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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1997 Commission File Number: 0-24796
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
(Exact name of registrant as specified in its charter)
Bermuda Not Applicable
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
--------------------
Clarendon House
Church Street
Hamilton HM CX
Bermuda
(Address of principal executive offices)
(441) 296-1431
(Registrant's telephone number)
--------------------
Securities registered pursuant to Section 12(b) of the Act: NONE
--------------------
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $0.01 par value
9.375% Senior Notes Due 2004
8.125% Senior Notes Due 2004
--------------------
Indicate by check mark whether the 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the voting stock of registrant held by
non-affiliates of the registrant as of March 24, 1998 was approximately
$479,841,278
--------------------
Number of shares of Class A Common Stock outstanding as of March 20, 1998:
16,945,519
Number of shares of Class B Common Stock outstanding as of March 20,1998:
7,057,083
--------------------
DOCUMENTS INCORPORATED BY REFERENCE
Location in Form 10-K in which
Document Document is Incorporated
-------- ------------------------
Registrant's Proxy Statement Part III
for the 1998 Annual Meeting of Shareholders
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TABLE OF CONTENTS
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Page
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PART I
Item 1. Business........................................................................................1
Item 2. Properties.....................................................................................22
Item 3. Legal Proceedings..............................................................................22
Item 4. Submission of matters to vote of security holders..............................................24
PART II
Item 5. Market for registrant's common equity and related stockholder matters..........................25
Item 6. Selected financial data........................................................................25
Item 7. Management's discussion and analysis of financial condition and results
Of operations..................................................................................27
Item 8. Financial statements and supplementary data....................................................40
Item 9. Changes in and disagreements with accountants on accounting and
financial disclosure..........................................................................107
PART III
Item 10. Directors and executive officers of the registrant............................................107
Item 11. Executive compensation........................................................................107
Item 12. Security ownership of certain beneficial owners and management................................107
Item 13. Certain relationships and related transactions................................................107
PART IV
Item 14. Exhibits, financial statement schedules and reports on Form 8-K...............................107
</TABLE>
SIGNATURES
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PART I
Item 1. BUSINESS
General
Central European Media Enterprises Ltd. ("CME") is a Bermuda
corporation. All references to the "Company" include CME, its predecessors and
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, the Slovak Republic and Slovenia had the leading
nationwide audience shares for 1997; the Company's television station in Ukraine
had the leading nationwide audience share for the fourth quarter of 1997; and
the Company's television network in Romania had the leading average audience
share within its area of broadcast reach for 1997. In October 1997, the Company
launched television broadcast operations in Poland and Hungary. The Company's
television studios, production facilities and editing suites at its national
television stations produced approximately 11,000 hours of original programming
in 1997 to support the Company's broadcasting operations, making it the largest
private producer of local television programming in Central and Eastern Europe.
To complement its commercial television activities, the Company is increasingly
active in program rights distribution and other media services.
The Company's current television stations and networks, which reach an
aggregate of approximately 100 million people in seven countries, consist of the
following:
<TABLE>
<CAPTION>
Broadcast Economic
Country Population(1) Stations and Networks Reach (2) Interest
- ------- ------------- --------------------- --------- --------
<S> <C> <C> <C> <C>
Czech Republic............ 10.3 Nova TV 10.2 99.0%
Romania................... 22.5 PRO TV/Acasa TV 14.4 66.0%
Slovenia.................. 2.0 POP TV/Gajba TV 1.6 85.3%
Slovak Republic........... 5.4 Markiza TV 4.8 80.0%
Ukraine................... 50.4 Studio 1+1 Group 47.9 50.0%
Poland.................... 38.6 TVN 17.4 50.0%
Hungary................... 10.2 TV3 3.6 71.2%
--------- -----------
Total................. 139.4 99.9
========= ===========
</TABLE>
(1) Country population in millions.
(2) "Broadcast Reach" measures the number of people in millions reached by
the Company's stations and networks.
The Company's first national television operation began in February
1994 with the launch of Nova TV in the Czech Republic. Since then, Nova TV has
consistently achieved an audience share in excess of 50%. The Company estimates
that television advertising expenditures in the Czech Republic grew from
approximately $67 million in 1993 to approximately $163 million in 1997. The
Company believes that Nova TV has achieved its success in large part by
providing a wide range of popular programming designed to appeal to a mass
market audience, including a mix of locally produced news and entertainment
formats and films and television series acquired from major international
distributors, and a format distinctly different from that offered by competing
stations in terms of image and local focus. The Company capitalized on its
successful launch of Nova TV by adopting similar
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programming and operating strategies for PRO TV in Romania, POP TV in Slovenia,
Markiza TV in the Slovak Republic and Studio 1+1 in Ukraine.
Unless otherwise noted, all statistical and financial information
presented in this report has been converted into United States dollars using
exchange rates as of December 31, 1997. All references to '$' or 'dollars' are
to United States dollars, all references to 'Kc' are to Czech korunas, all
references to 'ROL' are to Romanian lei, all references to 'SIT' are to Slovenia
tolar, all references to 'Sk' are to Slovak korunas, all references to 'Zl' are
to Polish zloty, all references to 'Hrn' are to Ukrainian hryvna, all references
to HUF are to Hungarian forints and all references to 'DM' are to German marks.
The exchange rates as of December 31, 1997 used in this report are 34.64 Kc/$;
8,023 ROL/$; 169.18 SIT/$; 34.78 Sk/$; 3.52 Zl/$; 1.90 Hrn/$; 204 HUF/$; and
1.80 DM/$.
Corporate Structure
Central European Media Enterprises Ltd. was incorporated on June 15,
1994 under the laws of Bermuda. CME's assets are held through a series of Dutch
and Netherland Antilles holding companies.
The Company's ownership interest in Ceska Nezavisla Televizni
Spolecnost s.r.o. ("CNTS"), which operates Nova TV, is governed by the terms of
a Memorandum of Association and Investment Agreement dated as of May 4, 1993 to
which Ceska Sporitelna Bank ("CS") and CET 21 s.r.o. ("CET 21") are also
parties. The Company is entitled to 99% of the total profits of and has 97% of
the voting power in CNTS. In August 1996, the Company purchased from CS a 22%
economic and 20% voting interest in CNTS (the "Additional CNTS Purchase"), at
which time CS granted the Company an option to acquire CS's remaining 2% voting
interest for no additional consideration. In December 1997, the Company
exercised its option and acquired the 2% voting interest and the Company is in
the process of registering such acquisition pursuant to Czech law. Upon the
completion of such registration the Company will have 99% of the voting power in
CNTS. CET 21 owns 1.0% of CNTS. CET 21 has granted to CNTS the exclusive access
to the use of the broadcast license. The Company has the right to appoint six of
the seven members of CNTS's Committee of Representatives, which directs the
affairs of CNTS. A representative of CET 21 has certain delay and veto rights on
non-economic programming matters related directly to the broadcast license.
The Company's interest in PRO TV is governed by a Cooperation Agreement
(the "Romanian Agreement") among the Company, Adrian Sarbu and Ion Tiriac,
forming Media Pro International S.A. ("MPI"), through which PRO TV and Acasa TV
(launched in February 1998) are operated. Pursuant to the Romanian Agreement,
the Company owns 66% of the equity of MPI. Interests in profits of MPI are equal
to the partners' equity interests. The Company has the right to appoint three of
the five members of the Council of Administration which directs the affairs of
MPI. Although the Company has majority voting power in MPI, with respect to
certain fundamental financial and corporate matters the affirmative vote of
either Mr. Sarbu or Mr. Tiriac is required. The Company owns 49% of the equity
of PRO TV, SRL which holds many of the licenses for the stations which comprise
the PRO TV network. Messrs. Sarbu and Tiriac own substantially all of the
remainder of PRO TV, SRL. In addition, in Romania, the Company owns 70% of each
of Media Vision SRL ("Media Vision"), a production and dubbing company, and
Video Vision International SRL ("Video Vision"), a post-production company. The
Company owns a 95% equity interest in Unimedia SRL ("Unimedia"), which owns a
10% equity interest in a consortium, MobilRom ("MobilRom"). MobilRom operates a
GSM cellular telephone network in Romania. Mr. Sarbu owns the remaining 5% of
Unimedia.
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The Company's interest in POP TV and Gajba TV (launched in October
1997) is governed by a Partnership Agreement among the Company, MMTV 1 d.o.o.
Ljubljana ("MMTV") and Tele 59 d.o.o. Maribor ("Tele 59"), forming Produkcija
Plus d.o.o. ("Pro Plus"). The Company currently owns 78% of the equity in Pro
Plus, but has an effective economic interest of 85.3% as a result of its right
to 33% of the profits of MMTV and 33% of the profits of Tele 59. Tele 59
currently owns a 21% equity interest in Pro Plus, and MMTV currently owns a 1%
equity interest in Pro Plus. The Company owns 10% of the equity of each of Tele
59 and MMTV. Voting power and interests in profits of Pro Plus are equal to the
partners' equity interests. All major decisions concerning the affairs of Pro
Plus are made by the general meeting of partners and require a 70% affirmative
vote. Certain fundamental financial and corporate matters require an 85%
affirmative vote of the partners. The Company also owns a 20% interest in Meglic
Telecom d.o.o. ("MTC") a cable operator in Ljubljana. In July 1996, the Company,
together with MMTV and Tele 59, entered into an agreement to purchase a 66%
equity interest in Kanal A, a privately owned television station in Slovenia,
which competes with POP TV (the "Kanal A Agreement"). There is currently an
injunction in effect preventing the completion of the Kanal A Agreement.
See Item 3 "Legal Proceedings".
The Company's interest in Markiza TV is governed by a Participants
Agreement dated September 28, 1995 (the "Slovak Agreement") between the Company
and Markiza-Slovakia s.r.o. ("Markiza") forming Slovenska Televizna Spolocnost,
s.r.o. ("STS"). Pursuant to the Slovak Agreement, the Company is required to
fund all of the capital requirements of, and holds a 49% voting interest and an
80% economic interest in, STS. Markiza, which holds the television broadcast
license, and STS have entered into an agreement under which STS is entitled to
conduct television broadcast operations pursuant to the license. On an ongoing
basis, the Company is entitled to 80% of the profits of STS, except that until
the Company is repaid its capital contributions plus a priority return at the
rate of 6% per annum on such capital contributions, 90% of the profits will be
paid to the Company. A Board of Representatives directs the affairs of STS, the
composition of which includes two designees of the Company and three designees
(two of whom have been named) of Markiza, however, all significant financial and
operational decisions of the Board of Representatives require a vote of 80% of
its members. In addition, certain fundamental corporate matters are reserved for
decision by a general meeting of partners and require a 67% affirmative vote of
the partners.
The Studio 1+1 Group consists of several entities in which the Company
holds direct or indirect interests. The Company holds a 50% equity interest in
each of Innova Film GmbH ("Innova") and International Media Services ("IMS") and
an indirect 25% equity interest in Prioritet, a Ukrainian company ("Prioritet").
Innova holds 100% of Intermedia, a Ukrainian company ("Intermedia"), which in
turn holds a 30% equity interest in a separate Ukrainian company which holds the
license to broadcast programming and sell advertising on UT-2 (the "UT-2
License"). Innova, IMS, Intermedia and Prioritet have entered into arrangements
regarding advertising revenues generated on UT-2. Interests in profits of each
entity in the Studio 1+1 Group are equal to equity interests held in such
entities. All significant decisions of the entities in the Studio 1+1 Group are
reserved for decision of the shareholders, requiring a majority vote (other than
decisions of the shareholders of the Ukrainian company which holds the UT-2
broadcast license, which require a 75% vote). Certain fundamental corporate
matters of these entities require unanimous shareholder approval. In December
1997, Intermedia acquired 50% of Stolychni Novyny, a Ukrainian joint stock
company which in January 1998 began publishing and distributing throughout
Ukraine the weekly newspaper Stolichnye Novosti.
In Poland, the Company has a 50% interest in Federacja Sp.zo.o.
("Federation"), which provides programming and advertising services to TVN. The
Company's interest in Federation is governed by a shareholders' agreement (the
"Federation Agreement"). ITI Media Group N.V. ("ITI") owns the remainder of
Federation. The Company owns an additional 5% indirect interest in Federation
through its 10%
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interest in ITI. TVN Sp.zo.o., owned 67% by ITI and 33% by the Company, holds
broadcast licenses, awarded in February 1997, for northern Poland and the cities
of Warsaw and Lodz and, in addition, a private regional television station in
southern Poland. Under the Federation Agreement, approval of at least 51% of the
shareholders of Federation is required for certain fundamental corporate
matters, including the payment of dividends by Federation. The day-to-day
affairs of Federation are directed by a Management Board which is overseen by a
Supervisory Board. The Company and ITI have an equal number of representatives
on the Supervisory Board. The Company has three representatives and ITI has two
representatives on the Management Board. The General Director is jointly
appointed by the Company and ITI.
The governance provisions for TVN Sp.zo.o. are set forth in a
Shareholders Agreement dated as of May 25, 1995 between the Company and ITI (the
"TVN Agreement"). Pursuant to the TVN Agreement, the economic interests of the
Company and ITI are equivalent to their equity interests. A Supervisory Board
directs the affairs of TVN Sp.zo.o., and is comprised of five designees of ITI
and four designees of the Company. The affirmative vote of at least two ITI
designees and two Company designees is required to approve certain significant
financial and operational decisions. Certain fundamental corporate matters,
including the declaration of dividends and the termination or liquidation of TVN
Sp.zo.o., are reserved for decision by the shareholders of TVN Sp.zo.o., and
require the affirmative vote of holders of at least 75% of the outstanding
equity. 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. The remaining shareholders of Polskie Media S.A. have instituted
legal proceedings challenging TVN Sp.zo.o.'s acquisition. See Item 3 "Legal
Proceedings."
In addition, in Poland, the Company owns a 12% interest in
Endemol-Neovision Sp.zo.o. ("Endemol-Neovision"), a joint venture with Endemol
Entertainment International, one of Europe's largest independent television
production companies. Endemol-Neovision is engaged in television program
production for TVN and the development of television program formats for the
Polish market, including TVN, as well as other Central and Eastern European
markets.
In Hungary, in September 1997, the Company acquired a 71.2% 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 has the right to appoint three of the five members of the
Board of Directors of TV3, all decisions of which require a simple majority. The
Company also wholly owns Videovox Studio Limited Liability Company, a Hungarian
dubbing and duplication company ("Videovox").
CME Development Corporation, a wholly owned Subsidiary of the Company,
provides financial, legal, marketing, business development and administrative
support services to the Company. CME Programming Services, Inc., a wholly owned
Subsidiary of the Company, provides programming, production and satellite
transmission services to the Company's television broadcast operations in
Central and Eastern Europe. See "--Corporate Operations."
As of December 31, 1997, the Company transferred for nominal
consideration all of its interests in regional television operations in
Nuremberg ("FFF") and Dresden and Leipzig ("SFF") to the managing director of
those operations, thereby terminating its ownership interests in German
broadcast operations. On May 13, 1997, the Company announced its decision to
discontinue funding of 1A TV Betelligungsgessellschaft GmbH & Co. Betriebs KG
("1A TV"), which operated PULS, a regional television station operating in the
Berlin-Brandenburg area of Germany. On May 27, 1997, 1A TV initiated a
bankruptcy proceeding in the Bankruptcy Court of Berlin-Charlottenberg, which is
pending. See Item 3 "Legal Proceedings."
The Company's registered offices are located at Clarendon House, Church Street,
Hamilton HM CX Bermuda, and its telephone number is 441-296-1431. Certain of the
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Subsidiaries maintain offices at 18 D'Arblay Street, London W1V 3FP England,
telephone number 44-171-292-7900.
Operating Environment
Private commercial television stations (those which derive the majority
of their revenues from the sale of advertising) generally began broadcasting in
the United States in the 1940s, in most parts of Western Europe in the 1980s,
but not until the 1990s in Central and Eastern Europe. Commercial television has
become an important medium for advertisers in the more developed advertising
markets. For example, in 1997 television advertising expenditures totalled $41
billion in the United States and an aggregate of $25 billion in the 16 countries
in Western Europe. The Company believes that, over time, television advertising
expenditures in Central and Eastern European countries, which are currently
relatively low, will follow a pattern of development similar to that of Western
Europe and the United States.
The following tables set forth (i) the population and number of TV
households for those countries of Central and Eastern Europe where the Company
is focusing its efforts and (ii) the recent growth in television advertising
expenditures in certain of those countries.
Country Population (1) TV Households (2)
------- -------------- -----------------
(in millions)
Czech Republic......................... 10.3 4.1
Romania................................ 22.5 7.5
Slovenia............................... 2.0 0.6
Slovak Republic........................ 5.4 1.9
Ukraine................................ 50.4 16.4
Poland................................. 38.6 10.8
Hungary................................ 10.2 3.7
------- ------
Total.............................. 139.4 45.0
====== =====
(1) Source: United States Bureau of the Census, February 1998.
(2) Source: IP European Key Facts: Television '97. A TV household is a
residential dwelling with one or more television sets.
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Television Advertising Expenditures
<TABLE>
<CAPTION>
Country 1993 1994 1995 1996 1997
------- ---- ---- ---- ---- ----
US dollars (millions)
<S> <C> <C> <C> <C> <C>
Czech Republic................................... 67 96 135 165 163
Romania.......................................... N/A 9 25 44 62
Slovenia ........................................ 15 23 30 35 35
Slovak Republic.................................. 15 18 26 39 47
Ukraine.......................................... N/A N/A 9 21 53
Poland........................................... 148 268 334 385 510
Hungary.......................................... N/A 158 150 158 167
</TABLE>
- ------------
Note: All figures are Company estimates. "N/A" - estimates not available.
European Regulations
Access to the available frequencies is controlled by regulatory bodies
in each country in which the Company operates. New awards of licenses to use
broadcast frequencies occur infrequently.
The European Union
If any Central or Eastern European country in which the Company
operates becomes a member of the European Union (the "EU"), the Company's
broadcast operations in such country would be subject to relevant legislation of
the EU, including programming content regulations. The Czech Republic, Hungary,
Poland, Romania, the Slovak Republic and Slovenia have entered into or signed
Association Agreements with the EU and some or all of these countries may be
admitted to the EU as early as 2002.
The EU's Television Without Frontiers directive (the "EU Directive")
sets forth the legal framework for television broadcasting in the EU. It
requires broadcasters, where "practicable and by appropriate means," to reserve
a majority proportion of their transmission time for "European works." Such
works are defined as originating from an EU member state or a signatory to the
Council of Europe's Convention on Transfrontier Television, as well as written
and produced mainly by residents of the EU or Council of Europe member states.
News, sports, games, advertising, teletext services and teleshopping are
excluded from the calculation of this quota. In addition, the EU Directive
provides for a 10% quota of either broadcast time or programming budget for
programs made by European producers who are independent of broadcasters.
Further, the EU Directive provides for regulations on advertising, including
limits on the amount of time that may be devoted to advertising spots. Member
states are free to introduce stricter content requirements than those in the EU
Directive. The Company intends to align its broadcast operations with any
applicable EU legislation. The Company believes that the EU Directive, as
currently drafted, will not have a material adverse effect on its operations.
Council of Europe
The Company's broadcast operations are all located in countries which
are members of the Council of Europe, a supranational body through which
international conventions are negotiated. In 1990, the Council of Europe adopted
a Convention on Transfrontier Television, which provides for European
programming content quotas similar to those in the EU Directive. This Convention
has been ratified by some of the countries in which the Company operates
(including Hungary, Poland and the Slovak Republic), but all countries in which
the
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Company operates have already implemented its principles into their national
media legislation.
Czech Republic
The Czech Republic is a parliamentary democracy of approximately 10.3
million people, which the Company believes has developed a stable market
economy. Per capita GDP was an estimated $4,750 in 1997. Prior to 1992,
television advertising in the Czech Republic was limited to two public channels.
Currently, there are four over-the-air television stations in the Czech
Republic: two public stations which reach 98% and 83% of the population,
respectively, and two private commercial stations, Nova TV and Prima TV, which
reach 99% and 55% of the population, respectively. Since the onset of
privatization activities in 1992, the television advertising market in the Czech
Republic has expanded to approximately $163 million in 1997, according to the
Company's estimates.
Romania
Romania is a parliamentary democracy of approximately 22.5 million
people, making it the third most populous market in which the Company operates
after Ukraine and Poland. Per capita GDP was an estimated $1,610 in 1997.
Approximately 97% of Romanian households have television, and cable penetration
is approximately 39%. According to the Company's estimates, television
advertising totalled approximately $62 million in 1997. In 1992, the National
Commission for Audio-Visual (the "Romanian Media Commission") was established to
grant broadcast licenses and regulate television, radio and cable. Currently,
there are two public stations and three private stations competing with PRO TV
and Acasa TV. Of the public stations, TVR1 reaches virtually the entire Romanian
population and TVR2 reaches 60%. Two private competitors, Antena 1 and Tele
7ABC, reach approximately 48% and 27% of the population, respectively. A new
private competitor, Prima TV, was launched in December 1997 with a broadcast
reach of an estimated 20% of the Romanian population. PRO TV and Acasa TV have
broadcast reaches of approximately 64% and 25%, respectively, of the Romanian
population.
Slovenia
Slovenia is a parliamentary democracy of 2.0 million people and had an
estimated per capita GDP of approximately $8,750 in 1997, the highest among the
former Eastern bloc countries. Approximately 95% of Slovenian households have
television. According to the Company's estimates, television advertising
totalled $35 million in 1997, and represented approximately 36% of total
advertising expenditures. The POP TV and Gajba TV network stations operate under
licenses regulated pursuant to the Law on Public Media adopted in 1994 and
pursuant to the Law on Telecommunications adopted in 1997. Currently, there are
two public stations and two other private stations in Slovenia competing with
POP TV and Gajba TV. POP TV and Gajba TV have broadcast reaches of approximately
79% and 40% respectively, of the Slovenian population. Historically, the
Slovenian television market has been dominated by one of the public stations,
SLO 1, which reaches 99% of Slovenia's TV households. In addition, cable
television penetration in Slovenia is a relatively high 34%.
Slovak Republic
The Slovak Republic has a population of 5.4 million and 98% of
households have television. Per capita GDP was an estimated $3,570 in 1997. The
economy of the Slovak Republic has recently begun to respond to economic reform,
with estimated GDP growth of 5% in 1997. The Company believes that as a market
economy develops in the Slovak Republic, television advertising spending has the
potential to grow significantly. Television advertising increased approximately
20% in 1997 to $47 million, according to the Company's
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estimates, yet television advertising spending per capita in the Slovak Republic
in 1997 still was approximately half of that of the Czech Republic. The license
under which Markiza TV operates is regulated pursuant to the Act on Radio and
Television Broadcasting. Two national public stations, both with reaches of
nearly all of the Slovak population, compete with Markiza TV. Commercial
broadcaster VTV reaches 50% of the population. Markiza TV has a broadcast reach
of approximately 88% of the Slovak population.
Ukraine
Ukraine, a parliamentary democracy of 50.4 million people, is the most
populous market served by the Company. Approximately 92% of Ukrainian households
have television, Cable penetration is approximately 4% and satellite penetration
is approximately 3%. Television advertising in Ukraine more than doubled from
$21 million in 1996 to $53 million in 1997. Ukraine is served by four television
channels: UT-1, UT-2 and UT-3, which are state owned, and ICTV, a private
broadcaster. The Company expects Ukraine's television advertising market to grow
rapidly from the current $1.05 per person as Ukraine develops an economy that
fosters competition among providers of goods and services. Per capita GDP of
$944 for 1997 is the lowest of all the Company's markets. The Studio 1+1 Group
has a broadcast reach through UT-2 of 95% of Ukraine's population.
Poland
Poland is a parliamentary democracy of 38.6 million people and had an
estimated per capita GDP of approximately $3,460 in 1997. Poland has the largest
television advertising market of the former Eastern bloc countries, other than
Russia, with $510 million of television advertising expenditures in 1997. The
Company estimates that television advertising expenditures increased by 32% from
1996 to 1997. Approximately 96% of Polish households have television, and cable
and satellite penetration are 24% and 12%, respectively. Competition in Poland
consists of two national public broadcast channels, TVP1 and TVP2, with
broadcast reaches of nearly all of Poland's population; Polsat, the largest
private broadcaster, with a broadcast reach of 78% of Poland's population; and
18 public and private regional channels.
Hungary
Hungary is a parliamentary democracy of 10.2 million people and had an
estimated per capita GDP of $4,350 in 1997. The two national public channels,
MTV1 and MTV2, reach 98% and 55% of the population. Two commercial national
stations were launched in October 1997. TV2 reaches 93% of the population. RTL
Klub reaches 86% of the population. Cable and satellite penetration are
currently at 40% and 19% respectively. The 35% of the Hungarian population
reached by TV3 are predominately in urban areas, including Budapest, and
represent approximately 66% of the country's purchasing power.
Corporate Operations
The Company's central service organization provides each broadcast
operation with a central resource, particularly in the start-up or early
development phase of any project. The service functions provided from offices in
London and Amsterdam include development, programming services and advertising
sales.
Development
CME Development Corporation ("CME Development") provides services to
the Company to assist it in managing the growth of its current operations,
expanding its
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operations into new strategic markets, forming potential joint ventures and
strategic alliances and executing acquisitions. CME Development also assists the
Company in identifying attractive markets for expansion as well as local
partners in such markets, determines the vehicles through which, as well as the
manner in which, the Company will enter such markets and oversees the
implementation of these plans.
Programming Services
Through CME Programming Services, Inc. ("CME Programming"), the Company
provides an array of program-related services to its television operations in
Central and Eastern Europe, including program acquisition, production,
distribution (including satellite transmission), promotion, schedule advisory
services and coordination of viewer research. Currently, CME Programming assists
the Company's broadcast operations and broadcast operations under development in
obtaining programming from American and Western European film and television
studios. In addition, CME Programming advises the Company's broadcast operations
in connection with locally produced programming. As the Company expands its
broadcast operations in Central and Eastern Europe, the Company has begun to and
intends to continue to reduce overall program costs by centralizing the purchase
of rights to films and programming on a regional basis, which the Company
believes will provide it with significant advantages with international studios
relative to national competitors. The Company also intends to create a program
exchange service among the Company's broadcast operations and identify
opportunities for co-production and co-financing of programming among these
broadcast operations.
Advertising Sales
The Company's advertising sales department initiates, develops and
maintains relationships between individual stations and networks and
multinational advertisers and advertising agencies. The advertising sales
department also provides the Company's stations and networks with advertising
sales training and marketing, pricing and operational expertise.
Other
The Company provides technical expertise and support relating to
broadcasting and transmission for all of its operations. The Company also
provides certain centralized financial and legal services for its broadcast
operations, including financial planning and analysis, cost control and network
management.
Operations in the Czech Republic: Nova TV
General
CNTS, the operator of Nova TV, is the leading commercial television
operator in the Czech Republic. Nova TV broadcasts pursuant to a 12-year license
awarded to CET 21 in February 1993. Nova TV reaches 99% of the Czech Republic's
population of approximately 10.3 million, including 4.1 million TV households.
By adopting a different programming strategy than that historically
followed by public television stations, including a mix of locally produced news
and entertainment formats and film and television series acquired from
international distributors, Nova TV has built and maintained significant market
share during its first four years of operations. According to independent
surveys undertaken by Rapid Dema and Taylor Nelson AGB, independent polling
agencies, Nova TV achieved an average audience share of 55.3% of the Czech
Republic television market for 1997. Audience share represents the percentage of
televisions turned on at a particular time which are tuned to a particular
television station.
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Programming
Nova TV's programming strategy is to appeal to a mass market audience.
The station broadcasts for 19 hours daily, including locally produced news,
sports (including exclusive coverage of the Czech Republic's national soccer
league), variety shows and other programming, as well as a broad range of
popular films and series from international distributors. In 1997, Nova TV
produced approximately 2,900 hours of original local programming, which
primarily consists of a daily breakfast show, news broadcasts and news related
shows, sports, game shows and music videos. In 1997, such original local
programming produced by the Company, together with Czech films and other Czech
origin programming, comprised approximately 44% of Nova TV's broadcast time.
CNTS has acquired exclusive broadcasting rights in the Czech Republic
or in the Czech language, to a number of successful American and Western
European programs and films (e.g., "Beverly Hills 90210," "ER", "Seinfeld",
"Hercules") produced by such companies as Canal+, Paramount Pictures, Sony
Pictures, Twentieth Century Fox, Walt Disney, Warner Bros., Metro Goldwyn
Mayer/United Artists, Universal Pictures, NBC Enterprises and CBS International.
Nova TV has over 4,000 hours of films and television series in its programming
library. CNTS has agreements with CNN, Reuters and WTN to receive foreign news
reports and film footage to integrate into its news programs. All foreign
language programs and films are dubbed into the Czech language.
Advertising
CNTS derives its revenues principally from the sale of commercial
advertising time. In the Czech Republic most television advertising is sold
through independent agencies and media buying groups. CNTS currently serves over
200 advertisers, including such large multinational advertisers as Unilever,
Henkel, Procter & Gamble and Coca Cola. In 1997, no single advertiser accounted
for more than 10% of CNTS's revenues.
In May 1997, the television association in the Czech Republic launched
an initiative to gather data automatically on television viewing statistics.
Metering devices commonly known as "people meters" have been placed in a
representative number of television homes and the data collected is distributed
to interested parties. The Company believes that the availability of detailed
data on viewing patterns will enable it to market to advertisers more
effectively and potentially increase future advertising revenues.
CNTS is permitted to broadcast advertising on Nova TV for up to 20% of
its broadcast time in any one hour, subject to an overall daily limit of 10% of
broadcast time. In addition, up to 60 minutes per day of broadcast time may be
used for "direct sales" advertising. Its primary competitor, CT1, a public
television station, is restricted to 1% of daily broadcast time for advertising.
The Council for Radio and Television Broadcasting in the Czech Republic (the
"Czech Radio and Television Council") and the Act on the Operation of Radio and
Television Broadcasting make certain distinctions between private and public
broadcasters. For example, private broadcasters, such as CNTS, are permitted to
interrupt programming with advertising, while public broadcasters may not. As
the television advertising market in the Czech Republic continues to develop,
the Company believes Nova TV is well positioned to capitalize on its much larger
inventory of available advertising time and its ability to interrupt programming
with advertising.
Competition
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Nova TV competes principally with CT1 for audience, programming and
advertising. Nova TV competes on a more limited basis with CT2, a public network
of regional frequencies which reaches approximately 83% of the Czech Republic's
population and Prima TV, a privately owned and operated television station
serving approximately 55% of the country's population. There are no other
significant television stations broadcasting Czech language programming to the
Czech Republic. The Company believes that, for various technical, political and
financial reasons, additional private national broadcast competition in the
Czech Republic is unlikely in the near future.
Limited competition for viewers also comes from local and foreign
stations transmitted through cable and satellite television. Approximately 15%
of all Czech Republic households currently have cable television and
approximately 18% receive direct-to-home satellite television. The media
authorities in the Czech Republic have licensed several companies to provide
cable television services to the Czech Republic. The largest is Kable Plus, with
over 435,000 subscribers. Czech authorities have required cable operators to
carry all over-the-air broadcasting within their areas free of charge.
Nova TV competes for revenues with other media, such as newspapers,
radio, magazines, outdoor advertising, transit advertising, telephone directory
advertising and direct mail.
Regulation
CNTS and the terms of the license pursuant to which it operates are
regulated by the Czech Radio and Television Council pursuant to recently amended
legislation. The license was granted by the Czech Radio and Television Council
to CET 21 until 2005 under terms which require CET 21 to cooperate with the
Company in operating CNTS. CET 21 has given CNTS the exclusive access to the use
of the license.
Under Czech legislation or the license pursuant to which CNTS operates
Nova TV, CNTS is required to comply with certain restrictions on programming and
advertising. In addition to the restrictions discussed above under
"--Advertising," advertising is not permitted during children's programming or
the evening news. Restrictions on advertising content include that (i) tobacco
advertising is prohibited, (ii) advertising targeted at children before or after
children's programming is prohibited if such advertising promotes behavior that
would endanger the health, physical or moral development of children, (iii)
advertising of alcoholic beverages is restricted but not prohibited and (iv)
members of the news department of Nova TV are prohibited from appearing in
advertisements. There are also restrictions on the frequency of advertising
breaks within a program.
Operations in the Czech Republic: Radio Alfa
The Company owns a 76% interest in Radio Alfa a.s. ("Radio Alfa").
Radio Alfa had been operating as a "news/information" station with an audience
share of approximately 5%. In October 1995, the Company relaunched Radio Alfa
with a greater proportion of entertainment-driven programming. Average 1997
audience share was approximately 8.8%.
The Company is entitled to a consulting fee equal to 60% of the pre-tax
profits of Radio Alfa and provides management advisory services to the radio
station. Certain of the Company's outstanding loans to, and interest in, Radio
Alfa are convertible into an additional equity interest which, when combined
with its current 76% interest, would give the Company a 92.4% interest in Radio
Alfa.
The license for Radio Alfa expires in February 1999. Although the
Company intends to reapply for the license, there can be no assurance that the
license will be renewed. Radio
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Alfa also has a 50% interest in Media Marketing Services s.r.o. ("MMS"), which
sells advertising time for radio stations throughout the Czech Republic,
including Radio Alfa. Radio competition in the Czech Republic includes the Czech
public radio, one other national private radio station and over 60 local radio
stations.
Operations in Romania: PRO TV and Acasa TV
General
PRO TV is a national television broadcast network in Romania which was
launched in December 1995 and which broadcasts its programming on, and sells
advertising for, regional television stations operated under licenses held by
PRO TV, SRL and Media Pro, SRL. PRO TV is operated through MPI, in which the
Company has a 66% interest. PRO TV reaches approximately 64% of the Romanian
population of 22.5 million, primarily in Romania's urban areas. PRO TV
broadcasts from studios located in Bucharest via digitally encoded satellite
signals which deliver programming to terrestrial broadcast facilities and to
approximately 250 cable systems throughout Romania. The Company anticipates that
PRO TV will be able to continue to increase its reach from current levels
through utilizing additional regional licenses which have been granted to
entities currently controlled by PRO TV, SRL and through affiliations with other
local broadcasters and agreements with cable carriers. Independent research from
Gallup Media in Romania shows that PRO TV is currently the top-rated television
station in its broadcast area, with an average television viewer share of
approximately 45% for 1997.
MPI also operates PRO FM, a radio network which is broadcast through
owned and affiliated stations to approximately 9 million people in Romania.
Programming
PRO TV's programming strategy is to appeal to a mass market audience
through a wide range of programming, including movies, comedies, dramatic
series, talk shows, news and reports. PRO TV broadcasts 24 hours of programming
daily. Approximately 40% of PRO TV's programming is comprised of locally
produced programming, including, news, sports (including coverage of Romania's
soccer league), a breakfast show, game shows and current affairs shows.
PRO TV has secured exclusive broadcast rights in Romania to a large
number of successful American and Western European programs and films (e.g.,
"X-Files," "ER," "Married with Children," "NYPD Blue" and "Seinfeld") produced
by such companies as CBS, Granada, Universal Pictures, Metro Goldwyn
Mayer/United Artists, Paramount Pictures, Sony Pictures, Twentieth Century Fox,
Warner Bros., Gaumont and BBC Worldwide. All foreign language programs and
films are subtitled in Romanian. PRO TV also receives foreign news reports and
film footage from Reuters and WTN to integrate into its news programs.
Advertising
PRO TV derives revenues principally from the sale of commercial
advertising time, most of which is sold through independent agencies.
Advertisers include large multinational firms such as Unilever, Coca-Cola,
Henkel, Colgate-Palmolive, Wrigley and Procter & Gamble.
PRO TV is permitted to broadcast advertising for up to 20% of its
broadcast time in any hour, subject to an overall daily limit of 15% of
broadcast time as compared to public
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broadcasters which are permitted to use up to 7.5% of their time for
advertising. An additional 5% of broadcast time may be used for direct sales
advertising. PRO TV's primary competitor, the public national station TVR 1, is
restricted to 7.5% of daily broadcast time for advertising and a maximum of 10%
during any one hour. Both private and public broadcasters are subject to
restrictions on the frequency of advertising breaks, but restrictions on public
stations are more severe. For example, private broadcasters can insert
advertising during news programs while public broadcasters cannot. Tobacco
advertising is prohibited and alcohol advertising is restricted.
Competition
Prior to the launch of PRO TV, TVR 1 was the dominant broadcaster in
Romania due to its coverage of 100% of the population, a popular news show and
light entertainment programming. In 1997, PRO TV achieved an average audience
share of 45% in its coverage area, while TVR1's 1997 average audience share in
its coverage area was 22%. Other competitors include the second public national
station, TVR 2, with a 60% broadcast reach, and privately owned Antena 1 and
Tele 7 ABC, which reach approximately 48% and 27% of the population,
respectively. A new private competitor, Prima TV, was launched in December 1997
with a broadcast reach of an estimated 20% of the Romanian population.
Additional competitors include cable and satellite stations, which
currently penetrate approximately 39% and 8% of the Romanian market,
respectively. PRO TV competes for advertising revenues with other media, such as
newspapers, radio, magazines, outdoor advertising, telephone directory
advertising and direct mail.
Regulation
Licenses for the television stations which show programming provided by
PRO TV and which broadcast advertising sold by PRO TV are regulated by the
Romanian Media Commission. In addition to its terrestrial television licenses
which have been granted for seven-year periods expiring in 2001, 2003, and 2004,
PRO TV has been granted a seven-year license to broadcast via satellite. Under
regulations established by the Romanian Media Commission and the various
licenses of stations which broadcast PRO TV, programming and advertising
provided by PRO TV is required to comply with certain restrictions. These
restrictions include a requirement that at least 40% of programming be "own"
produced.
Regulations related to advertising content include (i) a ban on tobacco
and restrictions on alcohol advertising, (ii) advertising targeted at children
or during children's programming must account for the overall sensitivity of
that age group and (iii) members of the news department of PRO TV are prohibited
from appearing in advertisements. There are also restrictions on the placement
of advertisements during programming.
Recent Developments
In February 1998, MPI launched Acasa TV, a station reaching
approximately 25% of the Romanian population, including approximately 40% of the
urban population via satellite and cable distribution. Acasa TV's programming
schedule, which includes soap operas, Sunday programming of mostly sports, and
cartoons during PRO TV's evening news, is expected to lead to viewer
demographics complementary to PRO TV's, providing an attractive advertising
medium for small to medium sized companies that would not otherwise advertise on
television.
In November 1997, the Company completed its acquisition of a
controlling interest in Media Vision and Video Vision. Media Vision is the
leading television production company in Romania and produces all of PRO TV's
entertainment programming, including gameshows,
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concerts, music videos and live special events, and performs dubbing. Media
Vision produces advertising spots for third party clients such as Coca Cola,
Colgate-Palmolive and L'Oreal. Video Vision, Romania's leading provider of
television post-production and graphics, provides nearly all of PRO TV's and
Acasa TV's graphics.
Romania: Investment in MobilRom
The Company owns a 95% equity interest in Unimedia, which owns a 10%
equity interest in MobilRom. In December 1996, MobilRom was awarded one of two
national GSM cellular telephone licenses in Romania. In June 1997, MobilRom
launched its GSM subscription service under the brand name "Dialog". In November
1997, MobilRom launched its prepaid card service under the brand name "Alo". As
of December 1997, MobilRom had approximately 82,000 subscribers and the
technical coverage was approximately 65% of the Romanian population and 40% of
the country's territory, including over 150 towns and cities and over 7,500
kilometres of road. Roaming has been established with 49 operators in other
countries. The Company does not anticipate exercising any managerial or
operational control over MobilRom although one of the Company's employees serves
on MobilRom's Board of Directors.
Operations in Slovenia: POP TV and Gajba TV
General
POP TV is a national television broadcast network in Slovenia which
provides its programming to, and sells advertising for, MMTV, Tele 59 and
additional affiliates. POP TV is operated through Pro Plus, in which the Company
has an effective economic interest of 85.3%. In addition, the Company has a 33%
economic interest in each of its two major Slovenian affiliate stations, MMTV
and Tele 59. POP TV reaches approximately 80% of the population of Slovenia,
including Ljubljana, the capital of Slovenia, and Maribor, Slovenia's second
largest city. Independent industry research shows that in the areas of Slovenia
in which POP TV can be seen, the network had an average television viewer share
of approximately 45% for 1997, the largest share of television viewers in
Slovenia.
Programming
POP TV's programming strategy is to appeal to a mass market audience
through a wide range of programming, including movies, comedies, dramatic
series, talk shows, news and sports. POP TV provides an average of 18 hours of
programming daily. Approximately 32% of POP TV's programming is comprised of
locally produced programming, including a nightly news program, a daily game
show and weekly variety shows.
POP TV has secured exclusive program rights in Slovenia to a large
number of successful American and Western European programs and films (e.g.,
"X-Files," "NYPD Blue", "Alien3", "Home Alone 2", "My Cousin Vinny") produced by
such companies as Twentieth Century Fox, Warner Bros., Metro Goldwyn
Mayer/United Artists, Universal Pictures, Paramount Pictures, Sony Pictures, NBC
Enterprises, CBS International and Polygram. Special events aired include the
Academy Awards, Miss World and Formula One racing. The POP TV and Gajba TV (see
"--Recent Developments") library includes over 2,100 feature films and over
4,100 television episodes. All foreign language programs and films are
subtitled in Slovenian.
Advertising
POP TV derives revenues principally from the sale of commercial
advertising time. Current multinational advertisers include firms such as
Procter & Gamble, Wrigley, Coca Cola
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and Johnson & Johnson. Private commercial television stations are permitted to
broadcast advertising for up to 20% of daily broadcast time compared with 15%
for public television stations in Slovenia. Both private and public television
broadcasters in Slovenia are subject to restrictions on the frequency of
advertising breaks, as well as on the advertising of tobacco and alcohol.
Competition
Historically, the television market in Slovenia has been dominated by
SLO 1, a national public television station. SLO 1 is entertainment oriented
while the other national public station, SLO 2, focuses on sports programming
and special events. SLO 1 reaches 99% of Slovenia's TV households, and SLO 2
reaches 95% of Slovenia's TV households. No national private television
frequency has been made available in Slovenia. Two private television stations
which compete with POP TV in Slovenia, Kanal A and TV3, have achieved a
relatively small audience share, together less than 13%, due primarily to their
low budget programming and lack of extensive news programming, which the Company
believes are important contributors to attracting significant audience share.
POP TV also competes with foreign television stations, particularly
Croatian, Italian, German and Austrian stations. Cable penetration at 34% is
relatively high compared with other countries in Central and Eastern Europe and
approximately 15% of households have satellite dishes. In addition, POP TV
competes for revenues with other media, such as newspapers, radio, magazines,
outdoor advertising, telephone directory advertising and direct mail.
In July 1996, the Company, together with MMTV and Tele 59, entered into
an agreement to purchase a 66% equity interest in Kanal A, a privately owned
television station in Slovenia in competition with POP TV. There is currently an
injunction in effect preventing the implementation of the Kanal A Agreement. See
Item 3 "Legal Proceedings."
Regulation
The licenses granted to POP TV's affiliate stations have been granted
for 10-year terms expiring in 2003, with respect to licenses reaching 53% of the
population, and in 2006 and 2007, with respect to the remaining licenses. Under
Slovenian television regulations, POP TV and its affiliate stations are required
to comply with a number of restrictions on programming and advertising. These
restrictions include that 10% of the station's broadcast time must be internally
produced programming, certain films and other programs may only be broadcast
between 11:00 pm and 6:00 am, and POP TV news editors, journalists and
correspondents must not reflect a biased approach toward news reporting.
In addition to the restrictions discussed above under "--Advertising,"
advertising is not permitted during news, documentary or children's programming
under 30 minutes in duration, or during religious programming. There are also
restrictions on the frequency of advertising breaks during films and other
programs. Restrictions on advertising content include a prohibition on tobacco
advertising and on the advertising of alcoholic beverages other than low alcohol
content beer.
Recent Developments
In October 1997, the Company launched Gajba TV, the Company's second
television broadcast network in Slovenia. Gajba TV is operated through Pro Plus
and provides programming to, and sells advertising for, its affiliate
broadcasters. The Gajba TV signal is also carried by a cable channel operated by
Tele 59 in Maribor. Gajba TV reaches
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approximately 40% of the population of Slovenia and for November and December
1997 had an average audience share of 2.1% in its coverage area.
Gajba TV's strategy is to appeal to a youthful audience. Gajba TV
broadcasts for 9 hours per day and features successful American and Western
European programs and films, popular local movies, locally produced talk and
variety shows, an information broadcast and other programming.
Operations in the Slovak Republic: Markiza TV
General
Markiza TV, in which the Company owns an 80% economic interest, was
launched as a national television station in the Slovak Republic in August 1996.
Markiza TV reaches approximately 88% of the Slovak Republic's population of 5.4
million, including virtually all of its major cities. The Company intends to
increase Markiza TV's broadcast reach by adding additional transmitters or
affiliates. According to independent industry research, Markiza TV had an
average television viewer share of approximately 53% for its broadcast reach
areas for 1997.
Programming
Markiza TV's programming strategy is to appeal to a mass market
audience. Markiza TV provides an average of 19 hours of programming daily.
Approximately 35% of Markiza TV's programming is locally produced, including
news, current affairs, game shows, variety shows and a weekly sitcom.
Markiza TV has secured exclusive broadcast rights in the Slovak
Republic to a large number of top-rated United States and European programs and
films (e.g., "Suddenly Susan", "Melrose Place", "Sleepless in Seattle") produced
by major studios including BBC, Universal Pictures, Twentieth Century Fox,
Warner Bros., Sony Pictures, Metro Goldwyn Mayer/United Artists and Paramount
Pictures. Markiza TV's library includes over 3,300 films and television
episodes. All foreign language programming is dubbed in either Slovak or Czech.
Markiza TV also receives foreign news reports and film footage from CNN, Reuters
and WTN, which it integrates into news programs.
Advertising
Markiza TV derives revenues principally from the sale of commercial
advertising time. Advertisers include large multinational firms such as Procter
& Gamble, Unilever, Henkel, Benckiser and Wrigley. Private commercial television
stations are permitted to broadcast advertising for up to 10% of total daily
broadcast time and up to 20% of broadcast time in any single hour.
Currently, approximately 60% of Markiza TV's advertising revenues are
sourced from agencies based in the Czech Republic which are more developed and
have stronger relationships with international advertisers than with those in
the Slovak Republic. The Company expects that in the future, a greater
proportion of advertising revenues will be sourced from the Slovak Republic as
the local advertising market develops.
Competition
The Slovak Republic is served by two national public television
stations, STV1 and STV2, which dominated the ratings until Nova TV and Markiza
TV began broadcasting in 1994 and 1996, respectively. Nova TV's signal reaches a
portion of the Slovak Republic and
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its launch provided the first alternative in the country to public television.
Nova TV has maintained its popularity in the Slovak Republic, with an
approximately 9.1% audience share for 1997. Markiza TV also competes with VTV, a
private satellite broadcaster; public television stations located in Austria,
the Czech Republic and Hungary, which stations' signals reach the Slovak
Republic; additional foreign private television stations; and foreign satellite
stations. Competitors have indicated a possibility of legal action to challenge
the Company's partnership arrangements with Markiza TV in connection with the
formation of STS.
Regulation
Markiza TV's broadcast operations are subject to regulations imposed by
the Act on Radio and Television Broadcasting, the Act on Advertising and
conditions contained in the license granted by the Council of the Slovak
Republic for Broadcasting and Television Transmission (the "Slovak Television
Council"). The Slovak Television Council granted the license to operate Markiza
TV to the Company's local partner in STS for a period of 12 years under terms
requiring the Company's local partner to enter into a partnership with the
Company to found STS.
Under the license pursuant to which Markiza TV operates, Markiza TV is
required to comply with several restrictions on programming. These restrictions
include the following broadcast time rules: 40% must be Slovak production
(increasing to a minimum of 51% within three years from commencement of
broadcasting); 10% must be programming for children or youth; broadcasts of
first performance films and series must have a minimum of 47% European
production (of which there must be a minimum of 8% Slovak production) and no
more than 45% United States production; and no more than 40% of foreign first
performance films and series may be in the Czech language (decreasing to 20% by
the fourth year of broadcasting). Markiza TV's programming is required to be
consistent with the Slovak Constitution and not promote violence, hate,
intolerance, or immoral behavior or intentionally use indecent language.
Programming endangering the psychological or moral growth of children and youth
cannot be broadcast between 6:00 am and 10:00 pm, and Markiza TV's news
broadcasts must be objective and balanced and clearly differentiate between
opinion and news.
In addition to the restrictions discussed above under "--Advertising",
regulations relating to advertising content include that (a) the news may not be
sponsored and news staff may not appear in advertisements (b) tobacco
advertising is prohibited, (c) advertising for children or in which children
perform and which promotes behavior endangering the health, psychological or
moral development of children is prohibited, and (d) advertising which endangers
the viewer's morality, health, safety and environmental protection are also
prohibited. The advertisement of beer is permitted; however, advertisement of
other alcoholic beverage remains prohibited. There are also restrictions on the
frequency of advertising breaks within a program.
Operations in Ukraine: Studio 1+1 Group
General
The Company owns a 50% economic interest in the Studio 1+1 Group, which
has the right pursuant to a ten-year television broadcast license held by a
Ukrainian-based member of the Studio 1+1 Group to broadcast programming and sell
advertising on Ukrainian National Channel Two ("UT-2"), one of Ukraine's
state-owned television channels, for 84 hours per week, including all the prime
time hours. UT-2 reaches approximately 95% of Ukraine's population. Although
television advertising in Ukraine was $53 million in 1997 ($1.05 per person),
the Company expects that Ukraine's television advertising market will grow
rapidly
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as Ukraine develops an economy that fosters competition among providers of goods
and services, and that the Company's investments in Ukraine will position it to
take advantage of any such growth. According to SOCIS Gallup, average 1997
audience share in coverage area was 31% for Studio 1+1 Group, 32% for Inter and
13% for UT-1. In December 1997, average audience share in coverage area was 39%
for Studio 1+1 Group, 24% for Inter and 12% for UT-1.
The Studio 1+1 Group began broadcasting on UT-2 in January 1997. Prior
to that time, the Studio 1+1 Group had been broadcasting programming for
approximately 50 hours per week on Ukrainian National Channel One ("UT-1")
pursuant to a contractual, rather than license, right, which contract was to
expire in 2000. The Studio 1+1 Group was required to relinquish its right to
broadcast programming on UT-1 in order to acquire the license to broadcast on
UT-2.
The Company continues to hold a 30% equity interest in Gravis, a
company which operates two terrestrial television stations in the capital city
of Kiev. Gravis currently generates only limited revenues.
Programming
The Studio 1+1 Group's programming strategy is to appeal to a mass
market audience. The Studio 1+1 Group has secured exclusive territorial or local
language broadcast rights in Ukraine to a large number of successful American
and Western European programs and films (e.g. "Dynasty", "Melrose Place",
"Hercules", "LA Heat", "Basic Instinct", "Robocop", "Cliffhanger") from many of
the major studios, including Paramount, Universal and Warner Bros. All
foreign-language programs and films (other than those in the Russian language)
are dubbed into the Ukrainian language.
During 1997, the Studio 1+1 Group developed a program mix closer to
that used by other Company stations by increasing the percentage of its locally
produced programming, including talk shows and entertainment shows, and
emphasizing the local audience appeal. The Company believes that changing the
station's image and programming has had and will continue to have a significant
benefit in terms of audience share and will increase the station's appeal to
advertisers.
Advertising
The Studio 1+1 Group derives revenues principally from the sale of
commercial advertising time. Advertisers include Procter & Gamble, SmithKline
Beecham, Wrigley and Nestle. The Studio 1+1 Group is permitted to sell 15% of
its overall broadcast time for advertising. UT-2, like other broadcasters, is
subject to restrictions on the frequency of advertising breaks, as well as on
the advertising of tobacco and alcohol.
Competition
Ukraine is served by four television channels: UT-1, UT-2 and UT-3,
which are state owned, and ICTV, a private broadcaster. The Studio 1+1 Group,
through UT-2, has a broadcast reach of 95% of the Ukrainian population. The
state run station UT-1 has a broadcast reach of approximately 98% of the
Ukrainian population. ICTV, a private station, reaches 34% of Ukraine's
population. The private station Inter, through UT-3, has a broadcast reach of
approximately 85% of the Ukrainian population. Inter's program schedule consists
primarily of rebroadcasts of the Russian-language ORT network.
Regulation
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The Studio 1+1 Group provides programming to UT-2 pursuant to a
ten-year television broadcast license expiring in December 2006. Broadcasts of
the Studio 1+1 Group's programming and advertising on UT-2 are regulated by the
State Committee on Television and Radio of Ukraine and the National Council on
Television and Radio of Ukraine. These agencies enforce Ukraine's media laws,
which include restrictions on the content of programming and advertising and
limitations on the amount and placement of advertising in programs. Programming
produced in Ukraine must account for at least 70% of all programming and
programming produced by Studio 1+1 Group must account for 50% of all
programming. Up to 15% of each broadcasting hour may be used for advertising.
Recent Developments
In January 1998, the Studio 1+1 Group, in a 50-50 joint venture with
the publisher of the weekly "Moscow News", began publishing a weekly newspaper
for Ukraine. The paper, Stolichnye Novosti ("News From the Capital"), contains a
weekly summary of news, political analysis, sports, an opinion page, a history
page, cultural features, a media section and economic news. The only market
competitor is Zerkolo Nedelli ("Weekly Mirror"), which has a total circulation
of approximately 37,400 and limited distribution outside of Kiev. Stolichnye
Novosti currently has a circulation of 30,000.
Operations in Poland: TVN
General
In Poland, the Company owns a 50% interest in Federation. ITI owns the
remainder of Federation. The Company owns a 10% interest in ITI. TVN Sp.zo.o.,
which is owned 67% by ITI and 33% by the Company, holds broadcast licenses for
the northern region of Poland and the cities of Warsaw and Lodz and owns a
regional television station in southern Poland. Federation provides programming
and advertising services to TVN. Since its launch in October 1997, TVN Sp.zo.o
has had an average viewer share of 8.5% in its area of broadcast reach.
The Company believes that the reach of TVN is approximately 45% of
Poland's population. TVN is a technologically complex project involving the
integration of local low power and medium power transmitters, cable headends and
several separate regional program feeds, as required by the broadcast licenses,
using digital satellite distribution. Results from TVN indicate a need to
continue to upgrade the terrestrial signal distribution network, re-orient
antennae and work with cable operators to ensure high quality carriage. These
efforts, which will continue for several months, have resulted in and are
expected to continue to result in a gradual increase in technical coverage of
the Polish population. The growth of ratings and increase in revenues of TVN
will depend in large part on the speed and success of these efforts.
Programming
The TVN programming strategy is to appeal to a mass market audience.
Currently, TVN provides approximately 19 hours of programming per day and has
exclusive programming rights in Poland to a number of popular programs and films
(e.g., "Melrose Place", "Beverly Hills 90210", "Millennium", "The Abyss", "Die
Hard", "Home Alone") produced by companies such as Metro Goldwyn Mayer/United
Artists, Mediaset, Paramount and Warner Bros. This library includes over 5,000
hours of programming.
Endemol-Neovision, the Company's joint venture with Endemol
Entertainment International, one of Europe's largest independent television
production companies, is
19
<PAGE>
engaged in television program production and the development of television
program formats for the Polish market, including TVN as well as other Central
and Eastern European markets. TVN has acquired the programming rights to
"Miniplaybackshow" and "Soundmixshow", two popular gameshows produced by
Endemol-Neovision.
Advertising
TVN derives revenues principally from the sale of commercial
advertising time, most of which is sold through independent agencies.
Advertisers include a number of local, national and multinational companies such
as Procter & Gamble, Toyota, Unilever, MasterFoods and Colgate-Palmolive.
Restrictions on advertising provide that advertising on TVN may not exceed 15%
of daily broadcasting time and 12 minutes in any one hour.
Competition
Competition in Poland consists of two national public broadcast
channels, TVP 1 and TVP 2, with broadcast reaches of 95% and 94% of Poland's
population, respectively, Polsat, the largest private broadcaster, with a
broadcast reach of 93% of Poland's population, and 18 regional public and
private channels. Cable and satellite stations currently have an approximate 24%
and 12% market penetration, respectively. Additional competition for advertising
revenues includes other media, such as newspapers, radio, magazines, outdoor
advertising, telephone directory advertising and direct mail.
Regulation
Television broadcasting in Poland is subject to regulations imposed by
the Act on Communications (the "Polish Communications Act") and regulated by the
Polish National Radio and Television Council (the "Polish Television Council").
The Polish Communications Act restricts the foreign ownership and voting power
of license holders to 33%. New media regulations under discussion could increase
the maximum foreign ownership to 49%. If such regulations are introduced, the
Company has the ability to raise its shareholdings in TVN Sp.zo.o. to the
maximum permitted. In addition, Polish nationals residing in Poland must
comprise the majority of the managing boards of such license holders.
The licenses granted to TVN contain restrictions on programming and
advertising. Programming produced in Europe is required to account for 50% of
programming, which includes a requirement of 30% domestic production (30% in
1999 and 35% in 2000), of which TVN must produce or commission at least 10% of
annual programming. In the southern Poland region, domestic production must
account for 40% of programming. Programming produced by Polish producers not
associated with TVN must account for 15% (10% for the southern Poland region)
of their annual programming. See also "--Advertising" above.
Operations in Hungary: TV3
General
The Company owns a 71.2% equity interest in TV3, a television station
distributed via MMDS in Budapest and via satellite to cable systems throughout
Hungary. TV3 reaches approximately 35% of Hungary's population. The Company
intends to increase the coverage of TV3 by providing cable operators which do
not carry TV3's signal with decoders to receive the TV3 signal. Since its
relaunch by the Company in October 1997, TV3 has had an average viewer share of
approximately 7.3% in its coverage area.
Programming
20
<PAGE>
TV3's programming strategy is to appeal to a mass market audience, with
an emphasis on younger urban viewers. TV3 broadcasts for 10 hours on weekdays
and 16 hours per day on weekends, including prime time. TV3 has exclusive
broadcast rights in Hungary to over 10,000 hours of popular programming, (e.g.,
"Friends", "Dynasty", "Maverick", "The Abyss", "Batman", "NYPD Blue") and an
extensive library of feature films produced by major studios such as Universal
Pictures, Twentieth Century Fox, Warner Bros. and Sony Pictures. All foreign
language programming is dubbed into Hungarian.
Advertising
TV3 derives revenues principally from the sale of commercial
advertising time. Advertisers include Procter & Gamble, Master Foods, Benckiser
and SmithKline Beecham. Advertisements may not exceed 15% of daily broadcast
time and 12 minutes per hour.
Competition
The national public channels, MTV1 and MTV2, reach 98% and 55%,
respectively, of the Hungarian population. The commercial national stations TV2
and RTL Klub, were launched in October 1997. TV2 reaches 93% of the population
and is on the air for 19 hours per day. RTL Klub reaches 86% of the population
and is on air for 18 hours per day. TV3 competes for revenue with other media,
such as newspapers, radio, magazines, outdoor advertising, transit advertising,
telephone directory advertising and direct mail.
Regulation
TV3 is distributed by MMDS (multi channel multipoint distribution
service) and satellite and is not required to operate pursuant to a broadcast
license. However, TV3 is recognized as a national broadcaster by the Hungarian
National Radio and Television Commission and is therefore subject to the
Hungarian Radio and Television Act. Advertisements on TV3 may not exceed 15% of
daily broadcast time and 12 minutes per hour. At least 15% (20% beginning in
1999) of total annual broadcast time (not including feature films,
advertisements, news, live sports and game shows) must be Hungarian produced. At
least 10% (15% beginning in 1999) of total annual broadcast time must be
programming commissioned or purchased from an independent Hungarian producer
that is not more than five years old. Six percent of total annual advertising
revenues must be used for the creation of new Hungarian films or, in the
alternative, 3% of annual advertising revenues may be donated to a Hungarian
film production fund.
Other
In January 1997, the Hungarian Television Commission announced tender
procedures for the award of two national television broadcast licenses. The
Company formed a consortium, MKTV Rt. ("IRISZ TV"), which submitted an
application for both of these licenses. The consortium presently includes
Intercom, the largest film and video distributor and cinema operator in Hungary,
and DDTV, a company managed by Gyorgy Balo, the General Director of TV3 and the
Company's partner in 2002 Kft. Two other consortia submitted bids by the April
10, 1997 deadline. On June 30, 1997, the Hungarian Television Commission
announced the award of the licenses to the other consortia which subsequently
launched TV2 and RTL Klub. On July 4, 1997, IRISZ TV filed a complaint in the
Budapest Capital Court against the Hungarian Television Commission and the other
consortia challenging the license awards. At a hearing on March 25, 1998, the
Court denied IRISZ TV's claims. IRISZ TV intends to appeal the Court's decision.
See Item 3 "Legal Proceedings."
Seasonality
21
<PAGE>
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 (typically July and
August), and highest during the fourth quarter of each calendar year.
Employees
As of December 31, 1997, CME had a corporate operations staff of 70
employees and its Subsidiaries had a total of approximately 2,500 employees.
None of CME's employees or the employees of any of its Subsidiaries are covered
by a collective bargaining agreement. The Company believes that its relations
with its employees are good.
Recent Developments
On March 26, 1998, Michel Delloye was elected President and Chief
Executive Officer of CME, effective as of such date. Mr. Delloye also was
appointed to CME's Board of Directors. Mr. Delloye is the former Managing
Director of CLT Multimedia (now CLT-UFA), a Luxembourg based media company that
owns and operates television, radio and production companies in Luxembourg,
Belgium, France, Germany, the Netherlands, Poland and the United Kingdom. Mr.
Delloye succeeds Leonard M. Fertig, who is leaving CME to pursue other business
opportunities and investments. Mr. Fertig will remain a consultant to CME.
Item 2. PROPERTIES
The Central European Media Enterprises Ltd. group of companies leases
office space in London in three separate locations. One lease covers
approximately 4,347 square feet of space and expires in 2004, except that the
Company can terminate the lease at its option in 1999, subject to penalty. The
second lease, for 2,205 square feet of office space in a nearby building,
expires in 2006. A third lease of 2,600 square feet of office space in another
nearby building expires in September 1998.
Nova TV occupies approximately 65,000 square feet, and modern studios
have been constructed in the building, which is owned by CNTS. The Company has
entered into an agreement on behalf of MPI for the purpose of acquiring the
facility in Bucharest which contains PRO TV's studios for a purchase price of
approximately $1.8 million. The Company owns a portion of a building in
Ljubljana which contains POP TV's studios and offices. Videovox owns the
building in Budapest in which its studios are located. STS owns its principal
office facility in Bratislava. TVN, the Studio 1+1 Group and TV3 each lease
office and studio space.
The Company leases transponder space on the Eutelsat 2F1 satellite for
the use of TVN and PRO TV; the Amos 1 satellite for the use of TV3; the Eutelsat
Hotbird 2 satellite for the use of TVN, PRO TV and Acasa TV; and the Eutelsat
2F3 satellite for the use of TVN.
Item 3. LEGAL PROCEEDINGS
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
the Company and Ronald S. Lauder, the non-Executive Chairman of the Company's
Board of Directors. Perekhid alleges 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 seeks compensatory damages of $250 million, punitive
damages
22
<PAGE>
of $500 million, and an injunction against the Company and Mr. Lauder to prevent
the continuation of the alleged conduct. On July 2, 1997, the Company filed a
motion to dismiss the complaint, which is pending. Management believes that it
has substantial defenses in this matter and intends to defend the matter
vigorously.
On March 18, 1998, TV Studio Information Service Ltd. ("TV SIS"), a
Ukrainian television broadcaster, filed a complaint in the Supreme Court of
Arbitration, Kiev, against the National Council on Television and Radio of
Ukraine and Studio 1+1, as a third party defendant, seeking to invalidate the
award of the broadcast license to Studio 1+1. TV SIS alleges that (i) the
broadcast license granted to Studio 1+1 in October 1996 was awarded in violation
of law, (ii) a three-hour increase in airtime granted to Studio 1+1 under the
broadcast license in November 1997 was granted illegally, (iii) Studio 1+1 has
failed to comply with local content programming requirements, and (iv) Studio
1+1 has exceeded foreign investment limitations. Studio 1+1 intends to defend
the matter vigorously.
In January 1997, the Hungarian National Radio and Television Commission
awarded two national television broadcast licenses to two consortia. The
Company's consortium, IRISZ TV, was an unsuccessful bidder in the license tender
process. On July 4, 1997, IRISZ TV filed a complaint in the Budapest Capital
Court against the Hungarian National Radio and Television Commission and the
two successful consortia, alleging that the Hungarian National Radio and
Television Commission (i) violated the tender procedures in connection with the
acceptance of bids; (ii) violated the integrity and fairness of the tender; and
(iii) breached its own published guidelines in the bid evaluation process. At a
hearing on March 25, 1998, the Court denied IRISZ TV's claims. IRISZ TV intends
to appeal the Court's decision.
In December 1997, TVN Sp.zo.o. acquired 22% of the economic and 9.68%
of the voting interests of Polskie Media S.A. for a purchase price of $3.2
million. The remaining shareholders refused to enter TVN Sp.zo.o into the
Polskie Media S.A. shareholder register on the grounds that the transfer to TVN
Sp.zo.o. did not meet the applicable requirements for such a transfer. On
January 30, 1998, TVN Sp.zo.o. instituted proceedings at the Voivodship Economic
Court in Warsaw requesting that the Court invalidate attempts by the
shareholders of Polskie Media S.A. to block the TVN Sp.zo.o. purchase. TVN
Sp.zo.o. has also requested that the Court order Polskie Media to enter TVN
Sp.zo.o. into the share register. Polskie Media S.A. has not yet responded.
Certain unsuccessful bidders for the licenses of northern Poland and
the cities of Warsaw and Lodz have filed challenges to the awards 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 Supreme
Administrative Court has joined all of these challenges into a single
proceeding, the next hearing for which has been set for April 1, 1998.
In July 1996, the Company, together with MMTV and Tele 59, entered into
an agreement to purchase a 66% equity interest in Kanal A, a privately owned
television station in Slovenia (the "Kanal A Agreement"). Scandinavian
Broadcasting System SA ("SBS"), which claims to have certain rights to the
equity of Kanal A pursuant to various agreements, has challenged the validity of
the Kanal A Agreement in a United Kingdom court. Both the Company and SBS have
been granted injunctions by the United Kingdom courts preventing SBS, in the
case of the Company, and the Company, in the case of SBS, from taking certain
actions either to enforce such entity's claim to equity in Kanal A or to block
the claim of the other entity to equity in Kanal A. The Company has instituted
action in a Slovenian court requesting that courts in Slovenia resolve these
claims.
One of the owners of CET 21 has filed two claims against CET 21 in the
Regional Commercial Court in Prague. The claims, filed on December 26, 1996 and
May 6, 1997,
23
<PAGE>
allege that CET21 and the Czech Radio and Television Council did not complete
all required procedures for approving certain transfers of CET 21 participation
interests and request that such transfers be invalidated. CET 21 has not been
informed of a hearing date for either of the claims.
On May 13, 1997, the Company announced its decision to discontinue
funding of 1A TV Beteiligungsgessellschaft GmbH & Co. Betriebs KG ("1A TV"),
which operated PULS, a regional television station operating in the
Berlin-Brandenburg area of Germany. The Company had a 58% non-controlling
interest in 1A TV. On May 27, 1997, 1A TV initiated a bankruptcy proceeding in
the Bankruptcy Court of Berlin-Charlottenburg. The Court has appointed a trustee
to liquidate and wind-up 1A TV. The Company has met with the administrator in
connection with possible claims on behalf of the bankruptcy estate, including
possible claims against the Company and the other 1A TV shareholders. To date,
no such claim has been filed.
Beginning in 1993, 1A TV received investment grants in an aggregate
amount of DM8,544,000 ($4,747,000) from a German public bank, to partially
finance the development of the station. The grants were guaranteed by a wholly
owned German subsidiary of the Company. The grants were repayable if 1A TV did
not fulfil certain conditions, including maintaining specified levels of
employment for a five year period. As a result of the bankruptcy proceedings
initiated by 1A TV, the German public bank has demanded repayment of the
investment grants from 1A TV and the guarantor, plus interest at the rate of
6.0% per annum. In January 1998, the Company filed an appeal of the demand for
repayment with the German public bank, which is pending. Management believes
that the Company is exposed only to the extent of the value of its German
assets, the value of which has been fully reserved in the Consolidated Financial
Statements of the Company.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
24
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
CME's Class A Common Stock began trading on the Nasdaq National Market
on October 13, 1994 under the trading symbol "CETV." On March 24, 1998, the last
reported sales price for the Class A Common Stock was $27.625. The following
table sets forth the high and low sales prices for the Class A Common Stock for
each quarterly period during the last two fiscal years of the Company and for
the first quarter of 1998, as reported by the Nasdaq National Market:
Price Period High Low
- ------------ ---- ---
1996
First Quarter................................... $ 24.250 19.750
Second Quarter.................................. 30.000 22.500
Third Quarter................................... 31.500 21.250
Fourth Quarter.................................. 31.750 27.000
1997
First Quarter................................... 37.125 31.250
Second Quarter.................................. 32.750 23.500
Third Quarter................................... 26.750 22.375
Fourth Quarter.................................. 32.875 23.438
1998
First Quarter (through March 24, 1998).......... 27.625 21.375
At March 20, 1998, there were 29 holders of record (including brokerage
firms and other nominees) and approximately 1,281 beneficial shareholders of the
Class A Common Stock and 10 holders of record of the Class B Common Stock. There
is no established public trading market for the Class B Common Stock.
DIVIDEND POLICY
The Company has not declared or paid and has no present intention to
declare or pay in the foreseeable future any cash dividends in respect to any
class of its Common Stock. The Company's ability to pay cash dividends is
primarily dependent upon receipt of dividends or distributions from its
Subsidiaries over which it has limited control. In addition, the indentures
which govern the Company's 9.375% Senior Notes Due 2004 and 8.125% Senior Notes
Due 2004 restrict the ability of CME to declare and pay cash dividends. See
"Management"s Discussion and Analysis of Financial Condition and Results of
Operations."
Item 6. SELECTED FINANCIAL DATA
(Selected Financial Data begins on the following page and ends on the
page immediately preceding Item 7).
25
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(dollars in thousands, except per share data)
The selected financial information presented below for the five years
ended December 31, 1997 is derived from the audited Consolidated Financial
Statements of the Company. The following selected financial information should
be read in conjunction with the Company's Consolidated Financial Statements and
Notes thereto as of December 31, 1997, 1996 and 1995, included elsewhere herein.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Operating Data:
Net revenues................................... $ 155,394 $135,985 $ 98,919 $ 53,566 $ --
--------- ---------- --------- --------- ----------
Total station operating costs and expenses..... 128,289 85,101 52,542 36,083 1,802
Selling, general and administrative expenses... 27,372 21,357 7,725 6,009 811
Corporate operating costs and development
expenses................................... 25,467 15,782 10,669 3,699 2,708
Amortization of goodwill and allowance for
development costs.......................... 14,845 2,940 3,442 985 --
Non-cash stock compensation charge............. -- -- 858 5,833 --
Capital registration tax....................... -- 809 1,375 -- --
--------- ---------- --------- --------- ----------
Total operating expenses....................... 195,973 125,989 76,611 52,609 5,321
--------- ---------- --------- --------- ----------
Operating (loss) income........................ (40,579) 9,996 22,308 957 (5,321)
Equity in loss of unconsolidated
affiliates.................................. (12,394) (17,867) (14,816) (13,677) (3,671)
Loss on impairment of investments in
unconsolidated affiliates (1).............. (20,707) -- -- -- --
Interest and other income...................... 10,142 2,876 1,238 179 64
Interest expense............................... (16,128) (4,670) (4,959) (1,992) (140)
Foreign currency exchange (losses) gains ...... (6,818) (2,861) 324 (245) (176)
--------- ---------- --------- --------- ----------
(Loss) income before provision for income
taxes...................................... (86,484) (12,526) 4,095 (14,778) (9,244)
--------- ---------- --------- --------- ----------
Provision for income taxes..................... (14,608) (16,405) (16,340) (3,331) --
--------- ---------- --------- --------- ----------
Loss before minority interest in consolidated
subsidiaries............................... (101,092) (28,931) (12,245) (18,109) (9,244)
Minority interest in loss (income) of
consolidated subsidiaries.................. 16,000 (1,072) (6,491) (2,396) 884
--------- ---------- --------- --------- ----------
Net loss....................................... $(85,092) $ (30,003) $(18,736) $(20,505) $ (8,360)
--------- ---------- --------- --------- ----------
--------- ---------- --------- --------- ----------
Net loss per common share
Basic...................................... $ (3.56) $ (1.55) $ (1.28)
--------- ---------- ---------
--------- ---------- ---------
Diluted.................................... $ (3.56) $ (1.55) $ (1.28)
--------- ---------- ---------
--------- ---------- ---------
Common shares used in computing per share
amounts (000s)
Basic...................................... 23,911 19,373 14,678
--------- ---------- ---------
--------- ---------- ---------
Diluted.................................... 23,911 19,373 14,678
--------- ---------- ---------
--------- ---------- ---------
Other Data:
Broadcast cash flow (2)........................ $ 4,410 $ 41,444 $ 38,182 $ 12,233 $ --
Cash flow from operations...................... (46,024) (3,044) 2,555 (1,532) (4,054)
Balance Sheet Data:
Current assets....................... $ 209,457 $ 146,159 $ 116,728 $ 71,447 $ 4,773
Total assets......................... 491,567 365,130 222,027 115,332 17,824
Total debt........................... 237,969 55,096 20,285 32,592 5,142
Shareholders' equity................. 157,583 249,320 138,936 62,631 3,464
26
<PAGE>
- ----------------------
(1) On May 13, 1997, the Company announced its decision to discontinue funding
of 1A TV Beteiligungsgessellschaft GmbH & Co. Betriebs KG ("1A TV"), which
operated PULS, a regional television station in the Berlin-Brandenburg
area of Germany. In May 1997, 1A TV declared bankruptcy. The Company wrote
down its investments in Germany by $20,707,000 in 1997, thereby fully
eliminating the carrying value of such investments.
(2) "Broadcast cash flow," which is commonly used as a measure of performance
for broadcast companies, as used herein, is defined as net broadcast
revenues, less broadcast operating expenses excluding depreciation and
amortization of acquired programming and of intangible assets, broadcast
selling, general and administrative expenses, and cash program rights
costs. Cash program rights costs represent cash payments for current
programs payable and such payments do not necessarily correspond to
program use. Broadcast cash flow should not be considered as a substitute
measure of operating performance, or liquidity prepared in accordance with
generally accepted accounting principles. Broadcast cash flow is only
presented for the periods in which broadcasting took place and only for
the Company's consolidated broadcast subsidiaries. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
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 certain barter transactions in which
its broadcast operations exchange unsold 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
(typically July and August), and highest during the fourth quarter of each
calendar year. The primary expenses incurred in operating broadcast stations are
programming costs, employee salaries, broadcast transmission expenses and
selling, general and administrative expenses. Certain of the Company's
operations do not require the direct incurrence of broadcast transmission
expenses. However, the Company incurs significant development expenses,
including funding and negotiating with local partners, researching and preparing
license applications, preparing business plans and conducting pre-operating
activities as well as restructuring 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, stockholders 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.
27
<PAGE>
Selected Combined Financial Information
The following table is neither required by United States generally
accepted accounting principles ("GAAP") nor intended to replace the Consolidated
Financial Statements prepared in accordance with GAAP. The table sets forth
certain combined operating data for the years ended December 31, 1997, 1996 and
1995 for operating entities. The financial information included below departs
materially from GAAP because it aggregates the 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 with those of the
Company's consolidated operations. This supplemental information is 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 station financial information in the
table is unadjusted for CME's effective economic interest in each entity, which
economic interest is the basis used by the Company for consolidation and equity
method accounting in the Company's GAAP consolidated financial statements.
Intercompany transactions such as management service charges are not reflected
in the table. The Company believes that this unaudited combined information
provides useful disclosure. The Company's former operations in Germany are not
included in this analysis.
In the Consolidated Financial Statements, consolidated entities are
CNTS, PRO TV, POP TV, Videovox, Radio Alfa, Federation and TV3, and entities
reported using the equity method of accounting are the Studio 1+1 Group, Markiza
TV and TVN Sp.zo.o. Under the equity method of accounting, the Company's
interest in net earnings or losses of TVN Sp.zo.o, Markiza TV and the Studio 1+1
Group 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 information includes
certain financial information of TVN Sp.zo.o, Markiza TV and the Studio 1+1
Group on a line-by-line basis, similar to that of the Company's consolidated
entities, CNTS, PRO TV, POP TV, Federation, TV3, Radio Alfa and Videovox.
Of the continuing stations, 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 the Czech Republic, of which a
controlling interest was acquired 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 do 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.
"Broadcast cash flow", a broadcasting industry measure of performance,
is defined as net broadcast revenues, less broadcast operating expenses
excluding depreciation and amortization of acquired programming and of
intangible assets, broadcast selling, general and administrative expenses, and
cash program rights costs. Cash program rights costs represent cash payments for
current programs payable and such payments do not necessarily correspond to
program use. 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.
28
<PAGE>
SELECTED COMBINED FINANCIAL INFORMATION (1)
(unaudited)
($000s)
Year Ended December 31,
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Net Revenue EBITDA
---------------------------------------- -----------------------------------------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
CNTS................. 99,163 109,242 98,305 49,921 53,441 49,782
PRO TV............... 30,155 15,803 314 (1,298) (4,368) (898)
Studio 1+1 Group..... 16,661 N/A N/A 19 N/A N/A
Markiza TV .......... 31,296 7,462 N/A 5,259 (2,240) N/A
POP TV............... 14,989 9,080 300 (1,613) (5,157) (2,981)
------------- ------------- ------------ ------------- ------------- ------------
Total continuing operations 192,264 141,587 98,919 52,288 41,676 45,903
TVN Sp.zo.o.
/ Federation......... 6,781 N/A N/A (27,407) N/A N/A
TV3.................. 1,464 N/A N/A (3,086) N/A N/A
------------- ------------- ------------ ------------- ------------- ------------
Total new stations........ 8,245 N/A N/A (30,493) N/A N/A
Other Operations (2). 4,495 1,860 N/A (799) (1,075) N/A
============= ============= ============ ============= ============= ============
Total Combined Operations. 205,004 143,447 98,919 20,996 40,601 45,903
============= ============= ============ ============= ============= ============
</TABLE>
SELECTED COMBINED FINANCIAL INFORMATION (1)
(unaudited)
($000s)
Year Ended December 31,
- -------------------------------------------------------------------------------
Broadcast Cash Flow
--------------------------------------
1997 1996 1995
---- ---- ----
CNTS................. 48,326 53,128 44,789
PRO TV............... (3,889) (5,290) (2,483)
Studio 1+1 Group..... (1,419) N/A N/A
Markiza TV .......... 4,044 (4,502) N/A
POP TV............... (1,742) (6,394) (4,124)
------------- ------------- ---------
Total continuing operations 45,320 36,942 38,182
TVN Sp.zo.o.
/ Federation......... (28,579) N/A N/A
TV3.................. (9,906) N/A N/A
------------- ------------- ---------
Total new stations........ (38,485) N/A N/A
Other Operations (2). (799) (1,075) N/A
============= ============= =========
Total Combined Operations. 6,036 35,867 38,182
============= ============= =========
(1) The explanations under the heading "Selected Combined Financial
Information" immediately preceding this table provide important
information about this table.
(2) Other operations include Radio Alfa and Videovox. Other operations have
been included in 1996 and 1995 for the purpose of comparison with 1997.
29
<PAGE>
EBITDA
The total combined EBITDA for the continuing operations increased by
$10,612,000 from $41,676,000 in 1996 to $52,288,000 in 1997. The increase was
attributable to improvements in EBITDA at Markiza TV, PRO TV and POP TV. The
overall increase in continuing operations was offset in part by CNTS's EBITDA
decrease, which was due to the devaluation of the Czech koruna.
CNTS's EBITDA decreased by $3,520,000, or 7%, to $49,921,000 for 1997,
due to an 18% devaluation of the Czech koruna against the United States dollar.
However, in local currency terms, CNTS's EBITDA increased 10% from Kc
1,454,000,000 to Kc 1,599,000,000. CNTS maintained its leading share of the
television advertising market despite increased competition in the Czech
Republic during 1997. As a result, measured in local currency, CNTS's net
revenues from advertising sales increased at a similar rate as the overall
television advertising market in the Czech Republic. Measured in local currency,
operating expenses increased by 4% primarily due to higher salary and production
costs as Nova TV began production of various new entertainment formats to meet
increasing audience demand for local programming and in response to increased
competition in the Czech television market. This increase in operating expenses
was offset in part by lower amortization of programming rights and lower bad
debt expense.
Markiza TV, launched in August 1996, achieved positive EBITDA of
$5,259,000 in its first full year of operation primarily as a result of its
market leadership in both ratings and advertising sales revenues. Positive
EBITDA was achieved despite increased production costs incurred to meet
relatively high original production requirements in the Slovak Republic.
POP TV's EBITDA improved by $3,544,000, or 69%, to negative $1,613,000
for 1997 as a result of increased revenues offset in part by higher operating
expenses. The revenue growth is a result of POP TV's increased audience share
and the related increase in its share of the overall television advertising
market in Slovenia. Increased audience demand for locally produced programming
resulted in higher production costs. In addition, POP TV expenses increased due
to technical expansion and the addition of the new second channel, Gajba TV.
Programming amortization rose in 1997 due to increased prices for acquired
programming and an expanded programming library. Marketing costs increased in
1997 due to a promotional campaign for Gajba TV.
PRO TV's EBITDA improved by $3,070,000 to negative $1,298,000 for 1997
due to a doubling of revenues offset in part by higher operating expenses. PRO
TV continued to maintain its leading share of the television advertising market
and benefited from the growth of the overall television advertising market in
Romania. Increased audience demand for locally produced programming resulted in
higher production costs, including costs of developing new formats. Increased
competition led to an increase in acquired programming costs and selling,
general and administrative expenses increased as a result of increased marketing
activity.
The Studio 1+1 Group recorded positive EBITDA of $19,000 in its first
year of inclusion in the Company's results.
The new television operations, TVN in Poland and TV3 in Hungary,
reported negative EBITDA of $27,407,000 and $3,086,000, respectively, for the
period from October 1997 (launch date of both operations) through December 1997,
primarily as a result of these operations being in an early phase of
development.
30
<PAGE>
Total combined EBITDA decreased by $19,605,000 from $40,601,000 in 1996
to $20,996,000 in 1997. The decrease was primarily due to negative EBITDA at the
Company's new television operations in Poland and Hungary. In addition, CNTS's
EBITDA decreased as a result of the devaluation of the Czech koruna against the
United States dollar. The overall decrease in EBITDA is offset in part by EBITDA
improvements at Markiza TV, POP TV and PRO TV.
Broadcast Cash Flow
Total combined broadcast cash flow for the continuing operations
increased by $8,378,000 from $36,942,000 in 1996 to $45,320,000 in 1997. The
increase was attributable to improvements at Markiza TV, PRO TV and POP TV. This
increase was offset in part by a decrease in broadcast cash flow of CNTS
(due to the currency devaluation of the Czech koruna against the United States
dollar) and the inclusion of negative broadcast cash flow of the Studio 1+1
Group. The new television operations in Poland and Hungary (TVN and TV3) had a
negative broadcast cash flow of $38,485,000.
Total combined broadcast cash flow decreased by $29,831,000 from
$35,867,000 in 1996 to $6,036,000 in 1997. The decrease was primarily due to
negative broadcast cash flow from the new television operations in Poland and
Hungary. The decrease in total combined broadcast cash flow from 1996 to 1997
exceeded the decrease in total combined EBITDA due primarily to significant
up-front programming payments by the Company's new operations.
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, PRO TV, POP
TV, Federation, TV3, Videovox (wholly-owned since May 1997) and Radio Alfa, and
separately set forth the minority interests attributable to other owners of
CNTS, PRO TV, POP TV, Federation, TV3, Videovox and Radio Alfa. The results of
other broadcast operations, Markiza TV, TVN Sp.zo.o., the Studio 1+1 Group, 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
interest 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"), Ukranian hryvna ("Hrn"), Polish zloty ("ZI")
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
31
<PAGE>
operate in economies qualifying as 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, together with the 1997 impact of currency devaluation
on each station.
<TABLE>
<CAPTION>
Balance Sheet Income Statement
--------------------------------- ---------------------------------------
At December 31, Average for the year ending
December 31,
1997 1996 % Change 1997 1996 % Change
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Czech koruna equivalent of $1.00 34.64 27.33 -26.7% 32.03 27.21 -17.7%
German mark equivalent of $1.00 1.80 1.55 -16.0% 1.73 1.50 -15.5%
Hungarian forint equivalent of $1.00 204 162 -25.9% 201 151 -33.0%
Polish zloty equivalent of $1.00 3.52 2.88 -22.2% 3.52 2.70 -30.4%
Romanian lei equivalent of $1.00 8,023 4,035 -98.8% 7,077 3,204 -120.9%
Slovak koruna equivalent of $1.00 34.78 31.90 -9.0% 33.64 31.14 -8.0%
Slovenian tolar equivalent of $1.00 169.18 141.48 -19.6% 160.37 136.45 -17.5%
Ukrainian hryvna equivalent of $1.00 1.90 1.89 -0.5% 1.86 1.83 -1.7%
</TABLE>
The Company's results of operations and financial position during 1997
were impacted by changes in foreign currency exchange rates from December 31,
1996 to December 31, 1997. As shown above, all operating currencies have
weakened against the United States dollar during the twelve months ended
December 31, 1997.
Due to foreign exchange movements, the underlying local currency assets
and liabilities of CNTS, POP TV and TV3 decreased by 26.7%, 19.6% and 25.9%
respectively, in United States dollar terms during the twelve months ended
December 31, 1997. PRO TV's local currency monetary assets and liabilities
decreased by up to 100% during the twelve months ended December 31, 1997,
depending on the time they remained outstanding during the period.
Operating income, interest costs and minority interest in income of
CNTS, POP TV and TV3 are respectively 17.7%, 17.5% and 33.0% lower than would be
the case had the weighted average exchange rate during the twelve months ended
December 31, 1997 remained the same as during the twelve months ended December
31, 1996. In the highly inflationary economy in Romania, PRO TV indexes sales
contracts to the United States dollar in order to minimize the effects of
Romanian lei devaluation.
In limited instances, the Company enters into forward foreign exchange
contracts and purchases foreign currency options to hedge foreign currency
transactions for periods consistent with its identified exposures. Premiums on
foreign currency options are amortized over the option period being hedged. At
December 31, 1997, there were four forward exchange contracts outstanding for
the purchase, in aggregate, of $2,500,000 by CNTS and the sale of Czech korunas.
Two of these contracts matured on February 27, 1998 and March 2, 1998. The two
remaining contracts for the purchase of $500,000 each mature on May 22 and June
16, 1998, respectively. A foreign exchange loss of Kc 870,000 ($25,000)
resulting from the revaluation of these contracts at the year end exchange rate
was recorded in 1997 and is reflected in the accompanying Consolidated Financial
Statements. No material exposure exists at December 31, 1997 as a result of
these contracts.
32
<PAGE>
Results of Operations
1997 compared to 1996
The Company's net revenues increased by $19,409,000, or 14%, to
$155,394,000 in 1997 from $135,985,000 in 1996. The increase was primarily
attributable to the increase in net revenues of PRO TV and POP TV and to the
addition of the revenues of Federation (the Company's consolidated Subsidiary in
Poland), TV3 and Radio Alfa, offset by a decrease in net revenues of CNTS.
PRO TV's and POP TV's net revenues of $30,155,000 and $14,989,000,
respectively, in 1997, reflect increases of $14,352,000, or 91%, and $5,909,000,
or 65%, respectively. PRO TV's and POP TV's net revenues improved due to the
growth in their respective television advertising markets and, to a lesser
extent, to increases in POP TV's and PRO TV's audience shares.
Federation, TV3 and Radio Alfa, which were not included in the
Company's 1996 results, recorded net revenues of $5,128,000, $1,464,000 and
$1,808,000, respectively, for 1997. Videovox also contributed to the Company's
net revenue growth with an increase of $939,000, or 55%, from $1,707,000 in 1996
to $2,646,000 in 1997.
CNTS's net revenues decreased by $10,079,000, or 9%, to $99,163,000 in
1997 from $109,242,000 in 1996. The decrease in CNTS's United States dollar net
revenues is due to the 18% devaluation of the Czech koruna against the United
States dollar. Measured in local currency, CNTS's net revenues from advertising
sales increased by Kc 292,462,000, or 11%, which approximates the growth rate of
the Czech television advertising market in local currency terms. CNTS's United
States dollar net revenues from advertising sales were approximately $16,750,000
lower than they would have been if the Czech koruna had remained unchanged
against the United States dollar during 1997. Other revenues (principally barter
and game show revenues) decreased by $4,093,000.
Total station operating costs and expenses increased by $43,188,000, or
51%, to $128,289,000 in 1997 from $85,101,000 in 1996. 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 $29,639,000 and
$3,331,000, respectively. This increase was also attributable to increases in
1997 in operating costs and expenses at PRO TV of $8,549,000, or 51.8%, to
$25,047,000 and at POP TV of $2,654,000, or 20.8%, to $15,418,000 in 1997. PRO
TV's and POP TV's operating costs and expenses rose as a result of increased
expenses related to local production in response to increasing audience demand
for local programming. This increase was partially offset by a decrease in
CNTS's operating costs and expenses in United States dollar terms from
$54,578,000 to $50,796,000, primarily due to currency devaluations. In local
currency terms, CNTS's operating costs and expenses increased by Kc 141,994,000,
or 10%, from Kc 1,484,849,000 to Kc 1,626,843,000, primarily due to higher
salary and production costs in response to increased competition in the Czech
television market. During 1997, Nova TV began production on various new
entertainment formats to meet increasing audience demand for local programming.
Station selling, general and administrative expenses increased by
$6,015,000, or 28%, to $27,372,000 in 1997 from $21,357,000 in 1996. This
increase was primarily attributable to the addition of Federation to the
Company's operations as well as increases at PRO TV primarily due to increased
administrative costs associated with expansion of network affiliates,
diversification into the production and post production businesses and increased
marketing activity in response to competition entering the market. To a lesser
extent, the increase in station selling, general and administrative expenses was
attributable to the addition to the
33
<PAGE>
Company's results of TV3 and Radio Alfa in 1997. The increase was partially
offset by a decrease in the selling, general and administrative expenses of CNTS
due to a lower bad debt provision in 1997 as a result of improvements in
collecting receivables and the effect of the devaluation of the Czech koruna
against the United States dollar.
Corporate operating costs and development expenses for 1997 and 1996
were $25,467,000 and $15,782,000, respectively, an increase of $9,685,000, or
61%. The increase was primarily attributable to increased scope of operations
and increased legal and consulting fees.
Amortization of goodwill and allowance for development costs was
$14,845,000 and $2,940,000 in 1997 and 1996, respectively. This increase was
primarily attributable to the full-year amortization of goodwill related to the
Company's purchase in August 1996 of a 22% economic interest in CNTS (the
"Additional CNTS Purchase"), the Company's purchase in early 1997 of an
additional 5.2% economic interest in CNTS (the "1997 CNTS Purchase") and the
Company's purchase of a 5.8% economic interest in CNTS in August 1997 (the
"Second 1997 CNTS Purchase"), together with the amortization of goodwill related
to the Company's investment in Radio Alfa.
As a result of the above factors, the Company generated an operating
loss of $40,579,000 in 1997 compared to operating income of $9,996,000 in 1996.
Equity in loss of unconsolidated affiliates decreased by $5,473,000 to
$12,394,000 in 1997 from $17,867,000 in 1996 primarily as a result of the
cessation of funding of 1A TV.
Loss on impairment of investments in unconsolidated affiliates of
$20,707,000 was a result of the write-down of the Company's investments in
Germany. This write-down, together with losses incurred by the German
operations, has resulted in a total charge of $27,389,000 to the Company's
operations in 1997.
Interest and other income increased by $7,266,000 to $10,142,000 in
1997 from $2,876,000 in 1996. The increase in interest income was primarily
attributable to interest income earned on higher cash balances and loans to
affiliates in 1997 compared to 1996. Other income increased as a result of a
gain realized on the exercise of an option by one of the Company's partners in
PRO TV.
Interest expense increased by $11,458,000, to $16,128,000 in 1997 from
$4,670,000 in 1996. This increase was 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
(collectively, the "Senior Notes"), together with the full-year impact of
interest on the Company's borrowings with Ceska Sporitelna Bank ("CS") in
connection with the Additional CNTS Purchase.
The net foreign currency exchange loss of $6,818,000 in 1997 is
primarily attributable to the devaluation of the local operating currencies
against the United States dollar. These currencies devalued considerably more
against the United States dollar in 1997 than in 1996. The net foreign
currencies exchange loss was partially offset by a gain the Company realized
on the Czech koruna debt funding for the Additional CNTS Purchase, which is not
considered as a hedge against net investments in the Czech Republic.
Provision for income taxes was $14,608,000 in 1997 versus $16,405,000
in 1996 as a result of the effect on CNTS's taxable income of the devaluation of
the Czech koruna against the United States dollar.
34
<PAGE>
Minority interest in loss of consolidated Subsidiaries was $16,000,000
in 1997 and minority interest in income of consolidated Subsidiaries was
$1,072,000 in 1996. This increase was primarily the result of the addition of
Federation to the Company's operations, which incurred losses, and to the
Company's increased ownership in CNTS, which continued to be profitable during
1997.
As a result of these factors, the net loss of the Company was
$85,092,000 and $30,003,000 for 1997 and 1996, respectively.
1996 compared to 1995
The Company's net revenues increased by $37,066,000, or 37%, to
$135,985,000 in 1996 from $98,919,000 in 1995. This increase was primarily
attributable to the increase in revenues of PRO TV and POP TV, which were
operational for all of 1996 compared to one month in 1995, and the increase in
Nova TV's net revenues. PRO TV and POP TV posted net revenues of $15,803,000 and
$9,080,000 in 1996, respectively, and CNTS net revenues increased $10,937,000,
or 11%, to $109,242,000 in 1996 from $98,305,000 in 1995. CNTS's increase in net
revenue was primarily attributable to the continued growth of the total
advertising market in the Czech Republic and Nova TV's ability to maintain an
audience share of 65% to 70%. To a lesser extent, Videovox, a Hungarian dubbing
company purchased in May 1996, also contributed to the increase in the Company's
net revenues with net revenues of $1,707,000 for 1996.
Total station operating costs and expenses increased $32,559,000, or
62%, to $85,101,000 in 1996 from $52,542,000 in 1995. The increase in total
station operating costs and expenses was primarily attributable to PRO TV, POP
TV, and Videovox's total station operating costs and expenses which were
$16,497,000, $12,764,000 and $1,213,000 in 1996, respectively, and, to a lesser
extent, to an increase in CNTS's total station operating costs and expenses of
$4,684,000, or 9%, to $54,578,000 in 1996. The increase in CNTS's total station
operating costs and expenses is primarily the result of an enhancement in the
production quality of self-produced programs necessary to maintain Nova TV's
audience share.
Station selling, general and administrative expenses increased
$13,632,000, or 176%, to $21,357,000 in 1996 from $7,725,000 in 1995. This
increase was primarily attributable to additional station selling, general and
administrative expenses for PRO TV and POP TV. From 1995, CNTS's station
selling, general and administrative expenses increased by $3,714,000, or 67%, to
$9,247,000 due to increased marketing efforts in 1996 and the write-off of bad
debts in the fourth quarter of 1996 totaling $1,300,000, from co-producers of
certain game shows broadcast on Nova TV.
Corporate operating costs and development expenses for 1996 and 1995
were $15,782,000 and $11,527,000, respectively, increasing $4,255,000, or 37%.
The increase was primarily attributable to the Company's increased scope of
operations over the same period in 1995, which includes the Company's new
operations and development activities in other countries.
Amortization of goodwill and allowance for development costs decreased
$502,000, or 15%, to $2,940,000 in 1996 from $3,442,000 in 1995. The decrease
was primarily the result of an allowance for development activities in Poland
during 1995, partially offset by amortization related to the Additional CNTS
Purchase and, to a lesser extent, the amortization of goodwill and license
acquisition costs related to investments in PRO TV and POP TV in December 1995.
35
<PAGE>
The Company incurred $809,000 and $1,375,000 in capital registration
taxes for 1996 and 1995, respectively.
Operating income decreased $12,312,000, or 55%, to $9,996,000 in 1996
from $22,308,000 in 1995. The decrease in the Company's operating results was
primarily attributable to operating losses of PRO TV and POP TV, and, to a
lesser extent, increased corporate and development expenses, partially offset by
the increase in operating income of CNTS over the same period in 1995.
Equity in loss of unconsolidated affiliates increased by $3,051,000, or
21%, to $17,867,000 in 1996 from $14,816,000 in 1995, primarily attributable to
the launch of Markiza TV in August 1996, partially offset by reduced losses at
FFF. The Company's share of the losses of Markiza TV for 1996 totaled
$3,583,000. The Company's share of losses in 1A TV and FFF decreased by
$1,045,000, or 7%, in 1996. The Company's share of losses in 1A TV, including
goodwill amortization, for 1996 remained at approximately the same level despite
the Company's increase in ownership from 48.5% at December 31, 1995 to 58% at
December 31, 1996. In 1996, 1A TV began a new local programming format which
resulted in reduced operating costs and slightly increased net revenues. In
addition, losses at FFF have also decreased as a result of a similar change in
its programming format and slightly increased net revenues.
Interest and other income increased $1,638,000, or 132%, to $2,876,000
for 1996 from $1,238,000 in 1995. The increase in interest income is primarily
attributable to the net cash proceeds from the Company's public offering of
shares of Class A Common Stock completed in November 1996.
Interest expense decreased $289,000, or 5.8%, to $4,670,000 in 1996
from $4,959,000 in 1995. This is primarily attributable to lower debt levels at
CNTS, including the early repayment of debt, during 1996 compared to 1995,
partially offset by interest expense from debt incurred to make the Additional
CNTS Purchase.
The foreign currency exchange loss of $2,861,000 in 1996 was primarily
attributable to the United States dollar denominated borrowings of PRO TV and
POP TV and the devaluation during 1996 of the Romanian lei and the Slovenian
tolar, respectively, against the dollar. Movements in these currencies in 1995
had less of an impact on the Company because PRO TV and POP TV commenced
operations in December 1995.
Provision for income taxes was $16,405,000 for 1996 and $16,340,000 for
1995. The income tax provision in 1996 and 1995 primarily related to income
taxes payable in the Czech Republic on CNTS pre-tax profits which have increased
due to higher operating income at CNTS, offset by an income tax rate of 41% in
1995 and a lower income tax rate of 39% in 1996.
Minority interest in income of consolidated Subsidiaries was $1,072,000
in 1996 and $6,491,000 in 1995. This decrease was primarily the result of the
Additional CNTS Purchase, together with losses for PRO TV and POP TV.
Primarily as a result of these factors, the net loss of the Company was
$30,003,000 and $18,736,000 for 1996 and 1995, respectively.
Liquidity and Capital Resources
Net cash used in operating activities was $46,024,000 in 1997 compared
to $3,044,000 in 1996. The increase in net cash used in operating activities of
$42,980,000 was
36
<PAGE>
primarily the result of increased programming payments and higher operating
losses due to the addition of the Company's new television operations in Poland
and Hungary.
Net cash used in investing activities was $101,834,000 in 1997 compared
to $112,641,000 in 1996. The decrease was primarily attributable to a reduction
from 1996 to 1997 in the need for investment in Markiza TV and the Studio 1+1
Group, as well as the cessation of funding of 1A TV in Germany in May 1997. This
decrease was offset by new investments in Poland and Hungary and the Second 1997
CNTS Purchase, described below.
Net cash provided by financing activities for 1997 was $176,204,000
compared to $140,739,000 in 1996. The increase was primarily the result of the
Senior Notes Offering described below.
In August 1997, CME issued the Senior Notes, which raised net proceeds
of approximately $170,000,000 (the "Senior Notes Offering"). 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 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,
sell assets and engage in extraordinary transactions. Management believes that,
as of December 31, 1997, the Company was in compliance with such restrictions.
Prior to the Senior Notes Offering, the Company's operations were
financed primarily through public offerings of shares of Class A Common Stock
completed in October 1994 (the "IPO"), November 1995 and November 1996 (the
"1996 Offering"), which raised net proceeds of approximately $68,800,000,
$86,600,000 and $143,600,000, respectively. Prior to the IPO, the Company relied
on Ronald S. Lauder and entities controlled by or affiliated with him for
capital in the form of both debt and equity financing.
In May 1997, CNTS declared a total dividend of Kc 495,000,000
($13,665,000) of which the Company was paid Kc 150,150,000 ($3,334,000) in June
1997 and was paid Kc 115,500,000 ($3,522,000) in each of November 1997 and
January 1998. The remaining Kc 113,850,000 ($3,287,000) was paid to minority
shareholders.
In August 1997, the Company received $2,800,000 from one of its
partners in Romania, Ion Tiriac, in connection with his exercise of an option to
increase his interest in MPI, which operates PRO TV.
As a result of the factors described above, the Company had cash of
$106,188,000 at December 31, 1997 compared to $78,507,000 at December 31, 1996
and marketable securities of $69,000 at December 31, 1997 compared to $2,896,000
at December 31, 1996.
The Company has made, and expects to continue to make, investments to
develop broadcast operations in Central and Eastern Europe. The Company's cash
needs for those investment activities may exceed cash generated from operations
and the proceeds of the Senior Notes Offering, resulting in external financing
requirements.
The Company entered into a loan facility with ING Bank N.V. ("ING"), on
July 11, 1997 pursuant to which ING agreed to provide the Company with bank
financing of up to $25 million (the "ING Bridge Facility"). The ING Bridge
Facility matured upon the consummation of the Notes Offering and proceeds from
the Notes Offering were used to repay in full the ING Bridge Facility. In
connection with the ING Bridge Facility, the Company executed a term
37
<PAGE>
sheet with ING for a $35 million secured revolving credit facility anticipated
to have a term of up to three and one-half years to fund working capital
requirements, as well as operating and capital expenditures (the "Proposed ING
Credit Facility"). The Proposed ING Credit Facility is expected to be incurred
by a subsidiary. The availability of the Proposed ING Credit Facility is subject
to definitive documentation and satisfaction of various conditions.
On August 11, 1997, the Company made the Second 1997 CNTS Purchase when
it purchased Nova Consulting a.s. ("NC") 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, subject to adjustment as described below. NC owns a 5.8% interest in
CNTS. A portion of the payments are subject to increase based upon the
performance of CME's Class A Common Stock. As of December 31, 1997, the
Company has paid $11,500,000 of the purchase price and is obligated to make
further payments of $9,162,000 during 1998, $5,313,000 during 1999, and
$2,562,000 during 2000.
On August 1, 1996, the Company entered into the Additional CNTS
Purchase for the purchase of CS's 22% economic interest and virtually all of
CS'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 to finance 85% of the
purchase price. The principal outstanding at December 31, 1997 was Kc
723,200,000 ($20,878,000). Quarterly repayments on the loan are required in the
amount of Kc 22,500,000 ($650,000) during the period from February 1998 through
November 1998, Kc 42,500,000 ($1,227,000) during the period from February 1999
through May 2002, and Kc 37,500,000 ($1,082,000) in 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 for up to Kc 250,000,000 ($7,217,000) bearing
interest at a rate 0.5% over the Prague Interbank Offer Rate ("PRIBOR"). In
October 1997, CNTS entered into a Kc 500,000,000 ($14,434,000) line of credit
with ING Bank. The line of credit, which may be drawn in Czech koruna, German
marks or United States dollars, bears interest at a rate of 0.5% over the
interbank offered rate for the applicable currency and matures in October 1999.
CNTS had no borrowings under these facilities at December 31, 1997. This
facility is secured by CNTS's equipment, vehicles and receivables.
In June 1997, CEDC Praha s.r.o. ("CEDC Praha"), which owned the
facility that Nova TV uses as its main studios and principal offices (the "Nova
Facility"), terminated the capital lease pursuant to which CEDC Praha leased the
Nova Facility to CNTS, and entered into an agreement with CNTS pursuant to which
(i) CEDC Praha assigned the Nova Facility to CNTS and (ii) CNTS assumed CEDC
Praha's obligations under a loan from CS (the "CS Loan") secured by a mortgage
on the Nova Facility. The CS Loan provides for quarterly payments of Kc
16,500,000 ($476,000), plus interest equal to three month PRIBOR plus 1.0%, to
be paid through December 1999. As of December 31, 1997, the outstanding balance
under the CS Loan was Kc 126,000,000 ($3,637,000).
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 2000. The line of credit bears interest at a
rate of 1.5% over LIBOR. The second facility consists of an Sk 100,000,000
($2,875,000) line of credit from Bank Austria which matures in September 2000.
This line of credit bears interest at a rate of 0.5% over Bratislava Interbank
Offer Rate. These facilities are secured by Markiza TV's land and buildings.
PRO TV has two borrowing facilities with Tiriac Bank in Romania. The
first facility consists of a $2,000,000 line of credit which bears interest at a
rate of 5% over 6 month LIBOR. At December 31, 1997, $1,999,000 was outstanding
under this facility. This facility
38
<PAGE>
matured at the end of 1997 and is currently being renegotiated. The Company
expects that this facility will be extended to the end of 1998. The second
facility is a long-term loan for $4,000,000. The long-term loan bears interest
at 5% over 6 month LIBOR and is to be repaid in monthly installments through
February 28, 2001. At December 31, 1997, $3,854,000 was borrowed under this
facility. These facilities are secured by PRO TV's equipment and vehicles.
Notwithstanding these borrowing facilities, the Company believes that it will be
required to provide additional funding to PRO TV in 1998.
TVN Sp.zo.o. has borrowings of $13,970,000 under three short-term
bridge loan agreements with three Polish banks. Two loans with $9,210,000
outstanding at December 31, 1997 are guaranteed by the Company. The third loan
for $4,760,000 is guaranteed by the Company's partner in Poland, ITI. These
loans are drawn in Polish zloty and United States dollars and bear interest at
LIBOR and WIBOR (Warsaw Interbank Offer Rate) plus 2.15%. At December 31, 1997,
Federation had a $3,500,000 short term bridge loan with a Polish bank secured by
its accounts receivable which bears interest at LIBOR plus 2.15%. It is
anticipated that these loans will be repaid by TVN Sp.zo.o. and Federation from
a $30,500,000 revolving credit facility, currently being negotiated with a
syndicate of Polish banks. Future shareholder funding for the Poland operations
is expected to be shared by the Company and ITI and the Company expects to fund
up to $30,000,000 in 1998. Since December 31, 1997, the Company has advanced
$12,000,000 to its operations in Poland.
TV3 has borrowings of $1,368,000 from a local bank in Hungary and is
currently renegotiating certain terms, including maturity. The new loan
agreement, which is expected to be completed in April 1998, requires quarterly
repayments from March 1999 until December 2000 and will be secured by certain
fixed assets of TV3. The Company has loaned $550,000 to TV3 since December 31,
1997 and expects to loan an additional $1,000,000 during 1998. The Company has
made approximately $3,134,000 in programming payments on behalf of TV3 since
December 31, 1997 and has additional programming commitments for TV3 in 1998 and
1999 of approximately $17,981,000 and $5,939,000, 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 is actively engaged in
the development of additional
39
<PAGE>
broadcast operations and investing in its existing broadcasting companies
throughout Central and Eastern Europe. The Company incurs certain expenses in
identifying and pursuing broadcast opportunities before any investment decision
is made. The Company anticipates making additional investments in other
broadcast operations, supplemented by capital raised from local strategic
financial partners as well as local debt and lease financing, to the extent that
it is available and appropriate for each project.
The Company is conducting a comprehensive review of its computer
systems to identify the systems that could be affected by the Year 2000 issue
and is developing an implementation plan to resolve the issue. The Year 2000
problem is the result of computer programs being written using two digits rather
than four to define the applicable year. The Company presently believes that the
Year 2000 problem will not pose significant operational problems for the
Company's computer systems. However, management has not yet assessed the Year
2000 compliance costs and related effect on the Company's earnings. Accounting
rules require such costs to be expensed.
The Company believes that its current cash balances, cash generated
from CNTS and local financing of broadcast operations should be adequate to
satisfy the Company's operating and capital requirements for its current
operations through 1998. To acquire additional broadcast rights, the Company
would require significant additional financing.
Statements made in "Operations in Poland: TVN" and "Liquidity and
Capital Resources", regarding the Company's Poland operations (including funds
to be provided by the Company for these operations), future investments in
existing television broadcast operations, business strategies and the future
need for additional funds from outside sources, 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 set forth in or contemplated by the forward-looking
statements herein. Important factors that contribute to such risks include the
Company's success in increasing signal quality and availability in Poland (with
respect to operations in Poland) and success in obtaining additional broadcast
licenses, the cost of developing opportunities into television broadcast
operations, the ability to acquire programming, the ability to attract
audiences, the rate of development of advertising markets in countries where the
Company currently operates and may in the future operate and general market and
economic conditions in these countries.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Financial Statements and Supplementary data begin on the following page
and end on the page immediately preceding Item 9.)
40
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Central European Media Enterprises Ltd.:
We have audited the accompanying consolidated balance sheets of Central European
Media Enterprises Ltd. as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Central European Media
Enterprises Ltd. as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with United States generally accepted
accounting principles.
ARTHUR ANDERSEN & CO.
Hamilton, Bermuda
March 30, 1998
41
<PAGE>
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
($000s)
<TABLE>
<CAPTION>
ASSETS Note December 31,
-------------------------------
1997 1996
---- ----
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................................ $ 106,188 $ 78,507
Investments in marketable securities..................................... 3 69 2,896
Restricted cash.......................................................... 3,4 800 2,749
Accounts receivable (net of allowances of $3,698, $3,200)................ 41,985 37,342
Program rights costs..................................................... 3 30,220 12,675
Value-added tax recoverable.............................................. 5,229 182
Amount due from unconsolidated affiliates................................ 11 6,696 1,066
Advances to affiliates................................................... 11 7,979 4,119
Other short-term assets.................................................. 6 3,273 850
Prepaid expenses......................................................... 7,018 5,773
------------- --------------
Total current assets............................................ 209,457 146,159
Investments in unconsolidated affiliates................................. 58,552 56,599
Investments.............................................................. 22,951 3,600
Loans to affiliates...................................................... 11 31,927 17,766
Property, plant & equipment (net of depreciation of $31,517, $22,317).... 5 68,090 58,982
Program rights costs..................................................... 3 12,851 14,266
Broadcast licence costs and other intangibles (net of amortization of
$ 2,381, $1,579)........................................................ 3 2,752 3,097
Licence acquisition costs (net of amortization of $1,901, $854).......... 3 3,456 3,923
Goodwill................................................................. 3 65,910 35,338
Organization costs (net of amortization of $1,222, $950)................ 3 541 934
Development costs (net of allowance of $2,121, $996).................... 3 -- 19,105
Deferred income taxes.................................................... 7 746 868
Other assets............................................................. 6 14,334 4,493
------------- --------------
Total assets.................................................... $ 491,567 $ 365,130
============= ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
42
<PAGE>
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONSOLIDATED BALANCE SHEETS - (Continued)
December 31, 1997 and 1996
($000s)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY Note December 31,
-------------------------------
1997 1996
---- ----
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable...................................................... $ 30,929 $ 18,775
Accrued liabilities................................................... 22,929 17,010
Duties and other taxes payable........................................ 10,989 3,312
Income taxes payable.................................................. 2,308 9,948
Current portion of obligations under capital lease.................... 10 88 1,794
Current portion of credit facilities.................................. 8 11,722 7,106
Dividends payable..................................................... 996 --
Investments payable................................................... 16,714 1,955
Advances from affiliates.............................................. 11 25,508 606
------------- --------------
Total current liabilities......................................... 122,183 60,506
Deferred income taxes................................................. 7 916 2,142
Long-term portion of obligations under capital leases................. 10 27 7,120
Long-term portion of credit facilities................................ 8 24,177 22,488
Investments payable................................................... 7,875 14,633
$100,000,000 9 3/8 % Senior Notes due 2004 (net of discount 99,853 --
of $147).......................................................... 8
DM 140,000,000 8 1/8 % Senior Notes due 2004 (net of discount 77,513 --
of $347).......................................................... 8
Other liabilities..................................................... 199 305
Minority interest in consolidated subsidiaries........................ 1,241 8,616
SHAREHOLDERS' EQUITY:
Preferred Stock, $0.01 par value; authorized; 5,000,000 shares;
issued and outstanding: none.......................................... -- --
Class A Common Stock, $0.01 par value: authorized: 100,000,000 shares
at December 31, 1997 and 30,000,000 at December 31, 1996; issued
and outstanding; 16,934,894 at December 31, 1997
and 16,664,143 at December 31, 1996............................... 169 167
Class B Common Stock, $0.01 par value: authorized: 15,000,000 shares
at December 31, 1997 and December 31, 1996; issued and
outstanding; 7,064,475 at December 31, 1997 and
7,191,475 at December 31, 1996.................................... 71 72
Additional paid-in capital............................................ 332,386 330,315
Accumulated deficit................................................... (163,096) (78,004)
Cumulative currency translation adjustment............................ (11,947) (3,230)
------------- --------------
Total shareholders' equity........................................ 157,583 249,320
------------- --------------
Total liabilities and shareholders' equity........................ $ 491,567 $ 365,130
============= ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
43
<PAGE>
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
($000s, except per share data)
<TABLE>
<CAPTION>
For the years ended December 31,
----------------------------------------
Note 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross revenues:............................................ $ 199,502 $ 170,114 $121,113
Discounts and agency commissions........................... (44,108) (34,129) (22,194)
------------ ------------ ------------
Net revenues............................................... 155,394 135,985 98,919
Station expenses:
Other operating costs and expenses....................... 80,171 50,188 28,972
Amortization of programming rights....................... 32,464 21,599 16,319
Depreciation of station fixed assets and other intangibles 15,654 13,314 7,251
------------ ------------ ------------
Total station operating costs and expenses............... 128,289 85,101 52,542
Selling, general and administrative expenses............. 27,372 21,357 7,725
Corporate expenses:
Corporate operating costs and development expenses....... 25,467 15,782 11,527
Amortization of goodwill and allowance for development 14,845 2,940 3,442
costs....................................................
Capital registration tax................................. -- 809 1,375
------------ ------------ ------------
40,312 19,531 16,344
Operating (loss) income.................................... (40,579) 9,996 22,308
Equity in loss of unconsolidated affiliates................ 3 (12,394) (17,867) (14,816)
Loss on impairment on investments in unconsolidated
affiliates................................................. 3 (20,707) -- --
Interest and other income.................................. 10,142 2,876 1,238
Interest expense........................................... (16,128) (4,670) (4,959)
Foreign currency exchange (loss)/gain...................... (6,818) (2,861) 324
------------ ------------ ------------
Net (loss) income before provision for income taxes........ (86,484) (12,526) 4,095
Provision for income taxes................................. (14,608) (16,405) (16,340)
------------ ------------ ------------
Loss before minority interest in consolidated subsidiaries. (101,092) (28,931) (12,245)
Minority interest in loss (income) of consolidated
subsidiaries............................................. 16,000 (1,072) (6,491)
------------ ------------ ------------
Net Loss................................................... $(85,092) $(30,003) $ (18,736)
============ ============ ============
PER SHARE DATA:
Net loss per share
Basic.................................................... 3 $ (3.56) $ (1.55) $ (1.28)
========= =========== =========
Diluted.................................................. $ (3.56) $ (1.55) $ (1.28)
========= =========== =========
Common shares used in computing per share amounts (000s):
Basic.................................................... 23,911 19,373 14,678
============ ============ ============
Diluted.................................................. 23,911 19,373 14,678
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
44
<PAGE>
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
For the Period from December 31, 1994 to December 31, 1997
($000s)
<TABLE>
<CAPTION>
Cumulative
Class A Class B Currency
Common Common Additional Treasury Deferred Accumulated Translation Total
Stock Stock Paid-in Stock Compensation Deficit Adjustment
Capital (1)
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994....... $ 59 $ 81 $ 94,956 $ -- $ (3,334) $(29,265) $ 134 $ 62,631
Capital Contributed by
Shareholders including $6,500
loan converted, less related
costs of $5,426.............. 44 -- 93,041 -- -- -- -- 93,085
Stock compensation charge........
Charge....................... -- -- -- -- 858 -- -- 858
Reduction in stock
compensation charge.............. -- -- -- (2,476) 2,476 -- -- --
Foreign Currency Translation -- -- -- -- -- -- 1,098 1,098
Adjustment.......................
Net loss........................ -- -- -- -- -- (18,736) -- (18,736)
----------------------------------------------------------------------------------------
BALANCE, December 31, 1995....... 103 81 187,997 (2,476) -- (48,001) 1,232 138,936
Retirement of Treasury Stock..... (2) -- (2,474) 2,476 -- -- -- --
Capital contributed by
Shareholders, less
related costs of $8,177 (2).. 66 (9) 144,792 -- -- -- -- 144,849
Foreign Currency Translation
Adjustment....................... -- -- -- -- -- -- (4,462) (4,462)
Net loss......................... -- -- -- -- -- (30,003) -- (30,003)
----------------------------------------------------------------------------------------
BALANCE, December 31, 1996 167 72 330,315 -- -- (78,004) (3,230) 249,320
Capital contributed by
shareholders (2)................. 2 (1) 2,071 -- -- -- -- 2,072
Foreign Currency Translation
Adjustment................... -- -- -- -- -- -- (8,717) (8,717)
Net Loss -- -- -- -- -- (85,092) -- (85,092)
========================================================================================
BALANCE, December 31, 1997 $169 $71 $332,386 -- -- $(163,096) $(11,947) $157,583
========================================================================================
</TABLE>
(1) Of the accumulated deficit of $163,096,000 at December 31, 1997,
$83,349,000 represents accumulated losses in unconsolidated affiliates.
(2) Includes transfers between Class A and Class B Common Stock in 1996 and
1997.
The accompanying notes are an integral part of these consolidated
financial statements.
45
<PAGE>
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD
Consolidated Statements of Cash Flows
($000s)
<TABLE>
<CAPTION>
For the years ended
December 31,
------------------------------------------
1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss........................................................ $(85,092) $(30,003) $(18,736)
Adjustments to reconcile net loss to net cash used in operating
activities:
Equity in loss of unconsolidated affiliates................... 12,394 17,867 14,816
Loss on impairment of investments in unconsolidated
affiliates.................................................. 20,707 -- --
Depreciation and amortization (excluding amortization of
barter programs)............................................ 61,419 33,288 23,705
Profit/(loss) on disposal of fixed assets/investments......... (2,255) -- --
Accredtion/amortization of discount/debt costs................ 379 -- --
Minority interest in (loss) income of consolidated affiliates (16,000) 1,072 6,491
Valuation allowance for development costs..................... 1,125 714 3,388
Stock compensation charge..................................... -- -- 858
Changes in assets & liabilities:
Accounts receivable........................................... (11,167) (4,881) (18,176)
Related party receivable...................................... -- -- 115
Program rights paid........................................... (43,493) (24,072) (24,040)
Value-added tax recoverable................................... (5,394) 551 (710)
Advances to affiliates........................................ 16,254 (3,334) (337)
Prepaid expenses.............................................. (1,796) (415) (1,780)
Other assets.................................................. -- (1,838) (3,639)
Accounts payable.............................................. (510) 3,931 1,180
Accrued liabilities........................................... 6,122 7,227 6,197
Income and other taxes payable................................ 1,283 (3,151) 13,223
----------- ------------ ------------
Net cash used in operating activities .................... (46,024) (3,044) 2,555
----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in unconsolidated affiliates ..................... (12,018) (52,977) (19,220)
Other investments............................................. (15,630) (3,600) --
Investments in marketable securities.......................... 2,827 7,756 (2,927)
Restricted cash............................................... 1,949 1,467 (2,616)
Acquisition of fixed assets................................... (27,329) (17,801) (23,196)
Acquisition of minority shareholders' interests............... (16,950) (5,607) --
Purchase of business.......................................... (2,471) (4,895) (1,510)
Loans and advances to affiliates.............................. (28,461) (16,705) (6,272)
Payments for license acquisition costs........................ -- -- (4,777)
Payments for organization costs............................... -- (48) (1,032)
Payments for broadcast license costs, other assets and
intangibles................................................. (3,630) (1,295) (760)
Development costs............................................. (121) (18,936) (12,325)
----------- ------------ ------------
Net cash used in investing activities..................... (101,834) (112,641) (74,635)
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Credit facilities............................................. (4,446) 3,045 (6,140)
Payments under capital leases................................. (229) (1,636) (1,570)
Dividends paid to minority shareholders....................... (3,090) (3,575) (612)
Advances received from affiliates............................. -- -- 2,687
Repayment of advances by affiliates........................... -- (2,081) --
Issuance of debt, net of related costs........................ 169,572 -- --
Capital contributed by shareholders........................... 2,072 144,849 86,585
Other long-term liabilities................................... (42) 137 173
Investments by minority shareholders in consolidated affiliates 12,367 -- 2,000
----------- ------------ ------------
Net cash provided by financing activities................. 176,204 140,739 83,123
----------- ------------ ------------
IMPACT OF EXCHANGE RATE FLUCTUATIONS ON CASH (665) 243 165
----------- ------------ ------------
Net increase in cash and cash equivalents..................... 27,681 25,297 11,208
CASH AND CASH EQUIVALENTS, beginning of period.................. 78,507 53,210 42,002
=========== ============ ============
CASH AND CASH EQUIVALENTS, end of period........................ $ 106,188 $ 78,507 $ 53,210
=========== ============ ============
Supplemental information:
Cash paid for interest........................................ $ 5,648 $ 4,590 $ 4,942
=========== ============ ============
Income taxes.................................................. $ 24,072 $22,048 $ 2,922
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
46
<PAGE>
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
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, as of December 31, 1997, the Company is entitled
to 99% of the total profits of and has 97% of the voting power in Ceska
Nezavisla Televizni Spolecnost s.r.o. ("CNTS"), which operates Nova TV, a
private national television station in the Czech Republic. In August 1996, when
the Company increased its economic interest in CNTS through the acquisition of a
22% economic interest in CNTS from Ceska Sporitelna Bank ("CS") (the "Additional
CNTS Purchase"), CS granted the Company an option to acquire CS's remaining 2%
voting interest for no additional consideration. On December 9, 1997, the
Company exercised its option and upon completion of registration pursuant to
Czech law of the 2% voting interest, the Company will have 99% of the voting
power in CNTS. CET 21 has a 1% equity interest in CNTS. In March 1997 the
Company acquired a 5.2% interest in CNTS (the "1997 CNTS Purchase") and in
August 1997, the Company acquired a 5.8% interest in CNTS (the "Second 1997 CNTS
Purchase").
The Company owns a 76% ownership interest in Radio Alfa a.s. ("Radio
Alfa"), one of two private Czech Republic national radio broadcasters. The
Company is a party to certain loan and consulting agreements with Radio Alfa.
Certain of the Company's outstanding loans to Radio Alfa are convertible into an
additional equity interest which, when combined with its 76% interest, would
give the Company an 92.4% interest in Radio Alfa.
In Romania, the Company and two local partners, Adrian Sarbu and Ion
Tiriac, operate PRO TV, a commercial television network, through Media Pro
International S.A. ("Media Pro International"). The Company owns a 66% equity
interest in Media Pro International. In August 1997, the Company's interest in
Media Pro International was reduced from 77.5% to 66% as a result of the
exercise of an option by Mr. Tiriac to increase his interest in Media Pro
International. The Company owns 49% of the equity of PRO TV, SRL, an affiliate
station of Media Pro International. Messrs. Sarbu and Tiriac own substantially
all of the remainder of PRO TV, SRL. PRO TV, SRL holds many of the licenses for
the stations comprising the PRO TV network. The Company owns a 95% equity
interest in Unimedia SRL ("Unimedia"), which owns a 10% equity interest in a
consortium, MobilRom, which holds one of two GSM cellular telephone licenses in
Romania. Mr. Sarbu owns the remaining 5% of Unimedia.
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.
Also in Slovenia, in July 1996, the Company, together with MMTV and
Tele 59, entered into an agreement to purchase a 66% equity interest in Kanal A
(Notes 6 and 10).
47
<PAGE>
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1996
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 launched Markiza TV as a national television station on
August 31, 1996.
In Hungary, in September 1997, the Company acquired a 71.2% equity
interest in Budapesti Kommunikacios Rt. ("TV3"), a television station. The
Company wholly owns Videovox Studio Limited Liability Company ("Videovox"), a
Hungarian dubbing and duplication company acquired in May 1996 and owns 24.9% of
the equity of 2002 Tanacsado es Szolgaltato Korlatolt Felelosegu Tarsasag ("2002
Kft"), a broadcasting company.
In Germany, as of December 31, 1997, the Company transferred for
nominal consideration all of its interests in regional television operations in
Nuremberg ("FFF") and Dresden and Leipzig ("SFF") to the managing director of
those operations, thereby terminating its ownership interests in those German
broadcast operations. On May 13, 1997, the Company announced its decision to
discontinue funding of 1A TV Beteiligungsgessellschaft GmbH & Co. Betriebs KG
("1A TV"), which operated PULS, a regional television station operating in the
Berlin - Brandenburg area of Germany. On May 27, 1997, 1A TV initiated a
bankruptcy proceeding in the Bankruptcy Court of Berlin-Charlottenberg, which
is pending (Note 10). Prior to these transactions, the Company owned
non-controlling equity and voting interests in those entities.
In Poland, the Company owns a 50% direct interest in Federacja Sp.zo.o.
("Federation"). In addition, the Company owns an additional 5% indirect interest
in Federation through its 10% equity interest in ITI Media Group N.V., which
owns the remainder of Federation. TVN Sp.zo.o., owned 67% by ITI and 33% by the
Company, holds broadcast licenses, awarded in February 1997, for northern Poland
and the cities of Warsaw and Lodz. TVN Sp.zo.o. owns 100% of Telewizja Wisla
Sp.zo.o. ("TV Wisla"), a private regional television station in southern Poland.
Federation provides programming and advertising services to TVN Sp.zo.o. 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. The remaining shareholders of Polskie Media S.A. have instituted legal
proceedings challenging TVN Sp.zo.o.'s acquisition (Note 10).
Also in Poland, the Company owns a 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 has the right to
broadcast programming and sell advertising on Ukrainian National Channel 2
("UT-2") through 2006.
2. FINANCING OF OPERATING AND CAPITAL NEEDS
In 1997, the Company raised cash contributions of approximately
$170,000,000 after underwriting costs, discounts, commissions and expenses of
approximately $5,834,000, from the issue of $100,000,000 9.375% Senior Notes due
2004 and DM 140,000,000 8.125% Senior Notes due 2004.
In 1996, the Company raised cash contributions of $151,800,000 from a
public offering of common stock, less underwriting costs and issue and other
related expenses of approximately $8,177,000, from the issue of 5,520,000 shares
of Class A Common Stock.
48
<PAGE>
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1996
In 1995, the Company raised cash contributions of $92,000,000 from a
public offering of common stock, less underwriting costs and issue and other
related expenses of approximately $5,426,000, from the issue of 4,000,000 shares
of Class A Common Stock.
Proceeds from the above public offerings and other equity raised have
been used to fund the Company's activities and to repay certain loans and
advances from affiliates. The Company had cash of $106,188,000 and marketable
securities of $69,000 at December 31, 1997 to enable it to finance its future
activities.
Dividends from Consolidated Subsidiaries and Unconsolidated Affiliates
The Company conducts all of its operations through subsidiaries and
affiliates. Accordingly, the primary internal source of the Company's cash
available for operations will ultimately be dividends and other distributions
from its subsidiaries and affiliates. Each of these subsidiaries and affiliates
was formed under the laws of, and has its operations in, a country other than
Bermuda, the jurisdiction of the Company. In addition, each of the operating
subsidiaries and affiliates receives the majority of its revenues in the local
currency of the jurisdiction in which it is situated. As a consequence, 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 and affiliates operate.
The laws under which the Company's currently operating subsidiaries and
affiliates 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. In the case of POP TV, the Company's voting power
is not sufficient to compel the payment of dividends. 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 TV3, the Company's voting power is sufficient to
compel the payment of dividends. There are no legal reserve requirements in
Hungary. The Company's voting power in Federation and TVN Sp.zo.o. is not
sufficient to compel the distribution of dividends. There are no legal reserve
requirements in Poland. In cases where the Company's subsidiaries are not
wholly-owned, the declaration of such dividends will lead to a reduction in
resources, as such payments to minority shareholders will reduce the Company's
cash and cash equivalents.
49
<PAGE>
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1996
General
While losses from operating and development activities are expected to
continue in 1998, management believes that the Company's liquidity and capital
resources at December 31, 1997, including current cash balances, cash generated
from CNTS and local financing of broadcast operations should be adequate to
satisfy the Company's operating and capital requirements for its current
operations through 1998.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. The significant
accounting policies are summarized as follows:
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, Videovox and Radio Alfa (the
"Consolidated Affiliates"), as consolidated entities and reflect the interests
of the minority owners of these entities for the years presented, as applicable
(Note 1). The results of Markiza TV, the Studio 1+1 Group, TVN Sp.zo.o., FFF,
SFF and 1A TV (for the first quarter of 1997 only) (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. 1A TV
initiated a bankruptcy proceeding in May 1997. The Company records other
investments at the lower of cost or market value.
Acquisitions have been accounted for using the purchase method of
accounting.
Cash and Cash Equivalents
Cash and cash equivalents includes unrestricted cash in banks and
highly liquid investments with original maturities of less than three months.
Investments in Marketable Securities
The Company accounts for Investments in Marketable Securities under
Statement of Financial Accounting Standards (SFAS) No.115 'Accounting for
Certain Investments in Debt and Equity Securities'. Pursuant to this
pronouncement, debt and equity securities held by the Company that may be sold
in response to changes in interest rates, prepayments, and other factors have
been classified as available-for-sale. Such securities are reported at fair
value, with unrealized gains and losses excluded from earnings and reported in a
separate component of shareholders' equity (on an after tax basis). Gains and
losses on the disposition of securities are recognized on the specific
identification method in the period in which they occur. There were no
significant realized or unrealized gains or losses as of December 31, 1997 and
1996 or for the three years ended December 31, 1997.
50
<PAGE>
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1996
Revenue Recognition
Revenues primarily result from the sale of advertising time and are
recognized in the period in which advertising is aired.
Barter Transactions
Revenue from barter transactions (television advertising time provided
in exchange for goods and services) is recognized as income when commercials are
broadcast, and programming, merchandise or services received are charged to
expense or capitalized as appropriate when received or used. Barter revenues of
$2,817,000, $6,354,000 and $3,647,000 have been recognized for the years ended
December 31, 1997, 1996 and 1995 respectively.
The Company records barter transactions at the estimated fair market
value of goods or services received. In cases where bartered programs can only
be obtained through a barter agreement, the Company values the barter at the
value of the asset conveyed in exchange for the programs. In other cases where
the Company has elected to enter into barter agreements as an alternate method
of payment, strictly for economic reasons, the Company values the barter
agreement at the value of the asset received. If merchandise or services are
received prior to the broadcast of a commercial, a liability is recorded.
Likewise, if a commercial is broadcast first, a receivable is recorded.
Long-lived assets
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121 ("SFAS 121"), "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS 121
requires that long-lived assets and certain identifiable intangibles, including
goodwill, to be held and used by an entity, be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Pursuant to this standard, the Company evaluates its
long-lived assets using projected undiscounted future cash flows and operating
income for each subsidiary. The Company has determined that the goodwill
resulting from its investment in Radio Alfa has suffered material impairment and
has therefore written off $6,140,000 during 1997.
Property, Plant and Equipment
Property, plant and equipment is carried at cost, less accumulated
depreciation. Depreciation is computed using the straight-line method over the
estimated useful lives of the related assets (Note 5).
Assets Held Under Capital Leases
Assets held under capital leases are accounted for in accordance with
SFAS No. 13, 'Accounting for Leases', and recorded in Property, Plant and
Equipment and depreciated accordingly. The related liability is included in
obligations under capital lease.
51
<PAGE>
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1996
Program Rights and Production Costs
Program rights acquired by the Company under license agreements and the
related obligations incurred are recorded as assets and liabilities when the
program is available and the license period begins. The assets are amortized
using straight-line and accelerated methods based on the estimated period of
usage, ranging from one to five years. The unamortized cost of such rights and
liability for future payments under these agreements are included in the
Consolidated Balance Sheets. Amortization estimates for program rights are
reviewed periodically and adjusted prospectively.
Payments made for program rights in which the license period has not
begun before year end are classified as prepaid expenses and are $4,972,000 and
$2,854,000 at December 31, 1997 and 1996, respectively.
Production costs for self-produced programs are expensed when first
broadcast except where the programming has potential to generate future
revenues. When this is the case, production costs are capitalized and amortized
on the same basis as programming obtained from third parties.
Goodwill
Goodwill represents the Company's excess cost over the fair value of
net assets acquired and is being amortized on a straight-line basis over the
estimated useful life of the assets. Amounts recognized to date have been
amortized over periods ranging from 2 to 8 1/2 years from the original date of
acquisition.
License Acquisition Costs
License acquisition costs reflect the excess of the Company's
investment above the Company's share of net assets received from newly formed,
consolidated entities and reflect the amounts paid to secure exclusive rights to
the licenses. Such costs are amortized over the lives of the related licenses
which range from 5 to 10 years. License acquisition costs are reviewed for
impairment whenever events or circumstances provide evidence that suggests that
the carrying amount of license acquisition costs may not be recoverable. At
December 31, 1997 and 1996, $5,357,000 and $4,777,000, respectively, has been
capitalized and $1,901,000 and $854,000, respectively, has been amortized.
Broadcast License Costs and Other Intangibles
The costs of acquiring licenses to broadcast are capitalized and
amortized over the life of the related license. As of December 31, 1997 and
1996, $1,629,000 and $1,756,000, respectively, has been capitalized in the
accompanying consolidated financial statements related to the Company's 12 year
broadcast license in the Czech Republic, and $785,000 and $534,000 has been
amortized through December 31, 1997 and 1996, respectively.
Other intangibles, which include the cost of acquiring software and
other intangible assets, are capitalized and amortized over their estimated
useful lives. At December 31, 1997 and 1996, $3,505,000 and $2,920,000
respectively, has been capitalized, and $1,597,000 and $1,045,000, respectively,
has been amortized.
52
<PAGE>
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1996
Organization Costs
The Company has capitalized $1,763,000 and $1,884,000 in costs incurred
in connection with the organization and incorporation of consolidated
subsidiaries at December 31, 1997 and 1996, respectively, which will be
amortized over four years. Amortization of $1,222,000 and $950,000 has been
provided through December 31, 1997 and 1996, respectively.
Development Costs
In the course of its activities the Company incurs external costs in
connection with the development of new license opportunities for the Company.
These costs are capitalized and shown as an asset on the balance sheet where
separately identifiable. It is the Company's policy to account for these assets
at the lower of cost or estimated realizable value. As part of an ongoing review
of the valuation of such assets, management assesses their carrying value. If
this review indicates that the assets will not be recoverable through potential
future operations, the carrying values of these assets are reduced to their
estimated recoverable value by the recording of an allowance. As of December 31,
1997 and 1996, the Company had incurred capitalizable costs of $2,121,000 and
$20,101,000 respectively, which have been reduced by an allowance of $2,121,000
and $996,000 respectively. The Company's investment in the Studio 1+1 Group has
been transferred from development costs at December 31, 1996 to investments in
unconsolidated affiliates at December 31, 1997. As a result of its review,
management has determined that such assets are fairly stated at December 31,
1997 and 1996.
Fair Value of Financial Instruments
The Company accounts for the fair value of financial instruments in
accordance with SFAS No. 107, 'Disclosures about Fair Value of Financial
Instruments'. To meet the reporting requirements of SFAS No. 107, the Company
calculates the fair value of financial instruments and includes this additional
information in the notes to financial statements when the fair value is
different from book value of those financial instruments. When the fair value is
equal to the book value, no additional disclosure is made. The Company uses
quoted market prices whenever available to calculate these fair values. When
quoted market prices are not available, the Company uses standard pricing models
for various types of financial instruments which take into account the present
value of estimated future cash flows. At December 31, 1997 and 1996, the
carrying value of all financial instruments (primarily loans payable and
receivable and, in limited circumstances, foreign exchange contracts)
approximated fair value.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
'Accounting for Income Taxes.' This statement requires a liability approach for
measuring deferred taxes based on temporary differences between the financial
statement and income tax bases of assets and liabilities existing at each
balance sheet date using enacted rates for the years in which the taxes are
expected to be paid or recovered.
Deferred income taxes are provided on temporary differences between
financial statement and taxable income. The primary sources of these differences
are depreciation, amortization, tax losses carried forward and capital lease
payments.
53
<PAGE>
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1996
Foreign Currency Translation
The Company has applied the provisions of SFAS No. 52 'Foreign Currency
Translation' in translating the financial statements of its entities from Czech
korunas ("Kc"), Romanian lei ("ROL"), Slovenian tolars ("SIT"), Slovak korunas
("Sk"), Hungarian forints ("HUF"), Polish zloty ("Zl"), Ukrainian hryvna ("Hrn")
and German marks ("DM") to U.S. dollars. Transactions denominated in foreign
currencies are recorded at the exchange rate in effect at the date of the
transaction.
The financial statements of CNTS, POP TV, Markiza TV, TV3, Videovox,
Radio Alfa, Federation, TVN Sp.zo.o. and Studio 1+1 Group entities, which
operate in economies that are considered non-highly inflationary, are measured
using the local currency as the functional currency. Income and expense items
are translated at average monthly rates of exchange. Gains and losses from
currency translations of these affiliates are included in net earnings. Assets
and liabilities of these affiliates are translated at the rates of exchange at
the balance sheet date. The resultant translation adjustments are included as
cumulative currency translation adjustment as a component of shareholders'
equity.
PRO TV operates in an economy qualifying as highly inflationary.
Accordingly, non-monetary assets and liabilities are translated at historical
exchange rates and monetary assets and liabilities are translated at current
exchange rates. Translation adjustments are included in the determination of
income.
Year end exchange rates and weighted average exchange rates for the
respective periods are as follows:
<TABLE>
<CAPTION>
Balance Sheet Income Statement
--------------------------------- --------------------------------------
At December 31, Weighted average for the year ending
December 31,
1997 1996 % Change 1997 1996 % Change
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Czech koruna equivalent of $1.00 34.64 27.33 -26.7% 32.03 27.21 -17.7%
German mark equivalent of $1.00 1.80 1.55 -16.0% 1.73 1.50 -15.5%
Hungarian forint equivalent of $1.00 204 162 -25.9% 201 151 -33.0%
Polish zloty equivalent of $1.00 3.52 2.88 -22.2% 3.52 2.70 -30.4%
Romanian lei equivalent of $1.00 8,023 4,035 -98.8% 7,077 3,204 -120.9%
Slovak koruna equivalent of $1.00 34.78 31.90 -9.0% 33.64 31.14 -8.0%
Slovenian tolar equivalent of $1.00 169.18 141.48 -19.6% 160.37 136.45 -17.5%
Ukrainian hryvna equivalent of $1.00 1.90 1.89 -0.5% 1.86 1.83 -1.7%
</TABLE>
In the accompanying notes, $ equivalents of Kc, ROL, SIT, Sk, HUF, Zl,
Hrn and DM amounts have been included in brackets at December 31, 1997, 1996 or
historical rates, as applicable, for illustrative purposes only. Future amounts
are shown at December 31, 1997 exchange rates. In limited instances, the Company
enters into forward foreign exchange contracts and purchases foreign currency
options to hedge foreign currency transactions for periods consistent with its
identified exposures. Premiums on foreign currency options are amortized over
the option period being hedged. The accompanying Consolidated Financial
Statements include a loss of $25,000 related to foreign exchange contracts in
1997.
54
<PAGE>
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1996
Stock-Based Compensation
In 1996, the Company adopted the provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), by continuing to
apply the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," while providing the required pro
forma disclosures as if the fair value method had been applied (see Note 9).
Net Loss Per Share
Effective December 31, 1997, the Company adopted SFAS No. 128,
"Earnings Per Share" ("SFAS No. 128"). Basic net income (loss) per common share
("Basic EPS") is computed by dividing net income (loss) by the weighted average
number of common shares outstanding. Diluted net income (loss) per common share
("Diluted EPS") is computed by dividing net income (loss) by the weighted
average number of common shares and dilutive common share equivalents and
convertible securities then outstanding. SFAS No. 128 requires the presentation
of both Basic EPS and Diluted EPS on the face of the consolidated statements of
operations. The impact of the adoption of this statement was not material to all
previously reported EPS amounts. Diluted EPS for 1997, 1996 and 1995 is the same
as Basic EPS for those years, as the inclusion of the impact of stock options,
warrants and convertible securities then outstanding would be anti-dilutive
(Note 9). Accordingly, no reconciliation of those amounts has been presented
herein.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting year. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications were made to prior period amounts to conform
to current period classifications.
4. RESTRICTED CASH
Restricted cash at December 31, 1997 and 1996 is $800,000 and
$2,749,000, respectively. Restricted cash at December 31, 1997 consists of
$800,000 in connection with a letter of credit issued on behalf of FFF ("FFF
Letter of Credit") in relation to leasing commitments in that entity, which
expire in 1998. This cash will be released in 1998. Restricted cash at December
31, 1996 consisted of (1) $1,600,000 of cash restricted in connection with the
FFF Letter of Credit and (2) $1,149,000 held by the Romanian customs authority
for imports into Romania.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
55
<PAGE>
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1996
<TABLE>
<CAPTION>
December 31,
Useful --------------------------
Lives 1997 1996
----- ---- ----
Years $000 $000
<S> <C> <C> <C>
Land and buildings held under capital leases................... 25-50 16,800 19,803
Leasehold improvements......................................... 4-15 4,840 3,894
Station machinery, fixtures and equipment...................... 4-8 67,659 52,605
Other equipment................................................ 3-8 4,558 3,754
Construction in progress....................................... -- 5,750 1,243
------------- -------------
99,607 81,299
Less - Accumulated depreciation................................ (31,517) (22,317)
============= =============
68,090 58,982
============= =============
</TABLE>
6. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1996
---- ----
$000 $000
<S> <C> <C>
Current:
Satellite transponder............................................... -- 850
Kanal A............................................................. 1,000 --
Other............................................................... 2,273 --
--------------- ----------------
3,273 850
Long term:
Satellite transponder............................................... 1,331 --
Advances for technical equipment.................................... 1,395 3,970
Capitalized debt costs.............................................. 6,389 --
Other............................................................... 5,219 523
=============== ================
14,334 4,493
=============== ================
</TABLE>
The $1,000,000 due from Kanal A has been transferred from development
costs during the year to December 31, 1997, to current assets since management
believes this amount is recoverable.
In June 1995 the Company, through CME Programming Services Inc.,
obtained leasehold rights for a 12 year period to a 33 MHz transponder on the
Eutelsat Hot Bird 3 satellite ("Hot Bird 3"). The Company paid a deposit of
$850,000, $500,000 of which has now been utilized against the transponder lease
obligations following the launch of Hot Bird 3 in September 1997. The annual
charge for the lease is ECU 3,443,000 ($3,789,000). Provided that the contract
does not terminate before the expiration date (September 2009), the remaining
$350,000 of the deposit is repayable to the Company by deduction from the final
two invoices.
In September 1997, the Company, through CME Programming Services Inc.,
extended and renegotiated its rights to two 9 MHz transponders on the Eutelsat
IIF 1 satellite ("Eutelsat IIF 1"). The Company paid a deposit equivalent to a
three month invoicing period of ECU 440,000 ($477,000), which is refundable at
the end of the contract (which is defined as being the end of the life of
Eutelsat IIF 1 - approximately mid-1999). The annual charge for the lease is ECU
1,760,000 ($1,937,000).
56
<PAGE>
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Consolidated)
December 31, 1997 and 1996
In October 1997, the Company, through CME Programming Services Inc.,
paid a reservation fee of ECU 440,000 ($504,000) providing it with an
opportunity to enter into a guaranteed reservation for the lease of a
transponder on the Eutelsat Hot Bird 5 ("Hot Bird 5") satellite. Hot Bird 5 is
intended to serve as a continuation of service for carriers on Eutelsat IIF 1.
The reservation fee will be deducted from the first invoices for the lease
contract, which the Company is committed to entering into by April 30, 1998.
Should the lease contract not be entered into by the Company, the reservation
fee will be non-refundable.
Capitalized debt costs relate to expenses and fees incurred in
connection with the Company's Senior Notes. Such costs are being amortized over
the life of the Senior Notes due 2004.
Other long-term assets as at December 31, 1997 of $5,219,000 represent
minority shareholders' interests in net liabilities of one of the Company's
consolidated subsidiaries.
7. INCOME AND CAPITAL TAXES PAYABLE
(a) Provision for income taxes relates primarily to the profits of CNTS.
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1997 1996 1995
---- ---- ----
$000 $000 $000
<S> <C> <C> <C>
Current income taxes................................................ 15,342 16,826 15,473
Deferred income taxes............................................... (734) (421) 867
============= ============ =============
14,608 16,405 16,340
============= ============ =============
</TABLE>
Income taxes are provided on CNTS profits, which cannot be offset
against losses incurred elsewhere in the group or against corporate costs
incurred in other jurisdictions. The effective income tax rate in the Czech
Republic is 39%, 39% and 41% for the years ended December 31, 1997, 1996 and
1995, respectively.
At the present time no income, profit, capital or capital gain taxes
are levied in Bermuda and, accordingly, no provision for such taxes has been
recorded by the Company. In the event that such taxes are levied, the Company
has received an undertaking from the Bermuda Government exempting it from all
such taxes until March 28, 2016.
Deferred income tax assets relate to the following timing differences:
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
---- ----
$000 $000
<S> <C> <C>
Provisions against receivables...................................... 725 1,045
Accelerated amortization of programming licenses.................... 602 856
Tax loss carryforwards.............................................. 1,348 --
Other............................................................... 724 12
-------------- --------------
3,399 1,913
Valuation allowance on deferred tax asset........................... (2,653) (1,045)
============== ==============
746 868
============== ==============
</TABLE>
A full valuation allowance is provided for provisions against
receivables in 1997 and 1996 due to the delay in obtaining a tax deduction for
such amounts in the Czech Republic.
57
<PAGE>
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1996
Deferred income tax liabilities relate to the following timing differences:
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
---- ----
$000 $000
<S> <C> <C>
Depreciation and amortization....................................... 466 1,491
Lease payments...................................................... 250 382
Other............................................................... 200 269
============== ==============
916 2,142
============== ==============
</TABLE>
Net operating losses incurred in 1997, 1996 and 1995 in Germany,
Romania, Slovenia, Slovakia, Poland and Hungary are available for offset against
taxable income in those countries in the future. Net operating losses
experienced in these jurisdictions in certain years may not be fully available
for offset against taxable income in the future in those countries.
A valuation allowance has been provided for all net operating loss
carryforwards in all jurisdictions, as it is more likely than not, for a variety
of reasons, including the uncertainties in the tax regimes, that they may not be
fully utilized.
(b) Capital Registration Tax
Capital registration tax is payable on the contribution of capital to
certain subsidiaries of CME. It has been included within corporate expenses for
1997, 1996 and 1995, as it is not dependent upon the level of income, in the
amount of $0, $809,000 and $1,375,000, respectively.
8. LOAN AND OVERDRAFT OBLIGATIONS
Group loan obligations and overdraft facilities consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
---- ----
$000 $000
<S> <C> <C>
CME B.V.
Ceska Sporitelna Loan...................................... (a) 20,857 16,464
Tele 59 loan............................................... (b) 681 903
CNTS
Long-term investment loan.................................. (c) -- 6,586
Mortgage loan.............................................. (d) 3,638 --
PRO TV
Line of credit............................................. (e) 1,999 1,709
Long-term loan............................................. (f) 3,854 2,758
Overdraft facilities....................................... -- 969
POP TV
Unsecured short-term loans................................. 153 205
TV3
MKB loan................................................... (g) 1,217 --
Federation
Long-term loan............................................. (h) 3,500 --
-------------- --------------
35,899 29,594
Less current maturities.................................... (11,722) (7,106)
============== ==============
24,177 22,488
============== ==============
</TABLE>
58
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1996
CME B.V.
(a) On August 1, 1996, the Company entered into an agreement for the
purchase of CS's 22% economic interest and virtually all of CS's voting rights
in CNTS for a purchase price of Kc 1 billion ($36,590,000). The Company has also
entered into a loan agreement with CS to finance 85% of the purchase price. The
remainder of the purchase price of Kc150,000,000 ($5,488,000) was paid by the
Company on November 15, 1996. Kc450,000,000 ($16,464,000) and Kc400,000,000
($14,636,000) of the CS loan was drawn in August 1996 and April 1997,
respectively, to fund purchase payments due at those times.
Quarterly repayments are required in the amount of Kc22,500,000
($650,000) during the period from February 1998 through November 1998,
Kc42,500,000 ($1,227,000) during the period from February 1999 through May 2002,
and Kc 37,500,000 ($1,082,000) in August 2002. The loan bears interest at 12.9%
per annum.
(b) The Company entered into a loan agreement on November 21, 1996 with
Tele 59 to finance a loan to Tele 59 from SKB banka d.d. ("SKB"). The principal
amount of the loan is DM 1,496,000 ($831,000) with principal repayments of DM
136,000 ($76,000) twice yearly. Initially, under this agreement the Company was
to reimburse Tele 59 for payments made to SKB and Tele 59 was required to repay
the loan from the Company together with interest (at 7.8%) per annum. As at
December 31, 1997, the Company has capitalized the loan receivable from Tele 59
as part of the licence cost for POP TV and is amortizing the value over the
remaining period of the licence (Note 11).
CNTS
(c) The long-term investment loan obtained from CS for the purchase of
equipment was repaid during 1997.
(d) During 1997, CNTS exercised an option to purchase the building in
which the company is located and assumed, with effect from June 1, 1997, all
obligations under a long-term investment loan agreement between Central European
Development Corporation Praha, spol. s.r.o. and Ceska Sporitelna, a.s. The
principal obligation assumed by CNTS was Kc 175,500,000 ($5,066,000). The
principal outstanding at December 31, 1997 was Kc 126,000,000 ($3,637,000) and
is to be repaid in quarterly instalments from March 1998 to December 1999. The
rate of interest is equal to three month PRIBOR plus 1%. The loan is secured by
a lien on the building.
PRO TV
(e) The line of credit, obtained from Tiriac Bank, provides a maximum
facility of $2,000,000 bearing interest at 6 month LIBOR plus 5%. This facility
matured at the end of 1997 and is currently being renegotiated. The Company
expects that this facility will be extended to the end of 1998. This facility is
secured by assets with a book value of $2,575,000.
(f) The long-term loan, also obtained from Tiriac Bank, has a maximum
facility of $4,000,000, bearing interest at 6 month LIBOR plus 5%. This loan is
payable in monthly instalments of $83,500 beginning July 31, 1997 through
February, 2001, the final instalment
59
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Contineud)
December 31, 1997 and 1996
being $75,500. The loan is secured by assets representing $3,357,000 and 70%
of the assets purchased with the loan up to a value of $2,800,000.
TV3
(g) TV3 is currently renegotiating a HUF 279,000,000 ($1,368,000) long
term loan with Magyar Kulkereskedelmi Bank Rt. The loan is secured on certain
fixed assets of TV3 and bears interest at the bank's prime rate, currently
20.5%. The loan is to be repaid in eight quarterly installments of HUF
34,875,000 ($171,000) commencing March 1, 1999 and ending on December 3, 2000.
Federation
(h) Federation has a $3,500,000 bank loan, which is secured on the
accounts receivable of Federation. The interest rate is LIBOR plus 2.15%. It is
intended that this loan will be repaid from the long-term credit facility that
is currently being negotiated.
At December 31, 1997, maturities of debt are as follows:
Total
$000
----
1998........................................................ 11,722
1999........................................................ 8,472
2000........................................................ 6,589
2001........................................................ 5,487
2002 Thereafter............................................. 3,629
------
35,899
======
Loan notes payable
On August 20, 1997, the Company issued Senior Notes of $100,000,000 at
9.375% and DM 140,000,000 at 8.125%, due 2004 (collectively the "Senior
Notes"). The Senior Notes are unsecured senior indebtedness of the company and
rank pari passu with all existing and future unsecured unsubordinated
indebtedness of the Company and are effectively subordinated to all existing and
future indebtedness of the Company's subsidiaries.
The Senior Notes are redeemable at the option of the Company, in whole
or in part, at any time on or after August 15, 2001 at the redemption prices set
forth below.
<PAGE>
Dollar Note DM Note
Redemption Price Redemption Price
2001.................................... 104.68750% 104.06250%
2002.................................... 102.34375% 102.03125%
2003 and thereafter..................... 100.00000% 100.00000%
In addition, in the event of one or more equity offerings or placings
prior to August 15, 2000, the Company may, at its option, redeem up to 35% of
the original principal amount of each series of Senior Notes from the net
proceeds thereof at 109.375% of the principal
60
<PAGE>
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1996
amount in the case of the US dollar denominated Senior Notes and 108.125% of
the principal amount in the case of the DM denominated Senior Notes, plus
accrued and unpaid interest, if any, to the date of redemption.
Interest is payable semi-annually in arrears on each February 15 and
August 15, commencing February 15, 1998. Interest expense on the US dollar
denominated Senior Notes and DM denominated Senior Notes for the period to
December 31, 1997 was approximately $3,385,000 and DM 4,108,000 ($2,273,000),
respectively.
The indentures pursuant to which the Senior Notes were issued contain
certain restrictive covenants, which among other things, restrict the ability of
the Company and its subsidiaries to : (i) incur additional indebtedness, (ii)
pay dividends or make certain other distributions, (iii) make certain
investments and other restricted payments, (iv) enter into certain transactions
with affiliates, (v) create liens, (vi) sell assets and (vii) create
restrictions on the ability of certain of its subsidiaries to make certain
payments to the Company. Management believes that, as of December 31, 1997, the
Company was in compliance with such restrictive covenants.
9. STOCK OPTION PLAN
The Company adopted the 1994 Stock Option Plan in 1994 and the 1995
Stock Option Plan in August 1995. Under the 1994 Stock Option Plan, the
Compensation Committee is authorized to grant options for up to 900,000 shares
of the Company's Class A Common Stock. Under the 1995 Stock Option Plan the
Compensation Committee is authorized to grant options for up to 1,200,000 shares
of the Company's Class A Common Stock. The Stock Option Plans allow grants to
consultants and non-affiliated directors. The maximum term of the options
granted under the Stock Option Plans is ten years. Options granted may be either
incentive stock options under the Internal Revenue Code of 1986, as amended (the
"Code"), or non-qualified stock options. Under the Stock Option Plans,
non-affiliated directors are automatically granted each year options to purchase
10,000 shares of Class A Common Stock. The Compensation Committee has granted
substantially all options to purchase the 900,000 shares of Class A Common Stock
created by the 1994 Stock Option Plan. In August 1997 the Compensation Committee
awarded 853,950 options which exceeded the available amount under the 1995
Option Plan by 570,530. The Board of Directors of the Company will recommend
that the shareholders authorize the grant of these 570,530 options at the
Company's 1998 Annual General Meeting. The 1995 Stock Option Plan includes
options to purchase 167,000 shares of Class A Common Stock granted to a former
President and Chief Executive Officer of the Company and 103,900 shares of Class
A Common Stock granted to the Vice President-Finance and Chief Financial
Officer.
Under both plans the option exercise price equals the stock's market
price on date of grant. The 1994 plan options vest after two years and expire
after ten years. The 1995 plan was revised in February 1997 so that options
granted under this plan will vest after two years and will expire after ten
years. This change was applied retrospectively and the following tables have
been prepared under the revised 1995 plan.
61
<PAGE>
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1996
A summary of the status of the Company's two stock option plans at
December 31, 1997, 1996 and 1995 and changes during the years 1997, 1996 and
1995 is presented in the table and narrative below:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------- -------------------------------- -------------------------------
Wtd. Wtd. Wtd.
Avg. Avg. Avg.
Exercise Option Exercise Option Exercise Option
Shares Price Price $ Shares Price Price $ Shares Price Price $
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
start of year... 1,534,103 17.41 0.20-21.75 1,049,600 13.81 0.20-20.00 354,500 6.10 0.20-14.00
Granted......... 974,450 24.30 23.00-33.50 636,800 21.51 20.75-21.75 756,600 16.44 14.00-20.00
Excercised...... (143,751) 14.13 0.20-21.75 (139,644) 8.78 0.20-14.63 (55,000) 0.20 0.20
Forfeited....... (55,853) 26.20 20.00-33.50 (12,653) 20.00 20.00 (6,500) 14.63 14.63
--------- ---------- --------
Outstanding
at end of year.. 2,308,949 20.31 0.20-33.50 1,534,103 17.41 0.20-21.75 1,049,600 13.81 0.20-20.00
========= ===== ========== ========= ===== ========== ========= ===== ==========
</TABLE>
At December 31, 1997, 1996 and 1995, 1,466,125, 528,356 and 122,250
shares were exercisable, respectively.
In August 1997, the Board of Directors of CME approved a grant to
Ronald S. Lauder of options to purchase 100,000 Class B shares under the 1995
Plan, subject to shareholder approval at the Annual General Meeting.
One of the Company's directors was awarded 25,000 options on August 3,
1995 which were granted outside of both the 1994 Amended and Restated Option
Plan and the 1995 Stock Option Plan. Half of his shares vested six months after
issue and the remainder after one year.
The Company accounts for these plans under APB No. 25, under which no
compensation cost is recognized for stock options granted to employees with an
exercise price at or above the prevailing market price on the date of the grant.
Had compensation cost for these plans been determined consistent with the fair
value approach required by SFAS No. 123, the Company's net loss and net loss per
common share would increase to the following pro forma amounts:
<TABLE>
<CAPTION>
Year ended
December 31,
---------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C>
Net Loss ($000).................................. As Reported (85,092) (30,003) (18,736)
Pro Forma (91,928) (34,468) (20,197)
Net Loss Per Common Share ($)
Basic................................... As Reported (3.56) (1.55) (1.28)
Pro Forma (3.84) (1.78) (1.38)
Diluted................................. As Reported (3.56) (1.55) (1.28)
Pro Forma (3.84) (1.78) (1.38)
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions
used:
62
<PAGE>
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1996
Risk Free
Date of option grant interest rate
-------------------- -------------
January 1, 1995 7.84%
August 3, 1995 6.21%
August 10, 1995 6.23%
August 14, 1995 6.28%
October 17, 1995 5.76%
December 15, 1995 5.53%
January 2, 1996 5.30%
August 1, 1996 6.36%
February 27, 1997 6.30%
August 1, 1997 6.03%
Expected dividend yields are assumed to be 0% for each grant; expected
lives of 4 years for all grants; expected stock price volatility of 47.6% for
1995 and 1996 and 47.19% for 1997.
The effects of applying SFAS No. 123 in this pro forma disclosure may
not be indicative of future amounts because SFAS No. 123 does not apply to stock
options granted prior to January 1, 1995 and additional stock option grants are
anticipated in future years.
10. 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
the Company and Ronald S. Lauder, the Chairman of the Company's Board of
Directors. Perekhid alleges 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 seeks 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, the Company
filed a motion to dismiss the complaint, which is pending. Management believes
that it has substantial defenses in this matter and intends to defend the matter
vigorously.
In December 1997, TVN Sp.zo.o. acquired 22% of the economic and 9.68%
of the voting interests of Polskie Media S.A. for a purchase price of $3.2
million financed in part by a $1.6 million loan by the Company to TVN. The
remaining shareholders refused to enter TVN Sp.zo.o into the Polskie Media S.A.
shareholder register on the grounds that the transfer to TVN Sp.zo.o. did not
meet the applicable requirements for such a transfer. On January 30, 1998, TVN
Sp.zo.o. instituted proceedings at the Voivodship Economic Court in Warsaw
requesting that the Court invalidate attempts by the shareholders of Polskie
Media S.A. to block the TVN Sp.zo.o. purchase. TVN Sp.zo.o. has also requested
that the court order Polskie Media to enter TVN Sp.zo.o. into the share
register. Polskie Media S.A. has not yet responded.
63
<PAGE>
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1996
In July 1996, the Company, together with MMTV and Tele 59, entered into
an agreement to purchase a 66% equity interest in Kanal A, a privately owned
television station in Slovenia (the "Kanal A Agreement"). Scandinavian
Broadcasting System SA ("SBS"), which claims to have certain rights to the
equity of Kanal A pursuant to various agreements, has challenged the validity of
the Kanal A Agreement in a United Kingdom court. Both the Company and SBS have
been granted injunctions by the United Kingdom courts preventing SBS, in the
case of the Company, and the Company, in the case of SBS, from taking certain
actions either to enforce such entity's claim to equity in Kanal A or to block
the claim of the other entity to equity in Kanal A. The Company has instituted
action in a Slovenian court requesting that courts in Slovenia resolve these
claims.
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 management reasonably expect could have a
material adverse effect on its business or operations.
Financial Commitments -- Existing Entities
It is anticipated that the majority of the Company's existing
operations will be self-supporting in terms of funding during 1998, with cash
being available through local credit facilities and/or generated from
operations. Existing operations that will require the Company to provide
additional funding are as follows:
CNTS
On August 11, 1997, the Company made the Second 1997 CNTS Purchase when
it purchased Nova Consulting a.s. ("NC") from certain of the partners of CET 21,
for a purchase price of $28,537,000, to be paid on an installment basis through
February 15, 2000, subject to adjustment as described below. NC owns a 5.8%
interest in CNTS. A portion of the payments are subject to increase based upon
the performance of CME's Class A Common Stock. As of December 31, 1997, the
Company has paid $11,500,000 of the purchase price and is obligated to make
further payments of $9,162,000 during 1998, $5,313,000 during 1999, and
$2,562,000 during 2000. Any adjustments made as a result of the performance of
CME's Class A Common Stock will be accounted for as additional purchase price.
PRO TV
The Company has provided a loan of $1,000,000 to PRO TV subsequent to
December 31, 1997 and expects to provide a further $3,000,000 in 1998. It is
anticipated that these amounts will be repaid in 1998.
Unimedia
At December 31, 1997, the Company had contributed $8,400,000 in equity
capital in MobilRom, a company which was awarded one of the mobile
telecommunication licenses in Romania. Unimedia is obligated to contribute a
further $3,600,000 to MobilRom, bringing Unimedia's total contribution to
$12,000,000, representing 10% of the equity capital of MobilRom. The outstanding
capital contribution has been fully accrued as at December 31, 1997.
64
<PAGE>
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1996
Germany
As of December 31, 1997, the Company has transferred for nominal
consideration, all of its interests in the regional television operations in
Nuremburg, Dresden and Leipzig to the managing director of those operations,
thereby terminating its ownership interests and eliminating any future funding
requirements.
Beginning in 1993, 1A TV received investment grants in an aggregate
amount of DM8,544,000 ($4,747,000) from a German public bank, to partially
finance the development of the station. The grants were guaranteed by a
wholly-owned German subsidiary of the Company. The grants were repayable if 1A
TV did not fulfill certain conditions, including maintaining specified levels of
employment for a five year period. As a result of the bankruptcy proceedings
initiated by 1A TV, the German public bank has demanded repayment of the
investment grants from 1A TV and the guarantor, plus interest at the rate of
6.0% per annum. In January 1998, the Company filed an appeal of the demand for
repayment with the German public bank, which is pending. Management believes
that the maximum exposure is limited to the German assets, which have been fully
provided for.
Poland
Management expects that the Company will fund up to $30,000,000 for
the Polish operations in 1998, of which $12,000,000 has already been advanced in
the form of two $6,000,000 loans, one of which has been guaranteed by ITI.
TV3
The Company has provided $550,000 in the form of loans to TV3 since
December 31, 1997, and has paid for programming on its behalf totaling
$3,134,000. Management anticipate that further funding of up to $1,000,000 will
be required in 1998, which will likely be contributed in the form of loans.
Licenses
The Company has no reason to believe that the licenses for stations
will not be renewed. However, no statutory or regulatory presumption exists for
the current license holder, and there can be no assurance that licenses will be
renewed upon expiration of their initial terms. The failure of any such licenses
to be renewed may adversely affect the results of the Company's operations.
Currency exchange rate fluctuation
The Company generates most of its revenues in Czech korunas ("Kc"),
Romanian lei ("ROL"), Slovenian tolars ("SIT"), Slovak korunas("Sk"), Polish
zloty ("Zl"), Ukrainian hryvna ("Hrn"), Hungarian forints ("HUF") and German
marks ("DM") and incurs expenses in those currencies, as well as in British
pounds and United States dollars. In addition, certain expenses, primarily for
programming, are incurred in United States dollars, and certain of the Company's
capital and operating commitments are in foreign currencies. Fluctuations in the
value of foreign currencies may cause United States dollar translated amounts to
change in comparison with previous periods. The Company has not hedged against
fluctuations in foreign currency rates. Due to the number of currencies
involved, the constantly changing
65
<PAGE>
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1996
currency exposures and the fact that all foreign currencies do not fluctuate in
the same manner against the United States dollar, the Company cannot anticipate
the effect of exchange rate fluctuations on its financial condition.
Foreign Exchange Contracts
At December 31, 1997, there were four forward exchange contracts
outstanding for the purchase, in aggregate, of $2,500,000 by CNTS and the sale
of Czech korunas. Two of these contracts matured on February 27, 1998 and March
2, 1998. The two remaining contracts for the purchase of $500,000 each mature on
May 22 and June 16, 1998, respectively. A foreign exchange loss of Kc 870,000
($25,000) resulting from the revaluation of these contracts at the year end
exchange rate was recorded in 1997. No material exposure exists at December 31,
1997 as a result of these contracts.
Pension and other post-retirement benefits
The Company has no obligation to provide pension and other
post-retirement benefits.
Station Programming Rights Agreements
The Company had programming rights commitments for $54,088,000 and
$43,876,000 in respect of future programming which includes contracts signed
with license periods starting after December 31, 1997 and 1996, respectively.
Lease Commitments
Minimum future obligations under capital leases, including interest,
are expected to be as follows:
Payments due $000s
------------ ----
1998 ............................................... 99
1999 ............................................... 24
2000 ............................................... 6
----
Less: 129
Amounts representing interest....................... (14)
----
Total............................................... 115
Less current maturities............................. (88)
----
27
====
For the fiscal years ended December 31, 1997, 1996 and 1995, the
Company paid aggregate rent on all facilities of $2,036,000, $1,776,000 and
$340,000 respectively. Future minimum lease payments at December 31, 1997 for
non-cancelable operating leases with remaining terms in excess of one year are
payable as follows:
At December 31,
1997
---------------
$000s
1998............................. 7,284
1999............................. 5,799
2000............................. 4,750
2001............................. 4,708
2002............................. 4,405
2003 and thereafter.............. 30,529
--------
57,475
========
66
<PAGE>
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1996
11. RELATED PARTY TRANSACTIONS
Contributed Services
Affiliates controlled by certain shareholders of the Company provide
various administrative services for the Company. Amounts charged for the years
ended December 31, 1997, 1996 and 1995 were $111,000, $88,000 and $357,000,
respectively, and are included in corporate operating costs and expenses.
Amounts due from Unconsolidated Affiliates
During 1997, the Company made payments for programming, goods and
services and incurred costs on behalf of the unconsolidated affiliates TVN
Sp.zo.o., Markiza TV, and the Studio 1+1 Group totaling $6,696,000. These are
classified as amounts due from unconsolidated affiliates in the accompanying
consolidated balance sheet. As at December 31, 1997 amounts due from
unconsolidated affiliates totaled $1,066,000.
Advances to Affiliates
The Company has ongoing business relations with television and radio
service providers owned by the other equity holders in the various broadcast
operations, some of which are the only service providers in their respective
field; affiliation agreements, whereby funds are advanced to license holders for
expenses to be incurred on behalf of the Company and repaid from advertising
sales from regional windows, and has agreed to provide funding as part of the
original purchase agreement to license holding companies, as well as to pay
related party companies for services rendered by the General Directors. POP TV
had advances to affiliates of $725,000 and $354,000 at December 31, 1997 and
1996, respectively.
At December 31, 1996, PRO TV had amounts due from affiliates under
affiliation agreements of $735,000. In 1997, services due under these agreements
have been rendered by the affiliated entities and as such, the outstanding
amounts have been written off to the income statement.
At December 31, 1997 and 1996, PRO TV had $2,816,000 and $692,000,
respectively, of advances to affiliates for future services to be provided.
At December 31, 1996, PRO TV had advances to affiliates related to
financing arrangements to license holders which totaled $1,399,000. At December
31, 1997, such advances have been capitalized and are being amortized over the
remaining life of the licence.
At December 31, 1997 and 1996, POP TV had advances to affiliates of $0
and $903,000 respectively relating to financing arrangements to licence holders.
During 1997, these financing arrangements were assumed by the Company on behalf
of POP TV. The advance has subsequently been capitalized in the Company's
balance sheet and is being amortized over the remaining life of the licence.
At December 31, 1997 Federation had $4,419,000 due from affiliated
entities in relation to technical equipment.
67
<PAGE>
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1996
Loans to Affiliates
Upon the initial contribution to the broadcast operations, the Company
has, at times, financed the other equity holders' capital contributions into the
broadcast operations, entered into certain business arrangements which are
beneficial to the broadcast operation, and provided funding to the broadcast
operations through loans. During 1995, the Company had contributed $2,000,000 in
share capital to PRO TV on behalf of Adrian Sarbu, which was outstanding at
December 31, 1997 and 1996.
Also during 1995, the Company made a $1,302,000 loan to a company
wholly-owned by Adrian Sarbu in order to finance that company's purchase of a
majority equity interest in a construction company which owns PRO TV's
television broadcast station. The loan was outstanding at December 31, 1997 and
1996. At December 31, 1997, the Company also had amounts receivable from Adrian
Sarbu of $255,000.
During 1996, the Company entered into an agreement to lend the General
Director of Nova TV funds totaling $5,200,000 to finance his purchase of
interests in CET 21 in order to increase his ownership in CET 21 to 60.0%. In
March 1997, the Company acquired an additional 5.2% interest in CNTS as a result
of the retirement of this loan.
In 1997, the Company's loans to Markiza TV of $9,000,000 were converted
into equity. The interest outstanding on those loans of $777,000 remained
outstanding as of December 31, 1997, and is intended to be repaid in 1998.
Also in 1997, the Company provided funding in the form of loans to TVN
Sp.zo.o. in Poland totaling $19,050,000. These amounts together with accumulated
interest of $584,000 remained outstanding at December 31, 1997.
Loans of $6,000,000 were made available to the Studio 1+1 Group in
1997 and this amount, together with accumulated interest of $10,000 remained
outstanding at December 31, 1997.
In 1997, the Company acquired a 70% equity holding in Media Vision
s.r.l. and Video Vision s.r.l. Loans of $1,300,000 and $545,000 together with
accumulated interest of $17,000 and $7,000, respectively, remained outstanding
from these entities at December 31, 1997.
Advances from Affiliates
From time-to-time, the Company has received financing from its majority
shareholder, Ronald S. Lauder, and services from affiliates and has incurred
charges under affiliation agreements and employment agreements. In addition,
during the initial start up of a particular station, the Company may owe amounts
to the other joint venture shareholders in connection with various purchase
agreements.
Amounts outstanding at December 31, 1997 and 1996 related to affiliates
who provide various administrative services for the Company were $32,000 and
$22,500, respectively, and are included in advances from affiliates in the
accompanying consolidated balance sheet.
Interest of $0, $68,000 and $565,000 was charged to income in 1997,
1996 and 1995, respectively, in relation to these loans and a loan from CME's
majority shareholder.
68
<PAGE>
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1996
At December 31, 1997 and 1996, PRO TV owed $27,000 and $193,000
respectively under affiliation agreements. At December 31, 1997 and 1996, POP TV
owed $256,000 and $385,000, respectively, under affiliation agreements.
At December 31, 1997, Federation owed $24,631,000 under affiliation
agreements to TVN Sp.zo.o., TV Wisla and other non-consolidated and related
entities for the purchase of fixed assets and other services provided.
At December 31, 1997, the Company owed $302,000 to TVN Sp.zo.o. in
connection with the deposit for the satellite contract entered into by the
Company through CME Programming Services Inc. on behalf of TVN Sp.zo.o. The
deposit will be refundable to the Company and the above amount will be forwarded
to TVN Sp.zo.o. at the end of the contract life in mid-1999, thereby making
payment of the amount owed to TVN Sp.zo.o. (Note 6).
12. SUMMARY FINANCIAL INFORMATION FOR TVN Sp.zo.o., THE STUDIO 1+1 GROUP, 1A TV,
MARKIZA TV AND FFF
<TABLE>
<CAPTION>
As at
------------------------------------------------------------------------------
December 31, 1997 December 31, 1996
------------------------------------ ------------------------------------
TVN Studio
Sp.zo.o. 1+1 Group Markiza TV Markiza TV 1A TV FFF
---------- --------- ---------- ---------- --------- ---------
($000s) ($000s) ($000s) ($000s) ($000s) ($000s)
<S> <C> <C> <C> <C> <C> <C>
Current assets..................... 27,106 7,744 18,385 10,896 3,235 2,694
Non-current assets................. 49,608 21,542 25,900 28,783 12,260 2,105
Current liabilities................ (21,884) (5,976) (13,328) (6,635) (3,996) (1,270)
Non-current liabilities............ (41,812) (6,000) (998) (9,222) (6,305) (11,923)
-------- ------- -------- ------- ------- --------
Net assets (liabilities)........... 13,018 17,310 29,959 23,822 5,194 (8,394)
======== ======= ======== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
For the years ended
------------------------------------------------------------------------------
December 31, 1997 December 31, 1996
------------------------------------ ------------------------------------
TVN Studio
Sp.zo.o. 1+1 Group Markiza TV Markiza TV 1A TV FFF
---------- --------- ---------- ---------- --------- ---------
($000s) ($000s) ($000s) ($000s) ($000s) ($000s)
<S> <C> <C> <C> <C> <C> <C>
Net revenues................... 1,653 16,661 31,296 7,462 3,248 4,736
Operating loss................. (962) (799) 799 (3,712) (18,812) (3,585)
Net loss....................... (6,225) (1,082) (674) (4,230) (18,785) (3,823)
</TABLE>
The Company's share of the losses in Unconsolidated Affiliates for 1997
(including goodwill amortization for Markiza TV and the Studio 1+1 Group) was
$12,394,000, including $2,843,000 in 1A TV (prior to the write-down described
below), $2,548,000 in FFF, $1,291,000 in SFF, $1,084,000 in Markiza TV,
$2,054,000 in TVN Sp.zo.o. and $2,574,000 in the Studio 1+1 Group. On May 13,
1997, the Company announced its decision to discontinue funding of 1A TV. As a
result, the Company has written down its investments in Germany (including 1A
TV, FFF and SFF) by $20,707,000 and eliminated the carrying value of these
investments. This write-down, together with losses incurred by the German
operations in 1997, has resulted in a total charge of $33,101,000 in the
Company's Consolidated Statements of Operations.
69
<PAGE>
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1996
13. PRO FORMA RESULTS OF ACQUISITION
The unaudited pro forma effects of the Additional CNTS Purchase, as if
this transaction occurred at the beginning of 1995, are as follows:
1996 1995
------------ ------------
Net revenues ($000)..................... $ 135,985 $ 98,919
Operating loss ($000)................... (33,110) (21,260)
Net loss per share...................... (1.71) (1.45)
This pro forma information includes the effects of the amortization of
goodwill related to the transaction, as well as interest expense associated with
related borrowings. The pro forma effects of the 1997 CNTS Purchase and the
Second 1997 CNTS Purchase have not been presented, as they are not material to
the Company's results of operations.
14. SUBSEQUENT EVENTS
Stock Options
Since December 31, 1997, 3,233 stock options for Class A Common
Stock were exercised at prices of $0.20 to $14.63.
70
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To IA TV Beteiligungsgesellschaft mbH & Co. Betriebs-KG:
We have audited the accompanying balance sheet of IA TV Beteiligungsgesellschaft
mbH & Co. Betriebs-KG (a Limited Partnership organized under German law) as of
December 31, 1995 and 1996, and the related statements of operations, partners'
capital and cash flows for the years then ended. These financial statements are
the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of IA TV Beteiligungsgesellschaft
mbH & Co. Betriebs-KG as of December 31, 1995 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with United
States generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As described in Note 3 to the
financial statements, the Partnership has incurred significant operating losses
during the years 1994 through 1996, and is dependent upon additional capital to
fund its operations. These factors raise substantial doubt about the
Partnership's ability to continue as a going concern. The financial statements
do not include any adjustments relating to the recoverability or classification
of asset carrying amounts or the amount and classification of liabilities that
might result should the Partnership be unable to continue as a going concern.
ARTHUR ANDERSEN
Wirtschaftsprufungsgesellschaft
Steuerberatungsgesellschaft mbH
March 5, 1997
Berlin, Germany
71
<PAGE>
IA TV BETEILIGUNGSGESELLSCHAFT
MBH & CO. BETRIEBS-KG
BALANCE SHEET AS OF DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
TDM TDM
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................... 1,721 3,015
Accounts receivable............................. 1,018 662
Program rights costs............................ 37 441
Value-added tax receivables..................... 287 534
Other receivables (Note 5)...................... 1,724 2,727
Prepaid expenses................................ 116 43
Contribution receivable......................... 112 2,500
------------ ------------
Total current assets......................... 5,015 9,922
------------ ------------
PROPERTY, PLANT & EQUIPMENT, including equipment
held under lease, net (Note 6).................. 16,653 20,280
------------ ------------
BROADCAST LICENSE COSTS, net...................... 44 55
------------ ------------
OTHER INTANGIBLE ASSETS, net (Note 7)............. 2,306 2,504
------------ ------------
Total assets................................. 24,018 32,761
------------ ------------
------------ ------------
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable and accrued liabilities (Note
8)........................................... 5,603 7,337
Duties and other taxes payable.................. 457 364
Related party payables.......................... 132 419
------------ ------------
Total current liabilities.................... 6,192 8,120
------------ ------------
NON CURRENT LIABILITIES:
Capital lease obligation........................ 4,117 6,125
Deferred income (Note 9)........................ 5,657 6,861
------------ ------------
Total non current liabilities................ 9,774 12,986
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 10)
PARTNERS' CAPITAL:
Contributed Capital............................. 135,575 111,000
Accumulated deficit............................. (127,523) (99,345)
------------ ------------
Total Partners' capital...................... 8,052 11,655
------------ ------------
Total liabilities and partners' capital...... 24,018 32,761
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of this balance sheet.
72
<PAGE>
IA TV BETEILIGUNGSGESELLSCHAFT MBH & CO. BETRIEBS-KG
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
TDM TDM
------- -------
<S> <C> <C>
REVENUES:
Advertising.......................................... 4,872 4,847
------- -------
STATION EXPENSES:
Amortization of programming rights................... (652) (4,375)
Depreciation of station equipment.................... (4,056) (3,846)
Other operating costs and expenses................... (7,544) (13,321)
Selling, general and administrative expenses......... (20,838) (18,374)
------- -------
Operating loss.................................... (28,218) (35,069)
------- -------
INTEREST AND OTHER INCOME.............................. 581 1,115
INTEREST EXPENSE....................................... (541) (851)
------- -------
40 264
------- -------
Net loss.......................................... (28,178) (34,805)
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of this statement.
73
<PAGE>
IA TV BETEILIGUNGSGESELLSCHAFT MBH & CO. BETRIEBS-KG
STATEMENT OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
TDM TDM
------------ ------------
<S> <C> <C>
Partners' capital, brought forward................ 11,655 8,960
Capital contributions during the year............. 24,575 37,500
Net loss for the year............................. (28,178) (34,805)
------------ ------------
Partners' capital, carried forward................ 8,052 11,655
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of this statement.
74
<PAGE>
IA TV BETEILIGUNGSGESELLSCHAFT MBH & CO. BETRIEBS-KG
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
TDM TDM
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)................................................ (28,178) (34,805)
Adjustments to reconcile net (loss) to net cash used in
operating activities:
Depreciation and amortization.......................... 4,708 8,222
Increase in assets and liabilities:
Accounts receivable.................................. (356) 193
Prepaid expenses..................................... (73) (21)
Accounts payable and accrued liabilities............. (1,734) 1,360
Program and film rights.............................. (248) (3,368)
Related party liabilities............................ (287) (158)
Value-added tax receivables.......................... 247 464
Other receivables.................................... 1,003 1,392
Other payables....................................... 93 (1,145)
-------- --------
Net cash used in operating activities.................. (24,825) (27,866)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditure....................................... (1,637) (1,295)
Additions to other intangible assets...................... (240) (2,516)
Disposals................................................. 157 1,039
Deferred income--investment grants and allowances......... 296 1,030
-------- --------
Net cash used in investing activities..................... (1,424) (1,742)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft............................................ 0 (864)
Partners' capital contributions, net...................... 26,963 35,000
Capital lease payments.................................... (2,008) (1,857)
-------- --------
Net cash provided by financing activities................. 24,955 32,279
-------- --------
Net decrease/increase in cash and cash equivalents.......... (1,294) 2,671
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 3,015 344
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... 1,721 3,015
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of this statement.
75
<PAGE>
IA TV BETEILIGUNGSGESELLSCHAFT MBH & CO. BETRIEBS-KG
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. ORGANIZATION AND BUSINESS
IA TV Beteiligungsgesellschaft mbH & Co. Betriebs-KG, Berlin ('IA
Fernsehen' or 'the Partnership'), set up under German law as a Limited
Partnership, was established in 1993.
The management of the Partnership is carried out by IA TV
Beteiligungsgesellschaft mbH, Berlin ('IA TV'), the sole general partner of IA
Fernsehen. According to the Partnership agreement the general partner is not
required to contribute any capital nor does he participate in Partnership
profits or losses. IA TV has a supervisory board which monitors the activities
of management.
IA Fernsehen principally broadcasts television programs in the
Berlin/Brandenburg area of Germany. Until the third quarter of 1995 this
included the purchase and airing of acquired program rights for films and
series. The Partnership limited the acquisition of such rights and has since
been pondering more strongly on the broadcasting of self produced news and
entertainment features with regional content. In May 1996 the station was
relaunched and is since then broadcasting under the name of 'Puls Tv'.
The Partnership was awarded the first private regional television license
in Germany on August 4, 1993 from the Media Authority of Berlin-Brandenburg. The
license is limited to a period of 7 years commencing from the date of
broadcasting which was November 28, 1993. The license granted to the Partnership
is, under the terms of the license, renewable. However, no statutory or
regulatory presumption exists for the current license holder, and there can be
no assurance that the Partnership will receive a renewal upon expiration of the
initial term of the license.
2. FINANCING OF OPERATING AND CAPITAL NEEDS
Under the provisions of the Partnership Agreement the limited Partners were
required to contribute fixed capital of DM 10 mio. and variable capital of DM 90
mio. The total amount of fixed and variable capital of DM 100 mio. was called up
as of June 30, 1995.
According to the bylaws of the Partnership Agreement the partners may
decide with a majority of 75 % of votes cast to call variable capital amounts
exceeding DM 90 mio. The obligation and the right to contribute in such a case
shall exist only for those limited partners who have voted in favour of a
corresponding resolution or who give notice in writing to the General Partner
within one month following such resolution that they will participate in the
increase. The contributions shall be made in proportion to the share in fixed
capital of the limited partners participating in the increase.
In response to the capital needs of the Partnership the partners have
resolved the following capital calls in 1996 that were mainly supported by one
major partner:
<TABLE>
<CAPTION>
TDM
------
<S> <C>
March 26, 1996........ 10,000
June 19, 1996......... 2,500
August 6, 1996........ 2,500
August 28, 1996....... 2,000
September 17, 1996.... 2,500
September 17, 1996.... 575
November 12, 1996..... 4,500
------
24,575
------
------
</TABLE>
76
<PAGE>
IA TV BETEILIGUNGSGESELLSCHAFT MBH & CO. BETRIEBS-KG
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1995
3. GOING CONCERN
Since its inception the Partnership has incurred losses of DM 127.5 mio.
The initially agreed fixed and variable capital of DM 100 mio. as well as
additional capital of DM 35.5 mio. was nearly used until year-end 1996. Until
December 31, 1997, losses are projected to reach DM 15 mio. to DM 20 mio. Due to
the amortization of liabilities and capital expenditures the necessary funding
for 1997 is beyond DM 15 mio. as well and therefore exceeds the cash presently
available and resolved capital calls.
To maintain the operation as a going concern until year-end 1997 further
capital calls and funding are necessary. Presently the Partnership is unable to
fulfil its financial commitments. On September 4, 1996, the Partnership engaged
an investment bank to seek a strategic investor who may acquire a share in the
Partnership. Meanwhile the Partnership is provided with Partner's capital on a
day to day basis.
The factors described in the preceding paragraph raise substantial doubt
about the Partnership's ability to continue as a going concern. The financial
statements do not include any adjustments relating to the recoverability or
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Partnership be unable to continue as a
going concern.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Program and Film Rights
The book value of film licences reduced from TDM 441 as of December 31,
1995 to TDM 37 as of December 31, 1996. Since the change of the program
structure in 1995 the Partnership limited the purchase of film rights. In 1996
the Partnership changed its accounting policy for program and film rights from
capitalization and amortization based upon the actual airing to directly
expensing the costs for program rights.
Production Costs
Production costs for self-produced programs are recorded as operating
costs.
Property, Plant and Equipment and Intangible Assets
Fixed and intangible assets are carried at cost and are depreciated on a
straight line basis using the shorter of estimated useful lives, the underlying
lease period or the term of the television license period.
Replacements, renewals and improvements are capitalized. Maintenance and
repairs are charged to expense as incurred.
Investment grants and allowances that subsidize the assets of IA Fernsehen
are recorded as deferred income and disclosed among other liabilities.
Accordingly the assets are reported at their acquisition value net of
amortization. The amortization of deferred investment grants and allowances
relate to the underlying estimated useful lives of fixed assets acquired and are
netted with the amortization of such assets.
Income Taxes
Income taxes have not been recorded in the accompanying financial
statements as they are the obligation of the partners. Municipal trade tax on
income is payable by the Partnership. No such tax is due for the period ending
December 31, 1996 due to losses incurred by the Partnership in this period.
77
<PAGE>
IA TV BETEILIGUNGSGESELLSCHAFT MBH & CO. BETRIEBS-KG
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1995
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Cash and cash equivalents
Cash and cash equivalents include cash in banks and cash on hand.
Revenue Recognition
Revenues result from the sale of advertising time. Advertising revenue is
recognized at the time the commercials are broadcast.
Barter Transactions
Revenue from barter transactions (television advertising provided in
exchange for goods and services) is recognized as income when advertisements are
broadcast, and merchandise or services received are charged to expense (or
capitalized as appropriate) when received or used.
Receivables and payables arising from barter transactions are offset when
the services have been rendered to the customer and from the vendor.
Barter transactions in 1996 of TDM 944 are included in advertising revenues
and the related expenditures of TDM 917 are included in direct operating costs.
5. OTHER RECEIVABLES
Other receivables consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
TDM TDM
------------ ------------
<S> <C> <C>
Receivable from Deutsche Leasing AG (see Note
10)............................................. 1,497 1,610
Investment subsidies receivable................... 20 1,075
Other receivables................................. 207 42
------------ ------------
1,724 2,727
------------ ------------
------------ ------------
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
TDM TDM
------------ ------------
<S> <C> <C>
Fixtures and fittings............................. 12,094 12,043
Station machinery and office equipment............ 19,219 17,875
-- thereof relating to assets held under lease:
TDM 15,144 (1995: TDM 15,144)
------------ ------------
31,313 29,918
Less-Accumulated depreciation..................... (14,660) (9,638)
------------ ------------
16,653 20,280
------------ ------------
------------ ------------
</TABLE>
78
<PAGE>
IA TV BETEILIGUNGSGESELLSCHAFT MBH & CO. BETRIEBS-KG
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1995
7. OTHER INTANGIBLE ASSETS
Other intangible assets, net consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
TDM TDM
------------ ------------
<S> <C> <C>
Studio equipment software held under lease........ 2,586 2,500
Financial systems software........................ 578 425
------------ ------------
3,164 2,925
Less--Accumulated depreciation.................... (858) (421)
------------ ------------
2,306 2,504
------------ ------------
------------ ------------
</TABLE>
The studio equipment software represents a traffic system leased from
Enterprise Air-Time Systems Limited, Thames Ditton, U.K.
8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
TDM TDM
------------ ------------
<S> <C> <C>
Accounts payable, trade........................... 4,169 6,152
Vacation accrual.................................. 354 354
Ancillary rental cost............................. 339 245
Consulting fees................................... 241 --
Compensation...................................... 117 214
Contract risks.................................... 70 120
Miscellaneous accruals............................ 313 252
------------ ------------
5,603 7,337
------------ ------------
------------ ------------
</TABLE>
Trade payables include an unsettled liability of TDM 1,980 relating to the
operating lease contract with Enterprise Air-Time Systems Limited, Thames
Ditton, U.K., for the new traffic system.
9. DEFERRED INCOME
On October 5, 1993 the Partnership was awarded a first federal and state
funded grant amounting to 23% of capital investment of up to DM 50 mio. between
1993 and 1996. Total investments relating to the underlying budget for this
investment grant amounted to DM 37.1 mio. as of August 1996 with the Partnership
having received investment grants of TDM 8,544. As all budgeted investments were
finalized by that time the approval for investment grants was adjusted from
initially TDM 11,287 to TDM 8,544.
On August 26, 1996 the Partnership was awarded a second federal and state
funded grant amounting to 25% of capital investments of up to DM 13 Mio. between
1996 and 1999. As of December 31, 1996 the Partnership has received investment
grants of TDM 349 relating to this second investment grant approval.
The Partnership is required to retain the underlying assets acquired, upon
which these grants were received, in its business and region for a period of at
least 3 years. Furthermore 130 employment positions are guaranteed to be
maintained for a period of five years beginning with the first airing in
79
<PAGE>
IA TV BETEILIGUNGSGESELLSCHAFT MBH & CO. BETRIEBS-KG
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1995
9. DEFERRED INCOME--(CONTINUED)
November 1993. The second investment grant increases the number of guaranteed
labour from 130 to 150 for a period of five years beginning with the completion
of the budgeted investments. A failure to meet these two conditions could result
in the Partnership having to repay some or all of the grants received.
In addition the Partnership has the right, as governed by German tax law,
to receive tax free investment subsidies of 5% respectively of 8% of the cost of
acquired moveable fixed assets. The allowance is granted subject to the acquired
fixed assets remaining in the business for a period of at least 3 years.
Deferred investment grants and tax free subsidies are amortized according
to the underlying estimated useful lives of fixed assets acquired.
The total amount of grants and tax free subsidies received by the
Partnership and recorded in the accompanying balance sheet as deferred income is
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
TDM TDM
------------ ------------
<S> <C> <C>
Investment grants and subsidies................... 10,308 10,012
Less--Amortization to December 31................. (4,651) (3,151)
------------ ------------
5,657 6,861
------------ ------------
------------ ------------
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
Commitments under capital leases
The Partnership signed a contract with an investment bank, the Deutsche
Leasing AG, Berlin (Deutsche Leasing), to finance a part of its investments in
studio equipment. The total lease financing of DM 10 mio. represented two thirds
of the originally planned volume of investments in studio equipment of DM 15
mio. It was agreed that Deutsche Leasing retains a guarantee of DM 1 mio. at an
interest rate payable to IA Fernsehen of 5.35% p.a. The loan of DM 10 mio. is
financed at an annual interest rate of 6.9%. The loan has to be repaid to
Deutsche Leasing by October 1998 with monthly installments of TDM 201.
Deutsche Leasing is entitled to demand immediate repayment of the loan
amount outstanding if IA Fernsehen fails to meet the terms of the loan
agreement. The corresponding liability to the fixed assets held under finance
lease is the DM 4.1 mio. payable to Deutsche Leasing as of December 31, 1996.
Additionally, IA Fernsehen records a receivable from Deutsche Leasing of DM 1.5
mio. representing the guarantee (DM 1 mio.) and the unused finance volume (DM
0.5 mio.). The future obligations under the capital leases are as follows:
<TABLE>
<CAPTION>
INTEREST AMORTIZATION TOTAL
TDM TDM TDM
-------- ------------ -----
<S> <C> <C> <C>
1997.... 239 2,172 2,411
1998.... 64 1,945 2,009
-------- ------------ -----
303 4,117 4,420
-------- ------------ -----
-------- ------------ -----
</TABLE>
80
<PAGE>
IA TV BETEILIGUNGSGESELLSCHAFT MBH & CO. BETRIEBS-KG
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1995
10. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
Commitments under operating leases
--TV station headquarters
The Partnership entered into an operating lease for the television station
headquarters adjacent to the Television tower at the Alexanderplatz in Berlin on
May 14, 1993. The lease term commenced on May 1, 1993 and expires on December
31, 1999. The lease provides for a renewal option. For the period ended December
31, 1996, the Partnership paid rent and operating expenses amounting to DM 1.8
mio. Under the agreement the monthly rent amounts to DM 105,000 until April 30,
1998. Thereafter it increases to DM 197,500 per month. In addition the
Partnership is obliged to pay certain taxes, insurance costs and operating
expenses, as provided in the lease agreement.
According to the lease contract the Partnership is liable for possible
third party claims arising from restitution filings on the premises leased. The
Partnership as tenant cannot obtain valid evidence from the BVS ('Bundesanstalt
fur vereinigungs-bedingte Sonderaufgaben'--the former privatization agency
of the German Government) regarding any pending restitution claims. Should the
Partnership be forced to terminate its rental agreement prior to December 31,
1999, the lessor has agreed to negotiate the amount of capital expenditures
incurred to be reimbursed. The management will cooperate with the lessor in
order to obtain information on possible restitution claims.
According to the lease contract the Partnership is liable to guarantee the
pedestrians' safety on all passageways around the rented building. The
Partnership has taken steps to provide for such safety. Furthermore the
Partnership has to carry out maintenance work relating to the building at its
own cost. This obligation may result in additional costs which have not been
evaluated and correspondingly not been accrued for.
The Company has minimum future obligations under the operating lease
relating to the TV station headquarters as follows:
<TABLE>
<CAPTION>
TDM
-----
<S> <C>
1997.... 1,620
1998.... 2,360
1999.... 2,730
</TABLE>
--Traffic system
On May 24, 1995, the Partnership entered into a lease agreement for a
traffic system with the Enterprise Air-Time Systems Limited, Thames Ditton, U.K.
The lease term commenced on May 24, 1995, and expires on May 24, 2005. The
agreement may be terminated by written notice if a party e.g. ceases to carry on
its business. The traffic system was capitalized at TDM 2,568 and
correspondingly accrued for under trade liabilities. Amortization of TDM 266 for
1996 was expensed. The future payments represent the repayment of the liability
and will annually be increased with reference to the
81
<PAGE>
IA TV BETEILIGUNGSGESELLSCHAFT MBH & CO. BETRIEBS-KG
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1995
10. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
development of the Electrical and Electronical Engineering Index. The future
obligations under the terms of this operating lease are as follows:
<TABLE>
<CAPTION>
TDM
-----
<S> <C>
1997.......... 248
1998.......... 248
1999.......... 248
2000.......... 248
thereafter.... 1,236
</TABLE>
Government Regulation
Broadcast operations in Germany are subject to extensive Government
regulation. Television in Germany is regulated by the Media Authority of each
region, and the Media Authority Berlin-Brandenburg ('MABB') is responsible for
the activities of the Partnership. Regulations govern the issuance, renewal,
transfer and ownership of station licenses, as well as the timing and content of
programming and the timing, content and amount of commercial advertising
permitted. There are also regulations requiring that certain percentages of
programming are being produced or originated in local markets. The ownership of
a private TV station is closely monitored to avoid a single shareholder being
able to exercise a dominant influence on the business and program of a TV
station.
The Partnership communicated in writing the changes effected and intended
regarding the Partners' capital, the Partners' voting rights and the program
structure to MABB and obtained assurance to comply with the rules of the TV
license.
Employment Agreements
The managing directors of the Partnership are employed at the general
partner. In 1996 the following persons have been managing directors:
<TABLE>
<CAPTION>
APPOINTMENT PER DISMISSAL PER PARTNERS'
PARTNERS' RESOLUTION RESOLUTION
-------------------- -----------------------
<S> <C> <C>
Dr. Dietmar Straube.... September 19, 1995 September 30, 1996
Stefan Ziegenhagen..... March 26, 1996
</TABLE>
In accordance with para 4.1 of the General Partner's Agreement IA TV
Beteiligungs--gesellschaft mbH shall have at least two managing directors. The
Partnership is aware of this deficiency and will take corrective action. None of
the resolutions or changes of 1995 and 1996 have been inscribed in the
commercial register.
In 1996 an average of 148 employees and 103 freelancers worked for the
Partnership. Generally employment agreements may be terminated by either party
within 1 to 2 months upon prior written notice.
Litigation
Various competitors of IA Fernsehen have taken legal action against the
Media Authority Berlin-Brandenburg to overturn its decision in awarding the
Partnership the broadcast license for IA Fernsehen. The Partnership and legal
counsel believe that its broadcast license for IA Fernsehen is in
82
<PAGE>
IA TV BETEILIGUNGSGESELLSCHAFT MBH & CO. BETRIEBS-KG
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1995
10. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
no danger. The Media Authority has informed the Partnership that these legal
actions have no realistic chance of success.
The Company is from time to time involved in litigation incidental to the
conduct of its business. Management and its counsel believe such pending
litigation will not have a material adverse effect on the company's financial
condition.
83
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Slovenska televizna spolocnost, s.r.o.
We have audited the accompanying balance sheets of Slovenska televizna
spolocnost, s.r.o. as of December 31, 1996 and 1995, and the related statements
of income and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Slovenska televizna spolocnost,
s.r.o. as of December 31, 1996 and 1995, and the results of its operations and
its cash flows for the years then ended in conformity with United States
generally accepted accounting principles.
ARTHUR ANDERSEN
Bratislava, Slovak Republic
13 March 1997
84
<PAGE>
SLOVENSKA TELEVIZNA SPOLOCNOST, S.R.O.
BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1996
(CURRENCY--THOUSANDS OF SLOVAK CROWNS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................... 15,257 30,756
Accounts receivable (net of allowances of 3,387
TSK)......................................... -- 169,979
Program rights costs, net (Note 3).............. -- 5,155
Amounts due from shareholders................... -- 6
Other assets (Note 4)........................... 52,214 141,681
------------ ------------
Total current assets......................... 67,471 347,577
------------ ------------
INVESTMENT (Note 5)............................... -- 100
PROPERTY, PLANT & EQUIPMENT (net of depreciation
of 299 SK and 39,843 SK) (Note 6)............... 36,248 682,480
PROGRAM RIGHTS COST, net (Note 3)................. -- 166,618
INTANGIBLE ASSETS (net of amortisation of 27 SK,
1,324 SK) (Note 7).............................. 198 13,782
PRE OPERATIONAL COSTS (net of amortisation of nil,
5,016 SK) (Note 3).............................. 5,459 55,185
------------ ------------
Total assets................................. 109,376 1,265,742
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................ 4,910 158,537
Accrued Liabilities (Note 8).................... 1,005 24,233
Duties and other taxes payable.................. 167 17,162
Amounts due to Shareholders (Note 9)............ -- 10,521
Amounts due to related parties (Note 10)........ -- 1,192
------------ ------------
Total current liabilities.................... 6,082 211,645
------------ ------------
NON CURRENT LIABILITIES:
Shareholder loan (Note 9)....................... -- 294,192
------------ ------------
Total non current liabilities................ -- 294,192
------------ ------------
SHAREHOLDERS' EQUITY: (Note 13)
Capital stock................................... 100 100
Other contributed capital....................... 105,446 893,768
Accumulated deficit............................. (2,252) (133,963)
------------ ------------
Total shareholders' equity................... 103,294 759,905
------------ ------------
Total liabilities and shareholders' equity... 109,376 1,265,742
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
85
<PAGE>
SLOVENSKA TELEVIZNA SPOLOCNOST, S.R.O.
INCOME STATEMENTS
FOR THE PERIODS ENDED DECEMBER 31, 1995 AND 1996
(CURRENCY--THOUSANDS OF SLOVAK CROWNS)
<TABLE>
<CAPTION>
1995 1996
------ --------
<S> <C> <C>
REVENUES:
Advertising............................................... -- 227,026
Other..................................................... 1 5,334
------ --------
1 232,360
------ --------
------ --------
STATION EXPENSES:
Depreciation of station equipment......................... (299) (39,544)
Amortisation of programming rights........................ -- (74,769)
Amortisation of intangibles and pre-operational costs..... (27) (6,313)
Other operating costs and expenses........................ (1,908) (177,374)
Selling, general and administrative expenses.............. -- (49,966)
------ --------
Operating loss.............................................. (2,233) (115,606)
------ --------
------ --------
INTEREST AND OTHER INCOME (NOTE 14)......................... 4 7,750
INTEREST EXPENSE (NOTE 15).................................. (23) (23,855)
------ --------
Net loss.................................................... (2,252) (131,711)
------ --------
------ --------
</TABLE>
The accompanying notes are an integral part of these income statements.
86
<PAGE>
SLOVENSKA TELEVIZNA SPOLOCNOST, S.R.O.
STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED DECEMBER 31, 1995 AND 1996
(CURRENCY--THOUSANDS OF SLOVAK CROWNS)
<TABLE>
<CAPTION>
1995 1996
-------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. (2,252) (131,711)
Depreciation and amortization............................. 326 45,857
Depreciation of program rights............................ -- 74,769
Provision for bad debts................................... -- 3,387
-------- ----------
Operating profit before changes in operating assets....... (1,926) (7,698)
(Increase) decrease in operating assets:
Accounts receivable.................................... -- (173,366)
Other assets........................................... (52,214) (84,037)
Increase (decrease) in operating liabilities:
Accounts payable....................................... 4,910 153,627
Accrued liabilities.................................... 1,005 23,228
Duties and other taxes payable......................... 167 16,995
Amounts due to shareholders............................ -- 10,521
Amounts due to related parties......................... -- 1,192
-------- ----------
Net cash (used)/ from operating activities............. (48,058) (59,538)
-------- ----------
-------- ----------
Cash flows from investing activities:
Investments in program rights............................. -- (251,978)
Investments............................................... -- (100)
Net purchase of property, plant & equipment............... (36,547) (685,776)
Net purchase of intangible assets......................... (225) (14,881)
Pre-operational cost capitalised.......................... (5,459) (54,742)
-------- ----------
Net cash (used)/ from investing activities.................. (42,231) (1,007,477)
-------- ----------
-------- ----------
Cash flows from financing activities:
Increase in shareholder loan.............................. -- 294,192
Capital increase.......................................... 100 --
Increase in other contributed capital..................... 105,446 788,322
-------- ----------
Net cash(used)/ from financing activities................... 105,546 1,082,514
-------- ----------
-------- ----------
Net increase in cash and cash equivalents................... 15,257 15,499
-------- ----------
-------- ----------
Cash and cash equivalents at the beginning of the year.... -- 15,257
-------- ----------
Cash and cash equivalents at end of year.................. 15,257 30,756
-------- ----------
-------- ----------
</TABLE>
The accompanying notes are an integral part of this statement.
87
<PAGE>
SLOVENSKA TELEVIZNA SPOLOCNOST, S.R.O.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
(CURRENCY--THOUSANDS OF SLOVAK CROWNS)
(1) ORGANIZATION AND BUSINESS
Slovenska televizna spolocnost, s.r.o. (STS or the Company) was established
as a Limited Liability Company under the Laws of the Slovak Republic on October
9, 1995, to develop an independent, private television station, TV Markiza, and
to both technically secure the preparation of television broadcasting and to
provide full scale television programming.
Programming prepared by STS, is broadcast by Markiza Slovakia, s.r.o., in
accordance with the license granted to Markiza Slovakia, by The Council of the
Slovak Republic for Broadcasting and Television Transmission. The license
provides for broadcast within the territory of the Slovak Republic utilising
terrestrial signals, achieving an initial 65% national coverage. The license is
limited for a period of 12 years commencing August 7, 1995.
The provision of programming to Markiza Slovakia by STS, is performed in
accordance with the terms of an agreement between these parties, under which
Markiza Slovakia grants STS the rights to all revenues derived from broadcasting
in exchange for a 51% ownership interest and a 20% economic interest in the
Company, subject to the repayment of the original capital contribution made by
Central Media Enterprises, B.V. (CME).
(2) FINANCING OF OPERATING AND CAPITAL NEEDS
The share capital of 100 TSK is 51% owned by Markiza Slovakia, s.r.o., a
limited liability company established under the Laws of the Slovak Republic, and
41% owned by CME, a Limited Liability Company established under the Laws of The
Netherlands.
In addition to the share capital provided, contributions amounting to
893,768 TSK have been received from CME for the provision of operating funds to
the Company. As a result of this increased contribution, and in accordance with
the Participants agreement between the shareholders, CME is entitled to 80% of
the Company's profits and losses and 80% of the proceeds upon liquidation of the
Company's assets.
In addition to shareholders capital, CME have granted loans to the Company
amounting to 294,192 TSK, as of December 31, 1996, inclusive of accrued interest
of 6,815 TSK.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements, consisting of the balance sheet as
of December 31, 1996 and 1995, and the related statements of income, cash-flow
statements and notes to the financial statements for the year ended 31 December
1996 are presented in accordance with US GAAP and, accordingly, give a true and
fair view of the Company's net worth, financial position and results.
a) Basis of accounting
The Company maintains its books of accounts and prepares statements for
regulatory purposes in accordance with Slovak accounting principles. The
accompanying financial statements are based on the accounting records of the
Company, together with appropriate reclassifications necessary for fair
presentation in accordance with US GAAP.
88
<PAGE>
SLOVENSKA TELEVIZNA SPOLOCNOST, S.R.O.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
(CURRENCY--THOUSANDS OF SLOVAK CROWNS)
b) Property, Plant and Equipment and Intangible Assets
Fixed and Intangible assets are carried at cost less accumulated
depreciation. Depreciation is computed using the straight line method over the
estimated useful lives of the related assets. (Notes 6 and 7).
c) Assets held under Capital Leases
Assets held under capital leases are accounted for in accordance with
Statement of Financial Accounting Standards No. 13, 'Accounting for Leases', and
recorded in Property, Plant and Equipment. The related liability is included in
obligations under capital lease.
d) Program Rights and Production Costs
Program rights acquired by the Company under license agreements and the
related obligations incurred are recorded as assets and liabilities when the
license period begins, and the assets are amortised to expense using accelerated
methods based on the estimated period of usage, ranging from one to five years.
Amortisation estimates for program rights are reviewed periodically and adjusted
prospectively. Program rights costs are shown net of amortisation of 74,769 TSK.
Payments made for program rights for which the license period has not begun
before the year end are classified as prepaid expenses and amount to 5,436 TSK
at December 31, 1996. (See Note 4).
The elements of program rights for which the licence period will expire
within one year, amounting to 5,155 TSK have been reclassified as current
assets.
Production costs for self-produced programs are capitalised, and expensed
when first broadcast except where the programming has potential to generate
future revenues. When this is the case, production costs are capitalised and
amortised on the same basis as programming obtained from third parties.
e) Pre Operational Costs
The Company has capitalised 60,201 TSK in costs incurred in connection with
the organisation and incorporation of the business prior to the commencement of
broadcasting of its programming. These costs will be amortised over four years
from the commencing of broadcasting of the station. Amortisation of 5,016 TSK
has been provided to December 31, 1996. (1995--nil)
f) Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, 'Accounting for Income Taxes.' No tax is
due for the period ending December 31, 1996 due to losses incurred by the
Company in this period.
g) Foreign Currency Transactions
Transactions denominated in foreign currencies are recorded at the exchange
rate in effect at the date of the transaction. Outstanding foreign currency
obligations and receivables have been translated at the exchange rate in effect
as of the balance sheet date. Translation gains or losses have been charged to
other income and expense.
89
<PAGE>
SLOVENSKA TELEVIZNA SPOLOCNOST, S.R.O.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
(CURRENCY--THOUSANDS OF SLOVAK CROWNS)
h) Cash and cash equivalents
Cash and cash equivalents include cash in banks and on hand. The Company
does not have any restricted cash balances.
i) Revenue Recognition
Revenues primarily result from the sale of advertising time and are
recognized at the time the advertisements are broadcast.
j) Barter Transactions
Revenue from barter transactions (television advertising provided in
exchange for goods and services) is recognised as income when advertisements are
broadcast, and programming, merchandise or services received are charged to
expense (or capitalised as appropriate) when received or used. Barter revenues
and related expenditures of 11,977 TSK have been recognised for the year within
advertising revenues and operating expenses respectively.
The Company does not believe that the bartered programming has significant
value on its second showing on Slovak television as it has been the experience
of the industry that first runs, on average, account for a substantial majority
of the program's potential revenue. Thus, no asset or liability is recorded on
the balance sheet for the potential rebroadcast of bartered programming.
The Company records barter transactions at the estimated fair value of the
production or services received. In cases where bartered programs can only be
obtained through a barter agreement the Company values the barter at the value
of the asset given up. In other cases where the Company has elected to enter
into barter agreements as an alternate method of payment, strictly for economic
reasons, the Company values the barter agreement at the value of the asset
received. If merchandise or services are received prior to the broadcast of a
commercial, a liability is recorded. Likewise, if a commercial is broadcast
first, a receivable is recorded.
Receivables and payables arising from barter transactions are offset when
the services have been rendered to the customer and the services rendered, or
the merchandise received from the vendor.
(4) OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Value-added tax......................... 2,189 18,765
Operational advances 50,018 116,413
Prepayments
--programming......................... -- 5,436
--other............................... -- 854
Other................................... 7 213
-------- -----------------
52,214 141,681
-------- -----------------
-------- -----------------
</TABLE>
In 1996, the Company entered into an agreement with Slovak Telecom for the
provision of the broadcasting infrastructure and signal transmission. In
accordance with this, advances of 127,000 TSK were remitted to Slovak Telecom,
against future signal transmission charges. This agreement accounts for 50,000
TSK and 108,632 TSK at December 31, 1995 and 1996, respectively.
90
<PAGE>
SLOVENSKA TELEVIZNA SPOLOCNOST, S.R.O.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
(CURRENCY--THOUSANDS OF SLOVAK CROWNS)
(5) INVESTMENTS
The Company hold 100% (100 TSK) of the share capital of company, 'Vyhra'. A
limited liability company established by STS under the Laws of the Slovak
Republic. Vyhra has not traded since its establishment.
(6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consist of the following:
<TABLE>
<CAPTION>
USEFUL DECEMBER 31, DECEMBER 31,
LIVES 1995 1996
------ --------------- ---------------
<S> <C> <C> <C>
Land and buildings...................... 25 -- 243,838
Technical Equipment..................... 4-8 1,197 394,595
Other................................... 4 -- 70,552
Construction in progress................ -- 15,102 --
Advances for tangibles.................. -- 20,248 13,338
--------------- ---------------
36,547 722,323
Less--Accumulated depreciation.......... (299) (39,843)
--------------- ---------------
36,248 682,480
--------------- ---------------
--------------- ---------------
</TABLE>
(7) INTANGIBLE ASSETS
Intangible assets, net consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
--------------- ---------------
<S> <C> <C>
Software................................ 25 7,013
Other................................... 200 8,093
--------------- ---------------
225 15,106
Less--Accumulated amortisation.......... (27) (1,324)
--------------- ---------------
198 13,782
--------------- ---------------
--------------- ---------------
</TABLE>
(8) ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
--------------- ---------------
<S> <C> <C>
Legal and Professional fees............. -- 194
Personnel accruals...................... 1,005 15,381
Social fund............................. -- 297
Other................................... -- 8,361
--------------- ---------------
1,005 24,233
--------------- ---------------
--------------- ---------------
</TABLE>
91
<PAGE>
SLOVENSKA TELEVIZNA SPOLOCNOST, S.R.O.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
(CURRENCY--THOUSANDS OF SLOVAK CROWNS)
(9) AMOUNTS DUE TO SHAREHOLDERS
Shareholder Loan
The Company has borrowed a total of 287,377 TSK over the period from July
10, 1996 to August 26, 1996. These loans are unsecured, repayable after a period
of no less than 5 years, maturing in 2007, and bearing interest at the rate of
6% per annum Interest of 6,815 TSK has accrued as at December 31, 1996 relating
to the period to this date.
Other
The Company owes 10,521 TSK to CME as at December 31, 1996, in relation to
consultancy services for the six months to the year end and for programming
services provided to the Company by CME.
(10) AMOUNTS DUE TO RELATED PARTIES
The Company has liabilities to Ceska nezavisla televizni spolecnost, s.r.o.
(TV Nova) at December 31, 1996, amounting to 1,192 TSK, relating to the purchase
of programs.
(11) LOAN OBLIGATIONS
The Company has no loan obligations other than that disclosed in Note 9.
(12) COMMITMENTS AND CONTINGENCIES
Commitments under Capital Leases
The Company has no material Capital Lease commitments at December 31, 1996.
Commitments under Operating Leases
The Company has entered into operating leases for three properties located
in Bratislava. The lease terms commenced June 15, and July 1, 1996 and expire
June 30, 1999 or have unlimited terms. Where a definitive term is set, the lease
provides for a renewal option. For the fiscal year ended December 31, 1996, the
Company paid aggregate rent on all facilities of 8,083 TSK.
The Company has minimum future obligations under operating leases relating
to property with definitive terms as follows:
<TABLE>
<CAPTION>
YEAR DM TSK
- -------- --- -----
<S> <C> <C>
1996.... 96 1,969*
1997.... 96 1,969
1998.... 96 1,969
1999.... 48 985
--- -----
336 6,892
--- -----
--- -----
</TABLE>
- ------------------
*translated using the exchange rate as at December 31, 1996.
Monthly payments relating to leases with unlimited terms amount to 56 TSK.
92
<PAGE>
SLOVENSKA TELEVIZNA SPOLOCNOST, S.R.O.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
(CURRENCY--THOUSANDS OF SLOVAK CROWNS)
Programming Rights Commitments
The Company has commitments amounting to 80,122 TSK in respect of rights
for future programming.
The Company has also entered into certain barter agreements in 1996 that
continue through 1997 and beyond, by which television advertising will be
provided in exchange for programming. As the value of this advertising time will
only be established at the time of broadcast, it is not possible to quantify the
impact of these agreements.
(13) SHAREHOLDERS' EQUITY
The movement on shareholders' equity in the year is as follows:
<TABLE>
<CAPTION>
OTHER TOTAL
CONTRIBUTED ACCUMULATED SHAREHOLDERS'
SHARE CAPITAL CAPITAL DEFICIT EQUITY
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balance as at December 31, 1995.... 100 105,446 (2,252) 103,294
Contributions...................... -- 788,322 -- 788,322
Loss for the year.................. -- -- (131,711) (131,711)
----- ----------- ----------- -------------
Balance as at December 31, 1996.... 100 893,768 (133,963) 759,905
----- ----------- ----------- -------------
----- ----------- ----------- -------------
</TABLE>
(14) INTEREST INCOME
Interest income consists of the following:
<TABLE>
<CAPTION>
1995 1996
---- -----
<S> <C> <C>
Bank & short term deposit......................... 4 2,509
Realised foreign exchange gains................... -- 190
Other............................................. -- 5,051
---- -----
4 7,750
---- -----
---- -----
</TABLE>
(15) INTEREST EXPENSE
Interest expense consists of the following:
<TABLE>
<CAPTION>
1995 1996
---- ------
<S> <C> <C>
Shareholder loan interest......................... -- 6,815
Foreign exchange losses
--realised...................................... -- 529
--unrealised.................................... -- 14,333
Other............................................. 23 2,178
---- ------
23 23,855
---- ------
---- ------
</TABLE>
93
<PAGE>
SLOVENSKA TELEVIZNA SPOLOCNOST, S.R.O.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
(CURRENCY--THOUSANDS OF SLOVAK CROWNS)
(16) NUMBER OF EMPLOYEES
The number of employees as of December 31, 1996, was 380 full time and 3
part-time.
(17) TAXATION
The reconciliation between the accounting loss and the taxable base of the
Corporate Income Tax is as follows:
<TABLE>
<CAPTION>
1996
--------
<S> <C>
Profit for the year............................... (131,711)
Permanent differences
Non deductible expenses......................... 12,667
Temporary differences
Unrealised exchange looses...................... 19,340
Difference with tax depreciation................ 4,124
US GAAP Adjustments............................. (54,733)
--------
Taxable income, (loss)............................ (150,313)
--------
--------
</TABLE>
Following the prudence principle and due to the uncertainty on the
recoverability of the tax credit following the current Slovak tax legislation,
the Management of STS has decided not to record the tax carry forward (60,125
TSK) or the deferred tax (asset, 21,893 TSK, liability, 9,386 TSK) as of
December 31, 1996.
94
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To FF Franken Funk und Fernsehen GmbH:
We have audited the accompanying consolidated balance sheet of FF Franken Funk
und Fernsehen GmbH (a Limited Partnership organized under German law) and
subsidiary as of December 31, 1994 and 1995, and the related consolidated
statements of operations, shareholders' and partners' capital and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material mis-statement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FF Franken Funk und Fernsehen
GmbH and subsidiary as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for the years then ended in conformity with
United States generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note 3 to the
financial statements, the Company has incurred significant operating losses
during the years ended December 31, 1994 through 1996, and is dependent upon
additional capital to fund its operations. These factors raise substantial doubt
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments relating to the recoverability or
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
ARTHUR ANDERSEN
WIRTSCHAFTSPRUFUNGSGESELLSCHAFT
STEUERBERATUNGSGESELLSCHAFT MBH
March 4, 1996
(except for the matters
discussed in Note 3, as to which
the date is March 5, 1997)
Berlin, Germany
95
<PAGE>
FF FRANKEN FUNK UND FERNSEHEN GMBH AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
TDM TDM
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents....................... 176 1,753
Accounts receivable............................. 765 745
Related party receivables (Note 5).............. 454 29
Amounts due from shareholder (Note 6)........... 1,752 0
Other assets (Note 7)........................... 429 1,006
Prepaid expenses................................ 55 2
Contribution receivable......................... 0 1,255
------------ ------------
Total current assets.............................. 3,631 4,790
------------ ------------
Investments in Uncombined Affiliates (Note 8)..... 78 78
------------ ------------
Property, Plant & Equipment, including equipment
held under lease, net (Note 9).................. 4,546 5,562
------------ ------------
Intangible Assets (Note 10)....................... 106 105
------------ ------------
Total Assets...................................... 8,361 10,535
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank overdraft.................................. 10 0
Accounts payable................................ 531 1,083
Accrued liabilities (Note 11)................... 430 414
Duties and other taxes payable.................. 273 910
Related party payables (Note 12)................ 773 137
------------ ------------
Total current liabilities......................... 2,017 2,544
------------ ------------
Non Current Liabilities:
Other liabilities (Note 13)....................... 3,622 2,602
Long term loans (Note 14)......................... 10,000 4,000
------------ ------------
Total non current liabilities..................... 13,622 6,602
------------ ------------
Commitments and Contingencies (Note 15)
Silent Partners' Capital
Initial capital................................. 8,000 8,000
Accumulated deficit............................. (7,431) (3,098)
------------ ------------
Total silent partners' capital.................. 569 4,902
------------ ------------
Shareholders' Equity
Capital stock................................... 1,355 1,355
Accumulated deficit............................. (9,202) (4,868)
------------ ------------
Total shareholders' equity........................ (7,847) (3,513)
------------ ------------
Total liabilities and partners' capital........... 8,361 10,535
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
96
<PAGE>
FF FRANKEN FUNK UND FERNSEHEN GMBH AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
TDM TDM
------- -------
<S> <C> <C>
REVENUES:
Advertising (Note 16)..................................... 2,935 2,666
Other (Note 17)........................................... 3,407 3,051
------- -------
6,342 5,717
------- -------
STATION EXPENSES:
Depreciation of station equipment......................... (1,628) (1,852)
Other operating costs and expenses........................ (7,614) (7,324)
Selling, general and administrative expenses.............. (4,374) (4,375)
------- -------
Operating loss......................................... (7,274) (7,834)
------- -------
INTEREST AND OTHER INCOME................................... 147 176
INTEREST EXPENSE (Note 18).................................. (1,540) (308)
------- -------
(1,393) (132)
------- -------
Net loss before loss allocation........................ (8,667) (7,966)
------- -------
LOSS PORTION SILENT PARTNER................................. 4,333 3,098
------- -------
Net loss............................................... (4,334) (4,868)
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of this statement.
97
<PAGE>
FF FRANKEN FUNK UND FERNSEHEN GMBH AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' AND PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
TDM TDM
------------ ------------
<S> <C> <C>
SHAREHOLDERS' CAPITAL
Capital Stock
Subscribed capital of FFF.................... 100 100
Minority share of NMF assigned to FFF........ 1,255 1,255
------------ ------------
Accumulated deficit 1,355 1,355
------------ ------------
Beginning balance............................ (4,868) 0
Net loss before allocation................... (8,667) (7,966)
Less--silent partner portion................. 4,333 3,098
------------ ------------
Ending balance............................... (9,202) (4,868)
------------ ------------
Total shareholders' capital..................... (7,847) (3,513)
------------ ------------
------------ ------------
SILENT PARTNERS' CAPITAL
Initial capital................................. 8,000 8,000
Accumulated deficit
Beginning balance............................ (3,098) 0
Loss portion of the year..................... (4,333) (3,098)
------------ ------------
Ending balance............................... 569 4,902
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of this statement.
98
<PAGE>
FF FRANKEN FUNK UND FERNSEHEN GMBH AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
TDM TDM
------ ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) before loss allocation......................... (8,667) (7,966)
Adjustments to reconcile net (loss) to net cash used in
operating activities
Depreciation of station equipment...................... 1,628 1,852
Increase in assets and liabilities:
Accounts receivable.................................. (20) (330)
Amount due from uncombined affiliates................ (425) 92
Prepaid expenses..................................... (53) 2
Other assets......................................... 577 (724)
Accounts payable and accrued liabilities............. (536) 1,122
Duties and other taxes payable....................... (637) 910
Related party liabilities............................ 636 (288)
Other liabilities.................................... 1,030 2,485
------ ------
Net cash used in operating activities.................. (6,467) (2,845)
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (613) (7,498)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long term loans from silent partner....................... 7,000 2,000
Long term loan from shareholder........................... 0 2,000
Repayment of shareholder loan............................. (1,000) 0
Loan granted to shareholder............................... (1,752) 0
Partners' capital contributions........................... 1,255 8,000
------ ------
Net cash provided by financing activities................. 5,503 12,000
------ ------
Net decrease in cash and cash equivalents................. (1,577) 1,657
CASH AND CASH EQUIVALENTS, beginning of period.............. 1,753 96
------ ------
CASH AND CASH EQUIVALENTS, end of period.................... 176 1,753
------ ------
------ ------
</TABLE>
The accompanying notes are an integral part of this statement.
99
<PAGE>
FF FRANKEN FUNK UND FERNSEHEN GMBH AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
1. ORGANIZATION AND BUSINESS
FF Franken Funk und Fernsehen GmbH, Berlin ('FFF' or 'the Company'), set up
under German law as a Limited Partnership, began broadcasting on December 10,
1990 ('RTL Regional Window') and on February 23, 1994 (Terrestrial/cable
frequency K23) and respectively reaches the Nuremberg metropolitan area of
approximately 1.1 million people.
On December 10, 1990 the Company was awarded the RTL Regional Window (cable
channel K9). This licence was limited until July 1, 1995, prolonged until
October 31, 1995 but then cancelled by the supervisory board of the BLM, because
FFF had not announced the silent Partnership with CME Medienbeteiligungen GmbH &
Co. Media Enterprises KG ('CME') on time.
On February 23, 1994 the BLM awarded a full time licence for regional
television in the Nuremberg metropolitan area on the terrestrial/cable frequency
K23 to the consolidated NMF Neue Medien Franken GmbH & Co. KG ('NMF'), a
Partnership of FFF and Mr. Rudolf Wohrl. The license is limited for a period of
7 years commencing on February 27, 1994.
The consolidated financial statements consider FFF as parent Company and
the Partnership NMF as subsidiary. NMF has been fully consolidated. The minority
share of Mr. Rudolf Wohrl has been assigned to FFF as majority shareholder.
2. FINANCING OF OPERATING AND CAPITAL NEEDS
The share capital of TDM 100 is fully owned by Perimed Verlag Dr. Dietmar
Straube. The minority share of TDM 1,255 legally owned by Mr. Rudolf Wohrl is
not separately classified as minority sharecapital, but assigned to FFF.
In 1994 FFF signed a silent Partnership agreement with CME
Medienbeteiligungen GmbH & Co. Media Enterprises KG, Berlin, which became
effective on April 1, 1994. According to this agreement CME Medienbeteiligungen
GmbH & Co. Media Enterprises KG granted a silent partner capital of DM 8 mio. to
FFF. The silent partner is entitled to 50% of FFF's profits and losses and 50%
of the proceeds upon liquidation of its assets.
In addition to shareholders' and partners' capital the shareholder and the
silent partner granted loans to FFF which amounted to DM 10 mio. as of December
31, 1995.
3. GOING CONCERN
Since its inception FFF incurred consolidated losses of DM 22.4 mio. which
have been funded with DM 20.0 mio. by the silent partner CME, while the net cash
contribution of the single shareholder of FFF, Dr. Dietmar Straube, amounted to
DM 2.5 mio. Until December 31, 1997, further cash losses are projected to reach
DM 2.5 mio. Due to the present illiquidity of FFF the going concern of the
Company depends on day to day cash contributions and financial commitments by
the shareholder and the silent partner respectively.
The factors described in the preceding paragraph raise substantial doubt
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments relating to the recoverability or
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
100
<PAGE>
FF FRANKEN FUNK UND FERNSEHEN GMBH AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1994
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The subsidiary NMF has been fully consolidated. For true and fair view
reasons the minority share of a minority partner in NMF has not been separately
shown in the consolidated financial statements.
Property, Plant and Equipment and Intangible Assets
Fixed and intangible assets are carried at cost and are depreciated on a
straight line basis using the shorter of estimated useful lives or the
underlying lease period.
Replacements, renewals and improvements are capitalized. Maintenance and
repairs are charged to expense as incurred.
Income Taxes
No tax is due for the period ending December 31, 1995 due to losses
incurred by the Company in this period.
Cash and cash equivalents
Cash and cash equivalents include cash in banks and cash on hand.
Revenue Recognition
Revenues result from the sale of advertising time and from cable charges.
Advertising revenue is recognized at the time the commercials are broadcast.
5. RELATED PARTY RECEIVABLES
Amounts due from related parties consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
TDM TDM
------------ ------------
<S> <C> <C>
IA TV Beteilgungsgesellschaft mbH & Co.
Betriebs-KG..................................... 278 --
CME Medienbeteiligungen GmbH & Co. Media
Enterprises KG.................................. 150 --
B.I.S. Ballungsraumfernsehen in Sachen GmbH....... 26 --
Sachsen Funk und Fernsehen GmbH................... -- 27
Compliance Verlag Dr. Straube GmbH................ -- 2
----- --
454 29
----- --
----- --
</TABLE>
6. AMOUNTS DUE FROM SHAREHOLDER
On January 31, 1995 the Company granted a loan of TDM 1,632 to Perimed
Verlag Dr. Dietmar Straube. The loan bears interest at a rate of 8%. The accrued
interest of TDM 120 is included in the total balance as of December 31, 1995 of
TDM 1,752.
101
<PAGE>
FF FRANKEN FUNK UND FERNSEHEN GMBH AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1994
7. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
TDM TDM
------------ ------------
<S> <C> <C>
Value-added tax............... 115 238
Cable charges................. 100 617
Video-cassettes............... 70 75
Various....................... 144 76
----- ------------
429 1,006
----- ------------
----- ------------
</TABLE>
8. INVESTMENTS IN UNCOMBINED AFFILIATES
Investments in uncombined affiliates consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
TDM TDM
------------ ------------
<S> <C> <C>
Mittelfrankische Kabelgesellschaft mbH Region 7... 16 16
Medienbetriebsgesellschaft Oberfranken West mbH... 25 25
NMF-Neue Medien Franken Verwaltungs-GmbH.......... 37 37
----- ------------
78 78
----- ------------
----- ------------
</TABLE>
9. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
TDM TDM
------------ ------------
<S> <C> <C>
Technical equipment............................... 5,552 5,552
-- thereof relating to assets held under
lease: TDM 5,552 (1994: TDM 5,552)
Other equipment, operational and office
equipment....................................... 2,422 1,855
-- thereof relating to assets held under
lease: TDM 506 (1994:TDM 392)
------------ ------------
7,974 7,407
Less--Accumulated depreciation.................... (3,428) (1,845)
------------ ------------
4,546 5,562
------------ ------------
------------ ------------
</TABLE>
102
<PAGE>
FF FRANKEN FUNK UND FERNSEHEN GMBH AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1994
10. INTANGIBLE ASSETS
Intangible assets, net consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
TDM TDM
------------ ------------
<S> <C> <C>
Software................................ 124 167
Other intangibles....................... 17 20
----- ------------
141 187
Less--Accumulated depreciation.......... (35) (82)
----- ------------
106 105
----- ------------
----- ------------
</TABLE>
11. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
TDM TDM
------------ ------------
<S> <C> <C>
Legal and professional fees.................. 162 122
Vacation and overtime accrual................ 152 188
Miscellaneous accruals....................... 116 104
----- ------------
430 414
----- ------------
----- ------------
</TABLE>
12. RELATED PARTY PAYABLES
Related party payables consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
TDM TDM
------------ ------------
<S> <C> <C>
CME Medienbeteiligungen GmbH & Co. Media
Enterprises KG.................................. 666 --
NMF Neue Medien Franken Verwaltungs-GmbH.......... 49 46
Perimed Verlag Dr. Dietmar Straube................ 47 80
Medienbetriebsgesellschaft Oberfranken West mbH... 11 11
----- ------------
773 137
----- ------------
----- ------------
</TABLE>
103
<PAGE>
FF FRANKEN FUNK UND FERNSEHEN GMBH AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1994
13. OTHER LIABILITIES
Other liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
TDM TDM
------------ ------------
<S> <C> <C>
Capital lease obligation (see Note 15)....... 3,450 2,449
Other........................................ 172 153
------------ ------------
3,622 2,602
------------ ------------
------------ ------------
</TABLE>
14. LONG TERM LOANS
Long term loans consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
TDM TDM
------------ ------------
<S> <C> <C>
CME Medienbeteiligungen GmbH & Co. Media
Enterprises KG.................................. 9,000 2,000
Perimed Verlag Dr. Dietmar Straube................ 1,000 2,000
------------ ------------
10,000 4,000
------------ ------------
------------ ------------
</TABLE>
With loan agreements dated June 20, 1995 and September 10, 1995 CME granted
loans of DM 6.5 mio. and DM 2.5 mio. to FFF. These loans bear interest at a rate
of 10.5%. The loans shall be repayable at the latest on June 6, 1996, if and to
the extent the shareholder Dr. Dietmar Straube should until then not have
provided shareholder loans to FFF in the same amount. It is anticipated that the
loan will be substituted in the amount payable until June 6, 1996, by the
contributions of new shareholders. Should this not have happened and should FFF
not be able to repay, the parties will reach agreement on a refinancing, such as
by converting the loans into a silent Partnership contribution.
DM 1.0 mio. of the DM 2.0 mio. loan that the Perimed Verlag Dr. Dietmar
Straube granted to the Company in 1994 had been repaid on April 3, 1995.
15. COMMITMENTS AND CONTINGENCIES
Commitments under capital leases
The Company signed a contract with an investment bank, the Deutsche Leasing
AG, to finance most of its studio equipment and parts of its office equipment.
The total lease financing amounted to DM 5.6 mio. as of December 31, 1995.
The corresponding liability to the fixed assets held under capital lease is
the TDM 3,450 payable to Deutsche Leasing AG, which is included in other
liabilities.
104
<PAGE>
FF FRANKEN FUNK UND FERNSEHEN GMBH AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1994
15. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
The future obligations under the capital leases are as follows:
<TABLE>
<CAPTION>
TOTAL
TDM
-----
<S> <C>
1996.... 1,714
1997.... 1,598
1998.... 303
1999.... 18
-----
3,633
-----
-----
</TABLE>
Commitments under operating leases
The Company entered into an operating lease for the television station
facilities in Erlangen with the Perimed Verlag Dr. Dietmar Straube. The lease
term commenced on January 1, 1994 and expires on December 31, 2001. For the
period ended December 31, 1995, the Company paid rent and operating expenses
amounting to TDM 2,635. Under the agreement the yearly rent amounted to TDM
1,000 for the studio facilities and TDM 1,635 for 3,800 m2 of office space,
parking lots and utilities. In 1996 the leased office space had been reduced to
3,600 m2 so that the Company has yearly minimum future obligations under
operating leases of TDM 2,552 until year end 2001.
Government Regulation
Broadcast operations in Germany are subject to extensive Government
regulation. Television in Germany is regulated by the Media Authority of each
region, and the Bayerische Landesmedienanstalt ('BLM') is responsible for the
activities of FFF and NMF respectively. Regulations govern the issuance,
renewal, transfer and ownership of station licenses, as well as the timing and
content of programming and the timing, content and amount of commercial
advertising permitted. There are also regulations requiring that certain
pecentages of programming be produced or originated in local markets. The
ownership of a private TV station is closely monitored to avoid a single
shareholder being able to exercise a dominant influence on the business and
program of a TV station.
The Company lost its licence for the RTL window frequency K9 in October
1995. This cancellation might have a negative impact on the terrestrial/cable
frequency K23 as the BLM requested FFF to start negotiations with the new owner
of the RTL Regional Window regarding a joint management of the frequency K23.
16. ADVERTISING REVENUES
The cancellation of the licence for the 'RTL Regional Window' has a
material impact on the economic situation of FFF. For the period from January
through October 1995 advertising income from this licence amounted to TDM 980
(1994: TDM 1,596). Comparable advertising income from the terrestrial/cable
frequency K23 was TDM 1,955 in 1995 (1944: TDM 1,070).
105
<PAGE>
FF FRANKEN FUNK UND FERNSEHEN GMBH AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1994
17. OTHER REVENUES
Other revenues consist of the following:
<TABLE>
<CAPTION>
1995 1994
TDM TDM
----- -----
<S> <C> <C>
BLM and cable charges.................................. 1,965 2,391
Production and intercompany charges.................... 1,078 538
Other.................................................. 364 122
----- -----
3,407 3,051
----- -----
----- -----
</TABLE>
18. INTEREST EXPENSE
Interest expense consists of the following:
<TABLE>
<CAPTION>
1995 1994
TDM TDM
----- -----
<S> <C> <C>
Long term loans due to CME Medienbeteiligungen GmbH & Co.
Media Enterprises KG...................................... 621 45
Perimed Verlag Dr. Dietmar Straube........................ 132 45
----- -----
753 90
Capital Lease Deutsche Leasing AG........................... 600 --
Perimed Verlag Dr. Straube (from acquisition)............... -- 207
Other....................................................... 187 11
----- -----
1,540 308
----- -----
----- -----
</TABLE>
106
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated herein by reference
to the section entitled "Election of Directors" in the Company's Proxy Statement
for the 1998 Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference
to the sections entitled "Executive Compensation," "Compensation Committee
Report on Executive Compensation" and "Performance Graph" in the Company's Proxy
Statement for the 1998 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference
to the section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Company's Proxy Statement for the 1998 Annual Meeting of
Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference
to the section entitled "Certain Relationships and Related Transactions" in the
Company's Proxy Statement for the 1998 Annual Meeting of Shareholders.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following Financial Statements of the Company are included in Part
II, Item 8 of this Report:
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Operations for the years ended December 31, 1997,
1996 and 1995
Consolidated Statements of Shareholders' Equity (Deficit) for the period
from December 31, 1994 to December 31, 1997
107
<PAGE>
Consolidated Statements of Cash Flows for the years ended December 31, 1997,
1996 and 1995
Note to Consolidated Financial Statements
(a)(2) The following Financial Statements of 1A TV Beteiligungsgesellschaft MBH
& Co. Betreibs-KG are included in Part II, Item 8 of this Report:
Report of Independent Public Accountants
Balance Sheet as of December 31, 1996 and 1995
Statement of Operation for the years ended December 31, 1996 and 1995
Statement of Partners' Capital for the years ended December 31, 1996 and
1995
Statement of Cash Flows for the years ended December 31, 1996 and 1995
Notes to Financial Statements
(a)(3) The following Financial Statements of Slovenska Televizna Spolocnost,
s.r.o. are included in Part II, Item 8 of this Report:
Report of Independent Public Accountants
Balance Sheet as of December 31, 1995 and 1996
Income Statements for the periods ended December 31, 1995 and 1996
Statements of Cash Flows for the periods ended December 31, 1995 and 1996
Notes to Financial Statements
(a)(4) The following Financial statements of Franken Funk und Fernsehen GmbH are
included in Part II, Item 8 of this Report:
Report of Independent Public Accountants
Consolidated Balance Sheet as of December 31, 1995 and 1994
Consolidated Statement of Operations for the years ended December 31, 1995
and 1994
Consolidated Statement of Shareholders' and Partners' Capital for the years
ended December 31, 1995 and 1994
Consolidated Statement of Cash Flows for the years ended December 31, 1995
and 1994
Notes to Consolidated Financial Statements
(a)(5) The following exhibits are included in this report:
108
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
3.01* -- Memorandum of Association (incorporated by reference to Exhibit
3.01 to the Company's Registration Statement No. 33-80344 on
Form S-1, filed June 17, 1994).
3.02* -- Bye-Laws of Central European Media Enterprises Ltd., as
amended, dated as of May 2, 1997 (incorporated by reference to
Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1997).
3.03* -- Memorandum of Increase of Share Capital (incorporated by
reference to Exhibit 3.03 to Amendment No. 1 to the Company's
Registration Statement No. 33-80344 on Form S-1, filed August
19, 1994).
3.04* -- Memorandum of Reduction of Share Capital (incorporated by
reference to Exhibit 3.04 to Amendment No. 2 to the Company's
Registration Statement No. 33-80344 on Form S-1, filed
September 14, 1994).
3.05* -- Certificate of Deposit of Memorandum of Increase of Share
Capital executed by Registrar of Companies on May 20, 1997
(incorporated by reference to Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1997).
4.01* -- Specimen Class A Common Stock Certificate (incorporated by
reference to Exhibit 4.01 to Amendment No. 1 to the Company's
Registration Statement No. 33-80344 on Form S-1, filed August
19, 1994).
4.02* -- Specimen Note for 9 3/8% Senior Notes Due 2004 (incorporated by
reference to Exhibit 4.1 to the Company's Amendment No. 3 to
Form S-3 filed on August 14, 1997)
4.03* -- Specimen Note for 8 1/8% Senior Notes Due 2004 (incorporated by
reference to Exhibit 4.1 to the Company's Amendment No. 3 to
Form S-3 filed on August 14, 1997)
4.04* -- Form of Indenture for 9 3/8% Senior Notes Due 2004
(incorporated by reference to Exhibit 4.2 to the Company's
Amendment No. 3 to Form S-3 filed on August 14, 1997)
4.05* -- Form of Indenture for 8 1/8% Senior Notes Due 2004
(incorporated by reference to Exhibit 4.2 to the Company's
Amendment No. 3 to Form S-3 filed on August 14, 1997)
10.01* -- Central European Media Enterprises Ltd. Amended and Restated
1994 Stock Option Plan (incorporated by reference to Exhibit
10.01 to Amendment No. 3 to the Company's Registration
Statement No. 33-80344 on Form S-1, filed October 13, 1994).
10.01A*-- Central European Media Enterprises Ltd. Amended and Restated
1994 Stock Option Plan, as amended to October 17, 1995.
109
<PAGE>
(incorporated by reference to Exhibit 10.01A to Amendment No. 1
to the Company's Registration Statement No. 33-96900 on Form
S-1, filed October 18, 1995).
10.02* -- Central European Media Enterprises Ltd. 1995 Stock Option Plan,
as amended to October 17, 1995. (incorporated by reference to
Exhibit 10.02A to Amendment No. 1 to the Company's Registration
Statement No. 33-96900 on Form S-1, filed October 18, 1995).
10.03* -- Partnership Agreement for CEDC Management Services GmbH & Co.
CME Betriebs KG, dated May 25, 1993 between CEDC Management
Services GmbH and CEDC Management Services GmbH & Co. Media
Enterprises KG (incorporated by reference to Exhibit 10.06 to
the Company's Registration Statement No. 33-80344 on Form S-1,
filed June 17, 1994).
10.04* -- Partnership Agreement for CEDC Management Services GmbH & Co.
Television KG between CEDC Management Services GmbH and CEDC
Management Services GmbH & Co. Media Enterprises KG
(incorporated by reference to Exhibit 10.07 to the Company's
Registration Statement No. 33-80344 on Form S-1, filed June 17,
1994).
10.05* -- Partnership Agreement for Schamoni TV Beteiligungsgesellschaft
GmbH & Co. Betriebs-KG dated May 14, 1993 (incorporated by
reference to Exhibit 10.08 to the Company's Registration
Statement No. 33-80344 on Form S-1, filed June 17, 1994).
10.06* -- Memorandum of Association and Investment Agreement dated May 4,
1993, as amended, by and between Central European Development
Corporation Management Services GmbH, Ceska Sporitelna, a.s.
and CET 21 s.r.o. (incorporated by reference to Exhibit 10.09
to the Company's Registration Statement No. 33-80344 on Form
S-1, filed June 17, 1994).
10.07* -- Services Agreement dated as of July 29, 1994 among Andrew
Gaspar, Bukfenc Inc. and Central European Media Enterprises
Ltd. (incorporated by reference to Exhibit 10.12 to Amendment
No. 1 to the Company's Registration Statement No. 33-80344 on
Form S-1, filed August 19, 1994).
10.07A*-- Amendment, dated January 1, 1997, to Services Agreement among
Central European Media Enterprises Ltd., Bukfenc Inc. and
Andrew Gaspar, dated July 29, 1994 (incorporated by reference
to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1997).
10.07B*-- Extension, dated October 23, 1996, of Services Agreement among
Central European Media Enterprises Ltd., Bukfenc Inc. and
Andrew Gaspar, dated July 29, 1994 (incorporated by reference
to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1997).
10.08* -- Credit Agreement between Ceska Sportelma, a.s. and Ceska
Nezavisla Televizni Spolecnost, s.r.o. (incorporated by
reference to Exhibit 10.16 to Amendment No. 1 to the Company's
Registration Statement No. 33-80344 on Form S-1, filed August
19, 1994).
110
<PAGE>
10.09* -- Term Promissory Note in favor of Ronald S. Lauder dated
September 9, 1994 and Warrant for the Purchase of Shares of
Common Stock issued to Ronald S. Lauder dated as of September
9, 1994 (incorporated by reference to Exhibit 10.17 to
Amendment No. 2 to Registration Statement No. 33-80344 on Form
S-1, filed September 14, 1994).
10.10* -- Consultancy Agreement, dated February 9, 1995, between CME
Media Enterprises B.V. and Radio Alfa a.s. (incorporated by
reference to Exhibit 10.18 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994).
10.11* -- Loan Agreement, dated as of February 9, 1995 between CME Media
Enterprises B.V. and Radio Alfa a.s. (incorporated by reference
to Exhibit 10.19 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994).
10.11A* -- Supplementary Loan Agreement, dated March 20, 1995,
between CME Media Enterprises B.V. and Radio Alfa a.s.
(incorporated by reference to Exhibit 10.19A to the
Company's Report on Form 10-Q for the quarterly period
ended June 30, 1995).
10.11B*-- Second Supplementary Loan Agreement, dated July 14, 1995,
between CME Media Enterprises B.V. and Radio Alfa a.s.
(incorporated by reference to Exhibit 10.19B to the Company's
Report on Form 10-Q for the quarterly period ended June 30,
1995).
10.11C*-- Third Supplementary Loan Agreement, dated December 11, 1995,
between CME Media Enterprises B.V. and Radio Nova Alfa a.s.
(f.k.a. Radio Alfa a.s.) (incorporated by reference to Exhibit
10.16C to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995).
10.11D*-- Fourth Supplementary Loan Agreement, dated February 29, 1996,
between CME Media Enterprises B.V. and Radio Alfa a.s.
(incorporated by reference to Exhibit 10.15D to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1996).
10.11E*-- Fifth Supplementary Loan Agreement, dated November 29, 1996,
between CME Media Enterprises B.V. and Radio Alfa a.s.
(incorporated by reference to Exhibit 10.15E to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1996).
10.12* -- Partnership Agreement of Produkcija Plus d.o.o. Ljubljana,
dated February 10, 1995 among CME Media Enterprises B.V.,
Boutique MMTV d.o.o. Ljubljana, and Tele 59 d.o.o. Maribor.
(incorporated by reference to Exhibit 10.20 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1994).
10.13* -- Letter Agreement, dated March 23, 1995, among, Kanal A,
Boutique MMTV d.o.o. Ljubljana, Tele 59 d.o.o. Maribor, Euro 3
and Baring Communications Equity as advisor to Baring
Communications Equity Limited, regarding Produkcija Plus d.o.o.
(incorporated by reference to Exhibit 10.21 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1994).
111
<PAGE>
10.14* -- Credit Agreement, dated as of November 14, 1994, between Ceska
Sportelma, a.s. and Ceska Nezavisla Televizni Spolecnost,
s.r.o. (incorporated by reference to Exhibit 10.22 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994).
10.15* -- Lease, dated February 2, 1995, between CME Development
Corporation Inc. and JRT (Properties) Limited for the term of
ten years for the offices at 9 Poland Street and 17, 18 and 19
D'Arblay Street in London. (incorporated by reference to
Exhibit 10.23 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994).
10.15A*-- Shareholder Agreement, dated May 25, 1995, between ITI TV
Holdings Sp. z.o.o. and CME Media Enterprises B.V.
(incorporated by reference to Exhibit 10.24A to the Company's
Report on Form 10-Q for the quarterly period ended June 30,
1995).
10.15B*-- Stock Purchase Agreement, dated May 25, 1995,
between ITI Media Group N.V. and CME Media Enterprises
B.V. (incorporated by reference to Exhibit 10.24B to
the Company's Report on Form 10-Q for the quarterly
period ended June 30, 1995).
10.16* -- Contract for Space Segment Service dated June 9, 1995, between
British Telecommunications plc ('BT') and CME Programming
Services, Inc. for the provision of programming transmission
services by BT and the payment thereon (incorporated by
reference to Exhibit 10.25A to the Company's Report on Form
10-Q for the quarterly period ended June 30, 1995).
10.16A*-- Guarantee by Central European Media Enterprises Ltd. in respect
of obligations due to British Telecommunications plc by CME
Programming Services, Inc. dated June 9, 1995 (incorporated by
reference to Exhibit 10.25B to the Company's Report on Form
10-Q for the quarterly period ended June 30, 1995).
10.17* -- Cooperation Agreement among CME Media Enterprises B.V., Ion
Tiriac and Adrian Sarbu (incorporated by reference to Exhibit
10.27 to the Company's Registration Statement No.33- 96900 on
Form S-1 filed September 13, 1995).
10.18* -- Preliminary Agreement, dated June 12, 1995, between CME Media
Enterprises B.V. and Markiza-Slovakia s.r.o. (incorporated by
reference to Exhibit 10.28 to the Company's Registration
Statement No. 33-96900 on Form S-1, filed September 13, 1995).
10.18A*-- Memorandum of Association between CME Media Enterprises, B.V.
and Markiza-Slovakia s.r.o. (incorporated by reference to
Exhibit 10.28A to Amendment No. 1 to the Company's Registration
Statement No. 33-96900 on Form S-1, filed October 18, 1995).
10.18B*-- Articles of Association of Slovenska Televizna Spolocnost,
s.r.o. founded by CME Media Enterprises, B.V. and
Markiza-Slovakia s.r.o. (incorporated by reference to Exhibit
10.28B to Amendment No. 1 to the Company's Registration
Statement No. 33-96900 on Form S-1, filed October 18, 1995).
112
<PAGE>
10.19* -- Modification of the Articles of Association of 2002 Tanacsado
es Szolgaltato Karlatolt Felelossegu Tarasag, dated March 1,
1995 (incorporated by reference to Exhibit 10.29 to the
Company's Registration Statement No. 33-96900 on Form S-1,
filed September 13, 1995).
10.20* -- The Constituent Agreement on the Activity of the
Ukrainian-Dutch Joint Venture with Limited Liability 'Gravis',
dated September 12, 1995, among Manufacturing-Commercial Firm
VGV and Victor K. Leshyk, Olna O. Mykhailova, Pavlo D. Bohdan,
Volodymyr P. Popov, and CME Media Enterprises, B.V.
(incorporated by reference to Exhibit 10.30 to Amendment No.1
to the Company's Registration Statement No. 33-96900 on Form
S-1, filed October 18, 1995).
10.20A*-- Charter of the Ukrainian-Dutch Joint Venture with Limited
Liability Gravis, dated September 12, 1995 (incorporated by
reference to Exhibit 10.30A to Amendment No. 1 to the Company's
Registration Statement No. 33-96900 on Form S-1, filed October
18, 1995).
10.21* -- Heads of Agreement, dated September 6, 1995, between Dr.
Dietmar Straube, CME Medienbeteiligungen GmbH & Co. Media
Enterprises KG and Sachsen Funk und Fernsehen GmbH.
(incorporated by reference to Exhibit 10.31 to Amendment No. 1
to the Company's Registration Statement No. 33-96900 on Form
S-1, filed October 18, 1995).
10.22* -- Contract of Sale, dated July 7, 1995 between In Razvoj in
Svetovanje d.o.o. Ljubljana and Produkcija Plus d.o.o.
Ljubljana and Central European Media Enterprises Group
(incorporated by reference to Exhibit 10.29 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1995).
10.23* -- Loan Agreement, dated December 4, 1995, between CME Media
Enterprises, B.V., and Inter Media S.R.L. (incorporated by
reference to Exhibit 10.30 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995).
10.24* -- Loan Agreement, dated as of March 4, 1996, by and between CME
Media Enterprises B.V. as lender and Nova Mova TV Company
(incorporated by reference to Exhibit 10.31 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1995).
10.25* -- Contocurrent Credit Contract kept with the Current Account,
dated as of November 1, 1995 between Ceska Sporitelna a.s. and
Czech Independent Television Company s.r.o. (Ceska Nezavisla
Televizni Spolecnost s.r.o.) (incorporated by reference to
Exhibit 10.32 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995).
10.26* -- Quota Purchase Agreement for Videovox (incorporated by
reference to Exhibit 10.01 to the Company's Report on Form 10-Q
for the quarterly period ended June 30, 1996).
10.26A*-- Amendment to the Quota Purchase Agreement for
Videovox (incorporated by reference to Exhibit 10.02
to the Company's
113
<PAGE>
Report on Form 10-Q for the quarterly period ended
June 30, 1996).
10.27* -- Transfer Agreement between Ceska Sporitelna and CME BV
(incorporated by reference to Exhibit 10.03 to the Company's
Report on Form 10-Q for the quarterly period ended June 30,
1996).
10.27A*-- Annex to Transfer Agreement between Ceska Sporitelna
and CME BV (incorporated by reference to Exhibit 10.04
to the Company's Report on Form 10-Q for the quarterly
period ended June 30, 1996).
10.28* -- Loan Agreement between Ceska Sporitelna and CME BV
(incorporated by reference to Exhibit 10.05 to the Company's
Report on Form 10-Q for the quarterly period ended June 30,
1996).
10.29* -- Agreement on a Future Agreement between Ceska Sporitelna and
CME BV (incorporated by reference to Exhibit 10.06 to the
Company's Report on Form 10-Q for the quarterly period ended
June 30, 1996).
10.30* -- Bridge Loan Agreement between ING bank and CME BV (incorporated
by reference to Exhibit 10.07 to the Company's Report on Form
10-Q for the quarterly period ended June 30, 1996).
10.31* -- Share Pledge Agreement between ING bank and CME BV
(incorporated by reference to Exhibit 10.08 to the Company's
Report on Form 10-Q for the quarterly period ended June 30,
1996).
10.32* -- Loan Agreement between Vladimir Zelezny and CME dated August 1,
1996 (incorporated by reference to Exhibit 10.01 to the
Company's Report on Form 10-Q for the quarterly period ended
September 30, 1996).
10.32A*-- Amendment to the Loan Agreement of August 1, 1996 and
agreements referred to as Security Documents between Vladimir
Zelezny and CME, dated as of March 11, 1997 (incorporated by
reference to Exhibit 10.38A to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996).
10.33* -- Promissory Note in Favor of Ronald S. Lauder, dated October 2,
1996 (incorporated by reference to Exhibit 10.02 to the
Company's Report on Form 10-Q for the quarterly period ended
September 30, 1996).
10.34* -- Ronald S. Lauder Warrant for the Purchase of Shares, dated
October 2, 1996 (incorporated by reference to Exhibit 10.03 to
the Company's Report on Form 10-Q for the quarterly period
ended September 30, 1996).
10.35* -- Articles of Association for Mobil Rom S.A., dated September 26,
1996 (incorporated by reference to Exhibit 10.04 to the
Company's Report on Form 10-Q for the quarterly period ended
September 30, 1996).
10.36* -- Company Agreement for the creation of Mobil Rom S.A., dated
September 26, 1996 (incorporated by reference to Exhibit 10.05
to the Company's Report on Form 10-Q for the quarterly period
ended September 30, 1996).
10.37* -- GSM General Agreement, dated September 26, 1996 (incorporated
114
<PAGE>
by reference to Exhibit 10.06 to the Company's Report on Form
10-Q for the quarterly period ended September 30, 1996).
10.38* -- Unimedia Assignment of Shares Agreement, dated September 22,
1996 (incorporated by reference to Exhibit 10.07 to the
Company's Report on Form 10-Q for the quarterly period ended
September 30, 1996).
10.39* -- Additional Agreement for Unimedia, dated September 26, 1996
(incorporated by reference to Exhibit 10.08 to the Company's
Report on Form 10-Q for the quarterly period ended September
30, 1996).
10.40* -- Unimedia Warranties, dated September 26, 1996 (incorporated by
reference to Exhibit 10.09 to the Company's Report on Form 10-Q
for the quarterly period ended September 30, 1996).
10.41* -- Agreement between CME, Boris Fuchsmann, Alexander Rodniansky
and Innova Film GmbH in English, dated October 25, 1996
(incorporated by reference to Exhibit 10.10 to the Company's
Report on Form 10-Q for the quarterly period ended September
30, 1996).
10.42* -- Agreement between CME, Boris Fuchsmann, Alexander Rodniansky
and Innova Film GmbH in German, dated October 25, 1996
(incorporated by reference to Exhibit 10.11 to the Company's
Report on Form 10-Q for the quarterly period ended September
30, 1996).
10.43* -- TVN--Realbud Agreement, dated September 4, 1996 (incorporated
by reference to Exhibit 10.12 to the Company's Report on Form
10-Q for the quarterly period ended September 30, 1996).
10.44* -- TVN--Realbud Agreement, dated September 4, 1996 (incorporated
by reference to Exhibit 10.13 to the Company's Report on Form
10-Q for the quarterly period ended September 30, 1996).
10.45* -- TVN--Realbud Agreement, dated September 6, 1996 (incorporated
by reference to Exhibit 10.14 to the Company's Report on Form
10-Q for the quarterly period ended September 30, 1996).
10.46* -- Appendix to the TVN--Realbud Agreement, dated September 19,
1996 (incorporated by reference to Exhibit 10.15 to the
Company's Report on Form 10-Q for the quarterly period ended
September 30, 1996).
10.47* -- TVN--Realbud Share Sale Agreement, dated October 30, 1996
(incorporated by reference to Exhibit 10.16 to the Company's
Report on Form 10-Q for the quarterly period ended September
30, 1996).
10.48* -- Annex No. 2 to the Supplementary Agreement between TVN and
Realbud, dated October 30, 1996 (incorporated by reference to
Exhibit 10.17 to the Company's Report on Form 10-Q for the
quarterly period ended September 30, 1996).
10.49* -- Poland Street Lease Agreement, dated April 2, 1996
(incorporated by reference to Exhibit 10.18 to the Company's
Report on Form 10-Q for the quarterly period ended September
30, 1996).
115
<PAGE>
10.50* -- Share Purchase Agreement between IDOS Praha, spol. s.r.o. and
CME Media Enterprises B.V., dated November 15, 1996
(incorporated by reference to Exhibit 10.56 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1996).
10.51* -- Share Purchase Agreement between Releas, a.s. and CME Media
Enterprises B.V., dated December 3, 1996 (incorporated by
reference to Exhibit 10.57 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996).
10.52* -- Share Purchase Agreement between Ceska Sporitelna a.s. and CME
Media Enterprises B.V., dated December 12, 1996 (incorporated
by reference to Exhibit 10.58 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996).
10.53* -- Agreement on Assignment of Claim between Ceska Sporitelna, a.s.
and CME Media Enterprises B.V., dated December 12, 1996
(incorporated by reference to Exhibit 10.59 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1996).
10.54* -- Assignment of Shares Agreement between Balaclava B.V., Adrian
Sarbu (as shareholders of PRO TV Ltd.), CME Media Enterprises
B.V., Grigoruta Roxana Dorina and Petrovici Liana, dated
December 6, 1996 (incorporated by reference to Exhibit 10.60 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996).
10.55* -- Quota Purchase Agreement between and by Magyarhang Dubbing and
Production Limited Liability Company and CME Media Enterprises
B.V., dated December 23, 1996 (incorporated by reference to
Exhibit 10.61 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996).
10.56* -- Shareholders Agreement between TVN, Ltd. and Ambresa, dated
December 30, 1996 (incorporated by reference to Exhibit 10.62
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996).
10.57* -- First Amendment to Stock Purchase Agreement between ITI Media
Group N.V. and CME Media Enterprises B.V., dated December 31,
1996 (incorporated by reference to Exhibit 10.63 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996).
10.58* -- Net Reimbursement Agreement by and among International
Teleservices Limited, International Media Services, Limited and
Limited Liability Company 'Prioritet', dated February 13, 1997
(incorporated by reference to Exhibit 10.64 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1996).
10.59* -- Agreement by and between International Media Services, Ltd and
Innova Film GmbH, dated January 23, 1997 (incorporated by
reference to Exhibit 10.65 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996).
116
<PAGE>
10.60* -- Amended and Restated Charter of the Enterprise 'Inter-Media',
dated January 23, 1997 (incorporated by reference to Exhibit
10.66 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996).
10.61* -- Amended and Restated Charter of the Broadcasting Company
'Studio 1+1', dated January 23, 1997 (incorporated by reference
to Exhibit 10.67 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996).
10.62* -- Amended and Restated Foundation Agreement on the Establishment
and Operation of the Broadcasting Company 'Studio 1+1,' dated
January 23, 1997 (incorporated by reference to Exhibit 10.68 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996).
10.63* -- Protocol of the Participants' Assembly of the Broadcasting
Company 'Studio 1+1,' dated January 23, 1997 (incorporated by
reference to Exhibit 10.69 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996).
10.64* -- Marketing, Advertising and Sales Agreement by and between
International Media Services Ltd and Innova Film GmbH, dated
January 23, 1997 (incorporated by reference to Exhibit 10.70 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996).
10.64A*-- Amendment Agreement to Marketing, Advertising and Sales
Agreement between Innova Film GmbH and International Media
Services Limited, dated May 7, 1997 (incorporated by reference
to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1997).
10.65* -- Marketing and Sales Agreement by and between International
Media Services Ltd. and Prioritet, dated January 23, 1997
(incorporated by reference to Exhibit 10.71 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1996).
10.65A* -- Termination Agreement between International Media
Services Ltd. and Prioritet, dated May 7, 1997
(incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1997).
10.66* -- Lease between Sony Music Entertainment (UK) Limited and CME
Development Corporation, dated December 19, 1996, concerning
Great Marlborough Street, London premises (incorporated by
reference to Exhibit 10.72 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996).
10.67* -- IMS Advertising Service Agreement between International Media
Services Ltd. and Limited Liability Company --Prioritet--, dated
May 7, 1997 (incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1997).
10.68* -- Advertising Consultancy Agreement between Intermedia and
Limited Liability Company --Prioritet--, dated May 7, 1997
117
<PAGE>
(incorporated by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1997).
10.69* -- Service Agreement between R. S. Lauder Gaspar & Co., LP and
Central European Media Enterprises Ltd., dated as of April 1,
1997 (incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1997).
10.70* -- Contract on Purchase of Real Estate between Central European
Development Corporation Praha, spol s.r.o. and Ceska Nezavisla
Televizni Spolecnost, spol. s.r.o., dated May 21, 1997
(incorporated by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1997).
10.71* -- Shareholders' Agreement, dated August 1, 1997, among Federacja
Sp.zo.o., ITI Media Group N.V., and CME Media Enterprises B.V.
(incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1997).
10.72 -- Employment Agreement between CME Development Corporation and
John Schwallie, dated as of November 21, 1997.
10.73 -- Employment Agreement between Central European Media Enterprises
Ltd. and John Schwallie, dated as of November 21, 1997.
10.74 -- Employment Agreement between CME Development Corporation and
Fred Klinkhammer, dated as of January 1, 1998.
10.75 -- Employment Agreement between Central European Media Enterprises
Ltd. and Fred Klinkhammer, dated as of January 1, 1998.
21.01 -- List of subsidiaries.
23.01 -- Consent of Arthur Andersen & Co.
24.01 -- Power of Attorney, dated as of February 9, 1998, authorizing
Leonard Fertig, Frederic T. Klinkhammer and John A. Schwallie
as attorney for Ronald S. Lauder, Andrew Gaspar, Robert A.
Rayne, Frederic T. Klinkhammer, Leonard M. Fertig, Herbert S.
Schlosser, Nicolas G. Trollope and John A. Schwallie.
27.01 -- Financial data schedule.
99.01 -- Press Release, dated March 26, 1998.
(b) -- Current Reports on Form 8-K:
None
(c) -- Exhibits: See (a)(5) above for a
listing of the exhibits included as part
of this report.
(d) -- Report of Independent Public Accountants on
Schedule Schedule II--Schedule of
Valuation Allowances.
* -- Previously filed exhibits
118
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Central European Media Enterprises Ltd.
By: /s/ John A. Schwallie
---------------------
John A. Schwallie
Vice President-Finance and Chief
Financial Officer
March 30, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
*
- -----------------------
Ronald S. Lauder Chairman of the Board of Directors March 30, 1998
/s/ Michel Delloye
- -----------------------
Michel Delloye President, Chief Executive Officer March 30, 1998
and Director (Principal Executive
Officer)
/s/ John A. Schwallie
- ------------------------
John A. Schwallie Vice President - Finance and Chief March 30, 1998
Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
*
- ------------------------
Nicolas G. Trollope Vice President, Secretary and March 30, 1998
Director
*
- ------------------------
Andrew Gaspar Director March 30, 1998
*
- ------------------------
Herbert S. Schlosser Director March 30, 1998
*
- ------------------------
Robert A. Rayne Director March 30, 1998
*
- ------------------------
Leonard M. Fertig Director March 30, 1998
*By: /s/ John A. Schwallie
---------------------
John A. Schwallie
Attorney-in-fact
119
<PAGE>
INDEX TO SCHEDULES
Report of Independent Public Accountants on Schedule:...................... S-2
Schedule II: Schedule of Valuation Allowances............................. S-3
S-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To: Central European Media Enterprises Ltd.:
We have audited in accordance with auditing standards generally accepted in the
United States, the financial statements of Central European Media Enterprises
Ltd. included in this filing and have issued our report thereon dated March 24,
1997. Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the accompanying
index is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in our audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen & Co.
Hamilton, Bermuda
March 30, 1998
S-2
<PAGE>
Schedule II
Schedule of Valuation Allowances
$000s
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
January 1, Costs and Other December
1997 Expenses Accounts Deductions 31, 1997
----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Bad debt provision................ 3,200 1,314 -- (816) 3,698
Development costs................. 996 1,125 -- -- 2,121
</TABLE>
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
January 1, Costs and Other December
1996 Expenses Accounts Deductions 31, 1996
----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Bad debt provision................ 1,105 2,095 -- -- 3,200
Development costs................. 4,373 714 -- (4,091) 996
</TABLE>
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
January 1, Costs and Other December
1995 Expenses Accounts Deductions 31, 1995
----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Bad debt provision................ 945 160 -- -- 1,105
Development costs................. 985 3,388 -- -- 4,373
</TABLE>
S-3
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.72 -- Employment Agreement between CME Development Corporation and
John Schwallie, dated as of November 21, 1997.
10.73 -- Employment Agreement between Central European Media Enterprises
Ltd. and John Schwallie, dated as of November 21, 1997.
10.74 -- Employment Agreement between CME Development Corporation and
Fred Klinkhammer, dated as of January 1, 1998.
10.75 -- Employment Agreement between Central European Media Enterprises
Ltd. and Fred Klinkhammer, dated as of January 1, 1998.
21.01 -- List of Subsidiaries.
23.01 -- Consent of Arthur Andersen & Co.
24.01 -- Power of Attorney, dated as of February 9, 1998, authorizing Leonard
Fertig, Frederic T. Klinkhammer and John A. Schwallie as attorney
for Ronald S. Lauder, Andrew Gaspar, Robert A. Rayne, Frederic T.
Klinkhammer, Leonard M. Fertig, Herbert S. Schlosser, Nicolas G.
Trollope and John A. Schwallie.
27.01 -- Financial Data Schedule.
99.01 -- Press Release, dated March 26, 1998.
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 21st day of the November, 1997, by and between CME
Development Corporation, a Delaware corporation (the "Corporation") and John
Schwallie ("Schwallie")
WITNESSETH:
WHEREAS, the Corporation wishes to employ Schwallie, and Schwallie wishes
to be employed by the Corporation, on the terms and conditions set forth below;
NOW, THEREFORE, in consideration of the foregoing and the terms and
conditions contained herein, the parties hereto agree as follows:
1. Position and Responsibilities.
1.1. The Corporation hereby employs Schwallie to serve in an executive
capacity as Vice President Finance and Chief Financial Officer of the
Corporation. Subject to the direction and authorization of the President and
Chief Executive of the Corporation, Schwallie shall perform such functions and
undertake such responsibilities as are customarily associated with such a
position. All these functions will take place inside the United Kingdom.
Schwallie shall hold such directorships and executive officerships in the
Corporation and any subsidiary to which, from time to time, he may be elected or
appointed during the term of this Agreement.
1.2. Schwallie shall devote his full time and best efforts to the business
and affairs of the Corporation and to the promotion of its interests; provided,
however, that Schwallie shall be entitled to devote such time as is necessary to
fulfil
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his obligations under the Employment Agreement dated the date hereof
between Schwallie and Central European Media Enterprises Ltd.
1.3. The parties acknowledge that Schwallie will perform the duties
hereunder wholly inside the United Kingdom and acknowledge that Schwallie has
entered into an employment agreement with Central European Media Enterprises
Ltd. which would cover services to be performed by him outside the United
Kingdom. Schwallie will do such travelling as may reasonably be required in the
performance of his duties hereunder, consistent with his level of travel during
the twelve months prior to the date hereof.
2. Term.
2.1. The term of this Agreement shall commence on 1 August 1997 and
terminate on August 14, 1999, unless sooner terminated as provided in this
Agreement. The term of this Agreement and any extension thereof is herein
referred to as the "Term."
2.2. Notwithstanding the provisions of Section 2.1 hereof, the Corporation
shall have the right, on written notice to Schwallie, to terminate this
Agreement for Cause (as defined herein) , such termination to be effective seven
days after the date on which written notice is given or as of such later date
otherwise specified in the notice.
2.3 For purposes of this Agreement, the term "Cause" shall mean fraud or
dishonesty or acts of gross negligence in the course of providing his services
herein which are injurious to the Corporation; wilful misrepresentation to
shareholders or directors which is injurious to the Corporation; a wilful
failure without reasonable justification to comply with a reasonable written
order of the President and Chief Executive or the Board of Directors, which
shall not be cured within 20 days after written notice; a wilful and material
breach of this Agreement,
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which shall not be cured within 20 days after written notice; or the commission
of a felony.
2.4. For purposes of this Agreement, the term "Good Reason" shall mean any
of the following: (a) the assignment to Schwallie by the Corporation of duties
inconsistent with, or a material reduction in the nature of, Schwallie's
responsibilities as Vice President and Chief Financial Officer of the
Corporation; (b) a relocation outside of the London metropolitan area without
Schwallie's prior consent; (c) failure by the Corporation to comply with any of
the material terms of this Agreement, which shall not have been cured within 20
days after written notice thereof; or (d) Schwallie shall no longer be Vice
President Finance and Chief Financial Officer of the Corporation (except by
reason of Sections 2.2, 4.1 or 4.2 hereof). For a period of 30 days after the
occurrence of a Good Reason event, Schwallie shall have the right to terminate
this Agreement for Good Reason.
2.5. If this Agreement shall be terminated (a) by the Corporation other
than pursuant to Sections 2.2, 4.1 or 4.2 hereof or (b) by Schwallie for Good
Reason (as defined herein) then the Corporation shall continue to pay to
Schwallie all compensation, bonuses, benefits, reimbursement and other payments
to which Schwallie is entitled to under this Agreement for the Term. In such
event the Corporation will pay relocation expenses back to the Czech Republic or
the Corporation shall pay an amount equivalent to the cost of relocation of
Schwallie to the Czech Republic. In the event this Agreement shall be terminated
by the Corporation pursuant to Sections 4.1 or 4.2 hereof, the Corporation shall
continue to pay to Schwallie and/or his wife and children for all benefits
provided in Section 3.2 of this Agreement, and specifically ensure that health,
life and disability insurance shall continue in effect for the remainder of the
Term.
2.6. Upon termination of this Agreement for any reason, the Corporation
will immediately pay Schwallie all amounts due and owing, including
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but not limited to bonuses, accrued vacation, expense reimbursements and
earned salary.
2.7. The Company will inform Schwallie no later than six months prior to
the termination date of this Agreement whether or not the Company wishes to
renew the Agreement.
2.8. Upon expiration or termination of this Agreement, including any
extension thereof, for any reason, all directorships or executive officerships
in the Corporation or any of its affiliates to which Schwallie was elected or
appointed shall also immediately terminate.
2.9. In the event that Schwallie wishes to terminate this Agreement for
other than Good Reason, Schwallie agrees to give the Corporation three months
notice. Nevertheless, at the option of the Corporation, Schwallie shall be
required to perform his duties during this notice period.
3. Salary.
3.1. The Corporation shall pay to Schwallie for the services to be rendered
by Schwallie hereunder a salary at the rate of US$112,500 per annum. The salary
shall be payable in equal monthly installments of US$9,375 each. Such salary
will be increased on the first anniversary of this Agreement to US$125,000,
payable in equal monthly installments of US$10,416.66. The Board of Directors of
the Corporation in its sole discretion may grant Schwallie an annual bonus.
3.2. Schwallie shall be entitled to participate in, and receive benefits
from, any insurance, medical, disability, bonus, incentive compensation, or
other employee benefit plan, if any are adopted, of the Corporation or any
subsidiary which may be in effect at any time during this Agreement, provided
that in any event Schwallie shall, at the Corporation's expense, be entitled to
private medical insurance
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for himself, his wife and dependent children, disability insurance and
permanent health insurance at the maximum permissible levels from time to time,
and life insurance in an amount commensurate with the life insurance
offered to the other senior executives of the Corporation. These benefits will
not be reduced from the present level without his prior written consent.
3.3. The Corporation agrees to reimburse Schwallie for all reasonable and
necessary business expenses incurred by, him on behalf of the Corporation in the
course of his duties hereunder upon the presentation by Schwallie of appropriate
receipts therefore.
3.4. For each calendar month during the Term Schwallie shall be entitled
to a monthly living allowance of Pound Sterling 1,000 to be paid in equal
monthly installments.
3.5. Schwallie's entitlement to paid vacation is governed by the
Corporation's Employee Handbook.
4. Death; Incapacity.
4.1. If, during the Term, because of illness or other incapacity, Schwallie
shall fail for a period of 180 consecutive days, or for shorter periods
aggregating more than 180 days during any twelve month period, to render the
services contemplated hereunder, then the Corporation, at its option, may
terminate this Agreement by notice from the Corporation to Schwallie, effective
on the giving of such notice.
4.2. In the event of the death of Schwallie during the Term, this Agreement
shall terminate on the date of such death.
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4.3. Upon termination of this Agreement, the Corporation shall pay to
Schwallie or his legal representatives any amounts owed to him including but not
limited to expense reimbursement, accrued vacation and earned bonuses, and
Schwallie shall pay to the Corporation any amounts owed to the Corporation, to
the date of termination.
5. Other Activities During Agreement.
5.1. Schwallie agrees to devote up to 120 working days per year to
performing services under this Agreement and up to 120 working days per year to
performing services under the Employment Agreement dated the date hereof between
Schwallie and Central European Media Enterprises Ltd.; Schwallie shall devote
his full business time to performing services under these two agreements.
5.2. During the Term and for a period of two years thereafter, and except
as contemplated herein, neither Schwallie nor any entity in which he may be
interested as a partner, trustee, director, officer, employee, shareholder,
option holder, lender of money or guarantor (each, a "Schwallie Affiliate")
shall be engaged directly or indirectly in the business of licensing of
television or radio stations and provision of programming engaged in by the
Corporation, or any subsidiary, in any country in Europe where the Corporation,
or any subsidiary, conducts such business at any time during the Term (a
"Competitive Activity"); provided, however, that the foregoing shall not be
deemed to prevent Schwallie from investing in not more than 5% of the
outstanding securities of a public company. If, for a period of two years after
the Term, Schwallie or a Schwallie Affiliate proposes to engage in what may be a
Competitive Activity, Schwallie shall so notify the Corporation in writing which
shall fully set forth and describe in detail the nature of the activity which
may be a Competitive Activity, the names of the companies or other entities with
or for whom such activity is proposed to be undertaken, and whether it is
proposed to be engaged in by Schwallie or by a Schwallie Affiliate (the "Section
5 Notice"). If, within 30 days after notice to the Corporation pursuant to a
Section 5 Notice, the Corporation shall
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fail to notify Schwallie that it deems the proposed activity to be a
Competitive Activity, then Schwallie shall be free to engage in the activities
described in the Section 5 Notice without violation of this Section 5.2. It is
understood and agreed that any opportunity directly or indirectly related to any
business engaged in by the Corporation, or any subsidiary, in any country in
Europe where the Corporation, or any subsidiary, conducts such business at any
time during the Term shall be deemed a corporate opportunity of the Corporation
and Schwallie shall promptly make such opportunity available exclusively to the
Corporation.
5.3. Schwallie shall not at any time during this Agreement or after the
termination hereof directly or indirectly divulge, furnish, use, publish or make
accessible to any person or entity other than Central European Media Enterprises
Ltd. Any Confidential Information (as hereinafter defined) other than in
connection with the performance of his duties hereunder. It is the specific
intent of the Corporation and Schwallie that each and all of the provisions set
forth hereinabove shall be valid and enforceable as specifically set forth
hereinabove; and that Schwallie acknowledges that the Corporation's remedies at
law are likely to be inadequate, and Schwallie consents to the application of
the equitable remedies of specific performance to enforce the Corporation's
rights hereunder. Further, should any person seek to legally compel Schwallie
(by oral questions, interrogatories, requests for information or documents,
subpoena, civil investigative demands or otherwise) to disclose any Confidential
Information, Schwallie shall provide the Corporation with prompt notice followed
up in writing so that the Corporation may seek a protective order or other
appropriate remedy, failing which Schwallie shall be entitled to make such
disclosure as is legally required. In any event Schwallie shall use his best
efforts with the advice of counsel to furnish only that portion of the
Confidential Information which is legally required and, with the cooperation of
the Corporation, will exercise his best efforts to obtain reliable assurance
that confidential treatment will be accorded information so disclosed. In the
event of a breach or a threatened breach by Schwallie of the provisions of this
Section 5.3, the Corporation may, in addition to any other remedies it may have,
obtain injunctive relief in any court of appropriate jurisdiction to enforce
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this Section 5.3. The provisions of this Section 5.3 shall survive the
expiration or termination, for any reason, of this Agreement and shall be
separately enforceable. Any records of Confidential Information prepared by
Schwallie or which come into Schwallie's possession during the Term are and
remain the property of the Corporation and upon termination of this Agreement
all such records and copies thereof shall be either left with or returned to the
Corporation.
5.4. The term "Confidential Information" shall mean information disclosed
to Schwallie or known, learned, created or observed by him as a consequence of
or through this Agreement, not generally known in the relevant trade or
industry, about the Corporation's business activities, services and processes,
including but not limited to information concerning advertising, sales
promotion, publicity, sales data, research, programming and plans for
programming, finances, accounting, methods, processes, business plans (including
prospective or pending license applications or investments in license holders or
applicants), client or supplier lists and records, potential client or supplier
lists, and client or supplier billing.
6. Indemnification.
6.1. The Corporation will indemnify Schwallie and pay on his behalf all
Expenses (as defined below) incurred by Schwallie in any Proceeding (as defined
below), whether the Proceeding which gave rise to the right of indemnification
pursuant to this Agreement occurred prior to or after the date of this Agreement
provided that Schwallie shall promptly notify the Corporation of such
Proceedings and the Corporation shall be entitled to participate in such
Proceedings and, to the extent that it wishes, jointly with Schwallie, assume
the defense thereof with counsel of its choice. This indemnification shall not
apply if it is determined by a court of competent jurisdiction in a Proceeding
that any losses, claims, damages or liabilities arose primarily out of the gross
negligence, wilful misconduct or bad faith of Schwallie.
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6.2. The term "Proceeding" shall include any threatened, pending or
completed action, suit or proceeding, or any inquiry or investigation, whether
brought in the name of the Corporation or otherwise and whether of a civil,
criminal, administrative or investigative nature, including, but not limited to,
actions, suits or proceedings brought under or predicated upon any securities
laws, in which Schwallie may be or may have been involved as a party or
otherwise, and any threatened, pending or completed action, suit or
proceeding or any inquiry or investigation that Schwallie in good faith believes
might lead to the institution of any such action, suit or proceeding or any such
inquiry or investigation, by reason of the fact that Schwallie is or was a
director, officer, employee, agent or fiduciary of the Corporation, by reason of
any action taken by Schwallie or of any inaction on his part while acting as
such director, officer, employee, agent or fiduciary or by reason of the fact
that he is or was serving at the request of the Corporation as a director,
officer, employee, trustee, fiduciary or agent of another corporation,
partnership, joint venture, employee benefit plan, trust or other enterprise,
whether or not he is serving in such capacity at the time any liability or
expense is incurred for which indemnification or reimbursement can be provided
under this Agreement.
6.3. The term "Expenses" shall include, without limitation thereto,
expenses (including, without limitation, attorneys' fees and expenses) of
investigations, judicial or administrative proceedings or appeals, damages,
judgements, fines, penalties or amounts paid in settlement by or on behalf of
Schwallie and any Expenses of establishing a right to indemnification under this
Agreement.
6.4. The Expenses incurred by Schwallie in any Proceeding shall be paid by
the Corporation as incurred and in advance of the final disposition of the
Proceeding at the written request of Schwallie. Schwallie hereby agrees and
undertakes to repay such amounts if it shall ultimately be decided in a
Proceeding that he is not entitled to be indemnified by the Corporation pursuant
to this Agreement or otherwise.
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6.5. The indemnification and advancement of Expenses provided by this
Agreement shall not be deemed exclusive of any other rights to which Schwallie
may be entitled under the Corporation's Articles of Incorporation or Bye-Laws,
any agreement, any vote of stockholders or disinterested directors, the laws
under which the Corporation was formed, or otherwise, and may be exercised in
any order Schwallie elects and prior to, concurrently with or following the
exercise of any other such rights to which Schwallie may be entitled, including
pursuant to directors and officers insurance maintained by the Corporation, both
as to action in official capacity and as to action in another capacity while
holding such office, and the exercise of such rights shall not be deemed a
waiver of any of the provisions of this Agreement. To the extent that a change
in law (whether by statute or judicial decision) permits greater indemnification
by agreement than would be afforded currently under the Corporation's Articles
of Incorporation, Bye-Laws and this Agreement, it is the intent of the parties
hereto that Schwallie shall enjoy by this Agreement the greater benefit so
afforded by such change. The provisions of this Section 6 shall survive the
expiration or termination, for any reason, of this Agreement and shall be
separately enforceable.
7. Assignment. The Corporation shall require any successor or assign to all
or substantially all the assets of the Corporation, prior to consummation of any
transaction therewith, to expressly assume and agree to perform in writing this
Agreement in the same manner and to the same extent that the Corporation would
be required to perform it if no such succession or assignment had taken place.
This Agreement shall inure to the benefit of and be binding upon the Corporation
and its successors and assigns. Schwallie shall not transfer, assign, convey,
pledge or encumber this Agreement , or his rights, title or interest herein
without the prior consent of the Corporation.
8. No Third Party Beneficiaries. This Agreement does not create, and shall
not be construed as creating, any rights enforceable by any person not a party
to this Agreement, except as provided in Sections 2.5, 2.6, 4.3, 6 and 7 hereof.
<PAGE>
9. Headings. The headings of the sections hereof are inserted for
convenience only and shall not be deemed to constitute a part hereof nor to
affect the meaning thereof.
10. Interpretation. In case any one or more of the provisions contained in
this Agreement shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Agreement, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein. If, moreover, any one or more of the provisions
contained in this Agreement shall for any reason be held to be excessively broad
as to duration, geographical scope, activity or subject, it shall be construed
by limiting and reducing it, so as to be enforceable to the extent compatible
with the applicable law as it shall then appear.
11. Notices. All notices under this Agreement shall be in writing and shall
be deemed to have been given at the time when mailed by registered or certified
mail or when delivered by hand or recognized overnight courier service,
addressed to the address below stated of the party to which notice is given, or
to such changed address as such party may have fixed by notice:
To the Corporation:
18 D'Arblay Street
London W1V 2FP England
Attn: Leonard M. Fertig
with a copy to:
Legal Department
18 D'Arblay Street
London W1V 2FP England
To Schwallie:
18 D'Arblay Street
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London W1V 2FP England
with a copy to:
Mark T. Schwallie, Esq.
116 Chesterfield Road
Westhampton, MA 01027
USA
and a copy to:
James D. Lebson
Lebson & Muller; PC
25 Franklin Street
Tenatly,
New Jersey 07670 USA
provided, however, that any notice of change of address shall be effective only
upon receipt.
12. Waivers. If any party should waive any breach of any provision of this
Agreement, it shall not thereby be deemed to have waived any preceding or
succeeding breach of the same or any other provision of this Agreement.
13. Complete Agreement; Amendments. The foregoing is the entire agreement
of the parties with respect to the subject matter hereof and may not be amended,
supplemented, cancelled or discharged except by written instrument executed by
the parties hereto.
14. Survival. Sections 2.4 - 2.8, 2.8, 3.2, 3.7, 4.3, 5.2 - 5.4, 6 and 15
shall survive the termination hereof, whether such termination shall be by
expiration of this Agreement or an early termination pursuant to Section 2
hereof.
15. Governing Law. This Agreement is to be governed by and construed in
accordance with the laws of New York, without giving effect to principles of
conflicts of law.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
CME DEVELOPMENT CORPORATION
By: /s/ Leonard M. Fertig
---------------------------------
Name: Leonard M. Fertig
Title: President and Chief Executive Officer
JOHN SCHWALLIE /s/ John Schwallie
----------------------
John Schwallie
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 21st day of November 1997, by and between Central
European Media Enterprises Ltd., a Bermuda corporation (the "Corporation") and
John Schwallie ("Schwallie")
WITNESSETH:
WHEREAS, the Corporation wishes to employ Schwallie, and Schwallie wishes
to be employed by the Corporation, on the terms and conditions set forth below;
NOW, THEREFORE, in consideration of the foregoing and the terms and conditions
contained herein, the parties hereto agree as follows:
1. Position and Responsibilities.
1.1. The Corporation hereby employs Schwallie to serve in an executive
capacity as Vice President Finance and Chief Financial Officer of the
Corporation. Subject to the direction and authorization of the President and
Chief Executive of the Corporation, Schwallie shall perform such functions and
undertake such responsibilities as are customarily associated with such a
position . All these functions will take place outside the United Kingdom.
Schwallie shall hold such directorships and executive officersh ips in the
Corporation and any subsidiary to which, from time to time, he may be elected or
appointed during the term of this Agreement.
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1.2. Schwallie shall devote his full time and best efforts to the business
and affairs of the Corporation and to the promotion of its interests; provided,
however, that Schwallie shall be entitled to devote such time as is necessary to
fulfil his obligations under the Employment Agreement dated the date hereof
between Schwallie and CME Development Corporation.
1.3. The parties acknowledge that Schwallie will perform the duties
hereunder wholly outside of the United Kingdom and acknowledge that Schwallie
has entered into an employment agreement with CME Development Corporation which
would cover services to be performed by him within the United Kingdom. Schwallie
will do such travelling as may reasonably be required in the performance of his
duties hereunder, consistent with his level of travel during the twelve months
prior to the date hereof.
2. Term.
2.1. The term of this Agreement shall commence on 1 August 1997 and
terminate on August 14, 1999, unless sooner terminated as provided in this
Agreement. The term of this Agreement and any extension thereof is herein
referred to as the "Term."
2.2. Notwithstanding the provisions of Section 2.1 hereof, the Corporation
shall have the right, on written notice to Schwallie, to terminate this
Agreement for Cause (as defined herein) , such termination to be effective seven
days after the date on which written notice is given or as of such later date
otherwise specified in the notice.
2.3 For purposes of this Agreement, the term "Cause" shall mean fraud or
dishonesty or acts of gross negligence in the course of providing his services
<PAGE>
herein which are injurious to the Corporation; wilful misrepresentation to
shareholders or directors which is injurious to the Corporation; a wilful
failure without reasonable justification to comply with a reasonable written
order of the President and Chief Executive or the Board of Directors, which
shall not be cured within 20 days after written notice; a wilful and material
breach of this Agreement, which shall not be cured within 20 days after written
notice; or the commission of a felony.
2.4. For purposes of this Agreement, the term "Good Reason" shall mean any
of the following: (a) the assignment to Schwallie by the Corporation of duties
inconsistent with, or a material reduction in the nature of, Schwallie's
responsibilities as Vice President and Chief Financial Officer of the
Corporation; (b) a relocation outside of the London metropolitan area without
Schwallie's prior consent; (c) failure by the Corporation to comply with any of
the material terms of this Agreement, which shall not ha ve been cured within 20
days after written notice thereof; or (d) Schwallie shall no longer be Vice
President Finance and Chief Financial Officer of the Corporation (except by
reason of Sections 2.2, 4.1 or 4.2 hereof). For a period of 30 days after the
occurrence of a Good Reason event, Schwallie shall have the right to terminate
this Agreement for Good Reason.
2.5. If this Agreement shall be terminated (a) by the Corporation other
than pursuant to Sections 2.2, 4.1 or 4.2 hereof or (b) by Schwallie for Good
Reason (as defined herein) then the Corporation shall continue to pay to
Schwallie all compensation, bonuses, benefits, reimbursement and other payments
to which Schwallie is entitled to under this Agreement for the Term. In such
event the Corporation will pay relocation expenses back to the Czech Republic or
the Corporation shall pay an amount equivalent to the cost of relocation of
Schwallie to the Czech Republic. In the event this Agreement shall be terminated
by the Corporation pursuant to Sections 4.1 or 4.2 hereof, the Corporation shall
continue
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to pay to Schwallie and/or his wife and children for all benefits provided
in Section 3.2 of this Agreement, and specifically ensure that health, life and
disability insurance shall continue in effect for the remainder of the Term.
2.6 Upon termination of this Agreement for any reason, the Corporation will
immediately pay Schwallie all amounts due and owing, including but not limited
to bonuses, accrued vacation, expense reimbursements and earned salary.
2.7 The Company will inform Schwallie no later than six months prior to the
termination date of this Agreement whether or not the Company wishes to renew
the Agreement.
2.8 Upon expiration or termination of this Agreement, including any
extension thereof, for any reason, all directorships or executive officerships
in the Corporation or any of its affiliates to which Schwallie was elected or
appointed shall also immediately terminate.
2.9 In the event that Schwallie wishes to terminate this Agreement for
other than Good Reason, Schwallie agrees to give the Corporation three months
notice. Nevertheless, at the option of the Corporation, Schwallie shall be
required to perform his duties during this notice period.
3. Salary.
3.1. The Corporation shall pay to Schwallie for the services to be rendered
by Schwallie hereunder a salary at the rate of US$112,500 per annum. The salary
shall be payable in equal monthly installments of US$9,375 each. Such salary
will be increased on the first anniversary of this Agreement to US$125,000,
payable in
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equal monthly installments of US$10,416.66. The Board of Directors of
the Corporation in its sole discretion may grant Schwallie an annual bonus.
3.2 Schwallie shall be entitled to participate in, and receive benefits
from, any insurance, medical, disability, bonus, incentive compensation, or
other employee benefit plan, if any are adopted, of the Corporation or any
subsidiary which may be in effect at any time during this Agreement, provided
that in any event Schwallie shall, at the Corporation's expense, be entitled to
private medical insurance for himself, his wife and dependent children,
disability insurance and permanent health insurance at the maximum permissible
levels from time to time, and life insurance in an amount commensurate with the
life insurance offered to the other senior executives of the Corporation. These
benefits will not be reduced from the present level without his prior written
consent.
3.3 The Corporation agrees to reimburse Schwallie for all reasonable and
necessary business expenses incurred by him on behalf of the Corporation in the
course of his duties hereunder upon the presentation by Schwallie of appropriate
receipts therefor.
3.4 For each calendar month during the term Schwallie shall be entitled to
a monthly living allowance of Pound Sterling 1,000 to be paid in equal monthly
installments.
3.5 Schwallie's entitlement to paid vacation is governed by the
Corporation's Employee Handbook.
3.6(a) As soon as practicable after the Commencement Date the President and
Chief Executive Officer of the Corporation shall recommend to the Compensation
Committee of the Board of Directors of the Corporation that, pursuant to the
1995 Stock Option Plan (the "Plan") of the Corporation, Schwallie shall be
granted for his services hereunder an option to purchase of 80,000 shares of
Class A Common Stock of the Corporation at an exercise price per share equal to
the market value of a share of such stock as of August 1997. The option shall
become exercisable
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in two installments, with an option to purchase 40,000 shares becoming
exercisable on the first and second anniversary dates of such date, subject to
the terms of the Plan. (b) In addition, for each of the next two years the
President and Chief Executive Officer of the Corporation may, if in his sole
discretion he believes Schwallie to have fully and adequately performed his
duties under this Agreement in such a manner as to meet or exceed expectations
("P erformance Goals"), recommend to the Compensation Committee of the Board of
Directors of the Corporation that Schwallie be granted, in addition to any
option granted in accordance with par. 3.5(a) of this Agreement, an option to
purchase additional shares, but no more than 20,000 additional shares per year,
of Class A Common Stock of the Corporation. at an exercise price per share equal
to the market value of a share of such stock determined in accordance with the
terms of the existing stock option plan. Schwallie and the President and Chief
Executive Officer of the Corporation shall determine the precise nature of these
Performance Goals within 30 days after the signing of this Agreement. Options
will be incentive stock options to the extent permitted by Section 422(d) of the
US Internal Revenue Code 1986, as amended. Schwallie acknowledges and agrees
that this provision is not a guarantee that the Board of Directors Compensation
Committee will actually grant any options to Schwallie.
3.7 In the event that any of the terms of the Plan become more favourable
to employees, then Schwallie shall be entitled to benefit from such provisions
to the extent allowed by the Compensation Committee.
3.8 In the event that this Agreement is terminated by the Corporation for
any reason other than for Cause or if the Agreement is terminated by Schwallie
for Good Reason, the Corporation shall be obliged to enter into a non-exclusive
Consulting Agreement with Schwallie for the nominal fee of US$ 1.00 per year for
a period which will allow all of the options granted to Schwallie by the
Corporation to vest and thus become exercisable. The sole purpose of such a
Consulting Agreement
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is to enable certain of Sc hwallie's options granted under this Section 3
to vest and remain exercisable as though Schwallie were still an employee under
the terms of this Agreement. It is understood that the Consulting Agreement
itself would not prevent Schwallie from taking a full-time job with another
company.
4. Death; Incapacity.
4.1. If, during the Term, because of illness or other incapacity, Schwallie
shall fail for a period of 180 consecutive days, or for shorter periods
aggregating more than 180 days during any twelve month period, to render the
services contemplated hereunder, then the Corporation, at its option, may
terminate this Agreement by notice from the Corporation to Schwallie, effective
on the giving of such notice.
4.2. In the event of the death of Schwallie during the Term, this Agreement
shall terminate on the date of such death.
4.3. Upon termination of this Agreement, the Corporation shall pay to
Schwallie or his legal representatives any amounts owed to him including but not
limited to expense reimbursement, accrued vacation and earned bonuses, and
Schwallie shall pay to the Corporation any amounts owed to the Corporation, to
the date of termination.
5. Other Activities During Agreement.
5.1. Schwallie agrees to devote up to 120 working days per year to
performing services under this Agreement and up to 120 working days per year to
performing services under the Employment Agreement dated the date hereof between
<PAGE>
Schwallie and CME Development Corporation; Schwallie shall devote his full
business time to performing services under these two agreements.
5.2. During the Term and for a period of two years thereafter, and except
as contemplated herein, neither Schwallie nor any entity in which he may be
interested as a partner, trustee, director, officer, employee, shareholder,
option holder, lender of money or guarantor (each, a "Schwallie Affiliate")
shall be engaged directly or indirectly in the business of licensing of
television or radio stations and provision of programming engaged in by the
Corporation, or any subsidiary, in any country in Europe wher e the Corporation,
or any subsidiary, conducts such business at any time during the Term (a
"Competitive Activity"); provided, however, that the foregoing shall not be
deemed to prevent Schwallie from investing in not more than 5% of the
outstanding securities of a public company. If, for a period of two years after
the Term, Schwallie or a Schwallie Affiliate proposes to engage in what may be a
Competitive Activity, Schwallie shall so notify the Corporation in writing which
shall fully set forth and desc ribe in detail the nature of the activity which
may be a Competitive Activity, the names of the companies or other entities with
or for whom such activity is proposed to be undertaken, and whether it is
proposed to be engaged in by Schwallie or by a Schwallie Affiliate (the "Section
5 Notice"). If, within 30 days after notice to the Corporation pursuant to a
Section 5 Notice, the Corporation shall fail to notify Schwallie that it deems
the proposed activity to be a Competitive Activity, then Schwallie sha ll be
free to engage in the activities described in the Section 5 Notice without
violation of this Section 5.2. It is understood and agreed that any opportunity
directly or indirectly related to any business engaged in by the Corporation, or
any subsidiary, in any country in Europe where the Corporation, or any
subsidiary, conducts such business at any time during the Term shall be deemed a
corporate opportunity of the Corporation and Schwallie shall promptly make such
opportunity available exclusively to the Corporation.
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5.3. Schwallie shall not at any time during this Agreement or after the
termination hereof directly or indirectly divulge, furnish, use, publish or make
accessible to any person or entity other than CME Development Corporation any
Confidential Information (as hereinafter defined) other than in connection with
the performance of his duties hereunder. It is the specific intent of the
Corporation and Schwallie that each and all of the provisions set forth
hereinabove shall be valid and enforceable as specifi cally set forth
hereinabove; and that Schwallie acknowledges that the Corporation's remedies at
law are likely to be inadequate, and Schwallie consents to the application of
the equitable remedies of specific performance to enforce the Corporation's
rights hereunder. Further, should any person seek to legally compel Schwallie
(by oral questions, interrogatories, requests for information or documents,
subpoena, civil investigative demands or otherwise) to disclose any Confidential
Information, Schwallie sh all provide the Corporation with prompt notice
followed up in writing so that the Corporation may seek a protective order or
other appropriate remedy, failing which Schwallie shall be entitled to make such
disclosure as is legally required. In any event Schwallie shall use his best
efforts with the advice of counsel to furnish only that portion of the
Confidential Information which is legally required and, with the cooperation of
the Corporation, will exercise his best efforts to obtain reliable assurance
that confidential treatment will be accorded information so disclosed. In the
event of a breach or a threatened breach by Schwallie of the provisions of this
Section 5.3, the Corporation may, in addition to any other remedies it may have,
obtain injunctive relief in any court of appropriate jurisdiction to enforce
this Section 5.3. The provisions of this Section 5.3 shall survive the
expiration or termination, for any reason, of this Agreement and shall be
separately enforceable. Any records of Confiden tial Information prepared by
Schwallie or which come into Schwallie's possession during the Term are and
remain the property of the Corporation and upon termination of this Agreement
all such records and copies thereof shall be either left with or returned to the
Corporation.
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5.4. The term "Confidential Information" shall mean information disclosed
to Schwallie or known, learned, created or observed by him as a consequence of
or through this Agreement, not generally known in the relevant trade or
industry, about the Corporation's business activities, services and processes,
including but not limited to information concerning advertising, sales
promotion, publicity, sales data, research, programming and plans for
programming, finances, accounting, methods, processes, business pl ans
(including prospective or pending license applications or investments in license
holders or applicants), client or supplier lists and records, potential client
or supplier lists, and client or supplier billing.
6. Indemnification.
6.1. The Corporation will indemnify Schwallie and pay on his behalf all
Expenses (as defined below) incurred by Schwallie in any Proceeding (as defined
below), whether the Proceeding which gave rise to the right of indemnification
pursuant to this Agreement occurred prior to or after the date of this Agreement
provided that Schwallie shall promptly notify the Corporation of such
Proceedings and the Corporation shall be entitled to participate in such
Proceedings and, to the extent that it wishes, jointly w ith Schwallie, assume
the defense thereof with counsel of its choice. This indemnification shall not
apply if it is determined by a court of competent jurisdiction in a Proceeding
that any losses, claims, damages or liabilities arose primarily out of the gross
negligence, wilful misconduct or bad faith of Schwallie.
6.2. The term "Proceeding" shall include any threatened, pending or
completed action, suit or proceeding, or any inquiry or investigation, whether
brought in the name of the Corporation or otherwise and whether of a civil,
criminal, administrative or investigative nature, including, but not limited to,
actions, suits or proceedings brought under or predicated upon any securities
laws, in which Schwallie
<PAGE>
may be or may have been involved as a party or otherwise, and any
threatened, pending or completed actio n, suit or proceeding or any inquiry or
investigation that Schwallie in good faith believes might lead to the
institution of any such action, suit or proceeding or any such inquiry or
investigation, by reason of the fact that Schwallie is or was a director,
officer, employee, agent or fiduciary of the Corporation, by reason of any
action taken by Schwallie or of any inaction on his part while acting as such
director, officer, employee, agent or fiduciary or by reason of the fact that he
is or was serving a t the request of the Corporation as a director. officer,
employee, trustee, fiduciary or agent of another corporation, partnership, joint
venture, employee benefit plan, trust or other enterprise, whether or not he is
serving in such capacity at the time any liability or expense is incurred for
which indemnification or reimbursement can be provided under this Agreement.
6.3. The term "Expenses" shall include, without limitation thereto,
expenses (including, without limitation, attorneys' fees and expenses) of
investigations, judicial or administrative proceedings or appeals, damages,
judgements, fines, penalties or amounts paid in settlement by or on behalf of
Schwallie and any Expenses of establishing a right to indemnification under this
Agreement.
6.4. The Expenses incurred by Schwallie in any Proceeding shall be
paid by the Corporation as incurred and in advance of the final disposition of
the Proceeding at the written request of Schwallie. Schwallie hereby agrees and
undertakes to repay such amounts if it shall ultimately be decided in a
Proceeding that he is not entitled to be indemnified by the Corporation pursuant
to this Agreement or otherwise.
6.5. The indemnification and advancement of Expenses provided by this
Agreement shall not be deemed exclusive of any other rights to which Schwallie
may be entitled under the Corporation's Articles of Incorporation or Bye-Laws,
any
<PAGE>
agreement, any vote of stockholders or disinterested directors, the laws
under which the Corporation was formed, or otherwise, and may be exercised in
any order Schwallie elects and prior to, concurrently with or following the
exercise of any other such rights to which Schwallie may be entitled, including
pursuant to directors and officers insurance maintained by the Corporation, both
as to action in official capacity and as to action in another capacity while
holding such office, and the exercise of such rights shall not be deemed a
waiver of any of the provisions of this Agreement. To the extent that a change
in law (whether by statute or judicial decision) permits greater indemnification
by agreement than would be afforded currently under the Corporation's Articles
of Incorpo ration, By-Laws and this Agreement, it is the intent of the parties
hereto that Schwallie shall enjoy by this Agreement the greater benefit so
afforded by such change. The provisions of this Section 6 shall survive the
expiration or termination, for any reason, of this Agreement and shall be
separately enforceable.
7. Assignment. The Corporation shall require any successor or assign to all
or substantially all the assets of the Corporation, prior to consummation of any
transaction therewith, to expressly assume and agree to perform in writing this
Agreement in the same manner and to the same extent that the Corporation would
be required to perform it if no such succession or assignment had taken place.
This Agreement shall inure to the benefit of and be binding upon the Corporation
and its successors and assigns. Schwallie shall not transfer, assign, convey,
pledge or encumber this Agreement , or his rights, title or interest herein
without the prior consent of the Corporation.
8. No Third Party Beneficiaries. This Agreement does not create, and shall
not be construed as creating, any rights enforceable by any person not a party
to this Agreement, except as provided in Sections 2.5, 2.6, 4.3, 6 and 7 hereof.
<PAGE>
9. Headings. The headings of the sections hereof are inserted for
convenience only and shall not be deemed to constitute a part hereof nor to
affect the meaning thereof.
10. Interpretation. In case any one or more of the provisions contained in
this Agreement shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Agreement, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein. If, moreover, any one or more of the provisions
contained in this Agreement shall for any reason be h eld to be excessively
broad as to duration, geographical scope, activity or subject, it shall be
construed by limiting and reducing it, so as to be enforceable to the extent
compatible with the applicable law as it shall then appear.
11. Notices. All notices under this Agreement shall be in writing and shall
be deemed to have been given at the time when mailed by registered or certified
mail or when delivered by hand or recognized overnight courier service,
addressed to the address below stated of the party to which notice is given, or
to such changed address as such party may have fixed by notice:
To the Corporation:
18 D'Arblay Street
London W1V 2FP England
Attn: Leonard M. Fertig
with a copy to:
Legal Department
18 D'Arblay Street
London W1V 2FP England
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To Schwallie:
18 D'Arblay Street
London W1V 2FP England
with a copy to:
Mark T. Schwallie, Esq.
116 Chesterfield Road
Westhampton, MA 01027
USA
and a copy to:
James D. Lebson
Lebson & Muller, PC
25 Franklin Street
Tenatly, New Jersey 07670
USA
provided, however, that any notice of change of address shall be effective
only upon receipt.
12. Waivers. If any party should waive any breach of any provision of
this Agreement, it shall not thereby be deemed to have waived any preceding or
succeeding breach of the same or any other provision of this Agreement.
13. Complete Agreement; Amendments. The foregoing is the entire agreement
of the parties with respect to the subject matter hereof and may not be amended,
supplemented, cancelled or discharged except by written instrument executed by
the parties hereto.
14. Survival. Sections 2.4 - 2.8, 2.8, 3.2, 3.8, 4.3, 5.2 - 5.4, 6 and 15
shall survive the termination hereof, whether such termination shall be by
expiration of this Agreement or an early termination pursuant to Section 2
hereof.
15. Governing Law. This Agreement is to be governed by and construed in
accordance with the laws of New York, without giving effect to principles of
conflicts of laws.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
CENTRAL EUROPEAN MEDIA ENTERPRISES LIMITED
By: /s/ Leonard M. Fertig
---------------------------------
Name: Leonard M. Fertig
Title: President and Chief Executive Officer
JOHN SCHWALLIE
/s/ John Schwallie
- -------------------------------------
John Schwallie
Approval by Central European Media Enterprises Ltd.'s Compensation
Committee of the Board of Directors
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of January 1, 1998 by and
between CME Development Corporation, a Delaware corporation (the "Company"), and
Fred Klinkhammer ("Executive").
W I T N E S S E T H:
WHEREAS, the Company desires to secure the services of
Executive as an employee, and Executive desires to accept such employment under
the terms and conditions set forth below;
NOW, THEREFORE, in consideration of the mutual covenants
herein contained, the Company and Executive hereby agree as follows:
1. Employment.
(a) Agreement to Employ. Upon the terms and subject to the conditions
of this Agreement, the Company hereby employs Executive, and Executive hereby
accepts employment by the Company.
(b) Term of Employment. The Company shall employ Executive for a term
commencing January 1, 1998 (the "Commencement Date") and ending December 31,
2002, unless extended by a written agreement signed by both parties. The Company
will advise Executive at least six months prior to the end of the Term whether
it intends to extend the Term. The Term of this Agreement as extended as
provided herein is herein referred to as the "Term". The period commencing on
the Commencement Date and ending on the earlier of (i) the expiration of the
Term, or (ii) the date of Executive's termination of employment pursuant to
Section 5(a) shall be referred to as the "Employment Period".
(c) No Conflict. Executive represents that he is entering into this
Agreement voluntarily and that his employment hereunder and compliance by him
with the terms and conditions of this Agreement will not conflict with or result
in the breach of any agreement to which he is a party or by which he may be
bound.
<PAGE>
2. Position and Duties.
(a) In general. Executive shall be employed as Executive Vice
President, Managing Director and Chief Operating Officer and shall perform such
duties and services, consistent with such position for the Company, as may be
(i) specified in the By-Laws of the Company or (ii) assigned to him from time to
time by the Chief Executive Officer of the Company (the "CEO") or the Chairman.
The duties of the Executive shall include serving as an officer or director or
otherwise performing services for any "Affiliate" of the Company as requested by
the Company. An "Affiliate" of any person means any entity that controls, is
controlled by or is under common control with such person. Executive shall
report to the CEO and shall be a member of the Office of the CEO. Without
limiting the generality of the foregoing the Executive shall provide regular
on-site management in the UK of the day to day operations of the Company
including the Programme Acquisition, Human Resources, IT, and Finance
departments and any specific Development initiatives assigned from time to time.
Executive's office shall be the principal office of the Company in the U.K.
(b) Full-time employment. During the Employment Period, and subject to
his obligations to Central European Media Enterprises, Ltd., which is
anticipated to require one-third of his business time, Executive shall devote
his full business time to the services required of him hereunder, except for
time devoted to services required by him to be performed for any "Affiliate" of
the Company, vacation time and reasonable periods of absence due to sickness,
personal injury or other disability, and shall use his best efforts, judgement,
skill and energy to perform such services in a manner consonant with the duties
of his position and to improve and advance the business and interests of the
Company, provided, however, that Executive shall perform such services under
this Agreement exclusively within the United Kingdom and the United States and
Executive has entered into an employment agreement with Central European Media
Enterprises, Ltd. for his services outside of the United Kingdom and the United
States. Executive shall not be engaged in any other business activity which, in
the reasonable judgment of the CEO, conflicts with the duties of the Executive
under this Agreement. Executive shall travel to such location or locations
within the United Kingdom and the United States as may be requested by the
Company, or which Executive believes is necessary or advisable, in the
performance by Executive of his duties hereunder or to the extent appropriate to
improve and advance the interests of the Company and its Affiliates.
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<PAGE>
3. Compensation.
(a) Base Salary. During the Employment Period, the Company shall pay
Executive a base salary at the annual rate of US$100,000 (the "Base Salary").
The Base Salary shall be payable in such installments (but not less frequent
than monthly) as the salaries of other executives of the Company are paid. The
Executive's base salary shall be reviewed annually by the Compensation Committee
of the Board of Directors of Central European Media Enterprises, Ltd. (the
"Compensation Committee"), and shall be subject to increase at the option and
sole discretion of the Compensation Committee.
(b) Annual Bonus. The Company shall provide Executive with the
opportunity to earn an annual cash bonus in an amount up to 100% of Executive's
Base Salary. The amount of any such annual bonus shall be based upon the joint
recommendation of the Chairman and the CEO, and subject to the Compensation
Committee's approval in its sole discretion. Executive and the Company
anticipate that Executive shall have a target annual bonus of approximately 75%
of Base Salary for superior performance, and that the annual bonus may range
from zero to up to 100% of Base Salary. Both the overall performance of the
Company as a whole and the individual performance of Executive shall be taken
into account in determining the amount of the annual bonus, if any.
4. Benefits, Perquisites and Expenses.
(a) Benefits. During the Employment Period, Executive shall be eligible
to participate in (i) each welfare benefit plan sponsored or maintained by the
Company, including, without limitation, each group life, hospitalization,
medical, dental, health, accident or disability insurance or similar plan or
program of the Company, provided that in any event Executive shall at the
Company's expense, be entitled to private medical insurance for himself, his
wife and dependent children, disability insurance and permanent health insurance
at the maximum permissible levels from time to time, and life insurance in an
amount commensurate with the life insurance offered to the other senior
executives of the Company, and (ii) each pension, profit sharing, retirement,
deferred compensation or savings plan sponsored or maintained by the Company, in
each case, whether now existing or established hereafter, to the extent that
Executive is eligible to participate in any such plan under the generally
applicable provisions thereof, provided that if Executive is also entitled to
any of such benefits under an agreement with an Affiliate, the benefits shall be
provided by the Company and its Affiliates to Executive in a manner that avoids
duplication. The Company may amend or terminate any such plan in its discretion.
3
<PAGE>
(b) Perquisites. During the Employment Period, Executive shall be
entitled to home leave as specified in the Company's Employee Handbook and shall
also be entitled to receive such perquisites as are generally provided to other
senior officers of the Com pany in accordance with the then current policies and
practices of the Company, provided that if Executive is also entitled to any of
such benefits under an agreement with an Affiliate, the benefits shall be
provided by the Company and its Affiliates to Executive in a manner that avoids
duplication. For each calendar month during the Employment Period that Executive
maintains a principal residence in the Greater London Metropolitan Area,
Executive shall be entitled to receive an annual expatriate premium of Pounds
Sterling (pound)15,000 to be paid in equal monthly installments, and subject to
annual increase based on the increase in the consumer price index (HICP) for the
London metropolitan area published by the Office of National Statistics for the
preceding year, or if such index is no longer available, such other generally
available index measuring changes in consumer purchasing power (in the London
metropolitan area or nationally) designated by the Board of Directors. The
Company shall pay, or reimburse Executive, for the actual and reasonable costs
of moving Executive, his family and their household goods from Toronto, Canada
to London, England (including customary realty and legal fees on the disposition
of Executive's principal residence in Canada); the actual and reasonable
relocation counseling for Executive's spouse; and the actual and reasonable
costs of moving Executive, his family and their household goods back from London
to Toronto, Canada upon expiration of Executive's employment for any reason, or
to another location requested by Executive (or in the event of his death, his
surviving spouse), provided the cost of moving to such other location does not
exceed the reasonable cost of moving to Toronto, Canada. If Executive accepts
employment in England following termination of his employment with the Company,
the Company shall not be responsible for the costs of relocating Executive
thereafter.
(c) Business Expenses. During the Employment Period, the Company shall
pay or reimburse Executive for all reasonable expenses incurred or paid by
Executive in the performance of Executive's duties hereunder, upon presentation
of expense statements or vouchers and such other information as the Company may
require and in accordance with the generally applicable policies and procedures
of the Company.
(d) Indemnification. The Company shall indemnify Executive and hold
Executive harmless from and against any claim, loss or cause of action arising
from or out of Executive's performance as an officer, director or employee of
the Company or any of its subsidiaries or in any other capacity, including any
fiduciary capacity, in which Executive serves at the request of the Company to
the maximum extent permitted by applicable law and the Company's Articles of
Incorporation and By-Laws. If any claim is asserted against Executive with
respect to which Executive reasonably believes in good faith he is entitled to
indemnification, the Company shall either defend Executive or, at its
4
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option, pay Executive's legal expenses (or cause such expenses to be paid) on a
quarterly basis, provided that Executive shall reimburse the Company for such
amounts, plus simple interest thereon at the 90-day United States Treasury Bill
rate as in effect from time to time, compounded annually, if Executive shall be
found by a court of competent jurisdiction not to have been entitled to
indemnification.
(e) Withholding. Any payments provided for herein shall be reduced by
any amounts required to be withheld by the Company from time to time under any
applicable income tax or other law, rule or regulation.
(f) Currency of Payment. Payments provided for herein shall be in the
currency stated, or in such other mutually beneficial currency as the Company
and Executive shall agree from time to time sufficiently in advance of payment
to permit timely payment. Payment in a currency other than in the currency
stated shall be based at the current exchange rate at the time of payment.
(g) Right of Offset. If the Company makes any payment to a third party
on Exectuive's behalf or as guarantor of an obligation of Executive, the Company
shall be entitled to seek reimbursement from the Executive of any such amounts
and/or to offset any such amounts against any payments by the Company to
Executive hereunder.
5. Termination of Employment.
(a) Termination of the Employment Period. The Employment Period shall
end upon the earliest to occur of (i) a termination of Executive's employment on
account of Executive's death, (ii) a Termination due to Disability or
Retirement, (iii) a Termination for Cause, (iv) a Termination Without Cause, (v)
a Termination for Good Reason, (vi) a Termination Without Good Reason, or (vii)
the expiration of the Term. The Company or the Executive may initiate a
termination in any manner permitted hereunder by giving the other party written
notice thereof (the "Termination Notice"). The effective date (the "Termination
Date") of any termination shall be deemed to be the later of (i) in the case of
a Termination Notice from Executive, 45 days after the receipt by the Company of
the Termination Notice, (ii) the date on which the Termination Notice is given,
or (iii) the date specified in the Termination Notice; provided, however, that
in the case of the Executive's death, the Termination Date shall be the date of
death. Upon termination of his employment for any reason, Executive will
immediately resign from all positions that he holds with the Company and its
Affiliates.
5
<PAGE>
(b) Payments Upon Certain Terminations.
(i) Termination for Good Reason or Termination Without Cause.
In the event that Executive's employment is terminated by Executive for Good
Reason or by the Company Without Cause, the Company shall pay Executive his
Earned Salary, Vested Benefits, and a Severance Benefit (as such terms are
hereinafter defined).
(ii) Termination due to Death. In the event of the
termination of Executive's employment due to Executive's death, the Company
shall pay Executive's estate Executive's Earned Salary, Vested Benefits, and
shall provide to Executive's surviving spouse and children Executive's Base
Salary (at the rate in effect on the date of his death) and the health insurance
provided in Section 4(a)(i) for a period of 12 months and the Relocation
Payment.
(iii) Termination due to Disability or Retirement. In the
event of termination of Executive's employment by the Company due to Disability
or a Termination due to Retirement, the Company shall pay Executive his Earned
Salary and Vested Benefits as provided in Section 3(c), plus, in the event of
termination due to Disability, to the Executive or his estate his Base Salary at
the Termination Date on a monthly basis, the benefits provided in Section
4(a)(i) for 12 months and the Relocation Payment. In the event that Executive's
employment with the Company is terminated due to Disability, Executive's
entitlement to continuation of his Base Salary under this subsection (iii) shall
be reduced by the amount of any Company sponsored (and paid for) disability
benefits paid to Executive.
(iv) Termination Without Good Reason. In the event of a
termination of Executive's employment by Executive Without Good Reason, the
Company shall pay Executive his Earned Salary and Vested Benefits.
(v) Termination for Cause. In the event of a termination of
Executive's employment by the Company for Cause, the Company shall pay
Executive his Earned Salary and Vested Benefits.
(c) Timing of Payments. Earned Salary shall be paid in a single lump
sum as soon as practicable, but in no event more than 60 days, following the end
of the Employment Period. Vested Benefits shall be payable in accordance with
the terms of the plan, policy, practice, program, contract or agreement under
which such benefits have accrued except as otherwise expressly modified by this
Agreement. Severance Benefits shall be paid in equal monthly installments.
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<PAGE>
(d) Definitions. The following capitalized terms have the following
meanings:
"Earned Salary" means any Base Salary earned, but unpaid, for
services rendered to the Company on or prior to the date on which the Employment
Period ends.
"Normal Retirement Age" means the first day of the month
following Executive attaining age 65.
"Relocation Payments" means an amount equal to the cost of
relocating Executive and his family from the United Kingdom as provided in
Section 4(b).
"Severance Benefit" means Executive's minimum Base Salary for
the remainder of the Term.
"Termination due to Disability" means a termination of
Executive's employment by the Company because Executive has been incapable of
substantially fulfilling the positions, duties, responsibilities and obligations
set forth in this Agreement because of physical, mental or emotional incapacity
resulting from injury, sickness or disease for a period of (i) at least six
consecutive months or (ii) a total of more than 183 days in any twelve month
period. Any question as to the existence, extent or potentiality of Executive's
disability upon which Executive and the Company cannot agree shall be determined
by a qualified, independent physician selected by the Company and reasonably
acceptable to Executive. The determination of any such physician shall be final
and conclusive for all purposes of this Agreement. Executive or his legal
representative or any adult member of his immediate family shall have the right
to present to such physician such information and arguments as to Executive's
disability as he, she or they deem appropriate, including the opinion of
Executive's personal physician.
"Termination due to Retirement" means termination of
employment by Executive, or termination of Executive's employment by the Company
other than a Termination for Cause, on or after Executive's Normal Retirement
Age.
"Termination for Cause" means a determination by a majority of
the Board to terminate Executive's employment by the Company due to (i)
Executive's conviction of a felony or the entering by Executive of a plea of
nolo contendere with respect to a charged felony, (ii) Executive's gross
negligence, recklessness, dishonesty, fraud, willful malfeasance or willful
misconduct in the performance of the services contemplated by this Agreement,
(iii) willful misrepresentation to shareholders or directors which is injurious
to the Company; (iv) a willful failure without reasonable justification to
comply with a reasonable written order of the CEO or Board of Directors; or (v)
a willful and
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<PAGE>
material breach of Executive's duties or obligations under this
Agreement. Notwith standing the foregoing, a termination shall not be treated as
a Termination for Cause unless the Company shall have delivered a written notice
to Executive stating that it intends to terminate his employment for Cause not
less than seven days following the giving of such notice and specifying the
factual basis for such termination, and the event or events that form the basis
for the notice, if capable of being cured, shall not have been cured within the
period stated in the receipt of such notice.
"Termination for Good Reason" means a termination of
Executive's employment by Executive within 30 days following (i) a reduction in
Executive's annual Base Salary or bonus opportunity contemplated by Sections
3(a) and (b), (ii) a material reduction in Executive's positions, duties,
responsibilities or reporting lines from those described in Section 2 hereof;
(iii) a material breach of this Agreement by the Company, (iv) a permanent
relocation of Executive's principal office outside of the London metropolitan
area or (v) any termination of the Executive's employment with Central European
Media Enterprises, Ltd. due to a "Termination Without Cause" by Central European
Media Enterprises, Ltd. or a "Termination With Good Reason by Executive", as
those terms are defined in the employment agreement between the Executive and
Central European Media Enterprises, Ltd. Notwithstanding the foregoing, a
termination shall not be treated as a Termination for Good Reason (x) if
Executive shall have con sented in writing to the occurrence of the event giving
rise to the claim of Termination for Good Reason or (y) unless Executive shall
have delivered a written notice to the Company within 30 days of his having
actual knowledge of the occurrence of one of such events stating that he intends
to terminate his employment for Good Reason and specifying the factual basis for
such termination, and such event, if capable of being cured, shall not have been
cured within 30 days of the receipt of such notice.
"Termination Without Cause" means any termination by the
Company of Executive's employment hereunder other than (i) a Termination due to
Disability, (ii) a Termination due to Retirement or (iii) a Termination for
Cause.
"Termination Without Good Reason" means any termination by
Executive of Executive's employment hereunder upon not less than three month's
notice to the Company other than (i) a termination due to Executive's death,
(ii) a Termination due to Retirement, (iii) a Termination for Good Reason, or
(iv) a Termination due to Disability.
"Vested Benefits" means amounts which are vested or which
Executive is otherwise entitled to receive under the terms of or in accordance
with any plan, policy, practice or program of, or any contract or agreement
with, the Company, at or subsequent to the date of his termination without
regard to the performance by Executive of further
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services or the resolution of a contingency and expenses incurred prior
to termination of employment that are reimbursable under Section 4(c).
(e) Full Discharge of Company Obligations. The amounts payable to
Executive pursuant to this Section 5 following termination of his employment
(including amounts payable with respect to Vested Benefits) shall be in full and
complete satisfaction of Executive's rights under this Agreement and any other
claims he may have in respect of his employment by the Company or any of its
subsidiaries. Such amounts shall constitute liquidated damages with respect to
any and all such rights and claims and, upon Executive's receipt of such
amounts, the Company shall be released and discharged from any and all liability
to Executive in connection with this Agreement or otherwise in connection with
Executive's employment with the Company and its subsidiaries, other than
Executive's rights to indemnification under Section 4(d).
6. Agreement Not to Compete With Company
(a) During the Employment Period and for a period of two years
thereafter, Executive shall not directly or indirectly own, manage, operate,
finance, join, control, advise, consult, render services to, have an interest or
future interest or participate in the ownership, management, operation,
financing or control of, or be employed by or connected in any manner with any
Competing Business (other than as a holder of common stock of the Company, and
not in excess of 1% of the outstanding voting shares of any other publicly
traded company). "Competing Business" means the business of licensing of
television or radio stations and provision of programming engaged in by the
Company or any Affiliate in any country in Europe where the Company or an
Affiliate conducts such business at any time during the Term. Any opportunity
directly or indirectly related to any business engaged in by the Company, its
subsidiaries and Affiliates of which Executive becomes aware during the Term
shall be deemed a corporate opportunity of the Company, and Executive shall
promptly make such opportunity available to the Company.
(b) If, during the period of two years after expiration of the
Term, Executive or an Affiliate of Executive proposes to engage in what may be a
Competing Business, Executive shall so notify the Company in a writing which
shall fully set forth and describe in detail the nature of the activity which
may be a competitive Business, the names of the companies or other entities with
or for whom such activity is proposed to be engaged in by Executive or by an
Affiliate of Executive (the "Section 6 Notice"). If, within 30 days after
receipt by the Company of a Section 6 Notice, the Company shall fail to notify
Executive that it deems the proposed activity to be a Competitive Business,
then Executive shall be free to engage in the activities described in the
Section 6 Notice without violation of Section 6(a). If, however, the Company
notifies Executive that the
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proposed activities constitute a Competitive Business, then (i) Executive shall
not engage in such Competitive Business during the two-year period following
expiration of the Term, and (ii) the Company shall pay Executive, during such
two-year period, in equal monthly installments, an amount equal to his highest
Base Salary; provided that the amount payable under this Section 6(b) shall be
reduced by the amount of Severance Benefit that Executive is receiving for such
period.
7. Consulting Following the Term
(a) If the Company does not extend the Term, Executive shall
make himself available as an independent consultant to the Company and its
Affiliates for the period commencing on the expiration of the Term and ending on
the earlier of the second anniversary of such date and Executive's death (the
"Consulting Period"). For making himself available for consulting services
during the Consulting Period, the Company shall pay Executive a consulting fee
at the annual rate of US$50,000, payable no less frequently than monthly. During
the Consulting Period Executive shall make himself available for any requests
for consultation by the Company and its Affiliates during regular business hours
of the Company for up to 5 hours per month during the Consulting Period. The
Company shall give due consideration to Executive's other commitments in
determining the time and place of such requests and consultation. Executive
shall be entitled to be reimbursed for expenses reasonably and necessarily
incurred by him in connection with such consultation.
8. Confidential Information
(a) Without the prior written consent of the Company, Executive shall
not disclose at any time during the Employment Period or any time thereafter any
Confidential Information (as defined below) to any third person other than in
the course of fulfilling Executive's responsibilities under this Agreement
unless such Confidential Information has been previously disclosed to the public
by the Company or an Affiliate or is in the public domain (other than by reason
of Executive's breach of the provisions of this paragraph).
(b) "Confidential Information" is any non-public information pertaining
to the Company or an Affiliate, any of their businesses or the business or
personal affairs of Ronald S. Lauder ("Lauder") or his family and how any of
them conducts its or his business or affairs. "Confidential Information"
includes not only information disclosed by the Company or an Affiliate to
Executive, but information developed, created or learned by Executive during the
course of or as a result of Executive's employment with the Company.
"Confidential Information" specifically includes information and documents
concerning the Company's and its Affiliates' methods of doing business;
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research, telecommunications technology, its actual and potential clients,
transactions and suppliers (including the Company's or an Affiliate's terms,
conditions and other business arrangements with them); client or potential
client or transaction lists and billing; advertising, marketing and business
plans and strategies (including prospective or pending licensing applications or
investments in license holders or applicants); profit margins, goals, objectives
and projections; compilations, analyses and projections regarding the Company,
its Affiliates or any of its clients or potential clients or their businesses;
trade secrets; salary, staffing, management organization or employment
information; information relating to members of the Board of Directors and
management of the Company or an Affiliate; files, drawings or designs;
information regarding product development, marketing plans, sales plans or
manufacturing plans; operating policies or manuals, business plans, financial
records or packaging design; or any other financial, commercial, business or
technical information relating to the Company, an Affiliate, Lauder or his
family or information designated as confidential or proprietary that the
Company, an Affiliate or Lauder may receive belonging to others who do business
with any of them.
(c) Nothing herein shall prevent the disclosure by Executive of any
information required by an order of a court having competent jurisdiction or
under subpoena from a government agency, provided that, if Executive receives a
request for the disclosure of any Confidential Information pursuant to court
process or by a government agency, Executive shall immediately (and at the
latest within two business days) notify the Company of that request and
cooperate to the maximum extent authorized by law with the Company in protecting
the Company's and it Affiliates' interest in maintaining the confidentiality of
any Confidential Information.
9. No Disparaging Comments
Each of the parties hereto agrees not to make disparaging or derogatory comments
about the other party, members of the Board or Affiliates, except to the extent
required by law, and then only after consultation with the other party to the
maximum extent possible in order to maintain goodwill for each of the parties.
10. Return of Company Property
Promptly (and at the latest within ten business days) following Executive's
termination of services, Executive shall:
(i) return to the Company all documents, records, notebooks,
computer diskettes and tapes and anything else containing the
Company's Confidential Information (as defined above), and any
other property or
11
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Confidential Information of the Company or its Affiliates,
including all copies thereof in Executive's possession,
custody or control, and
(ii) delete from any computer or other electronic storage medium
owned by Executive any of the proprietary or Confidential
Information of the Company or its Affiliates.
11. No Soliciting or Hiring Company Employees
During the Employment Period and for a two-year period thereafter, Executive
shall not directly or indirectly induce any employee of the Company or any
Affiliate, other than Executive's secretary or personal assistant, to terminate
employment with such entity, and during the Employment Period and for a one-year
period thereafter, shall not directly or indirectly, either individually or as
owner, agent, employee, consultant or otherwise, employ or offer employment to
any person who is or was employed by the Company or any Affiliate as an
employee, other than the Company's current Vice President of Business
Development and Executive's secretary or personal assistant.
12. Continuing Obligations Following Termination
Executive agrees that his obligations and restrictions with respect to noncom
petition, confidentiality, Company property, nondisparagement and
nonsolicitation, and the Company obligations to indemnify Executive under
Section 4(d), will continue to apply following the termination of Executive's
relationship regardless of the manner in which his relationship with the Company
is terminated, whether voluntarily, for Cause, for Good Reason, without Cause or
otherwise.
13. Arbitration of All Disputes
(a) Any dispute, controversy or claim between the Executive and the
Company or any of its officers, directors, employees or shareholders (who are
expressly made third-party beneficiaries of this agreement) arising out of,
relating to or in connection with this agreement, or the breach, termination or
validity thereof, shall be finally
resolved by binding and non-appealable arbitration, before a single arbitrator
selected by the procedure set forth below, conducted in Hamilton, Bermuda. To
the extent practicable, any such arbitration shall be consolidated with any
other arbitration proceeding between Executive and any Affiliate of the Company
(if any).
(b) Either party may commence an arbitration proceeding by giving
written notice to the other party of its desire to arbitrate.
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<PAGE>
(c) The single arbitrator (the "Arbitrator") shall be selected from
among the New York City members of the New York Regional Panel of Distinguished
Neutrals (the "Panel") of the Center for Public Resources ("CPR") by mutual
agreement of the parties, or if the parties are unable to agree, by the
following means:
(A) The Company, on one hand, and Executive
on the other hand, shall simultaneously exchange lists each
containing the names of five members of their choice of the
Panel who have indicated a willingness to serve.
(B) If a single name appears on both lists,
that individual shall be appointed.
(C) If more than one name appears on both
parties' lists, the Arbitrator shall be selected from the
common names by mutual agreement of the parties or by the toss
of a coin.
(D) If the lists contain no names in common,
each party shall strike four names from the other party's list
and the Arbitrator shall be selected from the remaining two
names by mutual agreement of the parties or by the toss of a
coin.
(E) If the CPR ceases to have a Panel or it
is otherwise impossible to select the Arbitrator from the
Panel as contemplated by this Agreement, the Arbitrator shall
be selected by the President of the CPR in the manner that the
President deems closest to satisfying the purposes of this
Section, or, if such person is unable to do so, by the
President of the Association of the Bar of the City of New
York.
(d) The Arbitrator, after appropriate consultation with the parties,
shall (i) determine, in his or her sole discretion, the rules governing the
arbitration proceeding, including whether and to what extent the parties shall
have any right to pre-hearing discovery or other forms of disclosure, the manner
of presentation of arguments and/or evidence before or at any hearing, whether
and to what extent formal rules of evidence shall govern the proceeding and the
parties' rights following the proceeding, and (ii) be governed in exercising
such discretion by the goal of reaching a fair and reasonable decision in an
expeditious and efficient manner while endeavoring to streamline the process and
avoid undue litigation costs.
(e) The Arbitrator shall assess the costs of the proceeding (including
the prevailing party's reasonable attorney's fees) on any unsuccessful party to
the extent the
13
<PAGE>
Arbitrator concludes that such party is unsuccessful, unless he
or she concludes that matters of equity or important considerations of fairness
dictate otherwise.
(f) The Arbitrator shall be required to state his or her decision in
writing and may, but shall not be required to, elaborate on the reasons for such
decision.
(g) The arbitrator(s) shall have the authority upon application by a
party to direct specific performance, including preliminary or interim specific
performance pending the final resolution of the arbitration, of any portion of
this agreement. The parties expressly consent to the jurisdiction and power of
any federal or state court in New York to enforce the terms of such a direction
upon application by a party. If the arbitrator(s) have not yet been appointed,
the parties may obtain injunctive or other appropriate relief from a court to
enforce the terms of this agreement pending the appointment of the arbitrator(s)
who shall thereafter have full power to continue, modify or vacate the terms of
any injunctive relief ordered by the court.
(h) Notwithstanding the terms of this agreement that provide that New
York law shall govern, the arbitration and the provisions in this agreement
dealing with arbitration shall be governed exclusively by the United States
(Federal) Arbitration Act, 9 U.S.C. ss.ss. 1-16, and judgment on or enforcement
of the award or any direction for specific performance rendered by the
arbitrators may be entered by any court having jurisdiction thereof or having
jurisdiction over the relevant party or assets of such party.
(i) If, notwithstanding the parties' agreement to arbitrate, any issue
is presented to a court for decision, the parties hereby waive any right to
trial by jury.
(j) The parties agree that any dispute between the parties and the
arbitration itself shall be kept confidential and that the existence of the
arbitration and any element of it (including but not limited to any pleading,
brief or other document submitted or exchanged, any testimony or other oral
submission, and any award) shall not be disclosed except to the arbitrator(s),
the CPR Institute for Dispute Resolution, the parties, their counsel and any
person necessary to the conduct of the proceeding, except as may be lawfully
required in judicial proceedings relating to the arbitration or otherwise.
14. No Punitive or Emotional Damages
The parties hereto agree that neither the Executive nor the Company will be
entitled to seek or obtain punitive, exemplary or similar damages of any kind
from the other or, in the case of Executive, from the Company's officers,
directors, employees or shareholders, or to seek or obtain damages or
compensation for emotional distress, as a result of any dispute, controversy or
claim arising out of, relating to or in connection with this
14
<PAGE>
Agreement, or the performance, breach, termination or validity thereof. Nothing
herein shall preclude an award of compensatory or punitive damages against any
other third party.
15. Injunctive Relief to Avoid Irreparable Injury
(a) Executive acknowledges and agrees that the individualized services
and capabilities that he will provide to the Company under this Agreement are of
a personal, special, unique, unusual, extraordinary and intellectual character.
(b) Executive acknowledges and agrees that the restrictions in this
agreement are reasonable to protect the Company's rights under this Agreement
and to safeguard the Company's and it Affiliates' Confidential Information.
(c) Executive acknowledges and agrees that the covenants and
obligations of Executive with respect to noncompetition, nonsolicitation,
confidentiality and Company property relate to special, unique and extraordinary
matters and that a violation of any of the terms of such covenants and
obligations will cause the Company and its Affiliates irreparable injury for
which adequate remedies are not available at law. Executive therefore agrees
that the Company shall be entitled to an order of specific performance,
injunction, restraining order or such other interim or permanent equitable
relief (without the requirement to post bond) restraining Executive from
committing any violation of the covenants and obligations contained in this
Agreement
(d) These injunctive remedies are cumulative and are in addition to any
other rights and remedies the Company may have at law or in equity.
(e) Executive represents that his economic means and circumstances are
such that the provisions of this Agreement, including the noncompetition,
nonsolicitation, confidentiality and Company property provisions, will not
prevent him from providing for himself and his family on a basis satisfactory
to him and them.
16. Automatic Amendment by Court Order
and Interim Enforcement
(a) If the Arbitrator(s) or a court determines that, but for the
provisions of this paragraph, any part of this agreement is illegal, void as
against public policy or otherwise unenforceable, the relevant part will
automatically be amended to the extent necessary to make it sufficiently narrow
in scope, time and geographic area to be legally enforceable.
All other terms will remain in full force and effect.
15
<PAGE>
(b) If the Executive raises any question as to the enforceability of
any part or terms of this agreement, including, without limitation, the
provisions relating to noncompetition, nonsolicitation, confidentiality and
Company property, the Executive specifically agrees that he will comply fully
with this Agreement unless and until the entry of an arbitral award to the
contrary.
17. Notices
All notices and other communications required or permitted hereunder shall be
sufficiently given if (a) delivered personally, (b) sent by facsimile
transmission (with confirmation received), (c) sent by a nationally-recognized
air courier assuring overnight delivery, or (d) mailed (by registered or
certified mail, return receipt requested and postage prepaid) as follows:
if to the Executive, to the Executive at:
18 D'Arblay Street
London W1V 3FP, England
with a copy to each of:
Fred Klinkhammer
Suite 18 Peninsula Heights
93 Albert Embankment
London SE1 7TY
if to the Company, to the Company at
18 D'Arblay Street
London W1V 2FP , England
Attention: Leonard M. Fertig
with a copy to each of:
Legal Department
18 D'Arblay Street
London W1V 2FP, England
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<PAGE>
Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
Fax: (212) 909-6836
Attention: Louis Begley, Esq.
or to such other address as shall be furnished by notice from time to time by
one party hereto to the other party. Any such communication shall be deemed to
have been given, (i) in the case of personal delivery, on the date of delivery,
(ii) in the case of delivery by air courier, on the first business day following
the day on which such communication was posted, and (iii) in the case of
mailing, on the third business day following the day on which such notice was
posted.
18. Sole and Entire Understanding; Amendments
The entire understanding and agreement between the Company and Executive have
been incorporated into this Agreement. There are no other promises,
representations, understandings or inducements by the Company to Executive or
Executive to the Company other than those specifically set forth in this
Agreement. This Agreement may not be altered, amended or added to except in a
single writing signed by the Company and the Executive. Coincident herewith,
Executive and Central European Media Enterprises, Ltd. are entering into an
Employment Agreement covering Executive's services to Central European Media
Enterprises, Ltd. and its subsidiaries.
19. Waiver of Breach
A waiver or breach of any provision of this Agreement shall not constitute or
operate as a waiver of any other breach of such provision or of any other
provision, and any failure to enforce any provision hereof shall not operate as
a waiver of such provision or of any other provision.
20. Headings
The headings of sections in this Agreement are for convenience only, are not a
part of this Agreement and shall not affect the construction of the provisions
of this Agreement.
21. Arm's Length
(a) This Agreement was entered into at arm's length, without duress or
coercion, and is to be interpreted as an agreement between parties of equal
bargaining strength. Both the Company and the Executive agree that this
Agreement is clear and unambiguous
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<PAGE>
as to its terms, and that no parol or other evidence will be used or admitted to
alter or explain the terms of this Agreement, but that it will be interpreted
based on the language within its four corners in accordance with the purposes
for which it is entered into.
(b) The parties hereto expressly agree that any rule or contractual
interpretation, as applied under California law or anywhere else, that would
allow parol or extrinsic evidence to attempt to show fraud in the inducement or
duress to contradict the plain, unambiguous terms of this Agreement shall not
apply to this Agreement and its performance and enforcement. This provision is a
material part of this Agreement and, should any party try to introduce evidence
contrary to this provision, any other party shall be entitle to consider it a
breach and to rescind this contract in full.
22. Successors and Assigns
(a) This Agreement will inure to the benefit of, and will be binding
upon, the Company, its successors and assigns and upon the Executive and his
heirs, successors and assigns; provided, however, that, because this is an
Agreement for personal services, the Executive cannot assign any of his
obligations under this Agreement to anyone else.
(b) This Agreement may be executed in counterparts, in which case each
of the two counterparts will be deemed to be an original and the final
counterpart shall be deemed to have been executed in New York, New York.
23. No Third Party Beneficiaries
This Agreement does not create, and shall not be construed as creating, any
rights enforceable by any person not a party to this Agreement, except as
provided in Sections 4(d) and 5(b).
24. New York Law Governs
Any questions or other matters arising under this Agreement, whether of
validity, interpretation, performance or otherwise, will therefore be governed
by and construed in accordance with the laws of the State of New York applicable
to agreements made and to be wholly performed in New York, without reference to
principles of conflicts or choice of law under which the law of any other
jurisdiction would apply.
IN WITNESS WHEREOF, this Agreement has been executed by
Executive and then by the Company in New York, New York, on the dates shown
below, but effective as of the date and year first above written.
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Date: /s/ Fred Klinkhammer
------------ ---------------------------
Fred Klinkhammer
CME DEVELOPMENT CORPORATION
Date: BY: /s/ Leonard M. Fertig
------------ ------------------------
Title: President and Chief
Executive Officer
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EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of January 1, 1998 by and
between Central European Media Enterprises Ltd., a Bermuda corporation (the
"Company"), and Fred Klinkhammer ("Executive").
W I T N E S S E T H:
WHEREAS, the Company desires to secure the services of
Executive as an employee, and Executive desires to accept such employment under
the terms and conditions set forth below;
NOW, THEREFORE, in consideration of the mutual covenants
herein contained, the Company and Executive hereby agree as follows:
1. Employment.
(a) Agreement to Employ. Upon the terms and subject to the conditions
of this Agreement, the Company hereby employs Executive, and Executive hereby
accepts employment by the Company.
(b) Term of Employment. The Company shall employ Executive for a term
commencing January 1, 1998 (the "Commencement Date") and ending December 31,
2002, unless extended by a written agreement signed by both parties. The Company
will advise Executive at least six months prior to the end of the Term whether
it intends to extend the Term. The Term of this Agreement as extended as
provided herein is herein referred to as the "Term". The period commencing on
the Commencement Date and ending on the earlier of (i) the expiration of the
Term, or (ii) the date of Executive's termination of employment pursuant to
Section 5(a) shall be referred to as the "Employment Period".
(c) No Conflict. Executive represents that he is entering into this
Agreement voluntarily and that his employment hereunder and compliance by him
with the terms and
<PAGE>
conditions of this Agreement will not conflict with or result in the breach of
any agreement to which he is a party or by which he may be bound.
<PAGE>
2. Position and Duties.
(a) In general. Executive shall be employed as Executive Vice President
and Chief Operating Officer and shall perform such duties and services,
consistent with such position for the Company, as may be (i) specified in the
Bye-Laws of the Company or (ii) assigned to him from time to time by the Chief
Executive Officer of the Company (the "CEO") or the Chairman. The duties of the
Executive shall include serving as an officer or director or otherwise
performing services for any "Affiliate" of the Company as requested by the
Company. An "Affiliate" of any person means any entity that controls, is
controlled by or is under common control with such person. Executive shall
report to the CEO and shall be a member of the Office of the CEO. Without
limiting the generality of the foregoing the Executive shall provide regular
on-site supervision of and/or assistance to each television station operating in
countries outside the UK. Such supervision and or assistance shall be in the
areas of programming, production and marketing due to the Executive's specific
experience and background in these areas and their importance of these areas to
the stations' profitability.
(b) Full-time employment. During the Employment Period, and subject to
his obligations to CME Development Corporation, which is anticipated to require
two-thirds of his business time, Executive shall devote his full business time
to the services required of him hereunder, except for time devoted to services
required by him to be performed for any "Affiliate" of the Company, vacation
time and reasonable periods of absence due to sickness, personal injury or other
disability, and shall use his best efforts, judgement, skill and energy to
perform such services in a manner consonant with the duties of his position and
to improve and advance the business and interests of the Company, provided,
however, that Executive shall perform such services under this Agreement
exclusively outside of the United Kingdom and the United States and Executive
has entered into an employment agreement with CME Development Corporation for
his services within the United Kingdom and the United States. Executive shall
not be engaged in any other business activity which, in the reasonable judgment
of the CEO, conflicts with the duties of the Executive under this Agreement.
Executive shall travel to, and may be stationed on a short-term basis (up to
three to six months) in, such location or locations outside of the United
Kingdom and the United States as may be requested by the Company, or which
Executive believes is necessary or advisable, in the performance by Executive of
his duties hereunder or to the extent appropriate to improve and advance the
interests of the Company and its Affiliates.
2
<PAGE>
3. Compensation.
(a) Base Salary. During the Employment Period, the Company shall pay
Executive a base salary at the annual rate of US$200,000 (the "Base Salary").
The Base Salary shall be payable in such installments (but not less frequent
than monthly) as the salaries of other executives of the Company are paid. The
Executive's base salary shall be reviewed annually by the Compensation Committee
of the Board of Directors of the Company (the "Compensation Committee"), and
shall be subject to increase at the option and sole discretion of the
Compensation Committee.
(b) Annual Bonus. The Company shall provide Executive with the
opportunity to earn an annual cash bonus in an amount up to 100% of Executive's
Base Salary. The amount of any such annual bonus shall be based upon the joint
recommendation of the Chairman and the CEO, and subject to the Compensation
Committee's approval in its sole discretion. Executive and the Company
anticipate that Executive shall have a target annual bonus of approximately 75%
of Base Salary for superior performance, and that the annual bonus may range
from zero to up to 100% of Base Salary. Both the overall performance of the
Company as a whole and the individual performance of Executive shall be taken
into account in determining the amount of the annual bonus, if any.
(c) Special Long-Term Incentive Bonus. Given that the share price of
the Company is largely dependent on the performance of the individual television
stations, if Executive is employed by the Company on December 31, 2002, and if
the Fair Market Value of a Class A Share of Company Stock on December 31, 2002
has increased from the Fair Market Value of such Share on January 1, 1998, and
the percentage increase is greater that the percentage increase in the NASDAQ
Composite Average (or, if the Company adopts a new average against which to
compare the performance of its stock in its proxy statement for 1998, such new
average) during the same period, Executive will receive a special one-time bonus
of US$750,000.
(d) Equity Participation. The Company has granted Executive an option
to purchase 100,000 Class A Shares of the Company as of January 19, 1998 and
50,000 Class A Shares on February 23, 1998 (collectively, the "Option"). The
Option shall become exercisable as to 40,000 shares on each of the first two
anniversaries of the date of grant (such portion of the Option, "Option A"), and
the remainder shall become exercisable in three equal annual installments on the
third and fourth anniversaries of the date of grant and on December 31, 2002
grant (such portion of the Option, "Option B"), provided Executive is employed
by the Company on such date. The exercise price per share as to 100,000 shares
(two-thirds of Option A and Option B, respectively) shall equal $24.00, which
was the mean between the high and low prices of the Company's Class A shares as
reported by NASDAQ for January 19, 1993. The exercise price per
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<PAGE>
share as to 50,000 shares (one-third of Option A and Option B, respectively)
shall equal the mean between the high and low prices of the Company's Class A
shares as reported by NASDAQ for February 23, 1998. With respect to Option B
(but not Option A), the exercise price shall increase on each January 1,
compounded annually, by an amount based on the yield to maturity on U.S.
Treasury Securities with a maturity nearest to seven years on the date that the
Option is granted (i.e., 5.55%). Option A shall expire ten years after the date
of grant and Option B shall expire seven years after the date of grant. The
Option shall become immediately exercisable in full in the event that
Executive's employment with the Company is terminated (i) by the Company other
than for Cause, (ii) by the Executive for Good Reason, (iii) by reason of the
death or Disability of the Executive or (iv) by the Company following a Change
in Control (as these terms are hereinafter defined). Once exercisable, the
option shall remain exercisable for the specified term, except that (i) if
Executive's employment is terminated for Cause the Option shall immediately
terminate and (iii) if Executive's employment terminates for any other reason,
the Option shall remain exercisable for the lesser of the remaining term of
Option and one year following termination of employment.
The timing and amount of any subsequent option awards (if
any), shall be at the discretion of the Compensation Committee and approved by
the Board of Directors, but will be generally commensurate with Executive's
position with the Company and taking into account option awards made to the
other senior executives of the Company.
As used herein, "Change in Control" means the occurrence of
(i) a sale or other disposition of stock of the Company, or an issuance of stock
of the Company as a result of which any "person" (as such term is used in
section 13(d) and 14(d) of the Securities Exchange Act of 1934), other than
Ronald S. Lauder ("Lauder") is or becomes the beneficial owner of more than 25%
of the total voting power of the Company, and Lauder (x) beneficially owns a
lesser percentage of the total voting power of the Company and (y) does not have
the right or ability by voting power, contract or otherwise to elect or
designate a majority of the Board of Directors or (ii) more than 50% of the
total value of the assets of the Company and its consolidated subsidiaries are
sold and the acquirer of such assets is not Lauder or a company controlled by
Lauder.
4. Benefits, Perquisites and Expenses.
(a) Benefits. During the Employment Period, Executive shall be
eligible to participate in (i) each welfare benefit plan sponsored or maintained
by the Company, including, without limitation, each group life,
hospitalization, medical, dental, health, accident or disability insurance or
similar plan or program of the Company, provided that in any event Executive
shall at the Company's expense, be entitled to private medical insurance for
himself, his wife and dependent children, disability insurance and
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permanent health insurance at the maximum permissible levels from time to time,
and life insurance in an amount commensurate with the life insurance offered to
the other senior executives of the Company, and (ii) each pension, profit
sharing, retirement, deferred compensation or savings plan sponsored or
maintained by the Company, in each case, whether now existing or established
hereafter, to the extent that Executive is eligible to participate in any such
plan under the generally applicable provisions thereof, provided that if
Executive is also entitled to any of such benefits under an agreement with an
Affiliate, the benefits shall be provided by the Company and its Affiliates to
Executive in a manner that avoids duplication. The Company may amend or
terminate any such plan in its discretion.
(b) Perquisites. During the Employment Period, Executive shall be
entitled to home leave as specified in the Company's Employee Handbook and shall
also be entitled to receive such perquisites as are generally provided to other
senior officers of the Com pany in accordance with the then current policies and
practices of the Company, provided that if Executive is also entitled to any of
such benefits under an agreement with an Affiliate, the benefits shall be
provided by the Company and its Affiliates to Executive in a manner that avoids
duplication. For each calendar month during the Employment Period that Executive
maintains a principal residence in the Greater London Metropolitan Area,
Executive shall be entitled to receive an annual expatriate premium of Pounds
Sterling (pound)30,000 to be paid in equal monthly installments, and subject to
annual increase based on the increase in the consumer price index (HICP) for the
London metropolitan area published by the Office of National Statistics for the
preceding year, or if such index is no longer available, such other generally
available index measuring changes in consumer purchasing power (in the London
metropolitan area or nationally) designated by the Board of Directors.
(c) Business Expenses. During the Employment Period, the Company shall
pay or reimburse Executive for all reasonable expenses incurred or paid by
Executive in the performance of Executive's duties hereunder, upon presentation
of expense statements or vouchers and such other information as the Company may
require and in accordance with the generally applicable policies and procedures
of the Company.
(d) Indemnification. The Company shall indemnify Executive and hold
Executive harmless from and against any claim, loss or cause of action arising
from or out of Executive's performance as an officer, director or employee of
the Company or any of its subsidiaries or in any other capacity, including any
fiduciary capacity, in which Executive serves at the request of the Company to
the maximum extent permitted by applicable law and the Company's Memorandum of
Association and Bye-Laws. If any claim is asserted against Executive with
respect to which Executive reasonably believes in good faith he is entitled to
indemnification, the Company shall either defend Executive
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or, at its option, pay Executive's legal expenses (or cause such expenses to be
paid) on a quarterly basis, provided that Executive shall reimburse the Company
for such amounts, plus simple interest thereon at the 90-day United States
Treasury Bill rate as in effect from time to time, compounded annually, if
Executive shall be found by a court of competent jurisdiction not to have been
entitled to indemnification.
(e) Withholding. Any payments provided for herein shall be reduced by
any amounts required to be withheld by the Company from time to time under any
applicable income tax or other law, rule or regulation.
(f) Currency of Payment. Payments provided for herein shall be in the
currency stated, or in such other mutually beneficial currency as the Company
and Executive shall agree from time to time sufficiently in advance of payment
to permit timely payment. Payment in a currency other than in the currency
stated shall be based at the current exchange rate at the time of payment.
(g) Right of Offset. If the Company makes any payment to a third party
on Exectuive's behalf or as guarantor of an obligation of Executive, the Company
shall be entitled to seek reimbursement from the Executive of any such amounts
and/or to offset any such amounts against any payments by the Company to
Executive hereunder.
5. Termination of Employment.
(a) Termination of the Employment Period. The Employment Period shall
end upon the earliest to occur of (i) a termination of Executive's employment on
account of Executive's death, (ii) a Termination due to Disability or
Retirement, (iii) a Termination for Cause, (iv) a Termination Without Cause, (v)
a Termination for Good Reason, (vi) a Termination Without Good Reason, or (vii)
the expiration of the Term. The Company or the Executive may initiate a
termination in any manner permitted hereunder by giving the other party written
notice thereof (the "Termination Notice"). The effective date (the "Termination
Date") of any termination shall be deemed to be the later of (i) in the case of
a Termination Notice from Executive, 45 days after the receipt by the Company of
the Termination Notice, (ii) the date on which the Termination Notice is given,
or (iii) the date specified in the Termination Notice; provided, however, that
in the case of the Executive's death, the Termination Date shall be the date of
death. Upon termination of his employment for any reason, Executive will
immediately resign from all positions that he holds with the Company and its
Affiliates.
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(b) Payments Upon Certain Terminations.
(i) Termination for Good Reason or Termination Without Cause.
In the event that Executive's employment is terminated by Executive for Good
Reason or by the Company Without Cause, the Company shall pay Executive his
Earned Salary, Vested Benefits, and a Severance Benefit (as such terms are
hereinafter defined).
(ii) Termination due to Death. In the event of the
termination of Executive's employment due to Executive's death, the Company
shall pay Executive's estate Executive's Earned Salary, Vested Benefits, and
shall provide to Executive's surviving spouse and children Executive's Base
Salary (at the rate in effect on the date of his death) and the health insurance
provided in Section 4(a)(i) for a period of 12 months.
(iii) Termination due to Disability or Retirement. In the
event of termination of Executive's employment by the Company due to Disability
or a Termination due to Retirement, the Company shall pay Executive his Earned
Salary and Vested Benefits as provided in Section 3(c), plus, in the event of
termination due to Disability, to the Executive or his estate his Base Salary at
the Termination Date on a monthly basis, the benefits provided in Section
4(a)(i) for 12 months. In the event that Executive's employment with the Company
is terminated due to Disability, Executive's entitlement to continuation of his
Base Salary under this subsection (iii) shall be reduced by the amount of any
Company sponsored (and paid for) disability benefits paid to Executive.
(iv) Termination Without Good Reason. In the event of a
termination of Executive's employment by Executive Without Good Reason, the
Company shall pay Executive his Earned Salary and Vested Benefits.
(v) Termination for Cause. In the event of a termination of
Executive's employment by the Company for Cause, the Company shall pay Executive
his Earned Salary and Vested Benefits.
(c) Timing of Payments. Earned Salary shall be paid in a single lump
sum as soon as practicable, but in no event more than 60 days, following the end
of the Employment Period. Vested Benefits shall be payable in accordance with
the terms of the plan, policy, practice, program, contract or agreement under
which such benefits have accrued except as otherwise expressly modified by this
Agreement. Severance Benefits shall be paid in equal monthly installments.
(d) Definitions. The following capitalized terms have the following
meanings:
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"Earned Salary" means any Base Salary earned, but unpaid, for
services rendered to the Company on or prior to the date on which the Employment
Period ends.
"Normal Retirement Age" means the first day of the month
following Executive attaining age 65.
"Severance Benefit" means Executive's minimum Base Salary for
the remainder of the Term.
"Termination due to Disability" means a termination of
Executive's employment by the Company because Executive has been incapable of
substantially fulfilling the positions, duties, responsibilities and obligations
set forth in this Agreement because of physical, mental or emotional incapacity
resulting from injury, sickness or disease for a period of (i) at least six
consecutive months or (ii) a total of more than 183 days in any twelve month
period. Any question as to the existence, extent or potentiality of Executive's
disability upon which Executive and the Company cannot agree shall be determined
by a qualified, independent physician selected by the Company and reasonably
acceptable to Executive. The determination of any such physician shall be final
and conclusive for all purposes of this Agreement. Executive or his legal
representative or any adult member of his immediate family shall have the right
to present to such physician such information and arguments as to Executive's
disability as he, she or they deem appropriate, including the opinion of
Executive's personal physician.
"Termination due to Retirement" means termination of
employment by Executive, or termination of Executive's employment by the Company
other than a Termination for Cause, on or after Executive's Normal Retirement
Age.
"Termination for Cause" means a determination by a majority of
the Board to terminate Executive's employment by the Company due to (i)
Executive's conviction of a felony or the entering by Executive of a plea of
nolo contendere with respect to a charged felony, (ii) Executive's gross
negligence, recklessness, dishonesty, fraud, willful malfeasance or willful
misconduct in the performance of the services contemplated by this Agreement,
(iii) willful misrepresentation to shareholders or directors which is injurious
to the Company; (iv) a willful failure without reasonable justification to
comply with a reasonable written order of the CEO or Board of Directors; or (v)
a willful and material breach of Executive's duties or obligations under this
Agreement. Notwith standing the foregoing, a termination shall not be treated as
a Termination for Cause unless the Company shall have delivered a written notice
to Executive stating that it intends to terminate his employment for Cause not
less than seven days following the giving of such notice and specifying the
factual basis for such termination, and the event
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or events that form the basis for the notice, if capable of being cured, shall
not have been cured within the period stated in the receipt of such notice.
"Termination for Good Reason" means a termination of
Executive's employment by Executive within 30 days following (i) a reduction in
Executive's annual Base Salary or bonus opportunity contemplated by Sections
3(a) and (b), (ii) a material reduction in Executive's positions, duties,
responsibilities or reporting lines from those described in Section 2 hereof;
(iii) a material breach of this Agreement by the Company, or (iv) any
termination of the Executive's employment with CME Development Corporation due
to a "Termination Without Cause" by CME Development Corporation or a
"Termination With Good Reason by Executive", as those terms are defined in the
employment agreement between the Executive and CME Development Corporation.
Notwithstanding the foregoing, a termination shall not be treated as a
Termination for Good Reason (x) if Executive shall have consented in writing to
the occurrence of the event giving rise to the claim of Termination for Good
Reason or (y) unless Executive shall have delivered a written notice to the
Company within 30 days of his having actual knowledge of the occurrence of one
of such events stating that he intends to terminate his employment for Good
Reason and specifying the factual basis for such termination, and such event, if
capable of being cured, shall not have been cured within 30 days of the receipt
of such notice.
"Termination Without Cause" means any termination by the
Company of Executive's employment hereunder other than (i) a Termination due to
Disability, (ii) a Termination due to Retirement or (iii) a Termination for
Cause.
"Termination Without Good Reason" means any termination by
Executive of Executive's employment hereunder upon not less than three month's
notice to the Company other than (i) a termination due to Executive's death,
(ii) a Termination due to Retirement, (iii) a Termination for Good Reason, or
(iv) a Termination due to Disability.
"Vested Benefits" means amounts which are vested or which
Executive is otherwise entitled to receive under the terms of or in accordance
with any plan, policy, practice or program of, or any contract or agreement
with, the Company, at or subsequent to the date of his termination without
regard to the performance by Executive of further services or the resolution of
a contingency and expenses incurred prior to termination of employment that are
reimbursable under Section 4(c).
(e) Full Discharge of Company Obligations. The amounts payable to
Executive pursuant to this Section 5 following termination of his employment
(including amounts payable with respect to Vested Benefits) shall be in full and
complete satisfaction of Executive's rights under this Agreement and any other
claims he may have
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in respect of his employment by the Company or any of its subsidiaries. Such
amounts shall constitute liquidated damages with respect to any and all such
rights and claims and, upon Executive's receipt of such amounts, the Company
shall be released and discharged from any and all liability to Executive in
connection with this Agreement or otherwise in connection with Executive's
employment with the Company and its subsidiaries, other than Executive's rights
to indemnification under Section 4(d).
6. Agreement Not to Compete With Company
(a) During the Employment Period and for a period of two years
thereafter, Executive shall not directly or indirectly own, manage, operate,
finance, join, control, advise, consult, render services to, have an interest or
future interest or participate in the ownership, management, operation,
financing or control of, or be employed by or connected in any manner with any
Competing Business (other than as a holder of common stock of the Company, and
not in excess of 1% of the outstanding voting shares of any other publicly
traded company). "Competing Business" means the business of licensing of
television or radio stations and provision of programming engaged in by the
Company or any Affiliate in any country in Europe where the Company or an
Affiliate conducts such business at any time during the Term. Any opportunity
directly or indirectly related to any business engaged in by the Company, its
subsidiaries and Affiliates of which Executive becomes aware during the Term
shall be deemed a corporate opportunity of the Company, and Executive shall
promptly make such opportunity available to the Company.
(b) If, during the period of two years after expiration of the
Term, Executive or an Affiliate of Executive proposes to engage in what may be a
Competing Business, Executive shall so notify the Company in a writing which
shall fully set forth and describe in detail the nature of the activity which
may be a competitive Business, the names of the companies or other entities with
or for whom such activity is proposed to be engaged in by Executive or by an
Affiliate of Executive (the "Section 6 Notice"). If, within 30 days after
receipt by the Company of a Section 6 Notice, the Company shall fail to notify
Executive that it deems the proposed activity to be a Competitive Business, then
Executive shall be free to engage in the activities described in the Section 6
Notice without violation of Section 6(a). If, however, the Company notifies
Executive that the proposed activities constitute a Competitive Business, then
(i) Executive shall not engage in such Competitive Business during the two-year
period following expiration of the Term, and (ii) the Company shall pay
Executive, during such two-year period, in equal monthly installments, an amount
equal to his highest Base Salary; provided that the amount payable under this
Section 6(b) shall be reduced by the amount of Severance Benefit that Executive
is receiving for such period.
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7. Consulting Following the Term
(a) If the Company does not extend the Term, Executive shall
make himself available as an independent consultant to the Company and its
Affiliates for the period commencing on the expiration of the Term and ending on
the earlier of the second anniversary of such date and Executive's death (the
"Consulting Period"). For making himself available for consulting services
during the Consulting Period, the Company shall pay Executive a consulting fee
at the annual rate of US$150,000, payable no less frequently than monthly.
During the Consulting Period Executive shall make himself available for any
requests for consultation by the Company and its Affiliates during regular
business hours of the Company for up to 15 hours per month during the Consulting
Period. The Company shall give due consideration to Executive's other
commitments in determining the time and place of such requests and consultation.
Executive shall be entitled to be reimbursed for expenses reasonably and
necessarily incurred by him in connection with such consultation.
8. Confidential Information
(a) Without the prior written consent of the Company, Executive shall
not disclose at any time during the Employment Period or any time thereafter any
Confidential Information (as defined below) to any third person other than in
the course of fulfilling Executive's responsibilities under this Agreement
unless such Confidential Information has been previously disclosed to the public
by the Company or an Affiliate or is in the public domain (other than by reason
of Executive's breach of the provisions of this paragraph).
(b) "Confidential Information" is any non-public information pertaining
to the Company or an Affiliate, any of their businesses or the business or
personal affairs of Ronald S. Lauder ("Lauder") or his family and how any of
them conducts its or his business or affairs. "Confidential Information"
includes not only information disclosed by the Company or an Affiliate to
Executive, but information developed, created or learned by Executive during the
course of or as a result of Executive's employment with the Company.
"Confidential Information" specifically includes information and documents
concerning the Company's and its Affiliates' methods of doing business;
research, telecommunications technology, its actual and potential clients,
transactions and suppliers (including the Company's or an Affiliate's terms,
conditions and other business arrangements with them); client or potential
client or transaction lists and billing; advertising, marketing and business
plans and strategies (including prospective or pending licensing applications or
investments in license holders or applicants); profit margins, goals, objectives
and projections; compilations, analyses and projections regarding the Company,
its Affiliates or any of its clients or potential clients or their
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businesses; trade secrets; salary, staffing, management organization or
employment information; information relating to members of the Board of
Directors and management of the Company or an Affiliate; files, drawings or
designs; information regarding product development, marketing plans, sales plans
or manufacturing plans; operating policies or manuals, business plans, financial
records or packaging design; or any other financial, commercial, business or
technical information relating to the Company, an Affiliate, Lauder or his
family or information designated as confidential or proprietary that the
Company, an Affiliate or Lauder may receive belonging to others who do business
with any of them.
(c) Nothing herein shall prevent the disclosure by Executive of any
information required by an order of a court having competent jurisdiction or
under subpoena from a government agency, provided that, if Executive receives a
request for the disclosure of any Confidential Information pursuant to court
process or by a government agency, Executive shall immediately (and at the
latest within two business days) notify the Company of that request and
cooperate to the maximum extent authorized by law with the Company in protecting
the Company's and it Affiliates' interest in maintaining the confidentiality of
any Confidential Information.
9. No Disparaging Comments
Each of the parties hereto agrees not to make disparaging or derogatory comments
about the other party, members of the Board or Affiliates, except to the extent
required by law, and then only after consultation with the other party to the
maximum extent possible in order to maintain goodwill for each of the parties.
10. Return of Company Property
Promptly (and at the latest within ten business days) following Executive's
termination of services, Executive shall:
(i) return to the Company all documents, records, notebooks,
computer diskettes and tapes and anything else containing the
Company's Confidential Information (as defined above), and any
other property or Confidential Information of the Company or
its Affiliates, including all copies thereof in Executive's
possession, custody or control, and
(ii) delete from any computer or other electronic storage medium
owned by Executive any of the proprietary or Confidential
Information of the Company or its Affiliates.
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11. No Soliciting or Hiring Company Employees
During the Employment Period and for a two-year period thereafter, Executive
shall not directly or indirectly induce any employee of the Company or any
Affiliate, other than Executive's secretary or personal assistant, to terminate
employment with such entity, and during the Employment Period and for a one-year
period thereafter, shall not directly or indirectly, either individually or as
owner, agent, employee, consultant or otherwise, employ or offer employment to
any person who is or was employed by the Company or any Affiliate as an
employee, other than the Company's current Vice President of Business
Development and Executive's secretary or personal assistant.
12. Continuing Obligations Following Termination
Executive agrees that his obligations and restrictions with respect to noncom
petition, confidentiality, Company property, nondisparagement and
nonsolicitation, and the Company obligations to indemnify Executive under
Section 4(d), will continue to apply following the termination of Executive's
relationship regardless of the manner in which his relationship with the Company
is terminated, whether voluntarily, for Cause, for Good Reason, without Cause or
otherwise.
13. Arbitration of All Disputes
(a) Any dispute, controversy or claim between the Executive and the
Company or any of its officers, directors, employees or shareholders (who are
expressly made third-party beneficiaries of this agreement) arising out of,
relating to or in connection with this agreement, or the breach, termination or
validity thereof, shall be finally resolved by binding and non-appealable
arbitration, before a single arbitrator selected by the procedure set forth
below, conducted in Hamilton, Bermuda. To the extent practicable, any such
arbitration shall be consolidated with any other arbitration proceeding between
Executive and any Affiliate of the Company (if any).
(b) Either party may commence an arbitration proceeding by giving
written notice to the other party of its desire to arbitrate.
(c) The single arbitrator (the "Arbitrator") shall be selected from
among the New York City members of the New York Regional Panel of Distinguished
Neutrals (the "Panel") of the Center for Public Resources ("CPR") by mutual
agreement of the parties, or if the parties are unable to agree, by the
following means:
(A) The Company, on one hand, and Executive
on the other hand, shall simultaneously exchange lists each
containing the names
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of five members of their choice of the Panel who have
indicated a willingness to serve.
(B) If a single name appears on both lists,
that individual shall be appointed.
(C) If more than one name appears on both
parties' lists, the Arbitrator shall be selected from the
common names by mutual agreement of the parties or by the toss
of a coin.
(D) If the lists contain no names in common,
each party shall strike four names from the other party's list
and the Arbitrator shall be selected from the remaining two
names by mutual agreement of the parties or by the toss of a
coin.
(E) If the CPR ceases to have a Panel or it
is otherwise impossible to select the Arbitrator from the
Panel as contemplated by this Agreement, the Arbitrator shall
be selected by the President of the CPR in the manner that the
President deems closest to satisfying the purposes of this
Section, or, if such person is unable to do so, by the
President of the Association of the Bar of the City of New
York.
(d) The Arbitrator, after appropriate consultation with the parties,
shall (i) determine, in his or her sole discretion, the rules governing the
arbitration proceeding, including whether and to what extent the parties shall
have any right to pre-hearing discovery or other forms of disclosure, the manner
of presentation of arguments and/or evidence before or at any hearing, whether
and to what extent formal rules of evidence shall govern the proceeding and the
parties' rights following the proceeding, and (ii) be governed in exercising
such discretion by the goal of reaching a fair and reasonable decision in an
expeditious and efficient manner while endeavoring to streamline the process and
avoid undue litigation costs.
(e) The Arbitrator shall assess the costs of the proceeding (including
the prevailing party's reasonable attorney's fees) on any unsuccessful party to
the extent the Arbitrator concludes that such party is unsuccessful, unless he
or she concludes that matters of equity or important considerations of fairness
dictate otherwise.
(f) The Arbitrator shall be required to state his or her decision in
writing and may, but shall not be required to, elaborate on the reasons for such
decision.
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(g) The arbitrator(s) shall have the authority upon application by a
party to direct specific performance, including preliminary or interim specific
performance pending the final resolution of the arbitration, of any portion of
this agreement. The parties expressly consent to the jurisdiction and power of
any federal or state court in New York to enforce the terms of such a direction
upon application by a party. If the arbitrator(s) have not yet been appointed,
the parties may obtain injunctive or other appropriate relief from a court to
enforce the terms of this agreement pending the appointment of the arbitrator(s)
who shall thereafter have full power to continue, modify or vacate the terms of
any injunctive relief ordered by the court.
(h) Notwithstanding the terms of this agreement that provide that New
York law shall govern, the arbitration and the provisions in this agreement
dealing with arbitration shall be governed exclusively by the United States
(Federal) Arbitration Act, 9 U.S.C. ss.ss. 1-16, and judgment on or enforcement
of the award or any direction for specific performance rendered by the
arbitrators may be entered by any court having jurisdiction thereof or having
jurisdiction over the relevant party or assets of such party.
(i) If, notwithstanding the parties' agreement to arbitrate, any issue
is presented to a court for decision, the parties hereby waive any right to
trial by jury.
(j) The parties agree that any dispute between the parties and the
arbitration itself shall be kept confidential and that the existence of the
arbitration and any element of it (including but not limited to any pleading,
brief or other document submitted or exchanged, any testimony or other oral
submission, and any award) shall not be disclosed except to the arbitrator(s),
the CPR Institute for Dispute Resolution, the parties, their counsel and any
person necessary to the conduct of the proceeding, except as may be lawfully
required in judicial proceedings relating to the arbitration or otherwise.
14. No Punitive or Emotional Damages
The parties hereto agree that neither the Executive nor the Company will be
entitled to seek or obtain punitive, exemplary or similar damages of any kind
from the other or, in the case of Executive, from the Company's officers,
directors, employees or shareholders, or to seek or obtain damages or
compensation for emotional distress, as a result of any dispute, controversy or
claim arising out of, relating to or in connection with this Agreement, or the
performance, breach, termination or validity thereof. Nothing herein shall
preclude an award of compensatory or punitive damages against any other third
party.
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15. Injunctive Relief to Avoid Irreparable Injury
(a) Executive acknowledges and agrees that the individualized services
and capabilities that he will provide to the Company under this Agreement are of
a personal, special, unique, unusual, extraordinary and intellectual character.
(b) Executive acknowledges and agrees that the restrictions in this
agreement are reasonable to protect the Company's rights under this Agreement
and to safeguard the Company's and it Affiliates' Confidential Information.
(c) Executive acknowledges and agrees that the covenants and
obligations of Executive with respect to noncompetition, nonsolicitation,
confidentiality and Company property relate to special, unique and extraordinary
matters and that a violation of any of the terms of such covenants and
obligations will cause the Company and its Affiliates irreparable injury for
which adequate remedies are not available at law. Executive therefore agrees
that the Company shall be entitled to an order of specific performance,
injunction, restraining order or such other interim or permanent equitable
relief (without the requirement to post bond) restraining Executive from
committing any violation of the covenants and obligations contained in this
Agreement
(d) These injunctive remedies are cumulative and are in addition to any
other rights and remedies the Company may have at law or in equity.
(e) Executive represents that his economic means and circumstances are
such that the provisions of this Agreement, including the noncompetition,
nonsolicitation, confidentiality and Company property provisions, will not
prevent him from providing for himself and his family on a basis satisfactory to
him and them.
16. Automatic Amendment by Court Order
and Interim Enforcement
(a) If the Arbitrator(s) or a court determines that, but for the
provisions of this paragraph, any part of this agreement is illegal, void as
against public policy or otherwise unenforceable, the relevant part will
automatically be amended to the extent necessary to make it sufficiently narrow
in scope, time and geographic area to be legally enforceable.
All other terms will remain in full force and effect.
(b) If the Executive raises any question as to the enforceability of
any part or terms of this agreement, including, without limitation, the
provisions relating to noncompetition, nonsolicitation, confidentiality and
Company property, the Executive
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specifically agrees that he will comply fully with this Agreement unless and
until the entry of an arbitral award to the contrary.
17. Notices
All notices and other communications required or permitted hereunder shall be
sufficiently given if (a) delivered personally, (b) sent by facsimile
transmission (with confirmation received), (c) sent by a nationally-recognized
air courier assuring overnight delivery, or (d) mailed (by registered or
certified mail, return receipt requested and postage prepaid) as follows:
if to the Executive, to the Executive at:
18 D'Arblay Street
London W1V 3FP, England
with a copy to each of:
Fred Klinkhammer Suite 18 Peninsula Heights 93 Albert
Embankment London SE1 7TY if to the Company, to the Company at
18 D'Arblay Street
London W1V 2FP , England
Attention: Leonard M. Fertig
with a copy to each of:
Legal Department
18 D'Arblay Street
London W1V 2FP, England
Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
Fax: (212) 909-6836
Attention: Louis Begley, Esq.
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or to such other address as shall be furnished by notice from time to time by
one party hereto to the other party. Any such communication shall be deemed to
have been given, (i) in the case of personal delivery, on the date of delivery,
(ii) in the case of delivery by air courier, on the first business day following
the day on which such communication was posted, and (iii) in the case of
mailing, on the third business day following the day on which such notice was
posted.
18. Sole and Entire Understanding; Amendments
The entire understanding and agreement between the Company and Executive have
been incorporated into this Agreement. There are no other promises,
representations, understandings or inducements by the Company to Executive or
Executive to the Company other than those specifically set forth in this
Agreement. This Agreement may not be altered, amended or added to except in a
single writing signed by the Company and the Executive. Coincident herewith,
Executive and CME Development Corporation are entering into an Employment
Agreement covering Executive's services to CME Development Corporation and its
subsidiaries.
19. Waiver of Breach
A waiver or breach of any provision of this Agreement shall not constitute or
operate as a waiver of any other breach of such provision or of any other
provision, and any failure to enforce any provision hereof shall not operate as
a waiver of such provision or of any other provision.
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20. Headings
The headings of sections in this Agreement are for convenience only, are not a
part of this Agreement and shall not affect the construction of the provisions
of this Agreement.
21. Arm's Length
(a) This Agreement was entered into at arm's length, without duress or
coercion, and is to be interpreted as an agreement between parties of equal
bargaining strength. Both the Company and the Executive agree that this
Agreement is clear and unambiguous as to its terms, and that no parol or other
evidence will be used or admitted to alter or explain the terms of this
Agreement, but that it will be interpreted based on the language within its four
corners in accordance with the purposes for which it is entered into.
(b) The parties hereto expressly agree that any rule or contractual
interpretation, as applied under California law or anywhere else, that would
allow parol or extrinsic
18
<PAGE>
evidence to attempt to show fraud in the inducement or duress to contradict the
plain, unambiguous terms of this Agreement shall not apply to this Agreement and
its performance and enforcement. This provision is a material part of this
Agreement and, should any party try to introduce evidence contrary to this
provision, any other party shall be entitle to consider it a breach and to
rescind this contract in full.
22. Successors and Assigns
(a) This Agreement will inure to the benefit of, and will be binding
upon, the Company, its successors and assigns and upon the Executive and his
heirs, successors and assigns; provided, however, that, because this is an
Agreement for personal services, the Executive cannot assign any of his
obligations under this Agreement to anyone else.
(b) This Agreement may be executed in counterparts, in which case each
of the two counterparts will be deemed to be an original and the final
counterpart shall be deemed to have been executed in New York, New York.
23. No Third Party Beneficiaries
This Agreement does not create, and shall not be construed as creating, any
rights enforceable by any person not a party to this Agreement, except as
provided in Sections 4(d) and 5(b).
24. New York Law Governs
Any questions or other matters arising under this Agreement, whether of
validity, interpretation, performance or otherwise, will therefore be governed
by and construed in accordance with the laws of the State of New York applicable
to agreements made and to be wholly performed in New York, without reference to
principles of conflicts or choice of law under which the law of any other
jurisdiction would apply.
IN WITNESS WHEREOF, this Agreement has been executed by
Executive and then by the Company in New York, New York, on the dates shown
below, but effective as of the date and year first above written.
/s/ Fred Klinkhammer
Date: -------------------------
------------- Fred Klinkhammer
19
<PAGE>
CENTRAL EUROPEAN MEDIA
ENTERPRISES LTD.
Date: BY: /s/ Leonard M. Fertig
------------- ---------------------
Leonard M. Fertig
President and Chief
Executive Offier
20
<PAGE>
Subsidiaries as of December 31, 1997
Company Name Jurisdiction of Organization
- ------------ ----------------------------
Federacja Sp.zo.o. Poland
ITI Media Group N.V. Netherlands Antilles
Neovision Holding B.V. Netherlands
Neovision Sp.zo.o. Poland
Telewizja Wisla Sp.zo.o. Poland
TVN Sp.zo.o. Poland
ENDEMOL-Neovision Sp.zo.o. Poland
Unidome Beheer B.V. Netherlands
NTP Plus S.A. Poland
Polskie Media S.A. Poland
Media Pro International S.A. Romania
Media Vision S.R.L. Romania
Video Vision International S.R.L. Romania
Mobil Rom S.A. Romania
Pro TV S.R.L. Romania
Unimedia S.R.L. Romania
International Media Services Ltd. Bermuda
Innova Film GmbH. Germany
Enterprise "Intermedia". Ukraine
Limited Liability Company "Prioritet". Ukraine
Broadcasting Company "Studio 1+1". Ukraine
Ukraine Advertising Holding B.V. Netherlands
Gravis. Ukraine
Ceska Nezavisla Televizni Spolecnost, spol. s.r.o. Czech Republic
Radio Alfa, a.s. Czech Republic
Alfa Media, spol. s.r.o. Czech Republic
Alfa-R, spol. s.r.o. Czech Republic
Media Marketing Services, spol. s.r.o. Czech Republic
Nova Consulting a.s. Czech Republic
Nova Holding a.s. Czech Republic
Slovenska Televizna Spolocnost, spol. s.r.o. Slovakia
2002 Kft Hungary
MKTV Rt (Iris TV) Hungary
BK Rt (TV3) Hungary
Videovox Kft Hungary
GammaSat Media Investment Holding Kft Hungary
Magyarhang Kft Hungary
Veszprem Varosi TVKft Hungary
<PAGE>
Company Name Jurisdiction of Organization
- ------------ ----------------------------
MM TV 1, d.o.o. Slovenia
Tele 59, d.o.o. Slovenia
Meglic Telecom, d.o.o. Slovenia
Produkcija Plus, d.o.o. Slovenia
MTV Regionalfernsehen GmbH Germany
CME Germany GmbH Germany
CME Medienbeteiligungen GmbH Germany
CME Medienbeteiligungen GmbH &
Co. Media Enterprises KG Germany
CME Medienbeteiligungen GmbH &
Co. Erste Medienprojekte Berlin KG Germany
CME Medienbeteiligungen GmbH &
Co. Zweite Medienprojekte Berlin KG Germany
Rhein-Main Ballungsraumfernsehen
Verwaltungs GmbH Germany
Modern Video City-TV Beteiligung
Verwaltungs GmbH Germany
1ATV Beteiligungsgesellschaft GmbH
& Co. Betriebs KG Germany
CME Media Enterprises B.V. Netherlands
CME Czech Republic B.V. Netherlands
CME Czech Republic II B.V. Netherlands
CME Germany B.V. Netherlands
CME Hungary B.V. Netherlands
CME Poland B.V. Netherlands
CME Romania B.V. Netherlands
CME Slovakia B.V. Netherlands
CME Slovenia B.V. Netherlands
CME Ukraine B.V. Netherlands
CME Media Enterprises UK UK
CME Ukraine Holding GmbH Austria
CME Development Corporation Inc. USA
CME Programming Services Inc. USA
Central European Media Enterprises N.V. Netherlands Antilles
<PAGE>
EXHIBIT 23.01
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 333-1560.
ARTHUR ANDERSEN & CO.
Hamilton, Bermuda
March 30, 1998
<PAGE>
POWER OF ATTORNEY
Each person whose signature appears below, constitutes and appoints
Leonard M. Fertig, Frederic T. Klinkhammer and John A. Schwallie, and each of
them, with full power to act without the other, such person's true and lawful
attorney-in-fact, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign the Annual
Report on Form 10-K for the fiscal year 1997 of Central European Media
Enterprises Ltd., a Bermuda corporation and any and all amendments to such
Annual Report on Form 10-K and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in fact, and
each of them, full power and authority to do and perform each an every act and
thing necessary or desirable to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, thereby ratifying
and confirming all that said attorneys-in-fact, or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
February 9, 1998
/s/ Ronald S. Lauder /s/ Leonard M. Fertig
-------------------- ---------------------
Ronald S. Lauder Leonard M. Fertig
/s/ Andrew Gaspar /s/ Herbert S. Schlosser
----------------- ------------------------
Andrew Gaspar Herbert S. Schlosser
/s/ Robert A. Rayne /s/ Nicolas G. Trollope
------------------- -----------------------
Robert A. Rayne Nicolas G. Trollope
/s/ Frederic T. Klinkhammer /s/ John A. Schwallie
--------------------------- ---------------------
Frederic T. Klinkhammer John A. Schwallie
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 106,188
<SECURITIES> 69
<RECEIVABLES> 41,985
<ALLOWANCES> 3,698
<INVENTORY> 0
<CURRENT-ASSETS> 209,457
<PP&E> 68,090
<DEPRECIATION> 31,517
<TOTAL-ASSETS> 491,567
<CURRENT-LIABILITIES> 122,183
<BONDS> 177,366
0
0
<COMMON> 240
<OTHER-SE> 157,343
<TOTAL-LIABILITY-AND-EQUITY> 491,567
<SALES> 155,394
<TOTAL-REVENUES> 155,394
<CGS> 0
<TOTAL-COSTS> 195,973
<OTHER-EXPENSES> 33,101
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,128
<INCOME-PRETAX> (86,484)
<INCOME-TAX> (14,608)
<INCOME-CONTINUING> (85,092)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (85,092)
<EPS-PRIMARY> (3.56)
<EPS-DILUTED> (3.56)
</TABLE>
<PAGE>
[LOGO]
FOR IMMEDIATE RELEASE
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NAMES MICHEL DELLOYE PRESIDENT AND CEO
- - Veteran Media Executive to Concentrate on Building Shareholder Value -
HAMILTON, BERMUDA, MARCH 26, 1998 - Veteran European media executive
Michel Delloye has been elected President and Chief Executive Officer of Central
European Media Enterprises Ltd. (Nasdaq: CETV), effective immediately, the
company announced today. CME is the leading commercial television company in
Central and Eastern Europe, with interests in television operations in seven
countries, cumulatively reaching 100 million people.
Mr. Delloye, 41, is the former Managing Director of CLT Multimedia (now
CLT-UFA), the Luxembourg-based media company that owns and operates television,
radio and production companies in Luxembourg, Belgium, France, Germany, the
Netherlands, Poland and the U.K. He has also held senior management positions at
the Belgian holding company Groupe Bruxelles Lambert. Mr. Delloye succeeds
Leonard M. Fertig, who is leaving CME to pursue other business opportunities
and investments. Mr. Fertig has agreed to remain a consultant to the company.
Commenting on the announcement, Ronald S. Lauder, Chairman and Founder of
CME, said, "We are very pleased that Michel Delloye has agreed to join CME as
President and CEO. With his extensive knowledge of the European media business
and strong financial background, Michel is the perfect leader for CME as it
prepares to enter the next phase of its development. Michel's clear mandate from
the CME Board is to build long-term shareholder value by further enhancing the
performance of the company's existing assets and pursuing opportunities for
focused growth."
Mr. Lauder continued, "I am confident that with his unique combination of
industry knowledge, financial expertise and considerable energy and enthusiasm,
Michel will be extremely successful at CME as he builds upon the outstanding
collection of assets and superb management team assembled by Len Fertig. We are
grateful to Len for his many contributions to CME's success and wish him well in
his new endeavors."
Mr. Fertig said, "I am very grateful for the opportunity to work with CME
during its building phase. I am proud of its achievements. As the company enters
a new stage, I am confident that Michel will provide meaningful leadership."
- continued -
<PAGE>
Page 2 of 2
Mr. Delloye said, "I am looking forward to the many opportunities and
challenges ahead for CME. In a relatively short period of time, CME has
established itself as the clear leader in privately owned television
broadcasting in Central and Eastern Europe. My objective will be to ensure that
CME remains the leader in its current and prospective markets, while delivering
solid financial results for its shareholders."
Mr. Delloye served as Managing Director of CLT Multimedia from 1992 to
1996, setting in motion an effective growth strategy, overseeing the creation of
a coherent and effective multi-cultural management team, and launching ten new
television stations. During that period, CLT Multimedia's revenues nearly
doubled and net income increased by more than 100 percent.
Prior to joining CLT Multimedia, Mr. Delloye served as General Manager of
Groupe Bruxelles Lambert in Brussels. He previously served as Chief Financial
Officer of the firm and as President of the firm's U.S. subsidiary, the Lambert
Brussels Capital Corporation. He began his professional career in the audit and
tax department of Deloitte Haskins & Sells in Brussels.
A Belgian citizen who currently resides in Belgium, Mr. Delloye holds a
law degree from the University of Louvain in Belgium. He is married with four
children.
CME invests in, develops, and operates national broadcast television
stations and station groups in Central and Eastern Europe. It is the leading
commercial television company in Central and Eastern Europe and owns interests
in television operations in the Czech Republic, Hungary, Poland, Romania,
Slovakia, Slovenia and Ukraine.
For further information, contact:
- ---------------------------------
Press: Investors:
- ------ ----------
Eugene Secunda - USA Chris Plunkett or Michael Smargiassi
212-777-3841 Brainerd Communicators, Inc.
212-986-6669
Gerry Buckland - Europe
44-374-860-011
