(Exact
name of registrant as specified in its charter)
BERMUDA
98-0438382
(State
or other jurisdiction of incorporation and organization)
(IRS
Employer Identification No.)
Clarendon
House, Church Street, Hamilton
HM
11 Bermuda
(Address
of principal executive offices)
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Code)
Registrant's
telephone number, including area code: 441-296-1431
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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
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accelerated filer, a non-accelerated filer or a smaller reporting
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Central
European Media Enterprises Ltd., a Bermuda company, was formed in June
1994. We hold investments in national and regional commercial
television stations and channels in Central and Eastern Europe through a series
of Dutch and Netherlands Antilles holding companies. At September 30,2008, we had television operations in Bulgaria, Croatia, the Czech Republic,
Romania, the Slovak Republic, Slovenia and Ukraine.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts in US$ 000’s, except share and per share data)
(Unaudited)
Bulgaria
On August1, 2008, we acquired an 80.0% indirect interest in each of TV2, which operates a
national terrestrial network in Bulgaria, and Ring TV, which operates a sports
cable channel. See Note 3, “Acquisitions and Disposals - Bulgaria” for further
information. The national terrestrial license for TV2 expires in February
2010.
Croatia
We
operate one national channel in Croatia, NOVA TV (Croatia). We own 100.0% of
Nova TV (Croatia), which holds a national terrestrial broadcast license for NOVA
TV (Croatia) that expires in April 2010.
Czech
Republic
We
operate one national television channel in the Czech Republic, TV NOVA (Czech
Republic) and two cable/satellite channels, NOVA SPORT and NOVA CINEMA. We own
100.0% of CET 21, which holds the national terrestrial broadcast license for TV
NOVA (Czech Republic) that expires in January 2017 and a satellite license for
NOVA CINEMA that expires in November 2019. CET 21 owns 100.0% of Galaxie Sport,
which holds the broadcast license for NOVA SPORT that expires in March
2014.
Romania
We
operate five television channels in Romania: PRO TV, ACASA, PRO CINEMA, SPORT.RO
and MTV ROMANIA, as well as PRO TV INTERNATIONAL, a channel distributed by
satellite outside the country featuring programs re-broadcast from other
Romanian channels. We operate two radio channels in Romania, PRO FM, a pop music
channel, and INFO PRO, a national infotainment channel.
We own a
95.0% interest in each of Pro TV, MPI and Media Vision, a production, dubbing
and subtitling company. The remaining shares of each of these
companies are owned by companies, or individuals associated with, Adrian Sarbu,
our Chief Operating Officer. Pro TV holds the licenses for the PRO
TV, ACASA, PRO TV INTERNATIONAL, PRO CINEMA, SPORT.RO and MTV ROMANIA channels.
These licenses expire on various dates between April 2009 and April
2017.
We own
10.0% of Media Pro BV and 8.7% of Media Pro Management S.A., the parent
companies of the Media Pro group of companies (“Media Pro”). Substantially all
of the remaining shares of Media Pro are owned directly or indirectly by Mr.
Sarbu. Media Pro comprises a number of companies with operations in the fields
of publishing, information, printing, cinema, entertainment and radio in
Romania.
Slovak
Republic
We
operate one national television channel in the Slovak Republic, TV MARKIZA. We
own 100.0% of Markiza, which holds a national terrestrial broadcast license for
TV MARKIZA that expires in September 2019.
Slovenia
We
operate two national television channels in Slovenia, POP TV and KANAL
A. We own 100.0% of Pro Plus, the operating company for our Slovenia
operations. Pro Plus has a 100.0% interest in each of Pop TV, which
holds the licenses for the POP TV channel, and Kanal A, which holds the licenses
for the KANAL A channel. All such licenses expire in August
2012.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts in US$ 000’s, except share and per share data)
(Unaudited)
Ukraine
(Studio 1+1)
We
operate one national television channel in Ukraine, STUDIO 1+1. The fifteen hour
prime time and off prime time license of STUDIO 1+1 expires in December 2016.
The license to broadcast for the remaining nine hours in off prime time expires
in August 2014.
As at
September 30, 2008, we held a 90% interest in the Studio 1+1 group,
which is comprised of several entities in which we hold direct or indirect
interests. On October 17, 2008, we completed the purchase of the remaining 10.0%
interest in the Studio 1+1 group from our former partners Boris Fuchsmann and
Alexander Rodnyansky for cash consideration of US$ 109.1 million. (See Note 19,
“Subsequent Events“).
Following
this acquisition, we hold a 100.0% voting and economic interest in each of IMS,
Innova and TV Media Planet and an 83.4% voting and economic interest in
Innova. Innova owns 100.0% of 1+1 Production, a Ukrainian company,
which in turn holds a 30.0% voting and economic interest in Studio 1+1, the
license holder for the STUDIO 1+1 channel. In addition, we hold a 99.9% interest
in UMS, which owns a 42.0% direct voting and economic interest in Studio 1+1,
and 100.0% of Grizard, which owns a 23.0% direct voting and economic
interest in Studio 1+1 and 100% of Grintwood Investments Limited, which owns
a 5.0% direct voting and economic interest in Studio 1+1.
Ukraine
(KINO, CITI)
In
Ukraine we operate KINO, a network of regional channels, and CITI, a local
channel that broadcasts in the Kiev area.
We hold a
65.5% interest in Ukrpromtorg. Ukrpromtorg owns (i) 92.2% of Gravis, which
operates the KINO and CITI channels; (ii) 100.0% of Nart LLC, which holds a
satellite broadcasting license; and (iii) 98.1% of TV Stimul. We also
own a 60.4% interest in each of Zhysa and Tor, two regional broadcasters.
Licenses for KINO and CITI expire on dates ranging from November 2008 to August
2018.
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
interim financial statements for the three and nine months ended September 30,2008 should be read in conjunction with the Notes to the Consolidated Financial
Statements contained in our Annual Report on Form 10-K for the period ended
December 31, 2007. Our significant accounting policies have not
changed since December 31, 2007, except as noted below.
In the
opinion of management, the accompanying interim, unaudited financial statements
reflect all adjustments, consisting only of normal recurring items, necessary
for their fair presentation in conformity with generally accepted accounting
principles in the United States of America (“U.S. GAAP”). The
consolidated results of operations for interim periods are not necessarily
indicative of the results to be expected for a full year.
The
preparation of financial statements in conformity with U.S. 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 year. Actual results could differ from
those estimates and assumptions.
The
condensed consolidated financial statements include the accounts of Central
European Media Enterprises 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)
We, like
other television operators, experience seasonality, with advertising sales
tending to be lower during the first and third quarters of each calendar year,
particularly during the summer holiday period (typically July and August) and
higher during the second and fourth quarters of each calendar year, particularly
toward the end of the year.
The terms
“Company”, “we”, “us”, and “our” are used in this Form 10-Q to refer
collectively to Central European Media Enterprises Ltd. and our subsidiaries,
through which our various businesses are actually conducted. Unless
otherwise noted, all statistical and financial information presented in this
report has been converted into US dollars using appropriate exchange
rates. All references to “US$” or “dollars” are to U.S. dollars, all
reference to “BGN” are to Bulgarian Lev, all references to “HRK” are to Croatian
kuna, all references to “CZK” are to Czech korunas, all references to “RON” are
to the New Romanian lei, all references to “SKK” are to Slovak korunas, all
references to “UAH” are to Ukrainian hryvna and all references to “Euro” or
“EUR” are to the European Union Euro.
Fair
Value of Financial Instruments
In
September 2006, the FASB issued FASB Statement No. 157, “Fair Value
Measurements” (“FAS 157”). FAS 157 addresses the need for increased
consistency in fair value measurements and defines fair value, establishes a
framework for measuring fair value and expands disclosure requirements. FAS 157
was to be effective in its entirety for fiscal years beginning after November15, 2007, however in February 2008, the FASB issued FASB Staff Position No. FSP
FAS 157-2 “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”). Under
FSP FAS 157-2, application of FAS 157 may be deferred until fiscal years
beginning after November 15, 2008 for nonfinancial assets and liabilities,
except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis.
We
adopted those parts of FAS 157 not deferred by FSP FAS 157-2 on January 1, 2008.
There was no impact on the carrying value of any asset or liability recognized
at adoption and additional disclosure is provided in Note 12, “Financial
Instruments and Fair Value Measurements” to comply with the enhanced disclosure
requirements of the standard. We do not expect that the adoption of those parts
of FAS 157 deferred by FSP FAS 157-2 will result in a material impact on our
financial position and results of operations.
On
January 1, 2008, we adopted FASB Statement No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("FAS 159") which gives entities the
option to prospectively measure many financial instruments and certain other
items at fair value in the balance sheet with changes in the fair value
recognized in the income statement. We did not elect to apply the fair value
option to any asset or liability upon, or since, adoption, therefore there was
no impact on our financial position and results of operations.
In
October 2008, the FASB issued Staff Position No. FSP FAS 157-3 “Determining the
Fair Value of a Financial Asset When the Market for That Asset Is Not Active”
(“FSP FAS 157-3”) which amends FAS 157 to include guidance on how to determine
the fair value of a financial asset in an inactive market and which is effective
immediately on issuance, including prior periods for which financial statements
have not been issued. The implementation of FSP FAS 157-3 did not
have a material impact on our financial position and results of
operations.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts in US$ 000’s, except share and per share data)
(Unaudited)
Recent
Accounting Pronouncements
In
December 2007, the FASB issued FASB Statement No. 141(R), “Business Combinations”
(“FAS 141(R)”), which establishes principles and requirements for how the
acquirer: (a) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree; (b) recognizes and measures the goodwill acquired
in the business combination or a gain from a bargain purchase; and
(c) determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. FAS 141(R) requires contingent consideration to be
recognized at its fair value on the acquisition date and, for certain
arrangements, changes in fair value to be recognized in earnings until
settled. FAS 141(R) also requires acquisition-related transaction and
restructuring costs to be expensed rather than treated as part of the cost of
the acquisition. FAS 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,2008. Because the requirements of FAS 141(R) are largely prospective, we
do not expect its adoption to have a material impact on our consolidated
financial position and results of operations.
In
December 2007, the FASB issued FASB Statement No. 160, “Noncontrolling
Interests in Consolidated Financial Statements an Amendment of ARB No. 51”
(“FAS 160”), which establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. FAS 160 clarifies that a noncontrolling interest in a
subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements. FAS 160
also requires consolidated net income to be reported at amounts that include the
amounts attributable to both the parent and the noncontrolling interest.
It also requires disclosure, on the face of the consolidated statement of
income, of the amounts of consolidated net income attributable to the parent and
to the noncontrolling interest. FAS 160 also provides guidance when a
subsidiary is deconsolidated and requires expanded disclosures in the
consolidated financial statements that clearly identify and distinguish between
the interests of the parent’s owners and the interests of the noncontrolling
owners of a subsidiary. FAS 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after
December 15, 2008. We are currently evaluating the impact this
statement will have on our financial position and results of
operations.
In March
2008, the FASB issued FASB Statement No. 161 “Disclosures About Derivative
Instruments and Hedging Activities, an Amendment of FASB Statement No. 133”
(“FAS 161”) which enhances the disclosure requirements about derivatives and
hedging activities. FAS 161 requires additional narrative disclosure about how
and why an entity uses derivative instruments, how they are accounted for under
FASB Statement No. 133 “Accounting for Derivative Instruments and Hedging
Activities” (“FAS 133”), and what impact they have on financial position,
results of operations and cash flows. FAS 161 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after November 15,2008. Although certain additional narrative disclosures may be required in our
future financial statements, our limited use of derivative instruments means we
do not expect the adoption of FAS 161 will result in a material impact on our
financial position and results of operations.
In April
2008 the FASB issued FASB Staff Position No. FAS 142-3 “Determination of the
Useful Life of Intangible Assets,” which aims to improve consistency between the
useful life of a recognized intangible asset under FASB Statement No. 142
“Goodwill and Other Intangible Assets” and the period of expected cash flows
used to measure the fair value of the asset under FAS 141(R), especially where
the underlying arrangement includes renewal or extension terms. The FSP is
effective prospectively for fiscal years beginning after December 15, 2008 and
early adoption is prohibited. The adoption of FSP FAS 142-3 will not have any
impact on the valuation of our existing intangible assets at the date of
adoption, and we do not expect it will result in a significant difference in the
methodology we will use to value acquired intangible assets in the
future.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts in US$ 000’s, except share and per share data)
(Unaudited)
In May
2008, the FASB issued FASB Statement No. 162, “The Hierarchy of Generally
Accepted Accounting Principles” (“FAS 162”). FAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of non-governmental entities that are
presented in accordance with GAAP. With the issuance of this statement, the FASB
concluded that the GAAP hierarchy should be directed toward the entity and not
its auditor, and reside in the accounting literature established by the FASB as
opposed to the American Institute of Certified Public Accountants (“AICPA”)
Statement on Auditing Standards No. 69, “The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles.” FAS 162 is effective
from November 15, 2008. The adoption of FAS 162 will not have a material impact
on our consolidated financial position and results of
operations.
In May
2008, the FASB issued Staff Position No. APB 14-1, “Accounting for Convertible
Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial
Cash Settlement)” (“FSP APB 14-1”), which clarifies the accounting for
convertible debt instruments that may be settled in cash (including partial cash
settlement) upon conversion. FSP APB 14-1 requires issuers to account separately
for the liability and equity components of certain convertible debt instruments
in a manner that reflects the issuer's non-convertible debt (unsecured debt)
borrowing rate when interest cost is recognized. FSP APB 14-1 requires
bifurcation of a component of the debt including allocated issuance costs,
classification of that component in equity and the accretion of the resulting
discount on the debt and the allocated acquisition costs to be recognized as
part of interest expense in the consolidated Statement of Operations. FSP APB
14-1 requires retrospective application to the terms of instruments as they
existed for all periods presented. FSP APB 14-1 is effective for us as of
January 1, 2009 and early adoption is prohibited. The adoption of FSP APB 14-1
will affect the accounting for our Convertible Notes and, we expect, will result
in approximately the following changes to the 2008 comparative balances in our
2009 financial statements to reflect the revised equity and liability balances
on issuance (net of allocated acquisition costs) of US$ 108.1 million and US$
364.2 million respectively:
In
addition, at present, we expect that the adoption of FSP APB 14-1 will cause our
reported interest expense in the 2008 and 2009 financial years to increase by
approximately US$ 14.0 million and US$ 18.9 million respectively to reflect the
amortization of the issuance discount.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts in US$ 000’s, except share and per share data)
(Unaudited)
3. ACQUISITIONS
AND DISPOSALS
Bulgaria
Acquisition
of TV2 and Ring TV
In order
to continue the expansion of our free-to-air broadcasting operations into new
markets in Central and Eastern Europe, on August 1, 2008 we purchased an 80%
indirect interest in each of TV2, which operates a national terrestrial network
in Bulgaria, and Ring TV, which operates a cable sports.
Initial
consideration was approximately US$ 172.0 million, which was reduced to US$
146.4 million after adjustments for indebtedness and a net working capital
deficit. An additional retention amount of US$ 4.5 million less any subsequently
identified liabilities will also be payable within 12 months of the acquisition
date.
We
performed a preliminary fair value exercise to allocate the purchase price to
the acquired assets and liabilities and separately identifiable intangible
assets as at August 1, 2008. We are still awaiting reports to confirm
the value of certain assets and the quantification of certain acquisition date
liabilities. The following table summarizes the preliminary fair
values of the assets acquired and liabilities assumed at the date of
acquisition
Fair
Value on Acquisition
Cash
and cash equivalents
$
326
Other
net assets
(17,481
)
Broadcasting
licenses subject to amortization (1)
95,114
Other
intangible assets subject to amortization (2)
8,161
Goodwill
(3)
75,585
Deferred
tax liability
(10,114
)
Total
purchase price (4)
$
151,591
(1) The
broadcasting licenses subject to amortization comprise television broadcasting
licenses of US$ 94.4 million, which are being amortized on a straight-line basis
over 16.5 years, and radio broadcasting licenses of US$ 0.7 million, which are
being amortized on a straight-line basis over 17.4 years.
(2) The
other intangible assets subject to amortization comprise a favorable advertising
sales contract with a leading Bulgarian advertising agency of US$ 7.5, which is
being amortized on a straight-line basis over 5.3 years and trademarks of US$
0.7 million, which are being amortized over two years using the declining
balance method.
(3) No
goodwill is expected to be deductible for tax purposes
(4) The
total purchase price includes US$ 4.5 million of additional retention amount and
US$ 0.7 million of capitalized acquisition costs.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts in US$ 000’s, except share and per share data)
(Unaudited)
Czech
Republic
Acquisition
of Jyxo and Blog
In order
to enhance both our internet offering and our software delivery capabilities in
the Czech Republic, we purchased 100.0% of Jyxo, an information technology
provider, and Blog, the operator of the leading blog site in the Czech Republic,
blog.cz on May 27, 2008.
Initial
cash consideration was approximately US$ 9.0 million and we subsequently paid
US$ 0.4 million. In addition, we are obligated to pay a further CZK 27.0 million
(approximately US$ 1.7 million at the date of acquisition) within one month of
the second anniversary of completion, which has been recorded as consideration
payable. An additional amount of up to CZK 37.0 million (approximately US$ 2.4
million) may also be payable if certain operational targets are met. We
concluded that if the additional consideration becomes payable, we will record
the fair value of the consideration issuable as an additional cost of acquiring
Jyxo.
We
performed a fair value exercise to allocate the purchase price to the acquired
assets and liabilities and separately identifiable intangible assets as at May27, 2008. The following table summarizes the fair values of the
assets acquired and liabilities assumed at the date of acquisition:
Fair
Value on Acquisition
Cash
and cash equivalents
$
727
Other
net assets
618
Property,
plant and equipment
3,744
Intangible
assets not subject to amortization (1)
9,124
Contingent
consideration liability (2)
(160
)
Deferred
tax liability
(2,462
)
Total
purchase price (3)
$
11,591
(1)
Intangible assets not subject to amortization comprise trademarks.
(2) Since
the aggregate value of the assets and liabilities acquired exceeds the purchase
price without considering any additional amounts we may have to pay that are
contingent upon meeting operational targets, we have recognized this excess,
which is lower than the maximum amount of contingent consideration that may
become payable, as if it were a liability.
(3) The
total purchase price includes US$ 0.5 million of capitalized acquisition costs,
initial cash payments of approximately US$ 9.4 million and consideration payable
of CZK 27.0 million (approximately US$ 1.7 million at the date of
acquisition).
Romania
Acquisition
of Radio Pro
In order
to further strengthen our position in the youth market in Romania and complement
our acquisition of the license for MTV Romania, we purchased certain assets of
Radio Pro, which is owned by Media Pro, a company which is controlled by Mr.
Sarbu and in which we hold an 8.7% interest, for total consideration of RON 47.2
million (approximately US$ 20.6 million at the date of acquisition) on April 17,2008.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts in US$ 000’s, except share and per share data)
(Unaudited)
We
determined that the assets we acquired met the definition of a business and
therefore performed a fair value exercise to allocate the purchase price to the
acquired assets and liabilities and separately identifiable intangible
assets. The following table summarizes the fair values of the assets
acquired and liabilities assumed at the date of acquisition:
Fair
Value on Acquisition
Property,
plant and equipment
$
2,561
Intangible
assets not subject to amortization (1)
15,892
Goodwill
(2)
2,394
Total
purchase price (3)
$
20,847
(1)
Intangible assets not subject to amortization comprise trademarks of US$ 1.7
million and broadcasting licenses of US$ 14.2 million.
(2) No
goodwill is expected to be deductible for tax purposes.
(3) The
total purchase price includes US$ 0.2 million of capitalized acquisition
costs.
Ukraine
(Studio 1+1)
Acquisition
of additional interest – Studio 1+1
On June30, 2008, we acquired a 30.0% interest in the Studio 1+1 group from our
partners, Alexander Rodnyansky and Boris Fuchsmann. The interests
acquired consisted of (i) an 8.335% direct and indirect ownership interest in
the Studio 1+1 group held by Messrs. Rodnyansky and Fuchsmann and (ii) a 21.665%
direct and indirect interest in Studio 1+1, Innova and IMS over which Igor
Kolomoisky, one of our shareholders and a member of our board of directors, held
options (the “Optioned Interests”). Following the completion of these
transactions, we held a 90.0% interest in the Studio 1+1 group and Messrs.
Rodnyansky and Fuchsmann each held a 5.0% interest.
Messrs.
Rodnyansky and Fuchsmann received a combined total cash consideration of US$
79.6 million, including a de minimus amount upon exercise of the Optioned
Interests, in exchange for the 30.0% beneficial ownership interest in the Studio
1+1 group. Mr Kolomoisky received total cash consideration of US$
140.0 million upon the assignment of his options to us.
In
addition, we granted Messrs. Rodnyansky and Fuchsmann the right to jointly put
both of their remaining 5.0% interests in the Studio 1+1 group to us, which
became effective upon completion of our purchase of the 30.0% interest in the
Studio 1+1 Group. We calculated that the fair value of these options was US$
58.0 million at the purchase date using a binomial option pricing model and
included it in the purchase price in accordance with EITF Topic D-87
“Determination of the Measurement Date for Consideration Given by the Acquirer
in a Business Combination When That Consideration is Securities Other Than Those
Issued by the Acquirer.” (“EITF D-87”).
We
performed a fair value exercise to allocate the purchase price to the acquired
assets and liabilities and separately identifiable intangible assets as at June30, 2008. The following table summarizes the fair values of the
assets acquired and liabilities assumed at the date of acquisition:
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts in US$ 000’s, except share and per share data)
(Unaudited)
Fair
Value on Acquisition
Intangible
assets subject to amortization (1)
$
41,480
Intangible
assets not subject to amortization (2)
35,652
Goodwill
208,964
Deferred
tax liability
(19,284
)
Minority
interests (3)
14,398
Total
purchase price (4)
$
281,210
(1) The
intangible assets subject to amortization comprise broadcasting licenses of US$
40.9 million, which are being amortized on a straight-line basis over 18 years,
and customer relationships of US$ 0.6 million, which are being amortized on a
straight-line basis over nine years.
(2)
Intangible assets not subject to amortization comprise trademarks.
(3) As a
result of granting Messrs. Rodyansky and Fuchsmann options to put their
remaining 10% interests to us we have accounted for the remaining 10.0% interest
as a redeemable minority interest. (See Note 18, “Commitments and Contingencies,
Ukraine Buyout Agreements: redeemable minority interest”).
(4) The
total purchase price includes US$ 3.6 million of capitalized acquisition costs,
cash payments to Messrs. Rodyansky and Fuchsmann of US$ 79.6 million, cash
payments of US$ 140.0 million to Mr Kolomoisky and the fair value of options
granted to Messrs. Rodyansky and Fuchsmann of US$ 58.0 million.
On
October 17, 2008 we completed the purchase of the remaining 10.0% interest in
the Studio 1+1 group from Messrs. Rodnyansky and Fuchsmann for cash
consideration of US$ 109.1 million following the exercise of our call option,
(see Note 19, “Subsequent Events”).
Our
goodwill and intangible asset additions are the result of acquisitions in
Bulgaria, Croatia, the Czech Republic, Romania, the Slovak Republic, Slovenia
and Ukraine. No goodwill is expected to be deductible for tax
purposes.
CENTRAL
EUROPEAN MEDIA ENTERPRISES LTD.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts in US$ 000’s, except share and per share data)
(1) At
December 31, 2007, we had not completed our purchase price allocation for the
acquisition of MTS in Romania. The carrying value of goodwill was adjusted
during the first quarter of 2008 to reflect the finalization of the valuation of
certain assets and liabilities of MTS.
Broadcast
licenses and other intangible assets:
The net
book value of our broadcast licenses and other intangible assets as at September30, 2008 and December 31, 2007 is summarized as follows:
(1) At
December 31, 2007 we had not completed our purchase price allocation of MTS in
Romania. The carrying value of other intangible assets was adjusted during the
first quarter of 2008 to reflect the final value of our Trademark and
Programming Agreement with MTV NE which allows MTS access to MTV programming and
to use the MTV name.
Our
broadcast licenses in Croatia, Romania and Slovenia have indefinite lives
because we expect the cash flows generated by those assets to continue
indefinitely. These licenses are subject to annual impairment
reviews. The licenses in Ukraine have economic useful lives of, and
are amortized on a straight-line basis over, between two and eighteen
years. The license in the Czech Republic has an economic useful life
of, and is amortized on a straight-line basis over, twelve years. The
license in the Slovak Republic has an economic useful life of, and is amortized
on a straight-line basis over, thirteen years. The licenses in Bulgaria have an
economic useful life of, and are amortized on a straight-line basis over,
between sixteen and eighteen years.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts in US$ 000’s, except share and per share data)
(Unaudited)
Customer
relationships are deemed to have an economic useful life of, and are amortized
on a straight-line basis over, five to fourteen years. Trademarks
have an indefinite life, with the exception of those acquired trademarks which
we do not intend to use, which have an economic life of, and are
being amortized over, two years.
The gross
value and accumulated amortization of broadcast licenses and other intangible
assets was as follows at September 30, 2008 and December 31, 2007:
On May 5,2005, we issued EUR 245.0 million of 8.25% senior notes (the “Fixed Rate
Notes”). The Fixed Rate Notes mature on May 15, 2012.
On May16, 2007, we issued EUR 150.0 million of floating rate senior notes (the
“Floating Rate Notes”, and collectively with the Fixed Rate Notes, the “Senior
Notes”) which bear interest at six-month Euro Inter Bank Offered Rate
(“EURIBOR”) plus 1.625% (6.504% was applicable at September 30, 2008). The
Floating Rate Notes mature on May 15, 2014.
On March10, 2008, we issued US$ 475.0 million of 3.50% Senior Convertible Notes (the
“Convertible Notes”). The Convertible Notes mature on March 15,2013.
Interest
is payable semi-annually in arrears on each May 15 and November
15. The fair value of the Fixed Rate Notes as at September 30, 2008
and December 31, 2007 was calculated by multiplying the outstanding debt by the
traded market price.
CENTRAL
EUROPEAN MEDIA ENTERPRISES LTD.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts in US$ 000’s, except share and per share data)
(Unaudited)
The Fixed
Rate Notes are secured senior obligations and rank pari passu with all existing
and future senior indebtedness and are effectively subordinated to all existing
and future indebtedness of our subsidiaries. The amounts outstanding
are guaranteed by two subsidiary holding companies and are secured by a pledge
of shares of those subsidiaries as well as an assignment of certain contractual
rights. The terms of our Fixed Rate Notes restrict the manner in
which our business is conducted, including the incurrence of additional
indebtedness, the making of investments, the payment of dividends or the making
of other distributions, entering into certain affiliate transactions and the
sale of assets.
In the
event that (A) there is a change in control by which (i) any party other than
our present shareholders becomes the beneficial owner of more than 35.0% of our
total voting power; (ii) we agree to sell substantially all of our operating
assets; or (iii) there is a change in the composition of a majority of our Board
of Directors; and (B) on the 60th day
following any such change of control the rating of the Fixed Rate Notes is
either withdrawn or downgraded from the rating in effect prior to the
announcement of such change of control, we can be required to repurchase the
Fixed Rate Notes at a purchase price in cash equal to 101.0% of the principal
amount of the Fixed Rate Notes plus accrued and unpaid interest to the date of
purchase.
The Fixed
Rate Notes are redeemable at our option, in whole or in part, at the redemption
prices set forth below:
Prior to
May 15, 2009, we may redeem all or a part of the Fixed Rate Notes at a
redemption price equal to 100.0% of the principal amount of such notes, plus a
“make-whole” premium and accrued and unpaid interest to the redemption
date.
Certain
derivative instruments, including redemption call options and change of control
and asset disposition put options, have been identified as being embedded in the
Fixed Rate Notes but as they are considered clearly and closely related to those
notes, they are not accounted for separately.
Floating
Rate Notes
Interest
is payable semi-annually in arrears on each May 15 and November
15. The fair value of the Floating Rate Notes as at September 30,2008 and December 31, 2007 was calculated by multiplying the outstanding debt by
the traded market price.
The
Floating Rate Notes are secured senior obligations and rank pari passu with all
existing and future senior indebtedness and are effectively subordinated to all
existing and future indebtedness of our subsidiaries. The amounts
outstanding are guaranteed by two subsidiary holding companies and are secured
by a pledge of shares of those subsidiaries as well as an assignment of certain
contractual rights. The terms of our Floating Rate Notes restrict the
manner in which our business is conducted, including the incurrence of
additional indebtedness, the making of investments, the payment of dividends or
the making of other distributions, entering into certain affiliate transactions
and the sale of assets.
In the
event that (A) there is a change in control by which (i) any party other than
our present shareholders becomes the beneficial owner of more than 35.0% of our
total voting power; (ii) we agree to sell substantially all of our operating
assets; or (iii) there is a change in the composition of a majority of our Board
of Directors; and (B) on the 60th day
following any such change of control the rating of the Floating Rate Notes is
either withdrawn or downgraded from the rating in effect prior to the
announcement of such change of control, we can be required to repurchase the
Floating Rate Notes at a purchase price in cash equal to 101.0% of the principal
amount of the Floating Rate Notes plus accrued and unpaid interest to the date
of purchase.
Certain
derivative instruments, including redemption call options and change of control
and asset disposition put options, have been identified as being embedded in the
Floating Rate Notes but as they are considered clearly and closely related to
those notes, they are not accounted for separately.
Convertible
Notes
Interest
is payable semi-annually in arrears on each March 15 and September
15. The fair value of the Convertible Notes as at September 30, 2008
was calculated by multiplying the outstanding debt by the traded market
price.
The
Convertible Notes are secured senior obligations and rank pari passu with all
existing and future senior indebtedness and are effectively subordinated to all
existing and future indebtedness of our subsidiaries. The amounts
outstanding are guaranteed by two subsidiary holding companies and are secured
by a pledge of shares of those subsidiaries as well as an assignment of certain
contractual rights.
Prior to
December 15, 2012, the Convertible Notes are convertible following certain
events and from that date, at any time, based on an initial conversion rate of
9.5238 shares of our Class A common stock per US$ 1,000 principal amount of
Convertible Notes (which is equivalent to an initial conversion price of
approximately US$ 105.00, or a 25% conversion premium based on the closing sale
price of US$ 84.00 per share of our Class A common stock on March 4, 2008). The
conversion rate is subject to adjustment if we make certain distributions to the
holders of our Class A common stock, undergo certain corporate transactions or a
fundamental change, and in other circumstances specified in the Convertible
Notes. From time to time up to and including December 15, 2012,
we will have the right to elect to deliver (i) shares of our Class A
common stock or (ii) cash and, if applicable, shares of our Class A common stock
upon conversion of the Convertible Notes. At present, we have elected to deliver
cash and, if applicable, shares of our Class A common stock. As at September 30,2008, the Convertible Notes may not be converted. In addition, the
holders of the Convertible Notes have the right to put the Convertible Notes to
us for cash equal to the aggregate principal amount of the Convertible Notes
plus accrued but unpaid interest thereon following the occurrence of certain
specified fundamental changes (including a change of control, certain mergers,
insolvency and a delisting).
In order
to increase the effective conversion price of our Convertible Notes, on March 4,2008 we purchased, for aggregate consideration of US$ 63.3 million, capped call
options over 4,523,809 shares of our Class A common stock from Lehman Brothers
OTC Derivatives Inc. (“Lehman OTC,” 1,583,333 shares), BNP Paribas (“BNP,”
1,583,333 shares) and Deutsche Bank Securities Inc. (“DB,” 1,357,144 shares).
The amount of shares corresponds to the number of shares of our Class A common
stock that would be issuable on a conversion of the Convertible Notes at the
initial conversion price if we elected to settle the Convertible Notes solely in
shares of Class A common stock. The options entitle us to receive, at our
election, cash or shares of Class A common stock with a value equal
approximately to the difference between the trading price of our shares at the
time the option is exercised and US$ 105.00, up to a maximum trading price of
US$ 151.20. At present, we have elected to receive shares of our Class A common
stock on exercise of the capped call options.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts in US$ 000’s, except share and per share data)
(Unaudited)
On
September 15, 2008, Lehman Brothers Holdings Inc, (“Lehman Holdings”, and
collectively with Lehman OTC, “Lehman Brothers”), the guarantor of the
obligations of Lehman OTC under the capped call agreement, filed for protection
under Chapter 11 of the United States Bankruptcy Code. The bankruptcy filing of
Lehman Holding, as guarantor, was an event of default that gave us the right to
terminate early the capped call option agreement with Lehman OTC and to claim
for losses. We exercised this right on September 16, 2008 and have claimed an
amount of US$ 19.9 million, which bears interest at a rate equal to our estimate
of our cost of funding plus 1% per annum.
At the
date of purchase, we determined that all of these capped call options met the
definition of an equity instrument within the scope of EITF Issue No. 00-19
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock” (“EITF 00-19”) and consequently recognized
them on issuance at fair value within Additional Paid-In Capital. We believe
that this classification is still correct with respect to the BNP and DB capped
call options and have continued to recognize them within Shareholders’ Equity.
Subsequent changes in fair value have not been, and will not be, recognized as
long as the instruments continue to be classified in Shareholders’
Equity.
We
concluded that from September 16, 2008, upon delivery of the termination notice,
the capped call options with Lehman OTC were effectively extinguished. The
nullification of the non-bankruptcy provisions of the original contract meant
that the fair value of the instrument no longer varies with movements in the
value of an underlying (previously, shares of our Class A common stock) and
consequently the contract ceased to be a derivative instrument and ceased to
fall within the scope of EITF 00-19. Effective September 16, 2008, we
reclassified the US$ 22.2 million cost of the Lehman OTC capped call options
from Additional Paid-In Capital to Retained Earnings to reflect this
extinguishment. We further concluded that our claim did not meet the definition
of an asset under FASB Statement of Financial Accounting Concepts No. 6
“Elements of Financial Statements” because the future benefit it embodies is not
sufficiently probable. We have therefore treated our bankruptcy claim in
accordance with FASB Statement No. 5 “Accounting for Contingencies” and will
only recognize a gain upon realization of our claim (see Note 18, “Commitments
and Contingencies: Lehman Brothers bankruptcy claim”).
Prior to
the termination of the capped call options with Lehman OTC, we noted that no
dilution would occur prior to our trading price reaching US$
151.20. This conclusion was based on a number of assumptions,
including that we would exercise all capped call options simultaneously, we
would continue with our election to receive shares of our Class A common stock
on the exercise of the capped call options, and no event that would result in an
adjustment to the conversion rate of value of the options would have
occurred.
Following
the termination of the Lehman OTC capped call options, which represented 35% of
the total number of capped call options we acquired on March 4, 2008, limited
dilution will occur following the exercise of the BNP and DB capped call options
if the price of shares of our Class A common stock is above US$ 105.00 per share
when the Convertible Notes are converted. The table below shows how many shares
of our Class A common stock we would issue following a conversion of the
Convertible Notes and the exercise of the remaining DB and BNP capped
call options for a variety of share price scenarios. This table assumes the
currently selected settlement methods continue to apply and no event that would
result in an adjustment to the conversion rate or the value of the option has
occurred:
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts in US$ 000’s, except share and per share data)
(Unaudited)
Stock
Price
Shares
issued on conversion of Convertible Notes
Shares
received on exercise of capped call options
Net
shares issued
Value
of shares issued (US$ ‘000)
$105.00
and below
-
-
-
$
-
$
110.00
(205,628)
133,658
(71,970)
($7,917)
$
120.00
(565,476)
367,559
(197,917)
($23,750)
$
130.00
(869,963)
565,475
(304,488)
($39,583)
$
140.00
(1,130,951)
735,118
(395,833)
($55,417)
$
151.20
(1,382,274)
898,478
(483,796)
($73,150)
$
200.00
(2,148,807)
679,248
(1,469,559)
($293,912)
At
September 30, 2008, the options could not be exercised because no conversion of
any Convertible Notes had occurred. In the event any Convertible Notes had been
converted at September 30, 2008, no shares of our Class A common stock would
have been issuable because the closing price of our shares was below US$ 105.00
per share. The aggregate fair value of the remaining DB and BNP capped call
options at September 30, 2008 was US$ 39.0 million.
Certain
derivative instruments, including put options and conversion options, have been
identified as being embedded in the Convertible Notes, but as they are either
considered to be clearly and closely related to those Convertible Notes, or
would be treated as equity instruments if free-standing, they are not accounted
for separately. However this treatment will change when we adopt FSP APB 14-1 on
January 1, 2009 (see Note 2, “Summary of Significant Accounting Policies: Recent
Accounting Pronouncements”).
At
September 30, 2008, CZK 326.8 million (approximately US$ 19.0 million) (December31, 2007: CZK 695.6 million, US$ 40.3 million) of receivables in the Czech
Republic were pledged as collateral subject to a factoring agreement (see Note
10, “Credit Facilities and Obligations under Capital
Leases”).
Capitalized
debt costs primarily comprise the costs incurred in connection with the issuance
of our Senior Notes and Convertible Notes (see Note 5, “Senior Debt”), and are
being amortized over the term of the Senior Notes and Convertible Notes using
the effective interest method. The carrying value of the costs related to the
Convertible Notes will change when we adopt FSP APB 14-1 on January 1, 2009 (see
Note 2, “Summary of Significant Accounting Policies: Recent Accounting
Pronouncements”).
(a) On
July 21, 2006, we entered into a five-year revolving loan agreement for EUR
100.0 million (approximately US$ 143.0 million) arranged by the European Bank
for Reconstruction and Development (“EBRD”) and on August 22, 2007, we entered
into a second revolving loan agreement for EUR 50.0 million (approximately US$
71.5 million) arranged by EBRD (together with the EUR 100.0 million facility,
the “EBRD Loan”). ING Bank N.V. (“ING”) and Ceska
Sporitelna, a.s. (“CS”) are each participating in the EBRD Loan for EUR 37.5
million (approximately US$ 53.6 million). At September 30, 2008, the facility
was undrawn. In October 2008 we drew the entire EUR 50.0 million (US$ 71.5
million) and EUR 100.0 million (US$ 143.0 million) facility (see Note 19,
“Subsequent Events”).
We also
entered into a supplemental agreement with EBRD on August 22, 2007 to amend the
interest rate payable on the initial EUR 100.0 million loan, as a result of
which the EBRD Loan bears interest at a rate of three-month EURIBOR plus 1.625%
on the drawn amount. A commitment charge of 0.8125% is payable on any undrawn
portion of the EBRD Loan. The available amount of the EBRD Loan
amortizes by 15.0% every six months from May 2009 to November 2010 and by 40.0%
in May 2011.
Covenants
contained in the EBRD Loan are similar to those contained in our Senior Notes
(see below and Note 5, “Senior Debt”). In addition, the EBRD Loan’s
covenants restrict us from making principal repayments on other new debt of
greater than US$ 20.0 million per year for the life of the EBRD
Loan. This restriction is not applicable to our existing facilities
with ING or CS or to any refinancing of our Senior Notes.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts in US$ 000’s, except share and per share data)
(Unaudited)
The EBRD
Loan is a secured senior obligation and ranks pari passu with all existing and
future senior indebtedness, including the Senior Notes and the Convertible
Notes, and is effectively subordinated to all existing and future indebtedness
of our subsidiaries. The amount drawn is guaranteed by two subsidiary
holding companies and is secured by a pledge of shares of those subsidiaries as
well as an assignment of certain contractual rights. The terms of the
EBRD Loan restrict the manner in which our business is conducted, including the
incurrence of additional indebtedness, the making of investments, the payment of
dividends or the making of other distributions, entering into certain affiliate
transactions and the sale of assets.
(b) We
have an uncommitted multicurrency overdraft facility for EUR 10.0 million
(approximately US$ 14.3 million) from Bank Mendes Gans (“BMG”), a subsidiary of
ING. The cash pooling arrangement with BMG enables us to receive credit across
the group in respect of cash balances, which our subsidiaries in the
Netherlands, the Czech Republic, Romania, the Slovak Republic and Slovenia
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 September 30, 2008, the full EUR 10.0 million
(approximately US$ 14.3 million) facility was available to be drawn. Interest is
payable at the relevant money market rate plus 2%. At September 30, 2008, our
Slovak Republic operations had drawings of SKK 82.3 million (approximately US$
3.9 million) against total deposits equal to US$ 17.3 million made by our
subsidiary in the Netherlands.
Czech
Republic
(c) As at
September 30, 2008, there were no drawings by CET 21 under a credit facility of
CZK 1.2 billion (approximately US$ 69.6 million) available until December 31,2010 with CS. This facility may, at the option of CET 21, be drawn in
CZK, US$ or EUR and bears interest at the three-month, six-month or twelve-month
London Inter-Bank Offered Rate (“LIBOR”), EURIBOR or Prague Inter-Bank Offered
Rate (“PRIBOR”) rate plus 1.65%. A utilization interest of 0.25% is payable on
the undrawn portion of this facility. This percentage decreases to
0.125% of the undrawn portion if more than 50% of the loan is
drawn. This facility is secured by a pledge of receivables, which are
also subject to a factoring arrangement with Factoring Ceska Sporitelna, a.s.
(“FCS”), a subsidiary of CS.
(d) As at
September 30, 2008, CZK 250 million (approximately US$ 14.5 million), the full
amount of the facility, had been drawn by CET 21 under a working capital
facility agreement with CS with a maturity date of December 31, 2010. The
facility bears interest at three-month PRIBOR plus 1.65% (three-month PRIBOR
relevant to drawings under this facility at September 30, 2008 was 3.98%). This
facility is secured by a pledge of receivables, which are also subject to a
factoring arrangement with FCS.
(e) As at
September 30, 2008, there were no drawings under a CZK 300.0 million
(approximately US$ 17.4 million) factoring facility with FCS
available until June 30, 2011. The facility bears interest at
one-month PRIBOR plus 1.40% for the period that actively assigned accounts
receivable are outstanding.
Romania
(f) Two
loans from San Paolo IMI Bank, assumed on our acquisition of MTS, were repaid in
January 2008.
Slovak
Republic
(g) As at
September 30, 2008, our Slovak Republic operations had drawn approximately SKK
82.3 million (approximately US$ 3.9 million) on the BMG cash
pool. See (b) for further details.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts in US$ 000’s, except share and per share data)
(Unaudited)
Slovenia
(h) On
July 29, 2005, Pro Plus entered into a revolving facility agreement for up to
EUR 37.5 million (approximately US$ 53.6 million) in aggregate principal amount
with ING, Nova Ljubljanska Banka d.d., Ljubljana and Bank Austria Creditanstalt
d.d., Ljubljana. The facility amortizes by 10.0% each year for four
years commencing one year after signing, with 60.0% repayable after five
years. This facility is secured by a pledge of the bank accounts of
Pro Plus, the assignment of certain receivables, a pledge of our interest in Pro
Plus and a guarantee of our wholly-owned subsidiary CME Media Enterprises
B.V. Loans drawn under this facility will bear interest at a rate of
EURIBOR for the period of drawing plus a margin of between 2.1% and 3.6% that
varies according to the ratio of consolidated net debt to consolidated
broadcasting cash flow for Pro Plus. As at September 30, 2008, EUR
26.3 million (approximately US$ 37.5 million) was available for drawing under
this revolving facility and there were no drawings
outstanding.
Ukraine
(KINO, CITI)
(i) Our
Ukraine (KINO, CITI) operations have entered into a number of three-year
unsecured loans with Glavred-Media, LLC, the minority shareholder in
Ukrpromtorg. As at December 31, 2007 and September 30, 2008, the
total value of loans drawn was US$ 1.7 million. The loans are
repayable between August 2009 and December 2009 and bear interest at
9.0%.
Total
Group
At
September 30, 2008, the maturity of our debt (including our Senior Notes and
Convertible Notes) was as follows:
2008
18,395
2009
1,700
2010
-
2011
-
2012
350,424
2013
and thereafter
689,545
Total
$
1,060,064
Capital
Lease Commitments
We lease
certain of our office and broadcast facilities as well as machinery and
equipment under various leasing arrangements. The future minimum
lease payments from continuing operations, by year and in the aggregate, under
capital leases with initial or remaining non-cancelable lease terms in excess of
one year, consisted of the following at September 30, 2008:
12. FINANCIAL
INSTRUMENTS AND FAIR VALUE MEASUREMENTS
FAS 157
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
under FAS 157 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 valuations of
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.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts in US$ 000’s, except share and per share data)
(Unaudited)
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.
We
evaluate the position of each financial instrument measured at fair value in the
hierarchy individually based on the valuation methodology we apply. At September30, 2008, we have no material financial assets or liabilities carried at fair
value using significant level 1 or level 3 inputs and the only instruments we
value using level 2 inputs are currency swap agreements as follows:
Currency
Swap
On April27, 2006, we entered into cross currency swap agreements with JP Morgan Chase
Bank, N.A and Morgan Stanley Capital Services Inc, under which we swapped a
fixed annual coupon interest rate (of 9.0%) on notional principal of CZK 10.7
billion (approximately US$ 620.5 million), payable on July 15, October 15,
January 15, and April 15, to the termination date of April 15, 2012, for a fixed
annual coupon interest rate (of 9.0%) on notional principal of EUR 375.9 million
(approximately US$ 537.6 million) receivable on July 15, October 15, January 15,
and April 15, to the termination date of April 15, 2012.
These
currency swap agreements reduce our exposure to movements in foreign exchange
rates on a part of the CZK-denominated cash flows generated by our Czech
Republic operations that is approximately equivalent in value to the
Euro-denominated interest payments on our Senior Notes (see Note 5, “Senior
Debt”). They are financial instruments that are used to minimize currency risk
and are considered an economic hedge of foreign exchange rates. These
instruments have not been designated as hedging instruments as defined under FAS
133 and so changes in their fair value are recorded in the consolidated
statement of operations and in the consolidated balance sheet in other
non-current liabilities.
We value
our currency swap agreements using an industry-standard currency swap pricing
model which calculates the fair value on the basis of the net present value of
the estimated future cash flows receivable or payable. These instruments are
allocated to level 2 of the FAS 157 fair value hierarchy because the critical
inputs to this model, including the relevant yield curves and the known
contractual terms of the instrument, are readily observable.
The fair
value of these instruments as at September 30, 2008, was a US$ 29.9 million
liability, which represented a US$ 13.7 million increase from the US$ 16.2
million liability as at December 31, 2007 and a US$ 9.9 million decrease from
the US$ 39.8 million liability as at June 30, 2008. The gain of US$ 9.9 million
for the three months and the loss of US$ 13.7 million for the nine months was
recognized as a change in fair value of derivative instruments in the
consolidated statements of operations.
100,000,000
shares of Class A common stock and 15,000,000 shares of Class B common stock
were authorized as at September 30, 2008 and December 31, 2007. 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 for no additional
consideration on a one-for-one basis. 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
shareholders. The holders of each class have no preemptive or other
subscription rights and there are no redemption or sinking fund provisions with
respect to such shares.
The loss
on redemption of Senior Notes comprised a redemption premium of US$ 3.4 million
and accelerated amortization of capitalized debt issuance costs of US$ 3.5
million.
The
interest and amortization of capitalized debt issuance costs related to the
Convertible Notes will change when we adopt FSP APB 14-1 on January 1, 2009 (see
Note 2, “Summary of Significant Accounting Policies: Recent Accounting
Pronouncements”).
15. STOCK-BASED
COMPENSATION
The
charge for stock-based compensation in our condensed consolidated statements of
operations was as follows:
Stock-based
compensation charged under SFAS 123(R)
$
1,736
$
1,494
$
5,540
$
4,098
Under the
provisions of SFAS 123(R), the fair value of stock options is estimated on the
grant date using the Black-Scholes option-pricing model and recognized ratably
over the requisite service period.
2008
Option Grants
Pursuant
to the Amended and Restated 1995 Stock Incentive Plan, the Compensation
Committee of our Board of Directors awarded options to an executive to purchase
12,500 shares of our Class A common stock, with a vesting period of four years
and a contractual life of eight years, on April 1, 2008.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts in US$ 000’s, except share and per share data)
(Unaudited)
Pursuant
to the Amended and Restated 1995 Stock Incentive Plan, the Compensation
Committee of our Board of Directors awarded options to non-executive directors
to purchase an aggregate 40,000 shares of our Class A common stock and 5,000
shares of our Class B common stock with a vesting period of one year and a
contractual life of five years on June 3, 2008.
The
exercise price of the options granted ranges from US$ 88.51 to US$ 109.58 per
share. The fair value of these option grants was estimated on the
date of the grant using the Black-Scholes option-pricing model, with the
following assumptions used:
The
expected stock price volatility was calculated based on an analysis of the
historical stock price volatility of our shares and those of our peers for the
preceding 5.25 or 3-year period. We consider this basis to represent
the best indicator of expected volatility over the life of the option. The
weighted average fair value of all the grants made in the nine months ended
September 30, 2008 was US$ 27.41 per option. In accordance with SFAS
123(R), the fair value of the option grants made in the nine months ended
September 30, 2008 (less expected forfeitures) of US$ 1.6 million is being
recognized as an expense in the consolidated statement of operations over the
requisite service period of the award.
A summary
of option activity for the nine months ended September 30, 2008 is presented
below:
Shares
Weighted
Average Exercise Price per Share
Weighted
Average Remaining Contractual Term (years)
The
exercise of stock options has generated a net operating loss carry forward in
our Delaware subsidiary of US$ 11.3 million. In the nine months ended
September 30, 2008 tax benefits of US$ 0.5 were recognized in respect
of the utilization of part of this loss, and were recorded as additional paid-in
capital, net of US$ 0.1 million of transfers related to the write-off of
deferred tax assets arising upon exercises and forfeitures. The losses are
subject to examination by the tax authorities and to restriction on their
utilization
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts in US$ 000’s, except share and per share data)
(Unaudited)
The
aggregate intrinsic value (the difference between the stock price on the last
day of trading of the third quarter of 2008 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 all option holders exercised
their options on September 30, 2008. This amount changes based on the
fair value of our common stock. The total intrinsic value of options
exercised during the nine months ended September 30, 2008 and 2007, was US$ 0.8
million and US$ 19.2 million, respectively. As of September 30, 2008,
there was US$ 13.5 million of total unrecognized compensation expense related to
options. The expense is expected to be recognized over a weighted
average period of 1.8 years. Proceeds received from the exercise of
stock options were US$ 1.2 million and US$ 3.5 million for the nine months ended
September 30, 2008 and 2007, respectively.
16. EARNINGS
PER SHARE
The
components of basic and diluted earnings per share are as follows:
Net
(loss) / income available for common shareholders
$
(14,755
)
$
(18,763
)
$
67,744
$
15,577
Weighted
average outstanding shares of common stock (000’s)
42,335
41,489
42,324
41,077
Dilutive
effect of employee stock options (000’s)
-
-
449
476
Common
stock and common stock equivalents (000’s)
42,335
41,489
42,773
41,553
Net
loss/ income per share:
Basic
$
(0.35
)
$
(0.45
)
$
1.60
$
0.38
Diluted
$
(0.35
)
$
(0.45
)
$
1.58
$
0.37
At
September 30, 2008, 259,000 (2007: 228,500) stock options were antidilutive to
income from continuing operations and excluded from the calculation of earnings
per share. These may become dilutive in the future. Class A common shares
potentially issuable under our Convertible Notes may also become dilutive in the
future although they were antidilutive to income at September 30,2008.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts in US$ 000’s, except share and per share data)
(Unaudited)
17. SEGMENT
DATA
We manage
our business on a geographic basis and review the performance of each business
segment using data that reflects 100% of operating and license company
results. Our business segments are Bulgaria, Croatia, the Czech
Republic, Romania, the Slovak Republic, Slovenia and our two businesses in
Ukraine.
We
evaluate the performance of our business segments based on Segment Net Revenues
and Segment EBITDA.
Our key
performance measure of the efficiency of our business segments is EBITDA
margin. We define Segment EBITDA margin as the ratio of Segment
EBITDA to Segment Net Revenues.
Segment
EBITDA is determined as segment net income / (loss), which includes program
rights amortization costs, before interest, taxes, depreciation and amortization
of intangible assets. Items that are not allocated to our business
segments for purposes of evaluating their performance and therefore are not
included in Segment EBITDA, include:
·
expenses
presented as corporate operating costs in our condensed consolidated
statements of operations and comprehensive
income;
·
stock-based
compensation charges;
·
foreign
currency exchange gains and losses;
·
changes
in fair value of derivatives; and
·
certain
unusual or infrequent items (e.g., extraordinary gains and losses,
impairments of assets or
investments).
Below are
tables showing our Segment Net Revenues, Segment EBITDA, segment depreciation
and segment asset information by operation, including a reconciliation of these
amounts to our consolidated results for the three and nine months ended
September 30, 2008 and 2007 for condensed consolidated statement of operations
data and as at September 30, 2008 and December 31, 2007 for condensed
consolidated balance sheet data:
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts in US$ 000’s, except share and per share data)
(Unaudited)
For
the Three Months Ended September 30,
Segment
Net Revenues (1)
Segment
EBITDA
2008
2007
2008
2007
Country:
Bulgaria
(TV2, RING TV) (2)
$
462
$
-
$
(3,101
)
$
-
Croatia
(NOVA TV)
8,525
7,055
(5,401
)
(2,981
)
Czech
Republic (TV NOVA, NOVA SPORT, NOVA CINEMA)
72,602
51,140
31,405
25,989
Romania
(3)
59,281
44,412
20,116
19,486
Slovak
Republic (TV MARKIZA)
24,795
20,286
5,847
5,544
Slovenia
(POP TV, KANAL A)
14,231
11,545
2,153
854
Ukraine
(STUDIO 1+1)
20,052
39,582
(7,359
)
16,599
Ukraine
(KINO, CITI)
1,061
816
(1,203
)
(1,339
)
Total
segment data
$
201,009
$
174,836
$
42,457
$
64,152
Reconciliation
to condensed consolidated statement of operations:
Consolidated
net revenues / (loss) / income before provision for income taxes and
minority interest
$
201,009
$
174,836
$
5,434
$
(14,121
)
Corporate
operating costs
-
-
11,902
20,396
Depreciation
of station property, plant and equipment
-
-
14,227
8,768
Amortization
of broadcast licenses and other intangibles
-
-
10,201
6,595
Interest
income
-
-
(2,127
)
(1,180
)
Interest
expense
-
-
17,947
11,883
Foreign
currency exchange loss/(gain), net
-
-
(4,969
)
23,300
Change
in fair value of derivatives
-
-
(9,868
)
8,555
Other
income
-
-
(290
)
(44
)
Total
segment data
$
201,009
$
174,836
$
42,457
$
64,152
(1) All
net revenues are derived from external customers. There are no
inter-segmental revenues.
(2) We
acquired our Bulgaria operations on August 1, 2008.
(3)
Romania channels are PRO TV, PRO CINEMA, ACASA, PRO TV INTERNATIONAL, SPORT.RO
and MTV ROMANIA for the three months ended September 30, 2008. For the three
months ended September 30, 2007 the Romanian channels were PRO TV, PRO CINEMA,
ACASA, PRO TV INTERNATIONAL and SPORT.RO.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts in US$ 000’s, except share and per share data)
(Unaudited)
For
the Nine Months Ended September 30,
Segment
Net Revenues (1)
Segment
EBITDA
2008
2007
2008
2007
Country:
Bulgaria
(TV2, RING TV) (2)
$
462
$
-
$
(3,101
)
$
-
Croatia
(NOVA TV)
38,153
24,701
(6,448
)
(9,800
)
Czech
Republic (TV NOVA, NOVA SPORT, NOVA CINEMA)
270,730
183,203
146,454
99,251
Romania
(3)
197,119
135,978
81,785
57,152
Slovak
Republic (TV MARKIZA)
88,126
68,615
28,958
23,012
Slovenia
(POP TV, KANAL A)
58,392
44,309
17,359
12,243
Ukraine
(STUDIO 1+1)
73,525
80,358
(11,316
)
14,794
Ukraine
(KINO, CITI)
3,363
1,868
(3,464
)
(5,511
)
Total
segment data
$
729,870
$
539,032
$
250,227
$
191,141
Reconciliation
to condensed consolidated statement of operations:
Consolidated
net revenues / income before provision for income taxes and minority
interest
$
729,870
$
539,032
$
88,915
$
44,067
Corporate
operating costs
-
-
35,627
42,613
Depreciation
of station property, plant and equipment
-
-
39,745
23,347
Amortization
of broadcast licenses and other intangibles
-
-
26,055
16,922
Interest
income
-
-
(8,088
)
(4,326
)
Interest
expense
-
-
50,337
42,717
Foreign
currency exchange loss, net
-
-
5,580
28,552
Change
in fair value of derivatives
-
-
13,671
(3,497
)
Other
(income) / expense
-
-
(1,615
)
746
Total
segment data
$
729,870
$
539,032
$
250,227
$
191,141
(1) All
net revenues are derived from external customers. There are no
inter-segmental revenues.
(2) We
acquired our Bulgaria operations on August 1, 2008.
(3)
Romania channels are PRO TV, PRO CINEMA, ACASA, PRO TV INTERNATIONAL, SPORT.RO
and MTV ROMANIA for the nine months ended September 30, 2008. For the nine
months ended September 30, 2007 the Romanian channels were PRO TV, PRO CINEMA,
ACASA, PRO TV INTERNATIONAL and SPORT.RO. We acquired SPORT.RO on February 20,2007.
Reconciliation
to condensed consolidated balance sheets:
Corporate
1,288
1,298
Total
long-lived assets
$
215,349
$
180,311
(1)
Reflects property, plant and equipment.
We do not
rely on any single major customer or group of major customers. No
customer accounts for more than 10% of revenue.
18. COMMITMENTS
AND CONTINGENCIES
Commitments
a)
Ukraine Buyout Agreements: redeemable minority interest
We
granted Messrs. Rodnyansky and Fuchsmann the right to jointly put both of their
remaining 5.0% interests in the Studio 1+1 group to us. This put option became
effective upon the completion of our acquisition of a 30% interest in the Studio
1+1 group on June 30, 2008 (see Note 3 “Acquisitions and Disposals: Ukraine
(Studio 1+1)”). The consideration payable by Messrs. Rodnyansky and Fuchsmann
upon exercise of these non-transferrable put options (“the exercise price”) is:
(i) US$ 95.4 million if exercised at any time from June 30, 2008 to June 29,2009; (ii) US$ 102.3 million if exercised between June 30, 2009 and June 29,2010; and (iii) the greater of US$ 109.1 million and an agreed valuation if
exercised at any time after June 30, 2010. As at June 30, 2008 we considered,
using a binomial option pricing model, that the fair value of the put option was
US$ 58.0 million because the exercise price was substantially higher than the
fair value of the underlying equity interests, and included this amount in the
purchase price of the Studio 1+1 group for the purposes of calculating goodwill
as required by FASB Statement No. 141 “Business Combinations” (“FAS 141”) as
interpreted by EITF D-87.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts in US$ 000’s, except share and per share data)
(Unaudited)
We
concluded that upon the issuance of these put options, the remaining minority
interests in the Studio 1+1 group met the definition of a Redeemable Security as
it is used in EITF Topic No. D-98 “Classification and Measurement of Redeemable
Securities” because Messrs. Rodnyansky and Fuchsmann could cause us to
repurchase their minority shareholdings at their option. Consequently, we
adjusted the minority interest in the Studio 1+1 group at June 30, 2008 to
reflect the US$ 95.4 million that would have been paid had Messrs. Rodnyansky
and Fuchsmann chosen to exercise their options at that date. The excess of this
amount over the minority interest that would have been recognized under
Accounting Research Bulletin No. 51 “Consolidated Financial Statements” (“ARB
51”) at that date was allocated between goodwill (US$ 58.0 million) and retained
earnings (initially US$ 32.6 million). The amount recognized within goodwill
represented the fair value of the put options on acquisition.
In
addition, Messrs. Rodnyansky and Fuchsmann granted us the right to call their
combined 10.0% interest in the Studio 1+1 group for a consideration of US$ 109.1
million and we exercised this option on September 10, 2008. As at
June 30, 2008 we considered, using a binomial pricing model, that
the fair value of our call option was approximately US$ nil because
the exercise price was substantially higher than the fair value of the
underlying equity interests.
In the
three months ended September 30, 2008, because we had not completed the purchase
of the remaining 10.0% interest, we recorded minority interest income of US$ 0.3
million that would have been recognized under ARB 51 through a reallocation
between retained earnings and minority interest income or expense.
On
October 17, 2008, we completed the acquisition of the combined 10.0% interests
held by Messrs. Rodnyansky and Fuchsmann for cash consideration of US$ 109.1
million pursuant to our exercise of our call option (see Note 19, “Subsequent
Events”). We will reflect the acquisition of these additional
interests in our financial statements by completing a purchase price allocation
under FAS 141 from the completion date; before doing this we will reverse any
amounts recognized in retained earnings in respect of the redeemable minority
interest.
b)
Ukraine Buyout Agreements: other commitments
Messrs.
Rodnyansky and Fuchsmann entered into consultancy agreements with us providing
for total annual aggregate compensation under both agreements not to exceed EUR
1.0 million. These agreements terminated on October 17, 2008, when we completed
the purchase of the remaining 10.0% interest in the Studio 1+1 group (see Note
19, “Subsequent Events”). We concluded that these amounts did not form part of
the purchase price of the 30.0% interest in the Studio 1+1 group and accounted
for them as compensation costs until October 17, 2008.
Messrs.
Rodnyansky and Fuchsmann intended to acquire 10.0% of our interest in the
entities operating the channels KINO and CITI in Ukraine for consideration of
US$ 1.92 million. In addition, we agreed that in the event Messrs. Rodnyansky
and Fuchsmann exercised their put or we exercised our call described above, this
10.0% interest would be transferred to us together with the 10.0% interest held
by Messrs. Rodnyansky and Fuchsmann in the Studio 1+1 group. At the agreement of
both parties, this agreement was terminated without being implemented on October17, 2008 when we completed the acquisition of the 10.0% interest from Messrs.
Rodnyansky and Fuchsmann (see Note 19, “Subsequent Events”).
At
September 30, 2008 we had the following commitments in respect of future
programming, including contracts signed with license periods starting after the
balance sheet date:
Of the
amount shown in the table above, US$ 139.0 million is payable within one
year.
d)
Operating Lease Commitments
For the
nine months ended September 30, 2008 and 2007 we incurred aggregate rent on all
facilities of US$ 11.1 million and US$ 8.7 million,
respectively. Future minimum operating lease payments at September30, 2008 for non-cancelable operating leases with remaining terms in excess of
one year (net of amounts to be recharged to third parties) are payable as
follows:
c)
Acquisition of Minority Shareholdings in Romania
Mr. Sarbu
has the right to sell to us his remaining shareholding in Pro TV and MPI under a
put option agreement entered into in July 2004 at a price to be determined by an
independent valuation, subject to a floor price of US$ 1.45 million for each
1.0% interest sold. Mr. Sarbu’s right to put his remaining shareholding is
exercisable from November 12, 2009, provided that we have not enforced a pledge
over this shareholding which Mr. Sarbu granted as security for our right to put
him our shareholding in Media Pro. As at September 30, 2008, we considered the
fair value of the put option of Mr. Sarbu to be approximately US$
nil.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts in US$ 000’s, except share and per share data)
(Unaudited)
d)
Other
Dutch
tax
On May19, 2003, we received US$ 358.6 million from the Czech Republic in final
settlement of our UNCITRAL arbitration in respect of our former operations in
the Czech Republic.
On June19, 2003, our Board of Directors decided to withdraw from operations in the
Czech Republic. The revenues and expenses of our former Czech Republic
operations and the award income and related legal expenses have therefore all
been accounted for as discontinued operations for all periods
presented.
On
February 9, 2004, we entered into an agreement with the Dutch tax authorities to
settle all tax liabilities outstanding for the period through 2003, including
receipts in respect of our 2003 award in the arbitration against the Czech
Republic, for a payment of US$ 9.0 million. We expected to continue
to pay tax in the Netherlands of between US$ 1.0 and US$ 2.5 million for the
foreseeable future and therefore also agreed to a minimum tax payable of US$ 2.0
million per year for the years 2004 - 2008 and US$ 1.0 million for
2009.
The
settlement with the Dutch tax authorities also provides that if any decision is
issued at any time prior to December 31, 2008 exempting awards under Bilateral
Investment Treaties from taxation in the Netherlands, we will be allowed to
recover losses previously used against the 2003 arbitration award, which could
be up to US$ 195.0 million, to offset other income within the applicable carry
forward rules. This would not reduce the minimum amount of tax agreed payable
under the settlement agreement. At this time there is no indication
that the Dutch tax authorities will issue such a decision.
As at
September 30, 2008, we provided US$ 1.3 million (US$ 0.3 million in non-current
liabilities and US$ 1.0 million in current liabilities) and as at December 31,2007, we provided US$ 3.3 million (US$ 1.0 million in non-current liabilities
and US$ 2.3 million in current liabilities) of tax in the Netherlands as the
difference between our obligation under this agreement and our estimate of tax
in the Netherlands that may fall due over this period from business operations,
based on current business structures and economic conditions.
Czech
Republic - Factoring of Trade Receivables
CET 21
has a working capital credit facility of CZK 250 million (approximately US$ 14.5
million) with CS. This facility is secured by a pledge of receivables under the
factoring agreement with Factoring Ceska Sporitelna a.s..
The
transfer of the receivables is accounted for as a secured borrowing under FASB
Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities”, with the proceeds received recorded in the
Condensed Consolidated Balance Sheet as a liability and included in current
credit facilities and obligations under capital leases. The
corresponding receivables are a part of accounts receivable, as we retain the
risks of ownership.
Contingencies
a)
Litigation
We are,
from time to time, a party to litigation that arises in the normal course of our
business operations. However, we are not presently a party to any such
litigation which could reasonably be expected to have a material adverse effect
on our business or operations. As discussed in our Quarterly Report on Form 10-Q
for the period ended June 30, 2008, we terminated the arbitration
proceedings with Messrs. Rodnyansky and Fuchsmann relating to the Studio 1+1
group in Ukraine on July 3, 2008.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
amounts in US$ 000’s, except share and per share data)
(Unaudited)
b) Lehman Brothers bankruptcy
claim
On March4, 2008, we purchased for cash consideration of US$ 22.2 million, capped call
options from Lehman OTC (See Note 5, “Senior Debt: Convertible Notes”) over
1,583,333 shares of our Class A common stock which entitled us to receive, at
our election following a conversion under the Convertible Notes, cash or shares
of Class A common stock with a value equal to the difference between the trading
price of our shares at the time the option is exercised and US$ 105.00, up to a
maximum trading price of US$ 151.20.
On
September 15, 2008, Lehman Holdings, the guarantor of the obligations of Lehman
OTC under the capped call agreement, filed for protection under Chapter 11 of
the United States Bankruptcy Code. The bankruptcy filing of Lehman Holding, as
guarantor, was an event of default and gave us the right to terminate the capped
call agreement with Lehman OTC and claim for losses. We exercised this right on
September 16, 2008 and have claimed an amount of US$ 19.9 million, which bears
interest at a rate equal to CME’s estimate of its cost of funding plus 1% per
annum.
On
October 3, 2008, Lehman OTC filed for protection under Chapter 11 as
well. We have filed claims in the bankruptcy proceedings of both
Lehman Holding and Lehman OTC. Our claim is a general unsecured claim and ranks
together with similar claims. We do not have any information as to the timing of
the satisfaction of our claim or the amount we may receive.
c)
Licenses
Regulatory
bodies in each country in which we operate control access to available
frequencies through licensing regimes. We believe that the licenses for our
license companies will be renewed prior to expiry. In Romania, the Slovak
Republic, Slovenia and Ukraine local regulations contain a qualified presumption
for extensions of broadcast licenses, according to which a broadcast license may
be renewed if the licensee has operated substantially in compliance with the
relevant licensing regime. To date, all expiring licenses have been renewed;
however, there can be no assurance that any of the licenses will be renewed upon
expiration of their current terms. The failure of any such license to be renewed
could adversely affect the results of our operations.
The
following summarizes the expiry dates of our television broadcasting
licenses:
Bulgaria
The
license of TV2 expires in February 2010.
Croatia
The
license of NOVA TV (Croatia) expires in April 2010.
Czech
Republic
The
license of TV NOVA (Czech Republic) expires in January 2017. The GALAXIE
SPORT license expires in March 2014.
Romania
Licenses
expire on dates ranging from April 2009 to April 2017.
Slovak
Republic
The
license of TV MARKIZA in the Slovak Republic expires in September
2019.
Slovenia
The
licenses of POP TV and KANAL A expire in August 2012.
Ukraine
The
15-hour prime time and off prime time license of STUDIO 1+1 expires in
December 2016. The license to broadcast for the remaining nine hours in
off prime expires in August 2014. Licenses used for the KINO
and CITI channels expire on dates ranging from November 2008 to August
2018.
The
transition from analog to digital terrestrial broadcasting is beginning to
accelerate in our markets. While the approach being applied is not
uniform, there are certain steps that each jurisdiction appears to be
following. Typically, legislation governing the transition to digital
is adopted addressing the licensing of operators of the digital networks as well
as the licensing of digital broadcasters, technical parameters concerning the
allocation of frequencies to be used for digital services (including those
currently being used for analog services), broadcasting standards to be
provided, the timing of the transition and, ideally, principles to be applied in
the transition, including transparency and non-discrimination. As a rule, these
are embodied in a technical transition plan (“TTP”) that, in most jurisdictions,
is agreed among the relevant Media Council, the national telecommunications
agency (which is generally responsible for the allocation and use of
frequencies) and the broadcasters.
The TTP
will typically include the following: the timeline and final switchover date,
time allowances for the phases of the transition, allocation of frequencies for
digital broadcasting and other digital services, methods for calculating digital
terrestrial signal coverage and penetration of set top boxes, parameters for
determining whether the conditions for switchover have been satisfied for any
phase, the technical specifications for broadcasting standards to be utilized
and technical restrictions on parallel broadcasting in analog and terrestrial
during the transition phase.
Of our
markets, the Czech Republic, the Slovak Republic and Slovenia are the furthest
advanced in the transition to digital, although a recent lawsuit regarding the
licensing procedure may delay the digitalization process in the Slovak
Republic. All three have adopted new legislation or amendments to
existing legislation. Generally, this legislation provides that
incumbent analog broadcasters are entitled to receive a digital license or that
current licenses entitle the holders to digital terrestrial broadcasting,
although broadcasters in a specific jurisdiction may be required to formally
file an application in order for a digital license to be issued.
In that
regard, both of our Slovenian channels, POP TV and KANAL A, were issued digital
licenses in November 2007. We anticipate that the switchover to digital in
Slovenia will be completed by 2010. Under the TTP for the Czech
Republic, the license currently held by CET 21 allows for digital terrestrial
broadcasting by TV Nova (Czech Republic). In the Slovak Republic, TV
MARKIZA is entitled to receive a digital license under recently adopted
legislation and intends to apply for one following the completion of the tender
offer for the multiplex operator under the TTP for the Slovak
Republic.
Draft
legislation governing the transition to digital is under discussion in Bulgaria,
Romania and Croatia. We anticipate that legislation will be adopted
during 2008 that will address digital licensing and the TTP for each market in a
comprehensive way. We expect that all of our channels will receive
digital licenses in these markets.
The
Ukrainian governmental authorities have issued generic legislation in respect of
the transition to digital. In addition, the Ukraine Media Council has issued
decisions confirming that STUDIO 1+1 would be included in one of the multiplexes
to be launched in connection with the transition to digital
broadcasting. The Ukraine Media Council recently held a tender for
licenses for additional digital frequencies that will be made available for
niche channels in the switchover to digital, and is currently soliciting
proposals for technical development of certain digital multiplexes. However,
there has been no indication as to when a TTP will be adopted in
Ukraine.
We intend
to apply for and obtain digital licenses that are issued in replacement of
analog licenses in all our operating countries and to apply for additional
digital licenses and for licenses to operate digital networks where such
applications are permissible and prudent.
d) Restrictions on dividends from
Consolidated Subsidiaries and Unconsolidated Affiliates
Corporate
law in the Central and Eastern European countries in which we have operations
stipulates generally that dividends may be declared by shareholders, out of
yearly profits, subject to the maintenance of registered capital and required
reserves 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 5%) be allocated to a reserve, which
reserve is capped at a proportion of the registered capital of a company
(ranging from 5% to 25%). The restricted net assets of our
consolidated subsidiaries and equity in earnings of investments accounted for
under the equity method together are less than 25% of consolidated net
assets.
On
October 17, 2008 we completed the purchase of the remaining 10.0% interest in
the Studio 1+1 group from Messrs. Rodnyansky and Fuchsmann for cash
consideration of US$ 109.1 million.
Drawing
of EBRD facility
On
October 15 and 24, 2008 we drew down EUR 50.0 million (approximately US$ 71.5
million) and EUR 100 million (approximately US$ 143.0 million), the full amounts
available under the EBRD Loan. These drawings have been or will be used to fund
the purchase of the remaining 10.0% interest in the Studio 1+1 group in Ukraine
and for general corporate purposes. We intend to repay EUR 50.0 million (US$
71.5 million) of this drawing on November 10,2008.
Item
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Contents
I.
Forward-looking
Statements
II.
Executive
Summary
III.
Analysis
of Segment Results
IV.
Analysis
of the Results of Consolidated Operations
V.
Liquidity
and Capital Resources
VI.
Critical
Accounting Policies and
Estimates
I.
Forward-looking Statements
This
report contains forward-looking statements, including statements regarding our
capital needs, business strategy, expectations and intentions. Statements that
use the terms “believe”, “anticipate”, “expect”, “plan”, “estimate”, “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. 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: general market
and economic conditions in our markets as well as in the United States and
Western Europe; future EBITDA growth, the results of additional
investment in Bulgaria, Croatia and Ukraine; the impact of the buyout of our
partners in the Studio 1+1 group in Ukraine; the growth of television
advertising spending and the rate of development of advertising in our markets;
our ability to make future investments in television broadcast operations; our
ability to develop and implement strategies regarding sales and
multi-channel distribution; the performance of obligations by third parties with
whom we have entered into agreements; the general political, economic and
regulatory environments where we operate and application of relevant laws and
regulations; the renewals of broadcasting licenses and our ability to obtain
additional frequencies and licenses; and our ability to acquire necessary
programming and attract audiences. 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. We undertake no
obligation to publically update or review any forward-looking statements,
whether as a result of new information, future developments or
otherwise.
The
following discussion should be read in conjunction with the section entitled
"Risk Factors" in Part II, Item 1A, in addition to our interim financial
statements and notes included elsewhere in this report.
The
following table provides a summary of our consolidated results for the three and
nine months ended September 30, 2008 and 2007:
For
the Three Months Ended September 30, (US$ 000's)
2008
2007
Movement
Net
revenues
$
201,009
$
174,836
15.0
%
Operating
income
6,127
28,393
(78.4
)%
Net
(loss)
$
(14,755
)
$
(18,763
)
21.4
%
For
the Nine Months Ended September 30, (US$ 000's)
2008
2007
Movement
Net
revenues
$
729,870
$
539,032
35.4
%
Operating
income
148,800
108,259
37.5
%
Net
income
$
67,744
$
15,577
334.9
%
The
principal events for the three months ended September 30, 2008 are as
follows:
Performance:
·
In
the three months ended September 30, 2008, we reported growth in Segment
Net Revenues of 15% compared to the three months ended September 30,2007. Aside from our Ukraine (Studio 1+1) operations, which had
benefited from political advertising in the comparative period in 2007,
each of our stations showed growth in excess of 20%, with particularly
strong growth in the Czech Republic and
Romania.
·
Segment
EBITDA declined by 34% compared to the three months ended September 30,2007, due to the costs of our start-up Bulgaria operations and the
continued poor performance of our Ukraine (Studio 1+1)
operations. We generated a Segment EBITDA margin of 21%
compared to the 37% margin reported in the three months ended September30, 2007, (Segment EBITDA is defined and reconciled to our consolidated
results in Item 1, Note 17, “Segment
Data”.)
Acquisitions:
·
On
August 1, 2008, we acquired an 80% indirect interest in each of TV2, which
operates a national terrestrial network in Bulgaria, and Ring TV, which
operates a sports cable channel, for cash consideration of US$ 146.4
million. See Item 1, Note 3, “Acquisitions and Disposals – Bulgaria” for
further information.
Other:
·
On
September 18, 2008, we announced a multi-year licensing agreement with MTV
Networks International to launch a localized MTV channel in the Czech
Republic, with the opportunity to distribute the channel via cable and
satellite platforms in the Slovak Republic. We expect to launch the
channel during the first half of next
year.
·
On
September 22, 2008 we were awarded an International News Emmy from the
International Academy of Television Arts and Sciences for PRO TV’s report
“Any Idea What Your Kid Is Doing Right Now?” which focused on the issue of
child abandonment. This was the first International News Emmy awarded to
an Eastern European broadcaster.
On
October 17, 2008, we completed the acquisition of the remaining 10%
interest in the Studio 1+1 group held by our former partners, Alexander
Rodnyansky and Boris Fuchsmann for cash consideration of US$109.1
million.
·
Effective
October 22, 2008, Marina Williams, our Executive Vice President, resigned
to pursue other professional
opportunities.
Future
Trends
Many
Western and developing economies are experiencing a sharp slowdown in economic
growth or a possible recession as well as a severe tightening of their credit
markets. Signs of slower economic growth and more restricted access to credit
have also begun to appear in our markets. Many analysts currently predict that
the current economic and credit conditions will not lead to a recession in our
markets, although historically high economic growth rates are expected to slow
down in the future. We have not witnessed any significant reduction in the
demand for television advertising on our channels in the current year;
and it is our present view that the television advertising markets in
the countries in which we operate will continue to grow next year. Our
expectations for each market are outlined in the Analysis of Segment Results
below. However, the duration and possible impact on our markets of
global developments in general economic conditions and the credit markets on our
operations is uncertain. It is not possible to predict when the economic and
credit conditions may improve and there can be no assurance that a continuation
of the current global conditions will not adversely affect our markets in a more
significant manner in the future.
Our
financial resources are sufficient to meet our financial obligations and none of
our Senior Notes or Convertible Notes mature before 2012. However, an absence of
additional new funding may constrain additional business development until the
credit markets reopen. At present it is impossible to determine when
credit market conditions might ease. As a result, in the near term we
are managing our operating and capital expenditures, our cash and our growth
plans in order to ensure that we maintain a sufficient level of liquidity while
growing Segment EBITDA without the need for additional external funding (see
V(d) “Cash Outlook”.)
Since
September 30, 2008 the US dollar has strengthened considerably against most
European currencies, including the Euro and the local currencies of our station
operations. For any given value of local currency revenues or profit,
the reported value in US dollars will fall in any period in proportion to the
increased strength of the US dollar.
Notwithstanding
the current economic conditions, we believe over the medium term that we will
see higher levels of GDP growth as well as general advertising and television
advertising spending growth in our markets than in Western European or U.S.
markets. The largest portion of advertising spending in our markets is on
television advertising and it makes up a larger proportion than in Western
European or U.S. markets. We expect this trend to continue for the foreseeable
future.
The large
audience share that we enjoy in most of our markets is due both to the
commercial strength of our channels and to the constraints on bandwidth that
limit the number of free-to-air broadcasters in our markets. The only markets
where we currently face significant competition from other distribution
platforms are Romania and Slovenia, where cable penetration exceeds 50% of
television households.
As our
markets mature, we anticipate more intense competition for audience share and
advertising spending from other incumbent terrestrial broadcasters and from
cable, satellite and digital terrestrial broadcasters as the coverage of these
technologies grows. The advent of digital terrestrial broadcasting as well as
the introduction of alternative distribution platforms for content (including
additional direct-to-home (“DTH”) services, the internet, internet protocol TV
(“IPTV”), mobile television and video-on-demand services) will cause audience
fragmentation and change the competitive dynamics in our operating countries in
the medium term. We expect the impact on our advertising share will
be less significant due to the difficulty of selling the small audience rating
each individual new entrant channel can be expected to attract.
We
believe that our leading position in our operating countries and the strength of
our existing brands place us in a solid position to manage increased competition
and to launch new niche channels as these new technologies develop.
CME
Strategy
In
the near term we intend to continue to pursue further improvements in the
performance of our existing operations in order to maximize the potential for
organic growth in our existing businesses.
Our
priorities in this regard include:
·
improving
margins by leveraging expertise from our best-performing
operations;
·
optimizing
the cash generated from our existing operations by managing capital
expenditure and programming costs in order to provide liquidity and fund
future growth opportunities;
·
ensuring
that our leading position in our operating countries is secured during the
transition to digital terrestrial broadcasting and the anticipated growth
of DTH offerings;
·
launching
or acquiring additional channels in our markets in order to expand our
offerings, target niche audiences and increase our advertising inventory
when financially prudent;
·
developing
our Bulgaria and Ukraine operations in a controlled manner to secure
consistent performance and a leading position in those markets;
and
·
expanding
our capabilities in production and the development of local
content.
Internet
broadband penetration is low in all of our markets in comparison to Western
European and U.S. markets. As the GDP per capita of our markets grows over the
medium term, we anticipate broadband penetration will increase significantly and
will foster the development of significant new opportunities for generating
advertising and other revenues in new media. We operate a number of websites in
each of our markets and expect to continue to launch targeted sites in order to
support or achieve leading positions in terms of unique users. We believe that
the strength of our brands, our news programming and locally produced content,
our relationships with advertisers and the opportunities for cross promotion
afforded by the large audiences of our broadcast operations put us in a strong
position to achieve leading positions in these new forms of media as they
develop and to monetize those assets over time. We intend to continue our
program of investment into our non-broadcast activities in order to develop
offerings and launch services on the internet and mobile platforms that
complement our broadcast offerings and generate revenues.
We manage
our business on a geographic basis and review the performance of each business
segment using data that reflects 100% of operating and license company
results. We also consider how much of our total revenues and earnings
are derived from our broadcast and non-broadcast operations. Our business
segments are Bulgaria, Croatia, the Czech Republic, Romania, the Slovak
Republic, Slovenia and our two businesses in Ukraine.
We
evaluate the performance of our business segments based on Segment Net Revenues
and Segment EBITDA.
Our key
performance measure of the efficiency of our business segments is EBITDA
margin. We define Segment EBITDA margin as the ratio of Segment
EBITDA to Segment Net Revenues.
Segment
EBITDA is determined as segment net income/loss, which includes program rights
amortization costs, before interest, taxes, depreciation and amortization of
intangible assets. Items that are not allocated to our segments for
purposes of evaluating their performance, and therefore are not included in
Segment EBITDA, include:
·
expenses
presented as corporate operating costs in our condensed consolidated
statements of operations and comprehensive
income;
·
stock-based
compensation charges;
·
foreign
currency exchange gains and losses;
·
change
in fair value of derivatives; and
·
certain
unusual or infrequent items (e.g., extraordinary gains and losses,
impairments of assets or
investments).
EBITDA
may not be comparable to similar measures reported by other
companies. Non-GAAP measures should be evaluated in conjunction with,
and are not a substitute for, U.S. GAAP financial measures.
We
believe Segment EBITDA is useful to investors because it provides a more
meaningful representation of our performance as it excludes certain items that
either do not impact our cash flows or the operating results of our
stations. Segment EBITDA is also used as a component in determining
management bonuses.
For a
full reconciliation of our Segment EBITDA by operation to our consolidated
results for the three and nine months ended September 30, 2008 and 2007 see Item
1, Note 17 “Segment Data”.
A summary
of our total Segment Net Revenues, Segment EBITDA and Segment EBITDA margin
showing the relative contribution of each Segment, is as follows:
For
the Three Months Ended September 30, (US$ 000's)
2008
2007
Change
Constant
Currency (4)
Segment
Net Revenue
Bulgaria
(TV2, RING TV) (1)
$
462
$
-
nm(5
)
nm(5
)
Croatia
(NOVA TV)
8,525
7,055
21
%
8
%
Czech
Republic (TV NOVA, NOVA SPORT, NOVA CINEMA)
72,602
51,140
42
%
15
%
Romania
(2)
59,281
44,412
34
%
35
%
Slovak
Republic (TV MARKIZA)
24,795
20,286
22
%
2
%
Slovenia
(POP TV, KANAL A)
14,231
11,545
23
%
14
%
Ukraine
(STUDIO 1+1)
20,052
39,582
(49
)%
(49
)%
Ukraine
(KINO, CITI)
1,061
816
30
%
30
%
Total
Segment Net Revenues
$
201,009
$
174,836
15
%
5
%
Represented
by:
Broadcast
operations
$
198,834
$
173,991
14
%
Non-broadcast
operations
2,175
845
157
%
Total
Segment Revenues
$
201,009
$
174,836
15
%
Segment
EBITDA
Bulgaria
(1)
$
(3,101
)
$
-
nm(5
)
nm(5
)
Croatia
(NOVA TV)
(5,401
)
(2,981
)
81
%
(63
)%
Czech
Republic (TV NOVA, NOVA SPORT, NOVA CINEMA)
31,405
25,989
21
%
1
%
Romania
(2)
20,116
19,486
3
%
6
%
Slovak
Republic (TV MARKIZA)
5,847
5,544
6
%
(9
)%
Slovenia
(POP TV, KANAL A)
2,153
854
152
%
162
%
Ukraine
(STUDIO 1+1)
(7,359
)
16,599
(144
)%
(144
)%
Ukraine
(KINO, CITI)
(1,203
)
(1,339
)
10
%
10
%
Total
Segment EBITDA
$
42,457
$
64,152
(34
)%
(39
)%
Represented
by:
Broadcast
operations
$
45,247
$
65,805
(31
)%
Non-broadcast
operations
(2,790
)
(1,653
)
(69
)%
Total
Segment EBITDA
$
42,457
$
64,152
(34
)%
Segment
EBITDA Margin (3)
21
%
37
%
(1)
We acquired our Bulgaria operations on August 1, 2008.
(2)
Romania channels are PRO TV, PRO CINEMA, ACASA, PRO TV INTERNATIONAL, SPORT.RO
and MTV ROMANIA for the three months ended September 30, 2008. For the three
months ended September 30, 2007 the Romanian channels were PRO TV, PRO CINEMA,
ACASA, PRO TV INTERNATIONAL and SPORT.RO.
(3)
We define Segment EBITDA margin as the ratio of Segment EBITDA to Segment Net
Revenue.
(4)
Constant currency reflects the impact of applying the 2008 monthly average
exchange rates to 2007 revenues and costs.
For
the Nine Months Ended September 30, (US$ 000's)
2008
2007
Change
Constant
Currency (4)
Segment
Net Revenue
Bulgaria
(TV2 RING TV) (1)
$
462
$
-
nm(5
)
nm(5
)
Croatia
(NOVA TV)
38,153
24,701
55
%
34
%
Czech
Republic (TV NOVA, NOVA SPORT, NOVA CINEMA)
270,730
183,203
48
%
16
%
Romania
(2)
197,119
135,978
45
%
41
%
Slovak
Republic (MARKIZA TV)
88,126
68,615
28
%
5
%
Slovenia
(POP TV, KANAL A)
58,392
44,309
32
%
16
%
Ukraine
(STUDIO 1+1)
73,525
80,358
(9
)%
(9
)%
Ukraine
(KINO, CITI)
3,363
1,868
80
%
80
%
Total
Segment Net Revenues
$
729,870
$
539,032
35
%
18
%
Represented
by:
Broadcast
operations
$
722,942
$
536,964
35
%
Non-broadcast
operations
6,928
2,068
235
%
Total
Segment Revenues
$
729,870
$
539,032
35
%
Segment
EBITDA
Bulgaria
(1)
$
(3,101
)
$
-
nm(5
)
nm(5
)
Croatia
(NOVA TV)
(6,448
)
(9,800
)
34
%
43
%
Czech
Republic (TV NOVA, NOVA SPORT, NOVA CINEMA)
146,454
99,251
48
%
16
%
Romania
(2)
81,785
57,152
43
%
40
%
Slovak
Republic (MARKIZA TV)
28,958
23,012
26
%
3
%
Slovenia
(POP TV, KANAL A)
17,359
12,243
42
%
24
%
Ukraine
(STUDIO 1+1)
(11,316
)
14,794
(177
)%
(177
)%
Ukraine
(KINO, CITI)
(3,464
)
(5,511
)
37
%
37
%
Total
Segment EBITDA
$
250,227
$
191,141
31
%
11
%
Represented
by:
Broadcast
operations
$
256,388
$
193,538
33
%
Non-broadcast
operations
(6,161
)
(2,397
)
(157
)%
Total
Segment EBITDA
$
250,227
$
191,141
31
%
Segment
EBITDA Margin (3)
34
%
35
%
(1)
We acquired our Bulgaria operations on August 1, 2008.
(2)
Romania channels are PRO TV, PRO CINEMA, ACASA, PRO TV INTERNATIONAL, SPORT.RO
and MTV ROMANIA for the nine months ended September 30, 2008. For the nine
months ended September 30, 2007 the Romanian channels were PRO TV, PRO CINEMA,
ACASA, PRO TV INTERNATIONAL and SPORT.RO. We acquired SPORT.RO on February 20,2007.
(3)
We define Segment EBITDA margin as the ratio of Segment EBITDA to Segment Net
Revenue.
(4)
Constant currency reflects the impact of applying the 2008 monthly average
exchange rates to 2007 revenues and costs.
Spot and Non-Spot Revenues.
For the purposes of our management’s discussion and analysis of financial
condition and results of operations, total television and radio advertising
revenue net of rebates is referred to as “spot revenues”. “Non-spot
revenues” refers to all other revenues, including those from sponsorship, game
shows, program sales, short message service (“SMS”) messaging, cable
subscriptions and barter transactions. The total of spot revenues and
non-spot revenues is equal to Segment Net Revenues.
Our goal
is to increase revenues from advertising in local currency year-on-year in every
market through disciplined management of our advertising
inventory. In any given period, revenue increases can be attributable
to combinations of price increases, higher inventory sales, seasonal or
time-of-day incentives, target-audience delivery of specific campaigns,
introductory pricing for new clients or audience movements based on our
competitors’ program schedule.
Audience Ratings and Share.
When describing our performance we refer to “audience share”, which
represents the share attracted by a channel as a proportion of the total
audience watching television, and “ratings”, which represents the number of
people watching a channel (expressed as a proportion of the total population
measured). Audience share and ratings information is measured in each market by
international measurement agencies, using peoplemeters, which quantify audiences
for different demographics and sub geographies of the population measured
throughout the day. Our channels schedule programming intended to attract
audiences within specific “target” demographics that we believe will be
attractive to advertisers. For each of our segments we show all day and prime
time audience share and program ratings information for our channels and our
major competitors, based on our channels’ target demographics.
Spot Sales. Our main unit of
sale is the commercial gross rating point (“GRP”). This is a measure
of the number of people watching when the advertisement is aired. Generally we
will contract with a client to provide an agreed number of GRPs for an agreed
price (“cost per point”). Much more rarely, and usually only for small niche
channels, we may sell on a fixed spot basis where an advertisement is placed at
an agreed time for a negotiated price that is independent of the number of
viewers. The price per GRP package varies depending on the season and
time of day the advertisement is aired, the volume of GRPs purchased,
requirements for special positioning of the advertisement, the demographic group
that the advertisement is targeting (in a multi-channel environment), and other
factors. Our larger advertising customers generally enter into annual contracts
which usually run from April to March and set the pricing for a committed volume
of GRPs.
Generally,
demand for broadcast advertising is highest in the fourth quarter of the year,
next highest is the second quarter and lowest in the third quarter.
We
acquired our Bulgaria operations on August 1, 2008. We hold an 80.0% voting and economic
interests in each of TV2 a start-up network
with a 70% technical reach, and RING TV, a cable sports channel. TV2
was launched in November 2007 and is one of three private national free-to-air
networks serving Bulgaria in addition to a single state owned
channel. RING TV has been broadcasting since
2000.
Since
acquiring our investment, our efforts have been focused on establishing the
infrastructure and resources required to operate a multichannel broadcast
operation. We have expanded the existing management team, and most
key positions are already filled. We continue to evaluate the leadership
needs of the business. We have also begun to revise the programming schedule and
launched TV2’s news on October 20, 2008, less than twelve weeks after our
acquisition. We have acquired the rights to broadcast the Bulgarian
football league for the next five years, initial broadcasts of which have
enjoyed ratings success in the range of 7%.
Market
Background: We expect the net television advertising market in
Bulgaria to grow by approximately 12% to 17% in 2008 in local
currency.
TV2
and RING TV Audience Share and Ratings Performance
For
advertising sales purposes, TV2’s target audience is the 18-49 all demographic
and RING TV’s target audience is 18-54 male. All audience data shown below is
based on the target demographic of TV2.
TV2 is
currently the smallest of the four national channels. For the two
months from our acquisition to September 30, 2008, of the other national
channels, bTV had a national all day audience share of 33.5%, Nova TV 11.7% and
the state run BNTV 16.1%. Despite the difference in audience share,
we consider these businesses to be the direct competitors of TV2. In
terms of its current audience share, TV2 is comparable to the larger cable or
satellite channels in the Bulgarian market: Diema + and Diema 2, with national
all day audience shares for the two months ended September 30, 2008 of 3.4% and
1.2%, respectively, Fox Life with 2.5% and TV7 with 0.8%.
Prime
time audience share for bTV for the two months ended September 30, 2008 was
35.4%, 18.4% for Nova TV and 14.8% for BNTV. Prime time audience
shares for Diema + and Diema 2 for the two months ended September 30,2008 were 3.7% and 1.1% respectively, 1.6% for Fox Life and 0.7% for
TV7.
Segment Net Revenues for
the two months from acquisition to September 30, 2008 were US$ 0.5
million. Spot revenues were US$ 0.2 million. Non-spot revenues were US$
0.3 million, primarily from cable
revenues.
·
Segment EBITDA losses
for the two months from acquisition to September 30, 2008 were US$ 3.1
million. We incurred programming costs of US$ 1.6 million, other operating
costs of US$ 1.2 million and selling, general and administrative costs of
US$ 0.8 million.
(B)
CROATIA
Market
Background: We estimate that the television advertising market
in Croatia experienced local currency growth of approximately 4% to 7% in 2007
and expect it to show 6% to 8% growth during 2008. The Croatian kuna appreciated
by 4% against the U.S. dollar between September 30, 2007 and September 30,2008.
We have
begun to witness some advertisers reducing budgets, particularly in the retail
and fast moving consumer goods (“FMCG”) sectors, however this has been largely
offset by increased demand from other sectors. In the aggregate, we have not
seen any significant impact from the current global economic conditions on the
performance of our Croatia operations.
NOVA
TV (Croatia) Audience Share and Ratings Performance
For
advertising sales purposes, the NOVA TV (Croatia) target audience is the 18-49
demographic and all audience data is shown on this basis.
Our major
competitors are the two state-owned channels, HRT1 and HRT2, with national all
day audience shares for the nine months ended September 30, 2008 of 22.4% and
17.3%, respectively, and privately owned broadcaster RTL with a national all day
audience share of 26.1%.
The
improved prime time audience share performance for NOVA TV (Croatia) in the nine
months ended September 30, 2008 compared to the same period in 2007 made NOVA TV
(Croatia) the second highest ranking channel in the market for the period. This
reflected the success of our strategy of investing in local productions, with
shows such as ‘The Farm’ and ‘Don’t Forget The Lyrics’ delivering particularly
strong ratings. Prime time audience share for HRT1 decreased from
24.6% to 21.0% for comparable periods, HRT2 decreased from 19.3% to 18.5% and
RTL decreased from 29.0% to 26.3%. NOVA TV (Croatia) was the only one
of the four main channels in the Croatia market to grow prime time audience
share during 2008.
Prime
time ratings for the Croatia market decreased from 35.6% to 33.5% for the
comparable nine month period.
Segment Net Revenues for
the three months ended September 30, 2008 increased by 21%, compared to
the three months ended September 30, 2007. In local currency,
Segment Net Revenues increased by 8%. Spot revenues for the
three months ended September 30, 2008 increased by 33% compared to the
same period in 2007 because our ratings improvement in 2007 and 2008 has
supported the sale of significantly higher volumes of
GRPs. Non-spot revenues decreased by 18%, primarily as a result
of decreased levels of sponsorship. We launched four new local
productions in the fall schedule, including the new game show “Moment of
Truth,” which has been particularly successful, with an average audience
share of 30%. Our Dnevnik.hr website enjoyed its most
successful month ever in September 2008, with the number of unique users
increasing by almost 60% from June
2008.
·
Segment EBITDA losses
for the three months ended September 30, 2008 increased by 81% compared to
the three months ended September 30, 2007. In local currency,
Segment EBITDA losses increased by
63%.
Costs
charged in arriving at Segment EBITDA for the three months ended September 30,2008 increased by 39%, compared to the three months ended September 30,2007. In local currency, costs charged in arriving at Segment EBITDA
increased by 24%. Cost of programming increased by 60% as we
increased our investment during the summer period to maintain ratings ahead of
the fall season. Other operating costs rose by 36%, reflecting the
increased volume of local productions as well as increased staff costs,
primarily due to a higher headcount and increased accruals for
performance-related bonuses. Selling, general and administrative
expenses remained in line with the three months ended September 30,2007.
For
the Nine Months Ended September 30, (US$ 000's)
2008
2007
Movement
Spot
revenues
$
31,796
$
18,812
69.0
%
Non-spot
revenues
6,357
5,889
8.0
%
Segment
Net Revenues
$
38,153
$
24,701
54.5
%
Represented
by:
Broadcast
operations
$
37,744
$
24,592
53.5
%
Non-broadcast
operations
409
109
275.2
%
Segment
Net Revenues
$
38,153
$
24,701
54.5
%
Segment
EBITDA
$
(6,448
)
$
(9,800
)
34.2
%
Represented
by:
Broadcast
operations
$
(4,977
)
$
(9,769
)
49.1
%
Non-broadcast
operations
(1,471
)
(31
)
(4645.2
)%
Segment
EBITDA
$
(6,448
)
$
(9,800
)
34.2
%
Segment
EBITDA Margin
(17
)%
(40
)%
23
%
·
Segment Net Revenues for
the nine months ended September 30, 2008 increased by 55%, compared to the
nine months ended September 30, 2007. In local currency,
Segment Net Revenues increased by 34%. Spot revenues for the
nine months ended September 30, 2008 increased by 69% compared to the same
period in 2007 because our ratings improvement in 2007 and 2008 has
supported the sale of significantly higher volumes of GRPs at increased
prices. Non-spot revenues increased by 8%, primarily as a
result of increased levels of non-broadcast
revenues.
Segment EBITDA
losses for the nine
months ended September 30, 2008 decreased by 34% compared to the nine
months ended September 30, 2007. In local currency, Segment
EBITDA losses decreased by 43%.
Costs
charged in arriving at Segment EBITDA for the nine months ended September 30,2008 increased by 29%, compared to the nine months ended September 30,2007. In local currency, costs charged in arriving at Segment EBITDA
increased by 12%. Cost of programming increased by 37% as a result of
continued investment in high-quality programming to improve performance, driven
by a 83% increase in production expenses due to the broadcast of popular
locally-produced content such as ‘The Farm’ and ‘Don’t Forget The
Lyrics’. Other operating costs rose by 40%, reflecting the increased
volume of local productions as well as increased staff costs, primarily due to a
higher headcount and increased accruals for performance-related
bonuses. Selling, general and administrative expenses decreased by 7%
primarily due to a reduction in our provision for doubtful debts and a reduction
in legal accruals following the successful resolution of a legal
proceeding.
(C)
CZECH REPUBLIC
Market
Background: We estimate that the television advertising market
in the Czech Republic grew by approximately 6% to 8% in local currency during
2007 and expect 7% to 9% growth in 2008. The Czech koruna appreciated
by 11% against the US dollar between September 30, 2007 and September 30,2008.
To date,
our Czech Republic operations have not experienced any negative impact from the
current global economic conditions, and we have not seen evidence that TV
advertisers are reviewing their spending plans for 2008 or
2009. There has been a shift in spending to television and, to
a lesser extent, internet advertising, largely from print.
TV
NOVA (Czech Republic) Audience Share and Ratings Performance
For
advertising sales purposes, the TV NOVA (Czech Republic) target audience is the
15-54 demographic and all audience data is shown on this basis.
Our major
competitors are the two state-owned channels CT1 and CT2, with all day audience
shares for the nine months ended September 30, 2008 of 17.3% and 7.4%
respectively, and privately owned broadcaster TV Prima with a national all day
audience share of 17.0%.
Prime
time audience share for CT1 decreased from 20.9% to 18.2% for the comparable
nine month period, CT2 decreased from 6.2% to 6.0% and TV Prima decreased from
18.0% to 17.3%.
Prime
time ratings for the Czech Republic market decreased from 29.4% to 28.9% for the
comparable nine month period.
For
the Three Months Ended September 30, (US$ 000's)
2008
2007
Movement
Spot
revenues
$
66,607
$
45,541
46.3
%
Non-spot
revenues
5,995
5,599
7.1
%
Segment
Net Revenues
$
72,602
$
51,140
42.0
%
Represented
by:
Broadcast
operations
$
71,813
$
51,032
40.7
%
Non-broadcast
operations
789
108
630.6
%
Segment
Net Revenues
$
72,602
$
51,140
42.0
%
Segment
EBITDA
$
31,405
$
25,989
20.8
%
Represented
by:
Broadcast
operations
$
33,044
$
26,258
25.8
%
Non-broadcast
operations
(1,639
)
(269
)
(509.3
%)
Segment
EBITDA
$
31,405
$
25,989
20.8
%
Segment
EBITDA Margin
43
%
51
%
(8
)%
·
Segment Net Revenues for
the three months ended September 30, 2008 increased by 42%, compared to
the three months ended September 30, 2007. In local currency,
Segment Net Revenues increased by 15%. Spot revenues increased
by 46%, with an increase in the average revenue per GRP sold. Non-spot
revenue increased by 7%, primarily due to increased
sponsorship. Our fall schedule includes several local fiction
formats, including the fourth series of “Insuring
Happiness”. Both the new and longer-running formats have
enjoyed strong initial ratings which is encouraging for the fourth
quarter. Our policy of encouraging advertisers to shift their
spending towards the cheaper low season has continued to prove attractive
to clients seeking to optimize budgets, but has had less impact than in
the first quarter.
Other
than in August, when the Olympic Games were broadcast on state television, TV
NOVA increased its prime time share in each month of the third quarter compared
to the same period in 2007. We re-launched GALAXIE SPORT as NOVA
SPORT on October 4, 2008. NOVA CINEMA is maintaining an audience
share of 3% to 5% in its coverage area, with some programs securing shares of up
to 12%. We expect to use our additional DTT (digital terrestrial television)
license to expand the distribution of NOVA CINEMA, which will increase our
ability to monetize these ratings. We entered into a license
agreement with MTV Networks International in September 2008 to operate a local
version of MTV in the Czech and Slovak Republics, which will allow us to offer
advertisers more targeted access to the youth demographic when the channel is
launched in the first half of 2009.
·
Segment EBITDA for the three months ended September 30, 2008
increased by 21%, compared to the three months ended September 30, 2007,
resulting in an EBITDA margin of 43% compared to 51% in the three months
ended September 30, 2007. In local currency, Segment EBITDA
increased 1%.
Costs
charged in arriving at Segment EBITDA for the three months ended September 30,2008 increased by 64%, compared to the three months ended September 30,2007. In local currency, costs charged in arriving at Segment EBITDA
increased by 32%. Cost of programming increased by 68%. Program
syndication costs grew by 115% over comparable periods due to an increase in the
number of hours of syndicated programming being broadcast as well as an increase
in the cost of such programming. Production costs showed an increase
of 27% due to an increase in the number of hours of news
programming. We signed a new contract with Warner Bros. during the
third quarter, securing quality acquired programming for our channels for the
next five years. Other operating costs increased by 97%, reflecting
higher staff costs. Selling, general and administrative expenses
increased by 21%, primarily due to increased marketing and research costs and
higher office running costs.
For
the Nine Months Ended September 30, (US$ 000's)
2008
2007
Movement
Spot
revenues
$
248,279
$
166,253
49.3
%
Non-spot
revenues
22,451
16,950
32.5
%
Segment
Net Revenues
$
270,730
$
183,203
47.8
%
Represented
by:
Broadcast
operations
$
269,236
$
183,001
47.1
%
Non-broadcast
operations
1,494
202
639.6
%
Segment
Net Revenues
$
270,730
$
183,203
47.8
%
Segment
EBITDA
$
146,454
$
99,251
47.6
%
Represented
by:
Broadcast
operations
$
149,337
$
100,017
49.3
%
Non-broadcast
operations
(2,883
)
(766
)
276.4
%
Segment
EBITDA
$
146,454
$
99,251
47.6
%
Segment
EBITDA Margin
54
%
54
%
-
·
Segment Net Revenues for
the nine months ended September 30, 2008 increased by 48%, compared to the
nine months ended September 30, 2007. In local currency,
Segment Net Revenues increased by 16%. Spot revenues increased
by 49%, with an increase in the average revenue per GRP sold. Non-spot
revenue increased by 33%, primarily due to increased
sponsorship. Our long running series such as Ordinace (Rose
Garden Medical Centre) and Ulice (Street) continue to perform
strongly.
·
Segment EBITDA for the
nine months ended September 30, 2008 increased by 48%, compared to the
nine months ended September 30, 2007, resulting in an unchanged EBITDA
margin of 54% compared to the nine months ended September 30,2007. In local currency, Segment EBITDA increased by
16%.
Costs
charged in arriving at Segment EBITDA for the nine months ended September 30,2008 increased by 48%, compared to the nine months ended September 30, 2007. In
local currency, costs charged in arriving at Segment EBITDA increased by 16%.
Cost of programming increased by 62%. Program syndication costs grew by 102%
over comparable periods due to an increase in the number of hours of syndicated
programming being broadcast as well as an increase in the cost of such
programming. Production costs showed an increase of 31% due to an
increase in the number of hours of news programming. Other operating
costs increased by 38%, reflecting higher staff costs. Selling,
general and administrative expenses increased by 21%, primarily due to increased
marketing and research costs and higher office running costs offset by lower
equipment costs.
Market
Background: We estimate that the television advertising market
grew by approximately 50% to 60% in US dollars during 2007 and expect the
continued growth in the range of 25% to 35% in 2008. The New Romanian lei (RON)
depreciated by 10% against the US dollar between September 30, 2007 and
September 30, 2008.
The
economic environment in Romania has started to become more challenging, with
inflation rising as a result of the increases in the price of raw materials and
fuel. The RON has depreciated sharply against the U.S. dollar in the
last two months and analysts are reporting a negative outlook for
2009. We have seen multinational advertisers, particularly those in
the FMCG sector, deferring budgets although we have seen a number of new local
and international advertisers enter the market. In aggregate we have not
experienced any negative impact and we still expect to see growth in 2009,
albeit at a slower rate.
Romania
Audience Share and Ratings Performance (Combined for all CME
stations)
For
advertising sales purposes, our Romanian channels have different target audience
demographics; PRO TV - 18-49 urban, ACASA - 15-49 female urban, PRO CINEMA -
18-49 urban, SPORT.RO - male all urban and MTV ROMANIA - 15-34 urban. All
audience data shown below is based on the target demographic of PRO
TV.
Our main
competitors are privately owned broadcaster Antena 1, which based on PRO TV’s
target demographic, had an all day audience share of 9.2% and the two channels
operated by the public broadcaster, TVR1 and TVR2, which had an all day audience
share for the nine months ended September 30, 2008 of 4.4% and 1.6%,
respectively.
Prime
time audience share for TVR1 decreased from 7.2% to 5.3% for comparable periods,
TVR2 decreased from 2.6% to 1.4% and Antena 1 decreased from 13.4% to
11.2%. The Olympic Games were broadcast on state television; however,
this had only a slight impact on our audience share.
Prime
time ratings for the Romania market increased from 28.9% to 32.3% for the
comparable nine-month period.
Additional
information
The
functional currency of our Romania operations changed from the U.S. dollar to
the New Romanian lei with effect from January 1, 2008.
For
the Three Months Ended September 30, (US$ 000's)
2008
2007
Movement
Spot
revenues
$
54,720
$
41,146
33.0
%
Non-spot
revenues
4,561
3,266
39.7
%
Segment
Net Revenues
$
59,281
$
44,412
33.5
%
Represented
by:
Broadcast
operations
$
59,044
$
44,326
33.2
%
Non-broadcast
operations
237
86
175.6
%
Segment
Net Revenues
$
59,281
$
44,412
33.5
%
Segment
EBITDA
$
20,116
$
19,486
3.2
%
Represented
by:
Broadcast
operations
$
20,413
$
19,613
4.1
%
Non-broadcast
operations
(297
)
(127
)
(133.9
)%
Segment
EBITDA
$
20,116
$
19,486
3.2
%
Segment
EBITDA Margin
34
%
44
%
(10
)%
·
Segment Net
Revenues for the three months ended September 30, 2008
increased by 34%, compared to the three months ended September 30,2007. The functional currency of our Romanian operations
changed from the US dollar to the New Romanian lei with effect from
January 1, 2008; for comparative purposes Segment Net Revenues increased
by 35% in New Romanian lei for the three months ended September 30, 2008
compared to the three months ended September 30, 2007. Spot
revenues increased by 33%, driven by increases in the average revenue per
GRP sold. In addition US$ 1.6 million of spot revenue was
generated from RADIO PRO, acquired on April 17, 2008, and US$ 0.7 million
was generated from MTV ROMANIA. Non-spot revenues increased by
40%, primarily due to increased cable tariff revenue generated by SPORT.RO
and MTV
ROMANIA.
ACASA’s
locally produced telenovellas have proved extremely popular, with the recent
launches of Little Angels and Regina (a spin-off from Gypsy Heart) being
particularly successful. Our broadcasts of the UEFA Champions League
on PRO TV generates audience shares of between 39% and 48% for games featuring
Romanian teams and provides high quality content for
SPORT.RO. Our internet development has gathered
pace. We re-launched the www.protv.rowebsite
as a video portal, and launched a new site www.stirileprotv.ro
focused on local news. We also launched a number of microsites to
support ACASA programs, as well as a series of new community features on www.sport.ro.
·
Segment EBITDA for the
three months ended September 30, 2008 increased by 3%, compared to the
three months ended September 30, 2007, resulting in an EBITDA margin of
34%, compared to 44% in the three months ended September 30, 2007.
In local currency, Segment EBITDA increased by
6%.
Costs
charged in arriving at Segment EBITDA for the three months ended September 30,2008 increased by 57%, compared to the three months ended September 30,2007. Cost of programming grew by 71%, reflecting increased
investment to enable us to maintain our ratings in the face of increased
competition. Production expenses increased by 125% due to increased
investment to expand news and news-related content on PRO TV and ACASA, the
increase in production costs related to the MTV ROMANIA acquisition and an
increase in the number of production hours broadcasted on
SPORT.RO. Programming syndication increased by 28% due to investment
in the programming schedule and an increase in syndicated hours
broadcast. Other operating costs increased by 40% primarily due to
increased staff costs as a result of increased headcount. Broadcast
operating expenses also increased. Selling, general and
administrative expenses increased by 26%, primarily due to increased office
running costs and marketing and research cost, offset by a reduction in the
provision for doubtful debts.
For
the Nine Months Ended September 30, (US$ 000's)
2008
2007
Movement
Spot
revenues
$
181,616
$
126,750
43.3
%
Non-spot
revenues
15,503
9,228
68.0
%
Segment
Net Revenues
$
197,119
$
135,978
45.0
%
Represented
by:
Broadcast
operations
$
196,072
$
135,836
44.3
%
Non-broadcast
operations
1,047
142
637.3
%
Segment
Net Revenues
$
197,119
$
135,978
45.0
%
Segment
EBITDA
$
81,785
$
57,152
43.1
%
Represented
by:
Broadcast
operations
$
82,163
$
57,512
42.9
%
Non-broadcast
operations
(378
)
(360
)
(5.0
)%
Segment
EBITDA
$
81,785
$
57,152
43.1
%
Segment
EBITDA Margin
41
%
42
%
(1
)%
·
Segment Net Revenues for the nine months ended September 30, 2008
increased by 45%, compared to the nine months ended September 30,2007. The functional currency of our Romanian operations
changed from the US dollar to the New Romanian lei with effect from
January 1, 2008; for comparative purposes Segment Net Revenues increased
by 41% in New Romanian lei for the nine months ended September 30, 2008
compared to the nine months ended September 30,2007. Spot revenues increased by 43%, driven by increases
in the average revenue per GRP sold. In addition US$ 3.1
million of spot revenue was generated from RADIO PRO, acquired on April17, 2008 and US$ 2.4 million was generated from MTV
ROMANIA. Non-spot revenues increased by 68%, primarily due to
increased cable tariff revenue generated by SPORT.RO and MTV
ROMANIA.
·
Segment EBITDA for the
nine months ended September 30, 2008 increased by 43%, compared to the
nine months ended September 30, 2007, resulting in an EBITDA margin of
41%, compared to 42% in the nine months ended September 30, 2007. In
local currency, Segment EBITDA increased by
40%.
Costs
charged in arriving at Segment EBITDA for the nine months ended September 30,2008 increased by 46%, compared to the nine months ended September 30,2007. Cost of programming grew by 48%, reflecting increased
investment to enable us to maintain our ratings in the face of increased
competition. Production expenses increased by 64% due to an increase
in production hours broadcasted, with increased news and news-related content on
PRO TV and ACASA, the increase in production hours related to the MTV ROMANIA
acquisition and an increase in the number of production hours broadcasted on
SPORT.RO. Programming syndication increased by 33% due to investment
in the programming schedule, with particular increases in foreign syndicated
programming on PRO TV and PRO CINEMA. Other operating costs increased by 48%
primarily due to increased staff costs as a result of increased
headcount. Broadcast operating expenses also
increased. Selling, general and administrative expenses increased by
32%, primarily due to increased office running costs and marketing and research
costs.
(E)
SLOVAK REPUBLIC
Market
Background: We estimate that the television advertising market
in the Slovak Republic grew by approximately 25% to 30% in local currency in
2007 and anticipate growth of 10% to 15% in 2008. The Slovak
koruna appreciated by 12% against the U.S. dollar between September 30, 2007 and
September 30, 2008.
Our
Slovak Republic operations have not yet experienced any negative impact from the
current global economic conditions, although the rate of growth of the
advertising market appears to be slowing in anticipation of the conversion to
EURO in 2009. There are indications that advertisers in the FMCG sector and
mobile telephone operators are reducing their spending plans as well as
advertisers in the financial services and insurance sectors following the
introduction of new legislation limiting the advertising spending of health
insurance companies.
TV
MARKIZA Audience Share and Ratings Performance
For
advertising sales purposes, TV MARKIZA’s target audience is the 12+ demographic
and all audience data shown below is on this basis.
Our
principal competitors are the main channels operated by the public broadcaster,
STV1 and STV2, with an all day audience share of 16.9% and 6.4%, respectively,
for the nine months ended September 30, 2008. The national all day audience
share of TV JOJ, the only other significant privately owned channel, was 16.2%
during the same period. The public broadcaster launched a new cable and
satellite sport channel in August 2008, and TV JOJ launched a cinema channel in
October 2008.
Prime
time audience share for STV1 decreased from 19.8% to 18.5% for comparable
periods, while prime time audience share for TV JOJ increased from 16.9% to
19.0% and prime time audience share for STV2 increased from 4.7% to 5.4%,
reflecting the fact that the Olympic Games were broadcast on that
channel.
Prime
time ratings for the Slovak Republic fell from 36.5% to 34.4% for the comparable
nine-month period.
For
the Three Months Ended September 30, (US$ 000's)
2008
2007
Movement
Spot
revenues
$
23,391
$
19,344
20.9
%
Non-spot
revenues
1,404
942
49.0
%
Segment
Net Revenues
$
24,795
$
20,286
22.2
%
Represented
by:
Broadcast
operations
$
24,749
$
20,183
22.6
%
Non-broadcast
operations
46
103
(55.3
)%
Segment
Net Revenues
$
24,795
$
20,286
22.2
%
Segment
EBITDA
$
5,847
$
5,544
5.5
%
Represented
by:
Broadcast
operations
$
6,269
$
5,656
10.8
%
Non-broadcast
operations
(422
)
(112
)
(276.8
)%
Segment
EBITDA
$
5,847
$
5,544
5.5
%
Segment
EBITDA Margin
24
%
27
%
(3
)%
·
Segment Net Revenues for
the three months ended September 30, 2008 increased by 22%, compared to
the three months ended September 30, 2007. In local currency,
Segment Net Revenues increased by 2%. The increase in Segment
Net Revenues was due to increases of 21% in spot revenues and 49% in
non-spot revenues. The increase in spot revenues is mainly due
to an increase in the average revenue per GRP sold, offsetting a slight
decrease in the volume of GRPs sold. The increase in non-spot revenues was
due to increased sponsorship from the show ‘Slovakia’s Got
Talent’.
Shows
such as Rose Garden Medical and Let’s Dance have continued to generate strong
ratings. Our news site www.tvnoviny.sk
attracted 420,000 unique visitors since launch on September 8, and in the last
week of September we launched a redesigned www.markiza.sk with a
stronger link to on-air material and improved video catch-up
capability.
·
Segment EBITDA for the three months ended September 30, 2008
increased by 6%, compared to the three months ended September 30, 2007,
and the EBITDA margin decreased to 24% from 27% over comparable
periods. In local currency, Segment EBITDA decreased by
9%.
Costs
charged in arriving at Segment EBITDA for the three months ended September 30,2008 increased by 29%, compared to the three months ended September 30,2007. In local currency, costs charged in arriving at Segment EBITDA
increased by 7%. Cost of programming increased by 46%, reflecting the
level of competition for acquired programming and increased investment in local
production and also the reclassification of production staff salaries to
production costs from other operating costs; without this reclassification, cost
of programming increased by 25%. Other operating costs remained
unchanged from comparable periods as a result of the reclassification described
above. Selling, general and administrative expenses increased by 27%
primarily as a result of increased office running costs.
For
the Nine Months Ended September 30, (US$ 000's)
2008
2007
Movement
Spot
revenues
$
81,593
$
65,913
23.8
%
Non-spot
revenues
6,533
2,702
141.8
%
Segment
Net Revenues
$
88,126
$
68,615
28.4
%
Represented
by:
Broadcast
operations
$
87,955
$
68,408
28.6
%
Non-broadcast
operations
171
207
(17.4
)%
Segment
Net Revenues
$
88,126
$
68,615
28.4
%
Segment
EBITDA
$
28,958
$
23,012
25.8
%
Represented
by:
Broadcast
operations
$
29,850
$
23,409
27.5
%
Non-broadcast
operations
(892
)
(397
)
(124.7
)%
Segment
EBITDA
$
28,958
$
23,012
25.8
%
Segment
EBITDA Margin
33
%
34
%
(1
)%
·
Segment Net Revenues
for the nine months ended September 30,2008 increased by 28%, compared to the nine months ended September 30,2007. In local currency, Segment Net Revenues increased by
5%. The increase in Segment Net Revenues was due to increases
of 24% in spot revenues and 142% in non-spot revenues. The
increase in spot revenues is mainly due to an increase in the average
revenue per GRP sold, offsetting a slight decrease in the volume of GRPs
sold. The increase in non-spot revenues was due to increased
sponsorship revenue generated from the shows ‘Elan Je Elan’, ‘Let’s Dance’
and ‘Slovakia’s Got Talent’, with the comparable period in 2007 having
only one sponsorship generating show in
‘Bailando’.
·
Segment EBITDA for the nine months ended September 30, 2008
increased by 26%, compared to the nine months ended September 30, 2007,
resulting in an EBITDA margin of 33% compared to 34% in the nine months
ended September 30, 2007. In local currency, Segment EBITDA
increased by 3%.
Costs
charged in arriving at Segment EBITDA for the nine months ended September 30,2008 increased by 30%, compared to the nine months ended September 30,2007. In local currency, costs charged in arriving at Segment EBITDA
increased by 7%. Cost of programming increased by 53%, partly due to
the reclassification of production staff salaries to production costs from other
operating costs; without this reclassification, cost of programming increased by
32%. This underlying increase is due to the level of competition for acquired
programming and increased investment in local production. Other
operating costs decreased by 5% due to the reclassification described above,
partially offset by increased broadcast operating costs. Selling,
general and administrative expenses increased by 20% primarily as a result of
increased office running costs and marketing and research
costs.
Market Background: We estimate
the television advertising market in Slovenia grew by approximately 8% to 10% in
local currency during 2007. We expect the television advertising
market to show growth in the range of 6% to 8% in 2008. The Euro
appreciated by 1% against the US dollar between September 30, 2007 and September30, 2008.
Our
Slovenia operations have not yet experienced any negative impact from the
current global economic conditions. However, there are recent indications that
the rate of growth of the advertising market has been
slowing. Television advertising growth in 2008 has been driven by
increased budgets from the FMCG and consumer electronics sectors, which more
than offset decreased spending from telecommunications
advertisers.
POP
TV and KANAL A Combined Audience Share and Ratings Performance
For
advertising sales purposes, each of POP TV’s and KANAL A’s target audience is
the 18-49 demographic and all audience data shown is on this basis.
Our major
competitors are the two channels operated by the public broadcaster, SLO1 and
SLO2, with all day audience shares for the nine months ended September 30, 2008
of 16.4% and 8.1%, respectively, and privately owned broadcaster TV3 with an all
day audience share of 6.8%.
Prime
time audience share for SLO 1 decreased from 19.8% to 19.1% for comparable
periods, SLO 2 decreased from 6.9% to 6.6%. TV3 increased from 4.2% to 6.3%,
helped by their coverage of the European Football Championships in
June.
Prime
time ratings for the Slovenia market remained unchanged at 23.8% for the
comparable nine-month period.
For
the Three Months Ended September 30, (US$ 000's)
2008
2007
Movement
Spot
revenues
$
11,902
$
10,413
14.3
%
Non-spot
revenues
2,329
1,132
105.7
%
Segment
Net Revenues
$
14,231
$
11,545
23.3
%
Represented
by:
Broadcast
operations
$
13,235
$
11,076
19.5
%
Non-broadcast
operations
996
469
112.4
%
Segment
Net Revenues
$
14,231
$
11,545
23.3
%
Segment
EBITDA
$
2,153
$
854
152.1
%
Represented
by:
Broadcast
operations
$
1,452
$
1,869
(22.3
)%
Non-broadcast
operations
701
(1,015
)
169.1
%
Segment
EBITDA
$
2,153
$
854
152.1
%
Segment
EBITDA Margin
15
%
7
%
8
%
·
Segment Net Revenues for
the three months ended September 30, 2008 increased by 23%, compared to
the three months ended September 30, 2007. In local currency,
Segment Net Revenues increased by 14%. Spot revenues increased by 14%,
driven by increases in the average revenue per GRP sold which more than
offset a slight decline in volume of GRPs sold. Non-spot
revenues increased by 106% primarily due to increased levels of
non-broadcast advertising revenues as well as increased
sponsorship.
While the
Olympic Games were broadcast by SLO2, audience reaction to the launch of our
fall schedule, with shows such as Deal or No Deal and Can U Dig It?!, more than
offset their impact. We launched the second season of The Farm at the
end of September, which enjoyed a 40% share. This should provide us
with a strong base for the fourth quarter, both on-air and
on-line. Our coverage of the parliamentary elections in September was
the highest rated of all broadcasters and provided additional content for our
news websites.
·
Segment EBITDA for the
three months ended September 30, 2008 increased by 152%, compared to the
three months September 30, 2007, resulting in an EBITDA margin of 15%
compared to 7% in the three months ended September 30, 2007. In
local currency, Segment EBITDA increased by
162%.
Costs
charged in arriving at Segment EBITDA for the three months ended September 30,2008 increased by 13%, compared to the three months ended September 30,2007. In local currency, costs charged in arriving at Segment EBITDA
increased by 3%. Cost of programming grew by 5%, due to increased
programming syndication costs during the summer months, partially offset by a
decrease in production expenses. Other operating costs increased by
28%, primarily due to higher staff costs. Selling, general and
administrative expenses increased by 16%, primarily due to increased office
running costs and marketing and research costs and also an increase in the
provision for doubtful debts, partially offset by lower consultancy
fees.
For
the Nine Months Ended September 30, (US$ 000's)
2008
2007
Movement
Spot
revenues
$
49,720
$
39,173
26.9
%
Non-spot
revenues
8,672
5,136
68.8
%
Segment
Net Revenues
$
58,392
$
44,309
31.8
%
Represented
by:
Broadcast
operations
$
54,646
$
42,901
27.4
%
Non-broadcast
operations
3,746
1,408
166.1
%
Segment
Net Revenues
$
58,392
$
44,309
31.8
%
Segment
EBITDA
$
17,359
$
12,243
41.8
%
Represented
by:
Broadcast
operations
$
17,227
$
12,752
35.1
%
Non-broadcast
operations
132
(509
)
125.9
%
Segment
EBITDA
$
17,359
$
12,243
41.8
%
Segment
EBITDA Margin
30
%
28
%
2
%
·
Segment Net Revenues for
the nine months ended September 30, 2008 increased by 32% compared to the
nine months ended September 30, 2007. In local currency,
Segment Net Revenues increased by 16%. Spot revenues increased by 27%
driven by increases in the average revenue per GRP
sold. Non-spot revenues increased by 69% primarily due to
increased levels of non-broadcast advertising revenues, as well as
increased sponsorship.
·
Segment EBITDA for the nine months ended September 30, 2008
increased by 42%, compared to the nine months September 30, 2007. This
resulted in the segment EBITDA margin growing to 30% from 28% in the nine
months ended September 30, 2007. In local currency, Segment
EBITDA increased by
24%.
Costs
charged in arriving at Segment EBITDA for the nine months ended September 30,2008 increased by 28% compared to the nine months ended September 30,2007. In local currency, costs charged in arriving at Segment EBITDA
increased by 13%. Cost of programming grew by 34%, with production
expenses increasing by 35% due to increased locally produced programming and
increased news coverage. Programming syndication costs increased by
31% due to increased investments in programming to maintain our leading position
in the market in the face of increased competition. Other operating
costs increased by 25%, primarily due to higher staff costs. Selling,
general and administrative expenses increased by 14%, primarily due to increased
office running costs and marketing and research costs, partially offset by lower
consultancy fees.
Market
Background: We estimate that the television advertising market
in Ukraine, where sales are denominated primarily in dollars, grew by
approximately 25% to 35% in 2007, excluding political advertising, and we expect
growth in the range of 15% to 25% in 2008.
Our
Ukraine (Studio 1+1) operations have not yet experienced any negative impact
from the current global economic conditions, although the local political
environment has adversely affected the market. The ongoing conflict between the
President and the Prime Minister resulted in the parliamentary coalition
collapsing in September with the President calling for elections in December
2008. It is not clear when elections will be held and this
uncertainty has caused advertisers to be cautious in spending their budgets.
Recently, the International Monetary Fund agreed to loan Ukraine US$ 16.5
billion to maintain the country’s economic and financial
stability.
STUDIO
1+1 Audience Share and Ratings Performance
For
advertising sales purposes, STUDIO 1+1’s target audience is the 18+ demographic
and all audience data is shown below on this basis.
Our main
competitors include Inter, with an all day audience share for the nine months
ended September 30, 2008 of 21.2%, Novy Kanal with 7.0%, ICTV with 7.7% and STB
with 7.9%.
Prime
time audience share for Inter increased from 25.8% to 26.6% for comparable
periods, Novy Kanal increased from 6.1% to 6.9%, ICTV increased from 6.3% to
7.8% and STB decreased from 7.1% to 7.0%.
Prime
time ratings in the Ukraine market increased from 33.9% to 34.1% for comparable
periods.
The
audience shares quoted above reflect the shares sampled in cities with a
population of 50,000 inhabitants or more and is the audience measurement on
which sales are currently based. From January 1, 2008 a new panel has been
introduced which includes audiences in smaller centers of population. In this
panel the all audience prime time share of Studio 1+1 in the nine months ended
September 30, 2008 was 18.6% and the target audience prime time share was also
18.6% for the same period.
UKRAINE
(STUDIO 1+1) SEGMENT FINANCIAL INFORMATION
For
the Three Months Ended September 30, (US$ 000's)
2008
2007
Movement
Spot
revenues
$
19,130
$
34,461
(44.5
)%
Non-spot
revenues
922
5,121
(82.0
)%
Segment
Net Revenues
$
20,052
$
39,582
(49.3
)%
Represented
by:
Broadcast
operations
$
20,042
$
39,582
(49.4
)%
Non-broadcast
operations
10
-
-
Segment
Net Revenues
$
20,052
$
39,582
(49.3
)%
Segment
EBITDA
$
(7,359
)
$
16,599
(144.3
)%
Represented
by:
Broadcast
operations
$
(7,150
)
$
16,750
(142.7
)%
Non-broadcast
operations
(209
)
(151
)
(38.4
)%
Segment
EBITDA
$
(7,359
)
$
16,599
(144.3
)%
Segment
EBITDA Margin
(37
)%
42
%
(79
)%
·
Segment Net Revenues for
the three months ended September 30, 2008 decreased by 49%, compared to
the three months ended September 30, 2007. Spot revenues decreased by 45%,
primarily due to the comparable period having benefitted from the receipt
of an estimated US$ 16.5 million of political advertising by Studio 1+1
generated from the parliamentary elections held on September 30,2007. Non-spot revenues decreased by 82% due to decreased
sponsorship, with the comparable period also having included US$ 1.5
million in political advertising. There was also a decrease in the sale of
surplus programming.
Since we
appointed new management in August 2008, we have begun to restructure all
aspects of our operations. Our new head of television has revised the
schedule, which had been performing poorly for some time, and removed a number
of programs and rescheduled others. We have increased the proportion
of locally produced programming in the schedule, and continued to improve our
news coverage, which we believe is vital to securing strong ratings
·
Segment EBITDA for the
three months ended September 30, 2008 decreased by 144% compared to the
three months ended September 30, 2007, resulting in an EBITDA margin loss
of (37)% compared to a 42% Segment EBITDA margin in the three months ended
September 30, 2007.
Costs
charged in arriving at Segment EBITDA for the three months ended September 30,2008 increased by 19%, compared to the three months ended September 30,2007. Cost of programming grew by 13%, including a charge of US$1.2
million to adjust poorly performing programming to its net realizable
value. Other operating costs increased by 20%, primarily due to
increased salary costs. Selling, general and administrative expenses
increased by 76%, primarily due to increased office running costs and
consultancy fees, partially offset by a decrease in the provision for doubtful
debts.
UKRAINE
(STUDIO 1+1) SEGMENT FINANCIAL INFORMATION
For
the Nine Months Ended September 30, (US$ 000's)
2008
2007
Movement
Spot
revenues
$
60,991
$
67,567
(9.7
)%
Non-spot
revenues
12,534
12,791
(2.0
)%
Segment
Net Revenues
$
73,525
$
80,358
(8.5
)%
Represented
by:
Broadcast
operations
$
73,466
$
80,358
(8.6
)%
Non-broadcast
operations
59
-
-
Segment
Net Revenues
$
73,525
$
80,358
(8.5
)%
Segment
EBITDA
$
(11,316
)
$
14,794
(176.5
)%
Represented
by:
Broadcast
operations
$
(10,717
)
$
15,128
(170.8
)%
Non-broadcast
operations
(599
)
(334
)
(79.3
)%
Segment
EBITDA
$
(11,316
)
$
14,794
(176.5
)%
Segment
EBITDA Margin
(15
)%
18
%
(33
)%
·
Segment Net Revenues for
the nine months ended September 30, 2008 decreased by 9%, compared to the
nine months ended September 30, 2007. Spot revenues decreased by 10%,
primarily due to the comparable period having benefitted from the receipt
of an estimated US$ 16.5 million of political advertising generated from
the parliamentary elections held on September 30,2007. Non-spot revenues decreased by 2%, with the comparable
period also including US$ 1.5 million of political
advertising. Political advertising in connection with the
election of the Mayor of Kiev on May 25, 2008 contributed US$ 2.2 million
to Segment Net Revenues for the nine months ended September 30,2008.
·
Segment EBITDA for the
nine months ended September 30, 2008 decreased by 177% compared to the
nine months ended September 30, 2007, resulting in an EBITDA margin loss
of (15)% compared to an 18% Segment EBITDA margin in the nine months ended
September 30, 2007.
Costs
charged in arriving at Segment EBITDA for the nine months ended September 30,2008 increased by 29%, compared to the nine months ended September 30,2007. Cost of programming grew by 26%, including a charge of US$ 5.2
million to adjust poorly performing programming to its net realizable
value. Other operating costs increased by 26%, primarily due to
increased salary costs and also increased broadcast operating
expenses. Selling, general and administrative expenses increased by
68%, primarily due to increased office running costs, increased consultancy fees
and an increase in the provision for doubtful debts.
KINO
and CITI Audience Share and Ratings Performance
For
advertising sales purposes, KINO’s target audience is the 15-50 demographic
nationally while CITI’s target audience is the 15-50 demographic in
Kiev.
UKRAINE
(KINO, CITI) SEGMENT FINANCIAL INFORMATION
For
the Three Months Ended September 30, (US$ 000's)
2008
2007
Movement
Spot
revenues
$
412
$
305
35.1
%
Non-spot
revenues
649
511
27.0
%
Segment
Net Revenues
$
1,061
$
816
30.0
%
Represented
by:
Broadcast
operations
$
1,061
$
816
30.0
%
Non-broadcast
operations
-
-
-
Segment
Net Revenues
$
1,061
$
816
30.0
%
Segment
EBITDA
$
(1,203
)
$
(1,339
)
10.2
%
Represented
by:
Broadcast
operations
$
(1,203
)
$
(1,339
)
10.2
%
Non-broadcast
operations
-
-
-
Segment
EBITDA
$
(1,203
)
$
(1,339
)
10.2
%
Segment
EBITDA Margin
(113
)%
(164
)%
51
%
·
Segment Net Revenues for
the three months ended September 30, 2008 increased by 30%, compared to
the three months ended September 30, 2007. Spot revenues increased by
35%. Non-spot revenues increased by
27%.
Costs
charged in arriving at Segment EBITDA for the three months ended September 30,2008 increased by 5%, compared to the three months ended September 30,2007. Cost of programming fell by 4% as we sought to minimize
programming costs. Other operating costs increased by
10%. Selling, general and administrative expenses increased by
50%.
UKRAINE
(KINO, CITI) SEGMENT FINANCIAL INFORMATION
For
the Nine Months Ended September 30, (US$ 000's)
2008
2007
Movement
Spot
revenues
$
1,424
$
783
81.9
%
Non-spot
revenues
1,939
1,085
78.7
%
Segment
Net Revenues
$
3,363
$
1,868
80.0
%
Represented
by:
Broadcast
operations
$
3,363
$
1,868
80.0
%
Non-broadcast
operations
-
-
-
Segment
Net Revenues
$
3,363
$
1,868
80.0
%
Segment
EBITDA
$
(3,464
)
$
(5,511
)
37.1
%
Represented
by:
Broadcast
operations
$
(3,464
)
$
(5,511
)
37.1
%
Non-broadcast
operations
-
-
-
Segment
EBITDA
$
(3,464
)
$
(5,511
)
37.1
%
Segment
EBITDA Margin
(103
)%
(295
)%
192
%
·
Segment Net Revenues for
the nine months ended September 30, 2008 increased by 80%, compared to the
nine months ended September 30, 2007. Spot revenues increased by
82%. Non-spot revenues increased by 79%, primarily due to
increased program sponsorship.
Costs
charged in arriving at Segment EBITDA for the nine months ended September 30,2008 decreased by 7%, compared to the nine months ended September 30,2007. Cost of programming fell by 18%. Other operating
costs increased by 17%. Selling, general and administrative expenses
decreased by 8%.
Our cost
of programming for the three and nine months ended September 30, 2008 and 2007
was as follows:
COST
OF PROGRAMMING
For
the Three Months Ended September 30, (US$ 000’s)
For
the Nine Months Ended September 30, (US$ 000’s)
2008
2007
2008
2007
Production
expenses
$
45,113
$
27,257
$
142,353
$
95,590
Program
amortization
51,929
38,652
167,052
119,445
Cost
of programming
$
97,042
$
65,909
$
309,405
$
215,035
Production
expenses represent the cost of in-house productions and locally commissioned
programming that will not be repeated, such as news, current affairs and game
shows. The cost of broadcasting all other programming is recorded as
program amortization.
Total
consolidated programming costs (including amortization of programming rights and
production costs) increased by US$ 31.1 million, or 47%, in the three months
ended September 30, 2008 compared to the three months ended September 30, 2007
primarily due to:
·
US$
1.5 million in programming costs from our Bulgaria operations that were
acquired on August 1, 2008;
·
US$
3.1 million of additional programming costs from our Croatia
operations;
·
US$
9.8 million of additional programming costs from our Czech Republic
operations.
·
US$
10.8 million of additional programming costs from our Romania
operations;
·
US$
3.6 million of additional programming costs from our Slovak Republic
operations;
·
US$
0.3 million of additional programming costs from our Slovenia
operations;
·
US$
2.1 million of additional programming costs from our Ukraine (STUDIO 1+1)
operations, which included US$ 1.2 million of write offs;
and
·
US$
(0.1) million of reduction in programming costs from our Ukraine (KINO,
CITI) operations.
Total
consolidated programming costs (including amortization of programming rights and
production costs) increased by US$ 94.4 million, or 44%, in the nine months
ended September 30, 2008 compared to the nine months ended September 30, 2007
primarily due to:
·
US$
1.5 million in programming costs from our Bulgaria operations that were
acquired on August 1, 2008;
·
US$
7.9 million of additional programming costs from our Croatia
operations;
·
US$
28.8 million of additional programming costs from our Czech Republic
operations;
·
US$
26.0 million of additional programming costs from our Romania
operations;
·
US$
12.9 million of additional programming costs from our Slovak Republic
operations;
US$
6.1 million of additional programming costs from our Slovenia
operations;
·
US$
12.0 million of additional programming costs from our Ukraine (STUDIO 1+1)
operations, which included US $ 5.2 million of write offs compared to US$
2.7 million in the comparable period;
and
·
US$
(0.8) million of reduction in programming costs from our Ukraine (KINO,
CITI) operations.
The
amortization of acquired programming for each of our consolidated operations for
the three and nine months ended September 30, 2008 and 2007 is set out in the
table below. For comparison, the table also shows the cash paid for
programming by each of our operations in the respective periods, which is
reflected within net cash generated from continuing operating activities in our
consolidated statement of cash flows.
PROGRAM
AMORTIZATION AND CASH PAID FOR PROGRAMMING
For
the Three Months Ended September 30, (US$ 000’s)
For
the Nine Months Ended September 30, (US$ 000’s)
2008
2007
2008
2007
Program
amortization:
Bulgaria
(TV2, RING TV) (1)
$
645
$
-
$
645
$
-
Croatia
(NOVA TV)
4,570
3,142
15,374
13,777
Czech
Republic (TV NOVA, NOVA SPORT NOVA CINEMA)
14,480
6,730
41,563
20,581
Romania
(2)
10,623
8,314
36,640
27,649
Slovak
Republic (TV MARKIZA)
5,217
4,391
15,998
10,567
Slovenia
(POP TV and KANAL A)
2,930
2,342
8,887
6,784
Ukraine
(STUDIO 1+1)
12,940
13,076
46,250
37,566
Ukraine
(KINO, CITI)
524
657
1,695
2,521
$
51,929
$
38,652
$
167,052
$
119,445
Cash
paid for programming:
Bulgaria
(TV2, RING TV) (1)
$
1,202
$
-
$
1,202
$
-
Croatia
(NOVA TV)
6,058
5,484
21,119
16,391
Czech
Republic (TV NOVA, NOVA SPORT, NOVA CINEMA)
7,542
6,814
26,781
17,662
Romania
(2)
25,680
19,875
57,075
42,852
Slovak
Republic (TV MARKIZA)
4,718
3,585
14,956
11,750
Slovenia
(POP TV and KANAL A)
2,580
3,568
8,536
8,220
Ukraine
(STUDIO 1+1)
11,900
16,509
34,053
43,023
Ukraine
(KINO, CITI)
187
375
716
1,537
$
59,867
$
56,210
$
164,438
$
141,435
(1) We
acquired our Bulgaria operations on August 1, 2008.
(2)
Romania channels are PRO TV, PRO CINEMA, ACASA, PRO TV INTERNATIONAL, SPORT.RO
and MTV ROMANIA for the three and nine months ended
September 30, 2008. For the three and nine months ended September 30,2007 Romanian Channels were PRO TV, PRO CINEMA, ACASA, PRO TV INTERNATIONAL and
SPORT.RO. We acquired SPORT.RO on February 20, 2007.
For
the Three Months Ended September 30, (US$ 000's)
2008
2007
Movement
Bulgaria
(1)
$
462
$
-
nm(2
)
Croatia
8,525
7,055
20.8
%
Czech
Republic
72,602
51,140
42.0
%
Romania
59,281
44,414
33.5
%
Slovak
Republic
24,795
20,284
22.2
%
Slovenia
14,231
11,545
23.3
%
Ukraine
(STUDIO 1+1)
20,052
39,582
(49.3
)%
Ukraine
(KINO, CITI)
1,061
816
30.0
%
Total
Consolidated Net Revenues
$
201,009
$
174,836
15.0
%
(1) We
acquired our Bulgaria operations on August 1, 2008
(2)
Number is not meaningful
Our
consolidated net revenues increased by US$ 26.2 million, or 15%, for the three
months ended September 30, 2008 compared to the three months ended September 30,2007. See discussion in Item 2, III. “Analysis of Segment
Results”.
For
the Nine Months Ended September 30, (US$ 000's)
2008
2007
Movement
Bulgaria
(1)
$
462
$
-
nm(2
)
Croatia
38,153
24,701
54.5
%
Czech
Republic
270,730
183,203
47.8
%
Romania
197,119
135,978
45.0
%
Slovak
Republic
88,126
68,615
28.4
%
Slovenia
58,392
44,309
31.8
%
Ukraine
(STUDIO 1+1)
73,525
80,358
(8.5
)%
Ukraine
(KINO, CITI)
3,363
1,868
80.0
%
Total
Consolidated Net Revenues
$
729,870
$
539,032
35.4
%
(1) We
acquired our Bulgaria operations on August 1, 2008
(2) Number is not
meaningful
Our
consolidated net revenues increased by US$ 26.2 million, or 15%, for the three
months ended September 30, 2008 compared to the three months ended September 30,2007. See discussion in Item 2, III. “Analysis of Segment
Results”.
For
the Three Months Ended September 30, (US$ 000's)
2008
2007
Movement
Operating
costs
$
38,727
$
27,166
42.6
%
Cost
of programming
97,042
65,909
47.2
%
Depreciation
of station property, plant and equipment
14,227
8,768
62.3
%
Amortization
of broadcast licenses and other intangibles
10,201
6,595
54.7
%
Total
Consolidated Cost of Revenues
$
160,197
$
108,438
47.7
%
Total
consolidated cost of revenues increased by US$ 51.8 million, or 48%, in the
three months ended September 30, 2008 compared to the three months ended
September 30, 2007.
Operating
costs: Consolidated operating costs (excluding programming
costs, depreciation of station property, plant and equipment, amortization of
broadcast licenses and other intangibles as well as station selling, general and
administrative expenses) for the three months ended September 30, 2008 increased
by US$ 11.6 million, or 43%, compared to the three months ended September 30,2007. See discussion in Item 2, III. “Analysis of Segment
Results”.
Cost of
programming: Consolidated programming costs (including
amortization of programming rights and production costs) for the three months
ended September 30, 2008 increased by US$ 31.1 million, or 47%, compared to the
three months ended September 30, 2007. See discussion in Item 2, III.
“Analysis of Segment Results”.
Depreciation of property, plant and
equipment: Consolidated depreciation of property, plant and
equipment for the three months ended September 30, 2008 increased by US$ 5.5
million, or 62%, compared to the three months ended September 30, 2007 primarily
due to depreciation of newly acquired production equipment assets across each of
our operations.
Amortization of broadcast licenses
and other intangibles: Consolidated amortization of broadcast
licenses and other intangibles for the three months ended September 30, 2008
increased by US$ 3.6 million, or 55%, compared to the three months ended
September 30, 2007 primarily due to the amortization of the broadcast licenses
and customer relationships of our Ukraine (Studio 1+1) and Bulgaria
operations.
Total
consolidated cost of revenues increased by US$ 145.2 million, or 43%, in the
nine months ended September 30, 2008 compared to the nine months ended September30, 2007.
Operating
costs: Consolidated operating costs (excluding programming
costs, depreciation of station property, plant and equipment, amortization of
broadcast licenses and other intangibles as well as station selling, general and
administrative expenses) for the nine months ended September 30, 2008 increased
by US$ 25.3 million, or 30%, compared to the nine months ended September 30,2007. See discussion in Item 2, III. “Analysis of Segment
Results”.
Cost of
programming: Consolidated programming costs (including
amortization of programming rights and production costs) for the nine months
ended September 30, 2008 increased by US$ 94.4 million, or 44%, compared to the
nine months ended September 30, 2007. See discussion in Item 2, III.
“Analysis of Segment Results”.
Depreciation of property, plant and
equipment: Consolidated depreciation of property, plant and
equipment for the nine months ended September 30, 2008 increased by US$ 16.4
million, or 70%, compared to the nine months ended September 30, 2007 primarily
due to depreciation of newly acquired production equipment assets across each of
our operations.
Amortization of broadcast licenses
and other intangibles: Consolidated amortization of broadcast
licenses and other intangibles for the nine months ended September 30, 2008
increased by US$ 9.1 million, or 54%, compared to the nine months ended
September 30, 2007 primarily due to the amortization of the broadcast licenses
and customer relationships of our Ukraine (Studio 1+1), Romania and Slovak
Republic operations.
IV
(e) Station Selling, General and Administrative Expenses for the three months
ended September 30, 2008 compared to the three months ended September 30,2007
CONSOLIDATED
STATION SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For
the Three Months Ended September 30, (US$ 000's)
2008
2007
Movement
Bulgaria
$
773
$
-
nm(1
)
Croatia
2,697
2,691
0.2
%
Czech
Republic
6,794
5,595
21.4
%
Romania
4,054
3,224
25.7
%
Slovak
Republic
2,891
2,279
26.9
%
Slovenia
2,107
1,821
15.7
%
Ukraine
(STUDIO 1+1)
3,162
1,814
74.3
%
Ukraine
(KINO, CITI)
305
185
64.9
%
Total
Consolidated Station Selling, General and Administrative
Expenses
$
22,783
$
17,609
29.4
%
(1)
Number is not meaningful
Total
consolidated station selling, general and administrative expenses increased by
US$ 5.2 million, or 29%, in the three months ended September 30, 2008 compared
to the three months ended September 30, 2007. See discussion in Item
2, III. “Analysis of Segment Results”.
IV
(f) Station Selling, General and Administrative Expenses for the nine months
ended September 30, 2008 compared to the nine months ended September 30,2007
CONSOLIDATED
STATION SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For
the Nine Months Ended September 30, (US$ 000's)
2008
2007
Movement
Bulgaria
$
773
$
-
-
Croatia
6,001
6,430
(6.7
)%
Czech
Republic
18,795
15,596
20.5
%
Romania
11,339
8,568
32.3
%
Slovak
Republic
7,842
6,539
19.9
%
Slovenia
6,038
5,293
14.1
%
Ukraine
(STUDIO 1+1)
9,510
5,698
66.9
%
Ukraine
(KINO, CITI)
906
965
(6.1
)%
Total
Consolidated Station Selling, General and Administrative
Expenses
$
61,204
$
49,089
24.7
%
Total
consolidated station selling, general and administrative expenses increased by
US$ 12.1 million, or 25%, in the nine months ended September 30, 2008 compared
to the nine months ended September 30, 2007. See discussion in Item 2, III.
“Analysis of Segment Results”.
Corporate
operating costs (excluding stock-based compensation) for the three months ended
September 30, 2008 decreased by US$ 8.5 million, or 46%, compared to the three
months ended September 30, 2007. This reflects a charge of US$ 8.7
million in respect of the estimated cost of settling our Croatia litigation
having been recorded in the three months ended September 30, 2007; excluding
this charge, corporate operating costs (excluding non-cash stock-based
compensation) decreased by US$ 2.1 million, reflecting:
·
decreased
legal and professional fees as a result of the conclusion of legal
proceedings in respect of our Ukraine and Croatia operations;
and
·
decreased
business development expenses incurred; partially offset
by
·
the
increase in salary and travel costs following the appointment of Adrian
Sarbu as our Chief Operating Officer in October 2007;
and
·
increased
corporate headcount following our establishment of a centralized planning
and development function to manage our initiatives to improve operational
efficiencies.
The
increase in the charge for non-cash stock-based compensation for the three
months ended September 30, 2008 compared to the three months ended September 30,2007 reflects an increase in the number of stock options granted in 2007
compared to prior years as well as an increase in the fair value of stock
options as our stock price increased in recent years. For more
details, see Item 1, Note 15 “Stock-Based Compensation”.
Corporate
operating costs (excluding stock-based compensation) for the nine months ended
September 30, 2008 decreased by US$ 8.4 million, or 22%, compared to the nine
months ended September 30, 2007, as a charge of US$ 12.5 million was recorded in
2007 in respect of the estimated cost of settling our Croatia litigation;
excluding this charge, corporate operating costs (excluding non-cash stock-based
compensation) increased by US$ 4.1 million, reflecting:
·
decreased
legal and professional fees as a result of the conclusion of legal
proceedings in respect of our Ukraine and Croatia operations;
and
·
decreased
business development expenses.
Partially
offset by
·
the
increase in salary and travel costs following the appointment of Adrian
Sarbu as our Chief Operating Officer in October 2007;
and
·
increased
corporate headcount following our establishment of a centralized planning
and development function to manage our initiatives to improve operational
efficiencies.
The
increase in the charge for non-cash stock-based compensation for the nine months
ended September 30, 2008 compared to the nine months ended September 30, 2007
reflects an increase in the fair value of stock options as our stock price
increased in recent years. For more details, see Item 1, Note 15,
“Stock-Based Compensation”.
For
the Three Months Ended September 30, (US$ 000's)
2008
2007
Movement
Operating
Income
$
6,127
$
28,393
(78.4
%)
Operating
income for the three months ended September 30, 2008 decreased by US$ 22.3
million, or 78%, compared to the three months ended September 30,2007. Operating margin was 3%, compared with 16% for the three months
ended September 30, 2007.
For
the Nine Months Ended September 30, (US$ 000's)
2008
2007
Movement
Operating
Income
$
148,800
$
108,259
37.5
%
Operating
income for the nine months ended September 30, 2008 increased by US$ 40.5
million, or 37%, compared to the nine months ended September 30,2007. Operating margin was 20%, in line with the nine months ended
September 30, 2007.
For
the Three Months Ended September 30, (US$ 000's)
2008
2007
Movement
Interest
income
$
2,127
$
1,180
80.3
%
Interest
expense
(17,947
)
(11,883
)
(51.0
)%
Foreign
currency exchange gain / (loss), net
4,969
(23,300
)
121.3
%
Change
in fair value of derivatives
9,868
(8,555
)
215.3
%
Other
income
290
44
559.1
%
Provision
for income taxes
(20,833
)
(131
)
(15,803
)%
Minority
interest in income of consolidated subsidiaries
644
(4,511
)
114.3
%
Currency
translation adjustment, net
(217,905
)
100,470
316.9
%
Interest income for the three
months ended September 30, 2008 increased by US$ 0.9 million compared to the
three months ended September 30, 2007, primarily as a result of our maintaining
higher average cash balances.
Interest expense for the three
months ended September 30, 2008 increased by US$ 6.1 million compared to the
three months ended September 30, 2007, of which approximately US$ 4.2 million
related to interest
on the Convertible Notes issued in March 2008.
Foreign currency exchange gain
/(loss), net: For the three
months ended September 30, 2008 we recognized a gain of US$ 5.0 million
primarily as a result of the strengthening of the dollar against the
Euro during the three-month period. Our Senior Notes are
denominated in Euros, and we recognized a transaction gain of approximately US$
57.7 million due to movements in the spot rate between June 30, 2008 and
September 30, 2008. This gain was partly offset by transaction losses
of US$ 18.3 million relating to the revaluation of monetary assets and
liabilities denominated in currencies other than the local functional currency
of the relevant subsidiary and US$ 34.4 million relating to the revaluation of
intercompany loans. Our subsidiaries generally receive funding via
loans that are denominated in currencies other than the US dollar, and any
change in the relevant exchange rate will require us to recognize a transaction
gain or loss on revaluation.
For the
three months ended September 30, 2007 we recognized a transaction loss of US$
23.3 million, largely as a result of the impact of the strengthening Euro on the
dollar value of our Senior Notes.
Change in fair value of
derivatives: For the three months ended September 30, 2008 we recognized
a gain of US$ 9.9 million as a result of the change in the fair value of the
currency swaps entered into on April 27, 2006. For further
information, see Item 1, Note 12, “Financial Instruments and Fair Value
Measurements”.
Other income: For
the three months ended September 30, 2008 we recognized other income of US$ 0.3
million compared to US$ 0.1 million for the three months ended September 30,2007.
Provision for income
taxes: The provision for income taxes for the three months
ended September 30, 2008 was US$ 20.8 million compared to US$ 0.1 million for
the three months ended September 30, 2007. The provision for income taxes for
the three months ended September 30, 2008 includes a charge of US$ 21.8 million
relating to movements in foreign exchange rates on intercompany loans with a
corresponding credit recognized in other comprehensive income.
Minority interest in income of
consolidated subsidiaries: For the three months ended
September 30, 2008, we recognized a gain of US$ 0.6 million in respect of the
minority interest in the income of consolidated subsidiaries, compared to a
charge of US$ 4.5 million for the three months ended September 30, 2007. This
reflected the decline in profitability of our Ukraine (Studio 1+1)
operations.
Currency translation adjustment,
net: For the three months ended September 30, 2008, we
recognized a loss of US$ 217.9 million on the revaluation of our net investments
in subsidiaries compared to a gain of US$ 100.5 million for the three months
ended September 30, 2007. The US dollar appreciated significantly against all
functional currencies of our operations in the three months ended September 30,2008, with increases of 13.8% against the Czech Koruna, 12.5% against the new
Romanian lei and 10.2% against the Euro. As a result the underlying
equity value of our investments (which are denominated in the relevant
functional currencies) have a lower value when converted to US dollars at
September 30, 2008 than at June 30, 2008. This is reflected as
a reduction in the US dollar value of each asset and liability on our
consolidated balance sheet. In the three months ended September 30,2007, the US dollar depreciated against the majority of our currencies, and as a
result the US dollar value of our net investments increased over that
period.
To the
extent that our subsidiaries incur transaction losses in their local functional
currency income statement on the revaluation of monetary assets and liabilities
denominated in US dollars, we recognize a gain of the same amount as a currency
translation adjustment within shareholders’ equity when we retranslate our net
investment in that subsidiary into US dollars. Similarly, any
exchange gain or loss arising on the retranslation of intercompany loans in the
functional currency of the relevant subsidiary or the US dollar will be offset
by an equivalent loss or gain on consolidation.
The net
loss on translation for the three months ended September 30, 2008 included a
loss of US$ 85.4 million on the revaluation of an intercompany loan that is
considered to form part of our investment in our Czech Republic operations
compared to a gain of US$ 46.1 million for the three months ended September 30,2007.
For
the Nine Months Ended September 30, (US$ 000's)
2008
2007
Movement
Interest
income
$
8,088
$
4,326
87.0
%
Interest
expense
(50,337
)
(42,717
)
(17.8
)%
Foreign
currency exchange loss, net
(5,580
)
(28,552
)
80.5
%
Change
in fair value of derivatives
(13,671
)
3,497
(490.9
)%
Other
income / (expense)
1,615
(746
)
316.5
%
Provision
for income taxes
(19,410
)
(18,609
)
(4.3
)%
Minority
interest in income of consolidated subsidiaries
(1,761
)
(9,881
)
82.2
%
Currency
translation adjustment, net
67,141
80,967
(17.1
)%
Obligation
to repurchase shares
488
-
nm
Interest income for the nine
months ended September 30, 2008 increased by US$ 3.8 million compared to the
nine months ended September 30, 2007, primarily as a result of our maintaining
higher average cash balances.
Interest expense for the nine
months ended September 30, 2008 increased by US$ 7.6 million compared to the
nine months ended September 30, 2007. This reflects approximately
US$ 9.3 million of
interest on the Convertible Notes issued in March 2008, partially offset by
the impact of the US$ 6.9 million cost associated with the redemption of
our 2012 Floating Rate Notes in May 2007. The annual interest
expense of the Convertible Notes, excluding the amortization of capitalized debt
costs, is approximately US$ 16.6 million.
Foreign currency exchange loss,
net: For the nine months ended September 30, 2008 we
recognized a US$ 5.6 million loss compared to a loss of US$ 28.6 million for the
nine months ended September 30, 2007. Our Senior Notes are
denominated in Euros, and we recognized a transaction gain of approximately US$
16.5 million due to the strengthening of the dollar against the Euro between
December 31, 2007 and September 30, 2008. This transaction gain was
more than offset by losses of US$ 13.2 million relating to the revaluation of
monetary assets and liabilities denominated in currencies other than the
functional currency of the relevant subsidiary and US$ 8.9 million relating to
the revaluation of intercompany loans.
Change in fair value of
derivatives: For the nine months ended September 30, 2008 we recognized a
loss of US$ 13.7 million as a result of the change in the fair value of the
currency swaps entered into on April 27, 2006. For further
information, see Item 1, Note 12, “Financial Instruments and Fair Value
Measurements”.
Other income /
(expense): For the nine months ended September 30, 2008 we
recognized other income of US$ 1.6 million compared to a US$ 0.7 million expense
for the nine months ended September 30, 2007.
Provision for income
taxes: The provision for income taxes for the nine months
ended September 30, 2008 was US$ 19.4 million compared to US$ 18.6 million for
the nine months ended September 30, 2007. The provision for income
taxes for the nine months ended September 30, 2008 includes a credit of US$ 7.3
million relating to movements in foreign exchange rates on intercompany loans,
with a corresponding charge recognized in other comprehensive income compared to
a credit of US$ 9.4 million for the nine months ended September 30, 2007. Our
stations pay income taxes at rates ranging from 16.0% in Romania to 25.0% in
Ukraine.
87
Minority interest in income of
consolidated subsidiaries: For the nine months ended September30, 2008, we recognized a charge of US$ 1.8 million in respect of the minority
interest in the income of consolidated subsidiaries, compared to a charge of US$
9.9 million for the nine months ended September 30, 2007. This
reflects the decline in profitability of our Ukraine (Studio 1+1)
operations.
Currency translation adjustment,
net: For the nine months ended September 30, 2008, we
recognized a gain of US$ 67.1 million on the revaluation of our net investments
in subsidiaries compared to a gain of US$ 81.0 million for the nine months ended
September 30, 2007. The US dollar appreciated by 5.7% against the new
Romanian lei and by 2.9% against the Euro during the nine months ended September30, 2008, but fell by 4.6% against the Czech Koruna and by 7.7% against the
Slovak Koruna.
The net
loss on translation for the nine months ended September 30, 2008 included a gain
of US$ 28.6 million on the revaluation of an intercompany loan that is
considered to form part of our investment in our Czech Republic operations
compared to a gain of US$ 36.9 million for the nine months ended September 30,2007.
Obligation to repurchase
shares: For the nine months ended September 30, 2008, we
recognized a gain of US$ 0.5 million compared to US$ nil for the nine months
ended September 30, 2007.
Current
assets: Current assets at September 30, 2008 increased US$
68.3 million compared to December 31, 2007, primarily as a result of increases
in cash and program rights, including productions in progress, partially offset
by a reduction in accounts receivable.
Non-current
assets: Non-current assets at September 30, 2008 increased US$
580.2 million compared to December 31, 2007, primarily as a result of the
recognition of goodwill and other intangible assets following our acquisition of
our Bulgaria operations and additional stakes in our Ukraine (Studio 1+1)
operations, as well as increased investment in station property, plant and
equipment in the Czech Republic and Romania.
Current
liabilities: Current liabilities at September 30, 2008
increased US$ 10.6 million compared to December 31, 2007, primarily reflecting
increases in interest payable, partially offset by a decrease in accounts
payable and programming liabilities.
Non-current
liabilities: Non-current liabilities at September 30, 2008
increased US$ 516.4 million compared to December 31, 2007. The movement reflects
our issuance of US$ 475.0 million of Convertible Notes; a US$ 16.5 million
decrease in the carrying value of our Senior Notes as a result of the movement
in the spot rate between December 31, 2007 and September 30, 2008, a US$ 13.7
million increase in the value of our liabilities under currency swaps and the
recognition of deferred tax and other liabilities following the acquisition of
our Bulgaria operations and additional stakes in our Ukraine (Studio
1+1) operations .
Minority interests in consolidated
subsidiaries: Minority interests in consolidated subsidiaries
at September 30, 2008 increased US$ 75.1 million compared to December 31, 2007,
primarily as a result of our granting a put option to our partners in the Studio
1+1 group in connection with our acquisition of an additional 30.0% stake in the
Studio 1+1 group. For more information, see Item 1, Note 18,
“Commitments and Contingencies: Ukraine Buyout Agreements”.
Shareholders’
equity: Total shareholders’ equity at September 30, 2008
increased US$ 46.3 million compared to December 31, 2007, primarily as a result
of our net income for the nine months ended September 30, 2008 of US$ 67.7
million and the increase in Other Comprehensive Income (US$ 67.6
million). These items were partially offset by our recognizing US$
63.3 million of the cost of the capped call options we entered into in
conjunction with our Convertible Notes and US$ 32.9 million in respect of the
excess of the value of the redeemable minority interest in Studio 1+1 over the
fair value of the underlying put option in shareholders’ equity. Included in the
total shareholders’ equity were proceeds from the exercise of stock options (US$
1.2 million) and a stock-based compensation charge of US$ 5.5
million.
V.
Liquidity and Capital Resources
V
(a) Summary of cash flows
Cash and
cash equivalents increased by US$ 36.1 million during the nine months ended
September 30, 2008. The change in cash and cash equivalents is
summarized as follows:
SUMMARY
OF CASH FLOWS
For
the Nine Months Ended September 30, (US$ 000's)
2008
2007
Net
cash generated from continuing operating activities
$
170,965
$
95,889
Net
cash used in continuing investing activities
(459,099
)
(188,463
)
Net
cash received from financing activities
386,079
136,446
Net
cash used in discontinued operations – operating
activities
(1,973
)
(2,164
)
Net
increase in cash and cash equivalents
$
82,810
$
46,665
Operating
Activities
Cash
generated from continuing operations increased from US$ 95.9 million in the nine
months ended September 30, 2007 to US$ 171.0 million in the nine months ended
September 30, 2008. The amount of cash generated by each of our stations other
than Croatia and Ukraine (KINO, CITI) increased as a result of improved
operational performance with particularly strong increases in the Czech
Republic, Romania and the Slovak Republic. These increases more than offset our
increased investment in programming, particularly in Ukraine, which is
experiencing significant price inflation for popular Russian series and is
making additional investments in such programming to boost ratings, and in
Croatia, where we are improving the quality of our programming to drive ratings
growth. It is likely that the cost of acquired programming across all
our markets will continue to grow in the future.
Investing
Activities
Cash used
in investing activities increased from US$ 188.5 million in the nine months
ended September 30, 2007 to US$ 459.1 million in the nine months ended September30, 2008. Our investing cash flows in the nine months ended September 30,2008 were primarily comprised of:
·
payment
of US$ 223.2 million in connection with our acquisition of an additional
30.0% stake in the Studio 1+1 group including acquisition costs (for
further information, see Item 1, Note 3, “Acquisitions and Disposals:
Ukraine (Studio 1+1)”);
·
Total
payments of US$ 146.8 million in connection with our acquisition of
Bulgarian operations, including acquisition costs (for further
information, see Item 1, Note 3, “Acquisitions and Disposals:
Bulgaria”);
payments
of RON 47.2 million (approximately US$ 20.6 million at the date of
payment) in connection with our acquisition of the assets of Radio Pro
(for further information, see Item 1, Note 3, “Acquisitions and Disposals:
Romania”);
·
payments
of US$ 9.9 million in connection with our acquisition of Jyxo and Blog
(for further information, see Item 1, Note 3, “Acquisitions and Disposals:
Czech Republic”) and
·
capital
expenditures of US$ 59.6 million.
Financing
Activities
Net cash
received from financing activities in the nine months ended September 30, 2008
was US$ 386.1 million compared to US$ 136.4 million in the nine months ended
September 30, 2007. The amount of cash received in the nine months
ended September 30, 2008 reflects the net proceeds of US$ 400.3 million from the
issuance of Convertible Notes.
Discontinued
Operations
In the
nine months ended September 30, 2008, we paid taxes of US$ 2.0 million to the
Dutch tax authorities pursuant to the agreement we entered into with them on
February 9, 2004, compared to US$ 2.2 million in the nine months ended September30, 2007.
V
(b) Sources and Uses of Cash
We
believe that our current cash resources are sufficient to allow us to continue
operating for at least the next 12 months and we do not anticipate additional
cash requirements in the near future, subject to the matters disclosed under
“Contractual Obligations and Commitments” and “Cash Outlook” below.
Our
ongoing source of cash at the operating stations is primarily the receipt of
payments from advertisers and advertising agencies. This may be supplemented
from time to time by local borrowing. Surplus cash generated in this manner,
after funding the ongoing station operations, may be remitted to us, or to other
shareholders where appropriate. Surplus cash is remitted to us in the
form of debt interest payments and capital 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 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 5%) be allocated to a reserve, which
reserve is capped at a proportion of the registered capital of a company
(ranging from 5% to 25%). The restricted net assets of our
consolidated subsidiaries and equity in earnings of investments accounted for
under the equity method together are less than 25% of consolidated net
assets.
As
at September 30, 2008 we had EUR 395.0 million (approximately US$ 565.0
million) of Senior Notes outstanding, comprising EUR 245.0 million
(approximately US$ 350.4 million) of 8.25% senior notes due May 2012 (the
“Fixed Rate Notes”) and EUR 150.0 million (approximately US$ 214.6
million) of floating rate Senior Notes due May 2014, (the “Floating Rate
Notes”, collectively the “Senior Notes”) which bear interest at six-month
Euro Inter-Bank Offered Rate (“EURIBOR”) plus 1.625% (6.504% was
applicable at September 30, 2008).
The
Senior Notes are secured senior obligations and rank pari passu with all
existing and future senior indebtedness and are effectively subordinated to all
existing and future indebtedness of our subsidiaries. The amounts
outstanding are guaranteed by certain of our subsidiaries and are secured by a
pledge of shares of these subsidiaries and an assignment of certain contractual
rights. The terms of the Senior Notes restrict the manner in which
our business is conducted, including the incurrence of additional indebtedness,
the making of investments, the payment of dividends or the making of other
distributions, entering into certain affiliate transactions and the sale of
assets.
In the
event that (A) there is a change in control by which (i) any party other than
our present shareholders becomes the beneficial owner of more than 35.0% of our
total voting power; (ii) we agree to sell substantially all of our operating
assets; or (iii) there is a change in the composition of a majority of our Board
of Directors; and (B) on the 60th day following any such change of control the
rating of the Senior Notes is either withdrawn or downgraded from the rating in
effect prior to the announcement of such change of control, we can be required
to repurchase the Senior Notes at a purchase price in cash equal to 101.0% of
the principal amount of the Senior Notes plus accrued and unpaid interest to the
date of purchase.
At any
time prior to May 15, 2009, we may redeem all or a part of the Fixed Rate Notes
at a redemption price equal to 100.0% of the principal amount of such notes,
plus a “make-whole” premium and accrued and unpaid interest, if any, to the
redemption date.
As of
September 30, 2008, Standard & Poor’s senior unsecured debt rating for our
Senior Notes was BB and our corporate credit rating was BB, having last been
upgraded on April 23, 2008. At September 30, 2008 Moody’s Investors Services
senior unsecured debt rating for our Senior Notes and our corporate credit
rating was Ba2.
(2)
As
at September 30, 2008 we had US$ 475.0 million of 3.50% Convertible Notes
outstanding that mature on March 15, 2013 (the “Convertible
Notes”). Interest is payable semi-annually in arrears on each
March 15 and September 15.
The
Convertible Notes are secured senior obligations and rank pari passu with all
existing and future senior indebtedness and are effectively subordinated to all
existing and future indebtedness of our subsidiaries. The amounts outstanding
are guaranteed by two subsidiary holding companies and are secured by a pledge
of shares of those subsidiaries as well as an assignment of certain contractual
rights.
(3)
On
July 21, 2006, we entered into a five-year revolving loan agreement for
EUR 100.0 million (approximately US$ 143.0 million) arranged
by the European Bank for Reconstruction and Development (“EBRD”
and the “EBRD Loan”) and on August 22, 2007, we entered into a second
revolving loan agreement for EUR 50.0 million (approximately US$ 71.5
million) also arranged by EBRD (collectively the “EBRD Loan”). ING Bank
N.V. (“ING”) and Ceska Sporitelna, a.s. (“CS”) are each participating in
the EBRD Loan for EUR 37.5 million.
We also
entered into a supplemental agreement on August 22, 2007 to amend the interest
rate payable on the initial EUR 100.0 million loan, as a result of which the
EBRD Loan bears interest at a rate of three-month EURIBOR plus 1.625% on the
drawn amount. A commitment charge of 0.8125% is payable on any undrawn portion
of the EBRD Loan. The available amount of the EBRD Loan amortizes by 15% every
six months from May 2009 to November 2010 and by 40% in May 2011. On October 15
and 24, 2008 we drew down EUR 50 million (US$ 71.5 million) and EUR 100 million
(US$ 143.0 million), respectively, to fund the purchase of the remaining 10.0%
interest in the Studio 1+1 group and for general corporate purposes. We intend
to repay EUR 50.0 million (US$ 71.5 million) of this drawing on November 10,2008.
Covenants
contained in the EBRD Loan are similar to those contained in our Senior
Notes. In addition, the EBRD Loan’s covenants restrict us from making
principal repayments on other new debt of greater than US$ 20.0 million per year
for the life of the EBRD Loan. This restriction is not applicable to
our existing facilities with ING or CS or to any refinancing of our Senior
Notes.
The EBRD
Loan is a secured senior obligation and ranks pari passu with all existing and
future senior indebtedness, including the Senior Notes, and is effectively
subordinated to all existing and future indebtedness of our
subsidiaries. The amount drawn is guaranteed by two subsidiary
holding companies and is secured by a pledge of shares of those subsidiaries as
well as an assignment of certain contractual rights. The terms of the
EBRD Loan restrict the manner in which our business is conducted, including the
incurrence of additional indebtedness, the making of investments, the payment of
dividends or the making of other distributions, entering into certain affiliate
transactions and the sale of assets.
(4)
We
have an uncommitted multicurrency overdraft facility for EUR 10.0 million
(approximately US$ 14.3 million) from Bank Mendes Gans (“BMG”), a
subsidiary of ING Bank N.V. as part of a cash pooling arrangement with
BMG. This arrangement enables us to receive credit across the group in
respect of cash balances which our subsidiaries in the Netherlands, the
Czech Republic, Romania, the Slovak Republic and Slovenia 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 September 30, 2008, the full EUR 10.0 million
(approximately US$ 14.3 million) facility was available to be drawn.
Interest is payable at the prevailing money market rate plus 2.00% on the
drawn amount. At September 30, 2008, our Slovak Republic operations had
drawings of SKK 82.3 million (approximately US$ 3.9 million) against
deposits made by our subsidiary in the
Netherlands.
CET
21 has a credit facility of CZK 1.2 billion (approximately US$ 69.6
million) with Ceska Sporitelna, a.s. (“CS”). The final
repayment date is December 31, 2010. This facility may, at the
option of CET 21, be drawn in CZK, US$ or EUR and bears interest at the
three-month, six-month or twelve-month London Inter-Bank Offered Rate
(“LIBOR”), EURIBOR or Prague Inter-Bank Offered Rate (“PRIBOR”) plus
1.65%. A utilization interest of 0.25% is payable on the
undrawn portion of this facility. This percentage decreases to
0.125% of the undrawn portion if more than 50% of the loan is drawn. This
facility is secured by a pledge of receivables, which are also subject to
a factoring arrangement with Factoring Ceska Sporitelna, a.s.(“FCS”), a
subsidiary of CS.
(6)
CET
21 has a working capital credit facility of CZK 250.0 million
(approximately US$ 14.5 million) with CS, which matures on December 31,2010. This working capital facility bears interest at the
three-month PRIBOR rate plus 1.65%. This facility is secured by a pledge
of receivables, which are also subject to a factoring arrangement with
FCS. As at September 30, 2008, the full CZK 250.0 million
(approximately US$ 14.5 million) was drawn under this facility bearing
interest at an aggregate 5.63% (the applicable three-month PRIBOR rate at
September 30, 2008 was 3.98%).
(7)
As
at September 30, 2008, there were no drawings under a CZK 300.0 million
(approximately US$ 17.4 million) factoring facility with
FCS. This facility is available until June 30, 2011 and bears
interest at the rate of one-month PRIBOR plus 1.40% for the period that
actively assigned accounts receivable are
outstanding.
(8)
As
at September 30, 2008, one of our Slovakian subsidiares had drawn
approximately SKK 82.3 million (approximately US$ 3.9 million) on the BMG
cash pool.
(9)
A
revolving five-year facility agreement was entered into by Pro Plus for up
to EUR 37.5 million (approximately US$ 53.6 million) in aggregate
principal amount with ING Bank N.V., Nova Ljubljanska Banka d.d.,
Ljubljana and Bank Austria Creditanstalt d.d., Ljubljana. The
facility availability amortizes by 10.0% each year for four years
commencing one year after signing, with 60.0% repayable after five
years. This facility is secured by a pledge of the bank
accounts of Pro Plus, the assignment of certain receivables, a pledge of
our interest in Pro Plus and a guarantee of our wholly-owned subsidiary
CME Media Enterprises B.V. Loans drawn under this facility will
bear interest at a rate of EURIBOR for the period of drawing plus a margin
of between 2.10% and 3.60% that varies according to the ratio of
consolidated net debt to consolidated broadcasting cash flow for Pro
Plus. As at September 30, 2008, EUR 26.3 million (approximately
US$ 37.5 million) was available for drawing under this
revolving facility; there were no drawings
outstanding.
(10)
Our
Ukraine (KINO, CITI) operations have entered into a number of three-year
unsecured loans with Glavred-Media, LLC, the minority shareholder in
Ukrpromtorg. As at September 30, 2008, the total value of loans
drawn was US$ 1.7 million. The loans are repayable between
August 2009 and December 2009 and bear interest at
9.0%.
Capital
Lease Obligations
Capital
lease obligations include future interest payments of US$ 1.9
million. For more information on our capital lease obligations see
Item 1, Note 10.
Operating
Leases
For more
information on our operating lease commitments see Item 1, Note 18.
Unconditional
purchase obligations largely comprise future programming
commitments. At September 30, 2008, we had commitments in respect of
future programming of US$ 188.5 million (December 31, 2007: US$ 107.6
million). This includes contracts signed with license periods
starting after September 30, 2008. For more information on our
programming commitments see Item 1, Note 18.
Other
Long-Term Obligations
Included
in Other Long-Term Obligations are our commitments to the Dutch tax authorities
of US$ 1.3 million (see Item 1, Note 18 “Commitments and Contingencies: Dutch
Tax”.)
In
addition to the amounts disclosed above, Adrian Sarbu, our Chief Operating
Officer, has the right to sell his 5.0% shareholdings in each of Pro TV and MPI
to us under a put option agreement entered into in July 2004 at a price to be
determined by an independent valuation, subject to a floor price of US$ 1.45
million for each 1.0% interest sold. Mr. Sarbu’s right to put his
remaining interest is exercisable from November 12, 2009, provided that we have
not enforced a pledge over this shareholding which Mr. Sarbu granted as security
for our right to put to him our 8.7% shareholding in Media Pro. As at September30, 2008, we considered the fair value of the put option of Mr. Sarbu to be
approximately US$ nil.
V
(d) Cash Outlook
We have
significant debt service obligations in respect of our Senior Notes, the
Convertible Notes and the EBRD Loan. We drew the full amount of the EBRD Loan in
October 2008 to fund the purchase of the remaining 10.0% interest in the Studio
1+1 group (see Item 1, Note 19, “Subsequent Events”) and for general corporate
purposes. We have undrawn credit facilities in the Czech Republic and
Slovenia.
Our
future cash needs will depend on our overall financial performance, debt service
requirements under the Senior Notes, the Convertible Notes and the EBRD Loan and
in respect of other indebtedness as well as any future acquisition, investment
and development projects. The majority of our indebtedness, which is
represented by the Senior Notes and the Convertible Notes, have maturity dates
from May 2012 to May 2014. The EBRD Loan amortizes by 15% every six months from
May 2009 through November 2010, with the final 40% payable in May
2011.
Our
capacity to raise further funds through external debt facilities depends on our
satisfaction of leverage and interest cover ratios under the Senior Notes. The
leverage ratio is incorporated into the EBRD Loan. In the short-term,
subject to compliance with the covenants of our other indebtedness, we presently
are able to fund our operations and committed investments from cash generated
from operations, our current cash and cash equivalents (approximately US$ 225.6
million, at September 30, 2008) and available undrawn credit facilities (US$
339.1 million, at September 30, 2008), plus an unutilized, uncommitted EUR 10.0
million (approximately US$ 14.3 million) overdraft facility from BMG under our
cash pooling arrangement (see Item 1, Note 10, “Credit Facilities and
Obligations under Capital Leases”) . The cash pooling arrangement
enables us to receive credit in respect of cash balances which our subsidiaries
in the Czech Republic, Romania, the Slovak Republic and Slovenia deposit with
BMG.
We expect
to invest up to US$ 110.0 million in capital expenditure in 2008 across our
broadcast and non-broadcast operations and approximately US$ 10.0 million in
operating expenditure in our non-broadcast operations.
Our
Croatia operations continue to require funding to improve their
performance. We expect the funding required to support Nova TV
(Croatia) to be approximately US$ 28.5 million during 2008.
Over the
next three years, we expect to invest to transform the performance of our
Bulgaria and Ukraine operations. We are currently reviewing these plans and the
associated level of investment.
Our
credit facilities, taken together with internally generated cash flow and our
current cash and cash equivalents, provide us with adequate financial resources
to meet our debt service and other existing financial obligations for the next
twelve months. Availability of additional liquidity is dependent upon
the overall status of the debt and equity capital markets as well as on our
continued financial and operating performance.
Credit
rating agencies have begun to monitor companies much more closely during recent
months and have made liquidity, and the key ratios associated with it, a
particular priority. One of the key indicators used by the ratings agencies in
assigning credit ratings to us is our gross leverage ratio, which was 3.6 times
at September 30, 2008 and is calculated as our Gross Debt divided by our
trailing twelve months Segment EBITDA after corporate operating costs. As at
September 30, 2008, our total gross debt of US$ 1,204.5 million was the sum of
our credit facilities and obligations under capital leases as disclosed in our
financial statements and the liability under our swap agreements, plus the US$
109.1 million we were obligated to pay following our exercise of our call option
to purchase the remaining 10.0% of the Studio 1+1 group from Messrs. Rodnyansky
and Fuchsmann. Our trailing twelve month Segment EBITDA after corporate
operating costs was US$ 330.4 million.
Another
key ratio is our net leverage ratio, as defined in our Senior Notes as gross
debt less cash and cash equivalents divided by our trailing twelve months
Segment EBITDA after corporate operating costs, which was 2.9 times at September30, 2008
Since
September 30, 2008 we have drawn the whole of our EBRD facility of EUR 100.0
million (US$ 143.0 million) and EUR 50.0 million (US$ 71.5 million) during
October 2008 and intend to repay EUR 50.0 million (US$ 71.5 million) on November10, 2008. We have also paid US$ 109.1 million to Messrs. Rodnyansky and
Fuchsmann to purchase the remaining 10.0% of the Studio 1+1 Group. The overall
effect of these transactions will be to increase our gross debt to US$ 1,238.4
million and our gross leverage ratio to 3.7 times using foreign exchange rates
prevailing at September 30, 2008.
Standard
and Poors and Moodys require a gross leverage ratio of between 3.5
and 4.0 times to be eligible for their BB and Ba2 ratings respectively, with a
preference for the lower end of this range. Currently, our gross leverage ratio
is within this range and we expect that the higher levels of cash we intend to
hold will mitigate against the risk of downgrading that our gross leverage ratio
moving closer to 4.0 times will carry. A downgrade may result in our having to
pay a higher interest rate in any future financing and may make it more
difficult for us to raise additional debt. We do not have any credit
facilities or other financial instruments which would require early termination,
the posting of collateral or any other financial penalties solely in the event
of our credit rating being downgraded. For the short term we intend to hold a
higher level of cash, with a consequent increase in gross debt, in order to
ensure liquidity in the current difficult financial
markets.
In view
of the severe tightening of credit and the limited availability of financing on
attractive terms at present it is unclear when it will next be possible to raise
additional or replacement finance from the capital markets. We believe that we
have adequate financial resources to meet our present obligations and
development plans and will closely control our operating and capital
expenditures to ensure this. We will also carefully monitor the debt
and equity markets and stand ready to access them if required and when
conditions to do so become favorable.
Credit
risk of financial counterparties
We have
entered into a number of significant contracts with financial counterparties as
follows:
Cross
Currency Swap
On April27, 2006, we entered into cross currency swap agreements with JP Morgan Chase
Bank, N.A and Morgan Stanley Capital Services Inc. (see Item 1, Note 12
“Financial Instruments” and Fair Value Measurements) under which we periodically
exchange CZK for Euro with the intention of reducing our exposure to movements
in foreign exchange rates. We do not consider that there is any risk to our
liquidity if either of our counterparties were unable to meet their respective
rights under the swap agreements because we would be able to convert the Czech
Koruna we receive from our subsidiary into Euros at the prevailing exchange rate
rather than the rate included in the swap.
On March4, 2008, we purchased, for aggregate consideration of US$ 63.3 million, capped
call options over 4,523,809 shares of our Class A common stock from Lehman
Brothers OTC Derivatives Inc. (“Lehman OTC,” 1,583,333 shares), BNP Paribas
(“BNP,” 1,583,333 shares) and Deutsche Bank Securities Inc. (“DB,” 1,357,144
shares) (See Item 1, Note 5 “Senior Debt: Convertible Notes”). Under the terms
of these agreements, the counterparties are obliged to deliver, at our election
following a conversion of the Convertible Notes, cash or shares of Class A
common stock with a value equal to the difference between the trading price of
our shares at the time the option is exercised and US$ 105.00, up to a maximum
trading price of US$ 151.20.
On
September 15, 2008, Lehman Brothers Holdings Inc, (“Lehman Holdings”, and
collectively with Lehman OTC, “Lehman Brothers”), the guarantor of the
obligations of Lehman OTC under the capped call agreement, filed for protection
under Chapter 11 of the United States Bankruptcy Code. The bankruptcy filing of
Lehman Holding, as guarantor, was an event of default that gave us the right to
terminate early the capped call option agreement with Lehman OTC and to claim
for losses. We exercised this right on September 16, 2008 and have claimed an
amount of US$ 19.9 million, which bears interest at a rate equal to our estimate
of our cost of funding plus 1% per annum.
We
consider the likelihood of similar loss on the BNP or DB contracts to be
significantly less following the coordinated response of Europe’s central banks
to the global liquidity crisis and the pivotal positions that each of these
banks occupy in its respective countries. In the event of any similar
default, there would be no impact on our current liquidity since the
purchase price of the options have already been paid and we have no further
obligation under the terms of the contracts to deliver cash or other assets to
the counterparties. Any default would increase the dilutive effect to
our existing shareholders resulting from the issuance of shares of Class A
common stock upon any conversion of the Convertible Notes.
Cash
Deposits
We
deposit cash in the global money markets with a range of bank counterparties and
frequently review the counterparties we choose. The maximum period of
deposit is three months but we have more recently held amounts on deposit for
shorter periods, from overnight to one month. The credit rating of a bank is a
critical factor in determining the size of cash deposits and we will only place
cash with banks of an investment grade of A or A2 or higher. In addition to
credit ratings, during the current financial crises we have also closely
monitored the credit default swap spread and other market information for each
of the banks with which we consider depositing or have deposited
funds.
V
(e) Off-Balance Sheet Arrangements
None.
VI. Critical
Accounting Policies and Estimates
Our
accounting policies affecting 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, 2007. 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 under the
circumstances, the results of which form the basis of making 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 relate to the following: program
rights, goodwill and intangible assets, impairment or disposal of long-lived
assets, revenue recognition, income taxes, foreign exchange and
contingencies. These critical accounting policies affect our more
significant judgments and estimates used in the preparation of our condensed
consolidated financial statements. There have been no significant
changes in our critical accounting policies since December 31,2007.
In
September 2006, the FASB issued FASB Statement No. 157, “Fair Value
Measurements” (“FAS 157”). FAS 157 addresses the need for increased
consistency in fair value measurements, defining fair value, establishing a
framework for measuring fair value and expanding disclosure requirements. FAS
157 was to be effective in its entirety for fiscal years beginning after
November 15, 2007, however in February 2008, the FASB issued FASB Staff Position
No. FSP FAS 157-2 “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”)
which allows application of FAS 157 to be deferred until fiscal years beginning
after November 15, 2008 for nonfinancial assets and liabilities, except for
items that are recognized or disclosed at fair value in the financial statements
on a recurring basis. We adopted those parts of FAS 157 not deferred
by FSP FAS 157-2 on January 1, 2008 and we do not expect that the adoption of
the remaining requirements will result in a material impact on our financial
position and results of operations.
In
December 2007, the FASB issued FASB Statement No. 141(R), “Business Combinations”
(“FAS 141(R)”), which establishes principles and requirements for how the
acquirer: (a) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree; (b) recognizes and measures the goodwill acquired
in the business combination or a gain from a bargain purchase; and
(c) determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. FAS 141(R) requires contingent consideration to be
recognized at its fair value on the acquisition date and, for certain
arrangements, changes in fair value to be recognized in earnings until
settled. FAS 141(R) also requires acquisition-related transaction and
restructuring costs to be expensed rather than treated as part of the cost of
the acquisition. FAS 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,2008. Because the requirements of FAS 141(R) are largely prospective, we
do not expect its adoption to have a material impact on our consolidated
financial position and results of operations.
In
December 2007, the FASB issued FASB Statement No. 160, “Noncontrolling
Interests in Consolidated Financial Statements an Amendment of ARB No. 51”
(“FAS 160”), which establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. FAS 160 clarifies that a noncontrolling interest in a
subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements. FAS 160
also requires consolidated net income to be reported at amounts that include the
amounts attributable to both the parent and the noncontrolling interest.
It also requires disclosure, on the face of the consolidated statement of
income, of the amounts of consolidated net income attributable to the parent and
to the noncontrolling interest. FAS 160 also provides guidance when a
subsidiary is deconsolidated and requires expanded disclosures in the
consolidated financial statements that clearly identify and distinguish between
the interests of the parent’s owners and the interests of the noncontrolling
owners of a subsidiary. FAS 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after
December 15, 2008. We are currently evaluating the impact this
statement will have on our financial position and results of
operations.
In March
2008, the FASB issued FASB Statement No. 161 “Disclosures About Derivative
Instruments and Hedging Activities an Amendment of FASB Statement No. 133” (“FAS
161”) which enhances the disclosure requirements about derivatives and hedging
activities. FAS 161 requires enhanced narrative disclosure about how and why an
entity uses derivative instruments, how they are accounted for under FASB
Statement No. 133 “Accounting for Derivative Instruments and Hedging Activities”
(“FAS 133”), and what impact they have on financial position, results of
operations and cash flows. FAS 161 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after November 15, 2008.
Although certain additional narrative disclosures may be required in our
financial statements, our limited use of derivative instruments means that we do
not expect the adoption of FAS 161 will result in a material impact on our
financial position and results of operations.
In April
2008, the FASB issued FASB Staff Position No. FAS 142-3 “Determination of the
Useful Life of Intangible Assets,” which aims to improve consistency between the
useful life of a recognized intangible asset under FASB Statement No. 142
“Goodwill and Other Intangible Assets” and the period of expected cash flows
used to measure the fair value of the asset under FAS 141 (R), especially where
the underlying arrangement includes renewal or extension terms. The FSP is
effective prospectively for fiscal years beginning after December 15, 2008 and
early adoption is prohibited. We are currently evaluating the impact this
statement will have on our financial position and results of
operations.
In May
2008, the FASB issued FASB Statement No. 162, “The Hierarchy of Generally
Accepted Accounting Principles” (“FAS 162”). FAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of non-governmental entities that are
presented in accordance with GAAP. With the issuance of this statement, the FASB
concluded that the GAAP hierarchy should be directed toward the entity and not
its auditor, and reside in the accounting literature established by the FASB as
opposed to the American Institute of Certified Public Accountants (“AICPA”)
Statement on Auditing Standards No. 69, “The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles.” FAS 162 is effective
from November 15, 2008. The adoption of FAS 162 will not have a material impact
on our consolidated financial position and results of
operations.
In May
2008, the FASB issued Staff Position No. APB 14-1, “Accounting for Convertible
Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial
Cash Settlement)” (“FSP APB 14-1”), which clarifies the accounting for
convertible debt instruments that may be settled in cash (including partial cash
settlement) upon conversion. FSP APB 14-1 requires issuers to account separately
for the liability and equity components of certain convertible debt instruments
in a manner that reflects the issuer's nonconvertible debt (unsecured debt)
borrowing rate when interest cost is recognized. FSP APB 14-1 requires
bifurcation of a component of the debt including allocated issuance costs,
classification of that component in equity and the accretion of the resulting
discount on the debt and the allocated acquisition costs to be recognized as
part of interest expense in the consolidated statement of operations. FSP APB
14-1 requires retrospective application to the terms of instruments as they
existed for all periods presented. FSP APB 14-1 is effective for us as of
January 1, 2009 and early adoption is prohibited. The adoption of FSP APB 14-1
will affect the accounting for our Convertible Notes and, we expect, will result
in approximately the following changes to the 2008 comparative balances in our
2009 financial statements to reflect the revised equity and liability balances
on issuance (net of allocated acquisition costs) of US$ 108.1 million and US$
364.2 million respectively:
In
addition, at present we expect that the adoption of FSP APB 14-1 will cause our
interest expense in the 2008 and 2009 financial years to increase by
approximately US$ 14.0 million and US$ 18.9 million respectively.
Item 3. Quantitative and Qualitative Disclosures about
Market Risk
We engage
in activities that expose us to various market risks, including the effects of
changes in foreign currency exchange rates and interest rates. We do
not regularly engage in speculative transactions, nor do we regularly hold or
issue financial instruments for trading purposes.
Foreign
Currency Exchange Risk Management
We
conduct business in a number of foreign currencies, although our functional
currency is the dollar, and our Senior Notes are denominated in
Euros. 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 certain
subsidiaries. In limited instances, we enter into forward foreign
exchange contracts to minimize foreign currency exchange rate risk.
We have
not attempted to hedge the Senior Notes and therefore may continue to experience
significant gains and losses on the translation of the Senior Notes into dollars
due to movements in exchange rates between the Euro and the dollar.
On April27, 2006, we entered into cross currency swap agreements with JP Morgan Chase
Bank, N.A and Morgan Stanley Capital Services Inc, under which we swapped a
fixed annual coupon interest rate (of 9.0%) on notional principal of CZK 10.7
billion (approximately US$ 620.5 million), payable on July 15, October 15,
January 15, and April 15, to the termination date of April 15, 2012, for a fixed
annual coupon interest rate (of 9.0%) on EUR 375.9 million (approximately US$
537.6 million) receivable on July 15, October 15, January 15, and April 15, to
the termination date of April 15, 2012.
The fair
value of these financial instruments as at September 30, 2008 was a US$ 29.9
million liability.
These
currency swap agreements reduce our exposure to movements in foreign exchange
rates on a part of the CZK-denominated cash flows generated by our Czech
Republic operations that is approximately equivalent in value to the
Euro-denominated interest payments on our Senior Notes (see Part I, Item 1, Note
5 “Senior Debt”). They are financial instruments that are used to
minimize currency risk and are considered an economic hedge of foreign exchange
rates. These instruments have not been designated as hedging
instruments as defined under SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities”, and so changes in their fair value are
recorded in the consolidated statement of operations and in the consolidated
balance sheet in other non-current liabilities.
Interest
Rate Risk Management
As at
September 30, 2008, we have six tranches of debt that provide for interest at a
spread above a base rate EURIBOR or PRIBOR, and four tranches of debt which were
maintained with a fixed interest rate. A significant rise in the
EURIBOR or PRIBOR base rate would have an adverse effect on our business and
results of operations.
Our Chief
Executive Officer and Chief Financial Officer evaluated the effectiveness of the
design and operation of our disclosure controls and procedures as of the end of
the period covered by this report. Based upon this evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the disclosure
controls and procedures are effective. There has been no change in
our internal control over financial reporting during the quarter ended September30, 2008 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
We are,
from time to time, a party to litigation that arises in the normal course of our
business operations. However, we are not presently a party to any such
litigation which could reasonably be expected to have a material adverse effect
on our business or operations. As discussed in our Quarterly Report on Form 10-Q
for the period ended June 30, 2008, we terminated the arbitration
proceedings with Messrs. Rodnyansky and Fuchsmann relating to the Studio 1+1
group in Ukraine on July 3, 2008.
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 Information”. 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 Operations
Our
operating results are dependent on favorable economic and political conditions
in countries in which we operate.
The
results of our operations rely heavily on advertising revenue and demand for
advertising is affected by prevailing general and regional economic
conditions. Although prior years have witnessed growth in the
economies of our operating countries, there can be no assurance that these
trends will continue or that any such improvement in economic conditions will
generate increased advertising revenue. Recently, concerns over inflation, the
availability and cost of credit, energy costs and geopolitical issues have
contributed to increased volatility in the financial markets and diminished
expectations for growth in a number of economies worldwide in the near term.
These factors, combined with declining business and consumer confidence and
increased unemployment, have precipitated an economic slowdown and concerns of a
recession in the United States as well as in countries across Western and
Central and Eastern Europe. Adverse economic conditions generally and downturns
in the economies of our operating countries specifically are likely to
negatively impact the advertising industries in those countries by reducing the
amounts our customers spend on advertising, which could result in a decrease in
demand for our advertising airtime. In addition, disasters, acts of terrorism,
civil or military conflicts or general political uncertainty may create economic
uncertainty that reduces advertising spending. The occurrence of any
of these events may have a material adverse affect on our financial position,
results of operations and cash flows.
Our
operating results depend on our ability to generate advertising
sales.
We
generate almost all of our revenues from the sale of advertising airtime on our
television channels. Our advertising revenues generally depend on the pricing of
our advertising time as well as other factors, including television viewing
levels, changes in audience preferences, our stations’ technical reach,
technological developments relating to media and broadcasting, competition from
other broadcasters and operators of other media platforms, seasonal trends in
the advertising market in the countries in which we operate, and shifts in
population and other demographics. Therefore, in order to maintain and increase
our advertising sales, we must be able to offer programming which appeals to our
target audiences in order to generate GRPs, respond to technological
developments in media, compete effectively with other broadcasters seeking to
attract similar audiences and manage the impact of any seasonal trends as well
as respond successfully to changes in other factors affecting advertising sales
generally, particularly in Ukraine. Any decline in advertising sales due to a
failure to respond to such changes or to successfully implement our advertising
sales strategies could have a material adverse effect on our financial position,
results of operations and cash flows.
We
may be adversely affected by fluctuations in exchange rates.
Our
reporting currency is the dollar but the majority of our consolidated revenues
and costs, including programming rights expenses and interest on debt, are in
other currencies. Furthermore, the functional currency of our
operations in Ukraine is the dollar. This is subject to annual review
and new circumstances that may be identified during these annual reviews may
result in the use of a functional currency that differs from our reporting
currency. In addition, our Senior Notes and the EBRD Loan are
denominated in Euros. We have not attempted to hedge the Senior
Notes. We have in the past and may therefore in the future continue
to experience significant gains and losses on the translation of our segment
revenues, the Senior Notes and the EBRD loan into dollars due to movements in
exchange rates between the Euro, the currencies of our local operations and the
dollar.
Our
operating results depend in part on our ability to successfully implement our
strategic plan for Ukraine following the completion of the buyout of our
minority partners.
In June
2008 we completed the acquisition of an additional 30% interest in the Studio
1+1 group from our partners, increasing our beneficial ownership
interest to 90% (see Part I, Item 1, Note 3 “Acquisitions and Disposals:
Ukraine”), and on October 17, 2008, completed the acquisition of the remaining
10% interest in the Studio 1+1 group for cash consideration of US$ 109.1 million
(the “Ukraine Buyout”) (see Part I, Item 1, Note 19 “Subsequent Events”). We
have undertaken a review of the Studio 1+1 group operations and have announced a
multi-year business plan to improve the overall standing and performance of the
STUDIO 1+1 channel together with our other channels in Ukraine and to achieve a
leading position in Ukraine. Successful implementation of this
business plan will depend on several factors, including but not limited to our
ability to consolidate the operations of our Ukraine channels, our achieving
cost savings by consolidating these operations, the cost and
popularity of local productions and Russian-language programming, and our
ability to achieve higher ratings and audience share, the implementation of new
management processes, the strength of the local management team, relationships
with external advertising agencies, the ability of our internet properties in
Ukraine to generate revenues as well as on general economic conditions in
Ukraine and the ability of the Ukrainian government to maintain political
stability and introduce economic reforms. In addition, there may be
substantial costs relating to material operational changes that will be incurred
in connection with the implementation of the business plan. There can
be no assurance that we will be able to successfully implement a new strategy in
Ukraine, and any such failure could have a material adverse effect on our
financial position, results of operations and cash flows.
We
may seek to make acquisitions of other stations, networks, content providers or
other companies in the future, and we may fail to acquire them on acceptable
terms or successfully integrate them or we may fail to identify suitable
targets.
Our
business and operations continue to experience rapid growth, including through
acquisition. The acquisition and integration of new businesses, including our
acquisition of broadcasting assets in Bulgaria in August 2008, pose significant
risks to our existing operations, including:
·
additional
demands placed on our senior management, who are also responsible for
managing our existing operations;
·
increased
overall operating complexity of our business, requiring greater personnel
and other resources;
·
difficulties
of expanding beyond our core expertise in the event that we acquire
ancillary businesses;
·
significant
initial cash expenditures to acquire and integrate new businesses;
and
·
in
the event that debt is incurred to finance acquisitions, additional debt
service costs related thereto as well as limitations that may arise under
our Senior Notes and the EBRD Loan.
To
effectively manage our growth and achieve pre-acquisition performance
objectives, we will need to integrate any new acquisitions, implement financial
and management controls and produce required financial statements in those
operations. The integration of new businesses may also be difficult
due to differing cultures or management styles, poor internal controls and an
inability to establish control over cash flows. If any acquisition
and integration is not implemented successfully, our ability to manage our
growth will be impaired and we may have to make significant additional
expenditures to address these issues, which could harm our financial position,
results of operations and cash flows. Furthermore, even if we are successful in
integrating new businesses, expected synergies and cost savings may not
materialize, resulting in lower than expected profit margins.
In
addition, prospective competitors may have greater financial resources than us
and increased competition for target broadcasters may decrease the number of
potential acquisitions that are available on acceptable terms.
Our
operating results are dependent on the importance of television as an
advertising medium.
We
generate almost all of our revenues from the sale of 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 assurances that the television advertising
market will maintain its current position among advertising media in our markets
or 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 in any
period or in specific markets could have an adverse effect on our financial
position, results of operations and cash flows.
We
may not be aware of all related party transactions, which may involve risks of
conflicts of interest that result in concluding transactions on less favorable
terms than could be obtained in arms-length transactions.
In
certain of our markets, the local shareholders, general directors or other
members of the management of our operating companies have other business
interests in their respective countries, including interests in television and
other media-related companies. We may not be aware of all such business
interests or relationships that exist with respect to entities with which our
operating companies enter into transactions. Transactions with companies,
whether or not we are aware of any business relationship between our employees
and third parties, may present conflicts of interests which may in turn result
in the conclusion of transactions on terms that are not arms-length. It is
likely that our subsidiaries will continue to enter into related party
transactions in the future. In the event there are transactions with persons who
subsequently are determined to be related parties, we may be required to make
additional disclosure and, if such contracts are material, may not be in
compliance with certain covenants under the Senior Notes and the EBRD Loan. In
addition, there have been instances in the past where certain related party
receivables have been collected more slowly than unrelated third party
receivables, which have resulted in slower cash flow to our operating companies.
Any related party transaction that is entered into on terms that are not
arms-length may result in a negative impact on our financial position, results
of operations and cash flows.
We
may not be able to prevent the management of our operating companies from
entering into transactions that are outside their authority and not in the best
interests of shareholders.
The
general directors of our operating companies have significant management
authority on a local level, subject to the overall supervision by the
corresponding company board of directors. In addition, we typically
grant authority to other members of management through delegated authorities. In
the past, our internal controls have detected transactions that have been
entered into by managers acting outside of their authority. Internal
controls may not be able to prevent an employee from acting outside his
authority. There is therefore a risk that employees with delegated
authorities may act outside their authority and that our operating companies
will enter into transactions that are not duly
authorized. Unauthorized transactions may not be in the best
interests of our shareholders, may create the risk of fraud or the breach of
applicable law, which may result in transactions or sanctions that may have an
adverse impact on our financial position, results of operations and cash
flows.
Our
programming 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,
particularly in Ukraine. The commercial success of our channels
depends substantially on our ability to develop, produce or acquire programming
that matches audience tastes, attracts high audience shares and generates
advertising revenues. The costs of acquiring content attractive to
our viewers, such as feature films and popular television series and formats,
may increase as a result of greater competition from existing and new television
broadcasting channels. Our expenditure in respect of locally produced
programming may also increase due to the implementation of new laws and
regulations mandating the broadcast of a greater number of locally produced
programs, changes in audience tastes in our markets in favor of locally produced
content, and competition for talent. In addition, we typically
acquire syndicated programming rights under multi-year commitments before we can
predict whether such programming will perform well 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
as well as to write down the value of such underperforming
programming. Any increase in programming costs or write-downs could
have a material adverse effect on our financial condition, results of operations
and cash flows.
The
transition to digital broadcasting may require substantial additional
investments and the timing of such investments is uncertain.
Countries
in which we have operations are initiating the migration from analog terrestrial
broadcasting to digital terrestrial broadcasting. Each country has
independent plans with its own timeframe and regulatory and investment
regime. The specific timing and approach to implementing such plans
is subject to change. We cannot predict the effect of the migration on our
existing operations or predict our ability to receive any additional rights or
licenses to broadcast for our existing channels or any additional channels if
such additional rights or licenses should be required under any relevant
regulatory regime. Furthermore, we may be required to make
substantial additional capital investment and commit substantial other resources
to implement digital terrestrial broadcasting, and the availability of competing
alternative distribution systems, such as direct-to-home platforms, may require
us to acquire additional distribution and content rights. We may not have access
to resources sufficient to make such investments when required.
Our
operations are subject to significant changes in technology that could adversely
affect our business.
The
television broadcasting industry may be affected by rapid innovations in
technology. The implementation of new technologies and the
introduction of broadcasting distribution systems other than analog terrestrial
broadcasting, such as digital terrestrial broadcasting, direct-to-home cable and
satellite distribution systems, the internet, video-on-demand and the
availability of television programming on portable digital devices, have
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. New technologies that enable viewers to
choose when and what content to watch, as well as to fast-forward or skip
advertisements, may cause changes in consumer behavior that could impact our
business. 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
additional channels could lower entry barriers for new channels and encourage
the development of increasingly targeted niche programming on various
distribution platforms. Our television broadcasting operations may be
required to expend substantial financial and managerial resources on the
implementation of new broadcasting technologies or distribution
systems. In addition, an expansion in competition due to
technological innovation may increase competition for audiences and advertising
revenue as well as the competitive demand for programming. Any
requirement for substantial further investment to address competition that
arises on account of technological innovations in broadcasting may have an
adverse effect on our financial position, 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. We cannot guarantee that
our current licenses or other authorizations will be renewed or extended, 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.
Our
current broadcasting licenses expire at various times between November 2008 and
September 2019. 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
operations are in developing markets where there is a risk of economic
uncertainty, biased treatment and loss of business.
Our
revenue generating operations are located in Central and Eastern
Europe. These markets pose different risks from those posed by
investments in more developed markets and the impact in our markets of
unforeseen circumstances on economic, political or social life is
greater. The economic and political systems, legal and tax regimes,
standards of corporate governance and business practices of countries in this
region continue to develop. Government policies may be subject to
significant adjustments, especially in the event of a change in leadership. This
may result in social or political instability or disruptions, potential
political influence on the media, inconsistent application of tax and legal
regulations, arbitrary treatment before judicial or other regulatory authorities
and other general business risks, any of which could have a material adverse
effect on our on our financial positions, results of operations and cash
flows. Other potential risks inherent in markets with evolving
economic and political environments include exchange controls, higher tariffs
and other levies as well as longer payment cycles.
The
relative level of development of our markets and the influence of local
political parties also present a potential for biased treatment of us before
regulators or courts in the event of disputes involving our investments. If such
a dispute occurs, those regulators or courts might favor local interests over
our interests. Ultimately, this could lead to loss of our business operations,
as occurred in the Czech Republic in 1999. The loss of a material business would
have an adverse impact 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 an important
contribution 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 business, results of operations and cash
flow.
Risks
Relating to our Financial Position
We
may require additional external sources of capital, which may not be available
or may not be available on acceptable terms.
The
acquisition, ownership and operation of television broadcasting operations
require substantial investment. Our ability to meet our total capital
requirements is based on our expected cash resources, including our debt
facilities, as well as estimates of future operating results, which are derived
from a variety of assumptions that may prove to be inaccurate. If our
assumptions prove to be inaccurate, if our assumptions or our investment plans
change in light of additional acquisitions or other investments, or if our costs
increase due to competitive pressures or other unanticipated developments, we
may need to obtain additional financing. Such financings, if
available at all, may not be available on acceptable terms. Sources of financing
may include public or private debt or equity financings, proceeds from the sale
of assets or other financing arrangements. Any additional debt or equity
securities issued to raise funds may have rights, preferences and privileges
that are senior to shares of our common stock, and the issuance of additional
equity may dilute the economic interest of the holders of shares of our common
stock. It is also not possible to ensure that such debt financings will be
available within the limitations on the incurrence of additional indebtedness
contained in the Indentures pursuant to which our Senior Notes were issued in
2005 (the “2005 Indenture”) and in 2007 (the “2007 Indenture”) and collectively
with the 2005 Indenture, the “Indentures”) or pursuant to the terms of the EBRD
Loan or as a result of general economic conditions. If we cannot obtain adequate
capital or on obtain it on acceptable terms, this could have an adverse effect
on our financial positions, results of operations and cash flows.
Our
cash flow and capital resources may not be sufficient for future debt service
and other obligations.
Our
ability to make debt service payments under our Senior Notes, Convertible Notes,
the EBRD Loan and other indebtedness depends on our future operating performance
and our ability to generate sufficient cash, which in turn depends in part on
factors that are not within our control, including general economic, financial,
competitive, market, legislative, regulatory and other factors. If
our cash flow and capital resources are insufficient to fund our debt service
obligations, we would face substantial liquidity problems. We may not be able to
maintain the ratings of our Senior Notes or Convertible Notes without adequate
liquidity, which would have an adverse impact on our ability to raise additional
debt financing. We may be obliged to reduce or delay capital or other
material expenditures at our stations, restructure our debt, obtain additional
debt or equity capital (if available on acceptable terms), or dispose of
material assets or businesses to meet our debt service and other obligations. It
may not be possible to accomplish any of these alternatives on a timely basis or
on satisfactory terms, if at all, which may have an adverse effect on our
financial position, results of operations and cash flows.
Our
increased debt service obligations following the issuance of the Senior Notes,
Convertible Notes and drawdowns under the EBRD Loan may restrict our ability to
fund our operations.
We have
significant debt service obligations under our Senior Notes, Convertible Notes
and the EBRD Loan and we are restricted in the manner in which our business is
conducted (see Part I, Item 1, Note 5 “Senior Debt”). Our high
leverage could have important consequences to our business and results of
operations, including but not limited to increasing our vulnerability to a
downturn in our business or economic and industry conditions, as well as
limiting our ability to obtain additional financing to fund future working
capital, capital expenditures, business opportunities and other corporate
requirements. We may have a higher level of debt than certain of our
competitors, which may put us at a competitive disadvantage. A substantial
portion of our cash flow from operations is required to be dedicated to the
payment of principal of, and interest on, our indebtedness, which means that
this cash flow is not available to fund our operations, capital expenditures or
other corporate purposes. Therefore, our flexibility in planning for, or
reacting to, changes in our business, the competitive environment and the
industry in which we operate is somewhat limited. Any of these or other
consequences or events could have a material adverse effect on our ability to
satisfy our debt obligations and would therefore have potentially harmful
consequences for the development of our business and strategic
plan.
Under
the Senior Notes, Convertible Notes and the EBRD Loan, we have pledged shares in
our two principal subsidiary holding companies that hold substantially all of
our assets and a default on our obligations could result in our inability to
continue to conduct our business.
Pursuant
to the terms of the Indentures, the indenture pursuant to which our Convertible
Notes were issued (the “2008 Indenture”) and the EBRD Loan, we have pledged
shares in our two principal subsidiary holding companies, which own
substantially all of our interests in our operating companies, including the TV
Nova (Czech Republic) group, Pro TV, Markiza, Pro Plus and Studio
1+1. If we were to default on any of the Indentures, the 2008
Indenture or the EBRD Loan, the trustees under our Indentures and the 2008
Indenture or EBRD would have the ability to sell all or a portion of all of
these assets in order to pay amounts outstanding under such debt
instruments.
If
our goodwill or intangible assets become impaired we may be required to record a
significant charge to earnings.
We review
our amortizable intangible assets for impairment when events or changes in
circumstances indicate the carrying value may not be
recoverable. Goodwill and indefinite-lived intangible assets are
required to be tested for impairment at least annually. Factors that
may be considered a change in circumstances indicating that the carrying value
of our goodwill or amortizable intangible assets may not be recoverable include
a decline in stock price and market capitalization, future cash flows, and
slower growth rates in our industry. We may be required to record a
significant charge to earnings in our financial statements during the period in
which any impairment of our goodwill or amortizable intangible assets is
determined resulting in a negative impact on our financial position, results of
operations and cash flows.
Our
holding company structure may limit our access to cash.
We are a
holding company and we conduct our operations through subsidiaries and
affiliates. The primary internal source of our cash to fund our
operating expenses as well as service our existing and future debt depends on
debt repayments from our subsidiaries, the earnings of our operating
subsidiaries, earnings generated from our equity interest in certain of our
affiliates and distributions of such earnings to us. Substantially
all of our assets consist of ownership of and loans to our subsidiaries and
affiliates. We currently rely on the repayment of intercompany
indebtedness and the declaration of dividends to receive distributions of cash
from our operating subsidiaries and affiliates. The distribution of
dividends is generally subject to conformity with requirements of local law,
including the funding of a reserve account and, in certain instances, the
affirmative vote of our partners. If our operating subsidiaries or
affiliates are unable to distribute to us funds to which we are entitled, we may
be unable to cover our operating expenses. Such inability would have
a material adverse effect on our financial position, 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.
Central
European Media Enterprises Ltd. is 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 (i) 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 (ii) 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 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.
CME
Holdco L.P. is in a position to decide corporate actions that require
shareholder approval and may have interests that differ from those of other
shareholders.
CME
Holdco L.P. owns all our outstanding shares of Class B common stock, each of
which carries 10 votes per share. Ronald Lauder, the chairman of our
Board of Directors, is the majority owner of CME Holdco L.P. and, subject to
certain limitations described below, is entitled to vote those shares on behalf
of CME Holdco L.P. The shares over which Ronald Lauder has voting
power represent 63.7% of the aggregate voting power of our outstanding common
stock. On September 1, 2006, Adele (Guernsey) L.P., a fund affiliated
with Apax Partners, acquired 49.7% of CME Holdco L.P. Under the terms
of the limited partnership agreement of CME Holdco L.P., Adele (Guernsey) L.P.
has certain consent rights in respect of the voting and disposition of the
shares of Class B common stock. CME Holdco L.P. is in a position to
control the outcome of corporate actions requiring shareholder approval, such as
the election of directors (including two directors Adele (Guernsey) L.P. is
entitled to recommend for appointment) and transactions involving a change of
control. The interests of CME Holdco L.P. may not be the same as
those of other shareholders, and such shareholders will be unable to affect the
outcome of such corporate actions for so long as CME Holdco L.P. retains voting
control.
The
price of our Class A common stock is likely to remain 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 those described above
under “Risks Relating to our Business and Operations” as well as the following:
license renewals, general economic and business trends, variations in quarterly
operating results, 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 investor and securities analyst
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 reduce the market price of shares of our Class A
common stock, regardless of our operating performance.
Our
share price may be adversely affected by future issuances and sales of our
shares.
As at
October 24, 2008, we have a total of 1.1 million options to purchase Class A
Republic common stock outstanding and 0.1 million options to purchase shares of
Class B common stock outstanding. An affiliate of PPF a.s., from whom
we acquired the TV Nova (Czech) group, holds 3,500,000 unregistered
shares of Class A common stock and Igor Kolomoisky, a member of our Board of
Directors and a party to the Ukraine Buyout, holds 1,275,227 unregistered shares
of Class A common stock. In addition, the Convertible Notes are
convertible into shares of our Class A common stock and mature on March 15,2013. Holders of the Convertible Notes have registration rights with respect to
the shares of Class A common stock underlying the Convertible Notes. Prior to
December 15, 2012, the Convertible Notes will be convertible following certain
events and from that date, at any time through March 15, 2013. From time to
time up to and including December 15, 2012, we will have the right to
elect to deliver (i) shares of our Class A common stock or (ii) cash
and, if applicable, shares of our Class A common stock upon conversion of the
Convertible Notes. At present, we have elected to deliver cash and, if
applicable, shares of our Class A common stock. (see Part I, Item 1, Note 5
“Senior Debt”). To mitigate the dilutive effect of a conversion of the
Convertible Notes on our Class A common stock, we have entered into several
capped call transactions, and in connection therewith we have purchased call
options with respect to shares of our Class A common stock that are exercisable
in the event of a conversion of the Convertible Notes or at maturity on March15, 2013. We may receive cash or shares of our Class A common
stock upon the exercise of an option (see Part I, Item 1, Note 5 “Senior Debt”).
We cannot predict what effect, if any, the issuance of shares of Class A common
stock underlying options or the Convertible Notes, or the entry into trading of
such registered or unregistered shares or any future issuances of our shares of
Class A common stock will have on the market price of our shares. If
more shares of Class A common stock are issued, the economic interest of current
shareholders may be diluted and the price of our shares may be adversely
affected.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.