SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-24796
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
(Exact name of registrant as specified in its charter)
BERMUDA N/A
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Clarendon House, Church Street, Hamilton HM CX Bermuda
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 441-296-1431
Indicate by check mark whether registrant: (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for each shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of May 7, 1999
----- -----------------------------
Class A Common Stock, par value $.01 18,506,849
Class B Common Stock, par value $.01 7,177,269
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
Consolidated Balance Sheets as at
March 31, 1999 and December 31, 1998
($000s)
ASSETS
March 31, December 31,
1999 1998
------------- --------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents....................................................... $ 62,726 $44,444
Restricted cash................................................................. 80 67
Accounts receivable (net of allowances of $2,526, $3,271)....................... 26,042 41,237
Program rights costs............................................................ 27,977 29,632
Advances to affiliates.......................................................... 14,216 11,058
Other short-term assets......................................................... 15,653 28,670
------------- --------------
Total current assets............................................................ 146,694 155,108
Investments in unconsolidated affiliates........................................ 25,890 29,357
Loans to affiliates............................................................. 5,614 9,514
Property, plant and equipment (net of depreciation of $47,866, $50,477)......... 60,699 66,282
Program rights costs............................................................ 21,334 21,206
License costs and other intangibles (net of amortization of $5,888, $6,813).... 5,773 6,502
Goodwill (net of amortization of $38,178, $33,968).............................. 66,799 70,196
Note receivable................................................................. 20,071 20,071
Other assets.................................................................... 6,638 7,230
============= ==============
Total assets.................................................................... $ 359,512 $ 385,466
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities........................................ $ 66,524 $ 69,187
Duties and other taxes payable.................................................. 10,508 11,722
Income taxes payable............................................................ 391 1,157
Current portion of credit facilities and obligations under capital leases....... 9,706 10,313
Investments payable............................................................. 5,188 12,281
Advances from affiliates........................................................ 1,124 2,533
------------- --------------
Total current liabilities.............................................. 93,441 107,193
Deferred income taxes........................................................... 225 302
Long-term portion of credit facilities and obligations under capital leases..... 20,030 23,296
Investments payable............................................................. - 2,563
$100,000,000 9 3/8 % Senior Notes due 2004 ..................................... 99,880 99,875
DM 140,000,000 8 1/8 % Senior Notes due 2004 ................................... 76,930 83,729
Other liabilities............................................................... 2,222 2,099
Minority interest in consolidated subsidiaries.................................. 606 702
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY:
Class A Common Stock, $0.01 par value: authorized: 100,000,000 shares at March
31, 1999 and December 31, 1998; issued and outstanding; 18,106,789
at March 31, 1999 and 18,070,789 at December 31, 1998......................... 181 181
Class B Common Stock, $0.01 par value: authorized: 15,000,000 shares at March
31, 1999 and December 31, 1998; issued and outstanding; 7,577,329 at March 31,
1999 and December 31, 1998.................................................... 76 76
Additional paid-in capital...................................................... 356,385 356,378
Accumulated deficit............................................................. (276,260) (288,348)
Accumulated other comprehensive income.......................................... (14,204) (2,580)
------------- --------------
Total shareholders' equity...................................................... 66,178 65,707
------------- --------------
Total liabilities and shareholders' equity...................................... $ 359,512 $ 385,466
============= ==============
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
Consolidated Statements of Operations
($000s, except per share data)
(Unaudited)
For the three months
ended March 31,
-----------------------
1999 1998
Gross revenues............................................................... $ 45,681 $ 43,466
Discounts and agency commissions............................................. (8,681) (9,705)
----------- ------------
Net revenues................................................................. 37,000 33,761
STATION EXPENSES:
Other operating costs and expenses........................................... 20,036 16,713
Amortization of programming rights........................................... 9,617 7,995
Depreciation of station fixed assets and other intangibles................. 4,540 3,927
----------- ------------
Total station operating costs and expenses................................. 34,193 28,635
Selling, general and administrative expenses............................... 6,556 7,008
CORPORATE EXPENSES:
Corporate operating costs and development expenses......................... 5,830 7,190
Amortization of goodwill and allowance for development costs............... 3,397 2,529
----------- ------------
9,227 9,719
Operating loss............................................................... (12,976) (11,601)
Equity in (loss)/income of unconsolidated affiliates (Note 3)................ (4,044) 79
Gain on sale of investment (Note 6).......................................... 25,870 -
Net interest and other income (expense)...................................... (3,713) (4,413)
Foreign currency exchange gain/(loss), net .................................. 8,622 (217)
----------- ------------
Income/(loss) before provision for income taxes, minority interest and
discontinued operations...................................................... 13,759 (16,152)
Provision for income taxes................................................... (1,649) (2,107)
----------- ------------
Income/(loss) before minority interest and discontinued operations 12,110 (18,259)
Minority interest in (income)/loss of consolidated affiliates................ (22) 714
----------- ------------
Income/(loss) from continuing operations..................................... 12,088 (17,545)
Discontinued operations:
Operating loss of discontinued operations - (7,493)
----------- ------------
Net Income/(loss)............................................................ $ 12,088 $ (25,038)
=========== ============
PER SHARE DATA:
Net income/(loss) per share (Note 5):
Continuing operations - Basic and diluted.................................. $ 0.47 $ (0.73)
Discontinued operations - Basic and diluted................................ 0.00 (0.31)
---- ------
Net........................................................................ $ 0.47 $ (1.04)
======= ========
Weighted average common shares used in computing per share amounts:
Basic...................................................................... 25,656 24,001
====== ======
Diluted.................................................................... 25,667 24,001
====== ======
Page 3
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
Consolidated Statements of Shareholders' Equity /
(Deficit) For the period from December 31, 1998
to March 31, 1999
($000s)
(Unaudited)
Accumulated
Comprehensive Class A Class B Other Total
Income Common Common Capital Accumulated Comprehensive Shareholders'
(loss) Stock Stock Surplus Deficit(1) Income(2) Equity
--------------- ----------- ----------- ---------- ------------- -------------- --------------
BALANCE, December 31, 1998. $181 $76 $356,378 $(288,348) $(2,580) $65,707
Comprehensive income:
Net income.............. $12,088 $12,088 $12,088
Other comprehensive
income (loss):
Unrealized translation $(11,624) $(11,624) $(11,624)
adjustments.... ---------------
Comprehensive income.... $464
===============
Stock issued:
Stock option plans............ $7 $7
=========== =========== ========== ============= ============== ==============
BALANCE, March 31, 1999.......... $181 $76 $356,385 $(276,260) $(14,204) $66,178
=========== =========== ========== ============= ============== ==============
..................
(1) Of the accumulated deficit of $276,260 at March 31, 1999, $89,208
represents accumulated losses in unconsolidated affiliates.
(2) Represents foreign currency translation adjustments.
Page 4
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
Consolidated Statements of Cash Flows
For the three months ended March 31, 1999 and 1998
($000s)
(Unaudited)
For the three months ended
March 31,
-----------------------------
1999 1998
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss)....................................................... $ 12,088 $ (25,038)
Adjustments to reconcile net loss to net cash used in operating
activities:
Equity in loss (income) of unconsolidated affiliates................. 4,044 (79)
Depreciation and amortization (excluding amortization of barter
programs)............................................................ 17,862 14,737
Discontinued operations.............................................. - 7,493
Gain on disposal of investment....................................... (25,870) -
Minority interest in income (loss) of consolidated subsidiaries...... 22 (714)
Foreign currency exchange (gain) loss, net........................... (8,622) 217
Accounts receivable.................................................. 10,203 9,231
Cash paid for program rights......................................... (12,003) (9,081)
Advances to affiliates............................................... 973 (137)
Other short-term assets.............................................. (872) (6,053)
Accounts payable and accrued liabilities............................. (5,572) (3,309)
Income and other taxes payable....................................... (1,536) (1,035)
------------- -------------
Net cash used in operating activities ........................... (9,283) (13,768)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in Unconsolidated Affiliates ............................ - (1,153)
Other investments.................................................... (6,056) (81)
Investments in discontinued operations............................... - (15,816)
Cash proceeds from sale of investment................................ 39,260 -
Restricted cash...................................................... (13) (492)
Acquisition of fixed assets.......................................... (3,169) (2,784)
Acquisition of minority interest..................................... - (6,480)
Purchase of business, net of cash acquired.......................... - (699)
Loans and advances to affiliates..................................... 259 -
Payments for license costs, other assets and intangibles............ - (477)
------------- -------------
Net cash provided by (used in) investing activities.............. 30,281 (27,982)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Credit facilities and payments under capital leases.................. 317 (1,281)
Dividends paid to minority shareholders.............................. - (1,117)
Capital contributed by shareholders.................................. 7 814
Advances paid to affiliates.......................................... (1,392) -
Other long-term liabilities.......................................... (145) -
------------- -------------
Net cash provided by financing activities........................ (1,213) (1,584)
------------- -------------
IMPACT OF EXCHANGE RATE FLUCTUATIONS ON CASH (1,503) 205
------------- -------------
Net increase (decrease) in cash and cash equivalents................. 18,282 (43,129)
CASH AND CASH EQUIVALENTS, beginning of period......................... 44,444 104,490
============= =============
CASH AND CASH EQUIVALENTS, end of period............................... $62,726 $61,361
============= =============
Supplemental information:
Cash paid for interest $ 4,757 $ 9,008
============= =============
Income taxes $ 2,830 $ 3,279
============= =============
Page 5
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
Notes to Consolidated Financial Statements
March 31, 1999
1. Organization and Business
Central European Media Enterprises Ltd. ("CME") is a Bermuda
corporation. All references to the "Company" include CME and its direct and
indirect Subsidiaries, and all references to "Subsidiaries" include each
corporation or partnership in which CME has a direct or indirect equity or
voting interest. The Company invests in, develops and operates national and
regional commercial television stations and networks in Central and Eastern
Europe.
Combination Transaction
On March 29, 1999, the Company entered into a Reorganization Agreement
with SBS Broadcasting S.A., a company organized under the laws of Luxembourg
("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 including the Company's outstanding Senior Notes
(which are to remain outstanding following the transaction); (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 368(a) of the
Internal Revenue Code (and thus to be tax-free for U.S. 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 71% of the vote of the Company, has entered into a
Shareholders' Agreement with SBS whereby he has committed to vote his shares of
Class A and Class B Common Stock in favor of the transaction. Certain members of
SBS's management have entered into a Shareholder Agreement with the Company
whereby they have agreed to vote their SBS shares 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.
Page 6
General
Laws, regulations and policies in CME's markets generally restrict the
level of direct or indirect interests that any non-local investor such as CME
may hold in companies holding broadcast licenses. As a result, broadcast
licenses are generally held by companies majority owned by CME's local partners
and CME owns controlling interests in service companies which provide
programming, advertising and other services to the licenseholding companies.
References to 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.
The following table sets forth certain data regarding the Company's
voting interest in each license and service company.
CME Voting CME Voting
License Interest Interest
Country Expiration TV License Company TV Services Company
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 Ukraine Advertising Holding B.V. (UAH)
Discontinued Operations
In December 1998, CME sold its interests in the TVN television
operations in Poland. 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 for the first quarter of 1998 have been restated in order to reflect
the Company's Polish operations as discontinued operations.
Czech Republic
The Company owns a 99% voting and economic interest in Ceska nezavisla
televizni spolecnost, spol. s.r.o. ("CNTS"), with the remaining 1% voting and
economic interest in CNTS held by CET 21, spol. s.r.o. ("CET"). CET holds a
terrestrial television broadcast license in the Czech Republic that expires in
January 2005. Dr. Vladimir Zelezny, the former General Director of 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. A
representative of CET has certain delay and veto rights on non-economic
programming matters related directly to the broadcast license.
Page 7
CNTS provides television programming and other 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 collects all of Nova TV's advertising and
other revenues, and retains as compensation for its services the balance of
those revenues net of Nova TV's operating expenses less CZK 100,000 ($2,800) per
month 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 Chairman took positions that
appear inconsistent with the existing relationship between CNTS and CET. The
Company has obtained evidence indicating that Dr. Zelezny provided the language
for significant aspects of the letter. Among other things, the Chairman
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 with Czech laws and regulations or that the Czech Media Council will
not require modifications of the arrangements between CET and CNTS.
In this connection, CME has been engaged in ongoing 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 to the CNTS Memorandum of Association and Investment Agreement and
the Services Agreement, which modifications CME is resisting. CME has proposed
to CET certain alternative arrangements that it believes would solidify CNTS's
relationship with CET and reduce the likelihood of future conflict. However, no
agreement has yet been reached.
On April 19, 1999, CNTS dismissed Dr. Zelezny from his position as
Executive and General Director of CNTS, for taking actions that exceeded his
authority and that were against the interest of CNTS. After an internal
investigation, it was learned that Dr. Zelezny had executed an unlimited CNTS
guarantee for the liabilities of a Czech television program acquisition company,
AQS a.s. ("AQS"), without any authorization. The investigation also indicated
that Dr. Zelezny had reassigned the program acquisition department of CNTS to
AQS, notified international providers of television programming that AQS would
replace CNTS as the program service provider to Nova TV, and taken other actions
contrary to the interests of CNTS.
Since the dismissal of Dr. Zelezny from his positions of General
Director and Executive of CNTS, CNTS has continued to provide programming and
other services to CET, collect advertising revenues and Nova TV has continued to
operate without interruption. CNTS has announced that it intends to comply with
its legal obligations under the Services Agreement and to cooperate with CET to
enable
Page 8
CET to comply with its obligations under the broadcast license and applicable
Czech law and regulations. Nevertheless, Dr. Zelezny has stated publicly that
unless CNTS and CET resolve their differences, CET might attempt to terminate
its relationship with CNTS and could seek to obtain television services from
another company. Such actions could result in a disruption of Nova TV's
broadcasting or CNTS's operations. Such a disruption, or the ongoing dispute in
general, could lead to the intervention of the Czech Media Council or the Czech
Parliament. Any material disruption of the Nova TV broadcast signal, a
significant reduction or termination of the existing commercial relationship
between CNTS and CET, or other significant changes in the relationship between
CNTS and CET, or the failure of CME and Dr. Zelezny to resolve their differences
in a satisfactory manner could have a material adverse affect on the business
and financial condition of CNTS and the Company.
It is uncertain whether the ongoing dispute with Dr. Zelezny in the Czech
Republic will result in a material reduction in dividends to be paid by CNTS to
the Company in 1999. A material reduction in CNTS's dividend payments to the
Company in 1999 could result in the Company not having adequate cash resources
to meet its operating and capital requirements prior to March 31, 2000. In the
absence of a material change in the commercial relationship between CET and
CNTS, the Company believes that CNTS will likely declare and pay a dividend in
1999 consistent with past practice. In addition, the Company is experiencing
increased legal, accounting and administrative costs as a result of the dispute
with Dr. Zelezny. See also Part II, Item 1 "Legal Proceedings" regarding related
legal proceedings.
Romania
The Company's interest in PRO TV is governed by a Cooperation Agreement
(the "Romanian Agreement") among the Company, Adrian Sarbu and Ion Tiriac,
forming Media Pro International S.A. ("MPI"), through which PRO TV and Acasa,
are operated. MPI provides programming to and sells advertising for the stations
which comprise the PRO TV and Acasa network. Pursuant to the Romanian Agreement,
the Company owns 66% of the equity of MPI. Interests in profits of MPI are equal
to the partners' equity interests. The Company has the right to appoint three of
the five members of the Council of Administration which directs the affairs of
MPI. Although the Company has majority voting power in MPI, with respect to
certain fundamental financial and corporate matters the affirmative vote of
either Mr. Sarbu or Mr. Tiriac is required. The Company owns 49% of the equity
of PRO TV, SRL which holds 20 of the 23 licenses for the stations which comprise
the PRO TV and Acasa network. Messrs. Sarbu and Tiriac own substantially all of
the remainder of PRO TV, SRL. The remaining three licenses for the PRO TV
network together with the licenses for the PRO FM and PRO AM radio networks are
held by Media Pro SRL, a company owned by Messrs. Sarbu and Tiriac. In addition,
in Romania, the Company owns 70% of each of Media Vision SRL ("Media Vision"), a
production and dubbing company, and Video Vision International SRL ("Video
Vision"), a post-production company.
Slovenia
The Company's interest in POP TV and Gajba TV is governed by a
Partnership Agreement among the Company, MMTV 1 d.o.o. Ljubljana ("MMTV") and
Tele 59 d.o.o. Maribor ("Tele 59"), forming Produkcija Plus d.o.o. ("Pro Plus").
Pro Plus provides programming to and sells advertising for the broadcast
licenseholders MMTV and Tele 59 as well as additional affiliates. The Company
currently owns 78% of the equity in Pro Plus, but has an effective economic
interest of 85.5% as a result of its right to 33% of the profits of MMTV and 33%
of the profits of Tele 59. Tele 59 currently owns a 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
Page 9
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 Part II, Item 1 "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 partners. There is currently litigation pending with respect to the
ownership of Markiza. See Part II, Item 1 "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% 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. See Part
II, Item 1 "Legal Proceedings".
Page 10
Hungary
In Hungary, the Company owns a 99% 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 Part II, Item 1
"Legal Proceedings" regarding litigation involving the Company's consortium
Irisz TV. The Company wholly owns Videovox Studio Limited Liability Company
("Videovox"), a Hungarian dubbing and duplication company.
2. Summary of Significant Accounting Policies
Reference is made to the Notes to Consolidated Financial Statements
contained in the Company's December 31, 1998 audited consolidated financial
statements included in the Company's 1998 Annual Report on Form 10-K filed with
the SEC on March 29, 1999. In the opinion of Management, the interim unaudited
financial statements included herein reflect all adjustments necessary,
consisting of normal recurring adjustments, for a fair presentation of such data
on a basis consistent with that of the audited data presented therein. The
consolidated results of operations for interim periods are not necessarily
indicative of the results to be expected for a full year.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company's wholly-owned subsidiaries and the results of Nova TV, PRO TV,
POP TV, Studio 1+1 (for the three months ended March 31, 1999 only), TV3,
Videovox, Media Vision and Video Vision (the "Consolidated Affiliates"), as
consolidated entities and reflect the interests of the minority owners of these
entities for the periods presented, as applicable. The results of Markiza TV and
Studio 1+1 (for the three months ended March 31, 1998 only), (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. 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 for the three months ended March 31,
1998, Studio 1+1 results are accounted for under the equity method. From January
1, 1999, Studio 1+1 is consolidated in all of the Company's financial
statements.
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
Page 11
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
The Company has adopted Statement of Financial Accounting Standards No.
131 ("SFAS 131"), Disclosures about Segments of an Enterprise and Related
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 4).
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. No material impact is expected as a result of the adoption of SFAS
No. 133 when it is applicable.
3. Summary Financial Information for Unconsolidated Affiliates.
As of
-------------------------------------
March 31, 1999 December 31, 1998
Page 12
$000s
----
Markiza TV Markiza TV
-------------- --------------
Current assets.................... 14,219 17,863
Non-current assets................ 21,986 26,682
Current liabilities............... (16,634) (17,703)
Non-current liabilities........... (985) (1,089)
-------------- --------------
Net assets........................ 18,586 25,753
============== ==============
For the three months ended,
--------------------------------------------------
March 31, 1999 March 31, 1998
---------------- ----------------
$000s Studio 1+1
----- Markiza TV Markiza TV Group
---------------- ---------------- ------------
Net revenues................ 6,853 7,772 6,622
Operating (loss) income..... (2,287) (337) 265
Net profit (loss)........... (4,397) 303 199
The Company's share of losses in Unconsolidated Affiliates (after
intercompany eliminations) for the three months ended March 31, 1999 was
$3,178,000 for Markiza TV and $866,000 for certain of the Studio 1+1 Group
entities.
4. Segment Data
The Company manages its business segments primarily on a geographic
basis. The Company's reportable segments are comprised of Nova TV (Czech
Republic), PRO TV (Romania), Markiza TV (Slovakia), POP TV (Slovenia), Studio
1+1 (Ukraine) and TV3 (Hungary). Each operating segment provides products and
services as further described below.
The accounting policies of the various segments are the same as those
described in the "Summary of Significant Accounting Policies" in Note 2. The
Company evaluates the performance of its segments based on segment EBITDA
(earnings before interest, taxes, depreciation and amortization). Costs for
programming amortization are included in segment EBITDA. Costs excluded from
segment EBITDA primarily consist of interest and foreign exchange gains and
losses, corporate expenses and goodwill amortization and equity in losses of
unconsolidated affiliates and other non-recurring charges for impairment of
investments or discontinued operations. The assets and liabilities of the
Company are managed centrally and are reported internally in the same manner as
the consolidated financial statements; thus, no additional information is
provided. Summary information by segment as of and for the three months ended
March 31, 1999 and 1998 is as follows:
SEGMENT FINANCIAL INFORMATION
For the three months ended March 31,
----------------------------------------------------------------------
($000s)
--------------------------------- -----------------------------------
Net Revenues EBITDA
--------------------------------- -----------------------------------
Station 1999 1998 1999 1998
---- ---- ---- ----
Nova TV........................... 20,833 20,080 5,823 8,140
PRO TV ........................... 7,798 7,756 (2,012) (2,461)
POP TV ........................... 4,565 3,684 (444) (1,515)
TV3 .............................. 1,148 1,075 (1,665) (2,529)
Page 13
Studio 1+1......................(1) 2,307 - (995) -
Other Operations ................. 349 1,166 (46) 66
------------------ -------------- ------------------ --------------
Total Consolidated Operations 37,000 33,761 661 1,701
Studio 1+1........................ - 6,622 - 506
Markiza TV ....................... 6,853 7,772 (919) 729
------------------ -------------- ------------------ --------------
Total Unconsolidated Operations 6,853 14,394 (919) 1,235
================== ============== ================== ==============
Total Operations..................... 43,853 48,155 (258) 2,936
================== ============== ================== ==============
Reconciliation to Consolidated Statements of Operations:
Consolidated Operations 661 1,701
Intercompany elimination 130 344
Station depreciation (4,540) (3,927)
Corporate expenses (9,227) (9,719)
------------------ --------------
Operating loss from continuing operations (12,976) (11,601)
================== ==============
(1) Studio 1+1 Group was consolidated effective December 23, 1998. Amounts
shown in the table above for Net Revenues and EBITDA for 1999 differ by
$1,337,000 and $576,000, respectively, from similar information shown in
Selected Combined Financial Information in Item 2. These differences relate to
the use of consolidated numbers in the table above and combined numbers (which
includes Studio 1+1 entities which are accounted for under the equity method) in
Item 2.
5. Earnings Per Share
The Company accounts for earnings per share pursuant to SFAS No. 128,
"Earnings Per Share." Basic net income per common share ("Basic EPS") is
computed by dividing net income by the weighted average number of common shares
outstanding. Diluted net income per common share ("Diluted EPS") is computed by
dividing net income by the weighted average number of common shares and dilutive
common share equivalents then outstanding. SFAS No. 128 requires the
presentation of both Basic EPS and Diluted EPS on the face of the consolidated
statement of operations. A reconciliation between the numerator and denominator
of Basic EPS and Diluted EPS is as follows:
For the quarter ended March 31, 1999
------------------------------------
Net Income Common Net Income Per
---------- ------ --------------
Shares Common Share
------ ------------
Basic EPS
Net income attributable to common stock $12,088 25,656 $0.47
Effect of dilutive securities: stock options - 11 -
------------- -------------- ------------------
Diluted EPS
Net income attributable to common stock and
assumed option exercises....................... $12,088 25,667 $0.47
============= ============== ==================
Diluted EPS, for the three months ended March 31, 1998, does not
include the impact of stock options then outstanding as their inclusion would be
anti-dilutive. Diluted EPS, for the three months ended March 31, 1999, excludes
the effect of
Page 14
certain outstanding stock warrants and options as their inclusion would be
anti-dilutive.
6. Sale of Investment in MobilRom
On March 18, 1999, the Company sold its interest in a Romanian mobile
telephone company, MobilRom S.A. As a result of this transaction the Company
realized a gain of $25,870,000. The impact of MobilRom S.A. on the Company's
operating results for 1998 and 1999 was not material.
7. 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.
Through the quarter ended March 31, 1999, there have been no significant changes
to the restructuring plan.
All payments related to this charge are expected to be finalized by the
end of the third quarter 1999. As of March 31, 1999, $389,000 of restructuring
charges remained in accrued liabilities.
8. Commitments and Contingencies
Financial Commitments - Discontinued or Former Entities
Beginning in 1993, 1A TV, the Company's former television station in
Berlin, Germany, 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 had 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.
In April 1999, the German public bank accepted the Company's proposal of
DM500,000 ($276,000) as full settlement of all outstanding claims. This payment
was made during April 1999.
Page 15
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
Central European Media Enterprises Ltd. ("CME") is a Bermuda
corporation. All references to the "Company" include CME, its direct and
indirect Subsidiaries, and all references to "Subsidiaries" include each
corporation or partnership in which CME has a direct or indirect equity or
voting interest.
The Company is the leading commercial television company in Central and
Eastern Europe. The Company's national private television stations and networks
in the Czech Republic, Slovakia and Slovenia had the leading nationwide audience
shares for 1998 and the first quarter of 1999 and the Company's television
network in Romania had the leading average audience share within its area of
broadcast reach for 1998 and the first quarter of 1999.
The Company's revenues are derived principally from the sale of
television advertising to local, national and international advertisers. The
Company also engages in barter transactions in which its stations exchange
commercial advertising time for goods and services. The Company, like other
television operators, experiences seasonality, with advertising sales tending to
be lowest during the third quarter of each calendar year, which includes the
summer holiday period, and highest during the fourth quarter of each calendar
year. The primary expenses incurred in television operations are programming and
production costs, employee salaries, broadcast transmission expenses and
selling, general and administrative expenses. The Company has incurred and might
in the future incur 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, stockholders or creditors of these entities.
The laws under which the Company's operating Subsidiaries are organized provide
generally that dividends may be declared by the partners or shareholders out of
yearly profits subject to the maintenance of registered capital and required
reserves and after the recovery of accumulated losses.
Selected Combined and Attributable Financial Information
The following tables are neither required by United States generally
accepted accounting principles ("GAAP") nor intended to replace the Consolidated
Financial Statements prepared in accordance with GAAP. The tables set forth
certain combined
Page 16
and attributable financial information for the three months ended March 31, 1999
and 1998 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 (for the three
months ended March 31, 1998 only) not consolidated in the Consolidated
Statements of Operations during the periods shown, are aggregated with those of
the Company's consolidated operations. In the table "Selected Attributable
Financial Information", combined information is adjusted for CME's economic
interest in each entity, which economic interest is the basis used for
consolidation and equity method accounting in the Company's GAAP Consolidated
Financial Statements as of March 31, 1999. 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 information of the unconsolidated entities of the Studio 1+1 Group on a
line-by-line basis, similar to that of the Company's consolidated entities.
Intercompany transactions such as management service charges are not reflected
in the tables. The Company believes that this unaudited combined and
attributable information provides useful disclosure.
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. 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
Page 17
assets), (ii) broadcast selling, general and administrative expenses, and (iii)
cash program rights costs. Cash program rights costs are included in the period
in which payment is made, which may not necessarily correspond to the timing of
program use or amortization. Broadcast cash flow should not be considered as a
substitute measure of operating performance or liquidity prepared in accordance
with GAAP (see the accompanying Consolidated Financial Statements).
Page 18
SELECTED COMBINED FINANCIAL INFORMATION (1)
(unaudited)
($000s)
Three Months Ended March 31,
------------------------------------------------------------------------------------------
Net Revenue EBITDA Broadcast Cash Flow
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
Nova TV...................... 20,833 20,080 5,823 8,140 3,363 6,828
PRO TV....................... 7,798 7,756 (2,012) (2,461) (1,654) (2,290)
Markiza TV .................. 6,853 7,772 (919) 729 (885) (392)
POP TV....................... 4,565 3,684 (444) (1,515) (1,169) (1,139)
Studio 1+1................... 3,644 6,622 (1,571) 506 (1,372) (272)
-------------- ------------- -------------- -------------- -------------- --------------
Total Established Stations........ 43,693 45,914 877 5,399 (1,717) 2,735
TV3.......................... 1,148 1,075 (1,665) (2,529) (1,690) (4,203)
Other Operations (2)......... 349 1,166 (46) 66 (46) 66
============== ============= ============== ============== ============== ==============
Total combined operations......... 45,190 48,155 (834) 2,936 (3,453) (1,402)
============== ============= ============== ============== ============== ==============
SELECTED ATTRIBUTABLE FINANCIAL INFORMATION (1)
(unaudited)
($000s)
Three months Ended March 31,
-----------------------------------------------------------------------------------------
Economic
Interest (3) Net Revenue EBITDA Broadcast Cash Flow
--------------------------- --------------------------- ---------------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
Nova TV................ 99% 20,625 19,879 5,765 8,059 3,329 6,760
PRO TV................. 66% 5,147 5,119 (1,328) (1,624) (1,092) (1,511)
Markiza TV ............ 80% 5,482 6,218 (735) 583 (708) (314)
POP TV................. 85.5% 3,903 3,150 (380) (1,295) (999) (974)
Studio 1+1............. 60% 2,186 3,973 (943) 304 (823) (163)
------------- ------------- ------------- ------------- ------------- -------------
Total Established Stations.. 37,343 38,339 2,379 6,027 (293) 3,798
TV3 ................... 99% 1,137 1,064 (1,648) (2,504) (1,673) (4,161)
Other operations (2) 100% 349 1,166 (46) 66 (46) 66
============= ============= ============= ============= ============= =============
Total attributable operations 38,829 40,569 685 3,589 (2,012) (297)
============= ============= ============= ============= ============= =============
- ------------------------
(1) Important information about these tables appears under the heading
"Selected Combined and Attributable Financial Information" immediately
preceding this table.
(2) Other operations include Videovox.
(3) Economic interest as of March 31, 1999. For comparison between the three
months ended March 31, 1999 and the same period in 1998, all results in
this table are pro forma as if such percentages had also been in place
during the three months ended March 31, 1998
Page 19
EBITDA
The total combined EBITDA for the Established Stations decreased by
$4,522,000 from $5,399,000 for the first quarter of 1998 to $877,000 for the
first quarter of 1999. The decrease was attributable to a combined $6,042,000
decrease in the EBITDA of Nova TV, Markiza TV and Studio 1+1. POP TV and PRO TV
recorded improvements in EBITDA of $1,071,000 and $449,000 respectively.
Nova TV's EBITDA decreased by $2,317,000 to $5,823,000 for the first
quarter of 1999 compared to $8,140,000 for the first quarter of 1999. An
increase in net revenues of $753,000 was offset by an increase in production
expenses and salary and benefits costs relating to managerial changes in
connection with the dismissal of Dr. Zelezny. The increase in production
expenses of $1,598,000 was due to an increase in the cost and in the number of
hours produced.
Studio 1+1 recorded EBITDA of negative $1,571,000 for the first quarter
of 1999 compared to positive EBITDA of $506,000 for the first quarter of 1998.
The lingering effects of the Russian financial crisis and a resulting "wait and
see" approach to the advertising market by the advertising agencies led to a
decrease in the net revenues of Studio 1+1 of $2,978,000. In response to the
weak market conditions Studio 1+1 reduced its station expenses by $901,000 in
the first quarter of 1999 compared to the first quarter of 1998.
Markiza TV recorded negative EBITDA of $919,000 for the first quarter
of 1999, compared to positive EBITDA of $729,000 in the first quarter of 1998.
Net revenues decreased by $919,000, reflecting the current weak economic
conditions in the Slovak Republic resulting from the economic reform measures
implemented by the new government which took power in late 1998. Markiza TV
recorded an increase of $729,000 in station expenses for the first quarter of
1999 compared to the first quarter of 1998. This increase was mainly due to an
increase in amortization of programming and an increase in selling, general and
administrative expenses.
POP TV's EBITDA improved by $1,071,000 to negative $444,000 for the
first quarter of 1999 compared to negative $1,515,000 for the first quarter of
1998. This increase was the result of strong revenue growth of $881,000, for the
first quarter of 1999 compared to the same period last year. POP TV has been
able to capitalize on the growth in the television advertising market in
Slovenia. Station expenses for the first quarter of 1999 were slightly below
those of the first quarter of 1998.
PRO TV's EBITDA improved by $449,000 to negative $2,012,000 for the
first quarter of 1999 compared to negative $2,461,000 for the first quarter of
1998. Net revenues increased by $42,000. This slight revenue growth reflects the
continued slow pace of economic reform within Romania and the continuing effects
of the Russian financial crisis on the Romanian economy. Station expenses for
the first quarter of 1999 were $407,000 below those of the first quarter of
1998. This decrease is due to a reduction in production expenses and lower
marketing costs.
TV3 recorded negative EBITDA of $1,665,000 for the first quarter of
1999 compared to negative EBITDA of $2,529,000 for the first quarter of 1998.
The
Page 20
EBITDA improvement of $864,000 was due to an increase in net revenues of
$73,000 and a $791,000 reduction in station expenses compared to the same period
last year. The reduction in station expenses is due to lower programming
amortization and reduced marketing expenses as TV3 focuses on becoming a niche
channel.
For the reasons described above total combined EBITDA decreased by
$3,770,000 from $2,936,000 for the first quarter of 1998 to negative $834,000
for the first quarter of 1999.
Broadcast Cash Flow
Differences between EBITDA and broadcast cash flow are the result of
timing differences between programming use and programming payments.
Application of Accounting Principles
The results of Markiza TV and Studio 1+1 (for the three months ended
March 31, 1998 only) 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 for the three months ended March 31,
1998, Studio 1+1 results are accounted for under the equity method. From January
1, 1999, Studio 1+1 is consolidated in the Company's financial statements.
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 Nova TV, POP TV, Markiza TV, Videovox, 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.
Page 21
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.
Balance Sheet Income Statement
------------------------------------ --------------------------------------
At At Weighted average for the three
March 31, December 31, months ending March 31,
1999 1998 %Change 1999 1998 % Change
---- ---- ------- ---- ---- --------
Czech koruna equivalent of $1.00 35.85 29.86 (20.1)% 33.49 34.43 2.7%
German mark equivalent of $1.00 1.81 1.67 (8.4)% 1.76 1.82 3.3%
Hungarian forint equivalent of $1.00 238.19 216.84 (9.8)% 225.43 209.06 (7.8)%
Romanian lei equivalent of $1.00 15,272 10,983 (39.1)% 12,520 8,222 (52.3)%
Slovak koruna equivalent of $1.00 41.86 36.91 (13.4)% 39.26 35.13 (11.8)%
Slovenian tolar equivalent of $1.00 177.71 161.20 (10.2)% 170.41 171.94 0.9%
Ukrainian hryvna equivalent of $1.00 3.94 3.43 (14.9)% 3.55 1.97 (80.2)%
The Company's results of operations and financial position during the
first quarter of 1999 were impacted by changes in foreign currency exchange
rates since December 31, 1998.
In limited instances, the Company enters into forward foreign exchange
contracts and purchases foreign currency options to hedge foreign currency
transactions for periods consistent with its identified exposures. Premiums on
foreign currency options are amortized over the option period being hedged.
Results of Operations
Three months ended March 31, 1999 compared to three months ended March 31, 1998
The Company's net revenues increased by $3,239,000, or 10%, to
$37,000,000 for the first quarter of 1999 from $33,761,000 for the first quarter
of 1998. The increase was attributable to increased net revenues at Nova TV, POP
TV, TV3 and the addition of Studio 1+1 as a consolidated entity for the first
quarter of 1999.
POP TV's net revenues increased by $881,000, or 24%, to $4,565,000
mainly due to continued growth in the television advertising market in Slovenia.
Total station operating costs and expenses increased by $5,558,000, or
19%, to $34,193,000 for the first quarter of 1999 from $28,635,000 for the first
quarter of 1998. The increase in total station operating costs and expenses was
primarily attributable to increases in operating costs and expenses at Nova TV,
PRO TV and the addition of Studio 1+1 as a consolidated entity for the
Page 22
first quarter of 1999. Nova TV's operating costs and expenses increased by
$2,357,000, or 19%, to $14,558,000 for the first quarter of 1999. Nova TV's
operating costs and expenses rose primarily as a result of an increase in the
cost and in the number of hours produced and, to a lesser extent, as a result of
increased salary and benefit costs relating to managerial changes in connection
with the dismissal of Dr. Zelezny. See "Czech Republic" below for a further
discussion of Nova TV.
PRO TV's operating costs and expenses increased by $951,000 or 12% to
$9,225,000 for the first quarter of 1999. PRO TV's operating costs and expenses
increased mainly due to an increase in programming amortization as a result of
the second channel Acasa and a higher depreciation charge on the broadcast
equipment needed to expand the signal reach.
Station selling, general and administrative expenses decreased by
$452,000, or 6%, to $6,556,000 for first quarter of 1999 from $7,008,000 for the
first quarter of 1998. The decrease in station selling, general and
administrative expenses was primarily attributable to decreases in the marketing
expenses of POP TV and PRO TV. Station selling, general and administrative
expenses decreased despite the inclusion of Studio 1+1 as a consolidated entity
for the first quarter of 1999.
Corporate operating costs and development expenses for the first
quarter of 1999 and 1998 were $5,830,000 and $7,190,000, respectively, a
decrease of $1,360,000, or 19%. This decrease was attributable to reduced
development activity and lower corporate headcount.
Amortization of goodwill and allowance for development costs increased
by $868,000, or 34%, to $3,397,000 for the first quarter of 1999 from $2,529,000
for the first quarter of 1998. This increase was attributable to increased
goodwill amortization associated with the consolidation of Studio 1+1.
As a result of the above factors, the Company generated an operating
loss of $12,976,000 for the first quarter of 1999 compared to an operating loss
of $11,601,000 for the first quarter of 1998.
Equity in loss of unconsolidated affiliates for the first quarter of
1999 was $4,044,000 compared to an equity in income of unconsolidated affiliates
of $79,000 for the first quarter of 1998. The decrease of $4,123,000 is a result
of Markiza TV recording a loss of $3,178,000 for the three months ended March
31, 1999 compared to a profit of $350,000 for the three months ended March 31,
1998. In addition, certain entities of the Studio 1+1 group which are not
consolidated recorded a loss of $866,000 for the three months ended March 31,
1999.
The Company recorded a gain of $25,870,000 on the sale of its interest
in a Romanian mobile telephone company MobilRom S.A.
Net interest and other income for the first quarter of 1999 was
negative $3,713,000 compared to negative $4,413,000 for the first quarter of
1998. The difference of $700,000, or 16%, is due to a combination of reduced
borrowings at all stations except for POP TV and increased interest on cash
balances.
Page 23
The net foreign currency exchange gain of $8,622,000 for the first
quarter of 1999 compared to a loss of $217,000 for the first quarter of 1998 was
primarily attributable to the effect of a weaker German mark on the Deutsche
mark denominated portion of CME's Senior Notes obligations and the effect of a
weaker Czech koruna on the Czech koruna debt funding for the additional CNTS
purchase.
Provision for income taxes was $1,649,000 for the first quarter of 1999
and $2,107,000 for the first quarter of 1998. The decrease was due to a decrease
in CNTS's taxable income.
Minority interest in income of consolidated subsidiaries was $22,000
for the first quarter of 1999 compared to a minority interest in loss of
consolidated subsidiaries of $714,000 for the first quarter of 1998. This change
was the result of changes in the profitability and, to a lesser extent, changes
in ownership of the consolidated entities.
As a result of these factors, CME's net income was $12,088,000 for the
first quarter of 1999 compared to a net loss of $25,038,000 for the first
quarter of 1998.
Czech Republic
As discussed in Part I, Item 1 under the heading "Czech Republic" and
Part II, Item 1 "Legal Proceedings", the Company is involved in a pending
dispute with Dr. Vladimir Zelezny regarding several matters, including Dr.
Zelezny's actions as General Director and Executive of CNTS prior to his removal
on April 19, 1999, Dr. Zelezny's actions under the 1997 share purchase agreement
under which CME purchased an additional 5.8% interest in CNTS which is the
subject of an arbitration claim filed by the Company, and the terms of the
relationship between CNTS and CET. CET holds the television broadcast license in
the Czech Republic utilized to broadcast Nova TV and Dr. Zelezny owns a 60%
controlling interest in CET. Since April 19, 1999, Nova TV has continued to
operate without interruption and there has been no material decrease in the
station's advertising revenues. Management is reviewing Nova TV's operating
costs and expenses, including recent increases in expenses related to local
production, to determine whether such expenses can be reduced.
Nova TV's net revenues were $20,833,000 for the three months ended
March 31, 1999 and $108,826,000 for 1998, comprising 56% of the Company's
consolidated net revenues for the three months ended March 31, 1999 and 60% of
the Company's consolidated net revenues for 1998. Nova TV's EBITDA was
$5,823,000 for the three months ended March 31, 1999 and $54,887,000 for 1998,
while the Company's overall consolidated EBITDA was $661,000 for the three
months ended March 31, 1999 and $44,796,000 for 1998. If the dispute with Dr.
Zelezny is not resolved in a manner satisfactory to the Company or the
commercial relationship between CNTS and CET is significally reduced or
terminated as a result of this dispute, some or all of Nova TV's revenues may be
lost, which would have a material adverse effect on the Company's results of
operations.
Programming Commitments in Hungary
Page 24
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 totalling $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, of which approximately
$2,129,000 is expected to be taken in the fourth quarter of 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 Part II, Item 1, "Legal Proceedings".
Liquidity and Capital Resources
Net cash used in operating activities was $9,283,000 in the three
months ended March 31, 1999 compared to $13,768,000 for the three months ended
March 31, 1998. The decrease in net cash used in operating activities of
$4,485,000 was primarily due to improved working capital management and, on a
basis which excludes the sale of MobilRom in 1999 and the discontinued
operations in Poland in 1998, improved operating results.
Net cash provided by investing activities was $30,281,000 in the three
months ended March 31, 1999 compared to net cash used in investing activities of
$27,982,000 for the three months ended March 31, 1998. The increase was
primarily attributable to the proceeds received on the sale of the Company's
interest in MobilRom S.A. and no investments during 1999 in discontinued
operations.
Net cash provided by financing activities for the three months ended
March 31, 1999 was $1,213,000 compared to $1,584,000 for the three months ended
March 31, 1998.
On March 18, 1999, the Company sold its interest in a Romanian mobile
telephone company, MobilRom S.A. As a result of this transaction the Company
realized a gain in the first quarter of 1999 of approximately $25,800,000 and
net cash proceeds of approximately $39,260,000.
The Company had cash and cash equivalents of $62,726,000 at March 31,
1999 compared to $44,444,000 at December 31, 1998.
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
Page 25
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.
On August 11, 1997, the Company purchased an indirect 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 March 31, 1999, the Company had paid $23,350,000 of the purchase
price and the agreement provides that the Company is to make two further
payments of $2,625,000 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. At March 31, 1999, no such increase has occurred because the
trading price of the Company's Class A Common Stock has been less than $23.375
on the relevant measurement dates. The Company has filed an arbitration claim
against Dr. Zelezny to recapture the portion of the purchase price previously
paid and to extinguish the remaining payment obligation. (See Part II, Item 1
"Legal Proceedings").
On August 1, 1996, the Company purchased CS's 22% economic interest and
virtually all of CS's voting rights in CNTS for a purchase price of Kc 1 billion
($36,590,000). The Company also entered into a loan agreement with CS to finance
85% of the purchase price. The principal outstanding at March 31, 1999 was Kc
590,080,000 ($16,460,000). Quarterly repayments on the loan are required in the
amount Kc 42,500,000 ($1,186,000) during the period from May 1999 through May
2002, and Kc 37,580,000 ($1,048,000) in August 2002.
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. At March 31, 1999 the Company had no
borrowings under this facility. The availability of the ING Facility is subject
to the satisfaction of various conditions and a successful resolution of the
Czech dispute. (See Part I, Item 1 "Czech Republic").
The Company expects CNTS's future cash requirements to continue to be
satisfied through operating cash flows and available borrowing facilities.
However, as described below the borrowing facilities of CNTS are currently
suspended. CNTS has a line of credit with CS Bank for up to Kc 250,000,000
($6,974,000). This facility is secured by CNTS's equipment, vehicles and
receivables. In October 1997, CNTS entered into a Kc 500,000,000 ($13,949,000)
line of credit with ING Bank N.V. The line of credit may be drawn in Czech
koruna, German marks or United States dollars. CNTS had borrowings of Kc
32,281,000 ($901,000) under the ING line of credit at March 31, 1999. In April
1999, CNTS was informed by CS Bank and ING Bank N.V. that the lines of credit
were unavailable for further draw-down as a result of the
Page 26
current dispute between CNTS and CET (See Part 1, Item 1 "Czech Republic"). The
unavailability of these facilities has had no material impact on CNTS's business
to date.
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 ($460,000), plus interest equal to three
month PRIBOR plus 1.0%, to be paid through December 1999. As of March 31, 1999,
the outstanding balance under the CS Loan was Kc 43,500,000 ($1,214,000).
In April 1998, POP TV entered into a multicurrency $5,000,000 loan
agreement with Creditanstalt AG which matures in May 2005. As of March 31, 1999,
the loan was fully drawn. 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 March 31, 1999, $1,075,000 was outstanding under this facility. The
second facility is a long-term loan for $4,000,000 which matures in December
2002. At March 31, 1999, $3,425,000 was borrowed under this facility. These
facilities are secured by PRO TV's equipment and vehicles.
TV3 has borrowings of HUF 244,125,000 ($1,025,000) from a local
Hungarian bank. The loan matures in December 2000 and is secured by pledges of
certain fixed assets of TV3. During the first quarter of 1999 the Company loaned
$400,000 to TV3 and made approximately $1,102,000 in cash programming payments
on behalf of TV3. In addition, the Company has cash programming payments due for
TV3 in the amount $11,100,000, $4,567,000 and $4,567,000 for 1999, 2000 and 2001
respectively. It is anticipated that the Company will lend up to an additional
$1,500,000 to TV3 throughout 1999.
At March 31, 1999 Innova had borrowings of DM 669,000 ($370,000) on an
overdraft facility from Dresdner bank. This facility is repayable on demand.
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
Page 27
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.
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 timing of the closing of the
transaction with SBS as contemplated by the Reorganization Agreement will also
affect the Company's future cash requirements. The Company is actively investing
in its existing broadcast operations and might engage in the development of
additional broadcast operations. The Company incurs certain expenses in
identifying and pursuing broadcast opportunities before any investment decision
is made. Subject to the events described in the next paragraph, in the event
that the closing of the transaction with SBS as contemplated by the
Reorganization Agreement does not occur later in 1999, the Company believes that
its current cash balances, cash generated from CNTS and local financing of
broadcast operations should be adequate to satisfy the Company's operating and
capital requirements for its current operations through March 31, 2000. To
acquire additional broadcast rights or to fund other significant investments,
the Company would require significant additional financing.
Dividends totaling $19,505,000 in 1998 and $7,972,000 in 1997 were paid
by CNTS to the Company, comprising all dividends paid to the Company from its
television operations during these periods. It is uncertain whether the ongoing
dispute with Dr. Zelezny in the Czech Republic will result in a material
reduction in dividends to be paid by CNTS to the Company in 1999. A material
reduction in CNTS's dividend payments to the Company in 1999 could result in the
Company not having adequate cash resources to meet its operating and capital
requirements prior to March 31, 2000. In the absence of a material change in the
commercial relationship between CET and CNTS, the Company believes that CNTS
will likely declare and pay a dividend in 1999 consistent with past practice. In
addition, the Company is experiencing increased legal, accounting and
administrative costs as a result of the dispute with Dr. Zelezny.
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 Executive 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.
Page 28
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 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 Part I, Item 1 under the heading "Czech Republic",
"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
Page 29
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 Part 1, Item 1 "Czech Republic", include legal and
regulatory conditions and developments 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 3. Quantitative and Qualitative Disclosures About Market Risk
The Company conducts business in a number of foreign currencies. As a
result, it is subject to foreign currency exchange rate risk due to the effects
that foreign exchange rate movements of these currencies have on the Company's
costs and on the cash flows it receives from certain subsidiaries. Several of
the Company's subsidiaries hold long-term debt under credit facilities that
provide for interest at a spread above a basis rate (such as LIBOR). A
significant rise in these basis rates would not materially adversely affect the
Company's business, financial condition or results of operations. The Company
does not utilize derivative financial instruments to hedge against changes in
interest rates. The Company believes that it currently has no material exposure
to market risk associated with activities in derivative or other financial
instruments.
In limited instances the Company enters into forward foreign exchange
contracts to hedge foreign currency exchange rate risk. There were no forward
foreign exchange contracts outstanding at March 31, 1999.
On August 11, 1997, the Company purchased an indirect 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 March 31, 1999, the Company had paid $23,350,000 of the purchase
price and the agreement provides that the Company is to make two further
payments of $2,625,000 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. At March 31, 1999, no such increase has occurred because the
trading price of the Company's Class A Common stock has been less than $23.375
on the relevant measurement dates. The Company has filed an arbitration claim
against Dr. Zelezny to recapture the portion of the purchase price previously
paid and to extinguish the remaining payment obligation. (See Part II, Item 1
"Legal Proceedings").
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
Page 30
On April 26, 1999, a wholly-owned subsidiary of the Company filed an
arbitration claim against Dr. Zelezny before the International Chamber of
Commerce Court of Arbitration in Paris, France. The Company seeks the return of
$23,350,000 paid to Dr. Zelezny, plus interest, and other unspecified damages,
based on breaches by Dr. Zelezny of a share purchase agreement entered into in
1997 under which the Company purchased from Dr. Zelezny a company owned by him
whose sole asset was a 5.8% interest in CNTS. The Company is also seeking the
forgiveness of the $5,187,000 unpaid balance of the purchase price under the
1997 share purchase agreement. The arbitration will be held in Amsterdam, The
Netherlands. In addition, the Company has filed an action for a preliminary
injunction with the Regional Commercial Court in Prague, Czech Republic to
attach certain assets of Dr. Zelezny that would likely be required to satisfy a
judgment against Dr. Zelezny in the action before the International Chamber of
Commerce Court of Arbitration.
On April 26, 1999, CNTS filed an action for a preliminary injunction in
the Regional Commercial Court in Prague, Czech Republic to invalidate 186
applications to transfer CNTS trademarks to CET that had been executed by Dr.
Zelezny and to prohibit CET from using in its business name any designations
identical or confusingly similar to CNTS trademarks. On May 4, 1999, a CET
General Meeting voted to change the name of CET to TV Nova. As a result, CNTS
amended its April 26, 1999 complaint to an action for tortious trademark
infringement against CET. CME, which owns a 1.25% participation interest in CET,
also filed an action in the Regional Commercial Court in Prague, Czech Republic
requesting that the court rule that the May 4, 1999 CET General Meeting was not
validly called because CME's representatives were not allowed to attend the
General Meeting. The Company intends to take all appropriate legal actions to
protect its legal rights in the Czech Republic.
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. In December 1998, the Regional Court of Bratislava
removed Gamatex as the registered owner of Markiza. Following this decision, the
General Meeting of STS in March 1999 approved the transfer of the 50.5% voting
interest to the company Mirox s.r.o. ("Mirox"), a company owned by Dr. Pavol
Rusko, the current General Director of STS. The transfer of the voting interest
is pending registration. There was no material change in the economic interest
in STS which will be owned 80% by the Company, 19.5% by Markiza and 0.5% by
Mirox. A number of legal proceedings are still 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. 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
Page 31
station in Slovenia (the "Kanal A Agreement"). SBS claims to have certain rights
to the equity of Kanal A pursuant to various agreements and 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
courts in Slovenia 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 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
Page 32
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. In April
1999 the Hungarian National Radio and Television Commission filed a Supervisory
request to the Supreme Court of Hungary stating that the decision of the Supreme
Court exceeded the Plaintiff's request and that the decision has other
procedural defects as well. The Supervisory request does not suspend the
enforceability of the decision of the Supreme Court. 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. On April 7, 1999, IRISZ TV requested that the Budapest
Metropolitan Court order the Hungarian National Radio and Television Commission
to enforce the Supreme Court's decision. On April 26, 1999, the Budapest
Metropolitan Court dismissed IRISZ TV's request. IRISZ TV intends to take all
appropriate legal actions to enforce the Supreme Court's decision or to seek
other appropriate resolutions to this dispute.
The Company is, from time to time, a party to litigation that arises in
the normal course of its business operations. The Company is not presently a
party to any such litigation which could reasonably be expected to have a
material adverse effect on its business or operations.
Item 6. Exhibits and Reports on Form 8-K.
a) The following exhibits are attached:
10.1 Amendment, dated as of December 8, 1998 to the Employment Agreement,
dated as of November 21, 1997, by and between CME Development
Corporation and John Schwallie
10.2 Amendment, dated as of December 8, 1998 to the Employment Agreement,
dated as of November 21, 1997, by and between Central European Media
Enterprises Ltd. and John Schwallie
27.01 Financial Data Schedule
b) No reports on Form 8-K were filed during the quarter ended March 31, 1999
Page 33
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 17, 1999 /s/ Frederic T. Klinkhammer
---------------------------
Frederic T. Klinkhammer
Chief Executive Officer
(Duly Authorized Officer)
Date: May 17, 1999 /s/ John A. Schwallie
---------------------
John A. Schwallie
Chief Financial Officer
(Principal Financial Officer)
Page 34
EXHIBIT INDEX
10.1 Amendment, dated as of December 8, 1998 to the Employment Agreement,
dated as of November 21, 1997, by and between CME Development
Corporation and John Schwallie
10.2 Amendment, dated as of December 8, 1998 to the Employment Agreement,
dated as of November 21, 1997, by and between Central European Media
Enterprises Ltd. and John Schwallie
27.01 Financial Data Schedule
Page 35