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CETV > SEC Filings for CETV > Form 10-Q on 31-Oct-2012All Recent SEC Filings

Show all filings for CENTRAL EUROPEAN MEDIA ENTERPRISES LTD

Form 10-Q for CENTRAL EUROPEAN MEDIA ENTERPRISES LTD


31-Oct-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Contents

I. Forward-looking Statements

II. Overview

III. Our Business

IV. Analysis of the Results of Operations and Financial Position

V. Liquidity and Capital Resources

VI. Critical Accounting Policies and Estimates

Key Financing Defined Terms

As used herein, the term "2014 Floating Rate Notes" refers to our floating rate senior notes due 2014; the term "2016 Fixed Rate Notes" refers to our 11.625% senior notes due 2016; the term "2017 Fixed Rate Notes" refers to the 9.0% senior secured notes due 2017 issued by our wholly owned subsidiary, CET 21 spol. s r.o. ("CET 21"); the term "Senior Notes" refers collectively to the 2014 Floating Rate Notes, 2016 Fixed Rate Notes and 2017 Fixed Rate Notes; the term "2015 Convertible Notes" refers to our 5.0% senior convertible notes due 2015, the term "2013 Convertible Notes" refers to our 3.50% senior convertible notes due 2013 and the term "Convertible Notes" refers collectively to the 2013 Convertible Notes and the 2015 Convertible Notes. The term "Secured Revolving Credit Facility" refers to the five-year CZK 1.5 billion secured revolving credit facility entered into on October 21, 2010 by CET 21 with BNP Paribas, S.A., J.P. Morgan plc, Citigroup Global Markets Limited, ING Bank N.V. and Ceska Sporitelna a.s. ("CSAS") as mandated lead arrangers and original lenders, BNP Paribas, S.A. as agent, BNP Paribas Trust Corporation UK Limited as security agent, and Central European Media Enterprises Ltd. ("CME Ltd.") and our wholly-owned subsidiaries Central European Media Enterprises N.V., CME Media Enterprises B.V. ("CME BV"), CME Investments B.V., CME Slovak Holdings B.V. and MARKÍZA-SLOVAKIA, spol. s r.o., as the original guarantors. The term "TW Loans" refers to amounts drawn under the Term Loan Facilities Credit Agreement dated April 30, 2012 with Time Warner Inc. ("Time Warner"). The term "Preferred Share" refers to the one share of Series A Convertible Preferred Stock, par value US$ 0.08 per share, issued to Time Warner Media Holdings B.V. ("TW Investor"). The term "Equity Commitment Agreement" refers to the Subscription and Equity Commitment Agreement, by and between TW Investor and the Company, dated as of April 30, 2012.

The exchange rates used in this report are as at September 30, 2012, unless otherwise indicated.

I. Forward-looking Statements

This report contains forward-looking statements, including those relating to our capital needs, business strategy, expectations and intentions. Statements that use the terms "believe", "anticipate", "trend", "expect", "plan", "estimate", "forecast", "intend" and similar expressions of a future or forward-looking nature identify forward-looking statements for purposes of the U.S. federal securities laws or otherwise. For these statements and all other forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy or are otherwise beyond our control and some of which might not even be anticipated. Forward-looking statements reflect our current views with respect to future events and because our business is subject to such risks and uncertainties, actual results, our strategic plan, our financial position, results of operations and cash flows could differ materially from those described in or contemplated by the forward-looking statements contained in this report.

Important factors that contribute to such risks include, but are not limited to, those factors set forth under "Risk Factors" as well as the following: the effect of the economic downturn and Eurozone instability in our markets and the extent and timing of any recovery; decreases in TV advertising spending and the rate of development of the advertising markets in the countries in which we operate; the extent to which our debt service obligations restrict our business; our ability to access external sources of capital as needed; our ability to make cost-effective investments in television broadcast operations, including investments in programming; our ability to develop and acquire necessary programming and attract audiences; changes in the political and regulatory environments where we operate and application of relevant laws and regulations; and the timely renewal of broadcasting licenses and our ability to obtain additional frequencies and licenses. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included in this report. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments or otherwise.

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes included elsewhere in this report.


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II. Overview

CME Ltd. is a media and entertainment company that operates broadcasting, content and new media businesses in Central and Eastern Europe.

The following tables provide a summary of our consolidated results for the three and nine months ended September 30, 2012 and 2011:

                                                  For the Three Months Ended September 30, (US$ 000's)
                                                         2012                   2011             Movement
Net revenues                                 $        140,092       $        165,472                (15.3 )%
Cost of revenues                                     (141,332 )             (150,560 )                6.1  %
Selling, general and administrative expenses          (17,161 )              (27,822 )               38.3  %
Operating loss                                        (18,401 )              (12,910 )              (42.5 )%
Net loss                                     $        (32,637 )     $        (82,196 )               60.3  %



                                                  For the Nine Months Ended September 30, (US$ 000's)
                                                       2012                    2011             Movement
Net revenues                                $       518,747       $         587,900                (11.8 )%
Cost of revenues                                   (453,553 )              (480,858 )                5.7  %
Selling, general and administrative
expenses                                            (70,248 )               (88,144 )               20.3  %
Operating (loss) / income                            (5,054 )                18,898               Nm (2)
Net loss                                    $       (43,309 )     $        (102,379 )               57.7  %

Net cash (used in) / generated from
operating activities                        $       (56,900 )     $          17,246               Nm (2)
Capital expenditures, net                           (21,081 )               (21,231 )                0.7  %
Free cash flow(1)                           $       (77,981 )     $          (3,985 )             Nm (2)



                                                  As at           As at
                                              September       September
                                               30, 2012        30, 2011       Movement
Cash and cash equivalents                       125,658         167,417          (24.9 )%

(1) Free cash flow is defined as cash flows from operating activities less purchases of property, plant and equipment, net of disposals of property, plant and equipment and is useful as a measure of our ability to generate cash.
(2) Number is not meaningful.

Our financial results for the three and nine months ended September 30, 2012 reflect the acquisition of Bontonfilm on June 30, 2011; the initial benefits from the roll-out of Voyo, our subscription video-on-demand service in all our territories; and the impact from the continued general lack of confidence in the growth of the economies in our region. On a constant currency basis, the television advertising spending in our markets declined by 7% in the nine months ended September 30, 2012 impacting the advertising revenues in our Broadcast division. Overall, on a constant currency basis, our consolidated net revenues declined slightly compared to the corresponding period in 2011 primarily due to the decline in spending in the television advertising markets which was partially offset by the growth in revenues in our Media Pro Entertainment ("MPE") and New Media divisions. We currently believe that, on a constant currency basis, our full year OIBDA, as defined in III. Our Business, will now be lower when compared to the prior year following the most recent decline in the television advertising spending in our markets.

Our negative free cash flow of US$ 78.0 million for the nine months ended September 30, 2012, compared to negative free cash flow of US$ 4.0 million for the corresponding period in 2011, was significantly lower due to lower revenues as a result of the year-on-year decline of the television advertising markets in our regions and subsequent decrease in cash receipts in 2012 compared to 2011. In addition, on a constant currency basis, higher payments relating to foreign programming and additional investment in our local content production also contributed to our negative free cash flow in the nine months ended September 30, 2012.

Since the beginning of the fourth quarter, we have experienced a significant decline in the demand for television advertising across our markets compared to our previous expectations, with a number of advertisers indicating that they no longer intend to honor previous spending commitments. In addition, we expect an increase in the net investment in programming (the difference between cash paid for programming and the amortization expense recognized), primarily due to (i) higher payments for foreign programming as our attempts to extend payment terms on foreign programming contracts have not achieved the level of success we anticipated and (ii) our investments in locally-produced programming to maintain our audience shares. As a result, we have reduced our forecasts of free cash flow for the fourth quarter, traditionally the most significant quarter for television advertising. Our current forecast for free cash flow for the full year of 2012 is now expected to be similar to that of the nine months ended September 30, 2012, between US$ (70) million and US$ (90) million. We now expect to end the year with a cash balance of at least US$ 130 million.


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Recent Developments
• On July 3, 2012, we issued 874,819 shares of our Class A common stock and one Preferred Share (collectively, the "Option Shares"), at a price per share of Class A common stock (including those underlying the Preferred Share) of US$ 7.51, to TW Investor for aggregate consideration of approximately US$ 90.8 million (collectively, the "Equity Subscriptions"), each pursuant to the Equity Commitment Agreement. The consideration for the Equity Subscriptions was applied to repay in full the TW Loans. As a result of the Equity Subscriptions, TW Investor owns 42.6% of the outstanding shares of Class A common stock and has a 49.9% economic interest in the Company.

• On August 16, 2012, CET 21, a wholly-owned subsidiary of CME Ltd., issued and sold EUR 70.0 million (approximately US$ 90.5 million) of its 2017 Fixed Rate Notes at an issue price of 108.25% for net proceeds of approximately EUR 73.8 million (approximately US$ 95.4 million) and approximately EUR 1.8 million (approximately US$ 2.3 million) of accrued interest from May 1, 2012. CET 21 used the net proceeds from the 2012 offering to fully repay outstanding amounts under and cancel its five-year CZK 1.5 billion (approximately US$ 85.8 million on the date of repayment) Secured Revolving Credit Facility.

• On September 7, 2012, we completed the issuance and sale of EUR 104.0 million (approximately US$ 134.5 million) of 2016 Fixed Rate Notes at an issue price of 103.00% for net proceeds of approximately EUR 104.8 million (approximately US$ 135.6 million) and approximately EUR 5.8 million (approximately US$ 7.5 million) of accrued interest from March 15, 2012.

• On October 7, 2012 we redeemed the remaining EUR 87.5 million (approximately US$ 113.1 million) aggregate principal amount of 2014 Floating Rate Notes outstanding at a price of 100.0%, plus EUR 0.9 million (approximately US$ 1.2 million) of interest payable at redemption, using a portion of the proceeds from the sale of the 2016 Fixed Rate Notes on September 7, 2012.

• Additionally, on September 7, 2012, we made an irrevocable deposit of US$ 21.0 million with the trustee for the 2013 Convertible Notes, which represents the aggregate principal amount plus all interest that will be payable when the 2013 Convertible Notes mature on March 15, 2013.


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III. Our Business

We manage our business on a divisional basis with three operating segments:
Broadcast, Media Pro Entertainment, our production and distribution business, and New Media. These operating segments, which are also our reportable segments, reflect how our operations are managed by segment managers, how our operating performance is evaluated by senior management and the structure of our internal financial reporting. We provide supplemental geographic information on the performance of our Broadcast operating segment due to the significance of our broadcast operations to CME Ltd. and management believes this provides users of the financial statements with useful information.

We evaluate the performance of our segments based on Net Revenues and OIBDA.

OIBDA, which includes program rights amortization costs, is determined as operating income / (loss) before depreciation, amortization of intangible assets and impairments of assets. Items that are not allocated to our segments for purposes of evaluating their performance and therefore are not included in their OIBDA, include stock-based compensation and certain other items.

Our key performance measure of the efficiency of our segments is OIBDA margin. We define OIBDA margin as the ratio of OIBDA to Net Revenues. 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. Intersegment revenues and profits have been eliminated on consolidation.

OIBDA, as defined above, and free cash flow, as defined in II. Overview, 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. For additional information regarding our business segments, see Item 1, Note 16, "Segment Data".

By December 31, 2012, we expect to complete changes to our management structure which were initiated to further our strategy of one content, multiple distribution, and to increase efficiencies in commercial activities. As a result, we anticipate our segment reporting will change to reflect that the first quarter of 2013 will be the first period the businesses are managed under a new structure and presented in results reviewed by the chief operating decision maker to allocate resources and assess performance.

The following analysis contains references to like-for-like ("% Lfl") or constant currency percentage movements. These references reflect the impact of applying the current period average exchange rates to the prior period revenues and costs. 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 like-for-like or constant currency percentage movements as well as actual ("% Act") percentage movements (which includes the effect of foreign exchange). Unless otherwise stated, all percentage increases or decreases in the following analysis refer to year-on-year percentage changes, that is, changes between the three and nine months ended September 30, 2012 and September 30, 2011.

A summary of our total Net Revenues and OIBDA by segment is as follows:

                                                    NET REVENUES
                                For the Three Months Ended September 30, (US$ 000's)
                                                                           Movement
                                    2012                 2011          % Act      % Lfl
Broadcast                 $      115,173       $      143,431          (19.7 )%    (7.5 )%
Media Pro Entertainment           44,759               35,141           27.4  %    49.0  %
New Media                          3,780                3,246           16.5  %    34.0  %
Intersegment revenues (1)        (23,620 )            (16,346 )        (44.5 )%   (66.6 )%
Total Net Revenues        $      140,092       $      165,472          (15.3 )%    (2.2 )%


                                                    NET REVENUES
                                For the Nine Months Ended September 30, (US$ 000's)
                                                                           Movement
                                    2012                 2011          % Act      % Lfl
Broadcast                 $      444,307       $      529,916          (16.2 )%    (5.7 )%
Media Pro Entertainment          141,619              126,575           11.9  %    27.5  %
New Media                         12,671               10,479           20.9  %    36.4  %
Intersegment revenues (1)        (79,850 )            (79,070 )         (1.0 )%   (13.9 )%
Total Net Revenues        $      518,747       $      587,900          (11.8 )%    (0.5 )%

(1) Reflects revenues earned by the Media Pro Entertainment segment through sales to the Broadcast segment. All other revenues are third party revenues.


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                                                       OIBDA
                               For the Three Months Ended September 30, (US$ 000's)
                                                                        Movement
                                2012                2011            % Act         % Lfl
Broadcast                $     8,039       $      20,135            (60.1 )%      (54.7 )%
Media Pro Entertainment        3,415                 218           Nm (1)        Nm (1)
New Media                     (1,512 )            (1,033 )          (46.4 )%      (70.8 )%
Central                       (3,956 )            (9,726 )           59.3  %       56.2  %
Intersegment elimination      (2,478 )              (696 )         Nm (1)        Nm (1)
Consolidated OIBDA       $     3,508       $       8,898            (60.6 )%      (52.8 )%

                                                      OIBDA
                               For the Nine Months Ended September 30, (US$ 000's)
                                                                        Movement
                                 2012                2011           % Act       % Lfl
Broadcast                $     81,399       $     122,402           (33.5 )%    (24.4 )%
Media Pro Entertainment        10,503               1,703          Nm (1)      Nm (1)
New Media                      (3,747 )            (3,122 )         (20.0 )%    (32.1 )%
Central                       (19,228 )           (31,969 )          39.9  %     37.1  %
Intersegment elimination       (4,247 )            (3,176 )         (33.7 )%    (56.6 )%
Consolidated OIBDA       $     64,680       $      85,838           (24.6 )%    (11.4 )%

(1) Number is not meaningful.

Broadcast

Our Broadcast segment comprises our broadcast channel operations in Bulgaria, Croatia, the Czech Republic, Romania, the Slovak Republic and Slovenia.

After adjusting for inflation, we estimate that GDP in our territories remained unchanged overall during the nine months ended September 30, 2012, and was down from the 2.2% growth rate reported in the first nine months of 2011 following the combination of a slowdown in export growth and ongoing restrictive fiscal measures in some of the countries in our region. Real private consumption is estimated to have declined slightly overall during the nine months ended September 30, 2012. On a constant currency basis, television advertising spending in our markets declined overall by 7% in the nine months ended September 30, 2012, with variances ranging from negative 13% in Croatia to negative 3% in the Slovak Republic. In Croatia, the decline in advertising spending was primarily due to a reduction in spending by advertisers in the telecoms industry, while in the Slovak Republic, television advertising spending benefited from additional advertising spending ahead of parliamentary elections. A full recovery in our region continues to be hampered by continuing concerns surrounding the levels of European sovereign debt, uncertainty about the future of the Euro and a general lack of confidence about economic growth in our countries. All of these issues are contributing to the reluctance of advertisers to spend.

The following table sets out our estimates of real GDP, real private consumption and television advertising market growth / (decline) in our countries for the nine months ended September 30, 2012:

                                        For the Nine Months Ended September 30, 2012
                                                      Real Private
                                                       Consumption
Country                          Real GDP Growth            Growth    TV Ad Market Growth
Bulgaria                                     1.1  %            3.1  %                  (4 )%
Croatia                                     (1.7 )%           (1.6 )%                 (13 )%
Czech Republic                              (0.9 )%           (2.6 )%                  (6 )%
Romania*                                     0.7  %            1.0  %                  (9 )%
Slovak Republic                              2.7  %           (0.1 )%                  (3 )%
Slovenia                                    (1.8 )%           (1.4 )%                  (6 )%
Total CME Markets                            0.1  %           (0.6 )%                  (7 )%

* Romania market excludes Moldova. Source: CME estimates

We are continuing our actions to maintain our leadership in audience and market shares across all of our Broadcast operations, which provide us with a unique competitive advantage and are essential to achieving high operating leverage when our television advertising markets recover. During the nine months ended


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September 30, 2012, we launched four new channels, FANDA in the Czech Republic, ACASA GOLD in Romania, DAJTO in Slovakia and BTV LADY in Bulgaria.
The Broadcast segment reported net revenues for the three and nine months ended September 30, 2012 of US$ 115.2 million and US$ 444.3 million compared to US$ 143.4 million and US$ 529.9 million in the same periods in 2011, decreases of 20% and 16%, respectively. On a constant currency basis, net revenues for the three and nine months ended September 30, 2012 decreased 8% and 6%, respectively, compared to the same periods in 2011, broadly in line with the decrease in overall television advertising spending in our region. During the first nine months of this year, we maintained our overall share of the television advertising markets compared to the same period in 2011 in conditions where our competitors discounted heavily in certain markets. Costs charged in arriving at OIBDA for the three and nine months ended September 30, 2012 decreased by 13% and 11% compared to the same periods in 2011. On a constant currency basis, costs for the three and nine months ended September 30, 2012 remained flat compared to the same periods in 2011, reflecting our ability to optimize our costs charged in arriving at OIBDA during the past two financial years, even while launching four new channels. We continue to implement cost efficiencies and we are able to exercise more control over our local content production costs, which represents a large proportion of our programming costs. We intend to continue to invest in local programming to maintain our audience leadership and deliver the necessary output of gross rating points, in line with the demands of the markets in which we operate, without increasing our overall costs.
Our Broadcast segment generated OIBDA of US$ 8.0 million and US$ 81.4 million for the three and nine months ended September 30, 2012 compared to US$ 20.1 million and US$ 122.4 million for the corresponding periods in 2011, decreases of 60% and 34% for the three and nine months ended September 30, 2012, respectively. On a constant currency basis, OIBDA decreased 55% and 24% for the three and nine months ended September 30, 2012, respectively compared to the same periods in 2011.
Our current view of television advertising spending in the fourth quarter of this year indicates that the year-to-date trend of television advertising spending will not improve, with advertisers spending less than their annual commitments. We currently believe that we will maintain our overall share of the television advertising markets for the full year compared to 2011, despite the continuing difficult market conditions. In the fourth quarter of 2012, we currently expect costs to be lower than the corresponding period in 2011. Our new channel in the Slovak Republic, DAJTO, operates pursuant to a digital license that is valid for an indefinite period. Our new FANDA channel in the Czech Republic now broadcasts pursuant to a satellite license that expires in June 2024 and a national terrestrial license that expires in August 2023, and in Romania the ACASA GOLD channel broadcasts pursuant to a national cable and satellite license that expires in April 2021. In Bulgaria, it has been announced that the transition to digital broadcasting will commence in March 2013 and the analogue switch-off is expected to occur by September 2013.

Media Pro Entertainment

Our Media Pro Entertainment ("MPE") segment is comprised of production and distribution businesses.

MPE's revenues predominantly represent sales of finished content to our broadcasters and revenues from third parties from our production and distribution operations. The MPE segment reported net revenues for the three and nine months ended September 30, 2012 of US$ 44.8 million and US$ 141.6 million, respectively, compared to US$ 35.1 million and US$ 126.6 million for the same periods in 2011, increases of 27% and 12%, respectively. On a constant currency basis, net revenues increased by 49% and 28% for the three and nine months ended September 30, 2012, respectively, compared to the same periods in 2011.

We generated approximately US$ 21.8 million (49% of total MPE segment revenues) and US$ 64.2 million (45% of total MPE revenues) of our revenues from third parties during the three and nine months ended September 30, 2012 respectively, . . .

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