UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
xxxx ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
oooo 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 0-24796
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
(Exact name of registrant as specified in its charter)
BERMUDA
(State or other jurisdiction of incorporation or organization)
Clarendon House, Church Street, Hamilton
(Address of principal executive offices)
98-0438382
(IRS Employer Identification No.)
HM CX Bermuda
(Zip Code)
Registrant’s telephone number, including area code: +1 441-296-1431
Securities registered pursuant to Section 12(b) of the Act:
CLASS A COMMON STOCK, $0.08 PAR VALUE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for each shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated
filer”, “large accelerated filer” or “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Page 1
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2008 (based on the closing sale price of US$ 90.53 of the registrant’s Common
Stock, as reported by the Nasdaq Global Select Market on such date) was approximately US$ 3.3 billion.
Number of shares of Class A Common Stock outstanding as of February 20, 2009: 36,024,273
Number of shares of Class B Common Stock outstanding as of February 20, 2009: 6,312,839
DOCUMENTS INCORPORATED BY REFERENCE
Document
Registrant’s Proxy Statement for the 2009 Annual General Meeting of Shareholders
Location in Form 10-K in Which Document is Incorporated
Part III
Page 2
TABLE OF CONTENTS
PART I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
PART II
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
Item 15
SIGNATURES
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedule
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Table of Contents
Unless the context otherwise requires, references in this report to the “Company”, “we”, “us” or “our” refer to Central European Media Enterprises Ltd. (“CME”) or CME 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 appropriate exchange rates. All references in this report to “US$” or “dollars” are to U.S. dollars, all references to “BGN” are to Bulgarian leva, all references to “HRK” are to
Croatian kuna, all references to “CZK” are to Czech korunas, all references to “RON” are to the New Romanian lei, all references to “SKK” are to Slovak korunas, all references to
“UAH” are to Ukrainian hryvnia, all references to “Euro” or “EUR” are to the European Union Euro and all references to “GBP” or “£” are to British pounds. The exchange rates as
of December 31, 2008 used in this report are BGN/US$ 1.41; HRK/US$ 5.21; CZK/US$ 19.35; RON/US$ 2.83; SKK/US$ 21.39; UAH/US$ 7.7; EUR/US$ 0.72 and GBP/US$ 0.68.
Forward-Looking Statements
This report contains forward-looking statements, including those relating to our capital needs, business strategy, expectations and intentions. Statements that use the terms
“believe”, “anticipate”, “expect”, “plan”, “estimate”, “intend” and similar expressions of a future or forward-looking nature identify forward-looking statements for purposes
of the U.S. federal securities laws or otherwise. For these statements and all other forward-looking statements, we claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy or are otherwise beyond our control and some
of which might not even be anticipated. Forward-looking statements reflect our current views with respect to future events and because our business is subject to such risks and
uncertainties, actual results, our strategic plan, our financial position, results of operations and cash flows could differ materially from those described in or contemplated by
the forward-looking statements contained in this report.
Important factors that contribute to such risks include, but are not limited to, those factors set forth under “Risk Factors” as well as the following: the effect of the credit crisis
and economic downturn in our markets as well as in the United States and Western Europe; decreases in television advertising spending and the rate of development of the
advertising markets in the countries in which we operate; the impact of any additional investments we make in our Bulgaria, Croatia and Ukraine operations; our effectiveness
in implementing our strategic plan for the Studio 1+1 group in Ukraine; our ability to make future investments in television broadcast operations; our ability to develop
and implement strategies regarding sales and multi-channel distribution; changes in the political and regulatory environments where we operate and application of relevant
laws and regulations; the timely renewal of broadcasting licenses and our ability to obtain additional frequencies and licenses; and our ability to acquire necessary
programming and attract audiences. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary
statements that are included in this report. We undertake no obligation to publically update or review any forward-looking statements, whether as a result of new information,
future developments or otherwise.
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Table of Contents
PART 1
ITEM 1. BUSINESS
GENERAL
CME is a Bermuda company that, together with its subsidiaries and affiliates, invests in, develops and operates commercial television channels in Central and Eastern Europe. At
present, we have operations in Bulgaria, Croatia, the Czech Republic, Romania, the Slovak Republic, Slovenia and Ukraine.
Our registered offices are located at Clarendon House, Church Street, Hamilton HM CX Bermuda, and our telephone number is +1-441-296-1431. Communications can also be sent
c/o CME Development Corporation at Aldwych House, 81 Aldwych, London WC2B 4HN, United Kingdom, telephone number +44-20-7430-5430.
We make available, free of charge, on our website at http://www.cetv-net.com our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
amendments to those reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”).
CORPORATE STRUCTURE
CME was incorporated on June 15, 1994 under the laws of Bermuda. Our assets are held through a series of Dutch and Netherlands Antilles holding companies. We have ownership
interests in license companies and operating companies in each market in which we operate. Operations are conducted either by the license companies themselves or by separate
operating companies. License companies have been authorized by the relevant local regulatory authority to engage in television broadcasting in accordance with the terms of a
particular license. We generate revenues primarily through entering into agreements with advertisers, advertising agencies and sponsors to place advertising on air of the television
channels that we operate. Other than in Bulgaria and Slovenia, the license companies also act as operating companies. As depicted in the table below, our share of profits in our
license and operating companies corresponds with our voting interest. Below is an overview of our operating structure at December 31, 2008 and a chart that details our simplified
corporate structure.
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Company Name
Bulgaria
Operating Companies:
LG Consult EOOD
Ring TV EAD (“Ring TV”)
License Company:
TV2 EOOD
Croatia
License Company:
Nova TV d.d. (“Nova TV (Croatia)”)
Czech Republic
License Company:
CET 21 spol s.r.o. (“CET 21”)
Romania
Operating Companies:
Media Pro International S.A. (“MPI”)
Media Vision S.R.L. (“Media Vision”)
License Company:
Pro TV S.A. (“Pro TV”)
Slovak Republic
License Company:
MARKIZA-SLOVAKIA, spol. s.r.o. (“Markiza”)
Slovenia
Operating Company:
Produkcija Plus d.o.o. (“Pro Plus”)
License Companies:
POP TV d.o.o. (“Pop TV”)
Kanal A d.o.o. (“Kanal A”)
Ukraine
Operating Companies:
Innova Film GmbH (“Innova”)
International Media Services Ltd. (“IMS”)
1+1 Production
TV Media Planet Ltd. (“TV Media Planet”)
Effective Voting Interest
Type of Affiliate
TV Channels
80.0%
80.0%
80.0%
Consolidated Subsidiary
Consolidated Subsidiary
N/A
RING TV
Consolidated Subsidiary
TV2
100.0%
Consolidated Subsidiary
NOVA TV (Croatia)
100.0%
Consolidated Subsidiary
TV NOVA (Czech Republic) NOVA
CINEMA and NOVA SPORT
95.0%
95.0%
95.0%
Consolidated Subsidiary
Consolidated Subsidiary
N/A
N/A
Consolidated Subsidiary
PRO TV, ACASA, PRO CINEMA,
PRO TV INTERNATIONAL, MTV
ROMANIA and SPORT.RO
100.0%
Consolidated Subsidiary
TV MARKIZA
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
Consolidated Subsidiary
N/A
Consolidated Subsidiary
Consolidated Subsidiary
POP TV
KANAL A
Consolidated Subsidiary
Consolidated Subsidiary
Consolidated Subsidiary
Consolidated Subsidiary
N/A
N/A
N/A
N/A
License Company:
Studio 1+1 LLC (“Studio 1+1”)
Gravis LLC (“Gravis”)
Gravis – Kino LLC (“Gravis-Kino”) (2)
Tor LLC (“Tor”) (3)
Zhysa LLC (“Zhysa”) (3)
(1) We owned CITI until February 10, 2009. See Part II, Item 8, Note 23 “Subsequent Events”. We now hold no ownership in Gravis.
(2) On January 26, 2009 we acquired 100% ownership of Gravis-Kino.
(3) Zhysa and Tor hold local terrestrial licenses which allow them to re-broadcast the KINO signal. On January 14, 2009, we acquired 100% ownership of Zhysa and Tor.
Consolidated Subsidiary
Consolidated Subsidiary
Consolidated Subsidiary
Consolidated Subsidiary
Consolidated Subsidiary
STUDIO 1+1
CITI (1)
KINO
KINO
KINO
100.0%
60.4%
60.4%
60.4%
60.4%
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OPERATING ENVIRONMENT
Our television channels reach an aggregate of approximately 87.6 million people in seven countries with a combined population of approximately 97 million people. The rankings of
our channels in the markets in which they broadcast are reflected below.
Country
Bulgaria
Croatia
Czech Republic
Romania
Slovak Republic
Slovenia
Ukraine
TV Channels
TV2
RING TV
NOVA TV
(Croatia)
TV NOVA
(Czech Republic)
NOVA SPORT
NOVA CINEMA(7)
PRO TV
ACASA
PRO CINEMA
SPORT.RO
MTV ROMANIA
TV MARKIZA
POP TV
KANAL A
STUDIO 1+1
KINO
CITI
Launch Date
November 2007 (3)
September 1998 (3)
August 2000 (4)
February 1994 (5)
April 2002 (6)
December 2007
December 1995
February 1998
April 2004
July 2003 (8)
June 2002 (9)
August 1996
December 1995
October 1991 (10)
January 1997
August 1993 (11)
March 1994 (11)
Technical Reach (1)
80.3%
58.6%
2008 All Day Audience
Share (2)
2.0%
0.3%
Market Rank (2)
8
22
89.0%
97.3%
20.7%
37.9%
98.6%
90.1%
75.0%
63.8%
56.3%
99.4%
95.7%
93.7%
98.5%
52.5%
8.2%
22.5%
41.5%
n/a
0.5%
16.5%
8.1%
2.0%
1.6%
0.6%
35.1%
25.4%
15.0%
12.0%
0.6%
0.1%
3
1
n/a
7
1
3
10
13
30
1
1
3
2
19
18
(1)
(2)
Source: Bulgaria: TNS; Croatia: AGB Nielsen Media Research; Czech Republic: ATO - Mediaresearch; Romania: GFK; Slovak Republic: PMT / TNS SK; Slovenia: AGB
Nielsen Media Research; Ukraine: GFK. “Technical Reach” is a measurement of the percentage of a country’s population that is able to receive the signals of the indicated
channels.
Source: Bulgaria: TNS; Croatia: AGB Nielsen Media Research; Czech Republic: ATO – Mediaresearch; Romania: GFK; Slovak Republic: PMT / TNS; Slovenia: AGB Nielsen
Media Research; Ukraine: GFK. Sales target group all day audience share and market rank.
(3) We acquired TV2 and RING TV in August 2008.
(4) We acquired NOVA TV (Croatia) in July 2004.
(5) We acquired TV NOVA (Czech Republic) in May 2005.
(6) We acquired NOVA SPORT in September 2005.
(7)
(8) We acquired SPORT.RO in March 2007.
(9) We acquired the license to broadcast MTV ROMANIA in December 2007.
(10) We acquired KANAL A in October 2000.
(11) We acquired KINO and CITI in January 2006 and relaunched them in July 2006 and December 2006, respectively. We disposed of the CITI channel in February 2009.
Technical reach for NOVA CINEMA includes the entrance of DBV-T (December 15, to December 31, 2008)
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The following table shows the population, technical reach of our primary channel, number and proportion of television households, and cable penetration for those countries of
Central and Eastern Europe where we conduct broadcast operations.
Country
Bulgaria
Croatia
Czech Republic
Romania
Slovak Republic
Slovenia
Ukraine
Total
Population
(in millions)
(1)
Technical reach (in millions)
(2)
7.6
4.6
10.2
21.3
5.4
2.0
45.9
97.0
5.9
3.7
9.9
19.9
5.0
1.9
41.3
87.6
Television Households
Reached
(in millions)
(3)
2.3
1.3
3.8
7.0
1.6
0.6
16.4
33.0
Television
Households Reached (%)
(3)
Cable
Penetration
(3)
99%
97%
98%
97%
98%
98%
97%
60%
16%
23%
67%
43%
65%
32%
(1)
(2)
(3)
Source: Global Insight.
Source: Internal estimates supplied by each country’s operations. Each of our operations has estimated its own technical reach based on the location, power and frequency
of each of its transmitters and the local population density and geography around the transmitter. The technical reach is separate from the independent third party
measurement that determines audience shares.
Source: Bulgaria: TNS, Croatia: AGB Nielsen Media Research,; Czech Republic: ATO Mediaresearch (Continual Study); Romania: GFK– Establishment Survey; Slovak
Republic: TNS; Slovenia: AGB Nielsen Media Research –Establishment Survey 2008; Ukraine: GFK.
Regulation
In this report, we refer to each broadcasting regulatory authority or agency in our operating countries individually as the “Media Council” and collectively as the “Media
Councils”. These authorities or agencies are as follows:
Bulgaria:
Croatia:
Council for Electronic Media
Electronic Media Council
Czech Republic:
The Council for Radio and Television Broadcasting
Romania:
National Audio-Visual Council
Slovak Republic:
Council of the Slovak Republic for Broadcasting and Television Transmission
Slovenia:
Ukraine:
Post and Electronic Communications Agency of the Republic of Slovenia
National Council for Television and Radio Broadcasting
Media Councils generally supervise broadcasters and their compliance with national broadcasting legislation. On the accession to the European Union (the “EU”) of any Central or
Eastern European country in which we operate, our broadcast operations in such country become subject to EU legislation, including regulations on the origin of programming
content. The Czech Republic, Slovenia and the Slovak Republic acceded to the EU on May 1, 2004. Romania and Bulgaria acceded to the EU on January 1, 2007.
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The EU Audiovisual Media Services Directive (the “AVMS Directive”) came into force in December 2007, amending the Television Without Frontiers Directive (the “TWF
Directive”). The AVMS Directive extends the legal framework from television broadcasting provided by the TWF Directive to media services generally in the EU. The AVMS
Directive covers both linear (i.e., broadcasting) and non-linear (e.g., video-on-demand and mobile television) transmissions of media services, with the latter subject to lighter
regulation. Among other things, the AVMS Directive preserves the requirement that broadcasters, where “practicable and by appropriate means,” reserve a majority of their
broadcast time for “European works.” Such works are 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 also preserves the requirement 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. The AVMS Directive has relaxed regulations in respect of advertising shown in linear broadcasts and has extended some of those rules to non-linear broadcasts. In general,
rules restricting when programming can be interrupted by advertising in linear broadcasting have been abolished except in the case of movies, news and childrens programming,
where programming can be interrupted once every thirty minutes or more. In addition, broadcasters may use product placement in most genres, subject to the identification of such
practices and limitations on prominence. Member states have two years to implement the AVMS Directive, and may adopt stricter conditions than those set forth in the AVMS
Directive. We intend to participate actively in any consultation process in respect of the implementation of the AVMS Directive in countries in which we operate that are EU
members.
License Renewal
Regulatory bodies in each country in which we operate control access to the available frequencies through licensing regimes. The analog licenses to operate our terrestrial
broadcast operations are effective for the following periods:
Bulgaria
Croatia
Czech Republic
The license of TV2 expires in February 2010.
The license of NOVA TV (Croatia) expires in March 2010.
The license of TV NOVA (Czech Republic) expires in January 2017. The NOVA SPORT license expires in September 2020. The satellite license for NOVA
CINEMA expires in November 2019.
Romania
Licenses expire on dates ranging from April 2009 to May 2017.
Slovak Republic
The license of TV MARKIZA expires in September 2019.
Slovenia
Ukraine
The licenses of POP TV and KANAL A expire in August 2012.
The 15-hour prime time and off prime time license of STUDIO 1+1 expires in December 2016. The license to broadcast for the remaining nine hours in off
prime time expires in July 2014. The satellite license expires in April 2018. Licenses used for the KINO and CITI channels expire on dates ranging from
March 2010 to April 2016.
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Digital Terrestrial Television Transition
In the transition from analog to digital terrestrial broadcasting each jurisdiction is following a similar set of steps - although the approach being applied is not uniform. Typically,
legislation governing the transition to digital is adopted addressing the licensing of operators of the digital networks as well as the licensing of digital broadcasters, technical
parameters concerning the allocation of frequencies to be used for digital services (including those currently being used for analog services), broadcasting standards to be
provided, the timing of the transition and, ideally, principles to be applied in the transition, including transparency and non-discrimination. As a rule, these are embodied in a
technical transition plan (“TTP”) that, in most jurisdictions, is agreed among the relevant Media Council, the national telecommunications agency (which is generally responsible for
the allocation and use of frequencies) and the broadcasters.
The TTP will typically include the following: the timeline and final switchover date, time allowances for the phases of the transition, allocation of frequencies for digital broadcasting
and other digital services, methods for calculating digital terrestrial signal coverage and penetration of set top boxes, parameters for determining whether the conditions for
switchover have been satisfied for any phase, the technical specifications for broadcasting standards to be utilized and technical restrictions on parallel broadcasting in analog and
terrestrial during the transition phase.
Of our markets, the Czech Republic, the Slovak Republic and Slovenia are the furthest advanced in the transition to digital. All three have adopted new legislation or amendments to
existing legislation and TTPs in order to facilitate the transition. Generally, this legislation provides that incumbent analog broadcasters are entitled to receive a digital license or
that current licenses entitle the holders to digital terrestrial broadcasting, although broadcasters in a specific jurisdiction may be required to formally file an application in order for a
digital license to be issued.
In that regard, both of our Slovenian channels, POP TV and KANAL A, were issued digital licenses in November 2007. We anticipate that the switchover to digital in Slovenia will
be completed by 2010. The license currently held by CET 21 allows for national digital terrestrial broadcasting of TV NOVA (Czech Republic) in any multiplex. Such license may be
extended for an additional eight years, to 2025, upon application by CET 21. In addition, CET 21 was granted a license for national digital terrestrial broadcasting of
NOVA CINEMA. This license is valid until the completion of transition to digital terrestrial broadcasting in the Czech Republic, at which time we expect a new license will be granted.
In the Slovak Republic, TV MARKIZA is entitled to receive a digital license under recently adopted legislation and intends to apply for one following the completion of the tender
offer for the multiplex operator under the TTP for the Slovak Republic. In addition, in January 2009 Markiza was granted a digital license for a niche channel which must be launched
by January 2011.
Draft legislation governing the transition to digital is under discussion in Bulgaria and Croatia. We anticipate that legislation will be adopted during 2009 that will address digital
licensing and the TTP for each market in a comprehensive way. We expect that our anchor channels will receive digital licenses in these markets.
The Romanian governmental authorities have adopted amendments to existing legislation which provide that analog broadcasters are entitled to receive digital licenses; however,
specific regulations to govern the transition to digitalization are yet to be adopted by the Romanian Media Council. The existing law provides that broadcasters within the same
multiplex are entitled to choose their own operator, whether one of those broadcasters, a separate company set up by those broadcasters or a third party.
The Ukrainian governmental authorities have issued generic legislation in respect of the transition to digital. In addition, the Ukrainian Media Council has issued decisions
confirming that STUDIO 1+1 would be included in one of the multiplexes to be launched in connection with the transition to digital broadcasting. The Ukrainian Media Council
recently held a tender for licenses for additional digital frequencies that will be made available for niche channels in the switchover to digital, and is currently soliciting proposals for
technical development of certain digital multiplexes. However, there has been no indication as to when a TTP will be adopted in Ukraine.
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We intend to apply for and obtain digital licenses that are issued in replacement of analog licenses in all our operating countries and to apply for additional digital licenses and for
licenses to operate digital networks where such applications are permissible and prudent.
OPERATIONS BY COUNTRY
BULGARIA
General
Bulgaria, which acceded to the European Union on January 1, 2007, is a parliamentary democracy with a population of approximately 7.6 million people. Per capita GDP is estimated
to be US$ 6,154 in 2008 with a GDP growth rate in 2008 of 5.8%. According to our estimates, in local currency the Bulgarian television advertising market grew by approximately 6 -
8% in 2008 and was worth approximately US$ 175 - 185 million. We acquired our Bulgaria operations on August 1, 2008 and operate two channels, TV2, a national terrestrial channel,
and RING TV, a cable sports channel.
License Holder
TV2 EOOD holds a national terrestrial programming license for Bulgaria and has primary responsibility for our broadcasting operations in Bulgaria.
Operations
TV2’s target audience is the 18-49 all demographic and RING TV’s target audience is 18-54 male. The chart below summarizes the all day and prime time audience share figures in the
TV2 target group:
TV2
All day
Prime time
RING TV
All day
Prime time
Source: TNS.
Programming
2004
2005
2006
-
-
1.0%
0.8%
-
-
0.6%
0.5%
-
-
0.5%
0.5%
2007
0.1%
0.1%
0.3%
0.3%
2008
2.0%
1.8%
0.3%
0.3%
TV2 broadcasts 24 hours per day and its programming strategy is to appeal to a broad audience through a wide range of programming, including news, sitcoms, police series, soap
operas and game shows. Approximately 46% of TV2’s programming is locally produced.
TV2 is required to comply with several restrictions on programming. These include the requirement that 30% of broadcast time consist of locally produced programming and 24% of
programming be produced by independent producers in the EU. TV2’s most successful program in 2008 was the broadcast of the Bulgarian National Football League. Local
programs that delivered the best performance in 2008 were ‘Azis Late Night Show’ and ‘Urban Legends’.
RING TV broadcasts 24 hours per day and targets a male audience with programming such as football matches and volleyball. Approximately 8% of RING TV’s programming is
locally produced, including a live studio show ‘Open Ring’, all live sport events, ‘Blitz News’ and ‘Live Sports News’, which achieved an audience share of 5.1%. RING TV’s most
successful program in 2008 was the broadcast of Bulgarian National Football League matches.
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Advertising
Our Bulgaria operations derive revenues principally from the sale of commercial advertising time on the TV2 and RING TV channels and revenue from cable providers who pay for
the right to carry RING TV. Advertising is sold through a contracted advertising agency. Our Bulgarian channels currently serve a variety of advertisers, including Eurofootball,
ITV Partner, Bella, Tehnomarket Europa, Danone and Wallmark. The top ten advertising clients on our Bulgarian channels contributed approximately 31% of our total Segment Net
Revenues in Bulgaria in 2008.
Within the Bulgarian advertising market, television accounts for approximately 55% of total advertising spending. Television competes for advertising revenues with other media
such as print, radio, outdoor advertising and direct mail.
Privately owned broadcasters are permitted to broadcast advertising for up to 12 minutes per hour. The public broadcaster, BNT, which is also financed through a compulsory
television license fee, is restricted to broadcasting advertising for 4 minutes per hour and no more than 15 minutes per day. 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, 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.
Competition
In addition to TV2, Bulgaria is served by the national public broadcaster BNT and two significant privately owned national broadcasters, bTV and Nova TV, as well as a number of
smaller cable or satellite channels. Despite the much larger audience share of bTV and Nova TV, we consider bTV and Nova TV to be TV2’s direct competitors. In terms of its
current audience share, TV2 is comparable to the larger cable or satellite channels in the Bulgarian market, including DIEMA +, DIEMA 2, FOX LIFE and TV7.
The chart below provides a comparison of the all day audience share and technical reach in our target group of our Bulgarian channels to those of our main competitors:
Main Television Channels
Ownership
Year of first transmission
Signal distribution
All day audience share
(2008)
Technical reach
bTV
NOVA TV
BNT
DIEMA +
TV2
RING TV
Others
Source: TNS.
News Corp
MTG
Public television
MTG
CME
CME
2000
1994
1959
1999
2007
1998
Cable / Terrestial / Satellite
Cable / Terrestial / Satellite
Cable / Terrestial / Satellite
Cable / Terrestial / Satellite
Cable / Terrestial / Satellite
Cable / Satellite
36.5%
16.9%
9.7%
3.6%
2.0%
0.5%
30.8%
100%
99.9%
95.3%
99.5%
67.3%
80.3%
58.6%
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Regulation and License Renewal
TV2 operates under a programming license and twenty seven regional technical permits issued by Council for Electronic Media Communications Regulation Commission
respectively.
Ownership
We indirectly own an 80% voting and economic interest in each of TV2 EOOD, which holds the license for TV2, and RING TV, which operates the RING TV cable sports channel.
CROATIA
General
Croatia is a parliamentary democracy with a population of approximately 4.6 million people. Per capita GDP is estimated to be US$ 13,491 in 2008 with a GDP growth rate in 2008 of
3.4%. According to our estimates, in local currency the Croatian television advertising market remained at the same level in 2008 as 2007 and was worth approximately US$ 155 - 165
million. We operate one national television channel in Croatia, NOVA TV (Croatia).
License Holder
Nova TV (Croatia) holds a national terrestrial broadcast license for Croatia and is responsible for our broadcasting operations in Croatia.
Operations
NOVA TV (Croatia)'s target demographic is 18-49. The chart below summarizes the all day and prime time audience share figures for NOVA TV (Croatia) in that target group:
All day
Prime time
Source: AGB Nielsen Media Research.
Programming
2004
15.6%
13.5%
2005
14.0%
14.5%
2006
15.7%
17.3%
2007
18.8%
19.7%
2008
22.5%
25.4%
NOVA TV (Croatia) broadcasts approximately 22 hours per day. Its programming strategy is to appeal to a commercial audience through a wide range of programming. NOVA TV
(Croatia)’s programming focus is locally produced news, sitcoms, magazine and other shows, together with popular acquired programming, including movies, series, sitcoms, soap
operas and sports.
Approximately 35% of NOVA TV (Croatia)’s programming is locally produced. The most successful locally produced programs in 2008 were the reality show ‘The Farm’ and
entertainment shows such as ‘Don’t Forget the Lyrics’ and ‘Moment of Truth’. We also continued to broadcast some of last year’s well received programs such as ‘Nad Lipom
35’ (‘35 Lime Street’) and a crime magazine show ‘Istraga’ (‘Investigation’). Our central news continued to grow in audience share with an average share for 2008 of 29%,
representing a growth of 38% from 2007.
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NOVA TV (Croatia) has secured exclusive broadcast rights in Croatia for a variety of popular American and European series, films and soap operas produced by major international
studios, including Sony, Paramount Universal and Walt Disney Television International. All foreign language programming is subtitled. Foreign news reports and film footage
licensed from Reuters, APTN and SNTV is integrated into news programs.
NOVA TV (Croatia) is required to comply with several restrictions on programming, including regulations on the origin of programming. These include the requirement that 20% of
broadcast time consists of locally produced programming and 60% of such locally produced programming be shown during prime time (between 6:00 p.m. and 10:00 p.m.).
Advertising
Our Croatia operations derive revenues principally from the sale of commercial advertising time on NOVA TV (Croatia), sold both through independent agencies and media buying
groups. NOVA TV (Croatia) currently serves a wide variety of advertisers, including domestic and multinational companies such as Croatian Telecom, Agrokor, Procter & Gamble,
Vipnet, L’Oréal, Wrigley and Reckitt Benckiser. The top ten advertising clients of NOVA TV (Croatia) contributed approximately 32% of its total Segment Net Revenues in 2008.
Within the Croatian advertising market, television advertising accounts for approximately 49% of total advertising spending. Television competes for advertising revenues with
other media such as print, radio, outdoor advertising and direct mail.
Privately owned broadcasters are permitted to broadcast advertising for up to 12 minutes per hour but not for more than 15% of their total daily broadcast time, and an additional 5%
of daily broadcast time may be used for direct sales advertising. The public broadcaster HRT, which is also financed through a compulsory television license fee, is restricted to
broadcasting 9 minutes of advertising per hour. HRT is not permitted to broadcast spots for teleshopping. There are restrictions on the frequency of advertising breaks that are
different for public and privately owned broadcasters as well as restrictions that relate to advertising content, including a ban on tobacco and alcohol advertising, which are similar
for public and privately owned broadcasters.
Competition
In addition to NOVA TV (Croatia), Croatia is served by HRT1 and HRT2, two channels operated by the public broadcaster HRT, and privately owned broadcaster RTL.
The chart below provides a comparison of our all day audience share and technical reach in our target group to those of our competitors:
Main Television Channels
RTL
Ownership
Bertelsmann
Year of first transmission
2004
Signal distribution
Terrestrial / satellite / cable
All day audience share
(2008)
26.4%
Technical reach
96.9%
HRT 1
Public Television
NOVA TV (Croatia)
CME
HRT 2
Others
Public Television
Source: AGB Nielsen Media Research.
1956
2000
1972
Terrestrial / satellite / cable
Terrestrial / satellite / cable
Terrestrial / satellite / cable
24.3%
22.5%
15.1%
11.7%
100.0%
96.3%
89.0%
96.1%
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NOVA TV (Croatia) also competes for audience share with smaller terrestrial, cable and satellite channels.
Regulation and License Renewal
NOVA TV (Croatia) operates pursuant to a license originally granted by the Croatian Telecommunications Agency and is regulated by the Croatian Media Council pursuant to the
Electronic Media Law and the Media Law. According to the Electronic Media Law, a license may be extended by the Croatian Media Council if requested by a license holder six
months before the expiration of the relevant license, so long as the requesting broadcaster has conducted its business in accordance with the law and the license. The Croatian
Media Council may hold a public tender in connection with a request to extend a license.
Ownership
We own 100% of the voting and economic interests in Nova TV (Croatia), the operating company for NOVA TV (Croatia).
CZECH REPUBLIC
General
The Czech Republic is a parliamentary democracy with a population of approximately 10.2 million people. Per capita GDP in 2008 is estimated to be US$ 22,575 with a GDP growth
rate in 2008 of 4.2%. According to our estimates, in local currency the Czech Republic television advertising market grew by 7 - 9% in 2008 and was worth approximately US$ 490 -
500 million. We operate one national television channel in the Czech Republic, TV NOVA (Czech Republic), and two cable/satellite channels, NOVA SPORT and NOVA CINEMA.
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License Holders
CET 21 holds the national terrestrial broadcast licenses for TV NOVA (Czech Republic) and NOVA CINEMA, as well as the satellite and digital licenses for NOVA SPORT.
Operations
TV NOVA (Czech Republic)’s target demographic is 15-54. The chart below summarizes the all day and prime time audience share figures for TV NOVA (Czech Republic) in that
target group:
All day
Prime time
Source: ATO – Mediaresearch.
NOVA SPORT
2004
42.6%
45.6%
2005
42.4%
43.6%
2006
43.6%
47.3%
2007
43.0%
46.8%
2008
41.5%
45.8%
NOVA SPORT, which was rebranded from GALAXIE SPORT in October 2008, currently has carriage agreements with the large cable distributors and with all direct-to-home
(“DTH”) distributors in the Czech Republic and the Slovak Republic. NOVA SPORT reaches approximately 1.66 million subscribers out of the approximately 2.78 million households
receiving cable in the combined markets. We estimate that
NOVA CINEMA
NOVA CINEMA is a niche channel focusing on films and series and is distributed via cable and satellite throughout the Czech Republic. Since December 15, 2008, NOVA CINEMA
has also been broadcast via its new digital terrestial licence. NOVA CINEMA reached approximately 18.3% of households in the Czech Republic as at December 31, 2008 and is
available in Digital Video Broadcasting - Terrestrial (“DVB-T”), cable and on satellite. We estimate that NOVA CINEMA had an all day audience share of 0.5 % in 2008.
Programming
TV NOVA (Czech Republic) broadcasts 24 hours per day and its programming strategy is to appeal to a broad audience, especially during prime time, with news, movies,
entertainment programs and sports highlights, and to target more specific demographics in off-peak broadcasting hours. Approximately 38% of the programming on TV NOVA
(Czech Republic) is locally produced, including ‘Televizni noviny’ (‘TV News’), locally produced sitcom ‘Comeback’, locally produced crime series ‘Kriminalka Andel’ (‘Crime
Department Andel’), ‘Soukrome Pasti’ ('Private Traps', individual short fiction stories addressing relevant and sometimes controversial topics), ‘Ordinace v ruzove zahrade’ (‘Rose
Garden Medical’), an original Czech series, ‘Pojistovna Stesti’ (‘Insuring Happiness’), an original Czech series and ‘Ulice’ (‘The Street’), an originally produced Czech soap
opera. ‘Televizni noviny’, the nightly news program of TV NOVA (Czech Republic) achieves the highest ratings among all Czech television shows on a regular basis. ‘Ordinace v
ruzove zahrade’ (‘Rose Garden Medical’), ‘Pojistovna Stesti’ (‘Insuring Happiness’), ‘Ulice’ (‘The Street’), 'Comeback' and ‘Kriminalka Andel’ (‘Crime Department Andel’) are also
among the top-rated shows in the Czech Republic.
TV NOVA (Czech Republic) is required to comply with certain restrictions on programming, including regulations on the origin of programming. These include the requirements that
broadcasters shall, (i) where practicable, reserve more than half of their broadcasting time for European productions; (ii) reserve, where practicable, at least 10% of their broadcasting
time or spend 10% of their programming budget on independent European productions; and (iii) ensure, where practicable, that at least 10% of broadcasting time reserved for
independent European productions is dedicated to productions made within the last five years.
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TV NOVA (Czech Republic) is required to comply with certain restrictions on programming, including regulations on the origin of programming. These include the requirements that
broadcasters shall, (i) where practicable, reserve more than half of their broadcasting time for European productions; (ii) reserve, where practicable, at least 10% of their broadcasting
time or spend 10% of their programming budget on independent European productions; and (iii) ensure, where practicable, that at least 10% of broadcasting time reserved for
independent European productions is dedicated to productions made within the last five years.
NOVA SPORT broadcasts high quality sports and sport-related programming in the Czech Republic and the Slovak Republic. NOVA SPORT has secured broadcast license rights to
some of the most popular sports programming in its markets, including the National Hockey League, the FA Premier League , the FA Cup, the French Football League, Barca TV, the
National Football League, the National Basketball Association, Major League Baseball, ATP Tennis tournaments, Formula One, IndyCar Series, motorcycle and automobile races,
golf tournaments, the World Poker Tour and other competitions. The program schedule also contains sport documentaries on popular sports in the Czech and Slovak Republics.
NOVA CINEMA broadcasts new and older movies and popular American series, as well as a mixture of short programs such as cinema news and star profiles.
Advertising
TV NOVA (Czech Republic) derives revenues principally from the sale of commercial advertising time through media buying groups and independent agencies. Advertisers include
large multinational firms such as Danone, CS Group, Procter & Gamble, T-Mobile, Nestlé, Henkel, Laboratories Garnier and Reckitt Benckiser. The top ten advertisers on TV NOVA
(Czech Republic) contributed approximately 29% of its total Segment Net Revenues in 2008.
NOVA SPORT derives its revenues principally from cable subscription fees and carries a low volume of advertising. NOVA CINEMA was a cable and satellite channel until
December 2008, when it was moved to DVB–T distribution. Previously NOVA CINEMA derived its revenue from cable subscription fees and carried a low volume of
advertising. Beginning in January 2009, NOVA CINEMA has derived its revenue only from advertising.
Within the Czech Republic advertising market, television accounts for approximately 45% of total advertising spending. Television competes for advertising revenues with other
media such as print, radio, outdoor advertising, internet and direct mail.
Privately owned broadcasters in the Czech Republic are permitted to broadcast advertising for up to 12 minutes per hour, but not for more than 15% of their total daily broadcast
time. From January 1, 2008, public broadcaster CT, which is also financed through a compulsory television license fee, has been restricted to broadcasting advertising for a maximum
of 0.75% of its daily broadcast time on its main channel (excluding teleshopping), and 0.5% for its other channel, without the ability to combine. There are also restrictions for all
broadcasters on the frequency of advertising breaks during and between programs, as well as restrictions that relate to advertising content, including a ban on tobacco advertising
and limitations on advertisements of alcoholic beverages.
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Competition
In addition to TV NOVA (Czech Republic), the Czech Republic is served by two national channels, CT1 and CT2, operated by the public broadcaster, and by the national privately
owned broadcaster TV Prima.
The chart below provides a comparison of the all day audience share and technical reach in our target group of our Czech Republic channels to those of their competitors:
Main Television Channels
Ownership
Year of first transmission
Signal distribution
All day audience share
(2008)
Technical reach
TV NOVA (Czech Republic)
CME
CT 1
Public Television
TV Prima
Modern Times Group/Local
owners
CT 2
Public Television
NOVA CINEMA (1)
NOVA SPORT
Others
CME
CME
1994
1953
1993
1970
2007
2002
Terrestrial / satellite and
digital
Terrestrial / satellite / digital
Terrestrial / satellite / digital
Terrestrial / satellite / digital
Cable / satellite / digital
Cable / satellite
41.5%
17.3%
17.0%
6.8%
0.5%
n/a
16.9%
100.0%
Source : ATO – Mediaresearch.
(1) Technical Reach for NOVA CINEMA includes DBV-T (December 15, to December 31, 2008).
97.3%
97.4%
94.5%
95.8%
37.9%
20.7%
TV NOVA (Czech Republic) also competes for audiences with foreign terrestrial television channels in Austria, Germany, the Slovak Republic and Poland whose originating signals
reach the Czech Republic, as well as with cable and satellite channels.
Regulation and License Renewal
The broadcast operations of TV NOVA (Czech Republic) are subject to regulations imposed by (i) the Broadcasting Act 2001, (ii) the Act on Advertising and (iii) conditions
contained in the license granted by the Czech Republic Media Council.
According to the Broadcasting Act 2001, a television broadcasting license can be extended once for an additional twelve years. The Czech Republic Media Council has granted one
extension of the TV NOVA (Czech Republic) license. In addition an extension of 8 years will be given to a license holder if it meets the criteria and receives a compensation license
for DVB-T broadcasting. TV NOVA met such criteria in December 2008 and applied for the extension in January 2009. The extension is administrative and is expected to be granted
during the first half of 2009. The proceedings are formal.
Ownership
We own 100% of CET 21, the operating company for TV NOVA (Czech Republic), NOVA CINEMA and NOVA SPORT.
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ROMANIA
General
Romania is a parliamentary democracy with a population of approximately 21.3 million people. Per capita GDP is estimated to be US$ 8,983 in 2008 with a GDP growth rate of 8.0% in
2008. According to our estimates, in local currency the Romanian television advertising market grew by approximately 27 - 29% in 2008 and was worth approximately US$ 465 - 475
million.
We operate six television channels in Romania, including PRO TV, ACASA, PRO CINEMA, SPORT.RO, MTV ROMANIA and PRO TV INTERNATIONAL, a channel distributed by
satellite outside the country featuring programs re-broadcast from other Romanian channels.
License Holders
Pro TV holds broadcasting licenses for PRO TV, ACASA, PRO CINEMA, PRO TV INTERNATIONAL, SPORT.RO and MTV ROMANIA. In December 2007, Pro TV acquired MTS;
in connection with this acquisition, Pro TV entered into a trademark and programming agreement with MTV Networks Europe (“MTVNE”) to operate the MTV ROMANIA channel.
Operations
PRO TV broadcasts from Bucharest to terrestrial broadcast facilities and to approximately 920 cable systems throughout Romania, and is also rebroadcast by five DTH systems via
satellite.
PRO TV’s target demographic is 18-49. The chart below summarizes the all day and prime time audience share figures for our Romanian channels in PRO TV’s target group:
2004
2005
2006
2007
2008
PRO TV
All day
Prime time
ACASA
All day
Prime time
SPORT.RO
All day
Prime time
PRO CINEMA
All day
Prime time
MTV ROMANIA (1)
All day
Prime time
Source: GFK , TNS/AGB International.
(1) We acquired MTV Romania in December 2007.
20.7%
22.9%
8.5%
9.0%
1.5%
1.3%
1.8%
1.5%
0.8%
0.5%
18.3%
21.5%
7.5%
7.1%
1.7%
1.3%
2.2%
1.9%
0.9%
0.6%
16.5%
19.7%
8.1%
9.4%
1.6%
1.2%
2.0%
1.8%
0.6%
0.5%
20.9%
22.8%
9.6%
11.2%
1.5%
1.4%
1.5%
1.3%
0.8%
0.5%
20.5%
23.7%
9.7%
10.3%
1.2%
1.0%
0.8%
0.8%
1.0%
0.5%
Page 20
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Programming
PRO TV broadcasts 24 hours per day and its programming strategy is to appeal to a broad audience through a wide range of programming, including movies and series, news,
sitcoms, police series, soap operas and game shows. More than 48% of PRO TV's programming is comprised of locally produced programming, including news and sports programs
as well as the local productions such as ‘Happy New Year’, ‘Dansez pentru tine’ (‘Dancing For A Dream’), ‘Made In Romania’ and ‘O-la-la’. Apart from UEFA Champions League
football matches and our main news program, ‘Happy New Year’ and ‘Dancing For A Dream’ were the top-rated shows in 2008.
PRO TV has secured exclusive broadcast rights in Romania to a variety of popular American and European programs and films produced by such companies as Warner Brothers and
DreamWorks/Paramount. PRO TV also licenses foreign news reports and film footage from Reuters, APTN and ENEX to integrate into its news programs. All foreign language
programs and films are subtitled in Romanian.
PRO TV is required to comply with several restrictions on programming, including the requirement that 48% of all material be locally produced. From January 1, 2008, PRO TV
complied with regulations on the origin of programming as a result of Romania’s accession to the European Union, including requirements that 50% of all programming be of
European origin including local content and that 10% of all programming be supplied by independent European producers.
ACASA broadcasts 24 hours per day and targets a female audience with programming such as telenovellas, films and soap operas, as well as news, daily local productions for
women and families and talk shows. ACASA's audience demographics complement PRO TV's, providing an attractive advertising platform for advertisers across our group of
channels. Approximately 42% of ACASA’s programming is locally produced, including ‘Inima de tigan’ (‘Gypsy Heart’), ‘Regina’ (‘The Queen’), and ‘Ingerasii’ (‘Little Angels’).
‘Inima de tigan’ (‘Gypsy Heart’) was the top-rated show on ACASA in 2008.
PRO CINEMA broadcasts 24 hours per day and is focused on those types of movies, series and documentaries that are popular among the upwardly mobile demographic, which is
an attractive advertising target group. Local productions make up 21% of the programming. SPORT.RO broadcasts 24 hours per day and targets male audiences with programming
focusing on local and international football, international boxing and a number of local Romanian sports. Local productions make up 43% of the programming, the majority being
general and special news programs.
SPORT.RO broadcasts 24 hours per day and targets male audiences with programming focusing on local and international football, international boxing and a number of local
Romanian sports. Local productions make up 43% of the programming, the majority being general and special news programs.
PRO TV INTERNATIONAL broadcasts 24 hours per day and targets Romanian communities outside Romania. The channel re-broadcasts locally produced programming from
certain of our Romanian channels (generally PRO TV and ACASA), as well as programming from Pro TV’s library.
MTV ROMANIA broadcasts 24 hours per day, with a programming strategy to attract a young audience in Romania by broadcasting music and youth related programming such as
‘A Shot at Love’, ‘Cribs’ and ‘Hogan Knows Best’. Approximately 55% of MTV ROMANIA’s programming is locally produced.
Advertising
Our Romania operations derive revenues principally from the sale of commercial advertising time on the PRO TV, ACASA, SPORT.RO and PRO CINEMA channels, sold both
through independent agencies and media buying groups. Our Romanian channels currently serve a wide variety of advertisers, including multinational companies such as Procter &
Gamble, Vodafone, Orange, Cosmote & Germano, Unilever, L’Oréal, and Coca-Cola. The top ten advertising clients on our Romanian channels contributed approximately 26% of our
total Segment Net Revenues in Romania in 2008.
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Within the Romanian advertising market, television accounts for approximately 61% of total advertising spending. Television competes for advertising revenues with other media
such as print, radio, outdoor advertising and direct mail.
Privately owned broadcasters are permitted to broadcast advertising for up to 12 minutes per hour but not for more then 15% of their total daily broadcast time, and an additional 5%
of daily broadcast time may be used for direct sales advertising. The public broadcaster, TVR, which is also financed through a compulsory television license fee, is restricted to
broadcasting advertising for eight 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). 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, 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.
Competition
PRO TV has a leading position among Romanian broadcasters in respect of national all day audience share. Other competitors include the public broadcaster TVR, which operates
TVR 1 and TVR 2, and privately owned broadcasters Antena 1 and Prima TV.
The chart below provides a comparison of the all day audience share and technical reach in PRO TV’s target group of our Romanian channels to those of our main competitors:
Main Television Channels
Ownership
Year of first transmission
Signal distribution
All day audience share
(2008)
Technical reach
PRO TV
Antena 1
ACASA
Prima TV
TVR 1
CME
Local owner
CME
SBS
Public Television
PRO CINEMA
CME
TVR 2
Public Television
SPORT.RO
MTV ROMANIA
Others
CME
CME
Source: GFK, TNS/AGB International.
1995
1993
1998
1994
1956
2004
1968
2003
2002
Terrestrial / satellite / cable
16.5%
Terrestrial / satellite / cable
Satellite / cable
Terrestrial / satellite / cable
Terrestrial / satellite / cable
Satellite / cable
Terrestrial / satellite / cable
Satellite / cable
Satellite / cable
9.4%
8.1%
5.3%
4.0%
2.0%
1.6%
1.6%
0.6%
50.9%
100.0%
98.6%
93.7%
90.1%
91.6%
99.2%
75.0%
95.8%
63.8%
56.3%
Our Romanian channels also compete for audience share with other cable and satellite stations. There is increased competition for audience share from new niche channels
distributed over cable and satellite, which is reflected in the audience share of 50.9% for other stations for the year ended December 31, 2008, as compared to 44.1% for the year
ended December 31, 2007.
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Regulation and License Renewal
PRO TV, ACASA, PRO CINEMA, SPORT.RO and MTV ROMANIA operate pursuant to licenses and regulations issued by the Romanian Media Council. To date, licenses have
been renewed as they expire.
Ownership
We own a 95% voting and economic interest in Pro TV. Adrian Sarbu, our President and Chief Operating Officer, owns the remaining 5% voting and economic interest in Pro TV.
Our interest in our Romania operations is generally governed by the articles of Pro TV. We have the right to appoint two of the three members of the Council of Administration, the
governing body of Pro TV. Although we have majority voting power in Pro TV, the affirmative vote of Adrian Sarbu is required with respect to certain financial and corporate
matters. Such matters are in the nature of protective rights, and are not an impediment to consolidation for accounting purposes.
We have a 95% voting and economic interest in Media Vision, which, together with other subsidiaries of the Media Pro group of companies (“Media Pro”), provides programming
and production services to Pro TV.
We also have a put option agreement with Mr. Sarbu that grants him the right to sell us his remaining interest in Pro TV and certain other companies of our Romania operations from
November 12, 2009 for a twenty-year period thereafter. The right to exercise this put is subject to a pledge of those interests to us in connection with our investment in Media Pro
(see Part II, Item 8, Note 5, “Investments”).
Media Pro
On August 11, 2006, we acquired a 10.0% interest in each of Media Pro B.V. and Media Pro Management S.A., the parent companies of Media Pro. Substantially all of the remaining
shares of Media Pro are owned directly or indirectly by Adrian Sarbu. Media Pro comprises a number of Romanian companies with operations in the fields of publishing,
information, printing, cinema and entertainment.
Following a capital call in 2007 in which we chose not to participate, our holding in Media Pro Management S.A. is now 8.7%. The remaining 91.3 % is held by Mr. Sarbu.
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SLOVAK REPUBLIC
General
The Slovak Republic is a parliamentary democracy with a population of approximately 5.4 million people. Per capita GDP is estimated to be US$ 17,994 in 2008 with a GDP growth rate
in 2008 of 6.9%. According to our estimates, in local currency the Slovak Republic television advertising market grew by approximately 6 - 8% in 2008 and was worth approximately
US$ 210 - 215 million. We operate one national television channel, TV MARKIZA in the Slovak Republic.
License Holder
Markiza holds a national terrestrial broadcast license for TV MARKIZA.
Operations
TV MARKIZA’s target demographic is 12+. The chart below summarizes all day and prime time audience share figures for TV MARKIZA:
All day
Prime time
Source: PMT, TNS.
Programming
2004
33.7%
35.4%
2005
31.2%
32.9%
2006
33.7%
35.9%
2007
35.5%
39.5%
2008
35.1%
37.7%
TV MARKIZA broadcasts 24 hours per day and its programming strategy is to appeal to a broad audience through news, movies, entertainment and sports programming, with
specific groups targeted in off-peak broadcasting hours. Approximately 27% of TV MARKIZA’s programming is locally produced, including ‘Televizne noviny’ (‘TV News’),
‘Sportove noviny’ (‘Sports News’), ‘Susedia’ (‘Neighbours’), ‘Slovensko hlada Superstar 3’ (‘Pop Idol 3’), ‘Bailando’ (a dance show), ‘Let’s dance’ and 'Slovensko ma talent (‘Got
Talent’). These programs are consistently the top-ranked shows in the Slovak Republic.
TV MARKIZA has secured exclusive broadcast rights to a variety of popular American and European series, films and telenovellas produced by major international studios
including Warner Brothers, NBC Universal, CBS Paramount, Dreamworks/Paramount, Grandview-Castle, and Buena Vista. All foreign language programming (other than those in
the Czech language) is dubbed into the Slovak language. Foreign news reports and film footage licensed from CNN, Reuters, APTN and SNTV are integrated into news programs on
TV MARKIZA.
TV MARKIZA is required to comply with several restrictions on programming, including regulations on the origin of programming. These include the requirement that a minimum of
12% of programming be public interest programming (which includes news and topical shows), and that a minimum of 51% of films and series be European productions.
Advertising
TV MARKIZA derives revenues principally from the sale of commercial advertising time through media buying groups and independent agencies. Advertisers include large
multinational companies such as T-Com / T-Mobile, Orange, Telefonica O2, Benckiser-COTY, Procter & Gamble, Henkel, L’Oréal, VUB Group, Nestlé and Danone. TV MARKIZA’s
top ten advertisers contributed 36% of the channel’s total Segment Net Revenues in 2008.
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Within the Slovak advertising market, television accounts for approximately 47% of total advertising spending. TV MARKIZA also competes for advertising revenues with other
media such as print, radio, outdoor advertising and direct mail.
Privately owned broadcasters are permitted to broadcast advertising for up to 12 minutes per hour but not for more than 15% of their total daily broadcast time. The public
broadcaster, STV, which is also financed through a compulsory license fee, can broadcast advertising for up to 12 minutes per hour, but between 7:00 p.m. and 10:00 p.m. may
broadcast only 8 minutes of advertising per hour and not more than 3% of their total daily broadcast time. There are restrictions on the frequency of advertising breaks during and
between programs. STV is not permitted to broadcast advertising breaks during programs. There are also restrictions that relate to advertising content, including a ban on tobacco
advertising and a ban on advertisements of alcoholic beverages (excluding beer) between 6:00 a.m. and 10:00 p.m.
Competition
In addition to TV MARKIZA, the Slovak Republic is served by two national public television channels, STV1 and STV2. TV MARKIZA also competes with the privately owned
broadcaster TV JOJ.
The chart below provides a comparison of the all day audience share in our target group and technical reach of TV MARKIZA to those of our competitors:
Ownership
CME
Local owner
Public Television
Public Television
Main Television Channels
TV MARKIZA
TV JOJ
STV 1
STV 2
Others
Source: CME.
Year of first transmission
1996
Signal distribution
Terrestrial / satellite / cable
All day audience share
(2008)
35.1%
Technical reach
99.4%
2002
1956
1969
Terrestrial / satellite / cable
Terrestrial / satellite / cable
Terrestrial / satellite / cable
16.9%
16.4%
5.8%
25.8%
100.0%
88.8%
99.9%
99.4%
TV MARKIZA also competes for audience share with foreign terrestrial television stations located in Austria, the Czech Republic and Hungary whose originating signals reach the
Slovak Republic, as well as cable and satellite stations. These stations do not compete for advertising revenues in the Slovak Republic.
Regulation and License Renewal
TV MARKIZA’s broadcast operations are subject to regulations imposed by (i) the Act on Broadcasting and Retransmission of September 2000; (ii) the Act on Advertising; and (iii)
conditions contained in the license granted by the Slovak Republic Media Council pursuant to the Act on Broadcasting and Retransmission.
Ownership
We own 100% of the voting and economic interests in Markiza, which is the licence holder for TV MARKIZA.
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SLOVENIA
General
Slovenia is a parliamentary democracy with a population of approximately 2.0 million people. Per capita GDP is estimated to be US$ 27,864 in 2008, the highest per capita GDP in
Central and Eastern Europe, with a GDP growth rate in 2008 of 4.3%. According to our estimates, in local currency the Slovenian television advertising market grew by approximately
7 - 9% during 2008 and was worth approximately US$ 100 - 105 million. We operate two national television channels in Slovenia, POP TV and KANAL A.
License Holders
Pop TV holds the broadcast licenses for the POP TV channel and Kanal A holds the broadcast licenses for the KANAL A channel.
Operations
POP TV and KANAL A
POP TV and KANAL A’s target demographic is 18-49. The chart below summarizes the all day and prime time audience share figures for POP TV and KANAL A in that target group:
POP TV
All day
Prime time
KANAL A
All day
Prime time
Source: AGB Nielsen Media Research.
Programming
2004
2005
2006
2007
2008
26.6%
32.6%
10.4%
12.3%
27.2%
33.9%
11.4%
13.5%
29.1%
36.0%
12.0%
13.8%
26.1%
32.2%
14.3%
15.3%
25.4%
31.9%
15.0%
15.5%
POP TV broadcasts 24 hours per day and its programming strategy is to appeal to a broad audience through a wide variety of programming including series, movies, news, variety
and game shows and features. Approximately 32% of programming is locally produced, including ‘Neighbours’ a version of Slovakia’s ‘Susiedia’, ‘Preverjeno!’ (‘Confirmed!’),
‘Trenja’ (‘Friction’), and reality show ‘The Farm 2’, which had the highest audience share and ratings for any reality show in Slovenia. KANAL A broadcasts 24 hours per day and
has a programming strategy to complement that of POP TV with a mixture of locally produced programs (approximately 35% in 2008) such as ‘World on Kanal A’, the reality show
‘Big Brother’ and acquired foreign programs, including films and series.
Pro Plus, the operating company for our Slovenia operations, has secured exclusive program rights in Slovenia to a variety of successful American and Western European programs
and films produced by studios such as Warner Brothers, Twentieth Century Fox and Paramount. All foreign language programs and films are subtitled in Slovenian with the
exception of some children’s programming that is dubbed. Pro Plus has agreements with CNN, Reuters and APTN to receive foreign news reports and film footage to integrate into
news programs on POP TV and KANAL A.
POP TV and KANAL A 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. Two percent of the
station's annual broadcast time must be Slovenian origin audio-visual works and this amount must increase each year until it reaches five percent. In the future a majority, increased
from the current 20%, of the station's annual broadcast time will be required to be European origin programming. Furthermore, 10% of the station’s annual broadcast time is required
to be devoted to programs made by European producers who are independent of broadcasters, and 50% of such works are to have been produced in the last five years.
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Advertising
Pro Plus derives revenues from the sale of commercial advertising time on POP TV and KANAL A. Current multinational advertisers include firms such as Spar, Benckiser Adriatic,
Procter & Gamble, SI Mobil, L’Oréal, Wrigley, Henkel and Ferrero, although no advertiser dominates the market. During 2008, we serviced a wide variety of advertisers, the majority
through advertising agencies. The top ten advertisers on POP TV and KANAL A contributed approximately 28% of our total Segment Net Revenues in Slovenia in 2008.
Within the Slovenian advertising market, television accounts for approximately 58% of total advertising spending. POP TV and KANAL A compete for revenues with other media
such as print, radio, outdoor advertising, the internet and direct mail.
Privately owned broadcasters are allowed to broadcast advertising for up to 12 minutes in any hour and for up to 20% of their total daily broadcasting time (with 15% for
advertisements only). The public broadcaster, SLO, which is also financed through a compulsory television license fee, is allowed to broadcast advertising for up to 12 minutes per
hour and for up to 15% of its total daily broadcasting time (with 10% for advertisements only), but is only permitted up to 9 minutes per hour between the hours of 6:00 p.m. and
11:00 p.m.
There are restrictions on the frequency of advertising breaks during programs. There are also restrictions that relate to advertising content, including 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%.
Competition
In addition to POP TV and KANAL A, Slovenia is served by two national public television channels, SLO 1 and SLO 2, and privately owned broadcaster TV3.
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The chart below provides a comparison of the all day audience share in our target group and technical reach of our Slovenian channels to those of our competitors:
Main Television Channels
Ownership
Year of first transmission
Signal distribution
All day audience share
(2008)
Technical reach
POP TV
SLO 1
KANAL A
SLO 2
TV3
Others
CME
Public Television
CME
Public Television
Modern Times Group
1995
1958
1991
1967
1995
Terrestrial / cable
Terrestrial / satellite / cable
Terrestrial / cable
Terrestrial / satellite / cable
Terrestrial / cable
25.4%
16.5%
15.0%
7.7%
6.8%
28.6%
100.0%
95.7%
99.9%
93.7%
99.2%
78.2%
Source: AGB Nielsen Media Research.
POP TV and KANAL A also compete for audience share with foreign television stations, particularly Croatian, Italian, German and Austrian stations whose originating signals reach
Slovenia.
Regulation and License Renewal
POP TV and KANAL A operate under licenses regulated pursuant to the Law on Media adopted in 2001 and pursuant to the Electronic Communications Act, which came into effect
on May 1, 2004. According to the Electronic Communications Act, the Slovenian Media Council may extend a license at the request of the broadcaster if it is in compliance with all
the license conditions. The licenses held by POP TV and KANAL A expires in August 2012.
Ownership
We own 100% of the voting and economic interests in Pro Plus, the operating company for our Slovenia operations. Pro Plus has a 100% voting and economic interest in Pop TV
and Kanal A.
UKRAINE
General
Ukraine, the most populous market in which we operate, is a parliamentary democracy with a population of approximately 45.9 million people. Per capita GDP is estimated to be US$
3,928 in 2008, the lowest of all our markets, with a GDP growth rate in 2008 of 2.1%. According to our estimates, the Ukrainian television advertising market declined by
approximately 3 – 5% in 2008 and was worth approximately US$ 450 - 460 million (excluding political advertising and sponsorship).
We operate one national television channel in Ukraine, STUDIO 1+1, the regional channel KINO and, until February 2009, the local channel CITI (see Part II, Item 8, Note 23,
“Subsequent Events”).
License Holders
Studio 1+1 holds the broadcasting licenses for the STUDIO 1+1 channel.
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KINO is broadcast through terrestrial licenses covering 16 cities and a satellite license and re-broadcasts across a network of regional stations (including our subsidiaries Tor and
Zhysa) and cable operators.
Operations
STUDIO 1+1
STUDIO 1+1’s target demographic is 18+. The chart below summarizes the all day and prime time audience share figures in STUDIO 1+1 in that target group:
All day
Prime time
Source: GFK Ukraine.
KINO and CITI
2004
21.9%
27.5%
2005
20.2%
22.2%
2006
18.4%
23.0%
2007
16.0%
18.5%
2008
12.0%
13.2%
KINO reaches approximately 53% of television households and broadcasts on average 19 hours per day with an all day 15-50 audience share of 0.6%. CITI reaches approximately
8.2% of television households in Ukraine and broadcasts 24 hours per day to the city of Kiev and the Kiev region. CITI achieved an average all day 15-50 audience share in Kiev and
Kiev region of 0.1%. In January and February of 2009, we entered into a number of agreements with our partners in KINO and CITI pursuant to which we acquired 100% of KINO
from, and transferred our ownership in CITI to our former partners (see Part II, Item 8, Note 23, “Subsequent Events”).
Programming
STUDIO 1+1’s programming strategy is to appeal to a broad audience through a wide variety of programming, including series (popular Russian police and action series in
particular), movies and locally produced Ukrainian shows, features and news. In 2008, approximately 56% of programming for prime-time broadcasting hours were either in-house or
outsourced local productions, which consist primarily of news broadcasts and news related programs, entertainment shows and TV series of various genres.
The Studio 1+1 group has secured exclusive territorial or local language broadcast rights in Ukraine to a variety of successful high quality Russian, American and Western European
programs and films from many of the major studios, including Warner Brothers, Paramount, Universal and Columbia. Studio 1+1 has agreements with Reuters for foreign news
packages and other footage to be integrated into its programming. Most non-Ukrainian language programs and films (including those in the Russian language) are dubbed or
subtitled in Ukrainian.
KINO, which targets the 15-50 age group, male skewed in prime time, female skewed in off-prime and family oriented on weekends, offers feature films, series, animation and other
entertainment programming, much of which is acquired from Western sources.
CITI, which targets the 15-50 age group, broadcasts mainly originally-produced shows, local news, and programs on Kiev culture, business and community, as well as teleshopping.
STUDIO 1+1, KINO and CITI are required to comply with certain restrictions on programming, including regulations on the origin of programming and the language of broadcast. At
least 50% of programming broadcast by STUDIO 1+1, KINO and CITI must be of Ukrainian origin and STUDIO 1+1 is further required to broadcast not less than 75% of its
programming in Ukrainian or dubbed into Ukrainian. Furthermore, the law stipulates that between 7:00 a.m. and 11:00 p.m. at least 80% of programming be European-made.
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Advertising
Until December 31, 2008, the sale of Studio 1+1’s advertising was outsourced to Video International-Prioritet LLC and certain of its affiliates (the “Video International Group”), a
Ukrainian subsidiary of a Russian advertising sales company, in which we have neither an economic nor a voting interest. The sale of KINO’s advertising was also outsourced to
Video International Group until December 31, 2008, when the relevant agreement expired. On December 24, 2008, Studio 1+1 and certain affiliates terminated agreements relating to
the sale of advertising and sponsorship on STUDIO 1+1 and KINO with the Video International Group. The effective date of these terminations is March 24, 2009. In connection
with these terminations, Studio 1+1 is required to pay a termination penalty equal to (i) 12% of the average monthly advertising revenues and (ii) 6% of the average monthly
sponsorship revenues for advertising and sponsorship sold by Video International Group for the six months prior to the termination date, multiplied by six. Since January 1, 2009, the
Studio 1+1 group has been selling advertising and sponsorship on STUDIO 1+1 and KINO directly. The Studio 1+1 group derives revenues principally from the sale of commercial
advertising to large multinational firms such as Procter & Gamble, Kraft Foods, UMC, Colgate – Palmolive Group, Unilever, Bittner and Nestle, as well as large Ukrainian companies
like Volun Holding, Obolon and Kyiv Star. The top ten advertising clients of STUDIO 1+1 contributed approximately 36% of STUDIO 1+1’s total Segment Net Revenues in 2008.
Gravis derives revenue from the sale of commercial advertising time on KINO and CITI. KINO targets smaller national advertisers and CITI aims to attract Kiev-based clients. Some
of the biggest KINO and CITI advertisers are Procter & Gamble, Obolon, Unilever, Meloni, Nestlé, Ukrtelecom and Wrigley. The top ten advertising clients of KINO and CITI
contributed approximately 53% of the total Segment Net Revenues of KINO and CITI in 2008.
Privately owned broadcasters are allowed to broadcast advertising for 15% of their total broadcast time. During an electoral season, this quota increases to 20% of the total
broadcasting time. These requirements are not applicable to specialized broadcasting channels. The portion of advertising per hour of actual broadcasting cannot exceed 20%, and
during the electoral process may not exceed 25%. The state owned broadcaster is subject to the same restrictions on advertising time. There are restrictions on the frequency of
advertising breaks both during and between programs. There are also restrictions that relate to advertising content, including a ban on tobacco advertising and a prohibition on the
advertising of alcoholic beverages from 6:00 a.m. to 11:00 p.m.
Competition
In addition to STUDIO 1+1, Ukraine is served by public broadcaster UT-1 and privately owned broadcasters Inter, ICTV, STB and Novy Kanal.
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The chart below provides a comparison of the all day audience share and technical reach of STUDIO 1+1 to those of its competitors. Audience shares reflect the STUDIO 1+1 target
group:
Main Television Channels
Inter
Ownership
Local owners
Year of first transmission
1996
STUDIO 1+1
CME
STB
ICTV
Novy Kanal
UT-1
Others
Local owner (same as Novy
Kanal and ICTV)
Local owner (same as Novy
Kanal and STB)
Local owner (same as ICTV
and STB)
Public
Television
1997
1997
1992
1998
1965
Source: GFK Ukraine, ATO - Mediaresearch.
Signal distribution
Terrestrial /
satellite / cable
Terrestrial /
satellite / cable
Terrestrial
Terrestrial
Terrestrial
Terrestrial /
cable
Audience share (2008)
21.0%
Technical reach
99.0%
12.0%
98.5%
96.5%
96.1%
97.2%
97.3%
8.0%
7.8%
7.2%
1.9%
42.1%
100.0%
KINO and CITI compete with certain regional and Kiev-based channels and other regions where KINO is broadcast, including TRK Ukraine, TRK Kiev, Megasport, RTR Planet,
Enter Film, NTV Mir, RU Music, K1 and K2 and Channel 1 Rus.
Regulation and License Renewal
The 15-hour prime time and off prime time license of STUDIO 1+1 expires in December 2016. The license to broadcast for the remaining nine hours in off prime time expires in July
2014. The satellite license expires in April 2018. Licenses used for the KINO and CITI channels expire on dates ranging from March 2010 to April 2016.
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Ownership
We own 100% of the voting and economic interests in the entities comprising the Studio 1+1 group.
On January 11, 2006, we acquired a 65.5% interest in Ukrpromtorg 2003 LLC (“Ukrpromtorg”), which owns 92.2% of Gravis LLC, which formerly operated the local channels KINO
(formerly CHANNEL 7) and CITI (formerly CHANNEL 35). On June 21, 2007, we acquired a 60.4% interest in each of Tor and Zhysa, two regional broadcasters. On February 20, 2009,
we increased our ownership to 100% in the entities that own the KINO channel and sold our 60.4% interest in the CITI channel (see Part II, Item 8, Note 23, “Subsequent Events”).
CORPORATE OPERATIONS
In addition to corporate administration, our central organization provides oversight and support to our television operations. The functions include treasury, internal audit, financial
planning and analysis, financial control and legal services.
SEASONALITY
We, like other television operators, experience seasonality, with advertising sales tending to be lowest during the third quarter of each calendar year due to the summer holiday
period (typically July and August), and highest during the fourth quarter of each calendar year. See Part II, Item 6, “Selected Financial Data” for further discussion.
EMPLOYEES
As of February 20, 2009, our operating companies had a total of approximately 4,100 employees (including contractors) in Amsterdam, Bucharest, Ljubljana, London
and Prague. None of our employees or the employees of any of our subsidiaries are covered by a collective bargaining agreement. We believe that our relations with our employees
are good.
FINANCIAL INFORMATION BY OPERATING SEGMENT AND BY GEOGRAPHICAL AREA
For financial information by operating segment and geographic area, see Part II, Item 8, Note 19, “Segment Data”.
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Item 1A.
Risk Factors
This report and the following discussion of risk factors contain forward-looking statements as discussed on page 4. 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
We cannot predict the extent to which adverse economic and political conditions in the countries in which we operate will adversely affect our results of operations.
The results of our operations rely heavily on advertising revenue and demand for advertising is affected by prevailing general and regional economic conditions. The financial
turmoil affecting the global financial markets and banking system has resulted in a tightening of credit and a low level of liquidity, which has had an adverse impact on economic
growth in the United States as well as in countries across Western and Central and Eastern Europe, many of which have fallen into recession. There has been a widespread
withdrawal of investment funding from the Central and Eastern European markets and companies with investments in them, particularly Ukraine, Bulgaria and Romania. Furthermore,
the continued economic downturn has adversely affected consumer and business spending, access to credit, liquidity, investments, asset values and unemployment rates and has
contributed to a strengthening of the dollar against many of the currencies in which we report our consolidated revenues. These adverse economic conditions have had a negative
impact on the advertising industries in our markets, leading our customers to reduce the amounts they spend on advertising. This has resulted in a decrease in demand for our
advertising airtime. In addition, the occurrence of disasters, acts of terrorism, civil or military conflicts or general political instability, such as that resulting from the dispute between
Ukraine and Russia over natural gas supplies, may create further economic uncertainty that reduces advertising spending. We cannot predict the severity of the impact of the
continuance or occurrence of any of these events on 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 almost all of our revenues from the sale of advertising airtime on our television channels. In addition to general economic conditions, other factors that may affect our
advertising revenues are the pricing of our advertising time as well as television viewing levels, changes in our programming strategy, changes in audience preferences, our
channels’ technical reach, technological developments relating to media and broadcasting, competition from other broadcasters and operators of other media platforms, seasonal
trends in the advertising market in the countries in which we operate, and shifts in population and other demographics. A reduction in advertising spending in our markets has put
pressure on prices at which we sell television advertising because of pressure to reduce prices from advertisers and discounting by competitors, particularly in Ukraine. Reduced
advertising spending and discounting of the price of television advertising in our markets and the competition from broadcasters seeking to attract similar audiences may have an
impact on our ability to maintain or increase our advertising sales. Our ability to maintain television viewing levels and to generate gross rating points depends in part on our
maintaining investments in television programming and productions at a sufficient level to continue to attract these audiences. Significant or sustained reductions in investments in
programming, production or other operating costs in response to reduced advertising spending in our markets may have an adverse impact on our television viewing levels. A
significant decline in advertising sales could have a material adverse effect on our financial position, results of operations and cash flows.
We may require additional external sources of capital, which may not be available or may not be available on acceptable terms.
The acquisition, ownership and operation of television broadcasting operations requires substantial investment. Our ability to meet our total capital requirements is based on our
expected cash resources, including our debt facilities, as well as estimates of future operating results, which are derived from a variety of assumptions that may prove to be
inaccurate. If economic conditions in our markets continue to deteriorate, if our assumptions regarding future operating results prove to be inaccurate, if our costs increase due to
competitive pressures or other unanticipated developments, or if our investment plans change, we may need to obtain additional financing. The recent tightening of the credit
markets and the impact of the continued economic downturn on our operations may constrain our ability to obtain financing, whether through public or private debt or equity
offerings, proceeds from the sale of assets or other financing arrangements. It is not possible to ensure that additional debt financings will be available within the limitations on the
incurrence of additional indebtedness contained in the indentures pursuant to which our Senior Notes were issued in 2005 (the “2005 Indenture”) and in 2007 (the “2007 Indenture”
and collectively with the 2005 Indenture, the “Indentures”) or pursuant to the terms of our EUR 100.0 million loan agreement dated July 21, 2006 with the European Bank for
Reconstruction and Development (“EBRD”) and our EUR 50.0 million loan agreement dated August 22, 2007 with EBRD (the “EBRD Loan”). Any additional debt or equity securities
issued to raise funds may have rights, preferences and privileges that are senior to shares of our common stock, and the issuance of additional equity may dilute the economic
interest of the holders of shares of our common stock. Moreover, such financings, if available at all, may not be available on acceptable terms. If we cannot obtain adequate capital
or obtain it on acceptable terms, this could have an adverse effect on our financial position, results of operations and cash flows.
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Our increased debt service obligations following the issuance of the Senior Notes, Convertible Notes and drawdowns under the EBRD Loan may restrict our ability to fund our
operations.
We have significant debt service obligations under our Senior Notes, Convertible Notes and the EBRD Loan and we are restricted in the manner in which our business is conducted
(see Part II, Item 8, Note 6 “Senior Debt”). Our high leverage could have important consequences for our business and results of operations, including but not limited to increasing
our vulnerability to a downturn in our business or economic and industry conditions, as well as limiting our ability to obtain additional financing to fund future working capital,
capital expenditures, business opportunities and other corporate requirements. We may have a higher level of debt than certain of our competitors, which may put us at a
competitive disadvantage. A substantial portion of our cash flow from operations is required to be dedicated to the payment of principal of, and interest on, our indebtedness, which
means that this cash flow is not available to fund our operations, capital expenditures or other corporate purposes. Therefore, our flexibility in planning for, or reacting to, changes in
our business, the competitive environment and the industry in which we operate is somewhat limited. Any of these or other consequences or events could have a material adverse
effect on our ability to satisfy our debt obligations and would therefore have potentially harmful consequences for the development of our business and the implementation of our
strategic plans.
If more of our goodwill, indefinite-lived intangible assets and long-lived assets become impaired we may be required to record additional significant charges to earnings.
We review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill and indefinite-
lived intangible assets are required to be tested for impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of our
goodwill or amortizable intangible assets may not be recoverable include slower growth rate in our markets, future cash flows and a decline in our stock price and market
capitalization. We recorded an impairment charge of US$ 336.7 million in 2008 in respect of our Bulgaria and Ukraine operations and a charge of US$ 0.7 million in respect of our
Croatia operations in 2006. We review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be
recoverable. Goodwill and indefinite-lived intangible assets are required to be tested for impairment at least annually. Factors that may be considered a change in circumstances
indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable include slower growth rate in our markets, future cash flows and a decline
in our stock price and market capitalization. We recorded an impairment charge of US$ 336.7 million in 2008 in respect of our Bulgaria and Ukraine operations and a charge of US$ 0.7
million in respect of our Croatia operations in 2006. Although we considered all current information in respect of calculating our impairment charge for 2008, our stock price has
continued to fall substantially since December 31, 2008. This constitutes an indication that the value of our goodwill, indefinite-lived intangible assets and long-lived assets may
have fallen further since January 1, 2009, and we may be required to record additional impairment charges in the first quarter of 2009. In addition, if our cash flow forecasts for our
operations deteriorate further, or discount rates continue to increase, we may be required to recognize additional impairment charges in later periods.
Fluctuations in exchange rates may adversely affect our results of operations.
Our reporting currency is the dollar but our consolidated revenues and costs, including programming rights expenses and interest on debt, are divided across a range of
currencies. The strengthening of the dollar against these currencies has had an adverse impact on our reported results for 2008. In addition, our EUR 245.0 million 8.25% Senior
Notes due 2012 (the “2005 Senior Notes”) and our EUR 150.0 million Senior Floating Rate Notes due 2014 (the “2007 Senior Notes”, and, together with the 2005 Senior Notes, the
“Senior Notes”) and the EBRD Loan are denominated in Euros. We have not attempted to hedge the foreign exchange exposure on the principal amount of the Senior Notes or the
EBRD Loan. We may continue to experience significant gains and losses on the translation of our segment revenues, the Senior Notes and the EBRD Loan into dollars due to
movements in exchange rates between the Euro, the currencies of our local operations and the dollar.
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Our cash flow and capital resources may not be sufficient for future debt service and other obligations.
Our ability to make debt service payments under our Senior Notes, US$ 475.0 million 3.50% Senior Convertible Notes due 2013 (the “Convertible Notes”), the EBRD Loan and other
indebtedness depends on our future operating performance and our ability to generate sufficient cash, which in turn depends in part on factors that are not within our control,
including general economic, financial, competitive, market, legislative, regulatory and other factors. If our cash flow and capital resources were insufficient to fund our debt service
obligations, we would face substantial liquidity problems. We may be obliged to reduce or delay capital or other material expenditures at our channels, restructure our debt, obtain
additional debt or equity capital (if available on acceptable terms), or dispose of material assets or businesses to meet our debt service and other obligations. It may not be possible
to accomplish any of these alternatives on a timely basis or on satisfactory terms, if at all, which may have an adverse effect on our financial position, results of operations and cash
flows.
A downgrading of our ratings may adversely affect our ability to raise additional financing.
Our Senior Notes and Convertible Notes are rated BB by Standard and Poor’s, who have also rated our corporate credit as BB. Moody’s Investors Services have rated both our
Senior Notes and our corporate credit as Ba2. These ratings reflect each agency’s opinion of our financial strength, operating performance and ability to meet our debt obligations
as they become due. Credit rating agencies have begun to monitor companies much more closely during recent months and have made liquidity, and the key ratios associated with it
such as gross leverage ratio and net leverage ratio, a particular priority. We expect that our ratios will exceed their current ranges over the course of 2009 and it is therefore probable
that our credit rating will be downgraded (see Part II, Item 7, V(d) “Cash Outlook”). In the event our debt or corporate credit ratings are lowered by the ratings agencies, our ability to
raise additional indebtedness may be more difficult and we will have to pay higher interest rates, which may have an adverse effect on our financial position, results of operations
and cash flows.
Under the Senior Notes, Convertible Notes and the EBRD Loan, we have pledged shares in our two principal subsidiary holding companies that hold substantially all of our
assets and a default on our obligations could result in our inability to continue to conduct our business.
Pursuant to the terms of the Indentures, the indenture pursuant to which our Convertible Notes were issued (the “2008 Indenture”) and the EBRD Loan, we have pledged shares in
our two principal subsidiary holding companies, which own substantially all of our interests in our operating companies, including the TV Nova (Czech Republic) group, Pro TV,
Markiza, Pro Plus and Studio 1+1. If we were to default on any of the Indentures, the 2008 Indenture or the EBRD Loan, the trustees under our Indentures and the 2008 Indenture or
EBRD would have the ability to sell all or a portion of all of these assets in order to pay amounts outstanding under such debt instruments.
Risks Relating to our Operations
If we fail to successfully implement our strategic goals for Ukraine, our operating results and cash flows will be materially adversely affected.
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In June 2008, we completed the acquisition of an additional 30% interest in the Studio 1+1 group from our partners, increasing our beneficial ownership interest to 90%; and in
October 2008, we completed the acquisition of the remaining 10% interest in the Studio 1+1 group (see Part II, Item 8, Note 3 “Acquisitions and Disposals, Ukraine”). In February
2009, we completed the buyout of our minority partners in the KINO channel and the sale of our interest in the CITI channel (see Part II, Item 8, Note 23 “Subsequent Events”). In
addition, in connection with the termination of our advertising sales arrangements with Video International Group, we created an in-house sales department to sell advertising on our
channels in Ukraine. As a result of these events, we have complete ownership of all of our broadcasting assets in Ukraine and have taken a series of measures to improve the
overall standing and performance of the STUDIO 1+1 and KINO channels. Successful implementation will depend on several factors, including but not limited to general economic
conditions in Ukraine, the ability of our in-house sales team to sell advertising, our ability to integrate the operations of our Ukraine channels, our achieving cost savings by
consolidating these operations, the cost and popularity of local productions and Russian-language programming, our ability to achieve higher ratings and audience share, the
implementation of new management processes, the strength of the local management team, the ability of our internet properties in Ukraine to generate revenues as well the ability of
the Ukrainian government to maintain political stability. There can be no assurance that we will be able to successfully implement a new strategy in Ukraine, and any such failure
will have a material adverse effect on our financial position, results of operations and cash flows.
We may seek to make acquisitions of other channels, networks, content providers or other companies in the future, and we may fail to acquire them on acceptable terms or
successfully integrate them or we may fail to identify suitable targets.
Our business and operations continue to experience rapid growth, including through acquisition. The acquisition and integration of new businesses, including our acquisition of
broadcasting assets in Bulgaria in August 2008, pose significant risks to our existing operations, including:
·
·
·
·
·
additional demands placed on our senior management, who are also responsible for managing our existing operations;
increased overall operating complexity of our business, requiring greater personnel and other resources;
difficulties of expanding beyond our core expertise in the event that we acquire ancillary businesses;
significant initial cash expenditures to acquire and integrate new businesses; and
in the event that debt is incurred to finance acquisitions, additional debt service costs related thereto as well as limitations that may arise under our Senior Notes and the EBRD
Loan.
To manage our growth effectively and achieve pre-acquisition performance objectives, we will need to integrate any new acquisitions, implement financial and management controls
and produce required financial statements in those operations. The integration of new businesses may also be difficult due to differing cultures or management styles, poor internal
controls and an inability to establish control over cash flows. If any acquisition and integration is not implemented successfully, our ability to manage our growth will be impaired
and we may have to make significant additional expenditures to address these issues, which could harm our financial position, results of operations and cash flows. Furthermore,
even if we are successful in integrating new businesses, expected synergies and cost savings may not materialize, resulting in lower than expected profit margins.
In addition, prospective competitors may have greater financial resources than us and increased competition for target broadcasters may decrease the number of potential
acquisitions that are available on acceptable terms.
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Our operating results are dependent on the importance of television as an advertising medium.
We generate almost all of our revenues from the sale of advertising airtime on television channels in our markets. Television competes with various other media, such as print, radio,
the internet and outdoor advertising, for advertising spending. In all of the countries in which we operate, television constitutes the single largest component of all advertising
spending. There can be no assurances that the television advertising market will maintain its current position among advertising media in our markets. 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 in any period or in specific markets would have an adverse effect on our
financial position, results of operations and cash flows.
Our programming content may become more expensive to produce or acquire or we may not be able to develop or acquire content that is attractive to our audiences.
Television programming is one of the most significant components of our operating costs, particularly in Ukraine. The commercial success of our channels depends substantially
on our ability to develop, produce or acquire programming that matches audience tastes, attracts high audience shares and generates advertising revenues. The costs of acquiring
content attractive to our viewers, such as feature films and popular television series and formats, may increase as a result of greater competition from existing and new television
broadcasting channels. Our expenditure in respect of locally produced programming may also increase due to the implementation of new laws and regulations mandating the
broadcast of a greater number of locally produced programs, changes in audience tastes in our markets in favor of locally produced content, and competition for talent. In addition,
we typically acquire syndicated programming rights under multi-year commitments before we can predict whether such programming will perform well in our markets. In the event
any such programming does not attract adequate audience share, it may be necessary to increase our expenditures by investing in additional programming as well as to write down
the value of such underperforming programming. Any increase in programming costs or write-downs could have a material adverse effect on our financial condition, results of
operations and cash flows.
The transition to digital broadcasting may require substantial additional investments and the timing of such investments is uncertain.
Countries in which we have operations are migrating from analog terrestrial broadcasting to digital terrestrial broadcasting. Each country has independent plans with its own
timeframe and regulatory and investment regime. The specific timing and approach to implementing such plans is subject to change. We cannot predict the effect of the migration
on our existing operations or predict our ability to receive any additional rights or licenses to broadcast for our existing channels or any additional channels if such additional rights
or licenses should be required under any relevant regulatory regime. Furthermore, we may be required to make substantial additional capital investment and commit substantial
other resources to implement digital terrestrial broadcasting, and the availability of competing alternative distribution systems, such as direct-to-home platforms, may require us to
acquire additional distribution and content rights. We may not have access to resources sufficient to make such investments when required.
Our operations are subject to significant changes in technology that could adversely affect our business.
The television broadcasting industry may be affected by rapid innovations in technology. The implementation of new technologies and the introduction of broadcasting
distribution systems other than analog terrestrial broadcasting, such as digital terrestrial broadcasting, direct-to-home cable and satellite distribution systems, the internet, video-on-
demand and the availability of television programming on portable digital devices, have fragmented television audiences in more developed markets and could adversely affect our
ability to retain audience share and attract advertisers as such technologies penetrate our markets. New technologies that enable viewers to choose when and what content to
watch, as well as to fast-forward or skip advertisements may cause changes in consumer behavior that could impact our business. In addition, compression techniques and other
technological developments allow for an increase in the number of channels that may be broadcast in our markets and expanded programming offerings that may be offered to highly
targeted audiences. Reductions in the cost of launching additional channels could lower entry barriers for new channels and encourage the development of increasingly targeted
niche programming on various distribution platforms. Our television broadcasting operations may be required to expend substantial financial and managerial resources on the
implementation of new broadcasting technologies or distribution systems. In addition, an expansion in competition due to technological innovation may increase competition for
audiences and advertising revenue as well as the competitive demand for programming. Any requirement for substantial further investment to address competition that arises on
account of technological innovations in broadcasting may have an adverse effect on our financial position, results of operations and cash flows.
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We may not be aware of all related party transactions, which may involve risks of conflicts of interest that result in concluding transactions on less favorable terms than could be
obtained in arms-length transactions.
In certain of our markets, Adrian Sarbu, our President and Chief Operating Officer (who is a shareholder in our Romania operations), general directors or other members of the
management of our operating companies have other business interests in their respective countries, including interests in television and other media-related companies. We may not
be aware of all such business interests or relationships that exist with respect to entities with which our operating companies enter into transactions. Transactions with companies,
whether or not we are aware of any business relationship between our employees and third parties, may present conflicts of interest which may in turn result in the conclusion of
transactions on terms that are not arms-length. It is likely that our subsidiaries will continue to enter into related party transactions in the future. In the event there are transactions
with persons who subsequently are determined to be related parties, we may be required to make additional disclosure and, if such contracts are material, may not be in compliance
with certain covenants under the Senior Notes and the EBRD Loan. In addition, there have been instances in the past where certain related party receivables have been collected
more slowly than unrelated third party receivables, which have resulted in slower cash flow to our operating companies. Any related party transaction that is entered into on terms
that are not arms-length may result in a negative impact on our financial position, results of operations and cash flows.
We may not be able to prevent the management of our operating companies from entering into transactions that are outside their authority and not in the best interests of
shareholders.
The general directors of our operating companies have significant management authority on a local level, subject to the overall supervision by the corresponding company board of
directors. In addition, we typically grant authority to other members of management through delegated authorities. In the past, our internal controls have detected transactions that
have been entered into by managers acting outside of their authority. Internal controls may not be able to prevent an employee from acting outside his authority. There is therefore
a risk that employees with delegated authorities may act outside their authority and that our operating companies will enter into transactions that are not duly
authorized. Unauthorized transactions may not be in the best interests of our shareholders and may create the risk of fraud or the breach of applicable law, which may result in
transactions or sanctions that may have an adverse impact on our financial position, results of operations and cash flows.
Our broadcasting licenses may not be renewed and may be subject to revocation.
We require broadcasting and, in some cases, other operating licenses as well as other authorizations from national regulatory authorities in our markets, in order to conduct our
broadcasting business. We cannot guarantee that our current licenses or other authorizations will be renewed or extended, or that they will not be subject to revocation, particularly
in markets where there is relatively greater political risk as a result of less developed political and legal institutions. The failure to comply in all material respects with the terms of
broadcasting licenses or other authorizations or with applications filed in respect thereto may result in such licenses or other authorizations not being renewed or otherwise being
terminated. Furthermore, no assurances can be given that renewals or extensions of existing licenses will be issued on the same terms as existing licenses or that further restrictions
or conditions will not be imposed in the future.
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Our analog broadcasting licenses expire at various times between April 2009 and September 2020. Any non-renewal or termination of any other broadcasting or operating licenses
or other authorizations or material modification of the terms of any renewed licenses may have a material adverse effect on our financial position, results of operations and cash
flows.
Our operations are in developing markets where there is a risk of economic uncertainty, biased treatment and loss of business.
Our revenue generating operations are located in Central and Eastern Europe. These markets pose different risks to those posed by investments in more developed markets and the
impact in our markets of unforeseen circumstances on economic, political or social life is greater. The economic and political systems, legal and tax regimes, standards of corporate
governance and business practices of countries in this region continue to develop. Government policies may be subject to significant adjustments, especially in the event of a
change in leadership. This may result in social or political instability or disruptions, potential political influence on the media, inconsistent application of tax and legal regulations,
arbitrary treatment before judicial or other regulatory authorities and other general business risks, any of which could have a material adverse effect on our financial positions,
results of operations and cash flows. Other potential risks inherent in markets with evolving economic and political environments include exchange controls, higher tariffs and other
levies as well as longer payment cycles.
The relative level of development of our markets and the influence of local political parties also present a potential for biased treatment of us before regulators or courts in the event
of disputes involving our investments. If such a dispute occurs, those regulators or courts might favor local interests over our interests. Ultimately, this could lead to loss of our
business operations, as occurred in the Czech Republic in 1999. The loss of a material business would have an adverse impact on our financial position, results of operations and
cash flows.
Our success depends on attracting and retaining key personnel.
Our success depends partly upon the efforts and abilities of our key personnel and our ability to attract and retain key personnel. Our management teams have significant
experience in the media industry and have made an important contribution to our growth and success. Although we have been successful in attracting and retaining such people in
the past, competition for highly skilled individuals is intense. There can be no assurance that we will continue to be successful in attracting and retaining such individuals in the
future. The loss of the services of any of these individuals could have an adverse effect on our business, results of operations and cash flows.
Risks Relating to Enforcement Rights
We are a Bermuda company and enforcement of civil liabilities and judgments may be difficult.
Central European Media Enterprises Ltd. is a Bermuda company; substantially all of our assets and all of our operations are located, and all of our revenues are derived, outside the
United States. In addition, several of our directors and officers are non-residents of the United States, and all or a substantial portion of the assets of such persons are or may be
located outside the United States. As a result, investors may be unable to effect service of process within the United States upon such persons, or to enforce against them
judgments obtained in the United States courts, including judgments predicated upon the civil liability provisions of the United States federal and state securities laws. There is
uncertainty as to whether the courts of Bermuda and the countries in which we operate would enforce (i) judgments of United States courts obtained against us or such persons
predicated upon the civil liability provisions of the United States federal and state securities laws or (ii) in original actions brought in such countries, liabilities against us or such
persons predicated upon the United States federal and state securities laws.
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Our bye-laws restrict shareholders from bringing legal action against our officers and directors.
Our bye-laws contain a broad waiver by our shareholders of any claim or right of action in Bermuda, both individually and on our behalf, against any of our officers or directors. The
waiver applies to any action taken by an officer or director, or the failure of an officer or director to take any action, in the performance of his or her duties, except with respect to any
matter involving any fraud or dishonesty on the part of the officer or director. This waiver limits the right of shareholders to assert claims against our officers and directors unless
the act or failure to act involves fraud or dishonesty.
Risks Relating to our Common Stock
CME Holdco L.P. is in a position to decide corporate actions that require shareholder approval and may have interests that differ from those of other shareholders.
CME Holdco L.P. owns all our outstanding shares of Class B common stock, each of which carries ten votes per share. Ronald Lauder, the chairman of our Board of Directors, is the
majority owner of CME Holdco L.P. and, subject to certain limitations described below, is entitled to vote those shares on behalf of CME Holdco L.P. The shares over which Ronald
Lauder has voting power represent 63.7% of the aggregate voting power of our outstanding common stock. On September 1, 2006, Adele (Guernsey) L.P., a fund affiliated with Apax
Partners, acquired 49.7% of CME Holdco L.P. Under the terms of the limited partnership agreement of CME Holdco L.P., Adele (Guernsey) L.P. has certain consent rights in respect
of the voting and disposition of our shares of Class B common stock held by CME Holdco L.P. CME Holdco L.P. is in a position to control the outcome of corporate actions
requiring shareholder approval, such as the election of directors (including two directors Adele (Guernsey) L.P. is entitled to recommend for appointment) or certain transactions,
including issuances of CME common stock that may result in a change of control. The interests of CME Holdco L.P. may not be the same as those of other shareholders, and such
shareholders will be unable to affect the outcome of such corporate actions for so long as CME Holdco L.P. retains voting control.
The price of our Class A common stock is likely to remain volatile.
The market price of shares of our Class A common stock may be influenced by many factors, some of which are beyond our control, including those described above under “Risks
Relating to our Operations” as well as the following: general economic and business trends, variations in quarterly operating results, license renewals, regulatory developments in
our operating countries and the EU, the condition of the media industry in our operating countries, the volume of trading in shares of our Class A common stock, future issuances of
shares of our Class A common stock and investor and securities 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 reduce the market price of shares of our Class A
common stock, regardless of our operating performance.
Our share price may be adversely affected by future issuances and sales of our shares.
As at February 25, 2009, we have a total of 1.3 million options to purchase Class A common stock outstanding and 0.1 million options to purchase shares of Class B common stock
outstanding. An affiliate of PPF a.s., from whom we acquired the TV Nova (Czech Republic) group, holds 3,500,000 unregistered shares of Class A common stock and Igor
Kolomoisky, a member of our Board of Directors and a party to the Ukraine Buyout, holds 1,275,227 unregistered shares of Class A common stock. In addition, the Convertible
Notes are convertible into shares of our Class A common stock and mature on March 15, 2013. Holders of the Convertible Notes have registration rights with respect to the shares
of Class A common stock underlying the Convertible Notes. Prior to December 15, 2012, the Convertible Notes will be convertible following certain events and from that date, at any
time through March 15, 2013. From time to time up to and including December 15, 2012, we will have the right to elect to deliver (i) shares of our Class A common stock or (ii) cash
and, if applicable, shares of our Class A common stock upon conversion of the Convertible Notes. At present, we have elected to deliver cash and, if applicable, shares of our Class
A common stock. (see Part II, Item 8, Note 6 “Senior Debt”). To mitigate the potentially dilutive effect of a conversion of the Convertible Notes on our Class A common stock, we
have entered into two capped call transactions. In connection therewith we have purchased call options with respect to a certain number of shares of our Class A common stock
that are exercisable in the event of a conversion of the Convertible Notes or at maturity on March 15, 2013. We may receive cash or shares of our Class A common stock upon the
exercise of an option (see Part II, Item 8, Note 6 “Senior Debt”). We cannot predict what effect, if any, an issuance of shares of our common stock, including the Class A common
stock underlying options or the Convertible Notes, any issuances of shares of our Class A or Class B common stock in connection with future financings, or the entry into trading
of previously issued unregistered shares of our Class A common stock, will have on the market price of our shares. If more shares of common stock are issued, the economic
interest of current shareholders may be diluted and the price of our shares may be adversely affected.
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ITEM 1 B. 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 operations, are in good condition and are adequately equipped for
purposes of conducting broadcasting 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.
Location
Property
Use
Hamilton, Bermuda
Amsterdam, Netherlands
London, United Kingdom
Sofia, Bulgaria
Zagreb, Croatia
Prague, Czech Republic
Bucharest and other key cities within Romania
Bratislava, Slovak Republic
Ljubljana, Slovenia
Kiev and other key cities within Ukraine
Zug, Switzerland
Leased office
Leased office
Leased office
Leased buildings
Owned and leased buildings
Owned and leased buildings
Owned and leased buildings
Owned buildings
Owned and leased buildings
Leased buildings
Leased office
Registered Office, corporate
Corporate Office, corporate
Administrative Center, corporate
Office and studio space, TV2 and RING TV
Office and studio space, NOVA TV (Croatia)
Office and studio space, TV NOVA (Czech Republic)
Office and studio space, PRO TV
Office and studio space, TV MARKIZA
Office and studio space, POP TV and KANAL A
Office and studio space, STUDIO 1+1 and KINO
Office space, IMS
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For further information on the cash resources that fund these facility-related costs, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources.”
ITEM 3. LEGAL PROCEEDINGS
General
We are, from time to time, a party to litigation that arises in the normal course of our business operations. However, we are not presently a party to any such litigation which could
reasonably be expected to have a material adverse effect on our business or operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
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 on October 13, 1994 under the trading symbol
“CETV”.
On February 20, 2009, the last reported sales price for shares of Class A Common Stock was US$ 6.43.
The following table sets forth the high and low sales prices for shares of Class A Common Stock for each quarterly period during the last two fiscal years.
Price Period
2008
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2007
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High (US$ / Share)
Low (US$ / Share)
66.47
89.42
106.99
114.17
123.49
100.85
100.74
88.92
9.07
61.99
86.34
78.50
93.36
76.91
86.85
70.95
At February 20, 2009, there were 215 holders of record (including brokerage firms and other nominees) of shares of Class A Common Stock and 1 holder of record of shares of Class
B Common Stock. There is no public market for shares of Class B Common Stock. Each share of Class B Common Stock has 10 votes.
4,500,000 shares have been authorized for issuance in respect of equity awards under a stock-based compensation plan (see Item 8, Note 17, “Stock-Based Compensation”).
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 2008.
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PERFORMANCE GRAPH
The following performance graph is a line graph comparing the change in the cumulative shareholder return of the Class A Common Stock against the total cumulative total return of
the Nasdaq Composite Index and the Dow Jones World Broadcasting Index between December 31, 2004 and December 31, 2008.
Value of US$ 100 invested at December 31, 2004 as of December 31, 2008:
Central European Media Enterprises Ltd.
NASDAQ Composite Index
Dow Jones World Broadcasting Index (1)
$
$
$
55.81
79.39
72.49
(1) This index includes 69 companies, many of which are non-U.S. based. Accordingly, we believe that the inclusion of this index is useful in understanding our stock performance
compared to companies in the television broadcast and cable industry.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED 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, 2008. The selected consolidated financial
data is qualified in its entirety and should be read in conjunction with the Consolidated Financial Statements and related notes thereto set forth in Item 8 and Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”. We have derived the consolidated statements of operations data for the years ended December 31,
2008, 2007 and 2006 and the consolidated balance sheet data as of December 31, 2008 and December 31, 2007 from the consolidated audited financial statements included elsewhere
in this Annual Report on Form 10-K. The consolidated statement of operations data for the years ended December 31, 2005 and 2004 and the balance sheet data as of December 31,
2006, 2005 and 2004 were derived from the consolidated audited financial statements that are not included in this Annual Report on Form 10-K.
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CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues
Operating (loss) / income
Net (loss) / income from continuing operations
Net (loss) / income on discontinued operations
Net income / (loss)
PER SHARE DATA:
Net (loss) / income per common share from:
Continuing operations – basic
Continuing operations – diluted
Discontinued operations – basic
Discontinued operations – diluted
Net (loss) / income – basic
Net (loss) / income – diluted
Weighted average common shares used in computing per share
amounts (000’s)
Basic
Diluted
CONSOLIDATED BALANCE SHEET DATA:
Cash
Other current assets
Non-current assets
Total assets
Current liabilities
Non-current liabilities
Minority interests
Shareholders’ equity
Total liabilities and shareholders’ equity
Seasonality
2008
1,019,934
(127,797)
(251,759)
(3,785)
(255,544)
(5.95)
(5.95)
(0.09)
(0.09)
(6.04)
(6.04)
42,328
42,328
107,433
387,962
1,913,338
2,408,733
228,673
1,175,694
3,187
1,001,179
2,408,733
$
$
$
$
$
$
$
$
$
$
$
$
$
$
For the Years Ended December 31,
2007
(US$ 000’s, except per share data)
2006
2005
2004
838,856
210,456
93,048
(4,480)
88,568
2.25
2.23
(0.11)
(0.11)
2.14
2.12
41,384
41,833
142,812
392,280
1,803,343
2,338,435
234,470
681,003
23,155
1,399,807
2,338,435
$
$
$
$
$
$
$
602,646
142,971
27,641
(7,217)
20,424
0.69
0.68
(0.18)
(0.18)
0.51
0.50
40,027
40,600
145,902
271,763
1,401,335
1,819,000
184,461
572,584
26,189
1,035,766
1,819,000
$
$
$
$
$
$
$
400,978
52,196
42,835
(513)
42,322
1.24
1.21
(0.01)
(0.01)
1.22
1.19
34,664
35,430
71,658
215,268
1,101,924
1,388,850
206,961
488,099
13,237
680,553
1,388,850
$
$
$
$
$
$
$
182,339
18,671
15,938
2,524
18,462
0.57
0.55
0.09
0.09
0.66
0.63
27,871
29,100
152,568
112,481
179,590
444,639
109,745
18,965
4,861
311,068
444,639
We, like other television operators, experience seasonality, with advertising sales tending to be lowest during the third quarter of each calendar year, which includes the summer
holiday period (typically July and August), and highest during the fourth quarter of each calendar year.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the sections entitled “Forward-looking Statements” on page 4 and “Risk Factors” in Part I, Item 1A.
Contents
I.
ll.
Ill.
IV.
V.
Vl.
Executive Summary
General Market Information
Analysis of Segment Results
Analysis of the Results of Consolidated Operations
Liquidity and Capital Resources
Critical Accounting Policies and Estimates
Vll.
Related Party Matters
l. Executive Summary
Continuing Operations
The following table provides a summary of our consolidated results for the years ended December 31, 2008 and 2007:
Net revenues
Operating (loss) / income
Net (loss) / Income
Net cash generated from continuing operating activities
For the Years Ended December 31, (US$ 000's)
Movement
2007
2008
$
$
$
1,019,934
(127,797)
(255,544)
135,555
$
$
$
838,856
210,456
88,568
106,695
$
$
$
181,078
(338,253)
(344,112)
28,860
The deterioration in our operating income is principally due to the recognition of a non-cash impairment charge of US$ 336.7 million in respect of our operations in Ukraine and
Bulgaria (see Item 8, Note 4, “Goodwill and Intangible Assets”).
Station Performance
In 2008 our established operations in Croatia, the Czech and Slovak Republics, Romania, and Slovenia performed very strongly. We acquired the interests of the minority partners in
our Ukraine (STUDIO 1+1) operations and re-launched the station in 2008, incurring significant costs as a result. We also acquired new operations in Bulgaria during 2008 which
incurred startup losses.
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In 2008 we reported growth in total Segment Net Revenues of 21.6%. Aside from our Ukraine (STUDIO 1+1) operations, each of our stations showed growth in excess of 15.9%, with
particularly strong growth in the Czech Republic and Romania.
Total Segment EBITDA grew by 6.9%. We generated a total Segment EBITDA margin of 34.0% compared to the 39.0% margin reported in 2007 (Segment EBITDA is defined and
reconciled to our consolidated results in Item 8, Note 19, “Segment Data”). Our total segment results were affected by losses in our developing markets of Ukraine and Bulgaria. In
Ukraine our two operating segments generated Segment EBITDA losses of US$ 34.8 million compared to Segment EBITDA of US$ 23.5 million in 2007, and our new operations in
Bulgaria generated Segment EBITDA losses of US$ 10.2 million. Excluding these, in 2008 we generated Segment EBITDA of US$ 390.7 million, an increase of 30.2% over 2007, and a
total Segment EBITDA margin of 42.5%, compared to 42.1% in 2007.
Our net cash generated from continuing operations increased by 27.0% in 2008.
During the first half of 2008, our Segment results benefited from a general weakening of the dollar against the currencies in which our results are generated. This situation reversed in
the second half of the year, and by December 31, 2008 the currencies of all our markets except the Slovak Republic were weaker against the dollar than they had been at the start of
the year. We were not impacted by the weakening general economic conditions that have affected many Western countries until very late in the year. Rapidly growing economic
uncertainty in the last quarter of 2008 led to a significant reduction in GDP growth rates in most of our markets and our advertising sales in December were lower than we had
anticipated in some markets.
Key Events
In late 2007 we began negotiations with our minority partners in the Studio 1+1 group to acquire their remaining 40.0% interest. On January 31, 2008, we entered into a framework
agreement which established a mechanism for us to acquire a 30.0% interest and an option to acquire the final 10.0% interest at agreed prices.
We completed the acquisition of the first 30.0% interest in June 2008, paying cash consideration of US$ 223.2 million (including acquisition costs) and began to implement our plan
to maximize the potential of the STUDIO 1+1 channel by establishing a multi-channel broadcasting platform. This included installing a new management team and significantly
restructuring our operations.
On September 10, 2008, we exercised our option to purchase the remaining 10.0% interest. We completed this purchase on October 17, 2008 for cash consideration of US$ 109.1
million. We have taken responsibility for advertising sales for Ukraine operations with effect from January 1, 2009 and have set up an in-house sales department following the
termination of our agreements with the Video International Group.
In December 2008, we also announced that we had entered into a preliminary agreement to buy out our minority partners in Gravis-Kino in exchange for our interest in CITI for net
consideration of US$ 10.0 million and to take a 10.0% interest in Glavred Media Holding LLC for cash consideration of US$ 12.0 million. These transactions, which were completed in
February 2009, will enable us to integrate the KINO channel with STUDIO 1+1 to build an efficient multi-channel broadcasting platform (see Item 8, Note 23, “Subsequent Events”).
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Although we strongly believe these transactions will ultimately maximize the value of our operations in Ukraine, our operations were vulnerable to the sharp decline in the market
that commenced in November and December of 2008 and which is expected to continue in 2009 and 2010 We therefore concluded that some of our Ukraine assets had become
impaired in the fourth quarter. Accordingly, we recorded an impairment charge of US$ 271.9 million in respect of both of our Ukraine operations (see Item 8, Note 4 “Goodwill and
Intangible Assets: Impairment of Goodwill, Indefinite-Lived Intangible Assets and Long-Lived Assets”).
During 2008 we also made the first expansion of our geographic footprint since 2005 through an acquisition in Bulgaria. In July we announced our acquisition of an indirect 80.0%
interest in TV2, which operates a start-up national terrestrial channel, and Ring TV, which operates a sports cable channel, for total cash consideration of US$ 152.3 million. The
acquisition of TV2 and RING TV provides an opportunity for us to establish a leading multi-channel broadcasting platform in a new market. Unfortunately, the Bulgarian economy
was also heavily impacted by the global financial crisis in the fourth quarter and is expected to continue to suffer in 2009 and 2010. We therefore recorded impairment charges of
US$ 64.9 million in respect of our Bulgarian operations (see Item 8, Note 4 “Goodwill and Intangible Assets: Impairment of Goodwill, Indefinite-Lived Intangible Assets and Long-
Lived Assets”).
In smaller transactions we expanded into radio with our acquisition of Radio Pro in Romania, and in the Czech Republic enhanced our internet operations and announced a licensing
agreement to launch a localized MTV channel in 2008. In April 2008, we acquired certain assets of Radio Pro, the owner of two leading radio channels in Romania, for RON 47.2
million (approximately US$ 20.6 million at the date of payment). In May 2008 we acquired Jyxo, an information technology provider and blog.cz, operator of the leading blog site in
the Czech Republic, which we also acquired, for up to US$ 11.6 million if certain operational targets are met (see Item 8 Note 3 “Acquisitions and Disposals: Romania). In September,
2008, we announced a multi-year licensing agreement with MTV Networks International to launch a localized MTV channel in the Czech Republic, with the opportunity to also
distribute the channel in the Slovak Republic via cable and satellite. We expect the channel to launch during 2009.
In March 2008, we issued US$ 475.0 million of 3.5% Senior Convertible Notes, the proceeds of which were used to acquire the additional ownership interests in our Ukraine
operations and for general corporate purposes. In connection with the issuance of the Convertible Notes we purchased capped call options over shares of our Class A Common
Stock.
Late in the year we had a number of executive management changes. Marina Williams, our Executive Vice President, resigned in October to pursue other professional opportunities.
Michael Garin retired as Chief Executive Officer at the end of December 2008 and resigned from the Board of Directors of CME in February 2009. Adrian Sarbu, our Chief Operating
Officer, was appointed President and Chief Operating Officer from January 1, 2009.
Future Trends
Economic conditions in our markets worsened significantly at the end of 2008 and economic news in the first two months of 2009 has been generally negative. There is a wide range
of GDP and economic predictions for our markets for 2009, but the majority of these anticipates substantially worse conditions than in 2008 and the consensus projections, which
steadily deteriorated in the last months of 2008, have sharply declined in the first months of 2009.
The first quarter of the year is the main period in which we negotiate advertising contracts with our clients. In light of these deteriorating economic conditions, advertisers are
uncertain about the level of spending they are prepared to commit and this has slowed our progress in closing advertising sales contracts for 2009. As a result, the level of
advertiser demand for gross rating points (“GRPs”) and the consequent effect on pricing is currently unclear. We therefore cannot predict with certainty how our advertising sales
will develop in 2009. We now expect that total advertising spending will decline in 2009 in most or all of the countries in which we operate. The extent of the decline will probably be
in a single digit percentage range, although if the current economic conditions continue or worsen the level of decline could be substantially greater. We cannot predict with any
degree of accuracy how the effect of such a decline will impact television advertising. In Ukraine uniquely poor economic conditions lead us to expect a decline of the television
advertising market of up to 60%.
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Since June 30, 2008 the dollar has strengthened considerably against most European currencies, including the Euro and the local currencies of our station operations. In general, an
increase in the strength of the dollar against the functional currencies of the markets in which we operate will reduce the dollar value of the segment sales and segment EBITDA that
we report. This trend has continued in the early months of 2009 and analyst predictions suggest that further weakening is likely.
We have been taking actions to reduce costs to protect profits and to conserve liquidity. These steps include staff reductions in our operations and our headquarters, pay
constraints, the deferral of certain operating expenditures, the deferral or cancellation of capital expenditures and managing our broadcast schedules to reduce the rate of
programming cost growth. We have also modified our development strategies for Ukraine and Bulgaria and significantly reduced our planned levels of investment
expenditure. Notwithstanding these cost reductions, our goal continues to be to maintain the high audience shares and the strength of our brands that we currently enjoy in our
key markets, as we believe this is essential to the long term value of CME. We intend to maintain sufficient investment to protect these strengths. Taking all these factors into
account, we now expect that we will see a decline in Segment Net Revenues and Segment EBITDA in 2009 in local currency in some or all of our markets.
When the global economic climate improves, we expect growth will resume in our markets. As a result, we expect that over the medium term we will see a return to higher levels of
GDP growth, as higher well as general advertising and television advertising spending growth in our markets than in Western European or U.S. markets.
Broadcast
The large audience share that we enjoy in most of our markets is due both to the commercial strength of our brands and channels and to the constraints on bandwidth that limit the
number of free-to-air broadcasters in our markets. The only markets where we currently face significant competition from other distribution platforms are Romania and Slovenia,
where cable penetration exceeds 50% of television households.
As our markets mature, we anticipate more intense competition for audience share and advertising spending from other incumbent terrestrial broadcasters and from cable, satellite
and digital terrestrial broadcasters as the coverage of these technologies grows. The advent of digital terrestrial broadcasting as well as the introduction of alternative distribution
platforms for content (including additional direct-to-home (“DTH”) services, the internet, internet protocol TV (“IPTV”), mobile television and video-on-demand services) will cause
audience fragmentation and change the competitive dynamics in our operating countries in the medium term. Due to our integrated multichannel and internet business model, we do
not expect that the impact on our advertising share will be significant.
We believe that our leading position in our operating countries and the strength of our existing brands place us in a solid position to manage increased competition, including by
launching new niche channels to target niche audiences as these new technologies develop.
Internet
Internet broadband penetration is low in all of our markets in comparison to Western European and U.S. markets. As the GDP per capita of our markets grows over the medium term,
we anticipate broadband penetration will increase significantly and will foster the development of significant new opportunities for generating advertising and other revenues in new
media. We operate a complex internet business in each of our markets and expect to continue to launch targeted services in order to support or achieve leading positions in terms of
unique users. We believe that the strength of our brands, our news programming and other locally produced content, our relationships with advertisers and the opportunities for
cross promotion afforded by the large audiences of our broadcast operations put us in a strong position to achieve leading positions in these new forms of media as they develop
and to monetize those assets over time. We intend to continue the development of our non-broadcast activities in order to create offerings and launch services on the internet and
mobile platforms that complement our broadcast schedules and generate additional revenues.
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Financial Position
We believe our financial resources are sufficient to meet our current financial obligations. We do not have any imminent refinancing need; as the earliest maturity date of our Senior
Notes or Convertible Notes is in 2012 and our EBRD Loan, which is scheduled to amortize from May 2009, does not mature until 2011. However, further deterioration in the
advertising market or continued strengthening of the dollar against the currencies of the markets in which our cash flow is generated would reduce our liquidity reserves. We may
also be constrained in accessing new funding due to prevailing credit market conditions and our increasing leverage as Segment EBITDA falls. We will continue to review
opportunities to raise additional liquidity, including restructuring our debt and issuing equity or additional local debt as market conditions allow.
CME Strategy
We enjoy very strong positions in our core markets. This is based on brand strength, audience share leadership, the depth and experience of local management and local content
production. Historically, these strengths have supported price leadership, high margins, and strong cash flows. We expect these strengths will give our operations resilience in the
current economic downturn and the opportunity to benefit as and when growth resumes.
We intend also to take a number of steps to enhance the performance of the business over the medium term. Our priorities in this regard include:
Optimizing the value of our resources through diversification of revenue sources:
· we intend to reorganize our operating structure into three areas - (broadcast) channel operations, content, and internet – to leverage our content strengths to develop a
significant new revenue source over the medium term; and
·
as this structure becomes established, we intend to continue our transformation from a television broadcaster to a broad based media company by capitalizing on our core
strengths and expanding our revenue base into five main sources: advertising, subscription, content distribution, internet and management services.
Further development of our operations:
· we will continue developing our Bulgaria and Ukraine operations in a controlled manner to secure consistent performance and a leading position in those markets; and.
· we will assess opportunities arising from current economic conditions to launch or acquire additional channels and internet operations in our region in order to expand our
offerings, target niche audiences and increase our advertising inventory when financially prudent.
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In the near term, while current difficult economic conditions continue, we will maintain a strong focus on cost control to protect both profitability and liquidity, while ensuring that
this does not lead to the erosion of our brands and competitive strength.
ll. General Market Information
Emerging Markets
Our revenue generating operations are in Bulgaria, Croatia, the Czech Republic, Romania, the Slovak Republic, Slovenia and Ukraine. These emerging economies have adopted
Western-style democratic forms of government within the last twenty years and have economic structures, political systems, legal systems, systems of corporate governance and
business practices that continue to evolve. The lower level of development and experience in these areas within our markets, by comparison with most Western European markets,
increases the relative level of our business risk.
One indicator of the rate of development and the relative level of business risk associated with economic development in a particular market is such market’s Coface rating, which is
an assessment of the relative risk of payment default in such market taking into account local business, financial and political factors. The table below indicates the Coface rating for
each country in which we operate. For purposes of comparison with other select markets, the United States, United Kingdom, Greece and Italy were ranked A2 in 2008, Hungary and
Poland were ranked A3 and Russia and Turkey were ranked B.
Country
Bulgaria
2008 Rating
A4
Details of 2008 Rating
A somewhat shaky political and economic outlook and a relatively volatile business
environment can affect corporate payment behavior. Corporate default probability is still
acceptable on average.
2007 Rating 2006 Rating 2005 Rating
-
-
-
Croatia
Czech Republic
Romania
Slovak Republic
Slovenia
Ukraine
A4
A2
A4
A3
A1
C
A somewhat shaky political and economic outlook and a relatively volatile business
environment can affect corporate payment behavior. Corporate default probability is still
acceptable on average.
The political and economic situation is good. A basically stable and efficient business
environment nonetheless leaves room for improvement. Corporate default is low on average.
A somewhat shaky political and economic outlook and a relatively volatile business
environment can affect corporate payment behavior. Corporate probability is still acceptable on
average.
Changes in generally good but somewhat volatile political and economic environment can
affect corporate payment behavior. A basically secure business environment can nonetheless
give rise to occasional difficulties for companies. Corporate default probability is quite
acceptable on average.
A4
A2
A4
A3
A4
A2
A4
A3
A4
A2
A4
A3
The political and economic situation is very good. A quality business environment has a
positive influence on corporate payment behavior. Corporate default probability is very low on
average.
A1
A1
A2
A very uncertain political and economic outlook and a business environment with many
troublesome weaknesses can have a
impact on corporate payment
behavior. Corporate default probability is high.
significant
C
C
C
Source: Coface USA. In January 2009, Coface downgraded a number of countries because of the credit crisis; Croatia, Slovenia and Ukraine have been placed on a negative watch.
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European Union Accession
The Czech Republic, the Slovak Republic and Slovenia acceded to the EU in May 2004, and Romania and Bulgaria acceded in January 2007. Croatia is currently in accession
negotiations. Accession to the EU brings certain positive developments. All countries joining the EU become subject to EU legislation and we believe that the ongoing progress
towards EU entry reduces the political and economic risks of operating in the emerging markets of Central and Eastern Europe. This reduction in political and economic risks may
encourage increased foreign investment that will support economic growth. Accession to the EU may also bring certain negative developments. The adoption of EU-compliant
legislation in connection with accession may result in the introduction of new standards affecting industry and employment, and compliance with such new standards may require
increased spending.
Television Advertising Markets
We derive almost all of our revenue from the sale of television advertising, most of which is sold through media houses and independent agencies. Like other television operators,
we experience seasonality, with advertising sales tending to be lowest during the third quarter of each calendar year due to the summer holiday period (July and August) and
highest during the fourth quarter of each calendar year. For the year ended December 31, 2008, 90% of our Segment Net Revenues came from the sale of television advertising.
The per capita GDP in our markets is lower than that of Western markets. As a result of the lower GDP and weaker domestic consumption, total advertising spending and,
consequently, television advertising spending per capita tends to be lower than in Western markets. However, as a result of television being commercialized in our markets at the
same time as other media, television advertising spending generally accounts for a higher proportion of total advertising spending than in Western markets, where newspapers and
magazines and radio were established as advertising media well before the advent of television advertising.
Country
Bulgaria
Croatia
Czech Republic
Romania
Slovak Republic
Slovenia
Ukraine
(1) Source: Global Insight.
(2) Source: Global Insight and CME estimates.
Population
(in millions) (1)
7.6
4.6
10.2
21.3
5.4
2.0
45.9
Per Capita GDP
2008 (1)
Total Advertising
Spending per
Capita 2008
(US$) (2)
Total Advertising
Spending as a %
of GDP 2008
(2)
TV Advertising
Spending per
Capita (US$)
2008
(2)
TV Advertising
Spending as a %
of Total
Advertising
Spending
2008
(2)
45.9
73.0
108.3
36.3
83.9
88.6
22.5
0.75% $
0.54% $
0.48% $
0.40% $
0.47% $
0.32% $
0.57% $
23.7
35.5
48.8
22.0
39.4
51.4
9.9
55%
49%
45%
61%
47%
58%
44%
$
$
$
$
$
$
$
6,154
13,491
22,575
8,983
17,994
27,864
3,928
$
$
$
$
$
$
$
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For purposes of comparison, the following table shows the advertising market statistics for certain other Central and Eastern European markets and selected Western markets.
Country
Greece
Hungary
Italy
Poland
Russia
Turkey
UK
USA
(1) Source: Global Insight.
(2) Source: Global Insight and CME estimates.
Population
(in millions) (1)
11.2
10.0
58.6
38.0
141.8
75.8
61.0
308.8
Per Capita GDP
2008 (1)
Total Advertising
Spending per
Capita 2008
(US$) (2)
Total Advertising
Spending as a %
of GDP 2008
(2)
TV Advertising
Spending per
Capita (US$)
2008
(2)
TV Advertising
Spending as a %
of Total
Advertising
Spending
2008
(2)
$
$
$
$
$
$
$
$
31,712
14,013
39,386
11,350
12,188
8,466
34,283
46,233
$
$
$
$
$
$
$
$
370.2
96.6
257.2
75.7
75.1
31.0
324.6
546.0
1.17% $
0.69% $
0.65% $
0.67% $
0.62% $
0.37% $
0.95% $
1.18% $
111.6
39.6
128.9
35.4
39.5
16.7
84.6
238.2
30%
41%
50%
47%
53%
54%
26%
44%
There is no independent source for reliable information on the size of total television advertising spending per country in our markets. The following table sets out our current
estimates of the development of television advertising spending by market (in US$ millions).
Country
2004
2005
2006
2007
2008
Bulgaria (1)
Croatia (1)
Czech Republic (1)
Romania
Slovak Republic
Slovenia
Ukraine (2)
Market sizes are quoted at average dollar exchange rates throughout each year.
(1) We acquired our Croatia operations in July 2004, our Czech Republic operations in May 2005 and our Bulgaria operations in August 2008.
(2) Excludes political advertising and sponsorship.
-
120 – $ 130
310 – $ 320
235 – $ 245
105 – $ 115
70 - $ 80
310 - $ 320
–
115 – $ 125
285 – $ 295
165 – $ 175
90 – $ 100
60 - $ 70
220 - $ 230
-
110 – $ 120
260 – $ 270
110 – $ 120
80 - $ 90
55 – $ 65
140 - $ 150
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
-
140 – $ 150
390 – $ 400
375 – $ 385
165 – $ 170
85 – $ 90
470 - $ 480
$
$
$
$
$
$
$
175 - $ 185
155 - $ 165
490 - $ 500
465 - $ 475
210 - $ 215
100 - $ 105
450 - $ 460
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The following table sets out our current estimates of the local functional currency growth of television advertising spending by market.
Country
Bulgaria (1)
Croatia (1)
Czech Republic (1)
Romania
Slovak Republic
Slovenia
Ukraine (2)
2004
2005
2006
2007
2008
-
-
-
20 - 30%
14 - 16%
8 - 11%
25 - 35%
-
(1 – 3)%
3 – 5%
25 - 35%
8 - 10%
9 - 11%
45 - 55%
-
2 - 5%
0 - 1%
30 – 40%
5 - 7%
9 - 11%
25 - 35%
-
4 – 7%
8 – 12%
50 - 60%
25 - 30%
8 - 10%
25 - 35%
6 – 8%
0%
7 – 9%
27 – 29%
6 – 8%
7 – 9%
(3 - 5 )%
(1) We acquired our Croatia operations in July 2004, our Czech Republic operations in May 2005 and our Bulgaria operations in August 2008.
(2) Excludes political advertising and sponsorship.
Television Advertising Sales
Spot and Non-Spot Revenues. For the purposes of our management’s discussion and analysis of financial condition and results of operations, total television and radio advertising
revenue net of rebates is referred to as “spot revenues”. “Non-spot revenues” refers to all other revenues, including those from sponsorship, game shows, program sales, short
message service (“SMS”) messaging, cable subscriptions and barter transactions. The total of spot revenues and non-spot revenues is equal to Segment Net Revenues.
Our goal is to increase revenues from advertising in local currency year-on-year in every market through disciplined management of our advertising inventory. In any given period,
revenue increases can be attributable to combinations of price increases, higher inventory sales, seasonal or time-of-day incentives, target-audience delivery of specific campaigns,
introductory pricing for new clients or audience movements based on our competitors’ program schedules.
Audience Ratings and Share. When describing our performance we refer to “audience share”, which represents the share attracted by a channel as a proportion of the total
audience watching television, and “ratings”, which represents the number of people watching a channel (expressed as a proportion of the total population measured). Audience
share and ratings information is measured in each market by international measurement agencies, using peoplemeters, which quantify audiences for different demographics and sub
geographies of the population measured throughout the day. Our channels schedule programming intended to attract audiences within specific “target” demographics that we
believe will be attractive to advertisers. For each of our segments we show all day and prime time audience share and program ratings information for our channels and their major
competitors, based on our channels’ target demographics.
Spot Sales. Our main unit of sale is the commercial gross rating point (“GRP”). This is a measure of the number of people watching when the advertisement is aired. Generally we will
contract with a client to provide an agreed number of GRPs for an agreed price (“cost per point” or “CPP”). 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. The price per GRP package varies
depending on the season and time of day the advertisement is aired, the volume of GRPs purchased, requirements for special positioning of the advertisement, the demographic
group that the advertisement is targeting (in a multi-channel environment) and other factors. Our larger advertising customers generally enter into annual contracts which usually
run from April to March and set the pricing for a committed volume of GRPs.
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Generally, demand for broadcast advertising is highest in the fourth quarter of the year, followed by the second quarter; demand for broadcast advertising tends to be lowest in the
third quarter of the year.
III. Analysis of Segment Results
OVERVIEW
We manage our business on a country-by-country basis and review the performance of each business segment using data that reflects 100% of operating and license company
results. We also consider how much of our total revenues and earnings are derived from our broadcast and non-broadcast operations. Our business segments are comprised of
Bulgaria, Croatia, the Czech Republic, Romania, the Slovak Republic, Slovenia and two Ukraine segments.
We evaluate the performance of our business segments based on Segment Net Revenues and Segment EBITDA. Segment Net Revenues and Segment EBITDA reflect 100% of the
results of each operation, regardless of our ownership interest and include our operations in the Slovak Republic which were not consolidated prior to January 23, 2006.
Our key performance measure of the efficiency of our business segments is EBITDA margin. We define Segment EBITDA margin as the ratio of Segment EBITDA to Segment Net
Revenues.
Segment EBITDA is determined as segment net income/loss, which includes program rights amortization costs, before interest, taxes, depreciation and amortization of intangible
assets. Items that are not allocated to our segments for purposes of evaluating their performance, and therefore are not included in Segment EBITDA, include:
·
·
·
·
·
expenses presented as corporate operating costs in our Consolidated Statement of Operations;
stock-based compensation charges;
foreign currency exchange gains and losses;
change in the fair value of derivatives; and
certain unusual or infrequent items (e.g., extraordinary gains and losses, impairments of assets or investments, or gains on the sale of unconsolidated affiliates).
Segment EBITDA is not a term defined under U.S. GAAP, and Segment EBITDA may not be comparable to similar measures reported by other companies. Non-U.S. GAAP
measures should be evaluated in conjunction with, and are not a substitute for, U.S. GAAP financial measures.
We believe Segment EBITDA is useful to investors because it provides a more meaningful representation of our performance as it excludes certain items that either do not impact
our cash flows or the operating results of our stations. Segment EBITDA is also used as a component in determining management bonuses.
For a full reconciliation of our Segment Net Revenues and Segment EBITDA by operation to our consolidated results for the years ended December 31, 2008, 2007 and 2006 see Part
II, Item 8, Note 19, “Segment Data”.
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A summary of our total Segment Net Revenues, Segment EBITDA and Segment EBITDA margin showing the relative contribution of each Segment, is as follows.
SEGMENT FINANCIAL INFORMATION
For the Years Ended December 31, (US$ 000's)
2008
(1)
2007
(1)
2006
Segment Net Revenues
Bulgaria (2)
Croatia (NOVA TV)
Czech Republic (3)
Romania (4)
Slovak Republic (TV MARKIZA) (5)
Slovenia (POP TV and KANAL A)
Ukraine (STUDIO 1+1)
Ukraine (KINO, CITI) (6)
Total Segment Net Revenues
Represented by:
Broadcast operations
Non-broadcast operations
Total Segment Net Revenues
Segment EBITDA
Bulgaria
Croatia (NOVA TV)
Czech Republic
Romania
Slovak Republic (TV MARKIZA)
Slovenia (POP TV and KANAL A)
Ukraine (STUDIO 1+1)
Ukraine (KINO, CITI)
Total Segment EBITDA
Represented by:
Broadcast operations
Non-broadcast operations
Total Segment EBITDA
$
$
$
$
$
$
$
$
1,263
54,651
376,546
274,627
132,692
80,697
96,738
2,720
1,019,934
1,010,404
9,530
1,019,934
(10,185)
(5,415)
208,655
111,783
50,228
25,413
(32,944)
(1,855)
345,680
354,387
(8,707)
345,680
0%
5% $
37%
27%
13%
8%
10%
0%
100% $
100% $
0%
100% $
(3)%
(2)% $
60%
33%
15%
7%
(9)%
(1)%
100% $
103% $
(3)%
100% $
-
37,193
279,237
215,402
110,539
69,647
125,323
1,515
838,856
835,232
3,624
838,856
-
(13,882)
156,496
93,075
41,532
22,767
27,000
(3,536)
323,452
327,330
(3,878)
323,452
-%
5% $
33%
26%
13%
8%
15%
0%
100% $
100% $
0%
100% $
-%
(4)% $
49%
29%
13%
7%
8%
(2)%
100% $
101% $
(1)%
100% $
-
22,310
208,387
148,616
73,420
54,534
96,413
726
604,406
601,416
2,990
604,406
-
(14,413)
100,488
65,860
20,805
19,842
29,973
(1,795)
220,760
221,046
(286)
220,760
(1)
-%
4%
34%
25%
12%
9%
16%
0%
100%
100%
0%
100%
-%
(7)%
46%
30%
10%
9%
14%
(2)%
100%
100%
0%
100%
Segment EBITDA Margin (7)
34%
(1) Percentage of Total Segment Net Revenues / Total Segment EBITDA.
(2) We acquired our Bulgaria operations (TV2, RING TV) on August 1, 2008.
(3) Our Czech Republic operations comprise TV NOVA, NOVA SPORT and NOVA CINEMA, which was launched in December 2007.
(4) Romanian channels are PRO TV, PRO CINEMA, ACASA, PRO TV INTERNATIONAL, SPORT.RO and MTV ROMANIA for the years ended December 31, 2008 and 2007 and
39%
37%
PRO TV, PRO CINEMA, ACASA and PRO TV INTERNATIONAL for the year ended December 31, 2006.
(5) Our Slovak Republic operations were accounted for as an equity affiliate until January 23, 2006.
(6) We acquired our Ukraine (KINO, CITI) operations on January 11, 2006 and disposed of the CITI channel in February 2009.
(7) We define Segment EBITDA margin as the ratio of Segment EBITDA to Segment Net Revenues.
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ANALYSIS BY GEOGRAPHIC SEGMENT
The following analysis contains references to like-for-like (“% Lfl”) or constant currency percentage movements. These references reflect the impact of applying the current period
average exchange rates to the prior period revenues and costs. Given the significant movement of the currencies in the markets in which we operate against the dollar, we believe
that it is more useful to provide percentage movements based on like-for-like (“% Lfl”) or constant currency percentage movements as well as actual (“% Act”) percentage
movements (which includes the effect of foreign exchange).
(A) BULGARIA
We acquired our Bulgaria operations on August 1, 2008. We hold an indirect 80.0% voting and economic interest in each of TV2, a start-up national channel, and RING TV, a cable
sports channel. TV2 was launched in November 2007.
Since acquiring our Bulgaria operations, we have been focused on establishing the necessary infrastructure and resources for the development of the operations, drawing on
experienced management support from Romania and other markets while we build the new local management team. We have expanded the existing management team with particular
attention to programming, marketing, sales and technical capability. The location of the broadcasting operations has been secured with sufficient floor space for our immediate
development plans. This space is under refurbishment and progress has been made in consolidating operations with the closure of two of three satellite offices in December 2008.
TV2 launched its news service ’Novinite’ on October 20, 2008 and now delivers three bulletins per night. In August 2008, we acquired the rights to broadcast the Bulgarian National
Football League for the next five years. The top five games aired in 2008 achieved audience share of over 6.5% on RING TV. In December 2008, we secured exclusive rights for the
UEFA Champions League and UEFA Cup for the next 3 seasons.
We intend to relaunch TV2 and RING TV in the second and third quarters of 2009, respectively.
Market Background: We estimate that the net television advertising market in Bulgaria was approximately US$ 175 -185 million in 2008. Economic projections for Bulgaria in 2009 are
poor and continue to worsen. Due to the resulting uncertainty among advertisers, we are closing sales contracts for 2009 more slowly than we anticipated, and as a result we cannot
accurately predict future market development. However, we currently expect the local currency total advertising market to decline by a single-digit percentage in 2009. If market
conditions continue to worsen, a further decline in the total advertising market can be expected.
TV2 and RING TV Audience Share and Ratings Performance
For sales purposes, TV2’s target audience demographic is 18-49. All audience data shown below is based on the target demographic of TV2.
All day audience share
All day ratings
Prime time audience share
Prime time ratings
For the
five months from
acquisition to
December 31,
2008
2.0%
0.2%
1.7%
0.5%
Our major competitors are the privately owned broadcaster bTV and NOVA TV and the public broadcaster BNT. From August 1, 2008 to December 31, 2008, bTV had an all day
audience share of 36.1%, NOVA TV had an all day audience share of 18.2% and BNT had an all day audience share of 10.0%. In terms of its audience share, TV2 currently is
comparable to the larger cable or satellite channels in the Bulgarian market: DIEMA + and DIEMA 2, with all day audience shares for the period from August 1, 2008 to December 31,
2008 of 4.4% and 1.1%, respectively, FOX LIFE with 2.4% and TV7 with 0.9%.
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Prime time audience share for the five months ended December 31, 2008 was 41.1% for bTV, 22.8% for NOVA TV and 10.0% for BNT. Prime time audience shares for the period from
August 1, 2008 to December 31, 2008 for DIEMA +, DIEMA 2, FOX LIFE and TV7 were 3.0%, 0.8%, 1.3% and 0.8%, respectively.
BULGARIA SEGMENT FINANICIAL INFORMATION
Spot revenues
Non-spot revenues
Segment Net Revenues
Represented by:
Broadcast operations
Non-broadcast operations
Segment Net Revenues
Segment EBITDA
Represented by:
Broadcast operations
Non-broadcast operations
Segment EBITDA
Segment EBITDA Margin
For the period
from acquisition
to December 31,
2008 (US$
000’s)
666
597
1,263
$
$
$
$
$
$
$
1,261
2
1,263
(10,185)
(10,182)
(3)
(10,185)
(806)%
· Segment Net Revenues for the five months from acquisition to December 31, 2008 were US$ 1.3 million. Spot revenues were US$ 0.7 million. Non-spot revenues were US$ 0.6
million, primarily from cable revenues.
·
Segment EBITDA losses for the period from acquisition to December 31, 2008 were US$ 10.2 million. We incurred programming costs of US$ 6.5 million, which included a
writedown of programming of US$ 0.5 million, other operating costs of US$ 2.3 million and selling, general and administrative costs of US$ 2.7 million.
(B) CROATIA
In 2008, NOVA TV (Croatia) experienced significant improvements in audience share, Segment Net Revenues and Segment EBITDA. NOVA TV (Croatia) achieved positive Segment
EBITDA not only in the fourth quarter, in line with the development plan we published in 2005, but also in the second quarter. These developments reflected broad-based
programming success, especially with local programming. Of particular note are the strong audience share achievements with the reality show ‘The Farm’ and the format ‘Don’t
Forget The Lyrics’. ‘Moment of Truth’, a new local game show launched in September, finished its first season with an average audience share of 29.6%. Our main evening news
program increased its target audience share by more than 35%.
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The number of unique daily users of our internet sites increased by approximately 31% in 2008. Several new themed microsites were launched targeted at women, children, sports,
and other niche groups.
Market Background: We estimate that the television advertising market in Croatia experienced no growth in local currency between 2007 and 2008, reflecting a reduction in demand
from international advertisers in the fourth quarter. Economic projections for Croatia in 2009 are poor and continue to worsen. Due to the resulting uncertainty among advertisers we
cannot predict future market development accurately. However, we currently expect the local currency total advertising market to decline by a single-digit percentage in 2009. If
market conditions continue to worsen, a further decline in the total advertising market can be expected.
NOVA TV (Croatia) Audience Share and Ratings Performance
For advertising sales purposes, the NOVA TV (Croatia) target audience is the 18-49 demographic and all audience data in this section is shown on this basis.
All day audience share
All day ratings
Prime time audience share
Prime time ratings
For the Years Ended December 31,
2008
2007
Movement
22.5%
3.4%
25.4%
8.8%
18.8%
3.0%
19.7%
7.2%
3.7 %
0.4 %
5.7 %
1.6 %
Our major competitors are the two channels of the public broadcaster, HRT1 and HRT2, with all day audience shares for the year ended December 31, 2008 of 24.3% and 15.1%,
respectively, and privately owned broadcaster RTL, with an all day audience share of 26.4%.
NOVA TV (Croatia) whose prime time audience share increased from 19.7% in 2007 to 25.4% in 2008 was ranked second in the market. Prime time audience share for RTL decreased
from 30.1% to 27.1% over the same period, while the prime time audience shares of HRT1 and HRT2 decreased from 24.6% to 22.6% and from 18.4% to 16.3% respectively.
Prime time ratings for NOVA TV (Croatia) increased from 7.3% in 2007 to 8.8% in 2008, while the total prime time ratings for the Croatian market decreased from 36.7% in 2007 to
34.8% in 2008.
During the three months ended December 31, 2008, the prime time audience share of NOVA TV (Croatia) increased from 19.4% to 23.9%. The prime time audience share of HRT1
increased from 23.7% to 24.6% over the same period, while those of RTL and HRT2 decreased from 33.1% to 28.8% and from 16.5% to 13.1%, respectively.
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2008
2007
% Act(1)
% Lfl(2)
2007
2006
% Act(1)
% Lfl(2)
For the Years Ended December 31, (US$ 000’s)
Movement
Movement
Spot revenues
Non-spot revenues
Segment Net Revenues
Represented by
Broadcast operations
Non-broadcast operations
Segment Net Revenues
Segment EBITDA
Represented by
Broadcast operations
Non-broadcast operations
Segment EBITDA
Segment EBITDA Margin
$
$
$
$
$
$
$
45,946
8,705
54,651
54,083
568
54,651
(5,415)
(3,503)
(1,912)
(5,415)
$
$
$
$
$
$
$
29,675
7,518
37,193
36,901
292
37,193
54.8 %
15.8 %
46.9 %
46.6 %
94.5 %
46.9 %
44.4 % $
4.9 %
36.2 % $
29,675
7,518
37,193
35.8 % $
94.3 %
36.2 % $
36,901
292
37,193
(13,882)
(61.0 )%
(64.1 )% $
(13,882)
(13,814)
(68)
(13,882)
74.6 %
76.7 % $
nm% (3)
nm% (3)
(61.0 )%
(64.1 )% $
(13,814)
(68)
(13,882)
$
$
$
$
$
$
$
16,442
5,868
22,310
22,298
12
22,310
80.5 %
28.1 %
66.7 %
65.1 %
14.9 %
51.7 %
65.5 %
nm% (3)
66.7 %
50.6 %
nm% (3)
51.7 %
(14,413)
3.7 %
10.7 %
(14,302)
(111)
(14,413)
3.4 %
38.7 %
3.7 %
10.4 %
47.3 %
10.7 %
(10)%
(37)%
27 %
28 %
(37)%
(65)%
28 %
26 %
(1) Actual ("%Act") reflects the percentage change between two years.
(2) Like for Like ("%Lfl") or constant currency reflects the impact of applying the current period average exchange rates to the prior period revenues and costs.
(3) Number is not meaningful.
· Segment Net Revenues for the year ended December 31, 2008 increased by 47%, compared to year ended December 31, 2007. In constant currency, Segment Net Revenues
increased by 36%. Spot revenues for 2008 increased by 55%, or 44% in constant currency, compared to 2007 due to the continuing significantly higher volume of GRPs sold at
increased prices, although in November and December we sold a lower proportion of the GRPs that we generated compared to the prior year. Non-spot revenues increased by
16% in 2008 compared to 2007 and there was an increase of 5% in constant currency primarily as a result of lower telephone-based services revenues (“Call TV”).
Segment Net Revenues for the year ended December 31, 2007 increased by 67%, compared to 2006. In constant currency, Segment Net Revenues grew by 52%. Spot revenues
increased by 81%, or 65% in constant currency, in 2007 compared to 2006 due to our stronger ratings improving our position in the market, which supported the sale of
significantly higher volumes of GRPs at increased prices. Non-spot revenues increased by 28%, or 15% in constant currency, in 2007 compared to 2006, primarily due to
increased sponsorships and the revenue arising from ‘Nova Lova’ Call TV. A blog site operated by Internet Dnevnik, which we acquired on June 7, 2007, contributed more than
half of non-broadcast revenues.
·
Segment EBITDA losses for the year ended December 31, 2008 decreased by 61% compared to year ended December 31, 2007. In constant currency, Segment EBITDA losses
decreased by 64%.
Costs charged in arriving at Segment EBITDA for 2008 increased by 9% in constant currency compared to year ended December 31, 2007. Cost of programming increased by
14% in constant currency primarily due to a higher proportion of locally produced programs included in our schedule, such as ‘The Farm’ and ‘Moment Of Truth’ and a
programming write off and impairment totalling US$ 0.6 million. Other operating costs increased by 17% in constant currency due to staff-related costs and broadcast operating
expenses. Staff-related costs increased due to increases in headcount relating to the continuing development of the company and performance-related bonuses. Broadcast
operating expenses increased primarily due to satellite transmission costs and maintenance costs. Selling, general and administrative expenses were 19% lower in constant
currency primarily due to due to reduced marketing expenses.
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Segment EBITDA losses for the year ended December 31, 2007 fell by 4% compared to the year ended December 31, 2006. In constant currency, Segment EBITDA losses fell by
11%.
Costs charged in arriving at Segment EBITDA for 2007 increased by 28% in constant currency compared to 2006. Cost of programming grew by 37% in constant currency as a
result of continued investment in high-quality programming to improve performance. Programming syndication grew by 34% in constant currency and production expenses
showed an increase of 43% in constant currency due to the broadcast of popular locally produced content, such as the entertainment show ‘Nad Lipom 35’ (‘35 Lime Street’),
the crime
show ‘Vecernja Skola’ (‘Evening School’) and the investigation magazine show
‘Provjereno’ (‘Testified’). Other operating costs increased by 11% in constant currency, primarily due to staff bonuses awarded due to a significant improvement in operating
results. Selling, general and administrative expenses increased by 18% in constant currency.
investigation series ‘Istraga’ (‘Investigation’), the entertainment
(C) CZECH REPUBLIC
TV NOVA (Czech Republic) maintained its clear leadership position in the market with an average prime time share in its target group of 45.8%. Strong local production, including
new programming such as the critically acclaimed “Women’s Stories”, the first Czech forensic crime series “Kriminalka” and the first true Czech sitcom “Comeback”, in addition to
continuing successful series, reality formats such as “X Factor” and news programming, continued to underpin this performance. NOVA CINEMA grew to take the number 2
position in the “other stations” (cable and satellite) category and began broadcasting in DVB-T from December 15, 2008 with an initial coverage in its target group of 43%. We
anticipate that this will increase our ability to monetize these ratings in 2009. We expect to launch the localized Czech version of MTV in the second half of 2009. Prima, our leading
competitor, has announced that it intends to launch a digital second channel “Prima Cool” during 2009.
The number of unique daily users to our internet sites grew from 69 thousand in December 2007 to 578 thousand in December 2008, propelled by the launch of a new news portal
tn.cz, the acquisition of Jyxo, s.r.o. and the leading Czech blog site in May, and the successful launch of Catch Up TV in the fall.
Market Background: We estimate that the television advertising market in the Czech Republic grew by approximately 7% to 9% in constant currency during 2008 although it
declined noticeably in December. Economic projections for the Czech Republic in 2009 are poor and continue to worsen. Due to the resulting uncertainty among advertisers we
cannot predict future market development accurately. However, we currently expect the local currency total advertising market to decline by a single-digit percentage in 2009. If
market conditions continue to worsen, a further decline in the total advertising market can be expected.
TV NOVA (Czech Republic) Audience Share and Ratings Performance
For advertising sales purposes, the TV NOVA (Czech Republic) target audience is the 15-54 demographic and all audience data in this section is shown on this basis.
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All day audience share
All day ratings
Prime time audience share
Prime time ratings
For Years Ended December 31,
2008
41.5%
4.7%
45.8%
13.5%
2007
43.0%
4.8%
46.8%
14.1%
Movement
(1.5 )%
(0.1 )%
(1.0 )%
(0.6 )%
Our main competitors are the two channels operated by the public broadcaster, CT1 and CT2, with all day audience shares for 2008 of 17.3% and 6.8%, respectively, and privately
owned broadcaster TV Prima, with an all day audience share of 17.0%.
Prime time audience share for CT1 decreased from 21.0% in 2007 to 18.2% in 2008, while the shares of CT2 and TV Prima decreased from 6.1% to 5.6% and from 17.4% to 17.1%,
respectively.
Prime time ratings for TV NOVA (Czech Republic) were 13.5% in 2008 compared to 14.1% in 2007, while total prime time ratings in the Czech Republic declined from 30.0% in 2007 to
29.4% in 2008.
During the three months ended December 31, 2008, the prime time audience share of TV NOVA (Czech Republic) was 47.0% compared to 46.4% for the same period in 2007. The
prime time audience share of TV Prima increased from 15.9% to 16.8%, while the prime time audience shares of CT1 and CT2 decreased from 21.3% to 18.3% and from 5.7% to 4.2%,
respectively over the same period.
2008
2007
% Act(1)
% Lfl(2)
2007
2006
% Act(1)
% Lfl(2)
For the Years Ended December 31, (US$ 000’s)
Movement
Movement
Spot revenues
Non-spot revenues
Segment Net Revenues
Represented by
Broadcast operations
Non-broadcast operations
Segment Net Revenues
Segment EBITDA
Represented by
Broadcast operations
Non-broadcast operations
Segment EBITDA
Segment EBITDA Margin
$
$
$
$
$
$
$
345,077
31,469
376,546
374,100
2,446
376,546
208,655
212,618
(3,963)
208,655
$
$
$
$
$
$
$
254,545
24,692
279,237
278,785
452
279,237
35.6 %
27.4 %
34.8 %
15.8 % $
8.2 %
15.1 % $
254,545
24,692
279,237
34.2 %
441.2 %
34.8 %
14.6 % $
392.5 %
15.1 % $
278,785
452
279,237
156,496
33.3 %
14.6 % $
156,496
157,362
(866)
156,496
35.1 %
357.6 %
33.3 %
16.1 % $
(271.7 )%
14.6 % $
157,362
(866)
156,496
$
$
$
$
$
$
$
181,965
26,422
208,387
207,671
716
208,387
100,488
100,724
(236)
100,488
39.9 %
(6.5 )%
34.0 %
24.2 %
(16.4 )
19.1 %
34.2 %
(36.9 )%
34.0 %
19.3 %
(48.9 )%
19.1 %
55.7 %
37.0 %
56.2 %
(266.9 )%
55.7 %
37.4 %
(192.6 )%
37.0 %
55%
56%
(1 )%
(1 )%
56%
48%
8 %
7 %
(1) Actual ("%Act") reflects the percentage change between two years.
(2) Like for Like ("%Lfl") or constant currency reflects the impact of applying the current period average exchange rates to the prior period revenues and costs.
(3) Number is not meaningful.
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· Segment Net Revenues for the year ended December 31, 2008 increased by 35% compared to the year ended December 31, 2007. In constant currency, Segment Net Revenues
increased by 15%. Spot revenues increased by 36%, or 16% in constant currency, in 2008 compared to 2007 and non-spot revenue revenues increased by 27%, or 8% in
constant currency. The increase in spot revenues was primarily due to an increase in prices, in particular our success in increasing the amount spent by advertisers in off prime
time and in the low season. The volume of GRPs sold in 2008 was broadly in line with 2007, although in December we sold a lower proportion of the GRPs that we generated
compared to the prior year. The increase in non-spot revenues was primarily due to a dedicated internet sales team, the acquisition of websites and services including Blog.cz
and Jyxo.cz in May 2008, as well as the launch of TN.cz and the upgrading of our website, NOVA.cz to include video-on-demand capability.
Segment Net Revenues for the year ended December 31, 2007 increased by 34% compared to the year ended December 31, 2006. In constant currency, Segment Net Revenues
increased by 19%. Spot revenues increased by 40%, or 24% in constant currency, as a result of price increases and an increase in the volume of GRPs sold, while non-spot
revenues fell by 7%, or 16% in constant currency, primarily due to lower telephone-based services revenues in a subsidiary that was sold in November 2007.
·
Segment EBITDA for the year ended December 31, 2008 increased by 33% compared to the year ended December 31, 2007, resulting in an EBITDA margin of 55% compared to
56% in 2007. In constant currency, Segment EBITDA increased by 15%.
Costs charged in arriving at Segment EBITDA for 2008 increased by 16% in constant currency compared to 2007. Cost of programming grew by 24% in constant currency
primarily due to increased scheduling of locally-produced fiction, which typically delivers higher ratings but is more expensive than acquired programming. Other operating
costs increased by 13%, primarily due to higher headcount, particularly in the area of our expanding internet operations, as well as higher fees paid for digital transmission.
Selling, general and administrative expenses decreased by 4% in constant currency, primarily due to cost savings in the cost of renting facilities and equipment following the
construction of our own facility in 2007.
Segment EBITDA for the year ended December 31, 2007 increased by 56% compared to the year ended December 31, 2006, resulting in an EBITDA margin of 56% compared to
48% in 2006. In constant currency, Segment EBITDA increased by 37%.
Costs charged in arriving at Segment EBITDA for 2007 increased by 2% in constant currency compared to 2006 reflecting the effective implementation of cost controls. Our cost
of programming grew by 4% in constant currency due to the increased cost per hour of programming driven by market-wide competition. Other operating costs increased by 4%
in constant currency, primarily due to higher salary costs and performance-related bonuses. Selling, general and administrative expenses decreased by 6% in constant currency.
(D) ROMANIA
Our Romania operations enjoyed another successful year with revenue growth in constant currency of 32% and Segment EBITDA margins in excess of 40%. They were the only
major channel group to maintain its average prime-time audience share in PRO TV’s target audience. Local programming continued to perform strongly with ‘Regina’, the spin-off
from the successful ‘Gypsy Heart’ series, delivering an audience share of 24.2%. Assets of Radio Pro were acquired in April to provide a differentiated approach to the youth
audience targeted by our MTV channel, and has been integrated successfully into PRO TV. The Romanian management team has also provided strong support to our developing
operations in Ukraine and Bulgaria.
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Our internet operations saw an increase in unique daily users of approximately 121% during 2008. Sport.ro is the leading sports news website in a highly competitive segment.
Stirileprotv.ro, a news website, was launched successfully in the late summer. Thirteen themed microsites were launched in 2008.
Our creative achievement was recognized in September with the award of an International News Emmy for PRO TV’s report “Any Idea What Your Kid Is Doing Right Now?” which
focused on the issue of child abandonment. This was the first International News Emmy awarded to an Eastern European broadcaster.
Market Background: We estimate that the television advertising market grew by approximately 27% to 29% in local currency during 2008. However, there was a marked decline in
the market in November and December due to budget cuts by advertisers.
Economic projections for Romania in 2009 are poor and continue to worsen. Due to the resulting uncertainty among advertisers, the progress of sales contract negotiation in the
early months of 2009 has been slower than usual and consequently we cannot predict future market development accurately. However, we currently expect the local currency total
advertising market to remain flat or decline by a single-digit percentage in 2009. If market conditions continue to worsen, a further decline in the total advertising market can be
expected.
Romania Audience Share and Ratings Performance (Combined for all CME Romanian channels)
For advertising sales purposes, our Romanian channels have different target audience demographics: PRO TV - 18-49 urban; ACASA - 15-49 female urban; PRO CINEMA - 18-49
urban; SPORT.RO - male all urban; and MTV ROMANIA - 15-34 urban. All audience data shown in this section below is based on the target demographic of PRO TV.
All day audience share
All day ratings
Prime time audience share
Prime time ratings
For Years Ended December 31,
2008
28.8%
4.5%
32.6%
10.8%
2007
Movement
30.6%
4.1%
32.4%
9.6%
(1.8 )%
0.4 %
0.2 %
1.2 %
Our main competitors are privately owned broadcaster Antena 1, which had an all day audience share for 2008 of 9.4%, and the two channels operated by the public broadcaster,
TVR1 and TVR2, which had all day audience shares of 4.0% and 1.6%, respectively.
Prime time audience share for TVR1 decreased from 7.1% in 2007 to 4.7% in 2008, while the prime time audience shares of TVR2 and Antena 1 decreased from 2.6% to 1.4% and from
12.9% to 11.4%, respectively.
Prime time ratings for PRO TV were 6.5% in 2008 compared to 6.3% in 2007 while total prime time ratings for the Romania market increased from 29.3% in 2007 to 33.1% in 2008.
During the three months ended December 31, 2008, the combined prime time audience share of PRO TV, ACASA, PRO CINEMA, SPORT.RO and MTV ROMANIA was 34.1%
compared to 32.5% for the same period in 2007. The prime time audience share of TVR 1 decreased from 6.4% to 3.4%, while the prime time audience share of Antena 1 increased from
11.2% to 12.0% over the same period.
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2008
2007
% Act(1)
% Lfl(2)
2007
2006
% Act(1)
% Lfl(2)
For the Years Ended December 31, (US$ 000’s)
Movement
Movement
Spot revenues
Non-spot revenues
Segment Net Revenues
Represented by
Broadcast operations
Non-broadcast operations
Segment Net Revenues
Segment EBITDA
Represented by
Broadcast operations
Non-broadcast operations
Segment EBITDA
$
$
$
$
$
$
$
253,649
20,978
274,627
273, 270
1,357
274,627
111,783
112,523
(740)
111,783
$
$
$
$
$
$
$
202,414
12,988
215,402
214,976
426
215,402
25.3 %
61.5 %
27.5 %
27.1 %
218.5 %
27.5 %
-
-
-
-
-
-
$
$
$
$
202,414
12,988
215,402
214,976
426
215,402
93,075
20.1 %
-
$
93,075
93,585
(510)
93,075
20.2 %
45.1 %
20.1 %
93,585
(510)
93,075
$
$
-
-
-
-
$
$
$
$
$
$
$
140,242
8,374
148,616
148,616
-
148,616
65,860
65,976
(116)
65,860
44.3 %
55.1 %
44.9 %
44.7 %
-
44.9 %
41.3 %
41.8 %
(339.7 )%
41.3 %
Segment EBITDA Margin
41%
43%
(2 )%
43%
44%
(1 )%
-
-
-
-
-
-
-
-
-
-
-
(1) Actual (%Act) reflects the percentage change between two years.
(2) The functional currency of our Romania operations changed from the dollar to the New Romanian lei with effect from January 1, 2008. We therefore do not apply the current
period average exchange rates to the prior period revenues and costs.
· Segment Net Revenues for the year ended December 31, 2008 increased by 27%, compared to the year ended December 31, 2007. Spot revenues increased by 25% and non-spot
revenues increased by 62%. The functional currency of our Romania operations changed from the dollar to the New Romanian lei with effect from January 1, 2008; for
comparative purposes, Segment Net Revenues increased by 32% in New Romanian lei in 2008. The increase in net spot revenues is attributable to an increase in prices which
more than offset a decline in the volume of GRPs sold. We sold a lower proportion of the GRPs that we generated in 2008 than in 2007; a trend that increased sharply in
November and December when advertisers reduced spending significantly. The increase in non-spot revenue of 62% was primarily due to increased cable tariff revenue
generated by PRO TV INTERNATIONAL, SPORT.RO, PRO CINEMA and MTV ROMANIA, launched in December 2007. MTV ROMANIA contributed approximately US $5.7
million to Romania’s Segment Net Revenues for the year ended December 31, 2008.
Segment Net Revenues for the year ended December 31, 2007 increased by 45%, compared to the year ended December 31, 2006. Spot revenues increased by 44% and non-spot
revenues increased by 55%. The increase in spot revenues was driven by increases in the average revenue per rating point sold on our Romanian channels, which more than
offset a decline in the volume of GRPs sold across the channels. The increase in non-spot revenue was primarily due to increased cable tariff revenue.
·
Segment EBITDA for the year ended December 31, 2008 increased by 20%, compared to the year ended December 31, 2007, resulting in an EBITDA margin of 41%, compared to
43% in 2007. In constant currency, Segment EBITDA increased by 25%.
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Costs charged in arriving at Segment EBITDA for 2008 increased by 33%, compared to 2007. Cost of programming grew by 35%, reflecting the increased investment required to
maintain our ratings in the face of increased competition. Production expenses increased by 46% mainly due to an 85% increase in the number of hours of locally-produced
content broadcast compared to 2007, albeit at reduced cost per hour of production. Other operating costs increased by 37% primarily due to salary related expenses, including
higher headcount. Broadcast operating expenses increased by 34% mainly due to the acquisition of Radio Pro. Selling, general and administrative expenses grew by 17%,
reflecting increases in marketing and research costs.
Segment EBITDA for the year ended December 31, 2007 increased by 41%, compared to the year ended December 31, 2006, resulting in an EBITDA margin of 43%, compared to
44% in 2006.
Costs charged in arriving at Segment EBITDA for 2007 increased by 48% compared to 2006. Cost of programming grew 50%. Production expenses increased by 54% as we
invested more in local programming to expand the news and news-related content on PRO TV and ACASA. Programming syndication increased by 46%, primarily driven by
investment in the programming schedule and also including US$ 3.2 million of programming write offs. Other operating costs increased by 56%, primarily due to increased salary
costs as a result of the weakening of the dollar against the New Romanian lei, the currency in which salaries are paid, annual pay rises and the increased headcount following
the SPORT.RO acquisition. Selling, general and administrative expenses increased by 26%, primarily due to increases in marketing and research costs, office running costs and
consultancy fees.
(E) SLOVAK REPUBLIC
The television advertising market reverted to modest growth in 2008 following the more spectacular development in 2007 which had been driven by a combination of a surge in
general economic growth and the entry of a new mobile operator on the market creating substantial additional advertising demand. TV Markiza’s local currency revenues increased
by 5% and segment EBITDA margins were maintained at almost 38%. Our leading competitor, TV JOJ, was the only channel to increase prime time audience share in 2008, becoming
the second channel on the market, and this was due primarily to the launch of a successful locally produced series and the increase of technical coverage from 82% to 90% during
the year. TV JOJ launched a second channel “Joj Plus” in October. Our application for a second channel licence in the Slovak Republic was approved in January 2009.
A new Audiovisual Fund Act and changes to the Broadcasting Act will reduce the amount of total broadcast time that state TV can devote to advertising from the current 3.0% by
0.5% per year until it is limited to 0.5% in 2012. From 2009, licensed broadcasters will be required to contribute 2.0% of their revenues to the Audiovisual Fund.
We saw an increase of approximately 45% in the number of daily unique visitors to our websites during 2008 assisted by the successful launch of a news website and extended and
improved website features.
Market Background: We estimate that the television advertising market in the Slovak Republic grew by approximately 6% to 8% in local currency in 2008. Economic projections for
the Slovak Republic in 2009 are poor and continue to worsen. Due to the resulting uncertainty among advertisers we cannot predict future market development accurately. However,
we expect the local currency total advertising market to decline by a single-digit percentage in 2009. If market conditions continue to worsen, a further decline in the total advertising
market can be expected.
Other Information: The Slovak Republic adopted the Euro on January 1, 2009.
TV MARKIZA Audience Share and Ratings Performance
For advertising sales purposes, TV MARKIZA’s target audience is the 12+ demographic and all audience data shown below is on this basis.
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All day audience share
All day ratings
Prime time audience share
Prime time ratings
For Years Ended December 31,
2008
35.1%
4.5%
37.7%
13.6%
2007
35.5%
4.8%
39.5%
14.8%
Movement
(0.4 )%
(0.3 )%
(1.8 )%
(1.2 )%
Our principal competitor is the main channel operated by a privately owned company, TV JOJ, with an all day audience share of 16.9% in 2008. The all day audience share of STV1,
the only significant public broadcaster, was 16.4% in 2008.
Prime time audience share for STV1 decreased from 19.0% in 2007 to 17.8% in 2008, while prime time share for TV JOJ increased from 16.9% to 19.6%. Prime time ratings for TV
MARKIZA were 13.6% in 2008 compared to 14.8% in 2007. Total prime time ratings for the market decreased from 37.4% in 2007 to 36.0% in 2008.
During the three months ended December 31, 2008, the prime time audience share of TV MARKIZA decreased to 38.3% from 43.2% in the same period in 2007. The prime time
audience share of STV 1 decreased from 17.0% to 16%, while TV JOJ’s audience share increased from 16.9% to 21.1% in the same period.
2008
2007
% Act(1)
% Lfl(2)
2007
2006
% Act(1)
% Lfl(2)
For the Years Ended December 31, (US$ 000’s)
Movement
Movement
Spot revenues
Non-spot revenues
Segment Net Revenues
Represented by
Broadcast operations
Non-broadcast operations
Segment Net Revenues
Segment EBITDA
Represented by
Broadcast operations
Non-broadcast operations
Segment EBITDA
Segment EBITDA Margin
$
$
$
$
$
$
$
122,527
10,165
132,692
132,367
325
132,692
50,228
51,452
(1,224)
50,228
$
$
$
$
$
$
$
106,445
4,094
110,539
110,158
381
110,539
15.1 %
148.3 %
20.0 %
1.0 % $
115.2 %
5.3 % $
106,445
4,094
110,539
20.2 %
(14.7 )%
20.0 %
5.4 % $
(26.7 )%
5.3 % $
110,158
381
110,539
41,532
20.9 %
7.6 % $
41,532
41,957
(425)
41,532
22.6 %
188.0 %
20.9 %
9.0 % $
(140.7 )%
7.6 % $
41,957
(425)
41,532
$
$
$
$
$
$
$
69,336
4,084
73,420
73,266
154
73,420
20,805
20,879
(74)
20,805
53.5 %
0.2 %
50.6 %
26.7 %
(16.5 )%
24.3 %
50.4 %
147.4 %
50.6 %
29.3 %
90.5 %
24.3 %
99.6 %
59.9 %
101.0 %
nm%(3)
99.6 %
53.7 %
nm%(3)
59.9 %
38%
38%
0 %
1 %
38%
28%
10 %
9 %
(1) Actual ("%Act") reflects the percentage change between two years.
(2) Like for Like ("%Lfl") or constant currency reflects the impact of applying the current period average exchange rates to the prior period revenues and costs.
(3) Number is not meaningful.
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· Segment Net Revenues for the year ended December 31, 2008 increased by 20% compared to the year ended December 31, 2007. In constant currency, Segment Net Revenues
increased by 5%. The increase in spot revenues was mainly due to an increase in prices offsetting a decrease in the volume of GRPs sold. Non-spot revenues grew mainly due
to an increase in sponsorship of new formats, such as ‘Elan je Elan’, ‘Lets Dance’ and ‘Got Talent’.
Segment Net Revenues for the year ended December 31, 2007 increased by 51% compared to the year ended December 31, 2006. In constant currency, Segment Net Revenues
increased by 24%. The majority of spot revenue growth was driven by price increases, with a modest increase in the volume of GRPs sold.
·
Segment EBITDA for the year ended December 31, 2008 increased by 21% compared to the year ended December 31, 2007, and the EBITDA margin remained constant at 38%
for both years. In constant currency, Segment EBITDA increased by 8%.
Costs charged in arriving at Segment EBITDA for 2008 increased by 4% in constant currency compared to 2007. Cost of programming increased by 21% in constant currency,
which is mainly attributable to a reallocation of the costs of production staff that were previously included within other operating costs; without this reallocation, programming
costs increased by 4% in constant currency. Syndication expenses were higher compared to 2007 due to an increase in the volume of local series included in the schedule as
well as increased prices of foreign programs. Our significant investment in our websites increased internet programming costs. Other operating costs declined by 22% in
constant currency, reflecting the reallocation described above. Without this reallocation, other operating costs increased by 7% in constant currency. Selling, general and
administrative costs increased by 2% in dollars but decreased by 10% in constant currency due to the implementation of a variety of cost saving initiatives.
Segment EBITDA for the year ended December 31, 2007 increased by 100% compared to the year ended December 31, 2006, and the EBITDA margin increased from 28% in 2006
to 38% in 2007. In constant currency, EBITDA increased by 60% in 2007 compared to 2006.
Costs charged in arriving at Segment EBITDA for 2007 increased by 10% in constant currency compared to 2006. The cost of programming increased by 14% in constant
currency in 2007 compared to 2006, reflecting the level of competition for programming. Other operating costs increased by 9% in constant currency in 2007 as a result of an
increase in salaries and incentive bonus payments reflecting the station’s improved performance. Selling, general and administrative costs decreased by 1% in constant
currency.
(F) SLOVENIA
Our Slovenia operations increased Segment Revenues by 16% in 2008, or 10% in constant currency terms, assisted by strong growth in our non-broadcast revenues which more
than doubled. Segment EBITDA margin fell from 32.7% to 31.5%. Our prime-time audience share in our target group was maintained at 47%. The reality show ‘The Farm 2’ was our
most successful program, achieving an audience share of 43%, the highest share for any reality show in Slovenia. Both of our channels obtained national DTT licenses and began
broadcasting on the digital terrestrial platform in September. We upgraded our news set and launched news using HD technology for the first time in December.
Our internet sites saw a 60% increase in unique daily users in 2008. In addition to the launch of six niche microsites, noteworthy developments include the success of our Big
Brother website for which over 31,000 access cards were sold.
Market Background: We estimate the television advertising market in Slovenia grew by approximately 7% to 9% in local currency in 2008, reflecting strong growth in the first nine
months of the year followed by a sharp decline in the fourth quarter. Economic projections for Slovenia in 2009 are poor and continue to worsen. Due to the resulting uncertainty
among advertisers we cannot predict future market development accurately. However, we currently expect the local currency total advertising market to decline by a single-digit
percentage in 2009. If market conditions continue to worsen, a further decline in the total advertising market can be expected.
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POP TV and KANAL A Combined Audience Share and Ratings Performance
For advertising sales purposes, each of POP TV’s and KANAL A’s target audience is the 18-49 demographic and all audience data shown in this section is on this basis:
All day audience share
All day ratings
Prime time audience share
Prime time ratings
For the Years Ended December 31,
2008
2007
Movement
40.4%
4.5%
47.4%
11.6%
40.4%
4.6%
47.5%
11.9%
0.0 %
(0.1 )%
(0.1 )%
(0.3 )%
Our major competitors are the two channels operated by the public broadcaster, SLO1 and SLO2, with all day audience shares for 2008 of 16.5% and 7.7%, respectively, and privately
owned broadcaster TV3, with an all day audience share of 6.8%.
Prime time audience share for TV3 increased from 4.2% in 2007 to 6.5% in 2008, helped by its coverage of the European Football Championships in June 2008. The prime time
audience shares of SLO 1 and SLO 2 decreased from 19.9% to 18.9% and from 6.7% to 6.2%, respectively.
Combined prime time ratings for our channels decreased from 11.9% in 2007 to 11.6% in 2008. Total prime time ratings for the market declined from 24.9% in 2007 to 24.6% in 2008.
During the three months ended December 31, 2008, our combined prime time audience share increased to 51.0% from 49.1% in the same period in 2007. The prime time audience share
of TV3 increased from 4.1% to 6.4% over the same period, while the prime time audience shares of SLO 1 and SLO2 declined to 18.1% from 20.2% and from 6.2% to 5.1%,
respectively.
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Spot revenues
Non-spot revenues
Segment Net Revenues
Represented by
Broadcast operations
Non-broadcast operations
Segment Net Revenues
Segment EBITDA
Represented by
Broadcast operations
Non-broadcast operations
Segment EBITDA
Segment EBITDA Margin
2008
2007
% Act(1)
% Lfl(2)
For the Years Ended December 31, (US$ 000’s)
Movement
14.8 %
23.2 %
15.9 %
8.7 % $
18.5 %
10.0 % $
2007
60,559
9,088
69,647
$
$
$
$
$
$
$
69,497
11,200
80,697
75,963
4,734
80,697
25,413
24,620
793
25,413
$
$
$
$
$
$
$
60,559
9,088
69,647
67,574
2,073
69,647
22,767
24,249
(1,482)
22,767
12.4 %
128.4 %
15.9 %
6.7 % $
114.2 %
10.0 % $
67,574
2,073
69,647
11.6 %
8.8 % $
22,767
1.5 %
153.5 %
11.6 %
(1.5 )% $
154.8 %
8.8 % $
24,249
(1,482)
22,767
2006
50,682
3,852
54,534
52,426
2,108
54,534
19,842
19,518
324
19,842
$
$
$
$
$
$
$
Movement
% Act(1)
% Lfl(2)
19.5 %
135.9 %
27.7 %
8.5 %
114.3 %
16.0 %
28.9 %
(1.7 )%
27.7 %
17.3 %
(15.6 )%
16.0 %
14.7 %
4.2 %
24.2 %
nm%(3)
14.7 %
12.1 %
nm%(3)
4.2 %
31%
33%
(2 )%
(1 )%
33%
36%
(3 )%
(4 )%
(1) Actual ("%Act") reflects the percentage change between two years.
(2) Like for Like ("%Lfl") or constant currency reflects the impact of applying the current period average exchange rates to the prior period revenues and costs.
(3) Number is not meaningful.
· Segment Net Revenues for the year ended December 31, 2008 increased by 16% compared to the year ended December 31, 2007. In constant currency, Segment Net Revenues
increased by 10%. Spot revenues increased by 9% in 2008 in constant currency compared to 2007, due to increased spending from existing customers and increased prices. We
sold a higher proportion of the GRPs that we generated in the first nine months of 2008 than in the same period of 2007, however this trend reversed sharply in November and
December when advertisers reduced spending significantly. Non-spot revenues increased by 19% in constant currency compared to 2007, primarily driven by an increase in
internet revenues.
Segment Net Revenues for the year ended December 31, 2007 increased by 28% compared to the year ended December 31, 2006. In constant currency, Segment Net Revenues
increased by 16%. Spot revenues increased by 9% in 2007 in constant currency compared to 2006, driven by double-digit price increases. In 2006 sponsorship was included in
the spot revenues rather than non-spot revenues; excluding the impact of this reclassification, spot revenues would have increased by 16% in constant currency. Non-spot
revenues increased by 113% in constant currency compared to 2006; excluding the impact of the sponsorship reclassification, non-spot revenues increased by 20% in constant
currency, primarily driven by telephone voting and internet revenues.
·
Segment EBITDA for the year ended December 31, 2008 increased by 12% compared to the year ended December 31, 2007. In constant currency, Segment EBITDA increased by
9%.
Costs charged in arriving at Segment EBITDA for 2008 increased by 11% in constant currency compared to 2007. Cost of programming increased by 11% in constant currency
due to an increase in the cost of acquired programming as a result of increased competition. Other operating costs increased by 12% in constant currency due primarily to the
development of our internet department. Selling, general and administrative expenses increased by 9% primarily due to higher travel expenses, as staff from our Slovenia
operations undertook development work at our other operations.
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Segment EBITDA for the year ended December 31, 2007 increased by 15% compared to the year ended December 31, 2006. In constant currency, Segment EBITDA increased by
3%.
Costs charged in arriving at Segment EBITDA for 2007 increased by 23% in constant currency compared to 2006. Cost of programming increased by 28% in constant currency
due to investments in programming to maintain our leading position in the market in light of increased competition. Other operating costs increased by 14% due primarily to
higher staff costs as a result of increased headcount. Selling, general and administrative expenses increased by 17% primarily due to higher marketing and research costs and
broadcast equipment costs.
The fall in Segment EBITDA in our non-broadcast operations in 2007 compared to 2006 was the result of significant investment on hardware and software for the internet
business unit during the year. This expenditure was intended to result in increased revenues for the Slovenia operations and synergy benefits in our non-broadcast operations
across all our Segments in future periods.
(G) UKRAINE (STUDIO 1+1)
On June 30, 2008, we acquired an additional 30% interest in our Ukraine (STUDIO 1+1) operations. On October 17, 2008, we completed the exercise of our call option to acquire the
remaining 10% interest held by our former partners, taking our ownership to 100%. With the support of specialist management teams from other CME stations, we began
restructuring the operating processes within Studio 1+1 in April 2008 and made certain interim changes to senior management and management structures before appointing our new
senior management team in August. The organizational and operational models were revised to support improved performance and drive cost savings in 2009, resulting in
substantial reductions in headcount. We have established dubbing, fiction and non-fiction production units, improved programming acquisition, planning and scheduling
procedures and successfully relaunched “TSN”, our news programming. We terminated our agreements with the external sales house Video International Group at the end of the
fourth quarter of 2008 and created an in-house sales department that took responsibility for sales from January 2009.
There was a significant decline in our financial performance in 2008 due to a combination of declining revenues and increased costs. Even excluding the impact of political
advertising in 2007, we experienced a decline in revenues in 2008. Contributory factors included poor and inconsistent programming decisions of prior management leading to lower
ratings and a decline in audience share, as well as expenses of restructuring. Of greater significance was the sharp decline in the market that commenced in November and December
2008, largely due to the rapidly worsening economic outlook for Ukraine. This was aggravated by political uncertainty caused by the collapse of the parliamentary coalition in
September.
Costs were adversely affected by significant charges to write down programming due to a combination of schedule revisions and deteriorating sales projections, the penalty in
respect of the early termination of our agreements with Video International Group, and redundancy costs.
In December 2008, we recognized a non-cash impairment charge of US$ 263.8 million against our Ukraine (STUDIO 1+1) operations on account of significantly reduced performance
expectations caused by the rapid deterioration in the economic outlook for the country and the consequent sharp decline in projections for the total advertising market.
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Market Background: We estimate that the television advertising market in Ukraine declined by approximately 3 - 5% in 2008, reflecting steady growth in the first ten months of the
year, followed by a significant decline in November and December.
Economic projections for Ukraine in 2009 are now extremely poor. We expect the total advertising market to decline by up to 60% during 2009 due to a combination of the continued
worsening of economic conditions and significant price reductions by a majority of leading market participants. If market conditions continue to worsen, a further decline in the total
advertising market can be expected.
STUDIO 1+1 Audience Share and Ratings Performance
For advertising sales purposes, STUDIO 1+1’s target audience is the 18+ demographic and all audience data is shown below on this basis.
All day audience share
All day ratings
Prime time audience share
Prime time ratings
For the Years Ended December 31,
2008
2007
Movement
12.0%
2.2%
13.2%
4.9%
16.3%
3.0%
18.1%
6.7%
(4.3 )%
(0.8 )%
(4.9 )%
(1.8 )%
Our main competitors include Inter, with an all day audience share for 2008 of 21.4%, Novy Kanal with 7.2%, ICTV with 7.8% and STB with 8.1%.
Prime time audience share for Inter remained constant at 27.1 for 2007 and 2008, while the prime time audience shares of Novy Kanal, ICTV and STB increased from 6.2% to 7.4%,
from 6.0% to 7.6% and from 6.8% to 7.3%, respectively.
Prime time ratings for STUDIO 1+1 decreased from 6.7% in 2007 to 4.9% in 2008. Prime time ratings in the Ukraine market increased from 37.1% in 2007 to 37.2% in 2008.
During the three months ended December 31, 2008, the prime time audience share of STUDIO 1+1 decreased to 11.2% from 19.3% compared to the same period in 2007. Inter’s prime
time audience share decreased to 25.0% from 29.6% in the same period, while the prime time shares of ICTV and Novy Kanal increased to 7.9% from 6.0% and from 5.9% to 8.9%,
respectively.
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Spot revenues
Non-spot revenues
Segment Net Revenues
Represented by
Broadcast operations
Non-broadcast operations
Segment Net Revenues
Segment EBITDA
Represented by
Broadcast operations
Non-broadcast operations
Segment EBITDA
2008
81,266
15,472
96,738
96,639
99
96,738
(32,944)
(31,285)
(1,659)
(32,944)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
For the Years Ended December 31, (US$ 000’s)
Movement
Movement
2007
% Act(1)
% Lfl(2)
2007
2006
% Act(1)
% Lfl(2)
102,204
23,119
125,323
125,323
-
125,323
(20.5 )%
(33.1 )%
(22.8 )%
(22.9 )%
-
(22.8 )%
-
-
-
-
-
-
$
$
$
$
102,204
23,119
125,323
125,323
-
125,323
27,000
(222.0 )%
-
$
27,000
27,527
(527)
27,000
(213.6 )%
(214.8 )%
(222.0 )%
27,527
(527)
27,000
$
$
-
-
-
-
$
$
$
$
$
$
$
86,042
10,371
96,413
96,413
-
96,413
29,973
30,045
(72)
29,973
18.8 %
122.9 %
30.0 %
30.0 %
-
30.0 %
(9.9 )%
(8.4 )%
nm%(3)
(9.9 )%
22%
31%
(9 )%
-
-
-
-
-
-
-
-
-
-
-
Segment EBITDA Margin
(34)%
22%
(56 )%
(1) Actual ("%Act") reflects the percentage change between two years.
(2) The functional currency of our UKRAINE (STUDIO 1+1) operations is the dollar.
(3) Number is not meaningful.
· Segment Net Revenues for the year ended December 31, 2008 decreased by 23% compared to the year ended December 31, 2007. Spot revenues decreased by 21%, reflecting
the impact of US$16.5 million of political advertising in 2007, the decline of our ratings and a significant downturn of the overall market late in the year. Non-spot revenues
decreased by 33% in 2008 compared to 2007 primarily due to the absence of one-off revenues from the sale of surplus programming as compared to 2007 and the impact of US$
1.5 million of political advertising revenues.
Segment Net Revenues for the year ended December 31, 2007 increased by 30% compared to the year ended December 31, 2006. Spot revenues increased by 19% due to an
estimated US$ 16.5 million of political advertising generated from the elections held on September 30, 2007. This offset a slight decline in revenues due to a decrease in the
volume of GRPs sold, reflecting the uncertainty in the advertising market ahead of the parliamentary elections and our ratings decline due to the poor performance of certain
series on STUDIO 1+1 and increased competition from other broadcasters. Non-spot revenues increased by 123% in 2007 compared to 2006 primarily due to the sale of surplus
programming and increased sponsorship, as well as US$ 1.5 million of political advertising revenues.
·
Segment EBITDA for the year ended December 31, 2008 decreased by US$ 59.9 million compared to the year ended December 31, 2007. Costs charged in arriving at Segment
EBITDA for 2008 increased by 32% compared to 2007. Cost of programming grew by 24% mostly due to an expense of US$ 18.8 million to write down programming as a result of
schedule revisions and deteriorating sales projections for 2009. Other operating costs increased by 17% due to the costs of terminating 120 employees and higher transmission
charges from RRT, the state telecommunications company. Selling, general and administrative expenses increased by 132%, reflecting an estimated charge of US$ 4.9 million
payable following the early termination of our agreements with Video International Group.
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Segment EBITDA for the year ended December 31, 2007 decreased by 10% compared to the year ended December 31, 2006, resulting in an EBITDA margin of 22% compared to
an EBITDA margin of 31% in the year ended December 31, 2006. Costs charged in arriving at Segment EBITDA for 2007 increased by 48% compared to 2006. Cost of
programming grew by 78%, one third of which increase is represented by US$ 10.4 million of value adjustments to program rights. The increase in the cost of programming
reflects the continued price inflation for Russian programming, which drives strong ratings in the Ukrainian market, as well as increased investment in such programming to
improve our programming schedule and boost ratings following disappointing ratings earlier in the year in comparison with unusually strong programming on Inter. Other
operating costs increased by 28% due to increased salary costs and increased broadcast operating expenses. Selling, general and administrative expenses decreased by 30%,
primarily due to reallocating withholding tax on programming acquisitions to cost of programming, which was partially offset by higher office running costs.
(H) UKRAINE (KINO, CITI)
On January 11, 2006 we acquired a 65.5% interest in Ukrpromtorg, owner of 92.2% of Gravis, which operated the local channels, CHANNEL 35 and CHANNEL 7. In July 2006, we
relaunched CHANNEL 7 as a new entertainment channel, KINO, targeted at a younger demographic. On December 1, 2006, we relaunched CHANNEL 35 as a new youth-oriented
channel, CITI, in greater Kiev.
We operated CITI until February 10, 2009, when we sold our 60.4% interest in the CITI channel to our partners and acquired our partners’ 39.6% interest in the KINO channel (see
Part II, Item 8, Note 23, “Subsequent Events”). The CITI channel has been treated as a discontinued operation in the financial statements for all periods presented and is therefore
not considered in the commentary below.
From the first quarter of 2009, we expect that the Ukraine (KINO,CITI) operating segment will no longer exist as a result of our acquisition of the remaining non-controlling interests
in the KINO channel. These operations will be merged into our Ukraine (STUDIO 1+1) operations and will no longer meet the definition of an operating segment under FASB
Statement No.131 “Disclosures about Segments of an Enterprise and Related Information”. For more information see Item 8, Note 23, “Subsequent Events”.
KINO and CITI Audience Share and Ratings Performance
In December 2008, we recognized a non-cash impairment charge of US$ 8.0 million against our Ukraine (KINO, CITI) operations on account of significantly reduced performance
expectations caused by the rapid deterioration in the economic outlook for the country and the consequent collapse in projections for the television advertising market.
For advertising sales purposes, KINO’s target audience is the 15-50 demographic while CITI’s target audience is the 15-50 demographic in Kiev.
KINO: Target (15-50) prime time audience share
CITI: Target (15-50 Kiev) prime time audience share
For the Years Ended December 31,
2008
2007
Movement
0.6%
1.1%
0.6%
2.0%
0.0 %
(0.9 )%
KINO had a 15-50 all day audience share in Kiev of 0.7% for 2008 compared to 0.8% for 2007. CITI had an all day audience share in Kiev of 1.1% for 2008 compared to 1.9% for 2007.
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Spot revenues
Non- spot revenues
Segment Net Revenues
Represented by
Broadcast operations
Non-broadcast operations
Segment Net Revenues
Segment EBITDA
Represented by
Broadcast operations
Non-broadcast operations
Segment EBITDA
Segment EBITDA Margin
For the Years Ended December 31, (US$ 000’s)
Movement
Movement
2006
% Act(1)
% Lfl(2)
2008
1,214
1,506
2,720
2,720
-
2,720
(1,855)
(1,855)
-
(1,855)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2007
% Act(1)
% Lfl(2)
907
608
1,515
1,515
-
1,515
33.8%
147.7%
79.6%
79.6%
-
79.6%
-
-
-
-
-
-
$
$
$
$
2007
907
608
1,515
1,515
-
1,515
(3,536)
47.5%
-
$
(3,536)
(3,536)
-
(3,536)
47.5%
-
47.5%
(3,536)
-
(3,536)
$
$
-
-
-
-
$
$
$
$
$
$
$
387
339
726
726
-
726
134.4%
79.4%
108.7%
108.7%
-
108.7%
(1,795)
(97.0)%
(1,795)
-
(1,795)
(97.0)%
-
(97.0)%
(68)%
(233)%
165%
(233)%
(248)%
15%
-
-
-
-
-
-
-
-
-
-
-
(1) Actual ("%Act") reflects the percentage change between two years.
(2) The functional currency of our UKRAINE (KINO, CITI) operations is the dollar.
· Segment Net Revenues for the year ended December 31, 2008 increased by 80% compared to the year ended December 31, 2007. Spot revenues increased by 34%. Non-spot
revenues increased by 148%, primarily due to home shopping channels, interactive, gameshow and program-related revenues.
Segment Net Revenues for the year ended December 31, 2007 increased by 109% compared to the year ended December 31, 2006. Spot revenues increased by 134%. Non-spot
revenues increased by 79%, primarily due to increased sponsorship.
Segment EBITDA losses for the year ended December 31, 2008 decreased by 48% compared to the year ended December 31, 2007. Costs charged in arriving at Segment
EBITDA for 2008 decreased by 10% compared to 2007. Cost of programming declined by 29%, due to the slower rollout of the channel and a change of the program schedule.
Other operating costs increased by 19% due to higher headcount and the planned annual increase which took place in January 2008 along with reclassification of technical staff
from production costs. Selling, general and administrative expenses decreased by 2% in 2008 compared to 2007, due to a reduction in travel and training expenses.
Segment EBITDA losses for the year ended December 31, 2007 increased by 97% compared to the year ended December 31, 2006. Costs charged in arriving at Segment EBITDA
for 2007 increased by 100% compared to 2006. Cost of programming grew by 111%, other operating costs increased by 97% and selling, general and administrative expenses
increased by 73%.
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PROGRAMMING PAYMENTS AND PROGRAM AMORTIZATION
Our consolidated cost of programming for 2008, 2007, and 2006 was as follows:
Production expenses
Program amortization
Cost of programming
$
$
For the Years Ended December 31, (US$ 000’s)
2007
2008
2006
110,126
138,696
194,759
116,007
188,534
243,444
226,133
327,230
438,203
$
$
$
$
Production expenses represent the cost of in-house productions and locally commissioned programming that will not be repeated, such as news, current affairs and game
shows. The cost of broadcasting all other purchased programming is recorded as program amortization.
Total consolidated programming costs (including amortization of programming rights and production costs) increased by US$ 111.0 million, or 33.9%, in the year ended December 31,
2008 compared to 2007 due to:
· US$ 31.4 million of additional programming costs from our Czech Republic operations;
· US$ 29.4 million of additional programming costs from our Romania operations;
· US$ 17.5 million of additional programming costs from our Ukraine (STUDIO 1+1) operations;
· US$ 14.9 million of additional programming costs from our Slovak Republic operations;
· US$ 7.4 million of additional programming costs from our Croatia operations;
· US$ 6.5 million of additional programming costs from our newly acquired Bulgaria operations;
· US$ 4.8 million of additional programming costs from our Slovenia operations; and
· US$ (0.9) million decrease in programming costs from our Ukraine (KINO, CITI) operations.
The amortization of acquired programming for each of our operations for 2008, 2007 and 2006, including our operations in the Slovak Republic for the period prior to January 23, 2006
when they were previously accounted for as an equity affiliate, is set out in the table below. For comparison the table also shows the cash paid for programming by each of our
operations in the respective periods. The cash paid for programming by our operations in Bulgaria, Croatia, the Czech Republic, Romania, Slovenia, Ukraine and the Slovak Republic
(for the period from January 23, 2006) is reflected within net cash provided by continuing operating activities in our consolidated statement of cash flows.
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Program amortization:
Bulgaria (1)
Croatia (NOVA TV)
Czech Republic (2)
Romania (3)
Slovak Republic (TV MARKIZA) (4)
Slovenia (POP TV and KANAL A)
Ukraine (STUDIO 1+1)
Ukraine (KINO, CITI) (5)
Cash paid for programming:
Bulgaria (1)
Croatia (NOVA TV)
Czech Republic (2)
Romania (3)
Slovak Republic (TV MARKIZA) (4)
Slovenia (POP TV and KANAL A)
Ukraine (STUDIO 1+1)
Ukraine (KINO, CITI) (5)
For the Years Ended December 31, (US$ 000’s)
2006
2007
2008
$
$
$
$
2,865
21,229
57,580
55,253
20,855
13,076
71,054
1,532
243,444
10,117
24,922
35,638
73,223
23,905
11,300
47,671
987
227,763
$
$
$
$
-
20,784
34,992
44,673
16,326
10,289
59,591
1,879
188,534
-
22,894
27,343
61,271
18,273
9,751
68,597
1,890
210,019
$
$
$
$
-
14,237
27,170
30,610
7,539
7,164
28,355
932
116,007
-
17,165
28,237
48,277
12,598
7,067
38,419
1,096
152,859
(1) We acquired our Bulgaria operations (TV2, RING TV) on August 1, 2008.
(2) Our Czech Republic operations comprise TV NOVA, NOVA SPORT and NOVA CINEMA, which was launched in December 2007.
(3) Romanian channels are PRO TV, PRO CINEMA, ACASA, PRO TV INTERNATIONAL, SPORT.RO and MTV ROMANIA for the years ended December 31, 2008 and 2007 and
PRO TV, PRO CINEMA, ACASA and PRO TV INTERNATIONAL for the year ended December 31, 2006.
(4) Our Slovak Republic operations were accounted for as an equity affiliate until January 23, 2006.
(5) We acquired our Ukraine (KINO, CITI) operations on January 11, 2006.
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IV. Analysis of the Results of Consolidated Operations
OVERVIEW
IV (a) Net Revenues for the years ending December 31, 2008, 2007 and 2006:
Bulgaria (1)
Croatia
Czech Republic
Romania
Slovakia
Slovenia
Ukraine (STUDIO 1+1)
Ukraine (KINO, CITI) (2)
Total Consolidated Net Revenues
Consolidated Net Revenues
For the Years Ended December 31, (US$ 000’s)
2008
1,263
54,651
376,546
274,627
132,693
80,696
96,738
2,720
1,019,934
$
$
$
$
2007
-
37,193
279,237
215,402
110,539
69,647
125,323
1,515
838,856
Movement
- % $
46.9 %
34.9 %
27.5 %
20.0 %
15.9 %
(22.8 )%
79.5 %
21.6% $
2007
-
37,193
279,237
215,402
110,539
69,647
125,323
1,515
838,856
$
$
2006
-
22,310
208,387
148,616
71,660
54,534
96,413
726
602,646
Movement
- %
66.7 %
34.0 %
44.9 %
54.3 %
27.7 %
30.0 %
108.7 %
39.2 %
(1) We acquired our Bulgaria operations on August 1, 2008.
(2) We acquired our Ukraine (KINO, CITI) operations on January 11, 2006.
Our consolidated net revenues increased by US$ 181.1 million in 2008 compared to 2007 and by US$ 236.2 million in 2007 compared to 2006 (see Item 7, III, “Analysis of Segment
Results”).
IV (b) Cost of Revenues for the years ending December 31, 2008, 2007 and 2006
Consolidated Cost of Revenues
For the Years Ended December 31, (US$ 000’s)
Operating Costs
Cost of programming
Depreciation of station property, plant and
equipment
Amortization of broadcast licenses and other
intangibles
Total Consolidated Cost of Revenues
$
$
$
2008
145,210
438,203
51,668
35,381
670,462
$
2007
116,859
327,230
32,653
24,970
501,712
Movement
24.3 % $
33.9 %
2007
116,859
327,230
$
58.2 %
32,653
41.7 %
33.6 % $
24,970
501,712
$
2006
89,486
226,133
25,430
18,799
359,848
Movement
30.1 %
44.7 %
28.4 %
32.8 %
39.4 %
Total cost of revenues increased by US$ 168.8 million in 2008 compared to 2007, and by US$ 141.9 million in 2007 compared to 2006.
Operating Costs: Total consolidated station operating costs (excluding programming costs, depreciation of station property, plant and equipment, amortization of broadcast
licenses and other intangibles as well as station selling, general and administrative expenses) increased by US$ 28.4 million in 2008 compared to 2007 and by US$ 27.4 million in 2007
compared to 2006 (see Item 7, III, “Analysis of Segment Results”).
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Cost of Programming: Total consolidated programming costs (including amortization of programming rights and production costs) increased by US$ 111.0 million in 2008 compared
to 2007 and by US$ 101.1 million in 2007 compared to 2006 (see Item 7, III “Analysis of Segment Results”).
Depreciation of Station Property, Plant and Equipment: Total consolidated depreciation of station property, plant and equipment increased by US$ 19.0 million in 2008 compared to
2007 primarily due to depreciation of newly acquired production assets across each of our operations, particularly in the Czech Republic and Romania.
Total consolidated depreciation of station property, plant and equipment increased by US$ 7.2 million in 2007 compared to 2006.
Amortization of Broadcast Licenses and Other Intangibles: Total consolidated amortization of broadcast licenses and other intangibles increased by US$ 10.4 million in 2008
compared to 2007 primarily as a result of the amortization of broadcast licenses and other intangible assets acquired in the 2008 purchases of the remaining 40.0% interest in our
Ukraine (STUDIO 1+1) operations and our Bulgaria operations, as well as the impact of charging a full year of amortization relating to the 2007 acquisitions in Romania and the
Slovak Republic.
Total consolidated amortization of broadcast licenses and other intangibles increased by US$ 6.2 million in 2007 compared to 2006 primarily as a result of the amortization of the
broadcast license and customer relationships of our Romania and Slovak Republic operations arising from our acquisition of increased stakes in early 2007.
IV (c) Station Selling, General and Administrative Expenses for the years ending December 31, 2008, 2007 and 2006
$
Bulgaria
Croatia
Czech Republic
Romania
Slovakia
Slovenia
Ukraine (STUDIO 1+1)
Ukraine (KINO, CITI)
Total Consolidated Station Selling, General and
Consolidated Station Selling, General and Administrative Expenses
For the Years Ended December 31, (US$ 000’s)
$
2008
2,653
7,758
25,498
15,877
10,923
8,132
19,240
760
2007
-
8,844
22,411
13,552
10,732
6,707
8,292
777
Movement
nm(1)
$
(12.3 )%
13.8 %
17.2 %
1.8 %
21.2 %
132.0 %
(2.2 )%
$
2007
-
8,844
22,411
13,552
10,732
6,707
8,292
777
2006
-
6,884
21,358
10,725
8,547
5,195
11,818
448
Movement
-
28.5 %
4.9 %
26.4 %
25.6 %
29.1 %
(29.8 )%
73.4 %
Administrative Expenses
$
90,841
$
71,315
27.4 % $
71,315
$
64,975
9.8 %
Total consolidated station selling, general and administrative expenses increased by US$ 19.5 million in 2008 compared to 2007 and by US$ 6.3 million in 2007 compared to 2006 (see
Item 7, III, “Analysis of Segment Results”).
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IV (d) Corporate operating costs (including non-cash stock-based compensation) for the years ending December 31, 2008, 2007, and 2006 were as follows:
Corporate operating costs (excluding non-cash
stock-based compensation)
Non-cash stock-based compensation
Corporate operating costs (including non-cash
stock-based compensation)
For the Years Ended December 31, (US$ 000’s)
2008
43,569
6,107
$
2007
49,639
5,734
Movement
2007
(12.2 )% $
6.5 %
49,639
5,734
$
2006
30,529
3,575
49,676
$
55,373
(10.3 )% $
55,373
$
34,104
$
$
Movement
62.6 %
60.4 %
62.4 %
Corporate operating costs (excluding stock-based compensation) for 2008 decreased by US$ 6.1 million, or 12.2%, compared to 2007. A charge of US$ 12.5 million was recorded in
2007 in respect of the estimated cost of settling our Croatia litigation; excluding this charge, corporate operating costs (excluding non-cash stock-based compensation) increased by
US$ 6.4 million, reflecting:
·
·
·
an increase in travel costs, primarily related to the use of a chartered aircraft and salary and travel costs following the establishment of a centralized planning and development
function to manage our initiatives to improve operational efficiencies;
a further increase in staff-related costs as a result of redundancy payments following headcount reductions in the fourth quarter; and
an increase in business development expenses incurred in evaluating potential investments.
The increase in corporate operating costs (excluding non-cash stock-based compensation) of US$ 19.1 million in 2007 compared to 2006 was principally due to recognition of the
charge of US$ 12.5 million in respect of the cost of settling our Croatia litigation; excluding this charge, corporate operating costs (excluding non-cash stock-based compensation)
increased by US$ 6.6 million, reflecting:
·
·
increased accruals for performance-related bonus payments; and
increased business development expenses incurred in evaluating potential investments,
partly offset by:
·
·
decreased property-related costs, as the expense incurred in 2006 included a lease exit charge of approximately US$ 1.6 million (including additional depreciation of US$ 0.3
million) incurred following the relocation of our London office during the first quarter of 2006; and
decreased legal costs incurred in connection with legal proceedings in respect of our Ukraine operations.
The increase in the charge for non-cash stock-based compensation in 2008 compared to 2007 reflects amortization of progressively higher value stock options issued in 2006, and
2007 and 2008 offset by a net credit of US$ 1.3 million in respect of the acceleration of Michael Garin’s unvested stock options in connection with his retirement. The increase in the
charge for non-cash stock-based compensation in 2007 compared to 2006 reflects an increase in the number of stock options issued during 2007 compared to 2006 as well as an
increase in the fair value of our stock options as our stock price increased during that period (see Item 8, Note 17, “Stock-Based Compensation”).
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Impairment charge:
We recognized the following impairment charges in respect of Goodwill and Long-Lived Assets in the year ended December 31, 2008:
Bulgaria
Ukraine (STUDIO 1+1)
Ukraine (KINO, CITI)
Total
Amortized
Trademarks
222
-
-
222
$
$
Long-Lived Assets
Amortized
Broadcast
Licenses
-
-
637
637
$
$
Other Intangible
Assets
625
-
-
625
$
$
Goodwill and Indefinite-Lived
Intangible Assets
Indefinite-Lived
Trademarks
-
8,481
-
8,481
$
$
$
$
Goodwill
64,044
255,305
7,438
326,787
$
$
Total
64,891
263,786
8,075
336,752
We test all goodwill and intangible assets for impairment in the fourth quarter of each year and at any time during the year when events occur that indicate an asset may be impaired
in accordance with FASB Statement No.142 “Goodwill and Other Intangible Assets” (“FAS 142”). When indicators of impairment exist, long-lived assets are also tested for
impairment under FASB Statement No. 144 “Accounting for the Impairment or Disposal of Long Lived Assets” (“FAS 144”).
In connection with the preparation of our financial statements for the year ended December 31, 2008, we concluded that a number of indicators of impairment had occurred in the
period following the filing of our report on Form 10-Q for the quarterly period ended September 30, 2008 and initiated impairment reviews under both FAS 142 and FAS 144 in
addition to the annual impairment review under FAS 142. We concluded that rapidly deteriorating global economic conditions had caused the estimated fair value of certain assets,
such as goodwill and other intangible assets, to fall and that for the Ukrainian and Bulgarian economies in particular some of these had fallen below their carrying value during the
forth quarter. Specifically, the impairment charge resulted from factors impacted by current market conditions including: 1) lower current cash flow forecasts for the affected
countries; 2) higher discount rates resulting from increases in returns required by market participants for investing in more risky markets; and 3) lower market valuations for
broadcasting assets (see Item 8, Note 4, “Goodwill and Intangible Assets”).
Although we considered all current information in respect of calculating our impairment charge for 2008, our stock price has continued to fall substantially since December 31, 2008.
This constitutes an indication that the value of our goodwill, indefinite-lived intangible assets and long-lived assets may have fallen further since January 1, 2009, and we may be
required to record additional impairment charges in the first quarter of 2009. In addition, if our cash flow forecasts for our operations deteriorate still further, or discount rates
continue to increase, we may be required to recognize additional impairment charges in later periods.
In the year ended December 31, 2006, we recognized an impairment charge of US$ 0.7 million with respect to our Croatia operations. When we updated our medium-term forecast
models at June 30, 2006, we determined that the forecast future cash flows of our Croatia operations had decreased compared to our previous forecast. We therefore reviewed the
carrying value of the intangible assets with indefinite lives to determine whether the assets are impaired. As a result of our analysis, we recognized an impairment charge of US$ 0.7
million to write down the carrying value of goodwill to US$ nil.
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IV (e) Operating (loss) / income for the years ending December 31, 2008, 2007 and 2006
Operating (loss) / income
2008
(127,797)
$
2007
210,456
$
Movement
(160.7 )% $
2007
210,456
$
2006
142,971
Movement
47.2 %
For the Years Ended December 31, (US$ 000’s)
Due to the impairment charge (see Item 8, Note 4, “Goodwill and Intangible Assets”), we recognized an operating loss of US$ 127.8 million in 2008 compared to operating income of
US$ 210.5 million in 2007, a decrease of US$ 338.3 million; excluding the impact of the impairment losses, operating income decreased by US$ 1.5 million. Operating margin was
(12.5)% in 2008 compared to 25% in 2007.
Operating income increased by US$ 67.5 million in the year ended December 31, 2007 compared to 2006. Operating margin was 25% compared to 24% in 2006.
IV (f) Other expense items for the years ending December 31, 2008, 2007 and 2006
$
Interest income
Interest expense
Foreign currency exchange loss, net
Other income
Change in fair value of derivatives
Provision for income taxes
Minority interest in income of consolidated
subsidiaries
Equity in (loss)/income of unconsolidated
affiliates
Gain on sale of unconsolidated affiliate
Pre tax loss on discontinued operations (Ukraine)
Pre tax loss on discontinued operations (Ukraine)
Discontinued operations (Czech Republic)
Currency translation adjustment, net
For the Years Ended December 31, (US$ 000’s)
$
2008
10,006
(68,475)
(37,877)
2,620
6,360
(34,525)
(2,071)
-
-
(3,849)
64
-
(88,609)
2007
5,728
(54,936)
(34,409)
7,891
(3,703)
(20,822)
(17,157)
-
-
(4,509)
29
-
158,825
Movement
74.7 % $
24.6 %
10.1 %
(66.8 )%
(271.8 )%
65,8 %
(87.9 )%
-
-
(14.6)%
120.7%
-
(155.8 )%
$
2007
5,728
(54,936)
(34,409)
7,891
(3,703)
(20,822)
(17,157)
-
-
(4,509)
29
-
158,825
2006
6,359
(44,212)
(44,892)
3,059
(12,539)
(14,952)
(13,602)
(730)
6,179
(2,354)
-
(4,863)
157,524
Movement
(9.9 )%
24.3 %
(23.4 )%
157.9 %
(70.5 )%
39.3 %
26.1 %
100 %
(100 )%
91.6 %
-
100 %
n/m
Interest income increased by US$ 4.3 million compared to 2007 primarily as a result of our maintaining higher average cash balances during 2008. Interest income for 2007 decreased
by US$ 0.6 million in comparison to 2006.
Interest expense increased by US$ 13.5 million in 2008 compared to 2007 primarily as a result of interest paid on our Convertible Notes issued in March 2008. Interest
expense increased by US$ 10.7 million in 2007 compared to 2006 primarily as a result of US$ 6.9 million of costs associated with the redemption of our EUR 125 million of floating rate
senior notes due May 2012 (the “2012 Floating Rate Notes”), as well as an increase in our average borrowings.
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Foreign currency loss, 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, including our Senior Notes which are denominated in Euros, as well as
intercompany loans. Our subsidiaries generally receive funding via loans that are denominated in currencies other than the dollar, and any change in the relevant exchange rate will
require us to recognize a transaction gain or loss on revaluation.
During 2008, we recognized a net loss of US$ 37.9 million comprising: transaction losses of US$ 40.2 million relating to the revaluation of monetary assets and liabilities denominated
in currencies other than the local functional currency of the relevant subsidiary; a transaction gain of approximately US$ 31.8 million on the Senior Notes due to the strengthening of
the dollar against the Euro between December 31, 2007 and December 31, 2008; and US$ 29.5 million of transaction losses relating to the revaluation of intercompany loans.
In 2007, we recognized a net loss of US$ 34.4 million primarily as a result of the strengthening of the Euro against the dollar over that period. We incurred a transaction loss of
approximately US$ 59.6 million on the Senior Notes due to the strengthening of the Euro against the dollar, which was partly offset by gains on the revaluation of monetary assets
and liabilities and intercompany loans of US$ 25.2 million.
In 2006, we recognized a net loss of US$ 44.9 million loss primarily as a result of the strengthening of the Euro against the dollar over that period. We incurred a transaction loss of
approximately US$ 50.9 million on the Senior Notes due to the strengthening of the Euro against the dollar, which was partly offset by gains on the revaluation of monetary assets
and liabilities of US$ 6.0 million.
Other income: We recognized income of US$ 2.6 million in 2008, US$ 7.9 million in 2007 and US$ 3.1 million in 2006 which largely relates to the release of provisions against certain
historic tax contingencies within our Romania operations.
Change in fair value of derivatives: We recognized income of US$ 6.4 million in 2008 and incurred losses of US$ 3.7 million in 2007 and US$ 12.5 million in 2006 as a result of the
change in the fair value of the currency swaps entered into on April 27, 2006 (see Item 8, Note 13, “Financial Instruments and Fair Value Measurements”).
Provision for income taxes: Provision for income taxes was US$ 34.5 million in 2008 compared to $20.8 million in 2007 and $ 15.0 million in 2006. We incurred a tax charge in 2008
despite reporting a loss before income taxes due to the fact that there is no tax benefit attributable to the impairment charge in respect of goodwill booked in the year. Our channels
pay tax at rates ranging from 10.0% in Bulgaria to 25.0% in Ukraine.
In 2007 the tax charge benefited from a deferred tax credit of US$ 9.1 million arising from the enactment of lower tax rates for future years in the Czech Republic.
For further information on taxes see Item 8, Note 15, “Income Taxes”.
Minority interest in income of consolidated subsidiaries: Minority interest in the income of consolidated subsidiaries was US$ 2.1 million in 2008 compared to US$ 17.2 million in
2007 and US$ 13.6 million in 2006. This is as a result of the purchase of increased stakes in our operations in Ukraine (STUDIO 1+1) in 2008 and in our Romania and Slovak Republic
operations in 2007.
Equity in (loss)/income of unconsolidated affiliates: Our Slovak Republic operations ceased to be accounted for as an equity affiliate on January 23, 2006, when we acquired
majority control of the license company (see Item 8, Note 5, “Investments, STS”). We disposed of our Romanian equity affiliate on August 11, 2006 (see Item 8, Note 5,
“Investments, Media Pro”).
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Slovak Republic operations
Romania operations
Equity in (loss)/income of unconsolidated
affiliates
$
$
For the Years Ended December 31, (US$ 000’s)
2008
-
-
$
-
$
2007
-
-
-
Movement
- % $
- %
- % $
2007
-
-
$
-
$
2006
(737)
7
(730)
Movement
(100.0 )%
(100.0 )%
(100.0 )%
Gain on sale of unconsolidated affiliate: We recognized a gain of US$ 6.2 million on the sale of our investment in Radio Pro to Media Pro, a company controlled by Adrian Sarbu,
currently our President and Chief Operating Officer, on August 11, 2006 (see Item 8, Note 5, “Investments, Media Pro”).
Discontinued operations: The amounts charged to the consolidated statements of operations in respect of discontinued operations are as follows:
Ukraine(KINO, CITI)
Loss from discontinued operations
Tax on result of discontinued operations
Czech Republic
Tax on disposal of discontinued operations
Discontinued operations
Ukraine (KINO, CITI)
2008
2007
Movement
2007
2006
Movement
For the Years Ended December 31, (US$ 000’s)
$
$
(3,849)
64
$
-
(3,785)
$
(4,509)
29
-
(4,480)
(14.6)% $
120.7%
-
(15.5 )% $
(4,509)
29
$
-
(4,480)
$
(2,354)
-
(4,863)
(7,217)
91.5 %
100 %
(100.0 )%
(37,9 )%
In the fourth quarter of 2008 we agreed to acquire 100% of the KINO channel from our minority partners and to sell them our interest in the CITI channel. The results of the CITI
channel have therefore been treated as discontinued operations for each year presented.
Czech Republic
On June 19, 2003, our Board of Directors decided to withdraw from operations in the Czech Republic. On October 23, 2003 we sold our 93.2% participation interest in CNTS, our
former Czech Republic operating company, for US$ 53.2 million. The revenues and expenses of our former Czech Republic operations and the related legal expenses have therefore
all been treated as discontinued operations for each year.
The amounts charged to discontinued operations in 2006 represent revised estimates of additional payments we expect to make to the Dutch tax authorities pursuant to the
agreement we entered into on February 9, 2004.
For additional information, see Item 8, Note 20, “Discontinued Operations”.
Currency translation adjustment, net: The underlying equity value of our investments (which are denominated in the functional currency of the relevant operation) 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. In 2008, we recognized
a loss of US$ 88.6 million on the revaluation of our net investments in subsidiaries compared to gains of US$ 158.8 million and US$ 157.5 million for 2007 and 2006, respectively. The
dollar appreciated significantly against all functional currencies of our operations during 2008, with increases of 7.0% against the Czech koruna, 15.4% against the New Romanian lei,
4.6% against the Croatian kuna and 5.8% against the Euro, whereas it had generally experienced a decline in value against most of our operating currencies over the previous two
years.
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To the extent that our subsidiaries incur transaction losses in their local functional currency income statement on the revaluation of monetary assets and liabilities denominated in
dollars, we recognize a gain of the same amount as a currency translation adjustment within shareholders’ equity when we retranslate our net investment in that subsidiary into
dollars. Similarly, any exchange gain or loss arising on the retranslation of intercompany loans in the functional currency of the relevant subsidiary or the dollar will be offset by an
equivalent loss or gain on consolidation.
The net loss on translation for 2008 included a loss of US$ 38.7 million on the revaluation of an intercompany loan that is considered to form part of our investment in our Czech
Republic operations which will be recognized in the income statement from February 2009 as this loan is no longer considered to be long term in nature (see Item 8, Note 23,
“Subsequent Events”). This compares to gains of US$ 79.2 million and US$ 77.3 million in 2007 and 2006, respectively.
IV (g) Consolidated Balance Sheet as at December 31, 2008 compared to December 31, 2007
The principal components of our Consolidated Balance Sheet at December 31, 2008 compared to December 31, 2007 are summarized below:
(US$ 000’s)
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Minority interests in consolidated subsidiaries
Shareholders’ equity
December 31,
2008
495,395
1,913,338
228,673
1,175,694
3,187
1,001,179
$
$
December 31,
2007
535,092
1,803,343
234,470
681,003
23,155
1,399,807
$
$
Movement
(7.4 )%
6.1 %
(2.5 )%
72.6 %
(86.2 )%
(28.5 )%
Current assets: Current assets at December 31, 2008 decreased US$ 39.7 million compared to December 31, 2007, reflecting a decrease in cash and cash equivalents of US$ 35.4
million, partly offset by an increase in prepaid programming and productions in progress, of US$ 11.8 million.
Non-current assets: Non-current assets at December 31, 2008 increased US$ 110.0 million compared to December 31, 2007. This reflects a net increase in broadcast licenses of US$
104.0 million, primarily in connection with our investments in our Ukraine (STUDIO 1+1) operations, as well as approximately US$ 37.3 million of other intangible assets, partly offset
by foreign exchange translation losses of US$ 73.7 million on the carrying value of goodwill, primarily in the Czech Republic. Property, plant and equipment increased by US$ 30.9
million as we continued to develop our broadcasting facilities, particularly in the Czech Republic, Romania and the Slovak Republic.
Current liabilities: Current liabilities at December 31, 2008 decreased US$ 5.8 million compared to December 31, 2007, reflecting decreases in income taxes and duties payable of
US$ 27.7 million, partly offset by increases of US$ 21.4 million in short-term credit facilities (primarily the BMG cash pool) and US$ 4.9 million in accrued interest relating to the
Convertible Notes.
Non-current liabilities: Non-current liabilities at December 31, 2008 increased US$ 494.7 million compared to December 31, 2007, reflecting the issuance of US$ 475.0 million of
Convertible Notes and our drawing of EUR 25.0 million (approximately US$ 34.8 million) of the EBRD Loan. These increases were partly offset by decreases of US$ 31.8 million in the
carrying value of our Senior Notes as a result of the movement in the spot rate during 2008 and US$ 6.4 million in our liability under currency swaps.
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Minority interests in consolidated subsidiaries: Minority interests in consolidated subsidiaries at December 31, 2008 decreased US$ 20.0 million compared to December 31, 2007,
primarily as a result of the buyout of our partners in our Ukraine (STUDIO 1+1) operations.
Shareholders’ equity: Total shareholders’ equity at December 31, 2008 decreased US$ 398.6 million compared to December 31, 2007. This decrease reflects primarily the net loss of
US$ 255.5 million and the decrease in Other Comprehensive Income of US$ 88.6 million. We also recognized the US$ 63.3 million purchase of capped call options we entered into in
conjunction with our Convertible Notes as a reduction to shareholders’ equity. Included in the total shareholders’ equity were proceeds from the exercise of stock options (US$ 1.2
million) and a stock-based compensation charge of US$ 7.1 million.
V. Liquidity and Capital Resources
V (a) Summary of cash flows:
Cash and cash equivalents decreased by US$ 35.4 million during the year ended December 31, 2008. The change in cash and cash equivalents is summarized as follows:
(US$ 000’s)
Net cash generated from continuing operating activities
Net cash used in continuing investing activities
Net cash received from financing activities
Net cash used in discontinued operations-operating activities
Net cash used in discontinued operations-investing activities
Net cash received from discontinued operations-financing activities
Impact of exchange rate fluctuations on cash
Net (decrease) / increase in cash and cash equivalents
Operating Activities
$
$
2008
135,555
(588,798)
444,558
(4,920)
(495)
-
(21,279)
(35,379)
$
$
$
For the Years Ended December 31,
2006
75,370
(126,955)
130,700
(3,667)
-
1,700
(2,904)
74,244
2007
106,695
(235,898)
135,530
(6,001)
(1,520)
-
(1,896)
(3,090)
$
Cash generated from continuing operations in 2008 increased US$ 28.9 million to US$ 135.6 million. Our operations in the Czech Republic and Romania showed significant increases
in cash generation following continued strong operational performance. These increases more than offset our investment in our start-up operations in Bulgaria, where we are
investing in programming and infrastructure, and in Ukraine, where we are making additional investments in Russian programming to boost ratings following the buyout of our
minority partners. We also continue to invest in programming in Croatia to continue the ratings growth we have experienced in the last two years. It is likely that the cost of
acquired programming across all our markets will continue to grow in the future (see Part I, Item 1A, “Risk Factors - Risks Relating to our Operations“). Due to the significant
appreciation of the dollar against our local currencies and the downturn in performance experienced in the fourth quarter of 2008, it is unlikely that our operations will generate the
same level of cash in 2009 as in 2008.
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Cash generated from continuing operations in 2007 increased US$ 31.3 million to US$ 106.7 million.
Investing Activities
Cash used in investing activities increased by US$ 352.9 million from 2007 to US$ 588.8 million in 2008. Our investing cash flows in 2008 were primarily comprised of:
·
·
·
·
·
·
payment of US$ 223.2 million in connection with our acquisition of an additional 30.0% stake in the Studio 1+1 group including acquisition costs (for further information, see
Item 1, Note 3, “Acquisitions and Disposals: Ukraine (STUDIO 1+1)”);
payment of US$ 109.3 million in connection with our acquisition of an additional 10.0% stake in the Studio 1+1 group including acquisition costs (for further information, see
Item 1, Note 3, “Acquisitions and Disposals: Ukraine (STUDIO 1+1)”);
total payments of US$ 147.8 million in connection with our acquisition of Bulgarian operations, including acquisition costs (for further information, see Item 1, Note 3,
“Acquisitions and Disposals: Bulgaria”);
payments of RON 47.2 million (approximately US$ 20.6 million at the date of payment) in connection with our acquisition of the assets of Radio Pro (for further information, see
Item 1, Note 3, “Acquisitions and Disposals: Romania”);
payments of US$ 9.9 million in connection with our acquisition of Jyxo and Blog (for further information, see Item 1, Note 3, “Acquisitions and Disposals: Czech Republic”); and
capital expenditures of US$ 78.7 million, largely in respect of the expansion of our broadcasting facilities and equipment in the Czech Republic, Romania and the Slovak
Republic.
In 2007, net cash used in investing activities of US$ 235.9 million consisted primarily of the following:
·
·
·
·
·
·
capital expenditure of US$ 79.9 million largely in respect of the expansion of our broadcasting facilities and equipment in the Czech Republic and Romania;
payments of SKK 1.9 billion (approximately US$ 78.5 million) in connection with our acquisition of a 20% interest in our Slovak Republic operations (see Item 8, Note 3,
“Acquisitions and Disposals: Slovak Republic“);
payments of US$ 51.6 million in connection with our acquisition of an additional 5% interest in our Romania operations and a 20% stake in our Romanian production company
(see Item 8, Note 3 “Acquisitions and Disposals: Romania”);
payments of EUR 9.4 million (approximately US$ 13.9 million) in connection with our acquisition of 100% interest in MTS (see Item 8, Note 3, “Acquisitions and Disposals:
Romania”);
payments of EUR 6.7 million (approximately US$ 8.4 million) in connection with our acquisition of Sport.ro (see Item 8, Note 3, “Acquisitions and Disposals: Romania); and
payments of US$ 3.1 million in connection with our acquisition of a 60.4% interest in each of Tor and Zhysa (see Item 8, Note 3 “Acquisitions and Disposals: Ukraine”).
In 2006, net cash used in investing activities of US$ 127.0 million consisted primarily of the following:
·
·
capital expenditure of US$ 60.4 million, largely in respect of the expansion of our broadcasting facilities and equipment in Romania and the Czech Republic;
a payment of US$ 30.1 million in connection with our acquisition of ARJ a.s. (“ARJ”);
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·
·
·
a payment of US$ 27.2 million in connection with our acquisition of an additional 5% interest in our Romania operations;
a payment of EUR 8.0 million (approximately US$ 10.3 million) in connection with our acquisition of our stake in Media Pro (see Item 8, Note 5, “Investments”); and
a payment of a further US$ 2.0 million following completion of our acquisition of a 65.5% stake in Ukrpromtorg.
Financing Activities
Net cash received from financing activities increased US$ 309.1 million from 2007 to US$ 444.6 million in 2008. The amount of cash received in 2008 reflects the net proceeds of US$
400.3 million from the issuance of Convertible Notes and purchase of the Capped Calls, US$ 37.4 million of proceeds from the EBRD Loan and US$ 22.7 million of drawings on the
BMG cash pool .
Our financing cash flows in 2007 primarily comprised net proceeds of US$ 199.4 million from the issuance of the 2007 Senior Notes and US$ 109.9 million from the issuance of
1,275,227 unregistered shares of Class A Common Stock to Igor Kolomoisky, partially offset by payment of EUR 127.5 million (approximately US$ 169.0 million at the date of
payment) to redeem our 2012 Floating Rate Notes (see Item 8, Note 6, “Senior Debt”).
Net cash received from financing activities in 2006 consisted primarily of the following:
·
·
·
receipt of approximately US$ 168.7 million (net of fees) from a public offering of 2,530,000 shares of our Class A Common Stock;
receipts of US$ 35.0 million from drawing on credit facilities in the Czech Republic and Slovenia, largely to finance the acquisition of ARJ and the increased investment in our
Romania operations; and
repayment of US$ 75.3 million of amounts drawn under the same credit facilities.
Discontinued Operations
In 2008, we paid taxes of US$ 2.0 million to the Dutch tax authorities pursuant to the agreement we entered into with them on February 9, 2004, compared to US$ 2.2 million in 2007
and US$ 1.7 million in 2006.
The CITI channel had cash outflows of US$ 3.4 million, US$ 5.3 million and US$ 0.3 million in 2008, 2007 and 2006, respectively.
V (b) Sources and Uses of Cash
We believe that our current cash resources are sufficient to allow us to continue operating for at least the next 12 months and we do not anticipate requirements for additional cash
in the near future, subject to the matters disclosed under “Contractual Obligations and Commitments” and “Cash Outlook” below.
Our ongoing source of cash at our operations is primarily the receipt of payments from advertisers and advertising agencies. This may be supplemented from time to time by local
borrowing. Surplus cash after funding the ongoing operations may be remitted to us. Surplus cash is remitted to us in the form of debt interest payments and capital repayments,
dividends, and other distributions and loans from our subsidiaries.
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Corporate law in the Central and Eastern European countries in which we operate stipulates generally that dividends may be declared by the partners or shareholders out of yearly
profits subject to the maintenance of registered capital, required reserves and after the recovery of accumulated losses. The reserve requirement restriction generally provides that
before dividends may be distributed, a portion of annual net profits (typically 5%) be allocated to a reserve, which reserve is capped at a proportion of the registered capital of a
company (ranging from 5% to 25%). The restricted net assets of our consolidated subsidiaries and equity in earnings of investments accounted for under the equity method
together are less than 25% of consolidated net assets.
As at December 31, 2008, we had the following debt outstanding:
Corporate
Czech Republic
Romania
Slovak Republic
Slovenia
Ukraine (STUDIO 1+1)
Total
December 31,
2008
(US$ 000’s)
1,081,901
12,923
104
-
-
172
1,095,100
(1) – (4)
(5) – (7)
(8)
(9)
(10)
(11)
(1) As at December 31, 2008 we had EUR 395.0 million (approximately US$ 549.7 million) of Senior Notes outstanding, comprising EUR 245.0 million (approximately US$ 341.0 million)
of the 2005 Senior Notes and EUR 150.0 million (approximately US$ 208.7 million) of the 2007 Senior Notes, which bear interest at six-month Euro Inter-Bank Offered Rate
(“EURIBOR”) plus 1.625%. The applicable rate at December 31, 2008 was 5.934%.
The Senior Notes are secured senior obligations and rank pari passu with all existing and future senior indebtedness and are effectively subordinated to all existing and future
indebtedness of our subsidiaries. The amounts outstanding are guaranteed by certain of our subsidiaries and are secured by a pledge of shares of these subsidiaries and an
assignment of certain contractual rights. The terms of the Senior Notes restrict the manner in which our business is conducted, including the incurrence of additional
indebtedness, the making of investments, the payment of dividends or the making of other distributions, entering into certain affiliate transactions and the sale of assets.
In the event that (A) there is a change in control by which (i) any party other than our present shareholders becomes the beneficial owner of more than 35.0% of our total voting
power; (ii) we agree to sell substantially all of our operating assets; or (iii) there is a change in the composition of a majority of our Board of Directors; and (B) on the 60th day
following any such change of control the rating of the Senior Notes is either withdrawn or downgraded from the rating in effect prior to the announcement of such change of
control, we can be required to repurchase the Senior Notes at a purchase price in cash equal to 101.0% of the principal amount of the Senior Notes plus accrued and unpaid
interest to the date of purchase.
At any time prior to May 15, 2009, we may redeem all or a part of the 2005 Senior Notes at a redemption price equal to 100.0% of the principal amount of such notes, plus a
“make-whole” premium and accrued and unpaid interest, if any, to the redemption date.
As of December 31, 2008, Standard & Poor’s senior unsecured debt rating for our Senior Notes was BB and our corporate credit rating was BB. As of December 31, 2008
Moody’s Investors Services senior unsecured debt rating for our Senior Notes and our corporate credit rating was Ba2. On November 5, 2008, S&P changed its outlook for all
credits to negative from stable. Moody’s Investors Services (“Moody’s”) have rated both our Senior Notes and our corporate credit as Ba2. On November 3, 2008 Moody’s
changed its outlook for all credits to negative from stable.
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(2) As at December 31, 2008 we had US$ 475.0 million of Convertible Notes outstanding that mature on March 15, 2013. Interest is payable semi-annually in arrears on each March
15 and September 15.
The Convertible Notes are secured senior obligations and rank pari passu with all existing and future senior indebtedness and are effectively subordinated to all existing and
future indebtedness of our subsidiaries. The amounts outstanding are guaranteed by two subsidiary holding companies and are secured by a pledge of shares of those
subsidiaries as well as an assignment of certain contractual rights.
(3) On July 21, 2006, we entered into a five-year revolving loan agreement for EUR 100.0 million (approximately US$ 139.2 million) arranged by EBRD and on August 22, 2007, we
entered into a second revolving loan agreement for EUR 50.0 million (approximately US$ 69.6 million) also arranged by EBRD (collectively the “EBRD Loan”). ING Bank N.V.
(“ING”) and Ceska Sporitelna, a.s. (“CS”) are each participating in the EBRD Loan for EUR 37.5 million. The EBRD Loan bears interest at a rate of three-month EURIBOR plus
1.625% on the drawn amount. A commitment charge of 0.8125% is payable on any undrawn portion of the EBRD Loan. The available amount of the EBRD Loan amortizes by
15% every six months from May 2009 to November 2010 and by 40% in May 2011. On October 15 and 24, 2008 we drew down EUR 50.0 million (US$ 69.6 million) and EUR 100.0
million (US$ 139.2 million), respectively, to fund the purchase of the remaining 10.0% interest in the Studio 1+1 group and for general corporate purposes. We repaid EUR 75.0
million in November 2008. As at December 31, 2008, EUR 25.0 million (approximately US$ 34.8 million) was drawn. A further EUR 125.0 million (approximately US$ 174.0 million)
was drawn on February 2, 2009.
Covenants contained in the EBRD Loan are similar to those contained in our Senior Notes. In addition, the EBRD Loan’s covenants restrict us from making principal
repayments on other new debt of greater than US$ 20.0 million per year for the life of the EBRD Loan. This restriction is not applicable to our existing facilities with ING or CS or
to any refinancing of our Senior Notes.
The EBRD Loan is a secured senior obligation and ranks pari passu with all existing and future senior indebtedness, including the Senior Notes, and is effectively subordinated
to all existing and future indebtedness of our subsidiaries. The amount drawn is guaranteed by two subsidiary holding companies and is secured by a pledge of shares of those
subsidiaries as well as an assignment of certain contractual rights. The terms of the EBRD Loan restrict the manner in which our business is conducted, including the
incurrence of additional indebtedness, the making of investments, the payment of dividends or the making of other distributions, entering into certain affiliate transactions and
the sale of assets.
(4) We have an uncommitted multicurrency overdraft facility for EUR 10.0 million (approximately US$ 13.9 million) from Bank Mendes Gans (“BMG”), a subsidiary of ING. As at
December 31, 2008, the facility was undrawn. Interest is payable at the prevailing money market rate plus 2.00% on the drawn amount. This facility is part of a cash pooling
arrangement with BMG (the “BMG cash pool”). The cash pooling arrangement enables us to receive credit across the group in respect of cash balances which our subsidiaries
in the Netherlands, Bulgaria, the Czech Republic, Romania, the Slovak Republic, Slovenia and Ukraine deposit with BMG. Cash deposited with BMG by our participating
subsidiaries is pledged as security against the drawings of other subsidiaries up to the amount deposited. As at December 31, 2008, our Dutch holding company, CME Media
Enterprises B.V. (“CME B.V.”), had EUR 8.4 million (approximately US$ 11.7 million) deposited in the BMG cash pool and had drawn an overdraft of US$ 22.4 million from the
BMG cash pool. Our operations in the Czech Republic, the Slovak Republic and Slovenia had deposited CZK 154.9 million (approximately US$ 8.0 million), SKK 125.5 million
(approximately US$ 5.8 million) and EUR 2.0 million (approximately US$ 2.8 million), respectively in the BMG cash pool. As stated in Note (8) our Romania operations had drawn
US$0.1 million from the BMG cash pool at December 31, 2008. In addition, as stated in Note (11), our Ukraine (STUDIO 1+1) operations had drawn EUR 0.1 million (approximately
US$ 0.2 million) from the BMG cash pool at December 31, 2008.
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(5) CET 21 has a credit facility of CZK 1.2 billion (approximately US$ 62.0 million) with CS. The final repayment date is December 31, 2010. This facility may, at the option of CET 21,
be drawn in CZK, US$ or EUR and bears interest at the three-month, six-month or twelve-month London Inter-Bank Offered Rate (“LIBOR”), EURIBOR or Prague Inter-Bank
Offered Rate (“PRIBOR”) plus 1.65%. A utilization interest of 0.25% is payable on the undrawn portion of this facility. This percentage decreases to 0.125% of the undrawn
portion if more than 50% of the loan is drawn. This facility is secured by a pledge of receivables, which are also subject to a factoring arrangement with Factoring Ceska
Sporitelna, a.s.(“FCS”), a subsidiary of CS. On February 19, 2009, the full CZK 1.2 billion (approximately US$ 53.1 million at the date of drawing) of this facility was drawn.
(6) CET 21 has a working capital credit facility of CZK 250.0 million (approximately US$ 12.9 million) with CS, which matures on December 31, 2010. This working capital facility
bears interest at the three-month PRIBOR rate plus 1.65%. The applicable rate at December 31, 2008 was 5.28% .This facility is secured by a pledge of receivables, which are also
subject to a factoring arrangement with CS. As at December 31, 2008, the full CZK 250.0 million (approximately US$ 12.9 million) was drawn under this facility.
(7) As at December 31, 2008, there were no drawings under a CZK 300.0 million (approximately US$ 15.5 million) factoring facility with CS. This facility is available until June 30,
2011 and bears interest at the rate of one-month PRIBOR plus 1.40% for the period that actively assigned accounts receivable are outstanding.
(8) As stated in Note (4), our Romania operations had drawn US$ 0.1 million from the BMG cash pool at December 31, 2008.
(9) On May 15, 2008, our Slovak Republic operations secured a SKK 100.0 million (US$ 4.6 million) overdraft facility from ING. This can be utilized for short term advances up to six
months at an interest rate of EURIBOR + 2%. At December 31, 2008 there were no drawings under this facility.
(10) In July 2005 Pro Plus entered into a revolving five-year facility agreement for up to EUR 37.5 million (approximately US$ 52.2 million) in aggregate principal amount with ING
Bank N.V., Nova Ljubljanska Banka d.d., Ljubljana and Bank Austria Creditanstalt d.d., Ljubljana. The facility availability amortizes by 10.0% each year for four years
commencing one year after signing, with 60.0% repayable after five years. This facility is secured by a pledge of the bank accounts of Pro Plus, the assignment of certain
receivables, a pledge of our interest in Pro Plus and a guarantee of our wholly-owned subsidiary CME B.V. Loans drawn under this facility will bear interest at a rate of
EURIBOR for the period of drawing plus a margin of between 2.10% and 3.60% that varies according to the ratio of consolidated net debt to consolidated broadcasting cash
flow for Pro Plus. As at December 31, 2008, EUR 26.3 million (approximately US$ 36.5 million) was available for drawing under this revolving facility. On February 19, 2009, the
full EUR 36.5 million (approximately US$ 33.6 million at the date of drawing) of this facility was drawn.
(11) As stated in note (4), our Ukraine (STUDIO 1+1) operations had drawn EUR 0.1 million (approximately US$ 0.2 million) from the BMG cash pool at December 31, 2008.
Capital Lease Obligations
Capital lease obligations include future interest payments of US$ 1.4 million. For more information on our capital lease obligations see Item 8, Note 11, “Credit Facilities and Obligations
under Capital Lease”.
Operating Leases
For more information on our operating lease commitments see Item 8, Note 21, “Commitments and Contingencies”.
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Unconditional Purchase Obligations
Unconditional purchase obligations largely comprise future programming commitments. At December 31, 2008, we had commitments in respect of future programming of US$ 280.5
million (December 31, 2007: US$ 107.6 million). This includes contracts signed with license periods starting after December 31, 2008. For more information on our programming
commitments see Item 8, Note 21, “Commitments and Contingencies”.
Other Long-Term Obligations
Included in Other Long-Term Obligations are our commitments to the Dutch tax authorities of US$ 1.3 million (see Item 8, Note 21, “Commitments and Contingencies: Dutch Tax”.)
In addition to the amounts disclosed above, Adrian Sarbu, our President and Chief Operating Officer, has the right to sell his 5.0% shareholdings in each of Pro TV and MPI to us
under a put option agreement entered into in July 2004 at a price to be determined by an independent valuation, subject to a floor price of US$ 1.45 million for each 1.0% interest
sold. Mr. Sarbu’s right to put his remaining interest is exercisable from November 12, 2009, provided that we have not enforced a pledge over this shareholding which Mr. Sarbu
granted as security for our right to put to him our 8.7% shareholding in Media Pro. As at December 31, 2008, we considered the fair value of the put option of Mr. Sarbu to be
approximately US$ nil.
V (d) Cash Outlook
Liquidity and Capital Resources
Since 2005, our Czech Republic, Slovak Republic, Slovenia and Romania operations have generated positive cash flows sufficient, in conjunction with new equity and debt, to fund
our operations, the launch of new channels, the acquisition of non-controlling interests in our existing channels and expansion into new territories. Most economic predictions show
a substantial worsening in 2009 of the adverse economic conditions that arose at the end of 2008 in all of our markets. This has caused uncertainty among advertisers about the
level of spending they are prepared to commit to our channels. As a result, it has become much more difficult to predict the amount of cash our operations will generate. However,
we still expect that our Czech Republic, Slovak Republic, Slovenia and Romania operations, in conjunction with current cash and available facilities, will continue to generate excess
cash sufficient to fund our developing operations in Bulgaria, Croatia and Ukraine for the next twelve months, as well as meeting other external financial obligations, including the
commitment to pay a total of US$ 10.0 million in connection with the acquisition of the non-controlling interests in the KINO channel and US$ 12.0 million for a 10.0% ownership
interest in Glavred-Media LLC. We expect the funding requirement for our developing operations to be up to US$ 100.0 million during 2009 however if market conditions continue to
deteriorate, we may have to provide additional funding. As at December 31, 2008 we had US$ 413.9 million available in cash and credit facilities (including uncommitted overdraft
facilities).
With the deterioration of the global credit markets through most of 2008 and the worsening of economic conditions in our markets since the end of 2008, we have taken steps to
conserve cash to ensure we are able to meet our debt service and other existing financial obligations. These steps have included significant reductions to our operating cost base
through headcount reductions and widespread cost optimization programs, deferral of capital expenditure and the rescheduling of expansion plans.
On February 2, 2009, we drew the remaining EUR 125.0 million (approximately US$ 174.0 million) under the EBRD Loan. On February 19, 2009, CET 21 drew the full CZK 1.2 billion
(approximately US$ 53.1 million at the date of drawing) of its credit facility with CS. At the same time, Pro Plus drew the full EUR 26.3 million (approximately US$ 33.6 million at the
date of drawing) available under its five-year revolving facility. We made these requests in order to assure the continued availability of the funds in light of renewed concerns over
the solvency of credit providers in the region and intend to keep the funds deposited in low risk short-term deposits.
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As at December 31, 2008, our Senior Notes and Convertible Notes represented 93% of our total debt outstanding. This debt does not begin to mature until May 2012, with the
longest dated instrument maturing in May 2014. The EBRD Loan, which represented 3% of our total debt outstanding at December 31, 2008 (approximately 12% as at February 23,
2009), amortizes by 15% every six months from May 2009 through November 2010, with the final 40% payable in May 2011. With credit markets continuing to be volatile, we will not
need to refinance the vast majority of our existing senior debt in the near term.
We do not have maintenance style covenants on our Fixed Rate Notes or EBRD Loan. This means that there is no event of default on Senior Notes or EBRD Loans related to a
minimum level of EBITDA, gearing or other EBITDA related ratio. Both the Senior Notes and the EBRD Loan are however subject to an incurrence covenant which restricts us from
raising new debt at the corporate level if the ratio of Indebtedness to twelve-month Consolidated EBITDA, (both of which are terms defined in our Senior Notes and not the same as
similar measures defined under U.S. GAAP), exceeds 4.5 times, or if the raising of such debt would cause this ratio to be exceeded. If this ratio is exceeded we are not considered to
be in default, but we would be restricted from raising new debt with certain defined exceptions. These exceptions include the refinancing of any of our existing debt, the draw-down
of our existing facilities with CS and ING which will total US$ 86.7 million when the February 19, 2008 draw downs are completed, the raising of a further US$ 91.0 million of additional
new facilities and the raising of $ 30.4 million of capitalized leases and mortgages. The ratio of Indebtedness to Consolidated EBITDA at December 31, 2008 was 3.3 times. Following
the draw-down of the EBRD Loan and credit facilities in the Czech Republic and Slovenia, this ratio will rise to approximately 4.1 times. Although neither the US$ 336.8 million of
impairment charges we recognized in 2008, nor any future similar charges have an impact on EBITDA, we currently anticipate that Consolidated EBITDA may decline during the
course of 2009; therefore we may exceed this ratio.
Availability of additional liquidity is dependent upon the overall status of the debt and equity capital markets as well as on our continued financial performance, operating
performance and credit ratings. In view of the severe tightening of credit in high yield bond, convertible debt and bank markets, which has intensified during 2008 and into 2009, it is
becoming more difficult to raise additional or replacement finance by issuing debt. Banks are presently more inclined to lend at the subsidiary, rather than the corporate level which
potentially restricts the amount of funding available to us from the bank market and there is very limited investor demand in the high yield bond and convertible debt markets. In
fully drawing the EBRD Loan and our credit facilities in the Czech Republic and Slovenia, we have substantially increased the level of cash on hand to approximately US$ 307.1
million at February 25, 2008, but reduced the facilities we have available with our current bank lenders. The likelihood of obtaining additional facilities from our existing lenders is
consequently reduced. Therefore we may need to attempt to obtain future debt funding from banks with little or no financial exposure to us.
As at December 31, 2008 our Senior and Convertible Notes are rated BB by S&P, who have also rated our corporate credit as BB. On November 5, 2008 S&P changed its outlook for
all credits to negative from stable. As at December 31, 2008, Moody’s rated both our Senior Notes and our corporate credit as Ba2. On November 3, 2008 Moody’s changed its
outlook for all credits to negative from stable.
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Credit rating agencies have begun to monitor companies much more closely during recent months and have made liquidity, and the key ratios associated with it, a particular priority.
One of the key indicators used by the ratings agencies in assigning credit ratings to us is our gross leverage ratio, which was 3.7 times at December 31, 2008 and is calculated as our
Gross Debt divided by our trailing twelve-month Segment EBITDA after corporate operating costs as defined by the ratings agencies. As at December 31, 2008, our total gross debt
of US$ 1,109.9 million was the sum of our credit facilities and obligations under capital leases as disclosed in our financial statements and the liability under our swap agreements.
Our trailing twelve-month Segment EBITDA after corporate operating costs was US$ 302.1 million.
S&P and Moody’s require that a gross leverage ratio of between 3.5 and 4.0 times be maintained to be eligible for their BB and Ba2 ratings, respectively, with a preference for the
lower end of this range. As at December 31, 2008, our gross leverage ratio was within this range however we expect that the combination of drawing our EBRD Loan and facilities
with ING and CS and forecasted declines in EBITDA may well cause us to materially exceed this range. It is therefore probable that our credit rating will be downgraded. A
downgrade will not result in us being required to repay any of our outstanding debt earlier than the current maturity, nor will it result in any variation of the current interest terms,
however it would result in our having to pay higher interest rates on any future financing and may make it more difficult for us to raise additional debt. We do not have any credit
facilities or other financial instruments which would require early termination, the posting of collateral, or any other financial penalties, solely in the event of our credit rating being
downgraded.
Credit risk of financial counterparties
We have entered into a number of significant contracts with financial counterparties as follows:
Cross Currency Swap
On April 27, 2006, we entered into cross currency swap agreements with JP Morgan Chase Bank, N.A. and Morgan Stanley Capital Services Inc. (see Item 8, Note 13, “Financial
Instruments and Fair Value Measurements”) under which we periodically exchange Czech koruna for Euro with the intention of reducing our exposure to movements in foreign
exchange rates. We do not consider that there is any risk to our liquidity if either of our counterparties were unable to meet their respective rights under the swap agreements
because we would be able to convert the CZK we receive from our subsidiary into Euros at the prevailing exchange rate rather than the rate included in the swap.
Capped Call Options
On March 4, 2008, we purchased, for aggregate consideration of US$ 63.3 million, capped call options over 4,523,809 shares of our Class A common stock from Lehman Brothers
OTC Derivatives Inc. (“Lehman OTC,” 1,583,333 shares) (the “Lehman Capped Call”) BNP Paribas (“BNP,” 1,583,333 shares) (the “BNP Capped Call”) and Deutsche Bank Securities
Inc. (“DB,” 1,357,144 shares) (the “DB Capped Call”, and, together with the Lehman Capped Call and the BNP Capped Call, “Capped Calls”, (See Item 8, Note 6 “Senior Debt:
Convertible Notes”). Under the terms of the capped call options, the counterparties are obliged to deliver, at our election following a conversion of the Convertible Notes, cash or
shares of Class A common stock with a value equal to the difference between the trading price of our shares at the time the option is exercised and US$ 105.00, up to a maximum
trading price of US$ 151.20.
On September 15, 2008, Lehman Brothers Holdings Inc, (“Lehman Holdings”, and collectively with Lehman OTC, “Lehman Brothers”), the guarantor of the obligations of Lehman
OTC under the Lehman Capped Call, filed for protection under Chapter 11 of the United States Bankruptcy Code. The bankruptcy filing of Lehman Holding, as guarantor, was an
event of default that gave us the right to early termination of the Lehman Capped Call and to claim for losses. We exercised this right on September 16, 2008 and have claimed an
amount of US$ 19.9 million, which bears interest at a rate equal to our estimate of our cost of funding plus 1% per annum.
We consider the likelihood of similar loss on the BNP or DB Capped Calls to be significantly less following the coordinated response of Europe’s central banks to the global
liquidity crisis and the pivotal positions that each of these banks occupies in its respective country. In the event of any similar default, there would be no impact on our current
liquidity since the purchase price of the options has already been paid and we have no further obligation under the terms of the Capped Calls to deliver cash or other assets to the
counterparties. Any default would increase the dilutive effect to our existing shareholders resulting from the issuance of shares of Class A Common Stock upon any conversion of
the Convertible Notes.
Cash Deposits
We deposit cash in the global money markets with a range of bank counterparties and review the counterparties we choose weekly. The maximum period of deposit is three months
but we have more recently held amounts on deposit for shorter periods, from overnight to one month. The credit rating of a bank is a critical factor in determining the size of cash
deposits and we will only deposit cash with banks of an investment grade of A or A2 or higher. 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.
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V (c) Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
Our future contractual obligations as at December 31, 2008 were as follows:
Contractual Obligations
Payments due by period (US$ 000’s)
Long-Term Debt – principal
Long-Term Debt – interest (1)
Capital Lease Obligations
Operating Leases
Unconditional Purchase Obligations
Other Obligations (2)
Deferred consideration
FIN 48 Obligations
Total Contractual Obligations
(1)
(2)
Total
1,095,100
252,417
6,296
18,552
294,582
24,046
6,620
1,799
1,699,412
Less than 1 year
35,587
$
70,211
1,146
6,514
226,449
24,046
5,224
421
369,598
$
$
$
$
$
1-3 years
34,792
117,386
1,315
5,777
58,123
-
1,396
1,378
220,167
$
$
3-5 years
815,966
59,142
1,146
2,294
9,413
-
-
-
887,961
$
$
More than 5
years
208,755
5,678
2,689
3,967
597
-
-
-
221,686
Interest obligations on variable rate debt are calculated using the rate applicable at the balance sheet date.
Includes US$ 10.0 million to acquire the remaining non-controlling interests in our KINO channel and US$ 12.0 million for a 10.0% interest in Glavred-Media LLC.
V (f) Off-Balance Sheet Arrangements
None.
Vl. Critical Accounting Policies and Estimates
Our accounting policies affecting our financial condition and results of operations are more fully described in Note 2 to our consolidated financial statements that are included in
Item 8. 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 are believed to be reasonable under the circumstances,
the results of which form the basis of making judgments about the carrying values of assets and liabilities and the reported amounts of revenues and expenses that are not readily
apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe 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 acquired from third parties and programming produced locally and forms an important component of our station broadcasting
schedules. Program rights and the related liabilities are recorded at their gross value when the license period begins and the programs are available for use. Program rights are
amortized on a systematic basis over their expected useful lives. Both films and series are amortized as shown 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. For program rights acquired under a standard two-run license, we generally
amortize 65% after the first run and 35% after the second run and for those with a three-run license, we amortize 60% on the first run, 30% on the second run and 10% on the third
run. 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 way of recording an
additional amortization 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 Statement of Operations.
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Recognition of goodwill and intangible assets
In accordance with FASB Statement No. 141, “Business Combinations,” we allocate the purchase price of our acquisitions to the tangible assets, liabilities and identifiable intangible
assets acquired based on their estimated fair values, with the excess purchase price over those fair values being recorded as goodwill.
The fair value assigned to identifiable intangible assets acquired is supported by valuations that involve the use of a large number of estimates and assumptions provided by
management. If we had made different estimates and assumptions, the valuations of identifiable intangible assets could have changed, and the amount of purchase price
attributable to these assets could have changed, and led to a corresponding change in the value of goodwill.
The assumptions and estimates that we have applied vary according to the date, location and type of assets acquired for each of our acquisitions. For example, some of the
assumptions and estimates that we have used in determining the value of acquired broadcast licenses are as follows: methodology applied in valuation, discount rate (being the
weighted average cost of capital and applicable risk factor), useful life of license (definite or indefinite) and probability of renewal, audience share growth and advertising market
share, power ratio and growth, revenue growth for the forecast period and then in perpetuity, operating margin growth, future capital expenditure and working capital requirements,
future cost saving as a result of the switch from an analog to a digital environment, inflation and workforce cost, among others.
All assumptions and estimates applied were based on best estimates at the respective acquisition dates.
Impairment of goodwill, indefinite lived- intangible assets and long-lived assets
We assess the carrying value of intangible assets with indefinite lives and goodwill on an annual basis, or more frequently if events or changes in circumstances indicate that such
carrying value may not be recoverable. Other than our annual review, factors we consider important which could trigger an impairment review include: under-performance of
operating segments 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 and negative market
conditions or economic trends. 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 goodwill and indefinite-lived intangible assets are performed at the reporting unit level. If potential impairments of goodwill exist, the fair value of the reporting
unit is subsequently measured against the fair value of its underlying assets and liabilities, excluding goodwill, to estimate an implied fair value of the reporting unit’s goodwill. An
impairment loss is recognized for any excess of the carrying value of the reporting unit’s goodwill over the implied fair value after adjusting for any impairments of indefinite-lived
intangible assets or long-lived assets. Determination of a reporting unit requires judgment, and if we were to change our business structure we could change the number and nature
of the reporting units we use to assess potential impairment.
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The fair value of each reporting unit, and consequently the amount of implied goodwill is determined using an income methodology estimating projected future cash flows related to
each reporting unit, which we determine to be our business segments (Bulgaria, Croatia, Czech Republic, Romania, Slovak Republic, Slovenia, Ukraine (STUDIO 1+1) and Ukraine
(KINO, CITI)). These projected future cash flows are discounted back to the valuation date. Significant assumptions inherent in the methodology employed include estimates of
discount rates, future revenue growth rates 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.
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 by the amount by which the carrying amount exceeds the fair value of the respective asset.
Assessing goodwill, indefinite-lived intangible assets and long-lived assets requires significant judgment. The process involves making a number of estimates in order to evaluate
the fair value of a number of assets, the fair value of the reporting units, and the future cash flows expected in each reporting unit. The table below shows the key measurements
involved and the valuation methods applied:
Measurement
Recoverability of cash flows
Fair value of indefinite-lived broadcast licenses
Fair value of indefinite-lived trademarks
Fair value of reporting units
Valuation Method
Undiscounted future cash flows
Build-out method
Relief from royalty method
Discounted cash flow model
In all cases, each method involves a number of significant assumptions which could materially change the result, and the decision on 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, level of forecast operating costs and capital
expenditure and the rate of growth into perpetuity. The table below shows whether an adverse change of 10.0% in any of these assumptions would result in additional impairments
after reflecting the impairment charge recognized in the year ended December 31, 2008:
10% Adverse Change in
Cost of Capital
Total Advertising Market
Market Share
Forecast operating costs
Forecast capital expenditure
Long-Lived Assets
None
Indefinite-Lived Trademarks
Ukraine (STUDIO 1+1)
Indefinite-Lived Broadcast
Licenses
Romania, Slovenia
Bulgaria
Bulgaria
Bulgaria
None
Ukraine (STUDIO 1+1)
Ukraine (STUDIO 1+1)
Slovenia
Slovenia
Not applicable
Romania, Slovenia
Not applicable
None
None
Perpetuity Growth rate
Not applicable
Ukraine (STUDIO 1+1)
Goodwill
None
Croatia
Croatia
Croatia
None
None
Although we considered all current information in respect of calculating our impairment charge for 2008, our stock price has continued to fall substantially since December 31, 2008.
This constitutes an indication that the value of our goodwill, indefinite-lived intangible assets and long-lived assets may have fallen further since January 1, 2009, and we may be
required to record additional impairment charges in the first quarter of 2009. In addition, if our cash flow forecasts for our operations deteriorate still further, or discount rates
continue to increase, we may be required to recognize additional impairment charges in later periods. The assets most susceptible to changes in such key assumptions are the long-
lived assets in Bulgaria (TV2), indefinite-lived broadcast licenses in Romania and Slovenia, the indefinite-lived trademark in Croatia and the goodwill in Croatia.
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Revenue Recognition
Net revenues primarily comprise revenues from the sale of advertising time less discounts and agency commissions. Net revenues are recognized when the advertisement is aired as
long as there is persuasive evidence that an arrangement with a customer exists, the price of the delivered advertising time is fixed or determinable, and collection of the arrangement
fee is reasonably assured. In the event that a customer falls significantly behind its contractual payment terms, revenue is deferred until the customer has resumed normal payment
terms.
Agency commissions, where applicable, are calculated based on a stated percentage applied to gross billing revenue. Advertisers remit the gross billing amount to the agency and
the agency remits gross billings, less their commission, to us when the advertisement is not placed directly by the advertiser. Payments received in advance of being earned are
recorded as deferred income.
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.
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 deferred tax assets will not be realized.
The realization of our deferred tax assets is primarily dependent on future earnings. 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.
Foreign exchange
Our reporting currency and functional 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 debt. In addition, our Senior Notes are denominated in Euros. Our operations in Ukraine, which account for approximately 10% of our 2008 consolidated
revenues, and our corporate holding companies, have a functional currency of the dollar. All of our other operations have functional currencies other than the dollar.
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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 Statement of Operations. 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,
including our Senior Notes which are denominated in Euros, as well as intercompany loans, which are generally provided in currencies other than the dollar. We recorded
transaction losses of US$ 37.9 million, US$ 34.4 million and US$ 44.9 million in 2008, 2007 and 2006, respectively. See Item 7, IV (f), “Other expense items” for more detailed
information.
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 Shareholders’ Equity.
Determination of the functional currency of an entity requires considerable management judgment, which is essential and paramount in this determination. 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 or all of our operations, potentially changing the amounts we report as transaction gains and losses in the
Consolidated Statement of Operations 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.
On May 2, 2005, we made a loan of US$ 465.5 million to a 100% wholly-owned subsidiary holding our operations in the Czech Republic. This loan was converted to CZK 11,425
million during the second quarter of 2005 and CZK 738 million (US$ 30.5 million at the date of conversion) of this balance was capitalized as equity on August 25, 2005. The loan has
a balance of CZK 10,687 million (US$ 552.4 million) as at December 31, 2008.
During the year ended December 31, 2008, we recorded a foreign exchange loss of US$ 38.7 million on the retranslation of this inter-company loan. As this loan is long-term in nature
as contemplated by FASB Statement No. 52 “Foreign Currency Translation” paragraph 20(b), the foreign exchange adjustment is reported in the same manner as translation
adjustments in “Other Comprehensive Income”, a separate component of equity.
On February 19, 2009, CET 21 drew the full CZK 1.2 billion (approximately US$ 53.1 million at the date of drawing) of its credit facility with CS and used some of the money it received
to repay a portion of this loan. From this date, the loan is no longer long-term in nature and we will be required to record subsequent foreign exchange adjustments as income or
expense in our Consolidated Statement of Operations.
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 litigation exposure.
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Recent Accounting Pronouncements
In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 addresses the need for increased consistency in fair value
measurements, defining fair value, establishing a framework for measuring fair value and expanding disclosure requirements. FAS 157 was to be effective in its entirety for fiscal
years beginning after November 15, 2007, however in February 2008, the FASB issued FASB Staff Position No. FSP FAS 157-2 “Effective Date of FASB Statement No. 157” (“FSP
FAS 157-2”) which allows application of FAS 157 to be deferred until fiscal years beginning after November 15, 2008 for nonfinancial assets and liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring basis. We adopted those parts of FAS 157 not deferred by FSP FAS 157-2 on January 1, 2008 and we
do not expect that the adoption of the remaining requirements will result in a material impact on our financial position or results of operations.
In May 2008, the FASB issued FASB Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“FAS 162”). FAS 162 identifies the sources of accounting
principles and the framework for selecting the principles used in the preparation of financial statements of non-governmental entities that are presented in accordance with GAAP.
With the issuance of this statement, the FASB concluded that the GAAP hierarchy should be directed toward the entity and not its auditor, and reside in the accounting literature
established by the FASB as opposed to the American Institute of Certified Public Accountants (“AICPA”) Statement on Auditing Standards No. 69, “The Meaning of Present Fairly
in Conformity With Generally Accepted Accounting Principles.” FAS 162 is effective from November 15, 2008. The adoption of FAS 162 did not have a material impact on our
financial position or results of operations.
In December 2007, the FASB issued FASB Statement No. 141(R), “Business Combinations” (“FAS 141(R)”), which establishes principles and requirements for how the acquirer:
(a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; (b) recognizes and
measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (c) determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business combination. FAS 141(R) requires contingent consideration to be recognized at its fair value on the
acquisition date and, for certain arrangements, changes in fair value to be recognized in earnings until settled. FAS 141(R) also requires acquisition-related transaction and
restructuring costs to be expensed rather than treated as part of the cost of the acquisition. FAS 141(R) applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Because the requirements of FAS 141(R) are largely prospective, its
adoption did not have a material impact on our financial position or results of operations, however we recognized an expense of approximately US$ 0.9 million in the fourth quarter of
2008 for acquisition costs incurred on potential acquisitions that did not complete prior to December 31, 2008 and for which capitalization would be prohibited under FAS 141(R).
In December 2007, the FASB issued FASB Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements an Amendment of ARB No. 51” (“FAS 160”), which
establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. FAS 160 clarifies that a noncontrolling
interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. FAS 160 also requires
consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face
of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. FAS 160 also provides guidance
when a subsidiary is deconsolidated and requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the
parent’s owners and the interests of the noncontrolling owners of a subsidiary. FAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. The adoption of FAS 160 impacts the presentation of our consolidated balance sheet and consolidated statement of operations; however, it did not have a
material impact on our financial position or results of operations
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In March 2008, the FASB issued FASB Statement No. 161 “Disclosures About Derivative Instruments and Hedging Activities an Amendment of FASB Statement No. 133” (“FAS
161”) which enhances the disclosure requirements about derivatives and hedging activities. FAS 161 requires enhanced narrative disclosure about how and why an entity uses
derivative instruments, how they are accounted for under FASB Statement No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”), and what impact
they have on financial position, results of operations and cash flows. FAS 161 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after
November 15, 2008. The adoption of FAS 161 did not result in a material impact on our financial position or results of operations.
In April 2008, the FASB issued FASB Staff Position No. FAS 142-3 “Determination of the Useful Life of Intangible Assets,” (“FSP FAS 142-3”) which aims to improve consistency
between the useful life of a recognized intangible asset under FASB Statement No. 142 “Goodwill and Other Intangible Assets” and the period of expected cash flows used to
measure the fair value of the asset under FAS 141 (R), especially where the underlying arrangement includes renewal or extension terms. The FSP is effective prospectively for fiscal
years beginning after December 15, 2008 and early adoption is prohibited. The adoption of FSP FAS 142-3 did not have a material impact on our financial position or results of
operations.
In May 2008, the FASB issued Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash
Settlement)” (“FSP APB 14-1”), which clarifies the accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion. FSP
APB 14-1 requires issuers to account separately for the liability and equity components of certain convertible debt instruments in a manner that reflects the issuer's nonconvertible
debt (unsecured debt) borrowing rate when interest cost is recognized. FSP APB 14-1 requires bifurcation of a component of the debt including allocated issuance costs,
classification of that component in equity and the accretion of the resulting discount on the debt and the allocated acquisition costs to be recognized as part of interest expense in
the consolidated statement of operations. FSP APB 14-1 requires retrospective application to the terms of instruments as they existed for all periods presented. FSP APB 14-1 is
effective for us as of January 1, 2009 and early adoption is prohibited. The adoption of FSP APB 14-1 affects the accounting for our Convertible Notes and, we expect, will result in
approximately the following changes to the 2008 comparative balances in our 2009 financial statements to reflect the revised equity and liability balances on issuance (net of
allocated acquisition costs) of US$ 108.1 million and US$ 364.2 million respectively:
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US$ millions
Consolidated Statement of Operations
Interest expense
US$ millions
Consolidated Balance Sheet
Other current assets
Other non-current assets
Senior Debt
Additional paid-in capital
(Accumulated deficit) / Retained Earnings
For the Year Ended December 31, 2008
As reported
Impact of
Adoption
As Adjusted
(68.5)
(14.0)
(82.5)
As at December 31, 2008
As reported
Impact of
Adoption
As Adjusted
98.7
20.7
(1,024.7)
1,018.5
(224.1)
(0.6)
(1.5)
96.2
108.1
(14.0)
98.1
19.2
(928.5)
1,126.6
(238.1)
In addition, at present we expect that the adoption of FSP APB 14-1 will cause our interest expense in the 2009 financial year to increase by approximately US$ 18.9 million to reflect
the amortization of the issuance discount.
In November 2008, the FASB ratified the Emerging Issues Task Force consensus on Issue No. 08-6, “Equity Method Investment Accounting Considerations” (“EITF 08-6”) which
addresses certain effects of FAS 141R and FAS 160 on an entity’s accounting for equity-method investments. The consensus indicates, among other things, that transaction costs
for an investment should be included in the cost of the equity-method investment (and not expensed) and shares subsequently issued by the equity-method investee that reduce
the investor’s ownership percentage should be accounted for as if the investor had sold a proportionate share of its investment, with gains or losses recorded through earnings.
EITF 08-6 is effective for transactions occurring after December 31, 2008. The adoption of this standard did not have a material impact on our financial condition or results of
operations.
In November 2008, the FASB ratified the EITF consensus on Issue No. 08-7, “Accounting for Defensive Intangible Assets” (“EITF 08-7”). The consensus addresses the accounting
for an intangible asset acquired in a business combination or asset acquisition that an entity does not intend to use or intends to hold to prevent others from obtaining access (a
defensive intangible asset). Under EITF 08-7, a defensive intangible asset would need to be accounted as a separate unit of accounting and would be assigned a useful life based on
the period over which the asset diminishes in value. EITF 08-7 is effective for transactions occurring after December 31, 2008. The adoption of this standard did not have a material
impact on our financial condition or results of operations.
Vll. Related party matters
Overview
There is a limited local market for many specialist television services in the countries in which we operate; many of these services are provided to us by parties known to be
connected to our local shareholders. As stated in FASB Statement No. 57 “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 will continue to review all of these arrangements.
Page 102
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We consider our related parties to be those shareholders who have direct control and/or influence and other parties that can significantly influence management; a “connected”
party is one for whom we are aware of the existence of a family or business connection to a shareholder. We have entered into related party transactions in all of our markets. For
detailed discussion of all such transactions, see Item 8, Note 22, “Related Party Transactions”.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We engage in activities that expose us to various market risks, including the effects of changes in foreign currency, exchange rates and interest rates. We do not regularly engage in
speculative transactions, nor do we regularly hold or issue financial instruments for trading purposes.
Foreign Currency Exchange Risk Management
We conduct business in a number of foreign currencies, although our functional currency is the dollar, and our Senior Notes are denominated in Euros. As a result, we are subject
to foreign currency exchange rate risk due to the effects that foreign exchange rate movements of these currencies have on our costs and on the cash flows we receive from certain
subsidiaries. In limited instances, we enter into forward foreign exchange contracts to minimize foreign currency exchange rate risk.
We have not attempted to hedge the Senior Notes and therefore may continue to experience significant gains and losses on the translation of the Senior Notes into dollars due to
movements in exchange rates between the Euro and the dollar.
On April 27, 2006, we entered into cross currency swap agreements with JP Morgan Chase Bank, N.A and Morgan Stanley Capital Services Inc., under which we swapped a fixed
annual coupon interest rate (of 9.0%) on notional principal of CZK 10.7 billion (approximately US$ 620.5 million), payable on July 15, October 15, January 15, and April 15, to the
termination date of April 15, 2012, for a fixed annual coupon interest rate (of 9.0%) on notional principal of EUR 375.9 million (approximately US$ 537.6 million) receivable on July 15,
October 15, January 15, and April 15, to the termination date of April 15, 2012.
The fair value of these instruments as at December 31, 2008, was a liability of US$ 9.9 million.
These currency swap agreements reduce our exposure to movements in foreign exchange rates on a part of the CZK-denominated cash flows generated by our Czech Republic
operations that is approximately equivalent in value to the Euro-denominated interest payments on our Senior Notes (see Item 8, Note 6, “Senior Debt”). They are financial
instruments that are used to minimize currency risk and are considered an economic hedge of foreign exchange rates. These instruments have not been designated as hedging
instruments as defined under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and so changes in their fair value are recorded in the
consolidated statement of operations and in the consolidated balance sheet in other non-current liabilities.
Interest Rate Risk Management
As at December 31, 2008, approximately 25.0% of the carrying value of our debt provides for interest at a spread above a base rate of EURIBOR or PRIBOR, which mitigates the
impact of an increase in interbank rates on our overall debt.
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Interest Rate Table as at December 31, 2008
Total Debt in Euro (000’s)
Fixed Rate
Average Interest Rate
Variable Rate
Average Interest Rate
Total Debt in US$ (000’s)
Fixed Rate
Average Interest Rate
Total Debt in CZK (000’s)
Variable Rate
Average Interest Rate
2009
2010
2011
2012
2013
Thereafter
Expected Maturity Dates
-
-
-
-
-
-
250,000
5,28%
-
-
-
-
-
-
-
-
-
-
25,000
6.56%
245,000
8.25%
-
-
-
-
-
-
-
-
150,000
5.93%
-
-
-
-
-
-
-
-
475,000
3.50%
-
-
-
-
-
-
Variable Interest Rate Sensitivity as at December 31, 2008
Value of Debt as at
December 31, 2008 (US$
000’s)
$ 243,547
(EUR 175.0 million)
$ 12,923
(CZK 250.0 million)
Total
Interest Rate
as at
December 31,
2008
Yearly Interest
Charge
(US$ 000’s)
Yearly interest charge if interest rates increase by
(US$ 000s):
1%
2%
3%
4%
6.02% $
14,671 $
17,106
$
19,542
$
21,977
$
24,412
$
5.28%
682
812
941
1,070
1,199
5%
26,847
1,328
$
15,353 $
17,918
$
20,483
$
23,047
$
25,611
$
28,175
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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 Shareholders of
Central European Media Enterprises Ltd.
We have audited the accompanying consolidated balance sheets of Central European Media Enterprises Ltd. and subsidiaries (the "Company") as of December 31, 2008 and 2007,
and the related consolidated statements of operations and comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 31,
2008. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and the financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on the financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Central European Media Enterprises Ltd. and subsidiaries as of
December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting
principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting
as of December 31, 2008, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 25, 2009 expressed an unqualified opinion on the Company's internal control over financial reporting.
DELOITTE LLP
London, United Kingdom
February 25, 2009
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONSOLIDATED BALANCE SHEETS
(US$ 000’s)
ASSETS
Current assets
Cash and cash equivalents
Accounts receivable (net of allowance) (Note 7)
Program rights, net
Other current assets (Note 8)
Total current assets
Non-current assets
Investments (Note 5)
Property, plant and equipment, net (Note 9)
Program rights, net
Goodwill (Note 4)
Broadcast licenses and other intangible assets, net (Note 4)
Other non-current assets (Note 8)
Total non-current assets
Total assets
December 31,
2008
December 31,
2007
$
$
$
107,433
221,450
67,787
98,725
495,395
16,559
206,667
113,596
1,041,041
514,732
20,743
1,913,338
2,408,733
$
142,812
224,713
77,112
90,455
535,092
16,559
175,308
108,362
1,114,347
373,422
15,345
1,803,343
2,338,435
The accompanying notes are an integral part of these consolidated financial statements
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONSOLIDATED BALANCE SHEETS (continued)
(US$ 000’s)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued liabilities (Note 10)
Credit facilities and obligations under capital leases (Note 11)
Other current liabilities (Note 12)
Total current liabilities
Non-current liabilities
Credit facilities and obligations under capital leases (Note 11)
Senior Debt (Note 6)
Other non-current liabilities (Note 12)
Total non-current liabilities
Commitments and contingencies (Note 21)
Minority interests in consolidated subsidiaries
SHAREHOLDERS' EQUITY:
Nil shares of Preferred Stock of $0.08 each (December 31, 2007 – nil)
36,024,273 shares of Class A Common Stock of $0.08 each (December 31, 2007 – 36,003,198)
6,312,839 shares of Class B Common Stock of $0.08 each (December 31, 2007 – 6,312,839)
Additional paid-in capital
(Accumulated deficit) / Retained earnings
Accumulated other comprehensive income
Total shareholders’ equity
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these consolidated financial statements
Page 107
December 31,
2008
December 31,
2007
$
$
$
174,885
36,502
17,286
228,673
38,758
1,024,721
112,215
1,175,694
3,187
-
2,882
505
1,018,532
(224,086)
203,346
1,001,179
2,408,733
$
203,313
15,090
16,067
234,470
4,162
581,479
95,362
681,003
23,155
-
2,880
505
1,051,336
53,619
291,467
1,399,807
2,338,435
Table of Contents
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(US$ 000’s, except share and per share data)
Net revenues
Operating costs
Cost of programming
Depreciation of station property, plant & equipment
Amortization of broadcast licenses and other intangibles (Note 4)
Cost of revenues
Station selling, general and administrative expenses
Corporate operating costs
Impairment charge (Note 4)
Operating (loss) / income
Interest income
Interest expense (Note 16)
Foreign currency exchange loss, net
Change in fair value of derivatives (Note 13)
Other income
(Loss) / income before provision for income taxes, minority interest, equity in loss of unconsolidated affiliates and
discontinued operations
Provision for income taxes (Note 15)
(Loss) / income before minority interest, equity in loss of unconsolidated affiliates and discontinued operations
Minority interest in income of consolidated subsidiaries
Equity in loss of unconsolidated affiliates (Note 5)
Gain on sale of unconsolidated affiliate (Note 5)
Net (loss) / income from continuing operations
Discontinued operations (Note 20):
Pre-tax loss of discontinued operations - Ukraine (KINO, CITI)
Tax of discontinued operations - Ukraine (KINO, CITI)
Tax on disposal of discontinued operations - Czech Republic
Net loss from discontinued operations
Net (loss) / income
Currency translation adjustment, net
Obligation to repurchase shares
Total comprehensive (loss) / income
$
$
$
$
$
For the Years Ended December 31,
2008
1,019,934
145,210
438,203
51,668
35,381
670,462
90,841
49,676
336,752
(127,797)
10,006
(68,475)
(37,877)
6,360
2,620
2007
838,856
116,859
327,230
32,653
24,970
501,712
71,315
55,373
-
210,456
5,728
(54,936)
(34,409)
(3,703)
7,891
(215,163)
(34,525)
(249,688)
(2,071)
-
-
(251,759)
(3,849)
64
-
(3,785)
(255,544)
(88,609)
488
(343,665)
$
$
131,027
(20,822)
110,205
(17,157)
-
-
93,048
(4,509)
29
-
(4,480)
88,568
158,825
(488)
246,905
$
$
2006
602,646
89,486
226,133
25,430
18,799
359,848
64,975
34,104
748
142,971
6,359
(44,212)
(44,892)
(12,539)
3,059
50,746
(14,952)
35,794
(13,602)
(730)
6,179
27,641
(2,354)
-
(4,863)
(7,217)
20,424
157,524
-
177,948
The accompanying notes are an integral part of these consolidated financial statements
Page 108
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PER SHARE DATA (Note 18):
Net (loss) / income per share:
Continuing operations – Basic
Continuing operations – Diluted
Discontinued operations – Basic
Discontinued operations – Diluted
Net income – Basic
Net income – Diluted
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (continued)
(US$ 000’s, except share and per share data)
For the Years Ended December 31,
2008
2007
2006
$
$
(5.95)
(5.95)
(0.09)
(0.09)
(6.04)
(6.04)
$
$
2.25
2.23
(0.11)
(0.11)
2.14
2.12
$
$
42,328
42,328
41,384
41,833
0.69
0.68
(0.18)
(0.18)
0.51
0.50
40,027
40,600
Weighted average common shares used in computing per share amounts (000’s):
Basic
Diluted
The accompanying notes are an integral part of these consolidated financial statements.
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BALANCE, January 1, 2006
Stock-based Compensation
Shares issued, net of fees
Stock options exercised
Conversion of Class B to Class A
Common Stock
Net income
Currency translation adjustment
BALANCE, December 31, 2006
Impact of adoption of FIN 48
Stock-based compensation
Shares issued, net of fees
Stock options exercised
Net income
Currency translation adjustment
Obligation to repurchase shares
BALANCE, December 31, 2007
Stock-based compensation
Stock options exercised
Purchase of capped call options
(Note 5)
Extinguishment of capped call
options (Note 5)
Net loss
Currency translation adjustment
Obligation to repurchase shares
BALANCE, December 31, 2008
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(US$ 000’s)
Class A Common Stock
Class B Common Stock
Number of
shares
31,032,994
-
2,530,000
95,450
753,694
-
-
34,412,138
-
1,275,227
315,833
-
-
-
36,003,198
-
21,075
$
$
$
-
-
-
Par value
2,482
-
202
8
61
-
-
2,753
-
102
25
-
-
-
2,880
-
2
-
-
-
Number of
shares
6,966,533
-
-
100,000
(753,694)
-
-
6,312,839
-
-
-
-
-
-
6,312,839
-
-
$
$
$
-
-
-
Additional
Paid-In
Capital
Retained
Earnings /
(Accumulated
Deficit)
Par value
$
$
$
$
$
$
558
-
-
8
(61)
-
-
505
-
-
-
-
-
-
505
-
-
-
-
-
754,061
4,898
168,452
3,697
-
-
-
931,108
6,402
109,751
4,075
-
-
-
1,051,336
7,133
1,220
(63,318)
22,161
-
(52,154)
-
-
-
-
20,424
-
(31,730)
(3,219)
-
-
-
88,568
-
-
53,619
-
-
-
(22,161)
(255,544)
-
36,024,273
$
-
2,882
-
6,312,839
$
-
505
$
-
1,018,532
$
-
(224,086)
$
The accompanying notes are an integral part of these consolidated financial statements
Page 110
Accumulated
Other
Comprehensive
Income/(Loss)
(24,394)
-
-
-
$
-
-
157,524
133,130
-
-
-
-
158,825
(488)
291,467
-
-
$
$
Total
Shareholders'
Equity
$
$
$
680,553
4,898
168,654
3,713
-
20,424
157,524
1,035,766
(3,219)
6,402
109,853
4,100
88,568
158,825
(488)
1,399,807
7,133
1,222
-
(63,318)
-
-
(88,609)
488
203,346
$
-
(255,544)
(88,609)
488
1,001,179
Table of Contents
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US$ 000’s)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) / income
Adjustments to reconcile net (loss) / income to net cash generated from operating activities:
Loss from discontinued operations (Note 20)
Equity in loss of unconsolidated affiliates, net of dividends received
Gain on sale of unconsolidated affiliate (Note 5)
Depreciation and amortization
Impairment charge (Note 4)
Loss on disposal of fixed assets
Stock-based compensation (Note 17)
Minority interest in income of consolidated subsidiaries
Change in fair value of derivative instruments (Note 13)
Foreign currency exchange loss, net
Net change in (net of effects of acquisitions and disposals of businesses):
Accounts receivable
Program rights
Other assets
Other accounts payable and accrued liabilities
Income taxes payable
Deferred taxes
VAT and other taxes payable
For the Years Ended December 31,
2008
2007
2006
$
(255,544)
$
88,568
$
20,424
3,785
-
-
336,358
336,752
51
6,107
2,072
(6,360)
37,877
(13,654)
(251,462)
(3,638)
(15,066)
(18,308)
(19,550)
(3,865)
4,480
-
-
254,463
-
-
5,734
17,157
3,703
34,441
(57,449)
(255,147)
(4,192)
7,882
15,423
(2,202)
(6,166)
Net cash generated from continuing operating activities
135,555
106,695
CASH FLOWS USED IN INVESTING ACTIVITIES:
Net change in restricted cash
Purchase of property, plant and equipment
Proceeds from disposal of property, plant and equipment
Investments in subsidiaries and unconsolidated affiliates
Repayment of loans and advances to related parties
Net cash used in continuing investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Senior Notes
Proceeds from credit facilities
Payment of credit facilities and capital leases
Redemption of Senior Notes
Net proceeds from issuance of Convertible Notes
Purchase of capped call option
Excess tax benefits from share-based payment arrangements
Proceeds from exercise of stock options
Issuance of Class A Common Stock
Dividends paid to minority shareholders
Net cash received from continuing financing activities
-
(78,665)
408
(512,531)
1,990
(588,798)
-
223,091
(176,615)
-
463,560
(63,318)
1,026
1,222
-
(4,408)
444,558
(440)
(79,943)
570
(156,535)
450
(235,898)
199,400
177,515
(182,391)
(169,010)
-
668
4,100
109,853
(4,605)
135,530
The accompanying notes are an integral part of these consolidated financial statements.
Page 111
7,217
730
(6,179)
164,100
748
1,292
3,575
13,602
12,539
44,908
(42,125)
(173,345)
(6,033)
16,908
(1,697)
9,580
9,126
75,370
5,516
(60,387)
19
(72,603)
500
(126,955)
-
34,981
(75,263)
-
-
-
3,713
168,654
(1,385)
130,700
Table of Contents
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(US$ 000’s)
NET CASH USED IN DISCONTINUED OPERATIONS-OPERATING
NET CASH USED IN DISCONTINUED OPERATIONS-INVESTING
NET CASH USED IN DISCONTINUED OPERATIONS-FINANCING
Impact of exchange rate fluctuations on cash
Net (decrease) / increase in cash and cash equivalents
CASH AND CASH EQUIVALENTS, beginning of year
CASH AND CASH EQUIVALENTS, end of year
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest
Cash paid for income taxes (net of refunds)
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES:
Purchase of Krsak interest in the TV Nova (Czech Republic) group financed with payable
Acquisition of property, plant and equipment under capital lease
For the Years Ended December 31,
2008
2007
(4,920)
(495)
-
(21,279)
(35,379)
142,812
107,433
55,331
72,974
-
554
$
$
$
$
$
(6,001)
(1,520)
-
(1,896)
(3,090)
145,902
142,812
46,313
40,903
-
136
$
$
$
$
$
2006
(3,667)
-
1,700
(2,904)
74,244
71,658
145,902
41,038
35,831
27,591
702
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements
Page 112
Table of Contents
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
1. ORGANIZATION AND BUSINESS
Central European Media Enterprises Ltd., a Bermuda corporation, was formed in June 1994. Our assets are held through a series of Dutch and Netherlands Antilles holding
companies. We invest in, develop and operate national and regional commercial television stations and channels in Central and Eastern Europe. At December 31, 2008, we have
operations in Bulgaria, Croatia, the Czech Republic, Romania, the Slovak Republic, Slovenia and Ukraine.
Our principal subsidiaries, equity-accounted affiliates and cost investments as at December 31, 2008 were:
Company Name
Top Tone Media S.A.
TV2 EOOD (“TV2”)
Top Tone Media Bulgaria EOOD
Asteos EOOD
Zopal S.A.
LG Consult EOOD
Ring TV EAD (“Ring TV”)
Nova TV d.d. (“Nova TV (Croatia)”)
Operativna Kompanija d.o.o.
Media House d.o.o.
Internet Dnevnik d.o.o.
CET 21 spol. s.r.o. (“CET 21”)
MEDIA CAPITOL, a.s.
Jyxo, s.r.o. (“Jyxo”)
BLOG Internet, s.r.o. (“Blog“)
CME Romania B.V.
Media Pro International S.A. (“MPI”)
Media Vision S.R.L (“Media Vision”)
Music Television System S.R.L. (“MTS”)
Pro TV S.A. (“Pro TV”)
Sport Radio TV Media S.R.L (“Sport.ro”)
Media Pro Management S.A. (“Media Pro”)
Media Pro B.V.
CME Slovak Holdings B.V.
A.R.J., a.s.
MARKIZA-SLOVAKIA spol. s r.o. (“Markiza”)
GAMATEX spol. s r.o.
Effective Voting Interest
Jurisdiction of
Organization
Type of Affiliate
80.0%
80.0%
80.0%
80.0%
80.0%
80.0%
80.0%
100.0%
100.0%
100.0%
76.0%
100.0%
100.0%
100.0%
100.0%
100.0%
95.0%
95.0%
95.0%
95.0%
95.0%
8.7%
10.0%
100.0%
100.0%
100.0%
100.0%
Luxembourg
Bulgaria
Bulgaria
Bulgaria
Luxembourg
Bulgaria
Bulgaria
Croatia
Croatia
Croatia
Croatia
Czech Republic
Czech Republic
Czech Republic
Czech Republic
Netherlands
Romania
Romania
Romania
Romania
Romania
Romania
Netherlands
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Cost investment
Cost investment
Netherlands
Slovak Republic
Slovak Republic
Slovak Republic
Subsidiary
Subsidiary
Subsidiary
Subsidiary (in liquidation)
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Company Name
Effective Voting Interest
A.D.A.M. a.s.
MEDIA INVEST, spol. s.r.o. (“Media Invest”)
EMAIL.SK s.r.o.
PMT, s.r.o.
MMTV 1 d.o.o.
Produkcija Plus d.o.o. (“Pro Plus”)
POP TV d.o.o. (“Pop TV”)
Kanal A d.o.o. (“Kanal A”)
Euro 3 TV d.o.o.
TELEVIDEO d.o.o. (trading as TV Pika)
International Media Services Ltd.
CME Ukraine Holding GmbH
Innova Film GmbH
CME Cyprus Holding Ltd.
TV Media Planet Ltd.
1+1 Production
Studio 1+1 LLC (“Studio 1+1”)
Ukrainian Media Services LLC
Grizard Investments Limited.
Grintwood Investments Limited
CME Ukraine Holding B.V.
Ukrpromtorg-2003 LLC (“Ukrpromtorg”)
Gravis LLC (“Gravis”)
Gravis-Kino LLC (“Gravis-Kino”)
Delta JSC
Nart LLC
TV Stimul LLC (“TV Stimul”)
TOR LLC (“Tor”)
ZHYSA LLC (“Zhysa”)
Central European Media Enterprises N.V.
Central European Media Enterprises II B.V.
CME Media Enterprises B.V.
CME Programming B.V.
CME Development Corporation
CME SR d.o.o.
100.0%
100.0%
80.0%
31.5%
100.0%
100.0%
100.0%
100.0%
42.0%
20.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
99.9%
100.0%
100.0%
100.0%
65.5%
60.4%
60.4%
60.4%
65.5%
64.2%
60.4%
60.4%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
Page 114
Jurisdiction of
Organization
Slovak Republic
Slovak Republic
Slovak Republic
Slovak Republic
Type of Affiliate
Subsidiary (in liquidation)
Subsidiary
Subsidiary
Cost investment
Slovenia
Slovenia
Slovenia
Slovenia
Slovenia
Slovenia
Bermuda
Austria
Germany
Cyprus
Cyprus
Ukraine
Ukraine
Ukraine
Cyprus
Cyprus
Netherlands
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Netherlands Antilles
Netherlands Antilles
Netherlands
Netherlands
Delaware (USA)
Serbia
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Equity-Accounted
Affiliate
Equity-Accounted
Affiliate
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Table of Contents
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
The significant accounting policies are summarized as follows:
Basis of Presentation
The consolidated financial statements include the accounts of Central European Media Enterprises Ltd. and our subsidiaries, after the elimination of intercompany accounts and
transactions. We consolidate the financial statements of entities in which we hold at least a majority voting interest and entities in which we hold less than a majority voting interest
but over which we have the ability to exercise control. Entities in which we hold less than a majority voting interest but over which we exercise significant influence are accounted
for using the equity method. Other investments are accounted for using the cost method.
Revenue Recognition
Revenue is recognized when there is persuasive evidence of an arrangement, delivery of products has occurred or services have been rendered, the price is fixed or determinable and
collectability is reasonably assured.
Revenues are recognized net of discounts and customer sales incentives. Our principal revenue streams and their respective accounting treatments are discussed below:
Advertising revenue
Revenues primarily result from the sale of advertising time. Television advertising revenue is recognized as the commercials are aired. In certain countries, we commit to provide
advertisers with certain rating levels in connection with their advertising. Revenue is recorded net of estimated shortfalls, which are usually settled by providing the advertiser
additional advertising time. Discounts and agency commissions are recognized at the point when the advertising is broadcast and are reflected as a reduction to gross revenue.
Subscription revenues
Subscriber fees receivable 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. Subscriber revenue is recognized as contracted, based upon the level of subscribers.
Program distribution revenue
Program distribution revenue is recognized when the relevant agreement has been entered into, the product is available for delivery, collectability of the cash is reasonably assured
and all of our contractual obligations have been satisfied.
Barter transactions
Barter transactions represent advertising time exchanged for non-cash goods and/or services, such as promotional items, advertising, supplies, equipment and services. Revenue
from barter transactions is recognized as income when advertisements are broadcast. Expenses are recognized when goods or services are received or used. We record barter
transactions at the fair value of goods or services received or advertising surrendered, whichever is more readily determinable. Barter revenue amounted to US$ 5.6 million, US$ 5.0
million and US$ 8.2 million for the years ending December 31, 2008, 2007 and 2006, respectively.
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and marketable securities with original maturities of three months or less. Cash that is subject to restrictions is classified as
restricted cash.
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
Land
Buildings
Station machinery, fixtures and equipment
Other equipment
Software licenses
Estimated useful life
Indefinite
25 years
4 - 8 years
3 – 8 years
3 – 5 years
Construction-in-progress is not depreciated until put into use. Capital 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
value or fair value, less 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.
In accordance with FASB Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“FAS 144”), we review long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The carrying values of long-lived assets are considered impaired when the
anticipated undiscounted cash flows from such assets are less than their carrying values. In that event, a loss is recognized based on the amount by which the carrying value
exceeds the fair value.
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 net realizable value.
Program rights are amortized on a systematic basis over their expected useful lives, depending on their categorization. The appropriateness of the amortization profiles are
reviewed regularly and are as follows:
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Type of programming
Special blockbuster
Films and series, 2 runs
Films and series, 3 runs
Long-run series, Ukraine
Concerts, documentaries, sports events, etc.
Amortization %
Run 1
Run 2
Run 3
Run 4
Run 5
30%
65%
60%
85%
100%
25%
35%
30%
15%
-
20%
-
10%
-
-
15%
-
-
-
-
10%
-
-
-
-
A “special blockbuster” must meet specific requirements to be classified as such, while the number of runs in other films and series is generally described in the license
agreement.
Produced program rights
Program rights that are produced by us are stated at the lower of cost less accumulated amortization or net realizable value. The amortization charge is based on the ratio of the
current period’s gross revenues to estimated remaining total gross revenues from such programs. 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 net realizable value.
Produced program rights are classified as current or non-current assets based on anticipated usage.
Goodwill and Indefinite-Lived Intangible Assets
Goodwill represents the excess of the fair value of consideration paid over the fair value of net tangible and other identifiable intangible assets acquired in a business
combination. In accordance with FASB Statement No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”), the carrying value of goodwill is evaluated for impairment on an
annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. We evaluate goodwill for impairment in the fourth quarter of each
year, or more frequently if events or changes in circumstances indicate that the asset might be impaired. An impairment exists when the carrying value of a reporting unit (including
its goodwill), exceeds its fair value after adjusting for any impairments of long-lived assets or indefinite life intangible assets. Goodwill impairment is measured as the excess of the
carrying value of goodwill over its implied fair value which is calculated by deducting the fair value of all assets, including recognized and unrecognized intangible assets from the
fair value of the reporting unit. We have determined that our reporting units are the same as our operating segments.
Indefinite-lived intangible assets consist of certain acquired broadcast licenses and trademarks. Broadcast licenses are assigned indefinite lives after consideration of the following
conditions:
· we intend to renew the licenses into the foreseeable future;
· we have precedents of renewals or reasonable expectation of renewals;
· we do not expect any substantial cost to be incurred as part of a future license renewal and no costs have been incurred in the renewals to date; and
· we have not experienced any historical evidence of a compelling challenge to our holding these licenses.
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Indefinite-lived intangible assets are not amortized. We evaluate indefinite-lived intangible assets for impairment in the fourth quarter of each year, or more frequently if events or
changes in circumstances indicate that the asset might be impaired. Under FAS 142, an impairment loss is recognized if the carrying value of an indefinite-lived intangible asset
exceeds its fair value.
Fair value is determined based on estimates of future cash flows discounted at appropriate rates and on publicly available information, where appropriate. In the assessment of
discounted future cash flows the following data is used: management plans for a period of at least five years, a terminal value at the end of this period assuming an inflationary
perpetual growth rate, and a discount rate selected with reference to the relevant cost of capital.
Income Taxes
We account for income taxes under the asset and liability method as set out in FASB Statement No. 109, “Accounting for Income Taxes.” 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. Valuation allowances are
established when necessary to reduce deferred tax assets to amounts which are more likely than not to be realized.
On January 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”).
Foreign Currency
Translation of financial statements
Our reporting currency and functional 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 Shareholders’
Equity. Translation adjustments arising from intercompany financing that is in the nature of a long-term investment are accounted for in a similar manner. At December 31, 2008, a
translation loss of US$ 38.7 million (December 31, 2007: a gain of US$ 79.2 million, December 31, 2006: a gain of US$ 77.3 million) related to such intercompany financing is included in
Accumulated Other Comprehensive Income.
Transactions in foreign currencies
Gains and losses from foreign currency transactions are included in Foreign currency exchange (loss)/gain, net in the Consolidated Statement of Operations in the period during
which they arise.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
year. Actual results could differ from those estimates.
Leases
Leases are classified as either capital or operating. Those leases that transfer substantially all benefits and risks of ownership of the property to us are accounted for as capital
leases. All other leases are accounted for as operating leases.
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Capital leases are accounted for as assets and are depreciated on a straight-line basis over the shorter of the estimated useful life of the asset or the lease term. Commitments to
repay the principal amounts arising under capital lease obligations are included in current liabilities to the extent that the amount is repayable within one year; otherwise the principal
is included in non-current liabilities. The capitalized lease obligation reflects the present value of future lease payments. The financing element of the lease payments is charged to
interest expense over the term of the lease.
Operating lease costs are expensed on a straight-line basis.
Financial Instruments
Fair value of financial instruments
The carrying value 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 Senior Debt is included in Note 6 “Senior Debt”.
Derivative financial instruments
We use derivative financial instruments for the purpose of mitigating currency risks, which exist as part of ongoing business operations. As a policy, we do not engage in
speculative or leveraged transactions, nor do we hold or issue derivative financial instruments for trading purposes.
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
Statement of Operations, together with realized gains and losses arising on settlement of these contracts.
Put options
Put options written on the stock of a consolidated subsidiary which do not provide net settlement are accounted for in accordance with FASB Statement No. 150 “Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“FAS 150”) and EITF No. 00-6 “Accounting for Freestanding Derivative Financial Instruments
Indexed to, and Potentially Settled in the Stock of a Consolidated Subsidiary” where applicable. These instruments are recorded in the Consolidated Balance Sheet at fair value. At
December 31, 2008 the fair value of put options are considered to be US$ nil (2007: US$ nil).
Stock-Based Compensation
Stock based compensation is accounted for under FASB Statement No. 123(R), “Share-Based Payment” (“FAS 123(R)”), which requires the recognition of stock-based
compensation at fair value. We calculate the fair value of stock option awards using the Black-Scholes option pricing model and recognize the compensation cost over the vesting
period of the award.
Contingencies
Contingencies are recorded in accordance with FASB Statement No. 5, “Accounting for Contingencies.” The estimated loss from a loss contingency such as a legal proceeding or
claim is recorded in the Consolidated Statement of Operations 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.
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Discontinued Operations
We present our results of operations, financial position and cash flows of operations that have either been sold or that meet the criteria for “held-for-sale accounting” as
discontinued operations. At the time an operation qualifies for held-for-sale accounting, the operation is evaluated to determine whether or not the carrying value exceeds its fair
value less cost to sell. Any loss as a result of carrying value in excess of fair value less cost to sell is recorded in the period the operation meets held-for-sale
accounting. Management judgment is required to (1) assess the criteria required to meet held-for-sale accounting, and (2) estimate fair value. Changes to the operation could cause
it to no longer qualify for held-for-sale accounting and changes to fair value could result in an increase or decrease to previously recognized losses.
In the fourth quarter of 2008, we agreed to acquire 100% of the KINO channel from our minority partners and to sell them our interest in the CITI channel. The results of the CITI
channel have therefore been treated as discontinued operations. See Note 20, “Discontinued Operations”.
During 2003, we disposed of our former operations in the Czech Republic; all results of this disposal have been treated as discontinued operations.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense incurred for the years ending December 31, 2008, 2007 and 2006 totaled US$ 15.9 million, US$ 11.7 million and US$
10.1 million, respectively.
Earnings Per Share
Basic net income per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the
weighted-average number of common and dilutive potential common shares outstanding during the period.
Comparative Amounts
Balances in respect of 2007 and 2006 have been changed to reflect the classification of our CITI channel as a discontinued operation.
Recent Accounting Pronouncements
In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 addresses the need for increased consistency in fair value
measurements, defining fair value, establishing a framework for measuring fair value and expanding disclosure requirements. FAS 157 was to be effective in its entirety for fiscal
years beginning after November 15, 2007; however, in February 2008, the FASB issued FASB Staff Position No. FSP FAS 157-2 “Effective Date of FASB Statement No. 157” (“FSP
FAS 157-2”) which allows application of FAS 157 to be deferred until fiscal years beginning after November 15, 2008 for nonfinancial assets and liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring basis. We adopted those parts of FAS 157 not deferred by FSP FAS 157-2 on January 1, 2008 and we
do not expect that the adoption of the remaining requirements will result in a material impact on our financial position or results of operations.
In May 2008, the FASB issued FASB Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“FAS 162”). FAS 162 identifies the sources of accounting
principles and the framework for selecting the principles used in the preparation of financial statements of non-governmental entities that are presented in accordance with GAAP.
With the issuance of this statement, the FASB concluded that the GAAP hierarchy should be directed toward the entity and not its auditor, and reside in the accounting literature
established by the FASB as opposed to the American Institute of Certified Public Accountants (“AICPA”) Statement on Auditing Standards No. 69, “The Meaning of Present Fairly
in Conformity With Generally Accepted Accounting Principles.” FAS 162 is effective from November 15, 2008. The adoption of FAS 162 did not have a material impact on our
financial position or results of operations.
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
In December 2007, the FASB issued FASB Statement No. 141(R), “Business Combinations” (“FAS 141(R)”), which establishes principles and requirements for how the acquirer:
(a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; (b) recognizes and
measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (c) determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business combination. FAS 141(R) requires contingent consideration to be recognized at its fair value on the
acquisition date and, for certain arrangements, changes in fair value to be recognized in earnings until settled. FAS 141(R) also requires acquisition-related transaction and
restructuring costs to be expensed rather than treated as part of the cost of the acquisition. FAS 141(R) applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Because the requirements of FAS 141(R) are largely prospective, we do
not expect its adoption to have a material impact on our financial position or results of operations, however we recognized an expense of approximately US$ 0.9 million in the fourth
quarter of 2008 for acquisition costs incurred on potential acquisitions that did not complete prior to December 31, 2008 and for which capitalization would be prohibited under FAS
141(R).
In December 2007, the FASB issued FASB Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements an Amendment of ARB No. 51” (“FAS 160”), which
establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. FAS 160 clarifies that a noncontrolling
interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. FAS 160 also requires
consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face
of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. FAS 160 also provides guidance
when a subsidiary is deconsolidated and requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the
parent’s owners and the interests of the noncontrolling owners of a subsidiary. FAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. The adoption of FAS 160 impacts the presentation of our consolidated balance sheet and consolidated statement of operations; however, it did not have a
material impact on our financial position or results of operations
In March 2008, the FASB issued FASB Statement No. 161 “Disclosures About Derivative Instruments and Hedging Activities an Amendment of FASB Statement No. 133” (“FAS
161”) which enhances the disclosure requirements about derivatives and hedging activities. FAS 161 requires enhanced narrative disclosure about how and why an entity uses
derivative instruments, how they are accounted for under FASB Statement No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”), and what impact
they have on financial position, results of operations and cash flows. FAS 161 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after
November 15, 2008. The adoption of FAS 161 did not result in a material impact on our financial position or results of operations.
In April 2008, the FASB issued FASB Staff Position No. FAS 142-3 “Determination of the Useful Life of Intangible Assets,” (“FSP FAS 142-3”) which aims to improve consistency
between the useful life of a recognized intangible asset under FASB Statement No. 142 “Goodwill and Other Intangible Assets” and the period of expected cash flows used to
measure the fair value of the asset under FAS 141 (R), especially where the underlying arrangement includes renewal or extension terms. The FSP is effective prospectively for fiscal
years beginning after December 15, 2008 and early adoption is prohibited. The adoption of FSP FAS 142-3 did not have a material impact on our financial position or results of
operations.
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
In May 2008, the FASB issued Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash
Settlement)” (“FSP APB 14-1”), which clarifies the accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion. FSP
APB 14-1 requires issuers to account separately for the liability and equity components of certain convertible debt instruments in a manner that reflects the issuer's nonconvertible
debt (unsecured debt) borrowing rate when interest cost is recognized. FSP APB 14-1 requires bifurcation of a component of the debt including allocated issuance costs,
classification of that component in equity and the accretion of the resulting discount on the debt and the allocated acquisition costs to be recognized as part of interest expense in
the consolidated statement of operations. FSP APB 14-1 requires retrospective application to the terms of instruments as they existed for all periods presented. FSP APB 14-1 is
effective for us as of January 1, 2009 and early adoption is prohibited. The adoption of FSP APB 14-1 will affect the accounting for our Convertible Notes and, we expect, will result
in approximately the following changes to the 2008 comparative balances in our 2009 financial statements to reflect the revised equity and liability balances on issuance (net of
allocated acquisition costs) of US$ 108.1 million and US$ 364.2 million respectively:
US$ millions
Consolidated Statement of Operations
Interest expense
US$ millions
Consolidated Balance Sheet
Other current assets
Other non-current assets
Senior Debt
Additional paid-in capital
(Accumulated deficit) / Retained Earnings
For the Year Ended December 31, 2008
As reported
Impact of
Adoption
As Adjusted
(68.5)
(14.0)
(82.5)
As at December 31, 2008
As reported
Impact of
Adoption
As Adjusted
98.7
20.7
(1,024.7)
1,018.5
(224.1)
(0.6)
(1.5)
96.2
108.1
(14.0)
98.1
19.2
(928.5)
1,126.6
(238.1)
In addition, at present we expect that the adoption of FSP APB 14-1 will cause our interest expense in the 2009 financial year to increase by approximately US$ 18.9 million to reflect
the amortization of the issuance discount.
In November 2008, the FASB ratified the Emerging Issues Task Force (EITF) consensus on Issue No. 08-6, “Equity Method Investment Accounting Considerations” (EITF 08-6)
which addresses certain effects of SFAS Nos. 141R and 160 on an entity’s accounting for equity-method investments. The consensus indicates, among other things, that
transaction costs for an investment should be included in the cost of the equity-method investment (and not expensed) and shares subsequently issued by the equity-method
investee that reduce the investor’s ownership percentage should be accounted for as if the investor had sold a proportionate share of its investment, with gains or losses recorded
through earnings. EITF 08-6 is effective for transactions occurring after December 31, 2008. The adoption of this standard did not have a material impact on our financial condition or
results of operations. In November 2008, the FASB ratified the EITF consensus on Issue No. 08-7, “Accounting for Defensive Intangible Assets” (EITF 08-7). The consensus
addresses the accounting for an intangible asset acquired in a business combination or asset acquisition that an entity does not intend to use or intends to hold to prevent others
from obtaining access (a defensive intangible asset). Under EITF 08-7, a defensive intangible asset would need to be accounted as a separate unit of accounting and would be
assigned a useful life based on the period over which the asset diminishes in value. EITF 08-7 is effective for transactions occurring after December 31, 2008. The adoption of this
standard did not have a material impact on our financial condition or results of operations.
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
3. ACQUISITIONS AND DISPOSALS
Bulgaria
Acquisition of TV2 and Ring TV
In order to continue the expansion of our free-to-air broadcasting operations into new markets in Central and Eastern Europe, on August 1, 2008 we purchased an 80.0% indirect
interest in each of TV2 EOOD, which operates a national terrestrial channel, and Ring TV, which operates a cable sports channel.
Initial cash consideration was approximately US$ 172.0 million, which was reduced to US$ 147.1 million after final adjustments for indebtedness and a net working capital deficit. An
additional retention amount of US$ 4.5 million less any subsequently identified liabilities will also be payable within 12 months of the acquisition date.
We performed a fair value exercise to allocate the purchase price to the acquired assets and liabilities and separately identifiable intangible assets as at August 1, 2008. The
following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition:
Cash and cash equivalents
Other net assets
Broadcasting licenses subject to amortization (1)
Other intangible assets subject to amortization (2)
Goodwill (3)
Deferred tax liability
Total purchase price (4)
Fair Value on
Acquisition
353
(15,311)
95,114
8,161
74,137
(10,114)
152,340
(1) The broadcasting licenses subject to amortization comprise television broadcasting licenses of US$ 94.4 million, which are being amortized on a straight-line
basis over 16.5 years, and radio broadcasting licenses of US$ 0.7 million, which are being amortized on a straight-line basis over 17.4 years.
(2) The other intangible assets subject to amortization comprise a favorable advertising sales contract with a leading Bulgarian advertising agency of US$ 7.5
million, which is being amortized on a straight-line basis over 5.3 years and trademarks of US$ 0.7 million, which are being amortized over two years using the
declining balance method.
(3) No goodwill is expected to be deductible for tax purposes.
(4) The total purchase price includes US$ 4.5 million of additional retention amount and US$ 0.8 million of capitalized acquisition costs.
We tested the goodwill and long lived assets acquired for impairment in accordance with FAS 142 and FAS 144 as part of the preparation of our financial statements for the year
ended December 31, 2008. As a result of this review, we recorded an impairment charge of US$ 64.9 million against goodwill and certain intangible assets (see Note 4, “Goodwill and
Intangible Assets”).
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(Tabular amounts in US$ 000’s, except share data)
Croatia
2007 Acquisition - Internet Dnevnik
On June 6, 2007, we purchased 76.0% of Internet Dnevnik d.o.o for cash consideration of EUR 0.5 million (approximately US$ 0.7 million). Internet Dnevnik d.o.o operates the largest
blogging website in Croatia, Blog.hr.
Czech Republic
Acquisition of Jyxo and Blog
In order to enhance both our internet offering and our software delivery capabilities in the Czech Republic, we purchased 100.0% of both Jyxo, an information technology provider,
and Blog, the operator of the leading blog site in the Czech Republic, blog.cz, on May 27, 2008.
Initial cash consideration was approximately US$ 9.4 million. In addition, we are obligated to pay a further CZK 27.0 million (approximately US$ 1.4 million) within one month of the
second anniversary of completion, which has been recorded as consideration payable. An additional amount of up to CZK 37.0 million (approximately US$ 1.9 million) may also be
payable if certain operational targets are met on the second anniversary of the transaction closing. We concluded that if the additional consideration becomes payable, we will
record the fair value of the consideration issuable as an additional cost of acquiring Jyxo.
We performed a fair value exercise to allocate the purchase price to the acquired assets and liabilities and separately identifiable intangible assets as at May 27, 2008. The following
table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition:
Cash and cash equivalents
Other net assets
Property, plant and equipment
Intangible assets not subject to amortization (1)
Contingent consideration liability (2)
Deferred tax liability
Total purchase price (3)
Fair Value on
Acquisition
$
$
727
618
3,744
9,124
(160)
(2,462)
11,591
(1) Intangible assets not subject to amortization comprise trademarks.
(2) Since the aggregate value of the assets and liabilities acquired exceeds the purchase price without considering any additional amounts we may have to pay that are contingent
upon meeting operational targets, we have recognized this excess, which is lower than the maximum amount of contingent consideration that may become payable, as if it were a
liability.
(3) The total purchase price includes US$ 0.5 million of capitalized acquisition costs, initial cash payments of approximately US$ 9.4 million and consideration payable of CZK 27.0
million (approximately US$ 1.7 million at the date of acquisition).
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(Tabular amounts in US$ 000’s, except share data)
Romania
Acquisition of Radio Pro
In order to further strengthen our position in the youth market in Romania and complement our acquisition of the license for MTV Romania, we purchased certain assets of Radio
Pro from the Media Pro group, which is controlled by Adrian Sarbu, our President and Chief Operating Officer, and in which we hold an 8.7% interest, for total consideration of RON
47.2 million (approximately US$ 20.6 million at the date of acquisition) on April 17, 2008.
We determined that the assets we acquired met the definition of a business and therefore performed a fair value exercise to allocate the purchase price to the acquired assets and
liabilities and separately identifiable intangible assets. The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition:
Property, plant and equipment
Intangible assets not subject to amortization (1)
Goodwill (2)
Total purchase price (3)
Fair Value on
Acquisition
$
$
2,561
15,892
2,394
20,847
(1) Intangible assets not subject to amortization comprise trademarks of US$ 1.7 million and broadcasting licenses of US$ 14.2 million.
(2) No goodwill is expected to be deductible for tax purposes.
(3) The total purchase price includes US$ 0.2 million of capitalized acquisition costs.
2007 Acquisition – MTS
In order to further our multi-channel strategy and strengthen our position in a fragmenting market, we acquired 100% of MTS on December 12, 2007 from, an unrelated third party. In
connection with this acquisition, we entered into an agreement with MTV Networks Europe (“MTV NE”) to license the trademark of MTV in Romania, an internationally recognized
music television brand, as well as programming and other content. Total consideration for this acquisition was EUR 10.9 million (approximately US$ 16.1 million at the date of
acquisition), of which EUR 9.4 million (approximately US$ 13.9 million at the date of acquisition) was paid in December 2007. Further payments were made during 2008 and the
remaining EUR 0.5 million (approximately US$ 0.7 million) was paid in January 2009.
We performed a fair value exercise to allocate the purchase price to the acquired assets and liabilities, and identified separately identifiable assets as at December 12, 2007. The
following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition:
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(Tabular amounts in US$ 000’s, except share data)
Fair Value on
Acquisition
Property, plant and equipment
410
Intangible assets subject to amortization (1)
1,709
Other assets
827
Goodwill
17,253
Deferred tax liability
(273)
Other liabilities
(3,417)
Total purchase price (2)
16,509
(1) The intangible assets subject to amortization is a Trademark and Programming Agreement with MTV NE which allows MTS access to MTV programming and to broadcast
using the MTV name. This agreement is being amortized over 4.3 years.
(2) Includes acquisition costs of approximately US$ 0.4 million.
$
$
2007 Acquisition of additional interest – Sport.ro
On December 14, 2006, we acquired 20.0% of Sport.ro from an unrelated third party for cash consideration of EUR 2.0 million (approximately US$ 2.6 million at the date of
acquisition). Sport.ro operates a sports channel focusing on local and international football, international boxing and a number of local Romanian sports.
On February 20, 2007, we acquired control of Sport.ro by acquiring an additional 50.0% interest from an unrelated party for cash consideration of EUR 4.2 million (approximately US$
5.3 million at the date of acquisition). We acquired the remaining 30.0% of Sport.ro from that third party on March 15, 2007 for cash consideration of EUR 2.5 million (approximately
US$ 3.1 million at the date of acquisition).
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(Tabular amounts in US$ 000’s, except share data)
We performed a fair value exercise to allocate the purchase price to the acquired assets and liabilities and identified separately identifiable assets. The following table summarizes
the fair values of the assets acquired and liabilities assumed at the date of acquisition:
Fair Value on
Acquisition
Property, plant and equipment
35
Intangible assets subject to amortization (1)
4,784
Intangible assets not subject to amortization (2)
8,974
Other assets
2,904
Goodwill
2,311
Deferred tax liability
(1,575)
Other liabilities
(6,398)
Total purchase price
11,035
(1) The intangible assets subject to amortization comprise customer relationships, which are being amortized over one to twenty years (weighted average: 15.5 years) and
trademarks, which are being amortized over two years.
(2) Intangible assets not subject to amortization represent television broadcast licenses.
$
$
2007 Acquisition of additional interest - Media Vision, MPI and Pro TV
On May 16, 2007, we acquired an additional 20.0% of Media Vision and on June 1, 2007 we acquired an additional 5.0% of Pro TV and MPI from companies owned by, or individuals
associated with, Mr. Sarbu for aggregate consideration of US$ 51.6 million, including acquisition costs. We now own 95.0% voting and economic interests in Pro TV, MPI and
Media Vision. We performed a fair value exercise to allocate the purchase price to the acquired assets and liabilities, and identified separately identifiable assets. The following
table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition:
Intangible assets subject to amortization (1)
Intangible assets not subject to amortization (2)
Goodwill
Deferred tax liability
Minority interests
Total purchase price
$
(1) The intangible assets subject to amortization comprise customer relationships, which are being amortized over one to ten years (weighted average: 8.3 years).
(2) Intangible assets not subject to amortization comprise approximately US$ 9.2 million in trademarks and US$ 14.4 million relating to television broadcast licenses.
$
4,517
23,597
23,974
(4,498)
4,029
51,619
Fair Value on
Acquisition
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(Tabular amounts in US$ 000’s, except share data)
Mr. Sarbu has the right to sell the remaining shareholding in Pro TV and MPI that he holds personally to us under a put option agreement entered into in July 2004 at a price to be
determined by an independent valuation, subject to a floor price of US$ 1.45 million for each 1.0% interest sold. Mr. Sarbu’s right to put his remaining shareholding to us is
exercisable from November 12, 2009, provided that we have not enforced a pledge over this shareholding which Mr. Sarbu granted as security for our right to put to him our
shareholding in Media Pro. As at December 31, 2008, we consider the fair value of Mr. Sarbu’s put option to be approximately US$ nil.
Slovak Republic
2007 Acquisition – Media Invest
On July 13, 2007, we purchased 100% of Media Invest from Jan Kovacik, our former partner in our Slovak Republic operations, for cash consideration of SKK 1.9 billion
(approximately US$ 78.5 million at the date of acquisition). Media Invest owns a 20.0% voting and economic interest in Markiza. Following this acquisition, our voting and economic
interest in Markiza increased to 100.0%.
We performed a fair value exercise to allocate the purchase price to the acquired assets and liabilities, and identified separately identifiable assets as at July 13, 2007. The following
table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition:
Fair Value on
Acquisition
Property Plant and Equipment
2,425
Intangible assets subject to amortization (1)
46,906
Intangible assets not subject to amortization (2)
2,405
Goodwill
26,757
Deferred tax liability
(9,761)
Minority interest
10,268
Other liabilities
(357)
Total purchase price (3)
78,643
(1) The intangible assets subject to amortization includes US$ 8.7 million relating to television broadcasting licenses, which are being amortized over 13 years and US$ 37.9 million
in customer relationships, which are being amortized over one to fourteen years (weighted average: 13.8 years).
(2) Intangible assets not subject to amortization comprise trademarks.
(3) Total purchase price includes US$ 0.1 million of capitalized acquisition costs.
$
$
Ukraine
Acquisition of additional 30% and 10% interests – Studio 1+1
In conjunction with our stated strategic objectives of establishing multi-channel broadcasting platforms and acquiring the remaining non-controlling interests in our channels, in late
2007 we began negotiations with our minority partners in the Studio 1+1 group, Alexander Rodnyansky and Boris Fuchsmann, with the objective of agreeing on a price for us to
obtain their 40.0% interest in the Studio 1+1 group. On January 31, 2008 we entered into a framework agreement which established a mechanism for us to acquire a 30.0% interest and
an option to acquire an additional 10.0% interest at agreed prices.
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(Tabular amounts in US$ 000’s, except share data)
On June 30, 2008, we acquired the first 30.0% interest, which consisted of (i) an 8.335% direct and indirect ownership interest in the Studio 1+1 group held by Messrs. Rodnyansky
and Fuchsmann and (ii) a 21.665% direct and indirect interest in Studio 1+1, Innova and IMS over which Igor Kolomoisky, one of our shareholders and a member of our board of
directors, held options (the “Optioned Interests”). Following the completion of these transactions, we held a 90.0% interest in the Studio 1+1 group and Messrs. Rodnyansky and
Fuchsmann each held a 5.0% interest.
Messrs. Rodnyansky and Fuchsmann received a combined total cash consideration of US$ 79.6 million, including a de minimis amount upon exercise of the Optioned Interests, in
exchange for the 30.0% beneficial ownership interest in the Studio 1+1 group. Mr. Kolomoisky received total cash consideration of US$ 140.0 million upon our completion of the
purchase of the Optioned Interests.
In addition, we granted Messrs. Rodnyansky and Fuchsmann the right to jointly put both of their remaining 5.0% interests in the Studio 1+1 group to us, which became effective
upon completion of our purchase of the 30.0% interest in the Studio 1+1 group. We calculated that the fair value of these options was US$ 58.0 million at the purchase date using a
binomial option pricing model and included it in the purchase price in accordance with EITF Topic D-87 “Determination of the Measurement Date for Consideration Given by the
Acquirer in a Business Combination When That Consideration is Securities Other Than Those Issued by the Acquirer.” (“EITF D-87”).
We concluded that upon the issuance of these put options, the remaining minority interests in the Studio 1+1 group met the definition of a Redeemable Security as it is used in EITF
Topic No. D-98 “Classification and Measurement of Redeemable Securities” because Messrs. Rodnyansky and Fuchsmann could cause us to repurchase their minority
shareholdings at their option. Consequently, we adjusted the minority interest in the Studio 1+1 group at June 30, 2008 to reflect the US$ 95.4 million that would have been paid had
Messrs. Rodnyansky and Fuchsmann chosen to exercise their options at that date. The excess of this amount over the minority interest that would have been recognized under
Accounting Research Bulletin No. 51 “Consolidated Financial Statements” (“ARB 51”) at that date was allocated between goodwill (US$ 58.0 million) and retained earnings (initially
US$ 32.6 million). The amount recognized within goodwill represented the fair value of the put options on acquisition.
In addition, under the January 31, 2008 framework agreement, Messrs. Rodnyansky and Fuchsmann granted us the right to call their combined 10.0% interest in the Studio 1+1 group
for a consideration of US$ 109.1 million, which we exercised on September 10, 2008. As at June 30, 2008 we used a binomial pricing model to conclude that the fair value of our call
option was approximately US$ nil because the exercise price was substantially higher than the fair value of the underlying equity interests. In the period between the acquisition of
the 30.0% interest and the 10.0% interest, we recorded minority interest income of US$ 0.3 million that would have been recognized under ARB 51 through a reallocation between
retained earnings and minority interest income or expense.
On October 17, 2008, we completed the acquisition of the combined 10.0% interests held by Messrs. Rodnyansky and Fuchsmann for cash consideration of US$ 109.1 million
pursuant to our exercise of the call option. We reflected the acquisition of these additional interests in our financial statements by completing a second purchase price allocation
under FAS 141. Before doing this allocation, we reversed the amounts then recognized in retained earnings and minority interest in respect of this redeemable minority interest.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
The following table summarizes the fair values of the assets acquired and liabilities assumed at the dates of acquisition:
June 30, 2008
Fair value on acquisition
October 17, 2008
Total
$
Intangible assets subject to amortization (1)
44,746
Intangible assets not subject to amortization (2)
38,671
Goodwill
251,209
Deferred tax liability
(20,855)
Minority interests (3)
76,781
Total purchase price (4)
390,552
(1) The intangible assets subject to amortization acquired on June 30, 2008 comprise broadcasting licenses of US$ 40.9 million, which are being amortized on a straight-line basis
over 18 years, and customer relationships of US$ 0.6 million, which are being amortized on a straight-line basis over nine years. The intangible assets subject to amortization on
October 17, 2008 comprise broadcasting licenses of US$ 3.2 million, which are being amortized on a straight-line basis over 17.8 years.
(2) Intangible assets not subject to amortization comprise trademarks.
(3) As a result of granting Messrs. Rodnyansky and Fuchsmann options to put their remaining 10.0% interests to us we accounted for the remaining 10.0% interest as a
redeemable minority interest. Before performing the purchase price allocation in respect of the October 17, 2008 acquisition, we reversed the outstanding redeemable minority
interest up to the amount then recognized in retained earnings.
(4) The total purchase price on June 30, 2008 included US$ 3.6 million of capitalized acquisition costs, cash payments to Messrs. Rodnyansky and Fuchsmann of US$ 79.6 million,
cash payments of US$ 140.0 million to Mr. Kolomoisky and the fair value of options granted to Messrs. Rodnyansky and Fuchsmann of US$ 58.0 million. The total purchase price
on October 17, 2008 included US$ 0.2 million of capitalized acquisition costs.
41,480
35,652
208,964
(19,284)
14,398
281,210
3,266
3,019
42,245
(1,571)
62,383
109,342
$
$
$
$
$
We tested the goodwill, indefinite-lived intangible and long lived assets acquired for impairment in accordance with FAS 142 and FAS 144 as part of the preparation of our financial
statements for the year ended December 31, 2008. As a result of this review, we recorded an impairment charge of US$ 263.8 million against goodwill and certain intangible assets
(see Note 4, “Goodwill and Intangible Assets”).
2007 Acquisition - Tor and Zhysa
On June 21, 2007, we completed the acquisition of a 60.4% interest in each of Tor and Zhysa for total consideration of US$ 3.1 million, including acquisition costs. Zhysa and Tor
are regional broadcasters in Ukraine.
We performed a fair value exercise to allocate the purchase price to the acquired assets and liabilities and have allocated US$ 0.3 million to broadcast licenses and US$ 2.9 million to
goodwill. In January and February 2009, we acquired the remaining 39.6% of Tor and Zhysa for consideration of US$ 2.5 million as part of the acquisition of the remaining non-
controlling interests in the KINO Channel (see Note 23, “Subsequent Events”).
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
4. GOODWILL AND INTANGIBLE ASSETS
Our goodwill and intangible asset additions are the result of acquisitions in each of our markets (see Note 3, “Acquisitions and Disposals”). No goodwill is expected to be
deductible for tax purposes.
Goodwill:
Goodwill by operating segment as at December 31, 2008, 2007, and 2006 is summarized as follows:
Bulgaria
Croatia
Czech Republic
Romania
Slovak Republic
Slovenia
Ukraine (STUDIO 1+1)
Ukraine (KINO, CITI)
Total
Bulgaria
Croatia
Czech Republic
Romania
Slovak Republic
Slovenia
Ukraine (STUDIO 1+1)
Ukraine (KINO, CITI)
Total
Balance Dec
31, 2006
-
-
823,786
31,130
25,483
16,458
4,096
4,627
905,580
$
$
Balance Dec
31, 2007
-
773
951,286
74,667
57,635
18,393
4,096
7,497
1,114,347
$
$
$
$
$
Additions
Allocation / Adjustment
Impairment charge
-
712
-
43,537
26,757
-
-
2,870
73,876
$
$
-
-
-
-
-
-
-
-
-
$
$
-
-
-
-
-
-
-
-
-
$
$
Additions
Allocation / Adjustment
Impairment charge
74,137
-
-
2,394
-
-
251,209
-
327,740
$
Page 131
-
-
-
(525)
-
-
-
(59)
(584)
$
(64,044)
-
-
-
-
-
(255,305)
(7,438)
(326,787)
$
Foreign
currency
movement
Balance Dec 31,
2007
-
61
127,500
-
5,395
1,935
-
-
134,891
$
$
-
773
951,286
74,667
57,635
18,393
4,096
7,497
1,114,347
Foreign
currency
movement
Balance Dec 31,
2008
(10,093)
(34)
(62,350)
(4,200)
4,007
(1,005)
-
-
(73,675)
$
-
739
888,936
72,336
61,642
17,388
-
-
1,041,041
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Broadcast licenses and other intangible assets:
The net book value of our broadcast licenses and other intangible assets as at December 31, 2008, 2007 and 2006 is summarized as follows:
Balance, December 31, 2006
Additions
Amortization
Foreign currency movements
Balance, December 31, 2007
Reallocation (1)
Additions
Impairment
Amortization
Foreign currency movements
Balance, December 31, 2008
Indefinite-Lived
Broadcast
Licenses
26,344
23,321
-
1,083
50,748
-
14,177
-
-
(5,069)
59,856
$
$
$
$
$
$
Amortized
Broadcast
Licenses
172,386
8,974
(18,960)
24,778
187,178
-
139,235
(637)
(25,088)
(18,630)
282,058
$
$
$
Trademarks
44,026
12,192
(265)
4,131
60,084
-
50,198
(8,703)
(1,054)
(3,478)
97,047
$
$
$
Customer
Relationships
27,213
46,554
(5,244)
4,744
73,267
-
598
-
(8,155)
2,570
68,280
$
$
$
Other
453
2,126
(501)
67
2,145
624
7,473
(625)
(1,084)
(1,042)
7,491
$
$
$
Total
270,422
93,167
(24,970)
34,803
373,422
624
211,681
(9,965)
(35,381)
(25,649)
514,732
(1) At December 31, 2007 we had not completed our purchase price allocation of MTS in Romania. The carrying value of other intangible assets was adjusted during the first quarter
of 2008 to reflect the final value of our Trademark and Programming Agreement with MTV NE which allows MTS access to MTV programming and to use the MTV name.
Our broadcast licenses in Croatia, Romania and Slovenia have indefinite lives because we expect the cash flows generated by those assets to continue indefinitely. These licenses
are subject to annual impairment reviews. The licenses in Ukraine have economic useful lives between, and are amortized on a straight-line basis over, two and eighteen years. The
license in the Czech Republic has an economic useful life of, and is amortized on a straight-line basis over, twelve years. The license in the Slovak Republic has an economic useful
life of, and is amortized on a straight-line basis over, thirteen years. The licenses in Bulgaria have an economic useful life between, and are amortized on a straight-line basis over,
sixteen and eighteen years.
Customer relationships are deemed to have an economic useful life of, and are amortized on a straight-line basis over, five to fourteen years. Trademarks have an indefinite life, with
the exception of those acquired trademarks which we do not intend to use, which have an economic life of, and are being amortized over, two years.
The gross value and accumulated amortization of broadcast licenses and other intangible assets was as follows at December 31, 2008 and December 31, 2007:
Gross value
Accumulated amortization
Net book value of amortized intangible assets
Indefinite-lived broadcast licenses
Total broadcast licenses and other intangible assets, net
Page 132
December 31,
2008
December 31,
2007
$
$
$
549,140
(94,264)
454,876
59,856
514,732
$
$
$
388,350
(65,676)
322,674
50,748
373,422
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
The estimated total amortization expense for our existing amortized broadcasting licenses and other intangible assets will be approximately US$ 22.0 million for 2009 and for each of
the years 2010-2013.
Impairment of Goodwill, Indefinite-Lived Intangible and Long-Lived Assets
We recognized the following impairment charges in respect of goodwill, indefinite-lived intangible and long-lived assets in the year ended December 31, 2008:
Bulgaria
Ukraine (STUDIO 1+1)
Ukraine (KINO, CITI)
Total
Amortized
Trademarks
222
-
-
222
$
$
Long-Lived Assets
Amortized
Broadcast
Licenses
-
-
637
637
$
$
Other Intangible
Assets
625
-
-
625
$
$
Goodwill and Indefinite-Lived
Intangible Assets
Indefinite-Lived
Trademarks
-
8,481
-
8,481
$
$
$
$
Goodwill
64,044
255,305
7,438
326,787
$
$
Total
64,891
263,786
8,075
336,752
We recorded no impairment charges in 2007 and US$ 0.7 million in 2006, all of which was to write off goodwill in our Croatia operations.
We evaluate goodwill and indefinite-lived intangible assets for impairment by reporting unit in the fourth quarter of each year. However, whenever events occur which suggest
assets may be impaired in a reporting unit, an additional evaluation of the goodwill and indefinite-lived intangible assets, together with the associated long-lived assets of each
asset group, is performed. We have determined that with the exception of Bulgaria and Ukraine (KINO, CITI) each reporting unit is also an asset group because they are the lowest
level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. In Bulgaria, there are two asset groups, namely RING TV and TV2, and
two in Ukraine (KINO, CITI), namely KINO and CITI.
In conjunction with our annual assessment, we noted that a number of events had occurred during the fourth quarter of 2008 which suggested that impairment may exist:
· Growing uncertainty in all of our markets over future growth or contraction in the advertising markets;
· A rapid deepening of the global economic crisis, including a widespread withdrawal of investment funding from the Central and Eastern European markets and companies
with investments in them, particularly Ukraine, Bulgaria and Romania;
· Significant and rapid falls in the price of our shares of Class A common stock, beyond the point at which the carrying value of our net assets exceeded the market value
of our shares, which were sustained throughout the period;
· An unprecedented spike in sovereign debt yields in our markets, suggesting a fundamental re-pricing of risk by investors; and
· An escalation of the economic and political crisis in Ukraine following its receipt of a US$ 16.5 billion emergency loan from the IMF, including a dispute with Russia over
natural gas supplies.
Bulgaria
We revised our estimates of future cash flows in our Bulgaria operations to reflect revised expectations of contraction in the advertising market in 2009 and lower growth in future
years. In addition, Bulgaria has been heavily impacted by the global economic crisis which has been reflected in increases in the returns expected by investors to reflect the
increased actual and perceived risk of investing in Bulgaria. We concluded that Long-Lived Assets in the Ring TV asset group were not recoverable and recorded a charge to write
them down to their fair value of US$ nil. Assets in the TV2 asset group were recoverable so no impairment charge was recorded. In addition, we recorded a charge of US$ 64.9 million
to write off goodwill because the fair value of the business did not exceed the combined fair value of the assets.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Ukraine (STUDIO 1+1)
In the fourth quarter of 2008, the outlook for the Ukraine economy in general, and the advertising market in particular, worsened significantly. This was both as a result of the global
economic crisis and factors unique to Ukraine, such as the need for assistance from the IMF, increasing political instability caused by disputes between the President and Prime
Minister and a dispute with Russia over supplies of natural gas. These developments were reflected in our evaluation of the fair values of the assets of the reporting unit and of the
reporting unit itself through, (a) a decline in expected revenues resulting from an expectation of lower growth in the advertising market in future years and (b) an increase in the
returns expected by investors to reflect the increased actual and perceived risk of investing in Ukraine.
Ukraine (KINO, CITI)
As in Ukraine (STUDIO 1+1), the rapid decline in the Ukraine economy caused us to conclude that the future cash flows to be generated by the business had decreased and the risk
associated had increased substantially. As a result we recorded a charge of US$ 8.1 million to write the carrying value of goodwill and the KINO broadcasting license down to US$
nil.
Critical Estimates and Assumptions
Assessing goodwill, indefinite-lived intangible assets and long-lived assets requires significant judgment. The process involves making a number of estimates in order to evaluate
the fair value of a number of assets, the fair value of the reporting units, and the future cash flows expected in each reporting unit. The table below shows the key measurements
involved and the valuation methods applied:
Measurement
Recoverability of cash flows
Fair value of broadcast licenses
Fair value of trademarks
Fair value of reporting units
Valuation Method
Undiscounted future cash flows
Build-out method
Relief from royalty method
Discounted cash flow model
In all cases, each method involves a number of significant assumptions which could materially change the result, and the decision on 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, level of forecast operating costs and capital
expenditure and the rate of growth into perpetuity. The table below shows whether an adverse change of 10.0% in any of these assumptions would result in additional impairments
after reflecting the impairment charge recognized in the year ended December 31, 2008:
10% Adverse Change in
Cost of Capital
Total Advertising Market
Market Share
Forecast operating costs
Forecast capital expenditure
Long-Lived Assets
None
Indefinite-Lived Trademarks
Ukraine (STUDIO 1+1)
Indefinite-Lived Broadcast
Licenses
Romania, Slovenia
Bulgaria
Bulgaria
Bulgaria
None
Ukraine (STUDIO 1+1)
Ukraine (STUDIO 1+1)
Slovenia
Slovenia
Not applicable
Romania, Slovenia
Not applicable
None
None
Perpetuity Growth rate
Not applicable
Ukraine (STUDIO 1+1)
Goodwill
None
Croatia
Croatia
Croatia
None
None
Although we considered all current information in respect of calculating our impairment charge for 2008, our stock price has continued to fall substantially since December 31, 2008.
This constitutes an indication that the value of our goodwill, indefinite-lived intangible assets and long-lived assets may have fallen further since January 1, 2009, and we may be
required to record additional impairment charges in the first quarter of 2009. In addition, if our cash flow forecasts for our operations deteriorate still further, or discount rates
continue to increase, we may be required to recognize additional impairment charges in later periods. The assets most susceptible to changes in such key assumptions are the long-
lived assets in Bulgaria (TV2), indefinite-lived broadcast licenses in Romania and Slovenia, the indefinite-lived trademark in Croatia and the goodwill in Croatia.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
5. INVESTMENTS
We hold the following investments in unconsolidated affiliates:
Media Pro
Media Pro
Type of Affiliate
Cost Method Investment
Effective Voting
interest
December 31,
2008
December 31,
2007
Carrying value
8.7% $
$
16,559
16,559
$
$
16,559
16,559
Until March 29, 2004, we held a 44.0% interest in Radio Pro, a radio broadcaster in Romania. In order to comply with Romanian Media Council regulations following our acquisition
of an additional 14.0% interest in MPI and Pro TV, it was necessary to reduce our holding in Radio Pro to 20.0%, which we achieved by selling 24.0% of our stake to Mr. Sarbu for
consideration of US$ 0.04 million with a resulting loss on disposal of US$ 0.02 million.
On August 11, 2006, we acquired a 10.0% interest in Media Pro and following capital calls in which we did not participate, at December 31, 2008 we own 8.7%, which is accounted for
using the cost method. The remaining interests in Media Pro are held by Mr. Sarbu.
In consideration for the purchase of this interest, we paid EUR 8.0 million (approximately US$ 10.1 million at the date of acquisition) in cash and transferred our remaining 20.0%
investment in Radio Pro. As a result of this transaction, we recorded a gain of US$ 6.2 million on disposal. Our share of the profits of Radio Pro for the period from January 1, 2006
to August 11, 2006 was US$ 7 thousand.
We have the right to put our investment in Media Pro to Mr. Sarbu for a three-month period from August 12, 2009 at a price equal to the greater of EUR 13.0 million (approximately
US$ 18.1 million) and the value of our investment, as determined by an independent valuation at exercise. This put option is secured by a pledge of a 4.79% shareholding in Pro TV
held by Mr. Sarbu (see Note 3, “Acquisitions and Disposals: Romania”). On acquisition, we determined the fair value of this put option to be US$ nil.
Sport.ro
On December 14, 2006, our Romania operations acquired 20.0% of Sport.ro from an unaffiliated third party for cash consideration of Euro 2.0 million (approximately US$ 2.6 million at
the date of acquisition). Subsequently, on February 20, 2007, we acquired control of the company and from then began to consolidate Sport.ro (see Note 3, “Acquisitions and
Disposals: Romania”).
STS
On January 23, 2006, we acquired control of STS, the predecessor of Markiza, and consequently STS has been accounted for as a consolidated subsidiary from that date. STS was
merged into Markiza on January 1, 2007. Our share of the loss of STS from January 1, 2006 to January 23, 2006 was US$ 0.7 million.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
6. SENIOR DEBT
Our senior debt comprised the following as at December 31, 2008 and December 31, 2007:
EUR 245.0 million 8.25% Senior Notes
EUR 150.0 million Floating Rate Senior Notes
USD 475.0 million 3.50% Senior Convertible Notes
Carrying Value
Fair Value
December 31,
2008
December 31,
2007
December 31,
2008
December 31,
2007
$
$
340,966
208,755
475,000
1,024,721
$
$
360,664
220,815
-
581,479
$
$
233,562
125,253
230,375
589,190
$
$
366,976
204,806
-
571,782
On May 5, 2005, we issued EUR 245.0 million of 8.25% senior notes (the “Fixed Rate Notes”). The Fixed Rate Notes mature on May 15, 2012.
On May 16, 2007, we issued EUR 150.0 million of floating rate senior notes (the “Floating Rate Notes”, and collectively with the Fixed Rate Notes, the “Senior Notes”) which bear
interest at six-month Euro Inter Bank Offered Rate (“EURIBOR”) plus 1.625% (The applicable rate at December 31, 2008 was 5.934%). The Floating Rate Notes mature on May 15,
2014.
On March 10, 2008, we issued US$ 475.0 million of 3.50% Senior Convertible Notes (the “Convertible Notes”). The Convertible Notes mature on March 15, 2013.
Fixed Rate Notes
Interest is payable semi-annually in arrears on each May 15 and November 15. The fair value of the Fixed Rate Notes as at December 31, 2008 and December 31, 2007 was calculated
by multiplying the outstanding debt by the traded market price.
The Fixed Rate Notes are secured senior obligations and rank pari passu with all existing and future senior indebtedness and are effectively subordinated to all existing and future
indebtedness of our subsidiaries. The amounts outstanding are guaranteed by two subsidiary holding companies and are secured by a pledge of shares of those subsidiaries as
well as an assignment of certain contractual rights. The terms of our Fixed Rate Notes restrict the manner in which our business is conducted, including the incurrence of additional
indebtedness, the making of investments, the payment of dividends or the making of other distributions, entering into certain affiliate transactions and the sale of assets.
In the event that (A) there is a change in control by which (i) any party other than our present shareholders becomes the beneficial owner of more than 35.0% of our total voting
power; (ii) we agree to sell substantially all of our operating assets; or (iii) there is a change in the composition of a majority of our Board of Directors; and (B) on the 60th day
following any such change of control the rating of the Fixed Rate Notes is either withdrawn or downgraded from the rating in effect prior to the announcement of such change of
control, we can be required to repurchase the Fixed Rate Notes at a purchase price in cash equal to 101.0% of the principal amount of the Fixed Rate Notes plus accrued and unpaid
interest to the date of purchase.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
The Fixed Rate Notes are redeemable at our option, in whole or in part, at the redemption prices set forth below:
From:
May 15, 2009 to May 14, 2010
May 15, 2010 to May 14, 2011
May 15, 2011 and thereafter
Fixed Rate Notes
Redemption Price
104.125%
102.063%
100.000%
Prior to May 15, 2009, we may redeem all or a part of the Fixed Rate Notes at a redemption price equal to 100.0% of the principal amount of such notes, plus a “make-whole” premium
and accrued and unpaid interest to the redemption date.
Certain derivative instruments, including redemption call options and change of control and asset disposition put options, have been identified as being embedded in the Fixed Rate
Notes but as they are considered clearly and closely related to those Notes, they are not accounted for separately.
Floating Rate Notes
Interest is payable semi-annually in arrears on each May 15 and November 15. The fair value of the Floating Rate Notes as at December 31, 2008 and December 31, 2007 was
calculated by multiplying the outstanding debt by the traded market price.
The Floating Rate Notes are secured senior obligations and rank pari passu with all existing and future senior indebtedness and are effectively subordinated to all existing and future
indebtedness of our subsidiaries. The amounts outstanding are guaranteed by two subsidiary holding companies and are secured by a pledge of shares of those subsidiaries as
well as an assignment of certain contractual rights. The terms of our Floating Rate Notes restrict the manner in which our business is conducted, including the incurrence of
additional indebtedness, the making of investments, the payment of dividends or the making of other distributions, entering into certain affiliate transactions and the sale of assets.
In the event that (A) there is a change in control by which (i) any party other than our present shareholders becomes the beneficial owner of more than 35.0% of our total voting
power; (ii) we agree to sell substantially all of our operating assets; or (iii) there is a change in the composition of a majority of our Board of Directors; and (B) on the 60th day
following any such change of control the rating of the Floating Rate Notes is either withdrawn or downgraded from the rating in effect prior to the announcement of such change of
control, we can be required to repurchase the Floating Rate Notes at a purchase price in cash equal to 101.0% of the principal amount of the Floating Rate Notes plus accrued and
unpaid interest to the date of purchase.
The Floating Rate Notes are redeemable at our option, in whole or in part, at the redemption prices set forth below:
From:
May 15, 2008 to May 14, 2009
May 15, 2009 and thereafter
Floating Rate Notes
Redemption Price
101.000%
100.000%
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Certain derivative instruments, including redemption call options and change of control and asset disposition put options, have been identified as being embedded in the Floating
Rate Notes but as they are considered clearly and closely related to those Notes, they are not accounted for separately.
Convertible Notes
Interest is payable semi-annually in arrears on each March 15 and September 15. The fair value of the Convertible Notes as at December 31, 2008 was calculated by multiplying the
outstanding debt by the traded market price.
The Convertible Notes are secured senior obligations and rank pari passu with all existing and future senior indebtedness and are effectively subordinated to all existing and future
indebtedness of our subsidiaries. The amounts outstanding are guaranteed by two subsidiary holding companies and are secured by a pledge of shares of those subsidiaries as
well as an assignment of certain contractual rights.
Prior to December 15, 2012, the Convertible Notes are convertible following certain events and from that date, at any time, based on an initial conversion rate of 9.5238 shares of our
Class A common stock per US$ 1,000 principal amount of Convertible Notes (which is equivalent to an initial conversion price of approximately US$ 105.00, or a 25% conversion
premium based on the closing sale price of US$ 84.00 per share of our Class A common stock on March 4, 2008). The conversion rate is subject to adjustment if we make certain
distributions to the holders of our Class A common stock, undergo certain corporate transactions or a fundamental change, and in other circumstances specified in the Convertible
Notes. From time to time up to and including December 15, 2012, we will have the right to elect to deliver (i) shares of our Class A common stock or (ii) cash and, if applicable,
shares of our Class A common stock upon conversion of the Convertible Notes. At present, we have elected to deliver cash and, if applicable, shares of our Class A common stock.
As at December 31, 2008, the Convertible Notes may not be converted. In addition, the holders of the Convertible Notes have the right to put the Convertible Notes to us for cash
equal to the aggregate principal amount of the Convertible Notes plus accrued but unpaid interest thereon following the occurrence of certain specified fundamental changes
(including a change of control, certain mergers, insolvency and a delisting).
In order to increase the effective conversion price of our Convertible Notes, on March 4, 2008 we purchased, for aggregate consideration of US$ 63.3 million, capped call options
over 4,523,809 shares of our Class A common stock from Lehman Brothers OTC Derivatives Inc. (“Lehman OTC,” 1,583,333 shares), BNP Paribas (“BNP,” 1,583,333 shares) and
Deutsche Bank Securities Inc. (“DB,” 1,357,144 shares). The amount of shares corresponds to the number of shares of our Class A common stock that would be issuable on a
conversion of the Convertible Notes at the initial conversion price if we elected to settle the Convertible Notes solely in shares of Class A common stock. The options entitle us to
receive, at our election, cash or shares of Class A common stock with a value equal approximately to the difference between the trading price of our shares at the time the option is
exercised and US$ 105.00, up to a maximum trading price of US$ 151.20. At present, we have elected to receive shares of our Class A common stock on exercise of the capped call
options.
On September 15, 2008, Lehman Brothers Holdings Inc, (“Lehman Holdings”, and collectively with Lehman OTC, “Lehman Brothers”), the guarantor of the obligations of Lehman
OTC under the capped call agreement, filed for protection under Chapter 11 of the United States Bankruptcy Code. The bankruptcy filing of Lehman Holding, as guarantor, was an
event of default that gave us the right to terminate early the capped call option agreement with Lehman OTC and to claim for losses. We exercised this right on September 16, 2008
and have claimed an amount of US$ 19.9 million, which bears interest at a rate equal to our estimate of our cost of funding plus 1% per annum.
At the date of purchase, we determined that all of these capped call options met the definition of an equity instrument within the scope of EITF Issue No. 00-19 “Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”) and consequently recognized them on issuance at fair value within
Additional Paid-In Capital. We believe that this classification is still correct with respect to the BNP and DB capped call options and have continued to recognize them within
Shareholders’ Equity. Subsequent changes in fair value have not been, and will not be, recognized as long as the instruments continue to be classified in Shareholders’ Equity.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
We concluded that from September 16, 2008, upon delivery of the termination notice, the capped call options with Lehman OTC were effectively extinguished. The nullification of the
non-bankruptcy provisions of the original contract meant that the fair value of the instrument no longer varies with movements in the value of an underlying (previously, shares of
our Class A common stock) and consequently the contract ceased to be a derivative instrument and ceased to fall within the scope of EITF 00-19. Effective September 16, 2008, we
reclassified the US$ 22.2 million cost of the Lehman OTC capped call options from Additional Paid-In Capital to Retained Earnings to reflect this extinguishment. We further
concluded that our claim did not meet the definition of an asset under FASB Statement of Financial Accounting Concepts No. 6 “Elements of Financial Statements” because the
future benefit it embodies is not sufficiently probable. We have therefore treated our bankruptcy claim in accordance with FASB Statement No. 5 “Accounting for Contingencies”
and will only recognize a gain upon realization of our claim (see Note 21, “Commitments and Contingencies: Lehman Brothers bankruptcy claim”).
Prior to the termination of the capped call options with Lehman OTC, we noted that no dilution would occur prior to our trading price reaching US$ 151.20. This conclusion was
based on a number of assumptions, including that we would exercise all capped call options simultaneously, we would continue with our election to receive shares of our Class A
common stock on the exercise of the capped call options, and no event that would result in an adjustment to the conversion rate of value of the options would have occurred.
Following the termination of the Lehman OTC capped call options, which represented 35% of the total number of capped call options we acquired on March 4, 2008, limited dilution
will occur following the exercise of the BNP and DB capped call options if the price of shares of our Class A common stock is above US$ 105.00 per share when the Convertible
Notes are converted. The table below shows how many shares of our Class A common stock we would issue following a conversion of the Convertible Notes and the exercise of
the remaining DB and BNP capped call options for a variety of share price scenarios. This table assumes the currently selected settlement methods continue to apply and no event
that would result in an adjustment to the conversion rate or the value of the option has occurred:
Stock Price
$105.00 and below
110.00
120.00
130.00
140.00
151.20
200.00
Shares issued on conversion
of Convertible Notes
-
(205,628)
(565,476)
(869,963)
(1,130,951)
(1,382,274)
(2,148,807)
Shares received on exercise
of capped call options
-
133,658
367,559
565,475
735,118
898,478
679,248
$
$
$
$
$
$
Net shares issued
-
(71,970)
(197,917)
(304,488)
(395,833)
(483,796)
(1,469,559)
Value of shares issued (US$
‘000)
-
(7,917)
(23,750)
(39,583)
(55,417)
(73,150)
(293,912)
$
$
$
$
$
$
$
At December 31, 2008, the options could not be exercised because no conversion of any Convertible Notes had occurred. In the event any Convertible Notes had been converted at
December 31, 2008, no shares of our Class A common stock would have been issuable because the closing price of our shares was below US$ 105.00 per share. The aggregate fair
value of the remaining DB and BNP capped call options at December 31, 2008 was US$ 3.5 million.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Certain derivative instruments, including put options and conversion options, have been identified as being embedded in the Convertible Notes, but as they are either considered to
be clearly and closely related to those Convertible Notes, or would be treated as equity instruments if free-standing, they are not accounted for separately. However this treatment
changed on January 1, 2009 when we adopted FSP APB 14-1 (see Note 2, “Summary of Significant Accounting Policies: Recent Accounting Pronouncements”).
7. ACCOUNTS RECEIVABLE
Accounts receivable comprised the following as at December 31, 2008 and 2007:
Third-party customers
Less allowance for bad debts and credit notes
Related parties
Less allowance for bad debts and credit notes
Total accounts receivable
December 31,
2008
227,253
(14,663)
8,913
(53)
221,450
$
$
December 31,
2007
231,128
(13,863)
8,165
(717)
224,713
$
$
Bad debt expense for the years ending December 31, 2008, 2007 and 2006 was US$ 2.5 million, US$ 1.9 million and US$ 2.0 million, respectively.
At December 31, 2008, CZK 820.7 million, (approximately US$ 42.4 million; 2007: CZK 695.6 million, approximately US$ 35.9 million) of receivables in the Czech Republic were pledged
as collateral subject to a factoring agreement (see Note 11, “Credit Facilities and Obligations Under Capital Leases”).
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
8. OTHER ASSETS
Other current and non-current assets comprised the following as at December 31, 2008 and 2007:
Current:
Prepaid programming
Other prepaid expenses
Productions in progress
VAT recoverable
Deferred tax
Capitalized debt costs
Loan to related party
Restricted cash
Income taxes recoverable
Assets held for sale
Other
Total other current assets
Non-current:
Capitalized debt costs
Deferred tax
Other
Total other non-current assets
December 31,
2008
December 31,
2007
$
$
$
$
54,301
7,286
14,080
3,460
5,898
5,275
-
821
1,216
5,484
904
98,725
December 31,
2008
14,760
2,108
3,875
20,743
$
$
$
$
50,914
11,656
5,724
3,891
3,652
3,104
1,924
1,286
1,234
6,385
685
90,455
December 31,
2007
10,310
2,123
2,912
15,345
Capitalized debt costs primarily comprise the costs incurred in connection with the issuance of our Senior Notes and Convertible Notes (see Note 6, “Senior Debt”), and are being
amortized over the terms of the Senior Notes and Convertible Notes using the effective interest method. The carrying value of the costs related to the Convertible Notes changed
following our adoption of FSP APB 14-1 on January 1, 2009 (see Note 2 “Summary of Significant Accounting Policies: Recent Accounting Pronouncements”).
Assets held for sales represent all assets relating to the CITI Channel.
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
9. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment comprised the following as at December 31, 2008 and 2007:
Land and buildings
Station machinery, fixtures and equipment
Other equipment
Software licenses
Construction in progress
Total cost
Less: Accumulated depreciation
Total net book value
Assets held under capital leases (included in the above)
Land and buildings
Station machinery, fixtures and equipment
Total cost
Less: Accumulated depreciation
Net book value
December 31,
2008
December 31,
2007
$
$
$
$
$
92,421
190,090
35,470
30,219
11,293
359,493
(152,826)
206,667
5,855
1,917
7,772
(1,644)
6,128
$
$
$
$
82,039
170,200
31,138
21,312
11,406
316,095
(140,787)
175,308
6,193
800
6,993
(1,368)
5,625
For further information on capital leases, see Note 11, “Credit Facilities and Obligations under Capital Leases”.
Depreciation expense for the years ending December 31, 2008, 2007 and 2006 was US$ 52.6 million, US$ 33.5 million and US$ 26.2 million, respectively. This includes corporate
depreciation expense for the years ending December 31, 2008, 2007 and 2006 of US$ 0.9 million, US$ 0.8 million and US$ 0.8 million, respectively, which are included in corporate
operating costs.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities comprised the following as at December 31, 2008 and 2007:
Accounts payable
Programming liabilities
Duties and other taxes payable
Accrued staff costs
Income taxes payable
Accrued production costs
Accrued interest payable
Authors’ rights
Other accrued liabilities
Total accounts payable and accrued liabilities
11. CREDIT FACILITIES AND OBLIGATIONS UNDER CAPITAL LEASES
Group loan obligations and overdraft facilities comprised the following as at December 31, 2008 and December 31, 2007:
Credit facilities:
Corporate
Czech Republic
Romania
Slovak Republic
Slovenia
Ukraine (STUDIO 1+1)
Total credit facilities
Capital leases:
Bulgaria operations, net of interest
Romania operations, net of interest
Slovak Republic operations, net of interest
Slovenia operations, net of interest
Total capital leases
Total credit facilities and capital leases
Less current maturities
Total non-current maturities
Page 143
December 31,
2008
35,778
44,251
22,635
27,318
7,399
6,531
10,531
4,734
15,708
174,885
$
$
December 31,
2007
37,924
49,457
29,945
29,202
27,705
4,982
5,768
5,522
12,808
203,313
December 31,
2008
December 31,
2007
$
57,180
12,923
104
-
-
172
-
13,829
683
-
-
70,379
$
14,512
689
289
36
3,867
4,881
75,260
(36,502)
38,758
$
$
$
$
-
242
86
4,412
4,740
19,252
(15,090)
4,162
$
$
$
$
$
$
$
$
(a) – (b)
(c) – (e)
(f)
(g)
(h)
(i)
Table of Contents
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Corporate
(a) On July 21, 2006, we entered into a five-year revolving loan agreement for EUR 100.0 million (approximately US$ 139.2 million) arranged by the European Bank for Reconstruction
and Development (“EBRD”) and on August 22, 2007, we entered into a second revolving loan agreement for EUR 50.0 million (approximately US$ 69.6 million) arranged by EBRD
(together with the EUR 100.0 million facility, the “EBRD Loan”). ING Bank N.V. (“ING”) and Ceska Sporitelna, a.s. (“CS”) are each participating in the EBRD Loan for EUR 37.5
million (approximately US$ 52.2 million).
The EBRD Loan bears interest at a rate of three-month EURIBOR plus 1.625% on the drawn amount. A commitment charge of 0.8125% is payable on any undrawn portion of the
EBRD Loan. The available amount of the EBRD Loan amortizes by 15.0% every six months from May 2009 to November 2010 and by 40.0% in May 2011. As at December 31, 2008,
EUR 25.0 million (approximately US$ 34.8 million) had been drawn and EUR 125.0 million (approximately US$ 174.0 million) was available for drawing and was drawn on February 2,
2009.
Covenants contained in the EBRD Loan are similar to those contained in our Senior Notes (see below and Note 6, “Senior Debt”). In addition, the EBRD Loan’s covenants restrict
us from making principal repayments on other new debt of greater than US$ 20.0 million per year for the life of the EBRD Loan. This restriction is not applicable to our existing
facilities with ING or CS or to any refinancing of our Senior Notes.
The EBRD Loan is a secured senior obligation and ranks pari passu with all existing and future senior indebtedness, including the Senior Notes and the Convertible Notes, and is
effectively subordinated to all existing and future indebtedness of our subsidiaries. The amount drawn is guaranteed by two subsidiary holding companies and is secured by a
pledge of shares of those subsidiaries as well as an assignment of certain contractual rights. The terms of the EBRD Loan restrict the manner in which our business is conducted,
including the incurrence of additional indebtedness, the making of investments, the payment of dividends or the making of other distributions, entering into certain affiliate
transactions and the sale of assets.
(b) We have an uncommitted multicurrency overdraft facility for EUR 10.0 million (approximately US$ 13.9 million) from Bank Mendes Gans (“BMG”), a subsidiary of ING, as part of a
cash pooling arrangement. The cash pooling arrangement with BMG enables us to receive credit across the group in respect of cash balances, which our subsidiaries in
Netherlands, Bulgaria, the Czech Republic, Romania, the Slovak Republic, Slovenia and Ukraine 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, 2008, the full EUR 10.0 million (approximately US$ 13.9 million) facility was
available to be drawn. Interest is payable at the relevant money market rate plus 2%.
As at December 31, 2008, our Dutch holding company, CME Media Enterprises B.V., had EUR 8.4 million (approximately US$ 11.7 million) deposited in the BMG cash pool and had
drawn US$ 22.4 million from the BMG cash pool. Our operations in the Czech Republic, the Slovak Republic and Slovenia had deposited CZK 154.9 million (approximately US$ 8.0
million), SKK 125.5 million (approximately US$ 5.8 million) and EUR 2.0 million (approximately US$ 2.8 million), respectively in the BMG cash pool. Our Romania operations had drawn
US$0.1 million from the BMG cash pool at December 31, 2008. In addition, our Ukraine operations had drawn EUR 0.1 million (approximately US$ 0.2 million) from the BMG cash pool
at December 31, 2008.
Czech Republic
(c) As at December 31, 2008, there were no drawings by CET 21 under a credit facility of CZK 1.2 billion (approximately US$ 62.0 million) available until December 31, 2010 with
CS. This facility may, at the option of CET 21, be drawn in CZK, US$ or EUR and bears interest at the three-month, six-month or twelve-month London Inter-Bank Offered Rate
(“LIBOR”), EURIBOR or Prague Inter-Bank Offered Rate (“PRIBOR”) rate plus 1.65%. A utilization interest of 0.25% is payable on the undrawn portion of this facility. This
percentage decreases to 0.125% of the undrawn portion if more than 50% of the loan is drawn. Drawings under this facility are secured by a pledge of receivables, which are also
subject to a factoring arrangement with Factoring Ceska Sporitelna, a.s. (“FCS”), a subsidiary of CS. On February 19, 2009, the full CZK 1.2 billion (approximately US$ 53.1 million at
the date of drawing) of this facility was drawn
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
(d) As at December 31, 2008, CZK 250 million (approximately US$ 12.9 million), the full amount of the facility, had been drawn by CET 21 under a working capital facility agreement
with CS with a maturity date of December 31, 2010. The facility bears interest at three-month PRIBOR plus 1.65% (three-month PRIBOR relevant to drawings under this facility at
December 31, 2008 was 3.63%). Drawings under this facility are secured by a pledge of receivables, which are also subject to a factoring arrangement with FCS.
(e) As at December 31, 2008, there were no drawings under a CZK 300.0 million (approximately US$ 15.5 million) factoring facility with FCS available until June 30, 2011. The facility
bears interest at one-month PRIBOR plus 1.40% for the period that actively assigned accounts receivable are outstanding.
Romania
(f) Our Romania operations had drawn US$ 0.1 million from the BMG cash pool at December 31, 2008. Two loans from San Paolo IMI Bank, assumed on our acquisition of MTS, were
repaid in January 2008.
Slovak Republic
(g) On May 15, 2008 our Slovak Republic operations secured a SKK 100 million (approximately US$ 4.6 million) overdraft facility from ING. This can be utilized for short term
advances up to six months at an interest rate of EURIBOR + 2.0%. At December 31, 2008 there were no drawings under this facility.
Slovenia
(h) On July 29, 2005, Pro Plus entered into a revolving facility agreement for up to EUR 37.5 million (approximately US$ 52.2 million) in aggregate principal amount with ING, Nova
Ljubljanska Banka d.d., Ljubljana and Bank Austria Creditanstalt d.d., Ljubljana. The facility amortizes by 10.0% each year for four years commencing one year after signing, with
60.0% repayable after five years. This facility is secured by a pledge of the bank accounts of Pro Plus, the assignment of certain receivables, a pledge of our interest in Pro Plus and
a guarantee of our wholly-owned subsidiary CME Media Enterprises B.V. Loans drawn under this facility will bear interest at a rate of EURIBOR for the period of drawing plus a
margin of between 2.1% and 3.6% that varies according to the ratio of consolidated net debt to consolidated broadcasting cash flow for Pro Plus. As at December 31, 2008, EUR 26.3
million (approximately US$ 36.5 million) was available for drawing under this revolving facility. On February 19, 2009, the full EUR 36.5 million (approximately US$ 33.6 million at the
date of drawing) of this facility was drawn.
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Ukraine (STUDIO 1+1)
Our Ukraine (STUDIO 1+1) operations had drawn EUR 0.1 million (approximately US$ 0.2 million) from the BMG cash pool at December 31, 2008.
Total Group
At December 31, 2008, the maturity of our debt (including our Senior Notes and Convertible Notes) was as follows:
2009
2010
2011
2012
2013
2014 and thereafter
Total
Capital Lease Commitments
$
$
35,587
-
34,792
340,966
475,000
208,755
1,095,100
We lease certain of our office and broadcast facilities as well as machinery and equipment under various leasing arrangements. The future minimum lease payments from continuing
operations, by year and in the aggregate, under capital leases with initial or remaining non-cancelable lease terms in excess of one year, consisted of the following at December 31,
2008:
2009
2010
2011
2012
2013
2014 and thereafter
Less: amount representing interest
Present value of net minimum lease payments
Page 146
$
$
$
1,146
704
611
598
3,237
-
6,296
(1,415)
4,881
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
12. OTHER LIABILITIES
Other current and non-current liabilities comprised the following as at December 31, 2008 and December 31, 2007:
Current:
Deferred revenue
Consideration payable – Bulgaria
Consideration payable - Romania
Dividends payable to minority shareholders in subsidiaries
Onerous contracts
Deferred tax
Liability held for sale
Obligation to repurchase shares
Total other current liabilities
Non-current:
Deferred tax
Income taxes payable
Fair value of derivatives
Program rights
Consideration payable – Czech Republic
Other
Total other non-current liabilities
December 31,
2008
December 31,
2007
$
$
$
$
7,684
4,500
724
-
1,994
177
2,207
-
17,286
December 31,
2008
89,126
1,070
9,882
9,922
1,396
819
112,215
$
$
$
$
7,011
-
2,208
1,226
2,832
272
2,030
488
16,067
December 31,
2007
73,340
2,495
16,242
23
-
3,262
95,362
13. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
FAS 157 establishes a hierarchy that prioritizes the inputs to those valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted
prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair
value hierarchy under FAS 157 are:
Level 1
Level 2
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted instruments.
Basis of Fair Value Measurement
Quoted prices in markets that are not considered to be active or valuations of financial instruments for which all significant inputs are observable, either directly or
indirectly.
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
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. At December 31, 2008, we
had no material financial assets or liabilities carried at fair value using significant level 1 or level 3 inputs and the only instruments we valued using level 2 inputs were currency swap
agreements as follows:
Currency Swap
On April 27, 2006, we entered into cross currency swap agreements with JP Morgan Chase Bank, N.A. and Morgan Stanley Capital Services Inc., under which we swapped a fixed
annual coupon interest rate (of 9.0%) on notional principal of CZK 10.7 billion (approximately US$ 553.1 million), payable on July 15, October 15, January 15, and April 15, to the
termination date of April 15, 2012, for a fixed annual coupon interest rate (of 9.0%) on notional principal of EUR 375.9 million (approximately US$ 523.1 million) receivable on July 15,
October 15, January 15, and April 15, to the termination date of April 15, 2012.
These currency swap agreements reduce our exposure to movements in foreign exchange rates on a part of the CZK-denominated cash flows generated by our Czech Republic
operations that is approximately equivalent in value to the Euro-denominated interest payments on our Senior Notes (see Note 6, “Senior Debt”). They are financial instruments that
are used to minimize currency risk and are considered an economic hedge of foreign exchange rates. These instruments have not been designated as hedging instruments as
defined under FAS 133 and so changes in their fair value are recorded in the consolidated statement of operations and in the consolidated balance sheet in other non-current
liabilities.
We value our currency swap agreements using an industry-standard currency swap pricing model which calculates the fair value on the basis of the net present value of the
estimated future cash flows receivable or payable. These instruments are allocated to level 2 of the FAS 157 fair value hierarchy because the critical inputs to this model, including
the relevant yield curves and the known contractual terms of the instrument, are readily observable.
The fair value of these instruments as at December 31, 2008, was a liability of US$ 9.9 million, which represented a gain of US$ 6.4 million from the liability of US$ 16.2 million as at
December 31, 2007. The gain of US$ 6.4 million (2007: loss of US$ (3.7) million, 2006: loss of US$ (12.5) million) was recognized as a change in fair value of derivative instruments in
the Consolidated Statements of Operations.
14. SHAREHOLDERS' EQUITY
Preferred Stock
5,000,000 shares of Preferred Stock, with a $ 0.08 par value, were authorized as at December 31, 2008 and 2007. None were issued and outstanding as at December 31, 2008 and 2007.
Class A and B Common Stock
100,000,000 shares of Class A Common Stock and 15,000,000 shares of Class B Common Stock were authorized as at December 31, 2008 and 2007. The rights of the holders of Class
A Common Stock and Class B Common Stock are identical except for voting rights. The shares of Class A Common Stock are entitled to one vote per share and the shares of Class
B Common Stock are entitled to ten votes per share. Class B Common Stock is convertible into Class A Common Stock for no additional consideration on a one-for-one
basis. Holders of each class of shares are entitled to receive dividends and upon liquidation or dissolution are entitled to receive all assets available for distribution to
shareholders. The holders of each class have no preemptive or other subscription rights and there are no redemption or sinking fund provisions with respect to such shares.
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
On August 30, 2007, we issued 1,275,227 unregistered shares of our Class A Common Stock to Igor Kolomoisky for net proceeds of US$ 109.9 million.
15. INCOME TAXES
As our investments are predominantly owned by Dutch holding companies, the components of the provision for income taxes and of the income from continuing operations before
provision for income taxes 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.
(Loss) / income before provision for income taxes, minority interest, equity in income of unconsolidated affiliates and discontinued operations:
The Netherlands and non-Netherlands components of (loss) / income from continuing operations before income taxes are:
Domestic
Foreign
Total tax charge for the years ended December 31, 2008, 2007 and 2006 was allocated as follows:
Income tax expense from continuing operations
Income tax expense from discontinued operations
Currency translation adjustment in accumulated other comprehensive income
Total tax charge
Page 149
$
$
$
For the Years Ended December 31,
2008
(15,795)
(199,368)
(215,163)
2007
(102,532)
233,559
131,027
$
$
$
$
For the Years Ended December 31,
2008
34,525
(64)
-
34,461
2007
20,822
(29)
20,202
40,995
$
$
$
$
2006
(43,777)
94,523
50,746
2006
14,952
4,873
22,878
42,703
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Income Tax Provision:
The Netherlands and non-Netherlands components of the provision for income taxes from continuing operations consists of:
Current income tax expense:
Domestic
Foreign
Deferred tax expense / (benefit):
Domestic
Foreign
Provision for income taxes
Reconciliation of Effective Income Tax Rate:
For the Years Ended December 31,
2008
2007
253
49,431
49,684
21
(15,180)
(15,159)
$
$
$
$
(20,046)
51,806
31,760
-
(10,938)
(10,938)
$
$
$
$
2006
(22,745)
36,000
13,255
1,467
230
1,697
34,525
$
20,822
$
14,952
$
$
$
$
$
The following is a reconciliation of income taxes, calculated at statutory Netherlands rates, to the income tax provision included in the accompanying Consolidated Statements of
Operations for the years ended December 31, 2008, 2007 and 2006:
Income taxes at Netherlands rates (2008 and 2007: 25.5%, 2006: 29.6%)
Jurisdictional differences in tax rates
Tax effect of impairment losses
Effect of change in tax law relating to investment allowances claimed in previous years
Interest expense disallowed
Tax effect of other permanent differences
Effect of changes in tax rates
Change in valuation allowance
Other
$
$
$
For the Years Ended December 31,
2008
(54,855)
715
73,092
-
1,150
6,724
9
7,192
498
2007
33,409
(15,971)
-
-
4,347
2,597
(9,271)
9,803
(4,092)
2006
15,018
(10,445)
149
(2,065)
7,365
(656)
89
5,418
79
Provision for income taxes
$
34,525
$
20,822
$
14,952
In 2008 we recognized impairment losses against goodwill in our Bulgaria, Ukraine (STUDIO 1+1) and Ukraine (KINO, CITI) operations for which there is no tax credit.
The amount included in 2007 for effect of changes in tax rates includes US$ 9.1 million arising from the enactment of lower tax rates for future years in the Czech Republic.
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except 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, 2008 and 2007:
Assets:
Tax benefit of loss carry-forwards and other tax credits
Programming rights
Property, plant and equipment
Accrued expense
Other
Gross deferred tax assets
Valuation allowance
Net deferred tax assets
Liabilities:
Broadcast licenses, trademarks and customer relationships
Property, plant and equipment
Temporary difference due to timing
Total deferred tax liabilities
Net deferred income tax liability
Page 151
December 31,
2008
December 31,
2007
$
$
$
$
48,384
3,119
1,899
4,613
4,684
62,699
(47,392)
15,307
(86,670)
(6,219)
(3,714)
(96,603)
(81,296)
$
$
$
$
$
$
28,247
3,734
1,607
4,959
1,500
40,047
(28,896)
11,151
(67,606)
(3,688)
(7,694)
(78,988)
(67,837)
Table of Contents
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Deferred tax is recognized on the Consolidated Balance Sheet as follows:
Current deferred tax assets
Non-current deferred tax assets
Current deferred tax liabilities
Non-current deferred tax liabilities
Net deferred income tax liability
December 31,
2008
December 31,
2007
$
$
$
5,898
2,109
8,007
(177)
(89,126)
(89,303)
$
$
$
3,652
2,123
5,775
(272)
(73,340)
(73,612)
(81,296)
$
(67,837)
We provided a valuation allowance against potential deferred tax assets of US$ 47.4 million and US$ 28.9 million as at December 31, 2008 and 2007, 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. Of the
valuation allowance recorded at December 31, 2008, US$ 0.8 million would reverse through goodwill.
During 2008, we had the following movements on valuation allowances:
Balance at December 31, 2007
Charged to costs and expenses
Charged to other accounts
Foreign exchange
Balance at December 31, 2008
As of December 31, 2008 we have operating loss carry-forwards that will expire in the following periods:
$
$
28,896
7,192
11,880
(576)
47,392
Year
Austria
Bulgaria
Croatia
Czech Republic
Slovenia
Ukraine
Cyprus
Romania
Total
2009
-
-
-
1,548
-
-
-
-
1,548
2010
-
-
442
2,904
-
-
-
-
3,346
Page 152
2011
-
-
9,330
29
-
-
-
-
9,359
2012
-
8,581
25,877
46
-
-
-
-
34,504
2013
-
10,653
14,479
14
-
-
-
181
25,327
Indefinite
12,472
-
-
-
11,880
17,412
361
-
42,125
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
In addition, there is a ruling deficit in The Netherlands of US$ 112.5 million which is available to offset future taxable profits in excess of the minimum amounts agreed with The
Netherlands tax authorities. The ruling deficit includes tax losses of US$ 77.9 million which will be subject to a nine-year statute of limitations.
The losses and ruling deficit are subject to examination by the tax authorities and to restriction on their utilization. In particular the losses and ruling deficit can only be utilized
against profits arising in the legal entity in which they arose. We have provided valuation allowances against the operating loss carry-forwards arising in Austria, Bulgaria, Croatia,
Czech Republic, Slovenia, Ukraine (except STUDIO 1+1), Romania and the ruling deficit in The Netherlands as we consider it more likely than not that we will fail to utilize all or in
certain cases part of these tax benefits.
We have not provided income taxes or withholding taxes on US$ 361.2 million (2007: US$ 354.2 million) of cumulative undistributed earnings of our subsidiaries and affiliates as
these earnings are either permanently reinvested in the companies concerned or can be recovered tax-free. It is not practicable to estimate the amount of taxes that might be payable
on the distribution of these earnings.
On January 1, 2007, we adopted FIN 48, which clarifies the accounting for uncertainty in tax positions. As a result of the implementation of FIN 48, we recognized an additional
liability of approximately US$ 1.7 million for unrecognized tax benefits, which was accounted for as an increase to our retained deficit as at January 1, 2007.
We recognize accrued interest and penalties related to unrecognized tax benefits within the provision for income taxes. At January 1, 2007, we had an accrual of US$ 1.8 million in
respect of interest and penalties, of which US$ 1.5 million was accounted for as an increase to our retained deficit at that date. The liability for accrued interest and penalties at
December 31, 2008 is US$ 0.6 million and as at December 31, 2007 we had an accrual of US $ 1.0 million. The decrease for the year of US$ 0.4 million arose as a result of the statute of
limitations expiring and this amount was recognized in the income statement.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Balance at December 31, 2007
Increases for tax positions taken during a prior period
Increases for tax positions taken during the current period
Decreases resulting from the expiry of the statute of limitations
Other
Balance at December 31, 2008
$
$
1,723
1,130
1,999
(495)
(54)
4,303
The total amount of unrecognized benefits that, if recognized, would affect the effective tax rate amounts to US$ 1.2 million. It is reasonably possible that the total amount of
unrecognized tax benefits will decrease by approximately US$ 0.3 million within 12 months of the reporting date as a result of tax audits closing and statutes of limitations expiring.
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Our subsidiaries file income tax returns in The Netherlands and various other tax jurisdictions including the United States. As at December 31, 2008, analysed by major tax
jurisdictions, our subsidiaries are generally no longer subject to income tax examinations for years before:
Country
Bulgaria
Croatia
Czech Republic
Germany
Netherlands
Romania
Slovak Republic
Slovenia
Ukraine
United States
16. INTEREST EXPENSE
Year
2002
2005
2006
2005
2007
2004
2003
2003
2005
2005
Interest expense comprised the following for the years ended December 31, 2008, 2007 and 2006, respectively:
Interest on Senior Notes
Interest on Convertible Notes
Loss on redemption of Senior Notes
Amortization of capitalized debt issuance costs
Interest on capital leases
Other interest and fees
Total interest expense
For the Years Ended December 31,
2008
2007
43,962
13,439
-
4,976
384
5,714
68,475
$
$
41,549
-
6,853
2,871
336
3,327
54,936
$
$
2006
39,032
-
-
2,478
304
2,398
44,212
$
$
The loss on redemption of Senior Notes in 2007 is comprised of a redemption premium of US$ 3.4 million and accelerated amortization of capitalized debt issuance costs of US$ 3.5
million.
The interest and amortization of capitalized debt issuance costs related to the Convertible Notes will change on January 1, 2009 as we have adopted FSP APB 14-1 (see Note 2,
“Summary of Significant Accounting Policies: Recent Accounting Pronouncements”).
17. STOCK-BASED COMPENSATION
4,500,000 shares have been authorized for issuance in respect of equity awards under a stock-based compensation plan (“the Plan”). Under the Plan, awards are made to employees
at the discretion of the Compensation Committee and to directors pursuant to an annual automatic grant under the Plan. Grants of options allow the holders to purchase shares of
Class A or Class B 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.
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
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,
2008, the maximum contractual life of options issued was 10 years. Upon providing the appropriate written notification, holders pay the exercise price and receive the stock. Stock
delivered under the Plan comes from the issuance of new shares. For the year ended December 31, 2008, US$ 1.2 million was received on exercise of options under the Plan. The
intrinsic value of awards exercised during 2008 was US$ 0.8 million (2007: US$ 23.3 million, 2006: US$ 8.2 million) and the income tax benefits realized thereon was US$ 0.1 million
(2007: US$ 1.1 million, 2006: US$ 1.3 million).
The charge for stock-based compensation in our Consolidated Statement of Operations is as follows:
Stock-based compensation charged under SFAS 123(R)
Income tax benefit recognized
For the Years Ended December 31,
2008
6,107
(641)
2007
5,734
(479)
2006
3,575
(482)
During the fourth quarter of 2008, Michael Garin, our former Chief Executive Officer announced his intention to retire from his executive position. In connection with this
announcement, the terms of unvested options over 97,500 shares were modified to accelerate vesting. As required by FAS 123(R), we reversed the compensation cost previously
recognized because at the modification dates the service conditions of the original awards were not expected to be satisfied. At the same time, we recognized the incremental cost
resulting from the modification. Because of the shorter life of the modified options, and the decline in our share price since the original awards were granted, the net effect was a
credit of US$ 1.3 million.
The charge for stock-based compensation cost related to awards that are not yet exercisable and which have not yet been recognized in our Consolidated Statement of Operations at
December 31, 2008 was US$ 12.7 million and the weighted average period over which it will be recognized is 2.2 years.
Under the provisions of FAS 123(R), the fair value of stock options that are expected to vest is estimated on the grant date using the Black-Scholes option-pricing model and
recognized ratably over the requisite servicing period. The calculation of compensation cost requires the use of several significant assumptions which are calculated as follows:
· Expected forfeitures. FAS 123(R) requires that compensation cost only be calculated on those instruments that are expected to vest in the future. The number of options
that actually vest will usually differ from the total number issued because employees forfeit options when they do not meet the service conditions stipulated in the
agreement. Since all forfeitures result from failure to meet service conditions, we have calculated the forfeiture rate by reference to the historical employee turnover rate.
· Expected volatility. Expected volatility has been calculated based on an analysis of the historical stock price volatility of the company and its peers for the preceeding
period corresponding to the options’ expected life.
· Expected term. The expected term of options granted has been calculated following the “shortcut” method as outlined in section D 2, question 6 of SEC Staff Accounting
Bulletin No. 107 “Share Based Compensation” because our options meet the definition of “plain vanilla” therein. Since insufficient data about holder exercise behavior is
available to make estimates of expected term, we have continued to apply the shortcut method in accordance with SAB 110.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
The weighted average assumptions used in the Black-Scholes model for grants made in the years ending December 31, 2008, 2007 and 2006 were as follows:
For the Years Ended December 31,
2008
2007
1.51%
4.60
45.18%
0%
$
12.31
3.62%
4.93
36.15%
0%
$
40.48
2006
4.76%
5.89
43.44%
0%
31.67
Risk-free interest rate
Expected term (years)
Expected volatility
Dividend yield
Weighted-average fair value
The following table summarizes information about stock option activity during 2008, 2007, and 2006:
2008
Weighted
Average Exercise
Price (US$)
Shares
$
2007
Weighted
Average Exercise
Price (US$)
Shares
Shares
2006
Weighted
Average Exercise
Price (US$)
Outstanding at beginning of year
Awards granted
Awards exercised
Awards expired
Awards forfeited
Outstanding at end of year
1,176,117
342,000
(21,075)
-
(58,000)
1,439,042
$
$
56.72
35.92
57.97
-
80.39
50.81
1,288,575
246,000
(315,833)
(20,000)
(22,625)
1,176,117
$
$
35.51
108.48
12.98
23.00
51.79
56.72
1,118,275
388,500
(195,450)
-
(22,750)
1,288,575
$
$
22.23
65.19
18.54
-
40.38
35.51
The exercise of stock options has generated a net operating loss brought forward in our Delaware subsidiary of US$ 11.3 million at January 1, 2008. In the year ended December 31,
2008 tax benefits of US$ 1.3 million were recognized in respect of the utilization of part of this loss, and were recorded as additional paid-in capital, net of US$ 0.1 million of transfers
related to the write-off of deferred tax assets arising upon exercises and forfeitures. The losses are subject to examination by the tax authorities and to restriction on their utilization.
The following table summarizes information about stock options outstanding at December 31, 2008:
Range of exercise prices
$ 0.01 - 20.00
$ 20.01 - 40.00
$ 40.01 - 60.00
$ 60.01 - 80.00
$ 80.01 - 100.00
$ 100.01 - 120.00
Total
Expected to vest
Shares
Average remaining
contractual life (years)
Aggregate intrinsic value
(US$)
Weighted average exercise
price (US$)
Options outstanding
261,000
412,042
255,500
241,625
38,125
230,750
1,439,042
1,323,370
4.79
6.84
6.93
5.94
3.82
6.33
6.17
6.10
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1,458
-
-
-
-
-
1,458
1,414
16.13
23.78
52.67
67.83
90.22
111.88
50.81
50.33
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
The following table summarizes information about stock options exercisable at December 31, 2008:
Options exercisable
Range of exercise price
$
$
$
$
$
$
Total
0.01 - 20.00
20.01 - 40.00
40.01 - 60.00
60.01 - 80.00
80.01 - 100.00
100.01 - 120.00
18. EARNINGS PER SHARE
Shares
Average remaining
contractual life (years)
Aggregate intrinsic value
(US$)
Weighted average exercise
price (US$)
261,000
127,542
161,375
85,375
38,125
49,813
723,230
4.79
5.60
6.84
7.54
3.82
6.41
5.78
1,458
-
-
-
-
-
1,458
The components of basic and diluted earnings per share are as follows:
Net (loss) / income available for common shareholders
Weighted average outstanding shares of common stock (000’s)
Dilutive effect of employee stock options (000’s)
Common stock and common stock equivalents
Earnings per share:
Basic
Diluted
$
$
$
For the Years Ended December 31,
2008
(255,544)
2007
88,568
$
$
42,328
-
42,328
41,384
449
41,833
(6.04)
(6.04)
$
$
2.14
2.12
$
$
16.13
26.21
51.55
71.16
90.22
113.56
42.93
2006
20,424
40,027
573
40,600
0.51
0.50
At December 31, 2008, 877,625 (2007: 206,000, 2006: 319,435) stock options were antidilutive to income from continuing operations and excluded from the calculation of earnings per
share. These may become dilutive in the future. Shares of Class A of common stock potentially issuable under our Convertible Notes may also become dilutive in the future
although they were antidilutive to income at December 31, 2008.
19. SEGMENT DATA
We manage our business on a geographic basis and review the performance of each business segment using data that reflects 100% of operating and license company results. Our
business segments are Bulgaria, Croatia, the Czech Republic, Romania, the Slovak Republic, Slovenia and our two businesses in Ukraine.
We evaluate the performance of our business segments based on Segment Net Revenues and Segment EBITDA.
Our key performance measure of the efficiency of our business segments is EBITDA margin. We define Segment EBITDA margin as the ratio of Segment EBITDA to Segment Net
Revenues.
Segment EBITDA is determined as segment net income / (loss), which includes program rights amortization costs, before interest, taxes, depreciation and amortization of intangible
assets. Items that are not allocated to our business segments for purposes of evaluating their performance and therefore are not included in Segment EBITDA, include:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
·
·
·
·
·
expenses presented as corporate operating costs in our Consolidated Statements of Operations and Comprehensive Income;
stock-based compensation charges;
foreign currency exchange gains and losses;
changes in fair value of derivatives; and
certain unusual or infrequent items (e.g., extraordinary gains and losses, impairments of assets or investments).
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Below are tables showing our Segment Net Revenues, Segment EBITDA, segment capital expenditure, segment depreciation and segment asset information by operation, including a
reconciliation of these amounts to our consolidated results for the years ending December 31, 2008, 2007 and 2006 for Consolidated Statement of Operations data and as at December 31, 2008
and 2007 for Balance Sheet data:
SEGMENT FINANCIAL INFORMATION
For the Years Ended December 31,
Segment Net Revenues (1)
2008
2007
Country
Bulgaria (TV2, RING TV) (2)
Croatia (NOVA TV)
Czech Republic (3)
Romania (4)
Slovak Republic (TV MARKIZA)
Slovenia (POP TV and KANAL A)
Ukraine (STUDIO 1+1)
Ukraine (KINO, CITI) (5)
$
$
1,263
54,651
376,546
274,627
132,693
80,696
96,738
2,720
1,019,934
$
$
Total Segment Data
Reconciliation to Consolidated Statement of Operations and Comprehensive Income:
Consolidated Net Revenues / (Loss) / income
before provision for income taxes, minority
interest, equity in income of unconsolidated
affiliates and discontinued operations
Corporate operating costs
Impairment charge
Unconsolidated equity affiliates (6)
Depreciation of station property, plant and
1,019,934
-
$
$
-
equipment
Amortization of broadcast licenses and other
intangibles
Interest income
Interest expense
Change in fair value of derivatives
Foreign currency exchange loss, net
Other income
Total Segment Data
-
-
-
-
-
-
-
1,019,934
$
$
-
37,193
279,237
215,402
110,539
69,647
125,323
1,515
838,856
838,856
-
-
-
-
-
-
-
-
-
838,856
$
$
$
$
2006
-
22,310
208,387
148,616
73,420
54,534
96,413
726
604,406
602,646
-
-
1,760
-
-
-
-
-
-
-
604,406
$
$
$
$
2008
Segment EBITDA
2007
(10,185)
(5,415)
208,655
111,783
50,228
25,413
(32,944)
(1,855)
345,680
(215,163)
49,676
336,752
-
51,668
35,381
(10,006)
68,475
(6,360)
37,877
(2,620)
345,680
$
$
$
$
-
(13,882)
156,496
93,075
41,532
22,767
27,000
(3,536)
323,452
131,027
55,373
-
-
32,653
24,970
(5,728)
54,936
3,703
34,409
(7,891)
323,452
$
$
$
$
2006
-
(14,413)
100,488
65,860
20,805
19,842
29,973
(1,795)
220,760
50,746
34,104
748
(1,292)
25,430
18,799
(6,359)
44,212
12,539
44,892
(3,059)
220,760
(1) All net revenues are derived from external customers. There are no inter-segmental revenues.
(2) We acquired our Bulgaria operations on August 1, 2008.
(3) Our Czech Republic operations comprise TV NOVA, NOVA SPORT and NOVA CINEMA, which was launched in December 2007.
(4) Romanian channels are PRO TV, PRO CINEMA, ACASA, SPORT.RO, MTV ROMANIA and PRO TV INTERNATIONAL for the years ended December 31, 2008 and 2007.
SPORT.RO was acquired on February 20, 2007 and MTV ROMANIA was acquired on December 12, 2007. For the year ended December 31, 2006 Romanian channels were PRO TV,
PRO CINEMA, ACASA and PRO TV INTERNATIONAL.
(5) We acquired our Ukraine (KINO, CITI) operations in January 2006.
(6) Unconsolidated equity affiliates were STS and Markiza in the Slovak Republic until January 23, 2006.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Depreciation of station property, plant & equipment and amortization of broadcast licenses and other intangibles:
Bulgaria
Croatia
Czech Republic
Romania
Slovak Republic
Slovenia
Ukraine (STUDIO 1+1)
Ukraine (KINO, CITI)
Total
Reconciliation to Consolidated Statement of Operations:
Unconsolidated equity affiliates
Total consolidated depreciation and amortization
Represented as follows:
Depreciation of station property, plant & equipment
Amortization of broadcast licenses and other intangibles
Capital expenditure:
Corporate
Bulgaria
Croatia
Czech Republic
Romania
Slovak Republic
Slovenia
Ukraine (STUDIO 1+1)
Ukraine (KINO, CITI)
Total
$
$
$
$
$
Page 160
For the Years Ended December 31,
2008
2007
3,421
6,198
41,165
15,148
10,988
5,526
4,490
113
87,049
$
$
-
3,630
28,810
10,511
6,784
4,650
3,148
90
57,623
$
$
2006
-
2,920
24,274
5,811
4,070
4,004
3,216
111
44,406
-
-
(177)
87,049
$
57,623
$
44,229
51,668
35,381
32,653
24,970
25,430
18,799
For the Years Ended December 31,
2008
2007
708
3,607
7,417
19,847
18,343
15,062
10,809
2,872
-
78,665
$
$
185
-
6,836
35,903
16,981
8,954
8,492
2,592
-
79,943
$
$
2006
1,990
-
2,114
16,608
24,363
6,777
2,506
6,029
-
60,387
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Total assets (1):
Bulgaria
Croatia
Czech Republic
Romania
Slovak Republic
Slovenia
Ukraine (STUDIO 1+1)
Ukraine (KINO, CITI)
Total segment assets
Reconciliation to Consolidated Balance Sheet:
Corporate
Assets held for sale(1)
Total assets
Long-lived assets (2):
Bulgaria
Croatia
Czech Republic
Romania
Slovak Republic
Slovenia
Ukraine (STUDIO 1+1)
Ukraine (KINO, CITI)
Total long-lived assets
Reconciliation to Consolidated Balance Sheet:
Corporate
Total Long-lived assets
(1) Assets held for sale include the assets of the CITI channel, which has been recognized as a discontinued operation in all periods.
(2) Segment assets exclude any inter-company investments, loans, payables and receivables.
We do not rely on any single major customer or group of major customers. No customer accounts for more than 10% of revenues.
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As at December 31,
2008
2007
107,805
50,431
1,306,997
387,845
240,899
93,022
118,647
10,943
2,316,589
86,660
5,484
2,408,733
$
$
$
-
44,787
1,429,256
360,144
203,302
89,984
90,064
11,469
2,229,006
103,044
6,385
2,338,435
As at December 31,
2008
2007
6,404
13,450
61,463
52,193
40,025
24,932
7,083
-
205,550
1,117
206,667
$
$
$
-
12,144
58,809
44,808
29,345
21,524
7,380
-
174,010
1,298
175,308
$
$
$
$
$
$
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
20. DISCONTINUED OPERATIONS
Ukraine(KINO, CITI)
Pre tax loss from discontinued operations
Tax on result of discontinued operations
Czech Republic
Tax on disposal of discontinued operations
Net loss from discontinued operations
Ukraine (KINO, CITI)
For the Years Ended December 31,
2008
2007
$
$
(3,849)
64
$
(4,509)
29
$
-
(3,785)
$
-
(4,480)
$
2006
(2,354)
-
(4,863)
(7,217)
In the fourth quarter of 2008 in connection with an agreement with our minority partners to acquire 100% of the KINO channel and sell them our interest in the CITI channel, we
segregated the broadcasting licenses and other assets of the KINO channel and transferred them to Gravis-Kino, a new entity spun off from Gravis, which previously operated the
KINO and the CITI channels. Between January 14, 2009 and February 10, 2009, we acquired a 100% interest in the KINO channel by acquiring from our minority partners their
interests in Tor, Zhysa, TV Stimul, Ukrpromtorg and Gravis-Kino and selling to them our interest in Gravis, which owns the broadcasting licenses and other assets of the CITI
channel. We concluded that the CITI channel represented a disposal group and therefore recognized the income and expenses of our CITI channel as a discontinued operation in all
periods presented. The assets and liabilities of the CITI channel have been classified as available for sale at each balance sheet date.
Czech Republic
On June 19, 2003, our Board of Directors decided to withdraw from operations in the Czech Republic. The revenues and expenses of our former Czech Republic operations and
related legal expenses have therefore all been accounted for as discontinued operations for all periods presented.
On February 9, 2004, we entered into an agreement with the Dutch tax authorities to settle all tax liabilities outstanding for the years up to and including 2003, including receipts in
respect of our 2003 award in the arbitration against the Czech Republic, for a payment of US$ 9.0 million (the “Settlement Agreement”). We expected to continue to pay tax in The
Netherlands of between US$ 1.0 and US$ 2.5 million for the foreseeable future and therefore agreed to a minimum payment of US$ 2.0 million per year for the years 2004 - 2008 and
US$ 1.0 million for 2009.
We have re-evaluated our forecasts of the amount of taxable income we expect to earn in The Netherlands in the period to 2009. As the tax payable on this income is lower than the
minimum amounts agreed with the Dutch tax authorities, we have provided for the shortfall. In our condensed consolidated statement of operations, we recognized a charge of US$
nil (2007: US$ nil, 2006: US$ 4.9 million) through discontinued operations.
The settlement agreement also provides that if any decision is issued at any time prior to December 31, 2008 exempting awards under Bilateral Investment Treaties from taxation in
The Netherlands, we will be allowed to recover losses previously used against the 2003 arbitration award, which could be up to US$ 195.0 million, to offset other income within the
applicable carry forward rules. This would not reduce the minimum amount of tax agreed payable under the Settlement Agreement. At this time there is no indication that the Dutch
tax authorities have issued such a decision.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
The settlement with the Dutch tax authorities has also resulted in a deductible temporary difference in the form of a ruling deficit against which a full valuation allowance has been
recorded.
21. COMMITMENTS AND CONTINGENCIES
Commitments
a) Station Programming Rights Agreements
At December 31, 2008, we had the following commitments in respect of future programming, including contracts signed with license periods starting after the balance sheet date:
Bulgaria
Croatia
Czech Republic
Romania
Slovak Republic
Slovenia
Ukraine (STUDIO 1+1)
Ukraine (KINO, CITI)
Total (1)
(1) Of the amounts in the table above, US$ 213.7 million is payable within one year.
b) Operating Lease Commitments
December 31,
2008
$
$
53,040
3,369
100,141
69,874
28,403
9,249
15,527
864
280,467
For the fiscal years ended December 31, 2008, 2007, and 2006 we incurred aggregate rent on all facilities of US$ 14.0 million, US$ 11.8 million and US$ 9.7 million. Future minimum
operating lease payments at December 31, 2008 for non-cancellable operating leases with remaining terms in excess of one year (net of amounts to be recharged to third parties) are
payable as follows:
2009
2010
2011
2012
2013
2014 and thereafter
Total
c) Acquisition of minority shareholdings
December 31,
2008
6,514
3,961
1,815
1,284
2,452
2,526
18,552
$
$
Mr. Sarbu has the right to sell to us the remaining shareholding in Pro TV and MPI that he holds personally under a put option agreement entered into in July 2004 at a price to be
determined by an independent valuation, subject to a floor price of US$ 1.45 million for each 1.0% interest sold. Mr. Sarbu’s right to put his remaining shareholding to us is
exercisable from November 12, 2009, provided that we have not enforced a pledge over this shareholding which Mr. Sarbu granted as security for our right to put to him our
shareholding in Media Pro. As at December 31, 2008, we consider the fair value of Mr. Sarbu’s put option to be approximately US$ nil.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
d)
Other
Dutch Tax
On February 9, 2004 we entered into an agreement with the Dutch tax authorities to settle all tax liabilities outstanding for the period through 2003, including receipts in respect of
our 2003 award in the arbitration against the Czech Republic, for a payment of US$ 9.0 million. We expected to continue to pay tax in The Netherlands of between US$ 1.0 and US$
2.5 million for the foreseeable future and therefore also agreed to a minimum tax payable of US$ 2.0 million per year for the years 2004 - 2008 and US$ 1.0 million for 2009. Should the
Dutch Ministry of Finance rule that arbitration awards such as the one we received are not taxable, we will be entitled to claim a tax loss, which can be offset against other taxable
income but will not reduce our minimum payment commitments.
As at December 31, 2008 we provided US$ 1.3 million in current liabilities and as at December 31, 2007 we provided US$ 3.3 million (US$ 1.0 million in non-current liabilities and US$
2.3 million in current liabilities) of tax in The Netherlands as the difference between our obligation under this agreement and our estimate of tax in the Netherlands that may fall due
over this period from business operations, based on current business structures and economic conditions, and recognized a charge of US$ nil (2007: US$ nil, 2006 US$ 4.9 million)
through discontinued operations in our Consolidated Statement of Operations for the year ended December 31, 2008.
Czech Republic - Factoring of Trade Receivables
CET 21 has a working capital credit facility of CZK 250 million (approximately US$ 12.9 million) with CS. This facility is secured by a pledge of receivables under the factoring
agreement with FCS.
The transfer of the receivables is accounted for as a secured borrowing under FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, with the proceeds received recorded in the Consolidated Balance Sheet as a liability and included in current credit facilities and obligations under
capital leases. The corresponding receivables are a part of accounts receivable, as we retain the risks of ownership.
Contingencies
a) Litigation
We are, from time to time, a party to litigation that arises in the normal course of our business operations. However, we are not presently a party to any such litigation which could
reasonably be expected to have a material adverse effect on our business or operations.
b) Lehman Brothers bankruptcy claim
On March 4, 2008, we purchased for cash consideration of US$ 22.2 million, capped call options from Lehman OTC (See Note 6, “Senior Debt: Convertible Notes”) over 1,583,333
shares of our Class A common stock which entitled us to receive, at our election following a conversion under the Convertible Notes, cash or shares of Class A common stock with
a value equal to the difference between the trading price of our shares at the time the option is exercised and US$ 105.00, up to a maximum trading price of US$ 151.20.
On September 15, 2008, Lehman Holdings, the guarantor of the obligations of Lehman OTC under the capped call agreement, filed for protection under Chapter 11 of the United
States Bankruptcy Code. The bankruptcy filing of Lehman Holding, as guarantor, was an event of default and gave us the right to terminate the capped call agreement with Lehman
OTC and claim for losses. We exercised this right on September 16, 2008 and have claimed an amount of US$ 19.9 million, which bears interest at a rate equal to CME’s estimate of its
cost of funding plus 1% per annum.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
On October 3, 2008, Lehman OTC filed for protection under Chapter 11 as well. We have filed claims in the bankruptcy proceedings of both Lehman Holding and Lehman OTC. Our
claim is a general unsecured claim and ranks together with similar claims. We do not have any information as to the timing of the satisfaction of our claim or the amount we may
receive.
c) Video International termination penalty payable
Until December 31, 2008, the sale of Studio 1+1’s advertising was outsourced to Video International-Prioritet LLC and certain of its affiliates (the “Video International Group”), a
Ukrainian subsidiary of a Russian advertising sales company, in which we have neither an economic nor voting interest. The sale of KINO’s advertising was also outsourced to
Video International Group until December 31, 2008, when the relevant contract expired. On December 24, 2008, Studio 1+1 and certain affiliates terminated agreements relating to the
sale of advertising and sponsorship on STUDIO 1+1 with the Video International Group. The effective date of these terminations is March 24, 2009. Since January 1, 2009, the Studio
1+1 group has been selling advertising and sponsorship on STUDIO 1+1 directly. In connection with these terminations, Studio 1+1 is required to pay a termination penalty equal to
(1) 12% of the average monthly advertising revenues and (ii) 6% of the average monthly sponsorship revenues for advertising and sponsorship sold by the Video International
Group for the six months immediately preceding the termination date. We have not reached an agreement with the Video International Group on the amount of the termination
penalty but we have recorded a provision and corresponding expense within Station selling, general and administration expenses of US$ 4.9 million representing the amount we
currently believe we will be required to pay. Under the terms of the relevant agreements, any disputes will be resolved through an independent arbitration process based in, and
under the laws of, England.
d) Licenses
Regulatory bodies in each country in which we operate control access to available frequencies through licensing regimes. We believe that the licenses for our license companies will
be renewed prior to expiry. In Romania, the Slovak Republic, Slovenia and Ukraine local regulations contain a qualified presumption for extensions of broadcast licenses, according
to which a broadcast license may be renewed if the licensee has operated substantially in compliance with the relevant licensing regime. To date, all expiring licenses have been
renewed; however, there can be no assurance that any of the licenses will be renewed upon expiration of their current terms. The failure of any such license to be renewed could
adversely affect the results of our operations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
The analog licenses to operate our terrestrial broadcast operations are effective for the following periods:
Bulgaria
Croatia
Czech Republic
The license of TV2 expires in February 2010.
The license of NOVA TV (Croatia) expires in March 2010.
The license of TV NOVA (Czech Republic) expires in January 2017. The NOVA SPORT license expires in September 2020. The satellite license for NOVA
CINEMA expires in November 2019.
Romania
Licenses expire on dates ranging from April 2009 to May 2017.
Slovak Republic
The license of TV MARKIZA expires in September 2019.
Slovenia
Ukraine
The licenses of POP TV and KANAL A expire in August 2012.
The 15-hour prime time and off prime time license of STUDIO 1+1 expires in December 2016. The license to broadcast for the remaining nine hours in off
prime time expires in July 2014. The satellite license expires in April 2018. Licenses used for the KINO and CITI channels expire on dates ranging from
March 2010 to April 2016.
Digital Terrestrial Television Transition
In the transition from analog to digital terrestrial broadcasting each jurisdiction is following a similar set of steps - although the approach being applied is not uniform. Typically,
legislation governing the transition to digital is adopted addressing the licensing of operators of the digital networks as well as the licensing of digital broadcasters, technical
parameters concerning the allocation of frequencies to be used for digital services (including those currently being used for analog services), broadcasting standards to be
provided, the timing of the transition and, ideally, principles to be applied in the transition, including transparency and non-discrimination. As a rule, these are embodied in a
technical transition plan (“TTP”) that, in most jurisdictions, is agreed among the relevant Media Council, the national telecommunications agency (which is generally responsible for
the allocation and use of frequencies) and the broadcasters.
The TTP will typically include the following: the timeline and final switchover date, time allowances for the phases of the transition, allocation of frequencies for digital broadcasting
and other digital services, methods for calculating digital terrestrial signal coverage and penetration of set top boxes, parameters for determining whether the conditions for
switchover have been satisfied for any phase, the technical specifications for broadcasting standards to be utilized and technical restrictions on parallel broadcasting in analog and
terrestrial during the transition phase.
Of our markets, the Czech Republic, the Slovak Republic and Slovenia are the furthest advanced in the transition to digital. All three have adopted new legislation or amendments to
existing legislation and TTPs in order to facilitate the transition. Generally, this legislation provides that incumbent analog broadcasters are entitled to receive a digital license or
that current licenses entitle the holders to digital terrestrial broadcasting, although broadcasters in a specific jurisdiction may be required to formally file an application in order for a
digital license to be issued.
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
In that regard, both of our Slovenian channels, POP TV and KANAL A, were issued digital licenses in November 2007. We anticipate that the switchover to digital in Slovenia will
be completed by 2010. The license currently held by CET 21 allows for national digital terrestrial broadcasting of TV NOVA (Czech Republic) in any multiplex. Such license may be
extended for an additional 8 years, to 2025, upon application by CET 21. In addition, CET 21 was granted a license for national digital terrestrial broadcasting of
NOVA CINEMA. This license is valid until the completion of transition to digital terrestrial broadcasting in the Czech Republic, at which time we expect a new license will be granted.
In the Slovak Republic, TV MARKIZA is entitled to receive a digital license under recently adopted legislation and intends to apply for one following the completion of the tender
offer for the multiplex operator under the TTP for the Slovak Republic. In addition, in January 2009 Markiza was granted a digital license for a niche channel which must be launched
by January 2011.
Draft legislation governing the transition to digital is under discussion in Bulgaria and Croatia. We anticipate that legislation will be adopted during 2009 that will address digital
licensing and the TTP for each market in a comprehensive way. We expect that our anchor channels will receive digital licenses in these markets.
The Romanian governmental authorities have adopted amendments to existing legislation which provide that analog broadcasters are entitled to receive digital licenses; however,
specific regulations to govern the transition to digitalization are yet to be adopted by the Romanian Media Council. The existing law provides that broadcasters within the same
multiplex are entitled to choose their own operator, whether one of those broadcasters, a separate company set up by those broadcasters or a third party.
The Ukrainian governmental authorities have issued generic legislation in respect of the transition to digital. In addition, the Ukrainian Media Council has issued decisions
confirming that STUDIO 1+1 would be included in one of the multiplexes to be launched in connection with the transition to digital broadcasting. The Ukrainian Media Council
recently held a tender for licenses for additional digital frequencies that will be made available for niche channels in the switchover to digital, and is currently soliciting proposals for
technical development of certain digital multiplexes. However, there has been no indication as to when a TTP will be adopted in Ukraine.
We intend to apply for and obtain digital licenses that are issued in replacement of analog licenses in all our operating countries and to apply for additional digital licenses and for
licenses to operate digital networks where such applications are permissible and prudent.
e) Restrictions on dividends from Consolidated Subsidiaries and Unconsolidated Affiliates
Corporate law in the Central and Eastern European countries in which we have operations stipulates generally that dividends may be declared by shareholders, out of yearly profits,
subject to the maintenance of registered capital and required reserves after the recovery of accumulated losses. The reserve requirement restriction generally provides that before
dividends may be distributed, a portion of annual net profits (typically 5.0%) be allocated to a reserve, which reserve is capped at a proportion of the registered capital of a company
(ranging from 5.0% to 25.0%). The restricted net assets of our consolidated subsidiaries are less than 25.0% of consolidated net assets as at December 31, 2008.
22. RELATED PARTY TRANSACTIONS
Overview
There is a limited local market for many specialist television services in the countries in which we operate; many of these services are provided by parties known to be connected to
our local shareholders. As stated in FASB Statement No. 57 “Related Party Disclosures” (“FAS 57”) transactions involving related parties cannot 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 will continue to review all of these arrangements.
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
We consider our related parties to be those shareholders who have direct control and/or influence and other parties that can significantly influence 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.
Related Party Transactions
Croatia
We contract with Concorde Media Beteiligungsgesellschaft mbH, acting as the agent of Tele München Fernseh GmbH & Co. Produktionsgesellschaft, for the purchase of program
rights. Both companies are wholly-owned by Dr. Herbert Kloiber, a member of our board of directors. Our total purchases from Concorde Media Beteiligungsgesellschaft mbH
during 2008 were US$ nil million, (2007: US$ nil 2006: US$ 0.3 million).
In addition, we purchased programming from companies related to or connected with Mr. Sarbu in 2008. These purchases were approximately US$ 0.1 million (2007: US$ 0.1 million,
2006: US$ 0.3 million).
Czech Republic
We purchased programming from companies related to or connected with Mr. Sarbu in 2008 with a value of approximately US$ 2.7 million (2007: US$ 0.7 million, 2006: US$ 0.7
million).
Slovenia
We purchased programming from companies related to or connected with Mr. Sarbu in 2008 with a value of approximately US$ 0.1 million in 2008 (2007: US$ nil, 2006: US$ nil).
Romania
The total purchases from companies related to or connected with Mr. Sarbu in 2008 were approximately US$ 47.1 million (2007: US$ 28.3 million, 2006: US$ 23.4 million). The
purchases were mainly for programming rights and for various technical, production and administrative related services. The total sales to companies related to or connected with
Mr. Sarbu in 2008 were approximately US$ 1.9 million (2007: US$ 3.1 million, 2006: US$ 2.5 million). At December 31, 2008, companies connected to Mr. Sarbu had an outstanding
balance due to us of US$ 8.6 million (2007: US$ 6.7 million), reflecting advances paid for undelivered programming. At December 31, 2008, companies related to Mr. Sarbu had an
outstanding balance due to them of US$ 1.3 million (2007: US$ 0.9 million).
On April 17, 2008 we acquired certain radio broadcasting assets of Radio Pro, which owns the two leading radio channels in Romania. Radio Pro is a 100% subsidiary of Media Pro,
in which we hold an 8.7% interest and Mr. Sarbu holds the remaining interest. The purchase price, based on an independent valuation, was RON 47.2 million (approximately US$ 20.6
million), of which Mr. Sarbu’s economic interest represents RON 43.1 million (approximately US$18.8 million).
On May 16, 2007 we purchased an additional 5% of Pro TV and MPI and 20% of Media Vision from Mr. Sarbu for consideration of US$ 51.6 million (for further information, see Note
3, “Acquisitions and Disposals, Romania”). Under a put option agreement with Mr. Sarbu entered into in July 2004, Mr. Sarbu has the right to sell his remaining shareholding in Pro
TV and MPI to us at a price, to be determined by an independent valuation, subject to a floor price of US$ 1.45 million for each 1% interest sold. This put is exercisable from
November 12, 2009 for a twenty-year period thereafter.
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
On August 11, 2006 we acquired a 10.0% interest in Media Pro. Following capital calls in which we did not participate, our holding is now 8.7%. The remaining 91.3 % of Media Pro
is held by Mr. Sarbu. In consideration for the purchase of this interest, we paid EUR 8.0 million (approximately US$ 10.1 million at the date of acquisition) in cash and transferred our
existing 20.0% investment in Radio Pro.
We have the right to put our investment in Media Pro to Mr. Sarbu for a three-month period from August 12, 2009 at a price equal to the greater of EUR 13.0 million (approximately
US$ 18.1 million) and the value of our investment, as determined by an independent valuer. This put option is secured by a pledge of a 4.79% shareholding in Pro TV held by Mr.
Sarbu. For more information, see Note 3, “Acquisitions and Disposals Romania”.
Slovak Republic
We purchased programming from companies related to or connected with Mr. Sarbu in 2008 with a value of approximately US$ 1.7 million (2007: US$ 0.04 million, 2006: US$ 0.4
million). The total amount payable as at December 31, 2008 was US$ 0.4 million.
We purchased film rights from Concorde Media Beteiligungs-GesmbH with a value of US$ 0.1 million in 2008 (2007: US$ nil, 2006: US$ nil).
Ukraine
Innova Marketing is a company 100% owned and managed by Mr. Fuchsmann, who was our partner in our Ukraine (STUDIO 1+1) operations until October 2008. Innova Marketing
renders consulting services to Innova. The amount of such services provided in 2008 was US$ 0.2 million (2007: US$ 0.1 million, 2006: US$ 0.1 million).
In 1998 we made a loan to Mr. Fuchsmann, the balance outstanding as at December 31, 2007 was US$ 1.9 million. The interest rate on this loan is US$ three-month LIBOR plus 3.0%,
subject to a minimum interest rate of 5.0%. The loan and all interest due thereon was repaid in full on June 30, 2008.
Alexander Rodnyansky, who was our partner in our Ukraine (STUDIO 1+1) operations until October 2008, was also the general director of the Russian broadcaster CTC based in
Moscow until August 4, 2008 when he became President of CTC and joined the Board of Directors of that company. Our total purchases from CTC in 2008 were US$ 3.4 million
(2007: US$ 8.2 million, 2006: US$ 0.1 million). In addition, we recorded revenue of US$ 0.7 million during 2008 from CTC relating to production of programming (2007: US$ 1.4 million,
2006: US$ 0.8 million).
In addition to the above, we contract with Sablock, a company connected to Mr. Rodnyansky, for license rights costs. Our total purchases during 2008 were US$ 1.0 million (2007:
US$ 3.6 million, 2006: US$ 4.0 million). At December 31, 2008, we have recorded a liability to Sablock of US$ nil (2007: US$ nil).
In 2006, we contracted with Kino-Kolo, a magazine that is 75% owned by Mr. Rodnyansky, for advertising Studio 1+1. Purchases of services from Kino-Kolo in 2008 amounted to
US$ nil (2007: US$ nil, 2006: US$ 0.1 million).
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
We receive legal and consulting services from LLC Legal Company Varlamov and Partners, a company headed by the former First Deputy General Director of Studio 1+1. The total
amount of services rendered by this company in 2008 was US$ 0.1 million (2007: US$ 0.1 million, 2006: US$ 0.3 million).
We purchased programming from companies related to or connected with Mr. Sarbu in 2008 with a value of approximately US$ 0.1 million (2007: US$ 0.1 million, 2006: US$ nil).
On June 30, 2008 we paid $140.0 million to Mr. Igor Kolomoisky, a member of the Board of Directors of CME and the Supervisory Boards of Studio 1+1 and 1+1 Production, to
acquire the interests in the Studio 1+1 group over which he held options (see Note 3, “Acquisitions and Disposals: Ukraine”).
As part of the transactions involving the split of the KINO and CITI channels, on February 10, 2009, we acquired a 10% ownership interest in Glavred-Media LLC for US$ 12.0
million, from an entity controlled by Alexander Tretyakov. Mr. Igor Kolomoisky owns indirectly 50% of Glavred and the remaining 40% is owned by Mr. Tretyakov.
23. SUBSEQUENT EVENTS
KINO acquisition
In the fourth quarter of 2008, in accordance with our stated objectives of establishing multi-channel broadcasting platforms in all of our markets and acquiring the remaining non-
controlling interests in our channels we reached an agreement with our minority partners to acquire 100.0% of the KINO channel and sell them our interest in the CITI channel. In
connection with this agreement, we segregated the broadcasting licenses and other assets of the KINO channel and transferred them to Gravis-Kino, a new entity spun off from
Gravis, which previously operated both the KINO and the CITI channels. Between January 14, 2009 and February 10, 2009, we acquired a 100.0% interest in the KINO channel by
acquiring from our minority partners their interests in Tor, Zhysa, TV Stimul, Ukrpromtorg and Gravis-Kino and selling to them our interest in Gravis, which owns the broadcasting
licenses and other assets of the CITI channel. The net consideration paid by us for these interests was US$ 10.0 million including a payment of US$ 1.5 million for the use of studios,
offices and equipment of Gravis and the provision of other transitional services through December 31, 2009. In addition, on February 10, 2009, CME acquired from an entity
controlled by Mr. Tretyakov a 10.0% ownership interest in Glavred-Media LLC for $12.0 million. Glavred-Media LLC owns a number of websites and print publications as well as a
radio station.
Mr. Kolomoisky, a member of the Board of Directors of CME and the Supervisory Boards of Studio 1+1 and 1+1 Production, indirectly holds a 50% interest in Glavred-Media LLC,
and the remaining 40% is owned by Mr. Tretyakov, our former partner in KINO and CITI.
Draw down of credit facilities
On February 2, 2009, we drew the remaining EUR 125.0 million (approximately US$ 174.0 million) under the EBRD Loan. On February 19, 2009, CET 21 drew the full CZK 1.2 billion
(approximately US$ 53.1 million at the date of drawing) of its credit facility. At the same time, Pro Plus issued a draw down request to ING to draw the full EUR 26.3 million
(approximately US$ 33.6 million at the date of drawing) available under its five-year revolving facility. We drew these funds in order to assure the continued availability of the funds
in light of renewed concerns over the solvency of credit providers in the region and intend to keep the funds deposited in low risk cash deposits.
CET 21 has used some of the money it received to repay a portion of the CZK 10,687 million (US$ 552.4 million) loan to us that was outstanding at December 31, 2008. We had
previously concluded that this loan was long term in nature as described in paragraph 20(b) of FASB Statement No. 52 “Foreign Currency Translation” because we had no intention
of repaying it and recorded a foreign exchange loss of US$ 38.7 million on the retranslation of this loan within Other Comprehensive Income. Now this loan is partly repaid, it is no
longer long term in nature and gains or losses on retranslation will be recorded in the Foreign currency exchange gain/loss, net line of the Consolidated Statement of Operations.
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
24. QUARTERLY FINANCIAL DATA
Selected quarterly financial data for the years ended December 31, 2008 and 2007 is as follows:
Consolidated Statement of Operations data:
Net revenues
Cost of revenue
Operating income
Net income / (loss) from continuing operations
Net income / (loss) from discontinued operations
Net income / (loss)
Net income / (loss) per share:
Basic EPS
Effect of dilutive securities
Diluted EPS
First Quarter
(Unaudited)
For the Year ended December 31, 2008
Second Quarter
Third Quarter
(Unaudited)
(Unaudited)
(US$ 000’s, except per share data)
Fourth Quarter
(Unaudited)
$
$
$
$
223,023
146,886
45,474
15,645
(750)
14,895
0.35
-
0.35
$
$
$
$
304,808
174,812
98,743
68,361
(758)
67,604
1.60
(0.02)
1.58
$
$
$
$
200,603
158,862
7,156
(13,726)
(1,027)
(14,754)
(0.35)
-
( 0.35)
$
$
$
291,500
189,903
(279,170)
(322,039)
(1,250)
(323,289)
(7.64)
-
(7.64)
Note: The amounts shown above reflect the reclassification of the results of the CITI channel as a discontinued operation for all periods presented
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Consolidated Statement of Operations data:
Net revenues
Cost of revenue
Operating income
Net income / (loss) from continuing operations
Net income / (loss) from discontinued operations
Net income / (loss)
Net income / (loss) per share:
Basic EPS
Effect of dilutive securities
Diluted EPS
First Quarter
(Unaudited)
For the Year ended December 31, 2007
Second Quarter
Third Quarter
(Unaudited)
(Unaudited)
(US$ 000’s, except per share data)
Fourth Quarter
(Unaudited)
$
$
$
$
147,712
103,079
14,237
709
(959)
(250)
(0.01)
-
(0.01)
$
$
$
215,992
125,353
67,653
35,670
(1,080)
34,590
0.84
(0.01)
0.83
$
$
$
174,600
107,399
29,371
(17,749)
(1,014)
(18,763)
(0.45)
-
(0.45)
$
$
300,552
165,881
99,195
74,418
(1,427)
72,991
1.73
(0.02)
1.71
Note: The amounts shown above reflect the reclassification of the results of the CITI channel as a discontinued operation for all periods presented.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure that information required to be disclosed in our Annual Report on Form 10-K is recorded, processed, summarized
and reported within the allowable time periods and to ensure that information required to be disclosed is accumulated and communicated to management, including the President
and Chief Operating Officer and the Chief Financial Officer to allow timely decisions regarding required disclosure.
Our President and Chief Operating Officer and the Chief Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of
December 31, 2008 and concluded that our disclosure controls and procedures are 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, 2008. This assessment was performed under the direction and supervision of our President and
Chief Operating Officer and our Chief Financial Officer, and utilized the framework established in “Internal Control - Integrated Framework” issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Based on that evaluation, we concluded that as of December 31, 2008, our internal control over financial reporting was effective. Our independent registered public accounting firm,
Deloitte LLP, has audited our financial statements and issued a report on the effectiveness of internal control over financial reporting, which is included herein.
Changes in Internal Controls
There were no changes in our internal controls over financial reporting during the three month period ended December 31, 2008 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
February 25, 2008
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Central European Media Enterprises Ltd.
We have audited the internal control over financial reporting of Central European Media Enterprises Ltd. and subsidiaries (the "Company") as of December 31, 2008, based on
criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. 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 Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or
persons performing similar functions, and effected by the company's board of directors, management, and other personnel 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 the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material
misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial
reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the criteria established in
Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
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We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and the financial
statement schedule as of and for the year ended December 31, 2008 of the Company and our report dated February 25, 2009 expressed an unqualified opinion on those financial
statements and the financial statement schedule.
DELOITTE LLP
London, United Kingdom
February 25, 2009
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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,” “Management,” “Corporate Governance and Board of
Director Matters” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement for the 2009 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”, “Compensation Committee Report” and
“Compensation Committee Interlocks and Insider Participation” in our Proxy Statement for the 2009 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 is incorporated herein by reference to the sections entitled “Security Ownership of Certain Beneficial Owners and Management” and “Equity
Compensation Plan Information” in our Proxy Statement for the 2009 Annual General Meeting of Shareholders.
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 “Director
Independence” in our Proxy Statement for the 2009 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 2009 Annual General Meeting
of Shareholders.
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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 Il, Item 8 of this Report:
· Report of Independent Registered Public Accounting Firm;
· Consolidated Balance Sheets as of December 31, 2008 and 2007;
· Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 2008, 2007 and 2006;
· Consolidated Statement of Shareholders’ Equity for the years ended December 31, 2008, 2007 and 2006;
· Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006; and
· Notes to Consolidated Financial Statements.
(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*
3.02
3.03*
3.04*
3.05*
4.01*
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).
Bye-Laws of Central European Media Enterprises Ltd., as amended and restated on June 3, 2008.
Memorandum of Increase of Share Capital (incorporated by reference to Exhibit 3.03 to Amendment No. 1 to the Company’s Registration Statement No. 33-80344
on Form S-1, filed August 19, 1994).
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).
Certificate of Deposit of Memorandum of Increase of Share Capital executed by the Registrar of Companies on May 20, 1997 (incorporated by reference to Exhibit
3.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997).
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).
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Exhibit
Number
4.02*
4.03*
4.04*
10.01+
10.02*
10.03*
10.04*
Description
Indenture among Central European Media Enterprises Ltd. as Issuer, Central European Media Enterprises N.V. and CME Media Enterprises B.V. as Subsidiary
Guarantors, BNY Corporate Trustee Services Limited as Trustee, The Bank of New York as Security Trustee, Principal Paying Agent and Transfer Agent and The
Bank of New York (Luxembourg) S.A. as Registrar, Luxembourg Transfer Agent and Luxembourg Paying Agent, dated May 16, 2007 (incorporated by reference to
Exhibit 10.65 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2007).
Registration Rights Agreement among Central European Media Enterprises Ltd., Lehman Brothers Inc., J.P. Morgan Securities Inc., Deutsche Bank Securities Inc.,
BNP Paribas and ING Bank N.V., London Branch, dated March 10, 2008 (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 2008).
Indenture among Central European Media Enterprises Ltd., Central European Media Enterprises N.V., CME Media Enterprises B.V. and The Bank of New York,
dated March 10, 2008 (incorporated by reference to Exhibit 4.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008).
Central European Media Enterprises Ltd. 1995 Amended and Restated 2005 Stock Incentive Plan, as amended on April 25, 2007.
Agreement between CME Media Enterprises B.V. and the Tax and Customs Administration of The Netherlands, dated March 24, 2004 (incorporated by reference
to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004).
Pro TV S.A. put-option between CME Romania B.V., Adrian Sarbu and Rootland Trading Ltd. (incorporated by reference to the Company’s Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 2004).
MPI S.A. put-option between CME Romania B.V., Adrian Sarbu and Rootland Trading Ltd. (incorporated by reference to the Company’s Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2004).
10.05*+
Employee Stock Option Form (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004).
10.06*
10.07*
10.08*
Framework Agreement among CME Media Enterprises B.V., Central European Media Enterprises Ltd. and PPF (Cyprus) Ltd., dated December 13, 2004
(incorporated by reference to the Company’s Annual Report on Form 10-K for the period ended December 31, 2004).
Agreement on Settlement of Disputes and Transfer of Ownership Interest between Mr. Peter Kršák and CME Media Enterprises B.V., dated February 24, 2005
(incorporated by reference to the Company’s Annual Report on Form 10-K for the period ended December 31, 2004).
Subscription Agreement between Central European Media Enterprises Ltd. and PPF (Cyprus) Ltd., dated May 2, 2005 (incorporated by reference to the Company’s
Quarterly Report on Form 10-Q for the quarterly period ended March 30, 2005).
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Exhibit
Number
10.10*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
10.19*
10.20*
Description
Deed of Guarantee among PPF a.s., Central European Media Enterprises Ltd. and CME Media Enterprises B.V., dated May 2, 2005 (incorporated by reference to the
Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 30, 2005).
PPF Group Guarantee among PPF Group N.V., Central European Media Enterprises Ltd. and CME Media Enterprises B.V., dated May 2, 2005 (incorporated by
reference to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 30, 2005).
Indenture among Central European Media Enterprises Ltd., Central European Media Enterprises N.V., CME Media Enterprises B.V., J.P. Morgan Chase Bank N.A.,
London Branch and J.P. Morgan Bank Luxembourg S.A., dated May 5, 2005 (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the
quarterly period ended March 30, 2005).
€ 37.5 million Facility Agreement, between Produkcija Plus Storitveno Podjetje d.o.o., ING Bank N.V., Nova Ljubljanska banka d.d. and Bank Austria Creditanstalt
d.d., dated July 29, 2005 (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005).
Credit Line Agreement No. 2644105/LCD between Ceska Sporitelna a.s. and CET 21 spol. s r.o., dated October 27, 2005 (incorporated by reference to the
Company’s Annual Report on Form 10-K for the period ended December 31, 2005).
Loan Agreement between Central European Media Enterprises Ltd. and European Bank for Reconstruction and Development, dated July 21, 2006 (incorporated by
reference to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006).
Pledge Agreement on Shares in Central European Media Enterprises N.V. among Central European Media Enterprises Ltd., European Bank for Reconstruction and
Development and Central European Media Enterprises N.V., dated July 21, 2006 (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 2006).
Pledge of Shares in CME Media Enterprises B.V. among Central European Media Enterprises N.V., European Bank for Reconstruction and Development and CME
Media Enterprises B.V., dated July 21, 2006 (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2006).
Deed of Guarantee and Indemnity between Central European Media Enterprises N.V. and European Bank for Reconstruction and Development, dated July 21, 2006
(incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006).
Deed of Guarantee and Indemnity between CME Media Enterprises B.V. and European Bank for Reconstruction and Development, dated July 21, 2006
(incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006).
Page 179
Table of Contents
Exhibit
Number
10.21*
10.22*+
10.23*+
10.24*+
10.25*
10.26*
10.27*
10.28*
10.29*
10.30*
10.31*
Description
Contract Assignment between CME Media Enterprises B.V., Central European Media Enterprises Ltd. and European Bank for Reconstruction and Development,
dated July 21, 2006 (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006).
Amendment of Employment Agreement (dated March 30, 2004) between Michael Garin, Chief Executive Officer, and CME Development Corporation, dated July 28,
2006 (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006).
Amended and Restated Contract of Employment between Marina Williams, Executive Vice President, and CME Development Corporation, dated October 5, 2006
(incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2006).
Amended and Restated Contract of Employment between Wallace Macmillan, Chief Financial Officer, and CME Development Corporation, dated October 6, 2006
(incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2006).
Subscription Agreement between Central European Media Enterprises Ltd. and Igor Kolomoisky, dated August 24, 2007 (incorporated by reference to Exhibit 4.02
to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2007).
Registration Rights Agreement between Central European Media Enterprises Ltd. and Igor Kolomoisky, dated as of August 24, 2007 (incorporated by reference to
Exhibit 4.03 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2007).
Supplemental Agreement Relating to the Loan Agreement dated July 21, 2006 (as amended by an amending Letter Agreement dated November 16, 2006) between
Central European Media Enterprises Ltd. and European Bank for Reconstruction and Development, dated August 22, 2007 (incorporated by reference to Exhibit
10.68 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2007).
Loan Agreement between Central European Media Enterprises Ltd. and European Bank for Reconstruction and Development, dated August 22, 2007 (incorporated
by reference to Exhibit 10.69 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2007).
Agreement on Transfer of Participation Interest in Media Invest, spol. s.r.o. between Mr. Jan Kovàčik and CME Slovak Holdings B.V., dated July 13, 2007
(incorporated by reference to Exhibit 10.70 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2007).
Agreement on Consideration between Mr. Jan Kovàčik and CME Slovak Holdings B.V., dated July 13, 2007 (incorporated by reference to Exhibit 10.71 to the
Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2007).
Purchase Agreement among Central European Media Enterprises Ltd. as Issuer, Central European Media Enterprises N.V. and CME Media Enterprises B.V. as
Guarantors and J.P. Morgan Securities Ltd., Lehman Brothers International (Europe) and ING Bank N.V., London Branch as the Initial Purchasers, dated May 9,
2007 (incorporated by reference to Exhibit 10.63 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2007).
Page 180
Table of Contents
Exhibit
Number
10.32*
10.33*
10.34*
10.35*+
10.35A*+
10.36*+
10.37*+
10.38*
10.39*
Description
Amended and Restated Registration Rights Agreement between Central European Media Enterprises Ltd. and Testora Ltd., dated May 11, 2007 (incorporated by
reference to Exhibit 10.64 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2007).
Sale-Purchase Contract for Shares in Pro TV S.A. between Rootland Trading Ltd. and CME Romania B.V., dated June 1, 2007 (incorporated by reference to Exhibit
10.66 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2007).
Sale-Purchase Contract for Shares in Media Pro International S.A. between Rootland Trading Ltd. and CME Romania B.V., dated June 1, 2007 (incorporated by
reference to Exhibit 10.67 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2007).
Employment Agreement between CME Development Corporation and Michael Garin, dated March 30, 2004 (incorporated by reference to Exhibit 10.9 to the
Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2008).
Letter of Amendment, dated November 15, 2007, to the Employment Agreement between CME Development Corporation and Michael Garin, dated March 30,
2004 (incorporated by reference to Exhibit 10.36A to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007).
Contract of Employment between CME Development Corporation and Adrian Sarbu, dated December 27, 2007 (incorporated by reference to Exhibit 10.37 to the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007).
Contract for the Performance of the Office between Pro TV SA and Adrian Sarbu, dated December 27, 2007 (incorporated by reference to Exhibit 10.38 to the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007).
Framework Agreement among Aleksandr Rodnyansky, Boris Fuchsmann, International Teleservices Ltd., Central European Media Enterprises Ltd., CME Media
Enterprises B.V., CME Ukraine Holding GmbH, CET 21 spol. s r.o., Ukrainian Media Services LLC, Studio 1+1 LLC, Foreign Enterprise Inter-Media, Innova Film
GmbH, International Media Services Ltd. and TV Media Planet Ltd., dated January 31, 2008 (incorporated by reference to Exhibit 10.39 to the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2007).
Termination Agreement by and between Aleksandr Rodnyansky, Boris Fuchsmann, International Teleservices Ltd., Central European Media Enterprises Ltd.,
CME Media Enterprises B.V., CME Ukraine Holding GmbH, CET 21 spol. s r.o., Ukrainian Media Services LLC, Studio 1+1 LLC, Foreign Enterprise Inter-Media,
Innova Film GmbH, International Media Services Ltd and TV Media Planet Ltd., dated January 31, 2008 (incorporated by reference to Exhibit 10.40 to the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007).
Page 181
Table of Contents
Exhibit
Number
10.40*
10.41*
10.42*
10.43*
10.44*
10.45*
10.46*
10.47*
10.48*
10.49*
Description
Assignment Agreement among Igor Kolomoisky, Manita Investments Limited, Global Media Group Ltd., Torcensta Holding Ltd., Central European Media
Enterprises Ltd., CME Media Enterprises B.V., CME Ukraine Holding GmbH and Ukrainian Media Services LLC, dated January 31, 2008 (incorporated by reference
to Exhibit 10.41 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007).
Agreement between Mr. Richard Anthony Sheldon and Nova TV d.d., dated November 26, 2007 (incorporated by reference to Exhibit 10.42 to the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2007).
Agreement among Global Komunikacije d.o.o., Nova TV d.d. and Operativna Kompanija d.o.o., dated November 26, 2007 (incorporated by reference to Exhibit 10.43
to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007).
Agreement among Narval A.M. d.o.o., Studio Millenium d.o.o. and Nova TV d.d., dated November 26, 2007 (incorporated by reference to Exhibit 10.44 to the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007).
Purchase Agreement among Central European Media Enterprises Ltd., Lehman Brothers Inc., J.P. Morgan Securities Inc., Deutsche Bank Securities Inc., BNP
Paribas and ING Bank N.V., London Branch, dated March 4, 2008 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 2008).
Deed of Amendment to the Intercreditor Agreement dated July 21, 2006, as amended, among Central European Media Enterprises Ltd., Central European Media
Enterprises N.V., CME Media Enterprises B.V., The Bank of New York, BNY Corporate Trustee Services Limited and European Bank for Reconstruction and
Development, dated March 10, 2008 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2008).
Security Assignment between Central European Media Enterprises Ltd., CME Media Enterprises B.V. and The Bank of New York, dated March 10, 2008
(incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008).
Pledge Agreement among Central European Media Enterprises Ltd., Central European Media Enterprises N.V. and The Bank of New York, dated March 10, 2008
(incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008).
Deed of Pledge of Shares among Central European Media Enterprises N.V., CME Media Enterprises B.V. and The Bank of New York, dated March 10, 2008
(incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008).
Agreement to Provide Advertising Services between Video International-Prioritet LLC and Broadcasting Company “Studio 1+1” LLC dated November 30, 2006
(incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007).
Page 182
Table of Contents
Exhibit
Number
10.50*
10.51*
10.52*
10.53*
10.54*
21.01
23.01
24.01
31.01
31.02
32.01
*
+
b)
c)
Description
Capped Call Transaction between Central European Media Enterprises Ltd., Deutsche Bank AG, London Branch and Deutsche Bank Securities Inc., dated March
4, 2008 (incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008).
Capped Call Transaction between Central European Media Enterprises Ltd. and BNP Paribas, dated March 4, 2008 (incorporated by reference to Exhibit 10.8 to the
Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008).
Master Share Purchase Agreement between CME Media Enterprises B.V. and Top Tone Media Holdings Limited, dated July 28, 2008 (incorporated by reference to
Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2008).
TV2 Group Shareholders Agreement between CME Media Enterprises B.V., Top Tone Media Holdings Limited and Equip Limited (incorporated by reference to
Exhibit 10.11 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2008).
Separation Agreement between CME Development Corporation and Michael Garin, dated December 14, 2008 (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on December 16, 2008).
List of subsidiaries.
Consent of Deloitte LLP.
Power of Attorney, dated as of February 25, 2009.
Certification of President and Chief Operating Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Certifications of President and Chief Operating Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (furnished only).
Previously filed exhibits
Exhibit is a management contract or compensatory plan
Exhibits: See (a)(3) above for a listing of the exhibits included as part of this report.
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.)
Page 183
Table of Contents
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.
Date: February 25, 2009
Date: February 25, 2009
/s/ Adrian Sarbu
Adrian Sarbu
President and Chief Operating Officer
(Principal Executive Officer)
/s/ Wallace Macmillan
Wallace Macmillan
Chief Financial Officer
(Principal Financial Officer and Accounting Officer)
Page 184
Table of Contents
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
Ronald S. Lauder
Herbert A. Granath
/s/ Adrian Sarbu
Adrian Sarbu
/s/ Wallace Macmillan
Wallace Macmillan
Frank Ehmer
Charles Frank
Herbert Kloiber
Igor Kolomoisky
Alfred W. Langer
Bruce Maggin
Ann Mather
Christian Stahl
Duco Sickinghe
Eric Zinterhofer
*
*
*
*
*
*
*
*
*
*
*
*
Title
Date
Chairman of the Board of Directors
February 25, 2009
Vice-Chairman of the Board of Directors
February 25, 2009
President and Chief Operating Officer
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer and Principal Accounting
Officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
*By
/s/Wallace Macmillan
Wallace Macmillan
Attorney-in-fact
February 25, 2009
February 25, 2009
February 25, 2009
February 25, 2009
February 25, 2009
February 25, 2009
February 25, 2009
February 25, 2009
February 25, 2009
February 25, 2009
February 25, 2009
February 25, 2009
Table of Contents
INDEX TO SCHEDULES
Schedule I
Schedule of Valuation Allowances
(US$ 000’s)
S-1
Balance at December 31, 2005
Charged to costs and expenses
Charged to other accounts (1)
Foreign exchange
Balance at December 31, 2006
Charged to costs and expenses
Charged to other accounts (1)
Foreign exchange
Balance at December 31, 2007
Charged to costs and expenses
Charged to other accounts (1)
Foreign exchange
Balance at December 31, 2008
(1) Charged to other accounts for the bad debt and credit note provision consist primarily of accounts receivable written off and opening balance of acquired companies.
12,640
1,852
(602)
691
14,581
2,541
(2,021)
(385)
14,716
Bad debt and
credit note
provision
9,250
1,981
1,524
(115)
Deferred tax
allowance
11,934
5,418
(1,168)
(299)
15,885
9,803
2,000
1,208
28,896
7,192
11,880
(576)
47,392
AMENDED AND RESTATED BYE-LAWS
OF
Exhibit 3.02
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
(first adopted pursuant to a written resolution of the sole member passed on 12th July, 1994 and amended at annual general meetings of 2nd May, 1997, 14th December, 1999, 25th
May, 2000, 15th May, 2002 and 3rd June, 2008).
SUBJECT
Interpretation
Share Capital
Alteration Of Capital
Share Rights
Variation Of Rights
Shares
Shares Certificates
Lien
Calls On Shares
Forfeiture Of Shares
Register Of Members
Record Dates
Transfer Of Shares
Transmission Of Shares
Untraceable Members
General Meetings
Notice Of General Meetings
Proceedings At General Meetings
Voting
Proxies
Corporations Acting By Representatives
Written Resolutions Of Members
Board Of Directors
Retirement Of Directors
Disqualification Of Directors
Executive Directors and Committee
Alternate Directors
Directors' Fees And Expenses
Directors' and Officers' Interests
General Powers Of The Directors
Borrowing Powers
Proceedings Of The Directors
Managers
Officers
Register of Directors and Officers
Minutes
Seal
Authentication Of Documents
Destruction Of Documents
Dividends And Other Payments
Reserves
Capitalisation
Subscription Rights Reserve
Accounting Records
Audit
Notices
Signatures
Winding Up
Indemnity
Alteration Of Bye-laws And Amendment To Memorandum of Association
Information
I N D E X
BYE-LAW NO.
1-2
3
4-7
8-9A
10-11
12-15
16-21
22-24
25-33
34-42
43-44
45
46-51
52-54
55
56-58
59-60
61-65
66-77
78-83
84
85
86
87-88
89
90-91A
92-95
96-99
100-103
104-109
110-113
114-123
124-126
127-131
132
133
134
135
136
137-146
147
148-149
150
151-153
154-159
160-162
163
164-165
166
167
168
In these Bye-laws, unless the context otherwise requires, the words standing in the first column of the following table shall bear the meaning set opposite them respectively
1.
in the second column.
INTERPRETATION
WORD
"Act"
"Auditor"
"Bye-laws"
MEANING
The Companies Act 1981 of Bermuda, as amended from time to time.
the auditor of the Company for the time being and may include any individual or partnership.
these Bye-laws in their present form or as supplemented or amended or substituted from time to time.
"Board" or "Directors"
the Board of Directors of the Company or the Directors present at a meeting of Directors at which a quorum is present.
"capital"
"clear days"
"clearing house"
the share capital from time to time of the Company.
in relation to the period of a notice that period excluding the day when the notice is given or deemed to be given and the day for which it is
given or on which it is to take effect.
a clearing house recognised by the laws of the jurisdiction in which the shares of the Company are listed or quoted on a stock exchange in
such jurisdiction.
"Company"
Central European Media Enterprises Ltd.
"competent" regulatory authority" a competent regulatory authority in the territory where the shares of the Company are listed or quoted on a stock exchange in such
territory.
"debenture" and"debenture holder"include debenture stock and debenture stockholder respectively.
"Designated Stock Exchange"
a stock exchange which is an appointed stock exchange for the purposes of the Act in respect of which the shares of the Company are listed
or quoted and where such appointed stock exchange deems such listing or quotation to be the primary listing or quotation of the shares of
the Company
1
"dollars" and "$"
dollars, the legal currency of the United States of America.
"head office"
such office of the Company as the Directors may from time to time determine to be the principal office of the Company.
"Immediate Family"
with respect to any individual, such individual's spouse, descendants (natural or adoptive), grandparents, parents, siblings of the whole or
half blood.
"Member"
"month"
"Notice"
"Office"
"paid up"
"Register"
a duly registered holder from time to time of the shares in the capital of the Company.
a calendar month.
written notice unless otherwise specifically stated and as further defined in these Bye-laws.
the registered office of the Company for the time being.
paid up or credited as paid up.
the principal register and where applicable, any branch register of Members of the Company to be kept pursuant to the provisions of the Act.
"Registration Office"
in respect of any class of share capital such place as the Board may from time to time determine to keep a branch register of Members in
respect of that class of share capital and where (except in cases where the Board otherwise directs) the transfers or other documents of title
for such class of share capital are to be lodged for registration and are to be registered.
"Seal"
"Secretary"
"Statutes"
"year"
common seal or any one or more duplicate seals of the Company (including a securities seal) for use in Bermuda or in any place outside
Bermuda.
any person firm or corporation appointed by the Board to perform any of the duties of secretary of the Company and includes any assistant,
deputy, temporary or acting secretary.
the Act and every other act of the Legislature of Bermuda for the time being in force applying to or affecting the Company, its memorandum
of association and/or these Bye-laws.
a calendar year.
2
2.
In these Bye-laws, unless there be something within the subject or context inconsistent with such construction:
(a)
words importing the singular include the plural and vice versa;
(b)
words importing a gender include every gender;
(c)
words importing persons include companies, associations and bodies of persons whether corporate or not;
(d)
the words:
(i)
(ii)
"may" shall be construed as permissive;
"shall" or "will" shall be construed as imperative;
(e)
(f)
expressions referring to writing shall, unless the contrary intention appears, be construed as including printing, lithography, photography and other modes of
representing words or figures in a visible form;
references to any act, ordinance, statute or statutory provision shall be interpreted as relating to any statutory modification or re-enactment thereof for the time
being in force;
(g)
save as aforesaid words and expressions defined in the Statutes shall bear the same meanings in these Bye-laws if not inconsistent with the subject in the context;
(h)
(i)
(j)
a resolution shall be a special resolution when it has been passed by a majority of not less than three-fourths of votes cast by such Members as, being entitled so
to do, vote in person or, in the case of such Members as are corporations, by their respective duly authorised representative or, where proxies are allowed, by proxy
at a general meeting of which not less than twenty-one (21) clear days' notice, specifying (without prejudice to the power contained in these Bye-laws to amend the
same) the intention to propose the resolution as a special resolution, has been duly given. Provided that, except in the case of an annual general meeting, if it is so
agreed by a majority in number of the Members having the right to attend and vote at any such meeting, being a majority together holding not less than ninety-five
(95) per cent. in nominal value of the shares giving that right, a resolution may be proposed and passed as a special resolution at a meeting of which less than
twenty-one (21) clear days' Notice has been given;
a resolution shall be an ordinary resolution when it has been passed by a simple majority of votes cast by such Members as, being entitled so to do, vote in person
or, in the case of any Member being a corporation, by its duly authorised representative or, where proxies are allowed, by proxy at a general meeting of which not
less than fourteen (14) clear days' Notice has been duly given;
a special resolution shall be effective for any purpose for which an ordinary resolution is expressed to be required under any provision of these Bye-laws or the
Statutes.
3
3.
(1)
The capital of the Company shall be divided into three classes of shares, namely:
SHARE CAPITAL
(a)
100,000,000 Shares of Class A Common Stock, par value $0.08 per share ("Class A Shares");
(b)
(c)
15,000,000 Shares of Class B Common Stock, par value $0.08 per share ("Class B Shares"); and
5,000,000 Shares of Preferred Stock, par value $0.08 per share ("Preferred Shares").
The Class A shares and the Class B Shares are together referred to as the "Common Shares".
(2)
The holders of Class A Shares shall, subject to the provisions of these Bye-laws:
(b)
be entitled to one vote per Class A Share;
(b)
be entitled to such dividends as the directors may from time to time declare on Class A Shares pari passu with the holders of Class B Shares; and
(c)
in the event of a winding-up or dissolution of the Company, whether voluntary or involuntary or for a reorganisation or otherwise or upon a distribution of
capital, be entitled, after the satisfaction of the rights of the holders of Preferred Shares, to all the surplus assets of the Company pari passu with the
holders of Class B Shares.
(3)
The holders of Class B Shares shall, subject to the provisions of these Bye-laws:
(a)
be entitled to ten votes per Class B Share;
(b)
be entitled to such dividends as the directors may from time to time declare on Class B Shares, pari passu with the holders of Class A Shares; and
(c)
in the event of a winding up or dissolution of the Company, whether voluntary or involuntary or for a re-organisation or otherwise or upon a distribution
of capital, be entitled, after the satisfaction of the rights of the holders of Preferred Shares, to all the surplus assets of the Company pari passu with the
holders of Class A Shares.
(4)
The Class B Shares shall be convertible into Class A Shares on a one for one basis at the option of the holder thereof. All of the issued and outstanding Class B
Shares shall automatically convert into Class A Shares on a one for one basis when the number of issued and outstanding Class B Shares is less that ten per cent (10%) of the
issued and outstanding Common Shares.
4
(5)
Class B Shares may only be transferred to the following (each a "Permitted Transferee"): (i) to other holders of Class B Shares who were holders of Class B shares
prior to the consummation of the Company's public offering of Class A Shares, (ii) in the case where the holder of Class B Shares is an individual, to his or her Immediate Family by
gift, devise or otherwise through laws of descent or distribution, to a trust established by holders of Class B Shares the beneficiaries of which are one or more of his or her
Immediate Family, to a corporation or other entity the majority of beneficial owners of which are or will be owned by holders of Class B Shares, (iii) in the case where the holder of
Class B Shares is a corporation, to its shareholders, (iv) in the case where the holder of Class B Shares is a partnership to its partners, and (v) to any person who would be a
Permitted Transferee through a series of permitted transfers. Any other transfer of Class B Shares is void. However, nothing in this Bye-law prevents a holder of Class B Shares
from converting his Class B Shares into Class A Shares as permitted by the Bye-laws and transferring such Class A Shares as permitted by law.
(6)
The transfer of more than fifty percent (50%) of the equity interest in a corporation or partnership which is a holder of Class B Shares to other than a Permitted
Transferee shall cause all of the Class B Shares held by such corporation or partnership to automatically convert into Class A Shares on a one for one basis. The Company shall be
entitled to seek specific enforcement of the conversion in the event the holder of the Class B Shares fails to comply with the requirements to effect such conversion, and shall be
entitled to recover from the holder the court costs, reasonable attorneys' fees and other cost and expenses incurred by the Company in connection with obtaining such specific
enforcement.
(7)
The Preferred Shares may be issued, subject to the Act, the Company's memorandum of association and these Bye-laws as from time to time amended, from time to
time in one or more series of any number of shares, and with distinctive serial designations, all as shall hereafter be stated and expressed in the resolution or resolutions providing
for the issuance of such Preferred Shares from time to time adopted by the Board of Directors pursuant to authority so to do which is hereby vested in the Board of
Directors. Subject to the Act, the Company's memorandum of association and these Bye-laws, each series of Preferred Shares (a) may have such voting powers, (b) may be subject
to redemption at such time or times, price or prices, or rate or rates, and with such adjustments, (c) may be entitled to receive dividends (which may be cumulative or noncumulative)
at such rates, on such conditions, and at such times, and payable in preference to, or in such relation to, the dividends payable on any other class or classes or of any other series of
stock, (d) may have such rights upon the dissolution of, or upon any distribution of the assets of, the Company, (e) may be made convertible into, or exchangeable for, shares of any
other class or classes or any other series of the same or any other class or classes of shares of the Company, at such price or prices or at such rate or rates of exchange, and with
such adjustments, (f) may be entitled to the benefit of a sinking fund with respect to the purchase or redemption of shares of such series, and (g) may have such other preferences
and relative, participating, optional or other special rights, and qualifications, limitations or restrictions of such preferences and/or rights, all as shall be stated in said resolution or
resolutions providing for the issue of such Preferred Shares.
5
Subject to the Act, the Company's memorandum of association and these Bye-laws as from time to time amended, with respect to the closing of the Register or the fixing of a record
date for the determination of Members entitled to vote and except as otherwise provided the Act, the Company's memorandum of association and these Bye-laws as from time to
time amended or by the resolution or resolutions providing for the issue of any series of Preferred Shares, the holders of outstanding Common Shares shall exclusively have the
right to vote for the election of directors and for all other purposes. Except as otherwise provided by the Act, the Company's memorandum of association and these Bye-laws as
from time to time amended or by the resolution or resolutions providing for the issue of any series of Preferred Shares, the holders of Common Shares shall be entitled, to the
exclusion of the holders of Preferred Shares of any and all series, to receive such dividends as from time to time may be declared by the Board of Directors. Except as otherwise
provided by the Act, the Company's memorandum of association and these Bye-laws as from time to time amended or by the resolution or resolutions providing for the issue of any
series of Preferred Shares, in the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, after payment shall have been made to the
holders of Preferred Shares of the full amount, if any, for which they shall be entitled pursuant to the resolution or resolutions providing for the issue of any series of Preferred
Shares, the holders of Common Shares shall be entitled, to the exclusion of the holders of Preferred Shares of any and all series, to share, rateably according to the number of
Common Shares held by them, in all remaining assets of the Company available for distribution to its Members.
(8)
Subject to the Act, the Company's memorandum of association and, where applicable, the rules of any Designated Stock Exchange and/or any competent
regulatory authority, any power of the Company to purchase or otherwise acquire its own shares shall be exercisable by the Board upon such terms and subject to such conditions
as it thinks fit.
(9)
Neither the Company nor any of its subsidiaries shall directly or indirectly give financial assistance to a person who is acquiring or proposing to acquire shares in
the Company for the purpose of that acquisition whether before or at the same time as the acquisition takes place or afterwards PROVIDED that nothing in this Bye-law shall
prohibit transactions permitted by the Statutes.
4.
The Company may from time to time by ordinary resolution passed by the holders of Common Shares in accordance with Section 45 of the Act:
ALTERATION OF CAPITAL
(a)
(b)
(c)
increase its capital by such sum, to be divided into shares of such amounts, as the resolution shall prescribe;
consolidate and divide all or any of its capital into shares of larger amount than its existing shares;
divide its shares into several classes and without prejudice to any special rights previously conferred on the holders of existing shares attach thereto respectively
any preferential, deferred, qualified or special rights, privileges, conditions or such restrictions which in the absence of any such determination by the Company in
general meeting, as the Directors may determine provided always that where the Company issues shares which do not carry voting rights, the words "non-voting"
shall appear in the designation of such shares;
6
(d)
(e)
(f)
sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the memorandum of association (subject, nevertheless, to the Act), and may by
such resolution determine that, as between the holders of the shares resulting from such sub-division, one or more of the shares may have any such preferred
rights or be subject to any such restrictions as compared with the other or others as the Company has power to attach to unissued or new shares;
change the currency denomination of its share capital; and
cancel any shares which, at the date of the passing of the resolution, have not been taken, or agreed to be taken, by any person, and diminish the amount of its
capital by the amount of the shares so cancelled.
The Board may settle as it considers expedient any difficulty which arises in relation to any consolidation and division under the last preceding Bye-law and in particular
5.
but without prejudice to the generality of the foregoing may issue certificates in respect of fractions of shares or arrange for the sale of the shares representing fractions and the
distribution of the net proceeds of sale (after deduction of the expenses of such sale) in due proportion amongst the Members who would have been entitled to the fractions, and for
this purpose the Board may authorise some person to transfer the shares representing fractions to their purchaser or resolve that such net proceeds be paid to the Company for the
Company's benefit. Such purchaser will not be bound to see to the application of the purchase money nor will his title to the shares be affected by any irregularity or invalidity in
the proceedings relating to the sale.
6.
The Company may from time to time by special resolution passed by the holders of Class A Shares and passed by the holders of Class B Shares, subject to any
confirmation or consent required by law, reduce its authorised or issued share capital or any share premium account or other undistributable reserve in any manner permitted by law.
7.
Except so far as otherwise provided by the conditions of issue, or by these Bye-laws, any capital raised by the creation of new shares shall be treated as if it formed part of
the original capital of the Company, and such shares shall be subject to the provisions contained in these Bye-laws with reference to the payment of calls and instalments, transfer
and transmission, forfeiture, lien, cancellation, surrender, voting and otherwise.
SHARE RIGHTS
8.
Subject to any special rights conferred on the holders of any shares or class of shares, any share in the Company (whether forming part of the present capital or not) may be
issued with or have attached thereto such rights or restrictions whether in regard to dividend, voting, return of capital or otherwise as the Company may by ordinary resolution
determine or, if there has not been any such determination or so far as the same shall not make specific provision, as the Board may determine.
9.
Subject to Sections 42 and 43 of the Act, any preference shares may be issued or converted into shares that, at a determinable date or at the option of the Company or the
holder if so authorised by its memorandum of association, are liable to be redeemed on such terms and in such manner as the Company before the issue or conversion may by
ordinary resolution of the Members determine.
7
(1)
9A.
transaction, and unless such resolution is passed by a majority of the votes cast at the meeting of each class, the resolution shall not pass.
There shall be a class vote for the holders of Class A Shares and a class vote for the holders of Class B Shares to pass a resolution to approve a going private
(2)
For the purposes of this bye-law, a "going private transaction" is any Rule 13e-3 transaction as such term is defined in Rule 13e-3 promulgated under the
Securities Exchange Act of 1934 of the United States of America, as amended, between the Company and (i) Ronald S. Lauder (the "Principal Shareholder"), (ii) any Affiliate of the
Principal Shareholder or (iii) any group consisting of the Principal Shareholder or Affiliates of the Principal Shareholder. For the purposes of this bye-law "Affiliate of the Principal
Shareholder" means (i) any individual or entity who or that, directly or indirectly, controls, is controlled by, or is under common control with, the Principal Shareholder, (ii) any
corporation or organisation (other than the Company or a majority-owned subsidiary of the Company) of which the Principal Shareholder is an officer or partner or is, directly or
indirectly, the beneficial owner of 10% or more of any class of voting securities, or in which the Principal Shareholder has a substantial beneficial interest, (iii) any trust or other
estate in which the Principal Shareholder has a substantial beneficial interest or as to which such Principal Shareholder serves as trustee or in a similar fiduciary capacity or (iv) any
relative or spouse of a Principal Shareholder, or any relative of such spouse, who has the same residence as such Principal Shareholder.
VARIATION OF RIGHTS
10.
Subject to the Act and without prejudice to Bye-law 8, all or any of the special rights for the time being attached to the shares or any class of shares may, unless otherwise
provided by the terms of issue of the shares of that class, from time to time (whether or not the Company is being wound up) be varied, modified or abrogated either with the
consent in writing of the holders of not less than three-fourths of the issued shares of that class or with the sanction of a special resolution passed at a separate general meeting of
the holders of the shares of that class. To every such separate general meeting all the provisions of these Bye-laws relating to general meetings of the Company shall, mutatis
mutandis, apply, but so that:
(a)
(b)
the necessary quorum (other than at an adjourned meeting) shall be two persons holding or representing by proxy not less than one-third in nominal value of the
issued shares of that class and at any adjourned meeting of such holders, two holders present in person or by proxy (whatever the number of shares held by them)
shall be a quorum;
every holder of shares of the class shall be entitled on a poll to one vote for every such share held by him or in the case of Class B Shares, ten votes for every
such share held by him; and
(c)
any holder of shares of the class present in person or by proxy may demand a poll.
The special rights conferred upon the holders of any shares or class of shares shall not, unless otherwise expressly provided in the rights attaching to or the terms of issue
11.
of such shares, be deemed to be varied, modified or abrogated by the creation or issue of further shares ranking pari passu therewith.
8
SHARES
(1)
12.
Subject to the Act and these Bye-laws and without prejudice to any special rights or restrictions for the time being attached to any shares or any class of shares,
the unissued shares of the Company (whether forming part of the original or any increased capital) shall be at the disposal of the Board, which may offer, allot, grant options over or
otherwise dispose of them to such persons, at such times and for such consideration and upon such terms and conditions as the Board may in its absolute discretion determine but
so that no shares shall be issued at a discount. Neither the Company nor the Board shall be obliged, when making or granting any allotment of, offer of, option over or disposal of
shares, to make, or make available, any such offer, option or shares to Members or others with registered addresses in any particular territory or territories being a territory or
territories where, in the absence of a registration statement or other special formalities, this would or might, in the opinion of the Board, be unlawful or impracticable. Members
affected as a result of the foregoing sentence shall not be, or be deemed to be, a separate class of members for any purpose whatsoever.
(2)
The Board may issue warrants conferring the right upon the holders thereof to subscribe for any class of shares or securities in the capital of the Company on
such terms as it may from time to time determine.
(3)
The Company may purchase its own shares for cancellation or acquire them as Treasury Shares in accordance with the Act on such terms as the Board may from
time to time determine. All rights attaching to Treasury Shares shall be suspended and shall not be exercised by the Company while it holds such Treasury Shares and, except where
required by the Act, all Treasury Shares shall be excluded from the calculation of any percentage or fraction of the share capital, or shares, of the Company. For the purposes of
these Bye-Laws, “Treasury Share” shall mean a share of the Company that was or is treated as having been acquired and held by the Company and has been continuously held by
the Company since it was so acquired and has not been cancelled.
13.
Act, the commission may be satisfied by the payment of cash or by the allotment of fully or partly paid shares or partly in one and partly in the other.
The Company may in connection with the issue of any shares exercise all powers of paying commission and brokerage conferred or permitted by the Act. Subject to the
14.
Except as required by law, no person shall be recognised by the Company as holding any share upon any trust and the Company shall not be bound by or required in any
way to recognise (even when having notice thereof) any equitable, contingent, future or partial interest in any share or any fractional part of a share or (except only as otherwise
provided by these Bye-laws or by law) any other rights in respect of any share except an absolute right to the entirety thereof in the registered holder.
Subject to the Act and these Bye-laws, the Board may at any time after the allotment of shares but before any person has been entered in the Register as the holder,
15.
recognise a renunciation thereof by the allottee in favour of some other person and may accord to any allottee of a share a right to effect such renunciation upon and subject to
such terms and conditions as the Board considers fit to impose.
9
16.
The shares of the Company’s stock may be certificated or uncertificated, as provided under the Act. Every share certificate shall be issued under the Seal or a facsimile
thereof and shall specify the number and class and distinguishing numbers (if any) of the shares to which it relates, and the amount paid up thereon and may otherwise be in such
form as the Directors may from time to time determine. No certificate shall be issued representing shares of more than one class. The Board may by resolution determine, either
generally or in any particular case or cases, that any signatures on any such certificates (or certificates in respect of other securities) need not be autographic but may be affixed to
such certificates by some mechanical means or may be printed thereon or that such certificates need not be signed by any person.
SHARE CERTIFICATES
17.
one of several joint holders shall be sufficient delivery to all such holders.
(1)
In the case of a share held jointly by several persons, the Company shall not be bound to issue more than one certificate therefor and delivery of a certificate to
(2)
Where a share stands in the names of two or more persons, the person first named in the Register shall as regards service of notices and, subject to the
provisions of these Bye-laws, all or any other matters connected with the Company, except the transfer of the shares, be deemed the sole holder thereof.
18.
Every person whose name is entered, upon an allotment of shares, as a Member in the Register shall be entitled, without payment, to receive one certificate for all such
shares of any one class or several certificates each for one or more of such shares of such class upon request in writing to the Company and upon payment for every certificate after
the first of such reasonable out-of-pocket expenses as the Board from time to time determines. A shareholder who does not submit such a request in writing to the Company shall
receive uncertificated shares.
19.
Share certificates requested pursuant to Bye-Law 18 shall be issued in the case of an issue of shares within twenty-one (21) days (or such longer period as the terms of the
issue provide) after such a request or in the case of a transfer of fully or partly paid shares within twenty-one (21) days after such a request following the lodgement of a transfer
with the Company, not being a transfer which the Company is for the time being entitled to refuse to register and does not register.
20.
Upon every transfer of certificated shares, the certificate held by the transferor shall be given up to be cancelled, and shall forthwith be cancelled accordingly, and if
requested by the tranferee pursuant to Bye-Law 18 a new certificate shall be issued to the transferee in respect of the shares transferred to him. If any of the shares included in the
certificate so given up shall be retained by the transferor a new certificate for the balance shall be issued to him if so requested by the transferor pursuant to Bye-law 18.
21.
If a share certificate shall be damaged or defaced or alleged to have been lost, stolen or destroyed a new certificate representing the same shares may be issued to the
relevant member upon request and on payment of such fee as the Designated Stock Exchange may determine to be the maximum payable or such lesser sum as the Board may
determine and, subject to compliance with such terms (if any) as to evidence and indemnity and to payment of the costs and reasonable out-of-pocket expenses of the Company in
investigating such evidence and preparing such indemnity as the Board may think fit and, in case of damage or defacement, on delivery of the old certificate to the Company
provided always that where share warrants have been issued, no new share warrant shall be issued to replace one that has been lost unless the Directors are satisfied beyond
reasonable doubt that the original has been destroyed.
10
LIEN
22.
The Company shall have a first and paramount lien on every share (not being a fully paid share) for all moneys (whether presently payable or not) called or payable at a
fixed time in respect of that share. The Company shall also have a first and paramount lien on every share (not being a fully paid share) registered in the name of a Member (whether
or not jointly with other Members) for all amounts of money presently payable by such Member or his estate to the Company whether the same shall have been incurred before or
after notice to the Company of any equitable or other interest of any person other than such member, and whether the period for the payment or discharge of the same shall have
actually arrived or not, and notwithstanding that the same are joint debts or liabilities of such Member or his estate and any other person, whether a Member of the Company or
not. The Company's lien on a share shall extend to all dividends or other moneys payable thereon or in respect thereof. The Board may at any time, generally or in any particular
case, waive any lien that has arisen or declare any share exempt in whole or in part, from the provisions of this Bye-law.
23.
Subject to these Bye-laws, the Company may sell in such manner as the Board determines any share on which the Company has a lien, but no sale shall be made unless
some sum in respect of which the lien exists is presently payable, or the liability or engagement in respect of which such lien exists is liable to be presently fulfilled or discharged nor
until the expiration of fourteen clear days after a notice in writing, stating and demanding payment of the sum presently payable, or specifying the liability or engagement and
demanding fulfilment or discharge thereof and giving notice of the intention to sell in default, has been served on the registered holder for the time being of the share or the person
entitled thereto by reason of his death or bankruptcy.
24.
The net proceeds of the sale shall be received by the Company and applied in or towards payment or discharge of the debt or liability in respect of which the lien exists, so
far as the same is presently payable, and any residue shall (subject to a like lien for debts or liabilities not presently payable as existed upon the share prior to the sale) be paid to the
person entitled to the share at the time of the sale. To give effect to any such sale the Board may authorise some person to transfer the shares sold to the purchaser thereof. The
purchaser shall be registered as the holder of the shares so transferred and he shall not be bound to see to the application of the purchase money, nor shall his title to the shares be
affected by any irregularity or invalidity in the proceedings relating to the sale.
CALLS ON SHARES
25.
Subject to these Bye-laws and to the terms of allotment, the Board may from time to time make calls upon the Members in respect of any moneys unpaid on their shares
(whether on account of the nominal value of the shares or by way of premium), and each Member shall (subject to being given at least fourteen (14) clear days' Notice specifying the
time and place of payment) pay to the Company as required by such notice the amount called on his shares. A call may be extended, postponed or revoked in whole or in part as the
Board determines but no member shall be entitled to any such extension, postponement or revocation except as a matter of grace and favour.
11
26.
A call shall be deemed to have been made at the time when the resolution of the Board authorising the call was passed and may be made payable either in one lump sum or
by instalments. The Directors may make arrangements on the issue of shares for a difference between the shareholders in the amount of calls to be paid and in the times of payment.
27.
made. The joint holders of a share shall be jointly and severally liable to pay all calls and instalments due in respect thereof or other moneys due in respect thereof.
A person upon whom a call is made shall remain liable for calls made upon him notwithstanding the subsequent transfer of the shares in respect of which the call was
28.
If a sum called in respect of a share is not paid before or on the day appointed for payment thereof, the person from whom the sum is due shall pay interest on the amount
unpaid from the day appointed for payment thereof to the time of actual payment at such rate (not exceeding twenty per cent. (20%) per annum) as the Board may determine, but the
Board may in its absolute discretion waive payment of such interest wholly or in part.
29.
No Member shall be entitled to receive any dividend or bonus or to be present and vote (save as proxy for another Member) at any General Meeting either personally or by
proxy, or be reckoned in a quorum, or exercise any other privilege as a Member until all calls or instalments due by him to the Company, whether alone or jointly with any other
person, together with interest and expenses (if any) shall have been paid.
30.
On the trial or hearing of any action or other proceedings for the recovery of any money due for any call, it shall be sufficient to prove that the name of the Member sued is
entered in the Register as the holder, or one of the holders, of the shares in respect of which such debt accrued, that the resolution making the call is duly recorded in the minute
book, and that notice of such call was duly given to the Member sued, in pursuance of these Bye-laws; and it shall not be necessary to prove the appointment of the Directors who
made such call, nor any other matters whatsoever, but the proof of the matters aforesaid shall be conclusive evidence of the debt.
31.
Any amount payable in respect of a share upon allotment or at any fixed date, whether in respect of nominal value or premium or as an instalment of a call, shall be deemed
to be a call duly made and payable on the date fixed for payment and if it is not paid the provisions of these Bye-laws shall apply as if that amount had become due and payable by
virtue of a call duly made and notified.
32.
On the issue of shares the Board may differentiate between the allottees or holders as to the amount of calls to be paid and the times of payment.
33.
The Board may, if it thinks fit, receive from any Member willing to advance the same, and either in money or money's worth, all or any part of the moneys uncalled and
unpaid or instalments payable upon any shares held by him and upon all or any of the moneys so advanced (until the same would, but for such advance, become presently payable)
pay interest at such rate (if any) as the Board may decide. The Board may at any time repay the amount so advanced upon giving to such Member not less than one month's notice
in writing of its intention in that behalf, unless before the expiration of such notice the amount so advanced shall have been called up on the shares in respect of which it was
advanced. Such payment in advance shall not entitle the holder of such share or shares to participate in respect thereof in a dividend subsequently declared.
12
FORFEITURE OF SHARES
34. (1)
If a call remains unpaid after it has become due and payable the Board may give to the person from whom it is due not less than fourteen (14) clear days' notice:
(a)
(b)
requiring payment of the amount unpaid together with any interest which may have accrued and which may still accrue up to the date of actual payment; and
stating that if the notice is not complied with the shares on which the call was made will be liable to be forfeited.
(2)
If the requirements of any such notice are not complied with, any share in respect of which such notice has been given may at any time thereafter, before payment
of all calls and interest due in respect thereof has been made, be forfeited by a resolution of the Board to that effect, and such forfeiture shall include all dividends and bonuses
declared in respect of the forfeited share but not actually paid before the forfeiture.
35.
invalidated by any omission or neglect to give such notice.
When any share has been forfeited, notice of the forfeiture shall be served upon the person who was before forfeiture the holder of the share. No forfeiture shall be
36.
The Board may accept the surrender of any share liable to be forfeited hereunder and, in such case, references in these Bye-laws to forfeiture will include surrender.
37.
Until cancelled in accordance with the requirements of the Act, a forfeited share shall be the property of the Company and may be sold, re-allotted or otherwise disposed of
to such person, upon such terms and in such manner as the Board determines, and at any time before a sale, re-allotment or disposition the forfeiture may be annulled by the Board
on such terms as the Board determines.
38.
A person whose shares have been forfeited shall cease to be a Member in respect of the forfeited shares but nevertheless shall remain liable to pay the Company all
moneys which at the date of forfeiture were presently payable by him to the Company in respect of the shares, with (if the Directors shall in their discretion so require) interest
thereon from the date of forfeiture until payment at such rate (not exceeding twenty per cent. (20%) per annum) as the Board determines. The Board may enforce payment thereof if
it thinks fit, and without any deduction or allowance for the value of the forfeited shares, at the date of forfeiture, but his liability shall cease if and when the Company shall have
received payment in full of all such moneys in respect of the shares. For the purposes of this Bye-law any sum which, by the terms of issue of a share, is payable thereon at a fixed
time which is subsequent to the date of forfeiture, whether on account of the nominal value of the share or by way of premium, shall notwithstanding that time has not yet arrived be
deemed to be payable at the date of forfeiture, and the same shall become due and payable immediately upon the forfeiture, but interest thereon shall only be payable in respect of
any period between the said fixed time and the date of actual payment.
13
39.
A declaration by a Director or the Secretary that a share has been forfeited on a specified date shall be conclusive evidence of the facts therein stated as against all
persons claiming to be entitled to the share, and such declaration shall (subject to the execution of an instrument of transfer by the Company if necessary) constitute a good title to
the share, and the person to whom the share is disposed of shall be registered as the holder of the share and shall not be bound to see to the application of the consideration (if
any), nor shall his title to the share be affected by any irregularity in or invalidity of the proceedings in reference to the forfeiture, sale or disposal of the share. When any share
shall have been forfeited, notice of the declaration shall be given to the member in whose name it stood immediately prior to the forfeiture, and an entry of the forfeiture, with the
date thereof, shall forthwith be made in the register, but no forfeiture shall be in any manner invalidated by any omission or neglect to give such notice or make any such entry.
40.
Notwithstanding any such forfeiture as aforesaid the Board may at any time, before any shares so forfeited shall have been sold, re-allotted or otherwise disposed of,
permit the shares forfeited to be bought back upon the terms of payment of all calls and interest due upon and expenses incurred in respect of the share, and upon such further
terms (if any) as it thinks fit.
41.
The forfeiture of a share shall not prejudice the right of the Company to any call already made or instalment payable thereon.
42.
time, whether on account of the nominal value of the share or by way of premium, as if the same had been payable by virtue of a call duly made and notified.
The provisions of these Bye-laws as to forfeiture shall apply in the case of non-payment of any sum which, by the terms of issue of a share, becomes payable at a fixed
43.
(1)
The Company shall keep in one or more books a Register of its Members and shall enter therein the following particulars, that is to say:
REGISTER OF MEMBERS
(a)
(b)
(c)
the name and address of each Member, the number and class of shares held by him and the amount paid or agreed to be considered as paid on such shares;
the date on which each person was entered in the Register; and
the date on which any person ceased to be a Member.
(2)
Subject to the Act, the Company may keep an overseas or local or other branch register of Members resident in any place, and the Board may make and vary such
regulations as it determines in respect of the keeping of any such register and maintaining a Registration Office in connection therewith.
44.
The Register and branch register of Members, as the case may be, shall be open to inspection between 10 a.m. and 12 noon on every business day by Members without
charge or by any other person, upon a maximum payment of five Bermuda dollars, at the Office or such other place in Bermuda at which the Register is kept in accordance with the
Act or, if appropriate, upon a maximum payment of ten dollars at the Registration Office. The Register including any overseas or local or other branch register of Members may, after
notice has been given by advertisement in an appointed newspaper and where applicable, any other newspapers in accordance with the requirements of any Designated Stock
Exchange to that effect, be closed at such times or for such periods not exceeding in the whole thirty (30) days in each year as the Board may determine and either generally or in
respect of any class of shares.
14
45.
Notwithstanding any other provision of these Bye-laws the Company or the Directors may fix any date as the record date for:
RECORD DATES
(a)
determining the Members entitled to receive any dividend, distribution, allotment or issue and such record date may be on, or at any time not more than 30 days
before or after, any date on which such dividend, distribution, allotment or issue is declared, paid or made;
(b)
determining the Members entitled to receive notice of and to vote at any general meeting of the Company.
TRANSFER OF SHARES
46.
Board and may be under hand only.
Subject to these Bye-laws, any Member may transfer all or any of his shares by an instrument of transfer in the usual or common form or in any other form approved by the
The instrument of transfer shall be executed by or on behalf of the transferor and the transferee provided that the Board may dispense with the execution of the instrument
47.
of transfer by the transferee in any case which it thinks fit in its discretion to do so. The Board may also resolve, either generally or in any particular case, upon request by either the
transferor or transferee, to accept mechanically executed transfers. The transferor shall be deemed to remain the holder of the share until the name of the transferee is entered in the
Register in respect thereof. Nothing in these Bye-laws shall preclude the Board from recognising a renunciation of the allotment or provisional allotment of any share by the allottee
in favour of some other person.
(1)
The Board may, in its absolute discretion, and without giving any reason therefor, refuse to register a transfer of any share issued under any share scheme for
48.
employees upon which a restriction on transfer imposed thereby still subsists, and it may also refuse to register a transfer of any share to more than four (4) joint holders. Nothing
in these Bye-laws shall impair the settlement of transactions entered into through the facilities of the National Association of Security Dealers Automated Quotations System or
other Designate Stock Exchange except as provided by such exchanges.
(2)
No transfer shall be made to an infant or to a person of unsound mind or under other legal disability.
(3)
The Board in so far as permitted by any applicable law may, in its absolute discretion, at any time and from time to time transfer any share upon the Register to
any branch register or any share on any branch register to the Register or any other branch register. In the event of any such transfer, the shareholder requesting such transfer shall
bear the cost of effecting the transfer unless the Board otherwise determines.
15
(4)
Unless the Board otherwise agrees (which agreement may be on such terms and subject to such conditions as the Board in its absolute discretion may from time
to time determine, and which agreement it shall, without giving any reason therefor, be entitled in its absolute discretion to give or withhold), no shares upon the Register shall be
transferred to any branch register nor shall shares on any branch register be transferred to the Register or any other branch register and all transfers and other documents of title
shall be lodged for registration, and registered, in the case of any shares on a branch register, at the relevant Registration Office, and, in the case of any shares on the Register, at
the Office or such other place in Bermuda at which the Register is kept in accordance with the Act.
49.
Without limiting the generality of the last preceding Bye-law, the Board may decline to recognise any instrument of transfer unless:-
(a)
(b)
the instrument of transfer is in respect of only one class of share;
the instrument of transfer is lodged at the Office or such other place in Bermuda at which the Register is kept in accordance with the Act or the Registration
Office (as the case may be) accompanied by the relevant share certificate(s) and such other evidence as the Board may reasonably require to show the right of
the transferor to make the transfer (and, if the instrument of transfer is executed by some other person on his behalf, the authority of that person so to do); and
(c)
if applicable, the instrument of transfer is duly and properly stamped.
50.
the Company, send to each of the transferor and transferee notice of the refusal.
If the Board refuses to register a transfer of any share in accordance with Bye-law 48, it shall, within two (2) months after the date on which the transfer was lodged with
51.
The registration of transfers of shares or of any class of shares may, after notice has been given by advertisement in an appointed newspaper and, where applicable, any
other newspapers in accordance with the requirements of any Designated Stock Exchange to that effect be suspended at such times and for such periods (not exceeding thirty (30)
days in any year) as the Board may determine.
TRANSMISSION OF SHARES
52.
If a Member dies, the survivor or survivors where the deceased was a joint holder, and his legal personal representatives where he was a sole or only surviving holder, will
be the only persons recognised by the Company as having any title to his interest in the shares; but nothing in this Bye-law will release the estate of a deceased Member (whether
sole or joint) from any liability in respect of any share which had been solely or jointly held by him.
53.
Subject to Section 52 of the Act, any person becoming entitled to a share in consequence of the death or bankruptcy or winding-up of a Member may, upon such evidence
as to his title being produced as may be required by the Board, elect either to become the holder of the share or to have some person nominated by him registered as the transferee
thereof. If he elects to become the holder he shall notify the Company in writing either at the Registration Office or Office, as the case may be, to that effect. If he elects to have
another person registered he shall execute a transfer of the share in favour of that person. The provisions of these Bye-laws relating to the transfer and registration of transfers of
shares shall apply to such notice or transfer as aforesaid as if the death or bankruptcy of the Member had not occurred and the notice or transfer were a transfer signed by such
Member.
16
54.
A person becoming entitled to a share by reason of the death or bankruptcy or winding-up of a Member shall be entitled to the same dividends and other advantages to
which he would be entitled if he were the registered holder of the share. However, the Board may, if it thinks fit, withhold the payment of any dividend payable or other advantages
in respect of such share until such person shall become the registered holder of the share or shall have effectually transferred such share, but, subject to the requirements of Bye-
law 75(2) being met, such a person may vote at meetings.
UNTRACEABLE MEMBERS
55. (1)
Without prejudice to the rights of the Company under paragraph (2) of this Bye-law, the Company may cease sending cheque for dividend entitlements or
dividend warrants by post if such cheque or warrants have been left uncashed on two consecutive occasions. However, the Company may exercise the power to cease sending
cheque for dividend entitlements or dividend warrants after the first occasion on which such a cheque or warrant is returned undelivered.
(2)
The Company shall have the power to sell, in such manner as the Board thinks fit, any shares of a Member who is untraceable, but no such sale shall be made
unless:
(a)
(b)
(c)
all cheque or warrants in respect of dividends of the shares in question, being not less than three in total number, for any sum payable in cash to the holder of
such shares in respect of them sent during the relevant period in the manner authorised by the Bye-laws of the Company have remained uncashed;
so far as it is aware at the end of the relevant period, the Company has not at any time during the relevant period received any indication of the existence of the
Member who is the holder of such shares or of a person entitled to such shares by death, bankruptcy or operation of law; and
the Company, if so required by the rules governing the listing of shares on the Designated Stock Exchange, has given notice to, and caused advertisement in
newspapers in accordance with the requirements of, the Designated Stock Exchange to be made of its intention to sell such shares in the manner required by the
Designated Stock Exchange, and a period of three (3) months or such shorter period as may be allowed by the Designated Stock Exchange has elapsed since the
date of such advertisement.
For the purpose of the foregoing, the "relevant period" means the period commencing twelve years before the date of publication of the advertisement referred to in
paragraph (c) of this Bye-law and ending at the expiry of the period referred to in that paragraph.
17
(3)
To give effect to any such sale the Board may authorise some person to transfer the said shares and an instrument of transfer signed or otherwise executed by or
on behalf of such person shall be as effective as if it had been executed by the registered holder or the person entitled by transmission to such shares, and the purchaser shall not
be bound to see to the application of the purchase money nor shall his title to the shares be affected by any irregularity or invalidity in the proceedings relating to the sale. The net
proceeds of the sale will belong to the Company and upon receipt by the Company of such net proceeds it shall become indebted to the former Member for an amount equal to such
net proceeds. No trust shall be created in respect of such debt and no interest shall be payable in respect of it and the Company shall not be required to account for any money
earned from the net proceeds which may be employed in the business of the Company or as it thinks fit. Any sale under this Bye-law shall be valid and effective notwithstanding
that the Member holding the shares sold is dead, bankrupt or otherwise under any legal disability or incapacity.
GENERAL MEETINGS
56.
An annual general meeting of the Company shall be held in each year other than the year of incorporation at such time and place as may be determined by the Board.
57.
determined by the Board.
Each general meeting, other than an annual general meeting, shall be called a special general meeting. General meetings may be held in any part of the world as may be
(1)
The Board may whenever it thinks fit call special general meetings, and Members holding at the date of deposit of the requisition not less than one-tenth of the
58.
paid up capital of the Company carrying the right of voting at general meetings of the Company shall at all times have the right, by written requisition to the Board or the Secretary
of the Company, to require a special general meeting to be called by the Board for the transaction of any business specified in such requisition; and such meeting shall be held
within two (2) months after the deposit of such requisition. If within twenty-one (21) days of such deposit the Board fails to proceed to convene such meeting the requisitionists
themselves may do so in accordance with the provisions of Section 74(3) of the Act.
(2)
A Member may raise business, including the nomination of a candidate for election as a Director, to be considered at annual and special general meetings of the
Company, provided, however, that in order to be brought before a general meeting Member proposals must (i) be a proper matter for Member action under the Act and the rules and
regulations promulgated by the U.S. Securities and Exchange Commission (the “Rules and Regulations”), (ii) comply with the requirements of this Bye-law 58 and (iii) with respect to
Director nominees, the Member submitting such proposal shall have beneficially owned at least five percent of any class of the Company’s outstanding stock for a period of at least
one year. Where a Member proposal is to be considered at an annual general meeting, notice of such Member proposal must be received by the Secretary not less than 120 days
prior to the anniversary date of the prior year’s annual general meeting proxy statement. Where a Member proposal is to be considered at a special general meeting, such notice
must be received not later than five (5) days following the earlier of the date on which notice of the special general meeting was given to Members in accordance with these Bye-
laws or the date on which public disclosure of the date of the special general meeting was made. Any notice of a Member proposal shall contain (i) the name, address and
relationship to the Company of the proposing Member and, with respect to director nominations, the proposed nominee, (ii) with respect to director nominations, a statement to the
effect that the proposed nominee has no direct or indirect business conflict of interest with the Company, (iii) with respect to director nominations, a statement to the effect that the
proposed nominee meets the Company’s published minimum criteria for consideration as a nominee for director of the Company, (iv) the form of resolution to be included in the
proxy statement, (v) a brief description as to why the passing of the resolution is beneficial to the Company and (vi) any such other information as would be required under the rules
and regulations of the U.S. Securities and Exchange Commission to be included in the Company’s proxy statement if such proposal were to be included therein. Notwithstanding the
foregoing, in order to include information with respect to a Member proposal in the Company’s proxy statement and form of proxy for a general meeting, such Member must provide
notice as required by, and otherwise comply with, the Act and the Rules and Regulations. The Company may exclude a Member’s proposal from the Company’s proxy statement and
form of proxy in accordance with the Act and the Rules and Regulations.
18
NOTICE OF GENERAL MEETINGS
59. (1)
by shorter notice if it is so agreed:
An annual general meeting and any special general meeting shall be called by not less than fourteen (14) clear days' Notice but a general meeting may be called
(a)
(b)
in the case of a meeting called as an annual general meeting, by all the Members entitled to attend and vote thereat; and
in the case of any other meeting, by a majority in number of the Members having the right to attend and vote at the meeting, being a majority together holding
not less than ninety-five per cent. (95%) in nominal value of the issued shares giving that right.
(2)
The period of notice shall be exclusive of the day on which it is served or deemed to be served and exclusive of the day on which the meeting is to be held, and
the notice shall specify the time and place of the meeting and, in case of special business, the general nature of the business. The notice convening an annual general meeting shall
specify the meeting as such. Notice of every general meeting shall be given to all Members other than to such Members as, under the provisions of these Bye-laws or the terms of
issue of the shares they hold, are not entitled to receive such notices from the Company, to all persons entitled to a share in consequence of the death or bankruptcy or winding-up
of a Member and to each of the Directors and the Auditors.
60.
receipt of such Notice or such instrument of proxy by, any person entitled to receive such Notice shall not invalidate any resolution passed or the proceedings at that meeting.
The accidental omission to give Notice of a meeting or (in cases where instruments of proxy are sent out with the Notice) to send such instrument of proxy to, or the non-
PROCEEDINGS AT GENERAL MEETINGS
(1)
61.
All business shall be deemed special that is transacted at a special general meeting, and also all business that is transacted at an annual general meeting, with the
exception of sanctioning dividends, the reading, considering and adopting of the accounts and balance sheet and the reports of the Directors and Auditors and other documents
required to be annexed to the balance sheet, the election of Directors and appointment of Auditors and other officers in the place of those retiring, the fixing of the remuneration of
the Auditors, and the voting of remuneration or extra remuneration to the Directors.
19
(2)
No business other than the appointment of a chairman of a meeting shall be transacted at any general meeting unless a quorum is present at the commencement
of the business. Such number of Members holding a majority of the votes of the Company and present in person or by proxy or (in the case of a member being a corporation) by its
duly authorised representative shall form a quorum for all purposes.
If within thirty (30) minutes (or such longer time not exceeding one hour as the chairman of the meeting may determine to wait) after the time appointed for the meeting a
62.
quorum is not present, the meeting, if convened on the requisition of Members, shall be dissolved. In any other case it shall stand adjourned to the same day in the next week at the
same time and place or to such time and place as the Board may determine. If at such adjourned meeting a quorum is not present within half an hour from the time appointed for
holding the meeting, the meeting shall be dissolved.
The President of the Company or the Chairman shall preside as chairman at every general meeting. If at any meeting the President or the Chairman, as the case may be, is
63.
not present within fifteen (15) minutes after the time appointed for holding the meeting, or if neither of them is willing to act as chairman, the Directors present shall choose one of
their number to act, or if one Director only is present he shall preside as chairman if willing to act. If no Director is present, or if each of the Directors present declines to take the
chair, or if the Chairman chosen shall retire from the chair, the Members present in person or by proxy and entitled to vote shall elect one of their number to be chairman.
64.
The Chairman may, with the consent of any meeting at which a quorum is present (and shall if so directed by the meeting), adjourn the meeting from time to time and from
place to place as the meeting shall determine, but no business shall be transacted at any adjourned meeting other than business which might lawfully have been transacted at the
meeting had the adjournment not taken place. When a meeting is adjourned for fourteen (14) days or more, at least seven (7) clear days' notice of the adjourned meeting shall be
given specifying the time and place of the adjourned meeting but it shall not be necessary to specify in such notice the nature of the business to be transacted at the adjourned
meeting and the general nature of the business to be transacted. Save as aforesaid, it shall be unnecessary to give notice of an adjournment. No business shall be transacted at any
such adjourned meeting other than the business which might have been transacted at the meeting from which the adjournment took place.
If an amendment is proposed to any resolution under consideration but is in good faith ruled out of order by the chairman of the meeting, the proceedings on the
65.
substantive resolution shall not be invalidated by any error in such ruling. In the case of a resolution duly proposed as a special resolution, no amendment thereto (other than a
mere clerical amendment to correct a patent error) may in any event be considered or voted upon.
20
VOTING
66.
Subject to any special rights or restrictions as to voting for the time being attached to any shares by or in accordance with these Bye-laws, at any general meeting on a
show of hands every Member present in person or by proxy or (being a corporation) is present by a representative duly authorised under Section 78 of the Act shall have one vote
and on a poll every Member present in person or in the case of a Member being a corporation by its duly authorised representative or by proxy shall have such number of votes as
are attached to every fully paid share of which he is the holder but so that no amount paid up or credited as paid up on a share in advance of calls or instalments is treated for the
foregoing purposes as paid up on the share. A resolution put to the vote of a meeting shall be decided on a show of hands unless (before or on the declaration of the result of the
show of hands or on the withdrawal of any other demand for a poll) a poll is demanded:
(a)
(b)
(c)
(d)
by the chairman of such meeting; or
by at least three Members present in person or in the case of a Member being a corporation by its duly authorised representative or by proxy for the time being
entitled to vote at the meeting; or
by a Member or Members present in person or in the case of a Member being a corporation by its duly authorised representative or by proxy and representing
not less than one-tenth of the total voting rights of all Members having the right to vote at the meeting; or
by a Member or Members present in person or in the case of a Member being a corporation by its duly authorised representative or by proxy and holding shares
in the Company conferring a right to vote at the meeting being shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total
sum paid up on all shares conferring that right.
A demand by a person as proxy for a Member or in the case of a Member being a corporation by its duly authorised representative shall be deemed to be the same as a demand by a
Member.
67.
Unless a poll is duly demanded and the demand is not withdrawn, a declaration by the chairman that a resolution has been carried, or carried unanimously, or by a
particular majority, or not carried by a particular majority, or lost, and an entry to that effect made in the minute book of the Company, shall be conclusive evidence of the fact
without proof of the number or proportion of the votes recorded for or against the resolution.
68.
chairman to disclose the voting figures on a poll.
If a poll is duly demanded the result of the poll shall be deemed to be the resolution of the meeting at which the poll was demanded. There shall be no requirement for the
69.
A poll demanded on the election of a chairman, or on a question of adjournment, shall be taken forthwith. A poll demanded on any other question shall be taken in such
manner (including the use of ballot or voting papers or tickets) and either forthwith or at such time (being not later than thirty (30) days after the date of the demand) and place as
the Chairman directs. It shall not be necessary (unless the chairman otherwise directs) for notice to be given of a poll not taken immediately.
70.
and, with the consent of the chairman, it may be withdrawn at any time before the close of the meeting or the taking of the poll, whichever is the earlier.
The demand for a poll shall not prevent the continuance of a meeting or the transaction of any business other than the question on which the poll has been demanded,
21
71.
72.
On a poll votes may be given either personally or by proxy.
A person entitled to more than one vote on a poll need not use all his votes or cast all the votes he uses in the same way.
73.
other vote he may have.
In the case of an equality of votes, whether on a show of hands or on a poll, the chairman of such meeting shall be entitled to a second or casting vote in addition to any
74.
Where there are joint holders of any share any one of such joint holder may vote, either in person or by proxy, in respect of such share as if he were solely entitled thereto,
but if more than one of such joint holders be present at any meeting the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of
the votes of the other joint holders, and for this purpose seniority shall be determined by the order in which the names stand in the Register in respect of the joint holding. Several
executors or administrators of a deceased Member in whose name any share stands shall for the purposes of this Bye-law be deemed joint holders thereof.
75. (1) A Member who is a patient for any purpose relating to mental health or in respect of whom an order has been made by any court having jurisdiction for the
protection or management of the affairs of persons incapable of managing their own affairs may vote, whether on a show of hands or on a poll, by his receiver, committee, curator
bonis or other person in the nature of a receiver, committee or curator bonis appointed by such court, and such receiver, committee, curator bonis or other person may vote on a poll
by proxy, and may otherwise act and be treated as if he were the registered holder of such shares for the purposes of general meetings, provided that such evidence as the Board
may require of the authority of the person claiming to vote shall have been deposited at the Office, head office or Registration Office, as appropriate, not less than forty-eight (48)
hours before the time appointed for holding the meeting, or adjourned meeting or poll, as the case may be.
(2)
Any person entitled under Bye-law 53 to be registered as the holder of any shares may vote at any general meeting in respect thereof in the same manner as if he
were the registered holder of such shares, provided that forty-eight (48) hours at least before the time of the holding of the meeting or adjourned meeting, as the case may be, at
which he proposes to vote, he shall satisfy the Board of his entitlement to such shares, or the Board shall have previously admitted his right to vote at such meeting in respect
thereof.
76.
registered and all calls or other sums presently payable by him in respect of shares in the Company have been paid.
No Member shall, unless the Board otherwise determines, be entitled to attend and vote and to be reckoned in a quorum at any General Meeting unless he is duly
22
77.
If:
(a)
(b)
(c)
any objection shall be raised to the qualification of any voter; or
any votes have been counted which ought not to have been counted or which might have been rejected; or
any votes are not counted which ought to have been counted;
the objection or error shall not vitiate the decision of the meeting or adjourned meeting on any resolution unless the same is raised or pointed out at the meeting or, as the case may
be, the adjourned meeting at which the vote objected to is given or tendered or at which the error occurs. Any objection or error shall be referred to the Chairman of the meeting and
shall only vitiate the decision of the meeting on any resolution if the Chairman decides that the same may have affected the decision of the meeting. The decision of the Chairman
on such matters shall be final and conclusive.
PROXIES
78.
Member may appoint a proxy in respect of part only of his holding of shares in the Company. A proxy need not be a Member of the Company.
Any Member entitled to attend and vote at a meeting of the Company shall be entitled to appoint another person as his proxy to attend and vote instead of him. A
79.
If an instrument appointing a proxy is in writing, it shall be under the hand of the appointor or of his attorney duly authorised in writing or, if the appointor is a corporation,
either under its seal or under the hand of an officer, attorney or other person authorised to sign the same. In the case of an instrument of proxy in writing purporting to be signed on
behalf of a corporation by an officer thereof it shall be assumed, unless the contrary appears, that such officer was duly authorised to sign such instrument of proxy on behalf of the
corporation without further evidence of the fact.
80.
Subject to the Act, the instrument appointing a proxy, whether in writing or in any other form as may be approved by the Board, and (if required by the Board) the power of
attorney or other authority (if any) under which it is signed, or a certified copy of such power or authority, shall be delivered or otherwise submitted or communicated to the
Company in such form and manner or to such place or one of such places (if any) as may be specified for that purpose in or by way of note to or in any document accompanying the
notice convening the meeting (or, if no place is so specified for instruments in writing, at the Registration Office or the Office, as may be appropriate) not less than forty-eight (48)
hours before the time appointed for holding the meeting or adjourned meeting at which the person named in the instrument proposes to vote or, in the case of a poll taken
subsequently to the date of a meeting or adjourned meeting, not less than twenty-four (24) hours before the time appointed for the taking of the poll and in default the instrument of
proxy shall not be treated as valid. No instrument appointing a proxy shall be valid after the expiration of twelve (12) months from the date named in it as the date of its execution, if
such instrument is in writing, or the date it is submitted or communicated to the Company, if such instrument is in a form other than in writing, except at an adjourned meeting or on a
poll demanded at a meeting or an adjourned meeting in cases where the meeting was originally held within twelve (12) months from such date. Delivery, submission or
communication, as the case may be, of an instrument appointing a proxy shall not preclude a Member from attending and voting in person at the meeting convened and in such
event, the instrument appointing a proxy shall be deemed to be revoked.
23
81.
Instruments of proxy shall be in any common form or in such other form as the Board may approve (provided that this shall not preclude the use of the two-way form) and
the Board may, if it thinks fit, send out or provide access to with the notice of any meeting forms of instrument of proxy for use at the meeting. The instrument of proxy shall be
deemed to confer authority to demand or join in demanding a poll and to vote on any amendment of a resolution put to the meeting for which it is given as the proxy thinks fit. The
instrument of proxy shall, unless the contrary is stated therein, be valid as well for any adjournment of the meeting as for the meeting to which it relates.
82.
A vote given in accordance with the terms of an instrument of proxy shall be valid notwithstanding the previous death or insanity of the principal, or revocation of the
instrument of proxy or of the authority under which it was executed, provided that no intimation in writing of such death, insanity or revocation shall have been received by the
Company at the Office or the Registration Office (or such other place as may be specified for the delivery of instruments of proxy in the notice convening the meeting or other
document sent therewith) two (2) hours at least before the commencement of the meeting or adjourned meeting, or the taking of the poll, at which the instrument of proxy is used.
83.
proxies and instruments appointing proxies shall apply mutatis mutandis in relation to any such attorney and the instrument under which such attorney is appointed.
Anything which under these Bye-laws a Member may do by proxy he may likewise do by his duly appointed attorney and the provisions of these Bye-laws relating to
CORPORATIONS ACTING BY REPRESENTATIVES
(1)
Any corporation which is a Member of the Company may by resolution of its directors or other governing body authorise such person as it thinks fit to act as its
84.
representative at any meeting of the Company or any class of Members of the Company. The person so authorised shall be entitled to exercise the same powers on behalf of such
corporation as the corporation could exercise if it were an individual Member of the Company and such corporation shall for the purposes of these Bye-laws be deemed to be
present in person at any such meeting if a person so authorised is present thereat. Any reference in these Bye-laws to a duly authorised representative of a Member being a
corporation shall mean a representative authorised under the provisions of this Bye-law.
(2)
If a clearing house is a Member, it may authorise such person or persons as it thinks fit to act as its representative or representatives at any meeting of the
Company or at any meeting of any class of Members provided that, if more than one person is so authorised, the authorization shall specify the number and class of shares in
respect of which each such person is so authorised. A person so authorised under the provisions of this Bye-law shall be entitled to exercise the same powers on behalf of the
clearing house (or its nominee) which he represents as that clearing house (or its nominee) could exercise if it were an individual Member.
WRITTEN RESOLUTIONS OF MEMBERS
(1)
85.
Subject to the Act, a resolution in writing signed (in such manner as to indicate, expressly or impliedly, unconditional approval) by or on behalf of all persons for
the time being entitled to receive notice of and to attend and vote at general meetings of the Company shall, for the purposes of these Bye-laws, be treated as a resolution duly
passed at a general meeting of the Company and, where relevant, as a special resolution so passed. Any such resolution shall be deemed to have been passed at a meeting held on
the date on which it was signed by the last Member to sign, and where the resolution states a date as being the date of his signature thereof by any Member the statement shall be
prima facie evidence that it was signed by him on that date. Such a resolution may consist of several documents in the like form, each signed by one or more relevant Members.
24
(2)
Notwithstanding any provisions contained in these Bye-laws, a resolution in writing shall not be passed for the purpose of removing a Director before the
expiration of his term of office under Bye-law 86(4) or for the purposes set out in Bye-law 154(3) relating to the removal and appointment of the Auditor.
BOARD OF DIRECTORS
(1)
86.
Unless otherwise determined by the Board of Directors, the number of Directors shall not be less than three (3). At all times, at least two (2) Directors shall be
independent directors. The Directors shall be elected or appointed by ordinary resolution in the first place at the statutory meeting of Members and thereafter at each annual general
meeting of the Company subject to Bye-law 87 and shall hold office until the next appointment of Directors or until their successors are elected or appointed.
(2)
The Directors shall have the power from time to time and at any time to appoint any person as a Director either to fill a casual vacancy on the Board or as an
addition to the existing Board but so that the number of Directors so appointed shall not exceed any maximum number determined from time to time by the Board of Directors. Any
Director so appointed by the Board shall hold office only until the next following annual general meeting of the Company and shall then be eligible for re-election at that meeting.
Neither a Director nor an alternate Director shall be required to hold any shares of the Company by way of qualification and a Director or alternate Director (as the
case may be) who is not a Member shall be entitled to receive notice of and to attend and speak at any general meeting of the Company and of all classes of shares of the Company.
(3)
(4)
Subject to any provision to the contrary in these Bye-laws the Members may, at any general meeting convened and held in accordance with these Bye-laws, by
special resolution remove a Director at any time before the expiration of his period of office notwithstanding anything in these Bye-laws or in any agreement between the Company
and such Director (but without prejudice to any claim for damages under any such agreement) provided that the notice of any such meeting convened for the purpose of removing a
Director shall contain a statement of the intention so to do and be served on such Director fourteen (14) days before the meeting and at such meeting such Director shall be entitled
to be heard on the motion for his removal.
(5)
A vacancy on the Board created by the removal of a Director under the provisions of subparagraph (4) above may be filled by the election or appointment by the
Members at the meeting at which such Director is removed to hold office until the next appointment of Directors or until their successors are elected or appointed or, in the absence
of such election or appointment the Board of Directors may fill any vacancy in the number left unfilled.
25
(6)
The Board of Directors may from time to time increase or reduce the number of Directors but so that the number of Directors shall never be less than two (2).
87. (1)
At each annual general meeting all of the Directors for the time being shall retire from office.
(2)
A retiring Director shall be eligible for re-election.
RETIREMENT OF DIRECTORS
88.
eligible for election as a Director at any general meeting.
No person other than a Director retiring at the meeting shall, unless recommended by the Directors for election or nominated by a Member pursuant to Bye-Law 58(2), be
89.
The office of a Director shall be vacated if the Director:
DISQUALIFICATION OF DIRECTORS
(1)
resignation;
resigns his office by notice in writing delivered to the Company at the Office or tendered at a meeting of the Board whereupon the Board resolves to accept such
(2)
becomes of unsound mind or dies;
(3)
without special leave of absence from the Board, is absent from meetings of the Board for six consecutive months, and his alternate Director, if any, shall not
during such period have attended in his stead and the Board resolves that his office be vacated; or
(4)
becomes bankrupt or has a receiving order made against him or suspends payment or compounds with his creditors;
(5)
is prohibited by law from being a Director; or
(6)
ceases to be a Director by virtue of any provision of the Statutes or is removed from office pursuant to these Bye-laws.
EXECUTIVE DIRECTORS AND COMMITTEES
90.
The Board may from time to time appoint any one or more of its body to be a Managing Director, Joint Managing Director or Deputy Managing Director or to hold any
other employment or executive office with the Company for such period (subject to their continuance as Directors) and upon such terms as the Board may determine and the Board
may revoke or terminate any of such appointments. Any such revocation or termination as aforesaid shall be without prejudice to any claim for damages that such Director may
have against the Company or the Company may have against such Director. A Director appointed to an office under this Bye-law shall be subject to the same provisions as to
removal as the other Directors of the Company, and he shall (subject to the provisions of any contract between him and the Company) ipso facto and immediately cease to hold
such office if he shall cease to hold the office of Director for any cause.
26
91.
Notwithstanding Bye-laws 96, 97, 98 and 99, an executive Director appointed to an office under Bye-law 90 hereof shall receive such remuneration (whether by way of
salary, commission, participation in profits or otherwise or by all or any of those modes) and such other benefits (including pension and/or gratuity and/or other benefits on
retirement) and allowances as the Board may from time to time determine, and either in addition to or in lieu of his remuneration as a Director.
91A. The Board may delegate any of its powers to a committee appointed by the Board and every such committee shall conform to such directions as the Board shall impose on
them. The Board shall maintain an audit committee, a majority of the members of which shall be independent directors.
ALTERNATE DIRECTORS
Any Director may at any time by Notice delivered to the Office or head office or at a meeting of the Directors appoint any person to be his alternate Director. Any person
92.
so appointed shall have all the rights and powers of the Director or Directors for whom such person is appointed in the alternative provided that such person shall not be counted
more than once in determining whether or not a quorum is present. An alternate Director may be removed at any time by the body which appointed him and, subject thereto, the
office of alternate Director shall continue until the next annual election of Directors or, if earlier, the date on which the relevant Director ceases to be a Director. Any appointment or
removal of an alternate Director shall be effected by Notice signed by the appointor and delivered to the Office or head office or tendered at a meeting of the Board. An alternate
Director may also be a Director in his own right and may act as alternate to more than one Director. An alternate Director shall, if his appointor so requests, be entitled to receive
notices of meetings of the Board or of committees of the Board to the same extent as, but in lieu of, the Director appointing him and shall be entitled to such extent to attend and
vote as a Director at any such meeting at which the Director appointing him is not personally present and generally at such meeting to exercise and discharge all the functions,
powers and duties of his appointor as a Director and for the purposes of the proceedings at such meeting the provisions of these Bye-laws shall apply as if he were a Director save
that as an alternate for more than one Director his voting rights shall be cumulative.
93.
An alternate Director shall only be a Director for the purposes of the Act and shall only be subject to the provisions of the Act insofar as they relate to the duties and
obligations of a Director when performing the functions of the Director for whom he is appointed in the alternative and shall alone be responsible to the Company for his acts and
defaults and shall not be deemed to be the agent of or for the Director appointing him. An alternate Director shall be entitled to contract and be interested in and benefit from
contracts or arrangements or transactions and to be repaid expenses and to be indemnified by the Company to the same extent mutatis mutandis as if he were a Director but he shall
not be entitled to receive from the Company any fee in his capacity as an alternate Director except only such part, if any, of the remuneration otherwise payable to his appointor as
such appointor may by notice in writing to the Company from time to time direct.
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94.
Every person acting as an alternate Director shall have one vote for each Director for whom he acts as alternate (in addition to his own vote if he is also a Director). If his
appointor is for the time being absent from Hong Kong or otherwise not available or unable to act, the signature of an alternate Director to any resolution in writing of the Board or a
committee of the Board of which his appointor is a member shall, unless the notice of his appointment provides to the contrary, be as effective as the signature of his appointor.
An alternate Director shall ipso facto cease to be an alternate Director if his appointor ceases for any reason to be a Director, however, such alternate Director or any other
95.
person may be re-appointed by the Directors to serve as an alternate Director PROVIDED always that, if at any meeting any Director retires but is re-elected at the same meeting, any
appointment of such alternate Director pursuant to these Bye-laws which was in force immediately before his retirement shall remain in force as though he had not retired.
DIRECTORS' FEES AND EXPENSES
96.
deemed to accrue from day to day.
The remuneration of the Directors shall from time to time be determined by the Directors and reported to the Members on an annual basis. Such remuneration shall be
97.
Each Director shall be entitled to be repaid or prepaid all travelling, hotel and incidental expenses reasonably incurred or expected to be incurred by him in attending
meetings of the Board or committees of the Board or general meetings or separate meetings of any class of shares or of debentures of the Company or otherwise in connection with
the discharge of his duties as a Director.
98.
Any Director who, by request, goes or resides abroad for any purpose of the Company or who performs services which in the opinion of the Board go beyond the ordinary
duties of a Director may be paid such extra remuneration (whether by way of salary, commission, participation in profits or otherwise) as the Board may determine and such extra
remuneration shall be in addition to or in substitution for any ordinary remuneration provided for by or pursuant to any other Bye-law.
99.
compensation for loss of office, or as consideration for or in connection with his retirement from office (not being payment to which the Director is contractually entitled).
The Board shall obtain the approval of the Company in general meeting before making any payment to any Director or past Director of the Company by way of
100.
A Director may:
DIRECTORS' AND OFFICERS' INTERESTS
(a)
hold any other office or place of profit with the Company (except that of Auditor) in conjunction with his office of Director for such period and, subject to the
relevant provisions of the Act, upon such terms as the Board may determine. Any remuneration (whether by way of salary, commission, participation in profits
or otherwise) paid to any Director in respect of any such other office or place of profit shall be in addition to any remuneration provided for by or pursuant to
any other Bye-law;
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(b)
(c)
act by himself or his firm in a professional capacity for the Company (otherwise than as Auditor) and he or his firm may be remunerated for professional services
as if he were not a Director;
continue to be or become a director, managing director, joint managing Director, deputy managing director, executive director, manager or other officer or member
of any other company promoted by the Company or in which the Company may be interested as a vendor, shareholder or otherwise and (unless otherwise
agreed) no such Director shall be accountable for any remuneration, profits or other benefits received by him as a director, managing director, joint managing
director, deputy managing director, executive director, manager or other officer or member of or from his interests in any such other company. Subject as
otherwise provided by these Bye-laws the Directors may exercise or cause to be exercised the voting powers conferred by the shares in any other company held
or owned by the Company, or exercisable by them as Directors of such other company in such manner in all respects as they think fit (including the exercise
thereof in favour of any resolution appointing themselves or any of them directors, managing directors, joint managing directors, deputy managing directors,
executive directors, managers or other officers of such company) or voting or providing for the payment of remuneration to the director, managing director, joint
managing director, deputy managing director, executive director, manager or other officers of such other company and any Director may vote in favour of the
exercise of such voting rights in manner aforesaid notwithstanding that he may be, or about to be, appointed a director, managing director, joint managing
director, deputy managing director, executive director, manager or other officer of such a company, and that as such he is or may become interested in the
exercise of such voting rights in manner aforesaid.
101. Subject to the Act and to these Bye-laws, no Director or officer or proposed or intending Director or officer shall be disqualified by his office from contracting with the
Company, either with regard to his tenure of any office or place of profit or as vendor, purchaser or in any other manner whatever, nor shall any such contract or any other contract
or arrangement in which any Director or officer is in any way interested be liable to be avoided, nor shall any Director or officer so contracting or being so interested be liable to
account to the Company or the Members for any remuneration, profit or other benefits realised by any such contract or arrangement by reason of such Director or officer holding
that office or of the fiduciary relationship thereby established provided that such Director or officer shall disclose the nature of his interest in any contract or arrangement in which
he is interested in accordance with Bye-law 102 herein.
102. A Director or officer who to his knowledge is in any way, whether directly or indirectly, interested in a contract or arrangement or proposed contract or arrangement with the
Company shall declare the nature of his interest at the meeting of the Board at which the question of entering into the contract or arrangement is first considered, if he knows his
interest then exists, or in any other case at the first meeting of the Board after he knows that he is or has become so interested. For the purposes of this Bye-law, a general notice to
the Board by a Director to the effect that:
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(a)
(b)
he is a member or officer of a specified company or firm and is to be regarded as interested in any contract or arrangement which may after the date of the notice
be made with that company or firm; or
he is to be regarded as interested in any contract or arrangement which may after the date of the notice be made with a specified person who is connected with
him;
shall be deemed to be a sufficient declaration of interest under this Bye-law in relation to any such contract or arrangement, provided that no such notice shall be effective unless
either it is given at a meeting of the Board or the Director or officer takes reasonable steps to secure that it is brought up and read at the next Board meeting after it is given.
103. (1)
he is to his knowledge materially interested, but this prohibition shall not apply to any of the following matters namely:
A Director shall not vote (nor be counted in the quorum) on any resolution of the Board in respect of any contract or arrangement or any other proposal in which
(i)
(ii)
(iii)
(iv)
(v)
any contract or arrangement for giving to such Director any security or indemnity in respect of money lent by him or obligations incurred or undertaken by him
at the request of or for the benefit of the Company or any of its subsidiaries;
)any contract or arrangement for the giving of any security or indemnity to a third party in respect of a debt or obligation of the Company or any of its
subsidiaries for which the Director has himself assumed responsibility in whole or in part whether alone or jointly under a guarantee or indemnity or by the
giving of security;
any contract or arrangement concerning an offer of shares or debentures or other securities of or by the Company or any other company which the Company
may promote or be interested in for subscription or purchase, where the Director is or is to be interested as a participant in the underwriting or sub-underwriting
of the offer;
any contract or arrangement in which he is interested in the same manner as other holders of shares or debentures or other securities of the Company or any of
its subsidiaries by virtue only of his interest in shares or debentures or other securities of the Company;
any contract or arrangement concerning any other company in which he is interested only, whether directly or indirectly, as an officer or executive or a
shareholder other than a company in which the Director together with any of his associates (as defined by the rules, where applicable, of the Designated Stock
Exchange) is beneficially interested in five (5) per cent or more of the issued shares or of the voting rights of any class of shares of such company (or any third
company through which his interest is derived); or
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(vi)
any proposal concerning the adoption, modification or operation of a share option scheme, a pension fund or retirement, death or disability benefits scheme or
other arrangement which relates both to directors and employees of the Company or of any of its subsidiaries and does not provide in respect of any Director as
such any privilege or advantage not accorded to the employees to which such scheme or fund relates.
(2)
A company shall be deemed to be a company in which a Director owns five (5) per cent. or more if and so long as (but only if and so long as) he and his
associates (as defined by the rules, where applicable, of the Designated Stock Exchange), (either directly or indirectly) are the holders of or beneficially interested in five (5) per cent.
or more of any class of the equity share capital of such company or of the voting rights available to members of such company (or of any third company through which his interest
is derived). For the purpose of this paragraph there shall be disregarded any shares held by a Director as bare or custodian trustee and in which he has no beneficial interest, any
shares comprised in a trust in which the Director's interest is in reversion or remainder if and so long as some other person is entitled to receive the income thereof, and any shares
comprised in an authorised unit trust scheme in which the Director is interested only as a unit holder.
(3)
Where a company in which a Director together with his associates (as defined by the rules, where applicable, of the Designated Stock Exchange) holds five (5)
per cent. or more is materially interested in a transaction, then that Director shall also be deemed materially interested in such transaction.
(4)
If any question shall arise at any meeting of the Board as to the materiality of the interest of a Director (other than the chairman of the meeting) or as to the
entitlement of any Director (other than such chairman) to vote and such question is not resolved by his voluntarily agreeing to abstain from voting, such question shall be referred
to the chairman of the meeting and his ruling in relation to such other Director shall be final and conclusive except in a case where the nature or extent of the interest of the Director
concerned as known to such Director has not been fairly disclosed to the Board. If any question as aforesaid shall arise in respect of the chairman of the meeting such question
shall be decided by a resolution of the Board (for which purpose such chairman shall not vote thereon) and such resolution shall be final and conclusive except in a case where the
nature or extent of the interest of such chairman as known to such chairman has not been fairly disclosed to the Board.
GENERAL POWERS OF THE DIRECTORS
104. (1)
The business of the Company shall be managed and conducted by the Board, which may pay all expenses incurred in forming and registering the Company and
may exercise all powers of the Company (whether relating to the management of the business of the Company or otherwise) which are not by the Statutes or by these Bye-laws
required to be exercised by the Company in general meeting, subject nevertheless to the provisions of the Statutes and of these Bye-laws and to such regulations being not
inconsistent with such provisions, as may be prescribed by the Company in general meeting, but no regulations made by the Company in general meeting shall invalidate any prior
act of the Board which would have been valid if such regulations had not been made. The general powers given by this Bye-law shall not be limited or restricted by any special
authority or power given to the Board by any other Bye-law.
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(2)
Without prejudice to the general powers conferred by these Bye-laws it is hereby expressly declared that the Board shall have the following powers:
(a) To give to any person the right or option of requiring at a future date that an allotment shall be made to him of any share at par or at such premium as may
be agreed.
(b) To give to any Directors, officers or servants of the Company an interest in any particular business or transaction or participation in the profits thereof or
in the general profits of the Company either in addition to or in substitution for a salary or other remuneration.
(c) To resolve that the Company be discontinued in Bermuda and continued in a named country or jurisdiction outside Bermuda subject to the provisions of
the Act.
105. [Deleted]
106. The Board may by power of attorney appoint under the Seal any company, firm or person or any fluctuating body of persons, whether nominated directly or indirectly by
the Board, to be the attorney or attorneys of the Company for such purposes and with such powers, authorities and discretions (not exceeding those vested in or exercisable by the
Board under these Bye-laws) and for such period and subject to such conditions as it may think fit, and any such power of attorney may contain such provisions for the protection
and convenience of persons dealing with any such attorney as the Board may think fit, and may also authorise any such attorney to sub-delegate all or any of the powers,
authorities and discretions vested in him. Such attorney or attorneys may, if so authorised under the Seal of the Company, execute any deed or instrument under their personal seal
with the same effect as the affixation of the Company's Seal.
107. Except as specified in Bye-law 130 or unless expressly authorized by the Board in accordance with these Bye-laws, no Director or Officer may (a) enter into any contract or
deed or other agreement pursuant to which the Company is obliged to make payment over such term or such amount as the Board may from time to time determine, or (b) issue or
agree to issue any share of the Company. The Board may entrust to and confer upon any officer such powers, with such terms, conditions and restrictions, as the Board in its
discretion deems appropriate.
108. All cheque, promissory notes, drafts, bills of exchange and other instruments, whether negotiable or transferable or not, and all receipts for moneys paid to the Company
shall be signed, drawn, accepted, endorsed or otherwise executed, as the case may be, in such manner as the Board shall from time to time by resolution determine. The Company's
banking accounts shall be kept with such banker or bankers as the Board shall from time to time determine.
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109. (1)
The Board may establish or concur or join with other companies (being subsidiary companies of the Company or companies with which it is associated in
business) in establishing and making contributions out of the Company's moneys to any schemes or funds for providing pensions, sickness or compassionate allowances, life
assurance or other benefits for employees (which expression as used in this and the following paragraph shall include any Director or ex-Director who may hold or have held any
executive office or any office of profit under the Company or any of its subsidiary companies) and ex-employees of the Company and their dependents or any class or classes of
such person.
(2)
The Board may pay, enter into agreements to pay or make grants of revocable or irrevocable, and either subject or not subject to any terms or conditions,
pensions or other benefits to employees and ex-employees and their dependents, or to any of such persons, including pensions or benefits additional to those, if any, to which such
employees or ex-employees or their dependents are or may become entitled under any such scheme or fund as mentioned in the last preceding paragraph. Any such pension or
benefit may, as the Board considers desirable, be granted to an employee either before and in anticipation of or upon or at any time after his actual retirement.
BORROWING POWERS
110. The Board may exercise all the powers of the Company to raise or borrow money and to mortgage or charge all or any part of the undertaking, property and assets (present
and future) and uncalled capital of the Company and, subject to the Act, to issue debentures, bonds and other securities, whether outright or as collateral security for any debt,
liability or obligation of the Company or of any third party.
111. Debentures, bonds and other securities may be made assignable free from any equities between the Company and the person to whom the same may be issued.
112. Any debentures, bonds or other securities may be issued at a discount (other than shares), premium or otherwise and with any special privileges as to redemption,
surrender, drawings, allotment of shares, attending and voting at general meetings of the Company, appointment of Directors and otherwise.
113. (1)
shall not be entitled, by notice to the members or otherwise, to obtain priority over such prior charge.
Where any uncalled capital of the Company is charged, all persons taking any subsequent charge thereon shall take the same subject to such prior charge, and
(2)
The Board shall cause a proper register to be kept, in accordance with the provisions of the Act, of all charges specifically affecting the property of the Company
and of any series of debentures issued by the Company and shall duly comply with the requirements of the Act in regard to the registration of charges and debentures therein
specified and otherwise.
PROCEEDINGS OF THE DIRECTORS
114. The Board may meet for the despatch of business, adjourn and otherwise regulate its meetings as it considers appropriate. Questions arising at any meeting shall be
determined by a majority of votes. A majority of the meetings of the Board of Directors of the Company that are held in any given fiscal year of the Company shall be held outside
the United States.
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115. A meeting of the Board may be convened by the Secretary on request of a Director or by any Director. The Secretary shall convene a meeting of the Board of which notice
may be given in writing or by telephone or in such other manner as the Board may from time to time determine whenever he shall be required so to do by the President or Chairman,
as the case may be, or any Director. Any Director may waive notice of any meeting either prospectively or retrospectively.
The quorum necessary for the transaction of the business of the Board may be fixed by the Board and, unless so fixed at any other number, shall be two (2). An
116. (1)
alternate Director shall be counted in a quorum in the case of the absence of a Director for whom he is the alternate provided that he shall not be counted more than once for the
purpose of determining whether or not a quorum is present.
(2)
Directors may participate in any meeting of the Board by means of a conference telephone or other communications equipment through which all persons
participating in the meeting can communicate with each other simultaneously and instantaneously and, for the purpose of counting a quorum, such participation shall constitute
presence at a Meeting as if those participating were present in person.
(3)
Any Director who ceases to be a Director at a Board meeting may continue to be present and to act as a Director and be counted in the quorum until the
termination of such Board meeting if no other Director objects and if otherwise a quorum of Directors would not be present.
117. The continuing Directors or a sole continuing Director may act notwithstanding any vacancy in the Board but, if and so long as the number of Directors is reduced below
the minimum number fixed by or in accordance with these Bye-laws, the continuing Directors or Director, notwithstanding that the number of Directors is below the number fixed by
or in accordance with these Bye-laws as the quorum or that there is only one continuing Director, may act for the purpose of filling vacancies in the Board or of summoning general
meetings of the Company but not for any other purpose.
118. The Board may elect a chairman and one or more deputy chairman of its meetings and determine the period for which they are respectively to hold such office. If no
chairman or deputy chairman is elected, or if at any meeting neither the chairman nor any deputy chairman is present within five (5) minutes after the time appointed for holding the
same, the Directors present may choose one of their number to be chairman of the meeting.
119. A meeting of the Board at which a quorum is present shall be competent to exercise all the powers, authorities and discretions for the time being vested in or exercisable by
the Board.
120. (1)
The Board may delegate any of its powers, authorities and discretions to committees, consisting of such Director, officer, Directors or officers as it thinks fit, and
they may, from time to time, revoke such delegation or revoke the appointment of and discharge any such committees either wholly or in part, and either as to persons or
purposes. Any committee so formed shall, in the exercise of the powers, authorities and discretions so delegated, conform to any regulations which may be imposed on it by the
Board.
(2)
All acts done by any such committee in conformity with such regulations, and in fulfilment of the purposes for which it was appointed, but not otherwise, shall
have like force and effect as if done by the Board, and the Board shall have power, with the consent of the Company in general meeting, to remunerate the members of any such
committee, and charge such remuneration to the current expenses of the Company.
34
121. The meetings and proceedings of any committee consisting of two or more members shall be governed by the provisions contained in these Bye-laws for regulating the
meetings and proceedings of the Board so far as the same are applicable and are not superseded by any regulations imposed by the Board under the last preceding Bye-law.
122. A resolution in writing signed by all the Directors except such as are temporarily unable to act through ill-health or disability, and all the alternate Directors, if appropriate,
whose appointors are temporarily unable to act as aforesaid shall (provided that such number is sufficient to constitute a quorum and further provided that a copy of such
resolution has been given or the contents thereof communicated to all the Directors for the time being entitled to receive notices of Board meetings in the same manner as notices of
meetings are required to be given by these Bye-laws) be as valid and effectual as if a resolution had been passed at a meeting of the Board duly convened and held. Such resolution
may be contained in one document or in several documents in like form each signed by one or more of the Directors or alternate Directors and for this purpose a facsimile signature
of a Director or an alternate Director shall be treated as valid.
123. All acts bona fide done by the Board or by any committee or by any person acting as a Director or members of a committee, shall, notwithstanding that it is afterwards
discovered that there was some defect in the appointment of any member or the Board or such committee or person acting as aforesaid or that they or any of them were disqualified
or had vacated office, be as valid as if every such person had been duly appointed and was qualified and had continued to be a Director or member of such committee.
MANAGERS
124. The Board may from time to time appoint a General Manager, a Manager or Managers of the Company and may fix his or their remuneration either by way of salary or
commission or by conferring the right to participation in the profits of the Company or by a combination of two or more of these modes and pay the working expenses of any of the
staff of the General Manager, Manager or Managers who may be employed by him or them upon the business of the Company.
125. The appointment of such General Manager, Manager or Managers may be for such period as the Board may decide, and the Board may confer upon him or them all or any
of the powers of the Board as they may think fit.
126. The Board may enter into such agreement or agreements with any such General Manager, Manager or Managers upon such terms and conditions in all respects as the
Board may in their absolute discretion think fit, including a power for such General Manager, Manager or Managers to appoint an Assistant Manager or Managers or other
employees whatsoever under them for the purpose of carrying on the business of the Company.
OFFICERS
127. (1)
The officers of the Company shall consist of the president, vice-president, and Secretary and such additional officers (who may or may not be Directors) as the
Board may from time to time determine, all of whom shall be deemed to be officers for the purposes of the Act and these Bye-laws as well as solely for the purposes of the Act, the
chairman, deputy chairman and Directors.
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(2)
The Directors shall, as soon as may be after each appointment or election of Directors, elect amongst the Directors a president and a vice-president or a chairman
and a deputy chairman; and if more than one (1) Director is proposed for either of these offices, the election to such office shall take place in such manner as the Directors may
determine.
(3)
The officers shall receive such remuneration as the Directors may from time to time determine.
(4)
Where the Company does not have a quorum of Directors ordinarily resident in Bermuda, the Company shall in accordance with the Act appoint and maintain a
resident representative ordinarily resident in Bermuda and the resident representative shall maintain an office in Bermuda and comply with the provisions of the Act.
comply with the provisions of the Act.
The Company shall provide the resident representative with such documents and information as the resident representative may require in order to be able to
The resident representative shall be entitled to have notice of, attend and be heard at any Directors' meetings or general meeting of the Company.
128. (1)
The Secretary and additional officers, if any, shall be appointed by the Board and shall hold office on such terms and for such period as the Board may
determine. If thought fit, two (2) or more persons may be appointed as joint Secretaries. The Board may also appoint from time to time on such terms as it thinks fit one or more
assistant or deputy Secretaries.
(2)
The Secretary shall attend all meetings of the Members and shall keep correct minutes of such meetings and enter the same in the proper books provided for the
purpose. He shall perform such other duties as are prescribed by the Act or these Bye-laws or as may be prescribed by the Board.
129. The President or the Chairman, as the case may be, shall act as chairman at all meetings of the Members and of the Directors at which he is present. In his absence a
chairman shall be appointed or elected by those present at the meeting.
130. The officers of the Company shall have such powers and perform such duties in the management, business and affairs of the Company as may be delegated to them by the
Directors from time to time. In addition, the President of the Company shall have the power and is expressly authorized to enter into any contract, deed or other agreement that
obliges the Company to make payments (or provide services or goods) in an amount (or having a fair value) not exceeding US$250,000 or, of such obligations is contemplated by
and within the limits established by an Annual Budget and Operating Plan approved by the Board, obligates the Company to make payments (or provide services or goods) in an
amount (or having a fair value) not exceeding US$1,000,000.
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131. A provision of the Act or of these Bye-laws requiring or authorising a thing to be done by or to a Director and the Secretary shall not be satisfied by its being done by or to
the same person acting both as Director and as or in place of the Secretary.
REGISTER OF DIRECTORS AND OFFICERS
132. (1)
respect to each Director and officer, that is to say:
The Board shall cause to be kept in one or more books at its Office a Register of Directors and officers and shall enter therein the following particulars with
(a)
(b)
his or her first name and surname; and
his or her address.
(2)
The Board shall within a period of fourteen (14) days from the occurrence of -
(a)
(b)
any change among its Directors and officers; or
any change in the particulars contained in the Register of Directors and officers,
cause to be entered on the Register of Directors and officers the particulars of such change and of the date on which it occurred.
(3) The Register of Directors and officers shall be open to inspection by members of the public without charge at the Office between 10:00 a.m. and 12:00 noon on
every business day.
(4) In this Bye-law "officer" has the meaning ascribed to it in Section 92A(7) of the Act.
MINUTES
133. The Board shall cause Minutes to be duly entered in books provided for the purpose:
(a)
(b)
(c)
of all elections and appointments of Directors and officers;
of the names of the Directors present at each meeting of the Directors and of any committee of the Directors;
of all resolutions and proceedings of each general meeting of the Members, meetings of the Board and meetings of committees of the Board.
SEAL
134. (1)
The Company shall have one or more Seals, as the Board may determine. For the purpose of sealing documents creating or evidencing securities issued by the
Company, the Company may have a securities seal which is a facsimile of the Seal of the Company with the addition of the words "Securities Seal" on its face or in such other form
as the Board may approve. The Board shall provide for the custody of each Seal and no Seal shall be used without the authority of the Board or of a committee of the Board
authorised by the Board in that behalf. Subject as otherwise provided in these Bye-laws, any instrument to which a Seal is affixed shall be signed autographically by one Director
and the Secretary or by two Directors or by such other person (including a Director) or persons as the Board may appoint, either generally or in any particular case, save that as
regards any certificates for shares or debentures or other securities of the Company the Board may by resolution determine that such signatures or either of them shall be dispensed
with or affixed by some method or system of mechanical signature. Every instrument executed in manner provided by this Bye-law shall be deemed to be sealed and executed with
the authority of the Board previously given.
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(2)
Where the Company has a Seal for use abroad, the Board may by writing under the Seal appoint any agent or committee abroad to be the duly authorised agent
of the Company for the purpose of affixing and using such Seal and the Board may impose restrictions on the use thereof as may be thought fit. Wherever in these Bye-laws
reference is made to the Seal, the reference shall, when and so far as may be applicable, be deemed to include any such other Seal as aforesaid.
AUTHENTICATION OF DOCUMENTS
135. Any Director or the Secretary or any person appointed by the Board for the purpose may authenticate any documents affecting the constitution of the Company and any
resolution passed by the Company or the Board or any committee, and any books, records, documents and accounts relating to the business of the Company, and to certify copies
thereof or extracts there from as true copies or extracts, and if any books, records, documents or accounts are elsewhere than at the Office or the head office the local manager or
other officer of the Company having the custody thereof shall be deemed to be a person so appointed by the Board. A document purporting to be a copy of a resolution, or an
extract from the minutes of a meeting, of the Company or of the Board or any committee which is so certified shall be conclusive evidence in favour of all persons dealing with the
Company upon the faith thereof that such resolution has been duly passed or, as the case may be, that such minutes or extract is a true and accurate record of proceedings at a duly
constituted meeting.
136. The Company shall be entitled to destroy the following documents at the following times:
DESTRUCTION OF DOCUMENTS
(a)
any share certificate which has been cancelled at any time after the expiry of one (1) year from the date of such cancellation;
38
(b)
(c)
(d)
(e)
any dividend mandate or any variation or cancellation thereof or any notification of change of name or address at any time after the expiry of two (2) years from
the date such mandate variation cancellation or notification was recorded by the Company;
any instrument of transfer of shares which has been registered at any time after the expiry of seven (7) years from the date of registration;
any allotment letters after the expiry of seven (7) years from the date of issue thereof; and
copies of powers of attorney, grants of probate and letters of administration at any time after the expiry of seven (7) years after the account to which the relevant
power of attorney, grant of probate or letters of administration related has been closed;
and it shall conclusively be presumed in favour of the Company that every entry in the Register purporting to be made on the basis of any such documents so destroyed was duly
and properly made and every share certificate so destroyed was a valid certificate duly and properly cancelled and that every instrument of transfer so destroyed was a valid and
effective instrument duly and properly registered and that every other document destroyed hereunder was a valid and effective document in accordance with the recorded
particulars thereof in the books or records of the Company. Provided always that: (1) the foregoing provisions of this Bye-law shall apply only to the destruction of a document in
good faith and without express notice to the Company that the preservation of such document was relevant to a claim; (2) nothing contained in this Bye-law shall be construed as
imposing upon the Company any liability in respect of the destruction of any such document earlier than as aforesaid or in any case where the conditions of proviso (1) above are
not fulfilled; and (3) references in this Bye-law to the destruction of any document include references to its disposal in any manner.
DIVIDENDS AND OTHER PAYMENTS
137. Subject to the Act, the Company in General Meeting may from time to time declare dividends in any currency to be paid to the Members but no dividend shall be declared
in excess of the amount recommended by the Board. The Company in general meeting may also make a distribution to the Members out of any contributed surplus (as ascertained
in accordance with the Act).
138. No dividend shall be paid or distribution made out of contributed surplus if to do so would render the Company unable to pay its liabilities as they become due or the
realisable value of its assets would thereby become less than the aggregate of its liabilities and its issued share capital and share premium accounts.
139. Except in so far as the rights attaching to, or the terms of issue of, any share otherwise provide:
39
(a)
(b)
all dividends shall be declared and paid according to the amounts paid up on the shares in respect of which the dividend is paid, but no amount paid up on a
share in advance of calls shall be treated for the purposes of this Bye-law as paid up on the share; and
all dividends shall be apportioned and paid pro rata according to the amounts paid up on the shares during any portion or portions of the period in respect of
which the dividend is paid.
140. The Board may from time to time pay to the Members such interim dividends as appear to the Board to be justified by the profits of the Company and in particular (but
without prejudice to the generality of the foregoing) if at any time the share capital of the Company is divided into different classes, the Board may pay such interim dividends in
respect of those shares in the capital of the Company which confer on the holders thereof deferred or non-preferential rights as well as in respect of those shares which confer on
the holders thereof preferential rights with regard to dividend and provided that the Board acts bona fide the Board shall not incur any responsibility to the holders of shares
conferring any preference for any damage that they may suffer by reason of the payment of an interim dividend on any shares having deferred or non-preferential rights and may
also pay any fixed dividend which is payable on any shares of the Company half-yearly or on any other dates, whenever such profits, in the opinion of the Board, justifies such
payment.
141. The Board may deduct from any dividend or other moneys payable to a Member by the Company on or in respect of any shares all sums of money (if any) presently
payable by him to the Company on account of calls or otherwise.
142. No dividend or other moneys payable by the Company on or in respect of any share shall bear interest against the Company.
143. Any dividend, interest or other sum payable in cash to the holder of shares may be paid by cheque or warrant sent through the post addressed to the holder at his
registered address or, in the case of joint holders, addressed to the holder whose name stands first in the Register in respect of the shares at his address as appearing in the Register
or addressed to such person and at such address as the holder or joint holders may in writing direct. Every such cheque or warrant shall, unless the holder or joint holders
otherwise direct, be made payable to the order of the holder or, in the case of joint holders, to the order of the holder whose name stands first on the Register in respect of such
shares, and shall be sent at his or their risk and payment of the cheque or warrant by the bank on which it is drawn shall constitute a good discharge to the Company
notwithstanding that it may subsequently appear that the same has been stolen or that any endorsement thereon has been forged. Any one of two or more joint holders may give
effectual receipts for any dividends or other moneys payable or property distributable in respect of the shares held by such joint holders.
144. All dividends or bonuses unclaimed for one (1) year after having been declared may be invested or otherwise made use of by the Board for the benefit of the Company until
claimed. Any dividend or bonuses unclaimed after a period of six (6) years from the date of declaration shall be forfeited and shall revert to the Company. The payment by the
Board of any unclaimed dividend or other sums payable on or in respect of a share into a separate account shall not constitute the Company a trustee in respect thereof.
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145. Whenever the Board or the Company in general meeting has resolved that a dividend be paid or declared, the Board may further resolve that such dividend be satisfied
wholly or in part by the distribution of specific assets of any kind and in particular of paid up shares, debentures or warrants to subscribe securities of the Company or any other
company, or in any one or more of such ways, and where any difficulty arises in regard to the distribution the Board may settle the same as it thinks expedient, and in particular may
issue certificates in respect of fractions of shares, disregard fractional entitlements or round the same up or down, and may fix the value for distribution of such specific assets, or
any part thereof, and may determine that cash payments shall be made to any members upon the footing of the value so fixed in order to adjust the rights of all parties, and may vest
any such specific assets in trustees as may seem expedient to the Board and may appoint any person to sign any requisite instruments of transfer and other documents on behalf of
the persons entitled to the dividend, and such appointment shall be effective and binding on the Members. The Board may resolve that no such assets shall be made available to
Members with registered addresses in any particular territory or territories where, in the absence of a registration statement or other special formalities, such distribution of assets
would or might, in the opinion of the Board, be unlawful or impracticable and in such event the only entitlement of the Members aforesaid shall be to receive cash payments as
aforesaid. Members affected as a result of the foregoing sentence shall not be or be deemed to be a separate class of Members for any purpose whatsoever.
146. Intentionally Deleted
RESERVES
147. Before recommending any dividend, the Board may set aside out of the profits of the Company such sums as it determines as reserves which shall, at the discretion of the
Board, be applicable for any purpose to which the profits of the Company may be properly applied and pending such application may, also at such discretion, either be employed in
the business of the Company or be invested in such investments as the Board may from time to time think fit and so that it shall not be necessary to keep any investments
constituting the reserve or reserves separate or distinct from any other investments of the Company. The Board may also without placing the same to reserve carry forward any
profits which it may think prudent not to distribute.
CAPITALISATION
148 (1). The Board may resolve to capitalise any part of the amount for the time being standing to the credit of any of the Company's share premium or other reserve
accounts or to the credit of the profit and loss account or otherwise available for dividend or distribution by applying such sum in paying up unissued shares to be allotted as fully
paid bonus shares pro rata to the Members.
(2) The Board may resolve to capitalise any sum standing to the credit of a reserve account or sums otherwise available for dividend or distribution by applying such
amounts in paying up in full partly paid shares of those Members who would have been entitled to such sums if they were distributed by way of dividend or distribution.
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149. The Board may settle, as it considers appropriate, any difficulty arising in regard to any distribution under the last preceding Bye-law and in particular may issue certificates
in respect of fractions of shares or authorise any person to sell and transfer any fractions or may resolve that the distribution should be as nearly as may be practicable in the correct
proportion but not exactly so or may ignore fractions altogether, and may determine that cash payments shall be made to any Members in order to adjust the rights of all parties, as
may seem expedient to the Board. The Board may appoint any person to sign on behalf of the persons entitled to participate in the distribution any contract necessary or desirable
for giving effect thereto and such appointment shall be effective and binding upon the Members.
150. The following provisions shall have effect to the extent that they are not prohibited by and are in compliance with the Act:
SUBSCRIPTION RIGHTS RESERVE
(1)
If, so long as any of the rights attached to any warrants issued by the Company to subscribe for shares of the Company shall remain exercisable, the Company
does any act or engages in any transaction which, as a result of any adjustments to the subscription price in accordance with the provisions of the conditions of the warrants,
would reduce the subscription price to below the par value of a share, then the following provisions shall apply:
(a)
(b)
(c)
as from the date of such act or transaction the Company shall establish and thereafter (subject as provided in this Bye-law) maintain in accordance with the
provisions of this Bye-law a reserve (the "Subscription Rights Reserve") the amount of which shall at no time be less than the sum which for the time being
would be required to be capitalised and applied in paying up in full the nominal amount of the additional shares required to be issued and allotted credited as
fully paid pursuant to sub- paragraph (c) below on the exercise in full of all the subscription rights outstanding and shall apply the Subscription Rights Reserve
in paying up such additional shares in full as and when the same are allotted;
the Subscription Rights Reserve shall not be used for any purpose other than that specified above unless all other reserves of the Company (other than share
premium account) have been extinguished and will then only be used to make good losses of the Company if and so far as is required by law;
upon the exercise of all or any of the subscription rights represented by any warrant, the relevant subscription rights shall be exercisable in respect of a nominal
amount of shares equal to the amount in cash which the holder of such warrant is required to pay on exercise of the subscription rights represented thereby (or,
as the case may be the relevant portion thereof in the event of a partial exercise of the subscription rights) and, in addition, there shall be allotted in respect of
such subscription rights to the exercising warrant holder, credited as fully paid, such additional nominal amount of shares as is equal to the difference between:
42
(i)
the said amount in cash which the holder of such warrant is required to pay on exercise of the subscription rights represented thereby (or, as the case may
be, the relevant portion thereof in the event of a partial exercise of the subscription rights); and
(ii)
the nominal amount of shares in respect of which such subscription rights would have been exercisable having regard to the provisions of the conditions
of the warrants, had it been possible for such subscription rights to represent the right to subscribe for shares at less than par
and immediately upon such exercise so much of the sum standing to the credit of the Subscription Rights Reserve as is required to pay up in full such additional
nominal amount of shares shall be capitalised and applied in paying up in full such additional nominal amount of shares which shall forthwith be allotted credited
as fully paid to the exercising warrant holders; and
(d)
if, upon the exercise of the subscription rights represented by any warrant, the amount standing to the credit of the Subscription Rights Reserve is not sufficient
to pay up in full such additional nominal amount of shares equal to such difference as aforesaid to which the exercising warrant holder is entitled, the Board
shall apply any profits or reserves then or thereafter becoming available (including, to the extent permitted by law, share premium account) for such purpose
until such additional nominal amount of shares is paid up and allotted as aforesaid and until then no dividend or other distribution shall be paid or made on the
fully paid shares of the Company then in issue. Pending such payment and allotment, the exercising warrant holder shall be issued by the Company with a
certificate evidencing his right to the allotment of such additional nominal amount of shares. The rights represented by any such certificate shall be in
registered form and shall be transferable in whole or in part in units of one share in the like manner as the shares for the time being are transferable, and the
Company shall make such arrangements in relation to the maintenance of a register therefor and other matters in relation thereto as the Board may think fit and
adequate particulars thereof shall be made known to each relevant exercising warrant holder upon the issue of such certificate.
(2)
Shares allotted pursuant to the provisions of this Bye-law shall rank pari passu in all respects with the other shares allotted on the relevant exercise of the
subscription rights represented by the warrant concerned. Notwithstanding anything contained in paragraph (1) of this Bye-law, no fraction of any share shall be allotted on
exercise of the subscription rights.
(3)
The provision of this Bye-law as to the establishment and maintenance of the Subscription Rights Reserve shall not be altered or added to in any way which
would vary or abrogate, or which would have the effect of varying or abrogating the provisions for the benefit of any warrant holder or class of warrant holders under this Bye-law
without the sanction of a special resolution of such warrant holders or class of warrant holders.
43
(4)
A certificate or report by the auditors for the time being of the Company as to whether or not the Subscription Rights Reserve is required to be established and
maintained and if so the amount thereof so required to be established and maintained, as to the purposes for which the Subscription Rights Reserve has been used, as to the extent
to which it has been used to make good losses of the Company, as to the additional nominal amount of shares required to be allotted to exercising warrant holders credited as fully
paid, and as to any other matter concerning the Subscription Rights Reserve shall (in the absence of manifest error) be conclusive and binding upon the Company and all warrant
holders and shareholders.
ACCOUNTING RECORDS
151. The Board shall cause true accounts to be kept of the sums of money received and expended by the Company, and the matters in respect of which such receipt and
expenditure take place, and of the property, assets, credits and liabilities of the Company and of all other matters required by the Act or necessary to give a true and fair view of the
Company's affairs and to explain its transactions.
152. The accounting records shall be kept at the Office or, subject to the Act, at such other place or places as the Board decides and shall always be open to inspection by the
Directors of the Company. No Member (other than a Director of the Company) shall have any right of inspecting any accounting record or book or document of the Company
except as conferred by law or authorised by the Board or the Company in general meeting.
153. Subject to Section 88 of the Act, a printed copy of the Directors' report, accompanied by the balance sheet and profit and loss account, including every document required
by law to be annexed thereto, made up to the end of the applicable financial year and containing a summary of the assets and liabilities of the Company under convenient heads and
a statement of income and expenditure, together with a copy of the Auditors' report, shall be sent to each person entitled thereto at least twenty-one (21) days before the date of the
general meeting and laid before the Company in general meeting in accordance with the requirements of the Act provided that this Bye-law shall not require a copy of those
documents to be sent to any person whose address the Company is not aware or to more than one of the joint holders of any shares or debentures.
AUDIT
154. (1)
Subject to Section 88 of the Act, at the annual general meeting or at a subsequent special general meeting in each year, the Members shall appoint an auditor to
audit the accounts of the Company and such auditor shall hold office until the Members appoint another auditor. Such auditor may be a Member but no Director or officer or
employee of the Company shall, during his continuance in office, be eligible to act as an auditor of the Company.
(2)
Subject to Section 89 of the Act, a person, other than a retiring Auditor, shall not be capable of being appointed Auditor at an annual general meeting unless
notice in writing of an intention to nominate that person to the office of Auditor has been given not less than fourteen (14) days before the annual general meeting and furthermore,
the Company shall send a copy of any such notice to the retiring Auditor.
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(3)
The Members may, at any general meeting convened and held in accordance with these Bye-laws, by special resolution remove the Auditor at any time before the
expiration of his term of office and shall by ordinary resolution at that meeting appoint another Auditor in his stead for the remainder of his term.
155. Subject to Section 88 of the Act the accounts of the Company shall be audited at least once in every year.
156. The remuneration of the Auditor shall be fixed by the Company in general meeting or in such manner as the Members may determine.
157. If the office of auditor becomes vacant by the resignation or death of the Auditor, or by his becoming incapable of acting by reason of illness, other disability or other
circumstances at a time when his services are required, the Directors may fill the vacancy.
158. The Auditor shall at all reasonable times have access to all books kept by the Company and to all accounts and vouchers relating thereto; and he may call on the Directors
or officers of the Company for any information in their possession relating to the books or affairs of the Company.
159. The statement of income and expenditure and the balance sheet provided for by these Bye-Laws shall be examined by the Auditor and compared by him with the books,
accounts and vouchers relating thereto; and he shall make a written report thereon stating whether such statement and balance sheet are drawn up so as to present fairly the
financial position of the Company and the results of its operations for the period under review and, in case information shall have been called for from Directors or officers of the
Company, whether the same has been furnished and has been satisfactory. The financial statements of the Company shall be audited by the Auditor in accordance with generally
accepted auditing standards. The Auditor shall make a written report thereon in accordance with generally accepted auditing standards and the report of the Auditor shall be
submitted to the Members in general meeting. The generally accepted auditing standards referred to herein may be those of a country or jurisdiction other than Bermuda. If so, the
financial statements and the report of the Auditor should disclose this fact and name such country or jurisdiction.
160. (1)
Any Notice from the Company to a Member may be given:
NOTICES
(a)
(b)
(c)
(d)
(e)
by delivering it to such Member in person; or
by sending it by letter mail or courier to such Member's address in the Register of Members; or
if consented to by the Member to whom such notice is given, by transmitting it by electronic means (including facsimile and electronic mail, but not telephone)
in accordance with such directions as may be given by such Member to the Company for such purpose; or
if consented to by the Member to whom such notice is given, by posting on an electronic network together with a separate notice to the Member of the specific
posting; or
if consented to by the Member to whom such notice is given, by any other form of electronic transmission.
45
(2) Any consent given by a Member with respect to a method of notice set forth in Bye-laws 160 (1)(c)-(e) above may be given by letter mail, courier, or any form of
electronic transmission and shall be revocable by the Member by notice to the Company given by letter mail, courier, or any form of electronic transmission. Any such consent shall
be deemed revoked if the Company is unable to deliver three consecutive notices in accordance with such consent or when such inability to deliver notice becomes known to the
Company’s secretary or transfer agent or other person responsible for the giving of notice.
(3) Any Notice from a Member to the Company may be given in accordance with such directions as may be given by the Company for such purpose on its website
or otherwise.
161. (1) Any notice delivered in accordance with Bye-laws 160(1)(a) or 160(1)(b) shall be deemed to have been served at the time when the same would be delivered in the
ordinary course of transmission and, in proving such service, it shall be sufficient to prove that the notice was properly addressed and prepaid, if posted, and the time when it was
posted or delivered to the courier.
(2) Any notice delivered in accordance with Bye-law 160(1)(c) shall be deemed to have been served when directed to a number or an electronic mail address at which
the Member has consented to receive notice.
(3) Any notice delivered in accordance with Bye-laws 160(1)(d) or 160(1)(e) shall be deemed to have been served upon the later of (i) the notification of the Member
in accordance with such Bye-law; and (ii) the publication of the information or document on the electronic network.
162. Any notice required to be given to a Member shall, with respect to any shares held jointly by two or more persons, be given to whichever of such persons is named first in
the Register of Members and notice so given shall be sufficient notice to all the holders of such shares.
163. For the purposes of these Bye-laws, a cable or telex or facsimile transmission message purporting to come from a holder of shares or, as the case may be, a Director or
alternate Director, or, in the case of a corporation which is a holder of shares from a director or the secretary thereof or a duly appointed attorney or duly authorised representative
thereof for it and on its behalf, shall in the absence of express evidence to the contrary available to the person relying thereon at the relevant time be deemed to be a document or
instrument in writing signed by such holder or Director or alternate Director in the terms in which it is received.
SIGNATURES
46
WINDING UP
164. (1)
The Board shall have power in the name and on behalf of the Company to present a petition to the court for the Company to be wound up.
(2)
A resolution that the Company be wound up by the court or be wound up voluntarily shall be a special resolution.
165. If the Company shall be wound up (whether the liquidation is voluntary or by the court) the liquidator may, with the authority of a special resolution and any other sanction
required by the Act, divide among the Members in specie or kind the whole or any part of the assets of the Company and whether or not the assets shall consist of properties of one
kind or shall consist of properties to be divided as aforesaid of different kinds, and may for such purpose set such value as he deems fair upon any one or more class or classes of
property and may determine how such division shall be carried out as between the Members or different classes of Members. The liquidator may, with the like authority, vest any
part of the assets in trustees upon such trusts for the benefit of the Members as the liquidator with the like authority shall think fit, and the liquidation of the Company may be
closed and the Company dissolved, but so that no contributory shall be compelled to accept any shares or other property in respect of which there is a liability.
INDEMNITY
166. (1) The Directors, Secretary and other officers (such term to include, for the purposes of this Bye-law 166 any person appointed to any committee by the Board) for
the time being and each such person who is or was or had agreed to become a Director or officer of the Company and each such person who is or was serving or who had agreed to
serve as an employee or agent of the Company or as a Director, officer, employee or agent of another company, corporation, partnership, joint venture, trust or other enterprise in
which the Company is or was engaged acting in relation to any of the affairs of the Company and the liquidator or trustees (if any) for the time being acting in relation to any of the
affairs of the Company and every one of them, and their heirs, executors and administrators, shall be indemnified and secured harmless out of the assets and profits of the Company
from and against all actions, costs, charges, losses, damages and expenses which they or any of them, their heirs, executors or administrators, shall or may incur or sustain by or by
reason of any act done, purported to be done, concurred in or omitted in or about the execution of their duty, or supposed duty, or in their respective offices or trusts, or on behalf
of the Company or purportedly on behalf of the Company, and none of them shall be answerable for the acts, receipts, neglects or defaults of the others of them or for joining in any
receipts for the sake of conformity, or for any bankers or other persons with whom any moneys or effects belonging to the Company shall or may be lodged or deposited for safe
custody, or for insufficiency or deficiency of any security upon which any moneys of or belonging to the Company shall be placed out on or invested, or for any other loss,
misfortune or damage which may happen in the execution of their respective offices or trusts, or in relation thereto, PROVIDED THAT this indemnity shall not extend to any matter
in respect of any fraud or dishonesty which may attach to any of said persons. Subject to the provisions of the Act and without limiting the generality or the effect of the foregoing,
the Company may enter into one or more agreements with any person which provide for indemnification greater or different than that provided in this Bye-law.
47
(2) Each Member agrees to waive and release any claim or right of action such Member might have, whether individually or by or in the right of the Company,
against any Director or officer on account of any act done, purported to be done, concurred in or omitted in or about the execution of their duty, or supposed duty, or in their
respective offices or trusts by such Director or officer, or the failure of such Director or officer to take any action in the performance of his duties with or for the Company,
PROVIDED THAT such waiver shall not extend to any matter in respect of any fraud or dishonesty which may attach to such Director or officer.
(3) The indemnity provided by Bye-law 166(1) above shall extend, as a matter of contract between each Member and each former Director and officer of the
Company and their heirs, executors and administrators, to any act done, purported to be done, concurred in or omitted in or about the execution of their duty, or supposed duty, or
in their respective offices or trusts by the former Directors and officers of the Company. The waiver of claims or right of action by each Member provided by Bye-law 166(2) above
shall extend, as a matter of contract between each Member and each former Director and officer of the Company and their heirs, executors and administrators, to any act done,
purported to be done, concurred in or omitted in or about the execution of their duty, or supposed duty, or in their respective offices or trusts by the former Directors and officers of
the Company.
(4) Any repeal or modification of this Bye-law 166 shall not adversely affect any right or protection existing under this Bye-law 166 immediately prior to such repeal
or modification.
(5) The Company may advance moneys to an individual who is indemnified pursuant to Bye-law 166(1) above for the costs, charges and expenses incurred by such
individual in defending any civil or criminal proceedings against them, on condition that such individual shall repay the advance if any allegation of fraud or dishonesty is proved
against them.
ALTERATION OF BYE-LAWS & AMENDMENT TO MEMORANDUM OF ASSOCIATION
167. No Bye-Law shall be rescinded, altered or amended and no new Bye-Law shall be made until the same has been approved by a resolution of the Directors and confirmed by
an ordinary resolution of the holders of Common Shares.
INFORMATION
168. No Member shall be entitled to require discovery of or any information respecting any detail of the Company's trading or any matter which is or may be in the nature of a
trade secret or secret process which may relate to the conduct of the business of the Company and which in the opinion of the Directors it will be inexpedient in the interests of the
members of the Company to communicate to the public.
*****
***
*
48
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
1995 AMENDED AND RESTATED 2005 STOCK INCENTIVE PLAN
As Amended as of April 25, 2007
Exhibit 10.01
1. Purpose
The purpose of the 1995 Amended and Restated Stock Incentive Plan (the "Plan") is to induce employees and directors who are not employees of the Company or a Subsidiary
("non-employee directors") to retain their association with Central European Media Enterprises Ltd (the "Company"), its affiliates and its present and future subsidiaries (each a
"Subsidiary"), as defined in Section 424(f) of the United States Internal Revenue Code of 1986, as amended (the "Code"), to attract new employees and directors who are not
employees and to encourage such employees and directors who are not employees to secure or increase on reasonable terms their stock ownership in the Company. The Board of
Directors of the Company (the "Board") believes that the granting of stock or stock-based awards (the "Awards") under the Plan will promote continuity of management and
increased incentive and personal interest in the welfare of the Company by those who are or may become primarily responsible for shaping and carrying out the long range plans of
the Company and securing its continued growth and financial success. Awards granted hereunder are intended to be either (a) Options, (b) Restricted Stock, (c) Restricted Stock
Units (as these terms are defined below), or (c) a combination thereof, as determined by the Committee (the "Committee") referred to in Section 5 hereof at the time of the grant
thereof.
2. Adoption of the Plan
The Plan was adopted originally adopted in 1995 as the Central European Media Enterprises Ltd. 1995 Stock Option Plan, amended several times thereafter, and further amended and
restated by resolution of the Board on April 11, 2005 and approved by a majority of the votes cast by the Company’s shareholders at the Company's annual general meeting of
shareholders on June 2, 2005, and amended by resolution of the Board on April 25, 2007. Unless the Plan is terminated earlier by the Board as provided herein, no Award shall be
granted after June 1, 2015.
3. Common Shares Subject to Plan
4,500,000 of the authorized but unissued shares of the Class A Common Shares (the "Class A Common Shares") and 450,000 of the authorized but unissued shares of the Class B
Common Shares (the "Class B Common Shares", together with the Class A Common Shares, the “Common Shares”), are hereby reserved for issue with respect to the Awards
granted under the Plan; provided, however, that the aggregate number of Common Shares that may be issued under the Plan shall not exceed 4,500,000; provided further, however,
that the number of Class A Common Shares reserved shall be reduced by the number of Class B Common Shares that are delivered with respect to Awards granted hereunder. To
the extent that Common Shares covered by an Award are not delivered because the Award expires, is forfeited, cancelled or otherwise terminated, such Common Shares shall be
deemed not to have been delivered for purposes of determining the maximum number of Common Shares available under the Plan and shall be included in the amount of shares
available for Awards and such shares may be subject to further grants of Awards.
4. Administration
The Plan shall be administered by the Committee as provided in Section 5 hereof. Subject to the express provisions of the Plan, the Committee shall have complete authority, in its
discretion, to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, to determine the terms and provisions of the respective option agreements or
certificates (which need not be identical), to determine the individuals (each a "Participant") to whom and the times and the prices (if any) at which Awards shall be granted, the
period during which each Award shall be exercisable (if applicable) and the vesting schedule therefor (which may vary with each Participant and may be granted on a basis less
favorable to the Participant than that provided in Section 11 hereof), the number of Class A Common Shares or of Class B Common Shares to be subject to each Award and to make
all other determinations necessary or advisable for the administration of the Plan (including whether any Option shall be an incentive stock option or a non-incentive stock option);
provided, however, that Awards of, or relating to, Class B Common Shares shall be granted only to persons eligible to be a holder of Class B Common Shares pursuant to the
Company's Bye-laws; and provided further, however, that only the Board shall grant Awards to non-employee directors, other than Awards granted to non-employee directors
pursuant to Section 24.B. hereof, and determine the terms thereof. In making such determinations, the Committee or the Board, as the case may be, may take into account the nature
of the services rendered by the respective employees and non-employee directors, their present and potential contributions to the success of the Company or any Subsidiary and
such other factors as the Committee or the Board in its discretion shall deem relevant. The Committee's or Board's determination on the matters referred to in this Section 4 shall be
conclusive. Any dispute or disagreement which may arise under or as a result of or with respect to any Award shall be determined by the Committee, in its sole discretion, and any
interpretations by the Committee of the terms of any Award shall be final, binding and conclusive.
5. Committee
The Committee shall mean the Compensation Committee of the Company as constituted by the Board of Directors from time to time and acting in accordance with its duly adopted
charter
6. Eligibility
An Award may be granted only to an employee of the Company or a Subsidiary. A director of the Company or a Subsidiary who is not an employee of the Company or a Subsidiary
shall be eligible to receive an Award, but only as provided in Sections 4 and 24 hereof.
OPTIONS
7. Awards of Options
A.
B.
C.
D.
Options (each an “Option”) may be granted alone or in addition to other Awards granted under the Plan and may be of two types: “incentive stock options” (within the
meaning of Section 422 of the Code) and “non-incentive stock options”. Any Option granted under the Plan shall be in such form as the Committee may from time to time
approve.
The Committee shall have the authority to grant any Participant incentive stock options, non-incentive stock options or both types of Options (in each case with or without
other Awards). Incentive stock options may be granted only to employees of the Company and its Subsidiaries. To the extent that any Option is not designated as an
incentive stock option or, even if so designated, does not qualify as an incentive stock option, it shall constitute a non-incentive stock option. Incentive stock options
may be granted only within 10 years from the date the Plan is adopted, or the date the Plan is approved by the Company’s shareholders, whichever is earlier.
Options shall be evidenced by option agreements in a form approved by the Committee. An option agreement shall indicate on its face whether it is intended to be an
agreement for an incentive stock option or a non-incentive stock option. The grant date of an Option shall be the date the Committee determines to be the grant date;
provided, that the grant complies in all respects with the pricing requirements in Section 8.
Anything in the Plan to the contrary notwithstanding, no term of the Plan relating to incentive stock options shall be interpreted, amended or altered, nor shall any
discretion or authority granted under the Plan be exercised, so as to disqualify the Plan under Section 422 of the Code or, without the consent of the Participant affected, to
disqualify any incentive stock option under Section 422 of the Code.
2
8. Option Exercise Prices
A.
B.
C.
The initial per share option price of an Option which is an incentive stock option shall be the price determined by the Committee, but not less than the fair market value of a
Class A Common Share or Class B Common Share on the date of grant; provided, however, that, in the case of a Participant who owns, or is deemed to own, Common
Shares representing more than 10% of the total combined voting power of all classes of stock of the Company or any parent or subsidiary corporation of the Company,
determined pursuant to rules applicable to Section 422(b)(6) of the Code (a “Ten-Percent Holder”), at the time an Option which is an incentive stock option is granted to
him, the initial per share option price shall not be less than 110% of the fair market value of a Class A Common Share or Class B Common Share on the date of grant.
The initial per share option price of any Option which is a non-incentive stock option granted to an employee shall be the price determined by the Committee, but not less
than the fair market value of a Class A Common Share or Class B Common Share on the date of grant. The Committee may provide that the option price per share will
increase to reflect the cost of the capital or any other objective measure or may set the initial exercise price at an amount in excess of the fair market value at the time of
grant. The per share option price of any Option granted to a non-employee director pursuant to Section 24.A. shall be determined in the same manner as the per share
option price for options granted to employees, and the per share option price of an Option granted to a non-employee director pursuant to Section 24.B. shall be determined
as provided in Section 24.B.
For all purposes of the Plan, the fair market value of a Class A Common Share or a Class B Common Share on any date shall be equal to (i) if, on such day, the Class A
Common Shares shall be traded on a national securities exchange, the closing sales price of a Class A Common Share as published by such national securities exchange or
if there is no sale of the Class A Common Shares on such date, the average of the bid and asked price on such exchange at the close of trading on such date, or (ii) if the
Class A Common Shares are not listed on a national securities exchange on such date, and are traded on a national securities market, the average of the bid and asked price
in the over-the-counter market at the close of trading on such date, or (iii) if the provisions of clause (i) and clause (ii) shall not be applicable, such amount as shall be
determined in good faith by the Board; provided, that the exercise price shall not be less than the par value of a share of Common Stock.
9. Option Term
Participants shall be granted Options for such term as the Committee shall determine, not in excess of ten years from the date of the granting thereof; provided, however, that, in the
case of an incentive stock option granted to a Ten-Percent Holder, the term with respect to such Option shall not be in excess of five years from the date of the granting thereof. The
Committee may provide that the length of the term of an Option will vary with the length of the period over which the Option first becomes exercisable.
10. Limitations on Amount of Incentive Stock Options Granted
The aggregate fair market value of the Class A Common Shares or the Class B Common Shares for which any Participant may be granted incentive stock options which are
exercisable for the first time in any calendar year (whether under the terms of the Plan or any other stock option plan of the Company) shall not exceed $100,000; provided that such
grant be made on or before August 2, 2005.
11. Exercise of Options
A.
Each Option shall be exercisable and the total number of shares subject thereto shall be purchasable in installments, which need not be equal, as specified in the Option.
Except as otherwise determined by the Committee, the first installment shall not become exercisable during the period commencing on the date of the granting of such
Option and ending on the day next preceding the first anniversary of such date. An installment once exercisable shall remain exercisable until the Option expires or is
terminated.
3
B.
C.
Except as hereinbefore otherwise set forth, an Option may be exercised either in whole at any time or in part from time to time.
An Option may be exercised only by a written notice of intent to exercise such Option with respect to a specific number of Class A Common Shares or Class B Common
Shares and payment to the Company of the amount of the option price for the number of Class A Common Shares or the Class B Common Shares so specified; provided,
however, that all or any portion of such payment may be made in kind by the delivery of Class A Common Shares or Class B Common Shares, as the case may be, having a
fair market value equal to the portion of the option price so paid; provided, further, however, that, subject to the requirements of Regulation T (as in effect from time to
time) promulgated under the United States Securities Exchange Act of 1934, as amended, the Committee may implement procedures to allow a broker chosen by a
Participant to make payment of all of any portion of the option price payable upon the exercise of an Option and receive, on behalf of such Participant, all or any portion of
the Class A Common Shares or Class B Common Shares issuable upon such exercise; provided, further, however, that any such exercise shall not violate Section 402 of the
United States Sarbanes-Oxley Act of 2002.
D.
Notwithstanding the terms of this Section 11, the Board may, in its discretion, permit any Option to be exercised, in whole or in part, prior to the time when it would
otherwise be exercisable.
12. Transferability
No Option shall be assignable or transferable except by will and/or by the laws of descent and distribution and, during the life of any Participant, each Option granted to him may be
exercised only by him; provided, however that the Board or Committee may provide that a Participant may transfer a non-incentive stock option for no consideration to any Family
Member of such Participant. For this purpose, “Family Member” shall mean any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece,
nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law of a Participant (including adoptive relationships); any person sharing the
Participant’s household (other than a tenant or employee); any trust in which the Participant and any of these persons have all of the beneficial interest; any trust or foundation in
which the Participant and any of these persons control the management of the assets; any corporation, partnership, limited liability company or other entity in which the Participant
and any of these other persons are the direct and beneficial owners of all of the equity interests (provided the Participant and these other persons agree in writing to remain the
direct and beneficial owners of all such equity interests); and any personal representative of the Participant upon the Participant’s death for purposes of administration of the
Participant’s estate or upon the Participant’s incompetency for purposes of the protection and management of the assets of the Participant.
RESTRICTED STOCK AND RESTRICTED STOCK UNITS
13. Restricted Stock and Restricted Stock Units
A.
B.
The Committee may make (1) Awards of Class A Common Shares (without any intervening Options) (“Restricted Stock”) or (2) Awards of units valued in US dollars by
reference to Class A Common Shares or otherwise based on Class A Common Shares (“Restricted Stock Units”), in each case with such vesting, restrictions, forfeiture
provisions, performance requirements, contingencies and other terms as provided herein or as the Committee shall determine.
The Committee shall have the authority to grant any Participant Restricted Stock or Restricted Stock Units or both Restricted Stock and Restricted Stock Units (in each case
with or without other Awards). The grant date of Restricted Stock or Restricted Stock Units shall be the date the Committee determines.
4
14. Time-Based Awards and Performance-Based Awards
A.
B.
C.
D.
E.
Awards under Section 13 may be issued to vest in one or more installments over the Participant’s period of employment or other service to the Company (“Time-Based
Awards”), or the Committee may make Awards that entitle the Participant to receive a specified number of vested Class A Common Shares (or the equivalent in cash at the
discretion of the Committee) upon the attainment of one or more performance goals or service requirements established by the Committee (“Performance-Based Awards”).
The vesting schedule for any Time-Based Awards and the term for performance for any Performance-Based Awards shall be set by the Committee at the time of grant, shall
constitute a “substantial risk of forfeiture” within the meaning of Section 409A of the Code and shall not exceed ten years (the “Restricted Period”).
The performance criteria shall be determined by the Committee, in its discretion, and shall be used as a basis for payment with respect to an Award. Such criteria may
include, but not be limited to, (i) attainment of or growth in a specified level of earnings per share, (ii) Common Shares price appreciation, (iii) attainment of or growth in a
specified level of net income or net operating income, (iv) earnings before interest and taxes, (v) revenues, (vi) market share, (vii) cost reduction goals, (viii) return on
equity, (ix) operating cash flow, (x) return on assets, (xi) the completion of certain corporate transactions or other strategic objectives, or (xii) a combination of the
foregoing.
An Award under Section 13 may be issued in exchange for any consideration which the Committee may deem appropriate in each individual instance, including, without
limitation:
(i)
(ii)
cash or cash equivalents;
services to be rendered to the Company or any Subsidiary (provided that, in such case, the par value of the stock subject to such Award shall be paid in cash or
cash equivalents, unless the Committee provides otherwise).
The Committee shall determine at the time of the grant of an Award of Restricted Stock Units whether the Award shall be paid in Class A Common Shares or in cash (based
on the fair market value of such Restricted Stock Unit as determined by reference to the fair market value of a Class A Common Share on the date the Restricted Stock Unit
has vested).
15. Restrictions on Awards, Exercise
A.
B.
C.
D.
Participants who receive Awards of Restricted Stock shall deliver to the Company a restricted stock agreement in a form approved by the Committee. Restricted Stock Units
shall be evidenced by a restricted stock unit agreement in a form approved by the Committee. Such forms need not be identical for all Participants.
Shares representing an Award of Restricted Stock shall be evidenced in such manner as the Committee may deem appropriate, including book-entry registration or issuance
of one or more certificates (which may bear appropriate legends referring to the terms, conditions and restrictions applicable to such Award). Shares underlying an Award
of Restricted Stock Units shall be evidenced in such manner as the Committee may deem appropriate.
The Committee may require that any certificates in respect of an Award of Restricted Stock be held in custody by the Company until any restrictions thereon shall have
lapsed and that the Participant deliver a share transfer form, endorsed in blank, relating to the Common Stock covered by such Award that will permit the transfer to the
Company of any or all shares of Restricted Stock that shall be forfeited by means of repurchase in accordance with the corresponding restricted stock agreement or shall
not become vested in accordance with the Plan.
A Participant who receives an Award of Restricted Stock shall on receipt of such Award be a shareholder of the Company with respect to all shares of Restricted Stock and
be entitled to vote such shares, to receive all cash dividends made in respect of such shares and to exercise all other rights in respect of such Restricted Stock except that
during the Restricted Period:
5
(i)
(ii)
(iii)
(iv)
for any certificates for which the Committee requires that the Company retain custody, a Participant will not be entitled to delivery of the stock certificate or other
evidence of such Restricted Stock before the end of such Restricted Period and unless all other vesting requirements shall have been satisfied;
other than cash dividends, the Company will not issue any such distributions (“Retained Distributions”) made or declared with respect to such Restricted Stock
until such time as the shares of Restricted Stock in respect of which such Retained Distributions shall have been made or declared shall have become vested (and
such Retained Distributions shall be subject to the same restrictions and other terms and conditions as are applicable to the shares of Restricted Stock underlying
such Restricted Distributions);
a Participant who receives an Award of Restricted Stock shall not sell, assign, exchange, transfer, pledge, charge, hypothecate or otherwise dispose of or
encumber any of the shares of Restricted Stock before the end of the Restricted Period and unless all other vesting requirements have been satisfied; and
any breach of any restrictions or other terms or conditions of such Award of any Restricted Stock or any Retained Distributions in respect thereof will result in
such Restricted Stock or Retained Distributions being forfeited by means of repurchase in accordance with the corresponding restricted stock agreement.
E.
F.
A Participant who receives an Award of Restricted Stock Units shall not be a shareholder on receipt of such Award and such a Participant shall not be considered an owner
of any Common Shares by virtue of such Award. During the Restricted Period and until all vesting requirements have been satisfied, a Participant who receives Restricted
Stock Units shall not sell, assign, exchange, transfer, pledge, charge hypothecate or otherwise dispose of or encumber any Restricted Stock Units; and any breach of any
restrictions or other terms or conditions of such Award of any Restricted Stock Units will result in such Restricted Stock Units being forfeited.
Each Restricted Stock Unit shall be exercised on such date as specified in the restricted stock agreement and the total number of shares subject thereto or cash
consideration to be received in respect thereof shall be receivable in a fixed scheme of installments, which need not be equal, as specified in the restricted stock unit
agreement. In addition, except as otherwise specified in the restricted stock agreement, the first installment shall not be exercised during the period commencing on the date
of the granting of such Restricted Stock Unit and ending on the day preceding the first anniversary of such grant date.
GENERAL PROVISIONS
16. Termination of Employment or Service
In the event a Participant leaves the employ of the Company and the Subsidiaries, or the services or the contract of a non-employee consultant to the Company or a Subsidiary
previously granted Awards of Options hereunder is terminated or a Participant ceases to serve as a non-employee director (a "Termination"), such Award may thereafter be
exercised only as hereinafter provided:
(a)
(b)
If Termination occurs by reason of (i) disability, (ii) death or (iii) retirement at or after age 65, each Option theretofore granted to him which shall not have
theretofore expired or otherwise been cancelled shall become fully vested and shall, to the extent not theretofore exercised, terminate upon the earlier to occur of
the expiration of one (1) year after the date of such Termination and the date of termination specified in such Options;
If Termination occurs by reason of (i) termination by the Company or a Subsidiary other than for Cause or (ii) the Participant's voluntary termination, each Option
theretofore granted to him that is fully vested which shall not have theretofore expired or otherwise have been cancelled shall, to the extent not theretofore
exercised, terminate upon the earlier to occur of the expiration of ninety (90) days after the date of Termination and the date of termination specified in such Award,
and
6
(c)
If Termination occurs by reason of termination by the Company for Cause, each Option theretofore granted to him which shall not have theretofore expired or
otherwise been cancelled shall immediately terminate.
In the event of a Termination of a Participant who has received an Award of Restricted Stock or Restricted Stock Units, the vesting and exercise of such Awards, as
applicable, shall be governed by the corresponding agreement in respect of such Awards.
"Cause" shall mean (i) the commission by a Participant of any act or omission that would constitute a felony under United States federal, state or equivalent foreign law, or
an indictable offense under Bermuda law, (ii) a Participant's gross negligence, recklessness, dishonesty, fraud, disclosure of trade secrets or confidential information, willful
malfeasance or willful misconduct in the performance of services to the Company or its Subsidiaries, (iii) willful misrepresentation to shareholders or directors which is
injurious to the Company; (iv) a willful failure without reasonable justification to comply with reasonable directions of a Participant's supervisor; or (v) a willful and material
breach of a Participant's duties or obligations under any agreement with the Company or a Subsidiary.
17. Adjustment of Number of Shares
A.
B.
C.
D.
In the event that a dividend shall be declared upon the Class A Common Shares payable in Class A Common Shares, the number of Class A Common Shares then subject
to any Award, the number of Class A Common Shares reserved for issuance in accordance with the provisions of the Plan but not yet covered by an Award and the
number of Class A Common Shares referred to in Section 24.B. hereof shall be adjusted by adding to each share the number of shares which would be distributable thereon
if such shares had been issued on the date fixed for determining the shareholders entitled to receive such stock dividend.
In the event that the issued Class A Common Shares shall be changed into or exchanged for a different number or kind of shares of stock or other securities of the
Company or of another corporation, whether through reorganization, stock split-up, combination of shares, sale of assets, amalgamation, merger or consolidation in which
the Company is the surviving corporation, then there shall be substituted for each Class A Common Share then subject to any Award, for each Class A Common Share
reserved for issuance in accordance with the provisions of the Plan but not yet covered by an Award and for each Class A Common Share referred to in Section 24.B.
hereof, the number and kind of shares of stock or other securities into which each issued Common Share shall be so changed or for which each such share shall be
exchanged.
In the event that there shall be any change, other than as specified in this Section 17, in the number or kind of issued Class A Common Shares, or of any stock or other
securities into which the Class A Common Shares shall have been changed, or for which it shall have been exchanged, then, if the Committee shall, in its sole discretion,
determine that such change equitably requires an adjustment in the number or kind of shares then subject to any Award, the number or kind of shares reserved for issuance
in accordance with the provisions of the Plan but not yet covered by an Award and the number or kind of shares referred to in Section 24.B. hereof, such adjustment shall
be made by the Committee and shall be effective and binding for all purposes of the Plan and of each corresponding agreement or certificate entered into in accordance with
the provisions of the Plan.
In the case of any substitution or adjustment in accordance with the provisions of this Section 17, the price (if any) in each agreement or certificate for each share covered
thereby prior to such substitution or adjustment shall be the price for all shares of stock or other securities which have been substituted for such share or to which such
share shall have been adjusted in accordance with the provisions of this Section 17.
7
E.
F.
G.
No adjustment or substitution provided for in this Section 17 shall require the Company to sell or issue a fractional share under any agreement or certificate.
In the event of the dissolution or liquidation of the Company, or a merger, reorganization or consolidation in which the Company is not the surviving corporation, then each
Award, to the extent not theretofore exercised, shall be immediately exercisable in full; provided, that such dissolution liquidation, amalgamation, merger, reorganization or
consolidation constitutes a “change in control” within the meaning of Section 409A of the Code.
This Section 17 shall apply, pari passu, with respect to Class B Common Shares.
18. Purchase for Investment, Withholding and Waivers
Unless the shares to be issued in connection with an Award to a Participant shall be registered prior to the issuance thereof under the United States Securities Act of 1933, as
amended, such Participant shall, as a condition of the Company's obligation to issue such shares, be required to give a representation in writing that he is acquiring such shares for
his own account as an investment and not with a view to, or for sale in connection with, the distribution of any thereof. In the event of the death of a Participant, the delivery to the
Company of tax waivers and other documents as may be required by the Committee. In connection with any Award, a Participant will enter into such arrangements with the
Company with respect to all federal, state, local and foreign withholding tax requirements as the Committee may determine or the Company may require.
19. No Shareholder Status
Except as provided in Section 15.D., neither any Participant nor his legal representatives, heirs, executors or assigns shall be or be deemed to be the holder of any Class A Common
Share or Class B Common Share covered by an Award unless and until a certificate for such share has been issued and delivered in accordance with the Plan. Upon payment of the
purchase price thereof (if any), a share issued in connection with any Award shall be fully paid and non-assessable.
20. No Restrictions on Corporate Acts
Neither the existence of the Plan nor any Award shall in any way affect the right or power of the Company or its shareholders to make or authorize any or all adjustments,
recapitalizations, reorganizations or other changes in the Company's capital structure or its business, or any amalgamations, merger or consolidation of the Company, or any issue of
bonds, debentures, preferred or prior preference stock ahead of or affecting the Class A Common Shares or Class B Common Shares or the rights thereof, or dissolution or
liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding whether of a similar character or otherwise.
21. No Employment Right or Right to Continued Service
Neither the existence of the Plan nor the grant of any Award shall require the Company or any Subsidiary to continue any Participant in the employ of the Company or such
Subsidiary, as a non-employee consultant to the Company or a Subsidiary or as a director of the Company.
22. Termination and Amendment of the Plan
The Board may at any time terminate the Plan or make such modifications of the Plan as it shall deem advisable; provided, however, that the Board may not without further approval
of the holders of a majority of the Common Shares voting as a single class as provided in the Company's Bye-Laws present in person or by proxy at any special or annual meeting of
the shareholders, increase the number of shares as to which Awards may be granted under the Plan (as adjusted in accordance with the provisions of Section 17 hereof), or change
the manner of determining the option prices, or extend the period during which an Award may be granted or exercised or otherwise amend the Plan in contravention of any
applicable law, rules or regulations, including the rules of any national securities exchange or market on which the Common Shares of the Company may be listed. Except as
otherwise provided in Section 17 hereof, no termination or amendment of the Plan may, without the consent of the Participant to whom any Award shall theretofore have been
granted, adversely affect the rights of such Participant under such Award.
8
23. Expiration and Termination of the Plan
The Plan shall terminate on the business day preceding the tenth anniversary of June 2, 2005 or at such earlier time as the Board may determine. Awards may be granted under the
Plan at any time and from time to time prior to its termination. Any Award outstanding under the Plan at the time of the termination of the Plan shall remain in effect until such Award
shall have been exercised or shall have expired in accordance with its terms.
24. Options for Non-employee Directors
A.
In addition to any Award granted pursuant to Section 4, a non-employee director shall be eligible to receive an annual Award. Except as otherwise provided in this Section
24, any Award granted to a non-employee director shall be subject to all of the terms and conditions of the Plan.
B. (1)
(2)
(3)
Effective at the 2007 annual meeting of the Company and each annual meeting thereafter, each non-employee director who shall have served as a non-employee
director since the immediately preceding annual meeting and any other non-employee director as determined by a vote of a majority of the members of the Board
(excluding any such other non-employee director) shall be granted (i) an annual Award of a non-incentive stock option to purchase 5,000 Common Shares, which
shall be Class B Common Shares in the case of a non-employee director who is eligible to be a holder of Class B Common Shares pursuant to the Company's Bye-
laws, or otherwise shall be Class A Common Shares, or (ii) an annual Award of non-incentive stock options, Restricted Stock or Restricted Stock Units (or any
combination thereof); provided, that the value of such options, shares of Restricted Stock or Restricted Stock Units (or combination thereof) in the aggregate shall
be equal to value to 5,000 non-incentive stock options referred to in subclause (i) on the date of grant. The Compensation Committee shall have discretion to
determine the components of the Awards within the limitations of the preceding sentence. For purposes of determining the value of 5,000 non-incentive stock
options, the Compensation Committee shall calculate a U.S. dollar amount using the methodology that is employed by the Company for valuing Options in its
most recent annual financial statements, including all assumptions contained therein. For purposes of determining the number of shares of Restricted Stock or
Restricted Stock Units constituting all or a portion of an Award, the U.S. dollar amount allocated to such Award shall be divided by the fair market value of a share
of the Company’s Class A Common Stock on the date of grant.
The initial per share option price of each Option granted to a non-employee director pursuant to this Section 24.B. shall be equal to the fair market value of a Class
A Common Share on the date the Option is granted, or 105% of the fair market value of a Class B Common Share on the date the Option is granted.
Notwithstanding the preceding sentence, the Committee may provide that the Option price per share will increase to reflect the cost of capital or any other
objective measure or may set the initial exercise price at an amount in excess of the fair market value at the time of grant.
The term of each Option granted to a non-employee director pursuant to this Section 24.B. shall be five years from the date of the granting thereof. The Board shall
determine by a majority vote the number of installments in which an Option granted pursuant to this Section 24 shall be exercisable; provided, that the first
installment shall not become exercisable during the period commencing on the date of the granting of such Option and ending on the day immediately preceding
the first anniversary of such date. An installment once exercisable shall remain exercisable until such Option expires or is terminated.
9
(4)
Subject to the provisions (including any applicable solvency test) of the Companies Act 1981, all or any portion of the payment required upon the exercise of an
Option granted to a non-employee director may be made in kind by the delivery of Class A Common Shares or Class B Common Shares, as the case may be, having
a fair market value on the date the Option is exercised equal to the portion of the option price so paid.
C.
The provisions of this Section 24 may not be amended except by the vote of a majority of the members of the Board and by the vote of a majority of the members of the
Board who are non-employee directors.
25. Miscellaneous
A.
B.
C.
D.
E.
F.
G.
H.
I.
Nothing contained in the Plan shall prevent the Company or any Subsidiary from adopting other or additional compensation arrangements for its employees.
Unless otherwise determined by the Committee, any withholding obligations may be settled with Common Shares, including Common Shares that are part of the award that
gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditional on such payment or arrangements, and the Company and its
Subsidiaries shall, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the Participant. The Committee may establish
such procedures as it deems appropriate for the settlement of withholding obligations with Common Shares.
The Committee shall establish such procedures as it deems appropriate for a Participant to designate a beneficiary to whom any amounts payable in the event of the
Participant’s death are to be paid.
Any amounts owed to the Company or a Subsidiary by the Participant of whatever nature may be offset by the Company from the value of any Common Shares, cash or
other thing of value under this Plan or an agreement or certificate to be transferred to the Participant, and no Common Shares, cash or other thing of value under this Plan or
an agreement or certificate shall be transferred unless and until all disputes between the Company and the Participant have been fully and finally resolved and the
Participant has waived all claims against the Company or a Subsidiary in respect thereof.
To the extent that the Committee determines that the restrictions imposed by the Plan preclude the achievement of the material purposes of the awards in jurisdictions
outside the United States of America, the Committee may in its discretion modify those restrictions as it determines to be necessary or appropriate to conform to applicable
requirements or practices of such jurisdictions.
The headings contained in the Plan are for reference purposes only and shall not affect the meaning or interpretation of this Plan.
If any provision of this Plan shall for any reason be held to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision hereby, and
this Plan shall be construed as if such invalid or unenforceable provision were omitted.
This Plan shall inure to the benefit of and be binding on each successor and assign of the Company. All obligations imposed on a Participant, and all rights granted to the
Company hereunder, shall be binding on the Participant’s heirs, legal representatives, successors and assigns.
This Plan and each agreement or certificate granting an Award constitute the entire agreement with respect to the subject matter hereof and thereof; provided, that in the
event of any inconsistency between this Plan and such agreement or certificate, the terms and conditions of the Plan shallprevail.
10
J.
None of the Company, any Subsidiary or the Committee shall have any duty or obligation to disclose affirmatively in any manner to a registered or beneficial holder of
Common Shares or an Option or other Award, and such holder shall have no right to be advised of, any material non-public information regarding the Company or any
Subsidiary at any time prior to, upon or in connection with, the receipt or exercise of an Option or other Award.
26. Governing Law
The Plan and all Awards, agreements and actions hereunder shall be governed by the laws of Bermuda.
* * * * *
11
Subsidiaries: Equity Accounted Affiliates and Cost Investments as at February 25, 2009
Exhibit 21.01
Company Name
Top Tone Media S.A.
Zopal S.A.
TV 2 EOOD
LG Consult EOOD
Top Tone Media Bulgaria EOOD
Ring TV EAD
Nova TV d.d.
Operativna Kompanija d.o.o.
Media House d.o.o.
Internet Dnevnik d.o.o.
CET 21 spol. s r.o.
MEDIA CAPITOL, a.s.
Jyxo, s.r.o.
BLOG Internet, s.r.o.
CME Slovak Holdings B.V.
CME Romania B.V.
Media Pro International S.A.
Media Vision SRL
Pro TV S.A.
Sport Radio TV Media SRL
Media Pro Management S.A.
Media Pro B.V.
Music Television System S.R.L.
A.R.J., a.s.
MARKIZA-SLOVAKIA, spol. s r.o.
GAMATEX spol. s r.o.
Effective Voting Interest
80.00%
80.00%
80.00%
80.00%
80.00%
80.00%
100.00%
100.00%
100.00%
76.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
95.00%
95.00%
95.0543%
95.0434%
8.70%
10.00%
95.0543%
100.00%
100.00%
100.00%
Jurisdiction of Organization
Type of Affiliate (1)
Luxembourg
Luxembourg
Bulgaria
Bulgaria
Bulgaria
Bulgaria
Croatia
Croatia
Croatia
Croatia
Czech Republic
Czech Republic
Czech Republic
Czech Republic
Netherlands
Netherlands
Romania
Romania
Romania
Romania
Romania
Netherlands
Romania
Slovak Republic
Slovak Republic
Slovak Republic
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Cost Investment
Cost Investment
Subsidiary
Subsidiary
Subsidiary
Subsidiary (in liquidation)
A.D.A.M. a.s.
MEDIA INVEST, spol s r.o.
EMAIL.SK s.r.o.
PMT, s r.o.
MMTV 1 d.o.o.
Produkcija Plus d.o.o.
POP TV d.o.o.
Kanal A d.o.o.
Euro 3 TV d.o.o.
TELEVIDEO d.o.o.
International Media Services Ltd.
CME Ukraine Holding GmbH
Innova Film GmbH
CME Cyprus Holding Ltd.
Grizard Investments Limited
Grintwood Investments Limited
TV Media Planet Ltd.
1+1 Production
Studio 1+1 LLC
Ukrainian Media Services LLC
Ukrpromtorg-2003 LLC
Gravis-Kino LLC
Nart LLC
TV Stimul LLC
TOR LLC
ZHYSA LLC
Glavred-Media LLC
Central European Media Enterprises N.V.
Central European Media Enterprises II B.V.
CME Media Enterprises B.V.
CME Programming B.V.
CME Ukraine Holding B.V.
CME Development Corporation
CME SR d.o.o.
________________________________
100.00%
100.00%
80%
31.50%
100.00%
100.00%
100.00%
100.00%
42.00%
20.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
99.98%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
10.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
Slovak Republic
Slovak Republic
Slovak Republic
Slovak Republic
Slovenia
Slovenia
Slovenia
Slovenia
Slovenia
Slovenia
Bermuda
Austria
Germany
Cyprus
Cyprus
Cyprus
Cyprus
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Netherlands Antilles
Netherlands Antilles
Netherlands
Netherlands
Netherlands
Delaware (USA)
Serbia
Subsidiary (in liquidation)
Subsidiary
Subsidiary
Cost Investment
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Equity-Accounted Affiliate
Equity-Accounted Affiliate
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Cost Investment
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
(1) All subsidiaries have been consolidated in our Financial Statements. All equity-accounted affiliates have been accounted for using the equity method. All cost investments
have been accounted for using the cost method.
Exhibit 23.01
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-151811 on Form S-3 and Registration Statement Nos. 333-60295, 333-110959, and 333-130405 on Form
S-8 of our reports dated February 25, 2009, relating to the financial statements and financial statement schedule of Central European Media Enterprises Ltd. and the effectiveness of
Central European Media Enterprises Ltd.'s internal control over financial reporting, appearing in this Annual Report on Form 10-K of Central European Media Enterprises Ltd. for the
year ended December 31, 2008, and to the reference to us under the heading "Experts" in the Prospectus, which is part of Registration Statement No. 333-151811 on Form S-3.
DELOITTE LLP
London, United Kingdom
February 25, 2009
Exhibit 24.01
POWER OF ATTORNEY
Each person whose signature appears below, constitutes and appoints Adrian Sarbu and Wallace Macmillan, and each of them, with full power to act without the other, such
person’s true and lawful attorney-in-fact, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Annual
Report on Form 10-K for the fiscal year 2008 of Central European Media Enterprises Ltd., a Bermuda corporation, and any and all amendments to such Annual Report on Form 10-K
and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them, full power and authority to do
and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person,
thereby ratifying and confirming all that said attorneys-in-fact, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
February 25, 2009
/s/ Ronald S. Lauder
__________________
Ronald S. Lauder
/s/ Adrian Sarbu
__________________
Adrian Sarbu
/s/ Frank Ehmer
__________________
Frank Ehmer
/s/ Igor Kolomoisky
__________________
Igor Kolomoisky
/s/ Alfred W. Langer
__________________
Alfred W. Langer
/s/ Ann Mather
__________________
Ann Mather
/s/ Christian Stahl
__________________
Christian Stahl
/s/ Herb Granath
__________________
Herbert A. Granath
/s/ Wallace Macmillan
__________________
Wallace Macmillan
/s/ Charles Frank
__________________
Charles Frank
/s/ Herbert Kloiber
__________________
Herbert Kloiber
/s/ Bruce Maggin
__________________
Bruce Maggin
/s/ Duco Sickinghe
__________________
Duco Sickinghe
/s/ Eric Zinterhofer
__________________
Eric Zinterhofer
Exhibit 31.01
I, Adrian Sarbu, certify that:
1. I have reviewed this annual report on Form 10-K of Central European Media Enterprises Ltd.;
CERTIFICATION OF PRESIDENT
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being
prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report), that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and
the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
/s/ Adrian Sarbu
Adrian Sarbu
President and Chief Operating Officer
February 25, 2009
Exhibit 31.02
I, Wallace Macmillan, certify that:
1. I have reviewed this annual report on Form 10-K of Central European Media Enterprises Ltd.;
CERTIFICATION OF CHIEF FINANCIAL OFFICER
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being
prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report), that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and
the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
/s/ Wallace Macmillan
Wallace Macmillan
Chief Financial Officer
February 25, 2009
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.01
In connection with the Annual Report of Central European Media Enterprises Ltd (the “Company”) on Form 10-K for the year ended December 31, 2007, as filed with the Securities
and Exchange Commission on the date hereof (the “Report”), we, Adrian Sarbu, President and Chief Operating Officer of the Company, and Wallace Macmillan, Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1
2
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company as of the dates and for the
periods explained in the report.
/s/ Adrian Sarbu
Adrian Sarbu
President and Chief Operating Officer
(Principal Executive Officer)
February 25, 2009
/s/ Wallace Macmillan
Wallace Macmillan
Chief Financial Officer
(Principal Financial and Accounting Officer)
February 25, 2009