SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________.
Commission File No. 0-21051
CAPITAL MEDIA GROUP LIMITED
-------------------------------------------------------------------------
(exact name of small business issuer in its charter)
NEVADA 87-0453100
- ------------------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
2 RUE DU NOUVEAU BERCY.
94220, CHARENTON, FRANCE
- ------------------------------------------- ---------------------------------
(Address of principal executive offices) (Zip Code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter periods that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. YES X NO
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 39,026,223 SHARES OF COMMON
STOCK AT AUGUST 31, 1998 (EXCLUDING 1,067,916 SHARES OWNED AT THAT DATE BY THE
COMPANY'S 81.6% OWNED SUBSIDIARY, UNIMEDIA, S.A.)
Transitional Small Business Disclosure Format. YES ____ NO X
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Unaudited financial statements for the quarter covered by this report are
attached hereto in accordance with item 310(b) of Regulation S-B.
INDEX TO FINANCIAL STATEMENTS
Unaudited consolidated balance sheet at June 30, 1998
and December 31, 1997..................................................3
Unaudited consolidated statement of operations for the three and six
months ended June 30, 1998 and 1997....................................4
Unaudited consolidated statement of stockholders' equity for
the six months ended June 30, 1998.....................................5
Unaudited consolidated statement of cash flows for the six
months ended June 30, 1998 and 1997....................................6
Notes to the unaudited consolidated financial statements....................7
2
<PAGE>
<TABLE>
<CAPTION>
CAPITAL MEDIA GROUP LIMITED
UNAUDITED CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
NOTE JUNE 30, DECEMBER 31,
1998 1997
$ $
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents 1,135,433 359,695
Accounts receivable, within one year, net of
allowances for doubtful accounts of $110,392
(December 31, 1997 - $10,399) 3 2,416,531 1,207,398
Inventories 28,950 25,660
Prepaid expenses and deposits 123,307 510,828
Amounts due from shareholder 4 313,691 313,691
---------------- ----------------
TOTAL CURRENT ASSETS 4,017,912 2,417,272
Investments 544,093 2,014,917
Intangible assets, net of accumulated amortization
of $2,523,496 (December 31, 1997 - $2,203,973) 5 2,836,511 3,452,976
Property, plant and equipment, net 6 1,306,247 1,020,818
---------------- ----------------
TOTAL ASSETS 8,704,763 8,905,983
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable 4,397,647 4,377,812
Accrued expenses 4,406,733 2,710,780
Loans repayable within one year 7 9,065,721 4,229,008
Amounts due to minority shareholders 199,147 614,173
---------------- ----------------
TOTAL LIABILITIES 18,069,248 11,931,773
COMMITMENTS AND CONTINGENCIES 8 - -
MINORITY INTEREST IN SUBSIDIARIES 1,139,098 901,980
---------------- ----------------
19,208,346 12,833,753
---------------- ----------------
STOCKHOLDERS' EQUITY
Preferred stock - 5,000,000 shares authorized:
$0.001 par value: no shares issued and outstanding
Common stock - 50,000,000 shares authorized:
$0.001 par value 40,094,139 (December 31, 1997 -
35,094,139) issued and outstanding 40,090 40,090
Additional paid in capital 31,139,909 31,155,909
Subscriptions receivable (5,000) (5,000)
Cumulative translation adjustment 2,762,709 2,846,067
Accumulated deficit (44,441,291) (37,964,836)
---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY (10,503,583) (3,927,770)
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 8,704,763 8,905,983
================ ================
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
CAPITAL MEDIA GROUP LIMITED
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
3 MONTHS 3 MONTHS 6 MONTHS 6 MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
NOTE $ $ $ $
<S> <C> <C> <C> <C> <C>
Operating revenues 1,353,333 467,695 2,685,620 874,733
Operating costs:
Staff costs 940,101 917,977 1,953,277 1,749,152
Depreciation and amortization 282,014 127,132 645,589 249,365
Operating expenses - exceptional 9 (390,845) 761,975 142,115 2,140,952
Operating expenses - other 2,616,576 2,998,779 5,615,694 5,642,787
-------------- ------------- --------------- --------------
Operating costs (3,447,846) (4,805,863) (8,356,675) (9,782,256)
-------------- ------------- --------------- --------------
Operating loss (2,094,513) (4,338,168) (5,671,055) (8,907,523)
Equity in net losses of investment
in joint venture (28,193) (70,224) (61,210) (137,514)
Interest (paid) (422,948) (35,050) (642,027) (82,553)
Other (expenses)/income (150,999) (5,865) (344,306) 9,381
-------------- ------------- --------------- --------------
Loss before income tax provision 10 (2,696,653) (4,449,307) (6,718,598) (9,118,209)
Income tax (provision) (796) (2,130) (670) (2,669)
-------------- ------------- --------------- --------------
Loss after taxation (2,697,449) (4,451,437) (6,719,268) (9,120,878)
Minority interest 146,044 26,386 242,813 67,617
-------------- ------------- --------------- --------------
Net loss (2,551,405) (4,425,051) (6,476,455) (9,053,261)
============== ============= =============== ==============
Net loss per share - basic ($0.06) ($0.30) ($0.16) ($0.48)
====== ====== ====== ======
Net loss per share-diluted ($0.05) ($0.16) ($0.13) ($0.32)
====== ====== ====== ======
Weighted average shares - basic 40,094,139 18,859,995 40,094,139 18,859,995
============== ============= =============== ==============
Weighted average shares - diluted 49,627,467 28,393,323 49,627,467 28,393,323
============== ============= =============== ==============
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
CAPITAL MEDIA GROUP LIMITED
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998
ADDITIONAL CUMULATIVE
COMMON PAID-IN SUBSCRIPTION TRANSLATION ACCUMULATED
STOCK CAPITAL RECEIVABLE ADJUSTMENT DEFICIT TOTAL
SHARES $ $ $ $ $ $
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 40,094,139 40,090 31,155,909 (5,000) 2,846,067 (37,964,836) (3,927,770)
Issuance of common stock - - (16,000) - - - (16,000)
Translation adjustment - - - - (83,358) - (83,358)
Net loss - - - - - (6,476,455) (6,476,455)
---------- ------- ---------- -------- --------- ----------- ------------
Balance at June 30, 1998 40,094,139 40,090 31,139,909 (5,000) 2,762,709 (44,441,291) (10,503,583)
========== ======= ========== ======== ========= =========== ============
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
CAPITAL MEDIA GROUP LIMITED
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
6 MONTHS 6 MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1998 1997
$ $
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (6,476,455) (9,053,261)
Adjustment to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 645,589 249,365
Equity in net losses of investment in joint venture 61,210 137,514
Minority interest (242,813) (81,281)
Changes in assets and liabilities:
Decrease/(increase) in inventories (3,290) 8,892
Increase in accounts receivable (1,197,590) (2,842,572)
Decrease in prepaid expenses 387,521 1,003,118
Increase in accrued expenses and
accounts payable 1,672,199 487,015
Decrease in amounts due to minority shareholders 64,905 20,000
----------------- ------------------
NET CASH USED IN OPERATIONS (5,088,724) (10,071,210)
----------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, plant and equipment (690,663) (22,010)
Acquisition of intangible assets 69,457 -
Sale of investments 1,409,614 (113,050)
----------------- ------------------
NET CASH USED IN INVESTING ACTIVITIES 649,494 (135,060)
----------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of shares - 10,146,472
Commission paid on issuance of shares (16,000) (240,000)
Loans taken out in the period 4,836,713 -
----------------- ------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,820,713 9,906,472
----------------- ------------------
NET (DECREASE) / INCREASE IN CASH 381,483 (299,798)
Effect of exchange rate movements on cash 394,255 1,657,993
Cash at start of period 359,695 320,070
----------------- ------------------
Cash at end of period 1,135,433 1,678,265
================= ==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITY:
Cash payments for interest 83,741 28,460
Cash paid for taxes - 2,669
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
6
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
1. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements are prepared in conformity with
generally accepted accounting principles in the United States of America.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Capital
Media Group Limited ("the Company") and its wholly owned subsidiaries
Capital Media (UK) Limited ("CM(UK)"), and Onyx Television GmbH ("Onyx")
its 51% owned subsidiary Tinerama Investment AG ("Tinerama"), together
with the Company's 81.6 owned subsidiary Unimedia SA ("Unimedia") and
Unimedia's wholly owned subsidiary Pixel Limited ("Pixel") and its 90%
owned subsidiary Topcard SA ("Topcard"). CM(UK)'s 50% joint venture
investment interest in Blink TV Limited ("Blink") has been accounted for
using the equity method after the elimination of all significant
intercompany balances and transactions. The results of Pixel have been
consolidated in the unaudited consolidated financial statements from
January 1, 1998 being the effective date of acquisition.
INTERIM ADJUSTMENTS
The consolidated financial statements as of, and for the periods ended,
June 30, 1998 and June 30, 1997, are unaudited. The interim financial
statements reflect all adjustments (consisting only of normal recurring
accruals) which are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented. The
consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto included in
the Company's 1997 Annual Report on Form 10-KSB. The results of operations
for the interim periods should not be considered indicative of results
expected for the full year.
INVENTORIES
Inventories are stated at the lower of first-in, first-out cost and market
value.
INTANGIBLE ASSETS
Intangible assets represent purchased broadcast licences, computer
software and goodwill arising on acquisition of subsidiary undertakings.
The amounts in the balance sheet are stated net of the related accumulated
depreciation. Intangible assets and goodwill are amortized on a
straight-line basis over a period of five years. The Company evaluates the
possible impairment of long-lived assets, including intangible assets
whenever events or circumstances indicate that the carrying value of the
assets may not be recoverable, by comparing the undiscounted future cash
flows from such assets with the carrying value of the assets. An
impairment loss would be computed based upon the amount by which the
carrying amount of the assets exceeds its fair value at any evaluation
date.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are all stated at cost. Depreciation is
recorded on a straight-line basis over the estimated useful lives of the
assets as shown below:
Buildings 25 to 50 years
Fixtures, fittings and equipment 5 to 20 years
7
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
FOREIGN CURRENCY
Assets and liabilities of the Company's foreign subsidiaries in the United
Kingdom and Germany are translated at year end exchange rates and the
results of those subsidiaries at the average exchange rate for the year.
The effects of these translation adjustments are reported in a separate
component of shareholders' equity. Exchange gains and losses arising from
transactions denominated in a currency other than the functional currency
of the entity involved are included in net income.
Assets and liabilities of the Company's foreign subsidiary in Romania are
translated at historical exchange rates in accordance with the temporal
method. This is due to the hyper-inflationary situation in Romania.
INCOME TAXES
Full provision is made for all deferred tax liabilities. Deferred income
tax assets are recognized for deductible temporary differences and net
operating losses, reduced by a valuation allowance if it is more likely
than not that some portion of the benefit will not be recognized.
LEASES
Operating leases are charged to the statement of operations in equal
annual amounts over the term of the lease.
INCOME PER SHARE
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 128 ("SFAS No. 128") EARNINGS PER SHARE, which requires
presentations of basic and diluted income per share on the face of the
Consolidated Statements of Operations. Basic income per share is
calculated on the basis of weighted average outstanding shares, after
giving effect to preferred stock dividends. Diluted income per share is
computed on the basis of weighted average shares outstanding common
shares, plus equivalent shares assuming exercised stock options and
conversion of outstanding convertible securities where issued. All income
per share disclosures have been restated in accordance with SFAS No. 128.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of certain financial instruments, including cash,
receivables, accounts payable, and other accrued liabilities, approximate
the amount recorded in the balance sheet because of the relatively
short-term maturities of these financial instruments. The fair value of
bank, insurance company and other long term financing at each period and
approximate the amounts recorded in the balance sheet based on information
available to the Company with respect to current interest rates and terms
for similar debt instruments.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 comparative figures
to conform to the 1998 period end presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
8
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
APPROVED ACCOUNTING STANDARDS NOT YET ADOPTED
In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No.130 "Reporting Comprehensive Income," and SFAS No.131, "Disclosure
about Segments of an Enterprise and Related Information." These statements
are required to be adopted in fiscal 1999. In 1998, the FASB issued SFAS
No.132, "Employers' Disclosures about Pensions and Other Post Retirement
Benefits." This statement is also required to be adopted in fiscal 1999.
In 1998, the FASB also issued SFAS No.133, "Accounting for Derivative
Instruments and Hedging Activities." This statement is required to be
adopted in fiscal 2000. The Company is currently in the process of
evaluating the impact of adopting these new standards.
2. GOING CONCERN
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in
the audited financial statements contained in the Company's 1997 Annual
Report on Form 10-KSB, the Company incurred net losses during 1997 and
1996 of $18,471,065, and $16,262,104, respectively. Additionally, the
Company incurred a net loss for the first six months of 1998 of
$6,476,455, including a non-cash accounting exchange rate transaction loss
of $142,115 arising from changes in currency exchange rates since December
31, 1987. Further, at June 30, 1998, the Company had net current
liabilities of $14,051,336 and its total liabilities exceeded its total
assets by $10,503,583. These factors among others may indicate that the
Company will be unable to continue as a going concern for a reasonable
period of time.
The accompanying financial statements do not include any adjustments
relating to the recoverability and classification of liabilities that
might be necessary should the Company be unable to continue as a going
concern. As described in Note 14, the Company's continuation as a going
concern is dependent upon its ability to obtain additional funding or
refinancing as may be required, and ultimately to attain successful
operations. Management reported in July 1998 that it had entered into two
agreements to provide funding of $11.64 million so that the Company can
meets its obligations and sustain operations from sources as described in
the 1997 Annual Report on Form-10-KSB.
3. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
$ $
<S> <C> <C>
Trade receivables 1,519,300 593,589
Taxation 732,870 449,167
Other debtors receivable within one year 164,361 164,642
--------------------- ----------------------
2,416,531 1,207,398
===================== ======================
</TABLE>
9
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
4. AMOUNT DUE FROM SHAREHOLDER
In December 1995, the Company issued shares to a shareholder in exchange
for the shareholder guaranteeing the establishment of a contract with PTT
Telecom. This resulted in the shareholder receiving shares for no payment.
5. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
$ $
<S> <C> <C>
Purchased broadcast licenses 250,275 246,810
Computer software 194,262 195,016
Research and development costs 176,958 161,979
Goodwill 4,738,512 5,053,144
---------------------- ----------------------
5,360,007 5,656,949
Less accumulated depreciation (2,523,496) (2,203,973)
---------------------- ----------------------
2,836,511 3,452,976
====================== ======================
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
$ $
<S> <C> <C>
Buildings 191,550 191,550
Fixtures, fittings and equipment 4,212,923 2,089,649
--------------------- ----------------------
Total property, plant and equipment 4,404,473 2,281,199
Less accumulated depreciation (3,098,226) (1,260,381)
--------------------- ----------------------
1,306,247 1,020,818
===================== ======================
</TABLE>
10
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
7. LOANS REPAYABLE WITHIN ONE YEAR
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
$ $
<S> <C> <C>
Loans repayable within one year comprise:
Instar Holding Ltd. 2,000,000 2,000,000
Unbeatable Investments Ltd. - 500,000
Superstar Ventures Ltd. 2,950,000 -
MMP, SA 2,400,000 -
Fontal Ltd. 200,000 200,000
Oradea 500,000 500,000
Roland Pardo 500,000 500,000
Falcon Management -- 335,000
Interest accrued 515,721 194,008
---------------- -----------------
9,065,721 4,229,008
================ =================
</TABLE>
The terms of the loans are:
The terms of the Instar loan are detailed in Note 14.
The Unbeatable loan was received on October 10, 1997 and carried an
interest rate of 10% per annum and was repaid on January 9, 1998.
The terms of the Superstar loan are detailed in Note 14.
The terms of the MMP loan are detailed in Note 14.
The Fontal loan was received on December 30, 1997 and carries an interest
rate of 10% per annum and was repayable on February 16, 1998. See Note 11.
The Oradea loan was made to Unimedia in 1996 and carries an interest rate
of 2% above 3 month Eurodollar Libor rate and was repayable starting on
April 17, 1998. See Note 11.
The Roland Pardo loan was made to Unimedia in 1996 and carries an interest
rate of 2% above 3 month Eurodollar Libor rate and was repayable starting
on July 29, 1998. See Note 11.
The Falcon loan was made to Unimedia in 1995 and carried an interest rate
of .5% per month and was repaid on May 25, 1998.
11
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
8. COMMITMENTS AND CONTINGENCIES
TRANSPONDER
A bank guarantee was originally provided to PTT Telecom on November 30,
1995 in the amount of ECU 2,000,000 in relation to an agreement to lease
transponder capacity in order to broadcast a television channel in
Germany. The guarantee required as at June 30, 1998 stood at ECU 950,000
($1,125,000 at June 30, 1998 exchange rates.) The Company was not in a
position to support the guarantee. As a result the guarantee has been
provided by Universal Independent Holdings Limited ("Universal") (see Note
14).
The Company was committed to paying ECU 825,000 ($980,000 at June 30, 1998
exchange rates) over the remaining period of the contract which expired on
September 25, 1998, for use of the transponder capacity under the terms of
the agreement.
COMMITMENTS
In March 1998, the Company entered into a monthly agreement to lease
offices, as well as the use of studio, post production and editing
facilities in Dortmund, Germany as required. Under the terms of the office
agreement, the Company was committed to paying DM 150,000 ($81,000 at June
30, 1998 exchange rates) per annum.
In January 1996, the Company entered into an agreement to lease master
control and broadcast equipment and editing facilities at Ingleheim
Germany. Under the terms of the agreement, the Company was committed to
paying DM 2,940,000 ($1,590,000 at June 30, 1998 exchange rates) per annum
for the use of the equipment and facilities until January 2001. Under the
terms of the agreement the lease can be terminated effective October 1998.
Notice of termination of the lease has been given to the lessor.
In January 1996, the Company entered into an agreement to lease uplink
capacity until January 2001, at a cost of approximately pound sterling
245,000 ($410,000 at June 30, 1998 exchange rates) per annum. Under the
terms of the agreement the lease can be terminated effective October 1998.
Notice of termination of the lease has been given to the lessor.
The Company has entered into leases for office space in France, expiring
between 1999 and 2002 at an annualized cost of $130,000 (at June 30, 1998
exchange rates).
12
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
9. OPERATING EXPENSES - EXCEPTIONAL
<TABLE>
<CAPTION>
6 MONTHS 6 MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1998 1997
$ $
<S> <C> <C>
Currency translation difference on foreign
currency net investments (142,115) (2,140,952)
============== ==============
</TABLE>
10. INCOME TAX
The income tax provisions consisted of the following
<TABLE>
<CAPTION>
6 MONTHS 6 MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1998 1997
$ $
<S> <C> <C>
Current tax credit/(expense) (670) (2,669)
============ =============
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
$ $
<S> <C> <C>
Net operating loss carry forwards give rise to
deferred tax assets are as follows:
Unutilized tax losses 1,400,000 4,180,000
Valuation allowances (1,400,000) (4,180,000)
------------ -------------
- -
============ =============
</TABLE>
The valuation allowance relates to deferred tax assets established under
Statement of Financial Accounting Standard No. 109 and relate to the
unutilized tax losses. These unutilized tax losses, substantially all of
which do not expire, will be carried forward to future years for possible
utilization. Because the Company has not yet achieved profitability, it
has not recognized the benefit for these unutilized tax losses in the
financial statements.
13
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
11. LITIGATION
The litigation against Com TV Production und Vertrieb GmbH ("Com") and Nen
TV ("Nen") and Mr. John Garman, relates to an agreement in 1995, wherein
the Company was purportedly to invest in and develop a satellite
broadcasting project and was thereby to allot Nen 5% of the issued share
capital of the project in consideration for various undertakings. The
Company has always maintained that there had been a repudiatory breach of
contract by Com and Nen and that the Company believed that the claims made
were without merit and intended to vigorously contest the same.
In December 1997, at the direction of the trial judge, the Company and Com
and Nen and John Garman were directed to either come to an agreement or
that the parties were instructed to prepare for the case to be immediately
held for trial. An agreement to settle this suit was made with Garman on
December 12, 1997 wherein the Company agreed to enter into reciprocal
commercial agreements allowing Garman to access available down time for
advertising purposes.
In June 1997, a former managing director of Onyx Television whose
employment was terminated brought suit in Germany for alleged wrongful
early termination of his employment. The suit sought damages of DM750,000.
Onyx maintained that the action which it took with respect to this
employee was lawful and in July 1998, the court ruled in favor of Onyx
Television. The plaintiff has the right to appeal and Onyx Television
believes that it has valid defenses to this claim. However, there can be
no assurance as to the outcome of this matter.
In May 1998, TV Strategies, a Dallas based television services company,
obtained a default judgment against Onyx Television for DM300,000, plus
interest, relating to services which TV Strategies alleges that they
provided to Onyx. Onyx intends to seek to have the default judgment set
aside in Texas, and believes that it has the grounds to obtain relief from
the default judgment. Onyx Television also believes that it has
meritorious defenses to the suit. There can be no assurance as to the
outcome of this matter.
In July 1998, the Company was sued in the U.S. District Court for the
District of Nevada by Fontal Limited ("Fontal") for breach of a promissory
note. See Note 7 for a description of the Fontal Note. The Company had
pledged the rights to trademarks for the international Onyx name and
branding outside of Germany, Switzerland and Austria to Fontal to secure
repayment of this note. The Company has filed a motion to dismiss this
suit for FORUM NON CONVENIENS, believing that the proper forum for this
suit is England. The Company also believes that it has meritorious
defenses to this suit and intends to vigorously defend same. There can be
no assurance as to the outcome of this matter.
Unimedia has three minority shareholders (Oradea, Roland Pardo and Fontal
(see note 7)) who have previously advised Unimedia that they do not
believe that the reorganization of Unimedia with the Company was in the
best interest of Unimedia and its stockholders. These stockholders have
brought numerous legal actions against Unimedia and/or its management
(which is also now, in part, the senior executive management of the
Company) contending that the past and future activities of Unimedia are
not in the best interest of Unimedia's shareholders and were not being
engaged in for the benefit of Unimedia and its stockholders. To date, such
suits have not been successful. In addition, the French Courts have to
date rejected all requests to appoint experts in judgment to review
Unimedia's management's actions.
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CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
Charles Koppel, the former chairman and CEO of the Company, had a service
agreement with the Company under which he was entitled to an annual base
salary of pound sterling 100,000 ($160,000). The agreement provided for
successive automatic one-year terms unless terminated upon one year's
prior notice in writing. Mr. Koppel resigned his positions with the
Company on August 6, 1997. Mr. Koppel has advised the Company that he
believes that the Board's selection of a new President and CEO of the
Company in August 1997 constituted a constructive dismissal of Mr. Koppel
under his service agreement. On March 12, 1998, the Company resolved its
dispute with Mr. Koppel in regard to his claim for wrongful dismissal.
Pursuant to the settlement, the Company agreed to pay Mr. Koppel pound
sterling 60,000 ($96,000) over an agreed period of time to resolve
outstanding claims under his services agreement with the Company.
In August 1998, Onyx Television sued Mr. Koppel in Germany. The suit
alleges that certain of Mr. Koppel's actions as the managing director of
Onyx Television were improperly performed and seeks damages in an
unspecified amount. The Company and Onyx are also preparing additional
actions against Mr. Koppel based, in part, upon the Company's view
that certain of Mr. Koppel's actions on behalf of the Company and
Onyx Television were taken for his own direct and indirect and/or for the
benefit of third parties and not for the benefit of the Company and Onyx
Television. The Company intends to vigorously pursue these actions against
Mr. Koppel. Mr. Koppel has advised the Company that he disputes the
Company's allegations and believes them to be untrue and without
foundation.
The Company is a party to legal actions in the normal course of business.
The Company does not believe that the resolution of any of these actions
will be material to the financial statements.
12. TINERAMA
Tinerama had an option to acquire up to a further 10% of the total issued
shares of each of its 51% owned Romanian subsidiary companies for a price
of Lei 1,000,000 ($145 at June 30, 1998) conditional upon certain
financial targets. The option was valid for a period of six months from
the date of finalization of the 1995 financial statements of the Romanian
subsidiaries on June 7, 1996. TIAG has formally confirmed its intention to
exercise its option to acquire the full 10%.
13. WARRANTS
The Company has the following warrants (all of which expire 36 months from
the date of either their effective future registration or their issuance)
outstanding at March 31, 1998:
DESCRIPTION NUMBER
Warrants for common stock exercisable at $4.00 5,200,000
Warrants for common stock exercisable at $3.125 2,033,328
Warrants for common stock exercisable at $2.50 2,300,000
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CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
The warrants were issued in connection with a Private Placement Offering
("the Offering") which took place in December 1995 and January 1996.
Warrants to purchase 4,200,000 and 1,000,000 shares of common stock at
exercise prices of $4.00 and $2.50 per share were issued to investors in
the Offering; warrants to purchase 1,000,000 and 433,328 shares of common
stock at exercise prices of $4.00 and $3.125 per share respectively were
issued to the placement agent and sub-distributors for the Offering; and
warrants to purchase 1,600,000 and 1,200,000 shares of common stock at
exercise prices of $3.125 and $2.50 respectively were issued to certain of
the founding shareholders. In September 1996, 100,000 shares and warrants
to purchase an additional 100,000 shares at an exercise price of $2.50 per
share were issued to a director for consulting services.
On March 10, 1998, the Board of Directors granted certain options to
executive officers of the Company to purchase an aggregate of 4,000,000
shares of common stock at an exercise price of $.35 per share (the fair
market value of the common stock on the date of grant). On the same date
the non-employee Directors were granted options to purchase an aggregate
of 500,000 of common stock at the same price. The options vest to
executive officers over 3 years and to non-employee Directors immediately.
14. LIQUIDITY AND CAPITAL RESOURCES
The Company has continued to use its cash reserves to fund its operations.
The ownership, development and operation of media interests, including the
Onyx television station, requires substantial funding. Due to the poorer
than expected advertising revenues at Onyx to date, the Company has
historically financed itself through sales of equity securities and debt
financing.
On January 13, 1997, the Company issued a Private Placement Memorandum
offering its securities to accredited investors. In the offering, the
Company sold an aggregate of 12,000,000 shares of common stock, $0.001 par
value per share, at a purchase price of $0.50 per share. On March 3, 1997,
the offering closed and the aggregate net proceeds to the Company were
approximately $5,850,000 after costs.
On June 30, 1997, the Company received subscriptions for $4 million in a
private placement offering of its securities to certain accredited
investors. In the offering, the Company agreed to issue an aggregate of
7,017,543 shares of common stock at a purchase price of $.57 per share. On
June 30, 1997, $1,500,000 of the proceeds was received, and the balance of
$2,500,000 was received on August 1, 1998.
On October 31, 1996, CM (UK) ("the Company") entered into a loan agreement
to borrow up to $2.0 million from Instar Holdings, Inc. ("Instar") to fund
working capital requirements ("the Instar Loan"). The loan was originally
due for repayment on December 31, 1996 or such earlier date as the Company
raised additional funds to repay the loan. The loan is guaranteed by the
Company and Onyx and is secured by a charge on all of CM (UK)'s assets and
a pledge of the stock of CM (UK). Interest is payable monthly and was
until December 31, 1997 at the rate of 2% above Lloyds Bank's base rate.
Interest as from January 1, 1998 is at the rate of 13% per annum. The
terms of the Instar Loan were amended in August 1997, January 1998 and
July 1998.
The terms of the Instar Loan were amended in July 1998 to provide that:
(i) the repayment date is now extended such to accede to a repayment
schedule plan commencing in September 1998 and terminating on
receipt of a final installment payment in late 1999; and
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(ii) the loan (or any part thereof) may be converted, at the option of
the holder, into fully paid shares of common stock, at a
conversation rate that may be offered from time to time by the
Company to any existing or potential investor.
On October 31, 1996, CM (UK) entered into a deed of counter-indemnity
("Deed") with Universal, a BVI corporation. The Deed secures the
obligation of CM (UK) to repay Universal if Universal is called upon to
make payment on its transponder guarantee. (See Note 8). CM (UK)'s
obligations under the Deed are guaranteed by the Company and Onyx, and are
secured by a charge on all of CM (UK)'s assets and a pledge of the stock
of CM (UK). Instar and Universal have agreed that their liens on the
Company's assets shall rank pari passu.
On January 9, 1998 CM (UK) borrowed an aggregate of $1,250,000 from
Superstar Ventures Limited ("Superstar"). Such loan was evidenced by two
13% Convertible Secured Promissory Notes (the "Notes") in the original
amounts of $750,000 and $500,000, respectively. Of the aggregate proceeds,
$500,000 was used to repay a loan previously made to CM (UK) by Unbeatable
Investments Limited. The Notes bear interest at the rate of 13% per annum
and are convertible into shares of common stock on the basis of one share
of common stock for each $0.50 of outstanding principal and accrued
interest. The Notes however, may not be converted until the Company has
held a shareholders meeting at which its Articles of Incorporation are
amended to increase sufficiently the number of authorized shares of common
stock of the Company.
On March 23, 1998, MMP, SA ("MMP"), a shareholder of the Company, made
available a $2,000,000 Line of Credit ("MMP Line of Credit"), which
carried interest at 13% per annum. The principal and accrued interest is
repayable on December 31, 1998, or earlier if the Company's cash flow
enables repayment.
On March 25, 1998, Superstar loaned the Company an additional $400,000
payable on the same terms as MMP Line of Credit.
On June 16, 1998, the Company entered into two Memorandum of Understanding
Agreements ("MOU") with AB Groupe ("AB"), (which is the parent company of
MMP) and Superstar to continue to fund the Company's operations. These new
Agreements will provide up to $11.64 million, $5.4 million in the form of
cash investment to be infused over a one year period and $6.24 million
through providing operating services to the Company over a period of two
years. The new funding will initially be in the form of debt to be
automatically converted into shares of common stock at $0.10 cents per
share upon and after approval of an increase in the Company's authorized
capital at the next shareholders meeting, which the Company is obligated
to hold no later than November 30, 1998.
15. RELATED PARTY TRANSACTIONS
There were no related party transactions other than in the normal course
of business between the group companies.
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ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THE FINANCIAL INFORMATION INCLUDED HEREIN SHOULD BE READ IN CONJUNCTION
WITH THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES
THERETO, INCLUDED ELSEWHERE IN THIS FORM 10-QSB. CERTAIN OF THE DATA CONTAINED
HEREIN INCLUDES FORWARD LOOKING INFORMATION AND RESULTS COULD DIFFER FROM THAT
SET FORTH BELOW. THIS DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
THE INFORMATION CONTAINED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE
YEAR ENDED DECEMBER 31, 1997 (THE "FORM 10-KSB").
RESULTS OF OPERATION
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30,
1997
Operating revenues for the three months ended June 30, 1998 were $1.35
million, an increase of $0.86 million compared to operating revenues of $0.47
million for the three months ended June 30, 1997. This increase in operating
revenue from period to period was largely attributable to an increase in revenue
at Onyx and the inclusion in the revenues for the first three months of 1998 of
an aggregate of $0.82 million of operating revenues at Unimedia, TopCard and
Pixel. The Company acquired each of these businesses under the purchase method
of accounting and therefore accounts for their revenues from their date of
purchase (August 1997, November 1997 and January 1998, respectively.)
Advertising sales by Onyx Television during the three months ended June
30, 1998 totaled $0.18 million, compared to $0.15 million for the same quarter
in 1997. The Company has recently signed an agreement with a newly appointed
media agency, whose agents are now working to develop new marketing and sales
strategies for Onyx Television. In addition, Onyx has entered into a strategic
alliance agreement with Groupe AB, a French television production company.
Based on these factors, the Company believes that Onyx Television's advertising
revenue will increase in the future, although there can be no assurance. At the
present time, Onyx Television reaches approximately 9.7 million cable homes and
an indeterminable number of direct satellite homes in Germany. For further
information, see Item 1. "BUSINESS" in the Form 10-KSB.
Operating costs, including depreciation and amortization, for the second
quarter of 1998 were $3.45 million (1997 - $4.81 million) and included $0.89
million of operating costs relating to the operations of Pixel, Unimedia and
TopCard. Operating costs also included an exceptional operating credit of $0.39
million (1997 - $0.76 million charge) in respect of non-cash accounting exchange
translation gains arising from changes in currency exchange rates at June 30,
1998 compared to exchange rates at December 31, 1997. Depreciation and
amortization for the three months ended June 30, 1998 was $0.28 million, an
increase of $0.15 million compared to $0.13 million for the three months ended
June 30, 1997. This increase was due primarily to a higher amortization charge
arising from the write-off at December 31, 1997 of certain of the goodwill
attributable to the businesses acquired in 1997.
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Total operating costs, excluding operating expenses - exceptional and
costs associated with the operations of Pixel, Unimedia and TopCard, decreased
by $1.10 million for the second quarter of 1998 compared to the second quarter
of 1997. During the latter part of 1997, and during the first and second
quarters of 1998, the Company took steps to substantially reduce costs across
all the group operations and these changes favorably impacted operating costs
during the second quarter of 1998. Additionally, each of the Tinerama companies
continued to operate at a small loss during the second quarter of 1998.
As a result of all of the above factors, the Company's operating loss was
$2.09 million for the three months ended June 30, 1998, compared to an operating
loss of $4.34 million for the same period in 1997.
The net loss for the quarterly period ended June 30, 1998 was $2.55
million ($0.06 per basic share), compared to a net loss of $4.4 million ($0.30
per basic share) for the period ended June 30, 1997. Weighted average shares
outstanding were 40,094,139 for the three months ended June 30, 1998, compared
to 18,859,995 for the three months ended June 30, 1997.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Operating revenues for the six months ended June 30, 1998 were $2.69
million, an increase of $1.82 million compared to operating revenues of $0.87
million for the six months ended June 30, 1997. This increase in operating
revenue from period to period was largely attributable to an increase in revenue
at Onyx and the inclusion in the revenues for the first six months of 1998 of an
aggregate of $1.48 million of operating revenues at Unimedia, TopCard and Pixel.
Advertising sales by Onyx Television during the six months ended June 30, 1998
totaled $0.50 million, compared to $0.25 million for the same six months in
1997.
Operating costs, including depreciation and amortization, for the first
two quarters of 1998 were $8.36 million (1997 - $9.78 million) and included
$1.76 million of operating costs relating to the operations of Pixel, Unimedia
and TopCard. Operating costs also included an exceptional operating charge of
$0.14 million (1997 - $2.14 million) in respect of non-cash accounting exchange
translation losses arising from changes in currency exchange rates at June 30,
1998 compared to exchange rates at December 31, 1997. For the reasons set forth
above, depreciation and amortization for the six months ended June 30, 1998 was
$0.65 million, an increase of $0.40 million compared to $0.25 million for the
six months ended June 30, 1997. Total operating costs, excluding operating
expenses - exceptional and costs associated with the operations of Pixel,
Unimedia and TopCard, decreased by $1.18 million for the first six months of
1998 compared to the first six months of 1997.
As a result of all of the above factors, the Company's operating loss was
$5.67 million for the six months ended June 30, 1998, compared to an operating
loss of $8.91 million for the same period in 1997.
The net loss for the six months ended June 30, 1998 was $6.48 million
($0.16 per basic share), compared to a net loss of $9.05 million ($0.48 per
basic share) for the six month period ended June 30, 1997. Weighted average
shares outstanding were 40,094,139 for the six months ended June 30, 1998,
compared to 18,859,995 for the six months ended June 30, 1997.
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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The ownership, development and operation of media interests, and
particularly the operation of a television station, requires substantial capital
investment. To date, the Company has financed its capital requirements through
sales of its equity securities and through debt financing. Since inception
through June 30, 1998, the Company has incurred an accumulated deficit of
approximately $44.4 million, principally related to the Company's launch and
operation of Onyx Television. At June 30, 1998, the Company had a negative
working capital of approximately $14.0 million.
In October 1996, the Company's UK subsidiary, CM (UK), entered into an
agreement to borrow US $2.0 million ("Convertible Debt" or the "Instar Loan")
from Instar Holdings, Inc. ("Instar") to fund the Company's working capital
requirements (principally related to the continuing operation of Onyx
Television). The Convertible Debt is guaranteed by the Company and Onyx and is
secured by a charge on all of CM (UK)'s assets and a pledge of the stock of CM
(UK). Interest is payable monthly on the Convertible Debt, at the rate of 2%
above Lloyds Bank base rate until December 31, 1997 and 13% per annum
thereafter. The Instar Loan has recently been renegotiated. For information
regarding the historical terms of the Instar Loan, see the Form 10-KSB.
In July 1998, Instar entered into a letter agreement with the Company
reflecting the new terms of this loan, which letter agreement is currently being
more formally documented in the form of amended Instar Loan documents. In the
letter agreement, Instar agreed to a repayment schedule whereby the Company will
repay this loan at the rate of $50,000 per month, commencing when the new
agreement is signed, for six months and $200,000 per month thereafter until paid
in full. The letter agreement also provides for certain prepayments to the
extent that the Company raises funds above the amounts already raised as
discussed in the Form 10-KSB. Under the terms of the new agreement, the Instar
Loan will no longer be convertible, but would become convertible at Instar's
option in the future in the event that Instar agrees to convert any of the
outstanding debt at such price as the Company may agree to sell additional
shares of its common stock to a third party.
CM(UK) has also granted a charge against all of its assets and the Company
has granted a charge against the shares of CM (UK) to secure the obligation in
connection with the guaranty of the transponder lease. See Note 8 of Notes to
Unaudited Consolidated Financial Statements with respect to the guaranty of the
transponder lease by Universal Independent Holdings Limited, a BVI corporation
("Universal"). CM(UK), under its transponder lease, was required to provide a
guaranty to PTT Telecom of its obligations under the lease. Universal agreed to
provide such guaranty, but required, among other things, (i) that CM(UK) enter
into, in favor of Universal, a deed of counter-indemnity ("Deed") to secure the
obligation of CM(UK) to repay Universal if Universal is called upon to make
payment on its transponder guaranty, (ii) that the Company and Onyx guarantee
the obligations of CM(UK) under the Deed, and (iii) that CM (UK) pledge all of
its assets and that the Company pledge its stock interest in CM (UK) to secure
their obligations in connection therewith. Instar and Universal have agreed that
their liens on the Company's assets shall rank PARI PASSU. If the Company were
to default under either or both of such guaranties and Instar and/or Universal
were to foreclose on the pledge of the Company's and CM (UK)'s assets, it would
likely have a significant and adverse impact on the Company's financial
position, and could result in the Company's loss of a significant portion of its
operating assets.
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On March 3, 1997, the Company closed a second private placement in which
the Company raised net proceeds of $5.85 million. The funds from this placement
were used to fund the continuing operation of Onyx Television and for general
corporate purposes. The Company issued an aggregate of 12.0 million shares of
Common Stock in this private placement ($0.50 per share), including 4.0 million
shares of Common Stock subscribed by Unimedia.
On June 25, 1997, the Company accepted a subscription for $4.0 million
from Unimedia, on behalf of certain investors. In the subscription, the Company
agreed to issue an aggregate of 7,017,543 shares of Common Stock at a purchase
price of $0.57 per share. On June 30, 1997, $1,500,000 of the proceeds of the
subscription was received by the Company and the balance of $2,500,000 was
released to the Company from escrow on July 31, 1997 at the closing of the
Unimedia acquisition. In connection with the private placement, the Company paid
Unimedia a fee of $240,000, which was netted against the purchase price of the
Shares. Unimedia, in turn, paid a fee to Valfab, S.A. for its services in
connection with introducing Unimedia to certain of the investors who purchased
shares in the offering. The fee consisted of $192,000 in cash and 106,666 shares
of the Common Stock acquired by Unimedia in this placement.
On July 31, 1997, the Company acquired 50.3% of the outstanding common
stock of Unimedia in exchange for 4,333,000 shares of the Company's authorized
but unissued common stock. Shareholders of Unimedia who did not participate in
the first closing of the Unimedia share exchange (the "Unimedia Share Exchange")
had until September 5, 1997 to convert their Unimedia securities into shares of
Common Stock and on September 5, 1997, the Company acquired an additional 31.3%
of Unimedia's common stock in exchange for an additional 2,693,600 shares of the
Company's authorized but unissued Common Stock. Shares issued in the Unimedia
Share Exchange were valued at their then fair market value ($0.57 per share).
At the closing of the Unimedia Share Exchange, Unimedia owned 5,564,913
shares of the Common Stock. Subsequent to the closing of the Unimedia Share
Exchange, Unimedia has transferred 4,496,997 of these shares to investors in
private transactions resulting in a net profit of $0.98 million in the year
ended December 31, 1997. At this date, Unimedia owns 1,067,916 shares of Common
Stock.
In September 1997, the Company borrowed $500,000 of short term working
capital in the form of a convertible debt from Unbeatable Investments Limited
("Unbeatable"). The debt was payable with interest of 10% per annum in April
1998 and was convertible into shares of Common Stock at the rate of $0.57 per
share. The Company's short term funding requirements were also met during the
fourth quarter of 1997 through private placements of an aggregate of 733,335
shares of the Company's authorized but unissued Common Stock (raising $550,000
at $0.75 per share).
On January 9, 1998, CM(UK) borrowed an aggregate of $1,250,000 from
Superstar Ventures Limited ("Superstar"). Such loan was evidenced by two 13%
Convertible Secured Promissory Notes in the original principal amounts of
$750,000 and $500,000, respectively (collectively, the "Notes"). Of the
aggregate proceeds, $500,000 was used to repay a loan previously made to CM(UK)
(see above) by Unbeatable. The Notes bear interest at the rate of 13% per annum
and are convertible into shares of the Company's Common Stock on the basis of
one share of Common Stock for each $0.50 of outstanding principal and accrued
interest on the Notes; provided, however, that the Notes may
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not be converted until the Company has held a shareholders meeting at which its
Articles of Incorporation are amended to increase the number of authorized
shares of Common Stock of the Company to at least the number required for
conversion of the Notes. The Notes were due and payable on March 31, 1998 but,
pursuant to the Notes and an agreement among the Company, CM(UK), Superstar,
Instar Holdings, Inc. ("Instar") and Universal Independent Holdings Limited
("Universal"), payments on the Notes may only be made pari passu pro rata as and
when payments are made to Instar according to a stated proportion. Instar and
Universal are secured creditors of the Company and CM(UK). To secure its
obligations under the Notes, CM(UK) and the Company have granted to Superstar a
security interest on the same collateral upon which Instar has been granted a
security interest by CM(UK) and the Company and upon identical terms and
conditions as are set forth in the security documents entered into between
Instar and CM(UK) (and Instar and the Company) pursuant to the loan documents
between CM (UK), the Company and Instar. Instar has also granted to Superstar a
right of first refusal to purchase the Instar Loan for the full amount due
before such loan is sold to a third party. The Company also pledged its interest
in 81.6% of Unimedia to Superstar to further secure its obligations under the
Notes.
Superstar and Unbeatable are parties controlled by David Ho, a Director of
the Company. Superstar received a fee of 200,000 shares of the Company's Common
Stock for arranging the original loan made by Unbeatable to the Company and will
receive a fee of 400,000 shares for arranging the January 1998 Superstar loan
(which fee will be payable at such time as the Company has authorized shares of
Common Stock available to issue in order to pay this fee). Additionally,
Superstar has been granted a contingent option such that if such loan is repaid
(and not converted), Superstar shall have a one year option to purchase up to
2.5 million shares of the Company's authorized and unissued Common Stock at an
exercise price of $.40 per share.
On March 23, 1998, MMP, SA ("MMP"), a shareholder of the Company and a
subsidiary of Groupe AB, made available to the Company a line of credit (the
"MMP Line of Credit") pursuant to which the Company may borrow up to $2,000,000.
Outstanding amounts under the MMP Line of Credit bear interest at the rate of
13% per annum. The Company has fully borrowed the proceeds available from the
MMP Line of Credit. Any outstanding principal amount and accrued interest is
payable not later than December 31, 1998, but becomes due and payable upon the
earlier of the consummation by the Company of any significant transaction or
when the Company's cash flow enables repayment. MMP may withdraw the MMP Line of
Credit at its sole discretion and without prior notice in the event that the
Company files for bankruptcy or is placed in bankruptcy by its creditors.
As further consideration for granting the MMP Line of Credit, MMP was
granted the right, until March 31, 2000, to purchase shares of authorized but
unissued Common Stock of the Company at a price of $0.20 per share up to the
aggregate outstanding principal amount of and accrued interest on the line of
credit; provided, however, that the option may not be exercised until the
Company holds a shareholders meeting to authorize additional shares of
authorized but unissued Common Stock. Such purchase would not affect the
outstanding principal amount of and accrued interest on the MMP Line of Credit.
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On March 25, 1998, Superstar loaned the Company an additional $400,000,
payable on the same terms as the MMP Line of Credit. In connection with this new
loan, Superstar was granted an option to purchase shares of the Company's common
stock on the same terms as the option granted to MMP as described above.
In the new agreements with Superstar and Groupe AB, Superstar has agreed
to make available $5.0 million and Groupe AB has agreed to provide cash and
services aggregating $6.64 million over a two year period. Such funding will
initially be in the form of debt, but will be automatically converted into
equity at the rate of $0.10 per share upon and after approval of an increase in
the Company's authorized common stock. If stockholder approval of the increase
in the authorized common stock is not obtained, then the debt incurred at that
date, together with interest and penalties, will be immediately due and payable.
Once these obligations are converted into Common Stock, Superstar and Groupe AB
will control approximately 80% of the Company's outstanding common stock and
will control the Company.
In regard to its future capital raising efforts to fund the Company's
businesses, the Company is likely going to have to fund these future capital
requirements through additional sales of its equity securities. The Company may
also seek funding for particular projects through investments directly into
those projects. The Company is also seeking additional strategic alliances with
respect to its other current and proposed businesses and to reduce operating
costs in all of its businesses whenever possible. No definitive agreements have
been entered into to date.
The Company believes that the proceeds from the Superstar and Group AB
agreements will fund, along with anticipated revenues from operations, the
Company's operations for the next 12 months. However, if revenues do not meet
expectations, additional funding will be required, and there can be no assurance
that such funding will be available.
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PART 2
ITEM 1. LEGAL PROCEEDINGS
For information regarding the status of the Company's currently
outstanding litigation, see Note 11 of Notes to Unaudited
Consolidated Financial Statements included herein and Item 3. "LEGAL
PROCEEDINGS" in the Form 10-KSB.
ITEM 2. CHANGE IN SECURITIES
See Notes 13 and 14 of Notes to Unaudited Consolidated Financial
Statements included herein and Item 2. "MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION" included herein for information
regarding changes in securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's securities
holders during the first three quarters of 1998.
ITEM 5. OTHER INFORMATION
The Company intends in the near future to:(i)call a meeting of
its stockholders to seek (a) approval of an increase in its
authorized Common Stock to permit the conversion of all of the
Company's outstanding convertible debt, and to provide the Company
additional shares to raise funds for corporate purposes in the
future, and (b) to reverse split its outstanding common stock; and
(ii)file a registration statement to register for resale the shares
of common stock which have been sold by the Company during the last
two years and the shares underlying the Company's outstanding
options, warrants and convertible debt. The Company plans to hold
its stockholders meeting on or before November 30, 1998, or as soon
thereafter as practicable.
The Company has also agreed to offer to one of its warrant
holders the right to subscribe to purchase 1,566,156 shares on the
basis of two shares for each of the warrants which they hold, at an
exercise of $.30 per share, effective upon the Company's
shareholders approving an increase in the Company's authorized
common stock. Additionally, subject to the compliance with
applicable U.S. securities laws and the approval of an increase in
the Company's authorized common stock to allow for such action, the
Company intends in the future to offer its other warrant holders the
right to exercise their warrants and receive two shares of common
stock at an exercise price of $0.30 per share.
The Company's common stock was quoted on the NASDAQ Small Cap
Market from July 1996 until June 8, 1998, when the Company's Common
Stock was delisted from the NASDAQ Small Cap Market. Since that
date, the common stock has been quoted on the pink sheets published
by the National Quotations Bureau. With the filing of this Form
10-QSB, the Company is again current in its filings with the U.S.
Securities and Exchange Commission and the Company is presently
seeking to have its common stock quoted in the Bulletin Board
maintained by the NASD.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
27.1 Financial Data Schedule
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Exchange Act, the Registrant caused
this Report to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 3rd day of November, 1998.
CAPITAL MEDIA GROUP LIMITED
By: /s/ GILLES ASSOULINE
--------------------------------
Gilles Assouline, President and
Chief Executive Officer
By: /s/ STEPHEN COLEMAN
--------------------------------
Stephen Coleman, Chief Financial
Officer
25
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-QSB
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,135,433
<SECURITIES> 0
<RECEIVABLES> 2,526,923
<ALLOWANCES> 110,392
<INVENTORY> 28,950
<CURRENT-ASSETS> 4,017,912
<PP&E> 1,306,247<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,704,763
<CURRENT-LIABILITIES> 18,069,248
<BONDS> 0
0
0
<COMMON> (10,503,583)
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 8,704,763
<SALES> 2,685,620
<TOTAL-REVENUES> 2,685,620
<CGS> 0
<TOTAL-COSTS> 8,356,675
<OTHER-EXPENSES> (344,306)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (642,027)
<INCOME-PRETAX> (6,718,598)
<INCOME-TAX> 670
<INCOME-CONTINUING> (6,476,455)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,476,455)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.13)
<FN>
- ----------
<F1> Net of depreciation.
</FN>
</TABLE>
