SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-24796
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
(Exact name of registrant as specified in its charter)
BERMUDA N/A
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Clarendon House, Church Street, Hamilton HM CX Bermuda
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 441-296-1431
Indicate by check mark whether registrant: (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for each shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding as of November 6, 2000
----- ----------------------------------
Class A Common Stock, par value $.08 2,313,346
Class B Common Stock, par value $.08 991,842
PART 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONSOLIDATED BALANCE SHEETS AS AT
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(US$000S, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------- ---------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents ................................................... $ 45,619 $ 36,990
Restricted cash ............................................................. 13,451 4,784
Accounts receivable (net of allowances of $2,077, $2,597) ................... 12,303 15,099
Program rights costs ........................................................ 9,918 9,883
Advances to affiliates ...................................................... 23,516 20,507
Income taxes receivable ..................................................... 7,042 7,640
Other current assets ........................................................ 4,541 8,167
--------- ---------
TOTAL CURRENT ASSETS ........................................................ 116,390 103,070
Investments in unconsolidated affiliates .................................... 19,061 23,095
Loans to affiliates ......................................................... 3,777 4,863
Property, plant and equipment (net of depreciation of $60,913, $56,292) ..... 36,641 48,471
Program rights costs ........................................................ 5,136 8,911
License costs and other intangibles (net of amortization of $10,038, $10,376) 2,293 2,912
Goodwill (net of amortization of $87,075, $79,263) .......................... 9,886 19,393
Note receivable ............................................................. -- 20,071
Deferred tax asset .......................................................... 175 138
Other assets ................................................................ 5,259 5,263
--------- ---------
TOTAL ASSETS ................................................................ $ 198,618 $ 236,187
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued liabilities .................................... $ 53,897 $ 51,504
Duties and other taxes payable .............................................. 10,367 11,678
Income taxes payable ........................................................ 1,023 864
Current portion of credit facilities and obligations under capital leases ... 6,100 6,409
Dividends payable ........................................................... 211 --
Investments payable ......................................................... 5,188 5,188
Advances from affiliates .................................................... 2,189 1,028
--------- ---------
TOTAL CURRENT LIABILITIES ................................................... 78,975 76,671
Long-term portion of credit facilities and obligations under capital leases . 8,929 15,115
$100,000,000 9 3/8 % Senior Notes due 2004 .................................. 99,914 99,897
DM 140,000,000 8 1/8 % Senior Notes due 2004 ................................ 62,997 71,519
Other liabilities ........................................................... 7,829 7,843
Minority interests in consolidated subsidiaries ............................. 52 378
Commitments and Contingencies
SHAREHOLDERS' DEFICIT:
Class A Common Stock, $0.08 par value: authorized:
100,000,000 shares at September 30, 2000 and December 31, 1999; issued and
outstanding; 2,313,346 at September 30, 2000 and at December 31, 1999 ....... 185 185
Class B Common Stock, $0.08 par value: authorized:
15,000,000 shares at September 30, 2000 and December 31, 1999; issued and
outstanding; 991,842 at September 30, 2000 and December 31, 1999 ............ 79 79
Additional paid-in capital .................................................. 356,385 356,385
Accumulated deficit ......................................................... (405,987) (378,218)
Accumulated other comprehensive loss ........................................ (10,740) (13,667)
--------- ---------
TOTAL SHAREHOLDERS' DEFICIT ................................................. (60,078) (35,236)
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT ................................. $ 198,618 $ 236,187
========= =========
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(US$000S, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Gross revenues .................................................... $ 16,386 $ 22,072 $ 59,392 $ 123,784
Discounts and agency commissions .................................. (2,446) (4,534) (10,127) (23,964)
--------- --------- --------- ---------
Net revenues ...................................................... 13,940 17,538 49,265 99,820
STATION EXPENSES:
Other operating costs and expenses ................................ 8,217 12,264 26,150 48,586
Amortization of programming rights ................................ 3,712 28,730 11,834 45,321
Depreciation of station fixed assets and other intangibles ........ 3,739 6,509 19,965 15,996
--------- --------- --------- ---------
Total station operating costs and expenses ........................ 15,668 47,503 57,949 109,903
Selling, general and administrative expenses ...................... 4,118 8,947 12,872 21,645
CORPORATE EXPENSES:
Corporate operating costs and development expenses ................ 2,194 5,106 7,100 14,745
Amortization of goodwill and allowance for development costs ...... 418 42,857 1,254 48,672
--------- --------- --------- ---------
2,612 47,963 8,354 63,417
Operating loss .................................................... (8,458) (86,875) (29,910) (95,145)
Equity in loss of unconsolidated affiliates (Note 3) .............. (3,706) (2,846) (4,200) (7,236)
Net interest and other expense .................................... (3,507) (3,206) (14,121) (10,137)
Foreign currency exchange gain/(loss), net ........................ 4,890 (4,266) 3,644 8,711
Gain on sale of investment ........................................ -- -- 17,186 25,870
Other income ...................................................... -- 8,250 -- 8,250
--------- --------- --------- ---------
Loss before provision for income taxes, minority interest and
discontinued operations ........................................... (10,781) (88,943) (27,401) (69,687)
(Provision for)/recovery of income taxes ......................... (221) 1,572 (410) (3,935)
--------- --------- --------- ---------
Loss before minority interest and discontinued operations ......... (11,002) (87,371) (27,811) (73,622)
Minority interest in loss of consolidated subsidiaries ............ 8 296 42 203
--------- --------- --------- ---------
Loss from continuing operations ................................... (10,994) (87,075) (27,769) (73,419)
DISCONTINUED OPERATIONS:
Operating loss of discontinued operations (Hungary) ............... -- (2,957) -- (8,037)
Loss on disposal of discontinued operations (Hungary) ............. -- (1,913) -- (1,913)
--------- --------- --------- ---------
NET LOSS .......................................................... $ (10,994) $ (91,945) $ (27,769) $ (83,369)
========= ========= ========= =========
PER SHARE DATA:
Net Loss per share (Note 5):
Continuing operations - Basic and diluted ......................... $ (3.33) $ (27.13) $ (8.40) $ (22.88)
Discontinued operations - Basic and diluted ....................... -- (1.52) -- (3.10)
--------- --------- --------- ---------
Total ............................................................. $ (3.33) $ (28.65) $ (8.40) $ (25.98)
========= ========= ========= =========
Weighted average common shares used in computing per share amounts:
Basic ............................................................. 3,305 3,209 3,305 3,209
========= ========= ========= =========
Diluted ........................................................... 3,305 3,209 3,305 3,209
========= ========= ========= =========
Page 3
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
FOR THE PERIOD FROM DECEMBER 31, 1999 TO SEPTEMBER 30, 2000
(US$000S)
(UNAUDITED)
ACCUMULATED
COMPREHENSIVE CLASS A CLASS B OTHER TOTAL
INCOME/ COMMON COMMON CAPITAL ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
(LOSS) STOCK STOCK SURPLUS (DEFICIT)(A) INCOME/(LOSS)(B) (DEFICIT)
------ ----- ----- ------- ------------ ---------------- ---------
BALANCE, December 31, 1999........ 185 79 356,385 (378,218) (13,667) (35,236)
Comprehensive income/(loss):
Net loss....................... (27,769) (27,769) (27,769)
Other comprehensive income:
Unrealized translation
adjustments ................. 2,927 2,927 2,927
--------
Comprehensive loss............. (24,842)
========
----- ----- ------- ------------ ---------------- ---------
BALANCE, September 30, 2000....... 185 79 356,385 (405,987) (10,740) (60,078)
===== ===== ======= ============ ================ =========
(a) Of the accumulated deficit of $405,987 at September 30, 2000, $100,385
represents accumulated losses in unconsolidated affiliates.
(b) Represents foreign currency translation adjustments.
Page 4
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(US$000S)
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2000 1999
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................. $ (27,769) $ (83,369)
Adjustments to reconcile net loss to net cash used in operating activities:
Equity in loss of unconsolidated affiliates ............................. 4,200 7,236
Depreciation and amortization (excluding amortization of barter programs) 34,121 112,924
Discontinued operations ................................................. -- 9,950
Gain on disposal of investment .......................................... (17,186) (25,870)
Minority interest in loss of consolidated subsidiaries .................. (42) (203)
Foreign currency exchange gain, net ..................................... (3,644) (8,711)
Accounts receivable ..................................................... 1,873 22,949
Cash paid for program rights ............................................ (10,562) (22,122)
Advances to affiliates .................................................. (537) (3,083)
Other current assets .................................................... 1,832 (11,533)
Accounts payable and accrued liabilities ................................ 4,140 (11,053)
Income and other taxes payable .......................................... (1,841) 413
--------- ---------
Net cash used in operating activities ................................. (15,415) (12,472)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Other investments ....................................................... (287) (6,056)
Investments in discontinued operations .................................. -- (8,891)
Cash proceeds from disposal of discontinued operations .................. 4,416 39,260
Cash proceeds from disposal of investment ............................... 37,250 --
Restricted cash ......................................................... (8,788) (1,125)
Acquisition of fixed assets ............................................. (891) (7,262)
Loans and advances to affiliates ........................................ 247 883
Payments for license costs, other assets and intangibles ................ (1,429) (196)
--------- ---------
Net cash provided by investing activities ............................. 30,518 16,613
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Credit facilities and payments under capital leases ..................... (4,466) (4,877)
Capital contributed by shareholders ..................................... -- 7
Other long-term liabilities ............................................. 2 (53)
--------- ---------
Net cash used in financing activities ................................. (4,464) (4,923)
--------- ---------
IMPACT OF EXCHANGE RATE FLUCTUATIONS ON CASH .............................. (2,010) (1,202)
--------- ---------
Net increase (decrease) in cash and cash equivalents ................... 8,629 (1,984)
CASH AND CASH EQUIVALENTS, beginning of period ............................ 36,990 43,354
========= =========
CASH AND CASH EQUIVALENTS, end of period .................................. $ 45,619 $ 41,370
========= =========
Supplemental information:
Cash paid for interest .................................................. $ 9,143 $ 18,913
========= =========
Income taxes ............................................................ $ 288 $ 93
========= =========
Supplemental disclosures of non-cash financing transactions:
As part of the February 21, 2000 sale of substantially all of its Hungarian
operations to SBS, programming rights valued at $12,700 and associated
liabilities of $12,195 were transferred to SBS.
Page 5
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
1. ORGANIZATION AND BUSINESS
Central European Media Enterprises Ltd. ("CME") is a Bermuda corporation.
All references to the "Company" include CME and its direct and indirect
Subsidiaries, and all references to "Subsidiaries" include each corporation or
partnership in which CME has a direct or indirect equity or voting interest. The
Company invests in, develops and operates national and regional commercial
television stations and networks in Central and Eastern Europe.
STATUS OF NOVA TV DISPUTE
The Company owns a 99% voting and economic interest in Ceska nezavisla
televizni spolecnost, spol. s.r.o. ("CNTS"). CET 21, spol. s.r.o. ("CET") holds
a terrestrial television broadcast license in the Czech Republic that expires in
January 2005. Beginning in 1994, CNTS provided television programming and other
services to CET, which broadcasts the Nova TV signal, and Nova TV became one of
the most successful television stations in Europe. Pursuant to an Agreement on
Cooperation in Ensuing Services for Television Broadcasting with CET dated May
21, 1997 (the "Cooperation Agreement"), CNTS provided television and programming
services to Nova TV, and in consideration therefor, CNTS collected all of Nova
TV's advertising and other revenues, and retained as compensation for its
services the balance of those revenues net of Nova TV's operating expenses less
Kc 100,000 ($2,500) per month payable to CET.
On April 19, 1999, CNTS dismissed Dr. Vladimir Zelezny from his position as
Executive and General Director of CNTS, for taking actions that exceeded his
authority, that breached his fiduciary duties and that were against the
interests of CNTS. Dr. Zelezny had executed an unlimited CNTS guarantee for the
liabilities of a Czech television program acquisition company, AQS a.s. ("AQS"),
without any authorization. Further investigation also indicated that Dr. Zelezny
had reassigned the program acquisition department of CNTS to AQS, notified
international providers of television programming that AQS would replace CNTS as
the program service provider to Nova TV, and taken other actions contrary to the
interests of CNTS.
On April 26, 1999, a wholly-owned subsidiary of the Company filed an
arbitration claim against Dr. Zelezny with the International Chamber of
Commerce's International Court of Arbitration in Paris, France. The claim in the
arbitration is for the return of $23,350,000 paid to Dr. Zelezny, plus interest,
and other damages, based on breaches by Dr. Zelezny of a share purchase
agreement entered into in 1997 under which this wholly-owned subsidiary of the
Company purchased from Dr. Zelezny a company owned by him whose sole asset was a
5.8% interest in CNTS. The Company is also
Page 6
seeking the forgiveness of the $5,188,000 unpaid balance of the purchase price
under the 1997 share purchase agreement.
From April 29 to May 5, 2000, the arbitral tribunal conducted a final
hearing in Amsterdam. A decision in the arbitration is expected in the fourth
quarter of 2000.
On August 5, 1999, CET pre-empted CNTS's transmission and began broadcasting
a substitute signal for Nova TV from a site other than CNTS's studios. In
addition, on the same day, CNTS received notification from CET that CET was
withdrawing from the Cooperation Agreement allegedly due to CNTS's failure to
supply CET with the daily program log for Nova TV on August 4, 1999. CET
representatives also stated publicly that CET would not utilize the services of
CNTS for Nova TV in the future. CET has continued to pre-empt all of CNTS's
programming for Nova TV.
As a result of CET's actions, CNTS has been unable to generate revenues and
its operations have been suspended. On September 9, 1999, the Company announced
the suspension of technical and production operations at CNTS and CNTS has since
dismissed 265 employees. The continued suspension of CNTS's operations has had a
material adverse effect on the Company.
CNTS is governed by a Memorandum of Association and Investment Agreement
(the "Memorandum of Association"). The Company believes that the Memorandum of
Association, the Cooperation Agreement and course of dealing over the life of
Nova TV establish that CNTS is legally entitled to be the exclusive provider of
television and related services to CET for Nova TV.
On August 9, 1999, CNTS filed an action against CET in the Regional
Commercial Court of Prague in which CNTS requested the court to declare the
withdrawal of CET from the Cooperation Agreement to be invalid and the
Cooperation Agreement to be in full force and effect, to issue an order
prohibiting CET from entering into television or advertising service
relationships with other companies on the basis that CNTS is entitled to provide
such services to CET for Nova TV on an exclusive basis under the Cooperation
Agreement, and to issue an order compelling CET to broadcast programming
supplied by CNTS on Nova TV. On May 4, 2000, the Commercial Court ruled that CET
is obliged to broadcast Nova TV exclusively in cooperation with CNTS, its
contractual service organization, pursuant to the Cooperation Agreement. This
ruling will become enforceable only if and when it is affirmed in an appeal that
is currently pending. No hearings on the appeal have as yet been scheduled. See
Part II, Item 1, "Legal Proceedings".
The Company believes that CET's actions violate the Cooperation Agreement
and CET's obligations under the CNTS Memorandum of Association, as well as Czech
media laws.
On August 23, 1999, Ronald S. Lauder, the non-Executive Chairman of the
Company's Board of Directors, instituted arbitration proceedings against
Page 7
the Czech Republic under the 1992 Bilateral Investment Treaty between the United
States and the Czech Republic. Mr. Lauder initiated the proceedings in his
personal capacity as a U.S. national who owns or controls (by virtue of his
voting control over CME) an investment in the Czech Republic. The claim
primarily asserts that the Czech Republic harmed and effectively expropriated
Mr. Lauder's investment in CNTS by taking unfair, inequitable and discriminatory
actions -- in the form of expressly approving an exclusive relationship between
CNTS and CET to entice CME's investment of foreign capital, and later changing
its position -- and by failing to act to remedy the effects of those actions or
the improper actions of Dr. Zelezny. Mr. Lauder seeks restitution of his
investment and/or monetary damages and other relief arising from harm caused to
CNTS by the Czech Republic's actions. The arbitration is taking place before a
tribunal of three arbitrators pursuant to the Arbitration Rules of the United
Nations Commission on International Trade Law. A hearing on the matter is
scheduled to begin on March 5, 2001.
On February 22, 2000, a wholly owned subsidiary of the Company, duly
incorporated and existing under the laws of The Netherlands, instituted
arbitration proceedings against the Czech Republic under the 1991 Bilateral
Investment Treaty between The Netherlands and the Czech Republic. The claims
asserted by the Dutch subsidiary are substantially similar to those asserted by
Mr. Lauder in the arbitration proceedings that he has instituted in his personal
capacity against the Czech Republic. The claim seeks restitution of the
subsidiary's investment and/or monetary damages and other relief arising from
harm caused to CNTS (and therefore to the subsidiary) by the Czech Republic's
actions. The arbitration is taking place before a tribunal of three arbitrators
pursuant to the Arbitration Rules of the United Nations Commission on
International Trade Law. A preliminary hearing is scheduled for November 17,
2000. A hearing on the merits is not yet scheduled.
SENIOR NOTES RESTRUCTURING
The Company has outstanding two tranches of Senior Notes, the principal of
which becomes due in August 2004 (the "Senior Notes"). The United States dollar
tranche totals $100,000,000 in principal amount and bears interest at a rate of
9.375% per annum. The German mark tranche totals DM 140,000,000 ($63,063,000) in
principal amount and bears interest at a rate of 8.125% per annum. On October
20, 2000 the Company entered into an agreement (the "Noteholders Agreement")
with certain of its Noteholders ("Consenting Holders"). The Noteholders
Agreement was reached with holders of over 60% of the 9.375% Senior Notes and
holders of over 60% of the 8.125% Senior Notes. The Noteholders Agreement
resulted from discussions commenced with a group of holders of the Senior Notes
in August 2000 relating to a possible consensual restructuring of the Senior
Notes. CME determined the need to restructure the Senior Notes as a result of an
ongoing dispute involving its operations in the Czech Republic (see above under
the heading "Status of Nova TV Dispute").
Pursuant to the Noteholders Agreement, the Company made the semi-annual
interest payment on the Senior Notes which was due on August 15,
Page 8
2000. As a result of such payment, the Company is no longer in default under the
indentures relating to the Senior Notes. The Consenting Holders have agreed to
accept their pro rata share of $100 million in cash (including the interest
payment due on August 15, 2000), 25% of the equity of the Company and four-year
warrants for 5% of the equity of the Company in exchange for their Senior Notes
if such an offer is made by the Company to the holders of the Senior Notes and
such restructuring of the Senior Notes is consummated on or prior to January 15,
2001. The Company is currently seeking to raise new financing to provide it with
the financial resources to purchase the Senior Notes on the terms previously
described. The exercise price of the warrants will be equal to the per share
investment price paid for the equity of the Company by new investors in
connection with the restructuring of the Senior Notes. A material development
relating to the financial condition and/or prospects of the Company constitutes
a termination event under the Noteholders Agreement.
The Company can make no assurance that it will be able to raise the
financing needed to purchase the Senior Notes pursuant to the terms of the
Noteholders Agreement. If the Company is unable to raise new financing to
purchase the Senior Notes pursuant to the terms of the Noteholders Agreement
then the Company will likely be unable to make required interest payments on the
Senior Notes after 2001. An Event of Default under the Senior Notes would occur
if a required interest payment is not made within 30 days of its due date. If an
Event of Default occurs under the Senior Notes, the Trustee under the Indentures
or the holders of the Senior Notes may accelerate all of the Company's
obligations under the Senior Notes, including the payment of the entire
principal amount of the Senior Notes. If payment of the entire principal amount
of the Senior Notes was accelerated, the Company would have insufficient funds
to meet the obligation.
The Company believes, and its independent public accountants have confirmed,
that the audit opinion accompanying its year end financial statements will
contain a going concern qualification if the Company has not been able to raise
the financing needed to purchase the Senior Notes, or the Company, as a result
of one or more of its claims against Dr. Zelezny, CET or the Czech Republic, has
not reached a cash settlement or been awarded damages or a penalty that it has
been able to collect.
CZECH REPUBLIC TAX AUDIT
CNTS has been the subject of a VAT inspection by the Czech Republic tax
authorities for the years 1997 and 1998. As a result of this inspection the
Czech tax authorities have levied an initial assessment seeking VAT payments of
Kc319,267,000 ($7,978,000). Additional penalties up to approximately 120% of
this amount may also be levied. The Czech authorities have asserted that CNTS
was providing certain services to CET and that these services should have been
subject to VAT. In 1996 CNTS was audited by the financial authorities for income
tax, VAT and personnel taxes for the years 1993 to 1995 and no material
assessment was made. The business relationship between CNTS and CET had not
materially changed from 1995 to August 5, 1999. As a result of the tax
inspection the tax authorities have frozen CNTS' 1998 and 1999 income tax
prepayments in the
Page 9
amount of Kc281,790,000 ($7,042,000). In addition, the tax authorities are
investigating the 1999 CNTS tax return which has extended the period for return
of the income tax prepayments. These income tax prepayments would have become
payable by the Czech tax authorities to CNTS one month after submission of the
CNTS annual income tax return. To date, the tax authorities have not issued a
final VAT assessment and the tax inspections are still pending. The Company and
CNTS will contest any unfavorable VAT assessment.
REPUBLIC OF SLOVENIA TAX AUDIT
The Company's subsidiary in Slovenia, Produkcija Plus d.o.o. (Pro Plus, see
"Slovenia" below) has been the subject of an income tax inspection by the
Republic of Slovenia tax authorities for the years 1995 to 1998. As a result of
these inspections the Slovene tax authorities have levied an assessment seeking
unpaid income taxes, customs duties and interest charges of SIT 1,073,000,000
($4,523,000). The Slovene authorities have asserted that capital contributions
and loans made by CME in the years 1995 and 1996 to Pro Plus should be
extraordinary revenue to Pro Plus. On this basis, Pro Plus made a profit in 1995
and 1996 for which it owes income taxes and interest. Additionally, the fixed
assets imported as capital contributions would now be subject to customs duties
which were not paid.
Pro Plus is contesting this assessment to the courts in Slovenia and has
received a temporary order delaying the payment of the assessment pending the
final outcome of the court proceedings.
KANAL A PURCHASE
On October 11, 2000 the Company completed a transaction through which the
Company acquired control over the economics and the programming of Kanal A, for
$12,500,000. Kanal A is the second leading commercial television broadcaster in
Slovenia. As a result of the transaction, 90% of the Kanal A shares are being
held by Superplus Holding ("Superplus") which is owned by individuals who are
holding the share of Superplus in trust for the Company until the Slovene media
law is clarified or until the Company determines final ownership.
SBS TRANSACTION
On February 21, 2000 the Company sold to SBS Broadcasting S.A. ("SBS")
substantially all of its Hungarian operations for $16,000,000. $12,700,000 of
the purchase price has been applied to pay the programming liabilities for the
territory of Hungary which were assumed by SBS from CME and $3,300,000 plus the
net current assets of the Hungarian operations was settled in cash in March
2000. The net current assets of the Hungarian operations are subject to final
determination.
On February 21, 2000, the Company and SBS also entered into an option
agreement with respect to the ITI Note (the "ITI Note Option
Page 10
Agreement"). The ITI Note was acquired by the Company in connection with the
sale of its interest in the TVN television operations in Poland to International
Trading and Investments Holding S.A. ("ITI") in December 1998. The ITI Note is
in the principal amount of $40,000,000 and bears interest at a rate of 5% per
annum and matures on December 10, 2001. On June 29, 2000 SBS exercised its call
option on the ITI Note for $37,250,000 plus accrued interest. This resulted in a
reported gain of $17,186,000.
NASDAQ NATIONAL MARKET SYSTEM DELISTING
On October 10, 2000 the Company's Class A Common Stock was delisted from the
Nasdaq National Market. The Company's Class A Common Stock is now quoted on the
Over the Counter Bulletin Board under the ticker symbol CETVF.OB.
GENERAL
Laws, regulations and policies in CME's markets generally restrict the level
of direct or indirect interests that any non-local investor such as CME may hold
in companies holding broadcast licenses. As a result, broadcast licenses are
generally held by companies majority owned by CME's local partners and CME owns
controlling interests in service companies which provide programming,
advertising and other services to the license holding companies. References to
PRO TV, Acasa, POP TV, Gajba TV, Markiza TV and Studio 1+1 in this report may be
to either the license company or the service companies or both, as the case may
be.
The following table sets forth certain data regarding the Company's voting
interest in each license and service company.
CME
LICENSE VOTING CME VOTING
COUNTRY EXPIRATION TV LICENSE COMPANY INTEREST TV SERVICES COMPANY INTEREST
- ------- ---------- ------------------ -------- ------------------- --------
Romania........... 2004-2008 Pro TV S.R.L............. 49% MPI................. 66%
Media Pro S.R.L.......... 0%
Slovenia.......... 2003-2007 Tele 59.................. 10% PRo Plus............ 78%
MMTV..................... 10%
Slovak Republic... 2007 Markiza-Slovakia s.r.o... 0% STS................. 49%
Ukraine........... 2007 Studio 1+1............... 15% INnova, IMS, UAH.... 60%
Prioritet........... 50%(1)
(1) 50% interest owned by Ukraine Advertising Holding B.V. (UAH).
Note: See "Status of Nova TV Dispute" above for a discussion on the ongoing
dispute between CNTS and CET.
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
Page 11
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 18
licenses for the stations which comprise the PRO TV network. Messrs. Sarbu and
Tiriac own substantially all of the remainder of PRO TV, SRL. The remaining four
licenses for the News Channel, Acasa TV and PRO Sport 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 Tele 59 and a 10% direct equity interest in MMTV. The Company also
owns a 20% equity interest in MTC Holding d.o.o. ("MTC") which owns the
remaining 90% equity interest in MMTV. 76% of MTC's equity is being separately
held by a Slovene person, in trust for the Company, until the Slovene media law
is clarified or until the Company determines final ownership. Voting power and
interests in profits of Pro Plus are equal to the partners' equity interests.
All major decisions concerning the affairs of Pro Plus are made by the general
meeting of partners and require a 70% affirmative vote. Certain fundamental
financial and corporate matters require an 85% affirmative vote of the partners.
On October 11, 2000 the Company completed a transaction through which the
Company acquired control over the economics and the programming of Kanal A.
Kanal A is the second leading commercial television broadcaster in Slovenia. As
a result of the transaction, 90% of the Kanal A shares are being held by
Superplus which is owned by individuals who are holding the shares of Superplus
in trust for the Company until the Slovene media law is clarified or until the
Company determines final ownership.
Page 12
SLOVAK REPUBLIC
The Company's interest in Markiza TV is governed by a Participants Agreement
dated September 28, 1995 (the "Slovak Agreement") between the Company and
Markiza-Slovakia s.r.o. ("Markiza") forming Slovenska Televizna Spolocnost,
s.r.o. ("STS"). Pursuant to the Slovak Agreement, the Company is required to
fund all of the capital requirements of, and holds a 49% voting interest and an
80% economic interest in STS. Markiza, which holds the television broadcast
license, and STS have entered into an agreement under which STS is entitled to
conduct television broadcast operations pursuant to the license. On an ongoing
basis, the Company is entitled to 80% of the profits of STS, except that until
the Company is repaid its capital contributions plus a priority return at the
rate of 6% per annum on such capital contributions, 90% of the profits will be
paid to the Company. A Board of Representatives directs the affairs of STS, the
composition of which includes two designees of the Company and three designees
(two of whom have been named) of Markiza; however, all significant financial and
operational decisions of the Board of Representatives require a vote of 80% of
its members. In addition, certain fundamental corporate matters are reserved for
decision by a general meeting of partners and require a 67% affirmative vote of
the partners. There is currently litigation pending with respect to the
ownership of Markiza.
UKRAINE
The Studio 1+1 Group consists of several entities in which the Company holds
direct or indirect interests. The Company owns a 60% equity interest in each of
Innova Film GmbH ("Innova"), Ukraine Advertising Holding B.V. ("UAH") and
International Media Services ("IMS"). UAH holds a 50% equity interest in
Prioritet, a Ukrainian company engaged in advertising sales. Innova holds 100%
of Intermedia, a Ukrainian company ("Intermedia"), which in turn holds a 30%
equity interest in a separate Ukrainian company which holds the license to
broadcast programming and sell advertising on UT-2 (the "UT-2 License"). Innova,
IMS, Intermedia and Prioritet have entered into arrangements regarding the
provision of programming and advertising sales services to Studio 1+1. Interests
in profits of each entity in the Studio 1+1 Group are equal to equity interests
held in such entities. All significant decisions of the entities in the Studio
1+1 Group are reserved for decision of the shareholders, requiring a majority
vote (other than decisions of the shareholders of the Ukrainian company which
holds the UT-2 broadcast license, which require a 75% vote). Certain fundamental
corporate matters of these entities require 61% shareholder approval.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reference is made to the Notes to Consolidated Financial Statements
contained in the Company's December 31, 1999 audited consolidated financial
statements included in the Company's 1999 Annual Report on Form 10-K filed with
the SEC on March 15, 2000. In the opinion of Management, the interim unaudited
financial statements included herein reflect all
Page 13
adjustments necessary, consisting of normal recurring adjustments, for a fair
presentation of such data on a basis consistent with that of the audited data
presented therein. The consolidated results of operations for interim periods
are not necessarily indicative of the results to be expected for a full year.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company's wholly-owned subsidiaries and the results of PRO TV, POP TV,
Studio 1+1, Media Vision, Video Vision and CNTS (the "Consolidated Affiliates"),
as consolidated entities and reflect the interests of the minority owners of
these entities for the periods presented, as applicable. The results of Markiza
TV and certain entities of the Studio 1+1 group (the "Unconsolidated
Affiliates") in which the Company has, or during the periods presented had,
minority or non-controlling ownership interests, are included in the
accompanying consolidated financial statements using the equity method of
accounting.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting year. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications were made to prior period amounts to conform to
current period classifications.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -- NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.
Pursuant to SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133
Page 14
- - An Amendment of FASB Statement No. 133", which was issued in June 1999, SFAS
No. 133 will be effective for fiscal years beginning after June 15, 2000
(January 1, 2001 for CME). A company may also implement the Statement as of the
beginning of any fiscal quarter after issuance (that is, fiscal quarters
beginning June 16, 1999 and thereafter). SFAS No. 133 cannot be applied
retroactively. SFAS No. 133 must be applied to (a) derivative instruments and
(b) certain derivative instruments embedded in hybrid contracts that were
issued, acquired, or substantively modified after either December 31, 1997 or
1998, at the company's election.
The Company occasionally enters into forward foreign exchange contracts. No
material impact is expected as a result of the adoption of SFAS No. 133 when it
is applicable. The Company plans to adopt SFAS No. 133 on the effective date
noted above.
3. SUMMARY FINANCIAL INFORMATION FOR MARKIZA TV
SEPTEMBER 30, 2000 DECEMBER 31, 1999
MARKIZA TV MARKIZA TV
$000'S $000'S
------ ------
Current assets.................. 13,128 16,303
Non-current assets............ 12,345 15,864
Current liabilities............. (16,428) (16,354)
Non-current liabilities........ (1,154) (835)
------- -------
Net assets...................... 7,891 14,978
======= =======
FOR THE THREE MONTHS ENDED,
---------------------------
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
MARKIZA TV MARKIZA TV
$000'S $000'S
------ ------
Net revenues.................. 5,398 5,760
Operating loss................. (2,908) (2,624)
Net loss......................... (4,028) (2,632)
FOR THE NINE MONTHS ENDED,
--------------------------
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
MARKIZA TV MARKIZA TV
$000'S $000'S
------ ------
Net revenues.................. 21,965 21,869
Operating loss................. (3,143) (3,908)
Net loss........................ (5,402) (6,413)
The Company's share of losses in Unconsolidated Affiliates (after
intercompany eliminations) for the nine months ended September 30, 2000 was
$3,759,000 for Markiza TV and $441,000 for certain of the Studio 1+1 Group
entities.
4. SEGMENT DATA
Page 15
The Company manages its business segments primarily on a geographic basis.
The Company's reportable segments are comprised of PRO TV (Romania), Markiza TV
(Slovakia), POP TV (Slovenia), Studio 1+1 (Ukraine) and CNTS (Czech Republic).
Each operating segment provides products and services as further described
below.
The Company evaluates the performance of its segments based on segment
EBITDA (earnings before interest, taxes, depreciation and amortization). Costs
for programming amortization are included in segment EBITDA. Costs excluded from
segment EBITDA primarily consist of interest and foreign exchange gains and
losses, corporate expenses and goodwill amortization and equity in losses of
unconsolidated affiliates and other non-recurring charges for impairment of
investments or discontinued operations. The assets and liabilities of the
Company are managed centrally and are reported internally in the same manner as
the consolidated financial statements, thus no additional information is
provided. Summary information by segment as of and for the three and nine months
ended September 30, 2000 and 1999 is as follows:
SEGMENT FINANCIAL INFORMATION
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(US$000S)
NET REVENUES EBITDA
STATION 2000 1999 2000 1999
------- ---- ---- ---- ----
PRO TV............................... 7,368 7,529 (1,561) (1,013)
POP TV................................ 3,741 3,736 (228) (741)
Studio 1+1 (1)........................ 2,085 1,795 (250) (735)
CNTS (2).............................. 746 4,476 (55) (29,912)
Other Operations.................... 0 2 (13) (2)
------ ------ ------ -------
Total Consolidated Operations...... 13,940 17,538 (2,107) (32,403)
Markiza TV........................... 5,398 5,760 (1,814) (1,271)
------ ------ ------ -------
Total Unconsolidated Operations... 5,398 5,760 (1,814) (1,271)
------ ------ ------ -------
Total Operations........................ 19,338 23,298 (3,921) (33,674)
====== ====== ====== =======
RECONCILIATION TO CONSOLIDATED STATEMENTS OF OPERATIONS:
CONSOLIDATED OPERATIONS.......... (2,107) (32,403)
Station depreciation................ (3,739) (6,509)
Corporate expenses............... (2,612) (47,963)
------ -------
OPERATING LOSS FROM CONTINUING OPERATIONS (8,458) (86,875)
====== =======
(1) Amounts shown in the table above for Net Revenues for the three months
ending September 30, 2000 and 1999 differ by $841,000 and $1,507,000,
respectively, from similar information shown in Selected Combined Financial
Information in Item 2. Amounts shown in the table above for EBITDA for the
three months ending September 30, 2000 and 1999 differ by $(519,000) and
$(859,000), respectively, from similar information shown in Selected
Combined Financial Information in Item 2. These
Page 16
differences relate to the use of consolidated numbers in the table above
and combined numbers (which includes Studio 1+1 entities which are
accounted for under the equity method) in Item 2.
(2) CNTS ceased broadcast operations during 1999. See above under "Status of
Nova TV Dispute" for a further discussion on Nova TV and the ongoing
dispute between CNTS and CET.
SEGMENT FINANCIAL INFORMATION
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(US$000S)
NET REVENUES EBITDA
STATION 2000 1999 2000 1999
------- ---- ---- ---- ----
PRO TV............................... 26,128 25,062 (1,323) (3,103)
POP TV................................ 14,527 15,555 2,241 1,157
Studio 1+1 (1)........................ 6,738 6,223 (882) (2,511)
CNTS (2).............................. 1,867 52,972 (1,609) (11,258)
Other Operations.................... 5 8 (18) (17)
------ ------- ------ -------
Total Consolidated Operations.......... 49,265 99,820 (1,591) (15,732)
Markiza TV........................... 21,965 21,869 345 188
------ ------- ------ -------
Total Unconsolidated Operations....... 21,965 21,869 345 188
------ ------- ------ -------
Total Operations.......................... 71,230 121,689 (1,246) (15,544)
====== ======= ====== =======
RECONCILIATION TO CONSOLIDATED STATEMENTS OF OPERATIONS:
CONSOLIDATED OPERATIONS............ (1,591) (15,732)
Station depreciation.................. (19,965) (15,996)
Corporate expenses................... (8,354) (63,417)
------- -------
OPERATING LOSS FROM CONTINUING OPERATIONS (29,910) (95,145)
======= =======
(1) Amounts shown in the table above for Net Revenues for the nine months
ending September 30, 2000 and 1999 differ by $3,783,000 and $4,050,000,
respectively, from similar information shown in Selected Combined Financial
Information in Item 2. Amounts shown in the table above for EBITDA for the
nine months ending September 30, 2000 and 1999 differ by $(221,000) and
$(2,341,000), respectively, from similar information shown in Selected
Combined Financial Information in Item 2. These differences relate to the
use of consolidated numbers in the table above and combined numbers (which
includes Studio 1+1 entities which are accounted for under the equity
method) in Item 2.
(2) CNTS ceased broadcast operations during 1999. See above under "Status of
Nova TV Dispute" for a further discussion on Nova TV and the ongoing
dispute between CNTS and CET.
5. 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
Page 17
shares and dilutive common share equivalents then outstanding. During the
periods presented, diluted loss per share was equivalent to basic loss per share
as the inclusion of stock options would have had an anti-dilutive effect on EPS.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
---------------------------------------------
NET LOSS PER
NET LOSS COMMON SHARES COMMON SHARE
-------- ------------- ------------
Basic EPS
---------
Net loss attributable to common stock............ $(10,994) 3,305 $(3.33)
Effect of dilutive securities: stock options..... - -
-------- ----- ------
Diluted EPS
-----------
Net loss attributable to common stock and assumed
option exercises................................. $(10,994) 3,305 $(3.33)
======== ===== ======
Diluted EPS, for the three months ended September 30, 2000, excludes the
effect of certain outstanding stock options as their inclusion would be
anti-dilutive.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
---------------------------------------------
NET LOSS PER
NET LOSS COMMON SHARES COMMON SHARE
-------- ------------- ------------
Basic EPS
---------
Net loss attributable to common stock............ $(91,945) 3,209 $(28.65)
Effect of dilutive securities: stock options..... - -
-------- ----- -------
Diluted EPS
-----------
Net loss attributable to common stock and assumed
option exercises................................. $(91,945) 3,209 $(28.65)
======== ===== =======
Diluted EPS, for the three months ended September 30, 1999, excludes the
effect of certain outstanding stock options as their inclusion would be
anti-dilutive.
Page 18
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
--------------------------------------------
NET LOSS PER
NET LOSS COMMON SHARES COMMON SHARE
-------- ------------- ------------
Basic EPS
---------
Net loss attributable to common stock............ $(27,769) 3,305 $(8.40)
Effect of dilutive securities: stock options..... - -
-------- ----- ------
Diluted EPS
-----------
Net loss attributable to common stock and assumed
option exercises................................. $(27,769) 3,305 $(8.40)
======== ===== ======
Diluted EPS, for the nine months ended September 30, 2000, excludes the
effect of certain outstanding stock options as their inclusion would be
anti-dilutive.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
--------------------------------------------
NET INCOME PER
NET INCOME COMMON SHARES COMMON SHARE
---------- ------------- ------------
Basic EPS
---------
Net income attributable to common stock........ $(83,369) 3,209 $(25.98)
Effect of dilutive securities: stock options... - - -
-------- ----- -------
Diluted EPS
-----------
Net income attributable to common stock and assumed
option exercises............................... $(83,369) 3,209 $(25.98)
======== ===== =======
Diluted EPS, for the nine months ended September 30, 1999, excludes the
effect of certain outstanding stock options as their inclusion would be
anti-dilutive.
6. SUBSEQUENT EVENTS
KANAL A PURCHASE
On October 11, 2000 the Company completed a transaction through which the
Company acquired control over the economics and the programming of Kanal A, for
$12,500,000. Kanal A is the second leading commercial television broadcaster in
Slovenia. As a result of the transaction, 90% of the Kanal A shares are being
held by Superplus which is owned by individuals who are holding the shares of
Superplus in trust for the Company until the Slovene media law is clarified or
until the Company determines final ownership. The Company anticipates that this
transaction will result in the Company recognizing a significant amount of
goodwill.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
Page 19
Central European Media Enterprises Ltd. ("CME") is a Bermuda corporation.
All references to the "Company" include CME, its direct and indirect
Subsidiaries, and all references to "Subsidiaries" include each corporation or
partnership in which CME has a direct or indirect equity or voting interest.
The Company's national private television stations and networks in Slovakia
and Slovenia had the leading nationwide audience shares for 1999 and the first
nine months of 2000 and the Company's television network in Romania had the
leading average audience share within its area of broadcast reach for 1999 and
the first nine months of 2000.
The Company's revenues are derived principally from the sale of television
advertising to local, national and international advertisers. The Company also
engages in barter transactions in which its stations exchange commercial
advertising time for goods and services. The Company, like other television
operators, experiences seasonality, with advertising sales tending to be lowest
during the third quarter of each calendar year, which includes the summer
holiday period, and highest during the fourth quarter of each calendar year. The
primary expenses incurred in television operations are programming and
production costs, employee salaries, broadcast transmission expenses and
selling, general and administrative expenses. The Company has incurred and might
in the future incur expenses conducting pre-operating activities, as well as
reorganizing existing affiliate entities which hold the broadcast licenses.
The primary internal sources of cash available for corporate operating costs
and development expenses are dividends and other distributions from
Subsidiaries. To date, the only Subsidiary to distribute dividends has been CNTS
which suspended operations on August 5, 1999. See Item 1, "Status of Nova TV
Dispute" for a further discussion on Nova TV and the ongoing dispute between
CNTS and CET. This suspension has resulted in CNTS being unable to distribute
dividends and consequently affected the major internal source of cash available
for corporate operating costs and development expenses. The Company's ability to
obtain dividends or other distributions is subject to, among other things,
restrictions on dividends under applicable local laws and foreign currency
exchange regulations of the jurisdictions in which its Subsidiaries operate. The
Subsidiaries' ability to make distributions is also subject to the legal
availability of sufficient operating funds not needed for operations,
obligations or other business plans and, in some cases, the approval of the
other partners, stockholders or creditors of these entities. The laws under
which the Company's operating Subsidiaries 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
Page 20
The following tables are neither required by United States generally
accepted accounting principles ("GAAP") nor intended to replace the Consolidated
Financial Statements prepared in accordance with GAAP. The tables set forth
certain combined and attributable financial information for the three and nine
months ended September 30, 2000 and 1999 for the Company's operating entities.
This financial information departs materially from GAAP.
In the tables "Selected Combined Financial Information," revenues and
operating expenses of Markiza TV and certain entities of the Studio 1+1 Group
not consolidated in the Consolidated Statements of Operations during the periods
shown, are aggregated with those of the Company's consolidated operations. In
the tables "Selected Attributable Financial Information", combined information
is adjusted for CME's economic interest in each entity, which economic interest
is the basis used for consolidation and equity method accounting in the
Company's GAAP Consolidated Financial Statements as of September 30, 2000.
The tables are presented solely for additional analysis and not as a
presentation of results of operations of each component, nor as combined or
consolidated financial data presented in accordance with GAAP. See "Application
of Accounting Principles". The following supplementary unaudited combined and
attributable information includes certain financial information of Markiza TV
and of the unconsolidated entities of the Studio 1+1 Group on a line-by-line
basis, similar to that of the Company's consolidated entities. Intercompany
transactions such as management service charges are not reflected in the tables.
The Company believes that this unaudited combined and attributable information
provides useful disclosure.
EBITDA consists of earnings before interest, income taxes, depreciation and
amortization of intangible assets (which does not include programming rights).
EBITDA is provided because it is a measure of operating performance commonly
used in the television industry. It is presented to enhance an understanding of
the Company's operating results and is not intended to represent cash flow or
results of operations in accordance with GAAP for the periods indicated.
The term "station expenses" used in the discussion of EBITDA immediately
following the tables refers to the total of a station's (i) other operating
costs and expenses, (ii) amortization of programming rights and (iii) selling,
general and administrative expenses.
Page 21
"Broadcast cash flow", a broadcasting industry measure of performance, is
defined as net broadcast revenues, less (i) station operating costs and expenses
(excluding depreciation and amortization of acquired programming and of
intangible assets), (ii) broadcast selling, general and administrative expenses,
and (iii) cash program rights costs. Cash program rights costs are included in
the period in which payment is made, which may not necessarily correspond to the
timing of program use or amortization. Broadcast cash flow should not be
considered as a substitute measure of operating performance or liquidity
prepared in accordance with GAAP (see the accompanying Consolidated Financial
Statements).
Page 22
SELECTED COMBINED FINANCIAL INFORMATION (1)
THREE MONTHS ENDED SEPTEMBER 30,
(US$000'S)
(UNAUDITED)
-----------------------------------------------------------------
NET REVENUES EBITDA BROADCAST CASH FLOW
------------------- -------------------- -------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
PRO TV.................. 7,368 7,529 (1,561) (1,013) (785) (346)
Markiza TV.............. 5,398 5,760 (1,814) (1,271) (696) (379)
POP TV.................. 3,741 3,736 (228) (741) 181 (346)
Studio 1+1.............. 2,926 3,302 (769) (1,594) (281) (789)
------ ------ ------ ------ ------ ------
TOTAL STATIONS 19,433 20,327 (4,372) (4,619) (1,581) (1,860)
====== ====== ====== ====== ====== ======
SELECTED ATTRIBUTABLE FINANCIAL INFORMATION (1)
THREE MONTHS ENDED SEPTEMBER 30,
(US$000'S)
(UNAUDITED)
--------------------------------------------------------------------------------------
ECONOMIC INTEREST NET REVENUES EBITDA BROADCAST CASH FLOW
------------------- ------------------- ----------------- -------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
PRO TV........ 66% 4,863 4,969 (1,030) (669) (518) (228)
Markiza TV.... 80% 4,318 4,608 (1,451) (1,017) (557) (303)
POP TV........ 85.5% 3,199 3,194 (195) (634) 155 (296)
Studio 1+1.... 60% 1,756 1,981 (461) (956) (169) (473)
------ ------ ------ ------ ------ ------
TOTAL STATIONS 14,136 14,752 (3,137) (3,276) (1,089) (1,300)
====== ====== ====== ====== ====== ======
(1) Important information about these tables appears under the heading "Selected
Combined and Attributable Financial Information" immediately preceding this
table.
(2) EBITDA and Broadcast Cash Flow data for 1999 has been restated to exclude
the effect of intercompany transactions.
Page 23
SELECTED COMBINED FINANCIAL INFORMATION (1)
NINE MONTHS ENDED SEPTEMBER 30,
(US$000'S)
(UNAUDITED)
-----------------------------------------------------------------
NET REVENUES EBITDA BROADCAST CASH FLOW
------------------- ------------------- -------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
PRO TV.................. 26,128 25,062 (1,323) (3,103) (767) (1,236)
Markiza TV.............. 21,965 21,869 345 188 1,883 1,633
POP TV.................. 14,527 15,555 2,241 1,157 3,145 1,085
Studio 1+1.............. 10,521 10,273 (1,103) (4,852) (100) (2,579)
------ ------ ------ ------ ----- ------
TOTAL STATIONS 73,141 72,759 160 (6,610) 4,161 (1,097)
====== ====== ====== ====== ===== ======
SELECTED ATTRIBUTABLE FINANCIAL INFORMATION (1)
NINE MONTHS ENDED SEPTEMBER 30,
(US$000'S)
(UNAUDITED)
----------------------------------------------------------------------------------------
ECONOMIC INTEREST NET REVENUES EBITDA BROADCAST CASH FLOW
------------------- ------------------- ------------------- -------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
PRO TV........ 66% 17,244 16,541 (873) (2,048) (506) (816)
Markiza TV.... 80% 17,572 17,495 276 150 1,506 1,306
POP TV........ 85.5% 12,421 13,300 1,916 989 2,689 928
Studio 1+1.... 60% 6,313 6,164 (662) (2,911) (60) (1,547)
------ ------ --- ------ ----- ------
TOTAL STATIONS 53,550 53,500 657 (3,820) 3,629 (129)
====== ====== === ====== ===== ======
(1) Important information about these tables appears under the heading "Selected
Combined and Attributable Financial Information" immediately preceding this
table.
(2) EBITDA and Broadcast Cash Flow data for 1999 has been restated to exclude
the effect of intercompany transactions.
Page 24
EBITDA
The total combined EBITDA for the Company's stations increased by $247,000
from negative $4,619,000 for the third quarter of 1999 to negative $4,372,000
for the third quarter of 2000. This increase was as a result of EBITDA increases
at Studio 1+1 of $825,000 and POP TV of $513,000 offset by EBITDA decreases at
PRO TV of $548,000 and Markiza TV of $543,000.
Studio 1+1's EBITDA increased by $825,000 to negative $769,000 for the third
quarter of 2000 from negative $1,594,000 for the third quarter of 1999. This
increase was achieved despite a reduction of $376,000 in Studio 1+1's net
revenues for the third quarter of 2000 compared to the third quarter of 1999.
This increase was as a result of a reduction in operating costs of $1,201,000
for the third quarter of 2000 compared to the third quarter of 1999. This
reduction in operating costs was primarily as a result of reductions in
amortization of program rights costs.
POP TV's EBITDA increased by $513,000 to negative $228,000 for the third
quarter of 2000 compared to negative $741,000 for the third quarter of 1999.
This increase was primarily as a result of a reduction in operating costs of
$508,000 for the third quarter of 2000 compared to the third quarter of 1999.
In local currency terms POP TV recorded net revenues for the third quarter of
2000 that were approximately 24% higher than the third quarter of 1999. The
reduction in operating costs was primarily as a result of reductions in
amortization of program rights costs and reductions in salary and benefits
costs.
PRO TV's EBITDA decreased by $548,000 to negative $1,561,000 for the third
quarter of 2000 compared to negative $1,013,000 for the third quarter of 1999.
This decrease was partially as a result of a decrease of $161,000 in net
revenues and partially as a result of an increase of $387,000 in the operating
costs of PRO TV for the third quarter of 2000 compared to third quarter of 1999.
The decrease in net revenues was as a result of the European Soccer
Championships and the Olympic Games being shown exclusively by Romanian state
television. The increase in operating costs was primarily as a result of an
increase in salary and benefits costs due to the introduction of a new
employment tax law and an increase in production expenses as a result of new
show formats partially offset by reductions in amortization of program rights
costs.
Markiza TV recorded an EBITDA decrease of $543,000 from negative $1,271,000
for the third quarter of 1999 to negative $1,814,000 for the third quarter of
2000. This decrease was as a result of an increase in operating costs of
$181,000 coupled with a decrease of $362,000 in net revenues for the third
quarter of 2000 compared to the third quarter of 1999. The decrease in net
revenues was as a result of the appreciation of the US dollar against the Slovak
koruna. In local currency terms the net revenues of Markiza TV increased by 6%
for the third quarter of 2000 compared to the third quarter of
Page 25
1999. The increase in operating costs was primarily as a result of an increase
in selling, general and administrative expenses in particular, marketing and
consulting services partially offset by a reduction in amortization of program
rights costs.
For the reasons described above total combined EBITDA increased by $247,000
from negative $4,619,000 for the third quarter of 1999 to negative $4,372,000
for the third quarter of 2000.
BROADCAST CASH FLOW
Differences between EBITDA and broadcast cash flow are the result of timing
differences between programming use and programming payments.
APPLICATION OF ACCOUNTING PRINCIPLES
The results of Markiza TV and certain entities of the Studio 1+1 Group have
been accounted for using the equity method such that CME's interests in net
earnings or losses of those operations is included in the consolidated earnings
and an adjustment is made to the carrying value at which the investment is
recorded on the Consolidated Balance Sheet. The Company records other
investments at the lower of cost or market value.
FOREIGN CURRENCY TRANSLATION
The Company generates revenues primarily in Romanian lei ("ROL"), Slovak
korunas ("Sk"), Slovenian tolar ("SIT") and Ukrainian hryvna ("Hrn") and incurs
expenses in those currencies as well as German marks, British pounds and United
States dollars. The Romanian lei, Slovenian tolar, Ukrainian hryvna and Slovak
koruna are managed currencies with limited convertibility. The Company incurs
operating expenses for acquired programming in United States dollars and other
foreign currencies. For entities operating in economies considered non-highly
inflationary, including POP TV, Markiza TV and certain entities of the Studio
1+1 Group, balance sheet accounts are translated from foreign currencies into
United States dollars at the relevant period end exchange rate; statement of
operations accounts are translated from foreign currencies into United States
dollars at the weighted average exchange rates for the respective periods. The
resulting translation adjustments are reflected as a component of shareholders'
equity with no effect on the consolidated statements of operations.
PRO TV and certain entities of the Studio 1+1 Group operate in economies
considered highly inflationary. Accordingly, non-monetary assets are translated
at historical exchange rates, monetary assets are translated at current exchange
rates and translation adjustments are included in the determination of net
income. Currency translation adjustments relating to transactions of the Company
in currencies other than the functional currency of the entity involved are
reflected in the operating results of the Company.
Page 26
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 NINE MONTHS
SEPTEMBER 30, DECEMBER 31, ENDING SEPTEMBER 30,
2000 1999 %CHANGE 2000 1999 % CHANGE
---- ---- ------- ---- ---- --------
German mark equivalent of $1.00 2.22 1.95 (13.8)% 2.14 1.87 (14.4)%
Romanian lei equivalent of $1.00 24,177 18,255 (32.4)% 20,527 14,626 (40.3)%
Slovak koruna equivalent of $1.00 49.37 42.27 (16.8)% 45.08 41.61 (8.3)%
Slovenian tolar equivalent of $1.00 237.24 196.77 (20.6)% 218.07 179.99 (21.2)%
Ukrainian hryvna equivalent of $1.00 5.44 5.22 (4.2)% 5.44 4.32 (25.9)%
The Company's results of operations and financial position during the three
and nine months ended September 30, 2000 were impacted by changes in foreign
currency exchange rates since December 31, 1999.
In limited instances, the Company enters into forward foreign exchange
contracts and purchases foreign currency options to hedge foreign currency
transactions for periods consistent with its identified exposures. Premiums on
foreign currency options are amortized over the option period being hedged.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
The Company's net revenues decreased by $3,598,000, or 21%, to $13,940,000
for the third quarter of 2000 from $17,538,000 for the third quarter of 1999.
The decrease was primarily attributable to the suspension of the broadcast
operations of CNTS and partially attributable to decreases in the net revenues
of PRO TV. See Item 1, "Status of Nova TV Dispute" for a further discussion on
Nova TV and the ongoing dispute between CNTS and CET. PRO TV's net revenues
decreased by $161,000, or 2%, for the third quarter of 2000 compared to the
third quarter of 1999. This decrease was as a result of the European Soccer
Championships and the Olympic Games being shown exclusively by Romanian state
television. The net revenues of the consolidated entities of the Studio 1+1
Group increased by $290,000, or 16%, for the third quarter of 2000 compared to
the third quarter of 1999. POP TV's US dollar net revenues increased by $5,000,
or 0.1%, for the third quarter of 2000 compared to the third quarter of 1999.
This increase would have been even greater had the US dollar not continued to
appreciate against the Slovenian tolar in the third quarter of 2000. In local
currency terms POP TV's net revenues increased by approximately 24% for the
third quarter of 2000 compared to the third quarter of 1999.
Total station operating costs and expenses (including amortization of
program rights and depreciation of fixed assets and other intangibles) decreased
by $31,835,000, or 67%, to $15,668,000 for the third quarter of 2000 from
$47,503,000 for the third quarter of 1999. The decrease in total station
operating costs and expenses was primarily attributable to the
Page 27
cessation of broadcasting by CNTS and partially attributable to reductions at
POP TV and the consolidated entities of the Studio 1+1 Group. During the third
quarter of 1999 the Company recorded a write down on the full value of the CNTS
programming library. See Item 1, "Status of Nova TV Dispute" for a further
discussion on Nova TV and the ongoing dispute between CNTS and CET. POP TV and
the consolidated entities of the Studio 1+1 Group recorded decreases in station
operating costs and expenses for the third quarter of 2000 compared to the third
quarter of 1999 of $677,000 and $352,000, respectively. POP TV reduced
amortization of program rights costs by $365,000 for the third quarter of 2000
compared to the third quarter of 1999. POP TV's other operating costs and
expenses decreased by $214,000 primarily as a result of decreases in salary and
benefits costs and decreases in production costs. The consolidated entities of
the Studio 1+1 Group reduced other operating costs and expenses by $229,000
primarily as a result of reductions in production expenses and salary and
benefits costs. The consolidated entities of the Studio 1+1 Group recorded an
increase of $137,000 in program rights costs for the third quarter of 2000
compared to the third quarter of 1999. PRO TV's Station operating costs and
expenses increased by $254,000 as a result of an increase in production expenses
relating to new show formats and an increase in salary and benefits costs as a
result of the introduction of a new employment tax law, partially offset by a
reduction of $672,000 in program rights costs.
Station selling, general and administrative expenses decreased by
$4,829,000, or 54%, to $4,118,000 for the third quarter of 2000 from $8,947,000
for the third quarter of 1999. The decrease in station selling, general and
administrative expenses was primarily attributable to the cessation of
broadcasting by CNTS. See Item 1, "Status of Nova TV Dispute" for a further
discussion on Nova TV and the ongoing dispute between CNTS and CET. The
consolidated entities of the Studio 1+1 Group decreased station selling, general
and administrative expenses by $14,000. POP TV increased station selling,
general and administrative expenses by $71,000 primarily as a result of
increases in marketing and equipment costs. PRO TV increased station selling,
general and administrative expenses by $43,000 primarily as a result of an
increase in equipment costs.
Corporate operating costs and development expenses for the third quarter of
2000 and 1999 were $2,194,000 and $5,106,000, respectively, a decrease of
$2,912,000, or 57%. This decrease is as a result of reduced corporate expenses
and lower corporate headcount.
Amortization of goodwill and allowance for development costs decreased by
$42,439,000, or 99%, to $418,000 for the third quarter of 2000 from $42,857,000
for the third quarter of 1999. For the third quarter of 1999 the Company
recorded amortization of goodwill relating to the purchases of additional equity
interests in CNTS made by the Company in August 1996 and August 1997. Due to the
cessation of broadcasting by CNTS and the subsequent write-off of goodwill
during the third quarter of 1999, no such charge for the third quarter of 2000
was recorded, leading to the reduction in amortization of goodwill and
allowances for development costs. See Item 1,
Page 28
"Status of Nova TV Dispute" for a further discussion on Nova TV and the ongoing
dispute between CNTS and CET.
As a result of the above factors, the Company generated an operating loss of
$8,458,000 for the third quarter of 2000 compared to an operating loss of
$86,875,000 for the third quarter of 1999.
Equity in loss of unconsolidated affiliates of $3,706,000 for the third
quarter of 2000 compares to an equity in loss of unconsolidated affiliates of
$2,846,000 for the third quarter of 1999. This change of $860,000, or 30%, is as
a result of higher losses of Markiza TV and certain entities of the Studio 1+1
Group for the third quarter of 2000 compared to the third quarter of 1999.
Net interest and other expense increased by $301,000 to $3,507,000 for the
third quarter of 2000 from $3,206,000 for the third quarter of 1999. This
increase is primarily due to a reduction in interest income as a result of the
sale of the ITI Notes. See Item 1, "SBS Transaction".
A net foreign currency exchange gain of $4,890,000 for the third quarter of
2000 compares to a net foreign currency exchange loss of $4,266,000 for the
third quarter of 1999. The foreign currency exchange gain is a result 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 outstanding
Czech koruna denominated debt of the Company incurred in connection with the
Company's 1996 purchase of an additional economic interest in CNTS.
Provision for income taxes increased by $1,793,000 to $221,000 for the third
quarter of 2000 from a recovery of income tax position of $1,572,000 for the
third quarter of 1999. The recovery of income tax position was primarily as a
result of the cessation of broadcasting by CNTS and the subsequent loss reported
by CNTS for the third quarter of 1999. See Item 1, "Status of Nova TV Dispute"
for a further discussion on Nova TV and the ongoing dispute between CNTS and
CET. In the third quarter of 2000 the Company's corporate entities incurred
higher income taxes than in the third quarter of 1999.
Minority interest in loss of consolidated subsidiaries was $8,000 for the
third quarter of 2000 compared to $296,000 for the third quarter of 1999. This
change was the result of the cessation of broadcasting by CNTS and the
subsequent lower loss reported by CNTS for the third quarter of 2000 compared to
the third quarter of 1999. See Item 1, "Status of Nova TV dispute" for a further
discussion on Nova TV and the ongoing dispute between CNTS and CET.
During 1999 the Company agreed to sell substantially all of its assets in
Hungary. The sale has resulted in the Company's operations in Hungary being
recorded as discontinued operations.
Page 29
As a result of these factors, the net loss of the Company was $10,994,000
for the third quarter of 2000 compared to a net loss of $91,945,000 for the
third quarter of 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
The Company's net revenues decreased by $50,555,000, or 51%, to $49,265,000
for the first nine months of 2000 from $99,820,000 for the first nine months of
1999. The decrease was attributable to the suspension of the broadcast
operations of CNTS. See Item 1, "Status of Nova TV Dispute" for a further
discussion on Nova TV and the ongoing dispute between CNTS and CET. PRO TV's net
revenues increased by $1,066,000, or 4%, for the first nine months of 2000
compared to the first nine months of 1999. The net revenues of the consolidated
entities of the Studio 1+1 Group increased by $515,000, or 8%. POP TV's US
dollar net revenues decreased by $1,028,000, or 7%, as a result of the continued
strength of the US dollar against the Slovenian tolar. In local currency terms
POP TV's net revenues increased by approximately 13%.
Total station operating costs and expenses (including amortization of
program rights and depreciation of fixed assets and other intangibles) decreased
by $51,954,000, or 47%, to $57,949,000 for the first nine months of 2000 from
$109,903,000 for the first nine months of 1999. The decrease in total station
operating costs and expenses was primarily attributable to the cessation of
broadcasting by CNTS and partially attributable to reductions at PRO TV and POP
TV. See Item 1, "Status of Nova TV Dispute" for a further discussion on Nova TV
and the ongoing dispute between CNTS and CET. POP TV and PRO TV recorded
decreases in station operating costs and expenses for the first nine months of
2000 compared to the first nine months of 1999 of $1,867,000 and $634,000,
respectively. POP TV and PRO TV reduced amortization of program rights costs by
$1,213,000 and $1,348,000 respectively, for the first nine months of 2000
compared to the first nine months of 1999. POP TV's other operating costs and
expenses decreased by $436,000 primarily as a result of reductions in salary and
benefits costs. PRO TV's other operating costs and expenses increased by
$856,000 primarily as a result of an increase in production expenses as a result
of new show formats partially offset by reductions in salary and benefits costs
and equipment and engineering expenses. The consolidated entities of the Studio
1+1 Group reduced other operating costs and expenses by $815,000 primarily as a
result of reductions in salary and benefits costs and production expenses. These
cost reductions for the consolidated entities of the Studio 1+1 Group were
offset by an additional charge of $7,197,000 for amortization of goodwill. This
charge is the result of a Company review of the carrying value of the goodwill
relating to the Studio 1+1 asset and the subsequent decision to write the
goodwill down. This review was conducted according to SFAS 121, "Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed
of", and the remaining goodwill relating to the Studio 1+1 asset is $7,869,000.
Page 30
Station selling, general and administrative expenses decreased by
$8,773,000, or 41%, to $12,872,000 for the first nine months of 2000 from
$21,645,000 for the first nine months of 1999. The decrease in station selling,
general and administrative expenses was primarily attributable to the cessation
of broadcasting by CNTS. See Item 1, "Status of Nova TV Dispute" for a further
discussion on Nova TV and the ongoing dispute between CNTS and CET. In addition,
POP TV, the consolidated entities of the Studio 1+1 Group and PRO TV decreased
station selling, general and administrative expenses by $463,000, $294,000 and
$222,000, respectively, for the first nine months of 2000 compared to the first
nine months of 1999.
Corporate operating costs and development expenses for the first nine months
of 2000 and 1999 were $7,100,000 and $14,745,000 respectively, a decrease of
$7,645,000, or 52%. This decrease was as a result of reduced corporate expenses
and lower corporate headcount.
Amortization of goodwill and allowance for development costs decreased by
$47,418,000, or 97%, to $1,254,000 for the first nine months of 2000 from
$48,672,000 for the first nine months of 1999. For the first nine months of 1999
the Company recorded amortization of goodwill relating to the purchases of
additional equity interests in CNTS made by the Company in August 1996 and
August 1997. Due to the cessation of broadcasting by CNTS and the subsequent
write off of goodwill during the third quarter of 1999, no such charge for the
first nine months of 2000 was recorded, leading to most of the reduction in
amortization of goodwill and allowances for development costs. See Item 1,
"Status of Nova TV Dispute" for a further discussion on Nova TV and the ongoing
dispute between CNTS and CET.
As a result of the above factors, the Company generated an operating loss of
$29,910,000 for the first nine months of 2000 compared to an operating loss of
$95,145,000 for the first nine months of 1999.
Equity in loss of unconsolidated affiliates decreased by $3,036,000, or 42%,
to $4,200,000 for the first nine months of 2000 from $7,236,000 for the first
nine months of 1999. The decrease is due to lower losses of Markiza TV and lower
losses of the unconsolidated entities of the Studio 1+1 Group for the first nine
months of 2000 compared to the first nine months of 1999.
Net interest and other expense increased by $3,984,000, or 39%, to
$14,121,000 for the first nine months of 2000 from $10,137,000 for the first
nine months of 1999. The increase is as a result of a Company review of the
potential interest and penalties relating to outstanding tax obligations of PRO
TV and the subsequent decision to provide for these charges.
A net foreign currency exchange gain of $3,644,000 for the first nine months
of 2000 compares to a net foreign currency exchange gain of $8,711,000 for the
first nine months of 1999. During the first nine months of 2000 and 1999 the
German mark and the Czech koruna depreciated significantly against the US dollar
and as a result the Company recorded a gain on the German mark denominated
Senior Notes and a gain on the
Page 31
outstanding Czech koruna denominated debt of the Company incurred in connection
with the Company's 1996 purchase of an additional economic interest in CNTS.
During the first nine months of 2000 the foreign exchange gain was offset by a
foreign exchange loss on the dividends declared by CNTS.
During the first nine months of 2000 the Company recorded a gain of
$17,186,000 on the ITI Notes as a result of SBS exercising its call option to
purchase the ITI Notes from the Company, see Item 1, "SBS Transaction".
During the first nine months of 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.
In September 1999 the Company announced that the Reorganization Agreement
dated March 29, 1999 between the Company and SBS had been mutually terminated.
In October 1999, in connection with the termination of the Reorganization
Agreement, the Company received $8,250,000 as a termination fee from SBS.
Provision for income taxes of $410,000 for the first nine months of 2000
compares to $3,935,000 for the first nine months of 1999. The change was as a
result of the cessation of broadcasting by CNTS and the subsequent decrease in
income taxes for the first nine months of 2000 compared to the first nine months
of 1999. See Item 1, "Status of Nova TV Dispute" for a further discussion on
Nova TV and the ongoing dispute between CNTS and CET.
Minority interest in loss of consolidated subsidiaries was $42,000 for the
first nine months of 2000 compared to $203,000 for the first nine months of
1999. This change was the result of the cessation of broadcasting by CNTS and
the subsequent lower loss reported by CNTS for the first nine months of 2000
compared to the first nine months of 1999. See Item 1, "Status of Nova TV
dispute" for a further discussion on Nova TV and the ongoing dispute between
CNTS and CET.
During 1999 the Company agreed to sell substantially all of its assets in
Hungary. The sale has resulted in the Company's operations in Hungary being
recorded as discontinued operations.
As a result of these factors, the net loss of the Company was $27,769,000
for the first nine months of 2000 compared to a net loss of $83,369,000 for the
first nine months of 1999.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $15,415,000 for the nine months
ended September 30, 2000 compared to $12,472,000 for the nine months ended
September 30, 1999. The change of $2,943,000 is primarily the result of the
cessation of broadcasting by CNTS. See Item 1, "Status of
Page 32
Nova TV Dispute" for a further discussion on Nova TV and the ongoing dispute
between CNTS and CET.
Net cash provided by investing activities was $30,518,000 for the nine
months ended September 30, 2000 compared to $16,613,000 for the nine months
ended September 30, 1999. The increase of $13,905,000 was primarily attributable
to lower investments and no investments in discontinued operations during the
nine months ended September 30, 2000 compared to the nine months ended September
30, 1999.
Net cash used in financing operations was $4,464,000 for the nine months
ended September 30, 2000 compared to $4,923,000 for the nine months ended
September 30, 1999. The change of $459,000 was primarily attributable to lower
payments on credit facilities and capital leases for the nine months ended
September 30, 2000 compared to nine months ended September 30, 1999.
The Company had cash and cash equivalents of $45,619,000 at September 30,
2000 compared to $36,990,000 at December 31, 1999.
In August 1997, CME issued the Senior Notes, which raised net proceeds of
approximately $170,000,000. The Senior Notes are denominated in United States
dollars, in part, and in German marks, in part. The United States dollar
denominated Senior Notes bear interest at a rate of 9.375% per annum, and the
German mark denominated Senior Notes bear interest at a rate of 8.125% per
annum. The principal amount of the Senior Notes is repayable on their maturity
date, August 15, 2004. The indentures governing the Senior Notes contain certain
restrictions relating to the ability of CME and its Subsidiaries and affiliates
to incur additional indebtedness, incur liens on assets, make investments in
unconsolidated companies, declare and pay dividends (in the case of CME), sell
assets and engage in extraordinary transactions.
On October 20, 2000 the Company entered into an agreement (the "Noteholders
Agreement") with certain of its Noteholders ("Consenting Holders"). The
Noteholders Agreement was reached with holders of over 60% of the 9.375% Senior
Notes and holders of over 60% of the 8.125% Senior Notes. The Noteholders
Agreement resulted from discussions commenced with a group of holders of the
Senior Notes in August 2000 relating to a possible consensual restructuring of
the Senior Notes. CME determined the need to restructure the Senior Notes as a
result of an ongoing dispute involving its operations in the Czech Republic (see
above under the heading "Status of Nova TV Dispute").
Pursuant to the Noteholders Agreement, the Company made the semi-annual
interest payment on the Senior Notes which was due on August 15,
Page 33
2000. As a result of such payment, the Company is no longer in default under the
indentures relating to the Senior Notes. The Consenting Holders have agreed to
accept their pro rata share of $100 million in cash (including the interest
payment due on August 15, 2000), 25% of the equity of the Company and four-year
warrants for 5% of the equity of the Company in exchange for their Senior Notes
if such an offer is made by the Company to the holders of the Senior Notes and
such restructuring of the Senior Notes is consummated on or prior to January 15,
2001. The Company is currently seeking to raise new financing to provide it with
the financial resources to purchase the Senior Notes on the terms previously
described. The exercise price of the warrants will be equal to the per share
investment price paid for the equity of the Company by new investors in
connection with the restructuring of the Senior Notes. A material development
relating to the financial condition and/or prospects of the Company constitutes
a termination event under the Noteholders Agreement.
The Company can make no assurance that it will be able to raise the
financing needed to purchase the Senior Notes pursuant to the terms of the
Noteholders Agreement. If the Company is unable to raise new financing to
purchase the Senior Notes pursuant to the terms of the Noteholders Agreement
then the Company will likely be unable to make required interest payments on the
Senior Notes after 2001. An Event of Default under the Senior Notes would occur
if a required interest payment is not made within 30 days of its due date. If an
Event of Default occurs under the Senior Notes, the Trustee under the Indentures
or the holders of the Senior Notes may accelerate all of the Company's
obligations under the Senior Notes, including the payment of the entire
principal amount of the Senior Notes. If payment of the entire principal amount
of the Senior Notes was accelerated, the Company would have insufficient funds
to meet the obligation.
The Company believes, and its independent public accountants have confirmed,
that the audit opinion accompanying its year end financial statements will
contain a going concern qualification if the Company has not been able to raise
the financing needed to purchase the Senior Notes, or the Company, as a result
of one or more of its claims against Dr. Zelezny, CET or the Czech Republic, has
not reached a cash settlement or been awarded damages or a penalty that it has
been able to collect.
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 September 30, 2000 was
Kc 335,080,600 ($8,373,000). Quarterly repayments on the loan are required in
the amount Kc 42,500,000 ($1,062,000) during the period from November 2000
through May 2002, and Kc 37,580,600 ($939,000) in August 2002.
In April 1998, POP TV entered into a multicurrency $5,000,000 loan agreement
with Creditanstalt AG which matures in May 2005. As of September 30, 2000, the
loan was fully drawn. The loan is secured by the land, buildings and equipment
of POP TV and is guaranteed by CME. This
Page 34
loan agreement contains certain covenants with which the Company was not in
compliance, but for which the Company has received a waiver.
PRO TV has a borrowing facility with Tiriac Bank in Romania for $4,000,000
which matures in December 2002. At September 30, 2000, $2,055,000 was borrowed
under this facility. This facility is secured by PRO TV's equipment and
vehicles.
The laws under which CME's operating Subsidiaries are organized provide
generally that dividends may be declared by the partners or shareholders out of
yearly profits subject to the maintenance of registered capital, required
reserves and after the recovery of accumulated losses. In the case of the
Company's Dutch and Netherlands Antilles subsidiaries, the Company's voting
power is sufficient to compel the making of distributions. In the case of PRO
TV, distributions may be paid from the profits of PRO TV subject to a reserve of
5% of annual profits until the aggregate reserves equal 20% of PRO TV's
registered capital. A majority vote can compel PRO TV to make distributions.
There are no legal reserve requirements in Slovenia. In the case of Markiza TV,
distributions may be paid from net profits subject to an initial reserve
requirement of 10% of net profits until the reserve fund equals 5% of registered
capital. Subsequently, the reserve requirement is equal to 5% of net profits
until the reserve fund equals 10% of registered capital. The Company's voting
power in Markiza TV is not sufficient to compel the distribution of dividends.
The Company's voting power in the Studio 1+1 Group is sufficient to compel the
distribution of dividends.
The Company's future cash needs, over and above working capital
requirements, will depend on the Company's overall financial performance and its
future acquisition and development decisions. The Company believes that, taken
together, its current cash balances, internally generated cash flow and local
financing of broadcast operations should result in the Company having
approximately $30,000,000 of cash at the corporate level as at December 31,
2000. Assuming the Company is unsuccessful in consummating the purchase of the
Senior Notes pursuant to the terms of the Noteholders Agreement or otherwise
restructuring the Senior Notes, the Company currently estimates that during 2001
it will have corporate cash expenditures of approximately $32,000,000 comprising
Senior Notes interest payments, interest and principal payments on bank debt and
corporate overhead. Based on these estimates, if the Company does not exceed its
current estimates for internally generated cash flow, it will need additional
funding to satisfy working capital requirements during the first quarter of
2002.
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
Page 35
of the countries in which the Company operates are likely to join EMU at some
point in the future.
The conversion rates between the euro and the participating nations'
currencies were fixed irrevocably as of January 1, 1999 and the participating
national currencies will be removed from circulation between January 1, and June
30, 2002 and replaced by euro notes and coinage. During the "transition period"
from January 1, 1999 through December 31, 2001, public and private entities as
well as individuals may pay for goods and services using either checks, drafts,
or wire transfers denominated in euro or the participating country's national
currency.
Under the regulations governing the transition to a single currency, there
is a "no compulsion, no prohibition" rule which states that no one is obliged to
use the euro until the notes and coinage have been introduced on January 1,
2002. In keeping with this rule, the Company expects to be euro "compliant"
(able to receive euro denominated payments and able to invoice in euros as
requested by vendors and suppliers, respectively) by the time national
currencies are removed from circulation. The cost of software and business
process conversion is not expected to be material.
FORWARD-LOOKING STATEMENTS
Statements made in Items 1 and 2, under the headings "Status of Nova TV
Dispute", "Senior Notes Restructuring", "Results of Operations" and under
"Liquidity and Capital Resources" regarding future operations of CNTS, the
ongoing dispute between CNTS and CET, future investments in existing television
broadcast operations, business strategies and commitments, anticipated corporate
cash expenditures through the end of 2001, the possible restructuring of the
Senior Notes and the timing of the need for additional cash resources are
forward-looking statements. Forward-looking statements are inherently subject to
risks and uncertainties, many of which cannot be predicted with accuracy and
some of which might not even be anticipated. Future events and actual results,
financial and otherwise, could differ materially from those described in or
contemplated by the forward-looking statements. Important factors that
contribute to such risks include the ability to acquire programming, the ability
to attract audiences, the rate of development of advertising markets in
countries where the Company currently operates and general market and economic
conditions in these countries. Important factors with respect to the future
operations of CNTS in the Czech Republic and the ongoing dispute between CNTS
and CET, include legal, political and regulatory conditions and developments in
the Czech Republic. Important factors with regard to restructuring of the Senior
Notes include the ability to attract an equity investor or investors.
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
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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 September 30, 2000.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On April 26, 1999, a wholly-owned subsidiary of the Company filed an
arbitration claim against Dr. Zelezny with the International Chamber of
Commerce's International Court of Arbitration in Paris, France. The claim in the
arbitration is for the return of $23,350,000 paid to Dr. Zelezny, plus interest,
and other damages, based on breaches by Dr. Zelezny of a share purchase
agreement entered into in 1997 under which a wholly-owned subsidiary of the
Company purchased from Dr. Zelezny a company owned by him whose sole asset was a
5.8% interest in CNTS. The Company is also seeking the forgiveness of the
$5,188,000 unpaid balance of the purchase price under the 1997 share purchase
agreement.
From April 29 to May 5, 2000, the arbitral tribunal conducted a final
hearing in Amsterdam. A decision in the arbitration is expected in the fourth
quarter of 2000.
In May 1999, CET filed an action with the Regional Commercial Court in
Prague, requesting that the court declare the Cooperation Agreement invalid for
vagueness and other reasons. On May 4, 2000, the Commercial Court dismissed the
action. CET appealed this decision on June 8, 2000 and the appeal is pending.
On June 30, 1999, CNTS filed an action with the Regional Commercial Court of
Prague requesting that the court declare invalid an agreement between CET and
another Czech company, Produkce, a.s. under which CET purported to transfer
CET's 1% participation interest in CNTS to Produkce, a.s., since such transfer
did not comply with the CNTS Memorandum of Association. This action is pending.
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On August 9, 1999, CNTS filed an action against CET in the Regional
Commercial Court of Prague in which CNTS requested the court to declare the
withdrawal of CET from the Cooperation Agreement to be invalid and the
Cooperation Agreement to be in full force and effect, to issue an order
prohibiting CET from entering into television or advertising service
relationships with other companies on the basis that CNTS is entitled to provide
such services to CET for Nova TV on an exclusive basis under the Cooperation
Agreement, and to issue an order compelling CET to broadcast programming
supplied by CNTS on Nova TV. On May 4, 2000, the Commercial Court ruled that CET
is obliged to broadcast Nova TV exclusively in cooperation with CNTS, its
contractual service organization, pursuant to the Cooperation Agreement. This
ruling will become enforceable only if and when it is affirmed in an appeal that
is currently pending. No hearings on the appeal have as yet been scheduled.
CNTS has filed several legal actions against Dr. Zelezny, including a
damages claim for breaches of his fiduciary duties while serving as an executive
of CNTS. On October 26, 1999, CNTS filed an unfair competition claim against Dr.
Zelezny and CET with the Regional Commercial Court in Prague, and requested that
the court order them to cease their competitive activities with CNTS. These
actions are pending.
On February 22, 2000, a wholly owned subsidiary of the Company, duly
incorporated and existing under the laws of The Netherlands, instituted
arbitration proceedings against the Czech Republic under the 1991 Bilateral
Investment Treaty between The Netherlands and the Czech Republic. The claims
asserted by the Dutch subsidiary are substantially similar to those asserted by
Mr. Lauder in the arbitration proceedings that he has instituted in his personal
capacity against the Czech Republic. See Item 1, "Status of Nova TV Dispute".
The claim seeks restitution of the subsidiary's investment and/or monetary
damages and other relief arising from harm caused to CNTS (and therefore to the
subsidiary) by the Czech Republic's actions. The arbitration will take place
before a tribunal of three arbitrators pursuant to the Arbitration Rules of the
United Nations Commission on International Trade Law. A preliminary hearing is
scheduled for November 17, 2000. A hearing on the merits is not yet scheduled.
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 currently a party
to any such litigation which could reasonably be expected to have a material
adverse effect on its business or operations.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
The Company has outstanding two tranches of Senior Notes, the principal of
which becomes due in August 2004. The United States dollar tranche totals
$100,000,000 in principal amount and bears interest at a rate of 9.375% per
annum. The German mark tranche totals DM 140,000,000 ($63,063,000) in principal
amount and bears interest at a rate of 8.125% per annum.
An Event of Default occurred during the third quarter of 2000 because the
Company did not make the semi-annual interest payment of $4,687,500 and
DM 5,687,500 ($2,562,000) within 30 days of its due date of August 15, 2000. The
Company cured this Event of Default on October 20, 2000 when it paid the
semi-annual interest payment and the related interest on interest. See, Item 1,
Part 1 "Senior Notes Restructuring".
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) The following exhibits are attached:
27.01 Financial Data Schedule
b) A Form-8K was filed on September 27, 2000.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 2000 /s/ Frederic T. Klinkhammer
--------------------------------
Frederic T. Klinkhammer
Chief Executive Officer
(Duly Authorized Officer)
Date: November 13, 2000 /s/ Mark J. L. Wyllie
---------------------
Mark J. L. Wyllie
Finance Director
(Principal Financial Officer)
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EXHIBIT INDEX
27.01 Financial Data Schedule
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