-----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, WqOAT3wyyBNAp6QMyGBDGG2YaEDhKgrDMvGmDZYBqUwpZkCkZvGdbmKzyQE+M1bq eMtzDhs2OnbxAzXNR4YCqA== 0000950123-97-006859.txt : 19970815 0000950123-97-006859.hdr.sgml : 19970815 ACCESSION NUMBER: 0000950123-97-006859 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTRAL EUROPEAN MEDIA ENTERPRISES LTD CENTRAL INDEX KEY: 0000925645 STANDARD INDUSTRIAL CLASSIFICATION: TELEVISION BROADCASTING STATIONS [4833] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-24796 FILM NUMBER: 97660381 BUSINESS ADDRESS: STREET 1: 18 D ARBLAY STREET CITY: LONDON W1V 3FP ENGLA STATE: X0 BUSINESS PHONE: 8092961431 MAIL ADDRESS: STREET 1: CCLARENDON HOUSE STREET 2: HAMILTON HM CX CITY: BERMUDA STATE: D0 10-Q 1 FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number 0-24796 CENTRAL EUROPEAN MEDIA ENTERPRISES LTD. (Exact name of registrant as specified in its charter) BERMUDA N/A (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) Clarendon House, Church Street, Hamilton HM CX Bermuda (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 441-296-1431 Indicate by check mark whether registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for each shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class Outstanding as of August 11, 1997 ----- --------------------------------- Class A Common Stock, par value $.01 16,732,178 Class B Common Stock, par value $.01 7,149,475
2 CENTRAL EUROPEAN MEDIA ENTERPRISES LTD. CONSOLIDATED BALANCE SHEETS AS AT JUNE 30, 1997 AND DECEMBER 31, 1996 ($000S) ASSETS
JUNE 30, DECEMBER 31, 1997 1996 -------- ------------ CURRENT ASSETS: Cash and Cash Equivalents.............................................................. 16,949 78,507 Investments in Marketable Securities................................................... 2,880 2,896 Restricted Cash........................................................................ 1,814 2,749 Accounts Receivable (net of allowances of $3,291, $3,200).............................. 31,117 37,342 Program Rights Costs................................................................... 13,529 12,675 Value-added Tax Recoverable............................................................ 445 182 Amount due from Unconsolidated Affiliates.............................................. 6,942 1,066 Advances to Affiliates................................................................. 7,108 4,119 Other Short-term Assets................................................................ 1,241 850 Prepaid Expenses....................................................................... 6,014 5,773 ------- ------- TOTAL CURRENT ASSETS............................................................ 88,039 146,159 Investments in Unconsolidated Affiliates............................................... 56,555 56,599 Investments............................................................................ 15,450 3,600 Loans to Affiliates.................................................................... 19,035 17,766 Property, Plant & Equipment (net of depreciation of $25,670, $22,317).................. 55,622 58,982 Program Rights Costs................................................................... 14,369 14,266 Broadcast Licence Costs and Other Intangibles (net of amortization of $1,973, $1,579).............................................................................. 2,771 3,097 Licence Aquisition Costs (net of amortization of $1,254, $854)......................... 3,523 3,923 Goodwill............................................................................... 42,982 35,338 Organization Costs (net of amortization of $1,115, $950)............................... 701 934 Development Costs (net of allowance of $1,236, $996)................................... 2,822 19,105 Deferred Taxes......................................................................... 1,160 868 Other Assets........................................................................... 490 4,493 ------- ------- TOTAL ASSETS.................................................................... 303,519 365,130 ------- ------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable....................................................................... 22,955 18,775 Accrued Liabilities.................................................................... 16,839 17,010 Duties and Other Taxes Payable......................................................... 6,856 3,312 Income Taxes Payable................................................................... 1,941 9,948 Current Portion of Obligations under Capital Lease..................................... 67 1,794 Current Portion of Credit Facilities................................................... 8,111 7,106 Dividends payable...................................................................... 2,153 -- Investments Payable.................................................................... 7,730 1,955 Advances from Affiliates............................................................... 1,137 606 ------- ------- TOTAL CURRENT LIABILITIES....................................................... 67,798 60,506 Deferred Income Taxes.................................................................. 1,224 2,142 Obligations under Finance Leases....................................................... 39 7,120 Long-Term Portion of Credit Facilities................................................. 30,333 22,488 Investments Payable.................................................................... -- 14,633 Other Liabilities...................................................................... 19 305 Minority Interest in Consolidated Subsidiaries......................................... 3,547 8,616 SHAREHOLDERS' EQUITY: Preferred Stock, $0.01 par value; authorized; 5,000,000 shares; issued and outstanding; none................................................................................. -- -- Class A Common Stock, $0.01 par value; authorized; 100,000,000 shares at June 30, 1997 and 30,000,000 at December 31; issued and outstanding; 16,732,178 and 16,664,143 at June 30, 1997 and December 31, 1996.................................................. 167 167 Class B Common Stock, $0.01 par value; authorized; 15,000,000 shares; issued and outstanding; 7,149,475 and 7,191,475 at June 30, 1997 and December 31, 1996.......... 72 72 Additional Paid-in Capital............................................................. 330,644 330,315 Accumulated Deficit.................................................................... (119,824) (78,004) Cumulative Currency Tanslation Adjustment.............................................. (10,500) (3,230) ------- ------- TOTAL SHAREHOLDERS' EQUITY...................................................... 200,559 249,320 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...................................... 303,519 365,130 ------- -------
Page 1 of 31 3 CONSOLIDATED STATEMENTS OF OPERATIONS ($000'S, EXCEPT PER SHARE DATA) (UNAUDITED)
FOR THE THREE FOR THE SIX MONTHS MONTHS ENDED JUNE 30, ENDED JUNE 30, ---------------- ----------------- 1997 1996 1997 1996 ------- ------ ------- ------- GROSS REVENUES:............................................ $53,435 $48,045 $90,915 $76,935 Discounts and Agency Commissions........................... (11,966) (9,495) (20,281) (15,130) ------- ------ ------- ------- Net Revenues............................................... 41,469 38,550 70,634 61,805 STATION EXPENSES: Other Operating Costs and Expenses....................... 14,403 11,931 27,949 24,423 Amortization of Programming Rights....................... 4,605 5,963 9,891 10,269 Depreciation of Station Fixed Assets and Other Intangibles........................................... 3,850 3,175 7,500 6,109 ------- ------ ------- ------- Total Station Operating Costs and Expenses............... 22,858 21,069 45,340 40,801 Selling, General and Administrative Expenses............. 6,505 5,797 10,834 8,735 CORPORATE EXPENSES: Corporate Operating Costs and Development Expenses....... 4,866 3,669 9,441 6,760 Amortization of Goodwill and Allowance for Development Costs................................................. 2,598 313 4,595 413 ------- ------ ------- ------- 7,464 3,982 14,036 7,173 OPERATING PROFITS.......................................... 4,642 7,702 424 5,096 Equity in Loss of Unconsolidated Affiliates (Note 3)....... (3,334) (3,167) (10,103) (5,936) Loss on Impairment of Investments in Unconsolidated Affiliates (Note 3)...................................... -- -- (20,707) -- Interest and Other Income.................................. 516 442 2,616 1,079 Interest Expense........................................... (1,113) (525) (3,287) (1,532) Foreign Currency Exchange Loss............................. (2,515) (1,235) (4,586) (1,630) ------- ------ ------- ------- Net Loss Before Provision for Income Taxes................. (1,804) 3,217 (35,643) (2,923) Provision for Income Taxes................................. (4,922) (6,309) (6,833) (8,313) ------- ------ ------- ------- Net loss before minority interest.......................... (6,726) (3,092) (42,476) (11,236) Minority Interest in (income) loss of Consolidated Subsidiaries............................................. (106) (1,538) 656 (1,144) ------- ------ ------- ------- NET LOSS................................................... $(6,832) $(4,630) $(41,820) $(12,380) ======= ====== ======= ======= PER SHARE DATA: Net loss per share (Note 2)................................ $ (0.29) $(0.25) $ (1.75) $ (0.67) ======= ====== ======= ======= Weighted average number of common shares outstanding (000's).................................................. 23,863 18,447 23,863 18,447 ------- ------ ------- -------
Page 2 of 31 4 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 1997 ($000'S) (UNAUDITED)
CUMULATIVE CLASS A CLASS B ADDITIONAL CURRENCY COMMON COMMON PAID-IN ACCUMULATED TRANSLATION STOCK STOCK CAPITAL DEFICIT(1) ADJUSTMENT TOTAL ------ ------ ---------- ----------- ------------ ------- BALANCE, December 31, 1996.......... $167 $72 $330,315 $(78,004) $(3,230) $249,320 Capital Consolidated by Shareholders................... -- -- 329 -- -- 329 Foreign Currency Translation Adjustments.................... -- -- -- -- (7,270) (7,270) Net Loss.......................... -- -- -- (41,820) -- (41,820) -- ---- -------- --------- -------- -------- BALANCE, June 30, 1997.............. $167 $72 $330,644 $(119,824) $(10,500) $200,559 ==== === ======== ========= ======== ========
- ------------ (1) Of the accumulated deficit of $119,824 at June 30, 1997, $81,058 represents accumulated losses in unconsolidated affiliates. Page 3 of 31 5 CONSOLIDATED STATEMENTS OF CASH FLOWS ($000S) (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, ------------------- 1997 1996 ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss................................................................. $(41,820) $(12,380) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Equity in Loss of Unconsolidated Affiliates............................ 10,103 5,936 Loss on Impairment of Investments in Unconsolidated Affiliates......... 20,707 -- Depreciation & Amortization (excluding amortization of barter programs)........................................................... 22,501 16,862 Minority Interest in (Loss)income of Consolidated Subsidiaries......... (656) 1,144 Valuation Allowance for Development Costs.............................. 240 413 Changes in assets & liabilities: Accounts Receivable.................................................... 1,218 (3,675) Program Rights Paid.................................................... (11,442) (13,787) Value-added Tax Recoverable............................................ (263) 458 Dividends paid & proposed to minority shareholders..................... (1,650) (1,396) Advances to Affiliates................................................. (8,183) (2,899) Production costs....................................................... (100) -- Prepaid Expenses....................................................... (357) (545) Other Assets........................................................... (260) (127) Accounts Payable....................................................... 841 1,558 Accrued Liabilities.................................................... 543 4,159 Other Short-term Liabilities........................................... (242) -- Income & Other Taxes Payable........................................... (3,895) 8,347 ------- ------- Net cash provided by (used in) operating activities............ (12,715) 4,068 CASH FLOWS FROM INVESTING ACTIVITIES: Investments in Unconsolidated Affiliates............................... (10,054) (9,444) Other Investments...................................................... (15,097) -- Investments in Marketable Securities................................... 16 6,300 Restricted Cash........................................................ 935 2,524 Acquisition of Fixed Assets............................................ (5,133) (10,670) Acquisition of Minority Shareholder's Interest......................... (1,676) -- Purchase of business................................................... -- (2,962) Payments for Broadcast License Costs, Other Assets and Intangibles..... (464) -- Development Costs...................................................... (1,409) (14,349) ------- ------- Net cash used in investing activities.......................... (32,882) (28,601) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Credit Facilities...................................................... (7,656) (2,108) Payments under Capital Leases.......................................... (809) (776) Loans and Advances to Affiliates....................................... (6,569) (731) Capital Contributed by Shareholders.................................... 329 789 ------- ------- Net cash used in financing activities.......................... (14,705) (2,826) IMPACT OF EXCHANGE RATE FLUCTUATIONS ON CASH............................. (1,256) (503) ------- ------- Net decrease in cash and cash equivalents...................... (61,558) (27,862) CASH AND CASH EQUIVALENTS, beginning of period........................... 78,507 53,210 ------- ------- CASH AND CASH EQUIVALENTS, end of period................................. $16,949 $25,348 ------- ------- Supplemental Information: Cash Paid for interest................................................. $ 3,287 $ 1,750 ------- ------- Income Taxes........................................................... $16,892 $ -- ------- -------
Page 4 of 31 6 CENTRAL EUROPEAN MEDIA ENTERPRISES LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 1. ORGANIZATION AND BUSINESS Central European Media Enterprises Ltd., a Bermuda corporation ("CME"), was formed in June 1994. Through its predecessor companies, CME has been in operation since 1991. CME, together with its subsidiaries (CME and its subsidiaries and affiliates are collectively referred to as the "Company"), invests in, develops and operates national and regional commercial television stations and networks in Central and Eastern Europe and regional commercial television stations in Germany. In the Czech Republic, the Company owns a 93.2% economic interest and has 91.2% of the voting power in Ceska Nezavisla Televizni Spolecnost s.r.o. ("CNTS"), which operates Nova TV, the leading private national television station in the Czech Republic. As of June 30, 1997, CET 21 s.r.o. ("CET 21") and certain of its partners owned 6.8% of CNTS. On August 11, 1997, the Company purchased Nova Consulting a.s. ("NC"), which owns a 5.8% participation interest in CNTS, from certain of the partners of CET 21 (Note 4). Ceska Sporitelna Bank ("CS") has a 2% voting interest in CNTS. In 1995, in the Czech Republic, the Company entered into loan ("Radio Alfa Loan") and consulting agreements with Radio Alfa a.s. ("Radio Alfa"), one of two private Czech Republic national radio broadcasters. During December 1996, the Company purchased a 62% ownership interest from Radio Alfa's other shareholders for a purchase price of Kc 37,500,000 ($1,372,000). Certain of the Company's outstanding loans to, and interest in, Radio Alfa are convertible into an additional equity interest which, when combined with its 62% interest, would give the Company an 83.7% interest in Radio Alfa. In Romania, the Company and two local partners, Adrian Sarbu and Ion Tiriac, operate PRO TV, a commercial television network, through Media Pro International S.A. ("Media Pro International"). The Company owns a 77.5% equity interest in Media Pro International, although Mr. Tiriac and Mr. Sarbu hold options which, if exercised, could reduce the Company's equity interest in Media Pro International to not less than 66%. Mr. Tiriac has informed the Company that he intends to exercise such option. The Company owns 49% of the equity of PRO TV, SRL, an affiliate station of Media Pro International. Messrs. Sarbu and Tiriac own substantially all of the remainder of PRO TV, SRL. PRO TV, SRL holds many of the licenses for the stations comprising the PRO TV network. In September 1996, the Company acquired a 95% equity interest in Unimedia SRL ("Unimedia"), which owns a 10% equity interest in a consortium, MobilRom, which obtained one of two GSM licenses in Romania in December 1996. Mr. Sarbu owns the remaining 5.0% of Unimedia. In Slovenia, the Company operates POP TV, together with MMTV d.o.o. Ljubljana ("MMTV") and Tele 59 d.o.o. Maribor ("Tele 59"), through Produkcija Plus d.o.o. ("Pro Plus"). POP TV provides programming to, and sells advertising for, Page 5 of 31 7 MMTV, Tele 59 and affiliates TV Robin and Euro 3. In March 1997, the Company purchased a substantial portion of MMTV's interest in Pro Plus for an aggregate price of approximately $5,000,000. After giving effect to this purchase, the Company owns 78% of the equity of Pro Plus, but has an effective economic interest of 85.3% as a result of a 33% economic interest in MMTV and a 33% economic interest in Tele 59. Tele 59 owns a 21% equity interest in Pro Plus, and the remaining 1% equity interest in Pro Plus is owned by MMTV. In the Slovak Republic, the Company owns an 80% non-controlling economic interest and a 49% voting interest in Slovenska Televizna Spolocnost s.r.o. ("STS"), which launched Markiza TV as a national television station on August 31, 1996. In Poland, the Company, together with the Polish media group ITI, formed TVN Sp.zo.o. ("TVN"). ITI owns 67% of the equity in TVN and the remaining 33% is owned by the Company. In February 1997, TVN was awarded television broadcast licenses for northern Poland and the cities of Warsaw and Lodz. TVN also owns a 76.3% (increased from 49% during the second quarter of 1997) interest in Telewizja Wisla Sp.zo.o. ("TV Wisla"), which operates a regional television station in southern Poland. The Company owns a 50% direct interest and a 5% indirect interest in Federacja Sp.zo.o ("Federation"), through which the Company intends to operate a Polish television broadcast network, the TVN Network, commencing in the fourth quarter of 1997. In Ukraine, the Company owns a 50% interest in a group of companies (collectively, the "Studio 1+1 Group"), which has the right to broadcast programming and sell advertising on Ukrainian National Channel 2 ("UT-2") through 2006. The Company owns 24.9% of the equity of 2002 Tanacsado es Szolgaltato Korlatolt Felelosegu Tarsasag ("2002 Kft."), a broadcasting company in Hungary. The Company wholly owns Videovox Studio Limited Liability Company, a Hungarian dubbing and production company ("Videovox"). In January 1997, the Hungarian Television Commission announced tender procedures for the award of two national television broadcast licenses. The Company formed a consortium, MKTV Rt. ("IRISZ TV"), which submitted an application for these licenses. On June 30, 1997, the Hungarian Television Commission announced the award of the licenses to other consortia. On July 4, 1997, IRISZ TV filed a complaint in the Budapest Capital Court against the Hungarian Television Commission and the other consortia challenging the license awards. See "Other Information - Legal Proceedings." The Company owns a 50% interest (non-voting profit participation) in Franken Funk & Fernsehen GmbH ("FFF"), which owns 74.8% of a regional television station in Nuremberg, Germany, NMF Neue Medien Franken GmbH and Co., K.G. ("NMF"). The Company has a 49% equity interest, and a 50% economic interest in Sachsen Funk und Fernsehen GmbH ("SFF") which owns a 33.33% equity interest in Sachsen Fernsehen Betriebs KG, which operates regional television stations in Leipzig and Dresden, Germany. On May 13, 1997, the Company announced its decision to discontinue funding of PULS, a regional television station operating in the Berlin-Brandenburg area of Germany in which the Company has a 58% non-controlling Page 6 of 31 8 interest. On May 27, 1997, PULS initiated a bankruptcy proceeding in the Bankruptcy Court of Berlin-Charlottenburg. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying financial statements have been prepared in accordance with United States generally accepted accounting principles ("GAAP"). In the opinion of management, these consolidated financial statements include all adjustments necessary to fairly state the Company's financial position and results of operations. The results for the six months ended June 30, 1997 are not necessarily indicative of the results expected for the year. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company's wholly owned subsidiaries and the accounts of CNTS, PRO TV, POP TV, Videovox (wholly owned since April 1997) and Radio Alfa (the "Consolidated Affiliates") as consolidated entities and reflect the interests of the minority owners of CNTS, PRO TV and POP TV and Radio Alfa for the six months ended June 30, 1997. Videovox was acquired on May 1, 1996 and a controlling interest in Radio Alfa was acquired on December 26, 1996. As a result, CNTS, PRO TV, POP TV and Videovox were the only consolidated entities for the six months ended June 30, 1996. The results of the Company's operating stations, Markiza TV, FFF, SFF, Studio 1+1, TVN and PULS (for the first quarter of 1997 only) (the "Unconsolidated Affiliates") in which the Company has, or during the six months ended June 30, 1997 had, minority or non-controlling ownership interests, are included in the accompanying consolidated financial statements as equity in loss or income of unconsolidated affiliates using the equity method. PULS, a regional station in the Berlin-Brandenburg area of Germany, declared bankruptcy in May 1997. The Company records other investments at the lower of cost and market value. Net Loss Per Share Net loss per share was computed by dividing the Company's net loss by the weighted average number of Common Shares (both Class A and Class B) and common share equivalents outstanding during the period ended June 30, 1997. The impact of outstanding options and warrants has not been included in the computation of net loss per share, as the effect of their inclusion would be anti-dilutive. Recently Issued Accounting Standards In March 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share" ("SFAS 128"). This statement establishes standards for computing and presenting earnings per share ("EPS"), replacing the presentation of currently required primary EPS with a presentation of Basic EPS. For entities with complex capital structures, the statement requires the dual presentation of both Basic EPS and Diluted EPS on the face of the statement of operations. Under this new standard, Basic EPS is computed based on weighted average shares outstanding and Page 7 of 31 9 excludes any potential dilution. Diluted EPS reflects potential dilution from the exercise or conversion of securities into common stock or from other contracts to issue common stock and is similar to the currently required fully diluted EPS. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods, and earlier application is not permitted. When adopted, the Company will be required to restate its EPS data for all prior periods presented. The Company does not expect the impact of the adoption of this statement to be material to previously reported EPS amounts. Reclassifications Certain reclassifications were made to prior period amounts to conform to current period classifications. 3. SUMMARY FINANCIAL INFORMATION FOR UNCONSOLIDATED AFFILIATES.
----------------------------------------------- ($ 000S) AS OF ------- ----------------------------- ---------------- DECEMBER 31, JUNE 30, 1997 1996 ----------------------------- ---------------- MARKIZA TV STUDIO 1+1 MARKIZA TV GROUP Current assets 14,691 3,007 10,896 Non-current assets 25,261 21,508 28,783 Current liabilities (8,470) (2,993) (6,635) Non-current liabilities (9,998) (3,000) (9,222) ------ ------ ------ Net assets 21,484 18,522 23,822 ====== ====== ======
------------------------------ ---------------------------------- FOR THE SIX MONTHS ENDED, FOR THE THREE MONTHS ENDED, JUNE 30, 1997 JUNE 30, 1997 ------------------------------ ---------------------------------- ($ 000S) MARKIZA TV STUDIO 1+1 MARKIZA TV STUDIO 1+1 -------- ---------- ---------- ---------- ---------- GROUP GROUP ----- ----- Net revenues 13,829 6,977 8,201 3,891 Operating loss (443) (1,493) 709 (12) Net loss (1,288) (1,659) 433 (178)
The Company's share of losses in Unconsolidated Affiliates (including amortization of goodwill, with the exception of SFF)for the six months ended June 30, 1997 was $10,103,000, including $2,843,000 in PULS, $1,439,000 in FFF, $254,000 in SFF, $1,303,000 in Markiza TV, $2,272,000 in TVN and $1,992,000 in Studio 1+1 Group. On May 13, 1997, the Company announced its decision to discontinue funding of PULS. As a result, the Company has written down its investments in Germany (including PULS, FFF and SFF) by $20,707,000 and eliminated the carrying value of these investments. This write-down, together with losses incurred by the German operations during the six months ended June 30, 1997, has resulted in a total charge of $25,243,000 in the Company's Consolidated Statements of Operations. On May 27, 1997, PULS initiated a bankruptcy proceeding. Under bankruptcy rules in Germany, the Company no longer has access to the accounting records of PULS and, as a result, no financial information for PULS has Page 8 of 31 10 been provided above. To finance developments, PULS received investment grants in an aggregate amount of DM8,544,000 ($4,910,000) from a German public bank in 1993. These grants were guaranteed by a wholly owned subsidiary of the Company. As a result of the bankruptcy proceedings initiated by PULS, no assurance can be given that the bank will not seek repayment of all or part of the investment grants from the guarantor. No provision has been made in respect of this matter, as management believes that the repayment of any part of these grants is remote and the maximum exposure is limited to the German assets, which have been fully provided for. 4. SUBSEQUENT EVENTS On August 11, 1997, the Company purchased Nova Consulting a.s. ("NC") from certain of the partners of CET 21, for a purchase price of $28,537,500, to be paid on an installment basis through February 15, 2000, subject to adjustment as described below. NC owns an additional 5.8% interest in CNTS. A portion of the payments are indexed based upon the performance of CME's Class A Common Stock. The Company intends to sell a similar minority interest in CNTS to one or more strategic Czech investors or in a public offering in the Czech Republic. Page 9 of 31 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The Company is the leading commercial television company in Central and Eastern Europe. The Company has developed and currently operates the leading national private television stations and networks, as measured by audience share within their respective areas of broadcast reach, in the Czech Republic, the Slovak Republic, Slovenia and Romania. The Company also recently commenced broadcasting in Ukraine and southern Poland and plans to launch a television network in Poland and develop broadcasting operations in Hungary. The Company's television studios, production facilities and editing suites at its national television stations produced approximately 12,000 hours of original programming in 1996 to support the Company's broadcasting operations, making it the largest private producer of local television programming in Central and Eastern Europe. To complement its commercial television activities, the Company also has interests in national radio stations and is increasingly active in program rights distribution and other media services. The Company's revenues are derived principally from the sale of television advertising to local, national and international advertisers. To a limited extent, the Company also engages in certain barter transactions in which its broadcast operations exchange unsold commercial advertising time for goods and services. The Company, like other television operators, experiences seasonality, with advertising sales tending to be lowest during the third quarter of each calendar year, which includes the summer holiday period (typically July and August), and highest during the fourth quarter of each calendar year. The primary expenses incurred in operating broadcast stations are programming costs, employee salaries, broadcast transmission expenses and selling, general and administrative expenses. Certain of the Company's operations do not require the direct incurrence of broadcast transmission expenses. However, the Company incurs significant development expenses, including funding and negotiating with local partners, researching and preparing license applications, preparing business plans and conducting pre-operating activities as well as reorganizing existing affiliate entities which hold the broadcast licenses. The primary internal sources of cash available for corporate operating costs and development expenses are dividends and other distributions from subsidiaries and affiliates. The Company's ability to obtain dividends or other distributions is subject to, among other things, restrictions on dividends under applicable local laws and foreign currency exchange regulations of the jurisdictions in which its subsidiaries and affiliates operate. The subsidiaries' and affiliates' ability to make distributions is also subject to the legal availability of sufficient operating funds not needed for operations, obligations or other business plans and, in some cases, the approval of the other partners, stockholders or creditors of these entities. The laws under which the Company's operating subsidiaries and affiliates are organized provide generally that dividends may be declared by the partners or shareholders out of yearly profits subject to the maintenance of registered capital and required reserves and after the recovery of accumulated losses. Page 10 of 31 12 Central Europe, including parts of the Czech Republic, the Slovak Republic, Poland and Germany, has recently experienced extensive flooding. The Company is not able to predict at this time what impact, if any, the flooding will have on the Company's financial condition and results of operations. SELECTED COMBINED FINANCIAL INFORMATION - BROADCAST CASH FLOW The following tables are neither required by United States generally accepted accounting principles ("GAAP") nor intended to replace the Consolidated Financial Statements prepared in accordance with GAAP. The tables set forth certain combined operating data for the six months ended June 30, 1997 and 1996 for national television broadcast stations or networks. The financial information included below departs materially from GAAP because it aggregates the revenues and operating income of certain Unconsolidated Affiliates with Consolidated Affiliates. This supplemental information is presented solely for additional analysis and not as a presentation of results of operations of each component, nor as combined or consolidated financial data presented in accordance with GAAP. The Company's television operations in Poland are not included in this analysis, as these operations are in the early stages of development. Regional television stations in Germany are not included in this analysis as these operations are dissimilar from those of national television broadcast entities. The Company accounts for its 80% non-controlling interest in Markiza TV and its 50% interest in the Studio 1+1 Group using the equity method of accounting. Under this method of accounting, the Company's interest in net earnings or losses of Markiza TV and the Studio 1+1 Group is included in the consolidated earnings and an adjustment is made to the carrying value at which the investment is recorded on the consolidated balance sheet. The following supplementary unaudited combined information includes certain financial information of Markiza TV and the Studio 1+1 Group on a line-by-line basis, similar to that of the Company's consolidated television broadcast entities, which include CNTS, PRO TV and POP TV. Management service charges to the stations are not included in the combined operating data below as these are eliminated in the Consolidated Financial Statements. POP TV and PRO TV began operations in December 1995, Markiza TV began operations in August 1996 and the Studio 1+1 Group began generating significant revenues during the second quarter of 1997. The Company believes that this unaudited combined and combining operating information provides useful disclosure. Page 11 of 31 13
THREE MONTHS ENDED JUNE 30, CNTS PRO TV POP TV ----------------------- ------------------ -------------------- 1996 1997 1996 1997 1996 1997 ------- ------- ------ ------ ------ ------ STATION OPERATING DATA: (DOLLARS IN THOUSANDS) Net revenues ................... 32,258 27,830 3,429 8,136 2,572 4,471 Station operating expense ...... (13,206) (11,906) (3,886) (5,994) (3,603) (4,014) Selling, General and Administrative expenses ........ (2,879) (1,581) (1,448) (3,375) (1,108) (1,044) ------- ------- ------ ------ ------ ------ Station operating income (loss) 16,173 14,343 (1,905) (1,233) (2,139) (587) Depreciation of assets ......... 1,830 2,015 594 1,095 728 629 ------- ------- ------ ------ ------ ------ EBITDA (3) ..................... 18,003 16,358 (1,311) (138) (1,411) 42 Amortization of programming .... 4,856 2,928 911 913 208 764 rights Cash program rights costs ...... (5,509) (3,209) (1,414) (2,374) (587) (546) ------- ------- ------ ------ ------ ------ Broadcast cash flow ............ 17,350 16,077 (1,814) (1,599) (1,790) 260 ======= ======= ====== ====== ====== ====== Broadcast cash flow margin ..... 53.79% 57.77% -- -- -- 5.82% Broadcast cash flow attributable to the Company ................. 15,268(4) 14,983(6) (1,406) (1,239) (1,289) 222
THREE MONTHS ENDED JUNE 30, SUBTOTAL (1) MARKIZA TV STUDIO 1+1 TOTAL COMBINED (2) GROUP --------------------- ------ ---------- 1996 1997 1997 1997 1996 (5) 1997 ------- ------- ------ ------ ------- ------- STATION OPERATING DATA: (DOLLARS IN THOUSANDS) Net revenues ................... 38,259 40,437 8,201 3,891 38,259 52,529 Station operating expense ...... (20,695) (21,914) (6,617) (3,018) (20,695) (31,549) Selling, General and Administrative expenses ........ (5,435) (6,000) (875) (885) (5,435) (7,760) ------- ------- ------ ------ ------- ------- ............................... ....... Station operating income (loss) 12,129 12,523 709 (12) 12,129 13,220 ......... Depreciation of assets ......... 3,152 3,739 1,094 76 3,152 4,909 ------- ------- ------ ------ ------- ------- EBITDA (3) ..................... 15,281 16,262 1,803 64 15,281 18,129 Amortization of programming .... 5,975 4,605 2,777 262 5,975 7,644 rights Cash program rights costs ...... (7,510) (6,129) (2,938) (804) (7,510) (9,871) ------- ------- ------ ------ ------- ------- Broadcast cash flow ............ 13,746 14,738 1,642 (478) 13,746 15,902 ======= ======= ====== ====== ======= ======= Broadcast cash flow margin ..... 35.93% 36.45% 20.02% -- 35.93% 30.27% Broadcast cash flow attributable to the Company ................. 12,573 13,966 1,314 (239) 12,573 15,041
(1) Includes consolidated television broadcast entities only. (2) Represents combined operating data for national television broadcast entities, including Markiza TV and the Studio 1+1 Group, on a line-by-line basis, which are accounted for using the equity method of accounting in the accompanying consolidated financial statements, and does not include (i) regional television stations in Germany, because these operations are dissimilar from those of national broadcast entities and (ii) television operations in Poland, which are in the early stages of operations. (3) EBITDA consists of earnings before interest, income taxes, depreciation and amortization of intangible assets (which do not include programming rights). EBITDA is provided because it is a measure commonly used in the television industry. It is presented to enhance an understanding of the Company's operating results and is not intended to represent cash flow or results of operations in accordance with GAAP for the periods indicated. See the Company's Consolidated Financial Statements included in the accompanying financial statements. (4) Reflects the Company's purchase in August, 1996 of CS's 22% economic interest in CNTS and virtually all of CS's voting power in CNTS (the "Additional CNTS Purchase") as if such acquisition had been effective from January 1, 1996. (5) Does not include Markiza TV and the Studio 1+1 Group, which began operations after June 30, 1996. (6) Reflects the Company's purchase in March 1997 of an additional 5.2% economic interest in CNTS (the "1997 CNTS Purchase") as if such acquisition have been effective from January 1, 1997. Page 12 of 31 14
SIX MONTHS ENDED JUNE 30, CNTS PRO TV POP TV ----------------------- ------------------- ------------------ 1996 1997 1996 1997 1996 1997 ------- ------- ------ ------- ------ ------ STATION OPERATING DATA: (DOLLARS IN THOUSANDS) Net revenues ................... 52,878 48,495 4,980 13,083 3,656 7,142 Station operating expense ...... (26,421) (24,717) (7,730) (11,114) (6,275) (7,654) Selling, General and Administrative expenses ........ (4,356) (3,137) (2,253) (5,139) (1,765) (1,766) ------- ------- ------ ------- ------ ------ Station operating income (loss) 22,101 20,641 (5,003) (3,170) (4,384) (2,278) Depreciation of assets ......... 3,786 3,981 1,149 1,999 1,163 1,274 ------- ------- ------ ------- ------ ------ EBITDA (3) ..................... 25,887 24,622 (3,854) (1,171) (3,221) (1,004) Amortization of programming rights 8,196 6,390 1,453 1,925 620 1,576 Cash program rights costs ...... (9,742) (7,754) (3,118) (2,672) (927) (1,016) ------- ------- ------ ------- ------ ------ Broadcast cash flow ............ 24,341 23,258 (5,519) (1,918) (3,528) (444) ======= ======= ====== ======= ====== ====== Broadcast cash flow margin ..... 46.03% 47.96% -- -- -- -- Broadcast cash flow attributable to the Company ................. 21,420(4) 21,676(6) (4,277) (1,486) (2,540) (379)(7)
SIX MONTHS ENDED JUNE 30, SUBTOTAL (1) MARKIZA TV STUDIO 1+1 TOTAL COMBINED (2) GROUP ---------------------- ------- ------- --------------------- 1996 1997 1997 1997 1996 (5) 1997 ------- ------- ------- ------ ------- ------- STATION OPERATING DATA: (DOLLARS IN THOUSANDS) Net revenues ................... 61,514 68,720 13,829 6,977 61,514 89,526 Station operating expense ...... (40,426) (43,485) (12,517) (6,709) (40,426) (62,711) Selling, General and Administrative expenses ........ (8,374) (10,042) (1,755) (1,761) (8,374) (13,558) ------- ------- ------- ------ ------- ------- Station operating income (loss) 12,714 15,193 (443) (1,493) 12,714 13,257 Depreciation of assets ......... 6,098 7,254 2,118 282 6,098 9,654 ------- ------- ------- ------ ------- ------- EBITDA (3) ..................... 18,812 22,447 1,675 (1,211) 18,812 22,911 Amortization of programming rights 10,269 9,891 4,338 556 10,269 14,785 Cash program rights costs ...... (13,787) (11,442) (5,466) (1,067) (13,787) (17,975) ------- ------- ------- ------ ------- ------- Broadcast cash flow ............ 15,294 20,896 547 (1,722) 15,294 19,721 ======= ======= ======= ====== ======= ======= Broadcast cash flow margin ..... 24.86% 30.41% 3.96% -- 24.86% 22.03% Broadcast cash flow attributable to the Company ................. 14,603 19,811 438 (861) 14,603 19,387
(1) Includes consolidated television broadcast entities only. (2) Represents combined operating data for national television broadcast entities, including Markiza TV and the Studio 1+1 Group, on a line-by-line basis, which are accounted for using the equity method of accounting in the accompanying consolidated financial statements, and does not include (i) regional television stations in Germany, because these operations are dissimilar from those of national broadcast entities and (ii) television operations in Poland, which are in the early stages of operations. (3) EBITDA consists of earnings before interest, income taxes, depreciation and amortization of intangible assets (which do not include programming rights). EBITDA is provided because it is a measure commonly used in the television industry. It is presented to enhance an understanding of the Company's operating results and is not intended to represent cash flow or results of operations in accordance with GAAP for the periods indicated. See the Company's Consolidated Financial Statements included in the accompanying financial statements. (4) Reflects the Company's purchase in August, 1996 of CS's 22% economic interest in CNTS and virtually all of CS's voting power in CNTS (the "Additional CNTS Purchase") as if such acquisition had been effective from January 1, 1996. (5) Does not include Markiza TV and the Studio 1+1 Group, which began operations after June 30, 1996. (6) Reflects the Company's purchase in March 1997 of an additional 5.2% economic interest in CNTS (the "1997 CNTS Purchase") as if such acquisition have been effective from January 1, 1997. (7) Reflects the Company's purchase in March 1997 of an additional effective economic interest of 13.3% as if such acquisition had been effective from January 1, 1997. Page 13 of 31 15 "Broadcast cash flow", a broadcasting industry measure of performance, is defined as net broadcast revenues, less broadcast operating expenses excluding depreciation and amortization, broadcast selling, general and administrative expenses, and cash program rights costs. "Broadcast cash flow margin" is broadcast cash flow divided by net broadcast revenues. "Broadcast cash flow attributable to the Company" is broadcast cash flow which is attributable to the Company based on the Company's effective economic interest in CNTS, PRO TV, POP TV, Markiza TV and the Studio 1+1 Group as of June 30, 1997 which was 93.2%, 77.5%, 85.3%, 80.0% and 50%, respectively. Cash program rights costs represent cash payments for current programs payable and such payments do not necessarily correspond to program use. The Company has included broadcast cash flow because it is commonly used in the broadcast industry as a measure of performance. Broadcast cash flow should not be considered as a substitute measure of operating performance or liquidity prepared in accordance with GAAP. EBITDA consists of earnings before interest, income taxes, depreciation and amortization of intangible assets (which do not include programming rights). EBITDA is provided because it is a measure commonly used in the television industry. It is presented to enhance an understanding of the Company's operating results and is not intended to represent cash flow or results of operations in accordance with GAAP for the periods indicated. See the Company's Consolidated Financial Statements included in the accompanying financial statements. CERTAIN STATION OPERATING DATA The three months ended June 30, 1997 compared to the three months ended June 30, 1996 Total combined broadcast cash flow increased by $2,156,000 to $15,902,000, or by 15.7%, for the three months ended June 30, 1997 compared to the same period in 1996. The increase was primarily due to a positive change in broadcast cash flow for POP TV and PRO TV of $2,050,000, and $215,000, respectively, for the three months ended June 30, 1997 compared to the same period in 1996 and the addition of positive broadcast cash flow for Markiza TV (launched in August 1996) of $1,642,000 for the three months ended June 30, 1997. This increase was partially offset by a decrease in CNTS's broadcast cash flow measured in US dollars (due primarily to devaluations in the Czech koruna) and negative broadcast cash flow from the Studio 1+1 Group. Measured in local currency, CNTS's broadcast cash flow increased by 3.2% for the three months ended June 30, 1997 compared to the same period in 1996. On a broadcast cash flow margin basis, which is not impacted by currency fluctuations, CNTS's broadcast cash flow margin was 57.8% for the second quarter of 1997 compared to 53.8% for the same period in 1996. Markiza TV's broadcast cash flow margin was 20.0% for the three months ended June 30, 1997. CNTS, Markiza TV and POP TV reported positive broadcast cash flow of $16,077,000, $1,642,000 and $260,000, respectively, for the three months ended June 30, 1997. Total combined EBITDA increased by $2,848,000, or 18.6%, for the three months ended June 30, 1997 compared to the same period last year. The increase is Page 14 of 31 16 primarily attributable to an increase in EBITDA of $1,453,000 and $1,173,000 for POP TV and PRO TV, respectively, and of $1,803,000 for Markiza TV for the three months ended June 30, 1997 compared to the same period in 1996. This increase was partially offset by a decrease in EBITDA for CNTS of $1,645,000 due to currency devaluations. CNTS, Markiza TV, POP TV and the Studio 1+1 Group reported positive EBITDA of $16,358,000, $1,803,000, $42,000 and $64,000, respectively, for the three months ended June 30, 1997. In local currency terms, CNTS's EBITDA increased by Kc 7,398,000, or 1.5%. Markiza TV's EBITDA increase is primarily the result of increased net revenues of $8,201,000 in the second quarter of 1997 compared to $5,628,000 in the first quarter of 1997 due in part to Markiza TV's increasing share of the growing television advertising market as well as seasonal revenue increases. The six months ended June 30, 1997 compared to the six months ended June 30, 1996 Total combined broadcast cash flow increased by $4,427,000 to $19,721,000, or by 28.9%, for the six months ended June 30, 1997 compared to the same period in 1996. The increase was primarily due to a positive change in broadcast cash flow for POP TV and PRO TV of $3,084,000, and $3,601,000, respectively, for the six months ended June 30, 1997 compared to the same period in 1996 and the addition of positive broadcast cash flow for Markiza TV (launched in August 1996) of $547,000 for the six months ended June 30, 1997. This increase was partially offset by a decrease in CNTS's broadcast cash flow measured in US dollars (due primarily to devaluations in the Czech koruna) and negative broadcast cash flow from the Studio 1+1 Group. Measured in local currency, CNTS's broadcast cash flow increased by 4.6% for the six months ended June 30, 1997 compared to the same period last year. On a broadcast cash flow margin basis, which is not impacted by currency fluctuations, CNTS's broadcast cash flow margin was 48.0% for the second quarter of 1997 compared to 46.0% for the same period in 1996. CNTS and Markiza TV reported positive broadcast cash flow of $23,258,000 and $547,000, respectively, for the six months ended June 30, 1997. Total combined EBITDA increased by $4,099,000, or 21.8%, for the six months ended June 30, 1997 compared to the same period of 1996. The increase is primarily attributable due to a positive change in EBITDA of $2,217,000 and $2,683,000 for POP TV and PRO TV, respectively, and of $1,675,000 for Markiza TV for the six months ended June 30, 1997. This increase was partially offset by decreases in EBITDA for CNTS of $1,265,000 (due primarily to currency devaluations) and negative EBITDA for the Studio 1+1 Group of $1,211,000. Measured in local currency, CNTS's EBITDA increased 4.1% for the six months ended June 30, 1997 compared to the same period in 1996. CNTS and Markiza TV reported positive EBITDA of $24,622,000 and $1,675,000, respectively, for the six months ended June 30, 1997. Application of Accounting Principles Although the Company conducts operations largely in foreign currencies, the Company prepares its financial statements in United States dollars and in accordance Page 15 of 31 17 with GAAP. The Company's consolidated operating statements include the results of wholly owned subsidiaries and the results of CNTS, PRO TV, POP TV, Videovox (wholly owned since April 1997) and Radio Alfa and separately set forth the minority interest attributable to other owners of CNTS, PRO TV, POP TV, Videovox and Radio Alfa. The results of other broadcast operations, Markiza TV, FFF, SFF, TVN, the Studio 1+1 Group and PULS, a regional television station in the Berlin-Brandenburg area of Germany which declared bankruptcy in May 1997, are accounted for using the equity method, which reflects the Company's share of the net income or losses in those operations. The Company records other investments at the lower of cost and market value. Foreign Currency The Company and its subsidiaries generate revenues primarily in Czech korunas ("Kc"), Romanian lei ("ROL"), Slovenian tolar ("SIT"), Slovak korunas ("Sk"), Hungarian forints ("HUF"), Ukrainian hryvna ("Hrn"), Polish zloty ("ZI") and German marks ("DM"), and incur substantial operating expenses in those currencies. The Romanian lei, Slovenian tolar, Ukrainian hryvna and Slovak koruna are managed currencies with limited convertibility. The Company also incurs operating expenses of programming in United States dollars and other foreign currencies. For entities operating in economies considered non-highly inflationary, including CNTS, POP TV, Markiza TV, Videovox, Radio Alfa, TVN and certain Studio 1+1 Group entities, balance sheet accounts are translated from foreign currencies into United States dollars at the relevant period end exchange rate; statement of operations accounts are translated from foreign currencies into United States dollars at the weighted average exchange rates for the respective periods. The resulting translation adjustments are reflected in a component of shareholders' equity with no effect on the consolidated statements of operations. PRO TV and certain Studio 1+1 Group entities operate in economies qualifying as highly inflationary. Accordingly, non-monetary assets are translated at historical exchange rates, monetary assets are translated at current exchange rates and translation adjustments are included in the determination of income. Currency translation adjustments relating to transactions of the Company in currencies other than the functional currency of the entity involved are reflected in the operating results of the Company. The exchange rates at the end of, and during, the periods indicated were as follows:
Balance Sheet Income Statement ---------------------------------- ----------------------------------- At At Average for the six months December June 30, ending June 30, 31, ----------------------------------- ---------------------------------- 1996 1997 % change 1996 1997 % change ---- ---- -------- ---- ---- -------- Czech koruna equivalent of $1.00 27.33 32.05 -17.3% 27.46 30.05 -9.4% German mark equivalent of $1.00 1.55 1.74 -12.3% 1.50 1.69 -12.7% Hungarian forint equivalent of $1.00 162 187 -15.4% n/a 179 n/a Polish zloty equivalent of $1.00 2.88 3.29 -14.2% n/a 3.08 n/a Romanian lei equivalent of $1.00 4,035 7,032 -74.3% 2,888 6,563 -127.3% Slovak koruna equivalent of $1.00 31.90 33.38 -4.6% n/a 33.19 n/a Slovenian tolar equivalent of $1.00 141.48 156.87 -10.9% 134.34 154.64 -15.1% Ukrainian hyrvna equivalent of $1.00 1.89 1.85 2.1% n/a 1.85 n/a
Page 16 of 31 18 The Company's results of operations and financial position during the first and second quarter of 1997 were impacted by changes in foreign currency exchange rates since December 31, 1996. In the highly inflationary economy in Romania, PRO TV indexes sales contracts to the United States dollar in order to minimize the effects of Romanian lei devaluation. As shown above, virtually all operating currencies have weakened against the United States dollar during the six months ended June 30,1997. The underlying Czech koruna and Slovenian tolar assets and liabilities of CNTS and POP TV decreased by 17.3% and 10.9%, respectively, in United States dollar terms during the six months ended June 30, 1997, due to foreign exchange movements. PRO TV's local currency monetary assets and liabilities decreased by up to 74.3% during the six months ended June 30, 1997, depending on the time they remained outstanding during the period. CNTS's operating income, interest costs and minority interest in income, are approximately 9.4% lower than would be the case had the weighted average exchange rate during the six months ended June 30, 1997 remained the same as during the six months ended June 30, 1996. RESULTS OF OPERATIONS The three months ended June 30, 1997 compared to the three months ended June 30, 1996 The Company's net revenues increased by $2,919,000, or 7.6%, to $41,469,000, in the three months ended June 30, 1997 from $38,550,000 in the three months ended June 30, 1996. PRO TV and POP TV achieved net revenues of $8,136,000 and $4,471,000, respectively, for the three months ended June 30, 1997, reflecting increases of $4,707,000, or 137.3%, and $1,899,000, or 73.8%, respectively, over the same period in 1996. This significant revenue growth was primarily the result of the growth in audience share and PRO TV's and POP TV's ability to convert their dominant audience shares into larger shares of their respective advertising markets, as well as the overall growth of the Company's television advertising markets. Videovox and Radio Alfa, with combined net revenues of $1,032,000 for the three months ended June 30, 1997, also contributed to the increase in the Company's net revenues. Videovox was acquired in May 1996 and Radio Alfa was acquired in December 1996. The reduction in CNTS's net advertising revenues of $2,799,000, or 9.4%, was due to the devaluation of the Czech koruna in the three months ended June 30, 1997 compared to the three months ended June 30, 1996. In local currency terms, CNTS's net advertising revenues increased by 2.2% to Kc 845,162,000 for the three months ended June 30, 1997 compared to the same period in 1996. In April and May 1997, CNTS's advertising revenues were negatively impacted by a temporary decline in the Czech economy. In June 1997, the Czech economy resumed growth rates consistent with levels of recent years. Other revenues (principally game show revenues) decreased by $1,629,000. The decline in game show revenues is primarily attributable to fewer game shows due to a current lack of game show sponsors. Primarily as a result of currency devaluations and the decrease in game show revenues, CNTS's total net revenues decreased $4,428,000, in the three months ended June 30, 1997 compared to the same period in 1996. Page 17 of 31 19 Total station operating costs and expenses increased by $1,789,000, or 8.5%, to $22,858,000 in the three months ended June 30, 1997 from $21,069,000 in the three months ended June 30, 1996. The increase in total station operating costs and expenses was primarily attributable to PRO TV's and POP TV's achievement of full-scale operations, together with the inclusion of operating expenses of Videovox and Radio Alfa. This increase was partially offset by a decrease in CNTS's operating costs and expenses in the three months ended June 30, 1997 compared to the three months ended June 30, 1996. Station selling, general and administrative expenses increased by $708,000, or 12.2%, to $6,505,000 in the three months ended June 30, 1997 from $5,797,000 in the three months ended June 30, 1996. This increase was primarily attributable to the increase in marketing expenses at PRO TV. To a lesser extent, the increase in station selling, general and administrative expenses was attributable to the addition to the Company's operations of Radio Alfa in December 1996 and Videovox in May 1996. Measured in local currency, CNTS's station selling, general and administrative expenses decreased by 37.5% from Kc 79,530,000 to Kc 49,731,000, for the three months ended June 30, 1996 and 1997, respectively. Corporate operating costs and development expenses for the three months ended June 30, 1997 and the three months ended June 30, 1996 were $4,866,000 and $3,669,000, respectively, an increase of $1,197,000. Corporate operating costs and development expenses as a percentage of net revenues increased from 9.6% in the three months ended June 30, 1996 to 11.7% in the three months ended June 30, 1997. The increase was primarily attributable to the Company's increased scope of operations, the continued development of the Company's infrastructure, the Company's new operations in Poland and Ukraine and development activities in other countries, including Hungary. Amortization of goodwill and allowance for development costs was $2,598,000 and $313,000 in the three months ended June 30, 1997 and 1996, respectively. This increase was primarily attributable to amortization of goodwill related to the Company's purchase in August 1996 of a 22% economic interest in CNTS (the "Additional CNTS Purchase") and the Company's purchase in March 1997 of a 5.2% economic interest in CNTS (the "1997 CNTS Purchase") and, to a lesser extent, the amortization of goodwill related to investments in Radio Alfa and additional investments in POP TV. As a result of the above factors, operating income decreased by $3,060,000, or 39.7%, to $4,642,000 in the three months ended June 30, 1997 from $7,702,000 in the three months ended June 30, 1996. Equity in loss of unconsolidated affiliates increased by $167,000 to $3,334,000 in the three months ended June 30, 1997 from $3,167,000 in the three months ended June 30, 1996. The increase resulted from the addition of new operations, including the Studio 1+1 Group, TVN and Markiza TV, which were not operational in the same period in 1996. During the three months ended June 30, 1997, the Company provided additional operating funds to FFF. This amount has been included in equity in loss of unconsolidated affiliates in the accompanying Consolidated Financial Statements. The Page 18 of 31 20 Company did not provide any funds to PULS or SFF in the three months ended June 30, 1997. In addition, Markiza TV recorded net income of $433,000 in the three months ended June 30, 1997 and Studio 1+1 Group recorded a net loss of $178,000. Interest and other income increased to $516,000 for the three months ended June 30, 1997 from $442,000 for the three months ended June 30, 1996. The increase in interest income was primarily attributable to the Company's moving deposits into higher interest bearing accounts and interest income CNTS earned on higher cash balances. Interest expense increased by $588,000, to $1,113,000 in the three months ended June 30, 1997 from $525,000 in the three months ended June 30, 1996. This was primarily attributable to interest expense incurred on the Czech koruna debt funding for the Additional CNTS Purchase and higher debt levels in PRO TV, partially offset by lower debt levels at CNTS. The net foreign currency exchange loss of $2,515,000 in the three months ended June 30, 1997 is primarily attributable to the United States dollar denominated liabilities of CNTS, PRO TV and POP TV (including intercompany loans) and the devaluation during this period of the Czech koruna, Romanian lei and Slovenian tolar against the dollar. Movements in these currencies during the three months ended June 30, 1996 were significantly less than in the corresponding period for 1997. These losses were partially offset by a gain the Company realized on the Czech koruna debt funding for the Additional CNTS Purchase, which is not considered as a hedge against net investments in the Czech Republic. Provision for income taxes was $4,922,000 for the three months ended June 30, 1997 and $6,309,000 for the three months ended June 30, 1996 as a result of improved tax planning. Minority interest in income of consolidated subsidiaries was $106,000 in the three months ended June 30, 1997 and $1,538,000 in the three months ended June 30, 1996. This decrease was primarily the result of the Additional CNTS Purchase and the 1997 CNTS Purchase. As a result of these factors, the net loss of the Company was $6,832,000 and $4,630,000 for the three months ended June 30, 1997 and 1996, respectively. The six months ended June 30, 1997 compared to the six months ended June 30, 1996 The Company's net revenues increased by $8,829,000, or 14.3%, to $70,634,000, in the six months ended June 30, 1997 from $61,805,000 in the six months ended June 30, 1996. This increase was attributable to the increase in PRO TV and POP TV net revenues in the six months ended June 30, 1997 compared to the six months ended June 30, 1996. PRO TV and POP TV achieved net revenues of $13,083,000 and $7,142,000, respectively, for the six months ended June 30, 1997, reflecting increases of $8,103,000, or 162.7%, and $3,486,000, or 95.4%, respectively, Page 19 of 31 21 over the same period in 1996. This significant revenue growth is primarily the result of the growth in audience share and PRO TV's and POP TV's ability to convert their dominant audience shares into larger shares of their respective advertising markets. Videovox and Radio Alfa, with combined net revenues of $1,914,000, for the six months ended June 30, 1997, also contributed to the increase in the Company's net revenues. Videovox was acquired in May 1996 and Radio Alfa was acquired in December 1996. CNTS's net advertising sales, measured in local currency, increased by Kc 99,564,000, or 7.5%, to Kc 1,421,406,000 in the six months ended June 30, 1997 compared to the same period in 1996. This increase was offset by a 9.4% depreciation of the Czech koruna. As a result, CNTS's United States dollar net revenues from advertising sales were approximately $4,600,000 lower than they would have been if the currency had remained unchanged from exchange rates for the same period in 1996. Other revenues (principally game show revenues) decreased by $3,547,000. The decline in game show revenues is principally attributable to fewer game shows due to a current lack of game show sponsors. As a result, CNTS's net revenues decreased by $4,383,000, to $48,495,000 in the six months ended June 30, 1997 from $52,878,000 in the six months ended June 30, 1996. Total station operating costs and expenses increased by $4,539,000, or 11.1%, to $45,340,000 in the six months ended June 30, 1997 from $40,801,000 in the six months ended June 30, 1996. The increase in total station operating costs and expenses is primarily attributable to PRO TV's and POP TV's achievement of full-scale operations, together with the inclusion of the operating expenses of Videovox and Radio Alfa. This increase was partially offset by a decrease in CNTS's operating costs and expenses in the six months ended June 30, 1997 compared to the six months ended June 30, 1996. Station selling, general and administrative expenses increased by $2,099,000, or 24.0%, to $10,834,000 in the six months ended June 30, 1997 from $8,735,000 in the six months ended June 30, 1996. This increase was primarily attributable to the increase in marketing expenses at PRO TV. To a lesser extent, the increase in station selling, general and administrative expenses was attributable to the addition to the Company's operations of Radio Alfa in December 1996 and Videovox in May 1996. Corporate operating costs and development expenses for the six months ended June 30, 1997 and the six months ended June 30, 1996 were $9,441,000 and $6,760,000, respectively, an increase of $2,681,000. Corporate operating costs and development expenses as a percentage of net revenues increased from 10.9% in the six months ended June 30, 1996 to 13.4% in the six months ended June 30, 1997. The increase was primarily attributable to the Company's increased scope of operations, the continued development of the Company's infrastructure, the Company's new operations in Poland and Ukraine and development activities in other countries, including Hungary. Amortization of goodwill and allowance for development costs was $4,595,000 and $413,000 in the six months ended June 30, 1997 and 1996, respectively. This increase was primarily attributable to amortization of goodwill Page 20 of 31 22 related to the Additional CNTS Purchase and the 1997 CNTS Purchase and, to a lesser extent, the amortization of goodwill related to investments in Radio Alfa and additional investments in POP TV. As a result of the above factors, the Company's operating income decreased by $4,672,000 to $424,000 in the six months ended June 30, 1997 compared to $5,096,000, in the six months ended June 30, 1996. Equity in loss of unconsolidated affiliates increased by $4,167,000 to $10,103,000 in the six months ended June 30, 1997 from $5,936,000 in the six months ended June 30, 1996. The increase reflects the addition of Markiza TV, TVN and the Studio 1+1 Group to the Company's operations, together with continued losses in the Company's German operations (for the three months ended March 31, 1997 only), excluding the Company's write-down of its investments in Germany, in the six months ended June 30, 1997. Loss on impairment of investments in unconsolidated affiliates of $20,707,000, was a result of the write-down of the Company's investments in Germany. This write-down, together with losses incurred by the German operations during the six months ended June 30, 1997, has resulted in a total charge of $25,243,000 in the Company's Consolidated Statements of Operations in that period. Interest and other income increased by $1,537,000 to $2,616,000 for the six months ended June 30, 1997 from $1,079,000 for the six months ended June 30, 1996. The increase in interest income was primarily attributable to the Company's moving deposits into higher interest bearing accounts and to interest income earned by CNTS on its cash balance during the first six months of 1997. Interest expense increased by $1,755,000, to $3,287,000 in the six months ended June 30, 1997 from $1,532,000 in the six months ended June 30, 1996. This increase was primarily attributable to interest expense incurred on the Czech koruna debt funding for the Additional CNTS Purchase and higher debt levels in PRO TV, partially offset by lower debt levels at CNTS. The net foreign currency exchange loss of $4,586,000 in the six months ended June 30, 1997 is primarily attributable to the United States dollar denominated liabilities of CNTS, PRO TV and POP TV (including intercompany loans) and the devaluation during this period of the Czech koruna, Romanian lei and Slovenian tolar against the dollar. Movements in these currencies during the six months ended June 30, 1996 were significantly less than in the corresponding period for 1997. These losses were partially offset by a gain the Company realized on the Czech koruna debt funding for the Additional CNTS Purchase, which is not considered as a hedge against net investments in the Czech Republic. Provision for income taxes was $6,833,000 for the six months ended June 30, 1997 and $8,313,000 for the six months ended June 30, 1996 as a result of improved tax planning. Page 21 of 31 23 Minority interest in loss of consolidated subsidiaries was $656,000 in the six months ended June 30, 1997 and minority interest in income of consolidated subsidiaries was $1,144,000 in the six months ended June 30, 1996. This decrease was primarily the result of the Additional CNTS Purchase and the 1997 CNTS Purchase. As a result of these factors, the net loss of the Company was $41,820,000 and $12,380,000 for the six months ended June 30, 1997 and 1996, respectively. Liquidity and Capital Resources Net cash used in operating activities was $12,715,000 in the six months ended June 30, 1997, compared to cash provided by operating activities of $4,068,000 in the six months ended June 30, 1996. The increase in net cash used for operating activities of $16,783,000 was primarily the result of the timing of income tax payments in the Czech Republic and increased programming payments at Markiza TV and in Poland. Net cash used in investing activities was $32,882,000 in the six months ended June 30, 1997 compared to $28,601,000 in the six months ended June 30, 1996. The increase was primarily attributable to an increase in investments in unconsolidated affiliates and other investments in Poland and Hungary and in MobilRom in Romania. This increase is partially offset by a reduction in capital expenditures from levels during the start-up of PRO TV and POP TV in 1996. In addition, the Company's investment in marketable securities during the six months ended June 30, 1997 decreased compared to the same period in 1996. Development costs decreased by $12,940,000 in the six months ended June 30, 1997 compared to the same period in 1996, primarily due to reduced development costs related to Markiza TV. Net cash used in financing activities for the six months ended June 30, 1997 was $14,705,000 compared to $2,826,000 for the same period in 1996. The increase was primarily due to payments made by CNTS in accordance with a long-term bank facility that was repaid in full in April 1997 and loans and advances to TVN and the Studio 1+1 Group. The Company's operations to date have been financed primarily through public offerings of shares of Class A Common Stock completed in October 1994 (the "IPO"), November 1995 and November 1996 (the "1996 Offering"), which raised net proceeds of approximately $68,800,000, $86,600,000 and $143,600,000, respectively. Prior to the IPO, the Company relied on Ronald S. Lauder and entities controlled by or affiliated with him for capital in the form of both debt and equity financing. In May 1997, CNTS declared a total dividend of Kc 495,000,000 ($15,443,000) of which the Company was paid Kc 150,150,000 ($4,684,000) in June 1997 and will be paid Kc 231,000,000 ($7,207,000) in November 1997. The remaining Kc 113,850,000 ($3,552,000) is to be paid to minority shareholders. As a result of the factors described above, the Company had cash of $16,949,000 at June 30, 1997 ($78,507,000 at December 31, 1996) and marketable Page 22 of 31 24 securities of $2,880,000 at June 30, 1997 ($2,896,000 at December 31, 1996) available to finance its activities. On August 14, 1997, the Company filed an amendment to a previously filed registration statement with the Securities and Exchange Commission. The amended registration statement provides for the proposed sale by the Company of approximately $155,000,000 of two tranches of Senior Notes due 2004 (the "Notes Offering"), with one tranche denominated in United States dollars and the other in German marks. Certain covenants contained in the indentures related to the Senior Notes will restrict the ability of CME to pay dividends or make distributions and of the Company to, among other things, incur additional indebtedness and sell assets. The Company has made, and will continue to make, investments to develop broadcast operations in Central and Eastern Europe. The Company is currently further developing broadcast operations in Ukraine and Poland. The Company's cash needs for those investment activities may exceed cash generated from operations, resulting in external financing requirements. To finance developments, PULS received investment grants in an aggregate amount of DM8,544,000 ($4,910,000) from a German public bank in 1993. These grants were guaranteed by a wholly owned subsidiary of the Company. As a result of the bankruptcy proceedings initiated by PULS, no assurance can be given that the bank will not seek repayment of all or part of the investment grants from the guarantor. On August 1, 1996, the Company entered into the Additional CNTS Purchase for the purchase of CS's 22% economic interest and virtually all of CS's voting rights in CNTS for a purchase price of Kc 1 billion ($35,067,000). The Company also entered into a loan agreement with CS to finance 85% of the purchase price. The remainder of the purchase price, Kc 150,000,000 ($5,607,000), was paid by the Company on November 15, 1996 out of the Company's cash balances. The loan from CS was drawn in August 1996 and in April 1997 in the amounts of Kc 450,000,000 ($16,464,000) and Kc 400,000,000 ($12,996,000), respectively, to fund purchase payments due at those times. The loan bears an annual interest rate of 12.9%. Quarterly repayments on the loan are required in the amount of Kc 22,500,000 ($702,000) during the period from November 1997 through November 1998, Kc 42,500,000 ($1,326,000) during the period from February 1999 through August 2002, and Kc 20,000,000 ($624,000) during the period from November 2002 through November 2003. On August 11, 1997, the Company purchased Nova Consulting a.s. ("NC") from certain of the partners of CET 21, for a purchase price of $28,537,500, to be paid on an installment basis through February 15, 2000, subject to adjustment as described below. NC owns a 5.8% interest in CNTS. A portion of the payments are indexed based upon the performance of the Company's Class A Common Stock. The Company intends to sell a similar minority interest in CNTS to one or more strategic Czech investors or in a public offering in the Czech Republic. Page 23 of 31 25 The Company expects CNTS's future cash requirements to continue to be satisfied through operating cash flows and available borrowing facilities. As of June 30, 1997, CNTS had a line of credit with CS, obtained in October 1996, for up to Kc 250,000,000 ($7,800,000) bearing interest at a rate 0.5% over the Prague Interbank Offer Rate ("PRIBOR"). Under this facility, which is secured by CNTS's equipment, vehicles and receivables, CNTS had borrowings of Kc 58,006,000 ($1,810,000) at June 30, 1997. CNTS also had a long-term bank facility that was repaid in full in April 1997. In June 1997, CEDC Praha s.r.o. ("CEDC Praha"), which owned the facility that Nova TV uses as its main studios and principal offices (the "Nova Facility"), terminated the capital lease pursuant to which CEDC Praha leased the Nova Facility to CNTS, and entered into an agreement with CNTS pursuant to which (i) CEDC Praha assigned the Nova Facility to CNTS and (ii) CNTS assumed CEDC Praha's obligations under a loan from CS (the "CS Loan") secured by a mortgage on the Nova Facility. The CS Loan provides for quarterly payments of Kc 16,500,000 ($515,000), plus interest equal to CS's prime rate plus 1.5%, to be paid through December 1999. As of June 30, 1997, the outstanding balance under the CS Loan was Kc 159,000,000 ($4,961,000). PRO TV has two borrowing facilities with Tiriac Bank in Romania. The first facility consists of a $2,000,000 line of credit substantially payable by September 30, 1997. The line of credit bears interest at a rate of 5% over LIBOR, which was 6.00% at June 30, 1997. At June 30, 1997, $1,999,000 was outstanding under this facility. The second facility is a long-term loan for $4,000,000 due July 31, 2001. The long-term loan bears interest at 5% over LIBOR and is to be repaid in monthly installments starting September 30, 1997. At June 30, 1997, $3,854,000 was borrowed under this facility. These facilities are secured by PRO TV's equipment and vehicles. Notwithstanding these borrowing facilities, the Company believes that it will be required to provide additional funding to PRO TV in the second half of 1997. The laws under which the Company's operating subsidiaries are organized provide generally that dividends may be declared by the partners or shareholders out of yearly profits subject to the maintenance of registered capital, required reserves and after the recovery of accumulated losses. In the case of the Company's Dutch and Netherlands Antilles subsidiaries, the Company's voting power is sufficient to compel the making of distributions. The Company's voting power is sufficient to compel CNTS to make distributions. In the case of PRO TV, distributions may be paid from the profits of PRO TV subject to a reserve of 5% of annual profits until the aggregate reserves equal 20% of PRO TV's registered capital. A majority vote can compel PRO TV to make distributions. There are no legal reserve requirements in Slovenia. In the case of Markiza TV, distributions may be paid from net profits subject to an initial reserve requirement of 10% of net profits until the reserve fund equals 5% of registered capital. Subsequently, the reserve requirement is equal to 5% of net profits until the reserve fund equals 10% of registered capital. The Company's voting power in Markiza TV is not sufficient to compel the distribution of dividends. In the case of Federation and TVN in Poland, there are no legal reserve requirements with respect to distributions. The Company does not have sufficient voting power in Federation or TVN to compel the making of distributions. In general, the laws of countries where Page 24 of 31 26 the Company is developing operations contain restrictions on the payment of dividends. The Company entered into a loan facility with ING Bank N.V. ("ING"), on July 11, 1997 pursuant to which ING agreed to provide the Company with bank financing of up to $25 million (the "ING Bridge Facility"). The ING Bridge Facility bears interest at a per annum rate equal to LIBOR plus 1.6% and matures on the earlier of October 31, 1997 and the consummation of the Notes Offering. The ING Bridge Facility is secured by pledges of the shares of certain of CME's subsidiaries. The ING Bridge Facility also contains affirmative and negative covenants, including limitations on additional borrowing, financial covenants (such as consolidated indebtedness to consolidated net worth), and restrictions on merger, sale or transfer of assets. As of August 11, 1997, $20,000,000 was outstanding under the ING Bridge Facility. A portion of the proceeds from the Notes Offering will be used to repay the ING Bridge Facility. In connection with the ING Bridge Facility, the Company has executed a term sheet with ING for a $35 million secured revolving credit facility anticipated to have a term of up to three and one-half years to fund working capital requirements, as well as operating and capital expenditures (the "Proposed ING Credit Facility"). Such facility is expected to be incurred by a subsidiary. The availability of such facility is subject to definitive documentation and satisfaction of various conditions. Except for the Company's working capital requirements, the Company's future cash needs will depend on the Company's financial performance and its future acquisition and development decisions. The Company is actively engaged in the development of additional broadcast operations and investing in its existing broadcasting companies throughout Central and Eastern Europe. The Company incurs certain expenses in identifying and pursuing broadcast opportunities before any investment decision is made. The Company anticipates making additional investments in other broadcast operations, supplemented by capital raised from local strategic financial partners as well as local debt and lease financing, to the extent that it is available and appropriate for each project. The Company believes that the net proceeds from the Notes Offering, together with its current cash balances, cash from CNTS, the Proposed ING Credit Facility and local financing of broadcast operations and broadcast operations under development should be adequate to satisfy the Company's operating and capital requirements for 12 to 18 months for both its current operations and operations under development. If the Notes Offering is not completed, the Company may not be able to acquire additional broadcast rights or complete the development of additional broadcast opportunities. Statements made in this section, "Liquidity and Capital Resources," regarding future investments in existing television broadcast operations and the development of new television broadcast operations (including the amount and nature thereof), business strategies and the future need for additional funds from outside sources, are forward-looking statements. Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Future events and actual results, financial and otherwise, could differ materially from those set forth in or contemplated by the forward-looking statements herein. Important factors that contribute to such risks Page 25 of 31 27 include the Company's success in obtaining additional broadcast licenses, the cost of developing these opportunities into television broadcast operations, the ability to acquire programming, the ability to attract audiences, the rate of development of advertising markets in these countries and general market and economic conditions in these countries. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On April 30, 1997, Perekhid Media Enterprises Ltd. ("Perekhid") filed a complaint in the Supreme Court of New York County, State of New York, against the Company and Ronald S. Lauder, the Chairman of the Company's Board of Directors. Perekhid alleges that the issuance of a license to the Studio 1+1 Group pursuant to which Studio 1+1 has been broadcasting programming on Ukrainian National Channel 2 ("UT-2"), constitutes a tortious interference by CME and Mr. Lauder with a Perekhid contract with the Ukrainian authorities for Perekhid to provide programming for and sell advertising time on UT-2. Perekhid's complaint seeks compensatory damages of $250 million, punitive damages of $500 million, and an injunction against the Company and Mr. Lauder to prevent the continuation of the alleged conduct. Management believes that it has substantial defenses in this matter and intends to defend the matter vigorously. On July 2, 1997, the Company filed a motion to dismiss the complaint. In January 1997, the Hungarian Television Commission announced tender procedures for the award of two national television broadcast licenses. Two other consortiums submitted bids by the April 10, 1997 deadline. On June 30, 1997, the Hungarian Television Commission announced the two other consortia as winners of the licenses. On July 4, 1997, IRISZ TV filed a complaint in the Budapest Capital Court against the Hungarian Television Commission and the other consortia. The complaint alleges that the Hungarian Television Commission (i) violated the tender procedures in connection with the acceptance of bids; (ii) violated the integrity and fairness of the tender; and (iii) breached its own published guidelines in the bid evaluation process. IRISZ TV is seeking an order to terminate the broadcasting agreements entered into by the other consortia and has reserved its right to seek damages. At a hearing on July 16, 1997, the Court denied IRISZ TV's request for interim relief. The trial on the merits of the claim is set for September 12, 1997. On May 13, 1997, the Company announced its decision to discontinue funding of PULS, a regional television station operating in the Berlin-Brandenburg area of Germany in which the Company has a 58% non-controlling interest. On May 27, 1997, PULS initiated a bankruptcy proceeding in the Bankruptcy Court of Berlin-Charlottenburg. The Court has appointed a trustee to liquidate and wind-up PULS. PULS's broadcast license will be re-tendered by the Berlin-Brandenburg Media Council. Page 26 of 31 28 The Company is, from time to time, a party to litigation that arises in the normal course of its business operations. The Company is not presently a party to any such litigation which could reasonably be expected to have a material adverse effect on its business or operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS The following are the results of voting by shareholders present or represented at the Annual Meeting of Shareholders on May 2, 1997. a. The following persons were elected to serve as Directors of the Company until the next Annual Meeting of shareholders or until their respective successors have been elected and qualified:
Votes for Abstain --------- ------- Ronald S. Lauder 78,843,922 2,700 Leonard M. Fertig 78,843,922 2,700 Andrew Gaspar 78,843,922 2,700 Robert A. Rayne 78,843,922 2,700 Herbert A. Schlosser 78,843,922 2,700 Nicolas G. Trollope 78,843,922 2,700
b. The proposal to set at eight the maximum number of directors to serve on the Board of Directors until the next Annual Meeting of Shareholders was approved, with 78,814,922 votes cast for approval, 2,700 votes cast against approval and 29,000 votes abstaining. c. The proposal to increase the number of authorized shares of CME's stock from 50,000,000 shares to 120,000,000 shares by increasing the number of authorized Class A Common Stock from 30,000,000 shares to 100,000,000 shares by (i) amending CME's Memorandum of Association and (ii) amending CME's Bye-laws was approved, with 77,438,608 votes cast for approval, 1,406,650 votes cast against approval and 1,364 votes abstaining. d. The proposal to amend CME's Bye-laws concerning the scope of the authority of the directors and officers of the Company was approved, with 78,617,587 votes cast for approval, 5,350 votes cast against approval and 223,685 votes abstaining. e. The proposal to amend CME's Bye-laws concerning the requirements for approving certain proposals was approved, with 78,534,937 votes cast for approval, 256,450 votes cast against approval and 55,235 votes abstaining. f. The proposal to change the compensation of directors was approved, with 78,378,933 votes cast for approval, 12,475 votes cast against approval and 455,214 votes abstaining. Page 27 of 31 29 g. The proposal to amend CME's Bye-laws to permit the Board of Directors to set the compensation to be paid to directors was approved, with 77,858,633 votes cast for approval, 532,775 votes cast against approval and 455,214 votes abstaining. h. The financial statements of the Company for the fiscal year ending December 31, 1996, together with the auditor's report thereon were approved, with 78,843,922 votes cast for approval, 2,400 votes cast against approval and 300 votes abstaining. i. The proposal to appoint Arthur Andersen & Co. as auditors for the Company and to authorize the directors to approve their fees was approved, with 78,844,922 votes cast for approval, 1,400 votes cast against approval and 300 votes abstaining. Page 28 of 31 30 ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. a) The following exhibits are attached: 10.1 Amendment, dated January 1, 1997, to Services Agreement among Central European Media Enterprises Ltd., Bukfenc Inc. and Andrew Gaspar, dated July 29, 1994. 10.2 Extension, dated October 23, 1996, of Services Agreement among Central European Media Enterprises Ltd., Bukfenc Inc. and Andrew Gaspar, dated July 29, 1994. 10.3 Service Agreement between R.S. Lauder Gaspar & Co., LP and Central European Media Enterprises Ltd., dated as of April 1, 1997. 10.4 Contract on Purchase of Real Estate between Central European Development Corporation Praha, spol. s.r.o. and Ceska Nezavisla Televizni Spolecnost, spol. s.r.o., dated May 21, 1997. 27.01 Financial Data Schedule b) No reports on Form 8-K were filed during the quarter ended June 30 , 1997. Page 29 of 31 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: August 14, 1997 /s/Leonard M. Fertig ------------------------------------- Leonard M. Fertig Chief Executive Officer (Duly Authorized Officer) Date: August 14, 1997 /s/ John A. Schwallie ------------------------------------- John A. Schwallie Chief Financial Officer (Principal Financial Officer) Page 30 of 31 32 EXHIBIT INDEX 10.1 Amendment, dated January 1, 1997, to Services Agreement among Central European Media Enterprises Ltd., Bukfenc Inc. and Andrew Gaspar, dated July 29, 1994. 10.2 Extension, dated October 23, 1996, of Services Agreement among Central European Media Enterprises Ltd., Bukfenc Inc. and Andrew Gaspar, dated July 29, 1994. 10.3 Service Agreement between R.S. Lauder Gaspar & Co., LP and Central European Media Enterprises Ltd., dated as of April 1, 1997. 10.4 Contract on Purchase of Real Estate between Central European Development Corporation Praha, spol. s.r.o. and Ceska Nezavisla Televizni Spolecnost, spol. s.r.o., dated May 21, 1997. 27.01 Financial Data Schedule Page 31 of 31 EX-10.1 2 AMENDMENT TO SERVICES AGREEMENT 1 Exhibit 10.1 CENTRAL EUROPEAN MEDIA ENTERPRISES LTD. 18 D'Arblay Street London WIV 3FP England January 1, 1997 Mr. Andrew Gaspar President Bukfenc Inc. 122 Salem Road Roslyn, NY 11577 Dear Mr. Gaspar: In connection with the Services Agreement between Central European Media Enterprises Ltd. dated as of July 29, 1994, as extended by letter agreement dated October 23, 1996, this will reflect our agreement to amend Section 1.1 of such Services Agreement. We agree that Section 1.1 of the Services Agreement shall be amended to read as follows: "Section 1.1. The Corporation engages Bukfenc, and Bukfenc hereby accepts such engagement to act as the Corporation's Agent, to make available to the Corporation the services of its employee, Gaspar, to perform for the Corporation such functions as are designated by the Board of Directors of the Corporation and, in addition, to serve as an officer and/or director of subsidiaries of the Corporation. Gaspar's duties shall include assisting in the planning and implementation of financial strategies for the Corporation and its subsidiaries as well as the planning and the implementation of overall organizational strategies for the Corporation and its subsidiaries. The Corporation authorizes Bukfenc, for the Corporation's account and on its behalf, to perform any lawful act and do everything lawful and necessary or desirable in order for Bukfenc to perform under this Agreement. Please indicate your approval of this amendment by signing below and returning this letter to me. Sincerely, Leonard Fertig Chief Executive Officer AGREED AND ACCEPTED: BUKFENC INC. Andrew Gaspar, President EX-10.2 3 EXTENSION OF SERVICES AGREEMENT 1 Exhibit 10.2 October 23, 1996 Central European Media Enterprises Group Mr. Andrew Gaspar President Bukfenc, Inc. 122 Salem Road Roslyn, NY 11577 Dear Mr. Gaspar: Central European Media Enterprises Ltd. wishes to extend the Services Agreement between itself and Bukfenc, Inc. for a period of two years from the date hereof on the same terms and conditions as the current agreement, a copy of which is attached. Please indicate your approval of this extension by signing below and returning this letter to me. We look forward to continued success working together. Sincerely, Leonard Fertig AG:map ACCEPTED: Andrew Gaspar, President Date Bukfenc, Inc. EX-10.3 4 SERVICE AGREEMENT 1 Exhibit 10.3 SERVICE AGREEMENT BETWEEN R.S. LAUDER, GASPAR & CO. LP, A DELAWARE CORPORATION, AND CENTRAL EUROPEAN MEDIA ENTERPRISES LTD., A BERMUDA CORPORATION As of April 1, 1997 Central European Media Enterprises Ltd. agrees to reimburse R.S.Lauder, Gaspar & Co., LP for the following services performed as requested: 1) treasury functions, i.e. banking services, overview of all financial functions, 2) legal and administrative functions, i.e. overview and management of Central European Media Enterprises Ltd.'s legal relationships, insurance policies, etc. 3) strategic planning, i.e. management of Central European Media Enterprises Ltd.'s relationships with joint venture partners, both current and future, 4) personnel policies, i.e. overview and management of hiring, compensation, health insurance and other benefit activities relating to Central European Media Enterprises Ltd.'s personnel, both current and future, 5) to be available to represent CME to major shareholders, i.e. management of Central European Media Enterprises Ltd.'s relationships with major investors, supplying data and explanations regarding current and future strategies, investments, etc., 6) interaction with major sources of new funding, i.e. managing Central European Media Enterprises Ltd.'s activities and relationships with the investment banking community and commercial banks and other lenders and other sources of funding on a worldwide basis, and 7) making available office space, full secretarial and office support services etc., to visiting CME personnel. Expenses incurred during the performance of these services will be reimbursed monthly provided full backup is provided. This agreement will remain in force unless 90 days' notification of termination is given to R. S. Lauder, Gaspar & Co. , LP by Central European Media Enterprises Ltd. 2 CENTRAL EUROPEAN MEDIA: R.S. LAUDER, GASPAR & CO.0 LP ENTERPRISES LTD. By: Bukfenc, Inc., its General Partner By: Leonard Fertig Chief Financial officer By: Andrew Gaspar President EX-10.4 5 CONTRACT ON PURCHASE OF REAL ESTATE 1 Exhibit 10.4 C O N T R A C T ON PURCHASE OF REAL ESTATE in accordance with Section 132 and those that follow in the Civil Code AND ON TRANSFER OF RIGHTS AND OBLIGATIONS in accordance with the Commercial Code This contract on the purchase of real estate and the in the building (hereinafter only as the "Contract") was concluded in Prague between the following contracting parties: 1. Central European Development Corporation Praha, spol. s r. o., with its registered office at Prague 1, Jungmannova 17, IDN: 48 53 63 77, represented by its agent John Alan Schwallie (hereinafter only as the "Seller") and 2. Ceska nezavisla televizni spolecnost, spol. s r. o., with its registered office at Prague 1, Vladislavova 20, IDN: 49 61 66 68, represented by PhDr. Vladimir Zelezny, the Executive (hereinafter only as the "Purchaser") (hereinafter individually only as the "Party" and collectively only as the "Parties") ARTICLE I. OWNERSHIP TITLE 1. The Seller declares that he is the sole owner of the house - the building with land registry no. 1477 with a built-up area - the lot with parcel no. 696 of a 1,262 m2 area; of the house - the building with land registry no. 28 with a built-up area - the lot with parcel no. 709 of a 695 m2 area; and of the yard - the lot with parcel no. 697 of a 155 m2 area, including exterior work, all operation equipment, which is specified in the Enclosure No. 1, which presents an integral part of this Contract, and complete accessories, based on the following acquisition title: Purchase contract dated 10 August 1993, number V1 9340/93 this is all registered in the Registry of Deeds at the Cadastral Office of Prague - City on ownership deed no. 1326 for the cadastral territory of Nove Mesto, Prague 2 municipality, Prague district (all aforementioned real estate shall be hereinafter only as the "Real Estate") second page 2 2. The Seller also declares that he is the bearer of rights and obligations directly associated with his ownership of the Real Estate and, resulting mainly, but not exclusively, from lease contracts, contracts on work, and others, which are specified in Appendix no. 2 which is part and parcel of this Contract (hereinafter only as the "Rights and Obligations"). ARTICLE II. SUBJECT OF THE CONTRACT 1. By this Contract, the Seller sells the Real Estate and transfers the ownership of the Real Estate including all rights and obligations to the Purchaser, and the Purchaser, by this Contract, buys and acquires the Real Estate, including all rights and obligations, for the purchase price included in Article III., paragraph 1 of this Contract. 2. By this Contract, the Seller transfers the Rights and Obligations to the Purchaser, and the Purchaser, by this Contract, assumes the Rights and Obligations free of charge. ARTICLE III. PURCHASE PRICE AND ITS DUE DATE 1. The purchase price of the Real Estate which was agreed upon between the Parties and which the Purchaser will pay to the Seller amounts to a total of 295.500.000 CZK (in words: two hundred and ninety-five million five hundred thousand Czech crowns) and is divided into the following two parts: a) the purchase price of the building that is subject to tax write-offs and which amounts to 204.563.086 CZK (in words: two hundred and four million five hundred sixty-three thousand eighty-six Czech crowns), and which equals the remaining value of the building as of the date of the signing of this Contract; b) the purchase price of the lot which is not subject to tax write-offs and which amounts to 75.175.182 CZK (in words: seventy-five million one hundred and seventy-five thousand one hundred and eighty-two Czech crowns), and which is determined by an expert opinion as of the date of the signing of this Contract. c) The purchase price of the technical equipment which was agreed upon between the Parties and which the Purchaser will pay to the Seller third page 3 amounts to a total of 15.761.732 CZK (in words: fifteen million seven hundred and sixty-one thousand seven hundred and thirty-two Czech crowns) and is equal to the remaining value of the technical equipment as of the date of the signing of this Contract. 2. By signing this contract, the Parties are explicitly confirming that part of the purchase price of the Real Estate was paid by the Purchaser in the form of advance payments towards the purchase price, in accordance with paragraph 4.2. of Article IV. of the supplement of 30 December 1994 to the lease contract between the Parties dated 27 December 1993. 3. Another part of the purchase price of the Real Estate will be paid off by assuming the Seller's obligation to Ceska sporitelna, a. s., (hereinafter only as the "Sporitelna") arisen on the basis of a contract on a loan between the Seller and Sporitelna of November 4, 1993, including all interest and fees pertaining to the aforementioned contract on a loan, payable from June 1, 1997 (interest until May 31, 1997, including, shall be calculated as the payment of the Seller). 4. The balance of the purchase price of the Real Estate will be paid to the Seller's account at Sporitelna account no. 937350-018/0800 within 21 (in words: twenty one) days after the legal power of the Cadastral Office Prague - City's decision on allowing the entering of the Purchaser's ownership right to the Real Estate. 5. By this, the Parties mutually settled the purchase price. ARTICLE IV. MUTUAL GUARANTEES AND OBLIGATIONS 1. The Seller declares that he is the sole owner of the Real Estate and the sole bearer of the Rights and Obligations, and that there are no obligations, material rights or burdens, or other legal commitments pending on the Real Estate and the Rights and Obligations with the exception of the following: a) a lien on the Real Estate in favor of Sporitelna, which secures the Seller's obligation towards Sporitelna and which will be assumed by the Purchaser. This obligation is in the amount of 328,000,000 CZK (in words: three hundred twenty-eight million Czech crowns) and arose on the basis of the following title: the contract on loan no. 4503-164855-988/0800 closed between Sporitelna and the Seller on November 4, 1993, number V2 10053/93; and fourth page 4 b) a lien on a part of the Real Estate in favor of the Seller which secures the Seller's obligation towards the Purchaser. The obligation is in the amount of 91,000,000 CZK (in words: ninety-one million Czech crowns) and occurred based on the following title: contract on lien closed between the Purchaser and the Seller on January 31, 1993, number V2 2869/97. 2. The Parties declare that they have the right to render this Contract valid by signing it and to fulfill the obligations resulting from this Contract, mainly to transfer the Real Estate to the Seller's ownership and to transfer the Rights and Obligations to the Seller. 3. The Parties declare that the signing of this Contract and the fulfillment of obligations resulting from this Contract will not cause the violation of any other contract, obligation, or generally binding legal regulation or decision of a state administrative body that might be at variance with this Contract. Furthermore, the signing of this Contract and the fulfillment of obligations resulting from this Contract will not be at variance with any generally binding legal regulation or decision of a state administrative body which relates to the Real Estate and Rights and Obligations. 4. The Parties declare that no lawsuit or other claim was filed against them at any court or state administrative body that could, in the event of an unfavorable decision, seriously and unfavorably influence the fulfillment of this Contract. 5. The Seller declares that he is selling the Real Estate in the condition corresponding to their wear and that he is not aware of any defects which he should specifically report in accordance with Section 596 and those that follow in the Commercial Code 6. The Purchaser has acquainted himself with the Real Estate and the , and he is buying them in this condition. Furthermore, he has acquainted himself with the condition of the Rights and Obligations, and he is assuming them in this condition. 7. After the transfer, the Purchaser will have the exclusive ownership right to the Real Estate and the and will be the exclusive holder of the Rights and Obligations. fifth page 5 ARTICLE V. OTHER ARRANGEMENTS 1. The Parties have agreed that, within 10 (in words: ten) days of the effective date of this Contract, the Purchaser will propose that the Cadastral Office Prague - City issue a permit to enter the ownership right to the Real Estate. 2. The Parties have agreed that in the event that by the date of the transfer of the ownership rights for the Real Estate to the Purchaser, the Real Estate is terminated or is fundamentally devalued, or if the entering of the Purchaser's ownership right to the Real Estate is not permitted through no fault of the Purchaser, this Contract loses its validity and effect. 3. The Purchaser has the right to withdraw from this Contract if the Seller violates Article IV. of this Contract. 4. The Seller has the right to withdraw from this Contract if the Purchaser violates Article IV. of this Contract. 5. The Parties have agreed that in the event of withdrawal from this Contract, this Contract becomes null and void, and the Parties are obligated to return the mutually provided fulfillment to each other. 6. The Parties acknowledge that the ownership rights to the Real Estate will pass to the Purchaser upon the date of the legal power of the Cadastral Office Prague - City's decision to permit the entering of the ownership right to the Real Estate to the Purchaser, on the date of filing the proposal for entry. 7. The Parties acknowledge that the Rights and Obligations will pass to the Purchaser upon the date of the legal power of the Cadastral Office Prague - City's decision to permit the entry of the ownership right to the Real Estate to the Purchaser, on the date of filing the proposal for entry. 8. The Parties have agreed that the tax on real estate transfer will be paid by the Seller and that administrative and other fees associated with this Contract, including the expenses for the drafting of this Contract, will be paid by the Purchaser. 9. The Parties have agreed that on the date of filing the proposal for entry of the Purchaser's ownership of the Real Estate, the lien contract on a part of the Real Estate in favor of the Seller signed by the Purchaser and the Seller on January 31, 1993, number V2 2869/97 and the last version of the lease contract signed by the Purchaser and the Seller on December 27, sixth page 6 1993 are abolished. The Parties have agreed on a condition subsequent of this abolishment which would come on if that the Cadastral Office does not allow to entry the Purchaser's ownership of the Real Estate. In this case the lien contract, signed by the Purchaser and Seller on January 31, 1993, number V2 2869/97 and the lease contract, signed by the Purchaser and the Seller on December 27, 1993, will be considered as not abolished, in their last version valid on the date of filing the proposal for entry. ARTICLE VI. FINAL PROVISIONS 1. This Contract becomes valid upon the date of its signing by both Parties and effective on June 1, 1997. 2. This Contract is closed according to the laws of the Czech Republic. 3. This Contract is drafted in 6 (in words: six) copies of which each is considered to be original. 2 (in words: two) copies will be submitted along with the appropriate proposal and other documents to the Cadastral Office Prague - City for the purpose of initiating the proceedings on permitting the entry of the Purchaser's ownership right to the Real Estate. Each of the Parties will receive 2 (two) copies. 4. This Contract supersedes any contracts, agreements, and declarations between the Parties on the subject of this Contract that preceded this Contract. 5. Any amendments and supplements to this Contract must be executed in writing and signed by both Parties. 6. If any of the provisions of this Contract are found invalid or ineffective, and if this fact will not influence the validity or effect of this Contract as a whole, the other provisions of this Contract are still considered valid and effective. 7. Any notifications or other documents relating to this Contract will be delivered by the Parties to the Parties' addresses as specified in the heading of this Contract. 8. Any disputes arising from this Contract will be first solved by conciliation. If no conciliation is achieved within 30 (in words: thirty) days of the date of the occurrence of the dispute, the Parties will address the Court of Arbitration at the Economic Chamber of the Czech Republic and the Agrarian Chamber of the Czech Republic (hereinafter only as the "Court") seventh page 7 which will rule according to its procedural rules. The Parties undertake to respect the Court's finding. 9. The Parties declare that they thoroughly read the Contract before its signing, that the Contract was specifically, seriously, and understandably drafted according to their true will, and that it was not negotiated under duress or under otherwise unfavorable conditions. ARTICLE VII. LAND REGISTRY CLAUSE Both Parties propose in concurrence that, according to this Contract, the following is recorded in the Registry of Deeds at the Cadastral Office Prague - City on ownership deed no. 1326 for the cadastral area of Nove Mesto, county Prague 2, district Prague: ALV: Ceska nezavisla televizni spolecnost, spol. s r. o., Prague 1, Vladislavova 20, IDN: 49 61 66 68, 1/1 in respect to the whole BLV: without changes CLV: lien Contract Czech Savings Bank, joint-stock company - headquarters in Prague 328,000,000 CZK pursuant to the Loan Contract No. 4503-164855-988/0800 number V2 10053/93 DLV: no record ELV: purchase agreement of May 21, 1997 In witness of the acknowledgment of the effects of this Contract and in a position in which the Parties were under no duress and were not aware of any unfavorable conditions, the Parties entered this Contract into validity and signed it in front of JUDr. Martin Radvan, attorney at law, register no. 0448, at the law offices of Radvan & Co., Jindrisska 20, after he determined their identities. In Prague on May 21, 1997 (twenty first day of May nineteen ninety-seven) eight page 8 ______________________________ _________________________________ Seller Purchaser _________________________________ JUDr. Martin Radvan nine page EX-27.01 6 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 16,949 2,880 31,117 (3,291) 0 88,039 55,622 25,670 303,519 67,798 0 0 0 239 200,320 303,519 70,634 70,634 0 70,210 30,810 0 3,287 (35,643) (6,833) (41,820) 0 0 0 (41,820) (1.75) 0.000
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