AMENDMENT NO. 4 TO
SCHEDULE 14A
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or
Rule 14a-12
[ ] Confidential, For Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
CAPITAL MEDIA GROUP LIMITED
------------------------------------------------
(Name of Registrant as Specified in Its Charter)
N/A
------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No Fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials:
- --------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE>
CAPITAL MEDIA GROUP LIMITED
2 RUE DU NOUVEAU BERCY
94229, CHARENTON, FRANCE
+33-1-43-53-6999
July , 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% interest in the outstanding common stock of Unimedia, S.A. When I took
office, helped by my brother, Michel Assouline, who became 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. Additionally, the
Company did not have sufficient authorized shares available to issue to raise
the funds required to meet the Company's capital requirements and substantially
all of its assets were already pledged to Instar Holdings, Inc. 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 capital requirements. In short, we
faced a myriad of serious business problems and had 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 stockholders, 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 due to the high level of risk. We also took
decisive steps to reduce Onyx Television's operating costs, including the
termination of expensive service agreements entered into in 1995 and 1996 in
connection with Onyx Televisions's broadcast operations, and to refocus the
strategy of the group on the survival and redevelopment of Onyx Television. 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 further 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 your 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 have provided to the Company.
We are also pleased that we have been able to restore the Company's
<PAGE>
To Our Stockholders
July , 1999
Page 2
quotation on the Bulletin Board maintained by the National Association of
Securities Dealers (the Company's symbol is "CPMG.")
However, it would be unfair to say that the Company is out of the woods
at this time. As you will note when you read the Company's Proxy Statement
relating to the Company's special meeting of stockholders, the Company still
faces several litigation matters and significant debts, including both the debts
due to Groupe AB and Superstar and the debts due to third parties such as Instar
Holdings, Inc. Additionally, you should be aware that the Company is not yet
operating on a consolidated cash flow positive or profitable basis. For the year
ended December 31, 1998, the Company reported a net operating loss of $10.8
million, compared to a net operating loss of $18.4 million for 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 the Company 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 ratify the terms of the financial
arrangements between the Company and Groupe AB and the Company and Superstar, as
described below. Second, we are asking our stockholders to approve a one-for ten
reverse stock split of the Company's outstanding common stock, thereby reducing
the Company's outstanding common shares from 40,094,139 shares to 4,009,413
shares. This will leave the Company with 45,990,587 authorized but unissued
shares, as the Company's authorized common shares will remain at 50,000,000
shares under the proposal.
These authorized but unissued shares will allow the Company to meet its
contractual obligations to Superstar and Groupe AB to convert their debt into
common stock of the Company (or the Company will be obligated to immediately
repay this debt (with interest and a penalty) in accordance with its terms,
which it is not in a position to do), all as more particularly set forth in the
Proxy Statement. These authorized shares will also provide the Company with
sufficient authorized shares to issue 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 outstanding
convertible debt which they currently hold into common stock upon the approval
of the reverse stock split. This will immediately reduce the Company's negative
stockholders' equity at December 31, 1998 from $17.2 million to $6.7 million.
However, as a consequence of the approval of this proposal, the Company will
issue (assuming an April 30, 1999 closing) immediately upon its approval an
additional 6,650,000 post reverse stock split shares to Superstar and an
additional 6,060,000 reverse stock split shares to Groupe AB. The Company will
also be contractually obligated to issue to Groupe AB over the next two years an
additional 8,580,000 post reverse stock split shares for services and agreed to
additional fundings (plus, the Company will be obligated to issue approximately
1,660,000 additional post reverse stock split shares relating to the conversion
into common stock of interest and penalty on the convertible debt). While all of
these
<PAGE>
To Our Stockholders
July , 1999
Page 3
issuances of shares will be significantly dilutive to the Company's other
stockholders, and Groupe AB and Superstar will own, in the aggregate, and
assuming no exercise of warrants and options, more than 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 to the Company 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 reverse-stock split is not approved, all of the debt
due to Superstar and Groupe AB (approximately $12.7 million at this date), plus
interest and penalties, will become immediately due and payable.
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 pre-reverse split
shares (approximately 5% of the outstanding common stock on a fully diluted
basis) at $0.10 per share (the fair value of the common stock on the date of
grant). The Board has decided that because of our collective efforts, and the
role we have played in the survival of the Company, that we should be given the
right to participate in a meaningful way in the future success of the Company.
Fourth, we are asking our stockholders to vote on a proposed slate of
nominees for election to the Company's Board of Directors.
Finally, we are asking for stockholders to grant us their proxy to allow
us the discretion to vote to adjourn the stockholders' meeting while votes are
being counted. If the required votes to approve one or more of these proposals
have not been received by the date of the meeting, we need this discretion in
order to allow the Company sufficient time to complete the solicitation of
proxies.
Your Company began 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 Stockholders in the
future. We also hope in the future to give our stockholders 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 August _____, 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 ratify the terms of the financial arrangements between the
Company and Groupe AB and the Company and Superstar;
(2) To consider and vote upon a proposed reverse stock split the
Company's outstanding Common Stock on a one-for-ten basis (with
the Company's authorized common shares remaining at 50 million
shares);
(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 pre-reverse
stock split shares of Common Stock at an exercise price of $0.10
per share;
(4) To elect six 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; and
(5) To vote to adjourn the meeting if there are not sufficient votes
to approve one or more matters, in order to provide additional
time to solicit proxies.
(6) 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 July __, 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
July ___, 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 August ___, 1999 at __________ a.m.,
local time, at _________________________. The approximate date on which this
Proxy Statement and the enclosed form of proxy will be sent to stockholders will
be July ___, 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) to ratify the terms of the agreements
between the Company and Groupe AB and the Company and Superstar, (ii) for the
proposed reverse split of the outstanding Common Stock on a one-for-ten basis
(the "Reverse Split"); (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 pre Reverse Split shares of the Company's
authorized but unissued common stock at an exercise price of $0.10 per share;
(iv) to elect six persons to serve as directors until the next Annual Meeting of
Stockholders or until their successors are elected and qualified, (v) to vote to
adjourn the meeting if there are not sufficient votes to approve one or more of
the above-described matters, and (vi) in their discretion, to vote upon such
other business as may properly come before the Meeting. All share and per share
information contained in this Proxy Statement is set forth in pre-Reverse Split
shares, unless otherwise stated.
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 July ___ , 1999 (the "Record Date"), the
Company had outstanding 40,094,139 shares of Common Stock, including 1,667,916
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 38,426,223 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. However, shares
voted by proxy will only be voted in favor of any adjournment of the meeting if
the holders of such shares have voted in favor of Proposal 5. The quorum
necessary to conduct business at the Meeting consists of a majority of the
outstanding shares of Common Stock.
1
<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:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Gilles Assouline 43 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
Patrick Ho 42 Director Nominee
Stephen Coleman 51 Chief Financial Officer
</TABLE>
Stephen Kornfeld and Jean-Pierre Souviron, 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, unexpectedly
resigned from the Board. Additionally, two directors of the Company, for reasons
unrelated to the Company's operations and the Company's acquisition of Unimedia,
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."
Prior to July 1995, 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. Mr. Ho is also a director of Regency Worldwide Holdings Limited.
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 to
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 NOMINEE
Patrick Ho is the President of Caltex South China Investments Limited, where he
has been employed for more than the last five years. Mr. Ho is also a director
of Regency Worldwide Holdings Limited. Patrick Ho is the brother of David Ho.
See "Certain Relationships and Related Transactions" and "Business Experience of
Directors and Executive Officers."
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 with respect to 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 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 stockholders 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 Monte-Carlo
casino in Monaco and the Palm Beach Casino in Cannes, France.
In 1997, Valfab received the following fees relating to introducing
investors to Unimedia who purchased Company common stock from Unimedia (a)
$195,000 in cash (b) 106,666 shares of the Common Stock with a $64,000 value.
See "Management's Discussion and Analysis -- Financial Condition, Liquidity and
Capital Resources." Further, if Valfab introduces investors to the Company in
the future, Valfab will receive commissions not to exceed 8% of the investment
made.
6
<PAGE>
Valfab has also received (and will receive in the future) commissions
for services relating to the Company's and Unimedia's on-line gaming and
entertainment activities. It can be anticipated that a portion of any fees paid
to Valfab will be paid in shares of the Company's authorized but unissued common
stock.
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)
The Company's officers, directors and more than 10% holders are required
to make filings with the SEC on Forms 3, 4 and, if required, 5 under Section
16(a) of the Securities Exchange Act of 1934, to report their beneficial
ownership of the Company's securities at the time they became officers,
directors and more than 10% stockholders of the Company, and each month
thereafter that such ownership changes. All of the Company's current officers,
and all of the Company's current directors (except Jean-Francois Klein) have
made all of their required filings for 1998 and for periods prior thereto. Based
upon the information available to the Company, all of the holders who are
believed to own beneficially more than 10% of the Company's outstanding shares
have made their required filings under Section 16(a), except Groupe AB and
Claude Berda. All of the filings made by all of the Company's current officers,
directors and more than 10% stockholders were not filed on a timely basis as
required under Section 16(a). The delinquent filings required to be made by
Messrs. Klein and Berda and by Groupe AB will be filed in the near future.
7
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information about the compensation paid
or accrued during 1998 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 $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------- OTHER ANNUAL ------------ ALL OTHER
NAME YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
($) ($) ($) (#) ($)
- ---- ---- ------- --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Gilles Assouline 1998 250,000 1,000,000 --
1997 104,000 -- -- (1)
Michel Assouline 1998 200,000 1,000,000 --
1997 83,000 -- -- (1)
Stephen Coleman 1998 200,000 1,000,000 --
1997 160,000 -- --
Charles Koppel 1997 110,000 -- -- -- 100,000(2)
Barry Llewellyn 1998 75,000 200,000 20,000(3)
1997 160,000 -- -- --
<FN>
- -----------------------------
(1) Gilles Assouline and Michel Assouline received in 1997 under their
employment agreements (see "Employment Agreements with Executive Officers"
below) a grant of 200,000 shares and 175,000 shares, respectively, and
warrants to purchase 200,000 shares and 175,000 shares, respectively.
(2) Settlement of amounts due under Service Agreement. See "Business - Legal
Proceedings" below.
(3) Settlement of amounts due under Service Agreement. No longer employed by
the Company.
</FN>
</TABLE>
OPTION GRANTS DURING LAST FISCAL YEAR
The following table sets forth information concerning options to
purchase pre Reverse Split shares of CMG's Common Stock granted during the
fiscal year ended December 31, 1998 to those persons named in the Summary
Compensation Table.
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SHARES OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION
NAME GRANTED FISCAL YEAR ($/SHARE) DATE
-------------- -------------- ------------ -----------
<S> <C> <C> <C> <C>
Gilles Assouline.................... 1,000,000 25% $0.35 3/10/03
Michel Assouline.................... 1,000,000 25% $0.35 3/10/03
Stephen Coleman..................... 1,000,000 25% $0.35 3/10/03
Barry Llewellyn(1).................. 1,000,000 25% $0.35 3/10/03
<FN>
- -----------------------
(1) No longer employed by the Company. Unvested portion of these options
(800,000 shares) have been forfeited.
</FN>
</TABLE>
8
<PAGE>
AGGREGATED OPTIONS EXERCISED, LAST FISCAL YEAR END OPTION VALUES
The following table sets forth information concerning the exercise of
stock options to purchase pre Reverse Split shares of Common Stock during the
1998 fiscal year and the value of unexercised stock options to purchase pre
Reverse Split shares of Common Stock at the end of the 1998 fiscal year for the
persons named in the Summary Compensation Table.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
AT FISCAL YEAR END FISCAL YEAR END($)*
NUMBER OF SHARES ------------------------ -------------------------
ACQUIRED ON
NAME EXERCISE VALUE REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---------------- --------------- -------------------------- -------------------------
<S> <C> <C> <C> <C>
Gilles Assouline. -- -- 320,000/880,000 0/0
Michel Assouline. -- -- 305,000/870,000 0/0
Stephen Coleman.. -- -- 500,000/800,000 0/0
Barry Llewellyn(1) -- -- 200,000/0 0/0
<FN>
- -----------------------------
* Computed based upon the difference between the closing price of CMG Common
Stock at December 31, 1998 and the exercise price. No value has been
assigned to options which are not in-the-money.
(1) No longer employed by the Company. Unvested options have been forfeited.
</FN>
</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,
(paid in french francs at the rate of six French francs to the dollar after
August 1998); (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 pre
Reverse Split Common Stock; (iv) options to purchase an additional 200,000 and
175,000 shares of pre Reverse Split Common Stock at the fair market value of the
Common Stock on the date of grant ($0.57); 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 (pound)12,500 ($20,000) in full satisfaction of the Company's future
obligations under his service agreement and the service agreement was canceled.
9
<PAGE>
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 stock options to its executive
officers and directors. See "Executive Officers and Directors-Board
Compensation" for information regarding the terms of these stock options.
On December 18, 1998, the Board approved the grant of a two-year warrant
to purchase an aggregate of 16.0 million shares at an exercise price of $0.10
per share (1.6 million shares at $1.00 per share after the Reverse Split) 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, 1,667,916 (including 600,000 pledged as security by Unimedia to
support its guaranty of certain debt of Pixel, Ltd. due to a financial
institution) of which are owned by Unimedia, a company which is an 81.6% owned
subsidiary of the Company. As such, at that date there were 38,426,223 shares of
Common Stock issued and outstanding and entitled to vote at the Meeting.
Additionally, the Company will issue (assuming a conversion of the
convertible debt at April 30, 1998) immediately upon the approval of the Reverse
Split an additional 6,660,000 post Reverse Split shares to Superstar and an
additional 6,060,000 post Reverse Split shares to Groupe AB (plus, in each such
case, additional shares (approximately 1,660,000 post Reverse Split shares)
representing the conversion into shares of interest and penalty due on this
convertible debt to the date of conversion). The Company will also be
contractually obligated to issue to Groupe AB for services to be rendered on
behalf of Onyx Television and fundings to be made to the Company by Groupe AB
over the next two years an additional 8,580,000 post Reverse Split shares. Upon
conversion of all of the convertible debt of the Company held by Groupe AB and
Superstar into Common Stock (including interest and penalties thereon and
assuming no exercise of warrants and options), Superstar and Groupe AB will
collectively own approximately 80% of the outstanding Common Stock. 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 ($1.00 per share
post Reverse Split) until such time as the Company holds the Meeting.
10
<PAGE>
The following table sets forth, as of the Record Date, the share
ownership (pre Reverse Split) 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 stockholders approve the Reverse Split,
thereby increasing the Company's authorized but unissued Common Stock and
allowing for the automatic conversion of this debt into Common Stock) by (i)
each person who owns beneficially more than 5% of the outstanding Common Stock,
since the Company's authorized common shares will remain at 50 million shares;
(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) 1,750,000 4.5%
Stephen Kornfeld(6)(9) 775,000 2.0%
Karl Hauptmann(10) 1,908,000 5.0%
James Leitner(11) 1,399,500 3.6%
Jean-Pierre Souviron(1)(6)(12) 140,000 *
Jean-Francois Klein(1)(6)(13)(14) 1,785,700 4.6%
Stanley Hollander(6)(15) 90,000 *
Edgeport Nominees(16) 2,332,656 6.6%
Groupe AB(17) 5,000,000 13.8%
Claude Berda(13)(17) 6,785,700 18.4%
Stephen Coleman(3)(18) 300,000 *
Kestrel, S.A.(19) 1,730,942 4.5%
Directors and Executive Officers as
a group (8 persons)(20) 9,618,965 24.6%
</TABLE>
- ------------------------------------
* Less than 1%.
(1) In connection with the Unimedia Share Exchange, (see "Management's
Discussion and Analysis - Liquidity and Capital Resources" for information)
the Company became obligated to issue to the former stockholders of Unimedia
certain warrants to purchase shares of the Company's common stock, as
follows: (i) warrants to purchase an aggregate of 197,675 shares at an
exercise price of $2.50 per share; (ii) warrants to purchase an aggregate of
77,871 shares at an exercise price of $3.125 per share; and (iii) warrants
to purchase an aggregate of 1,139,144 shares at an exercise price of $4.00
per share. The Company will issue these warrants in the near future.
(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
11
<PAGE>
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, Mr. and Mrs.
Assouline's pecuniary interest is subject to a put (through ownership of
shares in Media Ventures) aggregating 110,800 of the Company shares from
which they benefit. See footnotes (4) and (13) below. If the put were to be
exercised, it would reduce Anne-Marie and Gilles Assouline's collective
interest in the Company to 2,007,630 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 benefit from 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 which may be
issued to Michel Assouline under his employment agreement or under Proposal
3. Additionally, Michel Assouline's pecuniary interest is subject to a put
(see footnote 2 for details) aggregating 55,413 of the Company shares from
which he benefits. See footnotes (2) and (13). If the put were to be
exercised, it would reduce Michel 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.
(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 1,500,000 shares of Common Stock 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.
(10) Owned of record by Telor International Limited ("Telor"), a corporation
controlled by Mr. Hauptmann. Includes warrants to acquire 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 a $200,000 interest in the Instar Loan. See "Management's
Discussion and Analysis" for information regarding the current status of
the Instar Loan. See also footnote (8).
12
<PAGE>
(11) Includes warrants to purchase 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 a $500,000 interest in the
Instar Loan. 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 of which Gilles Assouline is the Chairman, 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 is also deemed to be the beneficial owner over the
shares owned by BIMAP, Media Ventures, MMI and Groupe AB. See footnote (17)
below. The beneficiaries of these shares have a put (see footnote 2 for
details) to acquire the benefit of an additional 166,063 Company 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%) based upon his interest in BIMAP and Media Venture. Additionally,
Mr. Berda has a pecuniary interest in his proportionate interest of the
Company securities owned by Groupe AB. 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 a $300,000 interest in the Instar Loan. 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. Mr. Klein disclaims beneficial ownership over the
shares and warrants owned by Groupe AB. Mr. Berda is deemed the beneficial
owner of the shares and warrants owned by Groupe AB, by virtue of his being
a principal stockholder, officer and director of that entity, although he
only benefits from his proportionate share of such securities. If the
securities owned by Groupe AB are aggregated with the shares beneficially
owned by Mr. Berda through BIMAP and, Media Ventures, Mr. Berda would be
deemed to ultimately benefit from an aggregate of 7,064,237 shares (19.4%),
or 7,230,300 (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."
13
<PAGE>
(18) Includes options to purchase 300,000 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 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), a wholly owned subsidiary of this Company,
borrowed US $2.0 million from Instar Holdings, Inc. (the "Instar Loan") and the
Company currently owes Instar $2.61 million including interest to April 30,
1999. At the date of this Proxy Statement, the Company and Instar have reached
an agreement in principal to settle their dispute. Under the settlement (the
"Instar Settlement"), the Company has agreed to pay Instar $2.2 million, $1.4
million of which was paid at the closing of the Instar Settlement and the
balance of which will be paid (without interest) in installments of $100,000
over the next eight months. Groupe AB has agreed to guaranty repayment of this
amount to Instar, and will be obligated to deliver a guaranty agreement to
Instar within 30 days after the closing. Additionally, as part of the
settlement, Instar will receive 200,000 Post Reverse-Split Shares when the
Company's Stockholders' approve an increase in the Company's authorized Common
Stock. See Proposal 2. The settlement is expected to be completed in the near
future, although there can be no assurance that the settlement will be
completed.
Further as part of the settlement: (i) Universal has agreed that the
Company shall no longer be liable to it for its guaranty of the transponder
lease, (ii) the liability of Latitude Investments, Ltd. ("Latitude") to the
Company will be extinguished; (iii) the Company and Instar, Universal and
Latitude will enter into mutual releases regarding their respective obligations
relating to the Instar, Universal and Latitude matters, and (iv) the Company and
Charles Koppel, the former Chief Executive Officer of the Company, will enter
into a mutual general release. Finally, as part of the Instar Settlement, Instar
and Universal will be releasing their charges against CM(UK)'s assets and the
stock of CM(UK). See "Management's Discussion and Analysis -- Financial
Condition, Liquidity and Capital Resources."
Karl Hauptmann, James Leitner and Barry Townsley, each of whom is a
former director of the Company, have interests of 10%, 25% and 15%,
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 Latitude, Universal and Transit
Securities, Inc.
14
<PAGE>
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 ("TIAG"). The other 51% of TIAG is owned by the Company. Mr.
Hauptmann is also a director of TIAG. 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 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.
Superstar has loaned the Company an aggregate of $6,650,000 and Groupe
AB has loaned the Company $2.4 million in cash and is currently providing
services to the Company with a value of $6.24 million over a two year period.
Groupe AB has also recently agreed to lend the Company an additional $6.0
million, a portion of which will be used to fund the Company's settlement with
Instar. These loans (principal and interest) and the amounts due for such
services are automatically convertible into shares of Common Stock once the
Company holds its annual meeting of stockholders and its stockholders approve
the Reverse Split. The Company has agreed to pay a 2% per month penalty on the
outstanding principal of the loans, payable in shares of Common Stock, for each
month the Company fails to hold its special stockholders meeting subsequent to
November 30, 1998. The convertible debt becomes automatically due to Superstar
and Groupe AB and payable (with interest plus a 20% penalty) if the Company's
stockholders do not approve the Reverse Split. Groupe AB and Superstar, pursuant
to their agreements with the Company, will own more than 80% of the outstanding
Common Stock of the Company when their debt is converted into Common Stock (more
than 90% after all fundings and services are provided by Groupe AB to the
Company). For additional terms of these loans, see "Management's Discussion and
Analysis -- Financial Condition, Liquidity and Capital Resources" and Proposals
1 and 2. 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.
15
<PAGE>
In June 1997, prior to the Company's acquisition of an 81.6% interest in
Unimedia and prior to Gilles Assouline and Michel Assouline becoming executive
officers of the Company, the Company was assisted by Unimedia in completing a
private placement. In connection with such placement, the Company paid Unimedia
a fee of $240,000, which was netted against the proceeds of such offering. A
portion of that fee ($195,000) was paid by Unimedia to Valfab for introducing
Unimedia to certain of the investors acquired some of the Company's shares from
Unimedia simultaneously with and/or immediately after this private placement.
For information regarding the fees paid to Valfab, see "Executive Officers and
Directors-Consultants." For additional information regarding the Company's
private placements, see "Management's Discussion and Analysis -- Financial
Condition, Liquidity and Capital Resources."
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:
1997 HIGH LOW
---- ---- ---
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) 21/32 1/4
1999
----
First Quarter 3/16 5/32
Second Quarter (to June 4, 1999) 11/64 9/64
16
<PAGE>
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.
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.
COMMON STOCK PURCHASE WARRANTS
The Company has the following warrants to purchase pre Reverse Split
common shares outstanding at the date of this Proxy Statement:
DESCRIPTION NUMBER
----------- ------
Warrants to purchase common stock at $4.00 per share 5,200,000
Warrants to purchase common stock at $3.125 per share 433,328
Warrants to purchase common stock at $2.50 per share 1,100,000
The Company is also obligated to issue warrants to the former Unimedia
stockholders, as follows:
DESCRIPTION NUMBER
----------- ------
Warrants to purchase common stock at $4.00 per share 1,139,144
Warrants to purchase common stock at $3.125 per share 77,871
Warrants to purchase common stock at $2.50 per share 197,675
All of the outstanding and to be outstanding warrants will expire 36
months after the Company registers the shares underlying such warrants for
resale. In that regard, the Company intends in the near future to file a
registration statement to register the resale of these shares by the warrant
holders.
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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 the warrant holders the
right, for a period of not less than 61 days, to exercise their warrants and
receive two shares of Common Stock at an exercise price of $0.30 per share. If
the holders of the outstanding warrants do not exercise this right, the warrants
will remain outstanding on their original terms until their expiration date.
This right will be given to the Company's warrantholders in order to allow the
Company's warrantholders, many of whom originally acquired their shares at $2.50
per share, to acquire additional company securities at a lower price and to
raise additional capital for the Company's operations.
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 783,078 warrants which they
hold, but at an exercise of $0.20 per share. Auric was granted this lower price
due to the assistance which they provided to the Company in helping the Company
obtain the quotation on the Bulletin Board maintained by the NASD.
OTHER MATTERS
The Company is also 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.
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.
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BUSINESS OF THE COMPANY
GENERAL
THE STATISTICAL AND OTHER INFORMATION CONTAINED IN THIS SECTION HAS
BEEN DERIVED FROM KABEL & SATELLIT, A PUBLICATION IN GERMANY FOCUSING ON THE
CABLE AND SATELLITE INDUSTRY. THE COMPANY ALSO RECEIVES INFORMATION FROM
DEUTSCHE TELEKOM, PRIVATE CABLE OPERATORS, SATELLITE OPERATORS AND EUTELSAT
SUPPORTING ITS DISTRIBUTION AND MARKET INFORMATION.
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 11.0 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. Groupe AB, in March 1999, also agreed to fund an additional
$6.0 million to allow the Company to repay indebtedness and for working capital.
All of this funding will be initially in the form of debt, but will be
automatically converted into common equity at the rate of $0.10 per share ($1.00
pre Reverse Split share) upon approval of an increase in the Company's
authorized but unissued common stock (which will occur upon approval of the
Reverse Split). Once these obligations are converted into Common Stock, and
assuming no exercise of warrants and options, Superstar will control
approximately 45% and Groupe AB will control approximately 39% of the Company's
outstanding common stock (approximately 31% and 58% respectively after the
completion of all services and fundings) and will control the Company. The
diluted holdings, after warrants and options are exercised, will be 26% and 49%
respectively. 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. The
Company has experienced substantial working capital shortfalls over the last 18
months.
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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 four other businesses: (i) Blink TV,
which is a specialist TV programming company which provides lifestyle
programming on large video screens at concert events, (ii) Pixel, which
specializes in computer graphics and 3D animation for TV packaging, digital
broadcasting and special effects, (iii) TopCard, a software development business
which is engaged in the development of applications based upon smart card
technology (including remote security Internet access and infra-red contactless
smart-card technology) and (iv) Unimedia, which intends to develop in the future
a software platform for Internet entertainment and gaming. The Company further
has an interest in Tinerama, which operates a Romanian print media group and
radio station, which is being held as an asset held for disposition.
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.
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As of December 31, 1998, Onyx's broadcast signal was distributed to 9.7
million cable homes in Germany, 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 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
members of the Target Audience watch more television than any other demographic
group in Germany and that the Target Audience has high purchasing power. At
present, the Company believes that there are an estimated 35 million people
comprising the Target Audience, equating to approximately 40% of the population.
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.
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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 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 stockholders 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.
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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
designed to reach Onyx Televisions Target Audience. 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.
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.
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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 ($1.00 per post Reverse Split share) if the Company's
stockholders approve an increase of the Company's common stock available for
issuance (which will occur upon the approval of the Reverse Split) thereby
allowing such shares to be converted into shares of the Common Stock (or will be
repayable in full, with interest and a penalty, in the event that the Company's
stockholders' do not approve such increase in shares available for issuance by
approving the Reverse Split). See Proposals 1 and 2.
In that regard, effective October 1, 1998, Onyx Television's signal
began to be broadcast on EUTELSAT, a digital satellite transponder used by
Groupe AB, and Groupe AB commenced providing Onyx Television with an uplink
facility and with the other services contemplated by the Services Agreement.
Over the last year, the Company's executive management has 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.
In March 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. 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.
OTHER BUSINESSES
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.
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The Company owns a 50% interest in Blink TV. The balance is owned by RCL
Communications, Ltd. 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 1996, 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.
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. Stockholders of Unimedia who did not participate in
the first closing of 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 these share exchanges (the "Unimedia
Share Exchanges") were valued at their then fair value ($0.57 per share).
At the time that the Company acquired an 81.6% interest in Unimedia, it
was a development-stage company. The main thrust of its operations was the
development of on-line applications for home shopping and gaming. Projects under
development at that time included (i) the creation of specific entertainment
sites and several multi-player games, (ii) the promotion of TV packaging
activity and (iii) distant interactive education.
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Unimedia also owned at that time minority equity positions in several
companies which Unimedia believed had progressive Internet, Smart Card and
advanced software technologies, with the objective to be involved in their
product development and subsequent distribution while securing enabling front
edge Internet technologies to acquire a competitive advantage on applications
under development. To that date, its acquisition activities had been comprised
principally of the acquisition of interest in companies like ActivCard, Pixel,
TopCard, Internet Way and Enanti, whose technologies include remote security and
authentication technology, sales automation, Internet access and intra-red
contactless Smart Card technology.
Unimedia had revenues of $327,726 and $93,815, respectively, for 1996
and the first six months of 1997 and Unimedia had a net loss of $3,399,283 for
1996 and net income of $437,730 for the first six months of 1997 (much of which
was derived from the sale of investments). At June 30, 1997, Unimedia had total
assets of $11.0 million, including $6.2 million in investments, liabilities of
$7.5 million and stockholders' equity of $3.5 million.
At July 31, 1997, Unimedia: (i) held a 10% minority interest in TopCard
and was seeking to acquire the remaining balance of TopCard's outstanding
shares, (ii) had made a $2.5 million loan to Pixel, (iii) held a minority
interest in ActivCard, S.A. ("ActivCard"), a French company that has developed
remote security and authentication token technology, and was acting as a
distributor of ActivCard's technology, and (iv) held a minority interest in
several other companies, including Enanti Corp., a Florida company with
technology for Internet sales automation and contact management, and Internet
Way, a French internet service provider. Unimedia had eight employees at July
31, 1997. At the time that the Company acquired its interest in Unimedia,
Unimedia was also in the beginning stages of seeking to develop a software
platform for internet gaming.
Subsequent to the Company's acquisition of an interest in Unimedia,
Unimedia has acquired an additional 80% interest in TopCard and acquired 100% of
Pixel Ltd., on the terms more particularly described below. Unimedia continues
to run both of those companies. Unimedia has also sold its interests in
ActivCard, InterNet Way, and has discontinued its involvement in distributing
ActivCard's technology.
In addition to operating TopCard and Pixel, Unimedia is continuing 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, 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
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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 consideration provided in connection with Unimedia's acquisition of
Pixel, in addition to 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.
Pixel is not affiliated, directly or indirectly, with Pixar, the
Richmond, California digital animation studio run by Stephen Jobs.
TOPCARD, S.A.
On November 1, 1997, Unimedia acquired an additional 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 stockholders 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
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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 concept to other countries.
DISCONTINUED OPERATIONS
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. TIAG is owned 51% by the Company and 49% by
Telor International Ltd., an entity controlled by Karl Hauptmann, a former
director and a more than 5% shareholder of the Company.
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 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
try to stem the continuing losses from its operations (see "Management's
Discussion and Analysis") and at December 31, 1998, the Company had determined
to dispose of its interest in TIAG.
PERSONNEL
At December 31 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.
PROPERTIES
The Company's Chairman is located in France and the Company's
headquarters is temporarily located in France. The Company intends to organize a
French branch, CMG France, to operate as a party to the Company's activities in
France and to serve as a temporary administrative agent for the
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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.
CMG France, when organized, will 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 10 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 ($30,000).
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 ($24,000), 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
($133,000). In turn, NEN will receive 25% of all amounts paid to Onyx relating
to such client, up to a maximum of DM1,500,000 ($900,000). 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 ($450,000).
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 ($180,000),
plus interest, relating to services which TV Strategies alleges that they
provided to Onyx. In March 1999, the default judgment was set aside by the Texas
Appeals Court. The time for TV Strategies to appeal the decision of the
appellate court will expire in April 1999. Assuming the default judgment is not
reinstated, the Company intends to vigorously defend this claim and believes,
based upon discussions with its counsel, that it has meritorious defenses to the
suit. No opinion of counsel has been obtained with respect to this matter and
there can be no assurance as to the outcome of this matter.
29
<PAGE>
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 owed Fontal $200,000, plus accrued but
unpaid interest. 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. In June 1999, the Fontal litigation
was fully settled for $327,500 and the related promissory note was satisfied.
This suit has now been dismissed with prejudice.
The suit has recently been amended to add fraud claims against the
Company with respect to the pledge of the security to Fontal. 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 believes, based upon its
discussions with its counsel, that it has meritorious defenses to this suit and
is vigorously defending same. No opinion of counsel has been obtained with
respect to this matter and no assurance can be given as to the ultimate outcome
of this matter.
Unimedia has three minority stockholders (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 stockholders
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 8 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, the court has established a payment plan
for Unimedia to repay these loans in installments, and to date, Unimedia has met
its obligations under the payment plan. Unimedia is also preparing actions
against Oradea and against Messrs. Lodolo 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 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
30
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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 paid Mr. Koppel (pound)60,000 to resolve outstanding claims under his
service agreement with the Company, which amount was paid prior to the end of
1998.
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 Mr. Koppel will exchange mutual general releases in
connection with the Instar Settlement and all of the suits between the Company
and Mr. Koppel will be dismissed with prejudice.
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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, 1997 AND 1998 INCLUDED ELSEWHERE HEREIN HAVE BEEN AUDITED BY
DELOITTE & TOUCHE AND PRICEWATERHOUSECOOPERS, RESPECTIVELY, INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS. THE FINANCIAL STATEMENTS AS OF AND FOR THE PERIODS
ENDED MARCH 31, 1999 AND 1998 INCLUDED ELSEWHERE HEREIN HAVE BEEN DERIVED FROM
THE UNAUDITED FINANCIAL STATEMENTS OF THE COMPANY. IN THE OPINION OF MANAGEMENT,
THE UNAUDITED FINANCIAL STATEMENTS INCLUDE ALL ADJUSTMENTS (CONSISTING ONLY OF
NORMAL AND RECURRING ADJUSTMENTS) NECESSARY FOR A FAIR PRESENTATION OF THE
COMPANY'S FINANCIAL POSITION AND RESULTS OF OPERATIONS FOR SUCH PERIODS. THE
SELECTED FINANCIAL DATA FOR THE THREE MONTHS ENDED MARCH 31, 1999 ARE NOT
NECESSARILY INDICATIVE OF THE RESULTS TO BE EXPECTED FOR THE YEAR ENDING
DECEMBER 31, 1999, OR ANY OTHER FUTURE PERIOD. THIS SECTION SHOULD BE READ IN
CONJUNCTION WITH THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES
THERETO AND "MANAGEMENT'S DISCUSSION AND ANALYSIS," WHICH ARE INCLUDED ELSEWHERE
IN THIS PROXY STATEMENT.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------- ----------------------------
RESTATED
1998 1997 1999 1998
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Operating Revenues ................................. $ 2,468,490 $ 1,286,076 $ 584,892 $ 619,932
Operating Costs:
Staff costs ................................... 2,765,239 3,572,498 611,525 832,654
Depreciation and amortization ................. 1,410,697 1,564,452 221,655 231,694
Other Operating expenses ...................... 9,145,292 11,104,510 1,612,858 2,565,539
------------- ------------ ----------- -----------
Total Operating Costs ................. (13,321,228) (16,241,460) (2,446,038) (3,629,887)
Operating Loss ..................................... (10,852,738) (14,955,384) (1,861,146) (3,009,955)
Equity in net losses in investment in
joint venture .................................... (150,808) (251,550) (55,437) (55,018)
Financial income (expense), net ..................... 970,407 (2,812,292) (3,310,629) (774,636)
Other income (expense) ............................. (465,996) (441,748) (11,088) (99,013)
------------- ------------ ----------- -----------
Loss from continuing operations before
taxation ......................................... (10,498,835) (17,577,478) (5,238,300) (3,938,622)
Tax provision (credit) ............................. 41,552 1,658 (121) 5,409
------------- ------------ ----------- -----------
(10,457,283) (17,575,820) (5,238,421) (3,933,213)
Discontinued operations loss (income) .............. (308,532) (797,770) (1,700) 25,138
Minority interest .................................. (1,732) 1,834 (2,005) 77,897
------------- ------------ ----------- -----------
Net Loss ........................................... (10,767,547) (18,371,756) (5,242,126) (3,830,178)
============= ============ =========== ===========
Net loss Per share for continuing operations .......
============= ============ =========== ===========
basic ($ 0.26) ($ 0.63) ($ 0.13) ($ 0.10)
============= ============ =========== ===========
diluted ($ 0.26) ($ 0.63) ($ 0.13) ($ 0.10)
============= ============ =========== ===========
Net loss per share including discontinued
operations .......................................
============= ============ =========== ===========
basic ($ 0.27) ($ 0.66) ($ 0.13) ($ 0.10)
============= ============ =========== ===========
diluted ($ 0.07) ($ 0.66) ($ 0.13) ($ 0.10)
============= ============ =========== ===========
Weighted Average Shares Outstanding - basic ........ 40,094,139 27,966,383 40,094,139 40,094,139
============= ============ =========== ===========
Weighted Average Shares Outstanding - diluted ...... 40,094,139 27,966,383 40,094,139 40,094,139
============= ============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -----------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital/(Deficit) ..................... $(23,522,002) $(20,607,970) $ (9,373,049)
Total Assets .................................. 6,937,232 6,608,642 6,302,328
Total Liabilities ............................. 26,131,676 23,440,814 11,611,064
Minority Interest ............................. 404,483 404,209 402,477
Stockholder's Equity/(Deficiency in Net Assets) (19,598,927) (17,236,381) (5,711,213)
</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 OF THE COMPANY 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, 1998 and first quarter 1999 financial results include the
consolidated accounts of the Company, its wholly owned subsidiary CM(UK) and
CM(UK)'s wholly owned subsidiary, Onyx, and the Company's 81.6% owned subsidiary
Unimedia, and Unimedia's 90% owned subsidiary TopCard SA ("TopCard"). The
Company's 50% 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. Both Unimedia and TopCard have revenues
from the sales of goods and services. Results for 1998 and first quarter 1999
also include the activities of Pixel Ltd. and its 47.5% interest in Henry
Communications, Ltd., which is accounted for using the equity method. Pixel was
effectively acquired as of January 1, 1998, has been consolidated as of its date
of acquisition. Pixel's revenues are generated from the sale of animation and
graphic design to Israel Cable Programming and from services provided in its
post-production editing facilities. The Company's interest in TIAG has been
accounted for as an asset held for disposition.
The 1997 Consolidated Financial Statements have been restated to
conform to the 1998 Consolidated Financial Statements. The restatement is in
respect of the treatment of the Company's issued stock held by Unimedia. The
stock held was within investments in the original 1997 Financial Statement and
the cost was adjusted by a year end valuation provision. The 1997 Restated
Financial Statements were restated to show the holding at original cost and as
an element of Shareholders' Equity. In Fiscal 1998, the results of Tinerama are
treated as discontinued operations and the 1997 comparatives have been
reclassified accordingly.
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<PAGE>
The Company has recently issued a significant amount of debt convertible
into Common Stock at $0.10 per share ($1.00 per post Reverse Split 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. While the Company's Common Stock is
quoted on the Bulletin Board maintained by the NASD, there is currently only a
limited 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 ($1.00 per post Reverse Split
share) when such convertible debt were issued, the difference between the fair
market value of such shares and $0.10 per share ($1.00 per post Reverse Split
share) would be charged to the Company's operations.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH
31, 1998
The net loss for the quarter ended March 31, 1999 was $5.24 million,
compared to a net loss of $3.83 million for the three months ended March 31,
1998. At an operating level, however, the operating loss decreased significantly
to $1.86 million for the quarter ended March 31, 1999, compared to $3.0 million
for the quarter ended March 31, 1998. The increase in net loss for the 1998
first quarter was primarily attributable to an increase in the financial expense
charge in respect of higher loan interest and a significant non-cash foreign
exchange loss arising since December 31, 1998. See Note 12 of Notes to Unaudited
Consolidated Financial Statements.
The net loss per share for the quarter ended March 31, 1999 (basic and
diluted) including discontinuing operations was $0.13, compared to a net loss
per share (basic and diluted) of $0.10 for the quarter ended March 31, 1998.
Weighted average shares outstanding basic and diluted were 40,194,139 for both
period.
Operating revenues for the quarter ended March 31, 1999 totaled $0.58
million, a decrease of $35,000 compared to revenues of $0.62 million for the
quarter ended March 31, 1998. Both Onyx and TopCard recorded small increases in
their operating revenue of $7,000 and $38,000 respectively, whilst Pixel had a
decrease in revenue of $58,000.
Operating costs, including staff costs, depreciation and amortization
totaled $2.45 million for the quarter ended March 31, 1999, compared to $3.63
million for the quarter ended March 31, 1998. The net decrease in operating
costs is primarily reflective of the cost reductions made across all the group
operations, but particularly at Onyx, where operating costs were reduced to
$1.55 million in the quarter to March 31, 1999 compared to $2.47 million in the
quarter ended March 31, 1998. Management believes that Onyx's operating costs
will be further reduced in 1999 compared to 1998 as a result of the full
implementation of the strategic agreement with Groupe AB which was entered into
in August 1998 and became effective in December. Operating expenses of Onyx
include programming costs, broadcast studio expenses and transmission expanses.
Under the two year strategic alliance agreement, a subsidiary of Groupe AB
provides Onyx with television technical services, the use of a transponder and
uplink facilities, transmission services and use of a master control room as
well as contributing to cable transmission fees, all for an annual cost of $3.12
million. The Company believes that the agreement will provide annual saving of
up to $3 million compared to the costs of the original 1995 contracts for these
services which have now been terminated.
Depreciation and amortization for the quarter ended March 1999 was
$0.22 million, compared to $0.23 million for the corresponding period in 1998.
The increase in Financial Expense relates to higher interest expense of
$0.82 for the quarter ended March 1999, compared to $0.21 million for the
quarter ended March 1998. This is due to the substantial increase in loans
obtained over the year. For the quarter ended March 31, 1999, Financial Expense
also included a charge of $2.49 million (Quarter to March 31, 1998-$0.57 million
charge) in respect of non-cash foreign exchange losses arising from changes in
currency exchange rates at March 31, 1999 compared to exchange rates at December
31, 1998.
As a result of all of the above factors, the Company's loss from
continuing operations was $5.24 million for the quarter ended March 31, 1999, an
increase of $1.30 million over the loss of $3.94 million for the quarter ended
March 31, 1998.
Total revenues at Onyx Television in Fiscal 1999 totaled $0.33 million,
a small increase of $7,000 over revenues of $0.32 million in the quarter ended
March 31, 1998. Onyx's management believes that as a result of the strategic
alliance agreement with Groupe AB, together with changes in governmental
regulations being put into effect in 1999, increased network distribution
already achieved and the recently appointed media agency, Onyx should be able to
substantially increase the development of its revenue over the next year.
34
<PAGE>
The German media authorities have recently confirmed that Onyx's rating
in Germany are ahead of its two main competitors VH-l and VIVA 2 and the Company
believes that Onyx's distributions will increase further during 1999. At the
present time, Onyx Television reaches approximately 11 million cable homes and
an indeterminable number of direct satellite homes.
Both Pixel and TopCard reported net profit of $45,000 and $48,000
respectively, for the first quarter of 1999 compared to $60,000 and nil for the
corresponding period in 1998. Pixel includes a share of the net loss of $8,000
for Henry, its 47.5% owned subsidiary, for 1999 compared to a share of net loss
of $22,000 for the corresponding period. Henry is accounted for on an equity
basis.
During 1998, the Board in its review of investments approved a decision
to dispose of Timerama and it is anticipated that its sale will be concluded
during 1999. Accordingly the operating loss of Tinerama has been reclassified as
a discontinuing operation and the 1998 results have been similarly restated.
Blink reported a similar operating loss for the first quarter of 1999 as for the
same period in 1998. Blink has still not met its original target objectives and
discussions with management are in progress in regard to its potential
divestment.
35
<PAGE>
YEAR ENDED DECEMBER 31, 1998 AND 1997
Operating revenues for the year ended December 31, 1998 were $2.47
million, an increase of $1.18 million compared to operating revenues of $1.29
million for 1997. This increase in operating revenue from period to period was
largely attributable to revenues for 1998 of an aggregate of $1.70 million of
operating revenues at 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.)
Advertising sales by Onyx Television during 1998 totaled $0.76 million,
compared to $0.46 million for 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. 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 when the
Company has sufficient authorized but unissued shares to allow for such
conversion).
Operating costs, including staff costs, depreciation and amortization,
totaled $13.32 million for Fiscal 1998 (1997 - $16.24 million). Fiscal 1998
included $2.40 million of operating costs relating to the operations of Pixel,
Unimedia and TopCard. This compares to $0.72 million in 1997 relating to TopCard
and Unimedia.
Total operating costs, excluding operating expenses associated with the
operations of Pixel, Unimedia and TopCard, decreased by $4.6 million for 1998
compared to 1997. During the latter part of 1997, and throughout 1998, the
Company took steps to substantially reduce costs across all the group operations
and these changes favorably impacted operating costs for 1998.
Onyx's operating costs were reduced to $8.24 million in Fiscal 1998
from $12.0 million in Fiscal 1997 and are set to fall further in 1999 as a
result of the strategic agreement detailed above with Groupe AB. Operating
expenses of Onyx include programming costs, broadcast studio expenses and
transmission expenses.
36
<PAGE>
Depreciation and amortization for Fiscal 1998 was $1.41 million compared
to $1.56 million for Fiscal 1997.
As a result of all of the above factors, the Company's operating loss
was $10.85 million for the year ended December 31, 1998, compared to an
operating loss of $14.96 million for the same period in 1997.
The increase in other expenses relates to the loss incurred on the sale
of investments in 1998. Interest expense also increased substantially during the
1998 period compared to interest expense in 1997, due to the substantial
increase in borrowings from period to period. Financial income also included a
credit of $2.25 million in respect of foreign exchange gains arising from
currency exchange rates at December 31, 1998 compared to exchange rates at
December 31, 1997 (Fiscal 1997 - $2.51 million charge).
Pixel reported a net profit of $112,000 in Fiscal 1998 compared to a net
profit of $376,000 in the year prior to acquisition. This result included a
share of the net loss of $74,000 for Henry, its 47.5% owned subsidiary, compared
to a share of net profit of $137,000 in the year prior to acquisition. Henry is
accounted for on an equity basis.
During Fiscal year 1998, the Tinerama companies continued to operate in
difficult economic uncertainty resulting in a loss of $308,532, compared to a
loss of $797,770 as restated for Fiscal 1997. While Blink reduced substantially
its operating loss in Fiscal 1998, it has still not met its original target
objectives and management is reviewing ways of eliminating the continuing
losses. During 1998, the Board in its review of investments approved a decision
to dispose of Tinerama and it is anticipated that its sale will be concluded by
the end of 1999. Accordingly the operating loss of Tinerama has been
reclassified as a discontinued operation and the 1997 results have been
similarly restated.
The Company has significant tax losses in the groups arising primarily
from the operating losses incurred in Germany. These tax losses are available to
be carried forward to be set off against future profits in Germany. However, at
the end of 1998, management forecast that the Company may not be profitable in
1999 and therefore no credit for income taxes was made. The Company will
continue to review its tax valuation allowance during future periods.
Taking into account all of these factors, the net loss for 1998 was
$10.77 million ($0.27 per basic and $0.07 per diluted share), compared to a net
loss of $18.37 million ($0.66 per basic and diluted share) for 1997.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The ownership, development and operation of media interests, and
particularly the operation of a television station, requires substantial capital
investment. To date, the Company has financed its capital requirements through
sales of its equity securities and through debt financing. Since inception
through March 31, 1999, the Company has incurred an accumulated deficit of
approximately $53.48 million, principally related to the Company's launch and
operation of Onyx Television. At March 31, 1999, the Company had a negative
working capital of approximately $23.52 million.
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INSTAR LOAN
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 was 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 part of the Instar Loan, CM (UK) 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 10 of Notes to 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 have equal status and that they shall share equally in
the proceeds of the collateral.
The Company and Instar have reached an agreement in principal to settle
their dispute. Under the Instar Settlement, the Company has agreed to pay Instar
$2.2 million, $1.4 million of which was paid at the closing of the Instar
Settlement and the balance of which will be paid (without interest) in
installments of $100,000 over the next eight months. The Company has also agreed
to issue 200,000 post Reverse Split shares to Instar when the Company's
Stockholders approve an increase in the Company's authorized common stock.
Groupe AB has agreed to guaranty repayment of the settlement amounts, and is
obligated to deliver a guaranty agreement to Instar within 30 days after the
closing. As part of the settlement, Universal has agreed that the Company shall
no longer be liable to it regarding its guaranty of the transponder lease.
Additionally, as part of the settlement: (i) the liability of Latitude
Investments, Ltd. ("Latitude") to the Company will be extinguished; (ii) the
Company and Instar, Universal and Latitude will enter into mutual releases
regarding their respective obligations in connection with these matters, and
(iii) the Company and Charles Koppel, the former Chief Executive Officer of the
Company, will enter into a mutual general release. As part of the settlement,
Instar and Universal will release their charges against CM(UK)'s assets and the
stock of CM(UK). The Instar Settlement is expected to be completed in the near
future, although there can be no assurance that the settlement will be
completed.
EQUITY OFFERINGS BY THE COMPANY
In 1995, the founders of the Company organized Excalibur Communications
Limited (n/k/a (CM(UK)) to develop Onyx Television and to own the Company's
interest in TIAG. In December 1995, the founders of the Company exchanged their
shares in Excalibur for shares of the Company's common stock. Simultaneously, in
late 1995 and early 1996, the Company raised net proceeds of $14.4 million in a
private placement of its securities.
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
38
<PAGE>
shares of Common Stock subscribed by Unimedia. At the time of this private
placement, Unimedia was not an affiliate of the Company.
On June 25, 1997, the Company accepted a subscription for $4.0 million
from Unimedia. In this 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, simultaneously with the closing of the share exchange between
certain of the stockholders of Unimedia and the Company, as described below. 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. At the time
of this private placement, Unimedia was not an affiliate of the Company.
Simultaneously with and immediately after this placement, Unimedia
transferred 6,109,140 of the shares which it owned to eight investors at prices
ranging from $0.57 to $0.75 per share. One of these investors was an entity
controlled by David Ho, who at the time of this transaction was not an affiliate
of the Company. That entity, Unbeatable Investments Limited ("Unbeatable")
acquired 4,385,965 of these shares. None of the other investors who purchased
shares from Unimedia at this time were affiliates of the Company or Unimedia. In
connection with the transfer of these shares, Unimedia paid a fee to Valfab for
its services in connection with introducing Unimedia to certain of these
investors. The fee consisted of $195,000 in cash and 106,666 shares of the
Common Stock owned 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. Stockholders of Unimedia who did not participate in
the first closing of 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. The shares issued in the Unimedia Share Exchange were
valued on the Company's books at $0.57 per share. The Company acquired Unimedia
based on their belief that the merged entity would cross fertilize Internet
development activities and television distribution in order to poise the Company
at the convergence of thematic entertainment television and the internet.
Additionally, Unimedia and investors identified by Unimedia provided significant
financing for use in the Company business.
As part of the completion of the first closing of the Unimedia share
exchange, four persons designated by Unimedia became directors of the Company
(Gilles Assouline, Michel Assouline, David Ho and Jean Pierre Souviron). At the
time, the Company's Board consisted of eight persons (Charles Koppel, James
Leitner, Karl Hauptmann, Barry Llewellyn, Stephen Kornfeld, Stanley Hollander,
Marc Sillam and Jean Francois Klein), and it was intended that the Board would
continue as a twelve person Board after completion of the Unimedia Share
Exchange. However, shortly after the closing, three of the Company's Board
members (Charles Koppel, James Leitner and Karl Hauptmann) unexpectedly
resigned from the Board.
At the time of the closing of the Unimedia Share Exchange, Unimedia held
4,908,403 shares of the Common Stock. Subsequent to the closing of the Unimedia
Share Exchange, Unimedia has transferred 3,240,487 of these shares to investors
in several private transactions, as follows:
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<PAGE>
TRANSFEREE SHARES
TRANSFERRED
Transferees not affiliated with the Company and Unimedia....... 1,244,487
Stockholders of TopCard(1)..................................... 456,000
Gralec Establishment(2)........................................ 1,540,000
---------
3,240,487
=========
- --------------------
(1) Shares were transferred to the stockholders of TopCard in connection with
Unimedia's acquisition of 80% of TopCard's outstanding shares. See
"Business of the Company-Other Businesses-TopCard, S.A." for information
regarding this transaction. None of the TopCard stockholders were
affiliates of the Company or Unimedia at the time that these shares were
transferred to the stockholders of TopCard.
(2) During the first half of 1998, Unimedia transferred 1,540,000 shares of the
Company's Common Stock to Gralec Establishment ("Gralec") for an aggregate
purchase price of $500,000. 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 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 has agreed with
Gralec to extend the period during which the registration may be completed
until April 30, 1999. In return, the Company has granted Gralec: (1) a
subscription to purchase 2.2 million pre Reverse Split shares for a
purchase price equal to the net proceeds from the sale of 50,000 ActivCard
shares, and (ii) an option to purchase 6.0 million pre Reverse Split shares
of its authorized but unissued common stock at an exercise price of $0.10
per share, which option will be exercisable until 30 days after the shares
of Common Stock originally issued to Gralec are registered for resale.
These transfers were effected to raise funds for the Company's and
Unimedia's operations and to complete the acquisitions of TopCard and Pixel.
At the date of this Proxy Statement, Unimedia continues to own 1,667,916
shares of the Company' Common Stock, including 600,000 shares which have been
pledged by Unimedia to Bank Hapoalin to secure Unimedia's guarantee to that bank
of certain indebtedness of Pixel, Ltd.
The Company's short term funding requirements were also met during the
fourth quarter of 1997 through direct private placements by the Company to four
non-U.S. investors of an aggregate of 793,335 shares of the Company's Common
Stock (raising $586,000 at prices between $0.60 and $0.75 per share).
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FUNDS BORROWED SUBSEQUENT TO THE UNIMEDIA SHARE EXCHANGE FROM
SUPERSTAR AND GROUPE AB
In September 1997, the Company borrowed $500,000 of short term working
capital in the form of a convertible loan from 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.
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
replace a loan previously made to CM(UK) (see above) by Unbeatable. The Notes
bear interest at the rate of 13% per annum and were 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 were not convertible until the Company has held a
stockholders meeting at which its Articles of Incorporation were 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 equally 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 pre Reverse Split 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 pre Reverse Split 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 pre Reverse Split 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 stockholder 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 borrowed $2,000,000.
Outstanding amounts under the MMP Line of Credit bear interest at the rate of
13% per annum. Outstanding principal and accrued interest was due and payable on
December 31, 1998 and the Loan has recently been amended (see below). As further
consideration for granting the MMP Line of Credit, MMP was granted the right,
until March 31, 2000, to purchase pre Reverse Split 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 stockholders meeting to authorize additional shares of
authorized but unissued
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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 (bearing interest at the rate of 13% per annum), 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 available
for issuance. See Proposals 1 and 2. If stockholder approval of the increase in
the authorized common stock is not obtained (by reason of Proposal 2 being
defeated), 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 and assuming no exercise of options and warrants,
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
stockholders of the increase in the Company's authorized Common Stock.
In March 1999, Groupe AB agreed to fund an additional $6.0 million to
the Company for working capital and to all the Company repay indebtedness,
including the funds required to complete the Instar Settlement. Such amount will
be funded over the next year and will automatically convert into Common Stock at
$0.10 per pre-Reverse Split share ($1.00 per post Reverse Split share).
DEBT DUE FROM LATITUDE INVESTMENTS LIMITED
The Company's balance sheet at December 31, 1998 includes a due from
stockholder of $313,691. This amount represents an amount due from Latitude, one
of the Company's founding stockholders. See "Certain Relationships and Related
Transactions." This amount was initially presented to the Company as a deposit
paid by Latitude 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 had
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. This obligation will be deemed satisfied as part of the Instar
Settlement.
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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 has been advised that
KPN has called upon the guaranty from Universal (see discussion above) and drawn
down upon the 500,000 ECU (approximately $587,000) being held to secure the
guaranty. As a result, the Company owed the amount paid by Universal back to
Universal. However, the Company's obligation to Universal will be deemed
satisfied as part of the Instar Settlement.
LIQUIDITY AND CAPITAL RESOURCES
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 Reverse Split is
approved and the Company's authorized Common Stock available for issuance is
increased thereby). 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 additional 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 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 stockholders 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,
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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.
INDEPENDENT AUDITORS
The Company has engaged the firm of PricewaterhouseCoopers to act as the
Company's independent auditors for the fiscal year ended December 31, 1998 and
intends to engage them as the Company's auditors for 1999. The Company believes
that PricewaterhouseCoopers has the personnel, professional qualifications and
independence necessary to act as the Company's independent auditors.
Representatives of PricewaterhouseCoopers are expected to appear at the
Meeting to make a statement, if they wish to do so, and to be available to
answer appropriate questions from stockholders at that time.
Deloitte & Touche ("Deloitte & Touche"), which served as the Company's
independent auditors during the fiscal years ended December 31, 1995, 1996 and
1997, resigned as the Company's independent auditors effective on February 18,
1999. In connection with their audits of the Company's financial statements for
each of the two fiscal years ended December 31, 1997 and 1996, and in the
subsequent interim periods preceding their resignation, there were no
disagreements between the Company and Deloitte & Touche on any matters of
accounting principles or practices, financial statement disclosure or auditing
scope or procedures which, if not resolved to the satisfaction of Deloitte and
Touche would have caused them to make reference to the subject matter of the
disagreement(s) in connection with their report. Deloitte and Touche's audit
reports for 1997 and 1996 contained explanatory paragraphs as to the going
concern and as to the outcome of certain litigation against the Company.
Stockholder approval of the selection of the Company's auditors is not
required, and the Company has not submitted such appointment to a vote of
stockholders for ratification.
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PROPOSALS
PROPOSAL 1. RATIFY THE AGREEMENTS BETWEEN THE COMPANY AND GROUPE
AB AND THE COMPANY AND SUPERSTAR
The convertible debt due to Superstar and Groupe AB was issued in
connection with the financing transactions to fund the Company's operations and
for services. See "Management's Discussion and Analysis - Financial Condition,
Liquidity and Capital Resources" for a description of the outstanding
convertible debt due to Groupe AB and Superstar.
Assuming that the Company's stockholders vote to approve the Reverse
Split, thereby increasing the Company's authorized but unissued common stock
(since the Company's authorized common shares will remain at 50 million shares),
and as a result all of outstanding convertible debt of the Company held by
Groupe AB and Superstar is automatically converted into Common Stock (including
interest and penalties thereon), Superstar and Groupe AB will collectively own
more than 80% of the outstanding Common Stock (more than 90% after Groupe AB
earns the additional shares based upon it satisfying its funding obligations and
its performing services under its two-year services agreement with Onyx
Television) and will thereby control the Company.
The terms of the outstanding convertible debt due to Groupe AB and
Superstar can be summarized as follows:
CONVERTIBLE DEBT(1)
<TABLE>
<CAPTION>
POST-REVERSE SPLIT
POST REVERSE SPLIT SHARES ISSUABLE ON
PAYEE AMOUNT CONVERSION PRICE ($) CONVERSATION
- ----- ---------- -------------------- ------------------
<S> <C> <C> <C>
Superstar Ventures, Ltd......... $1,250,000 1.00 1,250,000
Superstar Ventures, Ltd. 400,000 1.00 400,000
MMP, S.A........................ 2,000,000 1.00 2,000,000
Superstar Ventures, Ltd......... 5,000,000 1.00 5,000,000
MMP, S.A.(2).................... 6,640,000 1.00 6,640,000
MMP, S.A.(3) 6,000,000 1.00 6,000,000
Shares issuable to Superstar and
MMP, S.A. on conversion of interest
and penalties (4)............... 1,660,000
----------
22,950,000
==========
<FN>
- ----------
(1) See "Management's Discussion and Analysis" and "Certain Relationships and
Related Transactions." All of this debt bears an interest at the rate of
13% per annum and is repayable in full (with interest and a 20% penalty) if
the Reverse Split (Proposal 2) and this Proposal 1 is not approved, 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 (which will occur upon the approval of the Reverse Split).
(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 stockholders 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) 1,520,000 shares will be issued assuming conversion on April 30, 1999 and
4,480,000 shares will be issuable thereafter, as MMP makes the contemplated
fundings of the Company.
(4) Assumes conversion of debt into Common Stock on April 30, 1999.
</FN>
</TABLE>
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The Company believes that the terms of its agreements with Groupe AB and
Superstar are more favorable than could have been obtained from an unaffiliated
third party. Nevertheless, since these agreements are with affiliates, there
remains an issue as to whether the terms of such agreements are fair and
reasonable to the Company. In that regard, the convertible debt becomes
automatically due and payable (with interest and a 20% penalty) if the
stockholders do not approve an increase in the authorized Common Stock available
for issue allowing for conversion of this debt (which will occur upon the
approval of the Reverse Split). As a result, Board is asking the stockholders to
ratify the terms of the Company's arrangements with Superstar and Groupe AB as
described in this Proxy Statement. The proposal requires approval by a majority
of the Stockholders voting, in person or by proxy, at the meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF PROPOSAL 1.
PROPOSAL 2. REVERSE STOCK SPLIT
TERMS OF REVERSE SPLIT
The Board has 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. 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 $.001 per share. The rights and privileges of the
holders of the Common Stock will be substantially unaffected by the Reverse
Split and each stockholder's percentage ownership interest in the Company,
proportional voting power and other rights will remain unchanged, except to the
extent stockholders receive cash in lieu of fractional shares as described below
and except as described below.
The Company presently is authorized under the Articles of Incorporation
to issue 50,000,000 shares of the Common Stock. If this proposal is approved,
the authorized capital of the Company will remain at 50 million authorized
common shares.
COMMON AND COMMON EQUIVALENT SECURITIES OUTSTANDING
As of the Record Date, 40,094,139 shares of the Common Stock were issued
and outstanding. If Proposal 2 is adopted, the Reverse Split will reduce the
number of issued and outstanding shares of the Common Stock to approximately
4,009,413, however the number of authorized shares will remain at 50,000,000, so
that at these effective time of the Reverse Split, the Company will have
45,990,587 authorized but unissued common shares available for issue. The
Reverse Split will not affect the Company's retained deficit, and stockholders
equity will remain substantially unchanged.
At the time of Reverse Split, all of the outstanding convertible debt
due to Groupe AB and Superstar will be converted. See Proposal 1 for a
description of the shares to be issued upon conversion of the debt due to Groupe
AB and Superstar. The Company will also have the following additional securities
convertible into common stock outstanding:
[CHART ON NEXT PAGE]
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WARRANTS AND OPTIONS EXERCISE PRICE SHARES SUBJECT TO
($) WARRANTS AND OPTIONS
-------------- --------------------
Board and Management
Stock Options (1)............... 0.35 3,700,000
Option Granted to Diamond
Productions (2)................. 0.10 16,000,000
Warrants Outstanding or Issuable(3)
2.50 1,297,675
3.125 511,199
4.00 6,339,144
Gralec Subscription and Option (4) 8,200,000
Instar Settlement (5) 2,000,000
- ---------------------------------
(1) See "Executive Officers and Directors - Board Compensation."
(2) See "Executive Compensation-Stock Options" and Proposal 4.
(3) See "Price Range for the Common Stock-Common Stock Purchase Warrants."
(4) See "Management's Discussion and Analysis - Liquidity and Capital
Resources" for information.
(5) See "Certain Relationships and Related Transactions" for information.
Further, the Company has granted Stephen Kornfeld the right to convert
amounts due to him from the Company for consulting services provided in 1997
(plus the interest thereon), aggregating approximately $55,000, 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 through the
approval of the Reverse Split.
EFFECT OF REVERSE SPLIT
Presently authorized shares of Common Stock are not sufficient to meet
all of the above-described requirements, and the Board of Directors believes
that it is in the Company's best interests that the Company have the ability to
issue the shares required to complete the Company's existing contractual
obligations and also the flexibility to issue an additional 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. 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 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.
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.
47
<PAGE>
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 set forth herein, the
Company is not aware of any efforts to obtain control of the Company.
The Board also 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
the future 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 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,
48
<PAGE>
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 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 as
reported on the Bulletin Board as maintained by the NASD on the five most recent
business days preceding the Effective Date that the
49
<PAGE>
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.
Approval of the Reverse Split requires the affirmative vote of a
majority of the outstanding shares of Common Stock.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF PROPOSAL 2.
50
<PAGE>
PROPOSAL 3. RATIFICATION OF WARRANT GRANTED TO AN ENTITY
CONTROLLED BY THE COMPANY'S CHIEF EXECUTIVE OFFICER AND
CHIEF OPERATING OFFICER
At the Meeting, stockholders 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 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 as proposed in Proposal 2 is
approved). The warrant vests immediately upon its grant, but is not exercisable
unless and until the Company's stockholders approve an increase in the
authorized Common Stock available for issuance.
The Company's Board of Directors 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's Board
of Directors believes that the terms of this warrant are fair and reasonable to
the Company's stockholders.
While stockholder 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 Michael 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.
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 PROPOSAL 3.
PROPOSAL 4. ELECTION OF DIRECTORS
At the Meeting, six 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,
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.
51
<PAGE>
PROPOSAL 5. VOTE TO ADJOURN
Stockholders are being asked to provide proxies to give the authority,
in the discretion of the proxy holders, to vote to adjourn the meeting if there
are not sufficient votes at the date of the meeting to approve one or more of
the matters to be voted upon at the meeting. Approval of this proposal will
allow the Company, to the extent that shares voted by proxy are required to
approve a proposal to adjourn the meeting, to continue to solicit proxies to
determine whether sufficient shares will be voted in favor or against one or
more of the proposals. If the meeting cannot be adjourned because shares voted
by proxy may not be voted in favor of a motion to adjourn the meeting, it may
mean that one or more of the proposals described in this Proxy Statement will
fail, not because such proposals did not receive the votes of a majority of the
shares represented at the meeting, but rather because such proposals did not
obtain the requisite percentage vote of the stockholders in time to be approved
by the time of the meeting.
THE BOARD RECOMMENDS THAT THE STOCKHOLDERS VOTE IN FAVOR OF PROVIDING THE PROXY
HOLDERS WITH DISCRETION TO VOTE THEIR SHARES TO ADJOURN THE MEETING.
PROPOSAL 6. 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 1998 filed with the
Securities and Exchange Commission, including the financial statements and
schedules thereto. Such written request should be directed to the Company,
attention: Corporate 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
July __, 1999
52
<PAGE>
<TABLE>
<CAPTION>
CAPITAL MEDIA GROUP LIMITED
INDEX TO FINANCIAL STATEMENTS
PAGE
----
<S> <C>
YEAR END 1998 AND 1997
Independent Auditors' Report of PricewaterhouseCoopers to the Board of
Directors and Stockholders of Capital Media Group Limited.............................F-2
Independent Auditors' Report of Deloitte & Touche to the Board of
Directors and Shareholders of Capital Media Group Limited.............................F-3
Independent Auditors' Report of Coopers & Lybrand to the Board of
Directors and Stockholders of Tinerama Investment AG..................................F-4
Consolidated Balance Sheet at December 31, 1998 and 1997 (restated)........................F-5
Consolidated Statement of Operations for the Years ended December 31, 1998 and
1997 (restated)...................................................................F-6
Consolidated Statement of Stockholders' Equity for the Years ended December 31,
1998 and 1997 (restated)...........................................................F-7
Consolidated Statement of Cash Flows for the Years ended December 31, 1998
and 1997 (restated)................................................................F-8
Notes to the Consolidated Financial Statements.............................................F-9
QUARTER ENDED MARCH 31, 1999 AND 1998
Unaudited Consolidated Balance Sheet at March 31, 1999 and December 31, 1998..............F-31
Unaudited Consolidated Statement of Operations for the three months ended
March 31, 1999 and 1998 (restated)................................................F-32
Unaudited Consolidated Statement of Stockholders' Equity for the three months
ended March 31, 1999 and 1998 (restated)..........................................F-33
Unaudited Consolidated Statement of Cash Flows for the three months ended
March 31, 1999 and 1998 (restated)................................................F-34
Notes to Unaudited Consolidated Financial Statements......................................F-35
</TABLE>
F-1
<PAGE>
CAPITAL MEDIA GROUP LIMITED
INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND
STOCKHOLDERS OF CAPITAL MEDIA GROUP LIMITED FOR 1998
To the Board of Directors and
the Stockholders of Capital Media Group Limited
In our opinion, the consolidated balance sheet and the related
consolidated statements of income, of cash flows and of changes in stockholders'
equity presented on pages F-5 through F-30, present fairly, in all material
respects, the financial position of Capital Media Group Limited and its
subsidiaries (the "Company") at December 31, 1998 and the result of their
operations and their cash flows for the year in conformity with generally
accepted accounting principles in the United States of America. 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 conducted our audit in accordance with
generally accepted auditing standards in the United States of America which
require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2 of 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 16. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers
Paris, June 4, 1999
F-2
<PAGE>
CAPITAL MEDIA GROUP LIMITED
INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND
SHAREHOLDERS OF CAPITAL MEDIA GROUP LIMITED FOR 1997
We have audited the accompanying consolidated balance sheet of Capital
Media Group Limited and its subsidiaries ("the companies") as of December 31,
1997 and the related consolidated statements of operations, stockholders' equity
and cash flows for the year ended December 31, 1997. 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 and 1% of consolidated
operating loss for the year then ended. 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 the results of their operations and their cash flows for the year
ended December 31, 1997 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 16. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 14 to the financial statements, the outcome of
certain litigation against the company is unknown at this time.
As discussed in Note 18 to the financial statements, the accompanying
consolidated financial statements for the year ended December 31, 1997 have been
restated.
DELOITTE & TOUCHE
Chartered Accountants
London, England
14 October 1998 (13 April 1999 as to Note 18)
F-3
<PAGE>
CAPITAL MEDIA GROUP LIMITED
REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
TINERAMA INVESTMENT AG
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income and retained earnings and of cash
flows present fairly, in all material aspects the financial position of Tinerama
Investment AG and its subsidiaries as of December 31, 1997 and 1996 and the
results of its operations and its cash flows for each of the two years in the
period ended December 31, 1997 in conformity with Generally Accepted Accounting
Principles in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with Generally Accepted Auditing
Standards in the United States of America, which require that we plan and
perform the audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinions expressed
above.
Coopers & Lybrand
September 18, 1998
Bucharest, Roumania
F-4
<PAGE>
<TABLE>
<CAPTION>
CAPITAL MEDIA GROUP LIMITED
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
NOTE DECEMBER 31, DECEMBER 31,
1998 1997
AS RESTATED
(SEE NOTE 18)
($) ($)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents 3 583,320 332,795
Accounts receivable within one year, net of 4
allowances for doubtful accounts of $77,579 1,801,892 1,004,171
(December 31, 1997 - $11,788)
Inventories 93,938 80,364
Amounts due from stockholders 5-17 313,691 313,691
Prepaid expenses and deposits 40,003 507,024
------------ ------------
TOTAL CURRENT ASSETS 2,832,844 2,238,045
Investments 4,153 143,336
Equity in affiliate companies 117,000 87,454
Intangible assets, net of accumulated amortization of
$3,076,882 (December 31, 1997 - $2,203,973) 6 2,858,412 3,452,976
Property, plant and equipment, net 7 796,233 380,517
------------ ------------
TOTAL ASSETS 6,608,642 6,302,328
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable 3,786,764 4,245,888
Accrued expenses 4,630,380 2,625,765
Related parties loans repayable within one year 8-17 14,337,442 4,229,008
Other loans repayable within one year 8 190,000 -
Net liabilities for discontinued operations 9 496,228 338,433
Amounts due to minority stockholders - 171,970
------------ ------------
TOTAL LIABILITIES 23,440,814 11,611,064
COMMITMENTS AND CONTINGENCIES 10-14 - -
MINORITY INTEREST IN SUBSIDIARIES 404,209 402,477
------------ ------------
23,845,023 12,013,541
------------ ------------
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:
$0.001 par value 40,094,139 (December 31, 1997 -
40,094,139) issued and outstanding 40,090 40,090
Additional paid in capital 31,155,909 31,155,909
Shares held by subsidiary-1,667,916 (December 31, 18
1997 - 4,023,396), at cost (950,712) (2,282,752)
------------ ------------
30,245,287 28,913,247
Cumulative translation adjustment 756,406 2,846,067
Accumulated deficit (48,238,074) (37,470,527)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (17,236,381) (5,711,213)
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUIT 6,608,642 6,302,328
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
CAPITAL MEDIA GROUP LIMITED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
YEAR ENDED
DECEMBER 31,
YEAR ENDED 1997
DECEMBER 31, AS RESTATED
1998 (SEE NOTE 18)
NOTE ($) ($)
<S> <C> <C>
Operating Revenue 2,468,490 1,286,076
Operating costs
Staff costs 2,765,239 3,572,498
Depreciation and amortization 1,410,697 1,564,452
Other operating expenses 11 9,145,292 11,104,510
------------ ------------
(13,321,228) (16,241,460)
Operating loss (10,852,738) (14,955,384)
Other (expenses) / income (465,696) 441,748
Financial income (expense) net 12 970,407 (2,812,292)
Equity in net losses of affiliates (150,808) (251,550)
------------ ------------
Loss from continuing operations (10,498,835) (17,577,478)
before taxation
Income tax benefit 13 41,552 1,658
------------ ------------
(10,457,283) (17,575,820)
Discontinued operations 9
Net loss from operation of discontinued
subsidiary including provision for our
share of $84,267 estimated operating
losses through date of disposal (308,532) (797,770)
Minority interest (1,732) 1,834
------------ ------------
Net loss (10,767,547) (18,371,756)
============ ============
Net loss per share for continuing 15
operations - basic ($ 0.26) ($ 0.63)
============ ============
- - diluted ($ 0.26) ($ 0.63)
============ ============
Net loss per share including discontinued
operations 15
- - basic ($ 0.27) ($ 0.66)
============ ============
- - diluted ($ 0.27) ($ 0.66)
============ ============
Weighted average shares - basic 40,094,139 27,966,383
============ ============
Weighted average shares - diluted 40,094,139 27,966,383
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
CAPITAL MEDIA GROUP LIMITED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1998
ADDITIONAL
YEAR ENDED PAID-IN SHARES HELD
DECEMBER 31, 1998 COMMON STOCK CAPITAL BY SUBSIDIARY
SHARES ($) ($) ($)
<S> <C> <C> <C> <C>
Balance at 40,094,139 40,090 31,155,909 (2,282,752)
January 1, 1998
as restated
Translation adjustment -- -- -- --
Net loss
Comprehensive loss -- -- -- --
Issuance of common stock -- -- -- --
Shares held by subsidiary sold -- -- -- 1,332,040
----------- ----------- ----------- -----------
Balance at
December 31, 1998 40,094,139 40,090 31,155,909 (950,712)
=========== =========== =========== ===========
<CAPTION>
CUMULATIVE
OTHER
COMPREHEN-
SIVE INCOME ACCUMULATED
(DEFICIT) DEFICIT TOTAL
($) ($) ($)
<S> <C> <C> <C>
Balance at 2,846,067 (37,470,527) (5,711,213)
January 1, 1998
as restated
Translation adjustment (2,089,661) -- (2,089,661)
Net loss (10,767,547) (10,767,547)
-----------
Comprehensive loss -- (12,857,208)
Issuance of common stock -- -- --
Shares held by subsidiary sold -- -- 1,332,040
----------- ----------- -----------
Balance at
December 31, 1998 756,406 (48,238,074) (17,236,381)
=========== =========== ===========
<CAPTION>
ADDITIONAL
PAID-IN SHARES HELD
COMMON STOCK CAPITAL BY SUBSIDIARY
YEAR ENDED
SHARES DECEMBER 31, 1997 ($) ($) ($)
<S> <C> <C> <C> <C>
Balance at
January 1, 1997 12,663,328 12,663 17,117,651 --
Translation adjustment -- -- -- --
Net loss
Comprehensive loss -- -- -- --
Issuance of common stock 27,430,811 27,427 14,038,258 --
Shares held by subsidiary, at cost -- -- -- (2,282,752)
----------- ----------- ----------- -----------
Balance at
December 31, 1997 as
restated (Note 18) 40,094,139 40,090 31,155,909 (2,282,752)
=========== =========== =========== ===========
<PAGE>
<CAPTION>
CUMULATIVE
OTHER
COMPREHEN-
SIVE INCOME ACCUMULATED
(DEFICIT) DEFICIT TOTAL
($) ($) ($)
<S> <C> <C> <C>
Balance at
January 1, 1997 326,214 (19,098,771) (1,642,243)
Translation adjustment 2,519,853 -- 2,519,853
Net loss (18,371,756) (18,371,756)
-----------
Comprehensive loss -- (15,851,903)
Issuance of common stock -- -- 14,065,685
Shares held by subsidiary, at cost -- -- (2,282,752)
----------- ----------- -----------
Balance at
December 31, 1997 as
restated (Note 18) 2,846,067 (37,470,527) (5,711,213)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
CAPITAL MEDIA GROUP LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
YEAR ENDED
YEAR ENDED DECEMBER 31,
DECEMBER 31, 1997
1998 AS RESTATED.
(SEE NOTE 18)
($) ($)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (10,767,547) (18,371,756)
Adjustment to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,410,697 2,438,829
Equity in net losses of affiliates 150,808 251,550
Minority interest 1,732 (1,834)
Changes in assets and liabilities:
Decrease in other assets and inventories 39,539 635,334
Increase in accounts receivable (798,139) (372,512)
Increase in accrued expenses and other liabilities 2,704,749 3,994,657
------------- -----------
NET CASH USED IN OPERATIONS (7,258,161) (11,425,732)
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, plant and equipment (489,580) (17,742)
Acquisition of intangible assets (31,120) (4,615,776)
Cash proceeds from sale of investments 994,047 390,647
Acquisition of Investments - (2,939,210)
------------- -----------
NET CASH RECEIVED/(USED) IN INVESTING ACTIVITIES 473,347 (7,182,081)
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of shares - 14,924,892
Commission paid on issuance of shares - (859,207)
Increase in short term debt 9,460,000 2,035,000
Repayments of loans (335,000) -
------------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 9,125,000 16,100,685
------------- -----------
Effect of exchange rate changes on cash (2,089,661) 2,519,853
------------- -----------
Net increase in cash and cash equivalents 250,525 12,725
Cash and cash equivalents at beginning of period 332,795 320,070
------------- -----------
Cash and cash equivalent at end of period 583,320 332,795
============= ===========
Supplemental data:
Interest paid 151,977 111,285
Income tax paid 6,222 1,881
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 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"), together with the
Company's 81.6% owned subsidiary Unimedia S.A. ("Unimedia") and Unimedia's
wholly owned subsidiary Pixel Limited ("Pixel"), and its 90% owned subsidiary
TopCard S.A. ("TopCard"). All intercompany accounts and transactions have been
eliminated in consolidation. CM(UK)'s 50% investment interest in Blink TV
Limited ("Blink") and Pixel's 47.5% interest in Henry Communications Limited,
have been accounted for using the equity method, after the elimination of all
significant intercompany balances and transactions. Tinerama Investment AG
("Tinerama"), a 51% owned subsidiary, is treated as discontinued operations (See
Note 9).
The results of Unimedia, TopCard and Pixel have been consolidated in the
consolidated financial statements from September 1997, November 1997 and January
1998, being their respective dates of acquisition.
INVENTORIES
Inventories are stated at the lower of first-in, first-out cost or market value.
Inventories include both raw materials and finished goods.
INTANGIBLE ASSETS
Intangible assets represent purchased broadcast licenses, computer software and
goodwill arising on acquisition of subsidiary undertakings. The amounts in the
balance sheet are stated net of the related accumulated amortization. Computer
software are amortized in the year of their acquisition. Broadcast licenses and
goodwill are amortized on a straight-line basis over periods not exceeding six
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. Any 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:
Fixtures, fittings and equipment 5 to 20 years
F-9
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998
FOREIGN CURRENCY
Assets and liabilities of the Company's foreign subsidiaries are translated at
year-end exchange rates. Income statement items are translated at the average
rate for the period. 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.
Due to the hyper-inflationary situation in Romania, assets and liabilities of
the Company's foreign subsidiary in Romania are translated at historical
exchange rates in accordance with Statement of Financial Accounting Standards
No. 52.
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 realized.
LEASE
Operating leases are charged to expense, on a straight-line basis, over the term
of the lease.
REVENUE RECOGNITION
Sales are recognized when products, services and fees are delivered and when
advertisements are broadcast and thereby invoiced to the customer. Intercompany
charges are eliminated on consolidation and not included in revenues.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred.
EARNINGS PER SHARE
In Fiscal 1997, 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. Diluted income per share is computed on the basis of
weighted average outstanding common shares, plus potential common shares
assuming exercised stock options and conversion of outstanding convertible
securities where issued. All prior year earnings 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, 1998
F-10
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 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.
RECLASSIFICATIONS AND RESTATEMENT
Certain reclassifications have been made to the 1997 year end balances to
conform to the 1998 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 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
In 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions
and other Postretirement Benefits." This statement is required to be adopted in
1999. In 1998, the FASB also issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement, which establishes
accounting and reporting standards for derivative instruments and for hedging
activities, is required to be adopted in fiscal 2000. The Company is currently
in the process of evaluating the impact of adopting these 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, 1998 and 1997, the Company
incurred net losses of $10,767,547 and $18,371,756, respectively. At December
31, 1998, the Company had net current liabilities of $20,111,742 and its total
liabilities exceeded its total assets by $17,236,381. 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 assets 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 16, the Company's
continuation as a going concern is dependent upon its ability to obtain
additional financing as may be required, and ultimately to attain successful
operations. Management reported in March 1999 that it was to propose at the its
forthcoming Stockholders Meeting, a resolution to increase the authorized
capital of the Company and a further resolution to agree to allow the conversion
of certain of the loans received and interest accrued into equity of the
Company. Management reported in March 1999 that it had entered into a further
agreement to provide funding so that the Company can meet its obligations and
sustain operations from sources described in Note 17.
F-11
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998
3. CASH AND CASH EQUIVALENTS
Cash and cash equivalents at December 31, 1998 includes a bank deposit
balance of $520,164 (1997-Nil).
4. ACCOUNTS RECEIVABLE
DECEMBER 31, DECEMBER 31,
Accounts receivable comprise: 1998 1997
($) ($)
Trade receivables $899,352 503,605
Taxation receivables 19,761 449,167
Other debtors receivable 882,779 51,399
------------ ------------
1,801,892 1,004,171
============ ============
5. AMOUNT DUE FROM STOCKHOLDER
In December 1995, the Company issued 261,410 shares at $1.20 each to a
stockholder (Latitude Investments, Ltd.) in exchange for that stockholder
guaranteeing the establishment of a contract with PTT Telecom. This
resulted in the stockholder receiving shares for no payment. As part of an
overall agreement with Instar, Universal and Latitude (See Note 17)
this amount will be forgiven.
6. INTANGIBLE ASSETS
DECEMBER 31, DECEMBER 31,
1998 1997
($) ($)
Purchase broadcast licenses 249,570 246,810
Computer Software 591,560 419,978
Goodwill 5,094,165 4,990,161
------------ ------------
5,935,295 5,656,949
Less accumulated amortization (3,076,883) (2,203,973)
------------ ------------
2,858,412 3,452,976
============ ============
Goodwill net of amortization is as follows:
DECEMBER 31, DECEMBER 31,
1998 1997
($) ($)
Tinerama 0 0
Unimedia 2,138,468 2,592,989
Top Card 558,819 677,437
Pixel 78,986 --
------------ ------------
2,776,273 3,270,426
============ ============
F-12
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998
7. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, DECEMBER 31,
Property, plant and equipment consists of: 1998 1997
($) ($)
Fixtures, fittings and equipment 3,211,962 936,382
Less accumulated depreciation (2,415,729) (555,865)
------------ ------------
796,233 380,517
============ ============
8. LOANS REPAYABLE WITHIN ONE YEAR
DECEMBER 31, DECEMBER 31,
1998 1997
($) ($)
Instar Holdings Ltd.* 2,000,000 $ 2,000,000
Unbeatable Investments Ltd.* - 500,000
MMP, SA* 3,120,000 -
Superstar Investments Ltd.* 6,650,000 -
Fontal Ltd.* 200,000 200,000
Oradea* 500,000 500,000
Roland Pardo* 500,000 500,000
Falcon Management* - 335,000
Interest Accrued* 1,367,442 194,008
------------ ------------
Related party loans 14,337,442 4,229,008
Sundry loans 190,000 -
------------ ------------
14,527,442 4,229,008
============ ============
- ------------------------
* A related party.
The terms of the Instar, MMP (a fully owned subsidiary of Groupe AB) and
Superstar loans are detailed in Notes 15 and 16.
The Unbeatable loan was received on October 10, 1997 and carried an interest
rate of 10% per annum and was replaced on January 9, 1998 by a loan from
Superstar Ventures, Ltd., see Note 16.
F-13
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998
LOANS REPAYABLE WITHIN ONE YEAR (CONTINUED)
The Fontal loan was received on December 30, 1997 and carries an interest
rate of 15% per annum and was repayable on February 16, 1998, see Note 14.
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 18,
1998. See Note 14.
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
26, 1998. See Note 14.
The Falcon Loan was made to Unimedia in 1995 and carries an interest rate
of 0.5% per month and was repaid on May 25, 1998.
The sundry loans are in respect of two proposed subscriptions for
1,900,000 shares of common stock at $0.10 per share.
9. DISCONTINUED OPERATIONS
On May 13, 1998, the Company decided to sell its interests in the
Romania company, Tinerama. Discussions with the potential buyer are in
progress and the transaction is expected to be concluded in the second
quarter of 1999. The results of the Tinerama business have been
reported separately as discontinued operations. Prior year consolidated
financial statements have been restated to present the Tinerama
businesses as discontinued. The components of the net liabilities of
the discontinued operations included in the consolidated balance sheets
are as follows:
1998 1997
($) ($)
Current assets
Receivables 79,445 89,984
Inventory 38,930 26,079
Other current assets 34,369 63,848
--------- ---------
152,744 179,911
--------- ---------
Less current liabilities
Accounts payables (138,076) (131,924)
Other current liabilities (564,827) (527,218)
--------- ---------
(702,903) (659,142)
--------- ---------
Net current liabilities (550,159) (479,231)
Minority interests (460,559) (499,503)
Net property, plant and equipment 514,490 640,301
--------- ---------
Net liabilities (496,228) (338,433)
========= =========
F-14
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998
10. COMMITMENTS AND CONTINGENCIES
TRANSPONDER
A bank guarantee was originally provided to KPN Telecom (formerly PTT
Telecom) on November 30, 1995 in the amount of ECU 2,000,000 in
relation to an Agreement entered into by CM(UK) on behalf of Onyx to
lease transponder capacity in order to broadcast a television channel
in Germany. The Agreement for use of the transponder expired on
September 25, 1998 and the guarantee as at December 31, 1998 was ECU
500,000 ($587,000 at December 31, 1998 exchange rates).
The Company was originally not in a position to support the guarantee.
As a result the guarantee was provided by Universal Independent
Holdings Limited ("Universal") (see Note 16 to the Consolidated
Financial Statements).
LEASE 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
agreement, the Company was committed to paying DM 150,000 ($90,000 at
December 31, 1998 exchange rates) per annum.
In January 1996 the Company entered into an agreement to lease master
control and broadcast equipment and editing facilities at Ingleheim
Germany and was committed to paying DM 2,940,000 ($1,765,000 at
December 31, 1998 exchange rates) per annum for the use of the
equipment and facilities until January 2001. The terms of the original
agreement were renegotiated and subsequently the lease was terminated
on September 30, 1998.
In January 1996, the Company entered into an agreement to lease uplink
capacity at a cost of approximately (pound)245,000 ($408,000 at
December 31, 1998 exchange rates) per annum. The lease was terminated
effective October 1998.
The Company has also entered into leases for office space in France,
expiring between 1999 and 2002 at an annualized cost of $100,000 (at
December 31, 1998 exchange rates).
The total rental expense in 1998 and 1997, including transponders and
lease commitments as above, were $4,423,113 and $5,592,000,
respectively.
Under the terms of a two year service agreement which commenced
October 1, 1998, broadcasting facilities for Onyx comprising the
uplink, master control, and satellite transponder broadcasting and
cable transmission costs are provided by Groupe AB at an annual cost
of $3,120,000 (see Notes 15 and 16).
Minimum lease payments under operating lease as of December 31, 1998
are as follows:
$
Years ending December 31, -
1999 $2,648,500
2000 2,044,000
2001 170,000
2002 170,000
2003 and thereafter $ 295,000
----------
$5,327,500
==========
The Company is committed to pay to its directors and officers under
employment agreements an aggregate of $650,000 during the year ended
December 31, 1999.
F-15
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998
RETIREMENT INDEMNITIES AND PENSION PLANS.
Retired employees benefit from State or Government sponsored pension
schemes. Contributions by employers to these sponsored schemes are
expensed as incurred. There are no specific supplemental pension plans
operated by the Company or any subsidiary. There is no liability
arising from retirement indemnity.
11. RESEARCH AND DEVELOPMENT COSTS
TopCard is involved in the development of specific applications based
upon smart card technology including remote security Internet access
and infra-red contactless smart card technology. 1997 costs are from
the date of acquisition.
1998 1997
($) ($)
Research and development costs 268,641 45,330
========= ========
12. FINANCIAL INCOME (EXPENSE) NET
1998 1997
($) ($)
Interest expense (1,284,417) (244,694)
Foreign currency exchange gain/(losses) 2,254,824 (2,567,598)
----------- -----------
970,407 (2,812,292)
=========== ===========
The foreign currency exchange gain in 1998 and the loss in 1997 arose
primarily from the exchange differences arising in the intercompany
loan between CM (UK) and Onyx recorded in pounds sterling and German
Marks, respectively.
13. INCOME TAXES
The income tax benefit consisted of the following:
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
($) ($)
Income tax benefit (41,552) (1,658)
=========== ===========
F-16
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998
The income tax benefit, net, includes $53,321 of research and
development tax credit for TopCard.
Net operating loss carry forwards which give rise to deferred tax
assets at December 31, 1998 are as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
($) ($)
Deferred tax asset on unrealized tax losses 18,408,000 4,180,000
Timing differences 292,000
------------ ------------
Valuation allowances (18,700,000) (4,180,000)
------------ ------------
Total deferred tax assets - -
============ ============
The Company has significant deferred tax assets ($15,828,000)
corresponding to tax losses arising primarily from the operating
losses incurred by Onyx, in Germany. These tax losses are available to
be carried forward indefinitely to be set off against future profits
in Germany. However, at the end of 1998, the management forecast that
the Company will not be profitable in 1999 and therefore no credit for
income tax was recorded. The Company will continue to review its tax
valuation allowance in future periods.
14. LITIGATION
The Company's litigation against Com TV Production und Vertrieb GmbH
("Com") and Nen TV ("Nen") and Mr. John Garman, related 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 the other parties agreed to a form of
settlement, wherein the Company agreed to enter into reciprocal
commercial agreements allowing the other parties to introduce
potential clients wishing to access available down time for
advertising purposes. To date, no client has been introduced to Onyx
by Nen.
In June 1997, a former managing director of Onyx whose employment was
terminated brought suit in Germany for alleged wrongful early
termination of his employment. The suit sought damages of DM750,000
($450,000). Onyx maintained that the action taken was lawful and in
July 1998, the court ruled in favor of Onyx. The plaintiff has
appealed and Onyx believes that it has valid defenses to this claim.
However, there can be no assurance as to the outcome of the matter.
In May 1998, TV Strategies, a US Dallas based television services
company, obtained a default judgment against Onyx for DM300,000
($180,000), plus interest, relating to services which TV Strategies
alleges that they provided to Onyx. Onyx has taken action in the US to
have the default judgment set aside, and in March 1999, the Texas
appeal court overturned that default judgment. Onyx believes that it
has meritorious
F-17
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998
defenses to the suit and intends to vigorously defend same. However,
there can be no assurance as to the outcome of the 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
promissory note. See Note 8 for a description of the Fontal Note. The
Company had pledged the rights to trademarks for the International
Onyx name 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. However, there can be no assurance as to the outcome of the
matter.
Unimedia has three minority stockholders (Oradea, Roland Pardo and
Fontal (see Note 8) 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 stockholders 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 repayment of their unsecured loans due
from Unimedia (see Note 8). In connection with such actions and based
upon the fact that the notes do not by their terms reflect a repayment
date, in February 1999, the French court ruled that repayment of the
loans be made by a number of installments starting February 1999 until
September 1999 and set a lower rate of interest to accrue. Unimedia is
also preparing actions against the principal of Oradea and Pardo for
damages which it believes have been inappropriately caused by reason
of the actions taken by the principal of Oradea and Pardo against
Unimedia and its management.
Charles Koppel, the former chairman and CEO of the Company claimed
constructive dismissal following the Board's selection of a new
President and CEO for the Company in August 1997. In March 1998, the
Company resolved its dispute with Mr. Koppel in regard to his claim
for wrongful dismissal and paid Mr. Koppel (pound)60,000 ($100,000) to
resolve outstanding claims under his service contract with the
Company.
In August 1998, Onyx sued Mr. C. Koppel in Germany. The suit alleges
that certain of Mr. C. Koppel's actions as the managing director of
Onyx were improperly performed and seeks damages in an unspecified
amount. The Company and Mr. C. Koppel will exchange mutual
general releases in connection with the Instar Settlement (see Note
17) and all of the suits between the Company and Mr. C. Koppel will
be dismissed with prejudice.
F-18
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998
15. CAPITAL STRUCTURE
COMMON STOCK PURCHASE WARRANTS
The company has the following issued and vested warrants to purchase common
stock outstanding at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
December 31, December December
1998 Expired 31, 1997 Granted 31, 1996
<S> <C> <C> <C> <C> <C>
DESCRIPTION
Warrants for common stock exercisable @
$4.00 5,200,000 -- 5,200,000 -- 5,200,000
Warrants for common stock exercisable @
$3.125 433,328 (1,600,000) 2,033,328 -- 2,033,328
Warrants for common stock exercisable @
$2.50 1,100,000 (1,200,000) 2,300,000 100,000 2,200,000
------------ ------------- ------------ ------- ---------
6,733,328 (2,800,000) 9,533,328 100,000 9,433,328
============ ============= ============ ======= =========
</TABLE>
All outstanding warrants (except the warrants which expired on
December 31, 1998), expire 36 months from the date of the effective
registration of their underlying shares. 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 (which warrants expired at
December 31, 1998). In September 1996, 100,000 shares and warrants to
purchase an additional 100,000 shares at an exercise price of $2.50
were issued to a director for consulting services.
Additionally, the Company is obliged to issue warrants to former
Unimedia shareholders under the terms of the share exchange agreement
signed in 1997, as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1998 Expired 1997
<S> <C> <C> <C>
Warrants for Common Stock exercisable @ $4.00 1,139,144 -- 1,139,144
Warrants for Common Stock exercisable @ $3.125 77,871 (367,562) 445,433
Warrants for Common Stock exercisable @ $2.50 197,675 (306,177) 503,852
-------------- ------------ ------------
1,414,690 (673,739) 2,088,429
============== ============ ============
</TABLE>
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 the
warrant holders the right, for a period of not less than 61 days, to
exercise their warrants and receive two shares of Common Stock at an
exercise price of $0.30 per share. If the holders of the outstanding
warrants do not exercise this right, the warrants will remain
outstanding on their original terms until their expiration date. This
right will be given to the Company's warrant holders in order to allow
the Company's
F-19
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998
warrant holders to acquire additional Company securities at a lower
price and to raise additional capital for the Company's operations.
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 783,078
warrants which they hold, but at an exercise of $0.20 per share. Auric
was granted this lower price due to the assistance which they provided
to the Company in helping the Company to re-obtain obtain the
quotation on the Bulletin Board maintained by the NASD in 1998.
COMMON STOCK PURCHASE OPTIONS
<TABLE>
<CAPTION>
Outstanding at Outstanding at Outstanding at
December 31, December 31, December 31,
1998 Granted 1997 Granted 1996
<S> <C> <C> <C> <C> <C>
Executive officers options exercisable @ $0.57 375,000 -- 375,000 375,000 --
of which vested 225,000 150,000
Officers options exercisable @ $2.50 300,000 100,000 200,000 100,000 100,000
of which vested 200,000 100,000
Executive officers options exercisable @ $0.35 4,000,000 4,000,000 -- -- --
of which vested 800,000
Non-employee directors options exercisable @ $0.35 500,000 500,000 -- -- --
of which vested 500,000
Options to Diamond Production exercisable @ $0.10 16,000,000 16,000,000 -- -- --
--------------------------------------------------------------
21,175,000 20,600,000 575,000 475,000 100,000
==============================================================
</TABLE>
On August 1, 1997, the Company has entered into three-year employment
agreements with the executive officers providing for them to receive,
in addition to other compensations, options to purchase 200,000 and
175,000 shares of common stock at an exercise price of $0.57 per
share, the price at which transactions were effected at the time. The
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. These options expire 36 months from
the date of their effective registration.
The Chief Financial Officer as part of his service contract is
entitled to receive an option to purchase 100,000 common shares of the
Company at $2.50, the price at which transactions were effected at the
time for each of the years 1996, 1997 and 1998. These options expire
36 months from the date of their effective registration.
On March 10, 1998, the Board of Directors granted options to four
executive officers of the company to purchase an aggregate of
4,000,000 shares of common stock at an exercise price of $0.35 per
share (the price at which common stock was negotiated on the date of
grant). On the same date, non-employee directors were granted options
to purchase an aggregate of 500,000 shares at the same price. The
option vested to executive officers 200,000 each in 1998, with the
balance over 3 years, and to non-employee directors immediately.
The options are valid for 5 years and expire on March 10, 2003.
On December 18, 1998, the Board approved the grant of a two year
warrant to purchase an aggregate of 16,000,000 shares at an exercise
price of $0.10 per share to Diamond Production, a company owned by two
executive directors. This grant has to be approved at the forthcoming
stockholders' meeting.
PRO FORMA NET LOSS AND NET LOSS PER SHARE
The Company has adopted the disclosure requirements of SFAS No 123,
"Accounting for Stock-Based Compensation" and, as permitted under SFAS
No 123 applies Accounting Principles Board Opinion ("APB") No 25 and
related interpretations in accounting for its stock options. Since the
Company awarded the stock options with no discount as compared with
the market price at the time of the grants, there was no related
compensation costs for any of the years presented based on the
estimated grant date fair value as defined by FAS 123. The Company
pro-forma net loss and loss per share for the year ended December 31,
1998 and 1997 are as follows:
1998 1997
$ $
Pro forma net loss
Basic and diluted (10,767,547) (18,371,756)
Pro forma net loss per share
Basic and diluted (0.27) (0.66)
CONVERTIBLE DEBT AT DECEMBER 31, 1998
The following derivative securities outstanding will become
exercisable if the company's stockholders authorize an increase in
additional shares (see Note 2). Interest and penalties accrued are
also convertible into common stock.
<TABLE>
<CAPTION>
CONVERSION SHARES ISSUABLE
PAYEE $ PRICE($) ON CONVERSION
------------- ------------- ---------------
<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 SA 2,000,000 0.10 20,000,000
Superstar Ventures Ltd. 5,000,000 0.10 50,000,000
MMP SA (1) 1,120,000 0.10 11,200,000
Interest and Penalties Accrued 732,419 0.10 7,324,190
------------- ---------------
10,502,419 105,024,190
============= ===============
</TABLE>
- -------------------------
(FOOTNOTES ON NEXT PAGE)
F-20
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998
(FOOTNOTES FROM PRIOR PAGE)
(1) The debt is part of a convertible note under which MMP will
loan $6,640,000 over 2 years. See Note 10 - Lease Commitments.
It is convertible into common stock at $0.10 per share. The
total shares of common stock to be issued are 66,400,000.
These loans (principal and interest) are automatically convertible
into shares of common stock once the Company holds its meeting of
stockholders and its stockholders approve the increase in the number
of authorized shares. The Company has agreed to pay a 2% per monthly
penalty on the outstanding principal of the loans, payable in shares
of common stock, for each month the Company fails to hold its special
stockholders meeting subsequent to November 30, 1998. The convertible
debt becomes automatically due to Superstar and MMP SA and immediately
payable (with interest plus a 20% penalty) if the Company's
stockholders do not approve the above-mentioned share number increase.
F-21
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998
BASIC EPS COMPUTATION
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net income of continuing operations ($10,459,015) ($17,573,986)
-------------- ----------------
Net loss ($10,767,547) ($18,371,756)
-------------- ----------------
Weighted Average Number of Shares 40,094,139 27,966,383
-------------- ----------------
Basic EPS Net loss of continuing operations ($0.26) ($0.63)
-------------- ----------------
Basic EPS Net loss including discontinued operations ($0.27) ($0.66)
------------- ---------------
DILUTED EPS COMPUTATION
Weighted average shares 40,094,139 27,966,383
Warrants(1) - -
Convertible debt - 105,024,190 shares(1) - -
Board options - 1,300,000 vested in 1998(1) - -
-------------- ----------------
Adjusted Weighted Average 40,094,139 27,966,383
-------------- ----------------
Diluted EPS Net Loss of Continuing Operations ($0.26) ($0.63)
------------- ---------------
Diluted EPS Net Loss Including Discontinued ($0.27) ($0.66)
Operations
------------- ---------------
<FN>
- ------------------------
(1) The computation does not assume exercise of the warrants or options since
it would have an antidilutive effect on earnings per share.
</FN>
</TABLE>
16. 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
and third years 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.
F-22
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998
On January 13, 1997, the Company issued a Private Placement Memorandum
offering its securities to accredited investors including to all
existing stockholders. 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 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. See
note 17.
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 July 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 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 10) CM (UK)'s
obligations under the Deed are guaranteed by the Company and Onyx, and
are secured by substantially all of the Company's assets. 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, the latter replacing 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
stockholders' meeting at which its Articles of Association are amended
to increase sufficiently the number of authorized shares of Common Stock
of the Company.
F-23
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998
On March 23, 1998, MMP, SA ("MMP"), a stockholder of the Company made
available a $2,000,000 Line of Credit ("MMP Line of Credit"), which
carried interest at 13% per annum, and has been fully utilized. The
principal and accrued interest was repayable on December 31, 1998, or
earlier if the Company's cash flow enabled repayment.
On March 25, 1998, Superstar loaned the Company an additional $400,000,
payable on the same terms as the MMP Line of Credit.
These two loans are still outstanding at December 31, 1998.
On June 16, 1998, the Company entered into two Memorandum of
Understanding Agreements ("MOU") with Groupe AB ("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, of which $400,000 were received in 1998, and $6.24 million over
a 24-month period through providing operating services to the Company at
a rate of $200,000 per month starting October 1, 1998 and cash advances
of $60,000 per month starting November 1, 1998. 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
stockholders' meeting, which the Company was obligated to hold no later
than November 30, 1998. (See Note 15)
17. SUBSEQUENT EVENTS
The Company has reached an agreement in principal to settle the Instar
Loan. Under the terms of the settlement, the Company will pay Instar
$2.2 million in full settlement of this loan. As part of the
settlement, the company's obligations to Instar and Universal will be
extinguished. (See Notes 8 and 16). Additionally, the obligations of
Latitude Investments, Ltd. to the Company will be deemed paid in full.
(See Note 5). As part of the settlement, all of the securities given
will be released. This transaction is expected to result in a net
credit to income of some $400,000 representing the settlement of the
litigation. There can be no assurance that the settlement will be
completed.
On March 10, 1999, the Company entered into a new $6.0 million
Convertible Promissory Note agreement with AB to provide additional
funding for the Company's operations including $800,000, which was paid
for the purchase of certain technical equipment necessary to implement
the Service Agreement dated July 27, 1998; $3 million is to be loaned in
cash over the five months to July 31, 1999, of which $1,160,000 has been
received by the Company and the balance of $2.2 million, of the Note is
reserved for the Settlement of the proposed repayment of the Instar
loan. (See Note 16). The Note bears interest at the rate of 10% per
annum, and is automatically converted into the Company's Common Stock on
the basis of one share of Common Stock for each $0.10 of principal and
interest. As previous, the Note, may not be converted until the Company
has held its stockholders' meetings at which its Articles of Association
are amended to provide the sufficient number of authorized shares of
Common Stock of the Company.
18. RESTATEMENT
Subsequent to the issuance of the Company's consolidated financial
statements for the year ended December 31, 1997, the Company's
management determined that the 4,023,396 shares of the Company's stock
held at year end should be reflected as an element of stockholders
equity.
Prior to its acquisition by the Company, Unimedia S.A. held 4,556,320
shares in Capital Media Group. Between the date of its acquisition and
the year end, 76,924 shares were sold, and 456,000 formed part of the
consideration given in exchange for the shares in TopCard S.A. The
remaining 4,023,396 shares held at the
F-24
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998
year end were carried in the balance sheet within investments at the
market value of $0.44 per share in the previously issued financial
statements. This was after reducing the investment by approximately
$0.13 per share from the cost of $0.57 per share. The 1997 financial
statements have been restated to reflect this investment as an element
of the Stockholders' Equity at their original cost of $0.57 per share.
The consolidated financial statements have been restated from the
amounts previously reported as follows:
A summary of the significant effects of the restatement are as follows:
<TABLE>
<CAPTION>
As previously reported As restated
($) ($)
<S> <C> <C>
At December 31, 1997:
Investments 2,014,917 143,336
Total Stockholders' Equity (3,927,770) (5,711,213)
For the Year ended December 31, 1997
Other (expenses)/income (44,684) 441,748
Loss from continuing operation before
taxation (18,976,917) (17,577,478)
Net Loss after taxation (18,975,527) (18,371,756)
Net loss per share - basic and diluted (0.68) (0.66)
</TABLE>
19. PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial statement give
effect to the acquisition as of January 1, 1998 of Pixel Limited
(Israel) ("Pixel") by Unimedia, SA, as if the acquisition were effected
as of January 1, 1997. The acquisition was accounted for by the purchase
method of accounting.
The cost of investment by Unimedia was based upon the part
extinguishment of a loan made by Unimedia to Pixel Multimedia, its
parent company, in 1996. The loan including interest and costs
outstanding at December 31, 1997 was $2,700,000. The loan was fully
provided for in the accounts of Unimedia in the year ended December 31,
1996. At December 31, 1997, Pixel Multimedia sold to Pixel certain
software produced for Unimedia for $950,000. On closing of the purchase
of Pixel, Unimedia set-off this debt against the loan and reduced the
loan to $1,750,000. $750,000 was extinguished for the cost of investment
in Pixel and the remaining $1,000,000 is contingently extinguishable if
certain financial performance benchmarks are achieved.
The software has been fully amortized.
The excess of purchase price over the fair value of net assets acquired
is allocated to goodwill and is amortized over six years.
F-25
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998
Pixel and its 47.5% owned subsidiary Henry Communications Ltd. are
engaged in providing services in the area of television, computerized
graphics packaging, animation and special effects for television
commercials and other video graphics production.
19. PRO FORMA FINANCIAL INFORMATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
AS REPORTED
AFTER RESTATEMENT
-----------------
CAPITAL MEDIA PIXEL LIMITED PRO FORMA AS
GROUP ADJUSTED
($) ($) ($)
--------------- ------------- ---------------
<S> <C> <C> <C>
Operating Revenue 1,286,076 720,176 2,006,252
Operating costs
Staff costs 3,572,498 257,000 3,829,498
Depreciation and amortization 1,564,452 238,080 1,802,532
Other operating expenses 11,104,510 43,477 11,147,987
----------- ----------- -----------
16,241,460 538,557 16,780,017
----------- ----------- -----------
Operating profit / (loss) (14,955,384) 181,619 (14,773,765)
Other (expenses)/income 441,748 -- 441,748
Financial income (expense) net (2,812,292) (11,749) (2,824,041)
Equity in net losses of affiliates (251,550) 136,999 (114,551)
----------- ----------- -----------
Loss before income tax provision (17,577,478) 306,869 (17,270,609)
Income tax benefit 1,658 -- 1,658
----------- ----------- -----------
Continued operations (17,575,820) 306,869 (17,268,951)
Discontinued operations (797,770) -- (797,770)
Minority interests 1,834 (56,464) (54,630)
----------- ----------- -----------
Net loss (18,371,756) 250,405 (18,121,351)
=========== =========== ===========
Net loss per share for continuing operations ($ 0.63) ($ 0.65)
=========== ===========
Weighted average shares outstanding 27,966,383 27,966,383
=========== ===========
</TABLE>
F-26
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998
20. SEGMENT INFORMATION BY ACTIVITY AND GEOGRAPHIC AREA
The following financial information is summarized by business segment
and country.
- The television media segment contains the operations of Onyx; and
- The technology segment contains the operations of Unimedia, Pixel
and Topcard.
Capital Media Group's activities are concentrated in Germany, France
and Israel (Revenues account for: 1998 - approximately 31%, 39%, and
29% respectively, 1997 - approximately 35%, 65% and nil respectively).
Revenues were primarily derived from their domestic markets. In 1998,
in Israel all revenue was derived under contract from one Company,
Israeli Cable Programming. In France 55% of revenue was derived from
Societe Marseillaise de Transport.
<TABLE>
<CAPTION>
Television Elimination &
Media Technology Corporate Total
($) ($) ($) ($)
YEAR ENDED DECEMBER 31, 1998
<S> <C> <C> <C> <C>
Revenues 760,824 1,697,381 10,285 2,468,490
Inte-segment revenues -- -- -- --
----------- ----------- ----------- -----------
Total revenues 760,824 1,697,381 10,285 2,468,490
(Losses) from operations (7,480,286) (674,215) (2,698,237) (10,852,738)
Other (expenses) income 324,495 (348,240) (441,951) (465,696)
Interest revenue 0 10,752 0 10,752
Interest expenses (64,352) (169,086) (1,061,732) (1,295,170)
Other financial income, net 1,795,444 261,318 198,063 2,254,825
Equity in net losses of affiliates -- (74,000) (76,808) (150,808)
Loss in discontinued business -- -- (308,532) (308,532)
Income tax benefit (4,887) 47,774 (1,335) 41,552
Minority interest -- (1,732) -- (1,732)
----------- ----------- ----------- -----------
Net loss (5,429,586) (947,429) (4,390,532) (10,767,547)
=========== =========== =========== ===========
Total assets 1,066,965 2,385,586 3,156,091 6,608,642
=========== =========== =========== ===========
Capital expenditure 385,788 103,181 611 489,580
=========== =========== =========== ===========
Depreciation of fixed assets 135,355 288,123 17,008 440,486
=========== =========== =========== ===========
</TABLE>
F-27
<PAGE>
<TABLE>
<CAPTION>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998
SEGMENT INFORMATION BY ACTIVITY AND GEOGRAPHIC AREA (CONTINUED)
YEAR ENDED DECEMBER 31, 1998 GERMANY FRANCE ISRAEL OTHER CORPORATE TOTAL
($) ($) ($) ($) ($)
<S> <C> <C> <C> <C> <C>
Revenues 760,824 970,381 727,000 10,285 2,468,490
Inter-segment revenues -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Total revenues 760,824 970,381 727,000 10,285 2,468,490
(Losses) income from operations (7,480,286) (932,215) 258,000 (2,698,237) (10,852,738)
Other (expense) income 324,495 (343,240) (5,000) (441,951) (465,696)
Interest revenue -- 10,752 -- -- 10,752
Interest expenses (64,352) (102,086) (67,000) (1,061,732) (1,295,170)
Other financial income, net 1,795,444 261,318 -- 198,063 2,254,825
Equity in net losses of affiliates -- -- (74,000) (76,808) (150,808)
Loss in discontinued business -- -- -- (308,532) (308,532)
Income tax benefit (4,887) 47,774 -- (1,335) 41,552
Minority interest -- (1,732) -- -- (1,732)
----------- ----------- ----------- ----------- -----------
Net (loss)/profit (5,429,586) (1,059,429) 112,000 (4,390,532) (10,767,547)
=========== =========== =========== =========== ===========
Total assets 1,066,965 1,620,586 765,000 3,156,091 6,608,642
=========== =========== =========== =========== ===========
Capital expenditure 385,788 103,181 611 -- 489,580
=========== =========== =========== =========== ===========
Depreciation of fixed assets 135,355 288,123 17,008 -- 440,486
=========== =========== =========== =========== ===========
</TABLE>
F-28
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998
SEGMENT INFORMATION BY ACTIVITY AND GEOGRAPHIC AREA (CONTINUED)
<TABLE>
<CAPTION>
Elimination &
Television Media Technology Corporate Total
($) ($) ($) ($)
YEAR ENDED DECEMBER 31, 1997
<S> <C> <C> <C> <C>
Revenues 455,646 830,430 -- 1,286,076
Inte-segment revenues -- -- -- --
----------- ----------- ----------- -----------
Total revenues 455,646 830,430 -- 1,286,076
(Losses) income from operations (11,424,492) 101,628 (3,632,520) (14,955,384)
Other income 21,204 420,544 441,748
Interest revenue -- -- 4,782 4,782
Interest expense (69,876) (41,410) (138,190) (249,476)
Financial (expense) income, net (2,055,525) 158,753 (670,826) (2,567,598)
Equity in net losses of affiliates -- -- (251,550) (251,550)
Loss in discontinued business -- -- (797,770) (797,770)
Income tax benefit (1,613) 3,271 -- 1,658
Minority interest -- 1,834 -- 1,834
----------- ----------- ----------- -----------
Net (loss)/profit (13,530,302) 644,620 (5,486,074) (18,371,756)
=========== =========== =========== ===========
Total assets/(liabilities) 1,163,414 (1,123,048) 6,261,962 6,302,328
=========== =========== =========== ===========
Capital expenditure -- -- 17,742 17,742
=========== =========== =========== ===========
Depreciation of fixed assets 114,322 51,039 13,664 179,025
=========== =========== =========== ===========
Other
Germany France Corporate Total
($) ($) ($) ($)
Revenues 455,646 830,430 -- 1,286,076
Inter-segment revenues -- -- -- --
----------- ----------- ----------- -----------
Total revenues 455,646 830,430 -- 1,286,076
(Losses) income from operations (11,424,492) 101,628 (3,632,520) (14,955,384)
Other income 21,204 420,544 -- 441,748
Interest revenue -- -- 4,782 4,782
Interest expense (69,876) (41,410) (138,190) (249,476)
Financial (expenses) income, net (2,055,525) 158,753 (670,826) (2,567,598)
Equity in net losses of affiliates -- -- (251,550) (251,550)
Loss in discontinued business -- -- (797,770) (797,770)
Income tax benefit (1,613) 3,271 -- 1,658
Minority interest -- 1,834 -- 1,834
----------- ----------- ----------- -----------
Net (loss)/profit (13,530,302) 644,620 (5,486,074) (18,371,756)
=========== =========== =========== ===========
Total assets/(liabilities) 1,163,414 (1,123,048) 6,261,962 6,302,328
=========== =========== =========== ===========
Capital expenditure -- -- 17,742 17,742
=========== =========== =========== ===========
Depreciation of fixed assets 114,322 51,039 13,664 179,025
=========== =========== =========== ===========
</TABLE>
F-29
<PAGE>
21. RELATED PARTY TRANSACTIONS
In addition to the transactions described in Notes 5, 8, 10, 14, 15,
16 and 17, the related party transactions also include the following:
Mr. Jacques Dubost acts as consultant on behalf of his company,
Valfab, S.C.B. In 1997, the Company paid to Valfab fees relating to
introducing investors to Unimedia who purchased Company common stock
from Unimedia: a) $195,000 in cash b) 106,666 shares of the Common
Stock with a $64,000 value. Further, if Valfab introduces investors
to the Company in the future, Valfab will receive commissions not to
exceed 8% of the investment made.
Mr. 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 ("TIAG"). The other 51% of TIAG is
owned by the Company . Mr. Hauptmann is also a director of TIAG.
Townsley & Co., a UK brokerage firm, participated in the Company's
winter 1995/96 private placement for which it received direct
commissions of $210,000, 86,655 shares of Common Stock and warrants
to purchase 86,665 shares and 218,750 shares, respectively, at an
exercise price of $3,125 and $4.00, respectively. Mr. Barry Townsley,
Managing Director of Townsley & Co., was a Director of the Company
until January 1997.
Mr. 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 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. 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.
Mr. James Leitner, a former director and more than 5% shareholder of
the Company is a principal of Falcon Management which loaned $335,000
to Unimedia in 1995 and was repaid in 1998.
F-30
<PAGE>
CAPITAL MEDIA GROUP LIMITED
UNAUDITED CONSOLIDATED BALANCE SHEET
MARCH 31, 1999
<TABLE>
<CAPTION>
NOTE MARCH 31, DECEMBER 31,
1999 1998
(UNAUDITED) $
$
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents 3 359,166 583,320
Accounts receivable, within one year, net of allowances
for doubtful accounts of $68,122 (December 31, 1998 - $77,579) 4 1,816,524 1,801,892
Inventories 63,894 93,938
Amounts due from shareholder 5-17 313,691 313,691
Prepaid expenses and deposits 56,399 40,003
-------------- ----------------
TOTAL CURRENT ASSETS 2,609,674 2,832,844
Investments 3,819 4,153
Equity in affiliate companies 108,701 117,000
Intangible assets, net of accumulated amortization of
$3,221,161 (December 31, 1998-$3,076,882) 6 2,694,456 2,858,412
Property, plant and equipment, net 7 1,520,582 796,233
-------------- ----------------
TOTAL ASSETS 6,937,232 6,608,642
============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable 3,607,792 3,786,764
Accrued expenses 4,365,009 4,630,380
Related parties loans repayable within one year 8-17 17,291,782 14,337,442
Other loans repayable within one year 8 344,000 190,000
Net liabilities for discontinued operation 9 523,093 496,228
-------------- ----------------
TOTAL LIABILITIES 26,131,676 23,440,814
COMMITMENTS AND CONTINGENCIES 10-16
MINORITY INTEREST IN SUBSIDIARIES 404,483 404,209
-------------- ----------------
26,536,159 23,845,023
-------------- ----------------
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, 1998 -
40,094,139) issued and outstanding 40,090 40,090
Additional paid in capital 31,155,909 31,155,909
1,667,916 shares held by subsidiary (December 31,
1998 - 1,667,916) at cost (950,712) (950,712)
-------------- ----------------
30,245,287 30,245,287
Cumulative translation adjustment 3,635,986 756,406
Accumulated deficit (53,480,200) (48,238,074)
-------------- ----------------
TOTAL STOCKHOLDERS' EQUITY (19,598,927) (17,236,381)
-------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 6,937,232 6,608,642
============== ================
</TABLE>
See notes to the consolidated financial statements.
F-31
<PAGE>
CAPITAL MEDIA GROUP LIMITED
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
3 MONTHS 3 MONTHS
ENDED ENDED
MARCH 31, 1999 MARCH 31, 1998
(UNAUDITED) (UNAUDITED)
NOTE
<S> <C> <C> <C>
Operating revenues $584,892 $619,932
Operating costs:
Staff costs 611,525 832,654
Depreciation and amortization 221,655 231,694
Operating expenses - other 1,612,858 2,565,539
---------- ----------
(2,446,038) (3,629,887)
Operating loss (1,861,146) (3,009,955)
Other (expenses)/income (11,088) (99,013)
Financial income (expense) net 12 (3,310,629) (774,636)
Equity in net loss of affiliates (55,437) (55,018)
---------- ----------
Loss from continuing operations before
taxation (5,238,300) (3,938,622)
Income tax benefit (expense) (121) 5,409
---------- ----------
(5,238,421) (3,933,213)
Discontinued operations (Note 9)
Loss (income) from operations of discontinued
subsidiary (1,700) 25,138
---------- ----------
Net loss before minority interest (5,240,121) (3,908,075)
Minority interest (2,005) 77,897
---------- ----------
Net loss (5,242,126) (3,830,178)
========== ==========
Net loss per share for continuing operations -
basic ($0.13) ($0.10)
========== ==========
- diluted ($0.13) ($0.10)
========== ==========
Net loss per share including discontinued
operation-basic ($0.13) ($0.10)
========== ==========
- - diluted ($0.13) ($0.10)
========== ==========
Weighted average shares - basic 40,094,139 40,094,139
========== ==========
Weighted average shares - diluted 40,094,139 40,094,139
========== ==========
</TABLE>
See notes to the consolidated financial statements.
F-32
<PAGE>
CAPITAL MEDIA GROUP LIMITED
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE OTHER
SHARES HELD PAID-IN COMPREHENSIVE ACCUMULATED
COMMON STOCK BY SUBSIDIARY CAPITAL INCOME (DEFICIT) DEFICIT TOTAL
SHARES $ $ $ $ $ $
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1999 40,094,139 40,090 (950,712) 31,155,909 756,406 (48,238,074) (17,236,381)
Translation adjustment - - - - 2,879,580 2,879,580
Net loss - - - - (5,242,126) (5,242,126)
------------
Comprehensive loss (2,362,546)
------------- ---------- ----------- ------------ ------------- -------------- ------------
Balance at March 31, 1999 40,094,139 40,090 (950,712) 31,155,909 3,635,986 (53,480,200) (19,598,927)
============= ========== =========== ============ ============== ============== ============
<CAPTION>
ADDITIONAL CUMULATIVE OTHER
SHARES HELD PAID-IN COMPREHENSIVE ACCUMULATED
COMMON STOCK BY SUBSIDIARY CAPITAL INCOME (DEFICIT) DEFICIT TOTAL
SHARES $ $ $ $ $ $
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 40,094,139 40,090 (2,282,752) 31,155,909 2,846,067 (37,470,527) (6,711,213)
Translation adjustment - - - - (2,089,661) (2,089,661)
Net loss - - - - (10,767,547) (10,767,547)
------------
Comprehensive loss (12,857,208)
Shares held by subsidiary
Shares held by subsidiary sold 1,332,040 1,332,040
Net loss
------------- ---------- ----------- ------------ ------------- -------------- ------------
Balance at December 31, 1998 40,094,139 40,090 (950,712) 31,155,909 756,406 (48,238,074) (17,236,381)
============= ========== =========== ============ ============== ============== ============
</TABLE>
See notes to the consolidated financial statements.
F-33
<PAGE>
CAPITAL MEDIA GROUP LIMITED
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
RESTATED
3 MONTHS ENDED 3 MONTHS ENDED
MARCH 31, MARCH 31,
1999 1998
$ $
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (5,242,126) (3,830,178)
Adjustment to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 221,655 231,694
Equity in net losses of investment in joint venture 55,437 55,018
Minority interest 2,005 (77,897)
Changes in assets and liabilities:
(Increase)/decrease in other assets and inventories 13,982 (1,790)
Increase in accounts receivable (14,632) (885,224)
Increase in accrued expenses and other liabilities 325,945 1,882,825
---------------- -----------------
NET CASH USED IN OPERATIONS (4,637,734) (2,625,552)
---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of plant and equipment (800,000) (358,505)
Acquisition of intangible assets - (3,545)
Cash proceeds from sale of investments - 168,277
---------------- -----------------
NET CASH (USED) IN INVESTING ACTIVITIES (800,000) (193,773)
---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in short term debt 2,934,000 1,850,000
Repayment of loans (600,000) -
---------------- -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,334,000 1,850,000
---------------- -----------------
Effect of exchange rate changes on cash 2,879,580 826,429
Net (decrease)/increase in cash and cash equivalents (224,154) (142,896)
Cash and cash equivalents at beginning of period 583,320 332,795
---------------- -----------------
Cash at end of period 359,166 189,899
================ =================
SUPPLEMENTAL DATA:
Interest paid 7,976 8,749
Income tax paid 121 491
</TABLE>
See notes to the consolidated financial statements.
F-34
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
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"), 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"). All
intercompany accounts and transactions have been eliminated in
consolidation. CM (UK)'s 50% interest in Blink TV Limited ("Blink") and
Pixel's 47.5% interest in Henry Communications Limited ("Henry"), have
been accounted for using the equity method, after the elimination of
all significant intercompany balances and transactions. Tinerama
Investment AG ("Tinerama"), a 51% owned subsidiary is treated as
discontinued operations (See Note 9).
The results of Pixel has been consolidated in the consolidated
financial statements from January 1, 1998, being the date of
acquisition.
INTERIM ADJUSTMENTS
The consolidated financial statements as of, and for the periods ended,
March 31, 1999 and March 31, 1998 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 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 or
market value. Inventories include both raw materials and finished
goods.
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 amortization. Computer software are amortized in
the year of their acquisition. Broadcast licenses and goodwill are
amortized on a straight-line basis over a period not exceeding six
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.
F-35
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
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:
Fixtures, fittings and equipment 5 to 20 years
FOREIGN CURRENCY
Assets and liabilities of the Company's foreign subsidiaries are
translated at year-end exchange rates. Income statement items are
translated at the average rate for the period. 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.
Due to the hyper-inflationary situation in Romania, assets and
liabilities of the Company's foreign subsidiary in Romania are
translated at historical exchange rates in accordance with Statement of
Financial Accounting Standards No. 52.
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
realized.
LEASE
Operating leases are charged to expense, on a straight - line basis,
over the term of the lease.
REVENUE RECOGNITION
Sales are recognized when products, services and fees are delivered and
when advertisements are broadcast and thereby invoiced to the customer.
Intercompany charges are eliminated on consolidation and not included
in revenues.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred
EARNINGS PER SHARE
Basic income per share is calculated on the basis of weighted average
outstanding shares. Diluted income per share is computed on the basis
of weighted average outstanding common shares, plus potential common
shares assuming exercised stock options and conversion of outstanding
convertible securities where issued.
F-36
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
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
March 31, 1999 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 AND RESTATEMENT
Certain reclassifications have been made to the March 1998 balances to
conform to the 1998 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 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.
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 period ended March 31, 1999 and
the year ended December 31, 1998, the Company incurred net losses of
$5,242,126, and $10,767,547, respectively. At March 31, 1999, the
Company had net current liabilities of $22,198,909 and its total
liabilities exceeded its total assets by $19,598,927. 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 amount 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 16, the Company's continuation as a going concern is
dependent upon its ability to obtain additional financing as may be
required, and ultimately to attain successful operations. Management
reported in March 1999 that it intends to propose at its forthcoming
Stockholders' Meeting, a resolution to increase the authorized capital
of the Company and a further resolution to agree to allow the
conversion of certain of the loans received and interest accrued into
equity of the Company. Management also reported in March 1999 that it
had entered into a further agreement to provide funding so that the
Company can meet its obligations and sustain operations from sources as
described in note 16.
3. CASH AND CASH EQUIVALENTS
Cash and cash equivalents at March 31, 1999 includes a bank deposit
balance of Nil (December 31, 1998 - $520,164).
F-37
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
4. ACCOUNTS RECEIVABLE
MARCH 31, DECEMBER 31,
1999 1998
Accounts receivable comprise: $ $
Trade receivables 836,035 899,352
Taxation receivables 26,229 19,761
Other debtors receivable 954,260 882,779
------------ --------------
1,816,524 1,801,892
============ ==============
5. AMOUNT DUE FROM SHAREHOLDER
In December 1995, the Company issued 261,410 shares at $1.20 cash to a
shareholder (Latitude Investments, Ltd.) in exchange for the
shareholder guaranteeing the establishment of a contract with PTT
Telecom. This resulted in the shareholder receiving shares for no
payment. As part of an overall agreement with Instar, Universal and
Latitude (See Note 17) this amount will be forgiven.
6. INTANGIBLE ASSETS
MARCH 31, DECEMBER 31,
1999 1998
$ $
Purchased broadcast licenses 242,145 249,570
Computer software 579,307 591,560
Goodwill 5,094,165 5,094,165
------------- --------------
5,915,617 5,935,295
Less accumulated amortization (3,221,161) (3,076,883)
------------- --------------
2,694,456 2,858,412
============= ==============
Goodwill net of amortization is as follows:
MARCH 31, DECEMBER 31,
1999 1998
$ $
Tinerama 0 0
Unimedia 2,029,600 2,138,468
TopCard 525,097 558,819
Pixel 72,731 78,986
------------- --------------
2,627,428 2,776,273
============= ==============
F-38
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of: MARCH 31, DECEMBER 31,
1999 1998
$ $
Fixtures, fittings and equipment 3,704,511 3,211,962
Less accumulated depreciation (2,183,929) (2,415,729)
------------- --------------
1,520,582 796,233
============= ==============
8. LOANS REPAYABLE WITHIN ONE YEAR
MARCH 31, DECEMBER 31,
1999 1998
$ $
Instar Holding Ltd. 2,000,000 2,000,000
MMP, SA 5,900,000 3,120,000
Superstar Investments Ltd. 6,650,000 6,650,000
Fontal Ltd. 200,000 200,000
Oradeo 200,000 500,000
Roland Pardo 200,000 500,000
Interest and penalty interest accrued 2,141,782 1,367,442
------------- ---------------
Related party loans 17,291,782 14,337,442
Sundry loans 344,000 190,000
------------- ---------------
17,635,782 14,527,442
============= ===============
The terms of the loans are:
The terms of the Instar, MMP (a fully owned subsidiary of Groupe AB) and
Superstar loans are detailed in Note 15 and 16.
The Fontal loan was received on December 30, 1997 and carries an interest rate
of 15% per annum and was repayable on February 16, 1998. See Notes 14 and 17.
The Oradeo 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 18, 1998. See
Note 14.
F-39
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
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 14.
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.
The sundry loans are in respect of three proposed subscriptions for 3,440,000
shares of common stock at $0.10 per share.
9. DISCONTINUED OPERATIONS
During 1998, the Company approved a decision to sell its interests in
the Romanian company, Tinerama. Discussions with a potential buyer are
in progress and the transaction is expected to be concluded during
1999. The results of the Tinerama business have been reported
separately as discontinued operations. Prior year consolidated
financial statements have been restated to present the Tinerama
business as discontinued. The components of the net liabilities of the
discontinued operations included in the consolidated balance sheets are
as follows:
MARCH 31, DECEMBER 31,
1999 1998
$ $
Current assets 121,532 152,744
Less current liabilities (694,837) (702,903)
------------- --------------
Net current liabilities (573,305) (550,159)
Minority interests (433,107) (460,559)
Net property, plant and equipment 483,319 514,490
------------- --------------
Net liabilities (523,093) (496,228)
============= ==============
10. COMMITMENTS AND CONTINGENCIES
LEASE 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 is committed to paying DM 150,000 ($83,000
at March 31, 1999 exchange rates) per annum.
The Company has also entered into leases for office space in France,
expiring between 1999 and 2002 at an annualized cost of $100,000 (at
March 31, 1999 exchange rates).
The total rental expense in 1999 and 1998, including transponders and
lease commitments as above, are $2,648,500 and $4,423,000,
respectively.
F-40
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
Under the terms of a two year service agreement which commenced October
1, 1998, broadcasting facilities for Onyx, comprising of the uplink,
master control, and satellite transponder broadcasting and cable
transmission costs are provided by Group AB at an annual costs of
$3,120,000 (see Note 15 and 16).
Minimum lease payments under operating leases as of March 31, 1999 are
as follows:
Years ending December 31, $
1999 2,648,500
2000 2,044,000
2001 170,000
2002 170,000
2003 and thereafter 295,000
-------------
$5,327,500
=============
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, 1999.
RETIREMENT INDEMNITEES AND PENSION PLANS
Retired employee benefits from State of Government sponsored pension
schemes. Contributions by employers to these sponsored schemes are
expenses as incurred. There are no specific supplemental pension plans
operated by the Company or any subsidiary. There is no liability
arising from retirement indemnity.
11. RESEARCH AND DEVELOPMENT COSTS
TopCard is involved in the development of specific applications based
upon smart card technology including remote security Internet access
and infra-red contactless smart card technology.
MARCH 31, MARCH 31,
1999 1998
$ $
Research and development costs 61,296 72,700
=========== ===========
12. FINANCIAL EXPENSE (INCOME) NET
3 MONTHS 3 MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1999 1998
$ $
Interest expense 816,076 208,329
Foreign currency exchange loss 2,494,553 566,307
------------- --------------
3,310,629 774,636
============= ==============
F-41
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
The foreign currency exchange loss in 1999 and in 1998 arose primarily from the
exchange differences arising in the intercompany loan between CM(UK) and Onyx
recorded in pounds sterling and German Marks, respectively.
13. INCOME TAXES
Net operating loss carry forwards which give rise to deferred tax
assets at March 31, 1999 are as follows:
3 MONTHS 3 MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1999 1998
$ $
Deferred tax asset on unrealized tax losses 18,960,000 4,180,000
Timing differences 240,000
------------- -----------
Valuation allowances (19,200,000) (4,180,000)
------------- -----------
Total deferred tax assets - -
============= ===========
The Company has significant deferred tax assets ($16,380,000)
corresponding to tax losses arising primarily from the operating losses
incurred by Onyx, in Germany. These tax losses are available to be
carried forward indefinitely to be set off against future profits in
Germany. However, at the end of 1998, the management forecast that the
Company will not be profitable in 1999 and therefore no credit for
income tax was recorded. The Company will continue to review its tax
valuation allowance in future periods.
14. LITIGATION
The litigation against Com TV Production und Vertrieb GmbH ("Com") and
Nen TV ("Nen") and Mr. John Garman, related 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 claim made were without merit and intended to
vigorously contest the same. In December 1997, at the direction of the
trial judge, the Company and the other parties agreed to a form of
settlement, wherein the Company agreed to enter into reciprocal
commercial agreements allowing the other parties to introduce potential
clients wishing to access available down time for advertising purposes.
In June 1997, a former managing director of Onyx whose employment was
terminated brought suit in Germany for alleged wrongful early
termination of his employment. The suit sought damages of DM750,000
($414,000). Onyx maintained that the action taken was lawful and in
July 1998, the court ruled in favor of Onyx. The plaintiff has the
right to appeal and Onyx believes that it has valid defenses to this
claim. However, there can be no assurance as to the outcome of this
matter.
F-42
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
In May 1998, TV Strategies, a US Dallas based television services
company, obtained a default judgment against Onyx for DM300,000
($180,000), plus interest, relating to services which TV Strategies
alleges that they provided to Onyx. Onyx has taken action in the US to
have the default judgment set aside, and believes that it has grounds
to obtain relief from the default judgment. Onyx also believes that it
has meritorious defenses to the suit. However, there can be no
assurance as to the outcome of the 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 8 for a description of the Fontal Note. The
Company had pledged the rights to trademarks for the international Onyx
name outside of Germany, Switzerland and Austria to Fontal to secure
repayment of this note. Subsequent to March 31, 1999, this matter
was settled. See Note 17.
Unimedia has three minority shareholders (Oradea, Roland Pardo and
Fontal (see Note 8)) 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 stockholders 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 repayment of their unsecured loans due from
Unimedia (see Note 8). In connection with such actions and based upon
the fact that the notes do not by their terms reflect a repayment date.
In February 1999, the French court ruled that repayment of the loans be
made by a number of installments starting March 1999 until September
1999 and set a lower rate of interest to accrue. Unimedia is also
preparing actions against Lodelo and Pardo for damages which it
believes have been inappropriately caused by reason of the actions
taken by Lodelo and Pardo against Unimedia and its management.
Charles Koppel, the former chairman and CEO of the Company claimed
constructive dismissal following the Board's selection of a new
President and CEO for the Company in August 1997. In March 1998, the
Company resolved its dispute with Mr. Koppel in regard to his claim for
wrongful dismissal and paid Mr. Koppel /pound sterling/60,000 ($96,000)
to resolve outstanding claims under his service contract with the
Company.
In August 1998, Onyx sued Charles Koppel in Germany. The suit alleges
that certain of Mr. Koppel's actions as the managing director of Onyx
were improperly performed and seeks damages in an unspecified amount.
The Company and Charles Koppel will exchange mutual general releases in
connection with the Instar Settlement (See Note 17) and all of the
suits between the Company and Charles Koppel will be dismissed with
prejudice.
F-43
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
15. CAPITAL STRUCTURE
The Company has the following issued and vested warrants to purchase
common stock outstanding at March 31, 1999 and December 31, 1998
MARCH 31, DECEMBER
DESCRIPTION 1999 31, 1998
Warrants for common stock
exercisable at $4.00 5,200,000 5,200,000
Warrants for common stock
exercisable at $3.125 433,328 433,328
Warrants for common stock
exercisable at $2.50 1,100,000 1,100,000
----------------------------
6,733,328 6,733,328
============================
All outstanding warrants (except the warrants which expired by their
terms on December 31, 1998), expire 36 months from the date of the
effective registration of their underlying shares. 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 (which warrants expired
on December 31, 1998). In September 1996, 10,000 shares and warrants to
purchase an additional 100,000 shares at an exercise prices of $2.50
were issued to a director for consulting services.
Additionally, the Company is obliged to issue warrants to former
Unimedia shareholders under the terms of the share exchange agreement
signed in 1997, as follows:
MARCH 31, DECEMBER
DESCRIPTION 1999 31, 1998
Warrants for common stock
exercisable at $4.00 1,139,144 1,139,144
Warrants for common stock
exercisable at $3.125 77,871 77,871
Warrants for common stock
exercisable at $2.50 197,675 197,675
----------------------------
1,414,690 1,414,690
============================
F-44
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
Subject to the compliance with applicable US 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 the
warrant holders the right, for a period of not less than 61 days, to
exercise their warrants and receive two shares of Common Stock at an
exercise price of $0.30 per share. If the holders of the outstanding
warrants do not exercise this right, the warrants will remain
outstanding on their original terms until their expiration date. This
right will be given to the Company's warrant holders in order to allow
the Company's warrant holders to acquire additional Company securities
at a lower price and to raise additional capital for the Company's
operation.
The Company has offered one of its warrant holder, 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 783,078
warrants which they hold, but at an exercise price of $0.20 per share.
Auric was granted this lower price due to the assistance which they
provided to the Company in helping the Company to re-obtain the
quotation on the Bulletin Board maintained by NASD in 1998.
COMMON STOCK PURCHASE OPTIONS
<TABLE>
<CAPTION>
OUTSTANDING OUTSTANDING
AT AT
MARCH 31, DECEMBER
DESCRIPTION 1999 GRANTED 31, 1998
<S> <C> <C> <C>
Executive officers options exercisable @ $0.57 375,000 375,000
of which vested 225,000 225,000
Officers options exercisable @ $2.50 300,000 300,000
of which vested 300,000 200,000
Executive officers options exercisable @ $0.35 4,000,000 4,000,000
of which vested 1,599,998 800,000
Non-employee directors options exercisable @ $0.35 500,000 500,000
of which vested 500,000 500,000
Options to Diamond Production exercisable @ $0.10 16,000,000 16,000,000
----------------------------------------------
Total exercisable 21,175,000 - 21,175,000
==============================================
</TABLE>
On August 1, 1997, the Company entered into three year employment
agreements with the executive officers providing for them to receive in
addition to other compensations, options to purchase 200,000 and
175,000 shares of common stock at an exercise price of $0.57 per share,
the price at which transactions were effected at that time. The 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. These options expire 36 months from the date of their
effective registration.
The Chief Financial Officer as part of his service agreement is
entitled to receive an option to purchase 100,000 common shares of the
Company at $2.50, the price at which transactions were effected at the
time of each of the years 1996, 1997 and 1998. These options expire 36
months from the date of their effective registration.
F-45
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
On March 10, 1998, the Board of Directors granted options to four
executive officers of the Company to purchase an aggregate of 4,000,000
shares of common stock at an exercise price of $0.35 per share (the
price at which common stock was negotiated on the date of grant). On
the same date, non-employee directors were granted options to purchase
an aggregate of 500,000 shares at the same price. The options vested to
executive officers 200,000 each in 1998, with the balance over 3 years,
and to non-employee directors immediately. The options are valid for 5
years and expire on March 10, 2003.
On December 18, 1998, the Board approved the grant of a two year
warrant to purchase an aggregate of 16,000,000 shares at an exercise
price of $0.10 per share to Diamond Production, a company owned by two
executive directors. This grant will be considered for approval at the
forthcoming stockholders' meeting.
PRO FORMA NET LOSS AND NET LOSS PER SHARE
The Company has adopted the disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation" and, as permitted under SFAS
No. 123 applies Accounting Principles Board Opinion ("APB") No. 25 and
related interpretations in accounting for its stock options. Since the
Company awarded the stock options with no discount as compared with the
market price at the time of the grants, there was no related
compensation costs for any of the years presented based on the
estimated grant date fair value as defined by FAS 123. The Company
pro-forma net loss and loss per share for the three months ended March
31, 1999 and for the year ended December 31, 1998 are as follows:
MARCH 31, 1999 MARCH 31, 1998
$ $
Pro forma net loss
Basic and diluted (5,242,126) (3,830,178)
Pro forma net loss per share
Basic and diluted ($0.13) ($0.10)
CONVERTIBLE DEBT AT MARCH 31, 1999
The following derivative securities outstanding will become exercisable
if the Company's stockholders authorize an increase in additional
shares (See Note 2). Interest and penalties accrued are also
convertible into common stock.
F-46
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
SHARES
CONVERSION ISSUABLE ON
PAYEE $ PRICE ($) CONVERSION
<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 SA 2,000,000 0.10 20,000,000
Superstar Ventures Ltd. 5,000,000 0.10 50,000,000
MMP SA (1) 1,900,000 0.10 19,000,000
MMP SA 2,000,000 0.10 20,000,000
Interest and penalty interest accrued 1,418,992 0.10 14,189,920
-------------- ----------------
13,968,992 139,689,920
============== ================
<FN>
(1) The debt is part of a convertible note under which MMP will
loan $6,640,000 over 2 years. See Note 10 - Lease commitments.
It is convertible into common stock at $0.10 per share. The
total shares of common stock to be issued are 66,400,000.
</FN>
</TABLE>
These loans (principal and interest) are automatically convertible into
shares of common stock once the Company holds its meeting of
stockholders and its stockholders approve the increase in the number of
authorized shares. The Company has agreed to pay a 2% penalty per month
on the outstanding principal of the loans, payable in shares of common
stock, for each month the Company fails to hold its special
stockholders meeting subsequent to November 30, 1998. The convertible
debt becomes automatically due to Superstar and MMP SA and immediately
payable (with interest plus a 20% penalty) if the Company's
stockholders do not approve an increase in the Company's authorized
shares.
BASIC EPS COMPUTATION
<TABLE>
<CAPTION>
MARCH 31, DECEMBER
1999 31, 1998
<S> <C> <C>
Net income of continuing operations (5,240,426) (3,855,316)
--------------------------------
Net loss (5,242,126) (3,830,178)
--------------------------------
Weighted Average number of Shares 40,094,139 40,094,139
--------------------------------
Basic EPS Net loss of continuing operations ($0.13) ($0.10)
--------------------------------
Basic EPS Net loss including discontinued operations ($0.13) ($0.10)
--------------------------------
</TABLE>
F-47
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
March 31, March 31,
DILUTED EPS COMPUTATION 1999 1998
<S> <C> <C>
Weighted average shares 40,094,139 40,094,139
Warrants (1) - -
Convertible debt 139,689,920 shares (1) - -
Board options - 2,099,998 vested in 1998 and 1999 - -
--------------------------------
40,094,139 40,094,139
--------------------------------
Diluted EPS Net loss of continuing operations ($0.13) ($0.10)
--------------------------------
Diluted EPS Net loss including discontinued operations ($0.13) ($0.10)
--------------------------------
<FN>
(1) The computation does not assume exercise of the warrants or
options since it would have an antidilutive effect on earnings
per share.
</FN>
</TABLE>
16. 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 and third years 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%
F-48
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
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 July 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. 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 pari-passu. See Note 17.
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 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 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. (See Note 15)
On March 10, 1999, the Company entered into a new $6 Million
Convertible Promissory Note Agreement with AB to provide additional
funding for the Company's operations including $800,000, which was paid
for the purchase of certain technical equipment necessary to implement
the Service Agreement dated July 27, 1998; $3 million is to be loaned
in cash over the five months to July 31, 1999; of which $2,400,000 has
been received to July 2, 1999,
F-49
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
and the balance of $2.2 million of the Note is reserved for the agreed
upon settlement of the Instar loan, (See Note 17). The Note bears
interest at the rate of 10% per annum, and is automatically converted
into the Company's Common Stock on the basis of one share of Common
Stock for each $0.10 of principal and interest. As previous, the Note,
may not be converted until the Company has held its stockholders'
meetings at which its Articles of Association are amended to provide
the sufficient number of authorized shares of Common Stock of the
Company.
17. SUBSEQUENT EVENTS
The Company has reached an agreement in principal to settle the Instar
Loan. Under the terms of the settlement, the Company will pay Instar
$2.2 million in full settlement of this loan. As part of this
settlement, the Company's obligations to Instar and Universal will be
extinguished. (See Notes 8 and 16). Additionally, the obligations of
Latitude Investments Ltd. to the Company will be deemed paid in full.
(See Note 5). As part of the settlement, all of the securities given
will be released. This transaction is expected to result in a net
credit to income of some $400,000 representing the settlement of the
litigation.
The litigation concerning the Fontal loan has been fully settled for
$327,500, and the related Promissory Note has been fully paid and
satisfied. (See Notes 8 and 14).
18. RESTATEMENT
Subsequent to the issuance of the Company's consolidated financial
statements for the year ended December 31, 1997, the Company determined
that a holding of the Company's shares held at year end by a subsidiary
company as an investment, should have been reflected as an element of
stockholders equity. The 1997 financial statements have been restated
to reflect this investment as an element of the Stockholders' Equity at
their original cost of $0.57 per share. Accordingly, the comparative
1998 unaudited financial statements have been restated from the amounts
previously reported as follows:
<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED AS RESTATED
($) ($)
---------------------------------
<S> <C> <C>
For the three months ended March 31, 1998
Other (expenses) / income (193,308) (99,013)
Loss from continuing operation before taxation (4,021,946) (3,933,213)
Net loss after taxation (3,925,051) (3,908,085)
Net loss per share - basic and diluted ($0.10) ($0.10)
</TABLE>
F-50
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
19. SEGMENT INFORMATION BY ACTIVITY AND GEOGRAPHIC AREA
The following financial information is summarized by business segment
and country.
- The television media segment contains the operations of Onyx;
and
- The technology segment contains the operations of Unimedia,
Pixel and TopCard.
Capital Media Group's activities are concentrated in Germany, France
and Israel (Revenues account for: to March 1999 - approximately 56%,
24% and 20%, respectively, to March 1998 - approximately 51%, 20% and
29%, respectively.
F-51
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
TELEVISION TECHNOLOGY ELIMINATION TOTAL
MEDIA &
CORPORATE
<S> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 1999
Revenues 326,192 258,700 - 584,892
Inter-segment revenues - - - -
--------------- --------------- ---------------- ---------------
Total revenues 326,192 258,700 - 584,892
Income (losses) from operations (1,218,869) (55,568) (586,709) (1,861,146)
Other (expense) income 10,244 (21,332) - (11,088)
Interest revenue - 8,291 - 8,291
Interest expenses (9,395) (17,971) (797,001) (824,367)
Other financial (expense) income, net (1,410,090) 38,649 (1,123,112) (2,494,553)
Equity in net losses of affiliates - (8,299) (47,138) (55,437)
Loss in discontinued business - - (1,700) (1,700)
Income tax benefit (121) - - (121)
Minority interest - (2,005) - (2,005)
--------------- --------------- ---------------- ---------------
Net loss (2,628,231) (58,235) (2,555,660) (5,242,126)
=============== =============== ================ ===============
Total assets 1,921,868 3,822,932 1,192,432 6,937,232
=============== =============== ================ ===============
Capital expenditure 800,000 0 0 800,000
=============== =============== ================ ===============
Depreciation of fixed assets 65,311 38,564 3,425 107,300
=============== =============== ================ ===============
<CAPTION>
Germany France Israel Other Total
Corporate
<S> <C> <C> <C> <C> <C>
Revenues 326,192 140,924 117,776 - 584,892
Inter-segment revenues - - - - -
--------------- --------------- ---------------- --------------- ---------------
Total revenues 326,192 140,924 117,776 - 584,892
Income (losses) from operations (1,218,869) (101,121) 45,553 (586,709) (1,861,146)
Other (expense) income 10,244 (21,332) - - (11,088)
Interest revenue 0 0 8,291 - 8,291
Interest expenses (9,395) (17,971) - (797,001) (824,367)
Other financial (expense) income, net (1,410,090) 38,649 - (1,123,112) (2,494,553)
Equity in net losses of affiliates - - (8,299) (47,138) (55,437)
Loss in discontinued business - - - (1,700) (1,700)
Income tax benefit (121) - - - (121)
Minority Interest - (2,005) - - (2,005)
--------------- --------------- ---------------- --------------- ---------------
Net loss (2,628,231) (103,780) 45,545 (2,555,660) (5,242,126)
=============== =============== ================ =============== ===============
Total assets 1,921,868 3,116,295 706,637 1,192,432 6,937,232
=============== =============== ================ =============== ===============
Capital expenditure 800,000 0 0 0 800,000
=============== =============== ================ =============== ===============
Depreciation of fixed assets 65,311 33,314 5,250 3.425 107,300
=============== =============== ================ =============== ===============
</TABLE>
F-52
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
TELEVISION TECHNOLOGY ELIMINATION TOTAL
MEDIA &
CORPORATE
<S> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 1998
Revenues 319,055 300,877 - 619,932
Inter-segment revenues - - - -
--------------- -------------- ---------------- ---------------
Total revenues 319,055 300,877 - 619,932
Income (losses) from operations (2,154,875) (137,965) (717,115) (3,009,955)
Other (expense) income 51,573 (150,586) - (99,013)
Interest revenue 0 13,540 - 13,540
Interest expenses (8,837) (86,459) (126,573) (221,869)
Other financial (expense) income, net (1,029,645) (10,527) 473,865 (566,307)
Equity in net losses of affiliates - (22,000) (33,018) (55,018)
Profit in discontinued business - - 25,138 25,138
Income tax benefit (481) 5,890 - 5,409
Minority interest - 77,897 - 77,897
--------------- -------------- ---------------- ---------------
Net loss (3,142,265) (310,210) (377,703) (3,830,178)
=============== ============== ================ ===============
Total assets 1,921,868 2,051,357 3,443,602 7,026,918
=============== ============== ================ ===============
Capital expenditure 0 358,405 0 358,405
=============== ============== ================ ===============
Depreciation of fixed assets 35,675 108,261 3,668 147,604
=============== ============== ================ ===============
<CAPTION>
Germany France Israel Other Total
Corporate
<S> <C> <C> <C> <C> <C>
Revenues 319,055 124,940 175,937 619,932
Inter-segment revenues - - - - -
--------------- -------------- ---------------- -------------- ---------------
Total revenues 319,055 124,940 175,937 - 619,932
Income (losses) from operations (2,154,875) (206,315) 68,359 (717,115) (3,009,955)
Other (expense) income 51,573 (150,586) - - (99,013)
Interest revenue 0 0 13,540 - 13,540
Interest expenses (8,837) (86,459) - (126,573) (221,869)
Other financial (expense) income, net (1,029,645) (10,527) - 473,865 (566,307)
Equity in net losses of affiliates - - (22,000) (33,018) (55,018)
Profit in discontinued business - - - 25,138 25,138
Income tax benefit (481) 5,890 - - 5,409
Minority Interest - 77,897 - - 77,897
--------------- -------------- ---------------- -------------- ---------------
Net loss (3,142,265) (370,100) 59,890 (377,703) (3,830,178)
=============== ============== ================ ============== ===============
Total assets 1,532,959 1,228,183 823,174 3,442,602 7,026,918
=============== ============== ================ ============== ===============
Capital expenditure 0 0 358,405 0 358,405
=============== ============== ================ ============== ===============
Depreciation of fixed assets 35,675 54,165 54,096 3,668 147,604
=============== ============== ================ ============== ===============
</TABLE>
F-53
<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 August __, 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 - Ratify the terms of the agreements between the Company
and Groupe AB and between the Company and Superstar.
|_| FOR |_| AGAINST |_| ABSTAIN
2. PROPOSAL 2 - Reverse split the Company's outstanding common stock on a
one-for-ten basis (leaving the Company's authorized shares at 50
million shares).
|_| 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
Patrick Ho Jean-Francois Klein
Stanley Hollander David Ho
(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 - Authority to vote to adjourn meeting in their discretion.
|_| FOR |_| AGAINST |_| ABSTAIN
6. PROPOSAL 6 - 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 July __, 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.
