SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1997
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to_____________.
Commission File No. 0-21051
CAPITAL MEDIA GROUP LIMITED
- -------------------------------------------------------------------------
(exact name of small business issuer in its charter)
Nevada 87-0453100
- ------------------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25 James Street, London WIM 5HY
- ------------------------------------------- -------------------------------
(Address of principal executive offices) (Zip Code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter periods 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__
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 25,056,661 of Common Stock
Transitional Small Business Disclosure Format. YES [ ] NO [X]
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Unaudited financial statements for the quarter covered by this report are
attached hereto in accordance with item 310(b) of Regulation S-B.
INDEX TO FINANCIAL STATEMENTS
Unaudited consolidated balance sheet at March 31, 1997
and December 31, 1996........................................................................................3
Unaudited consolidated statement of operations for the three
months ended March 31, 1997 and 1996.........................................................................4
Unaudited consolidated statement of stockholders' equity for
the three months ended March 31, 1997........................................................................5
Unaudited consolidated statement of cash flows for the three
months ended March 31, 1997 and 1996.........................................................................6
Notes to the unaudited consolidated financial statements..........................................................7
2
CAPITAL MEDIA GROUP LIMITED
UNAUDITED CONSOLIDATED BALANCE SHEET
FOR THE THREE MONTHS ENDED MARCH 31, 1997
NOTE MARCH 31, DECEMBER 31,
1997 1996
$ $
ASSETS
Cash 2,764,017 320,070
Accounts receivable, net of allowances for doubtful
accounts of $18,355 (December 31, 1996 -
$10,399) 6 818,142 754,103
Inventories 62,430 38,455
Prepaid expenses and deposits 1,370,050 1,481,836
------------- -------------
TOTAL CURRENT ASSETS 5,014,639 2,594,464
Investments 144,607 217,213
Intangible assets, net of accumulated amortization
of $312,818 (December 31, 1996 - $262,536) 5 725,033 803,821
Property, plant and equipment, net 4 1,396,873 1,475,284
------------- -------------
TOTAL ASSETS 7,281,152 5,090,782
============= =============
LIABILITIES AND STOCKHOLDERS'
EQUITY
Accounts payable 1,713,590 1,378,801
Accrued expenses 1,467,070 2,310,261
Loans repayable within one year 13 2,057,168 2,016,568
Amounts due to minority shareholders 431,600 411,600
------------- -------------
TOTAL LIABILITIES 5,669,428 6,117,230
COMMITMENTS AND CONTINGENCIES 7,8 - -
MINORITY INTEREST IN SUBSIDIARIES 560,900 615,795
------------- -------------
6,230,328 6,733,025
------------- -------------
STOCKHOLDERS' EQUITY
Preferred stock - 5,000,000 shares authorized:
$0.001 par value: no shares issued and outstanding - -
Common stock - 50,000,000 shares authorized:
$0.001 par value 24,663,328 (December 31, 1996 -
12,663,328) issued and outstanding 13 24,663 12,663
Additional paid in capital 23,038,417 17,117,651
Subscriptions receivable (5,000) (5,000)
Cumulative translation adjustment 1,714,725 326,214
Accumulated deficit (23,721,981) (19,093,771)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 1,050,824 (1,642,243)
------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY 7,281,152 5,090,782
============= =============
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
3
CAPITAL MEDIA GROUP LIMITED
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
3 MONTHS 3 MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
NOTE 1997 1996
Revenue 407,038 478,158
Operating costs
Staff costs 831,175 665,499
Depreciation and amortization 122,233 199,988
Operating expenses 4,022,985 2,556,115
----------- ------------
(4,976,393) (3,421,602)
----------- ------------
Operating loss (4,569,355) (2,943,444)
Equity in net losses of investment in
joint venture 12 (67,290) -
Interest income net (47,503) 20,591
Minority interest 41,231 5,115
Other income 15,246 643
----------- ------------
Loss before taxation (4,627,671) (2,917,095)
Tax provision 3 (539) (41)
----------- ------------
Net loss (4,628,210) (2,917,136)
=========== ============
Net loss per share ($0.28) ($0.25)
Weighted average shares outstanding 16,663,328 11,446,131
=========== ============
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
4
CAPITAL MEDIA GROUP LIMITED
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1997
ADDITIONAL CUMULATIVE
COMMON PAID-IN SUBSCRIPTION TRANSLATION ACCUMULATED
STOCK CAPITAL RECEIVABLE ADJUSTMENT DEFICIT TOTAL
SHARES $ $ $ $ $ $
Balance at December 31, 1996 12,663,328 12,663 17,117,651 (5,000) 326,214 (19,093,771) (1,642,243)
Issuance of common stock 12,000,000 12,000 5,920,766 - - - 5,932,766
Translation adjustment - - - - 1,388,511 - 1,388,511
Net loss - - - - - (4,628,210) (4,628,210)
------------ --------- ----------- -------- --------- ----------- ----------
Balance at March 31, 1997 24,663,328 24,663 23,038,417 (5,000) 1,714,725 (23,721,981) 1,050,824
============ ========= =========== ======== ========= =========== ==========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
5
CAPITAL MEDIA GROUP LIMITED
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
3 MONTHS ENDED 3 months ended
MARCH 31, March 31,
1997 1996
$ $
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (4,628,210) (2,917,136)
Adjustment to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 122,233 259,941
Equity in net losses of investment in joint
venture 67,290 -
Minority interest (54,895) (5,115)
Changes in assets and liabilities:
(Increase) in inventories (23,975) (7,190)
(Increase) in accounts receivable (94,577) (983,375)
Decrease (increase) in prepaid expenses 171,794 (20,253)
Decrease in accrued expenses and
accounts payable (236,750) (167,806)
Increase (decrease) in amounts due to minority
shareholders 20,000 (202,788)
------------ ---------------
NET CASH USED IN OPERATIONS (4,657,090) (4,043,722)
------------ ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, plant and equipment (15,927) (2,286,814)
Acquisition of intangible assets - -
Acquisition of investments - -
Investment in joint venture - -
Acquisition of subsidiary undertakings, net of
cash acquired - -
------------ -------------
NET CASH USED IN INVESTING ACTIVITIES (15,927) (2,286,814)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of shares 5,932,766 6,971,673
Commission paid on issuance of shares - -
Loans taken out in the year -
------------ -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,932,766 6,971,673
------------ -------------
NET INCREASE / (DECREASE) IN CASH 1,259,749 641,137
Effect of exchange rate movements on cash 1,184,198 190,366
Cash at start of period 320,070 7,537,137
------------ -------------
CASH AT END OF PERIOD 2,764,017 8,368,640
============ =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITY:
Cash payments for interest 11,685 9,469
Cash paid for taxes 539 41
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
6
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements are prepared in conformity with
generally accepted accounting principles in the United States of
America.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Capital
Media Group Limited ("the Company") and its wholly owned subsidiaries
Capital Media (UK) Limited ("CM(UK)"), and Onyx Television GmbH
("Onyx") together with its 51% owned subsidiary Tinerama Investment AG
("Tinerama"), after the elimination of all significant intercompany
balances and transactions. The company's investment in Blink TV Limited
("Blink"), a joint venture in which the company holds a 50% interest,
has been accounted for using the equity method.
INTERIM ADJUSTMENTS
The consolidated financial statements as, and for the periods ended,
March 31, 1997 and March 31, 1996, are unaudited. The interim financial
statements reflect all adjustments (consisting only of normal recurring
accruals) which are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented. The
consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto
included in the Company's 1996 Annual Report on Form 10-KSB. The
results of operations for the interim periods should not be considered
indicative of results expected for the full year.
BASIS OF PREPARATION
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 period. Actual results could differ
from those estimates.
INVENTORIES
Inventories are stated at the lower of first-in, first-out cost and
market value.
INTANGIBLE ASSETS
Intangible assets represent purchased broadcast licences, computer
software and goodwill arising on acquisition of subsidiary
undertakings. The amounts in the balance sheet are stated net of the
related accumulated depreciation. Goodwill is amortized over ten years.
Broadcast licences and computer software are amortized over their
useful lives.
7
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are all stated at cost. Depreciation is
recorded on a straight-line basis over the estimated useful lives of
the assets as shown below:
Buildings 25 to 50 years
Fixtures, fittings and equipment 5 to 20 years
FOREIGN CURRENCY
Assets and liabilities of the Company's foreign subsidiaries in the
United Kingdom and Germany are translated at year end exchange rates
and the results of those subsidiaries at the average exchange rate for
the year. The effects of these translation adjustments are reported in
a separate component of shareholders' equity. Exchange gains and losses
arising from transactions denominated in a currency other than the
functional currency of the entity involved are included in net income.
Assets and liabilities of the Company's foreign subsidiary in Romania
are translated at historical exchange rates in accordance with the
temporal method. This is due to the hyper-inflationary situation in
Romania.
INCOME TAXES
Full provision is made for all deferred tax liabilities. Deferred
income tax assets are recognized for deductible temporary differences
and net operating losses, reduced by a valuation allowance if it is
more likely than not that some portion of the benefit will not be
recognized.
LEASES
Operating leases are charged to the statement of operations in equal
annual amounts over the term of the lease.
2. GOING CONCERN
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown
in the audited financial statements contained in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1996, during the
year ended December 31, 1996 and the period from February 17, 1995 to
December 31, 1995, the Company incurred net losses of $16,262,104 and
$2,831,667, respectively. Additionally, the Company's net loss for the
first quarter of 1997 was $4,628,210, which includes a non-cash
exchange rate translation loss of $1,378,977 arising from changes in
currency exchange rates since December 31, 1996. Further, at December
31, 1996 the Company had net current liabilities of $3,522,766 and its
total liabilities exceeded its total assets by $1,026,448. These
factors among others may indicate that the Company will be unable to
continue as a going concern for a reasonable period of time.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the
amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. As
described in note 13 the Company's continuation as a going concern is
dependent upon its ability to obtain additional financing or
refinancing as may be required, and ultimately to attain successful
operations. Management is continuing its efforts to obtain additional
funds so that the Company can meet its obligations and sustain
operations from sources that are described in note 13 to the financial
statements.
8
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
3. INCOME TAXES
The income tax provision consisted of the following:
3 MONTHS 3 MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1997 1996
$ $
Current tax expense (539) (41)
============= ===========
Net operating loss carry forwards which give rise to deferred tax assets are as
follows:
MARCH 31, DECEMBER 31,
1997 1996
$ $
Unutilized tax losses 1,157,000 4,757,000
Valuation allowances (1,157,000) (4,757,000)
-------------- ------------
Total deferred tax assets - -
============== ============
The valuation allowance relates to deferred tax assets established under
Statement of Financial Accounting Standard No. 109 and relate to the unutilized
tax losses. These unutilized tax losses, substantially all of which do not
expire, will be carried forward to future years for possible utilization.
Because the Company has not yet achieved profitability, it has not recognized
the benefit for these unutilized tax losses in the financial statements.
4. PROPERTY, PLANT AND EQUIPMENT
MARCH 31, DECEMBER 31,
Property, plant and equipment consists of: 1997 1996
$ $
Buildings 191,550 191,550
Fixtures, fittings and equipment 1,784,473 1,817,170
----------- -----------
Total property, plant and equipment 1,976,023 2,008,720
Less accumulated depreciation (579,150) (533,436)
----------- -----------
1,396,873 1,475,284
=========== ===========
9
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
5. INTANGIBLE ASSETS
MARCH 31, DECEMBER 31,
1997 1996
$ $
Purchased broadcast licences 360,102 364,969
Computer software 108,780 113,371
Goodwill 568,969 588,017
------------ ------------
1,037,851 1,066,357
Less accumulated amortization (312,818) (262,536)
------------ ------------
725,033 803,821
============ ============
6. ACCOUNTS RECEIVABLE
MARCH 31, DECEMBER 31,
1997 1996
$ $
Accounts receivable comprise:
Trade receivables 96,035 139,059
VAT receivables 131,120 116,801
Other debtors receivable within one year 590,987 498,243
Other debtors receivable after one year - -
------------ -----------
818,142 754,103
============ ==========
7. COMMITMENTS AND CONTINGENCIES
TRANSPONDER
A bank guarantee was originally provided to PTT Telecom on November 30,
1995 in the amount of ECU 2,000,000 in relation to an agreement to
lease transponder capacity in order to broadcast a television channel
in Germany. The guarantee required as at March 31, 1997 stood at ECU
1,550,000 ($1,751,000 at March 31, 1997 exchange rates).
The Company was not in a position to support the guarantee. As a result
the guarantee has been provided by Universal Independent Holdings
Limited ("Universal") (see Note 13).
The Company is committed to paying ECU 4,690,000 ($5,300,000 at March
31, 1997 exchange rates) over the next two years for use of the
transponder capacity under the terms of the agreement.
10
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
LEASE COMMITMENTS
In August 1995 the Company entered into an agreement to lease studio,
post production and editing facilities in Dortmund, Germany. Under the
terms of the agreement the Company is committed to paying DM 991,000
($585,000 at March 31, 1997 exchange rates) per annum for the use of
these facilities until February 1997. The Company is currently
re-negotiating a five year lease to remain in the facility on more
beneficial terms, although there can be no assurance that this will
occur.
In January 1996 the Company entered into an agreement to lease master
control and broadcast equipment and editing facilities at Ingleheim
Germany. Under the terms of the agreement the Company is committed to
paying DM 2,940,000 ($1,735,000 at March 31, 1997 exchange rates) per
annum for the use of the equipment and facilities until January 2001.
The lease can be terminated effective December 1998.
In January 1996, the Company entered into an agreement to lease uplink
capacity until January 1999, at a cost of approximately (pound)245,000
($399,000 at March 31, 1997 exchange rates) per annum.
The Company has also entered into leases for other office space in
Germany and the UK, expiring between 1997 and 2002 at an annualized
cost of $213,000 (at March 31, 1997 exchange rates).
TINERAMA
The shareholders' agreement between the Company and Telor International
Limited ("Telor"), provides that if either party wants to transfer its
ownership in Tinerama, it must first offer such ownership interest to
the other party. It also provides that in the first four years
commencing November 15, 1995, either shareholder may force a sale or
purchase of its shares at a price specified in the notice given from
one shareholder to the other.
8. LITIGATION
On May 9, 1996 Com TV Production und Vertrieb GmbH ("Com") and Nen TV
("Nen") in relation to their litigation with the Company served Further
and Better Particulars of the Defence and Counterclaim, which provide
details of matters alleged in the Defence and Counterclaim. The most
significant detail given is that Com and Nen have quantified their
estimated damages at DM3,325,438 ($1,981,000 at March 31, 1997 exchange
rates) based on a 5% share in profits over a five year period.
The Company has filed a Reply and Defence to the Counterclaim and
believes that the Counterclaim is without merit and intends to
vigorously contest the same.
In connection with the same matter, the Company commenced proceedings
against Mr John Garman. A Defence and Counterclaim has been served on
the Company.
Both actions have now been consolidated into one action and an Order
for Directions was made on March 13, 1997 which sets out the steps to
be taken up to and including the trial. Pursuant to the Order,
discovery was concluded by May 2, 1997.
The Company believes that both counterclaims are without merit,
however, there can be no assurance as to the outcome of the claims.
11
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
9. TINERAMA
Under the terms of the acquisition agreement, Tinerama had an option to
acquire up to a further 10% of the total issued shares of each of its
51% owned Romanian subsidiary companies for a price of Lei 1,000,000
($325 at March 31, 1997) conditional upon certain financial targets.
The option was valid for a period of six months from the date of
finalization of the 1995 financial statements of the Romanian
subsidiaries on June 7, 1996.
Tinerama considers that it is entitled to acquire the additional 10%
shareholdings, but the share transfers have not been effected.
Consequently, these accounts have been prepared on the basis of
Tinerama's existing 51% shareholdings.
10. WARRANTS
The Company has the following warrants (all of which expire 36 months
from the date of their effective future registration) outstanding at
March 31, 1997.
DESCRIPTION NUMBER
Warrants for common stock exercisable at $4.00 5,200,000
Warrants for common stock exercisable at $3.125 2,033,328
Warrants for common stock exercisable at $2.50 2,200,000
The warrants were issued in connection with a Private Placement
Offering ("the Offering") which took place in December 1995 and January
1996. Warrants to purchase 4,200,000 and 1,000,000 shares of common
stock at exercise prices of $4.00 and $2.50 per share were issued to
investors in the Offering; warrants to purchase 1,000,000 and 433,328
shares of common stock at exercise prices of $4.00 and $3.125 per share
respectively were issued to the placement agent and sub-distributors
for the Offering; and warrants to purchase 1,600,000 and 1,200,000
shares of common stock at exercise prices of $3.125 and $2.50
respectively were issued to certain of the founding shareholders.
11. RE-DOMESTICATION
The Company intends to re-domesticate its legal status to Bermuda or
another non-U.S. jurisdiction as soon as reasonably practicable.
12. BLINK TV LIMITED
The Company has invested $408,000 (at March 31, 1997 exchange rates) in
Blink which is a joint venture arrangement with Mirror Group PLC
("Mirror"). Mirror owns 50% of the share capital of Blink and has
financed the purchase of equipment for the use of Blink and provided
working capital to Blink. The Company and Mirror jointly control and
manage Blink. The investment in Blink has been accounted for in these
financial statements by the equity method.
12
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
13. LIQUIDITY AND CAPITAL RESOURCES
The Company is currently using its cash reserves to fund its
operations. Due to the poorer than expected advertising revenues at
Onyx and higher than planned expenditures in connection with the launch
and first year operation of Onyx, the funds raised by the Company in
late 1995 and early 1996 were expended earlier than anticipated.
On January 13, 1997, the Company issued a Private Placement Memorandum
offering its securities to accredited investors including to all
existing shareholders. In the offering, the Company sold an aggregate
of 12,000,000 shares of common stock, $.001 par value per share, at a
purchase price of $0.50 per share. On March 3, 1997, the offering
closed and the aggregate net proceeds to the Company were approximately
$5,850,000 after costs.
To continue to fund its operations, the Company will need to raise
significant additional capital. At present the Company is considering
various options to raise additional funding for its capital resources,
including potential direct investments by third parties into Onyx or
sales of certain of the Company's investments, including Onyx
Television. However, other than as set forth herein, no arrangements
have been entered into to date. There can be no assurance that
additional working capital will be available on terms acceptable to the
Company. The failure to obtain the additional funding required will
almost certainly have a material and adverse impact on the Company's
operations and financial position.
On October 31, 1996, CM (UK) entered into an agreement to borrow up to
$2.0 million from Instar Holdings, Inc. ("Instar") to fund working
capital requirements ("the Instar loan"). The loan was originally due
for repayment on December 31, 1996, or such earlier date as the Company
raises additional funds to repay the loan. The loan is guaranteed by
the Company and Onyx, and is secured by a charge on substantially all
of the Company's assets. Interest is payable monthly on the loan, at
the rate of 2% above Lloyds Bank's base rate.
The terms of the Instar Loan were amended in January 1997 to provide
that:
(i) the principal repayment date is now June 1, 1997, or if earlier,
the date on which the Company makes a private placement of its
securities (other than referred to in note 14 below) in an amount equal
to or greater than the amount outstanding under the loan; and
(ii) the loan is now convertible, at the option of each holder of a
portion of the loan, into fully paid shares of common stock at a
conversion rate of one share of common stock for each $ 0.50 principal
amount of the loan.
On October 31, 1996, CM (UK) entered into a deed of counter-indemnity
("Deed") with Universal, a BVI corporation. The Deed secures the
obligation of CM (UK) to repay Universal if Universal is called upon to
make payment on its transponder guarantee. (See note 7 to Notes to
Consolidated Financial Statements.)
CM (UK)'s obligations under the Deed are guaranteed by the Company and
Onyx, and are secured by a charge on substantially all of the Company's
assets.
Instar and Universal have agreed that their liens on the Company's
assets shall rank pari-passu.
14. RELATED PARTY TRANSACTIONS
INSTAR HOLDINGS, INC
Messrs. Hauptmann, Leitner and Townsley have interests of $200,000,
$500,000 and $300,000 respectively in the $2.0 million loan provided by
Instar and referred to in Note 13. Messrs. Hauptmann and Leitner are
13
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
shareholders and directors of the Company. Mr Townsley resigned from
the Company's Board of Directors in January 1997.
TELOR INTERNATIONAL LIMITED
Telor owns 49% of Tinerama and had an amount of $411,600 owing from
that company at March 31, 1997. Mr Hauptmann, a director and
shareholder of the Company, is a principal of Telor.
TOWNSLEY & CO.
Mr. Townsley, a director of the Company until January 1997, is Managing
Director of Townsley & Co., a UK brokerage firm. which participated in
the private placement in winter 1995/96, receiving direct commissions
of $210,000, 86,665 shares of common stock and warrants to purchase
86,665 shares and 218,750 shares of common stock at $3.125 and $4.00
respectively.
INTERNATIONAL CAPITAL GROWTH, LTD
The predecessor of International Capital Growth, Ltd ("ICG") was the
placement agent in connection with the winter 1995/96 private
placement, for which it received direct commissions and expense
allowances of an aggregate of $1,339,000, 346,663 shares of common
stock and warrants to purchase 346,663 and 781,250 shares of common
stock at $3.125 and $4.00, respectively. Mr. Hollander, a director of
the company, is Senior Vice-President and a director of ICG.
In April 1997, the Company issued 93,333 shares of Common Stock to ICG
for services.
KESTREL SA
Kestrel SA ("Kestrel"), a Switzerland based investment firm, holds
shares of common stock and warrants in the Company for the benefit of
multiple owners. Clients of Kestrel control Universal which has
arranged for the transponder guarantee referred to in note 7.
14
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THE FINANCIAL INFORMATION INCLUDED HEREIN SHOULD BE READ IN CONJUNCTION
WITH THE CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO,
INCLUDED ELSEWHERE IN THIS FORM 10- QSB. CERTAIN OF THE DATE CONTAINED HEREIN
INCLUDES FORWARD LOOKING INFORMATION AND RESULTS COULD DIFFER FROM THAT SET
FORTH BELOW. THIS DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
INFORMATION CONTAINED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR
ENDED DECEMBER 31, 1996 (THE "FORM 10-K").
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH
31, 1996
Operating revenues for the three months ended March 31, 1997 totaled
$407,038, a decrease of $71,114 compared to operating revenues of $478,158 for
the three months ended March 31, 1996. This decline in operating revenue from
period to period was largely attributable to a decline in revenue at Tinerama.
Advertising sales by Onyx Television during the three months ended March
31, 1997 continued to be nominal. The Company is presently taking steps to
develop Onyx Television's advertising revenue. In that regard, the Company has
recently engaged the services of an individual with Pan-European experience in
developing marketing and sales strategies for emerging networks such as Onyx
Television. The Company believes that over the next few months, Onyx
Television's advertising revenues will increase, although there can be no
assurance that this will, in fact, occur. At the present time, Onyx Television
reaches 8.2 million cable and satellite homes in Germany.
During the three months ended March 31, 1997, each of the Tinerama
companies continued to operate at either a small profit or experienced a small
loss. However, in the aggregate, the combined loss of the Tinerama companies
increased from $19,000 for the first quarter of 1996 to $84,000 for the first
quarter of 1997.
Operating costs, including depreciation and amortization, for the first
quarter of 1997 were $4.98 million, which included a non-cash accounting
exchange translation loss of $1.38 million arising from changes in currency
exchange rates at March 31, 1997 compared to exchange rates at December 31,
1996. Excluding this non-cash accounting exchange loss, operating costs for the
three months ended March 31, 1997 increased by $330,000 compared to the three
months ended March 31, 1996. The increase is principally reflective of the full
quarter's operation of Onyx Television for the first quarter of 1997, compared
to its more limited operations during the first quarter of 1996. Operating
expenses of Onyx Television include programming costs, broadcast studio
expenses, transmission expenses, employee salaries and general and
administrative expenses.
Depreciation and amortization for the three months ended March 31, 1997
was $122,223, a decrease of $77,765 compared to $199,988 for the three months
ended March 31, 1996. This decrease was due primarily to a reversal of an
equipment purchase arrangement into an operating lease agreement.
15
The Company's operating loss was $4.57 million for the three months
ended March 31, 1997, compared to an operating loss of $2.94 million for the
period ended March 31, 1996. The loss before tax provision totaled $4.63 million
for the period ended March 31, 1997, compared to $2.92 million for the period
ended March 31, 1996 and the net loss for the period ended March 31, 1997 was
$4.63 million ($0.28 per share), compared to a net loss of $2.92 million ($.25
per share) for the period ended March 31, 1996. Weighted average shares
outstanding were 16,663,328 for the three months ended March 31, 1997, compared
to 11,446,131 for the three months ended March 31, 1996.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The ownership, development and operation of media interests, including
television and radio stations, television production facilities and publishing,
requires substantial capital investment. To date, the Company has financed its
capital requirements through sales of its equity securities and through debt
financing. Since inception through March 31, 1997, the Company has incurred an
accumulated deficit of approximately $23.7 million, principally related to the
Company's launch and first year operation of Onyx television. The Company
anticipates that it will continue to incur losses from Onyx's operations until
at least the middle of 1998, although there can be no assurance that the Company
will be profitable after that time.
In February 1996, the Company completed a private placement of its
securities (the "First Private Placement"). The Company received net proceeds of
approximately $14.4 million in the First Private Placement. These funds, along
with capital infusions to the Company from its founding shareholders in the
amount of $3.0 million, were primarily utilized to fund the startup, launch and
first year of operation of Onyx Television, and for general corporate purposes.
In October 1996, the Company's UK subsidiary, CM (UK), entered into an
agreement to borrow up to US $2.0 million ("Convertible Debt") from Instar
Holdings, Inc. ("Instar") to fund the Company's working capital requirements
(principally related to the continuing operation of Onyx Television). The
Convertible Debt is guaranteed by the Company and Onyx and is secured by a
charge on substantially all of the Company's assets. Interest is payable monthly
on the Convertible Debt, at the rate of 2% above Lloyd Bank's base rate.
The Convertible Debt was originally due on December 31, 1996. In January
1997, the Convertible Debt was amended to provide that (i) the principal
repayment date is now June 1, 1997, or if earlier, the date on which the Company
makes a private placement of its securities (other than the private placement
completed on March 3, 1997) in an amount equal to or greater than the amount
outstanding under the Convertible Debt, and (ii) the Convertible Debt is
convertible, at the option of the holder(s) thereof, into fully paid shares of
Common Stock at a conversion rate of one share of Common Stock for each US $.50
principal amount of the Convertible Debt. See "Certain Transactions."
On March 3, 1997, the Company closed a second private placement in which
it raised net proceeds of $5.85 million, which is being used to fund the
continuing operation of Onyx Television
16
and for general corporate purposes. The Company issued an aggregate of 12.0
million shares of its common stock in this private placement.
CM(UK) and the Company have also granted a charge against substantially
all of their assets to secure their obligations in connection with the guaranty
of the transponder lease. See Note 2 of Notes to Consolidated Financial
Statements with respect to the guaranty of the transponder lease by Universal
Independent Holdings Limited, a BVI corporation ("Universal"). CM(UK) under its
transponder lease, was required to provide a guaranty to PTT Telecom of its
obligations under the lease. Universal agreed to provide such guaranty, but
required, among other things, (i) that CM(UK) enter into, in favor of Universal,
a deed of counter-indemnity ("Deed") to secure the obligation of CM(UK) to repay
Universal if Universal is called upon to make payment on its transponder
guaranty, (ii) that the Company and Onyx guarantee the obligations of CM(UK)
under the Deed, and (iii) that the Company pledge substantially all of its
assets to secure its obligations in connection therewith. Instar and Universal
have agreed that their liens on the Company's assets shall rank PARI PASSU. If
the Company were to default under either or both of such guaranties and Instar
and/or Universal were to foreclose on the pledge of the Company's assets, it
would likely have a significant and adverse impact on the Company's financial
position, and could result in the Company's loss of its operating assets,
including its interest in Onyx.
At the present time, the Company requires additional funds for working
capital needs of approximately U.S. $1.0 million per month to continue its
operations. The Company believes that its current resources will allow the
Company to continue its operation until at least the end of May 1997. The
Company is presently seeking additional capital, or other acceptable
alternatives, to continue its operations beyond that date and to fund the
continued short and long term development of its businesses. In that regard, the
Company is engaged in discussions and intends to engage in discussions with
others regarding the possibility of obtaining additional equity investments
and/or loans to satisfy its short and long-term financing needs and regarding
the possibility of entering into strategic alliances with key industry
participants that would allow Onyx Television greater access to markets and
resources. Alternatively, the Company may consider selling all or a substantial
portion of its operations to a third party (including its interest in Onyx
Television). No definitive agreements have been entered into to date.
There can be no assurance that the capital or other acceptable
arrangements required to continue the operations of the Company beyond the end
of May 1997 will be obtained. The Company's failure to raise sufficient funds to
repay the Convertible Debt, or the Company's being called on the transponder
guaranty, or the Company's failure to obtain sufficient working capital for its
operations, will likely have a significant and adverse impact on the Company's
financial position, and could result in the Company's losing its operating
assets, including its interest in Onyx Television.
The Company's independent auditors have included an explanatory
paragraph in their audit report in the Company's Report on Form 10-KSB for the
fiscal year ended December 31, 1996 stating that the financial statements have
been prepared assuming the Company will continue as a going concern and that as
a result of the Company's lack of working capital and losses since inception,
there is substantial doubt as to the Company's ability to continue as a going
concern. The
17
Company's failure to obtain additional capital or other acceptable arrangements
to continue the business of the Company will have a material and adverse effect
on the Company.
To the extent that the Company finances its activities through the
issuance of additional equity securities, any such issuance would result in
dilution to the interests of the Company's shareholders. Additionally, to the
extent that the Company incurs indebtedness or issues debt securities in
connection with financing activities, the Company will be subject to all of the
risks associated with incurring substantial indebtedness, including risks
associated with pledging assets of the Company and the risks that interest rates
may fluctuate and cash flow may be insufficient to pay principal and interest on
any such indebtedness.
The Company maintains its financial statements in dollars and holds the
majority of its funds in United States dollars, pounds sterling and German
Deutsche marks. Amounts paid to the Company are payable in various currencies,
which are subject to independent fluctuating exchange rates with the U.S.
dollar, the pound and the Deutsche Mark. In the event of a devaluation in a
particular currency between the time its income arises and the time such income
is received and converted by the Company into U.S. dollars, the Company would
suffer an exchange loss which could materially and adversely affect the
Company's financial condition, results of operations and/or cash flows. The
Company does not hedge against foreign currency exchange rate risks. Because of
the number of currencies involved, the constantly changing currency exposures
and the fact that all foreign currencies do not fluctuate in the same manner
against the United States dollar, the Company cannot predict with any certainty
the future effect, if any, from period to period, of exchange rate fluctuations
on its financial condition or results of operations.
18
PART 2
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in several lawsuits all relating to the relationship
between CM (UK) and John Garman. For information regarding the current status of
these suits, see Item 3 of the Form 10- K.
ITEM 2. CHANGE IN SECURITIES
See Note 10 to the Notes to the Company's Unaudited Financial Statements
included herewith.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None during the quarter covered by this report
ITEM 5. OTHER INFORMATION
Effective May 16, 1997, the Company terminated the Agreement and Plan of
Reorganization which it had previously entered into with Unimedia, S.A. For
information regarding the terms of the Company's agreement with Unimedia, see
Item 1 of the Form 10-K. The Company terminated the agreement with Unimedia
based upon the fact that Unimedia did not meet certain conditions to the closing
of the transaction.
The Company is presently having discussions with Unimedia regarding the
possibility of the transaction moving forward on new terms, although no
definitive agreements have been entered into to date. There can be no assurance
that the Company's proposed acquisition of Unimedia will be completed.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27. Financial Data Schedule.
(b) Two Current Reports on Form 8-K were filed by the Company during the
first quarter of 1997. The first reported completion of the Company's
winter 1997 private placement (see "Management's Discussion and Analysis
or Plan of Operation" above for information regarding the terms of the
private placement). The second reported that the Company had entered
into an Agreement and Plan of Reorganization with Unimedia, S.A. See
Item 5 above and Item 1 of the Form 10-K.
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SIGNATURES
Pursuant to the requirements of the Exchange Act, the Registrant caused
this Report to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 20th day of May, 1997.
CAPITAL MEDIA GROUP LIMITED
By: /s/ CHARLES KOPPEL
------------------------------------------
Charles Koppel, Co-Chairman, President and
Chief Executive Officer
By: /s/ STEPHEN KORNFELD
------------------------------------------
Stephen Kornfeld, Co-Chairman
By: /s/ STEPHEN COLEMAN
------------------------------------------
Stephen Coleman, Chief Financial Officer
20
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule