Item 1. BUSINESS
General
Central European Media Enterprises Ltd. ("CME") is a Bermuda corporation. All references to the "Company" include CME and its direct and indirect Subsidiaries, and all references to "Subsidiaries" include each corporation or partnership in which CME has a direct or indirect equity or voting interest.
The Company is the leading commercial television company in Central and Eastern Europe. The Company's national private television stations and networks in the Czech Republic, the Slovak Republic, Slovenia and Ukraine had the leading nationwide audience shares for 1998 and the Company's television network in Romania had the leading average audience share within its area of broadcast reach for 1998. The Company's television studios, production facilities and editing suites at its national television stations produced approximately 14,000 hours of original programming in 1998 to support the Company's broadcasting operations, making it the largest private producer of local television programming in Central and Eastern Europe.
The Company's television stations and networks, which reach an aggregate of approximately 84 million people in six countries, consist of the following:
(1) 50% interest owned by UAH
Czech Republic
The Company currently owns a 99% voting and economic interest in Ceska Nezavisla Televizni Spolecnost s.r.o. ("CNTS"), with the remaining 1% voting and economic interest in CNTS held by CET 21 s.r.o. ("CET"). CET holds a terrestrial television broadcast license in the Czech Republic that expires in January 2005. Dr. Vladimir Zelezny, the General Director of both CET and CNTS, owns a controlling 60% participation interest in CET. CNTS is governed by a Memorandum of Association and Investment Agreement. The Company has the right to appoint five of the seven members of CNTS's Committee of Representatives,
which directs the affairs of CNTS. A representative of CET has certain delay and veto rights on non-economic programming matters related directly to the broadcast license.
CNTS provides television and related services to CET, which broadcasts the Nova TV signal, pursuant to a Services Agreement with CET dated May 21, 1997 (the "Services Agreement"). In consideration for its activities under the Services Agreement, CNTS is entitled to retain revenues from sales of advertising on Nova TV less a monthly fee paid to CET.
On March 19, 1999, CET provided CNTS with a copy of a letter, dated March 15, 1999 addressed to Dr. Zelezny as executive of CET and signed by the Chairman of the Czech Media Council, in which the Czech Media Council takes positions that appear inconsistent with the existing relationship between CNTS and CET. Among other things, the Czech Media Council has questioned the exclusive nature of the commercial relationship between CNTS and CET and the manner in which CET enters into certain broadcasting-related contracts. CME believes that the structure of Nova TV and the contracts and business dealings between CET and CNTS are in compliance with all applicable Czech laws and regulations. However, there can be no assurance that the Czech Media Council will conclude, as it has in the past, that such dealings are in compliance and there can be no assurance that the Czech Media Council will not require modifications of the arrangements between CET and CNTS.
In this connection, CME has recently been engaged in discussions and negotiations with Dr. Zelezny regarding the relationship between CNTS and CET, including with respect to actions taken and proposed to be taken by CET concerning the acquisition of programming for CET and other matters with which CNTS disagrees. On behalf of CET, Dr. Zelezny has requested certain modifications in the CNTS Memorandum of Association and Investment Agreement and the Services Agreement, which modifications CME is resisting. CME has proposed to Dr. Zelezny alternative arrangements that it believes would solidify CNTS's contractual relationship with CET and satisfy Dr. Zelezny's concerns regarding the existing arrangements. However, there can be no assurance that CME and CNTS will be able to reach a satisfactory agreement with CET and Dr. Zelezny.
CME and CNTS intend to take all available actions to protect their legal rights and financial interests in connection with Nova TV, and it is possible that the current disagreements with Dr. Zelezny could result in protracted litigation. If the Czech Media Council were to require significant changes in the current arrangements between CNTS and CET, or if the differences between CNTS and CET cannot be resolved, one or more material adverse affects on the business and financial condition of CNTS and CME could result, including a substantial reduction in the economic benefits currently enjoyed by CNTS and CME and, potentially, a termination of the existing commercial relationship between CNTS and CET.
The Company owns a 76% interest in Radio Alfa a.s. v likvidoci, ("Radio Alfa"), formerly the service provider for a private national radio broadcaster in the Czech Republic. The license to operate the radio station expired in February 1999. Radio Alfa ceased to provide services as of December 31, 1998 and is being liquidated.
Romania
The Company's interest in PRO TV is governed by a Cooperation Agreement (the "Romanian Agreement") among the Company, Adrian Sarbu and Ion Tiriac, forming Media Pro International S.A. ("MPI"), through which PRO TV and Acasa, which was launched in February 1998, are operated. MPI provides programming to and sells advertising for the stations which comprise the PRO TV and Acasa network. Pursuant to the Romanian Agreement, the Company owns 66% of the equity of MPI. Interests in profits of MPI are equal to the partners' equity interests. The Company has the right to appoint three of the five members of the Council of Administration which directs the affairs of MPI. Although the Company has majority voting power in MPI, with respect to certain fundamental financial and
corporate matters the affirmative vote of either Mr. Sarbu or Mr. Tiriac is required. The Company owns 49% of the equity of PRO TV, SRL which holds 20 of the 23 licenses for the stations which comprise the PRO TV and Acasa network. Messrs. Sarbu and Tiriac own substantially all of the remainder of PRO TV, SRL. The remaining three licenses for the PRO TV network together with the licenses for the PRO FM and PRO AM radio networks are held by Media Pro SRL, a company owned by Messrs. Sarbu and Tiriac. In addition, in Romania, the Company owns 70% of each of Media Vision SRL ("Media Vision"), a production and dubbing company, and Video Vision International SRL ("Video Vision"), a post-production company.
On March 18, 1999, the Company sold its 9.6% equity interest in MobilRom S.A., a GSM telephone operator in Romania.
Slovenia
The Company's interest in POP TV and Gajba TV is governed by a Partnership Agreement among the Company, MMTV 1 d.o.o. Ljubljana ("MMTV") and Tele 59 d.o.o. Maribor ("Tele 59"), forming Produkcija Plus d.o.o. ("Pro Plus"). Pro Plus provides programming to and sells advertising for the broadcast licenseholders MMTV and Tele 59 as well as additional affiliates. The Company currently owns 78% of the equity in Pro Plus, but has an effective economic interest of 85.5% as a result of its right to 33% of the profits of MMTV and 33% of the profits of Tele 59. Tele 59 currently owns a 21% equity interest in Pro Plus, and MMTV currently owns a 1% equity interest in Pro Plus. The Company owns 10% of the equity of each of Tele 59 and MMTV. Voting power and interests in profits of Pro Plus are equal to the partners' equity interests. All major decisions concerning the affairs of Pro Plus are made by the general meeting of partners and require a 70% affirmative vote. Certain fundamental financial and corporate matters require an 85% affirmative vote of the partners. The Company also owns a 20% interest in Meglic Telecom d.o.o. ("MTC") a cable operator in Ljubljana which owns a 67% economic interest in MMTV. In July 1996, the Company, together with MMTV and Tele 59, entered into an agreement to purchase a 66% equity interest in Kanal A, a privately owned television station in Slovenia, which competes with POP TV (the "Kanal A Agreement"). There is currently an injunction in effect preventing the completion of the Kanal A Agreement. See Item 3 "Legal Proceedings".
Slovak Republic
The Company's interest in Markiza TV is governed by a Participants Agreement dated September 28, 1995 (the "Slovak Agreement") between the Company and Markiza-Slovakia s.r.o. ("Markiza") forming Slovenska Televizna Spolocnost, s.r.o. ("STS"). Pursuant to the Slovak Agreement, the Company is required to fund all of the capital requirements of, and holds a 49% voting interest and an 80% economic interest in STS. Markiza, which holds the television broadcast license, and STS have entered into an agreement under which STS is entitled to conduct television broadcast operations pursuant to the license. On an ongoing basis, the Company is entitled to 80% of the profits of STS, except that until the Company is repaid its capital contributions plus a priority return at the rate of 6% per annum on such capital contributions, 90% of the profits will be paid to the Company. A Board of Representatives directs the affairs of STS, the composition of which includes two designees of the Company and three designees (two of whom have been named) of Markiza; however, all significant financial and operational decisions of the Board of Representatives require a vote of 80% of its members. In addition, certain fundamental corporate matters are reserved for decision by a general meeting of partners and require a 67% affirmative vote of the
partners. There is currently a litigation pending with respect to the ownership of Markiza. See "Item 3, Legal Proceedings".
Ukraine
The Studio 1+1 Group consists of several entities in which the Company holds direct or indirect interests. The Company owns a 60% (increased from 50% in December 1998) equity interest in each of Innova Film GmbH ("Innova"), Ukraine Advertising Holding B.V. ("UAH") and International Media Services ("IMS"). UAH holds a 50% equity interest in Prioritet, a Ukrainian company engaged in advertising sales. Innova holds 100% of Intermedia, a Ukrainian company ("Intermedia"), which in turn holds a 30% equity interest in a separate Ukrainian company which holds the license to broadcast programming and sell advertising on UT-2 (the "UT-2 License"). Innova, IMS, Intermedia and Prioritet have entered into arrangements regarding the provision of programming and advertising sales services to Studio 1+1. Interests in profits of each entity in the Studio 1+1 Group are equal to equity interests held in such entities. All significant decisions of the entities in the Studio 1+1 Group are reserved for decision of the shareholders, requiring a majority vote (other than decisions of the shareholders of the Ukrainian company which holds the UT-2 broadcast license, which require a 75% vote). Certain fundamental corporate matters of these entities require 61% shareholder approval.
Hungary
In Hungary, the Company owns a 99% (increased from 89% in December 1998) equity interest in Budapesti Kommunikacios Rt ("TV3"), a television station distributing its signal via MMDS in Budapest and via satellite to cable systems throughout Hungary. The Company has the right to appoint all of the five members of the Board of Directors of TV3, all decisions of which require a simple majority. See Item 3 "Legal Proceedings" regarding the Company's consortium Irisz TV. The Company wholly owns Videovox Studio Limited Liability Company ("Videovox"), a Hungarian dubbing and duplication company.
Corporate
CME Development Corporation, a wholly owned subsidiary of the Company, provides financial, legal, marketing, business development and administrative support services to the Company. CME Programming Services, Inc., a wholly owned subsidiary of the Company, provides programming, production and satellite transmission services to the Company's television broadcast operations in Central and Eastern Europe. See "Corporate Operations."
The Company's registered offices are located at Clarendon House, Church Street, Hamilton HM CX Bermuda, and its telephone number is 441-296-1431. Certain of the Subsidiaries maintain offices at 18 D'Arblay Street, London W1V 3FP England, telephone number 44-171-292-7900.
Operating Environment
Private commercial television stations (those which derive the majority of their revenues from the sale of advertising) generally began broadcasting in the United States in the 1940s, in most parts of Western Europe in the 1980s, but not until the 1990s in Central and Eastern Europe. Commercial television has become an important medium for advertisers in the more developed advertising markets. For example, in 1998 television advertising
expenditures totaled $44 billion in the United States and an aggregate of $25 billion in the 15 countries in the European Union. The Company believes that, over time, television advertising expenditures in Central and Eastern European countries, which are currently relatively low, will follow a pattern of development similar to that of Western Europe and the United States.
The following two tables set forth (i) the population, number of TV households, per capita GDP and cable penetration for those countries of Central and Eastern Europe where the Company has broadcast operations and (ii) the recent growth in television advertising expenditures in those countries.
- -------------------- (1) Source: United States Bureau of the Census, February 1999.
(2) Source: IP European Key Facts: Television '98. A TV household is a residential dwelling with one or more television sets.
(3) Source: Economist Intelligence Unit (except Slovenia, Source: TV East Europe January 1999).
(4) Source: IP European Key Facts: Television '98 (except Slovenia and Ukraine, Source: CME stations).
Television Advertising Expenditures
Note: All figures are current Company estimates. "N/A" - estimates not available.
European Regulations
Access to the available frequencies is controlled by regulatory bodies in each country in which the Company operates. New awards of licenses to use broadcast frequencies occur infrequently.
The European Union
If any Central or Eastern European country in which the Company operates becomes a member of the European Union (the "EU"), the Company's broadcast operations in such country would be subject to relevant legislation of the EU, including programming content
regulations. The Czech Republic, Hungary, Romania, the Slovak Republic and Slovenia have entered into or signed Association Agreements with the EU and some or all of these countries may be admitted to the EU as early as 2002.
The EU's Television Without Frontiers directive (the "EU Directive") sets forth the legal framework for television broadcasting in the EU. It requires broadcasters, where "practicable and by appropriate means," to reserve a majority proportion of their broadcast time for "European works." Such works are defined as originating from an EU member state or a
signatory to the Council of Europe's Convention on Transfrontier Television, as well as written and produced mainly by residents of the EU or Council of Europe member states. In addition, the EU Directive provides for a 10% quota of either broadcast time or programming budget for programs made by European producers who are independent of broadcasters. News, sports, games, advertising, teletext services and teleshopping are excluded from the calculation of these quotas. Further, the EU Directive provides for regulations on advertising, including limits on the amount of time that may be devoted to advertising spots, including direct sales advertising. Member states are free to introduce stricter content requirements than those in the EU Directive for broadcasters within their jurisdiction. The Company intends to align its broadcast operations with any applicable EU legislation. The Company believes that the EU Directive, as currently drafted, will not have a material adverse effect on its operations.
Council of Europe
The Company's broadcast operations are all located in countries which are members of the Council of Europe, a supranational body through which international conventions are negotiated. In 1990, the Council of Europe adopted a Convention on Transfrontier Television, which provides for European programming content quotas similar to those in the EU Directive. This Convention has been ratified by some of the countries in which the Company operates (including Hungary and the Slovak Republic), but all countries in which the Company operates have already implemented its principles into their national media legislation.
Corporate Operations
The Company's London based central service organization provides each television operation with a central resource, particularly in the start-up or early development phase of any project. The service functions provided include development, programming services and advertising sales.
Development
CME Development Corporation ("CME Development") provides services to CME to assist it in managing the growth of its current operations, expanding its operations into new strategic markets, forming potential joint ventures and strategic alliances and executing acquisitions. CME Development also assists CME in identifying attractive markets for expansion as well as local partners in such markets, determines the vehicles through which, as well as the manner in which, the Company will enter such markets and oversees the implementation of these plans.
Programming Services
Through CME Programming Services, Inc. ("CME Programming"), the Company provides an array of program-related services to its television operations in Central and Eastern Europe, including facilitating international contacts; program acquisition; schedule advisory; coordination of viewer research; exchange of best practices and expertise among the stations; various programming related studies and analyses; and legal advice. The Company has begun to, and intends to continue to, reduce overall program costs by co-ordinating the purchase of rights to films and programming on a regional basis, which the Company believes will provide it with significant advantages with international studios relative to national competitors.
Advertising Sales
The Company's advertising sales department initiates, develops and maintains relationships between individual stations and networks and multinational advertisers and advertising agencies. The advertising sales department also provides the Company's stations and networks with advertising sales training and marketing, pricing and operational expertise.
Other
The Company provides technical expertise and support relating to broadcasting and transmission for all of its operations. The Company also provides certain centralized financial and legal services for its broadcast operations, including financial planning and analysis, cost control and network management.
As seen in the table below, the Company's stations have the leading position in five out of six markets.
- ------------------ (1) Second channels in Romania (Acasa) and Slovenia (Gajba TV) are not included in this table (2) Source: CME stations (3) Nationwide audience share and rank (except Romania, which is audience share and rank within coverage area).Source: (Czech Republic: Taylor Nelson AGB, Romania: CSOP Gallup, Slovenia: Gral Marketing, Slovak Republic: Visio/MVK, Ukraine: SOCIS Gallup/Peoplemeter AGB Ukraine, Hungary: AGB Hungary)
Operations in the Czech Republic: Nova TV
General
The Czech Republic is a parliamentary democracy of approximately 10.3 million people, which the Company believes has developed a stable market economy. Per capita GDP was an estimated $5,490 in 1998. On March 12, 1999, the Czech Republic formally joined NATO. Prior to 1992, television advertising in the Czech Republic was limited to two
public channels. Since the onset of privatization activities in 1992, the Company estimates that the television advertising market in the Czech Republic has expanded to approximately $188 million in 1998.
Nova TV is the leading commercial television station in the Czech Republic. Nova TV broadcasts pursuant to a 12 year license awarded to CET, which expires in January 2005. Nova TV reaches 99% of the Czech Republic's population.
By adopting a different programming strategy than that historically followed by public television stations, including a mix of locally produced news and entertainment formats and film and television series acquired from international distributors, Nova TV has built and maintained significant market share during its first five years of operations. According to surveys undertaken by the independent polling agency Taylor Nelson AGB using Peoplemeter devices, Nova TV achieved an average nationwide audience share of 52% in 1998. Audience share represents the percentage of televisions turned on at a particular time which are tuned to a particular television station.
Programming
Nova TV's programming strategy is to appeal to a mass market audience. The station broadcasts for 20 hours daily, including locally produced news, sports (including coverage of the Czech Republic's national soccer league), variety shows and other programming, as well as a broad range of popular films and series from international distributors. In 1998, Nova TV aired 3,275 hours of original local programming, which primarily consisted of light entertainment formats and game shows, a daily breakfast show, news broadcasts and news related shows and current and public affairs programming. In 1998, such original local programming comprised approximately 44% of Nova TV's broadcast time.
Nova TV has acquired exclusive broadcasting rights in the Czech Republic or in the Czech language to a number of successful American and Western European programs and films (e.g., "Beverly Hills 90210", "Melrose Place", "Stargate", "Hercules" and "X-Files") produced by such companies as MGM, Warner Bros., Columbia Tri-Star Television and Paramount. In addition, Nova TV has recently entered into a three year exclusive deal for broadcasting the Ice Hockey World Championships. Nova TV has agreements with CNN, Reuters and APTN to receive foreign news reports and film footage to integrate into its news programs. Nova TV produced and co-organized many special events in 1998 including the Music Academy Awards and Miss Czech Republic. All foreign language programs and films are dubbed into the Czech language except for film musicals, which are subtitled.
Advertising
Nova TV derives its revenues principally from the sale of commercial advertising time. In the Czech Republic most television advertising is sold through independent agencies and media buying groups. Nova TV currently serves over 200 advertisers, including large multinational advertisers such as Procter & Gamble, Unilever, Henkel and Nestle. In 1998, no single advertiser accounted for more than 10% of Nova TV's revenues.
Nova TV is permitted to broadcast advertising for up to 10% of its broadcast time. In addition, a further 10% of broadcast time may be used for "direct sales" advertising. Its primary competitor, CT1, a public television station, is restricted to 1% of daily broadcast time for advertising. The Council for Radio and Television Broadcasting in the Czech Republic (the
"Czech Radio and Television Council") and the Act on the Operation of Radio and Television Broadcasting make certain distinctions between private and public broadcasters. For example, private broadcasters, such as Nova TV, are permitted to interrupt programming with advertising, while public broadcasters may not.
Competition
Nova TV competes principally with CT1, which reaches 100% of the population, for audience, programming and advertising. Nova TV competes on a more limited basis with CT2, a public network of regional frequencies which reaches approximately 95% of the Czech Republic's population and Prima TV, a privately owned and operated television station serving approximately 75% of the country's population. There are no other significant television stations broadcasting Czech language programming to the Czech Republic.
Limited competition for viewers also comes from local and foreign stations transmitted through cable and satellite television. Approximately 17% of all Czech Republic households currently have cable television and approximately 15% receive direct-to-home satellite television. The media authorities in the Czech Republic have licensed several companies to provide cable television services to the Czech Republic. The largest is Kabel Plus, with over 440,000 subscribers in the Czech and Slovak Republics. Czech authorities require cable operators to carry all over-the-air broadcasting within their areas free of charge.
Nova TV competes for revenues with other media, such as newspapers, radio, magazines, outdoor advertising, transit advertising, telephone directory advertising and direct mail.
Regulation
Nova TV and the terms of the license granted to CET are regulated by the Czech Radio and Television Council pursuant to recently amended legislation. The license was granted to CET by the Czech Radio and Television Council until January 2005. See "Corporate Structure--Czech Republic" for a description of certain potential disputes regarding Nova TV.
Under Czech legislation and license terms, Nova TV is required to comply with certain restrictions on programming and advertising. In addition to the restrictions discussed above under "--Advertising," advertising is not permitted during children's programming or the evening news. Restrictions on advertising content include that (i) tobacco advertising is prohibited, (ii) advertising targeted at children before or after children's programming is prohibited if such advertising promotes behavior that would endanger the health, physical or moral development of children, (iii) advertising of alcoholic beverages is restricted but not prohibited and (iv) members of the news department of Nova TV are prohibited from appearing in advertisements. There are also restrictions on the frequency of advertising breaks within a program.
Operations in Romania: PRO TV and Acasa
General
Romania is a parliamentary democracy of approximately 22.3 million people. Per capita GDP was an estimated $1,830 in 1998. Approximately 86% of Romanian households have one or more television sets, and cable penetration is approximately 44%. According to the Company's estimates, television advertising totalled approximately $87 million in 1998.
PRO TV is a national television broadcast network in Romania which was launched in December 1995. PRO TV reaches approximately 71% of the Romanian population of 22.3 million, including 94% of the urban population. PRO TV broadcasts from studios located in Bucharest via digitally encoded satellite signals which deliver programming to terrestrial broadcast facilities and to approximately 250 cable systems throughout Romania. The Company anticipates that PRO TV will be able to continue to increase its reach from current levels through utilizing additional regional licenses which have been granted to entities currently controlled by PRO TV, SRL and through affiliations with other local broadcasters and agreements with cable carriers. Independent research from CSOP Gallup International in Romania shows that PRO TV is currently the top-rated television station in its broadcast area, with an average television viewer share of approximately 38% for 1998.
In February 1998, MPI launched Acasa, a station reaching approximately 54% of the Romanian population, including approximately 86% of the urban population via satellite and cable distribution. From February to December 1998 Acasa had an average television viewer share in its broadcast area of approximately 7%.
The Company has a controlling interest in Media Vision and Video Vision. Media Vision is the leading television production company in Romania and produces a significant portion of PRO TV's entertainment programming, including gameshows, concerts, music videos and live special events, and performs dubbing. Media Vision produces advertising spots for third party clients such as Coca Cola, Colgate-Palmolive and L'Oreal. Video Vision, Romania's leading provider of television post-production and graphics, provides a significant portion of PRO TV's and Acasa's graphics.
MPI also operates PRO FM, a radio network which is broadcast through owned and affiliate stations to approximately 9 million people in Romania. In 1998, PRO FM had an average audience share of 14.8% in the Bucharest area.
Programming
PRO TV's programming strategy is to appeal to a mass market audience through a wide range of programming, including movies and series, news, sitcoms, telenovellas, soap operas and game shows. PRO TV broadcasts 24 hours of programming daily. Approximately 40% of PRO TV's programming is comprised of locally produced programming, including, news and news related programs, sports, a breakfast show, game shows and talk shows.
PRO TV has secured exclusive broadcast rights in Romania to a large number of quality American and Western European programs and films (e.g., "Ally McBeal", "NYPD Blue", "Seinfeld", "E.R.", "Soldier of Fortune" and "Melrose Place") produced by such companies as Warner Bros. and Fox. PRO TV also receives foreign news reports and film footage from Reuters, APTN and ENEX to integrate into its news programs. In 1998 PRO TV aired such special events as the MTV European Music Awards and the MTV Movie Awards, and provided coverage of the NBA. All foreign language programs and films are subtitled in Romanian.
Acasa's programming strategy is to target a female audience on weekdays through programming including telenovellas, films and soap operas. Sunday programming consists mostly of sports events targeted to male viewers, including coverage of the United States Open tennis tournament. Acasa's viewer demographics are complementary to PRO TV's,
providing an attractive advertising medium for small to medium sized companies that would not otherwise advertise on television. There are two hours of local programming per week, including a cookery show and interviews. The most popular shows in 1998 were "The Bold and the Beautiful", "Sisters" and "Days of our Lives".
Advertising
PRO TV derives revenues principally from the sale of commercial advertising time, sold both through independent agencies and media buying groups. PRO TV currently serves approximately 450 advertisers, including multinational companies such as Unilever, Coca Cola, Henkel, Colgate and Procter & Gamble. No single advertiser dominates the market.
PRO TV is permitted to broadcast advertising for up to 20% of its broadcast time in any hour, subject to an overall daily limit of 15% of broadcast time. An additional 5% of broadcast time may be used for direct sales advertising. There are also restrictions on the frequency of advertising breaks (for example, news and children's programs shorter than 30 minutes cannot be interrupted). These restrictions are the same for public and private broadcasters.
Competition
Prior to the launch of PRO TV, TVR 1, a public station, was the dominant broadcaster in Romania. In 1998, PRO TV achieved an average audience share of 38% in its coverage area, while TVR 1's 1998 average audience share in PRO TV's coverage area was approximately 17%. TVR 1 reaches 99% of the Romanian population. Other competitors include the second public national station, TVR 2, with a 70% broadcast reach, and privately owned Antena 1, Tele 7 ABC and Prima TV, which reach approximately 50%, 35% and 35% of the population, respectively.
Additional competitors include cable and satellite stations. Cable and satellite currently penetrate approximately 44% and 9%, respectively, of the Romanian market respectively. PRO TV competes for advertising revenues with other media such as newspapers, radio, magazines, outdoor advertising, telephone directory advertising and direct mail.
Regulation
Licenses for the television stations which show programming provided by PRO TV and which broadcast advertising sold by PRO TV are regulated by Romania's National Audio-Visual Commission. PRO TV's television licenses have been granted for seven-year periods. Licenses which cover 17% of the Romanian population, including the license for Bucharest expire in 2001. The remaining licenses expire on dates ranging from 2002 to 2006. Under regulations established by the National Audio-Visual Commission and the various licenses of stations which broadcast PRO TV, programming and advertising provided by PRO TV is required to comply with certain restrictions. These restrictions include a requirement that at least 40% of programming be "own" produced.
Regulations related to advertising content include (i) a ban on tobacco and restrictions on alcohol advertising, (ii) advertising targeted at children or during children's programming must account for the overall sensitivity of that age group and (iii) members of the news department of PRO TV are prohibited from appearing in advertisements.
Operations in Slovenia: POP TV and Gajba TV
General
Slovenia, a parliamentary democracy of 2.0 million people, had an estimated per capita GDP of approximately $9,240 in 1998, the highest among the former Eastern bloc countries. Approximately 97% of Slovenian households have one or more televisions. According to the Company's estimates, television advertising totalled $51 million in 1998.
The national television broadcast network POP TV reaches approximately 84% of the population of Slovenia, including Ljubljana, the capital of Slovenia, and Maribor, Slovenia's second largest city. Independent research shows that in the areas of Slovenia in which POP TV can be seen, the network had an average television viewer share of approximately 45% for 1998, the largest share of television viewers in Slovenia.
In October 1997, the Company launched Gajba TV, the Company's second television broadcast network in Slovenia. Gajba TV is operated through Pro Plus and provides programming to, and sells advertising for, its affiliate broadcasters. The Gajba TV signal is also carried by a cable channel operated by Tele 59 in Maribor. Gajba TV reaches approximately 49% of the population of Slovenia. In 1998 it had an average television viewer share of approximately 3.6% in its coverage area.
Programming
POP TV's programming strategy is to appeal to a mass market audience through a wide variety of programming including movies, news, variety shows, features and dramatic series. POP TV broadcasts for 19 hours of programming daily, of which approximately 28% is locally produced programming, including news, game shows, music shows and variety shows.
POP TV has secured exclusive program rights in Slovenia to a number of successful American and Western European programs and films (e.g., "E.R.", "X-Files", "Friends", "Beverly Hills 90210", "Melrose Place") produced by studios such as Warner Bros., Fox and Worldvision. Special events aired in 1998 included the Academy Awards, Miss World and Formula One racing. Pro Plus has agreements with CNN, Reuters and APTN to receive foreign news reports and film footage to integrate into news programs. All foreign language programs and films are subtitled in Slovenian.
Gajba TV's programming strategy is to complement the POP TV profile with a variety of series and features including sci-fi, adventure and youth series as well as hourly local community shows. Gajba TV broadcasts for 10 hours per day, and features movies and series from international distributors as well as locally produced news, variety shows and other programs.
Advertising
POP TV derives revenues principally from the sale of commercial advertising time. Current multinational advertisers include firms such as Master Foods, Henkel, Procter & Gamble, Wrigley and Colgate, though no one advertiser dominates the market. During 1998 "Peoplemeter" devices were placed in a number of television homes, although they are not yet the primary source for POP TV's rating information. POP TV is permitted to broadcast advertising for up to 15% of its daily broadcast time and there are also restrictions on the
frequency of advertising breaks during films and other programs. The same rules apply to its competitors.
Competition
Historically, the television market in Slovenia has been dominated by SLO 1, a national public television station. The other national public station, SLO 2 provides programming which is complementary to SLO 1. SLO 1 reaches nearly all of Slovenia's TV households, and SLO 2 reaches 95% of Slovenia's TV households. No national private television frequency has been made available in Slovenia. Two private television stations which compete with POP TV in Slovenia, Kanal A and TV3, have achieved a relatively small audience share, together less than 14%, due primarily to their low budget programming and lack of extensive news programming.
POP TV also competes with foreign television stations, particularly Croatian, Italian, German and Austrian stations. Cable penetration at 40% is relatively high compared with other countries in Central and Eastern Europe and approximately 21% of households have satellite dishes. In addition, POP TV competes for revenues with other media, such as newspapers, radio, magazines, outdoor advertising, telephone directory advertising and direct mail.
In July 1996, the Company, together with MMTV and Tele 59, entered into an agreement to purchase a 66% equity interest in Kanal A, a privately owned television station in Slovenia which competes with POP TV. There is currently an injunction in effect preventing the implementation of the Kanal A Agreement. See Item 3 "Legal Proceedings."
Regulation
The POP TV and Gajba TV network stations operate under licenses regulated pursuant to the Law on Public Media adopted in 1994 and pursuant to the Law on Telecommunications adopted in 1997. The licenses granted to POP TV's affiliate stations have been granted for 10-year terms expiring in 2003 with respect to licenses reaching 53% of the population and in 2006 and 2007 with respect to the remaining licenses. Under Slovenian television regulations, POP TV and its affiliate stations are required to comply with a number of restrictions on programming and advertising. These restrictions include that 10% of the station's broadcast time must be internally produced programming, certain films and other programs may only be broadcast between 11:00 p.m. and 6:00 am, and POP TV news editors, journalists and correspondents must not reflect a biased approach toward news reporting.
In addition to the restrictions discussed above under "--Advertising," advertising is not permitted during news, documentary or children's programming under 30 minutes in duration, or during religious programming. Restrictions on advertising content include a prohibition on tobacco advertising and on the advertising of alcoholic beverages other than low alcohol content beer.
Operations in the Slovak Republic: Markiza TV
General
The Slovak Republic is a parliamentary democracy with a population of 5.4 million where nearly 100% of households have television. Per capita GDP was an estimated $3,960 in 1998. Television advertising increased approximately 19% in 1998 to $56 million, according to the Company's estimates, yet television advertising spending per capita in the Slovak Republic in 1998 was still only approximately 55% of that of the Czech Republic.
Markiza TV was launched as a national television station in the Slovak Republic in August 1996. Markiza TV reaches approximately 92% of the Slovak Republic's population of 5.4 million, including virtually all of its major cities. According to independent research, Markiza TV had an average national television viewer share for 1998 of approximately 50% versus 18% for its nearest competitor, STV 1. See Item 3 "Legal Proceedings".
Programming
Markiza TV's programming strategy is to appeal to a broad audience with specific groups targeted in marginal broadcasting hours. Markiza TV provides an average of 19.5 hours of programming daily, including news, movies, entertainment programmes and sport (including coverage of European Champion's League soccer, Formula One racing and ice hockey). Approximately 38% of Markiza TV's programming is locally produced, including a daily breakfast show, game shows, talks shows and news.
Markiza TV has secured exclusive broadcast rights in the Slovak Republic to a large number of popular United States and European programs and films (e.g., "E.R.", "Savannah", "Baywatch", "Love Boat", "Scarlet", "JAG") produced by major international studios including Warner Bros., Columbia Tri Star, Polygram, Paramount Pictures and Twentieth Century Fox. All foreign language programming is dubbed into the Slovak language. Markiza TV also receives foreign news reports and film footage from CNN, Reuters and APTN, which it integrates into news programs.
Advertising
Markiza TV derives revenues principally from the sale of commercial advertising time through media buying groups and independent agencies. Advertisers include large multinational firms such as Procter & Gamble, Henkel, Unilever, Wrigley and Benckiser. Television stations are permitted to broadcast advertising for up to 10% of total daily broadcast time and up to 20% of broadcast time in any single hour.
Currently, approximately 60% of Markiza TV's advertising revenues are sourced from agencies based in the Czech Republic. The Company expects that a greater proportion of advertising revenues will be sourced from the Slovak Republic as the local advertising market develops.
Competition
The Slovak Republic is served by two national public television stations, STV1 and STV2, which dominated the ratings until Nova TV and Markiza TV began broadcasting in 1994 and 1996, respectively. STV1 and STV2 reach nearly all of the Slovak population. Nova TV's signal reaches approximately one-third of the Slovak Republic's population and its launch provided the first alternative in the country to public television. Nova TV has maintained its popularity in the Slovak Republic, with an approximately 10% audience share for 1998. Markiza TV also competes with VTV, a private satellite broadcaster reaching 47% of
the population; public television stations located in Austria, the Czech Republic and Hungary with signals that reach the Slovak Republic; additional foreign private television stations; and foreign satellite stations.
Regulation
Markiza TV's broadcast operations are subject to regulations imposed by the Act on Radio and Television Broadcasting, the Act on Advertising and conditions contained in the license granted by the Council of the Slovak Republic for Broadcasting and Television Transmission (the "Slovak Television Council"). The Slovak Television Council granted the license to operate Markiza TV to the Company's local partner in STS for a period of 12 years, expiring in September 2007, under terms requiring the Company's local partner to enter into a partnership with the Company to found STS.
Under the license pursuant to which Markiza TV operates, Markiza TV is required to comply with several restrictions on programming. These restrictions include the following broadcast time rules: 40% must be Slovak production (increasing to a minimum of 51% in September 1999); 10% must be programming for children or youth; broadcasts of first run films and series must have a minimum of 47% European production (of which there must be a minimum of 8% Slovak production) and no more than 45% United States production; and no more than 40% of foreign first run films and series may be in the Czech language (decreasing to 20% by the fourth year of broadcasting). Markiza TV's programming is required to be consistent with the Slovak Constitution and not promote violence, hate, intolerance, or immoral behavior or intentionally use indecent language. Programming endangering the psychological or moral growth of children and youth cannot be broadcast between 6:00 am and 10:00 p.m., and Markiza TV's news broadcasts must be objective and balanced and clearly differentiate between opinion and news.
In addition to the restrictions discussed above under "--Advertising", regulations relating to advertising content include that (a) the news may not be sponsored and news staff may not appear in advertisements (b) tobacco advertising is prohibited, (c) advertising for children or in which children perform and which promotes behavior endangering the health, psychological or moral development of children is prohibited, and (d) advertising which endangers the viewer's morality, health, safety and environmental protection is prohibited. The advertisement of beer is permitted; however, advertisement of other alcoholic beverage is prohibited. There are also restrictions on the frequency of advertising breaks within a program.
Operations in Ukraine: Studio 1+1 Group
General
Ukraine, a parliamentary democracy of 49.8 million people, is the most populous market served by the Company. Nearly 100% of Ukrainian households have television, cable penetration is approximately 12% and satellite penetration is negligible. Per capita GDP of $810 for 1998 is the lowest of all the Company's markets, though television advertising in Ukraine grew by over 20% from $53 million in 1997 to $65 million in 1998.
Studio 1+1 broadcasts programming and sells advertising on Ukrainian National Channel Two ("UT-2"), one of Ukraine's state-owned television channels. UT-2 reaches approximately 95% of Ukraine's population. Television advertising in Ukraine was $65 million
in 1998 ($1.30 per capita). According to independent research, average national audience share in 1998 was 32% for Studio 1+1, 29% for Inter and 10% for UT-1. Studio 1+1 began broadcasting on UT-2 in January 1997.
Programming
Studio 1+1's programming strategy is to appeal to a mass market audience. The station broadcasts for 12 hours per day, including locally produced news, variety shows, game shows and magazine programmes as well as a broad range of popular and high quality films from international distributors. In 1998, Studio 1+1 produced and co-produced approximately 1,200 hours of programming (or approximately 35% of total programming hours), which primarily consists of a daily breakfast show, news broadcasts and news related programmes, talk shows, karaoke, game shows, a sport magazine, lifestyle magazine and comedy shows. In 1998, such original local programming together with other Ukrainian programming considered local programming by Ukrainian laws comprised approximately 49% of Studio 1+1's total broadcast time.
Studio 1+1 has secured exclusive territorial or local language broadcast rights in Ukraine to a large number of successful high quality American, Russian and Western European programs and films (e.g. "X-Files", "Beverly Hills 90210", "Chicago Hope", "Melrose Place", "E.R.", "Dr. Quinn", "Pretender", "Baywatch") from many of the major studios, including Twentieth Century Fox, Warner Bros., Paramount Pictures, Walt Disney, Universal Pictures, CBS International, Worldvision Enterprises and PolyGram. Special events aired include the Academy Awards ceremony, the soccer World Cup and Miss Europe '98. Studio 1+1 has agreements with Reuters, CNN and SNTV for foreign news packages and other footage to be integrated into its programming. All foreign language programs and films (other than those in the Russian language) are dubbed into the Ukrainian language. Studio 1+1 broadcasts more than 80% of its total air time in the Ukrainian language.
Advertising
Studio 1+1 derives revenues principally from the sale of commercial advertising time through both media buying groups and independent agencies. Advertisers include large multinational firms such as Procter & Gamble, Coca-Cola, Unilever, Nestle and Dandy. In 1998 Procter & Gamble accounted for 12% of advertising sales. Studio 1+1 is permitted to sell 15% of its overall broadcast time for advertising and is subject to restrictions on the frequency of advertising breaks. The advertising restrictions are the same for public and private broadcasters.
Competition
Ukraine is served by four television channels: UT-1, UT-2 (on which Studio 1+1 broadcasts) and UT-3, which are state owned, and ICTV, a private broadcaster. Studio 1+1, through UT-2, has a broadcast reach of 95% of the Ukrainian population. The state run station UT-1 has a broadcast reach of approximately 98% of the Ukrainian population. ICTV, a private station, reaches 32% of Ukraine's population. The private station Inter, through UT-3, has a broadcast reach of approximately 78% of the Ukrainian population. Inter's program schedule consists primarily of rebroadcasts of the Russian-language ORT network.
Regulation
Studio 1+1 provides programming to UT-2 pursuant to a ten-year television broadcast license contract expiring in January 2007. Broadcasts of Studio 1+1's programming and advertising on UT-2 are regulated by the State Committee on Television and Radio of Ukraine and the National Council on Television and Radio of Ukraine. These agencies enforce Ukraine's media laws, which include restrictions on the content of programming and advertising and limitations on the amount and placement of advertising in programs. All advertising of alcohol and tobacco on TV is banned in Ukraine. Programming produced in Ukraine must account for at least 70% of all programming and programming produced by Studio 1+1 must account for 49% of all programming.
Operations in Hungary: TV3
General
Hungary is a parliamentary democracy of 10.2 million people and had an estimated per capita GDP of $4,610 in 1998. On March 12, 1999 Hungary formally joined NATO. According to the Company's estimates television advertising totalled $183 million in 1998. Cable and satellite penetration are currently at 41% and 24% respectively. The 41% of the Hungarian population reached by TV3 are predominately in urban areas, including Budapest, and represent approximately 66% of the country's purchasing power.
TV3 is distributed via MMDS in Budapest and via satellite to cable systems throughout Hungary. TV3 reaches approximately 41% of Hungary's population. In 1998, TV3 had an average viewer share of approximately 6% in its coverage area.
Programming
TV3's programming strategy is to target a young urban audience. TV3 broadcasts for 16 hours per day, including four hours per day of the music channel VH1, locally produced news, magazines, sport (including soccer coverage of the English Premier League and Spanish Soccer League) and popular American films and series. TV3 produces original local programming, which primarily consists of news and news-related shows, a breakfast show and magazines on cinema, culture, science and music. Such local programming currently comprises 30% of total broadcast time.
TV3 has exclusive broadcast rights in Hungary to a number of successful American and Western European programs and films (e.g. "Frasier", "Police Academy", "Beverly Hills 90210", "Melrose Place", "Dynasty", "Married with Children", "The Simpsons", "MASH"), produced or distributed by such companies as Warner Bros., Fox, Columbia, MGM, Paramount, Orion, Canal + and Polygram. Special events aired in 1998 include coverage of the NBA. TV3 has agreements with Reuters and APTN to receive international news footage. All acquired programming is dubbed into the Hungarian language.
Advertising
TV3 derives revenues principally from the sale of commercial advertising time through independent agencies and media buying groups. Advertisers include Procter & Gamble, Unilever, Henkel and Master Foods. As a commercial television station, TV3 is allowed to advertise for 20% of every hour of broadcast time with a maximum of 15% of daily broadcast time, compared to the public TV stations, which may only advertise for 10% of every hour of
broadcast time. There are restrictions on advertising breaks related to the length of program being broadcast.
Competition
The national public channels, MTV1 and MTV2, reach 98% and 55%, respectively, of the Hungarian population. The commercial national stations TV2 and RTL Klub, were launched in October 1997. TV2 reaches 93% of the population and is on the air for 19 hours per day. RTL Klub reaches 88% of the population and is on air for 18 hours per day. TV3 competes for revenue with other media, such as newspapers, radio, magazines, outdoor advertising, transit advertising, telephone directory advertising and direct mail.
Regulation
TV3 is distributed by MMDS (multi channel multipoint distribution service) and satellite and is not required to operate pursuant to a broadcast license. However, TV3 is recognized as a national broadcaster by the Hungarian National Radio and Television Commission and is therefore subject to the Hungarian Radio and Television Act. Advertisements on TV3 may not exceed 15% of daily broadcast time and 12 minutes per hour. At least 20% of total annual broadcast time (not including feature films, advertisements, news, live sports and game shows) must be Hungarian produced. At least 15% of total annual broadcast time must be programming commissioned or purchased from an independent Hungarian production company that is not more than five years old. Six percent of total annual advertising revenues must be used for the creation of new Hungarian films or, in the alternative, 3% of annual advertising revenues may be donated to a Hungarian film production fund. Advertising of tobacco and alcohol is forbidden.
Hungary - IRISZ TV
In 1997, the Company formed a consortium, MKTV Rt. ("IRISZ TV"), which submitted an application for a national television broadcast licenses in a license tender competition. Following the award of these licenses to other consortia, IRISZ TV filed a complaint in the Budapest Capital Court challenging the license awards. See Item 3 "Legal Proceedings."
Seasonality
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.
Employees
As of March 12, 1999, CME had a corporate operations staff of 39 employees (versus 70 as of December 31, 1997) and its Subsidiaries had a total of approximately 2,900 employees (versus 2,500 as of December 31, 1997). None of CME's employees or the employees of any of its Subsidiaries are covered by a collective bargaining agreement. The Company believes that its relations with its employees are good.
Recent Developments
On March 18, 1999, the Company sold its equity interest in MobilRom S.A., a GSM cellular telephone network in Romania.
On March 24, 1999, Frederic T. Klinkhammer was elected President and Chief Executive Officer of CME, effective as of such date. Mr. Klinkhammer also was appointed to CME's Board of Directors. Mr. Klinkhammer was previously Chief Operating Officer and Executive Vice President of the Company. Mr. Klinkhammer succeeds Michel Delloye who is leaving CME to pursue other business opportunities.
On March 29, 1999, the Company entered into a Reorganization Agreement with SBS Broadcasting S.A. ("SBS"), which provides, among other things, for (a) the sale by the Company to SBS of all of the assets, business, properties and rights of the Company (consisting primarily of the stock of CME Media Enterprises B.V., an intermediate holding company wholly owned by CME); (b) the assumption by SBS of, and indemnification of the Company with respect to, all liabilities, obligations and commitments of the Company; (c) the issuance by SBS to the Company of a number of shares of SBS common stock, par value $1.50 per share ("SBS Stock"), equal to 0.5 times the total number of shares of the Company's Class A Common Stock and Class B Common Stock outstanding immediately prior to the closing of such transaction; and (d) the immediate commencement of the winding up of the Company and distribution of the SBS Stock so received by the Company to the shareholders of the Company (followed as soon as practical thereafter by the final dissolution of the Company). Accordingly, upon the closing of the transactions contemplated by the Reorganization Agreement, each shareholder of the Company would receive 0.5 shares of SBS Stock for each share of Common Stock of the Company owned by such shareholder.
The foregoing transaction is intended to be accounted for as a purchase, and to qualify as a reorganization under Section 268(a) of the Internal Revenue Code (and thus to be tax-free for US tax purposes to the shareholders of CME). The closing of the transaction is subject to a number of conditions precedent, some of which are beyond the control of the Company, including the approval of the shareholders of SBS. Ronald S. Lauder, who controls approximately 69% of the vote of the Company, has entered into a Shareholders Agreement with SBS whereby he commits to vote his shares of Class A and Class B Common Stock in favor of the transaction. In the event that the transaction is not consummated, the Reorganization Agreement provides various rights to the Company and to SBS, depending upon the circumstances.
Item 2.
Item 2. PROPERTIES
CME Development Corporation leases office space in London in two locations. One lease covers approximately 4,347 square feet of space and expires in 2004, except that the Company can terminate the lease at its option in 1999, subject to penalty. The second lease, for 2,205 square feet of office space in a nearby building, expires in 2006.
Nova TV occupies approximately 65,000 square feet, and modern studios have been constructed in the building, which is owned by CNTS. The Company has entered into an agreement on behalf of MPI which gives the Company the option to acquire the facility in Bucharest which contains PRO TV's studios for a purchase price of approximately $1.8 million. The Company owns a portion of a building in Ljubljana which contains POP TV's studios and offices. Videovox owns the building in Budapest in which its studios are located. STS owns its principal office facility near Bratislava. Studio 1+1 and TV3 both lease office and studio space.
Item 3.
Item 3. LEGAL PROCEEDINGS
The Company has been informed by CET that in May 1997, one of the owners of CET filed a claim against CET in the Regional Commercial Court of Prague alleging that CET did not satisfy all required procedures for approving certain transfers of CET ownership interests and requesting that such transfers be invalidated on the grounds that CET approved such transfers at procedurally deficient general meetings. The Court ruled in favor of the plaintiff. CET appealed the decision. The Company believes that the outcome of this action will not have an impact on the ownership structure of CET, as the transfers at issue were reconfirmed at subsequent general meetings of CET which have not been challenged.
The Company has been informed by CET that on July 31, 1998, the Czech Radio and Television Council notified CET that the Council had initiated an administrative proceeding to investigate allegedly unbalanced reporting of information on Nova TV in violation of Czech broadcasting regulations. Under applicable Czech media laws, such a proceeding could result in fines, withdrawal of the Nova TV broadcast license from CET or both. The Company has been informed that the proceeding has been terminated and that the written decision of the Council will be issued during the second quarter of 1999.
See Item 1 "Business--Corporate Structure--Czech Republic" for a description of certain potential disputes regarding Nova TV, CNTS and CET.
In August 1998, Gamatex Ltd., a Slovak company, asserted that it had obtained 100% ownership of Markiza-Slovakia s.r.o. through an auction process arising out of an unsatisfied claim against Markiza-Slovakia s.r.o. Markiza-Slovakia s.r.o. holds the Markiza TV broadcast license and owns a 51% voting interest in STS. A number of legal proceedings are pending in the District Court of Bratislava and Regional Court of Bratislava in which the original owners of Markiza-Slovakia s.r.o. have claimed that Gamatex's ownership claims are not legally valid.
STS has joined Markiza-Slovakia s.r.o. in a number of such proceedings, in particular proceedings to (i) confirm the interests of the original owners of Markiza-Slovakia s.r.o.; (ii) declare invalid Markiza-Slovakia s.r.o. and STS shareholders' meetings called by Gamatex without proper notice; and (iii) declare invalid Gamatex's claim to ownership in Markiza-Slovakia s.r.o.
In July 1996, the Company, together with MMTV and Tele 59, entered into an agreement to purchase a 66% equity interest in Kanal A, a privately owned television station in Slovenia (the "Kanal A Agreement"). Scandinavian Broadcasting System SA ("SBS"), which claims to have certain rights to the equity of Kanal A pursuant to various agreements, has challenged the validity of the CME-Kanal A Agreement in a United Kingdom court. The Court has enjoined both SBS and the Company from taking certain actions either to enforce such entity's claim to equity in Kanal A or to block the claim of the other entity to equity in Kanal A. The Company has instituted a number of actions in Slovene courts to resolve these claims.
On April 30, 1997, Perekhid Media Enterprise Ltd. ("Perekhid") filed a complaint in the Supreme Court of New York County, State of New York, against CME and Ronald S. Lauder, the non-Executive Chairman of the Company's Board of Directors. Perekhid alleged 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 sought compensatory damages of $250 million, punitive damages of $500 million, and an injunction against the Company and Mr. Lauder to prevent the continuation of the alleged conduct. On July 2, 1997, CME and Mr. Lauder filed a motion to dismiss the complaint. On April 8, 1998, the Court dismissed the complaint on grounds of forum non-conveniens. In June 1998, Perekhid filed a notice of appeal with the Court. Perekhid failed to proceed with such appeal within nine months from the date it filed the notice of appeal and as a result the appeal lapsed automatically in March 1999. On February 19, 1999, Atlantic Group Limited (formerly known as Perekhid Media Enterprise Ltd.) initiated proceedings against CME in the High Court in London, seeking $81,772,759 in damages. Atlantic Group Limited alleges that CME conspired with others to use unlawful means to procure the termination of Atlantic Group Limited's right to provide programming and advertising sales on UT-2. On March 17, 1999, CME issued a summons to dismiss the London proceedings. The summons is expected to be heard later in 1999.
In mid 1997, the Hungarian National Radio and Television Commission awarded two national television broadcast licenses to two consortia. The Company's consortium, IRISZ TV, was an unsuccessful bidder in the license tender process. On July 4, 1997, IRISZ TV filed a complaint in the Budapest Capital Court against the Hungarian National Radio and Television Commission and the two successful consortia, alleging that the Hungarian National Radio and Television Commission and the two successful consortia (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. On March 25, 1998, the Court denied IRISZ TV's claims. On May 8, 1998, IRISZ TV filed a notice of appeal with the Supreme Court of Hungary. In a decision released on February 22, 1999, the Supreme Court of Hungary reversed in part the decision of the trial court and ruled that the Hungarian National Radio and Television Commission acted illegally by (i) failing to exclude the bid of the consortium Magyar RTL Televizio Rt. ("RTL") which operates the channel RTL Klub, on grounds of invalidity arising from formal defects in the bid; (ii) entering
into an agreement with RTL; and (iii) deviating from its own published guidelines in the bid evaluation process. The Supreme Court stated that the Hungarian Media Act requires the Hungarian National Radio and Television Commission to terminate RTL's license agreements as a result of the Commission's illegal acts but stated that the Supreme Court could not issue a termination order because of the Commission's status as an administrative body of the state and that the legal consequences of the Commission's failure to abide by the Media Act are for the Hungarian Parliament to determine. The Hungarian National Radio and Television Commission recently publicly announced that it intends to request that the Constitutional Court of Hungary declare unconstitutional a provision of the Hungarian Media Act which the Supreme Court relied upon in part in its decision.
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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
CME's Class A Common Stock began trading on the Nasdaq National Market on October 13, 1994 under the trading symbol "CETV." On March 17, 1999, the last reported sales price for the Class A Common Stock was $8.75. The following table sets forth the high and low sales prices for the Class A Common Stock for each quarterly period during the last two fiscal years of the Company and for the first quarter of 1999, as reported by the Nasdaq National Market:
Price Period High Low - ------------ ---- --- First Quarter........................................... 37.125 31.250 Second Quarter.......................................... 32.750 23.500 Third Quarter........................................... 26.750 22.375 Fourth Quarter.......................................... 32.875 23.438
First Quarter........................................... 29.125 21.375 Second Quarter.......................................... 29.313 20.000 Third Quarter........................................... 22.125 9.625 Fourth Quarter.......................................... 9.625 4.750
First Quarter (through March 17, 1999).................. 10.125 6.875
At March 17, 1999, there were 34 holders of record (including brokerage firms and other nominees) and approximately 597 beneficial shareholders of the Class A Common Stock and seven holders of record of the Class B Common Stock. There is no established public trading market for the Class B Common Stock.
DIVIDEND POLICY
The Company has not declared or paid and has no present intention to declare or pay in the foreseeable future any cash dividends in respect to any class of its Common Stock. The Company's ability to pay cash dividends is primarily dependent upon receipt of dividends or distributions from its Subsidiaries over which it has limited control. In addition, the indentures which govern the Company's 9.375% Senior Notes Due 2004 and 8.125% Senior Notes Due 2004 restrict the ability of CME to declare and pay cash dividends. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Item 6
Item 6 SELECTED FINANCIAL DATA
(Selected Financial Data begins on the following page and ends on the page immediately preceding Item 7).
SELECTED CONSOLIDATED FINANCIAL DATA (dollars in thousands, except per share data)
The selected financial information presented below for the five years ended December 31, 1998 is derived from the audited Consolidated Financial Statements of the Company. The following selected financial information should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto for the years ended December 31, 1998, 1997 and 1996, included elsewhere herein.
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(1) On May 13, 1997, the Company announced its decision to discontinue funding of 1A TV Beteiligungsgessellschaft GmbH & Co. Betriebs KG ("1A TV"), which operated PULS, a regional television station in the Berlin-Brandenburg area of Germany. In May 1997, 1A TV declared bankruptcy. The Company wrote down its investments in Germany by $20,707,000 in 1997, thereby fully eliminating the carrying value of such investments.
(2) During the fourth quarter of 1998, the Company sold its interests in the TVN television operations in Poland at a loss, resulting in the treatment of these interests and related operations as discontinued operations for all periods presented. The Company's financial statements have been restated for all periods presented in order to reflect the operations of Poland as discontinued operations.
(3) "Broadcast cash flow", a broadcasting industry measure of performance, is defined as net broadcast revenues, less (i) station operating costs and expenses (excluding depreciation and amortization of acquired programming and of intangible assets), (ii) broadcast selling, general and administrative expenses, and (iii) cash program rights costs. Cash program rights costs are included in the period in which payment is made, which may not necessarily correspond to the timing of program use or amortization. Broadcast cash flow should not be considered as a substitute measure of operating performance or liquidity prepared in accordance with GAAP (see the accompanying Consolidated Financial Statements).
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
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 engages in barter transactions in which its stations exchange commercial advertising time for goods and services. The Company, like other television operators, experiences seasonality, with advertising sales tending to be lowest during the third quarter of each calendar year, which includes the summer holiday period, and highest during the fourth quarter of each calendar year. The primary expenses incurred in television operations are programming and production costs, employee salaries, broadcast transmission expenses and selling, general and administrative expenses. The Company has incurred and might in the future incur significant development expenses, including finding and negotiating with local partners, researching and preparing license applications, preparing business plans and conducting pre-operating activities, as well as reorganizing existing affiliate entities which hold the broadcast licenses.
The primary internal sources of cash available for corporate operating costs and development expenses are dividends and other distributions from Subsidiaries. The Company's ability to obtain dividends or other distributions is subject to, among other things, restrictions on dividends under applicable local laws and foreign currency exchange regulations of the jurisdictions in which its Subsidiaries operate. The Subsidiaries' ability to make distributions is also subject to the legal availability of sufficient operating funds not needed for operations, obligations or other business plans and, in some cases, the approval of the other partners, shareholders or creditors of these entities. The laws under which the Company's operating Subsidiaries are organized provide generally that dividends may be declared by the partners or shareholders out of yearly profits subject to the maintenance of registered capital and required reserves and after the recovery of accumulated losses.
Selected Combined and Attributable Financial Information
The following two 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 and
attributable financial information for the years ended December 31, 1998, 1997 and 1996 for the Company's operating entities. This financial information departs materially from GAAP.
In the table "Selected Combined Financial Information," revenues and operating expenses of certain entities (Markiza TV and Studio 1+1) not consolidated in the Consolidated Statements of Operations during the periods shown, are aggregated with those of the Company's consolidated operations. In the table "Selected Attributable Financial Information", combined information is adjusted for CME's economic interest in each entity, which economic interest is the basis used for consolidation and equity method accounting in the Company's GAAP Consolidated Financial Statements as of December 31, 1998. The tables separate the results of the "Established Stations", which have national or nearly national coverage, from TV3, the Company's newest operation which reaches 41% of the Hungarian population.
The tables are presented solely for additional analysis and not as a presentation of results of operations of each component, nor as combined or consolidated financial data presented in accordance with GAAP. See "Application of Accounting Principles". The following supplementary unaudited combined and attributable information includes certain financial information of Markiza TV and Studio 1+1 on a line-by-line basis, similar to that of the Company's consolidated entities.
The 1998 $21,289,000 write-down of the TV3 program library, taken to reduce TV3's program library to the estimated net realizable value, is not reflected in the tables in order to provide a better indication of the underlying performance of TV3. In addition, intercompany transactions such as management service charges are not reflected in the tables. The Company believes that this unaudited combined and attributable information provides useful disclosure.
The Established Stations refer to Nova TV, PRO TV, POP TV, Markiza TV and Studio 1+1. Nova TV began operations in February 1994. PRO TV and POP TV began operations in December 1995, Markiza TV began operations in August 1996 and Studio 1+1 began to generate significant revenues during the second quarter of 1997. Other Operations consist of Videovox, a Hungarian dubbing studio and duplication facility acquired by the Company in May 1996 and wholly-owned since May 1997, and Radio Alfa in the Czech Republic in which CME acquired a controlling interest in December 1996 and which ceased to provide services on December 31, 1998 and is being liquidated. TV3 began operations in October 1997.
EBITDA consists of earnings before interest, income taxes, depreciation and amortization of intangible assets (which does not include programming rights). EBITDA is provided because it is a measure of operating performance commonly used in the television industry. It is presented to enhance an understanding of the Company's operating results and is not intended to represent cash flow or results of operations in accordance with GAAP for the periods indicated.
The term "station expenses" used in the discussion of EBITDA immediately following the tables refers to the total of a station's (i) other operating costs and expenses, (ii) amortization of programming rights and (iii) selling, general and administrative expenses.
"Broadcast cash flow", a broadcasting industry measure of performance, is defined as net broadcast revenues, less (i) station operating costs and expenses (excluding depreciation and amortization of acquired programming and of intangible assets), (ii) broadcast selling,
general and administrative expenses, and (iii) cash program rights costs. Cash program rights costs are included in the period in which payment is made, which may not necessarily correspond to the timing of program use or amortization. Broadcast cash flow should not be considered as a substitute measure of operating performance or liquidity prepared in accordance with GAAP (see the accompanying Consolidated Financial Statements).
(1) Important information about this table appears under the heading "Selected Combined and Attributable Financial Information" immediately preceding this table. (2) TV3's EBITDA is without the impact of the $21,289,000 write-down in 1998 of the carrying value of capitalized costs of rights to program material. (3) Other operations include Radio Alfa and Videovox.
(1) Important information about this table appears under the heading "Selected Combined and Attributable Financial Information" immediately preceding this table. (2) TV3's EBITDA is without the impact of the $21,289,000 ($21,076,000 attributable in 1998) write-down of the carrying value of capitalized costs of rights to program material. (3) Other operations include Radio Alfa and Videovox. (4) Economic interest as of December 31, 1998. For comparison between the years ended December 31, 1998, 1997 and 1996, all results in this table are pro forma as if the December 31, 1998 percentages had also been in place during the years ended December 31, 1996 and 1997. See "Application of Accounting Principles" regarding the increase in the Company's interest in Studio 1+1 to 60%.
Combined EBITDA for the year ended December 31, 1998 compared to the year ended December 31, 1997
Established Stations
The total combined EBITDA for the Established Stations increased by $210,000 from $52,288,000 for 1997 to $52,498,000 for 1998.
The Russian financial crisis resulted in a number of advertisers reducing their advertising budgets in the fourth quarter of 1998 in many markets in Central and Eastern Europe, which adversely impacted net revenues at all of the Established Stations with the strongest impact in Ukraine (Studio 1+1) and Romania (PRO TV).
Nova TV's EBITDA increased by $4,966,000, or 10%, to $54,887,000 for 1998, compared with $49,921,000 for 1997. Nova TV's net revenues increased by $9,663,000, or 10%, as a result of growth in the total television advertising market. This revenue growth was achieved despite difficulties in the Czech economy during 1998. Station expenses increased by a total of $4,697,000, or 9.5%, which primarily reflects inflationary pressures on prices and increased local production.
POP TV's EBITDA improved from negative $1,613,000 for 1997 to negative $809,000 for 1998. Net revenues increased by $7,133,000, or 48%, to $22,122,000 for 1998 from $14,989,000 for 1997. The increase was a result of the growth of the overall television advertising market in Slovenia (from $39,000,000 in 1997 to $51,000,000 in 1998) and POP TV's increased audience share. POP TV's station expenses increased by $6,329,000, or 38%, for 1998 compared to 1997 primarily due to higher costs of acquired and locally produced programming. The cost of acquired programming increased primarily due to higher programming prices and the addition of Gajba TV, a second channel launched in October 1997.
PRO TV's EBITDA decreased by $718,000 from negative $1,298,000 for 1997 to negative $2,016,000 for 1998. The decrease was primarily a result of an increase in station expenses, primarily attributable to costs associated with expansion of the network, including Acasa (the Company's second channel in Romania) launched in February 1998, higher prices of acquired programming and increased hours of self production. Net revenues for 1998 increased by $11,782,000, or 39%, over 1997 net revenues. During the fourth quarter of 1998, PRO TV's net revenues were negatively impacted by the Russian financial crisis, resulting in only 11% net revenue growth for fourth quarter 1998 over fourth quarter 1997. For comparison, first nine month 1998 net revenue was 46% higher than first nine month 1997 net revenue.
Studio 1+1 recorded negative EBITDA of $2,047,000 for 1998 compared with positive EBITDA of $19,000 for 1997. Net revenues increased $6,937,000, or 42 %, from 1997 to 1998, due to an increase in Studio 1+1's audience share and significant growth in the Ukrainian television advertising market during the first eight months of 1998. The financial crisis in Russia negatively impacted the last four months of 1998 with fourth quarter net revenues $2,100,000, or 31%, lower than fourth quarter of 1997 net revenues. For comparison, first nine month 1998 net revenue was 92% higher than first nine month 1997 net revenue. Station expenses for 1998 were $9,003,000, or 54%, higher than in
1997 as Studio 1+1 did not reach full scale operational levels until the end of the third quarter of 1997.
Markiza TV recorded an EBITDA decrease of $2,776,000 from $5,259,000 for 1997 to $2,483,000 for 1998. This decrease was primarily due to a programming library write-down of approximately $2,000,000 as well as higher production expenses due to an increase in production hours. Net revenues increased by $6,497,000, or 21%, reflecting Markiza TV's continued market leadership in ratings and advertising share. During the fourth quarter of 1998, Markiza's net revenues were adversely impacted by the Russian financial crisis and economic difficulties in the Czech Republic (approximately 60% of Markiza TV's advertising revenues are sourced from agencies based in the Czech Republic).
TV3
TV3 in Hungary commenced operations in October 1997 and recorded negative EBITDA of $6,926,000 for 1998.
The Company recorded a $6,664,000 write-down of TV3's program library in the fourth quarter of 1998 and a total write-down of $21,289,000 for 1998. Programming commitments were entered into in 1996 and 1997 in anticipation of the grant of a national license for Hungary. The Company was not granted a national license for Hungary and has been unable to enter into a partnership with the license winners during 1998. See Item 3, "Legal Proceedings". In light of TV3's distribution and audience share, the Company does not expect to be able to realize the full value of the program library. The carrying value of the capitalized costs of rights to program material has been adjusted down to its estimated net realizable value. The EBITDA reported on the table is before this write-down, as the Company believes it provides a better indication of the underlying performance of the station.
Total Combined Operations
The total Combined Operations EBITDA (before the write-down of TV3's programming library) decreased by $3,171,000 from $48,403,000 for 1997 to $45,232,000 for 1998. As described above, this decrease was primarily due to negative EBITDA reported by the Company's new operation in Hungary and the decrease in EBITDA of Markiza TV, Studio 1+1 and PRO TV, offset in part by the EBITDA improvements in CNTS and POP TV .
Broadcast Cash Flow
Differences between EBITDA and broadcast cash flow are the result of timing differences between programming use and programming payments.
Application of Accounting Principles
Although the Company conducts operations largely in foreign currencies, the Company prepares its consolidated financial statements in United States dollars and in accordance with GAAP. In CME's Consolidated Statements of Operations, consolidated entities include wholly-owned subsidiaries and the results of Nova TV, PRO TV, POP TV,
TV3, Videovox and Radio Alfa, and separately set forth the minority interests attributable to other owners of such companies. The results of Markiza TV, Studio 1+1 and the Company's former German regional television operations FFF, SFF and 1A TV have been accounted for using the equity method such that CME's interests in net earnings or losses of those operations is included in the consolidated earnings and an adjustment is made to the carrying value at which the investment is recorded on the Consolidated Balance Sheet. The Company records other investments at the lower of cost or market value. In late December 1998 the Company increased its equity interest in Studio 1+1 to a 60% controlling interest and, due to the timing of this transaction, the Studio 1+1 balance sheet is consolidated in the Company's Consolidated Balance Sheet as of December 31, 1998, but on the Company's Consolidated Statements of Operations and Consolidated Statements of Cash Flows, Studio 1+1 results are accounted for under the equity method through the date of consolidation (December 23, 1998). In the future, Studio 1+1 will be consolidated in all of CME's GAAP financial statements for all periods subsequent to the acquisition of this additional interest. 1A TV initiated a bankruptcy proceeding in May 1997. The Company terminated its ownership interests in FFF and SFF as of December 31, 1997.
Foreign Currency
The Company generates revenues primarily in Czech korunas ("Kc"), Romanian lei ("ROL"), Slovenian tolar ("SiT"), Slovak korunas ("Sk"), Hungarian forints ("HUF") and Ukrainian hryvna ("Hrn") and incurs expenses in those currencies as well as German marks, British pounds and United States dollars. The Romanian lei, Slovenian tolar, Ukrainian hryvna and Slovak koruna are managed currencies with limited convertibility. The Company incurs operating expenses for acquired programming in United States dollars and other foreign currencies. For entities operating in economies considered non-highly inflationary, including CNTS, POP TV, Markiza TV, Videovox, Radio Alfa, TV3 and certain Studio 1+1 entities, balance sheet accounts are translated from foreign currencies into United States dollars at the relevant period end exchange rate and 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 (in accumulated other comprehensive income (loss) ) with no effect on the consolidated statements of operations.
PRO TV and certain Studio 1+1 entities operate in economies considered highly inflationary. Accordingly, non-monetary assets are translated at historical exchange rates, monetary assets are translated at current exchange rates and translation adjustments are included in the determination of net income. Currency translation adjustments relating to transactions of the Company in currencies other than the functional currency of the entity involved are reflected in the operating results of the Company.
The exchange rates at the end of and for the periods indicated are shown in the table below.
The Company's results of operations and financial position during 1998 were impacted by changes in foreign currency exchange rates since December 31, 1997.
Results of Operations
During the fourth quarter of 1998, the Company sold its interests in the TVN television operations in Poland at a loss, resulting in the treatment of these interests and related operations as discontinued operations for all periods described in Results of Operations. The Company's financial statements have been restated for all periods presented in order to reflect the operations in Poland as discontinued operations.
Year ended December 31, 1998 compared to year ended December 31, 1997
CME's consolidated net revenues increased by $32,102,000, or 21%, to $182,367,000 for 1998 from $150,265,000, for 1997. Net revenues increased for each of the consolidated television operations (Nova TV, PRO TV, POP TV and TV3). However, the Russian financial crisis resulted in a number of advertisers reducing their advertising budgets in the fourth quarter of 1998 in many markets in Central and Eastern Europe, which adversely impacted net revenues at all CME stations.
Nova TV, PRO TV and POP TV's net revenues improved primarily due to growth in their respective television advertising markets and despite the lingering effects of the Russian financial crisis on the advertising market in Romania and difficulties in the economy during 1998 in the Czech Republic. TV3 recorded net revenues of $5,379,000 in 1998, its first full year of operations.
Total station operating costs and expenses (including amortization of program rights and depreciation of fixed assets and other intangibles) increased by $47,624,000, to $146,275,000 for 1998 from $98,651,000 for 1997. The increase is primarily attributable to increases in 1998 station operating costs and expenses of TV3 of $28,028,000, of which $21,289,000 reflects the write-down of the carrying value of TV3's capitalized costs of rights to program material to its estimated net realizable value. The increase in total station operating costs and expenses is also attributable to increases in operating costs and expenses at PRO TV of $13,137,000, POP TV of $5,012,000 and Nova TV of $2,757,000.
PRO TV's station operating costs and expenses rose primarily as a result of expansion of network affiliates, higher prices of acquired programming and increased hours of self- production. In addition, programming amortization increased due to the second channel Acasa and depreciation increased due to the increase in network and broadcast equipment needed to expand the signal reach. Both Nova TV and POP TV's operating costs and expenses increases were primarily attributable to higher production
costs as a result of increased local production in response to audience demand and, in the case of POP TV, higher acquired programming costs due to an increase in programming prices.
Station selling, general and administrative expenses increased by $5,853,000 to $28,806,000 for 1998 from $22,953,000 for 1997. The increase is primarily attributable to increases at PRO TV, TV3 (which commenced operations in October 1997) and POP TV.
PRO TV's 1998 selling, general and administrative expenses were $2,763,000 higher as a result of administrative and marketing expenses related to the addition of Acasa and the development of production and post-production businesses. POP TV's selling, general and administrative expenses increased by $923,000 primarily due to increased marketing activity.
Corporate operating costs and development expenses decreased by $2,797,000, or 11%, from $25,467,000 in 1997 to $22,670,000 in 1998 due to reduced development activity and lower corporate headcount.
The increase in amortization of goodwill and allowance for development costs of $1,964,000, is primarily attributable to the write-off of goodwill associated with the Company's Hungarian operations and a provision against investments in Kanal A.
In the second quarter of 1998, the Company recorded a restructuring charge of $2,552,000 based on its decision to change its focus from aggressive development and growth to further enhancing the operating performance of the Company's existing assets and pursuing opportunities for focused growth. The restructuring charge is comprised of severance and other associated costs.
As a result of the above factors, the Company generated an operating loss of $34,745,000 for 1998 compared to an operating loss of $11,651,000 for 1997.
Equity in loss of unconsolidated affiliates decreased by $6,942,000 to a loss of $3,398,000 for 1998 from a loss of $10,340,000 for 1997. This is a result of the Company's termination of its loss-making German operations as of December 31, 1997.
Net interest and other income changed by $12,582,000 to negative $18,591,000 for 1998 from negative $6,009,000 for 1997. This was primarily attributable to a full year of interest expense related to CME's $100,000,000 principal amount 9.375% Senior Notes and DM 140,000,000 principal amount 8.125% Senior Notes, each due 2004, issued in August 1997 (collectively, the "Senior Notes").
The net foreign currency exchange loss increased to $8,412,000 for 1998 from $5,857,000 for 1997. The loss increased due to the effect of the appreciation of the German mark against the United States dollar on the Company's DM denominated Senior Notes and the effect of the appreciation of Czech koruna against the United States dollar on the Company's Czech koruna denominated loan with Ceska Sporitelna Bank ("CS"). This increase was offset in part by the effect of the appreciation of the Czech koruna on the Company's Czech koruna cash balances.
Provision for income taxes was $15,856,000 for 1998, an increase from $14,608,000 for 1997 due to an increase in CNTS's taxable income.
Minority interest in income of consolidated subsidiaries was $156,000 in 1998 and minority interest in loss of consolidated subsidiaries was $1,066,000 in 1997. This results from changes in profitability and, to a lesser extent, changes in ownership of the consolidated subsidiaries.
In December 1998, CME sold its interests in the TVN television operations in Poland to its former partner. The operating losses from the Company's Polish operations and the loss on the sale of the related assets appear on the Consolidated Statement of Operations under discontinued operations for both 1998 and 1997.
As a result of these factors, the net loss of the Company was $125,252,000 for 1998 compared to $85,092,000 for 1997.
Year ended December 31, 1997 compared to year ended December 31, 1996
The Company's net revenues increased by $14,280,000, or 11 %, to $150,265,000 in 1997 from $135,985,000 in 1996. The increase was primarily attributable to the increase in net revenues of PRO TV and POP TV and to the addition of the revenues of TV3 and Radio Alfa, offset by a decrease in net revenues of Nova TV.
PRO TV's and POP TV's net revenues of $30,155,000 and $14,989,000, respectively, in 1997, reflect increases of $14,352,000, or 91%, and $5,909,000, or 65%, respectively. PRO TV's and POP TV's net revenues improved due to the growth in their respective television advertising markets and, to a lesser extent, increases in their audience shares.
TV3 and Radio Alfa, which were not included in the Company's 1996 results, recorded net revenues of $1,464,000 and $1,808,000, respectively, for 1997. Videovox also contributed to the Company's net revenue growth with an increase of $939,000, or 55%, from $1,707,000 in 1996 to $2,646,000 in 1997.
Nova TV's net revenues decreased by $10,079,000, or 9%, to $99,163,000 in 1997 from $109,242,000 in 1996. The decrease in Nova TV's United States dollar net revenues is due to the 18% devaluation of the Czech koruna against the United States dollar in 1997. Measured in local currency, Nova TV's net revenues from advertising sales increased by Kc 292,462,000, or 11%, which approximates the growth rate of the Czech television advertising market in local currency terms. Nova TV's United States dollar net revenues from advertising sales were approximately $16,750,000 lower than they would have been if the Czech koruna had remained unchanged against the United States dollar during 1997. Other revenues (principally barter and game show revenues) decreased by $4,093,000.
Total station operating costs and expenses increased by $13,550,000, or 16%, to $98,651,000 in 1997 from $85,101,000 in 1996. The increase in total station operating costs and expenses is primarily attributable to increases in 1997 operating costs and expenses at PRO TV of $8,549,000, or 51.8%, to $25,047,000 and the addition of station operating costs and expenses of TV3 of $3,331,000. This increase was also attributable to
increases at POP TV of $2,654,000, or 20.8%, to $15,418,000 in 1997. PRO TV's and POP TV's operating costs and expenses rose as a result of increased expenses related to local production in response to increasing audience demand for local programming. This increase was partially offset by a decrease in Nova TV's operating costs and expenses in United States dollar terms from $54,578,000 to $50,796,000, primarily due to currency devaluation. In local currency terms, Nova TV's operating costs and expenses increased by Kc 141,994,000, or 10%, from Kc 1,484,849,000 to Kc 1,626,843,000, primarily due to higher salary and production costs in response to increased competition in the Czech television market. During 1997, Nova TV began production on various new entertainment formats to meet increasing audience demand for local programming.
Station selling, general and administrative expenses increased by $1,596,000 to $22,953,000 in 1997 from $21,357,000 in 1996. This increase was primarily attributable to increases at PRO TV, which were primarily due to increased administrative costs associated with expansion of network affiliates, diversification into the production and post production businesses and increased marketing activity in response to competition entering the market. To a lesser extent, the increase in station selling, general and administrative expenses was attributable to the addition to the Company's results of TV3 and Radio Alfa in 1997. The increase was partially offset by a decrease in the selling, general and administrative expenses of Nova TV due to a lower bad debt provision in 1997 as a result of improvements in collecting receivables and the effect of the devaluation of the Czech koruna against the United States dollar.
Corporate operating costs and development expenses for 1997 and 1996 were $25,467,000 and $15,782,000, respectively, an increase of $9,685,000, or 61%. The increase was primarily attributable to increased scope of operations and increased legal and consulting fees.
Amortization of goodwill and allowance for development costs was $14,845,000 and $2,940,000 in 1997 and 1996, respectively. This increase was primarily attributable to the full-year amortization of goodwill related to the Company's purchase in August 1996 of an additional 22% economic interest in CNTS (the "Additional CNTS Purchase"), the Company's purchase in early 1997 of an additional 5.2% economic interest in CNTS (the "1997 CNTS Purchase") and the Company's purchase of a 5.8% economic interest in CNTS in August 1997 (the "Second 1997 CNTS Purchase"), together with the amortization of goodwill related to the Company's investment in Radio Alfa.
As a result of the above factors, the Company generated an operating loss of $11,651,000 in 1997 compared to operating income of $9,996,000 in 1996.
Equity in loss of unconsolidated affiliates decreased by $7,527,000 to $10,340,000 in 1997 from $17,867,000 in 1996 primarily as a result of the cessation of funding of 1A TV.
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, has resulted in a total charge of $27,389,000 to the Company's Consolidated Statements of Operations in 1997.
Net interest and other income decreased by $4,215,000 to negative $6,009,000 in 1997 from negative $1,794,000 in 1996. This decrease was attributable to interest expense related to CME's $100,000,000 principal amount 9.375% Senior Notes and DM 140,000,000 principal amount 8.125% Senior Notes, each due 2004, issued in August 1997 (collectively, the "Senior Notes"), together with the full-year impact of interest on the Company's borrowings with CS in connection with the Additional CNTS Purchase.
The net foreign currency exchange loss of $5,857,000 in 1997 is primarily attributable to the devaluation of the local operating currencies against the United States dollar. These currencies devalued considerably more against the United States dollar in 1997 than in 1996. The net foreign currencies exchange loss was 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 $14,608,000 in 1997 versus $16,405,000 in 1996 as a result of the effect on Nova TV's taxable income of the devaluation of the Czech koruna against the United States dollar.
Minority interest in loss of consolidated subsidiaries was $1,066,000 in 1997 and minority interest in income of consolidated subsidiaries was $1,072,000 in 1996. This increase was primarily the result of the Company's increased ownership in Nova TV, which continued to be profitable during 1997.
In December 1998, CME sold its interests in the TVN television operations in Poland to its former partner. The operating losses from the Company's Polish operations for the year ended December 1997 have therefore been reclassified in the current year presentation as operating loss of discontinued operations.
As a result of these factors,the net loss of the Company was $85,092,000 for 1997 compared to $30,003,000 for 1996.
Programming Commitments in Hungary
Programming commitments were entered into in 1996 and 1997 in anticipation of the grant of a national license for Hungary. The Company was not granted a national license for Hungary and has been unable to enter into a partnership with the license winners. In light of TV3's distribution and audience share, the Company does not expect to be able to realize the full value of the program library. Accordingly, the Company took write-downs with regard to commitments for programming rights for TV3 of $10,961,000, $3,664,000 and $6,664,000 for the second, third and fourth quarters of 1998. The Company currently estimates that it will take further write-downs of up to $7,593,000 with regard to future programming rights, of which approximately $2,129,000 is expected to be taken in 1999 and $5,464,000 is expected to be taken in 2000 as these obligations are incurred. Program rights acquired by the Company under license agreements, and the related obligations incurred are recorded as assets and liabilities when the programming is available for use and the license period begins which is in accordance with SFAS No. 63. See Item 3, "Legal Proceedings".
Liquidity and Capital Resources
Net cash used in operating activities was $28,380,000 in 1998 compared to $27,744,000 in 1997.
Net cash used in investing activities was $55,761,000 in 1998 compared to $109,834,000 in 1997. The decrease of $54,073,000 was primarily attributable to the lower investments made by the Company in its Polish operations in 1998 compared to 1997 and proceeds from the sale of its Polish operations to its former partner.
Net cash provided by financing activities for 1998 was $22,796,000 compared to $161,330,000 in 1997. The decrease of $138,534,000 was primarily attributable to the issuance of CME's Senior Notes in August 1997 offset by the RSL equity investment in December 1998 (see below).
In August 1997, CME issued the Senior Notes, which raised net proceeds of approximately $170,000,000. The Senior Notes are denominated in United States dollars, in part, and in German marks, in part. The United States dollar denominated Senior Notes bear interest at a rate of 9.375% per annum, and the German mark denominated Senior Notes bear interest at a rate of 8.125% per annum. The principal amount of the Senior Notes is repayable on their maturity date, August 15, 2004. The indentures governing the Senior Notes contain certain restrictions relating to the ability of CME and its Subsidiaries and affiliates to incur additional indebtedness, incur liens on assets, make investments in unconsolidated companies, declare and pay dividends (in the case of CME), sell assets and engage in extraordinary transactions.
In December 1998, the Company received an equity investment of approximately $22,498,000 from RSL Capital LLC ("RSL"), a company wholly owned by Ronald S. Lauder, the non-executive Chairman of the Company's Board of Directors. RSL purchased 1,515,000 shares of the Company's Class B Common Stock for $15.00 per share. The purchase price per share is subject to adjustment as follows: If the last reported daily trading price of the Company's Class A Common Stock on NASDAQ does not equal or exceed $15.00 for at least 20 consecutive trading days during the period commencing November 13, 1998 and ending November 13, 1999 (the "Measurement Period"), the Company will issue additional shares of Class B Common Stock to RSL for no additional consideration so that the average per share price for the shares of the Company's Class B Common Stock acquired by RSL will equal the average last reported daily trading price of the Company's Class A Common Stock during the Measurement Period, provided, that, in no event shall the average price per share for the shares of the Company's Class B Common Stock acquired by RSL be less than $10.00 per share.
On December 11, 1998, CME sold its interests in the TVN television operations in Poland to International Trading and Investments Holding S.A. ("ITI"), a company publicly traded on the Luxembourg Stock Exchange and the Company's partner in the TVN television operations. CME caused its subsidiaries to transfer to ITI and certain of ITI's affiliates all of CME's interests in the TVN operations together with certain outstanding receivables in exchange for $10 million in cash, a note in a principal amount of $40 million bearing interest at a rate of 5% per annum and maturing in December 2001 that is convertible into equity securities of ITI and exchangeable into similar debt securities of ITI, the release of a $10 million bank guarantee and the assumption by ITI of various
obligations of CME and its subsidiaries in respect of programming and satellites relating to the TVN operations. The note was recorded at a net present value of $19,836,000 due to the prevailing interest rates on similar instruments at the date of the transaction. Ronald S. Lauder, the non-executive Chairman of the Board of Directors of the Company, owns a non-controlling indirect minority interest in ITI.
In May 1998, CNTS (Nova TV) declared a total dividend of Kc 550,000,000 ($16,963,000) of which the Company was paid Kc 525,010,000 ($16,192,000) during 1998. The remaining Kc 24,990,000 ($771,000) was paid to minority shareholders.
As a result of the factors described above, the Company had cash and cash equivalents of $44,444,000 at December 31, 1998 compared to $104,490,000 at December 31, 1997.
On August 11, 1997, the Company purchased a 5.8% interest in CNTS from certain of the partners of CET 21 (including Dr. Zelezny) for a purchase price of $28,537,000, to be paid in cash installments through February 15, 2000. As of December 31, 1998, the Company had paid $20,662,000 of the purchase price and is obligated to make further payments of $5,313,000 during 1999 and $2,562,000 during 2000. Each further payment is subject to increase to an amount equal to the value of such payment as if it had been invested in CME's Class A Common Stock at a purchase price of $23.375 per share.
On August 1, 1996, the Company purchased CS's 22% economic interest and virtually all of CS's voting rights in CNTS for a purchase price of Kc 1 billion ($36,590,000). The Company also entered into a loan agreement with CS to finance 85% of the purchase price. The principal outstanding at December 31, 1998 was Kc 632,580,000 ($21,188,000). Quarterly repayments on the loan are required in the amount Kc 42,500,000 ($1,424,000) during the period from February 1999 through May 2002, and Kc 37,580,000 ($1,259,000) in August 2002.
The Company expects CNTS's future cash requirements to continue to be satisfied through operating cash flows and available borrowing facilities. CNTS has a line of credit with CS for up to Kc 250,000,000 ($8,374,000) bearing interest at a rate 0.5% over the Prague Interbank Offer Rate ("PRIBOR"). This facility is secured by CNTS's equipment, vehicles and receivables. In October 1997, CNTS entered into a Kc 500,000,000 ($16,748,000) line of credit with ING Bank N.V. The line of credit, which may be drawn in Czech koruna, German marks or United States dollars, bears interest at a rate of 0.5% over the interbank offered rate for the applicable currency and matures in October 1999. CNTS had no borrowings under these facilities at December 31, 1998.
In June 1997 in connection with CNTS's acquisition of Nova TV's main studios and offices, CNTS assumed obligations under a loan from CS (the "CS Loan") secured by a mortgage on the studios and offices. The CS Loan provides for quarterly payments of Kc 16,500,000 ($553,000), plus interest equal to three month PRIBOR plus 1.0%, to be paid through December 1999. As of December 31, 1998, the outstanding balance under the CS Loan was Kc 60,000,000 ($2,010,000).
In February 1998, Markiza TV entered into a revolving credit facility with Bank Austria. The facility is for Sk 100,000,000 ($2,709,000) and matures in September 2000.
This facility is secured by Markiza TV's land and buildings. Bank Austria has notified Markiza TV that this facility is not available for draw-down as a result of the dispute regarding the ownership of Markiza-Slovakia s.r.o., the company which holds the Markiza TV broadcast license. The unavailability of this facility has had no material impact on Markiza TV's business to date. See Part I, Item 3 "Legal Proceedings".
In April 1998, POP TV entered into a multicurrency $5,000,000 loan agreement with Creditanstalt AG which matures in May 2005. As of December 31, 1998, the outstanding balance under the loan was $3,554,000. The loan is secured by the land, buildings and equipment of POP TV and is guaranteed by CME.
PRO TV has two borrowing facilities with Tiriac Bank in Romania. The first facility consists of a $2,000,000 line of credit which matures in June 2000. At December 31, 1998, $1,290,000 was outstanding under this facility. The second facility is a long-term loan for $4,000,000 which matures in December 2002. At December 31, 1998, $3,654,000 was borrowed under this facility. These facilities are secured by PRO TV's equipment and vehicles.
TV3 has borrowings of HUF 279,000,000 ($1,286,000) from a local Hungarian bank. The loan matures in December 2000 and is secured by pledges of certain fixed assets of TV3. The Company has loaned $400,000 to TV3 since December 31, 1998. The Company has made approximately $385,000 in cash programming payments on behalf of TV3 since December 31, 1998, and has additional cash programming payments due for TV 3 in the amount $10,863,000, $4,567,000 and $4,567,000 for 1999, 2000 and 2001. It is anticipated that the Company will lend up to an additional $2,000,000 to TV3 throughout 1999.
On February 26, 1999, the Company entered into a $15,000,000 secured revolving Credit Facility with ING Bank N.V. (the "ING Facility"). The ING Facility is for a term of three years and the commitment level is to be reduced in four equal semi-annual instalments starting in June 2000. The ING Facility is secured by the assets of a wholly-owned subsidiary of the Company, which holds the Company's interest in CNTS, and will be repaid from the dividends of CNTS. The rate of interest charged on the ING Facility is based on the ratio of the Company's indebtedness to CNTS's broadcast cash flow and may range from 3.75% to 2.50% over United States dollar LIBOR. The availability of the ING Facility is subject to the satisfaction of various conditions which have not yet been met.
On March 18, 1999, the Company added to its cash balances by receiving net proceeds of approximately $39,000,000 from the sale of its 9.6% stake in MobilRom in Romania.
The laws under which CME's operating Subsidiaries are organized provide generally that dividends may be declared by the partners or shareholders out of yearly profits subject to the maintenance of registered capital, required reserves and after the recovery of accumulated losses. In the case of the Company's Dutch and Netherlands Antilles subsidiaries, the Company's voting power is sufficient to compel the making of distributions. The Company's voting power is sufficient to compel CNTS to make distributions. In the case of PRO TV, distributions may be paid from the profits of PRO TV subject to a reserve of 5% of annual profits until the aggregate reserves equal 20% of PRO TV's registered capital. A majority vote can compel PRO TV to make distributions. There are no legal reserve requirements in Slovenia. In the case of Markiza TV, distributions may be paid from net profits subject to an initial reserve requirement of 10% of net profits until the reserve fund equals 5% of registered capital. Subsequently, the reserve requirement is equal to 5% of net profits until the reserve fund equals 10% of registered capital. The Company's voting power in Markiza TV is not sufficient to compel the distribution of dividends. The Company's voting power in the Studio 1+1 Group is sufficient to compel the distribution of dividends. In the case of TV3, the Company's voting interest is sufficient to compel the payment of dividends. There are no legal reserve requirements in Hungary.
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 continues to invest in its existing broadcast operations and might engage in the development of additional broadcast operations. The Company incurs certain expenses in identifying and pursuing broadcast opportunities before any investment decision is made.
The Company believes that taken together its current cash balances (including cash received from the MobilRom sale in March 1999), internally generated cash flow and local financing of broadcast operations should be adequate to satisfy the Company's operating and capital requirements for its current operations for the next 12 to 18 months. To acquire additional broadcast rights or to fund other significant investments, the Company would require significant additional financing.
Year 2000 Issue
The "Year 2000 Issue" consists of computer programs and embedded technology in equipment defining years using the last two digits rather than all four digits of the applicable year and could result in the complete or partial failure of computer applications and equipment with embedded technology by or at the year 2000. The Company has established a Year 2000 compliance plan and timetable. A Committee chaired by the Company's Chief Operating Officer and comprised of technical personnel from each of the Company's television operations is overseeing the process.
The Company has undertaken and expects to complete by mid-1999 (i) a systems and equipment review (both the Company's and that of third party vendors), (ii) an assessment of compliance costs and (iii) a plan for business continuity in the event that full compliance is not attainable and then proceed through implementation, testing and management.
Based upon the Company's current estimates, incremental out-of-pocket costs of its Year 2000 program are expected to be immaterial. These costs are expected to be incurred primarily in fiscal 1999 and include third-party consultants, remediation of existing computer software and replacement and remediation of embedded chips. Such costs do not include internal management time, the effect of which is not expected to be material to the Company's results of operations or financial condition.
The Company's broadcast operations are highly dependent upon equipment with embedded computer technology (cameras, mixing equipment, broadcast equipment, etc.), the widespread failure of which would have a material adverse impact on the Company's
results of operations. The Company will continually review its progress against its Year 2000 plans. Accounting rules require Year 2000 compliance costs to be expensed as incurred.
Euro Conversion
As part of the European Economic and Monetary Union (EMU), a single currency, the euro, will replace the national currencies of many of the member countries of the European Union. Although the Company does not currently conduct business in any of the countries which are adopting the euro, it holds debt denominated in German marks, one of the currencies scheduled to be replaced by the euro. Additionally, it is expected that several of the countries in which the Company operates are likely to join EMU at some point in the future.
The conversion rates between the euro and the participating nations' currencies were fixed irrevocably as of January 1, 1999 and the participating national currencies will be removed from circulation between January 1, and June 30, 2002 and replaced by euro notes and coinage. During the "transition period" from January 1, 1999 through December 31, 2001, public and private entities as well as individuals may pay for goods and services using either checks, drafts, or wire transfers denominated in euro or the participating country's national currency.
Under the regulations governing the transition to a single currency, there is a "no compulsion, no prohibition" rule which states that no one is obliged to use the euro until the notes and coinage have been introduced on January 1, 2002. In keeping with this rule, the Company expects to be euro "compliant" (able to receive euro denominated payments and able to invoice in euros as requested by vendors and suppliers, respectively) by the time national currencies are removed from circulation. The cost of software and business process conversion is not expected to be material.
Forward-looking Statements
Statements made in "Programming Commitments in Hungary" and "Liquidity and Capital Resources" regarding future investments in existing television broadcast operations, business strategies, commitments and the future need for additional funds from outside sources are forward-looking statements. Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Future events and actual results, financial and otherwise, could differ materially from those described in or contemplated by the forward-looking statements. Important factors that contribute to such risks include the ability to acquire programming, the ability to attract audiences, the rate of development of advertising markets in countries where the Company currently operates, including the continuing impact of the Russian financial crisis on the economies of these countries, and general market and economic conditions in these countries. Important factors with respect to discussions and negotiations described in "Corporate Structure-Czech Republic" include legal and regulatory conditions in the Czech Republic. Important factors with respect to completion of the Company's Year 2000 compliance plan include the outcome of the Company's systems and equipment review and the extent to which Company and third party systems are found to be out of compliance.
Item 7a.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
The Company conducts business in a number of foreign currencies. As a result, it is subject to foreign currency exchange rate risk due to the effects that foreign exchange rate movements of these currencies have on the Company's costs and on the cash flows it receives from certain subsidiaries. Several of the Company's subsidiaries hold long-term debt under credit facilities that provide for interest at a spread above a basis rate (such as LIBOR). A significant rise in these basis rates would not materially adversely affect the Company's business, financial condition or results of operations. The Company does not utilize derivative financial instruments to hedge against changes in interest rates. The Company believes that it currently has no material exposure to market risk associated with activities in derivative or other financial instruments.
In limited instances the Company enters into forward foreign exchange contracts to hedge foreign currency exchange rate risk. See Note 11 to the Consolidated Financial Statements. At December 31, 1998, CNTS was party to two foreign exchange contracts for the purchase of an aggregate of $1,000,000. The Company's value at risk from holding such contracts at December 31, 1998 was immaterial.
On August 11, 1997, the Company purchased a 5.8% interest in CNTS from certain of the partners of CET 21 for a purchase price of $28,537,000, to be paid in installments through February 15, 2000. As of December 31, 1998, the Company had paid $20,662,000 of the purchase price and is obligated to make further payments of $5,313,000 during 1999, and $2,562,000 during 2000. Each further payment is subject to increase to an amount equal to the value of such payment as if it had been invested in CME's Class A Common Stock at the date of the closing of the purchase at a purchase price of $23.375 per share. At December 31, 1998, no such increase has accrued because the trading price of CME's Class A Common Stock was less than $23.375.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Financial Statements and Supplementary data begin on the following page and end on the page immediately preceding Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated herein by reference to the section entitled "Election of Directors and Executive Officers" in the Company's Proxy Statement for the 1999 Annual Meeting of Shareholders.
Item 11.
Item 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to the sections entitled "Executive Compensation," "Compensation Committee Report on Executive Compensation" and "Performance Graph" in the Company's Proxy Statement for the 1999 Annual Meeting of Shareholders.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference to the section entitled "Security Ownership of Certain Beneficial Owners and Management" in the Company's Proxy Statement for the 1999 Annual Meeting of Shareholders.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference to the section entitled "Certain Relationships and Related Transactions" in the Company's Proxy Statement for the 1999 Annual Meeting of Shareholders.
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following Financial Statements of the Company are included in Part II, Item 8 of this Report:
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
(a)(2) The following Financial Statements of 1A TV Beteiligungsgesellschaft MBH & Co. Betreibs-KG are included in Part II, Item 8 of this Report:
Report of Independent Public Accountants
Balance Sheet as of December 31, 1996 and 1995
Statement of Operation for the years ended December 31, 1996 and 1995
Statement of Partners' Capital for the years ended December 31, 1996 and 1995
Statement of Cash Flows for the years ended December 31, 1996 and 1995
Notes to Financial Statements
(a)(3) The following Financial Statements of Slovenska Televizna Spolocnost, s.r.o. are included in Part II, Item 8 of this Report:
Report of Independent Public Accountants
Balance Sheet as of December 31, 1995 and 1996
Income Statements for the periods ended December 31, 1995 and 1996
Statements of Cash Flows for the periods ended December 31, 1995 and
Notes to Financial Statements
(a)(5) The following exhibits are included in this report:
EXHIBIT INDEX
Exhibit Number Description - ------ -----------
3.01* -- Memorandum of Association (incorporated by reference to Exhibit 3.01 to the Company's Registration Statement No. 33-80344 on Form S-1, filed June 17, 1994).
3.02* -- Bye-Laws of Central European Media Enterprises Ltd., as amended, dated as of May 2, 1997 (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997).
3.03* -- Memorandum of Increase of Share Capital (incorporated by reference to Exhibit 3.03 to Amendment No. 1 to the Company's Registration Statement No. 33-80344 on Form S-1, filed August 19, 1994).
3.04* -- Memorandum of Reduction of Share Capital (incorporated by reference to Exhibit 3.04 to Amendment No. 2 to the Company's Registration Statement No. 33-80344 on Form S-1, filed September 14, 1994).
3.05* -- Certificate of Deposit of Memorandum of Increase of Share Capital executed by Registrar of Companies on May 20, 1997 (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997).
4.01* -- Specimen Class A Common Stock Certificate (incorporated by reference to Exhibit 4.01 to Amendment No. 1 to the Company's Registration Statement No. 33-80344 on Form S-1, filed August 19, 1994).
4.02* -- Specimen Note for 9 3/8% Senior Notes Due 2004 (incorporated by reference to Exhibit 4.1 to the Company's Amendment No. 3 to Form S-3 filed on August 14, 1997)
4.03* -- Specimen Note for 8 1/8% Senior Notes Due 2004 (incorporated by reference to Exhibit 4.1 to the Company's Amendment No. 3 to Form S-3 filed on August 14, 1997)
4.04* -- Form of Indenture for 9 3/8% Senior Notes Due 2004 (incorporated by reference to Exhibit 4.2 to the Company's Amendment No. 3 to Form S-3 filed on August 14, 1997)
4.05* -- Form of Indenture for 8 1/8% Senior Notes Due 2004 (incorporated by reference to Exhibit 4.2 to the Company's Amendment No. 3 to Form S-3 filed on August 14, 1997)
10.01*+ -- Central European Media Enterprises Ltd. Amended and Restated 1994 Stock Option Plan, as amended to October 17, 1995. (incorporated by reference to
Exhibit Number Description - ------ -----------
Exhibit 10.01A to Amendment No. 1 to the Company's Registration Statement No. 33-96900 on Form S-1, filed October 18, 1995).
10.02+ -- Central European Media Enterprises Ltd. 1995 Stock Option Plan, as amended and restated to September 3, 1998
10.03 -- Memorandum of Association and Investment Agreement by and between CME Czech Republic B.V. and CET 21 spol s.r.o dated May 4, 1993 and as amended
10.04* -- Credit Agreement between Ceska Sporitelna, a.s. and Ceska Nezavisla Televizni Spolecnost, s.r.o. (incorporated by reference to Exhibit 10.16 to Amendment No. 1 to the Company's Registration Statement No. 33-80344 on Form S-1, filed August 19, 1994).
10.05* -- Term Promissory Note in favor of Ronald S. Lauder dated September 9, 1994 and Warrant for the Purchase of Shares of Common Stock issued to Ronald S. Lauder dated as of September 9, 1994 (incorporated by reference to Exhibit 10.17 to Amendment No. 2 to Registration Statement No. 33-80344 on Form S-1, filed September 14, 1994).
10.06* -- Partnership Agreement of Produkcija Plus d.o.o. Ljubljana, dated February 10, 1995 among CME Media Enterprises B.V., Boutique MMTV d.o.o. Ljubljana, and Tele 59 d.o.o. Maribor. (incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994).
10.07* -- Letter Agreement, dated March 23, 1995, among, Kanal A, Boutique MMTV d.o.o. Ljubljana, Tele 59 d.o.o. Maribor, Euro 3 and Baring Communications Equity as advisor to Baring Communications Equity Limited, regarding Produkcija Plus d.o.o. (incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994).
10.08* -- Credit Agreement, dated as of November 14, 1994, between Ceska Sportelma, a.s. and Ceska Nezavisla Televizni Spolecnost, s.r.o. (incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994).
10.09* -- Lease, dated February 2, 1995, between CME Development Corporation Inc. and JRT (Properties) Limited for the term of ten years for the offices at 9 Poland Street and 17, 18 and 19 D'Arblay Street in London. (incorporated by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994).
10.10* -- Contract for Space Segment Service dated June 9, 1995, between British Telecommunications plc ('BT') and CME Programming Services, Inc. for the provision of programming transmission services by BT and the payment
Exhibit Number Description - ------ -----------
thereon (incorporated by reference to Exhibit 10.25A to the Company's Report on Form 10-Q for the quarterly period ended June 30, 1995).
10.10A* -- Guarantee by Central European Media Enterprises Ltd. in respect of obligations due to British Telecommunications plc by CME Programming Services, Inc. dated June 9, 1995 (incorporated by reference to Exhibit 10.25B to the Company's Report on Form 10-Q for the quarterly period ended June 30, 1995).
10.11* -- Cooperation Agreement among CME Media Enterprises B.V., Ion Tiriac and Adrian Sarbu (incorporated by reference to Exhibit 10.27 to the Company's Registration Statement No.33- 96900 on Form S-1 filed September 13, 1995).
10.12* -- Preliminary Agreement, dated June 12, 1995, between CME Media Enterprises B.V. and Markiza-Slovakia s.r.o. (incorporated by reference to Exhibit 10.28 to the Company's Registration Statement No. 33-96900 on Form S-1, filed September 13, 1995).
10.12A* -- Memorandum of Association between CME Media Enterprises, B.V. and Markiza-Slovakia s.r.o. (incorporated by reference to Exhibit 10.28A to Amendment No. 1 to the Company's Registration Statement No. 33-96900 on Form S-1, filed October 18, 1995).
10.12B* -- Articles of Association of Slovenska Televizna Spolocnost, s.r.o. founded by CME Media Enterprises, B.V. and Markiza-Slovakia s.r.o. (incorporated by reference to Exhibit 10.28B to Amendment No. 1 to the Company's Registration Statement No. 33-96900 on Form S-1, filed October 18, 1995).
10.13* -- Contract of Sale, dated July 7, 1995 between In Razvoj in Svetovanje d.o.o. Ljubljana and Produkcija Plus d.o.o. Ljubljana and Central European Media Enterprises Group (incorporated by reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995).
10.14* -- Loan Agreement, dated December 4, 1995, between CME Media Enterprises, B.V., and Inter Media S.R.L. (incorporated by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995).
10.15* -- Contocurrent Credit Contract kept with the Current Account, dated as of November 1, 1995 between Ceska Sporitelna a.s. and Czech Independent Television Company s.r.o. (Ceska Nezavisla Televizni Spolecnost s.r.o.) (incorporated by reference to Exhibit 10.32 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995).
10.16* -- Transfer Agreement between Ceska Sporitelna and CME BV (incorporated by reference to Exhibit 10.03 to the Company's Report on Form 10-Q for the quarterly period ended June 30, 1996).
Exhibit Number Description - ------ -----------
10.16A* -- Annex to Transfer Agreement between Ceska Sporitelna and CME BV (incorporated by reference to Exhibit 10.04 to the Company's Report on Form 10-Q for the quarterly period ended June 30, 1996).
10.17* -- Loan Agreement between Ceska Sporitelna and CME BV (incorporated by reference to Exhibit 10.05 to the Company's Report on Form 10-Q for the quarterly period ended June 30, 1996).
10.18* -- Agreement on a Future Agreement between Ceska Sporitelna and CME BV (incorporated by reference to Exhibit 10.06 to the Company's Report on Form 10-Q for the quarterly period ended June 30, 1996).
10.19* -- Loan Agreement between Vladimir Zelezny and CME dated August 1, 1996 (incorporated by reference to Exhibit 10.01 to the Company's Report on Form 10-Q for the quarterly period ended September 30, 1996).
10.19A* -- Amendment to the Loan Agreement of August 1, 1996 and agreements referred to as Security Documents between Vladimir Zelezny and CME, dated as of March 11, 1997 (incorporated by reference to Exhibit 10.38A to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996).
10.20* -- Ronald S. Lauder Warrant for the Purchase of Shares, dated October 2, 1996 (incorporated by reference to Exhibit 10.03 to the Company's Report on Form 10-Q for the quarterly period ended September 30, 1996).
10.21* -- Agreement between CME, Boris Fuchsmann, Alexander Rodniansky and Innova Film GmbH in English, dated October 25, 1996 (incorporated by reference to Exhibit 10.10 to the Company's Report on Form 10-Q for the quarterly period ended September 30, 1996).
10.22* -- Agreement between CME, Boris Fuchsmann, Alexander Rodniansky and Innova Film GmbH in German, dated October 25, 1996 (incorporated by reference to Exhibit 10.11 to the Company's Report on Form 10-Q for the quarterly period ended September 30, 1996).
10.23* -- Poland Street Lease Agreement, dated April 2, 1996 (incorporated by reference to Exhibit 10.18 to the Company's Report on Form 10-Q for the quarterly period ended September 30, 1996).
10.24* -- Share Purchase Agreement between Ceska Sporitelna a.s. and CME Media Enterprises B.V., dated December 12, 1996 (incorporated by reference to Exhibit 10.58 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996).
10.25* -- Agreement on Assignment of Claim between Ceska Sporitelna, a.s. and CME Media Enterprises B.V., dated December 12, 1996 (incorporated by reference to Exhibit 10.59 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996).
Exhibit Number Description - ------ -----------
10.26* -- Assignment of Shares Agreement between Balaclava B.V., Adrian Sarbu (as shareholders of PRO TV Ltd.), CME Media Enterprises B.V., Grigoruta Roxana Dorina and Petrovici Liana, dated December 6, 1996 (incorporated by reference to Exhibit 10.60 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996).
10.27* -- Net Reimbursement Agreement by and among International Teleservices Limited, International Media Services, Limited and Limited Liability Company 'Prioritet', dated February 13, 1997 (incorporated by reference to Exhibit 10.64 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996).
10.28* -- Agreement by and between International Media Services, Ltd and Innova Film GmbH, dated January 23, 1997 (incorporated by reference to Exhibit 10.65 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996).
10.29* -- Amended and Restated Charter of the Enterprise 'Inter-Media', dated January 23, 1997 (incorporated by reference to Exhibit 10.66 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996).
10.30* -- Amended and Restated Charter of the Broadcasting Company 'Studio 1+1', dated January 23, 1997 (incorporated by reference to Exhibit 10.67 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996).
10.31* -- Amended and Restated Foundation Agreement on the Establishment and Operation of the Broadcasting Company 'Studio 1+1,' dated January 23, 1997 (incorporated by reference to Exhibit 10.68 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996).
10.32* -- Protocol of the Participants' Assembly of the Broadcasting Company 'Studio 1+1,' dated January 23, 1997 (incorporated by reference to Exhibit 10.69 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996).
10.33* -- Marketing, Advertising and Sales Agreement by and between International Media Services Ltd and Innova Film GmbH, dated January 23, 1997 (incorporated by reference to Exhibit 10.70 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996).
10.33A* -- Amendment Agreement to Marketing, Advertising and Sales Agreement between Innova Film GmbH and International Media Services Limited, dated May 7, 1997 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997).
10.34* -- Marketing and Sales Agreement by and between International Media Services Ltd. and Prioritet, dated January 23, 1997 (incorporated by reference to Exhibit 10.71 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996).
10.34A* -- Termination Agreement between International Media Services Ltd. and Prioritet, dated May 7, 1997 (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997).
Exhibit Number Description - ------ -----------
10.35* -- IMS Advertising Service Agreement between International Media Services Ltd. and Limited Liability Company --Prioritet--, dated May 7, 1997 (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997).
10.36* -- Advertising Consultancy Agreement between Intermedia and Limited Liability Company --Prioritet--, dated May 7, 1997 (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997).
10.37* -- Service Agreement between R. S. Lauder Gaspar & Co., LP and Central European Media Enterprises Ltd., dated as of April 1, 1997 (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997).
10.38* -- 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 (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997).
10.39*+ -- Employment Agreement between CME Development Corporation and John Schwallie, dated as of November 21, 1997 (incorporated by reference to Exhibit 10.72 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997).
10.40*+ -- Employment Agreement between Central European Media Enterprises Ltd. and John Schwallie, dated as of November 21, 1997 (incorporated by reference to Exhibit 10.72 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997).
10.41*+ -- Employment Agreement between CME Development Corporation and Fred Klinkhammer, dated as of January 1, 1998 (incorporated by reference to Exhibit 10.72 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997).
10.41A+ Amendment No. 1 to Employment Agreement between CME Development Corporation and Fred Klinkhammer, dated as of March 23, 1999.
10.42*+ -- Employment Agreement between Central European Media Enterprises Ltd. and Fred Klinkhammer, dated as of January 1, 1998 (incorporated by reference to Exhibit 10.72 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997).
10.42A+ Amendment No. 1 to Employment Agreement between Central European Media Enterprises Ltd. and Fred Klinkhammer, dated as of March 23, 1999.
Exhibit Number Description - ------ -----------
10.43*+ -- Employment Agreement, dated as of March 23, 1998, between CME Development Corporation and Michel Delloye (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998)
10.44*+ -- Employment Agreement, dated as of March 23, 1998, between Central European Media Enterprises Ltd. and Michel Delloye (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998)
10.45*+ -- Agreement, dated as of March 25, 1998, among Central European Media Enterprises Ltd., CME Development Corporation, CME Programming Services Inc., The Acorn Consulting Group, Inc. and Leonard M. Fertig (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998)
10.46* -- Sale and Purchase Agreement, dated December 10, 1998, between Central European Media Enterprise Ltd. and International Trading and Investments Holding S.A. (incorporated by reference to Exhibit 2.1 to Form 8-K filed on December 28, 1998)
10.47+ -- Central European Media Enterprises Ltd. Stock Appreciation Rights Plan, effective as of September 3, 1998
10.48+ -- Central European Media Enterprises Ltd. Director, Officer and Senior Executive Co-Investment Plan
10.49 -- Revolving Facility Agreement between CME Czech Republic B.V. and ING Bank N.V dated February 26, 1999
10.50 -- Contract on cooperation in ensuring service for television broadcasting between Ceska Nezavisla Televizni Spolecnost, spol. s.r.o. and CET 21, spol. s.r.o. dated May 21, 1997 and Supplement dated May 21, 1997
10.51 -- Stock Purchase Agreement between Central European Media Enterprises Ltd. and RSL Capital, dated as of December 3, 1998.
21.01 -- List of subsidiaries.
23.01 -- Consent of Arthur Andersen & Co.
24.01 -- Power of Attorney, dated as of March 8, 1999, authorizing Michel Delloye, Frederic T. Klinkhammer and John A. Schwallie as attorney for Ronald S. Lauder, Michel Delloye, Robert R. Grusky, Peter R. Goldscheider, Herbert S. Schlosser, Nicolas G. Trollope and John A. Schwallie.
27.01 -- Financial data schedule.
(b) -- Current Reports on Form 8-K:
Registrant filed a current report on Form 8-K on December 28, 1998 reporting the sale of the Company's interest in TVN Television Operations in Poland, under Item 2: Disposition of Assets
The following pro forma Financial Statements were filed in such Form 8-K
Pro Forma Consolidated Balance Sheet as of September 30, 1998
Pro Forma Consolidated Statements of Operations for the Year Ended December 31, 1997
Pro Forma Consolidated Statements of Operations for the Nine Months Ended September 30, 1998
(c) -- Exhibits: See (a)(5) above for a listing of the exhibits included as part of this report.
(d) -- Report of Independent Public Accountants on Schedule II-- Schedule of Valuation Allowances.
- ----------------------- * -- Previously filed exhibits + -- Exhibit is a management contract or compensatory plan
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Central European Media Enterprises Ltd.
By: /s/ John A. Schwallie ------------------------------- John A. Schwallie Vice President - Finance and Chief Financial Officer
March 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
* By: /s/ John A. Schwallie ---------------------------- John A. Schwallie Attorney-in-fact
INDEX TO SCHEDULES
Report of Independent Public Accountants on Schedule:.....................S-2 Schedule II: Schedule of Valuation Allowances............................S-3
S-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To: Central European Media Enterprises Ltd.:
We have audited in accordance with auditing standards generally accepted in the United States, the financial statements of Central European Media Enterprises Ltd. included in this filing and have issued our report thereon dated March 29, 1999. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the accompanying index is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
Arthur Andersen & Co.
Hamilton, Bermuda March 29, 1999
S-2
Schedule II
Schedule of Valuation Allowances
$000s
S-3