-----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, HivopKEMjn5bgPyUbmjEbNR7VVJXeu14kw3wKcK6Qu9xDDMs8CIudUceC3xzOnyV xSnB4KLIs5zmdK9Wsham8w== 0000889812-99-003499.txt : 19991123 0000889812-99-003499.hdr.sgml : 19991123 ACCESSION NUMBER: 0000889812-99-003499 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991122 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/A SEC ACT: SEC FILE NUMBER: 000-24796 FILM NUMBER: 99762152 BUSINESS ADDRESS: STREET 1: 18 D ARBLAY STREET CITY: LONDON W1V 3FP ENGLA STATE: X0 BUSINESS PHONE: 4412961431 MAIL ADDRESS: STREET 1: CLARENDON HOUSE STREET 2: HAMILTON HM CX CITY: BERMUDA STATE: D0 10-Q/A 1 QUARTERLY REPORT ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number 0-24796 CENTRAL EUROPEAN MEDIA ENTERPRISES LTD. (Exact name of registrant as specified in its charter) BERMUDA N/A (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) Clarendon House, Church Street, Hamilton HM CX Bermuda (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 441-296-1431 Indicate by check mark whether registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for each shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding as of November 18, 1999 ----- ---------------------------------- Class A Common Stock, par value $.01 18,506,849 Class B Common Stock, par value $.01 7,177,269 ================================================================================ EXPLANATORY NOTE The purpose of this amendment is to correct a misclassification in Part 1, Item 1, "Consolidated Statement of Cash Flows" and in Part 1, Item 2, "Liquidity and Capital Resources". The correction concerns the line item entitled Short Term Assets in the section Cash Flows From Operating Activities which has changed by negative $15,310,000 to negative $11,533,000 from positive $3,777,000 and the line item entitled Cash Proceeds From Sale of Investment in the Cash Flows From Investing Activities section which has changed by positive $15,310,000 to positive $39,260,000 from positive $23,950,000, both sections in the "Consolidated Statement of Cash Flows". In addition, this change has affected the first two paragraphs of the "Liquidity and Capital Resources" discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations". PART 1 FINANCIAL INFORMATION Item 1. Financial Statements CENTRAL EUROPEAN MEDIA ENTERPRISES LTD. Consolidated Balance Sheets as at September 30, 1999 and December 31, 1998 ($000s, except share data)
ASSETS September 30, December 31, ------ 1999 1998 ------------- ------------ (unaudited) CURRENT ASSETS: Cash and cash equivalents.................................................. $ 41,370 $ 43,354 Restricted cash............................................................ 1,192 67 Accounts receivable (net of allowances of $4,221, $3,193).................. 11,461 39,846 Program rights costs....................................................... 12,331 25,981 Advances to affiliates..................................................... 16,514 10,837 Other short-term assets.................................................... 20,874 28,557 --------- --------- Total current assets.............................................. 103,742 148,642 Investments in unconsolidated affiliates................................... 24,115 29,357 Loans to affiliates........................................................ 4,863 9,514 Property, plant and equipment (net of depreciation of $54,876, $49,292).... 54,514 61,926 Program rights costs....................................................... 12,323 21,206 License costs and other intangibles (net of amortization of $3,073, $6,705).................................................................. 3,065 6,365 Goodwill (net of amortization of $77,640, $27,504)......................... 20,414 70,196 Note receivable............................................................ 20,071 20,071 Deferred tax asset......................................................... 175 - Other assets............................................................... 5,481 7,230 --------- --------- Total assets...................................................... $ 248,763 $ 374,507 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Net liabilities of discontinued operations................................. $ - $ 3,183 Accounts payable and accrued liabilities................................... 50,129 57,269 Duties and other taxes payable............................................. 12,304 11,541 Income taxes payable....................................................... 876 1,157 Current portion of credit facilities and obligations under capital leases.. 6,765 9,670 Investments payable........................................................ 5,188 12,281 Advances from affiliates................................................... 875 2,533 --------- --------- Total current liabilities......................................... 76,137 97,634 Deferred income taxes...................................................... - 302 Long-term portion of credit facilities and obligations under capital leases................................................................... 17,468 22,049 Investments payable........................................................ - 2,563 $100,000,000 9 3/8% Senior Notes........................................... 99,892 99,875 DM 140,000,000 8 1/8% Senior Notes......................................... 76,321 83,729 Other Liabilities.......................................................... 4,580 1,946 Minority interest in consolidated subsidiaries............................. 589 702 COMMITMENTS AND CONTINGENCIES.............................................. SHAREHOLDERS' EQUITY: Class A Common Stock, $0.01 par value: authorized:100,000,000 shares at September 30, 1999 and December 31, 1998; issued and outstanding; 18,506,849 at September 30, 1999 and 18,070,879 at December 31, 1998..... 185 181 Class B Common Stock, $0.01 par value: authorized: 15,000,0000 shares at September 30, 1999 and December 31, 1999, issued and outstanding: 7,177,269 at: September 30, 1999 and 7,577,329 at December 31, 1998...... 72 76 Additional paid-in capital................................................. 356,385 356,378 Accumulated deficit........................................................ (371,717) (288,348) Accumulated other comprehensive income..................................... (11,149) (2,580) --------- --------- Total shareholders' (deficit) equity....................................... (26,224) 65,707 --------- --------- Total liabilities and shareholders' equity................................. $ 248,763 $ 374,507 ========= =========
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, --------------------- ----------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Gross Revenues............................................... $ 22,072 $ 38,988 $ 123,784 $ 147,767 Discounts and agency commissions............................. (4,534) (9,873) (23,964) (34,772) -------- -------- --------- --------- Net revenues................................................. 17,538 29,115 99,820 112,995 STATION EXPENSES: Other operating costs and expenses....................... 12,264 16,715 48,586 49,216 Amortization of programming rights....................... 28,730 6,507 45,321 19,971 Depreciation of station fixed assets and other intangibles............................................ 6,509 4,011 15,996 11,592 -------- -------- --------- --------- Total station operating costs and expenses............... 47,503 27,233 109,903 80,779 Selling, general and administrative expenses............. 8,947 7,017 21,645 18,594 CORPORATE EXPENSES: Corporate operating costs and development expenses....... 5,106 5,000 14,745 18,403 Amortization of goodwill and allowance for development costs.................................................. 42,857 2,311 48,672 7,115 Restructuring charge (Note 7............................. - - - 2,552 -------- -------- --------- --------- 47,963 7,311 63,417 28,070 Operating loss............................................... (86,875) (12,446) (95,145) (14,448) Equity in loss of unconsolidated affiliates (Note 3)......... (2,846) (1,793) (7,236) (580) Gain on sale of investment (Note 6).......................... - - 25,870 - Net interest and other expense............................... (3,206) (5,203) (10,137) (13,524) Foreign currency exchange (loss)/gain, net .................. (4,266) (5,154) 8,711 (6,944) Other income (Note 8)........................................ 8,250 - 8,250 - -------- -------- --------- --------- Loss before provision for income taxes, minority interest and discontinued operations................................ (88,943) (24,596) (69,687) (35,496) Recovery of/(provision for) income taxes..................... 1,572 (866) (3,935) (8,426) -------- -------- --------- --------- Loss before minority interest and discontinued operations.... (87,371) (25,462) (73,622) (43,922) Minority interest in loss/(income) of consolidated affiliates................................................. 296 (19) 203 592 -------- -------- --------- --------- Loss from continuing operations.............................. (87,075) (25,481) (73,419) (43,330) Discontinued operations: Operating loss of discontinued operations (Hungary)........ (2,957) (6,209) (8,037) (28,700) Loss on disposal of discontinued operations (Hungary)...... (1,913) - (1,913) - Operating loss on discontinued operations (Poland)......... - (3,338) - (16,667) ======== ======== ========= ========= Net loss..................................................... (91,945) (35,028) (83,369) (88,697) ======== ======== ========= ========= PER SHARE DATA: Net loss per share (Note 5): Continuing operations - Basic and diluted................ (3.39) (1.06) (2.86) (1.80) Discontinued operations - Basic and diluted.............. (0.19) (0.40) (0.39) (1.89) ======== ======== ========= ========= Net.................................................... (3.58) (1.46) (3.25) (3.69) ======== ======== ========= ========= Weighted average shares used in computing per share amounts: Basic.................................................... 25,674 24,063 25,674 24,063 ======== ======== ========= ========= Diluted.................................................. 25,674 24,063 25,674 24,063 ======== ======== ========= =========
Page 3 CENTRAL EUROPEAN MEDIA ENTERPRISES LTD. Consolidated Statements of Shareholders' Equity (Deficit) For the nine months ended September 30, 1999 ($000s) (Unaudited)
Accumulated Comprehensive Class A Class B Other Total Income Common Common Capital Accumulated Comprehensive Shareholders' (loss) Stock Stock Surplus Deficit(1) Income(2) equity (deficit) ------------- ----------- ----------- ----------- ------------ ------------------------------- BALANCE, December 31, 1998 $181 $76 $356,378 $(288,348) $(2,580) $ 65,707 Comprehensive loss: Net loss................... $(83,369) $ (83,369) $(83,369) Other comprehensive loss: Unrealized translation adjustments.............. (8,569) - - (8,569) (8,569) ----------- Comprehensive loss............ $(91,938) =========== Stock issued: stock option plans......... 4 (4) 7 7 -------- -------- -------- --------- --------- --------- BALANCE, September 30, 1999 $185 $72 $356,385 $(371,717) $(11,149) $(26,224) ======== ======== ======== ========= ========= =========
(1) Of the accumulated deficit of $371,717 at September 30, 1999, $96,444 represents accumulated losses in unconsolidated affiliates. (2) Represents foreign currency translation adjustments Page 4 CENTRAL EUROPEAN MEDIA ENTERPRISES LTD. Consolidated Statements of Cash Flows For the nine months ended September 30, 1999 and 1998 ($000s) (Unaudited)
For the nine months ended September 30, 1999 1998 ------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss......................................................................... $(83,369) $(88,697) Adjustments to reconcile net loss to net cash used in operating activities: Equity in loss of unconsolidated affiliates.............................. 7,236 580 Depreciation and amortization (excluding amortization of barter programs) 112,924 39,757 Discontinued operations.................................................. 9,950 45,367 Gain on disposal of investment........................................... (25,870) - Minority interest in loss of consolidated subsidiaries .................. (203) (592) Foreign currency exchange (gain) loss, net............................... (8,711) 6,944 Accounts receivable...................................................... 22,949 13,795 Cash paid for program rights............................................. (22,122) (21,775) Advances to affiliates................................................... (3,083) 3,714 Other short-term assets.................................................. (11,533) (3,949) Accounts payable and accrued liabilities................................. (11,053) (6,820) Income and other taxes payable........................................... 413 (2,563) ------------- -------------- Net cash used in operating activities................................. (12,472) (14,239) ------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments in unconsolidated affiliates................................. - (1,200) Other Investments........................................................ (6,056) (58) Investments in discontinued operations................................... (8,891) (34,475) Cash proceeds from sale of investment.................................... 39,260 - Restricted cash.......................................................... (1,125) 526 Acquisition of fixed assets.............................................. (7,262) (9,563) Acquisition of minority interest......................................... - (9,930) Loans and advances to affiliates......................................... - (716) Payments for license costs, other assets and intangibles................. (196) (1,759) ------------- -------------- Net cash provided by (used in) investing activities................... 15,730 (57,175) ------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Credit facilities and payments under capital leases...................... (4,877) (2,693) Dividends paid to minority shareholders.................................. - (2,386) Capital contributed by shareholders...................................... 7 1,509 Advances from affiliates................................................. 883 - Other long-term liabilities.............................................. (53) - ------------- -------------- Net cash (used in) financing activities............................... (4,040) (3,570) ------------- -------------- IMPACT OF EXCHANGE RATE FLUCTUATIONS ON CASH (1,202) 1,324 ------------- -------------- Net decrease in cash and cash equivalents................................ (1,984) (73,660) CASH AND CASH EQUIVALENTS, beginning of period............................... 43,354 103,772 ------------- -------------- CASH AND CASH EQUIVALENTS, end of period..................................... $41,370 $30,112 ============= ============== Supplemental information: Cash paid forinterest................................................. $18,913 $18,603 ============= ============== Income Taxes.......................................................... $ 93 $12,647 ============= ==============
Page 5 CENTRAL EUROPEAN MEDIA ENTERPRISES LTD. Notes to Consolidated Financial Statements September 30, 1999 1. Organization and Business Central European Media Enterprises Ltd. ("CME") is a Bermuda corporation. All references to the "Company" include CME and its direct and indirect Subsidiaries, and all references to "Subsidiaries" include each corporation or partnership in which CME has a direct or indirect equity or voting interest. The Company invests in, develops and operates national and regional commercial television stations and networks in Central and Eastern Europe. Termination of Business Combination Transaction and Asset Sale On September 28, 1999, the Company announced that the Reorganization Agreement dated March 29, 1999 between the Company and SBS Broadcasting S.A. ("SBS"), (the "Reorganization Agreement") had been mutually terminated. Under the Reorganization Agreement, pursuant to a number of transactions, SBS would have acquired all the assets and assumed all the liabilities of the Company, and each holder of Common Stock of the Company would have received 0.5 shares of SBS Common Stock for each share of Common Stock of the Company owned by such holder. In connection with the termination of the Reorganization Agreement, the Company received $8,250,000 as a termination fee from SBS, which is included in other income in the accompanying Consolidated Statement of Operations. In addition, the Company agreed to sell substantially all of its Hungarian operations to SBS for approximately $18,000,000 to be received in the form of SBS assuming substantially all of the Company's obligations to program suppliers for the Hungarian region. In Slovenia, the Company agreed to withdraw all pending litigation against SBS and to assign to SBS all claims against the former owners and operators of Kanal A, in exchange for an option to acquire for $12,250,000 an unencumbered 80% voting and economic interest in Kanal A. The option will be exercisable until the earlier of June 30, 2001 and six months from the date SBS confirms that it has the ability to transfer such interest to the Company. These transactions have not yet been consummated, and the Company and SBS are negotiating the final terms to implement these transactions. In accordance with United States generally accepted accounting principles ("GAAP"), the accompanying financial statements for the third quarter and full year of 1998 have been restated in order to reflect the Company's Hungarian operations as discontinued operations. General Laws, regulations and policies in CME's markets generally restrict the level of direct or indirect interests that any non-local investor such as CME may hold in Page 6 companies holding broadcast licenses. As a result, broadcast licenses are generally held by companies majority owned by CME's local partners and CME owns controlling interests in service or operating companies which provide programming, advertising and other services to the licenseholding companies. References to Nova TV, POP TV, Gajba TV, PRO TV, Acasa, Markiza TV and Studio 1+1 in this report may be to either the license company or the service companies or both, as the case may be. The following table sets forth certain data regarding the Company's voting interest in each license and service company.
License CME Voting CME Voting Country Expiration TV License Company Interest TV Services Company Interest - ------- ---------- ------------------ ---------- ------------------- ---------- Czech Republic......... 2005(1) CET....................... 1.25% CNTS.................. 99% Romania................ 2002-2006 Pro TV S.R.L.............. 49% MPI .................. 66% Media Pro S.R.L........... 0% Slovenia............... 2003-2007 Tele 59 .................. 10% Pro Plus.............. 78% MMTV...................... 10% Slovak Republic........ 2007 Markiza-Slovakia s.r.o.... 0% STS................... 49% Ukraine................ 2007 Studio 1+1................ 18% Innova, IMS, UAH...... 60% Prioritet 50%(2)
(1) See "Czech Republic" below (2) 50% interest owned by Ukraine Advertising Holding B.V. (UAH) Discontinued Operations - Poland In December 1998, CME sold its interests in the TVN television operations in Poland. This transaction resulted in the treatment of these interests and related operations as discontinued operations for all periods presented in the accompanying financial statements. The accompanying financial statements for the third quarter of 1998 have been restated in order to reflect the Company's Polish operations as discontinued operations. Czech Republic The Company owns a 99% voting and economic interest in Ceska nezavisla televizni spolecnost, spol. s.r.o. ("CNTS"), with the remaining 1% voting and economic interest in CNTS held by CET 21, spol. s.r.o. ("CET"). CET, which is purportedly controlled by Dr. Vladimir Zelezny, the former General Director of Nova TV, holds a terrestrial television broadcast license in the Czech Republic that expires in January 2005. Beginning in 1994, CNTS provided television programming and other services to CET, which broadcasts the Nova TV signal, and Nova TV became one of the most successful television stations in Europe. Pursuant to a Services Agreement with CET dated May 21, 1997 (the "Services Agreement"), CNTS provided substantially all of the television and programming services to Nova TV, and in consideration therefor, CNTS collected all of Nova TV's advertising and other revenues, and retained as compensation for its services the balance of those revenues net of Nova TV's operating expenses less CZK 100,000 ($2,800) per month payable to CET. On August 5, 1999, CET pre-empted CNTS's transmission and began broadcasting a substitute signal for Nova TV from a site other than CNTS's studios. In addition, on the Page 7 same day, CNTS received notification from CET that CET was withdrawing from the Services Agreement due to CNTS's alleged failure to supply CET with the daily program log for Nova TV on August 4, 1999. CET representatives also stated publicly that CET would not utilize the services of CNTS for Nova TV in the future. As of the date of this filing, CET has continued to pre-empt all of CNTS's programming for Nova TV. CNTS believes that CET's withdrawal from the Services Agreement was not legally effective since CNTS did not materially breach the Services Agreement and that the Services Agreement therefore remains in effect. CNTS filed a request for a preliminary injunction with the Regional Commercial Court in Prague to enjoin CET from entering into service relationships with other companies and requested the court to declare the Services Agreement to be in full force and effect, which was denied. A decision on the merits is pending. See Part II, Item 1 "Legal Proceedings." In connection with CET's actions, CNTS and the Company requested the Czech Media Council to call an extraordinary meeting to address breaches of the Czech media laws and destabilization of the Czech media market, and to institute proceedings against CET for the revocation of the broadcast license. To date, the Czech Media Council has taken no action in connection with this dispute. As a result of CET actions, CNTS has been unable to generate revenues and its operations have been suspended. On September 9, 1999, the Company announced the suspension of technical and production operations at CNTS and CNTS dismissed 215 employees. On October 21, 1999, an additional 50 CNTS employees were dismissed. CNTS is governed by a Memorandum of Association and Investment Agreement (the "Memorandum of Association"). The Company believes that the Memorandum of Association, the Services Agreement and course of dealing over the life of Nova TV establish that CNTS is legally entitled to be the exclusive provider of television and related services to CET for Nova TV. On April 19, 1999, CNTS dismissed Dr. Zelezny from his position as Executive and General Director of CNTS, for taking actions that exceeded his authority, that breached his fiduciary duties and that were against the interests of CNTS. After an internal investigation, it was learned that Dr. Zelezny had executed an unlimited CNTS guarantee for the liabilities of a Czech television program acquisition company, AQS a.s. ("AQS"), without any authorization. The investigation also indicated that Dr. Zelezny had reassigned the program acquisition department of CNTS to AQS, notified international providers of television programming that AQS would replace CNTS as the program service provider to Nova TV, and taken other actions contrary to the interests of CNTS. On April 26, 1999, a wholly-owned subsidiary of the Company filed an arbitration claim against Dr. Zelezny before the International Chamber of Commerce Court of Arbitration in Paris, France. The Company seeks the return of $23,350,000 paid to Dr. Zelezny, plus interest, and other unspecified damages, based on breaches by Dr. Zelezny of a share purchase agreement entered into in 1997 under which the Company purchased from Dr. Zelezny a company owned by him whose sole asset was a 5.8% interest in CNTS. The Company is also seeking the forgiveness of the $5,188,000 unpaid balance of the purchase price under the 1997 share purchase agreement and preliminary interim relief. On November 10, 1999, an international arbitral tribunal issued a preliminary order directing Dr. Vladimir Zelezny to take steps to restore CNTS to its prior position as an exclusive provider of critical services for Nova TV. See Part II, Item 1, "Legal Proceedings." Among other things, the order requires Dr. Zelezny to sever all dealings between CET 21 and other service providers and to resume exclusive relations with CNTS in the areas where CNTS was previously providing these services, Page 8 including program acquisition, programming and broadcasting services, and brokerage of advertising and receipt of advertising revenues. The preliminary order will remain in effect until the arbitral tribunal directs otherwise. Dr. Zelezny has indicated that he will not comply with the tribunal's order. CME and CNTS will be seeking to enforce the order in the Czech courts and through other means. A final award in the arbitration, following a final hearing in Amsterdam, The Netherlands, is expected during the first half of the year 2000. On August 23, 1999, Ronald S. Lauder, the non-executive Chairman of the Company's Board of Directors, instituted arbitration proceedings against the Czech Republic under the 1992 Bilateral Investment Treaty between the United States and the Czech Republic. Mr. Lauder initiated the proceedings in his personal capacity as a U.S. national who owns or controls (by virtue of his voting control over CME) an investment in the Czech Republic. The claim asserts that the Czech Republic harmed Mr. Lauder's investment in CNTS by taking unfair and discriminatory actions -- in the form of expressly approving an exclusive relationship between the service company and the license holder for Nova TV to entice CME's investment of foreign capital, and later changing its position -- and by failing to act to remedy the effects of those actions or the improper actions of Dr. Zelezny. Mr. Lauder seeks monetary damages and other relief arising from harm caused to CNTS by the Czech Republic's actions. The arbitration will take place before a tribunal of three arbitrators pursuant to the Arbitration Rules of the United Nations Commission on International Trade Law. The Company believes that the recent actions by CET violate the Services Agreement and CET's obligations under the CNTS Memorandum of Association, as well as Czech media laws. The continued suspension of CNTS's operations has had a material adverse effect on the Company and, absent other sources of cash, will result in the Company's inability to meet its debt service and other financial obligations during the fourth quarter of 2000. Romania The Company's interest in PRO TV is governed by a Cooperation Agreement (the "Romanian Agreement") among the Company, Adrian Sarbu and Ion Tiriac, forming Media Pro International S.A. ("MPI"), through which PRO TV and Acasa, are operated. MPI provides programming to and sells advertising for the stations which comprise the PRO TV and Acasa network. Pursuant to the Romanian Agreement, the Company owns 66% of the equity of MPI. Interests in profits of MPI are equal to the partners' equity interests. The Company has the right to appoint three of the five members of the Council of Administration which directs the affairs of MPI. Although the Company has majority voting power in MPI, with respect to certain fundamental financial and corporate matters the affirmative vote of either Mr. Sarbu or Mr. Tiriac is required. The Company owns 49% of the equity of PRO TV, SRL which holds 20 of the 23 licenses for the stations which comprise the PRO TV and Acasa network. Messrs. Sarbu and Tiriac own substantially all of the remainder of PRO TV, SRL. The remaining three licenses for the PRO TV network together with the licenses for the PRO FM and PRO AM radio networks are held by Media Pro SRL, a company owned by Messrs. Sarbu and Tiriac. In addition, in Romania, the Company owns 70% of each of Media Vision SRL ("Media Vision"), a production and dubbing company, and Video Vision International SRL ("Video Vision"), a post-production company. Page 9 Slovenia The Company's interest in POP TV and Gajba TV is governed by a Partnership Agreement among the Company, MMTV 1 d.o.o. Ljubljana ("MMTV") and Tele 59 d.o.o. Maribor ("Tele 59"), forming Produkcija Plus d.o.o. ("Pro Plus"). Pro Plus provides programming to and sells advertising for the broadcast licenseholders MMTV and Tele 59 as well as additional affiliates. The Company currently owns 78% of the equity in Pro Plus, but has an effective economic interest of 85.5% as a result of its right to 33% of the profits of MMTV and 33% of the profits of Tele 59. Tele 59 currently owns a 21% equity interest in Pro Plus, and MMTV currently owns a 1% equity interest in Pro Plus. The Company owns 10% of the equity of Tele 59 and a 10% direct equity interest in MMTV. The Company also owns a 20% equity interest in MTC Holding d.o.o. ("MTC") which owns the remaining 90% equity interest in MMTV. 76% of MTC's equity is being separately held by a Slovene person, in trust for the Company, until the Slovene media law is clarified or until the Company determines final ownership. Voting power and interests in profits of Pro Plus are equal to the partners' equity interests. All major decisions concerning the affairs of Pro Plus are made by the general meeting of partners and require a 70% affirmative vote. Certain fundamental financial and corporate matters require an 85% affirmative vote of the partners. In July 1996, the Company, together with MMTV and Tele 59, entered into an agreement to purchase a 66% equity interest in Kanal A, a privately owned television station in Slovenia, which competes with POP TV (the "Kanal A Agreement"). There is currently an injunction in effect preventing the completion of the Kanal A Agreement. See Part II, Item 1 "Legal Proceedings". Slovak Republic The Company's interest in Markiza TV is governed by a Participants Agreement dated September 28, 1995 (the "Slovak Agreement") between the Company and Markiza-Slovakia s.r.o. ("Markiza") forming Slovenska Televizna Spolocnost, s.r.o. ("STS"). Pursuant to the Slovak Agreement, the Company is required to fund all of the capital requirements of, and holds a 49% voting interest and an 80% economic interest in, STS. Markiza, which holds the television broadcast license, and STS have entered into an agreement under which STS is entitled to conduct television broadcast operations pursuant to the license. On an ongoing basis, the Company is entitled to 80% of the profits of STS, except that until the Company is repaid its capital contributions plus a priority return at the rate of 6% per annum on such capital contributions, 90% of the profits will be paid to the Company. A Board of Representatives directs the affairs of STS, the composition of which includes two designees of the Company and three designees (two of whom have been named) of Markiza; however, all significant financial and operational decisions of the Board of Representatives require a vote of 80% of its members. In addition, certain fundamental corporate matters are reserved for decision by a general meeting of partners and require a 67% affirmative vote of the partners. There is currently litigation pending with respect to the ownership of Markiza. Ukraine The Studio 1+1 Group consists of several entities in which the Company holds direct or indirect interests. The Company owns a 60% equity interest in each of Innova Page 10 Film GmbH ("Innova"), Ukraine Advertising Holding B.V. ("UAH") and International Media Services ("IMS"). UAH holds a 50% equity interest in Prioritet, a Ukrainian company engaged in advertising sales. Innova holds 100% of Intermedia, a Ukrainian company ("Intermedia"), which in turn holds a 30% equity interest in a separate Ukrainian company which holds the license to broadcast programming and sell advertising on UT-2 (the "UT-2 License"). Innova, IMS, Intermedia and Prioritet have entered into arrangements regarding the provision of programming and advertising sales services to Studio 1+1. Interests in profits of each entity in the Studio 1+1 Group are equal to equity interests held in such entities. All significant decisions of the entities in the Studio 1+1 Group are reserved for decision of the shareholders, requiring a majority vote (other than decisions of the shareholders of the Ukrainian company which holds the UT-2 broadcast license, which require a 75% vote). Certain fundamental corporate matters of these entities require 61% shareholder approval. 2. Summary of Significant Accounting Policies Reference is made to the Notes to Consolidated Financial Statements contained in the Company's December 31, 1998 audited consolidated financial statements included in the Company's 1998 Annual Report on Form 10-K filed with the SEC on March 29, 1999. In the opinion of Management, the interim unaudited financial statements included herein reflect all adjustments necessary, consisting of normal recurring adjustments, for a fair presentation of such data on a basis consistent with that of the audited data presented therein. The consolidated results of operations for interim periods are not necessarily indicative of the results to be expected for a full year. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company's wholly-owned subsidiaries and the results of Nova TV, PRO TV, POP TV, Studio 1+1 (for the three and nine months ended September 30, 1999 only), Media Vision and Video Vision (the "Consolidated Affiliates"), as consolidated entities and reflect the interests of the minority owners of these entities for the periods presented, as applicable. The results of Markiza TV and Studio 1+1 (for the three and nine months ended September 30, 1998 only), (the "Unconsolidated Affiliates") in which the Company has, or during the periods presented had, minority or non-controlling ownership interests, are included in the accompanying Consolidated financial statements using the equity method. In late December 1998 the Company increased its equity interest in Studio 1+1 to a 60% controlling interest and, due to the timing of this transaction, the Studio 1+1 balance sheet is consolidated in the Company's Consolidated Balance Sheet as of December 31, 1998, but in the Company's Consolidated Statements of Operations and Consolidated Statements of Cash Flows for the three and nine months ended September 30, 1998, Studio 1+1 results are accounted for under the equity method. From January 1, 1999, Studio 1+1 is consolidated in all of the Company's financial statements. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets Page 11 and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting year. Actual results could differ from those estimates. Reclassifications Certain reclassifications were made to prior period amounts to conform to current period classifications. Derivative Instruments and Hedging Activities -- New Accounting Pronouncement In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. Pursuant to SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 - An Amendment of FASB Statement No. 133", which was issued in June 1999, SFAS No. 133 will be effective for fiscal years beginning after June 15, 2000. A company may also implement the Statement as of the beginning of any fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1999 and thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after either December 31, 1997 and 1998, at the company's election. The Company occasionally enters into forward foreign exchange contracts. No material impact is expected as a result of the adoption of SFAS No. 133 when it is applicable. 3. Summary Financial Information for Unconsolidated Affiliates. As of ----------------------------------------- September 30, 1999 December 31, 1998 ------------------ ----------------- $000s ----- Markiza TV Markiza TV ---------- ---------- Current assets.................. 14,155 17,863 Non-current assets.............. 19,883 26,682 Current liabilities............. (16,529) (17,703) Non-current liabilities......... (872) (1,089) ------- ------- Net assets...................... 16,637 25,753 ======= ======= Page 12 For the three months ended, ---------------------------------------------------- September 30, 1999 September 30, 1998 ------------------ --------------------------- $000s ----- Studio 1+1 Markiza TV Markiza TV Group ---------- ---------- ---------- Net revenues............... 5,760 6,698 4,420 Operating loss............. (2,624) (4,110) (2,046) Net loss................... (2,632) (3,012) (1,912) For the nine months ended, ----------------------------------------------------- September 30, 1999 September 30, 1998 ------------------ ------------------ $000s ----- Studio 1+1 Markiza TV Markiza TV Group ---------- ---------- ---------- Net revenues............... 21,869 25,410 18,879 Operating loss............. (3,908) (2,067) (1,153) Net loss................... (6,413) (1,402) (1,117) The Company's share of losses in Unconsolidated Affiliates (after intercompany eliminations) for the nine months ended September 30, 1999 was $4,039,000 for Markiza TV and $3,197,000 for certain of the Studio 1+1 Group entities. 4 Segment Data The Company manages its business segments primarily on a geographic basis. The Company's reportable segments are comprised of Nova TV (Czech Republic), PRO TV (Romania), Markiza TV (Slovakia), POP TV (Slovenia) and Studio 1+1. Each operating segment provides products and services as further described below. The Company evaluates the performance of its segments based on segment EBITDA (earnings before interest, taxes, depreciation and amortization). Costs for programming amortization are included in segment EBITDA. Costs excluded from segment EBITDA primarily consist of interest and foreign exchange gains and losses, corporate expenses and goodwill amortization and equity in losses of unconsolidated affiliates and other non-recurring charges for impairment of investments or discontinued operations. The assets and liabilities of the Company are managed centrally and are reported internally in the same manner as the consolidated financial statements; thus, no additional information is provided. Summary information by segment as of and for the three and nine months ended September 30, 1999 and 1998 is as follows: Page 13
SEGMENT FINANCIAL INFORMATION For the three months ended September 30, --------------------------------------------------------------------- ($000s) ---------------------------------- --------------------------------- Net Revenues EBITDA ---------------------------------- --------------------------------- Station 1999 1998 1999 1998 ---- ---- ---- ---- Nova TV........................... $4,476 $17,827 $(29,912) $4,415 PRO TV ........................... 7,529 7,437 (1,038) (3,387) POP TV ........................... 3,736 3,564 (766) (2,095) Studio 1+1......................(1) 1,795 - (760) - Other Operations ................. 2 287 (2) (107) ---------- --------- ---------- --------- Total Consolidated Operations 17,538 29,115 (32,478) (1,174) Studio 1+1........................ - 4,420 - (1,768) Markiza TV ....................... 5,760 6,698 (1,296) (828) ---------- --------- ---------- --------- Total Unconsolidated Operations 5,760 11,118 (1,296) (2,596) ========== ========= ========== ========= Total Operations..................... $23,298 $40,233 $(33,774) $(3,770) ========== ========= ========== ========= Reconciliation to Consolidated Statements of Operations: Consolidated Operations $(32,478) $(1,174) Intercompany elimination 75 50 Station depreciation (6,509) (4,011) Corporate expenses (47,963) (7,311) ========== ========= Operating income (loss) from continuing operations $(86,875) $(12,446) ========== =========
(1) Studio 1+1 Group was consolidated effective December 23, 1998. Amounts shown in the table above for Net Revenues and EBITDA for the third quarter of 1999 differ by $1,507,000 and $859,000, respectively, from similar information shown in Selected Combined Financial Information in Item 2. These differences relate to the use of consolidated numbers in the table above and combined numbers (which includes Studio 1+1 entities which are accounted for under the equity method) in Item 2.
SEGMENT FINANCIAL INFORMATION For the nine months ended September 30, --------------------------------------------------------------------- ($000s) ---------------------------------- --------------------------------- Net Revenues EBITDA ---------------------------------- --------------------------------- Station 1999 1998 1999 1998 ---- ---- ---- ---- Nova TV........................... $52,972 $70,103 $(11,258) $30,446 PRO TV ........................... 25,062 26,764 (3,178) (3,553) POP TV ........................... 15,555 15,020 1,082 (1,691) Studio 1+1......................(1) 6,223 - (2,586) - Other Operations ................. 8 1,109 (17) (138) ---------- --------- ---------- --------- Total Consolidated Operations 99,820 112,996 (15,957) 25,064 Studio 1+1........................ - 18,879 - (372) Markiza TV ....................... 21,869 25,410 113 3,399 ---------- --------- ---------- --------- Total Unconsolidated Operations 21,869 44,289 113 3,027 ========== ========= ========== ========= Total Operations..................... $121,689 $157,285 $(15,844) $28,091 ========== ========= ========== ========= Reconciliation to Consolidated Statements of Operations: Consolidated Operations $(15,957) $25,064 Intercompany elimination 225 150 Station depreciation (15,996) (11,592) Corporate expenses (63,417) (28,070) ========== ========= Operating loss from continuing operations $(95,145) $ (14,448) ========== =========
(1) Studio 1+1 Group was consolidated effective December 23, 1998. Amounts shown in the table above for Net Revenues and EBITDA for the first nine months of 1999 differ by $4,050,000 and $2,341,000, respectively, from similar information shown in Selected Combined Financial Information in Item 2. These differences relate to the use of consolidated numbers in the table above and combined numbers (which includes Studio 1+1 entities which are accounted for under the equity method) in Item 2. Page 14 5 Earnings Per Share The Company accounts for earnings per share pursuant to SFAS No. 128, "Earnings Per Share." Basic net income per common share ("Basic EPS") is computed by dividing net income by the weighted average number of common shares outstanding. Diluted net income per common share ("Diluted EPS") is computed by dividing net income by the weighted average number of common shares and dilutive common share equivalents then outstanding. SFAS No. 128 requires the presentation of both Basic EPS and Diluted EPS on the face of the consolidated statement of operations. A reconciliation between the numerator and denominator of Basic EPS and Diluted EPS is as follows:
For the three months ended September 30, 1999 --------------------------------------------- Net Loss Per Net Loss Common shares Common Share -------- ------------- ------------ Basic EPS - --------- Net loss attributable to common stock $(91,945) 25,674 $(3.58) Effect of dilutive securities: stock options... - - - -------- -------- ------ Diluted EPS - ----------- Net loss attributable to common stock and assumed option exercises....................... $(91,945) 25,674 $(3.58) ======== ======== ======
For the nine months ended September 30, 1999 ----------------------------------------------- Net Income Per Net Income Common Shares Common Share ---------- ------------- -------------- Basic EPS - --------- Net income attributable to common stock $(83,369) 25,674 $(3.25) Effect of dilutive securities: stock options - - - -------- -------- ------ Diluted EPS - ----------- Net income attributable to common stock and assumed option exercises....................... $(83,369) 25,674 $(3.25) ======== ======== ======
Diluted EPS, for the three and nine months ended September 30, 1998 and September 30, 1999 does not include the impact of stock options then outstanding as their inclusion would be anti-dilutive. 6. Sale of Investment in MobilRom On March 18, 1999, the Company sold its interest in a Romanian mobile telephone company, MobilRom S.A. As a result of this transaction the Company realized a gain of $25,870,000. The impact of MobilRom S.A. on the Company's operating results for 1998 and 1999 was not material. Page 15 7. Restructuring Charge In the second quarter of 1998, the Company recorded a restructuring charge of $2,552,000 based on its decision to change its focus from aggressive development and growth to further enhancing the operating performance of the Company's existing assets and pursuing opportunities for focused growth. The restructuring charge is comprised of severance and other associated costs. During the nine months ended September 30, 1999, there have been no significant changes to the restructuring plans and all payments related to this charge were finalized. 8. Subsequent Events In connection with the termination of the Reorganization Agreement, the Company received $8,250,000 in cash from SBS on October 15, 1999. In connection with the December 1998 equity investment of approximately $22,498,000 from RSL Capital LLC ("RSL"), a company wholly owned by Ronald S. Lauder, the non-executive Chairman of the Company's Board of Directors, the Company is obligated to release a further tranche of 757,500 shares of Class B Common Stock as of November 19, 1999. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction Central European Media Enterprises Ltd. ("CME") is a Bermuda corporation. All references to the "Company" include CME, its direct and indirect Subsidiaries, and all references to "Subsidiaries" include each corporation or partnership in which CME has a direct or indirect equity or voting interest. The Company is the leading commercial television company in Central and Eastern Europe. The Company's national private television stations and networks in the Slovak Republic and Slovenia had the leading nationwide audience shares for 1998 and the first nine months of 1999 and the Company's television network in Romania had the leading average audience share within its area of broadcast reach for 1998 and the first nine months of 1999. The Company's revenues are derived principally from the sale of television advertising to local, national and international advertisers. The Company also engages in barter transactions in which its stations exchange commercial advertising time for goods and services. The Company, like other television operators, experiences seasonality, with advertising sales tending to be lowest during the third quarter of each calendar year, which includes the summer holiday period, and highest during the fourth quarter of each calendar year. The primary expenses incurred in television operations are programming and production costs, employee salaries, broadcast transmission expenses and selling, general and administrative expenses. The Company has incurred and might in the future incur significant development expenses, including finding and negotiating with local partners, researching and preparing license applications, preparing business plans and conducting pre-operating activities, as well as reorganizing existing affiliate entities which hold the broadcast licenses. Page 16 The primary internal sources of cash available for corporate operating costs and development expenses are dividends and other distributions from Subsidiaries. To date, the only Subsidiary to distribute dividends has been CNTS which suspended operations on August 5, 1999. See Part I, Item 1, Note 1 "Czech Republic". This suspension has resulted in CNTS being unable to distribute dividends and consequently affected the only internal source of cash available for corporate operating costs and development expenses. The Company's ability to obtain dividends or other distributions is subject to, among other things, restrictions on dividends under applicable local laws and foreign currency exchange regulations of the jurisdictions in which its Subsidiaries operate. The Subsidiaries' ability to make distributions is also subject to the legal availability of sufficient operating funds not needed for operations, obligations or other business plans and, in some cases, the approval of the other partners, stockholders or creditors of these entities. The laws under which the Company's operating Subsidiaries are organized provide generally that dividends may be declared by the partners or shareholders out of yearly profits subject to the maintenance of registered capital and required reserves and after the recovery of accumulated losses. Selected Combined and Attributable Financial Information The following tables are neither required by GAAP nor intended to replace the Consolidated Financial Statements prepared in accordance with GAAP. The tables set forth certain combined and attributable financial information for the three and nine months ended September 30, 1999 and 1998 for the Company's operating entities. This financial information departs materially from GAAP. In the table "Selected Combined Financial Information," revenues and operating expenses of certain entities, Markiza TV and Studio 1+1 (for the three and nine months ended September 30, 1998 only) not consolidated in the Consolidated Statements of Operations during the periods shown, are aggregated with those of the Company's consolidated operations. In the table "Selected Attributable Financial Information", combined information is adjusted for CME's economic interest in each entity, which economic interest is the basis used for consolidation and equity method accounting in the Company's GAAP Consolidated Financial Statements as of September 30, 1999. The tables are presented solely for additional analysis and not as a presentation of results of operations of each component, nor as combined or consolidated financial data presented in accordance with GAAP. See "Application of Accounting Principles". The following supplementary unaudited combined and attributable information includes certain financial information of Markiza TV and information of the unconsolidated entities of the Studio 1+1 Group on a line-by-line basis, similar to that of the Company's consolidated entities. Intercompany transactions such as management service charges are not reflected in the tables. The Company believes that this unaudited combined and attributable information provides useful disclosure. Total Stations refer to Nova TV, PRO TV, POP TV, Markiza TV and Studio 1+1. Nova TV began operations in February 1994. See Part I, Item 1, Note 1 "Czech Republic". PRO TV and POP TV began operations in December 1995, Markiza TV began operations in August 1996 and Studio 1+1 began to generate significant revenues during the second quarter of 1997. Page 17 EBITDA consists of earnings before interest, income taxes, depreciation and amortization of intangible assets (which does not include programming rights). EBITDA is provided because it is a measure of operating performance commonly used in the television industry. It is presented to enhance an understanding of the Company's operating results and is not intended to represent cash flow or results of operations in accordance with GAAP for the periods indicated. The term "station expenses" used in the discussion of EBITDA immediately following the tables refers to the total of a station's (i) other operating costs and expenses, (ii) amortization of programming rights and (iii) selling, general and administrative expenses. "Broadcast cash flow", a broadcasting industry measure of performance, is defined as net broadcast revenues, less (i) station operating costs and expenses (excluding depreciation and amortization of acquired programming and of intangible assets), (ii) broadcast selling, general and administrative expenses, and (iii) cash program rights costs. Cash program rights costs are included in the period in which payment is made, which may not necessarily correspond to the timing of program use or amortization. Broadcast cash flow should not be considered as a substitute measure of operating performance or liquidity prepared in accordance with GAAP (see the accompanying Consolidated Financial Statements). Page 18 SELECTED COMBINED FINANCIAL INFORMATION (1) (unaudited) ($000s)
For the three months ended September 30, -------------------------------------------------------------------------------- Net Revenue EBITDA Broadcast Cash Flow ------------------- ------------------- ------------------- 1999 1998 1999 1998 1999 1998 ---- ---- ---- ---- ---- ---- Nova TV...................... 4,476 17,827 (29,912) 4,415 (5,958) 751 PRO TV....................... 7,529 7,437 (1,038) (3,387) (371) (1,983) Markiza TV .................. 5,760 6,698 (1,296) (828) (404) (2,708) POP TV....................... 3,736 3,564 (766) (2,095) (371) (2,311) Studio 1+1................... 3,302 4,420 (1,619) (1,768) (814) (2,317) ====== ====== ======= ====== ====== ====== Total Stations.................... 24,803 39,946 (34,631) (3,663) (7,918) (8,568) ====== ====== ======= ====== ====== ======
SELECTED ATTRIBUTABLE FINANCIAL INFORMATION (1) (unaudited) ($000s)
For the three months ended September 30, ----------------------------------------------------------------------------------- Economic Interest(2) Net Revenue EBITDA Broadcast Cash Flow --------------------- ------------------ ------------------- 1999 1998 1999 1998 1999 1998 ---- ---- ---- ---- ---- ---- Nova TV................. 99% 4,431 17,649 (29,613) 4,371 (5,898) 743 PRO TV.................. 66% 4,969 4,908 (685) (2,235) (245) (1,309) Markiza TV ............. 80% 4,608 5,358 (1,037) (662) (323) (2,166) POP TV.................. 85.5% 3,194 3,047 (655) (1,791) (317) (1,976) Studio 1+1.............. 60% 1,981 2,652 (971) (1,061) (488) (1,390) ====== ======= ======= ====== ====== ===== Total Stations............... 19,183 33,614 (32,961) (1,378) (7,271) (6,098) ====== ======= ======= ====== ====== ======
- ---------- (1) Important information about these tables appears under the heading "Selected Combined and Attributable Financial Information" immediately preceding this table. (2) Economic interest as of September 30, 1999. For comparison between the three months ended September 30, 1999 and the same period in 1998, all results in this table are pro forma as if such percentages had also been in place during the three months ended September 30, 1998 Page 19 SELECTED COMBINED FINANCIAL INFORMATION (1) (unaudited) ($000s)
For the nine months ended September 30, --------------------------------------------------------------------------------- Net Revenue EBITDA Broadcast Cash Flow ---------------------- -------------------- -------------------- 1999 1998 1999 1998 1999 1998 ---- ---- ---- ---- ---- ---- Nova TV...................... 52,972 70,103 (11,258) 30,446 11,316 24,457 PRO TV....................... 25,062 26,764 (3,178) (3,553) (1,311) (2,958) Markiza TV .................. 21,869 25,410 113 3,399 1,558 1,665 POP TV....................... 15,555 15,020 1,082 (1,691) 1,010 (3,141) Studio 1+1................... 10,273 18,879 (4,927) (372) (2,654) (2,344) ======= ======= ======= ====== ====== ====== Total Stations.................... 125,731 156,176 (18,168) 28,229 9,919 17,679 ======= ======= ======= ====== ====== ======
SELECTED ATTRIBUTABLE FINANCIAL INFORMATION (1) (unaudited) ($000s) For the nine months ended September 30, ----------------------------------------------------------------------------------- Economic Interest(2) Net Revenue EBITDA Broadcast Cash Flow -------------------- ---------------------- ----------------------- 1999 1998 1999 1998 1999 1998 ---- ---- ---- ---- ---- ---- Nova TV.................. 99% 52,442 69,402 (11,145) 30,142 11,203 24,212 PRO TV................... 66% 16,541 17,664 (2,097) (2,345) (865) (1,952) Markiza TV .............. 80% 17,495 20,328 90 2,719 1,246 1,332 POP TV................... 85.5% 13,300 12,842 925 (1,446) 864 (2,686) Studio 1+1............... 60% 6,164 11,327 (2,956) (223) (1,592) (1,406) ======= ======= ======= ======= ====== ======= Total Stations................ 105,942 131,563 (15,183) 28,847 10,856 19,500 ======= ======= ======= ======= ====== =======
- --------------- (1) Important information about these tables appears under the heading "Selected Combined and Attributable Financial Information" immediately preceding this table. (2) Economic interest as of September 30, 1999. For comparison between the nine months ended September 30, 1999 and the same period in 1998, all results in this table are pro forma as if such percentages had also been in place during the nine months ended September 30, 1998 Page 20 Combined EBITDA for the three months ended September 30, 1999 compared to the three months ended September 30, 1998 The total combined EBITDA for the Company's Stations decreased by $30,968,000 from negative $3,663,000 for the third quarter of 1998 to negative $34,631,000 for the third quarter of 1999. The decrease was primarily attributable to decreases in EBITDA at Nova TV of $34,327,000 and at Markiza TV of $468,000, partially offset by increases at PRO TV, POP TV and Studio 1+1 totaling $3,827,000. Nova TV's EBITDA decreased by $34,327,000 to negative $29,912,000 for the third quarter of 1999 compared to positive $4,415,000 for the third quarter of 1998. This decrease was due to the suspension of the broadcasting operations of CNTS during the third quarter. See "Czech Republic" in Part I, Item 1, Note 1 and below for a further discussion on Nova TV and the ongoing dispute between CNTS and CET. As a result of the suspension of the broadcast operations of CNTS and the material impact of this suspension upon its results, CNTS has taken a write-down of the full value of its programming library. PRO TV's EBITDA improved by $2,349,000 to negative $1,038,000 for the third quarter of 1999 compared to negative $3,387,000 for the third quarter of 1998. Net revenues increased slightly, by $92,000. The EBITDA increase was primarily the result of a $2,257,000 decrease in station operating expenses for the third quarter of 1999. This decrease was primarily as a result of a reduction in other station and operating costs due to lower production and salary expenses and a decrease in selling, general and administrative expenses as a result of lower marketing costs. POP TV's EBITDA improved by $1,329,000 to negative $766,000 for the third quarter of 1999 compared to negative $2,095,000 for the third quarter of 1998. Net revenues for the third quarter of 1999 were $172,000 higher than the third quarter of 1998 as POP TV continued to capitalize on its market leading position. The EBITDA increase was primarily the result of a $1,157,000 decrease in station operating expenses for the third quarter of 1999 compared to the third quarter of 1998. This decrease was primarily the result of a decrease in other operating costs and expenses due to lower salary expenses and a decrease in selling, general and administrative expenses as a result of lower marketing costs. Markiza TV recorded EBITDA of negative $1,296,000 for the third quarter of 1999 compared to negative $828,000 for the third quarter of 1998. Net revenues decreased by $938,000 in US dollar terms largely as a result of the approximately 19% devaluation of the Slovak koruna in the third quarter of 1999 compared to the third quarter of 1998. In local currency terms, net revenues for the third quarter of 1999 were slightly higher than net revenues for the third quarter of 1998. Markiza TV recorded a decrease of $470,000 in station expenses for the third quarter of 1999 compared to the third quarter of 1998. Studio 1+1 recorded EBITDA of negative $1,619,000 for the third quarter of 1999 compared to negative EBITDA of $1,768,000 for the third quarter of 1998. The economic situation in Ukraine in the third quarter of 1999 has not improved and thus net revenues in the third quarter of 1999 decreased by $1,118,000, or over 25%, compared to the third quarter of 1998. To offset the decrease in net revenues, Studio 1+1 reduced its station expenses by $1,267,000 in the third quarter of 1999 compared to the third quarter of 1998. Primarily as a result of the suspension of the broadcasting operations of CNTS, the Page 21 total combined EBITDA decreased by $30,968,000 from negative $3,663,000 for the third quarter of 1998 to negative $34,631,000 for the third quarter of 1999. Broadcast Cash Flow Differences between EBITDA and broadcast cash flow are the result of timing differences between programming use and programming payments. Application of Accounting Principles The results of Markiza TV and Studio 1+1 (for the three and nine months ended September 30, 1998 only) have been accounted for using the equity method such that CME's interests in net earnings or losses of those operations is included in the consolidated earnings and an adjustment is made to the carrying value at which the investment is recorded on the Consolidated Balance Sheet. The Company records other investments at the lower of cost or market value. In late December 1998 the Company increased its equity interest in Studio 1+1 to a 60% controlling interest and, due to the timing of this transaction, the Studio 1+1 balance sheet is consolidated in the Company's Consolidated Balance Sheet as of December 31, 1998, but on the Company's Consolidated Statements of Operations and Consolidated Statements of Cash Flows for the three and nine months ended September 30, 1998, Studio 1+1 results are accounted for under the equity method. From January 1, 1999, Studio 1+1 is consolidated in the Company's financial statements. Foreign Currency Translation The Company generates revenues primarily in Czech korunas ("Kc"), Romanian lei ("ROL"), Slovenian tolar ("SIT"), Slovak korunas ("Sk") and Ukrainian hryvna ("Hrn") and incurs expenses in those currencies as well as German marks, British pounds and United States dollars. The Romanian lei, Slovenian tolar, Ukrainian hryvna and Slovak koruna are managed currencies with limited convertibility. The Company incurs operating expenses for acquired programming in United States dollars and other foreign currencies. For entities operating in economies considered non-highly inflationary, including Nova TV, POP TV, Markiza TV and certain Studio 1+1 entities, balance sheet accounts are translated from foreign currencies into United States dollars at the relevant period end exchange rate; statement of operations accounts are translated from foreign currencies into United States dollars at the weighted average exchange rates for the respective periods. The resulting translation adjustments are reflected in a component of shareholders' equity with no effect on the consolidated statements of operations. PRO TV and certain Studio 1+1 entities operate in economies considered highly inflationary. Accordingly, non-monetary assets are translated at historical exchange rates, monetary assets are translated at current exchange rates and translation adjustments are included in the determination of net income. Currency translation adjustments relating to transactions of the Company in currencies other than the functional currency of the entity involved are reflected in the operating results of the Company. The exchange rates at the end of and for the periods indicated are shown in the table below. Page 22
Balance Sheet Income Statement --------------------------------------- -------------------------------------- At At Weighted average for the three September 30, December 31, months ending September 30, 1999 1998 %Change 1999 1998 % Change ---- ---- ------- ---- ---- -------- Czech koruna equivalent of $1.00 33.84 29.86 (13.3)% 34.72 33.13 (4.8)% German mark equivalent of $1.00 1.83 1.67 (9.6)% 1.87 1.76 (6.3)% Romanian lei equivalent of $1.00 16,463 10,983 (49.9)% 14,626 9,050 (61.6)% Slovak koruna equivalent of $1.00 41.10 36.91 (11.3)% 41.61 34.95 (19.1)% Slovenian tolar equivalent of $1.00 186.36 161.20 (15.6)% 179.99 168.96 (6.6)% Ukrainian hryvna equivalent of $1.00 4.47 3.43 (30.3)% 4.32 2.77 (56.0)%
The Company's results of operations and financial position during the three and nine months ended September 30, 1999 were impacted by changes in foreign currency exchange rates since December 31, 1998. In limited instances, the Company enters into forward foreign exchange contracts and purchases foreign currency options to hedge foreign currency transactions for periods consistent with its identified exposures. Premiums on foreign currency options are amortized over the option period being hedged. Results of Operations Three months ended September 30, 1999 compared to three months ended September 30, 1998 The Company's net revenues decreased by $11,577,000, or 40%, to $17,538,000 for the third quarter of 1999 from $29,115,000 for the third quarter of 1998. The decrease was primarily attributable to a decrease of $13,351,000 in the net revenues of Nova TV, offset by increases of $92,000 at PRO TV and of $172,000 at POP TV and the inclusion of Studio1+1 as a consolidated entity for the three months ending September 30, 1999. Nova TV suspended broadcast operations on August 5, 1999 and has not generated any revenues since that time. See "Czech Republic" in Part 1, Item 1, Note 1 and below for a further discussion on Nova TV and the ongoing dispute between CNTS and CET. Unless the Company is able to resume operations of Nova TV, the Company will continue to experience large quarter over quarter reductions in net revenues for the next twelve months. Total station operating costs and expenses increased by $20,270,000, or 74%, to $47,503,000 for the third quarter of 1999 from $27,233,000 for the third quarter of 1998. The increase in total station operating costs and expenses was attributable to the inclusion of Studio 1+1 as a consolidated entity for the three months ending September 30, 1999 and an increase in amortization of programming rights of $22,223,000. The increase in amortization of programming rights was primarily due to the write down on the full value of the Nova TV programming library. See "Czech Republic" in Part 1, Item 1, Note 1 and below for a further discussion on Nova TV and the ongoing dispute between CNTS and CET. The increase in total station operating costs and expenses was partially offset by reductions in station operating costs and expenses at PRO TV of $1,009,000, primarily as a result of reduced salary and production expenses and POP TV of $184,000, primarily as a result of reduced salary expenses. Station selling, general and administrative expenses increased by $1,930,000, or 28%, to $8,947,000 for the third quarter of 1999 from $7,017,000 for the third quarter of 1998. The Page 23 increase in station selling, general and administrative expenses was as a result of an increase in Nova TV's station selling, general and administrative expenses of $3,494,000 and the inclusion of Studio 1+1 as a consolidated entity for the third quarter of 1999. Nova TV's station selling, general and administrative expenses increased as a result of increases in public relations, legal costs and professional service costs associated with the current license dispute between CNTS and CET. See "Czech Republic" in Part 1, Item 1, Note 1 and below for a further discussion on Nova TV and the ongoing dispute between CNTS and CET. PRO TV and POP TV reduced station selling, general and administrative expenses by $1,002,000 and $921,000, respectively. Corporate operating costs and development expenses for the third quarter of 1999 and 1998 were $5,106,000 and $5,000,000, respectively, an increase of $106,000, or 2%. Amortization of goodwill and allowance for development costs increased by $40,546,000, to $42,857,000 for the third quarter of 1999 from $2,311,000 for the third quarter of 1998. The increase was as a result of a $40,511,000 additional write-down of the goodwill relating to the purchases made by the Company of additional equity interest in CNTS in August 1996 and August 1997. See "Czech Republic" in Part 1, Item 1, Note 1 and below for a further discussion on Nova TV and the ongoing dispute between CNTS and CET. As a result of the above factors, the Company generated an operating loss of $86,875,000 for the third quarter of 1999 compared to an operating loss of $12,446,000 for the third quarter of 1998. Equity in loss of unconsolidated affiliates for the third quarter of 1999 was $2,846,000 compared to $1,793,000 for the third quarter of 1998. The increase of $1,053,000 was the result of certain entities of the Studio 1+1 group, which are not consolidated, recording a loss of $1,082,000 for the three months ended September 30, 1999, offset by Markiza TV recording a loss of $1,764,000 for the three months ended September 30, 1999 compared to a loss of $465,000 for the three months ended September 30, 1998. Net interest and other expense for the third quarter of 1999 was negative $3,206,000 compared to negative $5,203,000 for the third quarter of 1998. The difference of $1,997,000, or 38 %, was a result of reduced borrowings at all stations except for POP TV and increased interest on cash balances. Net foreign currency exchange loss was $4,266,000 for the third quarter of 1999 compared to a loss of $5,154,000 for the third quarter of 1998. The difference of $888,000 was attributable to the effect of a weaker German mark on the Deutsche mark denominated portion of CME's Senior Notes obligations and the effect of a weaker Czech koruna on the Czech koruna debt funding for the 1996 purchase by the Company of CS Bank's economic interest in CNTS. In September 1999 the Company announced that the Reorganization Agreement dated March 29, 1999 between the Company and SBS had been mutually terminated. In October 1999, in connection with the termination of the Reorganization Agreement, the Company received $8,250,000 as a termination fee from SBS and agreed, to sell substantially all of its Hungarian assets to SBS. See "Termination of Business Combination Page 24 Transaction and Asset Sale" in Part 1, Item 1, Note 1. The operating losses from these Hungarian operations for the third quarter of 1999 and the third quarter of 1998 have been reclassified as operating loss of discontinued operations. Recovery of income taxes of $1,572,000 for the third quarter of 1999 compares to a provision for income taxes of $866,000 for the third quarter of 1998. The decrease was due to a decrease in CNTS's taxable income. See "Czech Republic" in Part 1, Item 1, Note 1 and below for a further discussion on Nova TV and the ongoing dispute between CNTS and CET. Minority interest in loss of consolidated subsidiaries was $296,000 for the third quarter of 1999 compared to a minority interest in income of consolidated subsidiaries of $19,000 for the third quarter of 1998. This change was the result of changes in the profitability and, to a lesser extent, changes in ownership of the consolidated entities. As a result of these factors, CME's net loss was $91,945,000 for the third quarter of 1999 compared to a net loss of $35,028,000 for the third quarter of 1998. Nine months ended September 30, 1999 compared to nine months ended September 30, 1998 The Company's net revenues decreased by $13,175,000, or 12%, to $99,820,000 for the first nine months of 1999 from $112,995,000 for the first nine months of 1998. The decrease was primarily attributable to a decrease of $17,131,000 in the net revenues of Nova TV and $1,702,000 at PRO TV, partially offset by an increase in the revenues of POP TV of $535,000 and the inclusion of Studio 1+1 as a consolidated entity for the nine months ended September 30, 1999. Nova TV suspended broadcast operations on August 5, 1999 and has not generated any revenues since that time. See "Czech Republic" in Part 1, Item 1, Note 1 and below for a further discussion on Nova TV and the ongoing dispute between CNTS and CET. Unless the Company is able to resume operations of Nova TV, the Company will continue to realize large quarter over quarter reductions in net revenues for the next twelve months. Total station operating costs and expenses increased by $29,124,000, or 36% to $109,903,000 for the first nine months of 1999 from $80,779,000 for the same period in 1998. This increase was primarily attributable to a $25,350,000 increase in amortization of programming rights and to a lesser extent an increase of $4,404,000 in depreciation of station fixed assets and other intangibles. The increase in amortization of programming rights was primarily attributable to the write down on the full value of the Nova TV programming library. See "Czech Republic" in Part 1, Item 1, Note 1 and below for a further discussion on Nova TV and the ongoing dispute between CNTS and CET. The increase in depreciation of station fixed assets and other intangibles was primarily due to the inclusion of Studio 1+1 as a consolidated entity for the first nine months of 1999 and to increases at PRO TV of $1,071,000. The depreciation of station fixed assets has increased at PRO TV as a result of increased investments in broadcast equipment used to expand its signal reach. Station selling, general and administrative expenses increased by $3,051,000, or 16%, to $21,645,000 for the first nine months of 1999 from $18,594,000 for the first nine months of 1998. The increase was attributable to an increase in station selling, general and administrative expenses of $5,418,000 at Nova TV and the inclusion of Studio 1+1 as a consolidated entity for the first nine months of 1999. This increase at Nova TV was as a result of the increase in public relations, legal costs and professional service costs associated Page 25 with the current license dispute between CNTS and CET. See "Czech Republic" in Part 1, Item 1, Note 1 and below for a further discussion on Nova TV and the ongoing dispute between CNTS and CET. PRO TV and POP TV recorded decreases in station selling, general and administrative expenses of $2,073,000 and $1,899,000, respectively, for the first nine months of 1999 mainly due to decreases in marketing expenses. Corporate operating costs and development expenses for the first nine months of 1999 and 1998 were $14,745,000 and $18,403,000, respectively, a decrease of $3,658,000, or 20%. This decrease was attributable to reduced activity and lower corporate headcount. Amortization of goodwill and allowance for development costs increased by $41,557,000 from $7,115,000 for the first nine months of 1998 to $48,672,000 for the first nine months of 1999. This increase was primarily attributable to the additional $40,511,000 write-down of the goodwill relating to purchases of additional equity interests in CNTS made by the Company in August 1996 and August 1997. See "Czech Republic" in Part 1, Item 1, Note 1 and below for a further discussion on Nova TV and the ongoing dispute between CNTS and CET. As a result of the above factors, the Company generated an operating loss of $95,145,000 for the first nine months of 1999 compared to an operating loss of $14,448,000 for the first nine months of 1998. Equity in loss of unconsolidated affiliates increased by $6,656,000, to a loss of $7,236,000 for the first nine months of 1999 compared to a loss of $580,000 for the first nine months of 1998. This was a result of Markiza TV recording a higher net loss for the first nine months of 1999 compared to the first nine months of 1998 and certain entities of the Studio 1+1 group which are not consolidated recording a loss of $3,197,000 for the nine months ended September 30, 1999. Gain on sale of investment of $25,870,000 relates to the sale by the Company of its interest in a Romanian mobile telephone company MobilRom S.A. Net interest and other expense decreased by $3,387,000, or 25%, to negative $10,137,000 for the first nine months of 1999 from negative $13,524,000 for the first nine months of 1998. This decrease was a result of reduced borrowings at all stations except POP TV and increased interest on cash balances. The net foreign currency exchange gain of $8,711,000 for the first nine months of 1999 compared to a loss of $6,944,000 for the first nine months of 1998 was primarily attributable to the effect of a weaker German mark on the Deutsche mark denominated portion of CME's Senior Notes obligations and the effect of a weaker Czech koruna on the Czech koruna debt funding for the 1996 purchase by the Company of CS Bank's economic interest in CNTS. In September 1999 the Company announced that the Reorganization Agreement dated March 29, 1999 between the Company and SBS had been mutually terminated. In October 1999, in connection with the termination of the Reorganization Agreement, the Company received $8,250,000 as a termination fee from SBS and agreed, to sell substantially all of its Hungarian assets to SBS. See "Termination of Business Combination Transaction and Asset Sale" in Part 1, Item 1, Note 1. The operating losses from these Page 26 Hungarian operations for the nine months ended 1999 and the nine months ended 1998 have been reclassified as operating loss of discontinued operations. Provision for income taxes was $3,935,000 for the first nine months of 1999 and $8,426,000 for the first nine months of 1998. This decrease was due to a decrease in CNTS's taxable income. See "Czech Republic" in Part I, Item 1, Note 1 and below for a further discussion on Nova TV and the ongoing dispute between CNTS and CET. Minority interest in loss of consolidated affiliates was $203,000 for the first nine months of 1999 compared to a minority interest in loss of consolidated affiliates of $592,000 for the first nine months of 1998. This change was the result of changes in the profitability and, to a lesser extent, changes in ownership of the consolidated entities. As a result of these factors the net loss of the Company was $83,369,000 for the first nine months of 1999 compared to a net loss of $88,697,000 for the first nine months of 1998. Czech Republic As discussed in Part I, Item 1, Note 1 under the heading "Czech Republic" and Part II, Item 1 "Legal Proceedings", CNTS suspended operations on August 5, 1999 and has not generated any revenues since that date. Consequently, the Company's results of operations have been materially adversely affected. Absent other sources of cash, the suspension of operations by CNTS will impair the Company's ability to meet its future obligations as they fall due. This suspension was caused by the pre-emption by CET, the license holder for Nova TV, of CNTS's transmission of the programming for Nova TV and purported withdrawal from the Services Agreement between CNTS and CET. CET is purportedly controlled by Dr. Vladimir Zelezny, the former General Director of Nova TV. Dr. Zelezny was removed as General Director and Executive of CNTS on April 19, 1999. CNTS is governed by a Memorandum of Association. The Company believes that the Memorandum of Association, the Services Agreement and course of dealing over the life of Nova TV establish that CNTS is legally entitled to be the exclusive provider of television and related services to CET for Nova TV. The Company believes that the recent actions by CET violate the Services Agreement and CET's obligations under the CNTS Memorandum of Association, as well as Czech media laws. On April 26, 1999, a wholly-owned subsidiary of the Company filed an arbitration claim against Dr. Zelezny before the International Chamber of Commerce Court of Arbitration in Paris, France. The Company seeks the return of $23,350,000 paid to Dr. Zelezny, plus interest, and other unspecified damages, based on breaches by Dr. Zelezny of a share purchase agreement entered into in 1997 under which the Company purchased from Dr. Zelezny a company owned by him whose sole asset was a 5.8% interest in CNTS. The Company is also seeking the forgiveness of the $5,188,000 unpaid balance of the purchase price under the 1997 share purchase agreement and preliminary interim relief. On November 10, 1999, an international arbitral tribunal issued a preliminary order directing Dr. Zelezny to take steps to restore CNTS to its prior position as an exclusive provider of critical services for TV Nova. Among other things, the order requires Dr. Zelezny to sever all dealings between CET 21 and other service providers and to resume exclusive relations with CNTS in the areas where CNTS was previously providing these services, including program acquisition, programming and broadcasting services, and brokerage of advertising and receipt of advertising revenues. The order will remain in effect until the arbitral tribunal directs otherwise. Dr. Zelezny has indicated that he will not comply with the tribunal's order. CME and CNTS will be seeking to enforce the order in the Czech courts and through other means. A final award in the arbitration, following a final hearing in Amsterdam, The Netherlands, is expected during the first half of the year 2000. Page 27 The Company has taken a write-down on the full value of the programming library of CNTS and in addition, the Company has taken a write-down on the full carrying value of the goodwill relating to purchases of additional equity interests in CNTS made by the Company in August 1996 and August 1997. Liquidity and Capital Resources Net cash used in operating activities was $12,472,000 in the nine months ended September 30, 1999 compared to net cash used in operating activities of $14,239,000 for the nine months ended September 30, 1998. The difference of $1,767,000 was primarily due to improved working capital management and, on a basis which excludes the sale of MobilRom in 1999 and the discontinued operations in Poland and Hungary in 1999 and 1998, improved operating results. Net cash provided by investing activities was $15,730,000 in the nine months ended September 30, 1999 compared to net cash used in investing activities of $57,175,000 for the nine months ended September 30, 1998. The increase was primarily attributable to the proceeds received on the sale of the Company's interest in MobilRom S.A. and less investments during 1999 in discontinued operations. Net cash used in financing activities for the nine months ended September 30, 1999 was $4,040,000 compared to $3,570,000 for the nine months ended September 30, 1998. The Company had cash and cash equivalents of $41,370,000 at September 30, 1999 compared to $43,354,000 at December 31, 1998. On October 15, 1999 the Company received $8,250,000 in cash from SBS in connection with the termination of the Reorganization Agreement. In August 1997, CME issued the Senior Notes, which raised net proceeds of approximately $170,000,000. The Senior Notes are denominated in United States dollars, in part, and in German marks, in part. The United States dollar denominated Senior Notes bear interest at a rate of 9.375% per annum, and the German mark denominated Senior Notes bear interest at a rate of 8.125% per annum. The principal amount of the Senior Notes is repayable on their maturity date, August 15, 2004. The indentures governing the Senior Notes contain certain restrictions relating to the ability of CME and its Subsidiaries and affiliates to incur additional indebtedness, incur liens on assets, make investments in unconsolidated companies, declare and pay dividends (in the case of CME), sell assets and engage in extraordinary transactions. On August 1, 1996, the Company purchased CS Bank's 22% economic interest and virtually all of CS Bank's voting rights in CNTS for a purchase price of Kc 1 billion ($36,590,000). The Company also entered into a loan agreement with CS Bank to finance 85% of the purchase price. The principal outstanding at September 30, 1999 was Kc 505,080,600 ($14,926,000). Quarterly repayments on the loan are required in the amount Kc 42,500,000 ($1,256,000) during the period from November 1999 through May 2002, and Kc 37,580,600 ($1,111,000) in August 2002. Page 28 In April 1998, POP TV entered into a multicurrency $5,000,000 loan agreement with Creditanstalt AG which matures in May 2005. This loan is fully drawn and is secured by the land, buildings and equipment of POP TV and is guaranteed by CME. PRO TV has two borrowing facilities with Tiriac Bank in Romania. The first facility consists of a $2,000,000 line of credit which matures in June 2000. At September 30, 1999, $645,000 was outstanding under this facility. The second facility is a long-term loan for $4,000,000 which matures in December 2002. At September 30, 1999, $2,968,000 was borrowed under this facility. These facilities are secured by PRO TV's equipment and vehicles. The laws under which CME's operating subsidiaries are organized provide generally that dividends may be declared by the partners or shareholders out of yearly profits subject to the maintenance of registered capital, required reserves and after the recovery of accumulated losses. In the case of the Company's Dutch and Netherlands Antilles subsidiaries, the Company's voting power is sufficient to compel the making of distributions. The Company's voting power is sufficient to compel CNTS to make distributions. As discussed above under the heading "Czech Republic", the continuing dispute between CNTS and CET has resulted in the suspension of the operations of CNTS. Unless CNTS is able to resume operations, it will not be able to pay dividends to the Company. In the case of PRO TV, distributions may be paid from the profits of PRO TV subject to a reserve of 5% of annual profits until the aggregate reserves equal 20% of PRO TV's registered capital. A majority vote can compel PRO TV to make distributions. There are no legal reserve requirements in Slovenia. In the case of Markiza TV, distributions may be paid from net profits subject to an initial reserve requirement of 10% of net profits until the reserve fund equals 5% of registered capital. Subsequently, the reserve requirement is equal to 5% of net profits until the reserve fund equals 10% of registered capital. The Company's voting power in Markiza TV is not sufficient to compel the distribution of dividends. The Company's voting power in the Studio 1+1 Group is sufficient to compel the distribution of dividends. Except for the Company's working capital requirements, the Company's future cash needs will depend on the ability of CNTS to resume the operations of Nova TV, the Company's overall financial performance and its future acquisition and development decisions. The Company is actively investing in its existing broadcast operations in Ukraine and may in the future engage in the development of additional broadcast operations. The Company incurs certain expenses in identifying and pursuing broadcast opportunities before any investment decision is made. The Company believes that its current cash balances and local financing of broadcast operations should be adequate to satisfy the Company's operating and capital requirements for its current operations through September 30, 2000. To acquire additional broadcast rights or to fund other significant investments, the Company would require significant additional financing. Year 2000 Issue The "Year 2000 Issue" consists of computer programs and embedded technology in equipment defining years using the last two digits rather than all four digits of the applicable year and could result in the complete or partial failure of computer applications and equipment with embedded technology by or at the year 2000. The Company's broadcast operations are highly dependent upon equipment with embedded computer technology Page 29 (cameras, mixing equipment, broadcast equipment, etc.), the widespread failure of which would have a material adverse impact on the Company's results of operations. The Company has established a Year 2000 compliance plan and timetable. A Committee chaired by the Company's Chief Executive Officer and comprised of technical personnel from each of the Company's television operations is overseeing the process. The Company has completed a systems and equipment review and work has been completed on remedial action for most of the systems and equipment that were found to be non-compliant. Planned remedial action is continuing for a few systems that are currently non-compliant. In late November, the Company will conduct a final review meeting to resolve the final non-compliant issues. An independent audit of the stations preparedness conducted throughout late September and early October has revealed that no stations pose a high risk of failure. Generally, major suppliers and vendors have been contacted and contingencies made for those suppliers and vendors that indicated non-compliance. The Company's independent Year 2000 audit has highlighted that the major Year 2000 risk is that the infrastructures in some of the countries in which the Company operates and relies on for basic utilities, such as electricity, may not be Year 2000 compliant. To date, the out-of-pocket costs of the Year 2000 program have been immaterial. It is anticipated that the costs of the work still to be performed will not be material. Such costs do not include internal management time, the effect of which is not expected to be material to the Company's results of operations or financial condition. The Company will continually review its progress against its Year 2000 plans. Accounting rules require Year 2000 compliance costs to be expensed as incurred. Euro Conversion As part of the European Economic and Monetary Union (EMU), a single currency, the euro, will replace the national currencies of many of the member countries of the European Union. Although the Company does not currently conduct business in any of the countries which are adopting the euro, it holds debt denominated in German marks, one of the currencies scheduled to be replaced by the euro. Additionally, it is expected that several of the countries in which the Company operates are likely to join EMU at some point in the future. The conversion rates between the euro and the participating nations' currencies were fixed irrevocably as of January 1, 1999 and the participating national currencies will be removed from circulation between January 1, and June 30, 2002 and replaced by euro notes and coinage. During the "transition period" from January 1, 1999 through December 31, 2001, public and private entities as well as individuals may pay for goods and services using either checks, drafts, or wire transfers denominated in euro or the participating country's national currency. Under the regulations governing the transition to a single currency, there is a "no compulsion, no prohibition" rule which states that no one is obliged to use the euro until the notes and coinage have been introduced on January 1, 2002. In keeping with this rule, the Company expects to be euro "compliant" (able to receive euro denominated payments and Page 30 able to invoice in euros as requested by vendors and suppliers, respectively) by the time national currencies are removed from circulation. The cost of software and business process conversion is not expected to be material. Forward-looking Statements Statements made in Part I, Item 1, Note 1 under the heading "Czech Republic", "Results of Operations" and under "Liquidity and Capital Resources" regarding future operations of CNTS, the ongoing dispute between CNTS and CET, future investments in existing television broadcast operations, business strategies, commitments and the future need for additional funds from outside sources are forward-looking statements. Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Future events and actual results, financial and otherwise, could differ materially from those described in or contemplated by the forward-looking statements. Important factors that contribute to such risks include the ability to acquire programming, the ability to attract audiences, the rate of development of advertising markets in countries where the Company currently operates, including the continuing impact of the Russian financial crisis on the economies of these countries, and general market and economic conditions in these countries. Important factors with respect to the future of operations of CNTS in the Czech Republic and the ongoing dispute between CNTS and CET, include legal, political and regulatory conditions and developments in the Czech Republic. Important factors with respect to completion of the Company's Year 2000 compliance plan include the outcome of the Company's systems and equipment review and the extent to which Company and third party systems are found to be out of compliance with Year 2000 standards. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company conducts business in a number of foreign currencies. As a result, it is subject to foreign currency exchange rate risk due to the effects that foreign exchange rate movements of these currencies have on the Company's costs and on the cash flows it receives from certain subsidiaries. Several of the Company's subsidiaries hold long-term debt under credit facilities that provide for interest at a spread above a basis rate (such as LIBOR). A significant rise in these basis rates would not materially adversely affect the Company's business, financial condition or results of operations. The Company does not utilize derivative financial instruments to hedge against changes in interest rates. The Company believes that it currently has no material exposure to market risk associated with activities in derivative or other financial instruments. In limited instances the Company enters into forward foreign exchange contracts to hedge foreign currency exchange rate risk. There were no forward foreign exchange contracts outstanding at September 30, 1999. Page 31 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 22, 1999 /s/ Frederic T. Klinkhammer ------------------------------- Frederic T. Klinkhammer Chief Executive Officer (Duly Authorized Officer) Page 32 -----END PRIVACY-ENHANCED MESSAGE-----