<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-24796
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
(Exact name of registrant as specified in its charter)
BERMUDA N/A
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Clarendon House, Church Street, Hamilton HM CX Bermuda
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 441-296-1431
Indicate by check mark whether registrant: (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for each shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of August 7, 1998
----- --------------------------------
Class A Common Stock, par value $.01 17,979,188
Class B Common Stock, par value $.01 6,149,797
<PAGE>
PART 1
FINANCIAL INFORMATION
Item 1. Financial Statements
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
Consolidated Balance Sheets as at
June 30, 1998 and December 31, 1997
($000s, except share data)
<TABLE>
<CAPTION>
ASSETS June 30, December 31,
Note 1998 1997
--------- ---------
(unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .............................................................. 49,803 106,257
Restricted cash ........................................................................ 292 800
Accounts receivable, net ............................................................... 43,434 41,985
Program rights costs ................................................................... 21,777 30,220
Advances to affiliates ................................................................. 15,653 14,675
Other short-term assets ................................................................ 17,913 15,520
--------- ---------
Total current assets ......................................................... 148,872 209,457
Investments in unconsolidated affiliates ............................................... 56,120 58,552
Investments ............................................................................ 23,004 22,951
Loans to affiliates .................................................................... 32,925 31,927
Property, plant and equipment, net ..................................................... 68,320 68,090
Program rights costs ................................................................... 21,407 12,851
Licence costs and other intangibles, net ............................................... 6,431 6,208
Goodwill and organization costs, net ................................................... 56,448 66,451
Deferred income taxes ................................................................. 837 746
Other assets ........................................................................... 26,014 14,334
Total assets ................................................................ 440,378 491,567
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities ............................................... 59,627 53,858
Duties and other taxes payable ......................................................... 8,945 10,989
Income taxes payable ................................................................... 1,471 2,308
Current portion of credit facilities and obligations under capital leases .............. 9,896 11,810
Dividends payable ...................................................................... 923 996
Investments payable .................................................................... 9,816 16,714
Advances from affiliates ............................................................... 33,456 25,508
--------- ---------
Total current liabilities .................................................... 124,134 122,183
Deferred income taxes .................................................................. 669 916
Long-term portion of credit facilities and obligations under capital leases ............ 24,017 24,204
Investments payable .................................................................... 5,188 7,875
$100,000,000 9 3/8 % Senior Notes ...................................................... 99,864 99,853
DM 140,000,000 8 1/8 % Senior Notes .................................................... 77,135 77,513
Other Liabilities ...................................................................... 565 199
Minority interest in consolidated subsidiaries ......................................... 484 1,241
Commitments and contingencies 5
SHAREHOLDERS' EQUITY:
Class A Common Stock, $0.01 par value: authorized:
100,000,000 shares at June 30, 1998 and 100,000,000 shares at December 31, 1997
issued and outstanding: 17,975,088 at June 30, 1998 and 16,934,894 at December 31, 1997; 180 169
Class B Common Stock, $0.01 par value: authorized:
15,000,000 shares at June 30, 1998 and December 31, 1997 ;
issued and outstanding: 6,149,797 at June 30, 1998 and 7,064,475 at December 31, 1997 .. 62 71
Additional paid-in capital ............................................................. 333,775 332,386
Accumulated deficit .................................................................... (216,765) (163,096)
Cumulative currency translation adjustment ............................................. (8,930) (11,947)
--------- ---------
Total shareholders' equity ............................................................. 108,322 157,583
--------- ---------
Total liabilities and shareholders' equity ............................................. $ 440,378 $ 491,567
========= =========
</TABLE>
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
Consolidated Statements of Operations
($000s, except per share data)
<TABLE>
<CAPTION>
For the three months For the six months
ended June, 30 ended June, 30
-------------------- --------------------
Note 1998 1997 1998 1997
---- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
GROSS REVENUES: ...................................................... $ 79,650 $ 53,435 $ 127,912 $ 90,915
Discounts and agency commissions ..................................... (16,889) (11,966) (27,142) (20,281)
======== ======== ========= ========
Net revenues ......................................................... 62,761 41,469 100,770 70,634
STATION EXPENSES:
Other operating costs and expenses ............................. 25,969 14,403 51,448 27,949
Amortization of programming rights ............................. 28,348 4,605 43,301 9,891
Depreciation of station fixed assets and other intangibles ..... 4,724 3,850 9,781 7,500
-------- -------- --------- --------
Total station operating costs and expenses ..................... 59,041 22,858 104,530 45,340
Selling, general and administrative expenses ................... 7,873 6,505 16,113 10,834
CORPORATE EXPENSES:
Corporate operating costs and development expenses ............. 6,213 4,866 13,403 9,441
Amortization of goodwill and allowance for development costs ... 8,478 2,598 11,007 4,595
Restructuring charge ........................................... 3 2,552 -- 2,552 --
-------- -------- --------- --------
17,243 7,464 26,962 14,036
Operating (loss)/income .............................................. (21,396) 4,642 (46,835) 424
Equity in income/(loss) of unconsolidated affiliates ................. 4 153 (3,334) (874) (10,103)
Loss on impairment of investments in unconsolidated affiliates ....... 4 -- -- -- (20,707)
Net interest and other income ........................................ (4,155) (597) (8,280) (671)
Foreign currency exchange loss ....................................... (3,096) (2,515) (2,957) (4,586)
-------- -------- --------- --------
Net loss before provision for income taxes ........................... (28,494) (1,804) (58,946) (35,643)
Provision for income taxes ........................................... (5,453) (4,922) (7,560) (6,833)
-------- -------- --------- --------
Net loss before minority interest .................................... (33,947) (6,726) (66,506) (42,476)
Minority interest in loss / (income) of consolidated subsidiaries .... 5,316 (106) 12,837 656
-------- -------- --------- --------
Net loss ............................................................. ($28,631) ($ 6,832) ($ 53,669) ($41,820)
======== ======== ========= ========
PER SHARE DATA
Net loss per share.................................................... 2
Basic .......................................................... ($ 1.19) ($ 0.29) ($ 2.23) ($ 1.75)
======== ======== ========= ========
Diluted ........................................................ ($ 1.19) ($ 0.29) ($ 2.23) ($ 1.75)
======== ======== ========= ========
Weighted average common share data (000's):
Basic .......................................................... 24,030 23,863 24,030 23,863
======== ======== ========= ========
Diluted ........................................................ 24,030 23,863 24,030 23,863
======== ======== ========= ========
</TABLE>
Page 3
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
Consolidated Statements of Shareholders' Equity (Deficit)
For the six months ended June 30, 1998
($000s)
(Unaudited)
<TABLE>
<CAPTION>
Comprehensive Class A Class B
Income Common Common Capital Accumulated
(loss) Stock Stock Surplus Deficit(1)
------------- ------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997 $169 $71 $332,386 ($163,096)
Comprehensive income:
Net loss...................................... ($53,669) ($53,669)
Other comprehensive income
Unrealized translation adjustments............ $3,017 - -
-------------
Comprehensive income....................................... ($50,652)
=============
Stock issued:
stock option plans............................ $11 ($9) $1,389
------- -------- -------- -----------
BALANCE, June 30, 1998 $180 $62 $333,775 ($216,765)
======= ======== ======== ===========
<CAPTION>
Accumulated
Other Total
comprehensive Shareholders'
income(2) equity
-------------- -------------
<S> <C> <C>
BALANCE, December 31, 1997 ($11,947) $157,583
Comprehensive income:
Net loss...................................... ($53,669)
Other comprehensive income
Unrealized translation adjustments............ $3,017 $3,017
Comprehensive income.......................................
Stock issued:
stock option plans............................ $1,391
-------------- -------------
BALANCE, June 30, 1998 ($8,930) $108,322
============== =============
</TABLE>
(1) Of the accumulated deficit of $216,765,000 at June 30, 1998, $84,223,000
represents accumulated losses in unconsolidated affiliates.
(2) Represents foreign currency translation adjustments
Page 4
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
Consolidated Statements of Cash Flows
($000s)
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
June 30,
1998 1997
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ....................................................................... $ (53,669) $(41,820)
Adjustments to reconcile net loss to net cash used in operating activities:
Equity in loss of unconsolidated affiliates ................................ 874 10,103
Loss on impairment of investments in unconsolidated affiliates ............. -- 20,707
Restructuring charge ....................................................... 2,552 --
Depreciation and amortization (excluding amortization of barter
programs) ............................................................ 65,768 22,501
Minority interest in loss of consolidated subsidiaries ..................... (12,837) (656)
Valuation allowance for development costs .................................. -- 240
Accounts receivable and other debit balances ............................... (661) 1,218
Program rights paid ........................................................ (34,223) (11,442)
Advances to affiliates ..................................................... 6,446 (8,183)
Other short-term assets .................................................... (2,264) (980)
Accounts payable and accrued liabilities ................................... (4,468) 1,142
Income and other taxes payable ............................................. (2,400) (3,895)
--------- --------
Net cash used in operating activities ................................ (34,882) (11,065)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in unconsolidated affiliates ................................... (1,153) (10,054)
Other Investments .......................................................... (51) (15,097)
Restricted cash ............................................................ 508 935
Acquisition of fixed assets ................................................ (8,829) (5,133)
Acquisition of minority shareholder's interest ............................. (7,179) (1,676)
Loans and advances to affiliates ........................................... (998) (6,569)
Payments for license costs, other assets and intangibles ................... (1,029) (464)
Development costs .......................................................... -- (1,409)
--------- --------
Net cash used in investing activities .................................. (18,731) (39,467)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Credit facilities and payments under capital leases ........................ (2,910) (8,465)
Dividends paid to minority shareholders .................................... (984) (1,650)
Capital contributed by shareholders ........................................ 1,389 329
Other long term liabilities ................................................ (590) --
--------- --------
Net cash used in financing activities ................................. (3,095) (9,786)
--------- --------
IMPACT OF EXCHANGE RATE FLUCTUATIONS ON CASH ................................... 254 (1,256)
Net decrease in cash and cash equivalents .............................. (56,455) (61,574)
CASH AND CASH EQUIVALENTS, beginning of period ................................ 106,257 81,403
--------- --------
CASH AND CASH EQUIVALENTS, end of period ..................................... $ 49,803 $ 19,829
========= ========
SUPPLEMENTAL INFORMATION Cash paid for:
Cash paid for:
Interest ............................................................... $ 10,740 $ 3,287
Income Taxes ........................................................... $ 8,649 $ 16,892
</TABLE>
Page 5
<PAGE>
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
Notes to Consolidated Financial Statements
June 30, 1998
1. Organization and Business
Central European Media Enterprises Ltd., a Bermuda corporation
("CME"), was formed in June 1994. Through its predecessor companies, CME has
been in operation since 1991. CME, together with its subsidiaries and
affiliates (CME and its subsidiaries and affiliates are collectively referred
to as the "Company"), invests in, develops, and operates national and regional
commercial television stations and networks in Central and Eastern Europe.
In the Czech Republic, the Company has 99% voting and economic
interest in Ceska Nezavisla Televizni Spolecnost s.r.o. ("CNTS"), which
operates Nova TV, a private national television station in the Czech Republic.
The Company owns a 76% ownership interest in Radio Alfa a.s. ("Radio
Alfa"), one of two private national radio broadcasters in the Czech Republic.
The license to operate Radio Alfa expires in February 1999 and has not been
re-awarded to Radio Alfa, which will cease broadcast operations prior to the
expiration of the license.
In Romania, the Company and its local partners operate PRO TV, a
commercial television network, and the second channel Acasa through Media Pro
International S.A. ("Media Pro International"). The Company owns a 66% equity
interest in Media Pro International. The Company owns 49% of the equity of PRO
TV, SRL, an affiliate station of Media Pro International holding many of the
licenses for the stations comprising the PRO TV network. The Company owns a
96% equity interest in Unimedia SRL ("Unimedia"), which owns a 10% equity
interest in a consortium, MobilRom, which operates a GSM cellular telephone
network in Romania.
In Slovenia, the Company operates POP TV, together with MMTV d.o.o.
Ljubljana ("MMTV") and Tele 59 d.o.o. Maribor ("Tele 59"), through Produkcija
Plus d.o.o. ("Pro Plus"). Under the names POP TV and Gajba TV, Pro Plus
provides programming to, and sells advertising for, affiliated stations. The
Company owns 78% of the equity of Pro Plus, but has an effective economic
interest of 85.3% as a result of a 33% economic interest in MMTV and a 33%
economic interest in Tele 59. Tele 59 owns a 21% equity interest in Pro Plus,
and the remaining 1% equity interest in Pro Plus is owned by MMTV.
In the Slovak Republic, the Company owns an 80% non-controlling
economic interest and a 49% voting interest in Slovenska Televizna Spolocnost
s.r.o. ("STS"), which operates the national television station Markiza TV.
In Hungary, the Company owns an 89% (increased from 71% in April
1998) equity interest in Budapesti Kommunikacios Rt. ("TV3"), a television
station operating in Budapest and distributing its signal by satellite to
cable systems throughout Hungary. The Company wholly owns Videovox Studio
Limited Liability
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<PAGE>
Company ("Videovox"), a Hungarian dubbing and duplication
company and owns 24.9% of the equity of 2002 Tanacsado es Szolgaltato
Korlatolt Felelosegu Tarsasag ("2002 Kft"), a broadcasting company.
In Poland, the Company owns a 50% direct interest in Federacja
Sp.zo.o. ("Federation"). The Company owns an additional 5% indirect interest
in Federation through its 10% equity interest in ITI Media Group N.V., which
owns the remainder of Federation. Such 10% equity interest is subject to put
and call options between the Company and ITI, exerciseable from August 2000
until August 2003. TVN Sp.zo.o., owned 67% by ITI and 33% by the Company,
holds broadcast licenses for northern Poland and the cities of Warsaw and
Lodz., and in addition, 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. Ronald S. Lauder, the non-executive Chairman of the Board of
CME, owns a non-controlling indirect minority interest in ITI Holdings S.A., a
company publicly traded on the Luxembourg Stock Exchange which owns 90% of ITI
Media Group N.V. See also Part II, Item 1 "Legal Proceedings".
Also in Poland, the Company owns an indirect 12% interest in
Endemol-Neovision Sp.zo.o., a television program production company.
In Ukraine, the Company owns a 50% non-controlling interest in a
group of companies (collectively, the "Studio 1+1 Group"), which have the
right to broadcast programming and sell advertising on Ukrainian National
Channel 2 ("UT-2").
2. Summary of Significant Accounting Policies
The accompanying financial statements have been prepared in
accordance with United States generally accepted accounting principles
("GAAP"). In the opinion of management, these consolidated financial
statements include all adjustments necessary to fairly state the Company's
financial position and results of operations. These financial statements,
including the notes thereto, should be read in conjunction with CME's Form
10-K for the fiscal year ended December 31, 1997. The results for the three
months and the six months ended June 30, 1998 are not necessarily indicative
of the results expected for the year.
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company's wholly-owned subsidiaries and the results of CNTS
(which operates Nova TV), PRO TV, POP TV, Federation, TV3, Radio Alfa and
Videovox (the "Consolidated Affiliates"), as consolidated entities and reflect
the interests of the minority owners of these entities for the periods
presented, as applicable. The results of Markiza TV, the Studio 1+1 Group, TVN
Sp.zo.o. and, for the first quarter of 1997 only, FFF, SFF and 1A TV (the
"Unconsolidated Affiliates"), in which the Company has, or during the periods
presented had, minority or non-controlling ownership interests, are included
in the accompanying Consolidated Financial Statements using the equity method.
The Company's former German regional television operations were comprised of
1A TV, FFF and SFF. 1A TV initiated a bankruptcy proceeding in
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May 1997 and the Company terminated its ownership interests in FFF and SFF as
of December 31, 1997. The Company records other investments at the lower of
cost or market value.
Comprehensive Income (Loss)
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income", which requires companies to report all changes in equity during a
period, except those resulting from investment by owners and distribution to
owners, in a financial statement for the period in which they are recognized.
The Company has chosen to disclose Comprehensive Income, which encompasses net
income (loss) and foreign currency translation adjustments, in the
accompanying Consolidated Statement of Shareholders' Equity.
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS
No. 133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in
the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for qualifying
hedges allows a derivative's gains and losses to offset related results on the
hedged item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15,
1999. A company may also implement the SFAS No. 133 as of the beginning of any
fiscal quarter after issuance (that is, fiscal quarters beginning June 16,
1998 and thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No.
133 must be applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued, acquired, or
substantively modified after December 31, 1997 (and, at the company's
election, before January 1, 1998).
CME has not yet quantified the impact of adopting SFAS No. 133 on its
financial statements and has not determined the timing of or method of
adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility in
earnings and other comprehensive income.
Reclassifications
Certain reclassifications and combinations have been made to prior
period amounts to conform to current period classifications.
3. Corporate Restructuring
In the second quarter of 1998, the Company recorded a restructuring
charge based on its decision to change its focus from aggressive development
and growth to
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further enhancing the operating performance of the Company's existing assets
and pursuing opportunities for focused growth. This restructuring, which will
result in the elimination of 20 positions, will be completed by January 1999.
As a result, an accrual of $2,552,000 for severance and other associated costs
was required to cover the costs of reducing senior management and various
other positions over all sectors of the Company to levels more appropriately
suited to the current direction of the Company. Costs of $656,000 have been
paid as of June 30, 1998 and $1,896,000 of restructuring charges remained in
accrued liabilities as of June 30, 1998.
4. Summary Financial Information for Unconsolidated Affiliates.
<TABLE>
<CAPTION>
As of
--------------------------------------------------------------
June 30, 1998 December 31, 1997
----------------------------- -----------------------------
TVN Markiza Studio TVN Markiza Studio
$000s Sp.zo.o. TV 1+1 Group Sp.zo.o. TV 1+1 Group
----- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Current assets ........ 30,909 20,172 5,344 27,106 18,385 7,744
Non-current assets .... 44,266 28,149 28,294 49,608 25,900 21,542
Current liabilities ... (24,140) (17,124) (7,417) (21,884) (13,328) (5,976)
Non-current liabilities (42,801) (1,174) (8,115) (41,812) (998) (6,000)
------- ------- ------- ------- ------- -------
Net assets ............ 8,234 30,023 18,106 13,018 29,959 17,310
======= ======= ======= ======= ======= =======
</TABLE>
For the six months ended,
------------------------------------------------------
June 30, 1998 June 30, 1997
----------------------------- ---------------------
TVN Markiza Studio Markiza Studio
$000s Sp.zo.o. TV 1+1 Group TV 1+1 Group
----- ------- ------- ------- ------- -------
Net revenues ........... 1,171 18,712 14,459 13,829 6,977
Operating (loss)/income. (2,327) 2,043 893 (443) (1,493)
Net (loss)/income ...... (4,490) 1,610 795 (1,288) (1,659)
For the three months ended,
------------------------------------------------------
June 30, 1998 June 30, 1997
----------------------------- ----------------------
TVN Markiza Studio Markiza Studio
$000s Sp.zo.o. TV 1+1 Group TV 1+1 Group
----- ------- ------- ------- ------- -------
Net revenues ........... 841 10,940 7,837 8,201 3,891
Operating (loss)/income. (914) 2,357 628 709 (12)
Net (loss)/income ...... (2,598) 1,307 596 433 (178)
These tables above exclude the Company's former operations in Germany
and the loss on impairment of investment in such operations. A $20,707,000
loss on impairment of investments in unconsolidated affiliates was recorded in
the Company's Consolidated Statement of Operations for the six months ended
June 30, 1997 as a result of the write-down of the Company's investments in
Germany.
5. Commitments and Contingencies
Litigation
On April 30, 1997, Perekhid Media Enterprises Ltd. ("Perekhid") filed
a complaint in the Supreme Court of New York County, State of New York,
against CME and Ronald S. Lauder, the non-Executive Chairman of the Company's
Board of Directors. Perekhid alleged that the issuance of a license to the
Studio 1+1 Group pursuant to which Studio 1+1 has been broadcasting
programming on Ukrainian National Channel 2 ("UT-2"), constitutes a tortious
interference by CME and Mr.
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Lauder with a Perekhid contract with the Ukrainian authorities for Perekhid to
provide programming for and sell advertising time on UT-2. Perekhid's
complaint sought compensatory damages of $250 million, punitive damages of
$500 million, and an injunction against the Company and Mr. Lauder to prevent
the continuation of the alleged conduct. On July 2, 1997, CME and Mr. Lauder
filed a motion to dismiss the complaint. On April 8, 1998, the Court dismissed
the complaint on grounds of forum non-conveniens. In June 1998, Perekhid filed
a notice of appeal with the Court. Perekhid has nine months from the date it
filed a notice of appeal to submit an appellate brief.
Hungary
The Company has commitments of approximately $18,600,000 for future
programming rights with respect to TV3, which may not be fully realizable. The
Company currently estimates that it will take further write-downs of up to
$15,600,000 with regard to these commitments, of which approximately one-half is
expected to be taken in the second half of 1998 with the balance taken in 1999
and 2000. In addition to the aforementioned program library the Company has
approximately $16,500,000 of additional Hungarian assets and commitments.
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, as well as other currencies. 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 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
In limited instances, the Company enters into forward foreign
exchange contracts to hedge foreign currency transactions for periods
consistent with its identified exposures. At June 30, 1998, there were seven
forward exchange contracts outstanding for the purchase, in aggregate, of
$3,500,000 by CNTS and the sale of Czech korunas. These contracts mature by
October 1998. At June 30, 1998, the Company had one forward exchange contract
outstanding for the purchase of $3,951,000 and the sale of Czech korunas. This
contract matures on August 28, 1998. No material exposure exists at June 30,
1998 as a result of these contracts.
6. Subsequent Events
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Stock price protections
Pursuant to the terms of a severance agreement with CME's former
President and Chief Executive Officer Leonard M. Fertig, the Company agreed to
certain stock price protection provisions with respect to Mr. Fertig's CME
Class A Common Stock. The Company's maximum exposure pursuant to these stock
price protection provisions is $600,000. On August 7, 1998, Mr. Fertig
notified CME that his recent sales of CME Class A Common Stock entitle him to
$600,000 under his severance agreement, which amount was expensed as part of a
corporate restructuring charge in CME's Consolidated Statement of Operations
for the six months ended June 30, 1998.
MobilRom
In August 1998, the Company engaged an investment bank to assist it
in a potential sale of its interest in MobilRom, the Romanian GSM consortium.
Stock Option Exercises
Since June 30, 1998, 4,100 stock options for Class A Common Stock
were exercised at a price of $14.63.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
Central European Media Enterprises Ltd. ("CME") is a Bermuda
corporation. All references to the "Company" include CME, its direct and
indirect Subsidiaries, and all references to "Subsidiaries" include each
corporation or partnership in which CME has a direct or indirect equity or
voting interest.
The Company is the leading commercial television company in Central
and Eastern Europe. The Company's national private television stations and
networks in the Czech Republic, Slovakia, Slovenia and Ukraine had the leading
average nationwide audience shares for the first half of 1998 and the
Company's television network in Romania had the leading average audience share
within its area of broadcast reach for the first half of 1998. In October
1997, the Company launched television broadcast operations in Poland and
Hungary.
The Company's revenues are derived principally from the sale of
television advertising to local, national and international advertisers. To a
limited extent, the Company also engages in barter transactions in which its
broadcast operations exchange commercial advertising time for goods and
services. The Company, like other television operators, experiences
seasonality, with advertising sales tending to be lowest during the third
quarter of each calendar year, which includes the summer holiday period, and
highest during the fourth quarter of each calendar year. The primary expenses
incurred in operating broadcast stations are programming and production costs,
employee salaries, broadcast transmission expenses and selling, general and
administrative expenses. The Company has incurred and might in the
Page 11
<PAGE>
future incur significant development expenses, including finding and
negotiating with local partners, researching and preparing license
applications, preparing business plans and conducting pre-operating
activities, as well as reorganizing existing affiliate entities which hold the
broadcast licenses.
The primary internal sources of cash available for corporate
operating costs and development expenses are dividends and other distributions
from Subsidiaries. The Company's ability to obtain dividends or other
distributions is subject to, among other things, restrictions on dividends
under applicable local laws and foreign currency exchange regulations of the
jurisdictions in which its Subsidiaries operate. The Subsidiaries' ability to
make distributions is also subject to the legal availability of sufficient
operating funds not needed for operations, obligations or other business plans
and, in some cases, the approval of the other partners, 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.
Selected Combined and Attributable Financial Information
The following tables are neither required by United States generally
accepted accounting principles ("GAAP") nor intended to replace the
Consolidated Financial Statements prepared in accordance with GAAP. The tables
set forth certain combined and attributable financial information for the
three months and the six months ended June 30, 1998 and 1997 for the Company's
operating entities. This financial information departs materially from GAAP.
In the table "Selected Combined Financial Information," revenues and
operating expenses of certain entities (Markiza TV, the Studio 1+1 Group and
TVN Sp.zo.o.) not consolidated in the Consolidated Financial Statements are
aggregated with those of the Company's consolidated operations. In the tables
"Selected Attributable Financial Information", combined information is
adjusted for CME's economic interest in each entity, which economic interest
is the basis used for consolidation and equity method accounting in the
Company's GAAP Consolidated Financial Statements as of June 30, 1998. The
tables separate the results of the new stations, TVN and TV3, from the results
of the "Continuing Stations".
The tables are presented solely for additional analysis and not as a
presentation of results of operations of each component, nor as combined or
consolidated financial data presented in accordance with GAAP. The second
quarter 1998 $10,961,000 write-down of the TV3 program library to its
estimated net realizable value is not reflected in the tables to provide a
better indication of the underlying performance of TV3. In addition,
intercompany transactions such as management service charges are not reflected
in the tables. The Company believes that this unaudited combined and
attributable information provides useful disclosure.
In the Consolidated Financial Statements, consolidated entities
include CNTS, PRO TV, POP TV, Federation, TV3, Radio Alfa and Videovox, and
entities reported using the equity method of accounting include Markiza TV,
the Studio 1+1 Group and TVN Sp.zo.o. Under the equity method of accounting,
the Company's interest in net
Page 12
<PAGE>
earnings or losses of Markiza TV, the Studio 1+1 Group and TVN Sp.zo.o. is
included in the consolidated earnings and an adjustment is made to the
carrying value at which the investment is recorded on the Consolidated Balance
Sheet. The following supplementary unaudited combined and attributable
information includes certain financial information of Markiza TV, the Studio
1+1 Group and TVN Sp.zo.o on a line-by-line basis, similar to that of the
Company's consolidated entities.
The Continuing Stations refer to CNTS, PRO TV, POP TV, Markiza TV and
the Studio 1+1 Group. CNTS, which operates Nova TV, began operations in
February 1994. PRO TV and POP TV began operations in December 1995, Markiza TV
began operations in August 1996 and the Studio 1+1 Group began to generate
significant revenues during the second quarter of 1997. Other Operations
consist of Videovox, a Hungarian dubbing studio and duplication facility
acquired by the Company in May 1996 and wholly-owned since May 1997, and Radio
Alfa, a national radio station in the Czech Republic in which CME acquired a
controlling interest in December 1996. Both New Stations, TVN and TV3, began
operations in October 1997.
EBITDA consists of earnings before interest, income taxes,
depreciation and amortization of intangible assets (which does not include
programming rights). EBITDA is provided because it is a measure of operating
performance commonly used in the television industry. It is presented to
enhance an understanding of the Company's operating results and is not
intended to represent cash flow or results of operations in accordance with
GAAP for the periods indicated.
The term "station expenses" used in the discussion of EBITDA
immediately following the tables refers to the total of a station's (i) other
operating costs and expenses, (ii) amortization of programming rights and
(iii) selling, general and administrative expenses.
"Broadcast cash flow", a broadcasting industry measure of
performance, is defined as net broadcast revenues, less (i) station operating
costs and expenses (excluding depreciation and amortization of acquired
programming and of intangible assets), (ii) broadcast selling, general and
administrative expenses, and (iii) cash program rights costs. Cash program
rights costs are included in the period in which payment is made, which may
not necessarily correspond to the timing of program use or amortization.
Broadcast cash flow should not be considered as a substitute measure of
operating performance or liquidity prepared in accordance with GAAP (see the
accompanying Consolidated Financial Statements).
Page 13
<PAGE>
SELECTED COMBINED FINANCIAL INFORMATION (1)
(unaudited)
($000s)
Three Months Ended June 30,
<TABLE>
<CAPTION>
-----------------------------------------------------------
Net Revenue EBITDA Broadcast Cash Flow
-----------------------------------------------------------
1998 1997 1998 1997 1998 1997
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
CNTS .................... 32,196 27,830 17,891 16,358 16,879 16,077
PRO TV .................. 11,571 8,136 2,295 (138) 1,314 (1,599)
Markiza TV .............. 10,940 8,201 3,498 1,803 4,764 1,642
POP TV .................. 7,772 4,471 1,920 42 310 260
Studio 1+1 Group ........ 7,837 3,891 890 64 245 (478)
------ ------ ------ ------ ------ ------
Total Continuing Stations .... 70,316 52,529 26,494 18,129 23,512 15,902
TVN Sp.zo.o. / Federation 9,207 513 (8,423) -- (3,001) --
TV3 (2) ................. 1,505 -- (1,450) -- (4,224) --
------ ------ ------ ------ ------ ------
Total New Stations ........... 10,712 513 (9,873) -- (7,225) --
Other operations (3) .... 1,263 1,032 38 (310) 38 (310)
------ ------ ------ ------ ------ ------
Total combined operations .... 82,291 54,074 16,659 17,819 16,325 15,592
====== ====== ====== ====== ====== ======
</TABLE>
SELECTED ATTRIBUTABLE FINANCIAL INFORMATION (1)
(unaudited)
($000s)
Three months Ended June 30,
<TABLE>
<CAPTION>
Net Revenue EBITDA Broadcast Cash Flow
---------------- ----------------- -----------------
Economic 1998 1997 1998 1997 1998 1997
Interest (4) ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
CNTS ........................ 99% 31,874 27,552 17,712 16,194 16,710 15,916
PRO TV ...................... 66% 7,637 5,370 1,515 (91) 867 (1,055)
Markiza TV .................. 80% 8,752 6,561 2,798 1,442 3,811 1,314
POP TV ...................... 85.3% 6,630 3,814 1,638 36 264 222
Studio 1+1 Group ............ 50% 3,919 1,946 445 32 123 (239)
------ ------ ------ ------ ------ ------
Total Continuing Stations ........ 58,812 45,243 24,108 17,613 21,775 16,158
TVN Sp.zo.o. / Federation ... 50% 4,604 257 (4,212) -- (1,501) --
TV3 (2) ..................... 89% 1,339 -- (1,291) -- (3,759) --
------ ------ ------ ------ ------ ------
Total New Stations ............... 5,943 257 (5,503) -- (5,260) --
Other operations (3) ........ 100% 1,263 1,032 38 (310) 38 (310)
------ ------ ------ ------ ------ ------
Total attributable operations .... 66,018 46,532 18,643 17,303 16,553 15,848
====== ====== ====== ====== ====== ======
</TABLE>
- ---------
(1) Important information about these tables appears under the heading
"Selected Combined and Attributable Financial Information" immediately
preceding this table.
(2) EBITDA is without the impact of the $10,961,000 ($9,755,000 attributable)
write-down of the carrying value of capitalized costs of rights to
program material.
(3) Other operations include Radio Alfa and Videovox.
(4) Economic interest as of June 30, 1998. For comparison between the three
months ended June 30, 1998 and the same period in 1997, all results in
this table are pro forma as if such percentages had also been in place
during the three months ended June 30, 1997.
Page 14
<PAGE>
SELECTED COMBINED FINANCIAL INFORMATION (1)
(unaudited)
($000s)
Six Months Ended June 30,
<TABLE>
<CAPTION>
-----------------------------------------------------------
Net Revenue EBITDA Broadcast Cash Flow
-----------------------------------------------------------
1998 1997 1998 1997 1998 1997
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
CNTS .................... 52,276 48,495 26,032 24,622 23,706 23,258
PRO TV .................. 19,327 13,083 (166) (1,171) (975) (1,918)
Markiza TV .............. 18,712 13,829 4,227 1,675 4,373 547
POP TV .................. 11,456 7,142 404 (1,004) (830) (444)
Studio 1+1 Group ........ 14,459 6,977 1,397 (1,211) (27) (1,722)
------- ------ ------ ------ ------ ------
Total Continuing Stations .... 116,230 89,526 31,894 22,911 26,247 19,721
TVN Sp.zo.o. / Federation 13,875 792 (20,671) -- (10,549) --
TV3 (2) ................. 2,580 -- (3,979) -- (8,427) --
------- ------ ------ ------ ------ ------
Total New Stations ........... 16,455 792 (24,650) -- (18,976) --
Other operations (3) .... 2,428 1,914 104 (493) 104 (493)
------- ------ ------ ------ ------ ------
Total combined operations .... 135,113 92,232 7,348 22,418 7,375 19,228
======= ====== ====== ====== ====== ======
</TABLE>
SELECTED ATTRIBUTABLE FINANCIAL INFORMATION (1)
(unaudited)
($000s)
Six months Ended June 30,
<TABLE>
<CAPTION>
Net Revenue EBITDA Broadcast Cash Flow
-------------------- ------------------ -------------------
Economic 1998 1997 1998 1997 1998 1997
Interest (4) ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
CNTS ..................... 99% 51,753 48,010 25,772 24,376 23,469 23,025
PRO TV ................... 66% 12,756 8,635 (110) (773) (644) (1,266)
Markiza TV ............... 80% 14,970 11,063 3,382 1,340 3,498 438
POP TV ................... 85.3% 9,772 6,092 345 (856) (708) (379)
Studio 1+1 Group ......... 50% 7,230 3,489 699 (606) (14) (861)
------- ------ ------ ------ ------ ------
Total Continuing Stations...... 96,481 77,289 30,088 23,481 25,601 20,957
TVN Sp.zo.o. / Federation. 50% 6,938 396 (10,336) - (5,275) -
TV3 (2).. ................ 89% 2,296 - (3,541) - (7,500) -
------- ------ ------ ------ ------ ------
Total New Stations ............ 9,234 396 (13,877) - (12,775) -
Other Operations (3)...... 100% 2,428 1,914 104 (493) 104 (493)
------- ------ ------ ------ ------ ------
Total attributable operations.. 108,143 79,599 16,315 22,988 12,930 20,464
======= ====== ====== ====== ====== ======
</TABLE>
- ---------
(1) Important information about these tables appears under the heading
"Selected Combined and Attributable Financial Information" immediately
preceding this table.
(2) EBITDA is without the impact of the $10,961,000 ($9,755,000 attributable)
write-down of the carrying value of capitalized costs of rights to
program material.
(3) Other operations include Radio Alfa and Videovox.
(4) Economic interest as of June 30, 1998. For comparison between the six
months ended June 30, 1998 and the same period in 1997, all results in
this table are pro forma as if such percentages had also been in place
during the six months ended June 30, 1997.
Page 15
<PAGE>
Combined EBITDA for the three months ended June 30, 1998 compared to the three
months ended June 30, 1997
Continuing Stations
The total combined EBITDA for the Continuing Stations increased by
$8,365,000 from $18,129,000 for the second quarter of 1997 to $26,494,000 for
the second quarter of 1998. Each of the five Continuing Stations' EBITDA
improved in the second quarter as a result of a 34% increase in their combined
net revenues quarter over quarter.
PRO TV's EBITDA increased by $2,433,000 from negative $138,000 for
the second quarter of 1997 to positive $2,295,000 for the second quarter of
1998. This increase was attributable to a $3,435,000, or 42%, increase in net
revenues primarily as a result of PRO TV's increased audience share, growth in
the Romanian television advertising market and the second channel, Acasa.
Acasa was launched in February 1998 and attracts a complementary audience to
PRO TV's. Station expenses in the second quarter of 1998 increased $1,000,000,
or 12%, compared to the same period in 1997 primarily due to costs attributed
to expansion of the network and higher prices of acquired programming, offset
in part by lower overhead expenses.
The Studio 1+1 Group, which began operating as a CME station in
January 1997, recorded EBITDA of $890,000 in the second quarter of 1998
compared to EBITDA of $64,000 for the same period in 1997. Net revenues more
than doubled over 1997's second quarter. Growth in net revenues is due to an
increase in Studio 1+1's audience share and significant growth in the
Ukrainian television advertising market. Station expenses were $3,120,000, or
82%, above the second quarter of 1997 due to the second quarter 1997 results
not reflecting full production and staff levels. The programming and
production costs related to the airing of the 1998 Soccer World Cup during
June also contributed to the increase in station expenses.
Markiza TV recorded EBITDA of $3,498,000 for the second quarter of
1998, compared to $1,803,000 in the second quarter of 1997, due to higher net
revenues. Net revenues increased by $2,739,000, or 33%, reflecting Markiza
TV's continued market leadership in ratings and advertising share. An increase
in station expenses of 20% is primarily a result of higher salary costs as
competition in the market put significant upward pressure on wages. To a
lesser extent, station expenses increased due to the addition of new
broadcasting transmitters in April 1998 and increased marketing costs.
POP TV's EBITDA increased from $42,000 for the second quarter of 1997
to $1,920,000 for the second quarter of 1998 primarily as a result of
increased net revenues. The increase in net revenues of $3,301,000, or 74%, is
a result of the growth of the overall television advertising market in
Slovenia and POP TV's increased audience share. POP TV's station expenses
increased $1,424,000, or 32%, for the second quarter 1998 compared to the
second quarter 1997 primarily due to higher costs of acquired and locally
produced programming. Amortization of acquired programming rights increased as
a result of higher programming prices due to increased competition in Slovenia
and the addition of Gajba TV, the second channel launched in October 1997.
Increased audience demand for locally produced
Page 16
<PAGE>
programming resulted in higher production costs. To a lesser extent, POP TV's
expenses also increased due to technical expansion.
CNTS's EBITDA increased by $1,533,000, or 9%, to $17,891,000 for the
second quarter of 1998, compared with the second quarter of 1997 despite a 12%
devaluation of the Czech koruna against the US dollar. In local currency
terms, CNTS's EBITDA increased 18% primarily due to a 23% increase in net
revenues. In US dollar terms, CNTS's net revenues increased by $4,366,000 as a
result of growth in the total television advertising market and revenues from
sub-licensing of excess programming to another Czech commercial television
station. Station expenses increased by $2,834,000, or 25%, primarily due to
higher production costs as a result of increased local production in response
to audience demand, higher acquired programming costs as a result of increased
programming prices and the amortization of sub-licensed program rights. In
addition, CNTS's salary costs per employee increased as a result of upward
pressure on wages due to increased competition in the market.
New Stations
TVN in Poland and TV3 in Hungary, which both commenced operations in
October 1997, recorded negative EBITDA of $8,423,000 and $1,450,000,
respectively, for the second quarter of 1998. Their combined EBITDA loss for
the second quarter of negative $9,873,000 is a 33% improvement over first
quarter 1998 combined EBITDA of negative $14,777,000. This improvement, which
is attributable to an increase in net revenues, reflects the seasonality of
the television business. In addition, TVN's audience share improved.
The Company recorded a $10,961,000 write-down of TV3's program
library in the second quarter of 1998. Programming commitments were entered
into in 1996 and 1997 in anticipation of the grant of a national license for
Hungary. The Company was not granted a national license for Hungary and has
been unable to enter into a partnership with the license winners. In light
of TV3's distribution and audience share, the Company does not expect to be
able to realize the full value of the program library. The carrying value of
the capitalized costs of rights to program material has been adjusted down to
its estimated net realizable value. The EBITDA reported on the table is before
this write-down as the Company believes it provides a better indication of the
underlying performance of the station. See "-Hungary" below.
Total Combined Operations
The total Combined Operations EBITDA (before the write-down of TV3's
programming library) decreased by $1,160,000 from $17,819,000 for the second
quarter of 1997 to $16,659,000 for the second quarter of 1998. As described
above, this decrease was primarily due to negative EBITDA at the Company's new
operations in Poland and Hungary, offset in part by EBITDA improvements at the
five Continuing Stations.
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<PAGE>
Broadcast Cash Flow
Differences between EBITDA and broadcast cash flow are the result of
timing differences between programming use and programming payments.
Application of Accounting Principles
Although the Company conducts operations largely in foreign
currencies, the Company prepares its financial statements in United States
dollars and in accordance with GAAP. The Company's consolidated operating
statements include the results of wholly-owned subsidiaries and the results of
CNTS (which operates Nova TV), PRO TV, POP TV, Federation, TV3, Videovox and
Radio Alfa, and separately set forth the minority interests attributable to
other owners of such companies. The results of Markiza TV, the Studio 1+1
Group, TVN Sp.zo.o., FFF, SFF and 1A TV are accounted for using the equity
method, which reflects the Company's share of the net income or losses in
those operations. 1A TV initiated a bankruptcy proceeding in May 1997. The
Company terminated its ownership interests in FFF and SFF as of December 31,
1997. The Company records other investments at the lower of cost or market
value.
Foreign Currency
The Company and its subsidiaries generate revenues primarily in Czech
korunas ("Kc"), Romanian lei ("ROL"), Slovenian tolar ("SIT"), Slovak korunas
("Sk"), Hungarian forints ("HUF"), Ukrainian hryvna ("Hrn"), Polish zloty
("Zl") and German marks ("DM"), and incur substantial operating expenses in
those currencies. The Romanian lei, Slovenian tolar, Ukrainian hryvna and
Slovak koruna are managed currencies with limited convertibility. The Company
also incurs operating expenses for acquired programming in United States
dollars and other foreign currencies. For entities operating in economies
considered non-highly inflationary, including CNTS, POP TV, Markiza TV,
Videovox, Radio Alfa, Federation, TVN Sp.zo.o., TV3 and certain Studio 1+1
Group entities, balance sheet accounts are translated from foreign currencies
into United States dollars at the relevant period end exchange rate; statement
of operations accounts are translated from foreign currencies into United
States dollars at the weighted average exchange rates for the respective
periods. The resulting translation adjustments are reflected in a component of
shareholders' equity with no effect on the consolidated statements of
operations.
PRO TV and certain Studio 1+1 Group entities operate in economies
considered highly inflationary. Accordingly, non-monetary assets are
translated at historical exchange rates, monetary assets are translated at
current exchange rates and translation adjustments are included in the
determination of net income. Currency translation adjustments relating to
transactions of the Company in currencies other than the functional currency
of the entity involved are reflected in the operating results of the Company.
The exchange rates at the end of and for the periods indicated are
shown in the table below.
Page 18
<PAGE>
<TABLE>
<CAPTION>
Balance Sheet Income Statement
-------------------------------- ---------------------------------
Average for the six months ending
At June 30, At December June 30,
1998 31, 1997 % Change 1998 1997 % Change
---- -------- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Czech koruna equivalent of $1.00 33.42 34.64 3.5% 33.70 30.05 (12.16)%
German mark equivalent of $1.00 1.81 1.80 (0.65)% 1.79 1.69 (5.85)%
Hungarian forint equivalent of $1.00 219.35 204.03 (7.51)% 212.49 179.00 (18.71)%
Polish zloty equivalent of $1.00 3.48 3.52 1.0% 3.48 3.08 (12.89)%
Romanian lei equivalent of $1.00 8,653 8,023 (7.85)% 8,372 6,563 (27.56)%
Slovak koruna equivalent of $1.00 35.31 34.78 (1.51)% 34.91 33.19 (5.19)%
Slovenian tolar equivalent of $1.00 169.70 169.18 (0.31)% 169.79 154.64 (9.80)%
Ukrainian hryvna equivalent of $1.00 2.07 1.90 (9.14)% 2.05 1.85 (11.05)%
</TABLE>
The Company's results of operations and financial position during the
three months ended June 30, 1998 and the six months ended June 30, 1998 were
impacted by changes in foreign currency exchange rates since December 31,
1997.
In limited instances, the Company enters into forward foreign
exchange contracts to hedge foreign currency transactions for periods
consistent with its identified exposures. At June 30, 1998, there were seven
forward exchange contracts outstanding for the purchase, in aggregate, of
$3,500,000 by CNTS and the sale of Czech korunas. These contracts mature by
October 1998. At June 30, 1998, the Company had one forward exchange contract
outstanding for the purchase of $3,951,000 and the sale of Czech korunas. This
contract matures on August 28, 1998. No material exposure exists at June 30,
1998 as a result of these contracts.
Results of Operations
Three months ended June 30, 1998 compared to three months ended June 30, 1997
The Company's net revenues increased by $21,292,000, or 51%, to
$62,761,000 for the second quarter of 1998 from $41,469,000 for the second
quarter of 1997. The increase is attributable to the addition of revenues
generated by the Company's new operations in Poland and Hungary, as well as
double digit percentage revenue increases at the other consolidated television
operations, CNTS, PRO TV and POP TV.
Federation and TV3, which were not included in the Company's 1997
second quarter results, recorded net revenues of $8,454,000 and $1,505,000,
respectively, for the second quarter of 1998. CNTS, PRO TV and POP TV's net
revenues improved primarily due to growth in their respective television
advertising markets.
Total station operating costs and expenses (including amortization of
program rights and depreciation of fixed assets and other intangibles)
increased by $36,183,000, to $59,041,000 for the second quarter of 1998 from
$22,858,000 for the second quarter of 1997. The increase in total station
operating costs and expenses is primarily attributable to the addition of
station operating costs and expenses of Federation and TV3 of $17,221,000 and
$13,438,000, respectively. Of TV3's operating costs and expenses, $10,961,000
reflects the write-down of the carrying value of TV3's capitalized costs of
rights to program material to its estimated net
Page 19
<PAGE>
realizable value. The increase is also attributable to increases in operating
costs and expenses at PRO TV of $2,578,000, CNTS of $2,441,000 and POP TV of
$1,037,000.
PRO TV's operating costs and expenses rose primarily as a result of
expansion of network affiliates and increased programming amortization costs,
which reflect increased prices of acquired programming.
Both CNTS and POP TV's operating cost and expenses increases are
mainly attributable to higher production costs as a result of increased local
production in response to audience demand and higher acquired programming
costs due to an increase in programming prices.
Station selling, general and administrative expenses increased by
$1,368,000 to $7,873,000 for the second quarter of 1998 from $6,505,000 for
the second quarter of 1997. The increase is primarily attributable to the
addition of Federation and TV3 selling, general and administrative expenses of
$1,606,000 and $602,000, respectively. The increase was offset in part by
savings at PRO TV of $842,000 mainly due to lower marketing costs in 1998.
Corporate expenses for the second quarters of 1998 and 1997 were
$17,243,000 and $7,464,000, respectively, an increase of $9,779,000. This
increase is comprised of an increase in amortization of goodwill and allowance
for development costs of $5,880,000, a restructuring charge of $2,552,000 and
an increase in corporate operating costs and development expenses of
$1,347,000. The increase in amortization of goodwill and allowance for
development costs was attributable to the write-off of goodwill associated
with the Company's Hungarian operations. The Company's initial investment was
made in anticipation of the grant of a national license for Hungary. The
Company was not granted a national license for Hungary and has been unable to
enter into a partnership with the license winners. Instead, the Company is
operating a television station reaching 35% of Hungary's population, including
the city of Budapest. In light of the change in circumstances, the carrying
value of the goodwill may not be recoverable and hence has been written-off.
In addition, in the second quarter of 1998, the Company recorded a
restructuring charge of $2,552,000 based on its decision to change its focus
from aggressive development and growth to further enhancing the operating
performance of the Company's existing assets and pursuing opportunities for
focused growth. The restructuring charge is comprised of severance and other
associated costs. The increase in corporate operating costs and development
expenses was primarily attributable to the addition of costs for a back-up
satellite for certain of the Company's stations.
As a result of the above factors, the Company generated an operating
loss of $21,396,000 for the second quarter of 1998 compared to operating
income of $4,642,000 for the second quarter of 1997.
Equity in income / (loss) of unconsolidated affiliates increased by
$3,487,000 to income of $153,000 for the second quarter of 1998 from a loss of
$3,334,000 for the second quarter of 1997. This is a result of the Company's
decision to terminate its ownership interests in German broadcast operations
as of December 31, 1997, as well as improvements in the operations of Markiza
TV and the Studio 1+1 Group. Both
Page 20
<PAGE>
Markiza TV and Studio 1+1 recorded positive net income for the second quarter
of 1998.
Net interest and other income decreased by $3,558,000 to negative
$4,155,000 for the second quarter of 1998 from negative $597,000 for the
second quarter of 1997. This decrease was primarily attributable to interest
expense related to CME's $100,000,000 principal amount 9.375% Senior Notes and
DM 140,000,000 principal amount 8.125% Senior Notes, each due 2004, issued in
August 1997.
The net foreign currency exchange loss of $3,096,000 for the second
quarter is primarily attributable to the effect of the appreciation of the
German mark against the US dollar during the second quarter of 1998, on CME's
DM 140,000,000 Senior Notes. Local operating currencies devalued considerably
against the United States dollar during the second quarter of 1997 when the
Company recorded a net foreign currency exchange loss of $2,515,000.
Provision for income taxes was $5,453,000 for the second quarter of
1998 and $4,922,000 for the second quarter of 1997. The increase was mainly
due to an increase in CNTS's taxable income.
Minority interest in loss of consolidated Subsidiaries was $5,316,000
for the second quarter of 1998, compared to minority interest in income of
consolidated Subsidiaries of $106,000 for the second quarter of 1997. This
change was primarily the result of the addition to the Company's operations of
Federation, which incurred losses.
As a result of these factors, the net loss of the Company was
$28,631,000 for the second quarter of 1998 compared to $6,832,000 for the
second quarter of 1997.
Six months ended June 30, 1998 compared to six months ended June 30, 1997
The Company's net revenues increased by $30,136,000, or 43%, to
$100,770,000 for the first six months of 1998 from $70,634,000 for the first
six months of 1997. The increase is attributable to the addition of revenues
generated by the Company's new operations in Poland and Hungary and an
increase in net revenues at CNTS, PRO TV and POP TV.
Federation and TV3, which were not included in the Company's first
six month results of 1997, recorded net revenues of $12,703,000 and
$2,580,000, respectively, for the first six months of 1998. PRO TV's, CNTS and
POP TV's net revenues improved primarily due to the growth in their respective
television advertising markets.
Total station operating costs and expenses (including amortization of
program rights and depreciation of fixed assets and other intangibles)
increased by $59,190,000, to $104,530,000 for the first six months of 1998
from $45,340,000 for the same period in 1997. The increase in total station
operating costs and expenses is primarily attributable to the addition of
station operating costs and expenses, of Federation and TV3 of $34,076,000 and
$16,393,000, respectively. Of the TV3
Page 21
<PAGE>
operating costs and expenses, $10,961,000 reflects the write-down of the
carrying value of TV3's capitalized costs of rights to program material to its
estimated net realizable value. The increase is also attributable to increases
in operating costs and expenses at PRO TV of $5,732,000. PRO TV's operating
costs and expenses rose primarily as a result of expansion of network
affiliates, increased programming amortization costs, which reflect increased
prices of acquired programming and the launch of the second channel Acasa. In
addition, increased expenses were incurred due to an increase in the quantity
of local production, in response to increasing audience demand for local
programming.
Station selling, general and administrative expenses increased by
$5,279,000 to $16,113,000 for the first half of 1998 from $10,834,000 for the
first half of 1997. The increase in station selling, general and
administrative expenses is primarily attributable to the addition of
Federation's and TV3's selling, general and administrative expenses of
$2,839,000 and $1,385,000, respectively. The increase was also attributable to
an increase at POP TV and PRO TV of $932,000 and $884,000 respectively, offset
in part by savings at CNTS of $445,000. POP TV's increase was attributable to
higher marketing costs in response to stronger competition and promotion of
the new second channel, Gajba TV. PRO TV's increase was a result of
administrative and marketing expenses related to the addition of Acasa, the
expansion of network affiliates and diversification into the production and
post production businesses.
Corporate expenses for the first six months of 1998 and 1997 were
$26,962,000 and $14,036,000, respectively, an increase of $12,926,000. This
increase is comprised of an increase in amortization of goodwill and allowance
for development costs of $6,412,000, an increase in corporate operating costs
and development expenses of $3,962,000 and a restructuring charge in the
second quarter of 1998 of $2,552,000. The increase in amortization of goodwill
and allowance for development costs was primarily attributable to the
write-off of goodwill associated with the Company's Hungarian operations. The
increase in corporate operating costs and development expenses was primarily
attributable to expansion of operations in Poland and Hungary and costs for a
back-up satellite for certain of the Company's stations.
As a result of the above factors, the Company generated an operating
loss of $46,835,000 for the first six months of 1998 compared to operating
income of $424,000 for the first six months of 1997.
Equity in loss of unconsolidated affiliates decreased by $9,229,000
to $874,000 for the first six months of 1998 from $10,103,000 for the first
six months of 1997. This is a result of the Company's decision to terminate
its ownership interests in German broadcast operations as of December 31,
1997, as well as improvements in the operations of Markiza TV and the Studio
1+1 Group. Both Markiza TV and Studio 1+1 recorded positive net income for the
first six months of 1998.
Loss on impairment of investments in unconsolidated affiliates of
$20,707,000 for the first six months of 1997, was the result of the write-down
of the Company's investments in Germany in the first quarter of 1997. The
Company did not record any
Page 22
<PAGE>
loss on impairment of investments in unconsolidated affiliates in the first
six months of 1998.
Net interest and other income decreased by $7,609,000 to negative
$8,280,000 for the first six months of 1998 from negative $671,000 for the
first six months of 1997. This decrease was primarily attributable to interest
expense related to CME's $100,000,000 principal amount 9.375% Senior Notes and
DM 140,000,000 principal amount 8.125% Senior Notes, each due 2004, issued in
August 1997.
The net foreign currency exchange loss of $2,957,000 for the first
six months of 1998 is primarily attributable to dollar denominated liabilities
of TV3 and to the effect of the appreciation of the Czech koruna against the
US dollar on the Company's borrowings from CS Bank which financed the
Company's August 1996 purchase of a 22% interest in CNTS. Local operating
currencies devalued considerably against the United States dollar during the
first six months of 1997 when the Company recorded a net foreign currency
exchange loss of $4,586,000.
Provision for income taxes was $7,560,000 for the first six months of
1998 and $6,833,000 for the first six months of 1997. The increase was due to
an increase in CNTS's taxable income.
Minority interest in loss of consolidated Subsidiaries was
$12,837,000 for the first half of 1998 compared with $656,000 for the first
half of 1997. This increase was primarily the result of the addition to the
Company's operations of Federation, which incurred losses.
As a result of these factors, the net loss of the Company was
$53,669,000 for the first six months of 1998 compared to $41,820,000 for the
first six months of 1997.
Hungary
The Company has commitments of approximately $18,600,000 for future
programming rights with respect to TV3, which may not be fully realizable. The
Company currently estimates that it will take further write-downs of up to
$15,600,000 with regard to these commitments, of which approximately one-half is
expected to be taken in the second half of 1998 with the balance taken in 1999
and 2000. In addition to the aforementioned program library the Company has
approximately $16,500,000 of additional Hungarian assets and commitments.
Liquidity and Capital Resources
Net cash used in operating activities was $34,882,000 in the six
months ended June 30, 1998 compared to $11,065,000 in the same period in 1997.
The increase in net cash used in operating activities of $23,817,000 was
primarily the result of increased programming payments related to the new
stations and increases in programming prices.
Net cash used in investing activities was $18,731,000 in the six
months ended June 30, 1998 compared to $39,451,000 in the same period in 1997.
The decrease was attributable to the 1997 funding for the German operations,
MobilRom and the Studio 1+1 Group, none of which were funded in the first six
months of 1998, as well as a reduction in funding to TVN.
Page 23
<PAGE>
Net cash used in financing activities for the first six months of
1998 was $3,095,000 compared to $9,786,000 for the same period in 1997. The
difference was primarily the result of the repayment of a credit facility by
CNTS in April 1997.
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 (in the case of CME), sell assets and
engage in extraordinary transactions.
In May 1998, CNTS declared a total dividend of Kc 550,000,000
($16,014,000) of which the Company was paid Kc 277,510,000 ($8,926,000) in May
1998 and will be paid Kc 236,870,000 ($7,088,000) in August 1998. The
remainder of the CNTS total dividend is paid to minority shareholders. The
Company's voting power is sufficient to compel CNTS to make distributions.
As a result of the factors described above, the Company had cash and
cash equivalents of $49,803,000 at June 30, 1998 (compared to $106,257,000 at
December 31, 1997).
The Company has executed a term sheet with ING Bank N.V. ("ING Bank")
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 availability of the Proposed ING Credit Facility is subject to
definitive documentation and satisfaction of various conditions.
On August 11, 1997, the Company purchased a 5.8% interest in CNTS
from certain of the partners of CET 21 for a purchase price of $28,537,000, to
be paid in installments through February 15, 2000. As of June 30, 1998, the
Company had paid $17,912,000 of the purchase price and is obligated to make
further payments of $2,750,000 during 1998, $5,313,000 during 1999, and
$2,562,000 during 2000. Each further payment is subject to increase to an
amount equal to the value of such payment as if it had been invested in CME's
Class A Common Stock at a purchase price of $23.375 per share.
On August 1, 1996, the Company purchased CS Bank's 22% economic
interest and virtually all of CS Bank's voting rights in CNTS for a purchase
price of Kc 1 billion ($36,590,000). The Company also entered into a loan
agreement with CS Bank to finance 85% of the purchase price. The principal
outstanding at June 30, 1998 was Kc 678,200,000 ($20,293,000). Quarterly
payments on the loan are required through August 2002.
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<PAGE>
The Company expects CNTS's future cash requirements to continue to be
satisfied through operating cash flows and available borrowing facilities.
CNTS has a line of credit with CS Bank for up to Kc 250,000,000 ($7,480,000).
In October 1997, CNTS entered into a Kc 500,000,000 ($14,960,000) line of
credit with ING Bank which may be drawn in Czech koruna, German marks or
United States dollars and matures in October 1999. CNTS had no borrowings
under these facilities at June 30, 1998. The facilities are secured by CNTS's
equipment, vehicles and receivables.
In June 1997, in connection with CNTS's acquisition of Nova TV's main
studios and offices, CNTS assumed the obligations of a loan from CS Bank
secured by a mortgage on the studios and offices. The loan provides for
quarterly payments of Kc 16,500,000 ($494,000) through December 1999. As of
June 30, 1998, the outstanding balance under the CS Loan was Kc 93,000,000
($2,783,000).
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 2001. The second facility consists of an
Sk 100,000,000 ($2,832,000) line of credit from Bank Austria which matures in
September 2000. As of June 30, 1998, Markiza TV had no borrowings under these
facilities. These facilities are secured by Markiza TV's land and buildings.
In April 1998, POP TV entered into a multicurrency $5.0 million loan
agreement with Creditanstalt AG which matures in April 2005. As of June 30,
1998, the outstanding balance under the Creditanstalt loan was $3,285,000. The
loan is secured by the land, buildings and equipment of POP TV and is
guaranteed by CME.
PRO TV has two borrowing facilities with Tiriac Bank in Romania. The
first facility consists of a $2,000,000 line of credit and the second facility
consists of a $4,000,000 long-term loan. Since April 1998, both facilities
have borne interest at 10% per annum. PRO TV is negotiating a repayment plan
with Tiriac Bank, as the loan is currently past due. At June 30, 1998,
$1,628,000 and $3,845,000 were outstanding under the line of credit and the
long-term loan, respectively. These facilities are secured by PRO TV's
equipment and vehicles.
TVN Sp.zo.o. has borrowings of $13,790,000 under four short-term
bridge loan agreements with three Polish banks. Three loans with $9,035,000 in
the aggregate outstanding at June 30, 1998 are guaranteed by the Company. The
fourth 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. It is
anticipated that the remaining loans will be repaid by TVN Sp.zo.o. and
Federation from a $22,000,000 revolving credit facility, currently being
negotiated with a syndicate of Polish banks. There can be no assurance that
TVN will be able to close such facility. During February 1998, the Company
advanced $12,000,000 to its operations in Poland, $6,000,000 of which is
guaranteed by ITI. In addition, the Company has entered into a $28,662,000
commitment to provide satellite support for TVN through 2010 (with approximately
equal payments due each year) and has $35,000,000 in multi-year contracted
programming commitments in support of TVN, of which $25,000,000 may be
sub-licensed to third parties and is to be paid over eight years.
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<PAGE>
CME and its partner, the Polish media group ITI, continue to engage
in efforts to secure TVN's licenses in Warsaw and Lodz and extend signal
distribution. The station had negative EBITDA of $8,423,000 for the second
quarter of 1998. CME and ITI continue to have intensive discussions with
regard to TVN's positioning in the market, programming and promotional
strategy and financing. If such efforts and discussions are successful, the
Company may fund TVN with up to an additional $30,000,000 before the end of
1998. If such efforts and discussions are not successful or cannot be achieved
on a timely basis there can be no assurance that CME will not have to take a
reduction of a portion or all of the carrying value of its investments in
Poland. Any future shareholder funding for the Poland operations by CME is
expected to be matched by ITI.
TV3 has borrowings of HUF 279,000,000 ($1,272,000) from a local
Hungarian bank. The loan requires quarterly repayments from March 1999 until
December 2000 and is secured by pledges of certain fixed assets of TV3. The
Company has loaned $1,384,000 to TV3 since December 31, 1997 and may loan an
additional $1,000,000 during 1998. The Company has made approximately
$9,878,000 in programming payments on behalf of TV3 since December 31, 1997
and has additional programming payments due for TV3 in 1998, 1999 and beyond of
approximately $15,297,000, $6,000,000 and $5,860,000, 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
investing in its existing broadcast operations and might engage in the
development of additional broadcast operations. The Company incurs certain
expenses in identifying and pursuing broadcast opportunities before any
investment decision is made.
Page 26
<PAGE>
The Company believes that its current cash balances, cash generated
from CNTS, local financing of broadcast operations, the sale of the Company's
interest in MobilRom and the closing of the Proposed ING Credit Facility
should be adequate to satisfy the Company's operating and capital requirements
for its current operations through mid-1999. To acquire additional broadcast
rights or to fund other significant investments, the Company would require
significant additional financing. There can be no assurance that the Company
will be able to complete a sale of its interest in MobilRom or close the
Proposed ING Credit Facility.
Year 2000 Issue
The "Year 2000 Issue" consists of computer programs and embedded
technology in equipment defining years using the last two digits rather than
all four digits of the applicable year and could result in the complete or
partial failure of computer applications and equipment with embedded
technology by or at the year 2000. The Company has established a Year 2000
compliance plan and timetable. The Company is conducting a comprehensive
review to identify systems and equipment (both the Company's and that of third
party vendors) that could be affected by the Year 2000 issue. The Company
expects to complete by the end of 1998 (i) a systems and equipment review
(including responses from third party vendors), (ii) an assessment of
compliance costs and (iii) a plan for business continuity in the event that
full compliance is not attainable. The Company's broadcast operations are
highly dependent upon equipment with embedded computer technology (cameras,
mixing equipment, broadcast equipment, etc.), the widespread failure of which
would have a material adverse impact on the Company's results of operations.
Accounting rules require Year 2000 compliance costs to be expensed as
incurred.
Forward-looking Statements
Statements made in "Liquidity and Capital Resources" and "Hungary"
regarding future investments in existing television broadcast operations,
business strategies, commitments 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 described in or contemplated by the forward-looking
statements. Important factors that contribute to such risks include the
ability to acquire programming, the ability to attract audiences, the rate of
development of advertising markets in countries where the Company currently
operates and may in the future operate and general market and economic
conditions in these countries. Important factors with respect to completion of
the Company's Year 2000 compliance plan include the outcome of the Company's
systems and equipment review and the extent to which Company and third party
systems are found to be out of compliance.
PART II
OTHER INFORMATION
Page 27
<PAGE>
Item 1. 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 CME and Ronald S. Lauder, the non-Executive Chairman of the Company's
Board of Directors. Perekhid alleged that the issuance of a license to the
Studio 1+1 Group pursuant to which Studio 1+1 has been broadcasting
programming on Ukrainian National Channel 2 ("UT-2"), constitutes a tortious
interference by CME and Mr. Lauder with a Perekhid contract with the Ukrainian
authorities for Perekhid to provide programming for and sell advertising time
on UT-2. Perekhid's complaint sought compensatory damages of $250 million,
punitive damages of $500 million, and an injunction against the Company and
Mr. Lauder to prevent the continuation of the alleged conduct. On July 2,
1997, CME and Mr. Lauder filed a motion to dismiss the complaint. On April 8,
1998, the Court dismissed the complaint on grounds of forum non-conveniens. In
June 1998, Perekhid filed a notice of appeal with the Court. Perekhid has nine
months from the date it filed a notice of appeal to submit an appellate brief.
In mid 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. On March
25, 1998, the Court denied IRISZ TV's claims. On May 8, 1998, IRISZ TV filed a
notice of appeal with the Supreme Court and a hearing has been scheduled for
November 16, 1998.
Certain unsuccessful bidders for the licenses of northern Poland and
the cities of Warsaw and Lodz filed a complaint against the National Radio and
Television Council (the "National Council") to challenge the award of these
licenses to TVN Sp.zo.o. In addition, one unsuccessful bidder has challenged
the award of a regional license for central Poland to Polskie Media S.A. The
petitioners alleged that (i) the competition for broadcasting licenses was
unfair because the nature of the licenses awarded to TVN did not correspond
with the announcement soliciting applications for such licenses; (ii) the
decision of the National Council to submit only the winning applications to
the Ministry of Telecommunications for confirmation of technical parameters of
the licenses constituted unequal treatment of the applicants; and (iii) TVN is
a foreign-controlled entity. The Supreme Administrative Court consolidated
certain of these challenges and, in a ruling dated May 26, 1998, overturned
the award of broadcasting licenses to TVN for Warsaw and Lodz as well as to
Polskie Media for central Poland. A hearing in respect of the award of
broadcasting license to TVN for northern Poland is scheduled for August 21,
1998. The decisions to overturn the licenses have not been implemented. The
National Council has stated that it will endeavour to confirm the awards of
the licenses to TVN. The Company believes that the broadcasting licenses have
been properly awarded and will vigorously pursue all available remedies to
ensure that TVN continues to broadcast.
Page 28
<PAGE>
CET 21 s.r.o. has granted CNTS, which operates Nova TV, the exclusive
access to the use of the Nova TV broadcast license. The Company has been
informed by CET 21 that in May 1997, one of the owners of CET 21 filed a claim
against CET 21 in the Regional Commercial Court of Prague alleging that CET 21
and the Czech Radio and Television Council did not satisfy all required
procedures for approving certain transfers of CET 21 ownership interests and
requesting that such transfers be invalidated on the grounds that CET 21
approved such transfers at procedurally deficient general meetings. The Court
ruled in favor of the plaintiff. CET 21 appealed the decision. The Company
believes that the outcome of this action will not have an impact on the
ownership structure of CET 21, as the transfers at issue were reconfirmed at
general meetings of CET 21 which have not been challenged.
The Company has been informed by CET 21 that on July 31, 1998, the
Czech Radio and Television Council notified CET 21 that the Council had
initiated an administrative proceeding to investigate allegedly unbalanced
reporting of information on Nova TV in violation of Czech broadcasting
regulations. Under applicable Czech media laws, such a proceeding could result
in fines, withdrawal of the Nova TV broadcast license from CET 21 or both.
However, the Council has publicly stated that the objective of the proceeding
is not to prevent Nova TV from broadcasting but rather to ensure that all
broadcasting is in accordance with applicable laws. Based upon such public
statement, as well as the advice of Czech legal counsel, the Company believes
that the withdrawal of CET 21's license as a result of this proceeding to be
remote. However, a withdrawal of the broadcast license from CET 21 would have
a material adverse effect on the Company's operations and financial results.
See CME's Form 10-Q for the quarter period ended March 31, 1998 for a
description of certain other proceedings. There have been no material
additional developments in such proceedings.
The Company is, from time to time, a party to litigation that arises
in the normal course of its business operations. The Company is not presently
a party to any such litigation which could reasonably be expected to have a
material adverse effect on its business or operations.
Item 4. Submission of matters to a vote of security holders
The following are the results of voting by shareholders present or
represented at the Annual General Meeting of Shareholders on June 5, 1998.
a. Each of the nominees considered at the Annual Meeting of
Shareholders was elected to serve as a Director of CME until the next Annual
Meeting of Shareholders or until their respective successors have been elected
and qualified.
b. The proposal to consider and act upon a proposal to set at ten the
maximum number of directors to serve on the Board of Directors until the next
Annual General Meeting of Shareholders was approved, with 76,270,046 votes
cast for approval, 116,049 votes cast against approval and 42,900 votes
abstaining.
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<PAGE>
c. The proposal to consider and act upon a proposal to amend CME's
1995 Stock Option Plan to (a) increase the maximum number of shares of CME's
Common Stock reserved for issuance upon the exercise of options granted
pursuant to the 1995 Stock Option Plan by 2,000,000 shares from 1,200,000 to
3,200,000 shares and (b) authorize the grant of options to purchase shares of
Class B Common Stock of CME to eligible person in an amount not to exceed 10%
of the number of shares of CME Common Stock for which options may be granted
under the 1995 Stock Option Plan was approved, with 70,319,949 votes cast for
approval, 4,226,971 votes cast against approval and 13,100 votes abstaining.
d. The proposal to consider and act upon a proposal to grant to
Ronald S. Lauder options to purchase 100,000 shares of Class B Common Stock of
CME pursuant to CME's 1995 Amended Stock Option Plan was approved, with
21,011,674 votes cast for approval, 4,129,696 votes cast against approval and
49,418,650 votes abstaining.
e. The proposal to consider and act upon a proposal to adopt the
Director, Officer and Senior Executive Co-Investment Plan of CME, which
includes the ability of CME to make matching loans in the aggregate amount of
up to $2,000,000 to senior executives for the purchase of shares of CME's
Common Stock was approved, with 72,225,149 votes cast for approval, 2,319,371
votes cast against approval and 15,500 votes abstaining.
f. The proposal to consider and act upon a proposal to approve
certain stock depreciation protection provisions in Leonard M. Fertig's
severance agreement was approved, with 68,929,971 votes cast for approval,
5,614,249 votes cast against approval and 15,800 votes abstaining.
g. The financial statements for CME for the fiscal year ending
December 31, 1997, together with the auditors report thereon, were approved,
with 76,416,096 votes cast for approval, 1,567 votes cast against approval and
11,332 votes abstaining.
h. The proposal to appoint Arthur Andersen & Co. as auditors for CME
and to authorize the directors to approve their fees was approved, with
76,415,378 votes cast for approval, 3,517 votes cast against approval and
10,100 votes abstaining.
Item 6. Exhibits and Reports on Form 8-K.
a) The following exhibits are attached:
27.01 Financial Data Schedule
b) No reports on Form 8-K were filed during the quarter ended June 30, 1998
Page 30
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 12, 1998 /s/ Michel Delloye
-------------------------
Michel Delloye
Chief Executive Officer
(Duly Authorized Officer)
Date: August 12, 1998 /s/ John A. Schwallie
-------------------------
John A. Schwallie
Chief Financial Officer
(Principal Financial Officer)
Page 31
<PAGE>
EXHIBIT INDEX
27.01 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 49,733
<SECURITIES> 70
<RECEIVABLES> 43,434
<ALLOWANCES> 4,196
<INVENTORY> 0
<CURRENT-ASSETS> 148,872
<PP&E> 68,320
<DEPRECIATION> 36,636
<TOTAL-ASSETS> 440,378
<CURRENT-LIABILITIES> 124,134
<BONDS> 176,999
0
0
<COMMON> 242
<OTHER-SE> 108,080
<TOTAL-LIABILITY-AND-EQUITY> 440,378
<SALES> 100,770
<TOTAL-REVENUES> 100,770
<CGS> 0
<TOTAL-COSTS> 145,053
<OTHER-EXPENSES> 874
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,868
<INCOME-PRETAX> (58,946)
<INCOME-TAX> (7,560)
<INCOME-CONTINUING> (53,669)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (53,669)
<EPS-PRIMARY> (2.23)
<EPS-DILUTED> (2.23)
</TABLE>
