SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission File No. 000-21051
CAPITAL MEDIA GROUP LIMITED
---------------------------
(Exact name of small business issuer as specified in its charter)
NEVADA 87-0453100
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
In Mediapark 6B 50670 Cologne,
Germany
-------------------------------- -------------------
(Address of Principal Executive (Zip Code)
Offices)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12
months (or for such 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 [_]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: As of December 18, 2002
there were 36,032,710 shares of the Common Stock issued and outstanding.
Transitional Small Business Disclosure Format (check one)
Yes [X] No [_]
Part I. Financial Information
Page
----
Item 1. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Consolidated Balance Sheet at September 30, 2001 (unaudited) and December 31, 2000 ...... 3
Unaudited Consolidated Statement of Operations for the three and nine months
ended September 30, 2001 and September 30, 2000 ......................................... 4
Unaudited Consolidated Statement of Changes in Stockholders' equity for the nine
months ended September 30, 2001 ......................................................... 5
Unaudited Consolidated Statement of Cash Flows for the nine months
ended September 30, 2001 and 2000 ....................................................... 6
Notes to Unaudited Consolidated Financial Statements .................................... 7-30
2
CONSOLIDATED BALANCE SHEET AT SEPTEMEBER 30,
2001 AND DECEMBER 31, 2000
Note September 30,
2001 December 31,
(unaudited) 2000
ASSETS $ $
Cash and cash equivalents 132,411 929,913
Accounts receivable trade, net of allowances
for doubtful accounts of $31,660 1,108,419 1,212,781
(December 31, 2000 - $19,498)
Inventories, net 244,201 202,875
Prepaid expenses and deposits 69,680 176,460
------------- ------------
TOTAL CURRENT ASSETS 1,554,711 2,522,029
Equity in affiliated companies 0 68,076
Intangible assets, net of accumulated amortization of
$5,237,240 (December 31, 2000 - $4,276,276) 520,165 1,693,282
Property, plant and equipment, net 991,567 1,213,650
------------- ------------
TOTAL ASSETS 3,066,444 5,497,037
============= ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable 3,226,167 3,021,802
Accrued expenses 1,407,103 1,464,360
Related parties loans repayable within one year 3 10,948,581 5,733,819
Bank debt due within one year 455,883 1,369,454
------------- ------------
TOTAL LIABILITIES 16,037,734 11,589,435
Minority Interest in Subsidiaries (87,481) 382,057
------------- ------------
15,950,253 11,971,492
------------- ------------
Commitments and Contingencies 5 - -
STOCKHOLDERS' DEFICIT
Common stock - 50,000,000 shares authorized:
$0.001 par value 33,432,710 (December 31, 2000 - 6
33,203,251) issued and outstanding, 33,433 33,203
Additional paid in capital 66,449,459 66,449,689
133,058 shares held by subsidiary (December 31, 2000 (950,712) (950,712)
- 133,058) at cost ------------- -------------
65,532,180 65,532,180
Cumulative translation adjustment 7,135,094 7,205,017
Accumulated deficit (85,551,084) (79,211,652)
------------- ------------
TOTAL STOCKHOLDERS' DEFICIT (12,883,810) (6,474,455)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT 3,066,444 5,497,037
============= ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
For the three months and nine months ended September 30, 2001 and 2000
Restated
3 months 3 months 9 months 9 months
ended ended ended ended
September 30, September 30, September 30, September 30,
Note 2001 2000 2001 2000
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
$ $ $ $
Operating revenue 1,020,350 573,067 2,995,994 2,136,509
Operating costs
Staff costs 597,992 657,349 1,934,745 3,740,469
Depreciation and amortization 521,583 225,604 1,601,552 713,374
Other operating expenses 1,951,310 2,107,966 5,659,526 6,374,018
----------- ----------- ---------- -----------
(3,070,885) (2,990,919) (9,195,823) (10,827,861)
Operating loss (2,050,535) (2,417,852) (6,199,829) (8,691,352)
Other (expense) 19,929 (22,667) 113,662 40,178
Financial (expense) income net (13,919) (8,117) (858,943) (2,032,571)
Equity in net loss of affiliates - (5,933) - (27,075)
----------- ----------- ---------- -----------
Loss from operations before taxation (2,044,525) (2,454,569) (6,945,110) (10,710,820)
Income tax benefit (expense) - (9) - (311)
----------- ----------- ---------- -----------
(2,044,525) (2,454,578) (6,945,110) (10,711,131)
Minority interest 262,419 87,433 605,678 87,433
----------- ----------- ---------- -----------
Net loss (1,782,106) (2,367,145) (6,339,432) (10,623,698)
=========== =========== ========== ===========
Net loss per share
- - basic (0.05) (0.08) (0.19) (0.36)
=========== =========== ========== ===========
- - diluted (0.05) (0.08) (0.19) (0.36)
=========== =========== ========== ===========
Weighted average shares - basic 33,432,710 30,780,473 33,432,710 29,864,362
=========== =========== ========== ===========
Weighted average shares -diluted 33,432,710 30,780,473 33,432,710 29,864,362
=========== =========== ========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
4
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the nine months ended September 30, 2001
Cumulative
Shares Additional Other
held by paid-in comprehensive Accumulated Total
Common stock subsidiary Capital Income (deficit) deficit
Shares $ $ $ $ $ $
Balance at 33,203,251 33,203 (950,712) 66,449,689 7,205,017 (79,211,652) (6,474,455)
January 1, 2001
Shares Issued 229,459 230 - (230) -
Translation
Adjustment 73,741 73,741
Net loss - - - - (6,339,432) (6,339,432)
-----------
Comprehensive loss (6,265,691)
Other movements (143,664) (143,664)
---------- ------ -------- ---------- --------- ----------- -----------
Balance at
September 30, 2001 33,432,710 33,433 (950,712) 66,449,459 7,135,094 (85,551,084) (12,883,810)
========== ====== ======== ========== ========= =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
5
UNAUDITED CONSOLIDATED STATEMENT OF
CASH FLOWS
For the nine months ended September 30, 2001, and 2000
9 months ended 9 months ended
September 30, September 30,
2001 2000
$ $
Cash flows from operating activities
Net loss (6,339,432) (10,623,698)
Adjustment to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 1,601,552 713,374
Equity in net losses of affiliates and minority interests (469,537) 32,729
Other non-cash items - -
Changes in assets and liabilities:
(Increase) / Decrease in other assets and inventories 87,397 1,741,248
(Increase) / Decrease in accounts receivable 104,362 (52,751)
(Decrease) / Increase in accrued expenses and other liabilities (135,855) 1,285,654
---------- -----------
Net cash used in operations (4,879,803) (6,903,444)
---------- -----------
Cash flows from investing activities
Acquisition of plant and equipment (46,008) (221,317)
Acquisition of intangible assets (171,248) (29,106)
Disposal of financial assets 68,075 6,985
---------- -----------
Net cash (used) in investing activities (149,181) (243,438)
---------- -----------
Cash flows from financing activities
Increase in short term debt 5,188,764 1,911,630
Repayment of loans - (250,000)
Issuance of shares - 4,613,667
---------- -----------
Net cash provided by financing activities 5,188,764 6,275,297
---------- -----------
Effect of exchange rate changes on cash (69,708) 1,131,358
---------- -----------
Net (decrease) / increase in cash and cash equivalents 90,072 259,773
Cash and cash equivalents at beginning of period (413,544) (1,425,655)
---------- -----------
Net (debt) / cash and cash equivalents at end of period (323,472) (1,165,882)
========== ===========
Supplemental data :
Interest paid 456,947 367,594
Income tax paid - 311
The accompanying notes are an integral part of these consolidated financial
statements.
6
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2001
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements are
prepared in conformity with generally accepted accounting principles in
the United States of America for interim financial information and with
the instructions to Form 10-Q. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the nine-month period ended September 30, 2001
are not necessarily indicative of the results that may be expected for
the year ended December 31, 2001. The condensed balance sheet
information as of December 31, 2000 was derived from the audited
consolidated financial statements included in the Annual Report on Form
10-KSB of Capital Media Group Limited ("Company") for the year ended
December 31, 2000 (the "Form 10-KSB"). For further information, refer
to the consolidated financial statements and footnotes thereto included
in the Form 10-KSB.
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 nine months ended September 30,
2001 and the year ended December 31, 2000, the Company incurred net
losses of $6,339,432 and $13,094,754, respectively.
At September 30, 2001, the Company had net current liabilities of
$14,483,023 and its total liabilities exceeded its total assets by
$12,883,810. These factors among others raise substantial doubt about
the Company's its ability to continue as a going concern for a
reasonable period of time. The Company anticipates that any required
funding will be made available by its majority stockholder, AB Groupe,
although there can be no assurance that the necessary funding will
become available.
The financial statements do not include any adjustments relating to the
recoverability and classification of the recorded asset amounts or the
amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. As
described in Note 8, 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.
7
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2001
3. INTANGIBLE ASSETS
September 30, December 31,
2001 2000
$ $
Purchased broadcast licenses 361,732 223,642
Computer Software 813,732 1,164,098
Other intangible assets 14,436 14,313
Goodwill 4,567,505 4,567,505
---------- ---------
5,757,405 5,969,558
Less accumulated amortization (5,237,240) (4,276,276)
---------- ----------
520,165 1,693,282
========== ==========
Goodwill net of amortization is as follows:
September 30, December 31,
2001 2000
$ $
Unimedia - 1,213,446
TopCard 249,901 336,614
Pixel 10,180 28,945
---------- ---------
260,081 1,579,005
========== =========
4. LOANS REPAYABLE WITHIN ONE YEAR
September 30, December 31,
2001 2000
$ $
AB Groupe S.A. 10,449,743 5,488,970
Interest accrued 498,838 244,849
---------- ---------
Related party loans 10,948,581 5,733,819
========== =========
8
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2001
AB Groupe loans were received on the following dates:
Date loan received Amount in $
---------------------------------------------------------------
May 1999 150,000 (1)(3)(6)
August 1999 327,339 (1)(3)(6)
December 1999 500,000 (1)(3)(6)
-------------------
977,339
-------------------
January 2000 500,000 (1)(3)(6)
March 2000 1,000,000 (1)(3)(6)
June 2000 140,058 (2)(4)(5)
August 2000 280,116 (2)(5)
September 2000 140,058 (2)(5)
October 2000 2,600,000 (1)
October 2000 4,566 (2)(5)
-------------------
4,664,798
-------------------
February 2001 200,750 (2)(7)
March 2001 466,861 (2)(7)
July 2001 4,085,209 (2)(8)
September 2001 54,786 (2)(9)
-------------------
4,807,606
Total 10,449,743
===================
- --------------------------------------------------------------------------------
(1) Loans were made in U.S. Dollars.
(2) Loans were made in German Marks and Euros and translated to U.S.
dollars at the exchange rate on the date of the loan.
(3) Loans bear interest at the rate of 10% per annum. Loans were originally
two year loans. Loans are currently due on demand.
(4) Amount was classified as a trade payable at December 31, 2000, but has
been reclassified as a loan.
(5) Loans are due on demand with interest at the rate of 10% per annum.
(6) In December 2000, AB Groupe notified the Company that it had decided
not to exercise the 2.6 million warrants at $1.00 per share as
scheduled in an agreement dated October 20, 2000. The Company disputed
this and believed that an agreement had been reached with AB Groupe to
exercise of the 2.6 million warrants at the time the funds were
received. As described in Note 8, the dispute was recently settled and
these warrants have been exercised in September 2002
(7) Loans bear interest at 10% per annum and were originally due on April
30, 2001. Loans are currently due on demand. Loan is convertible
through the exercise of a corresponding warrant, at the option of the
holder, into shares of Common Stock at a conversion price of $0.60 per
share. See Note 6.1.
(8) Loan was due on June 25, 2002 bearing interest at 10% per annum and
repayable in cash.
(9) Loans bear interest at the rate of 10% per annum. Loans are due two
years from the date of the loan.
5. LITIGATION
In June 1997, a former managing director of Onyx, Mr. Muller, whose
employment was terminated brought suit in Germany for alleged wrongful
early termination of his employment. Onyx maintained that the action
taken was lawful and in July 1998, the court ruled in favor of Onyx.
The plaintiff appealed against the ruling and claimed (euro)85,900
($86,252) in respect of his 1997 salary. In December 2001, the
plaintiff increased his claim to a total of (Euro)333,000 ($334,365),
9
which includes his salary for 1998 and 1999, as well as an indemnity
regarding his departure. In June 2002, the court ruled in favor of the
plaintiff. Onyx has appealed this decision and believes that it has
valid defense and/or offsets to this claim. However, there can be no
assurance as to the outcome of the matter. In November 2002, Onyx was
obliged to freeze (Euro) 401,112 ($402,756) pending the outcome of the
appeal. The next court proceedings are not expected until April 2003.
Unimedia, a company sold in December 2001, has two minority
shareholders who have brought numerous legal actions against Unimedia
and/or its management. To date, all of these actions have been
unsuccessful. The Company is indemnifying Gilles Assouline, its former
Chairman and CEO, with respect to these claims. In November 2002, the
Company was informed by Mr. Assouline that he had signed a settlement
agreement with these minority shareholders, in which they renounce the
pursuit of legal actions against Mr. Assouline and vice versa. However,
Mr. Assouline's co-defendant in this legal action has not settled with
these minority shareholders and has asked the court to consider that
Mr. Assouline should be liable in part for any successful claim against
the co-defendant. As a result, there can be no assurance that Mr.
Assouline will not incur further legal expenses related to this action
and/or that he would not be liable in part for a successful claim
against the co-defendant.
In June 2000, Onyx+, which was planning to broadcast its digital
channels directly from Germany, signed a service agreement with
Mediagate. As a result of the numerous delays taken by the cable
operators with respect to the development of digital cable services in
Germany combined with the failure of certain conditions precedent to
the use by Onyx+ of the services provided by Mediagate, this agreement
never became applicable. Mediagate has taken the position that Onyx+
was obligated under the contract, and has been invoicing Onyx+ at a
monthly rate of DM 430,000 (approximately $220,756) starting January
2001. Mediagate has brought legal action against Onyx+ with respect to
its non-payment of these invoices and for breach of contract. While
Onyx+ has and will continue to vigorously dispute the application of
this agreement, there can be no assurance as to the outcome of the
pending litigation with Mediagate.
10
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2001
6. CAPITAL STRUCTURE
6.1 COMMON STOCK PURCHASE WARRANTS
The Company had the following issued and vested warrants to purchase
common stock outstanding at September 30, 2001 and December 31, 2000:
Description September 30, Exercised Lapsed Granted December 31,
2001 2000
Warrants for common stock 633,914 - - - 633,914
Exercisable at $40.00
Warrants for common stock 51,119 - - - 51,119
Exercisable at $31.25
Warrants for common stock 129,767 - - - 129,767
Exercisable at $25.00
Warrants for common stock 6,537,339 - - - 6,537,339
Exercisable at $1.00 (1)
Warrants for common stock 1,333,333 - - 1,333,333 -
Exercisable at $0.60 (2) --------- ---------- ---------- ---------- ----------
8,685,472 - - 1,333,333 7,352,139
(1) Includes 500,000 warrants issued and vested to AB Groupe, including
2 million warrants (initially 2.6 million warrants since 600,000
were lapsed) which Company asserts AB Groupe agreed to exercise
(see Note 4), and 1,600,000 issued and vested to Diamond
Productions.
(2) Shares issuable on conversion of a convertible loan through the
exercise of this warrant.
For a description of the terms of the outstanding warrants, see Note 13.1 of
Notes to Consolidated Financial Statements in the Form 10-KSB.
6.2 COMMON STOCK PURCHASE OPTIONS
Description Outstanding at Granted/ Outstanding at
September 30, Vested December 31,
2001 2000
Exercisable @ $1.00 -
Executive officers options exercisable @ $5.70 37,500 37,500
of which vested 37,500 37,500
Officers options exercisable @ $25.00 fully vested 30,000 30,000
Executive officers options exercisable @ $3.50 of the 266,665 400,000
400,000 options initially granted from which 133,335
lapsed due to resignations
of which vested 266,665 26,668 239,997
Non-employee directors options exercisable @
$3.50 fully vested 50,000 50,000
----------------------------------------------
Total exercisable 384,165 26,668 517,500
==============================================
11
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2001
For a description of the terms of the outstanding options, see Note 13.2 of
Notes to Consolidated Financial Statements in the Form 10-KSB.
6.3 ISSUANCE OF COMPANY SHARES
In March 2000, the Company granted the right to purchase up to 6.5
million shares to certain shareholders including the management as
detailed below:
Purchase Price Gilles Michel Jean-Francois David Ho Total
Assouline Assouline Klein
$1 per share 750,000 1,100,000 750,000 750,000 3,350,000
$1.50 per share 250,000 300,000 250,000 250,000 1,050,000
$2 per share 250,000 300,000 250,000 250,000 1,050,000
$2.50 per share 250,000 300,000 250,000 250,000 1,050,000
------- ------- ------- ------- ---------
Total 1,500,000 2,000,000 1,500,000 1,500,000 6,500,000
========= ========= ========= ========= =========
The terms and conditions of this proposed share issuance were recommended
by the audit committee of the Company's board on March 17, 2000. In
concluding this price to be the fair value for the shares, the audit
committee took into consideration the level of funding of the Company
required until the end of 2000 and the poor level of trading activity of
the Company's shares on the market (making, in their view, the market
price of the Common Stock unreliable as a factor in determining value).
These warrants (other than those relating to the shares issued to FA
Television Holdings) expired unexercised on December 31, 2000.
On April 21, 2000, the Board authorized the issuance of up to 500,000
shares to each AB Groupe and Superstar at $1.50 each prior to July 2000.
Of these shares, 780,000 shares were effectively issued and paid. AB
Groupe and Superstar purchased 480,000 and 300,0000 new shares,
respectively, out of which an aggregate number of 280,000 shares were
effectively subscribed for prior to June 30, 2000 and 500,000 shares were
effectively subscribed for in July 2000.
In September 2000, Superstar exercised 650,000 warrants and 650,000
shares of common stock were issued by the Company to Superstar.
In October 2000, FA Television Holdings LLC, a joint venture Company
among Allied Capital, Gilles Assouline and Michel Assouline, subscribed
to purchase 600,000 shares of common stock for an aggregate purchase
price of $840,000with all such shares being issued from the 6.5 million
shares reserved for certain shareholders including the management in
March 2000. In October 2000, 600,000 new shares of the Company were
issued to FA Television Holdings LLC. By a board decision of September
25, 2000, the Company agreed to register these shares.
After all of these share issuance's, at September 30, 2001 the Company
has 33,432,710 shares of common stock outstanding and AB Groupe's and
Superstar's stock holding represented 53.24% and 30.75%, respectively.
Including warrants and options, the total potential number of shares
would be 42,502,347.
The fair value of the options and warrants issued is calculated using the
Black-Scholes option-pricing model at the date of grant which takes into
account the stock price at the grant date, the exercise price, the
expected life of option, the volatility of the underlying stock and the
expected dividends on it, and the risk-free interest rate over the
expected life of the option.
12
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2001
This data is summarized in the table below:
-------------------------------------------------------------------------
Stock compensation and third Debt issued
parties warrants with warrants
or options
-------------------------------------------------------------------------
Dividends yield 0 0
-------------------------------------------------------------------------
Expected volatility 45-50 % 45 -50 %
-------------------------------------------------------------------------
Interest rate 4.59 % - 6.58 % 5.38 % - 6.48 %
-------------------------------------------------------------------------
Expected life 0,2 - 3 years 2 years
-------------------------------------------------------------------------
Marketability discount 75 % 75 %
-------------------------------------------------------------------------
Fair value $ 1,744,744 $ 230,757
-------------------------------------------------------------------------
7. CHANGE IN ACCOUNTING POLICY
As of January 1, 2000 the Company has adopted the recognition provisions
of SFAS No 123 - "Accounting for Stock Based Compensation" ("SFAS 123").
Under SFAS 123, the fair value of an option on the date of the grant is
amortized over the vesting periods of the options. The recognition
provisions of SAFS 123 are applied prospectively upon adoption. As a
result, the recognition provisions are applied to all stock awards
granted in the year of adoption and are not applied to awards granted in
previous years unless those awards are significantly modified. The
adoption of SAFS 123 resulted in non cash charges to operations of $
1,744,744 in 2000. The Company applied Accounting Principles Board
opinion N(degree) 25 - Accounting for Stock Issued to Employees" ("APB
25") in accounting for its stock options, prior to January 1, 2000.
Since the application of FAS 123 represents a change in accounting
policy, the impact on the quarterly consolidated statement of operation
previously published is as follows:
As published ($) As recalculated ($)
Nine months ended September 30, 2000
Operating loss (6,946,609) (8,691,352)
Finance expense (1,959,571) (2,032,571)
Loss from continuing operations before taxation and
minority interest (8,893,077) (10,710,820)
Net loss (8,805,951) (10,623,698)
Net loss per share basic and diluted $ (0.29) $ (0.36)
13
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2001
As published ($) As recalculated ($)
Three months ended September 30, 2000
Operating loss (2,417,852) (2,417,852)
Finance expense 18,883 (8,117)
Loss from continuing operations before taxation
and minority interest (2,427,569) (2,454,569)
Net loss (2,340,145) (2,367,145)
Net loss per share basic and diluted $ (0.08) $ (0.08)
8. SUBSEQUENT EVENTS
In December 2001, we sold our technology interests to Mr. Gilles
Assouline, our former Chairman and Chief Executive Officer. These
activities comprised Unimedia S.A., a holding company based in France,
and two operating subsidiaries:
(1) Pixel Ltd, an Israeli company, specialized in computer graphic
and 3D animation for TV packaging, digital broadcasting and special
effects; and
(2) TopCard S.A., a French company, which has developed secured
access smart card technology.
Pursuant to the terms of the agreement with Mr. Assouline, we sold our
98.33% interest in Unimedia in return for nominal consideration and a
share in the proceeds from any sale of TopCard during the two year
period following the agreement. We also waived our rights with regard to
our previous financing of Unimedia in return for deferred payments in
the event of an improvement in the operating performance of TopCard. As
a result of the sale of our technology acivities, we recorded a capital
loss of approximately $1.3 million in our consolidated financial
statements for 2001.
In September 2002, the Company entered into a global resolution of
outstanding issues between itself and AB Groupe, which provides for the
following with respect to all currently outstanding loans:
(1) The 2.6 million warrants (see note 4-(6)) will be deemed to have
been exercised and the loan converted into equity with an issue
price of $1.00 per share as of September 2002;
(2) The loans will all bear interest at the rate of 10% per annum;
(3) As of September 10, 2002, the Company owed AB Groupe an aggregate
of (Euro)12,218,818 (principal of (Euro)10,510,033 plus
(Euro)1,708,785 in fees due to AB Groupe under the services
agreement). All outstanding loans will be consolidated into a
single promissory note that will bear interest at the rate of 10%
per annum. The principal amount of (Euro)10,510,033 and all
accrued and unpaid interest will be due and payable in full on the
earlier of a sale of our assets, a refinancing of our outstanding
debt, or March 31, 2003. Additionally, AB Groupe is currently
loaning to us (Euro)1,708,785 to pay outstanding fees due to AB
Groupe for services rendered through this date. Such amount will
be represented by a promissory note on the same terms as the above
referenced loan.
AB Groupe has also agreed to fund up to an additional (Euro)2.0 million
to the Company, on the same terms as described above. However, AB Groupe
will not be obligated to advance additional funds in the event of a
material adverse change in the business, operations or financial
condition of Onyx. As of November 30, 2002, CMG had drawn down
(Euro)1,081,756 of this amount, of which (Euro)401,112 ($402,756) has
been frozen pending the outcome of Onyx's appeal of the Muller
litigation (see litigation).
As part of the agreement, the Company and AB Groupe also settled an
outstanding dispute relating to two invoices, which had been presented
to the Company by AB Groupe. The first, relating to a proposed $600,000
charge for broadcast services during the fourth quarter of 2000 was
compromised to $420,000. The full amount of the disputed invoice is
included in accounts payable at December 31, 2001, and $180,000 of such
amount will be reversed at December 31, 2002. The second, relating to
services, which AB Groupe allegedly rendered to Onyx+, in the amount of
$140,000, was also resolved, and such invoice remains due and payable.
As of November 30, 2002, CMG owed AB Groupe a total of (Euro)13,365,928
including (Euro)1,774,138 of accumulated interests and excluding
outstanding fees for services rendered through this date. This debt is
entirely due on March 31, 2003.
14
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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-Q. 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 Form 10-KSB.
Results of Operations
Nine months ended September 30, 2001 compared to nine months ended September 30,
2000
Operating revenues for the nine months ended September 30, 2001 were $2,995,994,
an increase of $859,485 (40.2%) compared to operating revenues of $2,136,509 for
the same period in 2000. Revenues at Onyx Television and Onyx+ for the nine
months ended September 30, 2001 totaled $2,252,879, compared to $1,563,917 for
the same period in 2000, an increase of 44.05%. This increase in revenues is due
primarily to revenues generated by Onyx's teleshopping contract with RTL Shop,
which became effective in the beginning of March 2001.
Operating costs, including staff costs, depreciation and amortization totaled
$9,195,823 for the nine months ended September 30, 2001 compared to $10,827,861
for the nine-month period ending September 30, 2000. The decrease in operating
costs was primarily at Onyx.
Financial expense for the nine months ended September 30, 2001 was $858,943
(including an exchange loss of $ 401,996), compared to $2,032,571 for the same
period in 2000.
As a result of all of the above factors, the Company incurred a net loss of
$6,339,432 for the nine months ended September 30, 2001 compared to $10,623,698
for the same period in 2000.
The net loss per share for the nine months ended September 30, 2001 (basic and
diluted) was $0.19, compared to a net loss per share (basic and diluted) of
$0.36 for the nine months ended September 30, 2000. Weighted average shares
outstanding basic and diluted were 33,432,710 for the nine months ended
September 30, 2001, compared to 29,864,362 for the corresponding period in 2000.
15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2001
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, we have financed our capital requirements through sales of our equity
securities and through debt financing. Since inception through September 30,
2001, we have incurred an accumulated deficit of approximately $85.6 million,
principally related to the launch and operation of Onyx. At September 30, 2001,
we had a negative working capital of $14.5 million.
The Company will require significant financing over the next twelve months in
order to remain a going-concern, the amount of which will depend in part on the
revenues generated by the Company. There can be no assurance that the Company
will be successful in securing the necessary funds to finance its operation
through 2001. Funding is expected to come from AB Groupe, the Company's majority
stockholder, although there can be no assurance that AB Groupe will fund the
amounts required.
Equity Offerings and Other Financing Agreements
In December 1999, AB Groupe made a loan to us of $500,000 for general
working capital purposes. The term of the loan was two years and bears interest
at the rate of ten percent (10%) per year. In connection with the loan, we
granted AB Groupe a two year warrant to purchase 500,000 shares of common stock
at the exercise price of $1.00 per share.
In January 2000, AB Groupe and Superstar made loans to us in the aggregate
of $1,000,000. The proceeds were in part used to increase the capital
investments in Onyx by $465,000 and TopCard by $225,000. The term of the loan
was two years and accrues interest at the rate of ten percent (10%) per year. In
connection with the loan, we granted AB Groupe and Superstar a two-year warrant
to purchase 1,000,000 shares of our common stock at an exercise price of $1.00
per share.
In March 2000, AB Groupe loaned us an additional $1,000,000 for working
capital. The term of the loan was two years with interest of ten percent (10%)
per annum. In connection with the loan, we granted AB Groupe a two year warrant
to purchase 1,000,000 shares of common stock at an exercise price of $1.00 per
share.
At a board meeting held on April 21, 2000, the board authorized the issue
of up to 500,000 shares to each Groupe AB and Superstar at $1.50 each prior to
the end of July 2000. Out of these, 780,000 shares were effectively issued and
paid. Groupe AB and Superstar purchased 480,000 and 300,000 new shares
respectively, out of which an aggregate number of 280,000 shares were
effectively subscribed prior to June 30, 2000 and 500,000 shares were
effectively subscribed in July 2000.
In August 2000 and in September 2000, AB Groupe sent (Euro)306,775
($302,874) and (Euro)153,388 ($151,454) respectively on behalf of the Company
for same to participate in a capital increase in Onyx+.
In September 2000, Superstar exercised 650,000 warrants and 650,000 shares
of Common Stock were issued by us to Superstar.
In October 2000, AB Groupe purportedly exercised 2.6 million warrants at an
exercise price of $1.00 per share. AB Groupe disputed their exercise of these
warrants and the accounts at December 31, 2001 include this amount as a loan
from AB Groupe. As discussed in Note 7 to the Financial Statements included
herein, as part of a recent resolution of outstanding issues between us and AB
Groupe, AB Groupe exercised these options.
16
In October 2000, FA Television Holdings LLC, a United States company acting
on behalf of Gilles and Michel Assouline was authorized by our board held on
September 25, 2000 to subscribe 480,000 shares at $1.50 each and 120,000 shares
at $1.00 each thus 600,000 new issued shares for an aggregate purchase price of
$840,000.
In February 2001, we accepted a funding proposal from AB Groupe to loan the
Company $800,000. AB Groupe loaned the Company (Euro)731,147 ($644,360) which
was required to support the Company's operations. The loan was due on April 30,
2001. Since the loan was not repaid by that date, the loan is, at AB Groupe's
option, convertible into shares of Common Stock at a conversion price of $0.60
per share.
In June 2001, we entered into a borrowing agreement with AB Groupe for up
to (Euro).5 million ($3.5 million). Under this agreement, we could borrow up to
this amount prior to December 31, 2001. The loan bears interest at 10% per annum
and was due on June 25, 2002. As of December 31, 2001, we had borrowed (Euro).5
million ($3.5 million) pursuant to this agreement with AB Groupe.
In November 2001, the Company accepted a funding proposal from AB Groupe to
enable meet the immediate financing requirements of the technology activities
and conclude an agreement regarding their sale. As a result, the Company
borrowed a total of (Euro) 776,511 ($684,339). This loan, which bears 10%
interest per annum, is due in December 2002.
In March 2002, we accepted a proposal from AB Groupe to provide additional
funding under the same terms and conditions as the loans provided to us by AB
Groupe in 2001.
As of September 10, 2002, we owed AB Groupe an aggregate of
(Euro)12,218,818 (principal of (Euro)10,510,033 plus (Euro)1,708,785 in fees due
to AB Groupe under the services agreement). As part of our resolution of
outstanding issues with AB Groupe, we have consolidated all outstanding loans
into a single promissory note that will bear interest at the rate of 10% per
annum. The principal amount of (Euro)10,510,033 and all accrued and unpaid
interest will be due and payable in full on the earlier of a sale of our assets,
a refinancing of our outstanding debt, or March 31, 2003. Additionally, AB
Groupe agreed to loan us (Euro)1,708,785 to pay outstanding fees due to AB
Groupe for services rendered through this date. Such amount is represented by a
promissory note on the same terms as the above referenced loan.
In addition, absent the occurrence of a material adverse change in the
business, operations or financial condition of Onyx, AB Groupe committed to
provide an additional (Euro)2.0 million in loans under the same terms and
conditions as the loans described above. As of November 30, CMG had borrowed
(Euro)1,081,756 under this financing arrangement.
Liquidity and Capital Resources
We believe that additional capital will be required, along with anticipated
revenues from operations, to fund our operations for the next 12 months. We
anticipate that the required fundings will come from the fundings already
committed by AB Groupe, as described above. We cannot assure you as to whether
such fundings will be sufficient to meet our working capital requirements,
because (i) the amounts of required funding will, in large measure, be impacted
by the level of revenues achieved by Onyx Television and (ii) the amount of
funding we may receive is conditioned upon the absence of any material adverse
change in the business, operations or financial condition of Onyx. Further,
while AB Groupe has committed to make the funding described above, AB Groupe has
not agreed to fund amounts in excess of those already committed, and there can
be no assurance that AB Groupe will fund amounts in excess of the funds already
committed if we were to require such additional funding. We may also consider
issuing additional shares of our common stock, or shares of the capital stock of
our subsidiaries, to meet our anticipated capital requirements.
17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2001
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks due to changes in currency exchange
rates. The Company's revenues and net worth are affected by foreign currency
exchange rates because its subsidiaries do business in various countries and
because each subsidiary owns assets and conducts business in its local currency.
Upon consolidation, the subsidiaries' financial results are impacted by the
value of the U.S. dollar at a time of the translation. A uniform % strengthening
as of January 1, 2000 in the value of the dollar would have resulted in reduced
revenues of $253,409 million for the year ended December 31, 2000. A uniform %
strengthening as of January 1, 1999 in the value of the dollar would have
resulted in reduced revenues of $248,063 million for the year ended December 31,
1999. A uniform 10 % strengthening as of December 31, 2000 in the value of the
dollar would have resulted in a reduction of the consolidated Company's net
worth by $48,911. A uniform 10 % strengthening as of December 31, 1999 in the
value of the dollar would have resulted in a reduction of the consolidated
Company's net worth by $76,807. The Company periodically evaluates the
materiality of foreign exchange risk and the financial instruments available to
mitigate this exposure. The Company attempts to mitigate its foreign exchange
exposures by maintaining assets in the exposed currency wherever possible. The
Company finds it impractical to hedge foreign currency exposure and as a result
will continue to experience foreign currency gains and losses.
18
Part II. Other Information
Item 1. LEGAL PROCEEDINGS
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. Onyx maintained that the action taken was lawful and in July 1998,
the court ruled in favor of Onyx. The plaintiff appealed against the ruling and
claimed (Euro)85,900 ($86,252) in respect of his 1997 salary. In December 2001,
the plaintiff increased his claim to a total of (Euro)333,000 ($334,365), which
includes his salary for 1998 and 1999, as well as an indemnity regarding his
departure. In June 2002, the court ruled in favor of the plaintiff. Onyx has
appealed this decision and believes that it has valid defense and/or offsets to
this claim. However, there can be no assurance as to the outcome of the matter.
In November 2002, Onyx was obliged to freeze (Euro)401,112 ($402,756) pending
the outcome of the appeal. The next court proceedings are not expected until
April 2003.
Unimedia has two minority shareholders who have brought numerous legal
actions against Unimedia and/or its management. To date, all of these actions
have been unsuccessful. The Company is indemnifying Gilles Assouline, its former
Chairman and CEO, with respect to these claims. In November 2002, the Company
was informed by Mr. Assouline that he had signed a settlement agreement with
these minority shareholders, in which they renounce the pursuit of legal actions
against Mr. Assouline and vice versa. However, Mr. Assouline's co-defendant in
this legal action has not settled with these minority shareholders and has asked
the court to consider that Mr. Assouline should be liable in part for any
successful claim against the co-defendant. As a result, there can be no
assurance that Mr. Assouline will not incur further legal expenses related to
this action and/or that he would not be liable in part for a successful claim
against the co-defendant.
In June 2000, Onyx+, which was planning to broadcast its digital channels
directly from Germany, signed a service agreement with Mediagate. As a result of
the numerous delays taken by the cable operators with respect to the development
of digital cable services in Germany combined with the failure of certain
conditions precedent to the use by Onyx+ of the services provided by Mediagate,
this agreement never became applicable. Mediagate has taken the position that
Onyx+ was obligated under the contract, and has been invoicing Onyx+ at a
monthly rate of DM 430,000 (approximately $220,756) starting January 2001.
Mediagate has brought legal action against Onyx+ with respect to its non-payment
of these invoices and for breach of contract. While Onyx+ has and will continue
to vigorously dispute the application of this agreement, there can be no
assurance as to the outcome of the pending litigation with Mediagate.
Item 2. CHANGE IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
19
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 CEO Certificate
99.2 CFO Certificate
(b) Reports on Form 8-K
None
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant certifies that it caused this quarterly Report to be
signed on its behalf by the undersigned, thereunto duly authorized, on December
20, 2002.
CAPITAL MEDIA GROUP LIMITED
By: /s/ Alain Krzentowski
--------------------------------------
Alain Krzentowski, President and Chief
Executive Officer
By: /s/ Jean-Francois Klein
--------------------------------------
Jean-Francois Klein
Chief Financial Officer
21
Certification by the Chief Executive Officer pursuant to Sarbanes-Oxley Section
302(a):
I, Alain Krzentowski, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Capital Media
Group Limited;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
Date: December 20, 2002 By: /s/ Alain Krzentowski
------------------------------------------
Alain Krzentowski
President and Chief Executive Officer
22
Certification by the Chief Financial Officer pursuant to Sarbanes-Oxley Section
302(a):
I, Jean-Francois Klein, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Capital Media
Group Limited;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
Date: December 20, 2002 By: /s/ Jean-Francois Klein
-------------------------------
Jean-Francois Klein
Chief Financial Officer
23
Exhibit Index
Exhibit Description
Exhibit
Number
99.1 CEO Certificate
99.2 CFO Certificate