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Policies (Policies)
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67: R49 Organization and Business (Details) HTML 54K
75: R50 Basis of Presentation (Details) HTML 36K
92: R51 GOODWILL AND INTANGIBLE ASSETS Goodwill (Details) HTML 58K
46: R52 GOODWILL AND INTANGIBLE ASSETS Other Intangible HTML 51K
Assets (Details)
12: R53 LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS HTML 40K
Long term debt summary (Details)
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Financing transactions, narrative (Details)
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Long-term debt and credit facilities, overview
(Details)
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Long-term debt and credit facilities, narrative
(Details)
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Maturities of long-term debt and credit facilities
(Details)
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Leverage summary (Details)
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Leverage narrative (Details)
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Interest rate summary (Details)
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2023 revolving credit facility, leverage overview
(Details)
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2023 revolving credit facility, narrative
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105: R63 LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS HTML 53K
Other credit facilities and capital lease
obligations composition (Details)
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31: R65 Accounts Receivable (Details) HTML 37K
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103: R67 Property, Plant and Equipment (Details) HTML 62K
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with Performance Conditions (Details)
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(Details)
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(Exact name of registrant as specified in its charter)
iBermuda
i98-0438382
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
O'Hara House,
i3
Bermudiana Road,
iHM 08
i Hamilton,
iBermuda
(Zip
Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: i(441)i296-1431
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iClass A Common Stock, par value $0.08
iCETV
iNASDAQ
Global Select Market
Indicate by check mark whether registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for each shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” or “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated Filer
☐
iAccelerated
Filer
☒
Non-accelerated Filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)
1. iORGANIZATION
AND BUSINESS
Central European Media Enterprises Ltd., a Bermuda company limited by shares, is a media and entertainment company operating in Central and Eastern Europe. Our assets are held through a series of Dutch and Curaçao holding companies. We manage our business on a geographical basis, with ifive operating segments; Bulgaria, the Czech Republic, Romania, the Slovak Republic and Slovenia, which are also our reportable segments and our main operating countries. See Note 19,
"Segment Data" for financial information by segment. Our previously held Croatian operations, which were sold on July 31, 2018, are classified as discontinued operations in our condensed consolidated statements of operations for the three and nine months ended September 30, 2018.
We are the market-leading broadcasters in each of our ifive operating countries with
a combined portfolio of i30 television channels. Each country develops and produces content for their television channels. We generate advertising revenues primarily through entering into agreements with advertisers, advertising agencies and sponsors to place advertising on the television channels that we operate. We generate additional revenues by collecting fees from cable, and direct-to-home and internet protocol television ("IPTV") operators for carriage of our channels as well as from advertising related to our digital initiatives. Unless
otherwise indicated, we own i100% of our broadcast operating and license companies in each country.
Bulgaria
We operate ione
general entertainment channel, BTV, and ifive other channels, BTV CINEMA, BTV COMEDY, BTV ACTION, BTV LADY and RING. We own i94%
of CME Bulgaria B.V., the subsidiary that owns our Bulgaria operations.
Czech Republic
We operate ione general entertainment channel, TV NOVA, and iseven
other channels, NOVA 2, NOVA CINEMA, NOVA SPORT 1, NOVA SPORT 2, NOVA ACTION, NOVA GOLD and NOVA INTERNATIONAL, a general entertainment channel broadcasting in the Slovak Republic.
Romania
We operate ione general entertainment channel, PRO TV, and isix
other channels, PRO 2, PRO X, PRO GOLD, PRO CINEMA, PRO TV INTERNATIONAL, as well as PRO TV CHISINAU, a general entertainment channel broadcasting in Moldova.
Slovak Republic
We operate ione general entertainment channel, TV MARKIZA, and ithree
other channels, DOMA, DAJTO, and MARKIZA INTERNATIONAL, a general entertainment channel broadcasting in the Czech Republic.
Slovenia
We operate itwo general entertainment channels, POP TV and KANAL A, and ithree
other channels, KINO, BRIO and OTO.
2. iBASIS OF PRESENTATION
The terms the "Company", "we", "us", and “our” are used in this Form 10-Q to refer collectively to the parent company, Central European Media Enterprises Ltd. (“CME Ltd.”), and the subsidiaries
through which our various businesses are conducted. Unless otherwise noted, all statistical and financial information presented in this report has been converted into U.S. dollars using period-end exchange rates. All references to "US$", "USD" or "dollars" are to U.S. dollars, all references to "BGN" are to the Bulgarian leva, all references to "CZK" are to the Czech koruna, all references to "RON" are to the New Romanian lei, and all references to "Euro" or "EUR" are to the European Union Euro. Where applicable, prior period presentation has been modified to conform to current year presentation.
i
Interim
Financial Statements
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Quarterly Report on Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles in the United States of America (“US GAAP”). Amounts as of December 31, 2018 included in the unaudited condensed consolidated financial statements have been derived from audited consolidated financial statements as of that date. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange
Commission on February 6, 2019. Our significant accounting policies have not changed since December 31, 2018, except as noted below.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring items and changes in US GAAP, necessary for their fair presentation in conformity with US GAAP for complete financial statements. The results of operations for interim periods are not necessarily indicative of the results to be expected for a full year.
i
Use
of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions.
i
Basis of Consolidation
The unaudited condensed consolidated financial statements include the accounts of CME Ltd. and our
subsidiaries, after the elimination of intercompany accounts and transactions. Entities in which we hold less than a majority voting interest but over which we have the ability to exercise significant influence are accounted for using the equity method. Other investments are accounted for using the cost method.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share
and per share data)
(Unaudited)
i
Seasonality
We experience seasonality, with advertising sales tending to be lowest during the third quarter of each calendar year due to the summer holiday period (typically July and August), and highest during the fourth quarter of each calendar year due to the winter holiday season.
Recent Accounting Pronouncements
i
Accounting
Pronouncements Adopted
In February 2016, the Financial Accounting Standards Board ("the FASB") issued guidance to increase transparency and comparability among organizations by recognizing leasing assets and liabilities on the balance sheet and requiring additional disclosures about an entity's leasing arrangements. The guidance requires that a lessee recognize a liability to make lease payments and a right-of-use asset ("ROU"), with an available exception for leases with an initial term shorter than twelve months. Adoption of the guidance changes our accounting for operating leases while the accounting for our finance leases (previously called capital leases) remains substantially unchanged.
We determine if an arrangement includes a lease at inception. An ROU represents our right to use an underlying asset for the lease term and the corresponding lease liability represents
our obligation to make periodic payments arising from that lease. Operating lease ROUs and liabilities are recognized at their commencement date based on the present value of the lease payments over the lease term. As most of our leases do not provide an implicit rate, we use an incremental borrowing rate based on the information available at the commencement date of a lease in determining the present value of the lease payments. The operating lease ROU also includes any lease payments made prior to commencement and excludes any lease incentives received or to be received under the agreement. Our determination of the lease term may include options to extend or terminate the lease when it is reasonably certain that we will exercise such option.
Where lease agreements include both lease and non-lease components, we generally account for each separately. For certain equipment leases, such as vehicles, we account for the lease
and non-lease components as a single lease component. We consider operating leases that are for a period less than 12 months, inclusive of options to extend that we are reasonably certain to exercise, as short-term. Short-term leases are not recognized on the balance sheet. Short-term lease cost is recognized on a straight-line basis over the lease term.
ROUs and related operating lease liabilities are included in other non-current assets, other current liabilities and other non-current liabilities, respectively on our condensed consolidated balance sheets. Operating lease costs are recognized on a straight-line basis over the lease term within content costs, other operating costs or sales, general and administrative expenses based on the use of the related ROU. ROUs and related finance lease liabilities are included in property and equipment, and long-term debt and other financing arrangements, respectively, on our condensed
consolidated balance sheets. Depreciation of an asset held under a finance lease is recognized in depreciation of property, plant and equipment.
We adopted this guidance as of the transition date of January 1, 2019, using the modified retrospective approach and have elected the transition option which allows us to continue to apply the legacy guidance for comparative periods, including disclosure requirements, in the year of adoption. We have elected to use the package of practical expedients available to us, including the short-term lease exception, however we have not elected the use of hindsight and have not elected to combine lease and non-lease components for our main classes of assets.
On transition, we recorded US$ i11.9
million in operating lease liabilities and ROUs while our accounting for finance leases remains substantially unchanged.
Recent Accounting Pronouncements Issued
/
In June 2016, the FASB issued new guidance to provide financial statement users with more information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments replace the incurred loss impairment methodology in the current guidance with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The guidance is effective for our
fiscal year beginning January 1, 2020 with early adoption permitted for our fiscal year beginning January 1, 2019. Based on our current assessment, the guidance will primarily apply to our accounts receivable but is not expected to substantially change our procedures for estimating our bad debt expense or the anticipated results of those procedures. We expect to adopt this guidance on January 1, 2020.
In March 2019, the FASB issued new guidance that aligns the accounting for production costs of an episodic television series with the accounting for production costs of films. The guidance further requires that an entity test a film or license agreement for program material for impairment at a film group level and under a fair value model when the film or license agreement is predominantly
monetized with other films and/or license agreements. Further, content acquired under a license agreement is not required to be separately presented on the balance sheet based on the estimated time of usage. Additional disclosures are required. The guidance is effective for our fiscal year beginning January 1, 2020 with early adoption permitted. We do not expect this guidance to significantly impact the condensed consolidated statements of operations and comprehensive income / loss, but we do anticipate the classification of all our acquired content as non-current on our condensed consolidated balance sheets. We expect to adopt this guidance on January 1, 2020.
Net
broadcast licenses consist solely of our TV NOVA license in the Czech Republic, which is amortized on a straight-line basis through its expiration date in 2025. Our customer relationships are deemed to have an economic useful life of, and are amortized on a straight-line basis, over ifive years to ififteen
years. Other intangibles primarily consist of software licenses which are typically amortized on a straight-line basis over three years to five years.
Total
long-term debt and other financing arrangements
i587,164
i788,230
Less:
current maturities
(i6,063
)
(i5,545
)
Total
non-current long-term debt and other financing arrangements
$
i581,101
$
i782,685
/
Overview
i
Total
long-term debt and credit facilities comprised the following at iSeptember 30, 2019:
Principal
Amount of Liability Component
Debt Issuance
Costs (1)
Net Carrying Amount
2021 Euro Loan
$
i65,699
$
(i108
)
$
i65,591
2023
Euro Loan
i510,476
(i3,710
)
i506,766
2023
Revolving Credit Facility
i—
i—
i—
Total
long-term debt and credit facilities
$
i576,175
$
(i3,818
)
$
i572,357
/
(1)
Debt
issuance costs related to the 2021 Euro Loan, the 2023 Euro Loan and the 2023 Revolving Credit Facility (each as defined below) are being amortized on a straight-line basis, which approximates the effective interest method, over the life of the respective instruments. Debt issuance costs related to the 2023 Revolving Credit Facility are classified as non-current assets in our condensed consolidated balance sheet.
On January 31, 2019, and June 14, 2019, we paid EUR i60.0
million (approximately US$ i68.9 million at January 31, 2019 rates) and EUR i40.0
million (approximately US$ i45.1 million at June 14, 2019 rates), respectively, of the outstanding principal balance of the 2021 Euro Loan. On September 23, 2019, we paid a further EUR i50.0
million (approximately US$ i54.9 million at September 23, 2019 rates) of the outstanding principal balance of the 2021 Euro Loan.
i
At
iSeptember 30, 2019, the maturity of our long-term debt and credit facilities was as follows:
2019
$
i—
2020
i—
2021
i65,699
2022
i—
2023
i510,476
2024
and thereafter
i—
Total long-term debt and credit facilities
i576,175
Debt
issuance costs
(i3,818
)
Carrying amount of long-term debt and credit facilities
The
estimated fair values of the Euro Loans (as defined below) as at iSeptember 30, 2019 and December 31, 2018 were determined using the average yield curve of comparable bonds with equivalent credit ratings which is a Level 2 input as described in Note 12, "Financial Instruments and Fair Value Measurements". Certain derivative instruments, including contingent event of default and change of control
put options, have been identified as being embedded in each of the Euro Loans. The embedded derivatives are considered clearly and closely related to their respective Euro Loan, and as such are not required to be accounted for separately.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)
2021 Euro Loan
As
at iSeptember 30, 2019, the principal amount of our floating rate senior unsecured term credit facility (the "2021 Euro Loan") outstanding was EUR i60.3
million (approximately US$ i65.7 million). The 2021 Euro Loan bears interest at three-month EURIBOR (fixed pursuant to customary hedging arrangements (see Note 12, "Financial Instruments and Fair Value Measurements")) plus a margin of between i1.1%
and i1.9% depending on the credit rating of Warner Media. As at iSeptember 30, 2019,
the all-in borrowing rate on amounts outstanding under the 2021 Euro Loan was i3.25%, the components of which are shown in the table below under the heading "Interest Rate Summary".
Interest on the 2021 Euro Loan is payable quarterly in arrears on each February 13, May 13, August 13 and November 13. The 2021 Euro Loan matures on November 1, 2021 and may be prepaid at our option,
in whole or in part, without premium or penalty from cash generated from our operations. From April 26, 2020, the 2021 Euro Loan may be refinanced at our option. The 2021 Euro Loan is a senior unsecured obligation of CME Ltd. and is unconditionally guaranteed by CME Media Enterprises B.V. ("CME BV") and by Warner Media, LLC ("Warner Media") and certain of its subsidiaries.
2023 Euro Loan
As at iSeptember
30, 2019, the principal amount of our floating rate senior unsecured term credit facility (the "2023 Euro Loan") outstanding was EUR i468.8 million (approximately US$ i510.5
million). The 2023 Euro Loan bears interest at three-month EURIBOR (fixed pursuant to customary hedging arrangements (see Note 12, "Financial Instruments and Fair Value Measurements")) plus a margin of between i1.1% and i1.9%
depending on the credit rating of Warner Media. As at iSeptember 30, 2019, the all-in borrowing rate on amounts outstanding under the 2023 Euro Loan was i3.50%,
the components of which are shown in the table below under the heading "Interest Rate Summary".
Interest on the 2023 Euro Loan is payable quarterly in arrears on each January 7, April 7, July 7 and October 7. The 2023 Euro Loan matures on April 26, 2023 and may be prepaid at our option, in whole or in part, without premium or penalty from cash generated from our operations. From April 26, 2020, the 2023 Euro Loan may be refinanced at our option. The 2023 Euro Loan is a senior unsecured obligation of CME BV and is unconditionally guaranteed by CME Ltd. and by Warner Media and certain of its subsidiaries.
Reimbursement Agreement and Guarantee Fees
In
connection with Warner Media’s guarantees of the 2021 Euro Loan and 2023 Euro Loan (collectively, the "Euro Loans"), we entered into a reimbursement agreement (as amended, the “Reimbursement Agreement") with Warner Media. The Reimbursement Agreement provides for the payment of guarantee fees (collectively, the "Guarantee Fees") to Warner Media as consideration for those guarantees, and the reimbursement to Warner Media of any amounts paid by them under any guarantee or through any loan purchase right exercised by it. The loan purchase right allows Warner Media to purchase any amount outstanding under the Euro Loans from the lenders following an event of default under the Euro Loans or the Reimbursement Agreement. The Reimbursement Agreement is jointly and severally guaranteed by both our i100%
owned subsidiary Central European Media Enterprises N.V. ("CME NV") and CME BV and is secured by a pledge over i100% of the outstanding shares of each of CME NV and CME BV. The covenants and events of default under the Reimbursement Agreement are substantially the same as under the 2023 Revolving Credit Facility (described below).
i
We
pay Guarantee Fees to Warner Media based on the amounts outstanding on the Euro Loans calculated on a per annum basis and on our consolidated net leverage (as defined in the Reimbursement Agreement) as shown in the tables below:
All-in Rate
Consolidated Net Leverage
2021 Euro Loan
2023 Euro
Loan
≥
i7.0x
i6.00
%
i6.50
%
<
i7.0x
-
i6.0x
i5.00
%
i5.50
%
<
i6.0x
-
i5.0x
i4.25
%
i4.75
%
<
i5.0x
-
i4.0x
i3.75
%
i4.25
%
<
i4.0x
-
i3.0x
i3.25
%
i3.75
%
<
i3.0x
i3.25
%
i3.50
%
/
Our
consolidated net leverage as at iSeptember 30, 2019 and December 31, 2018 was i2.5x
and i3.5x, respectively. For the three and nine months ended iSeptember
30, 2019 and 2018, we recognized US$ i3.2 million and US$ i10.5
million; and US$ i5.2 million and US$ i22.5 million,
respectively, of Guarantee Fees as interest expense in our condensed consolidated statements of operations and comprehensive income / loss.
The Guarantee Fees relating to the 2021 Euro Loan are payable semi-annually in arrears on each May 1 and November 1. The Guarantee Fees relating to the 2023 Euro Loan are payable semi-annually in arrears on each June 1 and December 1.
The Guarantee Fees on the 2023 Euro Loan that were previously paid in kind are presented as a component of other non-current liabilities (see Note 10, "Other Liabilities") and bear interest per annum at the applicable Guarantee Fee rate (as set forth in the table below). Guarantee Fees are included in cash flows from operating activities in our condensed consolidated statements of cash flows.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)
i
Interest Rate Summary
Base
Rate
Rate Fixed Pursuant to Interest Rate Hedges
Guarantee Fee Rate
All-in Borrowing Rate
2021 Euro Loan
i1.28
%
i0.31
%
(1)
i1.66
%
i3.25
%
2023
Euro Loan
i1.28
%
i0.28
%
(2)
i1.94
%
i3.50
%
2023
Revolving Credit Facility (if drawn)
i5.34
%
(3)
—
%
—
%
i5.34
%
(1)
Effective
until November 1, 2019. From November 1, 2019 through maturity on November 1, 2021, the rate fixed pursuant to interest rate hedges will increase to i0.47%, with a corresponding decrease in the Guarantee Fee rate, such that the all-in borrowing rate remains i3.25%
if our net leverage ratio remains unchanged.
(2)
Effective until February 19, 2021. From February 19, 2021 through maturity on April 26, 2023, the rate fixed pursuant to interest rate hedges will increase to i0.97%,
with a corresponding decrease in the Guarantee Fee rate, such that the all-in borrowing rate remains i3.50% if our net leverage ratio remains unchanged.
We had ino balance outstanding under the US$ i75.0
million revolving credit facility (the "2023 Revolving Credit Facility") as at iSeptember 30, 2019.
The 2023 Revolving Credit Facility bears interest at a rate per annum based on, at our option, an alternate base rate ("ABR Loans" as defined in the 2023 Revolving Credit Facility Agreement) plus the spread applicable to ABR Loans based on our consolidated net leverage or an amount equal to the greater of (i) an adjusted LIBO rate and (ii) i1.0%,
plus the spread applicable to the Eurodollar Loans (as defined in the 2023 Revolving Credit Facility Agreement) based on our consolidated net leverage ratio (as defined in the Reimbursement Agreement), with all amounts payable in cash. The maturity date of the 2023 Revolving Credit Facility is April 26, 2023. When drawn, the 2023 Revolving Credit Facility permits prepayment at our option in whole or in part without penalty.
The
2023 Revolving Credit Facility is jointly and severally guaranteed by CME NV and CME BV and is secured by a pledge over i100% of the outstanding shares of each of CME NV and CME BV. The 2023 Revolving Credit Facility agreement contains limitations on CME’s ability to incur indebtedness, incur guarantees, grant liens, pay dividends or make other distributions, enter into certain affiliate transactions, consolidate, merge or
effect a corporate reconstruction, make certain investments acquisitions and loans, and conduct certain asset sales. The agreement also contains maintenance covenants in respect of interest cover and total leverage ratios, and has covenants in respect of incurring indebtedness, the provision of guarantees, making investments and disposals, granting security and certain events of defaults.
Other Credit Facilities and Finance Lease Obligations
i
Cash Pooling
We have a cash pooling arrangement with Bank
Mendes Gans (“BMG”), a subsidiary of ING Bank N.V. (“ING”), which enables us to receive credit throughout the group in respect of cash balances which our subsidiaries deposit with BMG. Cash deposited by our subsidiaries with BMG is pledged as security against the drawings of other subsidiaries up to the amount deposited. As at iSeptember
30, 2019, we had deposits of US$ i17.8 million in and no drawings on the BMG cash pool. Interest is earned on deposits at the relevant money market rate. As at December 31, 2018, we had deposits of US$ i36.8
million in and ino drawings on the BMG cash pool.
Factoring Arrangements
Under a factoring framework agreement with Factoring Česka spořitelna a.s., up to CZK i475.0
million (approximately US$ i20.0 million) of receivables from certain customers in the Czech Republic may be factored on a recourse or non-recourse basis. The facility has a factoring fee of i0.19%
of any factored receivable and bears interest at one-month PRIBOR plus i0.95% per annum for the period that receivables are factored and outstanding.
Under a factoring framework agreement with Factoring KB, a.s., up to CZK i270.0
million (approximately US$ i11.4 million) from certain customers in the Czech Republic may be factored on a non-recourse basis. The facility has a factoring fee of i0.11%
of any factored receivable and bears interest at one-month PRIBOR plus i0.95% per annum for the period that receivables are factored and outstanding up to a maximum of 60 days from the due date.
Under a factoring framework agreement with Global Funds IFN S.A., receivables from certain customers in Romania may be factored on a non-recourse basis. The facility has a factoring fee of i4.0%
of any factored receivable and bears interest at i6.0% per annum from the date the receivables are factored to the due date of the factored receivable.
Includes
assets acquired under finance leases of US$ i3.5 million and US$ i9.5 million for the nine
months ended September 30, 2019 and 2018, respectively.
During
the three and nine months ended September 30, 2019 and 2018, we recognized revenue of US$ i1.8 million and US$ i7.4
million; and US$ i1.3 million and US$ i5.4
million, which was deferred as at December 31, 2018 and 2017, respectively.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)
11. iLEASES
We
enter into operating and finance leases for offices, production and related facilities, cars and certain equipment. Our leases have remaining lease terms up to ten years.
i
The components of lease cost for the three and nine months ended September 30, 2019 were as follows:
For
the Three Months Ended September 30,
For the Nine Months Ended September 30,
Operating lease cost:
Short-term operating lease cost
$
i1,354
$
i4,166
Long-term
operating lease cost
i1,147
i3,446
Total
operating lease cost
$
i2,501
$
i7,612
Finance
lease cost:
Amortization of right-of-use asset
$
i1,600
$
i4,319
Interest
on lease liabilities
i80
i276
Total
finance lease cost
$
i1,680
$
i4,595
/i
The
classification of cash flows related to our leases for the nine months ended September 30, 2019 was as follows:
For the Nine Months Ended September 30,
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
i3,371
Operating
cash flows from finance leases
i288
Financing cash flows from finance leases
i5,106
Right-of-use
assets obtained in exchange for lease obligations:
Current portion of long-term debt and other financing
arrangements
$
i6,063
Long-term debt and other financing arrangements
i8,744
Total
finance lease liabilities
$
i14,807
Weighted Average Remaining Lease Term
Years
Operating
leases
5.2
Finance leases
2.7
Weighted Average Discount Rate
Discount Rate
Operating leases
i4.77
%
Finance
leases
i2.07
%
i
Our
lease liabilities had the following maturities at September 30, 2019:
Operating Leases
Finance Leases
2019
$
i2,051
$
i1,636
2020
i2,134
i6,194
2021
i2,360
i4,792
2022
i1,600
i2,143
2023
i1,334
i459
2024
and thereafter
i2,649
i—
Total
undiscounted payments
i12,128
i15,224
Less:
amount representing interest
(i1,501
)
(i417
)
Present
value of net minimum lease payments
$
i10,627
$
i14,807
/
12. iFINANCIAL
INSTRUMENTS AND FAIR VALUE MEASUREMENTS
i
ASC 820, "Fair Value Measurements and Disclosure", establishes a hierarchy that prioritizes the inputs to those valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are:
Basis of Fair Value Measurement
Level
1
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted instruments.
Level 2
Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly.
Level 3
Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
A
financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)
We evaluate the position of each financial instrument measured at fair value in the hierarchy individually
based on the valuation methodology we apply. The carrying amount of financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities, approximate their fair value due to the short-term nature of these items. The fair value of our long-term debt is included in Note 4, "Long-term Debt and Other Financing Arrangements".
Hedging Activities
Cash Flow Hedges of Interest Rate Risk
We are party to interest rate swap agreements to mitigate our exposure to interest rate fluctuations on the outstanding principal amount of the Euro Loans. These interest rate swaps provide us with variable-rate cash receipts in exchange for fixed-rate payments over the lives of the agreements, with no exchange of the underlying notional amount. These instruments
are carried at fair value on our condensed consolidated balance sheets as other current and other non-current liabilities based on their maturity.
We value the interest rate swap agreements using a valuation model which calculates the fair value on the basis of the net present value of the estimated future cash flows. The most significant input used in the valuation model is the expected EURIBOR-based yield curve. These instruments were allocated to Level 2 of the fair value hierarchy because the critical inputs to this model, including current interest rates, relevant yield curves and the known contractual terms of the instruments, were readily observable.
As at September 30, 2019 each instrument is fully designated as a cash flow hedge. All changes in the fair value of these instruments
are recorded in accumulated other comprehensive income / loss and subsequently reclassified to interest expense when the hedged item affects earnings.
i
Information relating to financial instruments is as follows:
Interest rate hedge underlying 2023 Euro Loan, forward starting on February 19, 2021
$
(i10,464
)
i
/
Fair
Value of Derivatives
i
The change in fair value of derivatives not recognized within accumulated other comprehensive income / loss comprised the following for the three and nine months ended September 30, 2019 and 2018:
i200,000 shares of our Series B Convertible Redeemable Preferred Stock, par value US$ i0.08
per share (the “Series B Preferred Shares”) were issued and outstanding as at September 30, 2019 and December 31, 2018. The Series B Preferred Shares are held by Time Warner Media Holdings B.V. ("TW Investor"), a wholly owned subsidiary of AT&T. As at September 30, 2019 and December 31, 2018, the accreted value of the Series B Preferred Shares was US$ i269.4
million. The Series B Preferred Shares have a stated value of US$ i1,000 per share and no longer accrete subsequent to June 24, 2018. As of September 30, 2019, the i200,000
shares of Series B preferred stock were convertible into approximately i111.1 million shares of Class A common stock.
Each Series B Preferred Share may, at the holder's option, be converted into the number of shares of our Class A common stock determined by dividing (i) the accreted stated value plus accrued but unpaid dividends, if any, in each
case as of the conversion date, by (ii) the conversion price, which was approximately US$ i2.42 at September 30, 2019, but is subject to adjustment from time to time pursuant to customary weighted-average anti-dilution provisions with respect to our issuances of equity or equity-linked securities at a price below the then-applicable conversion price (excluding any securities issued
under our benefit plans at or above fair market value). We have the right to redeem the Series B Preferred Shares in whole or in part upon 30 days' written notice. The redemption price of each outstanding Series B Preferred Share is equal to its accreted stated value plus accrued but unpaid dividends, if any, in each case as of the redemption date specified in the redemption notice. After receipt of a redemption notice, each holder of Series B Preferred Shares will have the right to convert, prior to the date of redemption, all or part of such Series B Preferred Shares to be redeemed by us into shares of our Class A common stock in accordance with the terms of conversion described above.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)
Holders of the Series B Preferred Shares have no voting rights on any matter presented to holders of any class of our capital stock, with the exception that they may vote with holders of shares of our Class A common stock (i) with respect to a change of control event or (ii) as provided by our Bye-laws or applicable Bermuda law. Holders of Series B Preferred Shares will participate in any dividends declared or paid on our Class A common stock on an as-converted basis. The Series B Preferred Shares will rank pari passu with our Series A Convertible Preferred Stock and senior to all other equity securities of the
Company in respect of payment of dividends and distribution of assets upon liquidation. The Series B Preferred Shares have such other rights, powers and preferences as are set forth in the Certificate of Designation for the Series B Preferred Shares.
The Series B Preferred Shares are not considered a liability and the embedded conversion feature does not require bifurcation. The Series B Preferred Shares are classified outside of permanent equity at redemption value.
iOne
share of Series A Convertible Preferred Stock (the "Series A Preferred Share") was issued and outstanding as at September 30, 2019 and December 31, 2018. The Series A Preferred Share is convertible into i11,211,449
shares of Class A common stock on the date that is 61 days after the date on which the ownership of our outstanding shares of Class A common stock by a group that includes TW Investor and its affiliates would not be greater than i49.9%. The Series A Preferred Share is entitled to one vote per each share of Class A common stock into which it is convertible and has such other
rights, powers and preferences, including potential adjustments to the number of shares of Class A common stock to be issued upon conversion, as are set forth in the Certificate of Designation for the Series A Preferred Share.
i200,000 shares of Series B Preferred Shares were issued and outstanding as at September 30, 2019 and December 31, 2018
(see Note 13, "Convertible Redeemable Preferred Shares"). As of September 30, 2019, the i200,000 Series B Preferred Shares were convertible into approximately i111.1
million shares of Class A common stock.
Class A and Class B Common Stock
i440,000,000 shares of Class A common stock and i15,000,000
shares of Class B common stock were authorized as at September 30, 2019 and December 31, 2018. The rights of the holders of Class A common stock and Class B common stock are identical except for voting rights. The shares of Class A common stock are entitled to one vote per share and the shares of Class B common stock are entitled to ten votes per share. Shares of Class B common stock are convertible into shares of Class A common stock on a ione-for-ione
basis for no additional consideration and automatically convert into shares of Class A common stock on a one-for-one basis when the number of shares of Class B common stock is less than 10% of the total number of shares of common stock outstanding. Holders of each class of shares are entitled to receive dividends and upon liquidation or dissolution are entitled to receive all assets available for distribution to holders of our common stock. Under our Bye-laws, the holders of each class have no pre-emptive or other subscription rights and there are no redemption or sinking fund provisions with respect to such shares.
As at September 30, 2019, TW Investor owns i64.0%
of the outstanding shares of Class A common stock. In connection with the exercise of warrants by Warner Media and TW Investor in April 2018, each of them issued standing proxies to the independent directors of the Company, pursuant to which they granted the right to vote the approximately i100.9 million shares of Class A common stock received on the exercise of those warrants (the “Warrant
Shares”) on all matters other than at any meeting where the agenda includes a change in control transaction. In accordance with these proxies, the Warrant Shares will be voted in proportion to votes cast at a general meeting of the Company, excluding such Warrant Shares. Warner Media and TW Investor have undertaken to maintain this proxy arrangement in effect until April 2020 and may at their option extend it for an additional year from that date. As a result of the standing proxies, after giving effect to its ownership of the Series A Preferred Share, TW Investor has a i44.3%
voting interest in the Company.
Foreign
exchange (loss) / gain on intercompany loans (1)
(i2,966
)
i4,894
(i710
)
i1,370
Foreign
exchange loss on the Series B Preferred Shares
(i11,882
)
(i1,902
)
(i13,533
)
(i9,579
)
Currency
translation adjustments
(i17,988
)
i9,091
(i17,480
)
(i2,776
)
Balance,
end of period
$
(i239,391
)
$
(i195,241
)
$
(i239,391
)
$
(i195,241
)
Unrealized
loss on derivative instruments designated as hedging instruments
Balance, beginning of period
$
(i13,533
)
$
(i6,110
)
$
(i8,982
)
$
(i3,182
)
Change
in the fair value of hedging instruments
(i840
)
i480
(i6,242
)
(i5,115
)
Amounts
reclassified from accumulated other comprehensive loss:
Changes in fair value of hedging instruments reclassified to interest expense
i440
i553
i1,291
i1,784
Changes
in fair value of hedging instruments reclassified to other non-operating income / expense, net
i165
i—
i165
i1,436
Balance,
end of period
$
(i13,768
)
$
(i5,077
)
$
(i13,768
)
$
(i5,077
)
BALANCE,
end of period
$
(i253,159
)
$
(i200,318
)
$
(i253,159
)
$
(i200,318
)
/
(1)
Represents
foreign exchange gains and losses on intercompany loans that are of a long-term investment nature which are reported in the same manner as translation adjustments.
15.i INTEREST EXPENSE
i
Interest
expense comprised the following for the three and nine months ended iSeptember 30, 2019 and 2018:
Interest
on long-term debt and other financing arrangements
$
i7,201
$
i9,070
$
i21,451
$
i36,585
Amortization
of capitalized debt issuance costs
i836
i907
i2,563
i3,621
Total
interest expense
$
i8,037
$
i9,977
$
i24,014
$
i40,206
/
We
paid cash interest (including mandatory cash-pay Guarantee Fees) of US$ i17.0 million and US$ i30.6 millionduring the nine
months ended iSeptember 30, 2019 and 2018, respectively. In addition, we paid US$ i27.3
million of accrued Guarantee Fees during the nine months ended September 30, 2018, which we had previously elected to pay in kind.
Subsequent to the amendment approved at our Annual General Meeting on May 20, 2019, our 2015 Stock Incentive Plan (the "2015 Plan"), has i16,000,000 shares of Class A common stock authorized for grants of stock options, restricted stock
units ("RSU"), restricted stock and stock appreciation rights to employees and non-employee directors. Under the 2015 Plan, awards are made to employees and directors at the discretion of the Compensation Committee.
For the three and nine months ended iSeptember 30, 2019 and 2018, we recognized charges for stock-based compensation of US$ i0.9
million and US$ i3.1 million; and US$ i3.9 million and US$ i6.1
million respectively, presented as a component of selling, general and administrative expenses in our condensed consolidated statements of operations and comprehensive income / loss. Share-based compensation expense recognized during the three and nine months ended September 30, 2018 includes US$ i2.9 million related to the accelerated vesting of RSUs with performance
conditions in accordance with the terms of the corresponding award agreement following the completion of sale of the Company's Croatian operations on July 31, 2018.
Stock Options
Grants of options allow the holders to purchase shares of Class A common stock at an exercise price, which is generally the market price prevailing at the date of the grant, with vesting between one and ifour
years after the awards are granted. iThere was no option activity during the nine months ended iSeptember
30, 2019. The summary of stock options outstanding as at iSeptember 30, 2019 and December 31, 2018 is presented below:
Shares
Weighted
Average Exercise Price per Share
Weighted Average Remaining Contractual Term (years)
When
options are vested, holders may exercise them at any time up to the maximum contractual life of the instrument which is specified in the option agreement. At iSeptember 30, 2019, the maximum life of options that were issued under the 2015 Plan was iten
years. Upon providing the appropriate written notification, holders pay the exercise price and receive shares. Shares delivered in respect of stock option exercises are newly issued shares.
The aggregate intrinsic value (the difference between the stock price on the last day of trading of the third quarter of 2019 and the exercise prices multiplied by the number of in-the-money options) represents the total intrinsic value that would have been received by the option holders had they exercised all in-the-money options as at iSeptember
30, 2019. This amount changes based on the fair value of our Class A common stock. As at iSeptember 30, 2019, there was US$ i0.1
million of unrecognized compensation expense related to stock options which is expected to be recognized over a weighted-average period of i0.44 years with all options vesting by March 2020.
Restricted Stock Units with Time-Based
Vesting
Each RSU represents a right to receive ione share of Class A common stock of the Company for each RSU that vests in accordance with a time-based vesting schedule, generally between one to ifour
years from the date of grant. Holders of RSU awards are not entitled to receive cash dividend equivalents prior to the vesting of awards and are not entitled to vote shares underlying awards.
The
intrinsic value of unvested RSUs was US$ i10.5 million as at iSeptember
30, 2019. Total unrecognized compensation cost related to unvested RSUs as at iSeptember 30, 2019 was US$ i6.8
million and is expected to be recognized over a weighted-average period of i2.4 years.
Restricted Stock Units with Performance Conditions
Each RSU with performance conditions (“PRSU”) represents a right to receive one share of Class A common
stock of the Company for each PRSU that vests in accordance with a performance-based vesting schedule. The performance-based vesting schedule sets forth specified objectives for unlevered free cash flow and OIBDA over defined periods and by defined dates. Holders of PRSU awards are not entitled to receive cash dividend equivalents prior to the vesting of awards and are not entitled to vote shares underlying awards.
On December 4, 2018, the 2018 PRSU Award was granted with unlevered free cash flow and OIBDA targets corresponding to two, three and four-year performance periods ending December 31, 2020, 2021 and 2022, respectively. The maximum achievement
under the 2018 PRSU Award is i200% of the shares allotted to the corresponding target. There was no PRSU activity during the nine months ended iSeptember
30, 2019 and we have not recognized any related compensation cost to date.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)
i
18. EARNINGS
PER SHARE
i
We determined that the Series B Preferred Shares are a participating security, and accordingly, our basic and diluted net income / loss per share is calculated using the two-class method. Under the two-class method, basic net income / loss per common share is computed by dividing the net income available to common shareholders after deducting contractual amounts of accretion on our Series B Preferred Shares and the income allocated to these shares by the weighted-average number of common shares outstanding during the period. Diluted net income / loss per share is computed by dividing the adjusted net income by the weighted-average
number of dilutive shares outstanding during the period after adjusting for the impact of those dilutive shares on the allocation of income to the Series B Preferred Shares.
i
The components of basic and diluted earnings per share are as follows:
Less:
preferred share accretion paid in kind (Note 13)
i—
i—
i—
(i4,777
)
Less:
income allocated to Series B Preferred Shares
(i4,063
)
(i3,168
)
(i20,549
)
(i12,243
)
Income
from continuing operations available to common shareholders, net of noncontrolling interest
i9,682
i7,521
i48,913
i24,294
Income
from discontinued operations, net of tax
i—
i57,882
i—
i60,548
Less
income allocated to Series B Preferred Shares
i—
(i17,156
)
i—
(i20,290
)
Net
income attributable to CME Ltd. available to common shareholders — basic
i9,682
i48,247
i48,913
i64,552
Effect
of dilutive securities
Dilutive effect of employee stock options, RSUs and Series B Preferred Shares
i18
i60
i77
i3,202
Net
income attributable to CME Ltd. available to common shareholders — diluted
$
i9,700
$
i48,307
$
i48,990
$
i67,754
Weighted
average outstanding shares of common stock — basic (1)
i264,833
i263,829
i264,536
i219,267
Dilutive
effect of employee stock options, RSUs and common stock warrants
i1,696
i1,111
i1,404
i35,998
Weighted
average outstanding shares of common stock — diluted
i266,529
i264,940
i265,940
i255,265
Net
income per share:
Continuing operations — basic
$
i0.04
$
i0.03
$
i0.18
$
i0.11
Continuing
operations — diluted
i0.04
i0.03
i0.18
i0.10
Discontinued
operations — basic
i—
i0.15
i—
i0.18
Discontinued
operations — diluted
i—
i0.15
i—
i0.17
Attributable
to CME Ltd. — basic
i0.04
i0.18
i0.18
i0.29
Attributable
to CME Ltd. — diluted
i0.04
i0.18
i0.18
i0.27
/
(1)
For
the purpose of computing basic earnings per share, the i11,211,449 shares of Class A common stock underlying the Series A Preferred Share are included in the weighted average outstanding shares of common stock - basic, because the rights of the Series A Preferred Share are considered substantially similar to that of our Class
A common stock.
Wieighted-average equity awards and convertible shares are excluded from the calculation of diluted earnings per share if their effect would be anti-dilutive. The following instruments were anti-dilutive for the periods presented but may be dilutive in future periods:
We manage our business on a geographical basis, with ifive operating segments: Bulgaria, the Czech Republic, Romania, the Slovak Republic and Slovenia, which are also our reportable segments and our main operating countries. These segments reflect how CME Ltd.’s operating performance is evaluated by our chief operating decision makers, who we have identified as our co-Chief Executive Officers; how operations are managed by segment managers; and the structure of our internal
financial reporting.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)
Our segments generate revenues primarily from the sale of advertising and sponsorship on our channels and digital properties. This is supplemented by revenues from cable and satellite television service providers that carry our channels on their
platforms and from revenues through the sale of distribution rights to third parties. We do not rely on any single major customer or group of major customers. Intersegment revenues and profits have been eliminated in consolidation.
We evaluate our consolidated results and the performance of our segments based on net revenues and OIBDA (as defined below). We believe OIBDA is useful to investors because it provides a meaningful representation of our performance as it excludes certain items that either do not impact our cash flows or do not impact the operating results of our operations. OIBDA is also used as a component in determining management bonuses.
OIBDA includes amortization and impairment of program rights and is calculated as operating income / loss before depreciation, amortization of intangible assets, impairments of assets and certain unusual or infrequent items that are
not considered by our chief operating decision makers when evaluating our performance.
Below are tables showing our net revenues, OIBDA, total assets, capital expenditures and long-lived assets for our continuing operations by segment for the three and nine months ended September 30, 2019 and 2018 for condensed consolidated statements of operations and comprehensive income / loss data and condensed consolidated statements of cash flow data; and as at September 30, 2019 and December 31, 2018 for condensed
consolidated balance sheet data.
Amortization
of broadcast licenses and other intangibles
(i2,029
)
(i2,216
)
(i6,336
)
(i6,839
)
Other
items (1)
(i354
)
(i3,152
)
(i2,967
)
(i3,152
)
Operating
income
i30,783
i22,197
i118,882
i96,795
Interest
expense (Note 15)
(i8,037
)
(i9,977
)
(i24,014
)
(i40,206
)
Other
non-operating (expense) / income, net (Note 16)
(i3,963
)
i1,574
(i4,823
)
(i1,144
)
Income
before tax
$
i18,783
$
i13,794
$
i90,045
$
i55,445
/
(1)
Other
items during the three and nine months ended September 30, 2019 reflects costs relating to our strategic review, primarily financial and professional fees. Other items during the three and nine months ended September 30, 2018 consists solely of expense related to the accelerated vesting of RSUs with performance conditions in accordance with the terms of the corresponding award agreement following the completion of sale of the Company's Croatian operations on July 31, 2018.
Management
reviews the performance of our operations based on the above revenue types as well as on a geographic basis as described above. Management does not review other disaggregations of revenues from contracts with customers.
At
iSeptember 30, 2019, we had total commitments of US$ i81.7
million (December 31, 2018: US$ i62.8 million) in respect of future programming, including contracts signed with license periods starting after the balance
sheet date. In addition, we have digital transmission obligations and other commitments as follows:
Programming purchase obligations
Other commitments
2019
$
i6,133
$
i4,131
2020
i37,074
i10,087
2021
i20,542
i5,447
2022
i16,593
i5,437
2023
i732
i5,630
2024
and thereafter
i618
i—
Total
$
i81,692
$
i30,732
/
Contingencies
Litigation
We
are from time to time party to legal proceedings, arbitrations and regulatory proceedings arising in the normal course of our business operations, including the proceeding described below. We evaluate, on a quarterly basis, developments in such matters and provide accruals for such matters, as appropriate. In making such decisions, we consider the degree of probability of an unfavorable outcome and our ability to make a reasonable estimate of the amount of a loss. An unfavorable outcome in any such proceedings, if material, could have an adverse effect on our business or condensed consolidated financial statements.
In the fourth quarter of 2016, our Slovak subsidiary MARKIZA-SLOVAKIA, spol. s.r.o. ("Markiza") was notified of claims that were filed in June 2016 in a court of first instance in Bratislava, the Slovak Republic to collect amounts allegedly owing under ifour
promissory notes that have a collective face value of approximately EUR i69.0 million. These ifour
promissory notes were purportedly issued in June 2000 by Pavol Rusko in his personal capacity and were purportedly guaranteed by Markiza under the signature of Mr. Rusko, who was an executive director of Markiza at that time as well as one of its shareholders. iTwo of the notes purport to be issued in favor of Marian Kocner, a controversial Slovak businessman, and the other two to a long-time associate of Mr. Kocner. All
four notes were supposedly assigned several times, for no apparent consideration, to companies owned by or associated with Mr. Kocner and ultimately to Sprava a inkaso zmeniek, s.r.o., a company owned by Mr. Kocner that initiated the claims for payment in these proceedings.
iTwo of the notes, each of which purportedly has a face value of approximately EUR i8.3
million, allegedly matured in 2015. The other itwo notes, which were purportedly issued in blank, had the amount of approximately EUR i26.2
million inserted on each of them by Mr. Kocner or someone associated with him in mid-2016, shortly before their alleged maturity. The ifour notes accrue interest from their purported maturity dates. Although Mr. Rusko has asserted in testimony in the civil proceedings that he signed the notes in June 2000, we do not believe that the notes were signed in June 2000 or that any of the notes are authentic.
Despite
a random case assignment system in the Slovak Republic, claims in respect of ithree of the notes were initially assigned to the same judge. iOne
of those claims, concerning ione of the promissory notes having a face value of approximately EUR i8.3
million (the "First PN Case"), was subsequently reassigned. Proceedings on the claim in respect of the fourth promissory note (in the amount of approximately EUR i26.2 million) (the “Fourth PN Case”) were initially terminated in January 2017 by the presiding judge because the plaintiff failed to pay court fees and were terminated a second time by a different presiding judge in September 2017 after the plaintiff refiled but failed to pay court
fees a second time.
During the first quarter of 2018, the court of first instance began to schedule hearings in respect of the First PN Case as well in respect of the claims relating to the second promissory note having a face value of approximately EUR i8.3 million (the "Second PN Case") and one of the promissory notes having a face value of approximately EUR i26.2
million (the "Third PN Case").
On April 26, 2018, the judge in the First PN Case ruled in favor of the plaintiff. Markiza appealed that decision.
On May 14, 2018, Markiza filed a criminal complaint with the Special Prosecutor's Office of the Slovak Republic (the "Special Prosecutor’s Office") alleging that Mr. Kocner and Mr. Rusko committed the offenses of (1) counterfeiting, falsification, and illegal production of money and securities and (2) obstruction or perversion of justice. The Special Prosecutor’s Office opened criminal proceedings in the matter at that time.
On June 20, 2018, the Special Prosecutor’s Office issued a decision to formally
charge Mr. Kocner and Mr. Rusko with counterfeiting, falsification, and illegal production of money and securities and with obstruction or perversion of justice. Following this decision, Mr. Kocner has been taken into pre-trial custody by the Slovak authorities, where he has remained. Subsequently, the Special Prosecutor’s Office has charged Mr. Kocner’s long-time associate, who received two of the alleged promissory notes as the original beneficial owner and purported to endorse those notes to a company controlled by Mr. Kocner, with counterfeiting, falsification, and illegal production of money and securities.
On October 12, 2018, the court of first instance terminated proceedings in respect of the Second PN Case because the plaintiff failed to pursue the claim, which the plaintiff appealed.
On December
14, 2018, the appellate court suspended proceedings in respect of the First PN Case until a final and enforceable decision has been rendered in the criminal proceedings.
On December 21, 2018, the appellate court reversed the decision of the court of first instance to terminate the Second PN Case and directed the case be tried on the merits.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts
in US$ 000’s, except share and per share data)
(Unaudited)
On March 19, 2019, following the conclusion of the pre-trial investigation, the Special Prosecutor’s Office formally indicted Mr. Kocner and Mr. Rusko with counterfeiting, falsification, and illegal production of money and securities and with obstruction or perversion of justice and filed the indictment with the Special Criminal Court of the Slovak Republic.
On March 25, 2019, Markiza filed a complaint with the Slovak Constitutional Court in respect of the appellate court decision in the Second PN Case, which was accepted on October 2, 2019.
On May
14, 2019, the court of first instance decided to suspend proceedings in respect of the Second PN Case until a final and enforceable decision has been rendered in the criminal proceedings.
There have been no hearings held in respect of the Third PN Case since the initiation of the criminal proceedings. On May 14, 2019, the court of first instance decided to suspend proceedings in respect of the Third PN Case until a final and enforceable decision has been rendered in the criminal proceedings.
The plaintiff re-filed its claim with respect to the Fourth PN Case, which purportedly has a face value of approximately EUR i26.2
million, on May 13, 2019 and subsequently paid the requisite court fees. On June 6, 2019, the court of first instance decided to suspend proceedings in respect of the Fourth PN Case until a final and enforceable decision has been rendered in the criminal proceedings.
Accordingly, civil proceedings in respect of all four promissory notes have now been suspended until a final and enforceable decision is rendered in the criminal proceedings. Criminal proceedings commenced in July 2019 and are ongoing. The Special Criminal Court overseeing the criminal proceedings has scheduled hearing dates into December 2019.
In the event any of the civil proceedings are not dismissed as a result of the successful conclusion of the criminal proceedings, Markiza will continue
to vigorously defend the claims.
Based on the facts and circumstances of these cases, we have not accrued any amounts in respect of these claims.
i
21. RELATED PARTY TRANSACTIONS
We consider our related parties to be our officers, directors and shareholders who have direct control and/or influence over the
Company as well as other parties that can significantly influence management. We have identified transactions with individuals or entities associated with AT&T, which is represented on our Board of Directors and holds a i44.3% voting interest in CME Ltd. (see Note 14, "Equity") as at September 30, 2019, as material related
party transactions.
"2023
Euro Loan" refers to our floating rate senior unsecured term credit facility due April 26, 2023, entered into by CME BV (as defined below), guaranteed by Warner Media and CME Ltd., dated as of February 19, 2016, as amended on June 22, 2017 and April 25, 2018;
•
"Euro Loans" refers collectively to the 2021 Euro Loan and 2023 Euro Loan;
"Guarantee Fees" refers to amounts accrued and payable to Warner Media as consideration for Warner Media's guarantees of the Euro Loans;
•
"Reimbursement
Agreement" refers to our reimbursement agreement with Warner Media which provides that we will reimburse Warner Media for any amounts paid by them under any guarantee or through any loan purchase right exercised by Warner Media, dated as of November 14, 2014, as amended and restated on February 19, 2016, and as further amended and restated on April 25, 2018;
•
"CME BV" refers to CME Media Enterprises B.V., our 100% owned subsidiary;
•
"CME
NV" refers to Central European Media Enterprises N.V., our 100% owned subsidiary;
•
"AT&T" refers to AT&T, Inc.
•
"Warner Media" refers to Warner Media, LLC. (formerly Time Warner, Inc.), a wholly owned subsidiary of AT&T; and
•
"TW
Investor" refers to Time Warner Media Holdings B.V., a wholly owned subsidiary of Warner Media.
The exchange rates used in this report are as at September 30, 2019, unless otherwise indicated.
Please note that we may announce information using SEC filings, press releases, public conference calls, webcasts and posts to the "Investors" section of our website, www.cme.net. We intend
to continue to use these channels to communicate important information about CME Ltd. and our operations. We encourage investors, the media, our customers and others interested in the Company to review the information we post at www.cme.net.
I. Forward-looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 22E of the Securities Exchange Act of 1934 (the "Exchange Act"), including those relating to our capital needs, business
strategy, expectations and intentions. Statements that use the terms "believe", "anticipate", "trend", "expect", "plan", "estimate", "forecast", "should", "intend" and similar expressions of a future or forward-looking nature identify forward-looking statements for purposes of the U.S. federal securities laws or otherwise. In particular, information appearing under the sections entitled "Business,""Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" includes forward looking-statements. For these statements and all other forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be
predicted with accuracy or are otherwise beyond our control and some of which might not even be anticipated. Forward-looking statements reflect our current views with respect to future events and because our business is subject to such risks and uncertainties, actual results, our strategic plan, our financial position, results of operations and cash flows could differ materially from those described in or contemplated by the forward-looking statements contained in this report.
Important factors that contribute to such risks include, but are not limited to, those factors set forth under "Risk Factors” as well as the following: the effect of changes in global and regional economic conditions; the effect of ending the quantitative easing program implemented by the European Central Bank; the economic, political and monetary impacts of Brexit in our markets; the outcome of our strategic review and its impact on our business;
the impact of changes in local tax legislation; levels of television advertising spending and the rate of development of the advertising markets in the countries in which we operate; our ability to refinance our existing indebtedness; the extent to which our debt service obligations and covenants may restrict our business; our exposure to additional tax liabilities as well as liabilities resulting from regulatory or legal proceedings initiated against us; our success in continuing our initiatives to diversify and enhance our revenue streams; our ability to make cost-effective investments in our television businesses, including investments in programming; our ability to develop and acquire necessary programming and attract audiences; and changes in the political and regulatory environments where we operate and in the application of relevant laws and regulations.
The foregoing review of important factors should not be construed
as exhaustive and should be read in conjunction with other cautionary statements that are included in this report. All forward-looking statements speak only as of the date of this report. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments or otherwise, except as required by law.
Central European Media Enterprises Ltd. ("CME Ltd.")
is a media and entertainment company operating mainly in five countries in Central and Eastern Europe. We manage our business on a geographical basis, with five operating segments: Bulgaria, the Czech Republic, Romania, the Slovak Republic and Slovenia, which are also our reportable segments. These operating segments reflect how CME Ltd.’s operating performance is evaluated by our chief operating decision makers, who we have identified as our co-Chief Executive Officers, how our operations are managed by segment managers, and the structure of our internal financial reporting.
Non-GAAP Financial Measures
In this report we refer to several non-GAAP financial measures, including OIBDA, OIBDA margin, free cash flow and unlevered free cash flow. We believe that each of these metrics is useful to investors for the reasons outlined below.
Non-GAAP financial measures may not be comparable to similar measures reported by other companies. Non-GAAP financial measures should be evaluated in conjunction with, and are not a substitute for, US GAAP financial measures.
We evaluate our consolidated results and the performance of our segments based on net revenues and OIBDA. We believe OIBDA is useful to investors because it provides a meaningful representation of our performance, as it excludes certain items that do not impact either our cash flows or the operating results of our operations. OIBDA and unlevered free cash flow are also used as components in determining management bonuses.
OIBDA includes amortization and impairment of program rights and is calculated as operating income / loss before depreciation, amortization of intangible assets and impairments of assets and certain unusual or infrequent items that are not considered
by our co-Chief Executive Officers when evaluating our performance. Our key performance measure of the efficiency of our consolidated operations and our segments is OIBDA margin. We define OIBDA margin as the ratio of OIBDA to net revenues.
Following a repricing of our Guarantee Fees in March 2017 and April 2018, we pay interest and related Guarantee Fees on our outstanding indebtedness in cash. In addition to this obligation to pay Guarantee Fees in cash, we expect to use cash generated by the business to pay certain Guarantee Fees that were previously paid in kind. These cash payments are all reflected in free cash flow; accordingly, we believe unlevered free cash flow, defined as free cash flow before cash payments for interest and Guarantee Fees, best illustrates the cash generated by our operations when comparing periods. We define free cash flow as net cash generated from continuing operating activities less purchases
of property, plant and equipment, net of disposals of property, plant and equipment and excluding the cash impact of certain unusual or infrequent items that are not included in costs charged in arriving at OIBDA because they are not considered by our co-Chief Executive Officers when evaluating performance.
For additional information regarding our business segments, including a reconciliation of OIBDA to US GAAP financial measures, see Item 1, Note 19, "Segment Data". For a reconciliation of free cash flow and unlevered free cash flow to US GAAP financial measures, see "Free Cash Flow and Unlevered Free Cash Flow" below.
While our reporting currency is the dollar, our consolidated revenues and costs are divided across a range of European currencies and CME Ltd.’s functional currency is the Euro. Given the significant movement
of the currencies in the markets in which we operate against the dollar, we believe that it is useful to provide percentage movements based on actual percentage movements (“% Act”), which includes the effect of foreign exchange, as well as like-for-like percentage movements (“% Lfl”). The like-for-like percentage movement references reflect the impact of applying the current period average exchange rates to the prior period revenues and costs. Since the difference between like-for-like and actual percentage movements is solely the impact of movements in foreign exchange rates, our discussion in the following analysis is focused on constant currency percentage movements in order to highlight those factors influencing operational performance. The incremental impact of foreign exchange rates is presented in the tables preceding such analysis. Unless otherwise stated, all percentage increases or decreases in the following analysis refer to year-on-year percentage
changes between the three and nine months ended September 30, 2019 and 2018.
Executive Summary
The following table provides a summary of our consolidated results of our continuing operations for the three and nine months ended September 30, 2019 and 2018:
For
the Three Months Ended September 30, (US$ 000's)
For the Nine Months Ended September 30, (US$ 000's)
Movement
Movement
2019
2018
%
Act
% Lfl
2019
2018
% Act
%
Lfl
Net revenues
$
138,851
$
137,038
1.3
%
7.3
%
$
469,009
$
475,655
(1.4
)%
5.7
%
Operating
income
30,783
22,197
38.7
%
48.7
%
118,882
96,795
22.8
%
32.1
%
Operating
margin
22.2
%
16.2
%
6.0 p.p.
6.2 p.p.
25.3
%
20.3
%
5.0
p.p.
5.0 p.p.
OIBDA
$
41,411
$
35,767
15.8
%
23.2
%
$
152,810
$
131,936
15.8
%
24.2
%
OIBDA
margin
29.8
%
26.1
%
3.7 p.p.
3.8 p.p.
32.6
%
27.7
%
4.9
p.p.
4.9 p.p.
Our consolidated net revenues increased at actual rates in the third quarter, but decreased at actual rates in the nine months ended September 30, 2019, compared to the corresponding periods in 2018. Net revenues increased at constant rates in both the three and nine months ended September 30, 2019 compared to the corresponding periods in 2018, due to increases in both television advertising revenues and carriage fees and subscription
revenues. Television advertising spending overall in the markets of the countries in which we operate increased an estimated 3% at constant rates in the first nine months of 2019 compared to 2018. Our television advertising revenues decreased 3% at actual rates, but increased 4% at constant rates during the same period, as all of our businesses have seen growth in average prices this year. Carriage fees and subscription revenues increased 4% at actual rates and 11% at constant rates in the first nine months of 2019 as the subscriber base continued to grow and average prices increased.
Costs charged in arriving at OIBDA in the third quarter decreased 4%
at actual rates, but increased 2% at constant rates compared to the corresponding period in 2018. Content costs increased 3% at constant rates due to higher costs from changes to the mix of programming in the schedules in Bulgaria and the Slovak Republic, which was partially offset by more cost-effective foreign programming in the Czech Republic, Romania and Slovenia. In the first nine months of 2019, costs charged in arriving at OIBDA decreased 8% at actual rates and 1% at constant rates compared to the corresponding period in 2018, due primarily to a 2% decrease in content costs resulting from savings in the spring season this year.
We
saw a successful start to the fall season during the third quarter, leading to an increase in prime time audience share in each of our country operations in the period. Our focus remains on efficient spending for programming to achieve an unrivaled audience leadership position in each market. Our ability to monetize that reach provides the resources necessary to continue investing in high quality local content.
Since we continue to focus on controlling costs, the growth in net revenues increased our OIBDA margin in the three and nine months ended September 30, 2019 compared to the same periods in 2018. This dynamic also drove an increase in operating income, and improvement in the operating margin. We expect this trend of margin expansion to continue for the full year, albeit at a slower pace compared to the first nine months of
2019.
Improving Capital Structure
On September 23, 2019, we used cash generated by the business to repay EUR 50.0 million (approximately US$ 54.9 million at September 23, 2019 rates) of the outstanding principal balance of the 2021 Euro Loan. Combined with the additional debt payments made in January and June, we have paid a total of EUR 150.0 million (approximately US$ 168.9 million at transaction date rates) of the 2021 Euro Loan in the first nine months of 2019. Following these payments, there is now EUR 60.3 million (approximately US$ 65.7 million at September
30, 2019 rates) outstanding on our nearest debt maturity in November 2021.
The lower balance of gross debt, together with improved financial results in the first nine months of 2019, reduced our net leverage ratio to 2.5x at the end of September, down from 3.5x at the start of the year.
Review of Strategic Alternatives
On March 25, 2019, we announced that our Board of Directors had commenced a process to explore and evaluate potential strategic alternatives focused on maximizing shareholder value. These alternatives may include, among other things, the sale of part or all of the Company, a merger with another strategic partner, a recapitalization, or continuing
to execute on our long-term business plan (see Part II, Item 1A, Risk Factors).
Free Cash Flow and Unlevered Free Cash Flow
For the Nine Months Ended September 30, (US$ 000's)
2019
2018
Movement
Net
cash generated from continuing operating activities
$
167,973
$
93,762
79.1
%
Capital expenditures, net
(15,619
)
(15,027
)
3.9
%
Other
items (1)
1,242
—
NM (2)
Free cash flow
153,596
78,735
95.1
%
Cash
paid for interest (including Guarantee Fees)
16,955
29,827
(43.2
)%
Cash paid for Guarantee Fees previously paid in kind
—
27,328
(100.0
)%
Cash
paid for Guarantee Fees that previously could be paid in kind
—
812
(100.0
)%
Unlevered free cash flow
$
170,551
$
136,702
24.8
%
(1)
Reflects
costs relating to our strategic review, primarily financial and professional fees.
Unlevered free cash flow increased during the nine months ended September 30, 2019
compared to the same period in 2018, due to higher cash collections from improved operating performance. We also paid less for programming, which was partially offset by higher payments for income taxes. Net cash generated from continuing operating activities also benefited from lower cash paid for interest and Guarantee Fees, which was partially offset by payments related to the strategic review.
The following table sets out our estimates of the year-on-year changes in real GDP, real private consumption and the television advertising market, net
of discounts, in our countries for the nine months ended September 30, 2019:
Sources: Real GDP Growth and Real Private Consumption Growth, CME Ltd. estimates based on market consensus; TV Ad Market Growth, CME Ltd. estimates at constant exchange rates.
After adjusting for inflation, in the first nine months
of 2019 we estimate that GDP grew in each of the countries in which we operate at a rate that exceeded the average growth rate for Western Europe, a trend that has been ongoing for more than four years. Overall growth is lower than the same period in 2018, as exports have weakened slightly in certain countries, which is reported to be connected to a slowdown in the German economy, and uncertainty around the impact of tariffs on global trade as well as the final terms under which the UK will exit the EU. However, domestic private consumption remains generally robust, supported by historically low unemployment and higher average wages, and analysts forecast this level of overall growth will be sustained for the duration of 2019.
We estimate that the TV advertising markets in the countries in which we operate increased overall by 3% on
average at constant rates in the nine months ended September 30, 2019 compared to the same period in 2018. In Bulgaria, the market declined slightly, as lower average market prices more than offset a slight increase in gross ratings points ("GRPs") sold. In both the Czech and Slovak Republics average market prices increased significantly, which was partially offset by selling fewer GRPs. Growth in the Slovak Republic also reflected additional government spending on informational campaigns. The market decline in Romania reflected reduced spending by advertisers, primarily in the first quarter of 2019, who were directly impacted by new incremental taxes imposed early in 2019 on certain sectors of the economy, including telecommunications and banking. However, the decline in Romania
from selling fewer GRPs overall in the first nine months of the year was mostly offset by higher average market prices. In Slovenia, fewer GRPs were sold due to lower spending by larger multinationals and telecommunications operators, which was mostly offset by higher average market prices, reflecting more spending from smaller advertisers.
We expect the overall trend of higher spending on television advertising to continue for the remainder of 2019, supported by a forecast of strong growth in real private consumption for the year. In Romania, we anticipate additional spending on advertising in the fourth quarter by advertisers who were directly impacted by the new incremental taxes imposed early in 2019, which will result in full year growth for both the television advertising market and our television advertising revenues.
For
the Three Months Ended September 30, (US$ 000's)
For the Nine Months Ended September 30, (US$ 000's)
Movement
Movement
2019
2018
%
Act
% Lfl
2019
2018
% Act
%
Lfl
Television advertising
$
9,498
$
10,071
(5.7
)%
(0.9
)%
$
38,039
$
40,051
(5.0
)%
1.1
%
Carriage
fees and subscriptions
5,479
5,267
4.0
%
9.3
%
16,083
15,775
2.0
%
8.3
%
Other
1,085
1,010
7.4
%
13.0
%
3,840
3,382
13.5
%
20.6
%
Net
revenues
16,062
16,348
(1.7
)%
3.2
%
57,962
59,208
(2.1
)%
4.1
%
Costs
charged in arriving at OIBDA
13,632
11,867
14.9
%
20.8
%
41,523
46,124
(10.0
)%
(4.0
)%
OIBDA
$
2,430
$
4,481
(45.8
)%
(43.1
)%
$
16,439
$
13,084
25.6
%
32.6
%
OIBDA
margin
15.1
%
27.4
%
(12.3) p.p.
(12.4) p.p.
28.4
%
22.1
%
6.3
p.p.
6.1 p.p.
We estimate the television advertising market in Bulgaria declined1% at constant rates in the nine months ended September 30, 2019 compared to the same period in 2018.
Our television advertising revenues decreased on a constant currency basis in the third quarter due to lower sponsorship and product placement. In the first nine months of 2019,
television advertising revenues increased on a constant currency basis and outperformed the market as an increase in our average prices more than offset selling fewer GRPs. Carriage fees and subscription revenues increased in the quarter- and year-to-date periods due primarily to price inflation in existing contracts.
On a constant currency basis, costs charged in arriving at OIBDA increased in the third quarter due to higher content costs. The start of the fall season included more entertainment formats compared to the schedule in 2018 and such costs, together with higher charges related to foreign fiction programming, exceeded the savings from not continuing to broadcast last year's very successful locally produced telenovela. In the first nine months of 2019, lower bad debt charges, together with lower costs for local production in
the first half of the year and a planned reduction in the volume of sports rights, resulted in a decrease in costs charged in arriving at OIBDA for the year-to-date period.
Czech Republic
For
the Three Months Ended September 30, (US$ 000's)
For the Nine Months Ended September 30, (US$ 000's)
Movement
Movement
2019
2018
%
Act
% Lfl
2019
2018
% Act
%
Lfl
Television advertising
$
40,065
$
39,530
1.4
%
7.2
%
$
139,815
$
138,920
0.6
%
7.7
%
Carriage
fees and subscriptions
4,406
4,004
10.0
%
15.9
%
13,007
11,847
9.8
%
17.2
%
Other
2,386
1,955
22.0
%
29.0
%
8,730
7,284
19.9
%
28.0
%
Net
revenues
46,857
45,489
3.0
%
8.9
%
161,552
158,051
2.2
%
9.4
%
Costs
charged in arriving at OIBDA
29,352
30,101
(2.5
)%
2.8
%
96,807
99,042
(2.3
)%
4.7
%
OIBDA
$
17,505
$
15,388
13.8
%
21.0
%
$
64,745
$
59,009
9.7
%
17.2
%
OIBDA
margin
37.4
%
33.8
%
3.6 p.p.
3.8 p.p.
40.1
%
37.3
%
2.8
p.p.
2.7 p.p.
The television advertising market in the Czech Republic increased an estimated 6% at constant rates in the nine months ended September 30, 2019 compared to the same period in 2018.
Our television advertising revenues increased on a constant currency basis in the third quarter and first nine months of 2019 primarily due to our higher average
prices. Carriage fees and subscription revenues increased on a constant currency basis in the quarter- and year-to-date periods due to price inflation in existing contracts as well as an increase in the number of subscribers.
Costs charged in arriving at OIBDA increased at constant rates in the third quarter due to higher licensing costs and staff costs, including additional personnel to support our digital initiatives, which were partially offset by lower content costs from broadcasting more cost-effective foreign programming compared to the schedule in 2018. The increase in costs in the first nine months of 2019 also reflected marketing activities in the first quarter to celebrate the 25th anniversary of TV Nova broadcasting in the Czech Republic.
For
the Three Months Ended September 30, (US$ 000's)
For the Nine Months Ended September 30, (US$ 000's)
Movement
Movement
2019
2018
%
Act
% Lfl
2019
2018
% Act
%
Lfl
Television advertising
$
27,318
$
28,485
(4.1
)%
2.7
%
$
90,421
$
98,712
(8.4
)%
(0.6
)%
Carriage
fees and subscriptions
11,189
11,462
(2.4
)%
4.5
%
33,372
34,846
(4.2
)%
3.7
%
Other
1,177
1,181
(0.3
)%
6.0
%
3,063
3,125
(2.0
)%
5.5
%
Net
revenues
39,684
41,128
(3.5
)%
3.3
%
126,856
136,683
(7.2
)%
0.6
%
Costs
charged in arriving at OIBDA
22,743
25,521
(10.9
)%
(4.5
)%
67,139
77,987
(13.9
)%
(6.6
)%
OIBDA
$
16,941
$
15,607
8.5
%
16.0
%
$
59,717
$
58,696
1.7
%
10.2
%
OIBDA
margin
42.7
%
37.9
%
4.8 p.p.
4.7 p.p.
47.1
%
42.9
%
4.2
p.p.
4.1 p.p.
The television advertising market in Romania declined1% at constant rates in the nine months ended September 30, 2019 compared to the same period in 2018.
Our television advertising revenues increased at constant rates in the third quarter due to a significant increase in our average prices, which was mostly offset by selling fewer GRPs from
less inventory available to sell. In the first nine months of 2019 our television advertising revenues were broadly flat as an increase in average prices was mostly offset by reduced spending by advertisers, primarily in the first quarter of 2019, who were directly impacted by new incremental taxes imposed early in 2019 on certain sectors of the economy, including telecommunications and banking. We anticipate additional spending on advertising in the fourth quarter from these advertisers will result in full year growth for both the television advertising market and our television advertising revenues. Carriage fees and subscription revenues increased on a constant currency basis in the quarter- and year-to-date periods primarily due to an increase in the average number of subscribers.
On a constant currency basis, costs charged in arriving at OIBDA decreased during the third quarter and first nine months of 2019 primarily due
to a decrease in content costs as we utilized fewer hours and more cost-effective foreign content. Costs were also lower in the first nine months of 2019 from fewer sport rights in the first half of the year since we no longer broadcast UEFA Champions League matches.
Slovak Republic
For
the Three Months Ended September 30, (US$ 000's)
For the Nine Months Ended September 30, (US$ 000's)
Movement
Movement
2019
2018
%
Act
% Lfl
2019
2018
% Act
%
Lfl
Television advertising
$
19,126
$
17,929
6.7
%
12.4
%
$
60,575
$
61,067
(0.8
)%
5.6
%
Carriage
fees and subscriptions
2,186
2,080
5.1
%
10.4
%
6,749
6,516
3.6
%
10.1
%
Other
834
858
(2.8
)%
1.7
%
3,467
3,007
15.3
%
22.5
%
Net
revenues
22,146
20,867
6.1
%
11.7
%
70,791
70,590
0.3
%
6.8
%
Costs
charged in arriving at OIBDA
15,075
15,835
(4.8
)%
0.2
%
53,436
60,549
(11.7
)%
(6.0
)%
OIBDA
$
7,071
$
5,032
40.5
%
48.2
%
$
17,355
$
10,041
72.8
%
83.0
%
OIBDA
margin
31.9
%
24.1
%
7.8 p.p.
7.8 p.p.
24.5
%
14.2
%
10.3
p.p.
10.2 p.p.
The television advertising market in the Slovak Republic increased an estimated 7% at constant rates in the nine months ended September 30, 2019 compared to the same period in 2018.
Our television advertising revenues increased on a constant currency basis in the third quarter due to an increase in our average prices and selling more GRPs, including
additional spending on government informational campaigns. In the first nine months of 2019, the higher average prices and additional spending on government informational campaigns was partially offset by selling fewer GRPs and less product placement in the first half of the year. Carriage fees and subscriptions revenue increased in the third quarter and first nine months of 2019 from higher prices in new contracts in effect from the start of 2019.
On a constant currency basis, costs charged in arriving at OIBDA were flat in the third quarter as slightly higher investment in both foreign fiction and local productions was offset by savings from professional fees and lower transmission costs. Costs decreased in the first nine months of 2019 due to lower content costs from broadcasting fewer locally produced formats in the spring season
of 2019 and a decrease in professional fees.
For
the Three Months Ended September 30, (US$ 000's)
For the Nine Months Ended September 30, (US$ 000's)
Movement
Movement
2019
2018
%
Act
% Lfl
2019
2018
% Act
%
Lfl
Television advertising
$
7,423
$
7,559
(1.8
)%
3.4
%
$
32,811
$
34,792
(5.7
)%
0.5
%
Carriage
fees and subscriptions
6,308
5,355
17.8
%
23.7
%
19,146
16,060
19.2
%
26.7
%
Other
637
672
(5.2
)%
(0.3
)%
2,537
2,631
(3.6
)%
2.5
%
Net
revenues
14,368
13,586
5.8
%
11.2
%
54,494
53,483
1.9
%
8.5
%
Costs
charged in arriving at OIBDA
10,552
11,428
(7.7
)%
(2.9
)%
39,534
41,473
(4.7
)%
1.4
%
OIBDA
$
3,816
$
2,158
76.8
%
86.2
%
$
14,960
$
12,010
24.6
%
32.8
%
OIBDA
margin
26.6
%
15.9
%
10.7 p.p.
10.7 p.p.
27.5
%
22.5
%
5.0
p.p.
5.1 p.p.
The television advertising market in Slovenia was broadly flat at constant rates in the nine months ended September 30, 2019 compared to the same period in 2018.
Our television advertising revenues increased on a constant currency basis in the third quarter, when we saw a positive impact from broadcasting the European Volleyball Championships, which included additional sponsorship. Our television advertising revenues in the first nine
months of 2019 were broadly flat, as the increased spending in the third quarter was mostly offset by lower spending from larger multinationals and telecommunications operators in the first half of 2019. Carriage fees and subscription revenues increased in the third quarter and first nine months of 2019 due to price inflation in existing agreements, and the year-to-date period also benefited from additional subscribers.
On a constant currency basis, costs charged in arriving at OIBDA decreased in the third quarter from lower content costs, due to more cost-effective foreign programming being broadcast in the summer compared to the schedule last year. Costs charged in arriving at OIBDA increased in the first nine months of 2019 because the increase in the cost of content broadcast in the first quarter of 2019 more than offset the savings from foreign programming during the second and third quarters of this year.
III. Analysis
of the Results of Operations and Financial Position
For the Three Months Ended September 30, (US$ 000's)
Movement
2019
2018
%
Act
% Lfl
Revenue:
Television advertising
$
103,430
$
103,574
(0.1
)%
5.8
%
Carriage
fees and subscriptions
29,568
28,168
5.0
%
11.2
%
Other revenue
5,853
5,296
10.5
%
16.7
%
Net
Revenues
138,851
137,038
1.3
%
7.3
%
Operating expenses:
Content
costs
58,962
60,910
(3.2
)%
2.5
%
Other operating costs
13,274
13,260
0.1
%
5.6
%
Depreciation
of property, plant and equipment
8,245
8,202
0.5
%
6.1
%
Amortization of broadcast licenses and other intangibles
2,029
2,216
(8.4
)%
(3.6
)%
Cost
of revenues
82,510
84,588
(2.5
)%
3.2
%
Selling, general and administrative expenses
25,558
30,253
(15.5
)%
(11.0
)%
Operating
income
$
30,783
$
22,197
38.7
%
48.7
%
For
the Nine Months Ended September 30, (US$ 000's)
Movement
2019
2018
%
Act
% Lfl
Revenue:
Television advertising
$
361,661
$
373,542
(3.2
)%
3.8
%
Carriage
fees and subscriptions
88,357
85,044
3.9
%
11.3
%
Other revenue
18,991
17,069
11.3
%
18.6
%
Net
Revenues
469,009
475,655
(1.4
)%
5.7
%
Operating expenses:
Content
costs
199,678
219,337
(9.0
)%
(2.3
)%
Other operating costs
40,328
41,929
(3.8
)%
2.7
%
Depreciation
of property, plant and equipment
24,625
25,150
(2.1
)%
4.6
%
Amortization of broadcast licenses and other intangibles
6,336
6,839
(7.4
)%
(1.0
)%
Cost
of revenues
270,967
293,255
(7.6
)%
(1.0
)%
Selling, general and administrative expenses
79,160
85,605
(7.5
)%
(1.3
)%
Operating
income
$
118,882
$
96,795
22.8
%
32.1
%
Revenue:
Television
advertising revenues: We estimate television advertising spending in our markets increased on average by 3% at constant rates in the nine months ended September 30, 2019 as compared to the same period in 2018, positively impacting our television advertising revenues. See "Overview - Segment Performance" above for additional information on television advertising revenues for each of our operating countries.
Carriage fees and subscriptions: Carriage fees and subscriptions revenues during the three and nine months ended September
30, 2019 grew approximately 11% at constant rates as compared to the same periods in 2018 primarily due to new contracts with higher prices and an increase in the number of subscribers. See "Overview - Segment Performance" above for additional information on carriage fees and subscription revenues for each of our operating countries.
Other revenues: Other revenues include primarily internet advertising revenues and revenues generated through the licensing of our own productions. Other revenues increased during the three and nine months ended September 30, 2019
as compared to the same periods in 2018 primarily due to higher online revenues in the Czech Republic and Romania.
Operating Expenses:
Content costs: At constant rates, content costs (including production costs and amortization and impairment of program rights) increased during the three months ended September 30, 2019, compared to the same period in 2018 primarily due to the inclusion in our broadcast schedule of more local entertainment formats and foreign fiction in Bulgaria and local entertainment formats in the Slovak Republic, offset by fewer sporting rights in Romania and the use of more cost-effective acquired programming in the Czech Republic, Romania and Slovenia. Content
costs decreased during the nine months ended September 30, 2019 primarily due to there being fewer sporting rights in Romania and Bulgaria as well as the use of more cost effective acquired programming in Romania. The decrease was partially offset by higher quality local productions in the Czech Republic.
Other operating costs: At constant rates, other operating costs (excluding content costs, depreciation of property, plant and equipment, amortization of broadcast licenses and other intangibles as well as selling, general and administrative expenses) increased during the three and nine months ended September 30, 2019 compared to the same periods in 2018 primarily due
to higher licensing costs in the Czech Republic, offset by the savings in transmission costs in the Slovak Republic and Slovenia.
Depreciation of property, plant and equipment: Total depreciation of property, plant and equipment increased at constant rates during the three and nine months ended September 30, 2019 compared to the same periods in 2018 primarily due to depreciation of machinery and equipment in Romania and Bulgaria that was placed in service
during 2018 and 2019.
Amortization of broadcast licenses and other intangibles: Total amortization of broadcast licenses and other intangibles decreased for the three and nine months ended September 30, 2019 compared to the same periods in 2018 primarily due to certain customer relationships in the Czech Republic becoming fully amortized in the second quarter of 2019.
Selling, general and administrative expenses: Selling, general and administrative expenses decreased during the three months ended September 30, 2019 compared to the same period in 2018
primarily due to a reduction in share-based compensation, and lower bad debt charges in Bulgaria and Romania.
Selling, general and administrative expenses during the nine months ended September 30, 2019 compared to the same period in 2018, primarily reflects lower legal fees in the Slovak Republic, lower bad debt charges in Bulgaria, and the revision of a legal accrual as well as changes in local VAT legislation in Romania. The decreases were offset by costs incurred in the first quarter of 2019 related to the 25th anniversary event in the Czech Republic and costs relating to our review of strategic alternatives.
Non-cash stock-based compensation charges for the three and nine months ended September
30, 2019 and 2018 were US$ 0.9 million and US$ 3.1 million; and US$ 3.9 million and US$ 6.1 million, respectively. Share-based compensation expense recognized during the three and nine months ended September 30, 2018 includes US$ 2.9 million related to the accelerated vesting of RSUs with performance conditions in accordance with the terms of the corresponding award agreement following the completion of sale of the Company's Croatian operations
on July 31, 2018 See Item 1, Note 17, "Stock-based Compensation".
Operating income: At constant rates, operating income increased during the three months ended September 30, 2019 compared to the same period in 2018 primarily due to increases in television advertising and carriage fee revenues and a reduction of selling, general and administrative expenses.
At constant rates, operating income increased during the nine months ended September 30, 2019 compared to the same period in 2018
primarily due to increases in television advertising and carriage fee revenues and a reduction in content costs.
Our operating margin, which is determined as operating income divided by net revenues, was 22.2% and 25.3% for the three and nine months ended September 30, 2019 compared to 16.2% and 20.3% for the three and nine months ended September 30, 2018.
Other income / (expense):
For
the Three Months Ended September 30, (US$ 000's)
For the Nine Months Ended September 30, (US$ 000's)
2019
2018
% Act
2019
2018
%
Act
Interest expense
$
(8,037
)
$
(9,977
)
19.4
%
$
(24,014
)
$
(40,206
)
40.3
%
Other
non-operating income / (expense):
Interest income
80
142
(43.7
)%
347
549
(36.8
)%
Foreign
currency exchange (loss) / gain, net
(3,869
)
1,363
NM (1)
(4,791
)
(481
)
NM
(1)
Change in fair value of derivatives
(165
)
67
NM (1)
(201
)
(1,262
)
84.1
%
Loss
on extinguishment of debt
(105
)
(127
)
17.3
%
(340
)
(415
)
18.4
%
Other
income, net
96
129
(25.6
)%
162
465
(65.2
)%
Provision
for income taxes
(5,261
)
(3,185
)
(65.2
)%
(20,694
)
(14,405
)
(43.7
)%
Income
from discontinued operations, net of tax
—
57,882
NM (1)
—
60,548
NM
(1)
Net loss attributable to noncontrolling interests
223
80
178.8
%
111
274
(59.5
)%
(1)
Number
is not meaningful.
Interest expense: Interest expense during the three and nine months ended September 30, 2019 decreased compared to the same periods in 2018, primarily due to the repricing of our Guarantee Fees in April 2018, the repayment of outstanding amounts of the 2019 Euro Loan during 2018, the partial repayment of the 2021 Euro Loan as well as reduced borrowing costs following a reduction in our net leverage ratio as defined within the Reimbursement Agreement. See Item 1, Note 4, "Long-term Debt and Other Financing Arrangements".
Interest income: Interest income primarily reflects earnings on cash balances and was not
material.
Foreign currency exchange (loss) / gain, net: We are exposed to fluctuations in foreign exchange rates on the revaluation of monetary assets and liabilities denominated in currencies other than the local functional currency of the relevant subsidiary. This includes third party receivables and payables, as well as those intercompany loans which are not considered to be of a long-term investment nature. Our subsidiaries generally receive funding via loans that are denominated in currencies other than the functional currency of the lender, therefore any change in the relevant exchange rate will require us to recognize a transaction gain or loss on revaluation. Certain of our intercompany loans are classified as long-term in nature, and therefore gains or losses on revaluation are not
recorded through the statement of operations and comprehensive income / loss. See the discussion under "Currency translation adjustment, net" below.
Change
in fair value of derivatives: For the three and nine months ended September 30, 2019, and 2018 we recognized losses as a result of the partial settlement of our interest rate swaps in connection with the repayment of debt. See Item 1, Note 12, "Financial Instruments and Fair Value Measurements".
Loss on extinguishment of debt: During the three and nine months ended September 30, 2019, we recognized losses on extinguishment of debt related to our partial repayment of the 2021 Euro Loan. During the three
and nine months ended September 30, 2018, we recognized losses on extinguishment of debt related to our repayment of the 2019 Euro Loan and the partial repayment of the 2021 Euro Loan.
Other income, net: Our other income / expense, net during the three and nine months ended September 30, 2019 and 2018 was not material.
Provision for income taxes: The provision for income taxes for the three and nine months ended September
30, 2019 reflects income tax charges on profits in each of our operating segments and the impact of losses on which no tax benefit has been received.
The provision for income taxes for the three and nine months ended September 30, 2018 reflects income tax charges on profits in the Czech Republic, Romania, the Slovak Republic and Slovenia and the impact of losses on which no tax benefit has been received.
Our operating subsidiaries are subject to income taxes at statutory rates of 10% in Bulgaria, 16% in Romania, 19%
in the Czech Republic, 19% in Slovenia and 21% in the Slovak Republic.
Income from discontinued operations, net of tax: Income from discontinued operations, net of tax for the three and nine months ended September 30, 2018 comprised of the gain on sale of our Croatian operations, the results of the Croatian operations through the date of sale and the allocation of interest expense and Guarantee Fees and transaction costs.
Net loss attributable to noncontrolling interests: The results attributable to noncontrolling interests for the three
and nine months ended September 30, 2019 and 2018 relate to the noncontrolling interest share of our Bulgaria operations.
Other comprehensive (loss) / income:
For
the Three Months Ended September 30, (US$ 000's)
For the Nine Months Ended September 30, (US$ 000's)
2019
2018
% Act
2019
2018
%
Act
Currency translation adjustment, net
$
(32,525
)
$
12,137
NM (1)
$
(31,366
)
$
(10,707
)
NM
(1)
Unrealized (loss) / gain on derivative instruments
(235
)
1,033
NM (1)
(4,786
)
(1,895
)
NM
(1)
(1)
Number is not meaningful.
Currency translation adjustment, net: The underlying equity value of our investments (which are denominated in the functional currency of the relevant entity) are converted into dollars at each balance sheet date, with any change in value of the underlying assets and liabilities being recorded as a currency translation adjustment to the balance sheet rather than net income / (loss). Certain of our intercompany loans are denominated in currencies other than the functional currency of the lender and are considered to be of a long-term investment nature
as the repayment of these loans is neither planned nor anticipated for the foreseeable future. The foreign exchange gains on the remeasurement of these intercompany loans to the lender's functional currency are treated in the same manner as currency translation adjustments. Other comprehensive (loss) / income due to currency translation adjustment, net comprised the following for the three and nine months ended September 30, 2019 and 2018:
For
the Three Months Ended September 30, (US$ 000's)
For the Nine Months Ended September 30, (US$ 000's)
2019
2018
% Act
2019
2018
%
Act
Foreign exchange (loss) / gain on intercompany loans
$
(2,966
)
$
4,894
NM (1)
$
(710
)
$
1,370
NM
(1)
Foreign exchange loss on the Series B Preferred Shares
The following charts depict the movement of the dollar versus the functional currencies of our operations, based on monthly closing rates, during the nine months ended September 30, 2019
and September 30, 2018.
Unrealized
(loss) / gain on derivative instruments: The unrealized (loss) / gain on derivatives is due to the portion of changes in the fair value of our interest rate swaps designated as cash flow hedges and recognized in accumulated other comprehensive (loss) / income. See Item 1, Note 12, "Financial Instruments and Fair Value Measurements".
Noncontrolling
interests in consolidated subsidiaries
547
301
81.7
%
(17.0
)%
(1)
Number
is not meaningful.
Note: The analysis below is intended to highlight the key factors at constant rates that led to the movements from December 31, 2018, excluding the impact of foreign currency translation.
Current assets: Current assets at September 30, 2019 decreased from December 31, 2018 primarily due to the impact of seasonality on our receivables balance and the use of cash collected from receivables to partially repay the 2021 Euro Loan.
Non-current assets: At constant rates, non-current
assets at September 30, 2019 increased from December 31, 2018 primarily due to the inclusion of operating lease right-of-use assets following the adoption of the new accounting guidance, offset by depreciation of property, plant and equipment in excess of acquisitions.
Current liabilities: Current liabilities at September 30, 2019 increased from December 31, 2018 primarily due to higher deferred revenue from customer prepayments on their fall 2019 advertising campaigns and the recognition of operating lease liabilities
following the adoption of new accounting guidance.
Non-current liabilities: Non-current liabilities at September 30, 2019 decreased from December 31, 2018 primarily due to the repayments of amounts outstanding on the 2021 Euro Loan. See Item 1, Note 4, "Long-term Debt and Other Financing Arrangements".
Temporary equity: Temporary equity represents the accreted value of the Series B Preferred Shares.
CME Ltd. shareholders’ equity: The increase in shareholders' equity reflects the net income attributable to
CME Ltd. during the nine months ended September 30, 2019 which was partially offset by the impact of unrealized losses on derivative instruments recorded in accumulated other comprehensive loss.
Noncontrolling interests in consolidated subsidiaries: Noncontrolling interests in consolidated subsidiaries represents the noncontrolling interest in Bulgaria.
Cash and cash equivalents decreased by US$ 27.9 million during the nine months ended September 30, 2019. The change in cash and cash equivalents for the periods presented below is summarized as follows:
For
the Nine Months Ended September 30, (US$ 000's)
2019
2018
Net cash generated from continuing operating activities
$
167,973
$
93,762
Net
cash used in continuing investing activities
(15,619
)
(15,027
)
Net cash used in continuing financing activities
(176,098
)
(180,751
)
Net cash provided
by discontinued operations
—
105,127
Impact of exchange rate fluctuations on cash and cash equivalents
(4,133
)
(2,382
)
Net increase in cash
and cash equivalents
$
(27,877
)
$
729
Operating Activities
Net cash generated from continuing operations increased during the nine months ended September 30, 2019 when compared to the same period in 2018 primarily due to higher cash collections from improved operating
performance. We also paid less for programming and interest, which was partially offset by higher payments of cash taxes. We paid cash interest (including mandatory cash-pay Guarantee Fees) of US$ 17.0 million during the nine months ended September 30, 2019 compared to US$ 58.0 million during the nine months ended September 30, 2018 including US$ 27.3 million of which we had previously elected to pay in kind.
Investing Activities
Net cash used in continuing investing
activities for the nine months ended September 30, 2019 and 2018 primarily reflects capital expenditures for production related facilities and equipment in the Czech Republic, Bulgaria and Slovenia.
Financing Activities
Net cash used in continuing financing activities during the nine months ended September 30, 2019 primarily reflects EUR 150.0 million (US$ 168.9 million at transaction date rates) of principal repayments made on our obligations under the 2021 Euro Loan. Cash used in continuing financing activities
during the nine months ended September 30, 2018 primarily reflected principal repayments on our obligations under the 2019 Euro Loan and 2021 Euro Loan, net of warrant proceeds.
Discontinued Operations
The net cash provided by discontinued operations during the nine months ended September 30, 2018 primarily reflected the proceeds from the sale of our Croatia operations offset by the payment of Guarantee Fees and interest related to the 2019 Euro Loan.
IV
(b) Sources and Uses of Cash
Our ongoing source of cash is primarily the receipt of payments from advertisers, advertising agencies and distributors of our television channels. As at September 30, 2019, we also had available the aggregate principal amount of US$ 75.0 million under the 2023 Revolving Credit Facility (see Item 1, Note 4, "Long-term Debt and Other Financing Arrangements"). Surplus cash, after funding ongoing operations, may be remitted to us, where appropriate, by our subsidiaries in the form of debt interest payments, principal repayments, dividends, and other distributions and loans from our subsidiaries.
Corporate
law in the Central and Eastern European countries in which we operate stipulates generally that dividends may be declared by the partners or shareholders out of yearly profits subject to the maintenance of registered capital, required reserves (if applicable) and after the recovery of accumulated losses. The reserve requirement restriction generally provides that before dividends may be distributed, a portion of annual net profits (typically at least 5.0%) be allocated to a reserve, which is capped at a proportion of the registered capital of a company (ranging from 5.0% to 20.0%). There are no third-party restrictions that limit our subsidiaries' ability to transfer amounts to us in the form of loans or advances.
IV
(c) Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
Our future contractual obligations as at September 30, 2019 were as follows:
For more information on our long-term debt, see Item 1, Note 4, "Long-term Debt and Other Financing Arrangements". Interest payable on our long-term debt is calculated using interest rates and exchange rates in effect as at September 30, 2019.
Unconditional Purchase Obligations
Unconditional purchase obligations primarily comprise future programming commitments. At September 30, 2019, we had commitments in respect of future programming of US$ 81.7 million. This includes contracts
signed with license periods starting after September 30, 2019.
Operating and Finance Leases
For more information on our operating and finance lease commitments, see Item 1, Note 11, "Leases".
Other Long-Term Obligations
Other long-term obligations are primarily comprised of digital transmission commitments.
Other
Top Tone Media Holdings Limited has exercised its right to acquire additional equity in CME Bulgaria. However, the closing of this transaction has not yet occurred because purchaser financing is still pending. If consummated, we would own 90.0%
of our Bulgaria broadcast operations. The option strike price is the fair value of the equity in CME Bulgaria, as determined by an independent valuation.
IV (d) Cash Outlook
For the nine months ending September 30, 2019, net cash generated from continuing operations and unlevered free cash flows were US$ 168.0 million and US$ 170.6 million compared to US$ 93.8 million and US$ 136.7 million for the nine months ended September 30, 2018 (See Section II, Overview). As at September
30, 2019, we had US$ 34.2 million in cash and cash equivalents.
On January 31, 2019, June 14, 2019, and September 23, 2019, we paid EUR 60.0 million (approximately US$ 68.9 million at January 31, 2019 rates), EUR 40.0 million (approximately US$ 45.1 million at June 14, 2019 rates), and EUR 50.0 million (approximately US$ 54.9 million at
September 23, 2019 rates), respectively, of the outstanding principal balance of the 2021 Euro Loan with cash generated by our operations. Following these payments, there is now EUR 60.3 million (approximately US$ 65.7 million at September 30, 2019 rates) outstanding on our nearest debt maturity in November 2021. We expect cash paid for interest and Guarantee Fees to decline in 2019 compared to 2018 due to the reduction in our overall indebtedness and a lower weighted average all-in rate.
We expect our unlevered free cash flow to grow due to continued improvement in our operating results. We anticipate the amounts of cash paid for income taxes to continue to increase in 2019 and to further
converge with local statutory tax rates as our operating companies in each jurisdiction have returned to generating profits and previous tax losses were utilized.
As at September 30, 2019, the weighted average all-in rate applicable to the Euro Loans and Guarantee Fees previously paid in kind was approximately 3.4%. As at September 30, 2019, our net leverage ratio improved to 2.5x from 3.5x at December 31, 2018.
Credit ratings and future debt issuances
Our corporate
credit is rated B1 by Moody's Investors Service with a positive outlook and B+ by Standard & Poor's with a positive outlook. Our ratings show each agency's opinion of our financial strength, operating performance and ability to meet our debt obligations as they become due. These ratings take into account the particular emphasis the ratings agencies place on metrics such as leverage ratio and cash flow, which they use as measurements of a company's liquidity and financial strength. They also reflect an emphasis by the ratings agencies on the strong financial support from Warner Media historically. We may be subject to downgrades if our operating performance deteriorates or we fail to maintain adequate levels of liquidity.
Credit risk of financial counterparties
We have entered into a number
of significant contracts with financial counterparties as follows:
Interest Rate Swaps
We are party to interest rate swap agreements to mitigate our exposure to interest rate fluctuations on our Euro Loans. These interest rate swaps, certain of which are designated as cash flow hedges, provide the Company with variable-rate cash receipts in exchange for fixed-rate payments over the lives of the agreements, with no exchange of the underlying notional amount.
Foreign Exchange Forwards
We are exposed to movements in the USD to EUR exchange rates related to contractual payments under dollar-denominated agreements. To reduce this
exposure, we may decide to enter into pay-Euro receive-dollar forward foreign exchange contracts. We had no such agreements outstanding during the period ending September 30, 2019.
Cash Deposits
We may deposit cash in the global money markets with a range of bank counterparties and review the counterparties we choose regularly. The maximum period of deposit is three months, but we have more recently held amounts on deposit for shorter periods, mainly overnight. The credit rating of a bank is a critical factor in determining the size of cash deposits and we will only deposit cash with banks of investment grade rating. In addition, we also closely monitor the credit default swap spreads and other market
information for each of the banks with which we consider depositing or have deposited funds.
Our accounting policies that have a material effect on our financial condition and results of operations
are more fully described in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission ("SEC") on February 6, 2019. The preparation of these financial statements requires us to make judgments in selecting appropriate assumptions for calculating financial estimates, which inherently contain some degree of uncertainty. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable. Using these estimates, we make judgments about the carrying values of assets and liabilities and the reported amounts of revenues and expenses that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or
conditions.
We believe our critical accounting policies are as follows: program rights, goodwill and intangible assets, impairment or disposal of long-lived assets, revenue recognition, leases, income taxes, foreign exchange, determination of the fair value of financial instruments, contingencies and discontinued operations. These critical accounting policies affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements. See Item 1, Note 2, "Basis of Presentation" for a discussion of accounting standards adopted in the period, and recently issued accounting standards not yet adopted.
Item
3. Quantitative and Qualitative Disclosures about Market Risk
We engage in activities that expose us to various market risks, including the effect of changes in foreign currency exchange rates and interest rates. We do not engage in speculative transactions, nor do we hold or issue financial instruments for trading purposes. The table below sets forth our market risk sensitive instruments as at the following dates:
As
discussed in Item 1, Note 4, "Long-term Debt and Other Financing Arrangements", as consideration for Warner Media's guarantee of the Euro Loans, we pay Guarantee Fees to Warner Media based on the amounts outstanding on the Euro Loans, each calculated such that the all-in borrowing rate on the 2021 Euro Loan was 3.25% per annum and the all-in borrowing rate on the 2023 Euro Loan was 3.50% per annum as of September 30, 2019.
(2)
The interest rate swaps related to the 2021 Euro Loan maturing
in 2021 are forward starting to coincide with the maturity date of the interest rate swaps maturing in 2019. See Item 1, Note 12, "Financial Instruments and Fair Value Measurements".
(3)
The interest rate swaps related to the 2023 Euro Loan maturing in 2023 are forward starting to coincide with the maturity date of the interest rate swaps maturing in 2021. See Item 1, Note 12, "Financial Instruments and Fair Value Measurements".
As
discussed in Item 1, Note 4, "Long-term Debt and Other Financing Arrangements", as consideration for Warner Media's guarantee of the Euro Loans, we pay Guarantee Fees to Warner Media based on the amounts outstanding on the Euro Loans, each calculated such that the all-in borrowing rate on the 2021 Euro Loan was 3.25% per annum and the all-in borrowing rate on the 2023 Euro Loan was 3.75% per annum as of December 31, 2018.
(2)
The interest rate swaps related to the 2021 Euro Loan maturing
in 2021 are forward starting to coincide with the maturity date of the interest rate swaps maturing in 2019. See Item 1, Note 12, "Financial Instruments and Fair Value Measurements".
(3)
The interest rate swaps related to the 2023 Euro Loan maturing in 2023 are forward starting to coincide with the maturity date of the interest rate swaps maturing in 2021. See Item 1, Note 12, "Financial Instruments and Fair Value Measurements".
Foreign Currency Exchange Risk Management
We conduct business in a number of currencies
other than our functional currencies. As a result, we are subject to foreign currency exchange rate risk due to the effects that foreign exchange rate movements of these currencies have on our costs and on the cash flows we receive from our subsidiaries. In limited instances we enter into forward foreign exchange contracts to minimize foreign currency exchange rate risk.
We periodically enter into forward foreign exchange contracts to reduce our exposure to movements in the USD to EUR exchange rates related to contractual payments under dollar-denominated agreements. At September 30, 2019,
no forward foreign exchange contracts were outstanding.
Interest Rate Risk Management
The Euro Loans each bear interest at a variable rate based on EURIBOR plus an applicable margin. We are party to a number of interest rate swap agreements intended to reduce our exposure to interest rate movements (see Item 1, Note 12, "Financial Instruments and Fair Value Measurements").
We have established disclosure controls and procedures designed to ensure that information required to be disclosed in our Quarterly Report on Form 10-Q is recorded, processed, summarized and reported within the specified time periods and is designed to ensure that information required to be disclosed is accumulated and communicated to management, including the co-Principal Executive Officers and the Principal Financial Officer, to allow timely decisions regarding required disclosure.
Our co-Principal Executive Officers and our Principal Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2019 and concluded that our disclosure controls and procedures were effective as of that
date. There has been no change in our internal control over financial reporting during the three months ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Part 1, Item 1, Note 20, "Commitments and Contingencies" for a discussion of ongoing litigation.
Item
1A. Risk Factors
This report and the following discussion of risk factors contain forward-looking statements as discussed in Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations". Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks and uncertainties described below and elsewhere in this report. These risks and uncertainties are not the only ones we may face. Additional risks and uncertainties of which we are not aware, or that we currently deem immaterial, may also become important factors that affect our financial condition, results of operations and cash flows.
Risks Relating to Our Financial Position
Changes in global or regional economic conditions may adversely affect our financial
position and results of operations.
The results of our operations depend heavily on advertising revenue, and demand for advertising is affected by general economic conditions in the region and globally. Our markets have experienced overall growth in real GDP (as adjusted for inflation) and advertising spending over the last several years; however, we cannot predict if the current growth trends will continue in the future. Recessions or periods of low or negative growth in the region or globally in the future may cause a deterioration of general economic conditions in one or more of our markets, which would have an adverse economic impact on our advertising revenues. The United States has imposed tariffs on certain products from many of its trading partners, including Europe and China, and has threatened to impose additional tariffs. If trade tensions between the United States and Europe escalate, this may result in the imposition
of tariffs on cars and auto part exports from Europe. Such tariffs could have a significant adverse impact on the economies of our countries of operation. Additionally, a slowdown in China resulting from existing or increased tariffs on Chinese products may have an adverse impact on the global economy, which may ultimately reduce demand for European exports and the rate of GDP growth in the countries in which we operate. Other factors that may affect general economic conditions in our markets include defaults by sovereigns or systemically important companies, austerity programs, natural disasters, acts of terrorism, civil or military conflicts or general political instability and responses to it, any of which may also reduce advertising spending. In addition, although we believe the advertising spend per capita of the countries in which we operate and advertising intensity (the ratio of total advertising spend per capita to nominal GDP per capita) will eventually converge
with developed markets in Europe, such convergence may not occur in the time frame we expect, or at all. Any of these developments would have a significant negative effect on our financial position, results of operations and cash flows.
Ending the quantitative easing program implemented by the European Central Bank ("ECB") and the impact on the region of the United Kingdom’s exit from the European Union ("EU") may adversely affect our financial position and results of operations.
The ECB embarked upon quantitative easing in 2015 to address economic softness and a slowdown in growth of consumer prices in the Eurozone. The ECB also created funding and stability mechanisms to provide liquidity and financial assistance to Eurozone member states and financial institutions. Economic growth in recent years in the Eurozone has been helped by the ECB’s quantitative easing program
which was recalibrated in January 2018. Although the ECB, citing improved economic conditions, ended its original quantitative easing program at the end of December 2018, it announced in September 2019 that it would restart quantitative easing again in November 2019. While the duration of the current quantitative easing program is not known, the cessation of quantitative easing may adversely impact future growth in Eurozone countries, including the countries in which we operate would negatively impact our business.
At present, the period during which the United Kingdom is to finalize the terms and process for leaving the EU, commonly referred to as "Brexit", will expire on October 31, 2019. There is significant uncertainty regarding the specific timing and the terms on which the United Kingdom will leave the EU, and it is expected that economic conditions in the EU will
be impacted by Brexit. Given the ongoing uncertainty over the final terms of Brexit, the overall economic impact of Brexit on the EU and the Euro continues to be difficult to estimate as decisions to conserve cash and reduce spending by consumers and businesses in the United Kingdom would have a negative impact on economic growth rates in the United Kingdom and, to a lesser extent, in the EU, in particular those countries that are significant exporters to the United Kingdom. Furthermore, the departure of the United Kingdom from the EU may further affect the budgetary contributions and allocations among the EU member states in the medium term, including the countries in which we operate, which have historically been net recipients of EU funding. Economic uncertainty caused by Brexit or other instability in the EU resulting from Brexit could cause significant volatility in EU markets and reduce economic growth rates in the countries in which we operate, which would negatively
impact the demand for advertising and consequently our financial position, results of operations and cash flows.
Our operating results will be adversely affected if we cannot generate strong advertising sales.
We generate the majority of our revenues from the sale of advertising airtime on our television channels. While we have implemented pricing strategies to increase sales and television advertising spending, the success of these strategies has varied from market to market and continues to be challenged by pressure from advertisers and discounting by competitors. In addition to advertising pricing, other factors
that may affect our advertising sales include general economic conditions (described above), competition from other broadcasters and operators of other distribution platforms, changes in programming strategy, changes in distribution strategy, our ability to secure distribution on cable, satellite or IPTV operators, our channels’ technical reach, technological developments relating to media and broadcasting, seasonal trends in the advertising market, changing audience preferences and in how and when people view content and the accompanying advertising, increased competition for the leisure time of audiences and shifts in population and other demographics. Our advertising revenues also depend on our ability to maintain audience ratings and to generate GRPs. This requires us to have a distribution strategy that reaches a significant audience as well as to maintain investments in programming at a sufficient level to continue to attract audiences. Changes in the distribution
of our channels, such as our decision to cease broadcasting on digital terrestrial television ("DTT") in the Slovak Republic and Slovenia in 2017, may reduce the number of people who can view our channels, which may negatively impact our audience share and GRPs generated. Furthermore, significant or sustained reductions in investments in programming or other operating costs in response to reduced advertising revenues had and, if repeated, may have an adverse impact on our television viewing levels. Reductions in advertising spending in our markets and resistance to price increases as well as competition for ratings from broadcasters seeking to attract similar audiences may have an adverse impact on our ability to maintain our advertising sales. A failure to maintain and increase advertising sales could have a material adverse effect on our financial position, results of operations and cash flows.
We may be unable to
repay or refinance our existing indebtedness and may not be able to obtain favorable refinancing terms.
We have a substantial amount of indebtedness. Under the Reimbursement Agreement and the 2023 Revolving Credit Facility (when drawn), we can incur only limited amounts of additional indebtedness, other than indebtedness incurred to refinance existing indebtedness. In addition, all commitments under the 2023 Revolving Credit Facility also terminate on the refinancing of any Euro Loan. We face the risk that we will not be able to renew, repay or refinance our indebtedness when due, or that the terms of any renewal or refinancing will not be on better terms than those of such indebtedness being refinanced. Furthermore, pursuant to the Reimbursement Agreement, the all-in rates on each of the Euro Loans increase to a maximum of 10.0% (or 3.5% above the then-current all-in rate, if lower), on the date that is 365 days following
a change of control of CME Ltd. (as defined therein); and pursuant to the 2023 Revolving Credit Facility, all commitments terminate following a change of control (as defined therein) and the interest rate on amounts outstanding increases to 10% plus LIBOR or 9% plus the alternate base rate on the date that is 365 days following such change of control. In the event we are not able to refinance our indebtedness, we might be forced to dispose of assets on disadvantageous terms or reduce or suspend operations, any of which would materially and adversely affect our financial condition, results of operations and cash flows.
Our debt service obligations and covenants may restrict our ability to conduct our operations.
We have significant debt service obligations under the Euro Loans as well as the 2023 Revolving Credit Facility (when drawn), including the Guarantee Fees to Warner Media
as consideration for its guarantees of the Euro Loans (collectively, the "WM Guarantees"). In addition, if our financial performance does not meet our forecasts, we may bear higher average borrowing costs on our senior debt and pay more interest and Guarantee Fees. As a result of our debt service obligations and covenants contained in the related loan agreements, we are restricted under the Reimbursement Agreement and the 2023 Revolving Credit Facility (when drawn) in the manner in which our business is conducted, including but not limited to our ability to obtain additional debt financing to refinance existing indebtedness or to fund future working capital, capital expenditures, business opportunities or other corporate requirements, which may limit our flexibility in planning for, or reacting to, changes in our business, economic conditions or our industry. For additional information regarding the Reimbursement Agreement, the 2023 Revolving Credit Facility and
the WM Guarantees, see Part I, Item 1, Note 4, "Long-term Debt and Other Financing Arrangements".
We may be subject to changes in tax rates and exposure to additional tax liabilities.
We are subject to taxes in a number of foreign jurisdictions, including in respect of our operations as well as capital transactions undertaken by us. We are subject to regular review and audit by tax authorities, and in the ordinary course of our business there are transactions and calculations where the ultimate tax determination is unknown. Significant judgment is required in determining our provision for taxes. The final determination of our tax liabilities resulting from tax audits, related proceedings or otherwise could be materially different from our tax provisions. Economic and political pressures to increase receipts in various jurisdictions may make taxation and tax rates subject to
significant change and the satisfactory resolution of any tax disputes more difficult. The occurrence of any of these events could have a material adverse effect on our financial position, results of operations and cash flows.
A default by us in connection with our obligations under our outstanding indebtedness could result in our inability to continue to conduct our business.
Pursuant to the Reimbursement Agreement and the 2023 Revolving Credit Facility, we pledged all of the shares of CME NV and of CME BV, which together own all of our interests in our operating subsidiaries, in favor of Warner Media as security for this indebtedness. If we or these subsidiaries were to default under the terms of any
of the relevant agreements, Warner Media would have the ability to sell all or a portion of the assets pledged to it in order to pay amounts outstanding under such debt instruments. This could result in our inability to conduct our business.
Fluctuations in exchange rates may continue to adversely affect our results of operations.
Our reporting currency is the dollar and CME Ltd.'s functional currency is the Euro. Our consolidated revenues and costs are divided across a range of European currencies. Any strengthening of the dollar will have a negative impact on our reported revenues. Furthermore, fluctuations in exchange rates may negatively impact programming costs. While local programming is generally purchased in local currencies, a significant portion of our content costs relates to foreign programming purchased pursuant to dollar-denominated agreements. If the dollar appreciates
against the functional currencies of our operating segments, the cost of acquiring such content would be adversely affected, which could have a material adverse effect on our results of operations and cash flows.
Our strategies to enhance our carriage fees and diversify our revenues may not be successful.
We are focused on creating additional revenue streams from our broadcast operations as well as increasing revenues generated from television advertising, which is how we generate most of our revenues. Our main efforts with respect to this strategy are on increasing carriage fees from cable, satellite and IPTV operators
for carriage of our channels as well as continuing to seek improvements in advertising pricing. Agreements with operators generally have a term of one or more years, at which time agreements must be renewed. There can be no assurance that we will be successful in renewing carriage fee agreements on similar or better terms. During negotiations to implement our carriage fees strategy in prior years, some cable and satellite operators suspended the broadcast of our channels, which negatively affected the reach and audience shares of those operations and, as a result, advertising revenues. There is a risk that operators may refuse to carry our channels while carriage fee negotiations are ongoing, which would temporarily reduce the reach of those channels and may result in clients withdrawing advertising from our channels. The occurrence of any of these events may have an adverse impact on our financial position, results of operations and cash flows. If we are ineffective
in negotiations with carriers or in achieving further carriage fee increases, our profitability will continue to be dependent primarily on television advertising revenues, which increases the importance placed on our ability to improve advertising pricing and generate advertising revenues. In addition to carriage fees, we are also working to build-out our offerings of advertising video-on-demand products and other opportunities for advertising online. There can be no assurances that our revenue diversification initiatives will ultimately be successful, and if unsuccessful, this may have an adverse impact on our financial position, results of operations and cash flows.
A downgrading of our corporate credit ratings may adversely affect our ability to raise additional financing.
Moody’s Investors Service rates our corporate credit as B1
with a positive outlook. Standard & Poor’s rates our corporate credit B+ (with a positive outlook). Our ratings show each agency's opinion of our financial strength, operating performance and ability to meet our debt obligations as they become due. These ratings take into account the particular emphasis the ratings agencies place on metrics such as leverage ratio and cash flow, which they use as measurements of a company's liquidity and financial strength. They also reflect an emphasis placed by the ratings agencies on the strong financial support from Warner Media historically. We may be subject to downgrades if our operating performance deteriorates or we fail to maintain adequate levels of liquidity. In the event our corporate credit ratings are lowered by the rating agencies, we may not be able to refinance our existing indebtedness
or raise new indebtedness that may be permitted under the Reimbursement Agreement and the 2023 Revolving Credit Facility (when drawn), and we will have to pay higher interest rates, all of which would have an adverse effect on our financial position, results of operations and cash flows.
If our goodwill, other intangible assets and long-lived assets become impaired, we may be required to record significant charges to earnings.
We review our long-lived assets for impairment when events or changes in circumstances indicate the carrying amount may not be recoverable. Goodwill and indefinite-lived intangible assets are required to be assessed for impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying amount of our goodwill, indefinite-lived intangible assets or long-lived assets may not be recoverable include slower growth
rates in our markets, reduced expected future cash flows, increased country risk premium as a result of political uncertainty and a decline in stock price and market capitalization. We consider available current information when calculating our impairment charge. If there are indicators of impairment, our long-term cash flow forecasts for our operations deteriorate or discount rates increase, we may be required to recognize additional impairment charges in later periods. See Part I, Item 1, Note 3, "Goodwill and Intangible Assets" for the carrying amounts of goodwill in each of our reporting units.
Risks Relating to Our Operations
Our operations are vulnerable to significant changes in viewing habits and technology that could adversely affect us.
The television broadcasting industry is
affected by rapid innovations in technology. The implementation of these new technologies and the introduction of non-traditional content distribution systems have increased competition for audiences and advertisers. Platforms such as direct-to-home cable and satellite distribution systems, the internet, subscription and advertising video-on-demand, user-generated content sites and the availability of content on portable digital devices have changed consumer behavior by increasing the number of entertainment choices available to audiences and the methods for the distribution, storage and consumption of content. This development has fragmented television audiences in more developed markets and could adversely affect our ability to retain audience share and attract advertisers as such technologies penetrate our markets. As we adapt to changing viewing patterns, it may be necessary to expend substantial financial and managerial resources to ensure necessary access to new
technologies or distribution systems. Such initiatives may not develop into profitable business models. Furthermore, technologies that enable viewers to choose when, how, where and what content to watch, as well as to fast-forward or skip advertisements, may cause changes in consumer behavior that could have a negative impact on our advertising revenues. In addition, compression techniques and other technological developments allow for an increase in the number of channels that may be broadcast in our markets and expanded programming offerings that may be offered to highly targeted audiences. Reductions in the cost of launching new channels could lower entry barriers and encourage the development of increasingly targeted niche programming on various distribution platforms. This could increase the competitive demand for popular programming, resulting in an increase in content costs as we compete for audiences and advertising revenues. A failure to successfully adapt to
changes in our industry as a result of technological advances may have an adverse effect on our financial position, results of operations and cash flows.
Content may become more expensive to produce or acquire or we may not be able to develop or acquire content that is attractive to our audiences.
Television programming is one of the most significant components of our operating costs. The ability of our programming to generate advertising revenues depends substantially on our ability to develop, produce or acquire programming that matches audience tastes and attracts high audience shares, which is difficult to predict. The commercial success of a program depends on several tangible and intangible factors, including the impact of competing programs, the availability of alternate forms of entertainment and leisure time activities, our ability to anticipate and adapt to changes in consumer
tastes and behavior, and general economic conditions. The cost of acquiring content attractive to our viewers, such as feature films and popular television series and formats, is likely to increase in the future. Our expenditures in respect of locally produced programming may also increase due to competition for talent and other resources, wage inflation, changes in audience tastes in our markets or from the implementation of any new laws and regulations mandating the broadcast of a greater number of locally produced programs. In addition, we typically acquire syndicated programming rights under multi-year commitments before knowing how such programming will perform in our markets. In the event any such programming does not attract adequate audience share, it may be necessary to increase our expenditures by investing in additional programming, subject to the availability of adequate financial resources, as well as to write down the value of any underperforming programming.
Any material increase in content costs could have a material adverse effect on our financial condition, results of operations or cash flows.
Our operating results are dependent on the importance of television as an advertising medium.
We generate most of our revenues from the sale of our advertising airtime on television channels in our markets. Television competes with various other media, such as print, radio, the internet and outdoor advertising, for advertising spending. In all of the countries in which we operate, television constitutes the single largest component of all advertising spending. There can be no
assurance that the television advertising market will maintain its current position among advertising media in our markets. Furthermore, there can be no assurances that changes in the regulatory environment or improvements in technology will not favor other advertising media or other television broadcasters. Increases in competition among advertising media arising from the development of new forms of advertising media and distribution could result in a decline in the appeal of television as an advertising medium generally or of our channels specifically. A decline in television advertising spending as a component of total advertising spending in any period or in specific markets would have an adverse effect on our financial position, results of operations and cash flows.
We are subject to legal compliance risks and the risk of legal or regulatory proceedings being initiated against us.
We
are required to comply with a wide variety of laws and other regulatory obligations in the jurisdictions in which we operate and compliance by our businesses is subject to scrutiny by regulators and other government authorities in these jurisdictions. Compliance with foreign as well as applicable U.S. laws and regulations related to our businesses, such as broadcasting content and advertising regulations, competition regulations, tax laws (including the Economic Substance Act in Bermuda which came into force in July 2019), employment laws, data protection requirements including the EU General Data Protection Regulation, and anti-corruption laws, increases the costs and risks of doing business in these jurisdictions. We believe we have implemented appropriate risk management and compliance policies and procedures that are designed to ensure our employees, contractors and agents comply with these laws and regulations; however, a violation of such laws and regulations or
the Company’s policies and procedures could occur. A failure or alleged failure to comply with applicable laws and regulations, whether inadvertent or otherwise, may result in legal or regulatory proceedings being initiated against us and fines or other penalties being levied against us.
In Slovenia, the competition law authorities launched an investigation in 2017 into whether our Slovenia subsidiary is dominant and abused its dominant position when concluding carriage fee agreements with platform operators in connection with its decision to cease broadcasting on DTT there. To date there has been no determination that a breach of competition has occurred. If these or other contingencies result in legal or regulatory proceedings being initiated against us, or if developments occur in respect of our compliance with existing laws or regulations,
or there are changes in the interpretation or application of such laws or regulations, we may incur substantial costs, be required to change our business practices (including on what terms and conditions we offer our channels under carriage agreements), our reputation may be damaged or we may be exposed to unanticipated civil or criminal liability, including fines and other penalties that may be substantial. This could have a material adverse effect on our business, financial position, results of operations and cash flows.
Our operations are in developing markets where there are additional risks related to political and economic uncertainty, biased treatment and compliance with evolving legal and regulatory systems.
Our revenue-generating operations are located in Central and Eastern Europe and we may be significantly affected by risks that may be different to those posed by investments
in more developed markets. These risks include, but are not limited to, social and political instability, changes in local regulatory requirements including restrictions on foreign ownership, inconsistent regulatory or judicial practice, corruption and increased taxes and other costs. The economic and political systems, legal and tax regimes, regulatory practices, standards of corporate governance and business practices of countries in this region continue to develop. Policies and practices may be subject to significant adjustments, including following changes in political leadership, as well as to the influence of commercial and governmental actors. This may result in inconsistent application of tax and legal regulations, arbitrary or biased treatment, and other general business risks as well as social or political instability or disruptions and the potential for political influence on the media. The relative level of development of our markets, the risk of corruption,
and the influence of local commercial and governmental actors also present a potential for biased or unfair treatment of us before regulators or courts in the event of disputes. If such a dispute occurs, those regulators or courts may not act with integrity or may favor local interests over our interests. Other potential risks inherent in markets with evolving economic and political environments include exchange controls, higher taxes, tariffs and other levies as well as longer payment cycles. Ultimately, the occurrence of any of these could have a material adverse impact on our business, financial position, results of operations and cash flows.
Piracy of our content may decrease revenues we can earn from our content and adversely impact our business and profitability.
Piracy of our content poses significant challenges in our markets. Technological developments, including digital
copying, file compressing, the use of international proxies and the growing penetration of high bandwidth internet connections, have made it easier to create, transmit and distribute high quality unauthorized copies of content in unprotected digital formats. Furthermore, there are a growing number of video streaming sites, increasing the risk of online transmission of our content without consent. The proliferation of such sites broadcasting content pirated from us could result in a reduction of revenues that we receive from the legitimate distribution of our content, including through video-on-demand and other services. Protection of our intellectual property is in large part dependent on the manner in which applicable intellectual property laws in the countries in which we operate are construed and enforced. We seek to limit the threat of content piracy. However, detecting and policing the unauthorized use of our intellectual property is often difficult and remedies
may be limited under applicable law. Steps we take may not prevent the infringement by third parties. There can be no assurance that our efforts to enforce our rights and protect our intellectual property will be successful in preventing piracy, which limits our ability to generate revenues from our content.
We rely on network and information systems and other technology that may be subject to disruption, security breaches or misuse, which could harm our business or our reputation.
We make extensive use of network and information systems and other technologies, including those related to our internal network management as well as our broadcasting operations. These systems are central to many of our business activities. Network and information systems-related events, such as computer hackings, computer viruses, worms or other destructive or disruptive software, process breakdowns,
malicious activities or other security breaches could result in a disruption or degradation of our services, the loss of information or the improper disclosure of personal data. The occurrence of any of these events could negatively impact our business if we are required to expend resources to remedy such a security breach or if they result in legal claims or proceedings or our reputation is harmed. In addition, improper disclosure of personal data could subject us to liability under laws, including the EU General Data Protection Regulation, that protect personal data in the countries in which we operate. The development and maintenance of systems to prevent these events from occurring requires ongoing monitoring and updating as efforts to overcome security measures become more sophisticated. As technologies evolve, we will need to expend additional resources to protect our technology and information systems, which could have an adverse impact on our results of operations
and cash flows.
Our broadcasting licenses may not be renewed and may be subject to revocation.
We require broadcasting and, in some cases, other operating licenses as well as other authorizations from national regulatory authorities in our markets in order to conduct our broadcasting business. While our broadcasting licenses for our operations in the Slovak Republic and Slovenia are valid for indefinite time periods, our other broadcasting licenses expire at various times from November 2019 through 2028. While we expect that our material licenses and authorizations will continue to be renewed or extended as required,
we cannot guarantee that this will occur or that they will not be subject to revocation, particularly in markets where there is relatively greater political risk as a result of less developed political and legal institutions. The failure to comply in all material respects with the terms of broadcasting licenses or other authorizations or with applications filed in respect thereto may result in such licenses or other authorizations not being renewed or otherwise being terminated. Furthermore, no assurances can be given that renewals or extensions of existing licenses will be issued on the same terms as existing licenses or that further restrictions or conditions will not be imposed in the future. Any non-renewal or termination of any other broadcasting or operating licenses or other authorizations or material modification of the terms of any renewed licenses may have a material adverse effect on our financial position, results of operations and cash flows.
Our
success depends on attracting and retaining key personnel.
Our success depends partly upon the efforts and abilities of our key personnel and our ability to attract and retain key personnel. Our management teams have significant experience in the media industry and have made important contributions to our growth and success. Although we have been successful in attracting and retaining such people in the past, competition for highly skilled individuals is intense. There can be no assurance that we will continue to be successful in attracting and retaining such individuals in the future. The loss of the services of any of these individuals could have an adverse effect on our businesses, results of operations and cash flows.
Risks Relating to Enforcement Rights
We are a Bermuda company and enforcement of civil liabilities and judgments may
be difficult.
We are a Bermuda company. Substantially all of our assets and all of our operations are located, and all of our revenues are derived, outside the United States. In addition, several of our directors and officers are non-residents of the United States, and all or a substantial portion of the assets of such persons are or may be located outside the United States. As a result, investors may be unable to effect service of process within the United States upon such persons, or to enforce against them judgments obtained in the United States courts, including judgments predicated upon the civil liability provisions of the United States federal and state securities laws. There is uncertainty as to whether the courts of Bermuda and the countries in which we operate would enforce (a) judgments of United States courts obtained against us or such persons predicated upon the civil liability provisions of the United States
federal and state securities laws or (b) in original actions brought in such countries, liabilities against us or such persons predicated upon the United States federal and state securities laws.
Our Bye-laws restrict shareholders from bringing legal action against our officers and directors.
Our Bye-laws contain a broad waiver by our shareholders of any claim or right of action in Bermuda, both individually and on our behalf, against any of our officers or directors. The waiver applies to any action taken or concurred in by an officer or director, or the failure of an officer or director to take any action, in the performance of his or her duties, except with respect to any matter involving any fraud or dishonesty on the part of the officer or director. This waiver limits the right of shareholders to assert claims against our officers and directors unless the act or failure to act
involves fraud or dishonesty.
Risks Relating to our Common Stock
Our share price may be adversely affected by sales of unregistered shares or future issuances of our shares.
AT&T, through its wholly owned subsidiaries Warner Media and TW Investor, is the largest beneficial owner of shares of our Class A common stock, holding 162,334,771 unregistered shares of Class A common stock, one share of Series A preferred stock ("Series A Preferred Share"), and 200,000 shares of Series B preferred stock ("Series B Preferred Shares"). The share of Series A Preferred Shares is convertible into 11,211,449 shares of Class A common stock and the Series B
Preferred Shares are convertible into approximately 111.1 million shares of Class A common stock at the option of Warner Media (subject to certain exceptions). Warner Media has registration rights with respect to all its shares of Class A common stock now held or hereafter acquired. For additional information on the Series A Preferred Shares, Series B Preferred Shares and warrants, see Part I, Item 1, Note 13, "Convertible Redeemable Preferred Shares" and Note 14, "Equity". We cannot predict what effect, if any, the entry into trading of previously issued unregistered shares of Class A common stock will have on the market price of our shares. We may also issue additional shares of Class A common stock or securities convertible into our equity in the future. If more shares of our Class A common stock (or securities convertible
into or exchangeable for shares of our Class A common stock) are issued to Warner Media, the economic interests of current shareholders may be diluted and the price of our shares may be adversely affected.
The interests of AT&T may conflict with the interests of other investors.
Through its wholly owned subsidiaries Warner Media and TW Investor, the aggregate beneficial ownership interest of AT&T in the Company is approximately 75.7%. In connection with the exercise of the warrants by Warner Media and TW Investor in April 2018, each of them issued standing proxies to the independent directors of the
Company, pursuant to which it granted the right to vote the 100,926,996 shares received on the exercise of those warrants (the “Warrant Shares”) on all matters other than at any meeting where the agenda includes a change in control transaction. In accordance with these proxies, the Warrant Shares will be voted in proportion to votes cast at a general meeting of the Company, excluding such Warrant Shares. Warner Media and TW Investor have undertaken to maintain this proxy arrangement until April 2020 and may extend it for an additional year at their option. As a result of the standing proxies, after giving effect to its ownership of the Series A Preferred Share, AT&T has a 44.3% voting interest in the Company. Furthermore, AT&T has the right to appoint one less than the number required
to constitute a majority of our board of directors, provided that AT&T continues to own not less than 40% of the voting power of the Company. As such, AT&T is in a position to exercise significant influence over the outcome of corporate actions requiring shareholder approval, such as the election of directors, amendments to our Bye-laws, or certain transactions, including transactions resulting in a change of control.
We are also party to an amended investor rights agreement with
Warner Media and the other parties thereto under which, among other things, Warner Media was granted a contractual pre-emptive right (subject to certain exclusions) with respect to issuances of the Company’s equity securities, which permits it to maintain its pro rata economic interest as well as a right to top any offer that would result in a change of control of the Company. Under Bermuda law, there is no takeover code or similar legislation requiring an acquirer of a certain percentage of our Class A common stock to tender for the remaining publicly held shares. Warner Media is also our largest secured creditor, as it guarantees 100% of our outstanding senior indebtedness and is the lender under the 2023 Revolving Credit Facility. The 2023 Revolving Credit Facility (when drawn) and the Reimbursement
Agreement contain maintenance covenants in respect of interest cover and total leverage ratios and includes covenants in respect of the incurrence of indebtedness (including refinancing indebtedness), the provision of guarantees, acquisitions and disposal and granting security. As such, Warner Media may be in a position to determine whether to permit transactions, waive defaults or accelerate such indebtedness or take other steps in its capacity as a secured creditor in a manner that might not be consistent with the interests of the holders of our Class A common stock. Furthermore, in certain circumstances, the interests of AT&T as our largest beneficial owner could be in conflict with the interests of minority shareholders
We are subject to risk and uncertainties related to our review of strategic alternatives that may adversely affect our business.
On March
25, 2019, we announced that our Board of Directors, working with the Company's management team and its legal and financial advisors, commenced a process to explore and evaluate potential strategic alternatives for the Company focused on maximizing shareholder value. Our Board has formed a committee of independent directors to lead this process. The potential alternatives may include, among others, the sale of part or all of the Company, a merger with another strategic partner, a recapitalization or the Company's continuing to execute on the long-term business plan.
The process of exploring
strategic alternatives involves the dedication of significant resources and the incurrence of fees and expenses and will likely result in the incurrence of significant fees and expenses if we determine to move forward with any of the strategic alternatives. In addition, our exploration of strategic alternatives may expose our business to other risks and uncertainties, including the diversion of management and employee attention and time; difficulty in recruiting, hiring, and retaining necessary personnel; and disruption to our relationships with clients and suppliers as well as to other commercial and strategic relationships. Furthermore, speculation regarding any developments related to the review of strategic alternatives and or uncertainty regarding the outcome could cause our share price to fluctuate significantly. There is no timeline for the completion of the strategic review and we do not intend to provide updates or further information on developments related
to the strategic review unless we determine that additional disclosure is necessary or appropriate. There can be no assurance that our exploration of strategic alternatives will result in the Company determining to proceed with any transaction and it is not possible to predict the impact of the conclusion of the strategic review on our business or share price. If we are unable to effectively mitigate the risks related to the strategic review, it may disrupt our business and adversely impact our financial results, results of operations and cash flows.
The price of our Class A common stock may be volatile.
The market price of shares of our Class A common stock may be influenced by many factors, some of which are beyond our control, including but not limited to those described in the Risk Factor above
”We are subject to risk and uncertainties related to our review of strategic alternatives that may adversely affect our business” and under "Risks Relating to Our Operations" as well as the following: general economic and business trends, variations in quarterly operating results, license renewals, regulatory developments in our operating countries and the European Union, the condition of the media industry in our operating countries, the volume of trading in shares of our Class A common stock, future issuances of shares of our Class A common stock and investors’ and securities analysts’ perception of us and other companies that investors or securities analysts deem comparable in the television broadcasting industry. In addition, stock markets in general have experienced extreme price and volume fluctuations that have often been unrelated to and disproportionate to the operating performance of broadcasting companies. These broad market and industry factors
may materially impact the market price of shares of our Class A common stock, regardless of our operating performance.
Our business could be negatively impacted as a result of shareholder activism.
In recent years, shareholder activists have become involved in numerous public companies. Shareholder activists frequently propose to involve themselves in the governance, strategic direction and operations of the Company, as occurred when TCS Capital Management, LLC ("TCS Capital"), filed an amendment to its Schedule 13D in January 2017 in which it disclosed its opinions on the Company’s governance and strategic direction. Such proposals may disrupt our business and divert the attention of our management and employees,
and any perceived uncertainties as to our future direction resulting from such a situation could result in the loss of potential business opportunities, be exploited by our competitors, cause concern to our current or potential customers, and make it more difficult to attract and retain qualified personnel and business partners, all of which could adversely affect our business. In addition, actions of activist shareholders may cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.
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.
