Item 1. Financial Statements
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(US$ 000’s, except share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
ASSETS
|
|
|
|
Current assets
|
|
|
|
Cash and cash equivalents
|
$
|
67,034
|
|
|
$
|
40,606
|
|
Accounts receivable, net (Note 7)
|
122,406
|
|
|
141,371
|
|
Program rights, net (Note 6)
|
70,510
|
|
|
69,662
|
|
Other current assets (Note 8)
|
28,197
|
|
|
27,541
|
|
Current assets held for sale (Note 3)
|
135,171
|
|
|
61,242
|
|
Total current assets
|
423,318
|
|
|
340,422
|
|
Non-current assets
|
|
|
|
|
|
Property, plant and equipment, net (Note 9)
|
100,308
|
|
|
89,080
|
|
Program rights, net (Note 6)
|
188,484
|
|
|
143,428
|
|
Goodwill (Note 4)
|
693,142
|
|
|
601,535
|
|
Other intangible assets, net (Note 4)
|
147,073
|
|
|
134,705
|
|
Other non-current assets (Note 8)
|
20,365
|
|
|
21,273
|
|
Non-current assets held for sale (Note 3)
|
—
|
|
|
60,274
|
|
Total non-current assets
|
1,149,372
|
|
|
1,050,295
|
|
Total assets
|
$
|
1,572,690
|
|
|
$
|
1,390,717
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
Current liabilities
|
|
|
|
Accounts payable and accrued liabilities (Note 10)
|
$
|
157,322
|
|
|
$
|
134,378
|
|
Current portion of long-term debt and other financing arrangements (Note 5)
|
2,425
|
|
|
1,228
|
|
Other current liabilities (Note 11)
|
23,535
|
|
|
8,467
|
|
Current liabilities held for sale (Note 3)
|
32,246
|
|
|
27,492
|
|
Total current liabilities
|
215,528
|
|
|
171,565
|
|
Non-current liabilities
|
|
|
|
|
|
Long-term debt and other financing arrangements (Note 5)
|
1,067,153
|
|
|
1,001,408
|
|
Other non-current liabilities (Note 11)
|
87,230
|
|
|
67,963
|
|
Non-current liabilities held for sale (Note 3)
|
—
|
|
|
1,414
|
|
Total non-current liabilities
|
1,154,383
|
|
|
1,070,785
|
|
Commitments and contingencies (Note 20)
|
|
|
|
|
|
TEMPORARY EQUITY
|
|
|
|
200,000 shares of Series B Convertible Redeemable Preferred Stock of $0.08 each (December 31, 2016 - 200,000) (Note 13)
|
262,115
|
|
|
254,899
|
|
EQUITY
|
|
|
|
|
CME Ltd. shareholders’ equity (Note 14):
|
|
|
|
|
One share of Series A Convertible Preferred Stock of $0.08 each (December 31, 2016 – one)
|
—
|
|
|
—
|
|
144,881,732 shares of Class A Common Stock of $0.08 each (December 31, 2016 – 143,449,913)
|
11,590
|
|
|
11,476
|
|
Nil shares of Class B Common Stock of $0.08 each (December 31, 2016 – nil)
|
—
|
|
|
—
|
|
Additional paid-in capital
|
1,905,449
|
|
|
1,910,244
|
|
Accumulated deficit
|
(1,776,411
|
)
|
|
(1,785,536
|
)
|
Accumulated other comprehensive loss
|
(199,906
|
)
|
|
(243,988
|
)
|
Total CME Ltd. shareholders’ deficit
|
(59,278
|
)
|
|
(107,804
|
)
|
Noncontrolling interests
|
(58
|
)
|
|
1,272
|
|
Total deficit
|
(59,336
|
)
|
|
(106,532
|
)
|
Total liabilities and equity
|
$
|
1,572,690
|
|
|
$
|
1,390,717
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME / LOSS
(US$ 000’s, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
For the Nine Months
Ended September 30,
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net revenues
|
$
|
119,431
|
|
|
$
|
107,527
|
|
|
$
|
378,058
|
|
|
$
|
356,147
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Content costs
|
55,871
|
|
|
51,920
|
|
|
174,214
|
|
|
166,938
|
|
Other operating costs
|
12,612
|
|
|
13,482
|
|
|
35,747
|
|
|
40,773
|
|
Depreciation of property, plant and equipment
|
6,936
|
|
|
5,801
|
|
|
19,345
|
|
|
17,134
|
|
Amortization of broadcast licenses and other intangibles
|
2,187
|
|
|
2,073
|
|
|
6,349
|
|
|
6,247
|
|
Cost of revenues
|
77,606
|
|
|
73,276
|
|
|
235,655
|
|
|
231,092
|
|
Selling, general and administrative expenses
|
25,803
|
|
|
22,801
|
|
|
70,204
|
|
|
64,984
|
|
Operating income
|
16,022
|
|
|
11,450
|
|
|
72,199
|
|
|
60,071
|
|
Interest expense (Note 15)
|
(18,352
|
)
|
|
(22,424
|
)
|
|
(54,773
|
)
|
|
(90,640
|
)
|
Loss on extinguishment of debt (Note 5)
|
(101
|
)
|
|
—
|
|
|
(101
|
)
|
|
(150,158
|
)
|
Other non-operating income, net (Note 16)
|
3,643
|
|
|
350
|
|
|
12,783
|
|
|
1,638
|
|
Income / (loss) before tax
|
1,212
|
|
|
(10,624
|
)
|
|
30,108
|
|
|
(179,089
|
)
|
Provision for income taxes
|
(3,157
|
)
|
|
(1,145
|
)
|
|
(12,770
|
)
|
|
(6,706
|
)
|
(Loss) / income from continuing operations
|
(1,945
|
)
|
|
(11,769
|
)
|
|
17,338
|
|
|
(185,795
|
)
|
Loss from discontinued operations, net of tax (Note 3)
|
(5,988
|
)
|
|
(8,054
|
)
|
|
(8,747
|
)
|
|
(15,971
|
)
|
Net (loss) / income
|
(7,933
|
)
|
|
(19,823
|
)
|
|
8,591
|
|
|
(201,766
|
)
|
Net loss attributable to noncontrolling interests
|
188
|
|
|
196
|
|
|
534
|
|
|
387
|
|
Net (loss) / income attributable to CME Ltd.
|
$
|
(7,745
|
)
|
|
$
|
(19,627
|
)
|
|
$
|
9,125
|
|
|
$
|
(201,379
|
)
|
|
|
|
|
|
|
|
|
Net (loss) / income
|
$
|
(7,933
|
)
|
|
$
|
(19,823
|
)
|
|
$
|
8,591
|
|
|
$
|
(201,766
|
)
|
Other comprehensive income
|
|
|
|
|
|
|
|
Currency translation adjustment
|
9,227
|
|
|
7,262
|
|
|
42,203
|
|
|
15,264
|
|
(Loss) / gain on derivative instruments (Note 12)
|
(135
|
)
|
|
(1,360
|
)
|
|
1,083
|
|
|
(5,581
|
)
|
Total other comprehensive income
|
9,092
|
|
|
5,902
|
|
|
43,286
|
|
|
9,683
|
|
Comprehensive income / (loss)
|
1,159
|
|
|
(13,921
|
)
|
|
51,877
|
|
|
(192,083
|
)
|
Comprehensive loss attributable to noncontrolling interests
|
439
|
|
|
232
|
|
|
1,330
|
|
|
568
|
|
Comprehensive income / (loss) attributable to CME Ltd.
|
$
|
1,598
|
|
|
$
|
(13,689
|
)
|
|
$
|
53,207
|
|
|
$
|
(191,515
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PER SHARE DATA (Note 18):
|
|
|
|
|
|
|
|
Net (loss) / income per share:
|
|
|
|
|
|
|
|
Continuing operations — basic
|
$
|
(0.03
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
0.04
|
|
|
$
|
(1.31
|
)
|
Continuing operations — diluted
|
(0.03
|
)
|
|
(0.09
|
)
|
|
0.03
|
|
|
(1.31
|
)
|
Discontinued operations — basic
|
(0.04
|
)
|
|
(0.05
|
)
|
|
(0.06
|
)
|
|
(0.11
|
)
|
Discontinued operations — diluted
|
(0.04
|
)
|
|
(0.05
|
)
|
|
(0.06
|
)
|
|
(0.11
|
)
|
Net loss attributable to CME Ltd. — basic
|
(0.07
|
)
|
|
(0.14
|
)
|
|
(0.02
|
)
|
|
(1.42
|
)
|
Net loss attributable to CME Ltd. — diluted
|
(0.07
|
)
|
|
(0.14
|
)
|
|
(0.02
|
)
|
|
(1.42
|
)
|
|
|
|
|
|
|
|
|
Weighted average common shares used in computing per share amounts (000’s):
|
|
|
|
|
|
|
|
Basic
|
156,189
|
|
|
153,494
|
|
|
155,579
|
|
|
149,898
|
|
Diluted
|
156,189
|
|
|
153,494
|
|
|
233,761
|
|
|
149,898
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(US$ 000’s, except share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CME Ltd.
|
|
|
|
|
|
|
|
Series A Convertible Preferred Stock
|
|
Class A
Common Stock
|
|
Class B
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares
|
Par value
|
|
Number
of shares
|
Par value
|
|
Number of shares
|
Par value
|
Additional Paid-In Capital
|
|
Accumulated Deficit
|
|
Accumulated Other Comprehensive Loss
|
|
|
Noncontrolling Interest
|
|
|
Total Deficit
|
|
BALANCE
December 31, 2016
|
1
|
|
$
|
—
|
|
|
143,449,913
|
|
$
|
11,476
|
|
|
—
|
|
$
|
—
|
|
$
|
1,910,244
|
|
$
|
(1,785,536
|
)
|
$
|
(243,988
|
)
|
|
$
|
1,272
|
|
|
$
|
(106,532
|
)
|
Stock-based compensation
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
2,140
|
|
—
|
|
—
|
|
|
—
|
|
|
2,140
|
|
Exercise of warrants (Note 14)
|
—
|
|
—
|
|
|
563,325
|
|
45
|
|
|
—
|
|
—
|
|
518
|
|
—
|
|
—
|
|
|
—
|
|
|
563
|
|
Share issuance, stock-based compensation
|
—
|
|
—
|
|
|
868,494
|
|
69
|
|
|
—
|
|
—
|
|
(69
|
)
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
Withholding tax on net share settlement of stock-based compensation
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
(168
|
)
|
—
|
|
—
|
|
|
—
|
|
|
(168
|
)
|
Preferred dividend paid in kind
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
(7,216
|
)
|
—
|
|
—
|
|
|
—
|
|
|
(7,216
|
)
|
Net income / (loss)
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
9,125
|
|
—
|
|
|
(534
|
)
|
|
8,591
|
|
Gain on derivative instruments
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1,083
|
|
|
—
|
|
|
1,083
|
|
Currency translation adjustment
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
42,999
|
|
|
(796
|
)
|
|
42,203
|
|
BALANCE
September 30, 2017
|
1
|
|
$
|
—
|
|
|
144,881,732
|
|
$
|
11,590
|
|
|
—
|
|
$
|
—
|
|
$
|
1,905,449
|
|
$
|
(1,776,411
|
)
|
$
|
(199,906
|
)
|
|
$
|
(58
|
)
|
|
$
|
(59,336
|
)
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(US$ 000’s)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
2017
|
|
|
2016
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
Net income / (loss)
|
$
|
8,591
|
|
|
$
|
(201,766
|
)
|
Adjustments to reconcile net income / (loss) to net cash generated from continuing operating activities:
|
|
|
|
|
Loss from discontinued operations, net of tax (Note 3)
|
8,747
|
|
|
15,971
|
|
Amortization of program rights
|
174,214
|
|
|
166,938
|
|
Depreciation and other amortization
|
29,976
|
|
|
43,785
|
|
Interest and related Guarantee Fees paid in kind
|
14,733
|
|
|
14,300
|
|
Loss on extinguishment of debt (Note 5)
|
101
|
|
|
150,158
|
|
Gain on disposal of fixed assets
|
(68
|
)
|
|
(45
|
)
|
Deferred income taxes
|
(1,300
|
)
|
|
6,783
|
|
Stock-based compensation (Note 17)
|
2,044
|
|
|
2,364
|
|
Change in fair value of derivatives
|
1,204
|
|
|
11,722
|
|
Foreign currency exchange gain, net
|
(12,459
|
)
|
|
(13,683
|
)
|
Changes in assets and liabilities:
|
|
|
|
Accounts receivable, net
|
35,280
|
|
|
19,530
|
|
Accounts payable and accrued liabilities
|
(5,435
|
)
|
|
(5,986
|
)
|
Program rights
|
(183,625
|
)
|
|
(174,346
|
)
|
Other assets and liabilities
|
(1,559
|
)
|
|
(1,470
|
)
|
Accrued interest
|
10,668
|
|
|
11,665
|
|
Income taxes payable
|
991
|
|
|
(255
|
)
|
Deferred revenue
|
11,645
|
|
|
12,576
|
|
VAT and other taxes payable
|
(3,110
|
)
|
|
(1,269
|
)
|
Net cash generated from continuing operating activities
|
$
|
90,638
|
|
|
$
|
56,972
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
Purchase of property, plant and equipment
|
$
|
(16,389
|
)
|
|
$
|
(14,850
|
)
|
Disposal of property, plant and equipment
|
139
|
|
|
88
|
|
Net cash used in continuing investing activities
|
$
|
(16,250
|
)
|
|
$
|
(14,762
|
)
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
Proceeds from debt
|
$
|
—
|
|
|
$
|
533,963
|
|
Repayment of debt
|
(59,060
|
)
|
|
(540,699
|
)
|
Debt transaction costs
|
(106
|
)
|
|
(9,541
|
)
|
Payment of credit facilities and capital leases
|
(1,757
|
)
|
|
(755
|
)
|
Settlement of forward currency swaps
|
—
|
|
|
(12,106
|
)
|
Proceeds from exercise of warrants
|
563
|
|
|
5,947
|
|
Proceeds from sale-leaseback transactions
|
2,746
|
|
|
—
|
|
Payments of withholding tax on net share settlement of share-based compensation
|
(168
|
)
|
|
—
|
|
Net cash used in continuing financing activities
|
$
|
(57,782
|
)
|
|
$
|
(23,191
|
)
|
|
|
|
|
Net cash provided by / (used in) discontinued operations - operating activities
|
3,273
|
|
|
(17,308
|
)
|
Net cash used in discontinued operations - investing activities
|
(3,125
|
)
|
|
(4,789
|
)
|
Net cash used in discontinued operations - financing activities
|
(210
|
)
|
|
(181
|
)
|
|
|
|
|
Impact of exchange rate fluctuations on cash and cash equivalents
|
9,884
|
|
|
2,005
|
|
Net increase / (decrease) in cash and cash equivalents
|
$
|
26,428
|
|
|
$
|
(1,254
|
)
|
CASH AND CASH EQUIVALENTS, beginning of period
|
40,606
|
|
|
59,120
|
|
CASH AND CASH EQUIVALENTS, end of period
|
$
|
67,034
|
|
|
$
|
57,866
|
|
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(US$ 000’s)
(Unaudited)
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
Cash paid for interest (including mandatory cash-pay Guarantee Fees)
|
$
|
22,206
|
|
|
$
|
38,317
|
|
Cash paid for Guarantee Fees that may be paid in kind
|
1,411
|
|
|
5,483
|
|
Cash paid for income taxes, net of refunds
|
12,380
|
|
|
234
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
|
|
|
|
Accretion on Series B Convertible Redeemable Preferred Stock
|
$
|
7,216
|
|
|
$
|
11,314
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)
1. ORGANIZATION AND BUSINESS
Central European Media Enterprises Ltd., a Bermuda company limited by shares, is a media and entertainment company operating in Central and Eastern Europe. Our assets are held through a series of Dutch and Curaçao holding companies. We manage our business on a geographical basis, with
four
operating segments; Bulgaria, the Czech Republic, Romania and the Slovak Republic, which are also our reportable segments and our main operating countries. See
Note 19, "Segment Data"
for financial information by segment. On July 9, 2017, we entered into a framework agreement with Slovenia Broadband S.à r.l., a wholly owned subsidiary of United Group B.V., relating to the sale of our Croatia and Slovenia operations. See
Note 3, "Discontinued Operations and Assets Held for Sale"
for further information.
We are the market-leading broadcasters in each of our operating countries with a combined portfolio of
27
television channels. Each of our broadcast operations develops and produces content for their television channels. We generate advertising revenues in our country operations primarily through entering into agreements with advertisers, advertising agencies and sponsors to place advertising on the television channels that we operate. We generate additional revenues by collecting fees from cable and direct-to-home (“DTH”) and internet protocol television ("IPTV") operators for carriage of our channels. With the exception of our Bulgarian operations, we own
100%
of our broadcast operating and license companies in each country.
Bulgaria
We operate
one
general entertainment channel, BTV, and
five
other channels, BTV CINEMA, BTV COMEDY, RING, BTV ACTION and BTV LADY. We own
94.0%
of CME Bulgaria B.V. ("CME Bulgaria"), the subsidiary that owns our Bulgaria operations.
Czech Republic
We operate
one
general entertainment channel, TV NOVA (Czech Republic), and
seven
other channels, NOVA CINEMA, NOVA SPORT 1, NOVA SPORT 2, NOVA ACTION, NOVA 2, NOVA GOLD and NOVA INTERNATIONAL, a general entertainment channel broadcasting in the Slovak Republic.
Romania
We operate
one
general entertainment channel, PRO TV, and
eight
other channels, PRO 2 (formerly ACASA), PRO GOLD (formerly ACASA GOLD), PRO CINEMA, PRO X (formerly SPORT.RO), MTV ROMANIA, PRO TV INTERNATIONAL, PRO TV CHISINAU, a general entertainment channel broadcasting in Moldova, and ACASA IN MOLDOVA.
Slovak Republic
We operate
one
general entertainment channel, TV MARKIZA, and
three
other channels, DOMA (Slovak Republic), DAJTO, and MARKIZA INTERNATIONAL, a general entertainment channel broadcasting in the Czech Republic.
2. BASIS OF PRESENTATION
The terms the “Company”, “we”, “us”, and “our” are used in this Form 10-Q to refer collectively to the parent company, Central European Media Enterprises Ltd. (“CME Ltd.”), and the subsidiaries through which we operate. Unless otherwise noted, all statistical and financial information presented in this report has been converted into U.S. dollars using period-end exchange rates. All references to “US$”, “USD” or “dollars” are to U.S. dollars; all references to “BGN” are to Bulgarian leva; all references to “CZK” are to Czech koruna; all references to “RON” are to the New Romanian lei; and all references to “Euro” or “EUR” are to the European Union Euro.
Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Quarterly Report on Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles in the United States of America (“US GAAP”). Amounts as of
December 31, 2016
included in the unaudited condensed consolidated financial statements have been derived from audited consolidated financial statements as of that date. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended
December 31, 2016
filed with the Securities and Exchange Commission on
February 9, 2017
. Our significant accounting policies have not changed since
December 31, 2016
, except as noted below.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with US GAAP for complete financial statements. The results of operations for interim periods are not necessarily indicative of the results to be expected for a full year.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions.
Discontinued Operations and Assets Held for Sale
We present our results of operations, financial position and cash flows of operations that have either been sold or that meet the criteria for "held-for-sale accounting" as discontinued operations if the disposal represents a strategic shift that will have a major effect on our operations and financial results. At the time an operation qualifies for held-for-sale accounting, the operation is evaluated to determine whether or not the carrying amount exceeds its fair value less cost to sell. Any loss as a result of carrying amounts in excess of fair value less cost to sell is recorded in the period the operation qualifies for held-for-sale accounting. Management judgment is required to (1) assess the criteria required to qualify for held-for-sale accounting, and (2) estimate fair value. Our Croatia and Slovenia operations are classified as discontinued operations and assets held for sale for all periods presented. See
Note 3, "Discontinued Operations and Assets Held for Sale"
.
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)
Basis of Consolidation
The unaudited condensed consolidated financial statements include the accounts of CME Ltd. and our subsidiaries, after the elimination of intercompany accounts and transactions. Entities in which we hold less than a majority voting interest but over which we have the ability to exercise significant influence are accounted for using the equity method. Other investments are accounted for using the cost method.
Seasonality
We experience seasonality, with advertising sales tending to be lowest during the third quarter of each calendar year due to the summer holiday period (typically July and August), and highest during the fourth quarter of each calendar year due to the holiday season.
Recent Accounting Pronouncements
Accounting Pronouncements Adopted
On January 1, 2017 we adopted guidance issued by the Financial Accounting Standards Board (the “FASB”) which is intended to improve the accounting for the income tax consequences of intercompany transfers of assets other than inventory. The guidance requires an entity to recognize the income tax consequences of such transfers in the period in which the transfer occurs, rather than defer recognition of current and deferred income taxes for the transfer until the asset is sold to a third party. The early adoption of this guidance did not have a material impact on our condensed consolidated financial statements.
Recent Accounting Pronouncements Issued
In May 2014, the FASB issued guidance which is intended to improve the comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. The guidance supersedes existing revenue recognition guidance and requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance is effective for our fiscal year beginning January 1, 2018. We have substantially completed our evaluation of the contractual terms of our significant revenue streams in each of our operating segments. While we are still in the process of evaluating the impact of the adoption of this guidance on our condensed consolidated financial statements, we currently do not expect the impact of this new guidance to be material. We expect to adopt the standard in 2018 using the modified retrospective transition method.
In February 2016, the FASB issued guidance to increase transparency and comparability among organizations by recognizing leasing assets and liabilities on the balance sheet and requiring additional disclosures about an entity's leasing arrangements. The guidance requires that a lessee recognize a liability to make lease payments and a right-of-use asset, with an available exception for leases shorter than twelve months. The guidance is effective for our fiscal year beginning January 1, 2019. We are currently in the process of evaluating the impact of the adoption of this guidance on our condensed consolidated financial statements.
In August 2016, the FASB issued guidance which is intended to reduce the existing diversity in practice related to specific cash flow issues. As applicable to us, the guidance requires that cash flows at the settlement of zero-coupon debt instruments or debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing be bifurcated between cash outflows for operating activities for the portion attributable to accrued interest, and cash outflows for financing activities for the portion attributable to the principal. The guidance requires a retrospective transition method and is effective for our fiscal year beginning January 1, 2018, with early adoption permitted. We expect to adopt this guidance as of January 1, 2018. Upon adoption, our net cash flows generated from / used in continuing operating activities for the year ended
December 31, 2016
will decrease by US$
110.7 million
with a corresponding increase in net cash used in / provided by continuing financing activities.
In January 2017, the FASB issued guidance which is intended to simplify goodwill impairment testing by eliminating Step 2, and instead recognize an impairment charge for the amount by which the carrying amount of the reporting unit exceeds the fair value of the reporting unit. The guidance also eliminates the requirement to perform a qualitative analysis for reporting units with a negative carrying value. The guidance is effective for annual and interim impairment tests after January 1, 2020, with early adoption permitted for interim and annual impairment tests performed from January 1, 2017. We expect to early adopt the guidance in the fourth quarter of 2017.
In August 2017, the FASB issued guidance which is intended to simplify the application of hedge accounting and increase transparency of information about an entity's risk management activities. The guidance changes both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results in the financial statements. The guidance is effective for our fiscal year beginning January 1, 2019, with early adoption during interim periods permitted. All requirements and elections should be applied to hedging relationships existing on the date of adoption and reflected as of the beginning of the fiscal year of adoption. We are currently in the process of evaluating the impact of the adoption of this guidance on our condensed consolidated financial statements.
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)
3. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
On July 9, 2017, we entered into a framework agreement with Slovenia Broadband S.à r.l. (the "Purchaser"), a wholly owned subsidiary of United Group B.V., relating to the sale of our Croatia and Slovenia operations for cash consideration of EUR
230.0 million
(approximately US$
271.5 million
) (the "Divestment Transaction"), subject to customary working capital adjustments. We expect the transaction to close by the end of 2017 or early 2018, subject to obtaining regulatory approvals and other customary closing conditions being satisfied. If the transaction is terminated by either party because the transaction has not closed prior to December 31, 2017 (which date may be extended under certain circumstances by the Purchaser to March 31, 2018), we would receive a termination fee of EUR
7.0 million
(approximately US$
8.3 million
), subject to certain exceptions, including if the requisite regulatory approvals have not been obtained as a result of the Purchaser being required to make specified material divestitures as a condition to any requisite regulatory approvals or if a notification has not been declared complete by a relevant regulatory authority.
The carrying amounts of the major classes of assets and liabilities of our discontinued operations that are classified as held for sale in the condensed consolidated balance sheets at
September 30, 2017
and
December 31, 2016
were:
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Assets held for sale
|
|
|
|
Current assets held for sale
|
|
|
|
Cash and cash equivalents
|
$
|
7,061
|
|
|
$
|
2,853
|
|
Accounts receivable, net
|
29,064
|
|
|
36,969
|
|
Program rights, net
|
66,449
|
|
|
16,489
|
|
Property, plant and equipment, net
|
20,909
|
|
|
—
|
|
Other current assets
|
11,688
|
|
|
4,931
|
|
Total current assets held for sale
|
$
|
135,171
|
|
|
$
|
61,242
|
|
Non-current assets held for sale
|
|
|
|
Program rights, net
|
$
|
—
|
|
|
$
|
35,927
|
|
Property, plant and equipment, net
|
—
|
|
|
20,008
|
|
Other non-current assets
|
—
|
|
|
4,339
|
|
Total non-current assets held for sale
|
$
|
—
|
|
|
$
|
60,274
|
|
|
|
|
|
Liabilities held for sale
|
|
|
|
Current liabilities held for sale
|
|
|
|
Accounts payable and accrued liabilities
|
$
|
27,922
|
|
|
$
|
26,603
|
|
Other current liabilities
|
4,324
|
|
|
889
|
|
Total current liabilities held for sale
|
$
|
32,246
|
|
|
$
|
27,492
|
|
Non-current liabilities held for sale
|
|
|
|
Other non-current liabilities
|
$
|
—
|
|
|
$
|
1,414
|
|
Total non-current liabilities held for sale
|
$
|
—
|
|
|
$
|
1,414
|
|
Loss from discontinued operations, net of tax
, comprised the following for the
three and nine months
ended
September 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
For the Nine Months
Ended September 30,
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net revenues
|
$
|
22,742
|
|
|
$
|
19,179
|
|
|
$
|
80,973
|
|
|
$
|
74,765
|
|
Cost of revenues
|
18,893
|
|
|
17,866
|
|
|
61,120
|
|
|
62,788
|
|
Selling, general and administrative expenses
|
5,394
|
|
|
4,378
|
|
|
14,484
|
|
|
12,004
|
|
Operating (loss) / income
|
(1,545
|
)
|
|
(3,065
|
)
|
|
5,369
|
|
|
(27
|
)
|
Interest expense
(1)
|
(4,913
|
)
|
|
(5,212
|
)
|
|
(14,220
|
)
|
|
(15,695
|
)
|
Other non-operating income / (expense), net
|
294
|
|
|
36
|
|
|
621
|
|
|
(8
|
)
|
Loss from discontinued operations, before tax
|
(6,164
|
)
|
|
(8,241
|
)
|
|
(8,230
|
)
|
|
(15,730
|
)
|
Credit / (provision) for income taxes
|
176
|
|
|
187
|
|
|
(517
|
)
|
|
(241
|
)
|
Loss from discontinued operations, net of tax
|
$
|
(5,988
|
)
|
|
$
|
(8,054
|
)
|
|
$
|
(8,747
|
)
|
|
$
|
(15,971
|
)
|
|
|
(1)
|
For the
nine months
ended
September 30, 2017
and
2016
, we paid US$
9.6 million
and US$
24.5 million
, respectively, of interest and Guarantee Fees (as defined below) associated with the 2018 Euro Term Loan (as defined below). These payments were allocated to
Net cash provided by / (used in) discontinued operations - operating activities
in our Condensed Consolidated Statements of Cash Flows as we are required to apply the expected proceeds from the sale of our Croatia and Slovenia operations towards the repayment of the remaining principal amounts owing in respect of the 2018 Euro Term Loan. (see
Note 5, "Long-term Debt and Other Financing Arrangements"
).
|
4. GOODWILL AND INTANGIBLE ASSETS
Goodwill:
Goodwill by reporting unit as at
September 30, 2017
and
December 31, 2016
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bulgaria
|
|
Czech Republic
|
|
Romania
|
|
Slovak Republic
|
|
Total
|
Gross Balance, December 31, 2016
|
$
|
171,389
|
|
|
$
|
744,483
|
|
|
$
|
82,786
|
|
|
$
|
46,089
|
|
|
$
|
1,044,747
|
|
Accumulated impairment losses
|
(144,639
|
)
|
|
(287,545
|
)
|
|
(11,028
|
)
|
|
—
|
|
|
(443,212
|
)
|
Balance, December 31, 2016
|
26,750
|
|
|
456,938
|
|
|
71,758
|
|
|
46,089
|
|
|
601,535
|
|
Foreign currency
|
3,208
|
|
|
75,461
|
|
|
7,386
|
|
|
5,552
|
|
|
91,607
|
|
Balance, September 30, 2017
|
29,958
|
|
|
532,399
|
|
|
79,144
|
|
|
51,641
|
|
|
693,142
|
|
Accumulated impairment losses
|
(144,639
|
)
|
|
(287,545
|
)
|
|
(11,028
|
)
|
|
—
|
|
|
(443,212
|
)
|
Gross Balance, September 30, 2017
|
$
|
174,597
|
|
|
$
|
819,944
|
|
|
$
|
90,172
|
|
|
$
|
51,641
|
|
|
$
|
1,136,354
|
|
Other intangible assets:
Changes in the net book value of our other intangible assets as at
September 30, 2017
and
December 31, 2016
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
Indefinite-lived:
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
$
|
86,448
|
|
|
$
|
—
|
|
|
$
|
86,448
|
|
|
$
|
76,731
|
|
|
$
|
—
|
|
|
$
|
76,731
|
|
Amortized:
|
|
|
|
|
|
|
|
|
|
|
|
Broadcast licenses
|
213,532
|
|
|
(155,054
|
)
|
|
58,478
|
|
|
184,195
|
|
|
(128,876
|
)
|
|
55,319
|
|
Trademarks
|
420
|
|
|
(420
|
)
|
|
—
|
|
|
380
|
|
|
(380
|
)
|
|
—
|
|
Customer relationships
|
57,813
|
|
|
(55,863
|
)
|
|
1,950
|
|
|
51,338
|
|
|
(48,997
|
)
|
|
2,341
|
|
Other
|
1,723
|
|
|
(1,526
|
)
|
|
197
|
|
|
1,522
|
|
|
(1,208
|
)
|
|
314
|
|
Total
|
$
|
359,936
|
|
|
$
|
(212,863
|
)
|
|
$
|
147,073
|
|
|
$
|
314,166
|
|
|
$
|
(179,461
|
)
|
|
$
|
134,705
|
|
Broadcast licenses consist of our TV NOVA license in the Czech Republic, which is amortized on a straight-line basis through the expiration date of the license in 2025. Our customer relationships are deemed to have an economic useful life of, and are amortized on a straight-line basis over,
five years
to
fifteen years
.
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)
5. LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
Summary
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Long-term debt
|
$
|
1,061,800
|
|
|
$
|
999,209
|
|
Other credit facilities and capital leases
|
7,778
|
|
|
3,427
|
|
Total long-term debt and other financing arrangements
|
1,069,578
|
|
|
1,002,636
|
|
Less: current maturities
|
(2,425
|
)
|
|
(1,228
|
)
|
Total non-current long-term debt and other financing arrangements
|
$
|
1,067,153
|
|
|
$
|
1,001,408
|
|
Financing Transactions
Pursuant to an amendment in March 2017 to the Reimbursement Agreement (as defined below) with Time Warner Inc. ("Time Warner"), as guarantor of our obligations under the Euro Term Loans (as defined below), the grid pricing structure on the all-in rate that applied only to the 2021 Euro Term Loan (as defined below) was extended to the 2018 Euro Term Loan (as defined below) and the 2019 Euro Term Loan (as defined below), with a reduction in the pricing under the grid for each of the Euro Term Loans resulting in an all-in rate ranging from
8.5%
(if our net leverage is greater than or equal to
seven
times) to
5.0%
(if our net leverage is less than
five
times). As at
September 30, 2017
, we reduced our net leverage ratio to below
six
times and anticipate a reduction of our all-in rate to
6.0%
from the end of October 2017. In addition, we can achieve a further
50
basis point reduction in the all-in rate if we reduce our long-term debt to less than EUR
815.0 million
, subject to certain adjustments in respect of specified debt repayments, on or prior to September 30, 2018. We are required to pay the first
5.0%
of the all-in rate (including the base rate and the rate paid pursuant to customary hedging arrangements) on the Euro Term Loans in cash and the remainder may be paid in cash or in kind, at our option. For details, see the table below under the heading "Reimbursement Agreement and Guarantee Fees".
On August 1, 2017, we elected to repay EUR
50.0 million
(approximately US$
59.1 million
at August 1, 2017 rates) of the outstanding principal balance of the 2018 Euro Term Loan on which we recognized a loss on extinguishment of US$
0.1 million
.
We are required to apply the proceeds from the sale of our Croatia and Slovenia operations to the repayment of the remaining principal amounts owing in respect of the 2018 Euro Term Loan. Any excess amounts will then be applied to pay fees related to the 2019 Euro Term Loan, including Guarantee Fees and the Commitment Fee which we have previously paid in kind pursuant to the Reimbursement Agreement (see
Note 3, "Discontinued Operations and Assets Held for Sale"
).
Overview
Total long-term debt and credit facilities comprised the following at
September 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount of Liability Component
|
|
|
Debt Issuance
Costs
(1)
|
|
|
Net Carrying Amount
|
|
2018 Euro Term Loan
|
$
|
237,064
|
|
|
$
|
(351
|
)
|
|
$
|
236,713
|
|
2019 Euro Term Loan
|
277,837
|
|
|
(411
|
)
|
|
277,426
|
|
2021 Euro Term Loan
|
553,465
|
|
|
(5,804
|
)
|
|
547,661
|
|
2021 Revolving Credit Facility
|
—
|
|
|
—
|
|
|
—
|
|
Total long-term debt and credit facilities
|
$
|
1,068,366
|
|
|
$
|
(6,566
|
)
|
|
$
|
1,061,800
|
|
|
|
(1)
|
Debt issuance costs related to the 2018 Euro Term Loan, 2019 Euro Term Loan and 2021 Euro Term Loan (each as defined below and collectively, the “Euro Term Loans”) are being amortized on a straight-line basis, which approximates the effective interest method, over the life of the respective instruments. Debt issuance costs related to the 2021 Revolving Credit Facility are classified as non-current assets in our condensed consolidated balance sheet and are being amortized on a straight-line basis over the life of the 2021 Revolving Credit Facility.
|
Long-term Debt
Our long-term debt comprised the following at
September 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount
|
|
Fair Value
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
2018 Euro Term Loan
|
$
|
236,713
|
|
|
$
|
263,734
|
|
|
$
|
225,679
|
|
|
$
|
233,297
|
|
2019 Euro Term Loan
|
277,426
|
|
|
247,594
|
|
|
251,012
|
|
|
203,314
|
|
2021 Euro Term Loan
|
547,661
|
|
|
487,881
|
|
|
464,212
|
|
|
369,738
|
|
|
$
|
1,061,800
|
|
|
$
|
999,209
|
|
|
$
|
940,903
|
|
|
$
|
806,349
|
|
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)
2018 Euro Term Loan
As at
September 30, 2017
, the principal amount of our floating rate senior unsecured term credit facility (as amended, the "2018 Euro Term Loan") outstanding was EUR
200.8 million
(approximately US$
237.1 million
). On August 1, 2017, we elected to repay EUR 50.0 million (approximately US$
59.1 million
at August 1, 2017 rates) of the outstanding principal balance of that loan on which we recognized a loss on extinguishment of US$
0.1 million
.
The 2018 Euro Term Loan bears interest at three-month EURIBOR (fixed pursuant to customary hedging arrangements (see
Note 12, "Financial Instruments and Fair Value Measurements"
) plus a margin of between
1.1%
and
1.9%
depending on the credit rating of Time Warner. The all-in borrowing rate including the Guarantee Fee ranges from
8.5%
to
5.0%
per annum based on our net leverage (see the table below under the heading "Reimbursement Agreement and Guarantee Fees"). As at
September 30, 2017
, the all-in borrowing rate on amounts outstanding under the 2018 Euro Term Loan was
7.25%
, the components of which are shown in the table below under the heading "Interest Rate Summary".
Interest on the 2018 Euro Term Loan is payable quarterly in arrears on each March 12, June 12, September 12 and December 12. The 2018 Euro Term Loan matures on November 1, 2018 and may currently be prepaid at our option, in whole or in part, without premium or penalty at any time. The 2018 Euro Term Loan is a senior unsecured obligation of CME Ltd., and is unconditionally guaranteed by our
100%
owned subsidiary CME Media Enterprises B.V. ("CME BV") and by Time Warner and certain of its subsidiaries.
The fair values of the 2018 Euro Term Loan as at
September 30, 2017
and
December 31, 2016
were determined based on comparable instruments that trade in active markets, plus an applicable spread. This measurement of estimated fair value uses Level 2 inputs as described in
Note 12, "Financial Instruments and Fair Value Measurements"
. Certain derivative instruments, including contingent event of default and change of control put options, have been identified as being embedded in the 2018 Euro Term Loan. The embedded derivatives are considered clearly and closely related to the 2018 Euro Term Loan, and as such are not required to be accounted for separately.
2019 Euro Term Loan
As at
September 30, 2017
, the principal amount of our floating rate senior unsecured term credit facility (the "2019 Euro Term Loan") outstanding was EUR
235.3 million
(approximately US$
277.8 million
). The 2019 Euro Term Loan bears interest at three-month EURIBOR (fixed pursuant to customary hedging arrangements (see
Note 12, "Financial Instruments and Fair Value Measurements"
)) plus a margin of between
1.1%
and
1.9%
depending on the credit rating of Time Warner. The all-in borrowing rate including the Guarantee Fee ranges from
8.5%
to
5.0%
per annum based on our net leverage (see the table below under the heading "Reimbursement Agreement and Guarantee Fees"). As at
September 30, 2017
, the all-in borrowing rate on amounts outstanding under the 2019 Euro Term Loan was
7.25%
, the components of which are shown in the table below under the heading "Interest Rate Summary".
Interest on the 2019 Euro Term Loan is payable quarterly in arrears on each February 13, May 13, August 13 and November 13. The 2019 Euro Term Loan matures on November 1, 2019 and may currently be prepaid at our option, in whole or in part, without premium or penalty. The 2019 Euro Term Loan is a senior unsecured obligation of CME Ltd., and is unconditionally guaranteed by CME BV and by Time Warner and certain of its subsidiaries.
The fair values of the 2019 Euro Term Loan as at
September 30, 2017
and
December 31, 2016
were determined based on comparable instruments that trade in active markets, plus an applicable spread. This measurement of estimated fair value uses Level 2 inputs as described in
Note 12, "Financial Instruments and Fair Value Measurements"
. Certain derivative instruments, including contingent event of default and change of control put options, have been identified as being embedded in the 2019 Euro Term Loan. The embedded derivatives are considered clearly and closely related to the 2019 Euro Term Loan, and as such are not required to be accounted for separately.
2021 Euro Term Loan
As at
September 30, 2017
, the principal amount of our floating rate senior unsecured term credit facility (the "2021 Euro Term Loan") outstanding was EUR
468.8 million
(approximately US$
553.5 million
). The 2021 Euro Term Loan bears interest at three-month EURIBOR (fixed pursuant to customary hedging arrangements (see
Note 12, "Financial Instruments and Fair Value Measurements"
)) plus a margin of between
1.1%
and
1.9%
depending on the credit rating of Time Warner. The all-in borrowing rate including the Guarantee Fee ranges from
8.5%
to
5.0%
per annum based on our net leverage (see the table below under the heading "Reimbursement Agreement and Guarantee Fees"). As at
September 30, 2017
, the all-in borrowing rate on amounts outstanding under the 2021 Euro Term Loan was
7.25%
, the components of which are shown in the table below under the heading "Interest Rate Summary".
Interest on the 2021 Euro Term Loan is payable quarterly in arrears on each January 7, April 7, July 7, and October 7. The 2021 Euro Term Loan matures on February 19, 2021 and may be prepaid at our option, in whole or in part, without premium or penalty, upon the earlier of the occurrence of certain events, including if our net leverage (as defined in the Reimbursement Agreement) decreases to below
five
times for two consecutive quarters, or at any time from February 19, 2020. The 2021 Euro Term Loan is a senior unsecured obligation of CME BV, and is unconditionally guaranteed by CME Ltd. and by Time Warner and certain of its subsidiaries.
The fair values of the 2021 Euro Term Loan as at
September 30, 2017
and
December 31, 2016
were determined based on comparable instruments that trade in active markets, plus an applicable spread. This measurement of estimated fair value uses Level 2 inputs as described in
Note 12, "Financial Instruments and Fair Value Measurements"
. Certain derivative instruments, including contingent event of default and change of control put options, have been identified as being embedded in the 2021 Euro Term Loan. The embedded derivatives are considered clearly and closely related to the 2021 Euro Term Loan, and as such are not required to be accounted for separately.
Reimbursement Agreement and Guarantee Fees
In connection with Time Warner’s guarantees of the Euro Term Loans, we entered into a reimbursement agreement (as amended, the “Reimbursement Agreement") with Time Warner. The Reimbursement Agreement provides for the payment of guarantee fees (collectively, the "Guarantee Fees") to Time Warner as consideration for those guarantees, and the reimbursement to Time Warner of any amounts paid by them under any guarantee or through any loan purchase right exercised by it. The loan purchase right allows Time Warner to purchase any amount outstanding under the Euro Term Loans from the lenders following an event of default under the Euro Term Loans or the Reimbursement Agreement. The Reimbursement Agreement is jointly and severally guaranteed by both our
100%
owned subsidiary Central European Media Enterprises N.V. ("CME NV") and CME BV and is secured by a pledge over
100%
of the outstanding shares of each of CME NV and CME BV. The covenants and events of default under the Reimbursement Agreement are substantially the same as under the 2021 Revolving Credit Facility (described below).
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)
We pay Guarantee Fees to Time Warner based on the amounts outstanding on the Euro Term Loans calculated on a per annum basis and on our consolidated net leverage (as defined in the Reimbursement Agreement) as shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Net Leverage
|
Cash Rate
(1)
|
|
|
PIK Fee Rate
|
|
|
Total Rate
(2)
|
|
≥
|
7.0x
|
|
|
|
5.00
|
%
|
|
3.50
|
%
|
|
8.50
|
%
|
<
|
7.0x
|
-
|
6.0x
|
|
5.00
|
%
|
|
2.25
|
%
|
|
7.25
|
%
|
<
|
6.0x
|
-
|
5.0x
|
|
5.00
|
%
|
|
1.00
|
%
|
|
6.00
|
%
|
<
|
5.0x
|
|
|
|
5.00
|
%
|
|
—
|
%
|
|
5.00
|
%
|
|
|
(1)
|
Includes cash paid for interest for the Euro Term Loans and the related customary hedging arrangements.
|
|
|
(2)
|
Subject to certain adjustments in respect of specified debt repayments, if we reduce our long-term debt to less than EUR
815.0 million
prior to September 30, 2018, a
50
basis point reduction in the all-in rate would be applied.
|
Our consolidated net leverage as at
September 30, 2017
and
December 31, 2016
was
5.8x
and
6.9x
, respectively. For the
three and nine months
ended
September 30, 2017
and
2016
, we recognized US$
11.8 million
and US$
36.3 million
and US$
16.5 million
and US$
37.7 million
, respectively, of Guarantee Fees as interest expense in our condensed consolidated statements of operations and comprehensive income / loss.
The Guarantee Fees relating to the 2018 Euro Term Loan and the 2019 Euro Term Loan are payable semi-annually in arrears on each May 1 and November 1, in cash or in kind, by adding such semi-annual Guarantee Fees to any such amount then outstanding. The Guarantee Fees relating to the 2021 Euro Term Loan are payable semi-annually in arrears on each June 1 and December 1. The first
5.0%
of the all-in rate for each facility (including the base rate and the rate paid pursuant to the hedging arrangements) must be paid in cash and the remainder is payable at our election in cash or in kind.
The Guarantee Fees paid in kind are presented as a component of other non-current liabilities (see
Note 11, "Other Liabilities"
) and bear interest per annum at their respective Guarantee Fee rate (as set forth in the table below). Guarantee Fees paid in cash are included in cash flows from operating activities in our condensed consolidated statements of cash flows.
Interest Rate Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Rate
|
|
|
Rate Fixed Pursuant to Interest Rate Hedges
|
|
|
Guarantee Fee Rate
|
|
|
All-in Borrowing Rate
|
|
2018 Euro Term Loan
|
1.50
|
%
|
|
0.21
|
%
|
(1)
|
5.54
|
%
|
|
7.25
|
%
|
2019 Euro Term Loan
|
1.50
|
%
|
|
0.31
|
%
|
|
5.44
|
%
|
|
7.25
|
%
|
2021 Euro Term Loan
|
1.50
|
%
|
|
0.28
|
%
|
|
5.47
|
%
|
|
7.25
|
%
|
2021 Revolving Credit Facility
(2)
|
9.33
|
%
|
(3)
|
—
|
%
|
|
—
|
%
|
|
9.33
|
%
|
|
|
(1)
|
Effective until November 1, 2017. From November 1, 2017 through maturity on November 1, 2018, the rate fixed pursuant to interest rate hedges will decrease to
0.14%
, with a corresponding increase in the Guarantee Fee rate, such that the all-in borrowing rate following an improvement of our net leverage ratio will be
6.00%
unless our net leverage ratio changes.
|
|
|
(2)
|
As at
September 30, 2017
, the 2021 Revolving Credit Facility was undrawn.
|
|
|
(3)
|
Based on the three month LIBOR of
1.33%
as at
September 30, 2017
.
|
2021 Revolving Credit Facility
As at
September 30, 2017
, we had
no
balance outstanding under the US$
115.0 million
revolving credit facility (the “2021 Revolving Credit Facility”), all of which was available to be drawn. The aggregate principal amount available decreases to US$
50.0 million
with effect from January 1, 2018 or, if earlier, upon the repayment of amounts owing in respect of the 2018 Euro Term Loan with the expected proceeds from the sale of our Croatia and Slovenia operations (see
Note 3, "Discontinued Operations and Assets Held for Sale"
).
The 2021 Revolving Credit Facility bears interest at a rate per annum based on, at our option, an alternative base rate plus
7.0%
or an amount equal to the greater of (i) an adjusted LIBOR and (ii)
1.0%
, plus, in each case,
8.0%
, with the first
5.0%
payable in cash and the remainder payable at our election in cash or in kind by adding such accrued interest to the applicable principal amount outstanding under the 2021 Revolving Credit Facility. The interest rate on the 2021 Revolving Credit Facility is determined on the basis of our net leverage ratio (as defined in the Reimbursement Agreement) and ranges from LIBOR (subject to a floor of
1.0%
) plus
9.0%
(if our net leverage is greater than or equal to
seven
times) to
7.0%
per annum (if our net leverage ratio is less than
five
times). The maturity date of the 2021 Revolving Credit Facility is February 19, 2021. When drawn, the 2021 Revolving Credit Facility permits prepayment at our option in whole or in part without penalty.
The 2021 Revolving Credit Facility is jointly and severally guaranteed by CME NV and CME BV and is secured by a pledge over
100%
of the outstanding shares of each of CME NV and CME BV. The 2021 Revolving Credit Facility agreement contains limitations on our ability to incur indebtedness, incur guarantees, grant liens, pay dividends or make other distributions, enter into certain affiliate transactions, consolidate, merge or effect a corporate reconstruction, make certain investments, acquisitions and loans, and conduct certain asset sales. The agreement also contains maintenance covenants in respect of interest cover, cash flow cover and total leverage ratios, and has covenants in respect of incurring indebtedness, the provision of guarantees, making investments and disposals, granting security and certain events of defaults.
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)
Other Credit Facilities and Capital Lease Obligations
Other credit facilities and capital lease obligations comprised the following at
September 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Credit facilities
(1) – (3)
|
$
|
—
|
|
|
$
|
—
|
|
Capital leases
|
7,778
|
|
|
3,427
|
|
Total credit facilities and capital leases
|
7,778
|
|
|
3,427
|
|
Less: current maturities
|
(2,425
|
)
|
|
(1,228
|
)
|
Total non-current credit facilities and capital leases
|
$
|
5,353
|
|
|
$
|
2,199
|
|
|
|
(1)
|
We have a cash pooling arrangement with Bank Mendes Gans (“BMG”), a subsidiary of ING Bank N.V. (“ING”), which enables us to receive credit across the group in respect of cash balances deposited 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, 2017
, we had deposits of US$
26.2 million
in and
no
drawings on the BMG cash pool. Interest is earned on deposits at the relevant money market rate. As at
December 31, 2016
, we had deposits of US$
16.4 million
in and
no
drawings on the BMG cash pool.
|
|
(2)
|
As at
September 30, 2017
and
December 31, 2016
, there were
no
drawings outstanding under a CZK
575.0 million
(approximately US$
26.1 million
) factoring framework agreement with Factoring České spořitelny, a.s. Under this facility, up to CZK
575.0 million
(approximately US$
26.1 million
) of receivables from certain customers in the Czech Republic may be factored on a recourse or non-recourse basis. The facility has a factoring fee of
0.19%
of any factored receivable and bears interest at one-month PRIBOR plus
0.95%
per annum for the period that receivables are factored and outstanding.
|
|
|
(3)
|
As at
September 30, 2017
and
December 31, 2016
, there were RON
67.8 million
(approximately US$
17.4 million
) and RON
105.7 million
(approximately US$
24.6 million
), respectively, of receivables factored under a factoring framework agreement with Global Funds IFN S.A. Under this facility, receivables from certain customers in Romania may be factored on a non-recourse basis. The facility has a factoring fee of
4.0%
of any factored receivable and bears interest at
6.0%
per annum from the date the receivables are factored to the due date of the factored receivable.
|
Total Group
At
September 30, 2017
, the maturity of our long-term debt and credit facilities, excluding any future elections to pay interest in kind, was as follows:
|
|
|
|
|
2017
|
$
|
—
|
|
2018
|
237,064
|
|
2019
|
277,837
|
|
2020
|
—
|
|
2021
|
553,465
|
|
2022 and thereafter
|
—
|
|
Total long-term debt and credit facilities
|
1,068,366
|
|
Debt issuance costs
|
(6,566
|
)
|
Carrying amount of long-term debt and credit facilities
|
$
|
1,061,800
|
|
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, by year and in the aggregate, under capital leases with initial or remaining non-cancellable lease terms in excess of one year, consisted of the following at
September 30, 2017
:
|
|
|
|
|
2017
|
$
|
696
|
|
2018
|
2,512
|
|
2019
|
2,153
|
|
2020
|
1,872
|
|
2021
|
708
|
|
2022 and thereafter
|
—
|
|
Total undiscounted payments
|
7,941
|
|
Less: amount representing interest
|
(163
|
)
|
Present value of net minimum lease payments
|
$
|
7,778
|
|
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)
6. PROGRAM RIGHTS
Program rights comprised the following at
September 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Program rights:
|
|
|
|
Acquired program rights, net of amortization
|
$
|
165,283
|
|
|
$
|
146,070
|
|
Less: current portion of acquired program rights
|
(70,510
|
)
|
|
(69,662
|
)
|
Total non-current acquired program rights
|
94,773
|
|
|
76,408
|
|
Produced program rights – feature films:
|
|
|
|
|
Released, net of amortization
|
983
|
|
|
1,039
|
|
Produced program rights – television programs:
|
|
|
|
|
|
Released, net of amortization
|
49,286
|
|
|
43,970
|
|
Completed and not released
|
9,414
|
|
|
2,592
|
|
In production
|
33,181
|
|
|
19,109
|
|
Development and pre-production
|
847
|
|
|
310
|
|
Total produced program rights
|
93,711
|
|
|
67,020
|
|
Total non-current acquired program rights and produced program rights
|
$
|
188,484
|
|
|
$
|
143,428
|
|
7. ACCOUNTS RECEIVABLE
Accounts receivable comprised the following at
September 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Unrelated customers
|
$
|
132,051
|
|
|
$
|
149,957
|
|
Less: allowance for bad debts and credit notes
|
(9,645
|
)
|
|
(8,586
|
)
|
Total accounts receivable
|
$
|
122,406
|
|
|
$
|
141,371
|
|
8. OTHER ASSETS
Other current and non-current assets comprised the following at
September 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Current:
|
|
|
|
Prepaid acquired programming
|
$
|
18,089
|
|
|
$
|
19,123
|
|
Other prepaid expenses
|
6,657
|
|
|
4,610
|
|
VAT recoverable
|
358
|
|
|
635
|
|
Income taxes recoverable
|
321
|
|
|
166
|
|
Other
|
2,772
|
|
|
3,007
|
|
Total other current assets
|
$
|
28,197
|
|
|
$
|
27,541
|
|
|
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Non-current:
|
|
|
|
|
|
Capitalized debt costs
|
$
|
13,764
|
|
|
$
|
15,019
|
|
Deferred tax
|
5,282
|
|
|
4,550
|
|
Other
|
1,319
|
|
|
1,704
|
|
Total other non-current assets
|
$
|
20,365
|
|
|
$
|
21,273
|
|
Capitalized debt costs are being amortized over the term of the 2021 Revolving Credit Facility using the straight-line method.
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)
9. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment comprised the following at
September 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Land and buildings
|
$
|
84,300
|
|
|
$
|
72,820
|
|
Machinery, fixtures and equipment
|
190,869
|
|
|
160,097
|
|
Other equipment
|
15,689
|
|
|
13,682
|
|
Software licenses
|
50,152
|
|
|
40,627
|
|
Construction in progress
|
2,092
|
|
|
5,311
|
|
Total cost
|
343,102
|
|
|
292,537
|
|
Less: accumulated depreciation
|
(242,794
|
)
|
|
(203,457
|
)
|
Total net book value
|
$
|
100,308
|
|
|
$
|
89,080
|
|
|
|
|
|
Assets held under capital leases (included in the above)
|
|
|
|
|
|
Machinery, fixtures and equipment
|
$
|
12,875
|
|
|
$
|
6,338
|
|
Total cost
|
12,875
|
|
|
6,338
|
|
Less: accumulated depreciation
|
(4,382
|
)
|
|
(2,579
|
)
|
Total net book value
|
$
|
8,493
|
|
|
$
|
3,759
|
|
The movement in the net book value of property, plant and equipment during the
nine months
ended
September 30, 2017
and
2016
was comprised of:
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
2017
|
|
|
2016
|
|
Opening balance
|
$
|
89,080
|
|
|
$
|
87,943
|
|
Additions
|
18,547
|
|
|
15,163
|
|
Disposals
|
(71
|
)
|
|
(43
|
)
|
Depreciation
|
(19,345
|
)
|
|
(17,134
|
)
|
Foreign currency movements
|
12,097
|
|
|
2,545
|
|
Ending balance
|
$
|
100,308
|
|
|
$
|
88,474
|
|
10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities comprised the following at
September 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Accounts payable and accrued expenses
|
$
|
54,416
|
|
|
$
|
45,037
|
|
Related party accounts payable
|
69
|
|
|
194
|
|
Programming liabilities
|
25,265
|
|
|
26,603
|
|
Related party programming liabilities
|
17,065
|
|
|
17,126
|
|
Duties and other taxes payable
|
7,797
|
|
|
10,325
|
|
Accrued staff costs
|
17,439
|
|
|
16,476
|
|
Accrued interest payable
|
3,228
|
|
|
2,935
|
|
Related party accrued interest payable (including Guarantee Fees)
|
24,176
|
|
|
9,588
|
|
Income taxes payable
|
7,159
|
|
|
5,091
|
|
Other accrued liabilities
|
708
|
|
|
1,003
|
|
Total accounts payable and accrued liabilities
|
$
|
157,322
|
|
|
$
|
134,378
|
|
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)
11. OTHER LIABILITIES
Other current and non-current liabilities comprised the following at
September 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Current:
|
|
|
|
Deferred revenue
|
$
|
19,413
|
|
|
$
|
4,979
|
|
Legal provision
|
2,926
|
|
|
2,412
|
|
Other
|
1,196
|
|
|
1,076
|
|
Total other current liabilities
|
$
|
23,535
|
|
|
$
|
8,467
|
|
|
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Non-current:
|
|
|
|
|
|
Deferred tax
|
$
|
21,527
|
|
|
$
|
19,710
|
|
Related party Commitment Fee payable
(1)
|
10,322
|
|
|
9,905
|
|
Related party Guarantee Fee payable (Note 5)
|
49,682
|
|
|
34,492
|
|
Other
|
5,699
|
|
|
3,856
|
|
Total other non-current liabilities
|
$
|
87,230
|
|
|
$
|
67,963
|
|
|
|
(1)
|
Represents the commitment fee (the "Commitment Fee") payable to Time Warner, including accrued interest, in respect of its obligation under a commitment letter dated November 14, 2014 between Time Warner and us whereby Time Warner agreed to provide or assist with arranging a loan facility to repay our
5.0%
senior convertible notes at maturity in November 2015. The Commitment Fee is payable by November 1, 2019, the maturity date of the 2019 Euro Term Loan, or earlier if the repayment of the 2019 Euro Term Loan is accelerated. The Commitment Fee bears interest at
8.5%
per annum and such interest is payable in arrears on each May 1 and November 1, and may be paid in cash or in kind, at our election.
|
12. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
ASC 820, “Fair Value Measurements and Disclosure”, establishes a hierarchy that prioritizes the inputs to those valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are:
Basis of Fair Value Measurement
|
|
Level 1
|
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted instruments.
|
|
|
Level 2
|
Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly.
|
|
|
Level 3
|
Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
|
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
We evaluate the position of each financial instrument measured at fair value in the hierarchy individually based on the valuation methodology we apply. The carrying amount of financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities, approximate their fair value due to the short-term nature of these items. The fair value of our long-term debt is included in
Note 5, "Long-term Debt and Other Financing Arrangements"
.
Hedging Activities
Cash Flow Hedges of Interest Rate Risk
We are party to interest rate swap agreements to mitigate our exposure to interest rate fluctuations on the outstanding principal amount of the Euro Term Loans. These interest rate swaps, designated as cash flow hedges, provide us with variable-rate cash receipts in exchange for fixed-rate payments over the lives of the agreements, with no exchange of the underlying notional amount. These instruments are carried at fair value on our condensed consolidated balance sheets as other current and other non-current liabilities based on their maturity, and the effective portion of the changes in the fair value is recorded in accumulated other comprehensive income / loss and subsequently reclassified to interest expense when the hedged item affects earnings. The ineffective portion of changes in the fair value is recognized immediately in other non-operating income, net in our condensed consolidated statements of operations and comprehensive income / loss. For the
three and nine months
ended
September 30, 2017
and
2016
, we did not recognize any charges related to hedge ineffectiveness.
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)
Information relating to financial instruments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade Date
|
|
Number of Contracts
|
|
|
Description
|
|
Aggregate Notional Amount
|
|
|
Maturity Date
|
|
Objective
|
|
Fair Value as at September 30, 2017
|
|
April 5, 2016
|
|
5
|
|
|
Interest rate swap
|
|
EUR
|
468,800
|
|
|
February 21, 2021
|
|
Interest rate hedge underlying 2021 Euro Term Loan
|
|
$
|
(1,798
|
)
|
April 5, 2016
|
|
4
|
|
|
Interest rate swap
|
|
EUR
|
200,800
|
|
|
November 1, 2018
|
|
Interest rate hedge underlying 2018 Euro Term Loan, forward starting on November 1, 2017
|
|
$
|
(338
|
)
|
November 10, 2015
|
|
3
|
|
|
Interest rate swap
|
|
EUR
|
235,335
|
|
|
November 1, 2019
|
|
Interest rate hedge underlying 2019 Euro Term Loan
|
|
$
|
(1,587
|
)
|
November 14, 2014
|
|
2
|
|
|
Interest rate swap
|
|
EUR
|
200,800
|
|
|
November 1, 2017
|
|
Interest rate hedge underlying 2018 Euro Term Loan
|
|
$
|
(52
|
)
|
We value the interest rate swap agreements using a valuation model which calculates the fair value on the basis of the net present value of the estimated future cash flows. The most significant input used in the valuation model is the expected EURIBOR-based yield curve. These instruments were allocated to Level 2 of the fair value hierarchy because the critical inputs to this model, including current interest rates, relevant yield curves and the known contractual terms of the instruments, were readily observable.
In August we settled in part the interest rate swaps underlying the 2018 Euro Term Loan to align with the EUR
50.0 million
reduction of the principal balance of that loan following the repayment on August 1, 2017 (see
Note 5, "Long-term Debt and Other Financing Arrangements"
). Changes in fair value for the settled portion of these interest rate swaps is recognized within other non-operating income, net in our condensed consolidated statements of operations and comprehensive income / loss.
The expected proceeds from the sale of the Croatia and Slovenia segments will be used to satisfy amounts owing in respect of the 2018 Euro Term Loan (see
Note 5, "Long-term Debt and Other Financing Arrangements"
). It is probable the sale will complete prior to the initial interest payment on the interest rate swap maturing November 1, 2018 which precludes recognition of the effective portion of the changes in fair value within accumulated other comprehensive income / loss. All related fair value adjustments and those previously recognized in accumulated other comprehensive income / loss are recognized in other non-operating income, net in our condensed consolidated statements of operations and comprehensive income / loss (see
Note 14, "Equity"
).
Foreign Currency Risk
We have entered into the below forward foreign exchange contracts to reduce our exposure to movements in foreign exchange rates related to contractual payments under certain dollar-denominated agreements. Information relating to financial instruments as at
September 30, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade Date
|
|
Number of Contracts
|
|
|
Description
|
|
Aggregate Notional Amount
|
|
|
Maturity Date
|
|
Objective
|
|
Fair Value as at September 30, 2017
|
|
January 31, 2017
|
|
1
|
|
|
EUR / USD forward
|
|
$
|
7,720
|
|
|
December 21, 2017
|
|
USD-denominated operating payments
|
|
$
|
(687
|
)
|
July 21, 2017
|
|
1
|
|
|
EUR / USD forward
|
|
$
|
18,530
|
|
|
December 20, 2017
|
|
USD-denominated operating payments
|
|
$
|
(228
|
)
|
These forward foreign exchange contracts are considered economic hedges but were not designated as hedging instruments, so changes in the fair value of the derivatives were recorded in other non-operating income, net in the condensed consolidated statements of operations and comprehensive income / loss and in the condensed consolidated balance sheet in other current liabilities. We valued these contracts using an industry-standard pricing model which calculated the fair value on the basis of the net present value of the estimated future cash flows receivable or payable. These instruments were allocated to Level 2 of the fair value hierarchy because the critical inputs to this model, including foreign exchange forward rates and the known contractual terms of the instruments, were readily observable.
Fair Value of Derivatives
The change in fair value of derivatives not recognized within accumulated other comprehensive income / loss comprised the following for the
three and nine months
ended
September 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
For the Nine Months
Ended September 30,
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Loss on currency swaps
|
$
|
(696
|
)
|
|
$
|
(398
|
)
|
|
$
|
(1,428
|
)
|
|
$
|
(11,904
|
)
|
Loss on interest rate swaps
|
(454
|
)
|
|
—
|
|
|
(454
|
)
|
|
—
|
|
Change in fair value of derivatives
|
$
|
(1,150
|
)
|
|
$
|
(398
|
)
|
|
$
|
(1,882
|
)
|
|
$
|
(11,904
|
)
|
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)
13. CONVERTIBLE REDEEMABLE PREFERRED SHARES
200,000
shares of our Series B Convertible Redeemable Preferred Stock, par value US$
0.08
per share (the “Series B Preferred Shares”), were issued and outstanding as at
September 30, 2017
and
December 31, 2016
. As at
September 30, 2017
and
December 31, 2016
, the carrying value of the Series B Preferred Shares was US$
262.1 million
and US$
254.9 million
, respectively. The Series B Preferred Shares are held by Time Warner Media Holdings B.V. ("TW Investor"). As of
September 30, 2017
, the
200,000
Series B Preferred Shares were convertible into approximately
108.1 million
shares of Class A common stock.
The initial stated value of the Series B Preferred Shares of US$
1,000
per share accretes at an annual rate of
3.75%
, compounded quarterly, from June 25, 2016 to June 24, 2018. We have the right to pay cash to the holder in lieu of any further accretion. Each Series B Preferred Share may, at the holder's option, be converted into the number of shares of our Class A common stock determined by dividing (i) the accreted stated value plus accrued but unpaid dividends, if any, in each case as of the conversion date, by (ii) the conversion price, which was approximately US$
2.42
at
September 30, 2017
, but is subject to adjustment from time to time pursuant to customary weighted-average anti-dilution provisions with respect to our issuances of equity or equity-linked securities at a price below the then-applicable conversion price (excluding any securities issued under our benefit plans at or above fair market value). We have the right to redeem the Series B Preferred Shares in whole or in part upon
30 days
' written notice. The redemption price of each outstanding Series B Preferred Share is equal to its accreted stated value plus accrued but unpaid dividends, if any, in each case as of the redemption date specified in the redemption notice. After receipt of a redemption notice, each holder of Series B Preferred Shares will have the right to convert, prior to the date of redemption, all or part of such Series B Preferred Shares to be redeemed by us into shares of our Class A common stock in accordance with the terms of conversion described above.
Holders of the Series B Preferred Shares have no voting rights on any matter presented to holders of any class of our capital stock, with the exception that they may vote with holders of shares of our Class A common stock (i) with respect to a change of control event or (ii) as provided by our Bye-laws or applicable Bermuda law. Holders of Series B Preferred Shares will participate in any dividends declared or paid on our Class A common stock on an as-converted basis. The Series B Preferred Shares rank pari passu with our Series A Convertible Preferred Stock and senior to all other equity securities of the Company in respect of payment of dividends and distribution of assets upon liquidation. The Series B Preferred Shares have such other rights, powers and preferences as are set forth in the Certificate of Designation for the Series B Preferred Shares.
We concluded that the Series B Preferred Shares were not considered a liability and that the embedded conversion feature in the Series B Preferred Shares was clearly and closely related to the host contract and therefore did not need to be bifurcated. The Series B Preferred Shares are required to be classified outside of permanent equity because such shares can be redeemed for cash in certain circumstances. The Series B Preferred Shares are carried on the balance sheet at redemption value. As the Series B Preferred Shares are redeemable, we have accreted changes in the redemption value since issuance. For the
three and nine months
ended
September 30, 2017
and
2016
, we recognized accretion on the Series B Preferred Shares of US$
2.5 million
and US$
7.2 million
; and US$
2.4 million
and US$
11.3 million
, respectively, with corresponding decreases in additional paid-in capital.
14. EQUITY
Preferred Stock
5,000,000
shares of Preferred Stock were authorized as at
September 30, 2017
and
December 31, 2016
.
One
share of Series A Convertible Preferred Stock (the "Series A Preferred Share") was issued and outstanding as at
September 30, 2017
and
December 31, 2016
. The Series A Preferred Share is convertible into
11,211,449
shares of Class A common stock on the date that is
61 days
after the date on which the ownership of our outstanding shares of Class A common stock by a group that includes TW Investor and its affiliates would not be greater than
49.9%
. The Series A Preferred Share is entitled to
one
vote per each share of Class A common stock into which it is convertible and has such other rights, powers and preferences, including potential adjustments to the number of shares of Class A common stock to be issued upon conversion, as are set forth in the Certificate of Designation for the Series A Preferred Share.
200,000
shares of Series B Preferred Shares were issued and outstanding as at
September 30, 2017
and
December 31, 2016
(see
Note 13, "Convertible Redeemable Preferred Shares"
). As of
September 30, 2017
, the
200,000
Series B Preferred Shares were convertible into approximately
108.1 million
shares of Class A common stock.
Class A and Class B Common Stock
440,000,000
shares of Class A common stock and
15,000,000
shares of Class B common stock were authorized as at
September 30, 2017
and
December 31, 2016
. The rights of the holders of Class A common stock and Class B common stock are identical except for voting rights. The shares of Class A common stock are entitled to
one
vote per share and the shares of Class B common stock are entitled to
ten
votes per share. Shares of Class B common stock are convertible into shares of Class A common stock on a
one
-for-
one
basis for no additional consideration. Holders of each class of shares are entitled to receive dividends and upon liquidation or dissolution are entitled to receive all assets available for distribution to holders of our common stock. Under our Bye-laws, the holders of each class have no preemptive or other subscription rights and there are no redemption or sinking fund provisions with respect to such shares.
There were
144.9 million
and
143.4 million
shares of Class A common stock outstanding at
September 30, 2017
and
December 31, 2016
, respectively, and
no
shares of Class B common stock outstanding at
September 30, 2017
or
December 31, 2016
.
As at
September 30, 2017
, TW Investor owns
42.4%
of the outstanding shares of Class A common stock and has a
46.5%
voting interest in the Company due to its ownership of the Series A Preferred Share.
Warrants
On May 2, 2014, we issued
114,000,000
warrants in connection with a rights offering. Each warrant may be exercised until May 2, 2018 and entitles the holder thereof to receive
one
share of our Class A common stock at an exercise price of US$
1.00
per share in cash. During the
nine months
ended
September 30, 2017
,
563,325
warrants were exercised resulting in net proceeds to us of approximately US$
0.6 million
. As at
September 30, 2017
,
106,439,720
warrants remained outstanding. Time Warner and TW Investor collectively hold
100,926,996
of these warrants. The warrants are classified in additional paid-in capital, a component of equity, and are not subject to subsequent revaluation.
Accumulated Other Comprehensive Loss
The movement in accumulated other comprehensive loss during the
nine months
ended
September 30, 2017
comprised the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment, net
|
|
|
(Loss) / Gain on derivative instruments designated as hedging instruments
|
|
|
TOTAL
Accumulated Other Comprehensive Loss
|
|
BALANCE December 31, 2016
|
$
|
(239,537
|
)
|
|
$
|
(4,451
|
)
|
|
$
|
(243,988
|
)
|
Other comprehensive income / (loss) before reclassifications:
|
|
|
|
|
|
Foreign exchange gain on intercompany transactions
(1)
|
7,824
|
|
|
—
|
|
|
7,824
|
|
Foreign exchange gain on the Series B Preferred Shares
|
29,284
|
|
|
—
|
|
|
29,284
|
|
Currency translation adjustment
|
5,891
|
|
|
—
|
|
|
5,891
|
|
Change in the fair value of hedging instruments
|
—
|
|
|
(1,484
|
)
|
|
(1,484
|
)
|
Amounts reclassified from accumulated other comprehensive loss:
|
|
|
|
|
|
|
Changes in fair value reclassified to interest expense
|
—
|
|
|
2,120
|
|
|
2,120
|
|
Changes in fair value reclassified to other non-operating income, net
(2)
|
—
|
|
|
447
|
|
|
447
|
|
Net other comprehensive income
|
42,999
|
|
|
1,083
|
|
|
44,082
|
|
BALANCE September 30, 2017
|
$
|
(196,538
|
)
|
|
$
|
(3,368
|
)
|
|
$
|
(199,906
|
)
|
|
|
(1)
|
Represents foreign exchange gains on intercompany loans that are of a long-term investment nature which are reported in the same manner as translation adjustments.
|
|
|
(2)
|
We will repay the 2018 Euro Term Loan with the expected proceeds from the sale of the Croatia and Slovenia segments (see
Note 5, "Long-term Debt and Other Financing Arrangements"
). It is probable the sale will complete prior to the initial interest payment on the interest rate swap maturing on November 1, 2018 which precludes recognition of the effective portion of the changes in fair value within accumulated other comprehensive income / loss. All related changes in fair value and those previously recognized in accumulated other comprehensive income / loss are recognized in other non-operating income, net in our condensed consolidated statements of operations and comprehensive income / loss. See
Note 12, "Financial Instruments and Fair Value Measurements"
.
|
15. INTEREST EXPENSE
Interest expense comprised the following for the
three and nine months
ended
September 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
For the Nine Months
Ended September 30,
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Interest on long-term debt and other financing arrangements
|
$
|
16,850
|
|
|
$
|
21,000
|
|
|
$
|
50,491
|
|
|
$
|
70,236
|
|
Amortization of capitalized debt issuance costs
|
1,502
|
|
|
1,424
|
|
|
4,282
|
|
|
7,459
|
|
Amortization of debt issuance discount
|
—
|
|
|
—
|
|
|
—
|
|
|
12,945
|
|
Total interest expense
|
$
|
18,352
|
|
|
$
|
22,424
|
|
|
$
|
54,773
|
|
|
$
|
90,640
|
|
We paid cash interest (including mandatory cash-pay Guarantee Fees) of US$
22.2 million
and US$
38.3 million
during the
nine months
ended
September 30, 2017
and
2016
, respectively. In addition, we paid US$
1.4 million
and US$
5.5 million
of Guarantee Fees in cash during the
nine months
ended
September 30, 2017
and
2016
, respectively, for which we had the option to pay in kind. Interest expense related to the 2018 Euro Term Loan has been allocated to results from discontinued operations (see
Note 3, "Discontinued Operations and Assets Held for Sale"
).
16. OTHER NON-OPERATING INCOME / EXPENSE
Other non-operating income / expense comprised the following for the
three and nine months
ended
September 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
For the Nine Months
Ended September 30,
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Interest income
|
$
|
139
|
|
|
$
|
89
|
|
|
$
|
326
|
|
|
$
|
466
|
|
Foreign currency exchange gain, net
|
4,609
|
|
|
602
|
|
|
14,085
|
|
|
13,099
|
|
Change in fair value of derivatives (Note 12)
|
(1,150
|
)
|
|
(398
|
)
|
|
(1,882
|
)
|
|
(11,904
|
)
|
Other income / (expense), net
|
45
|
|
|
57
|
|
|
254
|
|
|
(23
|
)
|
Total other non-operating income
|
$
|
3,643
|
|
|
$
|
350
|
|
|
$
|
12,783
|
|
|
$
|
1,638
|
|
17. STOCK-BASED COMPENSATION
Under our 2015 Stock Incentive Plan (the "2015 Plan"),
6,000,000
shares of Class A common stock are authorized for grants of stock options, restricted stock units ("RSU"), restricted stock and stock appreciation rights to employees and non-employee directors. In addition, any shares available under our Amended and Restated Stock Incentive Plan (which expired on June 1, 2015), including in respect of any awards that expire, terminate or are forfeited, will be available for awards under the 2015 Plan. Under the 2015 Plan, awards are made to employees and directors at the discretion of the Compensation Committee. Any awards previously issued under the Amended and Restated Stock Incentive Plan will continue to be governed by the terms of that plan.
For the
three and nine months
ended
September 30, 2017
and
2016
, we recognized charges for stock-based compensation of US$
0.5 million
and US$
2.1 million
; and US$
0.7 million
and US$
2.5 million
, respectively, presented as a component of selling, general and administrative expenses in our condensed consolidated statements of operations and comprehensive income / loss.
The charge for stock-based compensation in our condensed consolidated statement of operations and comprehensive income / loss was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
For the Nine Months
Ended September 30,
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Stock-based compensation expense from continuing operations
|
$
|
431
|
|
|
$
|
722
|
|
|
$
|
2,044
|
|
|
$
|
2,364
|
|
Stock-based compensation expense from discontinued operations
|
34
|
|
|
26
|
|
|
96
|
|
|
101
|
|
Stock Options
There was no option activity during the
nine months
ended
September 30, 2017
. The summary of stock options outstanding as at
September 30, 2017
and
December 31, 2016
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted Average Exercise Price per Share
|
|
|
Weighted Average Remaining Contractual Term (years)
|
|
Aggregate Intrinsic Value
|
|
Outstanding at December 31, 2016
|
2,011,392
|
|
|
$
|
2.32
|
|
|
8.58
|
|
$
|
453
|
|
Outstanding at September 30, 2017
|
2,011,392
|
|
|
2.32
|
|
|
7.83
|
|
3,470
|
|
Vested and expected to vest
|
2,011,392
|
|
|
2.32
|
|
|
7.83
|
|
3,470
|
|
Exercisable at September 30, 2017
|
902,848
|
|
|
$
|
2.31
|
|
|
7.76
|
|
$
|
1,572
|
|
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 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. The aggregate intrinsic value (the difference between the stock price on the last day of trading of the
third quarter
of
September 30, 2017
and the exercise prices multiplied by the number of in-the-money options) represents the value that would have been received by the option holders had they exercised all in-the-money options as at
September 30, 2017
. This amount changes based on the fair value of our Class A common stock. As at
September 30, 2017
, there was US$
1.4 million
of unrecognized compensation expense related to stock options which is expected to be recognized over a weighted-average period of
1.9 years
.
Restricted Stock Units
Each RSU represents a right to receive
one
share of Class A common stock according to its vesting conditions. The majority of RSU issued have time-based vesting conditions and vest ratably over
one
to
four
years from the date of grant. Vesting of RSU with performance-based vesting conditions ("PRSU") is contingent on the achievement of cumulative OIBDA and unlevered free cash flow targets over a multi-year period. Upon vesting, shares of Class A common stock are issued from authorized but unissued shares. Holders of RSU and PRSU awards are not entitled to receive cash dividend equivalents and are not entitled to vote. The grant date fair values of RSU and PRSU are calculated as the closing price of our Class A common stock on the date of grant.
The following table summarizes information about unvested RSU and PRSU as at
September 30, 2017
:
|
|
|
|
|
|
|
|
|
Number of
Shares / Units
|
|
|
Weighted Average
Grant Date
Fair Value
|
|
Unvested at December 31, 2016
|
2,542,625
|
|
|
$
|
2.61
|
|
Granted
|
1,158,887
|
|
|
3.62
|
|
Vested
|
(912,246
|
)
|
|
2.65
|
|
Forfeited
|
(75,582
|
)
|
|
1.53
|
|
Unvested at September 30, 2017
|
2,713,684
|
|
|
$
|
3.06
|
|
As at
September 30, 2017
, the intrinsic value of unvested RSUs was US$
11.0 million
. Total unrecognized compensation cost related to unvested RSUs as at
September 30, 2017
was US$
5.1 million
and is expected to be recognized over a weighted-average period of
2.1 years
.
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)
18. EARNINGS PER SHARE
We determined that the Series B Preferred Shares are a participating security, and accordingly, our basic and diluted net income / loss per share is calculated using the two-class method. Under the two-class method, basic net income / loss per common share is computed by dividing the net income available to common shareholders after deducting contractual amounts of accretion on our Series B Preferred Shares by the weighted-average number of common shares outstanding during the period. Diluted net income / loss per share is computed by dividing the adjusted net income by the weighted-average number of dilutive shares outstanding during the period.
The components of basic and diluted earnings per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
For the Nine Months
Ended September 30,
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
(Loss) / income from continuing operations
|
$
|
(1,945
|
)
|
|
$
|
(11,769
|
)
|
|
$
|
17,338
|
|
|
$
|
(185,795
|
)
|
Net loss attributable to noncontrolling interests
|
188
|
|
|
196
|
|
|
534
|
|
|
387
|
|
Less: preferred share accretion paid in kind (Note 13)
|
(2,454
|
)
|
|
(2,364
|
)
|
|
(7,216
|
)
|
|
(11,314
|
)
|
Less: income allocated to Series B Preferred Shares
|
—
|
|
|
—
|
|
|
(4,334
|
)
|
|
—
|
|
(Loss) / income from continuing operations available to common shareholders, net of noncontrolling interest
|
(4,211
|
)
|
|
(13,937
|
)
|
|
6,322
|
|
|
(196,722
|
)
|
Loss from discontinued operations, net of tax (Note 3)
|
(5,988
|
)
|
|
(8,054
|
)
|
|
(8,747
|
)
|
|
(15,971
|
)
|
Net loss attributable to CME Ltd. available to common shareholders — basic
|
(10,199
|
)
|
|
(21,991
|
)
|
|
(2,425
|
)
|
|
(212,693
|
)
|
|
|
|
|
|
|
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
Dilutive effect of Series B Preferred Shares
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net loss attributable to CME Ltd. available to common shareholders — diluted
|
$
|
(10,199
|
)
|
|
$
|
(21,991
|
)
|
|
$
|
(2,425
|
)
|
|
$
|
(212,693
|
)
|
|
|
|
|
|
|
|
|
Weighted average outstanding shares of common stock — basic
(1)
|
156,189
|
|
|
153,494
|
|
|
155,579
|
|
|
149,898
|
|
Dilutive effect of common stock warrants, employee stock options and RSUs
|
—
|
|
|
—
|
|
|
78,182
|
|
|
—
|
|
Weighted average outstanding shares of common stock — diluted
|
156,189
|
|
|
153,494
|
|
|
233,761
|
|
|
149,898
|
|
|
|
|
|
|
|
|
|
Net (loss) / income per share:
|
|
|
|
|
|
|
|
Continuing operations — basic
|
$
|
(0.03
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
0.04
|
|
|
$
|
(1.31
|
)
|
Continuing operations — diluted
|
(0.03
|
)
|
|
(0.09
|
)
|
|
0.03
|
|
|
(1.31
|
)
|
Discontinued operations — basic
|
(0.04
|
)
|
|
(0.05
|
)
|
|
(0.06
|
)
|
|
(0.11
|
)
|
Discontinued operations — diluted
|
(0.04
|
)
|
|
(0.05
|
)
|
|
(0.06
|
)
|
|
(0.11
|
)
|
Net loss attributable to CME Ltd. — basic
|
(0.07
|
)
|
|
(0.14
|
)
|
|
(0.02
|
)
|
|
(1.42
|
)
|
Net loss attributable to CME Ltd. — diluted
|
(0.07
|
)
|
|
(0.14
|
)
|
|
(0.02
|
)
|
|
(1.42
|
)
|
|
|
(1)
|
For the purpose of computing basic earnings per share, the
11,211,449
shares of Class A common stock underlying the Series A Preferred Share are included in the weighted average outstanding shares of common stock - basic, because the holder of the Series A Preferred Share is entitled to receive any dividends payable when dividends are declared by the Board of Directors with respect to any shares of common stock.
|
The following weighted-average, equity awards and convertible shares were excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
For the Nine Months
Ended September 30,
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Employee stock options
|
—
|
|
|
2,014
|
|
|
—
|
|
|
2,014
|
|
RSUs
|
719
|
|
|
1,290
|
|
|
719
|
|
|
1,469
|
|
Series B Preferred Shares
|
107,643
|
|
|
103,699
|
|
|
—
|
|
|
104,182
|
|
Total
|
108,362
|
|
|
107,003
|
|
|
719
|
|
|
107,665
|
|
These instruments may become dilutive in the future. As set forth in the Certificate of Designation for the Series B Preferred Shares, the holders of our Series B Preferred Shares are not contractually obligated to share in our losses.
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)
19. SEGMENT DATA
We manage our business on a geographical basis, with
four
operating segments: Bulgaria, the Czech Republic, Romania and the Slovak Republic, which are also our reportable segments and our main operating countries. These segments reflect how CME Ltd.’s operating performance is evaluated by our chief operating decision makers, who we have identified as our co-Chief Executive Officers; how operations are managed by segment managers; and the structure of our internal financial reporting.
Our segments generate revenues primarily from the sale of advertising and sponsorship on our channels. This is supplemented by revenues from cable and satellite television service providers that carry our channels on their platforms and from revenues through the sale of distribution rights to third parties. Intersegment revenues and profits have been eliminated in consolidation.
We evaluate our consolidated results and the performance of our segments based on net revenues and OIBDA (as defined below). We believe OIBDA is useful to investors because it provides a meaningful representation of our performance as it excludes certain items that either do not impact our cash flows or the operating results of our operations. OIBDA is also used as a component in determining management bonuses.
OIBDA includes amortization and impairment of program rights and is calculated as operating income / loss before depreciation, amortization of intangible assets, impairments of assets and certain unusual or infrequent items that are not considered by our chief operating decision makers when evaluating our performance. Stock-based compensation and certain other items are not allocated to our segments for purposes of evaluating their performance and therefore are not included in their respective OIBDA.
Below are tables showing our net revenues, OIBDA, total assets, capital expenditures and long-lived assets for our continuing operations by segment for the
three and nine months
ended
September 30, 2017
and
2016
for condensed consolidated statements of operations and comprehensive income / loss data and condensed consolidated statements of cash flow data; and as at
September 30, 2017
and
December 31, 2016
for condensed consolidated balance sheet data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues:
|
For the Three Months
Ended September 30,
|
|
For the Nine Months
Ended September 30,
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Bulgaria
|
$
|
16,039
|
|
|
$
|
13,789
|
|
|
$
|
52,118
|
|
|
$
|
50,103
|
|
Czech Republic
|
42,681
|
|
|
39,031
|
|
|
135,526
|
|
|
128,558
|
|
Romania
|
40,469
|
|
|
36,970
|
|
|
127,983
|
|
|
118,269
|
|
Slovak Republic
|
20,384
|
|
|
17,864
|
|
|
63,348
|
|
|
59,466
|
|
Intersegment revenues
(1)
|
(142
|
)
|
|
(127
|
)
|
|
(917
|
)
|
|
(249
|
)
|
Total net revenues
|
$
|
119,431
|
|
|
$
|
107,527
|
|
|
$
|
378,058
|
|
|
$
|
356,147
|
|
|
|
(1)
|
Reflects revenues earned from the sale of content to our other segments. All other revenues are third party revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OIBDA and reconciliation of OIBDA to condensed consolidated statements of operations and comprehensive income / loss:
|
For the Three Months
Ended September 30,
|
|
For the Nine Months
Ended September 30,
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Bulgaria
|
$
|
2,537
|
|
|
$
|
1,943
|
|
|
$
|
6,973
|
|
|
$
|
8,966
|
|
Czech Republic
|
12,618
|
|
|
13,180
|
|
|
49,130
|
|
|
46,353
|
|
Romania
|
15,496
|
|
|
12,606
|
|
|
52,450
|
|
|
45,030
|
|
Slovak Republic
|
2,944
|
|
|
(383
|
)
|
|
11,339
|
|
|
5,168
|
|
Elimination
|
10
|
|
|
6
|
|
|
27
|
|
|
9
|
|
Total operating segments
|
33,605
|
|
|
27,352
|
|
|
119,919
|
|
|
105,526
|
|
Corporate
|
(8,460
|
)
|
|
(8,028
|
)
|
|
(22,026
|
)
|
|
(22,074
|
)
|
Total OIBDA
|
25,145
|
|
|
19,324
|
|
|
97,893
|
|
|
83,452
|
|
Depreciation of property, plant and equipment
|
(6,936
|
)
|
|
(5,801
|
)
|
|
(19,345
|
)
|
|
(17,134
|
)
|
Amortization of broadcast licenses and other intangibles
|
(2,187
|
)
|
|
(2,073
|
)
|
|
(6,349
|
)
|
|
(6,247
|
)
|
Operating income
|
16,022
|
|
|
11,450
|
|
|
72,199
|
|
|
60,071
|
|
Interest expense (Note 15)
|
(18,352
|
)
|
|
(22,424
|
)
|
|
(54,773
|
)
|
|
(90,640
|
)
|
Loss on extinguishment of debt (Note 5)
|
(101
|
)
|
|
—
|
|
|
(101
|
)
|
|
(150,158
|
)
|
Non-operating income, net (Note 16)
|
3,643
|
|
|
350
|
|
|
12,783
|
|
|
1,638
|
|
Income / (loss) before tax
|
$
|
1,212
|
|
|
$
|
(10,624
|
)
|
|
$
|
30,108
|
|
|
$
|
(179,089
|
)
|
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
Total assets
(1)
:
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Bulgaria
|
$
|
146,813
|
|
|
$
|
130,873
|
|
Czech Republic
|
801,791
|
|
|
700,190
|
|
Romania
|
294,202
|
|
|
266,132
|
|
Slovak Republic
|
156,006
|
|
|
131,220
|
|
Total operating segments
|
1,398,812
|
|
|
1,228,415
|
|
Corporate
|
38,707
|
|
|
40,786
|
|
Assets held for sale
|
135,171
|
|
|
121,516
|
|
Total assets
|
$
|
1,572,690
|
|
|
$
|
1,390,717
|
|
|
|
(1)
|
Segment assets exclude any intercompany balances.
|
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
For the Nine Months Ended September 30,
|
|
2017
|
|
|
2016
|
|
Bulgaria
|
$
|
2,487
|
|
|
$
|
2,828
|
|
Czech Republic
|
6,768
|
|
|
4,317
|
|
Romania
|
4,369
|
|
|
5,027
|
|
Slovak Republic
|
1,520
|
|
|
1,286
|
|
Total operating segments
|
15,144
|
|
|
13,458
|
|
Corporate
|
1,245
|
|
|
1,392
|
|
Total capital expenditures
|
$
|
16,389
|
|
|
$
|
14,850
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets
(1)
:
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Bulgaria
|
$
|
7,511
|
|
|
$
|
6,280
|
|
Czech Republic
|
43,867
|
|
|
39,529
|
|
Romania
|
26,917
|
|
|
22,796
|
|
Slovak Republic
|
17,956
|
|
|
15,326
|
|
Total operating segments
|
96,251
|
|
|
83,931
|
|
Corporate
|
4,057
|
|
|
5,149
|
|
Total long-lived assets
|
$
|
100,308
|
|
|
$
|
89,080
|
|
|
|
(1)
|
Reflects property, plant and equipment, net.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenue by type:
|
For the Three Months
Ended September 30,
|
|
For the Nine Months
Ended September 30,
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Television advertising
|
$
|
93,830
|
|
|
$
|
85,282
|
|
|
$
|
303,486
|
|
|
$
|
289,975
|
|
Carriage fees and subscriptions
|
21,547
|
|
|
17,940
|
|
|
61,597
|
|
|
53,323
|
|
Other
|
4,054
|
|
|
4,305
|
|
|
12,975
|
|
|
12,849
|
|
Total net revenues
|
$
|
119,431
|
|
|
$
|
107,527
|
|
|
$
|
378,058
|
|
|
$
|
356,147
|
|
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)
20. COMMITMENTS AND CONTINGENCIES
Commitments
a) Programming Rights Agreements and Other Commitments
At
September 30, 2017
, we had total commitments of US$
138.9 million
(
December 31, 2016
: US$
128.2 million
) in respect of future programming, including contracts signed with license periods starting after the balance sheet date. In addition, we have digital transmission obligations, future minimum operating lease payments for non-cancellable operating leases with remaining terms in excess of one year and other commitments as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Programming purchase
obligations
|
|
|
Other
commitments
|
|
|
Operating
leases
|
|
|
Capital
expenditures
|
|
2017
|
$
|
20,465
|
|
|
$
|
6,802
|
|
|
$
|
1,029
|
|
|
$
|
2,055
|
|
2018
|
41,150
|
|
|
10,334
|
|
|
2,953
|
|
|
32
|
|
2019
|
32,450
|
|
|
11,733
|
|
|
1,436
|
|
|
13
|
|
2020
|
26,094
|
|
|
1,410
|
|
|
687
|
|
|
—
|
|
2021
|
12,115
|
|
|
429
|
|
|
514
|
|
|
—
|
|
2022 and thereafter
|
6,612
|
|
|
474
|
|
|
1,971
|
|
|
—
|
|
Total
|
$
|
138,886
|
|
|
$
|
31,182
|
|
|
$
|
8,590
|
|
|
$
|
2,100
|
|
Contingencies
Litigation
We are from time to time party to legal proceedings, arbitrations and regulatory proceedings arising in the normal course of our business operations, including the proceeding described below. We evaluate, on a quarterly basis, developments in such matters and provide accruals for such matters, as appropriate. In making such decisions, we consider the degree of probability of an unfavorable outcome and our ability to make a reasonable estimate of the amount of a loss. An unfavorable outcome in any such proceedings, if material, could have an adverse effect on our business or consolidated financial statements.
In the fourth quarter of 2016, our Slovak subsidiary MARKIZA-SLOVAKIA, spol. s.r.o. (“Markiza”) was notified of claims that were filed in June 2016 in a court of first instance in Bratislava, the Slovak Republic to collect amounts allegedly owing under
four
promissory notes. These
four
promissory notes were purportedly issued in June 2000 by Pavol Rusko in his personal capacity and were purportedly guaranteed by Markiza under the signature of Mr. Rusko, who was an executive director of Markiza at that time as well as one of its shareholders. The notes purport to be issued in favor of Marian Kocner, a controversial Slovak businessman, and to a former associate of Mr. Kocner, and were supposedly assigned several times, ultimately to Sprava a inkaso zmeniek, s.r.o., a company owned by Mr. Kocner that is the plaintiff in these proceedings. Two of the notes allegedly matured in 2015 and the other two in 2016. The
four
notes purport to be in the aggregate amount of approximately EUR
69.0 million
.
Despite a random case assignment system in the Slovak Republic, claims in respect of
three
of the notes were initially assigned to the same judge. The judge who was assigned the claim in respect of the fourth promissory note (in the amount of approximately EUR
26.0 million
) terminated proceedings in January 2017 because the plaintiff failed to pay court fees. The plaintiff refiled this claim in June 2017; the judge who was assigned the refiled claim terminated proceedings in September after the plaintiff again failed to pay court fees. In responses to the claims in respect of the other
three
promissory notes that were filed in August 2017, Mr. Rusko asserted that he signed the
three
notes in June 2000. We do not believe that the notes were signed in June 2000 or that any of the notes are authentic. We are vigorously defending the claims.
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)
21. RELATED PARTY TRANSACTIONS
We consider our related parties to be our officers, directors and shareholders who have direct control and/or influence over the Company as well as other parties that can significantly influence management. We have identified transactions with individuals or entities associated with Time Warner, which is represented on our Board of Directors and holds a
46.5%
voting interest in CME Ltd. as at
September 30, 2017
, as material related party transactions.
Time Warner
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
For the Nine Months
Ended September 30,
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Cost of revenues
|
$
|
4,504
|
|
|
$
|
4,052
|
|
|
$
|
11,696
|
|
|
$
|
11,961
|
|
Interest expense
|
14,170
|
|
|
17,930
|
|
|
41,423
|
|
|
74,832
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Programming liabilities
|
$
|
17,065
|
|
|
$
|
17,126
|
|
Other accounts payable and accrued liabilities
|
69
|
|
|
194
|
|
Accrued interest payable
(1)
|
24,176
|
|
|
9,588
|
|
Other non-current liabilities
(2)
|
60,004
|
|
|
44,397
|
|
|
|
(1)
|
Amount represents accrued Guarantee Fees for which we have not yet paid in cash or made an election to pay in kind. See
Note 5, "Long-term Debt and Other Financing Arrangements"
.
|
|
|
(2)
|
Amount represents Guarantee Fees for which we have made an election to pay in kind and the Commitment Fee. See
Note 5, "Long-term Debt and Other Financing Arrangements"
.
|
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following defined terms are used in this Quarterly Report on Form 10-Q:
|
|
•
|
"
2017 PIK Notes
" refers to our 15.0% senior secured notes due 2017, redeemed in April 2016;
|
|
|
•
|
"
2017 Term Loan
" refers to our 15.0% term loan facility due 2017, dated as of February 28, 2014, as amended and restated on November 14, 2014, repaid in April 2016;
|
|
|
•
|
"
2018 Euro Term Loan
" refers to CME Ltd.'s floating rate senior unsecured term credit facility due 2018, guaranteed by CME BV and Time Warner, dated as of November 14, 2014 and amended on March 9, 2015, February 19, 2016 and June 22, 2017;
|
|
|
•
|
"
2019 Euro Term Loan
" refers to CME Ltd.'s floating rate senior unsecured term credit facility due 2019, guaranteed by CME BV and Time Warner, dated as of September 30, 2015 and amended on February 19, 2016 and June 22, 2017;
|
|
|
•
|
"
2021 Euro Term Loan
" refers to CME BV's floating rate senior unsecured term credit facility due 2021, guaranteed by Time Warner and CME Ltd., dated as of February 19, 2016 and amended on June 22, 2017;
|
|
|
•
|
"
2021 Revolving Credit Facility
" refers to our amended and restated revolving credit facility dated as of February 28, 2014, as amended and restated as of November 14, 2014, further amended and restated on February 19, 2016 and amended on June 22, 2017;
|
|
|
•
|
"
CME BV
" refers to CME Media Enterprises B.V., our 100% owned subsidiary;
|
|
|
•
|
"
CME NV
" refers to Central European Media Enterprises N.V., our 100% owned subsidiary;
|
|
|
•
|
"
Divestment Transaction
" refers to the framework agreement dated July 9, 2017 with Slovenia Broadband S.à r.l. for the sale of our Croatia and Slovenia operations (see
Note 3, "Discontinued Operations and Assets Held for Sale"
for further information);
|
|
|
•
|
"
Euro Term Loans
" refers collectively to the 2018 Euro Term Loan, 2019 Euro Term Loan and 2021 Euro Term Loan;
|
|
|
•
|
"
Guarantee Fees
" refers to amounts accrued and payable to Time Warner as consideration for Time Warner's guarantees of the Euro Term Loans;
|
|
|
•
|
"
Reimbursement Agreement
" refers to an agreement with Time Warner which provides that we will reimburse Time Warner for any amounts paid by them under any guarantee or through any loan purchase right exercised by Time Warner, dated as of November 14, 2014, amended and restated on February 19, 2016 and amended on March 2, 2017 and June 22, 2017;
|
|
|
•
|
"
Time Warner
" refers to Time Warner Inc.; and
|
|
|
•
|
"
TW Investor
" refers to Time Warner Media Holdings B.V.
|
The exchange rates used in this report are as at
September 30, 2017
, unless otherwise indicated.
Please note that we may announce information using SEC filings, press releases, public conference calls, webcasts and posts to the "Investors" section of our website,
www.cme.net
. We intend to continue to use these channels to communicate important information about CME Ltd. and our operations. We encourage investors, the media, our customers and others interested in the Company to review the information we post at
www.cme.net
.
I. Forward-looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 22E of the Securities Exchange Act of 1934 (the "Exchange Act"), including those relating to our capital needs, business strategy, expectations and intentions. Statements that use the terms “believe”, “anticipate”, “trend”, “expect”, “plan”, “estimate”, “forecast”, “should”,“intend” and similar expressions of a future or forward-looking nature identify forward-looking statements for purposes of the U.S. federal securities laws or otherwise. In particular, information appearing under the sections entitled "Business," "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" includes forward looking-statements. For these statements and all other forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy or are otherwise beyond our control and some of which might not even be anticipated. Forward-looking statements reflect our current views with respect to future events and because our business is subject to such risks and uncertainties, actual results, our strategic plan, our financial position, results of operations and cash flows could differ materially from those described in or contemplated by the forward-looking statements contained in this report.
Important factors that contribute to such risks include, but are not limited to, those factors set forth under "Risk Factors” as well as the following: the expected timing of the closing of the sale of our operations in Croatia and Slovenia and the application of proceeds from it; changes in global or regional economic conditions and Eurozone instability in our markets; levels of television advertising spending and the rate of development of the advertising markets in the countries in which we operate; the extent to which our liquidity constraints and debt service obligations restrict our business; our exposure to additional tax liabilities as well as liabilities resulting from regulatory or legal proceedings initiated against us; our ability to refinance our existing indebtedness; our success in continuing our initiatives to diversify and enhance our revenue streams; our ability to make cost-effective investments in our television businesses, including investments in programming; our ability to develop and acquire necessary programming and attract audiences; and changes in the political and regulatory environments where we operate and in the application of relevant laws and regulations. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included in this report. All forward-looking statements speak only as of the date of this report. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments or otherwise, except as required by law.
II. Overview
Central European Media Enterprises Ltd. ("CME Ltd.") is a media and entertainment company operating mainly in four countries in Central and Eastern Europe. We manage our business on a geographical basis, with
four
operating segments: Bulgaria, the Czech Republic, Romania, and the Slovak Republic, which are also our reportable segments. These operating segments reflect how CME Ltd.’s operating performance is evaluated by our chief operating decision makers, who we have identified as our co-Chief Executive Officers, how our operations are managed by segment managers, and the structure of our internal financial reporting.
On July 9, 2017, we entered into a framework agreement with Slovenia Broadband S.à r.l., a wholly owned subsidiary of United Group B.V., relating to the sale of our Croatia and Slovenia operations. Accordingly, these operations are classified as held for sale and they are presented as discontinued operations for all periods in this report; and the discussion below relates to our continuing operations in the four remaining operating segments.
Non-GAAP Financial Measures
In this report we refer to several non-GAAP financial measures, including OIBDA, OIBDA margin, free cash flow and unlevered free cash flow. We believe that each of these metrics is useful to investors for the reasons outlined below. Non-GAAP financial measures may not be comparable to similar measures reported by other companies. Non-GAAP financial measures should be evaluated in conjunction with, and are not a substitute for, US GAAP financial measures.
We evaluate our consolidated results and the performance of our segments based on net revenues and OIBDA. We believe OIBDA is useful to investors because it provides a meaningful representation of our performance, as it excludes certain items that do not impact either our cash flows or the operating results of our operations. OIBDA and unlevered free cash flow are also used as components in determining management bonuses.
OIBDA includes amortization and impairment of program rights and is calculated as operating income / loss before depreciation, amortization of intangible assets and impairments of assets and certain unusual or infrequent items that are not considered by our co-Chief Executive Officers when evaluating our performance. Stock-based compensation and certain other items are not allocated to our segments for purposes of evaluating their performance and therefore are not included in their respective OIBDA. Our key performance measure of the efficiency of our consolidated operations and our segments is OIBDA margin. We define OIBDA margin as the ratio of OIBDA to net revenues.
Following a repricing of our Guarantee Fees completed in March 2017, the proportion of interest and related Guarantee Fees on our outstanding indebtedness that must be paid in cash has increased. In addition to this obligation to pay more interest and related Guarantee Fees in cash, we expect to use cash generated by the business to pay certain Guarantee Fees that are payable in kind. These cash payments are all reflected in free cash flow; accordingly, we believe unlevered free cash flow, defined as free cash flow before cash payments for interest and Guarantee Fees, best illustrates the cash generated by our operations when comparing periods. We define free cash flow as net cash generated from continuing operating activities less purchases of property, plant and equipment, net of disposals of property, plant and equipment and excluding the cash impact of certain unusual or infrequent items that are not included in costs charged in arriving at OIBDA because they are not considered by our co-Chief Executive Officers when evaluating performance.
For additional information regarding our business segments, including a reconciliation of OIBDA to US GAAP financial measures, see Item 1,
Note 19, "Segment Data"
. For a reconciliation of free cash flow and unlevered free cash flow to a US GAAP financial measure, see "Free Cash Flow and Unlevered Free Cash Flow" below.
While our reporting currency is the dollar, our consolidated revenues and costs are divided across a range of European currencies and CME Ltd.’s functional currency is the Euro. Given the significant movement of the currencies in the markets in which we operate against the dollar, we believe that it is useful to provide percentage movements based on actual percentage movements (“% Act”), which includes the effect of foreign exchange, as well as like-for-like percentage movements (“% Lfl”). The like-for-like percentage movement references reflect the impact of applying the current period average exchange rates to the prior period revenues and costs. Since the difference between like-for-like and actual percentage movements is solely the impact of movements in foreign exchange rates, our discussion in the following analysis is focused on constant currency percentage movements in order to highlight those factors influencing operational performance. The incremental impact of foreign exchange rates is presented in the tables preceding such analysis. Unless otherwise stated, all percentage increases or decreases in the following analysis refer to year-on-year percentage changes between the
three and nine months
ended
September 30, 2017
and
2016
.
Executive Summary
The following table provides a summary of our consolidated results of our continuing operations for the
three and nine months
ended
September 30, 2017
and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, (US$ 000's)
|
|
For the Nine Months Ended September 30, (US$ 000's)
|
|
|
|
|
|
Movement
|
|
|
|
|
|
Movement
|
|
2017
|
|
|
2016
|
|
|
% Act
|
|
|
% Lfl
|
|
|
2017
|
|
|
2016
|
|
|
% Act
|
|
|
% Lfl
|
|
Net revenues
|
$
|
119,431
|
|
|
$
|
107,527
|
|
|
11.1
|
%
|
|
4.8
|
%
|
|
$
|
378,058
|
|
|
$
|
356,147
|
|
|
6.2
|
%
|
|
6.0
|
%
|
Operating income
|
16,022
|
|
|
11,450
|
|
|
39.9
|
%
|
|
34.8
|
%
|
|
72,199
|
|
|
60,071
|
|
|
20.2
|
%
|
|
21.4
|
%
|
Operating margin
|
13.4
|
%
|
|
10.6
|
%
|
|
2.8 p.p.
|
|
|
3.0 p.p.
|
|
|
19.1
|
%
|
|
16.9
|
%
|
|
2.2 p.p.
|
|
|
2.4 p.p.
|
|
OIBDA
|
$
|
25,145
|
|
|
$
|
19,324
|
|
|
30.1
|
%
|
|
23.6
|
%
|
|
$
|
97,893
|
|
|
$
|
83,452
|
|
|
17.3
|
%
|
|
17.8
|
%
|
OIBDA margin
|
21.1
|
%
|
|
18.0
|
%
|
|
3.1 p.p.
|
|
|
3.2 p.p.
|
|
|
25.9
|
%
|
|
23.4
|
%
|
|
2.5 p.p.
|
|
|
2.6 p.p.
|
|
Our consolidated net revenues increased in the
three and nine months
ended
September 30, 2017
compared to the corresponding periods in
2016
due to growth in both television advertising revenues and carriage fees and subscription revenues. Television advertising spending in the markets of the countries in which we operate grew an estimated
6%
overall at constant rates in the first nine months of 2017 compared to 2016. Our television advertising revenues grew
5%
at actual rates and
4%
at constant rates during the same period due primarily to significant year-on-year growth in Romania, as well as higher levels of spending in Bulgaria and the Czech Republic. Carriage fees and subscription revenues increased
16%
at actual and constant rates in the nine months ended
September 30, 2017
compared to the corresponding period in
2016
primarily due to additional carriage fees from contracts with cable, satellite and internet protocol television ("IPTV") operators in the Slovak Republic since January of this year.
Costs charged in arriving at OIBDA increased
7%
and
3%
at actual rates in the
three and nine months
ended
September 30, 2017
compared to the corresponding periods in
2016
. At constant rates, costs were broadly flat in the third quarter, and increased
2%
in the first nine months of 2017 compared to 2016. Content costs increased
2%
and
5%
at constant rates in the third quarter and first nine months of 2017, respectively, as we made targeted investments in our programming line-up to monetize additional ratings in Romania when available, to improve our competitive positioning in Bulgaria and the Czech Republic, and to support the change in the way our channels are distributed in the Slovak Republic. Other operating costs decreased in the third quarter and first nine months of 2017 due to savings from transmission costs, which offset higher bad debt charges.
Since the growth in revenue outpaced the increase in costs, our OIBDA margin increased in the
three and nine months
ended
September 30, 2017
. This dynamic also drove an increase in operating income, with a similar improvement in operating margin. We expect revenues to grow at a faster pace than costs in 2017 and for the next few years, leading to continued OIBDA margin expansion year on year although trends may vary from quarter to quarter.
The improvement in our operations during the twelve month period ended September 30, 2017 reduced our net leverage ratio to
5.8x
at the end of the quarter, which will result in our cost of borrowing decreasing by 125 basis points to 6.0% from the end of October 2017.
We rolled-out the fall season in the third quarter, and its results contributed to our prime time and all day audience shares increasing in three out of four countries during the first nine months of 2017 compared to the same period in 2016. We continue to leverage popular content we produce for our prime time schedules, and supplement that with both foreign and locally acquired content to ensure we continue to attract the largest audience in each of our countries in the most profitable manner.
Divestment Transaction to Accelerate Deleveraging
On July 9, 2017, we agreed to sell our operations in Croatia and Slovenia to Slovenia Broadband S.à r.l., a subsidiary of United Group B.V. (“United Group”), subject to obtaining regulatory approvals and other customary closing conditions. The transaction is expected to close by the end of 2017 or early 2018.
Total cash consideration for the transaction is EUR 230.0 million (approximately US$
271.5 million
), subject to customary working capital adjustments. Upon closing, the proceeds will be used to repay the remaining balance of the 2018 Euro Term Loan in full, with any excess proceeds applied to repay the Commitment Fee and a portion of the 2019 Euro Term Loan and related Guarantee Fees, which will result in a significant decrease in our indebtedness and in our net leverage ratio. Based on our results for the period ended September 30, 2017, this would reduce CME’s net leverage ratio from
5.8x
to 4.8x.
Once debt is repaid following closing of the transaction, our current average borrowing cost is expected to decrease from 6.0% to 4.5%. We estimate the annual savings from interest and Guarantee Fees resulting from the transaction will exceed both income and cash generated by the combined operations of Croatia and Slovenia in 2016. The net assets of these businesses, which are presented as held for sale on the Condensed Consolidated Balance Sheet, were approximately US$ 102.9 million as at September 30, 2017.
Free Cash Flow and Unlevered Free Cash Flow
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, (US$ 000's)
|
|
2017
|
|
|
2016
|
|
|
Movement
|
|
Net cash generated from continuing operating activities
|
$
|
90,638
|
|
|
$
|
56,972
|
|
|
59.1
|
%
|
Capital expenditures, net
|
(16,250
|
)
|
|
(14,762
|
)
|
|
(10.1
|
)%
|
Free cash flow
|
74,388
|
|
|
42,210
|
|
|
76.2
|
%
|
Cash paid for interest (including mandatory cash-pay Guarantee Fees)
|
22,206
|
|
|
38,317
|
|
|
(42.0
|
)%
|
Cash paid for Guarantee Fees that may be paid in kind
|
1,411
|
|
|
5,483
|
|
|
(74.3
|
)%
|
Unlevered free cash flow
|
$
|
98,005
|
|
|
$
|
86,010
|
|
|
13.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(US$ 000's)
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
Movement
|
|
Cash and cash equivalents
|
$
|
67,034
|
|
|
$
|
40,606
|
|
|
65.1
|
%
|
Our unlevered free cash flow increased during the first nine months of 2017 compared to the same period in 2016 reflecting higher cash collections from revenue growth, which was partially offset by higher cash spending on programming as well as higher cash paid for income taxes and capital expenditures. Free cash flow increased significantly more than unlevered free cash flow due to a significant decrease in cash paid for interest and Guarantee Fees because last year we paid accrued interest related to the 2017 PIK Notes and 2017 Term Loan when they were refinanced in April 2016, and we also repaid accrued Guarantee Fees previously paid in kind in the first nine months of 2016.
In August 2017 we repaid EUR 50.0 million (approximately US$
59.1 million
at August 1, 2017 rates
) of the principal outstanding on the 2018 Euro Term Loan.
Following the repricing of our Guarantee Fees completed in March 2017, we are now required to pay a portion of the Guarantee Fees related to all of the Euro Term Loans in cash. However, the total amount of cash paid for interest and Guarantee Fees is expected to decrease significantly in 2017 due to the lower all-in rate payable following that transaction, the lower principal balance following the August repayment of debt and additional non-repeating payments that were made in 2016 when we elected to repay in cash a portion of the accrued Guarantee Fees related to the 2018 Euro Term Loan that were previously paid in kind. As a result, we expect free cash flow to increase significantly in 2017 compared to 2016.
Market Information
The following table sets out our estimates of the year-on-year changes in real GDP, real private consumption and the television advertising market, net of discounts, in our countries for the
nine months
ended
September 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2017
|
Country
|
Real GDP Growth
|
|
|
Real Private Consumption Growth
|
|
|
Net TV Ad Market Growth
|
|
Bulgaria
|
3.4
|
%
|
|
4.1
|
%
|
|
4.7
|
%
|
Czech Republic
|
3.6
|
%
|
|
3.5
|
%
|
|
3.7
|
%
|
Romania*
|
5.4
|
%
|
|
6.6
|
%
|
|
12.4
|
%
|
Slovak Republic
|
3.2
|
%
|
|
3.4
|
%
|
|
2.6
|
%
|
Total CME Ltd. Markets
|
4.1
|
%
|
|
4.6
|
%
|
|
6.1
|
%
|
* Romanian market excludes Moldova.
Sources: Real GDP Growth and Real Private Consumption Growth, CME Ltd. estimates based on market consensus; TV Ad Market Growth, CME Ltd. estimates at constant exchange rates.
After adjusting for inflation, we estimate that during the first nine months of 2017, GDP grew in each of the countries in which we operate at a rate that exceeded the average growth rate for Western Europe. Romania continued to be one of the fastest growing economies in the European Union, and is forecast to be the leader for the remainder of 2017. Similar to the last few years, it has been reported that GDP growth in our markets has been less reliant on growth in exports, and domestic demand has played a larger role in economic expansion. In Romania, increases to the minimum wage have provided support for higher disposable income. Consumer confidence remains strong in the Czech and Slovak Republics, reflecting historically low rates of unemployment in those countries. We believe the growth in real private consumption forecast for 2017 will support overall growth in the television advertising markets across the four countries where we continue to operate.
On March 29, 2017, the United Kingdom formally initiated the process to leave the European Union, commonly referred to as “Brexit”, triggering a two-year period to finalize the terms of that separation. While the negotiations over the exact terms of Brexit may negatively impact economic growth in the UK and Europe, the contribution of domestic demand as a component of GDP growth has reduced the sensitivity of our markets to external shocks affecting exports. Additionally, we have not seen an appreciable impact on the behavior of advertisers in the countries in which we operate since the UK electorate voted in favor of Brexit in June 2016.
On April 6, 2017, the Czech National Bank determined that the recent increase in inflation in the country was sustainable and its mandate for price stability had been met. As a result, it ended its commitment to intervene in currency markets and withdrew the floor related to the EUR/CZK exchange rate. Following the announcement, the Czech Koruna has since strengthened more than 10% against the dollar, also reflecting some appreciation of the Euro versus the dollar. If the currency continues to appreciate, this will improve the results of our largest operation in dollar terms.
We estimate that the TV advertising markets in the countries in which we operate
increased
by
6%
on average at constant rates in the
nine months
ended
September 30, 2017
compared to the same period in
2016
. In Bulgaria, we estimate that all broadcasters increased their average prices, which more than offset selling fewer gross ratings points ("GRPs"). In the Czech Republic, market growth was driven primarily by higher average prices. In Romania, the market grew because the increase in demand for advertising that started in 2016 also led to significant increases in average prices in the first nine months of 2017 compared to the same period in 2016. In the second and third quarters of 2016, our main channel aired the European football championship, which increased inventory available and sold last year. If the benefit of the tournament last year was excluded, we estimate the market grew 15% in the first nine months of 2017. In the Slovak Republic, the market grew due to higher average prices while inventory sold in the year-to-date period was flat compared to last year following the end of spending on informational and political campaigns that took place during the first half of 2016. If this spending in the first half of 2016 is excluded, we estimate the market grew 11% in the year-to-date period, reflecting continued strong demand by the private sector.
Segment Performance
Our total Net Revenues and OIBDA by segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET REVENUES
|
|
For the Three Months Ended September 30, (US$ 000's)
|
|
For the Nine Months Ended September 30, (US$ 000's)
|
|
|
|
|
|
Movement
|
|
|
|
|
|
Movement
|
|
2017
|
|
|
2016
|
|
|
% Act
|
|
|
% Lfl
|
|
|
2017
|
|
|
2016
|
|
|
% Act
|
|
|
% Lfl
|
|
Bulgaria
|
$
|
16,039
|
|
|
$
|
13,789
|
|
|
16.3
|
%
|
|
10.4
|
%
|
|
$
|
52,118
|
|
|
$
|
50,103
|
|
|
4.0
|
%
|
|
4.3
|
%
|
Czech Republic
|
42,681
|
|
|
39,031
|
|
|
9.4
|
%
|
|
(0.1
|
)%
|
|
135,526
|
|
|
128,558
|
|
|
5.4
|
%
|
|
3.5
|
%
|
Romania
|
40,469
|
|
|
36,970
|
|
|
9.5
|
%
|
|
6.4
|
%
|
|
127,983
|
|
|
118,269
|
|
|
8.2
|
%
|
|
9.7
|
%
|
Slovak Republic
|
20,384
|
|
|
17,864
|
|
|
14.1
|
%
|
|
8.1
|
%
|
|
63,348
|
|
|
59,466
|
|
|
6.5
|
%
|
|
6.6
|
%
|
Intersegment revenues
|
(142
|
)
|
|
(127
|
)
|
|
NM
(1)
|
|
|
NM
(1)
|
|
|
(917
|
)
|
|
(249
|
)
|
|
NM
(1)
|
|
|
NM
(1)
|
|
Total net revenues
|
$
|
119,431
|
|
|
$
|
107,527
|
|
|
11.1
|
%
|
|
4.8
|
%
|
|
$
|
378,058
|
|
|
$
|
356,147
|
|
|
6.2
|
%
|
|
6.0
|
%
|
(1)
Number is not meaningful.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OIBDA
|
|
For the Three Months Ended September 30, (US$ 000's)
|
|
For the Nine Months Ended September 30, (US$ 000's)
|
|
|
|
|
|
Movement
|
|
|
|
|
|
Movement
|
|
2017
|
|
|
2016
|
|
|
% Act
|
|
|
% Lfl
|
|
|
2017
|
|
|
2016
|
|
|
% Act
|
|
|
% Lfl
|
|
Bulgaria
|
$
|
2,537
|
|
|
$
|
1,943
|
|
|
30.6
|
%
|
|
24.6
|
%
|
|
$
|
6,973
|
|
|
$
|
8,966
|
|
|
(22.2
|
)%
|
|
(22.0
|
)%
|
Czech Republic
|
12,618
|
|
|
13,180
|
|
|
(4.3
|
)%
|
|
(12.8
|
)%
|
|
49,130
|
|
|
46,353
|
|
|
6.0
|
%
|
|
3.7
|
%
|
Romania
|
15,496
|
|
|
12,606
|
|
|
22.9
|
%
|
|
19.6
|
%
|
|
52,450
|
|
|
45,030
|
|
|
16.5
|
%
|
|
18.3
|
%
|
Slovak Republic
|
2,944
|
|
|
(383
|
)
|
|
NM
(1)
|
|
|
NM
(1)
|
|
|
11,339
|
|
|
5,168
|
|
|
119.4
|
%
|
|
125.7
|
%
|
Eliminations
|
10
|
|
|
6
|
|
|
NM
(1)
|
|
|
NM
(1)
|
|
|
27
|
|
|
9
|
|
|
NM
(1)
|
|
|
NM
(1)
|
|
Total operating segments
|
33,605
|
|
|
27,352
|
|
|
22.9
|
%
|
|
15.9
|
%
|
|
119,919
|
|
|
105,526
|
|
|
13.6
|
%
|
|
13.6
|
%
|
Corporate
|
(8,460
|
)
|
|
(8,028
|
)
|
|
(5.4
|
)%
|
|
2.2
|
%
|
|
(22,026
|
)
|
|
(22,074
|
)
|
|
0.2
|
%
|
|
2.0
|
%
|
Consolidated OIBDA
|
$
|
25,145
|
|
|
$
|
19,324
|
|
|
30.1
|
%
|
|
23.6
|
%
|
|
$
|
97,893
|
|
|
$
|
83,452
|
|
|
17.3
|
%
|
|
17.8
|
%
|
(1)
Number is not meaningful.
Bulgaria
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, (US$ 000's)
|
|
Nine Months Ended September 30, (US$ 000's)
|
|
|
|
|
|
Movement
|
|
|
|
|
|
Movement
|
|
2017
|
|
|
2016
|
|
|
% Act
|
|
|
% Lfl
|
|
|
2017
|
|
|
2016
|
|
|
% Act
|
|
|
% Lfl
|
|
Television advertising
|
$
|
10,239
|
|
|
$
|
8,192
|
|
|
25.0
|
%
|
|
18.6
|
%
|
|
$
|
34,550
|
|
|
$
|
32,838
|
|
|
5.2
|
%
|
|
5.7
|
%
|
Carriage fees and subscriptions
|
4,923
|
|
|
4,824
|
|
|
2.1
|
%
|
|
(3.1
|
)%
|
|
14,378
|
|
|
14,036
|
|
|
2.4
|
%
|
|
2.1
|
%
|
Other
|
877
|
|
|
773
|
|
|
13.5
|
%
|
|
7.6
|
%
|
|
3,190
|
|
|
3,229
|
|
|
(1.2
|
)%
|
|
(0.7
|
)%
|
Net revenues
|
16,039
|
|
|
13,789
|
|
|
16.3
|
%
|
|
10.4
|
%
|
|
52,118
|
|
|
50,103
|
|
|
4.0
|
%
|
|
4.3
|
%
|
Costs charged in arriving at OIBDA
|
13,502
|
|
|
11,846
|
|
|
14.0
|
%
|
|
8.1
|
%
|
|
45,145
|
|
|
41,137
|
|
|
9.7
|
%
|
|
10.0
|
%
|
OIBDA
|
$
|
2,537
|
|
|
$
|
1,943
|
|
|
30.6
|
%
|
|
24.6
|
%
|
|
$
|
6,973
|
|
|
$
|
8,966
|
|
|
(22.2
|
)%
|
|
(22.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OIBDA margin
|
15.8
|
%
|
|
14.1
|
%
|
|
1.7 p.p.
|
|
|
1.8 p.p.
|
|
|
13.4
|
%
|
|
17.9
|
%
|
|
(4.5) p.p.
|
|
|
(4.5) p.p.
|
|
The television advertising market in Bulgaria
increased
an estimated
5%
at constant rates in the
nine months
ended
September 30, 2017
compared to the same period in 2016.
Our television advertising revenues increased at constant rates in the third quarter and first nine months of 2017 compared to the same periods in 2016 due to higher prices in our sales policy for the year, which were particularly strong year-on-year in the third quarter. Carriage fees and subscription revenues decreased slightly at constant rates during the third quarter, but increased year to-date due to continued efforts to secure new contracts with cable, satellite and IPTV operators with improved pricing.
On a constant currency basis, costs charged in arriving at OIBDA increased in the third quarter and first nine months of 2017 compared to the same periods of 2016 due primarily to increases in content costs, resulting primarily from higher quality productions in certain time slots compared to the schedule in the prior year, as well as higher bad debt charges.
Czech Republic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, (US$ 000's)
|
|
Nine Months Ended September 30, (US$ 000's)
|
|
|
|
|
|
Movement
|
|
|
|
|
|
Movement
|
|
2017
|
|
|
2016
|
|
|
% Act
|
|
|
% Lfl
|
|
|
2017
|
|
|
2016
|
|
|
% Act
|
|
|
% Lfl
|
|
Television advertising
|
$
|
37,792
|
|
|
$
|
34,518
|
|
|
9.5
|
%
|
|
0.0
|
%
|
|
$
|
121,453
|
|
|
$
|
115,981
|
|
|
4.7
|
%
|
|
2.8
|
%
|
Carriage fees and subscriptions
|
3,269
|
|
|
2,612
|
|
|
25.2
|
%
|
|
14.6
|
%
|
|
8,790
|
|
|
7,743
|
|
|
13.5
|
%
|
|
11.2
|
%
|
Other
|
1,620
|
|
|
1,901
|
|
|
(14.8
|
)%
|
|
(22.3
|
)%
|
|
5,283
|
|
|
4,834
|
|
|
9.3
|
%
|
|
6.1
|
%
|
Net revenues
|
42,681
|
|
|
39,031
|
|
|
9.4
|
%
|
|
(0.1
|
)%
|
|
135,526
|
|
|
128,558
|
|
|
5.4
|
%
|
|
3.5
|
%
|
Costs charged in arriving at OIBDA
|
30,063
|
|
|
25,851
|
|
|
16.3
|
%
|
|
6.4
|
%
|
|
86,396
|
|
|
82,205
|
|
|
5.1
|
%
|
|
3.4
|
%
|
OIBDA
|
$
|
12,618
|
|
|
$
|
13,180
|
|
|
(4.3
|
)%
|
|
(12.8
|
)%
|
|
$
|
49,130
|
|
|
$
|
46,353
|
|
|
6.0
|
%
|
|
3.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OIBDA margin
|
29.6
|
%
|
|
33.8
|
%
|
|
(4.2) p.p.
|
|
|
(4.3) p.p.
|
|
|
36.3
|
%
|
|
36.1
|
%
|
|
0.2 p.p.
|
|
|
0.1 p.p.
|
|
The television advertising market in the Czech Republic
increased
an estimated
4%
at constant rates in the
nine months
ended
September 30, 2017
compared to the same period in 2016.
Television advertising revenues increased at constant rates in the first nine months of 2017 compared to the same period in 2016 due to higher average prices. Third quarter revenues were flat at constant rates, as higher average prices were offset by selling fewer GRPs during the period. Carriage fees and subscription revenues increased on a constant currency basis in the third quarter and first nine months of 2017 due primarily to contracts for Nova International that became effective late in 2016.
Costs charged in arriving at OIBDA increased on a constant currency basis in the third quarter and first nine months of 2017 compared to the same periods in 2016 due to an increase in content costs from higher quality productions this year compared to the schedule in 2016, an earlier start to certain key shows, and increased costs for sport rights and news, which was partially offset by lower transmission costs.
Romania
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, (US$ 000's)
|
|
Nine Months Ended September 30, (US$ 000's)
|
|
|
|
|
|
Movement
|
|
|
|
|
|
Movement
|
|
2017
|
|
|
2016
|
|
|
% Act
|
|
|
% Lfl
|
|
|
2017
|
|
|
2016
|
|
|
% Act
|
|
|
% Lfl
|
|
Television advertising
|
$
|
28,445
|
|
|
$
|
25,763
|
|
|
10.4
|
%
|
|
7.3
|
%
|
|
$
|
92,782
|
|
|
$
|
85,256
|
|
|
8.8
|
%
|
|
10.4
|
%
|
Carriage fees and subscriptions
|
11,260
|
|
|
10,104
|
|
|
11.4
|
%
|
|
8.3
|
%
|
|
32,781
|
|
|
30,268
|
|
|
8.3
|
%
|
|
9.7
|
%
|
Other
|
764
|
|
|
1,103
|
|
|
(30.7
|
)%
|
|
(32.6
|
)%
|
|
2,420
|
|
|
2,745
|
|
|
(11.8
|
)%
|
|
(11.3
|
)%
|
Net revenues
|
40,469
|
|
|
36,970
|
|
|
9.5
|
%
|
|
6.4
|
%
|
|
127,983
|
|
|
118,269
|
|
|
8.2
|
%
|
|
9.7
|
%
|
Costs charged in arriving at OIBDA
|
24,973
|
|
|
24,364
|
|
|
2.5
|
%
|
|
(0.4
|
)%
|
|
75,533
|
|
|
73,239
|
|
|
3.1
|
%
|
|
4.5
|
%
|
OIBDA
|
$
|
15,496
|
|
|
$
|
12,606
|
|
|
22.9
|
%
|
|
19.6
|
%
|
|
$
|
52,450
|
|
|
$
|
45,030
|
|
|
16.5
|
%
|
|
18.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OIBDA margin
|
38.3
|
%
|
|
34.1
|
%
|
|
4.2 p.p.
|
|
|
4.2 p.p.
|
|
|
41.0
|
%
|
|
38.1
|
%
|
|
2.9 p.p.
|
|
|
3.0 p.p.
|
|
The television advertising market in Romania
increased
an estimated
12%
at constant rates in the
nine months
ended
September 30, 2017
compared to the same period in 2016.
Our television advertising revenues increased at constant rates in the third quarter of 2017 compared to the same period last year due to higher prices, and the year-to-date period in 2017 also benefited from selling more GRPs. The market continues to be largely sold-out in 2017 and we have increased our all-day audience share compared to 2016, and consequently our inventory available to sell. In addition, in the second and third quarters of 2016 our main channel aired the European football championship, which significantly increased the volume of inventory available and sold last year. If the benefit of the tournament last year was excluded, we estimate our television advertising revenues increased approximately 16% in the year-to-date period. Carriage fees and subscription revenues grew on a constant currency basis during the third quarter and first nine months of 2017 due to an increase in the number of reported subscribers.
Costs charged in arriving at OIBDA increased at constant rates during the first nine months of 2017 primarily due to a increase in content costs, as we invested more in local productions of entertainment formats and aired more popular foreign programming to increase ratings. In the third quarter of 2017, these costs were mostly offset by savings from the European football championship that was broadcast in 2016.
Slovak Republic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, (US$ 000's)
|
|
Nine Months Ended September 30, (US$ 000's)
|
|
|
|
|
|
Movement
|
|
|
|
|
|
Movement
|
|
2017
|
|
|
2016
|
|
|
% Act
|
|
|
% Lfl
|
|
|
2017
|
|
|
2016
|
|
|
% Act
|
|
|
% Lfl
|
|
Television advertising
|
$
|
17,354
|
|
|
$
|
16,809
|
|
|
3.2
|
%
|
|
(2.0
|
)%
|
|
$
|
54,701
|
|
|
$
|
55,900
|
|
|
(2.1
|
)%
|
|
(2.0
|
)%
|
Carriage fees and subscriptions
|
2,095
|
|
|
400
|
|
|
NM
(1)
|
|
|
NM
(1)
|
|
|
5,649
|
|
|
1,276
|
|
|
NM
(1)
|
|
|
NM
(1)
|
|
Other
|
935
|
|
|
655
|
|
|
42.7
|
%
|
|
30.6
|
%
|
|
2,998
|
|
|
2,290
|
|
|
30.9
|
%
|
|
27.0
|
%
|
Net revenues
|
20,384
|
|
|
17,864
|
|
|
14.1
|
%
|
|
8.1
|
%
|
|
63,348
|
|
|
59,466
|
|
|
6.5
|
%
|
|
6.6
|
%
|
Costs charged in arriving at OIBDA
|
17,440
|
|
|
18,247
|
|
|
(4.4
|
)%
|
|
(9.4
|
)%
|
|
52,009
|
|
|
54,298
|
|
|
(4.2
|
)%
|
|
(4.4
|
)%
|
OIBDA
|
$
|
2,944
|
|
|
$
|
(383
|
)
|
|
NM
(1)
|
|
|
NM
(1)
|
|
|
$
|
11,339
|
|
|
$
|
5,168
|
|
|
119.4
|
%
|
|
125.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OIBDA margin
|
14.4
|
%
|
|
(2.1
|
)%
|
|
16.5 p.p.
|
|
|
16.5 p.p.
|
|
|
17.9
|
%
|
|
8.7
|
%
|
|
9.2 p.p.
|
|
|
9.4 p.p.
|
|
(1)
Number is not meaningful.
The television advertising market in the Slovak Republic
increased
an estimated
3%
at constant rates in the
nine months
ended
September 30, 2017
compared to the same period in 2016.
Our television advertising revenues decreased on a constant currency basis during the third quarter of 2017 compared to the same period in 2016 from selling fewer GRPs due to lower coverage for our channels, which have been distributed exclusively on cable, satellite and IPTV platforms in the country since January of this year. Demand for GRPs was also lower in the first nine months of 2017 compared to 2016 due to informational and political campaigns that took place in the first half of 2016. If this spending is excluded, our television advertising revenues increased 3% at constant rates in the first nine months of 2017. The change in the way our channels are distributed resulted in a significant increase in carriage fees and subscriptions revenue, as well as a cost reduction from significantly lower transmission costs. During the remainder of 2017 we anticipate reduced pressure on our ratings as additional households transition to cable, satellite and IPTV platforms and the measurement panel is updated to better reflect how viewers watch television.
On a constant currency basis, costs charged in arriving at OIBDA decreased during the third quarter primarily due to lower transmission costs, which were partially offset in the first nine months of 2017 by an increase in content costs as we made targeted adjustments in the programming line-up since we changed the way our channels are distributed.
III. Analysis of the Results of Operations and Financial Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, (US$ 000's)
|
|
|
|
|
|
Movement
|
|
2017
|
|
|
2016
|
|
|
% Act
|
|
|
% Lfl
|
|
Revenue:
|
|
|
|
|
|
|
|
Television advertising
|
$
|
93,830
|
|
|
$
|
85,282
|
|
|
10.0
|
%
|
|
3.5
|
%
|
Carriage fees and subscriptions
|
21,547
|
|
|
17,940
|
|
|
20.1
|
%
|
|
14.9
|
%
|
Other revenue
|
4,054
|
|
|
4,305
|
|
|
(5.8
|
)%
|
|
(12.1
|
)%
|
Net Revenues
|
119,431
|
|
|
107,527
|
|
|
11.1
|
%
|
|
4.8
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
Content costs
|
55,871
|
|
|
51,920
|
|
|
7.6
|
%
|
|
1.8
|
%
|
Other operating costs
|
12,612
|
|
|
13,482
|
|
|
(6.5
|
)%
|
|
(12.3
|
)%
|
Depreciation of property, plant and equipment
|
6,936
|
|
|
5,801
|
|
|
19.6
|
%
|
|
11.8
|
%
|
Amortization of broadcast licenses and other intangibles
|
2,187
|
|
|
2,073
|
|
|
5.5
|
%
|
|
(3.1
|
)%
|
Cost of revenues
|
77,606
|
|
|
73,276
|
|
|
5.9
|
%
|
|
(0.1
|
)%
|
Selling, general and administrative expenses
|
25,803
|
|
|
22,801
|
|
|
13.2
|
%
|
|
5.8
|
%
|
Operating income
|
$
|
16,022
|
|
|
$
|
11,450
|
|
|
39.9
|
%
|
|
34.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, (US$ 000's)
|
|
|
|
|
|
Movement
|
|
2017
|
|
|
2016
|
|
|
% Act
|
|
|
% Lfl
|
|
Revenue:
|
|
|
|
|
|
|
|
Television advertising
|
$
|
303,486
|
|
|
$
|
289,975
|
|
|
4.7
|
%
|
|
4.4
|
%
|
Carriage fees and subscriptions
|
61,597
|
|
|
53,323
|
|
|
15.5
|
%
|
|
15.9
|
%
|
Other revenue
|
12,975
|
|
|
12,849
|
|
|
1.0
|
%
|
|
(0.4
|
)%
|
Net Revenues
|
378,058
|
|
|
356,147
|
|
|
6.2
|
%
|
|
6.0
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
Content costs
|
174,214
|
|
|
166,938
|
|
|
4.4
|
%
|
|
4.5
|
%
|
Other operating costs
|
35,747
|
|
|
40,773
|
|
|
(12.3
|
)%
|
|
(13.0
|
)%
|
Depreciation of property, plant and equipment
|
19,345
|
|
|
17,134
|
|
|
12.9
|
%
|
|
11.8
|
%
|
Amortization of broadcast licenses and other intangibles
|
6,349
|
|
|
6,247
|
|
|
1.6
|
%
|
|
(0.2
|
)%
|
Cost of revenues
|
235,655
|
|
|
231,092
|
|
|
2.0
|
%
|
|
1.8
|
%
|
Selling, general and administrative expenses
|
70,204
|
|
|
64,984
|
|
|
8.0
|
%
|
|
6.7
|
%
|
Operating income
|
$
|
72,199
|
|
|
$
|
60,071
|
|
|
20.2
|
%
|
|
21.4
|
%
|
Revenue:
Television advertising revenues:
We estimate television advertising spending in our markets grew on average by
6%
at constant rates in the
nine months
ended
September 30, 2017
as compared to the same period in
2016
, positively impacting our television advertising revenues. See "Overview - Segment Performance" above for additional information on television advertising revenues for each of our operating countries.
Carriage fees and subscriptions:
Carriage fees and subscriptions revenue increased during the
three and nine months
ended
September 30, 2017
to 18% and 16% of total net revenues, respectively, as compared to 17% and 15% for the same periods in
2016
. The increases arose primarily in the Slovak Republic where our channels are exclusively available on cable, satellite and IPTV platforms since January 2017 and in Romania due to higher subscriber counts. See "Overview - Segment Performance" above for additional information on carriage fees and subscription revenues for each of our operating countries.
Other revenues:
Other revenues include primarily internet advertising revenues and revenues generated through the licensing of our own productions. Other revenues decreased during the three months ended
September 30, 2017
as compared to the same period in
2016
primarily due to lower internet advertising in the Czech Republic and fewer special events in Romania, offset by increases in production services in the Slovak Republic. Other revenues for the nine months ended
September 30, 2017
remained in line with those of the same period in 2016.
Operating Expenses:
Content costs:
Content costs (including production costs and amortization and impairment of program rights) increased during the
three and nine months
ended
September 30, 2017
compared to the same periods in
2016
primarily due to the inclusion of both higher quality acquired programming and more hours of local productions in our broadcast schedules.
Other operating costs:
Other operating costs (excluding content costs, depreciation of property, plant and equipment, amortization of broadcast licenses and other intangibles as well as selling, general and administrative expenses) decreased during the
three and nine months
ended
September 30, 2017
compared to the same periods in
2016
, primarily due to cost savings in the Slovak Republic following our decision not to renew our contract for the terrestrial distribution of our channels there.
Depreciation of property, plant and equipment:
Total depreciation of property, plant and equipment increased during the
three and nine months
ended
September 30, 2017
compared to the same periods in
2016
primarily due to depreciation on production and technical equipment placed in service as we replaced fully depreciated assets.
Amortization of broadcast licenses and other intangibles:
Total amortization of broadcast licenses and other intangibles decreased during the
three and nine months
ended
September 30, 2017
compared to the same periods in
2016
primarily due to certain intangibles in Romania becoming fully amortized, partly offset by an increase in amortization of certain of our trademarks in the Czech Republic.
Selling, general and administrative expenses:
Selling, general and administrative expenses increased for the three and nine months ended
September 30, 2017
as compared to the same periods in
2016
primarily due to increased bad debt charges in Bulgaria.
Operating income:
Operating income during the
three and nine months
ended
September 30, 2017
increased compared to the same periods in
2016
due to increases in television advertising and carriage fee revenues, which outpaced the increases in content costs and selling, general and administrative expenses. Our operating margin, which is determined as operating income / loss divided by net revenues, was
13%
and
19%
for the
three and nine months
ended
September 30, 2017
compared to
11%
and
17%
for the
three and nine months
ended
September 30, 2016
.
Other income / expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30, (US$ 000's)
|
|
For the Nine Months Ended
September 30, (US$ 000's)
|
|
2017
|
|
|
2016
|
|
|
% Act
|
|
|
2017
|
|
|
2016
|
|
|
% Act
|
|
Interest expense
|
$
|
(18,352
|
)
|
|
$
|
(22,424
|
)
|
|
18.2
|
%
|
|
$
|
(54,773
|
)
|
|
$
|
(90,640
|
)
|
|
39.6
|
%
|
Loss on extinguishment of debt
|
(101
|
)
|
|
—
|
|
|
NM
(1)
|
|
|
(101
|
)
|
|
(150,158
|
)
|
|
99.9
|
%
|
Non-operating income / (expense):
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
139
|
|
|
89
|
|
|
56.2
|
%
|
|
326
|
|
|
466
|
|
|
(30.0
|
)%
|
Foreign currency exchange gain, net
|
4,609
|
|
|
602
|
|
|
NM
(1)
|
|
|
14,085
|
|
|
13,099
|
|
|
7.5
|
%
|
Change in fair value of derivatives
|
(1,150
|
)
|
|
(398
|
)
|
|
(188.9
|
)%
|
|
(1,882
|
)
|
|
(11,904
|
)
|
|
84.2
|
%
|
Other income / (expense), net
|
45
|
|
|
57
|
|
|
(21.1
|
)%
|
|
254
|
|
|
(23
|
)
|
|
NM
(1)
|
|
Provision for income taxes
|
(3,157
|
)
|
|
(1,145
|
)
|
|
(175.7
|
)%
|
|
(12,770
|
)
|
|
(6,706
|
)
|
|
(90.4
|
)%
|
Loss from discontinued operations, net of tax
|
(5,988
|
)
|
|
(8,054
|
)
|
|
25.7
|
%
|
|
(8,747
|
)
|
|
(15,971
|
)
|
|
45.2
|
%
|
Net loss attributable to noncontrolling interests
|
188
|
|
|
196
|
|
|
(4.1
|
)%
|
|
534
|
|
|
387
|
|
|
38.0
|
%
|
|
|
(1)
|
Number is not meaningful.
|
Interest expense:
Interest expense during the
three and nine months
ended
September 30, 2017
decreased compared to the
three and nine months
ended
September 30, 2016
primarily due to lower amortization of debt discount and issuance costs following the extinguishment of the 2017 PIK Notes and 2017 Term Loan in April 2016 and due to a lower effective interest rate on the replacement facility. We also realized interest expense savings as a result of the repricing of our Guarantee Fees in March of 2017. See Item 1,
Note 5, "Long-term Debt and Other Financing Arrangements"
.
Loss on extinguishment of debt:
During the nine months ended
September 30, 2017
, we recognized a loss on extinguishment of debt related to our repayment of EUR 50 million (approximately US$
59.1 million
at August 1, 2017 rates) of the 2018 Euro Term Loan. During the nine months ended September 30, 2016, we recognized a loss on extinguishment of debt related to the redemption and discharge of the 2017 PIK Notes, repayment of the 2017 Term Loan and modifications of the 2018 Euro Term Loan and the 2019 Euro Term Loan, which were accounted for in a similar manner to a debt extinguishment.
Interest income:
Interest income primarily reflects earnings on cash balances and was not material.
Foreign currency exchange gain, net
:
We are exposed to fluctuations in foreign exchange rates on the revaluation of monetary assets and liabilities denominated in currencies other than the local functional currency of the relevant subsidiary. This includes third party receivables and payables, as well as certain of our intercompany loans which are not considered of a long-term investment nature. Our subsidiaries generally receive funding via loans that are denominated in currencies other than the dollar, and any change in the relevant exchange rate will require us to recognize a transaction gain or loss on revaluation. Certain of our intercompany loans are classified as long-term in nature, and therefore gains or losses on revaluation are not recorded through the statement of operations and comprehensive income / loss. See the discussion under "Currency translation adjustment, net" below.
During the
nine months
ended
September 30, 2017
, we recognized a net gain of US$
14.1 million
comprised of transaction gains of US$
7.7 million
relating to the revaluation of intercompany loans, transaction gains of approximately US$
2.4 million
on our long-term debt and other financing arrangements and transaction gains of US$
4.0 million
relating to the revaluation of monetary assets and liabilities denominated in currencies other than the local functional currency of the relevant subsidiary.
During the
nine months
ended
September 30, 2016
, we recognized a net gain of US$
13.1 million
comprised of transaction gains of US$
38.1 million
relating to the revaluation of intercompany loans, transaction losses of approximately US$
25.3 million
on our long-term debt and other financing arrangements and transaction gains of US$
0.3 million
relating to the revaluation of monetary assets and liabilities denominated in currencies other than the local functional currency of the relevant subsidiary.
Change in fair value of derivatives:
During the
three and nine months
ended
September 30, 2017
, we recognized losses as a result of the change in the fair value of our USD/EUR foreign currency forward contracts entered into on January 31, 2017, May 16, 2017 and July 21, 2017 and the interest rate swaps we use as hedging instruments for interest payments on the 2018 Euro Term Loan. During the
three and nine months
ended
September 30, 2016
, we recognized losses as a result of the change in the fair value of certain USD/EUR foreign currency forward contracts which matured in 2016. See Item 1,
Note 12, "Financial Instruments and Fair Value Measurements"
.
Other income / (expense), net
:
Our other income / expense, net during the
three and nine months
ended
September 30, 2017
and 2016 was not material.
Provision for income taxes
:
The provision for income taxes for the
three and nine months
ended
September 30, 2017
and for the same periods in 2016 reflects losses on which no tax benefit has been received and an income tax charge on profits in the Czech Republic, Romania and the Slovak Republic.
Our subsidiaries are subject to income taxes at statutory rates ranging from
10.0%
in Bulgaria to
21.0%
in the Slovak Republic.
Loss from discontinued operations, net of tax:
Loss from discontinued operations, net of tax for the
three and nine months
ended
September 30, 2017
and
2016
is comprised of the operational results of the Croatia and Slovenia segments including the allocation of interest expense and Guarantee Fees from the 2018 Euro Term Loan and transaction costs. See Item 1,
Note 3, "Discontinued Operations and Assets Held for Sale"
and
Note 5, "Long-term Debt and Other Financing Arrangements"
.
Net loss attributable to noncontrolling interests
:
The results attributable to noncontrolling interests for the
three and nine months
ended
September 30, 2017
and
2016
relates to the noncontrolling interest share of our Bulgaria operations.
Other comprehensive income
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30, (US$ 000's)
|
|
For the Nine Months Ended
September 30, (US$ 000's)
|
|
2017
|
|
|
2016
|
|
|
% Act
|
|
|
2017
|
|
|
2016
|
|
|
% Act
|
|
Currency translation adjustment, net
|
$
|
9,227
|
|
|
$
|
7,262
|
|
|
27.1
|
%
|
|
$
|
42,203
|
|
|
$
|
15,264
|
|
|
176.5
|
%
|
(Loss) / gain on derivative instruments
|
(135
|
)
|
|
(1,360
|
)
|
|
90.1
|
%
|
|
1,083
|
|
|
(5,581
|
)
|
|
NM
(1)
|
|
|
|
(1)
|
Number is not meaningful.
|
Currency translation adjustment, net:
The underlying equity value of our investments (which are denominated in the functional currency of the relevant entity) are converted into dollars at each balance sheet date, with any change in value of the underlying assets and liabilities being recorded as a currency translation adjustment to the balance sheet rather than net income / loss. Other comprehensive income / (loss) due to currency translation adjustment, net comprised the following for the
three and nine months
ended
September 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30, (US$ 000's)
|
|
For the Nine Months Ended
September 30, (US$ 000's)
|
|
2017
|
|
|
2016
|
|
|
% Act
|
|
|
2017
|
|
|
2016
|
|
|
% Act
|
|
Foreign exchange gain on intercompany transactions
|
$
|
1,142
|
|
|
$
|
2,263
|
|
|
(49.5
|
)%
|
|
$
|
7,824
|
|
|
$
|
10,757
|
|
|
(27.3
|
)%
|
Foreign exchange gain / (loss) on the Series B Preferred Shares
|
8,833
|
|
|
1,334
|
|
|
NM
(1)
|
|
|
29,284
|
|
|
(4,919
|
)
|
|
NM
(1)
|
|
Currency translation adjustment
|
(748
|
)
|
|
3,665
|
|
|
NM
(1)
|
|
|
5,095
|
|
|
9,426
|
|
|
(45.9
|
)%
|
Currency translation adjustment, net
|
$
|
9,227
|
|
|
$
|
7,262
|
|
|
27.1
|
%
|
|
$
|
42,203
|
|
|
$
|
15,264
|
|
|
176.5
|
%
|
|
|
(1)
|
Number is not meaningful.
|
Certain of our intercompany loans are denominated in currencies other than the functional currency of the lender and are considered to be of a long-term investment nature as the repayment of these loans is neither planned nor anticipated for the foreseeable future. The foreign exchange gains / (losses) on the remeasurement of these intercompany loans to the lender's functional currency are treated in the same manner as currency translation adjustments.
The following charts depict the movement of the dollar versus the functional currencies of our operations, based on monthly closing rates, during the
nine months
ended
September 30, 2017
and
September 30, 2016
.
Percent Change During the
Nine Months
Ended
September 30, 2017
Percent Change During the
Nine Months
Ended
September 30, 2016
(Loss) / gain on derivative instruments
:
The (losses) / gains on derivatives classified as cash flow hedges of the Euro Term Loans, which are recognized in accumulated other comprehensive income / loss, for the
three and nine months
ended
September 30, 2017
and
2016
are due to the effective portion of the changes in the fair value of our interest rate swap on the 2019 and 2021 Euro Term Loans. See Item 1,
Note 12, "Financial Instruments and Fair Value Measurements"
.
Condensed consolidated balance sheets as at
September 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Balance Sheet (US$ 000’s)
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
% Act
|
|
|
% Lfl
|
|
Current assets
|
$
|
423,318
|
|
|
$
|
340,422
|
|
|
24.4
|
%
|
|
10.6
|
%
|
Non-current assets
|
1,149,372
|
|
|
1,050,295
|
|
|
9.4
|
%
|
|
(4.4
|
)%
|
Current liabilities
|
215,528
|
|
|
171,565
|
|
|
25.6
|
%
|
|
11.1
|
%
|
Non-current liabilities
|
1,154,383
|
|
|
1,070,785
|
|
|
7.8
|
%
|
|
(3.4
|
)%
|
Temporary equity
|
262,115
|
|
|
254,899
|
|
|
2.8
|
%
|
|
2.8
|
%
|
CME Ltd. shareholders’ deficit
|
(59,278
|
)
|
|
(107,804
|
)
|
|
45.0
|
%
|
|
43.1
|
%
|
Noncontrolling interests in consolidated subsidiaries
|
(58
|
)
|
|
1,272
|
|
|
NM
(1)
|
|
|
NM
(1)
|
|
|
|
(1)
|
Number is not meaningful.
|
Note: The analysis below is intended to highlight the key factors at constant rates that led to the movements from
December 31, 2016
, excluding the impact of foreign currency translation.
Current assets:
Excluding the impact of assets held for sale, current assets at
September 30, 2017
decreased from
December 31, 2016
primarily due to lower trade receivables from increased collection and higher bad debt provisions. Further decreases are due to seasonality and lower prepayments for program rights.
Non-current assets:
Excluding the impact of assets held for sale, non-current assets at
September 30, 2017
increased from
December 31, 2016
primarily due to higher program rights from foreign acquired and own-produced content partly offset by increased depreciation of property, plant and equipment and amortization of intangible assets.
Current liabilities:
Excluding the impact of liabilities held for sale, current liabilities at
September 30, 2017
increased from
December 31, 2016
. The increase is primarily due to higher deferred revenue from customer prepayments for the fall season and accrued interest and Guarantee Fees.
Non-current liabilities:
Excluding the impact of liabilities held for sale, non-current liabilities at
September 30, 2017
decreased from
December 31, 2016
primarily due to our election to repay a portion of the 2018 Euro Term Loan in August 2017. See Item 1, Note 5, "Long-term Debt and Other Financing Arrangements".
Temporary equity:
Temporary equity at
September 30, 2017
increased from
December 31, 2016
due to the accretion on the Series B Preferred Shares.
CME Ltd. shareholders’ deficit
:
CME Ltd. shareholders’ deficit decreased from
December 31, 2016
. This primarily reflects a decrease in accumulated other comprehensive loss due to currency translation adjustments and the net income attributable to CME Ltd. during the
nine months
ended
September 30, 2017
, which was partly offset by accretion of the preferred dividend paid in kind on our Series B Preferred Shares.
Noncontrolling interests in consolidated subsidiaries:
Noncontrolling interests in consolidated subsidiaries at
September 30, 2017
decreased from
December 31, 2016
due to the net loss attributable to the noncontrolling interest in Bulgaria.
IV. Liquidity and Capital Resources
IV (a) Summary of Cash Flows
Cash and cash equivalents
increased
by US$
26.4 million
during the
nine months
ended
September 30, 2017
. The change in cash and cash equivalents for the periods presented below is summarized as follows:
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, (US$ 000's)
|
|
2017
|
|
|
2016
|
|
Net cash generated from continuing operating activities
|
$
|
90,638
|
|
|
$
|
56,972
|
|
Net cash used in continuing investing activities
|
(16,250
|
)
|
|
(14,762
|
)
|
Net cash used in continuing financing activities
|
(57,782
|
)
|
|
(23,191
|
)
|
Net cash used in discontinued operations
|
(62
|
)
|
|
(22,278
|
)
|
Impact of exchange rate fluctuations on cash and cash equivalents
|
9,884
|
|
|
2,005
|
|
Net increase / (decrease) in cash and cash equivalents
|
$
|
26,428
|
|
|
$
|
(1,254
|
)
|
Operating Activities
The increase in cash generated from continuing operations during the
nine months
ended
September 30, 2017
reflects a significant decrease in cash paid for interest and Guarantee Fees. In 2016, we paid accrued interest related to the 2017 PIK Notes and 2017 Term Loan when they were refinanced in April 2016 and we also repaid US$ 5.5 million of accrued Guarantee Fees in the first half of 2016 which were previously paid in kind. The increase also reflects higher cash collections from revenue growth which are partly offset by higher cash paid for programming and taxes in 2017. We paid cash interest (including mandatory cash-pay Guarantee Fees) of US$
22.2 million
during the
nine months
ended
September 30, 2017
compared to US$
38.3 million
during the
nine months
ended
September 30, 2016
.
Investing Activities
Our net cash used in continuing investing activities for the
nine months
ended
September 30, 2017
and
2016
relates to capital expenditures for property, plant and equipment.
Financing Activities
Cash used in continuing financing activities during the
nine months
ended
September 30, 2017
primarily reflected principal repayments made on our 2018 Euro Term Loan. The cash used in continuing financing activities during the
nine months
ended
September 30, 2016
primarily reflected the refinancing of the 2017 PIK Notes and the 2017 Term Loan, partly offset by proceeds from the exercise of stock warrants.
Discontinued Operations
The net cash used in discontinued operations during the
nine months
ended
September 30, 2017
primarily reflected capital expenditures for property, plant and equipment. The net cash used in discontinued operations during the
nine months
ended
September 30, 2016
primarily reflected the payment of Guarantee Fees related to the 2018 Euro Term Loan.
IV (b) Sources and Uses of Cash
Our ongoing source of cash is primarily the receipt of payments from advertisers, advertising agencies and distributors of our television channels. We also have available the 2021 Revolving Credit Facility (see Item 1,
Note 5, "Long-term Debt and Other Financing Arrangements"
). As at
September 30, 2017
, the aggregate principal amount available under the 2021 Revolving Credit Facility was US$ 115.0 million and was undrawn. The available amount decreases to US$ 50.0 million with effect from January 1, 2018 or, if earlier, upon the repayment of the 2018 Euro Term Loan with the expected proceeds from the Divestment Transaction. Surplus cash, after funding ongoing operations, may be remitted to us, where appropriate, by our subsidiaries 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
5.0%
) be allocated to a reserve, which is capped at a proportion of the registered capital of a company (ranging from
5.0%
to
20.0%
). There are no third-party restrictions that limit our subsidiaries' ability to transfer amounts to us in the form of loans or advances.
IV (c) Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
Our future contractual obligations as at
September 30, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period (US$ 000’s)
|
|
Total
|
|
|
Less than 1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than 5 years
|
|
Long-term debt – principal
|
$
|
1,068,366
|
|
|
$
|
—
|
|
|
$
|
514,901
|
|
|
$
|
553,465
|
|
|
$
|
—
|
|
Long-term debt – interest
|
253,560
|
|
|
56,089
|
|
|
127,104
|
|
|
70,367
|
|
|
—
|
|
Unconditional purchase obligations
|
140,986
|
|
|
54,344
|
|
|
62,223
|
|
|
20,509
|
|
|
3,910
|
|
Operating leases
|
8,590
|
|
|
3,430
|
|
|
2,530
|
|
|
958
|
|
|
1,672
|
|
Capital lease obligations
|
7,941
|
|
|
2,606
|
|
|
4,172
|
|
|
1,163
|
|
|
—
|
|
Other long-term obligations
|
31,182
|
|
|
15,554
|
|
|
14,376
|
|
|
1,134
|
|
|
118
|
|
Total contractual obligations
|
$
|
1,510,625
|
|
|
$
|
132,023
|
|
|
$
|
725,306
|
|
|
$
|
647,596
|
|
|
$
|
5,700
|
|
Long-Term Debt
For more information on our long-term debt, see Item 1,
Note 5, "Long-term Debt and Other Financing Arrangements"
. Interest payable on our long-term debt is calculated using exchange rates and interest rates in effect as at
September 30, 2017
. For the purposes of the above table, it is assumed that the Guarantee Fees eligible to be paid in kind will be paid in kind at each interest payment date through the maturity dates of the respective Euro Term Loan. However, we intend to allocate excess cash towards paying the Guarantee Fees related to the 2018 Euro Term Loan in cash rather than electing to pay any portion in kind.
Unconditional Purchase Obligations
Unconditional purchase obligations primarily comprise future programming commitments. At
September 30, 2017
, we had commitments in respect of future programming of US$
$138.9 million
. This includes contracts signed with license periods starting after
September 30, 2017
.
Operating Leases
For more information on our operating lease commitments see Item 1,
Note 20, "Commitments and Contingencies"
.
Other Long-Term Obligations
Other long-term obligations are primarily comprised of digital transmission commitments.
Other
Top Tone Holdings has exercised its right to acquire additional equity in CME Bulgaria. However, the closing of this transaction has not yet occurred because the purchaser financing is still pending. If consummated, we would own
90.0%
of our Bulgaria broadcast operations. The option strike price is the fair value of the equity in CME Bulgaria, as determined by an independent valuation.
IV (d) Cash Outlook
Because cash flows from operating activities were negative from 2012 to 2014, we relied on equity and debt financings to ensure adequate funding for our operations. While cash flows from operating activities were positive in 2015 and 2016, our average cost of borrowing was high and our election to pay certain interest and Guarantee Fees in kind increased our leverage. Our financing transactions in 2016 and 2017 significantly lowered our cost of borrowing.
Following the repricing of our Guarantee Fees completed in March 2017, we are now required to pay a portion of the Guarantee Fees related to all of the Euro Term Loans in cash. However, the total amount of cash paid for interest and Guarantee Fees will decrease significantly in 2017 due to the lower all-in rate following this repricing transaction and non-repeating payments that were made in 2016 when we elected to repay in cash accrued Guarantee Fees related to the 2018 Euro Term Loan that were previously paid in kind as well as when we paid accrued interest on the 2017 PIK Notes and 2017 Term Loan when they were refinanced.
As at
September 30, 2017
, we have repaid in cash all previously accrued Guarantee Fees related to the 2018 Euro Term Loan and intend to continue to make payments of such Guarantee Fees in cash when due, rather than electing to pay in kind. However, we expect improvements in unlevered free cash flow to exceed the amount of these payments, and therefore expect free cash flow to increase in 2017 compared to 2016.
As at
September 30, 2017
, we had US$
67.0 million
in cash and cash equivalents. In August 2017, we paid down EUR 50.0 million (approximately US$
59.1 million
at August 1, 2017 rates
) of the outstanding principal balance of the 2018 Euro Term Loan with cash on hand. Following this repayment, we anticipate using excess cash, including free cash flow from the business, expected proceeds from the Divestment Transaction and expected proceeds from warrant exercises, to repay the remainder of the 2018 Euro Term Loan in full before it matures in November 2018. In the event that the Divestment Transaction does not close or we do not receive the expected warrant proceeds, we will need to secure other external sources of capital to repay the 2018 Euro Term Loan and fund our operations, including through public or private debt or equity financing transactions, which may not be available to us or may not be available on acceptable terms. If these actions are not successful, we will not have sufficient liquidity to repay the 2018 Euro Term Loan prior to its maturity on November 1, 2018.
Credit ratings and future debt issuances
Our corporate credit is rated
B2
by Moody's Investors Service with a positive outlook and
B+
by Standard & Poor's (currently on
CreditWatch
with developing implications due to the announced Divestment Transaction). Ratings agencies have indicated that retention of these ratings is dependent on maintaining an adequate liquidity profile, leverage ratios and cash flow profile as well as track record of strong financial support from Time Warner. Among other parameters, if we fail to meet adequate liquidity, it is likely that the rating agencies will downgrade us. The availability of additional liquidity is dependent upon our continued operating performance, improved financial performance and credit ratings. We are currently able to raise only a limited amount of additional debt (other than refinancing indebtedness) or under the agreement governing the 2021 Revolving Credit Facility and the Reimbursement Agreement.
Credit risk of financial counterparties
We have entered into a number of significant contracts with financial counterparties as follows:
Interest Rate Swaps
We are party to interest rate swap agreements to mitigate our exposure to interest rate fluctuations on our Euro Term Loans. These interest rate swaps, certain of which are designated as cash flow hedges, provide the Company with variable-rate cash receipts in exchange for fixed-rate payments over the lives of the agreements, with no exchange of the underlying notional amount.
Foreign Exchange Forwards
We are exposed to movements in the USD to EUR exchange rates related to contractual payments under dollar-denominated agreements. To reduce this exposure, from time to time we enter into pay-Euro receive-dollar forward foreign exchange contracts. As at
September 30, 2017
,
two
forward foreign exchange contract with an aggregate notional amount of approximately US$
26.3 million
related to contractual operating payments were outstanding.
Cash Deposits
We may deposit cash in the global money markets with a range of bank counterparties and review the counterparties we choose weekly. 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 deposit cash with banks of investment grade rating. In addition, we also closely monitor the credit default swap spreads and other market information for each of the banks with which we consider depositing or have deposited funds.
IV (e) Off-Balance Sheet Arrangements
None.
V. Critical Accounting Policies and Estimates
Our accounting policies that have a material effect on our financial condition and results of operations are more fully described in Part II, Item 8 of our Annual Report on Form 10-K for the year ended
December 31, 2016
filed with the Securities and Exchange Commission ("SEC") on
February 9, 2017
. The preparation of these financial statements requires us to make judgments in selecting appropriate assumptions for calculating financial estimates, which inherently contain some degree of uncertainty. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable. Using these estimates we make judgments about the carrying values of assets and liabilities and the reported amounts of revenues and expenses that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe our critical accounting policies are as follows: program rights, goodwill and intangible assets, impairment or disposal of long-lived assets, revenue recognition, income taxes, foreign exchange, determination of the fair value of financial instruments, contingencies and discontinued operations. These critical accounting policies affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements. See Item 1,
Note 2, "Basis of Presentation"
for a discussion of accounting standards adopted in the period, and recently issued accounting standards not yet adopted.