UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K10-K/A
Amendment No. 1
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 0-247960-24796
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
(Exact name of registrant as specified in its charter)
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| Bermuda | | | 98-0438382 |
| (State or other jurisdiction of incorporation or organization) | | | (I.R.S. Employer Identification No.) |
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| O'Hara House, | | | |
| 3 Bermudiana Road, | | | HM 08 |
| Hamilton, | Bermuda | | | (Zip Code) |
| (Address of principal executive offices) | | | |
Registrant's telephone number, including area code: (441) 296-1431
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| Securities registered pursuant to Section 12(b) of the Act: |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| CLASS A COMMON STOCK, $0.08 PAR VALUE | CETV | NASDAQNasdaq Global Select Market |
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for each shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” or “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated Filer | ☐ | | | Accelerated Filer | ☒ |
| Non-accelerated Filer | ☐ | | | Smaller reporting company | ☐ |
| | | | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act) Yes ☐ No ☒
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2019 (based on the closing price of US$ 4.36 of the registrant's Class A Common Stock, as reported by the NASDAQNasdaq Global Select Market on June 30, 2019) was US$ 383.6 million.
Number of shares of Class A Common Stock outstanding as of February 4,April 23, 2020: 253,607,026
DOCUMENTS INCORPORATED BY REFERENCE
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Document | | Location in 10-K in Which Document is Incorporated |
Registrant's Proxy Statement for the 2020 Annual General Meeting of Shareholders | | Part III |
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
FORMEXPLANATORY NOTE
On February 6, 2020, Central European Media Enterprises Ltd. (the "Company" or "we") filed its Annual Report on Form 10-K
For for the year ended December 31, 2019
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TABLE OF CONTENTS | Page |
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PART I | |
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PART II | |
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PART (the "Form 10-K"). This Amendment No. 1 amends Part III | |
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PART IV | |
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I. Forward-looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the Form 10-K to include information previously intended to be incorporated by reference in reliance on General Instruction G(3) to Form 10-K. General Instruction G(3) provides that registrants may incorporate by reference the information required by Part III of Form 10-K from a definitive proxy statement which involves the election of directors if such definitive proxy statement is filed with the Securities Act of 1933 and Section 22EExchange Commission (the "SEC") within 120 days after the end of the Securities Exchange Actfiscal year covered by the Form 10-K. Due to the pending Merger (defined below), the Company will not file a definitive proxy statement that involves the election of 1934 (the "Exchange Act")directors by April 29, 2020 (i.e., including those relating to our capital needs, business strategy, expectations and intentions. Statements that usewithin 120 days after 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 purposesend of the U.S. federal securities laws or otherwise. In particular, information appearing under the sections entitled "Business," "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" includes forward looking-statements. For these statements and all other forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy or are otherwise beyond our control and some of which might not even be anticipated. Forward-looking statements reflect our current views with respect to future events and because our business is subject to such risks and uncertainties, actual results, our strategic plan, our financial position, results of operations and cash flows could differ materially from those described in or contemplated by the forward-looking statements contained in this report.
Important factors that contribute to such risks include, but are not limited to, those factors set forth under "Risk Factors” as well as the following: the effect of the proposed Merger on our business; the risks that the closing conditions to the proposed Merger may not be satisfied or that necessary governmental approvals are not obtained or are obtained with conditions; the impact of any failure to complete the proposed Merger on our business; the effect of changes in global and regional economic conditions including as a result of the quantitative easing program implemented by the European Central Bank; the economic, political and monetary impacts of Brexit; levels of television advertising spending and the rate of development of the advertising markets in the countries in which we operate; our ability to refinance our existing indebtedness; the extent to which our debt service obligations and covenants may restrict our business; our exposure to additional tax liabilities as well as liabilities resulting from regulatory or legal proceedings initiated against us; our success in continuing our initiatives to diversify and enhance our revenue streams; our ability to make cost-effective investments in our television businesses, including investments in programming; our ability to develop and acquire necessary programming and attract audiences; and changes in the political and regulatory environments where we operate and in the application of relevant laws and regulations. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included in this report. All forward-looking statements speak only as of the date of this report. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments or otherwise, except as required by law.
Defined TermsCompany's 2019 fiscal year).
Unless the context otherwise requires, references in this report to the "Company", "CME", "we", "us" or "our" refer to Central European Media Enterprises Ltd. ("CME Ltd.") or CME Ltd. and its consolidated subsidiaries listed in Exhibit 21.01 hereto. Unless otherwise noted, all statistical and financial information presented in this report has been converted into U.S. dollars using period-end exchange rates or average rates where applicable. All references in this report to "US$" or "dollars" are to U.S. dollars, all references to "BGN" are to Bulgarian leva, all references to "CZK" are to Czech koruna, all references to "RON" are to the New Romanian lei and all references to "Euro" or "EUR" are to the European Union Euro. The exchange rates as at December 31, 2019 used in this report are US$/BGN 1.74; US$/CZK 22.62; US$/RON 4.26; and US$/EUR 0.89.
The following defined terms are used in this Annual Report on Form 10-K:
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• | "2019 Euro Loan" refers to our floating rate senior unsecured term credit facility guaranteed by Warner Media (as defined below), dated as of November 14, 2014, as amended on March 9, 2015, February 19, 2016, June 22, 2017 and February 5, 2018 which was repaid in full on July 31, 2018;
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• | "2021 Euro Loan" refers to our floating rate senior unsecured term credit facility due November 1, 2021, guaranteed by Warner Media, dated as of September 30, 2015, as amended on February 19, 2016, June 22, 2017 and April 25, 2018;
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• | "2023 Euro Loan" refers to our floating rate senior unsecured term credit facility due April 26, 2023, entered into by CME BV (as defined below), guaranteed by Warner Media and CME Ltd., dated as of February 19, 2016, as amended on June 22, 2017 and April 25, 2018;
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• | "Euro Loans" refers collectively to the 2019 Euro Loan (when outstanding), 2021 Euro Loan and 2023 Euro Loan;
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• | "2023 Revolving Credit Facility" refers to our revolving credit facility due April 26, 2023, dated as of May 2, 2014, as amended and restated as of February 19, 2016, and as further amended and restated on April 25, 2018;
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• | "Guarantee Fees" refers to amounts accrued and payable to Warner Media as consideration for Warner Media's guarantees of the Euro Loans;
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• | "Reimbursement Agreement" refers to our reimbursement agreement with Warner Media which provides that we will reimburse Warner Media for any amounts paid by them under any guarantee or through any loan purchase right exercised by Warner Media, dated as of November 14, 2014, as amended and restated on February 19, 2016, and as further amended and restated on April 25, 2018;
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• | "CME BV" refers to CME Media Enterprises B.V., our 100% owned subsidiary;
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• | "AT&T" refers to AT&T, Inc.
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• | "TW Investor" refers to Time Warner Media Holdings B.V., a wholly owned subsidiary of Warner Media;
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• | "Warner Media" refers to Warner Media, LLC. (formerly Time Warner, Inc.), a wholly owned subsidiary of AT&T.
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• | "Merger" refers to the merger of Merger Sub (as defined below) with and into the Company pursuant to the Merger Agreement (as defined below);
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• | "Merger Agreement" refers to the agreement and plan of merger dated October 27, 2019 by and among the Company, Parent (as defined below) and Merger Sub (as defined below);
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• | "Merger Sub" refers TV Bermuda Ltd., a Bermuda exempted company limited by shares and a wholly-owned subsidiary of Parent (as defined below);
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• | "Parent" refers TV Bidco B.V., a Netherlands private limited liability company; and
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• | "PPF" refers PPF Group N.V., a Netherlands public limited liability company.
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PART I
ITEM 1. 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 Dutch holding company. We manage our business on a geographical basis, with five operating segments, Bulgaria, the Czech Republic, Romania, the Slovak Republic and Slovenia, which are also our reportable segments and our main operating countries. We own 94% of our Bulgaria operations and 100% of our companies in our remaining countries.
Our main operating countries are members of the European Union (the "EU"). However, as emerging economies, they have adopted Western-style democratic forms of government and have economic structures, political and legal systems, and corporate governance and business practices that continue to evolve. As the economies of our operating countries converge with more developed nations and their economic and commercial infrastructures continue to mature, we believe the business risks of operating in these countries will continue to decline.
Merger
On October 27, 2019, the Company entered into thean Agreement and Plan of Merger (the "Merger Agreement") with TV Bidco B.V. ("Parent") and TV Bermuda Ltd. ("Merger Sub.Sub"). Parent and Merger Sub are affiliates of PPF.PPF Group N.V. ("PPF"). Pursuant to the Merger Agreement, Merger Sub will merge with and into the Company with the Company continuing as the surviving company in the Merger as a wholly-owned subsidiary of Parent.
The closing of the proposed Merger is subject to several conditions, including, but not limited to, the requisite vote of the Company’s shareholders in favor of the Merger Agreement and the proposed Merger, the receipt of certain competition and other regulatory approvals, compliance with covenants and agreements in the Merger Agreement (subject to certain materiality qualifications), and the absence of any governmental order prohibiting completion of the proposed Merger. A special general meeting of shareholders of the Company will be held on February 27, 2020, where shareholders will be asked to vote on a proposal to approve the Merger Agreement, the related statutory merger agreement and the Merger contemplated under such agreements.
Under the Merger Agreement, at the effective time of the Merger (the “Effective Time”"Merger"), without any action required by the Company, Parent, Merger Sub or any shareholder of the Company or any other person, each Class A Share issued and outstanding immediately prior to the Effective Time will be canceled and cease to exist automatically and each such Class A Share (other than shares owned by the Company, Parent, Merger Sub or any of their respective direct or indirect wholly-owned subsidiaries, in each case not held on behalf of third parties) will be converted into the right to receive $4.58 in cash.
Under the Merger Agreement, at the Effective Time, without any action required by the Company, Parent, Merger Sub or any shareholder of the Company or any other person, the Series A Preferred Share issued and outstanding immediately prior to the Effective Time will be canceled and cease to exist automatically and will be converted into the right to receive the $32,900,000 in cash, without interest, and each Series B Preferred Share issued and outstanding immediately prior to the Effective Time will be canceled and cease to exist automatically and will be converted into the right to receive the $1,630.875 in cash, without interest; provided that, among other things, any conversion of the Series A Preferred Share or any Series B Preferred Shares into Class A Shares on or after October 27, 2019 will be deemed to be null and void.
For further details on the proposed Merger, refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
Operating Strategy
We operate market leading television networks in five countries, broadcasting a total of 30 television channels to approximately 45 million people living in the region. Each segment also develops and produces content for their television channels and digital properties. We generate advertising revenues in our country operations from agreements with advertisers, advertising agencies and sponsors to place advertising on the television channels and websites that we operate. We generate additional revenues by collecting fees from cable, direct-to-home ("DTH") and internet protocol television ("IPTV") operators for carriage of our channels.
Our strategy is to maintain or increase our audience leadership in each of our operating countries and to pursue sales strategies designed to maximize our revenues in order to provide additional financial resources to invest in popular local content. We have built our audience leadership in each of our markets by operating a multi-channel business model with a diversified portfolio of television channels which appeal to a broad audience.
Content that consistently generates high audience shares is crucial to maintaining the success of each of our country operations. While content acquired from the Hollywood studios remains popular, our audiences increasingly demand content that is produced in their local language and reflects their society, attitudes and culture. We believe developing and producing local content is key to being successful and supporting market-leading television channels, particularly in prime time, and that maintaining a regular stream of popular local content at the lowest possible cost is a key strength over the long term.
As the distribution platforms in our region develop and become more diversified, our television channels and digital content will increasingly reach viewers through new distribution offerings and on mobile devices. We offer viewers the choice of watching our television content through a variety of platforms, including Voyo, our subscription video-on-demand service, and advertising supported catch-up services on our websites. Additionally, we operate a portfolio of digital media products that complement our news programming and other television station-related brands.
Sales
We generate advertising revenues primarily through entering into agreements with advertisers, advertising agencies and sponsors to place advertising on our television channels.
Our main unit of inventory is the commercial gross rating point ("GRP"), a measure of the number of people watching television when an advertisement is aired. We generally contract with a client to provide an agreed number of GRPs for an agreed price (“cost per point” or "CPP"). The CPP varies depending on the season and time of day during which the advertisement is aired, the volume of GRPs purchased, requests for special positioning of the advertisement, the demographic group that the advertisement is targeting and other factors. Much less frequently, and usually only for small niche channels, we may sell on a fixed spot basis where an advertisement is placed at an agreed time for a negotiated price that is independent of the number of viewers. Our larger advertising customers generally commit to specified amounts of advertising on an annual basis, which sets the pricing for a minimum volume of GRPs.
We operate our television networks based on a business model of audience leadership, brand strength and popular local content. Our sales strategy is to maximize the monetization of our advertising time by leveraging our high brand power and applying an optimal mix of pricing and sell-out rate. The effectiveness of our sales strategy is measured by our share of the television advertising market, which represents the proportion of our television advertising revenues compared to the total television advertising market.
We also generate a growing proportion of revenues by collecting carriage fees from cable, satellite and IPTV operators for broadcasting our television channels. This fee revenue is generally based on the number of subscribers to offerings from these operators that include our channels.
Programming
Our programming strategy in each country is tailored to match the expectations of key audience demographics by scheduling and marketing an optimal mix of programs in a cost effective manner. The programming that we provide drives our audience shares and ratings (see "Audience Share, Ratings and Competition" below)and consists of locally-produced news, current affairs, fiction, and reality and entertainment shows as well as acquired foreign movies, series and sports programming.
We focus our programming investments on securing leading audience share positions during prime time, where the majority of advertising revenues are derived, and improving our cost efficiency through optimizing the programming mix and limiting the cost of programming scheduled off-prime time while maintaining all day audience shares.
Audience Share, Ratings and Competition
Audience share represents the viewers watching a channel as a proportion of the total audience watching television at that time. Ratings represent the number of people watching a channel in proportion to the total population. Audience share and ratings information are measured in each market by independent agencies using peoplemeters, which measure audiences for different demographics and subgeographies of the population throughout the day. Our channels schedule programming intended to attract audiences within specific target demographics that we believe will be attractive to advertisers and television distributors. The tables below provide a comparison of all day and prime time audience shares for 2019 in the target demographic of each of our leading channels to the primary channels of our main competitors.
Bulgaria
We operate one general entertainment channel, BTV, and five other channels, BTV CINEMA, BTV COMEDY, BTV ACTION, BTV LADY and RING.
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| Target Demographic | | Channel | | Ownership | | All day audience share | | Prime time audience share |
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| 18-49 | | BTV | | CME | | 27.3% | | 29.7% | | 31.6% | | 32.4% |
| | | NOVA TV | | Advance Media Group | | 20.8% | | 17.7% | | 22.7% | | 19.3% |
| | | BNT 1 | | Public television | | 5.7% | | 6.6% | | 7.1% | | 8.9% |
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Source: GARB
The combined all day and prime time audience shares of our Bulgaria operations in 2019 were 38.0% and 41.9%, respectively.
Czech Republic
We operate one general entertainment channel, TV NOVA, and seven other channels, NOVA 2, NOVA CINEMA, NOVA SPORT 1, NOVA SPORT 2, NOVA ACTION, NOVA GOLD and NOVA INTERNATIONAL, a general entertainment channel broadcasting in the Slovak Republic.
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| Target Demographic | | Channel | | Ownership | | All day audience share | | Prime time audience share |
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| 15-54 | | TV NOVA | | CME | | 23.0% | | 22.4% | | 27.0% | | 25.8% |
| | | Prima | | GME | | 11.1% | | 10.8% | | 13.3% | | 13.1% |
| | | CT 1 | | Public television | | 13.3% | | 12.8% | | 15.8% | | 15.5% |
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Source: ATO - Nielsen Admosphere; Mediaresearch
The combined all day and prime time audience shares of our Czech Republic operations in 2019, excluding NOVA SPORT 1, NOVA SPORT 2 and NOVA INTERNATIONAL, were 34.8% and 36.9%, respectively.
Romania
We operate one general entertainment channel, PRO TV, and six other channels, PRO 2, PRO X, PRO GOLD, PRO CINEMA, PRO TV INTERNATIONAL, as well as PRO TV CHISINAU, a general entertainment channel broadcasting in Moldova.
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| Target Demographic | | Channel | | Ownership | | All day audience share | | Prime time audience share |
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| 18-49 Urban | | PRO TV | | CME | | 22.5% | | 22.5% | | 25.5% | | 24.7% |
| | | Antena 1 | | Intact group | | 14.6% | | 14.5% | | 15.9% | | 15.6% |
| | | TVR 1 | | Public television | | 1.3% | | 2.2% | | 1.3% | | 2.7% |
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Source: Kantar Media
The combined all day and prime time audience shares of our Romania operations in 2019, excluding PRO TV INTERNATIONAL and PRO TV CHISINAU, were 26.3% and 29.5%, respectively.
Slovak Republic
We operate one general entertainment channel, TV MARKIZA, and three other channels, DOMA, DAJTO and MARKIZA INTERNATIONAL, a general entertainment channel broadcasting in the Czech Republic.
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| Target Demographic | | Channel | | Ownership | | All day audience share | | Prime time audience share |
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| 12-54 | | TV MARKIZA | | CME | | 21.2% | | 21.3% | | 22.3% | | 21.8% |
| | | TV JOJ | | J&T Media Enterprises | | 14.5% | | 13.9% | | 18.3% | | 17.7% |
| | | Jednotka | | Public Television | | 8.2% | | 8.4% | | 10.1% | | 10.2% |
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Source: PMT/ TNS SK
The combined all day and prime time audience shares of our Slovak Republic operations in 2019, excluding MARKIZA INTERNATIONAL, were 28.4% and 29.7%, respectively.
Slovenia
We operate two general entertainment channels, POP TV and KANAL A, and three other channels, KINO, BRIO and OTO.
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| Target Demographic | | Channel | | Ownership | | All day audience share | | Prime time audience share |
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| 18-54 | | POP TV | | CME | | 20.6% | | 21.0% | | 31.6% | | 32.8% |
| | | Planet TV | | TSmedia | | 5.2% | | 5.4% | | 6.3% | | 6.8% |
| | | SLO 1 | | Public Television | | 9.2% | | 9.1% | | 10.1% | | 9.9% |
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Source: AGB Nielsen Media Research
The combined all day and prime time audience shares of our Slovenia operations in 2019 were 39.0% and 49.9%, respectively.
Seasonality
We experience seasonality, with advertising sales tending to be highest during the fourth quarter of each calendar year due to the holiday season, and lowest during the third quarter of each calendar year due to the summer vacation period (typically July and August). Our non-advertising sales are not affected by seasonality.
Regulation of Television Broadcasting
Television broadcasting in each of the countries in which we operate is regulated by a governmental authority or agency. In this report, we refer to such agencies individually as a "Media Council" and collectively as "Media Councils". Media Councils generally supervise broadcasters and their compliance with national broadcasting legislation, as well as control access to the available frequencies through licensing regimes.
Programming and Advertising Regulation
Our main operating countries are member states of the EU, and our broadcast operations in such countries are subject to relevant EU legislation relating to media.
The EU Audiovisual Media Services Directive (the "AVMS Directive"), which came into force in March 2010, provides the legal framework for audiovisual media services generally in the EU. On November 6, 2018, the European Council adopted amendments to the AVMS Directive, which formally entered into force on December 18, 2018. European Member States, including the territories in which CME operates, have until September 19, 2020, to transpose the amendments to the AVMS Directive into national legislation. The original AVMS Directive remains in force until new legislation incorporating the amendments to the AVMS Directive (described below) are implemented in the countries in which we operate. The AVMS Directive covers both linear (i.e., broadcasting) and non-linear (e.g., video-on-demand and catch-up) transmissions of audiovisual media services, with the latter subject to less stringent regulation. Among other things, the AVMS Directive requires broadcasters to comply with rules related to, but not limited to, program content, advertising content and quotas, product placement, sponsorship, teleshopping, the protection of minors, accessibility by persons with a visual or hearing disability, and minimum quotas with respect to "European works" (defined as originating from an EU member state or a signatory to the Council of Europe's Convention on Transfrontier Television as well as being written and produced mainly by residents of the EU or Council of Europe member states or pursuant to co-production agreements between such states and other countries). In addition, the AVMS Directive requires that at least 10% of either broadcast time or programming budget is dedicated to programs made by European producers who are independent of broadcasters. News, sports, games, advertising, teletext services and teleshopping are excluded from the calculation of these quotas. In respect of advertising, the AVMS Directive currently provides that the proportion of television advertising spots and teleshopping spots within any hour of broadcasting shall not exceed 20%. The current AVMS Directive does not otherwise restrict when programming may be interrupted by advertising in linear broadcasting, except in the case of films and news programming (where programming may be interrupted once every thirty minutes or more) and children’s programming (where the same restriction applies providing that the program is greater than thirty minutes) and religious programming (where no advertising or teleshopping shall be inserted). Under the current AVMS Directive, there is also a general prohibition on product placement, subject to certain exceptions (for example it is permitted in films and series, sports programs and light entertainment programs) and providing that the use of product placement is not ‘unduly’ prominent, is not promotional and is appropriately identified to viewers.
The amendments to the AVMS Directive liberalize some of the AVMS Directive requirements and extend some rules that currently apply to broadcasters to video-on-demand services (such as program content, advertising content, and quotas and prominence requirements for European works). The amendments also introduce more stringent rules related to the protection of minors as well as bringing video-sharing platforms that target audiences in the EU (such as YouTube, Facebook, Instagram) within its the scope.
In respect of advertising, the amendments to the AVMS Directive provide greater flexibility to linear broadcasters on the timing of advertising so that the share of television commercials and teleshopping spots between 6am and 6pm and between 6pm and midnight may not exceed 20% of the total broadcasting time in each respective time slot (rather than the 20% hourly limit that currently exists). This means that broadcasters are able to allocate up to 144 minutes of advertising in total during the period between 6am and 6pm, and 72 minutes in total between 6pm and midnight, with no specific restrictions on the amount of advertising between midnight and 6am. The amendments to the AVMS Directive permit product placement in all audiovisual media services except in news and current affairs programs, consumer affairs programs, religious programs and children’s programs while maintaining the requirements that the use of product placement is not unduly prominent, is not promotional and is appropriately identified to viewers and imposing restrictions on the type of products which may be placed (e.g., no cigarettes or alcohol). In addition, the amended AVMS Directive imposes a ban on advertising, sponsorship and product placement of electronic cigarettes in any audiovisual service.
In respect of the protection of minors, the amended AVMS Directive imposes a ban on teleshopping during the broadcast of children’s programs, provides Member States with the option of banning the sponsorship of children’s programs, and limits the uses of personal data of children.
Under the amendments to the AVMS Directive, Member States also have the option of imposing on their audiovisual service providers (including broadcasters and video-on-demand services providers whose operations target their service to an audience within a different Member State) a financial contribution towards the European production of Europeans works). There is also a requirement that broadcasters and other audiovisual service providers ensure that at least 30% of their video-on-demand service catalog is dedicated to European works and that such works are given due prominence.
Please see below for more detailed information on programming and advertising regulations that impact our channels.
Bulgaria: In Bulgaria, privately owned broadcasters are permitted to broadcast advertising for up to 12 minutes per hour. The public broadcaster, BNT, which is financed through a compulsory television license fee and by the government, is restricted to broadcasting advertising for four minutes per hour and no more than 15 minutes per day, of which only five minutes may be in prime time. There are also restrictions on the frequency of advertising breaks (for example, news and children's programs shorter than 30 minutes cannot be interrupted). These restrictions apply to both publicly and privately-owned broadcasters. Further restrictions relate to advertising content, including a ban on tobacco advertising and restrictions on alcohol advertising, regulations on medical products advertising and regulations on advertising targeted at children or during children's programming. In addition, members of the news department of our channels are prohibited from appearing in advertisements. Our channels in Bulgaria are required to comply with several restrictions on programming, including regulations on the origin of programming. These channels must ensure that 50% of a channel's total annual broadcast time consists of EU- or locally-produced programming and 12% of such broadcast time consists of programming produced by independent producers in the EU. News, sports, games and teleshopping programs, as well as advertising and teletext services, are excluded from these restrictions.
Czech Republic: Privately owned broadcasters in the Czech Republic are permitted to broadcast advertising for up to 12 minutes per hour. In September 2011, legislation was implemented in the Czech Republic which restricts the amount of advertising that may be shown on channels of the public broadcaster, CT. Pursuant to the regulation, channels CT 2 and CT 4 may show a limited amount of advertising up to 0.5% of the total daily broadcasting time on each channel, of which only 6 minutes per hour may be in prime time. No advertising may be shown on the other public TV channels, except where broadcasting an advertisement is a necessary condition for the acquisition of rights to broadcast cultural or sport events on such public channels. Where such broadcasting advertisement conditions apply, the same limitations on advertising time applicable to CT 2 and CT 4 shall apply to any advertising on the other public TV channels. Also included in the legislation is the requirement that national private broadcasters must contribute annually to a Czech cinematography fund in an amount equal to 2% of their net advertising revenues. We are entitled to apply for financing from the fund. In the Czech Republic, all broadcasters are restricted with respect to the frequency of advertising breaks during and between programs, as well as being subject to restrictions that relate to advertising content, including a ban on tobacco advertising and limitations on advertisements of alcoholic beverages, pharmaceuticals, firearms and munitions.
Romania: Privately owned broadcasters in Romania are permitted to broadcast advertising and direct sales advertising for up to 12 minutes per hour. There are also restrictions on the frequency of advertising breaks (for example, news and children's programs shorter than 30 minutes cannot be interrupted). Broadcasters are also required that from the total broadcasting time (except for the time allocated to news, sports events, games, advertising and teleshopping) (a) at least 50% must be European-origin audio-visual works and (b) at least 10% (or, alternatively, at least 10% of their programming budget) must be European audio-visual works produced by independent producers. The public broadcaster, TVR, is restricted to broadcasting advertising for eight minutes per hour and only between programs. Further restrictions relate to advertising content, including a ban on tobacco advertising and restrictions on alcohol advertising, and regulations on advertising targeted at children or during children's programming. In addition, news anchors of all channels are prohibited from appearing in advertisements and teleshopping programming.
Slovak Republic: Privately owned broadcasters in the Slovak Republic are permitted to broadcast advertising for up to 12 minutes per hour but not for more than 20% of their total daily broadcast time. Since January 2020, the public broadcaster can broadcast advertising for up to 0.5% of its total broadcast time on a given calendar day (up to 2.5% of total broadcast time including teleshopping programming), but between 7:00 p.m. and 10:00 p.m. may broadcast only eight minutes of advertising per hour. The restriction regarding total broadcast advertising time does not apply to the broadcasting of advertising in direct connection with the broadcasting of a sporting or cultural event, in which the broadcasting of advertising is a necessary condition for the acquisition of rights to broadcast such event. The broadcasting of advertising in direct connection with the broadcasting of a sporting or cultural event cannot exceed 15% of the daily total broadcast time. There are also restrictions on the frequency of advertising breaks during and between programs. The public broadcaster is not permitted to broadcast advertising breaks during programs. There are also restrictions that relate to advertising content, including a ban on tobacco, pharmaceuticals, firearms and munitions advertising and a ban on advertisements of alcoholic beverages (excluding beer and wine) between 6:00 a.m. and 10:00 p.m. Our operations in the Slovak Republic are also required to comply with several restrictions on programming, including regulations on the origin of programming. These include the requirement that 50% of the station's monthly broadcast time must be European-origin audio-visual works and at least 10% of a station's monthly broadcast time must be European audio-visual works produced by independent producers, at least 10% of which must be broadcast within five years of production. National private broadcasters must also contribute annually to an audiovisual fund in the amount equal to 2% of their net advertising revenues and public broadcasters must contribute annually to the audiovisual fund in the amount equal to 5% of its net advertising revenue. Both public and private broadcasters are entitled to apply for financing from the fund.
Slovenia: Privately owned broadcasters in Slovenia are allowed to broadcast advertising for up to 12 minutes in any hour. The public broadcaster, SLO, which is financed through a compulsory television license fee and commercial activities, is allowed to broadcast advertising for up to 10 minutes per hour, but is only permitted up to seven minutes per hour between the hours of 6:00 p.m. and 11:00 p.m. There are also restrictions on the frequency of advertising breaks during programs and restrictions that relate to advertising content, including restrictions on food advertising during children's programming and a ban on tobacco advertising and a prohibition on the advertising of any alcoholic beverages from 7:00 a.m. to 9:30 p.m. and generally for alcoholic beverages with an alcoholic content of more than 15%. Our Slovenian operations are required to comply with several restrictions on programming, including regulations on the origin of programming. These include the requirement that 20% of a station's daily programming consist of locally produced programming, of which at least 60 minutes must be broadcast between 6:00 p.m. and 10:00 p.m. In addition, 50% of our niche channels' annual broadcast time must be European-origin audio-visual works and at least 10% of such stations' annual broadcast time must be European audio-visual works produced by independent producers.
Licensing Regulation
The license granting and renewal process in our operating countries varies by jurisdiction and by type of broadcast permitted by the license (i.e., terrestrial, cable, satellite). Depending on the country, terrestrial licenses may be valid for an unlimited time period, may be renewed automatically upon application or may require a more lengthy renewal procedure, such as a tender process. Generally cable and satellite licenses are granted or renewed upon application. We expect all of our licenses will continue to be renewed or new licenses to be granted as required to continue to operate our business. All of the countries in which we operate have transitioned from analog to digital terrestrial broadcasting and we have obtained digital licenses where requested. In January 2017, we ceased terrestrial distribution of our channels in the Slovak Republic and Slovenia, and channels are now available exclusively on cable, satellite and IPTV platforms. We will apply for additional digital licenses where such applications are prudent and permissible. Please see below for more detailed information on licenses for our channels.
Bulgaria: BTV operates pursuant to a national digital terrestrial license issued by the Council for Electronic Media, the Bulgarian Media Council, that expires in July 2024. BTV ACTION broadcasts pursuant to a national cable and satellite registration that is valid for an indefinite time period and also has a digital terrestrial license that expires in January 2025 which is not currently in use. BTV CINEMA, BTV COMEDY, RING and BTV LADY, as well as BTV, each broadcast pursuant to a national cable and satellite registration that is valid for an indefinite time period.
Czech Republic: Our channels in the Czech Republic operate under a variety of licenses granted by the Czech Republic Media Council, The Council for Radio and Television Broadcasting. TV NOVA broadcasts under a national terrestrial license that expires in January 2025. TV NOVA may also broadcast pursuant to a satellite license that expires in December 2020. NOVA CINEMA broadcasts pursuant to a national terrestrial digital license that expires in September 2023. NOVA CINEMA also broadcasts via satellite pursuant to a license that is valid until October 2031. NOVA SPORT 1 broadcasts pursuant to a license that allows for both satellite and cable transmission that expires in October 2020. NOVA SPORT 2 broadcasts pursuant to a satellite license that expires in August 2027. NOVA ACTION broadcasts pursuant to a satellite license that expires in July 2024, a national terrestrial license that expires in September 2023. NOVA 2 broadcasts pursuant to a national terrestrial license that expires in December 2024 and a satellite license that expires in February 2025. NOVA GOLD broadcasts pursuant to a national terrestrial license and a satellite license that each expire in February 2025. In addition, each channel has a license that permits internet transmission that expires in June 2030, other than NOVA SPORT 1 and NOVA SPORT2 which expires in August 2027. NOVA INTERNATIONAL broadcasts pursuant to a license that permits internet transmission which expires in January 2028.
Romania: PRO TV broadcasts pursuant to a national satellite license granted by the Romanian Media Council, the National Audio-Visual Council, that expires in May 2023. PRO 2 broadcasts pursuant to a national satellite license that expires in January 2025. PRO GOLD broadcasts pursuant to a national satellite license that expires in April 2021. PRO CINEMA broadcasts pursuant to a national satellite license that expires in April 2022. PRO X broadcasts pursuant to a national satellite license that expires in July 2021. PRO TV INTERNATIONAL broadcasts pursuant to a national satellite license that expires in May 2027. PRO TV also broadcasts in high-definition pursuant to a national cable license that expires in September 2024. PRO 2 also broadcasts in high-definition pursuant to a national cable license that expires in October 2028. PRO X also broadcasts in high-definition pursuant to a national cable license that expires in October 2028. PRO TV CHISINAU broadcasts pursuant to a cable license granted by the Audio-Visual Coordinating Council of the Republic of Moldova (the "AVCC") that expires in November 2023.
Slovak Republic: TV MARKIZA, DOMA and DAJTO each broadcast pursuant to a national license for digital broadcasting granted by the Council for Broadcasting and Retransmission, the Media Council of the Slovak Republic, which is valid for an indefinite period. MARKIZA INTERNATIONAL is broadcast pursuant to the license granted to TV MARKIZA.
Slovenia: Our Slovenian channels POP TV, KANAL A, KINO, BRIO and OTO each have licenses granted by the Agency for Communication Networks and Services of the Republic of Slovenia and the Ministry of Culture, that allow for broadcasting on any platform, including digital, cable and satellite. These licenses are valid for an indefinite time period.
OTHER INFORMATION
Employees
As of December 31, 2019, we had a total of approximately 2,550 employees (including contractors).
Corporate Information
CME Ltd. was incorporated in 1994 under the laws of Bermuda. Our registered offices are located at O'Hara House, 3 Bermudiana Road, Hamilton HM 08, Bermuda, and our telephone number is +1-441-296-1431. Communications can also be sent c/o CME Media Services Ltd. at Krizeneckeho nam. 1078/5, 152 00 Praha 5, Czech Republic, telephone number +420-242-465-605. CME's Class A common stock is listed on the NASDAQ Global Select Market and the Prague Stock Exchange under the ticker symbol “CETV”.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Exchange Act are available on our website, free of charge, as soon as reasonably practicable after the reports are electronically filed with or furnished to the SEC. These reports together with press releases, public conference calls, webcasts and posts to the "Investors" section of our website are available at www.cme.net and we encourage investors to use our website. The information contained on our website is not included as a part of, or incorporated by reference into, this Report.
Financial Information by Operating Segment and by Geographical Area
For financial information by operating segment and geographic area, see Part II, Item 8, Note 20, "Segment Data".
ITEM 1A Risk Factors
This report and the following discussion of risk factors contain forward-looking statements as discussed on page 1 of this report. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks and uncertainties described below and elsewhere in this report. These risks and uncertainties are not the only ones we may face. Additional risks and uncertainties of which we are not aware, or that we currently deem immaterial, may also become important factors that affect our financial condition, results of operations and cash flows.
Risks Relating to Our Financial Position
Changes in global or regional economic conditions may adversely affect our financial position and results of operations.
The results of our operations depend heavily on advertising revenue, and demand for advertising is affected by general economic conditions in the region and globally. Our markets have experienced overall growth in real GDP (as adjusted for inflation) and advertising spending over the last several years; however, we cannot predict if the current growth trends will continue in the future. Analyst estimates for 2020 of real GDP in the countries in which we operate forecast a slower rate of growth overall compared to 2019. Recessions or periods of low or negative growth in the region or globally in the future may cause a deterioration of general economic conditions in one or more of our markets, which would have an adverse economic impact on our advertising revenues. The United States has imposed tariffs on certain products from many of its trading partners, including Europe and China, and has previously threatened to impose additional tariffs on cars and auto part exports from Europe. Such tariffs could have a significant adverse impact on the economies of our countries of operation. Additionally, a slowdown in China resulting from existing tariffs on Chinese products may have an adverse impact on the global economy, which may ultimately reduce demand for European exports and the rate of GDP growth in the countries in which we operate. Other factors that may affect general economic conditions in our markets include defaults by sovereigns or systemically important companies, austerity programs, natural disasters, acts of terrorism, civil or military conflicts or general political instability and responses to it, any of which may also reduce advertising spending. In addition, although we believe the advertising spend per capita of the countries in which we operate and advertising intensity (the ratio of total advertising spend per capita to nominal GDP per capita) will eventually converge with developed markets in Europe, such convergence may not occur in the time frame we expect, or at all. Any of these developments would have a significant negative effect on our financial position, results of operations and cash flows.
Changes to the quantitative easing program implemented by the European Central Bank ("ECB") may adversely affect our financial position and results of operations.
The ECB embarked upon quantitative easing in 2015 to address economic softness and a slowdown in growth of consumer prices in the Eurozone. The ECB also created funding and stability mechanisms to provide liquidity and financial assistance to Eurozone member states and financial institutions. Economic growth in recent years in the Eurozone has been helped by the ECB’s quantitative easing program which was recalibrated in January 2018. Although the ECB, citing improved economic conditions, ended its original quantitative easing program at the end of December 2018, it resumed its quantitative easing program in November 2019. While the duration of the current quantitative easing program is not known, the cessation of quantitative easing in the future may adversely impact growth in Eurozone countries, including the countries in which we operate, and would negatively impact our business.
Our financial position and results of operations may be adversely affected as a result of the United Kingdom’s decision to end its membership in the European Union.
The United Kingdom is in the process of negotiating its exit from the European Union (generally referred to as “Brexit”). On January 31, 2020, the United Kingdom formally left the European Union; however, it will remain in the single market and be subject to the EU’s rules and regulations during a transition period ending December 31, 2020. It is expected that economic conditions in the EU will be impacted by Brexit. The impact on our business from a result of Brexit will depend, in part, on the outcome of tariff, trade, regulatory and other negotiations during this transition period and on the ultimate manner and terms of the U.K.’s withdrawal from the EU. Given the ongoing uncertainty over the final terms of Brexit to be negotiated during the transition period, the overall economic impact of Brexit on the EU and the Euro continues to be difficult to estimate as decisions to conserve cash and reduce spending by consumers and businesses in the United Kingdom would have a negative impact on economic growth rates in the United Kingdom and, to a lesser extent, in the EU, in particular those countries that are significant exporters to the United Kingdom. Furthermore, the departure of the United Kingdom from the EU may further affect the budgetary contributions and allocations among the EU member states in the medium term, including the countries in which we operate, which have historically been net recipients of EU funding. Economic uncertainty caused by Brexit or other instability in the EU resulting from Brexit could cause significant volatility in EU markets and reduce economic growth rates in the countries in which we operate, which would negatively impact the demand for advertising and consequently our financial position, results of operations and cash flows.
Our operating results will be adversely affected if we cannot generate strong advertising sales.
We generate the majority of our revenues from the sale of advertising airtime on our television channels. While we have implemented pricing strategies to increase sales and television advertising spending, the success of these strategies has varied from market to market and continues to be challenged by pressure from advertisers and discounting by competitors. In addition to advertising pricing, other factors that may affect our advertising sales include general economic conditions (described above), competition from other broadcasters and operators of other distribution platforms, changes in programming strategy, changes in distribution strategy, our ability to secure distribution on cable, satellite or IPTV operators, our channels’ technical reach, technological developments relating to media and broadcasting, seasonal trends in the advertising market, changing audience preferences and in how and when people view content and the accompanying advertising, increased competition for the leisure time of audiences and shifts in population and other demographics. Our advertising revenues also depend on our ability to maintain audience ratings and to generate GRPs. This requires us to have a distribution strategy that reaches a significant audience as well as to maintain investments in programming at a sufficient level to continue to attract audiences. Changes in the distribution of our channels, such as our decision to cease broadcasting on digital terrestrial television ("DTT") in the Slovak Republic and Slovenia in 2017, may reduce the number of people who can view our channels, which may negatively impact our audience share and GRPs generated. Furthermore, significant or sustained reductions in investments in programming or other operating costs in response to reduced advertising revenues had and, if repeated, may have an adverse impact on our television viewing levels. Reductions in advertising spending in our markets and resistance to price increases as well as competition for ratings from broadcasters seeking to attract similar audiences may have an adverse impact on our ability to maintain our advertising sales. A failure to maintain advertising sales could have a material adverse effect on our financial position, results of operations and cash flows.
We may be unable to repay or refinance our existing indebtedness and may not be able to obtain favorable refinancing terms.
We have a substantial amount of indebtedness. In the event the proposed Merger is not completed, we face the risk that we will not be able to renew, repay or refinance our indebtedness when due, or that the terms of any renewal or refinancing will not be on better terms than those of such indebtedness being refinanced. Furthermore, pursuant to the Reimbursement Agreement, the all-in rates on each of the Euro Loans increase to a maximum of 10.0% (or 3.5% above the then-current all-in rate, if lower), on the date that is 365 days following a change of control of CME Ltd. (as defined therein); and pursuant to the 2023 Revolving Credit Facility, all commitments terminate following a change of control (as defined therein) and the interest rate on amounts outstanding increases to 10% plus LIBOR or 9% plus the alternate base rate on the date that is 365 days following such change of control. In the event we are not able to refinance our indebtedness, we might be forced to dispose of assets on disadvantageous terms or reduce or suspend operations, any of which would materially and adversely affect our financial condition, results of operations and cash flows.
Our debt service obligations and covenants may restrict our ability to conduct our operations.
We have debt service obligations under the Euro Loans as well as the 2023 Revolving Credit Facility (when drawn), including the Guarantee Fees to Warner Media as consideration for its guarantees of the Euro Loans (collectively, the "WM Guarantees"). In addition, if our financial performance does not meet our forecasts, we may bear higher average borrowing costs on our senior debt and pay more interest and Guarantee Fees. As a result of our debt service obligations and covenants contained in the related loan agreements, we are restricted under the Reimbursement Agreement and the 2023 Revolving Credit Facility (when drawn) in the manner in which our business is conducted, including but not limited to our ability to obtain additional debt financing to refinance existing indebtedness or to fund future working capital, capital expenditures, business opportunities or other corporate requirements, which may limit our flexibility in planning for, or reacting to, changes in our business, economic conditions or our industry. For additional information regarding the Reimbursement Agreement, the 2023 Revolving Credit Facility and the WM Guarantees, see Part II, Item 8, Note 4, "Long-term Debt and Other Financing Arrangements".
We may be subject to changes in tax rates and exposure to additional tax liabilities.
We are subject to taxes in a number of foreign jurisdictions, including in respect of our operations as well as capital transactions undertaken by us. We are subject to regular review and audit by tax authorities, and in the ordinary course of our business there are transactions and calculations where the ultimate tax determination is unknown. Significant judgment is required in determining our provision for taxes. The final determination of our tax liabilities resulting from tax audits, related proceedings or otherwise could be materially different from our tax provisions. Economic and political pressures to increase receipts in various jurisdictions may make taxation and tax rates subject to significant change and the satisfactory resolution of any tax disputes more difficult. The occurrence of any of these events could have a material adverse effect on our financial position, results of operations and cash flows.
A default by us in connection with our obligations under our outstanding indebtedness could result in our inability to continue to conduct our business.
Pursuant to the Reimbursement Agreement and the 2023 Revolving Credit Facility, we pledged all of the shares of CME BV, which owns all of our interests in our operating subsidiaries, in favor of Warner Media as security for this indebtedness. If we or CME BV were to default under the terms of any of the relevant agreements, Warner Media would have the ability to sell all or a portion of the assets pledged to it in order to pay amounts outstanding under such debt instruments. This could result in our inability to conduct our business.
Fluctuations in exchange rates may continue to adversely affect our results of operations.
Our reporting currency is the dollar and CME Ltd.'s functional currency is the Euro. Our consolidated revenues and costs are divided across a range of European currencies. Any strengthening of the dollar will have a negative impact on our reported revenues. Furthermore, fluctuations in exchange rates may negatively impact programming costs. While local programming is generally purchased in local currencies, a significant portion of our content costs relates to foreign programming purchased pursuant to dollar-denominated agreements. If the dollar appreciates against the functional currencies of our operating segments, the cost of acquiring such content would be adversely affected, which could have a material adverse effect on our results of operations and cash flows.
Our strategies to enhance our carriage fees and diversify our revenues may not be successful.
We are focused on creating additional revenue streams from our broadcast operations as well as increasing revenues generated from television advertising, which is how we generate most of our revenues. Our main efforts with respect to this strategy are on increasing carriage fees from cable, satellite and IPTV operators for carriage of our channels as well as continuing to seek improvements in advertising pricing. Agreements with operators generally have a term of one or more years, at which time agreements must be renewed. There can be no assurance that we will be successful in renewing carriage fee agreements on similar or better terms. During negotiations to implement our carriage fees strategy in prior years, some cable and satellite operators suspended the broadcast of our channels, which negatively affected the reach and audience shares of those operations and, as a result, advertising revenues. There is a risk that operators may refuse to carry our channels while carriage fee negotiations are ongoing, which would temporarily reduce the reach of those channels and may result in clients withdrawing advertising from our channels. The occurrence of any of these events may have an adverse impact on our financial position, results of operations and cash flows. If we are ineffective in negotiations with carriers or in achieving further carriage fee increases, our profitability will continue to be dependent primarily on television advertising revenues, which increases the importance placed on our ability to improve advertising pricing and generate advertising revenues. In addition to carriage fees, we are also working to build-out our offerings of advertising video-on-demand products and other opportunities for advertising online. There can be no assurances that our revenue diversification initiatives will ultimately be successful, and if unsuccessful, this may have an adverse impact on our financial position, results of operations and cash flows.
A downgrading of our corporate credit ratings may adversely affect our ability to raise additional financing.
Moody’s Investors Service rates our corporate credit as B1 with a positive outlook. Standard & Poor’s rates our corporate credit B+ (on watch with negative implications due to the proposed Merger). Our ratings show each agency's opinion of our financial strength, operating performance and ability to meet our debt obligations as they become due, as well as the proposed Merger. These ratings take into account the particular emphasis the ratings agencies place on metrics such as leverage ratio and cash flow, which they use as measurements of a company's liquidity and financial strength. They also reflect an emphasis placed by the ratings agencies on the historically strong financial support from Warner Media. We may be subject to downgrades if our operating performance deteriorates or we fail to maintain adequate levels of liquidity. In the event our corporate credit ratings are lowered by the rating agencies, we may not be able to refinance our existing indebtedness or raise new indebtedness that may be permitted under the Reimbursement Agreement and the 2023 Revolving Credit Facility (when drawn), and we will have to pay higher interest rates, all of which would have an adverse effect on our financial position, results of operations and cash flows.
If our goodwill, other intangible assets and long-lived assets become impaired, we may be required to record significant charges to earnings.
We review our long-lived assets for impairment when events or changes in circumstances indicate the carrying amount may not be recoverable. Goodwill and indefinite-lived intangible assets are required to be assessed for impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying amount of our goodwill, indefinite-lived intangible assets or long-lived assets may not be recoverable include slower growth rates in our markets, reduced expected future cash flows, increased country risk premium as a result of political uncertainty and a decline in stock price and market capitalization. We consider available current information when calculating our impairment charge. If there are indicators of impairment, our long-term cash flow forecasts for our operations deteriorate or discount rates increase, we may be required to recognize additional impairment charges in later periods. See Part II, Item 8, Note 3, "Goodwill and Intangible Assets" for the carrying amounts of goodwill in each of our reporting units.
Risks Relating to Our Operations
Our operations are vulnerable to significant changes in viewing habits and technology that could adversely affect us.
The television broadcasting industry is affected by rapid innovations in technology. The implementation of these new technologies and the introduction of non-traditional content distribution systems have increased competition for audiences and advertisers. Platforms such as direct-to-home cable and satellite distribution systems, the internet, subscription and advertising video-on-demand, user-generated content sites and the availability of content on portable digital devices have changed consumer behavior by increasing the number of entertainment choices available to audiences and the methods for the distribution, storage and consumption of content. This development has fragmented television audiences in more developed markets and could adversely affect our ability to retain audience share and attract advertisers as such technologies penetrate our markets. As we adapt to changing viewing patterns, it may be necessary to expend substantial financial and managerial resources to ensure necessary access to new technologies or distribution systems. Such initiatives may not develop into profitable business models. Furthermore, technologies that enable viewers to choose when, how, where and what content to watch, as well as to fast-forward or skip advertisements, may cause changes in consumer behavior that could have a negative impact on our advertising revenues. In addition, compression techniques and other technological developments allow for an increase in the number of channels that may be broadcast in our markets and expanded programming offerings that may be offered to highly targeted audiences. Reductions in the cost of launching new channels could lower entry barriers and encourage the development of increasingly targeted niche programming on various distribution platforms. This could increase the competitive demand for popular programming, resulting in an increase in content costs as we compete for audiences and advertising revenues. A failure to successfully adapt to changes in our industry as a result of technological advances may have an adverse effect on our financial position, results of operations and cash flows.
Content may become more expensive to produce or acquire or we may not be able to develop or acquire content that is attractive to our audiences.
Television programming is one of the most significant components of our operating costs. The ability of our programming to generate advertising revenues depends substantially on our ability to develop, produce or acquire programming that matches audience tastes and attracts high audience shares, which is difficult to predict. The commercial success of a program depends on several tangible and intangible factors, including the impact of competing programs, the availability of alternate forms of entertainment and leisure time activities, our ability to anticipate and adapt to changes in consumer tastes and behavior, and general economic conditions. The cost of acquiring content attractive to our viewers, such as feature films and popular television series and formats, is likely to increase in the future. Our expenditures in respect of locally produced programming may also increase due to competition for talent and other resources, wage inflation, changes in audience tastes in our markets or from the implementation of any new laws and regulations mandating the broadcast of a greater number of locally produced programs. In addition, we typically acquire syndicated programming rights under multi-year commitments before knowing how such programming will perform in our markets. In the event any such programming does not attract adequate audience share, it may be necessary to increase our expenditures by investing in additional programming, subject to the availability of adequate financial resources, as well as to write down the value of any underperforming programming. Any material increase in content costs could have a material adverse effect on our financial condition, results of operations or cash flows.
Our operating results are dependent on the importance of television as an advertising medium.
We generate most of our revenues from the sale of our advertising airtime on television channels in our markets. Television competes with various other media, such as print, radio, the internet and outdoor advertising, for advertising spending. In all of the countries in which we operate, television constitutes the single largest component of all advertising spending. There can be no assurance that the television advertising market will maintain its current position among advertising media in our markets. Furthermore, there can be no assurances that changes in the regulatory environment or improvements in technology will not favor other advertising media or other television broadcasters. Increases in competition among advertising media arising from the development of new forms of advertising media and distribution could result in a decline in the appeal of television as an advertising medium generally or of our channels specifically. A decline in television advertising spending as a component of total advertising spending in any period or in specific markets would have an adverse effect on our financial position, results of operations and cash flows.
We are subject to legal compliance risks and the risk of legal or regulatory proceedings being initiated against us.
We are required to comply with a wide variety of laws and other regulatory obligations in the jurisdictions in which we operate and compliance by our businesses is subject to scrutiny by regulators and other government authorities in these jurisdictions. Compliance with foreign as well as applicable U.S. laws and regulations related to our businesses, such as broadcasting content and advertising regulations, competition regulations, tax laws (including the Economic Substance Act in Bermuda which came into force in July 2019), employment laws, data protection requirements including the EU General Data Protection Regulation, and anti-corruption laws, increases the costs and risks of doing business in these jurisdictions. We believe we have implemented appropriate risk management and compliance policies and procedures that are designed to ensure our employees, contractors and agents comply with these laws and regulations; however, a violation of such laws and regulations or the Company’s policies and procedures could occur. A failure or alleged failure to comply with applicable laws and regulations, whether inadvertent or otherwise, may result in legal or regulatory proceedings being initiated against us and fines or other penalties being levied against us.
In Slovenia, the competition law authorities launched an investigation in 2017 into whether our Slovenia subsidiary is dominant and abused its dominant position when concluding carriage fee agreements with platform operators in connection with its decision to cease broadcasting on DTT there. To date there has been no determination that a breach of competition law has occurred. If these or other contingencies result in legal or regulatory proceedings being initiated against us, or if developments occur in respect of our compliance with existing laws or regulations, or there are changes in the interpretation or application of such laws or regulations, we may incur substantial costs, be required to change our business practices (including on what terms and conditions we offer our channels under carriage agreements), our reputation may be damaged or we may be exposed to unanticipated civil or criminal liability, including fines and other penalties that may be substantial. This could have a material adverse effect on our business, financial position, results of operations and cash flows.
Our operations are in developing markets where there are additional risks related to political and economic uncertainty, biased treatment and compliance with evolving legal and regulatory systems.
Our revenue-generating operations are located in Central and Eastern Europe and we may be significantly affected by risks that may be different to those posed by investments in more developed markets. These risks include, but are not limited to, social and political instability, changes in local regulatory requirements including restrictions on foreign ownership, inconsistent regulatory or judicial practice, corruption and increased taxes and other costs. The economic and political systems, legal and tax regimes, regulatory practices, standards of corporate governance and business practices of countries in this region continue to develop. Policies and practices may be subject to significant adjustments, including following changes in political leadership, as well as to the influence of commercial and governmental actors. This may result in inconsistent application of tax and legal regulations, arbitrary or biased treatment, and other general business risks as well as social or political instability or disruptions and the potential for political influence on the media. The relative level of development of our markets, the risk of corruption, and the influence of local commercial and governmental actors also present a potential for biased or unfair treatment of us before regulators or courts in the event of disputes. If such a dispute occurs, those regulators or courts may not act with integrity or may favor local interests over our interests. Other potential risks inherent in markets with evolving economic and political environments include exchange controls, higher taxes, tariffs and other levies as well as longer payment cycles. Ultimately, the occurrence of any of these could have a material adverse impact on our business, financial position, results of operations and cash flows.
Piracy of our content may decrease revenues we can earn from our content and adversely impact our business and profitability.
Piracy of our content poses significant challenges in our markets. Technological developments, including digital copying, file compressing, the use of international proxies and the growing penetration of high bandwidth internet connections, have made it easier to create, transmit and distribute high quality unauthorized copies of content in unprotected digital formats. Furthermore, there are a growing number of video streaming sites, increasing the risk of online transmission of our content without consent. The proliferation of such sites broadcasting content pirated from us could result in a reduction of revenues that we receive from the legitimate distribution of our content, including through video-on-demand and other services. Protection of our intellectual property is in large part dependent on the manner in which applicable intellectual property laws in the countries in which we operate are construed and enforced. We seek to limit the threat of content piracy. However, detecting and policing the unauthorized use of our intellectual property is often difficult and remedies may be limited under applicable law. Steps we take may not prevent the infringement by third parties. There can be no assurance that our efforts to enforce our rights and protect our intellectual property will be successful in preventing piracy, which limits our ability to generate revenues from our content.
We rely on network and information systems and other technology that may be subject to disruption, security breaches or misuse, which could harm our business or our reputation.
We make extensive use of network and information systems and other technologies, including those related to our internal network management as well as our broadcasting operations. These systems are central to many of our business activities. Network and information systems-related events, such as computer hackings, computer viruses, worms or other destructive or disruptive software, process breakdowns, malicious activities or other security breaches could result in a disruption or degradation of our services, the loss of information or the improper disclosure of personal data. The occurrence of any of these events could negatively impact our business if we are required to expend resources to remedy such a security breach or if they result in legal claims or proceedings or our reputation is harmed. In addition, improper disclosure of personal data could subject us to liability under laws, including the EU General Data Protection Regulation, that protect personal data in the countries in which we operate. The development and maintenance of systems to prevent these events from occurring requires ongoing monitoring and updating as efforts to overcome security measures become more sophisticated. As technologies evolve, we will need to expend additional resources to protect our technology and information systems, which could have an adverse impact on our results of operations and cash flows.
Our broadcasting licenses may not be renewed and may be subject to revocation.
We require broadcasting and, in some cases, other operating licenses as well as other authorizations from national regulatory authorities in our markets in order to conduct our broadcasting business. While our broadcasting licenses for our operations in the Slovak Republic and Slovenia are valid for indefinite time periods, our other broadcasting licenses expire at various times from October 2020 through 2028. While we expect that our material licenses and authorizations will continue to be renewed or extended as required, we cannot guarantee that this will occur or that they will not be subject to revocation, particularly in markets where there is relatively greater political risk as a result of less developed political and legal institutions. The failure to comply in all material respects with the terms of broadcasting licenses or other authorizations or with applications filed in respect thereto may result in such licenses or other authorizations not being renewed or otherwise being terminated. Furthermore, no assurances can be given that renewals or extensions of existing licenses will be issued on the same terms as existing licenses or that further restrictions or conditions will not be imposed in the future. Any non-renewal or termination of any other broadcasting or operating licenses or other authorizations or material modification of the terms of any renewed licenses may have a material adverse effect on our financial position, results of operations and cash flows.
Our success depends on attracting and retaining key personnel.
Our success depends partly upon the efforts and abilities of our key personnel and our ability to attract and retain key personnel. Our management teams have significant experience in the media industry and have made important contributions to our growth and success. Although we have been successful in attracting and retaining such people in the past, competition for highly skilled individuals is intense. There can be no assurance that we will continue to be successful in attracting and retaining such individuals in the future. In particular, the proposed Merger may adversely impact our ability to attract and retain such individuals. The loss of the services of any of these individuals could have an adverse effect on our businesses, results of operations and cash flows.
Risks Relating to Enforcement Rights
We are a Bermuda company and enforcement of civil liabilities and judgments may be difficult.
We are a Bermuda company. Substantially all of our assets and all of our operations are located, and all of our revenues are derived, outside the United States. In addition, several of our directors and officers are non-residents of the United States, and all or a substantial portion of the assets of such persons are or may be located outside the United States. As a result, investors may be unable to effect service of process within the United States upon such persons, or to enforce against them judgments obtained in the United States courts, including judgments predicated upon the civil liability provisions of the United States federal and state securities laws. There is uncertainty as to whether the courts of Bermuda and the countries in which we operate would enforce (a) judgments of United States courts obtained against us or such persons predicated upon the civil liability provisions of the United States federal and state securities laws or (b) in original actions brought in such countries, liabilities against us or such persons predicated upon the United States federal and state securities laws.
Our Bye-laws restrict shareholders from bringing legal action against our officers and directors.
Our Bye-laws contain a broad waiver by our shareholders of any claim or right of action in Bermuda, both individually and on our behalf, against any of our officers or directors. The waiver applies to any action taken or concurred in by an officer or director, or the failure of an officer or director to take any action, in the performance of his or her duties, except with respect to any matter involving any fraud or dishonesty on the part of the officer or director. This waiver limits the right of shareholders to assert claims against our officers and directors unless the act or failure to act involves fraud or dishonesty.
Risks Relating to our Common Stock
The interests of AT&T may conflict with the interests of other investors.
Through its wholly owned subsidiaries Warner Media and TW Investor, the aggregate beneficial ownership interest of AT&T in the Company is approximately 75.7%. In connection with the exercise of the warrants by Warner Media and TW Investor in April 2018, each of them issued standing proxies to the independent directors of the Company, pursuant to which it granted the independent directors the right to vote the 100,926,996 shares received on the exercise of those warrants (the “Warrant Shares”) on all matters other than at any meeting where the agenda includes a change in control transaction. In accordance with these proxies, the Warrant Shares will be voted in proportion to votes cast at such a meeting of the Company, excluding such Warrant Shares. Warner Media and TW Investor have undertaken to maintain this proxy arrangement until April 2020 and may extend it for an additional year at their option. After giving effect to its ownership of the Series A Preferred Share, AT&T has a 44.3% voting interest in the Company at any meeting where the Warrant Shares are voted pursuant to the standing proxies. Furthermore, AT&T has the right to appoint one less than the number required to constitute a majority of our board of directors, provided that AT&T continues to own not less than 40% of the voting power of the Company. As such, AT&T is in a position to exercise significant influence over the outcome of corporate actions requiring shareholder approval, such as the proposed Merger, the election of directors, amendments to our Bye-laws, or certain transactions, including transactions resulting in a change of control.
We are also party to an amended investor rights agreement with Warner Media and the other parties thereto under which, among other things, Warner Media was granted a contractual pre-emptive right (subject to certain exclusions) with respect to issuances of the Company’s equity securities, which permits it to maintain its pro rata economic interest as well as a right to top any offer that would result in a change of control of the Company. Under Bermuda law, there is no takeover code or similar legislation requiring an acquirer of a certain percentage of our Class A common stock to tender for the remaining publicly held shares. Warner Media is also our largest secured creditor, as it guarantees 100% of our outstanding senior indebtedness and is the lender under the 2023 Revolving Credit Facility. The 2023 Revolving Credit Facility (when drawn) and the Reimbursement Agreement contain maintenance covenants in respect of interest cover and total leverage ratios and includes covenants in respect of the incurrence of indebtedness (including refinancing indebtedness), the provision of guarantees, acquisitions and disposal and granting security. As such, Warner Media may be in a position to determine whether to permit transactions, waive defaults or accelerate such indebtedness or take other steps in its capacity as a secured creditor in a manner that might not be consistent with the interests of the holders of our Class A common stock. Furthermore, in certain circumstances, the interests of AT&T as our largest beneficial owner could be in conflict with the interests of minority shareholders.
The price of our Class A common stock may be volatile.
The market price of shares of our Class A common stock may be influenced by many factors, some of which are beyond our control, including but not limited to those described under "Risks Relating to Our Operations" and “Risks Relating to the Proposed Merger - The failure to complete the proposed Merger within the expected time frame or at all could adversely affect our business, financial condition, results of operations, liquidity and the price of our Class A common stock” as well as the following: general economic and business trends, variations in quarterly operating results, license renewals, regulatory developments in our operating countries and the European Union, the condition of the media industry in our operating countries, the volume of trading in shares of our Class A common stock, future issuances of shares of our Class A common stock and investors’ and securities analysts’ perception of us and other companies that investors or securities analysts deem comparable in the television broadcasting industry. In addition, stock markets in general have experienced extreme price and volume fluctuations that have often been unrelated to and disproportionate to the operating performance of broadcasting companies. These broad market and industry factors may materially impact the market price of shares of our Class A common stock, regardless of our operating performance.
Risks Relating to the Proposed Merger
The proposed Merger may cause disruption to our business.
The Merger Agreement generally requires CME to operate its business in the ordinary course during the pendency of the proposed Merger and contains customary covenants which restrict CME, without Parent’s consent, from taking certain specified actions until the proposed Merger closes or the Merger Agreement terminates. These restrictions may prevent us from taking actions or making changes with respect to the Company that we may otherwise consider to be advantageous and could result in our inability to respond effectively to competitive pressures, industry developments and future opportunities, which may adversely affect our business, financial condition, results of operations and cash flows.
The proposed Merger could cause disruptions to our business or business relationships. Uncertainty associated with the proposed Merger may cause business partners, customers and other counterparties to delay or defer decisions concerning our business or seek alternative relationships with third parties. Any delay or deferral of those decisions or changes to our business relationships could adversely affect our financial conditions, results of operations and cash flows, regardless of whether the proposed Merger is ultimately completed.
We have allocated, and expect to continue to allocate, significant management and financial resources towards the proposed Merger and its completion. The diversion of management’s attention away from day-to-day operations and other opportunities could adversely affect our business and results of operations. In addition, employee retention, recruitment and motivation may be challenging before the completion of the proposed Merger, as employees may experience uncertainty about their future roles following the proposed Merger. If, despite our retention and recruiting efforts, key employees depart because of issues relating to the uncertainty and potential outcome of the proposed Merger or a desire not to remain following the proposed Merger, our business and results of operations could be adversely affected.
Completion of the proposed Merger is subject to conditions, including the receipt of certain competition and other regulatory approvals, and if these conditions are not satisfied or waived or if the required approvals are not granted or are subject to conditions, completion of the proposed Merger may not occur.
Completion of the proposed Merger is subject to several conditions, including, but not limited to, the receipt of certain competition and other regulatory approvals, the requisite vote of the Company's shareholders, compliance with covenants and agreements in the Merger Agreement (subject to certain materiality qualifications), and the absence of any governmental order prohibiting completion of the proposed Merger, some of which are beyond our control. We cannot predict with certainty whether and when any of these conditions will be satisfied or waived, which may prevent, delay or otherwise adversely affect the completion of the proposed Merger in a material way. In addition, Parent’s obligation to complete the proposed Merger is subject to the receipt of certain governmental approvals without the requirement that Parent agree to take any action or commit to any condition or restriction necessary to secure such approval that would constitute a “burdensome condition” as defined in the Merger Agreement. There can be no assurance that regulators will not seek to impose conditions, terms, obligations or restrictions that would constitute burdensome conditions or that such conditions, terms, obligations or restrictions would not result in the termination of the Merger Agreement.
The failure to complete the proposed Merger within the expected time frame or at all could adversely affect our business, financial condition, results of operations, liquidity and the price of our Class A common stock.
If the proposed Merger is not completed by October 27, 2020, which date may be extended under certain circumstances to January 27, 2021, CME or Parent may choose not to proceed with the proposed Merger. Each of CME and Parent may also elect to terminate the Merger Agreement in certain other circumstances. If the Merger Agreement is terminated, CME may be required to pay to Parent a termination fee of $50 million. The termination of the Merger Agreement may also result in the share price of our Class A common stock declining. Additionally, we have already incurred, and we expect to continue to incur, significant costs in connection with the proposed Merger for which we will receive little or no benefit if the completion of the proposed Merger does not occur. In the event the proposed Merger is not completed, CME could also be subject to litigation related to any failure to complete the proposed Merger.
Therefore, if the proposed Merger is not completed, our business, financial condition, results of operations and cash flows may be adversely affected, and the share price of our Class A common stock may decline. Moreover, if the Merger Agreement is terminated and we decide to seek another business combination, we may not be able to negotiate or consummate a transaction with another party on terms comparable to, or better than, the terms of the Merger Agreement.
The Merger Agreement contains provisions that could discourage a potential competing acquirer.
The Merger Agreement contains certain provisions that restrict our ability to, among other things, solicit, knowingly encourage, knowingly facilitate, knowingly induce or initiate the submission of, enter into, or participate in any discussions or any negotiations regarding any "competing proposal" as defined in the Merger Agreement or the announcement of a competing proposal. The Merger Agreement also provides that the Board of Directors (or any committee thereof, including the Special Committee) will not make a "change of recommendation" as defined in the Merger Agreement except as permitted by the terms of the Merger Agreement. In addition, CME may be required to pay a termination fee of $50 million to Parent if the proposed Merger is not consummated under specified circumstances.
CME believes these provisions are reasonable, customary and not preclusive of other offers. Nevertheless, these provisions might discourage a third party that has an interest in acquiring all or a significant part of CME from considering or proposing such acquisition, even if such party were prepared to pay consideration with a higher value than the currently proposed aggregate merger consideration. Furthermore, the requirement that CME pay a termination fee under certain circumstances may result in a third party proposing to pay a lower per-share price to acquire CME, than it might otherwise have proposed to pay because of the added expense of the termination fee that may become payable by CME in certain circumstances.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We own and lease properties in the countries in which we operate. These facilities are fully utilized for current ongoing operations, are in good condition and are adequately equipped for purposes of conducting broadcasting, content production or such other operations as we require. We believe that suitable additional space is available on acceptable terms in the event of an expansion of our businesses. The table below provides a brief description of our significant properties.
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| | | | |
Location | | Property | | Use |
Hamilton, Bermuda | | Leased office | | Registered office, Corporate |
Amsterdam, The Netherlands | | Leased office | | Corporate office, Corporate |
Sofia, Bulgaria | | Leased buildings | | Office and studio space (Bulgaria segment) |
Prague, Czech Republic | | Owned and leased buildings | | Administrative center, Corporate;
Office and studio space (Czech Republic segment)
|
Bucharest, Romania | | Owned and leased buildings | | Office and studio space (Romania segment) |
Bratislava, Slovak Republic | | Owned buildings | | Office and studio space (Slovak Republic segment) |
Ljubljana, Slovenia | | Owned and leased buildings | | Office and studio space (Slovenia segment) |
London, United Kingdom | | Leased office | | Administrative center, Corporate |
For further information on the cash resources that fund these facility-related costs, see Part II, Item 7, III, "Liquidity and Capital Resources".
ITEM 3. LEGAL PROCEEDINGS
See Part II, Item 8, Note 21, "Commitments and Contingencies" for a discussion of ongoing litigation.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
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ITEM 5. | MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Shares of Class A common stock of Central European Media Enterprises Ltd. began trading on the NASDAQ National Market (since renamed the NASDAQ Global Select Market) on October 13, 1994 and began trading on the Prague Stock Exchange on June 27, 2005. On each market, the shares are traded under the ticker symbol "CETV".
On February 4, 2020, the last reported sales price for shares of our Class A common stock was US$ 4.50 and there were approximately 46 holders of record.
Under our 2015 Stock Incentive Plan (the "2015 Plan"), 16,000,000 shares of Class A are authorized for issuance in respect of equity awards. 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 (see Item 8, Note 17, "Stock-based Compensation"). See Part III, Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" for further information.
DIVIDEND POLICY
We have not declared or paid and have no present intention to declare or pay in the foreseeable future any cash dividends in respect to any class of our shares of common stock.
PURCHASE OF OWN STOCK
We did not purchase any of our own stock in 2019.
RECENT SALES OF UNREGISTERED SECURITIES
We did not make any sales of any unregistered securities in 2019.
PERFORMANCE GRAPH
The following performance graph is a line graph comparing the change in the cumulative total shareholder return of the Class A common stock against the cumulative total return of the NASDAQ Composite Index and the Dow Jones Europe Stock Index between December 31, 2014 and December 31, 2019. The graph below assumes the investment of US$ 100 on December 31, 2014 in our Class A common stock, the NASDAQ Composite and the Dow Jones Europe Stock Index, assuming dividends, if any, are reinvested.
Value of US$ 100 invested at December 31, 2014 as of December 31, 2019:
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| | | |
| Central European Media Enterprises Ltd. | $ | 141.12 |
|
| NASDAQ Composite Total Return Index | $ | 200.49 |
|
| Dow Jones Europe Stock Index | $ | 113.76 |
|
ITEM 6. SELECTED FINANCIAL DATA
Our selected consolidated financial data should be read together with our consolidated financial statements and related notes included in Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
The following tables set forth the selected consolidated financial data for each of the years in the five-year period ended December 31, 2019. The selected consolidated financial data is qualified in its entirety and should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 8, "Financial Statements and Supplementary Data". We have derived the consolidated statements of operations and comprehensive income / loss data for the years ended December 31, 2019, 2018 and 2017 and the consolidated balance sheet data as of December 31, 2019 and 2018 from the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The consolidated statements of operations and comprehensive income / loss data for the years ended December 31, 2016 and 2015 and the balance sheet data as of December 31, 2017, 2016 and 2015 were derived from consolidated financial statements that are not included in this Annual Report on Form 10-K.
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| | | | | | | | | | | | | | | | | | | |
| | For The Year Ended December 31, |
| | (US$ 000's, except per share data) |
| | 2019 |
| | 2018 |
| | 2017 |
| | 2016 |
| | 2015 |
|
| CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME / LOSS DATA: | | | | | | | | | |
| Net revenues | $ | 694,804 |
| | $ | 703,906 |
| | $ | 642,868 |
| | $ | 583,006 |
| | $ | 550,337 |
|
| Operating income | 187,336 |
| | 177,587 |
| | 139,914 |
| | 105,748 |
| | 89,645 |
|
| Income / (loss) from continuing operations | 119,208 |
| | 97,065 |
| | 51,063 |
| | (179,679 | ) | | (83,501 | ) |
| Income / (loss) from discontinued operations, net of tax | — |
| | 60,548 |
| | (1,636 | ) | | (918 | ) | | (32,071 | ) |
| Net income / (loss) attributable to CME Ltd. | $ | 119,134 |
| | $ | 157,692 |
| | $ | 49,768 |
| | $ | (180,291 | ) | | $ | (114,901 | ) |
| | | | | | | | | | |
| PER SHARE DATA: | | | | | | | | | |
| Net income / (loss) per common share from: | | | | | | | | | |
| Continuing operations — basic | $ | 0.32 |
| | $ | 0.27 |
| | $ | 0.16 |
| | $ | (1.28 | ) | | $ | (0.68 | ) |
| Continuing operations — diluted | 0.32 |
| | 0.25 |
| | 0.12 |
| | (1.28 | ) | | (0.68 | ) |
| Discontinued operations — basic | — |
| | 0.18 |
| | (0.01 | ) | | 0.00 |
| | (0.22 | ) |
| Discontinued operations — diluted | — |
| | 0.17 |
| | 0.00 |
| | 0.00 |
| | (0.22 | ) |
| Attributable to CME Ltd. — basic | 0.32 |
| | 0.45 |
| | 0.15 |
| | (1.28 | ) | | (0.90 | ) |
| Attributable to CME Ltd. — diluted | 0.32 |
| | 0.42 |
| | 0.12 |
| | (1.28 | ) | | (0.90 | ) |
| | | | | | | | | | |
| Weighted average common shares used in computing per share amounts (000’s): | | | | | | | | | |
| Basic | 264,611 |
| | 230,562 |
| | 155,846 |
| | 151,017 |
| | 146,866 |
|
| Diluted | 266,198 |
| | 257,694 |
| | 236,404 |
| | 151,017 |
| | 146,866 |
|
| | | | | | | | | | |
| | As at December 31, |
| | (US$ 000's) |
| | 2019 |
| | 2018 |
| | 2017 |
| | 2016 |
| | 2015 |
|
| CONSOLIDATED BALANCE SHEET DATA: | | | | | | | | | |
| Cash and cash equivalents | $ | 36,621 |
| | $ | 62,031 |
| | $ | 58,748 |
| | $ | 40,954 |
| | $ | 59,441 |
|
Other current assets (1) | 313,359 |
| | 312,062 |
| | 362,491 |
| | 299,466 |
| | 298,843 |
|
| Non-current assets | 1,097,882 |
| | 1,114,268 |
| | 1,206,816 |
| | 1,050,297 |
| | 1,082,133 |
|
| Total assets | $ | 1,447,862 |
| | $ | 1,488,361 |
| | $ | 1,628,055 |
| | $ | 1,390,717 |
| | $ | 1,440,417 |
|
| | | | | | | | | | |
Current liabilities (1) | $ | 156,001 |
| | $ | 139,692 |
| | $ | 186,946 |
| | $ | 171,564 |
| | $ | 146,308 |
|
| Non-current liabilities | 680,273 |
| | 849,978 |
| | 1,182,286 |
| | 1,070,786 |
| | 974,270 |
|
| Temporary equity | 269,370 |
| | 269,370 |
| | 264,593 |
| | 254,899 |
| | 241,198 |
|
| CME Ltd. shareholders' equity / (deficit) | 341,705 |
| | 229,020 |
| | (5,788 | ) | | (107,804 | ) | | 77,260 |
|
| Noncontrolling interests | 513 |
| | 301 |
| | 18 |
| | 1,272 |
| | 1,381 |
|
| Total liabilities and equity | $ | 1,447,862 |
| | $ | 1,488,361 |
| | $ | 1,628,055 |
| | $ | 1,390,717 |
| | $ | 1,440,417 |
|
| |
(1)
| Other current assets and current liabilities as at December 31, 2017 include total assets held for sale and total liabilities held for sale of our Croatian operations. |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Please refer to page 1 of this Annual Report on Form 10-K for a list of defined terms used herein.The following discussion and analysis should be read in conjunction with the other sections in this Annual Report, including Part I, Item 1. Business, Part II, Item 6. Selected Financial Data, and Part II, Item 8. Financial Statements and Supplementary Data. The exchange rates used in this report are as at December 31, 2019, unless otherwise indicated.
I. Overview
Our operations comprise a collection of television networks across Central and Eastern Europe, each of which enjoys a strong competitive position due to audience share leadership, brand strength, popular local content, and the depth and experience of country management. The reach and affinity we provide advertisers supports our model of pricing inventory at a premium to our competition, and we seek to maximize our revenues in order to provide additional financial resources to invest in original local content. We believe these competitive advantages position us to benefit if forecast economic growth leads to continued growth of the television advertising markets in the countries in which we operate.
We are focused on enhancing the performance of our television networks in each country, which we expect will continue improving profitability and cash generation. Our operating and financial priorities are as follows:
leveraging content popular with our target demographics to maintain or increase our television audience share leadership and advertising market shares;
increasing carriage fees and subscription revenues as well as expanding our online content offerings to provide more diversified and predictable income;
maintaining a strict cost discipline while safeguarding our brands and competitive strengths to increase profitability; and
completing the previously announced Merger with PPF.
As market leaders with experienced management teams in each country, we believe we are well positioned to identify new challenges in a timely manner and adjust our strategy as new opportunities or threats arise.
We manage our business on a geographical basis with five operating segments: Bulgaria, the Czech Republic, Romania, the Slovak Republic and Slovenia. These operating segments, which are also our reportable segments, reflect how our 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 October 27, 2019, the Company entered into the Merger Agreement with Parent and Merger Sub, pursuant to which Merger Sub will merge with and into the Company, with the Company continuing as the surviving company in the proposed Merger as a wholly-owned subsidiary of Parent. The closing of the proposed Merger is subject to several conditions, including, but not limited to, the requisite vote of the Company’s shareholders in favor of the Merger Agreement and the proposed Merger, the receipt of certain competition and other regulatory approvals, compliance with covenants and agreements in the Merger Agreement (subject to certain materiality qualifications), and the absence of any governmental order prohibiting completion of the proposed Merger. We expectA special general meeting of shareholders of the proposedCompany was held on February 27, 2020, where more than 99% of the votes cast by shareholders were in favor of approving the Merger. In addition, regulatory approvals required under the Merger Agreement in Romania and Slovenia have been obtained. For more information on the Merger, please see the proxy statement of the Company related to the special general meeting of shareholders filed with the SEC on January 10, 2020.
Certifications by the Company's principal executive officers and the Company's principal financial officer are filed as exhibits to this Amendment No. 1 under Item 15 of Part IV. Because no financial statements are included in this Amendment No. 1, paragraphs 3, 4 and 5 of the certifications have been omitted and no certifications under Section 906 of the Sarbanes-Oxley Act of 2002 are required to be completedfiled.
Except as stated herein, this Amendment No. 1 does not reflect facts or events that may have occurred subsequent to the filing of the Form 10-K and no attempt has been made in this Amendment No. 1 to modify or update other disclosures contained in the middleForm 10-K.
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
AMENDMENT NO. 1 TO FORM 10-K
For the year ended December 31, 2019
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| PART IV | |
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
Set forth below is information regarding six incumbent members of 2020.the Board of Directors of the Company (the "Board" or "Board of Directors") together with brief biographies. Directors are elected at each annual general meeting of the Company to serve until the next annual general meeting of shareholders or until their successors are elected or appointed.
Non-GAAPJohn K. Billock, 71, has served as a Director and as our Chairman of the Board since April 2014. Mr. Billock is a member of the Board of Advisors of Simulmedia, Inc. He served as a Director of TRA Inc. and TiVo Research and Analytics, Inc. from 2007 to 2011 and as a Director of Juniper Content Corporation from January 2007 to December 2008. From October 2001 until July 2005, he was Vice Chairman and Chief Operating Officer of Time Warner Cable Enterprises LLC. Before joining Time Warner Cable, Mr. Billock was with Home Box Office from 1978 to 2001 and served as President of its US Network Group from 1997 to 2001 and President of Sales and Marketing from 1995 to 1997. Before joining HBO, Mr. Billock was a product manager with Colgate Palmolive Company. Mr. Billock received a BA degree in English and Religion from Wesleyan University and an MBA from Boston University. Mr. Billock brings to our Board and its committees experience from his many years in the media industry as well as extensive executive management experience.
Peter Knag, 47, has served as a Director since September 2019. Mr. Knag is Executive Vice President and Chief Financial MeasuresOfficer of Turner Broadcasting System, Inc. He is responsible for managing, leading and overseeing all finance and accounting matters and teams across the business. Prior to that, Mr. Knag was Vice President of AT&T Inc. merger planning. From 2016 to 2018, he served as AT&T’s Managing Director of Corporate Development, where he led the management of client relationships, analysis, negotiation and execution of mergers, acquisitions, joint ventures, divestitures, and venture capital investments on behalf of AT&T and its affiliates worldwide. Prior to joining AT&T in 1999, Mr. Knag worked for Lehman Brothers and First Albany Corporation. Mr. Knag holds a Bachelor’s degree and a Master of Business Administration from Southern Methodist University. Mr. Knag brings to our Board longstanding business experience in the telecoms and media sectors as well as an extensive background in finance.
Alfred W. Langer, 69, has served as a Director since 2000. From 2002 until 2019, Mr. Langer served as a consultant to a number of privately held European companies in the areas of mergers and acquisitions, structured financing and organizational matters. From July 2001 until June 2002, Mr. Langer served as Chief Financial Officer of Solvadis AG, a German based chemical distribution and trading company. From October 1999 until May 2001, Mr. Langer served as Treasurer of Celanese AG, a German listed chemical company. From June 1997 until October 1999, Mr. Langer served as Chief Financial Officer of Celanese Corp., a U.S. chemical company. From October 1994 until July 1997, Mr. Langer served as Chief Executive Officer of Hoechst Trevira GmbH, a producer of synthetic fibers. From 1988 until September 1994, Mr. Langer served as a member of the Board of Management of Hoechst Holland N.V., a regional production and distribution company. Mr. Langer received an M.B.A. degree from the University GH Siegen. Mr. Langer brings to our Board and its committees substantial financial and financial reporting expertise.
Parm Sandhu, 51, has served as a Director since 2009. Mr. Sandhu is Chairman of Crystal Almond Holdings Limited, the holding company for Wind Hellas, an integrated telecoms operator in Greece and of JPI Media Limited as well as a non-executive director of Hibu. He has previously served as non-executive director of Eir and served as Chief Executive Officer of Unitymedia, Europe’s third largest cable operator, from 2003 to 2010. Prior to that, Mr. Sandhu was a Finance Director with Liberty Media International, where he pursued numerous strategic acquisitions, and held a number of senior finance and strategy positions during his six years with Telewest Communications plc. Before entering the technology, media and telecommunications sector, Mr. Sandhu worked at PricewaterhouseCoopers in London, where he qualified as a Chartered Accountant. He is a graduate of Cambridge University and holds an MA Honours degree in Mathematics. Mr. Sandhu brings to the Board and its committees significant executive management experience in the European media and telecoms sector and considerable expertise in the cable industry, as well as extensive knowledge of financial and accounting matters.
Kelli Turner, 49, has served as a Director since 2011. She is President and Chief Operating Officer at SESAC, INC., a music rights licensing company. She is also general partner of RSL Venture Partners. She was previously President and Chief Financial Officer of RSL Management Corporation from February 2011 to April 2012. Prior to that, Ms. Turner was Chief Financial Officer and Executive Vice President of Martha Stewart Living Omnimedia, Inc. (“MSLO”), a diversified media and merchandising company, from 2009 to 2011, where she was responsible for all aspects of the company’s financial operations, while working closely with the executive team in shaping MSLO’s business strategy and capital allocation process. A lawyer and a registered CPA with significant experience in the media industry, Ms. Turner joined MSLO in 2009 from Time Warner Inc. (n/k/a Warner Media, LLC), where she held the position of Senior Vice President, Operations in the Office of the Chairman and CEO. Prior to that, she served as SVP, Business Development for New Line Cinema from 2006 to 2007 after having served as Time Warner Inc.’s Vice President, Investor Relations from 2004 to 2006. Ms. Turner worked in investment banking for many years with positions at Allen & Company and Salomon Smith Barney prior to joining Time Warner Inc. Early in her career, she also gained tax and audit experience as a CPA at Ernst & Young, LLP. Ms. Turner received her undergraduate business degree and her law degree from the University of Michigan. Ms. Turner brings to our Board and its committees a strong financial and business background in the media industry.
Trey Turner, 45, has served as a Director since December 2018. Mr. Turner is Executive Vice President and Chief Financial Officer for Warner Media Sales & International, a business unit of Warner Media, where he is responsible for all financial operations for the business unit and is an active partner in shaping the direction of the business and implementing its strategy. Between 2017 and 2019, Mr. Turner was Chief Financial Officer for Turner International, Inc., an affiliate of Warner Media and a division of Turner Broadcasting System Inc. (“Turner”) responsible for operating and distributing Turner’s brands outside the United States. Prior to that, Mr. Turner was Senior Vice President - Corporate Finance, Mergers & Acquisitions for Turner, overseeing financial planning and analysis and corporate development activities for the company. Mr. Turner joined Turner as Director of Finance for CNN worldwide where he was responsible for strategic finance support, leading the financial analysis and business justification for new initiatives, partnerships and investments. Prior to joining Turner, he was with the corporate finance department of Stephens Inc., a leading investment bank and private equity firm. Mr. Turner earned a Bachelor of Science degree in Analytical Finance from Wake Forest University, where he graduated cum laude. Mr. Turner brings to our Board broad experience in finance and planning as a senior executive of a major media company in Europe.
There is no arrangement or understanding between any director and any other person pursuant to which such person was selected as a director other than Peter Knag and Trey Turner, who were nominated by Warner Media, LLC (formerly Time Warner Inc.) ("Warner Media") pursuant to the terms of a framework agreement dated as of February 28, 2014, among the Company, Warner Media and Time Warner Media Holdings B.V. ("TWBV"), whereby Warner Media has the right to appoint one less director than the number required to constitute a majority of our Board of Directors, provided that Warner Media continues to own at least 40% of the voting power of the Company.
Audit Committee
The Audit Committee is currently composed of Messrs. Langer and Sandhu and Ms. Turner (Chair). The members of the Audit Committee satisfy the relevant independence and expertise requirements set forth in the SEC regulations and the Nasdaq Marketplace Rules. In addition, the Board has determined that Messrs. Langer and Sandhu and Ms. Turner each qualify as “audit committee financial experts”.
In addition to the Audit Committee, there are two other standing committees of the Board of Directors: the Compensation Committee and the Corporate Governance/Nominating Committee. The members of these standing committees are independent and satisfy the relevant independence requirements set forth in the SEC regulations and the Nasdaq Marketplace Rules.
Corporate Governance Guidelines
We abide by the corporate governance principles set out in our Corporate Governance Guidelines to ensure that the Board of Directors is independent from management, that the Board of Directors adequately performs its function as the overseer of management and that the interests of the Board of Directors and management are aligned with those of shareholders. The Corporate Governance Guidelines assist the Board in the exercise of its responsibilities and serve as a general framework within which the Board operates, including in respect of Board composition and qualifications, director independence, standing committees and the term and retirement of Directors. Our Corporate Governance Guidelines are available on our website at www.cme.net.
Codes of Conduct
The Company has codes of conduct that are applicable to all employees and directors. These policies reinforce the importance of integrity and ethical conduct in our business, reflect the robust policy framework that exists within the Company and clarify the procedures for handling whistleblower complaints and other concerns.The Standards of Business Conduct applies to the Company’s employees and sets forth policies pertaining to employee conduct in the workplace, including the accuracy of books, records and financial statements, insider trading, electronic communications and information security, protection of personal data, confidentiality, conflicts of interest, anti-bribery and competition laws. The Standards of Business Conduct also includes information on how employees may report whistleblower complaints or raise concerns regarding questionable conduct or policy violations and provides for the anonymous, confidential submission by employees or others of any complaints or concerns about us or our accounting, internal accounting controls or auditing matters. The Standards of Business Conduct prohibits retaliation against employees who avail themselves of the policy. Failure to observe the terms of the Standards of Business Conduct can result in disciplinary action (including termination of employment).
The Company also has a Code of Conduct for Non-Employee Directors, which assists the Company’s non-employee directors in fulfilling their fiduciary and other duties to the Company. In addition to affirming the directors’ obligations to act ethically and honestly, the code also addresses conflicts of interest, compliance with applicable laws and confidentiality.
Both the Standards of Business Conduct and the Code of Conduct for Non-Employee Directors are available on our website at www.cme.net. They are also available in print to any shareholder on request.
Shareholder Communications
The Corporate Governance/Nominating Committee charter provides a process by which shareholders may communicate with the Company or the Board of Directors. Shareholders may submit communications in writing to the Chairman of the Corporate Governance/Nominating Committee in care of the Company Secretary, CME Media Services Limited, Kříženeckého náměstí 1078/5, 152 00 Prague 5, Czech Republic. The Chairman of the Corporate Governance/Nominating Committee shall determine, in his discretion, considering the identity of the submitting shareholder and the materiality and appropriateness of the communication, whether, and to whom within the Company, to forward the communication.
Board Leadership Structure and Role in Risk Oversight
Since April 2014, Mr. Billock has served as non-executive Chairman. The Chairman is appointed annually following the Annual General Meeting by at least a majority vote of the remaining directors. The role of the Chairman is to preside over meetings of the Board as well as meetings of the independent directors. The Chairman also provides advice to management. Since September 2013, the Company has had two co-Chief Executive Officers, Michael Del Nin and Christoph Mainusch, who are not members of the Board (see "Executive Officers" below). Mr. Del Nin oversees corporate matters and Mr. Mainusch focuses primarily on operations. We believe that this is the most appropriate Board structure for the Company. Mr. Billock, with his extensive prior media and executive experience, leads the Board in providing broad oversight of our overall strategy and the development of the Company, and Mr. Del Nin and Mr. Mainusch, our co-Chief Executive Officers, utilizing their extensive management and operational experience in overseeing the Company’s day-to-day operations, are dedicated to achieving the business objectives of the Company in terms of operating and financial performance.
The Company has created a robust framework to effectively identify, assess, and manage risk. Senior management has primary responsibility for the daily management of risks, while the Board provides regular oversight, both as a whole and through its committees. The Audit Committee is responsible for an annual review of a risk register prepared by senior management. The Company’s risk register identifies and evaluates the key strategic, operating, financial and compliance risksthat the Company faces and proposes ways in which to effectively manage such risks in the short- and long-term. In addition, our co-Chief Executive Officers consult regularly with directors regarding strategic and operational risks. Generally, the Board holds four regularly scheduled meetings per year at which directors receive a presentation regarding the business as well as relevant strategies, challenges, risks and opportunities for the Company. Senior management is in attendance at quarterly Board meetings and is available for discussions with the Board regarding risk management and any other concerns. Finally, through the authority delegated by the Board, the Corporate Governance/Nominating Committee, Compensation Committee and Audit Committee are tasked with oversight of governance, related party, compensation and treasury or finance risks, respectively. Committees report we refer to the full Board quarterly.
Executive Officers
Set forth below is certain information describing our current executive officers. Their terms of office are at the discretion of the Board of Directors and/or the co-Chief Executive Officers.
Michael Del Nin, 49, has served as the Company’s co-Chief Executive Officer since September 2013. From October 2009 until September 2013, he was a member of the Company’s Board of Directors. Prior to his appointment as co-Chief Executive Officer of the Company, Mr. Del Nin was the Senior Vice President of International and Corporate Strategy at Time Warner Inc. (n/k/a Warner Media, LLC) from April 2008 until September 2013, in which capacity he helped drive Time Warner Inc.’s global strategy and business development initiatives, with a particular focus on international operations and investments. From 2006 to 2008, Mr. Del Nin was the Senior Vice President responsible for Mergers and Acquisitions. Prior to joining Time Warner Inc., Mr. Del Nin was Senior Vice President, Business Development, at New Line Cinema. In that role Mr. Del Nin analyzed the economics of the studio’s film and television projects while helping to develop and implement New Line Cinema’s long-term business plan. Prior to joining New Line Cinema, Mr. Del Nin was an investment banker focused on the media industry at Salomon Smith Barney in New York. Mr. Del Nin holds an undergraduate business degree from Bocconi University and a law degree from the University of New South Wales.
Christoph Mainusch, 57, has served as the Company’s co-Chief Executive Officer since September 2013. Prior to joining the Company, he was an advisor to the President of Turner Broadcasting International, a wholly-owned subsidiary of Time Warner Inc. (n/k/a Warner Media, LLC), where he consulted on various projects from April 2013 until September 2013. From March 2004 to December 2012, Mr. Mainusch was a member of the Operational Management Committee of the RTL Group, a European entertainment network. From September 2009 to February 2012, Mr. Mainusch served as Chief Executive Officer of the Alpha Media Group in Greece, a terrestrial broadcast company partly owned by the RTL Group. Mr. Mainusch served as Chief Executive Officer of RTL Televizija in Croatia from 2004 to 2009. From 1996 until 2004, Mr. Mainusch served as Chief Executive Officer of ACS Media GmbH. Mr. Mainusch started his career as a freelancer for the public broadcaster Bayerischer Rundfunk in 1987, followed by several non-GAAPpositions at commercial broadcasters SAT.1, Tele 5, and RTL 2.
Daniel Penn, 54, joined the Company in 2002 and has served as General Counsel and Company Secretary since 2004. Mr. Penn was named an Executive Vice President of the Company in February 2010. Prior to joining the Company, he served as General Counsel and Head of Development/Business Affairs in an internet publishing business and in a multinational telecommunications company. He began his career in private practice with the law firm Mayer Brown, where he worked in their offices in New York, London and Tashkent, Uzbekistan. Mr. Penn graduated from Princeton University with a B.A. from the Woodrow Wilson School of Public and International Affairs and a Certificate of Achievement in Russian Studies. He received a J.D. from the Columbia University School of Law, where he served as Editor-in-Chief of the Columbia Law Review.
David Sturgeon, 50, has served as the Company’s Chief Financial Officer since June 2014 when he was also named an Executive Vice President of the Company. Prior to that, he served as Acting Chief Financial Officer from October 2013 and as Deputy Chief Financial Officer from July 2009. He oversees all of the Company's finance, accounting, business systems, internal audit, treasury and tax activities. Mr. Sturgeon joined the Company as Group Financial Controller in 2005, prior to which he was with Equant N.V., from 2002. From 1990 to 2002, Mr. Sturgeon was a member of Arthur Andersen’s Technology, Media and Communications practice. Mr. Sturgeon graduated from Oxford University with an M.A. in Philosophy, Politics and Economics and is a Chartered Accountant.
ITEM 11. EXECUTIVE COMPENSATION
This Compensation Discussion and Analysis provides information about the Company’s compensation programs and policies for our Named Executive Officers. In 2019, our Named Executive Officers were the co-Chief Executive Officers, the Chief Financial Officer and the General Counsel.
Philosophy and Objectives of Compensation Programs
General Philosophy
In making compensation decisions, the Compensation Committee believes that the Company’s executive compensation programs should be guided by certain key objectives: (i) maintaining Named Executive Officers’ accountability for Company performance as well as their individual performance, (ii) attracting, motivating and retaining key personnel, and (iii) promoting the creation of shareholder value. To achieve these objectives, the Compensation Committee has sought to tie compensation earned to performance achieved and to support sustainable financial measures,performance as follows:
Structuring executive compensation so that a substantial percentage is variable, where the amount Named Executive Officers can earn is based on achieving specific levels of achievement and a threshold level of achievement is required for compensation to be earned, with a significant portion being equity-based, including OIBDA, OIBDA margin,performance-based awards.
Using a mix of short-term and long-term compensation to foster the achievement of both annual and multi-year business objectives to support the execution of the Company’s strategy without encouraging unnecessary or excessive risk-taking, which better aligns the interests of management and shareholders.
Setting appropriate financial and strategic goals for each performance period to ensure compensation is appropriate, taking into consideration the Company’s strategy, profile and anticipated performance.
Implementing in 2019 a transaction-related program to support the closing of the Merger and provide incentives for employees in key positions to continue to deliver the Company’s business objectives before and after the Merger.
2019 Company Performance in Review
The Company’s strong operating results in 2019 reflect its success in the execution of its strategy last year. The Company maintained its audience share leadership and television advertising market shares in 2019 by leveraging its competitive advantages and making targeted investments in local programming in certain markets. In addition, it achieved another year of robust growth in carriage fee revenues and expanded its online offerings to further diversify its revenue streams. Building on the momentum of prior years, the Company took advantage of overall growth in its television advertising markets, its successful efforts to increase carriage fees and its focus on controlling costs to achieve further improvements in the profitability of its operations and free cash flow and unlevered free cash flow. We believe that each of these metrics is usefulgeneration, which increased by nearly 91% compared 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.2018.
2019 Financial Highlights
We evaluate our consolidated results and the performance of our operating segments based on net revenues and OIBDA. We believe OIBDA is useful to investors because it provides a meaningful representation of our performance, as it excludes certain items that do not impact either our cash flows or the operating results of our operations. OIBDA and unlevered free cash flow are also used as components in determining management bonuses.
OIBDA includes amortization and impairment of program rights and is calculated as operating income / loss before depreciation, amortization of intangible assets and impairments of assets and certain unusual or infrequent items that are not considered by our co-Chief Executive Officers when evaluating our performance. Our key performance measure of the efficiency of our consolidated operations and our segments is OIBDA margin. We define OIBDA margin as the ratio of OIBDA to net revenues.
Following a repricing of our Guarantee Fees in March 2017 and April 2018, we pay interest and related Guarantee Fees on our outstanding indebtedness in cash. In addition to this obligation to pay Guarantee Fees in cash, we expect to use cash generated by the business to pay certain Guarantee Fees that were previously paid in kind.1. 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 8, Note 20, "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 (“% Act”) percentage movements, 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.
Executive Summary
The following tables provide a summary of our consolidated resultsmetrics for the years ended December 31, 2019, 2018 and 2017:2018 are summarized in the tables below:
| | | | For The Year Ended December 31, (US$ 000's) | For The Year Ending December 31, (US$ 000's) |
| | | | | | Movement | | | | | | Movement | | | | | Movement |
| | 2019 |
| | 2018 |
| | % Act |
| | % Lfl |
| | 2018 |
| | 2017 |
| | % Act |
| | % Lfl |
| 2019 |
| | 2018 |
| | % Act |
| | % Lfl |
|
| Net revenues | $ | 694,804 |
| | $ | 703,906 |
| | (1.3 | )% | | 4.5 | % | | $ | 703,906 |
| | $ | 642,868 |
| | 9.5 | % | | 5.3 | % | $ | 694,804 |
| | $ | 703,906 |
| | (1.3 | )% | | 4.5 | % |
| Operating income | 187,336 |
| | 177,587 |
| | 5.5 | % | | 11.4 | % | | 177,587 |
| | 139,914 |
| | 26.9 | % | | 25.1 | % | 187,336 |
| | 177,587 |
| | 5.5 | % | | 11.4 | % |
| Operating margin | 27.0 | % | | 25.2 | % | | 1.8 p.p. | | 1.7 p.p. | | 25.2 | % | | 21.8 | % | | 3.4 p.p. | | 4.0 p.p. | 27.0 | % | | 25.2 | % | | 1.8 p.p. | | 1.7 p.p. |
| OIBDA | $ | 247,924 |
| | $ | 222,674 |
| | 11.3 | % | | 17.6 | % | | $ | 222,674 |
| | $ | 179,767 |
| | 23.9 | % | | 20.9 | % | 247,924 |
| | 222,674 |
| | 11.3 | % | | 17.6 | % |
| OIBDA margin | 35.7 | % | | 31.6 | % | | 4.1 p.p. | | 4.0 p.p. | | 31.6 | % | | 28.0 | % | | 3.6 p.p. | | 4.0 p.p. | 35.7 | % | | 31.6 | % | | 4.1 p.p. | | 4.0 p.p. |
| |
| (a) | While the reporting currency of the Company is the dollar, our consolidated revenues and costs are divided across a range of European currencies and the Company’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 (“% Act”) percentage movements, 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. |
Our consolidatedConsolidated net revenues decreased 1% at actual exchange rates in 2019 compared to 2018. At constant rates, net revenues increased 5% due to an increase in both television advertising revenues and carriage fee and subscription revenues. Television advertising spending in the countries in which we operateCompany’s markets grew an estimated 3% at constant rates in 2019 compared to 2018. Our consolidatedConsolidated television advertising revenues declined by 3% at actual rates but increased 3% at constant rates due to growth in four of our operating segments and higher average prices in eachall of the countries in which we operate.Company’s markets. Carriage fees and subscription revenues increased 3% at actual rates and 10% at constant rates primarily due to additional carriage fees from overall higher prices in contracts with cable, satellite and internet protocol television ("IPTV") operators as well as higher subscribers overall.
Costs charged in arriving at OIBDA decreased 7% at actual rates and 2% at constant rates in 2019 compared to 2018. Content costs decreased 2% at constant rates due to broadcasting fewer hours and more cost effectivecost-effective foreign content, as well as a planned reduction in the volume of sports rights. There was also a decrease in other costs resulting from lower legal and professional fees as well as lower bad debt charges, which were partially offset by higher personnel costs.
OurThe Company’s focus on controlling costs while improving revenues led to another year of OIBDA margin expansion, which increased to 36% in 2019 from 32% in 2018. This dynamic also drove an increase in operating income, although the operating margin expansion was lower than for OIBDA because costs incurred related to ourthe Company’s strategic review announced on March 25, 2019 and the resulting proposed Merger are not included within OIBDA.
We remained audience share leaders during 2019 in all of the countries in which we operate, with higher full year prime time audience shares compared to 2018 in four operating segments. We believe television continues to provide the most efficient medium to reach consumers in our markets, and we believe our audience share makes us the best partner for advertisers in those territories.
Using cash generated by the business, we paid a total of EUR 150.0 million (approximately US$ 168.9 million at transaction date rates) of the 2021 Euro Loan in 2019. Following these payments, there is now EUR 60.3 million (approximately US$ 67.8 million) outstanding on our nearest debt maturity in November 2021. Unlevered free cash flow was US$ 188.0 million in 2019, an increase of 21% compared to 2018.
Together with the increased profitability of our operations, our net leverage ratio was 2.4x at the end of 2019 compared to 3.5x at the end of 2018. Our weighted average cost of borrowing applicable to the Euro Loans and Guarantee Fees was approximately 3.4% at the end of 2019, down 10 basis points during the year, and the annual run-rate of our cash debt service obligations at December 31, 2019 was approximately US$ 21.3 million, a decrease of approximately 26% compared to 2018.
Free Cash Flow and Unlevered Free Cash Flow
|
| | | | | | | | | | | | | | | | | | | | | |
| | For The Year Ended December 31, (US$ 000's) |
| | 2019 |
| | 2018 |
| | Movement |
| | 2018 |
| | 2017 |
| | Movement |
|
| Net cash generated from continuing operating activities | $ | 179,652 |
| | $ | 109,024 |
| | 64.8 | % | | $ | 109,024 |
| | $ | 93,301 |
| | 16.9 | % |
| Capital expenditures, net | (24,375 | ) | | (24,540 | ) | | 0.7 | % | | (24,540 | ) | | (27,947 | ) | | 12.2 | % |
Other items (1) | 6,092 |
| | — |
| | NM (2) |
| | — |
| | — |
| | — | % |
| Free cash flow | 161,369 |
| | 84,484 |
| | 91.0 | % | | 84,484 |
| | 65,354 |
| | 29.3 | % |
| Cash paid for interest (including Guarantee Fees) | 26,651 |
| | 43,350 |
| | (38.5 | )% | | 43,350 |
| | 47,197 |
| | (8.2 | )% |
| Cash paid for Guarantee Fees previously paid in kind | — |
| | 27,328 |
| | (100.0 | )% | | 27,328 |
| | — |
| | NM (2) |
|
| Cash paid for Guarantee Fees that previously could be paid in kind | — |
| | 812 |
| | (100.0 | )% | | 812 |
| | 8,343 |
| | (90.3 | )% |
| Unlevered free cash flow | $ | 188,020 |
| | $ | 155,974 |
| | 20.5 | % | | $ | 155,974 |
| | $ | 120,894 |
| | 29.0 | % |
| |
(1)
| Other items during the year ended December 31, 2019 reflects costs relating to the strategic review and resulting proposed Merger.
|
| |
(2)
| Number is not meaningful. |
|
| | | | | | | | | | |
| | For The Year Ending December 31, (US$ 000's) |
| | 2019 |
| | 2018 |
| | Movement |
|
| Net cash generated from operating activities | $ | 179,652 |
| | $ | 109,024 |
| | 64.8 | % |
| Capital expenditures, net | (24,375 | ) | | (24,540 | ) | | 0.7 | % |
Other items (1) | 6,092 |
| | — |
| | NM (2) |
|
| Free cash flow | 161,369 |
| | 84,484 |
| | 91.0 | % |
| Cash paid for interest (including Guarantee Fees) | 26,651 |
| | 43,350 |
| | (38.5 | )% |
| Cash paid for Guarantee Fees previously paid in kind | — |
| | 27,328 |
| | (100.0 | )% |
| Cash paid for Guarantee Fees that previously could be paid in kind | — |
| | 812 |
| | (100.0 | )% |
| Unlevered free cash flow | $ | 188,020 |
| | $ | 155,974 |
| | 20.5 | % |
|
| | | | | | | | | | |
| | December 31, 2019 |
| | December 31, 2018 |
| | Movement |
|
| Cash and cash equivalents | $ | 36,621 |
| | $ | 62,031 |
| | (41.0 | )% |
(2) Number is not meaningful.
Unlevered free cash flow2 was US$ 188.0 million in 2019, an increase of 21% compared to 2018. The increase in unlevered free cash flow at actual rates during 2019 was due primarily to lower cash payments for acquired programming and production costs, which was partially offset by higher payments for income taxes. Net cash generated from continuing operating activities also benefited from lower cash paid for interest and Guarantee Fees,guarantee fees, which was partially offset by payments related to the strategic review.
We ended 2019 with cash of US$ 36.6 millionmillion. and we have access to another US$ 75.0 million of liquidity provided by the 2023 Revolving Credit Facility, which remains undrawn.
Market Information
After adjusting for inflation, we estimate that during 2019 GDP grew in each of the countries in which we operate at a rate that exceeded the average growth rate for Western Europe. Overall GDP growth in 2019 was lower than in 2018, as exports weakened slightly in certain countries, which is reported to be connected to a slowdown in the German economy, and uncertainty around the impact of tariffs on global trade as well as the final terms under which the UK will exit the EU (see Part I, Item 1A, "Risk Factors"). Analyst estimates for 2020 of GDP in the countries in which we operate forecast a slower rate of growth overall compared to 2019. However, domestic private consumption remains generally robust, supported by historically low unemployment and higher average wages. We believe the growth in real private consumption forecast for 2020 in the countries where we operate will sustain growth in the television advertising markets.
The following table sets out our estimates of television advertising spending, net of discounts, by country (in US$ millions) for the years set forth below:
|
| | | | | | | | | | | |
| Country | 2019 |
| | 2018 |
| | 2017 |
|
| Bulgaria | $ | 109 |
| | $ | 109 |
| | $ | 104 |
|
| Czech Republic | 340 |
| | 325 |
| | 315 |
|
| Romania* | 241 |
| | 241 |
| | 232 |
|
| Slovak Republic | 157 |
| | 147 |
| | 142 |
|
| Slovenia | 69 |
| | 67 |
| | 68 |
|
| Total CME Markets | $ | 916 |
| | $ | 889 |
| | $ | 861 |
|
| Growth rate | 3 | % | | 3 | % | | 6 | % |
* Romania market excludes Moldova.
Source: CME estimates, using the 2019 average exchange rate for all periods presented above.
On a constant currency basis, we estimate television advertising spending overall in our markets increased an estimated 3% in 2019 compared to the previous year. In Bulgaria, the market was estimated to be broadly flat as an increase in GRPs sold offset a decline in average market prices, even though our average prices increased. Market growth in the Czech Republic, the Slovak Republic and Slovenia all resulted from higher average prices that more than offset lower demand for GRPs. The market in the Slovak Republic also benefited from higher sponsorship. In Romania, the market was broadly flat as average market prices increased, but this was more than offset by selling fewer GRPs as there was less inventory available to sell. It also reflected reduced spending by advertisers, primarily in the first quarter of 2019, who were directly impacted by new incremental taxes imposed early in 2019 on certain sectors of the economy, including telecommunications and banking. Even though spending from these clients recovered during the course of 2019, overall spending from the affected sectors was lower than in 2018.
In the short-term, we believe that television advertising will continue to hold its share of total advertising spend in our markets because of its greater reach and effective measurement,1OIBDA, which makes this medium more appealing to advertisers. We believe television is especially attractive to advertisers because it delivers high reach at lower cost than other forms of media. More recently, internet advertising has grown at the expense of print and outdoor advertising, and we offer additional advertising opportunities when clients seek to complement their television campaigns with campaigns online. While spending for digital advertising has overtaken spending on television in more developed markets, this is not the case in our markets and we believe the strength of television as an advertising medium will continue for the foreseeable future.
There is increased competition for audience share in all our markets. The production of original local content remains a key pillar of our strategy, as it is an important factor in attracting large audiences to both television as well as other non-linear sources of entertainment. While subscription video-on-demand ("SVOD") platforms do not compete with television for spending on advertising, they do compete in terms of the amount of time that viewers spend consuming content, which can negatively impact our ratings. Netflix launched an English-language platform across Central and Eastern Europe in early 2016, primarily with foreign titles in its library. The service was offered with a user interface in local language in Romania in the middle of 2017, along with Romanian subtitles and dubbing of content. In the fourth quarter of 2019 it similarly introduced local language in its user interface in the Czech Republic, which is also available in the Slovak Republic, and expanded its offering to include significantly more local content. We have not yet seen an appreciable impact on viewer behavior resulting from this; however, if this trend of SVOD platforms in local language with local content spreads further and viewership habits change over the medium-term, this could reduce the amount of television advertising inventory we have to sell.
Segment Performance
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | NET REVENUES |
| | For The Year Ended December 31, (US$ 000's) |
| | | | | | Movement | | | | | | Movement |
| | 2019 |
| | 2018 |
| | % Act |
| | % Lfl |
| | 2018 |
| | 2017 |
| | % Act |
| | % Lfl |
|
| Bulgaria | $ | 83,406 |
| | $ | 84,593 |
| | (1.4 | )% | | 3.9 | % | | $ | 84,593 |
| | $ | 77,341 |
| | 9.4 | % | | 5.3 | % |
| Czech Republic | 237,320 |
| | 233,991 |
| | 1.4 | % | | 6.8 | % | | 233,991 |
| | 209,041 |
| | 11.9 | % | | 5.6 | % |
| Romania | 188,251 |
| | 201,505 |
| | (6.6 | )% | | 0.3 | % | | 201,505 |
| | 191,244 |
| | 5.4 | % | | 3.2 | % |
| Slovak Republic | 108,003 |
| | 106,834 |
| | 1.1 | % | | 6.4 | % | | 106,834 |
| | 97,721 |
| | 9.3 | % | | 5.5 | % |
| Slovenia | 80,809 |
| | 79,587 |
| | 1.5 | % | | 6.9 | % | | 79,587 |
| | 68,696 |
| | 15.9 | % | | 12.0 | % |
| Intersegment revenues | (2,985 | ) | | (2,604 | ) | | NM (1) |
| | NM (1) |
| | (2,604 | ) | | (1,175 | ) | | NM (1) |
| | NM (1) |
|
| Total Net Revenues | $ | 694,804 |
| | $ | 703,906 |
| | (1.3 | )% | | 4.5 | % | | $ | 703,906 |
| | $ | 642,868 |
| | 9.5 | % | | 5.3 | % |
(1) Number is not meaningful.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | OIBDA |
| | For The Year Ended December 31, (US$ 000's) |
| | | | | | Movement | | | | | | Movement |
| | 2019 |
| | 2018 |
| | % Act |
| | % Lfl |
| | 2018 |
| | 2017 |
| | % Act |
| | % Lfl |
|
| Bulgaria | $ | 25,720 |
| | $ | 21,620 |
| | 19.0 | % | | 24.3 | % | | $ | 21,620 |
| | $ | 16,241 |
| | 33.1 | % | | 33.0 | % |
| Czech Republic | 101,617 |
| | 94,576 |
| | 7.4 | % | | 12.8 | % | | 94,576 |
| | 82,652 |
| | 14.4 | % | | 9.2 | % |
| Romania | 87,727 |
| | 85,737 |
| | 2.3 | % | | 9.8 | % | | 85,737 |
| | 73,418 |
| | 16.8 | % | | 14.0 | % |
| Slovak Republic | 35,350 |
| | 27,941 |
| | 26.5 | % | | 31.5 | % | | 27,941 |
| | 23,845 |
| | 17.2 | % | | 16.2 | % |
| Slovenia | 26,395 |
| | 22,516 |
| | 17.2 | % | | 22.9 | % | | 22,516 |
| | 14,263 |
| | 57.9 | % | | 57.9 | % |
| Eliminations | 15 |
| | 34 |
| | NM (1) |
| | NM (1) |
| | 34 |
| | (3 | ) | | NM (1) |
| | NM (1) |
|
| Total operating segments | 276,824 |
| | 252,424 |
|
| 9.7 | % |
| 15.8 | % |
| 252,424 |
|
| 210,416 |
|
| 20.0 | % |
| 16.7 | % |
| Corporate | (28,900 | ) | | (29,750 | ) | | 2.9 | % | | (2.4 | )% | | (29,750 | ) | | (30,649 | ) | | 2.9 | % | | 7.8 | % |
| Total OIBDA | $ | 247,924 |
| | $ | 222,674 |
| | 11.3 | % | | 17.6 | % | | $ | 222,674 |
| | $ | 179,767 |
| | 23.9 | % | | 20.9 | % |
(1) Number is not meaningful.
Bulgaria
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, (US$ 000's) |
| | | | | | Movement | | | | | | Movement |
| | 2019 |
| | 2018 |
| | % Act |
| | % Lfl |
| | 2018 |
| | 2017 |
| | % Act |
| | % Lfl |
|
| Television advertising | $ | 56,276 |
| | $ | 58,350 |
| | (3.6 | )% | | 1.6 | % | | $ | 58,350 |
| | $ | 53,446 |
| | 9.2 | % | | 5.4 | % |
| Carriage fees and subscriptions | 21,404 |
| | 20,989 |
| | 2.0 | % | | 7.5 | % | | 20,989 |
| | 19,462 |
| | 7.8 | % | | 3.1 | % |
| Other | 5,726 |
| | 5,254 |
| | 9.0 | % | | 14.5 | % | | 5,254 |
| | 4,433 |
| | 18.5 | % | | 13.8 | % |
| Net revenues | 83,406 |
| | 84,593 |
| | (1.4 | )% | | 3.9 | % | | 84,593 |
| | 77,341 |
| | 9.4 | % | | 5.3 | % |
| Costs charged in arriving at OIBDA | 57,686 |
| | 62,973 |
| | (8.4 | )% | | (3.3 | )% | | 62,973 |
| | 61,100 |
| | 3.1 | % | | (1.7 | )% |
| OIBDA | $ | 25,720 |
| | $ | 21,620 |
| | 19.0 | % | | 24.3 | % | | $ | 21,620 |
| | $ | 16,241 |
| | 33.1 | % | | 33.0 | % |
| | | | | | | | | | | | | | | | |
| OIBDA margin | 30.8 | % | | 25.6 | % | | 5.2 p.p. |
| | 5.0 p.p. |
| | 25.6 | % | | 21.0 | % | | 4.6 p.p. |
| | 5.4 p.p. |
|
The television advertising market in Bulgaria was estimated to be broadly flat at constant rates in 2019, after having increased an estimated 5% in 2018.
Our television advertising revenues increased at constant rates in 2019, as an increase in our average prices more than offset selling fewer GRPs. Carriage fees and subscription revenues increased primarily due to price inflation in existing contracts, as well as a slight increase in the overall number of subscribers.
In 2018, our television advertising revenues increased at constant rates due to selling more GRPs at higher average prices, as significant growth in private consumption encouraged advertisers to increase their spending. There was also an increase in revenue from sponsorship and product placement. Carriage fees and subscription revenues increased in 2018 due to an increase in the average cost per subscriber.
On a constant currency basis,includes program rights amortization costs, charged in arriving at OIBDA decreased in 2019 due to lower bad debt charges and a decrease in content costs. We generated savings in local production from replacing last year's successful locally produced telenovela with entertainment formats, and also implemented a reduction in the volume of sports rights in our schedule.
Costs charged in arriving at OIBDA decreased at constant rates in 2018 due to lower bad debt charges as well as decreases in professional fees and personnel costs. These were partially offset by an increase in content costs related to a new telenovela on our main channel in the access-prime time slot in both the spring and fall seasons.
Czech Republic
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, (US$ 000's) |
| | | | | | Movement | | | | | | Movement |
| | 2019 |
| | 2018 |
| | % Act |
| | % Lfl |
| | 2018 |
| | 2017 |
| | % Act |
| | % Lfl |
|
| Television advertising | $ | 206,335 |
| | $ | 206,203 |
| | 0.1 | % | | 5.4 | % | | $ | 206,203 |
| | $ | 188,373 |
| | 9.5 | % | | 3.3 | % |
| Carriage fees and subscriptions | 17,580 |
| | 15,962 |
| | 10.1 | % | | 16.2 | % | | 15,962 |
| | 12,141 |
| | 31.5 | % | | 23.0 | % |
| Other | 13,405 |
| | 11,826 |
| | 13.4 | % | | 18.8 | % | | 11,826 |
| | 8,527 |
| | 38.7 | % | | 31.7 | % |
| Net revenues | 237,320 |
| | 233,991 |
| | 1.4 | % | | 6.8 | % | | 233,991 |
| | 209,041 |
| | 11.9 | % | | 5.6 | % |
| Costs charged in arriving at OIBDA | 135,703 |
| | 139,415 |
| | (2.7 | )% | | 2.7 | % | | 139,415 |
| | 126,389 |
| | 10.3 | % | | 3.3 | % |
| OIBDA | $ | 101,617 |
| | $ | 94,576 |
| | 7.4 | % | | 12.8 | % | | $ | 94,576 |
| | $ | 82,652 |
| | 14.4 | % | | 9.2 | % |
| | | | | | | | | | | | | | | | |
| OIBDA margin | 42.8 | % | | 40.4 | % | | 2.4 p.p. |
| | 2.3 p.p. |
| | 40.4 | % | | 39.5 | % | | 0.9 p.p. |
| | 1.3 p.p. |
|
The television advertising market in the Czech Republic increased an estimated 5% at constant rates in 2019, after having grown an estimated 3% in 2018.
Our television advertising revenues increased at constant rates in 2019 due to significantly higher average prices, which more than offset selling fewer GRPs. Carriage fees and subscription revenues increased on a constant currency basis due to price increases in existing contracts as well as an increase in the number of subscribers.
In 2018, our television advertising revenues increased at constant rates from selling more GRPs, reflecting overall increased demand for advertising in the market, particularly due to more spending being placed when list prices are lower outside the peak seasons of spring and fall. Carriage fees and subscription revenues increased due to an increase in the number of subscribers as well as contracts with higher prices.
Costs charged in arriving at OIBDA increased at constant rates in 2019 due to increased staff-related costs, higher licensing costs, and marketing activities in the first quarter to celebrate the 25th anniversary of TV Nova broadcasting in the Czech Republic.
On a constant currency basis, costs charged in arriving at OIBDA in 2018 increased due to investments in additional local content during the spring and fall seasons on the main channel, with more episodes of returning series as well as an additional local title in the fall season. There were also higher salary and staff costs.
Romania
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, (US$ 000's) |
| | | | | | Movement | | | | | | Movement |
| | 2019 |
| | 2018 |
| | % Act |
| | % Lfl |
| | 2018 |
| | 2017 |
| | % Act |
| | % Lfl |
|
| Television advertising | $ | 139,300 |
| | $ | 150,084 |
| | (7.2 | )% | | (0.4 | )% | | $ | 150,084 |
| | $ | 143,693 |
| | 4.4 | % | | 2.4 | % |
| Carriage fees and subscriptions | 44,243 |
| | 46,704 |
| | (5.3 | )% | | 1.8 | % | | 46,704 |
| | 44,032 |
| | 6.1 | % | | 3.4 | % |
| Other | 4,708 |
| | 4,717 |
| | (0.2 | )% | | 6.5 | % | | 4,717 |
| | 3,519 |
| | 34.0 | % | | 30.8 | % |
| Net revenues | 188,251 |
| | 201,505 |
| | (6.6 | )% | | 0.3 | % | | 201,505 |
| | 191,244 |
| | 5.4 | % | | 3.2 | % |
| Costs charged in arriving at OIBDA | 100,524 |
| | 115,768 |
| | (13.2 | )% | | (6.7 | )% | | 115,768 |
| | 117,826 |
| | (1.7 | )% | | (3.6 | )% |
| OIBDA | $ | 87,727 |
| | $ | 85,737 |
| | 2.3 | % | | 9.8 | % | | $ | 85,737 |
| | $ | 73,418 |
| | 16.8 | % | | 14.0 | % |
| | | | | | | | | | | | | | | | |
| OIBDA margin | 46.6 | % | | 42.5 | % | | 4.1 p.p. |
| | 4.0 p.p. |
| | 42.5 | % | | 38.4 | % | | 4.1 p.p. |
| | 4.0 p.p. |
|
The television advertising market in Romania was estimated to be broadly flat at constant rates 2019, after having increased an estimated 4% in 2018.
Our television advertising revenues were broadly flat at constant rates in 2019 as a significant increase in our average prices was offset by selling fewer GRPs. There was also reduced spending, primarily in the first quarter of 2019, by advertisers who were directly impacted by new incremental taxes imposed early in 2019 on certain sectors of the economy, including telecommunications and banking. Even though spending from these clients recovered during the course of 2019, overall spending from the affected sectors was lower than in 2018. Carriage fees and subscription revenues increased on a constant currency basis due to an increase in the average number of subscribers, even though we ceased broadcasting MTV ROMANIA on March 1, 2019.
In 2018, our television advertising revenues increased at constant rates from higher prices, which were partially offset by selling fewer GRPs due to lower ratings. Carriage fees and subscription revenues increased due to an increase in the number of subscribers.
Costs charged in arriving at OIBDA decreased in 2019 primarily due to a decrease in content costs as we utilized fewer hours and more cost-effective foreign content. We also had decreased costs due to fewer sport rights in the first half of the year since we no longer broadcast UEFA Champions League matches. We also recorded lower bad debt charges stemming from changes in local VAT legislation.
On a constant currency basis, costs charged in arriving at OIBDA in 2018 decreased at constant rates due to savings in production costs for locally produced formats in the spring season when compared to the schedule in 2017. Costs were also lower due to a reversal of a legal accrual and lower professional fees.
Slovak Republic
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, (US$ 000's) |
| | | | | | Movement | | | | | | Movement |
| | 2019 |
| | 2018 |
| | % Act |
| | % Lfl |
| | 2018 |
| | 2017 |
| | % Act |
| | % Lfl |
|
| Television advertising | $ | 94,091 |
| | $ | 94,030 |
| | 0.1 | % | | 5.3 | % | | $ | 94,030 |
| | $ | 85,715 |
| | 9.7 | % | | 6.0 | % |
| Carriage fees and subscriptions | 8,923 |
| | 8,550 |
| | 4.4 | % | | 10.1 | % | | 8,550 |
| | 7,597 |
| | 12.5 | % | | 8.1 | % |
| Other | 4,989 |
| | 4,254 |
| | 17.3 | % | | 23.4 | % | | 4,254 |
| | 4,409 |
| | (3.5 | )% | | (8.5 | )% |
| Net revenues | 108,003 |
| | 106,834 |
| | 1.1 | % | | 6.4 | % | | 106,834 |
| | 97,721 |
| | 9.3 | % | | 5.5 | % |
| Costs charged in arriving at OIBDA | 72,653 |
| | 78,893 |
| | (7.9 | )% | | (2.7 | )% | | 78,893 |
| | 73,876 |
| | 6.8 | % | | 2.2 | % |
| OIBDA | $ | 35,350 |
| | $ | 27,941 |
| | 26.5 | % | | 31.5 | % | | $ | 27,941 |
| | $ | 23,845 |
| | 17.2 | % | | 16.2 | % |
| | | | | | | | | | | | | | | | |
| OIBDA margin | 32.7 | % | | 26.2 | % | | 6.5 p.p. |
| | 6.2 p.p. |
| | 26.2 | % | | 24.4 | % | | 1.8 p.p. |
| | 2.4 p.p. |
|
(1) Number is not meaningful.
The television advertising market in the Slovak Republic increased an estimated 7% at constant rates in 2019, after having grown an estimated 4% in 2018.
Our television advertising revenues increased on a constant currency basis in 2019 as an increase in our average prices more than offset selling fewer GRPs. There was also a higher level of sponsorship reflecting additional spending on government informational campaigns. Carriage fees and subscriptions revenue increased in 2019 from higher prices in new contracts in effect from the start of 2019.
In 2018, our television advertising revenues increased on a constant currency basis due to higher average prices, and we regained market share lost in 2017. There was also higher spending on sponsorship compared to 2017, as sell-out rates remained elevated. Following our exit from digital terrestrial transmission of our channels at the beginning of 2017, carriage fees and subscription revenues increased significantly in 2018 as certain contracts were signed in the first half of 2017.
Costs charged in arriving at OIBDA decreased at constant rates in 2019 due to savings from legal and professional fees and lower transmission costs.
On a constant currency basis, costs charged in arriving at OIBDA in 2018 increased due primarily to an increase in legal and professional fees, which were mostly offset by lower personnel costs and transmission fees.
Slovenia
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, (US$ 000's) |
| | | | | | Movement | | | | | | Movement |
| | 2019 |
| | 2018 |
| | % Act |
| | % Lfl |
| | 2018 |
| | 2017 |
| | % Act |
| | % Lfl |
|
| Television advertising | $ | 51,522 |
| | $ | 53,783 |
| | (4.2 | )% | | 0.8 | % | | $ | 53,783 |
| | $ | 52,289 |
| | 2.9 | % | | (0.8 | )% |
| Carriage fees and subscriptions | 25,502 |
| | 21,541 |
| | 18.4 | % | | 24.8 | % | | 21,541 |
| | 12,591 |
| | 71.1 | % | | 66.8 | % |
| Other | 3,785 |
| | 4,263 |
| | (11.2 | )% | | (6.8 | )% | | 4,263 |
| | 3,816 |
| | 11.7 | % | | 8.3 | % |
| Net revenues | 80,809 |
| | 79,587 |
| | 1.5 | % | | 6.9 | % | | 79,587 |
| | 68,696 |
| | 15.9 | % | | 12.0 | % |
| Costs charged in arriving at OIBDA | 54,414 |
| | 57,071 |
| | (4.7 | )% | | 0.5 | % | | 57,071 |
| | 54,433 |
| | 4.8 | % | | 0.5 | % |
| OIBDA | $ | 26,395 |
| | $ | 22,516 |
| | 17.2 | % | | 22.9 | % | | $ | 22,516 |
| | $ | 14,263 |
| | 57.9 | % | | 57.9 | % |
| | | | | | | | | | | | | | | | |
| OIBDA margin | 32.7 | % | | 28.3 | % | | 4.4 p.p. |
| | 4.3 p.p. |
| | 28.3 | % | | 20.8 | % | | 7.5 p.p. |
| | 8.2 p.p. |
|
The television advertising market in Slovenia increased an estimated 3% at constant rates in 2019, after having decreased an estimated 1% in 2018.
Our television advertising revenues increased on a constant currency basis in 2019 as higher average prices were mostly offset by selling fewer GRPs. The lower spending from larger multinationals and telecommunications operators, which we saw in the first half of 2019, reversed in the second half of the year so spending in certain sectors was higher overall than in 2018. Carriage fees and subscription revenues increased due to price inflation in existing agreements as well as growth in subscribers.
In 2018, our television advertising revenues decreased on a constant currency basis due to selling fewer GRPs, which was mostly offset by higher prices. Carriage fees and subscription revenues increased following our exit from DTT, since prices increased and certain contracts took effect in the second quarter of 2017.
Costs charged in arriving at OIBDA were broadly flat at constant rates in 2019 as savings from fewer hours of local fiction in the fall schedule compared to 2018 was offset by higher personnel costs.
On a constant currency basis, costs charged in arriving at OIBDA in 2018 were broadly flat at constant rates as content costs decreased slightly due to savings from fewer sports rights, which was offset primarily by higher personnel costs.
II. Analysis of the Results of Operations and Financial Position
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For The Year Ended December 31, (US$ 000's) |
| | | | | | Movement | | | | | | Movement |
| | 2019 |
| | 2018 |
| | % Act |
| | % Lfl |
| | 2018 |
| | 2017 |
| | % Act |
| | % Lfl |
|
| Revenue: | | | | | | | | | | | | | | | |
| Television advertising | $ | 547,524 |
| | $ | 562,450 |
| | (2.7 | )% | | 3.0 | % | | $ | 562,450 |
| | $ | 523,516 |
| | 7.4 | % | | 3.3 | % |
| Carriage fees and subscriptions | 117,652 |
| | 113,746 |
| | 3.4 | % | | 9.9 | % | | 113,746 |
| | 95,823 |
| | 18.7 | % | | 14.5 | % |
| Other revenue | 29,628 |
| | 27,710 |
| | 6.9 | % | | 12.4 | % | | 27,710 |
| | 23,529 |
| | 17.8 | % | | 13.1 | % |
| Net Revenues | 694,804 |
| | 703,906 |
| | (1.3 | )% | | 4.5 | % | | 703,906 |
| | 642,868 |
| | 9.5 | % | | 5.3 | % |
| Operating expenses: | | | | | | | | | | | | | | | |
| Content costs | 284,715 |
| | 309,439 |
| | (8.0 | )% | | (2.4 | )% | | 309,439 |
| | 293,728 |
| | 5.3 | % | | 0.8 | % |
| Other operating costs | 54,826 |
| | 56,731 |
| | (3.4 | )% | | 2.2 | % | | 56,731 |
| | 55,924 |
| | 1.4 | % | | (3.5 | )% |
| Depreciation of property, plant and equipment | 33,536 |
| | 32,933 |
| | 1.8 | % | | 7.9 | % | | 32,933 |
| | 31,261 |
| | 5.3 | % | | 0.2 | % |
| Amortization of intangibles | 8,457 |
| | 9,002 |
| | (6.1 | )% | | (0.8 | )% | | 9,002 |
| | 8,592 |
| | 4.8 | % | | (2.5 | )% |
| Cost of revenues | 381,534 |
| | 408,105 |
| | (6.5 | )% | | (0.9 | )% | | 408,105 |
| | 389,505 |
| | 4.8 | % | | 0.1 | % |
| Selling, general and administrative expenses | 125,934 |
| | 118,214 |
| | 6.5 | % | | 12.5 | % | | 118,214 |
| | 113,449 |
| | 4.2 | % | | (0.1 | )% |
| Operating income | $ | 187,336 |
| | $ | 177,587 |
| | 5.5 | % | | 11.4 | % | | $ | 177,587 |
| | $ | 139,914 |
| | 26.9 | % | | 25.1 | % |
Revenue:
Television advertising revenues: On a constant currency basis, television advertising revenues increased by 3% in both 2019 and 2018, in line with the increase in television advertising spending in our markets.
Carriage fees and subscriptions: Carriage fees and subscription revenues increased in 2019, primarily in Slovenia, the Czech Republic and Bulgaria due to higher prices and increases in the number of subscribers. Carriage fees and subscription revenues increased in 2018, primarily in Slovenia, the Czech Republic and Romania due to new contracts with higher prices and higher subscriber counts.
Other revenues: Other revenues include primarily internet advertising revenues and revenues generated through the licensing of our own productions. Other revenues increased in 2019 due to higher online revenues, primarily in the Czech Republic. Other revenues increased during 2018 due to higher online revenues in the Czech Republic and Romania, partly offset by lower production services revenue in the Slovak Republic.
See "Segment Performance" above for additional information on trends in revenues.
Operating Expenses:
Content costs: Content costs (including production costs and amortization of programming rights) decreased in 2019 primarily due to the use of more cost-effective acquired programming and fewer sporting rights in Romania. Content costs increased slightly at constant rates during 2018 primarily due to the inclusion of more hours of local fiction in our broadcast schedules in all segments.
Other operating costs: On a constant currency basis, other operating costs increased during 2019 primarily due to higher salaries and staff related costs, licenses and rights costs in the Czech Republic and software licenses and related support costs in Bulgaria. On a constant currency basis, other operating costs decreased during 2018 primarily due to payroll and related cost savings in the Slovak Republic and Bulgaria and reductions in transmission costs in the Slovak Republic, which were partly offset by higher fees for author's rights in Romania.
Depreciation of property, plant and equipment: Depreciation of property, plant and equipment increased in 2019 due to depreciation of studio facilities and related equipment placed in service during 2018 and 2019 primarily in Romania and Bulgaria, respectively. Depreciation of property, plant and equipment increased in 2018 primarily due to depreciation of machinery and equipment placed in service during 2017.
Amortization of intangibles: On a constant currency basis, total amortization of broadcast licenses and other intangibles decreased slightly in 2019 primarily due to certain of our customer relationships in the Czech Republic becoming fully amortized in 2019. On a constant currency basis, total amortization of broadcast licenses and other intangibles decreased during 2018 primarily due to certain of our trademarks in the Czech Republic and customer relationships in Romania becoming fully amortized in 2017. For additional information, see Item 8, Note 3, "Goodwill and Intangible Assets".
Selling, general and administrative expenses: Selling, general and administrative expenses increased during 2019 primarily due to costs related to the strategic review and the resulting proposed Merger as well as higher salaries and staff-related costs in the Slovak Republic and the Czech Republic. The increase was partly offset by a decrease in professional fees related to the promissory notes litigation in the Slovak Republic (see Item 8, Note 21, "Commitments and Contingencies") and the release of bed debt charges in Bulgaria due to the collection of overdue amounts and in Romania due to changes in local VAT legislation.
On a constant currency basis, selling, general and administrative expenses decreased slightly during 2018 primarily due to lower bad debt charges in Bulgaria and the revision of a legal provision in Romania due to a change in our estimated exposure, partly offset by higher charges in respect of non-cash stock-based compensation and higher legal fees in the Slovak Republic.
Non-cash stock-based compensation charges for the years ended December 31, 2019, 2018 and 2017 were US$ 4.2 million, US$ 7.1 million and US$ 4.4 million, respectively. Stock-based compensation expense recognized during 2018 includes US$ 2.9 million related to the accelerated vesting of RSUs with performance conditions in accordance with the terms of the corresponding award agreement following the completion of sale of the Company's Croatian operations on July 31, 2018.
Operating income: Operating income increased from 2017 through 2019 due to increased television advertising and carriage fee revenues and effective cost control efforts. Our operating margin, which is determined as operating income divided by net revenues, was 27.0% in 2019, compared to 25.2% in 2018 and 21.8% in 2017.
Other income / expense items for the years ended December 31, 2019, 2018 and 2017:
|
| | | | | | | | | | | | | | | | | | | | | |
| | For The Year Ended December 31, (US$ 000's) |
| | 2019 |
| | 2018 |
| | % Act |
| | 2018 |
| | 2017 |
| | % Act |
|
| Interest expense | $ | (30,694 | ) | | $ | (49,106 | ) | | 37.5 | % | | $ | (49,106 | ) | | $ | (83,188 | ) | | 41.0 | % |
| Other non-operating income / (expense), net: | | | | | | | | | | | |
| Interest income | 467 |
| | 725 |
| | (35.6 | )% | | 725 |
| | 536 |
| | 35.3 | % |
| Foreign currency exchange (loss) / gain, net | (2,376 | ) | | (2,691 | ) | | 11.7 | % | | (2,691 | ) | | 17,761 |
| | NM (1) |
|
| Change in fair value of derivatives | (201 | ) | | (1,715 | ) | | 88.3 | % | | (1,715 | ) | | (1,783 | ) | | 3.8 | % |
| Loss on extinguishment of debt | (340 | ) | | (415 | ) | | 18.1 | % | | (415 | ) | | (101 | ) | | (310.9 | )% |
| Other income, net | 242 |
| | 508 |
| | (52.4 | )% | | 508 |
| | 428 |
| | 18.7 | % |
| Provision for income taxes | (35,226 | ) | | (27,828 | ) | | (26.6 | )% | | (27,828 | ) | | (22,504 | ) | | (23.7 | )% |
| Income / (loss) from discontinued operations, net of tax | — |
| | 60,548 |
| | NM (1) |
| | 60,548 |
| | (1,636 | ) | | NM (1) |
|
| Net (income) / loss attributable to noncontrolling interests | (74 | ) | | 79 |
| | (193.7 | )% | | 79 |
| | 341 |
| | (76.8 | )% |
| |
(1)
| Number is not meaningful. |
Interest expense: Interest expense decreased in 2018 and 2019. This reflects the repricing of our Guarantee Fees in April 2018, the repayment of the 2019 Euro Loan and the partial repayment of the 2021 Euro Loan, as well as reduced borrowing costs following reductions in our net leverage ratio as defined within the Reimbursement Agreement. See Item 8, Note 4, "Long-term Debt and Other Financing Arrangements" and Note 15, "Interest Expense".
Interest income: Interest income primarily reflects earnings on our cash balances and was not material in any year presented.
Foreign currency exchange (loss) / gain, net: We are exposed to fluctuations in foreign exchange rates on the revaluation of monetary assets and liabilities denominated in currencies other than the local functional currency of the relevant subsidiary. This includes third party receivables and payables, as well as certain of our intercompany loans which are not considered to be of a long-term investment nature. Our subsidiaries generally receive funding via loans that are denominated in currencies other than the functional currency of the lender, therefore any change in the relevant exchange rate will require us to recognize a transaction gain or loss on revaluation. Certain of our intercompany loans are classified as long-term in nature, and therefore gains or losses on revaluation of those loans are not recorded through the statement of operations and comprehensive income / loss. See the discussion under "Currency translation adjustment, net" below.
In 2019, we recognized a net loss of US$ 2.4 million, comprised of transaction gains of US$ 0.8 million relating to the revaluation of intercompany loans, transaction losses of approximately US$ 0.8 million on our long-term debt and other financing arrangements and transaction losses of US$ 2.4 million relating to the revaluation of monetary assets and liabilities denominated in currencies other than the local functional currency of the relevant subsidiary.
In 2018, we recognized a net loss of US$ 2.7 million, comprised of transaction losses of US$ 0.3 million relating to the revaluation of intercompany loans, transaction losses of approximately US$ 3.2 million on our long-term debt and other financing arrangements and transaction gains of US$ 0.8 million relating to the revaluation of monetary assets and liabilities denominated in currencies other than the local functional currency of the relevant subsidiary.
In 2017, we recognized a net gain of US$ 17.8 million, comprised of transaction gains of US$ 3.5 million relating to the revaluation of intercompany loans, transaction gains of approximately US$ 8.8 million on our long-term debt and other financing arrangements and transaction gains of US$ 5.5 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 2019, we recognized losses as a result of the partial settlement of our interest rate swaps in connection with the repayment of debt. See Item 8, Note 12, "Financial Instruments and Fair Value Measurements".
During 2018, we recognized a loss as a result of the change in the fair value of our interest rate swaps that were not designated as hedging instruments.
During 2017, we recognized losses as a result of the change in fair value of our USD/EUR foreign currency forward contracts entered into on January 31, 2017, May 16, 2017 and July 21, 2017 as well as the interest rate swaps we use as hedging instruments for interest payments on the 2019 Euro Loan.
Loss on extinguishment of debt: In 2019, we recognized losses on extinguishment of debt related to our partial repayments of the 2021 Euro Loan. In 2018, we recognized losses on extinguishment of debt related to our full repayment of the 2019 Euro Loan and partial repayment of the 2021 Euro Loan.
Other income, net: Our other income / expense, net was not material in any year presented.
Provision for income taxes: The provision for income taxes during 2019 reflects income tax charges on profits in each of our operating segments and the impact of losses on which no tax benefit has been received.
The provision for income taxes during 2018 reflects income tax charges on profits in the Czech Republic, Romania and the Slovak Republic and the impact of tax losses on which no tax benefit has been recognized offset by the release of a valuation allowance in Slovenia.
The provision for income taxes during 2017 is principally comprised of tax charges on profits in the Czech Republic, Romania and the Slovak Republic.
Our operating subsidiaries are subject to income taxes at statutory rates of 10% in Bulgaria, 16% in Romania, 19% in the Czech Republic and Slovenia and 21% in the Slovak Republic (see Item 8, Note 18, "Income Taxes").
Income / (loss) from discontinued operations, net of tax: Income from discontinued operations, net of tax for 2018 is comprised of the gain on sale of our Croatian operations, the results of the Croatian operations through the date of sale and the allocation of interest expense and Guarantee Fees and transaction costs. Loss from discontinued operations, net of tax for 2017 is primarily comprised of the results of the Croatia segment including the allocation of interest expense and Guarantee Fees from the 2019 Euro Loan and transaction costs.
Net (income) / loss attributable to noncontrolling interests: The results attributable to noncontrolling interests relate to the noncontrolling interest share of the comprehensive profits and losses in our Bulgaria operations.
Other comprehensive income / loss:
|
| | | | | | | | | | | | | | | | | | | | |
| | For The Year Ended December 31, (US$ 000's) |
| | 2019 |
| | 2018 |
| | % Act |
| | 2018 |
| | 2017 |
| | % Act |
| Currency translation adjustment, net | $ | (6,149 | ) | | $ | (23,050 | ) | | 73.3 | % | | $ | (23,050 | ) | | $ | 54,368 |
| | NM (1) |
| Unrealized (loss) / gain on derivative instruments | (3,979 | ) | | (5,800 | ) | | 31.4 | % | | (5,800 | ) | | 1,269 |
| | NM (1) |
| |
(1)
| Number is not meaningful. |
Currency translation adjustment, net: The underlying equity value of our investments (which are denominated in the functional currency of the relevant entity) are converted into dollars at each balance sheet date, with any change in value of the underlying assets and liabilities being recorded as a currency translation adjustment to the balance sheet rather than net income / loss. Certain of our intercompany loans are denominated in currencies other than the functional currency of the lender and are considered to be of a long-term investment nature as the repayment of these loans is neither planned nor anticipated for the foreseeable future. The foreign exchange (loss) / gain on the remeasurement of these intercompany loans to the lender's functional currency are treated in the same manner as currency translation adjustments. Other comprehensive income / loss due to currency translation adjustment, net comprised the following for the years ended December 31, 2019, 2018 and 2017:
|
| | | | | | | | | | | | | | | | | | | | |
| | For The Year Ended December 31, (US$ 000's) |
| | 2019 |
| | 2018 |
| | % Act |
| | 2018 |
| | 2017 |
| | % Act |
| Foreign exchange gain / (loss) on intercompany transactions | $ | 2,519 |
| | $ | (1,061 | ) | | NM (1) |
| | $ | (1,061 | ) | | $ | 11,326 |
| | NM (1) |
| Foreign exchange (loss) / gain on the Series B Preferred Shares | (5,129 | ) | | (12,527 | ) | | 59.1 | % | | (12,527 | ) | | 33,444 |
| | NM (1) |
| Currency translation adjustment | (3,539 | ) | | (9,462 | ) | | 62.6 | % | | (9,462 | ) | | 9,598 |
| | NM (1) |
| Currency translation adjustment, net | $ | (6,149 | ) | | $ | (23,050 | ) | | 73.3 | % | | $ | (23,050 | ) | | $ | 54,368 |
| | NM (1) |
| |
(1)
| Number is not meaningful. |
The following charts depict the movement of the dollar versus the functional currencies of our operations, based on monthly closing rates, during 2019, 2018 and 2017.
Percent Change During the Year Ended December 31, 2019
Percent Change During the Year Ended December 31, 2018
Percent Change During the Year Ended December 31, 2017
Unrealized (loss) / gain on derivative instruments: The unrealized (loss) / gain on derivatives is due to the portion of changes in the fair value of our interest rate swaps designated as cash flow hedges and recognized in accumulated other comprehensive income / loss. See Item 8, Note 12, "Financial Instruments and Fair Value Measurements".
Summarized consolidated balance sheets as at December 31, 2019 and December 31, 2018:
|
| | | | | | | | | | | | | |
| | December 31, 2019 |
| | December 31, 2018 |
| | % Act |
| | % Lfl |
|
| Current assets | $ | 349,980 |
| | $ | 374,093 |
| | (6.4 | )% | | (4.2 | )% |
| Non-current assets | 1,097,882 |
| | 1,114,268 |
| | (1.5 | )% | | 0.1 | % |
| Current liabilities | 156,001 |
| | 139,692 |
| | 11.7 | % | | 14.0 | % |
| Non-current liabilities | 680,273 |
| | 849,978 |
| | (20.0 | )% | | (18.5 | )% |
| Temporary equity | 269,370 |
| | 269,370 |
| | — | % | | — | % |
| CME Ltd. shareholders’ equity | 341,705 |
| | 229,020 |
| | NM (1) |
| | NM (1) |
|
| Noncontrolling interests in consolidated subsidiaries | 513 |
| | 301 |
| | NM (1) |
| | (16.9 | )% |
| |
(1)
| Number is not meaningful. |
Note: The analysis below is intended to highlight the key factors that led to the movements from December 31, 2018, excluding the impact of foreign currency translation.
Current assets: Current assets decreased primarily due to the use of cash generated by our operations to pay down amounts owed in respect of the 2021 Euro Loan.
Non-current assets: Non-current assets remained in line with 2018, as a reduction in acquired program rights and the amortization of our broadcast license in the Czech Republic was partly offset by increased production of local content and the recognition of operating lease right-of-use assets following the adoption of a new accounting standard.
Current liabilities: Current liabilities increased, primarily due to accruals for the costs related to the proposed Merger and the recognition of operating lease liabilities following the adoption of a new accounting standard.
Non-current liabilities: Non-current liabilities decreased, primarily due to the partial repayment of amounts outstanding under the 2021 Euro Loan, partly offset by the recognition of operating lease liabilities following the adoption of a new accounting standard.
Temporary equity: Temporary equity at December 31, 2019 and 2018 represents the accreted value of the Series B Preferred Shares.
CME Ltd. shareholders’ equity: The increase in shareholders’ equity reflects net income attributable to CME Ltd., partially offset by the impact of currency translation adjustments recognized in accumulated other comprehensive loss.
Noncontrolling interests in consolidated subsidiaries: The noncontrolling interests in consolidated subsidiaries represent the noncontrolling interest in our Bulgaria operations.
III. Liquidity and Capital Resources
III(a) Summary of Cash Flows
Cash and cash equivalents decreased by US$ 25.4 million during 2019. The change in cash and cash equivalents for the periods presented below is summarized as follows:
|
| | | | | | | | | | | |
| | For The Year Ended December 31, (US$ 000's) |
| | 2019 |
| | 2018 |
| | 2017 |
|
| Net cash generated from continuing operating activities | $ | 179,652 |
| | $ | 109,024 |
| | $ | 93,301 |
|
| Net cash used in continuing investing activities | (24,375 | ) | | (24,540 | ) | | (27,947 | ) |
| Net cash used in continuing financing activities | (178,089 | ) | | (182,362 | ) | | (58,439 | ) |
| Net cash provided by / (used in) discontinued operations | — |
| | 102,566 |
| | (141 | ) |
| Impact of exchange rate fluctuations on cash | (2,598 | ) | | (1,405 | ) | | 11,020 |
|
| Net (decrease) / increase in cash and cash equivalents | $ | (25,410 | ) | | $ | 3,283 |
| | $ | 17,794 |
|
Operating Activities
The increases in cash generated from continuing operations during 2019 was due primarily to lower cash payments for acquired programming and production costs and for interest and Guarantee Fees, which were partially offset by higher payments for income taxes.
The increase in cash generated from continuing operations during 2018 reflected higher cash collections from revenue growth and a decrease in cash paid for interest, offset by an increase in cash paid for accrued Guarantee Fees which were previously paid in-kind as well as taxes paid as a direct result of our improved operating performance.
We paid cash interest and Guarantee Fees of US$ 26.7 million, US$ 71.5 million (including US$ 27.3 million that was previously paid in kind) and US$ 55.5 million on our long-term debt and credit facilities in 2019, 2018 and 2017, respectively. The decreases in cash paid for interest and Guarantee Fees are due to the repricing of our Guarantee Fees, payments on the 2019 Euro Loan and 2021 Euro Loan, and reductions in our net leverage ratio due to improved performance.
We paid cash for taxes of US$ 36.0 million, US$ 28.4 million and US$ 15.1 million in 2019, 2018 and 2017, respectively.
Investing Activities
Net cash used in continuing investing activities consists of capital expenditures for property, plant and equipment, primarily in the Czech Republic and Bulgaria.
Financing Activities
The net cash used in continuing financing activities in 2019, 2018 and 2017, primarily reflects principal repayments made on our obligations under the 2019 and 2021 Euro Loans, offset by proceeds from the issuance of warrants in 2018.
Discontinued Operations
The net cash provided by discontinued operations during 2018 primarily reflected the cash received from the sale of our Croatian operations, offset by the payment of Guarantee Fees and interest related to the 2019 Euro Loan. The net cash used in discontinued operations during 2017 primarily reflected the results of our Croatian operations, including the payment of Guarantee Fees and interest related to the 2019 Euro Loan.
III(b) Sources and Uses of Cash
Our ongoing source of cash is primarily the receipt of payments from advertisers, advertising agencies and distributors of our television channels. As at December 31, 2019, we also had available the aggregate principal amount under the 2023 Revolving Credit Facility of US$ 75.0 million (see Item 8, Note 4, "Long-term Debt and Other Financing Arrangements"). Surplus cash, after funding ongoing operations, may be remitted to us, where appropriate, by our subsidiaries in the form of debt interest payments, principal repayments, dividends, and other distributions and loans from our subsidiaries.
Corporate law in the Central and Eastern European countries in which we operate stipulates generally that dividends may be declared by the partners or shareholders out of yearly profits subject to the maintenance of registered capital, required reserves (if applicable) and after the recovery of accumulated losses. The reserve requirement restriction generally provides that before dividends may be distributed, a portion of annual net profits (typically at least 5%) be allocated to a reserve, which is capped at a proportion of the registered capital of a company (ranging from 5% to 20%). There are no third-party restrictions that limit our subsidiaries' ability to transfer amounts to us in the form of loans or advances.
III(c) Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
Our future contractual obligations as at December 31, 2019 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 | $ | 594,431 |
| | $ | — |
| | $ | 67,781 |
| | $ | 526,650 |
| | $ | — |
|
| Long-term debt – interest | 105,418 |
| | 21,899 |
| | 40,412 |
| | 43,107 |
| | — |
|
| Unconditional purchase obligations | 103,506 |
| | 36,932 |
| | 47,993 |
| | 17,129 |
| | 1,452 |
|
| Operating leases | 13,136 |
| | 3,659 |
| | 5,263 |
| | 2,355 |
| | 1,859 |
|
| Finance lease obligations | 16,805 |
| | 7,109 |
| | 8,559 |
| | 1,137 |
| | — |
|
| Other long-term obligations | 30,120 |
| | 12,740 |
| | 11,480 |
| | 5,900 |
| | — |
|
| Total contractual obligations | $ | 863,416 |
| | $ | 82,339 |
| | $ | 181,488 |
| | $ | 596,278 |
| | $ | 3,311 |
|
Long-Term Debt
For more information on our long-term debt, see Item 8, Note 4, "Long-term Debt and Other Financing Arrangements". Interest payable on our long-term debt is calculated using interest rates and exchange rates as at December 31, 2019.
Unconditional Purchase Obligations
Unconditional purchase obligations primarily comprise future programming commitments. At December 31, 2019, we had commitments in respect of future programming of US$ 103.5 million. This includes contracts signed with license periods starting after December 31, 2019.
Operating and Finance Leases
For more information on our operating and finance lease commitments see Item 8, Note 11, "Leases".
Other Long-Term Obligations
Other long-term obligations are primarily comprised of digital transmission commitments.
Other
Top Tone Media Holdings Limited has exercised its right to acquire additional equity in CME Bulgaria B.V. However, the closing of this transaction has not yet occurred because purchaser financing is still pending. If consummated, we would own 90.0% of our Bulgaria broadcast operations. The option strike price is the fair value of the equity in CME Bulgaria, as determined by an independent valuation.
III(d) Cash Outlook
For the year ending December 31, 2019, net cash generated from continuing operations and unlevered free cash flow were US$ 179.7 million and US$ 188.0 million, respectively, compared to US$ 109.0 million and US$ 156.0 million for the year ended December 31, 2018 (see Section I, "Overview"). As at December 31, 2019, we had US$ 36.6 million in cash and cash equivalents and our nearest debt maturity is November 1, 2021.
In 2019, we repaid US$ 168.9 million of debt exclusively from cash generated by our operations. Following these payments, the principal amount of EUR 60.3 million (US$ 67.8 million) is outstanding on our nearest debt maturity in November 2021. We expect cash paid for interest and Guarantee Fees to decline in 2020 compared to 2019 due to the reduction in our overall indebtedness and a lower weighted average all-in rate.
We expect our unlevered free cash flow to grow due to further improvement in our operating results. We anticipate the amounts of cash paid for income taxes to continue to increase in 2020 and to further converge with local statutory tax rates as our operating companies in each jurisdiction have returned to generating profits and previous tax losses were utilized.
As at December 31, 2019, the weighted average all-in rate applicable to the Euro Loans and Guarantee Fees was approximately 3.4%. As at December 31, 2019, our net leverage ratio improved to 2.4x from 3.5x at December 31, 2018.
Credit ratings and future debt issuances
Our corporate credit is rated B1 by Moody's Investors Service with a positive outlook and B+ by Standard & Poor's, on watch with negative implications due to the proposed Merger. Our ratings show each agency's opinion of our financial strength, operating performance and ability to meet our debt obligations as they become due, as well as the proposed Merger. These ratings take into account the particular emphasis the ratings agencies place on metrics such as leverage ratio and cash flow, which they use as measurements of a company's liquidity and financial strength. They also reflect an emphasis by the ratings agencies on the track record of strong financial support from Warner Media. We may be subject to downgrades if our operating performance deteriorates or we fail to maintain adequate levels of liquidity. In addition, our ratings may be downgraded if the agencies form a view that material support from Warner Media is not as strong, or the strategic importance of CME to Warner Media is not as significant as it has been in the past.
Credit risk of financial counterparties
We have entered into a number of significant contracts with financial counterparties as follows:
Interest Rate Swap
We are party to interest rate swap agreements to mitigate our exposure to interest rate fluctuations on our Euro Loans. These interest rate swaps, certain of which are designated as cash flow hedges, provide the Company with variable-rate cash receipts in exchange for fixed-rate payments over the lives of the agreements, with no exchange of the underlying notional amount.
Foreign Exchange Forwards
We are exposed to movements in the USD to EUR exchange rates related to contractual payments under dollar-denominated agreements. To reduce this exposure, from time to time we may enter into pay-Euro receive-dollar forward foreign exchange contracts. We had no such agreements outstanding at December 31, 2019.
Cash Deposits
We may deposit cash in the global money markets with a range of bank counterparties and review the counterparties we choose regularly. The maximum period of deposit is three months but we have more recently held amounts on deposit for shorter periods, mainly overnight. The credit rating of a bank is a critical factor in determining the size of cash deposits and we will only deposit cash with banks of investment grade rating. In addition, we also closely monitor the credit default swap spreads and other market information for each of the banks with which we consider depositing or have deposited funds.
III(e) Off-Balance Sheet Arrangements
None.
IV. Critical Accounting Policies and Estimates
Our accounting policies affecting our financial condition and results of operations are more fully described in Item 8, Note 2, "Basis of Presentation and Summary of Significant Accounting Policies". 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 amounts 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 the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Program Rights
Program rights consist of programming (film and television) acquired from third parties and produced locally, which together form an important component of our station broadcasting schedules. Acquired program rights and the related liabilities are recorded at their gross value when the license period begins and the programs are available for use. Where the initial airing of content allowed by a license is expected to provide more value than subsequent airings, program rights are amortized over their expected useful lives in a manner which reflects the pattern we expect to use and benefit from the programming. These films and series are amortized with the amortization charged in respect of each airing calculated in accordance with a schedule that reflects our estimate of the relative economic value of each run. We review our programming amortization policy when events occur or circumstances change that would so require.
The program library is evaluated at least quarterly to determine if expected revenues are sufficient to cover the unamortized portion of each program. To the extent that the revenues we expect to earn from broadcasting a program are lower than the book value, the program rights are written down to their net realizable value by recording an impairment charge. Accordingly, our estimates of future advertising and other revenues, and our future broadcasting schedules have a significant impact on the value of our program rights on the consolidated balance sheet and the annual programming amortization charge recorded in the consolidated statements of operations and comprehensive income / loss.
Produced Program Rights
We also produce and license a variety of filmed content. The majority of this is television series and movies which are predominantly expected to be utilized by transmission on our broadcast stations. Produced program rights, which include direct costs, production overhead and development costs, are stated at the lower of cost, net of accumulated amortization, or net realizable value.
When we recognize revenue on a title, we also recognize a proportion of the capitalized film costs in the respective statements of operations using the individual film forecast model. The proportion of costs recognized is equal to the proportion of the revenue recognized compared to the total revenue expected to be generated throughout the title's life cycle (the "ultimate revenues").
The process of evaluating a title's ultimate revenues requires management judgment and is inherently subjective. The calculation of ultimate revenue can be a complex one, however, the level of complexity and subjectivity is correlated to the number of revenue streams that management believes will be earned. Our process for evaluating ultimate revenues is tailored to the potential we believe a title has for generating multiple types of revenues. As already mentioned, the majority of our production is intended primarily for exploitation by our own broadcasters and we have few supportable expectations of generating revenue from other sources. In such cases, we consider mainly the free television window in our calculation of the ultimate revenue. Changes in estimates of ultimate revenues from period to period affect the amount of film costs amortized in a given period and, therefore, could have an impact on our results for that period.
When the estimated ultimate revenues, less additional costs to be incurred (including exploitation costs), are less than the carrying amount of the film costs, the value of a film is deemed to be not recoverable and thus, an immediate write-off of unrecoverable film costs is recorded in the consolidated statements of operations and comprehensive income / loss.
Impairment of goodwill, indefinite-lived intangible assets and long-lived assets
We assess the carrying amount of goodwill and other intangible assets with indefinite lives on an annual basis, or more frequently if events or changes in circumstances indicate that such carrying amount may not be recoverable. Other than our annual review, factors we consider important which could trigger an impairment review include: under-performance of reporting units or changes in projected results, changes in the manner of utilization of the asset, a severe and sustained decline in the price of our shares that is not attributable to factors other than the underlying value of our assets, negative market conditions or economic trends or specific events such as new legislation, new market entrants, changes in technology, as well as adverse legal judgments that we believe could have a negative impact on our business. Therefore, our judgment as to the future prospects of each business has a significant impact on our results and financial condition. We believe that our assumptions are appropriate. If future cash flows do not materialize as expected or there is a future adverse change in market conditions, we may be unable to recover the carrying amount of an asset, resulting in future impairment losses.
Impairment tests of our goodwill are performed at the reporting unit level. The fair value of the reporting unit is compared to its carrying value, including goodwill. An impairment loss is recognized for any excess of the carrying amount of the reporting unit over its fair value. If goodwill and another asset or asset group are tested for impairment at the same time, the other assets are tested for impairment before goodwill. If the other asset or asset group is impaired, this impairment loss is recognized prior to goodwill being tested for impairment. Impairment tests of other intangible assets with indefinite lives are performed at the asset level. An impairment loss is recognized for any excess of the carrying amount of the intangible asset over the fair value.
The fair value of each reporting unit is determined using an income methodology estimating projected future cash flows related to each reporting unit. These projected future cash flows are discounted back to the valuation date. Significant assumptions inherent in the methodology used include estimates of discount rates, future revenue growth rates, operating margins and a number of other factors, all of which are based on our assessment of the future prospects and the risks inherent at the respective reporting units. We have identified five reporting units which consist of our five geographic operating segments: Bulgaria, the Czech Republic, Romania, the Slovak Republic and Slovenia.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the respective asset. The same estimates are also used in planning for our long- and short-range business planning and forecasting. We assess the reasonableness of the inputs and outcomes of our undiscounted cash flow analysis against available comparable market data. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized for the amount by which the carrying amount exceeds the fair value of the respective asset.
The table below shows the key measurements involved and the valuation methods applied:
|
| | |
Measurement | | Valuation Method |
Recoverability of carrying amounts | | Undiscounted future cash flows |
Fair value of broadcast licenses | | Build-out method |
Fair value of indefinite-lived trademarks | | Relief from royalty method |
Fair value of reporting units | | Discounted cash flow model |
Our estimate of the cash flows our operations will generate in future periods forms the basis for most of the significant assumptions inherent in our impairment reviews. Our expectations of these cash flows are developed during our long- and short-range business planning processes, which are designed to address the uncertainties inherent in the forecasting process by capturing a range of possible views about key trends which govern future cash flow growth.
Each method noted above involves a number of significant assumptions over an extended period of time which could materially change our decision as to whether assets are impaired. The most significant of these assumptions include: the discount rate applied, the total advertising market size, achievable levels of market share, forecast OIBDA and capital expenditure and the rate of growth into perpetuity, each described in more detail below:
Cost of capital: The cost of capital reflects the return a hypothetical market participant would require for a long-term investment in an asset and can be viewed as a proxy for the risk of that asset. We calculate the cost of capital according to the Capital Asset Pricing Model using a number of assumptions, the most significant of which is a Country Risk Premium ("CRP"). The CRP reflects the excess risk to an investor of investing in markets other than the United States and generally fluctuates with expectations of changes in a country's macro-economic environment. The costs of capital that we have applied to cash flows for our 2019 annual impairment test are generally lower than those we had used in the 2018 impairment test due to a decrease in long term yields of US government bonds.
Total advertising market: The size of the television advertising market effectively places an upper limit on the advertising revenue we can expect to earn in each country. Our estimate of the total advertising market is developed from a number of external sources, in combination with a process of on-going consultation with our segment management teams. In our 2019 annual impairment review, we decreased our medium- and long-term view of the size of most of our individual television advertising markets compared to the estimates used in the 2018 annual impairment review based on our estimate of the macro-economic outlook of each of our operating markets.
Market share: This is a function of the audience share we expect our stations to generate, and the relative price at which we can sell advertising. Our estimate of the total advertising market is developed from a number of external sources, in combination with a process of on-going consultation with our segment management teams. Our estimates for our market share in our 2019 annual impairment review remained consistent when compared with those in our 2018 impairment review.
Forecast OIBDA: The level of cash flow generated by each operation is ultimately governed by the extent to which we manage the relationship between revenues and costs. We forecast the level of operating costs by reference to (a) the historical absolute and relative levels of costs we have incurred in generating revenue in each reporting unit, (b) the operating strategy of each business and (c) specific forecast costs to be incurred. Our annual impairment review includes assumptions to reflect benefits of cost control measures taken to date and anticipated future cost control efforts.
Forecast capital expenditure: The size and phasing of capital expenditure, both recurring expenditure to replace retired assets and investments in new projects, has a significant impact on cash flows. We forecast the level of future capital expenditure based on current strategies and specific forecast costs to be incurred. The absolute levels of capital expenditure forecast for our segments have either increased or decreased since the prior year impairment review due to shifting strategies for the replacement of end of life production equipment.
Growth rate into perpetuity: This reflects the level of economic growth in each of our markets from the final year in our discrete forecast period into perpetuity and is the sum of an estimated real growth rate, which reflects our belief that macro-economic growth in our markets will ultimately converge to Western European markets, and long-term expectations for inflation. Our estimates of these rates are based on observable market data and, in most operating countries, have slightly decreased since the prior year impairment review due to stabilizing economic outlooks.
Assessing goodwill and indefinite-lived intangible assets for impairment is a complex process that requires significant judgment and involves a great deal of detailed quantitative and qualitative business-specific analysis and many individual assumptions which fluctuate with the passage of time. We have observed over many years a strong positive correlation between the macro-economic performance of our markets and the size of the television advertising market and the cash flows we generate. With this in mind, we have considered macro-economic trends in determining our cash flow forecasts. If our cash flow forecasts for our operations deteriorate, or if costs of capital increase, we may be required to recognize impairment charges in later periods.
Upon conclusion of our 2019 annual review, we determined that the fair values of our reporting units and indefinite-lived intangible assets were substantially in excess of their respective carrying values. We concluded that the total estimated fair values used for purposes of the test are reasonable by comparing our market capitalization to the results of the discounted cash flow analysis of our reporting units, as adjusted for unallocated corporate assets and liabilities. Upon announcement of the Merger Agreement, we assessed the impact by allocating the Merger Agreement consideration to each reporting unit in proportion to the value determined in the discounted cash flow analysis in the annual review. Under these assumptions, the fair values of our reporting units were substantially in excess of their respective carrying values. The balance of goodwill allocated to each reporting unit is presented in Item 8, Note 3, "Goodwill and Intangible Assets".
Revenue Recognition
Net revenues predominantly comprise revenues from the sale of advertising time less discounts and agency commissions, and fees charged to cable and satellite operators for carriage of our channels. Revenues are recognized upon satisfaction of our performance obligations to our customers, in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services, net of taxes assessed by a government authority that are both imposed on and concurrent with the specific revenue-producing transaction and collected from the customer.
We defer the recognition of revenues when cash payments are received or due in advance of our performance, including amounts which are refundable. We record a receivable when revenue is recognized prior to invoicing, or deferred revenue when revenue is recognized subsequent to invoicing. Invoicing typically occurs on a monthly basis and customers are obliged to pay within 30 to 60 days of issuance. For certain services and customer types, we require payment before the services are provided.
In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from our customers or to provide customers with financing.
We maintain a bad debt provision for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, additional allowances may be required in future periods. We review the accounts receivable balances periodically and our historical bad debt, customer concentrations and customer creditworthiness when evaluating the adequacy of our provision. In the event we recover amounts previously written off, we release the specific allowance to bad debt expense.
Income Taxes
The provision for income taxes includes local and foreign taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences between the financial statement carrying amounts and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which the temporary differences are expected to be recovered or settled. We evaluate the realizability of our deferred tax assets and establish a valuation allowance when it is more likely than not that all or a portion of a deferred tax asset will not be realized.
In evaluating the realizability of our deferred tax assets, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. Any reduction in estimated forecasted results may require that we record additional valuation allowances against our deferred tax assets. Once a valuation allowance has been established, it will be maintained until there is sufficient positive evidence to conclude that it is more likely than not that such assets will be realized. An ongoing pattern of sustained profitability will generally be considered as sufficient positive evidence. If the allowance is reversed in a future period, our income tax provision will be reduced to the extent of the reversal. Accordingly, the establishment and reversal of valuation allowances has had and could continue to have a significant negative or positive impact on our future earnings.
We measure deferred tax assets and liabilities using enacted tax rates that, if changed, would result in either an increase or decrease in the provision for income taxes in the period of change except where the deferred tax assets are covered by a valuation allowance which gives rise to an offsetting adjustment.
From time to time, we engage in transactions, such as business combinations and dispositions, in which the tax consequences may be subject to uncertainty. Significant judgment is required in assessing and estimating the tax consequences of these transactions. We prepare and file tax returns based on the interpretation of tax laws and regulations. In the normal course of business, our tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities. We only recognize tax benefits taken on tax returns when we believe they are "more likely than not" of being sustained upon examination based on their technical merits. There is considerable judgment involved in determining whether positions taken on the tax return are "more likely than not" of being sustained.
We recognize, when applicable, both accrued interest and penalties related to unrecognized benefits in income tax expense in the accompanying consolidated statements of operations and comprehensive income / loss.
Foreign exchange
Our reporting currency is the dollar but a significant portion of our consolidated revenues and costs are in other currencies, including programming rights expenses and interest on all of our long-term debt. CME Ltd.'s income, expenses and cash flows are primarily denominated in Euro. Our other operations have functional currencies other than the dollar.
We record assets and liabilities denominated in a currency other than our functional currency using the exchange rate prevailing at each balance sheet date, with any change in value between reporting periods being recognized as a transaction gain or loss in our consolidated statements of operations and comprehensive income / loss. We are exposed to foreign currency 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 intercompany loans, which are generally provided in currencies other than the dollar.
Certain of our intercompany loans 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. For the years ended December 31, 2019, 2018 and 2017, we recorded a gain of US$ 2.5 million, a loss of US$ 1.1 million and a gain of US$ 11.3 million, respectively, on the retranslation of these intercompany loans as an adjustment to accumulated other comprehensive income / loss, a component of shareholders' equity.
The financial statements of our operations are translated to dollars at the exchange rates in effect at the balance sheet date for assets and liabilities, and at weighted average rates for the period for revenues and expenses, including gains and losses. Translational gains and losses are charged or credited to accumulated other comprehensive income / loss.
Determination of the functional currency of an entity requires considerable management judgment. This includes our assessment of a series of indicators, such as the currency in which a majority of sales transactions are negotiated, expense incurred or financing secured. If the nature of our business operations changes, such as by changing the currency in which sales transactions are denominated or by incurring significantly more expenditure in a different currency, we may be required to change the functional currency of some of our operations, potentially changing the amounts we report as transaction gains and losses in the consolidated statements of operations and comprehensive income / loss as well as the translational gains and losses charged or credited to accumulated other comprehensive income / loss. In establishing functional currency, specific facts and circumstances are considered carefully, and judgment is exercised as to what types of information might be most useful to investors.
Contingencies
We are, from time to time, involved in certain legal proceedings and, as required, accrue our estimate of the probable costs for the resolution for these claims. These estimates are developed in consultation with legal counsel and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. It is possible, however, that future results of operations for any particular period could be materially affected by changes in our assumptions or the effectiveness of our strategies related to these proceedings. See Item 8, Note 21, "Commitments and Contingencies" for more detailed information on our litigation and other contingencies.
Recent Accounting Pronouncements
See Item 8, Note 2, "Basis of Presentation and Summary of Significant Accounting Policies" for a discussion of accounting standards adopted and recently issued accounting standards not yet adopted.
V. Related Party Matters
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. As stated in Financial Accounting Standards Board Accounting Standards Codification Topic 850, "Related Party Disclosures", transactions involving related parties cannot necessarily be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free-market dealings may not exist. We have entered into related party transactions in all of our markets, mainly for the purchase of program rights. In addition, Warner Media guarantees 100% of our outstanding senior indebtedness and is the lender under the 2023 Revolving Credit Facility. For a detailed discussion of all such transactions, see Item 8, Note 22, "Related Party Transactions" and Part III, Item 13, "Certain Relationships and Related Transactions, and Director Independence".
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We engage in activities that expose us to various market risks, including the effect of changes in foreign currency exchange rates and interest rates. We do not engage in speculative transactions, nor do we hold or issue financial instruments for trading purposes. The table below sets forth our market risk sensitive instruments as at the following dates:
December 31, 2019:
|
| | | | | | | | | | | | | | | | | | | |
| Expected Maturity Dates | | 2020 |
| | 2021 |
| | 2022 |
| | 2023 | | 2024 |
| | Thereafter |
|
| Long-term Debt (000's): | | | | | | | | | | | | | |
| Variable rate (EUR) | | — |
| | 60,335 |
| | — |
| | 468,800 |
| | | — |
| | — |
|
Average interest rate (1) | | — |
| | 1.28 | % | | — |
| | 1.28 | % | | | — |
| | — |
|
| | | | | | | | | | | | | | |
| Interest Rate Swaps (000's): | | | | | | | | | | | | | |
| Variable to fixed (EUR) | | — |
| | 529,135 |
| | — |
| | 468,800 |
| (2) | | — |
| | — |
|
| Average pay rate | | — |
| | 0.30 | % | | — |
| | 0.97 | % | | | — |
| | — |
|
| Average receive rate | | — |
| | — | % | | — |
| | — | % | | | — |
| | — |
|
| |
(1)
| As discussed in Item 8, Note 4, "Long-term Debt and Other Financing Arrangements", as consideration for Warner Media's guarantee of the Euro Loans, we pay Guarantee Fees to Warner Media based on the amounts outstanding on the Euro Loans, each calculated such that the all-in borrowing rate on the 2021 Euro Loan was 3.25% per annum and the all-in borrowing rate on the 2023 Euro Loan was 3.50% per annum as of December 31, 2019. |
| |
(2)
| The interest rate swaps related to the 2023 Euro Loan maturing in 2023 are forward starting to coincide with the maturity date of the interest rate swaps maturing in 2021. See Item 8, Note 12, "Financial Instruments and Fair Value Measurements". |
December 31, 2018:
|
| | | | | | | | | | | | | | | | | | | | |
| Expected Maturity Dates | | 2019 |
| | 2020 |
| | 2021 | | 2022 |
| | 2023 | | Thereafter |
|
| Long-term Debt (000's): | | | | | | | | | | | | | | |
| Variable rate (EUR) | | — |
| | — |
| | 210,335 |
| | | — |
| | 468,800 |
| | | — |
|
Average interest rate (1) | | — |
| | — |
| | 1.28 | % | | | — |
| | 1.28 | % | | | — |
|
| | | | | | | | | | | | | | | |
| Interest Rate Swaps (000's): | | | | | | | | | | | | | | |
| Variable to fixed (EUR) | | 210,335 |
| | — |
| | 679,135 |
| (2) | | — |
| | 468,800 |
| (3) | | — |
|
| Average pay rate | | 0.31 | % | | — |
| | 0.33 | % | | | — |
| | 0.97 | % | | | — |
|
| Average receive rate | | — | % | | — |
| | — | % | | | — |
| | — | % | | | — |
|
| |
(1)
| As discussed in Item 8, Note 4, "Long-term Debt and Other Financing Arrangements", as consideration for Warner Media's guarantee of the Euro Loans, we pay Guarantee Fees to Warner Media based on the amounts outstanding on the Euro Loans, each calculated such that the all-in borrowing rate on the 2021 Euro Loan was 3.25% per annum and the all-in borrowing rate on the 2023 Euro Loan was 3.75% per annum as of December 31, 2018. |
| |
(2)
| The interest rate swaps related to the 2021 Euro Loan maturing in 2021 were forward starting to coincide with the maturity date of the interest rate swaps which matured in 2019. See Item 8, Note 12, "Financial Instruments and Fair Value Measurements". |
| |
(3)
| The interest rate swaps related to the 2023 Euro Loan maturing in 2023 are forward starting to coincide with the maturity date of the interest rate swaps maturing in 2021. See Item 8, Note 12, "Financial Instruments and Fair Value Measurements". |
Foreign Currency Exchange Risk Management
We conduct business in a number of currencies other than our functional currencies. As a result, we are subject to foreign currency exchange rate risk due to the effects that foreign exchange rate movements of these currencies have on our costs and on the cash flows we receive from our subsidiaries. In limited instances, we enter into forward foreign exchange contracts to minimize foreign currency exchange rate risk (see Item 8, Note 12, "Financial Instruments and Fair Value Measurements").
Interest Rate Risk Management
The Euro Loans each bear interest at a variable rate based on EURIBOR plus an applicable margin. We are party to a number of interest rate swap agreements intended to reduce our exposure to interest rate movements (see Item 8, Note 12, "Financial Instruments and Fair Value Measurements").
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and Supplementary data begin on the following page and end on the page immediately preceding Item 9.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and the Shareholders of Central European Media Enterprises Ltd.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Central European Media Enterprises Ltd. (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations and comprehensive income / loss, equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and the financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2019 and 2018, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 6, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2016.
London, United Kingdom
February 6, 2020
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONSOLIDATED BALANCE SHEETS
(US$ 000’s, except share and per share data)
|
| | | | | | | |
| | December 31, 2019 |
| | December 31, 2018 |
|
| ASSETS | | | |
| Current assets | | | |
| Cash and cash equivalents | $ | 36,621 |
| | $ | 62,031 |
|
| Accounts receivable, net (Note 6) | 188,618 |
| | 193,371 |
|
| Program rights, net (Note 5) | 75,909 |
| | 77,624 |
|
| Other current assets (Note 7) | 48,832 |
| | 41,067 |
|
| Total current assets | 349,980 |
| | 374,093 |
|
| Non-current assets | | | |
| Property, plant and equipment, net (Note 8) | 113,901 |
| | 117,604 |
|
| Program rights, net (Note 5) | 166,237 |
| | 171,871 |
|
| Goodwill (Note 3) | 667,988 |
| | 676,333 |
|
| Other intangible assets, net (Note 3) | 127,589 |
| | 136,052 |
|
| Other non-current assets (Note 7) | 22,167 |
| | 12,408 |
|
| Total non-current assets | 1,097,882 |
| | 1,114,268 |
|
| Total assets | $ | 1,447,862 |
| | $ | 1,488,361 |
|
|
| | | | | | | |
| LIABILITIES AND EQUITY | | | |
| Current liabilities | | | |
| Accounts payable and accrued liabilities (Note 9) | $ | 135,650 |
| | $ | 120,468 |
|
| Current portion of long-term debt and other financing arrangements (Note 4) | 6,836 |
| | 5,545 |
|
| Other current liabilities (Note 10) | 13,515 |
| | 13,679 |
|
| Total current liabilities | 156,001 |
| | 139,692 |
|
| Non-current liabilities | |
| | |
|
| Long-term debt and other financing arrangements (Note 4) | 600,273 |
| | 782,685 |
|
| Other non-current liabilities (Note 10) | 80,000 |
| | 67,293 |
|
| Total non-current liabilities | 680,273 |
| | 849,978 |
|
| Commitments and contingencies (Note 21) |
|
| |
|
|
| TEMPORARY EQUITY | | | |
| 200,000 shares of Series B Convertible Redeemable Preferred Stock of $0.08 each (December 31, 2018 - 200,000) (Note 13) | 269,370 |
| | 269,370 |
|
| EQUITY | |
| | |
|
| CME Ltd. shareholders’ equity (Note 14): | |
| | |
|
| One share of Series A Convertible Preferred Stock of $0.08 each (December 31, 2018 – one) | — |
| | — |
|
| 253,607,026 shares of Class A Common Stock of $0.08 each (December 31, 2018 – 252,853,554) | 20,288 |
| | 20,228 |
|
| Nil shares of Class B Common Stock of $0.08 each (December 31, 2018 – nil) | — |
| | — |
|
| Additional paid-in capital | 2,007,275 |
| | 2,003,518 |
|
| Accumulated deficit | (1,458,942 | ) | | (1,578,076 | ) |
| Accumulated other comprehensive loss | (226,916 | ) | | (216,650 | ) |
| Total CME Ltd. shareholders’ equity | 341,705 |
| | 229,020 |
|
| Noncontrolling interests | 513 |
| | 301 |
|
| Total equity | 342,218 |
| | 229,321 |
|
| Total liabilities and equity | $ | 1,447,862 |
| | $ | 1,488,361 |
|
The accompanying notes are an integral part of these consolidated financial statements.
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME / LOSS
(US$ 000’s, except share and per share data)
|
| | | | | | | | | | | |
| | For The Year Ended December 31, |
| | 2019 |
|
| 2018 |
| | 2017 |
|
| Net revenues | $ | 694,804 |
| | $ | 703,906 |
| | $ | 642,868 |
|
| Operating expenses: | | | | | |
| Content costs | 284,715 |
| | 309,439 |
| | 293,728 |
|
| Other operating costs | 54,826 |
| | 56,731 |
| | 55,924 |
|
| Depreciation of property, plant and equipment | 33,536 |
|
| 32,933 |
|
| 31,261 |
|
| Amortization of intangibles | 8,457 |
|
| 9,002 |
|
| 8,592 |
|
| Cost of revenues | 381,534 |
| | 408,105 |
| | 389,505 |
|
| Selling, general and administrative expenses | 125,934 |
| | 118,214 |
| | 113,449 |
|
| Operating income | 187,336 |
|
| 177,587 |
| | 139,914 |
|
| Interest expense (Note 15) | (30,694 | ) | | (49,106 | ) | | (83,188 | ) |
| Other non-operating (expense) / income, net (Note 16) | (2,208 | ) | | (3,588 | ) | | 16,841 |
|
| Income before tax | 154,434 |
| | 124,893 |
| | 73,567 |
|
| Provision for income taxes | (35,226 | ) | | (27,828 | ) | | (22,504 | ) |
| Income from continuing operations | 119,208 |
| | 97,065 |
| | 51,063 |
|
| Income / (loss) from discontinued operations, net of tax | — |
| | 60,548 |
| | (1,636 | ) |
| Net income | 119,208 |
| | 157,613 |
| | 49,427 |
|
| Net (income) / loss attributable to noncontrolling interests | (74 | ) | | 79 |
| | 341 |
|
| Net income attributable to CME Ltd. | $ | 119,134 |
| | $ | 157,692 |
| | $ | 49,768 |
|
| | | | | | |
| Net income | $ | 119,208 |
| | $ | 157,613 |
| | $ | 49,427 |
|
| Other comprehensive (loss) / income | | | | | |
| Currency translation adjustment (Note 14) | (6,149 | ) | | (23,050 | ) | | 54,368 |
|
| Unrealized (loss) / gain on derivative instruments (Note 14) | (3,979 | ) | | (5,800 | ) | | 1,269 |
|
| Total other comprehensive (loss) / income | (10,128 | ) | | (28,850 | ) | | 55,637 |
|
| Comprehensive income | 109,080 |
| | 128,763 |
| | 105,064 |
|
| Comprehensive (income) / loss attributable to noncontrolling interests | (212 | ) | | (283 | ) | | 1,254 |
|
| Comprehensive income attributable to CME Ltd. | $ | 108,868 |
| | $ | 128,480 |
| | $ | 106,318 |
|
|
| | | | | | | | | | | |
| PER SHARE DATA (Note 19): | | | | | |
| Net income / (loss) per share: | | | | | |
| Continuing operations — basic | $ | 0.32 |
| | $ | 0.27 |
| | $ | 0.16 |
|
| Continuing operations — diluted | 0.32 |
| | 0.25 |
| | 0.12 |
|
| Discontinued operations — basic | — |
| | 0.18 |
| | (0.01 | ) |
| Discontinued operations — diluted | — |
| | 0.17 |
| | 0.00 |
|
| Attributable to CME Ltd. — basic | 0.32 |
| | 0.45 |
| | 0.15 |
|
| Attributable to CME Ltd. — diluted | 0.32 |
| | 0.42 |
| | 0.12 |
|
| | | | | | |
| Weighted average common shares used in computing per share amounts (000’s): | | | | | |
| Basic | 264,611 |
| | 230,562 |
| | 155,846 |
|
| Diluted | 266,198 |
| | 257,694 |
| | 236,404 |
|
The accompanying notes are an integral part of these consolidated financial statements.
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONSOLIDATED STATEMENTS OF EQUITY
(US$ 000’s, except share data)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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) / Equity |
|
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 | — |
| — |
| | — |
| — |
| | — |
| — |
| 4,412 |
| — |
| — |
| | — |
| | 4,412 |
|
| Exercise of warrants | — |
| — |
| | 1,148,469 |
| 92 |
| | — |
| — |
| 1,056 |
| — |
| — |
| | — |
| | 1,148 |
|
| Share issuance, stock based compensation | — |
| — |
| | 888,115 |
| 71 |
| | — |
| — |
| (71 | ) | — |
| — |
| | — |
| | — |
|
| Withholding tax on net share settlement of stock-based compensation | — |
| — |
| | — |
| — |
| | — |
| — |
| (168 | ) | — |
| — |
| | — |
| | (168 | ) |
| Preferred dividend paid in kind | — |
| — |
| | — |
| — |
| | — |
| — |
| (9,694 | ) | — |
| — |
| | — |
| | (9,694 | ) |
Net income / (loss)
| — |
| — |
| | — |
| — |
| | — |
| — |
| — |
| 49,768 |
| — |
| | (341 | ) | | 49,427 |
|
| Unrealized gain on derivative instruments | — |
| — |
| | — |
| — |
| | — |
| — |
| — |
| — |
| 1,269 |
| | — |
| | 1,269 |
|
| Currency translation adjustment | — |
| — |
| | — |
| — |
| | — |
| — |
| — |
| — |
| 55,281 |
| | (913 | ) | | 54,368 |
|
BALANCE December 31, 2017 | 1 |
| $ | — |
| | 145,486,497 |
| $ | 11,639 |
| | — |
| $ | — |
| $ | 1,905,779 |
| $ | (1,735,768 | ) | $ | (187,438 | ) | | $ | 18 |
| | $ | (5,770 | ) |
| Stock-based compensation | — |
| — |
| | — |
| — |
| | — |
| — |
| 7,083 |
| — |
| — |
| | — |
| | 7,083 |
|
| Exercise of warrants | — |
| — |
| | 105,652,401 |
| 8,452 |
| | — |
| — |
| 97,200 |
| — |
| — |
| | — |
| | 105,652 |
|
| Share issuance, stock based compensation | — |
| — |
| | 1,714,656 |
| 137 |
| | — |
| — |
| (137 | ) | — |
| — |
| | — |
| | — |
|
| Withholding tax on net share settlement of stock-based compensation | — |
| — |
| | — |
| — |
| | — |
| — |
| (1,630 | ) | — |
| — |
| | — |
| | (1,630 | ) |
| Preferred dividend paid in kind | — |
| — |
| | — |
| — |
| | — |
| — |
| (4,777 | ) | — |
| — |
| | — |
| | (4,777 | ) |
| Net income / (loss) | — |
| — |
| | — |
| — |
| | — |
| — |
| — |
| 157,692 |
| — |
| | (79 | ) | | 157,613 |
|
| Unrealized loss on derivative instruments | — |
| — |
| | — |
| — |
| | — |
| — |
| — |
| — |
| (5,800 | ) | | — |
| | (5,800 | ) |
| Currency translation adjustment | — |
| — |
| | — |
| — |
| | — |
| — |
| — |
| — |
| (23,412 | ) | | 362 |
| | (23,050 | ) |
BALANCE December 31, 2018 | 1 |
| $ | — |
| | 252,853,554 |
| $ | 20,228 |
| | — |
| $ | — |
| $ | 2,003,518 |
| $ | (1,578,076 | ) | $ | (216,650 | ) | | $ | 301 |
| | $ | 229,321 |
|
| Stock-based compensation | — |
| — |
| | — |
| — |
| | — |
| — |
| 4,184 |
| — |
| — |
| | — |
| | 4,184 |
|
| Share issuance, stock-based compensation | — |
| — |
| | 753,472 |
| 60 |
| | — |
| — |
| (60 | ) | — |
| — |
| | — |
| | — |
|
| Withholding tax on net share settlement of stock-based compensation | — |
| — |
| | — |
| — |
| | — |
| — |
| (367 | ) | — |
| — |
| | — |
| | (367 | ) |
| Net income | — |
| — |
| | — |
| — |
| | — |
| — |
| — |
| 119,134 |
| — |
| | 74 |
| | 119,208 |
|
| Unrealized loss on derivative instruments | — |
| — |
| | — |
| — |
| | — |
| — |
| — |
| — |
| (3,979 | ) | | — |
| | (3,979 | ) |
| Currency translation adjustment | — |
| — |
| | — |
| — |
| | — |
| — |
| — |
| — |
| (6,287 | ) | | 138 |
| | (6,149 | ) |
BALANCE December 31, 2019 | 1 |
| $ | — |
| | 253,607,026 |
| $ | 20,288 |
| | — |
| $ | — |
| $ | 2,007,275 |
| $ | (1,458,942 | ) | $ | (226,916 | ) |
| $ | 513 |
|
| $ | 342,218 |
|
The accompanying notes are an integral part of these consolidated financial statements.
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US$ 000’s)
|
| | | | | | | | | | | |
| | For The Year Ended December 31, |
| | 2019 |
| | 2018 |
| | 2017 |
|
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
| Net income | $ | 119,208 |
| | $ | 157,613 |
| | $ | 49,427 |
|
| Adjustments to reconcile net income to net cash generated from continuing operating activities: | |
| | | | |
| (Income) / loss from discontinued operations, net of tax | — |
| | (60,548 | ) | | 1,636 |
|
| Amortization of program rights | 284,715 |
| | 309,439 |
| | 293,728 |
|
| Depreciation and other amortization | 45,379 |
| | 46,437 |
| | 45,871 |
|
| Interest and related Guarantee Fees paid in kind | — |
| | 3,783 |
| | 23,331 |
|
| Loss on extinguishment of debt | 340 |
| | 415 |
| | 101 |
|
| Gain on disposal of fixed assets | (84 | ) | | (90 | ) | | (108 | ) |
| Deferred income taxes | (742 | ) | | 2,734 |
| | (483 | ) |
| Stock-based compensation (Note 17) | 4,184 |
| | 7,083 |
| | 4,412 |
|
| Change in fair value of derivatives | 201 |
| | 1,322 |
| | 231 |
|
| Foreign currency exchange loss / (gain), net | 661 |
| | 2,376 |
| | (13,773 | ) |
| Changes in assets and liabilities: | | | |
| | |
| Accounts receivable, net | 2,356 |
| | (16,461 | ) | | (325 | ) |
| Accounts payable and accrued liabilities | 11,892 |
| | (8,597 | ) | | (1,588 | ) |
| Program rights | (278,453 | ) | | (307,490 | ) | | (310,798 | ) |
| Other assets and liabilities | (4,107 | ) | | 587 |
| | 3,385 |
|
| Accrued interest | (768 | ) | | (31,338 | ) | | (3,727 | ) |
| Income taxes payable | (7 | ) | | (2,878 | ) | | 7,554 |
|
| Deferred revenue | 476 |
| | 6,293 |
| | (2,272 | ) |
| VAT and other taxes payable | (5,599 | ) | | (1,656 | ) | | (3,301 | ) |
| Net cash generated from continuing operating activities | $ | 179,652 |
| | $ | 109,024 |
| | $ | 93,301 |
|
| | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | |
| | |
| Purchase of property, plant and equipment | $ | (24,423 | ) | | $ | (24,583 | ) | | $ | (28,115 | ) |
| Proceeds from disposal of property, plant and equipment | 48 |
| | 43 |
| | 168 |
|
| Net cash used in continuing investing activities | $ | (24,375 | ) | | $ | (24,540 | ) | | $ | (27,947 | ) |
| | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | |
| | |
| | |
| Repayments of debt | $ | (168,913 | ) | | $ | (270,780 | ) | | $ | (59,060 | ) |
| Debt transactions costs | — |
| | (10,746 | ) | | (106 | ) |
| Settlement of derivative instruments | (1,712 | ) | | — |
| | — |
|
| Payment of credit facilities and capital leases | (7,097 | ) | | (4,858 | ) | | (2,999 | ) |
| Proceeds from exercise of warrants | — |
| | 105,652 |
| | 1,148 |
|
| Proceeds from sale-leaseback transactions | — |
| | — |
| | 2,746 |
|
| Payments of withholding tax on net share settlement of stock-based compensation | (367 | ) | | (1,630 | ) | | (168 | ) |
| Net cash used in continuing financing activities | $ | (178,089 | ) | | $ | (182,362 | ) | | $ | (58,439 | ) |
| | | | | | |
| Net cash provided by discontinued operations - operating activities | — |
| | 1,842 |
| | 736 |
|
| Net cash provided by / (used in) discontinued operations - investing activities | — |
| | 100,724 |
| | (877 | ) |
| | | | | | |
| Impact of exchange rate fluctuations on cash | (2,598 | ) | | (1,405 | ) | | 11,020 |
|
| Net (decrease) / increase in cash and cash equivalents | $ | (25,410 | ) | | $ | 3,283 |
| | $ | 17,794 |
|
| CASH AND CASH EQUIVALENTS, beginning of year | 62,031 |
| | 58,748 |
| | 40,954 |
|
| CASH AND CASH EQUIVALENTS, end of year | $ | 36,621 |
| | $ | 62,031 |
| | $ | 58,748 |
|
The accompanying notes are an integral part of these consolidated financial statements.
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US$ 000’s)
|
| | | | | | | | | | | |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | |
| Cash paid for interest (including Guarantee Fees) | $ | 26,651 |
| | $ | 43,350 |
| | $ | 47,197 |
|
| Cash paid for Guarantee Fees previously paid in kind | — |
| | 27,328 |
| | — |
|
| Cash paid for Guarantee Fees that previously could be paid in kind | — |
| | 812 |
| | 8,343 |
|
| Cash paid for income taxes, net of refunds | 35,998 |
| | 28,365 |
| | 15,143 |
|
| | | | | | |
| SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES: | | | | | |
| Accretion on Series B Convertible Redeemable Preferred Stock | $ | — |
| | $ | 4,777 |
| | $ | 9,694 |
|
| Acquisition of property, plant and equipment under finance lease | 5,753 |
| | 13,419 |
| | 8,811 |
|
The accompanying notes are an integral part of these consolidated financial statements.
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
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 Dutch holding company. We manage our business on a geographical basis, with 5 operating segments; Bulgaria, the Czech Republic, Romania, the Slovak Republic and Slovenia, which are also our reportable segments and our main operating countries. See Note 20, "Segment Data" for financial information by segment. Our previously held Croatian operations, which were sold during 2018, are classified as discontinued operations in our consolidated statements of operations for the years ended December 31, 2018 and December 31, 2017.
We are the market-leading broadcasters in each of our 5 operating countries with a combined portfolio of 30 television channels. Each country develops and produces content for their television channels. We generate advertising revenues primarily through entering into agreements with advertisers, advertising agencies and sponsors to place advertising on the television channels that we operate. We generate additional revenues by collecting fees from cable, direct-to-home and internet protocol television ("IPTV") operators for carriage of our channels as well as from advertising related to our digital initiatives. Unless otherwise indicated, we own 100% of our broadcast operating and license companies in each country.
Bulgaria
We operate 1 general entertainment channel, BTV, and 5 other channels, BTV CINEMA, BTV COMEDY, BTV ACTION, BTV LADY and RING. We own 94% of CME Bulgaria B.V., the subsidiary that owns our Bulgaria operations.
Czech Republic
We operate 1 general entertainment channel, TV NOVA, and 7 other channels, NOVA 2, NOVA CINEMA, NOVA SPORT 1, NOVA SPORT 2, NOVA ACTION, NOVA GOLD and NOVA INTERNATIONAL, a general entertainment channel broadcasting in the Slovak Republic.
Romania
We operate 1 general entertainment channel, PRO TV, and 6 other channels, PRO 2, PRO X, PRO GOLD, PRO CINEMA, PRO TV INTERNATIONAL, as well as PRO TV CHISINAU, a general entertainment channel broadcasting in Moldova.
Slovak Republic
We operate 1 general entertainment channel, TV MARKIZA, and 3 other channels, DOMA, DAJTO, and MARKIZA INTERNATIONAL, a general entertainment channel broadcasting in the Czech Republic.
Slovenia
We operate 2 general entertainment channels, POP TV and KANAL A, and 3 other channels, KINO, BRIO and OTO.
Merger
On October 27, 2019, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with TV Bidco B.V. ("Parent") and TV Bermuda Ltd. ("Merger Sub"). Parent and Merger Sub are affiliates of PPF Group N.V. Pursuant to the Merger Agreement, Merger Sub will merge with and into the Company (the "Merger"), with the Company continuing as the surviving company in the proposed Merger as a wholly-owned subsidiary of Parent.
The closing of the proposed Merger is subject to several conditions, including, but not limited to, the requisite vote of the Company’s shareholders in favor of the Merger Agreement and the proposed Merger, the receipt of certain competition and other regulatory approvals, compliance with covenants and agreements in the Merger Agreement (subject to certain materiality qualifications), and the absence of any governmental order prohibiting completion of the proposed Merger. A special general meeting of shareholders of the Company will be held on February 27, 2020, where shareholders will be asked to vote on a proposal to approve the Merger Agreement, the related statutory merger agreement and the Merger contemplated under such agreements.
Under the Merger Agreement, at the effective time of the proposed Merger (the “Effective Time”), without any action required by the Company, Parent, Merger Sub or any shareholder of the Company or any other person, each Class A Share issued and outstanding immediately prior to the Effective Time will be canceled and cease to exist automatically and each such Class A Share (other than shares owned by the Company, Parent, Merger Sub or any of their respective direct or indirect wholly-owned subsidiaries, in each case not held on behalf of third parties) will be converted into the right to receive $4.58 in cash.
Under the Merger Agreement, at the Effective Time, without any action required by the Company, Parent, Merger Sub or any shareholder of the Company or any other person, the Series A Preferred Share issued and outstanding immediately prior to the Effective Time will be canceled and cease to exist automatically and will be converted into the right to receive the $32,900,000 in cash, without interest and each Series B Preferred Share issued and outstanding immediately prior to the Effective Time will be canceled and cease to exist automatically and will be converted into the right to receive the $1,630.875 in cash, without interest; provided that, among other things, any conversion of the Series A Preferred Share or any Series B Preferred Shares into Class A Shares on or after October 27, 2019 will be deemed to be null and void.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The terms the "Company", "we", "us", and "our" are used in this Form 10-K to refer collectively to the parent company, Central European Media Enterprises Ltd. ("CME Ltd."), and the subsidiaries through which our various businesses are conducted. Unless otherwise noted, all statistical and financial information presented in this report has been converted into U.S. dollars using period-end exchange rates. All references to "US$", "USD" or "dollars" are to U.S. dollars, all references to "BGN" are to the Bulgarian leva, all references to "CZK" are to the Czech koruna, all references to "RON" are to the New Romanian lei, and all references to "Euro" or "EUR" are to the European Union Euro. Where applicable, prior period presentation has been modified to conform to current year presentation.
Basis of Consolidation
The 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.
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
Use of Estimates
The preparation of financial statements in conformity with US Generally Accepted Accounting Principles ("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.
Summary of Critical and Significant Accounting Policies
The following is a discussion of each of the Company’s critical accounting policies, including information and analysis of estimates and assumptions involved in their application, and other significant accounting policies.
Revenue Recognition
Revenue Recognition
Revenues are recognized upon satisfaction of our performance obligations to our customers, in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services, net of taxes assessed by a government authority that are both imposed on and concurrent with the specific revenue-producing transaction and collected from the customer.
The timing of revenue recognition may differ from the timing of invoicing to customers. We defer the recognition of revenues when cash payments are received or due in advance of our performance, including amounts which are refundable. We record a receivable when revenue is recognized prior to invoicing, or deferred revenue when revenue is recognized subsequent to invoicing. Invoicing typically occurs on a monthly basis and customers are obliged to pay within 30 to 60 days of issuance. For certain services and customer types, we require payment before the services are provided.
We maintain a bad debt provision for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, additional allowances may be required in future periods. We review the accounts receivable balances periodically and our historical bad debt, customer concentrations and customer creditworthiness when evaluating the adequacy of our provision. In the event we recover amounts previously written off, we release the specific allowance to bad debt expense.
In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from or to provide financing to our customers.
Our principal revenue streams and their respective accounting treatments are discussed below:
Television advertising revenues primarily result from the sale of advertising time. Television advertising revenues are earned as the commercials are aired. In many countries, we commit to provide advertisers with certain rating levels in connection with their advertising. Revenue is recorded based on a charge per Gross Rating Point ("GRP") ordered during the month, net of estimated shortfalls. Discounts and agency commissions on television advertising revenue are recognized on a monthly basis and are reflected as a reduction to gross revenue.
Carriage fees and subscription revenues include revenues from cable operators and direct-to-home broadcasters and fees from subscriptions to our streaming services. Revenues from cable operators and direct-to-home broadcasters are recognized as revenue over the period for which the channels are provided and to which the fees relate. This fee revenue is generally based on the number of subscribers to offerings from these operators and broadcasters that include our channels. The impacts of future changes in subscriber levels are recognized when they occur as estimates of future subscribers are constrained. Revenues from subscriptions to our streaming services are recognized over the period of the subscription.
Other revenues primarily include revenues from our internet display advertising, as well as revenues from the licensing of our content. Internet display advertising revenues are recognized on a cost-per-impression basis based on the number of times a customer's advertisement is displayed on our websites. Revenues from the licensing of our content are recognized upon delivery or reasonable access to the content.
Our revenue streams involve significant judgment with respect to the discounts and agency commissions we provide to certain customers based on the amount of advertising purchased. Such discounts are based on estimates of the total amount expected to be earned and reduce revenue based on a systematic and rational allocation of the cost of honoring the discounts earned and claimed to each of the underlying revenue transactions that result in progress by the customer towards earning the discount. Due to the timing of the information provided by the rating agencies, significant judgment may be necessary to estimate the total volume of GRPs delivered within the contract period.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and marketable securities, if applicable, with original maturities of three months or less. Cash that is subject to restrictions is classified as restricted cash, if applicable.
Program Rights
Purchased program rights
Purchased program rights and the related liabilities are recorded at their gross value when the license period begins and the programs are available for broadcast.
Purchased program rights are classified as current or non-current assets based on anticipated usage, while the related program rights liability is classified as current or non-current according to the payment terms of the license agreement.
Program rights are evaluated to determine if expected revenues are sufficient to cover the unamortized portion of the program. To the extent that expected revenues are insufficient, the program rights are written down to their expected net realizable value. These programming impairment charges, along with programming impairment charges related to own-produced content, are presented as a component of content costs in our consolidated statements of operations and comprehensive income / loss.
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
The costs incurred to acquire program rights are capitalized and amortized over their expected useful lives in a manner which reflects the pattern we expect to use and benefit from the programming. If the initial airing of content allowed by a license is expected to provide more value than subsequent airings, we apply an accelerated method of amortization. These accelerated methods of amortization depend on the estimated number of runs the content is expected to receive, and are determined based on a study of historical results for similar programming. For programming that is not advertising supported, each program's costs are amortized on a straight-line basis over the license period. For content that is expected to be aired only once, the entire cost is expensed on the first run.
Produced program rights
Program rights that are produced by us consist of deferred film and television costs including direct costs, production overhead and development costs. The costs are stated at the lower of cost, net of accumulated amortization, or net realizable value. The amount of capitalized production costs recognized as cost of revenues for a given production as it is exhibited in various markets is determined using the individual film forecast method. The proportion of costs recognized is equal to the proportion of the revenue recognized compared to the total revenue expected to be generated throughout the product's life cycle (the "ultimate revenues"). Our process for evaluating ultimate revenues is tailored to the potential we believe a title has for generating multiple revenues. The majority of our production is intended primarily for exploitation by our own broadcasters. In such cases, we consider mainly the free television window in our calculation of the ultimate revenues. Changes in estimates of ultimate revenues from period to period affect the amount of film costs amortized in a given period and, therefore, could have an impact on our results for that period.
Produced program rights are amortized on an individual production basis using the ratio of the current period's gross revenues to estimated remaining total ultimate revenues from such programs. Produced program rights are evaluated to determine if expected revenues, less additional costs to be incurred (including exploitation costs) are sufficient to cover the unamortized portion of the program. To the extent that expected revenues are insufficient, the program rights are written down to their net realizable value.
Property, Plant and Equipment
Property, plant and equipment is carried at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives assigned to each major asset category as below:
|
| |
Asset category | Estimated useful life |
Land | Indefinite |
Buildings | 25 years |
Machinery, fixtures and equipment | 4 - 8 years |
Other equipment | 3 - 8 years |
Software | 3 - 5 years |
Construction-in-progress is not depreciated until put into use. Assets under finance leases are depreciated on a straight-line basis over the shorter of the estimated useful life of the asset or the lease term. Leasehold improvements are depreciated over the shorter of the related lease term or the life of the asset. Assets to be disposed of are reported at the lower of carrying amount or fair value, less expected costs of disposal.
Long-Lived Assets Including Intangible Assets with Finite Lives
Long-lived assets include property, plant, equipment and intangible assets with finite lives. We evaluate the remaining useful life of intangible assets with finite lives each reporting period. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets are evaluated at the asset group level when there is an indication that they may be impaired. The carrying amounts of long-lived assets are considered impaired when the anticipated undiscounted cash flows from such assets are less than their carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair value.
Goodwill and Indefinite-Lived Intangible Assets
We evaluate goodwill and indefinite-lived intangible assets for impairment annually as of October 1, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Such events and changes in circumstances include:
under-performance of operating segments or changes in projected results;
changes in the manner of utilization of an asset;
severe and sustained declines in the trading price of shares of our Class A common stock that are not attributable to factors other than the underlying value of our assets;
negative market conditions or economic trends; and
specific events, such as new legislation, new market entrants, changes in technology or adverse legal judgments that we believe could have a negative impact on our business.
Goodwill is evaluated at the reporting unit level, which we have determined is each of our 5 operating segments. We elected to bypass the qualitative assessment for all of our reporting units in 2019 and proceeded directly to performing the quantitative goodwill impairment test. The fair values of our reporting units were determined based on the present value of expected future cash flows, including terminal value, discounted at appropriate rates, determined separately for each reporting unit, and on publicly available information, where appropriate. The determination of fair value involves the use of significant estimates and assumptions, including: revenue growth rates, operating margins, capital expenditures, working capital requirements, tax rates, terminal growth rates, management's long-term plan and a discount rate selected with reference to the relevant cost of capital. An impairment exists when the carrying amount of a reporting unit (including its goodwill), exceeds its fair value.
We evaluate whether the useful life of each indefinite-lived intangible asset remains indefinite. Each indefinite-lived intangible asset is evaluated for impairment individually. The fair values of our indefinite-lived intangible assets are determined using the relief from royalty method. An impairment loss is recognized if the carrying amount of an indefinite-lived intangible asset exceeds its fair value.
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
Income Taxes
We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which the temporary differences are expected to be recovered or settled. Valuation allowances are established when necessary to reduce deferred tax assets to amounts which are more likely than not to be realized. In evaluating the realizability of our deferred tax assets, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations.
We recognize in the consolidated financial statements those tax positions determined to be "more likely than not" of being sustained upon examination, based on the technical merits of the positions and we recognize, when applicable, both accrued interest and penalties related to uncertain tax positions in income tax expense in the accompanying consolidated statements of operations and comprehensive income / loss.
Foreign Currency
Translation of financial statements
Our reporting currency is the dollar. The financial statements of our operations whose functional currency is other than the dollar are translated from such functional currency to dollars at the exchange rates in effect at the balance sheet date for assets and liabilities, and at weighted average rates for the period for revenues and expenses, including gains and losses. Translational gains and losses are charged or credited to accumulated other comprehensive income / loss, a component of equity.
Certain of our intercompany loans to our subsidiaries are of a long-term investment nature. We recorded the results of the retranslation of these intercompany loans as an adjustment to accumulated other comprehensive income / loss, a component of shareholders' equity, as settlement of these loans is not planned or anticipated in the foreseeable future.
Transactions in foreign currencies
Gains and losses from foreign currency transactions are included in foreign currency exchange gain / loss, net in the consolidated statements of operations and comprehensive income / loss in the period during which they arise.
Leases
We determine if an arrangement includes a lease at inception. A right-of-use asset ("ROU") represents our right to use an underlying asset for the lease term and the corresponding lease liability represents our obligation to make periodic payments arising from that lease. ROUs and liabilities are recognized at their commencement date based on the present value of the lease payments over the lease term. As most of our leases do not provide an implicit rate, we use an incremental borrowing rate based on the information available at the commencement date of a lease in determining the present value of the lease payments. An ROU also includes any lease payments made prior to commencement and excludes any lease incentives received or to be received under the agreement. Our determination of the lease term may include options to extend or terminate the lease when it is reasonably certain that we will exercise such option.
Where lease agreements include both lease and non-lease components, we generally account for each separately. For certain equipment leases, such as vehicles, we account for the lease and non-lease components as a single lease component. We consider operating leases that are for a period less than 12 months, inclusive of options to extend that we are reasonably certain to exercise, as short-term. Short-term leases are not recognized on the balance sheet. Short-term lease cost is recognized on a straight-line basis over the lease term.
ROUs and related operating lease liabilities are included in other non-current assets, other current liabilities and other non-current liabilities, respectively on our consolidated balance sheets. Operating lease costs are recognized on a straight-line basis over the lease term within content costs, other operating costs or sales, general and administrative expenses based on the use of the related ROU. ROUs and related finance lease liabilities are included in property and equipment, and long-term debt and other financing arrangements, respectively, on our consolidated balance sheets. Depreciation of an asset held under a finance lease is recognized in depreciation of property, plant and equipment.
See below "Recent Accounting Pronouncements" for information on the adoption of Financial Accounting Standards Board ("FASB") Accounting Standards Codification Topic 842, "Leases" as at January 1, 2019.
Financial Instruments
Fair value of financial instruments
The carrying amount of financial instruments, including cash, 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 (as defined hereinafter) is included in Note 4, "Long-term Debt and Other Financing Arrangements".
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. US GAAP requires significant management estimates in determining fair value. The extent of management’s judgments is highly dependent on the valuation model employed and the observability of inputs to the fair value model. The level of management judgment required in establishing fair value of financial instruments is more significant where there is no active market in which the instrument is traded. For financial instruments that are not remeasured through net income, we estimate fair value at issuance and account for the instrument at amortized cost. For financial instruments that are remeasured through net income, we assess the fair value of the instrument at each period end or earlier when events occur or circumstances change that would so require (see Note 12, "Financial Instruments and Fair Value Measurements").
Derivative financial instruments
We use derivative financial instruments for the purpose of mitigating currency and interest rate risks, which exist as part of ongoing business operations and financing activities. As a policy, we do not engage in speculative or leveraged transactions, nor do we hold or issue derivative financial instruments for trading purposes.
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
Forward exchange contracts and currency swaps are used to mitigate exposures to currency fluctuations on certain short-term transactions generally denominated in currencies other than our functional currency. These contracts are marked to market at the balance sheet date, and the resultant unrealized gains and losses are recorded in the consolidated statements of operations and comprehensive income / loss, together with realized gains and losses arising on settlement of these contracts.
Interest rate swaps and other instruments may be used to mitigate exposures to interest rate fluctuations on certain of our long-term debt instruments with variable interest rates. These contracts are marked to market at the balance sheet date, and the resultant unrealized gains and losses are recorded in the consolidated statements of operations and comprehensive income / loss, together with realized gains and losses arising on settlement of these contracts. From time to time, we may designate certain of these instruments as hedges and apply hedge accounting as discussed in Note 12, "Financial Instruments and Fair Value Measurements".
Stock-Based Compensation
Stock-based compensation is recognized at fair value using the Black-Scholes option pricing model calculated as the closing price of our Class A common stock on the date of grant. The fair value of stock awards is recognized on a straight-line basis over the vesting period of the award as a component of selling, general and administrative expenses.
For awards with performance conditions, recognition of compensation expense over the vesting period depends on our assessment of the probability that the performance targets will be met. We update our assessments of the probability of achieving performance targets at each reporting period. Changes in our assessments of such probability may result in recording additional expense or reversing previously recorded expense in the current period reported.
Upon vesting of shares or exercise of options, shares of Class A common stock are issued from authorized but unissued shares. Stock-based compensation awards are accounted for as equity-settled transactions. Forfeitures of awards are recognized as they occur.
Contingencies
The estimated loss from a loss contingency such as a legal proceeding or other claim is recorded in the consolidated statements of operations and comprehensive income / loss if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. Disclosure of a loss contingency is made if there is at least a reasonable possibility that a loss has been incurred.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense incurred for the years ended December 31, 2019, 2018 and 2017 totaled US$ 6.4 million, US$ 6.2 million and US$ 5.4 million, respectively.
Earnings Per Share
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, as well as income allocated to these shares, by the weighted-average number of common shares outstanding during the period including the common stock underlying the Series A Preferred Shares. Diluted net income / loss per share is computed by dividing the adjusted net income by the weighted-average number of dilutive shares outstanding during the period after adjusting for the impact of those dilutive shares on the allocation of income to the Series B Preferred Shares. For further information on how to calculate basic and diluted earnings per share for continuing operations and discontinued operations, see Note 19, "Earnings per-share".
Recent Accounting Pronouncements
Accounting Pronouncements Adopted
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 an ROU, with an available exception for leases with an initial term shorter than twelve months. Adoption of the guidance changed our accounting for operating leases while the accounting for our finance leases (previously called capital leases) remained substantially unchanged.
We adopted this guidance as of the transition date of January 1, 2019, using the modified retrospective approach and have elected the transition option which allows us to continue to apply the legacy guidance for comparative periods, including disclosure requirements, in the year of adoption. We have elected to use the package of practical expedients available to us, including the short-term lease exception, however we have not elected the use of hindsight and have not elected to combine lease and non-lease components for our main classes of assets.
On transition, we recorded US$ 11.9 million in operating lease liabilities and related ROUs.
Recent Accounting Pronouncements Issued
In June 2016, the FASB issued new guidance to provide financial statement users with more information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments replace the incurred loss impairment methodology in the current guidance with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The guidance is effective for our fiscal year beginning January 1, 2020. Based on our assessment, the guidance primarily applies to our accounts receivable and is not expected to substantially change our procedures for estimating our bad debt expense or the anticipated results of those procedures. We adopted this guidance on January 1, 2020.
In March 2019, the FASB issued new guidance that aligns the accounting for production costs of an episodic television series with the accounting for production costs of films. The guidance further requires that an entity test a film or license agreement or program material for impairment at a film group level and under a fair value model when the film or license agreement is predominantly monetized with other films and/or license agreements. Further, content acquired under a license agreement is not required to be separately presented on the balance sheet based on the estimated time of usage. Additional disclosures are required. We adopted this guidance on January 1, 2020. Based on our assessment of the guidance, each operating segment predominantly monetizes its content as a film group and we anticipate classifying all our acquired content as non-current on our consolidated balance sheets. We do not anticipate that this guidance will significantly impact the impairment we recognize in the consolidated statement of operations.
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
3. GOODWILL AND INTANGIBLE ASSETS
Goodwill:
Goodwill by reporting unit as at December 31, 2019 and December 31, 2018 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Bulgaria | | Czech Republic | | Romania | | Slovak Republic | | Slovenia | | Total |
| Gross Balance, December 31, 2017 | $ | 175,071 |
| | $ | 837,732 |
| | $ | 90,305 |
| | $ | 52,463 |
| | $ | 19,400 |
| | $ | 1,174,971 |
|
| Accumulated impairment losses | (144,639 | ) | | (287,545 | ) | | (11,028 | ) | | — |
| | (19,400 | ) | | (462,612 | ) |
| Balance, December 31, 2017 | 30,432 |
| | 550,187 |
| | 79,277 |
| | 52,463 |
| | — |
| | 712,359 |
|
| Foreign currency | (1,377 | ) | | (28,762 | ) | | (3,505 | ) | | (2,382 | ) | | — |
| | (36,026 | ) |
| Balance, December 31, 2018 | 29,055 |
| | 521,425 |
| | 75,772 |
| | 50,081 |
| | — |
| | 676,333 |
|
| Accumulated impairment losses | (144,639 | ) | | (287,545 | ) | | (11,028 | ) | | — |
| | (19,400 | ) | | (462,612 | ) |
| Gross Balance, December 31, 2018 | $ | 173,694 |
| | $ | 808,970 |
| | $ | 86,800 |
| | $ | 50,081 |
| | $ | 19,400 |
| | $ | 1,138,945 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Bulgaria | | Czech Republic | | Romania | | Slovak Republic | | Slovenia | | Total |
| Gross Balance, December 31, 2018 | $ | 173,694 |
| | $ | 808,970 |
| | $ | 86,800 |
| | $ | 50,081 |
| | $ | 19,400 |
| | $ | 1,138,945 |
|
| Accumulated impairment losses | (144,639 | ) | | (287,545 | ) | | (11,028 | ) | | — |
| | (19,400 | ) | | (462,612 | ) |
| Balance, December 31, 2018 | 29,055 |
| | 521,425 |
| | 75,772 |
| | 50,081 |
| | — |
| | 676,333 |
|
| Foreign currency | (548 | ) | | (3,574 | ) | | (3,279 | ) | | (944 | ) | | — |
| | (8,345 | ) |
| Balance, December 31, 2019 | 28,507 |
| | 517,851 |
| | 72,493 |
| | 49,137 |
| | — |
| | 667,988 |
|
| Accumulated impairment losses | (144,639 | ) | | (287,545 | ) | | (11,028 | ) | | — |
| | (19,400 | ) | | (462,612 | ) |
| Gross Balance, December 31, 2019 | $ | 173,146 |
| | $ | 805,396 |
| | $ | 83,521 |
| | $ | 49,137 |
| | $ | 19,400 |
| | $ | 1,130,600 |
|
Other intangible assets:
The net book values of our other intangible assets as at December 31, 2019 and December 31, 2018 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| | Gross | | Accumulated Amortization | | Net | | Gross | | Accumulated Amortization | | Net |
| Indefinite-lived: | | | | | | | | | | | |
| Trademarks | $ | 85,484 |
| | $ | — |
| | $ | 85,484 |
| | $ | 87,356 |
| | $ | — |
| | $ | 87,356 |
|
| Amortized: | | | | | | | | | | | |
| Broadcast licenses | 208,669 |
| | (169,239 | ) | | $ | 39,430 |
| | 210,447 |
| | (162,936 | ) | | 47,511 |
|
| Trademarks | 609 |
| | (609 | ) | | — |
| | 631 |
| | (631 | ) | | — |
|
| Customer relationships | 54,807 |
| | (54,288 | ) | | $ | 519 |
| | 56,024 |
| | (55,158 | ) | | 866 |
|
| Other | 4,033 |
| | (1,877 | ) | | 2,156 |
| | 1,868 |
| | (1,549 | ) | | 319 |
|
| Total | $ | 353,602 |
| | $ | (226,013 | ) | | $ | 127,589 |
| | $ | 356,326 |
| | $ | (220,274 | ) | | $ | 136,052 |
|
Net broadcast licenses consist solely of our TV NOVA license in the Czech Republic, which is amortized on a straight-line basis through its expiration date in 2025. Our customer relationships are deemed to have an economic useful life of, and are amortized on a straight-line basis, over five years to fifteen years. Other intangibles primarily consist of non-cloud based software licenses which are typically amortized on a straight-line basis over the shorter of the contractual term or a period of up to five years.
The estimated amortization expense for the succeeding five years for our intangible assets with finite lives as of December 31, 2019 is as follows:
|
| | | |
| 2020 | $ | 8,638 |
|
| 2021 | 8,622 |
|
| 2022 | 8,313 |
|
| 2023 | 7,912 |
|
| 2024 | 7,855 |
|
Impairment of goodwill and other intangible assets:
Our annual assessment of impairment includes the allocation of corporate debt to individual reporting units based on their relative fair values. For the purpose of the impairment assessment, this allocation resulted in a negative carrying value for the Slovak Republic and Slovenia segments, however, these segments were not determined to be impaired.
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
Upon conclusion of our annual impairment assessment, we determined that the fair value of our reporting units and other intangible assets were substantially in excess of their respective carrying values. We did not recognize any impairment charges in respect of goodwill and other intangible assets during the years ended December 31, 2019, 2018 or 2017. See Note 2, "Basis of Presentation and Summary of Significant Accounting Policies" for further information.
4. LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
Summary
|
| | | | | | | |
| | December 31, 2019 |
| | December 31, 2018 |
|
| Long-term debt | $ | 590,777 |
| | $ | 772,339 |
|
Other credit facilities and finance leases(1) | 16,332 |
| | 15,891 |
|
| Total long-term debt and other financing arrangements | 607,109 |
| | 788,230 |
|
Less: current maturities(1) | (6,836 | ) | | (5,545 | ) |
| Total non-current long-term debt and other financing arrangements | $ | 600,273 |
| | $ | 782,685 |
|
(1) Balance consists entirely of finance leases. For more information on finance leases, see Note 11, "Leases".
Overview
Total long-term debt and credit facilities comprised the following at December 31, 2019:
|
| | | | | | | | | | | |
| | Principal Amount of Liability Component |
| | Debt Issuance Costs (1) |
| | Net Carrying Amount |
|
| 2021 Euro Loan | $ | 67,781 |
| | $ | (98 | ) | | $ | 67,683 |
|
| 2023 Euro Loan | 526,650 |
| | (3,556 | ) | | 523,094 |
|
| 2023 Revolving Credit Facility | — |
| | — |
| | — |
|
| Total long-term debt and credit facilities | $ | 594,431 |
| | $ | (3,654 | ) | | $ | 590,777 |
|
| |
(1)
| Debt issuance costs related to the 2021 Euro Loan, the 2023 Euro Loan and the 2023 Revolving Credit Facility (each as defined below) are being amortized on a straight-line basis, which approximates the effective interest method, over the life of the respective instruments. Debt issuance costs related to the 2023 Revolving Credit Facility are classified as non-current assets in our consolidated balance sheet. |
On January 31, 2019, June 14, 2019 and September 23, 2019, we paid EUR 60.0 million (approximately US$ 68.9 million at January 31, 2019 rates), EUR 40.0 million (approximately US$ 45.1 million at June 14, 2019 rates) and EUR 50.0 million (approximately US$ 54.9 million at September 23, 2019 rates), respectively, of the outstanding principal balance of the 2021 Euro Loan.
At December 31, 2019, the maturity of our long-term debt and credit facilities was as follows:
|
| | | |
| 2020 | — |
|
| 2021 | 67,781 |
|
| 2022 | — |
|
| 2023 | 526,650 |
|
| 2024 | — |
|
| 2025 and thereafter | — |
|
| Total long-term debt and credit facilities | 594,431 |
|
| Debt issuance costs | (3,654 | ) |
| Carrying amount of long-term debt and credit facilities | $ | 590,777 |
|
Long-term Debt
Our long-term debt comprised the following at December 31, 2019 and December 31, 2018:
|
| | | | | | | | | | | | | | | |
| | Carrying Amount | | Fair Value |
| | December 31, 2019 |
| | December 31, 2018 |
| | December 31, 2019 |
| | December 31, 2018 |
|
| 2021 Euro Loan | $ | 67,683 |
| | $ | 240,296 |
| | $ | 68,120 |
| | $ | 233,058 |
|
| 2023 Euro Loan | 523,094 |
| | 532,043 |
| | 529,303 |
| | 502,617 |
|
| | $ | 590,777 |
| | $ | 772,339 |
| | $ | 597,423 |
| | $ | 735,675 |
|
The estimated fair values of the Euro Loans (as defined below) as at December 31, 2019 and December 31, 2018 were determined using the average yield curve of comparable bonds with equivalent credit ratings which is a Level 2 input as described in Note 12, "Financial Instruments and Fair Value Measurements". Certain derivative instruments, including contingent event of default and change of control put options, have been identified as being embedded in each of the Euro Loans. The embedded derivatives are considered clearly and closely related to their respective Euro Loan, and as such are not required to be accounted for separately.
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
2021 Euro Loan
As at December 31, 2019, the principal amount of our floating rate senior unsecured term credit facility (the "2021 Euro Loan") outstanding was EUR 60.3 million (approximately US$ 67.8 million). The 2021 Euro Loan bears interest at three-month EURIBOR (fixed pursuant to customary hedging arrangements (see Note 12, "Financial Instruments and Fair Value Measurements")) plus a margin of between 1.1% and 1.9% depending on the credit rating of Warner Media. As at December 31, 2019, the all-in borrowing rate on amounts outstanding under the 2021 Euro Loan was 3.25% (the components of which are shown in the table below under the heading "Interest Rate Summary").
Interest on the 2021 Euro Loan is payable quarterly in arrears on each February 13, May 13, August 13 and November 13. The 2021 Euro Loan matures on November 1, 2021 and may be prepaid at our option, in whole or in part, without premium or penalty from cash generated from our operations. From April 26, 2020, the 2021 Euro Loan may be refinanced at our option. The 2021 Euro Loan is a senior unsecured obligation of CME Ltd. and is unconditionally guaranteed by CME Media Enterprises B.V. ("CME BV") and by Warner Media, LLC ("Warner Media") and certain of its subsidiaries.
2023 Euro Loan
As at December 31, 2019, the principal amount of our floating rate senior unsecured term credit facility (the "2023 Euro Loan") outstanding was EUR 468.8 million (approximately US$ 526.7 million). The 2023 Euro Loan bears interest at three-month EURIBOR (fixed pursuant to customary hedging arrangements (see Note 12, "Financial Instruments and Fair Value Measurements")) plus a margin of between 1.1% and 1.9% depending on the credit rating of Warner Media. As at December 31, 2019, the all-in borrowing rate on amounts outstanding under the 2023 Euro Loan was 3.50% (the components of which are shown in the table below under the heading "Interest Rate Summary").
Interest on the 2023 Euro Loan is payable quarterly in arrears on each January 7, April 7, July 7 and October 7. The 2023 Euro Loan matures on April 26, 2023 and may be prepaid at our option, in whole or in part, without premium or penalty from cash generated from our operations. From April 26, 2020, the 2023 Euro Loan may be refinanced at our option. The 2023 Euro Loan is a senior unsecured obligation of CME BV and is unconditionally guaranteed by CME Ltd. and by Warner Media and certain of its subsidiaries.
Reimbursement Agreement and Guarantee Fees
In connection with Warner Media’s guarantees of the 2021 Euro Loan and 2023 Euro Loan (collectively, the "Euro Loans"), we entered into a reimbursement agreement (as amended, the “Reimbursement Agreement") with Warner Media. The Reimbursement Agreement provides for the payment of guarantee fees (collectively, the "Guarantee Fees") to Warner Media as consideration for those guarantees, and the reimbursement to Warner Media of any amounts paid by them under any guarantee or through any loan purchase right exercised by it. The loan purchase right allows Warner Media to purchase any amount outstanding under the Euro Loans from the lenders following an event of default under the Euro Loans or the Reimbursement Agreement. The Reimbursement Agreement is guaranteed by our wholly owned subsidiary CME BV and is secured by a pledge over 100% of the outstanding shares of CME BV. The covenants and events of default under the Reimbursement Agreement are substantially the same as under the 2023 Revolving Credit Facility (described below).
We pay Guarantee Fees to Warner Media based on the amounts outstanding on the Euro Loans calculated on a per annum basis and on our consolidated net leverage (as defined in the Reimbursement Agreement) as shown in the tables below:
All-in Rate
|
| | | | | | | | | |
| Consolidated Net Leverage | 2021 Euro Loan |
| | 2023 Euro Loan |
|
| ≥ | 7.0x | | | | 6.00 | % | | 6.50 | % |
| < | 7.0x | - | 6.0x | | 5.00 | % | | 5.50 | % |
| < | 6.0x | - | 5.0x | | 4.25 | % | | 4.75 | % |
| < | 5.0x | - | 4.0x | | 3.75 | % | | 4.25 | % |
| < | 4.0x | - | 3.0x | | 3.25 | % | | 3.75 | % |
| < | 3.0x | | | | 3.25 | % | | 3.50 | % |
Our consolidated net leverage as at December 31, 2019 and December 31, 2018 was 2.4x and 3.5x, respectively. For the years ended December 31, 2019, 2018 and 2017, we recognized US$ 13.4 million, US$ 26.7 million; and US$ 55.7 million, respectively, of Guarantee Fees as interest expense in our consolidated statements of operations and comprehensive income / loss.
The Guarantee Fees relating to the 2021 Euro Loan are payable semi-annually in arrears on each May 1 and November 1. The Guarantee Fees relating to the 2023 Euro Loan are payable semi-annually in arrears on each June 1 and December 1.
The Guarantee Fees on the 2023 Euro Loan that were previously paid in kind are presented as a component of other non-current liabilities (see Note 10, "Other Liabilities") and bear interest per annum at the applicable Guarantee Fee rate (as set forth in the table below). Guarantee Fees are included in cash flows from operating activities in our consolidated statements of cash flows.
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
Interest Rate Summary |
| | | | | | | | | | | |
| | Base Rate |
| | Rate Fixed Pursuant to Interest Rate Hedges |
| | Guarantee Fee Rate |
| | All-in Borrowing Rate |
|
| 2021 Euro Loan | 1.28 | % | | 0.47 | % | | 1.50 | % | | 3.25 | % |
| 2023 Euro Loan | 1.28 | % | | 0.28 | % | (1) | 1.94 | % | | 3.50 | % |
| 2023 Revolving Credit Facility (if drawn) | 5.16 | % | (2) | — |
| | — |
| | 5.16 | % |
| |
(1)
| Effective until February 19, 2021. From February 19, 2021 through maturity on April 26, 2023, the rate fixed pursuant to interest rate hedges will increase to 0.97%, with a corresponding decrease in the Guarantee Fee rate, such that the all-in borrowing rate remains 3.50% if our net leverage ratio remains unchanged. |
| |
(2)
| Based on the three month LIBOR of 1.91% as at December 31, 2019. |
2023 Revolving Credit Facility
We had 0 balance outstanding under the US$ 75.0 million revolving credit facility (the “2023 Revolving Credit Facility”) as at December 31, 2019.
The 2023 Revolving Credit Facility bears interest at a rate per annum based on, at our option, an alternate base rate ("ABR Loans" as defined in the 2023 Revolving Credit Facility Agreement) plus the spread applicable to ABR Loans based on our consolidated net leverage or an amount equal to the greater of (i) an adjusted LIBO rate and (ii) 1.0%, plus the spread applicable to the Eurodollar Loans (as defined in the 2023 Revolving Credit Facility Agreement) based on our consolidated net leverage ratio (as defined in the Reimbursement Agreement), with all amounts payable in cash. The maturity date of the 2023 Revolving Credit Facility is April 26, 2023. When drawn, the 2023 Revolving Credit Facility permits prepayment at our option in whole or in part without penalty.
As at December 31, 2019, the following spreads were applicable:
|
| | | | | | | | | |
| Consolidated Net Leverage | Alternate Base Rate Loans |
| | Eurodollar Loans |
|
| ≥ | 7.0x | | | | 5.25 | % | | 6.25 | % |
| < | 7.0x | - | 6.0x | | 4.25 | % | | 5.25 | % |
| < | 6.0x | - | 5.0x | | 3.50 | % | | 4.50 | % |
| < | 5.0x | - | 4.0x | | 3.00 | % | | 4.00 | % |
| < | 4.0x | - | 3.0x | | 2.50 | % | | 3.50 | % |
| < | 3.0x | | | | 2.25 | % | | 3.25 | % |
The 2023 Revolving Credit Facility is guaranteed by CME BV and is secured by a pledge over 100% of the outstanding shares of CME BV. The 2023 Revolving Credit Facility agreement contains limitations on CME’s ability to incur indebtedness, incur guarantees, grant liens, pay dividends or make other distributions, enter into certain affiliate transactions, consolidate, merge or effect a corporate reconstruction, make certain investments acquisitions and loans, and conduct certain asset sales. The agreement also contains maintenance covenants in respect of interest cover and total leverage ratios, and has covenants in respect of incurring indebtedness, the provision of guarantees, making investments and disposals, granting security and certain events of defaults.
Other Credit Facilities and Finance Lease Obligations
Cash Pooling
We have a cash pooling arrangement with Bank Mendes Gans (“BMG”), a subsidiary of ING Bank N.V. (“ING”), which enables us to receive credit throughout the group in respect of cash balances which our subsidiaries deposit with BMG. Cash deposited by our subsidiaries with BMG is pledged as security against the drawings of other subsidiaries up to the amount deposited.
As at December 31, 2019, we had deposits of US$ 11.6 million in and 0 drawings on the BMG cash pool. Interest is earned on deposits at the relevant money market rate. As at December 31, 2018, we had deposits of US$ 36.8 million in and 0 drawings on the BMG cash pool.
Factoring Arrangements
Under a factoring framework agreement with Factoring Česka spořitelna, a.s., up to CZK 475.0 million (approximately US$ 21.0 million) of receivables from certain customers in the Czech Republic may be factored on a recourse or non-recourse basis. The facility has a factoring fee of 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.
Under a factoring framework agreement with Factoring KB, a.s., certain receivables in the Czech Republic may be factored on a non-recourse basis. The facility has a factoring fee of 0.11% 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 up to a maximum of 60 days from the due date.
Under a factoring framework agreement with Global Funds IFN S.A., receivables from certain customers in Romania may be factored on a non-recourse basis. The facility has a factoring fee of 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.
As at December 31, 2019, and December 31, 2018, we had no outstanding liability balances on any of our factoring arrangements.
Finance Leases
For additional information on finance leases, see Note 11, "Leases"
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
5. PROGRAM RIGHTS
Program rights comprised the following at December 31, 2019 and December 31, 2018:
|
| | | | | | | |
| | December 31, 2019 |
| | December 31, 2018 |
|
| Program rights: | | | |
| Acquired program rights, net of amortization | $ | 135,352 |
| | $ | 153,761 |
|
| Less: current portion of acquired program rights | (75,909 | ) | | (77,624 | ) |
| Total non-current acquired program rights | 59,443 |
| | 76,137 |
|
| Produced program rights – Feature Films: | | | |
| Released, net of amortization | 504 |
| | 653 |
|
| Produced program rights – Television Programs: | | | |
| Released, net of amortization | 57,190 |
| | 55,220 |
|
| Completed and not released | 16,578 |
| | 8,347 |
|
| In production | 32,248 |
| | 30,904 |
|
| Development and pre-production | 274 |
| | 610 |
|
| Total produced program rights | 106,794 |
| | 95,734 |
|
| Total non-current acquired program rights and produced program rights | $ | 166,237 |
| | $ | 171,871 |
|
6. ACCOUNTS RECEIVABLE
Accounts receivable comprised the following at December 31, 2019 and December 31, 2018:
|
| | | | | | | |
| | December 31, 2019 |
| | December 31, 2018 |
|
| Third-party customers | $ | 197,166 |
| | $ | 203,068 |
|
| Less: allowance for bad debts and credit notes | (8,548 | ) | | (9,697 | ) |
| Total accounts receivable | $ | 188,618 |
| | $ | 193,371 |
|
Bad debt (release) / expense for the years ended December 31, 2019, 2018 and 2017 was US$ (2.5) million, US$ 0.8 million, and US$ 1.9 million, respectively.
7. OTHER ASSETS
Other current and non-current assets comprised the following at December 31, 2019 and December 31, 2018:
|
| | | | | | | |
| | December 31, 2019 |
| | December 31, 2018 |
|
Current: | | | |
| Prepaid acquired programming | $ | 27,237 |
| | $ | 29,918 |
|
| Other prepaid expenses | 12,775 |
| | 9,119 |
|
| VAT recoverable | 7,775 |
| | 1,702 |
|
| Other | 1,045 |
| | 328 |
|
| Total other current assets | $ | 48,832 |
| | $ | 41,067 |
|
| | | | |
| | December 31, 2019 |
| | December 31, 2018 |
|
| Non-current: | |
| | |
|
| Capitalized debt costs (Note 4) | $ | 7,277 |
| | $ | 9,660 |
|
| Deferred tax | 2,261 |
| | 2,411 |
|
| Operating lease - right-of-use assets (Note 11) | 11,682 |
| | — |
|
| Other | 947 |
| | 337 |
|
| Total other non-current assets | $ | 22,167 |
| | $ | 12,408 |
|
Capitalized debt costs are being amortized over the term of the 2023 Revolving Credit Facility using the straight-line method, which approximates the effective interest method.
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment comprised the following at December 31, 2019 and December 31, 2018:
|
| | | | | | | |
| | December 31, 2019 |
| | December 31, 2018 |
|
| Land and buildings | $ | 100,502 |
| | $ | 100,574 |
|
| Machinery, fixtures and equipment | 212,810 |
| | 206,491 |
|
| Other equipment | 36,007 |
| | 35,022 |
|
| Software | 70,294 |
| | 68,239 |
|
| Construction in progress | 4,774 |
| | 4,663 |
|
| Total cost | 424,387 |
| | 414,989 |
|
| Less: accumulated depreciation | (310,486 | ) | | (297,385 | ) |
| Total net book value | $ | 113,901 |
| | $ | 117,604 |
|
| | | | |
| Assets held under finance leases (included in the above) | |
| | |
|
| Land and buildings | $ | 3,914 |
| | $ | 3,989 |
|
| Machinery, fixtures and equipment | 31,961 |
| | 25,414 |
|
| Total cost | 35,875 |
| | 29,403 |
|
| Less: accumulated depreciation | (15,799 | ) | | (10,705 | ) |
| Total net book value | $ | 20,076 |
| | $ | 18,698 |
|
Depreciation expense for the years ended December 31, 2019, 2018 and 2017 was US$ 33.5 million, US$ 32.9 million and US$ 31.3 million, respectively.
The movement in the net book value of property, plant and equipment during the years ended December 31, 2019 and 2018 was comprised of:
|
| | | | | | | |
| | For The Year Ended December 31, |
| | 2019 |
| | 2018 |
|
| Opening balance | $ | 117,604 |
| | $ | 119,349 |
|
Additions (1) | 32,348 |
| | 36,737 |
|
| Disposals | (29 | ) | | (42 | ) |
| Depreciation | (33,536 | ) | | (32,933 | ) |
| Foreign currency movements | (2,486 | ) | | (5,507 | ) |
| Ending balance | $ | 113,901 |
| | $ | 117,604 |
|
(1) Includes assets acquired under finance leases. For additional information, see Note 11, "Leases"
9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities comprised the following at December 31, 2019 and December 31, 2018:
|
| | | | | | | |
| | December 31, 2019 |
| | December 31, 2018 |
|
| Accounts payable and accrued expenses | $ | 56,343 |
| | $ | 48,708 |
|
| Related party accounts payable | 267 |
| | 292 |
|
| Programming liabilities | 17,293 |
| | 16,072 |
|
| Related party programming liabilities | 10,553 |
| | 12,171 |
|
| Duties and other taxes payable | 9,426 |
| | 9,014 |
|
Accrued staff costs(1) | 24,027 |
| | 17,425 |
|
| Accrued interest payable | 2,104 |
| | 2,456 |
|
| Related party accrued interest payable (including Guarantee Fees) | 1,103 |
| | 1,749 |
|
| Income taxes payable | 10,304 |
| | 10,415 |
|
| Other accrued liabilities | 4,230 |
| | 2,166 |
|
| Total accounts payable and accrued liabilities | $ | 135,650 |
| | $ | 120,468 |
|
(1) Includes certain retention bonuses related to the proposed Merger agreed in 2019.
10. OTHER LIABILITIES
Other current and non-current liabilities comprised the following at December 31, 2019and December 31, 2018:
|
| | | | | | | |
| | December 31, 2019 |
| | December 31, 2018 |
|
| Current: | | | |
| Deferred revenue | $ | 9,451 |
| | $ | 9,906 |
|
| Legal provisions | 635 |
| | 1,978 |
|
| Operating lease liabilities (Note 11) | 3,203 |
| | — |
|
| Other | 226 |
| | 1,795 |
|
| Total other current liabilities | $ | 13,515 |
| | $ | 13,679 |
|
| | | | |
| | December 31, 2019 |
| | December 31, 2018 |
|
| Non-current: | |
| | |
|
| Deferred tax | $ | 21,294 |
| | $ | 22,545 |
|
| Derivative instruments (Note 12) | 12,670 |
| | 9,817 |
|
| Related party Guarantee Fee payable (Note 4) | 33,465 |
| | 33,465 |
|
| Operating lease liabilities (Note 11) | 8,434 |
| | — |
|
| Other | 4,137 |
| | 1,466 |
|
| Total other non-current liabilities | $ | 80,000 |
| | $ | 67,293 |
|
During the years ended December 31, 2019, 2018 and 2017, we recognized revenue of US$ 9.7 million, US$ 5.4 million and US$ 4.9 million which we had deferred as at December 31, 2018, 2017 and 2016, respectively.
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
11. LEASES
We enter into operating and finance leases for offices, production and related facilities, cars and certain equipment. Our leases have remaining lease terms up to ten years.
The components of lease cost for the year ended December 31, 2019 were as follows:
|
| | | |
| Operating lease cost: | |
| Short-term operating lease cost | $ | 6,046 |
|
| Long-term operating lease cost | 4,600 |
|
| Total operating lease cost | $ | 10,646 |
|
| | |
| Finance lease cost: | |
| Amortization of right-of-use asset | $ | 5,894 |
|
| Interest on lease liabilities | 355 |
|
| Total finance lease cost | $ | 6,249 |
|
The classification of cash flows related to our leases for the year ended December 31, 2019 was as follows:
|
| | | |
| Cash paid for amounts included in the measurement of lease liabilities: | |
| Operating cash flows from operating leases | $ | 4,432 |
|
| Operating cash flows from finance leases | 362 |
|
| Financing cash flows from finance leases | 7,097 |
|
| | |
| Right-of-use assets obtained in exchange for lease obligations: | |
| Operating leases | $ | 3,802 |
|
| Finance leases | 5,753 |
|
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
Our current and non-current assets and liabilities related to our leasing arrangements comprised the following at December 31, 2019: |
| | | |
| Operating Leases | |
| Operating lease right-of-use-assets, gross | $ | 15,396 |
|
| Accumulated amortization | (3,714 | ) |
| Operating lease right-of-use-assets, net | $ | 11,682 |
|
| | |
| Other current liabilities | $ | 3,203 |
|
| Other non-current liabilities | 8,434 |
|
| Total operating lease liabilities | $ | 11,637 |
|
| | |
| Finance Leases | |
| Property, plant and equipment, gross | $ | 35,875 |
|
| Accumulated depreciation | (15,799 | ) |
| Property, plant and equipment, net | $ | 20,076 |
|
| | |
| Current portion of long-term debt and other financing arrangements | $ | 6,836 |
|
| Long-term debt and other financing arrangements | 9,496 |
|
| Total finance lease liabilities | $ | 16,332 |
|
| | |
| Weighted Average Remaining Lease Term | Years |
|
| Operating leases | 4.9 |
|
| Finance leases | 2.7 |
|
| | |
| Weighted Average Discount Rate | Discount Rate |
|
| Operating leases | 4.7 | % |
| Finance leases | 2.1 | % |
Our lease liabilities had the following maturities at December 31, 2019: |
| | | | | | | |
| | Operating Leases |
| | Finance Leases |
|
| 2020 | $ | 3,659 |
| | $ | 7,109 |
|
| 2021 | 3,015 |
| | 5,645 |
|
| 2022 | 2,248 |
| | 2,914 |
|
| 2023 | 1,467 |
| | 1,137 |
|
| 2024 | 888 |
| | — |
|
| 2025 and thereafter | 1,859 |
| | — |
|
| Total undiscounted payments | 13,136 |
| | 16,805 |
|
| Less: amount representing interest | (1,499 | ) | | (473 | ) |
| Present value of net minimum lease payments | $ | 11,637 |
| | $ | 16,332 |
|
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 4, "Long-term Debt and Other Financing Arrangements".
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
Hedging Activities
Cash Flow Hedges of Interest Rate Risk
We are party to interest rate swap agreements to mitigate our exposure to interest rate fluctuations on the outstanding principal amount of the Euro Loans. These interest rate swaps provide us with variable-rate cash receipts in exchange for fixed-rate payments over the lives of the agreements, with no exchange of the underlying notional amount. These instruments are carried at fair value on our consolidated balance sheets as other current and other non-current liabilities based on their maturity.
We value the interest rate swap agreements using a valuation model which calculates the fair value on the basis of the net present value of the estimated future cash flows. The most significant input used in the valuation model is the expected EURIBOR-based yield curve. These instruments were allocated to Level 2 of the fair value hierarchy because the critical inputs to this model, including current interest rates, relevant yield curves and the known contractual terms of the instruments, were readily observable.
As at December 31, 2019, each instrument is fully designated as a cash flow hedge. All changes in the fair value of these instruments are recorded in accumulated other comprehensive income / loss and subsequently reclassified to interest expense when the hedged item affects earnings.
Information relating to financial instruments is as follows: |
| | | | | | | | | | | | | | | |
| Trade Date | | Number of Contracts |
| | Aggregate Notional Amount |
| | Maturity Date | | Objective | | Fair Value as at December 31, 2019 |
|
| April 26, 2018 | | 3 |
| | EUR | 60,335 |
| | November 1, 2021 | | Interest rate hedge underlying 2021 Euro Loan | | $ | (585 | ) |
| April 5, 2016 | | 5 |
| | EUR | 468,800 |
| | February 19, 2021 | | Interest rate hedge underlying 2023 Euro Loan | | $ | (1,672 | ) |
| April 26, 2018 | | 4 |
| | EUR | 468,800 |
| | April 26, 2023 | | Interest rate hedge underlying 2023 Euro Loan, forward starting on February 19, 2021 | | $ | (10,413 | ) |
Foreign Currency Risk
From time to time, we have entered into forward foreign exchange contracts to reduce our exposure to movements in foreign exchange rates related to contractual payments under certain dollar-denominated agreements. We had 0 such agreements outstanding during the year ended December 31, 2019.
Fair Value of Derivatives
The change in fair value of derivatives not recognized within accumulated other comprehensive income / loss comprised the following for the years ended December 31, 2019, 2018 and 2017:
|
| | | | | | | | | | | |
| | For The Year Ended December 31, |
| | 2019 |
| | 2018 |
| | 2017 |
|
| Loss on currency swaps | $ | — |
| | $ | — |
| | $ | (1,380 | ) |
| Loss on interest rate swaps | (201 | ) | | (1,715 | ) | | (403 | ) |
| Change in fair value of derivatives | $ | (201 | ) | | $ | (1,715 | ) | | $ | (1,783 | ) |
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 December 31, 2019 and 2018. The Series B Preferred Shares are held by Time Warner Media Holdings B.V. ("TW Investor"), a wholly owned subsidiary of AT&T. As at December 31, 2019 and 2018, the accreted value of the Series B Preferred Shares was US$ 269.4 million. The Series B Preferred Shares have a stated value of US$ 1,000 per share and no longer accrete subsequent to June 24, 2018. As of December 31, 2019, the 200,000 shares of Series B preferred stock were convertible into approximately 111.1 million shares of Class A common stock.
Pursuant to the Certificate of Designation of the Series B Preferred Shares, 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 December 31, 2019, but is subject to adjustment from time to time pursuant to customary weighted-average anti-dilution provisions with respect to our issuances of equity or equity-linked securities at a price below the then-applicable conversion price (excluding any securities issued under our benefit plans at or above fair market value). We have the right to redeem the Series B Preferred Shares in whole or in part upon 30 days' written notice. The redemption price of each outstanding Series B Preferred Share is equal to its accreted stated value plus accrued but unpaid dividends, if any, in each case as of the redemption date specified in the redemption notice. After receipt of a redemption notice, each holder of Series B Preferred Shares will have the right to convert, prior to the date of redemption, all or part of such Series B Preferred Shares to be redeemed by us into shares of our Class A common stock in accordance with the terms of conversion described above.
Holders of the Series B Preferred Shares have no voting rights on any matter presented to holders of any class of our capital stock, with the exception that they may vote with holders of shares of our Class A common stock (i) with respect to a change of control event or (ii) as provided by our Bye-laws or applicable Bermuda law. Holders of Series B Preferred Shares will participate in any dividends declared or paid on our Class A common stock on an as-converted basis. The Series B Preferred Shares will rank pari passu with our Series A Convertible Preferred Stock and senior to all other equity securities of the Company in respect of payment of dividends and distribution of assets upon liquidation. The Series B Preferred Shares have such other rights, powers and preferences as are set forth in the Certificate of Designation for the Series B Preferred Shares.
The Series B Preferred Shares are not considered a liability and the embedded conversion feature does not require bifurcation. The Series B Preferred Shares are classified outside of permanent equity at redemption value. For the years ended December 31, 2018 and 2017, we recognized accretion on the Series B Preferred Shares of US$ 4.8 million and US$ 9.7 million, respectively, with corresponding decreases in additional paid-in capital.
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
14. EQUITY
Preferred Stock
5,000,000 shares of Preferred Stock were authorized as at December 31, 2019 and 2018.
NaN share of Series A Convertible Preferred Stock (the "Series A Preferred Share") was issued and outstanding as at December 31, 2019 and 2018. Pursuant to the Certificate of Designation, 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 December 31, 2019 and 2018 (see Note 13, "Convertible Redeemable Preferred Shares"). As of December 31, 2019, the 200,000 Series B Preferred Shares were convertible into approximately 111.1 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 December 31, 2019 and 2018. The rights of the holders of Class A common stock and Class B common stock are identical except for voting rights. The shares of Class A common stock are entitled to one vote per share and the shares of Class B common stock are entitled to ten votes per share. Shares of Class B common stock are convertible into shares of Class A common stock on a 1-for-1 basis for no additional consideration and automatically convert into shares of Class A common stock on a one-for-one basis when the number of shares of Class B common stock is less than 10% of the total number of shares of common stock outstanding. Holders of each class of shares are entitled to receive dividends and upon liquidation or dissolution are entitled to receive all assets available for distribution to holders of our common stock. Under our Bye-laws, the holders of each class have no pre-emptive or other subscription rights and there are no redemption or sinking fund provisions with respect to such shares.
There were 253.6 million and 252.9 million shares of Class A common stock outstanding at December 31, 2019 and 2018, respectively, and 0 shares of Class B common stock outstanding at December 31, 2019 or 2018.
As at December 31, 2019, TW Investor owns 64% of the outstanding shares of Class A common stock. In connection with the exercise of warrants (described below) by Warner Media and TW Investor in April 2018, each of them issued standing proxies to the independent directors of the Company, pursuant to which they granted the independent directors the right to vote the approximately 100.9 million shares of Class A common stock received on the exercise of those warrants (the “Warrant Shares”) on all matters other than at any general meeting where the agenda includes a change in control transaction. In accordance with these proxies, the Warrant Shares will be voted in proportion to votes cast at such a general meeting of the Company, excluding such Warrant Shares. Warner Media and TW Investor have undertaken to maintain this proxy arrangement in effect until April 2020 and may at their option extend it for an additional year from that date. After giving effect to its ownership of the Series A Preferred Share, Warner Media has a 44.3% voting interest in the Company at any meeting where the Warrant Shares are voted pursuant to the standing proxies.
Accumulated Other Comprehensive Loss
The movement in accumulated other comprehensive loss during the years ended December 31, 2019, 2018 and 2017 comprised the following:
|
| | | | | | | | | | | |
| | For The Year Ended December 31, |
| | 2019 |
| | 2018 |
| | 2017 |
|
| BALANCE, beginning of year | $ | (216,650 | ) | | $ | (187,438 | ) | | $ | (243,988 | ) |
| | | | | | |
| Currency translation adjustment, net | | | | | |
| Balance, beginning of year | $ | (207,668 | ) | | $ | (184,256 | ) | | $ | (239,537 | ) |
Foreign exchange gain / (loss) on intercompany loans (1) | 2,519 |
| | (1,061 | ) | | 11,326 |
|
| Foreign exchange (loss) / gain on the Series B Preferred Shares | (5,129 | ) | | (12,527 | ) | | 33,444 |
|
| Currency translation adjustments | (3,677 | ) | | (9,824 | ) | | 10,511 |
|
| Balance, end of year | $ | (213,955 | ) | | $ | (207,668 | ) | | $ | (184,256 | ) |
| | | | | | |
| Unrealized loss on derivative instruments designated as hedging instruments | | | | | |
| Balance, beginning of year | $ | (8,982 | ) | | $ | (3,182 | ) | | $ | (4,451 | ) |
| Change in the fair value of hedging instruments | (5,870 | ) | | (9,455 | ) | | (1,942 | ) |
| Amounts reclassified from accumulated other comprehensive loss: | | | | | |
| Changes in fair value of hedging instruments reclassified to interest expense | 1,726 |
| | 2,220 |
| | 2,764 |
|
| Changes in fair value of hedging instruments reclassified to other non-operating expense, net | 165 |
| | 1,435 |
| | 447 |
|
| Balance, end of year | $ | (12,961 | ) | | $ | (8,982 | ) | | $ | (3,182 | ) |
| | | | | | |
| BALANCE, end of year | $ | (226,916 | ) | | $ | (216,650 | ) | | $ | (187,438 | ) |
| |
(1)
| Represents foreign exchange gains and losses on intercompany loans that are of a long-term investment nature which are reported in the same manner as translation adjustments. |
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
15. INTEREST EXPENSE
Interest expense comprised the following for the years ended December 31, 2019, 2018 and 2017:
|
| | | | | | | | | | | |
| | For The Year Ended December 31, |
| | 2019 |
| | 2018 |
| | 2017 |
|
| Interest on long-term debt and other financing arrangements | $ | 27,308 |
| | $ | 44,604 |
| | $ | 77,170 |
|
| Amortization of capitalized debt issuance costs | 3,386 |
| | 4,502 |
| | 6,018 |
|
| Total interest expense | $ | 30,694 |
| | $ | 49,106 |
| | $ | 83,188 |
|
We paid cash interest (including mandatory cash-pay Guarantee Fees) of US$ 26.7 million, US$ 43.4 millionandUS$47.2 million during the years ended December 31, 2019, 2018 and 2017, respectively.
16. OTHER NON-OPERATING INCOME / EXPENSE, NET
Other non-operating income / expense, net comprised the following for the years ended December 31, 2019, 2018 and 2017:
|
| | | | | | | | | | | |
| | For The Year Ended December 31, |
| | 2019 |
| | 2018 |
| | 2017 |
|
| Interest income | $ | 467 |
| | $ | 725 |
| | $ | 536 |
|
| Foreign currency exchange (loss) / gain, net | (2,376 | ) | | (2,691 | ) | | 17,761 |
|
| Change in fair value of derivatives (Note 12) | (201 | ) | | (1,715 | ) | | (1,783 | ) |
| Loss on extinguishment of debt | (340 | ) | | (415 | ) | | (101 | ) |
| Other income, net | 242 |
| | 508 |
| | 428 |
|
| Total other non-operating (expense) / income, net | $ | (2,208 | ) |
| $ | (3,588 | ) |
| $ | 16,841 |
|
17. STOCK-BASED COMPENSATION
Subsequent to the amendment approved at our Annual General Meeting on May 20, 2019, our 2015 Stock Incentive Plan (the "2015 Plan") has 16,000,000 shares of Class A common stock authorized for grants of stock options, restricted stock units ("RSU"), restricted stock and stock appreciation rights to employees and non-employee directors. Under the 2015 Plan, awards are made to employees and directors at the discretion of the Compensation Committee.
For the years ended December 31, 2019, 2018 and 2017, we recognized charges for stock-based compensation of US$ 4.2 million, US$ 7.1 million and US$ 4.4 million, respectively, presented as a component of selling, general and administrative expenses in our consolidated statements of operations and comprehensive income / loss. Stock-based compensation expense recognized during the year ended December 31, 2018 includes US$ 2.9 million related to the accelerated vesting of RSUs with performance conditions in accordance with the terms of the corresponding award agreement following the completion of sale of the Company's Croatian operations on July 31, 2018.
Stock Options
Grants of options allow the holders to purchase shares of Class A common stock at an exercise price, which is generally the market price prevailing at the date of the grant, with vesting between one and four years after the awards are granted. There was no option activity during the years ended December 31, 2019, 2018 and 2017. The summary of stock options outstanding as at December 31, 2019 and December 31, 2018 is presented below:
|
| | | | | | | | | | | | |
| | Shares |
| | Weighted Average Exercise Price per Share |
| | Weighted Average Remaining Contractual Term (years) | | Aggregate Intrinsic Value |
|
| Outstanding at December 31, 2018 | 2,011,392 |
| | $ | 2.32 |
| | 6.58 | | $ | 916 |
|
| Outstanding at December 31, 2019 | 2,011,392 |
| | $ | 2.32 |
| | 5.58 | | $ | 4,436 |
|
| Vested or expected to vest at December 31, 2019 | 2,011,392 |
| | $ | 2.32 |
| | 5.58 | | $ | 4,436 |
|
| Exercisable at December 31, 2019 | 1,908,544 |
| | $ | 2.32 |
| | 5.55 | | $ | 4,223 |
|
When options are vested, holders may exercise them at any time up to the maximum contractual life of the instrument which is specified in the option agreement. At December 31, 2019, the maximum life of options that were issued under the 2015 Plan was ten years. Upon providing the appropriate written notification, holders pay the exercise price and receive shares. Shares delivered in respect of stock options are newly issued shares.
The aggregate intrinsic value (the difference between the stock price on the last day of trading of the fourth quarter of 2019 and the exercise prices multiplied by the number of in-the-money options) represents the total intrinsic value that would have been received by the option holders had they exercised all in-the-money options as at December 31, 2019. This amount changes based on the fair value of our Class A common stock. All unvested stock options at December 31, 2019 will vest in March 2020.
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
Restricted Stock Units with Time-Based Vesting
Each RSU represents a right to receive one share of Class A common stock of the Company for each RSU that vests in accordance with a time-based vesting schedule, generally between one to four years from the date of grant. Holders of RSU awards are not entitled to receive cash dividend equivalents prior to the vesting of awards and are not entitled to vote shares underlying awards.
The following table summarizes information about unvested RSUs as at December 31, 2019:
|
| | | | | | |
| | Number of Shares / Units |
| | Weighted-Average Grant Date Fair Value |
|
| Unvested at December 31, 2018 | 1,996,355 |
| | $ | 3.68 |
|
| Granted | 1,191,586 |
| | 3.57 |
|
| Vested | (855,260 | ) | | 3.49 |
|
| Unvested at December 31, 2019 | 2,332,681 |
| | $ | 3.69 |
|
The intrinsic value of unvested RSUs was US$ 10.6 million as at December 31, 2019. Total unrecognized compensation cost related to unvested RSUs as at December 31, 2019 was US$ 5.9 million and is expected to be recognized over a weighted-average period of 2.2 years.
Restricted Stock Units with Performance Conditions
Each RSU with performance conditions (“PRSU”) represents a right to receive one share of Class A common stock of the Company for each PRSU that vests in accordance with a performance-based vesting schedule. The performance-based vesting schedule sets forth specified objectives for unlevered free cash flow and OIBDA over defined periods and by defined dates. Holders of PRSU awards are not entitled to receive cash dividend equivalents prior to the vesting of awards and are not entitled to vote shares underlying awards.
On December 4, 2018, the 2018 PRSU Award was granted with unlevered free cash flow and OIBDA targets corresponding to two, three and four-year performance periods ended December 31, 2020, 2021 and 2022, respectively. The maximum achievement under the 2018 PRSU Award is 200% of the shares allotted to the corresponding target. At December 31, 2019 and 2018, there were 501,572 unvested shares with a weighted-average grant date fair value of US$ 3.19. There were no new awards granted or vested and we recognized US$ 0.2 million of related compensation cost during the year ended December 31, 2019 in respect of performance targets considered probable of being achieved.
The intrinsic value of unvested PRSUs was US$ 2.3 million as at December 31, 2019. Total unrecognized compensation cost related to unvested PRSUs as at December 31, 2019 was US$ 1.4 million of which US$ 0.2 million is related to performance targets currently considered probable of being achieved and will be recognized over a period of 1.2 years.
18. INCOME TAXES
As our investments are predominantly owned by Dutch holding companies, the components of the provision for income taxes and of the income / (loss) before tax have been analyzed between their Netherlands and non-Netherlands components. Similarly, the Dutch corporate income tax rates have been used in the reconciliation of income taxes.
Income from continuing operations before income taxes
The Netherlands and non-Netherlands components of income from continuing operations before income taxes are:
|
| | | | | | | | | | | |
| | For The Year Ended December 31, |
| | 2019 |
| | 2018 |
| | 2017 |
|
| Domestic | $ | (19,557 | ) | | $ | (38,434 | ) | | $ | (50,344 | ) |
| Foreign | 173,991 |
| | 163,327 |
| | 123,911 |
|
| Total | $ | 154,434 |
| | $ | 124,893 |
| | $ | 73,567 |
|
Total tax provision for the years ended December 31, 2019, 2018 and 2017 was allocated as follows:
|
| | | | | | | | | | | |
| | For The Year Ended December 31, |
| | 2019 |
| | 2018 |
| | 2017 |
|
| Income tax provision from continuing operations | $ | (35,226 | ) | | $ | (27,828 | ) | | $ | (22,504 | ) |
| Income tax provision from discontinued operations | — |
| | (1,423 | ) | | (1,226 | ) |
| Total tax provision | $ | (35,226 | ) | | $ | (29,251 | ) | | $ | (23,730 | ) |
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
Provision for Income Taxes
The Netherlands and non-Netherlands components of the provision for income taxes from continuing operations consist of:
|
| | | | | | | | | | | |
| | For The Year Ended December 31, |
| | 2019 |
| | 2018 |
| | 2017 |
|
| Current income tax provision: | | | | | |
| Domestic | $ | — |
| | $ | — |
| | $ | — |
|
| Foreign | (35,973 | ) | | (25,308 | ) | | (22,273 | ) |
| | (35,973 | ) | | (25,308 | ) | | (22,273 | ) |
| Deferred tax provision: | | | | | |
| Domestic | — |
| | — |
| | — |
|
| Foreign | 747 |
| | (2,520 | ) | | (231 | ) |
| | 747 |
| | (2,520 | ) | | (231 | ) |
| Provision for income taxes | $ | (35,226 | ) | | $ | (27,828 | ) | | $ | (22,504 | ) |
Reconciliation of Effective Income Tax Rate
The following is a reconciliation of income taxes, calculated at statutory Netherlands rates, to the provision for income taxes included in the accompanying consolidated statements of operations and comprehensive income / loss for the years ended December 31, 2019, 2018 and 2017:
|
| | | | | | | | | | | |
| | For The Year Ended December 31, |
| | 2019 |
| | 2018 |
| | 2017 |
|
| Income taxes at Netherlands rates (25%) | $ | (38,596 | ) | | $ | (31,206 | ) | | $ | (18,378 | ) |
| Jurisdictional differences in tax rates | 7,863 |
| | 10,384 |
| | 7,303 |
|
| Non-deductible interest | — |
| | (2,455 | ) | | (248 | ) |
| Losses expired | (12,196 | ) | | (7,111 | ) | | (7,583 | ) |
Change in valuation allowance (1) | 3,139 |
| | 26,042 |
| | (6,242 | ) |
| Unrecognized tax benefits | — |
| | 1,077 |
| | — |
|
Effect of change in tax rate (1) | 5,000 |
| | (21,982 | ) | | — |
|
| Non-deductible expenses | (872 | ) | | (879 | ) | | 207 |
|
| Other | 436 |
| | (1,698 | ) | | 2,437 |
|
| Provision for income taxes | $ | (35,226 | ) | | $ | (27,828 | ) | | $ | (22,504 | ) |
| |
(1)
| The effect of change in tax rate in 2019 and 2018 is the impact of tax rates enacted in the Netherlands on the tax benefit of loss carry-forwards. |
In 2017, the net provision for income taxes was more than the provision computed at statutory tax rates primarily due to losses on which no tax benefit has been received.
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
Components of Deferred Tax Assets and Liabilities
The following table shows the significant components included in deferred income taxes as at December 31, 2019 and 2018:
|
| | | | | | | |
| | December 31, 2019 |
| | December 31, 2018 |
|
| Assets: | | | |
| Tax benefit of loss carry-forwards and other tax credits | $ | 92,895 |
| | $ | 103,468 |
|
| Programming rights | 2,510 |
| | 2,211 |
|
| Property, plant and equipment | 2,989 |
| | 3,088 |
|
| Accrued expenses | 4,607 |
| | 3,922 |
|
| Other | 7,101 |
| | 2,997 |
|
| Gross deferred tax assets | 110,102 |
| | 115,686 |
|
| Valuation allowance | (98,915 | ) | | (103,126 | ) |
| Net deferred tax assets | $ | 11,187 |
| | $ | 12,560 |
|
| | | | |
| Liabilities: | | | |
| Broadcast licenses, trademarks and customer relationships | $ | (20,156 | ) | | $ | (21,979 | ) |
| Property, plant and equipment | (542 | ) | | (293 | ) |
| Programming rights | (4,491 | ) | | (5,123 | ) |
| Tax payable on potential distribution of reserves | (5,031 | ) | | (4,379 | ) |
| Other | — |
| | (920 | ) |
| Total deferred tax liabilities | (30,220 | ) | | (32,694 | ) |
| Net deferred income tax liability | $ | (19,033 | ) | | $ | (20,134 | ) |
Deferred tax is recognized on the consolidated balance sheet as follows:
|
| | | | | | | |
| | December 31, 2019 |
| | December 31, 2018 |
|
| Net non-current deferred tax assets | $ | 2,261 |
| | $ | 2,411 |
|
| Net non-current deferred tax liabilities | (21,294 | ) | | (22,545 | ) |
| Net deferred income tax liability | $ | (19,033 | ) | | $ | (20,134 | ) |
We provided a valuation allowance against potential deferred tax assets of US$ 98.9 million and US$ 103.1 million as at December 31, 2019 and 2018, respectively, since it has been determined by management, based on the weight of all available evidence, that it is more likely than not that the benefits associated with these assets will not be realized.
During 2019 and 2018, we had the following movements on valuation allowances:
|
| | | |
| Balance at December 31, 2017 | $ | 133,477 |
|
| Created during the period | 100 |
|
| Utilized | (26,142 | ) |
| Foreign exchange | (5,569 | ) |
| Other | 1,260 |
|
| Balance at December 31, 2018 | 103,126 |
|
| Created during the period | 3,773 |
|
| Utilized | (6,912 | ) |
| Foreign exchange | (1,936 | ) |
| Other | 864 |
|
| Balance at December 31, 2019 | $ | 98,915 |
|
As of December 31, 2019 we had operating loss carry-forwards that will expire in the following periods:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 |
| | 2021 |
| | 2022 |
| | 2023 |
| | 2024-27 |
| | Indefinite |
|
| The Netherlands | $ | 47,688 |
| | $ | 50,014 |
| | $ | 53,674 |
| | $ | 57,042 |
| | $ | 209,378 |
| | $ | — |
|
| Slovenia | — |
| | — |
| | — |
| | — |
| | — |
| | 9,810 |
|
| United Kingdom | — |
| | — |
| | — |
| | — |
| | — |
| | 1,960 |
|
| Total | $ | 47,688 |
| | $ | 50,014 |
| | $ | 53,674 |
| | $ | 57,042 |
| | $ | 209,378 |
| | $ | 11,770 |
|
The losses are subject to examination by the tax authorities and to restriction on their utilization. In particular, the losses can only be utilized against profits arising in the legal entity in which they arose. The utilization of the losses may also be restricted following a change of business activity.
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
We have provided valuation allowances against substantially all of the above loss carry-forwards.
As at December 31, 2019 and 2018, we had 0 permanently reinvested earnings in subsidiaries giving rise to a temporary difference.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
| | | |
| Balance at December 31, 2017 | $ | 1,052 |
|
| Settlement | (1,077 | ) |
| Foreign exchange | 25 |
|
| Balance at December 31, 2018 | $ | — |
|
We do not have any unrecognized tax benefits activity during the year ended December 31, 2019 and do not anticipate a material increase or decrease in unrecognized tax benefits within the next 12 months.
Our subsidiaries file income tax returns in the Netherlands and various other tax jurisdictions. As at December 31, 2019, our subsidiaries are generally no longer subject to income tax examinations for years before:
|
| |
Tax Jurisdiction | Year |
Bulgaria | 2015 |
Czech Republic | 2012 |
The Netherlands | 2018 |
Romania | 2014 |
Slovak Republic | 2012 |
Slovenia | 2014 |
United Kingdom | 2018 |
We recognize, when applicable, both accrued interest and penalties related to unrecognized tax benefits in income tax expense in the accompanying consolidated statements of operations and comprehensive income / loss. There were 0 significant interest or penalties accrued in the years ended December 31, 2019, 2018 and 2017.
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
19. 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 the Series B Preferred Shares and the income allocated to these shares by the weighted-average number of common shares outstanding during the period. Diluted net income / loss per share is computed by dividing the adjusted net income by the weighted-average number of dilutive shares outstanding during the period after adjusting for the impact of those dilutive shares on the allocation of income to the Series B Preferred Shares.
The components of basic and diluted earnings per share are as follows:
|
| | | | | | | | | | | |
| | For The Year Ended December 31, |
| | 2019 |
| | 2018 |
| | 2017 |
|
| Income from continuing operations | $ | 119,208 |
| | $ | 97,065 |
| | $ | 51,063 |
|
| Net (income) / loss attributable to noncontrolling interests | (74 | ) | | 79 |
| | 341 |
|
| Less: preferred share accretion paid in kind (Note 13) | — |
| | (4,777 | ) | | (9,694 | ) |
| Less: income allocated to Series B Preferred Shares | (35,237 | ) | | (29,956 | ) | | (16,994 | ) |
| Income / (loss) from continuing operations available to common shareholders, net of noncontrolling interest | 83,897 |
| | 62,411 |
| | 24,716 |
|
| Income / (loss) from discontinued operations, net of tax | — |
| | 60,548 |
| | (1,636 | ) |
| Less: (income) / loss allocated to Series B Preferred Shares | — |
| | (19,637 | ) | | 667 |
|
| Net income attributable to CME Ltd. available to common shareholders — basic | 83,897 |
| | 103,322 |
| | 23,747 |
|
| | | | | | |
| Effect of dilutive securities | | | | | |
| Dilutive effect of employee stock options, RSUs and common stock warrants | 148 |
| | 3,653 |
| | 3,829 |
|
| Net income attributable to CME Ltd. available to common shareholders — diluted | $ | 84,045 |
| | $ | 106,975 |
| | $ | 27,576 |
|
| | | | | | |
Weighted average outstanding shares of common stock — basic (1) | 264,611 |
| | 230,562 |
| | 155,846 |
|
| Dilutive effect of employee stock awards and common stock warrants | 1,587 |
| | 27,132 |
| | 80,558 |
|
| Weighted average outstanding shares of common stock — diluted | 266,198 |
| | 257,694 |
| | 236,404 |
|
| | | | | | |
| Net income / (loss) per share: | | | | | |
| Continuing operations — basic | $ | 0.32 |
| | $ | 0.27 |
| | $ | 0.16 |
|
| Continuing operations — diluted | 0.32 |
| | 0.25 |
| | 0.12 |
|
| Discontinued operations — basic | — |
| | 0.18 |
| | (0.01 | ) |
| Discontinued operations — diluted | — |
| | 0.17 |
| | 0.00 |
|
| Attributable to CME Ltd. — basic | 0.32 |
| | 0.45 |
| | 0.15 |
|
| Attributable to CME Ltd. — diluted | 0.32 |
| | 0.42 |
| | 0.12 |
|
| |
(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 rights of the Series A Preferred Share are considered substantially similar to that of our Class A common stock. |
Weighted-average, equity awards and convertible shares are excluded from the calculation of diluted earnings per share if their effect would be anti-dilutive. The following instruments were anti-dilutive for the periods presented, but may be dilutive in future periods:
|
| | | | | | | | |
| | For The Year Ended December 31, |
| | 2019 |
| | 2018 |
| | 2017 |
|
| RSUs | 376 |
| | 1,506 |
| | 144 |
|
| Total | 376 |
| | 1,506 |
| | 144 |
|
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 CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
20. SEGMENT DATA
We manage our business on a geographical basis, with 5 operating segments: Bulgaria, the Czech Republic, Romania, the Slovak Republic and Slovenia, which are also our reportable segments and our main operating countries. These segments reflect how CME Ltd.’s operating performance is evaluated by our chief operating decision makers, who we have identified as our co-Chief Executive Officers; how operations are managed by segment managers; and the structure of our internal financial reporting.
Our segments generate revenues primarily from the sale of advertising and sponsorship on our channels and digital properties. This is supplemented by revenues from cable and satellite television service providers that carry our channels on their platforms and from revenues through the sale of distribution rights to third parties. We do not rely on any single major customer or group of major customers. Intersegment revenues and profits have been eliminated in consolidation.
We evaluate our consolidated results and the performance of our segments based on net revenues and OIBDA (as defined below). We believe OIBDA is useful to investors because it provides a meaningful representation of our performance as it excludes certain items that either do not impact our cash flows or do not impact the operating results of our operations. OIBDA is also used as a component in determining management bonuses.
OIBDA includes amortization and impairment of program rights and is calculated as operating income / loss before depreciation, amortization of intangible assets impairmentsand impairment of assets and certain unusual or infrequent items that are not considered by our chief operating decision makers when evaluating our performance. For a quantitative reconciliation of non-GAAP financial measures to the most directly comparable financial measurements in accordance with GAAP, see Part II, Item 8, Note 20 to the financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2019.
Below2 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 excludes the cash impact of certain unusual or infrequent items that are tables showingnot included in costs charged in arriving at OIBDA in our financial statements because they are not considered by our chief operating decision makers when evaluating our performance. Unlevered free cash flow is free cash flow before the payment of interest and commitment and guarantee fees on our senior debt.
Key Operating Performance Achievements in 2019
The Company's successful effort to control costs while continuing to increase net revenues resulted in an increase in another increase in OIBDA year-on-year, by 11% at actual rates.
In addition to the sustained improvements in OIBDA, the Company has made significant progress in reducing its indebtedness.
Accelerating Deleveraging
Beginning in 2018, the Company took a number of steps to pay down a significant portion of its long-term debt and related interest and guarantee fees in order to achieve a significant reduction in its indebtedness and cost of borrowing.
On January 31, 2019, and June 14, 2019, we repaid EUR 60.0 million (approximately US$ 68.9 million at January 31, 2019 rates) and EUR 40.0 million (approximately US$ 45.1 million at June 14, 2019 rates), respectively, of the outstanding principal amount of the 2021 Euro Loan. On September 23, 2019, we paid a further EUR 50.0 million (approximately US$ 54.9 million at September 23, 2019 rates) of the outstanding principal amount of the 2021 Euro Loan. The current outstanding principal amount on this loan of EUR 60.3 million (approximately US$ 67.8 million) represents the Company’s nearest maturity, in November 2021.
As a result of these repayments, the Company reduced the amount of senior long-term debt by more than 25%. As at December 31, 2019, the Company’s aggregate principal amount of senior debt outstanding was approximately US$ 590 million, compared to approximately US$780 million as at December 31, 2018 and US$ 1.1 billion as at December 31, 2017.
|
| | | | | | | | | | | | | |
| | Q4 2016 | Q1 2017 | Q2 2017 | Q3 2017 | Q4 2017 | Q1 2018 | Q2 2018 | Q3 2018 | Q4 2018 | Q1 2019 | Q2 2019 | Q3 2019 | Q4 2019 |
| Weighted average costs of borrowing | 8.8% | 7.3% | 7.3% | 6.0% | 6.0% | 5.0% | 4.1% | 3.5% | 3.5% | 3.6% | 3.4% | 3.4% | 3.4% |
Gross debt (including related payables) (in US$ millions) | 1,051 | 1,065 | 1,150 | 1,128 | 1,155 | 1,123 | 943 | 821 | 812 | 730 | 694 | 611 | 628 |
The reduced leverage has resulted in an average cost of borrowing of 3.4% on the Company’s senior debt. Additionally, the Company’s continued improvements in financial performance and debt reduction contributed to a reduction in the Company’s net leverage ratio (as determined under the Reimbursement Agreement) to 2.4 times at the end of 2018, down from 3.5 times at the end of 2018 and 10.0 times at the end of 2014.
The Company's results in 2019 reflected continued success in the execution of its strategy.
Elements of Annual Compensation
The Compensation Committee reviews the Company’s executive compensation programs, covering Named Executive Officers and other members of senior management, on a regular basis. The annual compensation programs consist principally of base salary, an annual non-equity incentive award and long-term incentives, as set out below.
Base Salary
Salary levels for each of our Named Executive Officers are approved by the Compensation Committee and set out in their employment agreements. Employment agreements are customary for all employees in the countries in which we operate. Key considerations in establishing base salary levels and any increases include the overall level of responsibility of a given Named Executive Officer; the importance of the role; the experience, expertise and specific performance of the individual; the general financial performance of the Company; the general economic environment, and in the case of the co-Chief Executive Officers, compensation levels of similarly positioned executives at peer group companies. The Compensation Committee reviews these salary levels each year to determine whether any adjustment is appropriate.
Annual Non-equity Incentive Plans
Executives, managers and other key employees are eligible to earn annual non-equity incentive awards under their employment agreements or in accordance with the Company’s compensation practices and guidelines. Award opportunities vary by position and level in the organization. Annual non-equity incentive plan award targets for management generally consist of quantitative targets based on the Company’s financial performance goals and qualitative individual performance targets. The split between the financial targets and individual performance targets varies based on the role and level of seniority of an employee in the Company, with specific targets and weightings intended to correlate with the role or responsibilities of the relevant member of management.
Targets for the co-Chief Executive Officers are set by the Compensation Committee, and targets for the remaining Named Executive Officers are set by the co-Chief Executive Officers and recommended to the Compensation Committee for approval. In setting targets, the Compensation Committee’s approach is intended to have the Named Executive Officers be accountable for both the overall performance of the business and individual areas of responsibility in respect of key strategic or operational goals of the Company. In view of the Company’s capital structure, historically high levels of indebtedness and deleveraging strategy, the Compensation Committee has used OIBDA and unlevered free cash flow as key financial metrics for measuring management’s performance; they are among the key measures the Company uses to evaluate its performance on a Company-wide basis. Unlevered free cash flow is measured as free cash flow before the payment of interest or guarantee fees on the Company’s senior debt. Following repricing of the Company’s guarantee fees in March 2017 and April 2018, the Company pays all interest and related guarantee fees on its outstanding indebtedness in cash. In addition, the Company has used cash generated by the business to pay certain commitment and guarantee fees that were previously paid in kind. These cash payments are all reflected in free cash flow; accordingly, unlevered free cash flow best illustrates the cash generated by the Company’s operations.
The target non-equity incentive plan award Named Executive Officers are eligible to earn is equal to 100% of base salary. In addition, Named Executive Officers have the opportunity to earn up to 200% of base salary for exceeding target levels within a specified range. They are not entitled to earn any non-equity incentive compensation if specified threshold levels are not achieved. The target, maximum and threshold levels for 2019 are set out in “2019 Compensation Decisions - Annual Non-equity Incentive Plan Targets” below.
While performance targets form the basis for awarding non-equity incentive plan compensation, the Compensation Committee believes that judgment is also an important factor and the Compensation Committee can exercise discretion in determining awards. Accordingly, the Compensation Committee may take factors such as unexpected macroeconomic events or the impact of significant changes in strategy into consideration and may reasonably determine ranges or absolute numbers above or below which awards may be earned in respect of specific performance targets. The Compensation Committee may also award discretionary bonuses or establish other performance criteria for purposes of creating incentives for the achievement of specific objectives in addition to the annual incentive plans. The Compensation Committee did not award any discretionary bonuses to Named Executive Officers in 2019 and has not made any such discretionary bonus awards since 2013.
Long-Term Equity Incentive Programs
Long-term equity incentives are an important element of the Company’s compensation programs. They are the most effective way to link the interests of management and shareholders, and to incentivize management to strive for shareholder value creation. Prior to the Company’s entering into the Merger Agreement, the Compensation Committee, which administers the Company's 2015 Stock Incentive Plan, reviewed and approved annual grants of equity incentive awards to the Named Executive Officers as well as other senior employees. Such awards include time-based restricted stock units and performance-based restricted stock units (and previously included options). The types of awards granted and the levels have been determined on the basis of an individual’s position in the organization and reflect a number of other considerations, including the role the individual plays in setting and achieving long-term company goals, the overall dilution represented by equity grants and the cost of such grants as reflected in our financial statements.
The Compensation Committee has used time-based restricted stock units, which expose recipients to downside price risk, as the principal long-term incentive award. Beginning in 2015, the Compensation Committee introduced changes to the mix of long-term equity incentives awarded to Named Executive Officers under the Company's 2015 Stock Incentive Plan to include performance-based restricted stock units, initially pursuant to the 2015 LTIP (defined below) and currently pursuant to the 2019 LTIP (defined below).
The Compensation Committee’s first multi-year performance-based incentive program was implemented in 2015 (the “2015 LTIP”); and following the early termination of the 2015 LTIP on the completion of the sale of the Company’s Croatian operations in 2018, the Compensation Committee adopted a new multi-year performance-based incentive program (the “2019 LTIP”) and granted awards having similar vesting terms and conditions as the 2015 LTIP.
Under the 2019 LTIP, Named Executive Officers received a one-time award of performance-based restricted stock units. The corresponding award agreements provide for the vesting of those performance-based restricted stock units for the achievement of specified financial targets (OIBDA and unlevered free cash flow). 50% of the award can be earned for achieving a cumulative four-year OIBDA target and 50% for achieving a cumulative four-year unlevered free cash flow (UFCF) target, in each case measured at constant currency rate set in the Company’s 2019 budget.
The total assets, capital expenditurespayout opportunity ranges between 0% and long-lived assets200% of the target award of performance-based restricted stock units for the achievement of cumulative OIBDA and unlevered free cash flow targets over the four-year performance period. Accordingly, if the actual cumulative OIBDA and the cumulative UFCF of the Company equals or exceeds the top end of the cumulative OIBDA target and the cumulative UFCF target ranges set in the 2019 LTIP over the measurement period, then participating employees would receive 200% of the target award. If the actual cumulative OIBDA or the cumulative UFCF of the Company is below the bottom end of the cumulative OIBDA target and the cumulative UFCF target ranges set in the 2019 LTIP, then none of the PRSUs would be earned in respect of that target. The payout opportunity for the achievement of results between the target and the maximum or the threshold is measured on a straight-line basis. In addition, Named Executive Officers have the opportunity to earn 25% of the target award following the second anniversary of the grant if a cumulative two-year target for both OIBDA and unlevered free cash flow are reached, and to earn 25% of the target award after the third anniversary of the grant if a cumulative three-year target for both OIBDA and unlevered free cash flow are reached. Any portion of the target award earned following the second or third anniversary is netted off any award earned at the end of the performance period.
In the event of the early termination of an LTIP, including as a result of a change of control such as the Merger, the cumulative OIBDA and unlevered cash flow achieved is measured on the basis of the actual results for each completed fiscal year and the target amount of OIBDA or unlevered free cash flow for any uncompleted fiscal year.
Use of Peer Group Companies
The Compensation Committee gives consideration to a peer group of companies when making certain decisions regarding compensation. The peer group may be used as an input for such compensation elements as base salary, equity incentives (including performance-based awards) and total direct compensation as well as to benchmark the competitiveness of the Company’s compensation plans.
The current peer group was developed in 2017 with independent compensation consultant Clearbridge Compensation Group ("Clearbridge") and senior management of the Company. The Compensation Committee sought the assistance of Clearbridge in adapting the peer group in light of the improved financial position of the Company and changes in the composition of the peer group then used by the Company. The current peer group consists of publicly traded companies primarily in the U.S. and Europe and was generally developed on the basis of the following selection criteria: (i) companies in industries or businesses similar to the Company and (ii) companies having a comparable size as the Company (based primarily on revenues and enterprise value). No changes were made to the peer group in 2019 other than the substitution of Nordic Entertainment Group AB for Modern Times Group MTG AG following the split of Nordic Entertainment Group from MTG and the exclusion of Tribune Media Company, which was acquired by Nexstar Media Group Inc.
The following companies comprise the peer group:
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| | |
| Nexstar Media Group Inc. | The E.W. Scripps Company | Nordic Entertainment Group AB |
| Outfront Media Inc. | MSG Networks Inc. | Metropole Television S.A. |
| National CineMedia Inc. | Urban One Inc. | Atresmedia Corporación |
| Lamar Advertising Company | Entercom Communications Corp. | Mediaset Espana Communicacion, S.A. |
| Entravision Communications Corporation | Gray Television Inc. | |
In view of the fact that the Company has co-Chief Executive Officers, the Compensation Committee generally evaluates the compensation of each of them against the average compensation of the chief executive officer and the second highest paid executive of the peer group. Subsequent to a review conducted in 2017, the Compensation Committee determined the amount of long-term incentive plan compensation to be awarded to the co-Chief Executive Officers with regard for the median level of the average total direct compensation of the chief executive officer and second highest paid executive officer of the peer group of companies.
2019 Compensation Decisions
Overview
Set out below are the Compensation Committee’s key decisions for 2019 regarding compensation for the Named Executive Officers, including both decisions made as part of the annual review of the Company’s executive compensation programs and those made in connection with the Merger.
Annual Compensation Decisions
The Company’s regular compensation programs for Named Executive Officers provide for a higher proportion of variable compensation, including equity-based compensation, in total direct compensation. Such compensation, which is at-risk by being tied to performance, is intended to more closely align the interests of management and the shareholders and incentivize management toward achieving the performance goals of the Company and creating long-term value for shareholders.
We believe the financial results in 2019, as reflected in significant OIBDA growth and margin expansion and effective management of costs, affirm the Company’s ability to execute on its operating strategy. Significant free cash flow generation has allowed the Company to make further progress in reducing overall leverage and average cost of borrowing and significantly improve its balance sheet.
In 2019, variable compensation represented 75% of total direct compensation of our co-Chief Executive Officers in 2019 (adjusted as described below):
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| | |
| (a) | | Annual Base Salary |
| | |
| (b) | | Annual Non-Equity Incentive Award |
| | |
| (c) | | Equity-based Awards (1) |
| | |
(1) Includes a pro-rated portion of the target amount of performance-based restricted stock units under the 2019 LTIP (described above under “Elements of Compensation - Long-Term Equity Incentive Program”). Does not include the retention award under the retention award program implemented in connection with the Merger or the cash awards under the cash award agreement entered into in December 2019 (described below under “2019 Compensation Decisions - “Merger-related Compensation Decisions”.
Annual Base Salary
The Compensation Committee approved increases of 3% in the base salary of Named Executive Officers with effect from January 1, 2019.
After giving effect to the other adjustments described in the graph above, base salaries on average accounted for 26% of the total direct compensation of our Named Executive Officers in 2019. (Total direct compensation consists of base salary, non-equity incentive plan awards and annual equity incentives based on the grant value.)
Annual Non-equity Incentive Plan Targets
In 2019, each Named Executive Officer was entitled to earn 75% of his non-equity incentive plan award for the achievement of quantitative financial targets based on the Company’s performance and 25% for the achievement of qualitative targets tied to individual performance. The quantitative targets consisted of Consolidated Budgeted OIBDA3 of US$ 242.2 million (with a weighting of 50%) and Budgeted Unlevered Free Cash Flow4 of US$ 166.7 million (with a weighting of 25%). Individual qualitative targets are based on achieving specific annual objectives, including business goals, completion of strategic initiatives, communications, and organizational and employee development.
Each of the Named Executive Officers was entitled to earn an award equal to 100% of target for the achievement of Consolidated Budgeted OIBDA, Budgeted Unlevered Free Cash Flow and individual performance targets, with the total opportunity to earn a non-equity incentive plan award ranging of between 0% and 200% of their annual base salary. If Consolidated Actual OIBDA5 reached US$ 252.2 million and Actual Unlevered Free Cash Flow6 reached US$ 176.7 million, each Named Executive Officer was entitled to earn an award of 200% of annual base salary. No Named Executive Officer was entitled to earn any amount in respect of Consolidated Budgeted OIBDA in the event Consolidated Actual OIBDA was less than US$ 232.2 million or in respect of Budgeted Unlevered Free Cash Flow in the event Actual Unlevered Free Cash Flow was less than US$ 156.7 million.
2019 Non-equity Incentive Plan Awards
Each of the co-Chief Executive Officers earned a non-equity incentive plan award for 2019 of US$ 1.9 million. The Company achieved Consolidated Actual OIBDA of US$ 268.0 million and Actual Unlevered Free Cash Flow of US$ 192.0 million,which exceeded the upper end of the range for earning a non-equity incentive plan award.7 The Compensation Committee determined that the individual performance targets had been achieved. In addition to considering the co-Chief Executive Officers’ roles in connection with the strategic review, the negotiation of the Merger Agreement and actions following the entry into the Merger Agreement, the Compensation Committee considered the individual accomplishments during 2019 that helped the Company make progress on its long-term strategic objectives, including the achievement of operating performance targets in the face of significant competition, further diversification of revenues through improved pricing in carriage fees and an expansion in the Company’s online offerings, successful implementation of cost savings and effectively controlling costs, and the utilization of strong cash flow generation for the repayment of approximately US$ 170.0 million of gross debt.
The Chief Financial Officer earned a non-equity incentive plan award for 2019 of US$ 1.2 million. The Company achieved the Consolidated Actual OIBDA and Actual Unlevered Free Cash Flow set out above, which exceeded the upper end of the range for earning a non-equity incentive plan award. The Compensation Committee determined that the individual performance targets had been achieved. The Compensation Committee considered the achievement of individual performance targets, which included playing a key role in the preparation and conduct of the strategic review that resulted in the proposed Merger, maintaining successful oversight of the Company’s financial reporting obligations and audit processes, contributing to the Company’s successful effort to further reduce its senior indebtedness and the Company’s leverage ratio, and introducing further improvements to the Company’s financial systems and processes for better budgeting and planning performance.
The General Counsel earned a non-equity incentive plan award for 2019 of US$ 1.2 million. The Company achieved the Consolidated Actual OIBDA and Actual Unlevered Free Cash Flow set out above, which exceeded the upper end of the range for earning a non-equity incentive plan award. The Compensation Committee also determined that the individual performance targets had been achieved, which included leading a team of internal and external legal counsel in the launch and conduct of the strategic review and negotiation of the Merger Agreement, providing effective advice to the co-Chief Executive Officers, the Board and its committees on the strategic review and its review and approval of the Merger as well as a number of related legal issues for the Company, overseeing the preparation of the proxy statement and convening of a special general meeting of the Company to approve the Merger, providing advice and assistance with respect to corporate, compliance and regulatory matters, and overseeing the internal compliance program, including to address relevant legislative and regulatory developments.
The Compensation Committee measured the achievement of financial targets against the results delivered by the Company in respect of such targets for 2019, translated at exchange rates used in the Company’s 2019 budget in order to exclude the impact of exchange rate movements on internal performance targets. We use this approach because we believe that incentive targets should measure the underlying results of the business and management should be encouraged to make decisions that drive long-term value creation rather than to address short-term currency fluctuations or short-term non-recurring items. The Compensation Committee measured the achievement of individual performance targets against actual performance of the business or based on Board-level assessments of the co-Chief Executive Officers and self-assessments by the other Named Executive Officer that are reviewed by the co-Chief Executive Officers, who make recommendations to the Compensation Committee.
After giving effect to the adjustments described in the graph above, non-equity incentive plan awards on average accounted for 51% of the total direct compensation of our Named Executive Officers in 2019.
Long-Term Equity Incentive Awards
The Compensation Committee elected to award time-based and performance-based restricted stock units to Named Executive Officers in 2019. These awards are consistent with the Compensation Committee’s objective of having a meaningful proportion of total compensation consist of equity-based compensation, which is designed to better align the interests of management with shareholders. The dates and values of the equity grants to Named Executive Officers are included in the “Grants of Plan-Based Awards” table below. Fifteen other employees were awarded time-based restricted stock units. The time-based awards vest in four equal instalments on each anniversary of the grant date.
At the end of 2018, the Compensation Committee adopted the 2019 LTIP (see “Elements of Compensation - Long-Term Equity Incentive Programs”). The Named Executive Officers were granted performance-based awards under the 2019 LTIP with vesting based on achieving four -year OIBDA and unlevered free cash flow targets beginning with the 2019 fiscal year. The dates and target values of these grants to Named Executive Officers are included in the “Stock Awards” table below.
3 Consolidated Budgeted OIBDA is equal to consolidated OIBDA based on the Company’s 2019 budget, translated at exchange rates used in the Company’s 2019 budget.
4 Budgeted Unlevered Free Cash Flow is free cash flow before the payment of interest or commitment and guarantee fees on the Company’s senior debt based on the Company’s 2019 budget, translated at exchange rates used in the Company’s 2019 budget.
5 Consolidated Actual OIBDA is equal to actual consolidated OIBDA in 2019, translated at exchange rates used in the Company’s 2019 budget.
6 Actual Unlevered Free Cash Flow is unlevered free cash flow in 2019, translated at exchange rates used in the Company’s 2019 budget.
7Because of foreign exchange movements since the Company set its 2019 budget, the reported OIBDA and reported unlevered free cash flow of the Company differ from the Consolidated Actual OIBDA and Actual Unlevered Free Cash Flow, which are measured at budgeted exchange rates.
After giving effect to the adjustments described in the graph above, equity incentive awards on average accounted for 23% of the total direct compensation of our Named Executive Officers in 2019.
Merger-related Compensation Decisions
The Compensation Committee recognized that entering into the Merger Agreement and the proposed Merger would give rise to challenges relating to retaining and incentivizing key employees, which included the extended time period that could be required to complete the proposed Merger, the significant amount of work associated with closing the Merger, and the uncertainty of working at a company facing a change of control as well as the issue of providing appropriate incentives in light of restrictions in the Merger Agreement on the use of equity for compensation.
Retention award program
After taking the foregoing into consideration, the Compensation Committee approved a transaction-related retention award program on October 26, 2019, to provide targeted cash incentives to certain employees, including the Named Executive Officers, to support the closing of the Merger, the continued focus on the delivery of strong operating results and the retention of key employees.
Under the retention award program, each Named Executive Officer has the opportunity to earn a cash award on the closing of the Merger. In addition, Named Executive Officers may be entitled to the award in the event of termination of employment prior to the closing in certain circumstances, subject to the closing of the Merger occurring, as well as in the event the Merger Agreement is terminated. (See “Potential Payments upon Termination or a Change of Control” below.)
Cash-award agreement
In view of the restriction on issuing further equity-based compensation during the pendency of the Merger, on December 3, 2019, the Compensation Committee authorized cash awards in lieu of previous annual grants of restricted stock units. This cash award program allows for annual total direct compensation to be maintained at a level similar to the period before the Company entered into the Merger Agreement, with the amount earned being subject to similar payment terms as time-based restricted stock units. The Named Executive Officers are entitled to earn a cash award that generally corresponds in value to the most recent grant of time-based restricted stock units. These cash awards will be payable in cash in four equal instalments on each anniversary of the grant date, except where such awards are accelerated or forfeited pursuant to the terms of the corresponding cash award agreement. (See “Potential Payments upon Termination or a Change of Control” below.)
Other Compensation Practices and Policies
Executive Compensation Recoupment
The Company has a policy that permits the Compensation Committee to seek recovery of payments of incentive plan compensation awards and bonuses of Named Executive Officers and certain other covered senior executives if the Company is required to restate its financial statements (other than due to a change in accounting rules) or if the performance results leading to a payment of incentive compensation are subject to a material downward adjustment. For purposes of this policy, payment of incentive compensation includes awards of equity compensation under the Company’s 2015 Stock Incentive Plan. Under this policy, the Compensation Committee has discretion to determine what action it believes is appropriate, which may include recovery or cancellation of all or a portion of incentive payments, and may consider a number of factors in determining whether to seek recovery, including the degree of responsibility of a covered executive, the amount of excess compensation paid, the costs associated with recovery of compensation, applicable law and other actions the Company or third parties have taken.
Stock Ownership Guidelines and Policies on Hedging and Pledges
We encourage stock ownership by executives and directors but do not have formal stock ownership guidelines. Under the Company’s insider trading policy, officers, directors, employees and their related persons may not (i) trade in options, warrants, puts and calls or similar instruments on the Company’s shares of Class A Common Stock and other securities, (ii) sell such shares short, (iii) purchase any securities of the Company on margin, or (iv) purchase or use any financial instruments designed to hedge changes in the market value of the Company's securities. The insider trading policy also requires executives and directors to pre-clear pledges of shares and restricts the ability of executives and directors to pledge shares while they are in possession of material inside information.
Severance
As is customary in our markets, all of our Named Executive Officers have employment agreements with us or one of our subsidiaries and these agreements provide for compensation in the event of involuntary termination (other than for cause) and for voluntary termination by Named Executive Officers for certain material breaches by the Company. These termination payments, which are typically defined by local practice and are generally derived from the notice period or term of the relevant employment agreement, were negotiated with each Named Executive Officer individually and do not conform to a single policy. The basis for and value of these termination payments is further described and quantified under “Potential Payments Upon Termination or Change of Control” below.
Compensation Committee Consultants
In 2014, the Compensation Committee retained Clearbridge to serve as an independent advisor on executive compensation matters as well as on compensation plans or programs that are subject to the review or approval of the Compensation Committee. Clearbridge was retained by, and reports directly to, the Compensation Committee and the Compensation Committee has the sole authority to retain and terminate Clearbridge and to approve the terms of its retention and fees. The Compensation Committee has assessed the independence of Clearbridge and believes that Clearbridge is independent. All of the work performed by Clearbridge has been at the request of the Compensation Committee. Clearbridge has continued to provide ad hoc advice and recommendations to the Compensation Committee on the Company’s compensation programs from time to time.
Role of Executives in Establishing Compensation
The co-Chief Executive Officers, the Chief Financial Officer, the General Counsel and other members of senior management have participated in the development and implementation of certain executive compensation programs, particularly the establishment of targets for annual incentives and the development of long-term equity incentive programs. The Compensation Committee is responsible for approving targets and the achievement of incentive compensation for the Named Executive Officers. Incentive compensation for other managers and key employees is set in accordance with the Company’s management compensation policy guidelines (as amended, the “Management Compensation Policy Guidelines”). The Management Compensation Policy Guidelines and amendments to it are reviewed by the co-Chief Executive Officers and submitted to the Compensation Committee for its review or approval. Certain executives, including the co-Chief Executive Officers, may be invited to attend meetings of the Compensation Committee to discuss Company compensation programs; in addition, the General Counsel may be invited to attend meetings in his capacity as Company Secretary. While these executives may be asked to provide input and perspective, only Compensation Committee members vote on executive compensation matters. These decisions take place when no members of management are in attendance.
Compensation Risk Assessment
In establishing and reviewing executive compensation in annual compensation programs and the retention award program implemented in connection with the Merger, the Compensation Committee believes that executive compensation has been designed and allocated in a manner that does not encourage excessive risk-taking by management that may harm the value of the Company, reward poor judgment or is reasonably likely to have a material adverse effect on the Company.
Base salaries are designed to be consistent with an executive’s responsibilities and to provide sufficient financial security as a proportion of total compensation so as not to promote unnecessary or excessive risk-taking when earning compensation under the Company’s incentive compensation programs. The mix of incentives under those compensation programs is designed to mitigate potential risks without dampening their incentive nature.
In that regard, the Compensation Committee believes that a number of aspects of the Company’s compensation programs substantially mitigate the potential for excessive risk-taking. First, the Compensation Committee believes the annual budgeting process results in the establishment of annual targets that are based on a longer-term strategic vision for the Company and sustainable value creation. Second, having multiple targets that serve different goals mitigates the risk that certain Company performance objectives will be achieved (e.g., audience share or market share leadership) at the expense of others (e.g., controlling costs and generating positive free cash flow) and having to achieve a threshold level of Consolidated Budgeted OIBDA and Budgeted Unlevered Free Cash Flow in order to earn a non-equity incentive plan award limits the amount of such awards that can be earned in the event of poor overall Company performance. This encourages management to focus on revenue generation that is sustainable and profitable. Third, rewarding Named Executive Officers substantially on the basis of achieving Company-wide targets ensures that they are focused on the performance of the Company as a whole. While rewarding senior executives of the Company's operating segments for operating performance may result in risk taking, their targets have also been designed to serve different goals, which mitigate this potential risk. Moreover, provisions in our Management Compensation Policy Guidelines that permit senior executives to be rewarded for qualitative performance reasons can reduce the influence of formulae in the determination of quantitative performance awards. Fourth, long-term value creation and the pursuit of the Company’s strategic goals are fostered by the performance-based awards, which are earned by Named Executive Officers for delivering anticipated financial performance over a multi-year period, as well as by the retention award program implemented in connection with the Merger. Finally, we can seek to recoup incentive compensation under the Executive Compensation Recoupment Policy.
The Compensation Committee continues to believe that an appropriate balance of compensation elements will support the achievement of competitive revenues and earnings in variable economic and industry conditions without undue risk.
Equity Granting Policy
Recognizing the importance of adhering to appropriate practices and procedures when granting equity awards, our equity granting policy incorporates the following practices:
Decisions to award equity grants should only be taken during a period when trading in our shares is permitted in accordance with the Company's Insider Trading Policy.
All grants to Section 16 officers, including grants to new hires, must be approved at a meeting of the Compensation Committee, including telephonic meetings, and may not occur through action by unanimous written consent.
The grant date of any equity award approved at a meeting of the Compensation Committee shall be the date of such meeting or, in connection with an anticipated hire or an award to be granted in several instalments, a future date established by the Compensation Committee at such meeting, subject to employment commencing.
The exercise price for all option awards shall not be less than the closing price of the Company's shares on the date of grant.
Say-on-Pay Proposals
At the Company’s 2017 Annual General Meeting, shareholders voted on an advisory proposal as to the frequency with which the Company should conduct an advisory vote on executive compensation (a “say-on-pay proposal”). At that meeting, 66.6% of votes cast were in favor of holding such a vote once every three years and the Company intends at present to hold such vote every three years. At the 2017 Annual General Meeting, shareholders had an opportunity to cast an advisory vote on executive compensation as disclosed in the 2017 proxy statement and 68.0% of the votes cast were in favor of the proposal. In considering the results of this advisory vote, the Compensation Committee regards the successful turnaround implemented by the co-Chief Executive Officers and the noteworthy progress since 2014 to restore and improve the operating and financial performance of the Company - including the reduction in the Company’s overall leverage ratio from 10.0 times at the end of 2014 to 2.4 times at the end of 2019 and the improvement in free cash flow generation from US$ (93.8) million for 2014 to US$ 161.4 million for 2019 - as significant achievements. The Compensation Committee believes that the goals of achieving a sustainable leverage ratio and steady growth in free cash flow generation have been appropriate goals for the co-Chief Executive Officers as measures of the performance of the business, particularly under the challenging circumstances the Company faced when the co-Chief Executive Officers joined. The Company will continue to evaluate the outcome of say-on-pay votes when making future compensation decisions for Named Executive Officers.
In addition, the Company’s non-binding, advisory vote on compensation that may be paid or become payable to the Named Executive Officers in connection with the proposed Merger was approved at the special general meeting of shareholders held on February 27, 2020, with 90.6% of the votes cast in favor of this proposal.
Impact of Tax and Accounting on Compensation Decisions
As a general matter, the Compensation Committee gives due regard to the various tax and accounting implications of compensation vehicles employed by us. When determining amounts of long-term incentive compensation to executives and employees, the Compensation Committee examines the accounting cost associated with the grants. Under Accounting Standards Codification 718, “Compensation - Stock Compensation” (“ASC 718”), grants of stock options, restricted stock and restricted stock units permitted pursuant to the 2015 Stock Incentive Plan result in an accounting charge. The accounting charge is equal to the fair value of the number of instruments being issued that are expected to vest. For stock options, the cost is equal to the fair value of the option on the date of grant using a Black-Scholes option pricing model multiplied by the number of options that are expected to vest. For restricted stock or restricted stock units, the cost is equal to the fair value of the stock on the date of grant multiplied by the number of shares or units granted that are expected to vest. This expense is amortized over the requisite service or vesting period.
The Compensation Committee also considers the tax implications of its programs, both to the Company and to the participants. It is the Compensation Committee’s policy to maximize the effectiveness of our executive compensation plans in this regard. However, the Compensation Committee believes that compensation and benefits decisions should be primarily driven by the needs of the business rather than by tax policy. Therefore, the Compensation Committee may make pay decisions that result in certain tax inefficiencies.
Compensation Committee Report
We have reviewed and discussed the Compensation Discussion and Analysis with management. Based on our review and discussions, we recommend to the Board of Directors that the Compensation Discussion and Analysis be included in this Amendment No. 1 to the Form 10-K.
Members of the Compensation Committee:
John K. Billock
Parm Sandhu
Kelli Turner
Compensation Committee Interlocks and Insider Participation
None of the members of the Compensation Committee has been an officer of the Company or of any of our subsidiaries or had any relationship with us other than serving as a director. In addition, none of our executive officers served as a director or member of the compensation committee of any other entity one of whose executive officers serves as one of our directors or as a member of the Compensation Committee. The members of the Compensation Committee do not have any relationship that is required to be disclosed under this caption pursuant to SEC rules and regulations. There were no interlocks or other relationships among our executive officers and directors.
Summary Compensation Table
The following table summarizes all plan and non-plan compensation awarded to, earned by, or paid to the Company’s co-Chief Executive Officers, the Chief Financial Officer and the General Counsel, who were the only executive officers who served in such capacities on December 31, 2019 (collectively, the “Named Executive Officers”), for services rendered while such person was serving as a Named Executive Officer for our continuing operationslast three fiscal years. No non-qualified deferred compensation, bonuses or pension benefits were awarded to any Named Executive Officer in 2019, 2018 or 2017. Amounts of salary, non-equity incentive plan compensation and all other compensation earned by segmenteach Named Executive Officer in a currency other than U.S. dollars have been translated using the average exchange rate for the years ended December 31, 2019,, 2018 andor 2017, for consolidated statements of operations and comprehensive income / loss data and consolidated statements of cash flow data; and as at December 31, 2019 and 2018 for consolidated balance sheet data.applicable.
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| | | | | | | | | | | |
| Net revenues: | For The Year Ended December 31, |
| | 2019 |
| | 2018 |
| | 2017 |
|
| Bulgaria | $ | 83,406 |
| | $ | 84,593 |
| | $ | 77,341 |
|
| Czech Republic | 237,320 |
| | 233,991 |
| | 209,041 |
|
| Romania | 188,251 |
| | 201,505 |
| | 191,244 |
|
| Slovak Republic | 108,003 |
| | 106,834 |
| | 97,721 |
|
| Slovenia | 80,809 |
| | 79,587 |
| | 68,696 |
|
Intersegment revenues (1) | (2,985 | ) | | (2,604 | ) | | (1,175 | ) |
| Total net revenues | $ | 694,804 |
| | $ | 703,906 |
| | $ | 642,868 |
|
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| | | | | | | | | | | | | | | | | | | | |
| | Year | | Salary (US$) | | Stock Awards (US$) (1) | | Option Awards (US$) (1) | | Non-Equity Incentive Plan Compensation (US$) (2) | | All Other Compensation (US$) | | Total Compensation (US$) |
Michael Del Nin co-Chief Executive Officer | 2019 | | 967,000 |
| | 849,004 |
| | — |
| | 1,934,000 |
| | 119,965 |
| (3) | | 3,869,969 |
|
| | 2018 | | 938,000 |
| | 1,883,204 |
| | — |
| | 1,876,000 |
| | 136,292 |
| (4) | | 4,833,496 |
|
| | 2017 | | 910,000 |
| | 800,024 |
| | — |
| | 1,820,000 |
| | 120,391 |
| (5) | | 3,650,415 |
|
Christoph Mainusch co-Chief Executive Officer | 2019 | | 967,000 |
| | 849,004 |
| | — |
| | 1,934,000 |
| | 88,950 |
| (6) | | 3,838,954 |
|
| | 2018 | | 938,000 |
| | 1,883,204 |
| | — |
| | 1,876,000 |
| | 92,163 |
| (7) | | 4,789,367 |
|
| | 2017 | | 910,000 |
| | 800,024 |
| | — |
| | 1,820,000 |
| | 84,629 |
| (8) | | 3,614,653 |
|
David Sturgeon Chief Financial Officer | 2019 | | 580,000 |
| | 297,007 |
| | — |
| | 1,160,000 |
| | 122,982 |
| (9) | | 2,159,989 |
|
| | 2018 | | 546,000 |
| | 711,685 |
| | — |
| | 1,092,000 |
| | 121,922 |
| (10) | | 2,471,607 |
|
| | 2017 | | 530,000 |
| | 280,012 |
| | — |
| | 1,060,000 |
| | 137,219 |
| (11) | | 2,007,231 |
|
Daniel Penn General Counsel | 2019 | | 586,000 |
| | 372,012 |
| | — |
| | 1,172,000 |
| | 30,420 |
| (12) | | 2,160,432 |
|
| | 2018 | | 552,000 |
| | 890,615 |
| | — |
| | 1,104,000 |
| | 16,965 |
| (13) | | 2,563,580 |
|
| | 2017 | | 536,000 |
| | 350,017 |
| | — |
| | 1,072,000 |
| | 12,593 |
| (14) | | 1,970,610 |
|
| |
(1) | Reflects revenues earned fromThese amounts reflect aggregate grant date fair value of restricted stock units and options granted during the salefiscal years ended December 31, 2019, 2018 and 2017 under the 2015 Stock Incentive Plan and the Amended and Restated Stock Incentive Plan, as applicable, in accordance with ASC 718. Stock awards for 2018 comprise time-based restricted stock unit awards as well as performance-based restricted stock units awarded on the termination of contentthe 2015 LTIP and the target amount of performance-based restricted stock units awarded under the 2019 LTIP. Assumptions used in the calculation of the aggregate grant date fair value are included in Part II, Item 8, Note 17 to other country segmentsour Financial Statements included in CME Ltd. All other revenues are third party revenues.our Annual Report on Form 10-K for the year ended December 31, 2019. |
| |
(2) | Information in respect of non-equity incentive plan awards is summarized below for each Named Executive Officer. |
| |
(3) | Represents US$ 43,032 for school fees, US$ 20,229 for tax return preparation fees, US$ 30,000 for ground transportation, and US$ 26,704 for health and life insurance benefits. |
| |
(4) | Represents US$ 45,736 for school fees, US$ 31,910 for tax return preparation fees, US$ 30,000 for ground transportation, and US$ 28,646 for health and life insurance benefits. |
| |
(5) | Represents US$ 42,513 for school fees, US$ 31,255 for tax return preparation fees, US$ 30,000 for ground transportation, and US$ 16,623 for health and life insurance benefits. |
| |
(6) | Represents US$ 33,354 for health and life insurance benefits, US$ 30,000 for ground transportation, US$ 17,556 for school fees and US$ 8,040 for tax return preparation fees. |
| |
(7) | Represents US$ 33,710 for health and life insurance benefits, US$ 30,000 for ground transportation, US$ 17,890 for school fees and US$ 10,563 for tax return preparation fees. |
| |
(8) | Represents US$ 30,000 for ground transportation, US$ 20,567 for school fees, US$ 26,473 for health and life insurance benefits and US$ 7,589 for tax return preparation fees. |
| |
(9) | Represents US$ 74,512 for school fees, US$ 28,858 for health and life insurance benefits, US$ 18,000 for ground transportation and US$ 1,612 for tax return preparation fees. |
| |
(10) | Represents US$ 76,514 for school fees, US$ 25,696 for health and life insurance benefits, US$ 18,000 for ground transportation and US$ 1,712 for tax return preparation fees. |
| |
(11) | Represents US$ 93,885 for school fees, US$ 23,695 for health and life insurance benefits, US$ 18,000 for ground transportation and US$ 1,639 for tax return preparation fees. |
| |
(12) | Represents health and life insurance benefits of US$ 15,958 and US$ 14,462 for tax return preparation fees. |
| |
(13) | Represents health and life insurance benefits of US$ 11,060 and relocation costs of US$ 5,905. |
| |
(14) | Represents health and life insurance benefits. |
|
| | | | | | | | | | | |
| OIBDA: | For The Year Ended December 31, |
| | 2019 |
| | 2018 |
| | 2017 |
|
| Bulgaria | $ | 25,720 |
| | $ | 21,620 |
| | $ | 16,241 |
|
| Czech Republic | 101,617 |
| | 94,576 |
| | 82,652 |
|
| Romania | 87,727 |
| | 85,737 |
| | 73,418 |
|
| Slovak Republic | 35,350 |
| | 27,941 |
| | 23,845 |
|
| Slovenia | 26,395 |
| | 22,516 |
| | 14,263 |
|
| Elimination | 15 |
| | 34 |
| | (3 | ) |
| Total operating segments | 276,824 |
| | 252,424 |
| | 210,416 |
|
| Corporate | (28,900 | ) | | (29,750 | ) | | (30,649 | ) |
| Total OIBDA | 247,924 |
|
| 222,674 |
|
| 179,767 |
|
| Depreciation of property, plant and equipment | (33,536 | ) | | (32,933 | ) | | (31,261 | ) |
| Amortization of broadcast licenses and other intangibles | (8,457 | ) | | (9,002 | ) | | (8,592 | ) |
Other items (1) | (18,595 | ) | | (3,152 | ) | | — |
|
| Operating income | 187,336 |
| | 177,587 |
| | 139,914 |
|
| Interest expense (Note 15) | (30,694 | ) | | (49,106 | ) | | (83,188 | ) |
| Other non-operating (expense) / income, net (Note 16) | (2,208 | ) | | (3,588 | ) | | 16,841 |
|
| Income before tax | $ | 154,434 |
| | $ | 124,893 |
| | $ | 73,567 |
|
16
Michael Del Nin
Mr. Del Nin has served as co-Chief Executive Officer since September 16, 2013 and is compensated pursuant to an amended and restated employment agreement dated December 21, 2017 (as amended) with CME Media Services Limited, a wholly owned subsidiary of the Company. From January 1, 2020, Mr. Del Nin is entitled to receive an annual salary of US$ 996,000.
In 2019, Mr. Del Nin earned a non-equity incentive plan award of US$ 1.9 million based on meeting quantitative and qualitative performance targets described in the Compensation Discussion and Analysis section above. Mr. Del Nin earned awards of US$ 1.9 million in 2018 and US$ 1.8 million in 2017 for the achievement of performance targets set by the Compensation Committee for those years.
Mr. Del Nin’s employment agreement provides for a ground transportation allowance as well as medical, disability and life insurance benefits. See footnotes (3) to (5) of the Summary Compensation Table for additional information on his compensation. Mr. Del Nin’s employment agreement also contains non-competition provisions applicable for a 12-month period following termination, a covenant regarding corporate opportunities and a prohibition on the use of confidential information.
Christoph Mainusch
Mr. Mainusch has served as co-Chief Executive Officer since September 16, 2013 and is compensated pursuant to an amended and restated employment agreement dated December 21, 2017 (as amended) with CME Media Services Limited. From January 1, 2020, Mr. Mainusch is entitled to receive an annual salary of US$ 996,000.
In 2019, Mr. Mainusch earned a non-equity incentive plan award of US$ 1.9 million based on meeting quantitative and qualitative performance targets described in the Compensation Discussion and Analysis section above. Mr. Mainusch earned awards of US$ 1.9 million in 2018 and US$ 1.8 million in 2017 for the achievement of performance targets set by the Compensation Committee for those years.
Mr. Mainusch’s employment agreement provides for a ground transportation allowance as well as medical, disability and life insurance benefits. See footnotes (6) to (8) of the Summary Compensation Table for additional information on his compensation. Mr. Mainusch’s employment agreement also contains non-competition provisions applicable for a 12-month period following termination, a covenant regarding corporate opportunities and a prohibition on the use of confidential information.
David Sturgeon
Mr. Sturgeon has served as Chief Financial Officer since June 5, 2014 and is compensated pursuant to an amended and restated employment agreement dated December 21, 2017 (as amended) with CME Media Services Limited. From January 1, 2020, Mr. Sturgeon is entitled to receive an annual salary of US$ 580,000.
In 2019, Mr. Sturgeon earned a non-equity incentive plan award of US$ 1.2 million based on meeting quantitative and qualitative performance targets described in the Compensation Discussion and Analysis section above. Mr. Sturgeon earned a non-equity incentive plan award of US$ 1.1 million in 2018 and US$ 1.1 million in 2017 for the achievement of performance targets set by the Compensation Committee for those years.
Mr. Sturgeon’s employment agreement provides for a ground transportation allowance as well as medical, disability and life insurance benefits. See footnotes (9) to (11) of the Summary Compensation Table for additional information on his compensation. Mr. Sturgeon’s employment agreement also contains non-competition provisions applicable for a 12-month period following termination, a covenant regarding corporate opportunities and a prohibition on the use of confidential information.
Daniel Penn
Mr. Penn has served as General Counsel since May 1, 2004 and is compensated pursuant to an amended and restated employment agreement dated December 21, 2017 (as amended) with CME Media Services Limited. From January 1, 2020, Mr. Penn is entitled to receive an annual salary of US$ 586,000.
In 2019, Mr. Penn earned a non-equity incentive plan award of US$ 1.2 million based on meeting quantitative and qualitative performance targets described in the Compensation Discussion and Analysis section above. Mr. Penn earned a non-equity incentive plan award of US$ 1.1 million in 2018 and US$ 1.1 million in 2017 for the achievement of performance targets set by the Compensation Committee for those years.
Mr. Penn’s employment agreement provides for medical, disability and life insurance benefits. See footnotes (12) and (13) of the Summary Compensation Table for additional information on his compensation. Mr. Penn’s employment agreement also contains non-competition provisions applicable for a 12-month period following termination, a covenant regarding corporate opportunities and a prohibition on the use of confidential information.
Grants of Plan Based Awards
The following table sets forth information with respect to non-equity incentive plan and stock awards granted to the Named Executive Officers during the fiscal year ended December 31, 2019. No Named Executive Officer was granted a non-equity incentive plan award in 2019 whose payout would be earned in whole or in part in a future year. Foreign currency amounts in the table below have been translated using the average exchange rate for the year ended December 31, 2019.
|
| | | | | | | | | | | | |
| | | Estimated Future Payouts under Non-Equity Incentive Plan Awards (1) | | Restricted Stock Awards (2) | | Grant Date Fair Value of Stock and Option Awards
(US$) (3) |
| | | Target
(US$) | Maximum (US$) | | Number of Shares of Stock or Units | Grant Date
| |
| Michael Del Nin | | 967,000 |
| 1,934,000 |
| | 239,156 |
| March 4, 2019 | | 849,004 |
|
| Christoph Mainusch | | 967,000 |
| 1,934,000 |
| | 239,156 |
| March 4, 2019 | | 849,004 |
|
| David Sturgeon | | 580,000 |
| 1,160,000 |
| | 83,664 |
| March 4, 2019 | | 297,007 |
|
| Daniel Penn | | 586,000 |
| 1,172,000 |
| | 104,792 |
| March 4, 2019 | | 372,012 |
|
| |
(1) | Calculated using the criteria set out in “2019 Compensation Decisions - 2019 Non-Equity Incentive Plan Awards" in the Compensation Discussion and Analysis section of this proxy statement. Named Executive Officers are entitled to receive the target payout of their awards if the targets are achieved and the maximum payout if the targets are exceeded as set forth in the Compensation Discussion and Analysis section. There are no threshold amounts payable to Named Executive Officers if minimum target levels are not achieved. |
| |
Other items during(2)
| Consists of grants of time-based restricted stock units. |
| |
(3) | Grant date fair value was determined using the year ended December 31, 2019 reflects costs relatingmethodology provided by ASC 718. For a discussion of the assumptions underlying the valuation of employee stock compensation, see Part II, Item 8, Note 17 to the strategic review and resulting proposed Merger, primarily the full recognition of executive employee retention agreements and financial and professional fees and is reflected in selling, general and administrative expensesour Financial Statements included in our consolidated statements of operations. Other items duringAnnual Report on Form 10-K for the year ended December 31, 2018 consists solely of expense related to the accelerated vesting of RSUs with performance conditions in accordance with the terms of the corresponding award agreement following the completion of sale of the Company's Croatian operations on July 31, 2018.2019. |
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
Outstanding Equity Awards at December 31, 2019
|
| | | | | | | |
Total assets: (1) | December 31, 2019 |
| | December 31, 2018 |
|
| Bulgaria | $ | 135,593 |
| | $ | 142,165 |
|
| Czech Republic | 758,479 |
| | 771,286 |
|
| Romania | 289,968 |
| | 297,937 |
|
| Slovak Republic | 150,806 |
| | 146,252 |
|
| Slovenia | 92,144 |
| | 89,440 |
|
| Total operating segments | 1,426,990 |
| | 1,447,080 |
|
| Corporate | 20,872 |
| | 41,281 |
|
| Total assets | $ | 1,447,862 |
| | $ | 1,488,361 |
|
For information regarding the treatment of the equity awards granted to the Named Executive Officers following a termination of their employment or upon a change of control of the Company, see “Potential Payments Upon Termination or Change of Control”. For additional information regarding the treatment of the equity awards on the closing of the Merger, see the proxy statement of the Company related to the special general meeting of shareholders filed with the SEC on January 10, 2020.
|
| | | | | | | | | | | | | |
| | Stock Awards |
| | Grant date | | Number of Units of Stock that have not Vested (1) | | Market Value of Units of Stock that have not Vested (US$) (1) (2) | | Equity Incentive Plan Awards: Number of unearned Units that have not Vested (3) | | Equity Incentive Plan Awards: Market or Payout Value of unearned Units that have not Vested (US$) (2) (3) |
| Michael Del Nin | March 7, 2016 | | 20,326 |
| | 92,077 |
| | — |
| | — |
|
| | March 7, 2017 | | 64,518 |
| | 292,267 |
| | — |
| | — |
|
| | June 5, 2017 | | 48,782 |
| | 220,982 |
| | — |
| | — |
|
| | March 5, 2018 | | 140,457 |
| | 636,270 |
| | — |
| | — |
|
| | December 4, 2018 | | — |
| | — |
| | 156,740 |
| | 710,032 |
|
| | March 4, 2019 | | 239,156 |
| | 1,083,377 |
| | | |
|
|
| | | | | |
|
| | | |
|
|
| Christoph Mainusch | March 7, 2016 | | 20,326 |
| | 92,077 |
| | — |
| | — |
|
| | March 7, 2017 | | 64,518 |
| | 292,267 |
| | — |
| | — |
|
| | June 5, 2017 | | 48,782 |
| | 220,982 |
| | — |
| | — |
|
| | March 5, 2018 | | 140,457 |
| | 636,270 |
| | — |
| | — |
|
| | December 4, 2018 | | — |
| | — |
| | 156,740 |
| | 710,032 |
|
| | March 4, 2019 | | 239,156 |
| | 1,083,377 |
| | | |
|
|
| | | | | |
|
| | | |
|
|
| David Sturgeon | March 7, 2016 | | 8,131 |
| | 36,833 |
| | — |
| | — |
|
| | March 7, 2017 | | 20,968 |
| | 94,985 |
| | | | — |
|
| | June 5, 2017 | | 18,294 |
| | 82,872 |
| | — |
| | — |
|
| | March 5, 2018 | | 49,092 |
| | 222,387 |
| | — |
| | — |
|
| | December 4, 2018 | | — |
| | — |
| | 62,696 |
| | 284,013 |
|
| | March 4, 2019 | | 83,664 |
| | 378,998 |
| | | |
|
|
| | | | | | | | | | |
| Daniel Penn | March 7, 2016 | | 10,163 |
| | 46,038 |
| | — |
| | — |
|
| | March 7, 2017 | | 24,194 |
| | 109,599 |
| | — |
| | — |
|
| | June 5, 2017 | | 24,392 |
| | 110,496 |
| | — |
| | — |
|
| | March 5, 2018 | | 61,536 |
| | 278,758 |
| | — |
| | — |
|
| | December 4, 2018 | | — |
| | — |
| | 78,372 |
| | 355,025 |
|
| | March 4, 2019 | | 104,792 |
| | 474,708 |
| | | |
|
|
| |
(1) | Segment assets exclude any intercompany balances.Consists of grants of time-based restricted stock units. These awards vest in four equal instalments on anniversary of the grant date, except where forfeited or accelerated in accordance with the corresponding award agreement. |
| |
(2) | The market value of unvested units is equal to the product of the number of unvested units and the closing price of our Class A Common Stock on December 31, 2019. |
| |
(3) | Consists of performance-based restricted stock units. Restricted stock units with performance-based vesting are eligible for vesting in accordance with the performance criteria of the 2019 LTIP described in the Compensation Discussion and Analysis Section above under "Elements of Compensation - Long-term Equity Incentive Programs". |
|
| | | | | | | | | | | |
| Capital expenditures: | For The Year Ended December 31, |
| | 2019 |
|
| 2018 |
|
| 2017 |
|
| Bulgaria | $ | 6,023 |
| | $ | 4,222 |
| | $ | 4,584 |
|
| Czech Republic | 8,212 |
| | 9,012 |
| | 10,449 |
|
| Romania | 4,628 |
| | 4,767 |
| | 6,639 |
|
| Slovak Republic | 1,754 |
| | 1,601 |
| | 1,963 |
|
| Slovenia | 3,496 |
| | 4,200 |
| | 3,171 |
|
| Total operating segments | 24,113 |
| | 23,802 |
| | 26,806 |
|
| Corporate | 310 |
| | 781 |
| | 1,309 |
|
| Total capital expenditures | $ | 24,423 |
| | $ | 24,583 |
| | $ | 28,115 |
|
19
|
| | | | | | | |
Long-lived assets: (1) | December 31, 2019 |
| | December 31, 2018 |
|
| Bulgaria | $ | 13,538 |
| | $ | 10,627 |
|
| Czech Republic | 36,760 |
| | 39,314 |
|
| Romania | 31,115 |
| | 33,368 |
|
| Slovak Republic | 16,201 |
| | 16,376 |
|
| Slovenia | 15,207 |
| | 15,955 |
|
| Total operating segments | 112,821 |
| | 115,640 |
|
| Corporate | 1,080 |
| | 1,964 |
|
| Total long-lived assets | $ | 113,901 |
| | $ | 117,604 |
|
|
| | | | | | | | | | | | |
| | Option Awards |
| | Grant date | | Number of Securities Underlying Unexercised Options Exercisable | | Number of Securities Underlying Unexercised Options Unexercisable | | Option Exercise Price (US$) | | Option Expiration Date |
| Michael Del Nin | June 2, 2015 | | 500,000 |
| | — |
| | 2.29 |
| | June 1, 2025 |
| | March 7, 2016 | | 96,420 |
| | 32,140 |
| | 2.46 |
| | March 6, 2026 |
| | | | | | | | | | |
| Christoph Mainusch | June 2, 2015 | | 500,000 |
| | — |
| | 2.29 |
| | June 1, 2025 |
| | March 7, 2016 | | 96,420 |
| | 32,140 |
| | 2.46 |
| | March 6, 2026 |
| | | | | | | | | | |
| David Sturgeon | June 2, 2015 | | 200,000 |
| | — |
| | 2.29 |
| | June 1, 2025 |
| | March 7, 2016 | | 38,568 |
| | 12,856 |
| | 2.46 |
| | March 6, 2026 |
| | | | | | | | | | |
| Daniel Penn | June 2, 2015 | | 250,000 |
| | — |
| | 2.29 |
| | June 1, 2025 |
| | March 7, 2016 | | 48,210 |
| | 16,070 |
| | 2.46 |
| | March 6, 2026 |
Stock Vested
Set out below is information regarding time-based restricted stock units that vested during the fiscal year ended December 31, 2019. No performance-based restricted stock units vested and no options held by a Named Executive Officer were exercised during the year ended December 31, 2019.
|
| | | | | | | |
| | Stock Vested |
| | Grant Date | | Number of Shares of Stock Acquired upon Vesting of Units | | Market Value of Units of Stock that have Vested (US$) (1) |
| Michael Del Nin | March 13, 2015 | | 18,727 |
| | 66,294 |
|
| | March 7, 2016 | | 20,326 |
| | 70,938 |
|
| | March 7, 2017 | | 32,259 |
| | 112,584 |
|
| | June 5, 2017 | | 24,391 |
| | 95,613 |
|
| | March 5, 2018 | | 46,819 |
| | 169,017 |
|
| | | | | | |
| Christoph Mainusch | March 13, 2015 | | 18,727 |
| | 66,294 |
|
| | March 7, 2016 | | 20,326 |
| | 70,938 |
|
| | March 7, 2017 | | 32,259 |
| | 112,584 |
|
| | June 5, 2017 | | 24,391 |
| | 95,613 |
|
| | March 5, 2018 | | 46,819 |
| | 169,017 |
|
| | | | | | |
| David Sturgeon | March 13, 2015 | | 7,491 |
| | 26,518 |
|
| | March 7, 2016 | | 8,131 |
| | 28,377 |
|
| | March 7, 2017 | | 10,484 |
| | 36,589 |
|
| | June 5, 2017 | | 9,147 |
| | 35,856 |
|
| | March 5, 2018 | | 16,364 |
| | 59,074 |
|
| | | | | | |
| Daniel Penn | March 13, 2015 | | 9,364 |
| | 33,149 |
|
| | March 7, 2016 | | 10,163 |
| | 35,469 |
|
| | March 7, 2017 | | 12,097 |
| | 42,219 |
|
| | June 5, 2017 | | 12,196 |
| | 47,808 |
|
| | March 5, 2018 | | 20,512 |
| | 74,048 |
|
| |
(1) | Reflects property, plant and equipment, net.The market value of units of stock that have vested was determined by multiplying the number of units of stock that vested by the closing price of our Class A Common Stock on the date such stock was vested. |
Revenues from contracts with customers comprised the following:
|
| | | | | | | | | | | |
| Consolidated revenue by type: | For The Year Ended December 31, |
| | 2019 |
| | 2018 |
| | 2017 |
|
| Television advertising | $ | 547,524 |
| | $ | 562,450 |
| | $ | 523,516 |
|
| Carriage fees and subscriptions | 117,652 |
| | 113,746 |
| | 95,823 |
|
| Other | 29,628 |
| | 27,710 |
| | 23,529 |
|
| Total net revenues | $ | 694,804 |
| | $ | 703,906 |
| | $ | 642,868 |
|
Management reviews the performance of our operations based on the above revenue types as well as on a geographic basis as described above. Management does not review other disaggregations of revenues from contracts with customers.
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
21. COMMITMENTS AND CONTINGENCIESPotential Payments upon Termination or a Change of Control
CommitmentsSet out below is information reflecting compensation that may be payable to each of the Named Executive Officers in the event of the voluntary termination, involuntary termination (other than for cause) of such Named Executive Officer’s employment or following a change of control. The payments that Named Executive Officers would receive following termination (either in the absence of or following a change of control of the Company) or in the event of a change of control of the Company are generally governed by their employment agreement, their equity award agreements, their cash award agreements and the retention award program implemented in connection with the Merger. For purposes hereof, a “change of control” refers to certain corporate transactions or other events (including the Merger, an amalgamation or merger where the beneficial owners of the Company hold less than 50% of the voting power of the surviving entity and a sale of substantially all of the assets of the Company) as set forth in the 2015 Stock Incentive Plan or the Company’s award agreements that are customarily regarded as a change of control and excludes certain capital transactions involving AT&T Inc.
a) Programming Rights Agreements and Other Commitments
At The amounts shown below assume that such termination or change of control was effective as of December 31, 2019, we had total commitments of US$ 103.5 million (December 31, 2018: US$ 62.8 million) in respect of future programming, including contracts signed with license periods starting after the balance sheet date. In addition, we have digital transmission obligations and other commitments as follows:
|
| | | | | | | |
| | Programming purchase obligations |
| | Other commitments |
|
| 2020 | $ | 36,932 |
| | $ | 12,740 |
|
| 2021 | 24,944 |
| | 5,705 |
|
| 2022 | 23,049 |
| | 5,775 |
|
| 2023 | 11,601 |
| | 5,900 |
|
| 2024 | 5,528 |
| | — |
|
| 2025 and thereafter | 1,452 |
| | — |
|
| Total | $ | 103,506 |
| | $ | 30,120 |
|
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 collect2019. The amounts allegedly owing under 4 promissory notes that have a collective face value of approximately EUR 69.0 million. These 4 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. NaN of the notes purport to be issued in favor of Marian Kocner, a controversial Slovak businessman, and the other 2 to a long-time associate of Mr. Kocner. All 4 notes were supposedly assigned several times, for no apparent consideration, to companies owned by or associated with Mr. Kocner and ultimately to Sprava a inkaso zmeniek, s.r.o., a company owned by Mr. Kocner that initiated the claims for payment in these proceedings.
NaN of the notes, each of which purportedly has a face value of approximately EUR 8.3 million, allegedly matured in 2015. The other 2 notes, which were purportedly issued in blank, had the amount of approximately EUR 26.2 million inserted on each of them by Mr. Kocner or someone associated with him in mid-2016, shortly before their alleged maturity. The 4 notes accrue interest from their purported maturity dates. Although Mr. Rusko has asserted in testimony in the civil proceedings that he signed the notes in June 2000, we do not believe that the notes were signed in June 2000 or thatinclude non-equity incentive plan compensation for any of the notes are authentic.
Despite a random case assignment system in the Slovak Republic, claims in respect of 3 of the notes were initially assigned to the same judge. NaN of those claims, concerning 1 of the promissory notes having a face value of approximately EUR 8.3 million (the "First PN Case"), was subsequently reassigned. Proceedings on the claimNamed Executive Officers actually awarded in respect of the fourth promissory note (inyear ended December 31, 2019 (which is reflected in the Summary Compensation Table) or accrued vacation days.
Values of restricted stock unit are calculated using the closing price of shares of our Class A Common Stock on December 31, 2019, and the number of performance-based restricted stock units do not reflect actual performance against the 2019 LTIP for the year ended December 31, 2019 but are based on target performance for the four-year performance period. Option values are calculated based on the difference between the closing price of shares of our Class A Common Stock on December 31, 2019 and the exercise price of such options.
The numbers presented below are for illustrative purposes. Actual amounts that may be payable or will be paid can only be determined at the time of separation of a Named Executive Officer from the Company.
Michael Del Nin
Payments under employment agreement
Mr. Del Nin has an employment agreement for an indefinite term. Pursuant to Mr. Del Nin’s employment agreement, we may terminate his employment at any time without cause. Mr. Del Nin may terminate his employment agreement in the event of certain uncured material breaches by us, which following a change of control also include specified changes in the composition of the Board of Directors of the Company as well as the expiration of a six-month period following such change of control (“Good Reason”). If we give notice of termination to Mr. Del Nin (other than for cause) or if he terminates for Good Reason, the Company shall make a payment equal to (i) two times his annual salary and (ii) two times the average non-equity incentive plan award paid to him for the two years prior to such termination. Assuming a termination date of December 31, 2019, Mr. Del Nin would be entitled to receive US$ 5.7 million, subject to deductions for social insurance and other withholdings.
Mr. Del Nin may also terminate his employment at any time on 12 months’ notice. We may elect to make payment in lieu of notice, and pay him the portion of his annual salary for the portion of the notice period remaining at the time the Company makes this election. Assuming we elect to make payment in lieu of notice for the entire notice period and a termination date of December 31, 2019, Mr. Del Nin would be entitled to receive US$ 967,000, subject to deductions for social insurance and other withholdings.
In the event we terminate Mr. Del Nin’s employment due to cause, he is not entitled to receive any additional remuneration.
Equity
If we give notice of termination to Mr. Del Nin (other than for cause) or if he terminates for Good Reason, all time-based equity awards granted to Mr. Del Nin would vest and become immediately exercisable. In addition, any performance conditions for performance-based restricted stock units shall lapse and an amount of approximately EUR 26.2 million) (the "Fourth PN Case") were initially terminated in January 2017 byperformance restricted stock units calculated pursuant to the presiding judge becauseunderlying award agreement would vest.
If Mr. Del Nin terminates for other than Good Reason, all restricted stock units and unvested options awarded to Mr. Del Nin shall immediately terminate on the plaintiff faileddate of such termination. Any options issued to pay court feesMr. Del Nin that have vested as of the date of such termination may be exercised for a period of three months following such termination date.
In the event we terminate Mr. Del Nin’s employment due to cause, all vested but unexercised and were terminatedunvested options granted to him shall immediately terminate.
In the event of a second time by a different presiding judge in September 2017change of control, all equity awards granted to Mr. Del Nin would vest and options would become immediately exercisable pursuant to Mr. Del Nin's equity award agreements.
On December 31, 2019, the value of all unvested equity awards granted to Mr. Del Nin (including performance-based restricted stock units calculated at target performance) was US$ 3,035,005 and the value of all vested options was US$ 1,319,589.
Cash award agreement
If we give notice of termination to Mr. Del Nin (other than for cause) or if he terminates for Good Reason, any amount not yet paid under the cash award agreement would become immediately payable. If Mr. Del Nin terminates for other than Good Reason or we terminate Mr. Del Nin’s employment due to cause, Mr. Del Nin will not be entitled to any further payments under the cash award agreement after the plaintiff refileddate of such termination.
In the event of a change of control, any amount not yet paid under the cash award agreement would become immediately payable.
On December 31, 2019, the value of the cash award not yet paid to Mr. Del Nin was US$ 1.4 million.
Retention award agreement
At the time of a closing of the Merger, the entire amount of the retention award would become immediately payable.
If we give notice of termination to Mr. Del Nin (other than for cause) or if he terminates for Good Reason prior to a change of control, Mr. Del Nin would be entitled to receive the retention award at the time the Merger closes. If Mr. Del Nin terminates for other than Good Reason or we terminate Mr. Del Nin’s employment due to cause, Mr. Del Nin shall not be entitled to the retention award after the date of such termination.
Assuming the Merger occurred on December 31, 2019, Mr. Del Nin would be entitled to receive US$ 2.2 million, subject to deductions for social insurance and other withholdings.
Christoph Mainusch
Payments under employment agreement
Mr. Mainusch has an employment agreement for an indefinite term. Pursuant to Mr. Mainusch’s employment agreement, we may terminate his employment at any time without cause. Mr. Mainusch may terminate his employment agreement for Good Reason. If we give notice of termination to Mr. Mainusch (other than for cause) or if he terminates for Good Reason, the Company shall make a payment equal to (i) two times his annual salary and (ii) two times the average non-equity incentive plan award paid to him for the two years prior to such termination. Assuming a termination date of December 31, 2019, Mr. Mainusch would be entitled to receive US$ 5.7 million, subject to deductions for social insurance and other withholdings.
Mr. Mainusch may also terminate his employment at any time on 12 months’ notice. We may elect to make payment in lieu of notice, and pay him the portion of his annual salary for the portion of the notice period remaining at the time the Company makes this election. Assuming we elect to make payment in lieu of notice for the entire notice period and a termination date of December 31, 2019, Mr. Mainusch would be entitled to receive US$ 967,000, subject to deductions for social insurance and other withholdings.
In the event we terminate Mr. Mainusch’s employment due to cause, he is not entitled to receive any additional remuneration.
Equity
If we give notice of termination to Mr. Mainusch (other than for cause) or if he terminates for Good Reason, all time-based equity awards granted to Mr. Mainusch would vest and become immediately exercisable. In addition, any performance conditions for performance-based restricted stock units shall lapse and an amount of performance restricted stock units calculated pursuant to the underlying award agreement would vest.
If Mr. Mainusch terminates for other than Good Reason, all restricted stock units and unvested options awarded to Mr. Mainusch shall immediately terminate on the date of such termination. Any options issued to Mr. Mainusch that have vested as of the date of such termination may be exercised for a period of three months following such termination date.
In the event we terminate Mr. Mainusch’s employment due to cause, all vested but failedunexercised and unvested options granted to him shall immediately terminate.
In the event of a change of control, all equity awards granted to Mr. Mainusch would vest and options would become immediately exercisable pursuant to Mr. Mainusch’s equity award agreements.
On December 31, 2019, the value of all unvested equity awards granted to Mr. Mainusch (including performance-based restricted stock units calculated at target performance) was US$ 3,035,005 and the value of all vested options was US$ 1,319,589.
Cash award agreement
If we give notice of termination to Mr. Mainusch (other than for cause) or if he terminates for Good Reason, any amount not yet paid under the cash award agreement would become immediately payable. If Mr. Mainusch terminates for other than Good Reason or we terminate Mr. Mainusch’s employment due to cause, Mr. Mainusch will not be entitled to any further payments under the cash award agreement after the date of such termination.
In the event of a change of control, any amount not yet paid under the cash award agreement would become immediately payable.
On December 31, 2019, the value of the cash award not yet paid to Mr. Mainusch was US$ 1.4 million.
Retention award agreement
At the time of a closing of the Merger, the entire amount of the retention award would become immediately payable.
If we give notice of termination to Mr. Mainusch (other than for cause) or if he terminates for Good Reason prior to a change of control, Mr. Mainusch would be entitled to receive the retention award at the time the Merger closes. If Mr. Mainusch terminates for other than Good Reason or we terminate Mr. Mainusch’s employment due to cause, Mr. Mainusch shall not be entitled to the retention award after the date of such termination.
Assuming the Merger occurred on December 31, 2019, Mr. Mainusch would be entitled to receive US$ 2.0 million, subject to deductions for social insurance and other withholdings.
David Sturgeon
Payments under employment agreement
Mr. Sturgeon has an employment agreement for an indefinite term. We may terminate Mr. Sturgeon’s employment without cause on 12 months’ notice. Mr. Sturgeon may terminate his employment for Good Reason. If we give notice of termination to Mr. Sturgeon (other than for cause) or Mr. Sturgeon terminates for Good Reason, the Company will make payment in lieu of notice equal to 12 months of salary. Mr. Sturgeon is also entitled to payment of an amount consisting of (i) his target annual non-equity incentive plan award and (ii) his annual target non-incentive plan award pro-rated to the termination date. Assuming a termination date of December 31, 2019, Mr. Sturgeon would be entitled to receive US$ 1.2 million, subject to deductions for social insurance and other withholdings. Mr. Sturgeon is also entitled to medical and dental insurance for a period of 12 months following termination.
Mr. Sturgeon may also terminate his employment at any time on 12 months’ notice. We may elect to make payment in lieu of notice, and pay court feeshim the portion of his annual salary for the portion of the notice period remaining at the time the Company makes this election. Mr. Sturgeon is also entitled to any earned but unpaid non-equity incentive plan awards. Assuming we elect to make payment in lieu of notice for the entire notice period and a second time.termination date of December 31, 2019, Mr. Sturgeon would be entitled to receive US$ 580,000, subject to deductions for social security and other withholdings.
DuringIn the first quarterevent we terminate Mr. Sturgeon’s employment due to cause, he is not entitled to receive any additional remuneration.
Equity
The terms of 2018,Mr. Sturgeon’s equity award agreements do not provide for the courtvesting of first instance beganany awards on termination. Any restricted stock units and unvested options awarded to schedule hearingsMr. Sturgeon shall immediately terminate on the date of his termination. Any options issued to Mr. Sturgeon that have vested as of a date of termination (other than for cause) may be exercised for a period of three months following such termination date.
In the event of a change of control, all restricted stock units and options granted to Mr. Sturgeon would vest and become immediately exercisable pursuant to Mr. Sturgeon’s equity award agreements.
On December 31, 2019, the value of all unvested equity awards granted to Mr. Sturgeon (including performance-based restricted stock units calculated at target performance) was US$ 1,100,088 and the value of all vested options was US$ 527,836.
Cash award agreement
If we give notice of termination to Mr. Sturgeon (other than for cause) or if he terminates for Good Reason, any amount not yet paid under the cash award agreement would become immediately payable. If Mr. Sturgeon terminates for other than Good Reason or we terminate Mr. Sturgeon’s employment due to cause, Mr. Sturgeon will not be entitled to any further payments under the cash award agreement after the date of such termination.
In the event of a change of control, any amount not yet paid under the cash award agreement would become immediately payable.
On December 31, 2019, the value of the cash award not yet paid to Mr. Sturgeon was US$ 0.5 million.
Retention award agreement
At the time of a closing of the Merger, the entire amount of the retention award would become immediately payable.
If we give notice of termination to Mr. Sturgeon (other than for cause) or if he terminates for Good Reason prior to a change of control, Mr. Sturgeon would be entitled to receive the retention award at the time the Merger closes. If Mr. Sturgeon terminates for other than Good Reason or we terminate Mr. Sturgeon’s employment due to cause, Mr. Sturgeon shall not be entitled to the retention award after the date of such termination.
Assuming the Merger occurred on December 31, 2019, Mr. Sturgeon would be entitled to receive US$ 1.2 million, subject to deductions for social insurance and other withholdings.
Daniel Penn
Payments under employment agreement
Mr. Penn has an employment agreement for an indefinite term. Pursuant to Mr. Penn’s employment agreement, we may terminate Mr. Penn’s employment without cause on 12 months’ notice. Mr. Penn may terminate his employment for Good Reason. If we give notice of termination to Mr. Penn (other than for cause) or if Mr. Penn terminates for Good Reason, the Company will make payment in lieu of notice equal to 12 months of salary. Mr. Penn is also entitled to payment of an amount consisting of (i) two times his target annual non-equity incentive plan award and, (ii) his vacation days in respect of the First PN Casenotice period plus accrued vacation days and (iii) his annual target non-incentive plan award pro-rated to the termination date. Assuming a termination date of December 31, 2019, Mr. Penn would be entitled to receive US$ 2.0 million, subject to deductions for social insurance and other withholdings. Mr. Penn is also entitled to medical and dental insurance for a period of 12 months following termination.
Mr. Penn may also terminate his employment at any time on 12 months’ notice. We may elect to make payment in respectlieu of notice, and pay him the portion of his annual salary for the portion of the claims relatingnotice period remaining at the time the Company makes this election. Mr. Penn is also entitled to receive any earned but unpaid bonuses awarded in accordance with his employment agreement and payment for accrued vacation days. Assuming we elect to make payment in lieu of notice for the second promissory note havingentire notice period and a face valuetermination date of approximately EUR 8.3 million (the "Second PN Case")December 31, 2019, Mr. Penn would be entitled to receive US$ 586,000, subject to deductions for social insurance and oneother withholdings.
In the event we terminate Mr. Penn’s employment due to cause, he is not entitled to receive any additional remuneration.
Equity
The terms of Mr. Penn’s equity award agreements do not provide for the promissory notes havingvesting of any awards on termination. Any restricted stock units and unvested options awarded to Mr. Penn shall immediately terminate on the date of his termination. Any options issued to Mr. Penn that have vested as of a face valuedate of approximately EUR 26.2 million (the "Third PN Case").termination (other than for cause) may be exercised for a period of three months following such termination date.
On April 26, 2018,In the judge in the First PN Case ruled in favorevent of the plaintiff. Markiza appealed that decision.
On May 14, 2018, Markiza filed a criminal complaint with the Special Prosecutor's Officechange of the Slovak Republic (the "Special Prosecutor’s Office") alleging thatcontrol, all restricted stock units and options granted to Mr. KocnerPenn would vest and become immediately exercisable pursuant to Mr. Rusko committed the offenses of (1) counterfeiting, falsification, and illegal production of money and securities and (2) obstruction or perversion of justice. The Special Prosecutor’s Office opened criminal proceedings in the matter at that time.
On June 20, 2018, the Special Prosecutor’s Office issued a decision to formally charge Mr. Kocner and Mr. Rusko with counterfeiting, falsification, and illegal production of money and securities and with obstruction or perversion of justice. Following this decision, Mr. Kocner has been taken into pre-trial custody by the Slovak authorities, where he has remained. Subsequently, the Special Prosecutor’s Office has charged Mr. Kocner’s long-time associate, who received two of the alleged promissory notes as the original beneficial owner and purported to endorse those notes to a company controlled by Mr. Kocner, with counterfeiting, falsification, and illegal production of money and securities.
On October 12, 2018, the court of first instance terminated proceedings in respect of the Second PN Case because the plaintiff failed to pursue the claim, which the plaintiff appealed.Penn’s equity award agreements.
On December 14, 2018,31, 2019, the appellate court suspended proceedings in respectvalue of all unvested equity awards granted to Mr. Penn (including performance-based restricted stock units calculated at target performance) was US$ 1,374,624 and the First PN Case untilvalue of all vested options was US$ 659,795.
Cash award agreement
If we give notice of termination to Mr. Penn (other than for cause) or if he terminates for Good Reason, any amount not yet paid under the cash award agreement would become immediately payable. If Mr. Penn terminates for other than Good Reason or we terminate Mr. Penn’s employment due to cause, Mr. Penn will not be entitled to any further payments under the cash award agreement after the date of such termination.
In the event of a final and enforceable decision has been rendered inchange of control, any amount not yet paid under the criminal proceedings.cash award agreement would become immediately payable.
On December 21, 2018,31, 2019, the appellate court reversed the decisionvalue of the courtcash award not yet paid to Mr. Penn was US$ 0.6 million.
Retention award agreement
At the time of first instancea closing of the Merger, the entire amount of the retention award would become immediately payable.
If we give notice of termination to Mr. Penn (other than for cause) or if he terminates for Good Reason prior to a change of control, Mr. Penn would be entitled to receive the retention award at the time the Merger closes. If Mr. Penn terminates for other than Good Reason or we terminate Mr. Penn’s employment due to cause, Mr. Penn shall not be entitled to the Second PN Caseretention award after the date of such termination.
Assuming the Merger occurred on December 31, 2019, Mr. Penn would be entitled to receive US$ 1.2 million, subject to deductions for social insurance and directed the case be tried on the merits.other withholdings.
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TabularPay Ratio Disclosure
We are providing the following information regarding the ratio of the annual total compensation of our principal executive officer to the annual total compensation of our median employee.
For 2019, the annual total compensation of our principal executive officer was US$ 3,854,462. For purposes of this disclosure, this amount is calculated as the average of the annual total compensation of our two co-Chief Executive Officers, as reported in the Summary Compensation Table. The annual total compensation of our median employee (other than the co-Chief Executive Officers) for 2019, was US$ 22,563. Based on this information, the ratio of the annual total compensation of our principal executive officer to the annual total compensation of our median employee for 2019 was 171:1.
We have concluded that the average total compensation of the two co-Chief Executive Officers for 2019 is the most appropriate representation of the annual total compensation of the principal executive officer for purposes of this pay ratio disclosure. This is consistent with the evaluation of the compensation of co-Chief Executive Officers, which is determined with reference to the average compensation of the chief executive officer and the second highest paid executive officer of the peer group (see “Use of Peer Group Companies” under the Compensation Discussion and Analysis section of this report).
In accordance with Item 402(u) of Regulation S-K, we are using the same median employee that was identified in 2018 for purposes of the pay ratio calculation because there has been no change in our employee population or employee compensation arrangements in 2019 that we believe would significantly change our pay ratio disclosure. For purposes of calculating total annual compensation of our median employee, we considered the salary and bonus (which do not include other non-wage compensation) earned by all active full-time and part-time employees of the Company (including all consolidated subsidiaries) as reflected in our payroll records. We annualized compensation for such employees that were not employed for the entire calendar year but did not make any cost-of-living adjustments. Amounts of compensation in a currency other than U.S. dollars have been translated using the exchange rate as of December 31, 2019. This pay ratio calculation is a reasonable estimate calculated in a manner consistent with Item 402(u) of Regulation S-K.
Because the SEC rules for identifying the median employee and calculating the pay ratio allow companies to use different methodologies, exemptions, estimates and assumptions, the pay ratio disclosure presented here may not be comparable to the pay ratio reported by other companies.
Director Compensation
Historically, we have used a combination of cash and equity for the annual compensation of non-employee directors. Prior to the Company’s 2017 Annual General Meeting, each non-employee director was entitled to receive a cash fee of US$ 65,000 per annum and an award of restricted stock units having a value of approximately US$ 65,000 on the date of grant. In addition, the independent chairman of the Board was entitled to receive a cash fee of US$ 25,000 and the chair of each of our standing committees received an additional cash fee of US$ 5,000. Members of the Audit Committee were paid a cash fee of US$ 12,000. Members of the Compensation Committee and members of the Corporate Governance/Nominating Committee were paid a cash fee of US$ 5,000.
Since the Company’s 2017 Annual General Meeting, participating directors who are elected at an Annual General Meeting of the Company have the option of receiving annual director compensation either as (i) cash fees in the amounts previously paid for a year of Board and committee service (described above) and a grant of restricted stock units having a value of US$ 65,000 or (ii) a grant of restricted stock units having a value equal to the total remuneration a participating director would otherwise be entitled to receive for service on the Board and as a chair or a member of the Board’s standing committees plus a premium. For compensation consisting solely of restricted stock units, such compensation will only be received on the vesting of such restricted stock units on the first anniversary of the grant date and the compensation ultimately earned by participating directors will depend on share price performance, which serves to better align their interests with shareholders. All participating directors elected to receive director compensation for their current period of service in US$ 000’s, except sharethe form of restricted stock units. (See "Directors, Executive Officers and per share data)Corporate Governance" above for additional information on committee membership.)
The following table sets out information in respect of compensation earned by directors for the year ended December 31, 2019. Annual director compensation consists solely of grants of restricted stock units for participating directors for the current period of service, which commenced following the 2019 Annual General Meeting. We do not have any non-equity incentive compensation plans or pension or non-qualified deferred compensation earnings and directors received no other compensation. Messrs. Turner and Knag declined any director compensation.
|
| | | | | | | | |
| | Fees Earned or Paid in Cash (US$)(1) | | Stock Awards
(US$)(2)(3) | | Total Compensation (US$) |
| John K. Billock | 100,000 |
| | 212,503 |
| | 312,503 |
|
| Alfred Langer | 100,000 |
| | 183,752 |
| | 283,752 |
|
| Parm Sandhu | 125,000 |
| | 196,253 |
| | 321,253 |
|
| Kelli Turner | 100,000 |
| | 190,001 |
| | 290,001 |
|
| |
(1) | These amounts represent fees earned by directors in connection with their service on the special committee constituted by the Board of Directors to conduct the strategic review, which resulted in the proposed Merger. Mr. Sandhu received an additional fee for his service as the chair of the special committee. |
| |
(2) | These amounts consist of grants of restricted stock units and reflect total compensation paid to participating directors for current period of service, which commenced following the 2019 Annual General Meeting in May 2019. Stock awards representing compensation paid to directors for the period of service in 2019 that ended at the Company’s 2019 Annual General Meeting were reported in the proxy statement for the 2019 Annual General Meeting. |
| |
(3) | These amounts reflect aggregate grant date fair value of restricted stock unit awards granted during the fiscal year ended December 31, 2019 pursuant to the 2015 Stock Incentive Plan in accordance with ASC 718. Assumptions used in the calculation of this amount are included in Part II, Item 8, Note 17 to our Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2019. Such restricted stock units have a one-year vesting period. |
On March 19, 2019,ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following the conclusiontable sets forth information as of the pre-trial investigation, the Special Prosecutor’s Office formally indicted Mr. Kocner and Mr. Rusko with counterfeiting, falsification, and illegal production of money and securities and with obstruction or perversion of justice and filed the indictment with the Special Criminal Court of the Slovak Republic.
On March 25, 2019, Markiza filed a complaint with the Slovak Constitutional Court in respect of the appellate court decision in the Second PN Case, which was accepted on October 2, 2019.
On May 14, 2019, the court of first instance decided to suspend proceedings in respect of the Second PN Case until a final and enforceable decision has been rendered in the criminal proceedings.
There have been no hearings held in respect of the Third PN Case since the initiation of the criminal proceedings. On May 14, 2019, the court of first instance decided to suspend proceedings in respect of the Third PN Case until a final and enforceable decision has been rendered in the criminal proceedings.
The plaintiff re-filed its claimApril 23, 2020 with respect to the Fourth PN Case,beneficial ownership of shares of our outstanding voting securities of (i) each Named Executive Officer, (ii) each director, (iii) all directors and executive officers as a group and (iv) each shareholder known by us to beneficially own more than 5% of any class of our outstanding voting securities. Our outstanding voting securities are comprised of 254,298,255 shares of Class A Common Stock and a share of Series A Convertible Preferred Stock (the “Series A Preferred Share”), which purportedlyis entitled to one vote for each of the 11,211,449 shares of Class A Common Stock into which it is convertible as of the foregoing date. Our other outstanding equity securities are the 200,000 shares of Series B Convertible Redeemable Preferred Stock (the “Series B Preferred Stock”), which are non-voting except in certain limited circumstances and which are convertible into approximately 111.1 million shares of Class A Common Stock at the option of TWBV. See Note 2 and Note 8 below for additional information regarding Series A Preferred Share and Series B Preferred Stock. Our other authorized class of equity securities is Class B Common Stock, par value $0.08 per share, of which there are no shares outstanding.
In computing the number and percentage of shares owned by each shareholder, we have included any shares of Class A Common Stock that could be acquired within 60 days of April 23, 2020 by the exercise of stock options, the vesting of restricted stock units or the conversion of shares of Series B Preferred Stock. These shares, however, are not counted in computing the percentage ownership of any other shareholder. Except as otherwise noted, each of the shareholders identified in the table has sole voting and investment power over the shares beneficially owned by such shareholder.
|
| | | | | | | | | | | |
| | Beneficial Ownership |
| Name of Beneficial Owner | Class A Common Stock | | Options and RSUs (1) | | Series B Preferred Stock (2) | | % Ownership |
| John K. Billock | 181,614 |
| | 58,220 |
| | — |
| | * |
|
| Peter Knag | — |
| | — |
| | — |
| | --
|
|
| Alfred Langer | 196,322 |
| | 50,343 |
| | — |
| | * |
|
Parm Sandhu (3) | 313,782 |
| | 53,768 |
| | — |
| | * |
|
| Kelli Turner | 196,491 |
| | 52,055 |
| | — |
| | * |
|
| Trey Turner (Theodore McKinley Turner III) | — |
| | — |
| | — |
| | -- |
|
| | | | | | | | |
Michael Del Nin (4) | 963,003 |
| | 652,951 |
| | — |
| | * |
|
Christoph Mainusch (5) | 974,646 |
| | 652,951 |
| | — |
| | * |
|
David Sturgeon (6) | 487,153 |
| | 260,571 |
| | — |
| | * |
|
Daniel Penn (7) | 423,499 |
| | 326,476 |
| | — |
| | * |
|
| | | | | | | | |
| All directors and executive officers as a group (10 persons) | 3,736,510 |
| | 2,107,335 |
| | — |
| | 2.28 | % |
| | | | | | | | |
AT&T Inc.(8) | 162,334,771 |
| | — |
| | 111,136,877 |
| | 74.83 | % |
Warner Media, LLC (formerly Time Warner Inc.) (8) | 162,334,771 |
| | — |
| | 111,136,877 |
| | 74.83 | % |
TW Media Holdings LLC (8) | 162,334,771 |
| | — |
| | 111,136,877 |
| | 74.83 | % |
Time Warner Media Holdings B.V. (8) | 162,334,771 |
| | — |
| | 111,136,877 |
| | 74.83 | % |
| |
(1) | Includes shares of Class A Common Stock underlying exercisable stock options or vested restricted stock units and stock options or restricted stock units that will become exercisable or vest within 60 days of April 23, 2020. |
| |
(2) | Represents the number of shares of Class A Common Stock into which the 200,000 outstanding shares of Series B Preferred Stock is convertible. For additional information on the Series B Preferred Stock, see Note 13 to our financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019. |
| |
(3) | Represents shares beneficially owned by Mr. Sandhu which are held in a family trust. |
| |
(4) | Does not include 486,395 shares of Class A Common Stock underlying unvested restricted stock units. |
| |
(5) | Does not include 486,395 shares of Class A Common Stock underlying unvested restricted stock units. |
| |
(6) | Does not include 177,803 shares of Class A Common Stock underlying unvested restricted stock units. |
| |
(7) | Does not include 222,283 shares of Class A Common Stock underlying unvested restricted stock units. |
| |
(8) | Information (other than percentage ownership) for AT&T Inc.("AT&T"), Warner Media, TW Media Holdings LLC (“TWMH”) and TWBV is based upon a statement on Schedule 13D/A filed jointly by them on October 28, 2019. The address of AT&T, a Delaware corporation, is 208 S.Akard St., Dallas, Texas 75202. The address of each of Warner Media, a Delaware limited liability company, and TWMH, a Delaware limited liability company, is 30 Hudson Yards, New York, New York 10001. The address of TWBV, a private limited liability company organized under the laws of The Netherlands, is Piet Heinkade 173, 1019GM Amsterdam, The Netherlands. AT&T owns directly and indirectly all of the equity interests of Warner Media. Warner Media owns directly and indirectly all of the equity interests of TWMH and TWMH owns directly all of the equity interests of TWBV. AT&T, Warner Media, TWBV and TWMH beneficially own the Series A Preferred Share and 200,000 shares of Series B Preferred Stock, both of which are directly held by TWBV. TWBV as the direct holder of the Series A Preferred Share is entitled to one vote per each 11,211,449 shares of Class A Common Stock into which it is convertible. Pursuant to the terms of the Certificate of Designation of the Series A Preferred Share, the underlying shares of Class A Common Stock were not included in the calculations of ownership percentages set forth in the table above. For additional information on the Series A Preferred Share, see Note 14 to our financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019. |
On April 25, 2018, Warner Media and TWBV exercised outstanding warrants to purchase 100,926,996 shares of Class A Common Stock (which shares are included in the Class A Common Stock ownership in the table above). At the time of the exercise of these warrants, Warner Media and TWBV each undertook for a face valueperiod of approximately EUR 26.2 million,at least two years to transfer the right to vote these 100,929,996 shares at general meetings of the Company to the independent directors of the Company and issued standing proxies to the independent directors authorizing them to vote such shares in proportion to votes otherwise cast on May 13, 2019all matters at a general meeting (other than at any general meeting where the agenda includes a Change of Control Event (as defined in the standing proxies)). Because these standing proxies had a twelve-month term, each of Warner Media and subsequently paidTWBV issued a replacement proxy with a twelve-month term substantially identical to the requisite court fees.initial standing proxy on April 25, 2019. On June 6, 2019,April 25, 2020, each of Warner Media and TWBV issued a third standing proxy identical to the courtinitial standing proxy following the expiration of first instance decidedthe twelve-month term of the replacement proxy; and Warner Media and TWBV have agreed not to suspend proceedingsrevoke the proxies prior to their expiration dates.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Review and Approval of Related Party Transactions
All transactions with our directors and executive officers or with other persons that are subject to review, ratification or approval by us under relevant SEC regulations and Nasdaq Marketplace Rules in which the Company is a participant are reviewed to determine whether such persons have a direct or indirect material interest. Management is primarily responsible for the development and implementation of processes and controls to obtain information in respect of the Fourth PN Case until a finalsuch related party transactions and enforceable decision has been rendered in the criminal proceedings.
Accordingly, civil proceedings in respect of all four promissory notes have now been suspended until a final and enforceable decision is rendered in the criminal proceedings. Criminal proceedings commenced in July 2019 and are ongoing. The Special Criminal Court overseeing the criminal proceedings has scheduled hearing dates into mid-February 2020.
In the event any of the civil proceedings are not dismissed as a result of the successful conclusion of the criminal proceedings, Markiza will continue to vigorously defend the claims.
Basedfor determining, based on the facts and circumstances, whether we or a related party has a direct or indirect material interest in the transaction.
Our Corporate Governance/Nominating Committee reviews, approves or ratifies relevant related party transactions in accordance with a written procedure. In the course of these cases, we have not accrued any amountsits review, approval or ratification of related party transactions, the Corporate Governance/Nominating Committee considers: the nature of the related party’s interest in the transaction; the material terms of the transaction; the nature of our participation in the transaction; whether the transaction would impair the judgment of the related party to act in our best interests; and such other matters as are considered appropriate.
Any member of the Corporate Governance/Nominating Committee who is a related party in respect of these claims.a transaction under review may not participate in the deliberations or vote for an approval or ratification of such transaction.
Related Party Transactions 22. RELATED PARTY TRANSACTIONS
We consider our related parties to be our officers, directors andthose shareholders who have direct control and/or influence over the Company as well asand other parties that can significantly influence management.management as well as our officers and directors; a “connected” party is one in relation to whom we are aware of the existence of a family or business connection to a shareholder, director or officer. We have identified transactions with individuals or entities associated with AT&T whichInc., who is represented on our Board of Directors and holdsheld a 44.3% voting interest in CME Ltd. (see Note 14, "Equity")the Company as at December 31, 2019,, as material related party transactions.
AT&T Inc.
|
| | | | | | | | | | | |
| | For The Year Ended December 31, |
| | 2019 |
| | 2018 |
| | 2017 |
|
| Cost of revenues | $ | 20,666 |
| | $ | 22,609 |
| | $ | 22,373 |
|
| Interest expense | 17,380 |
| | 31,867 |
| | 62,501 |
|
|
| | | | | | | |
| | December 31, 2019 |
| | December 31, 2018 |
|
| Programming liabilities | $ | 10,553 |
| | $ | 12,171 |
|
| Other accounts payable and accrued liabilities | 267 |
| | 292 |
|
Accrued interest payable (1) | 1,103 |
| | 1,749 |
|
Other non-current liabilities (2) | 33,465 |
| | 33,465 |
|
The table below sets forth transactions between the Company and AT&T Inc. and its subsidiaries for the year ending December 31, 2019.
|
| | | |
| | For The Year Ending December 31, 2019 |
| | (US$ in 000's) |
| Cost of revenues | $ | 20,666 |
|
| Interest expense | 17,380 |
|
| Programming liabilities | 10,553 |
|
| Other accounts payable and accrued liabilities | 267 |
|
Accrued interest payable (1) | 1,103 |
|
Other non-current liabilities (2) | 33,465 |
|
| |
(1) | Amount represents accrued Guarantee Feesfees payable to Warner Media for guaranteeing the Company’s 2021 Euro Loan and the Company’s 2023 Euro Loan for which we have not yet paid. Seepaid in cash. For additional information on our long-term debt, see Part II, Item 8, Note 4 "Long-term Debt and Other Financing Arrangements".to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019. |
| |
(2) | Amount represents Guarantee Feesthe accrued fees payable to Warner Media for guaranteeing the Company’s 2023 Euro Loan for which we had previously made an election to pay in kind. SeeFor additional information on our long-term debt, see Part II, Item 8, Note 4 "Long-term Debt and Other Financing Arrangements".to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019. |
Director Independence
The Nasdaq Marketplace Rules require that a majority of the directors be “independent directors”. For a director to be considered independent, the Board must determine that the director (and in some cases, members of a director’s immediate family) has no material relationship with us or our subsidiaries and that the director is free of any other relationship, whether with us or otherwise, that would interfere with his or her exercise of independent judgment.
On an annual basis, the Corporate Governance/Nominating Committee reviews all material relationships any Director nominee and any director who is serving a term currently may have with the Company. Directors complete questionnaires that are used to establish the independence of independent directors as well as of the members of the Audit Committee and the Compensation Committee, to confirm the qualifications of the members of our Audit Committee and to disclose any transaction with us or our subsidiaries in which a director or executive officer (or any member of his or her immediate family) has a direct or indirect material interest. In the course of the determination by the Board regarding the independence of each director, it considered the beneficial ownership of such director or his or her affiliates in the Company as well as any transactions or arrangements that each director has with us.
Following an evaluation of factors specific to each director, the Board has affirmatively determined that John Billock, Alfred Langer, Parm Sandhu and Kelli Turner have no material direct or indirect relationship with us and qualify as independent directors pursuant to the Nasdaq Marketplace Rules.
23. QUARTERLY FINANCIAL DATAITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Selected quarterlyAudit Fees
EY’s audit fees (including reimbursement of out-of-pocket expenses) for auditing our annual consolidated financial datastatements for the year ended December 31, 2019 and reviewing our interim financial statements included in our filings on Forms 10-Q were US$ 2,003,765 (2018: US$ 2,101,000).
Audit-Related Fees
We paid no audit-related fees to EY for the years ended December 31, 2019 and 2018 is as follows:2018.
|
| | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2019 |
| | First Quarter (Unaudited) | | Second Quarter (Unaudited) | | Third Quarter (Unaudited) | | Fourth Quarter (Unaudited) |
| Consolidated Statements of Operations and Comprehensive Income / Loss Data: | | | | | | | |
| Net revenues | $ | 146,559 |
| | $ | 183,599 |
| | $ | 138,851 |
| | $ | 225,795 |
|
| Cost of revenues | 94,028 |
| | 94,429 |
| | 82,510 |
| | 110,567 |
|
| Operating income | 27,637 |
| | 60,462 |
| | 30,783 |
| | 68,454 |
|
| Income from continuing operations | 11,751 |
| | 44,078 |
| | 13,522 |
| | 49,857 |
|
| Net income | 11,751 |
| | 44,078 |
| | 13,522 |
| | 49,857 |
|
| Net income attributable to CME Ltd. | 11,758 |
| | 43,959 |
| | 13,745 |
| | 49,672 |
|
| | | | | | | | |
| Net income per share: | | | | | | | |
| Continuing operations — basic | $ | 0.03 |
| | $ | 0.12 |
| | $ | 0.04 |
| | $ | 0.13 |
|
| Continuing operations — diluted | 0.03 |
| | 0.12 |
| | 0.04 |
| | 0.13 |
|
| Attributable to CME Ltd. — basic | 0.03 |
| | 0.12 |
| | 0.04 |
| | 0.13 |
|
| Attributable to CME Ltd. — diluted | 0.03 |
| | 0.12 |
| | 0.04 |
| | 0.13 |
|
|
| | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2018 |
| | First Quarter (Unaudited) | | Second Quarter (Unaudited) | | Third Quarter (Unaudited) | | Fourth Quarter (Unaudited) |
| Consolidated Statements of Operations and Comprehensive Income / Loss Data: | | | | | | | |
| Net revenues | $ | 156,709 |
| | $ | 181,908 |
| | $ | 137,038 |
| | $ | 228,251 |
|
| Cost of revenues | 103,670 |
| | 104,997 |
| | 84,588 |
| | 114,850 |
|
| Operating income | 24,581 |
| | 50,017 |
| | 22,197 |
| | 80,792 |
|
| Income from continuing operations | 6,756 |
| | 23,675 |
| | 10,609 |
| | 56,025 |
|
| Income from discontinued operations, net of tax | 316 |
| | 2,350 |
| | 57,882 |
| | — |
|
| Net income | 7,072 |
| | 26,025 |
| | 68,491 |
| | 56,025 |
|
| Net income attributable to CME Ltd. | 7,250 |
| | 26,041 |
| | 68,571 |
| | 55,830 |
|
| | | | | | | | |
| Net (loss) / income per share (as adjusted): | | | | | | | |
| Continuing operations — basic | $ | 0.02 |
| | $ | 0.06 |
| | $ | 0.03 |
| | $ | 0.15 |
|
| Continuing operations — diluted | 0.01 |
| | 0.06 |
| | 0.03 |
| | 0.15 |
|
| Discontinued operations — basic | 0.00 |
| | 0.01 |
| | 0.15 |
| | — |
|
| Discontinued operations — diluted | 0.00 |
| | 0.00 |
| | 0.15 |
| | — |
|
| Attributable to CME Ltd. — basic | 0.02 |
| | 0.07 |
| | 0.18 |
| | 0.15 |
|
| Attributable to CME Ltd. — diluted | 0.01 |
| | 0.06 |
| | 0.18 |
| | 0.15 |
|
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and ProceduresTax Fees
We have established disclosure controls and procedures designed to ensure that information required to be disclosed in our Annual Report on Form 10-K is recorded, processed, summarized and reported withindid not engage EY for tax related services during the specified time periods and is designed to ensure that information required to be disclosed is accumulated and communicated to management, including the co-Chief Executive Officers and the Chief Financial Officer to allow timely decisions regarding required disclosure.
Our co-Chief Executive Officers and our Chief Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of December 31, 2019 and concluded that our disclosure controls and procedures were effective as of that date.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. We have performed an assessment of the design and operating effectiveness of our internal control over financial reporting as of December 31, 2019. This assessment was performed under the direction and supervision of our co-Chief Executive Officers and our Chief Financial Officer, and utilized the framework established in “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on that evaluation, we concluded that as ofyear ended December 31, 2019 our internal control over financial reporting was effective. Our independent registered public accounting firm, Ernst & Young LLP, has audited our financial statements and issued a report on the effectiveness of internal control over financial reporting, which is included herein.2018.
Changes in Internal ControlsAll Other Fees
There were no changes in our internal controls over financial reporting duringother fees paid to EY for the three month periodyears ended December 31, 2019 or 2018.
Policy on Pre-Approval of Services Provided by the Auditor
The Audit Committee of the Board of Directors has considered whether the provision of the services in respect of Audit-Related Fees, Tax Fees and All Other Fees is compatible with maintaining our auditor’s independence prior to the incurrence of such fees in accordance with the Charter of the Audit Committee. All engagements of the auditors are approved in advance by the Audit Committee. At the beginning of the fiscal year, management presents for approval by the Audit Committee a range of services to be provided by the auditors and estimated fees for such services for the current year. Any services to be provided by the auditors that have materially affected, or are reasonably likelynot included within such range of services are approved on a case-by-case basis by the Audit Committee. Management provides reports to materially affect, our internal control over financial reporting.the Audit Committee on at least a quarterly basis on the status of the services provided and the level of fees incurred in respect of each service. We did not approve the incurrence of any fees pursuant to the exceptions to the pre-approval requirements set forth in 17 CFR 210.2-01(c)(7)(i)(C).
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and the Shareholders of Central European Media Enterprises Ltd.
Opinion on Internal Control over Financial Reporting
We have audited Central European Media Enterprises Ltd.’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Central European Media Enterprises Ltd.’s (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Central European Media Enterprises Ltd. as of December 31, 2019 and 2018, the related consolidated statements of operations and comprehensive income / loss, equity and cash flows for each of the three years in the period ended December 31, 2019, of the Company and our report dated February 6, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Annual Report on Form 10-K. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
London, United Kingdom
February 6, 2020
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 is incorporated herein by reference to the sections entitled “Election of Directors,” “Executive Officers,” “Corporate Governance and Board of Director Matters” and “Delinquent Section 16(a) Reports” in our Proxy Statement for the 2020 Annual General Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to the sections entitled “Compensation Discussion and Analysis”, “Summary Compensation Table”, “Compensation Committee Report” and “Compensation Committee Interlocks and Insider Participation” in our Proxy Statement for the 2020 Annual General Meeting of Shareholders.
| |
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by Item 12 relating to the security ownership of certain beneficial owners and management is incorporated herein by reference to the section entitled “Security Ownership of Certain Beneficial Owners and Management" in our Proxy Statement for the 2020 Annual General Meeting of Shareholders.
Equity Compensation Plan Information
The following table provides information as of December 31, 2019 about common stock that may be issued upon the exercise of options, warrants and rights under all of our existing equity compensation plans.
|
| | | | | | | |
| Equity Compensation Plan Information |
| | (a) | | (b) | | (c) |
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
| Equity compensation plans approved by security holders: | | | | | |
| Stock options | 2,011,392 |
| | $2.32 | | (1) |
| Restricted stock units | 2,834,253 |
| | n/a | | (1) |
| Equity compensation plans not approved by security holders | — |
| | — | | — |
| Total | 4,845,645 |
| | $2.32 | | 10,078,617 |
|
| |
(1)
| There were 10,078,617 shares available for issuance under CME’s 2015 Stock Incentive Plan at December 31, 2019 after reflecting both stock options and restricted stock units in column (a).
|
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 is incorporated herein by reference to the sections entitled “Certain Relationships and Related Party Transactions” and “Corporate Governance and Board of Director Matters” in our Proxy Statement for the 2020 Annual General Meeting of Shareholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 is incorporated herein by reference to the section entitled “Selection of Auditors” in our Proxy Statement for the 2020 Annual General Meeting of Shareholders.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) The following financial statements of Central European Media Enterprises Ltd. are included in Part II, Item 8 of this Report:
Report of Independent Registered Public Accounting Firm;
| |
• | Consolidated Balance Sheets as of December 31, 2019 and 2018;
|
| |
• | Consolidated Statements of Operations and Comprehensive Income / Loss for the years ended December 31, 2019, 2018 and 2017;
|
| |
• | Consolidated Statements of Equity for the years ended December 31, 2019, 2018 and 2017;
|
| |
• | Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017; and
|
Notes to Consolidated Financial Statements.28
(a)(2) Financial Statement Schedule (included at page S-1 of this Annual Report on Form 10-K).
(a)(3) The following exhibits are included in this report:
EXHIBIT INDEX
|
| | |
| Exhibit Number | | Description |
3.01* | | Memorandum of Association (incorporated by reference to Exhibit 3.01 to the Company's Registration Statement No. 3380344 on Form S-1 filed June 17, 1994). |
| | |
3.02* | | Memorandum of Increase of Share Capital (incorporated by reference Exhibit 3.03 to Amendment No. 1 to the Company's Registration Statement No. 33-80344 on Form S-1, filed August 19, 1994). |
| | |
3.03* | | Memorandum of Reduction of Share Capital (incorporated by reference to Exhibit 3.04 to Amendment No. 2 to the Company's Registration Statement No. 33-80344 on Form S-1, filed September 14, 1994). |
| | |
3.04* | | |
| | |
3.05* | | |
| | |
3.06* | | |
| | |
3.07* | | |
| | |
3.08*+ | | |
| | |
4.01* | | Specimen Class A Common Stock Certificate (incorporated by reference to Exhibit 4.01 to Amendment No. 1 to the Company's Registration Statement No. 33-80344 on Form S-1, filed August 19, 1994). |
| | |
4.02* | | |
| | |
4.03* | | |
| | |
4.04* | | |
| | |
4.05 | | |
| | |
10.01*+ | | |
| | |
10.02*+ | | |
| | |
10.03*+ | | |
| | |
10.04*+ | | |
| | |
10.05*+ | | |
| | |
10.06*+ | | |
| | |
10.07*+ | | |
| | |
10.08*+ | | |
|
| | |
Exhibit Number | | Description |
| | |
10.09*+ | | |
| | |
10.10*+ | | |
| | |
10.11*+ | | |
| | |
10.12*+ | | |
| | |
10.13* | | |
| | |
10.14* | | |
| | |
10.15* | | |
| | |
10.16* | | |
| | |
10.17* | | |
| | |
10.18* | | |
| | |
10.19* | | |
| | |
10.20* | | |
| | |
10.21* | | |
| | |
10.22* | | |
| | |
10.23* | | |
| | |
10.24* | | Credit Agreement dated as of February 19, 2016 among CME Media Enterprises B.V., as borrower, Central European Media Enterprises Ltd., as guarantor, BNP Paribas, as administrative agent, Time Warner Inc., as guarantor, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 22, 2016). |
| | |
10.25* | | Amendment dated as of February 19, 2016 to the Credit Agreement dated as of September 30, 2015, among Central European Media Enterprises Ltd., as borrower, BNP Paribas, as administrative agent, Time Warner Inc., as guarantor, and the lenders party thereto (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on February 22, 2016). |
| | |
10.26* | | |
| | |
|
| | |
Exhibit Number | | Description |
10.27* | | |
| | |
10.28* | | |
| | |
10.29* | | |
| | |
10.30* | | |
| | |
10.31* | | |
| | |
10.32* | | |
| | |
10.33* | | |
| | |
10.34* | | |
| | |
10.35* | | Consent, Waiver and Second Amendment as of June 22, 2017 to the Credit Agreement dated as of September 30, 2015, as amended, among Central European Media Enterprises Ltd., as borrower, BNP Paribas, as administrative agent, Time Warner Inc., as guarantor, and the lenders party thereto (incorporated by reference to Exhibit 10.02 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2017). |
| | |
10.36* | | Consent, Waiver and First Amendment as of June 22, 2017 to the Credit Agreement dated as of February 19, 2016 among CME Media Enterprises B.V., as borrower, Central European Media Enterprises Ltd., as guarantor, BNP Paribas, as administrative agent, Time Warner Inc., as guarantor, and the lenders party thereto (incorporated by reference to Exhibit 10.03 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2017). |
| | |
10.37* | | Third Amendment, dated as of April 25, 2018, to the Credit Agreement dated as of September 30, 2015, among Central European Media Enterprises Ltd., as borrower, Time Warner Inc., as guarantor, BNP Paribas, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Company's Current Report in Form 8-K filed on April 26, 2018). |
| | |
10.38* | | Second Amendment, dated as of April 25, 2018, to the Credit Agreement dated as of February 19, 2016, among CME Media Enterprises B.V., as borrower, Central European Media Enterprises Ltd., as guarantor, Time Warner Inc., as guarantor, BNP Paribas, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.2 to the Company's Current Report in Form 8-K filed on April 26, 2018). |
| | |
10.39* | | Amendment and Restatement Agreement, dated April 25, 2018, in respect of the Amended and Restated Reimbursement Agreement, dated as of November 14, 2014, as amended and restated as of February 19, 2016, as amended, among Central European Media Enterprises Ltd., CME Media Enterprises B.V., and Time Warner Inc., as credit guarantor (incorporated by reference to Exhibit 10.3 to the Company's Current Report in Form 8-K filed on April 26, 2018). |
| | |
10.40* | | Second Amended and Restated Reimbursement Agreement, dated as of November 14, 2014, as amended and restated as of February 19, 2016, and as further amended and restated as of April 26, 2018, among Central European Media Enterprises Ltd., CME Media Enterprises B.V., and Time Warner Inc., as credit guarantor (incorporated by reference to Exhibit 10.4 to the Company's Current Report in Form 8-K filed on April 26, 2018). |
| | |
10.41* | | Amendment and Restatement Agreement, dated April 25, 2018, in respect of the Amended and Restated Revolving Loan Facility Credit Agreement, dated as of May 2, 2014, as amended and restated as of February 19, 2016, as amended, among Central European Media Enterprises Ltd., as borrower, Time Warner Inc., as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.5 to the Company's Current Report in Form 8-K filed on April 26, 2018). |
| | |
10.42* | | Second Amended and Restated Revolving Loan Facility Credit Agreement, dated as of May 2, 2014, as amended and restated as of February 19, 2016, and as further amended and restated as of April 26, 2018, among Central European Media Enterprises Ltd., as borrower, Time Warner Inc., as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.6 to the Company's Current Report in Form 8-K filed on April 26, 2018). |
| | |
10.43* | |
|
| | |
|
| | |
Exhibit Number | | Description |
10.44* | | |
| | |
10.45*+ | | |
| | |
10.46*+ | | |
| | |
10.47*+ | | |
| | |
10.48*+ | | |
| | |
21.01 | | |
| | |
23.01 | | |
| | |
24.01 | | |
| | |
| 31.01 | | |
| | | |
| 31.02 | | |
| | | |
| 31.03 | | |
| | |
32.01 | | |
| | |
99.01* | | |
| | |
99.02* | | |
| | |
99.03* | | |
| | |
101.INS | | XBRL Instance Document |
| | |
101.SCH | | XBRL Taxonomy Schema Document |
| | |
101.CAL | | XBRL Taxonomy Calculation Linkbase Document |
| | |
101.DEF | | XBRL Taxonomy Definition Linkbase Document |
| | |
101.LAB | | XBRL Taxonomy Label Linkbase Document |
| | |
101.PRE | | XBRL Taxonomy Presentation Linkbase Document |
* Previously filed exhibits.
+ Exhibit is a management contract or compensatory plan.29
b) Exhibits: See (a)(3) above for a listing of the exhibits included as part of this report.
c) Report of Independent Registered Public Accountants on Schedule II - Schedule of Valuation Allowances. (See page S-1 of this Annual Report on Form 10-K).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | |
| | | Central European Media Enterprises Ltd. |
| Date: | February 6,April 27, 2020 | /s/ David Sturgeon David Sturgeon Executive Vice President and Chief Financial Officer Principal Financial Officer and Principal Accounting Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
|
| | | | |
Signature | | Title | | Date |
| | | | |
* | | Chairman of the Board of Directors | | February 6, 2020 |
John K. Billock | | | | |
| | | | |
/s/ Michael Del Nin | | co-Chief Executive Officer | | February 6, 2020 |
Michael Del Nin | | (co-Principal Executive Officer) | | |
| | | | |
/s/ Christoph Mainusch | | co-Chief Executive Officer | | February 6, 2020 |
Christoph Mainusch | | (co-Principal Executive Officer) | | |
| | | | |
/s/ David Sturgeon | | Chief Financial Officer | | February 6, 2020 |
David Sturgeon
| | (Principal Financial Officer and
Principal Accounting Officer)
| | |
| | | | |
* | | Director | | February 6, 2020 |
Peter Knag | | | | |
| | | | |
* | | Director | | February 6, 2020 |
Alfred W. Langer | | | | |
| | | | |
* | | Director | | February 6, 2020 |
Parm Sandhu | | | | |
| | | | |
* | | Director | | February 6, 2020 |
Kelli Turner | | | | |
| | | | |
* | | Director | | February 6, 2020 |
Trey Turner | | | | |
|
| | | |
| * | By: | /s/ David Sturgeon |
| | | David Sturgeon |
| | | Attorney-in-fact ** |
| | | |
| ** | By authority of the power of attorney filed herewith |
INDEX TO SCHEDULES
Schedule II
Schedule of Valuation Allowances
(US$ 000's)
|
| | | | | | | |
| | Bad debt and credit note provision | | Deferred tax allowance |
| BALANCE December 31, 2016 | $ | 9,229 |
| | $ | 110,920 |
|
| Charged to costs and expenses | 1,913 |
| | 6,242 |
|
Deductions (1) | (1,886 | ) | | 471 |
|
| Foreign exchange | 1,180 |
| | 15,844 |
|
| BALANCE December 31, 2017 | 10,436 |
| | 133,477 |
|
| Charged to costs and expenses | 811 |
| | (26,042 | ) |
Deductions (1) | (1,079 | ) | | 1,260 |
|
| Foreign exchange | (471 | ) | | (5,569 | ) |
| BALANCE December 31, 2018 | 9,697 |
| | 103,126 |
|
| Charged to costs and expenses | (2,514 | ) | | (3,139 | ) |
Deductions (1) | 1,592 |
| | 864 |
|
| Foreign exchange | (227 | ) | | (1,936 | ) |
| BALANCE December 31, 2019 | $ | 8,548 |
| | $ | 98,915 |
|
| |
(1)
| Charged to other accounts for the bad debt and credit note provision consist primarily of accounts receivable written off. |
