<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File 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
incorporation or organization) Identification No.)
Clarendon House, Church Street, Hamilton HM CX Bermuda
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 441-296-1431
Indicate by check mark whether registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for each shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding as of November 18, 1999
----- ----------------------------------
Class A Common Stock, par value $.01 18,506,849
Class B Common Stock, par value $.01 7,177,269
================================================================================
<PAGE>
EXPLANATORY NOTE
The purpose of this amendment is to correct a misclassification in Part 1,
Item 1, "Consolidated Statement of Cash Flows" and in Part 1, Item 2, "Liquidity
and Capital Resources". The correction concerns the line item entitled Short
Term Assets in the section Cash Flows From Operating Activities which has
changed by negative $15,310,000 to negative $11,533,000 from positive $3,777,000
and the line item entitled Cash Proceeds From Sale of Investment in the Cash
Flows From Investing Activities section which has changed by positive
$15,310,000 to positive $39,260,000 from positive $23,950,000, both sections in
the "Consolidated Statement of Cash Flows". In addition, this change has
affected the first two paragraphs of the "Liquidity and Capital Resources"
discussion in "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
<PAGE>
PART 1
FINANCIAL INFORMATION
Item 1. Financial Statements
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
Consolidated Balance Sheets as at
September 30, 1999 and December 31, 1998
($000s, except share data)
<TABLE>
<CAPTION>
ASSETS September 30, December 31,
------ 1999 1998
------------- ------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................................................. $ 41,370 $ 43,354
Restricted cash............................................................ 1,192 67
Accounts receivable (net of allowances of $4,221, $3,193).................. 11,461 39,846
Program rights costs....................................................... 12,331 25,981
Advances to affiliates..................................................... 16,514 10,837
Other short-term assets.................................................... 20,874 28,557
--------- ---------
Total current assets.............................................. 103,742 148,642
Investments in unconsolidated affiliates................................... 24,115 29,357
Loans to affiliates........................................................ 4,863 9,514
Property, plant and equipment (net of depreciation of $54,876, $49,292).... 54,514 61,926
Program rights costs....................................................... 12,323 21,206
License costs and other intangibles (net of amortization of $3,073,
$6,705).................................................................. 3,065 6,365
Goodwill (net of amortization of $77,640, $27,504)......................... 20,414 70,196
Note receivable............................................................ 20,071 20,071
Deferred tax asset......................................................... 175 -
Other assets............................................................... 5,481 7,230
--------- ---------
Total assets...................................................... $ 248,763 $ 374,507
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Net liabilities of discontinued operations................................. $ - $ 3,183
Accounts payable and accrued liabilities................................... 50,129 57,269
Duties and other taxes payable............................................. 12,304 11,541
Income taxes payable....................................................... 876 1,157
Current portion of credit facilities and obligations under capital leases.. 6,765 9,670
Investments payable........................................................ 5,188 12,281
Advances from affiliates................................................... 875 2,533
--------- ---------
Total current liabilities......................................... 76,137 97,634
Deferred income taxes...................................................... - 302
Long-term portion of credit facilities and obligations under capital
leases................................................................... 17,468 22,049
Investments payable........................................................ - 2,563
$100,000,000 9 3/8% Senior Notes........................................... 99,892 99,875
DM 140,000,000 8 1/8% Senior Notes......................................... 76,321 83,729
Other Liabilities.......................................................... 4,580 1,946
Minority interest in consolidated subsidiaries............................. 589 702
COMMITMENTS AND CONTINGENCIES..............................................
SHAREHOLDERS' EQUITY:
Class A Common Stock, $0.01 par value: authorized:100,000,000 shares at
September 30, 1999 and December 31, 1998; issued and outstanding;
18,506,849 at September 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
September 30, 1999 and December 31, 1999, issued and outstanding:
7,177,269 at: September 30, 1999 and 7,577,329 at December 31, 1998...... 72 76
Additional paid-in capital................................................. 356,385 356,378
Accumulated deficit........................................................ (371,717) (288,348)
Accumulated other comprehensive income..................................... (11,149) (2,580)
--------- ---------
Total shareholders' (deficit) equity....................................... (26,224) 65,707
--------- ---------
Total liabilities and shareholders' equity................................. $ 248,763 $ 374,507
========= =========
</TABLE>
Page 2
<PAGE>
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
Consolidated Statements of Operations
($000s, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
--------------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross Revenues............................................... $ 22,072 $ 38,988 $ 123,784 $ 147,767
Discounts and agency commissions............................. (4,534) (9,873) (23,964) (34,772)
-------- -------- --------- ---------
Net revenues................................................. 17,538 29,115 99,820 112,995
STATION EXPENSES:
Other operating costs and expenses....................... 12,264 16,715 48,586 49,216
Amortization of programming rights....................... 28,730 6,507 45,321 19,971
Depreciation of station fixed assets and other
intangibles............................................ 6,509 4,011 15,996 11,592
-------- -------- --------- ---------
Total station operating costs and expenses............... 47,503 27,233 109,903 80,779
Selling, general and administrative expenses............. 8,947 7,017 21,645 18,594
CORPORATE EXPENSES:
Corporate operating costs and development expenses....... 5,106 5,000 14,745 18,403
Amortization of goodwill and allowance for development
costs.................................................. 42,857 2,311 48,672 7,115
Restructuring charge (Note 7............................. - - - 2,552
-------- -------- --------- ---------
47,963 7,311 63,417 28,070
Operating loss............................................... (86,875) (12,446) (95,145) (14,448)
Equity in loss of unconsolidated affiliates (Note 3)......... (2,846) (1,793) (7,236) (580)
Gain on sale of investment (Note 6).......................... - - 25,870 -
Net interest and other expense............................... (3,206) (5,203) (10,137) (13,524)
Foreign currency exchange (loss)/gain, net .................. (4,266) (5,154) 8,711 (6,944)
Other income (Note 8)........................................ 8,250 - 8,250 -
-------- -------- --------- ---------
Loss before provision for income taxes, minority interest
and discontinued operations................................ (88,943) (24,596) (69,687) (35,496)
Recovery of/(provision for) income taxes..................... 1,572 (866) (3,935) (8,426)
-------- -------- --------- ---------
Loss before minority interest and discontinued operations.... (87,371) (25,462) (73,622) (43,922)
Minority interest in loss/(income) of consolidated
affiliates................................................. 296 (19) 203 592
-------- -------- --------- ---------
Loss from continuing operations.............................. (87,075) (25,481) (73,419) (43,330)
Discontinued operations:
Operating loss of discontinued operations (Hungary)........ (2,957) (6,209) (8,037) (28,700)
Loss on disposal of discontinued operations (Hungary)...... (1,913) - (1,913) -
Operating loss on discontinued operations (Poland)......... - (3,338) - (16,667)
======== ======== ========= =========
Net loss..................................................... (91,945) (35,028) (83,369) (88,697)
======== ======== ========= =========
PER SHARE DATA:
Net loss per share (Note 5):
Continuing operations - Basic and diluted................ (3.39) (1.06) (2.86) (1.80)
Discontinued operations - Basic and diluted.............. (0.19) (0.40) (0.39) (1.89)
======== ======== ========= =========
Net.................................................... (3.58) (1.46) (3.25) (3.69)
======== ======== ========= =========
Weighted average shares used in computing per share amounts:
Basic.................................................... 25,674 24,063 25,674 24,063
======== ======== ========= =========
Diluted.................................................. 25,674 24,063 25,674 24,063
======== ======== ========= =========
</TABLE>
Page 3
<PAGE>
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
Consolidated Statements of Shareholders' Equity (Deficit)
For the nine months ended September 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 (deficit)
------------- ----------- ----------- ----------- ------------ -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1998 $181 $76 $356,378 $(288,348) $(2,580) $ 65,707
Comprehensive loss:
Net loss................... $(83,369) $ (83,369) $(83,369)
Other comprehensive loss:
Unrealized translation
adjustments.............. (8,569) - - (8,569) (8,569)
-----------
Comprehensive loss............ $(91,938)
===========
Stock issued:
stock option plans......... 4 (4) 7 7
-------- -------- -------- --------- --------- ---------
BALANCE, September 30, 1999 $185 $72 $356,385 $(371,717) $(11,149) $(26,224)
======== ======== ======== ========= ========= =========
</TABLE>
(1) Of the accumulated deficit of $371,717 at September 30, 1999, $96,444
represents accumulated losses in unconsolidated affiliates.
(2) Represents foreign currency translation adjustments
Page 4
<PAGE>
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
Consolidated Statements of Cash Flows
For the nine months ended September 30, 1999 and 1998
($000s)
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
1999 1998
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net
loss......................................................................... $(83,369) $(88,697)
Adjustments to reconcile net loss to net cash used in operating activities:
Equity in loss of unconsolidated affiliates.............................. 7,236 580
Depreciation and amortization (excluding amortization of barter programs) 112,924 39,757
Discontinued operations.................................................. 9,950 45,367
Gain on disposal of investment........................................... (25,870) -
Minority interest in loss of consolidated subsidiaries .................. (203) (592)
Foreign currency exchange (gain) loss, net............................... (8,711) 6,944
Accounts receivable...................................................... 22,949 13,795
Cash paid for program rights............................................. (22,122) (21,775)
Advances to affiliates................................................... (3,083) 3,714
Other short-term assets.................................................. (11,533) (3,949)
Accounts payable and accrued liabilities................................. (11,053) (6,820)
Income and other taxes payable........................................... 413 (2,563)
------------- --------------
Net cash used in operating activities................................. (12,472) (14,239)
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in unconsolidated affiliates................................. - (1,200)
Other Investments........................................................ (6,056) (58)
Investments in discontinued operations................................... (8,891) (34,475)
Cash proceeds from sale of investment.................................... 39,260 -
Restricted cash.......................................................... (1,125) 526
Acquisition of fixed assets.............................................. (7,262) (9,563)
Acquisition of minority interest......................................... - (9,930)
Loans and advances to affiliates......................................... - (716)
Payments for license costs, other assets and intangibles................. (196) (1,759)
------------- --------------
Net cash provided by (used in) investing activities................... 15,730 (57,175)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Credit facilities and payments under capital leases...................... (4,877) (2,693)
Dividends paid to minority shareholders.................................. - (2,386)
Capital contributed by shareholders...................................... 7 1,509
Advances from affiliates................................................. 883 -
Other long-term liabilities.............................................. (53) -
------------- --------------
Net cash (used in) financing activities............................... (4,040) (3,570)
------------- --------------
IMPACT OF EXCHANGE RATE FLUCTUATIONS ON CASH (1,202) 1,324
------------- --------------
Net decrease in cash and cash equivalents................................ (1,984) (73,660)
CASH AND CASH EQUIVALENTS, beginning of period............................... 43,354 103,772
------------- --------------
CASH AND CASH EQUIVALENTS, end of period..................................... $41,370 $30,112
============= ==============
Supplemental information:
Cash paid forinterest................................................. $18,913 $18,603
============= ==============
Income Taxes.......................................................... $ 93 $12,647
============= ==============
</TABLE>
Page 5
<PAGE>
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
Notes to Consolidated Financial Statements
September 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.
Termination of Business Combination Transaction and Asset Sale
On September 28, 1999, the Company announced that the Reorganization
Agreement dated March 29, 1999 between the Company and SBS Broadcasting S.A.
("SBS"), (the "Reorganization Agreement") had been mutually terminated. Under
the Reorganization Agreement, pursuant to a number of transactions, SBS would
have acquired all the assets and assumed all the liabilities of the Company, and
each holder of Common Stock of the Company would have received 0.5 shares of SBS
Common Stock for each share of Common Stock of the Company owned by such holder.
In connection with the termination of the Reorganization Agreement, the Company
received $8,250,000 as a termination fee from SBS, which is included in other
income in the accompanying Consolidated Statement of Operations.
In addition, the Company agreed to sell substantially all of
its Hungarian operations to SBS for approximately $18,000,000 to be
received in the form of SBS assuming substantially all of the Company's
obligations to program suppliers for the Hungarian region. In Slovenia,
the Company agreed to withdraw all pending litigation against SBS and to
assign to SBS all claims against the former owners and operators of
Kanal A, in exchange for an option to acquire for $12,250,000 an
unencumbered 80% voting and economic interest in Kanal A. The option
will be exercisable until the earlier of June 30, 2001 and six months
from the date SBS confirms that it has the ability to transfer such
interest to the Company. These transactions have not yet been
consummated, and the Company and SBS are negotiating the final terms to
implement these transactions.
In accordance with United States generally accepted accounting
principles ("GAAP"), the accompanying financial statements for the third quarter
and full year of 1998 have been restated in order to reflect the Company's
Hungarian operations as discontinued operations.
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
Page 6
<PAGE>
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>
License CME Voting CME Voting
Country Expiration TV License Company Interest TV Services Company Interest
- ------- ---------- ------------------ ---------- ------------------- ----------
<S> <C> <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 - Poland
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 third 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, which is
purportedly controlled by Dr. Vladimir Zelezny, the former General Director of
Nova TV, holds a terrestrial television broadcast license in the Czech Republic
that expires in January 2005. Beginning in 1994, CNTS provided television
programming and other services to CET, which broadcasts the Nova TV signal, and
Nova TV became one of the most successful television stations in Europe.
Pursuant to a Services Agreement with CET dated May 21, 1997 (the "Services
Agreement"), CNTS provided substantially all of the television and programming
services to Nova TV, and in consideration therefor, CNTS collected all of Nova
TV's advertising and other revenues, and retained 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 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
Page 7
<PAGE>
same day, CNTS received notification from CET that CET was withdrawing from the
Services Agreement due to CNTS's alleged 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. 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, which was denied. A decision
on the merits is pending. 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. To date, the Czech Media
Council has taken no action in connection with this dispute.
As a result of CET actions, CNTS has been unable to generate
revenues and its operations have been suspended. On September 9, 1999,
the Company announced the suspension of technical and production
operations at CNTS and CNTS dismissed 215 employees. On October 21,
1999, an additional 50 CNTS employees were dismissed.
CNTS is governed by a Memorandum of Association and Investment
Agreement (the "Memorandum of Association"). 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.
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.
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 and preliminary interim relief.
On November 10, 1999, an international arbitral tribunal issued a
preliminary order directing Dr. Vladimir Zelezny to take steps to restore CNTS
to its prior position as an exclusive provider of critical services for Nova TV.
See Part II, Item 1, "Legal Proceedings." Among other things, the order requires
Dr. Zelezny to sever all dealings between CET 21 and other service providers
and to resume exclusive relations with CNTS in the areas where CNTS was
previously providing these services,
Page 8
<PAGE>
including program acquisition, programming and broadcasting services, and
brokerage of advertising and receipt of advertising revenues. The preliminary
order will remain in effect until the arbitral tribunal directs otherwise.
Dr. Zelezny has indicated that he will not comply with the tribunal's
order. CME and CNTS will be seeking to enforce the order in the Czech courts and
through other means. A final award in the arbitration, following a final hearing
in Amsterdam, The Netherlands, is expected during the first half of the year
2000.
On August 23, 1999, Ronald S. Lauder, the non-executive Chairman of the
Company's Board of Directors, instituted arbitration proceedings against the
Czech Republic under the 1992 Bilateral Investment Treaty between the United
States and the Czech Republic. Mr. Lauder initiated the proceedings in his
personal capacity as a U.S. national who owns or controls (by virtue of his
voting control over CME) an investment in the Czech Republic. The claim asserts
that the Czech Republic harmed Mr. Lauder's investment in CNTS by taking unfair
and discriminatory actions -- in the form of expressly approving an exclusive
relationship between the service company and the license holder for Nova TV to
entice CME's investment of foreign capital, and later changing its position --
and by failing to act to remedy the effects of those actions or the improper
actions of Dr. Zelezny. Mr. Lauder seeks monetary damages and other relief
arising from harm caused to CNTS by the Czech Republic's actions. The
arbitration will take place before a tribunal of three arbitrators pursuant to
the Arbitration Rules of the United Nations Commission on International Trade
Law.
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. The continued suspension of CNTS's
operations has had a material adverse effect on the Company and, absent other
sources of cash, will result in the Company's inability to meet its debt service
and other financial obligations during the fourth quarter of 2000.
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 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.
Page 9
<PAGE>
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 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.
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
Page 10
<PAGE>
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.
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
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 nine months ended September 30, 1999
only), 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 nine months ended September 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 in the Company's Consolidated Statements of Operations
and Consolidated Statements of Cash Flows for the three and nine months ended
September 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
Page 11
<PAGE>
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.
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 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.
As of
-----------------------------------------
September 30, 1999 December 31, 1998
------------------ -----------------
$000s
-----
Markiza TV Markiza TV
---------- ----------
Current assets.................. 14,155 17,863
Non-current assets.............. 19,883 26,682
Current liabilities............. (16,529) (17,703)
Non-current liabilities......... (872) (1,089)
------- -------
Net assets...................... 16,637 25,753
======= =======
Page 12
<PAGE>
For the three months ended,
----------------------------------------------------
September 30, 1999 September 30, 1998
------------------ ---------------------------
$000s
----- Studio 1+1
Markiza TV Markiza TV Group
---------- ---------- ----------
Net revenues............... 5,760 6,698 4,420
Operating loss............. (2,624) (4,110) (2,046)
Net loss................... (2,632) (3,012) (1,912)
For the nine months ended,
-----------------------------------------------------
September 30, 1999 September 30, 1998
------------------ ------------------
$000s
----- Studio 1+1
Markiza TV Markiza TV Group
---------- ---------- ----------
Net revenues............... 21,869 25,410 18,879
Operating loss............. (3,908) (2,067) (1,153)
Net loss................... (6,413) (1,402) (1,117)
The Company's share of losses in Unconsolidated Affiliates (after intercompany
eliminations) for the nine months ended September 30, 1999 was $4,039,000 for
Markiza TV and $3,197,000 for certain of the Studio 1+1 Group entities.
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) and Studio
1+1. Each operating segment provides products and services as further described
below.
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
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
nine months ended September 30, 1999 and 1998 is as follows:
Page 13
<PAGE>
<TABLE>
<CAPTION>
SEGMENT FINANCIAL INFORMATION
For the three months ended September 30,
---------------------------------------------------------------------
($000s)
---------------------------------- ---------------------------------
Net Revenues EBITDA
---------------------------------- ---------------------------------
Station 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Nova TV........................... $4,476 $17,827 $(29,912) $4,415
PRO TV ........................... 7,529 7,437 (1,038) (3,387)
POP TV ........................... 3,736 3,564 (766) (2,095)
Studio 1+1......................(1) 1,795 - (760) -
Other Operations ................. 2 287 (2) (107)
---------- --------- ---------- ---------
Total Consolidated Operations 17,538 29,115 (32,478) (1,174)
Studio 1+1........................ - 4,420 - (1,768)
Markiza TV ....................... 5,760 6,698 (1,296) (828)
---------- --------- ---------- ---------
Total Unconsolidated Operations 5,760 11,118 (1,296) (2,596)
========== ========= ========== =========
Total Operations..................... $23,298 $40,233 $(33,774) $(3,770)
========== ========= ========== =========
Reconciliation to Consolidated Statements of Operations:
Consolidated Operations $(32,478) $(1,174)
Intercompany elimination 75 50
Station depreciation (6,509) (4,011)
Corporate expenses (47,963) (7,311)
========== =========
Operating income (loss) from continuing operations $(86,875) $(12,446)
========== =========
</TABLE>
(1) Studio 1+1 Group was consolidated effective December 23, 1998. Amounts
shown in the table above for Net Revenues and EBITDA for the third quarter of
1999 differ by $1,507,000 and $859,000, 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 nine months ended September 30,
---------------------------------------------------------------------
($000s)
---------------------------------- ---------------------------------
Net Revenues EBITDA
---------------------------------- ---------------------------------
Station 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Nova TV........................... $52,972 $70,103 $(11,258) $30,446
PRO TV ........................... 25,062 26,764 (3,178) (3,553)
POP TV ........................... 15,555 15,020 1,082 (1,691)
Studio 1+1......................(1) 6,223 - (2,586) -
Other Operations ................. 8 1,109 (17) (138)
---------- --------- ---------- ---------
Total Consolidated Operations 99,820 112,996 (15,957) 25,064
Studio 1+1........................ - 18,879 - (372)
Markiza TV ....................... 21,869 25,410 113 3,399
---------- --------- ---------- ---------
Total Unconsolidated Operations 21,869 44,289 113 3,027
========== ========= ========== =========
Total Operations..................... $121,689 $157,285 $(15,844) $28,091
========== ========= ========== =========
Reconciliation to Consolidated Statements of Operations:
Consolidated Operations $(15,957) $25,064
Intercompany elimination 225 150
Station depreciation (15,996) (11,592)
Corporate expenses (63,417) (28,070)
========== =========
Operating loss from continuing operations $(95,145) $ (14,448)
========== =========
</TABLE>
(1) Studio 1+1 Group was consolidated effective December 23, 1998. Amounts
shown in the table above for Net Revenues and EBITDA for the first nine months
of 1999 differ by $4,050,000 and $2,341,000, 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.
Page 14
<PAGE>
5 Earnings Per Share
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 September 30, 1999
---------------------------------------------
Net Loss Per
Net Loss Common shares Common Share
-------- ------------- ------------
<S> <C> <C> <C>
Basic EPS
- ---------
Net loss attributable to common stock $(91,945) 25,674 $(3.58)
Effect of dilutive securities: stock options... - - -
-------- -------- ------
Diluted EPS
- -----------
Net loss attributable to common stock and
assumed option exercises....................... $(91,945) 25,674 $(3.58)
======== ======== ======
</TABLE>
<TABLE>
<CAPTION>
For the nine months ended September 30, 1999
-----------------------------------------------
Net Income Per
Net Income Common Shares Common Share
---------- ------------- --------------
<S> <C> <C> <C>
Basic EPS
- ---------
Net income attributable to common stock $(83,369) 25,674 $(3.25)
Effect of dilutive securities: stock options - - -
-------- -------- ------
Diluted EPS
- -----------
Net income attributable to common stock and
assumed option exercises....................... $(83,369) 25,674 $(3.25)
======== ======== ======
</TABLE>
Diluted EPS, for the three and nine months ended September 30, 1998 and
September 30, 1999 does not include the impact of stock options then outstanding
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.
Page 15
<PAGE>
7. Restructuring Charge
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 nine months ended September 30, 1999, there have been no significant
changes to the restructuring plans and all payments related to this charge were
finalized.
8. Subsequent Events
In connection with the termination of the Reorganization Agreement, the
Company received $8,250,000 in cash from SBS on October 15, 1999.
In connection with the December 1998 equity investment of approximately
$22,498,000 from RSL Capital LLC ("RSL"), a company wholly owned by Ronald S.
Lauder, the non-executive Chairman of the Company's Board of Directors, the
Company is obligated to release a further tranche of 757,500 shares of Class B
Common Stock as of November 19, 1999.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
Central European Media Enterprises Ltd. ("CME") is a Bermuda
corporation. All references to the "Company" include CME, its direct and
indirect Subsidiaries, and all references to "Subsidiaries" include each
corporation or partnership in which CME has a direct or indirect equity or
voting interest.
The Company is the leading commercial television company in Central and
Eastern Europe. The Company's national private television stations and networks
in the Slovak Republic and Slovenia had the leading nationwide audience shares
for 1998 and the first nine 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 nine 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.
Page 16
<PAGE>
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 suspended operations on August 5, 1999. See Part I, Item 1, Note 1 "Czech
Republic". This suspension has resulted in CNTS being unable to distribute
dividends and consequently affected 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 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 nine months ended September 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 nine months ended September 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 September 30, 1999.
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.
Total Stations refer to Nova TV, PRO TV, POP TV, Markiza TV and Studio
1+1. Nova TV began operations in February 1994. See Part I, Item 1, Note 1
"Czech Republic". 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.
Page 17
<PAGE>
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 18
<PAGE>
SELECTED COMBINED FINANCIAL INFORMATION (1)
(unaudited)
($000s)
<TABLE>
<CAPTION>
For the three months ended September 30,
--------------------------------------------------------------------------------
Net Revenue EBITDA Broadcast Cash Flow
------------------- ------------------- -------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Nova TV...................... 4,476 17,827 (29,912) 4,415 (5,958) 751
PRO TV....................... 7,529 7,437 (1,038) (3,387) (371) (1,983)
Markiza TV .................. 5,760 6,698 (1,296) (828) (404) (2,708)
POP TV....................... 3,736 3,564 (766) (2,095) (371) (2,311)
Studio 1+1................... 3,302 4,420 (1,619) (1,768) (814) (2,317)
====== ====== ======= ====== ====== ======
Total Stations.................... 24,803 39,946 (34,631) (3,663) (7,918) (8,568)
====== ====== ======= ====== ====== ======
</TABLE>
SELECTED ATTRIBUTABLE FINANCIAL INFORMATION (1)
(unaudited)
($000s)
<TABLE>
<CAPTION>
For the three months ended September 30,
-----------------------------------------------------------------------------------
Economic
Interest(2) Net Revenue EBITDA Broadcast Cash Flow
--------------------- ------------------ -------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Nova TV................. 99% 4,431 17,649 (29,613) 4,371 (5,898) 743
PRO TV.................. 66% 4,969 4,908 (685) (2,235) (245) (1,309)
Markiza TV ............. 80% 4,608 5,358 (1,037) (662) (323) (2,166)
POP TV.................. 85.5% 3,194 3,047 (655) (1,791) (317) (1,976)
Studio 1+1.............. 60% 1,981 2,652 (971) (1,061) (488) (1,390)
====== ======= ======= ====== ====== =====
Total Stations............... 19,183 33,614 (32,961) (1,378) (7,271) (6,098)
====== ======= ======= ====== ====== ======
</TABLE>
- ----------
(1) Important information about these tables appears under the heading "Selected
Combined and Attributable Financial Information" immediately preceding this
table.
(2) Economic interest as of September 30, 1999. For comparison between the three
months ended September 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 September 30, 1998
Page 19
<PAGE>
SELECTED COMBINED FINANCIAL INFORMATION (1)
(unaudited)
($000s)
<TABLE>
<CAPTION>
For the nine months ended September 30,
---------------------------------------------------------------------------------
Net Revenue EBITDA Broadcast Cash Flow
---------------------- -------------------- --------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Nova TV...................... 52,972 70,103 (11,258) 30,446 11,316 24,457
PRO TV....................... 25,062 26,764 (3,178) (3,553) (1,311) (2,958)
Markiza TV .................. 21,869 25,410 113 3,399 1,558 1,665
POP TV....................... 15,555 15,020 1,082 (1,691) 1,010 (3,141)
Studio 1+1................... 10,273 18,879 (4,927) (372) (2,654) (2,344)
======= ======= ======= ====== ====== ======
Total Stations.................... 125,731 156,176 (18,168) 28,229 9,919 17,679
======= ======= ======= ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
SELECTED ATTRIBUTABLE FINANCIAL INFORMATION (1)
(unaudited)
($000s)
For the nine months ended September 30,
-----------------------------------------------------------------------------------
Economic
Interest(2) Net Revenue EBITDA Broadcast Cash Flow
-------------------- ---------------------- -----------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Nova TV.................. 99% 52,442 69,402 (11,145) 30,142 11,203 24,212
PRO TV................... 66% 16,541 17,664 (2,097) (2,345) (865) (1,952)
Markiza TV .............. 80% 17,495 20,328 90 2,719 1,246 1,332
POP TV................... 85.5% 13,300 12,842 925 (1,446) 864 (2,686)
Studio 1+1............... 60% 6,164 11,327 (2,956) (223) (1,592) (1,406)
======= ======= ======= ======= ====== =======
Total Stations................ 105,942 131,563 (15,183) 28,847 10,856 19,500
======= ======= ======= ======= ====== =======
</TABLE>
- ---------------
(1) Important information about these tables appears under the heading "Selected
Combined and Attributable Financial Information" immediately preceding this
table.
(2) Economic interest as of September 30, 1999. For comparison between the nine
months ended September 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 nine months ended September 30, 1998
Page 20
<PAGE>
Combined EBITDA for the three months ended September 30, 1999 compared to the
three months ended September 30, 1998
The total combined EBITDA for the Company's Stations decreased by
$30,968,000 from negative $3,663,000 for the third quarter of 1998 to negative
$34,631,000 for the third quarter of 1999. The decrease was primarily
attributable to decreases in EBITDA at Nova TV of $34,327,000 and at Markiza TV
of $468,000, partially offset by increases at PRO TV, POP TV and Studio 1+1
totaling $3,827,000.
Nova TV's EBITDA decreased by $34,327,000 to negative $29,912,000 for
the third quarter of 1999 compared to positive $4,415,000 for the third quarter
of 1998. This decrease was due to the suspension of the broadcasting operations
of CNTS during the third quarter. See "Czech Republic" in Part I, Item 1, Note 1
and below for a further discussion on Nova TV and the ongoing dispute between
CNTS and CET. As a result of the suspension of the broadcast operations of CNTS
and the material impact of this suspension upon its results, CNTS has taken a
write-down of the full value of its programming library.
PRO TV's EBITDA improved by $2,349,000 to negative $1,038,000 for the
third quarter of 1999 compared to negative $3,387,000 for the third quarter of
1998. Net revenues increased slightly, by $92,000. The EBITDA increase was
primarily the result of a $2,257,000 decrease in station operating expenses for
the third quarter of 1999. This decrease was primarily as a result of a
reduction in other station and operating costs due to lower production and
salary expenses and a decrease in selling, general and administrative expenses
as a result of lower marketing costs.
POP TV's EBITDA improved by $1,329,000 to negative $766,000 for the
third quarter of 1999 compared to negative $2,095,000 for the third quarter of
1998. Net revenues for the third quarter of 1999 were $172,000 higher than the
third quarter of 1998 as POP TV continued to capitalize on its market leading
position. The EBITDA increase was primarily the result of a $1,157,000 decrease
in station operating expenses for the third quarter of 1999 compared to the
third quarter of 1998. This decrease was primarily the result of a decrease in
other operating costs and expenses due to lower salary expenses and a decrease
in selling, general and administrative expenses as a result of lower marketing
costs.
Markiza TV recorded EBITDA of negative $1,296,000 for the third quarter
of 1999 compared to negative $828,000 for the third quarter of 1998. Net
revenues decreased by $938,000 in US dollar terms largely as a result of the
approximately 19% devaluation of the Slovak koruna in the third quarter of 1999
compared to the third quarter of 1998. In local currency terms, net revenues for
the third quarter of 1999 were slightly higher than net revenues for the third
quarter of 1998. Markiza TV recorded a decrease of $470,000 in station expenses
for the third quarter of 1999 compared to the third quarter of 1998.
Studio 1+1 recorded EBITDA of negative $1,619,000 for the third quarter
of 1999 compared to negative EBITDA of $1,768,000 for the third quarter of 1998.
The economic situation in Ukraine in the third quarter of 1999 has not improved
and thus net revenues in the third quarter of 1999 decreased by $1,118,000, or
over 25%, compared to the third quarter of 1998. To offset the decrease in net
revenues, Studio 1+1 reduced its station expenses by $1,267,000 in the third
quarter of 1999 compared to the third quarter of 1998.
Primarily as a result of the suspension of the broadcasting operations
of CNTS, the
Page 21
<PAGE>
total combined EBITDA decreased by $30,968,000 from negative $3,663,000 for the
third quarter of 1998 to negative $34,631,000 for the third 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 nine months
ended September 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 nine months ended
September 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") 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 and certain Studio 1+1 entities, balance sheet accounts are
translated from foreign currencies into United States dollars at the relevant
period end exchange rate; statement of operations accounts are translated from
foreign currencies into United States dollars at the weighted average exchange
rates for the respective periods. The resulting translation adjustments are
reflected in a component of shareholders' equity with no effect on the
consolidated statements of operations.
PRO TV and certain Studio 1+1 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.
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<TABLE>
<CAPTION>
Balance Sheet Income Statement
--------------------------------------- --------------------------------------
At At Weighted average for the three
September 30, December 31, months ending September 30,
1999 1998 %Change 1999 1998 % Change
---- ---- ------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Czech koruna equivalent of $1.00 33.84 29.86 (13.3)% 34.72 33.13 (4.8)%
German mark equivalent of $1.00 1.83 1.67 (9.6)% 1.87 1.76 (6.3)%
Romanian lei equivalent of $1.00 16,463 10,983 (49.9)% 14,626 9,050 (61.6)%
Slovak koruna equivalent of $1.00 41.10 36.91 (11.3)% 41.61 34.95 (19.1)%
Slovenian tolar equivalent of $1.00 186.36 161.20 (15.6)% 179.99 168.96 (6.6)%
Ukrainian hryvna equivalent of $1.00 4.47 3.43 (30.3)% 4.32 2.77 (56.0)%
</TABLE>
The Company's results of operations and financial position during the
three and nine months ended September 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 September 30, 1999 compared to three months ended September
30, 1998
The Company's net revenues decreased by $11,577,000, or 40%, to
$17,538,000 for the third quarter of 1999 from $29,115,000 for the third quarter
of 1998. The decrease was primarily attributable to a decrease of $13,351,000 in
the net revenues of Nova TV, offset by increases of $92,000 at PRO TV and of
$172,000 at POP TV and the inclusion of Studio1+1 as a consolidated entity for
the three months ending September 30, 1999. Nova TV suspended broadcast
operations on August 5, 1999 and has not generated any revenues since that time.
See "Czech Republic" in Part 1, Item 1, Note 1 and below for a further
discussion on Nova TV and the ongoing dispute between CNTS and CET. Unless the
Company is able to resume operations of Nova TV, the Company will continue to
experience large quarter over quarter reductions in net revenues for the next
twelve months.
Total station operating costs and expenses increased by
$20,270,000, or 74%, to $47,503,000 for the third quarter of 1999 from
$27,233,000 for the third quarter of 1998. The increase in total station
operating costs and expenses was attributable to the inclusion of Studio
1+1 as a consolidated entity for the three months ending September 30,
1999 and an increase in amortization of programming rights of
$22,223,000. The increase in amortization of programming rights was
primarily due to the write down on the full value of the Nova TV
programming library. See "Czech Republic" in Part 1, Item 1, Note 1 and
below for a further discussion on Nova TV and the ongoing dispute
between CNTS and CET. The increase in total station operating costs and
expenses was partially offset by reductions in station operating costs
and expenses at PRO TV of $1,009,000, primarily as a result of reduced
salary and production expenses and POP TV of $184,000, primarily as a
result of reduced salary expenses.
Station selling, general and administrative expenses increased by
$1,930,000, or 28%, to $8,947,000 for the third quarter of 1999 from $7,017,000
for the third quarter of 1998. The
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<PAGE>
increase in station selling, general and administrative expenses was as a result
of an increase in Nova TV's station selling, general and administrative expenses
of $3,494,000 and the inclusion of Studio 1+1 as a consolidated entity for the
third quarter of 1999. Nova TV's station selling, general and administrative
expenses increased as a result of increases in public relations, legal costs and
professional service costs associated with the current license dispute between
CNTS and CET. See "Czech Republic" in Part 1, Item 1, Note 1 and below for a
further discussion on Nova TV and the ongoing dispute between CNTS and CET. PRO
TV and POP TV reduced station selling, general and administrative expenses by
$1,002,000 and $921,000, respectively.
Corporate operating costs and development expenses for the third
quarter of 1999 and 1998 were $5,106,000 and $5,000,000, respectively, an
increase of $106,000, or 2%.
Amortization of goodwill and allowance for development costs increased
by $40,546,000, to $42,857,000 for the third quarter of 1999 from $2,311,000 for
the third quarter of 1998. The increase was as a result of a $40,511,000
additional write-down of the goodwill relating to the purchases made by the
Company of additional equity interest in CNTS in August 1996 and August 1997.
See "Czech Republic" in Part 1, Item 1, Note 1 and below for a further
discussion on Nova TV and the ongoing dispute between CNTS and CET.
As a result of the above factors, the Company generated an operating
loss of $86,875,000 for the third quarter of 1999 compared to an operating loss
of $12,446,000 for the third quarter of 1998.
Equity in loss of unconsolidated affiliates for the third quarter of
1999 was $2,846,000 compared to $1,793,000 for the third quarter of 1998. The
increase of $1,053,000 was the result of certain entities of the Studio 1+1
group, which are not consolidated, recording a loss of $1,082,000 for the three
months ended September 30, 1999, offset by Markiza TV recording a loss of
$1,764,000 for the three months ended September 30, 1999 compared to a loss of
$465,000 for the three months ended September 30, 1998.
Net interest and other expense for the third quarter of 1999 was
negative $3,206,000 compared to negative $5,203,000 for the third quarter of
1998. The difference of $1,997,000, or 38 %, was a result of reduced borrowings
at all stations except for POP TV and increased interest on cash balances.
Net foreign currency exchange loss was $4,266,000 for the third quarter
of 1999 compared to a loss of $5,154,000 for the third quarter of 1998. The
difference of $888,000 was 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.
In September 1999 the Company announced that the Reorganization
Agreement dated March 29, 1999 between the Company and SBS had been mutually
terminated. In October 1999, in connection with the termination of the
Reorganization Agreement, the Company received $8,250,000 as a termination fee
from SBS and agreed, to sell substantially all of its Hungarian assets to SBS.
See "Termination of Business Combination
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Transaction and Asset Sale" in Part 1, Item 1, Note 1. The operating losses from
these Hungarian operations for the third quarter of 1999 and the third quarter
of 1998 have been reclassified as operating loss of discontinued operations.
Recovery of income taxes of $1,572,000 for the third quarter of 1999
compares to a provision for income taxes of $866,000 for the third quarter of
1998. The decrease was due to a decrease in CNTS's taxable income. See "Czech
Republic" in Part 1, Item 1, Note 1 and below for a further discussion on Nova
TV and the ongoing dispute between CNTS and CET.
Minority interest in loss of consolidated subsidiaries was $296,000 for
the third quarter of 1999 compared to a minority interest in income of
consolidated subsidiaries of $19,000 for the third 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 $91,945,000 for the
third quarter of 1999 compared to a net loss of $35,028,000 for the third
quarter of 1998.
Nine months ended September 30, 1999 compared to nine months ended September 30,
1998
The Company's net revenues decreased by $13,175,000, or 12%, to
$99,820,000 for the first nine months of 1999 from $112,995,000 for the
first nine months of 1998. The decrease was primarily attributable to a
decrease of $17,131,000 in the net revenues of Nova TV and $1,702,000 at
PRO TV, partially offset by an increase in the revenues of POP TV of
$535,000 and the inclusion of Studio 1+1 as a consolidated entity for
the nine months ended September 30, 1999. Nova TV suspended broadcast
operations on August 5, 1999 and has not generated any revenues since
that time. See "Czech Republic" in Part 1, Item 1, Note 1 and below for
a further discussion on Nova TV and the ongoing dispute between CNTS and
CET. Unless the Company is able to resume operations of Nova TV, the
Company will continue to realize large quarter over quarter reductions
in net revenues for the next twelve months.
Total station operating costs and expenses increased by $29,124,000, or
36% to $109,903,000 for the first nine months of 1999 from $80,779,000 for the
same period in 1998. This increase was primarily attributable to a $25,350,000
increase in amortization of programming rights and to a lesser extent an
increase of $4,404,000 in depreciation of station fixed assets and other
intangibles. The increase in amortization of programming rights was primarily
attributable to the write down on the full value of the Nova TV programming
library. See "Czech Republic" in Part 1, Item 1, Note 1 and below for a further
discussion on Nova TV and the ongoing dispute between CNTS and CET. The increase
in depreciation of station fixed assets and other intangibles was primarily due
to the inclusion of Studio 1+1 as a consolidated entity for the first nine
months of 1999 and to increases at PRO TV of $1,071,000. The depreciation of
station fixed assets has increased at PRO TV as a result of increased
investments in broadcast equipment used to expand its signal reach.
Station selling, general and administrative expenses increased by
$3,051,000, or 16%, to $21,645,000 for the first nine months of 1999 from
$18,594,000 for the first nine months of 1998. The increase was attributable to
an increase in station selling, general and administrative expenses of
$5,418,000 at Nova TV and the inclusion of Studio 1+1 as a consolidated entity
for the first nine months of 1999. This increase at Nova TV was as a result of
the increase in public relations, legal costs and professional service costs
associated
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<PAGE>
with the current license dispute between CNTS and CET. See "Czech Republic" in
Part 1, Item 1, Note 1 and below for a further discussion on Nova TV and the
ongoing dispute between CNTS and CET. PRO TV and POP TV recorded decreases in
station selling, general and administrative expenses of $2,073,000 and
$1,899,000, respectively, for the first nine months of 1999 mainly due to
decreases in marketing expenses.
Corporate operating costs and development expenses for the first nine
months of 1999 and 1998 were $14,745,000 and $18,403,000, respectively, a
decrease of $3,658,000, or 20%. This decrease was attributable to reduced
activity and lower corporate headcount.
Amortization of goodwill and allowance for development costs increased
by $41,557,000 from $7,115,000 for the first nine months of 1998 to $48,672,000
for the first nine months of 1999. This increase was primarily attributable to
the additional $40,511,000 write-down of the goodwill relating to purchases of
additional equity interests in CNTS made by the Company in August 1996 and
August 1997. See "Czech Republic" in Part 1, Item 1, Note 1 and below for a
further discussion on Nova TV and the ongoing dispute between CNTS and CET.
As a result of the above factors, the Company generated an operating
loss of $95,145,000 for the first nine months of 1999 compared to an operating
loss of $14,448,000 for the first nine months of 1998.
Equity in loss of unconsolidated affiliates increased by
$6,656,000, to a loss of $7,236,000 for the first nine months of 1999
compared to a loss of $580,000 for the first nine months of 1998. This
was a result of Markiza TV recording a higher net loss for the first
nine months of 1999 compared to the first nine months of 1998 and
certain entities of the Studio 1+1 group which are not consolidated
recording a loss of $3,197,000 for the nine months ended September 30,
1999.
Gain on sale of investment of $25,870,000 relates to the sale by the
Company of its interest in a Romanian mobile telephone company MobilRom S.A.
Net interest and other expense decreased by $3,387,000, or 25%, to
negative $10,137,000 for the first nine months of 1999 from negative $13,524,000
for the first nine months of 1998. This decrease was a result of reduced
borrowings at all stations except POP TV and increased interest on cash
balances.
The net foreign currency exchange gain of $8,711,000 for the first nine
months of 1999 compared to a loss of $6,944,000 for the first nine months 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.
In September 1999 the Company announced that the Reorganization
Agreement dated March 29, 1999 between the Company and SBS had been
mutually terminated. In October 1999, in connection with the termination
of the Reorganization Agreement, the Company received $8,250,000 as a
termination fee from SBS and agreed, to sell substantially all of its
Hungarian assets to SBS. See "Termination of Business Combination
Transaction and Asset Sale" in Part 1, Item 1, Note 1. The operating
losses from these
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<PAGE>
Hungarian operations for the nine months ended 1999 and the nine months ended
1998 have been reclassified as operating loss of discontinued operations.
Provision for income taxes was $3,935,000 for the first nine months of
1999 and $8,426,000 for the first nine months of 1998. This decrease was due to
a decrease in CNTS's taxable income. See "Czech Republic" in Part I, Item 1,
Note 1 and below for a further discussion on Nova TV and the ongoing dispute
between CNTS and CET.
Minority interest in loss of consolidated affiliates was $203,000 for
the first nine months of 1999 compared to a minority interest in loss of
consolidated affiliates of $592,000 for the first nine months 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 the net loss of the Company was
$83,369,000 for the first nine months of 1999 compared to a net loss of
$88,697,000 for the first nine months of 1998.
Czech Republic
As discussed in Part I, Item 1, Note 1 under the heading "Czech
Republic" and Part II, Item 1 "Legal Proceedings", CNTS suspended operations on
August 5, 1999 and has not generated any revenues since that date. Consequently,
the Company's results of operations have been materially adversely affected.
Absent other sources of cash, the suspension of operations by CNTS will impair
the Company's ability to meet its future obligations as they fall due. This
suspension was caused by the pre-emption by CET, the license holder for Nova
TV, of CNTS's transmission of the programming for Nova TV and purported
withdrawal from the Services Agreement between CNTS and CET. CET is purportedly
controlled by Dr. Vladimir Zelezny, the former General Director of Nova TV. Dr.
Zelezny was removed as General Director and Executive of CNTS on April 19, 1999.
CNTS is governed by a Memorandum of Association. 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. 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.
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 and preliminary interim relief.
On November 10, 1999, an international arbitral tribunal issued a
preliminary order directing Dr. Zelezny to take steps to restore CNTS to its
prior position as an exclusive provider of critical services for TV Nova. Among
other things, the order requires Dr. Zelezny to sever all dealings between CET
21 and other service providers and to resume exclusive relations with CNTS in
the areas where CNTS was previously providing these services, including program
acquisition, programming and broadcasting services, and brokerage of advertising
and receipt of advertising revenues. The order will remain in effect until the
arbitral tribunal directs otherwise.
Dr. Zelezny has indicated that he will not comply with the tribunal's
order. CME and CNTS will be seeking to enforce the order in the Czech courts and
through other means. A final award in the arbitration, following a final hearing
in Amsterdam, The Netherlands, is expected during the first half of the year
2000.
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<PAGE>
The Company has taken a write-down on the full value of
the programming library of CNTS and in addition, the Company has taken a
write-down on the full carrying value of the goodwill relating to purchases of
additional equity interests in CNTS made by the Company in August 1996 and
August 1997.
Liquidity and Capital Resources
Net cash used in operating activities was $12,472,000 in the nine
months ended September 30, 1999 compared to net cash used in operating
activities of $14,239,000 for the nine months ended September 30, 1998. The
difference of $1,767,000 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 and Hungary in 1999 and 1998, improved
operating results.
Net cash provided by investing activities was $15,730,000 in the nine
months ended September 30, 1999 compared to net cash used in investing
activities of $57,175,000 for the nine months ended September 30, 1998. The
increase was primarily attributable to the proceeds received on the sale of the
Company's interest in MobilRom S.A. and less investments during 1999 in
discontinued operations.
Net cash used in financing activities for the nine months ended
September 30, 1999 was $4,040,000 compared to $3,570,000 for the nine months
ended September 30, 1998.
The Company had cash and cash equivalents of $41,370,000 at September
30, 1999 compared to $43,354,000 at December 31, 1998.
On October 15, 1999 the Company received $8,250,000 in cash from SBS in
connection with the termination of the Reorganization Agreement.
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 September 30, 1999 was Kc 505,080,600 ($14,926,000). Quarterly
repayments on the loan are required in the amount Kc 42,500,000 ($1,256,000)
during the period from November 1999 through May 2002, and Kc 37,580,600
($1,111,000) in August 2002.
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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 September 30, 1999, $645,000 was outstanding under this facility. The
second facility is a long-term loan for $4,000,000 which matures in December
2002. At September 30, 1999, $2,968,000 was borrowed under this facility. These
facilities are secured by PRO TV's equipment and vehicles.
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
has resulted in the suspension of the operations of CNTS. Unless CNTS is able to
resume operations, it will not be able to pay dividends to the Company. In the
case of PRO TV, distributions may be paid from the profits of PRO TV subject to
a reserve of 5% of annual profits until the aggregate reserves equal 20% of PRO
TV's registered capital. A majority vote can compel PRO TV to make
distributions. There are no legal reserve requirements in Slovenia. In the case
of Markiza TV, distributions may be paid from net profits subject to an initial
reserve requirement of 10% of net profits until the reserve fund equals 5% of
registered capital. Subsequently, the reserve requirement is equal to 5% of net
profits until the reserve fund equals 10% of registered capital. The Company's
voting power in Markiza TV is not sufficient to compel the distribution of
dividends. The Company's voting power in the Studio 1+1 Group is sufficient to
compel the distribution of dividends.
Except for the Company's working capital requirements, the Company's
future cash needs will depend on the ability of CNTS to resume the operations of
Nova TV, the Company's overall financial performance and its future acquisition
and development decisions. The Company is actively investing in its existing
broadcast operations in Ukraine and may in the future engage in the development
of additional broadcast operations. The Company incurs certain expenses in
identifying and pursuing broadcast opportunities before any investment decision
is made. The Company believes that its current cash balances and local financing
of broadcast operations should be adequate to satisfy the Company's operating
and capital requirements for its current operations through September 30, 2000.
To acquire additional broadcast rights or to fund other significant investments,
the Company would require significant additional financing.
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's broadcast operations are highly dependent upon
equipment with embedded computer technology
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(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 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 completed a systems and equipment review and work has
been completed on remedial action for most of the systems and equipment that
were found to be non-compliant. Planned remedial action is continuing for a few
systems that are currently non-compliant. In late November, the Company will
conduct a final review meeting to resolve the final non-compliant issues. An
independent audit of the stations preparedness conducted throughout late
September and early October has revealed that no stations pose a high risk of
failure. Generally, major suppliers and vendors have been contacted and
contingencies made for those suppliers and vendors that indicated
non-compliance.
The Company's independent Year 2000 audit has highlighted that the
major Year 2000 risk is that the infrastructures in some of the countries in
which the Company operates and relies on for basic utilities, such as
electricity, may not be Year 2000 compliant.
To date, the out-of-pocket costs of the Year 2000 program have been
immaterial. It is anticipated that the costs of the work still to be performed
will not be material. 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 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
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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", "Results of Operations" and under "Liquidity and Capital Resources"
regarding future operations of CNTS, the ongoing dispute between CNTS and CET,
future investments in existing television broadcast operations, business
strategies, commitments and the future need for additional funds from outside
sources are forward-looking statements. Forward-looking statements are
inherently subject to risks and uncertainties, many of which cannot be predicted
with accuracy and some of which might not even be anticipated. Future events and
actual results, financial and otherwise, could differ materially from those
described in or contemplated by the forward-looking statements. Important
factors that contribute to such risks include the ability to acquire
programming, the ability to attract audiences, the rate of development of
advertising markets in countries where the Company currently operates, 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 the future of operations of CNTS in the Czech
Republic and the ongoing dispute between CNTS and CET, include legal, political
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 with
Year 2000 standards.
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 September 30, 1999.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 22, 1999 /s/ Frederic T. Klinkhammer
-------------------------------
Frederic T. Klinkhammer
Chief Executive Officer
(Duly Authorized Officer)
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