SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to_____________.
Commission File No. 0-21051
CAPITAL MEDIA GROUP LIMITED
---------------------------
(exact name of small business issuer in its charter)
NEVADA 87-0453100
- -------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 RUE DU NOUVEAU BERCY.
94220, CHARENTON, FRANCE
- ---------------------------------------- ------------------------
(Address of principal executive offices) (Zip Code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter periods that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
YES X NO _____
Statethe number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 39,026,223
SHARES OF COMMON STOCK AT OCTOBER 31, 1998 (EXCLUDING
1,067,916 SHARES OWNED AT THAT DATE BY THE COMPANY'S 81.6% OWNED
SUBSIDIARY, UNIMEDIA, S.A.)
Transitional Small Business Disclosure Format. YES ____ NO X
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Unaudited financial statements for the quarter covered by this report are
attached hereto in accordance with item 310(b) of Regulation S-B.
INDEX TO FINANCIAL STATEMENTS
Unaudited consolidated balance sheet at September 30, 1998
and December 31, 1997................................................... 3
Unaudited consolidated statement of operations for the three and nine
months ended September 30, 1998 and 1997................................ 4
Unaudited consolidated statement of stockholders' equity for
the nine months ended September 30, 1998................................ 5
Unaudited consolidated statement of cash flows for the nine
months ended September 30, 1998 and 1997................................ 6
Notes to the unaudited consolidated financial statements..................... 7
2
<PAGE>
CAPITAL MEDIA GROUP LIMITED
UNAUDITED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
NOTE SEPTEMBER DECEMBER 31,
30, 1997
1998 $
$
<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.
3
<PAGE>
<TABLE>
<CAPTION>
CAPITAL MEDIA GROUP LIMITED
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
3 MONTHS
3 MONTHS ENDED ENDED 9 MONTHS END 9 MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
NOTE $ $ $ $
<S> <C> <C> <C> <C>
Operating revenues 1,374,921 673,678 4,060,541 1,548,410
Operating costs:
Staff costs 837,897 809,601 2,791,174 2,558,753
Depreciation and amortization 318,091 158,222 963,680 407,587
Operating expenses - exceptional 9 (1,797,324) 359,404 (1,655,208) 2,500,356
Operating expenses - other 2,291,973 2,727,431 7,907,666 8,370,218
--------------- -------------- ----------------- ---------------
Operating costs (1,650,637) (4,054,658) (10,007,312) (13,836,914)
--------------- -------------- ----------------- ---------------
Operating loss (275,716) (3,380,980) (5,946,771) (12,288,504)
Other (expenses)/income (338,533) 7,397 (682,840) (3,568)
Equity in net loss of
unconsolidated company (75,150) (6,597) (136,360) (144,111)
Interest (paid) (428,388) (12,950) (1,070,415) (75,156)
--------------- -------------- ----------------- ---------------
Loss before income tax provision (1,117,787) (3,393,130) (7,836,386) (12,511,339)
Income tax (provision) 10 (3,086) 1,003 (3,754) (1,666)
--------------- -------------- ----------------- ---------------
Loss after taxation (1,120,873) (3,392,127) (7,840,140) (12,513,005)
Minority interest 100,314 (129,180) 343,127 (61,563)
--------------- -------------- ----------------- ---------------
Net loss (1,020,559) (3,521,307) (7,497,013) (12,574,568)
=============== ============== ================= ===============
Net loss per share - basic ($0.03) ($0.10) ($0.19) ($0.44)
======= ======= ======= =======
Net loss per share-diluted ($0.03) ($0.10) ($0.19) ($0.44)
====== ======= ===== =======
Weighted average shares - basic 40,094,139 35,587,504 40,094,139 28,566,942
=============== ============== ================= ===============
Weighted average shares - diluted 49,627,467 45,120,832 49,627,467 38,100,270
=============== ============== ================= ===============
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
CAPITAL MEDIA GROUP LIMITED
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
ADDITIONAL CUMULATIVE
COMMON PAID-IN SUBSCRIPTION TRANSLATION ACCUMULATED
STOCK CAPITAL RECEIVABLE ADJUSTMENT DEFICIT TOTAL
Shares $ $ $ $ $ $
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 40,094,139 40,090 31,155,909 (5,000) 2,846,067 (37,964,836) (3,927,770)
Issuance of common stock - - (42,000) - - - (42,000)
Translation adjustment - - - - (1,996,491) - (1,996,491)
Net loss - - - - - (7,497,013) (7,497,013)
---------- ---------- ----------- ------------- ------------ ------------ -------------
Balance at September 30,
1998 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.
5
<PAGE>
<TABLE>
<CAPTION>
CAPITAL MEDIA GROUP LIMITED
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
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.
6
<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:
Buildings 25 to 50 years
7
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
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.
8
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
APPROVED ACCOUNTING STANDARDS NOT YET ADOPTED
In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.130
"Reporting Comprehensive Income," and SFAS No.131, "Disclosure about Segments
of an Enterprise and Related Information." These statements are required to
be adopted in fiscal 1999. In 1998, the FASB issued SFAS No.132, "Employers'
Disclosures about Pensions and Other Post Retirement Benefits." This
statement is also required to be adopted in fiscal 1999. In 1998, the FASB
also issued SFAS No.133, "Accounting for Derivative Instruments and Hedging
Activities." This statement is required to be adopted in fiscal 2000. The
Company is currently in the process of evaluating the impact of adopting
these new standards.
2. GOING CONCERN
The accompanying financial statements have been prepared on 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>
9
<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
================= =================
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment
consists of:
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>
10
<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
SEPTEMBER 30, 1998 DECEMBER 31, 1997
$ $
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
================= =============
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.
11
<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 sterling/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).
12
<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
currency net investments - (credit)/charge (1,655,208) 2,500,356
================== =================
</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.
13
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
In December 1997, at the direction of the trial judge, the Company and Com
and Nen and John Garman were directed to either come to an agreement or that
the parties were instructed to prepare for the case to be immediately held
for trial. An agreement to settle this suit was made with Garman on December
12, 1997 wherein the Company agreed to enter into reciprocal commercial
agreements allowing Garman to access available down time for advertising
purposes.
In June 1997, a former managing director of Onyx Television whose employment
was terminated brought suit in Germany for alleged wrongful early
termination of his employment. The suit sought damages of DM750,000. Onyx
maintained that the action which it took with respect to this employee was
lawful and in July 1998, the court ruled in favor of Onyx Television. The
plaintiff has the right to appeal and Onyx Television believes that it has
valid defenses to this claim. However, there can be no assurance as to the
outcome of this matter.
In May 1998, TV Strategies, a Dallas based television services company,
obtained a default judgment against Onyx Television for DM300,000, plus
interest, relating to services which TV Strategies alleges that they
provided to Onyx. Onyx intends to seek to have the default judgment set
aside in Texas, and believes that it has the grounds to obtain relief from
the default judgment. Onyx Television also believes that it has meritorious
defenses to the suit. There can be no assurance as to the outcome of this
matter.
In July 1998, the Company was sued in the U.S. District Court for the
District of Nevada by Fontal Limited ("Fontal") for breach of a promissory
note. See Note 7 for a description of the Fontal Note. The Company had
pledged the rights to trademarks for the international Onyx name and
branding outside of Germany , Switzerland and Austria to Fontal to secure
repayment of this note. The Company has filed a motion to dismiss this suit
for FORUM NON CONVENIENS, believing that the proper forum for this suit is
England. The Company also believes that it has meritorious defenses to this
suit and intends to vigorously defend same. There can be no assurance as to
the outcome of this matter.
Unimedia has three minority shareholders (Oradea, Roland Pardo and an entity
controlled by the same individual as 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
a 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.
14
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
Charles Koppel, the former chairman and CEO of the Company, had a service
agreement with the Company under which he was entitled to an annual base
salary of /pound sterling/100,000 (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
sterling/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 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
15
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
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
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 $.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.
16
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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 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.
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.
17
<PAGE>
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.
18
<PAGE>
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THE FINANCIAL INFORMATION INCLUDED HEREIN SHOULD BE READ IN CONJUNCTION
WITH THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES
THERETO, INCLUDED ELSEWHERE IN THIS FORM 10-QSB. CERTAIN OF THE DATA CONTAINED
HEREIN INCLUDES FORWARD LOOKING INFORMATION AND RESULTS COULD DIFFER FROM THAT
SET FORTH BELOW. THIS DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
THE INFORMATION CONTAINED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE
YEAR ENDED DECEMBER 31, 1997 (THE "FORM 10-KSB").
RESULTS OF OPERATION
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Operating revenues for the three months ended September 30, 1998 were
$1.37 million, an increase of $0.70 million compared to operating revenues of
$0.67 million for the three 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 same three months
of 1998 of an aggregate of $0.78 million of operating revenues at Unimedia,
TopCard and Pixel. The Company acquired each of these businesses under the
purchase method of accounting and therefore accounts for their revenues from
their date of purchase (August 1997, November 1997 and January 1998,
respectively.)
Advertising sales by Onyx Television during the three months ended
September 30, 1998 totaled $0.37 million, compared to $0.21 million for the same
quarter in 1997. As previously reported, 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 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). At
the present time, Onyx Television reaches approximately 9.7 million cable homes
and an indeterminable number of direct satellite homes in Germany. For further
information, see Item 1. "BUSINESS" in the Form 10-KSB.
Operating costs, including depreciation and amortization, for the
second quarter of 1998 were $1.65 million (1997 - $4.05 million) and included
$0.85 million of operating costs relating to the operations of Pixel, Unimedia
and TopCard. Operating costs also included an exceptional operating credit of
$1.80 million (1997 - $0.36 million charge) in respect of non-cash accounting
exchange
19
<PAGE>
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 three months ended September 30, 1998 was $0.32 million, an
increase of $0.16 million compared to $0.16 million for the three 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 $0.84 million for the third quarter of 1998 compared to the third quarter of
1997. During the latter part of 1997, and during the first and second quarters
of 1998, the Company took steps to substantially reduce costs across all the
group operations and these changes favorably impacted operating costs during the
third quarter of 1998. Additionally, each of the Tinerama companies continued to
operate at a small loss during the third quarter of 1998.
As a result of all of the above factors, the Company's operating loss
was $0.28 million for the three months ended September 30, 1998, compared to an
operating loss of $3.38 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 three and nine
months periods, and to sales of investments by the Company during such periods.
There were no such write downs or sales of investments during the comparable
periods in 1997. Interest expense also increased substantially during the 1998
three and nine month periods compared to interest expense in 1997, due to the
substantial increase in borrowings from period to period.
The net loss for the quarterly period ended September 30, 1998 was
$1.02 million ($0.03 per basic and diluted share), compared to a net loss of
$3.52 million ($0.10 per basic and diluted share) for the period ended September
30, 1997. Weighted average shares outstanding were 40,094,139 for the three
months ended September 30, 1998, compared to 35,587,504 for the three months
ended September 30, 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 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. 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.
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
20
<PAGE>
compared to exchange rates at December 31, 1997. For the reasons set forth
above, 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. 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.
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 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 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.
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 ("Convertible Debt" or the "Instar Loan")
from Instar Holdings, Inc. ("Instar") to fund the Company's working capital
requirements (principally related to the continuing operation of Onyx
Television). The Convertible Debt is guaranteed by the Company and Onyx and is
secured by a charge on all of CM (UK)'s assets and a pledge of the stock of CM
(UK). Interest is payable monthly on the Convertible Debt, at the rate of 2%
above Lloyds Bank base rate until December 31, 1997 and 13% per annum
thereafter. The Instar Loan has recently been renegotiated. For information
regarding the historical terms of the Instar Loan, see the Form 10-KSB.
In July 1998, Instar entered into a letter agreement with the Company
reflecting the new terms of this loan, which letter agreement is currently being
more formally documented in the form of amended Instar Loan documents. In the
letter agreement, Instar agreed to a repayment schedule whereby the Company will
repay this loan at the rate of $50,000 per month for six months and $200,000 per
month thereafter until paid in full. The letter agreement also provides for
certain prepayments to the extent that the Company raises funds above the
amounts already raised as discussed in the Form 10-KSB. Under the terms of the
new agreement, the Instar Loan will no longer be convertible, but would become
convertible at Instar's option in the future in the event that Instar agrees to
convert any of the outstanding debt at such price as the Company may agree to
sell additional shares of its common stock to a third party.
21
<PAGE>
CM (UK) has also granted a charge against all of its assets and the
Company has granted a charge against the shares of CM (UK) to secure the
obligation in connection with the guaranty of the transponder lease. See Note 8
of Notes to Unaudited Consolidated Financial Statements with respect to the
guaranty of the transponder lease by Universal Independent Holdings Limited, a
BVI corporation ("Universal"). CM (UK), under its transponder lease, was
required to provide a guaranty to PTT Telecom of its obligations under the
lease. Universal agreed to provide such guaranty, but required, among other
things, (i) that CM (UK) enter into, in favor of Universal, a deed of
counter-indemnity ("Deed") to secure the obligation of CM (UK) to repay
Universal if Universal is called upon to make payment on its transponder
guaranty, (ii) that the Company and Onyx guarantee the obligations of CM (UK)
under the Deed, and (iii) that CM (UK) pledge all of its assets and that the
Company pledge its stock interest in CM (UK) to secure their obligations in
connection therewith. Instar and Universal have agreed that their liens on the
Company's assets shall rank PARI PASSU. If the Company were to default under
either or both of such guaranties and Instar and/or Universal were to foreclose
on the pledge of the Company's and CM (UK)'s assets, it would likely have a
significant and adverse impact on the Company's financial position, and could
result in the Company's loss of a significant portion of its operating assets.
On March 3, 1997, the Company closed a second private placement in
which the Company raised net proceeds of $5.85 million. The funds from this
placement were used to fund the continuing operation of Onyx Television and for
general corporate purposes. The Company issued an aggregate of 12.0 million
shares of Common Stock in this private placement ($0.50 per share), including
4.0 million shares of Common Stock subscribed by Unimedia.
On June 25, 1997, the Company accepted a subscription for $4.0 million
from Unimedia, on behalf of certain investors. In the subscription, the Company
agreed to issue an aggregate of 7,017,543 shares of Common Stock at a purchase
price of $0.57 per share. On June 30, 1997, $1,500,000 of the proceeds of the
subscription was received by the Company and the balance of $2,500,000 was
released to the Company from escrow on July 31, 1997 at the closing of the
Unimedia acquisition. In connection with the private placement, the Company paid
Unimedia a fee of $240,000, which was netted against the purchase price of the
Shares. Unimedia, in turn, paid a fee to Valfab, S.A. for its services in
connection with introducing Unimedia to certain of the investors who purchased
shares in the offering. The fee consisted of $192,000 in cash and 106,666 shares
of the Common Stock acquired by Unimedia in this placement.
On July 31, 1997, the Company acquired 50.3% of the outstanding common
stock of Unimedia in exchange for 4,333,000 shares of the Company's authorized
but unissued common stock. Shareholders of Unimedia who did not participate in
the first closing of the Unimedia share exchange (the "Unimedia Share Exchange")
had until September 5, 1997 to convert their Unimedia securities into shares of
Common Stock and on September 5, 1997, the Company acquired an additional 31.3%
of Unimedia's common stock in exchange for an additional 2,693,600 shares of the
Company's authorized but unissued Common Stock. Shares issued in the Unimedia
Share Exchange were valued at their then fair market value ($0.57 per share).
At the closing of the Unimedia Share Exchange, Unimedia owned 5,564,913
shares of the Common Stock. Subsequent to the closing of the Unimedia Share
Exchange, Unimedia transferred 4,496,997 of these shares to investors in
private transactions resulting in a net profit of
22
<PAGE>
$0.98 million in the year ended December 31, 1997. At this date, Unimedia owns
1,067,916 shares of Common Stock.
In September 1997, the Company borrowed $500,000 of short term working
capital in the form of a convertible debt from Unbeatable Investments Limited
("Unbeatable"). The debt was payable with interest of 10% per annum in April
1998 and was convertible into shares of Common Stock at the rate of $0.57 per
share. The Company's short term funding requirements were also met during the
fourth quarter of 1997 through private placements of an aggregate of 733,335
shares of the Company's authorized but unissued Common Stock (raising $550,000
at $0.75 per share).
On January 9, 1998, CM (UK) borrowed an aggregate of $1,250,000 from
Superstar Ventures Limited ("Superstar"). Such loan was evidenced by two 13%
Convertible Secured Promissory Notes in the original principal amounts of
$750,000 and $500,000, respectively (collectively, the "Notes"). Of the
aggregate proceeds, $500,000 was used to repay a loan previously made to CM (UK)
(see above) by Unbeatable. The Notes bear interest at the rate of 13% per annum
and are convertible into shares of the Company's Common Stock on the basis of
one share of Common Stock for each $0.50 of outstanding principal and accrued
interest on the Notes; provided, however, that the Notes may not be converted
until the Company has held a shareholders meeting at which its Articles of
Incorporation are amended to increase the number of authorized shares of Common
Stock of the Company to at least the number required for conversion of the
Notes. The Notes were due and payable on March 31, 1998 but, pursuant to the
Notes and an agreement among the Company, CM (UK), Superstar, Instar Holdings,
Inc. ("Instar") and Universal Independent Holdings Limited ("Universal"),
payments on the Notes may only be made pari passu pro rata as and when payments
are made to Instar according to a stated proportion. Instar and Universal are
secured creditors of the Company and CM (UK). To secure its obligations under
the Notes, CM (UK) and the Company have granted to Superstar a security interest
on the same collateral upon which Instar has been granted a security interest by
CM (UK) and the Company and upon identical terms and conditions as are set forth
in the security documents entered into between Instar and CM (UK) (and Instar
and the Company) pursuant to the loan documents between CM (UK), the Company and
Instar. Instar has also granted to Superstar a right of first refusal to
purchase the Instar Loan for the full amount due before such loan is sold to a
third party. The Company also pledged its interest in 81.6% of Unimedia to
Superstar to further secure its obligations under the Notes.
Superstar and Unbeatable are parties controlled by David Ho, a Director
of the Company. Superstar received a fee of 200,000 shares of the Company's
Common Stock for arranging the original loan made by Unbeatable to the Company
and will receive a fee of 400,000 shares for arranging the January 1998
Superstar loan (which fee will be payable at such time as the Company has
authorized shares of Common Stock available to issue in order to pay this fee).
Additionally, Superstar has been granted a contingent option such that if such
loan is repaid (and not converted), Superstar shall have a one year option to
purchase up to 2.5 million shares of the Company's authorized and unissued
Common Stock at an exercise price of $.40 per share.
On March 23, 1998, MMP, SA ("MMP"), a shareholder of the Company and a
subsidiary of Groupe AB, made available to the Company a line of credit (the
"MMP Line of Credit") pursuant to which the Company may borrow up to $2,000,000.
Outstanding amounts under the MMP Line of Credit bear interest at the rate of
13% per annum. The Company has fully borrowed the proceeds
23
<PAGE>
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.
On March 25, 1998, Superstar loaned the Company an additional $400,000,
payable on the same terms as the MMP Line of Credit. In connection with this new
loan, Superstar was granted an option to purchase shares of the Company's common
stock on the same terms as the option granted to MMP as described above.
In the new agreements with Superstar and Groupe AB, Superstar has
agreed to make available $5.0 million and Groupe AB has agreed to provide cash
and services aggregating $6.64 million over a two year period. Such funding will
initially be in the form of debt, but will be automatically converted into
equity at the rate of $0.10 per share upon and after approval of an increase in
the Company's authorized common stock. If stockholder approval of the increase
in the authorized common stock is not obtained, then the debt incurred at that
date, together with interest and penalties, will be immediately due and payable.
Once these obligations are converted into Common Stock, Superstar and Groupe AB
will control approximately 80% of the Company's outstanding common stock and
will control the Company.
In regard to its future capital raising efforts to fund the Company's
businesses, the Company is likely going to have to fund these future capital
requirements through additional sales of its equity securities. The Company may
also seek funding for particular projects through investments directly into
those projects. The Company is also seeking additional strategic alliances with
respect to its other current and proposed businesses and to reduce operating
costs in all of its businesses whenever possible. No definitive agreements have
been entered into to date.
The Company believes that the proceeds from the Superstar and Group AB
agreements will fund, along with anticipated revenues from operations, the
Company's operations for the next 12 months. However, if revenues do not meet
expectations, additional funding will be required, and there can be no assurance
that such funding will be available.
24
<PAGE>
PART 2
ITEM 1. LEGAL PROCEEDINGS
For information regarding the status of the Company's currently
outstanding litigation, see Note 11 of Notes to Unaudited Consolidated
Financial Statements included herein and Item 3. "LEGAL PROCEEDINGS" in
the Form 10-KSB.
ITEM 2. CHANGE IN SECURITIES
See Notes 13 and 14 of Notes to Unaudited Consolidated Financial
Statements included herein and Item 2. "MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION" included herein for information regarding
changes in securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's securities holders
during the first three quarters of 1998.
ITEM 5. OTHER INFORMATION
The Company intends in the near future to: (i) call a meeting of its
stockholders to seek (a) approval of an increase in its authorized
Common Stock to permit the conversion of all of the Company's
outstanding convertible debt, and to provide the Company with sufficient
authorized common stock to allow the Company to sell additional shares
to raise funds for corporate purposes in the future, and (b) to reverse
split its outstanding common stock; and (ii) file a registration
statement to register for resale the shares of common stock which have
been sold by the Company during the last two years and the shares
underlying the Company's outstanding options, warrants and convertible
debt. While the Company is obligated to hold its stockholders meeting on
or before November 30, 1998, the Company does not believe it will be
able to hold its meeting by that date due to the delays encountered in
completing the Company 1997 audit. The Company
25
<PAGE>
intends to file preliminary proxy materials in the near future relating
to the meeting and to hold the meeting as soon as practicable.
The Company has also agreed to offer to one of its warrant holders the
right to subscribe to purchase 1,566,156 shares on the basis of two
shares for each of the warrants which they hold, at an exercise of $0.30
per share, effective upon the Company's shareholders approving an
increase in the Company's authorized common stock. Additionally, subject
to the compliance with applicable U.S. securities laws and the approval
of an increase in the Company's authorized common stock to allow for
such action, the Company intends in the future to offer its other
warrant holders the right to exercise their warrants and receive two
shares of common stock at an exercise price of $0.30 per share. The
Company's common stock is now quoted on the Bulletin Board maintained by
the NASD under the symbol "CPMG."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
27.1 Financial Data Schedule
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Exchange Act, the Registrant caused
this Report to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 18th day of November, 1998.
CAPITAL MEDIA GROUP LIMITED
By:/s/ GILLES ASSOULINE
------------------------------------------
Gilles Assouline, President and
Chief Executive Officer
By:/s/ STEPHEN COLEMAN
------------------------------------------
Stephen Coleman, Chief Financial Officer
27
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------ -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-QSB
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 547,876
<SECURITIES> 0
<RECEIVABLES> 3,038,327
<ALLOWANCES> 113,977
<INVENTORY> 25,890
<CURRENT-ASSETS> 3,996,761
<PP&E> 1,184,559<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,178,650
<CURRENT-LIABILITIES> 20,536,458
<BONDS> 0
0
0
<COMMON> (13,463,274)
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 8,704,763
<SALES> 4,060,541
<TOTAL-REVENUES> 4,060,541
<CGS> 0
<TOTAL-COSTS> 10,007,312
<OTHER-EXPENSES> (682,840)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,070,415)
<INCOME-PRETAX> (7,836,386)
<INCOME-TAX> (3,754)
<INCOME-CONTINUING> (7,497,013)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,497,013)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
<FN>
- --------
<F1> Net of depreciation.
</FN>
</TABLE>
