<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-24796
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
(Exact name of registrant as specified in its charter)
BERMUDA N/A
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Clarendon House, Church Street, Hamilton HM CX Bermuda
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 441-296-1431
Indicate by check mark whether registrant: (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for each shorter period 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 / /.
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding as of November 6, 1998
- ----- ----------------------------------
Class A Common Stock, par value $.01 18,070,789
Class B Common Stock, par value $.01 6,062,329
<PAGE>
PART 1
FINANCIAL INFORMATION
Item 1. Financial Statements
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997
($000s)
<TABLE>
<CAPTION>
ASSETS September 30, December 31,
------ 1998 1997
------------- ------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................................................. $ 31,240 $ 106,257
Restricted cash............................................................ 274 800
Accounts receivable, net................................................... 34,023 41,985
Program rights costs, net.................................................. 40,662 30,220
Advances to affiliates..................................................... 15,403 14,675
Other short-term assets.................................................... 19,435 15,520
----------- ----------
Total current assets.............................................. 141,037 209,457
Investments in unconsolidated affiliates................................... 52,809 58,552
Investments................................................................ 23,008 22,951
Loans to affiliates........................................................ 33,939 31,927
Property, plant and equipment, net......................................... 70,547 68,090
Program rights costs, net.................................................. 21,063 12,851
License costs and other intangibles, net................................... 6,274 6,208
Goodwill, net.............................................................. 53,383 66,451
Deferred income taxes...................................................... 1,653 746
Other assets............................................................... 28,669 14,334
Total assets..................................................... 432,382 491,567
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities................................... 71,065 53,858
Duties and other taxes payable............................................. 13,283 10,989
Income taxes payable....................................................... 608 2,308
Current portion of credit facilities and obligations under capital leases.. 9,672 11,810
Dividends payable.......................................................... - 996
Investments payable........................................................ 9,133 16,714
Advances from affiliates................................................... 34,676 25,508
----------- ----------
Total current liabilities........................................ 138,437 122,183
Deferred income taxes...................................................... 1,780 916
Long-term portion of credit facilities and obligations
under capital leases..................................................... 25,785 24,204
Investments payable........................................................ 2,563 7,875
$100,000,000 9 3/8 % Senior Notes.......................................... 99,870 99,853
DM 140,000,000 8 1/8 % Senior Notes........................................ 83,611 77,513
Other Liabilities.......................................................... 762 199
Minority interest in consolidated subsidiaries............................. - 1,241
Commitments and contingencies (Note 5).....................................
SHAREHOLDERS' EQUITY:
Class A Common Stock, $0.01 par value: authorized:
100,000,000 shares at September 30, 1998 and December 31, 1997
issued and outstanding: 18,070,789 at September 30, 1998 and
16,934,894 at December 31, 1997;........................................... 181 169
Class B Common Stock, $0.01 par value: authorized:
15,000,000 shares at September 30, 1998 and December 31, 1997;
issued and outstanding: 6,062,329 at September 30, 1998 and
7,064,475 at December 31, 1997............................................. 61 71
Additional paid-in capital................................................. 333,895 332,386
Accumulated deficit........................................................ (251,793) (163,096)
Cumulative currency translation adjustment................................. (2,770) (11,947)
----------- ----------
Total shareholders' equity................................................. 79,574 157,583
----------- ----------
Total liabilities and shareholders' equity................................. $432,382 $491,567
=========== ==========
</TABLE>
2
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD
CONSOLIDATED STATEMENTS OF OPERATIONS
($000s, except per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
---------------------------- ------------------------------
1998 1997 1998 1997
----
<S> <C> <C> <C> <C>
Gross revenues............................................. $ 47,371 $ 30,679 $ 175,283 $ 121,594
Discounts and agency commissions........................... (10,781) (6,911) (37,923) (27,192)
------------- ----------- ----------- -----------
Net revenues............................................... 36,590 23,768 137,360 94,402
Station expenses:
Other operating costs and expenses....................... 24,583 13,054 76,031 41,003
Amortization of programming rights....................... 14,508 4,630 57,809 14,521
Depreciation of station fixed assets and
other intangibles...................................... 4,877 3,740 14,658 11,240
------------- ----------- ----------- -----------
Total station operating costs and expenses 43,968 21,424 148,498 66,764
Selling, general and administrative expenses 9,443 4,422 25,556 15,256
Corporate expenses:
Corporate operating costs and development expenses 5,000 5,669 18,403 15,110
Amortization of goodwill and allowance for development costs 2,311 2,835 13,318 7,430
Restructuring charge (Note 3)........................... - - 2,552 -
------------- ----------- ----------- -----------
7,311 8,504 34,273 22,540
Operating loss............................................. (24,132) (10,582) (70,967) (10,158)
Equity in loss of unconsolidated affiliates (Note 4) (2,624) (6,219) (3,498) (16,322)
Loss on impairment of investments in unconsolidated
affiliates (Note 4)...................................... - - - (20,707)
Net interest and other income.............................. (5,191) (1,551) (13,471) (2,222)
Foreign currency exchange loss, net........................ (5,996) (1,999) (8,953) (6,585)
------------- ----------- ----------- -----------
Loss before provision for income taxes (37,943) (20,351) (96,889) (55,994)
Provision for income taxes................................. (866) (1,093) (8,426) (7,926)
-------------- ------------- -------------- --------------
Loss before minority interest.............................. (38,809) (21,444) (105,315) (63,920)
Minority interest in loss (income) of consolidated subsidiaries 3,781 2,627 16,618 3,283
------------- ----------- ----------- -----------
Net Loss................................................... $ (35,028) $ (18,817) $ (88,697) $ (60,637)
============= =========== =========== ===========
PER SHARE DATA:
Net loss per share (Note 2)................................
Basic.................................................... $ (1.46) $ (0.79) $ (3.69) $ (2.54)
============= =========== =========== ===========
Diluted.................................................. $ (1.46) $ (0.79) $ (3.69) $ (2.54)
============= =========== =========== ===========
Weighted average number of common shares outstanding (000s)
Basic.................................................... 24,063 23,877 24,063 23,877
============= =========== =========== ===========
Diluted.................................................. 24,063 23,877 24,063 23,877
============= =========== =========== ===========
</TABLE>
3
<PAGE>
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
Consolidated Statements of Shareholders' Equity
For the nine months ended September 30, 1998
($000s)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Comprehensive Class A Class B Other Total
Income(loss) Common Common Capital Accumulated Comprehensive Shareholders'
Stock Stock Surplus Deficit(1) Income(2) equity
-------------- ------- --------- --------- ----------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997 $169 $71 $332,386 $(163,096) $(11,947) $157,583
Comprehensive income:
Net Loss $(88,697) $(88,697) $(88,697)
Other comprehensive income
Unrealized translation
adjustments 9,177 - - $9,177 $9,177
----------
Comprehensive income $(79,520)
==========
Stock issued:
Stock options exercised $2 - $1,509 $1,511
Conversions from Class B to
Class A $10 $(10)
------- -------- -------- ----------- --------- ---------
BALANCE, September 30, 1998 $181 $61 $333,895 $(251,793) $(2,770) $79,574
======= ======== ======== ============ ========= =========
</TABLE>
(1) Of the accumulated deficit of $251,793,000 at September 30, 1998,
$86,847,000 represents accumulated losses in unconsolidated affiliates.
(2) Represents foreign currency translation adjustments.
4
<PAGE>
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
Consolidated Statements of Cash Flows
($000s)
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
1998 1997
----------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss.......................................................... $(88,697) $(60,637)
Adjustments to reconcile net loss to net cash used in
operating activities:
Equity in loss of unconsolidated affiliates................... 3,498 16,322
Loss on impairment of investments in unconsolidated
affiliates.................................................. - 20,707
Depreciation and amortization (excluding amortization of
barter programs)............................................ 88,523 32,401
Minority interest in loss of consolidated subsidiaries........ (16,618) (3,283)
Valuation allowance for development costs..................... - 538
Accounts receivable and other debit balances.................. 11,154 11,305
Program rights paid........................................... (53,842) (16,679)
Advances to affiliates........................................ 8,371 (6,575)
Other short-term assets....................................... (3,812) (5,180)
Accounts payable and accrued liabilities...................... (4,457) 819
Income and other taxes payable................................ 976 (3,382)
----------------------------------
Net cash used in operating activities................... (54,904) (13,644)
----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in unconsolidated affiliates...................... (1,152) (11,129)
Other Investments............................................. (55) (23,505)
Restricted cash............................................... 526 1,910
Acquisition of fixed assets................................... (11,209) (7,693)
Acquisition of minority shareholder's interest................ (9,930) (8,694)
Loans and advances to affiliates.............................. (2,012) (18,826)
Payments for license costs, other assets and intangibles...... (1,759) (571)
Development costs............................................. - (12,040)
----------------------------------
Net cash used in investing activities..................... (25,591) (80,548)
----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Credit facilities and payments under capital leases........... 5,030 (2,906)
Dividends paid to minority shareholders....................... (1,777) (1,650)
Issuance of debt, net of related costs ....................... - 169,572
Capital contributed by shareholders........................... 1,509 1,647
Other long term liabilities................................... (528) (225)
Investments by minority shareholders in consolidated subsidiaries - 2,800
----------------------------------
Net cash provided by financing activities................ 4,234 169,238
----------------------------------
IMPACT OF EXCHANGE RATE FLUCTUATIONS ON CASH...................... 1,244 (1,442)
----------------------------------
Net decrease in cash and cash equivalents................. (75,017) 73,604
CASH AND CASH EQUIVALENTS, beginning of period................... 106,257 81,403
----------------------------------
CASH AND CASH EQUIVALENTS, end of period........................ $31,240 $155,007
==================================
SUPPLEMENTAL INFORMATION
Cash paid for:
Interest.................................................. $19,008 $4,458
Income Taxes.............................................. $12,647 $20,614
</TABLE>
5
<PAGE>
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
Notes to Consolidated Financial Statements
September 30, 1998
1. Organization and Business
Central European Media Enterprises Ltd., a Bermuda corporation
("CME"), was formed in June 1994. Through its predecessor companies, CME has
been in operation since 1991. CME, together with its subsidiaries and
affiliates (CME and its subsidiaries and affiliates are collectively referred
to as the "Company"), invests in, develops, and operates national and regional
commercial television stations and networks in Central and Eastern Europe.
In the Czech Republic, the Company owns a 99% voting and economic
interest in Ceska Nezavisla Televizni Spolecnost s.r.o. ("CNTS"), which
operates Nova TV, a private national television station in the Czech Republic.
The Company owns a 76% interest in Radio Alfa a.s. ("Radio Alfa"), one of two
private national radio broadcasters in the Czech Republic. The license to
operate Radio Alfa expires in February 1999 and has not been re-awarded to Radio
Alfa, which will cease broadcast operations prior to the expiration of the
license.
In Romania, the Company and its local partners operate PRO TV, a
commercial television network, and a second channel, Acasa, through Media Pro
International S.A. ("Media Pro International"). The Company owns a 66% equity
interest in Media Pro International. The Company owns 49% of the equity of PRO
TV, SRL, an affiliate station of Media Pro International holding many of the
licenses for the stations comprising the PRO TV network. The Company owns a
96% equity interest in Unimedia SRL ("Unimedia"), which owns a 10% equity
interest in a consortium, MobilRom, which operates a GSM cellular telephone
network in Romania. In August 1998 the Company engaged an investment bank to
assist in a potential sale of the Company's interest in MobilRom.
In Slovenia, the Company operates POP TV, together with MMTV d.o.o.
Ljubljana ("MMTV") and Tele 59 d.o.o. Maribor ("Tele 59"), through Produkcija
Plus d.o.o. ("Pro Plus"). Under the names POP TV and Gajba TV, Pro Plus
provides programming to, and sells advertising for, affiliated stations. The
Company owns 78% of the equity of Pro Plus, but has an effective economic
interest of 85.3% as a result of a 33% economic interest in MMTV and a 33%
economic interest in Tele 59. Tele 59 owns a 21% equity interest in Pro Plus,
and the remaining 1% equity interest in Pro Plus is owned by MMTV.
In the Slovak Republic, the Company owns an 80% non-controlling
economic interest and a 49% voting interest in Slovenska Televizna Spolocnost
s.r.o. ("STS"), which operates the national television station Markiza TV.
Markiza-Slovakia s.r.o., the broadcast license holder, and STS have entered
into an agreement pursuant to which STS is entitled to provide exclusive
commercial television services to Markiza-Slovakia s.r.o. See Part II, Item 1
"Legal Proceedings".
6
<PAGE>
In Hungary, the Company owns an 89% equity interest in Budapesti
Kommunikacios Rt. ("TV3"), a television station operating in Budapest and
distributing its signal by satellite to cable systems throughout Hungary. The
Company wholly owns Videovox Studio Limited Liability Company ("Videovox"), a
Hungarian dubbing and duplication company and owns 24.9% of the equity of 2002
Tanacsado es Szolgaltato Korlatolt Felelosegu Tarsasag ("2002 Kft"), a
broadcasting company.
In Poland, the Company owns a 50% direct interest in Federacja
Sp.zo.o. ("Federation"). The Company owns an additional 5% indirect interest
in Federation through its 10% equity interest in ITI Media Group N.V., which
owns a 50% interest in Federation. The Company's 10% equity interest in ITI
Media Group N.V. is subject to put and call options between the Company and
ITI, exerciseable from August 2000 until August 2003. TVN Sp.z o.o., owned 67%
by ITI and 33% by the Company, was granted broadcast licenses for northern
Poland and the cities of Warsaw and Lodz, and in addition, wholly owns a
private regional television station in southern Poland. Federation has entered
into agreements to provide programming and advertising services to TVN Sp.zo.o.
(See Note 5). In December 1997, TVN Sp.zo.o. acquired 22% of Polskie Media
S.A., a private regional television station operating under the name "Nasza TV"
in central Poland. Ronald S. Lauder, the non-executive Chairman of the Board of
CME, owns a non-controlling indirect minority interest in ITI Holdings S.A., a
company publicly traded on the Luxembourg Stock Exchange which owns 90% of ITI
Media Group N.V. See Part II, Item 1 "Legal Proceedings" regarding challenges to
the awards of broadcast licenses to TVN Sp.zo.o.
Also in Poland, the Company owns an indirect 12% interest in
Endemol-Neovision Sp.zo.o., a television program production company.
In Ukraine, the Company owns a 50% non-controlling interest in a
group of companies (collectively, the "Studio 1+1 Group"), which have the
right to broadcast programming and sell advertising on Ukrainian National
Channel 2 ("UT-2").
2. Summary of Significant Accounting Policies
The accompanying financial statements have been prepared in
accordance with United States generally accepted accounting principles
("GAAP"). In the opinion of management, these consolidated financial
statements include all adjustments necessary to fairly state the Company's
financial position and results of operations. These financial statements,
including the notes thereto, should be read in conjunction with CME's Form
10-K for the fiscal year ended December 31, 1997. The results for the three
months and the nine months ended September 30, 1998 are not necessarily
indicative of the results expected for the year.
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company's wholly-owned subsidiaries and the results of CNTS
(which operates Nova TV), PRO TV, POP TV, Federation, TV3, Radio Alfa and
Videovox (the "Consolidated Affiliates"), as consolidated entities and reflect
the interests of the
7
<PAGE>
minority owners of these entities for the periods presented, as applicable.
The results of Markiza TV, the Studio 1+1 Group, TVN Sp.zo.o. and, for the
first quarter of 1997 only, FFF, SFF and 1A TV (the "Unconsolidated
Affiliates"), in which the Company has, or during the periods presented had,
minority or non-controlling ownership interests, are included in the
accompanying Consolidated Financial Statements using the equity method. The
Company's former German regional television operations were comprised of 1A
TV, FFF and SFF. 1A TV initiated a bankruptcy proceeding in May 1997 and the
Company terminated its ownership interests in FFF and SFF as of December 31,
1997. The Company records other investments at the lower of cost or market
value.
Comprehensive Income (Loss)
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income", which requires companies to report all changes in equity during a
period, except those resulting from investment by owners and distribution to
owners, in a financial statement for the period in which they are recognized.
The Company has chosen to disclose Comprehensive Income, which encompasses net
income (loss) and foreign currency translation adjustments, in the
accompanying Consolidated Statement of Shareholders' Equity.
Costs of Computer Software Developed or Obtained for Internal Use
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued the Statement of
Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use", which provides guidance on accounting
for the costs of computer software developed or obtained for internal use.
This SOP requires computer software costs that are incurred in the preliminary
project stage to be expensed as incurred. Once the capitalization criteria of
the SOP have been met, directly attributable development costs should be
capitalized. It also provides guidance on the treatment of upgrade and
maintenance expenditures. SOP 98-1 is effective for fiscal years beginning
after December 15, 1998. Costs incurred prior to initial application of this
SOP, whether capitalized or not, should not be adjusted to the amounts that
would have been capitalized had this SOP been in effect when those costs were
incurred. The Company expects that this SOP will have a minimal impact on its
consolidated financial statements.
Costs of Start-Up Activities
In April 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued the Statement of
Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up Activities",
which generally requires that costs for start-up activities and organization
costs should be expensed as incurred. SOP 98-5 is effective for financial
statements for fiscal years beginning after December 15, 1998 and initial
adoption is required to be reflected as a cumulative effect of accounting
change. The Company expects that this SOP will have a minimal impact on its
consolidated financial statements.
8
<PAGE>
Reclassifications
Certain reclassifications and combinations have been made to prior
period amounts to conform to current period classifications.
3. Corporate Restructuring
In the second quarter of 1998, the Company recorded a restructuring
charge based on its decision to change its focus from aggressive development
and growth to further enhancing the operating performance of the Company's
existing assets and pursuing opportunities for focused growth. This
restructuring, which will result in the elimination of 20 positions, will be
completed by January 1999. As a result, an accrual of $2,552,000 for severance
and other associated costs was required to cover the costs of reducing senior
management and various other positions over all sectors of the Company to
levels more appropriately suited to the current direction of the Company.
Costs of $1,713,000 have been paid as of September 30, 1998 and $839,000 of
restructuring charges remained in accrued liabilities as of September 30,
1998.
4. Summary Financial Information for Unconsolidated Affiliates.
<TABLE>
<CAPTION>
As of
-----------------------------------------------------------------------------------------------
September 30, 1998 December 31, 1997
------------------------------------------------ ----------------------------------------------
$000s TVN Sp.z o.o. Markiza Studio TVN Markiza Studio
----- TV 1+1 Group Sp.zo.o. TV 1+1 Group
--------------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Current assets................ 31,730 18,674 4,169 27,106 18,385 7,744
Non-current assets............ 42,419 29,387 29,639 49,608 25,900 21,542
Current liabilities........... (37,777) (18,244) (9,880) (21,884) (13,328) (5,976)
Non-current liabilities....... (29,054) (1,201) (7,688) (41,812) (998) (6,000)
--------------- --------- --------- --------- --------- ------------
Net assets.................... 7,318 28,616 16,240 13,018 29,959 17,310
=============== ========= ========= ========= ========= ============
</TABLE>
<TABLE>
<CAPTION>
For the nine months ended,
------------------------------------------------------------------------------
September 30, 1998 September 30, 1997
------------------------------------------------------------------------------
$000s TVN Sp.zo.o. Markiza Studio Markiza Studio 1+1
----- TV 1+1 Group TV Group
------------ --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net revenues................. 1,245 25,410 18,879 19,348 9,842
Operating (loss)/income...... (3,239) (2,067) (1,153) (2,652) (2,388)
Net (loss)/income............ (6,093) (1,402) (1,117) (3,804) (2,590)
</TABLE>
<TABLE>
<CAPTION>
For the three months ended,
---------------------------------------------------------------------------
September 30, 1998 September 30, 1997
---------------------------------------------------------------------------
$000s TVN Sp.zo.o. Markiza Studio Markiza Studio 1+1
----- TV 1+1 Group TV Group
------------ -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Net revenues................. 74 6,698 4,420 5,519 2,865
Operating (loss)/ income..... (912) (4,110) (2,046) (2,209) (895)
Net (loss)/ income........... (1,603) (3,012) (1,912) (2,516) (931)
</TABLE>
These tables above exclude the Company's former operations in Germany
and the loss on impairment of investment in such operations. A $20,707,000
loss on impairment of investments in unconsolidated affiliates was recorded in
the Company's Consolidated Statement of Operations for the nine months ended
September 30, 1997 as a result of the write-down of the Company's investments
in Germany.
9
<PAGE>
5. Commitments and Contingencies
Litigation
On April 30, 1997, Perekhid Media Enterprises Ltd. ("Perekhid") filed
a complaint in the Supreme Court of New York County, State of New York,
against CME and Ronald S. Lauder, the non-Executive Chairman of the Company's
Board of Directors. Perekhid alleged that the issuance of a license to the
Studio 1+1 Group pursuant to which Studio 1+1 has been broadcasting
programming on Ukrainian National Channel 2 ("UT-2"), constitutes a tortious
interference by CME and Mr. Lauder with a Perekhid contract with the Ukrainian
authorities for Perekhid to provide programming for and sell advertising time
on UT-2. Perekhid's complaint sought compensatory damages of $250 million,
punitive damages of $500 million, and an injunction against the Company and
Mr. Lauder to prevent the continuation of the alleged conduct. On July 2,
1997, CME and Mr. Lauder filed a motion to dismiss the complaint. On April 8,
1998, the Court dismissed the complaint on grounds of forum non-conveniens. In
June 1998, Perekhid filed a notice of appeal with the Court. Perekhid has nine
months from the date it filed a notice of appeal to submit an appellate brief.
On November 4, 1998, Perekhid notified the United States District Court for
the Southern District of New York that it intends to file a related claim
against CME in the High Court in London, United Kingdom.
Hungary
Programming commitments were entered into in 1996 and
1997 in anticipation of the grant of a national license for Hungary. The
Company was not granted a national license for Hungary and has been unable to
enter into a partnership with the license winners. In light of TV3's
distribution and audience share, the Company does not expect to be able to
realize the full value of the program library. Accordingly, the Company took
write-downs of $10,961,000 and $3,664,000 for the second and third quarters of
1998. The Company currently estimates that it will take further write-downs of
up to $12,200,000 with regard to future programming rights, of which
approximately $4,000,000 is expected to be taken in the fourth quarter of 1998
with the balance taken in 1999 and 2000. Program rights acquired by the Company
under license agreements, and the related obligations involved are recorded as
assets and liabilities when the programming is available for use and the license
period begins which is in accordance with SFAS No. 63. The Company has
commitments to make programming payments on behalf of TV3 in 1998, 1999 and
beyond, of approximately $10,751,000, $5,708,000 and $5,747,000, respectively.
Poland
CME and its partner, the Polish media group ITI, have thus far been
unable to reach an agreement with regard to TVN's positioning in the Poland
television market, programming, promotional strategy and financing, as well as,
more recently, a dispute regarding the service relationship between Federation
and TVN Sp. z o.o. Intensive discussions regarding these matters have taken
place over the past several months. However, no agreement has yet been reached
between CME and ITI and there can be no assurance that an agreement will be
reached. If a satisfactory agreement with ITI is not reached in the near future,
CME will likely have to take a reduction of a substantial portion or all of the
carrying value of its investments in Poland, which together with associated
commitments are estimated to be approximately $80,740,000 at September 30, 1998.
Certain of these commitments are discussed below.
10
<PAGE>
TVN Sp.zo.o. has borrowings of $13,755,000 under four short-term
bridge loan agreements with three Polish banks. Of these, three loans with
$8,996,000 in the aggregate outstanding at September 30, 1998 are guaranteed by
the Company. During February 1998, the Company advanced $12,000,000 to its
operations in Poland, of which the repayment of $6,000,000 is guaranteed by ITI.
The Company has commitments of approximately $22,847,000 to provide satellite
support for TVN through 2010 (with approximately equal payments due each year)
and commitments of approximately $33,700,000 for multi-year programming for TVN.
The Company has the right to sublease the entire satellite commitment and to
sublicense approximately $25,000,000 of the programming commitment (such
sublicenseable portion of the programming commitment is payable over eight
years). There can be no assurance that in the event that the Company seeks to
sublease the satellite commitment or sub-license the programming commitments
that the Company will be able to realize their full value.
Foreign Exchange Contracts
In limited instances, the Company enters into forward foreign
exchange contracts to hedge foreign currency transactions for periods
consistent with its identified exposures. At September 30, 1998, there were
six forward exchange contracts outstanding for the purchase, in aggregate, of
$3,000,000 by CNTS and the sale of Czech korunas. These contracts mature by
February 26, 1999. No material exposure exists at September 30, 1998 as a
result of these contracts.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
Central European Media Enterprises Ltd. ("CME") is a Bermuda
corporation. All references to the "Company" include CME, its direct and
indirect Subsidiaries, and all references to "Subsidiaries" include each
corporation or partnership in which CME has a direct or indirect equity or
voting interest.
The Company is the leading commercial television company in Central
and Eastern Europe. The Company's national private television stations and
networks in the Czech Republic, Slovakia, Slovenia and Ukraine had the leading
average nationwide audience shares for the first nine months of 1998 and the
Company's television network in Romania had the leading average audience share
within its area of broadcast reach for the same period. In October 1997, the
Company launched television broadcast operations in Poland and Hungary.
The Company's revenues are derived principally from the sale of
television advertising to local, national and international advertisers. To a
limited extent, the Company also engages in barter transactions in which its
broadcast operations exchange commercial advertising time for goods and
services. The Company, like other television operators, experiences
seasonality, with advertising sales tending to be lowest during the third
quarter of each calendar year, which includes the summer holiday period, and
highest during the fourth quarter of each calendar year. The primary expenses
incurred in operating broadcast stations are programming and production costs,
employee salaries, broadcast transmission expenses and selling, general and
administrative expenses. The Company has incurred and might in the future
incur significant development expenses, including finding and negotiating with
local partners, researching and preparing license applications, preparing
business plans and conducting pre-operating activities, as well as
reorganizing existing affiliate entities which hold the broadcast licenses.
The primary internal sources of cash available for corporate
operating costs and development expenses are dividends and other distributions
from Subsidiaries. The Company's ability to obtain dividends or other
distributions is subject to, among other things, restrictions on dividends
under applicable local laws and foreign currency exchange regulations of the
jurisdictions in which its Subsidiaries operate. The Subsidiaries' ability to
make distributions is also subject to the legal availability of sufficient
operating funds not needed for operations, obligations or other business plans
and, in some cases, the approval of the other partners, shareholders or
creditors of these entities. The laws under which the Company's operating
Subsidiaries are organized provide generally that dividends may be declared by
the partners or shareholders out of yearly profits subject to the maintenance
of registered capital and required reserves and after the recovery of
accumulated losses.
12
<PAGE>
Selected Combined and Attributable Financial Information
The following tables are neither required by United States generally
accepted accounting principles ("GAAP") nor intended to replace the
Consolidated Financial Statements prepared in accordance with GAAP. The tables
set forth certain combined and attributable financial information for the
three months and the nine months ended September 30, 1998 and 1997 for the
Company's operating entities. This financial information departs materially
from GAAP.
In the tables "Selected Combined Financial Information," revenues and
operating expenses of certain entities (Markiza TV, the Studio 1+1 Group and
TVN Sp.zo.o.) not consolidated in the Consolidated Financial Statements are
aggregated with those of the Company's consolidated operations. In the tables
"Selected Attributable Financial Information", combined information is
adjusted for CME's economic interest in each entity, which economic interest
is the basis used for consolidation and equity method accounting in the
Company's GAAP Consolidated Financial Statements as of September 30, 1998. The
tables separate the results of the new stations, TVN and TV3, from the results
of the "Continuing Stations".
The tables are presented solely for additional analysis and not as a
presentation of results of operations of each component, nor as combined or
consolidated financial data presented in accordance with GAAP. The third
quarter 1998 $3,664,000 write-down of the TV3 program library is in addition
to the write-down taken in the second quarter 1998 of $10,961,000. These
write-downs, taken to reduce TV3's program library to the estimated net
realizable value, are not reflected in the tables in order to provide a better
indication of the underlying performance of TV3. In addition, intercompany
transactions such as management service charges are not reflected in the
tables. The Company believes that this unaudited combined and attributable
information provides useful disclosure.
In the Consolidated Financial Statements, consolidated entities
include CNTS, PRO TV, POP TV, Federation, TV3, Radio Alfa and Videovox, and
entities reported using the equity method of accounting include Markiza TV,
the Studio 1+1 Group and TVN Sp.zo.o. Under the equity method of accounting,
the Company's interest in net earnings or losses of Markiza TV, the Studio 1+1
Group and TVN Sp.zo.o. is included in the consolidated earnings and an
adjustment is made to the carrying value at which the investment is recorded
on the Consolidated Balance Sheet. The following supplementary unaudited
combined and attributable information includes certain financial information
of Markiza TV, the Studio 1+1 Group and TVN Sp.zo.o on a line-by-line basis,
similar to that of the Company's consolidated entities.
The Continuing Stations refer to CNTS, PRO TV, POP TV, Markiza TV and
the Studio 1+1 Group. CNTS, which operates Nova TV, began operations in
February 1994. PRO TV and POP TV began operations in December 1995, Markiza TV
began operations in August 1996 and the Studio 1+1 Group began to generate
significant revenues during the second quarter of 1997. Other Operations
consist of Videovox, a Hungarian dubbing studio and duplication facility
acquired by the Company in May 1996 and wholly-owned since May 1997, and Radio
Alfa, a national radio station in
13
<PAGE>
the Czech Republic in which CME acquired a controlling interest in December
1996. Both New Stations, TVN and TV3, began operations in October 1997.
EBITDA consists of earnings before interest, income taxes,
depreciation and amortization of intangible assets (which does not include
programming rights). EBITDA is provided because it is a measure of operating
performance commonly used in the television industry. It is presented to
enhance an understanding of the Company's operating results and is not
intended to represent cash flow or results of operations in accordance with
GAAP for the periods indicated.
The term "station expenses" used in the discussion of EBITDA
immediately following the tables refers to the total of a station's (i) other
operating costs and expenses, (ii) amortization of programming rights and
(iii) selling, general and administrative expenses.
"Broadcast cash flow", a broadcasting industry measure of
performance, is defined as net broadcast revenues, less (i) station operating
costs and expenses (excluding depreciation and amortization of acquired
programming and of intangible assets), (ii) broadcast selling, general and
administrative expenses, and (iii) cash program rights costs. Cash program
rights costs are included in the period in which payment is made, which may
not necessarily correspond to the timing of program use or amortization.
Broadcast cash flow should not be considered as a substitute measure of
operating performance or liquidity prepared in accordance with GAAP (see the
accompanying Consolidated Financial Statements).
14
<PAGE>
SELECTED COMBINED FINANCIAL INFORMATION (1)
(unaudited)
($000s)
Three Months Ended September 30,
<TABLE>
<CAPTION>
Net Revenue EBITDA Broadcast Cash Flow
----------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
CNTS............................ 17,827 14,836 4,416 4,460 751 5,331
PRO TV.......................... 7,437 5,310 (3,387) (1,244) (1,982) (2,660)
Markiza TV ..................... 6,698 5,519 (828) (1,111) (2,708) (1,600)
POP TV.......................... 3,564 2,592 (2,096) (1,820) (2,312) (1,923)
Studio 1+1 Group................ 4,420 2,865 (1,767) (717) (2,317) (995)
-------- ------ -------- ------- --------- -------
Total Continuing Stations............ 39,946 31,122 (3,662) (432) (8,568) (1,847)
TVN Sp.zo.o. / Federation....... 5,936 517 (3,753) -- (9,050) --
TV3 (2)......................... 1,052 -- (1,486) -- (3,530) --
-------- ------ -------- ------- --------- -------
Total New Stations................... 6,988 517 (5,239) -- (12,580) --
Other operations (3)............ 849 1,030 (93) (185) (93) (185)
-------- ------ -------- ------- --------- -------
Total combined operations............ 47,783 32,669 (8,994) (617) (21,241) (2,032)
======== ====== ======== ======= ========= =======
</TABLE>
<TABLE>
<CAPTION>
SELECTED ATTRIBUTABLE FINANCIAL INFORMATION (1)
(unaudited)
($000s)
Three months Ended September 30,
Economic
Interest (4) Net Revenue EBITDA Broadcast Cash Flow
------------ ----------- ------- -------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
CNTS.......................... 99% 17,649 14,688 4,372 4,415 743 5,278
PRO TV........................ 66% 4,908 3,505 (2,235) (821) (1,308) (1,756)
Markiza TV ................... 80% 5,358 4,415 (662) (889) (2,166) (1,280)
POP TV........................ 85.3% 3,040 2,211 (1,788) (1,552) (1,972) (1,640)
Studio 1+1 Group 50% 2,210 1,433 (884) (359) (1,159) (498)
------- ------- -------- ------- -------- -------
Total Continuing Stations 33,165 26,252 (1,197) 794 (5,862) 104
TVN Sp.zo.o. / Federation 50% 2,968 259 (1,877) -- (4,525) -
TV3 (2)....................... 89% 936 -- (1,323) -- (3,142) -
------- ------- -------- ------- -------- -------
Total New Stations................ 3,904 259 (3,200) -- (7,667) -
Other operations (3)......... 100% 849 1,030 (93) (185) (93) (185)
------- ------- -------- ------- -------- -------
Total attributable operations..... 37,918 27,541 (4,490) 609 (13,622) (81)
======= ======= ======== ======= ======== =======
</TABLE>
(1) Important information about these tables appears under the heading "Selected
Combined and Attributable Financial Information" immediately preceding this
table.
(2) EBITDA is without the impact of the $3,664,000 ($3,261,000 attributable)
write-down of the carrying value of capitalized costs of rights to program
material.
(3) Other operations include Radio Alfa and Videovox.
(4) Economic interest as of September 30, 1998. For comparison between the three
months ended September 30, 1998 and the same period in 1997, all results in this
table are pro forma as if such percentages had also been in place during the
three months ended September 30, 1997.
15
<PAGE>
SELECTED COMBINED FINANCIAL INFORMATION (1)
(unaudited)
($000s)
Nine months Ended September 30,
<TABLE>
<CAPTION>
Net Revenue EBITDA Broadcast Cash Flow
--------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
CNTS......................... 70,103 63,331 30,447 29,082 24,457 28,589
PRO TV....................... 26,764 18,393 (3,553) (2,415) (2,957) (4,578)
Markiza TV .................. 25,410 19,348 3,399 564 1,665 (1,053)
POP TV....................... 15,020 9,734 (1,692) (2,824) (3,142) (2,367)
Studio 1+1 Group............. 18,879 9,842 (371) (1,928) (2,344) (2,717)
------- ------- ------- ------ -------- -------
Total Continuing Stations......... 156,176 120,648 28,230 22,479 17,679 17,874
TVN Sp.zo.o. / Federation 19,811 1,309 (24,424) -- (19,599) --
TV3 (2)...................... 3,632 -- (5,465) -- (11,957) --
------- ------- ------- ------ -------- -------
Total New Stations................ 23,443 1,309 (29,889) -- (31,556) --
Other operations (3)......... 3,277 2,944 11 (672) 11 (672)
------- ------- ------- ------ -------- -------
Total combined operations......... 182,896 124,901 (1,648) 21,807 (13,866) 17,202
======= ======= ======= ====== ======== =======
</TABLE>
SELECTED ATTRIBUTABLE FINANCIAL INFORMATION (1)
(unaudited)
($000s)
Nine months Ended September 30,
<TABLE>
<CAPTION>
Economic
Interest (4) Net Revenue EBITDA Broadcast Cash Flow
------------ ----------- ------- -------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
CNTS.......................... 99% 69,402 62,698 30,143 28,791 24,212 28,303
PRO TV........................ 66% 17,664 12,139 (2,345) (1,594) (1,952) (3,021)
Markiza TV ................... 80% 20,328 15,478 2,719 451 1,332 (842)
POP TV........................ 85.3% 12,812 8,303 (1,443) (2,409) (2,680) (2,019)
Studio 1+1 Group.............. 50% 9,440 4,921 (186) (964) (1,172) (1,359)
------- ------- -------- ------- -------- -------
Total Continuing Stations......... 129,646 103,539 28,888 24,275 19,740 21,062
TVN Sp.zo.o. / Federation..... 50% 9,906 655 (12,212) -- (9,800) --
TV3 (2)....................... 89% 3,232 -- (4,864) -- (10,642) --
------- ------- -------- ------- -------- -------
Total New Stations................ 13,138 655 (17,076) -- (20,442) --
Other operations (3).......... 100% 3,277 2,944 11 (672) 11 (672)
------- ------- -------- ------- -------- -------
Total attributable operations..... 146,061 107,138 11,823 23,603 (691) 20,390
======= ======= ======== ======= ======== =======
</TABLE>
(1) Important information about these tables appears under the heading "Selected
Combined and Attributable Financial Information" immediately preceding this
table.
(2) EBITDA is without the impact of the $14,625,000 ($13,016,000 attributable)
write-down of the carrying value of capitalized costs of rights to program
material.
(3) Other operations include Radio Alfa and Videovox.
(4) Economic interest as of September 30, 1998. For comparison between the nine
months ended September 30, 1998 and the same period in 1997, all results in this
table are pro forma as if such percentages had also been in place during the
nine months ended September 30, 1997.
16
<PAGE>
Combined EBITDA for the three months ended September 30, 1998 compared to the
three months ended September 30, 1997
Continuing Stations
The total combined EBITDA for the Continuing Stations decreased by
$3,230,000 from negative $432,000 for the third quarter of 1997 to negative
$3,662,000 for the third quarter of 1998.
The Company believes that the current financial crisis in Russia
resulted in a number of multi-national advertisers significantly reducing
their advertising budgets in the month of September 1998 in many markets in
Central and Eastern Europe, which adversely impacted station results in the
Czech Republic, Romania, Slovenia, the Slovak Republic and Ukraine.
Preliminary October 1998 results indicate that advertising budgets for
multi-national advertisers in the Czech Republic, Slovenia and the Slovak
Republic have returned to pre-Russia financial crisis levels but that Ukraine
and Romania continue to be adversely impacted by the crisis.
PRO TV's EBITDA decreased by $2,143,000 from negative $1,244,000 for
the third quarter of 1997 to negative $3,387,000 for the third quarter of 1998.
The decrease was primarily a result of an increase in station expenses of
$4,270,000 or 65%. The increase is primarily attributable to costs associated
with expansion of the network, including Acasa (second channel) launched in
February 1998, higher prices of acquired programming and increased hours of self
production. Net revenues for the third quarter of 1998 increased by $2,127,000,
or 40%, over the same period in 1997. In September 1998, PRO TV's revenues were
negatively impacted by the onset of the Russian financial crisis.
The Studio 1+1 Group, recorded a negative EBITDA of $1,767,000 in the
third quarter of 1998 compared to a negative EBITDA of $717,000 for the same
period in 1997. Net revenues increased $1,555,000, or 54%, from third quarter
1997 to third quarter 1998, due to an increase in Studio 1+1's audience share
and significant growth in the Ukrainian television advertising market during the
first eight months of 1998. In September 1998, Studio 1+1's revenues were
negatively impacted by the onset of the financial crisis in Russia. Combined
July and August net revenues in 1998 were more than double those of July and
August 1997. Station expenses were $2,605,000, or 73%, higher in the three
months ended September 30, 1998 than in the three months ended September 30,
1997 as Studio 1+1 had not reached full scale operational levels in the third
quarter of 1997.
Markiza TV recorded an EBITDA increase of $283,000, or 25%, from the
third quarter of 1997 to the third quarter of 1998, due to higher net revenues,
offset in part by higher operating expenses. Net revenues increased by
$1,179,000, or 21%, reflecting Markiza TV's continued market leadership in
ratings and advertising share. Markiza's July and August 1998 net revenues were
30% over July and August 1997. September 1998 net revenues were only 5% above
September 1997 net revenues due to the adverse impact of the Russian financial
crisis. An increase in Markiza's station expenses of $896,000, or 14% is in line
with inflationary increases in the Slovak Republic.
17
<PAGE>
POP TV's EBITDA decreased from negative $1,820,000 for the third
quarter of 1997 to negative $2,096,000 for the third quarter of 1998, as a
result of increased operating expenses, offset in part by higher net revenues.
The increase in net revenues of $972,000, or 38%, was primarily a result of the
growth of the overall television advertising market in Slovenia and POP TV's
increased audience share. September revenues were adversely impacted by the
Russian financial crisis. POP TV's station expenses increased $1,248,000, or
28%, for the third quarter of 1998 compared to the third quarter of 1997
primarily due to higher costs of acquired and locally produced programming. The
cost of acquired programming increased primarily due to higher programming
prices and the addition of Gajba TV, the second channel launched in October
1997.
CNTS's EBITDA decreased by $44,000, or 1%, to $4,416,000 for the third
quarter of 1998, compared with the third quarter of 1997. CNTS's net revenues
increased by $2,991,000, or 20%, as a result of growth in the total television
advertising market. This increase is primarily attributable to higher July and
August revenues. CNTS's net revenues for September 1998 showed no growth over
September 1997 due to the effects of the Russian financial crisis. Station
expenses increased by a total of $3,035,000, or 29%, primarily due to higher
production costs related to increased local production in response to audience
demand.
New Stations
TVN in Poland and TV3 in Hungary, which both commenced operations in
October 1997, recorded negative EBITDA of $3,753,000 and $1,486,000,
respectively, for the third quarter of 1998.
The Company recorded a $3,664,000 write-down of TV3's program library
in the third quarter of 1998. Programming commitments were entered into in
1996 and 1997 in anticipation of the grant of a national license for Hungary.
The Company was not granted a national license for Hungary and has been unable
to enter into a partnership with the license winners. In light of TV3's
distribution and audience share, the Company does not expect to be able to
realize the full value of the program library. The carrying value of the
capitalized costs of rights to program material has been adjusted down to its
estimated net realizable value. The EBITDA reported on the table is before
this write-down as the Company believes it provides a better indication of the
underlying performance of the station. See "-Poland" and "-Hungary" below.
Total Combined Operations
The total Combined Operations EBITDA (before the write-down of TV3's
programming library) decreased by $8,377,000 from negative $617,000 for the
third quarter of 1997 to negative $8,994,000 for the third quarter of 1998. As
described above, this decrease was primarily due to negative EBITDA reported
by the Company's new operations in Poland and Hungary and to the negative
impact of the Russian financial crisis which affected all stations in the
month of September 1998.
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<PAGE>
Broadcast Cash Flow
Differences between EBITDA and broadcast cash flow are the result of
timing differences between programming use and programming payments.
Application of Accounting Principles
Although the Company conducts operations largely in foreign
currencies, the Company prepares its financial statements in United States
dollars and in accordance with GAAP. The Company's consolidated operating
statements include the results of wholly-owned subsidiaries and the results of
CNTS (which operates Nova TV), PRO TV, POP TV, Federation, TV3, Videovox and
Radio Alfa, and separately set forth the minority interests attributable to
other owners of such companies. The results of Markiza TV, the Studio 1+1
Group, TVN Sp.zo.o., FFF, SFF and 1A TV are accounted for using the equity
method, which reflects the Company's share of the net income or losses in
those operations. 1A TV initiated a bankruptcy proceeding in May 1997. The
Company terminated its ownership interests in FFF and SFF as of December 31,
1997. The Company records other investments at the lower of cost or market
value.
Foreign Currency
The Company and its subsidiaries generate revenues primarily in Czech
korunas ("Kc"), Romanian lei ("ROL"), Slovenian tolar ("SIT"), Slovak korunas
("Sk"), Hungarian forints ("HUF"), Ukrainian hryvna ("Hrn"), Polish zloty
("Zl") and German marks ("DM"), and incur substantial operating expenses in
those currencies. The Romanian lei, Slovenian tolar, Ukrainian hryvna and
Slovak koruna are managed currencies with limited convertibility. The Company
also incurs operating expenses for acquired programming in United States
dollars and other foreign currencies. For entities operating in economies
considered non-highly inflationary, including CNTS, POP TV, Markiza TV,
Videovox, Radio Alfa, Federation, TVN Sp.zo.o., TV3 and certain Studio 1+1
Group entities, balance sheet accounts are translated from foreign currencies
into United States dollars at the relevant period end exchange rate; statement
of operations accounts are translated from foreign currencies into United
States dollars at the weighted average exchange rates for the respective
periods. The resulting translation adjustments are reflected in a component of
shareholders' equity with no effect on the consolidated statements of
operations.
PRO TV and certain Studio 1+1 Group entities operate in economies
considered highly inflationary. Accordingly, non-monetary assets are
translated at historical exchange rates, monetary assets are translated at
current exchange rates and translation adjustments are included in the
determination of net income. Currency translation adjustments relating to
transactions of the Company in currencies other than the functional currency
of the entity involved are reflected in the operating results of the Company.
The exchange rates at the end of and for the periods indicated are
shown in the table below.
19
<PAGE>
<TABLE>
<CAPTION>
Balance Sheet Income Statement
------------------------------------ -----------------------------------
Average for the nine months ending
At September At December September 30,
30, 1998 31, 1997 % Change 1998 1997 % Change
-------- -------- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Czech koruna equivalent of $1.00 29.94 34.64 13.6% 33.13 31.01 (6.8)%
German mark equivalent of $1.00 1.67 1.80 7.2% 1.76 1.80 2.1%
Hungarian forint equivalent of $1.00 219.55 204.03 (7.6)% 214.26 188.00 (14.0)%
Polish zloty equivalent of $1.00 3.55 3.52 (1.0)% 3.52 3.15 (11.9)%
Romanian lei equivalent of $1.00 9,238 8,023 (15.1)% 9,050 6,837 (32.4)%
Slovak koruna equivalent of $1.00 34.70 34.78 0.2% 34.95 33.49 (4.4)%
Slovenian tolar equivalent of $1.00 158.08 169.18 6.6% 168.96 157.58 (7.2)%
Ukrainian hryvna equivalent of $1.00 3.40 1.90 (79.0)% 2.77 1.82 (52.0)%
</TABLE>
The Company's results of operations and financial position during the
three months ended September 30, 1998 and the nine months ended September 30,
1998 were impacted by changes in foreign currency exchange rates since
December 31, 1997.
In limited instances, the Company enters into forward foreign
exchange contracts to hedge foreign currency transactions for periods
consistent with its identified exposures. At September 30, 1998, there were
six forward exchange contracts outstanding for the purchase, in aggregate, of
$3,000,000 by CNTS and the sale of Czech korunas. These contracts mature by
February 26, 1999. No material exposure exists at September 30, 1998 as a
result of these contracts.
Results of Operations
Three months ended September 30, 1998 compared to three months ended September
30, 1997
CME's consolidated net revenues increased by $12,822,000, or 54%, to
$36,590,000 for the third quarter of 1998 from $23,768,000 for the third
quarter of 1997. The increase is attributable to the addition of revenues
generated by the Company's new operations in Poland and Hungary, as well as
double digit percentage revenue increases at the other consolidated television
operations, CNTS, PRO TV and POP TV, offset in part by the effect of the
Russian financial crisis on net revenues of all stations in the month of
September 1998.
Federation and TV3, which were not included in the Company's 1997
third quarter results, recorded net revenues of $5,863,000 and $1,052,000,
respectively, for the third quarter of 1998. CNTS, PRO TV and POP TV's net
revenues improved primarily due to growth in their respective television
advertising markets.
Total station operating costs and expenses (including amortization of
program rights and depreciation of fixed assets and other intangibles) increased
by $22,544,000, to $43,968,000 for the third quarter of 1998 from $21,424,000
for the third quarter of 1997. The increase in total station operating costs and
expenses is primarily attributable to the addition of station operating costs
and expenses of Federation and TV3 of $10,582,000 and $5,970,000, respectively.
Of TV3's operating
20
<PAGE>
costs and expenses, $3,664,000 reflects the write-down of the carrying value of
TV3's capitalized costs of rights to program material to its estimated net
realizable value. The increase is also attributable to increases in operating
costs and expenses at PRO TV of $3,913,000, CNTS of $1,822,000 and POP TV of
$622,000.
PRO TV's operating costs and expenses rose primarily as a result of
expansion of network affiliates, higher prices of acquired programming and
increased hours of self production. Both CNTS and POP TV's operating costs and
expenses increases were primarily attributable to higher production costs as a
result of increased local production in response to audience demand and higher
acquired programming costs due to an increase in programming prices.
Station selling, general and administrative expenses increased by
$5,021,000 to $9,443,000 for the third quarter of 1998 from $4,422,000 for the
third quarter of 1997. The increase is attributable to increases at PRO TV,
CNTS and POP TV as well as to the addition of Federation and TV3 selling,
general and administrative expenses of $1,907,000 and $355,000, respectively.
PRO TV's third quarter 1998 selling, general and administrative
expenses were $1,114,000, higher as a result of administrative and marketing
expenses related to the addition of Acasa and development of production and
post-production businesses. CNTS's and POP TV's selling, general and
administrative expenses increased by $915,000 and $476,000 respectively,
primarily due to increased marketing activity.
Corporate operating costs and development expenses decreased by
$669,000 from $5,669,000 for the third quarter 1997 to $5,000,000 for the third
quarter of 1998. The third quarter of 1997 included one-time costs associated
with launch activities in Poland and Hungary.
Amortization of goodwill and allowance for development costs decreased
by $524,000 from $2,835,000 for the third quarter 1997 to $2,311,000 for the
third quarter 1998. Third quarter 1997 included amortization of goodwill
relating to Radio Alfa which was fully written-down at year-end 1997.
As a result of the above factors, the Company generated an operating
loss of $24,132,000 for the third quarter of 1998 compared to operating loss
of $10,582,000 for the third quarter of 1997.
Equity in loss of unconsolidated affiliates decreased by $3,595,000 to
a loss of $2,624,000 for the third quarter of 1998 from a loss of $6,219,000 for
the third quarter of 1997. This is a result of the improvements in the
operations of Markiza TV, lower loss in TVN Sp. z o.o. and the Company's
termination of its loss-making German operations as of December 31, 1997.
Net interest and other income decreased by $3,640,000 to negative
$5,191,000 for the third quarter of 1998 from negative $1,551,000 for the
third quarter of 1997. This decrease was primarily attributable to a full
quarter of interest expense related to
21
<PAGE>
CME's $100,000,000 principal amount 9.375% Senior Notes and DM 140,000,000
principal amount 8.125% Senior Notes, each due 2004, issued in August 1997.
The net foreign currency exchange loss increased to $5,996,000 for
the third quarter 1998 from $1,999,000 for the third quarter of 1997. The loss
increased due to the effect of the appreciation of the German mark against the
United States dollar on the Company's DM denominated Senior Notes and the effect
of the appreciation of Czech koruna against the United States dollar on the
Company's Czech koruna denominated loan with CS Bank. This increase was offset
in part by the effect of the appreciation of the Czech koruna and German mark on
the Company's cash balances.
Provision for income taxes was $866,000 for the third quarter of
1998, a decrease from $1,093,000 for the third quarter of 1997. The decrease
was due to a reduction in CNTS's taxable income.
Minority interest in loss of consolidated Subsidiaries was $3,781,000
for the third quarter of 1998, compared to minority interest in loss of
consolidated Subsidiaries of $2,627,000 for the third quarter of 1997. This
change was primarily the result of the addition to the Company's operations of
Federation, which incurred start-up losses.
As a result of these factors, the net loss of the Company was
$35,028,000 for the third quarter of 1998 compared to $18,817,000 for the
third quarter of 1997.
Nine months ended September 30, 1998 compared to nine months ended September
30, 1997
CME's consolidated net revenues increased by $42,958,000, or 46%, to
$137,360,000 for the first nine months of 1998 from $94,402,000 for the first
nine months of 1997. The increase is attributable to the addition of revenues
generated by the Company's new operations in Poland and Hungary and double digit
increases in net revenues at CNTS, PRO TV and POP TV, offset in part by the
effect of the Russian financial crisis on net revenues of all stations in the
month of September 1998.
Federation and TV3, which were not included in the Company's first
nine month results of 1997, recorded net revenues of $18,566,000 and
$3,632,000, respectively, for the first nine months of 1998. PRO TV's, CNTS
and POP TV's net revenues improved primarily due to the growth in their
respective television advertising markets.
Total station operating costs and expenses (including amortization of
program rights and depreciation of fixed assets and other intangibles)
increased by $81,734,000, to $148,498,000 for the first nine months of 1998
from $66,764,000 for the same period in 1997. The increase in total station
operating costs and expenses is primarily attributable to the addition of
station operating costs and expenses, of Federation and TV3 of $44,658,000 and
$22,364,000, respectively. Of the TV3 operating costs and expenses,
$14,625,000 reflects the write-down of the carrying
22
<PAGE>
value of TV3's capitalized costs of rights to program material to its estimated
net realizable value.
The increase in total operating costs and expenses is also
attributable to the factors listed below. PRO TV had increases in operating
costs and expenses of $9,643,000, primarily as a result of expansion of
network affiliates, increased programming amortization costs, which reflect
increased prices of acquired programming and the launch of the second channel
Acasa in Romania. In addition, increased expenses were incurred due to an
increase in the quantity of local production in response to increasing
audience demand for local programming. Operating costs and expenses increased
at CNTS by $3,653,000 as a result of increased local production in response to
audience demand. Operating costs and expenses at POP TV increased by
$2,483,000 primarily due to higher costs of acquired and locally produced
programming. The cost of acquired programming increased due to higher
programming prices and the addition of Gajba TV, the second channel launched
in October 1997.
Station selling, general and administrative expenses increased by
$10,300,000 to $25,556,000 for the first nine months of 1998 from $15,256,000
for the first nine months of 1997. The increase in station selling, general
and administrative expenses is primarily attributable to the addition of
Federation's and TV3's selling, general and administrative expenses of
$4,746,000 and $1,740,000, respectively. The increase was also attributable to
increases of selling, general and administrative expenses at PRO TV, and, to a
lesser extent, POP TV and CNTS.
PRO TV's selling, general and administrative expenses increased by
$1,998,000 as a result of administrative and marketing expenses related to the
addition of Acasa, the expansion of network affiliates and development
of production and post production businesses. POP TV's increase in selling,
general and administrative expenses of $1,408,000 was attributable to higher
marketing costs in response to stronger competition and promotion of the new
second channel, Gajba TV. The increase in CNTS of $470,000 was a result of
greater marketing activity.
Corporate expenses for the first nine months of 1998 and 1997 were
$34,273,000 and $22,540,000, respectively, an increase of $11,733,000. This
increase is comprised of an increase in amortization of goodwill and allowance
for development costs, an increase in corporate operating and development
costs and a restructuring charge of $2,552,000 taken in the second quarter of
1998. The increase in amortization of goodwill and allowance for development
costs of $5,888,000, is primarily attributable to the write-off of goodwill
associated with the Company's Hungarian operations. The increase in corporate
operating costs and development expenses of $3,293,000 is primarily
attributable to expansion of operations in Poland and Hungary and costs of a
back-up satellite for certain of the Company's stations.
As a result of the above factors, the Company generated an operating
loss of $70,967,000 for the first nine months of 1998 compared to operating
loss of $10,158,000 for the first nine months of 1997.
23
<PAGE>
Equity in loss of unconsolidated affiliates decreased by $12,824,000 to
$3,498,000 for the first nine months of 1998 from $16,322,000 for the first nine
months of 1997. This is a result of the Company's decision to terminate its
ownership interests in German broadcast operations as of December 31, 1997, as
well as improvements in the operations of Markiza TV and Studio 1+1.
Loss on impairment of investments in unconsolidated affiliates of
$20,707,000 for the first nine months of 1997, was the result of the write-down
of the Company's investments in Germany in the first quarter of 1997. The
Company did not record any loss on impairment of investments in unconsolidated
affiliates in the first nine months of 1998.
Net interest and other income decreased by $11,249,000 to negative
$13,471,000 for the first nine months of 1998 from negative $2,222,000 for the
first nine months of 1997. This decrease was primarily attributable to
interest expense related to CME's $100,000,000 principal amount 9.375% Senior
Notes and DM 140,000,000 principal amount 8.125% Senior Notes, each due 2004,
issued in August 1997.
The net foreign currency exchange loss of $8,953,000 for the first
nine months of 1998 is primarily attributable to the effects of appreciation of
the German mark against the United States dollar on the Company's DM denominated
Senior Notes and the effects of the appreciation of Czech koruna against the
United States dollar on the Company's borrowings from CS Bank which financed the
Company's August 1996 purchase of a 22% interest in CNTS. The loss was offset in
part by the effect of the appreciation of the Czech koruna and German mark on
the Company's cash balances. Local operating currencies devalued considerably
against the United States dollar during the first nine months of 1997 when the
Company recorded a net foreign currency exchange loss of $6,585,000.
Provision for income taxes was $8,426,000 for the first nine months
of 1998 and $7,926,000 for the first nine months of 1997. The increase was due
to an increase in CNTS's taxable income.
Minority interest in loss of consolidated Subsidiaries was
$16,618,000 for the first nine months of 1998 compared with $3,283,000 for the
first nine months of 1997. This increase was primarily the result of the
addition to the Company's operations of Federation, which incurred start-up
losses.
As a result of these factors, the net loss of the Company was
$88,697,000 for the first nine months of 1998 compared to $60,637,000 for the
first nine months of 1997.
Poland
CME and its partner, the Polish media group ITI, continue to engage
in efforts to secure TVN's licenses in Warsaw, Lodz and Poland's northern
region and extend signal distribution. The Company's operations in Poland had
negative EBITDA of $24,424,000 for the nine months ended September 30, 1998.
CME and ITI have thus far been unable to reach an agreement with regard to
TVN's positioning in the Poland television market, programming, promotional
strategy and financing, as well as, more
24
<PAGE>
recently, a dispute regarding the service relationship between Federation and
TVN Sp.zo.o. Intensive discussions regarding these matters have taken place over
the past several months. However, no agreement has yet been reached between CME
and ITI and there can be no assurance that an agreement will be reached. If a
satisfactory agreement with ITI is not reached in the near future, CME will
likely have to take a reduction of a substantial portion or all of the carrying
value of its investments in Poland, which together with associated commitments
are estimated to be approximately $80,740,000 at September 30, 1998.
Hungary
Programming commitments were entered into in 1996 and 1997 in
anticipation of the grant of a national license for Hungary. The Company was
not granted a national license for Hungary and has been unable to enter into a
partnership with the license winners. In light of TV3's distribution and
audience share, the Company does not expect to be able to realize the full
value of the program library. Accordingly, the Company took write-downs with
regard to commitments for programming rights for TV3 of $10,961,000 and
$3,664,000 for the second and third quarters of 1998. The Company currently
estimates that it will take further write-downs of up to $12,200,000 with
regard to future programming rights, of which approximately $4,000,000 is
expected to be taken in the fourth quarter of 1998 with the balance taken in
1999 and 2000. Program rights acquired by the Company under license agreements,
and the related obligations incurred are recorded as assets and liabilities when
the programming is available for use and the license period begins which is in
accordance with SFAS No. 63.
Liquidity and Capital Resources
Net cash used in operating activities was $54,904,000 in the nine
months ended September 30, 1998 compared to $13,644,000 in the same period in
1997. The increase in net cash used in operating activities of $41,260,000 was
primarily the result of increased programming payments related to the new
stations and increases in programming prices.
Net cash used in investing activities was $25,591,000 in the nine
months ended September 30, 1998 compared to $80,548,000 in the same period in
1997. The decrease was attributable to the 1997 funding for the Company's
German operations (which have been discontinued), MobilRom and the Studio 1+1
Group, none of which were funded in the first nine months of 1998, as well as
a reduction in funding to TVN.
Net cash provided by financing activities for the first nine months
of 1998 was $4,234,000 compared to $169,238,000 for the same period in 1997.
The difference was primarily due to the issuance of CME's Senior Notes and the
exercise of an equity purchase option by one of the partners of PRO TV, both of
which occurred in August 1997.
In August 1997, CME issued the Senior Notes, which raised net
proceeds of approximately $170,000,000. The Senior Notes are denominated in
United States dollars, in part, and in German marks, in part. The United
States dollar denominated Senior Notes bear interest at a rate of 9.375% per
annum, and the German mark denominated Senior Notes bear interest at a rate of
8.125% per annum. The principal amount of the Senior Notes is repayable on
their maturity date, August 15, 2004. The
25
<PAGE>
indentures governing the Senior Notes contain certain restrictions relating to
the ability of CME and its Subsidiaries and affiliates to incur additional
indebtedness, incur liens on assets, make investments in unconsolidated
companies, declare and pay dividends (in the case of CME), sell assets and
engage in extraordinary transactions.
In May 1998, CNTS declared a total dividend of Kc 550,000,000
($16,963,000) of which the Company was paid Kc 525,010,000 ($16,192,000). The
remainder of the CNTS dividend is paid to minority shareholders. The Company's
voting power is sufficient to compel CNTS to make distributions.
As a result of the factors described above, the Company had cash and
cash equivalents of $31,240,000 at September 30, 1998 compared to $106,257,000
at December 31, 1997.
On November 12, 1998, the Company and RSL Capital LLC ("RSL"), a
company wholly-owned by Ronald S. Lauder, the non-Executive Chairman of the
Company's Board of Directors, executed a commitment letter, pursuant to which,
at the Company's option, RSL has agreed to make an equity investment in the
Company of $22.725 million in exchange for shares of the Company's Class B
Common Stock at a price equal to $15.00 per share. The purchase price per share
is subject to adjustment as described below. Under the terms of the equity
commitment, the Company's option expires on December 31, 1998. If the last
reported daily trading price of the Company's Class A Common Stock on NASDAQ
does not equal or exceed $15.00 for at least 20 consecutive trading days during
the period commencing November 13, 1998 and ending November 12, 1999 (the
"Measurement Period"), the Company will issue additional shares of Class B
Common Stock to RSL for no additional consideration so that the average per
share price for the shares of the Company's Class B Common Stock acquired by RSL
will equal the average last reported daily trading price of the Company's Class
A Common Stock during the Measurement Period, provided, that, in no event shall
the average price per share for the shares of the Company's Class B Common Stock
acquired by RSL be less than $10.00 per share. RSL will receive a commitment fee
equal to $227,250. RSL's equity commitment is subject to customary closing
conditions, including the execution of definitive agreements.
The Company has executed a term sheet with ING Bank N.V. ("ING Bank")
for a $25 million secured revolving credit facility with a term of up to three
years to fund working capital requirements, as well as operating and capital
expenditures (the "Proposed ING Credit Facility"). The availability of the
Proposed ING Credit Facility is subject to definitive documentation and
satisfaction of various conditions.
On August 11, 1997, the Company purchased a 5.8% interest in CNTS
from certain of the partners of CET 21 for a purchase price of $28,537,000, to
be paid in installments through February 15, 2000. As of September 30, 1998,
the Company had paid $20,662,000 of the purchase price and is obligated to
make further payments of $5,313,000 during 1999, and $2,562,000 during 2000.
Each further payment is subject to increase to an amount equal to the value of
such payment as if it had been invested in CME's Class A Common Stock at a
purchase price of $23.375 per share.
On August 1, 1996, the Company purchased CS Bank's 22% economic
interest and virtually all of CS Bank's voting rights in CNTS for a purchase
price of Kc 1 billion ($36,590,000). The Company also entered into a loan
agreement with CS Bank to finance 85% of the purchase price. The principal
outstanding at September 30, 1998 was Kc 655,081,000 ($21,880,000). Quarterly
payments on the loan are required through August 2002.
The Company expects CNTS's future cash requirements to continue to be
satisfied through operating cash flows and available borrowing facilities.
CNTS has a line of credit with CS Bank for up to Kc 250,000,000 ($8,350,000).
In October 1997, CNTS entered into a Kc 500,000,000 ($16,700,000) line of
credit with ING Bank which may be drawn in Czech koruna, German marks or
United States dollars and matures in October 1999. CNTS had no borrowings
under these facilities at September 30, 1998. The facilities are secured by
CNTS's equipment, vehicles and receivables.
In June 1997, in connection with CNTS's acquisition of Nova TV's main
studios and offices, CNTS assumed the obligations of a loan from CS Bank
secured by a mortgage on the studios and offices. The loan provides for
quarterly payments of Kc 16,500,000 ($551,000) through December 1999. As of
September 30, 1998, the outstanding balance under the CS Loan was Kc
76,500,000 ($2,555,000).
26
<PAGE>
In February 1998, Markiza TV entered into two revolving credit
facilities. The first facility consists of a $3,000,000 line of credit from
Bank Austria which matures in March 2001. The second facility consists of an
Sk 100,000,000 ($2,882,000) line of credit from Bank Austria which matures in
September 2000. These facilities are secured by Markiza TV's land and
buildings. Bank Austria has notified Markiza TV that these facilities will not
be available for draw-down as a result of a dispute regarding the ownership of
Markiza-Slovakia s.r.o., the company which holds the Markiza TV broadcast
license. The unavailability of these facilities has had no material impact on
Markiza TV's business to date. See Part II, Item 1 "Legal Proceedings".
In April 1998, POP TV entered into a multicurrency $5.0 million loan
agreement with Creditanstalt AG which matures in April 2005. As of September
30, 1998, the outstanding balance under the Creditanstalt loan was $3,553,000.
The loan is secured by the land, buildings and equipment of POP TV and is
guaranteed by CME.
PRO TV has two borrowing facilities with Tiriac Bank in Romania. The
first facility consists of a $2,000,000 line of credit and the second facility
consists of a $4,000,000 long-term loan. These loans mature in June 2000 and
December 2002, respectively. At September 30, 1998, $1,576,000 and $3,854,000
were outstanding under the line of credit and the long-term loan,
respectively. These facilities are secured by PRO TV's equipment and vehicles.
TVN Sp.zo.o. has borrowings of $13,755,000 under four short-term
bridge loan agreements with three Polish banks. Of these, three loans with
$8,996,000 in the aggregate outstanding at September 30, 1998 are guaranteed
by the Company. The fourth loan for $4,759,000 is guaranteed by the Company's
partner in Poland, ITI. These loans are drawn in Polish zloty and United
States dollars. It is anticipated that these loans will be repaid by TVN
Sp.zo.o. and Federation from a $22,000,000 revolving credit facility with a
syndicate of Polish banks, the availability of which is subject to the
satisfaction of various conditions. During February 1998, the Company advanced
$12,000,000 to its operations in Poland, of which the repayment of $6,000,000
is guaranteed by ITI. The Company has commitments of approximately $22,847,000
to provide satellite support for TVN through 2010 (with approximately equal
payments due each year) and commitments of approximately $33,700,000 for
multi-year programming for TVN. The Company has the right to sublease the
entire satellite commitment and to sublicense approximately $25,000,000 of the
programming commitment (such sublicenseable portion of the programming
commitment is payable over eight years). There can be no assurance that in the
event that the Company seeks to sublease the satellite commitment or
sub-license the programming commitments that the Company will be able to
realize their full value. The Company anticipates the need for
additional financing for these operations. The ability to obtain such financing
may be negatively impacted by the ongoing disagreements between CME and its
Polish partner. See "-Poland."
TV3 has borrowings of HUF 279,000,000 ($1,271,000) from a local
Hungarian bank. The loan requires quarterly repayments from March 1999 until
December 2000 and is secured by pledges of certain fixed assets of TV3. The
Company has loaned $8,180,000 to TV3 since December 31, 1997 and may loan an
additional $620,000 during 1998. The Company has made approximately
$10,365,000 in programming payments on behalf of TV3 since December 31, 1997
and has
27
<PAGE>
additional programming payments due for TV3 in 1998, 1999 and beyond of
approximately $10,751,000, $5,708,000 and $5,747,000, respectively.
The laws under which CME's operating Subsidiaries are organized
provide generally that dividends may be declared by the partners or
shareholders out of yearly profits subject to the maintenance of registered
capital, required reserves and after the recovery of accumulated losses. In
the case of the Company's Dutch and Netherlands Antilles subsidiaries, the
Company's voting power is sufficient to compel the making of distributions.
The Company's voting power is sufficient to compel CNTS to make distributions.
In the case of PRO TV, distributions may be paid from the profits of PRO TV
subject to a reserve of 5% of annual profits until the aggregate reserves
equal 20% of PRO TV's registered capital. A majority vote can compel PRO TV to
make distributions. There are no legal reserve requirements in Slovenia. In
the case of Markiza TV, distributions may be paid from net profits subject to
an initial reserve requirement of 10% of net profits until the reserve fund
equals 5% of registered capital. Subsequently, the reserve requirement is
equal to 5% of net profits until the reserve fund equals 10% of registered
capital. The Company's voting power in Markiza TV is not sufficient to compel
the distribution of dividends. The Company's voting power in the Studio 1+1
Group is not sufficient to compel the distribution of dividends. In the case
of Federation and TVN Sp.zo.o. in Poland, there are no legal reserve
requirements with respect to distributions. The Company does not have
sufficient voting power in Federation or TVN to compel the making of
distributions. In the case of TV3, the Company's voting interest is sufficient
to compel the payment of dividends. There are no legal reserve requirements in
Hungary.
Except for the Company's working capital requirements, the Company's
future cash needs will depend on the Company's financial performance and its
future acquisition and development decisions. The Company continues to invest
in its existing broadcast operations and might engage in the development of
additional broadcast operations. The Company incurs certain expenses in
identifying and pursuing broadcast opportunities before any investment
decision is made.
The Company believes that taken together its current cash balances,
cash generated from CNTS, local financing of broadcast operations, the sale of
the Company's interest in MobilRom, the closing of the Proposed ING Credit
Facility and the RSL equity commitment should be adequate to satisfy the
Company's operating and capital requirements for its current operations through
the latter part of 1999. To acquire additional broadcast rights or to fund other
significant investments, the Company would require significant additional
financing. There can be no assurance that the Company will be able to complete a
sale of its interest in MobilRom or close the Proposed ING Credit Facility.
Year 2000 Issue
The "Year 2000 Issue" consists of computer programs and embedded
technology in equipment defining years using the last two digits rather than
all four digits of the applicable year and could result in the complete or
partial failure of computer applications and equipment with embedded
technology by or at the year 2000. The Company has established a Year 2000
compliance plan and timetable. The
28
<PAGE>
Company is conducting a comprehensive review to identify systems and equipment
(both the Company's and that of third party vendors) that could be affected by
the Year 2000 issue.
The Company expects to complete by the end of 1998 (i) a systems and
equipment review (including responses from third party vendors), (ii) an
assessment of compliance costs and (iii) a plan for business continuity in the
event that full compliance is not attainable and then proceed through
implementation, testing and management.
The Company's broadcast operations are highly dependent upon
equipment with embedded computer technology (cameras, mixing equipment,
broadcast equipment, etc.), the widespread failure of which would have a
material adverse impact on the Company's results of operations. The Company
will continually review its progress against its year 2000 plans and are in
the process of developing the appropriate and feasible contingency plans to
reduce its exposure to Year 2000 issues. Accounting rules require Year 2000
compliance costs to be expensed as incurred.
Forward-looking Statements
Statements made in "Selected Combined and Attributable Financial
Information - Continuing Stations", "Results of Operations", "Liquidity and
Capital Resources", "Poland" and "Hungary" regarding future investments in
existing television broadcast operations, business strategies, commitments, the
future need for additional funds from outside sources, notify and the
performance of the Company's stations in the fourth quarter of 1998, are
forward-looking statements. Forward-looking statements are inherently subject to
risks and uncertainties, many of which cannot be predicted with accuracy and
some of which might not even be anticipated. Future events and actual results,
financial and otherwise, could differ materially from those described in or
contemplated by the forward-looking statements. Important factors that
contribute to such risks include the ability to acquire programming, the ability
to attract audiences, the rate of development of advertising markets in
countries where the Company currently operates, including the impact of the
Russian financial crisis on the economies of these countries, and general market
and economic conditions in these countries. Important factors with respect to
completion of the Company's Year 2000 compliance plan include the outcome of the
Company's systems and equipment review and the extent to which Company and third
party systems are found to be out of compliance.
29
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Certain unsuccessful bidders for the licenses of northern Poland and
the cities of Warsaw and Lodz filed a complaint against the National Radio and
Television Council (the "National Council") to challenge the award of these
licenses to TVN Sp.zo.o. In addition, one unsuccessful bidder has challenged
the award of a regional license for central Poland to Polskie Media S.A. The
petitioners alleged that (i) the competition for broadcasting licenses was
unfair because the nature of the licenses awarded to TVN did not correspond
with the announcement soliciting applications for such licenses; (ii) the
decision of the National Council to submit only the winning applications to
the Ministry of Telecommunications for confirmation of technical parameters of
the licenses constituted unequal treatment of the applicants; and (iii) TVN is
a foreign-controlled entity. The Supreme Administrative Court consolidated
certain of these challenges and, in a ruling dated May 26, 1998, overturned
the award of broadcasting licenses to TVN for Warsaw and Lodz as well as to
Polskie Media for central Poland. In a ruling dated October 1, 1998, the
Supreme Administrative Court overturned the award of broadcasting license to
TVN for northern Poland. The decisions to overturn the licenses have not been
implemented. The National Council has stated that it will endeavor to confirm
the awards of the licenses to TVN and has already initiated the regrant
proceedings. The Company believes that the broadcasting licenses have been
properly awarded and will vigorously pursue all available remedies to ensure
that TVN continues to broadcast and that the licenses are regranted to TVN.
In August 1998, Gamatex Ltd., a Slovak company, asserted that it had
obtained 100% ownership of Markiza-Slovakia s.r.o. through an auction process
arising out of an unsatisfied claim against Markiza-Slovakia s.r.o.
Markiza-Slovakia s.r.o. holds the Markiza TV broadcast license and owns a 51%
voting interest in STS. A number of legal proceedings are pending in the
District Court of Bratislava and Regional Court of Bratislava in which the
original owners of Markiza-Slovakia s.r.o. have claimed that Gamatex's
ownership claims are not legally valid. STS has joined Markiza-Slovakia s.r.o.
in a number of such proceedings, in particular proceedings to (i) confirm the
interests of the original owners of Markiza-Slovakia s.r.o.; (ii) declare
invalid Markiza-Slovakia s.r.o. and STS shareholders' meetings called by
Gamatex without proper notice; and (iii) declare invalid Gamatex's claim to
ownership in Markiza-Slovakia s.r.o.
On April 30, 1997, Perekhid Media Enterprises Ltd. ("Perekhid") filed
a complaint in the Supreme Court of New York County, State of New York,
against CME and Ronald S. Lauder, the non-Executive Chairman of the Company's
Board of Directors. Perekhid alleged that the issuance of a license to the
Studio 1+1 Group pursuant to which Studio 1+1 has been broadcasting
programming on Ukrainian National Channel 2 ("UT-2"), constitutes a tortious
interference by CME and Mr. Lauder with a Perekhid contract with the Ukrainian
authorities for Perekhid to provide programming for and sell advertising time
on UT-2. Perekhid's complaint sought compensatory damages of $250 million,
punitive damages of $500 million, and an
30
<PAGE>
injunction against the Company and Mr. Lauder to prevent the continuation of
the alleged conduct. On July 2, 1997, CME and Mr. Lauder filed a motion to
dismiss the complaint. On April 8, 1998, the Court dismissed the complaint on
grounds of forum non-conveniens. In June 1998, Perekhid filed a notice of
appeal with the Court. Perekhid has nine months from the date it filed a
notice of appeal to submit an appellate brief. On November 4, 1998, Perekhid
notified the United States District Court for the Southern District of New
York that it intends to file a related claim against CME in the High Court in
London, United Kingdom.
See CME's Form 10-Qs for the quarter periods ended March 31, 1998 and
June 30, 1998 for a description of certain other proceedings. There have been
no material additional developments in such proceedings.
The Company is, from time to time, a party to litigation that arises
in the normal course of its business operations. The Company is not presently
a party to any such litigation which could reasonably be expected to have a
material adverse effect on its business or operations.
Item 6. Exhibits and Reports on Form 8-K.
a) The following exhibits are attached:
27.01 Financial Data Schedule
b) No reports on Form 8-K were filed during the quarter ended September 30,
1998
31
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 12, 1998 /s/ Michel Delloye
------------------
Michel Delloye
Chief Executive Officer
(Duly Authorized Officer)
Date: November 12, 1998 /s/ John A. Schwallie
---------------------
John A. Schwallie
Chief Financial Officer
(Principal Financial Officer)
32
<PAGE>
EXHIBIT INDEX
27.01 Financial Data Schedule
33
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 31,169
<SECURITIES> 71
<RECEIVABLES> 38,578
<ALLOWANCES> (4,555)
<INVENTORY> 0
<CURRENT-ASSETS> 141,037
<PP&E> 118,813
<DEPRECIATION> (48,266)
<TOTAL-ASSETS> 432,382
<CURRENT-LIABILITIES> 138,437
<BONDS> 183,481
0
0
<COMMON> 242
<OTHER-SE> 79,332
<TOTAL-LIABILITY-AND-EQUITY> 432,382
<SALES> 137,360
<TOTAL-REVENUES> 137,360
<CGS> 0
<TOTAL-COSTS> 208,327
<OTHER-EXPENSES> 3,498
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,002
<INCOME-PRETAX> (96,889)
<INCOME-TAX> (8,426)
<INCOME-CONTINUING> (88,697)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (88,697)
<EPS-PRIMARY> (3.69)
<EPS-DILUTED> (3.69)
</TABLE>
