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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1998 Commission File Number: 0-24796
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
(Exact name of registrant as specified in its charter)
Bermuda Not Applicable
(State or other jurisdiction of incorporation) (IRS Employer
Identification No.)
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Clarendon House
Church Street
Hamilton HM CX
Bermuda
(Address of principal executive offices)
(441) 296-1431
(Registrant's telephone number)
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Securities registered pursuant to Section 12(b) of the Act: NONE
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Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $0.01 par value
9.375% Notes Due 2004
8.125% Notes Due 2004
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Indicate by check mark whether the 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The aggregate market value of the voting stock of registrant held by
non-affiliates of the registrant as of March 17, 1999 was approximately
$168,249,576
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Number of shares of Class A Common Stock outstanding as of March 17, 1999:
18,106,789
Number of shares of Class B Common Stock outstanding as of March 17, 1999:
7,577,329
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DOCUMENTS INCORPORATED BY REFERENCE
Document
-------- Location in Form 10-K in Which
Registrant's Proxy Statement Document is Incorporated
for the Annual Meeting of ------------------------
Shareholders to be held on June 8,1999 Part III
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TABLE OF CONTENTS
Page
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PART I
Item 1. Business..........................................................3
Item 2. Properties.......................................................22
Item 3. Legal Proceedings................................................22
Item 4. Submission of Matters to a Vote of Security Holders..............24
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters..........................................................25
Item 6. Selected Financial Data..........................................25
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................27
Item 8. Financial Statements and Supplementary data......................45
Item 9. Changes in and Disagreements with accountants on accounting and
financial disclosure.............................................98
PART III
Item 10. Directors and executive officers of the registrant...............98
Item 11. Executive compensation...........................................98
Item 12. Security Ownership Of Certain Beneficial Owners And Management...98
Item 13. Certain relationships and related transactions...................98
PART IV
Item 14. Exhibits, financial statement schedules and reports on Form 8-K..99
SIGNATURES
PART I
Item 1. BUSINESS
General
Central European Media Enterprises Ltd. ("CME") is a Bermuda
corporation. All references to the "Company" include CME and its direct and
indirect Subsidiaries, and all references to "Subsidiaries" include each
corporation or partnership in which CME has a direct or indirect equity or
voting interest.
The Company is the leading commercial television company in Central and
Eastern Europe. The Company's national private television stations and networks
in the Czech Republic, the Slovak Republic, Slovenia and Ukraine had the leading
nationwide audience shares for 1998 and the Company's television network in
Romania had the leading average audience share within its area of broadcast
reach for 1998. The Company's television studios, production facilities and
editing suites at its national television stations produced approximately 14,000
hours of original programming in 1998 to support the Company's broadcasting
operations, making it the largest private producer of local television
programming in Central and Eastern Europe.
The Company's television stations and networks, which reach an
aggregate of approximately 84 million people in six countries, consist of the
following:
Population
---------- Technical Economic Voting
Country (1) Stations and Networks Reach (2) Interest (3) Interest (3)
- ------- ------ --------------------- --------- ------------ -------------
Czech Republic................ 10.3 Nova TV......................... 10.2 99.0% 99.0%
Romania....................... 22.3 PRO TV / Acasa.................. 15.8 66.0% 66.0%
Slovenia...................... 2.0 POP TV / Gajba TV............... 1.7 85.5% 78.0%
Slovak Republic............... 5.4 Markiza TV...................... 5.0 80.0% 49.0%
Ukraine....................... 49.8 Studio 1+1...................... 47.3 60.0% 60.0%
Hungary....................... 10.2 TV3............................. 4.2 99.0% 99.0%
-------------- -------------
Total..................... 100.0 84.2
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(1) Country population in millions. Source: United States Bureau of the Census,
February 1999.
(2) "Technical Reach" measures the number of people in millions who are able to
receive the signals of the indicated stations and networks. Source: CME
stations
(3) See discussion below under the heading "Corporate Structure".
The Company's first national television operation began in February
1994 with the launch of Nova TV in the Czech Republic. Since then, Nova TV has
consistently achieved an audience share in excess of 50%. The Company estimates
that television advertising expenditures in the Czech Republic grew from
approximately $67 million in 1993 to approximately $188 million in 1998. The
Company believes that Nova TV has achieved its success in large part by
providing a wide range of popular programming designed to appeal to a mass
market audience, including a mix of locally produced news and entertainment
formats and films and television series acquired from major international
distributors, and a format distinctly different from that offered by competing
stations in terms of image and local
3
focus. The Company believes that broadcasting a significant amount of locally
produced programming and developing a distinctive independent news program gives
a strong local identity to its stations, increases audience share and is
desired by local regulatory authorities. The Company capitalized on its
successful launch of Nova TV by adopting similar programming and operating
strategies for PRO TV in Romania, POP TV in Slovenia, Markiza TV in the Slovak
Republic and Studio 1+1 in Ukraine.
Unless otherwise noted, all statistical and financial information
presented in this report has been converted into United States dollars using
exchange rates as of December 31, 1998. All references to '$' or 'dollars' are
to United States dollars, all references to 'Kc' are to Czech korunas, all
references to 'ROL' are to Romanian lei, all references to 'SIT' are to Slovenia
tolar, all references to 'Sk' are to Slovak korunas, all references to 'Hrn' are
to Ukrainian hryvna, all references to HUF are to Hungarian forints and all
references to 'DM' are to German marks. The exchange rates as of December 31,
1998 used in this report are 29.86 Kc/$; 10,983 ROL/$; 161.20 SIT/$; 36.91 Sk/$;
3.43 Hrn/$; 217 HUF/$; and 1.67 DM/$.
Corporate Structure
Central European Media Enterprises Ltd. was incorporated on June
15, 1994 under the laws of Bermuda. CME's assets are held through a series of
Dutch and Netherlands Antilles holding companies. See "Recent Developments" for
a description of the Reorganization Agreement entered into on March 29, 1999
with SBS Broadcasting S.A.
Laws, regulations and policies in CME's markets generally restrict the
level of direct or indirect interests that any non-local investor such as CME
may hold in companies holding broadcast licenses. As a result, broadcast
licenses are generally held by companies majority owned by CME's local partners
and CME owns controlling interests in service companies which provide
programming, advertising and other services to the licenseholding companies.
References to Nova TV, POP TV, Gajba TV, PRO TV, Acasa, Markiza TV and Studio
1+1 in this report may be to either the license company or the service companies
or both, as the case may be.
CME CME
License Voting TV Services Voting
Country Expiration TV License Company Interest Company Interest
- ------- ---------- ------------------- --------- ---------- --------
Czech Republic......... 2005 CET............................. 1.25% CNTS.................... 99%
Romania................ 2002 -2006 Pro TV S.R.L.................... 49% MPI .................... 66%
Media Pro S.R.L................. 0%
Slovenia............... 2003 -2007 Tele 59 ........................ 10% Pro Plus................ 78%
MMTV............................ 10%
Slovak Republic........ 2007 Markiza-Slovakia s.r.o.......... 0% STS..................... 49%
Ukraine................ 2007 Studio 1+1...................... 15% Innova, IMS, UAH........ 60%
Prioritet............... 50%(1)
(1) 50% interest owned by UAH
Czech Republic
The Company currently owns a 99% voting and economic interest in Ceska
Nezavisla Televizni Spolecnost s.r.o. ("CNTS"), with the remaining 1% voting and
economic interest in CNTS held by CET 21 s.r.o. ("CET"). CET holds a terrestrial
television broadcast license in the Czech Republic that expires in January 2005.
Dr. Vladimir Zelezny, the General Director of both CET and CNTS, owns a
controlling 60% participation interest in CET. CNTS is governed by a Memorandum
of Association and Investment Agreement. The Company has the right to appoint
five of the seven members of CNTS's Committee of Representatives,
4
which directs the affairs of CNTS. A representative of CET has certain delay and
veto rights on non-economic programming matters related directly to the
broadcast license.
CNTS provides television and related services to CET, which broadcasts
the Nova TV signal, pursuant to a Services Agreement with CET dated May 21, 1997
(the "Services Agreement"). In consideration for its activities under the
Services Agreement, CNTS is entitled to retain revenues from sales of
advertising on Nova TV less a monthly fee paid to CET.
On March 19, 1999, CET provided CNTS with a copy of a letter, dated
March 15, 1999 addressed to Dr. Zelezny as executive of CET and signed by the
Chairman of the Czech Media Council, in which the Czech Media Council takes
positions that appear inconsistent with the existing relationship between CNTS
and CET. Among other things, the Czech Media Council has questioned the
exclusive nature of the commercial relationship between CNTS and CET and the
manner in which CET enters into certain broadcasting-related contracts. CME
believes that the structure of Nova TV and the contracts and business dealings
between CET and CNTS are in compliance with all applicable Czech laws and
regulations. However, there can be no assurance that the Czech Media Council
will conclude, as it has in the past, that such dealings are in compliance and
there can be no assurance that the Czech Media Council will not require
modifications of the arrangements between CET and CNTS.
In this connection, CME has recently been engaged in discussions and
negotiations with Dr. Zelezny regarding the relationship between CNTS and CET,
including with respect to actions taken and proposed to be taken by CET
concerning the acquisition of programming for CET and other matters with which
CNTS disagrees. On behalf of CET, Dr. Zelezny has requested certain
modifications in the CNTS Memorandum of Association and Investment Agreement and
the Services Agreement, which modifications CME is resisting. CME has proposed
to Dr. Zelezny alternative arrangements that it believes would solidify CNTS's
contractual relationship with CET and satisfy Dr. Zelezny's concerns regarding
the existing arrangements. However, there can be no assurance that CME and CNTS
will be able to reach a satisfactory agreement with CET and Dr. Zelezny.
CME and CNTS intend to take all available actions to protect their
legal rights and financial interests in connection with Nova TV, and it is
possible that the current disagreements with Dr. Zelezny could result in
protracted litigation. If the Czech Media Council were to require significant
changes in the current arrangements between CNTS and CET, or if the differences
between CNTS and CET cannot be resolved, one or more material adverse affects on
the business and financial condition of CNTS and CME could result, including a
substantial reduction in the economic benefits currently enjoyed by CNTS and CME
and, potentially, a termination of the existing commercial relationship between
CNTS and CET.
The Company owns a 76% interest in Radio Alfa a.s. v likvidoci, ("Radio
Alfa"), formerly the service provider for a private national radio broadcaster
in the Czech Republic. The license to operate the radio station expired in
February 1999. Radio Alfa ceased to provide services as of December 31, 1998 and
is being liquidated.
Romania
The Company's interest in PRO TV is governed by a Cooperation Agreement
(the "Romanian Agreement") among the Company, Adrian Sarbu and Ion Tiriac,
forming Media Pro International S.A. ("MPI"), through which PRO TV and Acasa,
which was launched in February 1998, are operated. MPI provides programming to
and sells advertising for the stations which comprise the PRO TV and Acasa
network. Pursuant to the Romanian Agreement, the Company owns 66% of the equity
of MPI. Interests in profits of MPI are equal to the partners' equity interests.
The Company has the right to appoint three of the five members of the Council of
Administration which directs the affairs of MPI. Although the Company has
majority voting power in MPI, with respect to certain fundamental financial and
5
corporate matters the affirmative vote of either Mr. Sarbu or Mr. Tiriac is
required. The Company owns 49% of the equity of PRO TV, SRL which holds 20 of
the 23 licenses for the stations which comprise the PRO TV and Acasa network.
Messrs. Sarbu and Tiriac own substantially all of the remainder of PRO TV, SRL.
The remaining three licenses for the PRO TV network together with the licenses
for the PRO FM and PRO AM radio networks are held by Media Pro SRL, a company
owned by Messrs. Sarbu and Tiriac. In addition, in Romania, the Company owns 70%
of each of Media Vision SRL ("Media Vision"), a production and dubbing company,
and Video Vision International SRL ("Video Vision"), a post-production company.
On March 18, 1999, the Company sold its 9.6% equity interest in
MobilRom S.A., a GSM telephone operator in Romania.
Slovenia
The Company's interest in POP TV and Gajba TV is governed by a
Partnership Agreement among the Company, MMTV 1 d.o.o. Ljubljana ("MMTV") and
Tele 59 d.o.o. Maribor ("Tele 59"), forming Produkcija Plus d.o.o. ("Pro Plus").
Pro Plus provides programming to and sells advertising for the broadcast
licenseholders MMTV and Tele 59 as well as additional affiliates. The Company
currently owns 78% of the equity in Pro Plus, but has an effective economic
interest of 85.5% as a result of its right to 33% of the profits of MMTV and 33%
of the profits of Tele 59. Tele 59 currently owns a 21% equity interest in Pro
Plus, and MMTV currently owns a 1% equity interest in Pro Plus. The Company owns
10% of the equity of each of Tele 59 and MMTV. Voting power and interests in
profits of Pro Plus are equal to the partners' equity interests. All major
decisions concerning the affairs of Pro Plus are made by the general meeting of
partners and require a 70% affirmative vote. Certain fundamental financial and
corporate matters require an 85% affirmative vote of the partners. The Company
also owns a 20% interest in Meglic Telecom d.o.o. ("MTC") a cable operator in
Ljubljana which owns a 67% economic interest in MMTV. 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,
which competes with POP TV (the "Kanal A Agreement"). There is currently an
injunction in effect preventing the completion of the Kanal A Agreement. See
Item 3 "Legal Proceedings".
Slovak Republic
The Company's interest in Markiza TV is governed by a Participants
Agreement dated September 28, 1995 (the "Slovak Agreement") between the Company
and Markiza-Slovakia s.r.o. ("Markiza") forming Slovenska Televizna Spolocnost,
s.r.o. ("STS"). Pursuant to the Slovak Agreement, the Company is required to
fund all of the capital requirements of, and holds a 49% voting interest and an
80% economic interest in STS. Markiza, which holds the television broadcast
license, and STS have entered into an agreement under which STS is entitled to
conduct television broadcast operations pursuant to the license. On an ongoing
basis, the Company is entitled to 80% of the profits of STS, except that until
the Company is repaid its capital contributions plus a priority return at the
rate of 6% per annum on such capital contributions, 90% of the profits will be
paid to the Company. A Board of Representatives directs the affairs of STS, the
composition of which includes two designees of the Company and three designees
(two of whom have been named) of Markiza; however, all significant financial and
operational decisions of the Board of Representatives require a vote of 80% of
its members. In addition, certain fundamental corporate matters are reserved for
decision by a general meeting of partners and require a 67% affirmative vote of
the
6
partners. There is currently a litigation pending with respect to the ownership
of Markiza. See "Item 3, Legal Proceedings".
Ukraine
The Studio 1+1 Group consists of several entities in which the Company
holds direct or indirect interests. The Company owns a 60% (increased from 50%
in December 1998) equity interest in each of Innova Film GmbH ("Innova"),
Ukraine Advertising Holding B.V. ("UAH") and International Media Services
("IMS"). UAH holds a 50% equity interest in Prioritet, a Ukrainian company
engaged in advertising sales. Innova holds 100% of Intermedia, a Ukrainian
company ("Intermedia"), which in turn holds a 30% equity interest in a separate
Ukrainian company which holds the license to broadcast programming and sell
advertising on UT-2 (the "UT-2 License"). Innova, IMS, Intermedia and Prioritet
have entered into arrangements regarding the provision of programming and
advertising sales services to Studio 1+1. Interests in profits of each entity in
the Studio 1+1 Group are equal to equity interests held in such entities. All
significant decisions of the entities in the Studio 1+1 Group are reserved for
decision of the shareholders, requiring a majority vote (other than decisions of
the shareholders of the Ukrainian company which holds the UT-2 broadcast
license, which require a 75% vote). Certain fundamental corporate matters of
these entities require 61% shareholder approval.
Hungary
In Hungary, the Company owns a 99% (increased from 89% in December
1998) equity interest in Budapesti Kommunikacios Rt ("TV3"), a television
station distributing its signal via MMDS in Budapest and via satellite to cable
systems throughout Hungary. The Company has the right to appoint all of the five
members of the Board of Directors of TV3, all decisions of which require a
simple majority. See Item 3 "Legal Proceedings" regarding the Company's
consortium Irisz TV. The Company wholly owns Videovox Studio Limited Liability
Company ("Videovox"), a Hungarian dubbing and duplication company.
Corporate
CME Development Corporation, a wholly owned subsidiary of the Company,
provides financial, legal, marketing, business development and administrative
support services to the Company. CME Programming Services, Inc., a wholly owned
subsidiary of the Company, provides programming, production and satellite
transmission services to the Company's television broadcast operations in
Central and Eastern Europe. See "Corporate Operations."
The Company's registered offices are located at Clarendon House, Church
Street, Hamilton HM CX Bermuda, and its telephone number is 441-296-1431.
Certain of the Subsidiaries maintain offices at 18 D'Arblay Street, London W1V
3FP England, telephone number 44-171-292-7900.
Operating Environment
Private commercial television stations (those which derive the majority
of their revenues from the sale of advertising) generally began broadcasting in
the United States in the 1940s, in most parts of Western Europe in the 1980s,
but not until the 1990s in Central and Eastern Europe. Commercial television has
become an important medium for advertisers in the more developed advertising
markets. For example, in 1998 television advertising
7
expenditures totaled $44 billion in the United States and an aggregate of $25
billion in the 15 countries in the European Union. The Company believes that,
over time, television advertising expenditures in Central and Eastern European
countries, which are currently relatively low, will follow a pattern of
development similar to that of Western Europe and the United States.
The following two tables set forth (i) the population, number of TV
households, per capita GDP and cable penetration for those countries of Central
and Eastern Europe where the Company has broadcast operations and (ii) the
recent growth in television advertising expenditures in those countries.
TV Per Capita GDP % Cable
Country Population (1) Households (2) 1998 (3) Penetration (4)
- ------- -------------- ------------------ -------- ---------------
Czech Republic...................... 10.3 3.9 $5,490 17%
Romania............................. 22.3 6.7 $1,830 44%
Slovenia............................ 2.0 0.6 $9,240 40%
Slovak Republic..................... 5.4 1.8 $3,960 30%
Ukraine............................. 49.8 18.5 $810 12%
Hungary............................. 10.2 3.7 $4,610 41%
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Total........................... 100.0 35.2
==================== ===================
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(1) Source: United States Bureau of the Census, February 1999.
(2) Source: IP European Key Facts: Television '98. A TV household is a
residential dwelling with one or more television sets.
(3) Source: Economist Intelligence Unit (except Slovenia, Source: TV East Europe
January 1999).
(4) Source: IP European Key Facts: Television '98 (except Slovenia and Ukraine,
Source: CME stations).
Television Advertising Expenditures
Country 1993 1994 1995 1996 1997 1998
------- ---- ---- ---- ---- ---- ----
US dollars (millions)
-------------------------------------------------------------------------
Czech Republic................................... $ 67 $ 96 $ 135 $ 165 $ 163 $ 188
Romania.......................................... N/A 9 25 44 74 87
Slovenia ........................................ 15 23 30 35 39 51
Slovak Republic.................................. 15 18 26 39 47 56
Ukraine.......................................... N/A N/A 9 21 53 65
Hungary.......................................... N/A 158 150 158 167 183
Note: All figures are current Company estimates. "N/A" - estimates not
available.
European Regulations
Access to the available frequencies is controlled by regulatory
bodies in each country in which the Company operates. New awards of licenses to
use broadcast frequencies occur infrequently.
The European Union
If any Central or Eastern European country in which the Company
operates becomes a member of the European Union (the "EU"), the Company's
broadcast operations in such country would be subject to relevant legislation of
the EU, including programming content
8
regulations. The Czech Republic, Hungary, Romania, the Slovak Republic and
Slovenia have entered into or signed Association Agreements with the EU and some
or all of these countries may be admitted to the EU as early as 2002.
The EU's Television Without Frontiers directive (the "EU Directive")
sets forth the legal framework for television broadcasting in the EU. It
requires broadcasters, where "practicable and by appropriate means," to
reserve a majority proportion of their broadcast time for "European
works." Such works are defined as originating from an EU member state or a
signatory to the Council of Europe's Convention on Transfrontier Television,
as well as written and produced mainly by residents of the EU or Council of
Europe member states. In addition, the EU Directive provides for a 10% quota
of either broadcast time or programming budget for programs made by European
producers who are independent of broadcasters. News, sports, games,
advertising, teletext services and teleshopping are excluded from the
calculation of these quotas. Further, the EU Directive provides for
regulations on advertising, including limits on the amount of time that may be
devoted to advertising spots, including direct sales advertising. Member
states are free to introduce stricter content requirements than those in the
EU Directive for broadcasters within their jurisdiction. The Company intends
to align its broadcast operations with any applicable EU legislation.
The Company believes that the EU Directive, as currently drafted, will not
have a material adverse effect on its operations.
Council of Europe
The Company's broadcast operations are all located in countries which
are members of the Council of Europe, a supranational body through which
international conventions are negotiated. In 1990, the Council of Europe adopted
a Convention on Transfrontier Television, which provides for European
programming content quotas similar to those in the EU Directive. This Convention
has been ratified by some of the countries in which the Company operates
(including Hungary and the Slovak Republic), but all countries in which the
Company operates have already implemented its principles into their national
media legislation.
Corporate Operations
The Company's London based central service organization provides
each television operation with a central resource, particularly in the
start-up or early development phase of any project. The service functions
provided include development, programming services and advertising sales.
Development
CME Development Corporation ("CME Development") provides services to
CME to assist it in managing the growth of its current operations, expanding its
operations into new strategic markets, forming potential joint ventures and
strategic alliances and executing acquisitions. CME Development also assists CME
in identifying attractive markets for expansion as well as local partners in
such markets, determines the vehicles through which, as well as the manner in
which, the Company will enter such markets and oversees the implementation of
these plans.
Programming Services
9
Through CME Programming Services, Inc. ("CME Programming"), the Company
provides an array of program-related services to its television operations in
Central and Eastern Europe, including facilitating international contacts;
program acquisition; schedule advisory; coordination of viewer research;
exchange of best practices and expertise among the stations; various programming
related studies and analyses; and legal advice. The Company has begun to, and
intends to continue to, reduce overall program costs by co-ordinating the
purchase of rights to films and programming on a regional basis, which the
Company believes will provide it with significant advantages with international
studios relative to national competitors.
Advertising Sales
The Company's advertising sales department initiates, develops and
maintains relationships between individual stations and networks and
multinational advertisers and advertising agencies. The advertising sales
department also provides the Company's stations and networks with advertising
sales training and marketing, pricing and operational expertise.
Other
The Company provides technical expertise and support relating to
broadcasting and transmission for all of its operations. The Company also
provides certain centralized financial and legal services for its broadcast
operations, including financial planning and analysis, cost control and network
management.
As seen in the table below, the Company's stations have the leading
position in five out of six markets.
Launch Date
----------- Technical 1998 Audience Rank in
CME Station (1) Reach (2) Share (3) market (3)
- --------------- --------- --------- ----------
Nova TV......................... February 1994 99% 51.7% 1
PRO TV.......................... December 1995 71% 38.0% 1
POP TV.......................... December 1995 84% 38.0% 1
Markiza TV...................... August 1996 92% 50.0% 1
Studio 1+1...................... January 1997 95% 32.2% 1
TV3............................. October 1997 41% 3.0% 4
- ------------------
(1) Second channels in Romania (Acasa) and Slovenia (Gajba TV) are not included
in this table
(2) Source: CME stations
(3) Nationwide audience share and rank (except Romania, which is audience share
and rank within coverage area).Source: (Czech Republic: Taylor Nelson AGB,
Romania: CSOP Gallup, Slovenia: Gral Marketing, Slovak Republic:
Visio/MVK, Ukraine: SOCIS Gallup/Peoplemeter AGB Ukraine, Hungary: AGB
Hungary)
Operations in the Czech Republic: Nova TV
General
The Czech Republic is a parliamentary democracy of approximately 10.3
million people, which the Company believes has developed a stable market
economy. Per capita GDP was an estimated $5,490 in 1998. On March 12, 1999, the
Czech Republic formally joined NATO. Prior to 1992, television advertising in
the Czech Republic was limited to two
10
public channels. Since the onset of privatization activities in 1992, the
Company estimates that the television advertising market in the Czech Republic
has expanded to approximately $188 million in 1998.
Nova TV is the leading commercial television station in the Czech
Republic. Nova TV broadcasts pursuant to a 12 year license awarded to CET, which
expires in January 2005. Nova TV reaches 99% of the Czech Republic's population.
By adopting a different programming strategy than that historically
followed by public television stations, including a mix of locally produced news
and entertainment formats and film and television series acquired from
international distributors, Nova TV has built and maintained significant market
share during its first five years of operations. According to surveys undertaken
by the independent polling agency Taylor Nelson AGB using Peoplemeter devices,
Nova TV achieved an average nationwide audience share of 52% in 1998. Audience
share represents the percentage of televisions turned on at a particular time
which are tuned to a particular television station.
Programming
Nova TV's programming strategy is to appeal to a mass market audience.
The station broadcasts for 20 hours daily, including locally produced news,
sports (including coverage of the Czech Republic's national soccer league),
variety shows and other programming, as well as a broad range of popular films
and series from international distributors. In 1998, Nova TV aired 3,275 hours
of original local programming, which primarily consisted of light entertainment
formats and game shows, a daily breakfast show, news broadcasts and news related
shows and current and public affairs programming. In 1998, such original local
programming comprised approximately 44% of Nova TV's broadcast time.
Nova TV has acquired exclusive broadcasting rights in the Czech
Republic or in the Czech language to a number of successful American and Western
European programs and films (e.g., "Beverly Hills 90210", "Melrose Place",
"Stargate", "Hercules" and "X-Files") produced by such companies as MGM, Warner
Bros., Columbia Tri-Star Television and Paramount. In addition, Nova TV has
recently entered into a three year exclusive deal for broadcasting the Ice
Hockey World Championships. Nova TV has agreements with CNN, Reuters and APTN to
receive foreign news reports and film footage to integrate into its news
programs. Nova TV produced and co-organized many special events in 1998
including the Music Academy Awards and Miss Czech Republic. All foreign language
programs and films are dubbed into the Czech language except for film musicals,
which are subtitled.
Advertising
Nova TV derives its revenues principally from the sale of commercial
advertising time. In the Czech Republic most television advertising is sold
through independent agencies and media buying groups. Nova TV currently serves
over 200 advertisers, including large multinational advertisers such as Procter
& Gamble, Unilever, Henkel and Nestle. In 1998, no single advertiser accounted
for more than 10% of Nova TV's revenues.
Nova TV is permitted to broadcast advertising for up to 10% of its
broadcast time. In addition, a further 10% of broadcast time may be used for
"direct sales" advertising. Its primary competitor, CT1, a public television
station, is restricted to 1% of daily broadcast time for advertising. The
Council for Radio and Television Broadcasting in the Czech Republic (the
11
"Czech Radio and Television Council") and the Act on the Operation of Radio and
Television Broadcasting make certain distinctions between private and public
broadcasters. For example, private broadcasters, such as Nova TV, are permitted
to interrupt programming with advertising, while public broadcasters may not.
Competition
Nova TV competes principally with CT1, which reaches 100% of the
population, for audience, programming and advertising. Nova TV competes on a
more limited basis with CT2, a public network of regional frequencies which
reaches approximately 95% of the Czech Republic's population and Prima TV, a
privately owned and operated television station serving approximately 75% of the
country's population. There are no other significant television stations
broadcasting Czech language programming to the Czech Republic.
Limited competition for viewers also comes from local and foreign
stations transmitted through cable and satellite television. Approximately 17%
of all Czech Republic households currently have cable television and
approximately 15% receive direct-to-home satellite television. The media
authorities in the Czech Republic have licensed several companies to provide
cable television services to the Czech Republic. The largest is Kabel Plus, with
over 440,000 subscribers in the Czech and Slovak Republics. Czech authorities
require cable operators to carry all over-the-air broadcasting within their
areas free of charge.
Nova TV competes for revenues with other media, such as newspapers,
radio, magazines, outdoor advertising, transit advertising, telephone directory
advertising and direct mail.
Regulation
Nova TV and the terms of the license granted to CET are regulated by
the Czech Radio and Television Council pursuant to recently amended legislation.
The license was granted to CET by the Czech Radio and Television Council until
January 2005. See "Corporate Structure--Czech Republic" for a description of
certain potential disputes regarding Nova TV.
Under Czech legislation and license terms, Nova TV is required to
comply with certain restrictions on programming and advertising. In addition to
the restrictions discussed above under "--Advertising," advertising is not
permitted during children's programming or the evening news. Restrictions on
advertising content include that (i) tobacco advertising is prohibited, (ii)
advertising targeted at children before or after children's programming is
prohibited if such advertising promotes behavior that would endanger the health,
physical or moral development of children, (iii) advertising of alcoholic
beverages is restricted but not prohibited and (iv) members of the news
department of Nova TV are prohibited from appearing in advertisements. There are
also restrictions on the frequency of advertising breaks within a program.
Operations in Romania: PRO TV and Acasa
General
Romania is a parliamentary democracy of approximately 22.3 million
people. Per capita GDP was an estimated $1,830 in 1998. Approximately 86% of
Romanian households have one or more television sets, and cable penetration is
approximately 44%. According to the Company's estimates, television advertising
totalled approximately $87 million in 1998.
12
PRO TV is a national television broadcast network in Romania which was
launched in December 1995. PRO TV reaches approximately 71% of the Romanian
population of 22.3 million, including 94% of the urban population. PRO TV
broadcasts from studios located in Bucharest via digitally encoded satellite
signals which deliver programming to terrestrial broadcast facilities and to
approximately 250 cable systems throughout Romania. The Company anticipates that
PRO TV will be able to continue to increase its reach from current levels
through utilizing additional regional licenses which have been granted to
entities currently controlled by PRO TV, SRL and through affiliations with other
local broadcasters and agreements with cable carriers. Independent research from
CSOP Gallup International in Romania shows that PRO TV is currently the
top-rated television station in its broadcast area, with an average television
viewer share of approximately 38% for 1998.
In February 1998, MPI launched Acasa, a station reaching approximately
54% of the Romanian population, including approximately 86% of the urban
population via satellite and cable distribution. From February to December 1998
Acasa had an average television viewer share in its broadcast area of
approximately 7%.
The Company has a controlling interest in Media Vision and Video
Vision. Media Vision is the leading television production company in Romania and
produces a significant portion of PRO TV's entertainment programming, including
gameshows, concerts, music videos and live special events, and performs dubbing.
Media Vision produces advertising spots for third party clients such as Coca
Cola, Colgate-Palmolive and L'Oreal. Video Vision, Romania's leading provider of
television post-production and graphics, provides a significant portion of PRO
TV's and Acasa's graphics.
MPI also operates PRO FM, a radio network which is broadcast through
owned and affiliate stations to approximately 9 million people in Romania. In
1998, PRO FM had an average audience share of 14.8% in the Bucharest area.
Programming
PRO TV's programming strategy is to appeal to a mass market audience
through a wide range of programming, including movies and series, news, sitcoms,
telenovellas, soap operas and game shows. PRO TV broadcasts 24 hours of
programming daily. Approximately 40% of PRO TV's programming is comprised of
locally produced programming, including, news and news related programs, sports,
a breakfast show, game shows and talk shows.
PRO TV has secured exclusive broadcast rights in Romania to a large
number of quality American and Western European programs and films (e.g., "Ally
McBeal", "NYPD Blue", "Seinfeld", "E.R.", "Soldier of Fortune" and "Melrose
Place") produced by such companies as Warner Bros. and Fox. PRO TV also receives
foreign news reports and film footage from Reuters, APTN and ENEX to integrate
into its news programs. In 1998 PRO TV aired such special events as the MTV
European Music Awards and the MTV Movie Awards, and provided coverage of the
NBA. All foreign language programs and films are subtitled in Romanian.
Acasa's programming strategy is to target a female audience on weekdays
through programming including telenovellas, films and soap operas. Sunday
programming consists mostly of sports events targeted to male viewers, including
coverage of the United States Open tennis tournament. Acasa's viewer
demographics are complementary to PRO TV's,
13
providing an attractive advertising medium for small to medium sized companies
that would not otherwise advertise on television. There are two hours of local
programming per week, including a cookery show and interviews. The most popular
shows in 1998 were "The Bold and the Beautiful", "Sisters" and "Days of our
Lives".
Advertising
PRO TV derives revenues principally from the sale of commercial
advertising time, sold both through independent agencies and media buying
groups. PRO TV currently serves approximately 450 advertisers, including
multinational companies such as Unilever, Coca Cola, Henkel, Colgate and Procter
& Gamble. No single advertiser dominates the market.
PRO TV is permitted to broadcast advertising for up to 20% of its
broadcast time in any hour, subject to an overall daily limit of 15% of
broadcast time. An additional 5% of broadcast time may be used for direct sales
advertising. There are also restrictions on the frequency of advertising breaks
(for example, news and children's programs shorter than 30 minutes cannot be
interrupted). These restrictions are the same for public and private
broadcasters.
Competition
Prior to the launch of PRO TV, TVR 1, a public station, was the
dominant broadcaster in Romania. In 1998, PRO TV achieved an average audience
share of 38% in its coverage area, while TVR 1's 1998 average audience share in
PRO TV's coverage area was approximately 17%. TVR 1 reaches 99% of the Romanian
population. Other competitors include the second public national station, TVR 2,
with a 70% broadcast reach, and privately owned Antena 1, Tele 7 ABC and Prima
TV, which reach approximately 50%, 35% and 35% of the population, respectively.
Additional competitors include cable and satellite stations. Cable and
satellite currently penetrate approximately 44% and 9%, respectively, of the
Romanian market respectively. PRO TV competes for advertising revenues with
other media such as newspapers, radio, magazines, outdoor advertising, telephone
directory advertising and direct mail.
Regulation
Licenses for the television stations which show programming provided by
PRO TV and which broadcast advertising sold by PRO TV are regulated by Romania's
National Audio-Visual Commission. PRO TV's television licenses have been granted
for seven-year periods. Licenses which cover 17% of the Romanian population,
including the license for Bucharest expire in 2001. The remaining licenses
expire on dates ranging from 2002 to 2006. Under regulations established by the
National Audio-Visual Commission and the various licenses of stations which
broadcast PRO TV, programming and advertising provided by PRO TV is required to
comply with certain restrictions. These restrictions include a requirement that
at least 40% of programming be "own" produced.
Regulations related to advertising content include (i) a ban on tobacco
and restrictions on alcohol advertising, (ii) advertising targeted at children
or during children's programming must account for the overall sensitivity of
that age group and (iii) members of the news department of PRO TV are prohibited
from appearing in advertisements.
14
Operations in Slovenia: POP TV and Gajba TV
General
Slovenia, a parliamentary democracy of 2.0 million people, had an
estimated per capita GDP of approximately $9,240 in 1998, the highest among the
former Eastern bloc countries. Approximately 97% of Slovenian households have
one or more televisions. According to the Company's estimates, television
advertising totalled $51 million in 1998.
The national television broadcast network POP TV reaches approximately
84% of the population of Slovenia, including Ljubljana, the capital of Slovenia,
and Maribor, Slovenia's second largest city. Independent research shows that in
the areas of Slovenia in which POP TV can be seen, the network had an average
television viewer share of approximately 45% for 1998, the largest share of
television viewers in Slovenia.
In October 1997, the Company launched Gajba TV, the Company's second
television broadcast network in Slovenia. Gajba TV is operated through Pro Plus
and provides programming to, and sells advertising for, its affiliate
broadcasters. The Gajba TV signal is also carried by a cable channel operated by
Tele 59 in Maribor. Gajba TV reaches approximately 49% of the population of
Slovenia. In 1998 it had an average television viewer share of approximately
3.6% in its coverage area.
Programming
POP TV's programming strategy is to appeal to a mass market audience
through a wide variety of programming including movies, news, variety shows,
features and dramatic series. POP TV broadcasts for 19 hours of programming
daily, of which approximately 28% is locally produced programming, including
news, game shows, music shows and variety shows.
POP TV has secured exclusive program rights in Slovenia to a number of
successful American and Western European programs and films (e.g., "E.R.",
"X-Files", "Friends", "Beverly Hills 90210", "Melrose Place") produced by
studios such as Warner Bros., Fox and Worldvision. Special events aired in 1998
included the Academy Awards, Miss World and Formula One racing. Pro Plus has
agreements with CNN, Reuters and APTN to receive foreign news reports and film
footage to integrate into news programs. All foreign language programs and films
are subtitled in Slovenian.
Gajba TV's programming strategy is to complement the POP TV profile
with a variety of series and features including sci-fi, adventure and youth
series as well as hourly local community shows. Gajba TV broadcasts for 10 hours
per day, and features movies and series from international distributors as well
as locally produced news, variety shows and other programs.
Advertising
POP TV derives revenues principally from the sale of commercial
advertising time. Current multinational advertisers include firms such as Master
Foods, Henkel, Procter & Gamble, Wrigley and Colgate, though no one advertiser
dominates the market. During 1998 "Peoplemeter" devices were placed in a number
of television homes, although they are not yet the primary source for POP TV's
rating information. POP TV is permitted to broadcast advertising for up to 15%
of its daily broadcast time and there are also restrictions on the
15
frequency of advertising breaks during films and other programs. The same rules
apply to its competitors.
Competition
Historically, the television market in Slovenia has been dominated by
SLO 1, a national public television station. The other national public station,
SLO 2 provides programming which is complementary to SLO 1. SLO 1 reaches nearly
all of Slovenia's TV households, and SLO 2 reaches 95% of Slovenia's TV
households. No national private television frequency has been made available in
Slovenia. Two private television stations which compete with POP TV in Slovenia,
Kanal A and TV3, have achieved a relatively small audience share, together less
than 14%, due primarily to their low budget programming and lack of extensive
news programming.
POP TV also competes with foreign television stations, particularly
Croatian, Italian, German and Austrian stations. Cable penetration at 40% is
relatively high compared with other countries in Central and Eastern Europe and
approximately 21% of households have satellite dishes. In addition, POP TV
competes for revenues with other media, such as newspapers, radio, magazines,
outdoor advertising, telephone directory advertising and direct mail.
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 which competes with POP TV. There is currently an
injunction in effect preventing the implementation of the Kanal A Agreement. See
Item 3 "Legal Proceedings."
Regulation
The POP TV and Gajba TV network stations operate under licenses
regulated pursuant to the Law on Public Media adopted in 1994 and pursuant to
the Law on Telecommunications adopted in 1997. The licenses granted to POP TV's
affiliate stations have been granted for 10-year terms expiring in 2003 with
respect to licenses reaching 53% of the population and in 2006 and 2007 with
respect to the remaining licenses. Under Slovenian television regulations, POP
TV and its affiliate stations are required to comply with a number of
restrictions on programming and advertising. These restrictions include that 10%
of the station's broadcast time must be internally produced programming, certain
films and other programs may only be broadcast between 11:00 p.m. and 6:00 am,
and POP TV news editors, journalists and correspondents must not reflect a
biased approach toward news reporting.
In addition to the restrictions discussed above under "--Advertising,"
advertising is not permitted during news, documentary or children's programming
under 30 minutes in duration, or during religious programming. Restrictions on
advertising content include a prohibition on tobacco advertising and on the
advertising of alcoholic beverages other than low alcohol
content beer.
Operations in the Slovak Republic: Markiza TV
General
16
The Slovak Republic is a parliamentary democracy with a population of
5.4 million where nearly 100% of households have television. Per capita GDP was
an estimated $3,960 in 1998. Television advertising increased approximately 19%
in 1998 to $56 million, according to the Company's estimates, yet television
advertising spending per capita in the Slovak Republic in 1998 was still only
approximately 55% of that of the Czech Republic.
Markiza TV was launched as a national television station in the Slovak
Republic in August 1996. Markiza TV reaches approximately 92% of the Slovak
Republic's population of 5.4 million, including virtually all of its major
cities. According to independent research, Markiza TV had an average national
television viewer share for 1998 of approximately 50% versus 18% for its nearest
competitor, STV 1. See Item 3 "Legal Proceedings".
Programming
Markiza TV's programming strategy is to appeal to a broad audience with
specific groups targeted in marginal broadcasting hours. Markiza TV provides an
average of 19.5 hours of programming daily, including news, movies,
entertainment programmes and sport (including coverage of European Champion's
League soccer, Formula One racing and ice hockey). Approximately 38% of Markiza
TV's programming is locally produced, including a daily breakfast show, game
shows, talks shows and news.
Markiza TV has secured exclusive broadcast rights in the Slovak
Republic to a large number of popular United States and European programs and
films (e.g., "E.R.", "Savannah", "Baywatch", "Love Boat", "Scarlet", "JAG")
produced by major international studios including Warner Bros., Columbia Tri
Star, Polygram, Paramount Pictures and Twentieth Century Fox. All foreign
language programming is dubbed into the Slovak language. Markiza TV also
receives foreign news reports and film footage from CNN, Reuters and APTN, which
it integrates into news programs.
Advertising
Markiza TV derives revenues principally from the sale of commercial
advertising time through media buying groups and independent agencies.
Advertisers include large multinational firms such as Procter & Gamble, Henkel,
Unilever, Wrigley and Benckiser. Television stations are permitted to broadcast
advertising for up to 10% of total daily broadcast time and up to 20% of
broadcast time in any single hour.
Currently, approximately 60% of Markiza TV's advertising revenues are
sourced from agencies based in the Czech Republic. The Company expects that a
greater proportion of advertising revenues will be sourced from the Slovak
Republic as the local advertising market develops.
Competition
The Slovak Republic is served by two national public television
stations, STV1 and STV2, which dominated the ratings until Nova TV and Markiza
TV began broadcasting in 1994 and 1996, respectively. STV1 and STV2 reach nearly
all of the Slovak population. Nova TV's signal reaches approximately one-third
of the Slovak Republic's population and its launch provided the first
alternative in the country to public television. Nova TV has maintained its
popularity in the Slovak Republic, with an approximately 10% audience share for
1998. Markiza TV also competes with VTV, a private satellite broadcaster
reaching 47% of
17
the population; public television stations located in Austria, the Czech
Republic and Hungary with signals that reach the Slovak Republic; additional
foreign private television stations; and foreign satellite stations.
Regulation
Markiza TV's broadcast operations are subject to regulations imposed by
the Act on Radio and Television Broadcasting, the Act on Advertising and
conditions contained in the license granted by the Council of the Slovak
Republic for Broadcasting and Television Transmission (the "Slovak Television
Council"). The Slovak Television Council granted the license to operate Markiza
TV to the Company's local partner in STS for a period of 12 years, expiring in
September 2007, under terms requiring the Company's local partner to enter into
a partnership with the Company to found STS.
Under the license pursuant to which Markiza TV operates, Markiza TV is
required to comply with several restrictions on programming. These restrictions
include the following broadcast time rules: 40% must be Slovak production
(increasing to a minimum of 51% in September 1999); 10% must be programming for
children or youth; broadcasts of first run films and series must have a minimum
of 47% European production (of which there must be a minimum of 8% Slovak
production) and no more than 45% United States production; and no more than 40%
of foreign first run films and series may be in the Czech language (decreasing
to 20% by the fourth year of broadcasting). Markiza TV's programming is required
to be consistent with the Slovak Constitution and not promote violence, hate,
intolerance, or immoral behavior or intentionally use indecent language.
Programming endangering the psychological or moral growth of children and youth
cannot be broadcast between 6:00 am and 10:00 p.m., and Markiza TV's news
broadcasts must be objective and balanced and clearly differentiate between
opinion and news.
In addition to the restrictions discussed above under "--Advertising",
regulations relating to advertising content include that (a) the news may not be
sponsored and news staff may not appear in advertisements (b) tobacco
advertising is prohibited, (c) advertising for children or in which children
perform and which promotes behavior endangering the health, psychological or
moral development of children is prohibited, and (d) advertising which endangers
the viewer's morality, health, safety and environmental protection is
prohibited. The advertisement of beer is permitted; however, advertisement of
other alcoholic beverage is prohibited. There are also restrictions on the
frequency of advertising breaks within a program.
Operations in Ukraine: Studio 1+1 Group
General
Ukraine, a parliamentary democracy of 49.8 million people, is the most
populous market served by the Company. Nearly 100% of Ukrainian households have
television, cable penetration is approximately 12% and satellite penetration is
negligible. Per capita GDP of $810 for 1998 is the lowest of all the Company's
markets, though television advertising in Ukraine grew by over 20% from $53
million in 1997 to $65 million in 1998.
Studio 1+1 broadcasts programming and sells advertising on Ukrainian
National Channel Two ("UT-2"), one of Ukraine's state-owned television channels.
UT-2 reaches approximately 95% of Ukraine's population. Television advertising
in Ukraine was $65 million
18
in 1998 ($1.30 per capita). According to independent research, average national
audience share in 1998 was 32% for Studio 1+1, 29% for Inter and 10% for UT-1.
Studio 1+1 began broadcasting on UT-2 in January 1997.
Programming
Studio 1+1's programming strategy is to appeal to a mass market
audience. The station broadcasts for 12 hours per day, including locally
produced news, variety shows, game shows and magazine programmes as well as a
broad range of popular and high quality films from international distributors.
In 1998, Studio 1+1 produced and co-produced approximately 1,200 hours of
programming (or approximately 35% of total programming hours), which primarily
consists of a daily breakfast show, news broadcasts and news related programmes,
talk shows, karaoke, game shows, a sport magazine, lifestyle magazine and comedy
shows. In 1998, such original local programming together with other Ukrainian
programming considered local programming by Ukrainian laws comprised
approximately 49% of Studio 1+1's total broadcast time.
Studio 1+1 has secured exclusive territorial or local language
broadcast rights in Ukraine to a large number of successful high quality
American, Russian and Western European programs and films (e.g. "X-Files",
"Beverly Hills 90210", "Chicago Hope", "Melrose Place", "E.R.", "Dr. Quinn",
"Pretender", "Baywatch") from many of the major studios, including Twentieth
Century Fox, Warner Bros., Paramount Pictures, Walt Disney, Universal Pictures,
CBS International, Worldvision Enterprises and PolyGram. Special events aired
include the Academy Awards ceremony, the soccer World Cup and Miss Europe '98.
Studio 1+1 has agreements with Reuters, CNN and SNTV for foreign news packages
and other footage to be integrated into its programming. All foreign language
programs and films (other than those in the Russian language) are dubbed into
the Ukrainian language. Studio 1+1 broadcasts more than 80% of its total air
time in the Ukrainian language.
Advertising
Studio 1+1 derives revenues principally from the sale of commercial
advertising time through both media buying groups and independent agencies.
Advertisers include large multinational firms such as Procter & Gamble,
Coca-Cola, Unilever, Nestle and Dandy. In 1998 Procter & Gamble accounted for
12% of advertising sales. Studio 1+1 is permitted to sell 15% of its overall
broadcast time for advertising and is subject to restrictions on the frequency
of advertising breaks. The advertising restrictions are the same for public and
private broadcasters.
Competition
Ukraine is served by four television channels: UT-1, UT-2 (on which
Studio 1+1 broadcasts) and UT-3, which are state owned, and ICTV, a private
broadcaster. Studio 1+1, through UT-2, has a broadcast reach of 95% of the
Ukrainian population. The state run station UT-1 has a broadcast reach of
approximately 98% of the Ukrainian population. ICTV, a private station, reaches
32% of Ukraine's population. The private station Inter, through UT-3, has a
broadcast reach of approximately 78% of the Ukrainian population. Inter's
program schedule consists primarily of rebroadcasts of the Russian-language ORT
network.
Regulation
19
Studio 1+1 provides programming to UT-2 pursuant to a ten-year
television broadcast license contract expiring in January 2007. Broadcasts of
Studio 1+1's programming and advertising on UT-2 are regulated by the State
Committee on Television and Radio of Ukraine and the National Council on
Television and Radio of Ukraine. These agencies enforce Ukraine's media laws,
which include restrictions on the content of programming and advertising and
limitations on the amount and placement of advertising in programs. All
advertising of alcohol and tobacco on TV is banned in Ukraine. Programming
produced in Ukraine must account for at least 70% of all programming and
programming produced by Studio 1+1 must account for 49% of all programming.
Operations in Hungary: TV3
General
Hungary is a parliamentary democracy of 10.2 million people and had an
estimated per capita GDP of $4,610 in 1998. On March 12, 1999 Hungary formally
joined NATO. According to the Company's estimates television advertising
totalled $183 million in 1998. Cable and satellite penetration are currently at
41% and 24% respectively. The 41% of the Hungarian population reached by TV3 are
predominately in urban areas, including Budapest, and represent approximately
66% of the country's purchasing power.
TV3 is distributed via MMDS in Budapest and via satellite to cable
systems throughout Hungary. TV3 reaches approximately 41% of Hungary's
population. In 1998, TV3 had an average viewer share of approximately 6% in its
coverage area.
Programming
TV3's programming strategy is to target a young urban audience. TV3
broadcasts for 16 hours per day, including four hours per day of the music
channel VH1, locally produced news, magazines, sport (including soccer coverage
of the English Premier League and Spanish Soccer League) and popular American
films and series. TV3 produces original local programming, which primarily
consists of news and news-related shows, a breakfast show and magazines on
cinema, culture, science and music. Such local programming currently comprises
30% of total broadcast time.
TV3 has exclusive broadcast rights in Hungary to a number of successful
American and Western European programs and films (e.g. "Frasier", "Police
Academy", "Beverly Hills 90210", "Melrose Place", "Dynasty", "Married with
Children", "The Simpsons", "MASH"), produced or distributed by such companies as
Warner Bros., Fox, Columbia, MGM, Paramount, Orion, Canal + and Polygram.
Special events aired in 1998 include coverage of the NBA. TV3 has agreements
with Reuters and APTN to receive international news footage. All acquired
programming is dubbed into the Hungarian language.
Advertising
TV3 derives revenues principally from the sale of commercial
advertising time through independent agencies and media buying groups.
Advertisers include Procter & Gamble, Unilever, Henkel and Master Foods. As a
commercial television station, TV3 is allowed to advertise for 20% of every hour
of broadcast time with a maximum of 15% of daily broadcast time, compared to the
public TV stations, which may only advertise for 10% of every hour of
20
broadcast time. There are restrictions on advertising breaks related to the
length of program being broadcast.
Competition
The national public channels, MTV1 and MTV2, reach 98% and 55%,
respectively, of the Hungarian population. The commercial national stations TV2
and RTL Klub, were launched in October 1997. TV2 reaches 93% of the population
and is on the air for 19 hours per day. RTL Klub reaches 88% of the population
and is on air for 18 hours per day. TV3 competes for revenue with other media,
such as newspapers, radio, magazines, outdoor advertising, transit advertising,
telephone directory advertising and direct mail.
Regulation
TV3 is distributed by MMDS (multi channel multipoint distribution
service) and satellite and is not required to operate pursuant to a broadcast
license. However, TV3 is recognized as a national broadcaster by the Hungarian
National Radio and Television Commission and is therefore subject to the
Hungarian Radio and Television Act. Advertisements on TV3 may not exceed 15% of
daily broadcast time and 12 minutes per hour. At least 20% of total annual
broadcast time (not including feature films, advertisements, news, live sports
and game shows) must be Hungarian produced. At least 15% of total annual
broadcast time must be programming commissioned or purchased from an independent
Hungarian production company that is not more than five years old. Six percent
of total annual advertising revenues must be used for the creation of new
Hungarian films or, in the alternative, 3% of annual advertising revenues may be
donated to a Hungarian film production fund. Advertising of tobacco and alcohol
is forbidden.
Hungary - IRISZ TV
In 1997, the Company formed a consortium, MKTV Rt. ("IRISZ TV"),
which submitted an application for a national television broadcast licenses
in a license tender competition. Following the award of these licenses to
other consortia, IRISZ TV filed a complaint in the Budapest Capital Court
challenging the license awards. See Item 3 "Legal Proceedings."
Seasonality
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.
Employees
As of March 12, 1999, CME had a corporate operations staff of 39
employees (versus 70 as of December 31, 1997) and its Subsidiaries had a total
of approximately 2,900 employees (versus 2,500 as of December 31, 1997). None of
CME's employees or the employees of any of its Subsidiaries are covered by a
collective bargaining agreement. The Company believes that its relations with
its employees are good.
Recent Developments
21
On March 18, 1999, the Company sold its equity interest in MobilRom
S.A., a GSM cellular telephone network in Romania.
On March 24, 1999, Frederic T. Klinkhammer was elected President and
Chief Executive Officer of CME, effective as of such date. Mr. Klinkhammer
also was appointed to CME's Board of Directors. Mr. Klinkhammer was
previously Chief Operating Officer and Executive Vice President of the
Company. Mr. Klinkhammer succeeds Michel Delloye who is leaving CME to
pursue other business opportunities.
On March 29, 1999, the Company entered into a Reorganization Agreement
with SBS Broadcasting S.A. ("SBS"), which provides, among other things, for (a)
the sale by the Company to SBS of all of the assets, business, properties and
rights of the Company (consisting primarily of the stock of CME Media
Enterprises B.V., an intermediate holding company wholly owned by CME); (b) the
assumption by SBS of, and indemnification of the Company with respect to, all
liabilities, obligations and commitments of the Company; (c) the issuance by SBS
to the Company of a number of shares of SBS common stock, par value $1.50 per
share ("SBS Stock"), equal to 0.5 times the total number of shares of the
Company's Class A Common Stock and Class B Common Stock outstanding immediately
prior to the closing of such transaction; and (d) the immediate commencement of
the winding up of the Company and distribution of the SBS Stock so received by
the Company to the shareholders of the Company (followed as soon as practical
thereafter by the final dissolution of the Company). Accordingly, upon the
closing of the transactions contemplated by the Reorganization Agreement, each
shareholder of the Company would receive 0.5 shares of SBS Stock for each share
of Common Stock of the Company owned by such shareholder.
The foregoing transaction is intended to be accounted for as a
purchase, and to qualify as a reorganization under Section 268(a) of the
Internal Revenue Code (and thus to be tax-free for US tax purposes to the
shareholders of CME). The closing of the transaction is subject to a number of
conditions precedent, some of which are beyond the control of the Company,
including the approval of the shareholders of SBS. Ronald S. Lauder, who
controls approximately 69% of the vote of the Company, has entered into a
Shareholders Agreement with SBS whereby he commits to vote his shares of Class A
and Class B Common Stock in favor of the transaction. In the event that the
transaction is not consummated, the Reorganization Agreement provides various
rights to the Company and to SBS, depending upon the circumstances.
Item 2. PROPERTIES
CME Development Corporation leases office space in London in two
locations. One lease covers approximately 4,347 square feet of space and expires
in 2004, except that the Company can terminate the lease at its option in 1999,
subject to penalty. The second lease, for 2,205 square feet of office space in a
nearby building, expires in 2006.
Nova TV occupies approximately 65,000 square feet, and modern studios
have been constructed in the building, which is owned by CNTS. The Company has
entered into an agreement on behalf of MPI which gives the Company the option to
acquire the facility in Bucharest which contains PRO TV's studios for a purchase
price of approximately $1.8 million. The Company owns a portion of a building in
Ljubljana which contains POP TV's studios and offices. Videovox owns the
building in Budapest in which its studios are located. STS owns its principal
office facility near Bratislava. Studio 1+1 and TV3 both lease office and studio
space.
Item 3. LEGAL PROCEEDINGS
The Company has been informed by CET that in May 1997, one of the
owners of CET filed a claim against CET in the Regional Commercial Court of
Prague alleging that CET did not satisfy all required procedures for approving
certain transfers of CET ownership interests and requesting that such transfers
be invalidated on the grounds that CET approved such transfers at procedurally
deficient general meetings. The Court ruled in favor of the plaintiff. CET
appealed the decision. The Company believes that the outcome of this action will
not have an impact on the ownership structure of CET, as the transfers at issue
were reconfirmed at subsequent general meetings of CET which have not been
challenged.
The Company has been informed by CET that on July 31, 1998, the Czech
Radio and Television Council notified CET that the Council had initiated an
administrative proceeding to investigate allegedly unbalanced reporting of
information on Nova TV in violation of Czech broadcasting regulations. Under
applicable Czech media laws, such a proceeding could result in fines, withdrawal
of the Nova TV broadcast license from CET or both. The Company has been informed
that the proceeding has been terminated and that the written decision of the
Council will be issued during the second quarter of 1999.
See Item 1 "Business--Corporate Structure--Czech Republic" for a
description of certain potential disputes regarding Nova TV, CNTS and CET.
In August 1998, Gamatex Ltd., a Slovak company, asserted that it had
obtained 100% ownership of Markiza-Slovakia s.r.o. through an auction process
arising out of an unsatisfied claim against Markiza-Slovakia s.r.o.
Markiza-Slovakia s.r.o. holds the Markiza TV broadcast license and owns a 51%
voting interest in STS. A number of legal proceedings are pending in the
District Court of Bratislava and Regional Court of Bratislava in which the
original owners of Markiza-Slovakia s.r.o. have claimed that Gamatex's ownership
claims are not legally valid.
22
STS has joined Markiza-Slovakia s.r.o. in a number of such proceedings, in
particular proceedings to (i) confirm the interests of the original owners of
Markiza-Slovakia s.r.o.; (ii) declare invalid Markiza-Slovakia s.r.o. and STS
shareholders' meetings called by Gamatex without proper notice; and (iii)
declare invalid Gamatex's claim to ownership in Markiza-Slovakia s.r.o.
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 CME-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 a number of actions in Slovene courts to
resolve these claims.
On April 30, 1997, Perekhid Media Enterprise 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. In June 1998,
Perekhid filed a notice of appeal with the Court. Perekhid failed to proceed
with such appeal within nine months from the date it filed the notice of appeal
and as a result the appeal lapsed automatically in March 1999. On February 19,
1999, Atlantic Group Limited (formerly known as Perekhid Media Enterprise Ltd.)
initiated proceedings against CME in the High Court in London, seeking
$81,772,759 in damages. Atlantic Group Limited alleges that CME conspired with
others to use unlawful means to procure the termination of Atlantic Group
Limited's right to provide programming and advertising sales on UT-2. On March
17, 1999, CME issued a summons to dismiss the London proceedings. The summons is
expected to be heard later in 1999.
In mid 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 and the two successful consortia (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 Supreme Court of
Hungary. In a decision released on February 22, 1999, the Supreme Court of
Hungary reversed in part the decision of the trial court and ruled that the
Hungarian National Radio and Television Commission acted illegally by (i)
failing to exclude the bid of the consortium Magyar RTL Televizio Rt. ("RTL")
which operates the channel RTL Klub, on grounds of invalidity arising from
formal defects in the bid; (ii) entering
23
into an agreement with RTL; and (iii) deviating from its own published
guidelines in the bid evaluation process. The Supreme Court stated that the
Hungarian Media Act requires the Hungarian National Radio and Television
Commission to terminate RTL's license agreements as a result of the Commission's
illegal acts but stated that the Supreme Court could not issue a termination
order because of the Commission's status as an administrative body of the state
and that the legal consequences of the Commission's failure to abide by the
Media Act are for the Hungarian Parliament to determine. The Hungarian National
Radio and Television Commission recently publicly announced that it intends to
request that the Constitutional Court of Hungary declare unconstitutional
a provision of the Hungarian Media Act which the Supreme Court relied upon in
part in its decision.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
24
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
CME's Class A Common Stock began trading on the Nasdaq National Market
on October 13, 1994 under the trading symbol "CETV." On March 17, 1999, the last
reported sales price for the Class A Common Stock was $8.75. The following table
sets forth the high and low sales prices for the Class A Common Stock for each
quarterly period during the last two fiscal years of the Company and for the
first quarter of 1999, as reported by the Nasdaq National Market:
Price Period High Low
- ------------ ---- ---
1997
First Quarter........................................... 37.125 31.250
Second Quarter.......................................... 32.750 23.500
Third Quarter........................................... 26.750 22.375
Fourth Quarter.......................................... 32.875 23.438
1998
First Quarter........................................... 29.125 21.375
Second Quarter.......................................... 29.313 20.000
Third Quarter........................................... 22.125 9.625
Fourth Quarter.......................................... 9.625 4.750
1999
First Quarter (through March 17, 1999).................. 10.125 6.875
At March 17, 1999, there were 34 holders of record (including brokerage
firms and other nominees) and approximately 597 beneficial shareholders of the
Class A Common Stock and seven holders of record of the Class B Common Stock.
There is no established public trading market for the Class B Common Stock.
DIVIDEND POLICY
The Company has not declared or paid and has no present intention to
declare or pay in the foreseeable future any cash dividends in respect to any
class of its Common Stock. The Company's ability to pay cash dividends is
primarily dependent upon receipt of dividends or distributions from its
Subsidiaries over which it has limited control. In addition, the indentures
which govern the Company's 9.375% Senior Notes Due 2004 and 8.125% Senior
Notes Due 2004 restrict the ability of CME to declare and pay cash dividends.
See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Item 6 SELECTED FINANCIAL DATA
(Selected Financial Data begins on the following page and ends on
the page immediately preceding Item 7).
25
SELECTED CONSOLIDATED FINANCIAL DATA
(dollars in thousands, except per share data)
The selected financial information presented below for the five years
ended December 31, 1998 is derived from the audited Consolidated Financial
Statements of the Company. The following selected financial information should
be read in conjunction with the Company's Consolidated Financial Statements and
Notes thereto for the years ended December 31, 1998, 1997 and 1996, included
elsewhere herein.
Years Ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Operating Data: (dollars in thousands)
Net revenues................................... $182,367 $150,265 $135,985 $98,919 $53,566
Total station operating costs and expenses..... 146,275 98,651 85,101 52,542 36,083
Selling, general and administrative expenses... 28,806 22,953 21,357 7,725 6,009
Corporate operating costs and development
expenses................................... 22,670 25,467 15,782 10,669 3,699
-------- -------- -------- ------- -------
Amortization of goodwill and allowance for
development costs.......................... 16,809 14,845 2,940 3,442 985
Non-cash stock compensation charge............. -- -- -- 858 5,833
Capital registration tax....................... -- -- 809 1,375 --
Restructuring charge........................... 2,552 -- -- -- --
-------- -------- -------- ------- -------
Total operating expenses....................... 217,112 161,916 125,989 76,611 52,609
-------- -------- -------- ------- -------
Operating (loss) income........................ (34,745) (11,651) 9,996 22,308 957
Equity in loss of unconsolidated
affiliates................................. (3,398) (10,340) (17,867) (14,816) (13,677)
Loss on impairment of investments in
unconsolidated affiliates (1).............. -- (20,707) -- -- --
Interest and other income...................... 7,624 10,113 2,876 1,238 179
Interest expense............................... (26,215) (16,122) (4,670) (4,959) (1,992)
Foreign currency exchange (losses) gains ...... (8,412) (5,857) (2,861) 324 (245)
-------- -------- -------- ------- -------
(Loss) income before provision for income
taxes...................................... (65,146) (54,564) (12,526) 4,095 (14,778)
Provision for income taxes..................... (15,856) (14,608) (16,405) (16,340) (3,331)
-------- -------- -------- ------- -------
Loss before minority interest in consolidated
subsidiaries............................... (81,002) (69,172) (28,931) (12,245) (18,109)
Minority interest in loss (income) of
consolidated subsidiaries.................. (156) 1,066 (1,072) (6,491) (2,396)
-------- -------- -------- ------- -------
Net loss from continuing operations............ (81,158) (68,106) (30,003) (18,736) (20,505)
Discontinued operations (2):
Operating loss of discontinued operations...... (15,289) (16,986) -- -- --
Loss on disposal of discontinued operations.... (28,805) -- -- -- --
-------- -------- -------- ------- -------
Net loss....................................... $ (125,252) $ (85,092) $ (30,003) $(18,736) $(20,505)
========== ========= ========== ======== ========
Net loss per common share from:
Continuing operations - basic and diluted.... $ (3.36) $ (2.85) $ (1.55) $ (1.28)
Discontinued operations - basic and diluted.. (1.83) (0.71) -- --
-------- -------- -------- -------
$ (5.19) $ (3.56) $ (1.55) $ (1.28)
========== ======== ======== ========
Common shares used in computing per share
amounts (000s)
Basic and diluted.......................... 24,134 23,911 19,373 14,678
========== ======== ======== ========
Other Data:
Broadcast cash flow (3)........................ $27,048 $31,609 $ 41,444 $ 38,182 $ 12,233
Cash flow from operations...................... (28,380) (27,744) (3,044) 2,555 (1,532)
Balance Sheet Data:
Current assets....................... $ 155,108 $ 184,878 $ 146,159 $116,728 $ 71,447
Total assets......................... 385,466 451,683 365,130 222,027 115,332
Total debt........................... 232,057 231,937 55,096 20,285 32,592
Shareholders' equity................. 65,707 157,583 249,320 138,936 62,631
- ----------------------
26
(1) 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 in the Berlin-Brandenburg
area of Germany. In May 1997, 1A TV declared bankruptcy. The Company wrote
down its investments in Germany by $20,707,000 in 1997, thereby fully
eliminating the carrying value of such investments.
(2) During the fourth quarter of 1998, the Company sold its interests in the
TVN television operations in Poland at a loss, resulting in the treatment
of these interests and related operations as discontinued operations for
all periods presented. The Company's financial statements have been
restated for all periods presented in order to reflect the operations of
Poland as discontinued operations.
(3) "Broadcast cash flow", a broadcasting industry measure of performance, is
defined as net broadcast revenues, less (i) station operating costs and
expenses (excluding depreciation and amortization of acquired programming
and of intangible assets), (ii) broadcast selling, general and
administrative expenses, and (iii) cash program rights costs. Cash program
rights costs are included in the period in which payment is made, which
may not necessarily correspond to the timing of program use or
amortization. Broadcast cash flow should not be considered as a substitute
measure of operating performance or liquidity prepared in accordance with
GAAP (see the accompanying Consolidated Financial Statements).
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
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 engages in barter transactions in which its stations
exchange commercial advertising time for goods and services. The Company, like
other television operators, experiences seasonality, with advertising sales
tending to be lowest during the third quarter of each calendar year, which
includes the summer holiday period, and highest during the fourth quarter of
each calendar year. The primary expenses incurred in television operations are
programming and production costs, employee salaries, broadcast transmission
expenses and selling, general and administrative expenses. The Company has
incurred and might in the future incur significant development expenses,
including finding 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, shareholders or creditors of these entities.
The laws under which the Company's operating Subsidiaries are organized provide
generally that dividends may be declared by the partners or shareholders out of
yearly profits subject to the maintenance of registered capital and required
reserves and after the recovery of accumulated losses.
Selected Combined and Attributable Financial Information
The following two 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
27
attributable financial information for the years ended December 31, 1998, 1997
and 1996 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 and Studio 1+1) not
consolidated in the Consolidated Statements of Operations during the periods
shown, are aggregated with those of the Company's consolidated operations. In
the table "Selected Attributable Financial Information", combined information is
adjusted for CME's economic interest in each entity, which economic interest is
the basis used for consolidation and equity method accounting in the Company's
GAAP Consolidated Financial Statements as of December 31, 1998. The tables
separate the results of the "Established Stations", which have national or
nearly national coverage, from TV3, the Company's newest operation which reaches
41% of the Hungarian population.
The tables are presented solely for additional analysis and not as a
presentation of results of operations of each component, nor as combined or
consolidated financial data presented in accordance with GAAP. See "Application
of Accounting Principles". The following supplementary unaudited combined and
attributable information includes certain financial information of Markiza TV
and Studio 1+1 on a line-by-line basis, similar to that of the Company's
consolidated entities.
The 1998 $21,289,000 write-down of the TV3 program library, taken to
reduce TV3's program library to the estimated net realizable value, is not
reflected in the tables in order to provide a better indication of the
underlying performance of TV3. In addition, 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 Established Stations refer to Nova TV, PRO TV, POP TV, Markiza TV
and Studio 1+1. 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 Studio 1+1 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 in the Czech Republic in which CME acquired a
controlling interest in December 1996 and which ceased to provide services on
December 31, 1998 and is being liquidated. TV3 began operations in October 1997.
EBITDA consists of earnings before interest, income taxes, depreciation
and amortization of intangible assets (which does not include programming
rights). EBITDA is provided because it is a measure of operating performance
commonly used in the television industry. It is presented to enhance an
understanding of the Company's operating results and is not intended to
represent cash flow or results of operations in accordance with GAAP for the
periods indicated.
The term "station expenses" used in the discussion of EBITDA
immediately following the tables refers to the total of a station's (i) other
operating costs and expenses, (ii) amortization of programming rights and (iii)
selling, general and administrative expenses.
"Broadcast cash flow", a broadcasting industry measure of performance,
is defined as net broadcast revenues, less (i) station operating costs and
expenses (excluding depreciation and amortization of acquired programming and of
intangible assets), (ii) broadcast selling,
28
general and administrative expenses, and (iii) cash program rights costs. Cash
program rights costs are included in the period in which payment is made, which
may not necessarily correspond to the timing of program use or amortization.
Broadcast cash flow should not be considered as a substitute measure of
operating performance or liquidity prepared in accordance with GAAP (see the
accompanying Consolidated Financial Statements).
29
SELECTED COMBINED FINANCIAL INFORMATION (1)
(unaudited)
($000s)
Year Ended December 31,
--------------------------------------------------------------------------------------------------------
Net Revenue EBITDA Broadcast Cash Flow
--------------------------------- ----------------------------- ---------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
Nova TV.................. 108,826 99,163 109,242 54,887 49,921 53,441 47,489 48,326 53,128
PRO TV................... 41,937 30,155 15,803 (2,016) (1,298) (4,368) (3,069) (3,889) (5,290)
Markiza TV .............. 37,793 31,296 7,462 2,483 5,259 (2,240) 2,634 4,044 (4,502)
POP TV................... 22,122 14,989 9,080 (809) (1,613) (5,157) (2,015) (1,742) (6,394)
Studio 1+1............... 23,598 16,661 - (2,047) 19 - (4,150) (1,419) -
------- ------ ------- ------ ------ ------ ------ ------ ------
Total Established
Stations.............. 234,276 192,264 141,587 52,498 52,288 41,676 40,889 45,320 36,942
TV3 (2)............... 5,379 1,464 - (6,926) (3,086) - (15,215) (9,906) -
Other Operations (3).. 4,103 4,494 1,860 (340) (799) (1,075) (340) (799) (1,075)
------- ------ ------- ------ ------ ------ ------ ------ ------
Total Combined
Operations............ 243,758 198,222 143,447 45,232 48,403 40,601 25,334 34,615 35,867
======= ======= ======= ====== ====== ====== ====== ====== ======
(1) Important information about this table appears under the heading "Selected
Combined and Attributable Financial Information" immediately preceding this
table.
(2) TV3's EBITDA is without the impact of the $21,289,000 write-down in
1998 of the carrying value of capitalized costs of rights to program
material.
(3) Other operations include Radio Alfa and Videovox.
30
SELECTED ATTRIBUTABLE FINANCIAL INFORMATION (1)
(unaudited)
($000s)
Year Ended December 31,
-----------------------------------------------------------------------------------------------------------------
Economic Net Revenue EBITDA Broadcast Cash Flow
Interest (4) ------------------------------- ----------------------------- ----------------------------------
----------- ------------------------------- ----------------------------- ----------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
Nova TV................ 99% 107,738 98,171 108,150 54,338 49,422 52,907 47,014 47,843 52,597
PRO TV................. 66% 27,678 19,902 10,430 (1,331) (857) (2,883) (2,026) (2,567) (3,491)
Markiza TV............. 80% 30,234 25,037 5,970 1,986 4,207 (1,792) 2,107 3,235 (3,602)
POP TV ...............85.5% 18,914 12,816 7,763 (692) (1,379) (4,409) (1,723) (1,489) (5,467)
Studio 1+1..............60% 14,159 9,997 - (1,228) 11 - (2,490) (851) -
------- ------ ------- ------ ------- ------ ------ ------ -------
Total Established Stations.... 198,723 165,923 132,313 53,073 51,404 43,823 42,882 46,171 40,037
TV3 (2).............. 99% 5,325 1,449 - (6,857) (3,055) - (15,063) (9,807) -
Other Operations(3). 100% 4,103 4,494 1,860 (340) (799) (1,075) (340) (799) (1,075)
------- ------ ------- ------ ------- ------ ------ ------ -------
Total Attributable
Operations 208,151 171,866 134,173 45,876 47,550 42,748 27,479 35,565 38,962
======= ======= ======= ====== ======= ====== ====== ====== =======
(1) Important information about this table appears under the heading "Selected
Combined and Attributable Financial Information" immediately preceding this
table.
(2) TV3's EBITDA is without the impact of the $21,289,000 ($21,076,000
attributable in 1998) write-down of the carrying value of capitalized
costs of rights to program material.
(3) Other operations include Radio Alfa and Videovox.
(4) Economic interest as of December 31, 1998. For comparison between
the years ended December 31, 1998, 1997 and 1996, all results in this
table are pro forma as if the December 31, 1998 percentages had also been
in place during the years ended December 31, 1996 and 1997. See
"Application of Accounting Principles" regarding the increase in the
Company's interest in Studio 1+1 to 60%.
31
Combined EBITDA for the year ended December 31, 1998 compared to the
year ended December 31, 1997
Established Stations
The total combined EBITDA for the Established Stations increased
by $210,000 from $52,288,000 for 1997 to $52,498,000 for 1998.
The Russian financial crisis resulted in a number of advertisers
reducing their advertising budgets in the fourth quarter of 1998 in many markets
in Central and Eastern Europe, which adversely impacted net revenues at all of
the Established Stations with the strongest impact in Ukraine (Studio 1+1) and
Romania (PRO TV).
Nova TV's EBITDA increased by $4,966,000, or 10%, to $54,887,000 for
1998, compared with $49,921,000 for 1997. Nova TV's net revenues increased by
$9,663,000, or 10%, as a result of growth in the total television advertising
market. This revenue growth was achieved despite difficulties in the Czech
economy during 1998. Station expenses increased by a total of $4,697,000, or
9.5%, which primarily reflects inflationary pressures on prices and increased
local production.
POP TV's EBITDA improved from negative $1,613,000 for 1997 to negative
$809,000 for 1998. Net revenues increased by $7,133,000, or 48%, to $22,122,000
for 1998 from $14,989,000 for 1997. The increase was a result of the growth of
the overall television advertising market in Slovenia (from $39,000,000 in 1997
to $51,000,000 in 1998) and POP TV's increased audience share. POP TV's station
expenses increased by $6,329,000, or 38%, for 1998 compared to 1997 primarily
due to higher costs of acquired and locally produced programming. The cost of
acquired programming increased primarily due to higher programming prices and
the addition of Gajba TV, a second channel launched in October 1997.
PRO TV's EBITDA decreased by $718,000 from negative $1,298,000 for 1997
to negative $2,016,000 for 1998. The decrease was primarily a result of an
increase in station expenses, primarily attributable to costs associated with
expansion of the network, including Acasa (the Company's second channel in
Romania) launched in February 1998, higher prices of acquired programming and
increased hours of self production. Net revenues for 1998 increased by
$11,782,000, or 39%, over 1997 net revenues. During the fourth quarter of 1998,
PRO TV's net revenues were negatively impacted by the Russian financial crisis,
resulting in only 11% net revenue growth for fourth quarter 1998 over fourth
quarter 1997. For comparison, first nine month 1998 net revenue was 46% higher
than first nine month 1997 net revenue.
Studio 1+1 recorded negative EBITDA of $2,047,000 for 1998 compared
with positive EBITDA of $19,000 for 1997. Net revenues increased $6,937,000, or
42 %, from 1997 to 1998, due to an increase in Studio 1+1's audience share and
significant growth in the Ukrainian television advertising market during the
first eight months of 1998. The financial crisis in Russia negatively impacted
the last four months of 1998 with fourth quarter net revenues $2,100,000, or
31%, lower than fourth quarter of 1997 net revenues. For comparison, first nine
month 1998 net revenue was 92% higher than first nine month 1997 net revenue.
Station expenses for 1998 were $9,003,000, or 54%, higher than in
32
1997 as Studio 1+1 did not reach full scale operational levels until the end of
the third quarter of 1997.
Markiza TV recorded an EBITDA decrease of $2,776,000 from $5,259,000
for 1997 to $2,483,000 for 1998. This decrease was primarily due to a
programming library write-down of approximately $2,000,000 as well as higher
production expenses due to an increase in production hours. Net revenues
increased by $6,497,000, or 21%, reflecting Markiza TV's continued market
leadership in ratings and advertising share. During the fourth quarter of 1998,
Markiza's net revenues were adversely impacted by the Russian financial crisis
and economic difficulties in the Czech Republic (approximately 60% of Markiza
TV's advertising revenues are sourced from agencies based in the Czech
Republic).
TV3
TV3 in Hungary commenced operations in October 1997 and recorded
negative EBITDA of $6,926,000 for 1998.
The Company recorded a $6,664,000 write-down of TV3's program library
in the fourth quarter of 1998 and a total write-down of $21,289,000 for 1998.
Programming commitments were entered into in 1996 and 1997 in anticipation of
the grant of a national license for Hungary. The Company was not granted a
national license for Hungary and has been unable to enter into a partnership
with the license winners during 1998. See Item 3, "Legal Proceedings". In light
of TV3's distribution and audience share, the Company does not expect to be able
to realize the full value of the program library. The carrying value of the
capitalized costs of rights to program material has been adjusted down to its
estimated net realizable value. The EBITDA reported on the table is before this
write-down, as the Company believes it provides a better indication of the
underlying performance of the station.
Total Combined Operations
The total Combined Operations EBITDA (before the write-down of TV3's
programming library) decreased by $3,171,000 from $48,403,000 for 1997 to
$45,232,000 for 1998. As described above, this decrease was primarily due to
negative EBITDA reported by the Company's new operation in Hungary and the
decrease in EBITDA of Markiza TV, Studio 1+1 and PRO TV, offset in part by the
EBITDA improvements in CNTS and POP TV .
Broadcast Cash Flow
Differences between EBITDA and broadcast cash flow are the result of
timing differences between programming use and programming payments.
Application of Accounting Principles
Although the Company conducts operations largely in foreign currencies,
the Company prepares its consolidated financial statements in United States
dollars and in accordance with GAAP. In CME's Consolidated Statements of
Operations, consolidated entities include wholly-owned subsidiaries and the
results of Nova TV, PRO TV, POP TV,
33
TV3, Videovox and Radio Alfa, and separately set forth the minority interests
attributable to other owners of such companies. The results of Markiza TV,
Studio 1+1 and the Company's former German regional television operations FFF,
SFF and 1A TV have been accounted for using the equity method such that CME's
interests in net earnings or losses of those operations is included in the
consolidated earnings and an adjustment is made to the carrying value at which
the investment is recorded on the Consolidated Balance Sheet. The Company
records other investments at the lower of cost or market value. In late December
1998 the Company increased its equity interest in Studio 1+1 to a 60%
controlling interest and, due to the timing of this transaction, the Studio 1+1
balance sheet is consolidated in the Company's Consolidated Balance Sheet as of
December 31, 1998, but on the Company's Consolidated Statements of Operations
and Consolidated Statements of Cash Flows, Studio 1+1 results are accounted for
under the equity method through the date of consolidation (December 23, 1998).
In the future, Studio 1+1 will be consolidated in all of CME's GAAP financial
statements for all periods subsequent to the acquisition of this additional
interest. 1A TV initiated a bankruptcy proceeding in May 1997. The Company
terminated its ownership interests in FFF and SFF as of December 31, 1997.
Foreign Currency
The Company generates revenues primarily in Czech korunas ("Kc"),
Romanian lei ("ROL"), Slovenian tolar ("SiT"), Slovak korunas ("Sk"), Hungarian
forints ("HUF") and Ukrainian hryvna ("Hrn") and incurs expenses in those
currencies as well as German marks, British pounds and United States dollars.
The Romanian lei, Slovenian tolar, Ukrainian hryvna and Slovak koruna are
managed currencies with limited convertibility. The Company incurs operating
expenses for acquired programming in United States dollars and other foreign
currencies. For entities operating in economies considered non-highly
inflationary, including CNTS, POP TV, Markiza TV, Videovox, Radio Alfa, TV3 and
certain Studio 1+1 entities, balance sheet accounts are translated from foreign
currencies into United States dollars at the relevant period end exchange rate
and 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 (in accumulated other comprehensive income (loss) ) with no
effect on the consolidated statements of operations.
PRO TV and certain Studio 1+1 entities operate in economies considered
highly inflationary. Accordingly, non-monetary assets are translated at
historical exchange rates, monetary assets are translated at current exchange
rates and translation adjustments are included in the determination of net
income. Currency translation adjustments relating to transactions of the Company
in currencies other than the functional currency of the entity involved are
reflected in the operating results of the Company.
The exchange rates at the end of and for the periods indicated are
shown in the table below.
<CAPION>
Balance Sheet Income Statement
--------------------------------- -----------------------------------
At December 31, Weighted average for the years
ending December 31,
1998 1997 % Change 1998 1997 % Change
---- ---- -------- ---- ---- --------
34
Czech koruna equivalent of $1.00 29.86 34.64 13.8% 31.96 32.03 0.2%
German mark equivalent of $1.00 1.67 1.80 7.2% 1.76 1.73 -1.7%
Hungarian forint equivalent of $1.00 217 204 -6.4% 217 201 -8.0%
Romanian lei equivalent of $1.00 10,983 8,023 -36.9% 8,863 7,077 -25.2%
Slovak koruna equivalent of $1.00 36.91 34.78 -6.1% 35.20 33.64 -4.6%
Slovenian tolar equivalent of $1.00 161.20 169.18 4.7% 165.99 160.37 -3.5%
Ukrainian hryvna equivalent of $1.00 3.43 1.90 -80.5% 2.45 1.86 -31.7%
The Company's results of operations and financial position during 1998
were impacted by changes in foreign currency exchange rates since December 31,
1997.
Results of Operations
During the fourth quarter of 1998, the Company sold its interests in
the TVN television operations in Poland at a loss, resulting in the treatment of
these interests and related operations as discontinued operations for all
periods described in Results of Operations. The Company's financial statements
have been restated for all periods presented in order to reflect the operations
in Poland as discontinued operations.
Year ended December 31, 1998 compared to year ended December 31, 1997
CME's consolidated net revenues increased by $32,102,000, or 21%, to
$182,367,000 for 1998 from $150,265,000, for 1997. Net revenues increased for
each of the consolidated television operations (Nova TV, PRO TV, POP TV and
TV3). However, the Russian financial crisis resulted in a number of advertisers
reducing their advertising budgets in the fourth quarter of 1998 in many markets
in Central and Eastern Europe, which adversely impacted net revenues at all CME
stations.
Nova TV, PRO TV and POP TV's net revenues improved primarily due to
growth in their respective television advertising markets and despite the
lingering effects of the Russian financial crisis on the advertising market in
Romania and difficulties in the economy during 1998 in the Czech Republic. TV3
recorded net revenues of $5,379,000 in 1998, its first full year of operations.
Total station operating costs and expenses (including amortization of
program rights and depreciation of fixed assets and other intangibles) increased
by $47,624,000, to $146,275,000 for 1998 from $98,651,000 for 1997. The increase
is primarily attributable to increases in 1998 station operating costs and
expenses of TV3 of $28,028,000, of which $21,289,000 reflects the write-down of
the carrying value of TV3's capitalized costs of rights to program material to
its estimated net realizable value. The increase in total station operating
costs and expenses is also attributable to increases in operating costs and
expenses at PRO TV of $13,137,000, POP TV of $5,012,000 and Nova TV of
$2,757,000.
PRO TV's station operating costs and expenses rose primarily as a
result of expansion of network affiliates, higher prices of acquired programming
and increased hours of self- production. In addition, programming amortization
increased due to the second channel Acasa and depreciation increased due to the
increase in network and broadcast equipment needed to expand the signal reach.
Both Nova TV and POP TV's operating costs and expenses increases were primarily
attributable to higher production
35
costs as a result of increased local production in response to audience demand
and, in the case of POP TV, higher acquired programming costs due to an increase
in programming prices.
Station selling, general and administrative expenses increased by
$5,853,000 to $28,806,000 for 1998 from $22,953,000 for 1997. The increase is
primarily attributable to increases at PRO TV, TV3 (which commenced operations
in October 1997) and POP TV.
PRO TV's 1998 selling, general and administrative expenses were
$2,763,000 higher as a result of administrative and marketing expenses related
to the addition of Acasa and the development of production and post-production
businesses. POP TV's selling, general and administrative expenses increased by
$923,000 primarily due to increased marketing activity.
Corporate operating costs and development expenses decreased by
$2,797,000, or 11%, from $25,467,000 in 1997 to $22,670,000 in 1998 due to
reduced development activity and lower corporate headcount.
The increase in amortization of goodwill and allowance for development
costs of $1,964,000, is primarily attributable to the write-off of goodwill
associated with the Company's Hungarian operations and a provision against
investments in Kanal A.
In the second quarter of 1998, the Company recorded a restructuring
charge of $2,552,000 based on its decision to change its focus from aggressive
development and growth to further enhancing the operating performance of the
Company's existing assets and pursuing opportunities for focused growth. The
restructuring charge is comprised of severance and other associated costs.
As a result of the above factors, the Company generated an operating
loss of $34,745,000 for 1998 compared to an operating loss of $11,651,000 for
1997.
Equity in loss of unconsolidated affiliates decreased by $6,942,000 to
a loss of $3,398,000 for 1998 from a loss of $10,340,000 for 1997. This is a
result of the Company's termination of its loss-making German operations as of
December 31, 1997.
Net interest and other income changed by $12,582,000 to negative
$18,591,000 for 1998 from negative $6,009,000 for 1997. This was primarily
attributable to a full year of 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 loss increased to $8,412,000 for 1998
from $5,857,000 for 1997. The loss increased due to the effect of the
appreciation of the German mark against the United States dollar on the
Company's DM denominated Senior Notes and the effect of the appreciation of
Czech koruna against the United States dollar on the Company's Czech koruna
denominated loan with Ceska Sporitelna Bank ("CS"). This increase was offset in
part by the effect of the appreciation of the Czech koruna on the Company's
Czech koruna cash balances.
36
Provision for income taxes was $15,856,000 for 1998, an increase
from $14,608,000 for 1997 due to an increase in CNTS's taxable income.
Minority interest in income of consolidated subsidiaries was $156,000
in 1998 and minority interest in loss of consolidated subsidiaries was
$1,066,000 in 1997. This results from changes in profitability and, to a lesser
extent, changes in ownership of the consolidated subsidiaries.
In December 1998, CME sold its interests in the TVN television
operations in Poland to its former partner. The operating losses from the
Company's Polish operations and the loss on the sale of the related assets
appear on the Consolidated Statement of Operations under discontinued operations
for both 1998 and 1997.
As a result of these factors, the net loss of the Company was
$125,252,000 for 1998 compared to $85,092,000 for 1997.
Year ended December 31, 1997 compared to year ended December 31, 1996
The Company's net revenues increased by $14,280,000, or 11 %, to
$150,265,000 in 1997 from $135,985,000 in 1996. The increase was primarily
attributable to the increase in net revenues of PRO TV and POP TV and to the
addition of the revenues of TV3 and Radio Alfa, offset by a decrease in net
revenues of Nova TV.
PRO TV's and POP TV's net revenues of $30,155,000 and $14,989,000,
respectively, in 1997, reflect increases of $14,352,000, or 91%, and $5,909,000,
or 65%, respectively. PRO TV's and POP TV's net revenues improved due to the
growth in their respective television advertising markets and, to a lesser
extent, increases in their audience shares.
TV3 and Radio Alfa, which were not included in the Company's 1996
results, recorded net revenues of $1,464,000 and $1,808,000, respectively, for
1997. Videovox also contributed to the Company's net revenue growth with an
increase of $939,000, or 55%, from $1,707,000 in 1996 to $2,646,000 in 1997.
Nova TV's net revenues decreased by $10,079,000, or 9%, to $99,163,000
in 1997 from $109,242,000 in 1996. The decrease in Nova TV's United States
dollar net revenues is due to the 18% devaluation of the Czech koruna against
the United States dollar in 1997. Measured in local currency, Nova TV's net
revenues from advertising sales increased by Kc 292,462,000, or 11%, which
approximates the growth rate of the Czech television advertising market in local
currency terms. Nova TV's United States dollar net revenues from advertising
sales were approximately $16,750,000 lower than they would have been if the
Czech koruna had remained unchanged against the United States dollar during
1997. Other revenues (principally barter and game show revenues) decreased by
$4,093,000.
Total station operating costs and expenses increased by $13,550,000, or
16%, to $98,651,000 in 1997 from $85,101,000 in 1996. The increase in total
station operating costs and expenses is primarily attributable to increases in
1997 operating costs and expenses at PRO TV of $8,549,000, or 51.8%, to
$25,047,000 and the addition of station operating costs and expenses of TV3 of
$3,331,000. This increase was also attributable to
37
increases at POP TV of $2,654,000, or 20.8%, to $15,418,000 in 1997. PRO TV's
and POP TV's operating costs and expenses rose as a result of increased expenses
related to local production in response to increasing audience demand for local
programming. This increase was partially offset by a decrease in Nova TV's
operating costs and expenses in United States dollar terms from $54,578,000 to
$50,796,000, primarily due to currency devaluation. In local currency terms,
Nova TV's operating costs and expenses increased by Kc 141,994,000, or 10%, from
Kc 1,484,849,000 to Kc 1,626,843,000, primarily due to higher salary and
production costs in response to increased competition in the Czech television
market. During 1997, Nova TV began production on various new entertainment
formats to meet increasing audience demand for local programming.
Station selling, general and administrative expenses increased by
$1,596,000 to $22,953,000 in 1997 from $21,357,000 in 1996. This increase was
primarily attributable to increases at PRO TV, which were primarily due to
increased administrative costs associated with expansion of network affiliates,
diversification into the production and post production businesses and increased
marketing activity in response to competition entering the market. To a lesser
extent, the increase in station selling, general and administrative expenses was
attributable to the addition to the Company's results of TV3 and Radio Alfa in
1997. The increase was partially offset by a decrease in the selling, general
and administrative expenses of Nova TV due to a lower bad debt provision in 1997
as a result of improvements in collecting receivables and the effect of the
devaluation of the Czech koruna against the United States dollar.
Corporate operating costs and development expenses for 1997 and 1996
were $25,467,000 and $15,782,000, respectively, an increase of $9,685,000, or
61%. The increase was primarily attributable to increased scope of operations
and increased legal and consulting fees.
Amortization of goodwill and allowance for development costs was
$14,845,000 and $2,940,000 in 1997 and 1996, respectively. This increase was
primarily attributable to the full-year amortization of goodwill related to the
Company's purchase in August 1996 of an additional 22% economic interest in CNTS
(the "Additional CNTS Purchase"), the Company's purchase in early 1997 of an
additional 5.2% economic interest in CNTS (the "1997 CNTS Purchase") and the
Company's purchase of a 5.8% economic interest in CNTS in August 1997 (the
"Second 1997 CNTS Purchase"), together with the amortization of goodwill related
to the Company's investment in Radio Alfa.
As a result of the above factors, the Company generated an operating
loss of $11,651,000 in 1997 compared to operating income of $9,996,000 in 1996.
Equity in loss of unconsolidated affiliates decreased by $7,527,000 to
$10,340,000 in 1997 from $17,867,000 in 1996 primarily as a result of the
cessation of funding of 1A TV.
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, has resulted in a total charge of $27,389,000 to the Company's
Consolidated Statements of Operations in 1997.
38
Net interest and other income decreased by $4,215,000 to negative
$6,009,000 in 1997 from negative $1,794,000 in 1996. This decrease was
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"),
together with the full-year impact of interest on the Company's borrowings with
CS in connection with the Additional CNTS Purchase.
The net foreign currency exchange loss of $5,857,000 in 1997 is
primarily attributable to the devaluation of the local operating currencies
against the United States dollar. These currencies devalued considerably more
against the United States dollar in 1997 than in 1996. The net foreign
currencies exchange loss was partially offset by a gain the Company realized on
the Czech koruna debt funding for the Additional CNTS Purchase, which is not
considered as a hedge against net investments in the Czech Republic.
Provision for income taxes was $14,608,000 in 1997 versus $16,405,000
in 1996 as a result of the effect on Nova TV's taxable income of the devaluation
of the Czech koruna against the United States dollar.
Minority interest in loss of consolidated subsidiaries was $1,066,000
in 1997 and minority interest in income of consolidated subsidiaries was
$1,072,000 in 1996. This increase was primarily the result of the Company's
increased ownership in Nova TV, which continued to be profitable during 1997.
In December 1998, CME sold its interests in the TVN television
operations in Poland to its former partner. The operating losses from the
Company's Polish operations for the year ended December 1997 have therefore been
reclassified in the current year presentation as operating loss of discontinued
operations.
As a result of these factors,the net loss of the Company was
$85,092,000 for 1997 compared to $30,003,000 for 1996.
Programming Commitments in Hungary
Programming commitments were entered into in 1996 and 1997 in
anticipation of the grant of a national license for Hungary. The Company was not
granted a national license for Hungary and has been unable to enter into a
partnership with the license winners. In light of TV3's distribution and
audience share, the Company does not expect to be able to realize the full value
of the program library. Accordingly, the Company took write-downs with regard to
commitments for programming rights for TV3 of $10,961,000, $3,664,000 and
$6,664,000 for the second, third and fourth quarters of 1998. The Company
currently estimates that it will take further write-downs of up to $7,593,000
with regard to future programming rights, of which approximately $2,129,000 is
expected to be taken in 1999 and $5,464,000 is expected to be taken in 2000 as
these obligations are incurred. Program rights acquired by the Company under
license agreements, and the related obligations incurred are recorded as assets
and liabilities when the programming is available for use and the license period
begins which is in accordance with SFAS No. 63. See Item 3, "Legal Proceedings".
39
Liquidity and Capital Resources
Net cash used in operating activities was $28,380,000 in 1998 compared
to $27,744,000 in 1997.
Net cash used in investing activities was $55,761,000 in 1998 compared
to $109,834,000 in 1997. The decrease of $54,073,000 was primarily attributable
to the lower investments made by the Company in its Polish operations in 1998
compared to 1997 and proceeds from the sale of its Polish operations to its
former partner.
Net cash provided by financing activities for 1998 was $22,796,000
compared to $161,330,000 in 1997. The decrease of $138,534,000 was primarily
attributable to the issuance of CME's Senior Notes in August 1997 offset by the
RSL equity investment in December 1998 (see below).
In August 1997, CME issued the Senior Notes, which raised net proceeds
of approximately $170,000,000. The Senior Notes are denominated in United States
dollars, in part, and in German marks, in part. The United States dollar
denominated Senior Notes bear interest at a rate of 9.375% per annum, and the
German mark denominated Senior Notes bear interest at a rate of 8.125% per
annum. The principal amount of the Senior Notes is repayable on their maturity
date, August 15, 2004. The indentures governing the Senior Notes contain certain
restrictions relating to the ability of CME and its Subsidiaries and affiliates
to incur additional indebtedness, incur liens on assets, make investments in
unconsolidated companies, declare and pay dividends (in the case of CME), sell
assets and engage in extraordinary transactions.
In December 1998, the Company received an equity investment of
approximately $22,498,000 from RSL Capital LLC ("RSL"), a company wholly owned
by Ronald S. Lauder, the non-executive Chairman of the Company's Board of
Directors. RSL purchased 1,515,000 shares of the Company's Class B Common Stock
for $15.00 per share. The purchase price per share is subject to adjustment as
follows: If the last reported daily trading price of the Company's Class A
Common Stock on NASDAQ does not equal or exceed $15.00 for at least 20
consecutive trading days during the period commencing November 13, 1998 and
ending November 13, 1999 (the "Measurement Period"), the Company will issue
additional shares of Class B Common Stock to RSL for no additional consideration
so that the average per share price for the shares of the Company's Class B
Common Stock acquired by RSL will equal the average last reported daily trading
price of the Company's Class A Common Stock during the Measurement Period,
provided, that, in no event shall the average price per share for the shares of
the Company's Class B Common Stock acquired by RSL be less than $10.00 per
share.
On December 11, 1998, CME sold its interests in the TVN television
operations in Poland to International Trading and Investments Holding S.A.
("ITI"), a company publicly traded on the Luxembourg Stock Exchange and the
Company's partner in the TVN television operations. CME caused its subsidiaries
to transfer to ITI and certain of ITI's affiliates all of CME's interests in the
TVN operations together with certain outstanding receivables in exchange for $10
million in cash, a note in a principal amount of $40 million bearing interest at
a rate of 5% per annum and maturing in December 2001 that is convertible into
equity securities of ITI and exchangeable into similar debt securities of ITI,
the release of a $10 million bank guarantee and the assumption by ITI of various
40
obligations of CME and its subsidiaries in respect of programming and satellites
relating to the TVN operations. The note was recorded at a net present value of
$19,836,000 due to the prevailing interest rates on similar instruments at the
date of the transaction. Ronald S. Lauder, the non-executive Chairman of the
Board of Directors of the Company, owns a non-controlling indirect minority
interest in ITI.
In May 1998, CNTS (Nova TV) declared a total dividend of Kc 550,000,000
($16,963,000) of which the Company was paid Kc 525,010,000 ($16,192,000) during
1998. The remaining Kc 24,990,000 ($771,000) was paid to minority shareholders.
As a result of the factors described above, the Company had cash and
cash equivalents of $44,444,000 at December 31, 1998 compared to $104,490,000 at
December 31, 1997.
On August 11, 1997, the Company purchased a 5.8% interest in CNTS from
certain of the partners of CET 21 (including Dr. Zelezny) for a purchase price
of $28,537,000, to be paid in cash installments through February 15, 2000. As of
December 31, 1998, the Company had paid $20,662,000 of the purchase price and is
obligated to make further payments of $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 purchased CS's 22% economic interest and
virtually all of CS's voting rights in CNTS for a purchase price of Kc 1 billion
($36,590,000). The Company also entered into a loan agreement with CS to finance
85% of the purchase price. The principal outstanding at December 31, 1998 was Kc
632,580,000 ($21,188,000). Quarterly repayments on the loan are required in the
amount Kc 42,500,000 ($1,424,000) during the period from February 1999 through
May 2002, and Kc 37,580,000 ($1,259,000) 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 for up to Kc 250,000,000 ($8,374,000) bearing
interest at a rate 0.5% over the Prague Interbank Offer Rate ("PRIBOR"). This
facility is secured by CNTS's equipment, vehicles and receivables. In October
1997, CNTS entered into a Kc 500,000,000 ($16,748,000) 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. CNTS had
no borrowings under these facilities at December 31, 1998.
In June 1997 in connection with CNTS's acquisition of Nova TV's main
studios and offices, CNTS assumed obligations under a loan from CS (the "CS
Loan") secured by a mortgage on the studios and offices. The CS Loan provides
for quarterly payments of Kc 16,500,000 ($553,000), plus interest equal to three
month PRIBOR plus 1.0%, to be paid through December 1999. As of December 31,
1998, the outstanding balance under the CS Loan was Kc 60,000,000 ($2,010,000).
In February 1998, Markiza TV entered into a revolving credit facility
with Bank Austria. The facility is for Sk 100,000,000 ($2,709,000) and matures
in September 2000.
41
This facility is secured by Markiza TV's land and buildings. Bank Austria has
notified Markiza TV that this facility is not available for draw-down as a
result of the dispute regarding the ownership of Markiza-Slovakia s.r.o., the
company which holds the Markiza TV broadcast license. The unavailability of this
facility has had no material impact on Markiza TV's business to date. See Part
I, Item 3 "Legal Proceedings".
In April 1998, POP TV entered into a multicurrency $5,000,000 loan
agreement with Creditanstalt AG which matures in May 2005. As of December 31,
1998, the outstanding balance under the loan was $3,554,000. The loan is secured
by the land, buildings and equipment of POP TV and is guaranteed by CME.
PRO TV has two borrowing facilities with Tiriac Bank in Romania. The
first facility consists of a $2,000,000 line of credit which matures in June
2000. At December 31, 1998, $1,290,000 was outstanding under this facility. The
second facility is a long-term loan for $4,000,000 which matures in December
2002. At December 31, 1998, $3,654,000 was borrowed under this facility. These
facilities are secured by PRO TV's equipment and vehicles.
TV3 has borrowings of HUF 279,000,000 ($1,286,000) from a local
Hungarian bank. The loan matures in December 2000 and is secured by pledges of
certain fixed assets of TV3. The Company has loaned $400,000 to TV3 since
December 31, 1998. The Company has made approximately $385,000 in cash
programming payments on behalf of TV3 since December 31, 1998, and has
additional cash programming payments due for TV 3 in the amount $10,863,000,
$4,567,000 and $4,567,000 for 1999, 2000 and 2001. It is anticipated that the
Company will lend up to an additional $2,000,000 to TV3 throughout 1999.
On February 26, 1999, the Company entered into a $15,000,000 secured
revolving Credit Facility with ING Bank N.V. (the "ING Facility"). The ING
Facility is for a term of three years and the commitment level is to be reduced
in four equal semi-annual instalments starting in June 2000. The ING Facility is
secured by the assets of a wholly-owned subsidiary of the Company, which holds
the Company's interest in CNTS, and will be repaid from the dividends of CNTS.
The rate of interest charged on the ING Facility is based on the ratio of the
Company's indebtedness to CNTS's broadcast cash flow and may range from 3.75% to
2.50% over United States dollar LIBOR. The availability of the ING Facility is
subject to the satisfaction of various conditions which have not yet been met.
On March 18, 1999, the Company added to its cash balances by receiving
net proceeds of approximately $39,000,000 from the sale of its 9.6% stake in
MobilRom in Romania.
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 sufficient to compel the
distribution of dividends. 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.
42
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 continues to invest 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 taken together its current cash balances
(including cash received from the MobilRom sale in March 1999), internally
generated cash flow and local financing of broadcast operations should be
adequate to satisfy the Company's operating and capital requirements for its
current operations for the next 12 to 18 months. To acquire additional broadcast
rights or to fund other significant investments, the Company would require
significant additional financing.
Year 2000 Issue
The "Year 2000 Issue" consists of computer programs and embedded
technology in equipment defining years using the last two digits rather than all
four digits of the applicable year and could result in the complete or partial
failure of computer applications and equipment with embedded technology by or at
the year 2000. The Company has established a Year 2000 compliance plan and
timetable. A Committee chaired by the Company's Chief Operating Officer and
comprised of technical personnel from each of the Company's television
operations is overseeing the process.
The Company has undertaken and expects to complete by mid-1999 (i) a
systems and equipment review (both the Company's and that of third party
vendors), (ii) an assessment of compliance costs and (iii) a plan for business
continuity in the event that full compliance is not attainable and then proceed
through implementation, testing and management.
Based upon the Company's current estimates, incremental out-of-pocket
costs of its Year 2000 program are expected to be immaterial. These costs are
expected to be incurred primarily in fiscal 1999 and include third-party
consultants, remediation of existing computer software and replacement and
remediation of embedded chips. Such costs do not include internal management
time, the effect of which is not expected to be material to the Company's
results of operations or financial condition.
The Company's broadcast operations are highly dependent upon equipment
with embedded computer technology (cameras, mixing equipment, broadcast
equipment, etc.), the widespread failure of which would have a material adverse
impact on the Company's
43
results of operations. The Company will continually review its progress against
its Year 2000 plans. Accounting rules require Year 2000 compliance costs to be
expensed as incurred.
Euro Conversion
As part of the European Economic and Monetary Union (EMU), a single
currency, the euro, will replace the national currencies of many of the member
countries of the European Union. Although the Company does not currently conduct
business in any of the countries which are adopting the euro, it holds debt
denominated in German marks, one of the currencies scheduled to be replaced by
the euro. Additionally, it is expected that several of the countries in which
the Company operates are likely to join EMU at some point in the future.
The conversion rates between the euro and the participating nations'
currencies were fixed irrevocably as of January 1, 1999 and the participating
national currencies will be removed from circulation between January 1, and June
30, 2002 and replaced by euro notes and coinage. During the "transition period"
from January 1, 1999 through December 31, 2001, public and private entities as
well as individuals may pay for goods and services using either checks, drafts,
or wire transfers denominated in euro or the participating country's national
currency.
Under the regulations governing the transition to a single currency,
there is a "no compulsion, no prohibition" rule which states that no one is
obliged to use the euro until the notes and coinage have been introduced on
January 1, 2002. In keeping with this rule, the Company expects to be euro
"compliant" (able to receive euro denominated payments and able to invoice in
euros as requested by vendors and suppliers, respectively) by the time national
currencies are removed from circulation. The cost of software and business
process conversion is not expected to be material.
Forward-looking Statements
Statements made in "Programming Commitments in Hungary" and "Liquidity
and Capital Resources" regarding future investments in existing television
broadcast operations, business strategies, commitments 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, including the continuing impact of the Russian financial crisis on the
economies of these countries, and general market and economic conditions in
these countries. Important factors with respect to discussions and negotiations
described in "Corporate Structure-Czech Republic" include legal and regulatory
conditions in the Czech Republic. Important factors with respect to completion
of the Company's Year 2000 compliance plan include the outcome of the
Company's systems and equipment review and the extent to which Company and
third party systems are found to be out of compliance.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
44
The Company conducts business in a number of foreign currencies. As a
result, it is subject to foreign currency exchange rate risk due to the effects
that foreign exchange rate movements of these currencies have on the Company's
costs and on the cash flows it receives from certain subsidiaries. Several of
the Company's subsidiaries hold long-term debt under credit facilities that
provide for interest at a spread above a basis rate (such as LIBOR). A
significant rise in these basis rates would not materially adversely affect the
Company's business, financial condition or results of operations. The Company
does not utilize derivative financial instruments to hedge against changes in
interest rates. The Company believes that it currently has no material exposure
to market risk associated with activities in derivative or other financial
instruments.
In limited instances the Company enters into forward foreign exchange
contracts to hedge foreign currency exchange rate risk. See Note 11 to the
Consolidated Financial Statements. At December 31, 1998, CNTS was party to two
foreign exchange contracts for the purchase of an aggregate of $1,000,000. The
Company's value at risk from holding such contracts at December 31, 1998 was
immaterial.
On August 11, 1997, the Company 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 December 31, 1998, the
Company had paid $20,662,000 of the purchase price and is obligated to make
further payments of $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 the date of
the closing of the purchase at a purchase price of $23.375 per share. At
December 31, 1998, no such increase has accrued because the trading price of
CME's Class A Common Stock was less than $23.375.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Financial Statements and Supplementary data begin on the following
page and end on the page immediately preceding Item 9.)
45
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Central European Media Enterprises Ltd.:
We have audited the accompanying consolidated balance sheets of Central European
Media Enterprises Ltd. as of December 31, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Central European Media
Enterprises Ltd. as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with United States generally accepted
accounting principles.
ARTHUR ANDERSEN & CO.
Hamilton, Bermuda
March 29, 1999
46
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
($000s)
ASSETS December 31,
---------------------------
1998 1997
---- ----
CURRENT ASSETS:
Cash and cash equivalents...................... $ 44,444 $ 104,490
Restricted cash................................ 67 800
Accounts receivable (net of allowances
of $3,271, $3,658)........................... 41,237 37,437
Program rights costs........................... 29,632 22,950
Advances to affiliates......................... 11,058 8,527
Other short-term assets........................ 28,670 10,674
---------- ----------
Total current assets......................... 155,108 184,878
Investments in unconsolidated affiliates....... 29,357 45,796
Investments.................................... - 12,951
Net assets of discontinued operations.......... - 44,587
Loans to affiliates............................ 9,514 12,293
Property, plant and equipment (net of
depreciation of $50,477, $31,047)........... 66,282 56,553
Program rights costs........................... 21,206 12,851
License costs and other intangibles (net of
amortization of $6,813, $4,282).............. 6,502 6,208
Goodwill (net of amortization of $33,968,
$16,124)..................................... 70,196 66,451
Note receivable (Note 1)....................... 20,071 -
Other assets................................... 7,230 9,115
---------- ----------
Total assets................................. $385,466 $ 451,683
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities....... $ 69,187 $ 46,071
Duties and other taxes payable................. 11,722 10,612
Income taxes payable........................... 1,157 2,308
Current portion of credit facilities and
obligations under capital leases............. 10,313 8,310
Dividends payable.............................. - 996
Investments payable............................ 12,281 14,182
Advances from affiliates....................... 2,533 566
---------- ----------
Total current liabilities.................... 107,193 83,045
Deferred income taxes.......................... 302 170
Long-term portion of credit facilities and
obligations under capital leases............. 23,296 24,204
Investments payable............................ 2,563 7,875
$100,000,000 9 3/8 % Senior Notes.............. 99,875 99,853
DM 140,000,000 8 1/8 % Senior Notes............ 83,729 77,513
Other Liabilities.............................. 2,099 199
Minority interest in consolidated
subsidiaries................................. 702 1,241
Commitments and contingencies (Note 11)
SHAREHOLDERS' EQUITY:
Class A Common Stock, $0.01 par value: authorized:
100,000,000 shares at December 31, 1998 and
December 31, 1997; issued and outstanding: 181 169
18,070,789 at December 31, 1998 and
16,934,894 at December 31, 1997............
Class B Common Stock, $0.01 par value: authorized:
15,000,000 shares at December 31, 1998 and
December 31, 1997; issued and outstanding 76 71
7,577,329 at December 31, 1998 and
7,064,475 at December 31, 1997............
Additional paid-in capital..................... 356,378 332,386
Accumulated deficit............................ (288,348) (163,096)
Accumulated other comprehensive income (loss).. (2,580) (11,947)
---------- -----------
Total shareholders' equity.............. 65,707 157,583
---------- -----------
Total liabilities and shareholders'
equity................................ $ 385,466 $451,683
========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
47
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
($000s, except per share data)
For the years
ended December, 31
--------------------------------
1998 1997 1996
---- ---- ----
Gross revenues $ 234,878 $ 194,373 $ 170,114
Discounts and agency commissions (52,511) (44,108) (34,129)
---------- ---------- ----------
Net revenues 182,367 150,265 135,985
STATION EXPENSES:
Other operating costs and expenses 73,993 60,697 50,188
Amortization of programming rights 55,226 22,770 21,599
Depreciation of station fixed assets
and other intangibles 17,056 15,184 13,314
---------- ---------- ----------
Total station operating costs and
expenses 146,275 98,651 85,101
Selling, general and administrative
expenses 28,806 22,953 21,357
CORPORATE EXPENSES:
Corporate operating costs and
development expenses 22,670 25,467 15,782
Amortization of goodwill and allowance
for development costs 16,809 14,845 2,940
Capital registration tax - - 809
Restructuring charge (Note 4) 2,552 - -
---------- ---------- ----------
42,031 40,312 19,531
---------- ---------- ----------
Operating (loss)/income (34,745) (11,651) 9,996
Equity in loss of unconsolidated
affiliates (3,398) (10,340) (17,867)
Loss on impairment of investments in
unconsolidated affiliates - (20,707) -
Net interest and other income (18,591) (6,009) (1,794)
Foreign currency exchange loss, net (8,412) (5,857) (2,861)
---------- ---------- ----------
Loss before provision for income
taxes, minority interest
and discontinued operations (65,146) (54,564) (12,526)
Provision for income taxes (15,856) (14,608) (16,405)
---------- ---------- ----------
Loss before minority interest and
discontinued operations (81,002) (69,172) (28,931)
Minority interest in (income)/loss
of consolidated subsidiaries (156) 1,066 (1,072)
---------- ---------- ----------
Net loss from continuing operations (81,158) (68,106) (30,003)
Discontinued operations:
Operating loss of discontinued
operations (15,289) (16,986) -
Loss on disposal of discontinued
operations (28,805) - -
---------- ---------- ----------
(44,094) (16,986) -
---------- ---------- ----------
Net loss $(125,252) $ (85,092) $ (30,003)
========== ========== ==========
PER SHARE DATA
Net loss per share (Note 3)
Continuing operations - Basic
and diluted $ (3.36) $ (2.85) $ (1.55)
Discontinued operations - Basic
and diluted (1.83) (0.71) -
---------- ---------- ----------
Net $ (5.19) $ (3.56) $ (1.55)
========== ========== ==========
Weighted average common shares used in
computing per share amounts:
Basic and diluted 24,134 23,911 19,373
========== ========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
48
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
For the Period from December 31, 1995 to December 31, 1998
($000s, except per share data)
Accumulated
Class A Class B Other Total
Comprehensive Common Common Capital Treasury Accumulated Comprehensive Shareholders'
Income Stock Stock Surplus Stock Deficit Income Equity
(Loss) (a) (Loss) (b)
------------- -------- -------- -------- -------- ----------- ------------- ---------------
BALANCE, December 31, 1995 103 81 187,997 (2,476) (48,001) 1,232 138,936
Comprehensive income (loss):
Net Loss (30,003) (30,003) (30,003)
Other comprehensive
income (loss):
Unrealized
translation adjustments (4,462) (4,462) (4,462)
--------------
Comprehensive loss (34,465)
==============
Stock issued:
Retirement of Treasury
Stock (2) - (2,474) 2,476 - - -
Capital contributed by
shareholders, net of
costs of $8,177 66 (9) 144,792 - - - 144,849
------ ---- ------- ----- -------- -------- --------
BALANCE, December 31, 1996 167 72 330,315 - (78,004) (3,230) 249,320
Comprehensive income (loss):
Net Loss (85,092) (85,092) (85,092)
Other comprehensive
income (loss):
Unrealized translation
adjustments (8,717) (8,717) (8,717)
--------------
Comprehensive loss (93,809)
==============
Stock issued:
Capital contributed by
shareholders 2 (1) 2,071 - - - 2,072
------ ---- ------- ----- -------- -------- --------
BALANCE, December 31, 1997 169 71 332,386 - (163,096) (11,947) 157,583
Comprehensive income (loss):
Net Loss (125,252) (125,252) (125,252)
Other comprehensive
income (loss):
Unrealized
translation adjustments 9,367 9,367 9,367
--------------
Comprehensive loss (115,885)
==============
Stock issued:
Capital contributed by
shareholders, net of
costs of $227 12 5 23,992 - - - 24,009
------ ---- -------- ----- -------- -------- --------
BALANCE, December 31, 1998 181 76 356,378 - (288,348) (2,580) 65,707
====== ==== ======== ===== ======== ======== ========
(a) Of the accumulated deficit of $288,348 at December 31, 1998, $85,164
represents accumulated losses in unconsolidated affiliates.
(b) Represents foreign currency translation adjustments.
The accompanying notes are an integral part of these consolidated financial
statements.
49
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000s)
For the years ended December 31,
------------------------------------------
1998 1997 1996
----- ----- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(125,252) $(85,092) $(30,003)
Adjustments to reconcile net loss to net cash used in operating activities:
Equity in loss of unconsolidated affiliates 3,398 10,340 17,867
Loss on impairment of investments in unconsolidated affiliates - 20,707 -
Depreciation and amortization (excluding amortization of barter 90,732 51,634 33,288
programs)
Discontinued operations 44,094 16,986 -
(Profit) loss on disposal of investment - (2,255) -
Minority interest in income (loss) of consolidated subsidiaries 156 (1,066) 1,072
Valuation allowance for development costs - 1,125 714
Foreign currency exchange loss, net 8,412 5,857 2,861
Accounts receivable 1,185 (6,619) (4,881)
Cash paid for program rights (52,520) (35,006) (24,072)
Advances to affiliates (1,102) (5,479) (3,334)
Other short-term assets (2,906) (2,605) (1,702)
Accounts payable and accrued liabilities 5,255 2,823 8,297
Income and other taxes payable 168 906 (3,151)
------------- ------------- -------------
Net cash used in operating activities (28,380) (27,744) (3,044)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in unconsolidated affiliates (7,148) (8,264) (45,884)
Other investments (34) (5,133) (3,600)
Investments in discontinued operations (26,513) (51,065) (7,093)
Cash proceeds from disposal of discontinued operations 10,000 - -
Restricted cash 733 1,949 1,467
Acquisition of fixed assets (15,088) (15,322) (17,801)
Acquisition of minority interest (9,930) (16,950) (5,607)
Purchase of business, net of cash acquired - (2,471) (4,895)
Loans and advances to affiliates (6,001) (8,827) (16,705)
Payments for license costs, other assets and intangibles (1,780) (3,630) (1,343)
Development costs - (121) (18,936)
------------- ------------- -------------
Net cash used in investing activities (55,761) (109,834) (120,397)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Credit facilities and payments under capital leases (2,354) (9,834) 1,409
Dividends paid to minority shareholders (1,777) (3,090) (3,575)
Advances received from affiliates 950 - -
Repayment of advances by affiliates - - (2,081)
Issuance of debt, net of related costs - 169,572 -
Capital contributed by shareholders 24,009 2,072 144,849
Other long term liabilities 1,968 (42) 137
Investments by minority shareholders in consolidated subsidiaries - 2,652 -
------------- ------------- -------------
Net cash provided by financing activities 22,796 161,330 140,739
------------- ------------- -------------
IMPACT OF EXCHANGE RATE FLUCTUATIONS ON CASH 1,299 (665) 243
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents (60,046) 23,087 17,541
CASH AND CASH EQUIVALENTS, beginning of period 104,490 81,403 63,862
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of period $44,444 $104,490 $81,403
============= ============= =============
SUPPLEMENTAL INFORMATION Cash paid for:
Interest $ 20,375 $ 5,648 $ 4,590
Income Taxes $ 16,613 $24,072 $22,048
The accompanying notes are an integral part of these consolidated financial
statements.
50
1. ORGANIZATION AND BUSINESS
See Note 15, "Sale Transaction".
Central European Media Enterprises Ltd., a Bermuda corporation ("CME"),
was formed in June 1994. 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.
The Company currently owns a 99% voting and economic interest in Ceska
Nezavisla Televizni Spolecnost s.r.o. ("CNTS"), with the remaining 1% voting and
economic interest in CNTS held by CET 21 s.r.o. ("CET"). CET holds a terrestrial
television broadcast license in the Czech Republic that expires in January 2005.
Dr. Vladimir Zelezny, the General Director of both CET and CNTS, owns a
controlling 60% participation interest in CET. CNTS is governed by a Memorandum
of Association and Investment Agreement. The Company has the right to appoint
five of the seven members of CNTS's Committee of Representatives, which directs
the affairs of CNTS. A representative of CET has certain delay and veto rights
on non-economic programming matters related directly to the broadcast license.
CNTS provides television and related services to CET, which broadcasts
the Nova TV signal, pursuant to a Services Agreement with CET dated May 21, 1997
(the "Services Agreement"). In consideration for its activities under the
Services Agreement, CNTS is entitled to retain revenues from sales of
advertising on Nova TV less a monthly fee paid to CET.
On March 19, 1999, CET provided CNTS with a copy of a letter, dated
March 15, 1999 addressed to Dr. Zelezny as executive of CET and signed by the
Chairman of the Czech Media Council, in which the Czech Media Council takes
positions that appear inconsistent with the existing relationship between CNTS
and CET. Among other things, the Czech Media Council has questioned the
exclusive nature of the commercial relationship between CNTS and CET and the
manner in which CET enters into certain broadcasting-related contracts. CME
believes that the structure of Nova TV and the contracts and business dealings
between CET and CNTS are in compliance with all applicable Czech laws and
regulations. However, there can be no assurance that the Czech Media Council
will conclude, as it has in the past, that such dealings are in compliance and
there can be no assurance that the Czech Media Council will not require
modifications of the arrangements between CET and CNTS.
In this connection, CME has recently been engaged in discussions and
negotiations with Dr. Zelezny regarding the relationship between CNTS and CET,
including with respect to actions taken and proposed to be taken by CET
concerning the acquisition of programming for CET and other matters with which
CNTS disagrees. On behalf of CET, Dr. Zelezny has requested certain
modifications in the CNTS Memorandum of Association and Investment Agreement and
the Services Agreement, which modifications CME is resisting. CME has proposed
to Dr. Zelezny alternative arrangements that it believes would solidify CNTS's
contractual relationship with CET and satisfy Dr. Zelezny's concerns regarding
the existing arrangements. However, there can be no assurance that CME and CNTS
will be able to reach a satisfactory agreement with CET and Dr. Zelezny.
CME and CNTS intend to take all available actions to protect their
legal rights and financial interests in connection with Nova TV, and it is
possible that the current disagreements with Dr. Zelezny could result in
protracted litigation. If the Czech Media Council were to require significant
changes in the current arrangements between CNTS and CET, or if the differences
between CNTS and CET cannot be resolved, one or more material adverse affects on
the business and financial condition of CNTS and CME could result, including a
substantial reduction in the economic benefits currently enjoyed by CNTS and CME
and, potentially, a termination of the existing commercial relationship between
CNTS and CET.
51
The Company owns a 76% interest in Radio Alfa a.s. v likvidoci ("Radio
Alfa"), which ceased operations on December 31, 1998 and is being liquidated.
In Romania, the Company and its local partners operate PRO TV, a
commercial television network, and a second channel, Acasa, 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 holding many of the
licenses for the stations comprising the PRO TV network. On March 18, 1999 the
Company sold its 9.6% equity interest in MobilRom, a GSM cellular network in
Romania, held through Unimedia, a holding company.
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 85.5%
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. The Company also owns a 20%
interest in Meglic Telecom d.o.o. ("MTC") a cable operator in Ljubljana which
owns a 67% economic interest in MMTV.
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 operates the national television station Markiza TV.
Markiza-Slovakia s.r.o., the broadcast license holder, and STS have entered into
an agreement pursuant to which STS is entitled to provide exclusive commercial
television services to Markiza-Slovakia s.r.o.
In Hungary, the Company owns a 99% equity interest in Budapesti
Kommunikacios Rt. ("TV3"), a television station operating in Budapest
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 and owns 24.9% of the equity of 2002
Tanacsado es Szolgaltato Korlatolt Felelosegu Tarsasag ("2002 Kft"), a
broadcasting company.
In Ukraine, the Company owns a 60% 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").
In December 1998, CME sold its interests in the TVN television
operations in Poland to International Trading and Investments Holding S.A.
("ITI") in exchange for $10 million in cash, a note in a principal amount of $40
million bearing interest at a rate of 5% per annum and maturing on December 10,
2001 that is convertible into equity securities of ITI and exchangeable into
similar debt securities of ITI, the release of a $10 million bank guarantee and
the assumption by ITI of various obligations of CME and its subsidiaries in
respect of programming and satellites relating to the TVN operations. The note
was recorded at a net present value of $19,836,000 due to the prevailing
interest rates on
52
similar instruments at the date of the transaction. Ronald S. Lauder, the
non-executive Chairman of the Board of Directors of the Company, owns a
non-controlling indirect minority interest in ITI.
This transaction resulted in the treatment of these interests and
related operations as discontinued operations for all periods presented in the
accompanying financial statements. The accompanying financial statements have
been restated for all periods presented in order to reflect the Company's Polish
operations as discontinued operations.
2. FINANCING OF OPERATING AND CAPITAL NEEDS
In 1998, the Company continued to use the cash proceeds from the Senior
Notes issued in 1997. In December 1998, the Company received an equity
investment of approximately $22,498,000 from RSL Capital LLC ("RSL"), a company
wholly owned by Ronald S. Lauder, the non-executive Chairman of the Company's
Board of Directors. RSL purchased 1,515,000 shares of the Company's Class B
Common Stock for $15.00 per share. The purchase price per share is subject to
adjustment as follows: If the last reported daily trading price of the Company's
Class A Common Stock on NASDAQ does not equal or exceed $15.00 for at least 20
consecutive trading days during the period commencing November 13, 1998 and
ending November 13, 1999 (the "Measurement period"), the company will issue
additional shares of Class B Common Stock to RSL for no additional consideration
so that the average per share price for the shares of the Company's Class B
Common Stock acquired by RSL will equal the average last reported daily trading
price of the Company's Class A Common Stock during the Measurement Period,
provided, that, in no event shall the average price per share for the shares of
the Company's Class B Common Stock acquired by RSL be less than $10.00 per
share.
The Company had cash of $44,373,000 and marketable securities of
$71,000 at December 31, 1998 to enable it to finance its future activities.
Dividends from Consolidated Subsidiaries and Unconsolidated Affiliates
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 sufficient to compel the
distribution of dividends. In the case of TV3, the Company's voting interest is
sufficient to compel the payment of dividends. There are no legal reserve
53
requirements in Hungary. In the Company's history, the only dividend received
from any of the Company's Subsidiaries are those received from CNTS.
General
The Company believes that taken together its current cash balances
(including cash received from the MobilRom sale in March 1999), internally
generated cash flow and local financing of broadcast operations should be
adequate to satisfy the Company's operating and capital requirements for its
current operations for the next 12 to 18 months. To acquire additional broadcast
rights or to fund other significant investments, the Company would require
significant additional financing.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. The significant
accounting policies are summarized as follows:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company's wholly-owned subsidiaries and the results of Nova TV, PRO TV,
POP TV, TV3, Videovox and Radio Alfa (the "Consolidated Affiliates"), as
consolidated entities and reflect the interests of the minority owners of these
entities for the years presented, as applicable (Note 1). The results of Markiza
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. The results of the Studio 1+1 Group are consolidated in the 1998 balance
sheet, but are included in the Consolidated Statements of Operations under the
equity method through December 23, 1998, the date at which CME increased its
ownership interest to 60% and began to consolidate the Studio 1+1 Group.
Revenue Recognition
Revenues primarily result from the sale of advertising time and are
recognized in the period in which advertising is aired.
Barter Transactions
Revenue from barter transactions (television advertising time provided
in exchange for goods and services) is recognized as income when commercials are
broadcast, and programming, merchandise or services received are charged to
expense or capitalized as appropriate when received or used.
The Company records barter transactions at the estimated fair market
value of goods or services received. In cases where bartered programs can only
be obtained through a barter agreement, the Company values the barter at the
value of the asset conveyed in exchange for the programs. In other cases where
the Company has elected
54
to enter into barter agreements as an alternate method of payment, strictly for
economic reasons, the Company values the barter agreement at the value of the
asset received. If merchandise or services are received prior to the broadcast
of a commercial, a liability is recorded. Likewise, if a commercial is broadcast
by the Company's station prior to receiving the merchandise or services, a
receivable is recorded.
Cash and cash equivalents
Cash and cash equivalents includes unrestricted cash in banks and
highly liquid investments with original maturities of less than three months.
Restricted cash (restricted for guarantees to third parties or vendors) at
December 31, 1998 and 1997 is $67,000 and $800,000 respectively.
Long-lived assets
The Company periodically evaluates its long-lived assets using
projected undiscounted future cash flows and operating income for each
subsidiary.
Program Rights and Production Costs
Program rights acquired by the Company under license agreements and the
related obligations incurred are recorded as assets and liabilities when the
program is available and the license period begins. The assets are amortized
using straight-line and accelerated methods based on the estimated period of
usage, ranging from one to five years. The unamortized cost of such rights and
liability for future payments under these agreements are included in the
accompanying Consolidated Balance Sheets. Amortization estimates for program
rights are reviewed periodically and adjusted prospectively.
Payments made for program rights in which the license period has not
begun before year end are classified as prepaid expenses.
Production costs for self-produced programs are expensed when first
broadcast except where the programming has potential to generate future
revenues. When this is the case, production costs are capitalized and amortized
on the same basis as programming obtained from third parties.
Intangible Assets
Intangible assets include goodwill, broadcast license, license
acquisition costs and capitalized debt costs.
Goodwill represents the Company's excess cost over the fair value of
net assets acquired and is being amortized on a straight-line basis over the
estimated useful life of the assets. Amounts recognized to date have been
amortized over periods ranging from 2 to 8 1/2 years from the original date of
acquisition.
License costs and other intangibles reflect the costs of acquiring
licenses to broadcast and the excess of the Company's investment above the
Company's share of net assets received from newly formed, consolidated entities
as well as the amounts paid to secure licenses. Broadcast license costs are
capitalized and amortized over the life of
55
the related license. License acquisition costs are amortized over the lives of
the related licenses which range from 5 to 10 years. These costs are reviewed
for impairment whenever events or circumstances provide evidence that suggests
that the carrying amount of license acquisition costs may not be recoverable.
Capitalized debt costs represent the costs incurred in connection with
obtaining debt financing. These costs are amortized over the life of the related
debt instrument.
Fair Value of Financial Instruments
The Company accounts for the fair value of financial instruments in
accordance with SFAS No. 107, 'Disclosures about Fair Value of Financial
Instruments'. To meet the reporting requirements of SFAS No. 107, the Company
calculates the fair value of financial instruments and includes this additional
information in the notes to financial statements when the fair value is
different from book value of those financial instruments. When the fair value is
equal to the book value, no additional disclosure is made. The Company uses
quoted market prices whenever available to calculate these fair values. When
quoted market prices are not available, the Company uses standard pricing models
for various types of financial instruments which take into account the present
value of estimated future cash flows. At December 31, 1998 and 1997, the
carrying value of all financial instruments (primarily loans payable and
receivable and, in limited circumstances, foreign exchange contracts)
approximated fair value.
Income Taxes
Deferred income taxes are provided on temporary differences between
financial statement and taxable income. The primary sources of these differences
are depreciation, amortization and tax losses carried forward.
Foreign Currency Translation
The Company generates revenues primarily in Czech korunas ("Kc"),
Romanian lei ("ROL"), Slovenian tolar ("SiT"), Slovak korunas ("Sk"), Hungarian
forints ("HUF") and Ukrainian hryvna ("Hrn") and incurs expenses in those
currencies as well as German marks, British pounds and United States dollars.
The Romanian lei, Slovenian tolar, Ukrainian hryvna and Slovak koruna are
managed currencies with limited convertibility. The Company incurs operating
expenses for acquired programming in United States dollars and other foreign
currencies. For entities operating in economies considered non-highly
inflationary, including CNTS, POP TV, Markiza TV, Videovox, Radio Alfa, TV3 and
certain Studio 1+1 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 entities operate in economies considered
highly inflationary. Accordingly, non-monetary assets are translated at
historical exchange rates, monetary assets are translated at current exchange
rates and translation adjustments are included in the determination of net
income. Currency translation adjustments relating to
56
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
--------------------------------- --------------------------------------
At December 31, Weighted average for the year
ending December 31,
1998 1997 % Change 1998 1997 % Change
---- ---- -------- ---- ---- --------
Czech koruna equivalent of $1.00 29.86 34.64 13.8% 31.96 32.03 0.2%
German mark equivalent of $1.00 1.67 1.80 7.2% 1.76 1.73 -1.7%
Hungarian forint equivalent of $1.00 217 204 -6.4% 217 201 -8.0%
Romanian lei equivalent of $1.00 10,983 8,023 -36.9% 8,863 7,077 -25.2%
Slovak koruna equivalent of $1.00 36.91 34.78 -6.1% 35.20 33.64 -4.6%
Slovenian tolar equivalent of $1.00 161.20 169.18 4.7% 165.99 160.37 -3.5%
Ukrainian hryvna equivalent of $1.00 3.43 1.90 -80.5% 2.45 1.86 -31.7%
In the accompanying notes, $ equivalents of Kc, ROL, SIT, Sk, HUF, Hrn
and DM amounts have been included at December 31, 1998, 1997 or historical
rates, as applicable, for illustrative purposes only. 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.
Net Loss Per Share
Net loss per share was computed by dividing the Company's net loss by
the weighted average of Common Shares (both Class A and Class B) outstanding
during the years ending December 31, 1998, 1997 and 1996. The impact of
outstanding options and warrants has not been included in the computation of
diluted net loss per share, as the effect of their inclusion would be
anti-dilutive.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting year. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications were made to prior period amounts to conform
to current period classifications.
Segment Data
During 1998, the Company adopted Statement of Financial Accounting
Standards No. 131 ("SFAS 131"), Disclosures about Segments of an Enterprise and
Related
57
Information. SFAS 131 supersedes SFAS 14, Financial Reporting for Segments of a
Business Enterprise, replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal reporting
that is used by management for making operating decisions and assessing
performance as the source of the Company's reportable segments. SFAS 131 also
requires disclosures about products and services, geographic areas and major
customers. The adoption of SFAS 131 did not affect results of operations or the
financial position of the Company but did affect the disclosure of segment
information (Note 14).
Comprehensive Income (Loss)
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income", 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 (Deficit).
Derivative Instruments and Hedging Activities -- New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15,
1999. A company may also implement SFAS No. 133 as of the beginning of any
fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998
and thereafter). SFAS No. 133 cannot be applied retroactively.
The Company occasionally enters into forward foreign exchange contracts
(See Note 11). No material impact is expected as a result of the adoption of
SFAS No. 133 when it is applicable.
4. RESTRUCTURING CHARGE
In the second quarter of 1998, the Company recorded a restructuring
charge of $2,552,000 based on its decision to change its focus from aggressive
development and growth to further enhancing the operating performance of the
Company's existing assets and pursuing opportunities for focused growth. The
restructuring charge is comprised of severance and other associated costs.
5. PROPERTY, PLANT AND EQUIPMENT
58
Property, plant and equipment is carried at cost, less accumulated
depreciation. Depreciation is computed using the straight-line method over the
estimated useful lives of the related assets. It consists of the following:
Useful December 31,
-----------------------
Lives 1998 1997
----- ---- ----
Years $000 $000
Land and buildings ............................................ 25-50 18,686 16,800
Leasehold improvements......................................... 4-15 8,036 4,840
Station machinery, fixtures and equipment...................... 4-8 78,033 56,083
Other equipment................................................ 3-8 7,761 4,558
Construction in progress....................................... -- 4,243 5,319
------------ ------------
116,759 87,600
Less - Accumulated depreciation................................ (50,477) (31,047)
============ ============
66,282 56,553
============ ============
6. OTHER ASSETS
Other assets consist of the following:
December 31,
------------------------------
1998 1997
---- ----
$000 $000
Current:
Kanal A ............................................................ -- 1,000
Prepaid program rights and dubbing.................................. 4,968 4,711
VAT recoverable..................................................... 2,419 704
Investment in Unimedia.............................................. 15,310 --
Other............................................................... 5,973 4,259
=============== ================
28,670 10,674
=============== ================
Long term:
Satellite transponder deposits...................................... 1,440 1,331
Advances for technical equipment.................................... -- 1,395
Capitalized debt costs.............................................. 5,502 6,389
Other............................................................... 288 --
=============== ================
7,230 9,115
=============== ================
In June 1995 the Company, through CME Programming Services Inc.,
obtained leasehold rights for a 12 year period to a 33 MHz transponder on the
Eutelsat Hot Bird 3 satellite ("Hot Bird 3"), which launched in October 1997.
The Company has paid a deposit of $350,000 against this lease. The annual charge
for the lease is euro 3,443,000. Provided that the contract does not terminate
before the expiration date (September 2009), the remaining $350,000 of the
deposit is repayable to the Company by deduction from the final two invoices.
In September 1997, the Company, through CME Programming Services Inc.,
extended and renegotiated its rights to two 9 MHz transponders on the Eutelsat
IIF 1 satellite ("Eutelsat IIF 1"). The Company paid a deposit equivalent to a
three month invoicing period of euro 440,000, which is refundable in
approximately mid-1999. There are no longer any charges due under this lease.
59
In October 1997, the Company, through CME Programming Services Inc.,
obtained leasehold rights for an approximate 12 year period to a 16.5 MHz
transponder on the Eutelsat Hot Bird 5 satellite ("Hot Bird 5"), which launched
in November 1998.The Company has paid a deposit of euro 557,000 ($678,000). The
annual charge for the lease is euro 1,900,000. Provided that the contract does
not terminate before the expiration date (October 2010), the deposit is
repayable to the Company by deduction from the final three invoices.
Capitalized debt costs represent the costs incurred in connection with
obtaining debt financing. These costs are amortized over the life of the related
debt instrument.
7. INCOME AND CAPITAL TAXES PAYABLE
(a) Provision for income taxes relates primarily to the profits of CNTS.
December 31,
------------------------------------------
1998 1997 1996
---- ---- ----
$000 $000 $000
Current, domestic taxes............................................. 15,712 15,342 16,826
Deferred foreign taxes.............................................. 144 (734) (421)
============= ============ =============
15,856 14,608 16,405
============= ============ =============
Income taxes are provided on CNTS profits, which cannot be offset
against losses incurred elsewhere in the group or against corporate costs
incurred in other jurisdictions. The effective income tax rate in the Czech
Republic is 35%, 39% and 39% for the years ended December 31, 1998, 1997 and
1996, respectively.
At the present time no income, profit, capital or capital gain taxes
are levied in Bermuda and, accordingly, no provision for such taxes has been
recorded by the Company. In the event that such taxes are levied, the Company
has received an undertaking from the Bermuda Government exempting it from all
such taxes until March 28, 2016.
Deferred income tax assets
December 31,
----------------------------
1998 1997
---- ----
$000 $000
Provisions against receivables...................................... 1,046 725
Accelerated amortization of programming licenses.................... -- 602
Tax loss carryforwards.............................................. 1,981 1,348
Other............................................................... 45 724
-------------- --------------
3,072 3,399
Valuation allowance on deferred tax asset........................... (1,806) (2,653)
-------------- --------------
1,266 746
-------------- --------------
Deferred income tax liabilities
December 31,
----------------------------
1998 1997
---- ----
$000 $000
Valuation allowance................................................. 489 --
60
Depreciation and amortization....................................... 467 466
Lease payments...................................................... 289 250
Other............................................................... 323 200
-------------- --------------
1,568 916
============== ==============
Net deferred tax liability.......................................... 302 170
============== ==============
Net operating losses incurred in 1998, 1997 and 1996 in Romania,
Slovenia, Slovakia, Hungary and Ukraine are available for offset against taxable
income in those countries in the future. Net operating losses experienced in
these jurisdictions in certain years may not be fully available for offset
against taxable income in the future in those countries.
A valuation allowance has been provided for net operating loss
carryforwards in these jurisdictions, as it is more likely than not, for a
variety of reasons, including the uncertainties in the tax regimes, that they
may not be fully utilized.
(b) Capital Registration Tax
Capital registration tax is payable on the contribution of capital to
certain subsidiaries of CME. It has been included within corporate expenses for
1996, as it is not dependent upon the level of income, in the amount of
$809,000.
8. INVESTMENTS PAYABLE
December 31,
-----------------------------
1998 1997
---- ----
$000 $000
Short Term:
CNTS....................................................... 5,312 9,162
Richard Knauff............................................. - 151
Radio Alfa................................................. 69 138
SFF........................................................ - 1,131
Unimedia................................................... 6,900 3,600
============== ==============
12,281 14,182
============== ==============
Long Term:
CNTS....................................................... 2,563 7,875
============== ==============
CNTS
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 $28,537,000, 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 subject to increase based upon
the performance of CME's Class A Common Stock. As of December 31, 1998, the
Company has paid $20,662,000 of the purchase price and is obligated to make
further payments of $5,312,000 during 1999, and $2,563,000 during 2000. Any
adjustments made in the future (none have been made through December 31, 1998)
as a result of the performance of CME's Class A Common Stock will be accounted
for as additional purchase price.
61
Unimedia
At December 31, 1998, the Company had contributed, through Unimedia,
$8,400,000 in equity capital in MobilRom, a mobile telephone company in
Romania. Unimedia is obligated to contribute a further $3,600,000 to MobilRom,
bringing Unimedia's total contribution to $12,000,000, representing 10% of the
equity capital of MobilRom. This $3,600,000 is being offset from the gross sale
price of the Company's interest in MobilRom (See Note 15). In addition, Unimedia
is obligated to contribute $3,500,000 to MobilRom in order to satisfy its 10%
share of a $35,000,000 capital call. The Company will pay $3,300,000 of the
$3,500,000 and the remaining amount will be met by existing cash balances of
Unimedia.
9. LOAN AND OVERDRAFT OBLIGATIONS
Group loan obligations and overdraft facilities consist of the following:
December 31,
-----------------------------
1998 1997
---- ----
$000 $000
CME B.V.
Ceska Sporitelna Loan...................................... (a) 21,207 20,857
Tele 59 loan............................................... (b) 572 681
CME DC
Capital Lease (vehicle ), net of interest.................. 22 98
CNTS
Mortgage loan.............................................. (c) 2,010 3,638
PRO TV
Line of credit............................................. (d) 1,290 1,999
Long-term loan............................................. (e) 3,662 3,854
POP TV
Long-term loan............................................. (f) 3,553 --
Capital lease (vehicles), net of interest, and unsecured
short-term loans........................................... 6 170
TV3
MKB loan................................................... (g) 1,287 1,217
-------------- --------------
33,609 32,514
Less current maturities.................................... (10,313) (8,310)
============== ==============
23,296 24,204
============== ==============
CME B.V.
(a) On August 1, 1996, the Company entered into an agreement for the
purchase of Ceska Sporitelna Bank ("CS")'s 22% economic interest and virtually
all of CS's voting rights in CNTS for a purchase price of Kc 1 billion
($36,590,000). The Company has also entered into a loan agreement with CS to
finance 85% of the purchase price. Quarterly repayments are required in the
amount of Kc 42,500,000 during the period from February
62
1999 through May 2002, and Kc 37,580,000 in August 2002. The loan bears interest
at 12.9% per annum.
(b) The Company entered into a loan agreement on November 21, 1996 with
Tele 59 to finance a loan to Tele 59 from SKB banka d.d. ("SKB"). The principal
amount of the loan is DM 1,496,000 with principal repayments of DM 136,000 twice
yearly. This loan matures in May 2004 and bears interest at 7.8% per annum.
CNTS
(c) In June 1997, CNTS assumed 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. This loan matures in December 1999 and
bears interest at three month PRIBOR plus 1.0% (13.36% at December 31, 1998).
PRO TV
(d) The line of credit, obtained from Tiriac Bank, provides a maximum
facility of $2,000,000. This facility matures in June 2000 and bears interest at
a rate of 4% over 6 month LIBOR (9.25% at December 31, 1998).
(e) The long-term loan, also obtained from Tiriac Bank, has a maximum
facility of $4,000,000. This facility matures in December 2002 and bears
interest at a rate of 4% over 6 month LIBOR(9.25% at December 31, 1998).
POP TV
(f) Multicurrency $5,000,000 loan agreement with Creditanstalt AG. This
loan matures in May 2005 and bears interest at a rate of 3% over FIBOR ( 6.72%
at December 31, 1998) until the loan is equal to or less than $2,000,000 then
the interest rate falls to 2% over FIBOR.
TV3
(g) Loan of HUF 279,000,000 with a local Hungarian bank. This loan
matures in December 2000 and bears interest at a Prime rate (19.25% at December
31, 1998).
At December 31, 1998, maturities of debt are as follows:
Total
$000
-----
1999................................................................. 10,313
2000................................................................. 7,851
2001................................................................. 7,771
2002................................................................. 7,674
============
33,609
============
Loan notes payable
On August 20, 1997, the Company issued Senior Notes of $100,000,000 at
9.375% and DM 140,000,000 at 8.125%, due 2004 (collectively the "Senior Notes").
The Senior
63
Notes are unsecured senior indebtedness of the Company and rank pari passu with
all existing and future unsecured unsubordinated indebtedness of the Company and
are effectively subordinated to all existing and future indebtedness of the
Company's subsidiaries.
The Senior Notes are redeemable at the option of the Company, in whole
or in part, at any time on or after August 15, 2001 at the redemption prices set
forth below.
Dollar Note DM Note
Redemption Redemption
Price Price
------- ------
2001..................................................104.68750% 104.06250%
2002..................................................102.34375% 102.03125%
2003 and thereafter...................................100.00000% 100.00000%
In addition, in the event of one or more equity offerings or placings
prior to August 15, 2000, the Company may, at its option, redeem up to 35% of
the original principal amount of each series of Senior Notes from the net
proceeds thereof at 109.375% of the principal amount in the case of the US
dollar denominated Senior Notes and 108.125% of the principal amount in the case
of the DM denominated Senior Notes, plus accrued and unpaid interest, if any, to
the date of redemption.
Interest is payable semi-annually in arrears on each February 15 and
August 15, commencing February 15, 1998. Interest expense on the US dollar
denominated Senior Notes and DM denominated Senior Notes for the period to
December 31, 1998 was $9,375,000 and DM 11,375,000 ($ 6,478,000), respectively.
The indentures pursuant to which the Senior Notes were issued contain
certain restrictive covenants, which among other things, restrict the ability of
the Company and its subsidiaries to : (i) incur additional indebtedness, (ii)
pay dividends or make certain other distributions, (iii) make certain
investments and other restricted payments, (iv) enter into certain transactions
with affiliates, (v) create liens, (vi) sell assets and also create restrictions
on the ability of certain of its subsidiaries to make certain payments to the
Company. Management believes that, as of December 31, 1998, the Company was in
compliance with such restrictive covenants.
10. STOCK OPTION PLAN
The Company adopted the 1994 Stock Option Plan in 1994 and the 1995
Stock Option Plan in August 1995. The 1995 Stock Option Plan was amended in May
1998 ("1995 Amended Stock Option Plan"). Under the 1994 Stock Option Plan, the
Compensation Committee is authorized to grant options for up to 900,000 shares
of the Company's Class A Common Stock. Under the 1995 Amended Stock Option Plan
the Compensation Committee is authorized to grant options for up to 3,200,000
shares of the Company's Class A Common Stock. Under the 1995 Amended Stock
Option Plan options can be given to eligible persons on Class B Common Stock.
The Stock Option Plans allow grants to consultants and non-affiliated directors.
The maximum term of the options granted under the Stock Option Plans is ten
years. Options granted may be either
64
incentive stock options under the Internal Revenue Code of 1986, as amended (the
"Code"), or non-qualified stock options. Under the 1995 Amended Stock Option
Plan, non-affiliated directors are automatically granted each year options to
purchase 10,000 shares of Class A Common Stock or Class B Common Stock if
eligible. The Compensation Committee has granted substantially all options to
purchase the 900,000 shares of Class A Common Stock created by the 1994 Stock
Option Plan and does not intend to issue any more options under the 1994 Stock
Option Plan.
Under both plans the option exercise price equals the stock's market
price on the date of grant. Options granted under the 1994 Stock option plan
vest after two years and expire after ten years. Options granted under the 1995
Amended Stock Option Plan can have vesting periods of up to five years and
expire at the latest after ten years. The exercise price of options granted
under the 1995 Amended Stock Option Plan can be made at market value subject to
an increase by the interest rate on US Treasury securities, compounded annually,
with a maturity equal to that of the options.
On September 18, 1998, the Company adopted the Stock Appreciation
Rights Plan, this plan allows the company to grant up to 1,000,000 Stock
Appreciation Rights (SAR's). The SAR's are subject to the same vesting and other
general conditions as options granted under the 1995 Amended Stock Option Plan.
When the SARs are exercised the employees will receive in cash the amount by
which the CME stock price exceeds the exercise price at the time of exercise, if
any, rather than purchase CME shares.
The number of SARs granted through December 31, 1998 totalled 145,350.
No compensation expense has been recognized through December 31, 1998 in
connection with the granting of these SARs.
A summary of the status of the Company's two stock option plans at
December 31, 1998, 1997 and 1996 and changes during the years 1998, 1997 and
1996 is presented in the table and narrative below. The following table does not
include the SARs.
1998 1997 1996
-------------------------------------------------------------------------------------------
Wtd. Wtd. Wtd.
Avg. Avg. Avg.
Exercise Option Exercise Option Exercise Option
Shares Price $ Price $ Shares Price $ Price $ Shares Price $ Price $
-------- -------- ---------------------- -------- ----------- ---------- ------- -----------
Outstanding
at start of year 2,308,949 20.31 0.20-33.50 1,534,103 17.41 0.20-21.75 1,049,600 13.81 0.20-20.00
Granted..... 580,000 20.28 11.44-24.56 974,450 24.30 23.00-33.50 636,800 21.51 20.75-21.75
Exercised... (133,749) 11.58 0.20-21.75 (143,751) 14.13 0.20-21.75 (139,644) 8.78 0.20-14.63
Forfeited... (173,666) 23.60 14.63-33.50 (55,853) 26.20 20.00-33.50 (12,653) 20.00 20.0
--------- -------- ----------
Oustanding
at end of year.... 2,581,534 20.54 0.20-33.50 2,308,949 20.31 0.20-33.50 1,534,103 17.41 0.20-21.75
========= ===== =========== ========= ===== ============ ========= ===== ===========
At December 31, 1998, 1997 and 1996, 1,643,872, 1,466,125 and 528,356
shares were exercisable, respectively.
The Company accounts for these plans under APB No. 25, under which no
compensation cost is recognized for stock options granted to employees with an
exercise price at or above the prevailing market price on the date of the grant.
Had compensation cost for these plans been determined consistent with the fair
value approach required by SFAS No. 123, the Company's net loss and net loss per
common share would increase to the following pro forma amounts:
65
Year ended
December 31,
---------------------------------------------
1998 1997 1996
----- ----- -----
$000s $000s $000s
----- ----- -----
Net Loss from continuing operations As Reported (81,158) (68,106) (30,003)
Pro Forma (88,577) (74,942) (34,468)
Net Loss from discontinued operations As Reported (44,094) (16,986) -
Pro Forma (44,094) (16,986) -
Net Loss As Reported (125,252) (85,092) (30,003)
Pro Forma (132,671) (91,928) (34,468)
Net Loss Per Common Share from As Reported (3.36) (2.85) (1.55)
Continuing operations - basic and diluted ($) Pro Forma (3.67) (3.13) (1.78)
Net Loss Per Common Share from As Reported (1.83) (0.71) -
Discontinued operations - basic and diluted ($) Pro Forma (1.83) (0.71) -
Total net Loss Per Common Share ($) As Reported (5.19) (3.56) (1.55)
Basic and Diluted....................... Pro Forma (5.50) (3.84) (1.78)
The fair value of each option grant is estimated on the date of the
grant using the Black-Scholes option pricing model, with the following
assumptions used.
Expected dividends yield are assumed to be 0% for each grant; expected
lives range from 4 to 5 years; expected stock price volatility of 47.6%, 47.19%
and 59.14% for 1996, 1997 and 1998 , respectively.
Risk Free
Date of Option Grant Interest Rate
--------------------------------- -------------------
January 1, 1995 7.84%
August 3, 1995 6.21%
August 10, 1995 6.23%
August 14, 1995 6.28%
October 17, 1995 5.76%
December 15, 1995 5.53%
January 2, 1996 5.30%
August 1, 1996 6.36%
February 27, 1997 6.30%
August 1, 1997 6.03%
January 19, 1998 5.55%
February 23, 1998 5.55%
March 23, 1998 5.63%
June 9, 1998 5.57%
September 3, 1998 4.91%
The effects of applying SFAS No. 123 in this pro forma disclosure may
not be indicative of future amounts because SFAS No. 123 does not apply to stock
options granted prior to January 1, 1995 and additional stock option grants are
anticipated in future years.
11. COMMITMENTS AND CONTINGENCIES
66
Litigation
On April 30, 1997, Perekhid Media Enterprise 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 to the Studio 1+1 Group of a
license 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. In June 1998,
Perekhid filed a notice of appeal with the Court. Perekhid has nine months from
the date it filed a notice of appeal to submit an appellate brief. On February
19, 1999, Atlantic Group Limited (formerly known as Perekhid Media Enterprise
Ltd.) initiated proceedings against CME in the High Court in London, seeking
$81,772,759 in damages. Atlantic Group Limited alleges that CME conspired with
others to use unlawful means to procure the termination of Atlantic Group
Limited's right to provide programming and advertising sales on UT-2. On March
17, 1999, CME issued a summons to dismiss the London proceedings. The summons is
expected to be heard later in 1999.
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 management reasonably expect could have a
material adverse effect on its business or operations.
Financial Commitments -- Existing Entities
It is anticipated that the majority of the Company's existing
operations will be self-supporting in terms of funding during 1999, with cash
being available through local credit facilities and/or generated from
operations. Existing operations that will require the Company to provide
additional funding are as follows:
Studio 1+1 Group
The company has provided $1,000,000 in the form of loans to the Studio
1+1 Group since December 31, 1998. It is anticipated that an additional
$2,500,000 may be required throughout 1999 and will be contributed in the form
of loans.
TV3
Programming commitments were entered into in 1996 and 1997 in
anticipation of the grant of a national license for Hungary. The Company was not
granted a national license for Hungary and has been unable to enter into a
partnership with the license winners. In light of TV3's distribution and
audience share, the Company does not expect to be able to realize the full value
of the program library. Accordingly, the Company wrote-down these assets by
$21,289,000 during 1998. The Company currently estimates that it will take
further write-downs of up to $7,593,000 with regard to future programming
rights,
67
of which approximately $2,129,000 is expected to be taken in 1999 and the
remaining in 2000 when the related license periods begin. Program rights
acquired by the Company under license agreements, and the related obligations
involved are recorded as assets and liabilities when the programming is
available for use and the license period begins which is in accordance with SFAS
No. 63. The Company has made approximately $385,000 in cash programming payments
on behalf of TV3 since December 31, 1998 and has commitments to make additional
cash programming payments on behalf of TV3 in 1999, 2000 and beyond, of
approximately $10,863,000, $4,567,000 and $4,567,000, respectively.
The Company has provided $400,000 in the form of loans to TV3 since
December 31, 1998. Management anticipates that further funding of up to
$2,000,000 will be required in 1999 which will likely be contributed in the form
of loans.
Financial Commitments - Discontinued or Former Entities
Beginning in 1993, 1A TV received investment grants in an aggregate
amount of DM8,544,000 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 maximum exposure is
limited to the German assets, which have been fully provided for. Under the
terms of a proposed settlement, which management believes is likely to be
accepted by both parties, the Company would be required to repay DM 500,000 to
the German public bank.
Licenses
The Company has no reason to believe that the licenses for stations
will not be renewed. However, no statutory or regulatory presumption exists for
the current license holder, and there can be no assurance that licenses will be
renewed upon expiration of their initial terms. The failure of any such licenses
to be renewed may adversely affect the results of the Company's operations.
Currency exchange rate fluctuation
The Company and its subsidiaries generate revenues and incur expenses
in a variety of currencies. Fluctuations in the value of foreign currencies may
cause United States dollar translated amounts to change in comparison with
previous periods. Other than as described below under "Foreign Exchange
Contracts", the Company has not hedged against fluctuations in foreign currency
rates. Due to the number of currencies involved, the constantly changing
currency exposures and the fact that all foreign currencies do not fluctuate in
the same manner against the United States dollar, the Company cannot anticipate
the effect of exchange rate fluctuations on its financial condition.
Foreign Exchange Contracts
68
In limited instances, the Company enters into forward foreign exchange
contracts to hedge foreign currency transactions for periods consistent with its
identified exposures. At December 31, 1998, there were two forward exchange
contracts outstanding for the purchase, in aggregate, of $1,000,000 by CNTS and
the sale of Czech korunas. These contracts mature by February 1999. No material
exposure exists at December 31, 1998 as a result of these contracts.
Station Programming Rights Agreements
The Company had programming rights commitments for $26,983,000 in
respect of future programming which includes contracts signed with license
periods starting after December 31, 1998.
Lease Commitments
For the fiscal years ended December 31, 1998, 1997 and 1996, the
Company paid aggregate rent on all facilities of $2,181,000, $2,036,000 and
$1,776,000 respectively. Future minimum lease payments at December 31, 1998 for
non-cancellable operating leases with remaining terms in excess of one year (net
of amounts to be recharged to third parties) are payable as follows:
At December 31,
1998
---------------
$000s
1999............................. 3,159
2000............................. 3,807
2001............................. 3,807
2002............................. 3,807
2003............................. 3,526
2004 and thereafter.............. 21,937
------------------------
40,043
=======================
12. RELATED PARTY TRANSACTIONS
Related party transactions involve transactions between the Company and
its stations, shareholders and partners and transactions between the stations
and their shareholders and partners.
Consolidated Balance Sheet Items As of
December 31,
-----------------------------
1998 1997
---- ----
$000 $000
Advances to Affiliates
Amounts due from Unconsolidated Affiliates
Markiza TV................................................. 4,539 2,734
Studio 1 + 1............................................... -- 1,513
69
Advances to Affiliates
Studio 1 + 1............................................... 3,469 --
POP TV..................................................... 1,029 721
Media Vision and Video Vision.............................. 1,112 2,816
Radio Alfa................................................. 74 64
Other...................................................... 213 49
Hungary.................................................... 622 630
-------------- --------------
Total 11,058 8,527
Loans to Affiliates
Loans to Unconsolidated Affiliates
Adrian Sarbu............................................... 2,246 2,246
Alexander Rodnyansky....................................... 5,000 --
Intermedia................................................. 1,302 1,302
Markiza ................................................... 777 777
Studio 1+1 Group........................................... -- 6,010
Mediavision................................................ -- 1,329
Videovision................................................ -- 552
Interest on ITI Notes...................................... 111 --
Loans to Affiliates
Hungary - DDTV............................................. 78 77
============== ==============
Total 9,514 12,293
============== ==============
Consolidated Statements of Operations Items Year Ended
December 31,
1998 1997 1996
---- ---- ----
$000 $000 $000
Corporate Operating Costs and Development Expenses
Shareholder controlled affiliates.......................... 86 111 88
Interest Expense
Shareholder and affiliate loans............................ -- -- 68
- --------------------------------------------------------------------------------------------------------------------
13. SUMMARY FINANCIAL INFORMATION FOR THE STUDIO 1+1 GROUP and MARKIZA TV
As at
-------------------------------------------------------
December 31
1998 December 31, 1997
-------------- ---------------------------------
Studio 1+1
Markiza TV Markiza TV Group
------------- ------------ ---------------
$000s $000s $000s
Current assets................................. 17,863 18,385 7,744
Non-current assets............................. 26,682 25,900 21,542
Current liabilities............................ (17,703) (13,328) (5,976)
Non-current liabilities........................ (1,089) (998) (6,000)
---------- --------- --------
Net assets (liabilities)....................... 25,753 29,959 17,310
========== ========= =========
70
For the years ended
December 31, 1998 December 31, 1997
-------------------------------------- ----------------------------------------
Studio 1+1 Studio 1+1
Markiza TV Group Markiza TV Group
------------------ ------------------- ------------------- -------------------
$000s $000s $000s $000s
------ ------ ---- -------
Net revenues................................... 37,793 23,598 31,296 16,661
Operating loss................................. (3,503) (3,150) 799 (799)
Net loss....................................... (3,619) (3,555) (674) (1,082)
The Company's share of the losses in Unconsolidated Affiliates for 1998
was $3,398,000 (including goodwill amortization related to the Studio 1+1 Group
of $1,583,000) after intercompany eliminations of $2,857,000. The Studio 1+1
Group is included in the consolidated balance sheets as of December 31, 1998 and
its results of operations from December 23, 1998 are included in the
Consolidated Statement of Operations.
The Company acquired its additional interest in Studio 1+1 in December 1998 for
$5,000,000. The impact of the purchase of this additional interest had it
occurred at January 1, 1997 is as follows:
For the years ended
December 31,
------------------------------------
1998 1997
---- ----
Net revenues.............................................. $ 205,965 $ 199,028
Net loss from continuing operations....................... (82,069) (68,770)
Net Loss per Share........................................
Continuing operations - basic and diluted............. (3.40) (2.88)
Discontinued operations - basic and diluted........... (1.83) (0.71)
---------------- ----------------
Net................................................... (5.23) (3.59)
================ ================
This pro forma presentation includes the effects of the amortization of goodwill
related to the transaction.
14. SEGMENT DATA
The Company manages its business segments primarily on a geographic
basis. The Company's reportable segments are comprised of CNTS (Czech Republic),
PRO TV (Romania), Markiza TV (Slovakia), POP TV (Slovenia), Studio 1+1 Group
(Ukraine) and TV3 (Hungary). Each operating segment provides products and
services as further described in Note 1.
The accounting policies of the various segments are the same as those
described in the "Summary of Significant Accounting Policies" in Note 3. The
Company evaluates the performance of its segments based on segment EBITDA
(earnings before interest, taxes, depreciation and amortization). Costs for
programming amortization are included in segment EBITDA. Costs excluded from
segment EBITDA primarily consist of interest and foreign exchange gains and
losses, corporate expenses and goodwill amortization and equity in losses of
unconsolidated affiliates, as well as programming write-offs at the
71
corporate level for TV3 and other non-recurring charges for impairment of
investments or discontinued operations. The assets and liabilities of the
Company are managed centrally and are reported internally in the same manner as
the consolidated financial statements, thus no additional information is
provided.
Summary information by segment as of and for the years ended December
31, 1998, 1997 and 1996 is as follows:
SEGMENT FINANCIAL INFORMATION
For the years ended December 31,
---------------------------------------------------------------------
($000s)
--------------------------------- -----------------------------------
Net Revenues EBITDA
--------------------------------- -----------------------------------
Station 1998 1997 1996 1998 1997 1996
------- ---- ---- ---- ---- ---- ----
CNTS.............................. 108,826 99,163 109,242 54,887 49,921 53,441
PRO TV ........................... 41,937 30,155 15,803 (2,016) (1,298) (4,368)
POP TV ........................... 22,122 14,989 9,080 (809) (1,613) (5,157)
TV3 .............................. 5,379 1,464 - (6,926) (3,086) -
Other Operations ................. 4,103 4,494 1,860 (340) (799) (1,075)
---------- ----------- ---------- ----------- ----------- -----------
Total Consolidated Operations 182,367 150,265 135,985 44,796 43,125 42,841
Studio 1+1 Group ...............(1) 23,598 16,661 - (2,047) 19 -
Markiza TV ....................... 37,793 31,296 7,462 2,483 5,259 (2,240)
---------- ----------- ---------- ----------- ----------- -----------
Total Unconsolidated Operations 61,391 47,957 7,462 436 5,278 (2,240)
---------- ----------- ---------- ----------- ---------- -----------
Total Operations..................... 243,758 198,222 143,447 45,232 48,403 40,601
========== =========== ========== =========== =========== ===========
Reconciliation to Consolidated Statements of Operations:
Consolidated Operations 44,797 43,125 42,841
Programming write-off in TV3 (21,289) - -
Intercompany elimination 834 720
Station depreciation (17,056) (15,184) (13,314)
Corporate expenses (42,031) (40,312) (19,531)
---------- ---------- ------------
Operating (loss)/ income from continuing operations (34,745) (11,651) 9,996
=========== =========== ===========
(1) Studio 1+1 Group revenue and other items from December 23, 1998 to December
31, 1998, included in the Consolidated Statements of Operations, were not
material.
15. SUBSEQUENT EVENTS
Sale Transaction
On March 29, 1999, the Company entered into a Reorganization Agreement
with SBS Broadcasting S.A. ("SBS"), which provides, among other things, for (a)
the sale by the Company to SBS of all of the assets, business, properties and
rights of the Company (consisting primarily of the stock of CME Media
Enterprises B.V., an intermediate holding company wholly owned by CME); (b) the
assumption by SBS of, and indemnification of the Company with respect to, all
liabilities, obligations and commitments of the Company; (c) the issuance by
SBS to the Company of a number of shares of SBS common stock, par value $1.50
per share ("SBS Stock"), equal to 0.5 times the total number of shares of the
Company's Class A Common Stock and Class B Common Stock outstanding immediately
prior to the closing of such transaction; and (d) the immediate commencement of
the winding up of the Company and distribution of the SBS Stock so received by
the Company to the shareholders of the Company (followed as soon as practical
thereafter by the final dissolution of the Company). Accordingly, upon the
closing of the transactions contemplated by the Reorganization Agreement, each
shareholder of the Company would receive 0.5 shares of SBS Stock for each share
of Common Stock of the Company owned by such shareholder.
The foregoing transaction is intended to be accounted for as a
purchase, and to qualify as a reorganization under Section 268(a) of the
Internal Revenue Code (and thus to be tax-free for US tax purposes to the
shareholders of CME). The closing of the transaction is subject to a number of
conditions precedent, some of which are beyond the control of the Company,
including the approval of the shareholders of SBS. Ronald S. Lauder, who
controls approximately 69% of the vote of the Company, has entered into a
Shareholders Agreement with SBS whereby he commits to vote his shares of Class A
and Class B Common Stock in favor of the transaction. In the event that the
transaction is not consummated, the Reorganization Agreement provides various
rights to the Company and to SBS, depending upon the circumstances.
Stock Options
Since December 31, 1998, 36,000 stock options for Class A Common Stock
were exercised at a price of $0.20.
72
Sale of Investment in MobilRom
On March 18, 1999, the Company sold its interest in the Romanian
mobile telephone company MobilRom. As a result of this transaction the Company
realized a gain in the first quarter of 1999 of approximately $25,800,000. The
impact of MobilRom on the Company's results of operations for 1996, 1997 and
1998 was not material.
ING Facility
On February 26, 1999, the Company entered into a $15,000,000 secured
revolving Credit Facility with ING Bank N.V. (the "ING Facility"). The ING
Facility is for a term of three years and the commitment level is to be reduced
in four equal semi-annual instalments starting in June 2000. The ING Facility
is secured by the assets of a wholly-owned subsidiary of the Company, which
holds the Company's interest in CNTS, and will be repaid from the dividends of
CNTS. The rate of interest charged on the ING Facility is based on the ratio of
the Company's indebtedness to CNTS's broadcast cash flow and may range from
3.75% to 2.50% over United States dollar LIBOR. The availability of the ING
Facility is subject to the satisfaction of various conditions which have not yet
been met.
73
REPORT TO INDEPENDENT PUBLIC ACCOUNTANTS
To IA TV Beteiligungsgesellschaft GmbH & Co. Betriebs-KG: We have audited the
accompanying balance sheet of IA TV Beteiligungsgesellschaft GmbH & Co.
Betriebs-KG (a Limited Partnership organized under German law) as of December
31, 1995 and 1996, and the related statements of operations, partners' capital
and cash flows for the years then ended. These financial statements are the
responsibilty of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of materialk misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluting the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to avove present fairly, in al
material respects, the financial position of IA TV Beteiligungsgesellschaft Gmbh
& Co. Betriebs-KG as of December 31, 1995 and 1996, and the results of its
operations and its cash flows for the years then ended in comformity with United
States generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As described in Note 3 to the
financial statements, the Partnership has incurred significant operating losses
during the years 1994 through 1996, and is dependent upon additional capital to
fund its operations. These factors raise substantial doubt about the
Partnership's ability to continue as a going concern. The financial statements
do not include any adjustments relating to the recoverability or classification
of asset carrying amounts or the amount and classification of liabilities that
might result should the Partnership be unable to continue as a going concern.
ARTHUR ANDERSEN
Wirtschaftsprufungsgesellschaft
Steuerberatungsgesellschaft GmbH
March 5, 1997
Berlin, Germany
74
IA TV BETEILIGUNGSGESELLSCHAFT
MBH & CO. BETRIEBS-KG
BALANCE SHEET AS OF DECEMBER 31, 1996 AND 1995
DECEMBER 31, DECEMBER 31,
1996 1995
TDM TDM
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................... 1,721 3,015
Accounts receivable............................. 1,018 662
Program rights costs............................ 37 441
Value-added tax receivables..................... 287 534
Other receivables (Note 5)...................... 1,724 2,727
Prepaid expenses................................ 116 43
Contribution receivable......................... 112 2,500
------------ ------------
Total current assets......................... 5,015 9,922
------------ ------------
PROPERTY, PLANT & EQUIPMENT, including equipment
held under lease, net (Note 6).................. 16,653 20,280
------------ ------------
BROADCAST LICENSE COSTS, net...................... 44 55
------------ ------------
OTHER INTANGIBLE ASSETS, net (Note 7)............. 2,306 2,504
------------ ------------
Total assets................................. 24,018 32,761
------------ ------------
------------ ------------
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable and accrued liabilities (Note
8)........................................... 5,603 7,337
Duties and other taxes payable.................. 457 364
Related party payables.......................... 132 419
------------ ------------
Total current liabilities.................... 6,192 8,120
------------ ------------
NON CURRENT LIABILITIES:
Capital lease obligation........................ 4,117 6,125
Deferred income (Note 9)........................ 5,657 6,861
------------ ------------
Total non current liabilities................ 9,774 12,986
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 10)
PARTNERS' CAPITAL:
Contributed Capital............................. 135,575 111,000
Accumulated deficit............................. (127,523) (99,345)
------------ ------------
Total Partners' capital...................... 8,052 11,655
------------ ------------
Total liabilities and partners' capital...... 24,018 32,761
------------ ------------
------------ ------------
The accompanying notes are an integral part of this balance sheet.
75
IA TV BETEILIGUNGSGESELLSCHAFT MBH & CO. BETRIEBS-KG
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
TDM TDM
------- -------
REVENUES:
Advertising.......................................... 4,872 4,847
------- -------
STATION EXPENSES:
Amortization of programming rights................... (652) (4,375)
Depreciation of station equipment.................... (4,056) (3,846)
Other operating costs and expenses................... (7,544) (13,321)
Selling, general and administrative expenses......... (20,838) (18,374)
------- -------
Operating loss.................................... (28,218) (35,069)
------- -------
INTEREST AND OTHER INCOME.............................. 581 1,115
INTEREST EXPENSE....................................... (541) (851)
------- -------
40 264
------- -------
Net loss.......................................... (28,178) (34,805)
------- -------
------- -------
The accompanying notes are an integral part of this statement.
76
IA TV BETEILIGUNGSGESELLSCHAFT MBH & CO. BETRIEBS-KG
STATEMENT OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
DECEMBER 31, DECEMBER 31,
1996 1995
TDM TDM
------------ ------------
Partners' capital, brought forward................ 11,655 8,960
Capital contributions during the year............. 24,575 37,500
Net loss for the year............................. (28,178) (34,805)
------------ ------------
Partners' capital, carried forward................ 8,052 11,655
------------ ------------
------------ ------------
The accompanying notes are an integral part of this statement.
77
IA TV BETEILIGUNGSGESELLSCHAFT MBH & CO. BETRIEBS-KG
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
TDM TDM
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)................................................ (28,178) (34,805)
Adjustments to reconcile net (loss) to net cash used in
operating activities:
Depreciation and amortization.......................... 4,708 8,222
Increase in assets and liabilities:
Accounts receivable.................................. (356) 193
Prepaid expenses..................................... (73) (21)
Accounts payable and accrued liabilities............. (1,734) 1,360
Program and film rights.............................. (248) (3,368)
Related party liabilities............................ (287) (158)
Value-added tax receivables.......................... 247 464
Other receivables.................................... 1,003 1,392
Other payables....................................... 93 (1,145)
-------- --------
Net cash used in operating activities.................. (24,825) (27,866)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditure....................................... (1,637) (1,295)
Additions to other intangible assets...................... (240) (2,516)
Disposals................................................. 157 1,039
Deferred income--investment grants and allowances......... 296 1,030
-------- --------
Net cash used in investing activities..................... (1,424) (1,742)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft............................................ 0 (864)
Partners' capital contributions, net...................... 26,963 35,000
Capital lease payments.................................... (2,008) (1,857)
-------- --------
Net cash provided by financing activities................. 24,955 32,279
-------- --------
Net decrease/increase in cash and cash equivalents.......... (1,294) 2,671
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 3,015 344
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... 1,721 3,015
-------- --------
-------- --------
The accompanying notes are an integral part of this statement.
78
IA TV BETEILIGUNGSGESELLSCHAFT MBH & CO. BETRIEBS-KG
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. ORGANIZATION AND BUSINESS
IA TV Beteiligungsgesellschaft mbH & Co. Betriebs-KG, Berlin ('IA
Fernsehen' or 'the Partnership'), set up under German law as a Limited
Partnership, was established in 1993.
The management of the Partnership is carried out by IA TV
Beteiligungsgesellschaft mbH, Berlin ('IA TV'), the sole general partner of IA
Fernsehen. According to the Partnership agreement the general partner is not
required to contribute any capital nor does he participate in Partnership
profits or losses. IA TV has a supervisory board which monitors the activities
of management.
IA Fernsehen principally broadcasts television programs in the
Berlin/Brandenburg area of Germany. Until the third quarter of 1995 this
included the purchase and airing of acquired program rights for films and
series. The Partnership limited the acquisition of such rights and has since
been pondering more strongly on the broadcasting of self produced news and
entertainment features with regional content. In May 1996 the station was
relaunched and is since then broadcasting under the name of 'Puls Tv'.
The Partnership was awarded the first private regional television license
in Germany on August 4, 1993 from the Media Authority of Berlin-Brandenburg. The
license is limited to a period of 7 years commencing from the date of
broadcasting which was November 28, 1993. The license granted to the Partnership
is, under the terms of the license, renewable. However, no statutory or
regulatory presumption exists for the current license holder, and there can be
no assurance that the Partnership will receive a renewal upon expiration of the
initial term of the license.
2. FINANCING OF OPERATING AND CAPITAL NEEDS
Under the provisions of the Partnership Agreement the limited Partners were
required to contribute fixed capital of DM 10 mio. and variable capital of DM 90
mio. The total amount of fixed and variable capital of DM 100 mio. was called up
as of June 30, 1995.
According to the bylaws of the Partnership Agreement the partners may
decide with a majority of 75 % of votes cast to call variable capital amounts
exceeding DM 90 mio. The obligation and the right to contribute in such a case
shall exist only for those limited partners who have voted in favour of a
corresponding resolution or who give notice in writing to the General Partner
within one month following such resolution that they will participate in the
increase. The contributions shall be made in proportion to the share in fixed
capital of the limited partners participating in the increase.
In response to the capital needs of the Partnership the partners have
resolved the following capital calls in 1996 that were mainly supported by one
major partner:
TDM
------
March 26, 1996........ 10,000
June 19, 1996......... 2,500
August 6, 1996........ 2,500
August 28, 1996....... 2,000
September 17, 1996.... 2,500
September 17, 1996.... 575
November 12, 1996..... 4,500
------
24,575
------
------
79
IA TV BETEILIGUNGSGESELLSCHAFT MBH & CO. BETRIEBS-KG
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1995
3. GOING CONCERN
Since its inception the Partnership has incurred losses of DM 127.5 mio.
The initially agreed fixed and variable capital of DM 100 mio. as well as
additional capital of DM 35.5 mio. was nearly used until year-end 1996. Until
December 31, 1997, losses are projected to reach DM 15 mio. to DM 20 mio. Due to
the amortization of liabilities and capital expenditures the necessary funding
for 1997 is beyond DM 15 mio. as well and therefore exceeds the cash presently
available and resolved capital calls.
To maintain the operation as a going concern until year-end 1997 further
capital calls and funding are necessary. Presently the Partnership is unable to
fulfil its financial commitments. On September 4, 1996, the Partnership engaged
an investment bank to seek a strategic investor who may acquire a share in the
Partnership. Meanwhile the Partnership is provided with Partner's capital on a
day to day basis.
The factors described in the preceding paragraph raise substantial doubt
about the Partnership's ability to continue as a going concern. The financial
statements do not include any adjustments relating to the recoverability or
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Partnership be unable to continue as a
going concern.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Program and Film Rights
The book value of film licences reduced from TDM 441 as of December 31,
1995 to TDM 37 as of December 31, 1996. Since the change of the program
structure in 1995 the Partnership limited the purchase of film rights. In 1996
the Partnership changed its accounting policy for program and film rights from
capitalization and amortization based upon the actual airing to directly
expensing the costs for program rights.
Production Costs
Production costs for self-produced programs are recorded as operating
costs.
Property, Plant and Equipment and Intangible Assets
Fixed and intangible assets are carried at cost and are depreciated on a
straight line basis using the shorter of estimated useful lives, the underlying
lease period or the term of the television license period.
Replacements, renewals and improvements are capitalized. Maintenance and
repairs are charged to expense as incurred.
Investment grants and allowances that subsidize the assets of IA Fernsehen
are recorded as deferred income and disclosed among other liabilities.
Accordingly the assets are reported at their acquisition value net of
amortization. The amortization of deferred investment grants and allowances
relate to the underlying estimated useful lives of fixed assets acquired and are
netted with the amortization of such assets.
Income Taxes
Income taxes have not been recorded in the accompanying financial
statements as they are the obligation of the partners. Municipal trade tax on
income is payable by the Partnership. No such tax is due for the period ending
December 31, 1996 due to losses incurred by the Partnership in this period.
80
IA TV BETEILIGUNGSGESELLSCHAFT MBH & CO. BETRIEBS-KG
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1995
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Cash and cash equivalents
Cash and cash equivalents include cash in banks and cash on hand.
Revenue Recognition
Revenues result from the sale of advertising time. Advertising revenue is
recognized at the time the commercials are broadcast.
Barter Transactions
Revenue from barter transactions (television advertising provided in
exchange for goods and services) is recognized as income when advertisements are
broadcast, and merchandise or services received are charged to expense (or
capitalized as appropriate) when received or used.
Receivables and payables arising from barter transactions are offset when
the services have been rendered to the customer and from the vendor.
Barter transactions in 1996 of TDM 944 are included in advertising revenues
and the related expenditures of TDM 917 are included in direct operating costs.
5. OTHER RECEIVABLES
Other receivables consist of the following:
DECEMBER 31, DECEMBER 31,
1996 1995
TDM TDM
------------ ------------
Receivable from Deutsche Leasing AG (see Note
10)............................................. 1,497 1,610
Investment subsidies receivable................... 20 1,075
Other receivables................................. 207 42
------------ ------------
1,724 2,727
------------ ------------
------------ ------------
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consist of the following:
DECEMBER 31, DECEMBER 31,
1996 1995
TDM TDM
------------ ------------
Fixtures and fittings............................. 12,094 12,043
Station machinery and office equipment............ 19,219 17,875
-- thereof relating to assets held under lease:
TDM 15,144 (1995: TDM 15,144)
------------ ------------
31,313 29,918
Less-Accumulated depreciation..................... (14,660) (9,638)
------------ ------------
16,653 20,280
------------ ------------
------------ ------------
81
IA TV BETEILIGUNGSGESELLSCHAFT MBH & CO. BETRIEBS-KG
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1995
7. OTHER INTANGIBLE ASSETS
Other intangible assets, net consist of the following:
DECEMBER 31, DECEMBER 31,
1996 1995
TDM TDM
------------ ------------
Studio equipment software held under lease........ 2,586 2,500
Financial systems software........................ 578 425
------------ ------------
3,164 2,925
Less--Accumulated depreciation.................... (858) (421)
------------ ------------
2,306 2,504
------------ ------------
------------ ------------
The studio equipment software represents a traffic system leased from
Enterprise Air-Time Systems Limited, Thames Ditton, U.K.
8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
DECEMBER 31, DECEMBER 31,
1996 1995
TDM TDM
------------ ------------
Accounts payable, trade........................... 4,169 6,152
Vacation accrual.................................. 354 354
Ancillary rental cost............................. 339 245
Consulting fees................................... 241 --
Compensation...................................... 117 214
Contract risks.................................... 70 120
Miscellaneous accruals............................ 313 252
------------ ------------
5,603 7,337
------------ ------------
------------ ------------
Trade payables include an unsettled liability of TDM 1,980 relating to the
operating lease contract with Enterprise Air-Time Systems Limited, Thames
Ditton, U.K., for the new traffic system.
9. DEFERRED INCOME
On October 5, 1993 the Partnership was awarded a first federal and state
funded grant amounting to 23% of capital investment of up to DM 50 mio. between
1993 and 1996. Total investments relating to the underlying budget for this
investment grant amounted to DM 37.1 mio. as of August 1996 with the Partnership
having received investment grants of TDM 8,544. As all budgeted investments were
finalized by that time the approval for investment grants was adjusted from
initially TDM 11,287 to TDM 8,544.
On August 26, 1996 the Partnership was awarded a second federal and state
funded grant amounting to 25% of capital investments of up to DM 13 Mio. between
1996 and 1999. As of December 31, 1996 the Partnership has received investment
grants of TDM 349 relating to this second investment grant approval.
The Partnership is required to retain the underlying assets acquired, upon
which these grants were received, in its business and region for a period of at
least 3 years. Furthermore 130 employment positions are guaranteed to be
maintained for a period of five years beginning with the first airing in
82
IA TV BETEILIGUNGSGESELLSCHAFT MBH & CO. BETRIEBS-KG
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1995
9. DEFERRED INCOME--(CONTINUED)
November 1993. The second investment grant increases the number of guaranteed
labour from 130 to 150 for a period of five years beginning with the completion
of the budgeted investments. A failure to meet these two conditions could result
in the Partnership having to repay some or all of the grants received.
In addition the Partnership has the right, as governed by German tax law,
to receive tax free investment subsidies of 5% respectively of 8% of the cost of
acquired moveable fixed assets. The allowance is granted subject to the acquired
fixed assets remaining in the business for a period of at least 3 years.
Deferred investment grants and tax free subsidies are amortized according
to the underlying estimated useful lives of fixed assets acquired.
The total amount of grants and tax free subsidies received by the
Partnership and recorded in the accompanying balance sheet as deferred income is
as follows:
DECEMBER 31, DECEMBER 31,
1996 1995
TDM TDM
------------ ------------
Investment grants and subsidies................... 10,308 10,012
Less--Amortization to December 31................. (4,651) (3,151)
------------ ------------
5,657 6,861
------------ ------------
------------ ------------
10. COMMITMENTS AND CONTINGENCIES
Commitments under capital leases
The Partnership signed a contract with an investment bank, the Deutsche
Leasing AG, Berlin (Deutsche Leasing), to finance a part of its investments in
studio equipment. The total lease financing of DM 10 mio. represented two thirds
of the originally planned volume of investments in studio equipment of DM 15
mio. It was agreed that Deutsche Leasing retains a guarantee of DM 1 mio. at an
interest rate payable to IA Fernsehen of 5.35% p.a. The loan of DM 10 mio. is
financed at an annual interest rate of 6.9%. The loan has to be repaid to
Deutsche Leasing by October 1998 with monthly installments of TDM 201.
Deutsche Leasing is entitled to demand immediate repayment of the loan
amount outstanding if IA Fernsehen fails to meet the terms of the loan
agreement. The corresponding liability to the fixed assets held under finance
lease is the DM 4.1 mio. payable to Deutsche Leasing as of December 31, 1996.
Additionally, IA Fernsehen records a receivable from Deutsche Leasing of DM 1.5
mio. representing the guarantee (DM 1 mio.) and the unused finance volume (DM
0.5 mio.). The future obligations under the capital leases are as follows:
INTEREST AMORTIZATION TOTAL
TDM TDM TDM
-------- ------------ -----
1997.... 239 2,172 2,411
1998.... 64 1,945 2,009
-------- ------------ -----
303 4,117 4,420
-------- ------------ -----
-------- ------------ -----
83
IA TV BETEILIGUNGSGESELLSCHAFT MBH & CO. BETRIEBS-KG
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1995
10. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
Commitments under operating leases
--TV station headquarters
The Partnership entered into an operating lease for the television station
headquarters adjacent to the Television tower at the Alexanderplatz in Berlin on
May 14, 1993. The lease term commenced on May 1, 1993 and expires on December
31, 1999. The lease provides for a renewal option. For the period ended December
31, 1996, the Partnership paid rent and operating expenses amounting to DM 1.8
mio. Under the agreement the monthly rent amounts to DM 105,000 until April 30,
1998. Thereafter it increases to DM 197,500 per month. In addition the
Partnership is obliged to pay certain taxes, insurance costs and operating
expenses, as provided in the lease agreement.
According to the lease contract the Partnership is liable for possible
third party claims arising from restitution filings on the premises leased. The
Partnership as tenant cannot obtain valid evidence from the BVS ('Bundesanstalt
fur vereinigungs-bedingte Sonderaufgaben'--the former privatization agency
of the German Government) regarding any pending restitution claims. Should the
Partnership be forced to terminate its rental agreement prior to December 31,
1999, the lessor has agreed to negotiate the amount of capital expenditures
incurred to be reimbursed. The management will cooperate with the lessor in
order to obtain information on possible restitution claims.
According to the lease contract the Partnership is liable to guarantee the
pedestrians' safety on all passageways around the rented building. The
Partnership has taken steps to provide for such safety. Furthermore the
Partnership has to carry out maintenance work relating to the building at its
own cost. This obligation may result in additional costs which have not been
evaluated and correspondingly not been accrued for.
The Company has minimum future obligations under the operating lease
relating to the TV station headquarters as follows:
TDM
-----
1997.... 1,620
1998.... 2,360
1999.... 2,730
--Traffic system
On May 24, 1995, the Partnership entered into a lease agreement for a
traffic system with the Enterprise Air-Time Systems Limited, Thames Ditton, U.K.
The lease term commenced on May 24, 1995, and expires on May 24, 2005. The
agreement may be terminated by written notice if a party e.g. ceases to carry on
its business. The traffic system was capitalized at TDM 2,568 and
correspondingly accrued for under trade liabilities. Amortization of TDM 266 for
1996 was expensed. The future payments represent the repayment of the liability
and will annually be increased with reference to the
84
IA TV BETEILIGUNGSGESELLSCHAFT MBH & CO. BETRIEBS-KG
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1995
10. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
development of the Electrical and Electronical Engineering Index. The future
obligations under the terms of this operating lease are as follows:
TDM
-----
1997.......... 248
1998.......... 248
1999.......... 248
2000.......... 248
thereafter.... 1,236
Government Regulation
Broadcast operations in Germany are subject to extensive Government
regulation. Television in Germany is regulated by the Media Authority of each
region, and the Media Authority Berlin-Brandenburg ('MABB') is responsible for
the activities of the Partnership. Regulations govern the issuance, renewal,
transfer and ownership of station licenses, as well as the timing and content of
programming and the timing, content and amount of commercial advertising
permitted. There are also regulations requiring that certain percentages of
programming are being produced or originated in local markets. The ownership of
a private TV station is closely monitored to avoid a single shareholder being
able to exercise a dominant influence on the business and program of a TV
station.
The Partnership communicated in writing the changes effected and intended
regarding the Partners' capital, the Partners' voting rights and the program
structure to MABB and obtained assurance to comply with the rules of the TV
license.
Employment Agreements
The managing directors of the Partnership are employed at the general
partner. In 1996 the following persons have been managing directors:
APPOINTMENT PER DISMISSAL PER PARTNERS'
PARTNERS' RESOLUTION RESOLUTION
-------------------- -----------------------
Dr. Dietmar Straube.... September 19, 1995 September 30, 1996
Stefan Ziegenhagen..... March 26, 1996
In accordance with para 4.1 of the General Partner's Agreement IA TV
Beteiligungs--gesellschaft mbH shall have at least two managing directors. The
Partnership is aware of this deficiency and will take corrective action. None of
the resolutions or changes of 1995 and 1996 have been inscribed in the
commercial register.
In 1996 an average of 148 employees and 103 freelancers worked for the
Partnership. Generally employment agreements may be terminated by either party
within 1 to 2 months upon prior written notice.
Litigation
Various competitors of IA Fernsehen have taken legal action against the
Media Authority Berlin-Brandenburg to overturn its decision in awarding the
Partnership the broadcast license for IA Fernsehen. The Partnership and legal
counsel believe that its broadcast license for IA Fernsehen is in
85
IA TV BETEILIGUNGSGESELLSCHAFT MBH & CO. BETRIEBS-KG
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1995
10. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
no danger. The Media Authority has informed the Partnership that these legal
actions have no realistic chance of success.
The Company is from time to time involved in litigation incidental to the
conduct of its business. Management and its counsel believe such pending
litigation will not have a material adverse effect on the company's financial
condition.
86
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Slovenska televizna spolocnost, s.r.o.
We have audited the accompanying balance sheets of Slovenska televizna
spolocnost, s.r.o. as of December 31, 1996 and 1995, and the related statements
of income and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Slovenska televizna spolocnost,
s.r.o. as of December 31, 1996 and 1995, and the results of its operations and
its cash flows for the years then ended in conformity with United States
generally accepted accounting principles.
ARTHUR ANDERSEN
Bratislava, Slovak Republic
13 March 1997
87
SLOVENSKA TELEVIZNA SPOLOCNOST, S.R.O.
BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1996
(CURRENCY--THOUSANDS OF SLOVAK CROWNS)
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................... 15,257 30,756
Accounts receivable (net of allowances of 3,387
TSK)......................................... -- 169,979
Program rights costs, net (Note 3).............. -- 5,155
Amounts due from shareholders................... -- 6
Other assets (Note 4)........................... 52,214 141,681
------------ ------------
Total current assets......................... 67,471 347,577
------------ ------------
INVESTMENT (Note 5)............................... -- 100
PROPERTY, PLANT & EQUIPMENT (net of depreciation
of 299 SK and 39,843 SK) (Note 6)............... 36,248 682,480
PROGRAM RIGHTS COST, net (Note 3)................. -- 166,618
INTANGIBLE ASSETS (net of amortisation of 27 SK,
1,324 SK) (Note 7).............................. 198 13,782
PRE OPERATIONAL COSTS (net of amortisation of nil,
5,016 SK) (Note 3).............................. 5,459 55,185
------------ ------------
Total assets................................. 109,376 1,265,742
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................ 4,910 158,537
Accrued Liabilities (Note 8).................... 1,005 24,233
Duties and other taxes payable.................. 167 17,162
Amounts due to Shareholders (Note 9)............ -- 10,521
Amounts due to related parties (Note 10)........ -- 1,192
------------ ------------
Total current liabilities.................... 6,082 211,645
------------ ------------
NON CURRENT LIABILITIES:
Shareholder loan (Note 9)....................... -- 294,192
------------ ------------
Total non current liabilities................ -- 294,192
------------ ------------
SHAREHOLDERS' EQUITY: (Note 13)
Capital stock................................... 100 100
Other contributed capital....................... 105,446 893,768
Accumulated deficit............................. (2,252) (133,963)
------------ ------------
Total shareholders' equity................... 103,294 759,905
------------ ------------
Total liabilities and shareholders' equity... 109,376 1,265,742
------------ ------------
------------ ------------
The accompanying notes are an integral part of these balance sheets.
88
SLOVENSKA TELEVIZNA SPOLOCNOST, S.R.O.
INCOME STATEMENTS
FOR THE PERIODS ENDED DECEMBER 31, 1995 AND 1996
(CURRENCY--THOUSANDS OF SLOVAK CROWNS)
1995 1996
------ --------
REVENUES:
Advertising............................................... -- 227,026
Other..................................................... 1 5,334
------ --------
1 232,360
------ --------
------ --------
STATION EXPENSES:
Depreciation of station equipment......................... (299) (39,544)
Amortisation of programming rights........................ -- (74,769)
Amortisation of intangibles and pre-operational costs..... (27) (6,313)
Other operating costs and expenses........................ (1,908) (177,374)
Selling, general and administrative expenses.............. -- (49,966)
------ --------
Operating loss.............................................. (2,233) (115,606)
------ --------
------ --------
INTEREST AND OTHER INCOME (NOTE 14)......................... 4 7,750
INTEREST EXPENSE (NOTE 15).................................. (23) (23,855)
------ --------
Net loss.................................................... (2,252) (131,711)
------ --------
------ --------
The accompanying notes are an integral part of these income statements.
89
SLOVENSKA TELEVIZNA SPOLOCNOST, S.R.O.
STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED DECEMBER 31, 1995 AND 1996
(CURRENCY--THOUSANDS OF SLOVAK CROWNS)
1995 1996
-------- ----------
Cash flows from operating activities:
Net loss.................................................. (2,252) (131,711)
Depreciation and amortization............................. 326 45,857
Depreciation of program rights............................ -- 74,769
Provision for bad debts................................... -- 3,387
-------- ----------
Operating profit before changes in operating assets....... (1,926) (7,698)
(Increase) decrease in operating assets:
Accounts receivable.................................... -- (173,366)
Other assets........................................... (52,214) (84,037)
Increase (decrease) in operating liabilities:
Accounts payable....................................... 4,910 153,627
Accrued liabilities.................................... 1,005 23,228
Duties and other taxes payable......................... 167 16,995
Amounts due to shareholders............................ -- 10,521
Amounts due to related parties......................... -- 1,192
-------- ----------
Net cash (used)/ from operating activities............. (48,058) (59,538)
-------- ----------
-------- ----------
Cash flows from investing activities:
Investments in program rights............................. -- (251,978)
Investments............................................... -- (100)
Net purchase of property, plant & equipment............... (36,547) (685,776)
Net purchase of intangible assets......................... (225) (14,881)
Pre-operational cost capitalised.......................... (5,459) (54,742)
-------- ----------
Net cash (used)/ from investing activities.................. (42,231) (1,007,477)
-------- ----------
-------- ----------
Cash flows from financing activities:
Increase in shareholder loan.............................. -- 294,192
Capital increase.......................................... 100 --
Increase in other contributed capital..................... 105,446 788,322
-------- ----------
Net cash(used)/ from financing activities................... 105,546 1,082,514
-------- ----------
-------- ----------
Net increase in cash and cash equivalents................... 15,257 15,499
-------- ----------
-------- ----------
Cash and cash equivalents at the beginning of the year.... -- 15,257
-------- ----------
Cash and cash equivalents at end of year.................. 15,257 30,756
-------- ----------
-------- ----------
The accompanying notes are an integral part of this statement.
90
SLOVENSKA TELEVIZNA SPOLOCNOST, S.R.O.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
(CURRENCY--THOUSANDS OF SLOVAK CROWNS)
(1) ORGANIZATION AND BUSINESS
Slovenska televizna spolocnost, s.r.o. (STS or the Company) was established
as a Limited Liability Company under the Laws of the Slovak Republic on October
9, 1995, to develop an independent, private television station, TV Markiza, and
to both technically secure the preparation of television broadcasting and to
provide full scale television programming.
Programming prepared by STS, is broadcast by Markiza Slovakia, s.r.o., in
accordance with the license granted to Markiza Slovakia, by The Council of the
Slovak Republic for Broadcasting and Television Transmission. The license
provides for broadcast within the territory of the Slovak Republic utilising
terrestrial signals, achieving an initial 65% national coverage. The license is
limited for a period of 12 years commencing August 7, 1995.
The provision of programming to Markiza Slovakia by STS, is performed in
accordance with the terms of an agreement between these parties, under which
Markiza Slovakia grants STS the rights to all revenues derived from broadcasting
in exchange for a 51% ownership interest and a 20% economic interest in the
Company, subject to the repayment of the original capital contribution made by
Central Media Enterprises, B.V. (CME).
(2) FINANCING OF OPERATING AND CAPITAL NEEDS
The share capital of 100 TSK is 51% owned by Markiza Slovakia, s.r.o., a
limited liability company established under the Laws of the Slovak Republic, and
41% owned by CME, a Limited Liability Company established under the Laws of The
Netherlands.
In addition to the share capital provided, contributions amounting to
893,768 TSK have been received from CME for the provision of operating funds to
the Company. As a result of this increased contribution, and in accordance with
the Participants agreement between the shareholders, CME is entitled to 80% of
the Company's profits and losses and 80% of the proceeds upon liquidation of the
Company's assets.
In addition to shareholders capital, CME have granted loans to the Company
amounting to 294,192 TSK, as of December 31, 1996, inclusive of accrued interest
of 6,815 TSK.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements, consisting of the balance sheet as
of December 31, 1996 and 1995, and the related statements of income, cash-flow
statements and notes to the financial statements for the year ended 31 December
1996 are presented in accordance with US GAAP and, accordingly, give a true and
fair view of the Company's net worth, financial position and results.
a) Basis of accounting
The Company maintains its books of accounts and prepares statements for
regulatory purposes in accordance with Slovak accounting principles. The
accompanying financial statements are based on the accounting records of the
Company, together with appropriate reclassifications necessary for fair
presentation in accordance with US GAAP.
91
SLOVENSKA TELEVIZNA SPOLOCNOST, S.R.O.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
(CURRENCY--THOUSANDS OF SLOVAK CROWNS)
b) Property, Plant and Equipment and Intangible Assets
Fixed and Intangible assets are carried at cost less accumulated
depreciation. Depreciation is computed using the straight line method over the
estimated useful lives of the related assets. (Notes 6 and 7).
c) Assets held under Capital Leases
Assets held under capital leases are accounted for in accordance with
Statement of Financial Accounting Standards No. 13, 'Accounting for Leases', and
recorded in Property, Plant and Equipment. The related liability is included in
obligations under capital lease.
d) Program Rights and Production Costs
Program rights acquired by the Company under license agreements and the
related obligations incurred are recorded as assets and liabilities when the
license period begins, and the assets are amortised to expense using accelerated
methods based on the estimated period of usage, ranging from one to five years.
Amortisation estimates for program rights are reviewed periodically and adjusted
prospectively. Program rights costs are shown net of amortisation of 74,769 TSK.
Payments made for program rights for which the license period has not begun
before the year end are classified as prepaid expenses and amount to 5,436 TSK
at December 31, 1996. (See Note 4).
The elements of program rights for which the licence period will expire
within one year, amounting to 5,155 TSK have been reclassified as current
assets.
Production costs for self-produced programs are capitalised, and expensed
when first broadcast except where the programming has potential to generate
future revenues. When this is the case, production costs are capitalised and
amortised on the same basis as programming obtained from third parties.
e) Pre Operational Costs
The Company has capitalised 60,201 TSK in costs incurred in connection with
the organisation and incorporation of the business prior to the commencement of
broadcasting of its programming. These costs will be amortised over four years
from the commencing of broadcasting of the station. Amortisation of 5,016 TSK
has been provided to December 31, 1996. (1995--nil)
f) Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, 'Accounting for Income Taxes.' No tax is
due for the period ending December 31, 1996 due to losses incurred by the
Company in this period.
g) Foreign Currency Transactions
Transactions denominated in foreign currencies are recorded at the exchange
rate in effect at the date of the transaction. Outstanding foreign currency
obligations and receivables have been translated at the exchange rate in effect
as of the balance sheet date. Translation gains or losses have been charged to
other income and expense.
92
SLOVENSKA TELEVIZNA SPOLOCNOST, S.R.O.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
(CURRENCY--THOUSANDS OF SLOVAK CROWNS)
h) Cash and cash equivalents
Cash and cash equivalents include cash in banks and on hand. The Company
does not have any restricted cash balances.
i) Revenue Recognition
Revenues primarily result from the sale of advertising time and are
recognized at the time the advertisements are broadcast.
j) Barter Transactions
Revenue from barter transactions (television advertising provided in
exchange for goods and services) is recognised as income when advertisements are
broadcast, and programming, merchandise or services received are charged to
expense (or capitalised as appropriate) when received or used. Barter revenues
and related expenditures of 11,977 TSK have been recognised for the year within
advertising revenues and operating expenses respectively.
The Company does not believe that the bartered programming has significant
value on its second showing on Slovak television as it has been the experience
of the industry that first runs, on average, account for a substantial majority
of the program's potential revenue. Thus, no asset or liability is recorded on
the balance sheet for the potential rebroadcast of bartered programming.
The Company records barter transactions at the estimated fair value of the
production or services received. In cases where bartered programs can only be
obtained through a barter agreement the Company values the barter at the value
of the asset given up. In other cases where the Company has elected to enter
into barter agreements as an alternate method of payment, strictly for economic
reasons, the Company values the barter agreement at the value of the asset
received. If merchandise or services are received prior to the broadcast of a
commercial, a liability is recorded. Likewise, if a commercial is broadcast
first, a receivable is recorded.
Receivables and payables arising from barter transactions are offset when
the services have been rendered to the customer and the services rendered, or
the merchandise received from the vendor.
(4) OTHER ASSETS
Other assets consist of the following:
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------- -----------------
Value-added tax......................... 2,189 18,765
Operational advances 50,018 116,413
Prepayments
--programming......................... -- 5,436
--other............................... -- 854
Other................................... 7 213
-------- -----------------
52,214 141,681
-------- -----------------
-------- -----------------
In 1996, the Company entered into an agreement with Slovak Telecom for the
provision of the broadcasting infrastructure and signal transmission. In
accordance with this, advances of 127,000 TSK were remitted to Slovak Telecom,
against future signal transmission charges. This agreement accounts for 50,000
TSK and 108,632 TSK at December 31, 1995 and 1996, respectively.
93
SLOVENSKA TELEVIZNA SPOLOCNOST, S.R.O.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
(CURRENCY--THOUSANDS OF SLOVAK CROWNS)
(5) INVESTMENTS
The Company hold 100% (100 TSK) of the share capital of company, 'Vyhra'. A
limited liability company established by STS under the Laws of the Slovak
Republic. Vyhra has not traded since its establishment.
(6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consist of the following:
USEFUL DECEMBER 31, DECEMBER 31,
LIVES 1995 1996
------ --------------- ---------------
Land and buildings...................... 25 -- 243,838
Technical Equipment..................... 4-8 1,197 394,595
Other................................... 4 -- 70,552
Construction in progress................ -- 15,102 --
Advances for tangibles.................. -- 20,248 13,338
--------------- ---------------
36,547 722,323
Less--Accumulated depreciation.......... (299) (39,843)
--------------- ---------------
36,248 682,480
--------------- ---------------
--------------- ---------------
(7) INTANGIBLE ASSETS
Intangible assets, net consist of the following:
DECEMBER 31, DECEMBER 31,
1995 1996
--------------- ---------------
Software................................ 25 7,013
Other................................... 200 8,093
--------------- ---------------
225 15,106
Less--Accumulated amortisation.......... (27) (1,324)
--------------- ---------------
198 13,782
--------------- ---------------
--------------- ---------------
(8) ACCRUED LIABILITIES
Accrued liabilities consist of the following:
DECEMBER 31, DECEMBER 31,
1995 1996
--------------- ---------------
Legal and Professional fees............. -- 194
Personnel accruals...................... 1,005 15,381
Social fund............................. -- 297
Other................................... -- 8,361
--------------- ---------------
1,005 24,233
--------------- ---------------
--------------- ---------------
94
SLOVENSKA TELEVIZNA SPOLOCNOST, S.R.O.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
(CURRENCY--THOUSANDS OF SLOVAK CROWNS)
(9) AMOUNTS DUE TO SHAREHOLDERS
Shareholder Loan
The Company has borrowed a total of 287,377 TSK over the period from July
10, 1996 to August 26, 1996. These loans are unsecured, repayable after a period
of no less than 5 years, maturing in 2007, and bearing interest at the rate of
6% per annum Interest of 6,815 TSK has accrued as at December 31, 1996 relating
to the period to this date.
Other
The Company owes 10,521 TSK to CME as at December 31, 1996, in relation to
consultancy services for the six months to the year end and for programming
services provided to the Company by CME.
(10) AMOUNTS DUE TO RELATED PARTIES
The Company has liabilities to Ceska nezavisla televizni spolecnost, s.r.o.
(TV Nova) at December 31, 1996, amounting to 1,192 TSK, relating to the purchase
of programs.
(11) LOAN OBLIGATIONS
The Company has no loan obligations other than that disclosed in Note 9.
(12) COMMITMENTS AND CONTINGENCIES
Commitments under Capital Leases
The Company has no material Capital Lease commitments at December 31, 1996.
Commitments under Operating Leases
The Company has entered into operating leases for three properties located
in Bratislava. The lease terms commenced June 15, and July 1, 1996 and expire
June 30, 1999 or have unlimited terms. Where a definitive term is set, the lease
provides for a renewal option. For the fiscal year ended December 31, 1996, the
Company paid aggregate rent on all facilities of 8,083 TSK.
The Company has minimum future obligations under operating leases relating
to property with definitive terms as follows:
YEAR DM TSK
- -------- --- -----
1996.... 96 1,969*
1997.... 96 1,969
1998.... 96 1,969
1999.... 48 985
--- -----
336 6,892
--- -----
--- -----
- ------------------
*translated using the exchange rate as at December 31, 1996.
Monthly payments relating to leases with unlimited terms amount to 56 TSK.
95
SLOVENSKA TELEVIZNA SPOLOCNOST, S.R.O.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
(CURRENCY--THOUSANDS OF SLOVAK CROWNS)
Programming Rights Commitments
The Company has commitments amounting to 80,122 TSK in respect of rights
for future programming.
The Company has also entered into certain barter agreements in 1996 that
continue through 1997 and beyond, by which television advertising will be
provided in exchange for programming. As the value of this advertising time will
only be established at the time of broadcast, it is not possible to quantify the
impact of these agreements.
(13) SHAREHOLDERS' EQUITY
The movement on shareholders' equity in the year is as follows:
OTHER TOTAL
CONTRIBUTED ACCUMULATED SHAREHOLDERS'
SHARE CAPITAL CAPITAL DEFICIT EQUITY
------------- ----------- ----------- -------------
Balance as at December 31, 1995.... 100 105,446 (2,252) 103,294
Contributions...................... -- 788,322 -- 788,322
Loss for the year.................. -- -- (131,711) (131,711)
----- ----------- ----------- -------------
Balance as at December 31, 1996.... 100 893,768 (133,963) 759,905
----- ----------- ----------- -------------
----- ----------- ----------- -------------
(14) INTEREST INCOME
Interest income consists of the following:
1995 1996
---- -----
Bank & short term deposit......................... 4 2,509
Realised foreign exchange gains................... -- 190
Other............................................. -- 5,051
---- -----
4 7,750
---- -----
---- -----
(15) INTEREST EXPENSE
Interest expense consists of the following:
1995 1996
---- ------
Shareholder loan interest......................... -- 6,815
Foreign exchange losses
--realised...................................... -- 529
--unrealised.................................... -- 14,333
Other............................................. 23 2,178
---- ------
23 23,855
---- ------
---- ------
96
SLOVENSKA TELEVIZNA SPOLOCNOST, S.R.O.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
(CURRENCY--THOUSANDS OF SLOVAK CROWNS)
(16) NUMBER OF EMPLOYEES
The number of employees as of December 31, 1996, was 380 full time and 3
part-time.
(17) TAXATION
The reconciliation between the accounting loss and the taxable base of the
Corporate Income Tax is as follows:
1996
--------
Profit for the year............................... (131,711)
Permanent differences
Non deductible expenses......................... 12,667
Temporary differences
Unrealised exchange looses...................... 19,340
Difference with tax depreciation................ 4,124
US GAAP Adjustments............................. (54,733)
--------
Taxable income, (loss)............................ (150,313)
--------
--------
Following the prudence principle and due to the uncertainty on the
recoverability of the tax credit following the current Slovak tax legislation,
the Management of STS has decided not to record the tax carry forward (60,125
TSK) or the deferred tax (asset, 21,893 TSK, liability, 9,386 TSK) as of
December 31, 1996.
97
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated herein by reference
to the section entitled "Election of Directors and Executive Officers" in the
Company's Proxy Statement for the 1999 Annual Meeting of Shareholders.
Item 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference
to the sections entitled "Executive Compensation," "Compensation Committee
Report on Executive Compensation" and "Performance Graph" in the Company's Proxy
Statement for the 1999 Annual Meeting of Shareholders.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference
to the section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Company's Proxy Statement for the 1999 Annual Meeting of
Shareholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference
to the section entitled "Certain Relationships and Related Transactions" in the
Company's Proxy Statement for the 1999 Annual Meeting of Shareholders.
98
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following Financial Statements of the Company are included in Part
II, Item 8 of this Report:
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity (Deficit) for the years
ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
(a)(2) The following Financial Statements of 1A TV Beteiligungsgesellschaft MBH
& Co. Betreibs-KG are included in Part II, Item 8 of this Report:
Report of Independent Public Accountants
Balance Sheet as of December 31, 1996 and 1995
Statement of Operation for the years ended December 31, 1996 and 1995
Statement of Partners' Capital for the years ended December 31, 1996
and 1995
Statement of Cash Flows for the years ended December 31, 1996 and 1995
Notes to Financial Statements
(a)(3) The following Financial Statements of Slovenska Televizna Spolocnost,
s.r.o. are included in Part II, Item 8 of this Report:
Report of Independent Public Accountants
Balance Sheet as of December 31, 1995 and 1996
Income Statements for the periods ended December 31, 1995 and 1996
Statements of Cash Flows for the periods ended December 31, 1995 and
1996
Notes to Financial Statements
(a)(5) The following exhibits are included in this report:
99
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
3.01* -- Memorandum of Association (incorporated by reference to Exhibit
3.01 to the Company's Registration Statement No. 33-80344 on Form
S-1, filed June 17, 1994).
3.02* -- Bye-Laws of Central European Media Enterprises Ltd., as amended,
dated as of May 2, 1997 (incorporated by reference to Exhibit 3.1
to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1997).
3.03* -- Memorandum of Increase of Share Capital (incorporated by reference
to Exhibit 3.03 to Amendment No. 1 to the Company's Registration
Statement No. 33-80344 on Form S-1, filed August 19, 1994).
3.04* -- Memorandum of Reduction of Share Capital (incorporated by
reference to Exhibit 3.04 to Amendment No. 2 to the Company's
Registration Statement No. 33-80344 on Form S-1, filed September
14, 1994).
3.05* -- Certificate of Deposit of Memorandum of Increase of Share Capital
executed by Registrar of Companies on May 20, 1997 (incorporated
by reference to Exhibit 3.1 to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1997).
4.01* -- Specimen Class A Common Stock Certificate (incorporated by
reference to Exhibit 4.01 to Amendment No. 1 to the Company's
Registration Statement No. 33-80344 on Form S-1, filed August 19,
1994).
4.02* -- Specimen Note for 9 3/8% Senior Notes Due 2004 (incorporated by
reference to Exhibit 4.1 to the Company's Amendment No. 3 to Form
S-3 filed on August 14, 1997)
4.03* -- Specimen Note for 8 1/8% Senior Notes Due 2004 (incorporated by
reference to Exhibit 4.1 to the Company's Amendment No. 3 to Form
S-3 filed on August 14, 1997)
4.04* -- Form of Indenture for 9 3/8% Senior Notes Due 2004 (incorporated
by reference to Exhibit 4.2 to the Company's Amendment No. 3 to
Form S-3 filed on August 14, 1997)
4.05* -- Form of Indenture for 8 1/8% Senior Notes Due 2004 (incorporated
by reference to Exhibit 4.2 to the Company's Amendment No. 3 to
Form S-3 filed on August 14, 1997)
10.01*+ -- Central European Media Enterprises Ltd. Amended and Restated 1994
Stock Option Plan, as amended to October 17, 1995. (incorporated
by reference to
100
Exhibit
Number Description
- ------ -----------
Exhibit 10.01A to Amendment No. 1 to the Company's Registration
Statement No. 33-96900 on Form S-1, filed October 18, 1995).
10.02+ -- Central European Media Enterprises Ltd. 1995 Stock Option Plan, as
amended and restated to September 3, 1998
10.03 -- Memorandum of Association and Investment Agreement by and between
CME Czech Republic B.V. and CET 21 spol s.r.o dated May 4, 1993
and as amended
10.04* -- Credit Agreement between Ceska Sporitelna, a.s. and Ceska
Nezavisla Televizni Spolecnost, s.r.o. (incorporated by reference
to Exhibit 10.16 to Amendment No. 1 to the Company's Registration
Statement No. 33-80344 on Form S-1, filed August 19, 1994).
10.05* -- Term Promissory Note in favor of Ronald S. Lauder dated September
9, 1994 and Warrant for the Purchase of Shares of Common Stock
issued to Ronald S. Lauder dated as of September 9, 1994
(incorporated by reference to Exhibit 10.17 to Amendment No. 2 to
Registration Statement No. 33-80344 on Form S-1, filed September
14, 1994).
10.06* -- Partnership Agreement of Produkcija Plus d.o.o. Ljubljana,
dated February 10, 1995 among CME Media Enterprises B.V., Boutique
MMTV d.o.o. Ljubljana, and Tele 59 d.o.o. Maribor. (incorporated
by reference to Exhibit 10.20 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994).
10.07* -- Letter Agreement, dated March 23, 1995, among, Kanal A,
Boutique MMTV d.o.o. Ljubljana, Tele 59 d.o.o. Maribor, Euro 3 and
Baring Communications Equity as advisor to Baring Communications
Equity Limited, regarding Produkcija Plus d.o.o. (incorporated by
reference to Exhibit 10.21 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1994).
10.08* -- Credit Agreement, dated as of November 14, 1994, between Ceska
Sportelma, a.s. and Ceska Nezavisla Televizni Spolecnost, s.r.o.
(incorporated by reference to Exhibit 10.22 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1994).
10.09* -- Lease, dated February 2, 1995, between CME Development Corporation
Inc. and JRT (Properties) Limited for the term of ten years for
the offices at 9 Poland Street and 17, 18 and 19 D'Arblay Street
in London. (incorporated by reference to Exhibit 10.23 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994).
10.10* -- Contract for Space Segment Service dated June 9, 1995, between
British Telecommunications plc ('BT') and CME Programming
Services, Inc. for the provision of programming transmission
services by BT and the payment
101
Exhibit
Number Description
- ------ -----------
thereon (incorporated by reference to Exhibit 10.25A to the
Company's Report on Form 10-Q for the quarterly period ended June
30, 1995).
10.10A* -- Guarantee by Central European Media Enterprises Ltd. in respect of
obligations due to British Telecommunications plc by CME
Programming Services, Inc. dated June 9, 1995 (incorporated by
reference to Exhibit 10.25B to the Company's Report on Form 10-Q
for the quarterly period ended June 30, 1995).
10.11* -- Cooperation Agreement among CME Media Enterprises B.V., Ion Tiriac
and Adrian Sarbu (incorporated by reference to Exhibit 10.27 to
the Company's Registration Statement No.33- 96900 on Form S-1
filed September 13, 1995).
10.12* -- Preliminary Agreement, dated June 12, 1995, between CME Media
Enterprises B.V. and Markiza-Slovakia s.r.o. (incorporated by
reference to Exhibit 10.28 to the Company's Registration Statement
No. 33-96900 on Form S-1, filed September 13, 1995).
10.12A* -- Memorandum of Association between CME Media Enterprises, B.V. and
Markiza-Slovakia s.r.o. (incorporated by reference to Exhibit
10.28A to Amendment No. 1 to the Company's Registration
Statement No. 33-96900 on Form S-1, filed October 18, 1995).
10.12B* -- Articles of Association of Slovenska Televizna Spolocnost, s.r.o.
founded by CME Media Enterprises, B.V. and Markiza-Slovakia s.r.o.
(incorporated by reference to Exhibit 10.28B to Amendment No. 1 to
the Company's Registration Statement No. 33-96900 on Form S-1,
filed October 18, 1995).
10.13* -- Contract of Sale, dated July 7, 1995 between In Razvoj in
Svetovanje d.o.o. Ljubljana and Produkcija Plus d.o.o. Ljubljana
and Central European Media Enterprises Group (incorporated by
reference to Exhibit 10.29 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995).
10.14* -- Loan Agreement, dated December 4, 1995, between CME Media
Enterprises, B.V., and Inter Media S.R.L. (incorporated by
reference to Exhibit 10.30 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995).
10.15* -- Contocurrent Credit Contract kept with the Current Account, dated
as of November 1, 1995 between Ceska Sporitelna a.s. and Czech
Independent Television Company s.r.o. (Ceska Nezavisla Televizni
Spolecnost s.r.o.) (incorporated by reference to Exhibit 10.32 to
the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995).
10.16* -- Transfer Agreement between Ceska Sporitelna and CME BV
(incorporated by reference to Exhibit 10.03 to the Company's
Report on Form 10-Q for the quarterly period ended June 30, 1996).
102
Exhibit
Number Description
- ------ -----------
10.16A* -- Annex to Transfer Agreement between Ceska Sporitelna and CME BV
(incorporated by reference to Exhibit 10.04 to the Company's
Report on Form 10-Q for the quarterly period ended June 30, 1996).
10.17* -- Loan Agreement between Ceska Sporitelna and CME BV (incorporated
by reference to Exhibit 10.05 to the Company's Report on Form 10-Q
for the quarterly period ended June 30, 1996).
10.18* -- Agreement on a Future Agreement between Ceska Sporitelna and CME
BV (incorporated by reference to Exhibit 10.06 to the Company's
Report on Form 10-Q for the quarterly period ended June 30, 1996).
10.19* -- Loan Agreement between Vladimir Zelezny and CME dated August 1,
1996 (incorporated by reference to Exhibit 10.01 to the Company's
Report on Form 10-Q for the quarterly period ended September 30,
1996).
10.19A* -- Amendment to the Loan Agreement of August 1, 1996 and agreements
referred to as Security Documents between Vladimir Zelezny and
CME, dated as of March 11, 1997 (incorporated by reference to
Exhibit 10.38A to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996).
10.20* -- Ronald S. Lauder Warrant for the Purchase of Shares, dated October
2, 1996 (incorporated by reference to Exhibit 10.03 to the
Company's Report on Form 10-Q for the quarterly period ended
September 30, 1996).
10.21* -- Agreement between CME, Boris Fuchsmann, Alexander Rodniansky and
Innova Film GmbH in English, dated October 25, 1996 (incorporated
by reference to Exhibit 10.10 to the Company's Report on Form 10-Q
for the quarterly period ended September 30, 1996).
10.22* -- Agreement between CME, Boris Fuchsmann, Alexander Rodniansky and
Innova Film GmbH in German, dated October 25, 1996 (incorporated
by reference to Exhibit 10.11 to the Company's Report on Form 10-Q
for the quarterly period ended September 30, 1996).
10.23* -- Poland Street Lease Agreement, dated April 2, 1996 (incorporated
by reference to Exhibit 10.18 to the Company's Report on Form 10-Q
for the quarterly period ended September 30, 1996).
10.24* -- Share Purchase Agreement between Ceska Sporitelna a.s. and CME
Media Enterprises B.V., dated December 12, 1996 (incorporated by
reference to Exhibit 10.58 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996).
10.25* -- Agreement on Assignment of Claim between Ceska Sporitelna, a.s.
and CME Media Enterprises B.V., dated December 12, 1996
(incorporated by reference to Exhibit 10.59 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1996).
103
Exhibit
Number Description
- ------ -----------
10.26* -- Assignment of Shares Agreement between Balaclava B.V., Adrian
Sarbu (as shareholders of PRO TV Ltd.), CME Media Enterprises
B.V., Grigoruta Roxana Dorina and Petrovici Liana, dated December
6, 1996 (incorporated by reference to Exhibit 10.60 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996).
10.27* -- Net Reimbursement Agreement by and among International
Teleservices Limited, International Media Services, Limited and
Limited Liability Company 'Prioritet', dated February 13, 1997
(incorporated by reference to Exhibit 10.64 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1996).
10.28* -- Agreement by and between International Media Services, Ltd and
Innova Film GmbH, dated January 23, 1997 (incorporated by
reference to Exhibit 10.65 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996).
10.29* -- Amended and Restated Charter of the Enterprise 'Inter-Media',
dated January 23, 1997 (incorporated by reference to Exhibit 10.66
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996).
10.30* -- Amended and Restated Charter of the Broadcasting Company 'Studio
1+1', dated January 23, 1997 (incorporated by reference to Exhibit
10.67 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996).
10.31* -- Amended and Restated Foundation Agreement on the Establishment and
Operation of the Broadcasting Company 'Studio 1+1,' dated January
23, 1997 (incorporated by reference to Exhibit 10.68 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996).
10.32* -- Protocol of the Participants' Assembly of the Broadcasting Company
'Studio 1+1,' dated January 23, 1997 (incorporated by reference to
Exhibit 10.69 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996).
10.33* -- Marketing, Advertising and Sales Agreement by and between
International Media Services Ltd and Innova Film GmbH, dated
January 23, 1997 (incorporated by reference to Exhibit 10.70 to
the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996).
10.33A* -- Amendment Agreement to Marketing, Advertising and Sales Agreement
between Innova Film GmbH and International Media Services Limited,
dated May 7, 1997 (incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1997).
10.34* -- Marketing and Sales Agreement by and between International Media
Services Ltd. and Prioritet, dated January 23, 1997 (incorporated
by reference to Exhibit 10.71 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996).
10.34A* -- Termination Agreement between International Media Services Ltd.
and Prioritet, dated May 7, 1997 (incorporated by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1997).
104
Exhibit
Number Description
- ------ -----------
10.35* -- IMS Advertising Service Agreement between International Media
Services Ltd. and Limited Liability Company --Prioritet--, dated
May 7, 1997 (incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1997).
10.36* -- Advertising Consultancy Agreement between Intermedia and Limited
Liability Company --Prioritet--, dated May 7, 1997 (incorporated
by reference to Exhibit 10.4 to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1997).
10.37* -- Service Agreement between R. S. Lauder Gaspar & Co., LP and
Central European Media Enterprises Ltd., dated as of April 1, 1997
(incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June
30, 1997).
10.38* -- Contract on Purchase of Real Estate between Central European
Development Corporation Praha, spol s.r.o. and Ceska Nezavisla
Televizni Spolecnost, spol. s.r.o., dated May 21, 1997
(incorporated by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June
30, 1997).
10.39*+ -- Employment Agreement between CME Development Corporation and John
Schwallie, dated as of November 21, 1997 (incorporated by
reference to Exhibit 10.72 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997).
10.40*+ -- Employment Agreement between Central European Media Enterprises
Ltd. and John Schwallie, dated as of November 21, 1997
(incorporated by reference to Exhibit 10.72 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1997).
10.41*+ -- Employment Agreement between CME Development Corporation and Fred
Klinkhammer, dated as of January 1, 1998 (incorporated by
reference to Exhibit 10.72 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997).
10.41A+ Amendment No. 1 to Employment Agreement between CME Development
Corporation and Fred Klinkhammer, dated as of March 23, 1999.
10.42*+ -- Employment Agreement between Central European Media Enterprises
Ltd. and Fred Klinkhammer, dated as of January 1, 1998
(incorporated by reference to Exhibit 10.72 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1997).
10.42A+ Amendment No. 1 to Employment Agreement between Central European
Media Enterprises Ltd. and Fred Klinkhammer, dated as of March 23,
1999.
105
Exhibit
Number Description
- ------ -----------
10.43*+ -- Employment Agreement, dated as of March 23, 1998, between CME
Development Corporation and Michel Delloye (incorporated by
reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1998)
10.44*+ -- Employment Agreement, dated as of March 23, 1998, between Central
European Media Enterprises Ltd. and Michel Delloye (incorporated
by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1998)
10.45*+ -- 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 (incorporated by reference to Exhibit 10.2 to
the Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1998)
10.46* -- Sale and Purchase Agreement, dated December 10, 1998, between
Central European Media Enterprise Ltd. and International Trading
and Investments Holding S.A. (incorporated by reference to Exhibit
2.1 to Form 8-K filed on December 28, 1998)
10.47+ -- Central European Media Enterprises Ltd. Stock Appreciation Rights
Plan, effective as of September 3, 1998
10.48+ -- Central European Media Enterprises Ltd. Director, Officer and
Senior Executive Co-Investment Plan
10.49 -- Revolving Facility Agreement between CME Czech Republic B.V. and
ING Bank N.V dated February 26, 1999
10.50 -- Contract on cooperation in ensuring service for television
broadcasting between Ceska Nezavisla Televizni Spolecnost, spol.
s.r.o. and CET 21, spol. s.r.o. dated May 21, 1997 and Supplement
dated May 21, 1997
10.51 -- Stock Purchase Agreement between Central European Media
Enterprises Ltd. and RSL Capital, dated as of December 3, 1998.
21.01 -- List of subsidiaries.
23.01 -- Consent of Arthur Andersen & Co.
24.01 -- Power of Attorney, dated as of March 8, 1999, authorizing Michel
Delloye, Frederic T. Klinkhammer and John A. Schwallie as attorney
for Ronald S. Lauder, Michel Delloye, Robert R. Grusky, Peter R.
Goldscheider, Herbert S. Schlosser, Nicolas G. Trollope and John
A. Schwallie.
27.01 -- Financial data schedule.
(b) -- Current Reports on Form 8-K:
106
Registrant filed a current report on Form 8-K on December 28,
1998 reporting the sale of the Company's interest in TVN
Television Operations in Poland, under Item 2: Disposition of
Assets
The following pro forma Financial Statements were filed in
such Form 8-K
Pro Forma Consolidated Balance Sheet as of September
30, 1998
Pro Forma Consolidated Statements of Operations for
the Year Ended December 31, 1997
Pro Forma Consolidated Statements of Operations for
the Nine Months Ended September 30, 1998
(c) -- Exhibits: See (a)(5) above for a listing of the exhibits
included as part of this report.
(d) -- Report of Independent Public Accountants on Schedule II--
Schedule of Valuation Allowances.
- -----------------------
* -- Previously filed exhibits
+ -- Exhibit is a management contract or compensatory plan
107
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Central European Media Enterprises Ltd.
By: /s/ John A. Schwallie
-------------------------------
John A. Schwallie
Vice President - Finance and Chief
Financial Officer
March 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
*
- -------------------------------- Chairman of the Board of Directors March 29, 1999
Ronald S. Lauder
/s/ Frederic T. Klinkhammer
- -------------------------------- President, Chief Executive Officer and March 29, 1999
Frederic T. Klinkhammer Director (Principal Executive Officer)
/s/ John A. Schwallie
- -------------------------------- Vice President - Finance and Chief March 29, 1999
John A. Schwallie Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
*
- -------------------------------- Vice President, Secretary and Director March 29, 1999
Nicolas G. Trollope
*
- -------------------------------- Director March 29, 1999
Robert R. Grusky
*
- -------------------------------- Director March 29, 1999
Herbert S. Schlosser
*
- -------------------------------- Director March 29, 1999
Peter R. Goldscheider
* By: /s/ John A. Schwallie
----------------------------
John A. Schwallie
Attorney-in-fact
108
INDEX TO SCHEDULES
Report of Independent Public Accountants on Schedule:.....................S-2
Schedule II: Schedule of Valuation Allowances............................S-3
S-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To: Central European Media Enterprises Ltd.:
We have audited in accordance with auditing standards generally accepted in the
United States, the financial statements of Central European Media Enterprises
Ltd. included in this filing and have issued our report thereon dated March 29,
1999. Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the accompanying
index is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in our audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen & Co.
Hamilton, Bermuda
March 29, 1999
S-2
Schedule II
Schedule of Valuation Allowances
$000s
Balance at Charged to Charged to Balance at
January 1, Costs and Other December
1998 Expenses Accounts Deductions 31, 1998
---------- ---------- ---------- ---------- ---------
Bad debt provision................ 3,658 (225) (555) 393 3,271
Development costs................. 2,660 -- -- -- 2,660
Restructuring costs............... -- 2,552 -- (2,042) 510
Balance at Charged to Charged to Balance at
January 1, Costs and Other December
1997 Expenses Accounts Deductions 31, 1997
---------- ---------- ---------- ---------- ---------
Bad debt provision................ 3,200 1,274 -- (816) 3,658
Development costs................. 996 1,400 264 -- 2,660
Balance at Charged to Charged to Balance at
January 1, Costs and Other December
1996 Expenses Accounts Deductions 31, 1996
---------- ---------- ---------- ---------- ---------
Bad debt provision................ 1,105 2,095 -- -- 3,200
Development costs................. 4,373 714 -- (4,091) 996
S-3