5B7d3f95-B2fb-4C6b-8065-37F33075d366 Baltmedia Sp
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Commentary on the Consolidated Quarterly Statements for the Third Quarter of 2010 I. Accounting principles The Group's consolidated financial statements were prepared in accordance with the International Financial Reporting Standards (IFRS) on a historical cost basis. All amounts are presented in thousands of Polish zloty (PLN k). II. Significant changes to estimates, including adjustments for provisions, deferred income tax provisions and assets, and impairment charges on assets The Group made/allocated: Provisions for future payables at PLN 619 k Provisions for remuneration under specific work contracts at PLN 1,131 k Deferred income tax provision at PLN 988 k Deferred income tax assets of PLN 995 k Estimated income from contracts in proportion to the costs incurred at PLN 18,639 k The Group released: Provisions for future trade payables of PLN 1,268 k Provisions for remuneration under specific work contracts of PLN 327 k Deferred income tax provision of PLN 769 k Deferred income tax assets of PLN 725 k Estimation of income from contracts in proportion to the costs incurred at PLN 11,583 k No material impairment charges were recorded in the third quarter of 2010. II. Brief description of the issuer’s significant achievements and failures during the reporting period, including a list of key events relating thereto The consolidated revenue and profit figures in the profit and loss account in the third quarter of 2010 are higher than in the first and second quarters of 2010 or in the last three quarters of 2009. This is due to the upturn in the television advertising market and, consequently, the improved condition of our main customers, and to the processes put in place in the ATM Group such as: cost reduction, improvement of the effectiveness of individual companies and organization units (due to two mergers within our Group, among other things), introduction of new formats of varying budgets, securing of additional external sources to finance production (grants from the National Film Institute, funds from cities and regions – in return for promotion in our productions etc.). The fall schedules of television channels included nine productions of ATM Group companies – six continuations (new episodes of “Tancerze”, “Licencja na wychowanie”, “Pierwsza Miłość” (“First Love”), “Świat według Kiepskich” (Kiepski’s World), “Ojciec Mateusz” and “Złotopolscy”) and three brand new offerings (the series “Ratownicy” and “Ludzie Chudego” and the talk show “Kobieta Cafe”). The first four of the productions are made by ATM Grupa S.A., the next three, respectively, by WorldReginfo - 5b7d3f95-b2fb-4c6b-8065-37f33075d366 Baltmedia Sp. z o.o., M.T.ART Sp. z o.o. and Profilm Agencja Filmowa Sp. z o.o., and the last two by Studio A Sp. z o.o. One of the major events of the third quarter of 2010 was the acquisition by ATM Grupa S.A. on September 8 of a 50% stake in Aidem Media Sp. z o.o., a computer game producer. This investment furthers our Group’s strategy of diversifying revenue and expanding into new areas of the media sector. Aidem Media Sp. z o.o. is currently expanding into the fast-growing segment of games for portable devices such as i-Pads, i-Phones and gaming consoles. Aidem Media will also create games based on television productions of ATM Group companies. In the reporting period our subsidiary ATM Studio Sp. z o.o. carried out works in connection with the construction of a studio complex in Warsaw. On September 21 the company signed a loan agreement with Bank Polska Kasa Opieki S.A. under which the Bank granted ATM Studio a long-term investment loan of PLN 25,000,000 which will enable our subsidiary to complete the project in a timely and uninterrupted manner, which is important for intensifying our further growth. The project is especially important in light of digitization, which will increase the number of new nationwide terrestrial TV channels. We expect new broadcasters and new thematic channels to enter the market, which will significantly increase demand for new programming and, consequently, for new studio spaces. Increasingly, Group companies invest in new programs at their own cost and risk. We have an extended programming library of proprietary scripts and of options and licenses for interesting international programs (for Polish adaptations). More and more often, we create pilots of new programs for television stations, which usually leads to signing production agreements with broadcasters. This can only be done by companies with sufficient financial resources, which gives us a strong competitive edge in the current economic climate. Wary of ill-advised program investments, television stations are more willing to order new programs once they see a demonstration episode, which enables them to assess the program’s appeal. The success of this strategy is demonstrated by productions such as “Licencja na wychowanie” and “On i ona”, a program combining the talk show and game show formats, which broadcasters commissioned after seeing the pilot episodes. In September we started production of two pilot episodes of a new soap and we hope to receive a production order from one of our main clients before the end of 2010. Below, presented in chronological order, are the major events of the third quarter of 2010: 1. On July 2, 2010, ATM FX Sp. z o.o. and Satchwell Warszawa Sp. z o. o. signed a contract to create special effects for the feature film “Syberiada Polska”. 2. On July 12, 2010, ATM Grupa S.A. and Telewizja Polsat S.A. signed a contract to produce new episodes of the series “Pierwsza Miłość”. 3. ATM Grupa S.A., together with its subsidiaries, and Telewizja Polska S.A. signed a number of contracts that meet the criterion of a major contract, i.e. their total worth of PLN 24,438 k exceeds 10% of the company’s equity. The above threshold was exceeded in July 2010. The contracts relate to the production of television content. The highest-value contract, worth PLN 13,768 k, was the contract of March 2, 2010, whereby a Group company, Baltmedia Sp. z o.o., undertook to produce the third season of the series “Ojciec Mateusz”. The signing of a major agreement with Telewizja Polska S.A. was disclosed in current report no. 14/2010 of July 13, 2010. WorldReginfo - 5b7d3f95-b2fb-4c6b-8065-37f33075d366 4. On August 3, 2010, Studio A started filming a new season of the series “Ranczo” (“The Ranch”), produced for Telewizja Polska S.A. 5. On August 19, 2010, ATM Grupa S.A. and Telewizja Polską S.A. signed a contract to produce new episodes of the series “Licencja na wychowanie”. 6. On August 31, 2010, ATM Grupa S.A. and Telewizja Polska S.A., signed a contract to produce new episodes of the series “Tancerze”. 7. On September 8, 2010, ATM Grupa S.A. acquired a 50% stake in Aidem Media Sp. z o.o., based in Gdańsk. 8. On September 22, 2010, ATM Studio Sp. z o.o. and Bank Polska Kasa Opieki S.A. signed a major contract whereby Bank Pekao S.A. undertook to extend an investment loan to finance the construction of a television and film studio in Warsaw. The value of the contract is PLN 25 million. The contract is a major contract as its value exceeds 10% of the issuer’s equity. IV. Description of factors and events, especially extraordinary ones, that have had a significant impact on the Group’s financial performance The tables below present the basic indicators of the Group’s profitability. Table 1. Selected consolidated financial data for the third quarters of 2010 and 2009 SELECTED FINANCIAL Third quarter of 2010 Third quarter of 2009 DATA AND July 1, 2010 to September July 1, 2009 to September PROFITABILITY RATIOS 30, 2010 30, 2009 (PLN k) (PLN k) Net sales 31 897 21 703 Profit on sales 4 484 - Margin 14,1% - Operating profit (loss) 2 516 -2 196 Margin 7,9% -10,1% EBITDA 5 991 1 245 Margin 18,8% 5,7% Net profit 1 368 -1 650 Margin 4,3% -7,6% Table 2. Selected consolidated financial data for the first three quarters of 2010 and 2009 SELECTED FINANCIAL Three quarters of 2010 Three quarters of 2009 DATA AND January 1, 2010 to January 1, 2009 to PROFITABILITY September 30, 2010 September 30, 2009 RATIOS (PLN k) (PLN k) Net sales 86 396 73 151 Profit on sales 11 038 10 278 Margin 12,8% 14,1% Operating profit (loss) 3 994 -38 Margin 4,6% -0,1% EBITDA 14 419 10 076 Margin 16,7% 13,8% Net profit 2 663 90 Margin 3,1% 0,1% WorldReginfo - 5b7d3f95-b2fb-4c6b-8065-37f33075d366 Compared to the third quarter of 2009, consolidated revenues in the third quarter of 2010 rose by 47%. Net profit for the three months ended September 30, 2010 was PLN 1,368 thousand (in 2009 the net loss for the three months ended September 30, 2009, was PLN 1,650 k). Consolidated revenue for the first three quarters of 2010 was PLN 86,396 k, a 18% rise on the same period of 2009. Net profit for the three quarters ended September 30, 2010 was PLN 2,663 k (net profit for the three quarters ended September 30, 2009 was PLN 90 thousand). Due to the downturn and the resulting slowdown in the advertising industry, 2009 was particularly difficult for television producers. Every quarter negative trends grew stronger: television stations ordered fewer episodes of cyclical productions, renegotiated prices, postponed new projects. The cuts made by television stations in the budgets allocated for the purchase of programs from external producers and, at the same time, an increase in fixed costs within our Group (mostly a significant increase in depreciation due to the completion of high-value development projects) translated to a significant decrease in our margins.