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 September 30, 1997
/ / 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 November 12, 1997
----- -----------------------------------
Class A Common Stock, par value $.01 16,916,577
Class B Common Stock, par value $.01 7,064,475
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD
Consolidated Balance Sheets as at
September 30, 1997 and December 31, 1996
($000s)
ASSETS September 30, December 31,
1997 1996
------------- -------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents ..................................................................... $ 125,017 $ 78,507
Investments in marketable securities .......................................................... 29,990 2,896
Restricted cash ............................................................................... 839 2,749
Accounts receivable (net of allowances of $3,338, $3,200) ..................................... 19,648 37,342
Program rights costs .......................................................................... 16,307 12,675
Value-added tax recoverable ................................................................... 562 182
Amount due from unconsolidated affiliates ..................................................... 8,570 1,066
Advances to affiliates ........................................................................ 3,756 4,119
Other short-term assets ....................................................................... 2,532 850
Prepaid expenses .............................................................................. 8,975 5,773
------------- -------------
Total current assets ................................................................. 216,196 146,159
Investments in unconsolidated affiliates ...................................................... 62,899 56,599
Investments ................................................................................... 12,000 3,600
Loans to affiliates ........................................................................... 31,292 17,766
Property, plant & equipment (net of depreciation of $28,431, $22,317) ......................... 53,449 58,982
Program rights costs .......................................................................... 12,237 14,266
Broadcast licence costs and other intangibles (net of amortization of $2,184, $1,579) ......... 2,570 3,097
Licence acquisition costs (net of amortization of $1,010, $854) ............................... 9,886 3,923
Goodwill ...................................................................................... 61,584 35,338
Organization costs (net of amortization of $1,190, $950) ...................................... 611 934
Development costs (net of allowance of $1,534, $996) .......................................... 13,155 19,105
Deferred taxes ................................................................................ 778 868
Other assets .................................................................................. 6,235 4,493
------------- -------------
Total assets ......................................................................... $ 482,892 $ 365,130
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .............................................................................. $ 22,619 $ 18,775
Accrued liabilities ........................................................................... 18,489 17,010
Duties and other taxes payable ................................................................ 7,858 3,312
Income taxes payable .......................................................................... 1,021 9,948
Current portion of obligations under capital lease ............................................ 77 1,794
Current portion of credit facilities .......................................................... 8,778 7,106
Dividends payable ............................................................................. 1,984 --
Investments payable ........................................................................... 21,434 1,955
Advances from affiliates ...................................................................... 789 606
------------- -------------
Total current liabilities ............................................................ 83,049 60,506
Deferred income taxes ......................................................................... 1,049 2,142
Long-term portion of obligations under capital leases ......................................... 32 7,120
Long-term portion of credit facilities ........................................................ 28,368 22,488
Investments payable ........................................................................... 7,875 14,633
$100,000,000 9 3/8 % Senior Notes due 2004 .................................................... 99,847 --
DM 140,000,000 8 1/8 % Senior Notes due 2004 .................................................. 79,122 --
Other liabilities ............................................................................. 29 305
Minority interest in consolidated subsidiaries ................................................ 1,363 8,616
SHAREHOLDERS' EQUITY:
Preferred Stock, $0.01 par value; authorized; 5,000,000 shares;
issued and outstanding: none ................................................................ -- --
Class A Common Stock, $0.01 par value: authorized: 100,000,000 shares at September 30, 1997
and 30,000,000 at December 31, 1996; issued and outstanding; 16,914,377 at September 30, 1997
and 16,664,143 at December 31, 1996 ......................................................... 169 167
Class B Common Stock, $0.01 par value: authorized: 15,000,000 shares at September 30, 1997 and
December 31, 1996; issued and outstanding; 7,064,475 at September 30, 1997 and
7,191,475 at December 31, 1996 .............................................................. 71 72
Additional paid-in capital .................................................................... 331,961 330,315
Accumulated deficit ........................................................................... (138,641) (78,004)
Cumulative currency translation adjustment .................................................... (11,402) (3,230)
------------- -------------
Total shareholders' equity .................................................................... 182,158 249,320
------------- -------------
Total liabilities and shareholders' equity .................................................... $ 482,892 $ 365,130
============= =============
Page 2
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD
CONSOLIDATED STATEMENTS OF OPERATIONS
($000s, except per share data)
(UNAUDITED)
For the three months For the nine months
ended September 30, ended September 30,
----------------------- -----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
Gross revenues: .......................................................... $ 30,679 $ 28,289 $ 121,594 $ 105,224
Discounts and agency commissions ......................................... (6,911) (5,857) (27,192) (20,987)
--------- --------- --------- ---------
Net revenues ............................................................. 23,768 22,432 94,402 84,237
Station expenses:
Other operating costs and expenses ..................................... 13,054 11,594 41,003 36,017
Amortization of programming rights ..................................... 4,630 5,171 14,521 15,440
Depreciation of station fixed assets and other intangibles ............. 3,740 3,279 11,240 9,388
--------- --------- --------- ---------
Total station operating costs and expenses ............................. 21,424 20,044 66,764 60,845
Selling, general and administrative expenses ........................... 4,422 5,682 15,256 14,417
Corporate expenses:
Corporate operating costs and development expenses ..................... 5,669 4,218 15,110 10,728
Amortization of goodwill and allowance for development costs ........... 2,835 744 7,430 1,407
--------- --------- --------- ---------
8,504 4,962 22,540 12,135
Operating loss ........................................................... (10,582) (8,256) (10,158) (3,160)
Equity in loss of unconsolidated affiliates (Note 3) ..................... (6,219) (5,621) (16,322) (11,557)
Loss on impairment of investments in unconsolidated affiliates (Note 3)... -- -- (20,707) --
Interest and other income ................................................ 1,380 205 3,996 1,284
Interest expense ......................................................... (2,931) (1,382) (6,218) (2,914)
Foreign currency exchange (loss) gain .................................... (1,999) 713 (6,585) (917)
--------- --------- --------- ---------
Loss before provision for income taxes ................................... (20,351) (14,341) (55,994) (17,264)
Provision for income taxes ............................................... (1,093) (885) (7,926) (9,198)
--------- --------- --------- ---------
Loss before minority interest ............................................ (21,444) (15,226) (63,920) (26,462)
Minority interest in loss (income) of consolidated affiliates ............ 2,627 534 3,283 (610)
--------- --------- --------- ---------
Net Loss ................................................................. $ (18,817) $ (14,692) $ (60,637) $ (27,072)
========= ========= ========= =========
PER SHARE DATA:
Net loss per share (Note 2) .............................................. $ (0.79) $ (0.80) $ (2.54) $ (1.48)
========= ========= ========= =========
Weighted average number of common shares outstanding (000s) .............. 23,877 18,348 23,877 18,348
========= ========= ========= =========
Page 3
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD
Consolidated Statements of Shareholders' Equity
For the nine months ended September 30, 1997
($000s)
(Unaudited)
Cumulative
Class A Class B Additional Currency
Common Common Paid-in Accumulated Translation
Stock Stock Capital Deficit (1) Adjustment Total
------- ------- ---------- ----------- ------------ ------------
BALANCE, December 31, 1996..................... $ 167 $ 72 $ 330,315 $ (78,004) $ (3,230) $ 249,320
Capital Contributed by Shareholders.......... 2 (1) 1,646 -- -- 1,647
Foreign Currency Translation Adjustments..... -- -- -- -- (8,172) (8,172)
Net loss..................................... -- -- -- (60,637) -- (60,637)
------- ------- ---------- ----------- ------------ ------------
BALANCE, September 30, 1997.................... $ 169 $ 71 $ 331,961 $ (138,641) $ (11,402) $ 182,158
======= ======= ========== ============ ============ ============
(1) Of the accumulated deficit of $138,641at September 30, 1997, $87,277
represents accumulated losses in Unconsolidated Affiliates.
Page 4
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD
Consolidated Statements of Cash Flows
For the nine months ended September 30, 1997 and 1996
($000s)
(Unaudited)
For the nine months
ended September 30,
-----------------------
1997 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ........................................................................ ($ 60,637) ($ 27,072)
Adjustments to reconcile net loss to net cash used in operating activities:
Equity in loss of unconsolidated affiliates ................................... 16,322 11,557
Loss on impairment of investments in unconsolidated affiliates ................ 20,707 --
Depreciation & amortization (excluding amortization of barter programs)........ 32,401 27,175
Minority interest in (loss) income of consolidated affiliates ................ (3,283) 610
Valuation allowance for development costs ..................................... 538 253
Changes in assets & liabilities:
Accounts receivable ........................................................... 11,305 9,239
Program rights paid ........................................................... (16,679) (18,656)
Value-added tax recoverable ................................................... (380) 666
Advances to affiliates ........................................................ (6,575) (4,174)
Production costs .............................................................. (303) --
Prepaid expenses .............................................................. (4,497) (1,376)
Accounts payable .............................................................. 900 (736)
Accrued liabilities ........................................................... (81) 8,905
Income & other taxes payable .................................................. (3,382) (7,700)
--------- ---------
Net cash used in operating activities ..................................... (13,644) (1,309)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in Unconsolidated Affiliates ...................................... (11,129) (32,684)
Other investments ............................................................. (23,505) --
Investments in marketable securities .......................................... (27,094) 8,835
Restricted cash ............................................................... 1,910 2,616
Acquisition of fixed assets ................................................... (7,693) (13,219)
Acquisition of minority shareholder's interest ................................ (8,694) (16,839)
Purchase of business .......................................................... -- (2,962)
Dividends paid to minority shareholders ....................................... (1,650) (1,396)
Payments for broadcast license costs, other assets and intangibles ............ (571) (137)
Development Costs ............................................................. (12,040) (2,873)
--------- ---------
Net cash used in investing activities ..................................... (90,466) (58,659)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Credit facilities ............................................................. (2,274) 22,770
Financing of acquisition of minority shareholder's interest ................... -- 16,839
Payments under capital leases ................................................. (632) (1,236)
Loans and advances to affiliates .............................................. (18,826) (18,034)
Issuance of debt .............................................................. 169,572 --
Capital contributed by shareholders ........................................... 1,647 999
Other long term liabilities ................................................... (225) (171)
Investments by minority shareholders in consolidated affiliates ............... 2,800 --
--------- ---------
Net cash provided by financing activities ................................. 152,062 21,167
--------- ---------
IMPACT OF EXCHANGE RATE FLUCTUATIONS ON CASH .................................... (1,442) (100)
--------- ---------
Net increase (decrease) in cash and cash equivalents .......................... 46,510 (38,901)
CASH AND CASH EQUIVALENTS, beginning of period .................................. 78,507 53,210
--------- ---------
CASH AND CASH EQUIVALENTS, end of period ........................................ $ 125,017 $ 14,309
--------- ---------
Supplemental information:
Cash paid for interest ........................................................ $ 4,458 $ 3,132
========= =========
Income taxes .................................................................. $ 20,614 $ 12,976
========= =========
Page 5
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
Notes to Consolidated Financial Statements
September 30, 1997
1. Organization and Business
Central European Media Enterprises Ltd., a Bermuda corporation ("CME"),
was formed in June 1994. Through its predecessor companies, CME has been in
operation since 1991. CME, together with its subsidiaries (CME and it
subsidiaries and affiliates are collectively referred to as the "Company"),
invests in, develops and operates national and regional commercial television
stations and networks in Central and Eastern Europe and regional commercial
television stations in Germany.
In the Czech Republic, the Company owns a 99% economic interest and has
97% of the voting power in Ceska Nezavisla Televizni Spolecnost s.r.o. ("CNTS"),
which operates Nova TV, the leading private national television station in the
Czech Republic. CET 21 s.r.o. ("CET 21") owns 1% of CNTS. Ceska Sporitelna Bank
("CS") has a 2% voting interest in CNTS. The Company's economic and voting
interest in CNTS increased during the third quarter of 1997 as a result of the
Company's August 1997 purchase of Nova Consulting a.s. ("NC"), which owns a 5.8%
participation interest in CNTS, from certain of the partners of CET 21,
including Vladimir Zelezny, the General Director of CNTS.
The Company owns a 62% ownership interest in Radio Alfa a.s. ("Radio
Alfa"), one of two private Czech Republic national radio broadcasters. The
Company is a party to certain loan and consulting agreements with Radio Alfa.
Certain of the Company's outstanding loans to Radio Alfa are convertible into an
additional equity interest which, when combined with its 62% interest, would
give the Company an 83.7% interest in Radio Alfa.
In Romania, the Company and two local partners, Adrian Sarbu and Ion
Tiriac, operate PRO TV, a commercial television network, through Media Pro
International S.A. ("Media Pro International"). The Company owns a 66% equity
interest in Media Pro International. In August 1997, the Company's interest in
Media Pro International was reduced from 77.5% to 66% as a result of the
exercise of an option by Mr. Tiriac to increase his interest in Media Pro
International. The Company owns 49% of the equity of PRO TV, SRL, an affiliate
station of Media Pro International. Messrs. Sarbu and Tiriac own substantially
all of the remainder of PRO TV, SRL. PRO TV, SRL holds many of the licenses for
the stations comprising the PRO TV network. The Company owns a 95% equity
interest in Unimedia SRL ("Unimedia"), which owns a 10% equity interest in a
consortium, MobilRom, which holds one of two GSM licenses in Romania. Mr. Sarbu
owns the remaining 5.0% of Unimedia.
In Slovenia, the Company operates POP TV, together with MMTV d.o.o.
Ljubljana ("MMTV") and Tele 59 d.o.o. Maribor ("Tele 59"), through Produkcija
Plus d.o.o. ("Pro Plus"). Pro Plus provides programming under the name POP TV
to, and sells advertising for, MMTV, Tele 59 and affiliate TV Robin. The Company
owns 78% of the equity of Pro Plus, but has an effective economic interest of
85.3% as a
Page 6
result of a 33% economic interest in MMTV and a 33% economic interest in Tele
59. Tele 59 owns a 21% equity interest in Pro Plus, and the remaining 1% equity
interest in Pro Plus is owned by MMTV. In October 1997, Pro Plus also began
providing programming under the name Gajba TV to, and selling advertising for,
affiliated stations in the Slovenian cities Ljubljana, Maribor and Murska
Sobota. (Note 4)
In the Slovak Republic, the Company owns an 80% non-controlling
economic interest and a 49% voting interest in Slovenska Televizna Spolocnost
s.r.o. ("STS"), which launched Markiza TV as a national television station on
August 31, 1996.
In Poland, the Company owns a 50% interest in Federacja Sp.zo.o.
("Federation"). The Polish media group ITI owns the remainder of Federation
through ITI Media Group N.V., in which the Company owns a 10% interest. TVN
Sp.zo.o. ("TVN"), which is owned 67% by ITI and 33% by the Company, holds
broadcast licenses for northern Poland and the cities of Warsaw and Lodz. TVN
owns 100% (increased from 76.3% during the fourth quarter of 1997) of Telewizja
Wisla Sp.zo.o. ("TV Wisla"), which operates a regional television station in
southern Poland (Note 4). Federation provides programming and advertising
services to TVN and TV Wisla.
In Ukraine, the Company owns a 50% interest in a group of companies
(collectively, the "Studio 1+1 Group"), which has the right to broadcast
programming and sell advertising on Ukrainian National Channel 2 ("UT-2")
through 2006.
In Hungary, in September 1997, the Company acquired a 71.2% equity
interest in Budapesti Kommunikacios Rt ("TV3"), a television station
broadcasting in Budapest and distributed by satellite to cable systems
throughout Hungary. TV3 was relaunched on October 26, 1997 (Note 4). The Company
also wholly owns Videovox Studio Limited Liability Company, a Hungarian dubbing
and production company ("Videovox") and 24.9% of the equity of 2002 Tanacsado es
Szolgaltato Korlatolt Felelosegu Tarsasag ("2002 Kft."), a broadcasting company
in Hungary. See "Other Information - Legal Proceedings."
The Company owns a 50% interest (non-voting profit participation) in
Franken Funk & Fernsehen GmbH ("FFF"), which owns 74.8% of a regional television
station in Nuremberg, Germany, NMF Neue Medien Franken GmbH and Co., K.G.
("NMF"). The Company has a 49% equity interest, and a 50% economic interest in
Sachsen Funk und Fernsehen GmbH ("SFF") which owns a 33.33% equity interest in
Sachsen Fernsehen Betriebs KG, which operates regional television stations in
Leipzig and Dresden, Germany. On May 13, 1997, the Company announced its
decision to discontinue funding of 1A TV Beteilgungsgessellschaft GmbH & Co.
Betriebs KG ("1A TV"), which operated PULS, a regional television station
operating in the Berlin-Brandenburg area of Germany. The Company had a 58%
non-controlling interest in 1A TV. On May 27, 1997, 1A TV initiated a bankruptcy
proceeding in the Bankruptcy Court of Berlin-Charlottenburg. See "Other
Information - Legal Proceedings".
Page 7
2. Summary of Significant Accounting Policies
The accompanying financial statements have been prepared in accordance
with United States generally accepted accounting principles ("GAAP"). In the
opinion of management, these consolidated financial statements include all
adjustments necessary to fairly state the Company's financial position and
results of operations. The results for the nine months ended September 30, 1997
are not necessarily indicative of the results expected for the year.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company's wholly owned subsidiaries and the accounts of CNTS, which
operates Nova TV, PRO TV, POP TV, Videovox and Radio Alfa (the "Consolidated
Affiliates"), as consolidated entities and reflect the interests of the minority
owners of CNTS, PRO TV, POP TV and Radio Alfa for the nine months ended
September 30, 1997. Videovox was acquired in May 1996 and has been wholly owned
since April 1997. A controlling interest in Radio Alfa was acquired in December
1996. CNTS, PRO TV, POP TV, 2002 Kft. (until March 1997, when the Company's
ownership in 2002 Kft. decreased to 24.9%) and Videovox were the only
consolidated entities for the same period in 1996. The results of Markiza TV,
FFF, SFF, the Studio 1+1 Group, TVN and 1A TV (for the first quarter of 1997
only) (the "Unconsolidated Affiliates") in which the Company has, or during the
nine months ended September 30, 1997 had, minority or non-controlling ownership
interests, are included in the accompanying consolidated financial statements as
equity in loss or income of unconsolidated affiliates using the equity method.
1A TV initiated a bankruptcy proceeding in May 1997. The Company records other
investments at the lower of cost and market value.
Net Loss Per Share
Net loss per share was computed by dividing the Company's net loss by
the weighted average number of Common Shares (both Class A and Class B)
outstanding during the period ended September 30, 1997. The impact of
outstanding options and warrants has not been included in the computation of net
loss per share, as the effect of their inclusion would be anti-dilutive.
Recently Issued Accounting Standards
In March 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share" ("SFAS 128"). This statement establishes standards for
computing and presenting earnings per share ("EPS"), replacing the presentation
of currently required primary EPS with a presentation of Basic EPS. For entities
with complex capital structures, the statement requires the dual presentation of
both Basic EPS and Diluted EPS on the face of the statement of operations. Under
this new standard, Basic EPS is computed based on weighted average shares
outstanding and excludes any potential dilution. Diluted EPS reflects potential
dilution from the exercise or conversion of securities into common stock or from
other contracts to issue common stock and is similar to the currently required
fully diluted EPS. SFAS
Page 8
128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods, and earlier application is not
permitted. When adopted, the Company will be required to restate its EPS data
for all prior periods presented. The Company does not expect the impact of the
adoption of this statement to be material to previously reported EPS amounts.
Reclassifications
Certain reclassifications were made to prior period amounts to conform
to current period classifications.
3. Summary Financial Information for Unconsolidated Affiliates.
-----------------------------------------------
($ 000s) As of
----------------------------- ----------------
December 31,
September 30, 1997 1996
----------------------------- ----------------
Markiza TV Studio 1+1 Markiza TV
Group
Current assets 15,195 3,833 10,896
Non-current assets 26,119 21,942 28,783
Current liabilities (12,592) (4,562) (6,635)
Non-current liabilities (10,001) (5,017) (9,222)
-------- ------- -------
Net assets 18,721 16,196 23,822
======== ======= =======
------------------------------ ----------------------------------
For the nine months ended, For the three months ended,
September 30, 1997 September 30, 1997
------------------------------ ----------------------------------
($ 000s) Markiza TV Studio 1+1 Markiza TV Studio 1+1
-------- ---------- ---------- ---------- ----------
Group Group
----- -----
Net revenues 19,348 9,842 5,519 2,865
Operating loss (2,652) (2,388) (2,209) (895)
Net loss (3,804) (2,590) (2,516) (931)
The Company's share of losses in Unconsolidated Affiliates for the nine
months ended September 30, 1997 was $16,322,000, including $2,843,000 in 1A TV
(prior to the write-down described below), $2,454,000 in FFF, $254,000 in SFF,
$3,453,000 in Markiza TV, $4,074,000 in TVN and $3,244,000 in the Studio 1+1
Group. On May 13, 1997, the Company announced its decision to discontinue
funding of 1A TV. As a result, the Company has written down its investments in
Germany (including 1A TV, FFF and SFF) by $20,707,000 and eliminated the
carrying value of these investments. This write-down, together with losses
incurred by the German operations during the nine months ended September 30,
1997, has resulted in a total charge of $26,258,000 in the Company's
Consolidated Statements of Operations.
To finance developments, 1A TV received investment grants in an aggregate
amount of DM8,544,000 ($4,855,000) from a German public bank beginning in 1993,
which grants were guaranteed by a wholly owned subsidiary of the Company. As a
result of the bankruptcy proceedings initiated by 1A TV, the bank has notified
the
Page 9
guarantor that it intends to seek repayment of the investment grants from the
guarantor, plus interest at the rate of 6.0% per annum. Management believes that
the maximum exposure is limited to the German assets, which have been fully
provided for.
4. Subsequent Events
In October 1997, the Company and its partner, the Polish media group
ITI, launched a television network in Poland, whereby Federation is providing
programming and advertising services to TVN and TV Wisla. Also in October, TVN
increased its ownership in TV Wisla from 76.3% to 100%. TV Wisla operates a
regional television station in southern Poland.
On October 26, 1997, Budapesti Kommunikacios Rt ("TV3"), a television
station broadcasting in Budapest and distributed by satellite to cable systems
throughout Hungary, was relaunched. In September 1997, the Company acquired a
71.2% equity interest in TV3.
In October 1997, Pro Plus began providing programming under the name
Gajba TV to, and selling advertising for, affiliated stations in the Slovenian
cities Ljubljana, Maribor and Murska Sobota.
Page 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
The Company is the leading commercial television company in Central and
Eastern Europe. The Company has developed and currently operates the leading
national private television stations and networks, as measured by audience share
within their respective areas of broadcast reach, in the Czech Republic, the
Slovak Republic, Slovenia and Romania and a leading station in Ukraine. The
Company recently launched a television network in Poland, a television station
in Hungary and a second television station in Slovenia. The Company's television
studios, production facilities and editing suites at its national television
stations produced approximately 12,000 hours of original programming in 1996 to
support the Company's broadcasting operations, making it the largest private
producer of local television programming in Central and Eastern Europe. To
complement its commercial television activities, the Company also has interests
in national radio stations and is increasingly active in program rights
distribution and other media services.
The Company's revenues are derived principally from the sale of
television advertising to local, national and international advertisers. To a
limited extent, the Company also engages in certain barter transactions in which
its broadcast operations exchange unsold 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
(typically July and August), and highest during the fourth quarter of each
calendar year. The primary expenses incurred in operating broadcast stations are
programming costs, employee salaries, broadcast transmission expenses and
selling, general and administrative expenses. Certain of the Company's
operations do not require the direct incurrence of broadcast transmission
expenses. However, the Company incurs significant development expenses,
including funding and negotiating with local partners, researching and preparing
license applications, preparing business plans and 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 and affiliates. 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 and affiliates operate. The
subsidiaries' and affiliates' 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 and affiliates 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.
Page 11
Selected Combined Financial Information - Broadcast Cash Flow
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 operating data for the three and nine months ended September
30, 1997 and 1996 for national television broadcast stations or networks. The
financial information included below departs materially from GAAP because it
aggregates the revenues and operating income of certain Unconsolidated
Affiliates with Consolidated Affiliates. This supplemental information is
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. The Company's television operations in Poland
are not included in this analysis, as they were not fully operational during the
three and nine months ended September 30, 1997. Regional television stations in
Germany are not included in this analysis as these operations are dissimilar
from those of national television broadcast entities.
The Company accounts for its 80% non-controlling interest in Markiza TV
and its 50% interest in the Studio 1+1 Group using the equity method of
accounting. Under this method of accounting, the Company's interest in net
earnings or losses of Markiza TV and the Studio 1+1 Group 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 following
supplementary unaudited combined information includes certain financial
information of Markiza TV and the Studio 1+1 Group on a line-by-line basis,
similar to that of the Company's consolidated television broadcast entities,
which include CNTS, PRO TV and POP TV.
Management service charges to the stations are not included in the
combined operating data below as these are eliminated in the Consolidated
Financial Statements.
Markiza TV began operations in August 1996 and the Studio 1+1 Group
began generating significant revenues during the second quarter of 1997. The
Company believes that this unaudited combined and combining operating
information provides useful disclosure.
Page 12
Three Months Ending September 30,
---------------------------------------------------------------------------------------------
CNTS PRO TV POP TV Subtotal(1)
------------------------ ---------------------- ---------------------- -------------------
1996 1997 1996 1997 1996 1997 1996 1997
---- ---- ---- ---- ---- ---- ---- ----
(dollars in thousands)
Station Operating Data:
Net revenues ....................... 17,449 14,836 2,995 5,310 1,563 2,592 22,007 22,738
Station operating expense .......... (13,032) (11,052) (3,785) (5,568) (3,009) (3,879) (19,826) (20,499)
Selling, General and
Administrative expenses ............ (1,591) (1,191) (1,759) (2,111) (1,689) (1,164) (5,039) (4,466)
------- ------- ------- ------- ------- ------- ------- -------
Station operating income (loss)..... 2,826 2,593 (2,549) (2,369) (3,135) (2,451) (2,858) (2,227)
Depreciation of assets.............. 1,926 1,867 614 1,125 717 631 3,257 3,623
------- ------- ------- ------- ------- ------- ------- -------
EBITDA (5).......................... 4,752 4,460 (1,935) (1,244) (2,418) (1,820) 399 1,396
Amortization of programming rights.. 4,164 2,804 752 1,064 255 762 5,171 4,630
Cash program rights costs........... (3,410) (1,933) (463) (2,480) (996) (865) (4,869) (5,278)
------- ------- ------- ------- ------- ------- ------- -------
Broadcast cash flow ................ 5,506 5,331 (1,646) (2,660) (3,159) (1,923) 701 748
======= ======= ======= ======= ======= ======= ======= =======
Broadcast cash flow margin ......... 31.55% 35.94% - - - - 3.18% 3.29%
Economic interest................... 88.0% 99.0% 77.5% 66.0% 72.0% 85.3% - -
Broadcast cash flow attributable to
the Company......................... 4,845(6) 5,278(7) (1,276) (1,756)(8) (2,274) (1,640) 1,295 1,882
Three Months Ending September 30,
------------------------------------------------------------
Studio 1+1
Markiza TV (2) Group Total Combined (3)
----------------------- ------------ -----------------------
1996 1997 1997 1996(2)(4) 1997
---- ---- ---- ---------- ----
(dollars in thousands)
Station Operating Data:
Net revenues ....................... 1,195 5,519 2,865 23,202 31,122
Station operating expense .......... (2,427) (6,504) (2,688) (22,253) (29,691)
Selling, General and
Administrative expenses ............ (1,044) (1,224) (1,073) (6,083) (6,763)
------- ------- ------- ------- -------
Station operating income (loss)..... (2,276) (2,209) (896) (5,134) (5,332)
Depreciation of assets.............. 326 1,098 179 3,583 4,900
------- ------- ------- ------- -------
EBITDA (5).......................... (1,950) (1,111) (717) (1,551) (432)
Amortization of programming rights.. 599 1,775 362 5,770 6,767
Cash program rights costs........... (3,196) (2,264) (640) (8,065) (8,182)
------- ------- ------- ------- -------
Broadcast cash flow ................ (4,547) (1,600) (995) (3,846) (1,847)
======= ======= ======= ======= =======
Broadcast cash flow margin ......... - - - - -
Economic interest................... 80.0% 80.0% 50.0% - -
Broadcast cash flow attributable to
the Company......................... (3,638) (1,280) (498) (2,343) 104
(1) Includes consolidated television broadcast entities only.
(2) Markiza TV began operations in August 1996.
(3) Represents combined operating data on a line-by-line basis for national
television broadcast entities, including Markiza TV and the Studio 1+1
Group, which are accounted for using the equity method of accounting in the
accompanying consolidated financial statements, and does not include (i)
regional television stations in Germany, because these operations are
dissimilar from those of national broadcast entities and (ii) television
operations in Poland, which were not fully operational during the three
months ended September 30, 1997.
(4) Does not include the Studio 1+1 Group, which began operations after
September 30, 1996.
(5) EBITDA consists of earnings before interest, income taxes, depreciation and
amortization of intangible assets (which do not include programming
rights). EBITDA is provided because it is a measure 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.
See the Company's Consolidated Financial Statements included in the
accompanying financial statements.
(6) Reflects the Company's purchase in August 1996 of CS's 22% economic
interest in CNTS and virtually all of CS's voting power in CNTS (the "1996
CNTS Purchase") as if such acquisition had been effective from January 1,
1996.
(7) Reflects the Company's purchase in March 1997 of an additional 5.2%
economic interest in CNTS (the "First 1997 CNTS Purchase") and the
Company's purchase in August 1997 of an additional 5.8% economic interest
in CNTS (the "Second 1997 CNTS Purchase") as if such acquisitions had been
effective from January 1, 1997.
(8) Reflects the reduction in August 1997 of the Company's interest in Media
Pro International from 77.5% to 66% as if such reduction had been effective
from January 1, 1997.
Page 13
Nine Months Ending September 30,
---------------------------------------------------------------------------------------------
CNTS PRO TV POP TV Subtotal(1)
------------------------ ---------------------- ---------------------- -------------------
1996 1997 1996 1997 1996 1997 1996 1997
---- ---- ---- ---- ---- ---- ---- ----
(dollars in thousands)
Station Operating Data:
Net revenues ....................... 70,327 63,331 7,975 18,393 5,219 9,734 83,521 91,458
Station operating expense .......... (39,453) (35,769) (11,515) (16,682) (9,284) (11,533) (60,252) (63,984)
Selling, General and
Administrative expenses ............ (5,947) (4,328) (4,012) (7,250) (3,454) (2,930) (13,413) (14,508)
-------- ------- ------- ------- ------- ------- -------- --------
Station operating income (loss)..... 24,927 23,234 (7,552) (5,539) (7,519) (4,729) 9,856 12,966
Depreciation of assets.............. 5,712 5,848 1,763 3,124 1,880 1,905 9,355 10,877
-------- ------- ------- ------- ------- ------- -------- --------
EBITDA (5).......................... 30,639 29,082 (5,789) (2,415) (5,639) (2,824) 19,211 23,843
Amortization of programming rights.. 12,360 9,194 2,205 2,989 875 2,338 15,440 14,521
Cash program rights costs........... (13,152) (9,687) (3,581) (5,152) (1,923) (1,881) (18,656) (16,720)
-------- ------- ------- ------- ------- ------- -------- --------
Broadcast cash flow ................ 29,847 28,589 (7,165) (4,578) (6,687) (2,367) 15,995 21,644
======== ======= ======= ======= ======= ======= ======= =======
Broadcast cash flow margin ......... 42.44% 45.14% - - - - 19.15% 23.67%
Economic interest................... 88.0% 99.0% 77.5% 66.0% 72.0% 85.3% - -
Broadcast cash flow attributable to
the Company......................... 26,265(6) 28,303(7) (5,553) (3,021)(8) (4,815) (2,019)(9) 15,897 23,263
Nine Months Ending September 30,
------------------------------------------------------------
Studio 1+1
Markiza TV (2) Group Total Combined (3)
---------------------- ------------ -----------------------
1996 1997 1997 1996(2)(4) 1997
---- ---- ---- ---------- ----
(dollars in thousands)
Station Operating Data:
Net revenues ....................... 1,195 19,348 9,842 84,716 120,648
Station operating expense .......... (2,427) (19,021) (9,397) (62,679) (92,402)
Selling, General and
Administrative expenses ............ (1,044) (2,979) (2,834) (14,457) (20,321)
------- ------- ------- -------- --------
Station operating income (loss)..... (2,276) (2,652) (2,389) 7,580 7,925
Depreciation of assets.............. 326 3,216 461 9,681 14,554
------- ------- ------- -------- --------
EBITDA (5).......................... (1,950) 564 (1,928) 17,261 22,479
Amortization of programming rights.. 599 6,113 918 16,039 21,552
Cash program rights costs........... (3,196) (7,730) (1,707) (21,852) (26,157)
------- ------- ------- -------- --------
Broadcast cash flow ................ (4,547) (1,053) (2,717) 11,448 17,874
======= ======= ======= ======== ========
Broadcast cash flow margin ......... - - - 13.51% 14.81%
Economic interest................... 80.0% 80.0% 50.0% - -
Broadcast cash flow attributable to
the Company......................... (3,638) (842) (1,359) 12,259 21,062
(1) Includes consolidated television broadcast entities only.
(2) Markiza TV began operations in August 1996.
(3) Represents combined operating data on a line-by-line basis for national
television broadcast entities, including Markiza TV and the Studio 1+1
Group, which are accounted for using the equity method of accounting in the
accompanying consolidated financial statements, and does not include (i)
regional television stations in Germany, because these operations are
dissimilar from those of national broadcast entities and (ii) television
operations in Poland, which were not fully operational during the nine
months ended September 30, 1997.
(4) Does not include the Studio 1+1 Group, which began operations after
September 30, 1996.
(5) EBITDA consists of earnings before interest, income taxes, depreciation and
amortization of intangible assets (which do not include programming
rights). EBITDA is provided because it is a measure 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.
See the Company's Consolidated Financial Statements included in the
accompanying financial statements.
(6) Reflects the Company's purchase in August 1996 of CS's 22% economic
interest in CNTS and virtually all of CS's voting power in CNTS (the "1996
CNTS Purchase") as if such acquisition had been effective from January 1,
1996.
(7) Reflects the Company's purchase in March 1997 of an additional 5.2%
economic interest in CNTS (the "First 1997 CNTS Purchase") and the
Company's purchase in August 1997 of an additional 5.8% economic interest
in CNTS (the "Second CNTS Purchase") as if such acquisitions had been
effective from January 1, 1997.
(8) Reflects the reduction in August 1997 of the Company's interest in Media
Pro International from 77.5% to 66% as if such reduction had been effective
from January 1, 1997.
(9) Reflects the Company's purchase in March 1997 of an additional effective
economic interest of 13.3% as if such acquisition had been effective from
January 1, 1997.
Page 14
"Broadcast cash flow", a broadcasting industry measure of performance,
is defined as net broadcast revenues, less broadcast operating expenses
excluding depreciation and amortization, broadcast selling, general and
administrative expenses, and cash program rights costs. "Broadcast cash flow
margin" is broadcast cash flow divided by net broadcast revenues. "Broadcast
cash flow attributable to the Company" is broadcast cash flow which is
attributable to the Company based on the Company's effective economic interest
in CNTS, PRO TV, POP TV, Markiza TV and the Studio 1+1 Group as of September 30,
1997, which was 99%, 66%, 85.3%, 80.0% and 50%, respectively. Cash program
rights costs represent cash payments for current programs payable and such
payments do not necessarily correspond to program use. The Company has included
broadcast cash flow because it is commonly used in the broadcast industry as a
measure of performance. Broadcast cash flow should not be considered as a
substitute measure of operating performance or liquidity prepared in accordance
with GAAP.
EBITDA consists of earnings before interest, income taxes, depreciation
and amortization of intangible assets (which do not include programming rights).
EBITDA is provided because it is a measure 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. See the Company's Consolidated
Financial Statements included in the accompanying financial statements.
Certain Station Operating Data
The three months ended September 30, 1997 compared to the three months ended
September 30, 1996
Total combined broadcast cash flow improved by $1,999,000, to negative
$1,847,000 for the three months ended September 30, 1997 compared to the same
period in 1996. This increase was primarily attributable to a positive change in
broadcast cash flow for Markiza TV and POP TV of $2,947,000 and $1,236,000,
respectively, for the three months ended September 30, 1997 compared to the same
period in 1996. The increase was partially offset by a $1,014,000 negative
change in PRO TV's broadcast cash flow and the addition to the Company's
operations of the Studio 1+1 Group, which had negative $995,000 broadcast cash
flow in the three months ended September 30, 1997. CNTS had broadcast cash flow
of $5,331,000 for the three months ended September 30, 1997, compared to
$5,506,000 for the same period in 1996, an increase of $175,000, or 3.2%.
Measured in local currency, CNTS's broadcast cash flow increased by 29.0%.
CNTS's broadcast cash flow margin, which is not affected by currency
fluctuations, was 35.94% for the third quarter of 1997 compared to 31.55%, for
the same period in 1996.
Total combined EBITDA had a positive change of $1,119,000, for the
three months ended September 30, 1997 compared to the same period last year.
This change is primarily attributable to a positive change in EBITDA for PRO TV,
POP TV and Markiza TV of $691,000, $598,000 and $839,000, respectively, for the
three months ended September 30, 1997 compared to the same period in 1996. The
increase was
Page 15
partially offset by the addition to the Company's operations of the
Studio 1+1 Group, which had negative $717,000 EBITDA for the three months ended
September 30, 1997. CNTS recorded EBITDA of $4,460,000 in the three months ended
September 30, 1997, compared to $4,752,000 for the same period in 1996, a
decrease of $292,000, or 6.1%. Measured in local currency, CNTS's EBITDA
increased by 29.9%.
The nine months ended September 30, 1997 compared to the nine months ended
September 30, 1996
Total combined broadcast cash flow increased by $6,426,000, to
$17,874,000, for the nine months ended September 30, 1997 compared to the same
period in 1996. The increase was primarily due to positive changes in broadcast
cash flow for PRO TV, POP TV and Markiza TV of $2,587,000, $4,320,000 and
$3,494,000, respectively, for the nine months ended September 30, 1997 compared
to the same period in 1996. The increase was partially offset by the addition to
the Company's operations of the Studio 1+1 Group, which had negative $2,717,000
broadcast cash flow for the nine months ended September 30, 1997. CNTS had
broadcast cash flow of $28,589,000 for the nine months ended September 30, 1997
compared to $29,847,000 for the same period in 1996, a decrease of $1,258,000,
or 4.2%. Measured in local currency, CNTS's broadcast cash flow increased by
8.9%. CNTS's broadcast cash flow margin, which is not affected by currency
fluctuations, was 45.14% for the nine months ended September 30, 1997, compared
to 42.44% for the same period in 1996.
Total combined EBITDA increased by $5,218,000, or 30.2%, for the nine
months ended September 30, 1997 compared to the same period in 1996. This
increase is primarily attributable to a positive change in EBITDA for PRO TV,
POP TV and Markiza TV of $3,374,000, $2,815,000 and $2,514,000, respectively,
for the nine months ended September 30, 1997. This increase was partially offset
by the addition to the Company's operations of the Studio 1+1 Group, which had
negative $1,928,000 EBITDA for the nine months ended September 30, 1997. CNTS
recorded EBITDA of $29,082,000 in the nine months ended September 30, 1997,
compared to $30,639,000 for the same period in 1996, a decrease of $1,557,000,
or 5.1%. Measured in local currency, CNTS's EBITDA increased by 7.9%.
Application of Accounting Principles
Although the Company conducts operations largely in foreign currencies,
the Company prepares its financial statements in United States dollars and in
accordance with GAAP. The Company's consolidated operating statements include
the results of wholly owned subsidiaries and the results of CNTS, PRO TV, POP
TV, Videovox (wholly owned since April 1997) and Radio Alfa and separately set
forth the minority interest attributable to other owners of CNTS, PRO TV, POP TV
and Radio Alfa. The results of other broadcast operations, Markiza TV, FFF, SFF,
the Studio 1+1 Group, TVN and 1A TV (which operated PULS, a regional television
station in the Berlin-Brandenburg area of Germany and which initiated a
bankruptcy proceeding in May 1997), are accounted for using the equity method,
which reflects the Company's share
Page 16
of the net income or losses in those operations. The Company records other
investments at the lower of cost and market value.
Foreign Currency
The Company and its subsidiaries generate revenues primarily in Czech
korunas ("Kc"), Romanian lei ("ROL"), Slovenian tolar ("SIT"), Slovak korunas
("Sk"), Hungarian forints ("HUF"), Ukrainian hryvna ("Hrn"), Polish zloty ("ZI")
and German marks ("DM"), and incur substantial operating expenses in those
currencies. The Romanian lei, Slovenian tolar, Ukrainian hryvna and Slovak
koruna are managed currencies with limited convertibility. The Company also
incurs operating expenses for programming in United States dollars and other
foreign currencies. For entities operating in economies considered non-highly
inflationary, including CNTS, POP TV, Markiza TV, Videovox, Radio Alfa, TVN and
certain Studio 1+1 Group entities, 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 Studio 1+1 Group entities operate in economies
qualifying as 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 income. Currency translation adjustments relating to
transactions of the Company in currencies other than the functional currency of
the entity involved are reflected in the operating results of the Company. The
exchange rates at the end of, and during, the periods indicated were as follows:
Balance Sheet Income Statement
------------------------------------- --------------------------------
At At Average for the nine months
December 31, September 30, ending September 30,
------------------------------------- --------------------------------
1996 1997 % change 1996 1997 % change
---- ---- -------- ---- ---- --------
Czech koruna equivalent of $1.00 27.33 32.79 -20.0% 27.27 31.01 -13.7%
German mark equivalent of $1.00 1.55 1.76 -13.5% 1.52 1.80 -18.5%
Hungarian forint equivalent of $1.00 162 197 -21.6% n/a 188 n/a
Polish zloty equivalent of $1.00 2.88 3.42 -18.6% n/a 3.15 n/a
Romanian lei equivalent of $1.00 4,035 7,606 -88.5% 2,987 6,837 -128.9%
Slovak koruna equivalent of $1.00 31.90 33.79 -5.9% 30.96* 33.49 -8.2%
Slovenian tolar equivalent of $1.00 141.48 165.06 -16.7% 135.00 157.58 -16.7%
Ukrainian hryvna equivalent of $1.00 1.89 1.87 0.9% n/a 1.82 n/a
*Average for September 1996
The Company's results of operations and financial position during the
first, second and third quarters of 1997 were impacted by changes in foreign
currency exchange rates since December 31, 1996. In the highly inflationary
economy in Romania, PRO TV indexes sales contracts to the United States dollar
in order to minimize the effects of Romanian lei devaluation. As shown above,
virtually all operating currencies have weakened against the United States
dollar during the nine months ended September 30, 1997.
Page 17
The underlying Czech koruna and Slovenian tolar assets and liabilities
of CNTS and POP TV decreased by 20.0% and 16.7%, respectively, in United States
dollar terms during the nine months ended September 30, 1997, due to foreign
exchange movements. PRO TV's local currency monetary assets and liabilities
decreased by up to 88.5% during the nine months ended September 30, 1997,
depending on the time they remained outstanding during the period. CNTS's
operating income, interest costs and minority interest in income, are
approximately 13.7% lower than would be the case had the weighted average
exchange rate during the nine months ended September 30, 1997 remained the same
as during the nine months ended September 30, 1996.
Results of Operations
The three months ended September 30, 1997 compared to the three months ended
September 30, 1996
The Company's net revenues increased by $1,336,000, or 6.0%, to
$23,768,000, in the three months ended September 30, 1997 from $22,432,000 in
the same period in 1996. PRO TV and POP TV achieved net revenues of $5,310,000
and $2,592,000, respectively, for the three months ended September 30, 1997,
reflecting increases of $2,315,000, or 77.3%, and $1,029,000, or 65.8%,
respectively, over the same period in 1996. This significant revenue growth was
primarily the result of the growth in audience share and PRO TV's and POP TV's
ability to convert their dominant audience shares into larger shares of their
respective advertising markets, as well as the overall growth of the Company's
television advertising markets. Videovox and Radio Alfa, with combined net
revenues of $1,030,000 for the three months ended September 30, 1997, also
contributed to the increase in the Company's net revenues. Videovox was acquired
in May 1996 and Radio Alfa was acquired in December 1996. These increases were
partially offset by a decrease in net revenues at CNTS, as discussed below.
CNTS's net advertising revenues decreased by $967,000, or 6.2%, in the
three months ended September 30, 1997 compared to the same period in 1996
primarily as a result of the devaluation of the Czech koruna. In local currency
terms, CNTS's net advertising revenues increased by 19.9% to Kc 500,047,000 for
the three months ended September 30, 1997 compared to the same period in 1996.
This increase was offset by a 13.7% depreciation of the Czech koruna. CNTS's
United States dollar net revenues from advertising sales were approximately
$2,211,000 lower than they would have been if the currency had remained stable
since the end of the same period in 1996. Other revenues (principally game show
revenues) decreased by $1,647,000. The decline in game show revenues is
primarily attributable to fewer game shows due to a current lack of game show
sponsors. Primarily as a result of currency devaluations and the decrease in
game show revenues, CNTS's total net revenues decreased $2,613,000, in the three
months ended September 30, 1997 compared to the same period in 1996.
Total station operating costs and expenses increased by $1,380,000, or
6.9%, to $21,424,000 in the three months ended September 30, 1997 from
$20,044,000 in
Page 18
the same period in 1996. The increase in total station operating costs and
expenses was primarily attributable to the increasing scope of operations of PRO
TV and POP TV. CNTS's operating costs and expenses decreased by $1,980,000 for
the three months ended September 30, 1997 compared to the same period in 1996.
This decrease is primarily attributable to the devaluation of the Czech koruna
and, to a lesser extent to lower amortization of program rights, as well as an
increase in operating costs and expenses at a rate less than Czech inflation for
the three months ended September 30, 1997, compared to the same period in 1996.
Station selling, general and administrative expenses decreased by
$1,260,000, or 22.2%, to $4,422,000 in the three months ended September 30, 1997
from $5,682,000 in the same period in 1996. This decrease was primarily
attributable to the decrease in POP TV and CNTS selling, general and
administrative expenses. Measured in local currency, CNTS's station selling,
general and administrative expenses decreased by 6.1% from Kc 42,559,000 to Kc
39,944,000, for the same period in 1996 and 1997, respectively.
Corporate operating costs and development expenses for the three months
ended September 30, 1997 and 1996 were $5,669,000 and $4,218,000, respectively,
an increase of $1,451,000. The increase was primarily attributable to the
Company's increased scope of operations, the continued development of the
Company's operational infrastructure, the Company's new operations in Poland and
Hungary and development activities in other countries.
Amortization of goodwill and allowance for development costs was
$2,835,000 and $744,000 in the three months ended September 30, 1997 and 1996,
respectively. This increase was primarily attributable to amortization of
goodwill related to the Company's purchase in August 1996 of a 22% economic
interest in CNTS (the "1996 CNTS Purchase"), the Company's purchase in March
1997 of a 5.2% economic interest in CNTS (the "First 1997 CNTS Purchase") and
the Company's purchase of a 5.8% economic interest in CNTS in August 1997 (the
"Second 1997 CNTS Purchase" and together with the 1996 CNTS Purchase and the
First 1997 CNTS Purchase, the "Additional CNTS Purchases"), and, to a lesser
extent, the amortization of goodwill related to investments in Radio Alfa.
As a result of the above factors, operating loss increased by
$2,326,000 to $10,582,000 in the three months ended September 30, 1997, from
$8,256,000 in the same period in 1996.
Equity in loss of unconsolidated affiliates increased by 10.6% or
$598,000 to $6,219,000 in the three months ended September 30, 1997 from
$5,621,000 in the same period in 1996. This increase is primarily attributable
to the addition of TVN and the Studio 1+1 Group to the Company's operations, as
these stations both incurred losses in the third quarter of 1997. The Company
has provided additional operating funds for FFF and SFF totalling $1,015,000,
which has been included in equity in loss of unconsolidated affiliates in the
accompanying Consolidated Financial Statements. The Company did not provide any
funds to 1A TV in the three months ended September 30, 1997.
Page 19
Interest and other income increased to $1,380,000 for the three months
ended September 30, 1997 from $205,000 for the same period in 1996. This
increase was primarily attributable to interest on increased cash and marketable
securities.
Interest expense increased by $1,549,000, to $2,931,000 in the three
months ended September 30, 1997 from $1,382,000 in the same period in 1996. This
increase is primarily attributable to accrued interest on CME's $100,000,000
principal amount 9 3/8% Senior Notes and DM 140,000,000 principal amount 8 1/8%
Senior Notes, each due 2004, issued in August 1997 (collectively, the "Senior
Notes"). See "-Liquidity and Capital Resources". This increase was also
partially attributable to interest expense incurred at the corporate level for
the Czech koruna debt funding for the 1996 CNTS Purchase and was partially
offset by lower interest expense at CNTS due to lower debt levels.
The net foreign currency exchange loss of $1,999,000 in the three
months ended September 30, 1997 is primarily attributable to the devaluation of
the Czech koruna, Romanian lei and Slovenian tolar against the dollar during
this period.
Minority interest in loss of consolidated subsidiaries was $2,627,000
in the three months ended September 30, 1997 and $534,000 in the same period in
1996. This increase is primarily the result of increased minority interest in
the net loss of PRO TV and decreased minority interest in the net income of
CNTS.
As a result of these factors, the net loss of the Company was
$18,817,000 and $14,692,000 for the three months ended September 30, 1997 and
1996, respectively.
The nine months ended September 30, 1997 compared to the nine months ended
September 30, 1996
The Company's net revenues increased by $10,165,000, or 12.1%, to
$94,402,000, in the nine months ended September 30, 1997 from $84,237,000 in the
same period in 1996. This increase was primarily was attributable to PRO TV and
POP TV net revenues of $18,393,000 and $9,734,000, respectively, for the nine
months ended September 30, 1997, reflecting increases of $10,418,000, or 130.6%,
and $4,515,000, or 86.5%, respectively, over the same period in 1996. This
significant revenue growth is primarily the result of the growth in audience
share and PRO TV's and POP TV's ability to convert their dominant audience
shares into larger shares of their respective advertising markets. Videovox and
Radio Alfa, with combined net revenues of $2,944,000, for the nine months ended
September 30, 1997, also contributed to the increase in the Company's net
revenues. Videovox was acquired in May 1996 and Radio Alfa was acquired in
December 1996. These increases were partially offset by a decrease in net
revenues at CNTS, as discussed below.
CNTS's net advertising revenues decreased by $1,802,000, or 2.8%, in
the nine months ended September 30, 1997 compared to the same period in 1996,
primarily as a result of the devaluation of the Czech koruna. In local currency
terms,
Page 20
CNTS's net advertising revenues increased by Kc 182,598,000, or 10.5%, to
Kc 1,921,442,000 in the nine months ended September 30, 1997 compared to the
same period in 1996. This increase was offset by a 13.7% depreciation of the
Czech koruna. CNTS's United States dollar net revenues from advertising sales
were approximately $8,500,000 lower than they would have been if the currency
had remained stable since the end of the same period in 1996. Other revenues
(principally game show revenues) decreased by $5,208,000. The decline in game
show revenues is principally attributable to fewer game shows due to a current
lack of game show sponsors. As a result, CNTS's total net revenues decreased by
$6,996,000, to $63,331,000 in the nine months ended September 30, 1997 from
$70,327,000 in the same period in 1996.
Total station operating costs and expenses increased by $5,919,000, or
9.7%, to $66,764,000 in the nine months ended September 30, 1997 from
$60,845,000 in the same period in 1996. The increase in total station operating
costs and expenses is primarily attributable to the increasing scope of
operations of PRO TV and POP TV. CNTS's operating costs and expenses decreased
by $3,684,000 for the nine months ended September 30, 1997 compared to the same
period in 1996. This decrease is primarily attributable to the devaluation of
the Czech koruna and, to a lesser extent, to lower amortization of program
rights at CNTS for the nine months ended September 30, 1997 compared to the same
period in 1996.
Station selling, general and administrative expenses increased by
$839,000, or 5.8%, to $15,256,000 in the nine months ended September 30, 1997
from $14,417,000 in the same period in 1996. This increase was primarily
attributable to increased marketing expenses at PRO TV. To a lesser extent, the
increase in station selling, general and administrative expenses was
attributable to the addition to the Company's operations of Radio Alfa in
December 1996 and Videovox in May 1996.
Corporate operating costs and development expenses for the nine months
ended September 30, 1997 and in 1996 were $15,110,000 and $10,728,000,
respectively, an increase of $4,382,000. The increase was primarily attributable
to the Company's increased scope of operations, the continued development of the
Company's operational infrastructure, the Company's new operations in Poland and
Hungary and development activities in other countries.
Amortization of goodwill and allowance for development costs was
$7,430,000 and $1,407,000 in the nine months ended September 30, 1997 and 1996,
respectively. This increase was primarily attributable to amortization of
goodwill related to the Additional CNTS Purchases and, to a lesser extent, the
amortization of goodwill related to investments in Radio Alfa.
As a result of the above factors, the Company's operating loss
increased by $6,998,000 to $10,158,000 in the nine months ended September 30,
1997 compared to $3,160,000, in the same period in 1996.
Equity in loss of unconsolidated affiliates increased by $4,765,000 to
$16,322,000 in the nine months ended September 30, 1997 from $11,557,000 in the
Page 21
same period in 1996. The increase reflects the addition of Markiza TV, TVN and
the Studio 1+1 Group to the Company's operations, as these stations all incurred
losses in the nine months ended September 30, 1997. This increase also reflects
losses in the Company's German operations, including 1A TV until May 1997, when
1A TV initiated a bankruptcy proceeding but excluding the Company's write-down
of its investments in Germany.
Loss on impairment of investments in unconsolidated affiliates of
$20,707,000, was a result of the write-down of the Company's investments in
Germany. This write-down, together with losses incurred by the German operations
during the nine months ended September 30, 1997, has resulted in a total charge
of $26,258,000 in the Company's Consolidated Statements of Operations in that
period.
Interest and other income increased by $2,712,000, to $3,996,000 for
the nine months ended September 30, 1997 from $1,284,000 for the same period in
1996. The increase was primarily attributable to interest on increased cash and
marketable securities.
Interest expense increased by $3,304,000, to $6,218,000 in the nine
months ended September 30, 1997 from $2,914,000 in the same period in 1996. This
increase is primarily attributable to accrued interest on CME's Senior Notes.
See "-Liquidity and Capital Resources." This increase was also attributable to
interest expense incurred at the corporate level for the Czech koruna debt
funding of the 1996 CNTS Purchase and was partially offset by lower interest
expense at CNTS due to lower debt levels.
The net foreign currency exchange loss of $6,585,000 in the nine months
ended September 30, 1997 is primarily attributable to the devaluation of the
Czech koruna, Romanian lei and Slovenian tolar against the dollar during this
period.
Provision for income taxes was $7,926,000 for the nine months ended
September 30, 1997 and $9,198,000 for the same period in 1996 as a result of
improved tax planning.
Minority interest in loss of consolidated subsidiaries was $3,283,000
in the nine months ended September 30, 1997 and minority interest in income of
consolidated subsidiaries was $610,000 in the same period in 1996. This increase
is primarily the result of increased minority interest in the net loss of PRO TV
and decreased minority interest in the net income of CNTS.
As a result of these factors, the net loss of the Company was
$60,637,000 and $27,072,000 for the nine months ended September 30, 1997 and
1996, respectively.
Operations in Poland
On October 3, 1997, the Company and its partner, the Polish media group
ITI, successfully launched the TVN network in Poland, whereby Federation is
providing programming and advertising services to TVN and TV Wisla. The launch
occurred
Page 22
after a short gestation period of only seven months since the grant of the TVN
licenses. The Poland operation is a technologically complex project involving
the integration of local low power and medium power transmitters,
cable headends and several separate regional programming feeds, as required by
the television licenses, using digital satellite distribution.
Initial results from the Poland project indicate a greater than
expected need to upgrade the terrestrial signal distribution network, re-orient
antennae and work with cable operators to ensure high quality carriage. The
company is actively engaged in efforts to increase signal availability to Polish
homes. These efforts, which will continue for several months, are expected to
result in a gradual increase of the ability to view the station to its level of
full technical coverage, which is currently approximately 57% of the Polish
population, and a concomitant increase in viewing and ratings. The growth of
ratings and achievement of targeted revenues of the TVN network will be a
function of the speed and success of these efforts.
Liquidity and Capital Resources
Net cash used in operating activities was $13,664,000 in the nine
months ended September 30, 1997 compared to $1,309,000 in the same period in
1996. The increase in net cash used in operating activities of $12,335,000 was
primarily the result of station prepayments for technical equipment and an
increase in advances to affiliates.
Net cash used in investing activities was $90,446,000 in the nine
months ended September 30, 1997 compared to $58,659,000 in the same period in
1996. The increase was primarily attributable to an increase in investments in
Poland and in MobilRom in Romania, an increase in development costs in Hungary
and the Second 1997 CNTS Purchase. In addition, the Company's investment in
marketable securities during the nine months ended September 30, 1997 increased
compared to the same period in 1996. This increase is partially offset by a
reduction in capital expenditures from levels during the start-up of PRO TV and
POP TV in 1996.
Net cash provided by financing activities for the nine months ended
September 30, 1997 was $152,062,000 compared to $21,167,000 for the same period
in 1996. The increase was primarily the result of the Notes Offering described
below.
In August 1997, CME issued the Senior Notes, which raised net proceeds
of approximately $170,000,000 (the "Notes Offering"). 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, sell assets and engage in extraordinary transactions.
Page 23
Prior to the Notes Offering, the Company's operations were financed
primarily through public offerings of shares of Class A Common Stock completed
in October 1994 (the "IPO"), November 1995 and November 1996 (the "1996
Offering"), which raised net proceeds of approximately $68,800,000, $86,600,000
and $143,600,000, respectively. Prior to the IPO, the Company relied on Ronald
S. Lauder and entities controlled by or affiliated with him for capital in the
form of both debt and equity financing.
In May 1997, CNTS declared a total dividend of Kc 495,000,000
($15,096,000) of which the Company was paid Kc 150,150,000 ($4,684,000) in June
1997 and will be paid Kc 115,500,000 ($3,522,000) in each of November 1997 and
January 1998. The remaining Kc 113,850,000 ($3,472,000) is to be paid to
minority shareholders.
In August 1997, the Company received $2,800,000 from its partner in
Romania, Ion Tiriac, in connection with his exercise of an option to increase
his interest in Media Pro International, which operates PRO TV.
As a result of the factors described above, the Company had cash of
$125,017,000 at September 30, 1997 ($78,507,000 at December 31, 1996) and
marketable securities of $29,990,000 at September 30, 1997 ($2,896,000 at
December 31, 1996) available to finance its activities.
The Company has made, and expects to continue to make, investments to
develop broadcast operations in Central and Eastern Europe. The Company's cash
needs for those investment activities may exceed cash generated from operations
and the proceeds of the Notes Offering, resulting in external financing
requirements.
The Company entered into a loan facility with ING Bank N.V. ("ING"), on
July 11, 1997 pursuant to which ING agreed to provide the Company with bank
financing of up to $25 million (the "ING Bridge Facility"). The ING Bridge
Facility matured upon the consummation of the Notes Offering. On August 25,
1997, approximately $20 million of the proceeds from the Notes Offering were
used to repay in full the ING Bridge Facility. In connection with the ING Bridge
Facility, the Company executed a term sheet with ING for a $35 million secured
revolving credit facility anticipated to have a term of up to three and one-half
years to fund working capital requirements, as well as operating and capital
expenditures (the "Proposed ING Credit Facility"). The Proposed ING Credit
Facility is expected to be incurred by a subsidiary. The availability of the
Proposed ING Credit Facility is subject to definitive documentation and
satisfaction of various conditions.
On August 11, 1997, the Company made the Second 1997 CNTS Purchase when
it purchased Nova Consulting a.s. ("NC") from certain of the partners of CET 21,
for a purchase price of $28,537,500, to be paid on an installment basis through
February 15, 2000, subject to adjustment as described below. NC owns a 5.8%
interest in CNTS. A portion of the payments are indexed based upon the
performance of the Company's Class A Common Stock. As of September 30, 1997, the
Company has paid $7,000,000 of the purchase price and will make further payments
of $4,500,000 during the fourth quarter of 1997. The Company intends to sell a
minority interest in
Page 24
CNTS in a public offering in the Czech Republic, as well as to one or more
strategic Czech investors.
On August 1, 1996, the Company entered into the Additional CNTS
Purchase for the purchase of CS's 22% economic interest and virtually all of
CS's voting rights in CNTS for a purchase price of Kc 1 billion ($35,067,000).
The Company also entered into a loan agreement with CS to finance 85% of the
purchase price. The remainder of the purchase price, Kc 150,000,000
($5,607,000), was paid by the Company on November 15, 1996 out of the Company's
cash balances. The loan from CS was drawn in August 1996 and in April 1997 in
the amounts of Kc 450,000,000 ($16,464,000) and Kc 400,000,000 ($12,996,000),
respectively, to fund purchase payments due at those times. The loan bears an
annual interest rate of 12.9%. Quarterly repayments on the loan are required in
the amount of Kc 22,500,000 ($686,000) during the period from November 1997
through November 1998, Kc 42,500,000 ($1,296,000) during the period from
February 1999 through August 2002, and Kc 20,000,000 ($610,000) during the
period from November 2002 through November 2003.
The Company expects CNTS's future cash requirements to continue to be
satisfied through operating cash flows and available borrowing facilities. CNTS
has a line of credit with CS, obtained in October 1996, for up to Kc 250,000,000
($7,624,000) bearing interest at a rate 0.5% over the Prague Interbank Offer
Rate ("PRIBOR"). Under this facility, which is secured by CNTS's equipment,
vehicles and receivables, CNTS had borrowings of Kc 406,000 ($12,000) at
September 30, 1997. In October 1997, CNTS entered into a Kc 500,000,000
($15,249,000) line of credit with ING Bank N.V. The line of credit, which may be
drawn in Czech koruna, German marks or United States dollars, bears interest at
a rate of 0.5% over the interbank offered rate for the applicable currency and
matures in October 1999.
In June 1997, CEDC Praha s.r.o. ("CEDC Praha"), which owned the
facility that Nova TV uses as its main studios and principal offices (the "Nova
Facility"), terminated the capital lease pursuant to which CEDC Praha leased the
Nova Facility to CNTS, and entered into an agreement with CNTS pursuant to which
(i) CEDC Praha assigned the Nova Facility to CNTS and (ii) CNTS assumed CEDC
Praha's obligations under a loan from CS (the "CS Loan") secured by a mortgage
on the Nova Facility. The CS Loan provides for quarterly payments of Kc
16,500,000 ($503,000), plus interest equal to CS's prime rate plus 1.5%, to be
paid through December 1999. As of September 30, 1997, the outstanding balance
under the CS Loan was Kc 142,500,000 ($4,346,000).
PRO TV has two borrowing facilities with Tiriac Bank in Romania. The
first facility consists of a $2,000,000 line of credit substantially payable
during December 1997. The line of credit bears interest at a rate of 5% over
LIBOR. At September 30, 1997, $1,999,000 was outstanding under this facility.
The second facility is a long-term loan for $4,000,000 due July 31, 2001. The
long-term loan bears interest at 5% over LIBOR and is to be repaid in monthly
installments starting during December 1997. At September 30, 1997, $3,854,000
was borrowed under this facility. These facilities are secured by PRO TV's
equipment and vehicles. Notwithstanding these
Page 25
borrowing facilities, the Company believes that it will be required to provide
additional funding to PRO TV.
The laws under which the Company's operating subsidiaries are
organized provide generally that dividends may be declared by the partners or
shareholders out of yearly profits subject to the maintenance of registered
capital, 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. The Company's
voting power is sufficient to compel CNTS to make 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. In the case of Federation and TVN in Poland, there are no legal
reserve requirements with respect to distributions. The Company does not have
sufficient voting power in Federation or TVN to compel the making of
distributions. In general, the laws of countries where the Company is developing
operations contain restrictions on the payment of dividends.
Except for the Company's working capital requirements, the Company's
future cash needs will depend on the Company's financial performance and its
future acquisition and development decisions. The Company is actively engaged in
the development of additional broadcast operations and investing in its existing
broadcasting companies throughout Central and Eastern Europe. The Company incurs
certain expenses in identifying and pursuing broadcast opportunities before any
investment decision is made. The Company anticipates making additional
investments in other broadcast operations, supplemented by capital raised from
local strategic financial partners as well as local debt and lease financing, to
the extent that it is available and appropriate for each project.
The Company believes that the net proceeds from the Notes Offering,
together with its current cash balances, cash from CNTS, the Proposed ING Credit
Facility and local financing of broadcast operations and broadcast operations
under development should be adequate to satisfy the Company's operating and
capital requirements for 12 to 18 months for both its current operations and
operations under development.
Statements made in "Operations in Poland" and "Liquidity and Capital
Resources," regarding the Poland operations, future investments in existing
television broadcast operations and the development of new television broadcast
operations (including the amount and nature thereof), business strategies and
the future need for additional funds from outside sources, are forward-looking
statements. Forward-looking statements are inherently subject to risks and
uncertainties, many of which cannot be predicted with accuracy and some
Page 26
of which might not even be anticipated. Future events and actual results,
financial and otherwise, could differ materially from those set forth in or
contemplated by the forward-looking statements herein. Important factors that
contribute to such risks include the Company's success in increasing signal
availability in Poland (with respect to "Operations in Poland") and success in
obtaining additional broadcast licenses, the cost of developing opportunities
into television broadcast operations, the ability to acquire programming, the
ability to attract audiences, the rate of development of advertising markets in
these countries and general market and economic conditions in these countries.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
On April 30, 1997, Perekhid Media Enterprises Ltd. ("Perekhid") filed a
complaint in the Supreme Court of New York County, State of New York, against
the Company and Ronald S. Lauder, the Chairman of the Company's Board of
Directors. Perekhid alleges that the issuance of a license to the Studio 1+1
Group pursuant to which Studio 1+1 has been broadcasting programming on
Ukrainian National Channel 2 ("UT-2"), constitutes a tortious interference by
CME and Mr. Lauder with a Perekhid contract with the Ukrainian authorities for
Perekhid to provide programming for and sell advertising time on UT-2.
Perekhid's complaint seeks compensatory damages of $250 million, punitive
damages of $500 million, and an injunction against the Company and Mr. Lauder to
prevent the continuation of the alleged conduct. On July 2, 1997, the Company
filed a motion to dismiss the complaint. Management believes that it has
substantial defenses in this matter and intends to defend the matter vigorously.
In January 1997, the Hungarian Television Commission announced tender
procedures for the award of two national television broadcast licenses. The
Company formed a consortium, MKTV Rt. ("IRISZ TV"), which submitted an
application for these licenses. Two other consortia submitted bids by the April
10, 1997 deadline. On June 30, 1997, the Hungarian Television Commission
announced the two other consortia as winners of the licenses. On July 4, 1997,
IRISZ TV filed a complaint in the Budapest Capital Court against the Hungarian
Television Commission and the other consortia. The complaint alleges that the
Hungarian Television Commission (i) violated the tender procedures in connection
with the acceptance of bids; (ii) violated the integrity and fairness of the
tender; and (iii) breached its own published guidelines in the bid evaluation
process. IRISZ TV is seeking an order to terminate the broadcasting agreements
entered into by the other consortia and has reserved its right to seek damages.
At a hearing on July 16, 1997, the Court denied IRISZ TV's request for interim
relief. The trial on the merits of the claim began on September 12, 1997. The
Court has ordered additional discovery and scheduled the next hearing for March
25, 1998.
Page 27
On May 13, 1997, the Company announced its decision to discontinue
funding of 1A TV, which operated PULS, a regional television station operating
in the Berlin-Brandenburg area of Germany. The Company had a 58% non-controlling
interest in 1A TV. On May 27, 1997, 1A TV initiated a bankruptcy proceeding in
the Bankruptcy Court of Berlin-Charlottenburg. The Court has appointed a trustee
to liquidate and wind-up 1A TV. The administrator has requested to meet with the
Company in connection with possible claims against the Company on behalf of the
bankruptcy estate. The Company expects to meet with the administrator in the
near future.
To finance developments, 1A TV received investment grants in an
aggregate amount of DM8,544,000 ($4,855,000) from a German public bank beginning
in 1993, which grants were guaranteed by a wholly owned subsidiary of the
Company. As a result of the bankruptcy proceedings initiated by 1A TV, the bank
has notified the guarantor that it intends to seek repayment of the investment
grants from the guarantor, plus interest at the rate of 6.0% per annum.
Management believes that the maximum exposure is limited to the German assets,
which have been fully provided for.
The Company is, from time to time, a party to litigation that arises in
the normal course of its business operations. The Company is not presently a
party to any such litigation which could reasonably be expected to have a
material adverse effect on its business or operations.
Item 2. Changes in Securities and Use of Proceeds.
On August 1, 1997, CME issued warrants to purchase up to 100,000 shares
of CME's Class A Common Stock to each of the Lavendar Foundation, Staffordshire
Corporation and MAWA Holding N.V., companies owned by certain affiliates of ITI,
a Polish media group and the Company's partner in Federation in Poland. In
consideration of the issuance of these warrants, such affiliates of ITI agreed
to restrict their and their affiliates' activities which could compete with the
Company's media businesses in Poland. Each of these warrants becomes
exerciseable with respect to 33,333 shares on August 1, 2000, 33,333 shares on
August 1, 2001 and 33,334 shares on August 1, 2002. The exercise price of these
warrants is $26.25 per share (110% of the average closing price of CME's Class A
Common Stock for the five trading days up to and including the warrant issuance
date). These warrants expire upon the earlier of (i) August 1, 2004 and (ii) a
material adverse change, by reason of any Polish regulatory requirement, in the
television and media businesses in which the Company and ITI are partners. The
issuance of the warrants did not involve any public offering and was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
Item 6. Exhibits and Reports on Form 8-K.
a) The following exhibits are attached:
Page 28
3.1 Certificate of Deposit of Memorandum of Increase of Share Capital,
executed by Registrar of Companies on May 20, 1997.
10.1 Shareholder's Agreement, dated August 1, 1997, among Federacja
Sp.zo.o., ITI Media Group N.V., CME Media Enterprises B.V., CME Poland
B.V. and Unidome Beheer B.V.
27.01 Financial Data Schedule
b) No reports on Form 8-K were filed during the quarter ended
September 30, 1997.
Page 29
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: November 13, 1997 /s/ Leonard M. Fertig
------------------------------
Leonard M. Fertig
Chief Executive Officer
(Duly Authorized Officer)
Date: November 13, 1997 /s/ John A. Schwallie
-----------------------------
John A. Schwallie
Chief Financial Officer
(Principal Financial Officer)
Page 30
EXHIBIT INDEX
3.1 Certificate of Deposit of Memorandum of Increase of Share Capital,
executed by Registrar of Companies on May 20, 1997.
10.1 Shareholder's Agreement, dated August 1, 1997, among Federacja
Sp.zo.o., ITI Media Group N.V., CME Media Enterprises B.V., CME Poland
B.V. and Unidome Beheer B.V.
27.01 Financial Data Schedule
Page 31