-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Heqa8UGTZDjLZwta9rcosMGFTvmEJqZx16uHTBg53wV82sz94oNxuXWzwxYEglFa yXDqFfBzMKrmfiJ9vxNQQQ== 0000889812-97-002404.txt : 19971115 0000889812-97-002404.hdr.sgml : 19971115 ACCESSION NUMBER: 0000889812-97-002404 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTRAL EUROPEAN MEDIA ENTERPRISES LTD CENTRAL INDEX KEY: 0000925645 STANDARD INDUSTRIAL CLASSIFICATION: TELEVISION BROADCASTING STATIONS [4833] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24796 FILM NUMBER: 97717437 BUSINESS ADDRESS: STREET 1: 18 D ARBLAY STREET CITY: LONDON W1V 3FP ENGLA STATE: X0 BUSINESS PHONE: 8092961431 MAIL ADDRESS: STREET 1: CCLARENDON HOUSE STREET 2: HAMILTON HM CX CITY: BERMUDA STATE: D0 10-Q 1 QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number 0-24796 CENTRAL EUROPEAN MEDIA ENTERPRISES LTD. (Exact name of registrant as specified in its charter) BERMUDA N/A (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) Clarendon House, Church Street, Hamilton HM CX Bermuda (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 441-296-1431 Indicate by check mark whether registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for each shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding as of November 12, 1997 ----- ----------------------------------- Class A Common Stock, par value $.01 16,916,577 Class B Common Stock, par value $.01 7,064,475 PART I FINANCIAL INFORMATION Item 1. Financial Statements CENTRAL EUROPEAN MEDIA ENTERPRISES LTD Consolidated Balance Sheets as at September 30, 1997 and December 31, 1996 ($000s)
ASSETS September 30, December 31, 1997 1996 ------------- ------------- (Unaudited) CURRENT ASSETS: Cash and cash equivalents ..................................................................... $ 125,017 $ 78,507 Investments in marketable securities .......................................................... 29,990 2,896 Restricted cash ............................................................................... 839 2,749 Accounts receivable (net of allowances of $3,338, $3,200) ..................................... 19,648 37,342 Program rights costs .......................................................................... 16,307 12,675 Value-added tax recoverable ................................................................... 562 182 Amount due from unconsolidated affiliates ..................................................... 8,570 1,066 Advances to affiliates ........................................................................ 3,756 4,119 Other short-term assets ....................................................................... 2,532 850 Prepaid expenses .............................................................................. 8,975 5,773 ------------- ------------- Total current assets ................................................................. 216,196 146,159 Investments in unconsolidated affiliates ...................................................... 62,899 56,599 Investments ................................................................................... 12,000 3,600 Loans to affiliates ........................................................................... 31,292 17,766 Property, plant & equipment (net of depreciation of $28,431, $22,317) ......................... 53,449 58,982 Program rights costs .......................................................................... 12,237 14,266 Broadcast licence costs and other intangibles (net of amortization of $2,184, $1,579) ......... 2,570 3,097 Licence acquisition costs (net of amortization of $1,010, $854) ............................... 9,886 3,923 Goodwill ...................................................................................... 61,584 35,338 Organization costs (net of amortization of $1,190, $950) ...................................... 611 934 Development costs (net of allowance of $1,534, $996) .......................................... 13,155 19,105 Deferred taxes ................................................................................ 778 868 Other assets .................................................................................. 6,235 4,493 ------------- ------------- Total assets ......................................................................... $ 482,892 $ 365,130 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable .............................................................................. $ 22,619 $ 18,775 Accrued liabilities ........................................................................... 18,489 17,010 Duties and other taxes payable ................................................................ 7,858 3,312 Income taxes payable .......................................................................... 1,021 9,948 Current portion of obligations under capital lease ............................................ 77 1,794 Current portion of credit facilities .......................................................... 8,778 7,106 Dividends payable ............................................................................. 1,984 -- Investments payable ........................................................................... 21,434 1,955 Advances from affiliates ...................................................................... 789 606 ------------- ------------- Total current liabilities ............................................................ 83,049 60,506 Deferred income taxes ......................................................................... 1,049 2,142 Long-term portion of obligations under capital leases ......................................... 32 7,120 Long-term portion of credit facilities ........................................................ 28,368 22,488 Investments payable ........................................................................... 7,875 14,633 $100,000,000 9 3/8 % Senior Notes due 2004 .................................................... 99,847 -- DM 140,000,000 8 1/8 % Senior Notes due 2004 .................................................. 79,122 -- Other liabilities ............................................................................. 29 305 Minority interest in consolidated subsidiaries ................................................ 1,363 8,616 SHAREHOLDERS' EQUITY: Preferred Stock, $0.01 par value; authorized; 5,000,000 shares; issued and outstanding: none ................................................................ -- -- Class A Common Stock, $0.01 par value: authorized: 100,000,000 shares at September 30, 1997 and 30,000,000 at December 31, 1996; issued and outstanding; 16,914,377 at September 30, 1997 and 16,664,143 at December 31, 1996 ......................................................... 169 167 Class B Common Stock, $0.01 par value: authorized: 15,000,000 shares at September 30, 1997 and December 31, 1996; issued and outstanding; 7,064,475 at September 30, 1997 and 7,191,475 at December 31, 1996 .............................................................. 71 72 Additional paid-in capital .................................................................... 331,961 330,315 Accumulated deficit ........................................................................... (138,641) (78,004) Cumulative currency translation adjustment .................................................... (11,402) (3,230) ------------- ------------- Total shareholders' equity .................................................................... 182,158 249,320 ------------- ------------- Total liabilities and shareholders' equity .................................................... $ 482,892 $ 365,130 ============= =============
Page 2 CENTRAL EUROPEAN MEDIA ENTERPRISES LTD CONSOLIDATED STATEMENTS OF OPERATIONS ($000s, except per share data) (UNAUDITED)
For the three months For the nine months ended September 30, ended September 30, ----------------------- ----------------------- 1997 1996 1997 1996 --------- --------- --------- --------- Gross revenues: .......................................................... $ 30,679 $ 28,289 $ 121,594 $ 105,224 Discounts and agency commissions ......................................... (6,911) (5,857) (27,192) (20,987) --------- --------- --------- --------- Net revenues ............................................................. 23,768 22,432 94,402 84,237 Station expenses: Other operating costs and expenses ..................................... 13,054 11,594 41,003 36,017 Amortization of programming rights ..................................... 4,630 5,171 14,521 15,440 Depreciation of station fixed assets and other intangibles ............. 3,740 3,279 11,240 9,388 --------- --------- --------- --------- Total station operating costs and expenses ............................. 21,424 20,044 66,764 60,845 Selling, general and administrative expenses ........................... 4,422 5,682 15,256 14,417 Corporate expenses: Corporate operating costs and development expenses ..................... 5,669 4,218 15,110 10,728 Amortization of goodwill and allowance for development costs ........... 2,835 744 7,430 1,407 --------- --------- --------- --------- 8,504 4,962 22,540 12,135 Operating loss ........................................................... (10,582) (8,256) (10,158) (3,160) Equity in loss of unconsolidated affiliates (Note 3) ..................... (6,219) (5,621) (16,322) (11,557) Loss on impairment of investments in unconsolidated affiliates (Note 3)... -- -- (20,707) -- Interest and other income ................................................ 1,380 205 3,996 1,284 Interest expense ......................................................... (2,931) (1,382) (6,218) (2,914) Foreign currency exchange (loss) gain .................................... (1,999) 713 (6,585) (917) --------- --------- --------- --------- Loss before provision for income taxes ................................... (20,351) (14,341) (55,994) (17,264) Provision for income taxes ............................................... (1,093) (885) (7,926) (9,198) --------- --------- --------- --------- Loss before minority interest ............................................ (21,444) (15,226) (63,920) (26,462) Minority interest in loss (income) of consolidated affiliates ............ 2,627 534 3,283 (610) --------- --------- --------- --------- Net Loss ................................................................. $ (18,817) $ (14,692) $ (60,637) $ (27,072) ========= ========= ========= ========= PER SHARE DATA: Net loss per share (Note 2) .............................................. $ (0.79) $ (0.80) $ (2.54) $ (1.48) ========= ========= ========= ========= Weighted average number of common shares outstanding (000s) .............. 23,877 18,348 23,877 18,348 ========= ========= ========= =========
Page 3 CENTRAL EUROPEAN MEDIA ENTERPRISES LTD Consolidated Statements of Shareholders' Equity For the nine months ended September 30, 1997 ($000s) (Unaudited)
Cumulative Class A Class B Additional Currency Common Common Paid-in Accumulated Translation Stock Stock Capital Deficit (1) Adjustment Total ------- ------- ---------- ----------- ------------ ------------ BALANCE, December 31, 1996..................... $ 167 $ 72 $ 330,315 $ (78,004) $ (3,230) $ 249,320 Capital Contributed by Shareholders.......... 2 (1) 1,646 -- -- 1,647 Foreign Currency Translation Adjustments..... -- -- -- -- (8,172) (8,172) Net loss..................................... -- -- -- (60,637) -- (60,637) ------- ------- ---------- ----------- ------------ ------------ BALANCE, September 30, 1997.................... $ 169 $ 71 $ 331,961 $ (138,641) $ (11,402) $ 182,158 ======= ======= ========== ============ ============ ============
(1) Of the accumulated deficit of $138,641at September 30, 1997, $87,277 represents accumulated losses in Unconsolidated Affiliates. Page 4 CENTRAL EUROPEAN MEDIA ENTERPRISES LTD Consolidated Statements of Cash Flows For the nine months ended September 30, 1997 and 1996 ($000s) (Unaudited)
For the nine months ended September 30, ----------------------- 1997 1996 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss ........................................................................ ($ 60,637) ($ 27,072) Adjustments to reconcile net loss to net cash used in operating activities: Equity in loss of unconsolidated affiliates ................................... 16,322 11,557 Loss on impairment of investments in unconsolidated affiliates ................ 20,707 -- Depreciation & amortization (excluding amortization of barter programs)........ 32,401 27,175 Minority interest in (loss) income of consolidated affiliates ................ (3,283) 610 Valuation allowance for development costs ..................................... 538 253 Changes in assets & liabilities: Accounts receivable ........................................................... 11,305 9,239 Program rights paid ........................................................... (16,679) (18,656) Value-added tax recoverable ................................................... (380) 666 Advances to affiliates ........................................................ (6,575) (4,174) Production costs .............................................................. (303) -- Prepaid expenses .............................................................. (4,497) (1,376) Accounts payable .............................................................. 900 (736) Accrued liabilities ........................................................... (81) 8,905 Income & other taxes payable .................................................. (3,382) (7,700) --------- --------- Net cash used in operating activities ..................................... (13,644) (1,309) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments in Unconsolidated Affiliates ...................................... (11,129) (32,684) Other investments ............................................................. (23,505) -- Investments in marketable securities .......................................... (27,094) 8,835 Restricted cash ............................................................... 1,910 2,616 Acquisition of fixed assets ................................................... (7,693) (13,219) Acquisition of minority shareholder's interest ................................ (8,694) (16,839) Purchase of business .......................................................... -- (2,962) Dividends paid to minority shareholders ....................................... (1,650) (1,396) Payments for broadcast license costs, other assets and intangibles ............ (571) (137) Development Costs ............................................................. (12,040) (2,873) --------- --------- Net cash used in investing activities ..................................... (90,466) (58,659) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Credit facilities ............................................................. (2,274) 22,770 Financing of acquisition of minority shareholder's interest ................... -- 16,839 Payments under capital leases ................................................. (632) (1,236) Loans and advances to affiliates .............................................. (18,826) (18,034) Issuance of debt .............................................................. 169,572 -- Capital contributed by shareholders ........................................... 1,647 999 Other long term liabilities ................................................... (225) (171) Investments by minority shareholders in consolidated affiliates ............... 2,800 -- --------- --------- Net cash provided by financing activities ................................. 152,062 21,167 --------- --------- IMPACT OF EXCHANGE RATE FLUCTUATIONS ON CASH .................................... (1,442) (100) --------- --------- Net increase (decrease) in cash and cash equivalents .......................... 46,510 (38,901) CASH AND CASH EQUIVALENTS, beginning of period .................................. 78,507 53,210 --------- --------- CASH AND CASH EQUIVALENTS, end of period ........................................ $ 125,017 $ 14,309 --------- --------- Supplemental information: Cash paid for interest ........................................................ $ 4,458 $ 3,132 ========= ========= Income taxes .................................................................. $ 20,614 $ 12,976 ========= =========
Page 5 CENTRAL EUROPEAN MEDIA ENTERPRISES LTD. Notes to Consolidated Financial Statements September 30, 1997 1. Organization and Business Central European Media Enterprises Ltd., a Bermuda corporation ("CME"), was formed in June 1994. Through its predecessor companies, CME has been in operation since 1991. CME, together with its subsidiaries (CME and it subsidiaries and affiliates are collectively referred to as the "Company"), invests in, develops and operates national and regional commercial television stations and networks in Central and Eastern Europe and regional commercial television stations in Germany. In the Czech Republic, the Company owns a 99% economic interest and has 97% of the voting power in Ceska Nezavisla Televizni Spolecnost s.r.o. ("CNTS"), which operates Nova TV, the leading private national television station in the Czech Republic. CET 21 s.r.o. ("CET 21") owns 1% of CNTS. Ceska Sporitelna Bank ("CS") has a 2% voting interest in CNTS. The Company's economic and voting interest in CNTS increased during the third quarter of 1997 as a result of the Company's August 1997 purchase of Nova Consulting a.s. ("NC"), which owns a 5.8% participation interest in CNTS, from certain of the partners of CET 21, including Vladimir Zelezny, the General Director of CNTS. The Company owns a 62% ownership interest in Radio Alfa a.s. ("Radio Alfa"), one of two private Czech Republic national radio broadcasters. The Company is a party to certain loan and consulting agreements with Radio Alfa. Certain of the Company's outstanding loans to Radio Alfa are convertible into an additional equity interest which, when combined with its 62% interest, would give the Company an 83.7% interest in Radio Alfa. In Romania, the Company and two local partners, Adrian Sarbu and Ion Tiriac, operate PRO TV, a commercial television network, through Media Pro International S.A. ("Media Pro International"). The Company owns a 66% equity interest in Media Pro International. In August 1997, the Company's interest in Media Pro International was reduced from 77.5% to 66% as a result of the exercise of an option by Mr. Tiriac to increase his interest in Media Pro International. The Company owns 49% of the equity of PRO TV, SRL, an affiliate station of Media Pro International. Messrs. Sarbu and Tiriac own substantially all of the remainder of PRO TV, SRL. PRO TV, SRL holds many of the licenses for the stations comprising the PRO TV network. The Company owns a 95% equity interest in Unimedia SRL ("Unimedia"), which owns a 10% equity interest in a consortium, MobilRom, which holds one of two GSM licenses in Romania. Mr. Sarbu owns the remaining 5.0% of Unimedia. In Slovenia, the Company operates POP TV, together with MMTV d.o.o. Ljubljana ("MMTV") and Tele 59 d.o.o. Maribor ("Tele 59"), through Produkcija Plus d.o.o. ("Pro Plus"). Pro Plus provides programming under the name POP TV to, and sells advertising for, MMTV, Tele 59 and affiliate TV Robin. The Company owns 78% of the equity of Pro Plus, but has an effective economic interest of 85.3% as a Page 6 result of a 33% economic interest in MMTV and a 33% economic interest in Tele 59. Tele 59 owns a 21% equity interest in Pro Plus, and the remaining 1% equity interest in Pro Plus is owned by MMTV. In October 1997, Pro Plus also began providing programming under the name Gajba TV to, and selling advertising for, affiliated stations in the Slovenian cities Ljubljana, Maribor and Murska Sobota. (Note 4) In the Slovak Republic, the Company owns an 80% non-controlling economic interest and a 49% voting interest in Slovenska Televizna Spolocnost s.r.o. ("STS"), which launched Markiza TV as a national television station on August 31, 1996. In Poland, the Company owns a 50% interest in Federacja Sp.zo.o. ("Federation"). The Polish media group ITI owns the remainder of Federation through ITI Media Group N.V., in which the Company owns a 10% interest. TVN Sp.zo.o. ("TVN"), which is owned 67% by ITI and 33% by the Company, holds broadcast licenses for northern Poland and the cities of Warsaw and Lodz. TVN owns 100% (increased from 76.3% during the fourth quarter of 1997) of Telewizja Wisla Sp.zo.o. ("TV Wisla"), which operates a regional television station in southern Poland (Note 4). Federation provides programming and advertising services to TVN and TV Wisla. In Ukraine, the Company owns a 50% interest in a group of companies (collectively, the "Studio 1+1 Group"), which has the right to broadcast programming and sell advertising on Ukrainian National Channel 2 ("UT-2") through 2006. In Hungary, in September 1997, the Company acquired a 71.2% equity interest in Budapesti Kommunikacios Rt ("TV3"), a television station broadcasting in Budapest and distributed by satellite to cable systems throughout Hungary. TV3 was relaunched on October 26, 1997 (Note 4). The Company also wholly owns Videovox Studio Limited Liability Company, a Hungarian dubbing and production company ("Videovox") and 24.9% of the equity of 2002 Tanacsado es Szolgaltato Korlatolt Felelosegu Tarsasag ("2002 Kft."), a broadcasting company in Hungary. See "Other Information - Legal Proceedings." The Company owns a 50% interest (non-voting profit participation) in Franken Funk & Fernsehen GmbH ("FFF"), which owns 74.8% of a regional television station in Nuremberg, Germany, NMF Neue Medien Franken GmbH and Co., K.G. ("NMF"). The Company has a 49% equity interest, and a 50% economic interest in Sachsen Funk und Fernsehen GmbH ("SFF") which owns a 33.33% equity interest in Sachsen Fernsehen Betriebs KG, which operates regional television stations in Leipzig and Dresden, Germany. On May 13, 1997, the Company announced its decision to discontinue funding of 1A TV Beteilgungsgessellschaft GmbH & Co. Betriebs KG ("1A TV"), which operated PULS, a regional television station operating in the Berlin-Brandenburg area of Germany. The Company had a 58% non-controlling interest in 1A TV. On May 27, 1997, 1A TV initiated a bankruptcy proceeding in the Bankruptcy Court of Berlin-Charlottenburg. See "Other Information - Legal Proceedings". Page 7 2. Summary of Significant Accounting Policies The accompanying financial statements have been prepared in accordance with United States generally accepted accounting principles ("GAAP"). In the opinion of management, these consolidated financial statements include all adjustments necessary to fairly state the Company's financial position and results of operations. The results for the nine months ended September 30, 1997 are not necessarily indicative of the results expected for the year. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company's wholly owned subsidiaries and the accounts of CNTS, which operates Nova TV, PRO TV, POP TV, Videovox and Radio Alfa (the "Consolidated Affiliates"), as consolidated entities and reflect the interests of the minority owners of CNTS, PRO TV, POP TV and Radio Alfa for the nine months ended September 30, 1997. Videovox was acquired in May 1996 and has been wholly owned since April 1997. A controlling interest in Radio Alfa was acquired in December 1996. CNTS, PRO TV, POP TV, 2002 Kft. (until March 1997, when the Company's ownership in 2002 Kft. decreased to 24.9%) and Videovox were the only consolidated entities for the same period in 1996. The results of Markiza TV, FFF, SFF, the Studio 1+1 Group, TVN and 1A TV (for the first quarter of 1997 only) (the "Unconsolidated Affiliates") in which the Company has, or during the nine months ended September 30, 1997 had, minority or non-controlling ownership interests, are included in the accompanying consolidated financial statements as equity in loss or income of unconsolidated affiliates using the equity method. 1A TV initiated a bankruptcy proceeding in May 1997. The Company records other investments at the lower of cost and market value. Net Loss Per Share Net loss per share was computed by dividing the Company's net loss by the weighted average number of Common Shares (both Class A and Class B) outstanding during the period ended September 30, 1997. The impact of outstanding options and warrants has not been included in the computation of net loss per share, as the effect of their inclusion would be anti-dilutive. Recently Issued Accounting Standards In March 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share" ("SFAS 128"). This statement establishes standards for computing and presenting earnings per share ("EPS"), replacing the presentation of currently required primary EPS with a presentation of Basic EPS. For entities with complex capital structures, the statement requires the dual presentation of both Basic EPS and Diluted EPS on the face of the statement of operations. Under this new standard, Basic EPS is computed based on weighted average shares outstanding and excludes any potential dilution. Diluted EPS reflects potential dilution from the exercise or conversion of securities into common stock or from other contracts to issue common stock and is similar to the currently required fully diluted EPS. SFAS Page 8 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods, and earlier application is not permitted. When adopted, the Company will be required to restate its EPS data for all prior periods presented. The Company does not expect the impact of the adoption of this statement to be material to previously reported EPS amounts. Reclassifications Certain reclassifications were made to prior period amounts to conform to current period classifications. 3. Summary Financial Information for Unconsolidated Affiliates. ----------------------------------------------- ($ 000s) As of ----------------------------- ---------------- December 31, September 30, 1997 1996 ----------------------------- ---------------- Markiza TV Studio 1+1 Markiza TV Group Current assets 15,195 3,833 10,896 Non-current assets 26,119 21,942 28,783 Current liabilities (12,592) (4,562) (6,635) Non-current liabilities (10,001) (5,017) (9,222) -------- ------- ------- Net assets 18,721 16,196 23,822 ======== ======= =======
------------------------------ ---------------------------------- For the nine months ended, For the three months ended, September 30, 1997 September 30, 1997 ------------------------------ ---------------------------------- ($ 000s) Markiza TV Studio 1+1 Markiza TV Studio 1+1 -------- ---------- ---------- ---------- ---------- Group Group ----- ----- Net revenues 19,348 9,842 5,519 2,865 Operating loss (2,652) (2,388) (2,209) (895) Net loss (3,804) (2,590) (2,516) (931)
The Company's share of losses in Unconsolidated Affiliates for the nine months ended September 30, 1997 was $16,322,000, including $2,843,000 in 1A TV (prior to the write-down described below), $2,454,000 in FFF, $254,000 in SFF, $3,453,000 in Markiza TV, $4,074,000 in TVN and $3,244,000 in the Studio 1+1 Group. On May 13, 1997, the Company announced its decision to discontinue funding of 1A TV. As a result, the Company has written down its investments in Germany (including 1A TV, FFF and SFF) by $20,707,000 and eliminated the carrying value of these investments. This write-down, together with losses incurred by the German operations during the nine months ended September 30, 1997, has resulted in a total charge of $26,258,000 in the Company's Consolidated Statements of Operations. To finance developments, 1A TV received investment grants in an aggregate amount of DM8,544,000 ($4,855,000) from a German public bank beginning in 1993, which grants were guaranteed by a wholly owned subsidiary of the Company. As a result of the bankruptcy proceedings initiated by 1A TV, the bank has notified the Page 9 guarantor that it intends to seek repayment of the investment grants from the guarantor, plus interest at the rate of 6.0% per annum. Management believes that the maximum exposure is limited to the German assets, which have been fully provided for. 4. Subsequent Events In October 1997, the Company and its partner, the Polish media group ITI, launched a television network in Poland, whereby Federation is providing programming and advertising services to TVN and TV Wisla. Also in October, TVN increased its ownership in TV Wisla from 76.3% to 100%. TV Wisla operates a regional television station in southern Poland. On October 26, 1997, Budapesti Kommunikacios Rt ("TV3"), a television station broadcasting in Budapest and distributed by satellite to cable systems throughout Hungary, was relaunched. In September 1997, the Company acquired a 71.2% equity interest in TV3. In October 1997, Pro Plus began providing programming under the name Gajba TV to, and selling advertising for, affiliated stations in the Slovenian cities Ljubljana, Maribor and Murska Sobota. Page 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction The Company is the leading commercial television company in Central and Eastern Europe. The Company has developed and currently operates the leading national private television stations and networks, as measured by audience share within their respective areas of broadcast reach, in the Czech Republic, the Slovak Republic, Slovenia and Romania and a leading station in Ukraine. The Company recently launched a television network in Poland, a television station in Hungary and a second television station in Slovenia. The Company's television studios, production facilities and editing suites at its national television stations produced approximately 12,000 hours of original programming in 1996 to support the Company's broadcasting operations, making it the largest private producer of local television programming in Central and Eastern Europe. To complement its commercial television activities, the Company also has interests in national radio stations and is increasingly active in program rights distribution and other media services. The Company's revenues are derived principally from the sale of television advertising to local, national and international advertisers. To a limited extent, the Company also engages in certain barter transactions in which its broadcast operations exchange unsold commercial advertising time for goods and services. The Company, like other television operators, experiences seasonality, with advertising sales tending to be lowest during the third quarter of each calendar year, which includes the summer holiday period (typically July and August), and highest during the fourth quarter of each calendar year. The primary expenses incurred in operating broadcast stations are programming costs, employee salaries, broadcast transmission expenses and selling, general and administrative expenses. Certain of the Company's operations do not require the direct incurrence of broadcast transmission expenses. However, the Company incurs significant development expenses, including funding and negotiating with local partners, researching and preparing license applications, preparing business plans and conducting pre-operating activities, as well as reorganizing existing affiliate entities which hold the broadcast licenses. The primary internal sources of cash available for corporate operating costs and development expenses are dividends and other distributions from subsidiaries and affiliates. The Company's ability to obtain dividends or other distributions is subject to, among other things, restrictions on dividends under applicable local laws and foreign currency exchange regulations of the jurisdictions in which its subsidiaries and affiliates operate. The subsidiaries' and affiliates' 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 and affiliates are organized provide generally that dividends may be declared by the partners or shareholders out of yearly profits subject to the maintenance of registered capital and required reserves and after the recovery of accumulated losses. Page 11 Selected Combined Financial Information - Broadcast Cash Flow The following tables are neither required by United States generally accepted accounting principles ("GAAP") nor intended to replace the Consolidated Financial Statements prepared in accordance with GAAP. The tables set forth certain combined operating data for the three and nine months ended September 30, 1997 and 1996 for national television broadcast stations or networks. The financial information included below departs materially from GAAP because it aggregates the revenues and operating income of certain Unconsolidated Affiliates with Consolidated Affiliates. This supplemental information is presented solely for additional analysis and not as a presentation of results of operations of each component, nor as combined or consolidated financial data presented in accordance with GAAP. The Company's television operations in Poland are not included in this analysis, as they were not fully operational during the three and nine months ended September 30, 1997. Regional television stations in Germany are not included in this analysis as these operations are dissimilar from those of national television broadcast entities. The Company accounts for its 80% non-controlling interest in Markiza TV and its 50% interest in the Studio 1+1 Group using the equity method of accounting. Under this method of accounting, the Company's interest in net earnings or losses of Markiza TV and the Studio 1+1 Group is included in the consolidated earnings and an adjustment is made to the carrying value at which the investment is recorded on the consolidated balance sheet. The following supplementary unaudited combined information includes certain financial information of Markiza TV and the Studio 1+1 Group on a line-by-line basis, similar to that of the Company's consolidated television broadcast entities, which include CNTS, PRO TV and POP TV. Management service charges to the stations are not included in the combined operating data below as these are eliminated in the Consolidated Financial Statements. Markiza TV began operations in August 1996 and the Studio 1+1 Group began generating significant revenues during the second quarter of 1997. The Company believes that this unaudited combined and combining operating information provides useful disclosure. Page 12
Three Months Ending September 30, --------------------------------------------------------------------------------------------- CNTS PRO TV POP TV Subtotal(1) ------------------------ ---------------------- ---------------------- ------------------- 1996 1997 1996 1997 1996 1997 1996 1997 ---- ---- ---- ---- ---- ---- ---- ---- (dollars in thousands) Station Operating Data: Net revenues ....................... 17,449 14,836 2,995 5,310 1,563 2,592 22,007 22,738 Station operating expense .......... (13,032) (11,052) (3,785) (5,568) (3,009) (3,879) (19,826) (20,499) Selling, General and Administrative expenses ............ (1,591) (1,191) (1,759) (2,111) (1,689) (1,164) (5,039) (4,466) ------- ------- ------- ------- ------- ------- ------- ------- Station operating income (loss)..... 2,826 2,593 (2,549) (2,369) (3,135) (2,451) (2,858) (2,227) Depreciation of assets.............. 1,926 1,867 614 1,125 717 631 3,257 3,623 ------- ------- ------- ------- ------- ------- ------- ------- EBITDA (5).......................... 4,752 4,460 (1,935) (1,244) (2,418) (1,820) 399 1,396 Amortization of programming rights.. 4,164 2,804 752 1,064 255 762 5,171 4,630 Cash program rights costs........... (3,410) (1,933) (463) (2,480) (996) (865) (4,869) (5,278) ------- ------- ------- ------- ------- ------- ------- ------- Broadcast cash flow ................ 5,506 5,331 (1,646) (2,660) (3,159) (1,923) 701 748 ======= ======= ======= ======= ======= ======= ======= ======= Broadcast cash flow margin ......... 31.55% 35.94% - - - - 3.18% 3.29% Economic interest................... 88.0% 99.0% 77.5% 66.0% 72.0% 85.3% - - Broadcast cash flow attributable to the Company......................... 4,845(6) 5,278(7) (1,276) (1,756)(8) (2,274) (1,640) 1,295 1,882 Three Months Ending September 30, ------------------------------------------------------------ Studio 1+1 Markiza TV (2) Group Total Combined (3) ----------------------- ------------ ----------------------- 1996 1997 1997 1996(2)(4) 1997 ---- ---- ---- ---------- ---- (dollars in thousands) Station Operating Data: Net revenues ....................... 1,195 5,519 2,865 23,202 31,122 Station operating expense .......... (2,427) (6,504) (2,688) (22,253) (29,691) Selling, General and Administrative expenses ............ (1,044) (1,224) (1,073) (6,083) (6,763) ------- ------- ------- ------- ------- Station operating income (loss)..... (2,276) (2,209) (896) (5,134) (5,332) Depreciation of assets.............. 326 1,098 179 3,583 4,900 ------- ------- ------- ------- ------- EBITDA (5).......................... (1,950) (1,111) (717) (1,551) (432) Amortization of programming rights.. 599 1,775 362 5,770 6,767 Cash program rights costs........... (3,196) (2,264) (640) (8,065) (8,182) ------- ------- ------- ------- ------- Broadcast cash flow ................ (4,547) (1,600) (995) (3,846) (1,847) ======= ======= ======= ======= ======= Broadcast cash flow margin ......... - - - - - Economic interest................... 80.0% 80.0% 50.0% - - Broadcast cash flow attributable to the Company......................... (3,638) (1,280) (498) (2,343) 104
(1) Includes consolidated television broadcast entities only. (2) Markiza TV began operations in August 1996. (3) Represents combined operating data on a line-by-line basis for national television broadcast entities, including Markiza TV and the Studio 1+1 Group, which are accounted for using the equity method of accounting in the accompanying consolidated financial statements, and does not include (i) regional television stations in Germany, because these operations are dissimilar from those of national broadcast entities and (ii) television operations in Poland, which were not fully operational during the three months ended September 30, 1997. (4) Does not include the Studio 1+1 Group, which began operations after September 30, 1996. (5) EBITDA consists of earnings before interest, income taxes, depreciation and amortization of intangible assets (which do not include programming rights). EBITDA is provided because it is a measure 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. See the Company's Consolidated Financial Statements included in the accompanying financial statements. (6) Reflects the Company's purchase in August 1996 of CS's 22% economic interest in CNTS and virtually all of CS's voting power in CNTS (the "1996 CNTS Purchase") as if such acquisition had been effective from January 1, 1996. (7) Reflects the Company's purchase in March 1997 of an additional 5.2% economic interest in CNTS (the "First 1997 CNTS Purchase") and the Company's purchase in August 1997 of an additional 5.8% economic interest in CNTS (the "Second 1997 CNTS Purchase") as if such acquisitions had been effective from January 1, 1997. (8) Reflects the reduction in August 1997 of the Company's interest in Media Pro International from 77.5% to 66% as if such reduction had been effective from January 1, 1997. Page 13
Nine Months Ending September 30, --------------------------------------------------------------------------------------------- CNTS PRO TV POP TV Subtotal(1) ------------------------ ---------------------- ---------------------- ------------------- 1996 1997 1996 1997 1996 1997 1996 1997 ---- ---- ---- ---- ---- ---- ---- ---- (dollars in thousands) Station Operating Data: Net revenues ....................... 70,327 63,331 7,975 18,393 5,219 9,734 83,521 91,458 Station operating expense .......... (39,453) (35,769) (11,515) (16,682) (9,284) (11,533) (60,252) (63,984) Selling, General and Administrative expenses ............ (5,947) (4,328) (4,012) (7,250) (3,454) (2,930) (13,413) (14,508) -------- ------- ------- ------- ------- ------- -------- -------- Station operating income (loss)..... 24,927 23,234 (7,552) (5,539) (7,519) (4,729) 9,856 12,966 Depreciation of assets.............. 5,712 5,848 1,763 3,124 1,880 1,905 9,355 10,877 -------- ------- ------- ------- ------- ------- -------- -------- EBITDA (5).......................... 30,639 29,082 (5,789) (2,415) (5,639) (2,824) 19,211 23,843 Amortization of programming rights.. 12,360 9,194 2,205 2,989 875 2,338 15,440 14,521 Cash program rights costs........... (13,152) (9,687) (3,581) (5,152) (1,923) (1,881) (18,656) (16,720) -------- ------- ------- ------- ------- ------- -------- -------- Broadcast cash flow ................ 29,847 28,589 (7,165) (4,578) (6,687) (2,367) 15,995 21,644 ======== ======= ======= ======= ======= ======= ======= ======= Broadcast cash flow margin ......... 42.44% 45.14% - - - - 19.15% 23.67% Economic interest................... 88.0% 99.0% 77.5% 66.0% 72.0% 85.3% - - Broadcast cash flow attributable to the Company......................... 26,265(6) 28,303(7) (5,553) (3,021)(8) (4,815) (2,019)(9) 15,897 23,263 Nine Months Ending September 30, ------------------------------------------------------------ Studio 1+1 Markiza TV (2) Group Total Combined (3) ---------------------- ------------ ----------------------- 1996 1997 1997 1996(2)(4) 1997 ---- ---- ---- ---------- ---- (dollars in thousands) Station Operating Data: Net revenues ....................... 1,195 19,348 9,842 84,716 120,648 Station operating expense .......... (2,427) (19,021) (9,397) (62,679) (92,402) Selling, General and Administrative expenses ............ (1,044) (2,979) (2,834) (14,457) (20,321) ------- ------- ------- -------- -------- Station operating income (loss)..... (2,276) (2,652) (2,389) 7,580 7,925 Depreciation of assets.............. 326 3,216 461 9,681 14,554 ------- ------- ------- -------- -------- EBITDA (5).......................... (1,950) 564 (1,928) 17,261 22,479 Amortization of programming rights.. 599 6,113 918 16,039 21,552 Cash program rights costs........... (3,196) (7,730) (1,707) (21,852) (26,157) ------- ------- ------- -------- -------- Broadcast cash flow ................ (4,547) (1,053) (2,717) 11,448 17,874 ======= ======= ======= ======== ======== Broadcast cash flow margin ......... - - - 13.51% 14.81% Economic interest................... 80.0% 80.0% 50.0% - - Broadcast cash flow attributable to the Company......................... (3,638) (842) (1,359) 12,259 21,062
(1) Includes consolidated television broadcast entities only. (2) Markiza TV began operations in August 1996. (3) Represents combined operating data on a line-by-line basis for national television broadcast entities, including Markiza TV and the Studio 1+1 Group, which are accounted for using the equity method of accounting in the accompanying consolidated financial statements, and does not include (i) regional television stations in Germany, because these operations are dissimilar from those of national broadcast entities and (ii) television operations in Poland, which were not fully operational during the nine months ended September 30, 1997. (4) Does not include the Studio 1+1 Group, which began operations after September 30, 1996. (5) EBITDA consists of earnings before interest, income taxes, depreciation and amortization of intangible assets (which do not include programming rights). EBITDA is provided because it is a measure 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. See the Company's Consolidated Financial Statements included in the accompanying financial statements. (6) Reflects the Company's purchase in August 1996 of CS's 22% economic interest in CNTS and virtually all of CS's voting power in CNTS (the "1996 CNTS Purchase") as if such acquisition had been effective from January 1, 1996. (7) Reflects the Company's purchase in March 1997 of an additional 5.2% economic interest in CNTS (the "First 1997 CNTS Purchase") and the Company's purchase in August 1997 of an additional 5.8% economic interest in CNTS (the "Second CNTS Purchase") as if such acquisitions had been effective from January 1, 1997. (8) Reflects the reduction in August 1997 of the Company's interest in Media Pro International from 77.5% to 66% as if such reduction had been effective from January 1, 1997. (9) Reflects the Company's purchase in March 1997 of an additional effective economic interest of 13.3% as if such acquisition had been effective from January 1, 1997. Page 14 "Broadcast cash flow", a broadcasting industry measure of performance, is defined as net broadcast revenues, less broadcast operating expenses excluding depreciation and amortization, broadcast selling, general and administrative expenses, and cash program rights costs. "Broadcast cash flow margin" is broadcast cash flow divided by net broadcast revenues. "Broadcast cash flow attributable to the Company" is broadcast cash flow which is attributable to the Company based on the Company's effective economic interest in CNTS, PRO TV, POP TV, Markiza TV and the Studio 1+1 Group as of September 30, 1997, which was 99%, 66%, 85.3%, 80.0% and 50%, respectively. Cash program rights costs represent cash payments for current programs payable and such payments do not necessarily correspond to program use. The Company has included broadcast cash flow because it is commonly used in the broadcast industry as a measure of performance. Broadcast cash flow should not be considered as a substitute measure of operating performance or liquidity prepared in accordance with GAAP. EBITDA consists of earnings before interest, income taxes, depreciation and amortization of intangible assets (which do not include programming rights). EBITDA is provided because it is a measure 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. See the Company's Consolidated Financial Statements included in the accompanying financial statements. Certain Station Operating Data The three months ended September 30, 1997 compared to the three months ended September 30, 1996 Total combined broadcast cash flow improved by $1,999,000, to negative $1,847,000 for the three months ended September 30, 1997 compared to the same period in 1996. This increase was primarily attributable to a positive change in broadcast cash flow for Markiza TV and POP TV of $2,947,000 and $1,236,000, respectively, for the three months ended September 30, 1997 compared to the same period in 1996. The increase was partially offset by a $1,014,000 negative change in PRO TV's broadcast cash flow and the addition to the Company's operations of the Studio 1+1 Group, which had negative $995,000 broadcast cash flow in the three months ended September 30, 1997. CNTS had broadcast cash flow of $5,331,000 for the three months ended September 30, 1997, compared to $5,506,000 for the same period in 1996, an increase of $175,000, or 3.2%. Measured in local currency, CNTS's broadcast cash flow increased by 29.0%. CNTS's broadcast cash flow margin, which is not affected by currency fluctuations, was 35.94% for the third quarter of 1997 compared to 31.55%, for the same period in 1996. Total combined EBITDA had a positive change of $1,119,000, for the three months ended September 30, 1997 compared to the same period last year. This change is primarily attributable to a positive change in EBITDA for PRO TV, POP TV and Markiza TV of $691,000, $598,000 and $839,000, respectively, for the three months ended September 30, 1997 compared to the same period in 1996. The increase was Page 15 partially offset by the addition to the Company's operations of the Studio 1+1 Group, which had negative $717,000 EBITDA for the three months ended September 30, 1997. CNTS recorded EBITDA of $4,460,000 in the three months ended September 30, 1997, compared to $4,752,000 for the same period in 1996, a decrease of $292,000, or 6.1%. Measured in local currency, CNTS's EBITDA increased by 29.9%. The nine months ended September 30, 1997 compared to the nine months ended September 30, 1996 Total combined broadcast cash flow increased by $6,426,000, to $17,874,000, for the nine months ended September 30, 1997 compared to the same period in 1996. The increase was primarily due to positive changes in broadcast cash flow for PRO TV, POP TV and Markiza TV of $2,587,000, $4,320,000 and $3,494,000, respectively, for the nine months ended September 30, 1997 compared to the same period in 1996. The increase was partially offset by the addition to the Company's operations of the Studio 1+1 Group, which had negative $2,717,000 broadcast cash flow for the nine months ended September 30, 1997. CNTS had broadcast cash flow of $28,589,000 for the nine months ended September 30, 1997 compared to $29,847,000 for the same period in 1996, a decrease of $1,258,000, or 4.2%. Measured in local currency, CNTS's broadcast cash flow increased by 8.9%. CNTS's broadcast cash flow margin, which is not affected by currency fluctuations, was 45.14% for the nine months ended September 30, 1997, compared to 42.44% for the same period in 1996. Total combined EBITDA increased by $5,218,000, or 30.2%, for the nine months ended September 30, 1997 compared to the same period in 1996. This increase is primarily attributable to a positive change in EBITDA for PRO TV, POP TV and Markiza TV of $3,374,000, $2,815,000 and $2,514,000, respectively, for the nine months ended September 30, 1997. This increase was partially offset by the addition to the Company's operations of the Studio 1+1 Group, which had negative $1,928,000 EBITDA for the nine months ended September 30, 1997. CNTS recorded EBITDA of $29,082,000 in the nine months ended September 30, 1997, compared to $30,639,000 for the same period in 1996, a decrease of $1,557,000, or 5.1%. Measured in local currency, CNTS's EBITDA increased by 7.9%. Application of Accounting Principles Although the Company conducts operations largely in foreign currencies, the Company prepares its financial statements in United States dollars and in accordance with GAAP. The Company's consolidated operating statements include the results of wholly owned subsidiaries and the results of CNTS, PRO TV, POP TV, Videovox (wholly owned since April 1997) and Radio Alfa and separately set forth the minority interest attributable to other owners of CNTS, PRO TV, POP TV and Radio Alfa. The results of other broadcast operations, Markiza TV, FFF, SFF, the Studio 1+1 Group, TVN and 1A TV (which operated PULS, a regional television station in the Berlin-Brandenburg area of Germany and which initiated a bankruptcy proceeding in May 1997), are accounted for using the equity method, which reflects the Company's share Page 16 of the net income or losses in those operations. The Company records other investments at the lower of cost and market value. Foreign Currency The Company and its subsidiaries generate revenues primarily in Czech korunas ("Kc"), Romanian lei ("ROL"), Slovenian tolar ("SIT"), Slovak korunas ("Sk"), Hungarian forints ("HUF"), Ukrainian hryvna ("Hrn"), Polish zloty ("ZI") and German marks ("DM"), and incur substantial operating expenses in those currencies. The Romanian lei, Slovenian tolar, Ukrainian hryvna and Slovak koruna are managed currencies with limited convertibility. The Company also incurs operating expenses for programming in United States dollars and other foreign currencies. For entities operating in economies considered non-highly inflationary, including CNTS, POP TV, Markiza TV, Videovox, Radio Alfa, TVN and certain Studio 1+1 Group entities, balance sheet accounts are translated from foreign currencies into United States dollars at the relevant period end exchange rate; statement of operations accounts are translated from foreign currencies into United States dollars at the weighted average exchange rates for the respective periods. The resulting translation adjustments are reflected in a component of shareholders' equity with no effect on the consolidated statements of operations. PRO TV and certain Studio 1+1 Group entities operate in economies qualifying as highly inflationary. Accordingly, non-monetary assets are translated at historical exchange rates, monetary assets are translated at current exchange rates and translation adjustments are included in the determination of 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 during, the periods indicated were as follows:
Balance Sheet Income Statement ------------------------------------- -------------------------------- At At Average for the nine months December 31, September 30, ending September 30, ------------------------------------- -------------------------------- 1996 1997 % change 1996 1997 % change ---- ---- -------- ---- ---- -------- Czech koruna equivalent of $1.00 27.33 32.79 -20.0% 27.27 31.01 -13.7% German mark equivalent of $1.00 1.55 1.76 -13.5% 1.52 1.80 -18.5% Hungarian forint equivalent of $1.00 162 197 -21.6% n/a 188 n/a Polish zloty equivalent of $1.00 2.88 3.42 -18.6% n/a 3.15 n/a Romanian lei equivalent of $1.00 4,035 7,606 -88.5% 2,987 6,837 -128.9% Slovak koruna equivalent of $1.00 31.90 33.79 -5.9% 30.96* 33.49 -8.2% Slovenian tolar equivalent of $1.00 141.48 165.06 -16.7% 135.00 157.58 -16.7% Ukrainian hryvna equivalent of $1.00 1.89 1.87 0.9% n/a 1.82 n/a
*Average for September 1996 The Company's results of operations and financial position during the first, second and third quarters of 1997 were impacted by changes in foreign currency exchange rates since December 31, 1996. In the highly inflationary economy in Romania, PRO TV indexes sales contracts to the United States dollar in order to minimize the effects of Romanian lei devaluation. As shown above, virtually all operating currencies have weakened against the United States dollar during the nine months ended September 30, 1997. Page 17 The underlying Czech koruna and Slovenian tolar assets and liabilities of CNTS and POP TV decreased by 20.0% and 16.7%, respectively, in United States dollar terms during the nine months ended September 30, 1997, due to foreign exchange movements. PRO TV's local currency monetary assets and liabilities decreased by up to 88.5% during the nine months ended September 30, 1997, depending on the time they remained outstanding during the period. CNTS's operating income, interest costs and minority interest in income, are approximately 13.7% lower than would be the case had the weighted average exchange rate during the nine months ended September 30, 1997 remained the same as during the nine months ended September 30, 1996. Results of Operations The three months ended September 30, 1997 compared to the three months ended September 30, 1996 The Company's net revenues increased by $1,336,000, or 6.0%, to $23,768,000, in the three months ended September 30, 1997 from $22,432,000 in the same period in 1996. PRO TV and POP TV achieved net revenues of $5,310,000 and $2,592,000, respectively, for the three months ended September 30, 1997, reflecting increases of $2,315,000, or 77.3%, and $1,029,000, or 65.8%, respectively, over the same period in 1996. This significant revenue growth was primarily the result of the growth in audience share and PRO TV's and POP TV's ability to convert their dominant audience shares into larger shares of their respective advertising markets, as well as the overall growth of the Company's television advertising markets. Videovox and Radio Alfa, with combined net revenues of $1,030,000 for the three months ended September 30, 1997, also contributed to the increase in the Company's net revenues. Videovox was acquired in May 1996 and Radio Alfa was acquired in December 1996. These increases were partially offset by a decrease in net revenues at CNTS, as discussed below. CNTS's net advertising revenues decreased by $967,000, or 6.2%, in the three months ended September 30, 1997 compared to the same period in 1996 primarily as a result of the devaluation of the Czech koruna. In local currency terms, CNTS's net advertising revenues increased by 19.9% to Kc 500,047,000 for the three months ended September 30, 1997 compared to the same period in 1996. This increase was offset by a 13.7% depreciation of the Czech koruna. CNTS's United States dollar net revenues from advertising sales were approximately $2,211,000 lower than they would have been if the currency had remained stable since the end of the same period in 1996. Other revenues (principally game show revenues) decreased by $1,647,000. The decline in game show revenues is primarily attributable to fewer game shows due to a current lack of game show sponsors. Primarily as a result of currency devaluations and the decrease in game show revenues, CNTS's total net revenues decreased $2,613,000, in the three months ended September 30, 1997 compared to the same period in 1996. Total station operating costs and expenses increased by $1,380,000, or 6.9%, to $21,424,000 in the three months ended September 30, 1997 from $20,044,000 in Page 18 the same period in 1996. The increase in total station operating costs and expenses was primarily attributable to the increasing scope of operations of PRO TV and POP TV. CNTS's operating costs and expenses decreased by $1,980,000 for the three months ended September 30, 1997 compared to the same period in 1996. This decrease is primarily attributable to the devaluation of the Czech koruna and, to a lesser extent to lower amortization of program rights, as well as an increase in operating costs and expenses at a rate less than Czech inflation for the three months ended September 30, 1997, compared to the same period in 1996. Station selling, general and administrative expenses decreased by $1,260,000, or 22.2%, to $4,422,000 in the three months ended September 30, 1997 from $5,682,000 in the same period in 1996. This decrease was primarily attributable to the decrease in POP TV and CNTS selling, general and administrative expenses. Measured in local currency, CNTS's station selling, general and administrative expenses decreased by 6.1% from Kc 42,559,000 to Kc 39,944,000, for the same period in 1996 and 1997, respectively. Corporate operating costs and development expenses for the three months ended September 30, 1997 and 1996 were $5,669,000 and $4,218,000, respectively, an increase of $1,451,000. The increase was primarily attributable to the Company's increased scope of operations, the continued development of the Company's operational infrastructure, the Company's new operations in Poland and Hungary and development activities in other countries. Amortization of goodwill and allowance for development costs was $2,835,000 and $744,000 in the three months ended September 30, 1997 and 1996, respectively. This increase was primarily attributable to amortization of goodwill related to the Company's purchase in August 1996 of a 22% economic interest in CNTS (the "1996 CNTS Purchase"), the Company's purchase in March 1997 of a 5.2% economic interest in CNTS (the "First 1997 CNTS Purchase") and the Company's purchase of a 5.8% economic interest in CNTS in August 1997 (the "Second 1997 CNTS Purchase" and together with the 1996 CNTS Purchase and the First 1997 CNTS Purchase, the "Additional CNTS Purchases"), and, to a lesser extent, the amortization of goodwill related to investments in Radio Alfa. As a result of the above factors, operating loss increased by $2,326,000 to $10,582,000 in the three months ended September 30, 1997, from $8,256,000 in the same period in 1996. Equity in loss of unconsolidated affiliates increased by 10.6% or $598,000 to $6,219,000 in the three months ended September 30, 1997 from $5,621,000 in the same period in 1996. This increase is primarily attributable to the addition of TVN and the Studio 1+1 Group to the Company's operations, as these stations both incurred losses in the third quarter of 1997. The Company has provided additional operating funds for FFF and SFF totalling $1,015,000, which has been included in equity in loss of unconsolidated affiliates in the accompanying Consolidated Financial Statements. The Company did not provide any funds to 1A TV in the three months ended September 30, 1997. Page 19 Interest and other income increased to $1,380,000 for the three months ended September 30, 1997 from $205,000 for the same period in 1996. This increase was primarily attributable to interest on increased cash and marketable securities. Interest expense increased by $1,549,000, to $2,931,000 in the three months ended September 30, 1997 from $1,382,000 in the same period in 1996. This increase is primarily attributable to accrued interest on CME's $100,000,000 principal amount 9 3/8% Senior Notes and DM 140,000,000 principal amount 8 1/8% Senior Notes, each due 2004, issued in August 1997 (collectively, the "Senior Notes"). See "-Liquidity and Capital Resources". This increase was also partially attributable to interest expense incurred at the corporate level for the Czech koruna debt funding for the 1996 CNTS Purchase and was partially offset by lower interest expense at CNTS due to lower debt levels. The net foreign currency exchange loss of $1,999,000 in the three months ended September 30, 1997 is primarily attributable to the devaluation of the Czech koruna, Romanian lei and Slovenian tolar against the dollar during this period. Minority interest in loss of consolidated subsidiaries was $2,627,000 in the three months ended September 30, 1997 and $534,000 in the same period in 1996. This increase is primarily the result of increased minority interest in the net loss of PRO TV and decreased minority interest in the net income of CNTS. As a result of these factors, the net loss of the Company was $18,817,000 and $14,692,000 for the three months ended September 30, 1997 and 1996, respectively. The nine months ended September 30, 1997 compared to the nine months ended September 30, 1996 The Company's net revenues increased by $10,165,000, or 12.1%, to $94,402,000, in the nine months ended September 30, 1997 from $84,237,000 in the same period in 1996. This increase was primarily was attributable to PRO TV and POP TV net revenues of $18,393,000 and $9,734,000, respectively, for the nine months ended September 30, 1997, reflecting increases of $10,418,000, or 130.6%, and $4,515,000, or 86.5%, respectively, over the same period in 1996. This significant revenue growth is primarily the result of the growth in audience share and PRO TV's and POP TV's ability to convert their dominant audience shares into larger shares of their respective advertising markets. Videovox and Radio Alfa, with combined net revenues of $2,944,000, for the nine months ended September 30, 1997, also contributed to the increase in the Company's net revenues. Videovox was acquired in May 1996 and Radio Alfa was acquired in December 1996. These increases were partially offset by a decrease in net revenues at CNTS, as discussed below. CNTS's net advertising revenues decreased by $1,802,000, or 2.8%, in the nine months ended September 30, 1997 compared to the same period in 1996, primarily as a result of the devaluation of the Czech koruna. In local currency terms, Page 20 CNTS's net advertising revenues increased by Kc 182,598,000, or 10.5%, to Kc 1,921,442,000 in the nine months ended September 30, 1997 compared to the same period in 1996. This increase was offset by a 13.7% depreciation of the Czech koruna. CNTS's United States dollar net revenues from advertising sales were approximately $8,500,000 lower than they would have been if the currency had remained stable since the end of the same period in 1996. Other revenues (principally game show revenues) decreased by $5,208,000. The decline in game show revenues is principally attributable to fewer game shows due to a current lack of game show sponsors. As a result, CNTS's total net revenues decreased by $6,996,000, to $63,331,000 in the nine months ended September 30, 1997 from $70,327,000 in the same period in 1996. Total station operating costs and expenses increased by $5,919,000, or 9.7%, to $66,764,000 in the nine months ended September 30, 1997 from $60,845,000 in the same period in 1996. The increase in total station operating costs and expenses is primarily attributable to the increasing scope of operations of PRO TV and POP TV. CNTS's operating costs and expenses decreased by $3,684,000 for the nine months ended September 30, 1997 compared to the same period in 1996. This decrease is primarily attributable to the devaluation of the Czech koruna and, to a lesser extent, to lower amortization of program rights at CNTS for the nine months ended September 30, 1997 compared to the same period in 1996. Station selling, general and administrative expenses increased by $839,000, or 5.8%, to $15,256,000 in the nine months ended September 30, 1997 from $14,417,000 in the same period in 1996. This increase was primarily attributable to increased marketing expenses at PRO TV. To a lesser extent, the increase in station selling, general and administrative expenses was attributable to the addition to the Company's operations of Radio Alfa in December 1996 and Videovox in May 1996. Corporate operating costs and development expenses for the nine months ended September 30, 1997 and in 1996 were $15,110,000 and $10,728,000, respectively, an increase of $4,382,000. The increase was primarily attributable to the Company's increased scope of operations, the continued development of the Company's operational infrastructure, the Company's new operations in Poland and Hungary and development activities in other countries. Amortization of goodwill and allowance for development costs was $7,430,000 and $1,407,000 in the nine months ended September 30, 1997 and 1996, respectively. This increase was primarily attributable to amortization of goodwill related to the Additional CNTS Purchases and, to a lesser extent, the amortization of goodwill related to investments in Radio Alfa. As a result of the above factors, the Company's operating loss increased by $6,998,000 to $10,158,000 in the nine months ended September 30, 1997 compared to $3,160,000, in the same period in 1996. Equity in loss of unconsolidated affiliates increased by $4,765,000 to $16,322,000 in the nine months ended September 30, 1997 from $11,557,000 in the Page 21 same period in 1996. The increase reflects the addition of Markiza TV, TVN and the Studio 1+1 Group to the Company's operations, as these stations all incurred losses in the nine months ended September 30, 1997. This increase also reflects losses in the Company's German operations, including 1A TV until May 1997, when 1A TV initiated a bankruptcy proceeding but excluding the Company's write-down of its investments in Germany. Loss on impairment of investments in unconsolidated affiliates of $20,707,000, was a result of the write-down of the Company's investments in Germany. This write-down, together with losses incurred by the German operations during the nine months ended September 30, 1997, has resulted in a total charge of $26,258,000 in the Company's Consolidated Statements of Operations in that period. Interest and other income increased by $2,712,000, to $3,996,000 for the nine months ended September 30, 1997 from $1,284,000 for the same period in 1996. The increase was primarily attributable to interest on increased cash and marketable securities. Interest expense increased by $3,304,000, to $6,218,000 in the nine months ended September 30, 1997 from $2,914,000 in the same period in 1996. This increase is primarily attributable to accrued interest on CME's Senior Notes. See "-Liquidity and Capital Resources." This increase was also attributable to interest expense incurred at the corporate level for the Czech koruna debt funding of the 1996 CNTS Purchase and was partially offset by lower interest expense at CNTS due to lower debt levels. The net foreign currency exchange loss of $6,585,000 in the nine months ended September 30, 1997 is primarily attributable to the devaluation of the Czech koruna, Romanian lei and Slovenian tolar against the dollar during this period. Provision for income taxes was $7,926,000 for the nine months ended September 30, 1997 and $9,198,000 for the same period in 1996 as a result of improved tax planning. Minority interest in loss of consolidated subsidiaries was $3,283,000 in the nine months ended September 30, 1997 and minority interest in income of consolidated subsidiaries was $610,000 in the same period in 1996. This increase is primarily the result of increased minority interest in the net loss of PRO TV and decreased minority interest in the net income of CNTS. As a result of these factors, the net loss of the Company was $60,637,000 and $27,072,000 for the nine months ended September 30, 1997 and 1996, respectively. Operations in Poland On October 3, 1997, the Company and its partner, the Polish media group ITI, successfully launched the TVN network in Poland, whereby Federation is providing programming and advertising services to TVN and TV Wisla. The launch occurred Page 22 after a short gestation period of only seven months since the grant of the TVN licenses. The Poland operation is a technologically complex project involving the integration of local low power and medium power transmitters, cable headends and several separate regional programming feeds, as required by the television licenses, using digital satellite distribution. Initial results from the Poland project indicate a greater than expected need to upgrade the terrestrial signal distribution network, re-orient antennae and work with cable operators to ensure high quality carriage. The company is actively engaged in efforts to increase signal availability to Polish homes. These efforts, which will continue for several months, are expected to result in a gradual increase of the ability to view the station to its level of full technical coverage, which is currently approximately 57% of the Polish population, and a concomitant increase in viewing and ratings. The growth of ratings and achievement of targeted revenues of the TVN network will be a function of the speed and success of these efforts. Liquidity and Capital Resources Net cash used in operating activities was $13,664,000 in the nine months ended September 30, 1997 compared to $1,309,000 in the same period in 1996. The increase in net cash used in operating activities of $12,335,000 was primarily the result of station prepayments for technical equipment and an increase in advances to affiliates. Net cash used in investing activities was $90,446,000 in the nine months ended September 30, 1997 compared to $58,659,000 in the same period in 1996. The increase was primarily attributable to an increase in investments in Poland and in MobilRom in Romania, an increase in development costs in Hungary and the Second 1997 CNTS Purchase. In addition, the Company's investment in marketable securities during the nine months ended September 30, 1997 increased compared to the same period in 1996. This increase is partially offset by a reduction in capital expenditures from levels during the start-up of PRO TV and POP TV in 1996. Net cash provided by financing activities for the nine months ended September 30, 1997 was $152,062,000 compared to $21,167,000 for the same period in 1996. The increase was primarily the result of the Notes Offering described below. In August 1997, CME issued the Senior Notes, which raised net proceeds of approximately $170,000,000 (the "Notes Offering"). The Senior Notes are denominated in United States dollars, in part, and in German marks, in part. The United States dollar denominated Senior Notes bear interest at a rate of 9.375% per annum, and the German mark denominated Senior Notes bear interest at a rate of 8.125% per annum. The principal amount of the Senior Notes is repayable on their maturity date, August 15, 2004. The indentures governing the Senior Notes contain certain restrictions relating to the ability of CME and its subsidiaries and affiliates to incur additional indebtedness, incur liens on assets, make investments, sell assets and engage in extraordinary transactions. Page 23 Prior to the Notes Offering, the Company's operations were financed primarily through public offerings of shares of Class A Common Stock completed in October 1994 (the "IPO"), November 1995 and November 1996 (the "1996 Offering"), which raised net proceeds of approximately $68,800,000, $86,600,000 and $143,600,000, respectively. Prior to the IPO, the Company relied on Ronald S. Lauder and entities controlled by or affiliated with him for capital in the form of both debt and equity financing. In May 1997, CNTS declared a total dividend of Kc 495,000,000 ($15,096,000) of which the Company was paid Kc 150,150,000 ($4,684,000) in June 1997 and will be paid Kc 115,500,000 ($3,522,000) in each of November 1997 and January 1998. The remaining Kc 113,850,000 ($3,472,000) is to be paid to minority shareholders. In August 1997, the Company received $2,800,000 from its partner in Romania, Ion Tiriac, in connection with his exercise of an option to increase his interest in Media Pro International, which operates PRO TV. As a result of the factors described above, the Company had cash of $125,017,000 at September 30, 1997 ($78,507,000 at December 31, 1996) and marketable securities of $29,990,000 at September 30, 1997 ($2,896,000 at December 31, 1996) available to finance its activities. The Company has made, and expects to continue to make, investments to develop broadcast operations in Central and Eastern Europe. The Company's cash needs for those investment activities may exceed cash generated from operations and the proceeds of the Notes Offering, resulting in external financing requirements. The Company entered into a loan facility with ING Bank N.V. ("ING"), on July 11, 1997 pursuant to which ING agreed to provide the Company with bank financing of up to $25 million (the "ING Bridge Facility"). The ING Bridge Facility matured upon the consummation of the Notes Offering. On August 25, 1997, approximately $20 million of the proceeds from the Notes Offering were used to repay in full the ING Bridge Facility. In connection with the ING Bridge Facility, the Company executed a term sheet with ING for a $35 million secured revolving credit facility anticipated to have a term of up to three and one-half years to fund working capital requirements, as well as operating and capital expenditures (the "Proposed ING Credit Facility"). The Proposed ING Credit Facility is expected to be incurred by a subsidiary. The availability of the Proposed ING Credit Facility is subject to definitive documentation and satisfaction of various conditions. On August 11, 1997, the Company made the Second 1997 CNTS Purchase when it purchased Nova Consulting a.s. ("NC") from certain of the partners of CET 21, for a purchase price of $28,537,500, to be paid on an installment basis through February 15, 2000, subject to adjustment as described below. NC owns a 5.8% interest in CNTS. A portion of the payments are indexed based upon the performance of the Company's Class A Common Stock. As of September 30, 1997, the Company has paid $7,000,000 of the purchase price and will make further payments of $4,500,000 during the fourth quarter of 1997. The Company intends to sell a minority interest in Page 24 CNTS in a public offering in the Czech Republic, as well as to one or more strategic Czech investors. On August 1, 1996, the Company entered into the Additional CNTS Purchase for the purchase of CS's 22% economic interest and virtually all of CS's voting rights in CNTS for a purchase price of Kc 1 billion ($35,067,000). The Company also entered into a loan agreement with CS to finance 85% of the purchase price. The remainder of the purchase price, Kc 150,000,000 ($5,607,000), was paid by the Company on November 15, 1996 out of the Company's cash balances. The loan from CS was drawn in August 1996 and in April 1997 in the amounts of Kc 450,000,000 ($16,464,000) and Kc 400,000,000 ($12,996,000), respectively, to fund purchase payments due at those times. The loan bears an annual interest rate of 12.9%. Quarterly repayments on the loan are required in the amount of Kc 22,500,000 ($686,000) during the period from November 1997 through November 1998, Kc 42,500,000 ($1,296,000) during the period from February 1999 through August 2002, and Kc 20,000,000 ($610,000) during the period from November 2002 through November 2003. The Company expects CNTS's future cash requirements to continue to be satisfied through operating cash flows and available borrowing facilities. CNTS has a line of credit with CS, obtained in October 1996, for up to Kc 250,000,000 ($7,624,000) bearing interest at a rate 0.5% over the Prague Interbank Offer Rate ("PRIBOR"). Under this facility, which is secured by CNTS's equipment, vehicles and receivables, CNTS had borrowings of Kc 406,000 ($12,000) at September 30, 1997. In October 1997, CNTS entered into a Kc 500,000,000 ($15,249,000) line of credit with ING Bank N.V. The line of credit, which may be drawn in Czech koruna, German marks or United States dollars, bears interest at a rate of 0.5% over the interbank offered rate for the applicable currency and matures in October 1999. In June 1997, CEDC Praha s.r.o. ("CEDC Praha"), which owned the facility that Nova TV uses as its main studios and principal offices (the "Nova Facility"), terminated the capital lease pursuant to which CEDC Praha leased the Nova Facility to CNTS, and entered into an agreement with CNTS pursuant to which (i) CEDC Praha assigned the Nova Facility to CNTS and (ii) CNTS assumed CEDC Praha's obligations under a loan from CS (the "CS Loan") secured by a mortgage on the Nova Facility. The CS Loan provides for quarterly payments of Kc 16,500,000 ($503,000), plus interest equal to CS's prime rate plus 1.5%, to be paid through December 1999. As of September 30, 1997, the outstanding balance under the CS Loan was Kc 142,500,000 ($4,346,000). PRO TV has two borrowing facilities with Tiriac Bank in Romania. The first facility consists of a $2,000,000 line of credit substantially payable during December 1997. The line of credit bears interest at a rate of 5% over LIBOR. At September 30, 1997, $1,999,000 was outstanding under this facility. The second facility is a long-term loan for $4,000,000 due July 31, 2001. The long-term loan bears interest at 5% over LIBOR and is to be repaid in monthly installments starting during December 1997. At September 30, 1997, $3,854,000 was borrowed under this facility. These facilities are secured by PRO TV's equipment and vehicles. Notwithstanding these Page 25 borrowing facilities, the Company believes that it will be required to provide additional funding to PRO TV. 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, required reserves and after the recovery of accumulated losses. In the case of the Company's Dutch and Netherlands Antilles subsidiaries, the Company's voting power is sufficient to compel the making of distributions. The Company's voting power is sufficient to compel CNTS to make distributions. In the case of PRO TV, distributions may be paid from the profits of PRO TV subject to a reserve of 5% of annual profits until the aggregate reserves equal 20% of PRO TV's registered capital. A majority vote can compel PRO TV to make distributions. There are no legal reserve requirements in Slovenia. In the case of Markiza TV, distributions may be paid from net profits subject to an initial reserve requirement of 10% of net profits until the reserve fund equals 5% of registered capital. Subsequently, the reserve requirement is equal to 5% of net profits until the reserve fund equals 10% of registered capital. The Company's voting power in Markiza TV is not sufficient to compel the distribution of dividends. In the case of Federation and TVN in Poland, there are no legal reserve requirements with respect to distributions. The Company does not have sufficient voting power in Federation or TVN to compel the making of distributions. In general, the laws of countries where the Company is developing operations contain restrictions on the payment of dividends. Except for the Company's working capital requirements, the Company's future cash needs will depend on the Company's financial performance and its future acquisition and development decisions. The Company is actively engaged in the development of additional broadcast operations and investing in its existing broadcasting companies throughout Central and Eastern Europe. The Company incurs certain expenses in identifying and pursuing broadcast opportunities before any investment decision is made. The Company anticipates making additional investments in other broadcast operations, supplemented by capital raised from local strategic financial partners as well as local debt and lease financing, to the extent that it is available and appropriate for each project. The Company believes that the net proceeds from the Notes Offering, together with its current cash balances, cash from CNTS, the Proposed ING Credit Facility and local financing of broadcast operations and broadcast operations under development should be adequate to satisfy the Company's operating and capital requirements for 12 to 18 months for both its current operations and operations under development. Statements made in "Operations in Poland" and "Liquidity and Capital Resources," regarding the Poland operations, future investments in existing television broadcast operations and the development of new television broadcast operations (including the amount and nature thereof), business strategies and the future need for additional funds from outside sources, are forward-looking statements. Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy and some Page 26 of which might not even be anticipated. Future events and actual results, financial and otherwise, could differ materially from those set forth in or contemplated by the forward-looking statements herein. Important factors that contribute to such risks include the Company's success in increasing signal availability in Poland (with respect to "Operations in Poland") and success in obtaining additional broadcast licenses, the cost of developing opportunities into television broadcast operations, the ability to acquire programming, the ability to attract audiences, the rate of development of advertising markets in these countries and general market and economic conditions in these countries. PART II OTHER INFORMATION Item 1. Legal Proceedings. On April 30, 1997, Perekhid Media Enterprises Ltd. ("Perekhid") filed a complaint in the Supreme Court of New York County, State of New York, against the Company and Ronald S. Lauder, the Chairman of the Company's Board of Directors. Perekhid alleges that the issuance of a license to the Studio 1+1 Group pursuant to which Studio 1+1 has been broadcasting programming on Ukrainian National Channel 2 ("UT-2"), constitutes a tortious interference by CME and Mr. Lauder with a Perekhid contract with the Ukrainian authorities for Perekhid to provide programming for and sell advertising time on UT-2. Perekhid's complaint seeks compensatory damages of $250 million, punitive damages of $500 million, and an injunction against the Company and Mr. Lauder to prevent the continuation of the alleged conduct. On July 2, 1997, the Company filed a motion to dismiss the complaint. Management believes that it has substantial defenses in this matter and intends to defend the matter vigorously. In January 1997, the Hungarian Television Commission announced tender procedures for the award of two national television broadcast licenses. The Company formed a consortium, MKTV Rt. ("IRISZ TV"), which submitted an application for these licenses. Two other consortia submitted bids by the April 10, 1997 deadline. On June 30, 1997, the Hungarian Television Commission announced the two other consortia as winners of the licenses. On July 4, 1997, IRISZ TV filed a complaint in the Budapest Capital Court against the Hungarian Television Commission and the other consortia. The complaint alleges that the Hungarian Television Commission (i) violated the tender procedures in connection with the acceptance of bids; (ii) violated the integrity and fairness of the tender; and (iii) breached its own published guidelines in the bid evaluation process. IRISZ TV is seeking an order to terminate the broadcasting agreements entered into by the other consortia and has reserved its right to seek damages. At a hearing on July 16, 1997, the Court denied IRISZ TV's request for interim relief. The trial on the merits of the claim began on September 12, 1997. The Court has ordered additional discovery and scheduled the next hearing for March 25, 1998. Page 27 On May 13, 1997, the Company announced its decision to discontinue funding of 1A TV, which operated PULS, a regional television station operating in the Berlin-Brandenburg area of Germany. The Company had a 58% non-controlling interest in 1A TV. On May 27, 1997, 1A TV initiated a bankruptcy proceeding in the Bankruptcy Court of Berlin-Charlottenburg. The Court has appointed a trustee to liquidate and wind-up 1A TV. The administrator has requested to meet with the Company in connection with possible claims against the Company on behalf of the bankruptcy estate. The Company expects to meet with the administrator in the near future. To finance developments, 1A TV received investment grants in an aggregate amount of DM8,544,000 ($4,855,000) from a German public bank beginning in 1993, which grants were guaranteed by a wholly owned subsidiary of the Company. As a result of the bankruptcy proceedings initiated by 1A TV, the bank has notified the guarantor that it intends to seek repayment of the investment grants from the guarantor, plus interest at the rate of 6.0% per annum. Management believes that the maximum exposure is limited to the German assets, which have been fully provided for. The Company is, from time to time, a party to litigation that arises in the normal course of its business operations. The Company is not presently a party to any such litigation which could reasonably be expected to have a material adverse effect on its business or operations. Item 2. Changes in Securities and Use of Proceeds. On August 1, 1997, CME issued warrants to purchase up to 100,000 shares of CME's Class A Common Stock to each of the Lavendar Foundation, Staffordshire Corporation and MAWA Holding N.V., companies owned by certain affiliates of ITI, a Polish media group and the Company's partner in Federation in Poland. In consideration of the issuance of these warrants, such affiliates of ITI agreed to restrict their and their affiliates' activities which could compete with the Company's media businesses in Poland. Each of these warrants becomes exerciseable with respect to 33,333 shares on August 1, 2000, 33,333 shares on August 1, 2001 and 33,334 shares on August 1, 2002. The exercise price of these warrants is $26.25 per share (110% of the average closing price of CME's Class A Common Stock for the five trading days up to and including the warrant issuance date). These warrants expire upon the earlier of (i) August 1, 2004 and (ii) a material adverse change, by reason of any Polish regulatory requirement, in the television and media businesses in which the Company and ITI are partners. The issuance of the warrants did not involve any public offering and was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. Item 6. Exhibits and Reports on Form 8-K. a) The following exhibits are attached: Page 28 3.1 Certificate of Deposit of Memorandum of Increase of Share Capital, executed by Registrar of Companies on May 20, 1997. 10.1 Shareholder's Agreement, dated August 1, 1997, among Federacja Sp.zo.o., ITI Media Group N.V., CME Media Enterprises B.V., CME Poland B.V. and Unidome Beheer B.V. 27.01 Financial Data Schedule b) No reports on Form 8-K were filed during the quarter ended September 30, 1997. Page 29 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 13, 1997 /s/ Leonard M. Fertig ------------------------------ Leonard M. Fertig Chief Executive Officer (Duly Authorized Officer) Date: November 13, 1997 /s/ John A. Schwallie ----------------------------- John A. Schwallie Chief Financial Officer (Principal Financial Officer) Page 30 EXHIBIT INDEX 3.1 Certificate of Deposit of Memorandum of Increase of Share Capital, executed by Registrar of Companies on May 20, 1997. 10.1 Shareholder's Agreement, dated August 1, 1997, among Federacja Sp.zo.o., ITI Media Group N.V., CME Media Enterprises B.V., CME Poland B.V. and Unidome Beheer B.V. 27.01 Financial Data Schedule Page 31 EX-3.1 2 CERTIFICATE OF DEPOSIT OF MEMORANDUM OF INCREASE OF SHARE CAPITAL FORM NO. 7A Registration No. EC 19574 [Coat of arms] BERMUDA CERTIFICATE OF DEPOSIT OF MEMORANDUM OF INCREASE OF SHARE CAPITAL THIS IS TO CERTIFY that a Memorandum of Increase of Share Capital of Central European Media Enterprises Ltd. was delivered to the Registrar of Companies on the 9th day of May, 1997 in accordance with section 45(3) of the Companies Act 1981 ("the Act"). Given under my hand this 20th day of May, 1997 [signature] for Registrar of Companies Capital prior to increase: US$ 500,000.00 Amount of increase: US$ 700,000.00 Present Capital: US$1,200,000.00 EX-10.1 3 FEDERATION SHAREHOLDER AGREEMENT SHAREHOLDERS' AGREEMENT, dated as of August 1, 1997, among Federacja Sp. z o.o. ("Federation"), a company organized under the laws of Poland, ITI Media Group N.V. ("ITI Media"), a company organized under the laws of the Netherlands Antilles, and CME Media Enterprises B.V. ("CME"), CME Poland B.V. ("CME Poland") and Unidome Beheer B.V. ("Unidome"), each a company organized under the laws of the Netherlands. RECITALS A. Unidome is a wholly-owned subsidiary of ITI Media and CME Poland is a wholly-owned subsidiary of CME. B. Unidome and CME Poland have formed and capitalized Federation for the purpose of providing Federated Television Stations (as hereinafter defined) with certain services related to their television and media business, including (i) the creation, purchase, sale and production of television programming, (ii) the packaging and sale of advertising, and (iii) the provision of technical, legal, management and research services (the "Business"). C. Each of Unidome and CME Poland (each a "Shareholder," and together, the "Shareholders") holds legal and beneficial title to 50% of the capital of Federation (the "Federation Shares"). Federation Shareholder Agreement D. Unidome and CME Poland have caused articles of incorporation in the form attached as Exhibit A to be adopted as the articles of incorporation of Federation (as amended from time to time, the "Articles") and intend to amend such articles of incorporation, as promptly as practicable following the date hereof, in a manner so as to give the fullest possible effect to the provisions of this Agreement. E. Unidome and CME Poland have agreed upon an initial long-term business plan relating to Federation (the "Business Plan") in the form attached as Exhibit B. F. Unidome and CME Poland intend that Federation enter into television services agreements to supply programming and other services to each of TVN Sp. z o.o. and Telewizja Wisla Sp. z o.o. (such agreements, and any other television services agreement of a similar nature entered into by Federation and any Federated Television Station (as hereinafter defined), are referred to herein as "Television Services Agreements"). G. Unidome and CME Poland desire to set forth their agreement as to the management of Federation, transfers of Federation Shares and certain other matters relating to Federation. NOW, THEREFORE, in consideration of the mutual agreements and covenants set forth herein, the parties hereto agree as follows: ARTICLE I SHAREHOLDERS' APPROVAL Federation Shareholder Agreement I.1. Fundamental Actions. None of the following actions shall be taken without the approval of the Shareholders, at a duly convened meeting of shareholders of Federation at which at least 51% of the outstanding Federation Shares is represented and voted: (1) any merger, split-up, liquidation, dissolution or similar transaction by or involving Federation or any subsidiary of Federation; (2) any recapitalization, capital increase or capital reduction by Federation or issuance or repurchase of (i) any equity securities of Federation, (ii) any securities convertible into or exchangeable for equity securities of Federation, or (iii) any options to acquire any of the foregoing; (3) any change or deviation from the dividend policy set forth in Section 5.4 and entering into any agreement limiting the authority of the shareholders' meeting to declare and pay dividends; and (4) any amendment to the Articles. ARTICLE II SUPERVISORY BOARD II.1. Supervisory Board. Each of CME Poland and Unidome shall have the right to appoint and remove one half of the members (each a "Director") of the Supervisory Board. The position of Chairman of the Supervisory Board shall be filled on an annual, rotating basis by a Director chosen by Unidome and CME Poland, Federation Shareholder Agreement respectively, with the position filled initially by a Director chosen by CME Poland. Directors shall serve a two-year renewable term. II.2. Meetings of the Supervisory Board. (a) The Supervisory Board shall meet at least once in each fiscal quarter of the Company, and otherwise when requested by any two Directors following at least 14 days' prior notice to each other Director. (b) The Chairman of the Supervisory Board shall prepare and furnish to each other Director, at least ten days prior to any meeting of the Supervisory Board, an agenda for such meeting, which agenda shall include any proposed action that any Director shall request by notice to the Chairman no later than 14 days prior to such meeting. Meetings may be held by telephone conference. 2.3. Decisions by the Supervisory Board. None of the following actions may validly be taken by or on behalf of Federation without the prior approval of at least two Directors appointed by Unidome and at least two Directors appointed by CME Poland. (1) any agreement or transaction between Federation and any Shareholder (or any Affiliate (as hereinafter defined) of such Shareholder), or any amendment thereto, other than any agreement or transaction involving aggregate payment obligations of Federation of less than US$ 50,000 or equivalent, which are entered into on arms' length terms and in the ordinary course of business; (2) amendment or termination of any Television Services Agreement, or decision not to enforce any Television Services Agreement following a breach thereof by a Federated Television Station; Federation Shareholder Agreement (3) any incurrence of debt (including, without limitation, the issuance or incurrence of any guaranty or similar contingent obligation) involving, in the aggregate, in excess of US$ 1 million or equivalent, or any material waiver or amendment of any provision of any loan or other financing agreement by which Federation is bound; (4) commencement or settlement by Federation of any suit, action or other proceeding outside the ordinary course of business, provided that, in the case of any suit, action or proceeding with respect to any agreement or obligation of any Shareholder or Affiliate of such Shareholder with or in favor of Federation, a majority of the Directors who were not designated by such Shareholder shall be sufficient to authorize Federation to enforce its rights under, or settle any action or proceeding with respect to, such agreement or obligation, and any such action or proceeding shall be conducted in accordance with the instruction of such Directors and provided further, that any dispute or controversy between Federation and any Shareholder or Affiliate of such Shareholder and not involving a third party, if not resolved within 30 days by the parties acting in good faith, shall be submitted to arbitration in accordance with the provisions of Section 6.4; (5) entry by Federation into any significant business activity not related to the Business; (6) entry by Federation into any joint venture, partnership or similar arrangement with any other Person (as hereinafter defined) other than television co-production arrangements and Television Services Agreements in the ordinary course of business and consistent with the then applicable business plan; Federation Shareholder Agreement (7) modification of the Business Plan and adoption or modification of subsequent annual business plans (but always in accordance with resolutions made by the Shareholders from time to time relating to such business plans); (8) purchase, lease or other acquisition of any asset or group of related assets, in a single transaction or series of related transactions, if after giving effect thereto, Federation would have expended more than US$500,000 or equivalent on such purchases, leases or other acquisitions during the applicable fiscal year, or entered into any agreement to do the foregoing; (9) sale, lease or other disposition of any asset or group of related assets of Federation, in a single transaction or series of related transactions, if after giving effect thereto, Federation would have sold, leased or otherwise disposed of assets (other than inventory) during the applicable fiscal year, having a fair market value in excess of the lesser of (i) 5% of the fair market value of the consolidated assets of Federation, or (ii) US$500,000 or equivalent, or entering into any agreement involving the foregoing; (10) entering into (i) any material agreement having a term in excess of three years, or (ii) any agreement having aggregate payment obligations of Federation reasonably expected to exceed US$ 200,000 or equivalent, in either case, to the extent not constituting an agreement or transaction described in any of the preceding clauses (1), (3), (8) or (9); (11) decision on any matter proposed at a meeting of the Supervisory Board that was not contained in the agenda for such meeting previously furnished Federation Shareholder Agreement to each Director in accordance with Section 2.2(b); and (12) the adoption or modification of any material accounting or tax principle or practice, or tax election, of Federation. ARTICLE III OFFICERS; MANAGEMENT BOARD III.1. Officers. (a) The executive officers of Federation shall include a General Director, a Deputy General Director, a Finance Director, a Director of Sales, a Director of Legal Affairs, a Director of Research, a Director of Administration and Personnel, and a Director of Production, Cable and Affiliates Relations. The nominees for the positions of Director of Research, Director of Administration and Personnel and Director of Production, Cable and Affiliates Relations shall be qualified individuals appointed and removed by Unidome. If Unidome and CME Poland are unable to agree on one nominee to fill a vacancy in any such position, Unidome shall have the right to appoint the successor. The nominees for the positions of Finance Director, Deputy General Director, Director of Sales and Director of Legal Affairs shall be qualified individuals appointed and removed by CME Poland. If CME Poland and Unidome are unable to agree on a nominee to fill a vacancy in any such position, CME Poland shall have the right to appoint the successor. (b) Operating budgets for each of the departments of Federation shall be developed and supervised by the respective executive officers heading such departments. Federation Shareholder Agreement (c) Having been mutually appointed by Unidome and CME Poland, Mr. Mariusz Walter shall serve as the initial General Director pursuant to an executive services agreement approved by the parties. Any General Director may be removed from the office for Cause (as hereinafter defined) by each of Unidome and CME Poland, and in the event that either of Unidome or CME Poland shall have exercised its right to remove the General Director, the other party shall take all necessary action (including, without limitation, voting its shares and approving resolutions in support of such removal in meetings of the governing bodies of Federation) to enable such removal to proceed. Except to the extent otherwise provided in Section 3.2(a), any successor to Mr. Walter shall be appointed by mutual agreement of Unidome and CME Poland. Pending the appointment of such successor, the Deputy General Director shall serve as an interim General Director and Unidome shall be entitled to appoint an interim Deputy General Director, and the affairs of Federation shall continue to be conducted in accordance with the Business Plan (if still in effect) and the annual business then in effect. (d) Nominees for all other senior management positions shall be appointed by mutual agreement of Unidome and CME Poland. (e) Any banking transaction of Federation, and any transaction, or series of related transactions, involving obligations of Federation in excess of US$40,000 or equivalent, shall require the approval of the General Director and the Finance Director, provided that any such transaction shall require the approval of the Federation Shareholder Agreement General Director, the Deputy General Director and the Finance Director during the tenure of any interim General Director appointed in conformity with Section 3.1(c). III.2. Management Board. (a) For so long as each Shareholder holds legal and beneficial title to 50% of the Federation Shares and no Competitor of ITI (as hereinafter defined) shall be entitled to appoint, directly or indirectly, a majority of the board of directors of CME Poland, the Management Board shall consist of two members to be appointed and removed by Unidome and three members to be appointed and removed by CME Poland. In the event that any Competitor of ITI shall be entitled to appoint, directly or indirectly, a majority of the board of directors of CME Poland, then (i) the Management Board shall consist of two members to be appointed and removed by Unidome and two members to be appointed and removed by CME Poland, and (ii) thereafter, Unidome shall be entitled to appoint and remove the General Director. The General Director, Deputy General Director and Finance Director shall be the members of the Management Board at all times. (b) The Management Board shall have an authority to act in all matters not otherwise reserved, either by virtue of this Agreement, the Articles or applicable Polish laws, to the Supervisory Board or the Shareholders. Two members of the Management Board, one designated by Unidome and one designated by CME Poland, acting jointly, shall have the power to represent Federation in dealings with third parties. (c) The Management Board shall meet and take its decisions in the manner provided in its regulations, which shall be adopted by decision of the Supervisory Board taken with the approval of at least two Directors chosen by Unidome and two Directors chosen by CME Poland as soon as practicable after the date of this Agreement and in any event within 120 days hereof. Federation Shareholder Agreement ARTICLE IV TRANSFERS OF FEDERATION SHARES IV.1. Restrictions on Transfer of the Federation Shares. (a) Neither of Unidome nor CME Poland may Transfer (as hereinafter defined) any Federation Shares to any Person, without the prior written consent of the other party, which consent may be withheld in such other party's sole and absolute discretion, except: (i) in a Transfer of all Federation Shares owned by it to a Permitted Transferee (as hereinafter defined) in which event, and after such Permitted Transferee shall have delivered a notice in appropriate form to Federation, agreeing to be bound by the provisions of this Agreement, such Permitted Transferee shall be considered a Shareholder hereunder, (ii) following the fifth anniversary of the date of establishment of Federation, in a Transfer of all (but not less than all) of the Federation Shares owned by it, in compliance with the procedures set forth in clause (b) of this Section 4.1, and (iii) following the fifth anniversary of the date of establishment of Federation, in a Transfer of less than all of the Federation Shares owned by it , in compliance with the procedures set forth in clause (c) of this Section 4.1. (b) Following the fifth anniversary of the date of establishment of Federation, in the event that either of Unidome and CME Poland (or a Permitted Transferee of either of them) (for purposes of this Section 4.1, a "Transferring Shareholder") wishes to Transfer all (but not less than all) of the Federation Shares owned by it, it shall deliver a notice (a "Transfer Offer") to the other party (the "Offeree") setting forth a price at which it is willing to sell such Federation Shares and the name of Federation Shareholder Agreement any third party purchaser, if any, from whom it has received an indication of interest in purchasing such Federation Shares, whereupon the Offeree shall be entitled to elect, by delivering a notice (a "Response Notice") to the Transferring Shareholder, within 45 days of delivery of such Transfer Offer: (i) to purchase from the Transferring Shareholder all of such Federation Shares for cash at the price specified in such Transfer Offer, or (ii) to sell to the Transferring Shareholder all of such Federation Shares at such price. Each of Unidome and CME Poland agrees that, in the event that it shall have delivered a Transfer Offer, in proper form, to the other party: (x) in the event that it receives a timely Response Notice indicating that the Offeree has elected to purchase all of such Federation Shares, it shall sell and deliver all such Federation Shares to the Offeree, accompanied by all instruments, stock powers, transfer stamps and other documents necessary to transfer full legal and beneficial ownership of such Federation Shares to the Offeree, free and clear of all Liens, against payment by the Offeree of the purchase price therefor, by wire transfer to it in cash in immediately available funds, at a closing to be held on a date agreed with the Offeree (but in no event later than 60 days following the date of delivery of such Response Notice), (y) in the event that it receives a timely Response Notice indicating that the Offeree has elected to sell to it all of such Federation Shares owned by the Offeree, it shall pay to the Offeree the purchase price specified in such Transfer Offer, by wire transfer to the Offeree of cash in immediately available funds, against delivery to it by the Offeree of all such Federation Shares, accompanied by all instruments, stock powers, transfer stamps and other documents necessary to transfer to it full legal and beneficial ownership of such Federation Shares, free Federation Shareholder Agreement and clear of all Liens, at a closing to be held on a date agreed with the Offeree (but in no event later than 60 days following the date of delivery of such Response Notice), (z) in the event that either (p) the Offeree shall not have delivered to it a Response Notice within 45 days following the date of delivery of such Transfer Offer, (q) it receives a Response Notice that fails to indicate whether the Offeree has elected either to buy or to sell all of such Federation Shares, or (r) following delivery of a Response Notice in which the Offeree has elected to buy all of such Federation Shares, the Offeree shall not have participated in a closing on or prior to a date that is not later than 60 days following the date of delivery of such Response Notice, it shall be entitled to sell to the third party specified in the Transfer Offer for cash all (but not less than all) of the Federation Shares owned by it at the same price and on the same terms specified in the Transfer Offer, provided that if the sale to such third party has not been completed within 150 days following the date of delivery of such Transfer Offer, it shall not be permitted to Transfer Federation Shares without again complying with this Section 4.1. (c) Following the fifth anniversary of the date of establishment of Federation, in the event that a Transferring Shareholder desires to Transfer less than all of the Federation Shares owned by it to a third party, such Transferring Shareholder shall deliver a notice (a "Refusal Notice") to the Offeree setting forth the identity of such third party and the price at which such Transferring Shareholder is willing to sell such number of Federation Shares, whereupon the Offeree shall be entitled to elect, by delivering a notice (a "Refusal Response") to the Transferring Shareholder within 45 days of delivery of the Refusal Notice: (i) to consent to the Transfer of such number of Federation Shares Federation Shareholder Agreement to such third party, or (ii) to purchase from the Transferring Shareholder such number of Federation Shares at the same price and on the same terms as specified in the Refusal Notice. Each of Unidome and CME Poland agrees that, in the event that it shall have delivered a Refusal Notice, in proper form, to the other party: (m) in the event that it receives a timely Refusal Response indicating that the Offeree has elected to purchase the Federation Shares specified in the Refusal Notice, it shall sell and deliver such Federation Shares to the Offeree, accompanied by all instruments, stock powers, transfer stamps and other documents necessary to transfer full legal and beneficial ownership of such Federation Shares to the Offeree, free and clear of all Liens, against payment by the Offeree of the purchase price therefor, by wire transfer to it in cash in immediately available funds, at a closing to be held on a date agreed with the Offeree (but in no event later than 60 days following the date of delivery of such Refusal Response Notice), and (n) in the event that either (s) the Offeree shall have delivered to it a Refusal Response consenting to the Transfer referred to in such Refusal Notice, (t) the Offeree shall not have delivered to it a Refusal Response within 45 days following delivery of such Refusal Notice, or (u) following delivery to it of a Refusal Response in which the Offeree has elected to purchase the number of Federation Shares specified in such Refusal Notice, the Offeree shall not have participated in a closing on or prior to a date that is not later than 60 days following the date of delivery of such Refusal Response, it shall be entitled to sell such number of Federation Shares to the third party specified in such Refusal Notice for cash, at the same price and on the same terms specified in such Refusal Notice, provided that if the sale to such third party has not been completed within Federation Shareholder Agreement 150 days following the date of delivery of such Refusal Notice, it shall not be permitted to Transfer Federation Shares without again complying with this Section 4.1. (d) To the fullest extent of its powers under applicable law, Federation shall refuse to recognize any Transfer of Federation Shares in violation of this Agreement. IV.2. Notation of Transfer Restrictions. Each of Unidome and CME Poland shall cause appropriate notations and entries to be made in Federation's share registry and the Articles to reflect that the Federation Shares are subject to transfer restrictions contained in this Agreement. ARTICLE V CERTAIN COVENANTS AND AGREEMENTS V.1. Books and Records; Inspection. (a) The Shareholders shall cause Federation to keep true and accurate accounting books and records of all operations. In addition to any other books and records as may be required under Polish law, books and records for Federation shall be kept in English and in U.S. Dollars and in accordance with the standards of U.S. GAAP (as hereinafter defined) and the International Accounting Standards Committee, in each case applied on a consistent basis. (b) Each Shareholder and its authorized representatives (including its internal and independent auditors) shall be permitted the equal opportunity to (i) visit and inspect any of the properties and assets of Federation, (ii) inspect any books and records of Federation, and make copies and take extracts therefrom, and (iii) discuss the affairs, Federation Shareholder Agreement finances and accounts of Federation with Federation's officers and independent auditors (and Federation shall authorize its independent auditors to discuss with CME Poland and Unidome and such representatives the affairs, finances and accounts of Federation), all at such reasonable times and as often as may be reasonably requested. (c) The Shareholders shall cause Federation to deliver to each of ITI Media and CME (i) as soon as practicable, but not later than 45 days following the end of each fiscal year, consolidated annual financial statements audited by an internationally recognized accounting firm selected by the Shareholders; (ii) as soon as practicable, but not later than 25 days following the end of each fiscal quarter, quarterly unaudited financial statements of Federation reviewed by an internationally recognized accounting firm selected by CME; and (iii) not later than 10 days following the end of each month, monthly financial reports as required by Polish laws and regulations. The financial statements referred to above shall be prepared in accordance with standards applied on a consistent basis, and, in the case of the Financial Statements referred to in (i) and (ii) above, shall be prepared in accordance with the standards of U.S. GAAP and the International Accounting Standards Committee, and shall also be suitable for filing with appropriate regulatory and tax authorities. (d) The Shareholders shall cause Federation to deliver to any Shareholder, at the request of such Shareholder, such information as may be reasonably requested to enable such Shareholder or its Affiliates to comply with applicable tax filing requirements, and for other legitimate purposes related to taxes. In the case of any withholding taxes on payments to CME Poland or Unidome, the Shareholders shall cause Federation to furnish promptly official tax receipts evidencing such withholding in respect of such payments. Federation Shareholder Agreement (e) CME Poland (or its representative) shall be entitled to prepare all U.S. tax filings in connection with Federation, and CME Poland shall be the "Tax Matters Partner" of Federation for U.S. tax purposes. V.2. Continued Ownership. (a) For as long as each of Unidome and CME Poland owns any Federation Shares, neither ITI Media nor CME shall Transfer the shares of capital stock of Unidome or CME Poland, respectively, that are owned by it or allow Unidome or CME Poland, respectively, as the case may be, to Transfer to any Person any shares of its own capital stock (or, if Unidome or CME Poland shall have transferred the shares of Federation owned by it to a Permitted Transferee, allow such Permitted Transferee to Transfer to any Person any shares of its own capital stock), or Transfer securities or other instruments convertible into, or exchangeable or exercisable for, shares of such capital stock, or rights to purchase such capital stock or any other rights, voting or otherwise, applicable thereto except: i. by pledge to a financial institution as security for financing from such institution, provided that such institution agrees in advance in writing to be bound by the terms of this Section 5.2; ii. if, after giving effect to such Transfer, ITI Media or CME, as the case may be, shall continue to own more than 50% of the outstanding capital stock of Unidome or CME Poland, respectively, as the case may be (or any Permitted Transferee thereof); or iii. in a Control Transfer (as hereinafter defined) for cash in compliance with clause (b) of this Section 5.2. Federation Shareholder Agreement For purposes of this Section 5.2, a "Control Transfer" shall mean any Transfer of the shares of capital stock of Unidome or CME Poland (or of the capital stock of any Permitted Transferee of either of them that owns Federation Shares), including any Transfer by a financial institution following foreclosure upon a pledge of such capital stock, if, after giving effect to such Transfer, ITI Media or CME, as the case may be, would not own, directly or indirectly, at least 50% of the outstanding capital stock of Unidome or CME Poland (or of any Permitted Transferee of either of them), respectively. (b) In the event that either of ITI Media or CME desires to make a Control Transfer for cash to a third party, it shall provide written notice (a "Control Transfer Notice") to the other party (the "Parent Offeree") in advance of such Control Transfer, specifying in detail the identity of such third party and the price and other terms of the transaction. The Parent Offeree shall then be entitled to elect, by delivering notice to the transferring party within 45 days of delivery of the Control Transfer Notice, to purchase all (but not less than all) of the shares that are the subject of such Control Transfer at the lesser of (i) fair market value and (ii) the price being offered to such third party. If the Parent Offeree shall not have delivered such notice within such 45-day period, the transferring party shall be entitled to Transfer to such third party all (but not less than all) of such shares, provided that if the Transfer to such third party shall not have been completed within 120 days of the delivery of the Control Transfer Offer, the transferring party shall not be permitted to Transfer such shares without again complying with this Section 5.2(b). (c) For purposes of this Section 5.2, if it is necessary to determine the fair market value of any shares of capital stock, such fair market value shall be determined by KPMG Peat Marwick, or if KPMG Peat Marwick is not considered by either of Federation Shareholder Agreement Unidome or CME Poland to be an appropriate firm to conduct such determination, due to a conflict of interest involving one or more of the parties hereto (or any of their respective Affiliates), then the parties shall endeavor to agree upon another public accounting firm of recognized international standing (any such firm, a "Valuation Firm") to conduct such valuation. In the event that CME Poland and Unidome cannot agree upon a single Valuation Firm before the expiry of such 45-day period, each of them shall be entitled to appoint a Valuation Firm and such two firms shall agree upon a third Valuation Firm to conduct such valuation. The two resulting appraisals which are closest in value to one another shall be averaged to determine such fair market value. In the event that either CME Poland or Unidome shall not have appointed a Valuation Firm within 30 days following the expiry of such 45-day period, the determination of fair market value prepared by the Valuation Firm selected by the other party shall be binding upon the parties. V.3. Covenant of ITI Media. ITI Media shall not, and shall procure that none of its Affiliates shall, prepare financial statements under or in accordance with U.S. GAAP, for so long as (i) no Competitor of ITI (as hereinafter defined) shall be entitled to appoint, directly or indirectly, a majority of the board of Federation Shareholder Agreement directors of CME Poland, and (ii) CME and its Affiliates continue to own at least 50% of the capital of Federation. V.4. Dividend Policy. The Shareholders agree that it shall be the policy of Federation to declare and pay dividends to the maximum extent possible, subject to any legal or contractual restrictions on dividends and to the Business Plan and any subsequent annual business plan, provided that, notwithstanding the foregoing, no dividends or other distributions to Shareholders shall be declared or paid by Federation at any time if, at such time, any balance (including principal and accrued interest) is owed to any Shareholder on account of shareholder loans extended to Federation or any Joint Company. V.5. Public Announcements. Except as required by law, without the prior written consent of the other party, neither Unidome nor CME Poland shall, and each shall cause its respective Affiliates and Federation not to, issue any press release or public statement with respect to this Agreement, any other agreements entered into by the parties with or relating to Federation or the business and affairs of Federation; provided that nothing herein shall prohibit any party from making required disclosures to its shareholders or to regulatory authorities. If any party is required by law to issue a press release or other public statement relating to the foregoing matters, it shall deliver prior notice to the other party of such requirement and of the disclosure proposed to be made. V.6. Further Assurances. Each of CME, CME Poland, ITI Media and Unidome will cause to be promptly and duly taken, executed, acknowledged and delivered all such further acts, documents and assurances (including, without limitation, as may be related to the finalization of amendments to the Articles and the Federation Shareholder Agreement completion of any matters concerning corporate records) as may from time to time be reasonably requested by ITI Media, Unidome, CME or CME Poland, as the case may be, in order to carry out the intent and purposes of the Agreement and the transactions contemplated hereby. ARTICLE VI MISCELLANEOUS VI.1. Definitions. In this Agreement, the following terms, not defined elsewhere in the text hereof, shall have the following respective meanings: "Affiliate" means, with regard to any Person, any other Person who individually or as a part of a "group" for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended, controls, is controlled by or under common control with, such Person. "Agreement" means this Shareholders' Agreement, including any exhibits and schedules hereto, as it may be supplemented or amended from time to time in accordance with its terms. "Cause" means, with respect to any individual Person, (i) conduct adverse to the interests of Federation or the Federated Television Stations, (ii) conduct involving moral turpitude, or (iii) an inability of such Person to discharge duties for 120 or more consecutive days. "Competitor of ITI" means any Person, other than CME, any consolidated subsidiary of CME, ITI Holdings S.A. or any Affiliate of ITI Holdings Federation Shareholder Agreement S.A., engaged in the ownership, operation or management of television stations. "Control" means the possession of the power, directly or indirectly, to direct the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise (which power shall be deemed to exist upon the ownership of more than 50% of any class of voting securities or equity interest in such Person). "Federated Television Station" means any television station delivering or distributing television programming in Poland, whether by means of terrestrial broadcasting, cable, satellite transmission or otherwise, with which Federation has entered into one or more Television Services Agreements. "Permitted Transferee" means, with respect to any Shareholder: (i) any direct or indirect wholly-owned subsidiary of such Shareholder, (ii) any Person of which such Shareholder is the direct or indirect wholly-owned subsidiary, or (iii) any Person which is a direct or indirect wholly-owned subsidiary of a Person of which such Shareholder is the direct or indirect wholly-owned subsidiary. "Person" means an individual, corporation, partnership, trust or other entity, including a governmental or political subdivision or an agency or an instrumentality thereof. "Transfer" means any sale, transfer, assignment, pledge, mortgage, hypothecation or other disposition, whether effected directly or indirectly. "US$" means United States Dollars. Federation Shareholder Agreement "U.S. GAAP" means the accounting principles generally accepted from time to time in the United States. VI.2. Termination. This Agreement shall remain in effect until terminated (a) by mutual agreement of Unidome and CME Poland, (b) by delivery of notice by CME Poland to any other Shareholders, in the event that Unidome (or a Permitted Transferee thereof) ceases to be a Shareholder, or (c) by delivery of notice by Unidome to any other Shareholders, in the event that CME Poland (or a Permitted Transferee thereof) ceases to be a Shareholder. VI.3. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to the conflict of law rules thereof. VI.4. Arbitration. (a) General. Any controversy or claim arising out of or relating to this Agreement or any breach thereof shall be settled by arbitration. The arbitration shall be held in London, England and, except to the extent inconsistent with this Agreement, shall be conducted in accordance with the Rules of the London Court of International Arbitration in effect at the time of the arbitration. The arbitration shall be conducted in the English language. The arbitration proceedings, all documents and all testimony, written or oral, produced in connection therewith, and the arbitration award shall be confidential. (b) Selection of the Arbitrators. The arbitration panel shall consist of three arbitrators, each of whom shall be a practicing attorney or a professor of law. The party initiating arbitration (the "Claimant") shall appoint its arbitrator in its demand (the "Demand"). The other party (the "Respondent") shall appoint its Federation Shareholder Agreement arbitrator within 30 days of receipt of the Demand (whether the Demand is received from the Claimant or from the London Court of International Arbitration) and shall notify the Claimant of such appointment in writing. If the Respondent fails to appoint an arbitrator within such 30-day period, the arbitrator named in the Demand shall decide the controversy or claim as a sole arbitrator. Otherwise, the two arbitrators appointed by the parties shall appoint a third arbitrator within 30 days after the Respondent has notified Claimant of the appointment of the Respondent's arbitrator. When the arbitrators appointed by the Claimant and Respondent have appointed a third arbitrator and the third arbitrator has accepted the appointment, the two arbitrators shall promptly notify the parties of the appointment of the third arbitrator. If the two arbitrators appointed by the parties fail or are unable so to appoint a third arbitrator and so notify the parties, either party may request the London Court of International Arbitration to appoint the third arbitrator. The London Court of International Arbitration shall appoint the third arbitrator within 30 days after such request and shall notify the parties of the appointment. The third arbitrator shall act as Chairman of the panel. If there are more than two parties to a dispute, each party shall propose to the other parties by notice the names of one or more persons, one or more of whom would serve as an arbitrator. If the parties are unable to agree on all three arbitrators within thirty days of the first notice given under the preceding sentence, then the remaining arbitrators shall be appointed by the London Court of International Arbitration. (c) Interim Orders. In addition to the authority conferred on the arbitrators by the Rules of the London Court of International Arbitration and by law, the arbitrators shall have the authority to order such discovery and production of documents, including the deposition of party witnesses, and to make such orders for Federation Shareholder Agreement interim relief, including injunctive relief, as they deem just and equitable. (d) The Award. The arbitral award may grant any relief available under the applicable law, including, without limitation, specific performance. The arbitral award shall state the reasons for the award and relief granted, shall be final and binding on the parties to the arbitration, and may include an award of costs, including reasonable attorneys' fees and disbursements. (e) Specific Enforcement. The foregoing agreement to arbitrate shall be specifically enforceable. (f) No Appeal. The parties expressly agree that leave to appeal under section 1(3)(b) of the United Kingdom Arbitration Act 1979 (the "1979 Act"), or under section 69 of the Arbitration Act 1996 (the "1996 Act") may not be sought with respect to any question of law arising from an award, nor application made under section 1(5)(b) of the 1976 Act with respect to any award, nor application made under section 2(1)(a) of the 1979 Act or section 45 of the 1996 Act with respect to any question of law. VI.5. Amendment, Assignment, etc. Neither this Agreement nor any term hereof may be amended, changed, waived, discharged or terminated, except by an instrument in writing, signed by the party against which enforcement of such amendment, change, waiver, discharge or termination is sought. This Agreement shall be binding upon the respective successors and permitted assigns of the parties hereto. This Agreement shall not be assignable or otherwise transferable by a party without the prior written consent of the other parties hereto and any attempt to so assign or transfer this Agreement without such consent shall be void and of no effect. Federation Shareholder Agreement VI.6. Notices. All notices, consents, requests, instructions, approvals and other communications provided for herein shall be in writing and shall be deemed validly given when received and may be given by hand delivery, telecopy or courier mail: (a) if to Federation, at: Powsinska 4 02-920 Warsaw Poland telecopy number: 011-48-22-640-4423 (b) if to ITI Media, at: Landhuis Joonchi Kaya Richard J. Beaujon z/r Curacao Netherlands Antilles with a copy to: ITI Management Ltd. Beustweg 12 8032 Zurich Switzerland telecopy number: 011-41-1-258-8888 Federation Shareholder Agreement (c) if to Unidome, at: De Roelelaau 7 1083 HJ Amsterdam The Netherlands with a copy to: ITI Management Ltd. Beustweg 12 8032 Zurich Switzerland telecopy number: 011-41-1-258-8888 (d) if to CME and/or CME Poland, at: 18 D'Arblay Street London W1V 3FP England Attention: Legal Department telecopy number: 011-44-171-292-7948 with a copy to: Louis Begley c/o Debevoise & Plimpton 875 Third Avenue New York, NY 10022 Federation Shareholder Agreement telecopy number: (212) 909-6836 or at such other address and telecopy number as CME, CME Poland, ITI Media or Unidome may designate by written notice to the other Shareholders; and if to any other Shareholder, at such address and telecopy number as such Shareholder may designate by written notice to the other Shareholders. VI.7. Survival of Representations and Warranties. All representations and warranties contained or incorporated in this Agreement or made in writing by or on behalf of any Shareholder in connection with the transactions contemplated by this Agreement shall survive the execution and delivery of this Agreement. VI.8. Expenses. Except as otherwise specifically provided in this Agreement, or as otherwise agreed by the parties, each party hereto shall pay all its own costs and expenses incident to this Agreement and the transactions contemplated hereby, including legal and accounting fees and disbursements. VI.9. Severability; Invalidity. (a) If any provision of this Agreement is held to be unenforceable for any reason, it shall be adjusted rather than voided, if possible, in order to achieve the intent of the parties to this Agreement to the extent possible. In any event, the invalidity or unenforceability of any provision of this Agreement in any jurisdiction shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of this Agreement, including that provision, in any other jurisdiction. Federation Shareholder Agreement (b) If any provision of the Articles is at any time in conflict with any of the provisions of this Agreement, the parties shall exercise all voting and other rights and powers available to them as stockholders and otherwise so as to give effect to the provisions of this Agreement and shall further, if necessary, procure any required amendment of the Articles. Without limiting the generality of the foregoing, the Shareholders shall take all actions necessary to cause the Articles to be at all times consistent with, and to give full affect to, the provisions of this Agreement and shall vote their shares and take all other reasonable measures to cause such amendment to be filed with and approved by the appropriate governmental authority in Poland as soon as practicable following the date of this Agreement. VI.10. Authority of Shareholders Limited. Except as expressly set forth herein, none of the Shareholders shall have any authority to represent or to bind the other Shareholders in any manner whatsoever, and each Shareholder shall be solely responsible and liable for its own acts. VI.11. No Third Party Beneficiaries. Nothing in this Agreement shall be construed as giving any Person, other than the parties hereto and their successors and permitted assigns, any right, remedy or claim under or in respect of this Agreement or any provision hereof. VI.12. Translation. This Agreement has been concluded in the English language and in the event of any inconsistency between the original English version and any translation, such English version shall govern. VI.13. Integration; Section Headings; Counterparts; etc.This Agreement (including the Schedules and Exhibits hereto) and the other documents delivered pursuant hereto constitute the entire agreement of the parties relating to the Federation Shareholder Agreement subject matter hereof and supersede any and all prior agreements, arrangements and understandings relating thereto. The section headings of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. ITI MEDIA GROUP N.V. By ----------------------------- Name: Title: UNIDOME BEHEER B.V. By ----------------------------- Name: Title: CME MEDIA ENTERPRISES B.V. By ----------------------------- Name: Title: CME POLAND B.V. Federation Shareholder Agreement By ----------------------------- Name: Title: FEDERACJA SP. Z O.O. By ----------------------------- Name: Title: EX-27.01 4 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 125,017 29,990 19,648 (3,338) 0 216,196 53,449 28,431 482,892 83,049 178,969 0 0 240 181,918 482,892 94,402 94,402 0 104,560 37,029 0 6,218 (55,994) (7,926) (60,637) 0 0 0 (60,637) (2.54) 0.000
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