UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
¨ 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 and 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: 441-296-1431
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK, $0.08 PAR VALUE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for each shorter
period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2006 (based on the closing sale price of US$ 63.19 of the registrant's Common Stock, as reported by
the Nasdaq Exchange on such date) was approximately US$ 2.2 billion.
Number of shares of Class A Common Stock outstanding as of February 20, 2007 : 34,412,138
Number of shares of Class B Common Stock outstanding as of February 20, 2007 : 6,312,839
DOCUMENTS INCORPORATED BY REFERENCE
Document
Registrant's Proxy Statement for the Annual General Meeting of Shareholders to be held on June 5,
2007
Location in Form 10-K in Which Document is Incorporated
Part III
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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 Schedules
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Table of Contents
PART I
ITEM 1. BUSINESS
Forward-looking Statements
This report contains forward-looking statements, including the impact of legal proceedings in Croatia and Ukraine, the results of additional investment in Croatia and Ukraine, the implementation
of an advertising sales strategy in the Czech Republic and cost reductions in the Czech and Slovak Republics, our ability to develop and implement multi-channel strategies generally, the growth of
television advertising in our markets, the future economic conditions in our markets, future investments in television broadcast operations, the growth potential of advertising spending in our
markets, and other business strategies and commitments. 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. Future events and actual results, affecting our strategic plan as well as our financial position, results of
operations and cash flows, could differ materially from those described in or contemplated by the forward-looking statements. Important factors that contribute to such risks include, but are not
limited to, the general regulatory environments where we operate and application of relevant laws and regulations, the renewals of broadcasting licenses, our ability to implement strategies
regarding sales and multi-channel distribution, the rate of development of advertising markets in countries where we operate, our ability to acquire necessary programming and the ability to attract
audiences, our ability to obtain additional frequencies and licenses, and general market and economic conditions in these countries as well as in the United States and Western Europe.
GENERAL
Central European Media Enterprises Ltd. is a Bermuda company that, together with its subsidiaries and affiliates, invests in, develops and operates national commercial television channels and stations in
Central and Eastern Europe. At present, we have operations in 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 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. The public may read and copy any materials the Company
files with the SEC at the SEC's Public Reference Room at 100F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-
SEC-0330.
Unless otherwise noted, all statistical and financial information presented in this report has been converted into US dollars using appropriate exchange rates. All references to “US$” or “dollars” are to US
dollars, all references to “HRK” are to Croatian kuna, all references to “CZK” are to Czech korunas, all references to “RON” are to the New Romanian lei, all references to “SKK” are to Slovak korunas, all
references to “SIT” are to Slovenian tolars, all references to “UAH” are to Ukrainian hryvna, all references to “Euro” are to the European Union Euro and all references to “GBP” are to British pounds. The
exchange rates as of December 31, 2006 used in this report are 5.58 HRK/US$; 20.88 CZK/US$; 2.57 RON/US$; 26.25 SKK/US$; 181.93 SIT/US$; 5.05 UAH/US$; 0.76 Euro/US$ and 0.51 GBP/US$.
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CORPORATE STRUCTURE
Central European Media Enterprises Ltd. 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. In each
market in which we operate, we have ownership interests in license companies and operating companies. 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 acquiring programming for broadcast by the corresponding license company and entering into agreements with advertisers and advertising agencies on behalf of the license
company. In Croatia, the Czech Republic, Romania and Ukraine, the license company also acts as an operating company; and since January 1, 2007, our license company in the Slovak Republic also acts
as an operating company. As depicted in the table below, our share of profits in our license and operating companies corresponds with our voting interest other than in the Slovak Republic and Ukraine,
where we are entitled by contract to a share of profits in those operations that does not correspond to our voting interest. Below is an overview of our operating structure at December 31, 2006, the type
of affiliate and a chart entitled “Simplified Corporate Structure - Continuing Operations”.
Company Name
Effective Voting Interest
Share of Profits
Type of Affiliate
TV Channels
Croatia
License Company:
Nova TV d.d. (“Nova TV (Croatia)”)
Czech Republic
License Companies:
CET 21 spol s.r.o. (“CET 21”)
Galaxie Sport s.r.o. (“Galaxie Sport”)
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
Operating Company:
Slovenska televizna spolocnost s r.o. (“STS”)
License Company:
MARKIZA-SLOVAKIA s.r.o. (“Markiza”)
100.0%
100.0%
Consolidated Subsidiary
NOVA TV (Croatia)
100.0%
100.0%
90.0%
75.0%
90.0%
89.8%
80.0%
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100.0%
100.0%
90.0%
75.0%
Consolidated Subsidiary
Consolidated Subsidiary
TV NOVA
(Czech Republic)
GALAXIE SPORT
Consolidated Subsidiary
Consolidated Subsidiary
90.0%
Consolidated Subsidiary
PRO TV, ACASA, PRO
CINEMA and PRO TV
INTERNATIONAL
80.0%
Consolidated Subsidiary
0.1%
Consolidated Subsidiary
MARKIZA TV
Table of Contents
Company Name
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”)
Foreign Enterprise “Inter-Media” (“Inter-Media”)
License Company:
Studio 1+1 LLC (“Studio 1+1”)
Gravis LLC (“Gravis”)
Effective Voting Interest
Share of Profits
Type of Affiliate
TV Channels
100.0%
100.0%
Consolidated Subsidiary
100.0%
100.0%
60.0%
60.0%
60.0%
18.0%
60.4%
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100.0%
100.0%
60.0%
60.0%
60.0%
60.0%
60.4%
Consolidated Subsidiary
POP TV
Consolidated Subsidiary
KANAL A
Consolidated Subsidiary
Consolidated Subsidiary
Consolidated Subsidiary
Consolidated Variable Interest
Entity
Consolidated Subsidiary
STUDIO 1+1
KINO and CITI
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OPERATING ENVIRONMENT
Market and Audience Share
Our television channels reach an aggregate of approximately 82 million people in six countries with a combined population of approximately 90 million people. TV NOVA in the Czech Republic was ranked
first in terms of national all day audience share in 2006, as were MARKIZA TV in the Slovak Republic and POP TV, our primary channel in Slovenia. PRO TV in Romania and STUDIO 1+1 in Ukraine were
ranked second in terms of national all day audience share for 2006 in competitive markets. In Croatia, NOVA TV was ranked fourth in terms of national all day audience share in 2006.
The rankings of our channels in the markets in which they broadcast are reflected below.
Country
TV Channels
Launch Date
Technical Reach (1)
2006 Audience Share (2)
Market Rank (2)
Croatia
Czech Republic
Romania
Slovak Republic
Slovenia
Ukraine
NOVA TV (Croatia)
TV NOVA (Czech Rep)
GALAXIE SPORT
PRO TV
ACASA
PRO CINEMA
MARKIZA TV
POP TV
KANAL A
STUDIO 1+1
KINO
CITI
August 2000 (3)
February 1994 (4)
April 2002 (5)
December 1995
February 1998
April 2004
August 1996
December 1995
October 1991 (7)
January 1997
July 2006
December 2006
90%
100%
35% (6)
82%
73%
53%
86%
93%
90%
95%
41.3%
11.7%
15%
42%
Not Measured
16%
8%
1%
34%
29%
9%
18%
0.2%
0.1%
4
1
Not Measured
2
4
16
1
1
3
2
23
32
(1) “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: Internal estimates supplied by each country's
operations. Each of our stations in the relevant country 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 that transmitter. The technical reach calculation is separate from the independent third party measurement that determines audience share.
(2) National all day audience share and rank. Source: Croatia: Peoplemeters AGB Media Services, Czech Republic: ATO - Mediaresearch / GFK, Romania: Peoplemeters Taylor Nelson Sofres, Slovak
Republic: PMT / TNS SK, Slovenia: Peoplemeters AGB Media Services, Ukraine: Peoplemeters GFK USM. There are four stations ranked in Croatia, four in the Czech Republic, twenty eight in
Romania, six in the Slovak Republic, four in Slovenia, and six significant stations ranked in Ukraine.
(3) We acquired NOVA TV (Croatia) in July 2004.
(4) We acquired TV NOVA (Czech Republic) in May 2005.
(5) We acquired GALAXIE SPORT in September 2005.
(6) 35% technical reach in the Czech Republic. In addition, GALAXIE SPORT has a technical reach of 48% in the Slovak Republic.
(7) We acquired KANAL A in October 2000.
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The following table shows the population, technical reach of our primary channel, number of television households, per capita GDP and cable penetration for those countries of Central and Eastern
Europe where we conduct broadcast operations.
Country
Croatia
Czech Republic
Romania
Slovak Republic
Slovenia
Ukraine
Total
Population
(in millions)
(1)
Technical Reach
(in millions)
(2)
Television Households
(in millions)
(3)
Per Capita GDP 2006 US$
(4)
Cable Penetration
(3)
4.4
10.2
20.9
5.4
2.0
46.7
89.6
4.0
10.2
17.1
4.6
1.9
44.4
82.2
1.4
3.9
6.9
1.6
0.7
18.5
33.0
$ 9,318
$ 13,971
$ 5,458
$ 10,231
$ 18,342
$ 2,027
16%
26%
61%
39%
61%
19%
(1) Source: National Statistical Office in each Country.
(2) 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 that transmitter. The technical reach is separate from the independent third party measurement that determines audience shares.
(3) Source: Informa Telecoms and Media (August 2006 data), ZenithOptimedia. A Television Household is a residential dwelling with one or more television sets. Cable Penetration refers to the
percentage of Television Households that subscribe to television services via cable channels.
(4) Source: ING (November 2006 data).
Regulation
In this report, we refer to broadcasting regulatory authorities or agencies in our operating countries as “The Media Council”. These authorities or bodies are as follows:
Croatia - 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 - Post and Electronic Communications Agency of the Republic of Slovenia
Ukraine - National Council for Television and Radio Broadcasting
Media Councils generally supervise broadcasters and their compliance with national broadcasting legislation. On 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 acceded to the EU on January 1, 2007.
The EU Television Without Frontiers directive (the “EU Directive”) sets out the legal framework for television broadcasting in the EU, which among other things, requires broadcasters, where “practicable
and by appropriate means,” to 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 written and produced mainly by residents of the EU or Council of Europe member states. In addition, the EU Directive requires that at least 10% of
either broadcast time or programming budget is dedicated to programs made by European producers who are independent of broadcasters. News, sports, games, advertising, teletext services and
teleshopping are excluded from the calculation of these quotas. Further, the EU Directive provides for regulations on advertising, including limits on the amount of time that may be devoted to
advertising, including direct sales advertising. The adoption by Croatia, which is currently in EU accession negotiations, and by Romania of media legislation for privately owned broadcasters that is
substantially in compliance with the EU Directive has had no material adverse effect on our operations.
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License Renewal
Regulatory bodies in each country in which we operate control access to the available frequencies through licensing regimes. Management believes that the licenses for our television 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 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
licenses will continue to 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.
The licenses to operate our terrestrial broadcast operations are effective for the following periods:
Croatia
Czech Republic
Romania
Slovak Republic
Slovenia
Ukraine
The license of NOVA TV (Croatia) expires in April 2010.
The license of TV NOVA (Czech Republic) expires in January 2017. The GALAXIE SPORT license expires in March 2014.
Licenses expire on dates ranging from March 2007 to January 2016.
The license of MARKIZA TV in the Slovak Republic expires in September 2019.
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
expires in August 2014. Licenses held by Ukrpromtorg expire on dates ranging from November 2008 to July 2016.
OPERATIONS BY COUNTRY
CROATIA
General
Croatia is a parliamentary democracy with a population of approximately 4.4 million people. Per capita GDP is estimated to be US$ 9,318 in 2006 with a GDP growth rate of 4.8% for 2006. Technical coverage
of Croatia is approximately 90%, and cable penetration is approximately 16%. According to our estimates, in local currency the Croatian television advertising market grew by approximately 2 - 5% in 2006
and was worth approximately US$ 120 - 130 million.
In Croatia, we operate one national television channel NOVA TV (Croatia). The two other national broadcasters are the public broadcaster HRT, which operates two channels, and privately owned
broadcaster RTL.
Operating and License Companies
We own 100% of Nova TV (Croatia), which holds a national terrestrial broadcast license for Croatia and is responsible for our broadcasting operations in Croatia.
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Operations
NOVA TV (CROATIA)
Independent research shows that among the main television stations in Croatia, the NOVA TV (Croatia) channel had a national all day audience share of 15.3% and a national prime time audience share of
17.1% for 2006.
The chart below summarizes the national all day and prime time audience share figures for NOVA TV (Croatia):
All day
Prime time
2002
15.3%
-
2003
15.6%
12.7%
2004
12.0%
10.9%
2005
13.6%
13.3%
2006
15.3%
17.1%
Source : 2006, 2005, 2004 and 2003 - AGB Media Services
Source : 2002 - CATI - phone recall research
No independent data is available for 2002 prime time.
Programming
NOVA TV (Croatia) broadcasts approximately 21 hours per day. Its programming strategy is to appeal to a commercial audience (target group 18-49) and to a broader 15+ audience as well through a wide
range of programming. Last year NOVA TV’s programming focus was local production, but it broadcasts other types of programming, such as movies, series, sitcoms, news, soap operas and sports.
Approximately 29% of NOVA TV’s (Croatia) programming is locally produced, including a Croatian version of Nasa Mala Klinika (Our Little Clinic), a sitcom originally produced by Pro Plus in Slovenia;
Nad lipom 35, a music entertainment show; and Kviskoteka, a Croatian quiz show.
NOVA TV (Croatia) has secured exclusive broadcast rights in Croatia to a variety of popular American and European series, films and soap operas produced by major international studios, including
MGM, Paramount Pictures and Walt Disney Television International for the NOVA TV (Croatia) channel. All foreign language programming is subtitled. Foreign news reports and film footage licensed
from Reuters, APTN and SNTV are integrated into news programs on the NOVA TV (Croatia) channel.
The NOVA TV (Croatia) channel 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 6:00pm and 10:00 p.m.).
Advertising
Our Croatia operations derive revenues principally from the sale of commercial advertising time on the NOVA TV (Croatia) channel, sold both through independent agencies and media buying groups.
The NOVA TV (Croatia) channel currently serves approximately 260 advertisers, including multinational companies such as Johnson & Johnson, L’Oreal, Procter & Gamble, Vipnet and Reckitt Benckiser.
Our top ten advertising clients contributed approximately 39% to our total advertising revenues in Croatia in 2006.
Within the Croatian advertising market, television advertising accounts for approximately 50% of total advertising spending. NOVA TV (Croatia) competes for advertising revenues with other media such
as print, radio, outdoor advertising and direct mail.
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Privately owned broadcasters are permitted to broadcast advertising for up to 12 minutes per hour but not more than 15% of their daily broadcast time, with an additional 5% of daily broadcast time that
may be used for direct sales advertising. The public broadcaster, which is also financed through a compulsory television license fee, is restricted to broadcasting 9 minutes of advertising per hour. The
public broadcaster is not permitted to broadcast spots for teleshopping. There are restrictions on the frequency of advertising breaks, which are different for public and privately owned broadcasters.
There are also restrictions that relate to advertising content, including a ban on tobacco and alcohol advertising. Those are similar for public and private owned broadcasters.
Competition
At the beginning of 2004, NOVA TV (Croatia) and HRT, which was then operating three channels, were the only national broadcasters in Croatia. In April 2004, RTL launched a channel under a license
issued by the Croatian government on the frequencies previously used by the public broadcaster HRT for a third channel which had ceased broadcasting earlier in 2004. We acquired Nova TV (Croatia) in
July 2004. During 2006 NOVA TV (Croatia) achieved a national all day audience share of 15.3%, which made it the fourth ranked station nationally.
The chart below provides a comparison of our audience share and technical reach to our competitors:
Main Television Channels
Ownership
Year of first transmission
Signal distribution
Audience share (2006)
Technical reach
HRT 1
RTL
HRT 2
NOVA TV (Croatia)
Others
Source : AGB Puls and CME
Public Television
Bertelsmann
Public Television
CME
1956
2004
1972
2000
Terrestrial / satellite / cable
Terrestrial / satellite / cable
Terrestrial / satellite / cable
Terrestrial / satellite / cable
34.3%
24.6%
17.8%
15.3%
8.0%
100.0%
99%
95%
99%
90%
During 2006 our technical reach increased from 88% to 90%. Additional competitors for audience share include cable and satellite channels.
Regulation and License Renewal
The NOVA TV (Croatia) channel operates pursuant to a license originally granted by the Telecommunications Agency of Croatia and is regulated by the Croatian Media Council pursuant to the
Electronic Media Law and the Media Law. The license of NOVA TV (Croatia) is for a period of 10 years, expiring in April 2010. According to the Electronic Media Law a license can be extended. The
Croatian Media Council has the authority to decide on an extension on the basis of a request for a renewal of a license filed six months before its expiration if a broadcaster has conducted its business in
accordance with law and the license. The Croatian Media Council may hold a public tender in connection with a request to extend a license.
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CZECH REPUBLIC
General
The Czech Republic is a parliamentary democracy with a population of 10.2 million. Per capita GDP in 2006 is estimated to be US$ 13,971 with a GDP growth rate in 2006 of 5.9%. Approximately 97% of
Czech Republic households have television and cable penetration is approximately 26%. According to our estimates, in local currency the Czech Republic television advertising market remained stable
and was worth approximately US$ 310 - 320 million in 2006.
In the Czech Republic, we operate one national television channel, TV NOVA (Czech Republic), as well as a cable channel, GALAXIE SPORT, both of which were acquired in 2005. The other two national
broadcasters are the public broadcaster CT, operating two channels, and privately owned broadcaster TV Prima.
Operating and License Companies
We own 100% of CET 21, which holds the national terrestrial broadcast license for TV NOVA (Czech Republic) which expires in 2017. The ownership of CET 21 is held through three shareholders: (i) CME
Media Enterprises B.V.; (ii) Central European Media Enterprises II B.V.; and (iii) VILJA a.s. VILJA a.s. is wholly owned by CME Media Investments s.r.o., a wholly owned subsidiary of Central European
Media Enterprises Ltd.
Effective December 31, 2006, CME Media Services s.r.o. (which provided services related to programming, production and advertising to CET 21) merged into CET 21.
Operations
TV NOVA (Czech Republic)
The TV NOVA (Czech Republic) channel reaches approximately 100% of the Czech Republic's television households. The TV NOVA (Czech Republic) channel had an average all day audience share for
2006 of 41.6% compared to 20.3% for its nearest commercial competitor, TV Prima.
The chart below summarizes the national all day and prime time audience share figures for TV NOVA (Czech Republic):
2002
44.2%
48.3%
2003
43.4%
45.8%
2004
42.2%
44.9%
2005
40.9%
42.3%
2006
41.6%
44.5%
All day
Prime time
Source: ATO - Mediaresearch
Galaxie Sport
The GALAXIE SPORT channel broadcasts via cable high quality sports and sport-related programming in the Czech Republic and the Slovak Republic. The GALAXIE SPORT channel has secured
valuable broadcast license rights to some of the most popular sports programming in its markets, including the National Hockey League, Premier League (British Football), the National Basketball
Association, Major League Baseball, ATP Tennis tournaments, Formula One qualifications, motorcycle and automobile races, golf tournaments and other competitions. The GALAXIE SPORT channel
also produces daily sports news programs in the Czech and Slovak languages as well as studio interviews with guests prior to the start of live transmitted key competitions. The program schedule also
contains many sport documentaries about the most attractive sports in the Czech Republic and Slovak Republic.
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The combined Czech Republic and Slovak Republic markets have a population of approximately 15.6 million people representing approximately 5.5 million television households. Cable passes
approximately 1.6 million households in the combined markets. Galaxie Sport currently has carriage agreements with all of the largest cable distributors and with all Direct To Home distributors in the
Czech Republic and Slovak Republic, reaching over 1 million subscribers.
Programming
The TV NOVA (Czech Republic) channel broadcasts 24 hours per day and has a programming strategy 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 32% of the programming on TV NOVA (Czech Republic) is locally produced,
including Televizni noviny (TV News), Cesko hleda SuperStar (Pop Idol), Ordinace v ruzove zahrade (an original Czech series) and Ulice (a daily soap opera). Televizni noviny, the nightly news program,
achieves the highest ratings among all Czech television shows on a regular basis. Cesko hleda SuperStar (Pop Idol), Ordinace v ruzove zahrade (an original Czech series) and Ulice (a daily soap opera) are
also among the top-rated shows in the Czech Republic.
The TV NOVA (Czech Republic) channel has secured exclusive broadcast rights in the Czech Republic to a variety of popular American and European series, films and telenovellas produced by major
international studios, including DreamWorks/Paramount, Sony Pictures, MGM, Universal, IFD, Carsey-Werner, Twentieth Century Fox, Alliance Atlantis and Walt Disney/Buena Vista International
Television. All foreign language programming is dubbed into the Czech language. Foreign news reports and film footage licensed from CNN, Reuters, APTN and SNTV are integrated into news programs
on the TV NOVA (Czech Republic) channel.
The TV NOVA (Czech Republic) channel is required to comply with certain restrictions on programming, including regulations on the origin of programming. These include the requirements that
broadcasters shall, where practicable, reserve half of their broadcasting time for European productions; reserve, where practicable, at least 10% of their broadcasting time or spend 10% of their
programming budget on independent European productions; and ensure, where practicable, that at least 10% of broadcasting time is dedicated to productions made within the last five years.
Advertising
The TV NOVA (Czech Republic) channel derives revenues principally from the sale of commercial advertising time through media buying groups and independent agencies. Advertisers include large
multinational firms such as Procter & Gamble, T-Mobile, Vodafone, Telefonica O2, Laboratoires Garnier and Reckitt Benckiser. The top ten advertisers on the TV NOVA (Czech Republic) channel
contributed approximately 27% of its advertising revenues in 2006.
Within the Czech Republic advertising market, television accounts for approximately 40% of total advertising spending. The television advertising market in the Czech Republic has shown slow growth
over the past several years compared to general economic growth rates. The TV NOVA (Czech Republic) channel 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 more than 15% of total daily broadcast time. From January 1, 2007, the
public broadcaster, which is also financed through a compulsory television license fee, is restricted to broadcasting advertising for a maximum of 0.5% of daily broadcast time (excluding teleshopping);
and from January 1, 2008, the public broadcaster cannot broadcast advertising or teleshopping (except in respect of certain sporting or cultural events). There are restrictions on the frequency of
advertising breaks during and between programs. There are also 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 the TV NOVA (Czech Republic) channel, the Czech Republic is served by two national public television stations, CT1 and CT2, which dominated the ratings until the TV NOVA (Czech
Republic) channel began broadcasting in 1994, and by the national privately owned broadcaster TV Prima (co-owned by Modern Times Group and local owners).
The chart below provides a comparison of our audience share and technical reach to our competitors:
Main Television
Channels
Ownership
Year of first
transmission
Signal
distribution
Audience
share (2006)
TV NOVA (Czech Republic)
CT 1
TV Prima
CT 2
Others
CME
Public Television
Modern Times Group/Local
owners
Public Television
1994
1953
1993
1970
Terrestrial
Terrestrial
Terrestrial / satellite
Terrestrial
41.6%
21.4%
20.3%
9.4%
7.2%
100.0%
Technical
reach
100%
100%
95%
99%
Source: CME and Ceske radiokomunikace; ATO - Mediaresearch
The TV NOVA (Czech Republic) channel also competes for audience with additional foreign terrestrial television stations located in Austria, Germany, the Slovak Republic and Poland, where originating
signals reach the Czech Republic, as well as with foreign satellite stations.
Regulation and License Renewal
The broadcast operations of the TV NOVA (Czech Republic) channel 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 pursuant to the Broadcasting Act 2001.
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, which expires in January 2017.
The Czech Republic Media Council issued a decision dated December 21, 2006 confirming that CET 21's existing analogue license (No. 001/1993) is also valid for digital broadcasting and permits the
company to broadcast the TV NOVA (Czech Republic) channel in the entire territory of the Czech Republic in any electronic communications network designated for terrestrial digital television
broadcasting.
The GALAXIE SPORT license expires in March 2014.
ROMANIA
General
Romania, which acceded to the European Union on January 1, 2007, is a parliamentary democracy with a population of approximately 20.9 million people. Per capita GDP is estimated to be US$ 5,458 in
2006 with a GDP growth rate of 6.7% for 2006. Approximately 91% of Romanian households have television and cable penetration is approximately 61%. According to our estimates, the Romanian
television advertising market grew by approximately 35 - 40% in 2006, and was worth approximately US$ 235 - 245 million.
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We operate three television channels in Romania, PRO TV, ACASA and PRO CINEMA as well as PRO TV INTERNATIONAL, a channel distributed by satellite to Romanians outside the country
featuring programs rebroadcast from our Romanian channels. The two other significant national broadcasters in Romania are the public broadcaster TVR, operating two channels, and privately owned
broadcaster Antena 1.
Operating and License Companies
Pro TV, which holds all broadcasting licenses for the PRO TV, ACASA and PRO CINEMA channels, is primarily responsible for broadcasting operations for the PRO TV, ACASA, PRO TV
INTERNATIONAL and PRO CINEMA channels. MPI provides various broadcasting services to Pro TV. Media Vision provides production, dubbing and subtitling services to our Romanian television
channels.
Operations
PRO TV, ACASA, PRO CINEMA and PRO TV INTERNATIONAL
PRO TV was launched in December 1995. PRO TV reaches approximately 82% of the Romanian population, including almost 93% of urban areas. PRO TV broadcasts from studios located in Bucharest to
terrestrial broadcast facilities and to approximately 790 cable systems throughout Romania. The PRO TV channel is currently the top-rated television channel in its coverage area and had a national all day
audience share of 15.6% during 2006, which made it second (of 28 ranked stations) in Romania. Advertisers, however, evaluate audience share within a channel’s coverage area (18-49) and by this
measure PRO TV was ranked first. On June 20, 2006 PRO TV was awarded a temporary digital license for Bucharest. PRO TV began to broadcast in High Definition in the Bucharest area on December 1,
2006 using this license and is the first television station in Central and Eastern Europe to do so.
The ACASA channel, a cable channel launched in 1998, reaches approximately 73% of Romanian television households and 85% of urban households. During 2005, ACASA had a national all day
audience share of 7.7%, which made it fourth (of 28 ranked stations) in Romania. ACASA is also ranked third in terms of all day audience share in its coverage area (15-49 Female Urban Area).
PRO CINEMA, a cable channel launched in April 2004, reaches approximately 53% of Romanian television households and approximately 73% of urban households. In 2006, PRO CINEMA had a national
all day audience of 1.0%, which made it 16th (of 28 ranked stations) in Romania.
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The chart below summarizes the national all day and prime time audience share figures for our Romanian channels:
PRO TV
All day
Prime time
ACASA
All day
Prime time
PRO CINEMA
All day
Prime time
Source: Peoplemeters Taylor Nelson Sofres
2002
14.9%
16.3%
6.0%
6.8%
-
-
2003
15.4%
17.1%
6.6%
7.8%
-
-
2004
15.8%
17.2%
7.4%
7.7%
0.6%
0.6%
2005
15.7%
16.6%
8.1%
9.1%
0.8%
0.7%
2006
15.6%
17.0%
7.7%
8.1%
1.0%
0.9%
The PRO TV INTERNATIONAL channel is a channel that rebroadcasts PRO TV and ACASA programs to cable and satellite operators in North America, Europe and in Israel, using the existing PRO TV
and ACASA satellite infrastructure.
Programming
The PRO TV channel broadcasts 24 hour per day and has a programming strategy 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 40% of PRO TV's programming is comprised of locally produced programming, including news and sports programs as well as Dancing For A Dream and
La Bloc (In the Apartment Block). Dancing For A Dream and La Bloc were among the top-rated shows in 2006.
The PRO TV channel has secured exclusive broadcast rights in Romania to a variety of popular American and European programs and films produced by such companies as Warner Bros. and
DreamWorks/Paramount. The PRO TV channel 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.
In 2006, Pro TV was required to comply with several restrictions on programming including that 30% of all material be locally produced. Future requirements will include new regulations on the origin of
programming arising from Romania’s entry into the European Union, including requirements that 50% of all programming be of European origin and that 10% of all programming be supplied by
independent European producers. The Media Law stipulates that compliance with these and similar provisions are not required prior to January 1, 2008.
The ACASA channel broadcasts 24 hours per day and targets a female audience with programming including telenovellas, films and soap operas as well as news, daily local productions for women and
family, talk shows and entertainment. ACASA's audience demographics are complementary to PRO TV's, providing an attractive advertising platform for advertisers across our group of channels.
Approximately 31% of ACASA’s programming is locally produced, including Iubire ca in filme (Movie like Romance), Povestiri Adevarate (True Stories) and Daria, iubirea mea (Daria, my Love). Lacrimi de
iubire (Tears of Love), also locally produced ,was one of the top-rated shows in 2006.
PRO CINEMA broadcasts 24 hours per day and is focused on movies, series and documentaries that would not attract sufficient audiences to air them on PRO TV but are still popular among the
educated, upwardly mobile urban population which is an attractive advertising target group.
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Advertising
Our Romania operations derive revenues principally from the sale of commercial advertising time on the PRO TV, ACASA and PRO CINEMA channels, sold both through independent agencies and
media buying groups. The PRO TV channel currently serves approximately 200 advertisers, including multinational companies such as Unilever, L’Oreal, Nestle, Procter & Gamble, Danone and Coca Cola.
Our top ten advertising clients contributed approximately 31% to our total advertising revenues in Romania in 2006.
Within the Romanian advertising market, television accounts for approximately 60% 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 more then 15% of their daily broadcast time, and an additional 5% of daily broadcast time may be
used for direct sales advertising. The public broadcaster, which is also financed through a compulsory television license fee, is restricted to broadcasting advertising for 8 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 public 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 PRO TV are prohibited from appearing in advertisements.
Competition
Prior to the launch of the PRO TV channel, TVR 1, a channel of the public broadcaster, was the dominant channel in Romania. During 2006, PRO TV and ACASA achieved national all day audience shares
of 15.6% and 7.7% respectively, ranking them second and fourth in national all day audience share. PRO CINEMA achieved an audience share of 1% during 2006. TVR 1’s continued leading national
position reflects its higher technical reach, to approximately 99% of the Romanian population, including areas in which it is the only significant broadcaster, compared to a 82% technical reach for PRO TV
and 73% for ACASA (as a cable channel based on relevant cable penetration). Within our coverage area, PRO TV is first and ACASA is third in terms of all day audience share for 2006. Other competitors
include the second channel of the public broadcaster, TVR 2, and privately owned broadcasters Antena 1 and Prima TV.
The chart below provides a comparison of our audience share and technical reach to our main competitors:
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Main Television
Channels
TVR 1
PRO TV
Antena 1
ACASA
TVR 2
Prima TV
PRO CINEMA
Others
Ownership
Public Television
CME
Local owner
CME
Public Television
SBS
CME
Source : Peoplemeters Taylor Nelson Sofres
Additional competitors include cable and satellite stations.
Regulation and License Renewal
Year of first
transmission
Signal
distribution
Audience
share (2006)
Technical
reach
1956
1995
1993
1998
1968
1994
2004
Terrestrial / satellite / cable
Terrestrial / satellite / cable
Terrestrial / satellite / cable
Satellite / cable
Terrestrial / satellite / cable
Terrestrial / satellite / cable
Satellite / cable
16.8%
15.6%
13.4%
7.7%
5.3%
4.2%
1.0%
36.0%
100.0%
99%
82%
82%
73%
94%
79%
53%
PRO TV, ACASA and PRO CINEMA operate pursuant to licenses and regulations issued by the Romanian Media Council. Pro TV holds all of the local television licenses for the PRO TV channel, the
licenses for the PRO TV INTERNATIONAL channel and the cable broadcasting licenses for ACASA and PRO CINEMA. To date, licenses have been renewed as they expire. The terrestrial television
license for Bucharest was renewed in October 2003 for a further nine years. The remaining broadcasting licenses expire on dates ranging from March 2007 to January 2016.
Ownership
We own a 90% voting and economic interest in Pro TV; Adrian Sarbu, the general director of our Romania operations, owns the remaining 10% voting and economic interests of Pro TV. During 2006 we
increased our voting and economic interest from 85% to 90% following the sale by Adrian Sarbu of a 5% interest on February 17, 2006 (for further information, see Item 8, Note 4, “Acquisitions and
Disposals, Romania”).
Our interest in our Romania operations is generally governed by a Co-operation Agreement entered into by Adrian Sarbu and ourselves. The articles of Pro TV replicate the governing bodies and minority
shareholder protective rights that exist in the Co-operation Agreement. We have the right to appoint three of the five members of the Council of Administration that directs the affairs of Pro TV and MPI.
Although we have majority voting power in Pro TV and MPI, the affirmative vote of Adrian Sarbu is required with respect to certain financial and corporate matters. The financial and corporate matters
which require approval of the minority shareholder are in the nature of protective rights, which are not an impediment to consolidation for accounting purposes.
We have a 75% voting and economic interest in Media Vision. The remainder is owned by Adrian Sarbu.
We also have a put option agreement with Adrian Sarbu that grants him the right to sell us his remaining interest in Pro TV and MPI from November 12, 2009 for a twenty-year period thereafter.
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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 the Media Pro group of companies (“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, entertainment and radio (for further information, see Item 8, Note 6, “Investments”).
TV Sport
On December 14, 2006, we acquired a 20.0% interest in Sport Radio TV Media S.R.L. (“TV Sport”), a male sports-oriented channel focusing on local and international football, international boxing and a
number of local Romanian sports. On February 20, 2007 we acquired control of TV Sport by acquiring an additional 50.0% interest and agreed to acquire the remaining 30.0% in March 2007, subject to
Media Council consent. For further information, see Item 8, Note 6, “Investments” and Item 8, Note 23, “Subsequent Events”.
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$ 10,231 in 2006 with a GDP growth rate of 7.9% in 2006.
Approximately 99% of households have television and cable penetration is 39%. According to our estimates, in local currency the Slovak Republic television advertising market grew by approximately 5 -
7% in 2006 and was worth approximately US$ 105 - 115 million.
In the Slovak Republic, we operate one national television channel, MARKIZA TV. The two other significant national broadcasters are the public broadcaster STV, operating two channels, and privately
owned broadcaster TV JOJ.
Operating and License Companies
Markiza holds the television broadcast license for MARKIZA TV. Markiza and our operating company, STS, had entered into a series of agreements pursuant to which STS was permitted to conduct
certain television broadcast operations for MARKIZA TV in accordance with the license. Effective January 1, 2007, STS merged into Markiza to form a combined operating and license company.
Operations
MARKIZA TV was launched as a national television channel in the Slovak Republic in August 1996. The MARKIZA TV channel reaches approximately 86% of the Slovak Republic's population,
including all of its major cities. The MARKIZA TV channel had an average national all day audience share for 2006 of 33.8% versus 18.4% for its nearest competitor, STV 1. In October 2004, the journal
method of measuring audience share and ratings was replaced with peoplemeters (an electronic audience measurement device). The introduction of peoplemeters has resulted in lower audience share and
ratings being recorded for all national broadcasters (see Item 7, “Analysis of Segment Results, Slovak Republic”). Since the introduction of peoplemeters, the national all day audience share of
MARKIZA TV has fallen from 40% to 34%.
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The chart below summarizes national all day and prime time audience share figures for MARKIZA TV:
2002
48.2%
47.4%
2003
45.8%
45.5%
2004
39.6%
40.0%
2005
31.1%
32.8%
2006
33.8%
35.9%
All day
Prime time
Source: TNS
Programming
The MARKIZA TV channel broadcasts 24 hours per day and has a programming strategy to appeal to a broad audience through news, movies, entertainment and sports programming, with specific
groups targeted in off-peak broadcasting hours. Approximately 31% of MARKIZA TV programming is locally produced, including Televizne noviny (TV News), Sportove noviny (Sports News), Let’s
dance, Susedia (Neighbors), Nevesta pre milionara (Bachelor). Televizne noviny is consistently the top-ranked show in the Slovak Republic. Let’s dance and Susedia were also among the most popular
shows in 2006.
MARKIZA TV channel has secured exclusive broadcast rights to a variety of popular American and European series, films and telenovellas produced by major international studios including Warner
Bros, NBC Universal, CBS Paramount, Dreamworks/Paramount, Grandview-Castle, and Buena Vista. All foreign language programming (other than that 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 the MARKIZA TV channel.
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 10% of programming be
public interest programming (which includes news and topical shows), that a minimum of 51% of first runs of films and series be European production, and that no more than 20% of foreign programming
be dubbed in the Czech language.
Advertising
The MARKIZA TV channel derives revenues principally from the sale of commercial advertising time through media buying groups and independent agencies. Advertisers include large multinational
firms such as T-Com / T-Mobile, Orange, Benckiser, Procter & Gamble, L’Oreal, Unilever, Nestle and Ferrero, though no one advertiser dominates the market. Our top ten advertisers contributed
approximately 33% to our total advertising revenues in the Slovak Republic in 2006.
Within the Slovak advertising market, television accounts for approximately 50% of total advertising spending. MARKIZA TV 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 more than 15% of total daily broadcast time. The public broadcaster, which is also financed
through a compulsory license fee, is restricted to broadcasting 8 minutes of advertising per hour but not more than 3% of total broadcast time. There are restrictions on the frequency of advertising
breaks during and between programs. These restrictions are the same for public and privately owned broadcasters. 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 am and 10:00 pm.
Competition
In addition to MARKIZA TV, the Slovak Republic is served by two national public television stations, STV1 and STV2, which dominated the ratings until the MARKIZA TV channel began broadcasting
in 1996. STV1 reaches almost the entire Slovak population. MARKIZA TV also competes with the privately owned broadcaster TV JOJ.
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The chart below provides a comparison of our audience share and technical reach to our competitors:
Main Television
Channels
MARKIZA TV
STV 1
TV JOJ
STV 2
Others
Ownership
CME
Public Television
Local owner
Public Television
Year of first
transmission
1996
1956
2002
1969
Signal
distribution
Terrestrial
Terrestrial
Terrestrial
Terrestrial
Source : Informa Telecoms and Media, Visio / MVK, PMT / TNS SK and CME
Audience
share (2006)
33.8%
18.4%
15.6%
6.2%
26.0%
100.0%
Technical
reach
86%
99%
73%
97%
The MARKIZA TV channel also competes with additional foreign terrestrial television stations located in Austria, the Czech Republic and Hungary, where originating signals reach the Slovak Republic,
and foreign satellite stations.
Regulation and License Renewal
MARKIZA TV’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.
The current broadcasting license for MARKIZA TV expires in September 2019.
Ownership
On January 23, 2006, we acquired control of our Slovak Republic operations and increased our economic interest from 70% to 80%. Following the merger of STS into Markiza on January 1, 2007, we now
own an 80.0% voting and economic interest in Markiza (see Item 7, “Analysis by Geographic Segment, Slovak Republic”).
We appoint three of the five members of the Board of Representatives, with the other two members being appointed by our partners. All significant financial and operational decisions of the Board of
Representatives require a simple majority vote. Three executives, two of whom are appointed by us, conduct the affairs of Markiza.
SLOVENIA
General
Slovenia is a parliamentary democracy with a population of 2.0 million people. Per capita GDP is estimated to be US$ 18,342 in 2006, the highest per capita GDP in Central and Eastern Europe, with a GDP
growth rate of 5.0% for 2006. Approximately 99% of Slovenian households have television and cable penetration is approximately 61%. According to our estimates, in local currency the Slovenian
television advertising market grew by approximately 6 - 8% during 2006 and was worth approximately US$ 65 - 75 million.
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In Slovenia, we operate two national television channels, POP TV and KANAL A. The other significant national broadcasters are the public broadcaster, operating as SLO 1 and SLO 2.
Operating and License Companies
Pro Plus provides programming to and sells advertising for the broadcast license holders of Pop TV and Kanal A. Pop TV holds all of the licenses for the POP TV channel and Kanal A holds all the
licenses for the KANAL A channel.
Operations
POP TV and KANAL A
The POP TV channel is the leading national commercial television broadcaster in Slovenia and reaches approximately 93% of the population, including the capital Ljubljana and Maribor, Slovenia's second
largest city. In 2006, the POP TV channel had a national all day audience share of 28.7% the largest in Slovenia.
The KANAL A channel reaches 90% of the population, including Ljubljana and Maribor. Independent research shows that among main television stations in 2006, the KANAL A channel had an all day
audience share of 9.0% making it the third most watched television channel in Slovenia.
The chart below summarizes the national all day and prime time audience share figures for POP TV and KANAL A:
2002
29.2%
32.3%
11.0%
11.0%
2003
29.5%
34.0%
10.2%
10.9%
2004
27.6%
31.9%
8.3%
9.4%
2005
27.3%
32.2%
8.5%
9.8%
2006
28.7%
34.3%
9.0%
9.9%
POP TV
All day
Prime time
KANAL A
All day
Prime time
Source: AGB Nielsen Media Research
Programming
POP TV broadcasts 18 hours per day and has a programming strategy to appeal to a broad audience through a wide variety of programming including series, movies, news, variety and game shows and
features. Approximately 33% of programming is locally produced, including Preverjeno! (Confirmed!), Trenja (Friction), the local series Nasa Mala Klinika (Our Little Clinic) and the reality show The Bar.
KANAL A broadcasts for 16 hours per day and has a programming strategy to complement that of the POP TV channel with a mixture of locally produced programs such as Extra Magazine and E+ and
acquired foreign programs, including films and series.
Pro Plus 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 Bros., Twentieth Century
Fox and Paramount. Pro Plus has agreements with CNN, Reuters and APTN to receive foreign news reports and film footage to integrate into news programs. All foreign language programs and films are
subtitled in Slovenian with the exception of some children’s programming that is dubbed.
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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 pm and 10:00 pm. 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 of annual broadcast time. 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 should be devoted to programs made by European producers who are
independent of broadcasters, and 50% of such works should have been produced in the last five years.
Advertising
Pro Plus derives revenues from the sale of commercial advertising time on the POP TV and KANAL A channels. Current multinational advertisers include firms such as Reckitt Benckiser, Procter &
Gamble, Mobitel, L’Oreal, Wrigley, Henkel and Beiersdorf, although no advertiser dominates the market. Our top ten advertisers contributed approximately 33% to our total advertising revenues in
Slovenia in 2006.
Within the Slovenian advertising market, television accounts for approximately 57% of total advertising spending. In addition, the POP TV and KANAL A channels 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 daily broadcasting time (with 15% for advertisements only). The public
broadcaster, 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 daily broadcasting time (with 10%
for advertisements only), but is only permitted up to 9 minutes per hour between the hours of 6.00pm and 11.00pm.
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 am to 9.30 pm and generally for alcoholic beverages with an alcoholic content of more than 15%.
Competition
Prior to the launch of POP TV, the television market in Slovenia had been dominated by SLO 1, a channel of the public broadcaster.
Page 24
The chart below provides a comparison of our audience share and technical reach to our competitors:
Main Television
Channels
POP TV
SLO 1
SLO 2
KANAL A
Others
Ownership
CME
Public Television
Public Television
CME
Source : Media Services AGB and CME Research
Year of first
transmission
Signal
distribution
Audience
share (2006)
1995
1958
1967
1991
Terrestrial / cable
Terrestrial / satellite / cable
Terrestrial / satellite / cable
Terrestrial / cable
28.7%
23.1%
8.9%
9.0%
30.3%
100.0%
Technical
reach
93%
100%
99%
90%
The POP TV and KANAL A channels also compete with foreign television stations, particularly Croatian, Italian, German and Austrian stations. Cable penetration is 61%, which is greater than many other
countries in Central and Eastern Europe, and approximately 18% of households have satellite television.
Regulation and License Renewal
The POP TV and KANAL A channels 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. In 2002
the Slovenian Media Council extended all of the licenses held by Pop TV and Kanal A until 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, which holds the licenses
for the POP TV network, and Kanal A, which holds the licenses for the KANAL A network. All such licenses expire in August 2012.
UKRAINE
General
Ukraine, the most populous market served by us, is a parliamentary democracy with a population of 46.7 million people. Per capita GDP is estimated to be US$ 2,027 in 2006, the lowest of all our markets,
with a GDP growth rate in 2006 of 6.0%. Nearly 100% of Ukrainian households have television and cable penetration is approximately 19%. According to our estimates, the Ukrainian television advertising
market grew by approximately 25 - 30% in 2006 and was worth approximately US$ 240 - 250 million.
In Ukraine, we operate one national television channel, STUDIO 1+1, and two local channels, KINO and CITI. The other five significant national broadcasters are the public broadcaster UT-1 as well as
privately owned broadcasters Inter, Novy Kanal, ICTV and STB.
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Operating and License Companies
The Studio 1+1 Group is comprised of several entities involved in the broadcasting operations of Studio 1+1, the license company. Innova and TV Media Planet provide programming and production
services to Studio 1+1. The sale of Studio 1+1’s advertising has been outsourced to Video International Group, a Ukrainian subsidiary of a Russian advertising sales company, in which we have neither
an economic nor a voting interest. CME Cyprus Holdings provides programming to KINO and CITI.
On January 11, 2006, we acquired a 65.5% interest in Ukrpromtorg 2003 LLC (“Ukrpromtorg”), which owns (i) 92.2% of Gravis LLC, which now operates the local channels, KINO (which replaced
CHANNEL 7) and CITI (which replaced CHANNEL 35); (ii) 100% of Nart LLC, which holds a satellite broadcasting license; and (iii) 75% of Stimul LLC, which operates TV STIMUL. In July 2006, we
launched a new entertainment channel, KINO, targeted at a younger demographic with coverage in Kiev and several regions in Ukraine, and in December 2006, we launched a new youth-oriented channel
in Kiev, CITI, on the frequencies we acquired.
Operations
STUDIO 1+1
The STUDIO 1+1 channel broadcasts programming and sells advertising under two licenses granted to it by the National Council for Radio and Television Broadcasting on Ukrainian National Frequency
Two (“UT-2”) and reaches approximately 98% of Ukraine's population. The STUDIO 1+1 channel began broadcasting on UT-2 in 1995 under a license permitting 15 hours of broadcasting per day,
primarily in prime time and off prime time. In July 2004, the station was awarded a second license allowing it to broadcast for the remaining nine hours not covered by the station's 15-hour license. STUDIO
1+1 has been broadcasting a full 24-hour schedule since early September 2004. The STUDIO 1+1 channel had a national all day audience share of 18.3% in 2006 and a 23.1% prime time audience share.
The chart below summarizes the national all day and prime time audience share figures for STUDIO 1+1:
All day
Prime time
Source: GFK USM
2002
22.2%
27.4%
2003
19.1%
25.8%
2004
20.9%
26.9%
2005
20.0%
22.2%
2006
18.3%
23.1%
Both the KINO and CITI channels broadcast programming and sell advertising. The KINO channel holds licenses covering 8 cities for terrestrial broadcasting and a satellite license. The KINO channel
was relaunched in July 2006, across a network of regional stations and cable operators, through which it reaches approximately 41.3% of the population. The KINO channel broadcasts for 24 hours per
day. The CITI channel broadcasts to the city of Kiev and the Kiev region for 24 hours per day.
Programming
STUDIO 1+1 has a programming strategy 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 2006, approximately 45% of programming for prime-time broadcasting hours were either in-house or out-sourced Ukranian production, which consists
primarily of news broadcasts and news related programs, entertainment shows and TV series of various genres.
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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 Bros., 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 is a youth-orientated channel which has a programming strategy designed to attract a target demographic of 14-35. It offers feature films, series, animation and other entertainment programming,
much of which is acquired from Western sources.
CITI, which targets the inhabitants of Kiev in the 18-50 age group, broadcasts mainly own-produced shows, may of which are live. This includes local news, and programs on Kiev culture, business and
community.
Studio 1+1, KINO and CITI are required to comply with certain restrictions on programming, including regulations on the origin of programming. These include the requirement that 75% of all
programming must be in the Ukrainian language, dubbed or have Ukranian subtitles.
In March 2006, amendments to the Ukrainian Media Law came into force, including modifications to the regulations on the origin of programming which now require that at least 50% of programming
broadcast by Studio 1+1, KINO and CITI be of Ukrainian origin.
Advertising
Within the Ukranian advertising market, television accounts for approximately 53% of total advertising spending. STUDIO 1+1, KINO and CITI also compete for advertising revenues with other media,
such as print, radio, outdoor advertising and direct mail.
The Studio 1+1 Group derives revenues principally from the sale of commercial advertising time through both media buying groups and independent agencies. Video International sells advertising for the
Studio 1+1 Group. Advertisers include large multinational firms such as Procter & Gamble, Kraft Foods, Unilever, Samsung, Mars, Sony, L’Oreal, Nestle and Baltic Beverage Holding. STUDIO 1+1 top ten
advertising clients contributed approximately 42% to STUDIO 1+1’s total advertising revenues in 2006.
KINO and CITI derived approximately half of their revenues from the sale of commercial advertising time. KINO targets smaller national advertisers and CITI aims to attract Kiev-based clients.
Within the Ukrainian advertising market, television accounts for approximately 53% of total advertising spending. STUDIO 1+1 also competes for advertising revenues with other media, such as print,
radio, outdoor advertising and direct mail.
Privately owned broadcasters are allowed to broadcast advertising for 15% of their total broadcast time. The public broadcaster, which is also financed through a compulsory license fee, 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 before 11:00 pm.
Competition
Three national television channels serve Ukraine: the public broadcaster UT-1, STUDIO 1+1, and Inter, another privately owned broadcaster. In addition, ICTV, STB and Novy Kanal, which are all
privately owned broadcasters, have used a series of regional frequencies to establish national networks. Inter is the main competitor of STUDIO 1+1.
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The chart below provides a comparison of STUDIO 1+1’s audience share and technical reach to our competitors:
Main Television
Channels
Inter
STUDIO 1+1
Novy Kanal
ICTV
STB
UT-1
Others
Ownership
Local owners
CME
Local owners
Local owners
Local owners
Public Television
Source : GFK USM and CME Research
Year of first
transmission
Signal
distribution
Audience
share (2006)
Technical
reach
1996
1995
1998
1992
1997
1965
Terrestrial / satellite / cable
Terrestrial / satellite / cable
Terrestrial
Terrestrial
Terrestrial
Terrestrial / cable
20.4%
18.3%
8.4%
7.3%
6.0%
2.1%
37.5%
100.0%
99%
95%
88%
90%
89%
96%
KINO and CITI, both of which target a youthful market have as their main competitors ICTV, TONIS and NTN. KINO has a technical reach of approximately 41.3% of the Ukraine population and since
being launched in July 2006 has achieved a national 14 - 49 prime time audience share of 0.33%, and an average share in the Kiev region of 1.87%. CITI, broadcasting to the city of Kiev and the Kiev
region, has a technical reach of 11.7% of the Ukraine population. CITI began broadcasting in December 2006 and in that month achieved an average 14 - 49 prime time audience share in the Kiev region of
1.77%.
License Renewal
Licenses in Ukraine are renewed by the National Council for Radio and Television Broadcasting in accordance with the terms of the 1993 Media Law, as amended in March 2006. On December 29, 2006,
the Ukrainian Media Council issued a new license to Studio 1+1 that extends its main 15-hour broadcast license, covering prime time and off prime time, until December 29, 2016. The remaining nine hours
of Studio 1+1’s off prime time schedule are broadcast pursuant to a 10-year broadcast license expiring in August 2014.
Ownership
The Studio 1+1 Group consists of several entities in which we hold direct or indirect interests. We hold a 60% ownership and economic interest in each of Innova, IMS and TV Media Planet. Innova owns
100% of Inter-Media, a Ukrainian company, which in turn holds a 30% interest in Studio 1+1.
Our indirect ownership interest in Studio 1+1 is 18%. On December 30, 2004, we entered into an additional agreement with Boris Fuchsmann, Alexander Rodnyansky and Studio 1+1, which re-affirms our
entitlement to 60% of any distribution from Studio 1+1 to its shareholders until such time as Ukrainian legislation allows us to increase our voting and economic interest in Studio 1+1 to 60%. Following
amendments to the Ukrainian Media Law in March 2006 that permit majority indirect foreign ownership, our partners entered into agreements with us to restructure the ownership of Studio 1+1 in order to
permit CME to hold a 60% indirect interest in Studio 1+1 (see Item 3, “Legal Proceedings, Ukraine”).
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CORPORATE OPERATIONS
In addition to group management and 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 Item 6, “Selected Financial Data” for further discussion.
EMPLOYEES
As of February 20, 2007, our operating companies had a total of approximately 3,300 employees (including freelance staff and contractors) and we had a corporate staff of 47 employees in London and
Amsterdam. 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 Item 8, Note 19, “Segment Data”.
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ITEM 1A.
RISK FACTORS
This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. See “Forward-looking Statements” in Item 1. Our actual results in the future could differ
materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks described below and elsewhere in this Annual Report on Form 10-K.
Risks Relating to our Operations
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 from 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. Countries in this region have economic and political systems, legal and tax regimes, standards of corporate governance
and business practices that continue to develop. Government policies may be subject to significant adjustments, especially in the event of a change in leadership, which 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. Other potential risks inherent in markets such as ours with changing 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 parties also presents a potential for biased treatment of us before regulators or courts in our markets 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. We are involved in certain disputes with some of the former shareholders of our Croatia operations and some of these shareholders may also challenge a restructuring that we
have undertaken in response to a request from the Croatian Media Council. The ability of certain of these shareholders to exert influence on local institutions may create a potential for biased treatment of
us. An adverse outcome in the Global Communications lawsuit (see Item 3, “Legal Proceedings, Croatia”) or a successful challenge to the restructuring could 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 Ukraine, 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.
Our current broadcasting licenses expire at various times between 2007 and 2017. 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.
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We do not have management control of our affiliate in Ukraine
We own our operations in Ukraine jointly with our partners through subsidiaries and affiliates. In Studio 1+1, we hold only an indirect 18% ownership interest. As a result, we do not have an ownership
interest that is sufficient to allow us to assert management control or unilaterally direct the strategies, operations and financial decisions of this company. Therefore, our ability to implement all financial
reporting and management processes that exist in our other operations requires the active cooperation of our partners. Their consent is also required for decisions affecting the acquisition of
programming, investment in production, retention and dismissal of key employees as well as other operational issues, including ensuring compliance with relevant tax and other obligations of Studio 1+1.
Our inability to obtain any required consent may result in Studio 1+1 being in breach of such tax or other obligations or may result in decisions being adopted that do not fully reflect our strategic
objectives, which may have an adverse impact on our financial position, results of operations and cashflows.
We may not be aware of all related party transactions; such transactions may involve risks of conflicts of interest and of concluding transactions on less favorable terms than could be obtained in
arms length transactions
In Romania, the Slovak Republic and Ukraine, the local shareholders and/or general directors of our television operating companies are individuals with other business interests in those countries,
including interests in television and other media related companies. Our local operating companies’ transactions with the businesses, whether or not we are aware that our local shareholders and general
directors have an interest therein, may present conflicts of interests that may in turn result in the conclusion of transactions on terms that are not arms length. Experience has shown that some related
party receivables have been collected more slowly than unrelated third party receivables, which has resulted in slower cash flow to our operating companies to the detriment of our shareholders. It is
likely that our subsidiaries will continue to enter into related party transactions in the future. As a result, there is a risk that related party transactions may be entered into on terms that are not arms length,
which may result in a negative impact on earnings or cash flows. 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 Agreement.
We may not be able to prevent our general directors 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 the past,
our internal controls have detected transactions that have been concluded by a general director acting outside his authority. Internal controls are not able to prevent a general director from acting outside
his authority, particularly if a related party relationship remains undisclosed to us. There is therefore a risk that a general director may act outside his 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 have an adverse impact on our results of operations.
We may seek to make acquisitions of other stations, networks, content providers or other companies in the future, or may fail to identify suitable targets, acquire them on acceptable terms or
successfully integrate them
Our business and operations continue to experience rapid growth, including through acquisition. The acquisition and integration of new businesses pose significant risks to our existing operations,
including:
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Increased overall operating complexity of our business, requiring greater personnel and other resources;
· Additional demands placed on our senior management, who are also responsible for managing our existing operations;
·
· Difficulties of expanding beyond our core expertise, in the event that we acquire content providers or other 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 Agreement.
To effectively manage our growth 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 for a variety of reasons, including 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.
Our operating results depend on our ability to generate advertising sales generally and, in the Czech Republic, to implement our advertising sales strategy
We generate almost all of our revenues from the sale of advertising airtime on our television channels. Our advertising revenues in general depend on the pricing of our advertising time as well as other
factors, including television viewing levels, changes in audience preferences, our stations’ technical reach, technological developments relating to media and broadcasting, competition from other
broadcasters and other media operators, seasonal trends in the advertising market in the countries in which we operate, and shifts in population and other demographics. Advertisers generally use gross
ratings points to measure television viewing levels. Our ability to generate gross ratings points depends on our offering programming which appeals to our target audiences, responding to technological
developments in media, competing effectively with other broadcasters seeking to attract similar audiences and managing the impact of any seasonal trends.
In the Czech Republic we are continuing to implement an advertising sales strategy adopted during the first quarter of 2006 to capture market growth through a more sophisticated pricing policy (see Item
7, “Analysis of Segment Results, Czech Republic”). There can be no assurance that we will be successful in fully implementing this advertising sales strategy in the Czech Republic or to respond
successfully to changes in other factors affecting advertising sales generally in order to maintain and increase our advertising sales. Any decline in advertising sales due to a failure to respond to such
changes or to successfully implement the advertising sales strategies, particularly in the Czech Republic, could have a material adverse effect on our financial position, results of operations and cash
flows.
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. In the advertising market, television competes with various other advertising media, such
as print, radio, the internet and outdoor advertising. 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 or that changes in the regulatory environment or 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 could have an adverse effect on
our results of operations and cash flows.
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Our operating results are dependent on general economic conditions
The results of our operations rely heavily on advertising revenue and demand for advertising is affected by prevailing general economic conditions. Adverse economic conditions generally and
downturns in the economies of our operating countries specifically are likely to negatively impact the advertising industries in those countries and, consequently, the results of our operations. In
addition, disasters, acts of terrorism, civil or military conflicts or general political uncertainty may create economic uncertainty that reduces advertising spending. Although recently there has been growth
in the economies of our operating countries, there can be no assurance that this trend will continue or that any such improvement in general economic conditions will generate increased advertising
revenue for our group. Global and local downturns in the general economic environment may cause our customers to reduce the amounts they spend on advertising, which could result in a decrease in
demand for our advertising airtime. This would adversely affect our business, financial condition, results of operations and cash flow.
Our programming content may become more expensive to produce or acquire or we may not be able to develop or acquire programming content that is attractive to our audiences
Television programming is one of the most significant components of our operating costs. The commercial success of our channels depends substantially on our ability to develop, produce or acquire
syndicated television programming content that matches audience tastes, attracts high audience shares and generates advertising revenues. Our programming costs or requirements may increase in
response to increased competition from existing and new television broadcasting channels for such programming or related talent. The costs of acquiring programming content attractive to our viewers,
such as feature films and popular television series and formats, may increase as a result of such competition. In addition, our expenditure in respect of locally produced programming content may 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. In the
event any such programming does not attract adequate audience share, it may be necessary to write down the value of such programming. Any such increase in programming costs or write-downs could
have a material adverse effect on our business, financial condition, results of operations and cash flow.
Our operations are subject to significant changes in technology that could adversely affect our business
Countries in which we have operations have plans to migrate from analogue terrestrial broadcasting to digital terrestrial broadcasting. Each country has independent plans with differing time frames and
regulatory regimes. The specific timing and approach to implementing such plans to be employed in our markets is not fully known and we cannot predict the timing or effect of such migration on our
existing operations or predict our ability to receive any additional rights or licenses to broadcast if such additional rights or licenses should be required under any relevant regulatory regime. We may be
required to commit substantial financial and other resources to the implementation of new technologies. We may be required to make substantial additional capital investment in order to implement digital
terrestrial broadcasting and the use of alternative distribution systems may require us to acquire additional distribution and content rights. In light of our increased leverage position following the
issuance of the Senior Notes, we may not have access to resources sufficient to make such investments.
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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
analogue terrestrial broadcasting, such as digital broadcasting, cable and satellite distribution systems, the internet, video-on-demand and the availability to television programming on portable digital
devices, have fragmented television audiences in more developed markets and could adversely affect our businesses. In addition, compression techniques and other technological developments allow for
expanded programming offerings to be offered to highly targeted audiences. Reductions in the cost of creating additional channel capacity 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 for digitalization or to address competition that arises on
account of technological innovations in broadcasting may have an adverse effect on our business, financial condition, 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. The loss of the services of any of these individuals could have an adverse effect on our business, results of operations and cash
flow. 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.
Risks Relating to our Financial Position
Our increased debt service obligations following the issuance of the Senior Notes may adversely affect our business
Our leverage has been significantly increased with the issuance of EUR 370.0 million (US$ 487.3 million at December 31, 2006) fixed and floating Senior Notes (see Item 8, Note 7 “Senior Notes”) in
connection with the acquisition of the TV Nova (Czech Republic) group. As a result, we have significant debt service obligations and we are restricted in the manner in which our business is conducted.
We anticipate that our high leverage will continue for the foreseeable future. Our high leverage could have important consequences to our business and results of operations, including but not limited to
the following: our vulnerability to a downturn in our business or economic and industry conditions has increased; our ability to obtain additional financing to fund future working capital, capital
expenditures, business opportunities and other corporate requirements has been limited. 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; and our flexibility in planning for, or reacting to, changes in our business, the competitive environment and the industry
in which we operate has been 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 strategic plan.
We may require additional external sources of capital, which may not be available on acceptable terms
The acquisition, ownership and operation of television broadcasting operations requires substantial capital investment. Our total capital requirements are based on our estimates of future operating
results, which are based on a variety of assumptions that may prove to be inaccurate. If our assumptions prove to be inaccurate, if our assumptions or plans change, or if our costs increase due to
competitive pressures or other unanticipated developments, we may need to obtain additional financing. Sources of financing may include public or private debt or equity financings, proceeds from the
sale of assets or other financing arrangements. Any additional equity or equity-linked financings may dilute the economic interest of the holders of our Common Stock. In addition, it is not possible to
ensure that such financings will be available within the limitations on the incurrence of additional indebtedness contained in the Indenture pursuant to which our Senior Notes were issued or pursuant to
the terms of the EBRD Loan Agreement (see Item 8, Note 7, “Senior Notes”, and 13 “Credit Facilities and Obligations Under Capital Leases”). Furthermore, such financings may not be available on
acceptable terms, or may be subject to limits on the incurrence of indebtedness under the Indenture.
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Under the Senior Notes and the EBRD Loan Agreement, we have pledged shares in our subsidiaries 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 our Indenture and the EBRD Loan Agreement, 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, STS (Markiza), Pro Plus and Studio 1+1. If we were to default on the Indenture or the EBRD Loan Agreement, the Indenture
trustee or the EBRD would have the ability to sell all or a portion of all of these assets in order to pay amounts outstanding under the Indenture or the EBRD Loan Agreement.
Our cash flow and capital resources may not be sufficient for future debt service obligations
Our ability to make debt service payments under our Senior Notes 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 are insufficient
to fund our debt service obligations, we would face substantial liquidity problems and we may be obliged to reduce or delay capital or other material expenditures at our stations, 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.
We are subject to risks relating to fluctuations in exchange rates
Our reporting currency is the US dollar but a significant portion of our consolidated revenues and costs, including programming rights expenses and interest on debt, are in other currencies. Furthermore,
the functional currency of our operations in Romania and Ukraine is the US dollar. This is subject to annual review and new circumstances that may be identified during these annual reviews may result in
use of functional currencies in these markets that differ from our reporting currency. In addition, our Senior Notes are denominated in Euros. We have not attempted to hedge the Senior Notes; we have in
the past and may therefore in the future continue to experience significant gains and losses on the translation of the Senior Notes into US dollars due to movements in exchange rates between the Euro
and the US dollar.
If our goodwill or amortizable intangible assets become impaired we may be required to record a significant charge 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 a decline in stock price and market capitalization, future cash flows, and slower growth rates in our industry. We may be required to record a significant charge to earnings in
our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined resulting in a negative impact on our results of operations.
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Our holding company structure may limit our access to cash
We are a holding company and we conduct our operations through subsidiaries and affiliates. The primary internal source of our cash to fund our operating expenses as well as service our existing and
future debt depends on debt repayments from our subsidiaries, the earnings of our operating subsidiaries, earnings generated from our equity interest in certain of our affiliates and distributions of such
earnings to us. Substantially all of our assets consist of ownership of and loans to our subsidiaries and affiliates. We currently rely on the repayment of inter-company indebtedness and the declaration
of dividends to receive distributions of cash from our operating subsidiaries and affiliates. The distribution of dividends is generally subject to conformity with requirements of local law, including the
funding of a reserve account and, in certain instances, the affirmative vote of our partners. If our operating subsidiaries or affiliates are unable to distribute to us funds to which we are entitled, we may be
unable to cover our operating expenses. Such inability would have a material adverse effect on our results of operations.
Risks Relating to Enforcement Rights
We may not be able to enforce our indemnification rights in a timely manner
Under the purchase agreement for the TV Nova (Czech Republic) group, PPF and certain of its affiliates have agreed to indemnify us for a limited period of time up to the full amount of the purchase price
paid by us for the TV Nova (Czech Republic) group for a series of events and circumstances, including claims relating to taxes and claims brought by certain former shareholders of the TV Nova (Czech
Republic) group. If we make an indemnification claim and we do not receive an indemnification payment or if such payment is delayed or contested, it may have a material adverse effect on our ability to
make any required repayments under the terms of the Senior Notes or other indebtedness or may adversely affect our results of operations.
Enforcement of civil liabilities and judgments may be difficult
Central European Media Enterprises Ltd. is a Bermuda company, and substantially all of our assets and all of our operations are located, and all of our revenues are derived, outside the United States of
America. In addition, several of our directors and officers are non-residents of the United States of America, and all or a substantial portion of the assets of such persons are or may be located outside the
United States of America. As a result, investors may be unable to effect service of process within the United States of America upon such persons, or to enforce against them judgments obtained in the
United States of America courts, including judgments predicated upon the civil liability provisions of the United States of America 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 of America courts obtained against us or such persons predicated upon the civil liability provisions
of the United States of America federal and state securities laws or (ii) in original actions brought in such countries, as applicable, liabilities against us or such persons predicated upon the United States
of America federal and state securities laws.
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 10 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
64.8% of the aggregate voting power of our 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 the shares of Class B Common Stock. 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 recommended by Adele (Guernsey) L.P., and transactions involving
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.
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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
Business and Operations” and including the following: license renewals, general economic and business trends, variations in quarterly operating results, 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, investor and securities analyst perception of us and other companies that investors or securities analysts deem comparable in the television broadcasting industry. In addition, the stock market in
general has 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 our Class A Common Stock, regardless of our operating performance.
Our share price may be adversely affected by potential future issuances and sales of our shares
As at December 31, 2006, we have a total of 1.2 million options to purchase Class A Common Stock outstanding and 0.1 million options to purchase Class B Common Stock outstanding. An affiliate of PPF
holds 3,500,000 unregistered shares of Class A Common Stock and has the right to demand a registration of up to 100% of such shares in May 2007. We cannot predict what effect, if any, the issuance of
shares underlying options, the registration of such unregistered shares or any future sales of our shares will have on the market price of our shares. However, if more shares are issued, the economic
interest of current shareholders may be diluted and the price of our shares may be adversely affected.
The risks described here are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely
affect our business, financial condition and / or operating results.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
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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. 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
Zagreb, Croatia
Prague, Czech Republic
Bucharest and other key cities within Romania
Bratislava, Slovak Republic
Ljubljana, Slovenia
Kiev, Ukraine
Kirovograd, Ukraine
Surrounding suburbs of Kiev, Ukraine
Zug, Switzerland
Leased office
Leased office
Leased office
Owned and leased buildings
Owned buildings and leased buildings
Owned and leased buildings
Owned buildings
Owned buildings and leased buildings
Owned and leased buildings
Leased buildings
Leased offices
Leased office
Registered Office, Corporate
Corporate Office, Corporate
Administrative Center, Corporate
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, MARKIZA TV
Office and studio space, POP TV and KANAL A
Office space, STUDIO 1+1. Office and studio space, KINO, CITI
Office and studio space, KINO, CITI
Studio space, STUDIO 1+1
Office space, IMS
For further information on using our cash resources to fund these facility-related costs, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources” in Item 7.
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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. Other than those claims discussed below, 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.
We present below a summary of our more significant proceedings by country.
Croatia
Global Communications Disputes
On October 29, 2004, OK filed suit against Global Communications d.o.o. claiming approximately HRK 53.0 million (approximately US$ 9.5 million) in damages. Global Communications is a company
controlled by Ivan Caleta, who had previously operated Nova TV (Croatia) through OK. Global Communications, together with GRP Media d.o.o., another company controlled by Ivan Caleta, had
provided certain goods and services to OK and Nova TV (Croatia) in exchange for advertising time pursuant to an agreement dated April 10, 2001 (the “Global Agreement”). Global Communications and
GRP Media were functionally managing the advertising inventory of Nova TV (Croatia). On December 31, 2003, Global Communications entered into a reconciliation agreement by which OK
acknowledged that Global Communications was entitled to approximately 375,000 seconds of advertising time for goods and services previously provided. Following our acquisition of Nova TV (Croatia)
and OK in July 2004, OK concluded that Global Communications had used all of its seconds by June 2004 based on a substantial discrepancy discovered between the utilization of advertising time
recorded by Global Communications and that recorded by AGB Puls, an independent television audience measurement service operating in Croatia. In the course of its investigation of the usage of
seconds by Global Communications, OK discovered that computer records of advertising seconds kept for OK may have been altered. OK brought a suit to recover amounts for advertising time used by
Global Communications in excess of the 375,000 seconds agreed. Global Communications filed a counterclaim in January 2005 for HRK 68.0 million (approximately US$ 12.2 million), claiming that the AGB
data is unreliable and that it is entitled to additional seconds under the previous agreement. The lower commercial court issued a judgment on July 12, 2006 in favor of Global Communications for the full
amount of the counterclaim, and we have appealed this decision on the basis of false and inadequate disclosure, wrongful application of substantive law and procedural error. Global Communications
separately brought a claim against Nova TV (Croatia), on the same basis as the OK counterclaim. Both Global Communications and Nova TV (Croatia) requested the court to join this claim with the OK
counterclaim but this request was denied. The lower commercial court issued a judgment on August 1, 2006 in favor of Global Communications for the full amount of the claim, after having denied
submission of evidence supporting our defense. We have also appealed this decision.
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On January 25, 2007, Nova TV (Croatia) filed suit against Global Communications. The facts underlying the claim are substantially the same as those of the abovementioned claims, but Nova TV (Croatia)
is claiming that the Global Agreement and the two reconciliation agreements dated April 30, 2004 and June 30, 2004 (the “Reconciliation Agreements”), by which OK acknowledged the number of seconds
of advertising time to which Global Communications was purportedly entitled, should be declared null and void under Article 141 of the Croatian Obligations Act. This provision is intended to protect a
contractual party which has entered into unfair bargaining terms due to its dependency on the other contractual party. Global Communications, OK and Nova TV (Croatia) were all related parties
(controlled by Ivan Caleta) and the contractual terms provided for the provision of 1,340,280 seconds by OK to Global Communications in exchange for certain transmitters. These seconds were valued at
an aggregate of DEM 5 million (or DEM 3.73 per second; HRK 3.91 per second at the time) whereas the rate card price was DEM 97.18 or HRK 380.00 per second (i.e. a price that was 26 times higher).
Other clients (unrelated parties) sampled from this period were paying between 382.50 HRK to 491.85 HRK per second. Nova TV (Croatia) is arguing for voidance of this contract because of its
unconscionable terms which were detrimental to OK and Nova TV (Croatia) and beneficial solely to Global Communications (which, in its capacity as an advertising agency, on-sold these seconds to its
clients at market rates, thereby reaping an extraordinary profit). Nova TV (Croatia) is further claiming restitution for advertising seconds appropriated by Global Communications under the Global
Agreement. The restitution amount is HRK 586.5 million (approximately US$ 105.1 million). Given that the resolution of the issues posed by this lawsuit constitutes a preliminary question on which
appellate review of the two lawsuits previously mentioned above should depend, we have requested suspension of those two reviews until this question has been finally adjudicated.
Former Shareholder Dispute
On July 21, 2005, Narval A.M. d.o.o. (a company wholly-owned by Ivan Caleta), Studio Millenium d.o.o. and Richard Anthony Sheldon, three of the former shareholders of OK, filed suit against Nova TV
(Croatia) for rescission of the sale and purchase contract pursuant to which they sold 75% of OK to Nova TV (Croatia) in July 2004 (the “OK Sale Contract”). Nova TV (Croatia) acquired OK immediately
prior to our acquiring Nova TV (Croatia). The provisions of the OK Sale Contract required Nova TV (Croatia) to make payment to the four shareholders of OK by September 1, 2004, upon receipt of
appropriate invoices and bank account details. The fourth shareholder, Pitos d.o.o., issued an invoice that was duly received by Nova TV (Croatia) and payment was made thereunder. The other three
shareholders claim that they hand-delivered a joint invoice to one of the former directors of Nova TV (Croatia), but we continue to dispute this. Under the Croatian Obligations Act, one party to a contract
who has performed may unilaterally rescind a contract if the other party fails to perform after receipt of a written warning. On May 24, 2006, the lower commercial court decided in favor of the plaintiffs to
rescind the OK Sale Contract and ordered the defendant to pay court costs. We have appealed the decision on the basis that evidence supporting our position was not allowed to be presented to the
court and we continue to challenge the validity of the power of attorney purportedly issued by Richard Anthony Sheldon (a resident of the United Kingdom) to legal counsel representing the other
plaintiffs.
On August 28, 2006, we received a lower court decision of an injunction against us (decided without a hearing) that, inter alia, prohibits a sale or encumbrance of 75% of the shares of OK. Although we
appealed this decision, the appellate commercial court upheld the lower court’s judgment on November 21, 2006. On November 6, 2006, we were notified of a request for a further injunction that would,
inter alia, prohibit us from taking any actions to decrease the value of OK and require the management of OK to report to a delegate of the former shareholders. We have unsuccessfully sought the
removal of the presiding judge, Raul Dubravec (who also presided over the Global Communications lawsuit against Nova TV (Croatia)). Mr. Dubravec ruled against us on December 18, 2006, requiring
imposition of a temporary director for OK, which is not a remedy available under Croatian law under the facts of this action. Further, the temporary director who has been appointed is one of the former
directors of OK who countersigned the Reconciliation Agreements and is an associate of Ivan Caleta. We have appealed this decision. While we continue to vigorously contest all these actions in the
face of serious concerns as to the impartiality of the Croatian judicial system, we do not expect our Croatia operations to suffer any significant loss or disruption as a consequence of these actions.
Czech Republic
Antimonopoly Office
The investigation of the Office for the Protection of Economic Competition of the Czech Republic was terminated in December 2006, and CET 21 received written confirmation from the Office that TV
Nova’s current sales contracts and conditions of advertising are in compliance with Czech antimonopoly legislation.
Romania
There are no significant outstanding legal actions that relate to our business in Romania.
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Slovenia
On November 20, 2002, we received notice of a claim filed by Zdenka Meglic, the founder and a former shareholder of MMTV 1 d.o.o (MMTV), against MMTV, a subsidiary of CME Media Enterprises
B.V. In her claim against MMTV, Zdenka Meglic is seeking an amount equal to SIT 190 million (approximately US$ 1.0 million) for repayment of monies advanced to MMTV from 1992 to 1994 (in the
amount of approximately SIT 29 million (approximately US$ 0.2 million)) plus accrued interest. On September 9, 2004, the court of first instance found against MMTV and issued a judgment requiring
MMTV to pay SIT 190 million (approximately US$ 1.0 million) plus interest as well as costs. On September 24, 2004, MMTV filed an appeal against the judgment. On December 15, 2004, the appellate court
vacated the judgment of the lower court and returned the case for further proceedings. We do not believe that Zdenka Meglic will prevail and will continue to defend the claim.
Slovak Republic
There are no significant outstanding legal actions that relate to our business in the Slovak Republic.
Ukraine
On October 11, 2005, Igor Kolomoisky filed a lawsuit against Alexander Rodnyansky and Studio 1+1 in a district court in Kiev. Our Ukrainian affiliate Intermedia has been joined in the proceedings as a
“third party”. Igor Kolomoisky is attempting to enforce what he alleges was a binding oral agreement with Alexander Rodnyansky to purchase the latter’s 70% interest in Studio 1+1 for consideration of
US$ 70.0 million and to transfer that interest to Igor Kolomoisky on receipt of a prepayment of US$ 2.0 million. The lawsuit arises from abortive negotiations among Igor Kolomoisky, Alexander
Rodnyansky and Boris Fuchsmann for the acquisition by Igor Kolomoisky of the totality of interests in the Studio 1+1 Group held by Alexander Rodnyansky and Boris Fuchsmann, subject to Igor
Kolomoisky assuming all of their obligations under our existing partnership arrangements. On August 16, 2006, the district court in Kiev ruled in favor of Igor Kolomoisky and found that he is entitled to
the 70% interest in Studio 1+1 held by Alexander Rodnyansky. Our Ukrainian affiliate Intermedia and Alexander Rodnyansky filed appeals against this decision.
At a hearing on October 31, 2006, the appellate court overturned the decision of the court of first instance and denied Igor Kolomoisky’s claim that he is entitled to a 70% interest in Studio 1+1 held by
Alexander Rodnyansky. On November 3, 2006, Igor Kolomoisky filed an appeal with the Supreme Court of Ukraine, the highest court in Ukraine. At a hearing on February 28, 2007, the Supreme Court
rejected this appeal. As a result, Igor Kolomoisky no longer has a basis for claiming this ownership right in Studio 1+1 on the same grounds.
On December 23, 2005, we initiated proceedings against our partners Alexander Rodnyansky and Boris Fuchsmann in order to enforce our contractual rights and compel a restructuring of the ownership
of Studio 1+1 in order to permit us to hold a 60% interest in Studio 1+1 through a subsidiary organized in Ukraine. Initiation of this proceeding followed protracted negotiations with our partners to
restructure following confirmation from the Ukraine Media Council that our proposed ownership structure would not be in violation of restrictions on foreign ownership contained in the Ukraine Media
Law, which restricts direct (but not indirect) investment by foreign persons in Ukrainian broadcasters to 30%. On January 12, 2006, the Ukraine parliament adopted an amended version of the Ukraine
Media Law that clarifies the absence of any restriction on indirect foreign ownership of television broadcasters. This amended Ukraine Media Law came into force in March 2006. Our partners have
acknowledged an obligation to restructure upon the entry into force of these amendments. On September 5, 2006, our partners entered into certain agreements to implement the restructuring. Following
the completion of the transactions reflected in these agreements and the registration of the charter of Studio 1+1 amended to reflect the new ownership of Studio 1+1, we will own 60% of Studio 1+1. Upon
successful completion of the restructuring, we will terminate the proceedings initiated against our partners in December 2005.
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Because of ongoing ancillary litigation to enjoin transactions related to the ownership of Studio 1+1 that have been initiated by Igor Kolomoisky, by our partners and by third parties who are not direct
parties in interest to legal proceedings initiated by Igor Kolomoisky against Alexander Rodnyansky, the state registrar in the district administration in Kiev where such charter amendments are registered
is presently enjoined from registering any amendments to the charter of Studio 1+1. Our partners are no longer seeking to enforce the injunction filed at their initiative; we expect that this injunction will be
removed once the case file in this matter has been transferred to the appellate court and the appeal filed by Igor Kolomoisky in respect of this injunction has been scheduled.
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
The 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, 2007 the last reported sales price for the Class A Common Stock was US$ 86.00.
The following table sets forth the high and low sales prices for the Class A Common Stock for each quarterly period during the last two fiscal years.
Price Period
2006
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2005
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High (US$ / Share)
Low (US$ / Share)
71.87
71.35
68.47
77.69
56.08
50.70
55.79
59.00
56.73
52.90
53.62
67.50
34.90
40.04
47.10
44.72
At February 20, 2007, there were 25 holders of record (including brokerage firms and other nominees) of the Class A Common Stock and 2 holders of record of the Class B Common Stock. There is no
public market for the Class B Common Stock. Each share of Class B Common Stock has 10 votes.
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 Common Stock.
PURCHASE OF OWN STOCK
We did not purchase any of our own stock in 2006.
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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, 2002 and December 31, 2006.
Value of US$ 100 invested at December 31, 2002 as of December 31, 2006:
Central European Media Enterprises Ltd.
NASDAQ Composite Index
Dow Jones World Broadcasting Index (1)
$
$
$
1,217.39
209.62
180.85
(1) This index includes 69 companies, all of which are non-U.S. based. Accordingly, the Company believes that the inclusion of this index is useful in understanding the stock performance of the Company
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 elsewhere in 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, 2006. 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, 2006, 2005 and 2004 and the consolidated balance sheet data as
of December 31, 2006 and December 31, 2005 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, 2003 and 2002 and the balance sheet data as of December 31, 2004, 2003 and 2002 were derived from the consolidated audited financial statements that are not included in
this Annual Report on Form 10-K, as restated under SAB 108.
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CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues
Operating income / (loss)
Net income / (loss) from continuing operations
(Loss) / income on discontinued operations (1)
Net income / (loss)
PER SHARE DATA: (2)
Net income / (loss) per common share from:
Continuing operations - basic
Continuing operations - diluted
Discontinued operations - basic
Discontinued operations - diluted
Net income / (loss) - basic
Net income / (loss) - diluted
Weighted average common shares used in computing per share amounts (000’s)
Basic
Diluted
CONSOLIDATED BALANCE SHEET DATA:
Current assets
Non-current assets
Total assets
Current liabilities
Non-current liabilities
Minority interests
Shareholders’ equity / (deficit)
Total liabilities and shareholders’ equity
$
$
$
$
$
$
$
For the Years Ended December 31,
2005 (as
restated)
(3,4)
(US$ 000’s, except per share data)
2004 (as
restated)
(4)
2003 (as
restated)
(4)
2006
603,115 $
140,674
25,287
(4,863)
20,424 $
0.63 $
0.62
(0.12)
(0.12)
0.51
0.50 $
40,027
40,600
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
413,616 $
1,405,384
1,819,000 $
182,961
574,084
26,189
1,035,766
1,819,000 $
286,926 $
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
265,049 $
179,590
444,639 $
109,745
18,965
4,861
311,068
444,639 $
124,978 $
(4,410)
(24,201)
370,213
346,012 $
(0.91) $
(0.91)
13.97
13.97
13.06
13.06 $
26,492
26,492
266,891 $
101,861
368,752 $
71,116
23,118
994
273,524
368,752 $
2002 (as
restated)
(4)
99,143
1,466
(25,106)
10,922
(14,184)
(0.95)
(0.95)
0.41
0.41
(0.54)
(0.54)
26,451
26,451
109,558
74,464
184,022
77,156
200,723
2,019
(95,876)
184,022
(1) In 2003 we sold our 93.2% participation interest in CNTS, our former Czech Republic operating company, to PPF. Our financial statements present our former operations in the Czech Republic as
discontinued operations for all periods.
(2) All per share data has been adjusted for the two-for-one stock splits which occurred on August 22, 2002, January 10, 2003 and November 5, 2003.
(3) The Consolidated Balance Sheet and Consolidated Statements of Operations reflect the effect of our acquisition of the TV NOVA (Czech Republic) group in May 2005.
(4) Our results for the years ended December 31, 2005, 2004, 2003 and 2002 have been restated to reflect the correction of certain errors relating to our historic accounting for the issuance of stock options.
See Item 8, Note 2 ”Restatement”.
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The restatement above had the impact on our previously presented financial information as set out below. All amounts are in US$ 000’s except per share data:
Balance Sheet (as of December 31, 2002)
Additional paid-in capital at December 31, 2002
Accumulated deficit at December 31, 2002
Balance Sheet (as of December 31, 2003)
Additional paid-in capital at December 31, 2003
Accumulated deficit at December 31, 2003
Balance Sheet (as of December 31, 2004)
Additional paid-in capital at December 31, 2004
Retained deficit at December 31, 2004
Balance Sheet (as of December 31, 2005)
Additional paid-in capital at December 31, 2005
Retained deficit at December 31, 2005
Statement of Operations (for the Year Ended December 31, 2004)
Corporate operating costs
Operating income
Income from continuing operations
Net income
Net income from continuing operations per share - Basic
Net income per share - Basic
Statement of Operations (for the Year Ended December 31, 2005)
Corporate operating costs
Operating income
Income from continuing operations
Net income
Net income from continuing operations per share - Basic
Net income per share - Basic
As reported
previously
Adjustment
As restated
$
$
$
$
359,342
(452, 011)
372,662
(105,999)
387,305
(87,468)
746,880
(44,973)
$
$
$
$
(29,185)
18,740
16,007
18,531
0.57
0.66
(25,374)
52,369
43,008
42,495
1.24
1.23
$
$
$
$
6,939
(6,939)
6,939
(6,939)
7,008
(7,008)
7,181
(7,181)
(69)
(69)
(69)
(69)
0.00
0.00
(173)
(173)
(173)
(173)
0.00
0.00
366,281
(458,950)
379,601
(112,938)
394,313
(94,476)
754,061
(52,154)
(29,254)
18,671
15,938
18,462
0.57
0.66
(25,547)
52,196
42,835
42,322
1.24
1.22
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The adjustment to Accumulated deficit and Additional paid in capital at December 31, 2002 represented additional stock-based compensation expense relating to the following years ended:
December 31, 1994
December 31, 1995
December 31, 1996
December 31, 1997
December 31, 1998
December 31, 1999
December 31, 2000
December 31, 2001
$
Adjustment
(US$ 000’s)
47
548
1,632
2,504
1,719
400
89
-
6,939
Seasonality
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” and “Risk Factors” in Item 1.
Contents
I.
II.
III.
IV.
V.
VI.
VII.
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
Related Party Matters
I. Executive Summary
During 2006 we delivered on our previously announced strategy:
· We improved the financial performance of our core stations (Romania, Slovak Republic, Slovenia and Ukraine) by delivering an increase in Segment Net Revenues of 30% and Segment EBITDA of
39% from 2005;
The principal events since January 1, 2006 are as follows:
· On January 11, 2006, we completed the acquisition of a 65.5% interest in Ukrpromtorg 2003 LLC (“Ukrpromtorg”), which owns 92.2% of Gravis LLC, the operator of the GRAVIS channel and
CHANNEL 7 in Kiev as well as two other local channels in Ukraine, for a total investment of approximately US$ 7.4 million (for further information see Item 8, Note 4, “Acquisitions and Disposals,
Ukraine”);
· On January 23, 2006, we completed the acquisition of control of our Slovak Republic operations and increased our economic interest from 70.0% to 80.0% for total consideration of approximately US$
29.8 million. As a result of this transaction, we began consolidating the results of our Slovak Republic operations from January 2006 (for further information see Item 8, Note 4, “Acquisitions and
Disposals, Slovak Republic”);
· Effective February 1, 2006, Vaclav Mika was appointed General Director for the MARKIZA TV channel;
· On February 17, 2006, we purchased an additional 5% of Pro TV, MPI and Media Vision from Adrian Sarbu for consideration of US$ 27.2 million (for further information, see Item 8, Note 4,
“Acquisitions and Disposals, Romania”). We now own a 90% voting and economic interest in Pro TV and MPI and a 75% voting and economic interest in Media Vision;
· On March 7, 2006, the Slovak Republic Media Council extended the broadcasting license of TV MARKIZA for an additional 12 years, until September 2019;
· On March 29, 2006, we completed the public offering of 2,530,000 shares of our Class A Common Stock and raised net proceeds of approximately US$ 168.7 million;
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· On July 1, 2006, we launched a new entertainment channel in Ukraine, KINO, targeted at a young demographic. In the period since being launched, KINO has secured a national 14-49 prime time
audience share of approximately 0.33%, and an average share in the Kiev area of 1.87%;
· On July 19, 2006, the Ukrainian Media Council issued a decision to extend the 15-hour broadcasting license of Studio 1+1 for a ten-year period to December 29, 2016;
· On August 11, 2006, we completed the acquisition of a 10.0% stake in Media Pro, a group of Romanian companies with operations in the fields of publishing, information, printing, cinema,
entertainment and radio (for further information see Item 8, Note 4, “Acquisitions and Disposals, Romania and Note 6, “Investments”);
· During the third quarter 2006, we commenced a voluntary review of our stock option granting practices covering the period from 1994 to 2002. The review found certain instances of administrative
and procedural deficiencies that occurred in the period between 1994 and 1998, but found no evidence from which it could be concluded that any errors were the result of deliberate or intentional
misconduct. We have restated our historic financial statements to correct these errors (for further information see Item 8, Note 2 “Restatement”); and
· On December 1, 2006, we launched a new entertainment channel in Ukraine, CITI, targeted at a young demographic. In the period since being launched, CITI has secured an average 14-49 prime time
audience share of approximately 1.77% in the Kiev region.
Management Changes
· On July 28, 2006, the term of Michael Garin’s employment agreement to serve as Chief Executive Officer was extended from 2008 to 2010;
· On August 1, 2006, we concluded an agreement with Adrian Sarbu in connection with his appointment in February 2006 to oversee our operations in the Czech and Slovak Republics in addition to his
existing responsibilities as general director of our operations in Romania;
· On August 3, 2006, Robert E. Burke announced his intention to step down as the Company’s President and Chief Operating Officer effective October 1, 2006; and
· On October 5, 2006, the term of Marina Williams’ agreement to serve as Executive Vice President was extended from 2008 to 2010.
Future Trends
As our markets mature, we anticipate more intense competition for audience share and advertising spending from other incumbent terrestrial broadcasters and, to a lesser extent, from local cable and
satellite broadcasters. We believe we are in a solid position to manage increased competition. In the near term we intend to continue to pursue further improvements in the performance of our existing
operations in order to maximize the potential for organic growth.
Our priorities in this regard include:
· Pursuing sub-regional efficiencies, especially in the area of local programming between Slovenia and Croatia and between the Czech and Slovak Republics;
· Supporting the growth of television advertising in our markets through increased development and through the launch or acquisition of additional channels to expand our advertising inventory and
target niche audiences;
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· Leveraging our existing brands and assets to develop new revenue opportunities, including in the creation and distribution of programming and in the new media sectors; and
· Continuing to expand our footprint into additional Central and Eastern European markets when financially prudent opportunities arise.
In particular, we are planning the following during 2007:
· Continuing the program of effectiveness improvements in our operations in the Czech Republic and the Slovak Republic which were identified in 2006.
· Continuing the development of our new Ukraine channels KINO and CITI which were launched in 2006.
· Further development of our non-broadcast activities, in particular through our New Media project which is coordinated across our markets.
· Acquisition of additional shares in our operations in Ukraine, the Slovak Republic and Romania if the opportunity arises.
· Expansion of our footprint within our existing markets or in adjacent markets if suitable acquisition opportunities materialize.
· Continuing to invest in the development of our Croatia operations.
II. General Market Information
Emerging Markets
Our revenue generating operations are located in Central and Eastern Europe, namely Croatia, the Czech Republic, Romania, the Slovak Republic, Slovenia and Ukraine. These emerging economies initially
adopted Western style democratic forms of government within the last twenty years and have legal systems, systems of corporate governance and business practices that continue to evolve. A lower
level of development and experience in these areas within our Central and Eastern European markets, by comparison with some other Central and Eastern European markets and with most Western
markets, increases the relative level of business risk.
One indicator of the rate of development and the current relative level of business risk associated with economic development is Coface ratings. These are an assessment of the relative risk of payment
default in different markets. The table below indicates the Coface ratings for each of the countries in which we operate. For purposes of comparison with other Central and Eastern European markets and
selected Western markets, the United States and the United Kingdom were both ranked A1 in 2006, Greece and Italy were ranked A2, Hungary and Poland were ranked A3 and Russia and Turkey were
ranked B.
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Country
2006
Rating
Detail of 2006 Rating
2005
Rating
2004
Rating
2003
Rating
Croatia
Czech Republic
Romania
Slovak Republic
Slovenia
Ukraine
A4
A2
A4
A3
A1
C
An already patchy payment record could be further worsened by a deteriorating
political and economic environment. Nevertheless, the probability of a default is
still acceptable.
Default probability is still weak even in the case when one country's political and
economic environment or the payment record of companies is not as good as in
A1-rated countries.
An already patchy payment record could be further worsened by a deteriorating
political and economic environment. Nevertheless, the probability of a default is
still acceptable.
Adverse political or economic circumstances may lead to a worsening payment
record that is already lower than the previous categories, although the
probability of a payment default is still low.
The steady political and economic environment has positive effects on an
already good payment record of companies. Very weak default probability.
A very unsteady political and economic environment could deteriorate an
already bad payment record.
A4
A2
A4
A3
A2
C
A4
A2
B
A3
A2
C
A4
A3
B
A3
A2
C
Source: Coface USA. Country ratings issued by the Coface Group measure the average default risk on corporate payments in a given country and indicate to what extent a company's financial
commitments are affected by the local business, financial and political outlook. Coface continuously monitors 140 countries using a spectrum of indicators incorporating political factors, risk of currency
shortage and devaluation, ability to meet financial commitments abroad, risk of a systemic crisis in the banking sector, cyclical risk, and payment behavior for short term transactions.
European Union Accession
The Czech Republic, the Slovak Republic and Slovenia acceded to the EU in May 2004, and Romania 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. The reduction in political risk factors may encourage increased foreign investment that will be supportive of 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, 2006, 90% of our total Segment Net Revenue came from television advertising.
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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 expenditure 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 in our markets,
television advertising spending tends to be higher as a proportion of total advertising spending compared to Western markets, where newspapers and magazines and radio were established as
advertising media well before the advent of television advertising.
Population
(in millions)
(1)
Per Capita
GDP 2006
(2)
Total
Advertising
Spending per
Capita 2006
(US$)
(3)
Total
Advertising
Spending as a
% of GDP
2006
(3)
TV Advertising
Spending
per Capita
(US$)
(3)
TV Advertising
Spending as
a % of Total
Advertising
Spending
(3)
4.4
10.2
20.9
5.4
2.0
46.7
$
$
$
$
$
$
9,318
13,971
5,458
10,231
18,342
2,027
$
$
$
$
$
$
57.0
77.5
19.1
40.3
64.0
9.9
0.61%
0.55%
0.35%
0.39%
0.35%
0.49%
$
$
$
$
$
$
28.6
30.9
11.4
20.1
36.5
5.3
50%
40%
60%
50%
57%
53%
Country
Croatia
Czech Republic
Romania
Slovak Republic
Slovenia
Ukraine
(1)
Source: Global Insight Country Analysis (2006 data).
(2)
Source: ING (November 2006 data).
(3)
Source: CME estimates.
For purposes of comparison, the following table shows the advertising market statistics for other Central and Eastern European markets and selected Western markets.
Country
Greece
Hungary
Italy
Poland
Russia
Turkey
UK
USA
(1)
Source: ZenithOptimedia (December 2006)
(2)
Source: ING (November 2006 data).
(3)
Source: CME estimates.
Population
(in millions)
(1)
Per Capita
GDP 2006
(2)
Total
Advertising
Spending per
Capita 2006
(US$)
(3)
Total
Advertising
Spending as a
% of GDP
2006
(3)
TV Advertising
Spending
per Capita
(US$)
(3)
TV Advertising
Spending as
a % of Total
Advertising
Spending (3)
11.1
10.1
58.1
38.5
143.2
73.2
59.7
298.2
$
$
$
$
$
$
$
$
20,802
13,299
31,534
8,327
8,086
5,522
42,629
45,970
$
$
$
$
$
$
$
$
235
133
170
37
46
26
329
528
1.13%
1.00%
0.54%
0.44%
0.57%
0.47%
0.77%
1.15%
$
$
$
$
$
$
$
$
73
85
93
19
22
17
89
196
31%
64%
55%
51%
48%
65%
27%
37%
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There is no objective source for reliable information on the size of television advertising spending in our markets. The following table sets out our current estimates of the development of television
advertising spending by market (in US$ millions).
Country
2006
2004
2003
2002
2005
Croatia
Czech Republic
Romania
Slovak Republic
Slovenia
Ukraine
65 - 75
40 - 50
45 - 55
85 - 100
85 - 95
60 - 70
45 - 55
100 - 115
110 - 120
260 - 270
110 - 120
80 - 90
55 - 65
130 - 140
Market sizes are quoted at US dollar exchange rates applicable at the end of each year.
The following table sets out our current estimates of the local currency growth of television advertising spending by market.
Country
Croatia
Czech Republic
Romania
Slovak Republic
Slovenia
Ukraine
Television Advertising Sales
2002
2003
2004
42 - 55%
16 - 18%
(11 - 13%)
24 - 29%
22 - 20%
14 - 16%
8 - 11%
11 - 18%
115 - 125
285 - 295
165 - 175
90 - 100
60 - 70
180 - 190
2005
(1 - 3%)
3 - 5%
28 - 34%
8 -10%
9 - 11%
35 - 42%
120 - 130
310 - 320
235 - 245
105 - 115
65 - 75
240 - 250
2006
2 - 5%
0 - 1%
32 - 37%
5 - 7%
6 - 8%
28 - 31%
In the countries in which we operate, advertisers tend to allocate their television advertising budgets among channels based on each channel's audience share, audience demographic profile and pricing
policy. We generally offer two different bases of pricing to our advertising customers. The first basis is cost per gross rating point (which we refer to as “GRP”). A GRP represents the percentage of
audience (from the population over the age of four) reached by a television advertisement and the number of GRPs achieved for a defined time period is the product of the proportion of that total viewing
population watching that television advertisement and the frequency that it is viewed (as measured by international measurement agencies using peoplemeters). The second basis is rate-card, which
reflects the timing and duration of an advertisement. Whether advertising is sold on a GRP basis or a rate-card basis depends on the dynamics of a particular market and our relative audience share.
Cost per GRP pricing: Advertising priced on a cost per GRP basis allows an advertiser to specify the number of gross ratings points that it wants to achieve with an advertisement within a defined period
of time. We schedule the timing of the airing of the advertisements during such defined period of time in a manner that enables us both to meet the advertiser's GRP target and to maximize the use and
profitability of our available advertising programming time. The price per GRP package varies depending on the demographic group that the advertisement is targeting, the flexibility given to us by
advertisers in scheduling their advertisements and the rebates offered by us to advertising agencies and their clients. GRP package sales generally allow for better inventory control than rate-card pricing
and optimize the net price per GRP achieved.
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Rate-card pricing: Advertising priced on a rate-card basis is applied to advertisements scheduled at a specific time. Consistent with industry practice, we provide an incentive rebate on rate-card prices
to a number of advertising agencies and their clients. We recognize our advertising revenue at the time the relevant advertisement is broadcast net of rebates.
The majority of our advertising customers commit to annual minimum spending levels. We usually schedule specific advertisements one month in advance of broadcasting them. Prices paid by
advertisers, whether they purchase advertising time on a GRP package or rate-card basis, tend to be higher during peak viewing months, particularly during the fourth quarter, than during off-peak
months such as July and August.
When describing relative performance against other competitors in attracting audience we refer to ratings share, which represents the number of people watching a channel as a proportion of the total
population, and audience share, which represents the share attracted by a channel of the total audience watching television.
For the purposes of our management discussion and analysis, total television 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, text messaging, cable subscriptions and barter transactions. The total of spot revenues and non-spot revenues is equal to Segment Net
Revenues.
Occasionally, we enter into barter transactions pursuant to which we exchange advertising time for goods and services. We record barter transactions at the fair market value of the goods or services
received. Barter transactions represented 1% of our Segment Net Revenues for 2006, 2% for 2005, and 3% for 2004.
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 schedule.
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 Croatia, the Czech Republic, Romania, the Slovak
Republic, Slovenia and Ukraine.
We evaluate the performance of our business segments based on Segment Net Revenues and Segment EBITDA. Segment Net Revenues and Segment EBITDA include our operations in the Slovak
Republic which were not consolidated prior to January 23, 2006.
We acquired our Czech Republic operations on May 2, 2005; therefore, we include only limited qualified comparisons of financial results for our Czech Republic operations for the year ended December
31, 2005.
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.
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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 and comprehensive income;
stock-based compensation charges;
foreign currency exchange gains and losses;
change in fair value of derivatives; and
certain unusual or infrequent items (e.g., extraordinary gains and losses, impairments of assets or investments, gain on sale of unconsolidated affiliates).
EBITDA is not a term defined under US GAAP, and Segment EBITDA may not be comparable to similar measures reported by other companies. Non-GAAP measures should be evaluated in conjunction
with, and are not a substitute for, US 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, 2006, 2005 and 2004 see 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)
Segment Net Revenues
Croatia (NOVA TV) (2)
Czech Republic (TV NOVA, GALAXIE SPORT) (3)
Romania (4)
Slovak Republic (MARKIZA TV) (5)
Slovenia (POP TV and KANAL A)
Ukraine (STUDIO 1+1)
Ukraine (KINO, CITI) (7)
Total Segment Net Revenues
Represented by:
Broadcast operations
Non-broadcast operations
Total Segment Net Revenues
Segment EBITDA
Croatia (NOVA TV) (2)
Czech Republic (TV NOVA, GALAXIE SPORT) (3)
Romania (4)
Slovak Republic (MARKIZA TV) (5)
Slovenia (POP TV and KANAL A)
Ukraine (STUDIO 1+1)
Ukraine (KINO, CITI) (7)
Total Segment EBITDA
Represented by:
Broadcast operations
Non-broadcast operations
Total Segment EBITDA
$
$
$
$
$
$
$
$
2006
22,310
208,387
148,616
73,420
54,534
96,413
1,195
604,875
601,885
2,990
604,875
(14,413)
100,488
65,860
20,805
19,842
29,973
(3,713)
218,842
219,128
(286)
218,842
(1)
4% $
34%
25%
12%
9%
16%
0%
100% $
100% $
0%
100% $
(7)% $
46%
30%
10%
9%
14%
(2%)
100% $
100% $
0%
100% $
2005
22,030
154,010
103,321
64,266
48,770
72,847
-
465,244
463,030
2,214
465,244
(15,866)
71,544
43,803
17,240
19,337
21,803
-
157,861
157,520
341
157,861
(1)
5% $
33%
22%
14%
10%
16%
-
100% $
100% $
0%
100% $
(10)% $
45%
28%
11%
12%
14%
-
100% $
100% $
0%
100% $
2004
9,757
-
76,463
61,576
45,388
53,351
-
246,535
245,970
565
246,535
(3,756)
-
25,198
18,975
19,077
14,729
-
74,223
74,195
28
74,223
(1)
4%
-%
31%
25%
18%
22%
-
100%
100%
0%
100%
(5)%
-%
34%
25%
26%
20%
-
100%
100%
0%
100%
Segment EBITDA Margin (6)
(1) Percentage of Total Segment Net Revenue / Total Segment EBITDA
36%
(2) We acquired our Croatia operations in July 2004
(3) We acquired our Czech Republic operations (TV NOVA) in May 2005 and GALAXIE SPORT in September 2005
34%
30%
(4) Romanian networks are PRO TV, PRO CINEMA, ACASA and PRO TV INTERNATIONAL for the years ended December 31, 2006 and 2005, and PRO TV, PRO CINEMA, ACASA, PRO TV
INTERNATIONAL, PRO FM and INFOPRO for the year ended December 31, 2004
(5) Our Slovak Republic operations were accounted for as an equity affiliate until January 23, 2006
(6) We define Segment EBITDA margin as the ratio of Segment EBITDA to Segment Net Revenue
(7) We acquired our Ukraine (KINO, CITI) operations on January 11, 2006
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ANALYSIS BY GEOGRAPHIC SEGMENT
For the purposes of our management discussion and analysis, total television 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, text messaging, cable subscriptions and barter transactions. The total of spot revenues and non-spot revenues is equal to Segment Net
Revenues.
(A) CROATIA
Market Background: We acquired our Croatia operations on July 16, 2004. We estimate the television advertising market in Croatia has shown local currency growth of approximately 2% - 5% in 2006
and is expected to show single digit growth during 2007.
In 2006, the national all day audience share for NOVA TV (Croatia) was 15.3% compared to 13.6% for 2005. Our major competitors are the two state-owned channels HRT1 and HRT2, with all day audience
shares for 2006 of 34.3% and 17.8%, respectively, and privately owned broadcaster RTL with 24.6%.
The average prime time ratings for NOVA TV (Croatia) increased from 5.8% in 2005 to 7.3% in 2006. Prime time audience share grew from 13.3% in 2005 to 17.1% in 2006. Prime time ratings for the whole
market decreased from 43.8% in 2005 to 43.3% in 2006.
Performance in the fourth quarter of 2006, the peak advertising selling period, is of particular importance to our station development plan. In the three months to December 31, 2006 our prime time audience
share increased to 18.4% from 12.7% for the same period in 2005 and our prime time ratings increased to 8.5% from 6.2%.
In July 2005, we initiated a multi-year investment plan to develop our transmission infrastructure and improve the quality of our programming, particularly locally produced content, in order to secure a
larger audience share and increased revenues. Under this plan, we anticipated that NOVA TV (Croatia) would approach Segment EBITDA breakeven in 2007. While the performance of NOVA TV (Croatia)
in terms of audience share and ratings has recently shown improvement, this has not yet translated into increased revenues in the timescales and amounts we anticipated in July 2005. As a result, we
presently expect that Segment EBITDA breakeven will be delayed by at least one year against the 2005 plan.
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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
2006
16,442
5,868
22,310
22,298
12
22,310
(14,413)
(14,302)
(111)
(14,413)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
CROATIA SEGMENT FINANCIAL INFORMATION
For the Years Ended December 31, (US$ 000's)
2005
Movement
2005
2004 (1)
Movement
15,954
6,076
22,030
22,030
-
22,030
(15,866)
(15,866)
-
(15,886)
$
$
$
$
$
$
$
488 $
(208 )
280 $
268 $
12
280 $
15,954
6,076
22,030
22,030
-
22,030
1,453 $
(15,866)
1,564 $
(111 )
1,453 $
(15,866)
-
(15,886)
$
$
$
$
$
$
$
5,746
4,011
9,757
9,757
-
9,757
(3,756)
(3,756)
-
(3,756)
$
$
$
$
$
$
$
10,208
2,065
12,273
12,273
-
12,273
(12,110 )
(12,110 )
-
(12,110 )
(65)%
(72)%
7 %
(72)%
(38)%
(34 )%
(1) 2004 Results are presented from acquisition in July 2004
·
·
Segment Net Revenues for the year ended December 31, 2006 increased by US$ 0.3 million, or 1%, compared to 2005. In local currency, Segment Net Revenues decreased by 1%. Spot revenues
increased by US$ 0.5 million, or 3%, as a result of price increases which offset the impact of the lower volume of GRPs sold. The lower volume of GRPs sold was a result of competitor price
reductions and the expiration of legacy deals. Non-spot revenues decreased by US$ 0.2 million, or 3%, as a result of lower levels of barter revenues as some contracts were forgone in accordance
with our policy to minimize barter transactions and decreased levels of sponsorship, which were partially offset by an increase in short message service (“SMS”), teletext and telesales revenues.
Segment Net Revenues for the year ended December 31, 2005 were US$ 22.0 million compared to US$ 9.8 million for the period from acquisition on July 16, 2004 to December 31, 2004. Segment Net
Revenues for the period from July 2005 fell US$ 1.0 million, or 10%, when compared to the equivalent post acquisition period in 2004. This reduction in revenue was attributable to lower barter
revenues as some of these were forgone in accordance with our policy to minimize barter transactions. Spot revenues increased by 19% over the period from July to December 2005 when compared
to the same period in 2004, driven principally by growth in the volume of GRPs sold.
Segment EBITDA for the year ended December 31, 2006 was a loss of US$ 14.4 million, compared to a loss of US$ 15.9 million for the year ended December 31, 2005. In local currency, Segment
EBITDA increased by 11%.
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Costs charged in arriving at Segment EBITDA for the year ended December 31, 2006 decreased by US$ 1.2 million, or 3%, compared to 2005. Cost of programming grew by US$ 1.1 million, or 6%,
due largely to the inclusion of salary-related costs of production staff within cost of programming rather than operating costs; excluding the impact of this change in classification, cost of
programming decreased by US$ 2.2 million, or 11%, as a result of the decision to restrict expenditure on higher cost local productions. Other operating costs decreased by US$ 1.1 million, or 12%,
primarily due to the difference in classification described above; excluding the impact of this change in classification, other operating costs increased by US$ 2.2 million, or 24%, due to the
appreciation of the Kuna compared to the US dollar, increasing salary and wage costs as a result of increased headcount, and higher transmission costs as a result of an expansion in transmitter
coverage. Selling, general and administrative expenses decreased by US$ 1.2 million, or 15%, primarily due to the comparative period including approximately US$ 0.9 million of one-time
consultancy fees and commissions relating to program acquisitions.
Segment EBITDA for the year ended December 31, 2005 was a loss of US$ 15.9 million, which is substantially attributable to investment in programming to attract greater audience share.
Costs charged in arriving at Segment EBITDA for 2005 included US$ 20.4 million of programming costs, US$ 9.4 million of other operating costs and US$ 8.1 million of selling, general and
administrative expenses.
(B) CZECH REPUBLIC
Market Background: We acquired our Czech Republic operations on May 2, 2005. We estimate that the television advertising market in the Czech Republic during 2006 remained stable in local currency.
We expect the advertising market to show high single digit growth in 2007.
The national all day audience share of our channel, TV NOVA (Czech Republic), for 2006 was 41.6% compared to 40.9% for 2005. The major competitors are the two state-owned channels CT1 and CT2,
with national all day audience shares for 2006 of 21.5% and 9.4% respectively, and privately owned broadcaster TV Prima with a national all day audience share of 20.3%. CT2 increased its audience share
from 8.1% for 2005 primarily due to the increased ratings during the periods of broadcast of the Winter Olympics in February, World Ice Hockey Championship in May and the Soccer World Cup in June.
During the first quarter of 2006, we announced a new advertising sales strategy based on our belief that growth in the television advertising market in the Czech Republic has been impeded over the past
several years due to broadcasters focusing on obtaining an increased share of revenues committed to television advertising rather than fostering market growth by focusing on maximizing value received
from the sale of GRPs. The focus of the TV Nova (Czech Republic) group is now on the development of advertising revenues over the medium term by supporting and then capturing market growth
through a more sophisticated pricing policy. In conjunction with this advertising strategy, the TV Nova (Czech Republic) group initiated a series of measures to reduce the costs of its operations,
including the cancellation of poorly performing formats and reductions in operational costs.
As expected, the TV Nova (Czech Republic) group’s advertising revenues declined in 2006 on a comparable year-on-year basis, as the positive impact of the new pricing policy did not compensate for the
expected loss in volume. However, we have seen increased revenues in the fourth quarter of 2006 compared to the fourth quarter of 2005 and expect to see accelerated growth both in the revenues of the
Czech Republic operations and in the television advertising market generally over the next several years.
A fundamental component of our strategy is continued strong audience share and ratings for TV NOVA (Czech Republic), which have been maintained since the new pricing policy was implemented on
April 1, 2006. Performance in the fourth quarter of 2006, the peak advertising selling period, is of particular importance to this strategy. During the three months ended December 31, 2006, the national all
day audience share of TV NOVA (Czech Republic) increased to 42.5%, from 39.0% in 2005. The national all day audience share of TV Prima fell from 25.0% to 20.2%, CT1 fell from 22.6% to 22.3%, while the
national all day audience share of CT2 grew from 6.9% to 7.6%.
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CZECH REPUBLIC SEGMENT FINANCIAL INFORMATION
For the Years Ended December 31, (US$ 000's)
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
$
$
$
$
$
$
$
2006
181,965
26,422
208,387
207,671
716
208,387
100,488
100,724
(236)
100,488
$
$
$
$
$
$
$
2005 (1)
133,250
20,760
154,010
153,626
384
154,010
71,544
71,742
(198)
71,544
$
$
$
$
$
$
$
Movement
48,715
5,662
54,377
54,045
332
54,377
28,944
28,982
(38 )
28,944
48%
46%
2 %
(1) 2005 Results are presented from acquisition on May 2, 2005
·
Segment Net Revenues for the year ended December 31, 2006 were US$ 208.4 million compared to US$ 154.0 million for the period from acquisition to December 31, 2005. We acquired the TV Nova
(Czech Republic) group on May 2, 2005 and accordingly our results of operations for the year ended December 31, 2005 reflect our ownership from that date. Based on management estimates, we
believe that Segment Net Revenues for the year ended December 31, 2005, including the period prior to our ownership from January 1, 2005 through May 1, 2005 were approximately US$ 235 million.
This decrease in Segment Net Revenues can be primarily attributed to the initial reaction of advertisers to the implementation of our new sales policy, which led to a decrease in the number of GRPs
sold.
Segment Net Revenues for the period from acquisition to December 31, 2005 were US$ 154.0 million. We acquired our Czech Republic operations in May 2005 and accordingly no comparative data
from 2004 is available.
·
Segment EBITDA for the year ended December 31, 2006 was US$ 100.5 million compared to US$ 71.5 million for the period from acquisition to December 31, 2005.
Costs charged in arriving at Segment EBITDA for the year ended December 31, 2006 included US$ 60.5 million of programming costs, US$ 26.1 million of other operating costs and US$ 21.3 million
of selling, general and administrative expenses.
Segment EBITDA for the period from May 2, 2005 to December 31, 2005 was US$ 71.5 million resulting in an EBITDA margin of 46%.
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Costs charged in arriving at Segment EBITDA for the eight months ended December 31, 2005 included US$ 50.6 million of programming costs, US$ 14.9 million of other operating costs and US$ 16.9
million of selling, general and administrative expenses.
Based on management estimates, we believe that Segment EBITDA for the year ended December 31, 2005, including the period prior to our ownership from January 1, 2005 through May 1, 2005,
was approximately US$ 110.8 million. Based on these management estimates for the year ended December 31, 2005, costs charged in arriving at Segment EBITDA for the year ended December 31,
2006 have decreased by US$ 16.3 million or 13%.
(C) ROMANIA
Market Background: We estimate the television advertising market grew by approximately 32% - 37% in US dollars during 2006. We expect the television advertising market to show continued growth in
the range of 20% to 25% in 2007.
The combined national all day audience share of our three channels (PRO TV, ACASA, and PRO CINEMA) was 24.3% in 2006 compared to 24.6% in 2005. The major competitors are the two state-owned
channels TVR1 and TVR2, with national all day audience shares for 2006 of 16.8% and 5.3%, respectively, and privately owned broadcaster Antena 1 with a national all day audience share of 13.4%.
The combined average prime time ratings of our channels for 2006 were 10.3% compared to 10.5% for 2005. The most significant prime time ratings movement for 2006 was a fall for TVR1 from 8.7% in 2005
to 7.6% in 2006, while all the other large channels remained broadly in line with the prior year. For the total market, prime time ratings for 2006 were 39.2% compared to 39.6% in 2005.
The functional currency for Romania is the US dollar.
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
ROMANIA SEGMENT FINANCIAL INFORMATION
For the Years Ended December 31, (US$ 000's)
2006
2005
Movement
2005
2004
Movement
140,242 $
8,374
148,616 $
97,915 $
5,406
103,321 $
42,327 $
2,968
45,295 $
97,915 $
5,406
103,321 $
148,616 $
103,321 $
45,295 $
103,321 $
-
-
-
-
148,616 $
103,321 $
45,295 $
103.321 $
72,895 $
3,568
76,463 $
76,463 $
-
76,463 $
25,020
1,838
26,858
26,858
-
26,858
65,860 $
43,803 $
22,057 $
43,803 $
25,198 $
18,605
65,976 $
(116)
65,860 $
43,803 $
-
43,803 $
22,173 $
(116 )
22,057 $
43,803 $
-
43,803 $
25,198 $
-
25,198 $
18,605
-
18,605
44%
42%
2 %
42%
33%
9 %
$
$
$
$
$
$
$
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·
·
Segment Net Revenues for the year ended December 31, 2006 increased by US$ 45.3 million, or 44%, compared to the year ended December 31, 2005. Spot revenues increased by US$ 42.3 million or
43%, and non-spot revenues increased by US$ 3.0 million, or 55%.
The increase in spot revenues was driven by double-digit advertising rate growth in each of our three channels and by an increase in the number of GRPs sold across each of our channels
compared to 2005. Two thirds of the total volume growth arose in PRO CINEMA and the balance was shared between PRO TV and ACASA in almost equal measures. The increase in non-spot
revenues was principally due to increased cable tariff revenue.
Segment Net Revenues for the year ended December 31, 2005 increased by US$ 26.9 million, or 35%, compared to the year ended December 31, 2004. Spot revenues increased by US$ 25.0 million or
34% and non-spot revenues increased by US$ 1.9 million, or 52%, principally due to increased cable tariff revenue. Excluding RADIO PRO, which was included in our results in 2004 but excluded in
2005, Segment Net Revenues grew US$ 29.5 million, or 40%, principally due to spot revenue growth of 39%.
Segment EBITDA for the year ended December 31, 2006 increased by US$ 22.1 million, or 50%, compared to the year ended December 31, 2005, resulting in an EBITDA margin of 44%, compared to
42% in 2005.
Costs charged in arriving at Segment EBITDA for the year ended December 31, 2006 increased by US$ 23.2 million, or 39%, compared to the year ended December 31, 2005. Cost of programming
grew by US$ 21.8 million, or 62%, due largely to the inclusion of salary-related costs of production staff within cost of programming rather than operating costs; excluding the impact of this change
in classification, cost of programming increased by US$ 15.4 million, or 44%, due to an increase in programming syndication of US$ 10.5 million and an increase in production expenses of US$ 4.9
million. Other operating costs decreased by US$ 1.2 million, or 7%, primarily due to the difference in classification described above; excluding the impact of this change in classification, other
operating costs increased by US$ 5.1 million, or 31%, mainly due to an increase in salary costs arising in part from the weakening of the US dollar against the Romanian Lei, the currency in which
salaries are paid. Selling, general and administrative expenses increased by US$ 2.7 million, or 34%, primarily due to increases in consultancy fees of US$ 0.8 million, office running costs of US$ 0.6
million and marketing and research costs of US$ 0.5 million.
Segment EBITDA for the year ended December 31, 2005 increased by US$ 18.6 million, or 74%, compared to the year ended December 31, 2004, resulting in an EBITDA margin of 42%, which
represents a significant increase over the 33% EBITDA margin achieved in the prior year.
Costs charged in arriving at Segment EBITDA for the year ended December 31, 2005 increased by US$ 8.3 million, or 16%, compared to the year ended December 31, 2004. Cost of programming
grew by US$ 5.5 million, or 19%, due to increased costs of acquired programming and increased investment in locally produced news and sport programs. Other operating costs increased by US$
1.8 million, or 13%, due to the appreciation of the New Romanian Lei, compared to the US dollar, increasing salary and wage costs. Selling, general and administrative expenses increased by US$ 0.9
million, or 13%, primarily due to increased rent and office costs of US$ 0.8 million.
(D) SLOVAK REPUBLIC
Market Background: We estimate that the television advertising market in the Slovak Republic grew by approximately 5% - 7% in local currency in 2006. We anticipate that the television advertising
market will show high single digit growth in 2007.
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On January 23, 2006, we acquired control of our Slovak Republic operations and increased our economic interest from 70% to 80%. We have made a number of senior management changes and are
pursuing improvements in the effectiveness of our operations in the Slovak Republic and have begun implementing measures to improve programming quality and reduce operating expenses.
MARKIZA TV is the leading channel in the Slovak Republic. National all day audience share for 2006 was 33.8% compared to 31.1% in 2005. The major competitor is the state-owned channel STV1, with a
national all day audience share of 18.4% in 2006. The national all day audience share of TV JOJ, the only other significant privately owned channel, was 15.6% in 2006.
The average prime time rating for MARKIZA TV for 2006 was 13.7% compared to 13.3% in 2005. Prime time ratings for the whole market fell from 40.4% in 2005 to 38.1% in 2006.
The implementation of peoplemeters to measure audience share and ratings in late 2004 had the anticipated effect of reducing the recorded share of all leading broadcasters. The all day average audience
share of MARKIZA TV fell to 31.1% from 39.6% in 2004. The primary beneficiaries of this change in audience share were foreign channels with cross border reception in the Slovak Republic and small
cable channels. The peoplemeter introduction also showed that fewer people watch television than had been previously been believed, with national all day ratings falling from 19.1% in 2004 to 14.3% in
2005 and prime time ratings falling from 62.8% in 2004 to 40.4% in 2005. This indicated that the amount paid for each rating point was higher than had previously been believed. All national channels
showed ratings losses. For MARKIZA TV, national all day ratings declined from 7.6% in 2004 to 4.5% in 2005 and national prime time ratings fell from 25.3% in 2004 to 13.3% in 2005.
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
SLOVAK REPUBLIC SEGMENT FINANCIAL INFORMATION
For the Years Ended December 31, (US$ 000’s)
2006
2005
Movement
2005
2004
Movement
69,336 $
4,084
73,420 $
73,266 $
154
73,420 $
60,004 $
4,262
64,266 $
64,266 $
-
64,266 $
9,332 $
(178 )
9,154 $
9,000 $
154
9,154 $
60,004 $
4,262
64,266 $
64,266 $
-
64,266 $
57,125 $
4,451
61,576 $
61,576 $
-
61,576 $
2,879
(189 )
2,690
2,690
-
2,690
20,805 $
17,240 $
3,565 $
17,240 $
18,975 $
(1,735 )
20,879 $
(74)
20,805 $
17,240 $
-
17,240 $
3,639 $
(74 )
3,565 $
17,240 $
-
17,240 $
18,975 $
-
18,975 $
(1,735 )
-
(1,735 )
28%
27%
1 %
27%
31%
(4 )%
$
$
$
$
$
$
$
·
Segment Net Revenues for the year ended December 31, 2006 increased by US$ 9.2 million, or 14%, compared to the year ended December 31, 2005, due to a combination of favorable exchange rate
movements, new entrants into the market and increased advertising spending from existing clients, specifically health insurance companies and financial service providers. In local currency,
Segment Net Revenues increased by 5%. The increase in Segment Net Revenues was due to an increase of US$ 9.3 million, or 16%, in spot revenues partially offset by a decline of US$ 0.2 million,
or 4%, in non-spot revenues. Both the volume of advertising spots sold by MARKIZA TV and the average revenue per thirty-second spot increased compared to 2005.
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Non-spot revenues for the year ended December 31, 2006 fell by US$ 0.2 million, or 4%, compared to the year ended December 31, 2005, due to lower revenues from sales of Markiza magazine,
following increased competition, and the impact of 2005 having enjoyed significant telephone voting sales related to the success of the reality show “Mojsejovci” that were not repeated in 2006.
Segment Net Revenues for the year ended December 31, 2005 increased by US$ 2.7 million, or 4%, compared to the year ended December 31, 2004. Spot revenues increased by US$ 2.9 million, or
5%, however, this was partially offset by a US$ 0.2 million or 4% decline in non-spot revenues as a result of reduced barter revenue. In local currency, Segment Net Revenues grew by 1% in 2005.
The volume of advertising spots sold by MARKIZA TV increased compared to 2004. The average revenue per thirty-second spot decreased in local currency, primarily as a result of the decline in
measured audience share following the introduction of peoplemeters in late 2004, but also because two significant local productions did not perform as well as expected in the fourth quarter and did
not achieve expected audience share against strong competition.
·
Segment EBITDA for the year ended December 31, 2006 increased by US$ 3.6 million, or 21%, compared to 2005, and the EBITDA margin increased from 27% in 2005 to 28% in 2006. Local currency
EBITDA increased by 21% in 2006 compared to 2005.
Costs charged in arriving at Segment EBITDA for the year ended December 31, 2006 increased by US$ 5.6 million, or 12%, compared to 2005. The cost of programming increased by US$ 5.1 million,
or 23%, due to an increase in the volume of higher cost local productions and write-off costs for an unsuccessful show of US$ 0.4 million. Other operating costs increased by US$ 1.4 million, or
10% primarily due to increased staff costs. Selling, general and administrative expenses were lower by US$ 0.9 million, or 9%, largely due to savings in taxes of US$ 0.7 million compared to 2005.
Segment EBITDA for the year ended December 31, 2005 decreased by US$ 1.7 million, or 9%, compared to 2004, and the EBITDA margin decreased from 31% in 2004 to 27% in 2005. Local currency
EBITDA decreased by 12% in 2005 compared to 2004.
Costs charged in arriving at Segment EBITDA for the year ended December 31, 2005 increased by US$ 4.4 million, or 10%, resulting in the reduction of Segment EBITDA and the corresponding
Segment EBITDA Margin compared to 2004. The cost of programming increased by US$ 1.5 million, or 7%, reflecting an increase in the volume of higher cost local production and the costs of
producing reality shows. Other operating costs increased by US$ 1.1 million, or 8%, due to increased staff and related costs. Selling, general and administrative expenses increased by US$ 1.8
million, or 22%, primarily as a result of the reversal of a US$ 1.1 million provision in 2004 due to resolution of a disagreement with the other shareholders that had given rise to a provision in 2003 as
well as increased facilities costs resulting from operating an additional studio.
(E) SLOVENIA
Market Background: We estimate the television advertising market in Slovenia showed growth of approximately 6% - 8% in local currency during 2006. We expect the television advertising market to
show low single digit growth in 2007.
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The combined national all day audience share of our two channels (POP TV and KANAL A) increased from 35.8% in the year ended December 31, 2005 to 37.7% in 2006. The major competitors are state-
owned SLO1 and SLO2, with national all day audience shares in 2006 of 23.1% and 8.9% respectively.
The combined average prime time ratings for our channels for the year ended December 31, 2006 were 14.4% compared to 13.7% in 2005. Prime time ratings for the whole market increased from 32.4% in
2005 to 32.7% in 2006.
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
SLOVENIA SEGMENT FINANCIAL INFORMATION
For the Years Ended December 31, (US$ 000’s)
2006
2005
Movement
2005
2004
Movement
$
$
$
$
$
$
$
50,682 $
3,852
54,534 $
52,426 $
2,108
54,534 $
45,594 $
3,176
48,770 $
46,940 $
1,830
48,770 $
19,842 $
19,337 $
19,518 $
324
19,842 $
18,797 $
540
19,337 $
5,088
676
5,764
5,486
278
5,764
505
721
(216 )
505
$
$
$
$
$
$
$
45,594 $
3,176
48,770 $
46,940 $
1,830
48,770 $
43,765 $
1,623
45,388 $
44,823 $
565
45,388 $
19,337 $
19,077 $
18,797 $
540
19,337 $
19,049 $
28
19,077 $
1,829
1,553
3,382
2,117
1,265
3,382
260
(252 )
512
260
36%
40%
(4 )%
40%
42%
(2 )%
·
Segment Net Revenues for the year ended December 31, 2006 increased by US$ 5.8 million, or 12%, compared to the year ended December 31, 2005. In local currency, Segment Net Revenues
increased by 10%.
Spot revenues increased by US$ 5.1 million, or 11%, in the year ended December 31, 2006 compared to the year ended December 31, 2005 as our operations benefited from a stronger ratings
performance which led to an increase in GRPs sold across our two channels, particularly in the off prime period. The Soccer World Cup in June 2006 contributed to US$ 0.9 million of this increase.
The average revenue per thirty-second advertising spot was largely unchanged from 2005. Non-spot revenues increased by US$ 0.7 million, or 21%, in the year ended December 31, 2006 compared
to 2005 due to an increase in short message service (“SMS”) revenues, telesales and on-line related revenues.
Segment Net Revenues for the year ended December 31, 2005 increased by US$ 3.4 million, or 7%, compared to the year ended December 31, 2004. Net spot revenue increased by US$ 1.8 million, or
4%, as a run of successful locally produced programs led to an increase in the volume of thirty-second advertising spots sold across our two channels. The average revenue per thirty-second
advertising spot was largely unchanged from 2004.
Non-spot revenues grew by US$ 1.6 million, or 96% due to increased internet and reality show driven revenue from text messaging.
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·
Segment EBITDA for the year ended December 31, 2006 increased by US$ 0.5 million, or 3%, compared to the year ended December 31, 2005. In local currency, Segment EBITDA increased by 1%.
EBITDA margin decreased from 40% in 2005 to 36% in 2006.
Costs charged in arriving at Segment EBITDA for the year ended December 31, 2006 increased by US$ 5.3 million, or 18%, compared to the year ended December 31, 2005. Cost of programming
increased by US$ 6.8 million, or 52%. This is partly due to the inclusion of the salary-related costs of production staff within cost of programming rather than operating costs; excluding the impact
of this change in classification, cost of programming increased by US$ 3.2 million, or 25%, due to the additional expense of airing more higher-cost local productions than in the prior year and the
cost of showing the Soccer World Cup which took place in June 2006. Other operating costs decreased by US$ 2.0 million, or 17%, primarily due to the difference in classification described above;
excluding the impact of this change in classification, other operating costs increased by US$ 1.5 million, or 13%, primarily due to higher bonus accruals and higher transmitter and associated
maintenance costs. Selling, general and administrative expenses increased by US$ 0.5 million, or 11%, compared to the year ended December 31, 2005 primarily due to higher marketing and
promotion costs of US$ 0.2 million and higher office running costs.
Segment EBITDA for the year ended December 31, 2005 increased by US$ 0.3, million or 1%, compared to the year ended December 31, 2004. In local currency Segment EBITDA increased by 2%.
EBITDA margin decreased from 42% in 2004 to 40% in 2005.
Costs charged in arriving at Segment EBITDA for the year ended December 31, 2005 increased by US$ 3.1 million, or 12%, compared to the year ended December 31, 2004. Cost of programming
increased by US$ 0.8 million, or 7%, due to an increase in local production costs from producing more reality shows. Other operating costs increased by US$ 2.2 million, or 23%, primarily as a result
of increased social insurance costs for employers of US$ 1.4 million as well as the reversal of a US$ 0.4 million provision for broadcasting transmission costs in 2004 resulting in a lower than normal
charge in that period. Selling, general and administrative expenses increased by US$ 0.1 million, or 2%, as a result of general overhead cost increases.
(F) UKRAINE (STUDIO 1+1)
Market Background: We estimate that the television advertising market in Ukraine, where sales are denominated primarily in US dollars, showed growth of approximately 28% - 31%% in 2006. It is
expected that the television advertising market will continue to grow between 30% and 35% during 2007.
STUDIO 1+1 had a national all day audience share of 18.3% for 2006 compared to 20.0% in 2005. Our competitors include Inter, with a national all day audience share of 20.4%, Novy Kanal with 8.4%,
ICTV with 7.3%, and STB with 6.0%.
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The average prime time ratings for STUDIO 1+1 for 2006 were 8.4% compared to 8.1% in 2005.
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
UKRAINE (STUDIO 1+1) FINANCIAL INFORMATION
For the Years Ended December 31, (US$ 000’s)
2006
2005
Movement
2005
2004
Movement
86,042 $
10,371
96,413 $
96,413 $
-
96,413 $
63,911 $
8,936
72,847 $
72,847 $
-
72,847 $
22,131 $
1,435
23,566 $
23,566 $
-
23,566 $
63,911 $
8,936
72,847 $
72,847 $
-
72,847 $
49,982 $
3,369
53,351 $
53,351 $
-
53,351 $
13,929
5,567
19,496
19,496
-
19,496
29,973 $
21,803 $
8,170 $
21,803 $
14,729 $
7,074
30,045 $
(72)
29,973 $
21,803 $
-
21,803 $
8,242 $
(72 )
8,170 $
21,803 $
-
21,803 $
14,729 $
-
14,729 $
7,074
-
7,074
31%
30%
1 %
30%
28%
2 %
$
$
$
$
$
$
$
·
Segment Net Revenues for the year ended December 31, 2006 increased by US$ 23.6 million, or 32%, compared to the year ended December 31, 2005. Spot revenues increased by US$ 22.1 million, or
35%, and non-spot revenues increased by US$ 1.4 million, or 16%.
The increase in spot revenues reflects the significant ongoing growth of the market. The majority of the growth reflects significantly higher average revenue per thirty-second advertising spot,
partially off set by a lower volume of spots sold. Spot revenues included US$ 8.4 million of political advertising in advance of the March 26, 2006 parliamentary elections. We believe that some of
this advertising replaced normal commercial activity but that the majority was incremental revenue.
Non-spot revenue has increased due to a significant rise in program sponsorship, which has increased due to more active management. Included within non-spot revenues for 2005 is a one-time
sale of programming of US$ 1.8 million.
Segment Net Revenues for the year ended December 31, 2005 increased by US$ 19.5 million, or 37%, compared to the year ended December 31, 2004. Net spot revenue increased by US$ 13.9 million,
or 28%, and non-spot revenue increased by US$ 5.6 million, or 165%.
Demand for advertising by multinational companies seeking to establish their brands in the Ukrainian market and by mobile telephone operators helped increase the average revenue per thirty-
second advertising spot compared to 2004. The volume of spots sold increased as a result of the full year impact of the additional nine hours of broadcast time awarded to the station from
September 2004. Non-spot revenue increases were derived from sales of programming and increased management focus on generating sponsorship revenue.
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·
Segment EBITDA for the year ended December 31, 2006 increased by US$ 8.2 million, or 37%, compared to the year ended December 31, 2005, resulting in an EBITDA margin of 31% compared to
30% in 2005.
Costs charged in arriving at Segment EBITDA for the year ended December 31, 2006 increased by US$ 15.4 million, or 30%, compared to the year ended December 31, 2005. Cost of programming
increased by US$ 10.8 million, or 36%, due to price inflation for Russian series, which are essential to maintaining strong ratings, as well as improvements to our programming schedule. Other
operating costs increased by US$ 1.5 million, or 12%, primarily due to increases in staff costs as a result of the restructuring of independent contactor arrangements. Selling, general and
administrative expenses have increased by US$ 3.1 million, or 36%, including US$ 0.8 million of higher withholding tax payments on increased programming acquisitions, US$ 0.6 million of higher
cost of facilities and US$ 0.5 million of additional management and professional costs compared with 2005.
Segment EBITDA for the year ended December 31, 2005 increased by US$ 7.1 million, or 48%, compared to the year ended December 31, 2004, resulting in an EBITDA margin of 30% compared to
28% in 2004.
Costs charged in arriving at Segment EBITDA for the year ended December 31, 2005 increased by US$ 12.4 million, or 32%, compared to the year ended December 31, 2004. Cost of programming
increased by US$ 5.3 million, or 22%, as a result of the full year cost of broadcasting for an additional nine hours as well as increases in the cost of popular Russian series. Another component of
the increase in programming costs was due to a US$ 1.1 million cost of writing down the value of American programming that no longer generates sufficient ratings in Ukraine. Other operating
costs increased by US$ 5.0 million, or 64%, primarily due to salary increases of US$ 3.0 million partially due to the restructuring of independent contractor arrangements, resulting in increased
employee-related taxation costs of approximately US$ 1.1 million, and increased transmission charges of US$ 0.9 million. Transmission charges from the state transmission agency increased due to
the extra cost of transmitting for the additional nine hours per day as well as due to price increases for transmission. Selling, general and administrative expenses increased by US$ 2.1 million, or
32%, due to additional facilities costs from an extra studio being operated since May 2005 to accommodate increased volumes of local production as well as local inflation.
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(G) UKRAINE (KINO, CITI)
On January 11, 2006, we acquired a 65.5% interest in Ukrpromtorg 2003 LLC, owner of 92.2% of Gravis LLC, which operated the local channels, CHANNEL 35 and CHANNEL 7. In July 2006, we ceased
operating CHANNEL 7 and launched a new entertainment channel, KINO, targeted at a younger demographic. On December 1, 2006, we ceased operating CHANNEL 35 and launched a new youth-
oriented channel, CITI, with a Kiev-wide reach.
UKRAINE (KINO, CITI) FINANCIAL INFORMATION
For the Year Ended December 31, (US$ 000's)
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 EBITA Margin
$
$
$
$
$
$
$
2006
549
646
1,195
1,195
0
1,195
(3,713)
(3,713)
-
(3,713)
(311)%
·
·
Segment Net Revenues for KINO and CITI, for the period from acquisition on January 11, 2006 to December 31, 2006, were US$ 1.2 million.
Spot revenues for the period ended December 31, 2006 were US$ 0.5 million.
Non-spot revenues for the period ended December 31, 2006 were US$ 0.6 million, including game show and music clips revenue of US$ 0.2 million, production studio rent revenue of US$ 0.2 million
and TV shopping revenue of US$ 0.1 million.
Segment EBITDA for KINO and CITI, for the period from acquisition on January 11, 2006 to December 31, 2006, was a loss of US$ 3.7 million. Costs charged in arriving at Segment EBITDA for the
period ended December 31, 2006 were US$ 4.9 million. Cost of programming was US$ 2.6 million, including US$ 1.5 million of acquired foreign programs for the KINO channel and US$ 0.9 million of
production expenses for the CITI channel, mainly related to the salaries of production employees. Other operating costs were US$ 1.4 million and comprised salary costs of US$ 0.9 million and
broadcast operating expenses of US$ 0.5 million. Selling, general and administrative expenses amounted to US$ 0.9 million.
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PROGRAMMING PAYMENTS AND PROGRAM AMORTIZATION
Our consolidated cost of programming for 2006, 2005, and 2004 was as follows:
Production expenses
Program amortization
Cost of programming
For the Years Ended December 31, (US$ 000’s)
2006
2005
$
$
110,948
116,561
227,509
$
$
67,366
81,471
148,837
$
$
2004
29,458
42,335
71,793
Production expenses represent the cost of in-house productions as well as locally commissioned programming, 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$ 78.7 million, or 53%, in the year ended December 31, 2006 compared to 2005
due to:
· The inclusion of US$ 25.8 million of programming costs from our Slovak Republic operations, which were consolidated from January 23, 2006, having previously been accounted for as an equity
affiliate;
· US$ 21.8 million of additional programming costs from our Romania operations;
· US$ 10.8 million of additional programming costs from our Ukraine (STUDIO 1+1) operations;
· US$ 9.8 million of additional programming costs from our Czech Republic operations, which are included for the entire twelve month periods rather than for the period from acquisition on May 2, 2005
in the prior year;
· US$ 6.8 million of additional programming costs from our Slovenia operations;
· US$ 2.6 million of additional programming costs from our newly acquired Ukraine (KINO, CITI) operations; and
· US$ 1.1 million of additional programming costs from our Croatia operations.
The amortization of acquired programming for each of our operations for 2006, 2005 and 2004, including our operations in the Slovak Republic (MARKIZA TV) 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 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:
Croatia (NOVA TV)
Czech Republic (TV NOVA, GALAXIE SPORT)
Romania (PRO TV, ACASA, PRO CINEMA and PRO TV INTERNATIONAL)
Slovak Republic (MARKIZA TV) (post-acquisition)
Slovenia (POP TV and KANAL A)
Ukraine (STUDIO 1+1)
Ukraine (KINO, CITI)
Slovak Republic (MARKIZA TV) (pre-acquisition)
Cash paid for programming:
Croatia (NOVA TV)
Czech Republic (TV NOVA, GALAXIE SPORT)
Romania (PRO TV, ACASA, PRO CINEMA and PRO TV INTERNATIONAL)
Slovenia (POP TV and KANAL A)
Ukraine (STUDIO 1+1)
Ukraine (KINO, CITI)
Slovak Republic (MARKIZA TV)
IV. Analysis of the Results of Consolidated Operations
OVERVIEW
2006
14,237
27,170
30,610
7,539
7,164
28,354
1,487
116,561
1,735
118,296
17,165
28,237
48,277
7,067
38,419
1,096
140,261
12,598
152,859
$
$
$
$
For the Years Ended December 31, (US$ 000's)
2004
2005
16,373
19,154
20,132
-
5,517
20,295
-
81,471
6,970
88,441
16,062
26,027
40,279
6,200
27,019
-
115,587
10,692
126,279
$
$
$
$
3,695
-
18,215
-
5,117
15,308
-
42,335
9,038
51,373
3,076
-
22,164
5,177
21,022
-
51,439
8,120
59,559
$
$
$
$
We consolidate the financial statements of entities in which we hold at least a majority voting interest and also those entities which are deemed to be a Variable Interest Entity of which we are the primary
beneficiary as defined by FIN 46 (R) (For further discussion, see Item 8, Note 3, “Summary of Significant Accounting Policies”). We consolidate our operations in Croatia, the Czech Republic, Romania,
the Slovak Republic, Slovenia and Ukraine.
Entities in which we hold less than a majority voting interest but over which we have the ability to exercise significant influence are accounted for using the equity method. We accounted for our
operations in the Slovak Republic and Radio Pro in Romania in this manner in 2005 and 2004. We disposed of our remaining investment in Radio Pro in August 2006 (See Item 8, Note 6, “Investments”).
Following our acquisition of a controlling interest in our Slovak Republic operations on January 23, 2006, we consolidate these operations (See Item 8, Note 4, “Acquisitions and Disposals, Slovak
Republic”)
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IV (a) Net Revenues for the years ending December 31, 2006, 2005 and 2004:
Croatia
Czech Republic
Romania
Slovakia
Slovenia
Ukraine (STUDIO 1+1)
Ukraine (KINO, CITI)
Total Consolidated Net Revenues
Consolidated Net Revenues
For the Years Ended December 31, (US$ 000’s)
2006
22,310 $
208,387
148,616
71,660
54,534
96,413
1,195
603,115 $
$
$
2005
22,030 $
154,010
103,321
-
48,770
72,847
-
400,978 $
Movement
280 $
54,377
45,295
71,660
5,764
23,566
1,195
202,137 $
2005
22,030 $
154,010
103,321
-
48,770
72,847
-
400,978 $
2004
9,757 $
-
73,843
-
45,388
53,351
-
182,339 $
Movement
12,273
154,010
29,478
-
3,382
19,496
-
218,639
Our consolidated net revenues increased by US$ 202.1 million, or 50%, for the year ended December 31, 2006 compared to 2005 due to:
· A US$ 0.3 million increase in the net revenues of our Croatia operations as described above in Item 7, III “Analysis of Segment Results”;
· A US$ 54.4 million, or 35.3%, increase in the net revenues of our Czech Republic operations as described in Item 7, III “Analysis of Segment Results”;
· A US$ 45.3 million, or 43.8%, increase in the net revenues of our Romania operations as described above in Item 7, III “Analysis of Segment Results”;
· The inclusion of US$ 71.7 million of net revenues from our newly consolidated Slovak Republic operations as described in Item 7, III “Analysis of Segment Results”;
· A US$ 5.8 million, or 11.8%, increase in the net revenues of our Slovenia operations as described above in Item 7, III “Analysis of Segment Results”;
· A US$ 23.6 million, or 32.4%, increase in the net revenues of our Ukraine (STUDIO 1+1) operations as described above in Item 7, III “Analysis of Segment Results”; and
· The inclusion of US$ 1.2 million of net revenues from our newly consolidated Ukraine (KINO, CITI) operations as described in Item7, III “Analysis of Segment Results”.
Our consolidated net revenues increased by US$ 218.6 million, or 120% during 2005 compared to 2004.
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IV (b) Total Operating Expenses for the years ending December 31, 2006, 2005 and 2004
Operating costs
Cost of programming
Station selling, general and administrative expenses
Depreciation of station property, plant and equipment
Amortization of broadcast licenses and other intangibles
Corporate operating costs
Impairment Charge
Total Operating Expenses
2006
90,060 $
227,509
65,412
25,795
18,813
34,104
748
462,441 $
$
$
Consolidated Operating Expenses
For the Years Ended December 31, (US$ 000’s)
2005
65,138 $
148,837
46,382
16,367
11,180
25,547
35,331
348,782 $
Movement
24,922 $
78,672
19,030
9,428
7,633
8,557
(34,583 )
113,659 $
2005
65,138 $
148,837
46,382
16,367
11,180
25,547
35,331
348,782 $
2004
33,615 $
71,793
22,112
6,429
465
29,254
-
163,668 $
Movement
31,523
77,044
24,270
9,938
10,715
(3,707 )
35,331
185,114
Total operating expenses increased by US$ 113.7 million, or 32%, in 2006 compared to 2005.
For the year ended December 31, 2005 total operating expenses increased by US$ 185.1 million, or 113%, compared to 2004.
Further detail on the change in the components of Total Operating Expenses is provided below:
Operating Costs: Total consolidated station operating costs (excluding programming costs, depreciation of station property, plant and equipment, amortization of broadcast licences and other
intangibles as well as station selling, general and administrative expenses) increased by US$ 24.9 million, or 38%, in 2006 compared to 2005 primarily due to:
· A US$ 1.1 million, or 12%, decrease in the station operating costs of our Croatia operations as described in Item 7, III “Analysis of Segment Results”;
· Operating costs of our Czech Republic operations increasing by US$ 11.1 million, or 74.8%, as described in Item 7, III “Analysis of Segment Results”;
· Operating costs of our Romania operations decreasing by US$ 1.2 million, or 7%, as described in Item 7, III “Analysis of Segment Results”;
· The inclusion of US$ 15.2 million of additional station operating costs relating to our newly consolidated Slovak Republic operations;
· Operating costs of our Slovenia operations decreasing by US$ 2.0 million, or 17%, as described in Item 7, III “Analysis of Segment Results”;
· Operating costs of our Ukraine (STUDIO 1+1) operations increasing by US$ 1.5 million, or 11.9%, as described in Item 7, III “Analysis of Segment Results”; and
· The inclusion of US$ 1.4 million of additional station operating costs relating to our new Ukraine (KINO, CITI) operations.
Total consolidated station operating costs increased by US$ 31.5 million, or 94%, in 2005 compared to 2004.
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Cost of Programming: Total consolidated programming costs (including amortization of programming rights and production costs) increased by US$ 78.7 million or 52.9% in 2006 compared to 2005
primarily due to:
· A US$ 1.1 million, or 5%, increase in the programming costs of our Croatia operations as described in Item 7, III “Analysis of Segment Results”;
· A US$ 9.9 million, or 19.6%, increase in the programming costs of our Czech Republic operations as described in Item 7, III “Analysis of Segment Results;
· A US$ 21.7 million, or 61.8%, increase in the programming costs of our Romania operations as described in Item 7, III “Analysis of Segment Results”;
· The inclusion of US$ 25.8 million of additional programming costs relating to our newly consolidated Slovak Republic operations;
· A US$ 6.8 million, or 52.3%, increase in the programming costs of our Slovenia operations station operating costs and expenses of our Slovenia operations as described in Item 7, III “Analysis of
Segment Results”; and
· A US$ 10.8 million, or 36.3%, increase in the programming costs of our Ukraine (STUDIO 1+1) operations as described in Item 7, III “Analysis of Segment Results”; and
· The inclusion of US$ 2.6 million of additional programming costs from our new Ukraine (KINO, CITI) operations as described in Item 7, III “Analysis of Segment Results”.
Total consolidated programming costs (including amortization of programming rights and production costs) increased by US$ 77.0 million, or 107%, in 2005 compared to 2004.
Station Selling, General and Administrative Expenses: Total consolidated station selling, general and administrative expenses increased by US$ 19.0 million, or 41%, in 2006 compared to 2005 primarily
due to:
· A US$ 1.2 million, or 15%, decrease in the station selling, general and administrative expenses of our Croatia operations as described in Item 7, III “Analysis of Segment Results”;
· A US$ 4.4 million, or 26.3%, increase in the station selling, general and administrative expenses of our Czech Republic operations as described in Item 7, III “Analysis of Segment Results”;
· A US$ 2.7 million, or 33.8%, increase in the station selling, general and administrative expenses of our Romania operations as described in Item 7, III “Analysis of Segment Results”;
· The inclusion of US$ 8.5 million of station selling, general and administrative expenses from our newly consolidated Slovak Republic operations;
· A US$ 0.5 million, or 10.9%, increase in the station selling, general and administrative expenses of our Slovenia operations as described in Item 7, III “Analysis of Segment Results”;
· A US$ 3.1 million, or 35.9%, increase in the station selling, general and administrative expenses of our Ukraine (STUDIO 1+1) operations as described in Item 7, III “Analysis of Segment Results”; and
· The inclusion of US$ 0.9 million of station selling, general and administrative expenses from our new Ukraine (KINO, CITI) operation as described in Item 7, III “Analysis of Segment Results”;
Total consolidated station selling, general and administrative expenses increased by US$ 24.3 million, or 110%, in 2005 compared to 2004.
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Depreciation of Station Property, Plant and Equipment: Total consolidated depreciation of station property, plant and equipment increased by US$ 9.4 million, or 57.6%, in 2006 compared to 2005
primarily due to:
· A US$ 2.2 million, or 38%, increase in the depreciation costs of our Czech Republic due to depreciation of newly acquired production equipment assets;
· A US$ 1.3 million, or 38%, increase in the depreciation costs of our Romania operations due to depreciation of newly acquired production equipment assets;
· The inclusion of US$ 3.2 million of additional depreciation relating to our newly consolidated Slovak Republic operations;
· A US$ 1.1 million, or 36%, increase in the depreciation costs of our Slovenia operations as a result of depreciation of newly acquired digital production and editing equipment assets;
· A US$ 1.2 million, or 76%, increase in the depreciation costs of our Ukraine (STUDIO 1+1) operations due to depreciation of newly acquired studio equipment assets; and
· The inclusion of US$ 0.4 million of additional depreciation costs of our newly acquired Ukraine (KINO, CITI) operations.
Total consolidated depreciation of station property, plant and equipment increased by US$ 9.9 million, or 154.6%, in 2005 compared to 2004.
Amortization of Broadcast Licenses and Other Intangibles: Total consolidated amortization of broadcast licenses and other intangibles increased by US$ 7.6 million in 2006 compared to 2005 primarily as
a result of the amortization of the broadcast license and customer relationships of our newly consolidated Slovak Republic operations.
Total consolidated amortization of broadcast licenses and other intangibles increased from US$ 0.5 million to US$ 11.2 million in 2005 compared to 2004.
Corporate operating costs (including non-cash stock-based compensation) for the years ending December 31, 2006, 2005, and 2004 were as follows:
2006
2005
Movement
2005
2004
Movement
For the Years Ended December 31, (US$ 000’s)
Corporate operating costs (excluding non-cash stock-based
compensation)
Non-cash stock-based compensation(1)
Corporate operating costs (including non-cash stock-based
compensation)
(1) The amounts charged in the years ended December 31, 2005 and 2004 have been restated (for further information, see Item 8, Note 2, “Restatement”).
8,109 $
448
22,420 $
3,127
30,529 $
3,575
34,104 $
25,547 $
8,557 $
$
$
22,420 $
3,127
25,547 $
19,083 $
10,171
29,254 $
3,337
(7,044 )
(3,707 )
The increase in corporate operating costs (excluding non-cash stock-based compensation) of US$ 8.1 million in 2006 compared to 2005 was principally due to:
·
·
an increase in legal expenses in connection with our investments in Ukraine and legal proceedings in respect of our Ukraine operations;
professional fees incurred in reviewing our historic stock option granting practices;
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·
·
an increase in staff-related costs caused by an increase in corporate staff as we brought in-house, certain activities that had previously been outsourced; and
an increase in business development expenses.
Included within corporate operating costs is a lease-exit charge of approximately US$ 1.6 million (including additional depreciation of US$ 0.3 million) incurred following relocation of our London office;
The increase in corporate costs (excluding non-cash stock-based compensation) in 2005 compared to 2004 was primarily due to:
·
·
an increase in staff-related costs caused by an increase in corporate staff , and temporary staff costs relating to the acquisition of the TV Nova (Czech Republic) group; and
an increase in professional fees in respect of legal, tax and press and public relations expenses relating to advice in connection with our investment in Ukraine, legal proceedings in respect of our
Ukraine operations and in connection with the acquisition of our Czech Republic operations and subsequent listing on the Prague Stock Exchange together with an increase in investor relations
activity;
partly off-set by:
·
a decrease in business development expenses.
The increase in the charge for non-cash stock-based compensation in 2006 compared to 2005 reflects an increase in the number of stock options issued during 2006 compared to 2005 as well as an
increase in the fair value of our stock options as our stock price has increased. The reduction in the charge for non-cash stock-based compensation in 2005 compared to 2004 reflects a reduction in the
charge for the options accounted for under FASB interpretation 44, the last of which were exercised on December 15, 2005 (see Item 8, Note 17, “Stock-Based Compensation”).
Impairment charge: 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.
We performed a similar review of our Croatia operations in late June 2005 and recorded an impairment charge of US$ 35.3 million at that time, of which US$ 18.6 million was attributable to the broadcast
license, US$ 7.0 million to trademarks and US$ 9.7 million to goodwill. Included in the provision for income taxes for the year ended December 31, 2005 is a US$ 5.1 million credit representing a release of
deferred tax relating to the impairment charge on the license and trademark.
IV (c) Operating Income for the years ending December 31, 2006, 2005 and 2004
Operating income
2006
140,674 $
$
2005
52,196 $
Movement
88,478 $
2005
52,196 $
2004
18,671 $
Movement
33,525
For the Years Ended December 31, (US$ 000’s)
Operating income increased by US$ 88.5 million, or 170%, in the year ended December 31, 2006 compared to 2005. Operating margin was 23% compared to 13% in 2005.
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Operating income increased by US$ 33.5 million, or 180%, in the year ended December 31, 2005 compared to 2004. Operating margin was 13% compared to 10% in 2004.
IV (d) Other expense items for the years ending December 31, 2006, 2005 and 2004
$
Interest income
Interest expense
Foreign currency exchange (loss)/gain, net
Other income/(expense)
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
Discontinued operations
2006
6,365 $
(44,228)
(44,908)
3,038
(12,539)
(14,962)
(13,602)
(730)
6,179
(4,863)
For the Years Ended December 31, (US$ 000’s)
2005
4,124 $
(29,387)
37,968
(4,705)
-
(16,691)
(8,908)
8,238
-
(513)
Movement
2,241 $
(14,841 )
(82,876 )
7,743
(12,539 )
1,729
(4,694 )
(8,968 )
6,179
(4,350 )
2005
4,124 $
(29,387)
37,968
(4,705)
-
(16,691)
(8,908)
8,238
-
(513)
2004
4,318 $
(1,203)
(574)
(698)
-
(11,089)
(4,106)
10,619
-
2,524
Movement
(194 )
(28,184 )
38,542
(4,007 )
-
(5,602 )
(4,802 )
(2,381 )
-
(3,037 )
Interest income increased by US$ 2.2 million in 2006 compared to 2005 primarily as a result of our maintaining a higher average cash balance in 2006. Interest income decreased by US$ 0.2 million in 2005
compared to 2004 primarily as a result of our maintaining a lower average cash balance in 2005 compared to 2004 and investments in short-term securities.
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Interest expense increased by US$ 14.8 million in 2006 compared to 2005 primarily as a result of a full year interest charge relating to our Senior Notes issued in May 2005 (see Item 8, Note 7, “Senior
Notes”). Interest expense increased by US$ 28.2 million in 2005 compared to 2004.
Foreign currency (loss)/gain: During 2006, we recognized a US$ 44.9 million loss primarily as a result of the strengthening of the Euro against the US dollar over that period. Our fixed and floating rate
Senior Notes are denominated in Euros, and we incurred a transaction loss of approximately US$ 50.8 million on the Senior Notes due to movements in the spot rate between December 31, 2005 and
December 31, 2006.
In 2005 we recognized a foreign currency exchange gain of US$ 38.0 million compared to a loss of US$ 0.6 million in 2004. This was primarily due to the strengthening of the US dollar between May
2005, when we issued our Senior Notes, and December 31, 2005.
Other income/(expense): We recognized income of US$ 3.0 million in 2006 following the release of provisions against certain historic tax contingencies within our Romania operations.
The expense of US$ 4.7 million in 2005 was primarily a result of a US$ 3.4 million fee incurred to secure bridge financing for our acquisition of the TV NOVA (Czech Republic) group in May 2005. We
did not ultimately utilize this bridge financing.
Change in fair value of derivatives: During 2006, we incurred a US$ 12.5 million loss as a result of the change in the fair value of the currency swaps entered into on April 27, 2006. For further information,
see Item 8, Note 14, “Financial Instruments”.
Provision for income taxes: Provision for income taxes was US$ 15.0 million in 2006, at an effective tax rate of 30.9%, compared to US$ 16.7 million, at an effective tax rate of 27.8%, in 2005. In 2006 our
stations paid income taxes at rates ranging from 16.0% in Romania to 25.0% in Slovenia and Ukraine. Our effective tax rate in 2005 benefited from a deferred tax credit of US$ 5.1 million with respect to
the impairment of our Croatia operations (For further information see Item 8, Note 5, “Goodwill and Intangible Assets, Impairment”). We recorded a provision for income taxes of US$ 11.1 million in
2004. For further information on taxes, see Item 8, Note 16, “Income Taxes”.
Minority interest in income of consolidated subsidiaries: Minority interest in the income of consolidated subsidiaries was US$ 13.6 million in 2006 compared to US$ 8.9 million in 2005 and US$ 4.1 million
in 2004. This is as a result of higher profitability of our Romania, Slovak Republic and Ukraine operations.
Equity in (loss)/income of unconsolidated affiliates: As explained in Item 1, “Business”, some of our broadcasting licenses were held by unconsolidated affiliates over which we had minority blocking
rights but not majority control. These affiliates were accounted for using the equity method.
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 via our acquisition of ARJ (for further
information see Item 8, Note 4, “Acquisitions and Disposals, Slovak Republic”). We disposed of our Romanian equity affiliate on August 11, 2006 (for further information see Item 8, Note 6,
“Investments”).
Slovak Republic operations
Romania operations
Slovenia operations
Equity in (loss)/income of unconsolidated affiliates
For the Years Ended December 31, (US$ 000’s)
2006
(737) $
7
-
(730) $
2005
8,240 $
(2)
-
8,238 $
Movement
(8,977 ) $
9
-
(8,968 ) $
2005
8,240 $
(2)
-
8,238 $
2004
10,382 $
237
-
10,619 $
Movement
(2,142 )
(239 )
-
(2,381 )
$
$
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 on August 11, 2006. For
further information, see Item 8, Note 6, “Investments”.
Discontinued operations: The amounts charged to the consolidated statements of operations in respect of discontinued operations are as follows:
2006
2005
Movement
2005
2004
Movement
For the Years Ended December 31, (US$ 000’s)
Gain on disposal of discontinued operations
Tax on disposal of discontinued operations
Discontinued operations
$
$
- $
(4,863)
(4,863) $
164 $
(677)
(513) $
(164 ) $
(4,186 )
(4,350 ) $
164 $
(677)
(513) $
146 $
2,378
2,524 $
18
(3,055 )
(3,037 )
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.
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The revenues and expenses of our former Czech Republic operations and the award income and related legal expenses have therefore all been treated as discontinued operations for each year. The
amounts charged to discontinued operations in 2006 largely 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”.
IV (e) Consolidated Balance Sheet as at December 31, 2006 compared to December 31, 2005
The principal components of our Consolidated Balance Sheet at December 31, 2006 have increased compared to December 31, 2005. These increases are summarized below:
Summarized Consolidated Balance Sheet (US$ 000’s)
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Minority interests in consolidated subsidiaries
Shareholders’ equity
$
$
December 31,
2006
413,616
1,405,384
182,961
574,084
26,189
1,035,766
$
December 31,
2005
286,926
1,101,924
206,961
488,099
13,237
680,553
Movement
126,690,
303,460
(24,000)
85,985
12,952
355,213
Current assets: Current assets have increased US$ 126.7 million at December 31, 2006 compared to December 31, 2005, primarily as a result of the receipt of the cash proceeds from the offering of
2,530,000 shares of Class A Common Stock completed on March 29, 2006, partially offset by the use of cash to fund acquisitions and reduce amounts drawn under credit facilities. Accounts receivable
increased by US$ 55.1 million, as our operations in the Czech Republic and Romania enjoyed strong growth, and approximately US$ 22.4 million of the increase in the value of our current assets was due
to consolidation of our Slovak Republic operations following our acquisition of ARJ on January 23, 2006.
Non-current assets: Non-current assets have increased US$ 303.5 million at December 31, 2006 compared to December 31, 2005, primarily as a result of the impact of the weakening US dollar on the
retranslation of our Czech Crown-denominated assets in the Czech Republic, as well as the recognition of additional goodwill and other intangible assets following the acquisition of an additional 5%
stake in our Romania operations. Of the increase in the value of our non-current assets, approximately US$ 40.5 million was due to the consolidation of the non-curent assets of our Slovak Republic
operations following the acquisition of ARJ on January 23, 2006.
Current liabilities: Current liabilities have decreased US$ 24.0 million at December 31, 2006 compared to December 31, 2005, primarily as a result of the repayment of US$ 25.1 million of amounts due under
credit facilities in the Czech Republic, and the payment of deferred consideration of US$ 24.4 million relating to the acquisition of our Czech Republic operations, partially offset by an increase of US$ 25.9
million in accounts payable and an additional US$ 13.4 million of accrued programming liabilities. Consolidation of the liabilities of our Slovak Republic operations following the acquisition of ARJ on
January 23, 2006 has increased the value of our current liabilities by approximately US$ 12.7 million.
Non-current liabilities: Non-current liabilities have increased US$ 86.0 million at December 31, 2006 compared to December 31, 2005, reflecting a US$ 50.9 million increase in the value of our Senior Notes
as a result of the movement in the spot rate between December 31, 2005 and December 31, 2006, as well as recognition of an additional US$ 15.9 million of deferred tax liabilities and a liability of US$ 12.5
million on the revaluation of the currency swaps entered into in April 2006.
Minority interests in consolidated subsidiaries: Minority interests in consolidated subsidiaries have increased US$ 13.0 million at December 31, 2006 compared to December 31, 2005, primarily as a result
of the recognition of a minority interest in our newly consolidated Slovak Republic operations, which had previously been reported as an equity accounted affiliate, as well as improved profitability of our
Romania and Ukraine operations.
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Shareholders’ equity: Total shareholders’ equity has increased US$ 355.2 million at December 31, 2006 compared to December 31, 2005, primarily as a result of the sale in a public offering of 2,530,000
shares of Class A Common Stock on March 29, 2006 for net proceeds of approximately US$ 168.7 million.
The remaining movement in shareholders’ equity relates to an increase in Accumulated Other Comprehensive Income (US$ 157.5 million), proceeds from the exercise of stock options (US$ 3.7 million),
stock-based compensation charge (US$ 4.9 million), and net income for the year ended December 31, 2006 of US$ 20.4 million.
V. Liquidity and Capital Resources
V (a) Summary of cash flows:
Cash and cash equivalents increased by US$ 74.2 million during the year ended December 31, 2006. The change in cash and cash equivalents is summarized as follows:
(US$ 000’s)
For the Years Ended December 31,
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 received from discontinued operations - investing activities
Impact of exchange rate fluctuations on cash
Net increase / (decrease) in cash and cash equivalents
Operating Activities
2006
73,395
(126,955)
132,400
(1,690)
-
(2,904)
74,246
$
$
$
2005
3,544
(298,803)
225,359
(2,000)
-
(9,010)
(80,910)
$
$
$
2004
2,415
(57,009)
1,886
(9,463)
20,349
2,144
(39,678)
Cash generated from continuing operations in 2006 increased US$ 69.9 million to US$ 73.4 million. This reflects (i) the level of cash generated by our Czech Republic operations, which has been
consolidated for a full year in 2006 rather than for the period from acquisition on May 2, 2005; (ii) consolidation of our Slovak Republic operations; and (iii) improved station performance in Romania,
Slovenia and Ukraine (Studio 1+1), partially offset by negative cash flows of our Croatia and Ukraine (KINO, CITI) operations.
Cash generated from continuing operations was reduced in 2006 by US$ 10.0 million, and in 2005 by US$ 41.6 million, by repayment of the settlement liability of the TV Nova (Czech Republic) group,
described in greater detail below. Excluding these repayments, cash generated from continuing operating activities increased by US$ 41.5 million in 2006.
Cash generated from continuing operations in 2005 increased US$ 1.1 million to US$ 3.5 million, despite having made a US$ 41.6 million partial repayment of the settlement liability of the TV Nova (Czech
Republic) group. The settlement liability represented an amount owed by CET 21 under a settlement agreement among CET 21, Ceska nezavisla televizni spolecnost, spol. s.r.o. (“CNTS”) and the
PPF Group dated December 19, 2003. This liability was assumed as part of the TV Nova (Czech Republic) group acquisition and has been refinanced at lower interest rates using our credit facilities from
Ceska Sporitelna, a.s. The income from refinancing appears within net cash received from financing operations and the remaining US$ 10.0 million was settled in January 2006.
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Excluding the payment of the settlement liability, cash generated from operating activities was US$ 45.2 million. This reflects the level of cash generated by our Czech Republic operations, improved
station performance in Romania and Ukraine, and an increase in dividends received from our Slovak Republic operations. These were partially offset by negative cash flows of our Croatia operations.
In 2004, net cash generated by continuing operations of US$ 2.4 million was after decreases in working capital for increased accounts receivable (US$ 9.1 million), increased investment in program rights
(US$ 45.4 million) and other assets (US$ 4.6 million) and decreased accounts payable and accrued liabilities (US$ 13.6 million).
Investing Activities
Cash used in investing activities decreased US$ 171.8 million from 2005 to US$ 127.0 million in 2006. Our investing cash flows in 2006 were primarily comprised of:
· 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 (see Item 8, Note 4, “Acquisitions and Disposals, Slovak Republic”);
· A payment of US$ 27.2 million in connection with the 5% increase in our holding of our Romanian operations (see Item 8, Note 4, “Acquisitions and Disposals, Romania”);
· A payment of EUR 8.0 million (approximately US$ 10.3 million) in connection with our acquisition of our 10% stake in Media Pro (see Item 8, Note 6, “Investments”); and
· A payment of a further US$ 2.0 million following completion of our acquisition of a 65.5% stake in Ukrpromtorg-2003 LLC (see Item 8, Note 4, “Acquisitions and Disposals, Ukraine”).
In 2005, net cash used in investing activities of US$ 298.8 million consisted primarily of the following:
· Total cash payments of US$ 218.1 million (net of cash acquired of US$ 35.6 million) for the acquisition of the TV Nova (Czech Republic) group in May 2005 (see item 8, Note 4, “Acquisitions and
Disposals, Czech Republic”). The remainder of the total purchase price of US$ 909.5 million consisted of non-cash items, including:
· the issuance of 3.5 million shares of Class A Common Stock (US$ 120.9 million);
· the incurrence of US$ 491.7 million of short-term indebtedness to PPF (which was repaid in cash on May 5, 2005);
· forgiveness of a US$ 18.5 million balance categorized as “Other Receivable” in our Consolidated Balance Sheet as at December 31, 2004; and
· the placement of US$ 24.7 million of cash into escrow as the second and final payment to Mr. Krsak;
· A payment of US$ 20.0 million in connection with the 5% increase in our holding of our Romania operations;
· A payment of US$ 2.1 million in connection with our acquisition of Galaxie Sport;
· A payment of Euro 4.7 million (approximately US$ 5.7 million) to acquire the remaining 3.15% interest in Pro Plus;
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· Advance payments of US$ 5.1 million with respect to our acquisition of a 65.5% interest in Ukrpromtorg 2003 LLC (see Item 8, Note 4, “Acquisitions and Disposals, Ukraine”);
· Capital expenditures of approximately US$ 26.5 million, primarily related to upgrades of broadcasting facilities and production equipment; and
· A net increase in restricted cash of US$ 18.6 million, of which US$ 24.6 million was a result of the acquisition of the TV Nova (Czech Republic) group, US$ 0.7 million of other increases, and a
reduction of US$ 6.7 million being the second payment for our acquisition of our Croatia operations.
In 2004, net cash used in investing activities of US$ 57.0 million was due to investments in subsidiaries and unconsolidated affiliates, primarily in Croatia and Romania, of US$ 35.8 million, investment in
property, plant and equipment of US$ 10.8 million, and increased restricted cash of US$ 10.1 million relating to cash held in escrow for the acquisition of our Croatia operations.
Financing Activities
Net cash received from financing activities decreased US$ 93.0 million from 2005 to US$ 132.4 million in 2006. Net proceeds 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$ 36.7 million from drawing on credit facilities in 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.
Net proceeds from financing activities of US$ 225.4 million in 2005 consisted primarily of the following:
· Net proceeds of approximately US$ 465.1 million from the issuance of our Senior Notes (see Item 8, Note 7, “Senior Notes”). The proceeds from this loan were used to finance part of the acquisition of
the TV Nova (Czech Republic) group;
· Net proceeds from the issuance of Class A Common Stock of approximately US$ 236.5 million, of which US$ 230.6 million was raised from the issuance of 5.4 million shares of Class A Common Stock,
the proceeds of which were used for our acquisition of the TV Nova (Czech Republic) group and approximately US$ 5.9 million from stock option exercises;
· Proceeds from borrowing of our Czech Republic operations (US$ 42.7 million) and our Slovenia operations (US$ 23.2 million). US$ 41.6 million of the proceeds from the borrowings of our Czech
Republic operations were used to repay the settlement liability discussed in Operating Activities above;
· Repayments of indebtedness by our Czech Republic operations (US$ 8.0 million), our Slovenia operations (US$ 31.7 million) and our Croatia operations (US$ 0.3 million); and
· Repayments of short-term indebtedness to PPF for the purchase of the TV Nova (Czech Republic) group (US$ 491.7 million) and Galaxie Sport (US$ 3.0 million).
In 2004, net cash received from financing activities of US$ 1.9 million was due to the issuance of shares of Class A Common Stock of US$ 4.2 million relating to warrants and stock options being exercised,
offset by net repayments under certain credit facilities and capital leases (US$ 2.3 million).
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Discontinued Operations
Pursuant to the agreement we entered into with the Dutch tax authorities on February 9, 2004, we paid US$ 1.7 million in 2006 compared to US$ 2.0 million during 2005.
In 2004, we paid taxes of US$ 9.0 to the Dutch tax authorities pursuant to this agreement and incurred US$ 0.5 of other expenses in connection with the disposal of our former Czech Republic operations.
We also received a second payment (of US$ 20.3 million) from PPF in respect of the sale of CNTS, our former Czech Republic operating company.
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 additional cash requirements in the near future subject
to the matters disclosed under “Contractual Obligations, Commitments and Off-Balance Sheet Arrangements” and “Cash Outlook”, below.
Our ongoing source of cash at the operating stations is primarily the receipt of payments from advertisers and advertising agencies. This may be supplemented from time to time by local borrowing.
Surplus cash generated in this manner, after funding the ongoing station operations, may be remitted to us, or to other shareholders where appropriate. 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.
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. Except as set forth below, our voting power is sufficient to compel the making of distributions.
In the case of Nova TV (Croatia), distributions may be paid from net profits subject to a reserve of 5% of annual profits until the aggregate reserves equal 5% of the registered capital of Nova TV (Croatia).
In the case of CET 21, distributions may be paid from net profits subject to a reserve of 5% of net profits until the aggregate reserves equal 10% of the registered capital of CET 21. In the case of Pro TV,
distributions may be paid from the profits of Pro TV subject to a reserve of 5% of annual profits until the aggregate reserves equal 20% of Pro TV's registered capital. A majority vote is required in order
for Pro TV to make distributions and we have sufficient voting power to compel distributions of dividends. In the case of STS, distributions may be paid from net profits subject to an initial reserve
requirement of 10% of net profits until the reserve fund equals 5% of registered capital. Subsequently, the reserve requirement is equal to 5% of net profits until the reserve fund equals 10% of registered
capital. As of January 23, 2006, we had a sufficient majority to compel the distributions of dividends by STS. In the case of Pro Plus, distributions may be paid from the profits of Pro Plus, subject to a
reserve equal to 10% of registered capital being established from accumulated profits. In the case of Studio 1+1, distributions may be paid from net profits subject to a reserve of 5% of net profits until the
aggregate reserves equals 25% of the registered capital of Studio 1+1. We do not have a sufficient majority in Studio 1+1 to compel the distribution of dividends. In the case of Intermedia, Innova and
IMS, distributions may be paid from their profits and there is no reserve requirement for these companies. Our voting power in Innova and IMS is sufficient to compel the distribution of dividends.
STS made dividend distributions to us in 2006, 2005, and 2004; Pro TV made dividend distributions to us in 2006 and 2005, and Pro Plus made dividend distributions to us in 2006 and 2004. We also
received payments of loan principal and interest from our operations in the Czech Republic, Romania and Ukraine.
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As at December 31, 2006 and 2005 the operations had the following unsecured intercompany balances owing to their respective holding companies:
Operating segment (US$ 000's)
Croatia
Czech Republic
Romania
Slovak Republic
Slovenia
Ukraine (STUDIO 1+1)
Ukraine (KINO, CITI)
Total
December 31,
2006
67,623 $
434,897
25,620
23,670
-
-
4,621
556,431 $
December 31,
2005
40,166
441,569
28,873
88
39
10,617
-
521,352
$
$
V (c) Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
Our future contractual obligations as at December 31, 2006 are as follows:
Contractual Obligations
Long-Term Debt - principal
Long-Term Debt - interest
Capital Lease Obligations
Operating Leases
Unconditional Purchase Obligations
Other Long-Term Obligations
Total Contractual Obligations
Long-Term Debt
As at December 31, 2006 we had the following debt outstanding:
Payments due by period (US$ 000’s)
Total
501,816 $
266,857
6,735
7,729
124,895
25,089
933,121 $
Less than 1 year
12,350 $
41,895
998
3,983
115,668
21,981
196,875 $
1-3 years
1,870 $
83,839
1,450
2,567
9,064
3,108
101,898 $
3-5 years More than 5 years
487,291
57,488
3,423
-
150
-
548,352
305 $
83,635
864
1,179
13
-
85,996 $
$
$
Corporate
Croatia operations
Czech Republic operations
Slovenia operations
Ukraine operations
Total
December 31, 2006
(US$ 000’s)
(1) - (2)
(3)
(4) - (6)
(7)
(8)
$
$
487,291
847
11,975
-
1,703
501,816
(1) In May 2005, we issued Senior Notes in the aggregate principal amount of EUR 370.0 million consisting of EUR 245.0 million of 8.25% Senior Notes due May 2012 and EUR 125.0 million of floating rate
Senior Notes due May 2012, which bear interest at six-month Euro Inter-Bank Offered Rate (“EURIBOR”) plus 5.50% (9.23% was applicable at December 31, 2006). Interest is payable semi-annually in
arrears on each May 15 and November 15.
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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 our indebtedness 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, 2008, we may redeem up to 35.0% of the fixed rate Senior Notes with the proceeds of any public equity offering at a price of 108.250% of the principal amount of such
notes, plus accrued and unpaid interest, if any, to the redemption date. In addition, prior to May 15, 2009, we may redeem all or a part of the fixed rate 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, 2006, Standard & Poor’s senior unsecured debt rating for our Senior Notes remained unchanged from December 31, 2005 at B+, with a corporate credit rating of BB- / stable. At
December 31, 2006, Moody’s Investors Service’s rating of both our corporate credit rating and our Senior Notes due 2012 was Ba3 stable.
(2) On July 21, 2006, we entered into a five-year revolving loan agreement for EUR 100.0 million (approximately US$ 131.7 million) arranged by the European Bank for Reconstruction and Development
(the “Loan”). ING Bank N.V. (“ING”) and Ceska Sporitelna, a.s. (“CS”) are participating in the facility for up to EUR 50.0 million in aggregate. Initial drawings up to EUR 100.0 million will be used for
certain specified projects in Central and Eastern Europe.
The Loan bears interest at a rate of three-month EURIBOR plus 2.75% on the drawn amount. The available amount of the Loan amortizes by 7.5% every six months from May 2008 to November 2009,
then by 15% in May 2010 and November 2010, and by 40% in May 2011. There were no drawings under this facility as at December 31, 2006.
Covenants contained in the Loan are in line with those contained in our Senior Notes (see Item 8, Note 7, “Senior Notes"). In addition, the Loan’s covenants restrict us from making principal
repayments on other debt of greater than US$ 20.0 million per year for the life of the Loan. This restriction is not applicable to our existing facilities with ING or CS or to any refinancing of our Senior
Notes.
The 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 certain of our subsidiaries and is secured by a pledge of shares of those subsidiaries and an assignment of certain contractual
rights. The terms of the 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.
(3) A total of EUR 0.6 million (approximately US$ 0.8 million) was drawn down under two loan agreements our Croatia operations have with Hypo Alpe-Adria-Bank d.d. These loans bear a variable
interest rate of three-month EURIBOR plus 2.50% and are repayable in quarterly instalments until April 1, 2011. As at December 31, 2006, an aggregate rate of 6.00% applied to these loans. These loan
facilities are secured by certain fixed assets of OK, which as at September 30, 2006 have a carrying amount of approximately US$ 0.1 million.
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(4) CET 21 has a four-year credit facility of CZK 1.2 billion (approximately US$ 57.5 million) with Ceska Sporitelna, a.s. (“CS”). The final repayment date is October 31, 2009. 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 1.95%. This facility is secured by a pledge of receivables, which are also subject to a factoring arrangement with Factoring Ceska Sporitelna, a.s., a subsidiary of CS. As at
December 31, 2006, there were no drawings under this facility.
(5) CET 21 has a working capital credit facility of CZK 250.0 million (approximately US$ 12.0 million) with CS, which matures on April 30, 2007. This working capital facility bears interest at the three-
month PRIBOR rate plus 1.65%. A preliminary agreement has been reached to extend this facility for 12 months from maturity. This facility is secured by a pledge of receivables, which are also subject
to a factoring arrangement with Factoring Ceska Sporitelna, a.s. As at December 31, 2006, the full CZK 250.0 million (approximately US$ 12.0 million) was drawn under this facility bearing interest at an
aggregate 4.20% (the applicable three-month PRIBOR rate at December 31, 2006 was 2.55%).
(6) As at December 31, 2006, there were no drawings under a CZK 600.0 million (approximately US$ 28.7 million) factoring facility with Factoring Ceska Sporitelna, a.s., a subsidiary of CS. This facility is
available until March 31, 2010 and bears interest at the rate of one-month PRIBOR plus 1.40% for the period that actively assigned accounts receivable are outstanding.
(7) A revolving five-year facility agreement was entered into by Pro Plus for up to EUR 37.5 million (approximately US$ 49.4 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 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 2.10% 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, 2006, there were no drawings under this revolving facility.
(8) On August 16, 2006 and November 6, 2006, our Ukraine (KINO, CITI) operations entered into US$ 0.9 million and US$ 0.6 million, three-year loans with Glavred-Media, LLC, the minority shareholder in
Ukrpromtorg. These loans are unsecured and bear interest at 9.0%. Our partners have also extended short-term non-interest bearing loans to our Ukraine (KINO, CITI) operations amounting to US$
0.2 million.
Capital Lease Obligations
Capital lease obligations include future interest payments of US$ 1.8 million. For more information on our capital lease obligations see Item 8, Note 13, “Credit Facilities and Obligations under Capital
Leases”
Operating Leases
For more information on our operating lease commitments see Item 8, Note 21, “Commitments and Contingencies, Commitments”.
Unconditional Purchase Obligations
Unconditional purchase obligations largely comprise future programming commitments. At December 31, 2006, we had commitments in respect of future programming of US$ 98.0 million (December 31,
2005: US$ 51.8 million). This includes contracts signed with license periods starting after December 31, 2006. For more information on our programming commitments see Item 8, Note 21, “Commitments
and Contingencies, Commitments”.
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Other Long-Term Obligations
Included in Other Long-Term Obligations are our commitments to the Dutch tax authorities of US$ 5.5 million (see Item 8, Note 21, “Commitments and Contingencies”).
In addition to the amounts disclosed above, Mr. Sarbu has the right to sell his remaining 10.0% shareholding in 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. A put option of 5.21% of this 10.0% shareholding is exercisable from November 12, 2009
for a twenty-year period thereafter. Mr. Sarbu’s right to put the remaining 4.79% shareholding is also exercisable from November 12, 2009, provided that we have not enforced a pledge over this 4.79%
shareholding which Mr. Sarbu granted as security for our right to put our 10.0% in Media Pro. As at December 31 2006, we consider the fair value of this put option to be approximately US$ nil (2005: US$
nil).
V (d) Cash Outlook
The issuance of the EUR 370.0 million (approximately US$ 480.0 million at the time of issuance) Senior Notes for the acquisition of the TV Nova (Czech Republic) group in May 2005 increased our leverage
and we have significant debt service obligations in respect of the Senior Notes. In addition, the terms of our indebtedness 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. Net cash proceeds
from the issuance of new shares of our Class A Common Stock of US$ 168.7 million in March 2006 significantly reduced our net debt and provides a useful source of funds to allow investment flexibility,
including acquisitions better suited to equity rather than debt financing. On July 21, 2006, we entered into a five-year EUR 100.0 million revolving loan facility, which, once fully drawn, can be used for
general corporate purposes to further increase our financing flexibility, and will reduce our average cost of debt.
Our future cash needs will depend on our overall financial performance, our ability to service the indebtedness incurred under the Senior Notes as well as other indebtedness incurred by us and any
future acquisition, investment and development decisions. Our ability to raise further funds through external debt facilities depends on our satisfaction of a leverage ratio under the Senior Notes. In the
short-term we are able to fund our operations from cash generated from operations, our current cash resources (US$ 145.9 million, at December 31, 2006) and available undrawn credit facilities (US$ 239.0
million, at December 31, 2006).
We expect to invest US$ 60-70 million on capital expenditure in 2007, and approximately US$ 10 million furthering the development of our non-broadcast operations.
Our Croatia operations continue to require funding to improve our ratings performance and increase our market share. We expect the funding required to support Nova TV (Croatia) to be in excess of US$
26.0 million during 2007, and have provided US$ 7.2 million in cash funding to Nova TV (Croatia) in the three months ended December 31, 2006.
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V (e) Tax Inspections
Pro Plus has been the subject of an income tax inspection by the Republic of Slovenia tax authorities for the years 1995 to 1998. As a result of these inspections the Slovenian tax authorities had levied an
assessment seeking unpaid income taxes, customs duties and interest charges of SIT 1,073.0 million (approximately US$ 5.3 million). The Slovenian authorities have asserted that capital contributions and
loans made by us to Pro Plus in 1995 and 1996 should be extraordinary revenue to Pro Plus. On this basis, the Slovenian authorities claim that Pro Plus made a profit in 1995 and 1996 for which it owes
income taxes and interest. Additionally, the Slovenian tax authorities claim that the fixed assets imported as capital contributions were subject to customs duties, which were not paid. On February 9, 2001,
the Slovenian tax authorities concluded that the cash capital contributions for 1995 and 1996 were not extraordinary income. This has reduced the assessment to SIT 636.8 million (approximately US$ 3.1
million) in aggregate principal amount. Pro Plus appealed this decision to the Administrative Court in Ljubljana and requested the tax authorities to defer the demand for payment until a final judgment has
been issued, and the tax authorities have so agreed. On April 18, 2005, the Administrative Court issued a decision in favor of Pro Plus and dismissed the claims of the tax authorities. The tax authorities
filed an appeal with the Slovenian Supreme Court in May 2005. We do not have a provision in our financial statements in relation to this legal action.
V (f) Off-Balance Sheet Arrangements
None.
VI. Critical Accounting Policies and Estimates
Our accounting policies affecting our financial condition and results of operations are more fully described in Note 3 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. The program library is evaluated at least annually 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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Goodwill and intangible assets
In accordance with SFAS 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. To assist in
the valuation process, we have on occasion utilized the services of independent valuation consulting firms. 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.
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 are: under-performance of operating segments or changes in projected results,
changes in the manner of utilization of the asset, 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 are performed at the reporting unit level. If potential for goodwill impairment exists, 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. 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. An impairment loss is recognized for any excess of the carrying value of the reporting unit’s
goodwill over the implied fair value.
The fair value of 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 (Croatia,
Czech Republic, Romania, Slovak Republic, Slovenia and Ukraine). 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.
A change in these assumptions resulting in an hypothetical 10% decrease to the fair values of each reporting unit would not result in any of our reporting units having a fair value that is less than the
carrying value of the reporting unit on our balance sheet. If fair value were less than carrying value, we would be required to record a charge for the impairment of goodwill related to the impaired reporting
unit. We recognized impairment losses during 2006 and 2005 in our Croatia operations. There was no such impairment in any of our operations during 2004.
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Impairment or disposal of long-lived assets
Long-lived assets, such as property, plant and equipment and intangible assets subject to amortization, including customer relationships and certain broadcast licenses, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors that are considered important which could trigger an impairment review
include the following: significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of the use of the acquired assets or the strategy
for the overall business, and significant negative industry or economic trends.
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.
Assets to be disposed are required to be separately presented in the Consolidated Balance Sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposal group classified as held-for-sale are required to be presented separately in the appropriate asset and liability sections of the Consolidated Balance
Sheet.
Reviewing long-lived assets for impairment requires considerable judgment. Estimating the future cash flows requires significant judgment. 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.
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. 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 periodically review the accounts receivable balances 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.
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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 US 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 Romania and Ukraine, which account for approximately 41% of our 2006 consolidated revenues, and our
corporate holding companies, have a functional currency of the US dollar however all our other operations have functional currencies other than the US dollar.
We record assets and liabilities denominated in a currency other than our functional currency using the exchange rate prevailing at each balance sheet date, with any change in value between reporting
periods being recognized as a transaction gain or loss in our Consolidated Statement of Operations; we recognized a transaction gain of US$ 38.0 million in 2005 and a transaction loss of US$ 44.9 million
in 2006, largely as a result of the change in the US dollar value of our EUR-denominated Senior Notes.
The financial statements of our operations whose functional currency is other than the US dollar are translated from such functional currency to US 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 that policy, specific facts and circumstances should be considered carefully, and judgment should be 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$ 511.9
million) as at December 31, 2006.
During the year ended December 31, 2006, a foreign exchange adjustment of US$ 77.2 million arose on inter-company foreign currency transactions, primarily consisting of this inter-company loan. As
these transactions are long-term in nature as contemplated by FAS 52 “Foreign Currency Translation” paragraph 20(b), the foreign exchange adjustments are reported in the same manner as translation
adjustments in “Other Comprehensive Income”, a separate component of equity. Foreign exchange adjustments on inter-company transactions that are not long-term in nature are included in our
determination of net income, and accordingly if we determined that the loan was no longer long-term in nature we would be required to record subsequent foreign exchange adjustments as income or
expense in our Consolidated Statement of Operations.
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Contingencies
We are currently involved in certain legal proceeding and, as required, accrue our estimate of the probable costs for the resolution for these claims. These estimates have been 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.
VII. Related party matters
Overview
There is a limited local market for many specialist television services in the countries in which we operate, many of which are provided by parties known to be connected to our local shareholders. As
stated in FAS 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.
We consider 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 in which we are
aware of a family or business connection to a shareholder.
Related Party Transactions
Croatia
We contract with Concorde Media Beteiligungsgesellschaft mbH for the purchase of program rights. This is a company connected to Dr. Herbert Kloiber, a Director of Central European Media Enterprises
Ltd. Our total purchases from Concorde Media Beteiligungsgesellschaft mbH during 2006 were US$ 0.3 million (2005: US$ nil, 2004: US$ nil).
Czech Republic
We have no related party transactions in the Czech Republic.
Romania
The total purchases from companies related or connected with Adrian Sarbu in 2006 were approximately US$ 23.4 million (2005: US$ 12.0 million, 2004: US$ 6.9 million). The purchases were mainly for
programming rights and for various technical, production and administrative related services. The total sales to companies related or connected with Adrian Sarbu in 2006 were approximately US$ 2.5
million (2005: US$ 0.4 million, 2004: US$ 0.1 million). At December 31, 2006, companies connected to Mr. Sarbu had an outstanding balance due to us of US$ 2.1 million (2005: US$ 1.4 million). At December
31, 2006, companies related to Mr. Sarbu had an outstanding balance due to them of US$ 0.8 million (2005: US$ 0.5 million, 2004: US$ 0.6 million).
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In addition, we purchased land with a value of US$ 8.5 million (EUR 6.5 million) (as determined by an independent appraisal) from a company controlled by Adrian Sarbu in December 2006. The investment
represents an opportunity to secure suitable accommodation for Pro TV at a time when the real estate market is experiencing significant growth. It will enable future growth in a location housing both
office space and the newly built digital studios. At December 31, 2006, US$ 8.3 million was recorded as a payable to this company.
On February 17, 2006, we purchased an additional 5% of Pro TV, MPI and Media Vision from Mr. Sarbu for consideration of US$ 27.2 million (for further information, see Item 8, Note 4, “Acquisitions and
Disposals, Romania”). On February 28, 2005 we acquired 2% of Pro TV and MPI from Mr. Sarbu for US$ 5.0 million and on July 29, 2005 we acquired an additional 3% of Pro TV and MPI from Mr. Sarbu for
US$ 15.0 million (see Item 8, Note 4, “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 and is 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.
On March 29, 2004, we acquired an additional 14% share in each of our consolidated subsidiaries MPI and Pro TV from a company controlled by Mr. Sarbu, for purchase consideration of US$ 20.3 million.
We now own a 90% voting and economic interest in Pro TV and MPI and a 75% voting and economic interest in Media Vision.
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. The consideration was determined by an independent valuation of Radio Pro.
On August 11, 2006 we acquired a 10.0% interest in Media Pro. The remaining 90.0% 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. As a result of this transaction, we recorded a gain of US$ 6.2 million on
disposal.
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$ 16.5 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 Item 8, Note 4,
“Acquisitions and Disposals, Romania”.
Slovenia
We have no related party transactions in Slovenia during 2006. On June 24, 2005, we acquired from Marijan Jurenec, director of our Adriatic regional operations, his remaining 3.15% interest in Pro Plus for
Euro 4.7 million (approximately US$ 5.7 million at the date of acquisition).
Slovak Republic
STS, our former operating company in the Slovak Republic that was merged into Markiza on January 1, 2007, had a number of contracts with companies connected to Jan Kovacik, a shareholder in
Markiza, and indirectly STS, for the provision of television programs. Many of these contracts were for the production of programs that required specialist studios and specific broadcast rights. Total
purchases from these companies in 2006 amounted to US$ 0.8 million (2005: US$ 0.5 million, 2004: US$ 0.4 million).
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STS also purchased advertising space relating to print media from companies connected with Mr Kovacik in 2006 with a value of US$ 1.5 million during 2006.
STS also sold advertising time through an advertising agency controlled by Jan Kovacik. The total 2006 advertising sales of STS placed through Mr. Kovacik’s advertising agency were US$ 0.4 million
(2005: US$ 0.2 million, 2004: US$ 1.9 million), and the total amount due to STS from this agency at December 31, 2006 was US$ 0.1 million (2005: US$ nil: 2004 US$ 0.4 million).
On December 1, 2005 we repaid STS, our equity-accounted affiliate in the Slovak Republic, SKK 228 million (approximately US$ 7.1 million at the time of repayment) in settlement of the principal and
interest due on a loan that had been advanced to us in 2002 and 2003. The loan bore interest at a rate of three-month Bratislava Inter-Bank Offered Rate (“BRIBOR”) plus 2.2%.
Ukraine
Prior to 2006, we contracted with Contact Film Studios for the production of certain television programs. This company was connected to Boris Fuchsmann, the 40% shareholder in, and joint Managing
Director of Innova, which is one of the operating companies for the Studio 1+1 group. Our total purchases from Contact Film Studios in 2006 were US$ nil (2005: US$ 0.1 million, 2004: US$ 0.1 million).
In 1998 we made a loan to Mr. Fuchsmann with a total balance outstanding at December 31, 2006 of US$ 2.2 million (2005: US$ 2.5 million). The interest rate on this loan is US$ three-month LIBOR+3%,
subject to a minimum of 5%.
We contract with Vabank for the provision of banking services. This is a bank connected to Boris Fuchsmann through his presence on the bank’s Supervisory Board. Our balance on the current account
with the bank was US$ 9.4 million as of December 31, 2006 (2005: US$ 5.0 million). Commission and other expenses incurred by us in respect of the banking services rendered by Vabank amount to US$ 0.2
million for the twelve months ended December 31, 2006. Interest of US$ 0.4 million was earned on funds on deposit with Vabank.
Innova Marketing is a company 100% owned and managed by Boris Fuchsmann. Innova Marketing renders consulting services to Innova. The amount of such services provided in 2006 was US$ 0.1
million (2005: US$ 0.1 million).
Alexander Rodnyansky, the former general director and current Honorary President of Studio 1+1, continues as the 70% shareholder in the license company. Mr. Rodnyansky is also the general director
of the Russian broadcaster CTC based in Moscow. Our total purchases from CTC in 2006 were US$ 0.1 million (2005: US$ 0.2 million, 2004: US$ 0.1 million). In addition, we recorded revenue of US$ 0.8
million during 2006 from CTC relating to production of programming.
In addition to the above, we contract with Sablock, a company connected to Mr. Rodnyansky, for license rights costs. Our total purchases during 2006 were US$ 4.0 million. At December 31, 2006, we
have recorded a liability to Sablock of US$ 1.3 million.
We contract with Kino-Kolo, a magazine that is 75% owned by Alexander Rodnyansky, for advertising Studio 1+1. Purchases of services from Kino-Kolo in 2006 amounted to US$ 0.1 million. (2005: US$
0.1).
We purchase legal and consulting services from LLC Legal Company Varlamov and Partners, a company headed by the Deputy General Director of Studio 1+1. The total amount of services rendered by
the company in 2006 was US$ 0.3 million (2005: US$ 0.3 million).
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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 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 US dollars due to movements in
exchange rates between the Euro and the US dollar.
On April 27, 2006, we entered into currency swap agreements with two counterparties whereby we swapped a fixed annual coupon interest rate (of 9.0%) on notional principal of CZK 10.7 billion
(approximately US$ 512.6 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 EUR 375.9 million
(approximately US$ 495.1 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 financial instruments as at December 31, 2006 was a US$ 12.5 million liability.
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 EUR-denominated interest payments on our Senior Notes (see Item 8, Note 7, “Senior Notes”). 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 SFAS 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, 2006, we have eight tranches of debt that provide for interest at a spread above a base rate of EURIBOR, LIBOR or PRIBOR, and two tranches of debt, which were maintained with a
fixed interest rate. A significant rise in the EURIBOR, LIBOR or PRIBOR base rate would have an adverse effect on our business and results of operations.
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Interest Rate Table as at December 31, 2006
Expected Maturity Dates
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)
Fixed Rate
Average Interest Rate
Variable Rate
Average Interest Rate
Variable Interest Rate Sensitivity as at December 31, 2006
2007
2008
2009
2010
2011
Thereafter
153
5.50%
80
5.50%
245,000
8.25%
125,000
8.57%
130
5.50%
137
5.50%
144
5.50%
1,500
2.74%
250,000
4.20%
Value of Debt as at December 31, 2006 (US$ 000's)
165,472
(EUR 125.6 million)
11,975
(CZK 250.0 million)
Total
Interest Rate as
at December 31,
2006
Yearly Interest
Charge
(US$ 000’s)
1%
2%
3%
4%
Yearly interest charge if interest rates increase by
(US$ 000s):
4.73% - 8.57 %
15,242
16,896
18,551
20,206
21,860
4.20%
503
15,745
623
17,519
742
19,293
862
21,068
982
22,842
5%
23,515
1,102
24,617
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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, 2006 and 2005, 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, 2006. Our audits also included the
consolidated financial statement schedules listed in the Index at Item 15. These financial statements and financial statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and financial statement schedules 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, 2006
and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth therein.
As discussed in Note 2, the accompanying 2005 and 2004 consolidated financial statements have been restated for stock based compensation.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting
as of December 31, 2006, 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 28, 2007 expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an unqualified opinion on the
effectiveness of the Company's internal control over financial reporting.
DELOITTE & TOUCHE LLP
London, United Kingdom
February 28, 2007
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ASSETS
Current assets
Cash and cash equivalents
Restricted cash (Note 8)
Accounts receivable, net (Note 9)
Income taxes receivable
Program rights
Other current assets (Note 10)
Total current assets
Non-current assets
Investments (Note 6)
Acquisition costs (Note 4)
Property, plant and equipment, net (Note 11)
Program rights
Goodwill (Note 5)
Broadcast licenses, net (Note 5)
Other intangible assets, net (Note 5)
Other non-current assets (Note 10)
Total non-current assets
Total assets
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONSOLIDATED BALANCE SHEETS
(US$ 000’s)
December 31,
2006
December 31,
2005
(as restated, see Note 2)
145,904
4,954
152,505
3,053
59,645
47,555
413,616
19,214
-
115,805
76,638
905,580
198,730
71,942
17,475
1,405,384
1,819,000
$
$
71,658
34,172
97,396
9,930
34,914
38,856
286,926
23,936
5,118
58,897
33,081
746,583
171,591
47,658
15,060
1,101,924
1,388,850
$
$
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 12)
Duties and other taxes payable
Income taxes payable (Note 16)
Credit facilities and obligations under capital leases (Note 13)
Deferred consideration - Croatia (Note 8)
Deferred consideration - Czech Republic (Note 4)
Deferred consideration - Ukraine (Note 4)
Deferred tax (Note 16)
Total current liabilities
Non-current liabilities
Credit facilities and obligations under capital leases (Note 13)
Senior Notes (Note 7)
Income taxes payable (Note 16)
Deferred tax (Note 16)
Other non-current liabilities
Total non-current liabilities
Commitments and contingencies (Note 21)
Minority interests in consolidated subsidiaries
SHAREHOLDERS' EQUITY (Note 15):
Nil shares of Preferred Stock of $0.08 each (2005 - nil)
34,412,138 shares of Class A Common Stock of $0.08 each (2005 - 31,032,994)
6,312,839 shares of Class B Common Stock of $0.08 each (2005 - 6,966,533)
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive income / (loss)
Total shareholders’ equity
Total liabilities and shareholders’ equity
December 31,
2006
December 31,
2005
(as restated, see Note 2)
119,717
31,707
12,434
13,057
4,010
-
200
1,836
182,961
6,359
487,291
3,000
58,092
19,342
574,084
26,189
-
2,753
505
931,108
(31,730)
133,130
1,035,766
1,819,000
$
$
84,849
27,654
21,894
43,566
3,591
24,402
-
1,005
206,961
4,740
436,424
681
42,149
4,105
488,099
13,237
-
2,482
558
754,061
(52,154)
(24,394)
680,553
1,388,850
$
$
The accompanying notes are an integral part of these consolidated financial statements.
Page 99
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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 5)
Cost of revenues
Station selling, general and administrative expenses
Corporate operating costs
Impairment charge (Note 5)
Operating income
Interest income
Interest expense
Foreign currency exchange (loss) / gain, net
Change in fair value of derivatives
Other income / (expense)
Income before provision for income taxes, minority interest, equity in income of unconsolidated affiliates and
discontinued operations
Provision for income taxes (Note 16)
Income before minority interest, equity in income of unconsolidated affiliates and discontinued operations
Minority interest in income of consolidated subsidiaries
Equity in (loss) / income of unconsolidated affiliates (Note 6)
Gain on sale of unconsolidated affiliate (Note 6)
Net income from continuing operations
Discontinued operations (Note 20):
Pre-tax income from discontinued operations (Czech Republic)
Tax on disposal of discontinued operations (Czech Republic)
Net (loss) / income from discontinued operations
Net income
Currency translation adjustment, net
Total comprehensive income
For the Years Ended December 31,
2006
603,115
90,060
227,509
25,795
18,813
362,177
65,412
34,104
748
140,674
6,365
(44,228)
(44,908)
(12,539)
3,038
48,402
(14,962)
33,440
(13,602)
(730)
6,179
25,287
-
(4,863)
(4,863)
20,424
157,524
177,948
2005
(as restated, see Note 2)
400,978
$
65,138
148,837
16,367
11,180
241,522
46,382
25,547
35,331
52,196
4,124
(29,387)
37,968
-
(4,705)
2004
(as restated, see Note 2)
182,339
$
33,615
71,793
6,429
465
112,302
22,112
29,254
-
18,671
4,318
(1,203)
(574)
-
(698)
60,196
(16,691)
43,505
(8,908)
8,238
-
42,835
164
(677)
(513)
42,322
(33,354)
8,968
$
$
20,514
(11,089)
9,425
(4,106)
10,619
-
15,938
146
2,378
2,524
18,462
4,228
22,690
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
Page 100
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PER SHARE DATA (Note 18):
Net income/(loss) 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,
2006
2005
(as restated, see Note 2)
2004
(as restated, see Note 2)
$
$
0.63
0.62
(0.12)
(0.12)
0.51
0.50
$
$
1.24
1.21
(0.01)
(0.01)
1.22
1.19
$
$
40,027
40,600
34,664
35,430
0.57
0.55
0.09
0.09
0.66
0.63
27,871
29,100
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, December 31, 2003 (as restated, See
Note 2)
Stock-based Compensation
Stock options exercised
Warrants exercised
Net income
Currency translation adjustment
BALANCE, December 31, 2004 (as restated, See
Note 2)
Stock-based Compensation
Shares issued to PPF
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, 2005 (as restated, See
Note 2)
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
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(US$ 000’s)
Class A Common Stock
Class B Common Stock
Number of
shares
Par value
Number of
shares
Par value
Additional
Paid-In Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income/(Loss)
Total
Shareholders'
Equity
19,269,766 $
-
1,083,634
696,000
-
-
21,049,400 $
-
3,500,000
5,405,000
710,359
368,235
-
-
31,032,994 $
-
2,530,000
95,450
753,694
-
-
34,412,138 $
1,542
-
87
55
-
-
1,684
-
280
432
57
29
-
-
2,482
-
202
8
61
-
-
2,753
7,334,768 $
-
-
-
-
-
7,334,768 $
-
-
-
-
(368,235)
-
-
6,966,533 $
-
-
100,000
(753,694)
-
-
6,312,839 $
587 $
-
-
-
-
-
587 $
-
-
-
-
(29)
-
-
558 $
-
-
8
(61)
-
-
505 $
379,601 $
10,171
2,853
1,688
-
-
394,313 $
3,127
120,603
230,172
5,846
-
-
-
754,061 $
4,898
168,452
3,697
-
-
-
931,108 $
(112,938) $
-
-
-
18,462
-
(94,476) $
-
-
-
-
-
42,322
-
(52,154) $
-
-
-
-
20,424
-
(31,730) $
4,732 $
-
-
-
-
4,228
8,960 $
-
-
-
-
-
-
(33,354)
(24,394) $
-
-
-
-
-
157,524
133,130 $
273,524
10,171
2,940
1,743
18,462
4,228
311,068
3,127
120,883
230,604
5,903
-
42,322
(33,354)
680,553
4,898
168,654
3,713
-
20,424
157,524
1,035,766
The accompanying notes are an integral part of these consolidated financial statements.
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Page 103
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US$ 000’s)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash generated from/(used in) operating activities:
For the Years Ended December 31,
2006
2005
(as restated, see Note 2)
2004
(as restated, see Note 2)
$
20,424
$
42,322
$
18,462
(Income)/loss from discontinued operations (Note 20)
Equity in income of unconsolidated affiliates, net of dividends received
Gain on sale of unconsolidated affiliate (Note 6)
Depreciation and amortization
Impairment charge (Note 5)
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 14)
Foreign currency exchange loss / (gain), net
Net change in (net of effects of acquisitions and disposals of businesses):
Accounts receivable
Program rights
Other assets
Settlement liability (Note 12)
Other accounts payable and accrued liabilities
Income taxes payable
Deferred taxes
VAT and other taxes payable
Net cash generated from continuing operating activities
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
Partial consideration for acquisition of TV Nova (Czech Republic) group
Proceeds from partial disposal of investment
Repayment of loans and advances to related parties
License costs, other assets and intangible assets
Net cash used in continuing investing activities
4, 863
730
(6,179)
164,479
748
1,292
3,575
13,602
12,539
44,908
(42,270)
(173,345)
(6,417)
(10,007)
26,915
(1,697)
9,705
9,530
73,395
5,516
(60,387)
19
(72,603)
-
-
500
-
(126,955)
513
3,454
-
110,846
35,331
685
3,127
8,908
-
(37,968)
1,693
(110,364)
11,989
(41,606)
(13,642)
9,597
(17,271)
(4,070)
3,544
(19,521)
(26,548)
125
(35,305)
(218,054)
-
500
-
(298,803)
(2,524)
(4,340)
-
49,357
-
18
10,171
4,106
-
574
(9,100)
(45,446)
(4,912)
-
(13,611)
548
-
(888)
2,415
(10,145)
(10,808)
72
(35,800)
-
42
400
(770)
(57,009)
The accompanying notes are an integral part of these consolidated financial statements.
Page 104
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(US$ 000’s)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Senior Notes
Proceeds from credit facilities
Payment of credit facilities and capital leases
Repayment of loans from unconsolidated affiliates
Repayment of notes for acquisition of TV Nova (Czech Republic) group
Repayment of liabilities on acquisition of Galaxie Sport
Proceeds from exercise of stock options and warrants
Issuance of Class A Common Stock
Dividends paid to minority shareholders
Net cash received from financing activities
NET CASH USED IN DISCONTINUED OPERATIONS-OPERATING
NET CASH RECEIVED FROM DISCONTINUED OPERATIONS-INVESTING
Impact of exchange rate fluctuations on cash
Net increase/(decrease) 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:
Exchange of 3.5 million shares of Class A Common Stock (Note 4)
Notes taken out for acquisition of TV Nova (Czech Republic) group (Note 4)
Exchange of Other receivable (Note 4)
Purchase of Krsak interest financed with payable (Note 4)
Purchase of share of Romania operations through settlement of loans receivable (Note 4)
Acquisition of property, plant and equipment under capital lease
For the Years Ended December 31,
2006
2005
(as restated, see Note 2)
2004
(as restated, see Note 2)
-
36,681
(75,263)
-
-
-
3,713
168,654
(1,385)
132,400
(1,690)
-
(2,904)
74,246
71,658
145,904
41,038
35,831
-
-
-
27,591
-
702
$
$
$
$
$
$
$
$
$
465,120
65,902
(41,243)
(5,827)
(491,703)
(3,000)
5,903
230,604
(397)
225,359
(2,000)
-
(9,010)
(80,910)
152,568
71,658
19,402
10,066
120,883
491,703
18,541
24,683
-
4,967
$
$
$
$
$
$
$
$
$
-
-
(2,797)
-
-
-
4,683
-
-
1,886
(9,463)
20,349
2,144
(39,678)
192,246
152,568
581
18,920
-
-
-
-
3,400
333
$
$
$
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
Page 105
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, 2006, we have operations in Croatia, the Czech Republic, Romania,
the Slovak Republic, Slovenia and Ukraine.
Our principal subsidiaries, equity-accounted affiliates and cost investments as at December 31, 2006 were:
Company Name
Nova TV d.d. (“Nova TV (Croatia)”)
Operativna Kompanija d.o.o. (“OK”)
Media House d.o.o.
CME Media Investments s.r.o.
VILJA a.s. (“Vilja”)
CET 21 spol. s.r.o. (“CET 21”)
ERIKA, a.s.
MEDIA CAPITOL, a.s.
NOVA-V.I.P., a.s.
HARTIC, a.s.
Galaxie Sport s.r.o. (“Galaxie Sport”)
Media Pro International S.A. (“MPI”)
Media Vision S.R.L. (“Media Vision”)
MPI Romania B.V.
Pro TV S.A. (“Pro TV”)
Sport Radio TV Media S.R.L. (“TV Sport”)
Media Pro B.V
Media Pro Management S.A.
A.R.J., a.s. (“ARJ”)
Slovenska televizna spolocnost, s.r.o. (“STS”)
MARKIZA-SLOVAKIA, spol. s.r.o. (“Markiza”)
GAMATEX, spol. s.r.o.
A.D.A.M. a.s.
Effective
Voting Interest
Jurisdiction of Organization
Type of Affiliate (1)
Croatia
Croatia
Croatia
Czech Republic
Czech Republic
Czech Republic
Czech Republic
Czech Republic
Czech Republic
Czech Republic
Czech Republic
Romania
Romania
Netherlands
Romania
Romania
Netherlands
Romania
Slovak Republic
Slovak Republic
Slovak Republic
Slovak Republic
Slovak Republic
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
90.0%
75.0%
90.0%
90.0%
18.0%
10.0%
10.0%
100.0%
89.8%
80.0%
89.8%
89.8%
Page 106
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary (in liquidation)
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Equity-Accounted Affiliate
Cost investment
Cost investment
Subsidiary
Subsidiary
Subsidiary
Subsidiary (in liquidation)
Subsidiary (in liquidation)
Table of Contents
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Company Name
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
MTC Holding d.o.o.
International Media Services Ltd. (“IMS”)
Innova Film GmbH (“Innova”)
Foreign Enterprise “Inter-Media” (“Inter-Media”)
TV Media Planet Ltd.
Studio 1+1 LLC (“Studio 1+1”)
Ukrainian Media Services LLC
Ukrpromtorg -2003 LLC
Gravis LLC
Delta JSC
Nart LLC
TV Stimul LLC
CME Media Enterprises B.V.
CME Czech Republic II B.V.
CME Romania B.V.
Central European Media Enterprises N.V.
Central European Media Enterprises II B.V.
CME SR d.o.o.
CME Ukraine Holding GmbH
CME Cyprus Holding Ltd.
CME Development Corporation
Effective
Voting Interest
100.0%
100.0%
100.0%
100.0%
42.0%
24.0%
60.0%
60.0%
60.0%
60.0%
18.0%
99.0%
65.5%
60.4%
60.4%
65.5%
49.1%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
Jurisdiction of Organization
Type of Affiliate (1)
Slovenia
Slovenia
Slovenia
Slovenia
Slovenia
Slovenia
Bermuda
Germany
Ukraine
Cyprus
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Netherlands
Netherlands
Netherlands
Netherlands Antilles
Netherlands Antilles
Serbia
Austria
Cyprus
Delaware
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Equity-Accounted Affiliate
Equity-Accounted Affiliate (in liquidation)
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Consolidated Variable Interest Entity
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Equity-Accounted Affiliate
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
(1) All subsidiaries have been consolidated in our Consolidated 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.
(2)
For further information, see Note 3, “Summary of Significant Accounting Policies”.
Page 107
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
2. RESTATEMENT
Subsequent to the issuance of our financial statements as of and for the period ended June 30, 2006 we initiated a voluntary review of our historical stock option granting practices for the period from
1994 to 2002. Our Audit Committee conducted the review with the assistance of independent legal counsel and an independent accounting firm. The Audit Committee found certain instances of
administrative and procedural deficiencies that resulted in incorrect accounting measurement dates and other incorrect accounting, but found no evidence from which it could be concluded that the errors
were the result of deliberate or intentional misconduct. These accounting errors resulted from grants made to grantees where the list of grantees and/or shares allocated to them were not sufficiently
definitive for the grant to be deemed final as of the reported measurement date as well as from a small number of grants made to employees and non-employees that had been accounted for incorrectly.
Errors were discovered in the accounting for grants made in the period between 1994 and 1998; we believe the impact of these instances to be immaterial for each prior year and they neither relate to nor
have an impact on the current period.
However, we concluded that correcting the error in the financial statements for the year ended December 31, 2006 would be material; therefore, in accordance with SAB 108, we have restated our historic
financial statements. The restatement is immaterial to the prior years.
The restatement above had the impact on our previously presented financial information as set out below. All amounts are in US$ 000’s except per share data:
Balance Sheet (as of December 31, 2003)
Additional paid-in capital at December 31, 2003
Accumulated deficit at December 31, 2003
Balance Sheet (as of December 31, 2004)
Additional paid-in capital at December 31, 2004
Accumulated deficit at December 31, 2004
Balance Sheet (as of December 31, 2005)
Additional paid-in capital at December 31, 2005
Accumulated deficit at December 31, 2005
Statement of Operations (for the Year Ended December 31, 2004)
Corporate operating costs
Operating income
Income from continuing operations
Net income
Net income from continuing operations per share - Basic
Net income per share - Basic
As reported previously
Adjustment
As restated
$
$
$
$
372,662
(105,999)
387,305
(87,468)
746,880
(44,973)
(29,185)
18,740
16,007
18,531
0.57
0.66
$
$
6,939
(6,939)
7,008
(7,008)
7,181
(7,181)
(69)
(69)
(69)
(69)
0.00
0.00
379,601
(112,938)
394,313
(94,476)
754,061
(52,154)
(29,254)
18,671
15,938
18,462
0.57
0.66
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Statement of Operations (for the Year Ended December 31, 2005)
Corporate operating costs
Operating income
Income from continuing operations
Net income
Net income from continuing operations per share - Basic
Net income per share - Basic
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
As reported previously
Adjusted
As restated
(25,374)
52,369
43,008
42,495
1.24
1.23
(173)
(173)
(173)
(173)
0.00
0.00
(25,547)
52,196
42,835
42,322
1.24
1.22
These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.
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 also those entities which are deemed to be a Variable Interest Entity of which we are the primary
beneficiary as defined by FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (“FIN 46 (R)”). Entities in which we hold less than a majority voting interest
but over which we have the ability to exercise significant influence are accounted for using the equity method. Other investments are accounted for using the cost method.
As we are the primary beneficiary related to the rights and obligations of Studio 1+1, we consolidate Studio 1+1 in accordance with FIN 46(R). Studio 1+1 is a license and broadcasting company within our
Ukraine operations and trades with the other companies within the group.
The following table summarizes Consolidated Balance Sheet and Consolidated Statement of Operations information that we consolidate with regard to Studio 1+1:
Balance Sheet:
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Minority interest
Net Assets
Statement of Operations:
Net revenues
Operating income
Net income
December 31,
2006
December 31,
2005
22,802
5,126
(10,534)
-
(6,958)
10,436
$
$
18,475
1,315
(9,678)
(106)
(4,002)
6,004
December 31,
2006
For the year ended
December 31,
2005
83,759
11,816
4,428
$
$
62,586
12,401
5,423
$
$
December 31,
2004
43,903
6,001
2,985
$
$
$
$
Page 109
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
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 collectibility 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, collectibility 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$ 8.2 million, US$ 7.0 million and US$ 5.7 million for the years ending December 31, 2006, 2005,
and 2004, respectively.
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
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Estimated useful life
Indefinite
25 years
4 - 8 years
3 - 8 years
3 - 5 years
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
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 FAS 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.
No impairment has been recognized for any long-lived assets in 2006, 2005, or 2004.
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.
Program rights are amortized on a systematic basis over their expected useful lives, according to the number of runs of the license. The amortization percentages are as follows:
Type of programming
Special blockbuster
Films and series, 2 runs
Films and series, 3 runs
Concerts, documentaries, film about film, etc.
Run 1
30%
65%
60%
100%
Run 2
25%
35%
30%
-
Amortization %
Run 3
Run 4
20%
-
10%
-
15%
-
-
-
Run 5
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.
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.
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.
Produced program rights
Program rights that are produced are stated at the lower of cost less accumulated amortization or fair 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
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
FAS 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. Potential impairment is identified when the carrying value of a reporting unit (including its goodwill), exceeds its fair value. Goodwill impairment is measured as the excess of the carrying value of
goodwill over its implied fair value. In accordance with FAS 142, we have determined that our reporting units are the same as our operating segments, except that we consider our Ukraine operating
segment to contain two reporting units, namely Studio 1+1 and the KINO and CITI channels.
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;
· We have not experienced any historical evidence of a compelling challenge to our holding these licenses; and
· We do not foresee that the technology used to exploit these licenses will undergo significant changes in the foreseeable future.
Indefinite-lived intangible assets are not amortized, but they are evaluated for impairment on an annual basis, 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 FAS No. 109, “Accounting for Income Taxes” (“FAS 109”). 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.
Foreign Currency
Translation of financial statements
Our reporting currency and functional currency is the US dollar. The financial statements of our operations whose functional currency is other than the US dollar are translated from such functional
currency to US 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 a long-term investment in nature is accounted for in a similar manner. At December 31, 2006, a translation gain of US$ 77.3 million (December 31, 2005: a loss of US$ 17.8
million) related to intercompany financing that is a long-term investment in nature is included in Accumulated Other Comprehensive Income/(Loss).
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Transactions in foreign currencies
Gains and losses from foreign currency transactions are included in Foreign currency exchange gain/(loss), in the Consolidated Statement of Operations in the period during which they arise.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles 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.
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 charged to expense 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 Notes is included in Note 7, “Senior Notes”.
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 FAS No. 150 “Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity” and EITF No. 00-6 “Accounting for Freestanding Derivative Financial Instruments Indexed to, and Potentially Settled in the Stock of a Consolidated
Subsidiary”. Put options are recorded in the Consolidated Balance Sheet at fair value, which at December 31, 2006 is considered to be US$ nil.
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Stock-Based Compensation
On January 1, 2006, we adopted FAS No. 123(R), “Share-Based Payment” (“FAS 123(R)”), which requires the recognition of stock-based compensation at fair value, using the modified prospective
transition method. Under that method, we recognized compensation cost for the requisite service rendered in the year ended December 31, 2006, for (a) awards granted prior to, but not vested as of,
January 1, 2006, based on the grant-date fair value of those awards as calculated for either recognition or pro forma disclosures under FAS 123, Accounting for Stock-Based Compensation (“FAS 123”)
and (b) awards granted after January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of FAS 123(R). We did not restate prior periods. Our adoption of FAS 123(R)
did not have a material impact on our Consolidated Statements of Operations or Cash Flows because we had previously adopted the fair value recognition provisions of FAS 123 prospectively for
employee stock option awards granted, modified, or settled beginning January 1, 2003, as contemplated by FAS 148, “Accounting for Stock-Based Compensation - Transition & Disclosure”. Prior to
January 1, 2003, we used the intrinsic method of accounting as defined in APB 25, “Accounting for Stock Issued to Employees”.
Pro Forma Disclosures
Had compensation costs for employee stock option awards granted, modified or settled prior to January 1, 2003 been determined consistent with the fair value approach required by FAS 123(R) for the
year ended December 31, 2006, using the Black-Scholes option pricing model with the assumptions as estimated on the date of each grant, our net income and net income per common share would change
on a pro forma basis as follows:
Net income
Add: Stock-based compensation expense included in reported net income, net of
related tax effects
Deduct: Total stock-based compensation expense determined under fair value based
method for all awards, net of related tax effects
As Reported
As Reported
Pro Forma Expense
Net income
Net income per share - Basic:
Net income per share - Diluted:
Contingencies
Pro Forma
As Reported
Pro Forma
As Reported
Pro Forma
For the Years Ended December 31,
2005
42,322
$
3,127
(3,196)
42,253
1.22
1.22
1.19
1.19
$
$
$
$
$
2004
18,462
10,171
(10,384)
18,249
0.66
0.65
0.63
0.63
$
$
$
$
$
$
Contingencies are recorded in accordance with FAS No. 5, “Accounting for Contingencies” (“FAS 5”). 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.
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.
During 2003, we disposed of our former operations in the Czech Republic; all results of this disposal have been treated as discontinued operations (see Note 20, “Discontinued Operations”).
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense incurred for the years ending December 31, 2006, 2005 and 2004 totaled US$ 10.2 million, US$ 6.6 million and US$ 2.6 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.
Recent Accounting Pronouncements
In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, “Accounting for Changes and Error Corrections” (“FAS 154”), which replaces APB Opinion No. 20 “Accounting
Changes” (“APB 20”), and Statement of Financial Accounting Standards No. 3, “Reporting Accounting Changes in Interim Financial Statements”, and changes the requirements for the accounting for
and reporting of a change in accounting principle. APB 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change
the cumulative effect of changing to the new accounting principle. FAS 154 requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest
period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings for that period rather than being reported in the income
statement. We adopted the provisions of FAS 154 on January 1, 2006 and it did not have a material impact on our financial position or results of operations.
In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for
uncertainty in tax positions. The evaluation of a tax position under FIN 48 is a two-step process. The first step is recognition: Tax positions taken or expected to be taken in a tax return should be
recognized only if those positions are more likely than not to be sustained upon examination, based on the technical merits of the position. In evaluating whether a tax position has met the more likely
than not recognition threshold, it should be presumed that the position will be examined by the relevant taxing authority that would have full knowledge of all relevant information. The second step is
measurement: Tax positions that meet the recognition criteria are measured at the largest amount of benefit that is greater than 50 percent likely of being recognized upon ultimate settlement.
FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December
15, 2006 and we will adopt it in the first quarter of the year beginning January 1, 2007. We are currently assessing FIN 48 and we expect the adoption of FIN 48 to have the following impact on our financial
position and results of operations:
An increase in non-current liabilities in the consolidated Balance Sheet and a corresponding reduction in retained earnings of between US$ 0.0 million and US$ 2.0 million as a result of the recognition
of unrecognized tax benefits recorded following the adoption of FIN 48. In addition an increase in non-current liabilities of between US$ 0.0 million and US$ 2.0 million and a corresponding reduction in
retained earnings as a result of the recognition of estimated interest and penalties recorded following the adoption of FIN 48.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 addresses the need for increased consistency in fair value
measurements, defining fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also
establishes a framework for measuring fair value and expands disclosure requirements. FAS 157 is effective for us beginning January 1, 2008. We are currently evaluating the impact of the adoption of
FAS 157 on our financial position and results of operations.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108 Section N to Topic 1, “Considering the Effects of Prior Year Misstatements in Current Year Financial Statements” (“SAB 108”). SAB
108 requires the evaluation of prior-year Misstatements using both the balance sheet approach and the income statement approach. In the initial year of adoption, should either approach result in
quantifying an error that is material in light of quantitative and qualitative factors, SAB 108 guidance allows for a one-time cumulative-effect adjustment to opening retained earnings. In years subsequent
to adoption, previously undetected misstatements deemed material shall result in the restatement of previously issued financial statements in accordance with Statement of Financial Accounting
Standards No. 154 “Accounting changes and error corrections”. We adopted SAB 108 in the third quarter of 2006 and concluded that there was no impact of adoption.
In February 2007, the FASB issued Statement No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("FAS 159"). FAS 159 gives entities the option to prospectively measure many
financial instruments and certain other items at fair value in the balance sheet with changes in the fair value recognized in the income statement. FAS 159 is effective for fiscal years beginning after
November 15, 2008, although entities electing to adopt the statement early, which is permissible for us from January 1, 2007, may designate certain items retrospectively. We are currently evaluating the
impact of adoption on our financial position and results of operations.
4. ACQUISITIONS AND DISPOSALS
Czech Republic
On April 3, 2006, the Czech Republic Media Council approved the transfer of the 1.25% interest in CET 21 held by Ceska Sporitelna, a.s. to Vilja and the transfer of the 1.25% interest in CET 21 held by
CEDC to PPF (Cyprus) Ltd. (“PPF”). On May 5, 2006 the Czech Republic Media Council approved the transfer of the PPF interest to Vilja and on May 16, 2006, Vilja acquired such interest after fulfillment
of all conditions precedent set forth in the relevant transfer agreement. We now have a voting and economic interest in CET 21 of 100%. Both of these transactions took place for nominal consideration.
On May 26, 2006, following the registration of our subsidiary CME Media Enterprises B.V. as the owner of 16.67% of CET 21, formerly owned by Peter Krsak, we paid the final CZK 600.0 million
(approximately US$ 27.3 million at the payment date) instalment of the consideration due to Mr. Krsak. This amount had been held in escrow, and disclosed in restricted cash (see Note 8 “Restricted
Cash”) since May 27, 2005, with a corresponding amount reported as deferred consideration.
2005 Acquisition - TV Nova
On May 2, 2005, we acquired 85% of the interest of PPF (Cyprus) Ltd (“PPF”) in the TV Nova (Czech Republic) group. Consideration for this acquisition was approximately US$ 630.3 million, including the
incurrence of US$ 491.7 million of interim indebtedness to PPF (which was repaid in cash on May 5, 2005), the issuance of 3.5 million unregistered shares of our Class A Common Stock (US$ 120.9 million)
and forgiveness of a US$ 18.5 million balance categorized as “Other Receivable” within “Other Current Assets” in our Consolidated Balance Sheet as at December 31, 2004. The 3.5 million shares of Class
A Common Stock issued were valued at US$ 34.538 per share, which was determined as the average of our share price over a reasonable period of time before and after the terms of the acquisition were
agreed and announced. The final purchase price was reduced by US$ 0.7 million following a post-completion audit for changes in the level of working capital and indebtedness from the time we entered
into a framework agreement with PPF on December 13, 2004 to May 2, 2005.
On May 27, 2005, we acquired from Peter Krsak his 16.67% interest in CET 21, which holds the national terrestrial broadcast license for TV NOVA in the Czech Republic, for CZK 1.2 billion (approximately
US$ 49.4 million at the date of acquisition). The purchase price was payable in two installments: one half of the consideration was paid on May 27, 2005 and the second installment of CZK 0.6 billion
(approximately US$ 27.6 million at the date of payment) was paid on May 26, 2006.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Following the exercise of our call option, we acquired from PPF its remaining 15% interest in the TV Nova (Czech Republic) group for cash consideration of approximately US$ 216.4 million on May 31,
2005.
We completed a fair value exercise to allocate the purchase price to the acquired assets and liabilities, and identified separately identifiable intangible assets. The following table summarizes the fair values
of the assets acquired and liabilities assumed at the date of acquisition:
Cash
Receivables
Property, plant and equipment
Program library
Intangible assets subject to amortization (1)
Intangible assets not subject to amortization (2)
Goodwill
Other assets
Liabilities
Deferred tax liability
Minority interest
Total purchase price (3)
Fair Value on
Acquisition
35,592
56,832
17,379
26,937
178,054
17,979
723,503
23,562
(122,249)
(45,933)
(2,200)
909,456
$
$
(1) The intangible assets subject to amortization comprise approximately US$ 11.9 million in customer relationships, which are being amortized over five to fourteen years (weighted average: 12.4 years),
US$ 0.6 million of customer backlog (fully amortized in 2005) and approximately US$ 165.6 million relating to the acquired television broadcast license, which is being amortized over twelve years.
(2) Intangible assets not subject to amortization relate to the ‘TV NOVA’ trade name.
(3) Total purchase price includes US$ 13.3 million of capitalized acquisition costs.
As of December 31, 2004 we had accrued US$ 10.8 million of acquisition costs (principally fees relating to legal and accounting diligence and mergers and acquisitions advisory services) in relation to the
acquisition of the TV Nova (Czech Republic) group. As of December 31, 2005, all acquisition costs were charged to goodwill following the acquisition of the TV Nova (Czech Republic) group.
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Our Consolidated Statement of Operations reflects the increased interest expense and amortization charges resulting from the acquisition of 85% of the TV Nova (Czech Republic) group on May 2, 2005,
the Krsak interest on May 27, 2005 and 15% of the TV Nova (Czech Republic) group on May 31, 2005. On an unaudited pro-forma basis, assuming that these acquisitions had occurred at the beginning of
2005 or 2004, our Consolidated Statements of Operations would have been as follows:
Pro-forma (unaudited)
Net revenues
Net income from continuing operations
Net income
Per Share Data:
Net income - Basic
Net income - Diluted
For the Years Ended December 31,
2005
483,102
60,839
60,326
1.60
1.57
$
$
$
2004
390,139
36,153
38,677
1.05
1.02
$
$
$
The pro-forma net income for each period presented reflects all costs relating to the Senior Notes issued to finance the acquisition of the TV Nova (Czech Republic) group and the Krsak interest. The
earnings per share calculation reflects the increase in the number of shares issued relating to these acquisitions.
The primary reason for the purchase of the TV Nova (Czech Republic) group and the main factor that contributed to a purchase price that results in the recognition of goodwill was the opportunity for us
to secure a significant broadcasting asset at a favorable valuation. Adding the leading broadcaster of one of the larger Central and East European markets to our portfolio of stations and channels
doubled our size and substantially enhanced our cash-flows, confirming our position as the dominant broadcaster in the region. Ownership of a significant asset such as the TV Nova (Czech Republic)
group creates a solid base for further expansion when opportunities arise.
2005 Acquisition - Galaxie Sport
On September 1, 2005, CP 2000 (which was subsequently merged into CME Media Services) acquired 100% of Galaxie Sport s.r.o. from PPF for consideration of CZK 49.5 million (approximately US$ 2.1
million at the time of acquisition) and the settlement of shareholder loans of CZK 69.2 million (approximately US$ 3.0 million at the time of acquisition). Galaxie Sport holds a satellite and cable broadcasting
license in the Czech Republic and the Slovak Republic for the sports cable channel GALAXIE SPORT.
We completed a fair value exercise to allocate the purchase price to the acquired assets and liabilities, and identified separately identifiable intangible assets. In accordance with FAS No. 141, “Business
Combinations (“FAS 141”), we allocated US$ 0.4 million of the purchase price to trademarks, which were assigned an indefinite life, and recognized a deferred tax liability arising from this asset. After
allocating the purchase price to all acquired assets, liabilities and intangible assets, US$ 3.8 million of goodwill remained.
Romania
Acquisition of additional interest - Pro TV, MPI and Media Vision
On February 17, 2006, we purchased an additional 5.0% of Pro TV, MPI and Media Vision from Adrian Sarbu, the general director of our Romania operations, for consideration of US$ 27.2 million. We now
own a 90.0% voting and economic interest in Pro TV and MPI and a 75.0% voting and economic interest in Media Vision. We completed 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:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Intangible assets subject to amortization (1)
Intangible assets not subject to amortization (2)
Goodwill
Deferred tax liability
Minority interest
Total purchase price
Fair Value on
Acquisition
$
$
4,655
12,947
11,376
(2,816)
1,038
27,200
(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$ 6.5 million in trademarks and US$ 6.5 million relating to television broadcast licenses.
Mr. Sarbu has the right to sell his remaining 10.0% shareholding in 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. A put option of 5.21% of this 10.0% shareholding is exercisable from November 12, 2009 for a twenty-year period thereafter. Mr.
Sarbu’s right to put the remaining 4.79% shareholding is also exercisable from November 12, 2009, provided that we have not enforced a pledge over this 4.79% shareholding which Mr. Sarbu granted as
security for our right to put our 10.0% in Media Pro to him. For more information, see Item 8, Note 6, “Investments”. As at December 31, 2006, we consider the fair value of this put option to be
approximately US$ nil.
2005 Acquisition of additional interest - MPI and Pro TV
On February 28, 2005, we acquired from Mr. Sarbu a 2% voting and economic interest in MPI and Pro TV for aggregate consideration of US$ 5.0 million. Following this transaction we owned a voting and
economic interest in MPI and Pro TV of 82%. The purchase price was agreed based on a multiple of MPI and Pro TV’s earnings. In accordance with FAS 141, we allocated US$ 1.2 million to broadcast
licenses, US$ 0.9 million to trademarks and US$ 0.2 million to customer relationships. We recognized a corresponding deferred tax liability on the tax basis difference arising from these assets. Both
trademarks and broadcast licenses were assigned an indefinite life, while customer relationships were deemed to have a remaining economic useful life of, and are being amortized on a straight-line basis
over, eight years. An amount of US$ 2.9 million was recognized as goodwill.
On July 29, 2005, we acquired from Mr. Sarbu a 3% voting and economic interest in MPI and Pro TV for aggregate consideration of US$ 15.0 million. Following this transaction we held a voting and
economic interest in MPI and Pro TV of 85%. The purchase price was finalized during July 2005 based on a multiple of MPI and Pro TV's future earnings. In accordance with FAS 141, we allocated US$ 3.0
million of the purchase price to broadcast licenses, US$ 2.8 million to trademarks and US$ 2.3 million to customer relationships. We recognized a corresponding deferred tax liability on the tax basis
difference arising from these assets. Both trademarks and broadcast licenses were assigned an indefinite life, while customer relationships were deemed to have a remaining economic useful life of, and are
amortized on a straight-line basis over, eight years. An amount of US$ 8.0 million was recognized as goodwill.
Slovak Republic
Acquisition - A.R.J., a.s.
On January 23, 2006, we completed the acquisition of a controlling interest in Markiza, the license-holding company for MARKIZA TV, by purchasing 100.0% of the share capital of ARJ. ARJ owns 46.0%
of the voting rights in Markiza.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
This acquisition consisted of our acquiring a 34.0% interest in ARJ from Pavol Rusko for total consideration of SKK 575.0 million (approximately US$ 18.5 million at the date of acquisition) of which SKK
494.0 million (US$ 15.9 million at the date of acquisition) was paid on closing and SKK 81.0 million (US$ 2.6 million at the date of acquisition) was paid on April 25, 2006. In addition, we acquired the
remaining 66.0% in ARJ from Media Partners s.r.o. and Salis s.r.o. for consideration of approximately US$ 11.0 million, of which EUR 7.0 million (approximately US$ 8.5 million at the date of acquisition) was
paid on closing and SKK 78.0 million (approximately US$ 2.5 million at the date of acquisition) was paid on May 2, 2006.
As of January 23, 2006, we held an 80.0% voting interest in Markiza and an 89.8% voting interest in STS and increased our economic interest in our Slovak Republic operations from 70.0% to 80.0%. The
remaining minority interests in Markiza are held by our partners Jan Kovacik and Milan Fil’o through Media Invest s.r.o. Markiza and STS have been consolidated from the date of acquisition of ARJ. STS
was merged into Markiza on January 1, 2007.
We completed 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:
Property, plant and equipment
Program library
Other assets
Intangible assets subject to amortization (1)
Intangible assets not subject to amortization (2)
Goodwill
Deferred tax liability
Total purchase price (3)
Fair Value on
Acquisition
$
$
870
185
733
8,128
530
21,288
(1,893)
29,841
(1) The intangible assets subject to amortization comprise approximately US$ 7.2 million in customer relationships, which are being amortized over three to fourteen years (weighted average: 13.8 years),
and US$ 0.9 million relating to television broadcast licenses, which are being amortized over fourteen years.
(2) Intangible assets not subject to amortization comprise trademarks.
(3) Total purchase price includes US$ 0.3 million of capitalized acquisition costs.
Slovenia
2005 Acquisition of additional interest - Pro Plus
On June 24, 2005, we acquired from Marijan Jurenec, director of our Adriatic regional operations, his remaining 3.15% interest in Pro Plus for Euro 4.7 million (approximately US$ 5.7 million at the date of
acquisition). The purchase price was determined with reference to the put option agreement we entered into with Mr. Jurenec in January 2003. Following this transaction we own a voting and economic
interest in Pro Plus of 100%. We allocated US$ 2.5 million of the purchase price to broadcast licenses and US$ 0.5 million to trademarks. We recognized a corresponding deferred tax liability of US$ 0.7
million on the tax basis difference arising from these assets. Both trademarks and broadcast licenses were assigned an indefinite life. An amount of US$ 2.3 million was recognized as goodwill.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Ukraine
Acquisition - Ukrpromtorg-2003 LLC
On January 11, 2006, we completed the acquisition of a 65.5% interest in Ukrpromtorg-2003 LLC (“Ukrpromtorg”), which owns 92.2% of Gravis LLC, the operator of the GRAVIS television channel in Kiev,
as well as two other local channels in Ukraine, for consideration of approximately US$ 7.4 million including acquisition costs. US$ 5.1 million of the consideration was paid in 2005 and reported as
acquisition costs on the consolidated balance sheet as at December 31, 2005, US$ 2.0 million was paid during 2006. The remainder of the purchase price was outstanding at December 31, 2006.
We completed 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:
Property, plant and equipment
Intangible assets subject to amortization (1)
Other assets
Goodwill
Deferred tax liability
Other liabilities
Total purchase price (2)
Fair Value on
Acquisition
$
$
2,615
968
239
4,627
(724)
(373)
7,352
(1) The intangible assets subject to amortization comprise approximately US$ 0.6 million relating to television broadcast licenses, which are being amortized over nine years, approximately US$ 0.3 million
relating to a favorable lease contract, which is being amortized over 19 years, and approximately US$ 0.1 million relating to order backlog, which was amortized during the year.
(2) Total purchase price includes US$ 0.4 million of capitalized acquisition costs.
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(Tabular amounts in US$ 000’s, except share data)
5. GOODWILL AND INTANGIBLE ASSETS
Our goodwill and intangible asset additions are the result of acquisitions in Croatia, the Czech Republic, Romania, the Slovak Republic, Slovenia and Ukraine (see Note 4, “Acquisitions and Disposals”).
No goodwill is expected to be deductible for tax purposes.
Goodwill:
Goodwill by operating segment as at December 31, 2006, 2005, and 2004 is summarized as follows:
Croatia
Czech Republic
Romania
Slovakia
Slovenia
Ukraine (STUDIO 1+1)
Total
Croatia
Czech Republic
Romania
Slovakia
Slovenia
Ukraine (STUDIO 1+1)
Ukraine (KINO, CITI)
Total
Balance
Dec 31, 2004
Additions
Allocation /
Adjustment (1)
Impairment charge
(2)
Foreign currency
movement
Balance
Dec 31, 2005
31,446 $
-
8,826
-
14,724
4,096
59,092 $
- $
727,282
10,928
-
2,300
-
740,510 $
(18,817) $
-
-
-
-
-
(18,817) $
(9,706) $
-
-
-
-
-
(9,706) $
(2,228) $
(20,332)
-
-
(1,936)
-
(24,496) $
695
706,950
19,754
-
15,088
4,096
746,583
Balance
Dec 31, 2005
Additions
Allocation /
Adjustment (1)
Impairment charge
(2)
Foreign currency
movement
Balance
Dec 31, 2006
695 $
706,950
19,754
-
15,088
4,096
-
746,583 $
- $
-
11,376
21,288
-
-
4,627
37,291 $
- $
(7,580)
-
-
-
-
-
(7,580) $
(748) $
-
-
-
-
-
-
(748) $
53 $
124,416
-
4,195
1,370
-
-
130,034 $
-
823,786
31,130
25,483
16,458
4,096
4,627
905,580
$
$
$
$
(1) At the year end, we had not completed our purchase price allocation, and the excess of the purchase price over the net book value was preliminarily allocated to goodwill. After we completed our
fair value exercise, part of this balance was allocated to other asset and liability accounts.
(2) When we updated our medium-term forecast models at June 30, 2006 and 2005, we determined that the forecast future cash flows of our Croatia operations had decreased compared to our previous
forecast. In such circumstances, SFAS 142 “Goodwill and Other Intangible Assets” requires that the carrying value of the intangible assets with indefinite lives are compared to their fair value to
determine whether an impairment exists. If an asset is determined to be impaired, the loss is measured as the excess of the carrying value over the fair value. As a result of our analysis, we
recognized an impairment charge of US$ 0.7 million (2005: US$ 9.7 million) relating to goodwill. A further impairment charge relating to other Long-Lived Assets was not deemed necessary under
the requirements of SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Broadcast licenses:
The net book value of our broadcast licenses as at December 31, 2006, 2005, and 2004 is summarized as follows:
Balance, December 31, 2004
Additions
Allocation (1)
Amortization
Impairment charge (2)
Foreign currency movements
Balance, December 31, 2005
Additions
Amortization
Foreign currency movements
Balance, December 31, 2006
Indefinite-lived
broadcast licenses
Amortized broadcast
licenses
$
$
$
13,400
6,639
18,654
-
(18,604)
(1,153)
18,936
6,475
-
933
26,344
$
$
$
1,175
165,576
-
(9,316)
-
(4,780)
152,655
9,033
(15,758)
26,456
172,386
$
$
$
Total
14,575
172,215
18,654
(9,316)
(18,604)
(5,933)
171,591
15,508
(15,758)
27,389
198,730
(1) At the year end, we had not completed our purchase price allocation, and the excess of the purchase price over the net book value was preliminarily allocated to goodwill. After we completed our
fair value exercise, part of this balance was allocated to other asset and liability accounts.
(2) When we updated our medium-term forecast models at June 30, 2006 and 2005, we determined that the forecast future cash flows of our Croatia operations had decreased compared to our previous
forecast. In such circumstances, SFAS 142 “Goodwill and Other Intangible Assets” requires that the carrying value of the intangible assets with indefinite lives are compared to their fair value to
determine whether an impairment exists. If an asset is determined to be impaired, the loss is measured as the excess of the carrying value over the fair value. As a result of our analysis, we
recognized an impairment charge of US$ 18.6 million relating to broadcast licenses. A further impairment charge relating to other Long-Lived Assets was not deemed necessary under the
requirements of SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”.
With the exception of our broadcast licenses in the Czech Republic, the Slovak Republic and Ukraine, our broadcast licenses primarily have indefinite lives and are subject to annual impairment reviews.
The licenses in Ukraine have economic useful lives of, and are amortized on a straight-line basis over, between seven and ten 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 life of, and is amortized on a straight-line basis over, thirteen years.
The gross value and accumulated amortization of amortized broadcast licenses was as follows at December 31, 2006 and 2005:
Gross value
Accumulated amortization
Total net book value
Page 123
December 31,
2006
December 31,
2005
$
$
201,994
(29,608)
172,386
$
$
163,628
(10,973)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Other intangible assets:
The net book value of our other intangible assets as at December 31, 2006, 2005, and 2004 is summarized as follows:
Balance, December 31, 2004
Additions/Allocations (1)
Amortization
Impairment charge (2)
Foreign currency movements
Balance, December 31, 2005
Additions
Amortization
Foreign currency movements
Balance, December 31, 2006
Trademarks Customer relationships
Other
$
$
$
10,519
30,015
-
(7,021)
(953)
32,560
7,695
-
3,771
44,026
$
$
$
2,237
14,921
(1,864)
-
(196)
15,098
11,975
(2,941)
3,081
27,213
$
$
$
-
-
-
-
-
-
817
(114)
-
703
$
$
$
Total
12,756
44,936
(1,864)
(7,021)
(1,149)
47,658
20,487
(3,055)
6,852
71,942
(1) At the year end, we had not completed our purchase price allocation, and the excess of the purchase price over the net book value was preliminarily allocated to goodwill. After we completed our
fair value exercise, part of this balance was allocated to other asset and liability accounts.
(2) When we updated our medium-term forecast models at June 30, 2006 and 2005, we determined that the forecast future cash flows of our Croatia operations had decreased compared to our previous
forecast. In such circumstances, SFAS 142 “Goodwill and Other Intangible Assets” requires that the carrying value of the intangible assets with indefinite lives are compared to their fair value to
determine whether an impairment exists. If an asset is determined to be impaired, the loss is measured as the excess of the carrying value over the fair value. As a result of our analysis, we
recognized an impairment charge of US$ 7 million relating to trademarks. A further impairment charge relating to other Long-Lived Assets was not deemed necessary under the requirements of
SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”.
Customer relationships are deemed to have an economic useful life of and are amortized on a straight-line basis over between five and fourteen years. Trademarks have an indefinite life.
The gross value and accumulated amortization of customer relationships was as follows at December 31, 2006 and 2005:
Gross value
Accumulated amortization
Total net book value
December 31,
2006
December 31,
2005
$
$
31,852
(4,639)
27,213
$
$
17,038
(1,940)
15,098
The estimated total annual amortization expense for our existing amortized broadcast licenses and customer relationships will be approximately US$ 20 million for 2007 and for each of the years 2008 - 2011.
Impairment
In the year ended December 31, 2006, we recognized an impairment charge of US$ 0.7 million with respect to our Croatia operations.
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(Tabular amounts in US$ 000’s, except share data)
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.
We performed a similar review of our Croatia operations in late June 2005 and recorded an impairment charge of US$ 35.3 million at that time, of which US$ 18.6 million was attributable to the broadcast
license, US$ 7.0 million to trademarks and US$ 9.7 million to goodwill. Included in the provision for income taxes for the year ended December 31, 2005 is a US$ 5.1 million credit representing a release of
deferred tax relating to the impairment charge on the license and trademark.
6. INVESTMENTS
We hold the following investments in unconsolidated affiliates:
STS
Radio Pro
Media Pro
TV Sport
STS
Type of Affiliate
Effective
Voting interest
December 31,
2006
December 31,
2005
Equity-Accounted Affiliate
Equity-Accounted Affiliate
Cost Method Investment
Equity-Accounted Affiliate
49%
Various
10%
18%
$
$
-
-
16,569
2,645
19,214
$
$
23,886
50
-
-
23,936
Our share of income from Unconsolidated Affiliates in respect of STS (MARKIZA TV) was US$ (0.7) million, US$ 8.2 million and US$ 10.4 million for the years ended December 31, 2006, 2005 and 2004,
respectively. In the years ended December 31, 2006, 2005 and 2004 we received dividends of US$ 11.8 million, US$ 11.7 million and US$ 6.3 million, respectively, from STS (MARKIZA TV). On January 23,
2006, we acquired control of STS through our purchase of ARJ and consequently STS is accounted for as a consolidated subsidiary from that date.
The following is a summary of significant balance sheet and income statement items of STS (MARKIZA TV) at December 31 2005, and for the years ending December 31, 2005 and 2004:
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Minority interest
Net Assets
Net revenues
Operating income
Net income
Currency translation adjustment
STS (MARKIZA TV)
December 31, 2005
$
$
STS (MARKIZA TV)
For the Years Ended December 31,
$
$
2005
64,266
14,641
11,771
(3,226)
$
$
23,261
18,612
(12,673)
(125)
(635)
28,440
2004
61,576
15,790
13,868
4,760
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Radio Pro and Media Pro
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 Adrian Sarbu, the general director of our Romania operations
for consideration of US$ 0.04 million with a resulting loss on disposal of US$ 0.02 million. The consideration was determined by an independent valuation of Radio Pro.
On August 11, 2006 we acquired a 10.0% interest in Media Pro which is accounted for using the cost method. The remaining 90% of Media Pro is held by Adrian 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.
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$ 16.5 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 4,
“Acquisitions and Disposals, Romania”. On acquisition, we determined the fair value of this put option to be US$ nil.
TV Sport
On December 14, 2006 we acquired 20.0% of TV Sport from Silviu Prigoana for cash consideration of Euro 2.0 million (US$ 2.6 million). TV Sport is a male sports-oriented channel focusing on local and
international football, international boxing and a number of local Romanian sports.
7. SENIOR NOTES
Our Senior Notes consist of the following:
Eur 245.0 million 8.25% Senior Notes
Eur 125.0 million floating rate Senior Notes
Carrying value
Fair value
December 31,
2006
December 31,
2005
December 31,
2006
December 31,
2005
$
$
322,666
164,625
487,291
$
$
288,984
147,440
436,424
$
$
353,722
170,181
523,903
$
$
323,737
156,324
480,061
On May 5, 2005, we issued Senior Notes in the aggregate principal amount of Eur 370.0 million consisting of Eur 245.0 million of 8.25% Senior Notes due May 2012 and Eur 125.0 million of floating rate
Senior Notes due May 2012, which bear interest at six-month Euro Inter-Bank Offered Rate (“EURIBOR”) plus 5.50% (9.23% at December 31, 2006). Interest is payable semi-annually in arrears on each
May 15 and November 15, commencing November 15, 2005. The fair value of the Senior Notes as at December 31, 2006 and December 31, 2005 was calculated by multiplying the outstanding debt by the
traded market price.
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 those subsidiaries and an assignment of certain contractual rights. The terms
of our indebtedness 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
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.
The Senior 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
Eur 245.0 million 8.25%
Senior Notes
Redemption Price
From:
104.125%
102.063%
100.000%
May 15, 2007 to May 14, 2008
May 15, 2008 to May 14, 2009
May 15, 2009 and thereafter
Eur 125.0 million floating
rate Senior Notes
Redemption Price
102.000%
101.000%
100.000%
In addition, at any time prior to May 15, 2008, we may redeem up to 35.0% of the fixed rate notes with the proceeds of any public equity offering at a price of 108.250% of the principal amount of such
notes, plus accrued and unpaid interest, if any, to the redemption date.
In addition, 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 Senior Notes but as they are
considered clearly and closely related to the Senior Notes, they are not accounted for separately.
8. RESTRICTED CASH
Restricted cash consists of the following at December 31, 2006 and 2005:
Czech Republic
Croatia
Directors’ and officers’ insurance
Other
Total restricted cash
December 31,
2006
-
4,183
-
771
4,954
$
$
December 31,
2005
24,554
3,640
5,285
693
34,172
$
$
The restricted cash balances in Czech Republic and Croatia at December 31, 2005 represented amounts held in escrow that are payable to certain former owners of our businesses in those countries. The
amount due to one of the former owners of our Czech Republic operations was paid on May 26, 2006 and the amount due to the former owners of our Croatia operations remains payable at December 31,
2006. Directors’ and officers’ insurance related to a balance held in a captive insurance company to underwrite a part of our directors’ and officers’ insurance program that was no longer required under
the program in 2006.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
9. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at December 31, 2006 and 2005:
Trading:
Third-party customers
Less: allowance for bad debts and credit notes
Related parties
Less: allowance for bad debts and credit notes
Total trading
Other:
Third-party customers
Less: allowance for bad debts and credit notes
Related parties
Less: allowance for bad debts and credit notes
Total other
Total accounts receivable
December 31,
2006
December 31,
2005
$
$
$
$
$
156,701
(11,472)
7,655
(798)
152,086
359
(103)
454
(291)
419
152,505
$
$
$
$
$
103,921
(8,612)
2,034
(265)
97,078
257
(83)
434
(290)
318
97,396
Bad debt expense for the years ending December 31, 2006, 2005 and 2004 was US$ 2.0 million, US$ 1.8 million and US$ 0.3 million, respectively.
At December 31, 2006, CZK 600.0 million (approximately US$ 28.7 million) (2005: CZK 516.7 million, approximately US$ 21.0 million at December 31, 2005) of receivables in the Czech Republic were pledged
as collateral subject to a factoring agreement (see Note 13, “Credit Facilities and Obligations Under Capital Leases”).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
10. OTHER ASSETS
Other current and non-current assets consist of the following at December 31, 2006 and 2005:
Current:
Prepaid programming
Other prepaid expenses
Deferred tax (Note 16)
VAT recoverable
Loan to related party (Note 22)
Capitalized debt costs
Assets held-for-sale
Other
Total other current assets
Non-current:
Capitalized debt costs
Loan to related party (Note 22)
Deferred tax (Note 16)
Other
Total other non-current assets
December 31,
2006
December 31,
2005
23,072
13,177
2,124
2,562
600
2,908
-
3,112
47,555
11,264
1,603
3,443
1,165
17,475
$
$
$
$
17,534
6,009
3,025
7,888
600
2,250
341
1,209
38,856
11,618
1,910
779
753
15,060
$
$
$
$
Capitalized debt costs primarily comprise the costs incurred in connection with the issuance of our Senior Notes in May 2005 (see Note 7, “Senior Notes”), and are being amortized over the term of the
Senior Notes using the effective interest method. The assets held-for-sale at December 31, 2005, related to land and buildings in our Croatia operations.
11. PROPERTY, PLANT & EQUIPMENT
Property, plant and equipment consists of the following at December 31, 2006 and 2005:
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,
2006
December 31,
2005
52,212
115,238
21,980
15,495
4,070
212,995
(97,190)
115,805
5,541
2,330
7,871
(1,877)
5,994
$
$
$
$
17,548
72,017
20,447
8,360
5,180
123,552
(64,655)
58,897
4,980
1,434
6,414
(1,167)
5,247
$
$
$
$
For further information on capital leases, see Note 13, “Credit Facilities and Obligations under Capital Leases”.
Depreciation expense for the years ending December 31, 2006, 2005 and 2004 was US$ 26.6 million, US$ 16.7 million and US$ 6.4 million, respectively. This includes corporate depreciation expense for the
years ending December 31, 2006, 2005 and 2004 of US$ 0.8 million, US$ 0.4 million and US$ 0.1 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)
12. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following at December 31, 2006 and 2005:
Accounts payable
Programming liabilities
Deferred income
Settlement liability
Accrued staff costs
Accrued production costs
Accrued interest payable
Accrued legal costs
Accrued rent costs
Other accrued liabilities
Total accounts payable and accrued liabilities
December 31,
2006
47,447
32,316
3,212
-
12,947
7,435
5,375
3,619
1,163
6,203
119,717
$
$
December 31,
2005
21,533
18,891
7,202
10,007
9,402
5,882
4,483
3,620
82
3,747
84,849
$
$
The settlement liability represents an amount owed by CET 21 under a settlement agreement among CET 21, Ceska nezavisla televizni spolecnost (“CNTS”) and the PPF Group dated December 19, 2003
following a mediation. This liability was assumed as part of the TV Nova (Czech Republic) group acquisition and was fully repaid in January 2006.
The accrued interest payable balance relates primarily to interest calculated on our Senior Notes (see Note 7, “Senior Notes”).
13. CREDIT FACILITIES AND OBLIGATIONS UNDER CAPITAL LEASES
Group loan obligations and overdraft facilities consist of the following at December 31, 2006 and 2005:
Credit facilities:
Corporate
Croatia operations
Czech Republic operations
Slovenia operations
Ukraine operations
Total credit facilities
Capital leases:
Croatia operations, net of interest
Czech Republic 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
(a)
(b)
(c) - (e)
(f)
(g)
December 31,
2006
December 31,
2005
-
847
11,975
-
1,703
14,525
19
-
495
154
4,223
4,891
19,416
(13,057)
6,359
$
$
$
$
$
$
-
1,135
42,703
-
-
43,838
132
6
290
-
4,040
4,468
48,306
(43,566)
4,740
$
$
$
$
$
$
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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$ 131.7 million) arranged by the European Bank for Reconstruction and Development (the
“Loan”). ING Bank N.V. (“ING”) and Ceska Sporitelna, a.s. (“CS”) are participating in the facility for up to EUR 50.0 million in aggregate. Initial drawings up to EUR 100.0 million will be used for certain
specified projects in Central and Eastern Europe.
The Loan bears interest at a rate of three-month EURIBOR plus 2.75% on the drawn amount. The available amount of the Loan amortizes by 7.5% every six months from May 2008 to November 2009, then
by 15% in May 2010 and November 2010, and by 40% in May 2011.
Covenants contained in the Loan are in line with those contained in our Senior Notes (see Note 7, “Senior Notes”). In addition, the Loan’s covenants restrict us from making principal repayments on other
debt of greater than US$ 20.0 million per year for the life of the Loan. This restriction is not applicable to our existing facilities with ING or CS or to any refinancing of our Senior Notes.
The 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 certain of our subsidiaries and is secured by a pledge of shares of those subsidiaries and an assignment of certain contractual
rights. The terms of the 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.
There were no drawings under this facility as at December 31, 2006.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Croatia
(b) A total of EUR 0.6 million (approximately US$ 0.8 million) was drawn down under two agreements our Croatia operations have with Hypo Alpe-Adria-Bank d.d. These loans bear a variable interest rate
of three-month EURIBOR plus 2.50% and are repayable in quarterly instalments until April 1, 2011. As at December 31, 2006, an aggregate rate of 6.00% applied to these loans. These loans are secured by
certain fixed assets of OK, which as at December 31, 2006 have a carrying value of approximately US$ 0.1 million.
Czech Republic
(c) As at December 31, 2006, there were no drawings by CET 21 under a four-year credit facility of CZK 1.2 billion (approximately US$ 57.5 million) available until October 31, 2009 with Ceska Sporitelna,
a.s. (“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 1.95%. This facility is secured by a guarantee and a pledge of receivables, which are also subject to a factoring arrangement with
Factoring Ceska Sporitelna, a.s., a subsidiary of CS.
(d) CZK 250.0 million (approximately US$ 12.0 million), the full amount of the facility, has been drawn by CET 21 under a working capital facility agreement with CS which matures on April 30, 2007 and
bears interest at the three-month PRIBOR plus 1.65% (three-month PRIBOR relevant to drawings under this facility at December 31, 2006 was 2.55%). A preliminary agreement has been reached to extend
this facility for 12 months from maturity. This facility is secured by a pledge of receivables, which are also subject to a factoring arrangement with Factoring Ceska Sporitelna, a.s.
(e) As at December 31, 2006, there were no drawings under a CZK 600.0 million (approximately US$ 28.7 million) factoring facility with Factoring Ceska Sporitelna, a.s. available until March 31, 2010. The
facility bears interest at one-month PRIBOR plus 1.40% for the period that actively assigned accounts receivable are outstanding.
Slovenia
(f) On July 29, 2005, Pro Plus entered into a revolving facility agreement for up to EUR 37.5 million (approximately US$ 49.4 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 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 2.10% 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, 2006, there were no drawings under this revolving facility.
Ukraine
(g) On August 16, 2006 and November 6, 2006, our Ukraine (KINO, CITI) operations entered into US$ 0.9 million and US$ 0.6 million, three-year loans with Glavred-Media, LLC, the minority shareholder in
Ukrpromtorg. These loans are unsecured and bear interest at 9%. Our partners have also extended short-term non-interest bearing loans to our Ukraine (KINO, CITI) operations amounting to US$ 0.2
million.
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Total Group
At December 31, 2006, the maturity of our debt (including our Senior Notes) is as follows:
2007
2008
2009
2010
2011 and thereafter
Total
Capital Lease Commitments
$
$
12,350
180
1,690
305
487,291
501,816
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, 2006:
2007
2008
2009
2010
2011
2012 and thereafter
Less: amount representing interest
Present value of net minimum lease payments
14. FINANCIAL INSTRUMENTS
$
$
998
806
644
432
432
3,423
6,735
(1,844)
4,891
On April 27, 2006, we entered into currency swap agreements with two counterparties whereby we swapped a fixed annual coupon interest rate (of 9.0%) on notional principal of CZK 10.7 billion
(approximately US$ 512.6 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$ 495.1 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 financial instruments as at December 31, 2006 was a US$ 12.5 million liability.
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 7, “Senior Notes”). 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 SFAS 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.
15. SHAREHOLDERS’ EQUITY
Preferred Stock
5,000,000 shares of Preferred Stock, with a $0.08 par value, were authorized as at December 31, 2006 and 2005. None were issued and outstanding as at December 31, 2006 and 2005.
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
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, 2006 and 2005. 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.
On March 29, 2006, we sold 2,530,000 shares of our Class A Common Stock (including 330,000 sold pursuant to an underwriters’ option) and received net proceeds of approximately US$ 168.7 million.
On December 9, 2005, EL/RSLG Media Inc. converted 306,000 shares of Class B Common Stock and on December 15, 2005 Ronald Lauder converted 62,235 shares of Class B Common Stock into a total of
368,235 shares of Class A Common Stock (par value of US$ 29,459), which decreased Class B Common Stock to US$ 557,323.
On May 3, 2006, EL/RSLG Media Inc. converted 336,000 shares of Class B Common Stock, on May 9, 2006, Leonard A. Lauder converted 140,000 and LWG Family Partners L.P. converted 215,000 shares
of Class B Common Stock, on May 11, 2006, EL/RSLG Media Inc. converted 4,895 shares of Class B Common Stock, and on June 23, 2006, Ronald Lauder converted 57,799 shares of Class B Common
Stock into a combined total of 753,694 shares of Class A Common Stock.
On August 28, 2006, Ronald Lauder exercised options over 100,000 shares of Class B Common Stock.
16. 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 rate has been used in the reconciliation of income taxes.
Income before provision for income taxes, minority interest, equity in income of unconsolidated affiliates and discontinued operations:
The Netherlands and non-Netherlands components of income from continuing operations before income taxes are:
Domestic
Foreign
For the Years Ended December 31,
2006
(43,777)
92,179
48,402
$
$
2005
(2,270)
62,466
60,196
$
$
2004
5,127
15,387
20,514
$
$
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Total tax charge for the years ended December 31, 2006, 2005 and 2004 was allocated as follows:
Income tax expense from continuing operations
Income tax expense/(benefit) from discontinued operations
Currency translation adjustment in accumulated other comprehensive loss
Total tax charge
Income Tax Provision:
For the Years Ended December 31,
2006
14,962
4,863
22,878
42,703
$
$
2005
16,691
677
(3,266)
14,102
$
$
$
$
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,
2006
(22,745)
36,009
13,264
1,467
231
1,698
14,962
$
$
$
$
$
2005
186
25,512
25,698
(1,467)
(7,540)
(9,007)
16,691
$
$
$
$
$
$
$
$
$
2004
11,089
(2,378)
-
8,711
2004
2,104
9,047
11,151
-
(62)
(62)
11,089
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, 2006, 2005 and 2004:
Income taxes at Netherlands rates (2006: 29.6%, 2005: 31.5%; 2004: 34.5%)
Jurisdictional differences in tax rates
Tax effect of Croatian goodwill impairment
Effect of change in tax law relating to investment allowances claimed in previous years
Interest expense disallowed under thin capitalisation provisions
Tax effect of other permanent differences
Effect of change in tax rates
Change in valuation allowance
Other
Provision for income taxes
For the Years Ended December 31,
$
$
2006
14,326
(10,432)
149
(2,065)
6,508
(656)
89
6,107
936
14,962
$
$
2005
18,961
(15,685)
1,983
-
-
4,921
620
5,115
776
16,691
$
$
2004
7,078
393
-
-
-
6,209
(858)
(1,366)
(367)
11,089
The amount included in 2005 for jurisdictional differences in tax rates includes US$ 13.1 million relating to profits arising in Bermuda, which are not subject to tax.
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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, 2006 and 2005:
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
Undistributed reserves not permanently reinvested
Temporary difference due to timing
Total deferred tax liabilities
Net deferred income tax liability
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,
2006
December 31,
2005
16,880
4,098
995
4,205
691
26,869
(16,574)
10,295
(57,036)
(2,936)
-
(4,684)
(64,656)
(54,361)
December 31,
2006
2,124
3,443
5,567
(1,836)
(58,092)
(59,928)
(54,361)
$
$
$
$
$
$
$
$
$
17,748
1,220
527
2,807
722
23,024
(11,934)
11,090
(42,674)
(4,057)
(1,944)
(1,765)
(50,440)
(39,350)
December 31,
2005
3,025
779
3,804
(1,005)
(42,149)
(43,154)
(39,350)
$
$
$
$
$
$
$
$
$
We provided a valuation allowance against potential deferred tax assets of US$ 16.6 million and US$ 11.9 million as at December 31, 2006 and 2005, 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, 2006, US$ 0.8 million would reverse through goodwill.
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
During 2006, we had the following movements on valuation allowances:
Balance at December 31, 2005
Charged to costs and expenses
Credited to other accounts
Foreign exchange
Balance at December 31, 2006
As of December 31, 2006 we have operating loss carry-forwards that will expire in the following periods:
$
$
11,934
6,107
(1,168)
(299)
16,574
Year
2007
2008
2009
2010
2011
Indefinite
Total
9,716
1,064
1,594
3,729
8,861
15,125
Austria
Croatia
Czech Republic
Netherlands
13
440
8,822
21
1,434
3,289
39
UK
Cyprus
Ukraine
Slovenia
9,716
1,043
147
11,491
198
96
3,340
The losses are subject to examination by the tax authorities and to restriction on their utilization. In particular the losses can only be utilized against profits arising in the legal entity in which the losses
arose. We have provided 100% valuation allowances against the operating loss carry-forwards arising in Austria, Croatia, Czech Republic, Netherlands, Slovenia, Cyprus and Ukraine as we consider it
more likely than not that we will fail to utilize these losses.
In addition there is a ruling deficit in the Netherlands of US$ 30.4 million which is available to offset future taxable profits in excess of the minimum amounts agreed with the Netherlands tax authorities.
The ruling deficit is subject to a nine year statute of limitations.
We have not provided income taxes or withholding taxes on US$ 227.0 million (2005: US$ 119.0 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.
17. STOCK-BASED COMPENSATION
4,500,000 shares are available for the issuance of shares in respect of equity awards under a stock based compensation plan (“the plan”). Under the plan, awards (“options”) 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 CME stock at an exercise price, which is
generally the market price prevailing at the date of the grant with vesting over three, four or five years.
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. The fair value of options vesting during
2006 was US$ 3.5 million (2005: US$ 3.2 million, 2004: 2.1 million). At December 2006, 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 option plan comes from the issuance of new shares. For the year ended December 31, 2006, US$ 3.7 million was received on
exercise of options under the plan. The intrinsic value of awards exercised during 2006 was US$ 8.2 million (2005: US$ 24.7 million, 2004: US$ 12.2 million).
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
The charge for stock-based compensation in our Consolidated Statements of Operations is as follows:
Stock-based compensation charged under FIN 44
Stock-based compensation charged under FAS 123(R) (2005 and 2004: FAS 123)
Total stock-based compensation
For the Years Ended December 31,
2006
-
3,575
3,575
$
$
2005
918
2,209
3,127
$
$
2004
9,046
1,125
10,171
$
$
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 Statements of Operations at December 31, 2006
was US$ 14.8 million and the weighted average period over which it will be recognized is 4.15 years.
Stock-based compensation under FIN 44
For certain options issued in 1998 and 2000, our stock-based compensation charge was calculated according to FASB Interpretation 44, “Accounting for Certain Transactions involving Stock
Compensation” (“FIN 44”). This requires that compensation costs for modified or variable awards are adjusted for increases and decreases in the intrinsic value in subsequent periods until that award is
exercised, forfeited or expires unexercised, subject to a minimum of the original intrinsic value at the original measurement date. The last of these options were exercised on December 15, 2005. The
amounts charged have been presented following the conclusion of our review of historic stock option grants (for further information see Note 3, “Summary of Significant Accounting Polices”).
Stock-based compensation under FAS 123(R)
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 6.5 years.
· 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.
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
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, 2006, 2005 and 2004 were as follows:
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 2006, 2005, and 2004:
For the Years Ended December 31,
2006
4.76%
5.89
43.44%
0%
$
31.67
2005
4.00%
6.25
50.56%
0%
$
26.29
2004
3.50%
6.00
51.50%
0%
12.51
$
Outstanding at beginning of year
Awards granted
Awards exercised
Awards forfeited
Outstanding at end of year
2006
2005
2004
Weighted Average
Exercise Price
(US$)
Shares
Weighted Average
Exercise Price
(US$)
Shares
Weighted Average
Exercise Price
(US$)
Shares
1,118,275 $
388,500
(195,450)
(22,750)
1,288,575 $
22.23
65.19
18.54
40.38
35.51
1,705,017 $
194,500
(685,359)
(95,883)
1,118,275 $
12.89
49.23
8.08
11.90
22.23
2,527,717 $
419,500
(1,083,634)
(158,566)
1,705,017 $
7.10
23.84
2.74
19.11
12.89
In addition to the amounts shown above, 25,000 options for shares of Class A Common Stock granted to a former director in August 1995 outside of our stock option plans were exercised in 2005.
The following table summarizes information about stock options outstanding at December 31, 2006:
$1.00-9.99
$10.00-19.99
$20.00-29.99
$30.00-39.99
$40.00-49.99
$50.00-59.99
$60.00-69.99
$70.00-79.99
Total
Expected to vest
Range of exercise prices
Shares
153,800
345,400
138,000
75,375
122,000
179,500
98,500
176,000
1,288,575
699,623
Page 139
Options outstanding
Average remaining
contractual life (years)
5.20
6.80
6.45
7.89
8.42
9.22
5.27
9.95
7.45
8.08
$
$
$
Aggregate intrinsic
value (US$)
Weighted average
exercise price (US$)
10,471
18,842
6,518
2,793
3,098
2,219
863
(361)
44,443
15,562
$
$
$
1.92
15.45
22.76
32.94
44.61
57.64
61.24
72.05
35.51
47.76
Table of Contents
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, 2006:
Range of exercise prices
Shares
$1.00-9.99
$10.00-19.99
$20.00-29.99
$30.00-39.99
$40.00-49.99
$50.00-59.99
$60.00-69.99
$70.00-79.99
Total
Options exercisable
Average remaining
contractual life (years)
5.19
6.73
5.71
7.89
8.42
8.97
-
-
6.42
$
$
141,000
223,400
78,667
38,958
30,500
16,375
-
-
528,900
Aggregate intrinsic
value (US$)
Weighted average
exercise price (US$)
9,599
12,401
3,703
1,444
774
213
-
-
28,134
$
$
1.92
14.49
22.94
32.92
44.61
57.00
-
-
16.81
The impact of adopting FAS 123(R) for the first time on January 1, 2006 was not material to our Consolidated Statements of Operations because we had already been recognizing compensation cost under
FAS 123.
18. EARNINGS PER SHARE
The components of basic and diluted earnings per share are as follows:
Net 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,
2006
20,424
40,027
573
40,600
0.51
0.50
$
$
$
$
2005
42,322
34,664
766
35,430
1.22
1.19
$
$
$
$
2004
18,462
27,871
1,229
29,100
0.66
0.63
$
$
$
$
At December 31, 2006, 319,435 (2005: 194,500, 2004: 60,543) 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.
19. SEGMENT DATA
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. Our business
segments are comprised of Croatia, the Czech Republic, Romania, the Slovak Republic, Slovenia and Ukraine.
We evaluate the performance of our business segments based on Segment Net Revenues and Segment EBITDA. Segment Net Revenues and Segment EBITDA for each year include our operations in the
Slovak Republic which were not consolidated prior to January 23, 2006. Segment Net Revenues and Segment EBITDA for the year ended December 31, 2004 also include Radio Pro in Romania, which was
not consolidated.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
We acquired our Croatia operations on July 16, 2004; therefore, comparable 2004 financial information is included from the date of acquisition only. We acquired our Czech Republic operations on May 2,
2005; therefore, 2005 results are from the date of acquisition.
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 Revenue.
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:
·
·
·
·
·
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;
change in fair value of derivatives; and
certain unusual or infrequent items (e.g., extraordinary gains and losses, impairments on assets or investments, gain on sale of unconsolidated affiliates).
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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 depreciation and segment asset information by operation, including a reconciliation of these amounts to our
consolidated results for the years ending December 31, 2006, 2005 and 2004 for consolidated statement of operations data and as at December 31, 2006 and 2005 for balance sheet data:
SEGMENT FINANCIAL INFORMATION
For the Years Ended December 31,
Segment Net Revenues (1)
Segment EBITDA
2006
2005
2004
2006
2005
Country
Croatia (NOVA TV) (2)
Czech Republic (TV NOVA, GALAXIE SPORT) (3)
Romania (4)
Slovak Republic (MARKIZA TV)
Slovenia (POP TV and KANAL A)
Ukraine (STUDIO 1+1)
Ukraine (KINO, CITI) (5)
Total Segment Data
$
$
22,310 $
208,387
148,616
73,420
54,534
96,413
1,195
604,875 $
Reconciliation to Consolidated Statement of Operations and Comprehensive Income:
Consolidated Net Revenues / 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 & equipment
Amortization of broadcast licenses and other intangibles
Interest income
Interest expense
Change in fair value of derivatives
Foreign currency exchange loss / (gain), net
Other (income) / expense
Total Segment Data
$
603,115 $
-
-
1,760
-
-
-
-
-
-
-
604,875 $
22,030 $
154,010
103,321
64,266
48,770
72,847
-
465,244 $
400,978 $
-
-
64,266
-
-
-
-
-
-
465,244 $
9,757 $
-
76,463
61,576
45,388
53,351
-
246,535 $
182,339 $
-
-
64,196
-
-
-
-
-
-
246,535 $
(14,413) $
100,488
65,860
20,805
19,842
29,973
(3,713)
218,842 $
48,402 $
34,104
748
(1,292)
25,795
18,813
(6,365)
44,228
12,539
44,908
(3,038)
218,842 $
(15,866) $
71,544
43,803
17,240
19,337
21,803
-
157,861 $
60,196 $
25,547
35,331
17,240
16,367
11,180
(4,124)
29,387
-
(37,968)
4,705
157,861 $
2004
(3,756)
-
25,198
18,975
19,077
14,729
-
74,223
20,514
29,254
-
19,404
6,429
465
(4,318)
1,203
-
574
698
74,223
(1) All net revenues are derived from external customers. There are no inter-segmental revenues.
(2) We acquired our Croatia operations in July 2004.
(3) We acquired our TV NOVA (Czech Republic) operations in May 2005 and GALAXIE SPORT in September 2005.
(4) Romanian networks are PRO TV, PRO CINEMA, ACASA and PRO TV INTERNATIONAL for the years ended December 31, 2006 and 2005 and PRO TV, PRO CINEMA, ACASA, PRO TV
INTERNATIONAL, PRO FM and INFOPRO for the year ended December 31, 2004.
(5) We acquired our Ukraine (KINO, CITI) operations in January 2006.
(6) Unconsolidated equity affiliates are STS and Markiza in the Slovak Republic and Radio Pro in Romania.
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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:
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
Total assets (1):
Croatia
Czech Republic
Romania
Slovak Republic
Slovenia
Ukraine (STUDIO 1+1)
Ukraine (KINO, CITI)
Total segment assets
Reconciliation to Consolidated Balance Sheet:
Unconsolidated equity affiliates
Corporate
Total assets
(1) Segment assets exclude any inter-company investments, loans, payables and receivables.
Page 143
For the Years Ended December 31,
2006
2,920
24,274
5,811
4,070
4,004
3,216
490
44,785
(177)
44,608
25,795
18,813
2006
30,394
1,200,894
206,850
86,872
67,919
75,020
13,293
1,681,242
-
137,758
1,819,000
$
$
$
$
$
2005
2,951
15,960
3,829
2,599
2,947
1,860
-
30,146
(2,599)
27,547
16,367
11,180
As at December 31,
2005
25,017
1,018,253
123,699
41,873
62,926
49,438
-
1,321,206
(41,873)
109,517
1,388,850
$
$
$
$
$
$
$
$
$
$
2004
1,173
-
2,843
1,735
1,654
1,224
-
8,629
(1,735)
6,894
6,429
465
2004
52,905
-
79,622
42,467
64,044
32,706
-
271,744
(42,467)
215,362
444,639
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Long-lived assets (1):
Croatia
Czech Republic
Romania
Slovak Republic
Slovenia
Ukraine (STUDIO 1+1)
Ukraine (KINO, CITI)
Total long-lived assets
Reconciliation to Consolidated Balance Sheet:
Unconsolidated equity affiliates
Corporate
Total Long-lived assets
(1) Reflects property, plant and equipment
As at December 31,
2006
6,804
28,002
32,312
19,498
15,595
7,965
3,674
113,850
-
1,955
115,805
$
$
$
$
$
$
2005
6,264
16,027
13,154
14,245
15,523
7,127
-
72,340
(14,245)
802
58,897
$
$
$
We do not rely on any single major customer or group of major customers. No customer accounts for more than 10% of revenue.
20. DISCONTINUED OPERATIONS
Arbitration related costs
Income on disposal of discontinued operations
Tax on disposal of discontinued operations
Net income/(loss) from discontinued operations
For the Years Ended December 31,
2006
-
-
(4,863)
$
2005
164
164
(677)
$
(4,863)
$
(513)
$
$
$
2004
6,775
-
9,081
12,818
11,834
3,153
-
43,661
(12,818)
705
31,548
2004
146
146
2,378
2,524
On May 19, 2003, we received US$ 358.6 million from the Czech Republic in final settlement of our UNCITRAL arbitration in respect of our former operations in the 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 the award income and
related legal expenses have therefore all been accounted for as discontinued operations for all periods presented.
On October 23, 2003 we sold our 93.2% participation interest in CNTS, our former Czech Republic operating company, to PPF for US$ 53.2 million.
The first installment of US$ 7.5 million was received on October 8, 2003, the second US$ 7.5 million installment was received on October 23, 2003 and the third US$ 20.3 million installment was received on
July 14, 2004. The remainder of the sales price was offset against our payment obligations to PPF in connection with the acquisition of the TV Nova (Czech Republic) group.
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. 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
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 consolidated statement of operations, we recognized a charge of US$ 4.9 million through discontinued operations for the
year ended December 31, 2006 (2005: US$ 0.7 million, 2004: a benefit of US$ 2.4 million).
The settlement with the Dutch tax authorities 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 use any resulting losses, 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 will issue such a decision.
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, 2006, we had the following commitments in respect of future programming, including contracts signed with license periods starting after the balance sheet date:
Croatia
Czech Republic
Romania
Slovak Republic
Slovenia
Ukraine (STUDIO 1+1)
Ukraine (KINO, CITI)
Total
Of the US$ 98.0 million in the table above, US$ 89.6 million is payable within one year.
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December 31, 2006
9,916
34,657
19,426
10,427
5,589
16,859
1,094
97,968
$
$
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
b)
Operating Lease Commitments
For the fiscal years ended December 31, 2006, 2005, and 2004 we incurred aggregate rent on all facilities of US$ 9.7 million, US$ 5.9 million and US$ 1.6 million. Future minimum operating lease payments at
December 31, 2006 for non-cancelable operating leases with remaining terms in excess of one year (net of amounts to be recharged to third parties) are payable as follows:
2007
2008
2009
2010
2011
2012 and thereafter
Total
c)
Acquisition of minority shareholdings
December 31, 2006
3,983
1,427
1,140
785
394
-
7,729
$
$
Mr. Sarbu has the right to sell his 10.0% shareholding in 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. A put option of 5.21% of this 10.0% shareholding is exercisable from November 12, 2009 for a twenty-year period thereafter. Mr. Sarbu’s right to
put the remaining 4.79% is also exercisable from November 12, 2009, provided that we have not enforced a pledge over this 4.79% shareholding which Mr. Sarbu granted as security for our right to put our
10.0% in Media Pro. As at December 31, 2006, we consider the fair value of this put option to be approximately US$ nil.
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, 2006 we provided US$ 5.5 million (US$ 3.0 million in non-current liabilities and US$ 2.5 million in current liabilities) and as at December 31, 2005 we provided US$ 2.1 million (US$ 0.7
million in non-current liabilities and US$ 1.4 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$ 4.9 million (2005: US$ 0.7 million, 2004: a
benefit of US$ 2.4 million) through discontinued operations in our Consolidated Statement of Operations for the year ended December 31, 2006.
Czech Republic - Factoring of Trade Receivables
CET 21 has a working capital credit facility of CZK 250 million (approximately US$ 12.0 million) with Ceska Sporitelna, a.s. This facility is secured by a pledge of receivables under the factoring agreement
with Factoring Ceska Sporitelna.
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.
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(Tabular amounts in US$ 000’s, except share data)
Contingencies
a)
Litigation
We are, from time to time, a party to litigation that arises in the normal course of our business operations. Other than those claims discussed below, 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. Unless otherwise disclosed, no provision has been made against any potential losses that could arise.
We present below a summary of our more significant proceedings by country.
Croatia
Global Communications Disputes
On October 29, 2004, OK filed suit against Global Communications d.o.o. claiming approximately HRK 53.0 million (approximately US$ 9.5 million) in damages. Global Communications is a company
controlled by Ivan Caleta, who had previously operated Nova TV (Croatia) through OK. Global Communications, together with GRP Media d.o.o., another company controlled by Mr. Caleta, had provided
certain goods and services to OK and Nova TV (Croatia) in exchange for advertising time pursuant to an agreement dated April 10, 2001 (the “Global Agreement”). Global Communications and GRP Media
were functionally managing the advertising inventory of Nova TV (Croatia). On December 31, 2003, Global Communications entered into a reconciliation agreement by which OK acknowledged that Global
Communications was entitled to approximately 375,000 seconds of advertising time for goods and services previously provided. Following our acquisition of Nova TV (Croatia) and OK in July 2004, OK
concluded that Global Communications had used all of its seconds by June 2004 based on a substantial discrepancy discovered between the utilization of advertising time recorded by Global
Communications and that recorded by AGB Puls, an independent television audience measurement service operating in Croatia. In the course of its investigation of the usage of seconds by Global
Communications, OK discovered that computer records of advertising seconds kept for OK may have been altered. OK brought a suit to recover amounts for advertising time used by Global
Communications in excess of the 375,000 seconds agreed. Global Communications filed a counterclaim in January 2005 for HRK 68.0 million (approximately US$ 12.2 million), claiming that the AGB data is
unreliable and that it is entitled to additional seconds under the previous agreement. The lower commercial court issued a judgment on July 12, 2006 in favor of Global Communications for the full amount
of the counterclaim, and we have appealed this decision on the basis of false and inadequate disclosure, wrongful application of substantive law and procedural error. Global Communications separately
brought a claim against Nova TV (Croatia), on the same basis as the OK counterclaim. Both Global Communications and Nova TV (Croatia) requested the court to join this claim with the OK counterclaim
but this request was denied. The lower commercial court issued a judgment on August 1, 2006 in favor of Global Communications for the full amount of the claim, after having denied submission of
evidence supporting our defense. We have also appealed this decision.
On January 25, 2007, Nova TV (Croatia) filed suit against Global Communications. The facts underlying the claim are substantially the same as those of the abovementioned claims, but Nova TV (Croatia)
is claiming that the Global Agreement and the two reconciliation agreements dated April 30, 2004 and June 30, 2004 (the “Reconciliation Agreements”), by which OK acknowledged the number of seconds
of advertising time to which Global Communications was purportedly entitled, should be declared null and void under Article 141 of the Croatian Obligations Act. This provision is intended to protect a
contractual party which has entered into unfair bargaining terms due to its dependency on the other contractual party. Global Communications, OK and Nova TV (Croatia) were all related parties
(controlled by Ivan Caleta) and the contractual terms provided for the provision of 1,340,280 seconds by OK to Global Communications in exchange for certain transmitters. These seconds were valued at
an aggregate of DEM 5 million (or DEM 3.73 per second; HRK 3.91 per second at the time) whereas the rate card price was DEM 97.18 or HRK 380.00 per second (i.e. a price that was 26 times higher).
Other clients (unrelated parties) sampled from this period were paying between 382.50 HRK to 491.85 HRK per second. Nova TV (Croatia) is arguing for voidance of this contract because of its
unconscionable terms which were detrimental to OK and Nova TV (Croatia) and beneficial solely to Global Communications (which, in its capacity as an advertising agency, on-sold these seconds to its
clients at market rates, thereby reaping an extraordinary profit). Nova TV (Croatia) is further claiming restitution for advertising seconds appropriated by Global Communications under the Global
Agreement. The restitution amount is HRK 586.5 million (approximately US$ 105.1 million). Given that the resolution of the issues posed by this lawsuit constitutes a preliminary question on which
appellate review of the two lawsuits previously mentioned above should depend, we have requested suspension of those two reviews until this question has been finally adjudicated.
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(Tabular amounts in US$ 000’s, except share data)
Former Shareholder Dispute
On July 21, 2005, Narval A.M. d.o.o. (a company wholly-owned by Ivan Caleta), Studio Millenium d.o.o. and Richard Anthony Sheldon, three of the former shareholders of OK, filed suit against Nova TV
(Croatia) for rescission of the sale and purchase contract pursuant to which they sold 75% of OK to Nova TV (Croatia) in July 2004 (the “OK Sale Contract”). Nova TV (Croatia) acquired OK immediately
prior to our acquiring Nova TV (Croatia). The provisions of the OK Sale Contract required Nova TV (Croatia) to make payment to the four shareholders of OK by September 1, 2004, upon receipt of
appropriate invoices and bank account details. The fourth shareholder, Pitos d.o.o., issued an invoice that was duly received by Nova TV (Croatia) and payment was made thereunder. The other three
shareholders claim that they hand-delivered a joint invoice to one of the former directors of Nova TV (Croatia), but we continue to dispute this. Under the Croatian Obligations Act, one party to a contract
who has performed may unilaterally rescind a contract if the other party fails to perform after receipt of a written warning. On May 24, 2006, the lower commercial court decided in favor of the plaintiffs to
rescind the OK Sale Contract and ordered the defendant to pay court costs. We have appealed the decision on the basis that evidence supporting our position was not allowed to be presented to the
court and we continue to challenge the validity of the power of attorney purportedly issued by Richard Anthony Sheldon (a resident of the United Kingdom) to legal counsel representing the other
plaintiffs.
On August 28, 2006, we received a lower court decision of an injunction against us (decided without a hearing) that, inter alia, prohibits a sale or encumbrance of 75% of the shares of OK. Although we
appealed this decision, the appellate commercial court upheld the lower court’s judgment on November 21, 2006. On November 6, 2006, we were notified of a request for a further injunction that would,
inter alia, prohibit us from taking any actions to decrease the value of OK and require the management of OK to report to a delegate of the former shareholders. We have unsuccessfully sought the
removal of the presiding judge, Raul Dubravec (who also presided over the Global Communications lawsuit against Nova TV (Croatia)). Mr. Dubravec ruled against us on December 18, 2006, requiring
imposition of a temporary director for OK, which is not a remedy available under Croatian law under the facts of this action. Further, the temporary director who has been appointed is one of the former
directors of OK who countersigned the Reconciliation Agreements and is an associate of Ivan Caleta. We have appealed this decision. While we continue to vigorously contest all these actions in the
face of serious concerns as to the impartiality of the Croatian judicial system, we do not expect our Croatia operations to suffer any significant loss or disruption as a consequence of these actions.
Czech Republic
Antimonopoly Office
The investigation of the Office for the Protection of Economic Competition of the Czech Republic was terminated in December 2006, and CET 21 received written confirmation from the Office that TV
Nova’s current sales contracts and conditions of advertising are in compliance with Czech antimonopoly legislation.
Romania
There are no significant outstanding legal actions that relate to our business in Romania.
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(Tabular amounts in US$ 000’s, except share data)
Slovenia
On November 20, 2002, we received notice of a claim filed by Mrs. Zdenka Meglic, the founder and a former shareholder of MMTV 1 d.o.o (MMTV), against MMTV, a subsidiary of CME Media
Enterprises B.V. In her claim against MMTV, Mrs. Meglic is seeking an amount equal to SIT 190.0 million (approximately US$ 1.0 million) for repayment of monies advanced to MMTV from 1992 to 1994 (in
the amount of approximately SIT 29.0 million (approximately US$ 0.2 million)) plus accrued interest. On September 9, 2004, the court of first instance found against MMTV and issued a judgment requiring
MMTV to pay SIT 190.0 million (approximately US$ 1.0 million) plus interest as well as costs. On September 24, 2004, MMTV filed an appeal against the judgment. On December 15, 2004, the appellate
court vacated the judgment of the lower court and returned the case for further proceedings. We do not believe that Mrs. Meglic will prevail and will continue to defend the claim.
Slovak Republic
There are no significant outstanding legal actions that relate to our business in the Slovak Republic.
Ukraine
On October 11, 2005, Igor Kolomoisky filed a lawsuit against Alexander Rodnyansky and Studio 1+1 in a district court in Kiev. Our Ukrainian affiliate Intermedia has been joined in the proceedings as a
“third party”. Igor Kolomoisky is attempting to enforce what he alleges was a binding oral agreement with Alexander Rodnyansky to purchase the latter’s 70.0% interest in Studio 1+1 for consideration of
US$ 70.0 million and to transfer that interest to Igor Kolomoisky on receipt of a prepayment of US$ 2.0 million. The lawsuit arises from abortive negotiations among Igor Kolomoisky, Alexander
Rodnyansky and Boris Fuchsmann for the acquisition by Igor Kolomoisky of the totality of interests in the Studio 1+1 Group held by Alexander Rodnyansky and Boris Fuchsmann, subject to Igor
Kolomoisky assuming all of their obligations under our existing partnership arrangements. On August 16, 2006, the district court in Kiev ruled in favor of Igor Kolomoisky and found that he is entitled to
the 70% interest in Studio 1+1 held by Alexander Rodnyansky. Our Ukrainian affiliate Intermedia and Alexander Rodnyansky filed appeals against this decision.
At a hearing on October 31, 2006, the appellate court overturned the decision of the court of first instance and denied Igor Kolomoisky’s claim that he is entitled to a 70% interest in Studio 1+1 held by
Alexander Rodnyansky. On November 3, 2006, Igor Kolomoisky filed an appeal with the Supreme Court of Ukraine, the highest court in Ukraine. At a hearing on February 28, 2007, the Supreme Court
rejected this appeal. As a result, Igor Kolomoisky no longer has a basis for claiming this ownership right in Studio 1+1 on the same grounds.
On December 23, 2005, we initiated proceedings against our partners Alexander Rodnyansky and Boris Fuchsmann in order to enforce our contractual rights and compel a restructuring of the ownership
of Studio 1+1 in order to permit us to hold a 60% interest in Studio 1+1 through a subsidiary organized in Ukraine. Initiation of this proceeding followed protracted negotiations with our partners to
restructure following confirmation from the Ukraine Media Council that our proposed ownership structure would not be in violation of restrictions on foreign ownership contained in the Ukraine Media
Law, which restricts direct (but not indirect) investment by foreign persons in Ukrainian broadcasters to 30%. On January 12, 2006, the Ukraine parliament adopted an amended version of the Ukraine
Media Law that clarifies the absence of any restriction on indirect foreign ownership of television broadcasters. This amended Ukraine Media Law came into force in March 2006. Our partners have
acknowledged an obligation to restructure upon the entry into force of these amendments. On September 5, 2006, our partners entered into certain agreements to implement the restructuring. Following
the completion of the transactions reflected in these agreements and the registration of the charter of Studio 1+1 amended to reflect the new ownership of Studio 1+1, we will own 60% of Studio 1+1. Upon
successful completion of the restructuring, we will terminate the proceedings initiated against our partners in December 2005.
Because of ongoing ancillary litigation to enjoin transactions related to the ownership of Studio 1+1 that have been initiated by Igor Kolomoisky, by our partners and by third parties who are not direct
parties in interest to legal proceedings initiated by Igor Kolomoisky against Alexander Rodnyansky, the state registrar in the district administration in Kiev where such charter amendments are registered
is presently enjoined from registering any amendments to the charter of Studio 1+1. Our partners are no longer seeking to enforce the injunction filed at their initiative; we expect that this injunction will be
removed once the case file in this matter has been transferred to the appellate court and the appeal filed by Igor Kolomoisky in respect of this injunction has been scheduled.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
b)
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; 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.
The following summarizes the expiry dates of our licenses:
Croatia
Czech Republic
Romania
Slovak Republic
Slovenia
Ukraine
The license of NOVA TV (Croatia) expires in April 2010.
The license of TV NOVA (Czech Republic) expires in January 2017. The GALAXIE SPORT license expires in March 2014.
Licenses expire on dates ranging from March 2007 to February 2016.
The license of MARKIZA TV in the Slovak Republic expires in September 2019.
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 expires in
August 2014. Licenses held by Ukrpromtorg expire on dates ranging from November 2008 to July 2016.
c)
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%) 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, 2006.
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
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 which are provided by parties known to be connected to our local shareholders. As
stated in FAS 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.
We consider 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 in which we are
aware of a family or business connection to a shareholder.
Related Party Transactions
Croatia
We contract with Concorde Media Beteiligungsgesellschaft mbH for the purchase of program rights. This is a company connected to Dr. Herbert Kloiber, a Director of Central European Media Enterprises
Ltd. Our total purchases from Concorde Media Beteiligungsgesellschaft mbH during 2006 were US$ 0.3 million (2005: US$ nil, 2004: US$ nil).
Czech Republic
We have no related party transactions in the Czech Republic.
Romania
The total purchases from companies related or connected with Adrian Sarbu in 2006 were approximately US$ 23.4 million (2005: US$ 12.0 million, 2004: US$ 6.9 million). The purchases were mainly for
programming rights and for various technical, production and administrative related services. The total sales to companies related or connected with Adrian Sarbu in 2006 were approximately US$ 2.5
million (2005: US$ 0.4 million, 2004: US$ 0.1 million). At December 31, 2006, companies connected to Mr. Sarbu had an outstanding balance due to us of US$ 2.1 million (2005: US$ 1.4 million). At December
31, 2006, companies related to Mr. Sarbu had an outstanding balance due to them of US$ 0.8 million (2005: US$ 0.5 million, 2004: US$ 0.6 million).
In addition, we have purchased land with a value of US$ 8.5 million (as determined by an independent appraisal) (EUR 6.5 million) from a company controlled by Adrian Sarbu in December 2006. The
investment represents an opportunity to secure suitable accommodation for Pro TV at a time when the real estate market is experiencing significant growth. It will enable future growth in a location
housing both office space and the newly built digital studios. At December 31, 2006, US$ 8.3 million was recorded as a payable to this company.
On February 17, 2006, we purchased an additional 5% of Pro TV, MPI and Media Vision from Mr. Sarbu for consideration of US$ 27.2 million (for further information, see Item 8, Note 4, “Acquisitions and
Disposals, Romania”). On February 28, 2005 we acquired 2% of Pro TV and MPI from Mr. Sarbu for US$ 5.0 million and on July 29, 2005 we acquired an additional 3% of Pro TV and MPI from Mr. Sarbu for
US$ 15.0 million (see Item 8, Note 4, “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 and is 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.
On March 29, 2004, we acquired an additional 14% share in each of our consolidated subsidiaries MPI and Pro TV from a company controlled by Mr. Sarbu, for purchase consideration of US$ 20.3 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 now own a 90% voting and economic interest in Pro TV and MPI and a 75% voting and economic interest in Media Vision.
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. The consideration was determined by an independent valuation of Radio Pro.
On August 11, 2006 we acquired a 10.0% interest in Media Pro. The remaining 90.0% 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. As a result of this transaction, we recorded a gain of US$ 6.2 million on
disposal.
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$ 16.5 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 Item 8, Note 4,
“Acquisitions and Disposals, Romania”.
We received contractual management fees from Radio Pro. The value of these fees was US$ 0.2 million in 2006 and US$ 0.2 million in each of 2005 and 2004.
Slovenia
We have no related party transactions in Slovenia during 2006. On June 24, 2005, we acquired from Marijan Jurenec, director of our Adriatic regional operations, his remaining 3.15% interest in Pro Plus for
Euro 4.7 million (approximately US$ 5.7 million at the date of acquisition).
Slovak Republic
STS, our former operating company in the Slovak Republic that was merged into Markiza on January 1, 2007, had a number of contracts with companies connected to Jan Kovacik, a shareholder in
Markiza, and indirectly STS, for the provision of television programs. Many of these contracts were for the production of programs that required specialist studios and specific broadcast rights. Total
purchases from these companies in 2006 amounted to US$ 0.8 million (2005: US$ 0.5 million, 2004: US$ 0.4 million).
STS also purchased advertising space relating to print media from companies connected with Mr Kovacik in 2006 with a value of US$ 1.5 million during 2006.
STS also sold advertising time through an advertising agency controlled by Jan Kovacik. The total 2006 advertising sales of STS placed through Mr. Kovacik’s advertising agency were US$ 0.4 million
(2005: US$ 0.2 million, 2004: US$ 1.9 million), and the total amount due to STS from this agency at December 31, 2006 was US$ 0.1 million (2005: US$ nil, 2004: US$ 0.4 million).
On December 1, 2005 we repaid STS, our equity-accounted affiliate in the Slovak Republic, SKK 228 million (approximately US$ 7.1 million at the time of repayment) in settlement of the principal and
interest due on a loan that had been advanced to us in 2002 and 2003. The loan bore interest at a rate of three-month Bratislava Inter-Bank Offered Rate (“BRIBOR”) plus 2.2%.
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Ukraine
Prior to 2006, we contracted with Contact Film Studios for the production of certain television programs. This company was connected to Boris Fuchsmann, the 40% shareholder in and joint Managing
Director of Innova, which is one of the operating companies for the Studio 1+1 group. Our total purchases from Contact Film Studios in 2006 were US$ nil (2005: US$ 0.1 million, 2004: US$ 0.1 million).
We contract with Vabank for the provision of banking services. This is a bank connected to Boris Fuchsmann through his presence on the bank’s Supervisory Board. Our balance on the current account
with the bank was US$ 9.4million as of December 31, 2006 (2005: US$ 5.0 million). Commission and other expenses incurred by us in respect of the banking services rendered by Vabank amount to US$ 0.2
million for the twelve months ended December 31, 2006. Interest of US$ 0.4 million was earned on funds on deposit with Vabank.
Innova Marketing is a company 100% owned and headed by Boris Fuchsmann. Innova Marketing renders consulting services to Innova. The amount of such services provided in 2006 was US$ 0.1
million (2005: US$ 0.1 million).
In 1998 we made a loan to Mr. Fuchsmann with a total balance outstanding at December 31, 2006 of US$ 2.2 million (2005: US$ 2.5 million). The interest rate on this loan is US$ three-month LIBOR+3%,
subject to a minimum of 5%.
Alexander Rodnyansky, the former general director and current Honorary President of Studio 1+1, continues as the 70% shareholder in the license company. Mr. Rodnyansky is also the general director
of the Russian broadcaster CTC based in Moscow. Our total purchases from CTC in 2006 were US$ 0.1 million (2005: US$ 0.2 million, 2004: US$ 0.1 million). In addition, we recorded revenue of US$ 0.8
million during 2006 from CTC relating to production of programming.
In addition to the above, we contract with Sablock, a company connected to Mr. Rodnyansky, for license rights costs. Our total purchases during 2006 were US$ 4.0 million. At December 31, 2006, we
have recorded a liability to Sablock of US$ 1.3 million.
We contract with Kino-Kolo, a magazine that is 75% owned by Alexander Rodnyansky, for advertising Studio 1+1. Purchases of services from Kino-Kolo in 2006 amounted to US$ 0.1 million (2005: US$
0.1).
We purchase legal and consulting services from LLC Legal Company Varlamov and Partners, a company headed by the Deputy General Director of Studio 1+1. The total amount of services rendered by
the company in 2006 was US$ 0.3 million (2005: US$ 0.3 million).
23. SUBSEQUENT EVENTS
On February 20, 2007 we acquired control of TV Sport by acquiring an additional 50.0 % interest from Nolsom Limited for cash consideration of Euro 4.2 million (approximately US$ 5.5 million) . We have
also agreed to acquire the remaining 30.0 % of TV Sport from Nolsom Limited in March 2007 for cash consideration of Euro 2.5 million (approximately US$ 3.3 million), subject to Media Council consent.
For further information, see Note 6, “Investments”.
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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
The unaudited quarterly results presented below reflect the restatement of our previously issued consolidated financial statements as discussed above in Note 2. As a result, the quarterly data presented
herein does not agree to previously issued quarterly statements. Selected quarterly financial data for the years ended December 31, 2006 and 2005 is as follows:
Consolidated Statement of Operations data:
Net revenues
Cost of revenue
Operating income / (loss)
Net income / (loss)
Net income / (loss) per share:
Basic EPS
Effect of dilutive securities
Diluted EPS
Consolidated Statement of Operations data:
Net revenues
Cost of revenue
Operating income / (loss)
Net income / (loss)
Net income / (loss) per share:
Basic EPS
Effect of dilutive securities
Diluted EPS
First Quarter
(Unaudited)
Second Quarter
(Unaudited)
Third Quarter
(Unaudited)
Fourth Quarter
(Unaudited)
For the Year ended December 31, 2006
(US$ 000’s, except per share data)
$
$
$
$
$
$
$
$
$
$
$
$
119,754
81,424
16,183
(18,264)
(0.48)
-
(0.48)
First Quarter
(Unaudited,
as restated)
48,304
35,897
(2,353)
(8,050)
(0.28)
-
(0.28)
Page 154
156,589
89,571
44,033
8,522
0.21
-
0.21
$
$
$
112,482
81,088
6,571
3,934
0.09
-
0.09
For the Year ended December 31, 2005 (1)
Third Quarter
(Unaudited,
as restated)
Second Quarter
(Unaudited,
as restated)
(US$ 000’s, except per share data)
113,109
54,903
6,877
25,474
0.74
(0.02)
0.72
$
$
$
87,067
64,709
4,752
(9,654)
(0.25)
-
(0.25)
$
$
$
$
$
$
214,290
110,094
73,887
26,232
0.64
-
0.64
Fourth Quarter
(Unaudited,
as restated)
152,498
86,013
42,920
34,552
0.91
(0.01)
0.90
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
The restatement above had the impact on our previously presented financial information as set out below. All amounts are in US$ 000’s:
Statement of Operations (for the Three Months Ended March 31, 2005)
Operating loss
Net loss
Statement of Operations (for the Three Months Ended June 30, 2005)
Operating income
Net income
Statement of Operations (for the Three Months Ended September 30, 2005)
Operating income
Net loss
Statement of Operations (for the Three Months Ended December 31, 2005)
Operating income
Net income
As reported previously
Adjustment
As restated
(2,252)
(7,949)
6,862
25,459
4,792
(9,614)
42,967
34,599
(101)
(101)
15
15
(40)
(40)
(47)
(47)
(2,353)
(8,050)
6,877
25,474
4,752
(9,654)
42,920
34,552
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Markiza- SLOVAKIA, spol. s r.o. (legal successor to Slovenska televizna spolocnost, s.r.o.)
Bratislava, Slovak Republic
We have audited the accompanying consolidated balance sheets of Slovenska televizna spolocnost, s.r.o., and subsidiaries (the “Company”) as of December 31, 2005 and 2004 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, 2005. These financial statements are
the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, 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 Slovenska televizna spolocnost, s.r.o. and its subsidiaries as of December 31, 2005,
and 2004 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the
United States of America.
Deloitte Audit s. r.o.
Bratislava, Slovak Republic
23 February 2006, except for Note 1, as to which the date is 7 February 2007
Page 156
Table of Contents
ASSETS
Current assets
Cash and cash equivalents
Accounts receivable (Note 4)
Program rights
Other current assets (Note 4)
Total current assets
Non-current assets
Investments
Property, plant and equipment (Note 5)
Program rights
Intangible assets (Note 6)
Deferred income tax, non-current (Note 9)
Total non-current assets
Total assets
SLOVENSKA TELEVIZNA SPOLOCNOST S.R.O.
CONSOLIDATED BALANCE SHEETS
(US$ 000’s)
December 31,
2005
December 31,
2004
5,253
9,452
5,509
3,047
23,261
4
14,245
4,156
46
161
18,612
41,873
$
$
4,601
18,043
1,815
1,089
25,548
4
12,818
2,722
132
1,243
16,919
42,467
$
$
The accompanying notes are an integral part of these consolidated financial statements.
Page 157
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SLOVENSKA TELEVIZNA SPOLOCNOST S.R.O.
CONSOLIDATED BALANCE SHEETS (continued)
(US$ 000’s)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities (Note 7)
Duties and other taxes payable
Income taxes payable
Credit facilities and obligations under capital leases (Note 8)
Other current liabilities
Total current liabilities
Non-current liabilities
Credit facilities and obligations under capital leases (Note 8)
Total non-current liabilities
Commitments and contingencies (Note 10)
Minority interests in consolidated subsidiaries
SHAREHOLDERS' EQUITY:
Registered capital
Additional paid-in capital
Shareholder loans (Note 11)
Retained earnings
Accumulated other comprehensive income/ (loss)
Total shareholders’ equity
Total liabilities and shareholders’ equity
December 31,
2005
December 31,
2004
11,481
412
-
71
709
12,673
125
125
635
6
24,242
-
4,414
(222)
28,440
41,873
$
$
10,874
515
917
2,878
261
15,445
149
149
371
6
24,242
(11,061)
10,311
3,004
26,502
42,467
$
$
The accompanying notes are an integral part of these consolidated financial statements.
Page 158
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SLOVENSKA TELEVIZNA SPOLOCNOST S.R.O.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(US$ 000’s, except share and per share data)
Net revenues
Operating costs
Cost of programming
Depreciation and amortization
Selling, general and administrative expenses
Total operating expenses
Operating income
Interest income
Interest expense
Foreign currency exchange gain/(loss), net
Other income
Income before provision for income taxes, and minority interest
Provision for income taxes (Note 9)
Income before minority interest
Minority interest in income of consolidated subsidiaries
Net income
Currency translation adjustment, net
Total comprehensive income
For the Years Ended December 31,
$
2005
64,266
7,090
22,445
2,599
17,491
49,625
14,641
588
(134)
(258)
245
15,082
(3,276)
11,806
(35)
11,771
$
2004
61,576
6,824
20,902
1,735
16,325
45,786
15,790
836
(200)
571
405
17,402
(3,511)
13,891
(23)
13,868
(3,226)
8,545
$
4,760
18,628
$
$
$
2003
50,814
5,828
19,276
1,805
13,326
40,235
10,579
731
(285)
932
436
12,393
(3,870)
8,523
-
8,523
5,315
13,838
The accompanying notes are an integral part of these consolidated financial statements.
Page 159
Table of Contents
BALANCE, December 31, 2002
Shareholders’ loans granted
Dividend distribution
Net income
Currency translation adjustment
BALANCE, December 31, 2003
Shareholders’ loans granted
Dividend distribution
Net income
Currency translation adjustment
BALANCE, December 31, 2004
Shareholders’ loans repaid
Dividend distribution
Net income
Currency translation adjustment
BALANCE, December 31, 2005
SLOVENSKA TELEVIZNA SPOLOCNOST, S.R.O.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(US$ 000’s)
Additional Paid-In
Capital
Shareholders’
loans
Retained Earnings /
(Accumulated
Deficit)
Accumulated Other
Comprehensive
Income/(Loss)
Total
Shareholders'
Equity
Registered Capital
$
6 $
-
-
-
-
6 $
-
-
-
-
6 $
-
-
-
-
6 $
39,326 $
-
(4,678)
-
-
34,648 $
-
(10,406)
-
-
24,242 $
-
-
-
-
24,242 $
(4,694) $
(4,298)
-
-
-
(8,992) $
(2,069)
-
-
-
(11,061) $
11,061
-
-
-
- $
(12,080) $
-
-
8,523
-
(3,557) $
-
-
13,868
-
10,311 $
-
(17,668)
11,771
-
4,414 $
(7,071) $
-
-
-
5,315
(1,756) $
-
-
-
4,760
3,004 $
-
-
-
(3,226)
(222) $
15,487
(4,298)
(4,678)
8,523
5,315
20,349
(2,069)
(10,406)
13,868
4,760
26,502
11,061
(17,668)
11,771
(3,226)
28,440
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
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SLOVENSKA TELEVIZNA SPOLOCNOST, S.R.O.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US$ 000’s)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash generated from operating activities:
Depreciation and amortization
Receivables write-off and provision for doubtful accounts receivable
(Gain)/loss on disposal of fixed assets
Deferred income taxes
Net change in:
Accounts receivable
Other assets
Program rights
Accounts payable and accrued liabilities
Income and other taxes payable
Other current liabilities
Net cash generated from operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment
Proceeds from disposal of property, plant and equipment
Investments in subsidiaries and unconsolidated affiliates
Purchase of other assets and intangibles
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from credit facilities
Payment of credit facilities and capital leases
Repayment of loans and advances to shareholders
Loans and advances to shareholders
Dividends paid
Net cash used in financing activities
Impact of exchange rate fluctuations on cash
Net increase in cash and cash equivalents
CASH AND CASH EQUIVALENTS, beginning of year
CASH AND CASH EQUIVALENTS, end of year
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest
Cash paid for income taxes (net of refunds)
For the Years Ended December 31,
2005
2004
$
11,771
$
13,868
$
9,584
101
(40)
769
6,790
(1,131)
(11,779)
913
(1,751)
440
15,667
(5,283)
54
-
(154)
(5,383)
-
(2,565)
10,104
-
(16,647)
(9,108)
(524)
652
4,601
5,253
131
4,108
$
$
$
10,834
77
(87)
336
(1,080)
(3)
(9,129)
109
(1,744)
(17)
13,164
(2,110)
257
-
(26)
(1,879)
105
(600)
-
(596)
(10,329)
(11,420)
657
522
4,079
4,601
200
6,448
$
$
$
$
$
$
2003
8,523
11,454
(35)
2
945
(1,969)
198
(10,124)
(1,773)
2,329
277
9,827
(942)
27
(3)
(212)
(1,130)
-
(973)
-
(2,955)
(4,205)
(8,133)
628
1,192
2,887
4,079
212
847
The accompanying notes are an integral part of these consolidated financial statements.
Page 161
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SLOVENSKA TELEVIZNA SPOLOCNOST, S.R.O.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
1. ORGANIZATION AND BUSINESS
Slovenska televizna spolocnost, s.r.o. (STS) is a Slovak limited liability partnership (without shares), having its legal seat in Okružná 18/10, 900 82 Blatné, Slovak Republic. It was founded on September 28,
1995 and incorporated into the Commercial Register on October 9, 1995. The main activities of STS are:
· The broadcasting of programming (both own production and acquired); and
· The sale of advertising.
License renewal
STS operates in conjunction with Markiza-Slovakia, spol. s.r.o., the license holder, based on an Exclusivity agreement.
The Slovak Republic Media Council granted the license to operate the MARKIZA TV network to Markiza-Slovakia, spol. s.r.o. for a period of 12 years, expiring in September 2007. According to the Act
on Broadcasting and Retransmission, a license can be extended once, for an additional 12 years by the Slovak Republic Media Council. Approval from the Slovak Republic Media Council granting
extension of our license for an additional 12 years was delivered to STS on March 22, 2006.
We filed for an extension of the license on February 3, 2006 and were informed on March 10, 2006 by the Media Council that they had extended the license for an additional 12 years. We expect to receive
the final official communication of the extension in the near future.
Our principal subsidiaries at December 31, 2005 were:
Company Name
Voting Interest
Jurisdiction of Organization
Subsidiary (1)
ADAM a.s.
Gamatex, spol. s.r.o.
Markiza-Slovakia, spol. s.r.o. (“Markiza”)
100%
100%
-%
Slovakia
Slovakia
Slovakia
Subsidiary
Subsidiary
Consolidated Variable-Interest Entity (2)
(1) All subsidiaries have been consolidated in our Financial Statements.
(2) For further information, see Note 2, "Summary of Significant Accounting Policies".
Subsequent events
During 2006, Markiza acquired 100% ownership and control of STS. Effective 1 January 2007 all assets, liabilities and operations of STS were transferred to Markiza. At the same time, STS was wound up
without liquidation and its legal existence ceased. These transactions have no material impact on the accompanying financial statements.
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.
The significant accounting policies are summarized as follows:
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SLOVENSKA TELEVIZNA SPOLOCNOST, S.R.O.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Basis of Presentation
The accompanying consolidated financial statements include the accounts of STS and its subsidiaries, after the elimination of inter-company accounts and transactions.
We consolidate the financial statements of entities in which we hold a majority voting interest and also those entities which are deemed to be a Variable Interest Entity of which we are the primary
beneficiary as defined by FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” ("FIN 46(R)"). Entities in which we hold less than a majority voting interest but
over which we have the ability to exercise significant influence are accounted for using the equity method. Other investments are accounted for using the cost method.
In accordance with FIN 46(R), we consolidate Markiza, a license holding company. This is due to the fact that Markiza’s activity is in the interest of STS and an obligation exists via an Exclusivity
Agreement for STS to fund Markiza through a cost plus margin reimbursement arrangement. Markiza has little activity with any third parties.
The following table summarizes balance sheet and income statement information that we consolidate with regard to Markiza. Minority interest represents the amount of statutory equity of Markiza
including a part of 2004 dividend income from STS which is to be distributed 99.9% to the Slovak shareholders.
Consolidated Balance Sheet Financial Statement Caption
Total current assets
Total assets
Total current liabilities
Total non-current liabilities
Minority interest
Total shareholders' equity
Consolidated Statement of Operations Financial Statement Caption
Net revenues
Total operating expenses
Operating income
Income before minority interest
Net income
As at December 31, 2005
Balance prior to
adjustment
Impact of FIN 46 (R)
Adjusted Balance
(US$ 000's)
22,682
41,291
12,726
125
-
28,440
$
$
579
582
(53)
-
635
-
$
$
23,261
41,873
12,673
125
635
28,440
For the Twelve Months ended December 31, 2005
Balance prior to
adjustment
Impact of FIN 46 (R)
Adjusted Balance
(US$ 000's)
64,266
49,664
14,602
11,771
11,771
$
$
-
(39)
39
35
-
$
$
64,266
49,625
14,641
11,806
11,771
$
$
$
$
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SLOVENSKA TELEVIZNA SPOLOCNOST, S.R.O.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Revenue Recognition
Revenue is recognized when there is persuasive evidence of an arrangement, delivery of products has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable and
collectibility 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 revenues
Revenues primarily result from the sale of advertising time. Television advertising revenue is recognized as the commercials are aired. In certain instances, 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.
Program distribution revenue
Program distribution revenue is recognized when the relevant agreement has been entered into, the product is available for delivery, collectibility 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 broadcasted. 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$ 1.6 million, US$ 1.9 million, and US$ 1.7 million for the years ending December 31, 2005, 2004,
and 2003, respectively.
We do not rely on any single major customer or group of customers. No customer accounts for more than 10% of revenue.
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 restricted for use is classified as restricted cash.
Property, Plant and Equipment
Property, plant and equipment are 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
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SLOVENSKA TELEVIZNA SPOLOCNOST, S.R.O.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
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.
Certain assets, such as stages and scenes, are built for specific programs or shows. The depreciation expense for the year ended December 31, 2005 related to these assets of US$ 0.7 million (2004: US$ nil,
2003: US$ nil ) is included in Depreciation and amortization in the Consolidated Statement of Operations.
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 FAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“FAS 144”), we review for impairment of long-lived assets 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.
Fair value is determined by reference to the higher of recoverable value and the discounted future cash flows that are expected to be generated based upon management’s expectations of future economic
and operating conditions. Recoverable value is the higher of the net selling price and value in use.
No impairment has been recognized for any long-lived assets in 2005, 2004, or 2003.
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. Program rights are amortized on a
systematic basis over their expected useful lives, according to the number of runs of the license. The amortization percentages are as follows:
Type of programming
Films and series, 2 runs
Concerts, documentaries, film about film, etc.
Amortization %
Run 1
Run 2
Run 3
Run 4
Run 5
65%
100%
35%
-
-
-
-
-
-
-
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. An impairment reserve of US$ nil at December 31, 2005 (2004: US$ 1.0 million) was recorded against program rights.
Purchased program rights are classified as current or non-current assets based on anticipated usage in the following year, while the related program rights liability is classified as current or non-current
according to the payment terms of the license agreement.
Future program rights of US$ 4.6 million (2004: US$ 9.1 million), which were acquired in 2005 but whose license period starts after December 31, 2005, are not included in Program rights on the
Consolidated Balance Sheet at December 31, 2005 (see Note 10, “Commitments and Contingencies”).
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SLOVENSKA TELEVIZNA SPOLOCNOST, S.R.O.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Produced program rights
Program rights that are produced are stated at the lower of cost less accumulated amortization or fair 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 in the following year.
Intangible Assets
Intangible assets are stated at cost less accumulated amortization. Amortization is provided using the straight-line method over the estimated useful lives of the assets, which are between one and three
years.
Income Taxes
We account for income taxes under the asset and liability method as set out in FAS 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.
Foreign Currency
Translation of Financial Statements
Our reporting currency is the US dollar and our functional currency is the Slovak Crown (SKK). All assets and liabilities are translated into the reporting currency at the exchange rates in effect at the
balance sheet date. Income and expense items are translated at the average exchange rates for the period. Net exchange gains or losses resulting from such translation are included in Other
Comprehensive Income, a component of Shareholders’ Equity.
Transactions in Foreign Currencies
Gains and losses from foreign currency transactions are included in Foreign currency exchange gain/(loss), in the Consolidated Statements of Operations in the period during which they arise.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles 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. Main estimates include bad debts provision, amortization and creation of reserve for program rights, depreciation of assets and creation of reserve for legal claims.
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.
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.
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SLOVENSKA TELEVIZNA SPOLOCNOST, S.R.O.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
Operating lease costs are charged to expense on a straight-line basis.
Contingencies
Contingencies are recorded in accordance with FAS No. 5, “Accounting for Contingencies” (“FAS 5”). The estimated loss from a loss contingency such as a legal proceeding or claim is recorded in the
Statement of Operations and Comprehensive Income 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.
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.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense incurred for the years ending December 31, 2005, 2004, and 2003 totaled US$ 1.6 million, US$ 1.6 million, and US$ 0.8 million, respectively.
Reclassifications
Certain minor reclassifications were made to the prior period balance sheet to conform to current period classifications.
3. ACCOUNTS RECEIVABLE:
Accounts receivable consist of the following at December 31, 2005 and 2004:
Trading:
Third-party customers
Less: allowance for bad debts and credit notes
Related parties
Total
December 31,
2005
December 31,
2004
$
$
10,936
(1,540)
56
9,452
$
$
19,497
(1,902)
448
18,043
Bad debt expense/(benefit) for the years ending December 31, 2005, 2004 and 2003 was US$ (0.1) million, US$ (0.1) million, and US$ 0.04 million, respectively.
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SLOVENSKA TELEVIZNA SPOLOCNOST, S.R.O.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
4. OTHER ASSETS:
Other current and non-current assets consist of the following at December 31, 2005 and 2004:
Current:
Prepaid expenses and advances
Income tax receivable
VAT and other taxes receivable
Deferred income taxes
Other receivables
Total
Non-current:
Deferred income taxes
Total
Page 168
December 31,
2005
December 31,
2004
621
1,084
854
267
221
3,047
161
161
$
$
$
$
590
216
-
79
204
1,089
1,243
1,243
$
$
$
$
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SLOVENSKA TELEVIZNA SPOLOCNOST, S.R.O.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following
Land and buildings
Machinery, fixtures and equipment
Other equipment
Software
Construction in progress
Total cost
Less: Accumulated depreciation
Total net book value
Assets held under capital lease (included in the above):
Other equipment
Total costs
Less: Accumulated depreciation
Net book value
December 31,
2005
December 31,
2004
11,771
19,734
6,963
1,431
111
40,010
(25,765)
14,245
429
429
(154)
275
$
$
$
$
12,910
17,945
7,186
1,435
76
39,552
(26,734)
12,818
418
418
(114)
304
$
$
$
$
For further information on capital leases, see Note 8, “Credit Facilities and Obligations under Capital Leases”
Depreciation expense for the years ending December 31, 2005, 2004 and 2003 was US$ 2.6 million US$ 1.7 million, and US$ 1.8 million, respectively.
6. INTANGIBLE ASSETS
The gross value and accumulated amortization of other intangible assets, which mainly include jingles was as follows at December 31, 2005 and 2004:
Gross value
Accumulated amortization
Total net book value
December 31,
2005
December 31,
2004
$
$
577
(531)
46
$
$
700
(568)
132
Amortization expense for the years ending December 31, 2005, 2004 and 2003 was US$ 0.02 million, US$ 0.03 million, and US$ 0.02 million, respectively.
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SLOVENSKA TELEVIZNA SPOLOCNOST, S.R.O.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
Accounts payable
Programming liabilities
Other accrued liabilities
8. CREDIT FACILITIES AND OBLIGATIONS UNDER CAPITAL LEASES
Group loan obligations and overdraft facilities consist of the following:
Long-term loans
Capital leases
Total
Less current maturities
Total non-current maturities
December 31,
2005
3,312
3,623
4,546
11,481
December 31,
2005
-
196
196
(71)
125
$
$
$
$
December 31,
2004
2,650
3,028
5,196
10,874
December 31,
2004
2,807
220
3,027
(2,878)
149
$
$
$
$
(a)
(a) On 24 July 2002 we obtained from Vseobecna uverova banka, a.s. a mid-term facility of SKK 100.0 million (US$ 3.5 million at December 31, 2004). Interest on this facility was 3-month BRIBOR+1.7%. The
interest rate as at 31 December 2004 was 5.98%. The balance on this facility was repaid in 2005.
Capital Lease Commitments
Assets held under capital leases represent vehicles. The future minimum lease payments from continuing operations, by year and in the aggregate, under capital leases with initial or remaining non-
cancellable lease terms in excess of one year, consisted of the following at December 31, 2005:
2006
2007
2008
2009
2010
2011 and thereafter
Total
Less: amount representing interest
Present value of net minimum lease payments
Page 170
$
$
90
81
49
-
-
-
220
(24)
196
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SLOVENSKA TELEVIZNA SPOLOCNOST, S.R.O.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
9. INCOME TAXES
Income Tax Provision:
The provision for income tax consists of:
Current income tax expense
Deferred tax provision
Provision for income taxes
Reconciliation of Effective Income Tax Rate:
For the Years Ended December 31,
2005
2,507
769
3,276
$
$
2004
3,175
336
3,511
$
$
2003
2,925
945
3,870
$
$
The following is a reconciliation of income taxes, calculated at statutory rates in the Slovak Republic, to the income tax provision included in the accompanying Consolidated Statements of
Operations for the years ended December 31, 2005, 2004 and 2003:
For the Years Ended December 31,
Income taxes at statutory rates (2005, 2004: 19.0%; 2003: 25.0%)
Effect of change in tax rate
Tax effect of permanent differences
Change in valuation allowance
Provision for income taxes
Components of Deferred Tax Assets and Liabilities:
$
$
2005
2,866
-
410
-
3,276
The following table shows the significant components included in deferred income taxes as at December 31, 2005 and 2004:
Assets:
Property, plant and equipment
Programs rights
Accounts receivable
Gross deferred tax assets
Valuation allowance
Net deferred tax assets
Liabilities:
Unrealized foreign exchange, net
Other
Total deferred tax liabilities
Net deferred income tax assets
Page 171
2004
3,295
-
216
-
3,511
December 31,
2005
40
281
113
434
-
434
(6)
-
(6)
428
$
$
$
$
$
$
2003
3,098
531
377
(136)
3,870
December 31,
2004
185
996
233
1,414
-
1,414
(83)
(9)
(92)
1,322
$
$
$
$
$
$
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SLOVENSKA TELEVIZNA SPOLOCNOST, S.R.O.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
10. COMMITMENTS AND CONTINGENCIES
Operating lease commitments
For the fiscal years ended December 31, 2005, 2004, and 2003 we incurred aggregate rent on all facilities of US$ 0.6 million, US$ 0.7 million, and US$ 0.7 million. Future minimum operating lease payments at
December 31, 2005 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:
2006
2007
2008
2009
2010
2011 and thereafter
Total
Future Contractual Obligations
We have the following future contractual obligations:
Unconditional purchase obligations
Station program rights
Other long-term obligations
Total
$
$
521
335
-
-
-
-
856
Total
Less than 1 year
2 years
3 years
More than 3 years
Payments due by period
$
$
13,170 $
4,629
5,446
13,170 $
2,267
5,446
- $
2,362
-
23,245 $
20,883 $
2,362 $
- $
-
-
- $
-
-
-
-
Unconditional purchase obligations relates to production expenses and overall operating expenses, such as utilities, legal and other consultancy etc.
Station program rights - We have commitments for US$ 4.6 million in respect of future programming. This includes all contracts signed in 2005 with license periods starting after December 31, 2005.
Other long-term obligations include broadcast telecommunication charges, author’s rights, and certain other related charges.
Legal claims
STS and Markiza Slovakia are in the normal course of business involved in litigation. The following summarizes cases where we have made a provision for contingent losses based on our assessment of
each case.
The Media Council has fined us for violations during a broadcast of a reality show and a late-night series. In response to these fines, we have accrued a total of US$ 0.6 million, which represents our best
estimate of the cost to settle these fines.
A remaining provision of US$ 0.3 million has been established in response to claims relating to our public affairs and news programs.
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SLOVENSKA TELEVIZNA SPOLOCNOST, S.R.O.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share data)
11. RELATED PARTY TRANSACTIONS
There is a limited local market for many specialist television services in the country in which we operate, many of which are provided by parties known to be connected to some of our shareholders. As
stated in FAS 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.
CME
We loaned to CME, one of our shareholders, a total of SKK 187 million (approximately US$ 6.6 million at December 31, 2004). The loan had an interest rate of 3-month BRIBOR+2.2 %, a rate which we
believe was comparable to independently negotiated third-party rates. This loan and related interest was repaid in full in December 2005.
We also pay CME contractual management fees. These fees totalled US$ 0.4 million for each of the years ended December 31, 2005, 2004 and 2003.
Media Invest
We loaned to Media Invest, one of our indirect shareholders, a total of SKK 80 million (approximately US$ 2.8 million at December 31, 2004). The loan had an interest rate of 3-month BRIBOR+2.2 %, a rate
which we believe was comparable to independently negotiated third-party rates. This loan and related interest was repaid in December 2005.
Forza Group
Markiza purchases several shows from the companies of the Forza Group, which are owned by one of our shareholders. Total production costs related to these shows were US$ 0.5 million, US$ 0.4 million,
and US$ nil for the years ended December 31, 2005, 2004 and 2003, respectively.
We also lease technical equipment and sell advertising spots to the Forza Group. Total revenues from the Forza Group amounted to US$ 0.1 million, US$ 0.1 million, and US$ nil for the years ended
December 31, 2005, 2004, and 2003.
12. RESTRICTION ON DIVIDEND DISTRIBUTION
The laws under which we are organized provide 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. In the case of STS, distributions may be paid from net profits subject to an initial reserve requirement of 10% of net profits until the reserve fund
equals 5% of registered capital. Subsequently, the reserve requirement is equal to 5% of net profits until the reserve fund equals 10% of registered capital. Distribution of dividends must be approved by
the General Assembly.
In the Statutory accounts our equity comprises of basic capital, capital funds and profit for the year. Other capital funds represent CME investment into STS and are netted by the losses generated. All of
the above funds may not be readily distributable because they are not created from profits. In the case of ultimate liquidation, if CME has not received by way of distributed profits an amount equivalent
to its total capital contribution increased cumulatively by 6% for each year of operation, it shall receive such amount less the total of distributed profits received by CME.
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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 the issuer's management, including the Chief Executive Officer and Chief Financial
Officer to allow timely decisions regarding required disclosure.
Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2006 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, 2006. This assessment was performed under the direction and supervision of our Chief Executive Officer and 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, 2006, our internal control over financial reporting was effective. Our independent registered public accounting firm, Deloitte & Touche
LLP, has audited our financial statements and issued an attestation report on our assessment of our 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, 2006 that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Central European Media Enterprises Ltd.
We have audited management's assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Central European Media Enterprises Ltd. and
subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2006, 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. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of 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, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
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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, management's assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedules as
of and for the year ended December 31, 2006 of the Company and our report dated February 28, 2007, expressed an unqualified opinion on those financial statements and financial statement schedules and
included an explanatory paragraph regarding the restatement for stock based compensation described in Note 2.
DELOITTE & TOUCHE LLP
London, United Kingdom
February 28, 2007
ITEM 9B.
OTHER INFORMATION
None
Page 175
Table of Contents
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 is incorporated herein by reference to the section entitled “Election of Directors and Executive Officers” and “Committees of the Board” in our Proxy Statement for the
2007 Annual General Meeting of Shareholders.
We have adopted a Code of Conduct and Ethics applicable to all employees and Board members.
The Code of Conduct and Ethics is posted on our website, www.cetv-net.com. In order to access this portion of our website, click on the “About CME” tab, then select “Company Policies and Charters”
from the available options. Any amendments to, or waivers of, the Code of Conduct and Ethics will be disclosed on our website promptly following the date of such amendment or waiver. Copies of our
Code of Conduct and Ethics are available free of charge by e-mailing a request to postmaster@cme-net.com.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to the sections entitled “Executive Compensation”, “Compensation Discussion and Analysis”, “Compensation Committee Report”
and “Director Compensation” in our Proxy Statement for the 2007 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 2007 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 section entitled “Certain Relationships and Related Transactions” and “Director Independence” in our Proxy Statement for
the 2007 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 “Principal Accountant Fees and Services” in our Proxy Statement for the 2007 Annual General Meeting of
Shareholders.
Page 176
Table of Contents
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) The following Financial Statements of Central European Media Enterprises Ltd. are included in Part II, Item 8 of this Report:
Report of Independent Registered Public Accountants
Consolidated Balance Sheets as of December 31, 2006 and 2005
Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 2006, 2005 and 2004
Consolidated Statement of Shareholders' Equity for the years ended December 31, 2006, 2005 and 2004
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004
Notes to Consolidated Financial Statements
The following Financial Statements of Slovenska televizna spolocnost, s.r.o. are included in Part II, Item 8 of this Report:
Report of Independent Registered Public Accountants
Consolidated Balance Sheets as of December 31, 2005 and 2004
Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 2005, 2004 and 2003
Consolidated Statement of Shareholders' Equity for the years ended December 31, 2005, 2004 and 2003
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules (included at pages S-1 to S-3 of this Annual Report on Form 10-K)
(a)(3) The following exhibits are included in this report:
Page 177
Table of Contents
EXHIBIT INDEX
Exhibit Number
3.01*
3.02*
3.03*
3.04*
3.05*
4.01*
10.01A+*
10.02*
10.8*
10.10*
10.11*
10.12*
10.13*
10.13A*
10.16*
10.18*+
10.19*
Description
Memorandum of Association (incorporated by reference to Exhibit 3.01 to the Company's Registration Statement No. 33-80344 on Form S-1, filed June 17, 1994).
Bye-Laws of Central European Media Enterprises Ltd., as amended, dated as of May 25, 2000 (incorporated by reference to Exhibit 3.02 to the Company’s Annual Report on Form
10-K for the fiscal year ending December 31, 2000).
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 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).
Central European Media Enterprises Ltd. 1995 Stock Incentive Plan, as amended and restated to April 11, 2004 (incorporated by reference to Exhibit A to the Company's Proxy
Statement dated May 9, 2005).
Cooperation Agreement among CME Media Enterprises B.V., Ion Tiriac and Adrian Sarbu (incorporated by reference to Exhibit 10.27 to the Company's Registration Statement
No.33 - 96900 on Form S-1 filed September 13, 1995).
Agreement by and between International Media Services Ltd and Innova Film GmbH, dated January 23, 1997 (incorporated by reference to Exhibit 10.65 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996).
Amended and Restated Charter of the Broadcasting Company 'Studio 1+1', dated January 23, 1997 (incorporated by reference to Exhibit 10.67 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996).
Amended and Restated Foundation Agreement on the Establishment and Operation of the Broadcasting Company 'Studio 1+1,' dated January 23, 1997 (incorporated by reference
to Exhibit 10.68 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996).
Protocol of the Participants' Assembly of the Broadcasting Company 'Studio 1+1,' dated January 23, 1997 (incorporated by reference to Exhibit 10.69 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996).
Marketing, Advertising and Sales Agreement by and between International Media Services Ltd and Innova Film GmbH, dated January 23, 1997 (incorporated by reference to
Exhibit 10.70 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996).
Amendment Agreement to Marketing, Advertising and Sales Agreement between Innova Film GmbH and International Media Services Limited, dated May 7, 1997 (incorporated
by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997).
Advertising Sales Agency Agreement between Studio 1+1 and Servland Continental S.A. dated March 14, 2001 (incorporated by reference to Exhibit 10.47 to the Company’s
Annual Report on Form 10-K for the fiscal year ending December 31, 2000).
Employment Agreement between CME Development Corporation and Robert E. Burke dated July 6, 2001 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2001).
Exclusive Contract of Providing and Broadcasting of Television Signal between Markiza-Slovakia s.r.o. and Slovenska Televizna Spolocnost s.r.o. dated August 30, 1996
(incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001).
Page 178
Table of Contents
10.20*
10.21*
10.22*
10.23*
10.24*
10.25*
10.26*+
10.27*+
10.28*+
10.29*
10.30*
10.31*
10.32*
10.33*
10.34*+
10.35*+
10.36*
10.37*
Exclusive Rights Transfer Agreement between Markiza-Slovakia s.r.o and Slovenska Televizna Spolocnost s.r.o. dated October 3, 2001 (incorporated by reference to Exhibit 10.5 to
the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001).
Key Agreement Boris Fuchsmann, Alexander Rodniansky, Studio 1+1 Ltd, Innova Film GmbH, International Media Services Ltd, Ukraine Advertising Holding, CME Ukraine GmbH
and CME Ukraine B.V entered into as of December 23, 1998 (incorporated by reference to Exhibit 10.43 to the Company’s Annual Report on Form 10-K for the fiscal year ending
December 31, 2001).
Memorandum of Association of Slovenska televizna spolocnost s.r.o (incorporated by reference to Exhibit 10.44 to the Company’s Annual Report on Form 10-K for the fiscal year
ending December 31, 2001).
Articles of Association of Slovenska televizna spolocnost s.r.o (incorporated by reference to Exhibit 10.45 to the Company’s Annual Report on Form 10-K for the fiscal year
ending December 31, 2001).
Amended Memorandum of Association Markiza - Slovakia spol. s.r.o (incorporated by reference to Exhibit 10.46 to the Company’s Annual Report on Form 10-K for the fiscal year
ending December 31, 2001).
Loan arrangement between Vseobecna userova banka a.s and S.T.S. s.r.o,, dated July 24, 2002 (incorporated by reference to Exhibit 10.50 to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 2002).
Employment Agreement between CME Development Corporation and Wallace Macmillan dated March 17, 2003 (incorporated by reference to Exhibit 10.63 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended March 30, 2003).
Employment Agreement between Central European Media Enterprises Ltd and Fred T. Klinkhammer dated October 21, 2003 (incorporated by reference to Exhibit 10.63 to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003).
Employment Agreement between CME Development Corporation and Michael Garin dated March 30, 2004 (incorporated by reference to Exhibit 10.63 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March 30, 2004).
Agreement between CME Media Enterprises BV 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).
CME Romania BV - Adrian Sarbu Funding and Share Sale Agreement, dated March 12, 2004 (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2004).
Share sale and purchase agreement of Nova TV d.d. (Croatia), dated July 7, 2004. (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2004).
Pro TV SA put-option between CME Romania BV, 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 SA put-option between CME Romania BV, 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).
Employee Stock Option Form (a management contract) (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2004).
Employment Agreement between CME Development Corporation and Marina Williams dated November 22, 2004.
Framework Agreement CME Media Enterprises BV, 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, dated February 24, 2005. (incorporated by reference to the Company's Annual Report on Form 10-K for
the period ended December 31, 2004).
Page 179
Table of Contents
10.38*
10.39*
10.40*
10.41*
10.42*
10.43*
10.44*
10.45*
10.46*
10.47*
10.48*
10.49*
10.50*
10.51*
10.52*
10.53*
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).
Registration Rights 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).
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., and 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).
Euro 37.5 million facility agreement, dated July 29, 2005, between Produkcija Plus Storitveno Podjetje d.o.o. and ING Bank N.V., Nova Ljubljanska banka d.d., and Bank Austria
Creditanstalt d.d. (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. 2644/05/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).
Agreement for the sale of shares in A.R.J., a.s. between PhDr. Pavol Rusko and CME Media Enterprises B.V. dated October 28, 2005. (incorporated by reference to the Company's
Annual Report on Form 10-K for the period ended December 31, 2005).
Agreement for the sale of shares in A.R.J., a.s. among Media Partner, spol. s r.o.,, Salis, s.r.o., CME Media Enterprises B.V., Ing. Milan Fil’o and Mr. Jan Kovacik dated October 31,
2005. (incorporated by reference to the Company's Annual Report on Form 10-K for the period ended December 31, 2005).
Sale-Purchase Contract for Shares of Media Pro International S.A. between CME Romania B.V. and Adrian Sarbu dated February 17, 2006. (incorporated by reference to the
Company's Annual Report on Form 10-K for the period ended December 31, 2005).
Sale-Purchase Contract for Shares of Pro TV S.A. between CME Romania B.V. and Adrian Sarbu dated February 17, 2006. (incorporated by reference to the Company's Annual
Report on Form 10-K for the period ended December 31, 2005).
Sale-Purchase Contract for Shares of Media Vision SRL between CME Romania B.V. and Media Pro Pictures S.A. dated February 17, 2006. (incorporated by reference to the
Company's Annual Report on Form 10-K for the period ended December 31, 2005).
Underwriting Agreement, dated March 23, 2006 (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2006).
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).
Page 180
Table of Contents
10.54*
10.55*
10.56*
10.57*+
10.58*+
10.59*+
10.60*+
10.61*+
10.62
21.01
23.01
24.01
31.01
31.02
32.01
*
+
b)
c)
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).
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 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).
Contract for the Performance of the Office between CET 21 s.r.o. and Adrian Sarbu, dated August 1, 2006 (incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2006).
Letter Agreement between Central European Media Enterprises Ltd. and Adrian Sarbu, dated August 1, 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).
Agreement to Provide Advertising Services between Video International-Prioritet LLC and Broadcasting Company “Studio 1+1” LLC dated November 30, 2006.
List of subsidiaries
Consents of Deloitte & Touche LLP and Deloitte Audit s.r.o.
Power of Attorney, dated as of February 24, 2007
Sarbanes-Oxley Certification s.302 CEO, dated March 1, 2007
Sarbanes-Oxley Certification s.302 CFO, dated March 1, 2007
Sarbanes-Oxley Certification - CEO and CFO, dated March 1, 2007 (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 pages S-1 to S-3 of this Form 10-K).
Page 181
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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: March 1, 2007
Date: March 1, 2007
/s/ Michael Garin
Michael Garin
Chief Executive Officer
(Duly Authorized Officer)
/s/ Wallace Macmillan
Wallace Macmillan
Vice President - Finance
(Principal Financial Officer and Accounting Officer)
Page 182
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/ Michael Garin
Michael Garin
/s/ Wallace Macmillan
Wallace Macmillan
*
Frank Ehmer
*
Charles Frank
*
Herbert Kloiber
*
Alfred W. Langer
*
Bruce Maggin
*
Ann Mather
*
Christian Stahl
*
Eric Zinterhofer
Date
March 1, 2007
March 1, 2007
March 1, 2007
March 1, 2007
March 1, 2007
March 1, 2007
March 1, 2007
March 1, 2007
March 1, 2007
March 1, 2007
March 1, 2007
March 1, 2007
Title
Chairman of the Board of Directors
Vice-Chairman of the Board of Directors
Chief Executive Officer and Director
(Principal Executive Officer)
Vice President - Finance
(Principal Financial Officer and Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
* By
/s/ Wallace Macmillan
Wallace Macmillan
Attorney-in-fact
Page 183
Table of Contents
INDEX TO SCHEDULES
Schedule II : Schedule of Valuation Allowances
Schedule II
Schedule of Valuation Allowances
(US$ 000’s)
Balance at December 31, 2003
Charged to costs and expenses
Charged to other accounts (1)
Foreign exchange
Balance at December 31, 2004
Charged to costs and expenses
Charged to other accounts (1)
Foreign exchange
Balance at December 31, 2005
Charged to costs and expenses
Charged to other accounts (1)
Foreign exchange
Balance at December 31, 2006
S-3
Bad debt and credit note provision
Deferred tax allowance
5,625
250
(203)
468
6,140
1,750
1,532
(172)
9,250
1,989
1,540
(115)
12,664
11,846
(1,366)
-
(2,469)
8,011
5,115
(185)
(1,007)
11,934
6,107
(1,168)
(299)
16,574
(1) Charged to other accounts for the bad debt and credit note provision consist primarily of accounts receivable written off and opening balances of acquired companies.
Page 184
Exhibit 10.62
The city of Kiev
Agreement
November 30, 2006
Broadcasting Company “Studio 1+1”, a legal entity organized and existing under the laws of Ukraine in the form of a limited liability company (hereinafter referred to as “TV Company”), represented by
its General Director Yuri Z. Morozov, acting in accordance with the TV Company’s Charter, and “VIDEO INTERNATIONAL-PRIORITET”, a legal entity organized and existing under the laws of Ukraine
in the form of a limited liability company (hereinafter referred to as “Customer”), represented by its General Director Vyacheslav Yu. Bulavin, acting in accordance with the Customer’s Charter (each of
them a “Party” and together the “Parties”) have entered into this Agreement to the effect as follows:
1.1 For the purpose hereof the terms set out below shall have the following meanings:
“TV Channel” - TV Channel “1+1”, broadcasting throughout the territory of Ukraine.
1. Terms and Definitions
“TV Channel’s Air” - TV Channel’s broadcasting of audio visual information and material (such as programmes, shows, TV features and motion pictures, advertising blocks, etc.) distributed to
the public in the territory of Ukraine, using technical broadcasting devices.
“Advertising Agreement” - an agreement between the Customer and the Advertiser. Its subject covers the placement of the Advertiser’s Advertising on the TV Channel’s Air.
“Advertising” - special audio visual information of a person, product or service provided by the TV Company as a commercial to an unrestricted circle of persons by way of TV broadcasting
(placement) and intended for shaping or maintaining consumers’ awareness, as well as their interest in such person, product or service. Unless otherwise stipulated herein, the term Advertising used
within the framework of this Agreement shall be interpreted to include National Advertising, Regional Advertising and Social Advertising.
“Placement Schedule” - a daily schedule of Advertising placement (Media-plan) that contains Advertisers, commodity and/or financial brands, date and time of the Advertising placement, its
duration and the type of Advertising.
“Unauthorized Advertising” - Advertising provided for the placement by third parties and placed by the TV Company on the TV Channel’s Air, except Advertising placed by the TV Company on
the TV Channel’s Air at its own discretion within the framework of: (i) the international agreement entered into with “Innova Film GmbH” on 11 December 1996 or its legal successor or within the
framework of another similar agreement, which shall be formalized in additional annex to this Agreement; and (ii) agreements on advertising services entered into with Gravis LLC concerning placement of
Advertising of TV channels whose broadcasting licenses are owned by Gravis LLC and agreements on advertising internet sites.
“Media Sponsorship” - (i) a placement by the TV Company of any information deemed advertising in nature about certain events in areas such as sports, entertainment, and social relations that are
either directly connected with the TV Company’s activities and/or aimed to promote and popularize the TV Channel and/or the TV projects of the TV Company; (ii) a placement of Advertising on the TV
Channel’s Air in order to perform the obligations of the TV Company under its agreements where the TV Company receives from Advertisers services for distribution or placement of Advertising or other
information related to the TV Company or other services of an amount equal to Advertising services provided to the Advertiser by the TV Company.
1
“National Advertising” - Advertising aired by the TV Channel throughout the territory of Ukraine (nationwide), i.e. Advertising that cannot be referred to as Regional Advertising.
“Improper Advertising” - unfair, comparative, hidden and other Advertising characterized by breaches of Ukraine’s legislation in respect of content, time, place, method and conditions of
distribution.
“Reporting Period” - one calendar month.
“Political Advertising” - direct or indirect propaganda placed on the TV Channel’s Air of subjects relating to elections, such as a political party (bloc), any person involved in political activities,
political programs, views and opinions, or any information related to the aforementioned during the election campaign period established by Ukrainian law. Political Advertising comprises the use of
symbolism or logos of parties (blocs) or other participants of political activities, as well as information on support provided by any parties (blocs) or any other participants of election activities of shows
or any other public events, or drawing attention to participation in such events of parties (blocs) or any other subjects relating to election campaigns.
“Product Placement” - the placement of goods (services) by the TV Company in the TV programmes/telecasts (films included) distributed on the TV Channel’s Air with or without indicating their
manufacturers and names thereof.
“Regional Advertising” - Advertising placed on the TV Channel’s Air within a certain part of Ukraine’s territory (not nationwide) in regional advertisement packages approved by the TV
Company.
“Advertising Materials” - a tangible medium of the type and format approved by the Parties which contains audio and video recording of Advertising. Unless otherwise additionally agreed by the
Parties. audio and video recordings of Advertising shall be presented using the PAL system with completed mix track and time code on video tapes, Betacam SP or Digital Betacam.
“Rates for Advertising Placement” - the average cost of 30 second CPP established monthly by the Customer (VAT and Advertising tax not included) and agreed with the TV Company for the
Advertising placement on the TV Channel’s Air and used by the Customer to determine the Cost of Advertising Placement under Advertising Agreements.
“Advertising Services” - services provided by the TV Company to the Customer pursuant to this Agreement and including the services of the Advertising placement in programmes, in between
programmes and special advertising blocks of the TV Channel.
“Advertising Schedule” - a document to define the time slots for advertising packages on the TV Channel’s Air in which Advertising may be placed.
“Advertiser” - a legal person which orders the production and/or distribution of Advertising.
2
“Social Advertising” - information of any kind, focused on the achievement of socially useful objectives and popularization of common human values, distribution of which is not intended for
profit making. Social Advertising should not contain references to any specific goods and/or its manufacturer, the Advertiser, or any objects of intellectual property owned by the manufacturer of the
product or the Advertiser.
“Sponsorship Advertising ” - Advertising of names, titles and trade marks for goods and services, owned by a person which voluntarily provides support and assistance (monetarily, financially or
organizationally) to any activities, including the TV Company’s activity, with the aim to exclusively promote its own name, title and trade mark for goods and services.
“Cost of Placement” - a monetary amount (including VAT and Advertising Tax) which is agreed upon between the Parties on a monthly basis according to the procedure stipulated hereunder and
which is deemed the basis for estimating the Cost of Advertising Services on the TV Channel’s Air and represents the total sum of the collection revenues of the Customer per each Reporting Period
according to the Advertising Agreements.
“Cost of Advertising Services” - the amount (including VAT and Advertising Tax) payable by the Customer for the Advertising Services provided by the TV Company pursuant to this
Agreement.
“Commodity Brand” - an advertising object, which includes goods, services, legal entities, individuals, etc.
“Financial Brand” - a reference designation for one or more commodity brands which may be used by the Parties for accounting purposes (Acts, invoices, etc)
“Log” - a document confirming the Advertising placement on the TV Channel’s Air.
“Broadcast Schedule” - a schedule of the broadcasting of TV programmes on the TV Channel’s Air.
“PR-Services” - services aimed to establish public relations, and in particular communication to the public of certain information available to it of a political or commercial nature by way of TV
broadcasting, carried out by the TV Company at the request of a third party on in-house current affairs and/or informative programmes outside advertising packages.
“Special Projects” - information to be used for placement on the TV Channel’s Air characterized by an original format and implemented in various interactive forms (quizzes, competitions, votings,
chats, etc.) which allows the audience to take part in the programmes by way of SMS communication.
“Forecast” - an estimate for the Cost of Advertising Services and associated indicators listed in clause 11.3 below for one calendar year as agreed by the Parties.
“Annual Budget” - the agreed Forecast for the Cost of Advertising Services and associated indicators listed in clause 11.3 below for one calendar year as agreed by the Parties.
“Reforecast” - any revision on the agreed outcome of the Cost of Advertising Services and associated indicators listed in clause 11.3 for the remainder of the specified calendar year made at any
point during that year. Such a revision may be made in relation to a previous Reforecast or to the Annual Budget.
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“Rating point” (“RP index”) - the rating of individual time intervals of Advertising on the TV Channel’s Air, identified on the basis of people-metric study results of the audience. These results to
be provided by the company “GfK - Ukraine” or by any other specialized company approved by the Parties.
“GRP” - gross RP index.
“CPP” - cost of RP index (net amount of VAT and Advertising Tax)
“Prime Time” - any time interval within the Broadcast Schedule between 6:00PM through 11:00PM ( Mondays to Fridays) and any time interval between 5:00PM -11:00PM (Saturdays and
Sundays and non-working days as determined by the Cabinet of Ministers of Ukraine).
“Off-Prime Time” - any time intervals within the Broadcast Schedules which are not indicated as Prime Time above.
2. SUBJECT OF AGREEMENT
2.1 This Agreement shall regulate the relationship between the Parties in respect of broadcasting (placement) on the TV Channel’s Air of National Advertising, Regional Advertising and Social
Advertising.
2.2 Pursuant to this Agreement the TV Company shall undertake to provide the Customer with Advertising Services to place the Advertising of the Customer’s clients (Advertisers) on the TV
Channel’s Air for the period commencing on January 1, 2007 until December 31, 2011 (hereinafter “Advertising Period”) and the Customer shall make payments for the services provided by the TV
Company in accordance with the scope and conditions defined in this Agreement.
2.3 Should the structure and procedure for the Regional Advertising placement be subject to any changes, the Parties shall additionally agree on the regions and the procedure for rendering
services to be provided by the TV Company with the aim to place the largest practical amount of Regional Advertising in any Reporting Period. Both Parties are hereby placed under an obligation to
notify each other of any such changes in accordance with the procedures set out in clause 14.10 under which the Parties shall reach a mutual solution within 30 (thirty) days.
2.4 Provisions for the Advertising placement shall be agreed upon on a monthly basis by the Parties in Annexes to this Agreement.
The Annexes shall be signed monthly by the Parties not later than 1 (one) working day prior to the beginning of the next Reporting Period.
Advertising Services shall be provided to the Customer in the volume (quantity) indicated in a relevant Annex and in compliance with the Placement Schedule.
2.5 Unless otherwise expressly agreed by the Parties, this Agreement shall not apply to legal relationships between the Parties in respect of Media Sponsorship, Product Placement, PR-Services,
Special Projects, Sponsorship Advertising and Political Advertising.
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3.1 The TV Company:
3. RIGHTS AND OBLIGATIONS OF THE PARTIES
3.1.1 shall provide the Customer with Advertising Services for the Advertising placement on the TV Channel’s Air in full compliance with the Placement Schedule. The Placement Schedules are
prepared by the Customer and placed in the Automated System of Advertising placement, a computer program (hereinafter “VIMB”). The TV Company shall accept the Placement Schedule at least 2 (two)
working days prior to the start date of the Advertising placement on the TV Channel’s Air. Both Parties shall perform their obligations in accordance with the provisions of clause 6 below.
3.1.2 shall provide the Customer with all and any relevant information required to perform this Agreement as well as to timely inform the Customer about the TV Company’s technical requirements
in respect of the quality standards of Advertising Materials.
3.1.3 shall not provide Advertising services to third parties similar to Advertising Services under this Agreement, except for Advertising placed by the TV Company on the TV Channel’s Air at its
own discretion within the framework of: (i) the international agreement entered into with “Innova Film GmbH” on 11 December 1996 as well as its legal successor or in the framework of another similar
agreement whose subject shall not be placement of Advertising of Advertisers - Ukraine residents (TV Company shall promptly inform the Customer about conclusion of such similar agreement and the
TV Company’s new counterparty shall be defined in the additional annex to this Agreement); and (ii) agreements on advertising services entered into with Gravis LLC concerning placement of
Advertising of TV channels whose broadcasting licenses are owned by Gravis LLC as well as agreements on advertising of internet sites and as otherwise provided in this Agreement.
3.1.4 shall refrain from broadcasting Unauthorized Advertising.
3.1.5 shall upon the execution of this Agreement, provide the Customer with the TV Channel’s prospective Broadcast and Advertising Schedules for the first quarter of 2007 and to further deliver
such Schedules to the Customer quarterly at the earliest convenience and not later than 10 (ten) working days before the commencement of the next relevant quarter.
3.1.6 shall inform the Customer about any changes of the Broadcast and Advertising Schedule not later than the 20th (twentieth) day of the current month. The TV Company shall immediately
(within 2 (two) days) inform the Customer of any changes in the Broadcast and Advertising Schedule for the next month in case the said changes are to be introduced by the TV Company later than the
20th (twentieth) day of the current month. The terms for a relevant advance notice may not be complied with by the TV Company if changes are to be introduced for reasons indicated in clause 3.1.7
below.
3.1.7 shall have the right to introduce the changes into the Broadcast Schedule for the next month after the 20th (twentieth) day of the current month only if such changes have been formerly agreed
with the Customer in writing, except for the situations where the changes are to be introduced urgently due to events of state importance and/or force majeure situations or in connection with annulment
or change of time of sports events which were supposed to be broadcasted live, etc, (i.e. when the written agreement between the Parties in advance would be impossible to reach due to reasons outside
the TV Company’s control).
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3.1.8 shall be entitled to refrain from accepting Advertising Materials for broadcasting if their technical specifications do no meet the TV Channel’s requirements for similar video products, the
Advertising’s content does not meet the TV Channel’s ethical, political or editorial principles and the Advertising does not comply with Ukraine’s legal provisions in respect of its form and content.
3.1.9 shall immediately notify the Customer of its refusal to place the Advertising due to the reasons indicated in clause 3.1.8 in accordance with the procedures established in clause 14.10 below
and shall suggest that it is either replaced or varied to comply with the TV Channel’s requirements and/or Ukraine’s legislation.
3.1.10 shall inform the Customer in writing of all changes in the Placement Schedule and other provisions agreed by the Parties which may arise in the course of the Advertising placement. The
relevant notice shall be delivered to the Customer at least 48 (forty-eight) hours prior to the date of the changes to be introduced except for the cases otherwise stipulated by legislation of Ukraine and
this Agreement.
3.1.11 shall inform the Customer in writing of all failures in respect of the Advertising placement. A relevant notice shall be delivered to the Customer no later than 24 (twenty-four) hours after the
time at which the relevant Advertising should have been aired according to the Placement Schedule.
3.1.12 shall edit the Advertising in order to compile it into advertising packages and shall provide services on placement of the Advertising according to the provisions and rules hereof for
providing such services as agreed by the Parties.
3.1.13 shall provide the Customer with a requested Log not later than 10 (ten) working days after the receipt of a relevant request.
3.1.14 shall review and respond to any of the Customer’s written requests regarding a possibility to broadcast any Advertising within 3 (three) working days of receipt of the written request, in
accordance with the procedure set out in clause 14.10 below. Should no answer be provided during this time, the Customer shall regard this as an affirmative answer.
3.1.15 shall in the event of the its refusal to provide Advertising Services for the Advertising placement in respect of any particular Advertiser and/or particular Advertising which is otherwise in
compliance with its technical requirements and ethical and editorial policies of the TV Company, duly inform the Customer in writing and provide the reasons for its refusal.
3.2. The Customer:
3.2.1 shall deliver to the TV Company all information and/or documentation required to provide services for the Advertising placement within the term of delivery that shall be sufficient to perform
the obligations assumed by the TV Company, including:
(i) shall provide the TV Company with Advertising Material and its necessary licenses (or their duly certified copies) if the activity, goods and/or services to be advertised are subject to licenses
and/or certificates or duly notarized copies thereof.
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(ii) shall provide the TV Company as soon as demanded with the appropriate documentation to duly prove that any object of industrial property used in Advertising such as trade marks for goods
and/or services, etc., have been legally and lawfully used in the Advertising;
(iii) shall provide the TV Company as soon as demanded with documents duly providing an individual’s consent for the usage of his/her image and/or name, if such individual’s image and/or name
has been used in the Advertising;
(iv) shall provide the TV Company as soon as demanded with documents duly confirming compliance with the rights attached to copyright works and/or related rights, when creating and
distributing such Advertising, as well as with information on Ukranian and foreign authors of the works used in the Advertising , according to the form requested by the TV Company, if the TV Company
views the Advertising as a likely breach of copyright and/or related rights of third parties.
3.2.2 shall provide the TV Company as soon as demanded with Advertising Materials which comply with the Ukrainian legislation and the TV Company’s technical requirements including
legislation on advertising, unfair competition, protection of consumers’ rights and intellectual property rights. Advertising Materials are to be provided at least 2 (two) working days prior to the first day
of the relevant Advertising placement. Should the relevant Advertising Materials be delivered later, then the TV Company shall not be held responsible for a breach of the Placement Schedule in respect
of compliance with the terms of such Advertising placement.
3.2.3 shall set out and agree with the Company on a monthly basis the Cost of the Advertising Placement based on the Rates for Advertising Placement, taking into account the TV Company’s
current programming policy, the audience, the TV Channel’s technical capabilities, the Advertising positioning in the advertising package, its seasonality and competitiveness.
Considering the above, the Customer has the right to use a lower amount than the agreed Rates for the Advertising placement only in cases when it was not possible to agree the Cost of the
Advertising Placement on the basis of the Rates of Advertising Placement higher than the agreed amount by the TV Company or in full compliance with them. Should the applied Rates for the
Advertising Placement be lower than ([***) of those agreed by the Parties or (***) more, the Customer shall provide the TV Company with a detailed explanation on a case by case basis within ten (10)
days of using such lower Rates for the Advertising Placement, without the need of prior request by the TV Company.
3.2.4 When forming the Cost for Advertising Placement for each subsequent year within this Agreement’s Effective Period, the Customer shall apply the Rates for Advertising Placement which
shall not be lower than those which were valid in the previous year.
3.2.5 shall provide the TV Company’s certain employees and/or professional advisors as agreed by the Parties with access to the Customer’s documents connected with the performance hereof,
including the VIMB data which allows the TV Company to daily monitor and retrieve data on the Customer’s clients (Advertisers), terms, prices and other provisions of the Advertising Agreements. The
access shall be provided to the TV Company’s employees and/or professional advisors during working hours subject to a notice in advance.
3.2.6 shall be entitled to send a request in writing to the TV Company concerning a possibility to broadcast other Advertising which has not been stipulated and/or regulated in this Agreement.
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3.3 The Parties shall execute monthly bilateral deeds on providing services and settlements of accounts pursuant to the terms and conditions stipulated hereunder.
3.4 The Parties shall agree the Rates for Advertising Placement for each subsequent year based on the TV Channel’s ratings, seasonal market fluctuations in Ukraine and other factors deemed by
the Parties as objective.
3.5 In the event of the Customer entering into similar agreements as this Agreement with broadcasting companies and/or with its representatives whose audience shares are similar to the TV
Company’s audience shares (hereinafter “Agreements with Broadcasters”), the Customer shall notify the TV Company about plans to enter into such Agreements with Broadcasters at least 30 (thirty)
days prior to the expected date of its conclusion.
3.6 (***)
4. COST OF SERVICES FOR ADVERTISING PLACEMENT AND MUTUAL SETTLEMENT OF ACCOUNTS
4.1 Monthly Cost of Placement shall be agreed by the Parties in Annexes hereto.
The monthly Cost of the TV Company’s Advertising Services provided hereunder shall be estimated in Ukraine’s local currency and shall constitute (***) of the relevant Cost of Placement.
4.2 The Cost of the TV Company’s Advertising Services and procedure for the payment thereof shall be agreed in relevant Annexes for the respective Reporting Period. Should the Parties not
agree otherwise in Annexes, the Customer shall pay the TV Company the Cost of Advertising Services by transferring the money to the TV Company’s bank account of the within 3 (three) banking days
from the receipt of the Cost of Placement to its bank account in accordance with the Advertising Agreements.
4.3 The Customer’s obligations in respect of payments for the TV Company’s Advertising Services shall be deemed performed the moment the relevant funds have been written off the Customer’s
account, provided that necessary bank transfer requests confirming that such funds were properly addressed to the TV Company’s bank account can be provided by the Customer on written request by
the TV Company.
4.4 The Customer is obliged to provide copies on a weekly basis of relevant payment documents for the previous week to the TV Company as proof of the payments for Advertising Services
hereunder.
4.5 All payments between the Parties shall be made inclusive of VAT and other taxes as well as other duties and mandatory payments to the budget which may be required in connection with such
payment settlements.
4.6 Beginning from July 1, 2007 and each quarter thereafter, the TV Company shall review the Cost of Advertising Services received by the TV Company during the preceding quarter and the first
month of the quarter just closed. Should the Cost of Advertising Services received by the TV Company on the date of review fall below (***) of the Cost of Advertising Services for those 4 (four)
months, the Customer shall within 7 (seven) days from the date of review but not earlier than the end of the second quarter pay the accrued current difference between (***) of the Cost of Advertising
Services and the actually paid Cost of Advertising Services.
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4.7 The Parties hereto shall be deemed corporate profit tax payers as generally provided for by the laws of Ukraine “On Corporate Profit Tax”.
5. PROCEDURE FOR PROVIDING REPORTS
5.1 Within 12 (twelve) days of the month following the Reporting Period the Parties shall prepare a draft service provision and a payment settlement deed that contains and approves the actual
amount of the Advertising Services (the number estimated in minutes), the actual Cost of the Advertising Services rendered and the amount of the Customer’s debt for the Advertising Services for the
previous Reporting Period. The Customer and TV Company hereby confirm that they shall take all reasonable measures to prepare the documents indicated in clauses 5.1 and 5.2 of this Agreement by the
10th (tenth) day of the month following the Reporting Period.
5.2 Along with the deed as per clause 5.1 above the Parties agree to break down the deed’s content in the form agreed by the Parties which contains the following:
1) Customer’s clients (Advertisers);
2) Names of Commodity Brands/Financial Brands;
3) Advertising placement period (Reporting Period);
4) The total Cost of Placement within the Reporting Period (including VAT and Advertising Tax), accompanied by a list of the 20 major Advertisers /Customer’s clients and the copies of invoices
issued by the Customer to the Advertisers in compliance with the TV Company’s request;
5) The cost of Advertising Services for Advertising placement within the Reporting Period in respect of the agreed audience;
6) The amount of the Customer’s debt for the Advertising Services for the previous Reporting Period;
7) The amount of the Customer’s debt for payment of the Cost of Advertising Services from the commencement date of the Placement Period up to the end of the Reporting Period.
The deed may also contain other information as the Parties deem appropriate.
5.3 The deed as per clause 5.1 above, shall be signed by both Parties within 3 (three) days upon its completion or the Parties shall present the reasoned objections to the deed in writing.
5.4 As to the accounting documentation that has not been stipulated here, both Parties shall sign a separate Annex hereto which shall determine the content and procedure of submission of the
accounting documentation. Such Annex to be signed at the same time as this Agreement.
6. TECHNICAL SUPPORT
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6.1 The exchange of information which is necessary for proper performance of either Party’s respective obligations hereunder (including preparation and approval of the Placement Schedule and
preparation and approval of full and accurate information regarding the budget of clients for the current and subsequent years, if available) shall be implemented through the use of VIMB by the
Customer and containing all necessary information used to sort orders for Advertising placements on the TV Channel’s Air. Procedures and conditions of the use of VIMB shall be regulated by a
separate license agreement (including agreed responsibility for technical matters of programme management).
6.2 The Customer shall copy all Placement Schedule data and financial information in connection with projecting the Cost of Placement daily. The Customer shall warrant and represent that in case
of a technical failure, natural disaster or breakdown it is able to restore (renew) the agreed information and functionality within 24 (twenty-four) hours or as soon as may be practicable upon the expiry of
the 24 (twenty-four) hours. Inability to provide the information or functionality within the period exceeding 1 (one) week shall be deemed as a failure to perform this Agreement.
6.3 Should any discrepancy be discovered between the invoices issued to the Customer’s clients (Advertisers) and the data contained in the Customer’s monthly reports on the Advertising
placement composed on the basis of the VIMB data and properly containing all the required adjustments pursuant to the latest data provided by GfK-Ukraine (or any other specialized company as agreed
by the Parties), the Customer shall provide an appropriate explanation in writing in respect of each such discrepancy within 3 (three) working days upon receipt of the TV Company’s respective request
(the TV Company shall provide the Customer with a list of persons authorized to deal with such request). The requests of this kind shall be sent by the TV Company in accordance with the provisions of
clause 14.10 below.
6.4 Should any Advertiser’s campaign be over before the Reporting Period expires the Customer shall provide the TV Company with the information containing the volume of ratings of such
campaign based on the data provided by GfK-Ukraine (or any other specialized company as agreed by the Parties) on the date of submission of such information, as well as the campaign’s period,
audience, brand and the type of Advertising. The information of this kind shall be provided to the TV Company in writing in accordance with the provisions of clause 14.10 below. The TV Company shall
either approve the information received or submit reasoned objections to approval by 12:00AM of the day following the day when it was provided by the Customer. The TV Company’s response shall be
signed by the TV Company’s Marketing Director (and/or any other duly authorized employee of the TV Company).
7. LIABILITY OF THE PARTIES
7.1 Should either Party fail to perform (or to improperly perform) its obligations hereunder, the Party at fault shall reimburse the other Party for all reasonable losses incurred as a direct result of
such failure to perform (or improper performance) pursuant to Ukrainian legislation.
7.2 In case of any delayed payment hereunder, the Party at fault shall pay a penalty for each delayed day to the other Party in the amount of the National Bank of Ukraine’s (***) effective during
the delay period, subject to the receiving Party sending a relevant claim in writing to the debtor. Should the receiving Party send no claim of this kind in writing, the penalty shall neither be charged nor
paid.
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7.3 Should the TV Company be in breach of its obligations in respect of providing Advertising Services (i.e. the Advertising has not been placed, the time or sequence of the Advertising placement
has been changed, the quality and technical parameters have not been complied with, i.e. lack of sound, disturbances, breaches regarding duration, contents or versions of the Agreement, etc.), the TV
Company shall place the non-placed or unduly placed Advertising increasing the time assigned by 1.5 within the slots agreed with the Customer, or return if so requested by the Customer, the funds that
have been paid by the Customer for the Advertising placement and reimburse the Customer in full for all accrued expenses.
7.4 The TV Company shall not be responsible for the breaches as per clause 7.3 above if the breaches occurred due to the Customer’s fault.
7.5 Should Unauthorized Advertising be placed on the TV Channel’s Air, the TV Company shall pay a fine to the Customer at the rate of double the cost of placement of such Unauthorized
Advertising using the Rates of the Advertising placement for each airing of the Unauthorized Advertising provided that the Customer sends the TV Company a relevant complaint in the form of a
registered letter. Should the Customer not demand in writing that the fine be paid, the fine will neither be charged nor paid.
7.6 In case of an unreasonable refusal to place the Advertising (clause 3.1.15), the TV Company shall be subject to a fine payable to the Customer at the rate of (***) of the Cost of the Advertising
Placement based on the Rates for the Advertising Placement that the TV Company refused to place.
To support compliance with the criteria of acceptable Advertising, the TV Company shall provide the Customer with a copy of its Ethics Policy and any regulations of the TV Company’s Editorial
Committee and the Customer hereby agrees to comply with all conditions applicable under this Agreement.
7.7 The Customer shall be liable for the Advertising Materials’ compliance with the TV Company’s technical standards and shall ensure the compliance with the applicable copyrights of the
Advertising (including those arising when the Advertising is produced), rights and lawful interests of third parties (including those provided for under the laws of Ukraine “On Copyrights and Related
Rights”) for which the Customer shall obtain similar guarantees from its clients/Advertisers. The Customer shall not order the Advertising to be placed on the TV Channel’s Air in respect of which it has
not obtained a written guarantee from its Client/Advertiser that production and distribution of the Advertising in question is not in breach of rights and interests of third parties when copyright works are
used.
All and any property claims of third parties including those submitted to the TV Company in connection with violations of their rights and interests in the course of the Advertising production
and/or distribution shall be readdressed to the Customer with a copy being sent to third parties in question for settlement by the Customer and/or Advertisers at their own expense. With this condition in
view the Customer shall undertake to actively participate in settling such claims.
Should the TV Company incur any losses due to the settlement of such claims, the Customer shall undertake to arrange that the losses shall be reimbursed in full by the actual infringer of the third
party rights and should that be impossible, the Customer shall pay to the TV Company a fine of an amount equal to the losses duly documented by the TV Company.
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7.8 Should the Customer be in breach of clause 6.3 hereof (in case of not providing explanations stipulated by such clause) and three times not provide explanations, the Customer shall pay a fine
to the TV Company at the rate of (***) of the amount equal to the negative difference between the invoices issued and the information contained in the Customer’s monthly accounting reports composed
on the basis of the VIMB data and containing all necessary adjustments pursuant to the final data provided by GfK-Ukraine (or another specialized company as agreed by the Parties). Unless the TV
Company demands in writing that the fine should be paid, the fine will neither be charged nor paid.
7.9 Should the Customer be in breach of clause 3.2.3 hereof (in case of not providing explanations stipulated by such clause) the Customer shall pay a fine to the TV Company at the rate of (***) of
the amount equal to the negative difference between the actual Cost of Placement and Cost of Placement calculated with the use of the Rates for Advertising Placement. Unless the TV Company demands
in writing that the fine should be paid, the fine will neither be charged nor paid.
7.10 All forfeits (penalties and fines) indicated herein shall be subject to payment by the Party at fault within 5 (five) business days upon the date of receipt of the request in writing sent by the
other Party. Payment of penalties or fines shall not release the Parties from performance of their obligations hereunder.
8. FORCE MAJEURE
8.1 Either Party shall be released of its responsibility for a full or partial failure to perform its respective obligations hereunder if such failure to perform results from force majeure that occurs and
prevails after the execution of this Agreement, which the said Party could neither foresee nor prevent using reasonable measures.
For the purpose hereof, force majeure circumstances include the following: natural disasters, wars or military operations, strikes in the industry or in a relevant region, laws adopted by the President
of Ukraine or state authorities leading to impossibility to perform this Agreement as well as urgent and prompt provision of the airtime to Ukraine’s officials, coverage of official visits of the state’s
leaders, violation/failure to provide services of transmitting signals by Concern RRT and other circumstances beyond the Parties’ reasonable control.
8.2 The Party which is not able to perform its obligations hereunder shall immediately (no later than 5 (five) working days) notify the other Party about the occurrence and termination of the force
majeure circumstances. The representatives of the Parties are to hold consultations as soon as possible to agree on the steps to be taken by the Parties.
The fact of such circumstances occurring and its duration shall be confirmed by a special document to be issued by competent authorities or organizations, including Ukraine’s Chamber of Trade
and Industry.
8.3 A failure to notify or a delayed notification in respect of the force majeure circumstances shall deprive the relevant Party of the right to refer to any of the above mentioned circumstances as
grounds for release of its liability for the delay in performing its obligations.
8.4 Should the Advertising not be aired by the TV Channel as a result of force majeure, the TV Company, at the Customer’s sole discretion, shall either place such Advertising within similar time
slots and similar programmes or return to the Customer the advance payments for the Advertising placement that has not been aired.
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9. SPECIAL PROVISIONS
9.1 Both Parties agreed to enter into a separate agreement by December 31, 2006 at the latest to implement the agreements on placing Political and Sponsorship Advertising entered into by the TV
Company independently.
9.2 Pursuant to the Agreement as per clause 9.1 above the Customer, as commissioned by the TV Company, shall provide the following services in exchange for a remuneration fee: to research
potential Advertisers to place Political and Sponsorship Advertising on the TV Channel’s Air, to prepare and send commercial offers to third parties to enter into agreements on the Political and
Sponsorship Advertising placement on the TV Channel’s Air, to hold pre-contractual negotiations with third parties concerning entering into agreements on the Political and Sponsorship Advertising
placement, to prepare rates for the Political and Sponsorship Advertising placement and to compile Placement Schedules in accordance with projected Broadcast and Advertising Schedules.
9.3 The cost of services to be provided by the Customer as per clause 9.2 above shall be:
9.3.1 (***) of the TV Company’s actual gross revenue which consists of (i) revenues collected from sales under agreements on the Political and Sponsorship Advertising placement; (ii) forfeits
(penalties, fines) to be payable to the TV Company and other revenues outside sales revenues actually received by the TV Company under the agreements for the Political and Sponsorship Advertising
placement; and (iii) compensation received by the TV Company in the Reporting Period under the agreements for the Political and Sponsorship Advertising placement entered into by the TV Company
with Advertisers.
10.1 All and any disputes/differences arising out of this Agreement or in connection herewith shall be settled by way of negotiations between the Parties.
10.2 Should the Parties be unable to settle the dispute amicably, it shall be subject to settlement at the Kiev City Economic Court pursuant to the procedure envisaged by Ukrainian legislation.
10. SETTLEMENT OF DISPUTES
11. OTHER PROVISIONS
11.1 Based on the monthly GRP Forecast for the TV Company’s advertising packages (expressed in 30 second GRPs per audience as agreed by the Parties) signed by the General Director of the TV
Company and presented by the TV Company for the following year, the Parties shall agree and approve a Forecast for the Cost of Advertising Services, its expected power ratio for the TV Channel, the
sold and average CPP and a list of risks and key forces on the TV advertising market for the following year, not later than 10 (ten) working days from the presentation of the GRP Forecast (expressed in 30
second GRPs per audience as agreed by the Parties) by the TV Company.
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The Parties shall agree to enter into a discussion about monthly GRP Forecasts for the TV Company’s advertising packages (expressed in 30 second GRPs per audience as agreed by the Parties)
and Cost of Advertising Services Forecasts, the expected power ratio of the TV Channel, the sold and average CPP from the Customer and to carry out necessary work jointly to agree a position to
determine the Annual Budget for the following year. This process shall not be undertaken more frequently than once a year according to the following procedure:
11.1.1 The Forecast for each calendar year within the Effective Period shall be agreed and approved by the Parties by September 30 of the year preceding the forecasted year. However, the Forecast
for 2007 shall be agreed by the Parties within 10 (ten) days from the day the TV Company provides the monthly GRPs for the TV Company’s advertising packages (expressed in 30 second GRPs per
audience as agreed by the Parties). Such preliminary Forecast shall contain projected numbers for the TV Company’s monthly GRPs (expressed in 30 second GRPs per audience as agreed by the Parties),
the TV Company’s monthly revenues, its planned monthly audience shares and basic characteristics of the TV Company’s audience.
11.1.2 The revised Forecast for each calendar year within the Effective Period shall be agreed and approved by the Parties by November 1 of the year preceding the forecasted year. However, the
Forecast for 2007 shall be agreed by the Parties within 10 (ten) days from the day the TV Company provides the monthly GRPs for the TV Company’s advertising packages (expressed in 30 second GRPs
per audience as agreed by the Parties). Such revised Forecast shall contain projected numbers for the TV Company’s monthly GRPs (expressed in 30 second GRPs per audience as agreed by the Parties),
the TV Company’s monthly revenues and planned monthly audience shares, basic characteristics of the TV Company’s audience and the percentage of inaccuracy arising when calculating the indicators
of the TV Company’s monthly revenues.
11.1.3 The Annual Budget for each calendar year within the Effective Period shall be agreed, approved and signed off by both Parties by November 15 of the year preceding the forecasted year.
However, the Forecast for 2007 shall be agreed by the Parties within 10 (ten) days from the day the TV Company provides the monthly GRPs for the TV Company’s advertising packages (expressed in 30
second GRPs per audience as agreed by the Parties). The TV Company shall not be entitled to withdraw its approval of the Annual Budget without providing the Customer with essential social and
economic reasons of such withdrawal. Any such reasons for withdrawal shall be presented by the TV Company within 1 (one) month from approval of the revised Budget. Should the Customer not be
provided with the reasons for withdrawal, the provisions of clause 12.4.3 (ii) shall not apply. The Annual Budget shall be in the form stipulated in the Annex.
11.2 Based on the forecasted indicators for the GRPs of the TV Company’s advertising packages (expressed in 30 second GRPs per audience as agreed by the Parties) presented by the TV
Company for a period of 5 (five) years (2007 - 2011 inclusive) and signed by the General Director of the TV Company, the Customer shall prepare and submit to the TV Company within 3 (three) weeks
from such presentation by the TV Company a 5 (five) year Forecast indicating an annual estimated target for the Cost of Placement, the expected power ratio for the TV Company, the sold and average
CPP and a list of risks and key forces on the market for the projected period.
Both Parties shall agree to enter into a discussion about the 5 (five) year Forecast for GRPs of the TV Company’s advertising packages (expressed in 30 second GRPs per audience as agreed by the
Parties) presented by the TV Company and for the Cost of Advertising Services, the expected power ratio, the sold and average CPP presented by the Customer and carry out any necessary work jointly
to agree a position in relation to the Forecast for 5 (five) years. This process shall not be undertaken more frequently than 3 (three) times per year.
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11.3 The Customer shall deliver the following analytical data to the TV Company in order to provide reasonable grounds for the Cost of Placement included into the Annual Budget, the 5 (five) year
Forecast and quarterly Reforecast, as well as the Cost of Placement in the Reporting Period:
- the GRP sold monthly within Prime Time slots and the total for the appropriate period;
- the GRP sold monthly within Off-Prime Time slots and the total for the appropriate period;
- the monthly average CPP within Prime Time Slots and the total for the appropriate period;
- the monthly average CPP within Off-Prime Time slots and the total for the appropriate period;
- the GRP within Prime Time and Off-Prime Time;
-the average CPP within Prime Time and Off-Prime Time.
Such data shall be provided as part of each Annual Budget and Reforecast on the dates as set out in clauses 11.1 above and 11.6 below.
11.4 By November 15 of the year preceding the projected year, the Customer shall provide the TV Company with the annual Forecast on the TV Channel in respect of the 20 (twenty) largest
Advertisers and industry categories as defined by the TV Company in the relevant request provided to the Customer, at least 10 (ten) working days before such provision by the Customer, with an
indication of monthly forecasted receipts and volumes in such year.
11.5 The TV Company shall provide the Customer with the specified Forecasts for GRPs of the TV Company’s advertising packages (expressed in 30 second GRP per audience as agreed by the
Parties) for each subsequent calendar month within the Effective Period by the 20th (twentieth) day of the month preceding the projected month and signed by the TV Company’s authorized
representative.
The projected amounts of the TV Company’s Cost of Advertising Services and GRPs for the TV Company’s advertising packages (expressed in 30 second GRPs) as well as the volume of
Advertising Services in minutes, shall be agreed on a monthly basis between the Parties in Annexes to this Agreement.
11.6 Reforecast. In order to support the Parties to achieve the budget indicators for the year, the Parties shall review their budgets together for the remainder of the year bearing in mind the
indicators for the preceding period of the year. The result of this process is an agreed Reforecast which will show the actually achieved results and/or identify and agree the actions to be taken by both
Parties to ensure that the Annual Budget is met. The Reforecast is to be documented in a letter signed and agreed by the Parties no later than the 15th (fifteenth) day following the end of the preceding
quarter.
A Reforecast of the Annual Budget does not eliminate the responsibilities of either Party under the Annual Budget, but simply provides an updated opinion on the likely results for the year to
better enable both Parties to fulfil their obligations under this Agreement.
15
11.7 Both Parties shall meet quarterly with the aim to discuss the situation of Ukraine’s advertising market, possible adjustments to annual volume of GRP for the TV Company’s advertising
packages (expressed in 30 second GRPs) and projected figures for the Cost of Placement. As part of this meeting the Customer shall provide the TV Company on a quarterly basis with a quantified
analysis of Ukraine’s TV Advertising market. As requested by the TV Company, the Customer shall provide an expert opinion on the development of the advertising market within 2 (two) weeks upon the
receipt of such a request, to confirm the projected Cost of Advertising Services.
12. EFFECTIVE PERIOD AND EARLY TERMINATION OF AGREEMENT
12.1 This Agreement shall come into force upon its execution and in respect of its clauses regarding the provision of Advertising Services from 00:00:01 of January 1, 2007 until 23:59:59 of
December 31, 2011 (“Placement Period”). However, upon expiration of the Placement Period the Agreement shall not expire until both Parties have fully performed their respective obligations assumed
hereunder(“Effective Period”).
12.2 Should any of the TV Company’s broadcasting licences become inoperative (due to expiry of their validity periods or as ruled by a court, or for any other reason) during the Effective Period,
the provisions hereof shall remain in force for the broadcasting time slots stipulated by any other license held by the TV Company which is still effective.
12.3 The Parties shall start negotiations concerning the possibility, terms and provisions of the extension of the Effective Period 6 (six) months prior to the expiry of the Placement Period.
12.4 This Agreement may be terminated early as set forth below:
12.4.1 at any time as agreed between the Parties;
12.4.2 as initiated by either Party. Should that be the case, the Party initiating the early termination shall send a relevant notice in writing to the other Party at least 90 (ninety) days prior to the
proposed termination date. The notice should be sent in accordance with the provisions set out in clause 14.10 below. The Party initiating the termination shall be obliged to pay within 7 (seven) banking
days of the termination date an indemnity to the other Party of an amount equal to (***) of the average monthly amount of the Cost of Placement calculated for the last (***) months and multiplied by
(***). The indemnity shall be calculated in Ukraine’s local currency;
12.4.3 as initiated by the TV Company without any indemnity payment in the event that:
(i) the Customer’s order of the TV Company’s Advertising Services account for less than (***) as compared to the volume of sales indicated in the Annual Budget for the current year, provided
that the TV Company has performed its obligations in respect of GRPs for the TV Company’s advertising packages in respect of the agreed audience (this provision shall apply cumulatively for 6 (six)
calendar months and/or for the entire year);
(ii) the Parties fail to approve the Annual Budget for the next calendar year by November 30 of the current year, provided the Parties comply with the provisions of clause 11 of this Agreement;
(iii) the Customer is in breach of clause 3.2.4 hereof;
(iv) the Customer is in breach of its obligation if he cannot comply with the provision under clause 6.2 for a period exceeding 2 (two) weeks.
16
Should that be the case, the TV Company shall be obliged to send a relevant notice in writing to the Customer not later than 90 (ninety) days prior to the proposed termination date. The notice
should be sent in accordance with the provisions set out in clause 14.10 below.
12.4.4 as initiated by the Customer without an indemnity payment, in the event of the TV Channel’s audience share accounting for (***) or less in the course of (***) consecutive months
according to the data provided by GfK-Ukraine or any other specialized company as agreed by the Parties. In this regard the Customer shall send to the TV Company a termination notice at least 6 (six)
months prior to December 31 of any year within the Effective Period. The notice should be sent in accordance with the provisions set out in clause 14.10 below;
12.4.5 as initiated by the TV Company without any indemnity payment, in the event of a substantial change of ownership control of the Customer or if any TV station or a direct or indirect
shareholder of the TV station becomes directly or indirectly a shareholder in the Customer.
12.4.6 as initiated by the Customer without an indemnity payment, in the event that CME (Central European Media Enterprises Ltd) does no longer, directly or indirectly, control the TV Company.
12.4.7 in respect of clauses 12.4.5 and 12.4.6, the Parties agree:
- on the date of execution of this Agreement to provide each other with complete and accurate information about the shareholders (including individuals who are ultimate owners) and further to
inform each other about any changes of shareholders;
- that the initiating Party shall send the relevant notice in writing not later than 120 (one hundred and twenty) days prior to the proposed termination date. The notice should be sent in accordance
with the provisions set out in clause 14.10 below.
12.5 A drastic change in macroeconomic indices shall not be deemed as grounds for early termination of this Agreement by the Parties. Should that be the case, the Parties shall first try to actively
reconsider the provisions hereof and introduce relevant changes.
12.6 In the event that the rendering of Advertising Services in connection with the Advertising placement to the Customer’s client/Advertiser is not completed as of this Agreement’s early
termination date under clause 12.4. above, the Parties’ obligations shall terminate from the date of completion of the Advertising Services as well as upon full and complete payment settlement between
the Parties in connection with the payment for the TV Company’s Advertising Services as provided in this Agreement.
13. CONFIDENTIALITY
13.1 The content of this Agreement and any other documents related and/or provided under this Agreement (hereinafter “Confidential Information”) can be disclosed by a Party only with prior
consent in writing from the other Party.
13.2 Notwithstanding the provision of clause 13.1 each Party shall have the right to disclose Confidential Information without prior consent of the other Party, however, with mandatory prompt
notification of the other Party of such disclosure in the following circumstances:
17
13.2.3 if disclosure of Confidential Information occurs in connection with requirements of applicable legislation or requirements of legislative, executive or judicial bodies;
13.2.4 if such information is disclosed to consultants or attorneys of the Party, financial and auditing companies, partners and counterparties or insurance agents to perform their obligations under
this Agreement and provided that they shall keep information received confidential. For the purposes of the confidentiality clause any experts and companies invited by either Party shall be deemed its
employees and the Party in question shall assume responsibility for them in the same way as for its own employees.
13.3 Upon this Agreement’s termination for any reason, including expiry of its Effective Period, either Party hereby agrees to refrain from further use and return to the other Party all and any
originals (whether complete or in parts) or copies of the Confidential Information which have been received from such Party.
13.4 This confidentiality clause shall be valid for 12 (twelve) months upon this Agreement’s termination for any reason.
14. FINAL PROVISIONS
14.1 This Agreement is made in 2 (two) copies in both English and Russian, one for each Party, with the same legal effect. In the event of any difference between the English and the Russian texts
of this Agreement, the Russian text of this Agreement shall always prevail.
14.2 Upon this Agreement’s effective date all previous negotiations and correspondence of the Parties on the issues regulated herein shall become null and void.
14.3 Amendments as well as Annexes hereto shall be legally valid and deemed an inseparable part hereof if they are put in writing and signed by duly authorized representatives of the Parties.
14.4 Neither Party shall be entitled to assign its respective rights and obligations hereunder to any third party without the consent in writing from the other Party unless otherwise expressly
provided for herein. Such consent shall not be unreasonably withheld.
14.5 Unilateral refusal to perform its respective obligations as well as unilateral amendments to the provisions hereof shall not be allowed unless otherwise expressly provided for herein.
14.6. In the event of any differences arising between the numbers designated in figures and the numbers spelled in letters, preference shall be given to those spelled.
14.7 Situations that are not stipulated herein shall be regulated by Ukrainian legislation.
14.8 The headings of this Agreement are for convenience only and shall not affect the Agreement’s interpretation.
14.9 The Parties are obliged to fully and immediately inform each other of any changes in their respective legal structure, addresses, bank details, etc..
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14.10 The Parties shall send notices and requests to each other concerning the provisions hereof and performance thereof to the agreed addresses, fax and phone numbers, by courier mail while
duplicating it by fax. Notices/ requests shall be deemed delivered:
- on the delivery day - if delivered by courier with appropriate receipt;
- on the day of dispatch - if sent by fax during regular working hours with appropriate confirmation of successful transmission to a fax number previously agreed between the Parties.
TV Company
Limited Liability Company “Broadcasting Company “Studio 1+1”
Customer
Limited Liability Company “VIDEO INTERNATIONAL-PRIORITET”
01001, Kyiv, Kreschatik, 7/11
01015, Kyiv, Leyptsigskaya St, 15
14. ADDRESSES AND BANK DETAILS
Yu. Z. Morozov
19
V. Yu. Bulavin
Exhibit 21.01
Subsidiaries, equity accounted affiliates and cost investments as at March 1, 2007
Company Name
Nova TV d.d. (“Nova TV (Croatia)”)
Operativna Kompanija d.o.o. (“OK”)
Media House d.o.o.
CME Media Investments s.r.o.
VILJA a.s. (“Vilja”)
CET 21 spol. s.r.o. (“CET 21”)
ERIKA, a.s.
MEDIA CAPITOL, a.s.
NOVA-V.I.P., a.s.
HARTIC, a.s.
Galaxie Sport s.r.o. (“Galaxie Sport”)
Media Pro International S.A. (“MPI”)
Media Vision S.R.L. (“Media Vision”)
MPI Romania B.V.
Pro TV S.A. (“Pro TV”)
Sport Radio TV Media S.R.L. (“TV Sport”)
Media Pro B.V
Media Pro Management S.A.
A.R.J., a.s. (“ARJ”)
MARKIZA-SLOVAKIA, spol. s.r.o. (“Markiza”)
GAMATEX, spol. s.r.o.
A.D.A.M. a.s.
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
MTC Holding d.o.o.
International Media Services Ltd. (“IMS”)
Innova Film GmbH (“Innova”)
Foreign Enterprise “Inter-Media” (“Inter-Media”)
TV Media Planet Ltd.
Studio 1+1 LLC (“Studio 1+1”)
Ukrainian Media Services LLC
Ukrpromtorg -2003 LLC
Gravis LLC
Delta JSC
Nart LLC
TV Stimul LLC
CME Media Enterprises B.V.
CME Czech Republic II B.V.
CME Romania B.V.
Central European Media Enterprises N.V.
Central European Media Enterprises II B.V.
Effective
Voting Interest
Jurisdiction of Organization
Type of Affiliate (1)
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
90.0%
75.0%
90.0%
90.0%
63.0%
10.0%
10.0%
100.0%
80.0%
80.0%
80.0%
100.0%
100.0%
100.0%
100.0%
42.0%
24.0%
60.0%
60.0%
60.0%
60.0%
18.0%
99.0%
65.5%
60.4%
60.4%
65.5%
49.1%
100.0%
100.0%
100.0%
100.0%
100.0%
Croatia
Croatia
Croatia
Czech Republic
Czech Republic
Czech Republic
Czech Republic
Czech Republic
Czech Republic
Czech Republic
Czech Republic
Romania
Romania
Netherlands
Romania
Romania
Netherlands
Romania
Slovak Republic
Slovak Republic
Slovak Republic
Slovak Republic
Slovenia
Slovenia
Slovenia
Slovenia
Slovenia
Slovenia
Bermuda
Germany
Ukraine
Cyprus
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary (in liquidation)
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Cost investment
Cost investment
Subsidiary
Subsidiary
Subsidiary (in liquidation)
Subsidiary (in liquidation)
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Equity-Accounted Affiliate
Equity-Accounted Affiliate (in
liquidation)
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Consolidated Variable Interest Entity
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Equity-Accounted Affiliate
Netherlands
Netherlands
Netherlands
Netherlands Antilles
Netherlands Antilles
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
CME SR d.o.o.
CME Ukraine Holding GmbH
CME Cyprus Holding Ltd.
CME Development Corporation
(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.
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Serbia
Austria
Cyprus
Delaware
100.0%
100.0%
100.0%
100.0%
Exhibit 23.01
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-01560, 333-60295, 333-110959, and 333-130405 on Form S-8 of our reports dated February 28, 2007, relating to the financial
statements and financial statement schedules of Central European Media Enterprises Ltd. (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the restatement
for stock based compensation discussed in Note 2) and management’s report on the effectiveness of 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, 2006.
DELOITTE & TOUCHE LLP
London, United Kingdom
February 28, 2007
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-01560, 333-60295, 333-110959, and 333-130405 on Form S-8 of our report dated 23 February, 2006, 7 February, 2007, as to
Note 1, relating to the financial statements of Slovenska televizna spolocnost, s.r.o., appearing in this Annual Report on Form 10-K of Central European Media Enterprises Ltd. for the year ended
December 31, 2006.
Deloitte Audit s.r.o.
Bratislava, Slovak Republic
28 February 2007
Exhibit 24.01
POWER OF ATTORNEY
Each person whose signature appears below, constitutes and appoints Michael Garin 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 2006 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 24, 2007
/s/ Ronald S. Lauder
Ronald S. Lauder
/s/ Michael Garin
Michael Garin
/s/ Frank Ehmer
Frank Ehmer
/s/ Herbert Kloiber
Herbert Kloiber
/s/ Bruce Maggin
Bruce Maggin
/s/ Christian Stahl
Christian Stahl
/s/ Herb Granath
Herbert A. Granath
/s/ Wallace Macmillan
Wallace Macmillan
/s/ Charles Frank
Charles Frank
/s/ Alfred W. Langer
Alfred W. Langer
/s/ Ann Mather
Ann Mather
/s/ Eric Zinterhofer
Eric Zinterhofer
Exhibit 31.01
I, Michael Garin, certify that:
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
1. I have reviewed this annual report on Form 10-K of Central European Media Enterprises Ltd.;
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/ Michael Garin
Michael Garin
Chief Executive Officer
March 1, 2007
Exhibit 31.02
I, Wallace Macmillan, certify that:
CERTIFICATION OF CHIEF FINANCIAL OFFICER
1. I have reviewed this annual report on Form 10-K of Central European Media Enterprises Ltd.;
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
March 1, 2007
Exhibit 32.01
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Central European Media Enterprises Ltd (the “Company”) on Form 10-K for the year ended December 31, 2006, as filed with the Securities and Exchange
Commission on the date hereof (the “Report”), we, Michael Garin, Chief Executive 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/ Michael Garin
Michael Garin
Chief Executive Officer
March 1, 2007
/s/ Wallace Macmillan
Wallace Macmillan
Chief Financial Officer