<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, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File 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 6, 1999
----- --------------------------------
Class A Common Stock, par value $.01 18,506,849
Class B Common Stock, par value $.01 7,177,269
<PAGE>
PART 1
FINANCIAL INFORMATION
Item 1. Financial Statements
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
Consolidated Balance Sheets as at
June 30, 1999 and December 31, 1998
($000s, except share data)
<TABLE>
<CAPTION>
ASSETS June 30, December 31
------ 1999 1998
----------- ------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................................................... $58,248 $44,444
Restricted cash.............................................................. 408 67
Accounts receivable (net of allowances of $2,545, $3,271).................... 29,074 41,237
Program rights costs......................................................... 27,083 29,632
Advances to affiliates....................................................... 16,404 11,058
Other short-term assets...................................................... 16,881 28,670
----------- ------------
Total current assets................................................ 148,098 155,108
Investments in unconsolidated affiliates..................................... 26,280 29,357
Loans to affiliates.......................................................... 4,877 9,514
Property, plant and equipment (net of depreciation of $51,182, $50,477)...... 58,490 66,282
Program rights costs......................................................... 18,068 21,206
License costs and other intangibles (net of amortization of $6,461,
$6,813)..................................................................... 5,614 6,502
Goodwill (net of amortization of $41,609, $33,968)........................... 63,863 70,196
Note receivable.............................................................. 20,071 20,071
Other assets................................................................. 5,753 7,230
----------- ------------
Total assets........................................................ $351,114 $385,466
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities..................................... $65,537 $69,187
Duties and other taxes payable............................................... 11,817 11,722
Income taxes payable......................................................... 491 1,157
Current portion of credit facilities and obligations under capital leases.... 8,879 10,313
Investments payable.......................................................... 5,188 12,281
Advances from affiliates..................................................... 1,401 2,533
----------- ------------
Total current liabilities........................................... 93,313 107,193
Deferred income taxes........................................................ 134 302
Long-term portion of credit facilities and obligations under capital 18,131 23,296
leases
Investments payable.......................................................... - 2,563
$100,000,000 9 3/8 % Senior Notes............................................ 99,886 99,875
DM 140,000,000 8 1/8 % Senior Notes.......................................... 72,894 83,729
Other Liabilities............................................................ 3,357 2,099
Minority interest in consolidated subsidiaries............................... 685 702
COMMITMENTS AND CONTINGENCIES ...............................................
SHAREHOLDERS' EQUITY:
Class A Common Stock, $0.01 par value: authorized: 100,000,000 shares at
June 30, 1999 and December 31, 1998; issued and outstanding; 18,506,849
at June 30, 1999 and 18,070,879 at December 31, 1998.......................... 185 181
Class B Common Stock, $0.01 par value: authorized: 15,000,0000 shares at
June 30, 1999 and December 31, 1998 ; issued and outstanding; 7,177,269
at June 30, 1999 and 7,577,329 at December 31, 1998 .......................... 72 76
Additional paid-in capital................................................... 356,385 356,378
Accumulated deficit.......................................................... (279,772) (288,348)
Accumulated other comprehensive income....................................... (14,156) (2,580)
----------- ------------
Total shareholders' equity................................................... 62,714 65,707
----------- ------------
Total liabilities and shareholders' equity................................... $351,114 $385,466
=========== ============
</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
---------------------- ------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross Revenues............................................... $59,631 $70,226 $105,312 $113,692
Discounts and agency commissions............................. (11,265) (15,920) (19,946) (25,625)
----------- --------- ---------- ------------
Net revenues................................................. 48,366 54,306 85,366 88,067
STATION EXPENSES:
Other operating costs and expenses....................... 18,363 18,470 38,399 35,183
Amortization of programming rights....................... 10,085 19,345 19,703 27,340
Depreciation of station fixed assets and other
intangibles.............................................. 5,254 4,003 9,795 7,930
----------- --------- ---------- ------------
Total station operating costs and expenses............... 33,702 41,818 67,897 70,453
Selling, general and administrative expenses............. 7,326 6,266 13,882 13,274
CORPORATE EXPENSES:
Corporate operating costs and development expenses....... 3,809 6,213 9,639 13,403
Amortization of goodwill and allowance for development
costs.................................................... 2,418 8,478 5,815 11,007
Restructuring charge (Note 7) - 2,552 - 2,552
----------- --------- ---------- ------------
6,227 17,243 15,454 26,962
Operating income/(loss)...................................... 1,111 (11,021) (11,867) (22,622)
Equity in (loss)/income of unconsolidated affiliates (Note 3) (345) 1,134 (4,390) 1,213
Gain on sale of investment (Note 6) - - 25,870 -
Net interest and other expense............................... (3,341) (3,502) (7,054) (8,773)
Foreign currency exchange gain/(loss), net .................. 2,994 (2,863) 11,617 (3,079)
----------- --------- ---------- ------------
Income/(loss) before provision for income taxes, minority
interest and discontinued operations......................... 419 (16,252) 14,176 (33,261)
Provision for income taxes................................... (3,857) (5,453) (5,507) (7,560)
----------- --------- ---------- ------------
(Loss)/income before minority interest and discontinued
operations................................................... (3,438) (21,705) 8,669 (40,821)
Minority interest in (income)/loss of consolidated affiliates (71) (103) (93) 611
----------- --------- ---------- ------------
(Loss)/income from continuing operations..................... (3,509) (21,808) 8,576 (40,210)
Discontinued operations:
Operating loss of discontinued operations.................. - (6,823) - (13,458)
=========== ========= ========== ============
Net (loss)/income (3,509) (28,631) 8,576 (53,668)
=========== ========= ========== ============
PER SHARE DATA:
Net (loss)/income per share (Note 5):
Continuing operations - Basic and diluted................ (0.14) (0.91) 0.33 (1.67)
Discontinued operations - Basic and diluted.............. - (0.28) - (0.56)
=========== ========= ========== ============
Net.................................................... (0.14) (1.19) 0.33 (2.23)
=========== ========= ========== ============
Weighted average shares used in computing per share amounts:
Basic.................................................... 25,665 24,030 25,665 24,030
=========== ========= ========== ============
Diluted.................................................. 25,665 24,030 25,676 24,030
=========== ========= ========== ============
</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, 1999
($000s)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Comprehensive Class A Class B Other Total
Income Common Common Capital Accumulated Comprehensive Shareholders'
(loss) Stock Stock Surplus Deficit(1) Income(2) equity
------------- ----------- ----------- ----------- ------------ -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1998 $181 $76 $356,378 $(288,348) $(2,580) $65,707
Comprehensive income:
Net income................. $8,576 8,576 8,576
Other comprehensive
income (loss):
Unrealized translation
adjustments (11,576) (11,576) (11,576)
-------------
Comprehensive income.......... $(3,000)
=============
Stock issued:
stock option plans......... 4 (4) 7 7
----------- ----------- ----------- ------------ -----------------------------
BALANCE, June 30, 1999 $185 $72 $356,385 $(279,772) $(14,156) $62,714
=========== =========== =========== ============ =============================
(1) Of the accumulated deficit of $279,772 at June 30, 1999, $93,598 represents accumulated losses in unconsolidated
affiliates.
(2) Represents foreign currency translation adjustments
</TABLE>
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
Consolidated Statements of Cash Flows
For the Six months ended June 30, 1999 and 1998
($000s)
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
June 30,
1999 1998
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss)............................................................. $8,576 $ (53,669)
Adjustments to reconcile net loss to net cash used in operating activities:
Equity in loss (income) of unconsolidated affiliates..................... 4,390 (1,213)
Depreciation and amortization (excluding amortization of barter programs) 35,800 46,725
Discontinued operations.................................................. - 13,458
Gain on disposal of investment........................................... (25,870) -
Minority interest in income (loss) of consolidated subsidiaries ......... 93 (611)
Foreign currency exchange (gain) loss, net............................... (11,617) 3,079
Accounts receivable...................................................... 7,210 1,693
Cash paid for program rights............................................. (18,839) (27,603)
Advances to affiliates................................................... (2,994) 3,435
Other short-term assets.................................................. (836) (203)
Accounts payable and accrued liabilities................................. (7,617) (2,642)
Income and other taxes payable........................................... (211) (3,163)
------------- --------------
Net cash used in operating activities................................. (11,915) (20,714)
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in unconsolidated affiliates................................. - (1,152)
Other Investments........................................................ (6,056) (58)
Investments in discontinued operations................................... - (19,888)
Cash proceeds from sale of investment.................................... 39,260 -
Restricted cash.......................................................... (341) 508
Acquisition of fixed assets.............................................. (4,639) (7,527)
Acquisition of minority interest......................................... - (6,480)
Purchase of business, net of cash acquired............................... - (699)
Loans and advances to affiliates......................................... - (139)
Payments for license costs, other assets and intangibles................. 382 (1,062)
------------- --------------
Net cash provided by (used in) investing activities................... 28,606 (36,497)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Credit facilities and payments under capital leases...................... (2,442) 779
Dividends paid to minority shareholders.................................. - (984)
Capital contributed by shareholders...................................... 7 1,389
Advances from affiliates................................................. 1,369 -
Other long-term liabilities.............................................. (243) 447
------------- --------------
Net cash (used in) provided by financing activities................... (1,309) 1,631
------------- --------------
IMPACT OF EXCHANGE RATE FLUCTUATIONS ON CASH (1,578) 234
------------- --------------
Net increase (decrease) in cash and cash equivalents..................... 13,804 (55,346)
CASH AND CASH EQUIVALENTS, beginning of period............................... 44,444 104,490
------------- --------------
CASH AND CASH EQUIVALENTS, end of period..................................... $ 58,248 $ 49,144
============= ==============
Supplemental information:
Cash paid for interest................................................ $10,907 $10,740
============= ==============
Income Taxes.......................................................... $5,562 $8,649
============= ==============
</TABLE>
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
Notes to Consolidated Financial Statements
June 30, 1999
1. Organization and Business
Central European Media Enterprises Ltd. ("CME") is a Bermuda
corporation. All references to the "Company" include CME and its direct and
indirect Subsidiaries, and all references to "Subsidiaries" include each
corporation or partnership in which CME has a direct or indirect equity or
voting interest. The Company invests in, develops and operates national and
regional commercial television stations and networks in Central and Eastern
Europe.
Business Combination Transaction In Progress
On March 29, 1999, the Company entered into a Reorganization Agreement
with SBS Broadcasting S.A., a company organized under the laws of Luxembourg
("SBS") , which provides, among other things, for (a) the sale by the Company to
SBS of all of the assets, business, properties and rights of the Company
(consisting primarily of the stock of CME Media Enterprises B.V., an
intermediate holding company wholly owned by CME); (b) the assumption by SBS of,
and indemnification of the Company with respect to, all liabilities, obligations
and commitments of the Company including the Company's outstanding Senior Notes
(which are to remain outstanding following the transaction); (c) the issuance by
SBS to the Company of a number of shares of SBS common stock, par value $1.50
per share ("SBS Stock"), equal to 0.5 times the total number of shares of the
Company's Class A Common Stock and Class B Common Stock outstanding immediately
prior to the closing of such transaction; and (d) the immediate commencement of
the winding up of the Company and distribution of the SBS Stock so received by
the Company to the shareholders of the Company (followed as soon as practical
thereafter by the final dissolution of the Company). Accordingly, upon the
closing of the transactions contemplated by the Reorganization Agreement, each
shareholder of the Company would receive 0.5 shares of SBS Stock for each share
of Common Stock of the Company owned by such shareholder.
The foregoing transaction is intended to be accounted for as a
purchase, and to qualify as a reorganization under Section 368(a) of the
Internal Revenue Code (and thus to be tax-free for U.S. tax purposes to the
shareholders of CME). The closing of the transaction is subject to a number of
conditions precedent, some of which are beyond the control of the Company,
including the approval of the shareholders of SBS. Ronald S. Lauder, who
controls approximately 71% of the vote of the Company's Common Stock, has
entered into a Shareholders' Agreement with SBS whereby he has committed to vote
his shares of Class A and Class B Common Stock in favor of the transaction.
Certain members of SBS's management have entered into a Shareholder Agreement
with the Company whereby they have agreed to vote their SBS shares in favor of
the transaction. In the event that the transaction is not consummated, the
Reorganization Agreement provides various rights to the Company and to SBS,
depending upon the circumstances.
There can be no assurance that the proposed transaction between SBS and
CME will be consummated on the terms set forth in the Reorganization Agreement,
or at all. In particular, recent developments relating to the Company's
operations in the Czech
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Republic, discussed below under Part I, Item 1 "Czech Republic" and Part II,
Item 1 "Legal Proceedings", have made it significantly less likely that the
conditions precedent to the closing of the transaction will be satisfied. If
such conditions are not satisfied (or waived) by December 31, 1999, the
Reorganization Agreement may be terminated by either CME or SBS.
General
Laws, regulations and policies in CME's markets generally restrict the
level of direct or indirect interests that any non-local investor such as CME
may hold in companies holding broadcast licenses. As a result, broadcast
licenses are generally held by companies majority owned by CME's local partners
and CME owns controlling interests in service or operating companies which
provide programming, advertising and other services to the licenseholding
companies. References to Nova TV, POP TV, Gajba TV, PRO TV, Acasa, Markiza TV
and Studio 1+1 in this report may be to either the license company or the
service companies or both, as the case may be.
The following table sets forth certain data regarding the Company's
voting interest in each license and service company.
<TABLE>
<CAPTION>
CME CME
--- ----
License Voting TV Services Company Voting
------- ------ ------------------- ------
Country Expiration TV License Company Interest Interest
- ------- ---------- ------------------ -------- --------
<S> <C> <C> <C> <C>
Czech Republic........... 2005 (1) CET............................. 1.25% CNTS.................... 99%
Romania.................. 2002 -2006 Pro TV S.R.L.................... 49% MPI .................... 66%
Media Pro S.R.L................. 0%
Slovenia................. 2003 -2007 Tele 59 ........................ 10% Pro Plus................ 78%
MMTV............................ 10%
Slovak Republic.......... 2007 Markiza-Slovakia s.r.o.......... 0% STS..................... 49%
Ukraine.................. 2007 Studio 1+1...................... 18% Innova, IMS, UAH........ 60%
Prioritet 50% (2)
</TABLE>
(1) See "Czech Republic" below
(2) 50% interest owned by Ukraine Advertising Holding B.V. (UAH)
Discontinued Operations
In December 1998, CME sold its interests in the TVN television
operations in Poland. This transaction resulted in the treatment of these
interests and related operations as discontinued operations for all periods
presented in the accompanying financial statements. The accompanying financial
statements for the second quarter of 1998 have been restated in order to reflect
the Company's Polish operations as discontinued operations.
Czech Republic
The Company owns a 99% voting and economic interest in Ceska nezavisla
televizni spolecnost, spol. s.r.o. ("CNTS"), with the remaining 1% voting and
economic interest in CNTS held by CET 21, spol. s.r.o. ("CET"). CET holds a
terrestrial television broadcast license in the Czech Republic that expires in
January 2005. Dr. Vladimir Zelezny, the former General Director of CNTS,
purports to own a controlling 60% participation interest in CET. Recently he
sought approval of the CET General Meeting to transfer his interests in
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CET to another Czech company. Such a transfer requires the approval of the Czech
Media Council. No application for such approval has been made at this time. CNTS
is governed by a Memorandum of Association and Investment Agreement (the
"Memorandum of Association"). The Company has the right to appoint five of the
seven members of CNTS's Committee of Representatives. A representative of CET
has certain delay and veto rights on non-economic programming matters related
directly to the broadcast license.
CNTS provides television programming and other services to CET, which
broadcasts the Nova TV signal, pursuant to a Services Agreement with CET dated
May 21, 1997 (the "Services Agreement"). In consideration for its activities
under the Services Agreement, CNTS collects all of Nova TV's advertising and
other revenues, and retains as compensation for its services the balance of
those revenues net of Nova TV's operating expenses less CZK 100,000 ($2,800) per
month payable to CET.
On April 19, 1999, CNTS dismissed Dr. Zelezny from his position as
Executive and General Director of CNTS, for taking actions that exceeded his
authority, that breached his fiduciary duties and that were against the
interests of CNTS. After an internal investigation, it was learned that Dr.
Zelezny had executed an unlimited CNTS guarantee for the liabilities of a Czech
television program acquisition company, AQS a.s. ("AQS"), without any
authorization. The investigation also indicated that Dr. Zelezny had reassigned
the program acquisition department of CNTS to AQS, notified international
providers of television programming that AQS would replace CNTS as the program
service provider to Nova TV, and taken other actions contrary to the interests
of CNTS.
CET, CNTS, CME and Dr. Vladimir Zelezny, the executive officer of CET,
are engaged in an ongoing dispute with respect to the operations of Nova TV and
the rights and obligations of each of CET and CNTS. On June 10, 1999, Dr.
Zelezny announced that CET has reached an agreement with another Czech company
to provide television services to CET and that CNTS would no longer be the
exclusive provider of television services to CET for Nova TV. The Company
believes that the Memorandum of Association, the Services Agreement and course
of dealing over the life of Nova TV establish that CNTS is legally entitled to
be the exclusive provider of television and related services to CET for Nova TV.
In June 1999, the Media Commission of the Czech Parliament requested
the Czech Media Council to provide its opinion regarding several issues related
to the dispute, including whether CNTS is entitled to be the exclusive provider
of television services to CET for Nova TV. On July 26, 1999, the Czech Media
Council sent CNTS excerpts of its report to the Media Commission. In the
excerpts of its report, the Media Council stated its view that the dispute
between CET and CME was essentially of a commercial nature and, as long as Czech
media laws were not violated, that the Media Council had no legal reason or
right to intervene. The report referred to several possible risks of breaches of
the Czech media laws arising from the dispute, including destabilization of the
Czech media environment, and asked CET and CNTS to immediately cease their media
campaigns and to inform the Media Council before August 15, 1999 of the steps
taken to minimize risks of media law violations and towards settlement of the
dispute. CNTS and CME responded to the Media Council that they will comply with
the Media Council's request and have offered to recommence negotiations to
resolve the disputes with Dr. Zelezny and CET. CNTS and CME, however, expressed
their disagreement with the Media Council's characterization of the disputes as
essentially commercial in nature, pointing out that the Media Council has
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been intimately involved in approving the structure of the legal relationships
between CET and CNTS, and, in fact, mandated many of the contractual changes
that gave rise to the current disputes. In response to CME's offer to
immediately commence negotiations to resolve the disputes, counsel to CET wrote
that the disputes were currently in litigation and indicated no interest in
negotiation.
On August 5, 1999, CET pre-empted CNTS's transmission and began
broadcasting a substitute signal for Nova TV from a site other than CNTS's
studios. In addition, on the same day, CNTS received notification from CET that
CET was withdrawing from the Services Agreement due to CNTS's failure to supply
CET with the daily program log for Nova TV on August 4, 1999. CET
representatives also stated publicly that CET would not utilize the services of
CNTS for Nova TV in the future. As of the date of this filing, CET has continued
to pre-empt all of CNTS's programming for Nova TV. CNTS believes that CET's
withdrawal from the Services Agreement was not legally effective since CNTS did
not materially breach the Services Agreement and that the Services Agreement
therefore remains in effect. On August 9, 1999, CNTS filed a request for a
preliminary injunction with the Regional Commercial Court in Prague to enjoin
CET from entering into service relationships with other companies and requested
the court to declare the Services Agreement to be in full force and effect. See
Part II, Item 1 "Legal Proceedings." In connection with CET's actions, CNTS and
the Company requested the Czech Media Council to call an extraordinary meeting
to address breaches of the Czech media laws and destabilization of the Czech
media market, and to institute proceedings against CET for the revocation of the
broadcast license. The next regular meeting of the Czech Media Council is
scheduled for August 17, 1999.
The Company believes that the recent actions by CET violate the
Services Agreement and CET's obligations under the CNTS Memorandum of
Association, as well as Czech media laws. If CNTS's operations continue to be
interrupted, CNTS's advertising revenues will be disrupted or curtailed
entirely, and CNTS's business operations could be suspended. CNTS's broadcast
cash flow was $47,489,000 in 1998 while the Company's combined broadcast cash
flow was $25,334,000 during that period. For the six month period ended June 30,
1999, CNTS's broadcast cash flow was $17,274,000 while the Company's combined
broadcast cash flow was $13,650,000. For the six month period ended June 30,
1999, CNTS's net revenues were $48,496,000 while the Company's combined net
revenues were $104,018,000. Any continued significant disruption of CNTS's
operations and cash flows would have a material adverse effect on the Company
and could result in its inability to meet its debt service and other financial
obligations.
Romania
The Company's interest in PRO TV is governed by a Cooperation Agreement
(the "Romanian Agreement") among the Company, Adrian Sarbu and Ion Tiriac,
forming Media Pro International S.A. ("MPI"), through which PRO TV and Acasa,
are operated. MPI provides programming to and sells advertising for the stations
which comprise the PRO TV and Acasa network. Pursuant to the Romanian Agreement,
the Company owns 66% of the equity of MPI. Interests in profits of MPI are equal
to the partners' equity interests. The Company has the right to appoint three of
the five members of the Council of Administration which directs the affairs of
MPI. Although the Company has majority voting power in MPI, with respect to
certain fundamental financial and corporate matters
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the affirmative vote of either Mr. Sarbu or Mr. Tiriac is required. The Company
owns 49% of the equity of PRO TV, SRL which holds 20 of the 23 licenses for the
stations which comprise the PRO TV and Acasa network. Messrs. Sarbu and Tiriac
own substantially all of the remainder of PRO TV, SRL. The remaining three
licenses for the PRO TV network together with the licenses for the PRO FM and
PRO AM radio networks are held by Media Pro SRL, a company owned by Messrs.
Sarbu and Tiriac. In addition, in Romania, the Company owns 70% of each of Media
Vision SRL ("Media Vision"), a production and dubbing company, and Video Vision
International SRL ("Video Vision"), a post-production company.
Slovenia
The Company's interest in POP TV and Gajba TV is governed by a
Partnership Agreement among the Company, MMTV 1 d.o.o. Ljubljana ("MMTV") and
Tele 59 d.o.o. Maribor ("Tele 59"), forming Produkcija Plus d.o.o. ("Pro Plus").
Pro Plus provides programming to and sells advertising for the broadcast
licenseholders MMTV and Tele 59 as well as additional affiliates. The Company
currently owns 78% of the equity in Pro Plus, but has an effective economic
interest of 85.5% as a result of its right to 33% of the profits of MMTV and 33%
of the profits of Tele 59. Tele 59 currently owns a 21% equity interest in Pro
Plus, and MMTV currently owns a 1% equity interest in Pro Plus. The Company owns
10% of the equity of Tele 59 and a 10% direct equity interest in MMTV. The
Company also owns a 20% equity interest in MTC Holding d.o.o. ("MTC") which owns
the remaining 90% equity interest in MMTV. 76% of MTC's equity is being
separately held by a Slovene person, in trust for the Company, until the Slovene
media law is clarified or until the Company determines final ownership. Voting
power and interests in profits of Pro Plus are equal to the partners' equity
interests. All major decisions concerning the affairs of Pro Plus are made by
the general meeting of partners and require a 70% affirmative vote. Certain
fundamental financial and corporate matters require an 85% affirmative vote of
the partners. In July 1996, the Company, together with MMTV and Tele 59, entered
into an agreement to purchase a 66% equity interest in Kanal A, a privately
owned television station in Slovenia, which competes with POP TV (the "Kanal A
Agreement"). There is currently an injunction in effect preventing the
completion of the Kanal A Agreement. See Part II, Item 1 "Legal Proceedings".
Slovak Republic
The Company's interest in Markiza TV is governed by a Participants
Agreement dated September 28, 1995 (the "Slovak Agreement") between the Company
and Markiza-Slovakia s.r.o. ("Markiza") forming Slovenska Televizna Spolocnost,
s.r.o. ("STS"). Pursuant to the Slovak Agreement, the Company is required to
fund all of the capital requirements of, and holds a 49% voting interest and an
80% economic interest in, STS. Markiza, which holds the television broadcast
license, and STS have entered into an agreement under which STS is entitled to
conduct television broadcast operations pursuant to the license. On an ongoing
basis, the Company is entitled to 80% of the profits of STS, except that until
the Company is repaid its capital contributions plus a priority return at the
rate of 6% per annum on such capital contributions, 90% of the profits will be
paid to the Company. A Board of Representatives directs the affairs of STS, the
composition of which includes two designees of the Company and three designees
(two of whom have been named) of Markiza; however, all significant financial
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and operational decisions of the Board of Representatives require a vote of 80%
of its members. In addition, certain fundamental corporate matters are reserved
for decision by a general meeting of partners and require a 67% affirmative vote
of the partners. There is currently litigation pending with respect to the
ownership of Markiza. See Part II, Item 1 "Legal Proceedings".
Ukraine
The Studio 1+1 Group consists of several entities in which the Company
holds direct or indirect interests. The Company owns a 60% equity interest in
each of Innova Film GmbH ("Innova"), Ukraine Advertising Holding B.V. ("UAH")
and International Media Services ("IMS"). UAH holds a 50% equity interest in
Prioritet, a Ukrainian company engaged in advertising sales. Innova holds 100%
of Intermedia, a Ukrainian company ("Intermedia"), which in turn holds a 30%
equity interest in a separate Ukrainian company which holds the license to
broadcast programming and sell advertising on UT-2 (the "UT-2 License"). Innova,
IMS, Intermedia and Prioritet have entered into arrangements regarding the
provision of programming and advertising sales services to Studio 1+1. Interests
in profits of each entity in the Studio 1+1 Group are equal to equity interests
held in such entities. All significant decisions of the entities in the Studio
1+1 Group are reserved for decision of the shareholders, requiring a majority
vote (other than decisions of the shareholders of the Ukrainian company which
holds the UT-2 broadcast license, which require a 75% vote). Certain fundamental
corporate matters of these entities require 61% shareholder approval. See Part
II, Item 1 "Legal Proceedings".
Hungary
In Hungary, the Company owns a 100% (increased from 99% in April 1999)
equity interest in Budapesti Kommunikacios Rt ("TV3"), a television station
distributing its signal via MMDS in Budapest and via satellite to cable systems
throughout Hungary. The Company has the right to appoint all of the five members
of the Board of Directors of TV3, all decisions of which require a simple
majority. See Part II, Item 1 "Legal Proceedings" regarding litigation involving
the Company's consortium Irisz TV. The Company wholly owns Videovox Studio
Limited Liability Company ("Videovox"), a Hungarian dubbing and duplication
company.
2. Summary of Significant Accounting Policies
Reference is made to the Notes to Consolidated Financial Statements
contained in the Company's December 31, 1998 audited consolidated financial
statements included in the Company's 1998 Annual Report on Form 10-K filed with
the SEC on March 29, 1999. In the opinion of Management, the interim unaudited
financial statements included herein reflect all adjustments necessary,
consisting of normal recurring adjustments, for a fair presentation of such data
on a basis consistent with that of the audited data presented therein. The
consolidated results of operations for interim periods are not necessarily
indicative of the results to be expected for a full year.
Principles of Consolidation
Page 11
<PAGE>
The accompanying consolidated financial statements include the accounts
of the Company's wholly-owned subsidiaries and the results of Nova TV, PRO TV,
POP TV, Studio 1+1 (for the three and six months ended June 30, 1999 only), TV3,
Videovox, Media Vision and Video Vision (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 and
Studio 1+1 (for the three and six months ended June 30, 1998 only), (the
"Unconsolidated Affiliates") in which the Company has, or during the periods
presented had, minority or non-controlling ownership interests, are included in
the accompanying Consolidated financial statements using the equity method. In
late December 1998 the Company increased its equity interest in Studio 1+1 to a
60% controlling interest and, due to the timing of this transaction, the Studio
1+1 balance sheet is consolidated in the Company's Consolidated Balance Sheet as
of December 31, 1998, but on the Company's Consolidated Statements of Operations
and Consolidated Statements of Cash Flows for the three and six months ended
June 30, 1998, Studio 1+1 results are accounted for under the equity method.
From January 1, 1999, Studio 1+1 is consolidated in all of the Company's
financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting year. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications were made to prior period amounts to conform
to current period classifications.
Segment Data
The Company has adopted Statement of Financial Accounting Standards No.
131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information." SFAS 131 supersedes SFAS 14, Financial Reporting for Segments of a
Business Enterprise, replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal reporting
that is used by management for making operating decisions and assessing
performance as the source of the Company's reportable segments. SFAS 131 also
requires disclosures about products and services, geographic areas and major
customers. The adoption of SFAS 131 did not affect results of operations or the
financial position of the Company but did affect the disclosure of segment
information (Note 4).
Derivative Instruments and Hedging Activities -- New Accounting Pronouncement
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
Page 12
<PAGE>
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.
Pursuant to SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 -
An Amendment of FASB Statement No. 133", which was issued in June 1999, SFAS No.
133 will be effective for fiscal years beginning after June 15, 2000. A company
may also implement the Statement as of the beginning of any fiscal quarter after
issuance (that is, fiscal quarters beginning June 16, 1999 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 either
December 31, 1997 and 1998, at the company's election.
The Company occasionally enters into forward foreign exchange
contracts. No material impact is expected as a result of the adoption of SFAS
No. 133 when it is applicable.
3. Summary Financial Information for Unconsolidated Affiliates.
<TABLE>
<CAPTION>
As of
------------------------------------
June 30, 1999 December 31, 1998
-------------- ------------------
$000s
-----
Markiza TV Markiza TV
---------------- ------------------
<S> <C> <C>
Current assets...................... 16,061 17,863
Non-current assets.................. 20,378 26,682
Current liabilities................. (17,393) (17,703)
Non-current liabilities............. (906) (1,089)
---- ------
Net assets.......................... 18,140 25,753
====== ======
<CAPTION>
For the three months ended,
-------------------------------------------------------
June 30, 1999 June 30, 1998
$000s Studio 1+1
----- Markiza TV Markiza TV Group
----------------- ----------------- --------------
<S> <C> <C> <C>
Net revenues........................ 9,256 10,940 7,837
Operating income.................... 1,003 2,357 628
Net income.......................... 616 1,307 596
<CAPTION>
For the six months ended,
-------------------------------------------------------
June 30, 1999 June 30, 1998
$000s Studio 1+1
----- Markiza TV Markiza TV Group
----------------- ---------------- --------------
<S> <C> <C> <C>
Net revenues........................ 16,109 18,712 14,459
Operating (loss)/income............. (1,284) 2,043 893
Net (loss)/income................... (3,781) 1,610 795
</TABLE>
The Company's share of losses in Unconsolidated Affiliates (after intercompany
eliminations) for the six months ended June 30, 1999 was $2,274,000 for Markiza
TV and $2,116,000 for certain of the Studio 1+1 Group entities.
Page 13
<PAGE>
4. Segment Data
The Company manages its business segments primarily on a geographic
basis. The Company's reportable segments are comprised of Nova TV (Czech
Republic), PRO TV (Romania), Markiza TV (Slovakia), POP TV (Slovenia), Studio
1+1 (Ukraine) and TV3 (Hungary). Each operating segment provides products and
services as further described below.
The accounting policies of the various segments are the same as those
described in the "Summary of Significant Accounting Policies" in Note 2. The
Company evaluates the performance of its segments based on segment EBITDA
(earnings before interest, taxes, depreciation and amortization). Costs for
programming amortization are included in segment EBITDA. Costs excluded from
segment EBITDA primarily consist of interest and foreign exchange gains and
losses, corporate expenses and goodwill amortization and equity in losses of
unconsolidated affiliates, as well as programming write-offs at the corporate
level for TV3 and other non-recurring charges for impairment of investments or
discontinued operations. The assets and liabilities of the Company are managed
centrally and are reported internally in the same manner as the consolidated
financial statements; thus, no additional information is provided. Summary
information by segment as of and for the three and six months ended June 30,
1999 and 1998 is as follows:
<TABLE>
<CAPTION>
SEGMENT FINANCIAL INFORMATION
For the three months ended June 30,
----------------------------------------------------------------------
($000s)
---------------------------------- ----------------------------------
Net Revenues EBITDA
---------------------------------- ----------------------------------
Station 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Nova TV........................... $27,663 $32,196 $12,831 $17,890
PRO TV ........................... 9,735 11,571 (128) 2,295
POP TV ........................... 7,255 7,772 2,293 1,921
TV3...............................(1) 1,164 1,505 (1,665) (1,450)
Studio 1+1........................(2) 2,120 - (922) -
Other Operations ................. 429 1,263 73 38
------------------ -------------- ----------------- --------------
Total Consolidated Operations 48,366 54,307 12,482 20,694
Studio 1+1........................ - 7,837 - 889
Markiza TV ....................... 9,256 10,940 2,328 3,498
------------------ -------------- ----------------- --------------
Total Unconsolidated Operations 9,256 18,777 2,328 4,387
================== ============== ================= ==============
Total Operations..................... $57,622 $73,084 $14,810 $25,081
================== ============== ================= ==============
</TABLE>
<TABLE>
Reconciliation to Consolidated Statements of Operations:
<S> <C> <C>
Consolidated Operations $ 12,482 $20,694
Intercompany elimination 110 492
Station depreciation (5,254) (4,003)
Corporate expenses (6,227) (17,243)
Programming write-off in TV3 (1) - (10,961)
</TABLE>
Page 14
<PAGE>
<TABLE>
<CAPTION>
================= ==============
<S> <C> <C>
Operating income (loss) from continuing operations $1,111 $(11,021)
================= ==============
</TABLE>
(1) 1998 EBITDA is without the impact of the $10,961,000 write-down in the
carrying value of capitalized costs of rights to program material.
(2) Studio 1+1 Group was consolidated effective December 23, 1998. Amounts shown
in the table above for Net Revenues and EBITDA for the second quarter of 1999
differ by $1,209,000 and $815,000, respectively, from similar information shown
in Selected Combined Financial Information in Item 2. These differences relate
to the use of consolidated numbers in the table above and combined numbers
(which includes Studio 1+1 entities which are accounted for under the equity
method) in Item 2.
<TABLE>
<CAPTION>
SEGMENT FINANCIAL INFORMATION
For the six months ended June 30,
----------------------------------------------------------------------
($000s)
---------------------------------- ----------------------------------
Net Revenues EBITDA
---------------------------------- ----------------------------------
Station 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Nova TV........................... $48,496 $52,276 $18,654 $26,030
PRO TV ........................... 17,533 19,327 (2,140) (166)
POP TV ........................... 11,819 11,456 1,848 405
TV3.............................(1) 2,312 2,580 (3,330) (3,979)
Studio 1+1......................(2) 4,428 - (1,917) -
Other Operations ................. 778 2,428 27 104
------------------ -------------- ----------------- --------------
Total Consolidated Operations 85,366 88,067 13,142 22,394
Studio 1+1........................ - 14,459 - 1,396
Markiza TV ....................... 16,109 18,712 1,410 4,227
------------------ -------------- ----------------- --------------
Total Unconsolidated Operations 16,109 33,171 1,410 5,623
================== ============== ================= ==============
Total Operations..................... $101,475 $121,238 $14,552 $28,017
================== ============== ================= ==============
</TABLE>
<TABLE>
Reconciliation to Consolidated Statements of Operations:
<S> <C> <C>
Consolidated Operations $13,142 $22,394
Intercompany elimination 240 838
Station depreciation (9,795) (7,930)
Corporate expenses (15,454) (26,962)
Programming write-off in TV3 (1) - (10,961)
================= ==============
Operating loss from continuing operations $(11,867) $(22,621)
================= ==============
</TABLE>
(1) 1998 EBITDA is without the impact of the $10,961,000 write-down in the
carrying value of capitalized costs of rights to program material.
(2) Studio 1+1 Group was consolidated effective December 23, 1998. Amounts shown
in the table above for Net Revenues and EBITDA for the first six months of 1999
differ by $2,543,000 and $1,391,000, respectively, from similar information
shown in Selected Combined Financial Information in Item 2. These differences
relate to the use of consolidated numbers in the table above and combined
numbers (which includes Studio 1+1 entities which are accounted for under the
equity method) in Item 2.
5. Earnings Per Share
Page 15
<PAGE>
The Company accounts for earnings per share pursuant to SFAS No. 128,
"Earnings Per Share." Basic net income per common share ("Basic EPS") is
computed by dividing net income by the weighted average number of common shares
outstanding. Diluted net income per common share ("Diluted EPS") is computed by
dividing net income by the weighted average number of common shares and dilutive
common share equivalents then outstanding. SFAS No. 128 requires the
presentation of both Basic EPS and Diluted EPS on the face of the consolidated
statement of operations. A reconciliation between the numerator and denominator
of Basic EPS and Diluted EPS is as follows:
<TABLE>
<CAPTION>
For the three months ended June 30, 1999
----------------------------------------
Net Loss Common Net Loss Per
-------- ------ ------------
Shares Common Share
------ ------------
Basic EPS
- ---------
<S> <C> <C> <C>
Net (loss) attributable to common stock $(3,509) 25,665 $(0.14)
Effect of dilutive securities: stock options - - -
------------- -------------- ------------------
Diluted EPS
- -----------
Net (loss) attributable to common stock and
assumed option exercises....................... $(3,509) 25,665 $(0.14)
============= ============== ==================
</TABLE>
<TABLE>
<CAPTION>
For the six months ended June 30, 1999
--------------------------------------
Net Income Common Net Income Per
---------- ------ --------------
Shares Common Share
------ ------------
Basic EPS
- ---------
<S> <C> <C> <C>
Net income attributable to common stock $8,576 25,665 $0.33
Effect of dilutive securities: stock options - 11 -
------------- -------------- ------------------
Diluted EPS
- -----------
Net income attributable to common stock and
assumed option exercises....................... $8,576 25,676 $0.33
============= ============== ==================
</TABLE>
Diluted EPS, for the three and six months ended June 30, 1998 and for
the three months ended June 30, 1999 does not include the impact of stock
options then outstanding as their inclusion would be anti-dilutive. Diluted EPS,
for the six months ended June 30, 1999, excludes the effect of certain
outstanding stock warrants and options as their inclusion would be
anti-dilutive.
6. Sale of Investment in MobilRom
On March 18, 1999, the Company sold its interest in a Romanian mobile
telephone company, MobilRom S.A. As a result of this transaction the Company
realized a gain of $25,870,000. The impact of MobilRom S.A. on the Company's
operating results for 1998 and 1999 was not material.
7. Restructuring Charge
Page 16
<PAGE>
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.
During the six months ended June 30, 1999, there have been no significant
changes to the restructuring plans.
All payments related to this charge are expected to be finalized by the
end of the third quarter 1999. As of June 30, 1999, $54,000 of restructuring
charges remained in accrued liabilities.
8. Subsequent Events
On August 5, 1999, CET pre-empted CNTS's transmission and began
broadcasting a substitute signal for Nova TV from a site other than CNTS
studios. In addition, on the same day, CNTS received notification from CET that
CET was withdrawing from the Services Agreement due to CNTS's failure to supply
CET with the daily program log for Nova TV on August 4, 1999. CET
representatives also stated publicly that CET would not utilize the services of
CNTS for Nova TV in the future. As of the date of this filing, CET has continued
to pre-empt all of CNTS's programming for Nova TV. CNTS believes that CET's
withdrawal from the Services Agreement was not legally effective since CNTS did
not materially breach the Services Agreement and that the Services Agreement
therefore remains in effect. On August 9, 1999, CNTS filed a request for a
preliminary injunction with the Regional Commercial Court in Prague to enjoin
CET from entering into service relationships with other companies and requested
the court to declare the Services Agreement to be in full force and effect. See
Part II, Item 1 "Legal Proceedings." In connection with CET's actions, CNTS and
the Company requested the Czech Media Council to call an extraordinary meeting
to address breaches of the Czech media laws and destabilization of the Czech
media market, and to institute proceedings against CET for the revocation of the
broadcast license. The next regular meeting of the Czech Media Council is
scheduled for August 17, 1999.
In connection with the current license dispute the Company is reviewing
the $42,439,000 carrying value of goodwill associated with the CNTS operations.
Depending on the outcome of the current dispute and its impact on the value of
the CNTS operations the Company may have to write-down all or a portion of this
value in future quarters. Programming rights in the amount of $15,892,000 may
also need to be written down in the event that CNTS is unable to deliver
programming to the public via a licensed broadcaster for any significant period
of time.
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.
Page 17
<PAGE>
The Company is the leading commercial television company in Central and
Eastern Europe. The Company's national private television stations and networks
in the Czech Republic, the Slovak Republic and Slovenia had the leading
nationwide audience shares for 1998 and the first six months of 1999 and the
Company's television network in Romania had the leading average audience share
within its area of broadcast reach for 1998 and the first six months of 1999.
The Company's revenues are derived principally from the sale of
television advertising to local, national and international advertisers. The
Company also engages in barter transactions in which its stations 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 television operations are programming and
production costs, employee salaries, broadcast transmission expenses and
selling, general and administrative expenses. The Company has incurred and might
in the future incur significant development expenses, including finding and
negotiating with local partners, researching and preparing license applications,
preparing business plans and conducting pre-operating activities, as well as
reorganizing existing affiliate entities which hold the broadcast licenses.
The primary internal sources of cash available for corporate operating
costs and development expenses are dividends and other distributions from
Subsidiaries. To date, the only subsidiary to distribute dividends has been CNTS
which is currently not broadcasting. See Part I, Item 1, Note 1 "Czech
Republic". A prolonged interruption in the CNTS broadcasting signal would have a
material adverse effect on the ability of CNTS to distribute dividends and
consequently on the only internal source of cash available for corporate
operating costs and development expenses. 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 and six
months ended June 30, 1999 and 1998 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 and Studio 1+1 (for the three
and six months
Page 18
<PAGE>
ended June 30, 1998 only) not consolidated in the Consolidated Statements of
Operations during the periods shown, are aggregated with those of the Company's
consolidated operations. In the table "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, 1999. The tables separate the results of the "Established
Stations", which have national or nearly national coverage, from TV3, the
Company's newest operation which reaches 41% of the Hungarian population.
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. See "Application
of Accounting Principles". The following supplementary unaudited combined and
attributable information includes certain financial information of Markiza TV
and information of the unconsolidated entities of the Studio 1+1 Group on a
line-by-line basis, similar to that of the Company's consolidated entities.
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.
The Established Stations refer to Nova TV, PRO TV, POP TV, Markiza TV
and Studio 1+1. 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 Studio 1+1 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. 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 19
<PAGE>
SELECTED COMBINED FINANCIAL INFORMATION (1)
(unaudited)
($000s)
<TABLE>
<CAPTION>
For the three months ended June 30,
------------------------------------------------------------------------------------------
Net Revenue EBITDA Broadcast Cash Flow
---------------------------- ----------------------------- -----------------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Nova TV...................... 27,663 32,196 12,831 17,890 13,910 16,879
PRO TV....................... 9,735 11,571 (128) 2,295 714 1,313
Markiza TV .................. 9,256 10,940 2,328 3,498 2,847 4,764
POP TV....................... 7,255 7,772 2,293 1,921 2,550 311
Studio 1+1................... 3,328 7,837 (1,737) 889 (1,983) 245
-------------- -------------- -------------- -------------- -------------- -------------
Total Established Stations........ 57,237 70,316 15,587 26,493 18,038 23,512
TV3.........................(2) 1,164 1,505 (1,665) (1,450) (1,007) (4,224)
Other Operations (3)......... 429 1,263 73 38 73 38
============== ============== ============== ============== ============== =============
Total combined operations......... 58,830 73,084 13,995 25,081 17,104 19,326
============== ============== ============== ============== ============== =============
</TABLE>
SELECTED ATTRIBUTABLE FINANCIAL INFORMATION (1)
(unaudited)
($000s)
<TABLE>
<CAPTION>
For the three months ended June 30,
---------------------------------------------------------------------------------------
Economic
Interest Net Revenue EBITDA Broadcast Cash Flow
(4)
--------------------------- -------------------------- --------------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Nova TV.....................99% 27,386 31,874 12,703 17,711 13,771 16,710
PRO TV......................66% 6,425 7,637 (84) 1,515 471 867
Markiza TV .................80% 7,405 8,752 1,862 2,798 2,278 3,811
POP TV....................85.5% 6,203 6,645 1,961 1,642 2,180 266
Studio 1+1..................60% 1,997 4,702 (1,042) 533 (1,190) 147
-------------- ------------- ------------- -------------- -------------- -------------
Total Established Stations...... 49,416 59,610 15,400 24,199 17,510 21,801
TV3...................(2) 100% 1,164 1,505 (1,665) (1,450) (1,007) (4,224)
Other operations (3) 429 1,263 73 38 73 38
============== ============= ============= ============== ============== =============
Total attributable operations 51,009 62,378 13,808 22,787 16,576 17,615
============== ============= ============= ============== ============== =============
</TABLE>
- -------------
(1) Important information about these tables appears under the heading
"Selected Combined and Attributable Financial Information" immediately
preceding this table.
(2) 1998 EBITDA is without the impact of the $10,961,000 write-down of the
carrying value of capitalized costs of rights to program material.
(3) Other operations include Videovox.
(4) Economic interest as of June 30, 1999. For comparison between the three
months ended June 30, 1999 and the same period in 1998, all results in
this table are pro forma as if such percentages had also been in place
during the three months ended June 30, 1998
Page 20
<PAGE>
SELECTED COMBINED FINANCIAL INFORMATION (1)
(unaudited)
($000s)
<TABLE>
<CAPTION>
For the six months ended June 30,
------------------------------------------------------------------------------------------
Net Revenue EBITDA Broadcast Cash Flow
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Nova TV...................... 48,496 52,276 18,654 26,030 17,274 23,706
PRO TV....................... 17,533 19,327 (2,140) (166) (940) (976)
Markiza TV .................. 16,109 18,712 1,410 4,227 1,962 4,373
POP TV....................... 11,819 11,456 1,848 405 1,380 (829)
Studio 1+1................... 6,971 14,459 (3,308) 1,396 (3,355) (27)
-------------- -------------- -------------- -------------- -------------- -------------
Total Established Stations........ 100,928 116,230 16,464 31,892 16,321 26,247
TV3.......................(2) 2,312 2,580 (3,330) (3,979) (2,698) (8,427)
Other Operations (3)......... 778 2,428 27 104 27 104
============== ============== ============== ============== ============== =============
Total combined operations......... 104,018 121,238 13,161 28,017 13,650 17,924
============== ============== ============== ============== ============== =============
</TABLE>
SELECTED ATTRIBUTABLE FINANCIAL INFORMATION (1)
(unaudited)
($000s)
<TABLE>
<CAPTION>
For the six months ended June 30,
--------------------------------------------------------------------------------------
Economic
Interest (4) Net Revenue EBITDA Broadcast Cash Flow
--------------------------- -------------------------- --------------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Nova TV.....................99% 48,011 51,753 18,467 25,770 17,101 23,469
PRO TV......................66% 11,572 12,756 (1,412) (110) (620) (644)
Markiza TV .................80% 12,887 14,970 1,128 3,382 1,570 3,498
POP TV....................85.5% 10,105 9,795 1,580 346 1,180 (709)
Studio 1+1..................60% 4,183 8,675 (1,985) 838 (2,013) (16)
-------------- ------------- ------------- -------------- -------------- -------------
Total Established Stations....... 86,758 97,949 17,778 30,226 17,218 25,598
TV3...................(2) 100% 2,312 2,580 (3,330) (3,979) (2,698) (8,427)
Other operations (3) 100% 778 2,428 27 104 27 104
============== ============= ============= ============== ============== =============
Total attributable operations 89,848 102,957 14,475 26,351 14,547 17,275
============== ============= ============= ============== ============== =============
</TABLE>
(1) Important information about these tables appears under the heading
"Selected Combined and Attributable Financial Information" immediately
preceding this table.
(2) 1998 EBITDA is without the impact of the $10,961,000 write-down of the
carrying value of capitalized costs of rights to program material.
(3) Other operations include Videovox.
(4) Economic interest as of June 30, 1999. For comparison between the six
months ended June 30, 1999 and the same period in 1998, all results in
this table are pro forma as if such percentages had also been in place
during the six months ended June 30, 1998
Page 21
<PAGE>
Combined EBITDA for the three months ended June 30, 1999 compared to the three
months ended June 30, 1998
The total combined EBITDA for the Established Stations decreased by
$10,906,000 from $26,493,000 for the second quarter of 1998 to $15,587,000 for
the second quarter of 1999. The decrease was attributable to a combined
$11,278,000 decrease in the EBITDA of Nova TV, PRO TV, Markiza TV, and Studio
1+1. POP TV recorded an improvement in EBITDA of $372,000.
A combination of weak economic conditions and US dollar strength
adversely affected the US dollar net revenues in all of the Company's markets
throughout the second quarter of 1999. In response to the economic conditions
the Company's Established stations reduced station expenses in the second
quarter of 1999 by $2,173,000 compared to the second quarter of 1998.
Nova TV's EBITDA decreased by $5,059,000 to $12,831,000 for the second
quarter of 1999 compared to $17,890,000 for the second quarter of 1998. This
decrease was mainly due to a decrease in net revenues of $4,533,000 from
$32,196,000 to $27,663,000 for the second quarter of 1999 compared to the second
quarter of 1998 which reflects the current weak economic conditions. The
remainder of the decrease in EBITDA is due to an increase in operating expenses
of $526,000 for the second quarter of 1999 compared to the second quarter of
1998 due to higher public relations costs, legal costs and professional services
in connection with the current license dispute between the Company's 99% owned
subsidiary CNTS, and CET, the license holder for Nova TV, offset in part, by a
reduction in operating costs and expenses and acquired programming costs
compared to the second quarter of 1998.
Studio 1+1 recorded EBITDA of negative $1,737,000 for the second
quarter of 1999 compared to positive EBITDA of $889,000 for the second quarter
of 1998. The economic situation in Ukraine has not improved since the beginning
of the year and reluctance by companies to advertise has led to a decrease in
second quarter 1999 net revenues from $7,837,000 to $3,328,000, a decrease of
$4,509,000 or over 50%, compared to the second quarter of 1998. Studio 1+1 cut
its station expenses by $1,883,000 in the second quarter of 1999 compared to the
second quarter of 1998.
PRO TV recorded EBITDA of negative $128,000 for the second quarter of
1999 compared to positive $2,295,000 for the second quarter of 1998. Net
revenues decreased by $1,836,000. This decrease is a result of the slow pace of
economic reform within Romania and the weak economic conditions. Station
expenses for the second quarter of 1999 were $587,000 higher than those of the
second quarter of 1998. This increase was mainly due to an increase in
amortization of programming reflecting a higher rate of amortization expense.
Markiza TV recorded EBITDA of $2,328,000 for the second quarter of 1999
compared to $3,498,000 for the second quarter of 1998. Net revenues decreased by
$1,684,000 in US dollar terms largely as a result of the approximately 6%
devaluation of the Slovak koruna in the second quarter of 1999. In local
currency terms net revenues for the second quarter of 1999 were slightly higher
than net revenues for the second quarter of 1998, despite the weak economic
conditions. Markiza TV recorded a decrease of $514,000 in station expenses for
the second quarter of 1999 compared to the second quarter of 1998. This decrease
was mainly due to a decrease in amortization of programming and a decrease in
selling, general and administrative expenses.
Page 22
<PAGE>
POP TV's EBITDA improved by $372,000 to $2,293,000 for the second
quarter of 1999 compared to $1,921,000 for the second quarter of 1998. Net
revenues for the second quarter of 1999 were lower than the second quarter of
1998 as the strong growth seen in the first quarter of 1999 slowed. The
improvement in EBITDA was a result of a $889,000 decrease in station operating
expenses for the second quarter of 1999 compared to the second quarter of 1998.
This decrease was mainly due to a decrease in other operating costs and expenses
and a decrease in selling, general and administrative expenses.
TV3 recorded negative EBITDA of $1,665,000 for the second quarter of
1999 compared to negative EBITDA of $1,450,000 for the second quarter of 1998.
The EBITDA decrease was a result of a $341,000 decrease in net revenues partly
offset by a slight reduction in station expenses.
For the reasons described above total combined EBITDA decreased by
$11,086,000 from $25,081,000 for the second quarter of 1998 to $13,995,000 for
the second quarter of 1999.
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
The results of Markiza TV and Studio 1+1 (for the three and six months
ended June 30, 1998 only) have been accounted for using the equity method such
that CME's interests in net earnings or losses of those operations 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 Company
records other investments at the lower of cost or market value. In late December
1998 the Company increased its equity interest in Studio 1+1 to a 60%
controlling interest and, due to the timing of this transaction, the Studio 1+1
balance sheet is consolidated in the Company's Consolidated Balance Sheet as of
December 31, 1998, but on the Company's Consolidated Statements of Operations
and Consolidated Statements of Cash Flows for the three and six months ended
June 30, 1998, Studio 1+1 results are accounted for under the equity method.
From January 1, 1999, Studio 1+1 is consolidated in the Company's financial
statements.
Foreign Currency Translation
The Company generates revenues primarily in Czech korunas ("Kc"),
Romanian lei ("ROL"), Slovenian tolar ("SIT"), Slovak korunas ("Sk"), Hungarian
forints ("HUF") and Ukrainian hryvna ("Hrn") and incurs expenses in those
currencies as well as German marks, British pounds and United States dollars.
The Romanian lei, Slovenian tolar, Ukrainian hryvna and Slovak koruna are
managed currencies with limited convertibility. The Company incurs operating
expenses for acquired programming in United States dollars and other foreign
currencies. For entities operating in economies considered non-highly
inflationary, including Nova TV, POP TV, Markiza TV, Videovox, TV3 and certain
Studio 1+1 entities, balance sheet accounts are translated from
Page 23
<PAGE>
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 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.
<TABLE>
<CAPTION>
Balance Sheet Income Statement
------------------------------------ --------------------------------------
At At Weighted average for the three
June 30, December 31, months ending June 30,
1999 1998 %Change 1999 1998 % Change
---- ---- ------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Czech koruna equivalent of $1.00 35.40 29.86 (18.6)% 34.67 33.70 (2.9)%
German mark equivalent of $1.00 1.91 1.67 (14.4)% 1.85 1.79 (3.4)%
Hungarian forint equivalent of $1.00 241.95 216.84 (11.6)% 232.05 212.49 (9.2)%
Romanian lei equivalent of $1.00 15,897 10,983 (44.7)% 13,881 8,372 (65.8)%
Slovak koruna equivalent of $1.00 43.77 36.91 (18.6)% 41.44 34.91 (18.7)%
Slovenian tolar equivalent of $1.00 187.88 161.20 (16.6)% 177.80 169.79 (4.7)%
Ukrainian hryvna equivalent of $1.00 3.98 3.43 (16.0)% 4.03 2.05 (96.6)%
</TABLE>
The Company's results of operations and financial position during the
three and six months ended June 30, 1999 were impacted by changes in foreign
currency exchange rates since December 31, 1998.
In limited instances, the Company enters into forward foreign exchange
contracts and purchases foreign currency options to hedge foreign currency
transactions for periods consistent with its identified exposures. Premiums on
foreign currency options are amortized over the option period being hedged.
Results of Operations
Three months ended June 30, 1999 compared to three months ended June 30, 1998
The Company's net revenues decreased by $5,940,000, or 11%, to
$48,366,000 for the second quarter of 1999 from $54,306,000 for the second
quarter of 1998. The decrease was attributable to decreased net revenues in US
dollar terms at all of the Company's stations. This reflects the current weak
economic conditions in the Company's markets and also US dollar strength
throughout the second quarter of 1999
Total station operating costs and expenses decreased by $8,116,000, or
19%, to $33,702,000 for the second quarter of 1999 from $41,818,000 for the
second quarter of 1998. The decrease in total station operating costs and
expenses was primarily attributable to a decrease in amortization of programming
rights. For the three months ended June 30, 1998 the Company took a write-down
of $10,961,000 relating to TV3's programming library. No such write-down was
recorded in the three months ended June 30, 1999 (see "Programming
Page 24
<PAGE>
Commitments in Hungary", below). Despite the inclusion of Studio 1+1 as a
consolidated entity for the second quarter of 1999 other operating costs and
expenses decreased by $107,000 as Nova TV, POP TV and PRO TV all recorded
decreases in other operating costs and expenses.
Station selling, general and administrative expenses increased by
$1,060,000, or 17%, to $7,326,000 for second quarter of 1999 from $6,266,000 for
the second quarter of 1998. The increase in station selling, general and
administrative expenses was due, in part, to the inclusion of Studio 1+1 as a
consolidated entity for the second quarter of 1999 offset by decreases in
station selling, general and administrative expenses of PRO TV, POP TV and TV3.
In addition, station selling, general and administrative expenses at Nova TV
increased by $1,486,000 due to the increase in public relations, legal costs and
professional services as a result of the current license dispute between CNTS
and CET. See "Czech Republic" below for a further discussion on Nova TV and the
ongoing dispute between CNTS and CET.
Corporate operating costs and development expenses for the second
quarter of 1999 and 1998 were $3,809,000 and $6,213,000, respectively, a
decrease of $2,404,000, or 39%. This decrease was attributable to reduced
development activity and lower corporate headcount.
Amortization of goodwill and allowance for development costs decreased
by $6,060,000, or 71%, to $2,418,000 for the second quarter of 1999 from
$8,478,000 for the second quarter of 1998. This decrease is due to the goodwill
write-off for TV3 that was taken in the second quarter of 1998. In the second
quarter of 1999 no such goodwill write-off was taken.
In addition, in the second quarter of 1998 the Company recorded a
restructuring charge of $2,552,000, of which $54,000 remains accrued on the
balance sheet, 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. No such
charge was taken in the second quarter of 1999.
As a result of the above factors, the Company generated operating
income of $1,111,000 for the second quarter of 1999 compared to an operating
loss of $11,021,000 for the second quarter of 1998.
Equity in loss of unconsolidated affiliates for the second quarter of
1999 was $345,000 compared to an equity in income of unconsolidated affiliates
of $1,134,000 for the second quarter of 1999. The decrease of $1,479,000 is a
result of Markiza TV recording a lower profit of $616,000 for the three months
ended June 30, 1999 compared to a profit of $1,307,000 for the three months
ended June 30, 1998. In addition, certain entities of the Studio 1+1 group which
are not consolidated recorded a loss of $1,250,000 for the three months ended
June 30, 1999.
Net interest and other income (expense) for the second quarter of 1999
was negative $3,341,000 compared to negative $3,502,000 for the second quarter
of 1998. The difference of $161,000, or 5%, is due to a combination of reduced
borrowings at all stations except for POP TV and increased interest on cash
balances.
Page 25
<PAGE>
The net foreign currency exchange gain of $2,994,000 for the second
quarter of 1999 compared to a loss of $2,863,000 for the second quarter of 1998
was primarily attributable to the effect of a weaker German mark on the Deutsche
mark denominated portion of CME's Senior Notes obligations and the effect of a
weaker Czech koruna on the Czech koruna debt funding for the 1996 purchase by
the Company of CS Bank's economic interest in CNTS.
Provision for income taxes was $3,857,000 for the second quarter of
1999 and $5,453,000 for the second quarter of 1998. The decrease was primarily
due to a decrease in CNTS's taxable income.
Minority interest in income of consolidated subsidiaries was $71,000
for the second quarter of 1999 compared to a minority interest in income of
consolidated subsidiaries of $103,000 for the second quarter of 1998. This
change was the result of changes in the profitability and, to a lesser extent,
changes in ownership of the consolidated entities.
As a result of these factors, CME's net loss was $3,509,000 for the
second quarter of 1999 compared to a net loss of $28,631,000 for the second
quarter of 1998.
Six months ended June 30, 1999 compared to six months ended June 30, 1998
The Company's net revenues decreased by $2,701,000, or 3%, to
$85,366,000 for the first six months of 1999 from $88,067,000 for the first six
months of 1998. The decrease is attributable to a reduction in net revenues in
US dollar terms at all of the Company's stations with the exception of POP TV.
This reduction is a reflection of the weak economic conditions and US dollar
strength that has been evident throughout the first six months of 1999.
Total station operating costs and expenses decreased by $2,556,000, or
4% to $67,897,000 for the first six months of 1999 from $70,453,000 for the same
period in 1998. This decrease is mainly attributable to a $7,637,000 decrease in
amortization of programming rights. During the first six months of 1998 the
Company took a write-down of $10,961,000 relating to TV3's programming library;
in the first six months of 1999 no such write-down was recorded (see
"Programming Commitments in Hungary"). Other operating costs and expenses and
depreciation of station fixed assets and other intangibles costs increased by
$3,216,000 and $1,865,000, respectively, mainly due to the inclusion of Studio
1+1 as a consolidated entity for the first six months of 1999. In addition,
other operating costs and expenses of Nova TV increased by $1,951,000 mainly due
to increases in production expenses. Depreciation of station fixed assets
increased at PRO TV by $826,000 as a result of a higher depreciation charge on
the broadcast equipment needed to expand the signal reach.
Station selling, general and administrative expenses increased by
$608,000, or 5%, to $13,882,000 for the first half of 1999 from $13,274,000 for
the first half of 1998. The increase was attributable to the inclusion of Studio
1+1 as a consolidated entity for the first six months of 1999 and an increase in
station selling, general and administrative expenses of $1,925,000 at Nova TV.
This increase was due to the increase in public relations, legal costs and
professional services as a result of the current license dispute between CNTS
and CET. See "Czech Republic" below for a further discussion on Nova TV and the
ongoing dispute between CNTS and CET. PRO TV, POP TV and TV3 all recorded
decreases in station
Page 26
<PAGE>
selling, general and administrative expenses for the first six months of 1999
mainly due to decreases in marketing expenses.
Corporate operating costs and development expenses for the first six
months of 1999 and 1998 were $9,639,000 and $13,403,000, respectively, a
decrease of $3,764,000, or 28%. This decrease was attributable to reduced
development activity and lower corporate headcount.
Amortization of goodwill and allowance for development costs decreased
by $5,192,000, or 47%, from $11,007,000 for the first six months of 1998 to
$5,815,000 for the first six months of 1999. This decrease is attributable to
the goodwill write-off for TV3 that was taken in the first six months of 1998.
In the first six months of 1999 no such additional goodwill write-off was taken.
As a result of the above factors, the Company generated an operating
loss of $11,867,000 for the first six months of 1999 compared to an operating
loss of $22,622,000 for the first six months of 1998.
Equity in (loss)/income of unconsolidated affiliates decreased by
$5,603,000, to a loss of $4,390,000 for the first six months of 1999 compared to
equity in income of unconsolidated affiliates of $1,213,000 for the first six
months of 1998. This is a result of Markiza TV and Studio 1+1 recording net
losses for the first six months of 1999 compared to net income for the first six
months of 1998.
Gain on sale of investment relates to the sale by the Company of its
interest in a Romanian mobile telephone company MobilRom S.A.
Net interest and other income (expense) decreased by $861,000, or 11%,
to negative $7,054,000 for the first six months of 1999 from negative $7,915,000
for the first six months of 1998. This decrease is due to a combination of
reduced borrowings at all stations except POP TV and increased interest on cash
balances.
The net foreign currency exchange gain of $11,617,000 for the first six
months of 1999 compared to a loss of $3,079,000 for the first six months of 1998
is primarily attributable to the effect of a weaker German mark on the Deutsche
mark denominated portion of CME's Senior Notes obligations and the effect of a
weaker Czech koruna on the Czech koruna debt funding for the 1996 purchase by
the Company of CS Bank's economic interest in CNTS.
Provision for income taxes was $5,507,000 for the first six months of
1999 and $7,560,000 for the first six months of 1998. This decrease was due to a
decrease in CNTS's taxable income.
Minority interest in income of consolidated affiliates was $93,000 for
the first half of 1999 compared to a minority interest in loss of consolidated
affiliates of $611,000 for the first half of 1998. This change was the result of
changes in the profitability and, to a lesser extent, changes in ownership of
the consolidated entities.
Page 27
<PAGE>
As a result of these factors the net income of the Company was
$8,576,000 for the first six months of 1999 compared to a net loss of
$53,668,000 for the first six months of 1998.
Czech Republic
As discussed in Part I, Item 1 under the heading "Czech Republic" and
Part II, Item 1 "Legal Proceedings", CNTS has not been broadcasting since August
5, 1999 and a continued interruption of the CNTS broadcasting signal will have a
material adverse effect on the revenues of Nova TV and consequently on the
Company's results of operations and could impair the Company's ability to meet
its future obligations as they fall due. This interruption is a result of a
pending dispute with Dr. Vladimir Zelezny regarding several matters, including
Dr. Zelezny's actions as General Director and Executive of CNTS prior to his
removal on April 19, 1999, Dr. Zelezny's actions under the 1997 share purchase
agreement under which CME purchased an additional 5.8% interest in CNTS which is
the subject of an arbitration claim filed by the Company, and the terms of the
relationship between CNTS and CET. CET holds the television broadcast license in
the Czech Republic utilized to broadcast Nova TV and Dr. Zelezny owns a
purported 60% controlling interest in CET.
Nova TV's net revenues were $48,496,000 for the six months ended June
30, 1999 and $108,826,000 for 1998, comprising 57% of the Company's consolidated
net revenues for the six months ended June 30, 1999 and 60% of the Company's
consolidated net revenues for 1998. Nova TV's EBITDA was $18,654,000 for the six
months ended June 30, 1999 and $54,887,000 for 1998, while the Company's overall
consolidated EBITDA was $13,142,000 for the six months ended June 30, 1999 and
$44,796,000 for 1998.
Programming Commitments in Hungary
Programming commitments were entered into in 1996 and 1997 in
anticipation of the grant of a national license for Hungary. The Company was not
granted a national license for Hungary and has been unable to enter into a
partnership with the license winners. In light of TV3's distribution and
audience share, the Company does not expect to be able to realize the full value
of the program library. Accordingly, the Company took write-downs with regard to
commitments for programming rights for TV3 totalling $21,289,000 during 1998.
The Company currently estimates that it will take further write-downs of up to
$7,593,000 with regard to future programming rights, of which approximately
$2,129,000 is expected to be taken in the fourth quarter of 1999 and $5,464,000
is expected to be taken in 2000 as these obligations are incurred. Program
rights acquired by the Company under license agreements, and the related
obligations incurred, are recorded as assets and liabilities when the
programming is available for use and the license period begins which is in
accordance with SFAS No. 63. See Part II, Item 1, "Legal Proceedings".
Liquidity and Capital Resources
Net cash used in operating activities was $11,915,000 in the six months
ended June 30, 1999 compared to $20,714,000 for the six months ended June 30,
1998. The decrease in net cash used in operating activities of $8,799,000 was
primarily due to improved working capital management and, on a basis which
excludes the sale of MobilRom in 1999 and the discontinued operations in Poland
in 1998, improved operating results.
Page 28
<PAGE>
Net cash provided by investing activities was $28,606,000 in the six
months ended June 30, 1999 compared to net cash used in investing activities of
$36,497,000 for the six months ended June 30, 1998. The increase was primarily
attributable to the proceeds received on the sale of the Company's interest in
MobilRom S.A. and no investments during 1999 in discontinued operations.
Net cash used in financing activities for the six months ended June
30, 1999 was $1,309,000 compared to net cash provided by financing activities of
$1,631,000 for the six months ended June 30, 1998.
On March 18, 1999, the Company sold its interest in a Romanian mobile
telephone company, MobilRom S.A. As a result of this transaction the Company
realized a gain in the first quarter of 1999 of approximately $25,800,000 and
net cash proceeds of approximately $39,260,000.
The Company had cash and cash equivalents of $58,248,000 at June 30,
1999 compared to $44,444,000 at December 31, 1998.
In August 1997, CME issued the Senior Notes, which raised net proceeds
of approximately $170,000,000. The Senior Notes are denominated in United States
dollars, in part, and in German marks, in part. The United States dollar
denominated Senior Notes bear interest at a rate of 9.375% per annum, and the
German mark denominated Senior Notes bear interest at a rate of 8.125% per
annum. The principal amount of the Senior Notes is repayable on their maturity
date, August 15, 2004. The 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.
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, 1999 was Kc 547,580,600 ($15,468,000). Quarterly
repayments on the loan are required in the amount Kc 42,500,000 ($1,201,000)
during the period from May 1999 through May 2002, and Kc 37,580,600 ($1,062,000)
in August 2002.
On February 26, 1999, the Company entered into a $15,000,000 secured
revolving Credit Facility with ING Bank N.V. (the "ING Facility"). The ING
Facility is for a term of three years and the commitment level is to be reduced
in four equal semi-annual instalments starting in June 2000. The ING Facility is
secured by the assets of a wholly-owned subsidiary of the Company, which holds
the Company's interest in CNTS, and will be repaid from the dividends of CNTS.
The rate of interest charged on the ING Facility is based on the ratio of the
Company's indebtedness to CNTS's broadcast cash flow and may range from 3.75% to
2.50% over United States dollar LIBOR. At June 30, 1999 the Company had no
borrowings under this facility. The availability of the ING Facility is subject
to the satisfaction of various conditions and a successful resolution of the
Czech dispute. (See Part I, Item 1, Note 1 "Czech Republic").
Page 29
<PAGE>
As described below, the borrowing facilities of CNTS are currently
suspended. CNTS has a line of credit with CS Bank for up to Kc 250,000,000
($7,062,000). This facility is secured by CNTS's equipment, vehicles and
receivables. In October 1997, CNTS entered into a Kc 500,000,000 ($14,124,000)
line of credit with ING Bank N.V. The line of credit may be drawn in Czech
koruna, German marks or United States dollars. As at June 30, 1999 CNTS had
borrowings of Kc 142,000 ($4,000) under this line of credit. In April 1999, CNTS
was informed by CS Bank and ING Bank N.V. that the lines of credit were frozen
as a result of the current license dispute between CNTS and CET (See Part 1,
Item 1, Note 1 "Czech Republic"). The unavailability of these facilities has had
no material impact on CNTS's business to date.
In June 1997 in connection with CNTS's acquisition of Nova TV's main
studios and offices, CNTS assumed obligations under a loan from CS (the "CS
Loan") secured by a mortgage on the studios and offices. The CS Loan provides
for quarterly payments of Kc 16,500,000 ($466,000), plus interest equal to three
month PRIBOR plus 1.0%, to be paid through December 1999. As of June 30, 1999,
the outstanding balance under the CS Loan was Kc 27,000,000 ($763,000).
In April 1998, POP TV entered into a multicurrency $5,000,000 loan
agreement with Creditanstalt AG which matures in May 2005. This loan is fully
drawn and 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 which matures in June
2000. At June 30, 1999, $860,000 was outstanding under this facility. The second
facility is a long-term loan for $4,000,000 which matures in December 2002. At
June 30, 1999, $3,197,000 was borrowed under this facility. These facilities are
secured by PRO TV's equipment and vehicles.
TV3 has borrowings of HUF 209,250,000 ($865,000) from a local Hungarian
bank. The loan matures in December 2000 and is secured by pledges of certain
fixed assets of TV3. During the first six months of 1999 the Company loaned
$1,000,000 to TV3 and made approximately $2,196,000 in cash programming payments
on behalf of TV3. In addition, the Company has cash programming payments due for
TV3 in the amount of $8,870,000, $4,567,000 and $4,567,000 for the remainder of
1999, 2000 and 2001 respectively. It is anticipated that the Company will lend
up to an additional $1,000,000 to TV3 throughout 1999.
At June 30, 1999 Innova had borrowings of DM 347,000 ($182,000) on an
overdraft facility from Dresdner bank. This facility is repayable on demand.
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. As discussed above
under the heading "Czech Republic", the continuing dispute between CNTS and CET
will adversely affect the revenues of CNTS and consequently adversely affect
CNTS's ability 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
Page 30
<PAGE>
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 sufficient to compel the distribution of dividends. 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 timing of the closing of the
transaction with SBS as contemplated by the Reorganization Agreement will also
affect the Company's future cash requirements. 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. Subject to the events described in the next paragraph, in the event
that the closing of the transaction with SBS as contemplated by the
Reorganization Agreement does not occur later in 1999, the Company believes that
its current cash balances, cash generated from CNTS and local financing of
broadcast operations should be adequate to satisfy the Company's operating and
capital requirements for its current operations through June 30, 2000. To
acquire additional broadcast rights or to fund other significant investments,
the Company would require significant additional financing.
Dividends totaling $19,505,000 in 1998 and $7,972,000 in 1997 were paid
by CNTS to the Company, comprising all dividends paid to the Company from its
television operations during these periods. The ongoing dispute with Dr. Zelezny
in the Czech Republic may result in a material reduction or elimination of
dividends to be paid by CNTS to the Company in 1999. A material reduction or
elimination of CNTS's dividend payments to the Company in 1999 will result in
the Company not having adequate cash resources to meet its operating and capital
requirements prior to June 30, 2000.
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. A Committee chaired by the Company's Chief Executive Officer and
comprised of technical personnel from each of the Company's television
operations is overseeing the process.
The Company has largely completed a systems and equipment review and
work has begun on remedial action for the systems and equipment that were found
to be non-compliant. Throughout the 3rd and 4th quarters of 1999 remedial work
will continue and business continuity plans will be drawn up. In the most part,
major suppliers and vendors have been contacted and contingencies made for those
that indicated non-compliance. Further work with suppliers and vendors will
ensue in the coming months.
Page 31
<PAGE>
Based upon the Company's current estimates, incremental out-of-pocket
costs of its Year 2000 program are expected to be immaterial. These costs are
expected to be incurred primarily in 1999 and include third-party consultants,
remediation of existing computer software and replacement and remediation of
embedded chips. Such costs do not include internal management time, the effect
of which is not expected to be material to the Company's results of operations
or financial condition.
The Company's broadcast operations are highly dependent upon equipment
with embedded computer technology (cameras, mixing equipment, broadcast
equipment, etc.), the widespread failure of which would have a material adverse
impact on the Company's results of operations. The Company will continually
review its progress against its Year 2000 plans. Accounting rules require Year
2000 compliance costs to be expensed as incurred.
Euro Conversion
As part of the European Economic and Monetary Union (EMU), a single
currency, the euro, will replace the national currencies of many of the member
countries of the European Union. Although the Company does not currently conduct
business in any of the countries which are adopting the euro, it holds debt
denominated in German marks, one of the currencies scheduled to be replaced by
the euro. Additionally, it is expected that several of the countries in which
the Company operates are likely to join EMU at some point in the future.
The conversion rates between the euro and the participating nations'
currencies were fixed irrevocably as of January 1, 1999 and the participating
national currencies will be removed from circulation between January 1, and June
30, 2002 and replaced by euro notes and coinage. During the "transition period"
from January 1, 1999 through December 31, 2001, public and private entities as
well as individuals may pay for goods and services using either checks, drafts,
or wire transfers denominated in euro or the participating country's national
currency.
Under the regulations governing the transition to a single currency,
there is a "no compulsion, no prohibition" rule which states that no one is
obliged to use the euro until the notes and coinage have been introduced on
January 1, 2002. In keeping with this rule, the Company expects to be euro
"compliant" (able to receive euro denominated payments and able to invoice in
euros as requested by vendors and suppliers, respectively) by the time national
currencies are removed from circulation. The cost of software and business
process conversion is not expected to be material.
Forward-looking Statements
Statements made in Part I, Item 1, Note 1 under the heading "Czech
Republic", "Programming Commitments in Hungary" and under "Liquidity and Capital
Resources" 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.
Page 32
<PAGE>
Important factors that contribute to such risks include the ability to acquire
programming, the ability to attract audiences, the rate of development of
advertising markets in countries where the Company currently operates, including
the continuing impact of the Russian financial crisis on the economies of these
countries, and general market and economic conditions in these countries.
Important factors with respect to discussions and negotiations described in Part
1, Item 1, Note 1 "Czech Republic", include legal and regulatory conditions and
developments in the Czech Republic. 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company conducts business in a number of foreign currencies. As a
result, it is subject to foreign currency exchange rate risk due to the effects
that foreign exchange rate movements of these currencies have on the Company's
costs and on the cash flows it receives from certain subsidiaries. Several of
the Company's subsidiaries hold long-term debt under credit facilities that
provide for interest at a spread above a basis rate (such as LIBOR). A
significant rise in these basis rates would not materially adversely affect the
Company's business, financial condition or results of operations. The Company
does not utilize derivative financial instruments to hedge against changes in
interest rates. The Company believes that it currently has no material exposure
to market risk associated with activities in derivative or other financial
instruments.
In limited instances the Company enters into forward foreign exchange
contracts to hedge foreign currency exchange rate risk. There were no forward
foreign exchange contracts outstanding at June 30, 1999.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On April 26, 1999, a wholly-owned subsidiary of the Company filed an
arbitration claim against Dr. Zelezny before the International Chamber of
Commerce Court of Arbitration in Paris, France. The Company seeks the return of
$23,350,000 paid to Dr. Zelezny, plus interest, and other unspecified damages,
based on breaches by Dr. Zelezny of a share purchase agreement entered into in
1997 under which the Company purchased from Dr. Zelezny a company owned by him
whose sole asset was a 5.8% interest in CNTS. The Company is also seeking the
forgiveness of the $5,188,000 unpaid balance of the purchase price under the
1997 share purchase agreement. The arbitration will be held in Amsterdam, The
Netherlands.
On April 26, 1999, CNTS filed an action for a preliminary injunction in
the Regional Commercial Court in Prague, Czech Republic to invalidate 186
applications to transfer CNTS trademarks to CET that had been executed by Dr.
Zelezny and to prohibit CET from using in its business name any designations
identical or confusingly similar to CNTS trademarks. On May 4, 1999, a CET
General Meeting voted to change the name of CET to TV Nova. As a result, CNTS
amended its April 26, 1999 complaint to an action for tortious trademark
infringement against CET. CME, which owns a 1.25% participation interest in CET,
also filed
Page 33
<PAGE>
a pending action in the Regional Commercial Court in Prague, Czech Republic
requesting that the court rule that the May 4, 1999 CET General Meeting was not
validly called because CME's representatives were not allowed to attend the
General Meeting.
In May 1999, CET filed an action with the Regional Commercial Court in
Prague, requesting that the court declare the Services Agreement invalid for
vagueness and other reasons. The action is pending.
In June 1999, CNTS filed a request for a preliminary injunction against
CET with the Regional Commercial Court in Prague seeking to have CET enjoined
from entering into contractual relations with other providers of television
services or advertising sales services, pursuant to the Memorandum of
Association. CNTS's request for a preliminary injunction was rejected by the
court in July 1999. CNTS has filed an appeal of the court's decision, which is
pending.
On June 28, 1999, the Regional Commercial Court in Prague issued a
preliminary injunction at the request of CET ordering CNTS to refrain from
interfering in television broadcast programming, and in particular, to refrain
from inserting programming without the consent of CET. The court found that CET,
as the license holder, was authorized to broadcast without interference of any
third party. CET had accused CNTS of unauthorized insertion of certain
advertisements into the Nova TV programming schedule. CNTS has appealed the
order, which is pending.
On June 30, 1999, CNTS filed an action with the Regional Commercial
Court of Prague requesting that the court declare invalid an agreement between
CET and another Czech company, Produkce, a.s. under which CET purported to
transfer CET's 1% participation interest in CNTS to Produkce, a.s., since such
transfer did not comply with the CNTS Memorandum of Association. The action is
pending.
On July 2, 1999, the Regional Commercial Court in Prague, Czech
Republic issued a preliminary injunction ordering Dr. Zelezny to refrain from
disposing or encumbering certain specified assets, including his purported 60%
interest in CET, until the conclusion of the action before the International
Chamber of Commerce Court of Arbitration. Dr. Zelezny has appealed the decision.
On July 21, 1999, CME filed an application with the Regional Commercial
Court in Prague seeking an additional preliminary order enjoining further
efforts by Dr. Zelezny to transfer or encumber certain assets. This action is
pending.
On August 9, 1999, CNTS filed an action against CET in the Regional
Commercial Court of Prague in which CNTS requested the court to declare the
withdrawal of CET from the Services Agreement to be invalid and the Services
Agreement to be in full force and effect, to issue an order prohibiting CET
from entering into television or advertising service relationships with other
companies since CNTS is entitled to provide such services to CET for Nova TV on
an exclusive basis under the Services Agreement, and to issue an order
compelling CET to broadcast programming supplied by CNTS on Nova TV.
On August 9, 1999, the Regional Commercial Court in Prague issued a
preliminary injunction ordering CET to abstain from producing or broadcasting
three television programs previously produced by CNTS. These programs were
broadcast by CET after August 5, 1999,
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<PAGE>
when CET began direct broadcasting of Nova TV. The court ordered CET not to
produce or broadcast these programs if they were produced by any entity other
than CNTS. The court's decision was based upon CNTS's trademark registrations
and copyrights of such programs, their formats, graphics and jingles.
No assurances can be given regarding the outcome of these legal
disputes, nor as to when they will be conclusively resolved.
If an adverse ruling in one or more of the above described actions
results in the continued interruption of CNTS's operations, CNTS's advertising
revenues could be disrupted or curtailed entirely and CNTS's business operations
could be suspended.
In August 1998, Gamatex Ltd., a Slovak company, asserted that it had
obtained 100% ownership of Markiza-Slovakia s.r.o. through an auction process
arising out of an unsatisfied claim against Markiza-Slovakia s.r.o.
Markiza-Slovakia s.r.o. holds the Markiza TV broadcast license and owns a 51%
voting interest in STS. In December 1998, the Regional Court of Bratislava
removed Gamatex as the registered owner of Markiza. Following this decision, the
General Meeting of STS in March 1999 approved the transfer of the 50.5% voting
interest to the company Mirox s.r.o. ("Mirox"), a company owned by Dr. Pavol
Rusko, the current General Director of STS. The transfer of the voting interest
is pending registration. There was no material change in the economic interest
in STS which will be owned 80% by the Company, 19.5% by Markiza and 0.5% by
Mirox. A number of legal proceedings are still pending in the District Court of
Bratislava and Regional Court of Bratislava in which the original owners of
Markiza-Slovakia s.r.o. have claimed that Gamatex's ownership claims are not
legally valid. STS has materially supported Markiza-Slovakia s.r.o. in a number
of such proceedings, in particular proceedings to; (i) confirm the interests of
the original owners of Markiza-Slovakia s.r.o.; (ii) declare invalid
Markiza-Slovakia s.r.o. and STS shareholders' meetings called by Gamatex without
proper notice; and (iii) declare invalid Gamatex's claim to ownership in
Markiza-Slovakia s.r.o.
In July 1996, the Company, together with MMTV and Tele 59, entered into
an agreement to purchase a 66% equity interest in Kanal A, a privately owned
television station in Slovenia (the "Kanal A Agreement"). SBS claims to have
certain rights to the equity of Kanal A pursuant to various agreements and has
challenged the validity of the CME-Kanal A Agreement in a United Kingdom court.
The Court has enjoined both SBS and the Company from taking certain actions
either to enforce such entity's claim to equity in Kanal A or to block the claim
of the other entity to equity in Kanal A. The Company has instituted a number of
actions in courts in Slovenia to resolve these claims.
On April 30, 1997, Perekhid Media Enterprise 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-
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<PAGE>
conveniens. In June 1998, Perekhid filed a notice of appeal with the Court.
Perekhid failed to proceed with such appeal within nine months from the date it
filed the notice of appeal and as a result the appeal lapsed automatically in
March 1999. On February 19, 1999, Atlantic Group Limited (formerly known as
Perekhid Media Enterprise Ltd.) initiated proceedings against CME in the High
Court in London, seeking $81,772,759 in damages. The proceedings are very
similar in nature to those filed in New York. Atlantic Group Limited alleges
that CME conspired with others to use unlawful means to procure the termination
of Atlantic Group Limited's right to provide programming and advertising sales
on UT-2. On March 17, 1999, CME issued a summons to dismiss the London
proceedings on grounds inter alia, of forum non-conveniens. The summons is due
to be heard in early December 1999.
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 and the two successful consortia (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 of
Hungary. In a decision released on February 22, 1999, the Supreme Court of
Hungary reversed in part the decision of the trial court and ruled that the
Hungarian National Radio and Television Commission acted illegally by (i)
failing to exclude the bid of the consortium Magyar RTL Televizio Rt. ("RTL")
which operates the channel RTL Klub, on grounds of invalidity arising from
formal defects in the bid; (ii) entering into an agreement with RTL; and (iii)
deviating from its own published guidelines in the bid evaluation process. The
Supreme Court stated that the Hungarian Media Act requires the Hungarian
National Radio and Television Commission to terminate RTL's license agreements
as a result of the Commission's illegal acts but stated that the Supreme Court
could not issue a termination order because of the Commission's status as an
administrative body of the state and that the legal consequences of the
Commission's failure to abide by the Media Act are for the Hungarian Parliament
to determine. In April 1999 the Hungarian National Radio and Television
Commission filed a Supervisory request to the Supreme Court of Hungary stating
that the decision of the Supreme Court exceeded the Plaintiff's request and that
the decision has other procedural defects as well. The court hearing is due to
be held in September 1999. The Supervisory request does not suspend the
enforceability of the decision of the Supreme Court. The Hungarian National
Radio and Television Commission recently publicly announced that it intends to
request that the Constitutional Court of Hungary declare unconstitutional a
provision of the Hungarian Media Act which the Supreme Court relied upon in part
in its decision. On April 7, 1999, IRISZ TV requested that the Budapest
Metropolitan Court order the Hungarian National Radio and Television Commission
to enforce the Supreme Court's decision. On April 26, 1999, the Budapest
Metropolitan Court dismissed IRISZ TV's request. IRISZ TV intends to take all
appropriate legal actions to enforce the Supreme Court's decision or to seek
other appropriate resolutions to this dispute.
In April 1999, the Public Prosecutor of Budapest initiated a legal
action for the judicial review of the registration of IRISZ TV Rt., and
requested that the Budapest
Page 36
<PAGE>
Metropolitan Court invalidate the registration of IRISZ TV Rt. IRISZ TV Rt.
believes that the registration of IRISZ TV is based on valid and effective legal
procedures.
The Company is, from time to time, a party to litigation that arises in
the normal course of its business operations. The Company is not presently a
party to any such litigation which could reasonably be expected to have a
material adverse effect on its business or operations.
Item 6. Exhibits and Reports on Form 8-K.
a) The following exhibits are attached:
10.1 Agreement dated as of July 27, 1999, among CME Development
Corporation, Central European Media Enterprises Ltd. and Michel
Delloye
27.01 Financial Data Schedule
b) A Form 8-K was filed on April 1, 1999. A Form 8-K was filed on
June 30, 1999.
Page 37
<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 16, 1999 /s/ Frederic T. Klinkhammer
---------------------------
Frederic T. Klinkhammer
Chief Executive Officer
(Duly Authorized Officer)
Date: August 16, 1999 /s/ John A. Schwallie
---------------------
John A. Schwallie
Chief Financial Officer
(Principal Financial Officer)
Page 38
<PAGE>
EXHIBIT INDEX
10.1 Agreement dated as of July 27, 1999, among CME Development
Corporation, Central European Media Enterprises Ltd. and Michel
Delloye
27.01 Financial Data Schedule
<PAGE>
AGREEMENT dated as of July 27, 1999, among CME Development
Corporation ("Development"), Central European Media Enterprises Ltd. ("Media
Enterprises") and Michel Delloye ("Executive").
WHEREAS, Executive is a party to employment agreements with
each of Development and Media Enterprises, dated as of March 23, 1998 (the
"Employment Agreements"), that set forth specific obligations for both during
and after the term of the Employment Agreements;
WHEREAS, Executive's employment with Development and Media
Enterprises terminated on March 23, 1999;
WHEREAS, Executive, Development and Media Enterprises wish to
resolve all issues between them regarding Executive's termination of employment;
NOW, THEREFORE, in consideration of their mutual promises
herein contained, the parties do hereby agree as follows:
1. Resignation of Corporate Positions. Executive hereby
acknowledges his resignation from all offices, board memberships and other
corporate positions with Development, Media Enterprises and their respective
subsidiaries and affiliates, effective as of March 23, 1999, and agrees to
promptly take all reasonable acts to effectuate such resignation.
2. Partial Termination of Agreements. Effective as of the date
hereof, all rights and obligations of the parties hereto contained in the
Employment Agreements will cease, other than to the extent specifically retained
herein. In that regard, this Agreement will constitute a written instrument of
amendment to the Employment Agreements, pursuant to Section 17 of each of the
Employment Agreements.
3. Severance Payment, House Acquisition Costs, and Legal Fees.
(a) Development and Media Enterprises will respectively pay to Executive, in
full satisfaction of (i) any obligations related to Executive's employment with
Development and Media Enterprises, including Executive's current and future
rights, if any, to receive bonus payments or other forms of incentive based
compensation, whether pursuant to the Employment Agreements, or otherwise, and
(ii) any other commitments made by Development and/or Media Enterprises to
Executive prior to the date hereof, lump sum severance payments of
275,000 pounds and $846,000 (the "Severance Payments"). The Severance Payments
from Development and Media Enterprises shall be respectively paid to Executive
within 10 days of the date hereof by a direct wire transfer deposit to
Executive's bank accounts in the United Kingdom and in Belgium. The
275,000 pounds severance payment paid by Development will be reduced by
applicable tax withholding to the extent required by law. Development
anticipates that such
<PAGE>
2
withholding tax will equal 63,250 pounds. Aside from the required tax
withholding, no other amounts will be withheld from the Severance Payments,
except the 63,365 pounds advanced by Development and Media Enterprises to
Executive in connection with the acquisition of a house and related costs
(one-third of which amount was advanced by Development and two-thirds of which
was advanced by Media Enterprises) so that the anticipated amount transferred by
Development will amount to 190,628 pounds and the amount transferred by Media
Enterprises will amount to $780,100. As the 63,365 pounds advance will as a
consequence have been reimbursed by Executive, no further money is owed by
Executive to Development and Media Enterprises and they will not seek repayment
from Executive of any monies.
(b) Media Enterprises will pay to the law firm of
Proskauer Rose LLP ("Proskauer") the sum of $25,000, representing the legal fees
and disbursements owed by Executive in connection with Proskauer's
representation of Executive in connection with his relationship with Development
and Media Enterprises.
4. Stock Options. Pursuant to Section 3(d) of the Employment
Agreement with Media Enterprises, Executive was granted an option (the "Option")
to purchase 225,000 shares of the Class A Common Stock of Media Enterprises,
subject to certain terms and conditions as to the exercise price, vesting and
exercisability of the Option. Executive and Media Enterprises hereby acknowledge
and agree that (i) immediately prior to Executive's termination of employment on
March 23, 1999, the Option was vested as to 87,500 shares of Class A Common
Stock with an exercise price of $24 9/16 per share, (ii) such vested portion of
the Option will remain exercisable until March 23, 2000 and (iii) the remaining
unvested portion of the Option (i.e., as to 137,500 shares) was terminated as of
March 23, 1999, and Executive shall have no further rights with respect to such
terminated portion of the Option. Executive shall have no rights under Section
3(d)(vii) of the Media Enterprises Employment Agreement with respect to any
additional bonus payment upon exercise of the Option.
5. Release of Claims Against Development and Media
Enterprises. In consideration of the commitments and payments set forth in this
Agreement, Executive, for himself and his heirs and personal representatives,
hereby fully and forever releases Development, Media Enterprises and their
respective subsidiaries, shareholders (including indirect shareholders),
affiliates, officers, employees, agents and representatives, from any and all
claims, liabilities, promises, contracts, and suits which have been or could
have been asserted by Executive, or on his behalf, in any forum by reason of
matters arising prior to the date of this Agreement.
6. Release of Claims Against Executive. Development and Media
Enterprises hereby fully and forever release Executive from any and all claims,
liabilities, promises, contracts, and suits which have been or could have been
asserted by any or all of them or on their behalf in any forum by reason of
matters arising prior to the date of this Agreement, other than any claim or
liability based in material part on
<PAGE>
3
criminal conduct by Executive not known to Development or Media Enterprises as
of the date hereof which would constitute a felony under United States law or an
equivalent crime under applicable foreign law. Development, Media Enterprises
and Executive each represent that, to the best of their knowledge, Executive has
not engaged in any such criminal conduct.
7. Continued Obligations. (a) The parties to this Agreement
agree not to disclose the terms of this Agreement except to their legal counsel
and accountants, and to maintain its confidentiality, except as required by law;
provided that nothing herein will be deemed to prohibit the parties from
disclosing the same as may be required in the conduct of their respective
businesses. The confidentiality requirements under this Section 7(a) shall be
suspended to the extent that the provisions of this Agreement are publicly
disclosed by Development or Media Enterprises pursuant to applicable securities
laws.
(b) Pursuant to Section 11 of the Employment
Agreements, Executive shall continue to be bound by all obligations and
restrictions in the Employment Agreements with respect to noncompetition,
confidentiality, property of Development and Media Enterprises, nondisparagement
and nonsolicitation; except that as of January 1, 2000 Executive shall cease to
be bound by the noncompetition restrictions set forth in Section 6 of the
Employment Agreements.
(c) The obligations of Development and Media
Enterprises to indemnify Executive pursuant to Section 4(d) of the Employment
Agreements shall continue in effect pursuant to the terms of the Employment
Agreements. Additionally, Development and Media Enterprises shall continue to be
bound by the provisions under Section 8 of the Employment Agreements with
respect to nondisparagement of Executive.
(d) All provisions of the Employment Agreements with
respect to arbitration of disputes shall continue in effect, notwithstanding any
other provision of this Agreement.
(e) Executive shall reasonably cooperate with
Development and Media Enterprises and make himself reasonably available for
consultation in connection with any litigation or third party investigation
involving Development or Media Enterprises or any of their respective
subsidiaries, shareholders (including indirect shareholders), affiliates,
officers, employees, agents or representatives. In connection therewith,
Development and Media Enterprises shall reimburse Executive for all reasonable
expenses incurred by Executive.
(f) Development and Media Enterprises covenant that
they will direct a representative of both companies to respond to any inquiries
with respect to Executive's employment with Development and Media Enterprises
and his termination
<PAGE>
4
of employment in a manner conveying that Executive was a valued executive of
Development and Media Enterprises and terminated employment on amicable terms.
For so long as Ronald S. Lauder ("Mr. Lauder") continues to serve as a member of
the board of directors of Media Enterprises, any successor thereto, or any
subsidiary thereof, Mr. Lauder shall act as the representative described in the
preceding sentence.
8. Miscellaneous. This Agreement will be governed by and
construed in accordance with the laws of the State of New York. This Agreement
constitutes the entire Agreement and understanding among the parties hereto
concerning the subject matter hereof and supersedes and replaces all prior
negotiations, proposed agreements and agreements, written or oral. The parties
agree that neither they nor any of their representatives, agents or attorneys
have made any promises, representations or warranties whatsoever, expressed or
implied, which are not specifically set forth herein, and neither party has
executed this Agreement in reliance upon any such promises, representations or
warranties. This Agreement may not be amended or modified except in a writing
signed by the parties hereto. This Agreement may be executed in one or more
counterparts.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first set forth above.
CME DEVELOPMENT CORPORATION
By: /s/ Ronald S. Lauder
-----------------------------------------
Name:
Title:
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
By: /s/ Ronald S. Lauder
-----------------------------------------
Name:
Title:
MICHEL DELLOYE
/s/ Michel Delloye
--------------------------------------------
<TABLE> <S> <C>
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 58,248
<SECURITIES> 0
<RECEIVABLES> 31,619
<ALLOWANCES> (2,545)
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<CURRENT-ASSETS> 148,098
<PP&E> 109,672
<DEPRECIATION> (51,182)
<TOTAL-ASSETS> 351,114
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<COMMON> 257
<OTHER-SE> 62,457
<TOTAL-LIABILITY-AND-EQUITY> 351,114
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<INTEREST-EXPENSE> (7,054)
<INCOME-PRETAX> 14,176
<INCOME-TAX> (5,507)
<INCOME-CONTINUING> 8,576
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,576
<EPS-BASIC> 0.33
<EPS-DILUTED> 0.33
</TABLE>
