<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
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Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1998 Commission File Number: 0-24796
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
(Exact name of registrant as specified in its charter)
Bermuda Not Applicable
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation)
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Clarendon House
Church Street
Hamilton HM CX
Bermuda
(Address of principal executive offices)
(441) 296-1431
(Registrant's telephone number)
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Securities registered pursuant to Section 12(b) of the Act: NONE
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Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $0.01 par value
9.375% Senior Notes Due 2004
8.125% Senior Notes Due 2004
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Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for each shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES __X__ NO _____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of the voting stock of registrant held by
non-affiliates of the registrant as of April 23, 1999 was approximately
$129,765,530.
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Number of shares of Class A
Common Stock outstanding as of April 23, 1999: 18,506,849
Number of shares of Class B
Common Stock outstanding as of April 23, 1999: 7,177,269
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<PAGE>
EXPLANATORY NOTE
The purpose of this amendment is to provide information required by
Items 10, 11, 12 and 13 of Part III of Form 10-K. This information is being
provided by amendment because the Registrant's Form 10-K for its fiscal year
ended December 31, 1998 incorporated by reference this information from the
Registrant's Proxy Statement (the "Proxy Statement") for its 1999 Annual General
Meeting of Shareholders, and the definitive Proxy Statement will not be filed
with the Securities and Exchange Commission by April 30, 1999.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information concerning directors and executive officers of the
Company is set forth below:
<TABLE>
<CAPTION>
Name Age Position with the Company
- ---- --- -------------------------
<S> <C> <C>
Ronald S. Lauder............... 55 Nonexecutive Chairman of the Board of Directors
Frederic T. Klinkhammer........ 53 President, Chief Executive Officer and Director
John A. Schwallie.............. 36 Vice President-Finance and Chief Financial Officer
Nicolas G. Trollope............ 51 Vice President, Secretary and Director
Peter R. Goldscheider.......... 55 Director
Robert R. Grusky............... 41 Director
Herbert S. Schlosser........... 72 Director
</TABLE>
Messrs. Lauder, Trollope and Schlosser have served as directors of the
Company since 1994, Messrs. Goldscheider and Grusky have served as directors of
the Company since 1998 and Mr. Klinkhammer has served as a director of the
Company since 1999.
Ronald S. Lauder, a founder of the Company, has served as nonexecutive
Chairman of the Board of the Company since its incorporation in 1994. He is also
the co-founder and has served as the Chairman of RSL Communications, Ltd.
("RSLC"), an international telecommunications company, since 1994. Mr. Lauder is
a principal shareholder of The Estee Lauder Companies Inc. ("Estee Lauder") and
has served as Chairman of Estee Lauder International, Inc. and Chairman of
Clinique Laboratories, Inc., divisions of Estee Lauder, since returning to the
private sector from government service in 1987. From 1986 until 1987, Mr. Lauder
served as U.S. Ambassador to Austria. From 1983 to 1986, Mr. Lauder served as
Deputy Assistant Secretary of Defense for European and NATO affairs. Mr. Lauder
is a director of Estee Lauder. He is Chairman of the Board of Trustees of the
Museum of Modern Art, Chairman of the Council of Presidents of American Jewish
Organizations, Chairman of the International Public Committee of the World
Jewish Restitution Organization, President of the Jewish National Fund,
Treasurer of the World Jewish Congress, a member of the Board of Governors of
the Joseph H. Lauder Institute of Management and International Studies at the
University of Pennsylvania and a member of the Visiting Committee of the Wharton
School at the University of Pennsylvania.
Frederic T. Klinkhammer has served as President and Chief Executive
Officer of the Company since March 1999. Mr. Klinkhammer has also served as
President and Chief Executive Officer of CME Development Corporation since March
1999. From January 1998 until March 1999, Mr. Klinkhammer served as Chief
Operating Officer and Executive Vice President of the Company and as Chief
Operating Officer, Executive Vice President and Managing Director of CME
Development Corporation. From July 1992 to December 1997, Mr. Klinkhammer
operated an international broadcasting and telecommunications consulting
practice. Mr. Klinkhammer was founding Chief Executive Officer of MediaLinx, the
multimedia arm of BCE Inc., from March 1993 to August 1996 and was responsible
for the creation of Sympatico, Canada's largest internet service provider. Mr.
Klinkhammer was President and Chief Executive Officer of IMAX Corporation from
August 1990 to June 1992, during which time that company produced its first two
feature length films. From March 1984 to August 1990, Mr. Klinkhammer served as
President and Chief Executive Officer of First Choice, Canada's largest pay
television company. From March 1983 to March 1984, Mr. Klinkhammer served as
Chief Executive Officer of Cablenet Ltd., a multi system cable operator with
operations in the U.S. and Canada. From January 1974 to March 1983, Mr.
Klinkhammer served as Vice President-Finance and later Vice President and
General Manager of Citytv in Toronto, Canada. Mr. Klinkhammer, a certified
Management Accountant, is a graduate of Ryerson Polytechnical Institute in
Business.
John A. Schwallie has served as Vice President-Finance and Chief
Financial Officer of the Company since August 1995. Mr. Schwallie, a certified
public accountant, served as Financial Director of CNTS, which provides
programming services for Nova TV in the Czech Republic, from 1994 until August
1995. From 1992 until 1993, Mr. Schwallie served as the Advisor to the Financial
Director of Prague Breweries, the second largest brewery in the Czech Republic.
During 1991, he served as the Assistant to the Regional Director of General
Atlantic, a London
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based multi-billion dollar privately held conglomerate, operating retail outlets
in Prague. Mr. Schwallie has his M.B.A. degree from Cornell University.
Nicolas G. Trollope has served as Vice President and Secretary of the
Company since January 1997. Mr. Trollope has been a partner with the law firm of
Conyers, Dill & Pearman, Hamilton, Bermuda, since 1991. Mr. Trollope serves as a
director of RSLC and Delphi International Ltd., an insurance company.
Peter R. Goldscheider has been co-owner, Managing Partner and Chairman
of the Board of European Privatization and Investment Corporation ("EPIC"), an
investment and merchant bank, since 1991. From March to December 1990, Mr.
Goldscheider co-owned and managed Landerbank Business Development Ges.b.b.H.,
EPIC's predecessor. From March 1977 to February 1987, Mr. Goldscheider was
President for marketing and sales and a Member of the Board of Zurich Kosmos
Insurance Company, an Austrian company. Prior to joining Zurich Kosmos Insurance
Company, Mr. Goldscheider served in a number of executive positions with
International Business Machines Corp. Austria, including Marketing Manager for
Finance (Banking and Insurance). Mr. Goldscheider also serves as Chairman of the
Board of Directors of EPIC Russia (formerly Sector Capital Development Company);
Chairman of the Supervisory board of I. EPIC Holdings, Prague; and President of
the Board of KINTO, Kiev.
Robert R. Grusky has been President of RSL Investments Corporation
since April 1998 and Senior Advisor to Ronald S. Lauder since April 1997. Mr.
Grusky was with Goldman, Sachs & Co., an international investment banking firm,
from 1985 to 1997, with a one-year leave of absence commencing in 1990 during
which he was appointed a White House Fellow by President Bush and served as
Assistant to the then Secretary of Defense Dick Cheney. At Goldman, Sachs, Mr.
Grusky was a member of the Mergers and Acquisitions (M&A) Department, and later
in the Principal Investment Area. Mr. Grusky is a graduate of the Harvard
Business School and Union College and is a member of the Board of Trustees of
the Hackley School.
Herbert S. Schlosser has served as a Senior Advisor, Global
Communications Group, to Schroder & Co. Inc., an international investment
banking firm, since 1999. From 1986 until 1999, Mr. Schlosser served as a Senior
Advisor, Broadcasting and Entertainment, to Schroder & Co., Inc. Mr. Schlosser
serves as a consultant to the Company and receives a fee for such services (see
page 7). Mr. Schlosser was Executive Vice President of RCA Corporation from 1978
until 1985 and President of the National Broadcasting Company (NBC) from 1974
until 1978. Mr. Schlosser is a director of United States Satellite Broadcasting
Company, Inc. and Data Broadcasting Corporation.
Committees of the Board
The Board of Directors has an Audit Committee which is composed of
Messrs. Goldscheider, Lauder and Schlosser. Prior to the 1998 Annual General
Meeting of Shareholders, the Audit Committee was composed of Messrs. Lauder and
Schlosser and Andrew Gaspar (who did not stand for re-election to the Board of
Directors in June 1998). Robert A. Rayne served on the Audit Committee following
the Company's 1998 Annual General Meeting of Shareholders until his resignation
from the Company's Board of Directors on September 28, 1998. The Audit Committee
is responsible for recommending annually to the Board of Directors the
independent auditors to be retained by the Company, reviewing with the
independent auditors the scope and results of the audit engagement and
establishing and monitoring the Company's financial policies and control
procedures. During the fiscal year ended December 31, 1998, the Audit Committee
met on one occasion.
The Board of Directors has a Compensation Committee which is composed
of Messrs. Lauder and Trollope. Prior to the Company's 1998 Annual General
Meeting of Shareholders, the Compensation Committee was composed of Messrs.
Lauder, Gaspar and Rayne. Mr. Rayne served on the Compensation Committee until
his resignation from the Company's Board of Directors on September 28, 1998. Mr.
Grusky served on the Compensation Committee beginning immediately following the
Company's 1998 Annual General Meeting of Shareholders for the remainder of 1998.
The Compensation Committee is responsible for determining executive compensation
policies and guidelines and for administering the Company's 1994 Stock Option
Plan (the "1994 Stock Option Plan") and the Company's 1995 Stock Option Plan
(the "1995 Stock Option Plan"; collectively, the 1994 Stock Option Plan and the
1995 Stock Option Plan may be referred to as the "Stock Option Plans"),
including granting options and setting the terms thereof pursuant to such plans.
In addition, the Compensation Committee is responsible for the administration of
the Company's Director, Officer and Senior Executive Co-Investment Plan and
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for reviewing and approving significant employment agreements. During the fiscal
year ended December 31, 1998, the Compensation Committee met on three occasions.
The Board of Directors has a Nominating Committee which is composed of
Messrs. Lauder, Goldscheider, Schlosser and Trollope. The Nominating Committee
is responsible for reviewing qualifications of candidates for Board membership,
recommending to the Board of Directors candidates for membership on the Board
and the annual slate of nominees for director, and recommending to the Board of
Directors criteria for Board membership, composition of the Board, tenure of
directors and fees to be paid to directors. The Nominating Committee does not
consider nominees recommended by shareholders. The Nominating Committee did not
meet during the fiscal year ended December 31, 1998.
During the fiscal year ended December 31, 1998, the Board of Directors
met, or acted by unanimous consent, on 14 occasions. Each member of the Board of
Directors attended at least 75% of the aggregate number of meetings of the Board
of Directors and the Committees of the Board on which they served during the
periods that they served.
There is no family relationship among any directors or executive
officers of the Company.
There is no arrangement or understanding between any executive officer
and any other person regarding selection as an executive officer.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's executive officers, directors and persons who
beneficially own greater than 10% of a registered class of the Company's equity
securities to file certain reports ("Section 16 Reports") with the Securities
and Exchange Commission with respect to ownership and changes in ownership of
the Common Stock and other equity securities of the Company. Based solely on the
Company's review of the Section 16 Reports furnished to the Company and written
representations from certain reporting persons, the Company believes that,
during the fiscal year ended December 31, 1998, all filing requirements under
Section 16(a) applicable to its officers, directors and greater than 10%
beneficial owners were complied with on a timely basis, except that Robert R.
Grusky filed a late Form 3 upon becoming a director of the Company in June 1998.
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ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table summarizes all plan and non-plan compensation
awarded to, earned by, or paid to the Company's present and two former Chief
Executive Officers and its other executive officer (together, the "Named
Executive Officers") who either served as executive officers during, or were
serving as executive officers at the end of, the last completed fiscal year
ended December 31, 1998, for services rendered in all capacities to the Company
and its subsidiaries for each of the Company's last three fiscal years.
<TABLE>
<CAPTION>
Long-Term Compensation
-------------------------
Awards
-------------------------
Annual Compensation Securities
-------------------------------------------- Restricted
Other Annual Stock Underlying All Other
Name and Salary Bonus Compensation Award(s) Options Compensation
Principal Position Year $ $ $ $ # $
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Frederic T. Klinkhammer 1998 300,000 200,000 74,700(4) -- 150,000 504(9)
President and Chief Executive
Officer (1).................
John A. Schwallie 1998 235,417 80,000 39,843(5) -- 20,000 1,008(9)
Vice President-Finance 1997 210,417 75,000 -- -- 80,000 --
and Chief Financial Officer.. 1996 184,375 50,000 -- -- -- 696(9)
Michel Delloye 1998 271,943 -- 254,125(4) -- 225,000 60(9)
Former President and Chief
Executive Officer (2)........
Leonard M. Fertig 1998 182,341 -- 59,769(6) -- -- 774,682(10)
Former President and Chief 1997 334,821 150,000 67,562(7) -- 50,000 --
Executive Officer (3)........ 1996 309,840 150,000 64,358(8) -- 50,000 --
</TABLE>
- ----------------------
(1) Mr. Klinkhammer served as Chief Operating Officer and Executive Vice
President of the Company from January 1, 1998 until he was promoted to
President and Chief Executive Officer of the Company on March 23, 1999.
(2) Mr. Delloye served as President and Chief Executive Officer of the
Company from March 26, 1998 until his resignation on March 23, 1999.
(3) Mr. Fertig resigned as President and Chief Executive Officer of the
Company on March 26, 1998. Thereafter, Mr. Fertig received a salary as
an employee of the Company and other compensation as a consultant to
the Company pursuant to a severance agreement (see pages 10-11).
(4) Represents an expatriate premium paid by the Company pursuant to the
terms of an employment agreement.
(5) Represents a living allowance paid by the Company pursant to the terms
of an employment agreement.
(6) Represents housing costs paid by the Company.
(7) Of this amount, $59,004 represents housing costs paid by the Company
and $8,558 represents use of a Company automobile.
(8) Of this amount, $55,800 represents housing costs paid by the Company
and $8,558 represents use of a Company automobile.
(9) Represents life insurance benefits paid by the Company.
(Footnotes continued on next page)
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(Footnotes continued from previous page)
(10) Of this amount, $600,000 represents payments made to Mr. Fertig by the
Company because he was unable to sell his shares of Class A Common
Stock at certain minimum prices pursuant to a severance agreement
entered into between Mr. Fertig and the Company and two of its
wholly-owned subsidiaries, $10,000 represents payments made to Mr.
Fertig by the Company for legal expenses in connection with negotiation
of the severance agreement, and $164,682 represents payments made to
Mr. Fertig and a company owned by Mr. Fertig for consulting services
provided to the Company and the two subsidiaries pursuant to the
severance agreement. See pages 10-11 for a discussion of the terms of
such severance agreement and various payments made or to be made to Mr.
Fertig by the Company.
No stock appreciation rights or long-term incentive plan awards (all as
defined in the proxy regulations of the Securities and Exchange Commission) were
awarded to, earned by, or paid to the Named Executive Officers during the time
periods described above.
Option Grants In Last Fiscal Year
The following table sets forth information with respect to grants of
options to purchase shares of Class A Common Stock granted to the Named
Executive Officers during the fiscal year ended December 31, 1998.
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------------- Potential Realizable
Percent of Value at Assumed Annual
Number of Total Rates of Stock Price
Securities Options Appreciation
Underlying Granted to for Option Term
Options Employees Exercise ---------------------------
Granted In Fiscal Price Expiration 5% 10%
Name (#) Year ($/sh) Date ($) ($)
- ---- --- ---- ------ ---- --- ---
<S> <C> <C> <C> <C> <C> <C>
Frederic Klinkhammer........... 53,333 9.36 24.0000 1/19/08 805,000 2,040,000
46,667 8.19 (1) 1/19/05 704,000 1,785,000
26,667 4.68 23.3125 2/23/08 391,000 991,000
23,333 4.09 (2) 2/23/05 342,000 867,000
John A. Schwallie.............. 20,000 3.51 (3) 8/1/03 144,000 365,000
Michel Delloye................. 175,000 30.70 24.5630 3/23/08 2,703,000 6,851,000
50,000 8.77 (4) 3/23/05 772,000 1,957,000
Leonard M. Fertig.............. 0 0.00 -- -- -- --
</TABLE>
- ---------------------------
(1) The initial exercise price of such options was equal to $24.00 per
share and increases on each January 1 by 5.55%.
(2) The initial exercise price of such options was equal to $23.3125 per
share and increases on each January 1 by 5.55%.
(3) The initial exercise price of such options was equal to $11.4375 per
share and increases on the first day of each calendar quarter by 25% of
4.91%, compounded annually.
(4) The initial exercise price of such options was equal to $24.563 per
share and increases each calendar quarter by 25% of 5.63%, compounded
annually.
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Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth information with respect to each
exercise of stock options during the fiscal year ended December 31, 1998 by the
Named Executive Officers and the value at December 31, 1998 of unexercised stock
options held by the Named Executive Officers.
<TABLE>
<CAPTION>
Number of Securities
Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
Shares Acquired Value Fiscal Year-end Fiscal Year-End(1)
On Exercise Realized (#) ($)
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
- ---- --------------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Frederic Klinkhammer... 0 0 40,000/110,000 0/0
John A. Schwallie...... 0 0 125,000/60,000 0/0
Michel Delloye......... 0 0 87,500/137,500 0/0
Leonard M. Fertig...... 0 0 325,000/0 0/0
</TABLE>
- -----------------
(1) Fair market value of securities underlying the options at fiscal year
end minus the exercise price of the options.
Compensation of Directors
The Company pays a cash fee to each of its non-employee directors of
$10,000 per annum. In addition, on the first business day following each annual
general meeting of the Company's shareholders during the term of the 1995 Stock
Option Plan, each non-employee director of the Company (other than Mr. Trollope
who declines such options, but including for these purposes the Chairman) who
has served as a director since the last annual general meeting of shareholders
will be granted options to purchase 10,000 shares (or, in the case of the
Chairman, such higher number as the Board of Directors shall determine) of Class
A Common Stock (in the case of the Chairman, Class B Common Stock). For the
non-employee directors, the exercise price of the options will initially equal
the average of the closing price of a share of Class A Common Stock for the 10
business days following the annual meeting (105% of the fair market value of a
share of Class A Common Stock in the case of an option to acquire Class B Common
Stock). The options will vest over the five year period from the date of grant
and will expire 10 years from the date of grant. The exercise price of the
options will increase quarterly by one-quarter of the interest rate on the U.S.
10-year Treasury Note on the date of the grant.
The Company reimburses each director for expenses in connection with
attending meetings of the Board of Directors. Mr. Trollope is a partner in the
law firm of Conyers Dill & Pearman, Hamilton, Bermuda, which served as the
Company's Bermuda counsel for the fiscal year ended December 31, 1998 and is
expected to continue to serve as the Company's Bermuda counsel in 1999. For the
fiscal year ended December 31, 1998, the Company paid fees of $148,852 to
Conyers, Dill & Pearman, which includes the services of Mr. Trollope as a
director. No separate compensation is paid to any director for serving on
committees. Directors who are also employees of the Company receive no
additional compensation for service as a director.
On August 1, 1996, the Company and Mr. Schlosser entered into a one
year consulting agreement which automatically renews for subsequent one year
terms unless terminated by either party 60 days prior to the end of each yearly
term. Under the consulting agreement, Mr. Schlosser serves as a consultant to
the Company and, at the request of the Company's management, performs general
consulting services relating to the Company's broadcast operations. Pursuant to
the agreement, the Company pays Mr. Schlosser at the rate of $100,000 per annum
and initially granted Mr. Schlosser 10 year options to purchase 15,000 shares of
Class A Common Stock at an exercise price equal to the last reported sale price
of the Class A Common Stock on the Nasdaq National Market on August 1, 1996
($21.75 per share). Such options are in addition to those granted separately to
Mr. Schlosser for serving as a director.
The Board of Directors has adopted a set of principles (the
"Compensation Principles") for the compensation of the Company's executives and
other key employees, as well as the Company's non-employee directors. As the
Compensation Principles apply to directors, they express the Company's belief
that it is important for non-employee directors to have a meaningful equity
interest in the Company and to have the bulk of directors' compensation paid in
equity-related items. In order to encourage the Company's non-employee directors
to increase
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their ownership of the Company's Common Stock, under the Compensation Principles
(as they apply to non-employee directors), the Board will, under the 1995 Stock
Option Plan, grant to any person who is not currently a director of the Company
and who becomes a non-employee director of the Company an option to acquire a
share of Class A Common Stock (or Class B Common Stock if such person is
eligible to hold Class B Common Stock under the Company's Bye-Laws) for each
share of Common Stock that he or she purchases within 90 days of his or her
first election to the Board of Directors, up to a maximum of 25,000 shares. If a
current non-employee director purchases a number of shares of Common Stock at
least equal to the number of shares underlying options that have previously been
granted to such non-employee director, in his capacity as a director, the Board
will, under the 1995 Stock Option Plan, grant an option to acquire a share of
Class A Common Stock (or Class B Common Stock if such person is eligible to hold
Class B Common Stock under the Company's Bye-Laws) for each share of Common
Stock purchased within 90 days thereafter, up to a maximum of 25,000 shares. Any
such option granted to a non-employee director will generally become exercisable
as to 10% on the first anniversary of the grant date, an additional 15% on each
of the second and third anniversaries of the grant date, an additional 25% on
the fourth anniversary of the grant date and an additional 35% on the fifth
anniversary of the grant date and will expire on the earlier of (a) 30 days
after the recipient ceases to serve as a director for any reason other than
death or disability, (b) one year following the date the recipient ceases to
serve as a director as a result of his or her death or disability and (c) the
tenth anniversary of the date of grant. Under the Company's Director, Officer
and Senior Executive Co-Investment Plan, non-employee directors are permitted to
purchase such shares directly from the Company (but non-employee directors are
not eligible to receive loans from the Company under the Director, Officer and
Senior Executive Co-Investment Plan). While not required, all directors are
encouraged to hold their shares of the Company's Common Stock, or options
convertible into shares of the Company's Common Stock, as long as they serve as
directors (other than making charitable gifts, transfers for estate planning
purposes or sales for tax reasons relating to the exercise of stock options).
Employment Agreements, Termination of Employment and Change-in-Control
Arrangements
Frederic T. Klinkhammer has entered into employment agreements dated as
of January 1, 1998 and amended as of March 23, 1999 with the Company and a
wholly-owned subsidiary of the Company. The employment agreements provide that
Mr. Klinkhammer will serve as President and Chief Executive Officer of the
Company and such subsidiary. Prior to March 23, 1999, under the employment
agreements, Mr. Klinkhammer served as Executive Vice President and Chief
Operating Officer of the Company and Executive Vice President, Managing Director
and Chief Operating Officer of such subsidiary. Pursuant to Mr. Klinkhammer's
employment agreement with the Company, as amended, the Company was required to
name Mr. Klinkhammer to its Board of Directors and the Board is required to
nominate Mr. Klinkhammer for election and re-election to the Board of Directors
of the Company during his term of employment with the Company. Under the
employment agreements, Mr. Klinkhammer will be entitled to receive a base salary
of $350,000 per year which will be increased annually, commencing on March 23,
2000, by 5% or such greater amount determined at the option and sole discretion
of the Compensation Committee, and an expatriate premium of UK (pound)104,000
per annum (plus an additional amount based on the increase in the consumer price
index in the London metropolitan area). The employment agreements provide for an
annual cash bonus opportunity of 75% of base salary if performance is at 100% of
target performance goals established by the Compensation Committee for such year
and up to 100% of his base salary if performance is at or above 150% of such
target. For the 1998 year, Mr. Klinkhammer was given a cash bonus of $200,000.
The employment agreements also provide that Mr. Klinkhammer will receive an
additional one time bonus of $1,000,000 if he is employed by the Company or any
successor corporation to the Company on December 31, 2003 and if the price of
the Company's Class A Common Stock has increased from its price as of March 22,
1999 (i.e., $8.3125 per share) and the percentage increase exceeds that of the
Nasdaq Composite Index for such period.
Under the amendment to Mr. Klinkhammer's employment agreement with the
Company, on his being named Chief Executive Officer on March 23, 1999 he was
awarded options to acquire 300,000 shares of the Company's Class A Common Stock
at an exercise price equal to $8.3125 per share, the mean between the high and
low trading prices of the Company's Class A Common Stock on the date of grant.
As to 150,000 of such options, the options became exercisable on March 23, 1999
and as to the remaining 150,000 options, such options will become exercisable in
five equal installments on each of the first five anniversaries of the date of
grant, provided that Mr. Klinkhammer is employed by the Company on each such
anniversary date. All 300,000 of such options are fixed price, that is the
exercise price does not increase over time, and will expire on March 23, 2009
(10 years). Under Mr. Klinkhammer's employment agreement with the Company, at
the time he was first hired as Executive Vice President and Chief Operating
Officer, he was also awarded in 1998 options to acquire, in the aggregate,
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150,000 shares of the Company's Class A Common Stock. The initial exercise price
of 100,000 of these options is $24.00 per share and the initial exercise price
of 50,000 of these options is $23.3125 per share. In each case, this was the
mean between the high and low trading prices of the Company's Class A Common
Stock on the date of grant. As to 80,000 of such options, the options will
generally become exercisable in equal installments on each of the first two
anniversaries of the date of grant and will generally remain exercisable for ten
years (40,000 of these options are currently exercisable). As to 70,000 of such
options, the options will generally become exercisable in equal annual
installments on the third and fourth anniversaries of the grant date and on
December 31, 2002, will generally expire on the seventh anniversary of the grant
date, and the exercise price per share will be increased on each January 1 by
5.55% (per annum), the rate at the time of grant for 7 year U.S. Treasury
securities. All options granted to Mr. Klinkhammer will become exercisable in
the event that Mr. Klinkhammer's employment is terminated by the Company as a
result of a change in control of the Company or in the event of a merger,
reorganization or consolidation in which the Company is not the surviving
corporation. The timing and amount of any subsequent option awards will be at
the discretion of the Compensation Committee and approved by the Board of
Directors, and will be commensurate with Mr. Klinkhammer's position with the
Company and taking into account option awards made to other executives of the
Company.
Mr. Klinkhammer's employment agreements also contain noncompetition
provisions applicable during the term of the employment agreement and for a two
year period thereafter, prohibit Mr. Klinkhammer from using confidential
information of the Company during the term of the employment agreements and
thereafter, and specify certain benefits and perquisites that Mr. Klinkhammer
shall be entitled to receive. The term of the employment agreements generally
expire on March 22, 2004. The employment agreements provide that if Mr.
Klinkhammer's employment agreements are not extended at the expiration of the
five year term, he will serve as a part-time consultant for two years following
such expiration, for which he will be paid $250,000 per annum.
John A. Schwallie, Vice President-Finance and Chief Financial Officer
of the Company, has employment agreements commencing August 1, 1997 and
originally terminating August 14, 1999 with the Company and a wholly-owned
subsidiary of the Company, which agreements were extended until August 14, 2000.
For each of the years ending August 14, 1999 and August 14, 2000, Mr. Schwallie
will receive an aggregate annual salary of $250,000. In addition, under such
agreements Mr. Schwallie receives a monthly living allowance of UK (pound)2,000
for each calendar month during which he maintains a principal residence in the
Greater London Metropolitan area. At the sole discretion of the Board of
Directors, Mr. Schwallie may be granted an annual bonus. For the 1998 year, Mr.
Schwallie was given a cash bonus of $80,000. The employment agreements contain a
confidentiality covenant and a non-compete covenant which has a term of two
years after the termination of Mr. Schwallie's employment. Mr. Schwallie, who
had previously been granted options to purchase 85,000 shares of Class A Common
Stock, all of which are currently exercisable, has been granted 10 year options
under his current agreements to purchase an additional 80,000 shares of Class A
Common Stock at an exercise price equal to the last reported sale price of a
share of Class A Common Stock on the Nasdaq National Market on August 1, 1997
($23.00 per share), pursuant to the Company's Stock Option Plans, 40,000 of
which became exercisable on August 1, 1998 and 40,000 of which will become
exercisable on August 1, 1999. Additional options may be granted by the Board,
upon the recommendation of the President and Chief Executive Officer, to Mr.
Schwallie annually depending on his and the Company's performance. In August
1998, Mr. Schwallie was granted options to purchase an additional 20,000 shares
of Class A Common Stock at an initial exercise price of $11.4375 per share (the
fair market value of a share of Class A Common Stock on the date of grant),
which exercise price will increase on the first day of each calendar quarter by
one-quarter of 4.91% (the rate at the time of grant for U.S. Treasury securities
having a maturity (7 years) approximately equal to the term of such options),
compounded annually, 6,667 of which will become exercisable on August 1, 1999
and 13,333 of which will become exercisable on August 1, 2000, and all of which
will expire in August 2005 (7 years). In the event of a merger, reorganization
or consolidation in which the Company is not the surviving corporation, then all
options which have been granted to Mr. Schwallie shall be immediately
exercisable in full. In addition, Mr. Schwallie will receive a payment from the
Company equal to 50% of his base salary for 1999 if the transactions
contemplated by the Reorganization Agreement (the "Reorganization Agreement"),
dated as of March 29, 1999, by and between SBS Broadcasting S.A. ("SBS") and the
Company close and Mr. Schwallie (i) continues to be an employee of the combined
company for a period of 90 days following the closing of such transactions or
(ii) if prior to such 90 day period his employment is terminated by the combined
company. Mr. Schwallie also will receive a payment from the Company equal to 50%
of his base salary for 1999 if the Company's subsidiary, CNTS, is able to
satisfactorily resolve certain outstanding issues with respect to the broadcast
of programming on Nova TV. Such payments would be in lieu of any other bonus
payments available to Mr. Schwallie for 1999.
9
<PAGE>
On March 23, 1999, Mr. Delloye resigned as President and Chief
Executive Officer of the Company. The Company and Mr. Delloye currently are
discussing entering into certain arrangements regarding his resignation as
President and Chief Executive Officer of the Company. These discussions include
the resolution of any claims that Mr. Delloye may have under his employment
agreements which are discussed below. Mr. Delloye has five year employment
agreements dated as of March 23, 1998 with the Company and a wholly-owned
subsidiary of the Company which provided that Mr. Delloye was to serve as
President and Chief Executive Officer of both the Company and of such
subsidiary. Under the employment agreements, Mr. Delloye was entitled to receive
a base salary of $350,000 for the first year, with such base salary being
increased by not less than $10,000 per year. In addition, Mr. Delloye was to
receive an expatriate premium of UK (pound)202,500 per annum (plus an additional
amount based on the increase in the consumer price index in the London
metropolitan area). The employment agreements provided for an annual cash bonus
opportunity of 75% of base salary if performance is at 100% of target
performance goals established by the Compensation Committee for such year and up
to 100% of his base salary if performance is at or above 150% of such target.
The employment agreements also provided that Mr. Delloye receive an additional
one time bonus of $1,000,000 if, at the end of the contract term, i.e., March
23, 2003, and subject to his continued employment through such date, the price
of the Company's Class A Common Stock had increased from its price as of March
23, 1998 (i.e., $24.563 per share) and the percentage increase exceeded that of
the Nasdaq Composite Index for such period.
Under Mr. Delloye's employment agreements with the Company, he was
awarded in March 1998 options to acquire, in the aggregate, 225,000 shares of
the Company's Class A Common Stock. The initial exercise price of all of these
options is $24.563 per share, the mean between the high and low trading prices
of the Company's Class A Common Stock on the date of the grant. As to 175,000 of
such options, the options will generally become exercisable in equal
installments on each of the first two anniversaries of the date of grant and
will generally remain exercisable for ten years (87,500 of these options are
currently exercisable). As to 50,000 of such options, the options will generally
become exercisable in equal annual installments on the third, fourth and fifth
anniversaries of the grant date, will generally expire on the seventh
anniversary of the grant date, and the exercise price per share will be
increased on the first day of each calendar quarter by one-quarter of 5.63% (the
rate at the time of grant for U.S. Treasury securities having a maturity
approximately equal to the term of such options), compounded annually, pro rated
for the first period. All such options shall become exercisable in the event
that Mr. Delloye's employment is terminated by the Company as a result of a
change in control of the Company or in the event of a merger, reorganization or
consolidation in which the Company is not the surviving corporation. The timing
and amount of any subsequent option awards were to be at the discretion of the
Compensation Committee and approved by the Board of Directors, commensurate with
Mr. Delloye's position with the Company and taking into account option awards
made to other executives of the Company.
Mr. Delloye's employment agreements also contain noncompetition
provisions applicable during the term of the employment agreements and for a two
year period thereafter, prohibit Mr. Delloye from using confidential information
of the Company during the term of the employment agreements and thereafter, and
specify certain benefits and perquisites that Mr. Delloye shall be entitled to
receive. The term of the employment agreements expire on March 23, 2003.
Termination of Employment
The Company and two of its wholly-owned subsidiaries entered into a
severance agreement, dated as of March 25, 1998, with Leonard M. Fertig, who
resigned as the Company's President and Chief Executive Officer on March 26,
1998. Mr. Fertig also resigned as a director of the Company on May 1, 1998.
Pursuant to the severance agreement, certain employment and consulting
agreements between Mr. Fertig, a company owned by Mr. Fertig, and the Company
and these subsidiaries were terminated. Under the severance agreement, Mr.
Fertig continued as an employee and his consulting company continued its
consulting arrangements on a full-time basis until May 1, 1998, and thereafter
on a part time basis through August 10, 1998. After August 10, 1998, Mr. Fertig
has served and will continue to serve as a consultant and his consulting company
has provided and will continue to provide consulting services until August 10,
1999. Mr. Fertig may terminate these arrangements with the Company and these
subsidiaries prior to August 10, 1999 on not less than 10 days' (but not more
than 15 days') written notice. From March 26, 1998 until either August 10, 1999
or such earlier date as Mr. Fertig ceases to be an employee or consultant, Mr.
Fertig will receive a base salary or consulting fee of $300,000 per year, and
his consulting company will receive a fee of $50,000 per year and both Mr.
Fertig and his consulting company will provide services on an as requested basis
by the Chairman or Chief Executive Officer of the Company or these subsidiaries,
provided that
10
<PAGE>
after May 1, 1998, such services will not unreasonably interfere with Mr.
Fertig's ability to seek other employment or consulting opportunities or exceed
20 hours per calendar month.
Until the earliest of the time that Mr. Fertig ceases to be an employee
or consultant, or moves his principal residence from the United Kingdom, or
August 10, 1999, Mr. Fertig will receive an expatriate payment of UK
(pound)3,000 per month. If Mr. Fertig relocates to the United States before
August 10, 1999, the Company will pay the actual and reasonable costs associated
with such relocation.
Pursuant to the severance agreement, in September 1998, Mr. Fertig
purchased from the Company for $4,658 (the book value) the automobile which had
been available for his use in the Netherlands and the Company paid Mr. Fertig
$10,000 for legal expenses in connection with the negotiation of the severance
agreement.
The severance agreement provided for Mr. Fertig to be paid a bonus of
$150,000 for services performed during 1997.
Under previous agreements, Mr. Fertig had been granted options to
purchase 325,000 shares of Class A Common Stock, 225,000 of which were
exercisable at the time of his resignation from the Company's Board of Directors
on May 1, 1998. Under the severance agreement, the remaining unexercisable
options became exercisable on May 1, 1998. All 325,000 options will generally
remain exercisable until the one year anniversary of the date on which Mr.
Fertig ceases to be an employee of, or consultant to, the Company.
Under the severance agreement, Mr. Fertig agreed not to sell more than
50,000 shares of the Company's Class A Common Stock prior to August 1, 1998, the
three month anniversary of the date on which he ceased to be a member of the
Board of Directors of the Company. In addition, the Company agreed that if Mr.
Fertig was not able to sell his shares of Class A Common Stock at certain
minimum prices, the Company would make certain additional payments to Mr. Fertig
up to a maximum of $600,000 in the aggregate. On September 2, 1998, Mr. Fertig
was paid such $600,000 maximum by the Company.
Mr. Fertig continues to be subject to a confidentiality covenant and to
a non-compete covenant, which expires on the earlier of the date that Mr. Fertig
ceases to serve as an employee or consultant or August 10, 1999. Under the
severance agreement, Mr. Fertig converted all of his shares of Class B Common
Stock of the Company into shares of Class A Common Stock of the Company.
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee at the end of the fiscal year
ended December 31, 1998 were Ronald S. Lauder and Nicolas G. Trollope, who is
the Secretary and a Vice President of the Company. Prior to the 1998 Annual
General Meeting of Shareholders, the Compensation Committee was composed of
Messrs. Lauder, Gaspar (who did not stand for re-election to the Board of
Directors in June 1998) and Rayne. Mr. Rayne continued to serve on the
Compensation Committee until his resignation from the Board of Directors of the
Company on September 28, 1998. Mr. Grusky served on the Compensation Committee
beginning immediately following the Company's 1998 Annual General Meeting of
Shareholders for the remainder of 1998. See "Compensation of Directors" and
"Certain Relationships and Related Transactions."
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<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of April 23, 1999
with respect to the beneficial ownership of the Company's Class A Common Stock
and Class B Common Stock and also sets forth certain information with respect to
voting power and percentage of ownership as of April 23, 1999, by (i) each
shareholder known by the Company to beneficially own more than 5% of any class
of the Company's outstanding voting securities, (ii) each director and nominee
for director of the Company, (iii) the Chief Executive Officer, the two former
Chief Executive Officers and the other executive officer of the Company and (iv)
all directors and executive officers of the Company as a group. Except as
otherwise noted below, each of the shareholders identified in the table has sole
voting and investment power over the shares beneficially owned by such person.
<TABLE>
<CAPTION>
Beneficial Ownership of Beneficial Ownership of Common Stock
Class A Common Class B Common ---------------------
Stock (a) Stock % of %
---------------------- ----------------------- Voting Owner-
Name of Beneficial Owner Number Percent Number Percent Power(b) Ship(b)
- ------------------------ ------ ------- ------ ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Ronald S. Lauder(1)(12)............ 326,000(19) 1.7% 6,505,595(26) 90.0% 71.5% 26.2%
Frederic T. Klinkhammer............ 191,000(20) 1.0 -- -- * *
Peter R. Goldscheider.............. -- -- -- -- -- --
Robert R. Grusky................... -- -- -- -- -- --
Herbert S. Schlosser............... 84,000(21) * -- -- * *
Nicolas G. Trollope(2)............. 1,700 * -- -- * *
John A. Schwallie.................. 125,000(22) * -- -- * *
All directors and executive
officers
as a group (7 persons)........... 727,700(23) 3.8 6,505,595(26) 90.0 71.5 27.3
Michel Delloye (3) ................ 87,500(24) * -- -- * *
Leonard M. Fertig(4)............... 325,000(25) 1.7 -- -- * 1.2
SBS Broadcasting S.A.(5)........... 326,000(19) 1.7 6,505,595(26) 90.0 71.5 26.2
Mercury Asset Management plc(6).... 2,169,950 11.7 -- -- 2.4 8.4
Warburg, Pincus Asset Management,
Inc.(7).......................... 2,042,600 11.0 -- -- 2.3 8.0
Genesis Asset Managers Limited(8).. 1,770,616 9.6 -- -- 2.0 6.9
Stephen L. Farley(9)(13)........... 1,709,150 9.2 -- -- 1.9 6.7
Labrador Partners L.P.(9)(14) ..... 1,470,000 7.9 -- -- 1.6 5.7
Capital Research and Management
Company (10)(15) ................ 1,235,000 6.7 -- -- 1.4 4.8
SMALLCAP World Fund, Inc.(10)(16).. 1,170,000 6.3 -- -- 1.3 4.6
Leonard A. Lauder(11)(17) ......... -- -- 1,368,568 19.1 15.2 5.3
EL/RSLG Media, Inc.(1)(18)......... -- -- 646,895 9.0 7.2 2.5
</TABLE>
- -----------------
* Less than 1.0%
(a) Does not include 7,227,269 shares of Class A Common Stock issuable upon
conversion of shares of Class B Common Stock. Shares of Class B Common
Stock are convertible at any time into shares of Class A Common Stock
for no additional consideration on a share-for-share basis.
(b) Represents the percentage of total voting power and the percentage
ownership of the Class A Common Stock and the Class B Common Stock
currently beneficially owned by each identified shareholder and all
directors and executive officers as a group. The Class A Common Stock
and the Class B Common Stock are the only authorized classes of the
Company's capital stock with shares outstanding.
(1) The address of each of the shareholders indicated is Suite 4200, 767
Fifth Avenue, New York, New York 10153.
(2) These shares are owned beneficially by the Proverbs Trust of which Mr.
Trollope and his wife are co-trustees and beneficiaries.
(3) Resigned as President, Chief Executive Officer and a director of the
Company on March 23, 1999.
(Footnotes continued on next page)
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<PAGE>
(Footnotes continued from previous page)
(4) Resigned as President and Chief Executive Officer of the Company on
March 26, 1998 and as a director of the Company on May 1, 1998. Mr.
Fertig is no longer required to file Section 16 Reports with the
Securities and Exchange Commission in connection with his beneficial
ownership of the Company's securities. The Company is not aware of any
shares of its stock beneficially owned by Mr. Fertig other than those
set forth herein.
(5) Information in respect of the beneficial ownership of SBS (other than
its percentage ownership) is based upon a statement on Schedule 13D
filed by such person. The address of SBS, is 36 Ives Street, London SW#
2ND. On March 29, 1999, SBS agreed to acquire the Company pursuant to
the terms of a Reorganization Agreement, dated as of March 29, 1999, by
and between SBS and the Company. Concurrently with the execution of the
Reorganization Agreement, SBS and Ronald S. Lauder, RSL Investments
Corporation, RSL Capital LLC and Duna Investments, Inc. (collectively,
the "Shareholders") entered into a Shareholders Agreement (the "CME
Shareholders' Agreement") where, in consideration for the delivery of
the Reorganization Agreement, the Shareholders agreed to vote their
shares of the Company's stock in favor of the Reorganization Agreement
and all transactions contemplated thereby. In connection with the
Shareholders' Agreement, the Shareholders have given an irrevocable
proxy to Harry Sloan in his capacity as Chief Executive Officer of SBS,
to vote their shares of the Company's stock in favor of any
transactions contemplated by the Reorganization Agreement and against
any inconsistent proposals or transactions. SBS disclaims beneficial
ownership of all such shares of the Company's stock
(6) Information in respect of the beneficial ownership of Mercury Asset
Management plc (other than percentage ownership) is based upon a
statement on Schedule 13D filed by such person. The address of Mercury
Asset Management plc is 33 King William Street, London, EC4R 9AS,
England.
(7) Information in respect of the beneficial ownership of Warburg, Pincus
Asset Management, Inc. (other than its percentage ownership) is based
upon a statement on Schedule 13G filed by such person. The address of
Warburg, Pincus Asset Management, Inc. is 466 Lexington Avenue, New
York, New York 10017.
(8) Information in respect of the beneficial ownership of Genesis Asset
Managers Limited (other than its percentage ownership) is based upon a
statement on schedule 13G filed by such person. The address of Genesis
Asset Managers Limited is Harbour Court, Les Amballes, St. Peter Port,
Guernsey, Channel Islands.
(9) Information in respect of the beneficial ownership of Stephen L. Farley
and Labrador Partners L.P. (other than percentage ownership) is based
upon a statement on Schedule 13G filed jointly by such persons. The
address of Mr. Farley and Labrador Partners L.P. is 655 Third Avenue,
Suite 2520, New York, New York 10017.
(10) Information in respect of the beneficial ownership of Capital Research
and Management Company and SMALLCAP World Fund, Inc. (other than
percentage ownership) is based upon a statement on Schedule 13G filed
jointly by such persons. The address of both Capital Research and
Management Company and SMALLCAP World Fund, Inc. is 333 South Hope
Street, Los Angeles, California 90071. Capital Research and Management
Company is an investment adviser which advises SMALLCAP World Fund,
Inc., an investment company.
(11) Information in respect of the beneficial ownership of Leonard A. Lauder
(other than his percentage ownership) is based upon a statement on
Schedule 13D filed by such person. The address of Mr. Leonard Lauder is
c/o The Estee Lauder Companies Inc., 767 Fifth Avenue, New York, New
York 10153.
(Footnotes continued on next page)
13
<PAGE>
(Footnotes continued from previous page)
(12) 120,034 of these shares of Class B Common Stock are owned directly by
Ronald S. Lauder, 3,385,417 of these shares of Class B Common Stock are
owned beneficially by RSL Investments Corporation, 1,515,000 of these
shares of Class B Common Stock are owned beneficially by RSL Capital
LLC and 577,788 of these shares of Class B Common Stock are owned
beneficially by Duna Investments, Inc., all of which are owned by Mr.
Lauder. 210,461 of these shares of Class B Common Stock are held by RAJ
Family Partners L.P. and beneficially owned by Mr. Lauder, and 646,895
of these shares of Class B Common Stock are held by EL/RSLG Media,
Inc., of which 50% of the common stock outstanding is beneficially
owned by the 1995 Estee Lauder RSL Trust and beneficially owned by Mr.
Lauder.
(13) 1,470,000 of these shares are also included in the shares reported as
being beneficially owned by Labrador Partners L.P. Mr. Farley is the
managing general partner of Labrador Partners L.P.
(14) These shares are also included in the shares reported as being
beneficially owned by Stephen L. Farley, the managing general partner
of Labrador Partners L.P.
(15) 1,170,00 of these shares are also included in the shares reported as
being beneficially owned by SMALLCAP World Fund, Inc., which is advised
by Capital Research and Management Company.
(16) These shares are also included in the shares reported as being
beneficially owned by Capital Research and Management Company, which
advises SMALLCAP World Fund, Inc.
(17) 285,239 of these shares of Class B Common Stock are owned directly by
Leonard A. Lauder. 646,895 of these shares of Class B Common Stock are
held by EL/RSLG Media, Inc., of which 50% of the common stock
outstanding is beneficially owned by the 1995 Estee Lauder LAL Trust,
of which Leonard A. Lauder is a co-trustee and beneficiary. 436,434 of
these shares of Class B Common Stock are held by LWG Family Partners
L.P., a partnership whose managing partner is a corporation which is
one-third owned by Mr. Lauder.
(18) These shares are also included in the shares reported as being
beneficially owned by Ronald S. Lauder and Leonard A. Lauder.
(19) Represents shares of Class A Common Stock underlying (i) warrants which
are currently exercisable at exercise prices per share of $16.10 and
$30.25 on 250,000 and 70,000 shares of Class A Common Stock,
respectively, (ii) 5,000 shares of Class A Common Stock underlying
options which are currently exercisable at $23.00 per share and (iii)
1,000 shares of Class A Common Stock underlying options which will
become exercisable within 60 days which had an initial exercise price
equal to $22.325 and which increases on the first day of each calendar
quarter by one quarter of 5.57%. Does not include 14,000 shares of
Class A Common Stock underlying options which are not currently
exercisable and which will not become exercisable within 60 days.
(20) Includes 190,000 shares of Class A Common Stock underlying options
which are currently exercisable at exercise prices per share of
$8.3125, $24.00. and $23.3125 on 150,000, 26,666 and 13,334 shares of
Class A Common Stock, respectively. Does not include 260,000 shares of
Class A Common Stock underlying options which are not currently
exercisable and which will not become exercisable within 60 days.
(21) Includes 80,000 shares of Class A Common Stock underlying options which
are currently exercisable at exercise prices per share of $14.00,
$14.63, $24.50, $21.75 and $23.00 on 10,000, 25,000, 10,000, 25,000 and
10,000 shares of Class A Common Stock, respectively and 1,000 shares of
Class A Common Stock underlying options which will become exercisable
within 60 days which had an initial exercise price equal to $22.325 and
which increases on the first day of each calendar quarter by one
quarter of 5.57%. Does not include 19,000 shares of Class A Common
Stock underlying options which are not currently exercisable and which
will not become exercisable within 60 days.
(Footnotes continued on next page)
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<PAGE>
(Footnotes continued from previous page)
(22) Represents 125,000 shares of Class A Common Stock underlying options
which are currently exercisable at exercise prices per share of $14.00,
$14.63, $20.75 and $23.00 on 10,000, 50,000, 25,000 and 40,000 shares
of Class A Common Stock, respectively. Does not include 60,000 shares
of Class A Common Stock underlying options which are not currently
exercisable and which will not become exercisable within 60 days.
(23) Includes 402,000 shares of Class A Common Stock underlying options
which are currently exercisable or which will become exercisable within
60 days and 320,000 shares of Class A Common Stock underlying warrants
which are currently exercisable. Does not include 353,000 shares of
Class A Common Stock underlying options which are not currently
exercisable and which will not become exercisable within 60 days.
(24) Represents 87,500 shares of Class A Common Stock underlying options
which are currently exercisable at an exercise price of $24.563 per
share. Does not include 137,500 shares of Class A Common Stock
underlying options which are not currently exercisable and which will
not become exercisable within 60 days.
(25) Represents shares of Class A Common Stock underlying options which are
currently exercisable at exercise prices per share of $14.00, $19.13,
$21,75 and $23.00 on 25,000, 200,000, 50,000 and 50,000 shares of Class
A Common Stock, respectively.
(26) Includes 50,000 shares of Class B Common Stock underlying options which
are currently exercisable at an exercise price of $23.927 per share.
Does not include 50,000 shares of Class B Common Stock underlying
options which are not currently exercisable and which will not become
exercisable within 60 days. Pursuant to a Stock Purchase Agreement (the
"RSL Capital Stock Purchase Agreement"), dated as of December 3, 1998,
between the Company and RSL Capital LLC, Mr. Lauder currently also has
the right to receive, without additional consideration, up to 757,500
shares of Class B Common Stock if the last reported trading price of a
share of the Company's Class A Common Stock does not equal or exceed
$15.00 on the NASDAQ Stock Market for at least 20 consecutive trading
days during the year ending November 12, 1999. Pursuant to the CME
Shareholders' Agreement, the RSL Capital Stock Purchase Agreement is to
be terminated immediately prior to the closing date of the transactions
contemplated by the Reorganization Agreement. See "Certain
Relationships and Related Transactions" on pages 15-17.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 29, 1999, SBS, Ronald S. Lauder (the nonexecutive Chairman of
the Company's Board of Directors), RSL Investments Corporation, RSL Capital LLC
and Duna Investments, Inc. entered into the CME Shareholders' Agreement in order
to facilitate the combination transaction between the Company and SBS on the
terms set out in the Reorganization Agreement. The Reorganization Agreement
provides, among other things, for (a) the sale by the Company to SBS of all of
the assets, properties and rights of the Company (consisting primarily of the
stock of CME Media Enterprises B.V., an intermediate holding company wholly
owned by the Company), (b) the assumption by SBS of, and indemnification of the
Company with respect to, all liabilities, obligations and commitments of the
Company, including the Company's outstanding bonds (which are intended to remain
outstanding following the transaction), (c) the issuance by SBS to the Company
of a number of common shares of SBS, equal to 0.5 times the total number of
shares of the Company's Class A Common Stock and shares of the Company's Class B
Common Stock outstanding immediately prior to the closing of such transaction,
and (d) the immediate commencement of the winding up of the Company and
distribution of the common shares of SBS so received by the Company to the
shareholders of the Company (followed as soon as practical thereafter by the
final dissolution of the Company).
Pursuant to the CME Shareholders' Agreement, Mr. Lauder and the other
Shareholders have agreed to not, prior to the final dissolution of the Company
(a) sell, assign, pledge, transfer or otherwise dispose of (including, without
limitation, any indirect Transfer effected through the Transfer of any equity
interest in a shareholder which is not a natural person, a "Transfer") or
consent to any Transfer of, any or all the shares of
15
<PAGE>
the Company's stock or any interest therein, (b) grant any proxy,
power-of-attorney or other authorization in or with respect to such shares of
the Company's stock, except under or in accordance or not in conflict with the
CME Shareholders' Agreement, or (c) deposit such shares of the Company's stock
into a voting trust, enter into a voting agreement or arrangement with respect
to such shares of the Company's stock or otherwise limit their power to vote
such shares in a manner that conflicts with the CME Shareholders' Agreement.
Under the terms of the CME Shareholders' Agreement, the Shareholders
have agreed to vote their shares of the Company's stock (a) in favor of the
Reorganization Agreement and the transactions contemplated thereby and (b)
against any Competing Proposal (as defined in the CME Shareholders' Agreement).
Moreover, the Shareholders have irrevocably appointed SBS and Harry Sloan, in
his capacity as Chief Executive Officer of SBS, as their proxy to vote their
shares for which they have or share the power to vote (i) in favor of any
transactions contemplated by the Reorganization Agreement and (ii) against any
Competing Proposal.
On December 11, 1998, the Company sold (the "TVN Sale") its interests
in its TVN television operations in Poland to International Trading and
Investments Holding S.A. ("ITI"), a company publicly traded on the Luxembourg
Stock Exchange and the Company's partner in the TVN operations. Mr. Lauder owns
a non-controlling indirect minority interest in ITI. The TVN Sale was effected
pursuant to a Sale and Purchase Agreement dated December 10, 1998. Prior to the
TVN Sale, the Company and ITI were partners in the TVN television operations
such that certain indirect wholly owned subsidiaries of the Company owned 33% of
the outstanding shares of TVN Sp. z o.o. ("TVN") and 50% of the outstanding
shares of Federacja Sp. z o.o. ("Federation"). In addition, certain indirect
wholly owned subsidiaries of the Company owned 49% of the outstanding shares of
Neovision Holding B.V. ("Neovision") and 10% of the outstanding shares of ITI
Media. Details of the TVN Sale are as follows: the Company caused its
subsidiaries to transfer to ITI and certain of its affiliates all of their above
listed interests in TVN, Federation, Neovision and ITI Media together with
certain outstanding receivables in exchange for $10 million in cash, a note (the
"ITI Note") in a principal amount of $40 million bearing interest at a rate of
5% per annum and generally maturing on December 10, 2001 that is convertible
into equity securities of ITI and exchangeable into similar debt securities of
ITI, the release of a $10 million bank guarantee and the assumption by ITI of
various obligations of the Company and its subsidiaries in respect of
programming and satellites relating to the TVN operations. Pursuant to the terms
of the Sale and Purchase Agreement and the ITI Note, between September 10, 2001
and the maturity date of the ITI Note, the Company will be able to convert, at
its option, all or any portion of the principal amount of the ITI Note plus all
interest accrued and unpaid thereon (the "Conversion Amount") into an amount of
equity securities of ITI (the "ITI Ordinary Shares") equal to the Conversion
Amount divided by 80% of the average of the daily closing price of one share of
the publicly traded ITI Ordinary Shares during the twelve month period
immediately preceding the time that the Company gives notice of its intention to
convert on whichever of the Warsaw Stock Exchange or the Luxembourg Stock
Exchange has the largest average daily trading volume. As a result of the TVN
Sale, the Company recorded a write-down of approximately $25 million in its
fourth quarter 1998 financial results.
On December 22, 1998, RSL Capital LLC, a company wholly-owned by Mr.
Lauder, made an equity investment of $22.725 million in the Company in exchange
for 1,515,000 shares of the Company's Class B Common Stock, which is a price
equal to $15.00 per share, pursuant to the terms of the RSL Capital Stock
Purchase Agreement, dated as of December 3, 1998, between the Company and RSL
Capital LLC. Pursuant to the RSL Capital Stock Purchase Agreement, if the last
reported daily trading price of the Class A Common Stock on the NASDAQ Stock
Market does not equal or exceed $15.00 for at least 20 consecutive trading days
during the period that commenced on November 13, 1998 and ends on November 12,
1999 (the "Measurement Period"), the Company will issue additional shares of
Class B Common Stock to RSL Capital for no additional consideration so that the
average per share price for the shares of Class B Common Stock acquired by RSL
Capital pursuant to the Stock Purchase Agreement will equal the average last
reported daily trading price of the Class A Common Stock during the Measurement
Period, provided, that, in no event shall the average price per share for the
shares of Class B Common Stock acquired by RSL Capital be less than $10.00 per
share. In connection with the Reorganization Agreement, Mr. Lauder entered into
the CME Shareholders' Agreement which provides that the RSL Capital Stock
Purchase Agreement be terminated effective immediately prior to the closing date
of the transactions contemplated by the Reorganization Agreement. Accordingly,
RSL Capital LLC may not receive additional shares of Class B Common Stock from
the Company pursuant to the terms of the RSL Capital Stock Purchase Agreement.
R.S. Lauder, Gaspar & Co., LP ("RSLAG"), which is in the process of
liquidating its holdings, performed administrative services for CME Media
Enterprises B.V. ("CME BV"), a subsidiary of the Company, pursuant to a services
agreement dated as of April 1, 1994 (and subsequently extended) (the "Services
Agreement"). Under the
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Services Agreement, CME BV had agreed to reimburse RSLAG for its costs
(including the costs of employees) incurred in providing administrative services
to the Company. The costs of such services that could have been requested from
time to time by the Company pursuant to the Services Agreement were at a rate
that could reasonably have been expected to be charged by an unaffiliated third
party. During the fiscal year ended December 31, 1998, the Company paid $15,013
to RSLAG under the Services Agreement. The Services Agreement was not negotiated
on an arm's length basis. The Company believes, however, that the terms of the
Services Agreement were at least as favorable to the Company as those it could
have negotiated with unrelated parties. Andrew Gaspar, a former director of the
Company, was the president of the corporate general partner of RSLAG, and Mr.
Lauder was a limited partner, but held a majority of the economic interests in
RSLAG. The Services Agreement is no longer in effect.
Mr. Gaspar had a service agreement with the Company, which expired in
October 1998. Pursuant to the agreement, the Company paid $125,000 per year to a
corporation owned by Mr. Gaspar and members of his family for services performed
by him outside of the United States. The agreement contained prohibitions on the
disclosure of confidential information and a non-compete covenant which has a
term of two years after its termination.
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Recent Developments
On April 19, 1999, the Company's subsidiary, CNTS, dismissed Dr.
Vladimir Zelezny from his position as Executive and General Director of CNTS,
for taking actions that exceeded his authority and that were against the
interests of CNTS. CNTS is the primary provider of television services to CET 21
spol. s.r.o. ("CET 21") for Nova TV in the Czech Republic. After an internal
investigation, it was learned that Dr. Zelezny had executed an unlimited CNTS
guarantee for the liabilities of another Czech Republic company, AQS a.s.
("AQS"), without any authorization, has reassigned the program acquisition
department of CNTS to AQS and has notified international television studios that
AQS would replace CTS as the program service provider to Nova TV.
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 million paid to Dr. Zelezny and other unspecified damages based on breaches
by Dr. Zelezny of a share purchase agreement entered into in 1997 under which
the Company purchased a 5.8% interest in CNTS from Dr. Zelezny. The Company is
also seeking the forgiveness of the $5.5 million unpaid balance of the purchase
price under the 1997 share purchase agreement. The arbitration will be
held in Amsterdam, The Netherlands.
Dr. Zelezny owns a controlling 60% participation interest in CET 21. It
has been reported that Dr. Zelezny has threatened that CET 21 could terminate
Nova TV's broadcast signal for up to 30 days unless CNTS and CET 21 resolve
their differences
If the differences between CNTS and CET 21 cannot be resolved, one or
more material adverse effects on the business and financial condition of CNTS
and the Company could result, including a substantial reduction in the economic
benefits currently enjoyed by CNTS and the Company, and, potentially a
termination of the existing commercial relationship between CNTS and CET 21.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
By: /s/ John A. Schwallie
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John A. Schwallie, Vice President-Finance and Chief
Financial Officer
April 30, 1999
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
23.01 Consent of Arthur Andersen & Co.
<PAGE>
Exhibit 23.01
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K into the Company's previously filed
Registration Statements File Nos. 333-1560 and 333-60295.
/s/ Arthur Andersen & Co.
ARTHUR ANDERSEN & CO.
Hamilton, Bermuda
April 30, 1999
