SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-24796
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
(Exact name of registrant as specified in its charter)
BERMUDA N/A
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Clarendon House, Church Street, Hamilton HM CX Bermuda
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 441-296-1431
Indicate by check mark whether registrant: (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for each shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of May 8, 1998
----- -----------------------------
Class A Common Stock, par value $.01 17,226,098
Class B Common Stock, par value $.01 6,888,387
PART 1
FINANCIAL INFORMATION
Item 1. Financial Statements
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
Consolidated Balance Sheets as at
March 31, 1998 and December 31, 1997
($000s)
ASSETS
------
December 31,
March 31, 1998 1997
---------------- ----------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents ................................................................ $ 61,926 $ 106,188
Investments in marketable securities ..................................................... 70 69
Restricted cash .......................................................................... 1,292 800
Accounts receivable (net of allowances of $4,196, $3,698) ................................ 35,583 41,985
Program rights costs ..................................................................... 27,510 30,220
Value-added tax recoverable .............................................................. 7,372 5,229
Amount due from unconsolidated affiliates ................................................ 8,836 6,696
Advances to affiliates ................................................................... 7,750 7,979
Other short-term assets .................................................................. 2,903 3,273
Prepaid expenses ......................................................................... 13,319 7,018
---------------- ----------------
Total current assets ..................................................................... 166,561 209,457
Investments in unconsolidated affiliates ................................................. 56,187 58,552
Investments .............................................................................. 23,021 22,951
Loans to affiliates ...................................................................... 32,424 31,927
Property, plant & equipment (net of depreciation of $36,636, $31,517) .................... 68,154 68,090
Program rights costs ..................................................................... 15,296 12,851
Broadcast licence costs and other intangibles (net of amortization of $2,698, $2,381) ... 2,875 2,752
Licence acquisition costs (net of amortization of $2,109, $1,901) ........................ 3,248 3,456
Goodwill ................................................................................. 63,905 65,910
Organization costs (net of amortization of $1,308, $1,222) ............................... 472 541
Deferred taxes ........................................................................... 764 746
Other assets ............................................................................. 20,249 14,334
================ ================
Total assets ............................................................................. $ 453,156 $ 491,567
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable ......................................................................... $ 34,288 $ 30,929
Accrued liabilities ...................................................................... 19,610 22,929
Duties and other taxes payable ........................................................... 11,137 10,989
Income taxes payable ..................................................................... 1,324 2,308
Current portion of obligations under capital lease ....................................... 75 88
Current portion of credit facilities ..................................................... 9,090 11,722
Dividends payable ........................................................................ -- 996
Investments payable ...................................................................... 10,310 16,714
Advances from affiliates ................................................................. 27,564 25,508
---------------- ----------------
Total current liabilities .................................................... 113,398 122,183
Deferred income taxes .................................................................... 747 916
Long-term portion of obligations under capital leases .................................... 17 27
Long-term portion of credit facilities ................................................... 22,694 24,177
Investments payable ...................................................................... 5,188 7,875
$100,000,000 9 3/8 % Senior Notes due 2004 (net of discount of $141, $147) ............... 99,859 99,853
DM 140,000,000 8 1/8 % Senior Notes due 2004 (net of discount of $333, $347) ............. 75,457 77,513
Other liabilities ........................................................................ 241 199
Minority interest in consolidated subsidiaries ........................................... 541 1,241
COMMITMENTS AND CONTINGENCIES (Note 4)
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 March 31, 1998
and 100,000,000 at December 31, 1997; issued and outstanding; 17,022,819 at
March 31, 1998 and 16,934,894 at December 31, 1997 .................................... 170 169
Class B Common Stock, $0.01 par value: authorized: 15,000,000 shares at March 31, 1998
and December 31, 1997; issued and outstanding; 7,057,083 at March 31, 1998 and
7,064,475 at December 31, 1997 ........................................................ 71 71
Additional paid-in capital ............................................................... 333,199 332,386
Accumulated deficit ...................................................................... (188,134) (163,096)
Cumulative currency translation adjustment ............................................... (10,292) (11,947)
---------------- ----------------
Total shareholders' equity ............................................................... 135,014 157,583
---------------- ----------------
Total liabilities and shareholders' equity ............................................... $ 453,156 $ 491,567
================ ================
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
($000s, except per share data)
(Unaudited)
For the three months
ended March 31,
--------------------
1998 1997
-------- --------
Gross revenues .................................................... $ 48,262 $ 37,480
Discounts and agency commissions .................................. (10,253) (8,315)
-------- --------
Net revenues ...................................................... 38,009 29,165
STATION EXPENSES:
Other operating costs and expenses ................................ 25,479 13,546
Amortization of programming rights .............................. 14,953 5,286
Depreciation of station fixed assets and other intangibles ...... 5,057 3,650
-------- --------
Total station operating costs and expenses ...................... 45,489 22,482
Selling, general and administrative expenses .................... 8,240 4,329
CORPORATE EXPENSES:
Corporate operating costs and development expenses .............. 7,190 4,575
Amortization of goodwill and allowance for development costs .... 2,529 1,997
-------- --------
9,719 6,572
Operating loss .................................................... (25,439) (4,218)
Equity in loss of unconsolidated affiliates (Note 3) .............. (1,027) (6,769)
Loss on impairment of investments in unconsolidated
affiliates (Note 3) ............................................... -- (20,707)
Interest and other income ......................................... 1,612 2,100
Interest expense .................................................. (5,737) (2,174)
Foreign currency exchange gain (loss) ............................. 139 (2,071)
-------- --------
Loss before provision for income taxes ............................ (30,452) (33,839)
Provision for income taxes ........................................ (2,107) (1,911)
-------- --------
Loss before minority interest ..................................... (32,559) (35,750)
Minority interest in loss of consolidated affiliates .............. 7,521 762
-------- --------
Net Loss .......................................................... $(25,038) $(34,988)
======== ========
PER SHARE DATA:
Net loss per share (Note 2):
Basic ........................................................... $ (1.04) $ (1.47)
Diluted ......................................................... $ (1.04) $ (1.47)
Weighted average number of common shares outstanding (000s):
Basic ........................................................... 24,001 23,857
Diluted ......................................................... 24,001 23,857
Page 3
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
Consolidated Statements of Shareholders' Equity / (Deficit)
For the three months ended March 31, 1998
($000s)
(Unaudited)
Comprehensive Class A Class B
Income Common Common Capital
(loss) Stock Stock Surplus
------------- --------- --------- ---------
BALANCE, December 31, 1997 ............. $ 169 $ 71 $ 332,386
Comprehensive income: (Note 2)
Net loss ............................ $ (25,038)
Other comprehensive income:
Unrealized translation adjustments $ 1,655 --
-------------
Comprehensive income ................ $ (23,383)
=============
Stock issued:
Stock option plans .................. $ 1 -- $ 813
--------- --------- ---------
BALANCE, March 31, 1998 ................ $ 170 $ 71 $ 333,199
========= ========= =========
Accumulated
Other Total
Accumulated comprehensive Shareholders'
Deficit(1) income(2) equity
----------- ------------- -------------
BALANCE, December 31, 1997 ............. $ (163,096) $ (11,947) $ 157,583
Comprehensive income: (Note 2)
Net loss ............................ $ (25,038) $ (25,038)
Other comprehensive income:
Unrealized translation adjustments $ 1,655 $ 1,655
Comprehensive income ................
Stock issued:
Stock option plans .................. $ 814
----------- ------------- -------------
BALANCE, March 31, 1998 ................ $ (188,134) $ (10,292) $ 135,014
=========== ============= =============
- ----------
(1) Of the accumulated deficit of $188,134,000 at March 31, 1998, $84,376,000
represents accumulated losses in unconsolidated affiliates.
(2) Represents foreign currency translation adjustments.
Page 4
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
Consolidated Statements of Cash Flows
For the three months ended March 31, 1998 and 1997
($000s)
(Unaudited)
For the three months ended
March 31,
------------------------------
1998 1997
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ....................................................................... $ (25,038) $ (34,988)
Adjustments to reconcile net loss to net cash used in operating activities:
Equity in loss of unconsolidated affiliates .................................. 1,027 6,769
Loss on impairment of investments in unconsolidated affiliates ............... -- 20,707
Depreciation and amortization (excluding amortization of barter programs) .... 22,837 10,789
Minority interest in loss of consolidated affiliates ......................... (7,521) (762)
Valuation allowance for development costs .................................... -- 120
Changes in assets and liabilities:
Accounts receivable .......................................................... 7,089 4,711
Related party receivable ..................................................... (1,021) --
Program rights paid .......................................................... (13,780) (5,313)
Value-added tax recoverable .................................................. (2,049) (43)
Advances to affiliates ....................................................... 907 183
Prepaid expenses and other short-term assets ................................. (3,126) (981)
Accounts payable ............................................................. (148) (2,921)
Accrued liabilities .......................................................... (3,423) (3,233)
Income and other taxes payable ............................................... 26 2,302
------------- -------------
Net cash used in operating activities .................................... (24,220) (2,660)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in Unconsolidated Affiliates ..................................... (1,153) (8,215)
Other investments ............................................................ (582) --
Investments in marketable securities ......................................... -- 38
Restricted cash .............................................................. (492) 951
Acquisition of fixed assets .................................................. (3,350) (2,667)
Acquisition of minority shareholder's interest ............................... (7,878) (74)
Loans and advances to affiliates ............................................. (427) (2,114)
Payments for broadcast license costs, other assets and intangibles ........... (361) --
Development costs ............................................................ -- (634)
------------- -------------
Net cash used in investing activities .................................... (14,243) (12,715)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Credit facilities ............................................................ (4,833) (2,689)
Payments under capital leases ................................................ -- (477)
Dividends paid to minority shareholders ...................................... (1,117) --
Capital contributed by shareholders .......................................... 814 157
Other long-term liabilities .................................................. (905) --
------------- -------------
Net cash provided by financing activities ................................ (6,041) (3,009)
------------- -------------
IMPACT OF EXCHANGE RATE FLUCTUATIONS ON CASH ................................... 242 (570)
------------- -------------
Net increase (decrease) in cash and cash equivalents ......................... (44,262) (18,954)
CASH AND CASH EQUIVALENTS, beginning of period ................................. 106,188 78,507
============= =============
CASH AND CASH EQUIVALENTS, end of period ....................................... $ 61,926 $ 59,553
============= =============
Supplemental information:
Cash paid for interest ....................................................... $ 9,058 $ 2,132
============= =============
Income taxes ................................................................. $ 3,279 $ 3,979
============= =============
Page 5
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
Notes to Consolidated Financial Statements
March 31, 1998
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 and
affiliates (CME and its 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.
In the Czech Republic, the Company is entitled to 99% of the total
profits of and has 97% of the voting power in Ceska Nezavisla Televizni
Spolecnost s.r.o. ("CNTS"), which operates Nova TV, a private national
television station in the Czech Republic. In August 1996, when the Company
increased its economic interest in CNTS through the acquisition of a 22%
economic interest in CNTS from Ceska Sporitelna Bank ("CS Bank") (the
"Additional CNTS Purchase"), CS Bank granted the Company an option to acquire
CS Bank's remaining 2% voting interest for no additional consideration. On
December 9, 1997, the Company exercised its option and upon completion of
registration pursuant to Czech law of the 2% voting interest, the Company will
have 99% of the voting power in CNTS. CET 21 has a 1% equity interest in CNTS.
In March 1997, the Company acquired a 5.2% interest in CNTS (the "1997 CNTS
Purchase") and in August 1997, the Company acquired an additional 5.8%
interest in CNTS (the "Second 1997 CNTS Purchase").
The Company owns a 76% ownership interest in Radio Alfa a.s. ("Radio
Alfa"), one of two private national radio broadcasters in the Czech Republic.
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. 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 96% equity interest in Unimedia SRL ("Unimedia"), which owns a
10% equity interest in a consortium, MobilRom, which holds one of the two GSM
cellular telephone licenses in Romania. Mr. Sarbu owns the remaining 4% 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"). Under the names POP TV and Gajba TV, Pro Plus
provides programming to, and sells advertising for, affiliated stations. The
Company owns 78% of the equity of Pro Plus, but has an effective economic
interest of 85.3% as a 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.
Page 6
Also in Slovenia, in July 1996, the Company, together with MMTV and
Tele 59, entered into an agreement to purchase a 66% equity interest in Kanal
A. Scandinavian Broadcasting System S.A. claims to have rights to such equity
interest. The Company instituted actions in Slovenian courts requesting
resolution of the dispute. See Part II, Item 1 "Legal Proceedings".
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 Hungary, the Company owns an 89% (increased from 71% in April 1998
for a purchase price of $700,000) equity interest in Budapesti Kommunikacios
Rt. ("TV3"), a television station operating in Budapest and distributing its
signal by satellite to cable systems throughout Hungary. The Company wholly
owns Videovox Studio Limited Liability Company ("Videovox"), a Hungarian
dubbing and duplication company acquired in May 1996 and owns 24.9% of the
equity of 2002 Tanacsado es Szolgaltato Korlatolt Felelosegu Tarsasag ("2002
Kft"), a broadcasting company.
In Germany, as of December 31, 1997, the Company terminated its
ownership interests in regional television operations in Nuremberg ("FFF") and
Dresden and Leipzig ("SFF"). Prior to these transactions, the Company owned
non-controlling voting interests in those entities. On May 13, 1997, the
Company announced its decision to discontinue funding of 1A TV
Beteiligungsgessellschaft GmbH & Co. Betriebs KG ("1A TV"), which operated
PULS, a regional television station operating in the Berlin - Brandenburg
area. On May 27, 1997, 1A TV initiated a bankruptcy proceeding in the
Bankruptcy Court of Berlin-Charlottenberg, which is pending.
In Poland, the Company owns a 50% direct interest in Federacja
Sp.zo.o. ("Federation"). The Company owns an additional 5% indirect interest
in Federation through its 10% equity interest in ITI Media Group N.V., which
owns the remainder of Federation. Such 10% equity interest is subject to put
and call options between the Company and ITI, which options are exerciseable
from August 2000 until August 2003. TVN Sp.zo.o., owned 67% by ITI and 33% by
the Company, holds broadcast licenses for northern Poland and the cities of
Warsaw and Lodz., and in addition, a private regional television station in
southern Poland. Federation provides programming and advertising services to
TVN Sp.zo.o. In December 1997, TVN Sp.zo.o. acquired 22% of Polskie Media
S.A., a private regional television station operating under the name "Nasza
TV" in central Poland. The remaining shareholders of Polskie Media S.A. have
instituted legal proceedings challenging TVN Sp.zo.o.'s acquisition. See Part
II, Item 1 "Legal Proceedings".
Also in Poland, the Company owns an indirect 12% interest in
Endemol-Neovision Sp.zo.o., a television program production company.
In Ukraine, the Company owns a 50% non-controlling interest in a
group of companies (collectively, the "Studio 1+1 Group"), which have the
right to broadcast programming and sell advertising on Ukrainian National
Channel 2 ("UT-2") through 2006.
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 three months
ended March 31, 1998 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 results of CNTS
(which operates Nova TV), PRO TV, POP TV, Federation, TV3 and Radio Alfa (the
"Consolidated Affiliates"), as consolidated entities and reflect the interests
of the minority owners of these entities for the periods presented, as
applicable (Note 1). The results of Markiza TV, the Studio 1+1 Group, TVN
Sp.zo.o. and, for the first quarter of 1997 only, FFF, SFF and 1A TV (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.
1A TV initiated a bankruptcy proceeding in May 1997 and the Company terminated
its ownership interests in FFF and SFF as of December 31, 1997. The Company
records other investments at the lower of cost or market value.
Net Loss Per Share
Effective December 31, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
Basic net income (loss) per common share ("Basic EPS") is computed by dividing
net income (loss) by the weighted average number of common shares outstanding.
Diluted net income (loss) per common share ("Diluted EPS") is computed by
dividing net income (loss) by the weighted average number of common shares and
dilutive common share equivalents and convertible securities then outstanding.
SFAS No. 128 requires the presentation of both Basic EPS and Diluted EPS on
the face of the consolidated statements of operations. Diluted EPS is the same
as Basic EPS, as the inclusion of the impact of stock options, warrants and
convertible securities then outstanding would be anti-dilutive. Accordingly,
no reconciliation of those amounts has been presented herein.
Comprehensive Income (Loss)
In 1998, the Company adopted SFAS No.130, "Reporting Comprehensive
Income" ( "SFAS No. 130" ), which requires companies to report all changes in
equity during a period, except those resulting from investment by owners and
distribution to owners, in a financial statement for the period in which they
are recognized. The Company has chosen to disclose Comprehensive Income, which
encompasses net income (loss) and foreign currency translation adjustments, in
the accompanying Consolidated Statement of Shareholders' Equity.
Page 8
Reclassifications
Certain reclassifications have been made to prior period amounts to
conform to current period classifications.
3. Summary Financial Information for Unconsolidated Affiliates.
As of
------------------------------------------------------------------------------
March 31, 1998 December 31, 1997
------------------------------------------------------------------------------
$000s TVN Studio TVN Studio
----- Sp.zo.o. Markiza TV 1+1 Group Sp.zo.o. Markiza TV 1+1 Group
------------------------------------------------------------------------------
Current assets............... 29,271 17,986 5,147 27,106 18,385 7,744
Non-current assets........... 47,073 26,550 12,208 49,608 25,900 21,542
Current liabilities.......... (23,315) (13,157) (6,470) (21,884) (13,328) (5,976)
Non-current liabilities...... (42,724) (1,353) (10,381) (41,812) (998) (6,000)
------------------------------------------------------------------------------
Net assets................... 10,305 28,930 504 13,018 29,959 17,310
==============================================================================
For the three months ended,
----------------------------------------------------------------------------------------------
March 31, 1998 March 31, 1997
----------------------------------------------------------------------------------------------
$000s TVN Markiza Studio TVN Markiza Studio 1+1
----- Sp.zo.o. TV 1+1 Group Sp.zo.o. TV Group 1A TV FFF
----------------------------------------------------------------------------------------------
Net revenues............ 330 7,772 6,622 279 5,628 3,086 611 1,161
Operating (loss) income. (1,413) (337) 265 (1,555) (1,152) (1,481) (3,596) (808)
Net profit (loss)....... (1,892) 303 199 (1,847) (1,721) (1,481) (3,611) (915)
The Company's share of losses in Unconsolidated Affiliates for the three
months ended March 31, 1998 (including goodwill amortization for Markiza TV
and the Studio 1+1 Group) was $1,027,000, including a profit of $350,000 in
Markiza TV, a loss of $1,106,000 in the Company's unconsolidated Poland
operations and a loss of $271,000 in the Studio 1+1 Group. On May 13, 1997,
the Company announced its decision to discontinue funding of 1A TV and the
Company terminated its ownership interests in FFF and SFF as of December 31,
1997. As a result, the Company has eliminated the carrying value of these
investments as of the year-end 1997.
4. Commitments and Contingencies
Stock price protections
Pursuant to the terms of a severance agreement, dated as of March 25,
1998, with CME's former President and Chief Executive Officer Leonard M. Fertig,
the Company has agreed to certain stock price protection provisions with respect
to Mr. Fertig's CME Class A Common Stock. If the average per share selling
price (before deductions for commissions and other expenses of sale) for all
shares of CME Class A Common Stock sold by Mr. Fertig prior to August 1998 is
less than $27.625 per share, then the Company will pay Mr. Fertig per share
sold, up to 50,000 shares, an amount equal to the difference between $27.625 and
the higher of (a) $20 and (b) the average selling price (before deduction for
commissions and other expenses for sale) for shares sold. The Company's maximum
exposure pursuant to these stock price protection provisions is $600,000. Any
amounts paid to Mr. Fertig pursuant to such stock price protection provisions
will be recognized and accrued as an expense by the Company based on changes in
the price of the CME's Class A Common Stock during
Page 9
the periods covered by the agreement. The severance agreement is filed as
Exhibit 10.3 to this Form 10-Q for the quarterly period ended March 31, 1998.
Subsidiary guarantee
Beginning in 1993, 1A TV received investment grants in an aggregate
amount of DM8,544,000 ($4,618,000) from a German public bank, to partially
finance the development of the station. The grants were guaranteed by a
wholly-owned German subsidiary of the Company. The grants were repayable if 1A
TV did not fulfill certain conditions, including maintaining specified levels
of employment for a five year period. As a result of the bankruptcy
proceedings initiated by 1A TV, the German public bank has demanded repayment
of the investment grants from 1A TV and the guarantor, plus interest at the
rate of 6.0% per annum. In January 1998, the Company filed an appeal of the
demand for repayment with the German public bank, which is pending. Management
believes that the Company's exposure is limited to a nominal settlement amount
or the value of its German assets, the value of which have been fully reserved
in the Consolidated Financial Statements of the Company.
5. Subsequent Events
Since March 31, 1998, 36,983 stock options for Class A Common Stock
were exercised at prices of $0.20 to $21.75.
Page 10
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 is the leading commercial television company in Central
and Eastern Europe. The Company's national private television stations and
networks in the Czech Republic, Slovakia, Slovenia and Ukraine had the leading
nationwide audience shares for March 1998 and the Company's television network
in Romania had the leading average audience share within its area of broadcast
reach for March 1998. In October 1997, the Company launched television
broadcast operations in Poland and Hungary.
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, 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. The Company has
incurred and might in the future incur 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. The Company's ability to obtain dividends or other
distributions is subject to, among other things, restrictions on dividends
under applicable local laws and foreign currency exchange regulations of the
jurisdictions in which its Subsidiaries operate. The Subsidiaries' ability to
make distributions is also subject to the legal availability of sufficient
operating funds not needed for operations, obligations or other business plans
and, in some cases, the approval of the other partners, stockholders or
creditors of these entities. The laws under which the Company's operating
Subsidiaries are organized provide generally that dividends may be declared by
the partners or shareholders out of yearly profits subject to the maintenance
of registered capital and required reserves and after the recovery of
accumulated losses.
Page 11
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 months ended March 31, 1998 and 1997 for the Company's operating
entities. This financial information departs materially from GAAP.
In the table "Selected Combined Financial Information," revenues and
operating expenses of certain entities (Markiza TV, the Studio 1+1 Group and
TVN Sp.zo.o.) not consolidated in the Consolidated Financial Statements are
aggregated with those of the Company's consolidated operations. In the table
"Selected Attributable Financial Information", combined information is
adjusted for CME's economic interest in each entity, which economic interest
is the basis used for consolidation and equity method accounting in the
Company's GAAP Consolidated Financial Statements as of March 31, 1998. Both
tables separate the results of the new stations, TVN and TV3, from the results
of the "Continuing Stations".
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. 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. The Company's former operations in
Germany are not included in this analysis.
In the Consolidated Financial Statements, consolidated entities
include CNTS, PRO TV, POP TV, Federation, TV3, Radio Alfa and Videovox, and
entities reported using the equity method of accounting include Markiza TV,
the Studio 1+1 Group and TVN Sp.zo.o. Under the equity method of accounting,
the Company's interest in net earnings or losses of Markiza TV, the Studio 1+1
Group and TVN Sp.zo.o. 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 and attributable information includes certain financial information
of Markiza TV, the Studio 1+1 Group and TVN Sp.zo.o on a line-by-line basis,
similar to that of the Company's consolidated entities, CNTS, PRO TV, POP TV,
Federation, TV3, Radio Alfa and Videovox.
Of the Continuing Stations, CNTS, which operates Nova TV, began
operations in February 1994. PRO TV and POP TV began operations in December
1995, Markiza TV began operations in August 1996 and the Studio 1+1 Group
began to generate significant revenues during the second quarter of 1997.
Other operations consist of Videovox, a Hungarian dubbing studio and
duplication facility acquired by the Company in May 1996 and wholly-owned
since May 1997, and Radio Alfa, a national radio station in the Czech
Republic, a controlling interest of which was acquired in December 1996. Both
new stations, TVN and TV3, began operations in October 1997.
Page 12
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 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.
"Broadcast cash flow", a broadcasting industry measure of
performance, is defined as net broadcast revenues, less broadcast operating
expenses excluding depreciation and amortization of acquired programming and
of intangible assets, broadcast selling, general and administrative expenses,
and cash program rights costs. Cash program rights costs represent cash
payments for current programs payable and such payments do not necessarily
correspond to program use. 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 13
SELECTED COMBINED FINANCIAL INFORMATION (1)
(unaudited)
($000s)
Three Months Ended March 31,
------------------------------------------------------------------------------------------
Net Revenue EBITDA Broadcast Cash Flow
------------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
CNTS.......................... 20,080 20,665 8,141 8,263 6,828 7,181
PRO TV........................ 7,756 4,947 (2,461) (1,032) (2,289) (319)
Markiza TV.................... 7,772 5,628 729 (128) (392) (1,095)
POP TV........................ 3,684 2,671 (1,516) (1,046) (1,140) (704)
Studio 1+1 Group.............. 6,622 3,086 507 (1,275) (272) (1,244)
-------------- ------------- -------------- -------------- -------------- --------------
Total Continuing Stations.......... 45,914 36,997 5,400 4,782 2,735 3,819
TVN Sp.zo.o. / Federation.... 4,668 -- (12,248) -- (7,549) --
TV3.......................... 1,075 -- (2,529) -- (4,203) --
-------------- ------------- -------------- -------------- -------------- --------------
Total New Stations................ 5,743 -- (14,777) -- (11,752) --
Other Operations (2)......... 1,165 882 66 (183) 66 (183)
============== ============= ============== ============== ============== ==============
Total combined operations......... 52,822 37,879 (9,311) 4,599 (8,951) 3,636
============== ============= ============== ============== ============== ==============
SELECTED ATTRIBUTABLE FINANCIAL INFORMATION (1)
(unaudited)
($000s)
Three months Ended March 31,
----------------------------------------------------------------------------------------
Economic
Interest (3) Net Revenue EBITDA Broadcast Cash Flow
--------------------------- --------------------------- --------------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
CNTS................... 99% 19,879 20,458 8,060 8,180 6,760 7,109
PRO TV................. 66% 5,119 3,265 (1,624) (681) (1,511) (211)
Markiza TV............. 80% 6,218 4,502 583 (102) (314) (876)
POP TV................. 85.3% 3,142 2,278 (1,293) (892) (972) (601)
Studio 1+1 Group....... 50% 3,311 1,543 254 (638) (136) (622)
------------- ------------- ------------- ------------- ------------- -------------
Total Continuing Stations... 37,669 32,046 5,980 5,867 3,827 4,799
TVN Sp.zo.o./Federation 50% 2,334 -- (6,124) -- (3,776) --
TV3.................... 89% 957 -- (2,251) -- (3,741) --
------------- ------------- ------------- ------------- ------------- -------------
Total New Stations.......... 3,291 -- (8,375) -- (7,517) --
Other operations (2) 1,165 882 66 (183) 66 (183)
============= ============= ============= ============= ============= =============
Total attributable operations 42,125 32,928 (2,329) 5,684 (3,624) 4,616
============= ============= ============= ============= ============= =============
(1) Important information about these tables appears under the heading
"Selected Combined and Attributable Financial Information" immediately
preceding this table.
(2) Other operations include Radio Alfa and Videovox.
(3) Economic interest as of March 31, 1998. For comparison between the three
months ended March 31, 1998 and the same period in 1997, all results in this
table are pro forma as if such percentages had also been in place during the
three months ended March 31, 1997
Page 14
EBITDA
The total combined EBITDA for the Continuing Stations increased by
$618,000 from $4,782,000 for the first quarter of 1997 to $5,400,000 for the
first quarter of 1998. The increase was attributable to improvements in EBITDA
at Markiza TV and the Studio 1+1 Group, offset in part by a higher negative
EBITDA at PRO TV and POP TV and to a decrease in CNTS's EBITDA due to the
devaluation of the Czech koruna.
The Studio 1+1 Group recorded EBITDA of $507,000 for the first
quarter of 1998 compared to negative EBITDA of $1,275,000 for the first
quarter of 1997. Net revenues more than doubled due to higher advertising
rates which were achieved, in part, because of an increase in Studio 1+1's
audience share. Studio 1+1 began operating as a CME station in January 1997
and, as a result, the first quarter 1997 results did not reflect full
production and staff levels.
Markiza TV recorded EBITDA of $729,000 for the first quarter of 1998,
compared to negative $128,000 in the first quarter of 1997. Net revenues
increased by $2,144,000, or 38%, reflecting Markiza TV's market leadership in
both ratings and advertising sales revenues. An increase in total operating
expenses of 22% is the result of increased production costs incurred to meet
relatively high original production requirements in the Slovak Republic. In
addition, Markiza TV commenced broadcasting in August 1996 and its financial
results for the first quarter of 1997 reflect its early phase of development.
PRO TV's EBITDA decreased by $1,429,000 to negative $2,461,000 for
the first quarter of 1998. Although net revenues increased by $2,809,000, or
57%, this increase was offset by increases in station expenses. Growth in net
revenues is a result of PRO TV's increased audience share and the growth of
the overall television advertising market in Romania. Increased demand for
locally produced programming resulted in higher production costs as PRO TV's
introduction of successful game shows and other entertainment formats
continued in the first quarter of 1998. Increased selling, general and
administrative expenses were the result of administrative and marketing expenses
related to the addition in February 1998 of the new second channel, Acasa TV,
expansion of network affiliates, and diversification into the production and
post-production businesses. In addition, programming rights amortization
increased as a result of increased competition, which has caused the price of
acquired programming to approximately double over the past year.
POP TV's EBITDA decreased by $470,000 to negative $1,516,000 for the
first quarter of 1998. An increase in net revenues of $1,013,000, or 38%, was
offset by increases in station expenses. Growth in net revenues is a result of
POP TV's increased audience share and the growth of the overall television
advertising market in Slovenia. Amortization of programming rights increased
as a result of higher prices for acquired programming in Slovenia and the
addition of the second channel, Gajba TV. Increased audience demand for
locally produced programming resulted in higher production costs. In addition,
POP TV's expenses increased due to technical expansion and the addition of
marketing costs related to the new second channel, Gajba TV, which was
launched in October 1997.
Page 15
CNTS's EBITDA decreased by $122,000, or 2%, to $8,141,000 for the
first quarter of 1998 primarily as a result of the devaluation of the Czech
koruna against the United States dollar. The koruna devaluation was
particularly large in the second and third quarters of 1997. CNTS's EBITDA in
local currency increased 19% primarily due to a 17% increase in spot
advertising sales, offset in part by a 16% increase in costs. Cost increases
were mainly attributable to higher salary and production costs as a result of
increased local production in response to audience demand. CNTS's United
States dollar EBITDA was approximately $1,690,000 lower than it would have been
if the Czech koruna had maintained its value against the United States dollar
since the first quarter of 1997.
The new television operations, TVN in Poland and TV3 in Hungary,
which commenced broadcasting in October 1997, recorded negative EBITDA of
$12,248,000 and $2,529,000, respectively, for the first quarter of 1998
primarily as a result of these operations being in an early phase of
development.
Total combined EBITDA decreased by $13,910,000 from $4,599,000 for
the first quarter of 1997 to negative $9,311,000 for the first quarter of
1998. As described above, this decrease was primarily due to negative EBITDA
at the Company's new operations in Poland and Hungary, as well as EBITDA
decreases at PRO TV, POP TV and CNTS. These decreases were partially offset by
increases in EBITDA at the Studio 1+1 Group and Markiza TV.
Broadcast Cash Flow
Total combined broadcast cash flow from Continuing Stations decreased
by $1,084,000 from $3,819,000 for the first quarter 1997 to $2,735,000 for the
first quarter of 1998. Broadcast cash flow was negatively impacted by
significantly higher programming payments at PRO TV and POP TV for the first
quarter of 1998 compared to the same period in 1997. CNTS's broadcast cash
flow decreased by $353,000, or 5%, due to the devaluation of the Czech koruna
against the United States dollar. This decrease was partly offset by improved
broadcast cash flow at Markiza TV and the Studio 1+1 Group.
Total combined broadcast cash flow decreased by $12,587,000 from
$3,636,000 for the first quarter of 1997 to negative $8,951,000 for the first
quarter of 1998. The decrease was primarily due to negative broadcast cash
flow from the new television operations in Poland and Hungary, which together
recorded combined negative broadcast cash flow of $11,752,000.
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, which operates Nova TV, PRO TV, POP TV, Federation, TV3, Videovox
(wholly-owned since May 1997) and Radio Alfa, and separately set forth the
minority interests attributable to other owners of such companies . The
results of Markiza TV, the Studio 1+1 Group, TVN Sp.zo.o., FFF, SFF and 1A TV
are accounted for using the equity method, which reflects the
Page 16
Company's share of the net income or losses in those operations. 1A TV
initiated a bankruptcy proceeding in May 1997. The Company terminated its
ownership interests in FFF and SFF as of December 31, 1997. The Company
records other investments at the lower of cost or 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 acquired 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, Federation, TVN Sp.zo.o., TV3 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 net income. Currency translation adjustments relating to
transactions of the Company in currencies other than the functional currency
of the entity involved are reflected in the operating results of the Company.
The exchange rates at the end of and for the periods indicated are
shown in the table below.
Balance Sheet Income Statement
------------------------------------- ---------------------------------
Average for the three months
At March 31, At December ending March 31,
1998 31, 1997 % Change 1998 1997 % Change
---- -------- -------- ---- ---- --------
Czech koruna equivalent of $1.00 33.68 34.64 2.8 34.43 28.51 (20.8)
German mark equivalent of $1.00 1.85 1.80 (2.7) 1.82 1.66 (9.5)
Hungarian forint equivalent of $1.00 214 204 (4.9) 209 169 (23.7)
Polish zloty equivalent of $1.00 3.45 3.52 2.0 3.51 2.98 (17.8)
Romanian lei equivalent of $1.00 8,478 8,023 (5.7) 8,222 6,196 (32.7)
Slovak koruna equivalent of $1.00 35.06 34.78 (0.8) 35.13 32.78 (7.2)
Slovenian tolar equivalent of $1.00 172.67 169.18 (2.1) 171.94 152.12 (13.0)
Ukrainian hryvna equivalent of $1.00 2.04 1.90 (7.3) 1.97 1.86 (6.0)
The Company's results of operations and financial position during the
first quarter of 1998 were impacted by changes in foreign currency exchange
rates since December 31, 1997.
Page 17
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. At March 31, 1998, there were eight forward exchange contracts
outstanding for the purchase, in aggregate, of $4,500,000 by CNTS and the sale
of Czech korunas. These contacts mature by August 1998. A foreign exchange
loss of Kc 5,439,000 ($161,000) resulting from the revaluation of these
contracts at the quarter end exchange rate was recorded in 1998 and is
reflected in the accompanying Consolidated Financial Statements. No material
exposure exists at March 31, 1998 as a result of these contracts.
Results of Operations
Quarter ended March 31, 1998 compared to Quarter ended March 31,1997
The Company's net revenues increased by $8,844,000, or 30%, to
$38,009,000 for the first quarter of 1998 from $29,165,000 for the first
quarter of 1997. The increase is attributable to the addition of revenues
generated by the Company's new operations in Poland and Hungary, as well as
increased revenues at PRO TV and POP TV. This increase was offset by a
$585,000 decrease in CNTS's revenues due to the devaluation of the Czech
koruna against the United States dollar.
Federation and TV3, which were not included in the Company's 1997
first quarter results, recorded net revenues of $4,249,000 and $1,075,000,
respectively, for the first quarter of 1998.
PRO TV's net revenues increased by 2,809,000, or 57%, to $7,756,000
and POP TV's net revenues increased by $1,013,000, or 38%, to $3,684,000. PRO
TV's and POP TV's net revenues improved due to the growth in their respective
television advertising markets and to increases in PRO TV's and POP TV's
audience shares.
CNTS's net revenues decreased by $585,000, or 3%, to $20,080,000 for
the first quarter of 1998 from $20,665,000 for the first quarter of 1997. The
decrease in CNTS's United States dollar net revenues is due to the 21%
devaluation of the Czech koruna against the United States dollar from the
first quarter of 1997 to the first quarter of 1998. Measured in local
currency, CNTS's net revenues increased by Kc 102,195,000, or 17%. CNTS's
United States dollar net revenues were approximately $3,585,000 lower than
they would have been if the Czech koruna had maintained its value against the
United States dollar since the first quarter 1997.
Total station operating costs and expenses increased by $23,007,000,
to $45,489,000 for the first quarter of 1998 from $22,482,000 for the first
quarter of 1997. The increase in total station operating costs and expenses is
primarily attributable to the addition of station operating costs and expenses
(including amortization of program rights), of Federation and TV3 of
$16,855,000 and $2,955,000, respectively. The increase is also attributable to
increases in operating costs and expenses at PRO TV of $3,155,000 to
$8,274,000 for the first quarter of 1998. PRO TV's operating costs and
expenses rose primarily as a result of increased
Page 18
expenses related to local production in response to increasing audience demand
for local programming and, to a lesser extent, as a result of increased
programming amortization costs, which reflect increased prices of acquired
programming and the launch of the second channel Acasa TV.
Station selling, general and administrative expenses increased by
$3,911,000 to $8,240,000 for first quarter of 1998 from $4,329,000 for the
first quarter of 1997. The increase in station selling, general and
administrative expenses is partly attributable to the addition of Federation's
and TV3's selling, general and administrative expenses of $1,232,000 and
$783,000, respectively. This increase was also attributable to an increase at
PRO TV of $1,726,000 as a result of administrative and marketing expenses
related to the addition of Acasa TV, expansion of network affiliates and
diversification into the production and post production businesses. To a lesser
extent, the increase in station selling, general and administrative expenses was
attributable to an increase at POP TV of $604,000 to $1,326,000 for the first
quarter of 1998 primarily as a result of higher marketing costs in a response to
stronger competition and promotion of the new second channel, Gajba TV.
Corporate operating costs and development expenses for the first
quarter of 1998 and 1997 were $7,190,000 and $4,575,000, respectively, an
increase of $2,615,000. The increase was attributable to expansion of operations
in Poland and Hungary, costs of a back-up satellite for certain of the
Company's stations and costs related to the Company's exit from Germany.
Amortization of goodwill and allowance for development costs was
$2,529,000 and $1,997,000 for the first quarter of 1998 and 1997,
respectively. This increase was primarily attributable to the amortization of
goodwill related to the Company's purchase of a 5.8% economic interest in CNTS
in August 1997 (the "Second 1997 CNTS Purchase").
As a result of the above factors, the Company generated an operating
loss of $25,439,000 for the first quarter of 1998 compared to an operating
loss of $4,218,000 for the first quarter of 1997.
Equity in loss of unconsolidated affiliates decreased by $5,742,000
to $1,027,000 for the first quarter of 1998 from $6,769,000 for the first
quarter of 1997. This is a result of the Company's decision to terminate its
ownership interests in German broadcast operations as of December 31, 1997, as
well as improvements in the operations of Markiza TV and the Studio 1+1 Group.
Loss on impairment of investments in unconsolidated affiliates of
$20,707,000 for the first quarter of 1997 was the result of the write-down of
the Company's investments in Germany. During the first quarter of 1998, the
Company did not record any loss on impairment of investments in unconsolidated
affiliates.
Interest and other income decreased by $488,000 to $1,612,000 for the
first quarter of 1998 from $2,100,000 for the first quarter of 1997 as a
result of lower interest earned on cash balances.
Interest expense increased by $3,563,000 to $5,737,000 for the first
quarter of 1998 from $2,174,000 for the first quarter of 1997. This increase
was primarily
Page 19
attributable to interest expense related to CME's $100,000,000 principal
amount 9.375% Senior Notes and DM 140,000,000 principal amount 8.125% Senior
Notes, each due 2004, issued in August 1997 (collectively, the "Senior
Notes").
The net foreign currency exchange gain of $139,000 for the first
quarter of 1998 is primarily attributable to the effect of a weaker Deutsche
mark on the Senior Notes obligations. Local operating currencies devalued
considerably against the United States dollar during the first quarter of 1997
when the company recorded a net foreign currency exchange loss of $2,071,000.
Provision for income taxes was $2,107,000 for the first quarter of
1998 and $1,911,000 for the first quarter of 1997. The increase was due to an
increase in CNTS's taxable income.
Minority interest in loss of consolidated Subsidiaries was $7,521,000
for the first quarter of 1998 and $762,000 for the first quarter of 1997. This
increase was primarily the result of the addition to the Company's operations
of Federation, which incurred losses.
As a result of these factors, the net loss of the Company was
$25,038,000 for the first quarter of 1998 compared to $34,988,000 for the
first quarter of 1997.
Liquidity and Capital Resources
Net cash used in operating activities was $24,220,000 in the first
quarter of 1998 compared to $2,660,000 in the same period in 1997. The
increase in net cash used in operating activities of $21,560,000 was primarily
the result of increased programming payments and operating losses of the
Company's new television operations in Poland and Hungary.
Net cash used in investing activities was $14,243,000 in the first
quarter of 1998 compared to $12,715,000 in the same period in 1997. The
increase was primarily attributable to the Second 1997 CNTS Purchase,
described below, as well as the acquisition of fixed assets at PRO TV offset,
in part, by the cessation of funding of 1A TV in Germany in May 1997.
Net cash used in financing activities for the first quarter of 1998
was $6,041,000 compared to $3,009,000 for the same period in 1997. The
increase was primarily the result of principal payments made in connection
with the Additional CNTS Purchase, described below, as well as the timing of
CNTS's dividend payments to minority shareholders.
In August 1997, CME issued the Senior Notes, which raised net
proceeds of approximately $170,000,000 (the "Senior 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
Page 20
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.
In May 1997, CNTS declared a total dividend of Kc 495,000,000
($13,665,000), of which the Company was paid Kc 150,150,000 ($3,334,000) in
June 1997, Kc 115,500,000 ($3,522,000) in November 1997 and Kc 115,500,000
($3,313,000) in January 1998. The remainder of the total dividend was paid to
minority shareholders.
In May 1998, subject to the formal approval of CNTS's shareholders,
CNTS declared a total dividend of Kc 550,000,000 ($16,330,000), to be paid in
two installments during 1998. The Company's voting power is sufficient to
compel CNTS to make distributions.
As a result of the factors described above, the Company had cash and
cash equivalents of $61,926,000 at March 31, 1998 (compared to $106,188,000 at
December 31, 1997) and marketable securities of $70,000 at March 31, 1998
(compared to $69,000 at December 31, 1997).
The Company has executed a term sheet with ING Bank N.V. ("ING Bank")
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 a 5.8% interest in CNTS from certain of the partners of CET
21 for a purchase price of $28,537,000, to be paid in installments through
February 15, 2000. As of March 31, 1998, the Company had paid $17,912,000 of the
purchase price and is obligated to make further payments of $2,750,000 during
1998, $5,313,000 during 1999, and $2,562,000 during 2000. Each further payment
is subject to increase to an amount equal to the value of such payment as if it
had been invested in CME's Class A Common Stock at a purchase price of $23.375
per share.
On August 1, 1996, the Company entered into the Additional CNTS
Purchase for the purchase of CS Bank's 22% economic interest and virtually all
of CS Bank'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 Bank to
finance 85% of the purchase price. The principal outstanding at March 31, 1998
was Kc 700,700,000 ($20,805,000). Quarterly repayments on the loan are
required in the amount of Kc 22,500,000 ($668,000) during the period from May
1998 through November 1998, Kc 42,500,000 ($1,262,000) during the period from
February 1999 through May 2002, and Kc 37,500,000 ($1,113,000) in August 2002.
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 Bank for up to Kc 250,000,000 ($7,423,000)
bearing interest at a rate 0.5% over the Prague Interbank Offer Rate
("PRIBOR"). In October 1997,
Page 21
CNTS entered into a Kc 500,000,000 ($14,846,000) line of credit with ING Bank.
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. CNTS had no
borrowings under these facilities at March 31, 1998. The facilities are
secured by CNTS's equipment, vehicles and receivables.
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 Bank (the "CS
Loan") secured by a mortgage on the Nova Facility. The CS Loan provides for
quarterly principal payments of Kc 16,500,000 ($490,000), plus interest at
three-month PRIBOR plus 1.0%, to be paid through December 1999. As of March
31, 1998, the outstanding balance under the CS Loan was Kc 109,500,000
($3,251,000).
In February 1998, Markiza TV entered into two revolving credit
facilities. The first facility consists of a $3,000,000 line of credit from
Bank Austria which matures in March 2001 and bears interest at a rate of 1.5%
over LIBOR. The second facility consists of an Sk 100,000,000 ($2,852,000)
line of credit from Bank Austria which matures in September 2000 and bears
interest at a rate of 0.5% over the Bratislava Interbank Offer Rate. These
facilities are secured by Markiza TV's land and buildings. As of March 31,
1998, Markiza TV had no borrowings under these facilities.
PRO TV has two borrowing facilities with Tiriac Bank in Romania. The
first facility consists of a $2,000,000 line of credit and the second facility
consists of a $4,000,000 long-term loan. Beginning April 1998, both facilities
bear interest at 10% per annum. The line of credit will be repaid in monthly
installments through December 1999 and the long-term loan will be repaid in
monthly installments through February 2001. At March 31, 1998, $1,940,000 and
$3,854,000 were outstanding under the credit facility and the long-term loan,
respectively. These facilities are secured by PRO TV's equipment and vehicles.
TVN Sp.zo.o. has borrowings of $14,100,000 under four short-term
bridge loan agreements with three Polish banks. Three loans with $9,341,000 in
the aggregate outstanding at March 31, 1998 are guaranteed by the Company. The
fourth loan for $4,760,000 is guaranteed by the Company's partner in Poland,
ITI. These loans are drawn in Polish zloty and United States dollars and bear
interest at LIBOR and WIBOR (Warsaw Interbank Offer Rate) plus 2.15% per
annum. During the first quarter, Federation repaid a $3,500,000 short-term
bridge loan that was outstanding at December 31, 1997. It is anticipated that
the remaining loans will be repaid by TVN Sp.zo.o. and Federation from a
$30,500,000 revolving credit facility, currently being negotiated with a
syndicate of Polish banks. Since December 31, 1997, the Company has advanced
$12,000,000 to its operations in Poland. Future shareholder funding for the
Poland operations is expected to be shared by the Company and ITI and the
Company expects to fund approximately $30,000,000 before the end of 1998.
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TV3 has borrowings of HUF 279,000,000 ($1,304,000) from a local
Hungarian bank. The loan requires quarterly repayments from March 1999 until
December 2000 and is secured by pledges of certain fixed assets of TV3. The
Company has loaned $1,384,000 to TV3 since December 31, 1997 and expects to
loan an additional $1,000,000 during 1998. The Company has made approximately
$7,747,000 in programming payments on behalf of TV3 since December 31, 1997
and has additional programming commitments for TV3 in 1998 and 1999 of
approximately $14,191,000 and $6,034,000, respectively.
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.
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. The Company's voting power in the Studio 1+1
Group is not sufficient to compel the distribution of dividends. In the case
of Federation and TVN Sp.zo.o. 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 the case of TV3, the Company's voting interest is sufficient
to compel the payment of dividends. There are no legal reserve requirements
in Hungary.
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
investing in its existing broadcast operations and might engage in the
development of additional broadcast operations. The Company incurs certain
expenses in identifying and pursuing broadcast opportunities before any
investment decision is made. The Company believes that its current cash
balances, cash generated from CNTS and local financing of broadcast operations
should be adequate to satisfy the Company's operating and capital requirements
for its current operations through 1998. To acquire additional broadcast
rights or to fund other significant investments, the Company would require
significant additional financing.
Year 2000 Issue
The Company is conducting a comprehensive review of its computer
systems to identify the systems that could be affected by the Year 2000 issue
and is developing an implementation plan to resolve the issue. The Year 2000
problem is the result of computer programs being written using two digits
rather than four to define the applicable year. The Company presently believes
that the Year 2000 problem will not
Page 23
pose significant operational problems for the Company's computer systems.
However, management has not yet assessed the Year 2000 compliance costs and
related effect on the Company's earnings. Accounting rules require such costs
to be expensed.
Forward-looking Statements
Statements made in "Liquidity and Capital Resources" regarding future
investments in existing television broadcast operations, 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 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 may in the future
operate 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 CME and Ronald S. Lauder, the non-Executive Chairman of the Company's
Board of Directors. Perekhid alleged 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 sought 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, CME and Mr. Lauder filed a motion to dismiss the complaint. On April 8,
1998, the Court dismissed the complaint on grounds of forum non-conveniens.
On March 18, 1998, TV Studio Information Service Ltd. ("TV SIS"), a
Ukrainian television broadcaster, filed a complaint in the Supreme Court of
Arbitration, Kiev, against the National Council on Television and Radio of
Ukraine and Studio 1+1, as a third party defendant, seeking to invalidate the
award of the broadcast license to Studio 1+1. TV SIS alleged that (i) the
broadcast license granted to Studio 1+1 in October 1996 was awarded in
violation of law, (ii) a three-hour increase in airtime granted to Studio 1+1
under the broadcast license in November 1997 was granted illegally, (iii)
Studio 1+1 has failed to comply with local content programming requirements,
and (iv) Studio 1+1 has exceeded foreign investment
Page 24
limitations. On April 22, 1998, the Court dismissed TV SIS's complaint on the
merits and TV SIS may appeal within two months of the dismissal.
In January 1997, the Hungarian National Radio and Television
Commission awarded two national television broadcast licenses to two
consortia. The Company's consortium, IRISZ TV, was an unsuccessful bidder in
the license tender process. On July 4, 1997, IRISZ TV filed a complaint in the
Budapest Capital Court against the Hungarian National Radio and Television
Commission and the two successful consortia, alleging that the Hungarian
National Radio and 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. On March 25, 1998, the Court denied IRISZ TV's claims.
On May 8, 1998, IRISZ TV filed a notice of appeal with the Court.
In December 1997, TVN Sp.zo.o. acquired 22% of the economic and 9.68%
of the voting interests of Polskie Media S.A. for a purchase price of $3.2
million. The remaining shareholders refused to enter TVN Sp.zo.o into the
Polskie Media S.A. shareholder register on the grounds that the transfer to
TVN Sp.zo.o. did not meet the applicable requirements for such a transfer. On
January 30, 1998, TVN Sp.zo.o. instituted proceedings at the Voivodship
Economic Court in Warsaw requesting that the Court invalidate attempts by the
shareholders of Polskie Media S.A. to block the TVN Sp.zo.o. purchase. TVN
Sp.zo.o. has also requested that the Court order Polskie Media to enter TVN
Sp.zo.o. into the share register. TVN Sp.zo.o. has not been notified of a
hearing date.
Certain unsuccessful bidders for the licenses of northern Poland and
the cities of Warsaw and Lodz have filed challenges to the awards of these
licenses to TVN Sp.zo.o. In addition, one unsuccessful bidder has challenged
the award of a regional license for central Poland to Polskie Media S.A. The
Supreme Administrative Court has joined all of these challenges into a single
proceeding, and scheduled a hearing for May 19, 1998.
In July 1996, the Company, together with MMTV and Tele 59, entered
into an agreement to purchase a 66% equity interest in Kanal A, a privately
owned television station in Slovenia (the "Kanal A Agreement"). Scandinavian
Broadcasting System SA ("SBS"), which claims to have certain rights to the
equity of Kanal A pursuant to various agreements, has challenged the validity
of the Kanal A Agreement in a United Kingdom court. The Court has enjoined
both SBS and the Company from taking certain actions either to enforce such
entity's claim to equity in Kanal A or to block the claim of the other entity
to equity in Kanal A. The Company has instituted an action in a Slovenian
court requesting that Slovenian courts resolve these claims. On April 6, 1998,
the Company filed a claim in the District Court in Koper, Slovenia against
Vladimir Polic to recover the purchase price paid to Mr. Polic for the Kanal A
shares, as well as lost revenues. The Court has not set a hearing date.
One of the owners of CET 21 has filed two claims against CET 21 in
the Regional Commercial Court in Prague. The claims, filed in December 1996
and May 1997, allege that CET 21 and the Czech Radio and Television Council
did not complete all required procedures for approving certain transfers of
CET 21 participation interests and request that such transfers and all general
meetings of CET
Page 25
21 following such transfers be invalidated. The claim filed in December 1996
was dismissed by the Court on April 27, 1998; the plaintiff has the right to
appeal. CET 21 has not been notified of a hearing date for the remaining
claim.
The Company is, from time to time, a party to litigation that arises
in the normal course of its business operations. The Company is not presently
a party to any such litigation which could reasonably be expected to have a
material adverse effect on its business or operations.
Item 6. Exhibits and Reports on Form 8-K.
a) The following exhibits are attached:
10.1 Employment Agreement, dated as of March 23, 1998, between CME
Development Corporation and Michel Delloye.
10.2 Employment Agreement, dated as of March 23, 1998, between Central
European Media Enterprises Ltd. and Michel Delloye.
10.3 Agreement, dated as of March 25, 1998, among Central European Media
Enterprises Ltd., CME Development Corporation, CME Programming
Services Inc., The Acorn Consulting Group, Inc. and Leonard M.
Fertig.
27.01 Financial Data Schedule
b) No reports on Form 8-K were filed during the quarter ended March 31, 1998
Page 26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 1998 /s/ Michel Delloye
------------------
Michel Delloye
Chief Executive Officer
(Duly Authorized Officer)
Date: May 15, 1998 /s/ John A. Schwallie
---------------------
John A. Schwallie
Chief Financial Officer
(Principal Financial Officer)
Page 27
EXHIBIT INDEX
10.1 Employment Agreement, dated as of March 23, 1998, between CME
Development Corporation and Michel Delloye.
10.2 Employment Agreement, dated as of March 23, 1998, between Central
European Media Enterprises Ltd. and Michel Delloye.
10.3 Agreement, dated as of March 25, 1998, among Central European Media
Enterprises Ltd., CME Development Corporation, CME Programming
Services Inc., The Acorn Consulting Group, Inc. and Leonard M.
Fertig.
27.01 Financial Data Schedule
Page 28