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, 1999
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________.
Commission File 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.)
2 rue du Nouveau Bercy.
94220, Charenton, France
- ---------------------------------------- ---------------------------------
(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: 40,094,139 SHARES OF COMMON STOCK AT
JUNE 30, 1999 (EXCLUDING 1,667,916 SHARES OWNED AT THAT DATE BY THE COMPANY'S
81.6% OWNED SUBSIDIARY, UNIMEDIA, S.A.)
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, 1999
and December 31, 1998....................................................3
Unaudited Consolidated Statement of Operations for
the three months ended March 31, 1999 and 1998 (restated)................4
Unaudited Consolidated Statement of Stockholders' Equity for
the three months ended March 31, 1999 and 1998 (restated)................5
Unaudited Consolidated Statement of Cash Flows for the three
months ended March 31, 1999 and 1998 (restated)..........................6
Notes to the Unaudited Consolidated Financial Statements......................7
2
CAPITAL MEDIA GROUP LIMITED
UNAUDITED CONSOLIDATED BALANCE SHEET
MARCH 31, 1999
NOTE MARCH 31, DECEMBER 31,
1999 1998
(UNAUDITED) $
$
ASSETS
Cash and cash equivalents 3 359,166 583,320
Accounts receivable, within one year, net of allowances
for doubtful accounts of $68,122 (December 31, 1998 - $77,579) 4 1,816,524 1,801,892
Inventories 63,894 93,938
Amounts due from shareholder 5-17 313,691 313,691
Prepaid expenses and deposits 56,399 40,003
-------------- ----------------
TOTAL CURRENT ASSETS 2,609,674 2,832,844
Investments 3,819 4,153
Equity in affiliate companies 108,701 117,000
Intangible assets, net of accumulated amortization of
$3,221,161 (December 31, 1998-$3,076,882) 6 2,694,456 2,858,412
Property, plant and equipment, net 7 1,520,582 796,233
-------------- ----------------
TOTAL ASSETS 6,937,232 6,608,642
============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable 3,607,792 3,786,764
Accrued expenses 4,365,009 4,630,380
Related parties loans repayable within one year 8-17 17,291,782 14,337,442
Other loans repayable within one year 8 344,000 190,000
Net liabilities for discontinued operation 9 523,093 496,228
-------------- ----------------
TOTAL LIABILITIES 26,131,676 23,440,814
COMMITMENTS AND CONTINGENCIES 10-16
MINORITY INTEREST IN SUBSIDIARIES 404,483 404,209
-------------- ----------------
26,536,159 23,845,023
-------------- ----------------
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 40,094,139 (December 31, 1998 -
40,094,139) issued and outstanding 40,090 40,090
Additional paid in capital 31,155,909 31,155,909
1,667,916 shares held by subsidiary (December 31,
1998 - 1,667,916) at cost (950,712) (950,712)
-------------- ----------------
30,245,287 30,245,287
Cumulative translation adjustment 3,635,986 756,406
Accumulated deficit (53,480,200) (48,238,074)
-------------- ----------------
TOTAL STOCKHOLDERS' EQUITY (19,598,927) (17,236,381)
-------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 6,937,232 6,608,642
============== ================
See notes to the consolidated financial statements.
3
CAPITAL MEDIA GROUP LIMITED
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
3 MONTHS 3 MONTHS
ENDED ENDED
MARCH 31, 1999 MARCH 31, 1998
(UNAUDITED) (UNAUDITED)
NOTE
Operating revenues $584,892 $619,932
Operating costs:
Staff costs 611,525 832,654
Depreciation and amortization 221,655 231,694
Operating expenses - other 1,612,858 2,565,539
---------- ----------
(2,446,038) (3,629,887)
Operating loss (1,861,146) (3,009,955)
Other (expenses)/income (11,088) (99,013)
Financial income (expense) net 12 (3,310,629) (774,636)
Equity in net loss of affiliates (55,437) (55,018)
---------- ----------
Loss from continuing operations before
taxation (5,238,300) (3,938,622)
Income tax benefit (expense) (121) 5,409
---------- ----------
(5,238,421) (3,933,213)
Discontinued operations (Note 9)
Loss (income) from operations of discontinued
subsidiary (1,700) 25,138
---------- ----------
Net loss before minority interest (5,240,121) (3,908,075)
Minority interest (2,005) 77,897
---------- ----------
Net loss (5,242,126) (3,830,178)
========== ==========
Net loss per share for continuing operations -
basic ($0.13) ($0.10)
========== ==========
- diluted ($0.13) ($0.10)
========== ==========
Net loss per share including discontinued
operation-basic ($0.13) ($0.10)
========== ==========
- - diluted ($0.13) ($0.10)
========== ==========
Weighted average shares - basic 40,094,139 40,094,139
========== ==========
Weighted average shares - diluted 40,094,139 40,094,139
========== ==========
See notes to the consolidated financial statements.
4
CAPITAL MEDIA GROUP LIMITED
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999
ADDITIONAL CUMULATIVE OTHER
SHARES HELD PAID-IN COMPREHENSIVE ACCUMULATED
COMMON STOCK BY SUBSIDIARY CAPITAL INCOME (DEFICIT) DEFICIT TOTAL
SHARES $ $ $ $ $ $
Balance at January 1, 1999 40,094,139 40,090 (950,712) 31,155,909 756,406 (48,238,074) (17,236,381)
Translation adjustment - - - - 2,879,580 2,879,580
Net loss - - - - (5,242,126) (5,242,126)
------------
Comprehensive loss (2,362,546)
------------- ---------- ----------- ------------ ------------- -------------- ------------
Balance at March 31, 1999 40,094,139 40,090 (950,712) 31,155,909 3,635,986 (53,480,200) (19,598,927)
============= ========== =========== ============ ============== ============== ============
ADDITIONAL CUMULATIVE OTHER
SHARES HELD PAID-IN COMPREHENSIVE ACCUMULATED
COMMON STOCK BY SUBSIDIARY CAPITAL INCOME (DEFICIT) DEFICIT TOTAL
SHARES $ $ $ $ $ $
Balance at January 1, 1998 40,094,139 40,090 (2,282,752) 31,155,909 2,846,067 (37,470,527) (6,711,213)
Translation adjustment - - - - (2,089,661) (2,089,661)
Net loss - - - - (10,767,547) (10,767,547)
------------
Comprehensive loss (12,857,208)
Shares held by subsidiary
Shares held by subsidiary sold 1,332,040 1,332,040
Net loss
------------- ---------- ----------- ------------ ------------- -------------- ------------
Balance at December 31, 1998 40,094,139 40,090 (950,712) 31,155,909 756,406 (48,238,074) (17,236,381)
============= ========== =========== ============ ============== ============== ============
See notes to the consolidated financial statements.
5
CAPITAL MEDIA GROUP LIMITED
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
RESTATED
3 MONTHS ENDED 3 MONTHS ENDED
MARCH 31, MARCH 31,
1999 1998
$ $
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (5,242,126) (3,830,178)
Adjustment to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 221,655 231,694
Equity in net losses of investment in joint venture 55,437 55,018
Minority interest 2,005 (77,897)
Changes in assets and liabilities:
(Increase)/decrease in other assets and inventories 13,982 (1,790)
Increase in accounts receivable (14,632) (885,224)
Increase in accrued expenses and other liabilities 325,945 1,882,825
---------------- -----------------
NET CASH USED IN OPERATIONS (4,637,734) (2,625,552)
---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of plant and equipment (800,000) (358,505)
Acquisition of intangible assets - (3,545)
Cash proceeds from sale of investments - 168,277
---------------- -----------------
NET CASH (USED) IN INVESTING ACTIVITIES (800,000) (193,773)
---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in short term debt 2,934,000 1,850,000
Repayment of loans (600,000) -
---------------- -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,334,000 1,850,000
---------------- -----------------
Effect of exchange rate changes on cash 2,879,580 826,429
Net (decrease)/increase in cash and cash equivalents (224,154) (142,896)
Cash and cash equivalents at beginning of period 583,320 332,795
---------------- -----------------
Cash at end of period 359,166 189,899
================ =================
SUPPLEMENTAL DATA:
Interest paid 7,976 8,749
Income tax paid 121 491
See notes to the consolidated financial statements.
6
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
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 the Company's 81.6% owned subsidiary Unimedia
SA ("Unimedia") and Unimedia's wholly owned subsidiary, Pixel Limited
("Pixel"), and its 90% owned subsidiary TopCard SA ("TopCard"). All
intercompany accounts and transactions have been eliminated in
consolidation. CM (UK)'s 50% interest in Blink TV Limited ("Blink") and
Pixel's 47.5% interest in Henry Communications Limited ("Henry"), have
been accounted for using the equity method, after the elimination of
all significant intercompany balances and transactions. Tinerama
Investment AG ("Tinerama"), a 51% owned subsidiary is treated as
discontinued operations (See Note 9).
The results of Pixel has been consolidated in the consolidated
financial statements from January 1, 1998, being the date of
acquisition.
INTERIM ADJUSTMENTS
The consolidated financial statements as of, and for the periods ended,
March 31, 1999 and March 31, 1998 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 results
of operations for the interim periods should not be considered
indicative of results expected for the full year.
INVENTORIES
Inventories are stated at the lower of first-in, first-out cost or
market value. Inventories include both raw materials and finished
goods.
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 amortization. Computer software are amortized in
the year of their acquisition. Broadcast licenses and goodwill are
amortized on a straight-line basis over a period not exceeding six
years. The Company evaluates the possible impairment of long-lived
assets, including intangible assets, whenever events or circumstances
indicate that the carrying value of the assets may not be recoverable,
by comparing the undiscounted future cash flows from such assets with
the carrying value of the assets. An impairment loss would be computed
based upon the amount by which the carrying amount of the assets
exceeds its fair value at any evaluation date.
7
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
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:
Fixtures, fittings and equipment 5 to 20 years
FOREIGN CURRENCY
Assets and liabilities of the Company's foreign subsidiaries are
translated at year-end exchange rates. Income statement items are
translated at the average rate for the period. 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.
Due to the hyper-inflationary situation in Romania, assets and
liabilities of the Company's foreign subsidiary in Romania are
translated at historical exchange rates in accordance with Statement of
Financial Accounting Standards No. 52.
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
realized.
LEASE
Operating leases are charged to expense, on a straight - line basis,
over the term of the lease.
REVENUE RECOGNITION
Sales are recognized when products, services and fees are delivered and
when advertisements are broadcast and thereby invoiced to the customer.
Intercompany charges are eliminated on consolidation and not included
in revenues.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred
EARNINGS PER SHARE
Basic income per share is calculated on the basis of weighted average
outstanding shares. Diluted income per share is computed on the basis
of weighted average outstanding common shares, plus potential common
shares assuming exercised stock options and conversion of outstanding
convertible securities where issued.
8
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of certain financial instruments, including cash,
receivables, accounts payable, and other accrued liabilities,
approximate the amount recorded in the balance sheet because of the
relatively short-term maturities of these financial instruments. The
fair value of bank, insurance company and other long-term financing at
March 31, 1999 approximate the amounts recorded in the balance sheet
based on information available to the Company with respect to current
interest rates and terms for similar debt instruments.
RECLASSIFICATIONS AND RESTATEMENT
Certain reclassifications have been made to the March 1998 balances to
conform to the 1998 year end presentation.
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 period. Actual results could differ
from those estimates.
2. GOING CONCERN
The accompanying financial statements have been prepared on the going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown
in the financial statements, during the period ended March 31, 1999 and
the year ended December 31, 1998, the Company incurred net losses of
$5,242,126, and $10,767,547, respectively. At March 31, 1999, the
Company had net current liabilities of $22,198,909 and its total
liabilities exceeded its total assets by $19,598,927. 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 the recorded asset amount 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 16, the Company's continuation as a going concern is
dependent upon its ability to obtain additional financing as may be
required, and ultimately to attain successful operations. Management
reported in March 1999 that it intends to propose at its forthcoming
Stockholders' Meeting, a resolution to increase the authorized capital
of the Company and a further resolution to agree to allow the
conversion of certain of the loans received and interest accrued into
equity of the Company. Management also reported in March 1999 that it
had entered into a further agreement to provide funding so that the
Company can meet its obligations and sustain operations from sources as
described in note 16.
3. CASH AND CASH EQUIVALENTS
Cash and cash equivalents at March 31, 1999 includes a bank deposit
balance of Nil (December 31, 1998 - $520,164).
9
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
4. ACCOUNTS RECEIVABLE
MARCH 31, DECEMBER 31,
1999 1998
Accounts receivable comprise: $ $
Trade receivables 836,035 899,352
Taxation receivables 26,229 19,761
Other debtors receivable 954,260 882,779
------------ --------------
1,816,524 1,801,892
============ ==============
5. AMOUNT DUE FROM SHAREHOLDER
In December 1995, the Company issued 261,410 shares at $1.20 cash to a
shareholder (Latitude Investments, Ltd.) in exchange for the
shareholder guaranteeing the establishment of a contract with PTT
Telecom. This resulted in the shareholder receiving shares for no
payment. As part of an overall agreement with Instar, Universal and
Latitude (See Note 17) this amount will be forgiven.
6. INTANGIBLE ASSETS
MARCH 31, DECEMBER 31,
1999 1998
$ $
Purchased broadcast licenses 242,145 249,570
Computer software 579,307 591,560
Goodwill 5,094,165 5,094,165
------------- --------------
5,915,617 5,935,295
Less accumulated amortization (3,221,161) (3,076,883)
------------- --------------
2,694,456 2,858,412
============= ==============
Goodwill net of amortization is as follows:
MARCH 31, DECEMBER 31,
1999 1998
$ $
Tinerama 0 0
Unimedia 2,029,600 2,138,468
TopCard 525,097 558,819
Pixel 72,731 78,986
------------- --------------
2,627,428 2,776,273
============= ==============
10
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of: MARCH 31, DECEMBER 31,
1999 1998
$ $
Fixtures, fittings and equipment 3,704,511 3,211,962
Less accumulated depreciation (2,183,929) (2,415,729)
------------- --------------
1,520,582 796,233
============= ==============
8. LOANS REPAYABLE WITHIN ONE YEAR
MARCH 31, DECEMBER 31,
1999 1998
$ $
Instar Holding Ltd. 2,000,000 2,000,000
MMP, SA 5,900,000 3,120,000
Superstar Investments Ltd. 6,650,000 6,650,000
Fontal Ltd. 200,000 200,000
Oradeo 200,000 500,000
Roland Pardo 200,000 500,000
Interest and penalty interest accrued 2,141,782 1,367,442
------------- ---------------
Related party loans 17,291,782 14,337,442
Sundry loans 344,000 190,000
------------- ---------------
17,635,782 14,527,442
============= ===============
The terms of the loans are:
The terms of the Instar, MMP (a fully owned subsidiary of Groupe AB) and
Superstar loans are detailed in Note 15 and 16.
The Fontal loan was received on December 30, 1997 and carries an interest rate
of 15% per annum and was repayable on February 16, 1998. See Notes 14 and 17.
The Oradeo loan was made to Unimedia in 1996 and carries an interest rate of 2%
above 3 month Eurodollar Libor rate and was repayable on April 18, 1998. See
Note 14.
11
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
The Roland Pardo loan was made to Unimedia in 1996 and carries an interest rate
of 2% above 3 month Eurodollar Libor rate and was repayable on July 29, 1998.
See Note 14.
The Falcon loan was made to Unimedia in 1995 and carried an interest rate of
0.5% per month and was repaid on May 25, 1998.
The sundry loans are in respect of three proposed subscriptions for 3,440,000
shares of common stock at $0.10 per share.
9. DISCONTINUED OPERATIONS
During 1998, the Company approved a decision to sell its interests in
the Romanian company, Tinerama. Discussions with a potential buyer are
in progress and the transaction is expected to be concluded during
1999. The results of the Tinerama business have been reported
separately as discontinued operations. Prior year consolidated
financial statements have been restated to present the Tinerama
business as discontinued. The components of the net liabilities of the
discontinued operations included in the consolidated balance sheets are
as follows:
MARCH 31, DECEMBER 31,
1999 1998
$ $
Current assets 121,532 152,744
Less current liabilities (694,837) (702,903)
------------- --------------
Net current liabilities (573,305) (550,159)
Minority interests (433,107) (460,559)
Net property, plant and equipment 483,319 514,490
------------- --------------
Net liabilities (523,093) (496,228)
============= ==============
10. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
In March 1998, the Company entered into a monthly agreement to lease
offices, as well as the use of studio, post production and editing
facilities in Dortmund, Germany as required. Under the terms of the
office agreement the Company is committed to paying DM 150,000 ($83,000
at March 31, 1999 exchange rates) per annum.
The Company has also entered into leases for office space in France,
expiring between 1999 and 2002 at an annualized cost of $100,000 (at
March 31, 1999 exchange rates).
The total rental expense in 1999 and 1998, including transponders and
lease commitments as above, are $2,648,500 and $4,423,000,
respectively.
12
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
Under the terms of a two year service agreement which commenced October
1, 1998, broadcasting facilities for Onyx, comprising of the uplink,
master control, and satellite transponder broadcasting and cable
transmission costs are provided by Group AB at an annual costs of
$3,120,000 (see Note 15 and 16).
Minimum lease payments under operating leases as of March 31, 1999 are
as follows:
Years ending December 31, $
1999 2,648,500
2000 2,044,000
2001 170,000
2002 170,000
2003 and thereafter 295,000
-------------
$5,327,500
=============
The Company is committed to pay to its directors and officers under
employment agreements an aggregate of $650,000 during the year ended
December 31, 1999.
RETIREMENT INDEMNITEES AND PENSION PLANS
Retired employee benefits from State of Government sponsored pension
schemes. Contributions by employers to these sponsored schemes are
expenses as incurred. There are no specific supplemental pension plans
operated by the Company or any subsidiary. There is no liability
arising from retirement indemnity.
11. RESEARCH AND DEVELOPMENT COSTS
TopCard is involved in the development of specific applications based
upon smart card technology including remote security Internet access
and infra-red contactless smart card technology.
MARCH 31, MARCH 31,
1999 1998
$ $
Research and development costs 61,296 72,700
=========== ===========
12. FINANCIAL EXPENSE (INCOME) NET
3 MONTHS 3 MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1999 1998
$ $
Interest expense 816,076 208,329
Foreign currency exchange loss 2,494,553 566,307
------------- --------------
3,310,629 774,636
============= ==============
13
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
The foreign currency exchange loss in 1999 and in 1998 arose primarily from the
exchange differences arising in the intercompany loan between CM(UK) and Onyx
recorded in pounds sterling and German Marks, respectively.
13. INCOME TAXES
Net operating loss carry forwards which give rise to deferred tax
assets at March 31, 1999 are as follows:
3 MONTHS 3 MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1999 1998
$ $
Deferred tax asset on unrealized tax losses 18,960,000 4,180,000
Timing differences 240,000
------------- -----------
Valuation allowances (19,200,000) (4,180,000)
------------- -----------
Total deferred tax assets - -
============= ===========
The Company has significant deferred tax assets ($16,380,000)
corresponding to tax losses arising primarily from the operating losses
incurred by Onyx, in Germany. These tax losses are available to be
carried forward indefinitely to be set off against future profits in
Germany. However, at the end of 1998, the management forecast that the
Company will not be profitable in 1999 and therefore no credit for
income tax was recorded. The Company will continue to review its tax
valuation allowance in future periods.
14. LITIGATION
The litigation against Com TV Production und Vertrieb GmbH ("Com") and
Nen TV ("Nen") and Mr. John Garman, related to an agreement in 1995,
wherein the Company was purportedly to invest in and develop a
satellite broadcasting project and was thereby to allot Nen 5% of the
issued share capital of the project in consideration for various
undertakings. The Company has always maintained that there had been a
repudiatory breach of contract by Com and Nen and that the Company
believed that the claim made were without merit and intended to
vigorously contest the same. In December 1997, at the direction of the
trial judge, the Company and the other parties agreed to a form of
settlement, wherein the Company agreed to enter into reciprocal
commercial agreements allowing the other parties to introduce potential
clients wishing to access available down time for advertising purposes.
In June 1997, a former managing director of Onyx whose employment was
terminated brought suit in Germany for alleged wrongful early
termination of his employment. The suit sought damages of DM750,000
($414,000). Onyx maintained that the action taken was lawful and in
July 1998, the court ruled in favor of Onyx. The plaintiff has the
right to appeal and Onyx believes that it has valid defenses to this
claim. However, there can be no assurance as to the outcome of this
matter.
14
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
In May 1998, TV Strategies, a US Dallas based television services
company, obtained a default judgment against Onyx for DM300,000
($180,000), plus interest, relating to services which TV Strategies
alleges that they provided to Onyx. Onyx has taken action in the US to
have the default judgment set aside, and believes that it has grounds
to obtain relief from the default judgment. Onyx also believes that it
has meritorious defenses to the suit. However, there can be no
assurance as to the outcome of the matter.
In July 1998, the Company was sued in the U.S. District Court for the
District of Nevada by Fontal Limited ("Fontal") for breach of a
promissory note. See Note 8 for a description of the Fontal Note. The
Company had pledged the rights to trademarks for the international Onyx
name outside of Germany, Switzerland and Austria to Fontal to secure
repayment of this note. Subsequent to March 31, 1999, this matter
was settled. See Note 17.
Unimedia has three minority shareholders (Oradea, Roland Pardo and
Fontal (see Note 8)) who have previously advised Unimedia that they do
not believe that the reorganization of Unimedia with the Company was in
the best interest of Unimedia and its stockholders. These stockholders
have brought numerous legal actions against Unimedia and/or its
management (which is also now, in part, the senior executive management
of the Company) contending that the past and future activities of
Unimedia are not in the best interest of Unimedia's stockholders and
were not being engaged in for the benefit of Unimedia and its
stockholders. To date, such suits have not been successful. In
addition, the French Courts have to date rejected all requests to
appoint experts in judgment to review Unimedia's management's actions.
Oradea and Pardo have also taken action through the courts in France
and Israel to safeguard their potential rights over certain assets of
Unimedia in order to secure repayment of their unsecured loans due from
Unimedia (see Note 8). In connection with such actions and based upon
the fact that the notes do not by their terms reflect a repayment date.
In February 1999, the French court ruled that repayment of the loans be
made by a number of installments starting March 1999 until September
1999 and set a lower rate of interest to accrue. Unimedia is also
preparing actions against Lodelo and Pardo for damages which it
believes have been inappropriately caused by reason of the actions
taken by Lodelo and Pardo against Unimedia and its management.
Charles Koppel, the former chairman and CEO of the Company claimed
constructive dismissal following the Board's selection of a new
President and CEO for the Company in August 1997. In March 1998, the
Company resolved its dispute with Mr. Koppel in regard to his claim for
wrongful dismissal and paid Mr. Koppel /pound sterling/60,000 ($96,000)
to resolve outstanding claims under his service contract with the
Company.
In August 1998, Onyx sued Charles Koppel in Germany. The suit alleges
that certain of Mr. Koppel's actions as the managing director of Onyx
were improperly performed and seeks damages in an unspecified amount.
The Company and Charles Koppel will exchange mutual general releases in
connection with the Instar Settlement (See Note 17) and all of the
suits between the Company and Charles Koppel will be dismissed with
prejudice.
15
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
15. CAPITAL STRUCTURE
The Company has the following issued and vested warrants to purchase
common stock outstanding at March 31, 1999 and December 31, 1998
MARCH 31, DECEMBER
DESCRIPTION 1999 31, 1998
Warrants for common stock
exercisable at $4.00 5,200,000 5,200,000
Warrants for common stock
exercisable at $3.125 433,328 433,328
Warrants for common stock
exercisable at $2.50 1,100,000 1,100,000
----------------------------
6,733,328 6,733,328
============================
All outstanding warrants (except the warrants which expired by their
terms on December 31, 1998), expire 36 months from the date of the
effective registration of their underlying shares. 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 (which warrants expired
on December 31, 1998). In September 1996, 10,000 shares and warrants to
purchase an additional 100,000 shares at an exercise prices of $2.50
were issued to a director for consulting services.
Additionally, the Company is obliged to issue warrants to former
Unimedia shareholders under the terms of the share exchange agreement
signed in 1997, as follows:
MARCH 31, DECEMBER
DESCRIPTION 1999 31, 1998
Warrants for common stock
exercisable at $4.00 1,139,144 1,139,144
Warrants for common stock
exercisable at $3.125 77,871 77,871
Warrants for common stock
exercisable at $2.50 197,675 197,675
----------------------------
1,414,690 1,414,690
============================
16
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
Subject to the compliance with applicable US securities laws and the
approval of an increase in the Company's authorized Common Stock to
allow for such action, the Company intends in the future to offer the
warrant holders the right, for a period of not less than 61 days, to
exercise their warrants and receive two shares of Common Stock at an
exercise price of $0.30 per share. If the holders of the outstanding
warrants do not exercise this right, the warrants will remain
outstanding on their original terms until their expiration date. This
right will be given to the Company's warrant holders in order to allow
the Company's warrant holders to acquire additional Company securities
at a lower price and to raise additional capital for the Company's
operation.
The Company has offered one of its warrant holder, Auric Investments
Limited ("Auric"), the right to subscribe to purchase 1,566,156 shares
of Common Stock on the basis of two shares for each of the 783,078
warrants which they hold, but at an exercise price of $0.20 per share.
Auric was granted this lower price due to the assistance which they
provided to the Company in helping the Company to re-obtain the
quotation on the Bulletin Board maintained by NASD in 1998.
COMMON STOCK PURCHASE OPTIONS
OUTSTANDING OUTSTANDING
AT AT
MARCH 31, DECEMBER
DESCRIPTION 1999 GRANTED 31, 1998
Executive officers options exercisable @ $0.57 375,000 375,000
of which vested 225,000 225,000
Officers options exercisable @ $2.50 300,000 300,000
of which vested 300,000 200,000
Executive officers options exercisable @ $0.35 4,000,000 4,000,000
of which vested 1,599,998 800,000
Non-employee directors options exercisable @ $0.35 500,000 500,000
of which vested 500,000 500,000
Options to Diamond Production exercisable @ $0.10 16,000,000 16,000,000
----------------------------------------------
Total exercisable 21,175,000 - 21,175,000
==============================================
On August 1, 1997, the Company entered into three year employment
agreements with the executive officers providing for them to receive in
addition to other compensations, options to purchase 200,000 and
175,000 shares of common stock at an exercise price of $0.57 per share,
the price at which transactions were effected at that time. The options
vested 2/5 upon the effective date of the agreement and will vest 1/5
on each of the first, second and third anniversaries, respectively, of
the agreement. These options expire 36 months from the date of their
effective registration.
The Chief Financial Officer as part of his service agreement is
entitled to receive an option to purchase 100,000 common shares of the
Company at $2.50, the price at which transactions were effected at the
time of each of the years 1996, 1997 and 1998. These options expire 36
months from the date of their effective registration.
17
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
On March 10, 1998, the Board of Directors granted options to four
executive officers of the Company to purchase an aggregate of 4,000,000
shares of common stock at an exercise price of $0.35 per share (the
price at which common stock was negotiated on the date of grant). On
the same date, non-employee directors were granted options to purchase
an aggregate of 500,000 shares at the same price. The options vested to
executive officers 200,000 each in 1998, with the balance over 3 years,
and to non-employee directors immediately. The options are valid for 5
years and expire on March 10, 2003.
On December 18, 1998, the Board approved the grant of a two year
warrant to purchase an aggregate of 16,000,000 shares at an exercise
price of $0.10 per share to Diamond Production, a company owned by two
executive directors. This grant will be considered for approval at the
forthcoming stockholders' meeting.
PRO FORMA NET LOSS AND NET LOSS PER SHARE
The Company has adopted the disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation" and, as permitted under SFAS
No. 123 applies Accounting Principles Board Opinion ("APB") No. 25 and
related interpretations in accounting for its stock options. Since the
Company awarded the stock options with no discount as compared with the
market price at the time of the grants, there was no related
compensation costs for any of the years presented based on the
estimated grant date fair value as defined by FAS 123. The Company
pro-forma net loss and loss per share for the three months ended March
31, 1999 and for the year ended December 31, 1998 are as follows:
MARCH 31, 1999 MARCH 31, 1998
$ $
Pro forma net loss
Basic and diluted (5,242,126) (3,830,178)
Pro forma net loss per share
Basic and diluted ($0.13) ($0.10)
CONVERTIBLE DEBT AT MARCH 31, 1999
The following derivative securities outstanding will become exercisable
if the Company's stockholders authorize an increase in additional
shares (See Note 2). Interest and penalties accrued are also
convertible into common stock.
18
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
SHARES
CONVERSION ISSUABLE ON
PAYEE $ PRICE ($) CONVERSION
Superstar Ventures Ltd. 1,250,000 0.10 12,500,000
Superstar Ventures Ltd. 400,000 0.10 4,000,000
MMP SA 2,000,000 0.10 20,000,000
Superstar Ventures Ltd. 5,000,000 0.10 50,000,000
MMP SA (1) 1,900,000 0.10 19,000,000
MMP SA 2,000,000 0.10 20,000,000
Interest and penalty interest accrued 1,418,992 0.10 14,189,920
-------------- ----------------
13,968,992 139,689,920
============== ================
<FN>
(1) The debt is part of a convertible note under which MMP will
loan $6,640,000 over 2 years. See Note 10 - Lease commitments.
It is convertible into common stock at $0.10 per share. The
total shares of common stock to be issued are 66,400,000.
</FN>
These loans (principal and interest) are automatically convertible into
shares of common stock once the Company holds its meeting of
stockholders and its stockholders approve the increase in the number of
authorized shares. The Company has agreed to pay a 2% penalty per month
on the outstanding principal of the loans, payable in shares of common
stock, for each month the Company fails to hold its special
stockholders meeting subsequent to November 30, 1998. The convertible
debt becomes automatically due to Superstar and MMP SA and immediately
payable (with interest plus a 20% penalty) if the Company's
stockholders do not approve an increase in the Company's authorized
shares.
BASIC EPS COMPUTATION
MARCH 31, DECEMBER
1999 31, 1998
Net income of continuing operations (5,240,426) (3,855,316)
--------------------------------
Net loss (5,242,126) (3,830,178)
--------------------------------
Weighted Average number of Shares 40,094,139 40,094,139
--------------------------------
Basic EPS Net loss of continuing operations ($0.13) ($0.10)
--------------------------------
Basic EPS Net loss including discontinued operations ($0.13) ($0.10)
--------------------------------
19
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
March 31, March 31,
DILUTED EPS COMPUTATION 1999 1998
Weighted average shares 40,094,139 40,094,139
Warrants (1) - -
Convertible debt 139,689,920 shares (1) - -
Board options - 2,099,998 vested in 1998 and 1999 - -
--------------------------------
40,094,139 40,094,139
--------------------------------
Diluted EPS Net loss of continuing operations ($0.13) ($0.10)
--------------------------------
Diluted EPS Net loss including discontinued operations ($0.13) ($0.10)
--------------------------------
<FN>
(1) The computation does not assume exercise of the warrants or
options since it would have an antidilutive effect on earnings
per share.
</FN>
16. LIQUIDITY AND CAPITAL RESOURCES
The Company has continued to use its cash reserves to fund its
operations. The ownership, development and operation of media
interests, including the Onyx television station requires substantial
funding. Due to the poorer than expected advertising revenues at Onyx
in its second and third years of operation, the funds raised by the
Company since commencement were expended earlier than anticipated. To
date, the Company has historically financed itself through sales of
equity securities and debt financing.
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.
On June 30, 1997, the Company received subscriptions for $4 million in
a Private Placement offering of its securities to certain accredited
investors. In the offering, the Company agreed to issue an aggregate of
7,017,543 shares of common stock, $.001 par value per share, at a
purchase price of $0.57 per share. On June 30, 1997, $1,500,000 of the
proceeds of the subscription was received and the balance of $2,500,000
was received on August 1, 1997.
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 and
was until December 31, 1997 at the rate of 2%
20
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
above Lloyds Banks' base rate. Interest as from January 1, 1998 is at
the rate of 13% per annum. The terms of the Instar Loan were amended in
August 1997, January 1998 and July 1998.
The terms of the Instar Loan were amended in July 1998 to provide that:
(i) the repayment date is now extended such to accede to a
repayment schedule plan commencing in July 1998 and
terminating on receipt of a final installment payment in late
1999; and
(ii) the loan (or any part thereof) may be converted, at the option
of the holder, into fully paid shares of common stock, at a
conversion rate that may be offered from time to time by the
Company to any existing or potential investor.
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. 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. See Note 17.
On January 9, 1998, CM(UK) borrowed an aggregate of $1,250,000 from
Superstar Ventures Limited ("Superstar"). Such loan was evidenced by
two 13% Convertible Secured Promissory Notes (the "Notes") in the
original amounts of $750,000 and $500,000, respectively. Of the
aggregate proceeds, $500,000 was used to repay a loan previously made
to CM(UK) by Unbeatable Investments Limited. The Notes bear interest at
the rate of 13% per annum and are convertible into the Company's Common
Stock on the basis of one share of Common Stock for each $0.50 of
outstanding principal and accrued interest. The Notes however, may not
be converted until the Company has held a shareholders meeting at which
its Articles of Association are amended to increase sufficiently the
number of authorized shares of Common Stock of the Company.
On March 23, 1998, MMP, SA ("MMP"), a shareholder of the Company made
available a $2,000,000 Line of Credit ("MMP Line of Credit"), which
carried interest at 13% per annum. The principal and accrued interest
is repayable on December 31, 1998, or earlier if the Company's cash
flow enables repayment.
On March 25, 1998, Superstar loaned the Company an additional $400,000,
payable on the same terms as the MMP Line of Credit.
On June 16, 1998, the Company entered into two Memorandum of
Understanding Agreements ("MOU") with AB Groupe ("AB"), (which is the
parent company of MMP) and Superstar to continue to fund the Company's
operations. These new Agreements will provide up to $11.64 million,
$5.4 million in the form of cash investment to be infused over a one
year period and $6.24 million through providing operating services to
the Company over a period of two years. The new funding will initially
be in the form of debt to be automatically converted into shares of
common stock at $0.10 cents per share upon and after approval of an
increase in the Company's authorized capital at the next shareholders
meeting. (See Note 15)
On March 10, 1999, the Company entered into a new $6 Million
Convertible Promissory Note Agreement with AB to provide additional
funding for the Company's operations including $800,000, which was paid
for the purchase of certain technical equipment necessary to implement
the Service Agreement dated July 27, 1998; $3 million is to be loaned
in cash over the five months to July 31, 1999; of which $2,400,000 has
been received to July 2, 1999,
21
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
and the balance of $2.2 million of the Note is reserved for the agreed
upon settlement of the Instar loan, (See Note 17). The Note bears
interest at the rate of 10% per annum, and is automatically converted
into the Company's Common Stock on the basis of one share of Common
Stock for each $0.10 of principal and interest. As previous, the Note,
may not be converted until the Company has held its stockholders'
meetings at which its Articles of Association are amended to provide
the sufficient number of authorized shares of Common Stock of the
Company.
17. SUBSEQUENT EVENTS
The Company has reached an agreement in principal to settle the Instar
Loan. Under the terms of the settlement, the Company will pay Instar
$2.2 million in full settlement of this loan. As part of this
settlement, the Company's obligations to Instar and Universal will be
extinguished. (See Notes 8 and 16). Additionally, the obligations of
Latitude Investments Ltd. to the Company will be deemed paid in full.
(See Note 5). As part of the settlement, all of the securities given
will be released. This transaction is expected to result in a net
credit to income of some $400,000 representing the settlement of the
litigation.
The litigation concerning the Fontal loan has been fully settled for
$327,500, and the related Promissory Note has been fully paid and
satisfied. (See Notes 8 and 14).
18. RESTATEMENT
Subsequent to the issuance of the Company's consolidated financial
statements for the year ended December 31, 1997, the Company determined
that a holding of the Company's shares held at year end by a subsidiary
company as an investment, should have been reflected as an element of
stockholders equity. The 1997 financial statements have been restated
to reflect this investment as an element of the Stockholders' Equity at
their original cost of $0.57 per share. Accordingly, the comparative
1998 unaudited financial statements have been restated from the amounts
previously reported as follows:
AS PREVIOUSLY
REPORTED AS RESTATED
($) ($)
---------------------------------
For the three months ended March 31, 1998
Other (expenses) / income (193,308) (99,013)
Loss from continuing operation before taxation (4,021,946) (3,933,213)
Net loss after taxation (3,925,051) (3,908,085)
Net loss per share - basic and diluted ($0.10) ($0.10)
22
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
19. SEGMENT INFORMATION BY ACTIVITY AND GEOGRAPHIC AREA
The following financial information is summarized by business segment
and country.
- The television media segment contains the operations of Onyx;
and
- The technology segment contains the operations of Unimedia,
Pixel and TopCard.
Capital Media Group's activities are concentrated in Germany, France
and Israel (Revenues account for: to March 1999 - approximately 56%,
24% and 20%, respectively, to March 1998 - approximately 51%, 20% and
29%, respectively.
23
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
TELEVISION TECHNOLOGY ELIMINATION TOTAL
MEDIA &
CORPORATE
THREE MONTHS ENDED MARCH 31, 1999
Revenues 326,192 258,700 - 584,892
Inter-segment revenues - - - -
--------------- --------------- ---------------- ---------------
Total revenues 326,192 258,700 - 584,892
Income (losses) from operations (1,218,869) (55,568) (586,709) (1,861,146)
Other (expense) income 10,244 (21,332) - (11,088)
Interest revenue - 8,291 - 8,291
Interest expenses (9,395) (17,971) (797,001) (824,367)
Other financial (expense) income, net (1,410,090) 38,649 (1,123,112) (2,494,553)
Equity in net losses of affiliates - (8,299) (47,138) (55,437)
Loss in discontinued business - - (1,700) (1,700)
Income tax benefit (121) - - (121)
Minority interest - (2,005) - (2,005)
--------------- --------------- ---------------- ---------------
Net loss (2,628,231) (58,235) (2,555,660) (5,242,126)
=============== =============== ================ ===============
Total assets 1,921,868 3,822,932 1,192,432 6,937,232
=============== =============== ================ ===============
Capital expenditure 800,000 0 0 800,000
=============== =============== ================ ===============
Depreciation of fixed assets 65,311 38,564 3,425 107,300
=============== =============== ================ ===============
Germany France Israel Other Total
Corporate
Revenues 326,192 140,924 117,776 - 584,892
Inter-segment revenues - - - - -
--------------- --------------- ---------------- --------------- ---------------
Total revenues 326,192 140,924 117,776 - 584,892
Income (losses) from operations (1,218,869) (101,121) 45,553 (586,709) (1,861,146)
Other (expense) income 10,244 (21,332) - - (11,088)
Interest revenue 0 0 8,291 - 8,291
Interest expenses (9,395) (17,971) - (797,001) (824,367)
Other financial (expense) income, net (1,410,090) 38,649 - (1,123,112) (2,494,553)
Equity in net losses of affiliates - - (8,299) (47,138) (55,437)
Loss in discontinued business - - - (1,700) (1,700)
Income tax benefit (121) - - - (121)
Minority Interest - (2,005) - - (2,005)
--------------- --------------- ---------------- --------------- ---------------
Net loss (2,628,231) (103,780) 45,545 (2,555,660) (5,242,126)
=============== =============== ================ =============== ===============
Total assets 1,921,868 3,116,295 706,637 1,192,432 6,937,232
=============== =============== ================ =============== ===============
Capital expenditure 800,000 0 0 0 800,000
=============== =============== ================ =============== ===============
Depreciation of fixed assets 65,311 33,314 5,250 3.425 107,300
=============== =============== ================ =============== ===============
24
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
TELEVISION TECHNOLOGY ELIMINATION TOTAL
MEDIA &
CORPORATE
THREE MONTHS ENDED MARCH 31, 1998
Revenues 319,055 300,877 - 619,932
Inter-segment revenues - - - -
--------------- -------------- ---------------- ---------------
Total revenues 319,055 300,877 - 619,932
Income (losses) from operations (2,154,875) (137,965) (717,115) (3,009,955)
Other (expense) income 51,573 (150,586) - (99,013)
Interest revenue 0 13,540 - 13,540
Interest expenses (8,837) (86,459) (126,573) (221,869)
Other financial (expense) income, net (1,029,645) (10,527) 473,865 (566,307)
Equity in net losses of affiliates - (22,000) (33,018) (55,018)
Profit in discontinued business - - 25,138 25,138
Income tax benefit (481) 5,890 - 5,409
Minority interest - 77,897 - 77,897
--------------- -------------- ---------------- ---------------
Net loss (3,142,265) (310,210) (377,703) (3,830,178)
=============== ============== ================ ===============
Total assets 1,921,868 2,051,357 3,443,602 7,026,918
=============== ============== ================ ===============
Capital expenditure 0 358,405 0 358,405
=============== ============== ================ ===============
Depreciation of fixed assets 35,675 108,261 3,668 147,604
=============== ============== ================ ===============
Germany France Israel Other Total
Corporate
Revenues 319,055 124,940 175,937 619,932
Inter-segment revenues - - - - -
--------------- -------------- ---------------- -------------- ---------------
Total revenues 319,055 124,940 175,937 - 619,932
Income (losses) from operations (2,154,875) (206,315) 68,359 (717,115) (3,009,955)
Other (expense) income 51,573 (150,586) - - (99,013)
Interest revenue 0 0 13,540 - 13,540
Interest expenses (8,837) (86,459) - (126,573) (221,869)
Other financial (expense) income, net (1,029,645) (10,527) - 473,865 (566,307)
Equity in net losses of affiliates - - (22,000) (33,018) (55,018)
Profit in discontinued business - - - 25,138 25,138
Income tax benefit (481) 5,890 - - 5,409
Minority Interest - 77,897 - - 77,897
--------------- -------------- ---------------- -------------- ---------------
Net loss (3,142,265) (370,100) 59,890 (377,703) (3,830,178)
=============== ============== ================ ============== ===============
Total assets 1,532,959 1,228,183 823,174 3,442,602 7,026,918
=============== ============== ================ ============== ===============
Capital expenditure 0 0 358,405 0 358,405
=============== ============== ================ ============== ===============
Depreciation of fixed assets 35,675 54,165 54,096 3,668 147,604
=============== ============== ================ ============== ===============
25
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 DATA 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, 1998 (THE "FORM 10-K")
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH
31, 1998
The net loss for the quarter ended March 31, 1999 was $5.24 million,
compared to a net loss of $3.83 million for the three months ended March 31,
1998. At an operating level, however, the operating loss decreased significantly
to $1.86 million for the quarter ended March 31, 1999, compared to $3.0 million
for the quarter ended March 31, 1998. The increase in net loss for the 1998
first quarter was primarily attributable to an increase in the financial expense
charge in respect of higher loan interest and a significant non-cash foreign
exchange loss arising since December 31, 1998. See Note 12 of Notes to Unaudited
Consolidated Financial Statements.
The net loss per share for the quarter ended March 31, 1999 (basic and
diluted) including discontinuing operations was $0.13, compared to a net loss
per share (basic and diluted) of $0.10 for the quarter ended March 31, 1998.
Weighted average shares outstanding basic and diluted were 40,194,139 for both
periods.
The March 31, 1999 Consolidated Financial Statements have been restated
to conform to the 1998 Annual Consolidated Financial Statements. The restatement
is in respect of the treatment of the Company's issued stock held by a
subsidiary company within Investments in the original 1997 Financial Statement
with the cost adjusted by a year end valuation provision. The comparatives in
the March 1999 Financial Statements were restated to show the holding at
original cost and as an element of Stockholders' Equity.
Operating revenues for the quarter ended March 31, 1999 totaled $0.58
million, a decrease of $35,000 compared to revenues of $0.62 million for the
quarter ended March 31, 1998. Both Onyx and TopCard recorded small increases in
their operating revenue of $7,000 and $38,000 respectively, whilst Pixel had a
decrease in revenue of $58,000.
Operating costs, including staff costs, depreciation and amortization
totaled $2.45 million for the quarter ended March 31, 1999, compared to $3.63
million for the quarter ended March 31, 1998. The net decrease in operating
costs is primarily reflective of the cost reductions made across all the group
operations, but particularly at Onyx, where operating costs were reduced to
$1.55 million in the quarter to March 31, 1999 compared to $2.47 million in the
quarter ended March 31, 1998. Management believes that Onyx's operating costs
will be further reduced in 1999 compared to 1998 as a result of the full
implementation of the strategic agreement with Groupe AB which was entered into
in August 1998 and became effective in December. See the Form 10-K. Operating
expenses of Onyx include programming costs, broadcast studio expenses and
transmission expanses. Under the two year strategic alliance agreement, a
subsidiary of Groupe AB provides Onyx with television technical services, the
use of a transponder and uplink facilities, transmission services and use of a
master control room as well as contributing to cable transmission fees, all for
an annual cost of $3.12 million. The Company believes that the agreement will
provide annual saving of up to $3 million compared to the costs of the original
1995 contracts for these services which have now been terminated.
Depreciation and amortization for the quarter ended March 1999 was
$0.22 million compared to $0.23 million for the corresponding period in 1998.
The increase in Financial Expense relates to higher interest expense of
$0.82 for the quarter ended March 1999, compared to $0.21 million for the
quarter ended March 1998. This is due to the substantial increase in loans
obtained over the year. For the quarter ended March 31, 1999 Financial Expense
also included a charge of $2.49 million (Quarter to March 31, 1998 $0.57 million
charge) in respect of non-cash foreign exchange losses arising from changes in
currency exchange rates at March 31, 1999 compared to exchange rates at December
31, 1998.
26
As a result of all of the above factors, the Company's loss from
continuing operations was of $5.24 million for the quarter ended March 1999, an
increase of $1.30 million over the loss of $3.94 million for the quarter ended
March 31, 1998.
Total revenues at Onyx Television in Fiscal 1999 totaled $0.33 million,
a small increase of $7,000 over revenues of $0.32 million in the quarter ended
March 31, 1998. Onyx's management believes that as a result of the strategic
alliance agreement with Groupe AB, together with changes in governmental
regulations being put into effect in 1999, increased network distribution
already achieved and the recently appointed media agency, Onyx should be able to
substantially increase the development of its revenue over the next year.
The German media authorities have recently confirmed that Onyx's rating
in Germany are ahead of its two main competitors VH-l and VIVA 2 and the Company
believes that Onyx's distributions will increase further during 1999. At the
present time, Onyx Television reaches approximately 11 million cable homes and
an indeterminable number of direct satellite homes. See the Form 10-K.
Both Pixel and TopCard reported net profit of $45,000 and $48,000
respectively, for the first quarter of 1999 compared to $60,000 and nil for the
corresponding period in 1998. Pixel includes a share of the net loss of $8,000
for Henry, its 47.5% owned subsidiary, for 1999 compared to a share of net loss
of $22,000 for the corresponding period. Henry is accounted for on an equity
basis.
During 1998, the Board in its review of investments approved a decision
to dispose of Timerama and it is anticipated that its sale will be concluded
during 1999. Accordingly the operating loss of Tinerama has been reclassified as
a discontinuing operation and the 1998 results have been similarly restated.
Blink reported a similar operating loss for the first quarter of 1999 as for the
same period in 1998. Blink has still not met its original target objectives and
discussions with management are in progress in regard to its potential
divestment.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The ownership, development and operation of media interests, and
particularly the operation of a television station, 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, 1999, the Company has incurred an accumulated deficit of
approximately $53.48 million, principally related to the Company's launch and
operation of Onyx Television. At March 31, 1999, the Company had a negative
working capital of approximately $23.52 million.
INSTAR LOAN
In October 1996, the Company's UK subsidiary, CM (UK), entered into an
agreement to borrow US $2.0 million (the "Instar Loan") from Instar Holdings,
Inc. ("Instar") to fund the Company's working capital requirements (principally
related to the continuing operation of Onyx Television). The Instar Loan is
guaranteed by the Company and Onyx and is secured by a charge on all of CM
(UK)'s assets and a pledge of the stock of CM (UK). Interest was payable monthly
on the Instar Loan, at the rate of 2% above Lloyds Bank base rate until December
31, 1997 and 13% per annum thereafter.
As part of the Instar Loan, CM (UK) granted a charge against all of its
assets and the Company has granted a charge against the shares of CM (UK) to
secure the obligation in connection with the guaranty of the transponder lease.
See Note 16 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,
27
and (iii) that CM (UK) pledge all of its assets and that the Company pledge its
stock interest in CM (UK) to secure their obligations in connection therewith.
Instar and Universal have agreed that their liens on the Company's assets shall
have equal status and that they shall share equally in the proceeds of the
collateral.
At the date of this Form 10-QSB, the Company and Instar have reached an
agreement in principal to settle their dispute. Under the Instar Settlement, the
Company has agreed to pay Instar $2.2 million, $1.5 million of which will be
paid at the closing of the Instar Settlement and the balance of which will be
paid (without interest) in installments of $100,000 over the next seven months.
The Company has also agreed to issue 2.0 million shares to Instar when the
Company's stockholders approve an increase in the Company's authorized common
stock. Groupe AB has agreed to guaranty repayment of the settlement amounts, and
is obligated to deliver a guaranty agreement to Instar within 30 days after the
closing. As part of the settlement, Universal has agreed that the Company shall
no longer be liable to it regarding its guaranty of the transponder lease.
Additionally, as part of the settlement: (i) the liability of Latitude
Investments, Ltd. ("Latitude") to the Company will be extinguished; (ii) the
Company and Instar, Universal and Latitude will enter into mutual releases
regarding their respective obligations in connection with these matters, and
(iii) the Company and Charles Koppel, the former Chief Executive Officer of the
Company, will enter into a mutual general release. As part of the settlement,
Instar and Universal will release their charges against CM(UK)'s assets and the
stock of CM(UK). The Instar Settlement is expected to be completed in the near
future.
EQUITY OFFERINGS BY THE COMPANY
In 1995, the founders of the Company organized Excalibur Communications
Limited (n/k/a (CM(UK)) to develop Onyx Television and to own the Company's
interest in TIAG. In December 1995, the founders of the Company exchanged their
shares in Excalibur for shares of the Company's common stock. Simultaneously, in
late 1995 and early 1996, the Company raised net proceeds of $14.4 million in a
private placement of its securities.
On March 3, 1997, the Company closed a private placement in which the
Company raised net proceeds of $5.85 million. The funds from this placement were
used to fund the continuing operation of Onyx Television and for general
corporate purposes. The Company issued an aggregate of 12.0 million shares of
Common Stock in this private placement ($0.50 per share), including 4.0 million
shares of Common Stock subscribed by Unimedia. At the time of this private
placement, Unimedia was not an affiliate of the Company.
On June 25, 1997, the Company accepted a subscription for $4.0 million
from Unimedia. In this subscription, the Company agreed to issue an aggregate of
7,017,543 shares of Common Stock at a purchase price of $0.57 per share. On June
30, 1997, $1,500,000 of the proceeds of the subscription was received by the
Company and the balance of $2,500,000 was released to the Company from escrow on
July 31, 1997, simultaneously with the closing of the share exchange between
certain of the stockholders of Unimedia and the Company, as described below. In
connection with the private placement, the Company paid Unimedia a fee of
$240,000, which was netted against the purchase price of the Shares. At the time
of this private placement, Unimedia was not an affiliate of the Company.
Simultaneously with and immediately after this placement, Unimedia
transferred 6,109,140 of the shares which it owed to eight investors at prices
ranging from $0.57 to $0.75 per share. One of these investors was an entity
controlled by David Ho, who at the time of this transaction was not an affiliate
of the Company. That entity, Unbeatable Investments Limited ("Unbeatable")
acquired 4,385,965 of these shares. None of the other investors who purchased
shares from Unimedia at this time were affiliates of the Company or Unimedia. In
connection with the transfer of these shares, Unimedia paid a fee to Valfab for
its services in connection with introducing Unimedia to certain of these
investors. The fee consisted of $195,000 in cash and 106,666 shares of the
Common Stock owned by Unimedia in this placement.
On July 31, 1997, the Company acquired 50.3% of the outstanding common
stock of Unimedia in exchange for 4,333,000 shares of the Company's authorized
but unissued common stock. Stockholders of Unimedia who did not participate in
the first closing of the Unimedia share exchange had until September 5, 1997 to
convert their Unimedia securities into shares of Common Stock and on September
5, 1997, the Company acquired an additional 31.3% of Unimedia's common stock in
exchange for an additional 2,693,600 shares of the Company's authorized but
unissued Common Stock. Shares issued in the Unimedia Share Exchange were valued
on the Company's books at $0.57 per
28
share. The Company acquired Unimedia based on their belief that the merged
entity would cross fertilize Internet development activities and television
distribution in order to poise the Company at the convergence of thematic
entertainment television and the internet. Additionally, Unimedia and investors
identified by Unimedia provided significant financing for use in the Company
business.
As part of the completion of the first closing of the Unimedia share
exchange, four persons designated by Unimedia became directors of the Company
(Gilles Assouline, Michel Assouline, David Ho and Jean Pierre Souviron). At the
time, the Company's Board consisted of eight persons (Charles Koppel, James
Leitner, Karl Hauptmann, Barry Llewellyn, Stephen Kornfeld, Stanley Hollander,
Marc Sillam and Jean Francois Klein), and it was intended that the Board would
continue as a twelve person Board after completion of the Unimedia Share
Exchange. However, shortly after the closing, three of the Company's Board
members (Charles Koppel, James Leitner and Karl Hauptmann) unexpectedly resigned
from the Board.
At the time of the closing of the Unimedia Share Exchange, Unimedia
held 4,908,403 shares of the Common Stock. Subsequent to the closing of the
Unimedia Share Exchange, Unimedia has transferred 3,240,487 of these shares to
investors in several private transactions, as follows:
TRANSFEREE SHARES
TRANSFERRED
Transferees not affiliated with the Company and Unimedia...... 1,244,487
Stockholders of TopCard(1).................................... 456,000
Gralec Establishment(2)....................................... 1,540,000
---------
3,240,487
=========
(1) Shares were transferred to the stockholders of TopCard in
connection with Unimedia's acquisition of 80% of TopCard's
outstanding shares. See "Business of the Company-Other
Businesses-TopCard, S.A." in the Form 10-K for information
regarding this transaction. None of the TopCard stockholders
were affiliates of the Company or Unimedia at the time that
these shares were transferred to the stockholders of TopCard.
(2) During the first half of 1998, Unimedia transferred 1,540,000
shares of the Company's Common Stock to Gralec Establishment
("Gralec") for an aggregate purchase price of $500,000. The
Company agreed to register the shares of Common Stock
transferred to Gralec, pursuant to a registration rights
agreement, on or before November 30, 1998, which has not
occurred. As part of the agreement, Unimedia agreed that
Gralec may put the shares back to Unimedia for the purchase
price if these shares were not registered by that date.
Since this registration has not taken place, the Company has
agreed with Gralec to extend the period during which the
registration may be completed until April 30, 1999. In return,
the Company has granted Gralec: (1) a subscription to purchase
2.2 million shares for a purchase price equal to the net
proceeds from the sale of 50,000 ActivCard shares, an EASDAQ
quoted stock and (ii) an option to purchase 6.0 million shares
of its authorized but unissued common stock at an exercise
price of $0.10 per share, which option will be exercisable
until 30 days after the shares of Common Stock originally
issued to Gralec are registered for resale.
These transfers were effected to raise funds for the Company's and
Unimedia's operations and to complete the acquisitions of TopCard and Pixel.
29
At the date of this Form 10-QSB, Unimedia continues to own 1,667,916
shares of the Company's Common Stock, including 600,000 shares which have been
pledged by Unimedia to Bank Hapoalin to secure Unimedia's guarantee to that bank
of certain indebtedness of Pixel, Ltd.
The Company's short term funding requirements were also met during the
fourth quarter of 1997 through direct private placements by the Company to four
non-U.S. investors of an aggregate of 793,335 shares of the Company's Common
Stock (raising $586,000 at prices between $0.60 and $0.75 per share).
FUNDS BORROWED SUBSEQUENT TO THE UNIMEDIA SHARE EXCHANGE FROM SUPERSTAR
AND GROUPE AB
In September 1997, the Company borrowed $500,000 of short term working
capital in the form of a convertible loan from Unbeatable. The debt was payable
with interest of 10% per annum in April 1998 and was convertible into shares of
Common Stock at the rate of $0.57 per share.
On January 9, 1998, CM (UK) borrowed an aggregate of $1,250,000 from
Superstar. Such loan was evidenced by two 13% Convertible Secured Promissory
Notes in the original principal amounts of $750,000 and $500,000, respectively
(collectively, the "Notes"). Of the aggregate proceeds, $500,000 was used to
replace a loan previously made to CM(UK) (see above) by Unbeatable. The Notes
bear interest at the rate of 13% per annum and were convertible into shares of
the Company's Common Stock on the basis of one share of Common Stock for each
$0.50 of outstanding principal and accrued interest on the Notes; provided,
however, that the Notes were not convertible until the Company has held a
stockholders meeting at which its Articles of Incorporation were amended to
increase the number of authorized shares of Common Stock of the Company to at
least the number required for conversion of the Notes. The Notes were due and
payable on March 31, 1998 but, pursuant to the Notes and an agreement among the
Company, CM (UK) Superstar, Instar Holdings, Inc. ("Instar") and Universal
Independent Holdings Limited ("Universal"), payments on the Notes may only be
made equally pro rata as and when payments are made to Instar according to a
stated proportion. Instar and Universal are secured creditors of the Company and
CM (UK). To secure its obligations under the Notes, CM (UK) and the Company have
granted to Superstar a security interest on the same collateral upon which
Instar has been granted a security interest by CM (UK) and the Company and upon
identical terms and conditions as are set forth in the security documents
entered into between Instar and CM (UK) (and Instar and the Company) pursuant to
the loan documents between CM (UK), the Company and Instar. Instar has also
granted to Superstar a right of first refusal to purchase the Instar Loan for
the full amount due before such loan is sold to a third party. The Company also
pledged its interest in 81.6% of Unimedia to Superstar to further secure its
obligations under the Notes. The conversion terms of the Superstar loan were
recently amended and are described below.
Superstar and Unbeatable are parties controlled by David Ho, a Director
of the Company. Superstar received a fee of 200,000 shares of the Company's
Common Stock for arranging the original loan made by Unbeatable to the Company
and will receive a fee of 400,000 shares for arranging the January 1998
Superstar loan (which fee will be payable at such time as the Company has
authorized shares of Common Stock available to issue in order to pay this fee).
Additionally, Superstar has been granted a contingent option such that if such
loan is repaid (and not converted), Superstar shall have a one year option to
purchase up to 2.5 million shares of the Company's authorized and unissued
Common Stock at an exercise price of $.40 per share. See below for the amended
conversion terms of this loan.
On March 23, 1998, MMP, SA ("MMP"), a stockholder of the Company and a
subsidiary of Groupe AB, made available to the Company a line of credit (the
"MMP Line of Credit") pursuant to which the Company borrowed $2,000,000.
Outstanding amounts under the MMP Line of Credit bear interest at the rate of
13% per annum. Outstanding principal and accrued interest was due and payable on
December 31, 1998 and the Loan has recently been amended (see below). As further
consideration for granting the MMP Line of Credit, MMP was granted the right,
until March 31, 2000, to purchase shares of authorized but unissued Common Stock
of the Company at a price of $0.20 per share up to the aggregate outstanding
principal amount of and accrued interest on the line of credit; provided,
however, that the option may not be exercised until the Company holds a
stockholders meeting to authorize additional shares of authorized but unissued
Common Stock. Such purchase would not affect the outstanding principal amount of
and accrued interest on the MMP Line of Credit. See below for the amended
conversion terms of this loan.
30
On March 25, 1998, Superstar loaned the Company an additional $400,000,
payable on the same terms as the MMP Line of Credit. In connection with this new
loan, Superstar was granted an option to purchase shares of the Company's common
stock on the same terms as the option granted to MMP as described above. See
below for the amended conversion terms of this loan.
In August 1998, the Company entered into agreements with Superstar and
Groupe AB pursuant to which Superstar agreed to make available $5.0 million and
Groupe AB agreed to provide cash and services aggregating $6.64 million
($400,000 in cash which was payable to the Company in August 1998 and $6.24
million in services over a two year period). Such funding is initially in the
form of debt (bearing interest at the rate of 13% per annum), but will be
automatically converted into equity at the rate of $0.10 per share upon and
after approval of an increase in the Company's authorized common stock available
for issuance. If stockholder approval of the increase in the authorized common
stock is not obtained, then the debt incurred to that date, together with
interest and penalties, will be immediately due and payable. Once these
obligations are converted into Common Stock and assuming no exercise of options
and warrants, Superstar and Groupe AB will control approximately 80% of the
Company's outstanding common stock and will control the Company.
In December 1998, when the Company did not meet its obligation to hold
a stockholders' meeting by November 30, 1998, Superstar and Groupe AB demanded
that the Company: (i) reduce the conversion price on all of its outstanding
convertible debt to $0.10 per share; and (ii) that the Company pay a penalty of
2% of the outstanding principal amount of the loans (payable in shares at $0.10
per share) for each month during which the Company does not hold its special
stockholders meeting to seek approval of the amendment to the Company's articles
of incorporation. On December 18, 1998, the Board agreed to these changes.
Superstar and Groupe AB also agreed, as part of the amendment to the terms of
their loans, that all of the convertible debt which they hold will now
automatically convert into Common Stock upon the approval by the Company's
stockholders of the increase in the Company's authorized Common Stock.
In March 1999, Groupe AB agreed to fund an additional $6.0 million to
the Company for working capital and to all the Company repay indebtedness,
including the funds required to complete the Instar Settlement. Such amount will
be funded over the next year and will automatically convert into Common Stock at
$0.10 per share.
DEBT DUE FROM LATITUDE INVESTMENTS LIMITED
The Company's balance sheet at December 31, 1998 includes a due from
stockholder of $313,691. This amount represents an amount due from Latitude, one
of the Company's founding stockholders. See "Certain Relationships and Related
Transactions" in the Form 10-K. This amount was initially presented to the
Company as a deposit paid by Latitude to PTT Telecom on behalf of CM (UK) and
Latitude received credit for the amount of such deposit in connection with its
original 1995 subscription to purchase shares of CM (UK)'s stock (which shares
were exchanged for shares of the Company's Common Stock in December 1995). The
Company had determined that no deposit was ever paid by Latitude to PTT Telecom
and that therefore the shares of Common Stock owned by Latitude were not fully
paid as presented. This obligation will be deemed satisfied as part of the
Instar Settlement.
The Company has been advised by KPN Telecom, formerly known as PTT
Telecom ("KPN"), that Onyx Television owes them approximately $1,060,000. The
Company believes that the amount due is significantly lower, due to failures in
the performance of services by KPN over the period of the agreement. At the
present time, the Company has accrued the entire amount allegedly owed to KPN
until this dispute is resolved. Additionally, the Company has been advised that
KPN has called upon the guaranty from Universal (see discussion above) and drawn
down upon the 500,000 ECU (approximately $587,000) being held to secure the
guaranty. As a result, the Company owed the amount paid by Universal back to
Universal. However, the Company's obligation to Universal will be deemed
satisfied as part of the Instar Settlement.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that the proceeds from the Superstar and Group AB
agreements will fund, along with anticipated revenues from operations, the
Company's operations for the next 12 months (assuming that the Company's
31
stockholders approve an increase in the Company's authorized Common Stock
available for issuance is increased thereby). However, if revenues do not meet
expectations, additional funding will be required. The Company will also require
additional funding to meet its non-operating indebtedness, and may issue
additional shares of its Common Stock to repay some of this indebtedness. There
can be no assurance that such funding will be available.
In regard to its future capital raising efforts to fund the Company's
businesses, the Company is likely going to have to fund these future capital
requirements through additional sales of its equity securities. The Company may
also seek funding for particular projects through investments directly into
those projects. The Company is also seeking additional strategic alliances with
respect to its other current and proposed businesses and to reduce operating
costs in all of its businesses whenever possible. No definitive agreements have
been entered into to date.
YEAR 2000 COMPLIANCE
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
two-digit year is commonly referred to as the Year 2000 compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
date-based information.
The Company believes that the software currently being used in its
operations is either year 2000 compliant or can be upgraded to bring it into
conformity with year 2000 requirements without a material cost to the Company.
32
PART 2
ITEM 1. LEGAL PROCEEDINGS
For information regarding the status of the Company's
currently outstanding litigation, see Note 14 of Notes to
Unaudited Consolidated Financial Statements included herein
and Item 3. "LEGAL PROCEEDINGS" in the Company's 1998
Form 10-KSB.
ITEM 2. CHANGE IN SECURITIES
See Note 15 of Notes to Unaudited Consolidated Financial
Statements included herein and Item 2. "MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION" included herein
for information regarding changes in securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's
securities holders during the first quarter of 1999.
ITEM 5. OTHER INFORMATION
The Company intends to hold a stockholders' meeting in the
near future. The Company intends to make the following
proposals for consideration by its stockholders at the
meeting: (i) a proposal to ratify the terms of the
arrangements between the Company and Groupe AB and Superstar,
as more particularly described in "Management's Discussion and
Analysis or Plan of Operations;" (ii) a proposal to reverse
split the Company's outstanding common stock on a one-for-ten
basis, with the Company's authorized common stock remaining at
50 million shares (thereby increasing the Company's available
shares for issuance to 45,990,587 shares and allowing for the
issuance of shares due to Groupe AB and Superstar upon the
exercise of outstanding convertible debt); (iii) to ratify the
grant of a two year warrant to purchase 16.0 million shares at
$0.10 per share to an entity controlled by the Company's
Chairman; and (iv) to elect six persons to serve as directors
of the Company until the next annual stockholders' meeting or
until their successors are elected and qualified. The Company
has filed a Preliminary Proxy Statement with the SEC and
expects to mail to its stockholders in the near future a
definitive proxy statement for use in connection with the
meeting. All share references in this Form 10-QSB are before
the proposed reverse stock split.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
27.1 Financial Data Schedule
33
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 21st day of July, 1999.
CAPITAL MEDIA GROUP LIMITED
By:/s/ GILLES ASSOULINE
-------------------------------------------------------
Gilles Assouline, President and Chief Executive Officer
By:/s/ STEPHEN COLEMAN
-------------------------------------------------------
Stephen Coleman, Chief Financial Officer
34
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule