SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to____________.
Commission File No. 0-21051
CAPITAL MEDIA GROUP LIMITED
-------------------------------------------------------------------------
(exact name of small business issuer in its charter)
Nevada 87-0453100
- ------------------------------------------ -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
2 rue du Nouveau Bercy
94220, Charenton, France
- ------------------------------------------ -------------------------------
(Address of principal executive offices) (Zip Code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter periods that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 27,574,876 SHARES OF POST-REVERSE
SPLIT COMMON STOCK AS OF NOVEMBER 1, 1999 (EXCLUDING 166,791 SHARES OWNED AT
THAT DATE BY THE COMPANY'S 81.6% OWNED SUBSIDIARY, UNIMEDIA, S.A.)
Transitional Small Business Disclosure Format. YES [ ] NO [X]
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Unaudited financial statements for the quarter covered by this report are
attached hereto in accordance with item 310(b) of Regulation S-B.
INDEX TO FINANCIAL STATEMENTS
Unaudited Consolidated Balance Sheet at September 30, 1999
(actual and proforma) and December 31, 1998...............................3
Unaudited Consolidated Statement of Operations for
the three and nine months ended September 30, 1999 and 1998 (restated)....4
Unaudited Consolidated Statement of Stockholders' Equity for
the nine months ended September 30, 1999..................................5
Unaudited Consolidated Statement of Cash Flows for the nine
months ended September 30, 1999 and 1998 (restated).......................6
Notes to Unaudited Consolidated Financial Statements...........................7
2
<PAGE>
CAPITAL MEDIA GROUP LIMITED
UNAUDITED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31,
---------------------------- -----------
PROFORMA(1) ACTUAL 1998
----------- ------ ----
NOTE $ $ $
(Unaudited)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents 3 153,165 153,165 583,320
Accounts receivable, within one year, net of allowances
for doubtful accounts of $80,106 (December 31, 1998 - $77,579) 4 1,428,238 1,428,238 1,801,892
Inventories 47,782 47,782 93,938
Amounts due from shareholder 5-17 -- -- 313,691
Prepaid expenses and deposits 161,138 161,138 40,003
----------- ----------- -----------
TOTAL CURRENT ASSETS 1,790,323 1,790,323 2,832,844
Investments 6,990 6,990 4,153
Equity in affiliate companies 143,788 143,788 117,000
Intangible assets, net of accumulated amortization of
$3,546,061 (December 31, 1998-$3,076,882) 6 2,376,982 2,376,982 2,858,412
Property, plant and equipment, net 7 1,203,842 1,203,842 796,233
----------- ----------- -----------
TOTAL ASSETS 5,521,925 5,521,925 6,608,642
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable 2,889,263 2,889,263 3,786,764
Accrued expenses 2,751,682 3,096,683 4,630,380
Related parties loans repayable within one year 8-17 640,894 22,585,932 14,337,442
Other loans repayable within one year 8 -- 583,000 190,000
Bank debt due within one year 763,292 763,292 --
Net liabilities for discontinued operation 9 557,606 557,606 496,228
----------- ----------- -----------
TOTAL LIABILITIES 7,602,737 30,475,776 23,440,814
COMMITMENTS AND CONTINGENCIES 10-16 -- -- --
MINORITY INTEREST IN SUBSIDIARIES 446,203 446,203 404,209
----------- ----------- -----------
8,048,940 30,921,979 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 4,009,413 (December 31, 1998 -
4,009,413) issued and outstanding 26,882 4,009 4,009
Additional paid in capital 54,042,155 31,191,990 31,191,990
166,791 shares held by subsidiary (December 31,
1998 - 166,791) at cost (950,712) (950,712) (950,712)
----------- ----------- -----------
53,118,325 30,245,287 30,245,287
Cumulative translation adjustment 3,850,786 3,850,785 756,406
Accumulated deficit (59,496,126) (59,496,126) (48,238,074)
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY (2,527,015) (25,400,054) (17,236,381)
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 5,521,925 5,521,925 6,608,642
=========== =========== ===========
(1) See Notes 1 and 17.
</TABLE>
See notes to the consolidated financial statements.
3
<PAGE>
CAPITAL MEDIA GROUP LIMITED
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
RESTATED RESTATED
3 MONTHS 3 MONTHS 9 MONTHS 9 MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
(UNAUDITED) (UNAUDITED) (UNAUDITED) UNAUDITED)
NOTE $ $ $ $
<S> <C> <C> <C> <C> <C>
Operating revenues 783,002 832,167 2,247,358 2,103,588
Operating costs:
Staff costs 566,091 680,339 1,685,754 2,270,256
Depreciation and amortization 277,579 290,207 770,048 677,744
Other operating expenes 1,619,120 1,865,624 5,133,732 6,612,816
----------- ----------- ----------- -----------
(2,462,790) (2,836,170) (7,589,534) (9,560,816)
Operating loss (1,679,788) (2,004,003) (5,342,176) (7,457,228)
Other (expenses) 804,518 (195,671) 709,304 (561,232)
Financial (expense) income, net: 12
Interest Payable (1,613,768) (417,638) (3,674,052) (1,038,165)
Foreign exchange (loss)/gain 1,106,228 1,811,352 (2,816,059) 1,685,921
Equity in net loss of affiliates (39,054) (97,150) (89,777) (202,360)
----------- ----------- ----------- -----------
Loss from continuing operations
before taxation (1,421,864) (903,110) (11,212,760) (7,573,064)
Income tax benefit (expense) 1,525 (5,665) 3,265 (491)
----------- ----------- ----------- -----------
(1,420,339) (908,775) (11,209,495) (7,573,555)
Discontinued operations (Note 9)
Loss (income) from operations of
discontinued subsidiary (32,662) (44,468) (48,557) (75,773)
----------- ----------- ----------- -----------
Net loss before minority interest (1,453,001) (953,243) (11,258,052) (7,649,328)
Minority interest -- -- -- --
----------- ----------- ----------- -----------
Net loss (1,453,001) (953,243) (11,258,052) (7,649,328)
=========== =========== =========== ===========
Net loss per share for continuing
operations - basic ($ 0.35) ($ 0.23) ($ 2.80) ($ 1.89)
=========== =========== =========== ===========
- - diluted ($ 0.35) ($ 0.23) ($ 2.80) ($ 1.89)
=========== =========== =========== ===========
Net loss per share including
discontinuedoperation - basic ($ 0.36) ($ 0.24) ($ 2.81) ($ 1.91)
=========== =========== =========== ===========
- - diluted ($ 0.36) ($ 0.24) ($ 2.81) ($ 1.91)
=========== =========== =========== ===========
Weighted average shares - basic 4,009,413 4,009,413 4,009,413 4,009,413
=========== =========== =========== ===========
Weighted average shares - diluted 4,009,413 4,009,413 4,009,413 4,009,413
=========== =========== =========== ===========
</TABLE>
See notes to the consolidated financial statements.
4
<PAGE>
CAPITAL MEDIA GROUP LIMITED
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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)
Adjustment for reverse split (36,084,726) (36,181) -- 36,181 -- -- --
(see Note 1)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at January 1, 1999
adjusted 4,009,403 4,009 (950,712) 31,191,990 756,406 (48,238,874) (17,236,381)
Translation adjustment -- -- -- -- 3,094,379 -- 3,094,379
Net loss -- -- -- -- -- (11,258,052) (11,258,052)
-----------
Comprehensive loss (8,163,673)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at September 30, 1999 4,009,413 4,009 (950,712) 31,191,990 3,850,785 (59,496,126) (25,400,054)
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See notes to the consolidated financial statements.
5
<PAGE>
CAPITAL MEDIA GROUP LIMITED
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
RESTATED
9 MONTHS ENDED 9 MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
$ $
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (11,258,052) (7,649,328)
Adjustment to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 770,048 677,745
Equity in net losses of investment in joint venture 89,777 202,360
Minority interest -- --
Changes in assets and liabilities:
Decrease in other assets and inventories 119,310 464,795
Decrease/(Increase) in accounts receivable 373,654 (1,399,869)
Increase in accrued expenses and other liabilities 459,804 2,403,525
----------- -----------
NET CASH USED IN OPERATIONS (9,445,459) (5,300,772)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of plant and equipment (731,122) (453,560)
Acquisition of intangible assets -- --
Sale of investments -- 915,659
----------- -----------
NET CASH (USED) IN INVESTING ACTIVITIES (731,122) 895,481
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in short term debt 8,588,755 7,250,000
Repayment of loans (2,700,000) (335,000)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,888,755 6,915,000
----------- -----------
Effect of exchange rate changes on cash 3,094,379 (1,727,657)
----------- -----------
Net (decrease)/increase in cash and cash equivalents (1,193,447) 348,670
Cash and cash equivalents at beginning of period 583,320 332,795
----------- -----------
Net (debt)/cash at end of period (610,127) 681,465
=========== ===========
SUPPLEMENTAL DATA:
Interest paid 810,044 8,749
Income tax paid 430 490
</TABLE>
See notes to the consolidated financial statements.
6
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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 September 30, 1999, and for
the periods ended September 30, 1999 and September 30, 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.
On October 27, 1999, the Company effected a one-for-ten reverse split
of its outstanding common stock, with its authorized shares remaining
at 50 million shares (see Stockholders' Meeting below). Unless
otherwise stated, all share per share data contained herein has been
adjusted to reflect the completion of the reverse split.
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.
7
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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
stockholders' 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.
8
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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
December 31, 1998 and September 30, 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 September 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.
STOCKHOLDERS' MEETING
A meeting of the Company's stockholders was held on October 22, 1999.
At the meeting, the stockholders approved the following resolutions:
(i) a reverse split of the Company's outstanding shares on a one for
ten basis, with the Company's authorized shares remaining at 50 million
shares; (ii) the terms of the financial arrangements between the
Company and Groupe AB, S.A., and between the Company and Superstar
Ventures Limited ("Superstar") (see Notes 15 and 16); and (iii) the
grant of an option to an entity controlled by the Company's Chairman
and CEO and the Company's Chief Operating Officer to purchase 1.6
million shares of the Company's common stock at an exercise price of
$1.00 per share. (See Note 15). The stockholders also elected five
directors to serve until the next annual meeting of Stockholders or
until their successors are elected and qualified.
Following the reverse split, which was effected on October 27, 1999, in
accordance with its financial arrangements among the Company, Groupe AB
and Superstar, the Company issued an aggregate of 22,598,255 shares to
Group AB and Superstar in conversion of $22,598,255 of outstanding
convertible debt, including $4,649,839 of accrued interest (see Notes
8, 15 and 16). The Company also issued additional shares in conversion
of certain sundry loans (see Note 8) and to other parties to which it
was obligated, including Instar Holdings Inc. which received 200,000
shares as part of its settlement with the Company (See Note 16). After
all of these share issuances, at November 1, 1999 the Company has
27,741,667 shares of common stock outstanding.
The 'Proforma' column as shown in the balance sheet reflects the
completion of the reverse split and the conversion of loans and accrued
interest into equity as if such transactions had occurred as of
September 30, 1999.
2. GOING CONCERN
The accompanying financial statements have been prepared on the going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown
in the financial statements, during the nine-month period ended
September 30, 1999 and for the year ended December 31, 1998, the
Company incurred net losses of $11,258,052, and $10,767,547,
respectively. At September 30, 1999, the Company had net current
liabilities of $28,127,847 and its total liabilities exceeded its total
assets by $24,953,851.
9
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
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.
At a stockholders' meeting held on October 22, 1999, a resolution
approved to reverse split the Company's common stock on a one share for
ten share basis, with the authorized capital of the Company remaining
at 50 million common shares, resulting in approximately 46 million
shares of common stock being available for issue. A further resolution
approved certain financial agreements entered into by the Company and
the conversion of approximately $22.6 million of convertible loans and
interest accrued into equity of the Company. On a pro-forma basis, as
if the conversion of convertible debt into equity had taken place at
September 30, 1999, the Company would have net current liabilities of
$5,254,808 and its total liabilities would have exceeded its total
assets by $2,080,812.
3. CASH AND CASH EQUIVALENTS
Cash and cash equivalents at September 30, 1999 includes a bank deposit
balance of Nil (December 31, 1998 - $520,164).
4. ACCOUNTS RECEIVABLE
SEPTEMBER 30, DECEMBER 31,
1999 1998
Accounts receivable comprise: $ $
Trade receivables 636,616 899,352
Taxation receivables 30,585 19,761
Other debtors receivable 761,037 882,779
--------- ---------
1,428,238 1,801,892
========= =========
5. AMOUNT DUE FROM STOCKHOLDER
In December 1995, the Company issued 26,141 shares at $12.00 each to a
stockholder (Latitude Investments, Ltd.) in exchange for the
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 settlement agreement made in July 1999
with Instar, Universal and Latitude (See Note 16), this amount has been
repaid.
10
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
6. INTANGIBLE ASSETS
SEPTEMBER 30, DECEMBER 31,
1999 1998
$ $
Purchased broadcast licenses 247,035 249,570
Computer software 581,843 591,560
Goodwill 5,094,165 5,094,165
---------- ----------
5,923,043 5,935,295
Less accumulated amortization (3,546,061) (3,076,883)
---------- ----------
2,376,982 2,858,412
========== ==========
Goodwill net of amortization is as follows:
SEPTEMBER 30, DECEMBER 31,
1999 1998
$ $
Unimedia 1,802,228 2,138,468
TopCard 467,290 558,819
Pixel 60,220 78,986
--------- ---------
2,329,738 2,776,273
========= =========
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
SEPTEMBER 30, DECEMBER 31,
1999 1998
$ $
Fixtures, fittings and equipment 3,665,724 3,211,962
Less accumulated depreciation (2,461,882) (2,415,729)
---------- ----------
1,203,842 796,233
========== ==========
11
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
8. LOANS REPAYABLE WITHIN ONE YEAR
SEPTEMBER 30, DECEMBER 31,
1999 1998
$ $
Instar Holding Inc. 500,000 2,000,000
Groupe AB, S.A 11,165,755 3,120,000
Superstar Ventures Limited 6,800,000 6,650,000
Fontal Ltd. -- 200,000
Oradea -- 500,000
Roland Pardo -- 500,000
Interest and penalty interest accrued 4,120,177 1,367,442
---------- ----------
Related party loans 22,585,932 14,337,442
Sundry loans 583,000 190,000
---------- ----------
23,168,932 14,527,442
========== ==========
The terms of the loans are:
The terms of the Groupe AB and Superstar loans are detailed in Note 15
and 16. Following the stockholders' meeting held on October 22, 1999,
which ratified the agreements between the Company and Groupe AB and the
Company, and Superstar, substantially all of the loans and accrued
interest as at October 31, 1999 were converted into equity. Of the
loans, $477,339 and $150,000 received from Group AB and Superstar,
respectively, are repayable in two years and bear interest at 10% per
annum. The Company has granted the lenders a two-year warrant to
purchase an aggregate of 627,339 shares of Common Stock at an exercise
price of $1.00 per share (see Note 16).
The terms of the Instar loan is detailed in Note 15 and 16. An
agreement to settle the Instar Loan was signed on July 21, 1999. See
Note 16 for a description of the terms of the settlement of the Instar
Loan.
The Fontal loan was received on December 30, 1997 and carried an
interest rate of 15% per annum. The Fontal loan was repaid on May 25,
1999. See Note 14.
The Oradea loan was made to Unimedia in 1996 and carried an interest
rate of 2% above the three month Eurodollar Libor rate. The Oradea loan
was repaid in July 1999. See Note 14.
The Roland Pardo loan was made to Unimedia in 1996 and carried an
interest rate of 2% above the three month Eurodollar Libor rate. The
Roland Pardo loan and was repaid in July 1999. See Note 14.
The sundry loans are in respect of eight proposed subscriptions
totaling $583,000 in respect of 583,000 shares of common stock.
Following the completion of the reverse split on October 27, 1999,
these loans were converted into equity.
12
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
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:
SEPTEMBER 30, DECEMBER 31,
1999 1998
$ $
Current assets 104,204 152,744
Less current liabilities (719,691) (702,903)
-------- --------
Net current liabilities (615,487) (550,159)
Minority interests (365,597) (460,559)
Net property, plant and equipment 423,477 514,490
-------- --------
Net liabilities (557,607) (496,228)
======== ========
10. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
In October 1999, the Company entered into a monthly agreement to lease
offices, as well as the use of studio, post production and editing
facilities in Cologne, Germany. Under the terms of the agreement, the
Company is committed to paying DM 180,000 ($96,000 at September 30,
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 $95,000 (at
September 30, 1999 exchange rates).
The total rental expense in 1999 and 1998, including transponders and
lease commitments as above, are $2,637,500 and $4,423,000,
respectively.
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 Groupe AB at an annual costs of
$3,120,000 (see Notes 15 and 16).
13
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
Minimum lease payments under operating leases as of September 30, 1999
are as follows:
Years ending December 31, $
1999 2,637,500
2000 2,066,000
2001 266,000
2002 266,000
2003 and thereafter 295,000
----------
$5,530,500
==========
The Company is committed to pay to its officers under employment
agreements an aggregate of $650,000 during the year ended December 31,
1999.
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.
<TABLE>
<CAPTION>
9 MONTHS ENDED 9 MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
$ $
<S> <C> <C>
Research and development costs 217,429 196,281
=============== ==================
</TABLE>
12. FINANCIAL EXPENSE (INCOME) NET
<TABLE>
<CAPTION>
9 MONTHS ENDED 9 MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
$ $
<S> <C> <C>
Interest expense 3,674,052 1,038,165
Foreign currency exchange loss (gain) 2,816,059 (1,685,921)
---------------- ------------------
6,490,111 (647,756)
================ ==================
</TABLE>
14
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
The foreign currency exchange loss in 1999 and gain 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 September 30, 1999 are as follows:
<TABLE>
<CAPTION>
9 MONTHS ENDED 9 MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
$ $
<S> <C> <C>
Deferred tax asset on unrealized tax losses 19,860,000 4,180,000
Timing differences 240,000 -
---------------- ---------------
Valuation allowances (20,100,000) (4,180,000)
---------------- ---------------
Total deferred tax assets - -
================ ===============
</TABLE>
The Company has significant deferred tax assets (approximately $18.0
million) 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
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
($395,000). 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.
In May 1998, TV Strategies, a US Dallas based television services
company, obtained a default judgment against Onyx for DM300,000
($158,000), 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 Company is now vigorously
defending this claim and 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. On May 25, 1999, this matter was settled for
$327,500, including interest and costs.
15
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
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 also took 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 did not by their terms reflect a repayment
date, in February 1999 the French court ruled that repayment of the
loans be made in installments and set a lower rate of interest to
accrue. Unimedia has complied with the ruling and has repaid these
loans in full. Unimedia has also been considering preparing actions
against the principal of Oradea and against Pardo for damages which it
believes have been inappropriately caused by reason of the actions
taken by them 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 ($96,000) to
resolve this claim.
In August 1998, Onyx sued Charles Koppel in Germany. The suit alleged
that certain of Mr. Koppel's actions as the managing director of Onyx
were improperly performed and sought damages in an unspecified amount.
The Company and Charles Koppel have exchanged mutual general releases
in connection with the Instar Settlement (See Note 16) and all of the
suits between the Company and Charles Koppel will be dismissed with
prejudice.
15. CAPITAL STRUCTURE
At a stockholders' meeting held on October 22, 1999, the stockholders
approved a reverse split of the Company's outstanding common stock on a
one new share for ten old shares basis, with the Company's authorized
shares remaining at 50 million shares. Unless otherwise noted, all
share and per share references herein reflect completion of the reverse
split on October 27, 1999.
The Company has the following issued and vested warrants to purchase
common stock outstanding at September 30, 1999 and December 31, 1998:
16
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
SEPTEMBER 30, DECEMBER 31,
DESCRIPTION 1999 1998
Warrants for common stock
exercisable at $40.00 520,000 520,000
Warrants for common stock
exercisable at $31.25 43,332 43,332
Warrants for common stock
exercisable at $25.00 110,000 110,000
Warrants for common stock
exercisable at $1.00 810,000 -
---------------------------------
1,483,332 673,332
=================================
All outstanding warrants 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 420,000 and 100,000 shares of common stock at exercise prices
of $40.00 and $25.00 per share, respectively, were issued to investors
in the Offering; warrants to purchase 100,000 and 43,332 shares of
common stock at exercise prices of $40.00 and $31.25 per share,
respectively, were issued to the placement agent and sub-distributors
for the Offering; and warrants to purchase 160,000 and 120,000 shares
of common stock at exercise prices of $31.25 and $25.00 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 10,000 shares at an exercise price
of $25.00 per share were issued to a director for consulting services.
In September 1999, Groupe AB provided a bank guarantee for half of a DM
3 million (approximately $1.6 million) bank facility obtained by Onyx
Television. In connection with the guaranty, the Company granted Groupe
AB a two year warrant to purchase 810,000 shares of Common Stock at an
exercise price of $1.00 per share. In the event the bank guarantee is
called upon, the Company will be obligated to issue to Groupe AB such
number of shares of common stock at $1.00 per share as is equal to the
amount paid by Groupe AB under its guaranty.
Additionally, the Company is obliged to issue warrants to former
Unimedia stockholders under the terms of a share exchange agreement
signed in 1997, as follows:
SEPTEMBER 30, DECEMBER 31,
DESCRIPTION 1999 1998
Warrants for common stock
exercisable at $40.00 113,914 113,914
Warrants for common stock
exercisable at $31.25 7,787 7,787
Warrants for common stock
exercisable at $25.00 19,767 19,767
-----------------------------------
141,468 141,468
===================================
17
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
Subject to compliance with applicable U.S. securities laws, the Company
intends in the future to offer its 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 $3.00 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 156,614 shares of
Common Stock on the basis of two shares for each of the 78,307 warrants
which they hold, but at an exercise price of $2.00 per share. Auric was
granted this lower price due to the assistance which they provided to
the Company in 1998 in helping the Company to re-obtain a quotation on
the Bulletin Board maintained by the NASD.
COMMON STOCK PURCHASE OPTIONS
<TABLE>
<CAPTION>
OUTSTANDING OUTSTANDING
AT AT
SEPTEMBER 30, DECEMBER 31,
DESCRIPTION 1999 GRANTED 1998
<S> <C> <C> <C>
Executive officers options exercisable @ $5.70 37,500 37,500
of which vested 30,000 30,000
Officers options exercisable @ $25.00 30,000 30,000
of which vested 30,000 20,000
Executive officers options exercisable @ $3.50 400,000 400,000
of which vested 159,999 80,000
Non-employee directors options exercisable @ $3.50 50,000 50,000
of which vested 50,000 50,000
Options to Diamond Production exercisable @ $1.00 1,600,000 1,600,000
---------------------------------
Total exercisable 2,117,500 - 2,117,500
=================================
</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 compensation, options to purchase 20,000 and
17,500 shares of common stock at an exercise price of $5.70 per share,
the price at which transactions were effected at that time. The options
vested 2/5 upon the effective date of the agreements and will vest 1/5
on each of the first, second and third anniversaries, respectively, of
the agreements. These options expire 36 months from the date of their
effective registration.
The Chief Financial Officer as part of his service agreement, holds an
option to purchase 30,000 common shares of the Company at $25.00 per
share, 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.
18
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
On March 10, 1998, the Board of Directors granted options to four
executive officers of the Company to purchase an aggregate of 400,000
shares of common stock at an exercise price of $3.50 per share (the
price at which common stock was quoted on the date of grant). On the
same date, non-employee directors were granted options to purchase an
aggregate of 50,000 shares at the same price. The options vested to
executive officers 20,000 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 1,600,000 shares at an exercise
price of $1.00 per share to Diamond Productions, a company owned by two
executive directors. This grant was approved by the Company's
stockholders at the stockholders' meeting held on October 22, 1999.
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 nine months ended
September 30, 1999 and 1998 are as follows:
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
$ $
Pro forma net loss
Basic and diluted (11,258,052) (7,649,328)
Pro forma net loss per share
Basic and diluted ($2.81) ($1.91)
CONVERTIBLE DEBT
The following derivative securities were outstanding (principal and
interest accrued) as at September 30, 1999. The Company had 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 failed to
hold its special stockholders meeting subsequent to November 30, 1998.
On October 22, 1999 the Company's stockholders approved a reverse
stock split of the common shares of the Company, with the Company's
authorized shares remaining at 50 million shares, thereby automatically
increasing the authorized but unissued common shares available for
issuance. Following approval, the derivative securities outstanding
(principal and interest accrued) were automatically converted into
common stock (See Note 1).
19
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
SHARES SHARES ISSUED
ISSUABLE ON ON CONVERSION
CONVERSION AT FOLLOWING
CONVERSION SEPTEMBER 30, STOCKHOLDERS'
PAYEE $ PRICE ($) 1999 MEETING
<S> <C> <C> <C> <C>
Superstar Ventures Ltd. 1,250,000 1.00 1,250,000 1,250,000
Superstar Ventures Ltd. 400,000 1.00 400,000 400,000
Groupe AB 2,000,000 1.00 2,000,000 2,000,000
Superstar Ventures Ltd. 5,000,000 1.00 5,000,000 5,000,000
Groupe AB (1) 3,400,000 1.00 3,400,000 3,720,000
Groupe AB 5,288,416 1.00 5,288,416 5,578,416
Interest and penalty interest accrued 4,106,623 1.00 4,106,623 4,649,839
-------------- ---------------------------------
21,445,039 21,445,039 22,598,255
============== =================================
</TABLE>
(1) The debt is part of a convertible note under which Groupe AB
is providing provide services with a value of $6,640,000 over
2 years. See Note 10 - Lease Commitments. Shares will be
issued at the rate of 260,000 shares per month at $1.00 per
share. The total shares of common stock to be issued are
6,640,000.
BASIC EPS COMPUTATION
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
<S> <C> <C>
Net loss of continuing operations (11,212,760) (7,573,064)
------------- -----------------
Net loss (11,258,052) (7,649,328)
------------- -----------------
Weighted Average number of Shares 4,009,413 4,009,413
------------- -----------------
Basic EPS Net loss of continuing operations ($2.80) ($1.89)
------------- -----------------
Basic EPS Net loss including discontinued operations ($2.81) ($1.91)
------------- -----------------
</TABLE>
20
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
DILUTED EPS COMPUTATION 1999 1998
<S> <C> <C>
Weighted average shares 4,009,413 4,009,413
Warrants (1) - -
Convertible debt 21,445,039 shares (1) - -
Board options - 209,999 vested in 1998 and 1999 - -
----------------- -----------------
4,009,413 4,009,413
----------------- -----------------
Diluted EPS Net loss of continuing operations ($2.80) ($1.89)
----------------- -----------------
Diluted EPS Net loss including discontinued operations ($2.81) ($1.91)
----------------- -----------------
</TABLE>
(1) The computation does not assume exercise of the warrants or
options since it would have an antidilutive effect on earnings
per share. In addition to the above, loans of $477,339 and
$150,000 received from Groupe AB and Superstar respectively,
are repayable in two years and bear interest at 10% per annum.
The Company has granted the lenders a two year warrant to
purchase an aggregate of 627,339 shares of Common Stock at an
exercise price of $1.00 per share.
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 1,200,000 shares of Common Stock, at a purchase price of $5.00 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 $4.0 million
in a Private Placement offering of its securities to certain accredited
investors. In the offering, the Company agreed to issue an aggregate of
701,754 shares of common stock, at a purchase price of $5.70 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
raised additional funds to repay the loan. The loan was guaranteed by
the Company and Onyx, and was secured by a charge on substantially all
of the Company's assets. Interest was payable monthly on the loan and
was until December 31, 1997 at the rate of 2% above Lloyds Banks'
21
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
base rate. Interest as from January 1, 1998 was at the rate of 13% per
annum. The terms of the Instar Loan were amended in August 1997,
January 1998 and July 1998.
On October 31, 1996, CM(UK) entered into a deed of counter-indemnity
("Deed") with Universal, a BVI corporation. The Deed secured the
obligation of CM(UK) to repay Universal if Universal were called upon
to make payment on its transponder guarantee. (See Note 8). CM(UK)'s
obligations under the Deed were guaranteed by the Company and Onyx, and
were secured by a charge on substantially all of the Company's assets.
Instar and Universal had agreed that their liens on the Company's
assets would rank pari-passu. See Note 17.
On July 21, 1999, the Company agreed 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, $1.9 million of which has been paid to
date. As part of this settlement, the Company's obligations to Instar
and Universal and Instar's and Universal's charge on CM(UK)'s and the
Company's assets has been extinguished. (See Note 8). Additionally, the
obligations of Latitude Investments Ltd. to the Company (see Note 5)
were deemed paid in full.
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 were convertible into Common Stock on the
basis of one share of Common Stock for each $5.00 of outstanding
principal and accrued interest.
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
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.
On June 16, 1998, the Company entered into two Memorandum of
Understanding Agreements ("MOU") with Groupe AB and Superstar to
continue to fund the Company's operations. These agreements provided
$11.64 million in funding, $5.4 million in the form of a 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 were initially in the form of debt, but were
to be automatically converted into shares of common stock at $1.00 per
share upon and after approval of an increase in the Company's
authorized capital available for issue. (See Note 15).
On March 10, 1999, the Company entered into a $6 Million Convertible
Promissory Note Agreement with Groupe AB to provide additional funding
for the Company's operations including $690,000, which was paid for the
purchase of certain technical equipment necessary to implement the
Service Agreement, $3.1 million to be loaned in cash over the five
months to July 31, 1999; of which $2.99 million has been received to
November 5, 1999, and the balance of $2.2 million of the Note was
reserved for use in funding the settlement of the Instar loan (see
above). The Note bears interest at the rate of 10% per annum, and was
automatically convertible into Common Stock on the basis of one share
of Common Stock for each $1.00 of principal and interest. As previous,
the Note could not be converted until the Company had held its
stockholders' meetings and obtained approval of an increase in the
authorized shares of Common Stock available for issue.
In May 1999, Groupe AB and Superstar made a loan to the Company in the
aggregate amount of $300,000, the proceeds of which were used to fund
the settlement of the Fontal loan. See Note 14. The loan is due in two
years and bears interest at the rate of 10% per annum. In connection
with the loan, the Company granted the lenders a
22
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
two-year warrant to purchase an aggregate of 300,000 shares of the
Common Stock at an exercise price of $1.00 per share.
In August 1999, Groupe AB made a loan to the Company in the aggregate
amount of $327,339, the proceeds of which were used to fund the
settlement of the outstanding amounts due to KPN Telecom. The loan is
due in two years and bears interest at the rate of 10% per annum. In
connection with the loan, the Company granted the lender a two-year
warrant to purchase 327,339 shares of the Common Stock at an exercise
price of $1.00 per share.
In September 1999, Groupe AB provided a bank guarantee for half of a DM
3 million (approximately $1.6 million) bank facility obtained by Onyx
Television. In connection with the guaranty, the Company granted Groupe
AB a two year warrant to purchase 810,000 shares of Common Stock at an
exercise price of $1.00 per share. In the event the bank guarantee is
called upon, the Company will be obligated to issue to Groupe AB such
number of shares of common stock at $1.00 per share as is equal to the
amount paid by Groupe AB under its guaranty.
17. SUBSEQUENT EVENTS
The Company held a meeting of its stockholders on October 22, 1999.
Following the stockholders meeting, the Company effected a one share
for ten share reverse split of its outstanding common stock and issued
certain new shares of its post-reverse split common stock. See Note 1
for information.
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 $5.70 per share. Accordingly, the comparative
1998 unaudited financial statements have been restated from the amounts
previously reported as follows:
<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED AS RESTATED
($) ($)
----------------- ----------------
<S> <C> <C>
For the nine months ended September 30, 1998
Other (expenses) / income (682,840) (561,232)
Loss from continuing operation before taxation (7,493,259) (7,573,064)
Net loss after taxation (7,497,013) (7,649,329)
Net loss per share - basic and diluted ($1.87) ($1.91)
</TABLE>
23
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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 September 1999 - approximately
66%, 17% and 17%, respectively; to September 1998 - approximately 42%,
32% and 26%, respectively).
24
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
ELIMINATION
TELEVISION &
MEDIA TECHNOLOGY CORPORATE TOTAL
NINE MONTHS ENDED SEPTEMBER 30, 1999
<S> <C> <C> <C> <C> <C>
Revenues 1,478,071 769,287 - 2,247,358
Inter-segment revenues - - - -
------------ --------------- ---------------- --------------
Total revenues 1,478,071 769,287 - 2,247,358
Income (losses) from operations (3,316,271) (215,373) (1,810,532) (5,342,176)
Other income 90,450 138,119 480,735 709,304
Interest expenses (60,233) (79,985) (3,533,834) (3,674,052)
Other financial (expense) income, net (2,479,318) 23,012 (359,753) (2,816,059)
Equity in net profit/(losses) of affiliates - 26,788 (116,565) (89,777)
Loss in discontinued business - - (48,557) (48,557)
Income tax benefit 3,695 (430) - 3,265
Minority interest - - - -
------------ --------------- ---------------- --------------
Net loss (5,761,677) (107,869) (5,388,506) (11,258,052)
============ =============== ================ ==============
Total assets 1,457,077 2,850,220 1,214,628 5,521,925
============ =============== ================ ==============
Capital expenditure 731,122 0 0 731,122
============ =============== ================ ==============
Depreciation of fixed assets 240,818 72,982 9,712 323,512
============ =============== ================ ==============
GERMANY FRANCE ISRAEL OTHER TOTAL
CORPORATE
Revenues 1,478,071 390,094 379,193 - 2,247,358
Inter-segment revenues - - - - -
------------ --------------- ---------------- ------------ --------------
Total revenues 1,478,071 390,094 379,193 - 2,247,358
Income (losses) from operations (3,316,271) (328,117) 112,744 (1,810,532) (5,342,176)
Other (expense) income 90,450 138,119 - 480,735 709,304
Interest expenses (60,233) (4,603) (75,382) (3,533,834) (3,674,052)
Other financial (expense) income, net (2,479,318) 23,012 - (359,753) (2,816,059)
Equity in net profit/(losses)of affiliates - - 26,788 (116,565) (89,777)
Loss in discontinued business - - - (48,557) (48,557)
Income tax benefit 3,695 (430) - - 3,265
Minority Interest - - - - -
------------ --------------- ---------------- ------------ --------------
Net loss (5,761,677) (172,019) 64,150 (5,388,506) (11,258,052)
============ =============== ================ ============ ==============
Total assets 1,457,077 2,196,476 653,744 1,214,628 5,521,925
============ =============== ================ ============ ==============
Capital expenditure 731,122 0 0 0 731,122
============ =============== ================ ============ ==============
Depreciation of fixed assets 240,818 35,088 37,894 9,712 323,512
============ =============== ================ ============ ==============
</TABLE>
25
<PAGE>
CAPITAL MEDIA GROUP LIMITED
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
TELEVISION TECHNOLOGY ELIMINATION & TOTAL
MEDIA CORPORATE
NINE MONTHS ENDED SEPTEMBER 30, 1998
<S> <C> <C> <C> <C> <C>
Revenues 886,802 1,216,786 - 2,103,588
Inter-segment revenues - - - -
---------------- --------------- --------------- ---------------
Total revenues 886,802 1,216,786 - 2,103,588
Income (losses) from operations (5,532,026) (324,076) (1,601,126) (7,457,228)
Other (expense) income 99,054 (660,286) - (561,232)
Interest expenses (74,281) (303,648) (660,235) (1,038,164)
Other financial (expense) income, net 1,022,935 126,164 536,822 1,685,921
Equity in net losses of affiliates - (66,000) (136,360) (202,360)
Profit in discontinued business - - (75,773) (75,773)
Income tax benefit (492) - - (492)
---------------- --------------- --------------- ---------------
Net loss (4,484,810) (1,227,846) (1,936,672) (7,649,328)
================ =============== =============== ===============
Total assets 1,711,049 2,294,746 3,138,679 7,144,474
================ =============== =============== ===============
Capital expenditure - 453,560 - 453,560
================ =============== =============== ===============
Depreciation of fixed assets 126,135 256,849 11,049 394,033
================ =============== =============== ===============
GERMANY FRANCE ISRAEL OTHER TOTAL
CORPORATE
Revenues 886,802 669,536 547,250 - 2,103,588
Inter-segment revenues - - - - -
---------------- --------------- --------------- -------------- ---------------
Total revenues 886,802 669,536 547,250 2,103,588
Income (losses) from operations (5,532,026) (508,826) 184,750 (1,601,126) (7,457,228)
Other income (expense) 99,054 (660,286) - - (561,232)
Interest expenses (74,281) (283,898) (19,750) (660,235) (1,038,164)
Other financial (expense) income, net 1,022,935 126,164 - 536,822 1,685,921
Equity in net losses of affiliates - - (66,000) (136,360) (202,360)
Profit in discontinued business - - - (75,773) (75,773)
Income tax benefit (492) - - - (492)
---------------- --------------- --------------- -------------- ---------------
Net loss (4,484,810) (1,326,846) 99,000 (1,936,672) (7,649,328)
================ =============== =============== ============== ===============
Total assets 1,711,049 1,850,746 444,000 3,138,679 7,144,474
================ =============== =============== ============== ===============
Capital expenditure - 453,560 - - 453,560
================ =============== =============== ============== ===============
Depreciation of fixed assets 126,135 101,349 155,500 11,049 394,033
================ =============== =============== ============== ===============
</TABLE>
26
<PAGE>
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THE FINANCIAL INFORMATION INCLUDED HEREIN SHOULD BE READ IN CONJUNCTION
WITH THE CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO,
INCLUDED ELSEWHERE IN THIS FORM 10-QSB. CERTAIN OF THE DATA CONTAINED HEREIN
INCLUDES FORWARD LOOKING INFORMATION AND RESULTS COULD DIFFER FROM THAT SET
FORTH BELOW. THIS DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
INFORMATION CONTAINED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR
ENDED DECEMBER 31, 1998 (THE "FORM 10-K").
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1998
The net loss for the quarter ended September 30, 1999 was $1.45
million, compared to a net loss of $0.95 million for the three months ended
September 30, 1998. However, at the operating level, the operating loss
decreased to $1.68 million in the quarter ended September 30, 1999, compared to
$2.0 million for the quarter ended September 30, 1998, on slightly decreased
revenues. The increase in net loss was primarily attributable to an increase in
the financial expenses charge in respect of higher loan interest and penalty
costs, offset in part by a significant foreign exchange gain arising since
December 31, 1998.
The net loss per share for the quarter ended September 30, 1999 (basic
and diluted) including discontinuing operations was $0.36, compared to a net
loss per share (basic and diluted) of $0.24 for the quarter ended September 30,
1998. Weighted average shares outstanding (basic and diluted) were 4,009,413 for
both periods. As described in the Notes to the Financial Statements, the
Company's stockholders, at a meeting held on October 22, 1999, approved a
one-for-ten reverse split of the Company's outstanding common stock with
authorized capital of the Company remaining at 50,000,000 shares of common
stock. The reverse split was effected October 27, 1999 and all references to the
Company's shares (including per share information) contained in this Form 10-QSB
are on a post reverse split basis.
The Consolidated Financial Statements have been restated to conform to
the 1998 Consolidated Financial Statements. The restatement is part in respect
of the treatment of the Company's issued stock held by a subsidiary company
within Investments in the original 1997 Financial Statement with the cost
adjusted by a year end valuation provision. The comparatives in the September
1998 Financial Statements were restated to show the holding at original cost and
as an element of Stockholders' Equity.
Operating revenues for the quarter ended September 30, 1999 totaled
$0.78 million, a decrease of $49,000 compared to revenues of $0.83 million for
the quarter ended September 30, 1998. Compared to the corresponding quarter in
1999, both Onyx and Pixel increased operating revenues by $138,000 and $19,000,
respectively, while TopCard's operating revenue decreased by $163,000.
Operating costs, including staff costs, depreciation and amortization
totaled $2.46 million for the quarter ended September 30, 1999, compared to
$2.84 million for the quarter ended September 30, 1998. The net decrease in
operating costs is primarily indicative of the cost reductions made across all
of the groups operations but specifically at Onyx where operating costs were
reduced to $1.64 million in the quarter to September 30, 1999, compared to $1.88
million in the quarter ended September 30, 1998.
Onyx's operating costs are set to fall significantly in 1999 as
compared to 1998, as a result of the Company's strategic services agreement with
Groupe AB. Operating expenses of Onyx include programming costs, broadcast,
studio expenses and transmission expenses. In October 1998, Onyx entered into a
two year strategic alliance agreement with Groupe AB, a French television
production company, to provide to Onyx, 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, at an annual
cost of $3.12 million.
Depreciation and amortization for the quarter ended September 30, 1999
was $0.28 million, compared to $0.29 million for the corresponding period in
1998.
27
<PAGE>
The increase in Financial Expense relates to higher interest expenses
of $1.61 million for the quarter ended September 30, 1999, compared to $0.42
million for the quarter ended September 30, 1998. This is entirely due to the
substantial increase in loans received over the year. For the quarter ended
September 30, 1999, financial expense also included a credit of $1.11 million
(quarter ended September 30, 1998 - $1.81 million credit) in respect of foreign
exchange gain arising from changes in currency exchange rates at September 30,
1999 compared to exchange rates at December 31, 1998.
The third quarter 1999 results were also impacted by a $0.48 million
net gain relating to the completion of the Instar and Fontal settlements. No
such gain was reported during the comparative 1998 period.
As a result of all of the above factors, the Company's loss from
continuing operations was $1.42 million for the quarter ended September 30,
1999, an increase of $0.51 million compared to a loss of $0.91 million for the
quarter ended September 30, 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1998
Operating revenues for the nine months ended September 30, 1999 were
$2.25 million, an increase of $144,000 compared to operating revenues of $2.1
million for the nine months ended September 30, 1998. This increase in operating
revenue was largely attributable to an increase of $592,000 at Onyx, while
operating revenues at both TopCard and Pixel decreased $156,000 and $165,000,
respectively, compared to the same nine months in 1998.
Operating costs, including staff costs, depreciation and amortization,
for the nine months to September 30, 1999 were $7.59 million compared to $9.56
million for the same period of 1998. As stated above, the net decrease in
operating costs is primarily indicative of the cost reductions made across all
the group operations but specifically at Onyx where operating costs were reduced
by $1.63 million to $4.79 million in the nine months to September 30, 1999,
compared to $6.42 million in the nine months ended September 30, 1998.
Depreciation and amortization for the nine months ended September 30,
1999 was $0.77 million compared to $0.68 million for the corresponding period in
1998.
The increase in financial expense related to higher interest expense of
$3.67 million for the nine months ended September 30, 1999, compared to $1.04
million for the nine months ended September 30, 1998. This is due to the
substantial increase in loans received over the year. In addition, financial
expense includes a charge in respect of foreign exchange losses of $2.82 million
for the nine months ended September 30, 1999, compared to a gain of $1.69
million for the comparative 1998 period. The foreign exchange losses arise from
changes in currency exchange rates at September 30, 1999 compared to exchange
rates at December 31, 1998.
The nine month 1999 results were also impacted by a $0.48 million net
gain relating to the completion of the Instar and Fontal settlements. No such
gain was reported during the comparative 1998 period.
As a result of all of the above factors, the Company's loss from
continuing operations was $11.21 million for the nine months ended September 30,
1999, an increase of $3.64 million from $7.57 million for the nine months ended
September 30, 1998.
Total revenues at Onyx Television for the nine months to September 30,
1999 totalled $1.48 million, a 67% increase over revenues of $0.89 million for
the nine months ended September 30, 1998. Onyx management firmly believes that
the strategic alliance agreement with Groupe AB, a French television production
company, together with changes in local regulations effective in 1999, increased
network distribution already achieved and the recently appointed media agency,
which has already proved extremely positive, should allow Onyx to substantially
increase the development of its revenue over the next year.
The German media authorities have officially confirmed that Onyx's
rating in Germany is ahead of its two main competitors VH-1 and VIVA 2 and it is
expected that Onyx's distributions will increase further during 1999, although
there can be no assurance. At the present time, Onyx Television reaches
approximately 11 million cable homes and an indeterminable number of direct
satellite homes in Germany. See the information contained in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1998.
TopCard had a net loss of $94,000 for the nine months to September 30,
1999, compared to a profit of $3,000 for the same period in 1998. Pixel reported
a profit of $64,000 for the nine months ended September 30, 1999, compared to
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<PAGE>
a profit of $99,000 for the same period in 1998. Henry, its 47.5% owned
subsidiary recorded a net share of profit of $27,000, compared to a profit of
$32,000 recorded for the corresponding period in 1998. Henry is accounted for on
an equity basis.
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
during the second half of 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 loss for the nine months to September 30, 1999 of
$117,000, compared to a $136,000 loss for the same period in 1998. Blink has
never met its original target objectives and following a management review, the
Company agreed in October 1999 to sell its 50% shareholding in Blink to RCL
Communication, the joint shareholder, for a nominal sum and to convert the
company's existing loans made to Blink into new equity. Following this change,
the Company will own approximately 21% of Blink, and if successful in the
future, Blink will be obligated to repay these monies converted into equity back
to the Company.
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 September 30, 1999, the Company has incurred an accumulated deficit of
approximately $59.5 million, principally related to the Company's launch and
operation of Onyx Television. At September 30, 1999, the Company had a negative
working capital of approximately $25.4 million. As described in the Notes to the
financial statements, and following the reverse split effected October 27, 1999,
on a pro-forma basis, as if the conversion of convertible debt into equity had
taken place at September 30, 1999, the Company would have had a negative net
worth of $2.5 million and a negative working capital of $5.25 million.
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 was
guaranteed by the Company and Onyx and was 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 granted a charge against the shares of CM (UK) to secure
the obligation in connection with the guaranty of the transponder lease. See
Note 16 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 had agreed that their liens on the
Company's assets should have equal status and that they would share equally in
the proceeds of the collateral.
On July 21, 1999, the Company and Instar settled this loan. Under the
Instar Settlement, the Company has agreed to pay Instar $2.2 million, $1.9
million of which has been paid and the balance of which will be paid (without
interest) in installments of $100,000 over the next three months. The Company
has also issued 200,000 shares to Instar as part of the settlement. Groupe AB
has agreed to guaranty repayment of the settlement amounts. 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 has been extinguished; (ii) the Company and Instar, Universal and
Latitude have entered into mutual releases regarding their respective
obligations in
29
<PAGE>
connection with these matters, and (iii) the Company and Charles Koppel, the
former Chief Executive Officer of the Company, have entered into a mutual
general release. As part of the settlement, Instar and Universal are releasing
their charges against CM(UK)'s assets and the stock of CM(UK).
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 Tinerama Investment AG. 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 1.2 million shares of
Common Stock in this private placement ($5.00 per share), including 400,000
shares of Common Stock subscribed by Unimedia, S.A. ("Unimedia"). At the time of
this private placement, Unimedia was not an affiliate of the Company.
On September 25, 1997, the Company accepted a subscription for $4.0
million from Unimedia. In this subscription, the Company agreed to issue an
aggregate of 701,754 shares of Common Stock at a purchase price of $5.70 per
share. On September 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 610,914 of the shares which it owed to eight investors at prices
ranging from $5.90 to $7.50 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 438,596 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 10,666 shares of the Common
Stock owned by Unimedia.
On July 31, 1997, the Company acquired 50.3% of the outstanding common
stock of Unimedia in exchange for 433,300 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 269,360 shares of the Company's authorized but
unissued Common Stock. Shares issued in the Unimedia Share Exchange were valued
on the Company's books at $5.70 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.
At the time of the closing of the Unimedia Share Exchange, Unimedia
held 490,840 shares of the Common Stock. Subsequent to the closing of the
Unimedia Share Exchange, Unimedia has transferred 324,048 of these shares to
investors in several private transactions, as follows:
30
<PAGE>
TRANSFEREE SHARES
TRANSFERRED
Transferees not affiliated with the Company and Unimedia... 124,448
Stockholders of TopCard(1)................................. 45,600
Gralec Establishment(2).................................... 154,000
-------
324,048
=======
- -----------------------------
(1) Shares were transferred to the stockholders of TopCard in
connection with Unimedia's acquisition of 80% of TopCard's
outstanding shares. See Item 1. "Description of Business-
Other Businesses-TopCard, S.A." in the Form 10-K 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 154,000
pre reverse split 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 1, 2000. In return,
the Company has granted Gralec: (1) a subscription to purchase
220,000 shares for a purchase price equal to the net proceeds
from the sale of 50,000 ActivCard shares, and (ii) an option
to purchase 600,000 shares of its authorized but unissued
common stock at an exercise price of $1.00 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 Form 10-QSB, Unimedia continues to own 166,791
shares of the Company's Common Stock, including 60,000 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 79,333 shares of the Company's Common
Stock (raising $586,000 at prices between $6.00 and $7.50 per share).
In July 1999, the Company received a letter (the "Letter") from Gilles
Assouline, the Company's Chairman and CEO, Anne- Marie Assouline, and an entity
controlled by Mr. and Mrs. Assouline, Diamond Productions, alleging claims under
the Agreement and Plan of Reorganization, dated March 4, 1997, as amended (the
"Unimedia Agreement"), between the Company, Unimedia and certain of the
stockholders of Unimedia. See the 1998 Form 10-KSB for the terms of the Unimedia
Agreement. Additionally, on July 30, 1999, two of the Company's directors
notified Diamond, Gilles Assouline and Michel Assouline (the Company's Vice
President and COO) that the Company was asserting a protective claim against
each of them under the Unimedia Agreement until the claims raised in the Letter
can be considered.
After consideration of these matters, the Company's Board and the
claimants concluded that these disputes held the potential of dragging the
Company into substantial and damaging litigation. As a result, the Board and the
claimants determined that the Company's best interests would be served by
resolving these issues at this time. To accomplish this purpose, on September
22, 1999, the Company entered into a settlement agreement with Diamond, Gilles
Assouline, Michel Assouline
31
<PAGE>
and Anne-Marie Assouline (collectively, the "Assoulines") pursuant to which the
asserted claims were withdrawn and the Company and the Assoulines exchanged
mutual releases. As part of the settlement, the Company also provided the
Assoulines with a full indemnity for all claims which may arise in the future
from third parties relating to the Unimedia Share Exchanges and with a general
release through the date of the settlement agreement.
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 $5.70 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 pre reverse split share of Common
Stock for each $5.00 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.
Superstar and Unbeatable are parties controlled by David Ho, a Director
of the Company. Superstar received a fee of 20,000 shares of the Company's
Common Stock for arranging the original loan made by Unbeatable to the Company
and a fee of 40,000 shares for arranging the January 1998 Superstar loan.
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 originally due and
payable on December 31, 1998. As further consideration for granting the MMP Line
of Credit, MMP was granted the right, until March 31, 2000, to purchase shares
of authorized but unissued Common Stock of the Company at a $2.00 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 Common Stock. Such purchase would not affect the
outstanding principal amount of and accrued interest on the MMP Line of Credit.
On March 25, 1998, Superstar loaned the Company an additional $400,000,
payable on the same terms as the MMP Line of Credit. In connection with this new
loan, Superstar was granted an option to purchase shares of the Company's common
stock on the same terms as the option granted to MMP as described above.
In 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 was initially in the
form of debt (bearing interest at the rate of 13% per annum), but was
automatically to be converted into equity at the rate of $1.00 per share
following approval of an increase in the Company's authorized common stock
available for issuance.
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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 $1.00 per share; and (ii) that the Company pay a penalty of
2% of the outstanding principal amount of the loans (payable in shares at $1.00
per share) for each month during which the Company did 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 then held would
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, including the funds required to complete the
Instar Settlement. Such amount was to be funded over the next year and would
automatically convert into Common Stock at $1.00 per share.
In May 1999, Groupe AB and Superstar made a loan to the Company in the
aggregate amount of $300,000, the proceeds of which were used to fund the
settlement of the Fontal loan. The loan is due in two year and bears interest at
the rate of 10% per annum. In connection with the loan, the Company granted the
lenders a two-year warrant to purchase 300,000 shares of the Common Stock at an
exercise price of $1.00 per share.
In September 1999, Groupe AB provided a bank guarantee for half of a DM
3 million (approximately $1.6 million) bank facility obtained by Onyx
Television. In connection with the guaranty, the Company granted Groupe AB a two
year warrant to purchase 810,000 shares of Common Stock at an exercise price of
$1.00 per share. In the event the bank guarantee is called upon, the Company
will be obligated to issue to Groupe AB such number of shares of common stock at
$1.00 per share as is equal to the amount paid by Groupe AB under its guaranty.
DEBT DUE FROM LATITUDE INVESTMENTS LIMITED
The Company's balance sheet at December 31, 1998 included 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" in the Form 10-K. 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 has been deemed satisfied as part of the
Instar Settlement.
The Company had been advised by KPN Telecom, formerly known as PTT
Telecom ("KPN"), that Onyx Television owed them approximately $1,060,000. The
Company believed that the amount due was significantly lower, due to failures in
the performance of services by KPN over the period of the agreement. The Company
had accrued the entire amount allegedly owed to KPN. Additionally, the Company
was advised that KPN had 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 has
been deemed satisfied as part of the Instar Settlement.
In August 1999, Groupe AB made a loan to the Company in the aggregate
amount of $327,339, the proceeds of which were used to fund the settlement of
the outstanding amounts due to KPN Telecom. The loan is due in two years and
bears interest at the rate of 10% per annum. In connection with the loan, the
Company granted the lender a two-year warrant to purchase 327,339 shares of the
Common Stock at an exercise price of $1 per share.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that further borrowings will be required, along
with anticipated revenues from operations, to fund the Company's operations for
the next 12 months. The Company anticipates that the required fundings to meet
operating expenses will be made available by Groupe AB or Superstar, or from
other sources, although there can be no assurance that the necessary funding
will become available. Further, required amounts of funding will be impacted by
the
33
<PAGE>
level of revenues achieved, particularly at Onyx Television. The Company will
likely issue additional shares of its Common Stock to meet its capital
requirements.
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.
34
<PAGE>
PART 2
ITEM 1. LEGAL PROCEEDINGS
For information regarding the status of the Company's
currently outstanding litigation, see Note 14 of Notes to
Unaudited Consolidated Financial Statements included herein
and Item 3. "LEGAL PROCEEDINGS" in the Company's 1998 Form
10-KSB.
ITEM 2. CHANGE IN SECURITIES
See Note 15 of Notes to Unaudited Consolidated Financial
Statements included herein and Item 2. "MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION" included herein
for information regarding changes in securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a stockholders' meeting on October 22, 1999.
The following proposals were adopted by the stockholders at
the meeting: (i) a proposal to ratify the terms of the
arrangements between the Company and Groupe AB and Superstar,
as more particularly described in "Management's Discussion and
Analysis or Plan of Operations;" (ii) a proposal to reverse
split the Company's outstanding common stock on a one-for-ten
basis, with the Company's authorized common stock remaining at
50 million shares (thereby increasing the Company's available
shares for issuance to 45,990,587 shares and allowing for the
issuance of shares due to Groupe AB and Superstar upon the
exercise of outstanding convertible debt); (iii) a proposal to
ratify the grant of a two year warrant to purchase 1.6 million
shares at $1.00 per share to an entity controlled by the
Company's Chairman and CEO and the Company's Chief Operating
Officer; and (iv) a proposal to elect five persons, Gilles
Assouline, Michel Assouline, David Ho, Patrick Ho and Jean
Francois Klein, to serve as directors of the Company until the
next annual stockholders' meeting or until their respective
successors are elected and qualified. See the Company's Form
8-K dated November 2, 1999, for information regarding the
tabulation of the votes taken at the meeting.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K, dated November
2, 1999, reporting the result of its stockholders meeting, the
completion of the reverse split and certain issuances of
shares of post-reverse split common stock.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of the Exchange Act, the Registrant caused
this Report to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 12th day of November, 1999.
CAPITAL MEDIA GROUP LIMITED
By: /s/ GILLES ASSOULINE
-----------------------------------------------
Gilles Assouline, President and
Chief Executive Officer
By: /s/ STEPHEN COLEMAN
-----------------------------------------------
Stephen Coleman, Chief Financial Officer
36
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains Summary Financial Information extracted from the
Company's Form 10-QSB for the quarter ended September 30, 1999 and is qualified
in its entirety by reference to such Financial Statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 153,165
<SECURITIES> 0
<RECEIVABLES> 1,508,344
<ALLOWANCES> 80,106
<INVENTORY> 47,782
<CURRENT-ASSETS> 1,790,323
<PP&E> 1,203,842<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,521,925
<CURRENT-LIABILITIES> 30,475,776
<BONDS> 0
0
0
<COMMON> (22,400,054)
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,521,925
<SALES> 2,247,358
<TOTAL-REVENUES> 2,247,358
<CGS> 0
<TOTAL-COSTS> 7,589,534
<OTHER-EXPENSES> 709,304
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,490,111
<INCOME-PRETAX> (11,212,760)
<INCOME-TAX> 3,265
<INCOME-CONTINUING> (11,209,495)
<DISCONTINUED> (48,557)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,258,052)
<EPS-BASIC> (2.81)
<EPS-DILUTED> (2.81)
<FN>
<F1>Net of depreciation.
</FN>
</TABLE>
