SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-24796
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
(Exact name of registrant as specified in its charter)
BERMUDA N/A
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Clarendon House, Church Street, Hamilton HM CX Bermuda
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 441-296-1431
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for each shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of November 13, 1996
- ----- -----------------------------------
Class A Common Stock, par value $.01 16,249,398
Class B Common Stock, par value $.01 7,592,903
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
Consolidated Balance Sheets
September 30, 1996 and December 31, 1995
($000s)
ASSETS September 30, December 31,
1996 1995
(unaudited)
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents 14,309 53,210
Investments in marketable securities 1,817 10,652
Restricted cash 1,600 4,216
Accounts receivable (net of allowances of $2,148, $1,105) 22,051 32,475
Program rights costs 10,842 9,219
Value-added tax recoverable 67 733
Advances to affiliates 2,741 953
Prepaid expenses 6,749 5,270
-------- --------
Total current assets 60,176 116,728
INVESTMENT IN UNCONSOLIDATED AFFILIATES 39,830 12,433
LOANS TO AFFILIATES 24,306 6,272
PROPERTY, PLANT & EQUIPMENT (net of depreciation
of $18,549, $10,281) 58,131 51,699
PROGRAM RIGHTS COSTS 11,442 10,496
BROADCAST LICENSE COSTS AND OTHER INTANGIBLES (net
of amortization of $1,370, $1,007) 2,036 2,365
LICENSE ACQUISITION COSTS (net of amortization of $654, $54) 4,123 4,723
GOODWILL 29,644 1,510
ORGANIZATION COSTS (net of amortization of $858, $507) 1,044 1,337
DEVELOPMENT COSTS (net of allowance of $3,627, $4,373) 17,373 10,127
DEFERRED TAXES 1,734 559
OTHER ASSETS 3,158 3,778
-------- --------
Total assets 252,997 222,027
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY September 30, December 31,
1996 1995
------------- -----------
CURRENT LIABILITIES:
Accounts payable 11,997 12,956
Accrued liabilities 19,025 9,804
Duties and other taxes payable 1,030 288
Income taxes payable 7,885 15,946
Dividend payable 1,355 --
Current portion of obligations under capital lease 1,729 2,111
Current portion of credit facilities 25,402 2,661
Current portion of investment payable 10,864 --
Advances from affiliates 324 2,687
-------- --------
Total current liabilities 79,611 46,453
DEFERRED INCOME TAXES 2,886 2,317
OBLIGATIONS UNDER CAPITAL LEASE 7,740 8,747
LONG-TERM PORTION OF CREDIT FACILITIES 23,517 6,766
LONG-TERM PORTION OF INVESTMENT PAYABLE 20,415 --
OTHER LIABILITIES -- 173
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 7,356 18,635
SHAREHOLDERS' EQUITY:
Preferred Stock, $0.01 par value: authorized: 5,000,000 shares;
issued and outstanding: none -- --
Class A Common Stock, $0.01 par value: authorized:
30,000,000 shares; issued and outstanding:
10,292,504 shares at September 30, 1996 and 10,294,549
at December 31, 1995 103 103
Class B Common Stock, $0.01 par value: authorized:
15,000,000 shares; issued and outstanding:
8,029,797 shares 80 81
Additional paid-in capital 186,521 187,997
176,872 Class A Treasury stock of $0.01 par value - retired -- (2,476)
-------- --------
186,521 185,521
Accumulated deficit (75,073) (48,001)
Cumulative currency translation adjustment (159) 1,232
-------- --------
Total shareholders' equity 111,472 138,936
-------- --------
Total liabilities and shareholders' equity 252,997 222,027
======== ========
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
Consolidated Statements of Operations
($000s, except per share data)
For the three months For the nine months
ended September 30, ended September 30,
-------------------------- -------------------------
1996 1995 1996 1995
(unaudited) (unaudited) (unaudited) (unaudited)
----------- ----------- ----------- -----------
GROSS REVENUES 28,289 18,920 105,224 77,117
Discounts and agency commissions (5,857) (3,386) (20,987) (14,345)
----------------------- -------------------------
NET REVENUES 22,432 15,534 84,237 62,772
STATION EXPENSES:
Operating costs and expenses 11,594 6,487 36,017 19,691
Amortization of programming rights 5,171 3,313 15,440 9,805
Depreciation of station fixed assets and other intangibles 3,279 1,679 9,388 4,875
----------------------- -------------------------
Total station operating costs and expenses 20,044 11,479 60,845 34,371
Selling, general and administrative expenses 5,682 1,358 14,417 4,297
----------------------- -------------------------
CORPORATE EXPENSES:
Corporate operating costs and development expenses 4,218 2,551 10,728 7,090
Stock compensation charge -- 50 -- 860
Amortization of goodwill and allowance for development costs 744 600 1,407 1,500
----------------------- -------------------------
4,962 3,201 12,135 9,450
OPERATING (LOSS) INCOME (8,256) (504) (3,160) 14,654
EQUITY IN LOSS OF UNCONSOLIDATED AFFILIATES (5,621) (3,927) (11,557) (10,693)
INTEREST AND OTHER INCOME 205 147 1,284 1,106
INTEREST EXPENSE (1,382) (1,375) (2,914) (3,509)
FOREIGN CURRENCY EXCHANGE (LOSS) GAIN 713 (47) (917) 68
----------------------- -------------------------
Net loss before provision for income taxes (14,341) (5,706) (17,264) 1,626
Provision for income taxes (885) (1,172) (9,198) (9,350)
-------- --------
Net loss before minority interest in consolidated subsidiaries (15,226) (6,878) (26,462) (7,724)
MINORITY INTEREST IN INCOME (LOSS)
OF CONSOLIDATED SUBSIDIARIES 534 (258) (610) (4,181)
----------------------- -------------------------
Net Loss (14,692) (7,136) (27,072) (11,905)
======================= ========================
PER SHARE DATA
Net loss per common share (0.80) (0.51) (1.48) (0.85)
Weighted average number of common shares outstanding (000's) 18,348 14,021 18,348 14,021
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
Consolidated Statements of Cash Flows
($000s)
For the nine months
ended September 30,
-------------------
1996 1995
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss (27,072) (11,905)
Adjustments to reconcile net loss to net cash
generated from operating activities:
Equity in loss of unconsolidated affiliates 11,557 10,693
Depreciation & amortization 27,175 14,680
Minority interest in income (loss) of consolidated
subsidiaries 610 4,181
Valuation allowance for development costs 253 1,500
Stock compensation charge -- 860
Changes in assets & liabilities:
Accounts receivable 9,239 (2,512)
Related party receivable -- 462
Program rights costs (18,656) (18,738)
Value-added tax recoverable 666 (98)
Advances to affiliates (4,174) --
Prepaid expenses (1,376) (3,472)
Other assets -- (60)
Accounts payable (736) (380)
Accrued liabilities 8,905 1,566
Income & other taxes payable (7,700) 7,707
Other liabilities -- 3,305
------- -------
Net cash from operating activities (1,309) 7,789
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in unconsolidated affiliates (32,684) (30,146)
Investments in marketable securities 8,835 2,592
Restricted cash 2,616 --
Acquisition of fixed assets (13,219) (5,110)
Acquisition of minority shareholder's interest (16,839) --
Purchase of subsidiary operation (2,962) --
Dividends paid to minority shareholders (1,396) --
Payments for broadcast license costs, other
assets and intangibles (137) (127)
Development costs (2,873) (6,312)
------- -------
Net cash used in investing activities (58,659) (39,103)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Current portion of credit facilities 22,770 (2,297)
Financing of acquisition of minority shareholder's
interest 16,839 --
Payments under capital lease (1,236) (1,274)
Loans to affiliates (18,034) --
Capital contributed by shareholders 999 --
Long-term payables (171) --
------- -------
Net cash used in financing activities 21,167 (3,571)
------- -------
IMPACT OF EXCHANGE RATE FLUCTUATIONS ON CASH (100) 43
------- -------
Net decrease in cash and cash equivalents (38,901) (34,842)
CASH AND CASH EQUIVALENTS, beginning of period 53,210 42,002
------- -------
CASH AND CASH EQUIVALENTS, end of period 14,309 7,160
====== =====
6
CENTRAL EUROPEAN MEDIA ENTERPRISES, LTD.
Consolidated Statements of Shareholders' Equity (Deficit)
For the Nine Month Period Ended September 30, 1996
($000s)
Cumulative
Class A Class B Additional Currency
Common Common Paid-in Treasury Accumulated Translation
Stock Stock Capital Stock Deficit(1) Adjustment Total
------- ------- ---------- -------- ----------- ---------- -----
BALANCE, December 31, 1995 103 81 187,997 (2,476) (48,001) 1,232 138,936
Foreign Currency Transaltion Adjustment -- -- -- -- -- (1,391) (1,391)
Capoital contributed by Shareholders -- (1) 1,000 -- -- -- 999
REtirement of the Treasury Stock -- -- (2,476) 2,476 -- -- --
Net Loss -- -- -- -- (27,072) -- (27,072)
------- --- -------- ------- ------- ------- -------
BALANCE September 30, 1996 103 80 186,521 -- (75,073) (159) 111,472
======= === ======== ======= ======== ======= =======
- ----------
(1) Of the accumulated deficit of $75,073,000 at September 30, 1996,
$43,938,000 represents loss in unconsolidated affiliates.
1. ORGANIZATION AND BUSINESS
Central European Media Enterprises Ltd., a Bermuda corporation ("CME"), was
formed in June 1994. Through its predecessor companies, CME has been in
operation since 1991. CME, together with its subsidiaries (CME and its
subsidiaries are collectively referred to as the "Company"), develops, owns and
operates national and regional commercial television stations and networks in
the newly emerging markets of Central and Eastern Europe and regional commercial
television stations in Germany.
In the Czech Republic, the Company owns a 88% economic interest in Ceska
Nezavisla Televizni Spolecnost s.r.o. ("Nova TV"), the leading private national
television station in the Czech Republic. On August 1, 1996, the Company
increased its economic interest in Nova TV to 88% from 66% through the
acquisition of a 22% economic interest in Nova TV from Ceska Sporitelna Bank
("CS") (the "Additional Nova TV Purchase"). The Company is in the process of
registering the Additional Nova TV Purchase pursuant to Czech law. On an ongoing
basis, after giving effect to the Additional Nova TV Purchase, the Company is
entitled to 88.0% of the total profits of Nova TV and has 86.0% of the voting
power in Nova TV. CET 21 has a 12% equity interest in Nova TV. The Company
entered into an agreement to lend Dr. Vladimir Zelezny, General Director of Nova
TV, funds to finance his purchase of shares in CET 21 in order to increase his
ownership in CET 21 to 60.0%. This loan will mature in five years. As part of
this agreement, Dr. Zelezny has agreed to vote such shares in accordance with
the vote of the Company with respect to certain matters, including dividends.
In Romania, the Company and two local partners, Adrian Sarbu and Ion Tiriac
operate PRO TV, a commercial television network, through Media Pro International
S.A. ("Media Pro International"). The Company holds a 77.5% equity interest in
Media Pro International, although the Company's partners hold options valid
through October 1997 which, if exercised, would reduce the Company's interest to
approximately 66%. PRO TV launched operations in December 1995 and reaches
approximately 48% of Romania's population. The Company intends to exercise its
option to purchase 49.0% of the equity of PRO TV, SRL, currently owned by
Messrs. Sarbu and Tiriac which holds many of the licenses for the stations which
comprise the PRO TV network. In September 1996, the Company acquired a 95.0%
equity interest in Unimedia SRL ("Unimedia"), which has agreed to acquire a
10.0% equity interest in a consortium, MobilRom ("MobilRom"). MobilRom has
applied for a telecommunications licenses in Romania. Adrian Sarbu owns the
remaining 5.0% of UniMedia. It is anticipated that MobilRom will not have active
operations unless it is awarded such a license.
In Slovenia, the Company launched POP TV in December 1995 together with
MMTV d.o.o. Ljubljana ("MMTV") (formerly known as Boutique MMTV) and Tele 59
d.o.o. Maribor ("Tele 59"), through the formation of Produkcija Plus d.o.o.
("Pro Plus"). POP TV provides programming to and sells advertising for MMTV,
Tele 59 and an additional affiliate, Robin TV. The Company owns 58% of the
equity of Pro Plus, but has an effective economic interest of 72%, as a result
of a 33% economic interest in MMTV and a 33% economic interest in Tele 59, each
of which have a 21% interest in Pro Plus. POP TV reaches approximately 75% of
Slovenia's population. In July 1996, the Company, together with MMTV and Tele 59
entered into an agreement to purchase a 66.0% equity interest in Kanal A, a
privately owned television station in Slovenia, which competes with POP TV (the
"Kanal A Agreement"), which would increase POP TV's broadcast reach to
approximately 85% of the Slovenian population. There is currently an injunction
in effect preventing the completion of the Kanal A Agreement (See "Legal
Proceedings").
2
In the Slovak Republic, the Company has an 80.0% economic and a 49.0%
voting interest in Slovenska Televizna Spolocnost s.r.o. ("STS") which launched
Markiza TV as a national television station on August 31, 1996. Markiza TV
reaches approximately 60% of the Slovak Republic's population.
In Hungary, the Company holds a 95% ownership interest in 2002 Consulting
and Servicing Limited Liability Company ("2002"), the entity through which the
Company intends to develop broadcast operations in Hungary. 2002 has a 97.4%
indirect beneficial ownership interest in Videovox Studio Limited Liability
Company ("Videovox"), a Hungarian dubbing and production company acquired by
2002 in May 1996.
The Company owns a 55.95% non-controlling interest in PULS ("PULS"), a
regional television station based in Berlin, Germany. The partners of PULS have
retained a financial advisor to seek one or more strategic partners for PULS.
Such a strategic partner would be expected to acquire a significant equity
interest in PULS and assume responsibility for PULS' operations. Such a
strategic investment would be anticipated to significantly dilute the Company's
equity investment in PULS and to decrease the Company's future funding
obligations to PULS. Such investment also could result in a material reduction
of the carrying value of the Company's equity investment in PULS, which is
$12,389,000 as of September 30, 1996, and a corresponding charge against the
Company's earnings in the period incurred. Regardless of whether a transaction
with a strategic investor is consummated, there is no assurance that the Company
may not have to take a reduction of all or a portion of the carrying value of
PULS. The Company owns a 50% interest (non-voting profit participation) in
Franken Funk & Fernsehen GmbH ("FFF"), which owns 74.8% of a regional television
station in Nuremberg, Germany, NMF Neue Medien Franken GmbH and Co., K.G.
("NMF"). The Company has a 49% non-controlling interest, and a 50% economic
interest in Sachsen Funk und Fernsehen GmbH, Germany ("SFF") which owns 33.33%
equity interest in Sachsen Fernsehen Betriebs KG, which operates regional
television stations in Leipzig and Dresden, Germany. A reduction of the carrying
value of PULS, or other factors, might cause the Company to reduce all or part
of the carrying value of the Company's investments in FFF and SFF, which were
$5,990,000 and $730,000, respectively, as of September 30, 1996. At the date of
filing the Company's Form 10-Q for the quarter ended September 30, 1996, the
Company does consider the value of PULS TV, FFF and SFF to be impaired.
In Ukraine, the Company recently acquired a 50.0% interest in a group of
companies, including Innova Film GmbH (collectively, the "Studio 1+1 Group"),
which has the right through August 2000 to broadcast programming and sell
advertising on one of Ukraine's public television stations, UT-1, for a
specified number of hours per week, including during prime time. In anticipation
of the privatization of all or part of the second Ukraine public television
station, UT-2, one of the partners of Studio 1+1 Group is actively seeking
rights to broadcast on UT-2. If such partner is successful in obtaining such
broadcast rights, the Company anticipates that the Studio 1+1 Group will
broadcast programming and sell advertising on UT-2 instead of UT-1. UT-1 reaches
approximately 98% of Ukraine's population while UT-2 reaches approximately 95%
of Ukraine's population. The Company's investment in Studio 1+1 Group of
$8,000,000, as of September 30, 1996, is classified in development costs in the
accompanying financial statements and was unpaid as of September 30, 1996.
In Poland, the Company has an agreement with the Polish media group ITI
which formed TVN Sp.z.o.o. ("TVN"), to seek national and regional television
broadcast licenses in Poland. In October 1996, the Polish National Radio and
Television Council made public its intention to award nine television
frequencies for Northern Poland, plus Warsaw and Lodz to TVN. It is anticipated
that the administrative process which is a requirement in order for the final
awards to be granted will be completed by the end of 1996 (See "Subsequent
Events"). ITI holds 67.0% of the equity in TVN and the Company holds the
remaining 33.0%. TVN recently exercised an option pursuant to which it has now
acquired a 49.0% interest in Televisja Wisla Sp.z.o.o. ("TV Wisla"), which
operates a television station in southern Poland.
3
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with the
accounting principles generally accepted in the United States. In the opinion of
management, these consolidated financial statements include all adjustments
necessary to fairly state the Company's financial position and results of
operations. The results for the nine months ended September 30, 1996 are not
necessarily indicative of the results expected for the year.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company's wholly-owned subsidiaries, Nova TV, PRO TV, POP TV, and Videovox
as consolidated entities and reflect the interests of the minority owners of
Nova TV, PRO TV, POP TV, and Videovox for the nine months ended September 30,
1996. POP TV and PRO TV began operations in December 1995, Videovox was acquired
on May 1, 1996 and thus Nova TV was the only consolidated entity for the nine
months ended September 30, 1995. The results of the operating stations, Markiza
TV, PULS, FFF, and SFF, in which the Company has minority or non-controlling
ownership interests, are included in the accompanying consolidated financial
statements as investments in unconsolidated affiliates using the equity method.
The Company's broadcast operations under development, which includes Studio 1+1
and TVN, and other broadcast development opportunities are reflected in the
balance sheet as development costs.
Net Loss Per Share
Net loss per share was computed by dividing the Company's net loss by the
weighted average number of Common Shares (both Class A and Class B) and common
share equivalents outstanding during the period ended September 30, 1996. The
impact of outstanding options and warrants has not been included in the
computation of net loss per share, as the effect of their inclusion would be
anti-dilutive.
3. DIVIDENDS
In March 1996, Nova TV declared a dividend of Kc 330,000,000 ($12,066,000)
of which 116,325,00 ($4,153,000) was paid to the Company in May 1996 and of
which Kc 116,325,000 ($4,294,000) was paid to the Company in September 1996.
4. SUMMARY FINANCIAL INFORMATION FOR MARKIZA TV, PULS AND FFF
September 30, 1996 December 31, 1995
-------------------------------- ----------------------
Markiza TV PULS FFF PULS FFF
$'000 $'000 $'000 $'000 $'000
-------- -------- -------- -------- --------
Current assets $ 17,359 $ 4,745 $ 2,310 $ 6,938 $ 2,538
Non-current assets 24,025 13,518 2,498 15,971 3,308
Current liabilities (10,978) (3,511) (2,735) (5,678) (1,410)
Non-current liabilities (10,613) (8,266) (9,744) (9,081) (9,526)
-------- -------- -------- -------- --------
Net assets 19,793 6,486 (7,671) 8,150 (5,090)
======== ======== ======== ======== ========
For the nine months ended
--------------------------------------------------------
September 30, 1996 December 31, 1995
-------------------------------- ----------------------
Markiza TV PULS FFF PULS FFF
$'000 $'000 $'000 $'000 $'000
-------- -------- -------- -------- --------
Net revenues 1,195 2,519 3,395 2,450 2,818
Operating loss (2,276) (14,021) (2,604) (18,211) (4,517)
Net loss (2,481) (14,078) (2,779) (18,593) (5,201)
4
The Company's share of the losses of Markiza TV, PULS, FFF and SFF are
accounted for by the equity method for the nine months ended September 30, 1996.
Investments in Markiza TV were reclassified from developments costs to
investments in unconsolidated affiliates on the station's launch date, August
31, 1996. The Company's share of losses of Markiza TV, PULS, FFF and SFF
accounted for by the equity method for the nine months ended September 30, 1996
were $11.6 million.
As of September 30, 1996 FFF had DM 11.0 million ($7.6 million) in loans
from the Company. The loans bear an annual interest rate of 10.5%. The Company
has agreed to subordinate its claims under the loans to all other claims against
FFF.
The Company had loans to Markiza TV of $9,000,000 as of September 30, 1996.
These loans bear an annual interest rate of 6.0% and are to be repaid in no
earlier than five years in accordance with local legal requirements for
shareholder loans.
5. SUBSEQUENT EVENTS
Public Offering
On November 4, 1996, the Company consumated the offering of 4,800,000
shares of Class A Common Stock (the "1996 Offering"). The 1996 Offering raised
$132.0 million, less underwriting discounts and commissions and issuance and
other related expenses of approximately $7.3 million. On November 12, 1996, the
underwriters for the 1996 Offering consumated the exercise of their option (the
"Overallotment Option") to purchase an additional 720,000 shares of Class A
Common Stock pursuant to the 1996 Offering. The consummation of the
Overallotment Option raised $19.8 million of proceeds, less underwriting
discount and commissions of approximately $1.0 million.
Loan Facility
CME, Central European Media Enterprises N.V., CME's Netherlands Antilles
Subsidiary ("CME NV'), and CME BV (collectively, the "CME Borrowers") have
executed a term sheet with ING pursuant to which ING and a group of banks would
provide the CME Borrowers, with a revolving loan facility in the aggregate of up
to $50.0 million (the "Potential Revolving Loan Facility"). The Potential
Revolving Loan Facility would bear interest at rates per annum ranging from 2.0%
to 3.5% over LIBOR, depending on the financial performance of the CME Borrowers,
and would mature on November 30, 2001, except that the maximum commitment would
be reduced incrementally every six months beginning on June 30, 1999. The
outstanding principal amount at any time on the Potential Revolving Loan
Facility could not exceed the maximum commitment at such time. Under the
Potential Revolving Loan Facility, the CME Borrowers would pay commitment,
arrangement and underwriting fees. The Potential Revolving Loan Facility would
be secured by a pledge of CME BV's equity interests in CME's operating
Subsidiaries, a pledge of CME NV's equity interest in CME BV, a security
interest on all of the assets of CME, and a lien on intercompany loans and
current account balances of the CME Borrowers. The Potential Revolving Loan
Facility also would contain affirmative and negative covenants, including
limitations on additional borrowing, financial covenants (such as limits on
consolidated indebtedness to consolidated net worth and consolidated
indebtedness to consolidated broadcast cash flow), a negative pledge on the
assets of the CME Borrowers, a prohibition on dividend payments to the holders
of the Common Stock of CME, and restrictions on mergers and sales and transfers
of assets. There can be no assurance that the Potential Revolving Loan Facility
will be consummated.
Lauder Promissory Note
5
In October 1996, the Company executed a Promissory Note in favor of Ronald
S. Lauder pursuant to which Mr. Lauder agreed to make loans of up to $20.0
million to the Company (the "Lauder Loan"). The Lauder Loan carried interest of
2.0% over LIBOR and provided Mr. Lauder with warrants exercisable for up to
100,000 shares of Class A Common Stock. The Lauder Loan was repaid in accordance
with its terms at the consummation of the 1996 Offering. Based on the aggregate
advances made by Mr. Lauder of $14.0 million, Mr. Lauder has received warrants
exercisable for 70,000 shares of the Class A Common Stock at an exercise price
of $30.25 per share, which warrants will be exercisable for 4 years commencing
on October 2, 1997.
Radio Alfa
During 1995 the Company entered into loan and consulting agreements with
Radio Nova Alfa ("Radio Alfa"), which broadcasts as the only private national
radio station in the Czech Republic, with the intention of converting loans made
by the Company to equity upon the approval of the Czech Radio and Television
Council. In October 1996, the Czech Radio and Television Council issued an
opinion to cancel one of the license conditions attached to the licenses through
which Radio Alfa broadcast. The cancellation of this condition will allow the
Company to convert loans totaling approximately $3.7 million as of September 30,
1996 into equity interest in Radio Alfa.
Poland
In October 1996, the Polish National Radio and Television Council made
public its intention to award nine television frequencies for Northern Poland,
plus Warsaw and Lodz to TVN, the Company's subsidiary. It is anticipated that
the administrative process which is a requirement in order for the final awards
to be granted will be completed by the end of 1996. ITI holds 67.0% of the
equity in TVN and the Company holds the remaining 33.0%. TVN recently exercised
an option pursuant to which it has now acquired a 49.0% interest in TV Wisla,
which operates a television station in southern Poland that broadcasts to
approximately 7.8 million people.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction
The Company is the leading television broadcaster in Central and Eastern
Europe, broadcasting to an aggregate of 77.1 million people in five countries in
the region and additional 8.9 million people in Germany bringing the total to 86
million people. The Company operates the leading national television station in
the Czech Republic and the Company's operations in Romania and Slovenia command
the leading audience share within their areas of broadcast reach. The Company
recently commenced operations in the Slovak Republic and Ukraine and has
operations under development in Poland and Hungary which potentially could reach
an additional 50 million people. The Company's strategy is to continue to
capitalize on the substantial market opportunities created by the emergence of
private commercial television and the corresponding significant growth of
television advertising expenditures in these markets.
The Company's revenues are derived principally from the sale of television
advertising to local, national and international advertisers. To a limited
extent, the Company also engages in certain barter transactions in which its
broadcast operations exchange unsold commercial advertising time for goods and
services such as programming, broadcasting equipment, hotel rooms, car rentals
and newspaper advertising space. The Company experiences seasonality with
advertising sales tending to be lowest during the third quarter of each calendar
year,
6
which includes the Summer holiday schedule (typically July and August) and
highest during the fourth quarter of each calendar year.
The primary expenses incurred in operating broadcast stations are
programming costs, employee salaries, broadcast transmission expenses and
selling, general and administrative expenses. Certain of the Company's
operations do not require the direct incurrence of broadcast transmission
expenses. License fees payable to government entities in connection with
securing television licenses from government authorities, if any, are usually
minimal. However, the Company incurs significant development expenses, including
funding and negotiating with local partners, researching and preparing license
applications, preparing business plans and conducting pre-operating activities
as well as restructuring existing affiliate entities which hold the licenses.
The Company conducts all of its operations through subsidiaries.
Accordingly, the primary internal sources of the Company's cash are dividends
and other distributions from its subsidiaries. The Company's ability to obtain
dividends or other distributions is subject to, among other things, restrictions
on dividends under applicable local laws and foreign currency exchange
regulations of the jurisdictions in which its subsidiaries operate. The
subsidiaries' ability to make distributions to the Company are also subject to
the legal availability of sufficient operating funds which are not needed for
operations, obligations or other business plans and, in some cases, the approval
of the other partners, stockholders or creditors of these entities. The laws
under which the Company's currently operating subsidiaries are organized provide
generally that dividends may be declared by the partners or shareholders out of
yearly profits subject to the maintenance of registered capital and required
reserves and after the recovery of accumulated losses based on local statutory
accounting principles.
SELECTED COMBINED FINANCIAL INFORMATION - BROADCAST CASH FLOW
The following table sets forth certain combining operating data for the
years ended December 31, 1995 and 1994 and the nine months ended September 30,
1996 and 1995 (dollar in thousands) for national television broadcast entities
or networks. This is supplemental information presented solely for additional
analysis of the consolidated statements and not as a presentation of financial
position and results of operations of each component. Regional television
stations in Germany are not included in this analysis as these operations are
dissimilar from those of national television broadcast entities as regional
television stations in Germany purchase only limited amounts of programming but
broadcast primarily self produced shows. Furthermore, the partners of PULS have
retained a financial advisor to seek one or more strategic partners for PULS
(See Note 1, "Organization and Business"). The investments in the German
operations are accounted for under the equity method and operating data for
these companies are set forth in Note 4.
The Company accounts for its 80% economic interest in Markiza TV using the
equity method of accounting. Under this method of accounting, the Company's
interest in net earnings or losses of Markiza TV is included in the consolidated
earnings and an adjustment is made to the carrying value at which the investment
is recorded on the Consolidated Balance Sheet. The following supplementary
unaudited combined information includes certain financial statement captions of
Markiza TV on a line-by-line basis as is done for the Company's consolidated
entities, Nova TV, PRO TV and POP TV.
7
For the year ended December 31, 1995 and the nine months ended September
30, 1995, Nova TV was the only operation included as a consolidated entity in
the figures below. POP TV and PRO TV began operations in December 1995 and
Markiza TV began operations in August 1996. The Company believes that this
combined operating data provides useful disclosure.
(Unaudited)
For the nine months ended
Year ended December 31, September 30,
----------------------- -------------------------
1994 1995 1995 1996(1)
---- ---- ---- -------
Operating Data (1):
Net revenues ................. $ 53,566 $ 98,919 $ 62,772 $ 84,716
Station operating expenses ... (36,083) (53,451) (34,371) (62,679)
Selling, general and
administrative expenses ...... (6,009) (6,816) (4,297) (14,457)
-------- -------- -------- --------
Station operating income ..... 11,474 38,652 24,104 7,580
Depreciation of assets ....... 3,773 7,251 4,875 9,681
Amortization of programming
rights ..................... 10,403 16,319 9,805 16,039
Cash program rights costs .... (13,417) (24,040) (18,738) (21,852)
-------- -------- -------- --------
Broadcast cash flow .......... $ 12,233 $ 38,182 $ 20,046 $ 11,448
======== ======== ======== ========
Broadcast cash flow margin ... 23% 39% 32% 14%
Broadcast cash flow
attributable to the Company .. 8,074 25,200 13,230 12,260(3)
Nine Months Ended September 30,
---------------------------------------------------------------------------------
1995 1996 1996 1996 1996 1996 1996
---- ---- ---- ---- ---- ---- ----
Nova TV Nova TV PRO TV POP TV Subtotal(2) Markiza Adjusted
------- ------- ------ ------ ----------- -------- --------
TV Total(1)
Operating Data:
Net revenues ................... $ 62,772 $ 70,327 $ 7,975 $ 5,219 $ 83,521 $ 1,195 $ 84,716
Station operating expense ...... (34,371) (39,453) (11,515) (9,284) (60,252) (2,427) (62,679)
Selling, general and
administrative expenses ........ (4,297) (5,947) (4,012) (3,454) (13,413) (1,044) (14,457)
-------- -------- -------- -------- -------- -------- --------
Station operating income ....... 24,104 24,927 (7,552) (7,519) 9,856 (2,276) 7,580
Depreciation of assets ......... 4,875 5,712 1,763 1,880 9,355 326 9,681
Amortization of programming
rights ......................... 9,805 12,360 2,205 875 15,440 599 16,039
Cash program rights costs ...... (18,738) (13,152) (3,581) (1,923) (18,656) (3,196) (21,852)
-------- -------- -------- -------- -------- -------- --------
Broadcast cash flow ............ 20,046 29,847 (7,165) (6,687) 15,995 (4,547) 11,448
======== ======== ======== ======== ======== ======== ========
Broadcast cash flow margin ..... 32% 42% -- -- 19% -- 14%
Broadcast cash flow attributable
to the Company ................. 13,230 26,265(3) (5,553) (4,815) 15,897(3) (3,638) 12,260(3)
8
(1) Represents combined operating data for national television broadcast
entities which includes Markiza TV, on a line-by-line basis, which is
accounted for using the equity method of accounting in the accompanying
consolidated financial statements, and does not include regional television
stations in Germany which purchase only limited amounts of programming and
Videovox, a Hungarian dubbing and production company. Furthermore, the
partners in PULS have retained a financial advisor to seek one or more
strategic partners for PULS (See Note 1, "Organization and Business").
(2) Includes consolidated television broadcast entities only.
(3) Reflects the Additional Nova TV Purchase on August 1, 1996 as if such
acquisition had been effective from January 1, 1996.
"Broadcast cash flow" is a broadcasting industry measure of performance and
defined as net revenues, less station operating expenses excluding depreciation
and amortization, station selling, general and administrative expenses, and cash
program rights costs. "Broadcast cash flow margin" is broadcast cash flow
divided by net revenues. "Broadcast cash flow attributable to the Company" is
broadcast cash flow which is attributable to the Company based on the Company's
effective economic interest in Nova TV, PRO TV, POP TV and Markiza TV as of
September 30, 1996 which was 88%, 77.5%, 72% and 80%, respectively. The Company
acquired the additional 22% economic interest in Nova TV on August 1, 1996
pursuant to the Additional Nova TV Purchase (which is in the process of being
registered under Czech law). Cash program rights costs represent cash payments
for current programs payable and such payments do not necessarily correspond to
program use. The Company has included broadcast cash flow because it is commonly
used in the broadcast industry as a measure of performance. Broadcast cash flow
should not be considered as a substitute measure of operating performance or
liquidity prepared in accordance with generally accepted accounting principles.
Total broadcast cash flow for the nine months ended September 30, 1996 was
$11,448,000. For the nine months ended September 30, 1996, Nova TV's broadcast
cash flow increased by 49% to $29,847,000 from $20,046,000 in the same period in
1995; while broadcast cash flow attributable to the Company from Nova TV would
have increased by 99%, or $13,035,000, had the Additional Nova TV Purchase (See
Note 1. "Organization and Business") been effective from January 1, 1996
compared to $13,230,000 in the same period in 1995. Nova TV's stronger broadcast
cash flow was primarily the result of increased net revenues and lower
programming rights costs during the period. Lower program rights costs in 1996
are in part the result of Nova TV's 1995 investment in programming for future
periods to achieve lower program costs. As anticipated by the Company, for the
nine months ended September 30, 1996, Nova TV's broadcast cash flow has
continued to be partially offset by negative broadcast cash flow of PRO TV
($7,165,000), POP TV ($6,687,000) and Markiza TV ($4,547,000) as these stations
continue to build out operations and invest in programming for future periods.
Application of Accounting Principles
Although the operations are largely in foreign currencies, the Company
prepares its financial statements in United States dollars and in accordance
with generally accepted accounting principles in the United States. The
Company's consolidated operating statements include the results of Nova TV, PRO
TV, POP TV, and Videovox and separately set forth the minority interest
attributable to other owners of Nova TV, PRO TV, POP TV, and Videovox for the
nine months ended September 30, 1996. POP TV and PRO TV began operations in
9
December 1995 while Videovox was acquired in May 1996. Nova TV was the only
consolidated entity for the nine months ended September 30, 1995. The results of
other broadcast operations, Markiza TV, PULS, FFF and SFF, are accounted for
using the equity method which reflects the Company's share of the net income or
losses in those operations. The Company's investments in broadcast operations
under development and other broadcast development opportunities are reflected on
the balance sheet as development costs.
Foreign currency
The Company and its subsidiaries generate revenues primarily in Czech
korunas ("KC"), Romanian lei ("ROL"), Slovenian tolar ("SIT") German marks
("DM") and Slovak korunas ("SK"), and incur substantial operating expenses in
those currencies. The Romanian lei, Slovenian tolar and Slovak koruna are
managed currencies with limited convertibility. The Company also incurs
operating expenses of programming in United States dollars and other foreign
currencies. For entities operating in economies that are considered non-highly
inflationary, which include Nova TV and POP TV, balance sheet accounts are
translated from foreign currencies into United States dollars at the relevant
period end exchange rate; statement of operations accounts are translated from
foreign currencies into United States dollars at the weighted average exchange
rates for the respective periods. The resulting translation adjustments are
reflected in a component of shareholders' equity with no effect on the
consolidated statements of operations. PRO TV operates in an economy qualifying
as highly inflationary. Accordingly, non-monetary assets are translated at
historical exchange rates and monetary assets are translated at current exchange
rates. Translation adjustments are included in the determination of the income.
Currency translation adjustments relating to transactions of the Company in
currencies other than the functional currency of the entity involved are
reflected in the operating results of the Company. The official exchange rates
for the Czech koruna, Romanian lei, Slovenian tolar and Slovak koruna and market
exchange rate for the German mark, at the end of, and during, the periods
indicated were as follows:
Income Statement
Balance Sheet ----------------
------------- Nine
Nine Months months
At At ended ended Movement
December September Movement September September %
31, 1995 30, 1996 % 30, 1995 30, 1996
-------- -------- - -------- --------- -
Czech koruna equivalent of 26.60 26.94 -1 26.50 27.27 -3
$1.00
Romanian lei equivalent of 2,578 3,261 -26 2,402(1) 2,987 -24
$1.00
Slovak koruna equivalent of 29.69 30.96 -8 29.68(2) 30.96(3) -4
$1.00
Slovenian tolar equivalent of 126 136 -8 126(4) 135 -7
$1.00
German mark equivalent of 1.43 1.5 -5 1.42 1.52 -7
$1.00
(1) Average exchange rate from December 1, 1995 through December 31, 1995 only.
(2) Average for 1995.
(3) Average for September 1996.
(4) Average exchange rate from December 15, 1995 through December 31, 1995
only.
The Company's results of operations and financial position for the nine
months ended September 30, 1996 have been impacted by changes in foreign
currency exchange rates since December 31, 1995. In the highly inflationary
economy in Romania, PRO TV indexes sales contracts to the United States dollar
in order to minimize the effects of Romanian lei devaluations. The Czech koruna,
German mark, Romanian lei, Slovenian tolar and the Slovak koruna have all
weakened against the United States dollar in the nine months ended September 30,
1996 as shown above.
10
As a result, the underlying Czech koruna and Slovenian tolar assets and
liabilities of Nova TV and POP TV, respectively, have decreased by 1% and 8%,
respectively, in dollar terms during the nine months ended September 30, 1996
due to foreign exchange movements. PRO TV's monetary assets and liabilities have
decreased by up to 26% during the nine month period ended September 30, 1996
depending on the time they remained outstanding during the period.
Nova TV's operating income, together with interest costs and minority
interest, is approximately 3% lower than would be the case had the weighted
average exchange rate for the nine months ended September 30, 1996 remained the
same as for the nine months ended September 30,1995.
PRO TV's and POP TV's operating losses, together with interest costs and
minority interest, are approximately 24% and 7%, respectively, lower than would
be the case had the weighted average exchange rate for the nine months ended
September 30, 1996 remained the same as for the year ended December 31, 1995
(subject to certain adjustments to Media Pro International profit and loss items
which are derived from non-monetary assets and liabilities). Similarly, equity
in losses in unconsolidated affiliates in Germany, PULS and FFF, and in the
Slovak Republic, Markiza TV, will have decreased 7% and 4% in dollar terms,
respectively.
11
Supplemental Operating Data
(Unaudited)
The following table sets forth certain combining operating data for the
three months ended September 30, 1996 and 1995 and the nine months ended
September 30, 1996 and 1995. For the three and nine months ended September 30,
1995, Nova TV was the only operation included as a consolidated entity in the
figures below. POP TV and PRO TV began operations in December 1995, Videovox in
May 1996, and Markiza TV in August 1996.
(000s of $) For the three months For the nine months
ended September 30, ended September 30,
-------------------- --------------------
1996 1995 1996 1995
---- ---- ---- ----
Net Revenue:
Nova TV - Czech Republic $ 17,449 $ 15,534 $ 70,327 $ 62,772
PRO TV - Romania 2,995 -- 7,975 --
POP TV - Slovenia 1,563 -- 5,219 --
Videovox - Hungary 425 -- 716
-------- -------- -------- --------
Total 22,432 15,534 84,237 62,772
Total Station Expense:
Nova TV - Czech Republic 14,623 12,837 45,400 38,668
PRO TV - Romania 5,544 -- 15,527 --
POP TV - Slovenia 4,698 -- 12,738 --
Videovox - Hungary 861 -- 1,597
-------- -------- -------- --------
Total 25,726 12,837 75,262 38,668
EBITDA:
Nova TV - Czech Republic 4,752 4,376 30,639 28,979
PRO TV - Romania (1,935) -- (5,789) --
POP TV - Slovenia (2,418) -- (5,639) --
-------- -------- -------- --------
Total 399 4,376 19,211 28,979
Operating profit (loss)
Nova TV - Czech Republic 2,826 2,697 24,927 24,104
PRO TV - Romania (2,549) -- (7,552) --
POP TV - Slovenia (3,135) -- (7,519) --
Videovox - Hungary (436) -- (881)
-------- -------- -------- --------
Total (3,294) 2,697 8,975 24,104
Equity in loss of unconsolidated
entities
German operations (PULS, (3,542) (3,927) (9,478) (10,693)
FFF and SFF)
Slovak entity (Markiza TV) (2,079) -- (2,079)
-------- -------- -------- --------
Total (5,621) (3,927) (11,557) (10,693)
12
Results of Operations
Three months ended September 30, 1996 compared to three months ended September
30, 1995
The Company's consolidated net revenues increased 44.4%, or $6,898,000, to
approximately $22,432,000 for the three months ended September 30, 1996 compared
to the same period in 1995. In the three months ended September 30, 1996, Nova
TV's net revenues from advertising sales increased by 21%, or $2,725,000,
compared to the same period in 1995 while net revenues from game shows and
barter transactions were lower by $810,000. Nova TV has decreased the volume of
barter programs and is realizing less income from game shows. As a result, Nova
TV's net revenues in the three months ended September 30, 1996, increased by
$1,915,000, or 12%, to $17,449,000 compared to the same period last year. The
increase in Nova TV's net revenue from advertising sales was due to the
continued increase of the total advertising market in the Czech Republic and
Nova TV's ability to maintain a market share of 65-70%. PRO TV's and POP TV's
net revenues were $2,995,000 and $1,563,000, respectively, for the three months
ended September 30, 1996. Since the Company has a minority ownership or
non-controlling interest in Markiza TV, PULS, FFF and SFF, losses incurred by
Markiza TV, PULS, FFF and SFF are accounted for under the equity method and,
therefore, no revenues are presented in respect of these entities.
Total station operating costs and expenses increased by $8,565,000 to
$20,044,000 for the three months ended September 30, 1996. The increase in total
station operating costs and expenses was primarily due to PRO TV's, POP TV's,
and Videovox's total station operating costs and expenses which were $3,783,000,
$3,009,000 and $218,000, respectively, and to a lesser extent an increase in
Nova TV's total station operating costs and expenses of $1,553,000, or 13.5%, to
$13,032,000 for the three months ended September 30, 1996. The increase in Nova
TV's total station operating costs and expenses is primarily due to the
increased scope of operations of Nova TV and amortization on Nova TV's larger
program library. Without the effects of increases in program amortization and
depreciation in the three months ended September 30, 1996 over the three months
ended September 30, 1995, Nova TV's total station operating costs and expenses
increased by 4%, or $455,000, in the three months ended September 30, 1996.
Additional distribution costs were incurred at PRO TV as the station expanded
its broadcast reach from approximately 33% at December 31, 1995 to approximately
48% at September 30, 1996.
Selling, general and administrative expenses increased by $4,324,000 to
$5,682,000 in the three months ended September 30, 1996 from $1,358,000 in the
three months ended September 30, 1995. The increase in selling, general and
administrative expenses was primarily due to the selling, general and
administrative expenses of PRO TV and POP TV which were $1,761,000 and
$1,689,000, respectively, in the three months ended September 30, 1996 and to a
lesser extent the increase in Nova TV's selling, general and administrative
expenses of $233,000, or 17%, to $1,591,000 in the three months ended September
30, 1996 from $1,358,000 in the three months ended September 30, 1995. In the
three months ended September 30, stations generally increase their marketing
efforts in anticipation of the fourth quarter of 1996.
Corporate operating costs and development expenses for the three months
ended September 30 1996 and 1995, are $4,218,000 and $2,551,000 respectively,
increasing $1,667,000, or 65%. The increase was primarily due to the Company's
increased scope of operations over the same period in 1995, which includes the
Company's new projects in Poland, Ukraine, and Hungary, the launch of Markiza TV
in August 1996 and development activities in other countries.
Equity in losses of unconsolidated affiliates was $5,621,000 for the three
months ended September 30, 1996 compared to $3,927,000 in the same period in
1995. The increase was primarily attributable to the Company's share of losses
of Markiza TV (launched in August 1996) which totaled $2,079,000; offset by a
reduction of $713,000, or 18%, of the
13
Company's share of losses in PULS and FFF compared to the same period in 1995
(See Note 1 "Organization and Business").
For the three months ended September 30, 1996, the Company net loss was
$14,692,000 compared to $7,136,000 for the same period in 1995. The increase in
net loss is primarily attributable to the anticipated losses from stations
launched after September 30, 1995, which includes PRO TV, POP TV, Markiza TV and
SFF and increased corporate and development costs; partially offset by stronger
results for Nova TV compared to the same period in 1995.
Nine months ended September 30, 1996 compared to the nine months ended September
30, 1995
For the nine months ended September 30, 1996, consolidated net revenue
totaled $84,237,000 compared to $62,772,000 for the same period last year,
representing an increase of 34%. In the nine months ended September 30, 1996,
Nova TV's net revenues from advertising sales increased by 17%, or $9,307,000,
compared to the same period in 1995 while net revenues from game shows and
barter transactions were lower by $1,752,000. Nova TV has decreased the volume
of barter programs and is realising less income from game shows. As a result,
Nova TV's net revenues in the nine months ended September 30, 1996, increased by
$7,555,000, or 12%, to $70,327,000 compared to the same period last year. The
increase in Nova TV's net revenues was due to the continued increase of the
total advertising market in the Czech Republic and Nova TV's ability to maintain
a market share of 65-70%. Net revenues for PRO TV and POP TV were $7,975,000 and
$5,219,000, respectively, during the period. Since the Company has a minority
ownership or non-controlling interest in Markiza TV, PULS, FFF and SFF, losses
incurred by Markiza TV, PULS, FFF and SFF are accounted for under the equity
method and, therefore, no revenues are presented in respect of these entities in
the accompanying consolidated financial statements.
Total station operating costs and expenses increased by $26,474,000 to
$60,845,000 in the nine months ended September 30, 1996. As a percentage of net
revenues, total station operating costs and expenses increased from 54.8% in the
nine months ended September 30, 1995 to 72.2% for the nine months ended
September 30, 1996. These expenses represent the costs associated with the
operations of Nova TV, PRO TV, POP TV and Videovox, including amortization of
programming rights of $15,440,000 and $9,805,000, and depreciation of station
assets and amortization of other intangibles of $9,388,000 and $4,875,000 in the
nine months ended September 30, 1996 and 1995, respectively. The increase in
total station operating costs and expenses is primarily attributable to the
addition of the Company's new operations, PRO TV, POP TV, and Videovox, which
had total operating costs and expenses of $11,515,000, $9,284,000 and $593,000,
respectively, and partially to the increased scope of operations of Nova TV and
amortization on Nova TV's larger program library. Without the effect of the
increase in program amortization and depreciation in the nine months ended
September 30, 1996 over the nine month period ended September 30, 1995, Nova
TV's total station operating costs and expenses increased by $1,690,000, or 9%,
from the same period in 1995. Additional distribution costs were incurred at PRO
TV as the station expanded its broadcast reach from approximately 33% at
December 31, 1995 to approximately 48% at September 30, 1996.
Station selling, general and administrative expenses increased by
$10,120,000 to $14,417,000 in the nine months ended September 30, 1996 from
$4,297,000 for the same period in 1995. As a percentage of net revenues, station
selling, general and administrative expenses increased from 6.8% for the nine
months ended September 30, 1995 to 17.1% for the nine months ended September 30,
1996. This increase in station selling, general and administrative expenses as a
percentage of net revenues was primarily the result of additional station
selling, general and administrative expenses from PRO TV and POP TV, as during
the nine months ended September 30, 1996 these companies were in the early stage
of operations and did not have proportionate revenues to Nova TV. In the nine
months ended
14
September 30, 1996, Nova TV's station selling, general and administrative
expenses increased by $1,650,000, or 38%, to $5,947,000 due to increased public
relations and marketing primarily during the six months ended June 30, 1996.
Corporate operating costs and development expenses in the nine months ended
September 30, 1996 and 1995 were $10,728,000 and $7,090,000, respectively,
increasing $3,638,000, or 51%. The increase was primarily due to the Company's
increased scope of operations over the same period in 1995, which includes the
Company's new projects in Poland, Ukraine, and Hungary, the launch of Markiza TV
in August 1996 and development activities in other countries.
Operating income (loss) decreased $17,814,000 as the Company generated
operating loss of $3,160,000 in the nine months ended September 30, 1996
compared to operating income of $14,654,000 in the nine months ended September
30, 1995. The overall decrease in the Company's operating results was primarily
attributable to anticipated operating losses from the Company's new operations,
PRO TV and POP TV, both launched in December 1995, and to a lesser extent to
increased corporate and development expenses; partially offset by the increase
in operating income of Nova TV over the same period in 1995.
Equity in loss in unconsolidated affiliates increased by $864,000 to
$11,557,000 for the nine months ended September 30, 1996 from $10,693,000 for
the nine months ended September 30, 1995. The Company's share of the losses of
Markiza TV which was launched in August 1996 totaled $2,079,000. The Company's
share of losses in PULS and FFF decreased by $1,542,000, or 14% for the nine
months ended September 30, 1996. The Company's share of losses in PULS for the
nine months ended September 30, 1996 was lower despite the Company's increase in
ownership from 43.57% at September 30, 1995 to 55.95% at September 30, 1996.
PULS has begun a new local programming format which has reduced operating costs
as well as slightly increasing net revenues. In addition, losses at FFF have
also decreased as a result of a similar change in its programming format and
slightly increased net revenues.
Interest and other income increased by $178,000, or 16% to $1,284,000 for
the nine months ended September 30, 1996.
Interest expense decreased $595,000, or 17%, to $2,914,000 during the nine
months ended September 30, 1996 from $3,509,000 in the nine months ended
September 30, 1995. This is primarily due to lower debt levels at Nova TV,
including the early repayment of debt, during the nine month period ended
September 30, 1996 compared to the same period in 1995; partially offset by
interest expense from a corporate bridge loan facility (See "Bridge Loan" in
Liquidity and Capital Resources).
Provision for income taxes was $9,198,000 for the nine months ended
September 30, 1996 and $9,350,000 for the nine months ended September 30, 1995.
The income tax provision in the nine months ended September 30, 1996 and 1995
primarily related to income taxes payable in the Czech Republic on Nova TV
pre-tax profits which have increased due to higher net income at Nova TV, offset
by an income tax rate of 41% in the nine months ended September 30, 1995 and an
income tax rate of 39% in the nine months ended September 30, 1996.
Minority interest in (income) loss of consolidated subsidiaries was
$610,000 in the nine months ended September 30, 1996 and $4,181,000 in the nine
months ended September 30, 1995. This decrease was primarily the result of
losses for the Company's new operations PRO TV and POP TV launched in December
1995, partially offset by the minority interest in income in Nova TV.
Primarily as a result of these factors, the net loss of the Company was
$27,072,000 and $11,905,000 for the nine months ended September 30, 1996 and
1995, respectively.
15
Liquidity and Capital Resources
Cash provided/(used) in operating activities was ($1,309,000) for the nine
months ended September 30, 1996 and $7,789,000 for the nine months ended
September 30, 1995. This decrease was primarily due to funding of the start-up
of operations at POP TV and PRO TV as these entities are in the early stage of
operations; offset by increased sales and accounts receivable collections by
Nova TV.
Accounts receivable increased by $5,009,000, or 29%, to $22,051,000, net of
currency fluctuations, from $17,042,000 at September 30, 1995. The increase in
accounts receivable is due primarily to increased sales at Nova TV and the
addition of accounts receivable balances for PRO TV and POP TV which were
launched in December 1995. Current liabilities increased by $52,238,000 to
$79,611,000 at September 30, 1996 from $27,373,000 at September 30, 1995,
principally as a result of a corporate bridge facility of $25,000,000, payables
of $8,000,000 related the purchase an economic interest in the Studio 1+1 Group,
increased income and other taxes payable, program contracts, accounts payable
and accrued liabilities related to the Company's new operations, PRO TV and POP
TV.
Cash used in investing activities was $58,659,000 and $39,103,000 for the
nine months ended September 30, 1996 and 1995, respectively. The increase is
attributable primarily to payments made in connection with the Additional Nova
TV Purchase and fixed asset acquisitions in the Company's new operations, PRO TV
and POP TV; offset by the marketable securities sold during the period. In the
nine month period ended September 30, 1996, the Company invested $13,219,000 in
property, plant and equipment to continue the buildout of the POP TV and PRO TV
operations as well as to further strengthen the capital base of Nova TV. During
the nine months ended September 30, 1996, the Company sold $8,835,000 of
marketable securities and $2,616,000 of restricted cash was made available by
the Hungarian government subsequent to the privatization of Videovox, to
partially fund these investments.
The Company's investment in unconsolidated affiliates increased, net of
currency fluctuations, to $39,830,000 as of September 30, 1996 from $12,433,000
as of December 31, 1995. This was primarily a result of additional investments
in PULS of DM 19,500,000 ($13,000,000), FFF of DM 2,000,000 ($1,334,000) and the
reclassification of development cost for SFF of $1,055,000 and Markiza TV of
$22,793,000 from development cost to investment in unconsolidated affiliates;
partially offset by the Company's share of the losses in PULS of DM 11,502,000
($7,668,000) , FFF of DM 2,226,000 ($1,484,000), SFF of DM 563,000 ($325,000)
and Markiza TV of SK 64,366,000 ($2,079,000) for the nine months ended September
30, 1996.
Cash provided/(used) in financing activities was $21,167,000 and
($3,571,000) for the nine months ended September 30, 1996 and 1995,
respectively. The increase in cash provided in financing activities consisted of
primarily loans from CS to purchase the Additional Nova TV Purchase and the
corporate loan bridge facility; offset by loans to affiliates which primarily
consisted of a $9,000,000 loan to Markiza TV and a $5,220,000 loan to Dr.
Zelezny.
The Company's operations to date have been financed primarily through
public offerings of shares of Class A Common Stock in October 1994 (the "IPO")
and November 1995 (the "1995 Offering") which raised net proceeds of $68.8
million and $86.5 million , respectively. Prior to the IPO, the Company relied
on certain affiliates for capital in the form of debt and equity financing.
The Company was paid a dividend of approximately $1,400,000 in 1995 by Nova
TV. In March 1996, Nova TV declared a dividend of Kc 330,000,000 ($12,066,000)
of which Kc 116,325,00 ($4,153,000) was paid to the Company in May 1996 with the
remainder of Kc 116,325,000 ($4,294,000) was paid to the Company in September
1996. After the receipt of the dividend paid in September 1996, based on the
Company's original
16
investment for its 66% interest in Nova TV, the Company has received 107% of its
original United States dollar investment in Nova TV made approximately 2.5 to 3
years earlier.
CME BV currently has bridge loan facility (the "Bridge Loan"), for up to
$25.0 million with ING Bank N.V. ("ING"). As of September 30, 1996, $25,000,000
was outstanding on the Bridge Loan which matures on November 30, 1996 and bears
annual interest at a rate of 1.6% per annum above LIBOR. The shares of CME BV
have been pledged by CME NV as security for the Bridge Loan. Both CME and CME NV
have guaranteed repayment of the Bridge Loan. The Bridge Loan contains financial
covenants (such as limits on consolidated indebtedness to consolidated net worth
and consolidated indebtedness to consolidated broadcast cash flow). The Bridge
Loan will be repaid with the proceeds of the 1996 Offering.
Primarily, as a result of the 1995 Offering, the Bridge Loan and the
results of operations of Nova TV in 1995 and 1996, the Company had cash of
$14,309,000 at September 30, 1996 ($53,210,000 at December 31, 1995) and
marketable securities of $1,817,000 at September 30, 1996 ($10,652,000 at
December 31, 1995) available to finance its future activities.
The Company has made and will continue to make investments to develop
broadcast operations in Central and Eastern Europe. The Company's cash needs for
those investment activities exceed cash generated from operations, resulting in
external financing requirements that may be satisfied through bank debt
facilities or other means.
On November 4, 1996, the Company consumated the offering of 4,800,000
shares of Class A Common Stock (the "1996 Offering"). The 1996 Offering raised
$132.0 million, less underwriting discounts and commissions and issuance and
other related expenses of approximately $7.3 million. On November 12, 1996, the
underwriters for the 1996 Offering consummated the exercise of their option (the
"Overallotment Option") to purchase an additional 720,000 shares of Class A
Common Stock pursuant to the 1996 Offering. The consummation of the
Overallotment Option raised $19.8 million of proceeds, less underwriting
discount and commissions of approximately $1.0 million.
CME, Central European Media Enterprises N.V., CME's Netherlands Antilles
Subsidiary ("CME NV'), and CME BV (collectively, the "CME Borrowers") have
executed a term sheet with ING pursuant to which ING and a group of banks
contemplate providing the CME Borrowers with a revolving loan facility in the
aggregate of up to $50.0 million (the "Potential Revolving Loan Facility"). The
Potential Revolving Loan Facility would bear interest at rates per annum ranging
from 2.0% to 3.5% over LIBOR, depending on the financial performance of the CME
Borrowers and would mature on November 30, 2001, except that the maximum
commitment would be reduced incrementally every six months beginning on June 30,
1999. The outstanding principal amount at any time on the Potential Revolving
Loan Facility could not exceed the maximum commitment at such time. Under the
Potential Revolving Loan Facility, the CME Borrowers would pay commitment,
arrangement and underwriting fees. The Potential Revolving Loan Facility would
be secured by a pledge of CME BV's equity interests in CME's operating
Subsidiaries, a pledge of CME NV's equity interest in CME BV, a security
interest on all of the assets of CME, an assignment of all distributions from
CME's operating Subsidiaries and a lien on intercompany loans and current
account balances of the CME Borrowers. The Potential Revolving Loan Facility
also would contain affirmative and negative covenants, including limitations on
additional borrowing, financial covenants (such as limits on consolidated
indebtedness to consolidated net worth and consolidated indebtedness to
consolidated broadcast cash flow), a negative pledge on the assets of the CME
Borrowers, a prohibition on dividend payments to the holders of the Common Stock
of CME, and restrictions on mergers and sales and transfers of assets. There can
be no assurance that the Potential Revolving Loan Facility will be consummated.
In October 1996, the Company executed a Promissory Note in favor of Ronald
S. Lauder pursuant to which Mr. Lauder agreed to make loans of up to $20.0
million to the Company (the "Lauder Loan"). The Lauder Loan carried interest of
2.0% over LIBOR and
17
provided Mr. Lauder with warrants exercisable for up to 100,000 shares of Class
A Common Stock. The Lauder Loan was repaid in accordance with its terms at the
consummation of the 1996 Offering. Based on the aggregate advances made by Mr.
Lauder of $14.0 million, Mr. Lauder has received warrants exercisable into
70,000 shares of the Class A Common Stock at an exercise price of $30.25 per
share, which warrants will be exercisable for 4 years commencing on October 2,
1997.
On August 1, 1996, the Company entered into the Additional Nova TV Purchase
for the purchase of CS's 22% economic interest and virtually all of CS's voting
rights in Nova TV for a purchase price of Kc 1 billion ($37.1 million). The
Company has also entered into a loan agreement with CS to finance 85% of the
purchase price. The remainder of the purchase price Kc 150 million ($5,607,000)
will be paid by the Company on November 15, 1996 out of the Company's cash
balances. The CS loan was drawn in August 1996 and will be drawn in April 1997
in the amounts of Kc 450,000,000 ($16,704,000) and Kc 400,000,000 ($14,848,000),
respectively, to fund purchase payments due at those times, and the loan bears
an interest rate of 12.9% annually. Quarterly repayments on the loan are
required in the amount of Kc 22,500,000 ($835,000) during the period from
November 1997 through November 1998, Kc 42,500,000 ($1,578,000) during the
period from February 1999 through August 2002, and Kc 20,000,000 ($742,000)
during the period from November 2002 through November 2003.
The Company expects that Nova TV's future cash requirements will continue
to be satisfied through operating cash flows and available borrowing facilities.
Nova TV currently has two loan facilities with CS. The first facility consists
of a long term loan due on December 30, 1999 in the principal amount of Kc 300
million ($11.1) and currently bears interest at a rate of 14.5% per annum,
subject to change based on fluctuations in the lender's base rate, of which Kc
180,000,000 ($6,682,000) was outstanding at September 30, 1996. Principal
payments of Kc 60,000,000 ($2,227,000) are due each year on this facility. In
January 1996 Nova TV paid the Kc 60,000,000 due on this facility for 1996. The
second facility is a line of credit loan, obtained in November 1995, for an
amount up to Kc 250,000,000 ($9,280,000) bearing interest at a rate of 12% per
annum. This facility was unutilized at September 30, 1996. These loans are
secured by Nova TV's equipment, vehicles and receivables.
Under the partnership agreement for PULS, the Company is not required to
contribute any additional capital to PULS; however, if any of the partners in
PULS, including the Company, do not fund future capital requirements their
equity interest in PULS may be diluted. Since September 1995, the partners have
approved capital calls aggregating DM34,500,000 ($22,697,000). The Company has
agreed to fund DM32,000,000 ($21,053,000) of which DM29,650,000 ($20,168,000)
has been funded until September 30, 1996.
The Partners of PULS have retained a financial advisor to seek one or more
strategic partners for PULS. Such strategic partner would be expected to acquire
a significant equity interest in PULS and assume responsibility for PULS'
operations. Such a strategic investment would be anticipated to significantly
dilute the Company's equity interest in PULS and to decrease the Company's
future funding obligations to PULS. Such investment also could result in a
material reduction of the carrying value of the Company's equity investment in
PULS, which was $12.4 million as of September 30, 1996, and a corresponding
charge against the Company's earnings in the period incurred. Regardless of
whether a transaction with a strategic investor is consummated, there is no
assurance that the Company may not have to take a reduction of all or a portion
of the carrying value of PULS. In addition, a reduction of the carrying value of
PULS, or other factors, might cause the Company to reduce all or part of the
carrying value of the Company' s investments in FFF and SFF, which were $5.9
million and $0.7 million, respectively, as of September 30, 1996.
Except for the Company's working capital requirements and completing the
funding of television stations in Romania, Slovenia, the Slovak Republic and
Ukraine, the Company's future cash needs will depend on management's acquisition
and development decisions. The Company is actively engaged in the development of
additional investment opportunities in broadcast licenses and investments in
existing broadcasting companies throughout Central
18
and Eastern Europe. The Company incurs limited expenses in identifying and
pursuing broadcast opportunities before any investment decision is made. The
Company anticipates making additional investments in other broadcast operations,
supplemented by capital raised from local financial strategic partners as well
as local debt and lease financing, to the extent that it is available and
appropriate for each project. If MobilRom is awarded a telecommunications
license in Romania, the Company will be obligated to fund MobilRom in the amount
of approximately $3.5 million within 15 days after such award and up to an
additional $6.5 million during the next 12 months. The Company's aggregate
funding commitment with respect to MobilRom is up to $16.0 million.
The laws under which the Company's currently operating subsidiaries and
affiliates are organized provide generally that dividends may be declared by the
partners or shareholders out of yearly profits subject to the maintenance of
registered capital, required reserves and after the recovery of accumulated
losses. In the case of the Company's Dutch and Netherlands Antilles
subsidiaries, the Company's voting power is sufficient to compel the making of
distributions. The Company's voting power is sufficient to compel Nova TV to
make distributions. In the case of PRO TV, distributions may be paid from the
profits of PRO TV subject to a reserve of 5% of annual profits until the
aggregate reserves equal 20% of PRO TV's registered capital. A majority vote can
compel PRO TV to make distributions. In the case of POP TV, the Company's voting
power is not sufficient to compel the payment of dividends. There are no legal
reserve requirements in Slovenia. In the case of Markiza TV, distributions may
be paid from net profits subject to an initial reserve requirement of 10% of net
profits until the reserve fund equals 5% of registered capital. The Company's
voting power in Markiza TV is not sufficient to compel the distributions of
dividends. In the case of PULS, the PULS Partnership Agreement provides that if
profits are available for distribution, 66 2/3% of the partnership interest may
require that 40% of such profits be placed in reserves until DM 16,700,000 are
reserved. All profits in excess thereof must be distributed. The agreement
relating to FFF does not contain restrictions on distributions out of available
profits. The laws of countries where the Company is developing operations
contain restrictions on the payment of dividends.
The Company believes that the net proceeds of the 1996 Offering together
with the Company's current cash balances, cash generated from Nova TV, the
Potential Revolving Loan Facility, and local financing of broadcast operations
and broadcast operations under development should be adequate to satisfy the
Company's operating and capital requirements for approximately 12 to 18 months.
This filing with the Securities and Exchange Commission ("SEC") contains
forward-looking statements. All statements, other than statements of historical
facts, included herein, that address activities, events or developments that the
Company expects, believes or anticipates will or may occur in the future are
forward-looking statements. Future events and actual results could differ
materially from the forward-looking statements contained herein depending
largely on the Company's acquisition and development decisions and the risk
factors contained in the Company's other filings with the SEC.
19
Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 1996, the Company, together with MMTV and Tele 59, entered into an
agreement to purchase 66% of the shares of Kanal A, a private television station
in Slovenia ("the Kanal A Agreement"). Scandinavian Broadcast Systems, S.A.
("SBS"), which purportedly has certain rights to the equity of Kanal A pursuant
to various agreements, has challenged the validity of the Kanal A Agreement in a
United Kingdom court. Both the Company and SBS have been granted injunctions by
the United Kingdom courts preventing SBS, in the case of the Company, and the
Company, in the case of SBS, from taking certain actions either to enforce such
entity's claim to equity in Kanal A or to block the claim of the other entity to
equity in Kanal A. The Company has instituted action in a Slovenian court
requesting that courts in Slovenia resolve these claims.
Various competitors of PULS and NMF have instituted legal action against
the media authorities for Berlin-Brandenburg and the Nuremberg area seeking to
overturn their decisions to award broadcast licenses to PULS and NMF,
respectively. These actions were instituted in 1994, and there have been no
proceedings in relation thereto in the last 12 months. An unfavorable decision
in either of these actions could have a material adverse effect on the Company.
The Company is, from time to time, a party to litigation that arises in the
normal course of its business operations. The Company is not presently a party
to any such litigation which could reasonably be expected to have a material
adverse effect on its business or operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) The following exhibits are attached:
Exhibit
-------
10.01 Vladimir Zelezny - CME Loan Agreement dated August 1, 1996
10.02 Promissory Note in Favor of Ronald S. Lauder dated October
2, 1996
10.03 Ronald S. Lauder Warrant for the Purchase of Shares dated
October 2, 1996
10.04 Articles of Association for Mobil Rom S.A. dated September
26, 1996
10.05 Company Agreement for the creation of Mobil Rom S.A. dated
September 26, 1996
10.06 GSM General Agreement dated September 26, 1996
10.07 Unimedia Assignment of Shares Agreement dated September 22,
1996
10.08 Additional Agreement for Unimedia dated September 22, 1996
10.09 Unimedia Warranties dated September 26, 1996
10.10 Agreement between CME, Boris Fuchsmann, Alexander
Rodniansky and Innova Film GmbH in English dated October
25, 1996 10.11 Agreement between CME, Boris Fuchsmann,
Alexander Rodniansky and Innova Film GmbH in German dated
October 25, 1996
10.12 TVN-Realbud Agreement dated September 4, 1996
10.13 TVN-Realbud Agreement dated September 4, 1996
10.14 TVN-Realbud Agreement dated September 6, 1996
10.15 Appendix to the TVN-Realbud Agreement dated September 19,
1996
10.16 TVN-Realbud Share Sale Agreement dated October 30, 1996
10.17 Appendix No. 2 to the Supplementary Agreement dated October
30, 1996
10.18 Poland Street Lease Agreement dated April 2, 1996
27.01 Financial Data Schedule
b) No reports on Form 8-K were filed during the quarter ended
September 30, 1996.
21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
/s/ Leonard M. Fertig
Date: November 14, 1996 -----------------------------
Leonard M. Fertig
Chief Executive Officer
(Duly Authorized Officer)
/s/ John A. Schwallie
Date: November 14, 1996 -----------------------------
John A. Schwallie
Chief Financial Officer
(Principal Financial Officer)
22
Exhibit Index
Exhibit Page
------- ----
10.01 Vladimir Zelezny - CME Loan Agreement dated August 1, 1996
10.02 Promissory Note in Favor of Ronald S. Lauder dated October 2, 1996
10.03 Ronald S. Lauder Warrant for the Purchase of Shares dated October 2,
1996
10.04 Articles of Association for Mobil Rom S.A. dated September 26, 1996
10.05 Company Agreement for the creation of Mobil Rom S.A. dated September
26, 1996
10.06 GSM General Agreement dated September 26, 1996
10.07 Unimedia Assignment of Shares Agreement dated September 22, 1996
10.08 Additional Agreement for Unimedia dated September 22, 1996
10.09 Unimedia Warranties dated September 26, 1996
10.10 Agreement between CME, Boris Fuchsmann, Alexander Rodniansky and
Innova Film GmbH in English dated October 25, 1996 10.11 Agreement
between CME, Boris Fuchsmann, Alexander Rodniansky and Innova Film GmbH
in German dated October 25, 1996
10.12 TVN-Realbud Agreement dated September 4, 1996
10.13 TVN-Realbud Agreement dated September 4, 1996
10.14 TVN-Realbud Agreement dated September 6, 1996
10.15 Appendix to the TVN-Realbud Agreement dated September 19, 1996
10.16 TVN-Realbud Share Sale Agreement dated October 30, 1996
10.17 Appendix No. 2 to the Supplementary Agreement dated October 30, 1996
10.18 Poland Street Lease Agreement dated April 2, 1996
27.01 Financial Data Schedule
23