Zelezny, plus interest, and other damages, based on
breaches by Dr. Zelezny of a share purchase agreement entered into in 1997 under
which the Company purchased from Dr. Zelezny a company owned by him whose sole
asset was a 5.8% interest in CNTS. The Company is also seeking the forgiveness
of the $5,188,000 unpaid balance of the purchase price under the 1997 share
purchase agreement.
On April 17, 2000, the arbitral tribunal issued an order. The tribunal
found that because Dr. Zelezny's participation interest had been reduced from
60% to approximately 11% as of December 1999, Dr. Zelezny had no ability to
direct CET. On this basis, the tribunal revoked the portion of an earlier order
requiring Dr. Zelezny to cause CET to sever its dealings with entities that
compete with CNTS and to resume its exclusive relations with CNTS in the areas
where CNTS had previously provided services. The tribunal re-affirmed the
remainder of the earlier order, reiterating its previous finding that Dr.
Zelezny had prima facie breached the share purchase agreement between himself
and CME.
On April 29, 2000 to May 5, 2000, the arbitral tribunal conducted a
final hearing in Amsterdam. A decision in the arbitration is expected in the
third quarter of 2000.
On August 23, 1999, Ronald S. Lauder, the non-Executive Chairman of
the Company's Board of Directors, instituted arbitration proceedings
Page 7
against the Czech Republic under the 1992 Bilateral Investment Treaty between
the United States and the Czech Republic. Mr. Lauder initiated the proceedings
in his personal capacity as a U.S. national who owns or controls (by virtue of
his voting control over CME) an investment in the Czech Republic. The claim
asserts that the Czech Republic harmed Mr. Lauder's investment in CNTS by taking
unfair and discriminatory actions -- in the form of expressly approving an
exclusive relationship between the service company and the license holder for
Nova TV to entice CME's investment of foreign capital, and later changing its
position -- and by failing to act to remedy the effects of those actions or the
improper actions of Dr. Zelezny. Mr. Lauder seeks monetary damages and other
relief arising from harm caused to CNTS by the Czech Republic's actions. The
arbitration is taking place before a tribunal of three arbitrators pursuant to
the Arbitration Rules of the United Nations Commission on International Trade
Law.
On February 22, 2000, a wholly owned subsidiary of the Company
instituted arbitration proceedings against the Czech Republic under the 1991
Bilateral Investment Treaty between The Netherlands and the Czech Republic. The
claims asserted by the Company are substantially similar to those asserted by
Mr. Lauder in the arbitration proceedings that he has instituted in his personal
capacity against the Czech Republic. The claim seeks monetary damages and other
relief arising from harm caused to CNTS by the Czech Republic's actions. The
arbitration will take place before a tribunal of three arbitrators pursuant to
the Arbitration Rules of the United Nations Commission on International Trade
Law.
On August 9, 1999, CNTS filed an action against CET in the Regional
Commercial Court of Prague in which CNTS requested the court to declare the
withdrawal of CET from the Services Agreement to be invalid and the Services
Agreement to be in full force and effect, to issue an order prohibiting CET from
entering into television or advertising service relationships with other
companies on the basis that CNTS is entitled to provide such services to CET for
Nova TV on an exclusive basis under the Services Agreement, and to issue an
order compelling CET to broadcast programming supplied by CNTS on Nova TV. On
May 4, 2000, the Commercial Court ruled that CET is obliged to broadcast NOVA TV
exclusively in cooperation with CNTS, its contractual service organization,
pursuant to the Services Agreement. This ruling is not yet enforceable. It is
expected that the full decision will be delivered in writing within
approximately 3 to 5 weeks, and any appeal from the decision can be taken within
15 days after it is delivered. The decision is not enforceable during the
appeals process. Dr. Zelezny has announced that CET will appeal the decision.
The Company believes that the recent actions by CET violate the
Services Agreement and CET's obligations under the CNTS Memorandum of
Association, as well as Czech media laws. The continued suspension of CNTS's
operations has had a material adverse effect on the Company. Despite the
suspension of CNTS's operations, the recent transaction with SBS and in
particular the CME Put Option on the ITI Note (see below under "SBS
Transaction") should result in the Company having adequate cash
Page 8
resources to meet its debt service and other financial obligations for the next
12 months.
SBS Transaction
On February 21, 2000 the Company sold to SBS Broadcasting S.A. ("SBS")
substantially all of its Hungarian operations for $16,000,000. $12,700,000 of
the purchase price has been applied to pay the programming liabilities for the
territory of Hungary which were assumed by SBS from CME and $3,300,000 plus the
net current assets of the Hungarian operations was settled in cash in March
2000. The net current assets of the Hungarian operations are subject to final
determination in May 2000.
On February 21, 2000, the Company and SBS also entered into an option
agreement with respect to the ITI Note (the "ITI Note Option Agreement"). The
ITI Note was acquired by the Company in connection with the sale of its interest
in the TVN television operations in Poland to International Trading and
Investments Holding S.A. ("ITI") in December 1998. The ITI Note is in the
principal amount of $40,000,000 and bears interest at a rate of 5% per annum. It
matures in December 2001 and is convertible into equity securities of ITI at the
option of the holder after September 10, 2001, and may be redeemed for cash by
ITI at any time prior thereto. The Company recorded the ITI Note at a net
present value of $19,836,000 due to the prevailing interest rates on similar
instruments at the date of the transaction. Ronald S. Lauder, the non-executive
Chairman of the Board of Directors of the Company, owns a non-controlling
indirect minority interest in ITI.
Under the ITI Note Option Agreement, SBS has an option to acquire all
but not less than all of the ITI Note for a cash consideration of $37,250,000
(the "SBS Call Option"). The SBS Call Option may be exercised on or before June
30, 2000. In addition, SBS granted CME an option to sell the ITI Note to SBS for
a cash consideration of $25,000,000 (the "CME Put Option"). The CME Put Option
may be exercised on or before June 30, 2000. CME may extend the term of the CME
Put Option until December 31, 2000 by delivering written notice thereof to SBS
prior to June 30, 2000. In the event of such extension, the SBS Call Option will
be automatically extended until September 30, 2000. If CME receives a bona fide
offer to purchase the ITI Note prior to the expiration of the SBS Call Option,
it may deliver to SBS written notice of the price (the "Offer Price") which CME
has been offered for the ITI Note. Upon receipt of notice of an offer for the
ITI Note, SBS will have the option to purchase the ITI Note for the lesser of
(i) the Offer Price and (ii) $40,000,000. If prior to June 30, 2000, SBS
exercises the SBS Call Option or CME exercises the CME Put Option, $12,000,0000
of the purchase price will be held in escrow until the earlier of the closing of
the Kanal A acquisition (see below) or June 30, 2000.
In addition to the transactions described above, the Company intends to
enter into a Share Purchase Agreement ("SPA") with SBS. This agreement
Page 9
entitles the Company to purchase a controlling interest in Kanal A, a Slovenian
television operation, for $12,000,000. The completion of the Kanal A acquisition
is subject to the completion of a Kanal A reorganization, regulatory approval
and certain other conditions.
General
Laws, regulations and policies in CME's markets generally restrict the
level of direct or indirect interests that any non-local investor such as CME
may hold in companies holding broadcast licenses. As a result, broadcast
licenses are generally held by companies majority owned by CME's local partners
and CME owns controlling interests in service companies which provide
programming, advertising and other services to the licenseholding companies.
References to PRO TV, Acasa, POP TV, Gajba TV, Markiza TV and Studio 1+1 in this
report may be to either the license company or the service companies or both, as
the case may be.
The following table sets forth certain data regarding the Company's
voting interest in each license and service company.
CME CME Voting
License --- ----------
Country Expiration TV License Company Voting TV Services Interest
------- ---------- ------------------ ------- ----------- --------
Interest Company
-------- -------
Romania................... 2004 -2008 Pro TV S.R.L.............. 49% MPI.................... 66%
Media Pro S.R.L........... 0%
Slovenia.................. 2003 -2007 Tele 59................... 10% Pro Plus............... 78%
MMTV...................... 10%
Slovak Republic........... 2007 Markiza-Slovakia s.r.o.... 0% STS.................... 49%
Ukraine................... 2007 Studio 1+1................ 15% Innova, IMS,
UAH.................... 60%
Prioritet.............. 50% (1)
(1) 50% interest owned by Ukraine Advertising Holding B.V. (UAH).
Note: See "Status of Nova TV Dispute" above for a discussion on the ongoing
dispute between CNTS and CET.
Discontinued Operations
The Company's financial statements for the three months ending March
31, 1999, have been restated in order to reflect the operations in Hungary as
discontinued operations.
Romania
The Company's interest in PRO TV is governed by a Cooperation Agreement
(the "Romanian Agreement") among the Company, Adrian Sarbu and Ion Tiriac,
forming Media Pro International S.A. ("MPI"), through which PRO TV and Acasa are
operated. MPI provides programming to and sells advertising for the stations
which comprise the PRO TV and Acasa network. Pursuant to the Romanian Agreement,
the Company owns 66% of the equity of MPI. Interests in profits of MPI are equal
to the partners' equity interests. The Company has the right to appoint three of
the five members of the Council of Administration which directs the affairs of
MPI. Although the Company has majority voting power in MPI, with respect to
certain
Page 10
fundamental financial and corporate matters the affirmative vote of either Mr.
Sarbu or Mr. Tiriac is required. The Company owns 49% of the equity of PRO TV,
SRL which holds 20 of the 23 licenses for the stations which comprise the PRO TV
and Acasa network. Messrs. Sarbu and Tiriac own substantially all of the
remainder of PRO TV, SRL. The remaining three licenses for the PRO TV network
together with the licenses for the PRO FM and PRO AM radio networks are held by
Media Pro SRL, a company owned by Messrs. Sarbu and Tiriac. In addition, in
Romania, the Company owns 70% of each of Media Vision SRL ("Media Vision"), a
production and dubbing company, and Video Vision International SRL ("Video
Vision"), a post-production company.
Slovenia
The Company's interest in POP TV and Gajba TV is governed by a
Partnership Agreement among the Company, MMTV 1 d.o.o. Ljubljana ("MMTV") and
Tele 59 d.o.o. Maribor ("Tele 59"), forming Produkcija Plus d.o.o. ("Pro Plus").
Pro Plus provides programming to and sells advertising for the broadcast
licenseholders MMTV and Tele 59 as well as additional affiliates. The Company
currently owns 78% of the equity in Pro Plus, but has an effective economic
interest of 85.5% as a result of its right to 33% of the profits of MMTV and 33%
of the profits of Tele 59. Tele 59 currently owns a 21% equity interest in Pro
Plus, and MMTV currently owns a 1% equity interest in Pro Plus. The Company owns
10% of the equity of Tele 59 and a 10% direct equity interest in MMTV. The
Company also owns a 20% equity interest in MTC Holding d.o.o. ("MTC") which owns
the remaining 90% equity interest in MMTV. 76% of MTC's equity is being
separately held by a Slovene person, in trust for the Company, until the Slovene
media law is clarified or until the Company determines final ownership. Voting
power and interests in profits of Pro Plus are equal to the partners' equity
interests. All major decisions concerning the affairs of Pro Plus are made by
the general meeting of partners and require a 70% affirmative vote. Certain
fundamental financial and corporate matters require an 85% affirmative vote of
the partners.
In July 1996, the Company, together with MMTV and Tele 59, entered into
an agreement to purchase a 66% equity interest in Kanal A, which competes with
POP TV (the "Kanal A Agreement"). There is currently an injunction in effect
preventing the completion of the Kanal A Agreement. The Company intends to enter
into a Share Purchase Agreement with SBS to purchase a controlling voting and
economic interest in Kanal A. See above under "SBS Transaction". As a condition
to the closing of this transaction the Company would cease all litigation
against SBS, Kanal A and certain affiliates.
Slovak Republic
The Company's interest in Markiza TV is governed by a Participants
Agreement dated September 28, 1995 (the "Slovak Agreement") between the Company
and Markiza-Slovakia s.r.o. ("Markiza") forming Slovenska Televizna Spolocnost,
s.r.o. ("STS"). Pursuant to the Slovak Agreement, the Company is required to
fund all of the capital requirements of, and holds a
Page 11
49% voting interest and an 80% economic interest in STS. Markiza, which holds
the television broadcast license, and STS have entered into an agreement under
which STS is entitled to conduct television broadcast operations pursuant to the
license. On an ongoing basis, the Company is entitled to 80% of the profits of
STS, except that until the Company is repaid its capital contributions plus a
priority return at the rate of 6% per annum on such capital contributions, 90%
of the profits will be paid to the Company. A Board of Representatives directs
the affairs of STS, the composition of which includes two designees of the
Company and three designees (two of whom have been named) of Markiza; however,
all significant financial and operational decisions of the Board of
Representatives require a vote of 80% of its members. In addition, certain
fundamental corporate matters are reserved for decision by a general meeting of
partners and require a 67% affirmative vote of the partners. There is currently
litigation pending with respect to the ownership of Markiza.
Ukraine
The Studio 1+1 Group consists of several entities in which the Company
holds direct or indirect interests. The Company owns a 60% equity interest in
each of Innova Film GmbH ("Innova"), Ukraine Advertising Holding B.V. ("UAH")
and International Media Services ("IMS"). UAH holds a 50% equity interest in
Prioritet, a Ukrainian company engaged in advertising sales. Innova holds 100%
of Intermedia, a Ukrainian company ("Intermedia"), which in turn holds a 30%
equity interest in a separate Ukrainian company which holds the license to
broadcast programming and sell advertising on UT-2 (the "UT-2 License"). Innova,
IMS, Intermedia and Prioritet have entered into arrangements regarding the
provision of programming and advertising sales services to Studio 1+1. Interests
in profits of each entity in the Studio 1+1 Group are equal to equity interests
held in such entities. All significant decisions of the entities in the Studio
1+1 Group are reserved for decision of the shareholders, requiring a majority
vote (other than decisions of the shareholders of the Ukrainian company which
holds the UT-2 broadcast license, which require a 75% vote). Certain fundamental
corporate matters of these entities require 61% shareholder approval.
2. Summary of Significant Accounting Policies
Reference is made to the Notes to Consolidated Financial Statements
contained in the Company's December 31, 1999 audited consolidated financial
statements included in the Company's 1999 Annual Report on Form 10-K filed with
the SEC on March 15, 2000. In the opinion of Management, the interim unaudited
financial statements included herein reflect all adjustments necessary,
consisting of normal recurring adjustments, for a fair presentation of such data
on a basis consistent with that of the audited data presented therein. The
consolidated results of operations for interim periods are not necessarily
indicative of the results to be expected for a full year.
Principles of Consolidation
Page 12
The accompanying consolidated financial statements include the accounts
of the Company's wholly-owned subsidiaries and the results of PRO TV, POP TV,
Studio 1+1, Media Vision, Video Vision and CNTS (the "Consolidated Affiliates"),
as consolidated entities and reflect the interests of the minority owners of
these entities for the periods presented, as applicable. The results of Markiza
TV and certain entities of the Studio 1+1 group (the "Unconsolidated
Affiliates") in which the Company has, or during the periods presented had,
minority or non-controlling ownership interests, are included in the
accompanying consolidated financial statements using the equity method.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting year. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications were made to prior period amounts to conform
to current period classifications.
Derivative Instruments and Hedging Activities -- New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.
Pursuant to SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 -
An Amendment of FASB Statement No. 133", which was issued in June 1999, SFAS No.
133 will be effective for fiscal years beginning after June 15, 2000 (January 1,
2001 for CME). A company may also implement the Statement as of the beginning of
any fiscal quarter after issuance (that is, fiscal quarters beginning June 16,
1999 and thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133
must be applied to (a) derivative instruments and (b) certain derivative
instruments embedded in
Page 13
hybrid contracts that were issued, acquired, or substantively modified after
either December 31, 1997 or 1998, at the company's election.
The Company occasionally enters into forward foreign exchange
contracts. No material impact is expected as a result of the adoption of SFAS
No. 133 when it is applicable. The Company will adopt this SFAS No. 133 on the
effective date noted above.
3. Summary Financial Information for Markiza TV
March 31, 2000 December 31, 1999
-------------- -----------------
Markiza TV Markiza TV
---------- ----------
$000's $000's
------ ------
Current assets............... 14,905 16,303
Non-current assets........... 14,455 15,864
Current liabilities.......... (15,253) (16,354)
Non-current liabilities...... (1,094) (835)
------------------ --------------------
Net assets.................. 13,013 14,978
================== ====================
March 31, 2000 March 31, 1999
-------------- --------------
Markiza TV Markiza TV
---------- ----------
$000's $000's
------ ------
Net revenues................. 7,097 6,853
Operating loss............... (1,165) (2,287)
Net loss..................... (1,567) (4,397)
The Company's share of losses in Unconsolidated Affiliates (after
intercompany eliminations) for the three months ended March 31, 2000 was
$1,067,000 for Markiza TV and $164,000 for certain of the Studio 1+1 Group
entities.
4. Segment Data
The Company manages its business segments primarily on a geographic
basis. The Company's reportable segments are comprised of PRO TV (Romania),
Markiza TV (Slovakia), POP TV (Slovenia), Studio 1+1 (Ukraine) and CNTS (Czech
Republic). Each operating segment provides products and services as further
described below.
The Company evaluates the performance of its segments based on segment
EBITDA (earnings before interest, taxes, depreciation and amortization). Costs
for programming amortization are included in segment EBITDA. Costs excluded from
segment EBITDA primarily consist of interest and foreign exchange gains and
losses, corporate expenses and goodwill amortization and equity in losses of
unconsolidated affiliates and other non-recurring charges for impairment of
investments or discontinued operations. The assets and liabilities of the
Company are managed centrally and are reported internally in the same manner as
the consolidated financial statements, thus no additional information is
provided. Summary information
Page 14
by segment for the three months ended March 31, 2000 and 1999 is as follows:
SEGMENT FINANCIAL INFORMATION
---------------------------------------------------------------------
For the three months ended March 31,
---------------------------------------------------------------------
(US$000s)
---------------------------------------------------------------------
Net Revenues EBITDA
--------------------------------- ----------------------------------
Station 2000 1999 2000 1999
------- ---- ---- ---- ----
PRO TV ............................... 8,424 7,798 (1,094) (2,012)
POP TV ............................... 4,110 4,565 206 (444)
Studio 1+1 (1) ....................... 2,449 2,307 (188) (995)
CNTS (2) ............................. 385 20,833 (1,186) 5,823
Other Operations ..................... 2 3 -- (12)
------ ------ ------ ------
Total Consolidated Operations ............. 15,370 35,506 (2,262) 2,360
Markiza TV ........................... 7,097 6,853 12 (919)
------ ------ ------ ------
Total Unconsolidated Operations ........... 7,097 6,853 12 (919)
------ ------ ------ ------
Total Operations .......................... 22,467 42,359 (2,250) 1,441
====== ====== ====== ======
Reconciliation to Consolidated Statements of Operations:
Consolidated Operations.......... (2,262) 2,360
Intercompany elimination......... 81 75
Station depreciation................ (4,811) (4,380)
Corporate expenses............... (2,740) (9,227)
------------------ --------------
Operating loss from continuing operations (9,732) (11,172)
================== ==============
(1) Amounts shown in the table above for Net Revenues for the three months
ending March 31, 2000 and 1999 differ by $1,076,000 and $1,337,000,
respectively, from similar information shown in Selected Combined Financial
Information in Item 2. Amounts shown in the table above for EBITDA for the
three months ending March 31, 2000 and 1999 differ by $288,000 and
$576,000, respectively, from similar information shown in Selected Combined
Financial Information in Item 2. These differences relate to the use of
consolidated numbers in the table above and combined numbers (which
includes Studio 1+1 entities which are accounted for under the equity
method) in Item 2.
(2) CNTS ceased broadcast operations during 1999. See above under "Status of
Nova TV dispute" for a further discussion on Nova TV and the ongoing
dispute between CNTS and CET.
5. Earnings Per Share
The Company accounts for earnings per share pursuant to SFAS No. 128,
"Earnings Per Share." Basic net income per common share ("Basic EPS") is
computed by dividing net income by the weighted average number of common shares
outstanding. Diluted net income per common share ("Diluted EPS") is computed by
dividing net income by the weighted average number of common shares and dilutive
common share equivalents then outstanding. SFAS No. 128 requires the
presentation of both Basic EPS and Diluted EPS
Page 15
on the face of the consolidated statement of operations. A reconciliation
between the numerator and denominator of Basic EPS and Diluted EPS is as
follows:
For the quarter ended March 31, 2000
------------------------------------
Net Loss
Per
Common Common
Net Loss Shares Share
-------- ------ -----
Basic EPS
---------
Net income attributable to common stock... $(13,669) 3,305 $(4.14)
Effect of dilutive securities: stock options... - -
------------- -------------- -----------------
Diluted EPS
-----------
Net income attributable to common stock and assumed
option exercises................. $(13,669) 3,305 $(4.14)
============= ============== =================
Diluted EPS, for the three months ended March 31, 2000, does not
include the impact of stock options then outstanding as their inclusion would be
anti-dilutive.
For the quarter ended March 31, 1999
------------------------------------
Net Income
Per
Net Common Common
Income Shares Share
------ ------ -----
Basic EPS
Net income attributable to common stock... $12,088 3,207 $3.77
Effect of dilutive securities: stock options... - 1 -
------------- -------------- -----------------
Diluted EPS
Net income attributable to common stock
and assumed option exercises................... $12,088 3,208 $3.77
============= ============== =================
Diluted EPS, for the three months ended March 31, 1999, excludes the
effect of certain outstanding stock warrants and options as their inclusion
would be anti-dilutive.
6. Subsequent Events
Stock Options
The Company's Board of Directors has agreed (subject to the approval of
the Company's shareholders at the Company's Annual General Meeting to be held
May 25, 2000) to cancel all outstanding options previously granted to
Page 16
Frederic T. Klinkhammer , the Chief Executive Officer of the Company, and John
A. Schwallie, the Chief Financial Officer of the Company and to grant new
options to acquire 132,000 and 33,000 shares of Class A Common Stock to Mr.
Klinkhammer and Mr. Schwallie, respectively, at an exercise price of $11.875.
Under GAAP, if the exercise price of a fixed employee stock option is reduced,
the option will be accounted for as "variable" from the date of the price
modification until the date on which the option is exercised, forfeited or
expires unexercised. For GAAP purposes, the cancellation of options and the
granting of new options with a lower exercise price within six months of the
date of the cancellation, as the Board of Directors has approved with respect to
Mr. Klinkhammer and Mr. Schwallie, constitutes a reduction in the exercise price
of their previously granted options which requires "variable" accounting
treatment. Accordingly, the cancellation of the options to purchase shares of
Class A Common Stock to Mr. Klinkhammer and Mr. Schwallie and the grant of new
options to purchase shares of Class A Common Stock to each of them as described
will result in the Company recording earnings charges for increases in the fair
market value of the shares of Class A Common Stock over the exercise price of
the new options multiplied by the number of shares underlying the cancelled
options which have been re-granted, which number of shares is 89,250.
Czech Republic Tax Audit
CNTS has been the subject of an income tax inspection by the Czech
Republic tax authorities for the years 1996 to 1998 and a VAT inspection for the
years 1997 and 1998. As a result of these inspections the Czech tax authorities
have levied an assessment seeking VAT payments of Kc319,267,000 ($8,571,000).
Additional penalties up to approximately 120% of this amount may also be levied.
The Czech authorities have asserted that CNTS was providing certain services to
CET and that these services should have been subject to VAT. The income tax
inspection for the years 1996 to 1998 confirmed that CNTS had fully complied
with Czech income tax laws and no tax was found due. In 1996 CNTS was audited by
the financial authorities for income tax, VAT and personnel taxes for the years
1993 to 1995 and no material assessment was made. The service relationship
between CNTS and CET had not materially changed from 1995 to August 5, 1999. As
a result of the tax inspection the tax authorities have frozen CNTS' 1999 income
tax prepayments in the amount of Kc275,000,000 ($7,380,000). These income tax
prepayments would have become payable by the Czech tax authorities to CNTS one
month after submission of the CNTS annual income tax return. The Company and
CNTS will contest the VAT assessment.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Introduction
Page 17
Central European Media Enterprises Ltd. ("CME") is a Bermuda
corporation. All references to the "Company" include CME, its direct and
indirect Subsidiaries, and all references to "Subsidiaries" include each
corporation or partnership in which CME has a direct or indirect equity or
voting interest.
The Company's national private television stations and networks in
Slovakia and Slovenia had the leading nationwide audience shares for 1999 and
the first quarter of 2000 and the Company's television network in Romania had
the leading average audience share within its area of broadcast reach for 1999
and the first quarter of 2000.
The Company's revenues are derived principally from the sale of
television advertising to local, national and international advertisers. The
Company also engages in barter transactions in which its stations exchange
commercial advertising time for goods and services. The Company, like other
television operators, experiences seasonality, with advertising sales tending to
be lowest during the third quarter of each calendar year, which includes the
summer holiday period, and highest during the fourth quarter of each calendar
year. The primary expenses incurred in television operations are programming and
production costs, employee salaries, broadcast transmission expenses and
selling, general and administrative expenses. The Company has incurred and might
in the future incur expenses conducting pre-operating activities, as well as
reorganizing existing affiliate entities which hold the broadcast licenses.
The primary internal sources of cash available for corporate operating
costs and development expenses are dividends and other distributions from
Subsidiaries. To date, the only Subsidiary to distribute dividends has been CNTS
which suspended operations on August 5, 1999. See Item 1, "Status of Nova TV
Dispute" for a further discussion on Nova TV and the ongoing dispute between
CNTS and CET. This suspension has resulted in CNTS being unable to distribute
dividends and consequently affected the major internal source of cash available
for corporate operating costs and development expenses. The Company's ability to
obtain dividends or other distributions is subject to, among other things,
restrictions on dividends under applicable local laws and foreign currency
exchange regulations of the jurisdictions in which its Subsidiaries operate. The
Subsidiaries' ability to make distributions is also subject to the legal
availability of sufficient operating funds not needed for operations,
obligations or other business plans and, in some cases, the approval of the
other partners, stockholders or creditors of these entities. The laws under
which the Company's operating Subsidiaries are organized provide generally that
dividends may be declared by the partners or shareholders out of yearly profits
subject to the maintenance of registered capital and required reserves and after
the recovery of accumulated losses.
Selected Combined and Attributable Financial Information
Page 18
The following tables are neither required by United States generally
accepted accounting principles ("GAAP") nor intended to replace the Consolidated
Financial Statements prepared in accordance with GAAP. The tables set forth
certain combined and attributable financial information for the three months
ended March 31, 2000 and 1999 for the Company's operating entities. This
financial information departs materially from GAAP.
In the table "Selected Combined Financial Information," revenues and
operating expenses of Markiza TV and certain entities of the Studio 1+1 group
not consolidated in the Consolidated Statements of Operations during the periods
shown, are aggregated with those of the Company's consolidated operations. In
the table "Selected Attributable Financial Information", combined information is
adjusted for CME's economic interest in each entity, which economic interest is
the basis used for consolidation and equity method accounting in the Company's
GAAP Consolidated Financial Statements as of March 31, 2000.
The tables are presented solely for additional analysis and not as a
presentation of results of operations of each component, nor as combined or
consolidated financial data presented in accordance with GAAP. See "Application
of Accounting Principles". The following supplementary unaudited combined and
attributable information includes certain financial information of Markiza TV
and information of the unconsolidated entities of the Studio 1+1 Group on a
line-by-line basis, similar to that of the Company's consolidated entities.
Intercompany transactions such as management service charges are not reflected
in the tables. The Company believes that this unaudited combined and
attributable information provides useful disclosure.
EBITDA consists of earnings before interest, income taxes, depreciation
and amortization of intangible assets (which does not include programming
rights). EBITDA is provided because it is a measure of operating performance
commonly used in the television industry. It is presented to enhance an
understanding of the Company's operating results and is not intended to
represent cash flow or results of operations in accordance with GAAP for the
periods indicated.
The term "station expenses" used in the discussion of EBITDA
immediately following the tables refers to the total of a station's (i) other
operating costs and expenses, (ii) amortization of programming rights and (iii)
selling, general and administrative expenses.
"Broadcast cash flow", a broadcasting industry measure of performance,
is defined as net broadcast revenues, less (i) station operating costs and
expenses (excluding depreciation and amortization of acquired programming and of
intangible assets), (ii) broadcast selling, general and administrative expenses,
and (iii) cash program rights costs. Cash program rights costs are included in
the period in which payment is made, which may not necessarily correspond to the
timing of program use or amortization. Broadcast cash flow should not be
considered as a substitute measure of
Page 19
operating performance or liquidity prepared in accordance with GAAP (see the
accompanying Consolidated Financial Statements).
Page 20
SELECTED COMBINED FINANCIAL INFORMATION (1)
Three Months Ended March 31,
(US$000's)
(Unaudited)
------------------------------ --- -------------------------- --- ------------------------------
Net Revenue EBITDA Broadcast Cash Flow
------------------------------ -------------------------- ------------------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
PRO TV .................. 8,424 7,798 (1,094) (2,012) (1,017) (1,654)
Markiza TV .............. 7,097 6,853 12 (919) (342) (885)
POP TV .................. 4,110 4,565 206 (444) 697 (1,169)
Studio 1+1 .............. 3,525 3,644 (476) (1,571) (138) (1,372)
------ ------ ------ ------ ------ ------
Total Stations ............. 23,156 22,860 (1,352) (4,946) (800) (5,080)
====== ====== ====== ====== ====== ======
SELECTED ATTRIBUTABLE FINANCIAL INFORMATION (1)
Three Months Ended March 31,
(US$000's)
(Unaudited)
----------------------------------------------------------------------------------------------------------
Economic Broadcast Cash
Interest Net Revenues EBITDA Flow
------------------- --------------------------- --------------------------- ----------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
PRO TV .............. 66% 5,560 5,147 (722) (1,328) (671) (1,092)
Markiza TV .......... 80% 5,678 5,482 10 (735) (274) (708)
POP TV .............. 85.5% 3,514 3,903 176 (380) 596 (999)
Studio 1+1 .......... 60% 2,115 2,186 (286) (943) (83) (823)
------ ------ ------ ------ ------ ------
Total Stations ......... 16,867 16,718 (822) (3,386) (432) (3,622)
====== ====== ====== ====== ====== ======
(1) Important information about these tables appears under the heading
"Selected Combined and Attributable Financial Information" immediately
preceding this table.
Page 21
EBITDA
The total combined EBITDA for the Company's Stations increased by
$3,594,000 from negative $4,946,000 for the first quarter of 1999 to negative
$1,352,000 for the first quarter of 2000. This increase was as a result of
EBITDA increases at Studio 1+1 of $1,095,000, Markiza TV of $931,000, PRO TV of
$918,000 and POP TV of $650,000.
Studio 1+1's EBITDA increased by $1,095,000 to negative $476,000 for
the first quarter of 2000 from negative $1,571,000 for the first quarter of
1999. This increase was achieved despite a reduction of $119,000 in the net
revenues of Studio 1+1 for the first quarter of 2000 compared to 1999. The
increase in EBITDA was as a result of a $1,214,000 reduction in the operating
costs of Studio 1+1 for the first quarter of 2000 compared to the first quarter
of 1999. The reduction in operating costs was primarily as a result of
reductions in program rights costs and reductions in marketing and general
administrative expenses.
Markiza TV recorded an EBITDA increase of $931,000 from negative
$919,000 for the first quarter of 1999 to positive $12,000 for the first quarter
of 2000. This increase was partially as a result of an increase of $244,000 in
Markiza TV's net revenues for the first quarter of 2000 compared to the first
quarter of 1999 and partially as a result of a reduction in operating cost of
$687,000 for the first quarter of 2000 compared to the first quarter of 1999.
The net revenues of Markiza TV increased for the first quarter of 2000 compared
to the first quarter of 1999 as the economic environment became less volatile.
The reduction in operating costs was primarily as a result of reductions in
program rights costs and general administrative expenses for the first quarter
of 2000 compared to the first quarter of 1999.
PRO TV's EBITDA increased by $918,000 to negative $1,094,000 for the
first quarter of 2000 compared to negative $2,012,000 for the first quarter of
1999. This increase was partially as a result of an increase of $626,000 in net
revenues and partially as a result of a decrease of $292,000 in the operating
costs of PRO TV for the first quarter of 2000 compared to first quarter of 1999.
The reduction in operating costs was primarily as a result of reductions in
salary and benefit expenses, equipment and engineering expenses and general
administrative expenses partially offset by an increase in production expenses
as a result of new show formats.
POP TV's EBITDA increased by $650,000 to positive $206,000 for the
first quarter of 2000 compared to negative $444,000 for the first quarter of
1999. This increase was achieved despite a reduction of $455,000 in the net
revenues of POP TV for the first quarter of 2000 compared to the first quarter
of 1999. This reduction in net revenues was as a result of the continued
strength of the US dollar against the Slovenian tolar. In local currency terms
POP TV recorded net revenues for the first quarter of 2000 that were
approximately 8% higher than the first quarter of 1999. The increase in EBITDA
was as a result of the $1,105,000 reduction in operating costs of POP TV for the
first quarter of 2000 compared to the first quarter of 1999,
Page 22
including reductions in program rights costs, salary and benefits costs and
production expenses.
For the reasons described above total combined EBITDA increased by
$3,594,000 from negative $4,946,000 for the first quarter of 1999 to negative
$1,352,000 for the first quarter of 2000.
Broadcast Cash Flow
Differences between EBITDA and broadcast cash flow are the result of timing
differences between programming use and programming payments.
Application of Accounting Principles
The results of Markiza TV and certain entities of the Studio 1+1 group
have been accounted for using the equity method such that CME's interests in net
earnings or losses of those operations is included in the consolidated earnings
and an adjustment is made to the carrying value at which the investment is
recorded on the Consolidated Balance Sheet. The Company records other
investments at the lower of cost or market value.
Foreign Currency Translation
The Company generates revenues primarily in Romanian lei ("ROL"),
Slovak korunas ("Sk"), Slovenian tolar ("SIT") and Ukrainian hryvna ("Hrn") and
incurs expenses in those currencies as well as German marks, British pounds and
United States dollars. The Romanian lei, Slovenian tolar, Ukrainian hryvna and
Slovak koruna are managed currencies with limited convertibility. The Company
incurs operating expenses for acquired programming in United States dollars and
other foreign currencies. For entities operating in economies considered
non-highly inflationary, including POP TV, Markiza TV and certain entities of
the Studio 1+1 group, balance sheet accounts are translated from foreign
currencies into United States dollars at the relevant period end exchange rate;
statement of operations accounts are translated from foreign currencies into
United States dollars at the weighted average exchange rates for the respective
periods. The resulting translation adjustments are reflected in a component of
shareholders' equity with no effect on the consolidated statements of
operations.
PRO TV and certain entities of the Studio 1+1 group operate in
economies considered highly inflationary. Accordingly, non-monetary assets are
translated at historical exchange rates, monetary assets are translated at
current exchange rates and translation adjustments are included in the
determination of net income. Currency translation adjustments relating to
transactions of the Company in currencies other than the functional currency of
the entity involved are reflected in the operating results of the Company.
The exchange rates at the end of and for the periods indicated are
shown in the table below.
Page 23
Balance Sheet Income Statement
----------------------------------------- --------------------------------------
At At Weighted average for the three
March 31, December 31, months ending March 31,
2000 1999 %Change 2000 1999 % Change
---- ---- ------- ---- ---- --------
German mark equivalent of $1.00 2.04 1.95 (4.6)% 1.99 1.76 (13.1)%
Romanian lei equivalent of $1.00 19,456 18,255 (6.6)% 18,733 12,520 (49.6)%
Slovak koruna equivalent of $1.00 43.46 42.27 (2.8)% 43.14 39.26 (9.9)%
Slovenian tolar equivalent of $1.00 211.07 196.77 (7.3)% 205.31 170.41 (20.5)%
Ukrainian hryvna equivalent of $1.00 5.43 5.22 (4.0)% 5.46 3.55 (53.8)%
The Company's results of operations and financial position during the
first quarter of 2000 were impacted by changes in foreign currency exchange
rates since December 31, 1999.
In limited instances, the Company enters into forward foreign exchange
contracts and purchases foreign currency options to hedge foreign currency
transactions for periods consistent with its identified exposures. Premiums on
foreign currency options are amortized over the option period being hedged.
Results of Operations
Three months ended March 31, 2000 compared to three months ended March 31, 1999
The Company's net revenues decreased by $20,136,000, or 57%, to
$15,370,000 for the first quarter of 2000 from $35,506,000 for the first quarter
of 1999. The decrease was attributable to the suspension of the broadcast
operations of CNTS. See Item 1, "Status of Nova TV Dispute" for a further
discussion on Nova TV and the ongoing dispute between CNTS and CET. PRO TV's net
revenues increased by $626,000, or 8%, for the first quarter of 2000 compared to
the first quarter of 1999. POP TV's US dollar net revenues decreased by
$455,000, or 10%, as a result of the continued strength of the US dollar against
the Slovenian tolar. In local currency terms POP TV's net revenues increased by
approximately 8%. The net revenues of Studio 1+1 decreased by $142,000, or 6%,
as the Ukrainian market displayed no signs of growth in the first quarter of
2000.
Total station operating costs and expenses (including amortization of
program rights and depreciation of fixed assets and other intangibles) decreased
by $13,591,000, or 43%, to $18,014,000 for the first quarter of 2000 from
$31,605,000 for the first quarter of 1999. The decrease in total station
operating costs and expenses was primarily attributable to the cessation of
broadcasting by CNTS. See Item 1, "Status of Nova TV dispute" for a further
discussion on Nova TV and the ongoing dispute between CNTS and CET. Studio 1+1,
POP TV and PRO TV all recorded decreases in station operating costs and expenses
for the first quarter of 2000 compared to the first quarter of 1999. POP TV,
PRO TV and Studio 1+1 reduced amortization of program rights costs by $412,000,
$65,000 and $51,000, respectively, for the first quarter of 2000 compared to the
first quarter of 1999. POP TV's other operating costs and expenses decreased by
$402,000 primarily as a
Page 24
result of reductions in production expenses and salary and benefits costs.
Studio 1+1 reduced other operating costs and expenses by $352,000 primarily as a
result of reductions in salary and benefits costs and production expenses. PRO
TV's other operating costs and expenses decreased by $119,000 primarily as a
result of reductions in equipment and engineering expenses,
Station selling, general and administrative expenses decreased by
$1,498,000, or 26%, to $4,348,000 for first quarter of 2000 from $5,846,000 for
the first quarter of 1999. The decrease in station selling, general and
administrative expenses was primarily attributable to the cessation of
broadcasting by CNTS. See Item 1, "Status of Nova TV Dispute" for a further
discussion on Nova TV and the ongoing dispute between CNTS and CET. In addition
POP TV, Studio 1+1 and PRO TV decreased station selling, general and
administrative expenses by $291,000, $270,000 and $108,000, respectively, for
the first quarter of 2000 compared to the first quarter of 1999.
Corporate operating costs and development expenses for the first
quarter of 2000 and 1999 were $2,322,000 and $5,830,000, respectively, a
decrease of $3,508,000, or 60%. This decrease was attributable to reduced
corporate expenses and lower corporate headcount.
Amortization of goodwill and allowance for development costs decreased
by $2,979,000, or 88%, to $418,000 for the first quarter of 2000 from $3,397,000
for the first quarter of 1999. For the first quarter of 1999 the Company
recorded amortization of goodwill relating to the purchases of additional equity
interests in CNTS made by the Company in August 1996 and August 1997. Due to the
cessation of broadcasting by CNTS no such charge for the first quarter of 2000
was recorded leading to most of the reduction in amortization of goodwill and
allowances for development costs. See Item 1, "Status of Nova TV Dispute" for a
further discussion on Nova TV and the ongoing dispute between CNTS and CET.
As a result of the above factors, the Company generated an operating
loss of $9,732,000 for the first quarter of 2000 compared to an operating loss
of $11,172,000 for the first quarter of 1999.
Equity in loss of unconsolidated affiliates decreased by $2,813,000, or
70%, to $1,231,000 for the first quarter of 2000 from $4,044,000 for the first
quarter of 1999. The decrease is due to lower losses of Markiza TV and lower
losses of the unconsolidated entities of the Studio 1+1 group for the first
quarter of 2000 compared to the first quarter of 1999.
Net interest and other expense increased by $11,000 to $3,704,000 for
the first quarter of 2000 from $3,693,000 for the first quarter of 1999.
The net foreign currency exchange gain decreased by $8,791,000, or 90%,
to $958,000 for the first quarter of 2000 compared to $9,749,000 for the first
quarter of 1999. The decrease was as a result of lower depreciation of the
German mark and the Czech koruna against the US dollar for the first
Page 25
quarter of 2000 compared to the first quarter of 1999. In addition, the Company
recorded a foreign exchange loss on the CNTS dividend made in February 2000.
During the first quarter of 1999 the Company recorded a gain of
$25,870,000 on the sale of its interest in a Romanian mobile telephone company
MobilRom S.A.
Benefit for income taxes of $18,000 for the first quarter of 2000
compares to provision for income taxes of $1,649,000 for the first quarter of
1999. The change was as a result of the cessation of broadcasting by CNTS and
the subsequent loss reported by CNTS for the first quarter of 2000 compared to
income for the first quarter of 1999. See Item 1, "Status of Nova TV Dispute"
for a further discussion on Nova TV and the ongoing dispute between CNTS and
CET.
Minority interest in loss of consolidated subsidiaries was $22,000 for
the first quarter of 2000 compared to a minority interest in income of
consolidated subsidiaries of $22,000 for the first quarter of 1999. This change
was the result of the cessation of broadcasting by CNTS and the subsequent loss
reported by CNTS for the first quarter of 2000 compared to income for the first
quarter of 1999. See Item 1, "Status of Nova TV dispute" for a further
discussion on Nova TV and the ongoing dispute between CNTS and CET.
During 1999 the Company agreed to sell substantially all of its assets
in Hungary. This agreement was consummated in February, 2000, see Item 1, "SBS
Transaction". This resulted in the Company's operations in Hungary being
recorded as discontinued operations.
As a result of these factors, the net loss of the Company was
$13,669,000 for the first quarter of 2000 compared to a net income of
$12,088,000 for the first quarter of 1999.
Liquidity and Capital Resources
Net cash used in operating activities was $12,010,000 for the three months
ended March 31, 2000 compared to $9,244,000 for the three months ended March 31,
1999. The decrease of $2,766,000 is primarily the result of the cessation of
broadcasting by CNTS (see Item 1 "Status of Nova TV Dispute" for a further
discussion on Nova TV and the ongoing dispute between CNTS and CET).
Net cash provided by investing activities was $4,246,000 for the three
months ended March 31, 2000 compared to $29,088,000 for the three months ended
March 31, 1999. The decrease of $24,842,000 was primarily due to lower cash
proceeds from the disposal of the Hungarian discontinued operations for the
three months ended March 31, 2000 compared to the cash proceeds from the
disposal of MobilRom S.A. for the three months ended March 31, 1999, partially
offset by a decrease in acquisition of fixed assets and investment activity.
Net cash used in financing activities was $1,887,000 for the three months
ended March 31, 2000 compared to net cash provided by financing activities of
$335,000 for the three months ended March 31, 1999. The decrease of $2,222,000
was primarily a result of no credit facility disbursements occurring for the
three months ended March 31, 2000 compared to the three months ended March 31,
1999.
The Company had cash and cash equivalents of $26,644,000 at March 31,
2000 compared to $36,990,000 at December 31, 1999.
In August 1997, CME issued the Senior Notes, which raised net proceeds
of approximately $170,000,000. The Senior Notes are denominated in United States
dollars, in part, and in German marks, in part. The United States dollar
denominated Senior Notes bear interest at a rate of 9.375% per annum, and the
German mark denominated Senior Notes bear interest at a rate of 8.125% per
annum. The principal amount of the Senior Notes is repayable on their maturity
date, August 15, 2004. The indentures governing the Senior Notes contain certain
restrictions relating to the ability of CME and its Subsidiaries and affiliates
to incur additional indebtedness, incur liens on assets, make investments in
unconsolidated companies, declare and pay
Page 26
dividends (in the case of CME), sell assets and engage in extraordinary
transactions.
On August 1, 1996, the Company purchased CS's 22% economic interest and
virtually all of CS's voting rights in CNTS for a purchase price of Kc 1 billion
($36,590,000). The Company also entered into a loan agreement with CS to finance
85% of the purchase price. The principal outstanding at March 31, 2000 was Kc
420,080,600 ($11,277,000). Quarterly repayments on the loan are required in the
amount Kc 42,500,000 ($1,141,000) during the period from May 2000 through May
2002, and Kc 37,580,000 ($1,009,000) in August 2002.
In April 1998, POP TV entered into a multicurrency $5,000,000 loan
agreement with Creditanstalt AG which matures in May 2005. As of March 31, 2000,
the loan was fully drawn. The loan is secured by the land, buildings and
equipment of POP TV and is guaranteed by CME. This loan agreement contains
certain covenants with which the Company was not in compliance, but for which
the Company has received a waiver.
PRO TV has a borrowing facility with Tiriac Bank in Romania for
$4,000,000 which matures in December 2002. At March 31, 2000, $2,512,000 was
borrowed under this facility. This facility is secured by PRO TV's equipment and
vehicles.
The laws under which CME's operating Subsidiaries are organized provide
generally that dividends may be declared by the partners or shareholders out of
yearly profits subject to the maintenance of registered capital, required
reserves and after the recovery of accumulated losses. In the case of the
Company's Dutch and Netherlands Antilles subsidiaries, the Company's voting
power is sufficient to compel the making of distributions. In the case of PRO
TV, distributions may be paid from the profits of PRO TV subject to a reserve of
5% of annual profits until the aggregate reserves equal 20% of PRO TV's
registered capital. A majority vote can compel PRO TV to make distributions.
There are no legal reserve requirements in Slovenia. In the case of Markiza TV,
distributions may be paid from net profits subject to an initial reserve
requirement of 10% of net profits until the reserve fund equals 5% of registered
capital. Subsequently, the reserve requirement is equal to 5% of net profits
until the reserve fund equals 10% of registered capital. The Company's voting
power in Markiza TV is not sufficient to compel the distribution of dividends.
The Company's voting power in the Studio 1+1 Group is sufficient to compel the
distribution of dividends.
The Company's future cash needs, over and above working capital
requirements, will depend on the Company's overall financial performance and its
future acquisition and development decisions. The Company believes that, taken
together, its current cash balances, internally generated cash flow, local
financing of broadcast operations and the CME Put Option on the ITI Note (see
Item 1, "SBS Transaction") should result in the Company having adequate cash
resources to meet its debt service and other financial obligations for the next
12 months.
Page 27
Euro Conversion
As part of the European Economic and Monetary Union (EMU), a single
currency, the euro, will replace the national currencies of many of the member
countries of the European Union. Although the Company does not currently conduct
business in any of the countries which are adopting the euro, it holds debt
denominated in German marks, one of the currencies scheduled to be replaced by
the euro. Additionally, it is expected that several of the countries in which
the Company operates are likely to join EMU at some point in the future.
The conversion rates between the euro and the participating nations'
currencies were fixed irrevocably as of January 1, 1999 and the participating
national currencies will be removed from circulation between January 1, and June
30, 2002 and replaced by euro notes and coinage. During the "transition period"
from January 1, 1999 through December 31, 2001, public and private entities as
well as individuals may pay for goods and services using either checks, drafts,
or wire transfers denominated in euro or the participating country's national
currency.
Under the regulations governing the transition to a single currency,
there is a "no compulsion, no prohibition" rule which states that no one is
obliged to use the euro until the notes and coinage have been introduced on
January 1, 2002. In keeping with this rule, the Company expects to be euro
"compliant" (able to receive euro denominated payments and able to invoice in
euros as requested by vendors and suppliers, respectively) by the time national
currencies are removed from circulation. The cost of software and business
process conversion is not expected to be material.
Forward-looking Statements
Statements made in Items 1 and 2, under the heading "Status of Nova TV
Dispute", "Results of Operations" and under "Liquidity and Capital Resources"
regarding future operations of CNTS, the ongoing dispute between CNTS and CET,
future investments in existing television broadcast operations, business
strategies and commitments and the timing of the need for additional cash
resources are forward-looking statements. Forward-looking statements are
inherently subject to risks and uncertainties, many of which cannot be predicted
with accuracy and some of which might not even be anticipated. Future events and
actual results, financial and otherwise, could differ materially from those
described in or contemplated by the forward-looking statements. Important
factors that contribute to such risks include the ability to acquire
programming, the ability to attract audiences, the rate of development of
advertising markets in countries where the Company currently operates and
general market and economic conditions in these countries. Important factors
with respect to the future operations of CNTS in the Czech Republic and the
ongoing dispute between CNTS and CET, include legal, political and regulatory
conditions and developments in the Czech Republic.
Page 28
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company conducts business in a number of foreign currencies. As a
result, it is subject to foreign currency exchange rate risk due to the effects
that foreign exchange rate movements of these currencies have on the Company's
costs and on the cash flows it receives from certain subsidiaries. Several of
the Company's subsidiaries hold long-term debt under credit facilities that
provide for interest at a spread above a basis rate (such as LIBOR). A
significant rise in these basis rates would not materially adversely affect the
Company's business, financial condition or results of operations. The Company
does not utilize derivative financial instruments to hedge against changes in
interest rates. The Company believes that it currently has no material exposure
to market risk associated with activities in derivative or other financial
instruments.
In limited instances the Company enters into forward foreign exchange
contracts to hedge foreign currency exchange rate risk. There were no forward
foreign exchange contracts outstanding at March 31, 2000.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
On April 26, 1999, a wholly-owned subsidiary of the Company filed an
arbitration claim against Dr. Zelezny before the International Chamber of
Commerce Court of Arbitration in Paris, France. The Company seeks the return of
$23,350,000 paid to Dr. Zelezny, plus interest, and other damages, based on
breaches by Dr. Zelezny of a share purchase agreement entered into in 1997 under
which the Company purchased from Dr. Zelezny a company owned by him whose sole
asset was a 5.8% interest in CNTS. The Company is also seeking the forgiveness
of the $5,188,000 unpaid balance of the purchase price under the 1997 share
purchase agreement.
On April 29, 2000 to May 5, 2000, the arbitral tribunal conducted a
final hearing in Amsterdam. A decision in the arbitration is expected in the
third quarter of 2000.
In May 1999, CET filed an action with the Regional Commercial Court in
Prague, requesting that the court declare the Services Agreement invalid for
vagueness and other reasons. On May 4, 2000, the Commercial Court dismissed the
action. This ruling is not yet enforceable. It is expected that the full
decision will be delivered in writing within approximately 3 to 5 weeks, and any
appeal from the decision can be taken within 15 days after it is delivered. The
decision is not enforceable during the appeals process.
Page 29
In June 1999, CNTS filed a request for a preliminary injunction against
CET with the Regional Commercial Court in Prague seeking to have CET enjoined
from entering into contractual relations with other providers of television
services or advertising sales services, pursuant to the Memorandum of
Association. CNTS's request for a preliminary injunction was rejected by the
court in July 1999. CNTS has filed an appeal of the court's decision, which is
pending. On June 30, 1999, CNTS filed an action with the Regional Commercial
Court of Prague requesting that the court declare invalid an agreement between
CET and another Czech company, Produkce, a.s. under which CET purported to
transfer CET's 1% participation interest in CNTS to Produkce, a.s., since such
transfer did not comply with the CNTS Memorandum of Association. This action is
pending.
On August 9, 1999, CNTS filed an action against CET in the Regional
Commercial Court of Prague in which CNTS requested the court to declare the
withdrawal of CET from the Services Agreement to be invalid and the Services
Agreement to be in full force and effect, to issue an order prohibiting CET from
entering into television or advertising service relationships with other
companies on the basis that CNTS is entitled to provide such services to CET for
Nova TV on an exclusive basis under the Services Agreement, and to issue an
order compelling CET to broadcast programming supplied by CNTS on Nova TV. On
May 4, 2000, the Commercial Court ruled that CET is obliged to broadcast NOVA TV
exclusively in cooperation with CNTS, its contractual service organization,
pursuant to the Services Agreement. This ruling is not yet enforceable. It is
expected that the full decision will be delivered in writing within
approximately 3 to 5 weeks, and any appeal from the decision can be taken within
15 days after it is delivered. The decision is not enforceable during the
appeals process. Dr. Zelezny has announced that CET will appeal the decision.
CNTS has filed several legal actions against Dr. Zelezny, including a
damages claim for breaches of his fiduciary duties while serving as an executive
of CNTS. On October 26, 1999, CNTS filed an unfair competition claim against Dr.
Zelezny and CET with the Regional Commercial Court in Prague, and requested that
the court order them to cease their competitive activities with CNTS. These
actions are pending.
On February 22, 2000, a wholly owned subsidiary of the Company
instituted arbitration proceedings against the Czech Republic under the 1991
Bilateral Investment Treaty between The Netherlands and the Czech Republic. The
claims asserted by the Company are substantially similar to those asserted by
Mr. Lauder in the arbitration proceedings that he has instituted in his personal
capacity against the Czech Republic. See Item 1, "Status of Nova TV Dispute".
The claim seeks monetary damages and other relief arising from harm caused to
CNTS by the Czech Republic's actions. The arbitration will take place before a
tribunal of three arbitrators pursuant to the Arbitration Rules of the United
Nations Commission on International Trade Law.
Page 30
The Company is, from time to time, a party to litigation that arises in
the normal course of its business operations. The Company is not presently a
party to any such litigation which could reasonably be expected to have a
material adverse effect on its business or operations.
Item 6. Exhibits and Reports on Form 8-K.
a) The following exhibits are attached:
27.01 Financial Data Schedule
b) A Form 8-K was filed on February 25, 2000.
Page 31
SIGNATURE
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.
Date: May 11, 2000 /s/ Frederic T. Klinkhammer
---------------------------
Frederic T. Klinkhammer
Chief Executive Officer
(Duly Authorized Officer)
Date: May 11, 2000 /s/ John A. Schwallie
---------------------
John A. Schwallie
Chief Financial Officer
(Principal Financial Officer)
Page 32
EXHIBIT INDEX
27.01 Financial Data Schedule
Page 33