SCHEDULE 14A
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
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SECURITIES EXCHANGE ACT OF 1934
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Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
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Rule 14a-12
CAPITAL MEDIA GROUP LIMITED
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
N/A
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<PAGE>
CAPITAL MEDIA GROUP LIMITED
2 RUE DU NOUVEAU BERCY
94229, CHARENTON, FRANCE
+33-1-43-53-6999
January , 1999
To Our Stockholders:
It is with pleasure that I write to you in my capacity as Chairman,
President and Chief Executive Officer of your Company. While the last two years
have been very difficult ones for your Company, I am pleased to advise you that
your Company is alive and on the road to what we hope will be a successful
future.
As many of you know, I became Chairman, President and Chief Executive
Officer of the Company in August 1997, shortly after the Company acquired an
81.6% in the outstanding common stock of Unimedia, S.A. When I took over the
management of the Company along with my brother, Michel Assouline, who is the
Company's Chief Operating Officer and the Managing Director of the Company's
principal German subsidiary, Onyx Television GmbH, the Company faced a less than
optimistic future. The Company had inadequate funds available to continue its
business, and the business was hemorrhaging money at an alarming rate. The
Company had at that time an accumulated deficit of almost $30 million and was in
serious jeopardy of going out of business. These problems, as well as the
numerous debts which the Company had amassed, made it impossible for the Company
to obtain conventional financing to meet the Company's needs. In short, we faced
a myriad of serious business problems and very few options to deal with them.
Since that date, we have taken decisive steps in an attempt to solve
the Company's numerous problems. First, we sought and have obtained substantial
financial help from Superstar Ventures Limited, a company controlled by one of
our directors and large shareholders, David Ho. Superstar stood beside us and
helped us meet our funding requirements at a time when no one else was willing
to step up and fund our operations. We also took decisive steps to reduce Onyx
Television's operating costs and to refocus the strategy of the group. In that
effort, we were pleased to have the support of one of our other large
stockholders, Groupe AB, a French television production company. Not only did
Groupe AB help us meet our funding requirements by investing in the Company, but
they have also agreed to be our strategic partner in the future development of
Onyx Television and have contractually agreed to provide Onyx Television with
transmission and other services at a reduced cost. Without the help of Superstar
and Groupe AB, and the hard work of our management team, your Company would
probably not have survived, and we are extremely grateful in that regard for the
help that Superstar and Groupe AB provided to us. We are also pleased that we
have recently been able to restore the Company's quotation on the Bulletin Board
maintained by the National Association of Securities Dealers (the Company's
symbol is "CPMG.")
<PAGE>
To Our Stockholders
January , 1999
Page 2
However, it would be unfair to say that the Company is completely out
of the woods at this time. As you will note when you read the Company's Proxy
Statement relating to the Company's meeting of stockholders, the Company still
faces several litigation matters and various debts, including both the debts due
to Groupe AB and Superstar and the debts due to third parties such as Instar
Holdings Limited. Additionally, you should be aware that the Company is not yet
operating on a cash flow positive or profitable basis. For the three and nine
months ended September 30, 1998, the Company reported an operating loss of $1.0
million and $7.5 million, respectively, compared to an operating loss of $3.5
million and $12.6 million, respectively, for the same periods in 1997. Thus,
while we have taken significant steps to cut our costs and reduce our losses,
and have made tremendous strides in that regard, we will need additional funding
in the future to meet our obligations and cover our losses until such time as
Onyx Television's revenues improve and we become cash flow positive. On that
front, we are working with a new advertising agency in Germany to increase Onyx
Television's advertising revenues and are seeking increased opportunities to add
significantly more teleshopping to our station. We have high hopes that through
the efforts of your management team, and the hard work of our employees, we will
turn the corner and move towards being cash flow positive and profitable during
the next year.
This meeting has been called to consider several important proposals.
First, we are asking our stockholders to approve an amendment to the Company's
articles of incorporation increasing the Company's authorized common stock from
50 million shares to 330 million shares. This will allow the Company to meet
both its contractual obligations to Superstar and Groupe AB and to also have
sufficient shares authorized and available for issuance in the future to fund
the Company's future capital requirements. In that regard, and as more
particularly set forth in the Proxy Statement, Superstar and Groupe AB have
agreed to convert all of the currently outstanding convertible debt which they
hold into common stock upon the approval of this amendment. This will
immediately reduce our negative stockholders' equity at September 30, 1998 from
$13.4 million to $4.3 million. However, as a consequence of the approval of the
amendment, the Company will issue immediately upon its approval an additional
68.9 million shares to Superstar and an additional 24.0 million shares to Groupe
AB. The Company will also be contractually obligated to issue to Groupe AB for
services to be rendered on behalf of Onyx Television over the next two years an
additional 62.4 million shares. While all of these issuances of shares will be
significantly dilutive to the Company's other shareholders, and Groupe AB and
Superstar will own, in the aggregate, about 80% of the Company's outstanding
common stock after all of these issuances of shares are completed, please bear
in mind that the fundings which have been made by Groupe AB and Superstar have
been the only means by which we have been able to keep the Company alive, and we
believe them under the circumstances to have been fair and reasonable to the
Company and its stockholders. Additionally, please bear in mind that if the
amendment is not adopted, all of the debt due to Superstar and Groupe AB
(approximately $11.5 million at this date), including interest and penalties,
will become immediately due and payable.
Second, we are seeking authority to approve a reverse split of the
outstanding common stock so that we may bring our capital structure back into
line with a more normative standard.
Third, we are seeking stockholder ratification of a two-year warrant
which the Board has approved in favor of an entity controlled by Michel
Assouline and myself to purchase an aggregate of 16.0 million shares
(approximately 5% of the outstanding common stock on a fully diluted basis) at
$0.10 per share
<PAGE>
To Our Stockholders
January , 1999
Page 3
(the fair market value of the common stock on the date of grant). We believe
that our collective efforts have played a large role in the survival of the
Company and that under these circumstances we should be given the right to
participate in a meaningful way in the future success of the Company.
Finally, we are asking our stockholders to vote on a proposed slate of
nominees for election to the Company's Board of Directors.
Your Company begins 1999 with a new positive outlook and a strategy for
its successful future development. While we continue to work hard to clean up
the problems which we inherited when we took our positions in the management of
the Company, we believe that a firm foundation has been established for the
future.
One final thought: we recognize that this is the first communication
which many of you have received from the Company in many years. We apologize for
this and pledge that we will be more communicative with our shareholders in the
future. We also hope in the future to give our shareholders an opportunity to
participate in the growth of the Company in a meaningful way.
Whether you plan to attend the meeting, please complete, sign and date
the enclosed proxy card and return it in the enclosed postage paid envelope as
soon as possible. If you attend the meeting, you may vote in person if you wish,
even though you returned your proxy card. The accompanying Proxy Statement
includes information regarding the business of the Company, as well as the
proposals to be considered at the meeting. Please give all of this information
your careful attention.
We appreciate your support. If we can be of assistance, please feel
free to call upon us.
Gilles Assouline
Chairman, President and CEO
<PAGE>
CAPITAL MEDIA GROUP LIMITED
2 RUE DU NOUVEAU BERCY
94229, CHARENTON, FRANCE
+33-1-43-53-6999
----------------------------------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
-----------------------------------------------------
NOTICE IS HEREBY GIVEN that the Special Meeting of Stockholders (the
"Meeting") of Capital Media Group Limited, a Nevada corporation (the "Company"),
will be held on February 4, 1999 at _____ a.m., local time, at
_____________________________, __________, for the following purposes, all of
which are set forth more completely in the accompanying proxy statement:
(1) To consider and vote upon a proposed amendment to the
Company's Articles of Incorporation, as amended, to increase
the number of authorized shares of common stock, par value
$.001 per share (the "Common Stock"), of the Company from
50,000,000 shares to 330,000,000 shares;
(2) To reverse split the Company's outstanding Common Stock on a
one-for-ten basis;
(3) To ratify the grant of a two-year warrant to an entity
controlled by the Company's Chief Executive Officer and Chief
Operating Officer to purchase an aggregate of 16.0 million
shares of Common Stock at an exercise price of $0.10 per
share; and
(4) To elect seven persons to serve on the Company's Board of
Directors until the next annual meeting of stockholders, or
until their successors are elected and qualified;
(5) To transact such other business as may properly come before
the meeting.
Pursuant to the Company's By-laws, the Board of Directors has fixed the close of
business on January 8, 1999 as the record date for the determination of
stockholders entitled to notice of and to vote at the Meeting.
A FORM OF PROXY IS ENCLOSED. IT IS IMPORTANT THAT PROXIES BE RETURNED
PROMPTLY. THEREFORE, WHETHER OR NOT YOU PLAN TO BE PRESENT IN PERSON AT THE
MEETING, PLEASE SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED
ENVELOPE WHICH DOES NOT REQUIRE POSTAGE IF MAILED IN THE UNITED STATES.
BY ORDER OF THE BOARD OF DIRECTORS
Gilles Assouline, President, Chairman and CEO
Paris, France
January ___, 1999
<PAGE>
CAPITAL MEDIA GROUP LIMITED
----------------------------
PROXY STATEMENT
----------------------------
The enclosed proxy is solicited by the Board of Directors (the "Board")
of Capital Media Group Limited, a Nevada corporation (the "Company"), for use at
the Meeting. The Meeting will be held on February 4, 1999 at __________ a.m.,
local time, at _________________________. The approximate date on which this
statement and the enclosed proxy will be sent to stockholders will be January
__, 1999. The form of proxy provides a space for you to withhold your vote for
any proposal. You are urged to indicate your vote on each matter in the space
provided. If signed but no space is marked, it will be voted by the persons
therein named at the Meeting: (i) for the proposed amendment to the Company's
Articles of Incorporation, as amended (the "Articles of Incorporation"), to
increase the number of authorized shares of common stock, par value $.001 per
share ("Common Stock") of the Company from 50,000,000 shares to 330,000,000
shares, (ii) to reverse split the outstanding Common Stock on a one-for-ten
basis; (iii) to ratify the grant to an entity controlled by the Company's Chief
Executive Officer and Chief Operating Officer of a two-year warrant to purchase
16.0 million shares of the Company's authorized but unissued Common Stock at an
exercise price of $0.10 per share; (iv) to elect seven persons to serve as
directors until the next Annual Meeting of Stockholders or until their
successors are elected and qualified; and (v) in their discretion, to vote upon
such other business as may properly come before the Meeting.
Whether or not you plan to attend the Meeting, please fill in, sign and
return your proxy card to the transfer agent in the enclosed envelope, which
requires no postage if mailed in the United States.
The cost of the Board's proxy solicitation will be borne by the
Company. In addition to solicitation by mail, directors, officers and employees
of the Company may solicit proxies personally and by telephone and telegraph,
all without extra compensation.
At the close of business on January 8, 1999 (the "Record Date"), the
Company had outstanding 40,094,139 shares of Common Stock, including 1,067,916
shares owned by the Company's 81.6% owned subsidiary, Unimedia, S.A.
("Unimedia"), which shares are considered issued but not outstanding under
applicable state law and may not be voted at the Meeting. As a result, the
holders of the 39,026,223 shares of Common Stock considered issued and
outstanding at the Record Date will be entitled to vote at the Meeting. Each
share of Common Stock entitles the holder thereof to one vote on each matter
submitted to a vote of stockholders at the Meeting. Only stockholders of record
at the close of business on the Record Date are entitled to notice of and to
vote at the Meeting. In the event that there are not sufficient votes for
approval of any of the matters to be voted upon at the Meeting, the Meeting may
be adjourned in order to permit further solicitation of proxies. The quorum
necessary to conduct business at the Meeting consists of a majority of the
outstanding shares of Common Stock.
<PAGE>
Shares represented by proxies which are marked "abstain" or which are
marked to deny discretionary authority will only be counted for determining the
presence of a quorum. Votes withheld in connection with the election of one or
more of the nominees for director will not be counted as votes cast for such
individuals. In addition, where brokers are prohibited from exercising
discretionary authority for beneficial owners who have not provided voting
instructions (commonly referred to as "broker non-votes"), those shares will not
be included in the vote totals.
A STOCKHOLDER WHO SUBMITS A PROXY ON THE ACCOMPANYING FORM HAS THE POWER TO
REVOKE IT AT ANY TIME PRIOR TO ITS USE BY DELIVERING A WRITTEN NOTICE TO THE
CHAIRMAN OF THE BOARD OF THE COMPANY, BY EXECUTING A LATER-DATED PROXY OR BY
ATTENDING THE MEETING AND VOTING IN PERSON. UNLESS AUTHORITY IS WITHHELD,
PROXIES WHICH ARE PROPERLY EXECUTED WILL BE VOTED FOR THE PURPOSES SET FORTH
THEREON.
2
<PAGE>
EXECUTIVE OFFICERS AND DIRECTORS
The following persons presently serve as directors and executive
officers of the Company:
NAME Age Position
- ---- ------ ---------
Gilles Assouline 42 Chairman, President, Chief Executive Officer
Michel Assouline 39 Director and Chief Operating Officer
David Ho 50 Director
Jean-Pierre Souviron 60 Director
Stanley Hollander 60 Director
Jean-Francois Klein 33 Director
Stephen Kornfeld 58 Director
Stephen Coleman 51 Chief Financial Officer
Patrick Ho Director Nominee
[Director Nominee] Director Nominee
Stephen Kornfeld and Jean-Pierre Souveron, who have served as directors
since September 1996 and August 1997, respectively, will retire from the Board
at the close of the Meeting as a result of their involvement in unrelated
business interests. The Board thanks Messrs. Kornfeld and Souviron for their
services on behalf of the Company.
CHANGES TO THE COMPANY'S MANAGEMENT
The Company's Board currently consists of seven members. In August
1997, in connection with the completion of the Company's acquisition of a
majority of the outstanding shares of Unimedia, S.A. ("Unimedia"), Gilles
Assouline, the Chief Executive Officer of Unimedia, Michel Assouline, an
executive officer of Unimedia, Jean-Pierre Souviron, a director of Unimedia, and
David Ho, were appointed to the Board. Shortly thereafter, three persons who
were on the Board at that date, Charles Koppel, Karl Hauptmann and James
Leitner, resigned from the Board. Additionally, two directors of the Company,
Marc Sillam and Barry Llewellyn, resigned from the Board in October 1997 and
September 1998, respectively.
At a Board meeting held on August 1, 1997, the newly constituted Board
elected Gilles Assouline as the Chairman, President and Chief Executive Officer,
and Michel Assouline as the Vice President and Chief Operating Officer, of the
Company.
3
<PAGE>
BUSINESS EXPERIENCE OF DIRECTORS AND EXECUTIVE OFFICERS
Gilles Assouline was, along with his brother, Michel Assouline, a
founder of Unimedia in July 1995. Prior thereto, for more than five years,
Gilles Assouline was the founder and managing director of several consulting,
software and media companies. See "Certain Relationships and Related
Transactions."
Michel Assouline together with his brother Gilles Assouline founded
Unimedia in July 1995. Prior thereto, for more than five years, Michel Assouline
was employed by Thomson-CSF in various executive capacities, including having
responsibility for business development at the corporate level. Prior to joining
Thompson in 1990, Michel Assouline was a management strategy consultant. See
"Certain Relationships and Related Transactions."
David Ho is the founder of Caltex South China Investments Limited and
holds the position of Executive Vice Chairman of this petroleum firm, where he
has been employed for more than the last five years. Mr. Ho, through a private
venture capital fund, also has interests in other Asia Pacific companies with
extensive interests in manufacturing, leisure, construction, meat processing and
real estate. See "Certain Relationships and Related Transactions."
Jean-Pierre Souviron has had an outstanding career both in French
industry and in various government positions. At various times, he held
positions as Technical Counsel to the Minister of Industry, Deputy Director for
the Minister of Foreign Affairs and Director of Industrial and International
Affairs at the Direction Generale des Telecommunications. He was, between 1978
and 1981, General Director of Industry for the French Ministry. Mr. Souviron has
previously held positions as Chairman of DB Morgan Grenfell France S.A. He is
presently the chairman and chief executive officer of a telephone company in
France that he founded. Mr. Souviron is also a member of the Board of Directors
of Cerus and Valeo. Mr. Souviron will retire from the Board at the completion
of the Meeting.
Stanley Hollander has been a director of the Company since January
1996. Since 1993, Mr. Hollander has been an executive officer and a director of
International Capital Growth, Ltd. ("ICG"), an investment banking firm, and its
predecessors. Prior thereto, from 1989 to 1993, he was a Managing Director and
joint head of Corporate Finance at Gruntal & Co. Incorporated. Mr. Hollander
serves as a director of Specialized Health Products, Inc. See "Certain
Relationships and Related Transactions."
Jean-Francois Klein has been employed by Groupe AB for more than the
last five years and is currently Vice President and Chief Financial Officer of
Groupe AB. See "Certain Relationships and Related Transactions."
Stephen Kornfeld is a director and was Co-Chairman of the Board of
Directors of the Company from September 20, 1996 to August 1, 1997. For the last
five years, Mr. Kornfeld has acted as an investor in and a consultant to several
companies, as well as pursuing other business interests. Mr. Kornfeld will
retire from the Board at the completion of the Meeting.
4
<PAGE>
Stephen Coleman was appointed Chief Financial Officer of the Company in
November 1996. From March 1993 until November 1996, Mr. Coleman was Director of
Finance at Lightworks Editing Systems, a United Kingdom digital editing systems
designer and manufacturer which was acquired by Tektronix, Inc. in 1995. Prior
to February 1993, Mr. Coleman served as Senior Financial Analyst at BICC PLC and
Financial Director of Bennett & Fountain Group PLC. Mr. Coleman is a Fellow of
the Association of Chartered Certified Accountants in the United Kingdom.
BUSINESS EXPERIENCE OF DIRECTOR NOMINEES
Biographical information on Patrick Ho and on a second nominee
recommended for election to the Board by Groupe AB will be added to this Proxy
Statement prior to the Company's mailing of its definitive Proxy Statement to
its shareholders.
COMMITTEES OF THE BOARD
The Board of Directors has established Committees to assist it in the
discharge of its responsibilities. These Committees, their principal
responsibilities, and the current members of each are described below. Prior to
August 1997, the Company did not have formal Audit or Compensation Committees.
It was considered the continuing responsibility of the whole Board to consider
matters respecting the independent public accountants, to determine employee
benefits and to recommend nominees for the Board. On August 1, 1997, the Board
of Directors created an Audit Committee and Compensation Committee of the Board.
The Compensation Committee met once during 1997 and once during 1998 and the
Audit Committee did not meet during 1997 or 1998.
AUDIT COMMITTEE. The Audit Committee is comprised of Messrs. Ho and
Souviron. The Audit Committee will recommend the firm to be appointed as
independent accountants to audit the Company's financial statements and to
perform services related to the audit, review the scope and results of the audit
with the independent accountants, review with management and the independent
accountants the Company's year-end operating results and consider the adequacy
of the Company's internal accounting procedures.
COMPENSATION COMMITTEE. The Compensation Committee is comprised of
Messrs. Ho, Klein, Hollander and Souviron. The Compensation Committee will
review and recommend the compensation arrangements for all directors and
officers and approve such arrangements for other senior level employees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
To the Company's knowledge, no compensation committee interlocks
currently exist between the Company's management and its directors.
5
<PAGE>
BOARD COMPENSATION
Directors of the Company receive no compensation for their services as
a director. However, directors are sometimes reimbursed for travel expenses
incurred in attending meetings of the Board of Directors and its committees.
On March 10, 1998, the Board of Directors granted options to purchase
an aggregate of 4,000,000 of Common Stock at an exercise price of $0.35 per
share (the fair market value of the Common Stock on the date of grant). Messrs.
Gilles Assouline, Chairman and Chief Executive Officer of the Company, Michel
Assouline, Chief Operating Officer of the Company, Stephen Coleman, Chief
Financial Officer of the Company and Barry Llewellyn, Vice President and then a
Director, of the Company, were each granted options to purchase 1,000,000
shares. Of each 1,000,000 share option grant, options to purchase 200,000 shares
vested immediately, with the remaining options vesting in equal portions over
the next three years (in that regard, 800,000 of the options which were issued
to Mr. Llewellyn have lapsed due to his resignation from the Company in
September 1998).
Additionally, on the same date, each non-employee director of the
Company was granted options to purchase 100,000 shares of Common Stock at an
exercise price of $0.35 per share, for each year of service on the Board of
Directors of the Company, with each non-employee director receiving a minimum of
100,000 options. An aggregate of options to purchase 500,000 shares were granted
to non-employee directors of the Company. These options vested immediately.
None of the options described in the two paragraphs above may be
exercised 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 the
issuance of shares upon the exercise and/or conversion of the Company's other
derivative securities.
CONSULTANTS
Jacques Dubost, age 69, acts as consultant on behalf of his company,
Valfab S.C.B. ("Valfab"), for Unimedia and the Company, with respect to gaming
and funding matters. Mr. Dubost has over 40 years of experience in the gaming
industry. Over that period, Mr. Dubost owned and operated a hotel casino in
Dieppe, France and managed several other casinos, including the MonteCarlo
casino in Monaco and the Palm Beach Casino in Cannes, France. Valfab has
received certain commissions for introducing the Company to certain of its
investors. See "Management's Discussion and Analysis." Valfab will also receive
commissions in the future for services relating to the Company's and Unimedia's
on-line gaming and entertainment activities, and it can be anticipated that
certain of these fees will be payable to Valfab in shares of the Company's
authorized but unissued common stock, although no arrangements have been made in
that regard.
6
<PAGE>
BOARD MEETINGS
The Board of Directors of the Company held a total of 10 meetings
during the fiscal year ended December 31, 1998. Each of the directors attended
at least 75% of the aggregate number of meetings of the Board of Directors.
FAMILY RELATIONSHIPS
Gilles Assouline, the Company's Chairman of the Board, President and
Chief Executive Officer, and Michel Assouline, both members and nominees to the
Company's Board of Directors, are brothers. Additionally, David Ho, a director
of the Company, and Patrick Ho, a nominee for election to the Board, are
brothers.
COMPLIANCE WITH SECTION 16(A)
At the present time, the Company's directors and executive officers are
not in compliance with their reporting obligations under Section 16(a) of the
Securities Exchange Act of 1934 (the "Exchange Act"). The Company's directors
and executive officers intend to make the required filings under Section 16(a)
in the near future.
7
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information about the compensation paid
or accrued during 1997 to the Company's Chief Executive Officer and to each of
the other most highly compensated executive officers of the Company whose
aggregate direct compensation exceeded $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------------- --------------
OTHER ANNUAL ALL OTHER
NAME YEAR SALARY BONUS COMPENSATION OPTIONS+ COMPENSATION
($) ($) ($) (#) ($)
------- ------ --------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gilles Assouline 1997 104,000 -- -- 1,000,000 --
Michel Assouline 1997 83,000 -- -- 1,000,000 --
Stephen Coleman 1997 160,000 -- -- 1,000,000 --
Charles Koppel 1997 110,000 -- -- -- 100,000*
1996 160,000 -- -- -- --
Barry Llewellyn 1997 160,000 -- -- 1,000,000 --
1996 160,000 -- -- -- --
____________
*Settlement of amount due under Services Agreement. See "Business-Legal
Proceedings" below.
+ Excludes shares and warrants issuable to Gilles Assouline and Michel Assouline
under their employment agreements (see below).
</TABLE>
EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS
The Company has entered into three-year employment agreements with
Gilles Assouline and Michel Assouline, effective August 1, 1997, providing for
them to receive the following compensation for their services on the Company's
behalf: (i) annual base compensation of $250,000 and $200,000, respectively;
(ii) such bonus compensation as is determined by the Board in its discretion;
(iii) a grant of 200,000 and 175,000 shares, respectively, of Common Stock; (iv)
options to purchase an additional 200,000 and 175,000 shares of Common Shares at
the fair market value of the Common Stock on the date of grant; and (v) such
benefits as are provided generally to the executive management of the Company.
The shares and options vested 2/5 upon the effective date of the agreement and
will vest 1/5 on each of the first, second and third anniversaries,
respectively, of the agreement. The agreements provide that Messrs. Gilles
Assouline and Michel Assouline shall be paid one year's base compensation if
they are terminated without cause during the term of the agreements.
Barry Llewellyn was a director of the Company from May 1995 until
September 1998, and was an executive officer of the Company from May 1995 until
June 1998. Mr. Llewellyn had a service agreement with the Company under which he
was entitled to annual base salary of (pound)100,000 ($160,000). In connection
with his resignation as an executive officer of the Company, the Company and Mr.
Llewellyn entered into a settlement pursuant to which Mr. Llewellyn received a
payment of
8
<PAGE>
(pound)12,500 ($20,000) in full satisfaction of the Company's future obligations
under his service agreement and the service agreement was canceled.
Mr. Coleman has an arrangement with the Company to serve as its Chief
Financial Officer, under which he was entitled prior to January 1, 1998 to an
annual base salary of (pound)100,000 ($160,000) and under which he is entitled
to an annual base salary of (pound)125,000 ($200,000) after December 31, 1997.
The agreement provides for successive automatic one-year terms unless terminated
upon one year's prior notice in writing.
STOCK OPTIONS
In March 1998, the Company granted certain stock options to its
executive officers. See "Executive Officers and Directors-Board Compensation"
for information regarding the terms of such stock options.
On December 18, 1998, the Board approved the grant of a two-year option
to purchase an aggregate of 16.0 million shares at an exercise price of $0.10
per share to Diamond Productions, an entity controlled by Gilles Assouline and
Michel Assouline. See Proposal 3.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of the Record Date, the Company had issued 40,094,139 shares of its
Common Stock, 1,067,916 of which were owned by Unimedia. As such, at that date
there were 39,026,223 shares of Common Stock issued and outstanding and entitled
to vote at the Meeting.
Additionally, the Company will issue, immediately upon the approval of
an amendment to its articles of incorporation increasing the Company's
authorized common stock (see Proposal 1), an additional 73.7 million shares to
Superstar and an additional 25.8 million shares to Groupe AB. The Company will
also be contractually obligated to issue to Groupe AB for services to be
rendered on behalf of Onyx Television over the next two years an additional 62.4
million shares. Assuming that the Company's shareholders vote to increase the
Company's authorized Common Stock and as a result all of outstanding convertible
debt of the Company held by Groupe AB and Superstar is converted into Common
Stock (including the interest and penalties thereon), Superstar and Groupe AB
will collectively own approximately 80.0% of the outstanding Common Stock (87.3%
after Groupe AB earns the shares issuable for its performance under its two-year
services agreement with Onyx Television). See Proposal 1.
The Company was contractually obligated to hold a stockholders' meeting
to vote on an increase in the Company's authorized Common Stock on or before
November 30, 1998. Groupe AB and Superstar have agreed to extend the deadline
for the Meeting, but the Company is now obligated to pay a penalty of two
percent (2%) per month of the outstanding principal amount due to Groupe AB and
Superstar, payable in shares of Common Stock at $0.10 per share, until such time
as the Company holds the Meeting.
9
<PAGE>
The following table sets forth, as of the Record Date, the share
ownership of the Common Stock (without the effect of the conversion of any
outstanding convertible debt, since such debt is not by its terms convertible
until the Company's shareholders approve an increase in the Company's authorized
Common Stock and without taking into account the effect of the proposed
one-for-ten reverse stock split), by (i) each person who owns beneficially more
than 5% of the outstanding Common Stock; (ii) each of the Registrant's directors
and executive officers; and (iii) all directors and executive officers as a
group, is as follows.
<TABLE>
<CAPTION>
SHARES PERCENT OF OUTSTANDING
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED COMMON STOCK
------------------------- ----------------- -----------------------
<S> <C> <C>
Gilles Assouline(1)(2)(3) 3,528,000 9.0%
Michel Assouline(1)(3)(4) 0 *
David Ho(5)(6) 4,585,965 11.8%
Charles Koppel(7)(8) 2,671,000 6.7%
Stephen Kornfeld(6)(9) 775,000 2.0%
Karl Hauptmann(10) 2,241,320 5.7%
James Leitner(11) 2,066,140 5.2%
Jean-Pierre Souviron(1)(6)(12) 140,000 *
Jean-Francois Klein(1)(6)(13)(14) 1,785,000 4.6%
Stanley Hollander(6)(15) 90,000 *
Edgeport Nominees(16) 2,332,656 6.6%
Groupe AB(17) 5,000,000 13.8%
Stephen Coleman(3)(18) 200,000 *
Kestrel, S.A.(19) 2,064,262 5.9%
Directors and Executive Officers as 9,618,965 24.6%
a group (8 persons)(20)
</TABLE>
____________
* Less than 1%.
(1) In connection with the Unimedia Share Exchange, the Company became
obligated to issue to the former shareholders of Unimedia certain
warrants to purchase shares of the Company's common stock, as follows:
(i) warrants to purchase an aggregate of 503,852 shares at an exercise
price of $2.50 per share; (ii) warrants to purchase an aggregate of
445,433 shares at an exercise price of $3.125 per share; and (iii)
warrants to purchase
10
<PAGE>
an aggregate of 1,139,144 shares at an exercise price of $4.00 per
share. The Company will issue these warrants to the former Unimedia
shareholders who exchanged their shares in the Unimedia Share Exchange
in the near future. These warrants may not be exercised until the
Company's stockholders approve an increase in the Company authorized
Common Stock, and therefore the shares underlying such warrants are not
deemed to be beneficially owned at this date for reporting purposes.
(2) Includes shares owned of record by two entities, Diamond Productions
and Multimedia Investments ("MMI"). Gilles Assouline, the Company's
President and Chief Executive Officer, controls the power to vote and
dispose of the shares of Common Stock owned by these entities, and may
therefore be deemed to be the beneficial owner of these shares for U.S.
securities law purposes. However, the actual number of shares of Common
Stock owned by these entities and a third entity, Media Ventures (see
footnote 13 below), from which Mr. Assouline and his wife, Anne-Marie
Assouline, ultimately benefit is 2,118,281 shares (5.4%). Excludes
shares, options and warrants to be issued to Mr. Assouline under his
employment agreement or under Proposal 3. Additionally, the shares held
by Mr. and Mrs. Assouline are subject to a put aggregating 110,800 of
the shares from which they benefit. See footnotes (4) and (13) below.
If the put were to be exercised, it would reduce the Assouline family's
interest in the Company to 2,007,487 shares (5.1%). Further, MMI
intends to utilize up to 1.2 million of its shares to repay certain
indebtedness owed by such company to third parties. In such event, Mr.
and Mrs. Assouline will control 1,714,493 shares (1,651,508 shares if
the put is exercised).
(3) Excludes options to purchase 1.0 million shares at $.35 per share.
Since these options cannot be exercised until the Company's
stockholders approve an amendment to the Company's Certificate of
Incorporation increasing the Company's authorized Common Stock, such
options are not deemed to be beneficially owned at this date for
reporting purposes.
(4) Michel Assouline, the Company's Chief Operating Officer, ultimately
benefits from the 765,726 (2.0%) shares owned by several corporate
entities controlled by Gilles Assouline and J. F. Klein. See footnotes
(2) and (13). Mr. Assouline does not control the power to vote and
dispose of the shares owned by those entities. Excludes shares, options
and warrants to be issued to Mr. Assouline under his employment
agreement or under Proposal 3. Additionally, the shares held by Mr.
Assouline are subject to a put aggregating 55,413 of the shares from
which he benefits. See footnotes (2) and (13). If the put were to be
exercised, it would reduce Mr. Assouline's interest in the Company to
708,822 shares (1.8%). Further, if MMI utilizes certain of its shares
to repay indebtedness, Mr. Assouline would ultimately benefit from
621,712 shares (590,223 if the put is exercised).
(5) Shares are owned of record by Unbeatable Investments Ltd. and
Superstar, both of which entities are controlled by Mr. Ho.
Additionally, Superstar holds $6.65 million in convertible debt of the
Company. See "Management's Discussion and Analysis" and "Certain
Relationships and Related Transactions."
(6) Excludes options to purchase 100,000 shares at $.35 per share. Since
these options cannot be exercised until the Company's stockholders
approve an amendment to the Company's Certificate of Incorporation
increasing the Company's authorized Common Stock, such options are not
deemed to be beneficially owned at this date for reporting purposes.
(7) A portion of Mr. Koppel's shares are owned of record by Clifton
Securities Limited ("Clifton"), a corporation controlled by Mr. Koppel.
Also includes warrants to purchase 640,000 shares of Common Stock at an
exercise price of $3.125 per share.
(8) Mr. Koppel controls the power to vote and dispose of all of the shares
of Common Stock owned by Clifton. However, Mr. Koppel is the beneficial
owner of only 1,287,500 of the 1,751,080 shares of Common Stock owned
by Clifton, and of all of the 560,000 warrants owned by Clifton. The
balance are held for the account of third parties, including Messrs.
Leitner and Hauptmann.
(9) Includes: (i) 400,000 Shares of Common Stock owned by Kornfeld
Associates International, Inc. ("KAI") and options to purchase an
additional 200,000 Shares of Common Stock at an exercise price of $2.50
per share, and (ii) 140,000 shares and 35,000 warrants to purchase
shares at $4.00 per share owned by trusts of which Mr. Kornfeld is
trustee.
11
<PAGE>
(10) Owned of record by Telor International Limited ("Telor"), a corporation
controlled by Mr. Hauptmann. Includes warrants to acquire (i) 200,000
shares of Common Stock at an exercise price of $2.50 per share, (ii)
133,320 shares of Common Stock at an exercise price of $3.125 per
share, and (iii) 67,500 shares of Common Stock at an exercise price of
$4.00 per share. Excludes 62,500 shares owned by Clifton for Mr.
Hauptmann's benefit. Additionally, Mr. Hauptmann has an interest in the
Instar Loan and would receive an indeterminate number of shares on the
conversion of such debt if Instar were to receive the right to convert
such debt and were to thereafter determine, at its option, to convert
such debt into Common Stock in accordance with its terms. See
"Management's Discussion and Analysis" for information regarding the
current status of the Instar Loan. See also footnote (8).
(11) Includes warrants to purchase (i) 400,000 shares of Common Stock at an
exercise price of $2.50 per share, (ii) 266,640 shares of Common Stock
at an exercise price of $3.125 per share, and (iii) 132,500 shares of
Common Stock at an exercise price of $4.00 per share. Excludes 50,000
shares owned by Clifton for Mr. Leitner's benefit. Additionally, Mr.
Leitner has an interest in the Instar Loan and would receive an
indeterminate number of shares on the conversion of such debt if Instar
were to receive the right to convert such debt and were to thereafter
determine, at its option, to convert such debt into Common Stock in
accordance with its terms. See "Management's Discussion and Analysis"
for information regarding the current status of the Instar Loan. See
also footnote (8).
(12) Owned of record by Souviron Industrie Conseil Sarl., an entity
controlled by Mr. Souviron.
(13) Includes shares owned of record by two entities, BIMAP and Media
Venture. Mr. Klein controls the power to vote and dispose of the shares
of Common Stock owned by these entities, and may therefore be deemed to
be the beneficial owner of these shares for U.S. securities law
purposes. However, the ultimate benefit from 2,064,234 of the shares
owned of record by these entities and an entity controlled by Mr.
Assouline, MMI, is held by Claude Berda, who is also an officer,
director and principal shareholder of Groupe AB. See "Certain
Relationships and Related Transactions." Mr. Berda disclaims beneficial
ownership over the shares owned by BIMAP, Media Ventures, MMI and
Groupe AB. See footnote (17) below. The beneficiaries of these shares
have a put to acquire the benefit of an additional 166,063 shares. See
footnotes (2) and (4) above. If the put were to be exercised, it would
increase Mr. Berda's ultimate interest in the Company to 2,230,297
shares (5.7%). Further, if MMI uses a portion of its shares to repay
debt, the shares from which Mr. Berda will ultimately benefit will be
1,413,036 shares (1,579,099 shares if the Put is exercised).
(14) While Mr. Klein serves as executive officers of Groupe AB, he disclaims
beneficial ownership over the shares and warrants owned by Groupe AB.
See footnote (17) below.
(15) Includes warrants to purchase (i) 15,000 shares at an exercise price of
$4.00 per share, and (ii) 15,000 shares at an exercise price of $2.50
per share. Does not include shares of Common Stock and warrants owned
of record by International Capital Growth, Inc. Mr. Hollander disclaims
beneficial ownership of such securities.
(16) Edgeport Nominees holds these securities for the benefit of customers
of Townsley & Co. See "Certain Relationships and Related Transactions."
Includes warrants to purchase 193,385 shares of Common Stock at an
exercise price of $3.125 per share, warrants to purchase 130,000 shares
of Common Stock at $2.50 per share and warrants to purchase 572,606
shares of Common Stock at $4.00 per share. Barry Townsley, the
principal of Townsley & Co. and a former director of the Company, also
owns an additional 105,000 shares of the Company's common stock and
warrants to purchase 52,500 shares of the Company's Common stock at an
exercise price of $4.00 per share. Additionally, Mr. Townsley has an
interest in the Instar Loan and would receive an indeterminate number
of shares on the conversion of such debt if Instar were to receive the
right to convert such debt and were to thereafter determine, at its
option, to convert such debt into Common Stock in accordance with its
terms. See "Management's Discussion and Analysis" for information
regarding the current status of the Instar Loan.
(17) Shares are owned of record by MMP, S.A. on behalf of Groupe AB.
Includes warrants to purchase 1,800,000 shares of Common Stock at an
exercise price of $4.00 per share. Messrs. Klein and Berda disclaim
beneficial ownership over the shares and warrants owned by Groupe AB.
If aggregated with the shares beneficially owned by Mr. Berda, he would
be deemed to benefit from an aggregate of 7,064,237 shares (19.4%), or
7,230,300
12
<PAGE>
(19.9%) if the put is exercised. See footnotes (13) and (14) above.
Group AB also owns certain convertible debt of the Company. See
"Management's Discussion and Analysis-Financial Condition, Liquidity
and Capital Resources" and "Certain Relationships and Related
Transactions."
(18) Includes options to purchase 200,000 shares at $2.50 per share.
(19) Kestrel, S.A., a Switzerland based investment firm, has advised the
Company that it holds these shares of the Common Stock and warrants to
purchase additional shares of Common Stock in two nominee corporations,
Latitude Investments and Transit Securities, for the benefit of
multiple owners. Clients of Kestrel also control Universal, which has
arranged for the transponder guarantee. See "Management's Discussion
and Analysis" and Note 8 to Notes to Consolidated Financial Statements.
Kestrel has advised the Company that it holds these securities in
non-discretionary accounts and that it does not have the power to vote
or dispose of the shares of Common Stock held by it. Kestrel has also
advised the Company that no affiliate of the Company has an interest in
these securities and that none of the beneficial owners of these
securities has a five percent or more direct or indirect beneficial
interest in the Common Stock. Includes warrants to purchase (i) 200,000
shares of Common Stock at an exercise price of $2.50 per share, (ii)
133,320 shares of Common Stock at an exercise price of $3.125 per
share, and (iii) 67,500 shares of Common Stock at an exercise price of
$4.00 per share. Montague Koppel, the father of Charles Koppel, the
Company's former CEO, acts on behalf of Instar, Universal, Latitude and
Transit with respect to the Company.
(20) Includes warrants to purchase an aggregate of 765,000 shares. Excludes
options described in footnotes (3) and (6) above.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1996, CM (UK) borrowed US $2.0 million from Instar Holdings,
Inc. (the "Instar Loan"). See"Management's Discussion and Analysis" for a
description of the current status of the Instar Loan. Karl Hauptmann, James
Leitner and Barry Townsley, each of whom is a former director of the Company,
have interests of $200,000, $500,000 and $300,000 respectively in the Instar
Loan and Montague Koppel, the father of Charles Koppel, the former Chief
Executive Officer of the Company, acts on behalf of Instar in connection with
the Instar Loan and controls the balance of the Instar Loan. Mr. Koppel also
acts on behalf of two other shareholders of the Company, Latitude Investments
Limited ("Latitude") and Transit Securities, Inc., and on behalf of the
interests of Universal.
Karl Hauptmann, a former director and a more than 5% shareholder of the
Company, is a principal of Telor International Limited, which owns 49% of
Tinerama Investment AG. Mr. Hauptmann is also a director of Tinerama Investment
AG. Telor had an amount of $411,600 owing from Tinerama at June 30, 1997. See
"Business-Other Businesses-Tinerama Investment AG." Mr. Hauptmann was a
Director of the Company until August 1997.
Townsley & Co., a U.K. brokerage firm, participated in the Company's
winter 1995/96 private placement for which it received direct commissions of
$210,000, 86,665 shares of Common Stock and warrants to purchase 86,665 shares
and 218,750 shares, respectively, of Common Stock at an exercise price of $3.125
and $4.00, respectively. Barry Townsley, Managing Director of Townsley & Co.,
was a Director of the Company until January 1997.
Stanley Hollander, a director of the Company, is Senior Vice President
and a director of International Capital Growth, Ltd. ("ICG"). The predecessor of
ICG was the placement agent in connection with the Company's winter 1995/96
private placement, for which it received direct commissions and expense
allowances of an aggregate of $1,339,000, 346,663 shares of Common Stock and
warrants to purchase 346,663 and 781,250 shares of Common Stock at an exercise
price of $3.125 and $4.00, respectively. Of these amounts, a portion of the
commissions and warrants
13
<PAGE>
were paid to subdistributors who participated in the placement, including
Townsley & Co. In April 1997, ICG received 93,333 shares of Common Stock for
services. Additionally, in June 1998, Mr. Hollander on behalf of ICG agreed to
continue to assist the Company in an advisory role at no additional charge.
Groupe AB and Superstar, pursuant to their agreements with the Company,
will become the majority shareholders of the Company if Proposal 1 is adopted.
For the terms of the Company's agreements with Superstar and Groupe AB, see
"Business," "Management's Discussion and Analysis" and Proposal 1. The Company's
believes that the terms of the Company's arrangements with Groupe AB and
Superstar are more favorable to the Company than the arrangements which might
have been available from unrelated third parties.
PRICE RANGE FOR THE COMMON STOCK
TRADING MARKET FOR THE COMPANY'S SECURITIES
The Common Stock was quoted on the NASDAQ Small Cap Market under the
symbol "CPMG" from July 1996 until June 8, 1998, when the Common Stock was
delisted from the NASDAQ Small Cap Market. Subsequent to that date, until
November 17, 1998, the Common Stock was only listed in the pink sheets published
by the National Quotations Bureau. On November 17, 1998, the Common Stock began
to be quoted on the Bulletin Board maintained by the NASD. The Company does not
believe that there is an active trading market for the Common Stock at this
time.
The following table sets forth, for the calendar quarters indicated,
the range of high and low bid prices per share of the Common Stock:
<TABLE>
<CAPTION>
HIGH LOW
-------- -------
<S> <C> <C>
1996 $ $
----
Third Quarter (commencing July 25, 1996) 6 1/4 3 1/4
Fourth Quarter 3 1/4 2 3/4
1997
----
First Quarter 3 3/4 1 5/8
Second Quarter 1997 1 15/16 1 1/8
Third Quarter 1 5/8 9/16
Fourth Quarter 1 1/32 1/4
1998
----
First Quarter 21/32 5/16
Second Quarter 5/8 5/16
Fourth Quarter (commencing November 17, 1998) 1/4 21/32
</TABLE>
At December 31, 1997, the Company had approximately 325 stockholders of
record. Additionally, the Company had at that date an indeterminable number of
stockholders who owned their shares in street name through brokerage firms.
14
<PAGE>
Since the Common Stock is no longer to be quoted on the NASDAQ SmallCap
Market, the Common Stock has become subject to certain regulations of the
Securities and Exchange Commission which impose sales practice requirements on
broker-dealers because the Common Stock has a market price of less than $5.00
per share. For example, in such situation, broker-dealers selling the
securities, are required, prior to effecting any transaction, to provide their
customers with a document which discloses the risks of investing in the Common
Stock. Furthermore, in such situation, if the person purchasing the securities
is someone other than an accredited investor or an established customer of the
broker-dealer, the broker-dealer must also approve the potential customer's
account by obtaining information concerning the customer's financial situation,
investment experience and investment objectives. The broker-dealer must also
make a determination whether the transaction is suitable for the customer and
whether the customer has sufficient knowledge and experience in financial
matters to be reasonably expected to be capable of evaluating the risks of
transactions in the security, which could limit the number of potential
purchasers of the Company's securities. The additional burdens imposed upon
broker-dealers by such requirements may discourage broker-dealers from effecting
transactions in the Common Stock which could severely limit the market liquidity
of the Common Stock.
OTHER MATTERS
The Company has offered one of its warrant holders, Auric Investments
Limited ("Auric"), the right to subscribe to purchase 1,566,156 shares of Common
Stock on the basis of two shares for each of the warrants which they hold, at an
exercise of $0.20 per share, effective upon the Company's shareholders approving
an increase in the Company's authorized Common Stock. The Company granted this
right to Auric for their assistance in helping the Company obtain a quotation on
the Bulletin Board.
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 will in the future offer to 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 is considering giving its existing stockholders the right
to participate in the future development of the Company at an attractive price,
although the terms of such participation have not been finally determined and
any such offer will be subject to satisfaction of applicable requirements under
U.S. securities laws.
Additionally, the Company may in the future consider redomesticating
the Company in a non U.S. jurisdiction (since the Company has no operations in
the United States). To date, no actions with respect to this matter have been
taken.
DIVIDEND POLICY
The Company has never declared a cash dividend on its Common Stock. The
Board anticipates that, for the foreseeable future, earnings, if any, will be
retained for use in the business, and no cash distributions will be made on the
Common Stock. The payment of future cash dividends, if any, will be at the
discretion of the board and will depend upon earnings, financial requirements of
the Company and such other factors as the board deems relevant.
15
<PAGE>
BUSINESS OF THE COMPANY
GENERAL
The Company's primary business is the broadcasting operation of Onyx
Television GmbH ("Onyx" or "Onyx Television"), which operates an advertiser
supported music television station in Germany. Onyx Television commenced
broadcast operations in January 1996, and its broadcasting signal is currently
received in approximately 10.0 million cable homes and an indeterminate number
of satellite homes in Germany. In July 1998, the Company entered into a
strategic alliance with a subsidiary of Groupe AB, a large French television
production company, with respect to the operation and future development of Onyx
Television's business. Pursuant to the agreement between the Company and Groupe
AB, Groupe AB will provide Onyx Television with significantly all of Onyx
Television's broadcasting requirements over the next two years and will work
closely with Onyx Television to further develop and expand Onyx Televisions'
programming in Germany. Groupe AB operates nineteen thematic television stations
which are distributed on various cable and satellite pay-TV services in France,
Switzerland and Belgium.
The agreement with Groupe AB was entered into simultaneously with an
agreement between the Company and Superstar Ventures Limited ("Superstar").
These agreements provided the Company with $11.64 million of funding, $5.4
million in the form of cash investments to be infused over a one year period and
$6.24 million through AB providing operating services to Onyx Television over a
two year period. The new funding will be initially 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 capital at the next
shareholders' meeting. Once these obligations are converted into Common Stock,
Superstar and Groupe AB will control a majority of the Company's outstanding
common stock and will control the Company. See "Security Ownership of Certain
Beneficial Owners and Management" and "Certain Relationships and Related
Transactions."
Since the Company's acquisition of Unimedia in July 1997 and the
assumption by Unimedia's executive management of the executive management of the
Company, the Company has taken decisive measures to reduce Onyx Television's
operating costs and to refocus the strategy of the group. The ownership,
development and operation of television stations and other new-media interests
requires substantial capital investment. To date, the Company has financed its
capital requirements through sales of equity securities and debt financing and
the Company has experienced substantial working capital shortfalls over the last
18 months.
The Company believes that the agreements with AB and Superstar provide
the funding required to develop Onyx Television's operations more positively in
the future and allow the Company to implement a far more cost effective
broadcasting operation than would otherwise be available. The Company also
believes that the agreement with Groupe AB provides Onyx Television with a
strategic partner with substantial experience in both television production and
broadcasting and with a partner interested in pursuing joint projects with Onyx
Television (such as teleshopping).
The Company also has interests in several other businesses: (i)
Tinerama, which operates a Romanian print media group and radio station, (ii)
Blink TV, which is a specialist TV programming company which provides lifestyle
programming on large video screens at concert events, (iii) Pixel,
16
<PAGE>
which specializes in computer graphics and 3D animation for TV packaging,
digital broadcasting and special effects, (iv) TopCard, a software development
business which is engaged in the development of applications based upon smart
card technology (including remote security Internet access and infrared
contactless smart-card technology) and (iv) Unimedia, which intends to develop
in the future a software platform for Internet entertainment and gaming.
ONYX TELEVISION
PROGRAMMING
Onyx develops, acquires and exhibits on its network a variety of music
videos, interviews and topical specials that focus on a distinctive mix of jazz,
blues, classical and popular German music and current and recurrent pop and
rock. Programs are acquired from a variety of sources or, to a lesser extent,
produced internally. Acquired programming includes music videos, concert footage
and other live performance material. Such programming is supplied to Onyx by
record companies and the music industry for a variety of fees ranging from
nominal handling charges plus royalty payments for videos to negotiated license
fees for live footage. Onyx's internal productions include interviews and
topical specials that range from profiles of specific artists to genre defined
shows such as JAZZ ONYX, ONYX COUNTRY CLUB, and ONYX OVERTURE (classical). Onyx
also broadcasts infomercials (teleshopping) on its television station.
Currently, music videos represent a substantial proportion of the
content utilized in Onyx's programming. Customarily, in the European record
industry, record companies provide the Company with music videos in exchange for
nominal handling charges plus royalty payments.
TARGET MARKET AND DISTRIBUTION
Germany is the largest cable television market in Europe, with a
population of over 82 million people and approximately 35.0 million households.
Cable television distribution systems covered approximately 24.0 million homes
and served over 17.4 million cable subscribers as of June 30, 1998. The German
cable television market is substantially built-out. As of December 31, 1997,
cable television systems covered approximately 75% of the households in Germany.
Additionally, as of August 31, 1998, Germany had approximately 11.4 million
homes served by direct-to-home satellite-delivered television services and
satellite master antenna television systems.
As of September 30, 1998, Onyx's broadcast signal was distributed to
9.7 million cable homes in Germany (10.0 million at November 30, 1998), compared
to 6.7 million homes as of August 31, 1997. In addition, Onyx's signal is
received by an indeterminate number of homes in Germany which are covered by
direct-to-home satellite systems.
Television is the fastest growing media in Germany, with advertising
revenues having increased from DM 1.4 billion ($0.9 billion) in 1984 to DM 6.5
billion ($3.9 billion) in 1997. During this same period, television advertising
revenue as a percentage of total advertising revenue has increased from
approximately 10% in 1984 to approximately 24% in 1997. Industry sources
estimate that television advertising will nearly double to DM 12.0 billion ($7.2
billion) by 2004. Since the
17
<PAGE>
introduction of cable and satellite television programming to Germany in 1984,
such programming's share of television advertising revenue has increased to
approximately 90%.
The target market for Onyx's programming is persons in the 20 to 55
year old age group (the "Target Audience"). The Target Audience is believed to
be one of the largest demographic segments in Germany. The Company believes that
the Target Audience watches more television than any other demographic group in
Germany and has high purchasing power.
ADVERTISING REVENUE
Substantially all of Onyx's revenues are derived from the sale of spot
advertising time. Onyx also derives revenue from direct response advertising in
which advertisers pay Onyx based on the number of products sold as a result of a
particular commercial or as a result of an infomercial which is broadcast on the
Company's station (teleshopping). In addition to providing access to cable
households in general, the Company believes that Onyx will in the future be
attractive to advertisers because it offers one of the most cost effective means
of reaching the Target Audience. The Company believes that distribution,
marketing and audience qualifications, and an effective advertising sales force,
are key to achieving success in the advertising sales market.
In August 1998, Onyx entered into an agreement with a large independent
media company in Germany to act as Onyx's exclusive sales agent in Germany.
Pursuant to the agreement, which is for a four year period, the sales agent will
be paid commissions based upon the revenues derived from the commercials
broadcast on the station. The agreement also establishes sales objectives to be
met by the sales agent on an annual basis in order for the agreement to continue
on an exclusive basis.
The demand by advertisers for advertising time on Onyx, and therefore
its operating results, are and will be affected in the future by general
economic conditions, the demographic characteristics of the audiences viewing
the Company's broadcasts, the activities of the Company's competitors, the
Company's ability to provide evidence to advertisers with regard to the size of
the Onyx Televisions' viewing audience, and other factors, as well as trends in
the advertising industry. To date, Onyx Television has not obtained a
substantial amount of advertising revenue from commercials and there can be no
assurance that Onyx Television will ever achieve sufficient levels of
advertising revenue to make the station profitable and cash flow positive.
GOVERNMENTAL REGULATION
The Company's ability to distribute Onyx Television through German
cable systems is dependent upon obtaining and thereafter maintaining the
approval of German Landes Medienanstalten (Local Media Authorities or "LMAs"),
each of which has authority to approve programming lineups for cable systems in
the 15 German regions known as "Bundeslanders" and each of whose members are
appointed by local government. Currently, Onyx Television's channel has been
granted the right or partial right to distribute programming through cable
networks located in 13 of the 15 Bundeslanders.
Because the number of channels available to a cable system is currently
limited by analog technology to 30 to 35, the success of Onyx Television is
dependent in part upon maintaining its
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approval and good relations with each of the LMAs who have previously agreed to
allow broadcast of Onyx Television on their cable system (both to maintain
existing distribution and to seek additional distribution on those cable
systems), and on creating a relationship with additional LMAs in order to obtain
additional distribution of Onyx Television's programming. Since decisions on
distribution are made annually by each LMA, there can be no assurance as to the
distribution which the Company might obtain in any year and from year to year.
Television broadcast operations in Germany are subject to extensive
government regulation as to the issuance, renewal, transfer and ownership of
station licenses, the timing and content of programming, the timing, content and
amount of commercial advertising permitted and the determination of which
stations will be permitted to broadcast on a particular cable system. There are
also regulations requiring that certain percentages of programming be produced
or originated in local markets. Further, countries into which Onyx Television
may in the future seek to expand may expose Onyx Television to substantial
additional government regulation.
The types of programming which Onyx Television may broadcast and the
costs associated with any such programming could also be impacted by political
initiatives which are being taken by the European Union to increase the amount
of European-produced programming which is being broadcast. In that regard, the
German National Convention of Broadcast, based upon a recent application of the
European Union, is expected by the end of 1998 to endorse and authorize an
increase in the time allowed for third party services such as teleshopping from
one hour per day to three hours daily. The Company believes that if such
amendment is adopted by the various LMAs whose cable systems carry Onyx
Television's station, it will have a positive effect on Onyx Television's
revenues. There can be no assurance as to the ultimate outcome of these matters
and their effect on Onyx Television.
Any change in the ownership of the Company or Onyx Television or the
addition of new shareholders who acquire a substantial interest in the Company
or Onyx Television must receive approval from the German media authorities
regarding the effect of the transaction on the ownership concentration in the
overall German television industry. The Company has made application to the
German media authorities in respect of the changes to its ownership and
operations resulting from the Company's recent agreements with Groupe AB and
Superstar and the Company expects to receive such approvals. However, the
failure of the German media authorities to approve such changes in ownership
would likely result in the suspension and/or revocation of Onyx Television's
broadcast licenses, which would have an adverse effect on the financial
condition of the Company.
COMPETITION
Among companies providing programming services via cable television in
Germany, there is intense competition for both viewers and for the right to
distribute programming over the various cable television networks throughout
Germany. A number of German cable television networks provide programming that
targets the Target Audience targeted by Onyx Television. The competition for
viewers includes broadcast television stations, satellite and wireless
programming services, radio, print media and the Internet. In connection with
its music programming, the Company competes with other broadcast operators,
which includes other music channels. Many of the Company's competitors have
significantly greater resources than the Company.
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Additionally, increased competition for viewers in the German cable
industry may result from the availability of additional channels and programming
made possible by technological advances, such as digital compression technology,
which allows cable systems to expand channel capacity, the deployment of fiber
optic cable, which has the capacity to carry a much greater number of channels
than coaxial cable, and "multiplexing," in which programming services offer more
than one feed of their programming. The increased number of choices available to
the Target Audience as a result of these technological advances could impact the
number of persons watching Onyx's programming.
LONG TERM STRATEGY
The Company's operating strategy with respect to Onyx is to (i) expand
the number of regional cable networks carrying Onyx, (ii) increase advertising
revenues through growth in both sellout and the prices paid per advertisement,
(iii) launch Onyx in other European countries, (iv) continue to develop
strategic alliances/relationships in order to seek to increase Onyx's ability to
penetrate existing markets and enter new markets, and (v) if possible, syndicate
Onyx's internally produced programming to third-parties. There can be no
assurance that these strategies will be successfully implemented.
STRATEGIC ALLIANCES AND RECENT DEVELOPMENTS
In July 1998, the Company entered into a two-year services agreement
(the "Services Agreement") with a subsidiary of Groupe AB, which agreement by
its terms became effective on October 1, 1998, pursuant to which Groupe AB has
agreed to provide certain technical services to the Company, including, among
other services: (i) use of a transponder aboard a satellite of the EUTELSAT
type, (ii) uplink facilities, (iii) all transmission services to the cable head
ends of each of the German cable television networks over which the Company's
programming is broadcast, and (iv) use of a master control room and other
transmission facilities required to operate Onyx Television. Additionally,
Groupe AB will fund the Company $60,000 per month in cash so that the Company
may pay the costs of transmitting its broadcast signal over telephone lines to
decoders at the cable ends.
In return for these services and this investment, Onyx will be
obligated to accrue $260,000 per month for the benefit of Groupe AB, which will
initially be debt, but will be automatically converted into Common Stock at a
conversion rate of $0.10 per share if the Company's stockholders approve an
amendment to the Company's articles of incorporation increasing the Company's
outstanding common stock, thereby allowing such shares to be converted into
shares of the Common Stock (and will be repayable in full, with interest and a
penalty, in the event that the Company's shareholders' do not approve such an
amendment). See Proposal 1.
In that regard, effective October 1, 1998, Onyx Television's signal
began to be broadcast on ABSAT, which is a digital satellite transponder
controlled by Groupe AB, and Groupe AB commenced providing Onyx Television with
an uplink facility and with the other services contemplated by the Services
Agreement.
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Over the last year, the Company's executive management have taken
significant steps to reduce the costs associated with the operations of Onyx
Television and the strategic alliance between Onyx Television and Groupe AB is
expected to result in an annual saving of approximately $2.0 million in overhead
expenses annually from the level of operating expenses previously incurred by
Onyx. Including the anticipated cost savings associated with the Services
Agreement with Groupe AB, Onyx Television's annual operating costs will have
been reduced by approximately 60% from the level of such costs incurred during
1997. See "Management's Discussion and Analysis."
The Company has applied to the German regulatory authorities to move
its principal television station license from Rheinland Pfalz to North Rhine
Westphalia, in order to allow the Company to take advantage of the benefits
associated with the Services Agreement with Groupe AB. The Company is hopeful
that it will obtain the required approvals, although there can be no assurance.
The Company also expects that the Company and Groupe AB will work together to
develop new programming opportunities for Onyx, including significantly
increased teleshopping programming, with the goal of increasing the revenues
being derived from the operation of Onyx Television.
On March 27, 1998, the Company, CM (UK) and Onyx entered into an
agreement (the "Sharing Agreement") with QVC Deutschland GmbH ("QVC Germany"), a
subsidiary of QVC, Inc. Under the terms of the Sharing Agreement, Onyx and QVC
Germany agreed to seek approval from the applicable German media authorities for
permission for QVC Germany to share broadcast time equally with Onyx in respect
of 5.8 million of the homes receiving the Onyx cable television broadcast and
not already receiving the QVC program. At the present time, the Sharing
Agreement has expired by its terms, since the regulatory approvals required
under the Sharing Agreement have not been obtained. However the Company and QVC
Germany are continuing to explore potential ventures from which they can
mutually benefit.
OTHER BUSINESSES
TINERAMA INVESTMENT AG
The Company owns a 51% interest in a holding company, Tinerama
Investment AG ("TIAG"), which, in turn, owns a 61% interest in four corporations
and a 49% interest, with an option to purchase an additional 12% for nominal
value, in a fifth corporation (such corporation is a Romanian broadcasting
company which, under Romanian law, may not be majority-owned by a non-Romanian
entity, but as to which TIAG has voting control) (collectively, the "Tinerama
Companies") having media-related operations in Romania (collectively,
"Tinerama"). The remaining 39% of each of the Tinerama Companies is owned by
Tinerama's founder, Max Banush ("Banush") and by Robert Perlitz. Banush
continues to operate the business.
Tinerama, which is headquartered in Bucharest, Romania, owns (i) seven
newspapers and periodicals with a total monthly production of approximately 1.0
million; (ii) a distribution network
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comprising of vans and automobiles; (iii) a printing facility; and (iv) a radio
station which broadcasts to approximately one-third of the country.
Successive governments since the overthrow of dictatorship in Romania
have built a viable democracy, but have failed to bring the economic benefits of
the transition from communism which have been seen elsewhere in the eastern
bloc. Tinerama has recently undergone some level of reorganization in order to
stem the continuing losses from its operations. See "Management's Discussion and
Analysis." Further actions are being considered and a review is to be undertaken
by the Company to determine whether the Company should continue its involvement
with Tinerama.
BLINK TV
Blink TV is a specialist TV programming vehicle which provides
lifestyle programming on large video screens at UK concert events. This
programming consists of music videos, style and fashion, and extreme sports,
which is broadcast as a 30 minute segment immediately prior to live
performances. Blink TV has installed video screens and projection equipment at
five major UK concert venues in order to offer programming at these venues.
The Company owns a 50% joint venture interest in Blink TV. The balance
is owned by RCL Communications, which purchased its interest in Blink during
1998 from Mirror Group PLC.
In connection with its business, Blink Television must obtain the right
to broadcast its programming at rock and pop concerts and other events at the
arenas where Blink has installed its high spec audio-visual equipment. In order
to obtain these rights, Blink Television has to negotiate successfully with
promoters of events, producers and managers of artists, as well as the artists
themselves. Further, Blink Television must successfully sell advertisers on its
concept. There can be no assurance that Blink will be successful in these
efforts.
Since launching Blink in November 1986, Blink TV has already
transmitted approximately 200 hours of tailor-made programming at approximately
400 concerts in the United Kingdom and the United States. Concerts at which
Blink TV's programming has been played have included Boyzone, Sting, Bryan
Adams, 3T, Kenny G, Status Quo, the Disney Christmas Show and the Spice Girls.
Advertising deals have been concluded with a variety of companies, including
Gillette, British Telecom, Volkswagen, Volvo, Duracell, Kodak and Lee Jeans.
Notwithstanding, Blink TV has taken longer than was originally
anticipated to be accepted as a new advertising median and has not yet become
profitable. Advertising agencies have been cautious in using Blink as an
alternative to classical advertising and some artists have been reluctant to use
Blink TV as a support act in their shows. Blink has been successful in
completing several concerts outside the United Kingdom, but United Kingdom
returns have not been as optimistic as hoped, and management is currently
reviewing the sales and co-ordination of events to improve results. Management
is also considering whether the Company should continue its involvement with
Blink or withdraw in some fashion from this venture.
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UNIMEDIA
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).
Unimedia intends to pursue the development of a software platform for
Internet gaming and entertainment. To date, in furtherance of this objective,
the Company has engaged the services of a consultant, SCP Valfab, which provides
the services of Jacques Dubost, a consultant to the casino industry and the
former manager of two famous casinos in Cannes, France and in Monte Carlo. Such
business is extremely competitive and no assurance can be given that Unimedia
will be successful in entering this business.
PIXEL, LTD.
On February 12, 1998, the Company, Unimedia, and Pixel Multimedia Ltd.
("PMM") consummated the transactions contemplated by an agreement executed on
that date and effective as of January 1, 1998. PMM previously owed Unimedia
$2,700,000 for loans made to PMM and for other expenses. As part of the
transaction, Unimedia purchased the outstanding stock of Pixel Ltd., an Israeli
company ("Pixel") from PMM. Pixel specializes in computer graphic and 3D
animation for TV packaging, digital broadcasting and special effects. Pixel also
owns a 47.5% interest in Henry Communication Ltd., a service company operated in
a joint venture with Video Broadcast SB Ltd., an Israeli broadcasting company.
Pixel has, in addition, a contractual relationship with Israel Cable Programming
Company Ltd., providing TV packaging and animation programming for the cable
operators in Israel, utilizing Pixel's digital editing systems and located in
Israel Cable Programming's studio facilities. As part of the transaction, Pixel
also purchased certain software previously developed for Unimedia by PMM for use
in connection with the development of the Company's and Unimedia's proposed
entertainment and gaming software platform.
The purchase price paid to acquire Pixel, together with the software
described above, consisted of: (i) forgiveness of $1.7 million of the debt owed
by PMM to Unimedia and (ii) the assumption by Pixel (guaranteed by Unimedia and
the Company) of certain PMM debt not exceeding $750,000 due to a financial
institution. Additionally, PMM may receive up to 600,000 shares of the Company's
Common Stock owned by Unimedia if certain performance objectives are achieved by
Pixel. These shares have been pledged by Unimedia to the financial institution
to secure Pixel's debt to the financial institution. Finally, the remaining
$1,000,000 owed by PMM to Unimedia will be forgiven in the event that certain
future performance objectives are achieved by Pixel. Rami Weitz, the President
of Pixel, continues to work with Pixel and Unimedia on a consulting basis.
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TOPCARD, S.A.
On November 1, 1997, Unimedia acquired an 80% interest in TopCard, a
French company engaged in the design and manufacture of infra-red contactless
smart card technology. Unimedia had previously owned 10% of the outstanding
stock of TopCard and, after this transaction, Unimedia owns 90% of the
outstanding stock of TopCard. The purchase price paid by Unimedia for the 80%
interest consisted of the transfer of 456,000 shares of the Company's Common
Stock owned by Unimedia to TopCard's shareholders and $150,000 in cash.
TopCard is developing secure access smart card technology required for
processing online transactions. TopCard has agreements to export its smart card
technology and turnkey solutions to Russia and China for use in securing access
to mobile phone applications and prepaid Internet services, respectively, and is
presently in a pilot project with the European Union to develop a secure
decrementing value card system (an electronic purse).
LONG TERM BUSINESS STRATEGY
The Company's long term strategy is to become a leading provider in
Europe of digital interactive thematic multimedia entertainment programs and
on-line services through conventional mediums, such as television and cable, and
the Internet. The Company believes that over time, it will be able to maximize
its opportunities by cross fertilizing the conventional aspects of its media
business with its proposed new media development and activities by finding
applications for its programming in new arenas (such as the Internet). One
product, for example, might be the development of a web site where persons may
view music videos and programming shown on Onyx Television. The Company also
hopes in the future to develop new television programming formats in order to
become a company at the leading edge of the convergence between television and
PC Networks. The Company also intends to pursue a strategy of seeking to provide
Onyx Television's programming through expanding digital European television
networks and seeking to expand the Onyx Television and Blink TV concepts to
other countries.
PERSONNEL
At September 30, 1998, the Company employed 77 persons, 23 of whom were
employed by Onyx Television, 24 of whom were employed by Tinerama, three of whom
were employed by Blink TV, 23 of whom are employed by Unimedia, Top Card and
Pixel, and four of whom were employed in administrative, financial and
managerial positions on behalf of the combined operation.
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PROPERTIES
The Company's Chairman is located in France and the Company's
headquarters is temporarily located in France. The Company is considering
organizing a French subsidiary, CM Development, to operate as a party to the
Company's activities in France and to serve as a temporary administrative agent
for the Company in France until such time as the Company relocates its
headquarters to another jurisdiction. Prior to September 1998, the Company's
principal executive office was located in leased office space in London,
England.
CM Development, if organized, would share office space with Unimedia
(at the present time, the Company and Unimedia have entered into an agreement to
allocate office space and office costs among the Company and Unimedia). Unimedia
leases office space in Charenton, France.
Onyx Television leases administrative offices in Dortmund, Germany.
Tinerama owns a building and, in addition, leases administrative offices and
print works in Bucharest, Romania. Blink TV leases offices in London. TopCard
leases office space in Aix-en-Provence, France and Pixel leases offices in Tel
Aviv, Israel. For information regarding the Company's financial obligations
under its leases, see Note 7 to Notes to Consolidated Financial Statements.
LEGAL PROCEEDINGS PENDING OR THREATENED
CM (UK) was sued in 1995 by COM TV Production Und Vertrieb GmbH and Nen
TV Limited ("NEN"). This suit, which the Company vigorously contested, sought an
interest in Onyx Television pursuant to an alleged agreement among the parties.
In December 1997, the parties entered into an agreement to settle this suit. As
part of the settlement, Onyx agreed to pay the plaintiffs DM50,000.
Additionally, the settlement allows NEN the right to introduce a client to Onyx
within one year of the settlement to use the broadcast downtime on the Onyx
Television station. In the event that a client is introduced, that client will
be required to pay Onyx a minimum monthly fee of DM40,000, plus a 22.5%
commission on all revenues earned by such client in connection with its
broadcasts on the channel to the extent that such revenue exceeds DM222,225. In
turn, NEN will receive 25% of all amounts paid to Onyx relating to such client,
up to a maximum of DM1,500,000. To date, no client has been introduced to Onyx
by NEN.
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 the 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 Television Concepts alleges that they
provided to Onyx. Onyx intends to seek to have the default judgment set
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<PAGE>
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.
The Company believes that Fontal is controlled by Marc Degarni, who is a
stockholder of the Company and who previously represented to the Company that he
is a stockholder in Unimedia (through an entity, Atlas Investments, although
that entity has advised Unimedia that it is now represented by another
individual, Roland Pardo. Mr. Degarni is also a former director of CM (UK).
Pursuant to the note, the Company owes Fontal $200,000, plus accrued
but unpaid interest. The Company had pledged the rights to international
trademarks for the 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 is
vigorously defending same. No assurance can be given as to the ultimate outcome
of this matter.
Unimedia has three minority shareholders (Oradea Inc., represented by
its chairman, Alfonso Lodolo D'Oria, Roland Pardo and Atlas Investments) who
have previously advised Unimedia that they do not believe that the summer 1997
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.
Oradea, Lodolo and Pardo have also taken action through the courts in
France and Israel to attempt to safeguard their potential rights over certain
assets of Unimedia in order to secure payment of their unsecured loans due from
Unimedia. See Note 7 of Notes to Consolidated Financial Statements. In
connection with such actions and based upon the fact that the notes do not by
their terms reflect a repayment date, Unimedia has proposed a payment plan to
repay these loans in installments, and is awaiting a court ruling from the
French court on its proposed payment plan. Unimedia is also preparing actions
against Oradea and against Messrs. Lodelo and Pardo for damages which it
believes have been caused by reason of Oradea, Lodolo and Pardo's inappropriate
actions against Unimedia.
The Company, which owns 81.6% of Unimedia, intends to operate and
continue the future development of Unimedia's business in the best interest of
Unimedia's stockholders, including the Company. Additionally, the Company has
been funding Unimedia's cash flow requirements through a $500,000 line of
credit, and in that regard, Unimedia has pledged its stock interest and loan in
Pixel
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to the Company to secure repayment of that obligation. To the extent that such
minority holders disagree with the business decisions made by Unimedia's
management in the future, including the use by Unimedia of funds available to
Unimedia which might be used in joint projects between the Company and Unimedia,
they may bring legal actions against Unimedia and/or its management for breach
of fiduciary duties or based upon other legal theories. Such actions, if
brought, may have an adverse impact on the Company and Unimedia. Further, any
such litigation would be time consuming and costly to Unimedia (and thereby to
the Company, based upon its ownership of an 81.6% interest in Unimedia), even if
such litigation were decided in favor of Unimedia and/or its management.
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)100,000 (approximately $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)60,000 over an agreed period of time to
resolve outstanding claims under his service agreement with the Company.
In August 1998, Onyx Television sued Charles 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.
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SELECTED FINANCIAL DATA
THE FOLLOWING INFORMATION HAS BEEN DERIVED FROM THE FINANCIAL
STATEMENTS OF THE COMPANY. THE FINANCIAL STATEMENTS AS OF AND FOR THE PERIODS
ENDED DECEMBER 31, 1996 AND 1997 INCLUDED ELSEWHERE HEREIN HAVE BEEN AUDITED BY
DELOITTE & TOUCHE, INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS. THE SELECTED
FINANCIAL DATA AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1997 AND 1998 ARE DERIVED FROM THE UNAUDITED INTERIM FINANCIAL STATEMENTS
CONTAINED ELSEWHERE HEREIN. OPERATING RESULTS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 ARE NOT NECESSARILY INDICATIVE OF RESULTS THAT MAY BE
EXPECTED FOR THE YEAR ENDING DECEMBER 31, 1998. THIS SECTION SHOULD BE READ IN
CONJUNCTION WITH THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES
THERETO AND "MANAGEMENT'S DISCUSSION AND ANALYSIS" INCLUDED ELSEWHERE IN THIS
PROXY STATEMENT.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
FISCAL YEAR ENDED DECEMBER 31, (UNAUDITED)
--------------------------------- ----------------------------------
1996 1997 1997 1998
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Operating Revenues............ $ 2,075,407 $ 2,429,275 $ 1,548,410 $ 4,060,541
Operating Costs:
Staff costs.............. 3,705,992 3,754,124 2,558,753 2,791,174
Depreciation and amortization 521,069 747,876 407,587 963,680
Operations expenses - exceptional 497,670 4,202,737 2,500,356 (1,655,208)
Operating expenses - other 13,628,277 12,160,527 8,370,218 7,907,666
-------------- -------------- ------------- -------------
Total Operating Costs 18,352,988 20,865,264 13,836,914 10,007,312
-------------- -------------- ------------- -------------
Operating Loss................ (16,277,581) (18,435,989) (12,288,504) (5,946,771)
Equity in net losses in investment in (211,414) (251,550) (144,111) (136,360)
joint venture.................
Interest (paid)/income, net... 132,950 (244,694) (75,156) (1,070,415)
Other income (expense)........ 42,531 (44,684) (3,568) (682,840)
============== ============== ============= =============
Loss before taxation.......... (16,313,514) (18,976,917) (12,511,339) (7,836,386)
Tax provision (credit)....... (6,623) 1,390 (1,666) (3,754)
------------- -------------- -------------- -------------
(16,320,137) (18,975,527) (12,513,005) (7,840,140)
Minority interest............. 58,033 104,462 (61,563) 343,127
------------ -------------- -------------- -------------
Net Loss...................... (16,262,104) (18,871,065) (12,574,568) (7,497,013)
============ ============== ============== =============
Net Loss Per Basic Share...... ($1.32) ($.67) ($.44) ($.19)
============ ============== ============== =============
Weighted Average Shares Outstanding 12,359,029 27,966,383 28,566,942 40,094,139
============ ============== ============== =============
</TABLE>
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<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------------------- ------------------
1996 1997 1998
----------------- ------------------ ------------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital/(Deficit)................... $(3,522,766) $(9,514,501) $(16,539,697)
Total Assets................................ 5,090,782 8,905,983 8,178,650
Total Liabilities........................... 6,117,230 11,931,773 20,536,458
Minority Interest........................... 615,795 901,980 1,105,466
Stockholder's Equity/(Deficiency in Net Assets) (1,642,243) (3,927,770) (13,463,274)
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS
THE FINANCIAL INFORMATION INCLUDED HEREIN SHOULD BE READ IN CONJUNCTION
WITH THE FINANCIAL STATEMENTS CONTAINED ELSEWHERE IN THIS PROXY STATEMENT,
INCLUDING THE NOTES THERETO. THIS PROXY STATEMENT CONTAINS FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT, AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, WHICH ARE INTENDED TO BE
COVERED BY THE SAFE HARBORS CREATED THEREBY. ALL STATEMENTS, OTHER THAN
STATEMENTS OF HISTORICAL FACT, INCLUDED IN THIS PROXY STATEMENT THAT ADDRESS
ACTIVITIES, EVENTS OR DEVELOPMENTS THAT THE COMPANY EXPECTS, BELIEVES OR
ANTICIPATES WILL OR MAY OCCUR IN THE FUTURE ARE FORWARD-LOOKING STATEMENTS.
INVESTORS ARE CAUTIONED THAT ALL FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES, INCLUDING, WITHOUT LIMITATION, THE ABILITY TO MAINTAIN OR
INCREASE THE DISTRIBUTION OF ONYX TELEVISION ON GERMAN CABLE SYSTEMS, THE
ABILITY TO INCREASE ONYX TELEVISION'S ADVERTISING REVENUES, CHANGES IN COSTS OF
PROGRAMMING, AND MATTERS RELATING TO ONYX TELEVISIONS' RELATIONSHIP WITH THE
GERMAN MEDIA AUTHORITIES HAVING JURISDICTION OVER ONYX TELEVISION, AS WELL AS
GENERAL MARKET CONDITIONS AND COMPETITION. FUTURE EVENTS AND ACTUAL RESULTS,
FINANCIAL AND OTHERWISE, COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN OR
CONTEMPLATED BY THE FORWARD-LOOKING STATEMENTS HEREIN. ALTHOUGH THE COMPANY
BELIEVES THAT THE ASSUMPTIONS UNDERLYING THE FORWARD-LOOKING STATEMENTS
CONTAINED HEREIN ARE REASONABLE, ANY OF THESE ASSUMPTIONS COULD BE INACCURATE
AND, THEREFORE, THERE CAN BE NO ASSURANCE THAT THE FORWARD-LOOKING STATEMENTS
INCLUDED IN THIS PROXY STATEMENT WILL PROVE TO BE ACCURATE. IN LIGHT OF THE
SIGNIFICANT UNCERTAINTIES INHERENT IN THE FORWARD-LOOKING STATEMENTS INCLUDED
HEREIN, INCLUSION OF SUCH INFORMATION SHOULD NOT BE REGARDED AS A REPRESENTATION
BY THE COMPANY OR ANY OTHER PERSON THAT THE OBJECTIVES AND PLANS OF THE COMPANY
WILL BE ACHIEVED.
GENERAL
The 1997 financial results include the consolidated accounts of the
Company, its wholly owned subsidiary CM(UK) and CM(UK)'s wholly owned
subsidiary, Onyx and CM(UK)'s 51% owned subsidiary, TIAG, and the Company's
81.6% owned subsidiary Unimedia, and Unimedia's 90% owned subsidiary TopCard SA
("TopCard"). The Company's 50% joint venture investment interest in Blink TV
Limited ("Blink") has been accounted for using the equity method. The results of
Unimedia and TopCard have been consolidated from September 1997 and November
1997, which are the respective dates of their acquisition. Results for 1998 also
include the activities of Pixel Ltd., which was effectively acquired as of
January 1, 1998 and has been consolidated as of its date of acquisition.
The Company has recently issued a significant amount of debt
convertible into Common Stock at $0.10 per share, the amount which the Board has
determined and believes to be the fair market value of the Common Stock at the
date of grant. There is currently no market for the Common Stock, and no opinion
on the valuation of the Common Stock has been obtained from a third party. If it
were to be later determined that the fair market value of the Common Stock on
the date of these transactions was greater than $0.10 per share when such
convertible debt were issued, the difference between the fair market value of
such shares and $0.10 per share would be charged to the Company's operations.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Operating revenues for the nine months ended September 30, 1998 were
$4.06 million, an increase of $2.51 million compared to operating revenues of
$1.55 million for the nine months ended September 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 nine months
of 1998 of an aggregate of $2.26 million of operating revenues at Unimedia,
TopCard and Pixel. The Company acquired Unimedia, TopCard and Pixel under the
purchase method of accounting and therefore accounted for their operations from
their respective date of purchase (August 1997, November 1997 and January 1998.)
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Advertising sales by Onyx Television during the nine months ended
September 30, 1998 totaled $0.89 million, compared to $0.55 million for the same
nine months in 1997. The Company has recently signed an agreement with a newly
appointed media agency, whose agents are developing new marketing and sales
strategies for Onyx Television and, although there can be no assurance, the
Company believes that Onyx Television's advertising revenue will increase in the
future. In addition, Onyx has entered into a two year strategic alliance
agreement with a subsidiary of Groupe AB, a French television production
company, which became operational on October 1, 1998. Pursuant to that
agreement, Groupe AB, through its subsidiary, MMP S.A., provides certain
technical services to the Company, including the use of a transponder and uplink
facilities, transmission services and use of a master control room, as well as
providing the funding required to pay cable transmission costs. In return, the
Company pays MMP $260,000 per month (initially in debt, but automatically
convertible into Common Stock if the Company's stockholders approve an amendment
to the Company's Articles of Incorporation increasing the Company's authorized
Common Stock).
Operating costs, including depreciation and amortization, for the first
three quarters of 1998 were $10.01 million (1997 - $13.84 million) and included
$2.61 million of operating costs relating to the operations of Pixel, Unimedia
and TopCard. Operating costs also included an exceptional operating credit of
$1.66 million (1997 - $2.5 million charge) in respect of non-cash accounting
exchange translation gains arising from changes in currency exchange rates at
September 30, 1998 compared to exchange rates at December 31, 1997. Depreciation
and amortization for the nine months ended September 30, 1998 was $0.96 million,
an increase of $0.55 million compared to $0.41 million for the nine months ended
September 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.
Total operating costs, excluding operating expenses - exceptional and
costs associated with the operations of Pixel, Unimedia and TopCard, decreased
by $2.02 million for the first nine months of 1998 compared to the first nine
months 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 group operations and these changes favorably impacted operating costs
during the nine months ended September 30, 1998. Additionally, each of the
Tinerama companies continued to operate at a small loss during the first nine
months of 1998.
As a result of all of the above factors, the Company's operating loss
was $5.95 million for the nine months ended September 30, 1998, compared to an
operating loss of $12.29 million for the same period in 1997.
The increase in other expenses relates to net write downs of the value
of certain of the Company's investments taken during the 1998 nine month period
and to sales of investments by the Company during such period. There were no
such write downs or sales of investments during the comparable period in 1997.
Interest expense also increased substantially during the 1998 nine month period
compared to interest expense in 1997, due to the substantial increase in
borrowings from period to period.
The net loss for the nine months ended September 30, 1998 was $7.5
million ($0.19 per basic and diluted share), compared to a net loss of $12.57
million ($0.44 per basic and diluted share) for
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the nine month period ended September 30, 1997. Weighted average shares
outstanding were 40,094,139 for the nine months ended September 30, 1998,
compared to 28,566,942 for the nine months ended September 30, 1997.
YEAR END 1997 AND 1996
For the fiscal year ended December 31, 1997 ("Fiscal 1997"), the
Company reported a net loss of $18.87 million, compared to a net loss of $16.26
million for the fiscal year ended December 31, 1996 ("Fiscal 1996"). The net
loss for Fiscal 1997 included exceptional charges of $4.2 million, as follows:
(1) a $1.69 million charge to write off additional goodwill and asset
amortization, and (ii) a $2.51 million non-cash currency exchange translation
charge (Fiscal 1996-$0.5 million) arising from changes in currency exchange
rates at December 31, 1997 compared to exchange rates at December 31, 1996.
Without these write-offs and non-cash charges, the net loss for Fiscal 1997
would have been $14.67 million.
The net loss per share for Fiscal 1997 was $0.67, compared to a net
loss per share of $1.32 for Fiscal 1996. Weighted average shares outstanding
were 27,966,383 for Fiscal 1997 compared to 12,359,029 for Fiscal 1996. The
increase in the number of shares outstanding is primarily due to the Company's
private placements completed in March 1997 (12,000,000 shares) and June 1997
(7,017,543 shares), and the Company's acquisition of an 81.6% interest in
Unimedia in August 1997 (7,026,600 shares).
Operating revenues in fiscal 1997 totaled $2.43 million, a net increase
of $0.35 million compared to revenues of $2.08 million in Fiscal 1996. While
sales at Tinerama decreased 37%, from $1.80 million in Fiscal 1996 to $1.14
million in Fiscal 1997, Onyx's advertising revenue increased to $.65 million in
Fiscal 1997 from $0.28 million in Fiscal 1996. There were also first-time
revenue contributions during Fiscal 1997 from Unimedia (from September 1997) and
TopCard (from November 1997) of $0.63 million and $0.19 million, respectively.
Operating costs, including staff costs, depreciation and exceptional
items, totaled $20.87 million in Fiscal 1997, compared to $18.35 million in
Fiscal 1996. Costs of Onyx Television's operations decreased from $14.42 million
in Fiscal 1996 to $11.54 million in Fiscal 1997. Operating expenses of Onyx
include programming costs, broadcast studio expenses and transmission expenses.
There were also first-time operating costs included for Unimedia and TopCard of
$0.61 million and $0.17 million, respectively.
Depreciation and amortization for Fiscal 1997 was $0.75 million,
compared to $0.52 million for Fiscal 1996. Operating expenses-exceptional
trading expenses of $4.2 million for Fiscal 1997 included: (i) additional
charges aggregating $1.69 million relating to: (A) the write down of goodwill
and assets based upon the Company's current evaluation of the valuation of
Tinerama, and (B) the write down of goodwill based upon the Company's current
evaluation of the valuation of Unimedia and TopCard; and (ii) the $2.51 million
non-cash currency translation charge described above.
While advertising revenue at Onyx increased in Fiscal 1997, such
increase was substantially lower than was anticipated and reflected the fact
that Onyx has taken longer to establish its product in the German advertising
market. At the present time, Onyx's television station's signal reaches
approximately 10 million cable homes and an indeterminate number of satellite
homes in Germany, compared to approximately 5.5 million cable homes at the end
of 1996.
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During Fiscal 1997, each of the Tinerama companies continued to
generate losses. The combined loss of the Tinerama companies for Fiscal 1997
totaled $176,000 compared to a loss of $143,000 for Fiscal 1996.
The Company's net loss for Fiscal 1997 included net profit
contributions from both Unimedia and TopCard of $0.39 million and $12,000,
respectively, which were consolidated with the Company's results from the dates
of their respective acquisitions.
For the twelve months ended December 31, 1997, Unimedia, TopCard and
Pixel had operating revenues of $0.93 million, $0.96 million and $1.99 million,
respectively, and net profit of $0.73 million, $0.08 million and $0.38 million,
respectively. Part of Unimedia's operating revenue and non-operating profit were
non-recurring items relating to a change of investment strategy pursuant to
which Unimedia has determined not to take minority positions in its future
investments and to sell off the minority positions which it currently holds.
Full-year contributions from each of these companies will be consolidated for
periods after Fiscal 1997.
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 September 30, 1998, the Company has incurred an accumulated deficit of
approximately $45.5 million, principally related to the Company's launch and
operation of Onyx Television. At September 30, 1998, the Company had a negative
working capital of approximately $16.5 million.
In October 1996, the Company's UK subsidiary, CM (UK), entered into an
agreement to borrow US $2.0 million (the "Instar Loan") from Instar Holdings,
Inc. ("Instar") to fund the Company's working capital requirements (principally
related to the continuing operation of Onyx Television). The Instar Loan is
guaranteed by the Company and Onyx and is secured by a charge on all of CM
(UK)'s assets and a pledge of the stock of CM (UK). Interest is payable monthly
on the Instar Loan, at the rate of 2% above Lloyds Bank base rate until December
31, 1997 and 13% per annum thereafter. As described below, the Instar Loan is
currently in default.
In October 1996, CM (UK) 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.
In July 1998, Instar entered into a letter agreement with the Company
reflecting new terms of the Instar Loan. Over the last few months, the Company,
Instar, Universal and Superstar have been negotiating over long form agreements
to more formally document these agreements. No long form agreements have been
entered into to date.
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 for six months
and $200,000 per month thereafter until paid in full. No payments have been made
to date, based upon the Company's expectation that it had an understanding with
Instar that the repayment terms would be revised from those contained in the
letter agreement and that final repayment terms would be provided for in the
long form agreement. The letter agreement also provided for certain prepayments
to the extent that the Company raises funds above the amounts already raised as
discussed in this section. Under the terms of the agreement contemplated by the
letter 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.
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The Instar Loan is currently in default and demand was made by Instar
on December 10, 1998 for repayment of the Instar Loan. The Company continues to
negotiate with Instar to seek a resolution of this matter. The Company has also
advised Instar that its new management has reservations regarding the
circumstances surrounding the Instar Loan and the fact that Instar received a
lien on what was then substantially all of the Company's assets for a $2.0
million loan and is reserving its rights on these issues. No new agreement has
been reached to date, although Instar has agreed not to enforce its rights under
the Instar Loan until after January 31, 1999. If Instar were to enforce its
rights under its pledge of CM (UK)'s assets and the stock of CM (UK), it would
have a significant and adverse impact on the Company's financial position, and
would likely result in the Company's loss of a significant portion of its
operating assets.
On March 3, 1997, the Company closed a private placement in which the
Company raised net proceeds of $5.85 million. The funds from this placement were
used to fund the continuing operation of Onyx Television and for general
corporate purposes. The Company issued an aggregate of 12.0 million shares of
Common Stock in this private placement ($0.50 per share), including 4.0 million
shares of Common Stock subscribed by Unimedia.
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).
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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 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 loan 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. 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 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. The conversion terms of the Superstar loan were
recently amended and are described below.
Superstar and Unbeatable are parties controlled by David Ho, a Director
of the Company. Superstar received a fee of 200,000 shares of the Company's
Common Stock for arranging the original loan made by Unbeatable to the Company
and will receive a fee of 400,000 shares for arranging the January 1998
Superstar loan (which fee will be payable at such time as the Company has
authorized shares of Common Stock available to issue in order to pay this fee).
Additionally, Superstar has been granted a contingent option such that if such
loan is repaid (and not converted), Superstar shall have a one year option to
purchase up to 2.5 million shares of the Company's authorized and unissued
Common Stock at an exercise price of $.40 per share.
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
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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.
See below for the amended conversion terms of this loan.
On March 25, 1998, Superstar loaned the Company an additional $400,000,
payable on the same terms as the MMP Line of Credit. In connection with this new
loan, Superstar was granted an option to purchase shares of the Company's common
stock on the same terms as the option granted to MMP as described above. See
below for the amended conversion terms of this loan.
In August 1998, the Company entered into agreements with Superstar and
Groupe AB pursuant to which Superstar agreed to make available $5.0 million and
Groupe AB agreed to provide cash and services aggregating $6.64 million
($400,000 in cash which was payable to the Company in August 1998 and $6.24
million in services over a two year period). Such funding is initially in the
form of debt, 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. See Proposal 1. If stockholder approval of the increase
in the authorized common stock is not obtained, then the debt incurred to that
date, together with interest and penalties, will be immediately due and payable.
Once these obligations are converted into Common Stock, Superstar and Groupe AB
will control approximately 80% of the Company's outstanding common stock and
will control the Company.
In December 1998, when the Company did not meet its obligation to hold
a stockholders' meeting by November 30, 1998, Superstar and Groupe AB demanded
that the Company: (i) reduce the conversion price on all of its outstanding
convertible debt to $0.10 per share; and (ii) that the Company pay a penalty of
2% of the outstanding principal amount of the loans (payable in shares at $0.10
per share) for each month during which the Company does not hold its special
stockholders meeting to seek approval of the amendment to the Company's articles
of incorporation. On December 18, 1998, the Board agreed to these changes.
Superstar and Groupe AB also agreed, as part of the amendment to the terms of
their loans, that all of the convertible debt which they hold will now
automatically convert into Common Stock upon the approval by the Company's
shareholders of the increase in the Company's authorized Common Stock.
During the first half of 1998, Unimedia sold 1,540,000 shares of Common
Stock to Gralec Establishment ("Gralec") for an aggregate purchase price of
$500,000 (plus delivery of 50,000 shares of a second entity.) The Company agreed
to register the shares of Common Stock transferred to Gralec, pursuant to a
registration rights agreement, on or before November 30, 1998, which has not
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occurred. As part of the agreement, Unimedia agreed that Gralec may put the
shares back to Unimedia for the purchase price if these shares were not
registered by that date.
Since this registration has not taken place, the Company is negotiating
with Gralec to extend the period during which the registration may be completed.
In that regard, the Company has agreed that in return for an extension of the
registration period until March 31, 1999, the Company will grant Gralec an
option to purchase 5.0 million shares of its authorized but unissued common
stock at an exercise price of $0.12 per share, which option will be exercisable
until 30 days after the shares of Common Stock originally issued to Gralec are
registered for resale. No definitive agreement has been entered into with Gralec
on this issue to this date.
The Company's balance sheet at September 30, 1998 includes a due from
shareholder of $313,691. This amount represents an amount due from Latitude, one
of the Company's founding shareholders. See "Certain Relationships and Related
Transactions." This amount was initially presented to the Company as a deposit
paid by Latidude to PTT Telecom on behalf of CM (UK) and Latitude received
credit for the amount of such deposit in connection with its original 1995
subscription to purchase shares of CM (UK)'s stock (which shares were exchanged
for shares of the Company's Common Stock in December 1995). The Company has now
determined that no deposit was ever paid by Latitude to PTT Telecom and that
therefore the shares of Common Stock owned by Latitude were not fully paid as
presented. Latitude has advised the Company that they do not acknowledge that
this money is presently due to the Company. The Company believes that these
funds are due and owing and intends to enforce its rights to receive such
proceeds.
The Company has been advised by KPN Telecom, formerly known as PTT
Telecom ("KPN"), that Onyx Television owes them approximately $1,060,000. The
Company believes that the amount due is significantly lower, due to failures in
the performance of services by KPN over the period of the agreement. At the
present time, the Company has accrued the entire amount allegedly owed to KPN
until this dispute is resolved. Additionally, the Company expects that KPN will
call upon the guaranty from Universal (see discussion above) and draw down upon
the $550,000 being held to secure the guaranty. If this occurs, the Company
would owe the amount paid by Universal back to Universal.
The Company believes that the proceeds from the Superstar and Group AB
agreements will fund, along with anticipated revenues from operations, the
Company's operations for the next 12 months (assuming that the proposed increase
in the Company's authorized Common Stock set forth in Proposal 1 is adopted).
However, if revenues do not meet expectations, additional funding will be
required. The Company will also require additional funding to meet its
non-operating indebtedness, and may issue shares of its Common Stock to repay
some of this indebtedness. There can be no assurance that such funding will be
available.
In regard to its future capital raising efforts to fund the Company's
businesses, the Company is likely going to have to fund these future capital
requirements through additional sales of its equity securities. The Company may
also seek funding for particular projects through investments directly into
those projects. The Company is also seeking additional strategic alliances with
respect to its other current and proposed businesses and to reduce operating
costs in all of its businesses whenever possible. No definitive agreements have
been entered into to date.
The Company maintains its financial statements in dollars and holds the
majority of its funds in United States Dollars, Pound Sterling, German Deutsche
Marks and French Francs. Amounts paid to the Company are payable in various
currencies, which are subject to independent fluctuating exchange rates with the
U.S. dollar, the pound, the Deutsche Mark and the Franc. In the event of a
devaluation in a particular currency between the time its income arises and the
time such income
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is received and converted by the Company into U.S. dollars, the Company would
suffer an exchange loss which could materially and adversely affect the
Company's financial condition, results of operations and/or cash flows. The
Company does not hedge against foreign currency exchange rate risks. Because of
the number of currencies involved, the constantly changing currency exposures
and the fact that all foreign currencies do not fluctuate in the same manner
against the United States Dollar, the Company cannot predict with any certainty
the future effect, if any, from period to period, of exchange rate fluctuations
on its financial condition or results of operations. However, such fluctuations
have been materially adverse in the past and may be materially adverse in the
future.
Although the Company is a Nevada corporation, its operations are
conducted outside of the United States through subsidiaries formed under the
laws of jurisdictions other than the United States. In addition, many of the
directors and officers of the Company are not residents of the United States.
As such, the Company, its shareholders and/or investors in the Common Stock,
are subject to the risks inherent in such an operational structure including,
without limitation, the following: (i) the Company's ability to receive
dividends or other distributions from its subsidiaries being subject to, among
other things, (a) restrictions on dividends under applicable local laws and
foreign currency exchange regulations of the jurisdictions in which its
subsidiaries operate and (b) board of directors or creditor approval; (ii) it
may be difficult, if not impossible, for investors to (a) enforce, outside the
United States, judgments against the Company obtained in the United States in
any civil actions, including actions predicated upon the civil liability
provisions of the United States federal securities laws and (b) effect service
of process within the United States upon directors and officers of the Company
who are non-residents of the United States or enforce against them judgments
obtained in the United States courts, including judgments predicated upon the
civil liability provisions of the United States federal securities laws; (iii)
changes in the political or economic climate in the countries in which the
Company does business; (iv) new or changed currency controls in foreign
jurisdictions that have or may in the future be implemented which may limit or
ban completely the Company's receipt of revenues from its foreign subsidiaries;
and (v) currency exchange risks (the Company does not currently hedge against
foreign currency exchange rate risks, and does not expect to do so in the
future). The Company is also exposed to the risk of changes in foreign and
domestic laws and policies that govern operations of overseas-based companies.
YEAR 2000 COMPLIANCE
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
two-digit year is commonly referred to as the Year 2000 compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
date-based information.
The Company believes that the software currently being used in its
operations is either year 2000 compliant or can be upgraded to bring it into
conformity with year 2000 requirements without a material cost to the Company.
38
<PAGE>
PROPOSALS
PROPOSAL 1. APPROVAL OF PROPOSED AMENDMENT TO ARTICLES OF
INCORPORATION TO INCREASE NUMBER OF AUTHORIZED SHARES
AND AGREEMENTS WITH GROUPE AB AND SUPERSTAR
On December 18, 1998, the Board adopted a proposed amendment to Article
IV of the Company's Articles of Incorporation, as amended, pursuant to which the
number of authorized shares of Common Stock would be increased from 50,000,000
shares to 330,000,000 shares, and the Board of Directors directed that the
proposed amendment be submitted to a vote of the stockholders at the Meeting for
their approval and adoption. If the proposed amendment is approved and adopted
by the Company's stockholders, the newly authorized shares of Common Stock will
have voting and other rights identical to the currently authorized shares of
Common Stock. The proposed amendment to the Articles of Incorporation, as
amended, is attached hereto as Exhibit A.
Of the 50,000,000 currently authorized shares of Common Stock,
40,094,139 shares were issued and outstanding as of the Record Date.
Additionally, as of the Record Date, an aggregate of 9,533,328 additional shares
had been reserved for issuance upon the exercise of currently outstanding
warrants, at exercise prices ranging from $2.50 per share to $4.00 per share.
See Note 13 to Notes to the Consolidated Financial Statements.
Further, the Company also has the following derivative securities
outstanding that will become convertible and exercisable if the Company's
shareholders authorize additional shares of common stock as provided herein:
<TABLE>
<CAPTION>
CONVERTIBLE DEBT(1)
SHARES ISSUABLE ON
PAYEE AMOUNT CONVERSION PRICE ($) CONVERSATION
- ----- ---------- -------------------- -----------------
<S> <C> <C> <C>
Superstar Ventures, Ltd................ $1,250,000 0.10 12,500,000
Superstar Ventures, Ltd. 400,000 0.10 4,000,000
MMP, S.A............................... 2,000,000 0.10 20,000,000
Superstar Ventures, Ltd................ 5,000,000 0.10 50,000,000
MMP, S.A.(2)........................... 6,640,000 0.10 66,400,000
Shares Issuable to Superstar and
MMP, S.A. on conversion of interest
and penalties(3)....................... 8,935,440
-----------------
161,835,440
</TABLE>
____________
(FOOTNOTES ON NEXT PAGE)
39
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
WARRANTS AND OPTIONS EXERCISE PRICE SHARES SUBJECT TO
- --------------------- --------------- WARRANTS AND OPTIONS
---------------------
Board and Management
Stock Options (4)...................... 0.35 3,700,000
Option Granted to Diamond
Productions(5)......................... 0.10 16,000,000
Warrants Issuable to
Unimedia Stockholders (6).............. 2.50 503,852
3.125 445,433
4.00 1,139,144
</TABLE>
(1) See "Management's Discussion and Analysis" and "Certain Relationships
and Related Transactions." All of this debt will be converted into
Common Stock upon the approval of an amendment to the Company's articles
of incorporation increasing the Company's authorized common stock.
(2) A portion of these shares ($6.24 million) will be issued for services to
be provided over a two-year period; the balance ($400,000) will be
issued at such time as the shareholders approve an amendment to the
Company's articles of incorporation increasing the Company's authorized
common stock. See "Business" and "Management's Discussion and Analysis."
(3) Assumes conversion of debt into Common Stock by January 31, 1999.
(4) See "Executive Officers and Directors - Board Compensation."
(5) See "Executive Compensation-Stock Options" and Proposal 4.
(6) See Footnote 1 to "Security Ownership of Certain Beneficial Owners and
Management."
Additionally, the Instar Loan may be convertible from time to time in
the future at such prices as the Company sells additional shares of its Common
Stock to third parties. See "Management's Discussion and Analysis-Financial
Condition, Liquidity and Capital Resources."
Further, the Company has granted Stephen Kornfeld the right to convert
$40,000 due to him from the Company for consulting services provided in 1997
(plus the interest thereon), into shares of Common Stock at $0.10 per share,
contingent on the Company's stockholders approving the proposed increase in the
authorized Common Stock.
The convertible debt due to Superstar and Group AB was issued in
connection with the financing transactions to fund the Company's operations. The
Company believes that the terms of such convertible agreements were more
favorable to the Company than could be obtained from an unaffiliated third
party. Nevertheless, since these arrangement are with affiliates, there remains
an issue as to whether the terms of convertibility of such debt due to Superstar
and Groupe AB is fair and reasonable to the Company. In that regard, the
convertible debt becomes automatically due and payable (with a 20% penalty) if
the stockholders do not approve an amendment of the Company's Articles of
Incorporation increasing the authorized Common Stock to allow conversion of this
debt. As a result, by agreeing to approve the proposed increase in the Company's
authorized Common Stock, the shareholders will also be ratifying the terms of
the Company's arrangements with Superstar and Groupe AB as described in this
Proxy Statement.
Presently authorized shares of Common Stock are not sufficient to meet
all present requirements, and the Board of Directors believes that it is in the
Company's best interests that the Company have the flexibility to issue a
substantial number of shares of Common Stock as needs may arise without further
stockholder action unless required by applicable law, regulation, listing
requirements or the Articles of Incorporation. Except as set forth herein, the
Company has no agreements, understandings or plans for the issuance or use of
the additional shares of Common Stock proposed to be authorized. However, the
Board of Directors believes that the current number of authorized and unreserved
shares of Common Stock will be insufficient to meet the Company's future needs.
The availability of additional shares will enhance the Company's flexibility in
connection with possible future actions, such as corporate mergers, acquisitions
of businesses, property or securities, stock dividends, stock splits, financings
and other corporate purposes. The
40
<PAGE>
Board of Directors will decide whether, when and on what terms the issuance of
shares of Common Stock may be appropriate in connection with any of the
foregoing purposes, without the expense and delay of a special meeting of
stockholders.
If this proposal is approved, the Board of Directors does not intend to
seek further stockholder approval prior to the issuance of any additional shares
of Common Stock in future transactions unless required by the Articles of
Incorporation or the listing requirements of any exchange on which the Company's
shares may trade in the future. Further, the Board of Directors of the Company
does not intend to issue any shares of Common Stock to be authorized under this
proposal except upon terms the Board of Directors deems to be in the best
interests of the Company and its stockholders.
The issuance of additional shares of Common Stock may, among other
things, have a dilutive effect on earnings per share, and on stockholders'
equity and voting rights. The issuance of additional shares, or the perception
that additional shares may be issued, may also adversely effect the market price
of Common Stock. Holders of Common Stock have no preemptive rights.
The availability for issuance of additional shares of Common Stock also
could have the effect of rendering more difficult or discouraging an attempt to
obtain control of the Company. For example, the issuance of shares of Common
Stock (within the limits imposed by applicable law and the rules of any exchange
upon which the Common Stock may be listed) in a public or private sale, merger
or similar transaction would increase the number of outstanding shares, thereby
possibly diluting the interest of a party attempting to obtain control of the
Company. The issuance of additional shares of Common Stock could also be used to
render more difficult a merger or similar transaction even if it appears to be
desirable to a majority of stockholders. Other than as described herein, the
Company is not aware of any efforts to obtain control of the Company.
In Proposal 2, the Board of Directors is seeking approval of a
one-for-ten reverse stock split of the Company's outstanding shares of Common
Stock. The reverse stock split will only be effected if this proposed amendment
increasing the Company's authorized Common Stock is approved. If this amendment
and the reverse stock split are both approved, the Company's outstanding shares
of Common Stock will be reduced to 4,009,413 shares. Additionally, in such event
the Company's authorized Common Stock pursuant to this amendment will remain at
50,000,000 shares, even though as a percentage the outstanding shares to the
authorized shares would have been lower if Proposal 2 were not adopted.
The proposed amendment to the Articles of Incorporation, as amended, is
subject to approval and adoption by the affirmative vote of the holders of a
majority of the Company's issued and outstanding Common Stock in attendance at
the Meeting, either in person or by proxy.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THIS PROPOSAL.
PROPOSAL 2. REVERSE STOCK SPLIT
On December 18, 1998, the Board adopted resolutions approving and
authorizing the submission to stockholders for their approval of a proposal to
effect a one-for-ten reverse stock split (the "Reverse Split") of the presently
issued and outstanding shares of the Common Stock.
41
<PAGE>
The Reverse Split would be effected by providing that, upon the
effective date, each issued and outstanding share of the Common Stock will be
automatically converted into one-tenth of a new share of Common Stock, par value
$.001 per share. The rights and privileges of the holders of the Common Stock
will be substantially unaffected by the Reverse Split and each stockholder's
percentage ownership interest in the Company, proportional voting power and
other rights will remain unchanged, except to the extent stockholders receive
cash in lieu of fractional shares as described below.
The Company presently is authorized under the Articles of
Incorporation to issue 50,000,000 shares of the Common Stock (to be increased to
330 million if Proposal 1 is adopted and this proposal is defeated). As of the
Record Date, 40,094,139 shares of the Common Stock were issued and outstanding.
If both Proposal 1 and Proposal 2 are adopted, the Reverse Split will reduce the
number of issued and outstanding shares of the Common Stock to approximately
4,009,413, however the number of authorized shares will remain at 50,000,000.
The Reverse Split will not affect the Company's retained deficit, and
stockholders equity will remain substantially unchanged.
The Board believes that the Reverse Split should enhance the
acceptability and marketability of the Common Stock by the financial community
and investing public. Theoretically, the number of shares outstanding should
not, by itself, affect the marketability of the Common Stock, the type of
investor who acquires it, or the Company's reputation in the financial
community. In practice, this is not necessarily the case, as certain
institutional investors and other members of the investing public view
low-priced stock as less attractive. Certain investors may be attracted to
low-priced stock because of the greater trading volatility sometimes associated
with such securities; however, this type of volatility may also diminish the
attractiveness of the stock to long-term investors and reduce liquidity.
An increase in market price per share may also increase the likelihood
that certain brokerage houses will analyze and recommend the stock. Many
brokerage houses are reluctant to recommend lower-priced stock to their clients
or to hold it in their own portfolios; they also do not publish research and
analysis for such stocks. Further, a variety of brokerage house policies and
practices discourage individual brokers within those firms from dealing in
low-priced stock because of the time-consuming procedures that make the handling
of low-priced stock unattractive to brokerage houses from an economic
standpoint.
In addition, since the broker's commissions on low-priced stock
generally represent a higher percentage of the stock price than commissions on
higher priced stock, the current share price of the Common Stock can result in
individual stockholders paying transaction costs (commission, markups or
markdowns) which are a higher percentage of their total share value than would
be the case if the share price were substantially higher. This factor also may
limit the willingness of investors to purchase the Common Stock at its current
per share market price. An increase in market price per share may also result in
greater flexibility in market listing opportunities.
In sum, the Board believes that the reduction in the number of issued
and outstanding shares of Common Stock caused by the proposed Reverse Split will
enhance the Company's flexibility in its future financing and capitalization
needs. The proposed Reverse Split should have no adverse impact on the Company's
aggregate market value.
If adopted, the Reverse Split may result in some stockholders owning
"odd lots" of less than 100 shares of the Common Stock received as a result of
the Reverse Split. Brokerage commissions
42
<PAGE>
and other costs of transactions in odd-lots may be higher, particularly on a
per-share basis, than the cost of transactions in even multiples of 100 shares.
No ruling from the United States Internal Revenue Service or opinion of
counsel will be obtained regarding the Federal income tax consequences to the
stockholders of the Company as a result of the Reverse Split. ACCORDINGLY, EACH
STOCKHOLDER IS ENCOURAGED TO CONSULT HIS OR HER TAX ADVISOR REGARDING THE
SPECIFIC TAX CONSEQUENCES OF THE PROPOSED TRANSACTION TO SUCH STOCKHOLDER,
INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN INCOME AND
OTHER TAX LAWS.
The Company believes that the Reverse Split would be a tax-free
recapitalization under U.S. tax law to the Company and its stockholders. If the
Reverse Split qualifies as a recapitalization under Section 368 (a)(1)(E) of the
Internal Revenue Code of 1986, as amended, a stockholder of the Company who
exchanges his or her shares of the Common Stock solely for shares of the Common
Stock received from the Company as a result of the Reverse Split (the "New
Common Stock") would recognize no gain or loss for Federal income tax purposes
except for any cash received by a stockholder in lieu of a fractional share. A
stockholder's aggregate tax basis in his or her shares of the New Common Stock
received from the Company as a result of the Reverse Split should be the same as
his or her aggregate tax basis in the shares of the Common Stock exchanged
therefor. The holding period of shares of the New Common Stock received from the
Company as a result of the Reverse Split should include the period during which
shares of the Common Stock surrendered in exchange therefor were held, provided
all such shares were held as a capital asset on the date of the exchange.
A stockholder who receives cash in lieu of fractional shares will be
treated as if the Company has issued fractional shares to him and then
immediately redeemed such shares for cash. Such stockholder should generally
recognize gain or loss, as the case may be, measured by the difference between
the amount of cash received and the basis of such stockholder's Common Stock
allocable to the fractional shares, had they actually been issued. Such gain or
loss will generally be a capital gain or loss if such stockholder's Common Stock
was held as a capital asset, and any such capital gain or loss will generally be
a long-term capital gain or loss to the extent such stockholder's holding period
for this Common Stock exceeds twelve months.
The par value of the Common Stock will remain at $.001 per share
following the Reverse Split, and the number of shares of the Common Stock
outstanding will be reduced. As a consequence, the aggregate par value of the
outstanding Common Stock will be reduced, while the aggregate capital in excess
of par value attributable to the outstanding Common Stock for statutory and
accounting purposes will be correspondingly increased.
If the Reverse Split is effected, the per share information and the
average number of shares outstanding as presented in previously issued
consolidated financial statements and other publicly available information of
the Company would be restated following the Effective Date to reflect the
Reverse Split.
If the Reverse Split is adopted, the effective date thereof is expected
to be the close of business on the date which is two days after the date of the
Meeting (the "Effective Date"). Thereupon, without any further action on the
part of the Company or its stockholders, each share of the issued and
outstanding Common Stock will be converted into one-tenth of a share of the New
Common
43
<PAGE>
Stock. The Board of Directors of the Company may abandon the proposed Reverse
Split without further action by the Company's stockholders, at any time prior to
the Effective Date, notwithstanding the approval of such by the Company's
stockholders.
No fractional shares of the New Common Stock will be issued to any
stockholder as a result of the Reverse Split. Instead, a stockholder who would
otherwise be entitled to receive a fractional share will receive, in lieu
thereof, cash in an amount equal to the product of the number of shares of
Common Stock which have not been reclassified into a whole share of the New
Common Stock multiplied by the average closing price of the Common Stock on the
five most recent business days preceding the Effective Date that the Common
Stock was traded. The Company believes that the cost of purchasing such
fractional shares will not be material.
As soon as practicable after the Effective Date, the Company will send a
letter of transmittal to each stockholder of record on the Effective Date for
use in transmitting certificates representing shares of the Common Stock to the
Company's transfer agent (the "Exchange Agent"). The letter of transmittal will
contain instructions for the surrender of certificates representing shares of
the Common Stock to the Exchange Agent in exchange for certificates representing
the number of whole shares of the New Common Stock. No new certificates will be
issued to a stockholder until such stockholder has surrendered all old
certificates together with a properly completed and executed letter of
transmittal to the Exchange Agent.
Upon proper completion and execution of the letter of transmittal and
return thereof to the Exchange Agent, together with all certificates
representing shares of the Common Stock, stockholders will receive a new
certificate or certificates representing the number of whole shares of the New
Common Stock into which their shares of the Common Stock have been reclassified
as a result of the Reverse Split. Until surrendered, outstanding certificates
representing shares of the Common Stock held by stockholders will be deemed for
all purposes to represent the number of whole shares of the New Common stock to
which such stockholders are entitled as a result of the Reverse Split.
Stockholders should not send their certificates representing shares of the
Common Stock to the Exchange Agent until they have received the letter of
transmittal. Shares not presented for surrender as soon as is practicable after
the letter of transmittal is sent shall be exchanged at the first time they are
presented for transfer.
Provided certificates representing shares of the New Common Stock are
issued in the same name as the certificates representing shares of the Common
Stock surrendered for exchange, no service charges or transfer taxes will be
payable by stockholders in connection with the exchange of certificates, all
expenses of which shall be borne by the Company.
No stockholder's interest will be completely eliminated by virtue of the
Reverse Split, except to those stockholders, if any, owning fewer than ten
shares of the Common Stock. No officer, director, associate or affiliate of the
Company will derive any material benefit from the Reverse Split other than the
benefits which would be enjoyed by any other person holding the same number of
shares.
There are no appraisal rights in connection with the Proposal No. 2
provided to dissenting stockholders under the Articles of Incorporation of the
Company or the laws of the State of Nevada.
44
<PAGE>
Approval of the Reverse Split requires the affirmative vote of a
majority of the outstanding shares of Common Stock entitled to vote at the
Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THIS PROPOSAL.
PROPOSAL 3. RATIFICATION OF WARRANT GRANTED TO AN ENTITY
CONTROLLED BY THE COMPANY'S CHIEF EXECUTIVE OFFICER AND
CHIEF OPERATING OFFICER
At the Meeting, shareholders will be asked to ratify the grant of a
two-year warrant to purchase 16.0 million shares of the Company's common
stock at an exercise price of $.10 per share (the fair market value of the
shares on the date of grant), which warrant has been granted to an entity
controlled by the Company's Chief Executive Officer and Chief Operating Officer
(1.6 million shares at $1.00 per share if the Reverse Split proposed in Proposal
2 is approved). The warrant vested immediately upon its grant, but is not
exercisable unless and until the Company's stockholders approve an amendment to
the Company's articles of incorporation increasing the authorized Common Stock.
See Proposal 1.
The Company believes that the warrant which was granted to management
provides the Company's management with both a bonus for their performance in
turning the Company around and with a significant stake to incentivize them for
their activities during future periods. The Company believes that the terms of
this warrant are fair and reasonable to the Company's stockholders.
While shareholder ratification or approval of these transactions is not
required under applicable law, since these arrangements were unanimously
recommended to the Board by the Compensation Committee and were unanimously
approved by the Board of Directors (with Gilles Assouline and Michel Assouline
abstaining), and all of the members of the Compensation Committee and all of the
members of the Board voting for the proposal were disinterested to the
transaction, the Board has concluded that it is appropriate at this time to have
the Company's stockholders ratify this transaction.
45
<PAGE>
The affirmative vote of the holders of a majority of the shares of the
Company's Common Stock present at the Meeting in person or by proxy and entitled
to vote is required to approve Proposal 3. If this proposal is not ratified by
the Company's stockholders, the Board will consider what actions to take under
the circumstances.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THIS PROPOSAL.
PROPOSAL 4. ELECTION OF DIRECTORS
At the Meeting, seven directors will be elected to serve on the
Company's Board of Directors. The director nominees will be elected to serve
until the next Annual Meeting of Stockholders (or until their successors are
elected and qualified).
It is intended that proxies will be voted for the following nominees:
Gilles Assouline, Michel Assouline, David Ho, Patrick Ho, Jean Francois Klein,
[Nominee recommended for election by Groupe AB] and Stanley Hollander. Brief
biographies of each of the nominees for director are set forth under "Executive
Officers and Directors" above.
The affirmative vote of stockholders holding a majority of the Company's
issued and outstanding Common Stock in attendance at the Meeting, either in
person or by proxy, is required to approve this proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THOSE PERSONS NOMINATED FOR
ELECTION TO THE BOARD OF DIRECTORS.
OTHER MATTERS
The Board of Directors is not aware of any other business that may come
before the Meeting. However, if additional matters properly come before the
meeting, proxies will be voted at the discretion of the proxy-holders.
STOCKHOLDER PROPOSALS
Stockholder proposals intended to be presented at the next Annual
Meeting of Stockholders of the Company must be received by the Company not later
than March 31, 2000 for inclusion in the proxy statement and proxy relating to
the 2000 Annual Meeting of Stockholders.
ADDITIONAL INFORMATION
The Company will furnish without charge to any stockholder submitting a
written request, the Company's Form 10-KSB Annual Report for 1997 filed with the
Securities and Exchange Commission, including the financial statements and
schedules thereto. Such written request should be directed to the Company,
attention: Secretary, at the address set forth above.
BY ORDER OF THE BOARD OF
DIRECTORS
Gilles Assouline, President,
Chief Executive Officer and
Chairman of the Board
January __, 1999
46
<PAGE>
CAPITAL MEDIA GROUP LIMITED
INDEX TO FINANCIAL STATEMENTS
PAGE
YEAR END 1997 AND 1996
Independent Auditors' Report of Deloitte & Touche to the Board of
Directors and Shareholders of Capital Media Group Limited..............F-2
Independent Auditors' Report of Price Waterhouse Coopers to the Board of
Directors and Stockholders of Tinerama Investment AG...................F-3
Consolidated Balance Sheet at December 31, 1997 and 1996....................F-4
Consolidated Statement of Operations For Years Ended
December 31, 1997 and 1996............................................F-5
Consolidated Statement of Stockholders' Equity For Years ended
December 31, 1997 and 1996............................................F-6
Consolidated Statement of Cash Flows For the Years Ended December 31, 1997
and 1996..............................................................F-7
Notes to Consolidated Financial Statements..................................F-8
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Unaudited consolidated balance sheet at September 30, 1998
and December 31, 1997................................................F-17
Unaudited consolidated statement of operations for the nine months ended
September 30, 1998 and 1997..........................................F-18
Unaudited consolidated statement of stockholders' equity for
the nine months ended September 30, 1998.............................F-19
Unaudited consolidated statement of cash flows for the nine months ended
September 30, 1998 and 1997..........................................F-20
Notes to the unaudited consolidated financial statements...................F-21
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND
SHAREHOLDERS OF CAPITAL MEDIA GROUP LIMITED
We have audited the accompanying consolidated balance sheet of Capital
Media Group Limited and its subsidiaries ("the companies") as of December 31,
1997 and 1996 and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended December 31, 1997 and
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. We did not audit the financial
statements of Tinerama Investments AG (a consolidated subsidiary), which
statements reflect total assets constituting 17% of consolidated total assets at
December 31, 1997 (1996 - 37%) and 1% of consolidated operating loss for the
year then ended (year ended December 31, 1996-1%). These statements were audited
by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for Tinerama Investment AG, is
based solely on the report of such other auditors.
We conducted our audit in accordance with generally accepted auditing
standards in the United Kingdom, which are similar to those in the United
States. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of the companies at December
31, 1997 and 1996 and the results of their operations and their cash flows for
the years ended December 31, 1997 and 1996 in conformity with generally accepted
accounting principles in the United States of America.
The accompanying financial statements have been prepared assuming that
the company will continue as a going concern. As discussed in note 2 to the
financial statements, the company's lack of cash being generated by trading and
the uncertainty over its ability to raise further funds raise substantial doubt
about its ability to continue as a going concern. Management's plans concerning
these matters are also described in note 15. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
As discussed in note 11 to the financial statements, the outcome of
certain litigation against the company is unknown at this time.
DELOITTE & TOUCHE
Chartered Accountants
London, England
14 October 1998
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
TINERAMA INVESTMENT AG
We have audited the financial statements of Tinerama Investment AG
Group of Companies as of December 31, 1997. The financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with Generally Accepted Auditing
Standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
management, as well as evaluating the overall financial statements presentation.
We believe that our audit provides a reasonable basis for our opinion.
As set out in note 15, the company has a claim for an additional 10% of
the share capital of the Romanian subsidiaries at zero consideration. Prior to
the final resolution of this matter, this potential additional ownership has not
been reflected in the financial statements of the company.
In our opinion, subject to the matter mentioned in the preceding
paragraph, the financial statements referred to above present fairly, in all
material respects, the financial position of Tinerama Investment AG Group of
Companies as at December 31, 1997 and December 31, 1996 and the results of its
operations and its statement of changes in financial position for the year ended
31 December, 1997 in conformity with United States Generally Accepted Accounting
Principles.
COOPERS & LYBRAND
Bucharest September 18, 1998
F-3
<PAGE>
CAPITAL MEDIA GROUP LIMITED
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
NOTE DECEMBER 31, DECEMBER 31,
1997 1996
$ $
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents 359,695 320,070
Accounts receivable within one year, net of allowances for
doubtful accounts of $11,788 (December 31, 1996 - 3 1,207,398 754,103
10,399)
Inventories 25,660 38,455
Amounts due from shareholder 4 313,691 313,691
Prepaid expenses and deposits 510,828 1,168,145
---------- ------------
TOTAL CURRENT ASSETS 2,417,272 2,594,464
Investments 2,014,917 217,213
Intangible assets, net of accumulated amortization of
$2,203,973 (December 31, 1996 - $262,536) 5 3,452,976 803,821
Property, plant and equipment, net 6 1,020,818 1,475,284
---------- ------------
TOTAL ASSETS 8,905,983 5,090,782
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable 4,377,812 1,378,801
Accrued expenses 2,710,780 2,310,261
Loans repayable within one year 7 4,229,008 2,016,568
Amounts due to minority shareholders 614,173 411,600
---------- ------------
TOTAL LIABILITIES 11,931,773 6,117,230
COMMITMENTS AND CONTINGENCIES 8 - -
MINORITY INTEREST IN SUBSIDIARIES 901,980 615,795
---------- ------------
12,833,753 6,733,025
STOCKHOLDERS' EQUITY
Preferred stock - 5,000,000 shares authorized:
$0.001 par value: no shares issued and outstanding - -
Common stock - 50,000,000 shares authorized:
$0.001 par value 35,094,139 (December 31, 1996 -
12,663,328) issued and outstanding 40,090 12,663
Additional paid in capital 31,155,909 17,117,651
Subscriptions receivable (5,000) (5,000)
Cumulative translation adjustment 2,846,067 326,214
Accumulated deficit (37,964,836) (19,093,771)
---------- ------------
TOTAL STOCKHOLDERS' EQUITY (3,927,770) (1,642,243)
---------- ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY 8,905,983 5,090,782
========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CAPITAL MEDIA GROUP LIMITED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C> <C> <C>
NOTE
$ $ $ $
Operating revenues 2,429,275 2,075,407
Operating costs:
Staff costs 3,754,124 3,705,972
Depreciation and amortization 747,876 521,069
Operating expenses - exceptional 9 4,202,737 497,670
Operating expenses - other 12,160,527 (20,865,264) 13,628,277 (18,352,988)
-------------- ------------ ----------- -------------
Operating loss (18,435,989) (16,277,581)
Other (expenses)/income (44,684) 42,531
Equity in net loss of unconsolidated
company (251,550) (211,414)
Interest (paid)/income, net (244,694) 132,950
------------ -------------
Loss before income tax provision (18,976,917) (16,313,514)
Income tax credit/(provision) 10 1,390 (6,623)
------------ -------------
Loss after taxation (18,975,527) (16,320,137)
Minority interest 104,462 58,033
------------ -------------
Net loss (18,871,065) (16,262,104)
============ =============
Net loss per share ($0.67) ($1.32)
============ =============
Weighted average shares outstanding 27,966,383 12,359,029
============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
CAPITAL MEDIA GROUP LIMITED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
YEAR ENDED ADDITIONAL CUMULATIVE
DECEMBER 31, PAID-IN SUBSCRIPTION TRANSLATION ACCUMULATED
1997 COMMON STOCK CAPITAL RECEIVABLE ADJUSTMENT DEFICIT Total
Shares $ $ $ $ $ $
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
(January 1, 1997) 12,663,328 12,663 17,117,651 (5,000) 326,214 (19,093,771) (1,642,243)
Issuance of
common stock 27,430,811 27,427 14,038,258 - - - 14,065,685
Translation - - - - 2,519,853 - 2,519,853
adjustment
Net loss - - - - - (18,871,065) (18,871,065)
---------- ------ ----------- ----- ----------- ----------- ----------
Balance at
December 31, 1997 40,094,139 40,090 31,155,909 (5,000) 2,846,067 (37,964,836) (3,927,770)
========== ====== =========== ===== =========== =========== ==========
YEAR ENDED ADDITIONAL CUMULATIVE
DECEMBER 31, PAID-IN SUBSCRIPTION TRANSLATION ACCUMULATED
1996 COMMON STOCK CAPITAL RECEIVABLE ADJUSTMENT DEFICIT TOTAL
Shares $ $ $ $ $ $
Balance at 9,326,664 9,327 10,309,314 (5,000) (59,963) (2,831,667) 7,422,011
(January 1, 1996)
Issuance of 3,336,664 3,336 6,808,337 - - - 6,811,673
common stock
Translation - - - - 386,177 - 386,177
adjustment
Net loss - - - - - (16,262,104) (16,262,104)
---------- ------ ----------- ----- ----------- ----------- ----------
Balance at
December 31, 1996 12,663,328 12,663 17,117,651 (5,000) 326,214 (19,093,771) (1,642,243)
========== ====== =========== ===== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
CAPITAL MEDIA GROUP LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
ECEMBER 31, DECEMBER 31,
1997 1996
$ $
<S> C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (18,871,065) (16,262,104)
Adjustment to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 2,438,829 521,069
Equity in net losses of investment in joint venture 251,550 211,414
Minority interest (104,462) (58,033)
Changes in assets and liabilities:
Decrease in inventories 12,795 41,959
Increase in accounts receivable (453,295) (232,991)
Increase in amount due from shareholder - (313,691)
Decrease/(increase) in prepaid expenses and deposits 657,317 (882,883)
Increase in accrued expenses and accounts payable 3,399,530 2,252,550
Increase/(decrease) in amounts due to minority
shareholders 202,573 (288,786)
------------ ------------
NET CASH USED IN OPERATIONS (12,466,228) (15,011,496)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, plant and equipment (355,778) (501,396)
Acquisition of intangible assets (4,277,740) (180,444)
Proceeds on the sale of investments (1,658,607) (393,822)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (6,292,125) (1,075,662)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of shares 14,924,892 7,181,673
Commission paid on issuance of shares (859,207) (370,000)
Loans 2,212,440 2,000,000
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 16,278,125 8,811,673
------------ ------------
NET (DECREASE) IN CASH (2,480,228) (7,275,485)
Effect of exchange rate movements on cash 2,519,853 58,418
Cash and cash equivalents at start of year 320,070 7,537,137
------------ ------------
Cash and cash equivalents at end of year 359,695 320,070
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITY:
Cash payments for interest 111,285 33,334
Cash paid for taxes 1,881 -
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements are prepared in conformity with
generally accepted accounting principles in the United States of
America.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Capital
Media Group Limited ("the Company") and its wholly owned subsidiaries
Capital Media (UK) Limited ("CM(UK)"), and Onyx Television GmbH
("Onyx"), its 51% owned subsidiary Tinerama Investment AG
("Tinerama")"), together with the Company's 81.6% owned subsidiary
Unimedia SA ("Unimedia") and Unimedia's 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 Unimedia and TopCard has been consolidated in the
consolidated financial statements from September 1997 and November
1997, respectively, being the dates of their acquisition.
INVENTORIES
Inventories are stated at the lower of first-in, first-out cost and
market value.
INTANGIBLE ASSETS
Intangible assets represent purchased broadcast licenses, 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 asset 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
FOREIGN CURRENCY
Assets and liabilities of the Company's foreign subsidiaries in the
United Kingdom and Germany are translated at year end exchange rates.
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, recognized by a valuation allowance if it is
more likely than not that some portion of the benefit will not be
recognized.
LEASE
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
presentation 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
F-8
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
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
December 31, 1997 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 1996 year end balances
to conform to the 1997 year end presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reported period. Actual results could differ
from those estimates.
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,
"Disclosures 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 Postretirement 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
statements.
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 years ended December 31, 1997
and 1996, the Company incurred net losses of $18,871,065 and
$16,262,104, respectively. At December 31, 1997, the Company had net
current liabilities of $9,514,501 and its total liabilities exceeded
its total assets by $3,025,790. These factors among others may indicate
that the Company will be unable to continue as a going concern for a
reasonable period of time.
The financial statements do not include any adjustments relating to the
recoverability and classification of the recorded asset 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 14, the Company's continuation as a going concern is
dependent upon its ability to obtain additional financing or
refinancing as may be required, and ultimately to attain successful
operations. Management reported in July 1998 that it had entered into
agreements to provide funding so that the Company can meet its
obligations and sustain operations from sources described in note 15.
F-9
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
3. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
$
$
<S> <C> <C>
Accounts receivable within one year comprise:
Trade receivables 593,589 139,059
Taxation receivables 449,167 116,801
Other debtors receivable 164,642 498,243
------------- ------------
Total 1,207,398 754,103
============= ============
</TABLE>
4. AMOUNT DUE FROM SHAREHOLDER
In December 1995, the Company issued shares to a shareholder in
exchange for that shareholder guaranteeing the establishment of a
contract with PTT Telecom. This resulted in the shareholder receiving
shares for no payment. The directors believe this amount to be
recoverable within one year.
5. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 199>
$
$
<S> <C> <C>
Purchased broadcast licenses 246,810 364,969
Computer Software 195,016 113,371
Goodwill 5,215,123 588,017
------------- -------------
5,656,949 1,066,357
Less accumulated amortization (2,203,973) (262,536)
------------- -------------
3,452,976 803,821
============= =============
</TABLE>
F-10
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
6. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
$ $
<S> <C> <C>
Property, plant and equipment consists of:
Buildings 191,550 191,550
Fixtures, fittings and equipment 2,089,649 1,817,170
------------ -----------
Total property, plant and equipment 2,281,199 2,008,720
Less accumulated depreciation (1,260,381) (533,436)
------------ -----------
1,020,818 1,475,284
============ ===========
</TABLE>
7. LOANS REPAYABLE WITHIN ONE YEAR
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
$ $
<S> <C> <C>
Loans repayable within one year comprise:
Instar Holdings Ltd 2,000,000 2,000,000
Unbeatable Investments Ltd 500,000 -
Fontal Ltd 200,000 -
Oradea 500,000 -
Roland Pardo 500,000 -
Falcon Management 335,000 -
Interest Accrued 194,008 16,568
---------- ---------
4,229,008 2,016,568
---------- ---------
</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, see Note 15.
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 on April 17, 1998. See
Note 11.
F-11
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
The Roland Pardo loan was made to Unimedia in 1996 and carries an interest
rate of 2% above 3 month Eurodollar Libor rate and was repayable on July
29, 1998. See Note 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.
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 December 31, 1997 stood at ECU
1,250,000 ($1,350,000 at December 31, 1997 exchange rates).
The Company was not in a position to support the guarantee. As a result
the guarantee has been provided by Universal Holdings Limited, See Note 11
to the Consolidated Financial Statements.
The Company is committed under the terms of the agreement to paying ECU
2,163,000 ($2,336,000 at December 31, 1997 exchange rates) over the
remaining period of the contract which expires 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 DM150,000 ($80,000
at December 31, 1997 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 ($1,635,000 at December 31, 1997 exchange rates) per
annum for the use of the equipment and facilities until January 2001.
Under the terms of the lease, 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)245,000
($403,000 at December 31, 1997 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 also entered into leases for office space in France,
expiring between 1999 and 2002 at an annualized cost of approximately
$130,000 (at December 31, 1997 exchange rates). The total rental expense
in 1997 and 1996 were $5,592,000 and $4,190,000, respectively.
The Company is committed to pay to its directors and officers under
employment agreements an aggregate of $650,000 during the year ended
December 31, 1998.
F-12
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
9. OPERATING EXPENSES - EXCEPTIONAL
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
$ $
<S> <C> <C>
Currency translation difference on foreign
currency net investment 2,511,784 497,670
Additional depreciation and amortization charges
relating to the Company's current evaluation of
the value of certain assets and goodwill 1,690,953 -
------------- -------------
4,202,737 497,670
============= ==============
</TABLE>
10. INCOME TAXES
The income tax provisions consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
$ $
<S> <C> <C>
Current tax credit/(expense) 1,390 (6,623)
============== ==============
</TABLE>
Net operating loss carry forwards which give rise to deferred tax assets
at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
$ $
<S> <C> <C>
Unutilized tax losses 4,180,000 4,757,000
Valuation Allowances (4,180,000) (4,757,000)
------------ -----------
Total deferred tax assets - -
============ ===========
</TABLE>
The valuation allowance relates to deferred tax assets established under
Statement of Financial Accounting Standard No. 109 and relates 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 statement.
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
F-13
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
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 Television Concepts 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 international trademarks for the Onyx name and
branding outside of Germany 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.
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)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)60,000 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 that certain of his other
actions were taken for his own direct or indirect benefit and not for the
benefit of Onyx Television. The suit seeks damages in an unspecified
amount. The Company intends to vigorously pursue this action against Mr.
Koppel.
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 has 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 December 31, 1997) 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 their effective future registration) outstanding at December
31, 1997:
F-14
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
DESCRIPTION NUMBER
Warrants for common stock exercisable at $4.00 5,200,000
Warrants for common stock exercisable at $3.125 2,033,328
Warrants for common stock exercisable at $2.50 2,300,000
The warrants were issued in connection with a Private Placement Offering
("the Offering") which took place in December 1995 and January 1996.
Warrants to purchase 4,200,000 and 1,000,000 shares of common stock at
exercise prices of $4.00 and $2.50 per share were issued to investors in
the Offering; warrants to purchase 1,000,000 and 433,328 shares of common
stock at exercise prices of $4.00 and $3.125 per share respectively were
issued to the placement agent and sub-distributors for the Offering; and
warrants to purchase 1,600,000 and 1,200,000 shares of common stock at
exercise prices of $3.125 and $2.50 respectively were issued to certain of
the founding shareholders; and
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 4,500,000
shares to purchase the Company's Common stock at an exercise price of
$0.35 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 certain
options to purchase an aggregate of 500,000 shares to purchase the
Company's Common stock at the same price. The options vest for executive
officers over 3 years and for 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 in its second year of
operation, the funds raised by the Company since commencement were
expended earlier than anticipated. To date the Company has historically
financed itself through sales of equity securities and debt financing.
On January 13, 1997, the Company issued a Private Placement Memorandum
offering its securities to accredited investors including to all existing
shareholders. In the offering, the Company sold an aggregate of 12,000,000
shares of common stock; $.001 par value per share, at a purchase price of
$0.50 per share. On March 3, 1997, the offering closed and the aggregate
net proceeds to the Company were approximately $5,850,000 after costs.
On June 30, 1997, the Company received subscriptions for $4 million in a
Private Placement offering of its securities to certain accredited
investors. In the offering, the Company agreed to issue an aggregate of
7,017,543 shares of common stock; $.001 par value per share, at a purchase
price of $0.57 per share. On June 30, 1997, $1,500,000 of the proceeds of
the subscription was received and the balance of $2,500,000 was received
on August 1, 1997.
On October 31, 1996, CM (UK) entered into an agreement to borrow up to
$2.0 million from Instar Holdings, Inc. ("Instar") to fund working capital
requirements ("the Instar loan"). The loan was originally due for
repayment on December 31, 1996 or such earlier date as the Company raises
additional funds to repay the loan. The loan is guaranteed by the Company
and Onyx, and is secured by a charge on substantially all of the Company's
assets. Interest is payable monthly on the loan and was until December 31,
1997 at the rate of 2% above Lloyds Banks' base rate. Interest as from
January 1, 1998 is at the rate of 13% per annum. The terms of the Instar
Loan were amended in August 1997, January 1998 and July 1998.
The terms of the Instar Loan were amended in July 1998 to provide that:
(i) the repayment date is now extended such to accede to a repayment
schedule plan commencing in September 1998 and terminating on receipt of a
final installment payment in late 1999; and
(ii) the loan ( or any part thereof) may be converted, at the option of
the holder, into fully paid shares of common stock at a conversion rate
that may be offered from time to time by the Company to any existing or
potential investor.
On October 31, 1996, CM (UK) entered into a deed of counter-indemnity
("Deed") with Universal, a BVI corporation. The Deed secures the
obligation of CM (UK) to repay Universal if Universal is called upon to
make payment on its transponder guarantee. (See note 8 to Notes to
Consolidated Financial Statements.)
F-15
<PAGE>
CM (UK)'s obligations under the Deed are guaranteed by the Company and
Onyx, and are secured by a charge on substantially all of the Company's
assets.
Instar and Universal have agreed that their liens on the Company's assets
shall rank parri-passu.
15. SUBSEQUENT EVENTS
On January 9, 1998, CM (UK) borrowed an aggregate of $1,250,000 from
Superstar Ventures Limited ("Superstar"). Such loan was evidenced by two
13% Convertible Secured Promissory Notes (the "Notes") in the original
amounts of $750,000 and $500,000, respectively. Of the aggregate proceeds,
$500,000 was used to repay a loan previously made to CM (UK) by Unbeatable
Investments Limited. The Notes bear interest at the rate of 13% per annum
and are convertible into the Company's Common Stock on the basis of one
share of Common Stock for each $0.50 of outstanding principal and accrued
interest. The Notes however, may not be converted until the Company has
held a shareholders meeting at which its Articles of Association are
amended to increase sufficiently the number of authorized shares of Common
Stock of the Company.
On February 12, 1998, the Company, Unimedia, and Pixel Multimedia Ltd.
("PMM") consummated the transactions contemplated by an agreement executed
on that date and effective as of January 1, 1998. PMM previously owed
Unimedia $2,700,000 for loans made to PMM and for other expenses. As part
of the transaction, Unimedia purchased the outstanding stock of Pixel
Ltd., an Israeli company ("Pixel") from PMM. As part of the transaction,
Pixel also purchased certain software previously developed for Unimedia by
PMM. The purchase price paid to acquire Pixel consisted of: (i)
forgiveness of $1.7 million of the debt owed by PMM to Unimedia and (ii)
the assumption by Pixel (guaranteed by Unimedia and the Company) of
certain PMM debt not exceeding $750,000 due to a financial institution.
Additionally, PMM may receive up to 600,000 shares of the Company's Common
Stock owned by Unimedia if certain performance objectives are achieved by
Pixel. These shares have been pledged by Unimedia to the financial
institution to secure Pixel's debt to the financial institution. Finally,
the remaining $1,000,000 owed by PMM to Unimedia will be forgiven in the
event that certain future performance objectives are achieved by Pixel.
On February 28, 1998, the Mirror Group PLC ("Mirror") sold its 50%
interest in the share capital of Blink to a director of Blink.
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. The MMP Line of Credit is convertible at $0.20 per
share.
On March 25, 1998, Superstar loaned the Company an additional $400,000
payable on the same terms as the MMP Line of Credit.
On June 16, 1998, the Company entered into two Memorandum of Understanding
Agreements ("MOU") with AB Groupe ("AB"), (which is the parent company of
MMP) and Superstar to continue to fund the Company's operations. These new
Agreements will provide up to $11.64 million, $5.4 million in the form of
cash investment to be infused over a one year period and $6.24 million
through providing operating services to the Company over a period of two
years. The new funding will initially be in the form of debt to be
automatically converted into shares of common stock at $0.10 cents per
share upon and after approval of an increase in the Company's authorized
capital at the next shareholders meeting, which the Company is obligated
to hold no later than November 30, 1998.
16. RELATED PARTY TRANSACTIONS
In July 1997, the Company paid Unimedia a fee of $240,000 in connection
with the $4.0 million private placement. See Note 14 above.
There were no related party transactions other than in the normal course
of business between the group companies.
F-16
<PAGE>
CAPITAL MEDIA GROUP LIMITED
UNAUDITED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
NOTE SEPTEMBER 30, DECEMBER 31,
1998 1997
$ $
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents 597,876 359,695
Accounts receivable, within one year, net of allowances
for doubtful accounts of $113,977
(December 31, 1997 - $11,788)
3 2,924,350 1,207,398
Inventories 25,890 25,660
Prepaid expenses and deposits 134,954 510,828
Amounts due from shareholder 4 313,691 313,691
-------------- -----------
TOTAL CURRENT ASSETS 3,996,761 2,417,272
Investments 254,430 2,014,917
Intangible assets, net of accumulated amortization of $2,596,380
(December 31, 1997 - $2,203,973)
5 2,742,900 3,452,976
Property, plant and equipment, net 6 1,184,559 1,020,818
-------------- -----------
TOTAL ASSETS 8,178,650 8,905,983
============== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable 3,693,579 4,377,812
Accrued expenses 4,868,307 2,710,780
Loans repayable within one year 7 11,813,298 4,229,008
Amounts due to minority shareholders 161,274 614,173
-------------- -----------
TOTAL LIABILITIES 20,536,458 11,931,773
COMMITMENTS AND CONTINGENCIES 8 - -
MINORITY INTEREST IN SUBSIDIARIES 1,105,466 901,980
-------------- -----------
21,641,924 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 -
40,094,139) issued and outstanding
40,090 40,090
Additional paid in capital 31,113,909 31,155,909
Subscriptions receivable (5,000) (5,000)
Cumulative translation adjustment 849,576 2,846,067
Accumulated deficit (45,461,849) (37,964,836)
------------- ------------
TOTAL STOCKHOLDERS' EQUITY (13,463,274) (3,927,770)
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
8,178,650 8,905,983
============= ============
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
F-17
<PAGE>
CAPITAL MEDIA GROUP LIMITED
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
NOTE NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
$ $
<S> <C> <C> <C>
Operating revenues 4,060,541 1,548,410
Operating costs:
Staff costs 2,791,174 2,558,753
Depreciation and amortization 963,680 407,587
Operating expenses - exceptional 9 (1,655,208) 2,500,356
Operating expenses - other 7,907,666 8,370,218
-------------- -----------
Operating costs (10,007,312) (13,836,914)
-------------- -----------
Operating loss (5,946,771) (12,288,504)
Other (expenses)/income (682,840) (3,568)
Equity in net loss of unconsolidated
company (136,360) (144,111)
Interest (paid) (1,070,415) (75,156)
-------------- -----------
Loss before income tax provision (7,836,386) (12,511,339)
Income tax (provision) 10 (3,754) (1,666)
-------------- -----------
Loss after taxation (7,840,140) (12,513,005)
Minority interest 343,127 (61,563)
-------------- -----------
Net loss (7,497,013) (12,574,568)
============== ===========
Net loss per share - basic ($0.19) ($0.44)
======= ======
Net loss per share-diluted ($0.19) ($0.44)
======= ======
Weighted average shares - basic 40,094,139 28,566,942
============== ===========
Weighted average shares - diluted 49,627,467 38,100,270
============== ===========
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
F-18
<PAGE>
CAPITAL MEDIA GROUP LIMITED
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE
COMMON PAID-IN SUBSCRIPTION TRANSLATION ACCUMULATE
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 - - (42,000) - - - (42,000)
Translation adjustment - - - - (1,996,491) - (1,996,491)
Net loss - - - - - (7,497,013) (7,497,013)
---------- ------ ---------- --------- ------------ ------------ -----------
Balance at September 30, 199 40,094,139 40,090 31,113,909 (5,000) 849,576 (45,461,849) (13,463,274)
========== ====== ========== ========= ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
F-19
<PAGE>
CAPITAL MEDIA GROUP LIMITED
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
9 MONTHS ENDED 9 MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
$ $
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (7,497,013) (12,574,568)
Adjustment to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 963,680 407,587
Equity in net losses of investment in joint venture 136,360 144,111
Minority interest (343,127) 495,100
Changes in assets and liabilities:
Decrease/(increase) in inventories (230) (336,091)
Increase in accounts receivable (1,604,298) (2,196,271)
Decrease in prepaid expenses 375,874 1,030,294
Increase in accrued expenses and
accounts payable 1,234,318 2,643,335
Decrease in amounts due to minority shareholders 93,714 148,365
------------- ---------------
NET CASH USED IN OPERATIONS (6,640,722) (10,238,139)
------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, plant and equipment (735,014) (205,064)
Acquisition of intangible assets (87,898) (1,911,963)
Investments 1,624,127 (2,957,011)
------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES 801,215 (5,074,038)
------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of shares - 13,893,942
Commission paid on issuance of shares (42,000) (240,000)
Loans received in the period 7,584,290 -
------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,542,290 13,653,942
------------- ---------------
NET INCREASE / (DECREASE) IN CASH (1,702,783) (1,658,235)
Effect of exchange rate movements on cash (1,464,602) 1,791,706
Cash at start of period 359,695 320,070
------------- ---------------
Cash at end of period 597,876 453,541
============= ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITY:
Cash payments for interest 239,676 33,975
Cash paid for taxes 492 266
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
F-20
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 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,
September 30, 1998 and September 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:
F-21
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
Buildings 25 to 50 years
Fixtures, fittings and equipment 5 to 20 years
FOREIGN CURRENCY
Assets and liabilities of the Company's foreign subsidiaries in the
United Kingdom and Germany are translated at year end exchange rates and
the results of those subsidiaries at the average exchange rate for the
year. The effects of these translation adjustments are reported in a
separate component of shareholders' equity. Exchange gains and losses
arising from transactions denominated in a currency other than the
functional currency of the entity involved are included in net income.
Assets and liabilities of the Company's foreign subsidiary in Romania
are translated at historical exchange rates in accordance with the
temporal method. This is due to the hyper-inflationary situation in
Romania.
INCOME TAXES
Full provision is made for all deferred tax liabilities. Deferred income
tax assets are recognized for deductible temporary differences and net
operating losses, reduced by a valuation allowance if it is more likely
than not that some portion of the benefit will not be recognized.
LEASES
Operating leases are charged to the statement of operations in equal
annual amounts over the term of the lease.
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 Statement 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
September 30, 1998 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.
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.
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.
F-22
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
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 audited financial statements contained in the Company's Annual
Report on Form 10-KSB for the years ended December 31, 1997 and 1996,
the Company incurred net losses of $18,471,065, and $16,262,104,
respectively. Additionally, the Company's net loss for the first nine
months of 1998 was $7,497,013, which included a non-cash accounting
exchange rate transaction gain of $1,655,208 arising from changes in
currency exchange rates since December 31, 1997. Further, at September
30, 1998, the Company had net current liabilities of $16,539,697 and its
total liabilities exceeded its total assets by $13,463,274. 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 meet its obligations and sustain operations from sources as
described in the Annual Report on Form 10-KSB for the year ended
December 31, 1997.
3. ACCOUNTS RECEIVABLE
Accounts receivable comprise:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
$ $
<S> <C> <C>
Trade receivables 1,645,041 593,589
Taxation 1,062,989 449,167
Other debtors receivable within one year 216,320 164,642
------------------ -------------------
2,924,350 1,207,398
================== ===================
</TABLE>
F-23
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 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.
The directors believe this amount to be recoverable within one year.
5. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
$ $
<S> <C> <C>
Purchased broadcast licenses 254,910 246,810
Computer software 230,730 195,016
Research and development costs 158,198 161,979
Goodwill 4,695,442 5,053,144
------------------ ------------
5,339,280 5,656,949
Less accumulated amortization (2,596,380) (2,203,973)
------------------ ------------
2,742,900 3,452,976
================== ============
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
$ $
<S> <C> <C>
Buildings 191,550 191,550
Fixtures, fittings and equipment 4,023,873 2,089,649
------------------ --------------
Total property, plant and equipment 4,215,423 2,281,199
Less accumulated depreciation (3,030,864) (1,260,381)
------------------ --------------
1,184,559 1,020,818
================== ==============
</TABLE>
F-24
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
7. LOANS REPAYABLE WITHIN ONE YEAR
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 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. 5,350,000 -
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 863,298 194,008
------------------ --------------
11,813,298 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
0.5% per month and was repaid on May 25, 1998.
F-25
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 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 of September 30, 1998 stood at ECU
500,000 ($589,000 at September 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 during 1998 to paying under the terms of the
agreement, which expired on September 25, 1998, ECU 2,475,000 ($2,915,000
at September 30, 1998 exchange rates) for use of the transponder
capacity.
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 ($90,000
at September 30, 1998 exchange rates) per annum.
In 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 ($1,759,000 at September 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 was terminated at the end of October
1998.
In 1996, the Company entered into an agreement to lease uplink capacity
until January 2001, at a cost of approximately (pound)245,000 ($416,000
at September 30, 1998 exchange rates) per annum. Under the terms of the
agreement the lease was terminated at the end of October 1998.
The Company has entered into leases for office space in France, expiring
between 1999 and 2002 at an annualized cost of $130,000 (at September 30,
1998 exchange rates).
Under the terms of a two year service agreement commencing October 1,
1998, broadcasting facilities for Onyx comprising the uplink, master
control, and satellite transponder broadcasting and cable transmission
costs are provided by Group AB at an annual cost of $3,120,000 (see note
14).
F-26
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
9. OPERATING EXPENSES - EXCEPTIONAL
<TABLE>
<CAPTION>
9 MONTHS ENDED 9 MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
$ $
<S> <C> <C>
Currency translation difference on foreign (1,655,208) 2,500,356
currency net investments - (credit)/charge
================== ==================
</TABLE>
10. INCOME TAX
The income tax provisions consisted of the following
<TABLE>
<CAPTION>
9 MONTHS ENDED 9 MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
$ $
<S> <C> <C>
Income tax (provision) (3,754) (1,666)
================== ==================
SEPTEMBER 30, 1998 DECEMBER 31, 1997
$ $
Net operating loss carry forwards give rise
to deferred tax assets are as follows:
Unutilized tax losses 1,600,000 4,180,000
Valuation allowances (1,600,000) (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.
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.
F-27
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
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.
Oradea and Pardo have also taken action through the courts in France and
Israel to safeguard their potential rights over certain assets of
Unimedia in order to secure payment of their unsecured loans due from
Unimedia (see Note 7). In connection with such actions and based upon the
fact that the notes do not by their terms reflect a repayment date,
Unimedia has proposed payment plan to repay these loans in installments,
and is awaiting a court ruling from the French court on its proposed
payment plan. Unimedia is also preparing actions against Lodelo and Pardo
for damages which it believes have been inappropriately caused by reason
of Lodelo and Pardo's actions against Unimedia.
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)100,000 (approximately $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)60,000 (approximately $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
F-28
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
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 September 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 outstanding at September 30, 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
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.
Of the outstanding warrants, warrants to purchase 1,200,000 shares at an
exercise price of $2.50 per share, and warrants to purchase 1,600,000
shares at an exercise price of $3.125 per share expire on December 29,
1998. The balance of the Company's outstanding warrants expire on the
date which is 36 months after the Company registers the shares underlying
such warrants for resale.
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 to purchase the Company's Common Stock at an exercise price of
$0.35 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
F-29
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
than expected advertising revenues at Onyx to date, the funds raised by
the Company has historically financed itself through sale 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, $.001 par value per share, at a
purchase price of $0.57 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 substantially 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:
a. 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
b. 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) (the "Company") entered into a deed of
counter-indemnity ("Deed") with Universal, a BVI corporation. The Deed
secures the obligation of CM (UK) to repay Universal if Universal is
called upon to make payment on its transponder guarantee. (See Note 7 to
Notes to Consolidated Financial Statements). CM (UK)'s obligations under
the Deed are guaranteed by the Company and Onyx, and are secured by a
charge on substantially all of CM (UK)'s assets and a pledge of the CM
(UK) stock. 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 the Company's Common Stock on the
basis of one share of Common Stock for each $0.50 of outstanding
principal and accrued interest. The Notes, however, may not be converted
until the Company has held a shareholders meeting at which its Articles
of 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.
F-30
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
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. SUBSEQUENT EVENTS
In August 1998, the Company entered into a services agreement with MMP
pursuant to which MMP will provide certain broadcasting services to Onyx
Television over a two year period. The agreement became effective on
October 1, 1998.
16. RELATED PARTY TRANSACTIONS
There were no related party transactions other than in the normal course
of business between the group companies.
F-31
<PAGE>
CAPITAL MEDIA GROUP LIMITED
2 RUE DU NOUVEAU BERCY
94220, CHARENTON, FRANCE
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Gilles Assouline and Michel Assouline,
and each of them, with full power of substitution, proxies of the undersigned,
to attend and vote all the shares of Common Stock, $0.001 par value, of Capital
Media Group Limited, a Nevada corporation (the "Company") which the undersigned
would be entitled to vote at the Special Meeting of Stockholders to be held
at__________________ , at ____ a.m. , local time, on February 4, 1999, or any
adjournment thereof, according to the number of votes the undersigned would be
entitled to cost if personally present upon the matters referred to on this
proxy and, in their discretion, upon any other business as may come before the
meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE PROPOSALS.
1. Proposal 1 - Amend the Articles of Incorporation to increase the number of
authorized shares of common stock, par value $.001 per share, from 50,000,000 to
330,000,000 shares.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Proposal 2 - Reverse split the Company's outstanding common stock on a
one-for-ten basis.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Proposal 3 - Ratify the Company's grant of a warrant to an entity
controlled by the Company's Chief Executive Officer and Chief Operating Officer,
all on the terms set forth in the Proxy Statement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. Proposal 4 - Election of Directors.
Election of the following persons as Directors of the Company:
[ ] FOR all nominees except as indicated [ ] WITHHOLD authority to vote
for all nominees
Gilles Assouline Michel Assouline David Ho
Patrick Ho Jean-Francois Klein
Stanley Hollander
(INSTRUCTION: To withhold authority to vote for an individual nominee,
strike a line through that nominee's name in the list above.)
5. Proposal 5 - To transact such other business as may properly come before
the meeting.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Continued and to be signed on other side)
<PAGE>
This Proxy when properly executed will be voted in the manner directed
herein by the undersigned stockholder. If no direction is made, this proxy will
be voted FOR the proposals as set forth herein.
The undersigned acknowledges receipt of Notice of Special Meeting of
Stockholders dated January __, 1999, and the accompanying Proxy Statement.
Date:______________________ , 1999.
Number of Shares of Common Stock held:____________
---------------------------------------
Signature
---------------------------------------
Name(s) (typed or printed)
---------------------------------------
Address(es)
Please sign exactly as name appears on this Proxy. When shares are held by
joint tenants, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by the President or other
authorized officer. If a partnership, please sign in partnership name by
authorized person.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE
ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED.
