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 June 30, 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 August 10, 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
June 30, 2000 and December 31, 1999
(US$000s, except per share data)
ASSETS
------
June 30, December 31,
2000 1999
----------- ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents ........................................................... $ 51,127 $ 36,990
Restricted cash ..................................................................... 13,489 4,784
Accounts receivable (net of allowances of $2,385, $2,597) ........................... 15,018 15,099
Program rights costs ................................................................ 9,412 9,883
Advances to affiliates .............................................................. 22,091 20,507
Income taxes receivable ............................................................. 7,462 7,640
Other current assets ................................................................ 4,646 8,167
----------- ------------
Total current assets ................................................................ 123,245 103,070
Investments in unconsolidated affiliates ............................................ 22,049 23,095
Loans to affiliates ................................................................. 3,763 4,863
Property, plant and equipment (net of depreciation of $60,265, $56,292) ............. 40,689 48,471
Program rights costs ................................................................ 6,342 8,911
License costs and other intangibles (net of amortization of $10,003, $10,376) ....... 2,540 2,912
Goodwill (net of amortization of $86,490, $79,263) .................................. 10,472 19,393
Note receivable ..................................................................... -- 20,071
Deferred tax asset .................................................................. 138 138
Other assets ........................................................................ 4,769 5,263
----------- ------------
Total assets ........................................................................ $ 214,007 $ 236,187
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities ............................................ $ 50,838 $ 51,504
Duties and other taxes payable ...................................................... 10,981 11,678
Income taxes payable ................................................................ 1,186 864
Current portion of credit facilities and obligations under capital .................. 5,571 6,409
leases
Dividends payable ................................................................... 224 --
Investments payable ................................................................. 5,188 5,188
Advances from affiliates ............................................................ 1,858 1,028
----------- ------------
Total current liabilities ........................................................... 75,846 76,671
Long-term portion of credit facilities and obligations under capital ................ 11,677 15,115
leases
$100,000,000 9 3/8 % Senior Notes due 2004 .......................................... 99,908 99,897
DM 140,000,000 8 1/8 % Senior Notes due 2004 ........................................ 68,419 71,519
Other liabilities ................................................................... 7,165 7,843
Minority interests in consolidated subsidiaries ..................................... 63 378
Commitments and Contingencies
SHAREHOLDERS' DEFICIT:
Class A Common Stock, $0.08 par value: authorized:
100,000,000 shares at June 30, 2000 and December 31, 1999; issued and outstanding;
2,313,346 at June 30, 2000 and at December 31, 1999 ................................. 185 185
Class B Common Stock, $0.08 par value: authorized:
15,000,000 shares at June 30, 2000 and December 31, 1999; issued and outstanding;
991,842 at June 30, 2000 and December 31, 1999 ...................................... 79 79
Additional paid-in capital .......................................................... 356,385 356,385
Accumulated deficit ................................................................. (394,992) (378,218)
Accumulated other comprehensive loss ................................................ (10,728) (13,667)
----------- ------------
Total shareholders' deficit ......................................................... (49,071) (35,236)
----------- ------------
Total liabilities and shareholders' deficit ......................................... $ 214,007 $ 236,187
=========== ============
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(US$000s, except share and per share data)
(Unaudited)
For the three months For the six months
ended June 30, ended June 30,
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Gross revenues ....................................................... $ 24,359 $ 57,732 $ 43,006 $ 101,712
Discounts and agency commissions ..................................... (4,404) (10,956) (7,681) (19,430)
--------- --------- --------- ---------
Net revenues ......................................................... 19,955 46,776 35,325 82,282
STATION EXPENSES:
Other operating costs and expenses ................................... 9,153 17,378 17,933 36,322
Amortization of programming rights ................................... 3,699 8,400 8,122 16,681
Depreciation of station fixed assets and other intangibles ........... 11,415 5,107 16,226 9,487
--------- --------- --------- ---------
Total station operating costs and expenses ........................... 24,267 30,885 42,281 62,490
Selling, general and administrative expenses ......................... 4,406 6,852 8,754 12,698
CORPORATE EXPENSES:
Corporate operating costs and development expenses ................... 2,584 3,809 4,906 9,639
Amortization of goodwill and allowance for development costs ......... 418 2,418 836 5,815
--------- --------- --------- ---------
3,002 6,227 5,742 15,454
Operating (loss)/income .............................................. (11,720) 2,812 (21,452) (8,360)
Equity in income/(loss) of unconsolidated affiliates (Note 3)......... 737 (346) (494) (4,390)
Net interest and other expense ....................................... (6,909) (3,280) (10,613) (6,973)
Foreign currency exchange (loss)/gain, net ........................... (2,204) 3,228 (1,246) 12,977
Gain on sale of investment ........................................... 17,186 -- 17,186 25,870
--------- --------- --------- ---------
(Loss)/ income before provision for income taxes, minority
interest and discontinued operations ................................. (2,910) 2,414 (16,619) 19,124
Provision for income taxes ........................................... (207) (3,858) (189) (5,507)
--------- --------- --------- ---------
(Loss)/ income before minority interest and discontinued operations... (3,117) (1,444) (16,808) 13,617
Minority interest in loss/(income) of consolidated subsidiaries....... 12 (71) 34 (93)
--------- --------- --------- ---------
(Loss)/income from continuing operations ............................. (3,105) (1,515) (16,774) 13,524
DISCONTINUED OPERATIONS:
Operating loss of discontinued operations (Hungary) .................. -- (1,997) -- (4,948)
--------- --------- --------- ---------
Net (Loss)/income .................................................... $ (3,105) $ (3,512) $ (16,774) $ 8,576
========= ========= ========= =========
PER SHARE DATA:
Net (Loss)/income per share (Note 5):
Continuing operations - Basic and diluted ............................ $ (0.94) $ (0.47) $ (5.08) $ 4.22
Discontinued operations - Basic and diluted .......................... -- (0.62) -- (1.54)
--------- --------- --------- ---------
Total ................................................................ $ (0.94) $ (1.09) $ (5.08) $ 2.68
========= ========= ========= =========
Weighted average common shares used in computing per share amounts:
Basic ................................................................ 3,305 3,208 3,305 3,208
========= ========= ========= =========
Diluted .............................................................. 3,305 3,209 3,305 3,209
========= ========= ========= =========
Page 3
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
For the period from December 31, 1999 to June 30, 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 ............................. (16,774) (16,774) (16,774)
Other comprehensive income:
Unrealized translation adjustments . 2,939 2,939 2,939
-------------
Comprehensive loss ................... (13,835)
=============
-------- -------- -------- ----------- ------------- ------------
BALANCE, June 30, 2000 .................. 185 79 356,385 (394,992) (10,728) (49,071)
======== ======== ======== =========== ============= ============
(a) Of the accumulated deficit of $394,992 at June 30, 2000, $96,679
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 six months ended June 30, 2000 and 1999
(US$000s)
(Unaudited)
For the six months ended
June 30,
------------------------
2000 1999
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income .................................................... $(16,774) $ 8,576
Adjustments to reconcile net loss to net cash used in operating
activities:
Equity in loss of unconsolidated affiliates ........................ 494 4,390
Depreciation and amortization (excluding amortization of barter .... 25,921 32,491
programs)
Discontinued operations ............................................ -- 4,948
Gain on disposal of investment ..................................... (17,186) (25,870)
Minority interest in (loss) income of consolidated ................. (34) 93
subsidiaries
Foreign currency exchange loss (gain), net ......................... 1,246 (12,977)
Accounts receivable ................................................ (394) 6,935
Cash paid for program rights ....................................... (8,161) (17,246)
Advances to affiliates ............................................. 408 (3,101)
Other short-term assets ............................................ 418 (835)
Accounts payable and accrued liabilities ........................... 1,419 (6,292)
Income and other taxes payable ..................................... (669) (151)
-------- --------
Net cash used in operating activities ............................ (13,312) (9,039)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Other investments .................................................. (53) (6,056)
Investments in discontinued operations ............................. -- (3,145)
Cash proceeds from disposal of discontinued operations ............. 4,416 39,260
Cash proceeds from disposal of investments ......................... 37,250 --
Restricted cash .................................................... (8,768) (29)
Acquisition of fixed assets ........................................ (898) (4,649)
Loans and advances to affiliates ................................... 261 1,369
Payments for license costs, other assets and intangibles ........... (616) 360
-------- --------
Net cash provided by investing activities ........................ 31,592 27,110
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Credit facilities and payments under capital leases ................ (3,190) (2,152)
Capital contributed by shareholders ................................ -- 7
Other long-term liabilities ........................................ (1) (243)
-------- --------
Net cash used in financing activities ............................ (3,191) (2,388)
-------- --------
IMPACT OF EXCHANGE RATE FLUCTUATIONS ON CASH ......................... (952) (1,465)
-------- --------
Net increase in cash and cash equivalents ......................... 14,137 14,218
CASH AND CASH EQUIVALENTS, beginning of period ....................... 36,990 43,354
-------- --------
CASH AND CASH EQUIVALENTS, end of period ............................. $ 51,127 $ 57,572
======== ========
Supplemental information:
Cash paid for interest ............................................. $ 9,588 $ 10,689
======== ========
Income taxes ....................................................... $ 0 $ 7,764
======== ========
Supplemental disclosures of non-cash 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 liabilities 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
June 30, 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 an Agreement on
Cooperation in Ensuing Services for Television Broadcasting with CET dated May
21, 1997 (the "Cooperation 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 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. 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. Further 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 with the International Chamber of
Commerce's International Court of Arbitration in Paris, France. The claim in the
arbitration is for 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 a wholly-owned subsidiary of 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
Page 6
$5,188,000 unpaid balance of the purchase price under the 1997 share purchase
agreement.
From April 29 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 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 Cooperation 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.
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 Cooperation 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 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 Cooperation Agreement to be invalid and the
Cooperation 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 Cooperation
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 Cooperation Agreement. This
ruling will become enforceable only if and when it is affirmed in an appeal that
is currently pending. No hearings on the appeal have as yet been scheduled. See
Part II, Item 1, "Legal Proceedings".
The Company belives that CET's actions violate the Corporation
Agreement and CET's obligations under the CNTS Memorandum of Association, as
well as Czech media laws.
On August 23, 1999, Ronald S. Lauder, the non-Executive Chairman of the
Company's Board of Directors, instituted arbitration proceedings 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
primarily asserts that the Czech Republic harmed and effectively expropriated
Page 7
Mr. Lauder's investment in CNTS by taking unfair, inequitable and discriminatory
actions -- in the form of expressly approving an exclusive relationship between
CNTS and CET 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 restitution of his
investment and/or 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. A hearing on the matter is
scheduled to begin on March 5, 2001.
On February 22, 2000, a wholly owned subsidiary of the Company, duly
incorporated and existing under the laws of the Netherlands, 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 Dutch subsidiary 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 restitution of its
investment and/or 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. A preliminary hearing is
scheduled for November 19, 2000 with a hearing on the merits not likely before
the summer of 2001.
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 SBS' decision to exercise its call
option on the ITI Notes (see below under "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 (See below under "Non-Timely
Payment of Senior Notes Interest" and Item 2, "Liquidity and Capital
Resources").
Non-Timely Payment of Senior Notes Interest
The Company has outstanding two tranches of Senior Notes, the principal
of which becomes due in August 2004 (the "Senior Notes"). The United States
dollar tranche totals $100,000,000 in principal amount and bears interest at a
rate of 9.375% per annum. The German mark tranche totals DM 140,000,000
($68,627,000) in principal amount and bears interest at a rate of 8.125% per
annum. The next semi-annual interest payment on the Senior Notes is payable on
August 15, 2000 (the "August 2000 Interest Payment"). The Company will not make
the August 2000 Interest Payment on August 15, 2000. Under the Indentures which
govern the Senior Notes, an Event of Default will not occur unless the August
2000 Interest Payment continues to be unpaid for a period of 30 days after
August 15, 2000. The Company has not determined whether it
Page 8
will make the August 2000 Interest Payment within such 30 day period. The
Company has commenced discussions with a group of holders of the Senior Notes
relating to a possible consensual restructuring of the Senior Notes. The Company
can make no assurance that its discussions with this group of holders of the
Senior Notes will be successful. If an Event of Default occurs under the Senior
Notes for failure to make the August 2000 Interest Payment within the 30 day
period described above, the Trustee under the Indentures or the holders of the
Senior Notes may accelerate all of the Company's obligations under the Senior
Notes, including the payment of the entire principal amount of the Senior Notes.
If payment of the entire principal amount of the Senior Notes was accelerated,
the Company would have insufficient funds to meet the obligation.
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 initial assessment seeking VAT payments of Kc319,267,000
($8,455,000). 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'
1998 and 1999 income tax prepayments in the amount of Kc281,790,000
($7,462,000). In addition, the tax authorities are investigating the 1999 CNTS
tax return which has extended the period for return of the income tax
prepayments. 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. To date, the tax authorities have not issued a final VAT assessment and
the tax inspections are still pending. The Company and CNTS will contest any
unfavorable VAT assessment.
Republic of Slovenia Tax Audit
The Company's subsidiary in Slovenia, Produkcija Plus d.o.o. (Pro Plus,
see "Slovenia" below) has been the subject of an income tax inspection by the
Republic of Slovenia tax authorities for the years 1995 to 1998. As a result
of these inspections the Slovene tax authorities have levied an assessment
seeking unpaid income taxes, customs duties and interest charges of SIT
1,073,000,000 ($4,968,000). The Slovene authorities have asserted that capital
contributions and loans made by CME in the years 1995 and 1996 to Pro Plus
should be extraordinary revenue to Pro Plus. On this basis, Pro Plus made a
profit in 1995 and 1996 for which it owes income taxes and interest.
Additionally, the fixed assets imported as capital contributions would now be
subject to customs duties which were not paid.
Pro Plus is contesting this assessment to the courts in Slovenia and
has received a temporary order delaying the payment of the assessment pending
the final outcome of the court proceedings.
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 during the third quarter 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
Page 9
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 and matures on December 10, 2001. On June 29, 2000 SBS exercised its call
option on the ITI Note for $37,250,000 plus accrued interest. This resulted in a
reported gain of $17,186,000.
On June 13, 2000 the Company finalized a share purchase agreement to
acquire at least a 98% controlling interest in Kanal A, for $12,500,000 prior to
August 18, 2000. Kanal A is the second leading commercial television broadcaster
in Slovenia. As part of this agreement $12,500,000 of the SBS proceeds from the
exercise of the call option on the ITI Note will be held in escrow until the
earlier of August 18, 2000 and the closing of the Kanal A acquisition. This
escrow amount is reported in restricted cash on the balance sheet. This
transaction is subject to regulatory approval and certain other conditions.
Potential Nasdaq National Market System Delisting
On May 23, 2000 the Company was notified by Nasdaq that the Company's
Class A Common Stock had failed to maintain a minimum market value of public
float of $15,000,000 over the previous 30 consecutive trading days as required
for continued listing on the Nasdaq National Market. If the closing price of the
Company's Class A Common Stock exceeds $10.77 per share for 10 consecutive
trading days before August 21, 2000 the Company would regain compliance with the
listing requirement for the Nasdaq National Market. However, given the recent
closing prices on Nasdaq for the Company's Class A Common Stock it is not
possible for the Company to satisfy the listing requirements for the Nasdaq
National Market System prior to the August 21, 2000 deadline. If compliance is
not met the Company's Class A Common Stock will be delisted at the opening of
business on August 23, 2000. The Company does not qualify for the standards for
listing on the Nasdaq SmallCap Market.
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 license holding 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.
Page 10
CME
License Voting CME Voting
Country Expiration TV License Company Interest TV Services Company Interest
- - ------- ---------- ------------------ -------- ------------------- --------
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 and six months ending
June 30, 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 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
Page 11
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.
The Company has entered into a share purchase agreement with SBS to
purchase a controlling voting and economic interest in Kanal A. See above under
"SBS Transaction".
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 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
Page 12
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
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.
Page 13
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 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
June 30, 2000 December 31, 1999
Markiza TV Markiza TV
------------- -----------------
$000's $000's
------ ------
Current assets ............... 15,844 16,303
Non-current assets ........... 14,880 15,864
Current liabilities .......... (17,085) (16,354)
Non-current liabilities ...... (1,038) (835)
------------- -----------------
Net assets ................... 12,601 14,978
============= =================
For the three months ended,
---------------------------
June 30, 2000 June 30, 1999
Markiza TV Markiza TV
------------- -----------------
$000's $000's
------ ------
Net revenues ................. 9,470 9,256
Operating income ............. 929 1,003
Net income ................... 193 616
Page 14
For the six months ended,
-------------------------
June 30, 2000 June 30, 1999
Markiza TV Markiza TV
------------- -----------------
$000's $000's
------ ------
Net revenues ................. 16,567 16,109
Operating loss ............... (236) (1,284)
Net loss ..................... (1,374) (3,781)
The Company's share of losses in Unconsolidated Affiliates (after
intercompany eliminations) for the six months ended June 30, 2000 was $724,000
for Markiza TV and the Company's share of income in Unconsolidated Affiliates
(after intercompany eliminations) for the six months ended June 30, 2000 was
$230,000 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 by segment as of and for the three and six months
ended June 30, 2000 and 1999 is as follows:
SEGMENT FINANCIAL INFORMATION
-----------------------------
For the three months ended June 30,
-----------------------------------
(US$000s)
---------
Net Revenues EBITDA
------------ ------
Station 2000 1999 2000 1999
------- ------- ------- ------- -------
PRO TV ............................ 10,336 9,735 1,307 (103)
POP TV ............................ 6,676 7,255 2,238 2,319
Studio 1+1 (1) .................... 2,204 2,120 (469) (897)
CNTS (2) .......................... 736 27,663 (368) 12,831
Other Operations .................. 3 3 (11) (4)
------- ------- ------- -------
Total Consolidated Operations .......... 19,955 46,776 2,697 14,146
Markiza TV ........................ 9,470 9,256 2,122 2,353
------- ------- ------- -------
Total Unconsolidated Operations ........ 9,470 9,256 2,122 2,353
------- ------- ------- -------
Total Operations ....................... 29,425 56,032 4,819 16,499
======= ======= ======= =======
Page 15
Reconciliation to Consolidated Statements of Operations:
Consolidated Operations .......................... 2,697 14,146
Station depreciation ........................ (11,415) (5,107)
Corporate expenses .......................... (3,002) (6,227)
------- -------
Operating loss from continuing operations (11,720) 2,812
======= =======
(1) Amounts shown in the table above for Net Revenues for the three months
ending June 30, 2000 and 1999 differ by $1,866,000 and $1,208,000,
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 June 30, 2000 and 1999 differ by
$586,000 and ($816,000), 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.
SEGMENT FINANCIAL INFORMATION
-----------------------------
For the six months ended June 30,
---------------------------------
(US$000s)
---------
Net Revenues EBITDA
------------ ------
Station 2000 1999 2000 1999
------- ---- ---- ---- ----
PRO TV ....................... 18,760 17,533 238 (2,090)
POP TV ....................... 10,786 11,819 2,469 1,898
Studio 1+1 (1) ............... 4,653 4,428 (632) (1,867)
CNTS (2) ..................... 1,121 48,496 (1,554) 18,654
Other Operations ............. 5 6 (5) (14)
------- ------- ------- -------
Total Consolidated Operations ..... 35,325 82,282 516 16,581
Markiza TV ................... 16,567 16,109 2,159 1,460
------- ------- ------- -------
Total Unconsolidated Operations ... 16,567 16,109 2,159 1,460
------- ------- ------- -------
Total Operations .................. 51,892 98,391 2,675 18,041
======= ======= ======= =======
Reconciliation to Consolidated Statements of Operations:
Consolidated Operations ............................ 516 16,581
Intercompany elimination
Station depreciation .......................... (16,226) (9,487)
Corporate expenses ............................ (5,742) (15,454)
------- -------
Operating loss from continuing operations (21,452) (8,360)
======= =======
(1) Amounts shown in the table above for Net Revenues for the six months
ending June 30, 2000 and 1999 differ by $2,942,000 and $2,543,000,
respectively, from similar information shown in Selected Combined
Financial Information in Item 2. Amounts shown in the table above for
EBITDA for the six months ending June 30, 2000 and 1999 differ by
$298,000 and ($1,391,000), respectively, from similar information shown
in Selected Combined Financial Information in Item 2. These differences
relate to the use of
Page 16
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 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 three months ended June 30, 2000
----------------------------------------
Net Loss Per
------------
Common Common
------ ------
Net Loss Shares Share
-------- ------ -----
Basic EPS
---------
Net loss attributable to common stock ................. $ (3,105) 3,305 $ (0.94)
Effect of dilutive securities: stock options .......... -- --
-------- ------- ------------
Diluted EPS
-----------
Net loss attributable to common stock and assumed
option exercises ...................................... $ (3,105) 3,305 $ (0.94)
======== ======= ============
Diluted EPS, for the three months ended June 30, 2000, does not include
the impact of stock options then outstanding as their inclusion would be
anti-dilutive.
For the three months ended June 30, 2000
----------------------------------------
Net Loss Per
------------
Common Common
------ ------
Net Loss Shares Share
-------- ------ -----
Basic EPS
Net loss attributable to common stock............ $ (3,512) 3,208 $(1.09)
Effect of dilutive securities: stock options........ -- 1 --
-------- ------ ------
Diluted EPS
Net loss attributable to common stock and assumed
option exercises........................... $ (3,512) 3,209 $(1.09)
======== ====== =======
Page 17
Diluted EPS, for the three months ended June 30, 1999, excludes the
effect of certain outstanding stock warrants and options as their inclusion
would be anti-dilutive.
For the six months ended June 30, 2000
Net Loss Per
------------
Common Common
------ ------
Net Loss Shares Share
-------- ------ -----
Basic EPS
---------
Net loss attributable to common stock .............. $(16,774) 3,305 $ (5.08)
Effect of dilutive securities: stock options ....... -- -- --
-------- -------- ----------
Diluted EPS
-----------
Net loss attributable to common stock and assumed
option exercises ................................... $(16,774) 3,305 $ (5.08)
======== ======== ==========
Diluted EPS, for the six months ended June 30, 2000, does not include
the impact of stock options then outstanding as their inclusion would be
anti-dilutive.
For the six months ended June 30, 1999
Net Income
----------
Common Per Common
------ ----------
Net Loss Shares Share
-------- ------ -----
Basic EPS
---------
Net income attributable to common stock ............ $ 8,576 3,208 $ 2.68
Effect of dilutive securities: stock options ....... -- 1 --
-------- -------- ----------
Diluted EPS
-----------
Net income attributable to common stock and assumed
option exercises ................................... $ 8,576 3,209 $ 2.68
======== ======== ==========
Diluted EPS, for the six months ended June 30, 1999, excludes the
effect of certain outstanding stock warrants and options as their inclusion
would be anti-dilutive.
Subsequent Events
Resignation of John A. Schwallie and Appointment of Mark Wyllie
On July 27, 2000 the Company announced that John A. Schwallie, Chief
Financial Officer, will leave the Company on October 31, 2000 to pursue a career
with a San Francisco based animation company.
The Company also announced the appointment of Mark Wyllie as Finance
Director. Mark Wyllie has had a progressive career with the UK
Page 18
based United Biscuits plc where he was most recently Finance Director, Asia and
Central Europe. Mr Wyllie will join the Company in September.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
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 six months 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 six months 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
Page 19
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
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 and six
months ended June 30, 2000 and 1999 for the Company's operating entities. This
financial information departs materially from GAAP.
In the tables "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 tables "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 June 30, 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.
Page 20
"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 operating performance or liquidity
prepared in accordance with GAAP (see the accompanying Consolidated Financial
Statements).
Page 21
SELECTED COMBINED FINANCIAL INFORMATION (1)
Three Months Ended June 30,
(US$000's)
(Unaudited)
--------------- ---------------- -------------------
Net Revenue EBITDA Broadcast Cash Flow
--------------- ---------------- -------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
PRO TV .......... 10,336 9,735 1,307 (103) 1,010 738
Markiza TV ...... 9,470 9,256 2,122 2,353 2,895 2,872
POP TV .......... 6,676 7,255 2,238 2,319 2,242 2,576
Studio 1+1 ...... 4,070 3,328 117 (1,713) 294 (443)
------ ------ ------ ------ ------ ------
Total Stations 30,552 29,574 5,784 2,856 6,441 5,743
====== ====== ====== ====== ====== ======
SELECTED ATTRIBUTABLE FINANCIAL INFORMATION (1)
Three Months Ended June 30,
(US$000's)
(Unaudited)
Economic Interest Net Revenues EBITDA Broadcast Cash Flow
------------------- --------------- --------------- ---------------------
2000 1999 2000 1999 2000 1999
------ ------ ------ ------ --------- ---------
PRO TV .......... 66% 6,822 6,425 863 (68) 667 487
Markiza TV ...... 80% 7,576 7,405 1,698 1,882 2,316 2,298
POP TV .......... 85.5% 5,708 6,203 1,913 1,983 1,917 2,202
Studio 1+1 ...... 60% 2,442 1,997 70 (1,028) 176 (266)
------ ------ ------ ------ --------- ---------
Total Stations 22,548 22,030 4,544 2,769 5,076 4,721
====== ====== ====== ====== ========= =========
(1) Important information about these tables appears under the heading
"Selected Combined and Attributable Financial Information" immediately
preceding this table.
(2) EBITDA and Broadcast Cash Flow data for 1999 has been restated to
exclude the effect of intercompany transactions.
Page 22
SELECTED COMBINED FINANCIAL INFORMATION (1)
Six Months Ended June 30,
(US$000's)
(Unaudited)
--------------- ---------------- ---------------------
Net Revenue EBITDA Broadcast Cash Flow
--------------- ---------------- ---------------------
2000 1999 2000 1999 2000 1999
------ ------ ------ ------ --------- ---------
PRO TV .......... 18,760 17,533 238 (2,090) 18 (890)
Markiza TV ...... 16,567 16,109 2,159 1,460 2,578 2,012
POP TV .......... 10,786 11,819 2,469 1,898 2,964 1,430
Studio 1+1 ...... 7,595 6,971 (334) (3,258) 181 (1,790)
------ ------ ------ ------ --------- ---------
Total Stations 53,708 52,432 4,532 (1,990) 5,741 762
====== ====== ====== ====== ========= =========
SELECTED ATTRIBUTABLE FINANCIAL INFORMATION (1)
Six Months Ended June 30,
(US$000's)
(Unaudited)
---------------- --------------- ---------------- -------------------
Economic Interest Net Revenues EBITDA Broadcast Cash Flow
---------------- --------------- ---------------- -------------------
2000 1999 2000 1999 2000 1999
------ ------ ------ ------ ------- -------
PRO TV .......... 66% 12,382 11,572 157 (1,379) 12 (587)
Markiza TV ...... 80% 13,254 12,887 1,727 1,168 2,062 1,610
POP TV .......... 85.5% 9,222 10,105 2,111 1,623 2,534 1,223
Studio 1+1 ...... 60% 4,557 4,183 (200) (1,955) 109 (1,074)
------ ------ ------ ------ ------- -------
Total Stations 39,415 38,747 3,795 (543) 4,717 1,172
====== ====== ====== ====== ======= =======
(1) Important information about these tables appears under the heading
"Selected Combined and Attributable Financial Information" immediately
preceding this table.
(2) EBITDA and Broadcast Cash Flow data for 1999 has been restated to
exclude the effect of intercompany transactions.
Page 23
EBITDA
The total combined EBITDA for the Company's stations increased by
$2,928,000 from $2,856,000 for the second quarter of 1999 to $5,784,000 for the
second quarter of 2000. This increase was as a result of EBITDA increases at
Studio 1+1 of $1,830,000 and PRO TV of $1,410,000 offset by EBITDA decreases at
Markiza TV of $231,000 and POP TV of $81,000.
Studio 1+1's EBITDA increased by $1,830,000 to $117,000 for the second
quarter of 2000 from negative $1,713,000 for the second quarter of 1999. This
increase was partially as a result of an increase of $742,000 in Studio 1+1's
net revenues and partially as a result of a reduction in operating costs of
$1,088,000 for the second quarter of 2000 compared to the second quarter of
1999. The increase in net revenues was as a result of increased economic
stability in Ukraine. The reduction in operating costs was primarily as a result
of reductions in amortization of program rights costs and general and
administrative expenses specifically consulting services and marketing.
PRO TV's EBITDA increased by $1,410,000 to positive $1,307,000 for the
second quarter of 2000 compared to negative $103,000 for the second quarter of
1999. This increase was partially as a result of an increase of $601,000 in net
revenues and partially as a result of a decrease of $809,000 in the operating
costs of PRO TV for the second quarter of 2000 compared to second quarter of
1999. The increase in net revenues was as a result of increased revenues for
Media Vision, a production company, offset by a reduction in the net revenues
generated from television station advertising as a result of the European Soccer
Championships which were broadcast exclusively by Romanian state television. The
reduction in operating costs was primarily as a result of reductions in
amortization of program rights costs and general and administrative expenses.
Markiza TV recorded an EBITDA decrease of $231,000 from $2,353,000 for
the second quarter of 1999 to $2,122,000 for the second quarter of 2000. This
decrease was as a result of an increase in operating costs of $445,000 partially
offset by an increase in net revenues of $214,000 for the second quarter of 2000
compared to the second quarter of 1999. The increase in operating costs was
primarily as a result of an increase in amortization of program rights costs due
to an increase in the cost of acquired programming. The increase in net revenues
was as a result of new advertisers entering the Slovak market and existing
advertisers increasing their expenditures. The economic reforms introduced by
the current government in Slovakia appear to be having a positive effect on the
economy within Slovakia.
POP TV's EBITDA decreased by $81,000 to $2,238,000 for the second
quarter of 2000 compared to $2,319,000 for the second quarter of 1999. This was
as a result of a reduction in US dollar net revenues of $579,000 due to the
continued strength of the US dollar against the Slovenian tolar. In local
currency terms POP TV recorded net revenues for the second quarter of 2000 that
were approximately 10% higher than the second quarter of 1999. The
Page 24
reduction in net revenues were partially offset by a reduction in operating
costs of $498,000 for the second quarter of 2000 compared to the second quarter
of 1999. This reduction was primarily as a result of reductions in amortization
of program rights costs.
For the reasons described above total combined EBITDA increased by
$2,928,000 from $2,856,000 for the second quarter of 1999 to $5,784,000 for the
second 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.
Page 25
The exchange rates at the end of and for the periods indicated are
shown in the table below.
Balance Sheet Income Statement
---------------------------------- -----------------------------------
At At Weighted average for the six months
June 30, December 31, ending June 30,
2000 1999 % Change 2000 1999 % Change
---- ---- -------- ---- ---- --------
German mark equivalent of $1.00 2.04 1.95 (4.6)% 2.09 1.85 (13.0)%
Romanian lei equivalent of $1.00 21,317 18,255 (16.8)% 19,545 13,881 (40.8)%
Slovak koruna equivalent of $1.00 45.42 42.27 (7.5)% 44.26 41.44 (6.8)%
Slovenian tolar equivalent of $1.00 216.00 196.77 (9.8)% 213.70 177.80 (20.2)%
Ukrainian hryvna equivalent of $1.00 5.44 5.22 (4.2)% 5.44 4.03 (35.0)%
The Company's results of operations and financial position during the
three and six months ended June 30, 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 June 30, 2000 compared to three months ended June 30, 1999
The Company's net revenues decreased by $26,821,000, or 57%, to
$19,955,000 for the second quarter of 2000 from $46,776,000 for the second
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 $601,000, or 6%, for the second quarter of 2000
compared to the second quarter of 1999. The net revenues of Studio 1+1 increased
by $84,000, or 4%, for the second quarter of 2000 compared to the second quarter
of 1999. The economic situation in Ukraine has continued to stabilize during the
second quarter of 2000. POP TV's US dollar net revenues decreased by $579,000,
or 8%, for the second quarter of 2000 compared to the second quarter of 1999 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 10% for
the second quarter of 2000 compared to the second quarter of 1999.
Total station operating costs and expenses (including amortization of
program rights and depreciation of fixed assets and other intangibles) decreased
by $6,618,000, or 21%, to $24,267,000 for the second quarter of 2000 from
$30,885,000 for the second quarter of 1999. The decrease in total station
operating costs and expenses was primarily attributable to the cessation of
broadcasting by CNTS and partially attributable to reductions at PRO TV and POP
TV. See Item 1, "Status of Nova TV Dispute" for a further
Page 26
discussion on Nova TV and the ongoing dispute between CNTS and CET. PRO TV and
POP TV recorded decreases in station operating costs and expenses for the second
quarter of 2000 compared to the second quarter of 1999. PRO TV and POP TV
reduced amortization of program rights costs by $611,000 and $436,000,
respectively, for the second quarter of 2000 compared to the second quarter of
1999. PRO TV's other operating costs and expenses increased by $3,000 as a
result of an increase in production expenses relating to new show formats
partially offset by reductions in salary and benefits costs and reductions in
equipment and engineering expenses. POP TV's other operating costs and expenses
increased by $180,000 primarily as a result of increases in equipment and
engineering expenses as a result of increased transmission fees and an increase
in production expenses as a result of new shows. These increases were partially
offset by reductions in salary and benefits costs. Studio 1+1 reduced other
operating costs and expenses by $235,000 primarily as a result of reductions in
salary and benefits costs and production expenses. In addition, Studio 1+1
reduced amortization of program rights costs by $90,000 for the second quarter
of 2000 compared to the second quarter of 1999. These cost reductions for Studio
1+1 were more than offset by a charge of $7,197,000 for amortization of
goodwill. This charge is the result of a Company review of the carrying value of
the goodwill relating to the Studio 1+1 asset and the subsequent decision to
write the goodwill down. This review was conducted according to SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of;" and the remaining goodwill relating to the Studio 1+1 asset is
$8,184,000.
Station selling, general and administrative expenses decreased by
$2,446,000, or 36%, to $4,406,000 for second quarter of 2000 from $6,852,000 for
the second 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. POP TV
decreased station selling, general and administrative expenses by $242,000
primarily as a result of reduced marketing expenses. PRO TV decreased station
selling, general and administrative expenses by $201,000 primarily as result of
reduced marketing and consulting expenses. Studio 1+1 decreased station selling,
general and administrative expenses by $19,000.
Corporate operating costs and development expenses for the second
quarter of 2000 and 1999 were $2,584,000 and $3,809,000, respectively, a
decrease of $1,225,000, or 32%. This decrease is as a result of reduced
corporate expenses and lower corporate headcount.
Amortization of goodwill and allowance for development costs decreased
by $2,000,000, or 83%, to $418,000 for the second quarter of 2000 from
$2,418,000 for the second quarter of 1999. For the second 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 and the subsequent
write-off of goodwill during the third quarter of 1999, no such charge for the
second quarter of 2000 was recorded leading to most of the reduction in
amortization of goodwill
Page 27
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 $11,720,000 for the second quarter of 2000 compared to an operating
income of $2,812,000 for the second quarter of 1999.
Equity in income of unconsolidated affiliates of $737,000 for the
second quarter of 2000 compares to an equity in loss of unconsolidated
affiliates of $346,000 for the second quarter of 1999. This positive change is
due to income for certain entities of the Studio 1+1 group for the second
quarter of 2000. During the second quarter of 1999 Markiza TV recorded income
and certain entities of the Studio 1+1 group recorded losses.
Net interest and other expense increased by $3,629,000 to $6,909,000
for the second quarter of 2000 from $3,280,000 for the second quarter of 1999.
The increase is a result of a Company review of the potential interest and
penalties relating to outstanding tax obligations of PRO TV and the subsequent
decision to provide for these charges.
A net foreign currency exchange loss of $2,204,000 for the second
quarter of 2000 compares to a net foreign currency exchange gain of $3,228,000
for the second quarter of 1999. The foreign currency exchange loss is a result
of a dividend declared (but not paid) by CNTS in the second quarter of 2000.
During the second quarter of 2000 the Company recorded a gain of
$17,186,000 on the ITI Notes as a result of SBS exercising its call option to
purchase the ITI Notes from the Company, see Item 1, "SBS Transaction".
Provision for income taxes decreased by $3,651,000 to $207,000 for the
second quarter of 2000 from $3,858,000 for the second quarter of 1999. The
decrease was as a result of the cessation of broadcasting by CNTS and the
subsequent loss reported by CNTS for the second quarter of 2000 compared to
income for the second 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 $12,000 for
the second quarter of 2000 compared to a minority interest in income of
consolidated subsidiaries of $71,000 for the second quarter of 1999. This change
was the result of the cessation of broadcasting by CNTS and the subsequent loss
reported by CNTS for the second quarter of 2000 compared to income for the
second 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.
Page 28
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" and resulted in a cash gain of $3,300,000. The sale has 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
$3,105,000 for the second quarter of 2000 compared to a net loss of $3,512,000
for the second quarter of 1999.
Six months ended June 30, 2000 compared to six months ended June 30, 1999
The Company's net revenues decreased by $46,957,000, or 57%, to
$35,325,000 for the first six months of 2000 from $82,282,000 for the first six
months 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 $1,227,000, or 7%, for the first six months of 2000
compared to the first six months of 1999. The net revenues of Studio 1+1
increased by $225,000, or 5%, as the economic situation in Ukraine stablized
during the first six months of 2000. POP TV's US dollar net revenues decreased
by $1,033,000, or 9%, 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 10%.
Total station operating costs and expenses (including amortization of
program rights and depreciation of fixed assets and other intangibles) decreased
by $20,209,000, or 32%, to $42,281,000 for the first six months of 2000 from
$62,490,000 for the first six months of 1999. The decrease in total station
operating costs and expenses was primarily attributable to the cessation of
broadcasting by CNTS and partially attributable to reductions at PRO TV and POP
TV. See Item 1, "Status of Nova TV Dispute" for a further discussion on Nova TV
and the ongoing dispute between CNTS and CET. POP TV and PRO TV recorded
decreases in station operating costs and expenses for the first six months of
2000 compared to the first six months of 1999. POP TV and PRO TV reduced
amortization of program rights costs by $848,000 and $676,000, respectively, for
the first six months of 2000 compared to the first six months of 1999. POP TV's
other operating costs and expenses decreased by $222,000 primarily as a result
of reductions in salary and benefits costs. PRO TV's other operating costs and
expenses decreased by $160,000 primarily as a result of reductions in salary and
benefits costs and equipment and engineering expenses partially offset by
increases in production expenses as a result of new show formats. Studio 1+1
reduced amortization of program rights costs by $141,000 for the first six
months of 2000 compared to the first six months of 1999. In addition, Studio 1+1
reduced other operating costs and expenses by $586,000 primarily as a result of
reductions in salary and benefits costs and production expenses. These cost
reductions for Studio 1+1 were offset by a charge of $7,197,000 for amortization
of goodwill. This charge is the result of a Company review of the
Page 29
carrying value of the goodwill relating to the Studio 1+1 asset and the
subsequent decision to write the goodwill down. This review was conducted
according to SFAS 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of", and the remaining goodwill relating to
the Studio 1+1 asset is $8,184,000.
Station selling, general and administrative expenses decreased by
$3,944,000, or 31%, to $8,754,000 for the first six months of 2000 from
$12,698,000 for the first six months 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 $534,000, $283,000 and $265,000, respectively, for
the first six months of 2000 compared to the first six months of 1999.
Corporate operating costs and development expenses for the first six
months of 2000 and 1999 were $4,906,000 and $9,639,000, respectively, a decrease
of $4,733,000, or 49%. This decrease was as a result of reduced corporate
expenses and lower corporate headcount.
Amortization of goodwill and allowance for development costs decreased
by $4,979,000, or 86%, to $836,000 for the first six months of 2000 from
$5,815,000 for the first six months of 1999. For the first six months 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 and the subsequent
write off of goodwill during the third quarter of 1999, no such charge for the
first six months 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 $21,452,000 for the first six months of 2000 compared to an operating
loss of $8,360,000 for the first six months of 1999.
Equity in loss of unconsolidated affiliates decreased by $3,896,000, or
89%, to $494,000 for the first six months of 2000 from $4,390,000 for the first
six months 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 six
months of 2000 compared to the first six months of 1999.
Net interest and other expense increased by $3,640,000, or 52%, to
$10,613,000 for the first six months of 2000 from $6,973,000 for the first six
months of 1999. The increase is a result of a Company review of the potential
interest and penalties relating to outstanding tax obligations of PRO TV and the
subsequent decision to provide for these charges.
Page 30
During the first six months of 2000 the Company recorded a gain of
$17,186,000 on the ITI Notes as a result of SBS exercising its call option to
purchase the ITI Notes from the Company, see Item 1, "SBS Transaction".
A net foreign currency exchange loss of $1,246,000 for the first six
months of 2000 compares to a net foreign currency exchange gain of $12,977,000
for the first six months of 1999. During the first six months of 1999 the German
mark and the Czech koruna depreciated significantly against the US dollar and as
a result the Company recorded a gain on the German mark denominated Senior Notes
and a gain on the Czech koruna loan, which was borrowed in 1996 to finance the
purchase by the Company of additional equity in CNTS. See item 1, "Status of
Nova TV Dispute" for a further discussion on Nova TV and the ongoing dispute
between CNTS and CET. During the first six months of 2000 the German mark and
the Czech koruna have depreciated slightly against the US dollar. In addition,
the Company recorded a foreign exchange loss on the CNTS dividend made in
February 2000 and a foreign exchange loss on the CNTS dividend declared (but not
paid) in the second quarter of 2000.
During the first six months of 1999 the Company recorded a gain of
$25,870,000 on the sale of its interest in a Romanian mobile telephone company
Mobil Rom S.A.
Provision for income taxes of $189,000 for the first six months of 2000
compares to $5,507,000 for the first six months 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 six months of 2000 compared to income for the first six
months 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 $34,000 for
the first six months of 2000 compared to a minority interest in income of
consolidated subsidiaries of $93,000 for the first six months of 1999. This
change was the result of the cessation of broadcasting by CNTS and the
subsequent loss reported by CNTS for the first six months of 2000 compared to
income for the first six months 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" and resulted in a cash gain of $3,300,000. The sale has 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
$16,774,000 for the first six months of 2000 compared to a net income of
$8,576,000 for the first six months of 1999.
Page 31
Liquidity and Capital Resources
Net cash used in operating activities was $13,312,000 for the six
months ended June 30, 2000 compared to $9,039,000 for the six months ended June
30, 1999. The change of $4,273,000 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 $31,592,000 for the six
months ended June 30, 2000 compared to $27,110,000 for the six months ended June
30, 1999. The increase of $4,482,000 was primarily attributable to higher cash
proceeds from the disposal of the Hungarian discontinued operations and the sale
of the ITI Note in the six months ended June 30, 2000 compared to the cash
proceeds from the disposal of MobilRom S.A. for the six months ended June 30,
1999. In addition, during the six months ended June 30, 2000 the Company
purchased fewer fixed assets, made no investments in discontinued operations
and had fewer other investments compared to the six months ended June 30, 1999.
Net cash used in financing operations was $3,191,000 for the six months
ended June 30, 2000 compared to $2,388,000 for the six months ended June 30,
1999. The change of $803,000 was primarily attributable to higher payments on
credit facilities and capital leases for the six months ended June 30, 2000
compared to June 30, 1999.
The Company had cash and cash equivalents of $51,127,000 at June 30,
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 dividends (in the case of CME), sell
assets and engage in extraordinary transactions.
The Company will not make the August 2000 Interest Payment on August
15, 2000. Under the Indentures which govern the Senior Notes, an Event of
Default will not occur unless the August 2000 Interest Payment continues to be
unpaid for a period of 30 days after August 15, 2000. The Company has not
determined whether it will make the August 2000 Interest Payment within such 30
day period. The Company has commenced discussions with a group of holders of the
Senior Notes relating to a possible consensual restructuring of the Senior
Notes. The Company
Page 32
can make no assurance that its discussions with this group of holders of the
Senior Notes will be successful. If an Event of Default occurs under the Senior
Notes for failure to make the August 2000 Interest Payment within the 30 day
period described above, the Trustee under the Indentures or the holders of the
Senior Notes may accelerate all of the Company's obligations under the Senior
Notes, including the payment of the entire principal amount of the Senior Notes.
If payment of the entire principal amount of the Senior Notes was accelerated,
the Company would have insufficient funds to meet the obligation.
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 June 30, 2000 was Kc
377,580,600 ($9,999,000). Quarterly repayments on the loan are required in the
amount Kc 42,500,000 ($1,126,000) during the period from August 2000 through May
2002, and Kc 37,580,600 ($995,000) 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 June 30, 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 June 30, 2000, $2,283,000 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.
Page 33
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 and local
financing of broadcast operations should result in the Company having
approximately $29,000,000 of cash at the corporate level as at December 31,
2000. Assuming the Company is unsuccessful in restructuring its Senior Notes, it
currently estimates that during 2001 it will have corporate cash expenditures of
approximately $32,000,000 comprising Senior Notes interest payments, interest
and principal payments on bank debt and corporate overhead. Based on these
estimates, if the Company does not exceed its current estimates for internally
generated cash flow, it will need additional funding during the fourth quarter
of 2001.
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 headings "Status of Nova TV
Dispute", "Non-Timely Payment of Senior Notes Interest", "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,
anticipated corporate cash expenditures through the end
Page 34
of 2001 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.
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 June 30, 2000.
Item 4. Submission of Matters to a Vote of Security Holders
The following are the results of voting by shareholders present or
represented at the Annual General Meeting of Shareholders on May 25, 2000.
a. Each of the nominees considered at the Annual General Meeting of Shareholders
was elected to serve as a Director of CME until the next Annual General Meeting
of Shareholders or until their respective successors have been elected and
qualified. The persons named below were elected to serve as Directors and
received the number of votes set forth opposite their respective names:
For Withheld
Ronald S. Lauder 11,801,364 661
Frederic T. Klinkhammer 11,801,364 661
Nicolas G. Trollope 11,801,364 661
Jacob Z. Schuster 11,801,364 661
Marie-Monique Steckel 11,801,364 661
Page 35
b. The proposal to consider and act upon an amendment to the Company's Bye-laws
concerning the indemnification provided by the Company to the Company's
directors and officers was approved, with 11,795,883 votes cast for approval,
5,630 votes cast against approval and 512 votes abstaining.
c. The proposal to cancel the options to purchase shares of Class A Common Stock
previously granted to Frederic T. Klinkhammer and John A. Schwallie and to grant
new options to purchase Class A Common Stock to Mr. Klinkhammer and Mr.
Schwallie was approved, with 10,043,855 votes cast for approval, 183,078 votes
cast against approval and 512 votes abstaining.
d. The financial statements of CME for the fiscal year ended December 31, 1999,
together with the auditor's report thereon, were approved, with 11,801,563 votes
cast for approval, 287 votes cast against approval and 175 votes abstaining.
e. The proposal to appoint Arthur Andersen as auditors of CME and to authorize
the directors to approve their fees was approved, with 11,801,863 votes cast for
approval, 137 votes cast against approval and 25 abstaining.
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 with the International Chamber of
Commerce's International Court of Arbitration in Paris, France. The claim in the
arbitration is for 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 a wholly-owned subsidiary of 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.
From April 29 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 Cooperation Agreement invalid for
vagueness and other reasons. On May 4, 2000, the Commercial Court dismissed the
action. CET appealed this decision on June 8, 2000 and the appeal is pending.
Page 36
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 Cooperation Agreement to be invalid and the
Cooperation 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 Cooperation
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 Cooperation Agreement. This
ruling will become enforceable only if and when it is affirmed in an appeal that
is currently pending. No hearings on the appeal have as yet been scheduled.
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, duly
incorporated and existing under the laws of the Netherlands, 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 Dutch subsidiary 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 restitution of its investment and/or 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. A preliminary hearing is scheduled for November 19, 2000 with a hearing on
the merits not likely before the summer of 2001.
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.
Page 37
Item 6. Exhibits and Reports on Form 8-K.
a) The following exhibits are attached:
10.1 Share Purchase Agreement for shares in Kanal A dated as of June 13, 2000,
among TV-IN d.d., IMPALER d.o.o., SBS Broadcasting S.A., Superplus Holding d.d.
and CME Media Enterprise B.V.
27.01 Financial Data Schedule
b) A Form-8K was filed on July 12, 2000.
Page 38
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: August 14, 2000 /s/ Frederic T. Klinkhammer
---------------------------
Frederic T. Klinkhammer
Chief Executive Officer
(Duly Authorized Officer)
Date: August 14, 2000 /s/ John A. Schwallie
---------------------
John A. Schwallie
Chief Financial Officer
(Principal Financial Officer)
Page 39
EXHIBIT INDEX
10.1 Share Purchase Agreement for shares in Kanal A dated as of June 13, 2000,
among TV-IN d.d., IMPALER d.o.o., SBS Broadcasting S.A., Superplus Holding d.d.
and CME Media Enterprise B.V.
27.01 Financial Data Schedule