XLON:0K8L Central European Media Enterprises Ltd Class A Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

o           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
 
98-0438382
(State or other jurisdiction of incorporation and organization)
 
(IRS Employer Identification No.)
 
 
 
Mintflower Place, 4th floor
8 Par-La-Ville Rd, Hamilton, Bermuda
 
HM 08 Bermuda
(Address of principal executive offices)
 
(Zip Code)

Registrant's telephone number, including area code: +1 (441) 296-1431

Indicate by check mark whether registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for each shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes T No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes T No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “accelerated filer”, “large accelerated filer” or “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer T
Accelerated filer £
Non-accelerated filer £
Smaller reporting company £

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act) Yes £ No T

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class
Outstanding as of April 27, 2012
Class A Common Stock, par value $0.08
56,892,114
Class B Common Stock, par value $0.08
7,516,936


 
 
 
 
 
 
 
 









THIS PAGE INTENTIONALLY LEFT BLANK




CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.

FORM 10-Q

For quarterly period ended March 31, 2012


 
Page
Part I Financial Information
 
 
Item 1. Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Part II. Other Information
 
 
 
 
 
 
 
 








Part I. Financial Information

Item 1. Financial Statements

CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(US$ 000’s, except share and per share data)
(Unaudited)

 
March 31, 2012

 
December 31, 2011

ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
150,032

 
$
186,386

Accounts receivable, net (Note 6)
186,187

 
192,157

Program rights, net (Note 5)
112,710

 
101,741

Other current assets (Note 7)
64,278

 
58,005

Total current assets
513,207

 
538,289

Non-current assets
 

 
 

Property, plant and equipment, net (Note 8)
219,877

 
217,367

Program rights, net (Note 5)
295,868

 
266,217

Goodwill (Note 3)
1,167,538

 
1,095,193

Broadcast licenses and other intangible assets, net (Note 3)
548,744

 
538,195

Other non-current assets (Note 7)
28,018

 
26,508

Total non-current assets
2,260,045

 
2,143,480

Total assets
$
2,773,252

 
$
2,681,769


The accompanying notes are an integral part of these condensed consolidated financial statements.

CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(US$ 000’s, except share and per share data)
(Unaudited)


 
March 31, 2012

 
December 31, 2011

LIABILITIES AND EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable and accrued liabilities (Note 9)
$
230,642

 
$
240,048

Current portion of long-term debt and other financing arrangements (Note 4)
123,918

 
1,058

Other current liabilities (Note 10)
22,313

 
14,469

Total current liabilities
376,873

 
255,575

Non-current liabilities
 

 
 

Long-term debt and other financing arrangements (Note 4)
1,239,637

 
1,323,311

Other non-current liabilities (Note 10)
85,150

 
84,941

Total non-current liabilities
1,324,787

 
1,408,252

Commitments and contingencies (Note 17)

 

EQUITY
 

 
 

CME Ltd. shareholders’ equity:
 

 
 

Nil shares of Preferred Stock of $0.08 each (December 31, 2011 – nil)

 

56,892,114 shares of Class A Common Stock of $0.08 each (December 31, 2011 –56,892,114)
4,551

 
4,551

7,500,936 shares of Class B Common Stock of $0.08 each (December 31, 2011 – 7,500,936)
600

 
600

Additional paid-in capital
1,405,508

 
1,404,648

Accumulated deficit
(439,094
)
 
(425,702
)
Accumulated other comprehensive income
84,691

 
17,595

Total CME Ltd. shareholders’ equity
1,056,256

 
1,001,692

Noncontrolling interests
15,336

 
16,250

Total equity
1,071,592

 
1,017,942

Total liabilities and equity
$
2,773,252

 
$
2,681,769


The accompanying notes are an integral part of these condensed consolidated financial statements.

CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(US$ 000’s, except share and per share data)
(Unaudited)

 
For the Three Months Ended March 31,
 
2012

 
2011

Net revenues
$
167,433

 
$
172,772

Operating expenses:
 
 
 
Operating costs
29,126

 
33,655

Cost of programming
97,724

 
96,031

Depreciation of property, plant and equipment
11,075

 
13,417

Amortization of broadcast licenses and other intangibles (Note 3)
12,483

 
7,627

Cost of revenues
150,408

 
150,730

Selling, general and administrative expenses
27,328

 
29,707

Operating loss
(10,303
)
 
(7,665
)
Interest income
214


1,128

Interest expense (Note 13)
(31,824
)
 
(56,039
)
Foreign currency exchange gain, net
23,394

 
43,265

Change in fair value of derivatives (Note 11)
927

 
(40
)
Other income / (expense)
209

 
(712
)
Loss before tax
(17,383
)
 
(20,063
)
Credit / (provision) for income taxes
3,570

 
(932
)
Net loss
(13,813
)
 
(20,995
)
Net loss / (income) attributable to noncontrolling interests
421

 
(119
)
Net loss attributable to CME Ltd.
$
(13,392
)
 
$
(21,114
)
 
 
 
 
Net loss
(13,813
)
 
(20,995
)
Currency translation adjustment
67,090

 
108,395

Comprehensive income
$
53,277

 
$
87,400

Comprehensive loss / (income) attributable to noncontrolling interests
427

 
(599
)
Comprehensive income attributable to CME Ltd.
$
53,704

 
$
86,801



 
For the Three Months Ended March 31,
 
2012

 
2011

PER SHARE DATA (Note 15):
 
 
 
Net loss per share:
 
 
 
Net loss attributable to CME Ltd. – Basic
$
(0.21
)
 
$
(0.33
)
Net loss attributable to CME Ltd. – Diluted
$
(0.21
)
 
$
(0.33
)
 
 
 
 
Weighted average common shares used in computing per share amounts (000’s):
 
 
 
Basic
64,393

 
64,369

Diluted
64,393

 
64,369



The accompanying notes are an integral part of these condensed consolidated financial statements.

CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(US$ 000’s, except share data)
(Unaudited)

 
 
 
 
 
CME Ltd.
 
 
 
 
 
Class A
Common Stock
 
Class B
Common Stock
 
Additional Paid-In Capital

 
Accumulated Deficit

 
Accumulated Other Comprehensive Income

 
Noncontrolling Interest

 
Total Equity

 
Number of shares
 
Par value
 
Number of shares
 
Par value
 
 
 
 
 
BALANCE December 31, 2011
56,892,114

 
$
4,551

 
7,500,936

 
$
600

 
$
1,404,648

 
$
(425,702
)
 
$
17,595

 
$
16,250

 
$
1,017,942

Stock-based compensation

 

 

 

 
1,087

 

 

 

 
1,087

Dividends

 

 

 

 

 

 

 
(487
)
 
(487
)
Other

 

 

 

 
(227
)
 

 

 

 
(227
)
Net loss

 

 

 

 

 
(13,392
)
 

 
(421
)
 
(13,813
)
Currency translation adjustment

 

 

 

 

 

 
67,096

 
(6
)
 
67,090

BALANCE March 31, 2012
56,892,114


$
4,551


7,500,936


$
600


$
1,405,508


$
(439,094
)

$
84,691


$
15,336

 
$
1,071,592



 
 
 
 
 
CME Ltd.
 
 

 
 

 
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

 
Noncontrolling Interest

 
Total Equity

BALANCE December 31, 2010
56,878,489

 
$
4,550

 
7,490,936

 
$
599

 
$
1,377,803

 
$
(233,818
)
 
$
77,745

 
$
20,873

 
$
1,247,752

Stock-based compensation

 

 

 

 
1,521

 

 

 

 
1,521

Repurchase of 2013 Convertible Notes

 

 

 

 
(6,742
)
 

 

 

 
(6,742
)
Issuance of 2015 Convertible Notes, net of transaction costs

 

 

 

 
9,380

 

 

 

 
9,380

Reclassification of capped call options

 

 

 

 
9,971

 
(9,971
)
 

 

 

Stock options exercised
1,000

 

 

 

 
17

 

 

 

 
17

Dividends

 

 

 

 

 

 

 
(358
)
 
(358
)
Net (loss) / income

 

 

 

 

 
(21,114
)
 

 
119

 
(20,995
)
Currency translation adjustment

 

 

 

 

 

 
107,915

 
480

 
108,395

BALANCE March 31, 2011
56,879,489

 
$
4,550

 
7,490,936

 
$
599

 
$
1,391,950

 
$
(264,903
)
 
$
185,660

 
$
21,114

 
$
1,338,970


The accompanying notes are an integral part of these condensed consolidated financial statements.

CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(US$ 000’s)
(Unaudited)
 
For the Three Months Ended March 31,
 
2012

 
2011

CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(13,813
)
 
$
(20,995
)
Adjustments to reconcile net loss to net cash generated from / (used in) operating activities:
 

 
 
Depreciation and amortization
29,144

 
28,633

Amortization of program rights
59,566

 
58,727

Loss on extinguishment of debt

 
21,556

Loss on disposal of fixed assets
117

 
534

Stock-based compensation (Note 14)
1,087

 
1,521

Change in fair value of derivatives (Note 11)
(927
)
 
40

Foreign currency exchange gain, net
(23,394
)
 
(43,265
)
Net change in (net of effects of acquisitions and disposals of businesses):
 

 
 

Accounts receivable, net
12,514

 
38,621

Accounts payable and accrued liabilities
14,945

 
(229
)
Program rights
(112,751
)
 
(91,956
)
Other assets
(2,246
)
 
(350
)
Accrued interest
(4,958
)
 
(10,804
)
Income taxes payable
544

 
(848
)
Deferred revenue
7,746

 
38,658

Deferred taxes
(6,407
)
 
(2,099
)
VAT and other taxes payable
5,768

 
12,428

Net cash (used in) / generated from operating activities
(33,065
)
 
30,172

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Purchase of property, plant and equipment
(7,339
)
 
(5,590
)
Disposal of property, plant and equipment
162

 
94

Investments in subsidiaries, net of cash acquired

 
(897
)
Net cash used in investing activities
(7,177
)
 
(6,393
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Repurchase of Senior Notes

 
(26,252
)
Payment on exchange of Convertible Notes

 
(27,132
)
Debt issuance costs
(811
)
 
(1,837
)
Proceeds from credit facilities
3,248

 
4,533

Payment of credit facilities and capital leases
(3,688
)
 
(6,536
)
Proceeds from exercise of stock options

 
17

Net cash used in financing activities
(1,251
)
 
(57,207
)
 
 
 
 
Impact of exchange rate fluctuations on cash
5,139

 
6,146

 
 
 
 
Net decrease in cash and cash equivalents
(36,354
)
 
(27,282
)
CASH AND CASH EQUIVALENTS, beginning of period
186,386

 
244,050

CASH AND CASH EQUIVALENTS, end of period
$
150,032

 
$
216,768


The accompanying notes are an integral part of these condensed consolidated financial statements.


4


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except per share data)
(Unaudited)

1.  ORGANIZATION AND BUSINESS

Central European Media Enterprises Ltd., a Bermuda company limited by shares, is a media and entertainment company operating leading broadcast, production and distribution, and new media businesses in Central and Eastern Europe. Our assets are held through a series of Dutch and Curaçao holding companies. At March 31, 2012, we operated mainly in Bulgaria, Croatia, the Czech Republic, Romania, the Slovak Republic and Slovenia.

We manage our business on a divisional basis, with three operating segments, Broadcast, Media Pro Entertainment, our production and distribution business, and New Media, which are also our reportable segments.

Broadcast

Our Broadcast segment consists of 31 television channels primarily in six countries.  We generate advertising revenues in our Broadcast segment primarily through entering into agreements with advertisers, advertising agencies and sponsors to place advertising on the television channels that we operate. Our main general entertainment television channels in each country are distributed on a free-to-air basis terrestrially in analog, digital or both, depending on the digitalization status in each country, and are also distributed via cable and satellite. Our other channels are generally distributed via cable and satellite.  Unless otherwise indicated, we own 100% of our broadcast operating and license companies in each country.

Bulgaria

We operate one general entertainment channel, BTV, and four other channels, BTV CINEMA, BTV COMEDY, RING.BG and BTV ACTION, as well as BTV LADY, a female-oriented cable channel, which was launched on January 28, 2012. We also own several radio channels. We currently own 94.0% of CME Bulgaria B.V. ("CME Bulgaria"), the subsidiary that owns our Bulgaria Broadcast operations. Top Tone Media Holdings Limited ("Top Tone Holdings"), the third party that owns the remaining interest in CME Bulgaria, has exercised its right to acquire additional equity in CME Bulgaria, however the closing of this transaction is not yet complete. Upon consummation of the equity transfer, we will own 90.0% of our Bulgaria Broadcast operations.

Croatia

We operate one general entertainment channel, NOVA TV (Croatia), one female-oriented channel, DOMA (Croatia), and an international channel, NOVA WORLD.

Czech Republic

We operate one general entertainment channel, TV NOVA (Czech Republic), and three other channels, NOVA CINEMA, NOVA SPORT and MTV CZECH.

Romania

We operate two general entertainment channels, PRO TV and ACASA, three other channels, PRO CINEMA, SPORT.RO and MTV ROMANIA, and an international channel, PRO TV INTERNATIONAL, as well as a general entertainment channel broadcasting in Moldova, PRO TV CHISINAU. On April 15, 2012, we launched an additional channel in Romania, ACASA GOLD, which is a female-oriented cable channel.

Slovak Republic

We operate one general entertainment channel, TV MARKIZA, and one female-orientated channel, DOMA (Slovak Republic).

Slovenia

We operate two general entertainment channels, POP TV and KANAL A, and POP NON STOP, a subscription package of six channels which includes POP KINO, POP KINO2, POP BRIO, POP FANI, POP OTO and POP SPOT.

Media Pro Entertainment

Media Pro Entertainment (“MPE”), our production and distribution business, leverages creative talent across all our countries and focuses on the development, production and distribution of content for our television channels and to third parties, both within our region and globally.

MPE is organized into two businesses:

Production: This business provides assets and expertise to produce a range of fiction, reality and entertainment programming, and films, using both purchased formats and developing original formats. The content produced may be easily adapted for use across several markets and in many revenue-generating windows.

Distribution: In addition to having responsibility for selling finished content and formats developed by our production operations to third parties, this business acquires rights to international film and television content across our region and distributes them both to third party clients and to our Broadcast operations. Our distribution operations are also able to generate third-party revenue by distributing content through the theatrical and home video operations. MPE owns and operates sixteen cinema screens in Romania. In addition, a home video distribution business sells DVD and Blu Ray discs to wholesale and retail clients in the Czech Republic, the Slovak Republic, Romania and Hungary. A significant portion of our distribution revenues are to third parties, which are expected to generate a significant portion of MPE’s consolidated profits in the short-term.

The MPE segment currently generates the majority of its revenues from sales to our Broadcast segment. For that reason, the financial results of the segment are largely dependent on the performance of the television advertising market, although the long-term nature of the production process is such that it takes time for significant market changes to be reflected in this segment's results.

New Media

We own and operate more than 75 websites across our markets in addition to our video-on-demand service, Voyo, with two principal objectives: to build strong online channels to distribute popular content and to operate an efficient marketing tool for our Broadcast segment.  The New Media segment focuses on offering viewers the choice of watching our premium television content anytime, anywhere and operates a series of news portals, ranging from general information to sports or niche sites. Revenues generated by the New Media segment are primarily derived from the sale of advertising.

Voyo is an internet-based content aggregation and distribution platform that offers consumers both free and paid content in multiple distribution windows. During the first three months of 2012, Voyo completed the introduction of a subscription based video-on-demand service in all of its regions, carrying premium locally produced productions as well as hundreds of local and foreign feature films. It also offers an embedded transactional video-on-demand element devoted to movie content from major Hollywood and independent studios.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Quarterly Report on Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles in the United States of America (“US GAAP”). Amounts as of December 31, 2011 included in the unaudited condensed consolidated financial statements have been derived from audited consolidated financial statements as of that date. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission ("SEC") on February 22, 2012 as amended by our Form 10-K/A filed with the SEC on April 20, 2012. Our significant accounting policies have not changed since December 31, 2011, except as noted below.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with US GAAP for complete financial statements.  The condensed consolidated results of operations for interim periods are not necessarily indicative of the results to be expected for a full year.

The terms the “Company”, “we”, “us”, and “our” are used in this Form 10-Q to refer collectively to the parent company, Central European Media Enterprises Ltd. (“CME Ltd.”), and the subsidiaries through which our various businesses are conducted.  Unless otherwise noted, all statistical and financial information presented in this report has been converted into U.S. dollars using appropriate exchange rates.  All references to “US$”, “USD” or “dollars” are to U.S. dollars, all references to “BGN” are to Bulgarian leva, all references to “HRK” are to Croatian kuna, all references to “CZK” are to Czech korunas, all references to “RON” are to the New Romanian lei, all references to “UAH” are to Ukrainian hryvna and all references to “Euro” or “EUR” are to the European Union Euro.

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates and assumptions.

The unaudited condensed consolidated financial statements include the accounts of CME Ltd. and our subsidiaries, after the elimination of intercompany accounts and transactions.  Entities in which we hold less than a majority voting interest but over which we have the ability to exercise significant influence are accounted for using the equity method.  Other investments are accounted for using the cost method.

On January 1, 2012, we adopted guidance issued in June 2011, which gives entities the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. Our condensed consolidated financial statements already presented the components of net income and other comprehensive income in two separate but consecutive statements. In December 2011, additional guidance was released deferring the requirement to present reclassifications out of accumulated other comprehensive income.

Program Rights

Purchased program rights

The costs incurred to acquire program rights are capitalized and amortized over their expected useful lives in a manner which reflects the pattern we expect to use and benefit from the programming. If the initial airing of content allowed by a license is expected to provide more value than subsequent airings, we apply an accelerated method of amortization. These accelerated methods of amortization depend on the estimated number of runs the content is expected to receive, and are determined based on a study of historical results for similar programming. For programming that is not advertising supported, each program's costs are amortized on a straight-line basis over the license period. For content that is expected to be aired only once, the entire cost is recognized as an expense on the first run.

During the third quarter of 2011, we concluded a comprehensive examination of the appropriateness of our program rights policy. This review included a study of the relative value generated by all runs of a license in past periods. We concluded that the existing allocation for films and series with an estimated two runs of 65% on showing the first run and 35% on showing the second run was still appropriate. However, past performance showed that content with an estimated three runs generated more relative value on the third run than our previous estimate. Consequently, from July 1, 2011 these titles were amortized 50% on showing the first run, 28% on showing the second run and 22% on showing the third run. The impact of this change is a lower amortization charge of approximately US$ 1.8 million for the three months ended March 31, 2012. Had we continued with our estimate to amortize content with an estimated three runs by 60% on the first run, 30% on the second run and 10% on the third run from January 1, 2012 to March 31, 2012 our net loss attributable to CME Ltd., basic net loss per common share and diluted net loss per common share would have been US$ (15.2) million, US$ (0.24) and US$ (0.24), respectively, for the three months ended March 31, 2012.

Goodwill

On January 1, 2012, we adopted guidance issued in September 2011 to simplify how entities test goodwill for impairment by providing an option to first assess qualitative factors to determine whether the existence of events or circumstances indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is not necessary. The adoption of this guidance will impact how we perform our goodwill testing, but not the amount of impairment recognized in the financial statements if goodwill is found to be impaired.

Financial Instruments

On January 1, 2012, we adopted guidance issued in May 2011, which represents clarifications of common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP. It also includes instances where a particular principle or requirement for measuring fair value has changed. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows, but did result in additional disclosure.

Recent Accounting Pronouncements

There are no recent accounting pronouncements that are expected to have an impact on our condensed consolidated financial statements.


3. GOODWILL AND INTANGIBLE ASSETS

Goodwill:

Goodwill by reporting unit as at March 31, 2012 and December 31, 2011 is summarized as follows:

 
Gross Balance, December 31, 2011
Accumulated Impairment Losses
Balance, December 31, 2011
Foreign Currency
Balance, March 31, 2012
Accumulated Impairment Losses
Gross Balance, March 31, 2012
Broadcast segment:
 
 
 
 
 
 
 
Bulgaria
$
176,394

$
(117,460
)
$
58,934

$
1,900

$
60,834

$
(117,460
)
$
178,294

Croatia
11,116

(10,454
)
662

23

685

(10,454
)
11,139

Czech Republic
862,457


862,457

66,078

928,535


928,535

Romania
62,078


62,078

1,122

63,200


63,200

Slovak Republic
56,575


56,575

1,823

58,398


58,398

Slovenia
18,321


18,321

590

18,911


18,911

Media Pro
Entertainment segment:
 
 
 
 
 
 
 

Fiction and reality and entertainment
17,502


17,502

393

17,895


17,895

Production services
11,028

(11,028
)



(11,028
)
11,028

Distribution
18,664


18,664

416

19,080


19,080

Total
$
1,234,135

$
(138,942
)
$
1,095,193

$
72,345

$
1,167,538

$
(138,942
)
$
1,306,480



5


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except per share data)
(Unaudited)


Broadcast licenses and other intangible assets:

The net book value of our broadcast licenses and other intangible assets as at March 31, 2012 and December 31, 2011 is summarized as follows:

 
Indefinite-Lived Broadcast Licenses

 
Amortized Broadcast Licenses

 
Trademarks

 
Customer Relationships

 
Other

 
Total

Balance, December 31, 2011
$
51,800

 
$
280,210

 
$
126,645

 
$
74,346

 
$
5,194

 
$
538,195

Reclassifications
(51,800
)
 
51,800

 

 

 

 

Amortization

 
(9,864
)
 

 
(2,254
)
 
(365
)
 
(12,483
)
Foreign currency movements

 
15,337

 
4,661

 
2,614

 
420

 
23,032

Balance, March 31, 2012
$

 
$
337,483

 
$
131,306

 
$
74,706

 
$
5,249

 
$
548,744


Until December 31, 2011, our broadcast licenses in Croatia, Romania and Slovenia were determined to have indefinite lives and were subject to annual impairment reviews.  Due to the change in estimates discussed below, these balances were reclassified from indefinite-lived to amortized on January 1, 2012. The indefinite-lived licenses were not impaired as at January 1, 2012. Prior to December 31, 2011, the licenses in Bulgaria were determined to have an estimated economic useful life of, and were amortized on a straight-line basis over, twenty-four years.  Licenses in the Czech Republic were determined to have an economic useful life of, and were amortized on a straight-line basis over, twenty years.  The license in the Slovak Republic was determined to have an economic useful life of, and was amortized on a straight-line basis over, thirteen years.

We revised our estimate of the remaining useful life of certain of our Broadcast licenses as of January 1, 2012, and now amortize the remaining balances on a straight-line basis over the following periods, which are generally the remaining contractual life of the license: twelve years in Bulgaria, thirteen years in the Czech Republic, three years in Romania, eight years in the Slovak Republic, and ten years in Slovenia. The license in Croatia was previously written down to a nominal value. The impact of this change in estimates is a higher amortization charge of approximately US$ 5.3 million recorded during the three months ended March 31, 2012, or US$ 0.08 and US$ 0.08 per basic common share and diluted common share, respectively.

Customer relationships are deemed to have an economic useful life of, and are amortized on a straight-line basis over, five to fifteen years.  Trademarks have an indefinite life.

The gross value and accumulated amortization of broadcast licenses and other intangible assets was as follows at March 31, 2012 and December 31, 2011:

 
March 31, 2012

 
December 31, 2011

Gross value
$
593,818

 
$
514,641

Accumulated amortization
(176,380
)
 
(154,891
)
Net book value of amortized intangible assets
417,438

 
359,750

Indefinite-lived broadcast licenses and trademarks
131,306

 
178,445

Total broadcast licenses and other intangible assets, net
$
548,744

 
$
538,195



6


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except per share data)
(Unaudited)




4.  LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS

Summary

 
March 31, 2012

 
December 31, 2011

Senior debt
$
1,275,728

 
$
1,243,207

Total credit facilities and capital leases
87,827

 
81,162

Total long-term debt and other financing arrangements
1,363,555

 
1,324,369

Less current maturities
(123,918
)
 
(1,058
)
Total non-current long-term debt and other financing arrangements
$
1,239,637

 
$
1,323,311


Senior Debt

Our senior debt comprised the following as of March 31, 2012 and December 31, 2011:

 
Carrying Value
 
Fair Value
 
March 31,
2012

 
December 31,
2011

 
March 31,
2012

 
December 31,
2011

USD 129.7 million 2013 Convertible Notes
$
122,843

 
$
121,230

 
$
126,030

 
$
117,926

EUR 148.0 million 2014 Floating Rate Notes
197,669

 
191,497

 
177,902

 
141,708

USD 261.0 million 2015 Convertible Notes
225,391

 
223,341

 
202,355

 
163,276

EUR 374.6 million 2016 Fixed Rate Notes
502,773

 
487,176

 
476,551

 
373,215

EUR 170.0 million 2017 Fixed Rate Notes
227,052

 
219,963

 
236,418

 
206,765

 
$
1,275,728

 
$
1,243,207

 
$
1,219,256

 
$
1,002,890


Convertible Notes

2013 Convertible Notes

On March 10, 2008, we issued US$ 475.0 million of 3.5% Senior Convertible Notes due 2013 (the “2013 Convertible Notes”), which mature on March 15, 2013.  During 2011, we completed privately negotiated exchanges totaling US$ 261.0 million in aggregate principal amount of our 2013 Convertible Notes for US$ 261.0 million in aggregate principal amount of our 5.0% Senior Convertible Notes due 2015 (the “2015 Convertible Notes” and collectively with the 2013 Convertible Notes, the “Convertible Notes”). The exchanging holders of the 2013 Convertible Notes also received cash consideration of approximately US$ 35.4 million, including accrued interest of US$ 3.3 million. We also repurchased US$ 49.5 million aggregate principal amount of our 2013 Convertible Notes for US$ 47.4 million including accrued interest in September 2011, and US$ 34.8 million aggregate principal amount for US$ 30.7 million plus accrued interest in October 2010.

Interest on the 2013 Convertible Notes is payable semi-annually in arrears on each March 15 and September 15.  The fair value of the 2013 Convertible Notes as at March 31, 2012 and December 31, 2011 was calculated by multiplying the outstanding debt by the traded market price because we considered the embedded conversion option to have no value since the market price of our shares was so far below the conversion price. This measurement of estimated fair value uses Level 1 inputs as described in Note 11, "Financial Instruments and Fair Value Measurements".

The 2013 Convertible Notes are secured senior obligations and rank pari passu with all existing and future senior indebtedness and are effectively subordinated to all existing and future indebtedness of our subsidiaries.  The amounts outstanding are guaranteed by our wholly owned subsidiaries CME Media Enterprises N.V. (“CME NV”) and CME Media Enterprises B.V. ("CME BV") and are secured by a pledge of shares of those subsidiaries as well as an assignment of certain contractual rights.

Prior to December 15, 2012, the 2013 Convertible Notes are convertible following certain events and from that date, at any time, based on an initial conversion rate of 9.5238 shares of our Class A common stock per US$ 1,000 principal amount of 2013 Convertible Notes (which is equivalent to an initial conversion price of approximately US$ 105.00 per share). The conversion rate is subject to adjustment if we make certain distributions to the holders of our Class A common stock, undergo certain corporate transactions or a fundamental change, and in other circumstances specified in the 2013 Convertible Notes.   From time to time up to and including December 15, 2012, we will have the right to elect to deliver (i) shares of our Class A common stock or (ii) cash and, if applicable, shares of our Class A common stock upon conversion of the 2013 Convertible Notes. At present, we have elected to deliver cash and, if applicable, shares of our Class A common stock. As at March 31, 2012, the 2013 Convertible Notes could not be converted.  In addition, the holders of the 2013 Convertible Notes have the right to put the 2013 Convertible Notes to us for cash equal to the aggregate principal amount of the 2013 Convertible Notes plus accrued but unpaid interest thereon following the occurrence of certain specified fundamental changes (including a change of control, certain mergers, insolvency and a delisting).


7


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except per share data)
(Unaudited)


As at March 31, 2012, we had capped call options over 2,940,477 shares of our Class A common stock, 1,583,333 shares from BNP Paribas (“BNP”), and 1,357,144 shares from Deutsche Bank Securities Inc. (“DB”). The amount of shares corresponded to the number of shares of our Class A common stock that we would be entitled to receive on a conversion of the 2013 Convertible Notes at the initial conversion price if we elected to settle the capped call options solely in shares of Class A common stock. The options entitle us to receive, at our election, cash or shares of Class A common stock with a value equal approximately to the difference between the trading price of our shares at the time the option is exercised and US$ 105.00, up to a maximum trading price of US$ 151.20. These options expire on March 15, 2013. At present, we have elected to receive shares of our Class A common stock on exercise of the capped call options.

At the date of purchase, we determined that all of these capped call options met the definition of an equity instrument and consequently recognized them on issuance at fair value within additional paid-in capital. This classification is still correct and we have continued to recognize them within equity. Subsequent changes in fair value have not been, and will not be, recognized as long as the instruments continue to be classified in equity.

We recorded adjustments to equity during 2011 totaling US$ 17.3 million in respect of the portion of the capped call options that were no longer exercisable following the privately negotiated exchange transactions. Subsequent to the exchange transactions, current shareholders would not suffer dilution to their shareholding until the price of shares of our Class A common stock reaches US$ 151.20 per share. This calculation is based on a number of assumptions, including that we would exercise all capped call options simultaneously, we would continue with our election to receive shares of our Class A common stock on the exercise of the capped call options, and no event that would result in an adjustment to the conversion rate of value of the options would have occurred.

At March 31, 2012, the 1,706,343 remaining capped call options could not be exercised because no conversion of 2013 Convertible Notes had occurred. The aggregate fair value of the remaining capped call options with DB and BNP at March 31, 2012 was US$ nil.

We separately account for the liability and equity components of the 2013 Convertible Notes.  The embedded conversion option is not accounted for as a derivative.
 
Principal Amount of Liability Component

 
Unamortized Discount

 
Net Carrying Value

 
Equity Component

BALANCE December 31, 2011
$
129,660

 
$
(8,430
)
 
$
121,230

 
$
102,369

Amortization of debt issuance discount

 
1,613

 
1,613

 

BALANCE March 31, 2012
$
129,660

 
$
(6,817
)
 
$
122,843

 
$
102,369


The remaining issuance discount is being amortized over the life of the 2013 Convertible Notes, which mature on March 15, 2013 using the effective interest method.  The effective interest rate on the liability component for all periods presented was 10.3%.

Certain other derivative instruments have been identified as being embedded in the 2013 Convertible Notes, but as they are considered to be clearly and closely related to the 2013 Convertible Notes they are not accounted for separately.

2015 Convertible Notes

During 2011, we completed privately negotiated exchanges totaling US$ 261.0 million in aggregate principal amount of our 2013 Convertible Notes for US$ 261.0 million in aggregate principal amount of our 2015 Convertible Notes.  The 2015 Convertible Notes mature on November 15, 2015.

Interest is payable semi-annually in arrears on each May 15 and November 15.  The fair value of the liability component of the 2015 Convertible Notes as at March 31, 2012 was calculated as the present value of the future cash flows associated with the liability component discounted using the rate of return an investor would have required on our non-convertible debt with other terms substantially similar to the 2015 Convertible Notes. This measurement of estimated fair value uses Level 2 inputs as described in Note 11, "Financial Instruments and Fair Value Measurements".

The 2015 Convertible Notes are secured senior obligations and rank pari passu with all existing and future senior indebtedness and are effectively subordinated to all existing and future indebtedness of our subsidiaries.  The amounts outstanding are guaranteed by CME NV and CME BV and are secured by a pledge of shares of those companies.

Prior to August 15, 2015, the 2015 Convertible Notes are convertible following certain events and from that date, at any time, based on an initial conversion rate of 20 shares of our Class A common stock per US$ 1,000 principal amount of 2015 Convertible Notes (which is equivalent to an initial conversion price of US$ 50.00 per share). The conversion rate is subject to adjustment if we make certain distributions to the holders of shares of our Class A common stock, undergo certain corporate transactions or a fundamental change, and in other circumstances specified in the 2015 Convertible Notes.   From time to time up to and including August 15, 2015, we will have the right to elect  to deliver (i) shares of our Class A common stock, (ii) cash, or (iii) cash and, if applicable, shares of our Class A common stock upon conversion of the 2015 Convertible Notes.  At present, we have elected to deliver cash and, if applicable, shares of our Class A common stock.  As at March 31, 2012, the 2015 Convertible Notes may not be converted.  In addition, the holders of the 2015 Convertible Notes have the right to put the 2015 Convertible Notes to us for cash equal to the aggregate principal amount of the 2015 Convertible Notes plus accrued but unpaid interest thereon following the occurrence of certain specified fundamental changes (including a change of control, certain mergers, insolvency and a delisting).

We separately account for the liability and equity components of the 2015 Convertible Notes.  The embedded conversion option is not accounted for as a derivative.

8


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except per share data)
(Unaudited)


 
Principal Amount of Liability Component

 
Unamortized Discount

 
Net Carrying Value

 
Equity Component

BALANCE December 31, 2011
$
261,034

 
$
(37,693
)
 
$
223,341

 
$
11,907

Amortization of debt issuance discount

 
2,050

 
2,050

 

BALANCE March 31, 2012
$
261,034

 
$
(35,643
)
 
$
225,391

 
$
11,907


The issuance discount is being amortized over the life of the 2015 Convertible Notes using the effective interest method.  The effective interest rate on the liability component was 10.0%.

Certain other derivative instruments have been identified as being embedded in the 2015 Convertible Notes, but as they are considered to be clearly and closely related to the 2015 Convertible Notes they are not accounted for separately.

Floating Rate Notes

On May 16, 2007, we issued EUR 150.0 million of Floating Rate Senior Notes due 2014 (the “2014 Floating Rate Notes”) which bear interest at the six-month Euro Inter Bank Offered Rate (“EURIBOR”) plus 1.625% (the applicable rate at March 31, 2012 was 3.31%). The 2014 Floating Rate Notes mature on May 15, 2014.  In 2010, we repurchased EUR 2.0 million (approximately US$ 2.8 million at the date of repurchase) aggregate principal amount of our 2014 Floating Rate Notes for EUR 1.6 million (approximately US$ 2.3 million at date of repurchase) plus accrued interest.

Interest on the 2014 Floating Rate Notes is payable semi-annually in arrears on each May 15 and November 15.  The fair value of the 2014 Floating Rate Notes as at March 31, 2012 and December 31, 2011 was equal to the outstanding debt multiplied by the traded market price. This measurement of estimated fair value uses Level 1 inputs as described in Note 11, "Financial Instruments and Fair Value Measurements".

The 2014 Floating Rate Notes are secured senior obligations and rank pari passu with all existing and future senior indebtedness and are effectively subordinated to all existing and future indebtedness of our subsidiaries. The amounts outstanding are guaranteed by CME NV and CME BV and are secured by a pledge of shares of those subsidiaries as well as an assignment of certain contractual rights.  The terms of our 2014 Floating Rate Notes restrict the manner in which our business is conducted, including the incurrence of additional indebtedness, the making of investments, the payment of dividends or the making of other distributions, entering into certain affiliate transactions and the sale of assets (see Note 19, “Indenture Covenants”).

In the event that (A) there is a change in control by which (i) any party other than certain of 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 2014 Floating Rate Notes is either withdrawn or downgraded from the rating in effect prior to the announcement of such change of control, we can be required to repurchase the 2014 Floating Rate Notes at a purchase price in cash equal to 101.0% of the principal amount of the 2014 Floating Rate Notes plus accrued and unpaid interest to the date of purchase.

The 2014 Floating Rate Notes are redeemable at our option for the remainder of their life, in whole or in part, at 100.0% of their face value.

Certain derivative instruments, including redemption call options and change of control and asset disposition put options, have been identified as being embedded in the 2014 Floating Rate Notes but as they are considered clearly and closely related to the 2014 Floating Rate Notes, they are not accounted for separately.
 
Fixed Rate Notes

2016 Fixed Rate Notes

On September 17, 2009, we issued EUR 200.0 million of 11.625% senior notes due 2016 at an issue price of 98.261%, and on September 29, 2009, we issued an additional EUR 240.0 million tranche of 11.625% senior notes due 2016 at an issue price of 102.75% (collectively, the "2016 Fixed Rate Notes"). The 2016 Fixed Rate Notes mature on September 15, 2016.  In 2010, we repurchased a total of EUR 48.4 million (approximately US$ 67.1 million at the date of repurchase) aggregate principal amount of our 2016 Fixed Rate Notes for EUR 49.3 million (approximately US$ 68.5 million at the date of repurchase) plus accrued interest.  In 2011, we repurchased an additional EUR 17.0 million (approximately US$ 24.0 million at the date of repurchase) aggregate principal amount of our 2016 Fixed Rate Notes for EUR 18.6 million (approximately US$ 26.3 million at the date of repurchase) plus accrued interest.

Interest on the 2016 Fixed Rate Notes is payable semi-annually in arrears on each March 15 and September 15.  The fair value of the 2016 Fixed Rate Notes as at March 31, 2012 and December 31, 2011 was calculated by multiplying the outstanding debt by the traded market price. This measurement of estimated fair value uses Level 1 inputs as described in Note 11, "Financial Instruments and Fair Value Measurements".

The 2016 Fixed Rate Notes are secured senior obligations and rank pari passu with all existing and future senior indebtedness and are effectively subordinated to all existing and future indebtedness of our subsidiaries.  The amounts outstanding are guaranteed by CME NV and CME BV and are secured by a pledge of shares of those subsidiaries as well as an assignment of certain contractual rights.  The terms of our 2016 Fixed Rate Notes restrict the manner in which our business is conducted, including the incurrence of additional indebtedness, the making of investments, the payment of dividends or the making of other distributions, entering into certain affiliate transactions and the sale of assets (see also Note 19, “Indenture Covenants”).

In the event that (A) there is a change in control by which (i) any party other than certain of 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 2016 Fixed Rate Notes is either withdrawn or downgraded from

9


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except per share data)
(Unaudited)


the rating in effect prior to the announcement of such change of control, we can be required to repurchase the 2016 Fixed Rate Notes at a purchase price in cash equal to 101.0% of the principal amount of the 2016 Fixed Rate Notes plus accrued and unpaid interest to the date of purchase.

The 2016 Fixed Rate Notes are redeemable at our option, in whole or in part, at the redemption prices set forth below:
 
From
Fixed Rate Notes
Redemption Price

 
 
September 15, 2013 to September  14, 2014
105.813
%
September 15, 2014 to September  14, 2015
102.906
%
September 15, 2015 and thereafter
100.000
%

Certain derivative instruments, including redemption call options and change of control and asset disposition put options, have been identified as being embedded in the 2016 Fixed Rate Notes but as they are considered clearly and closely related to the 2016 Fixed Rate Notes, they are not accounted for separately. We have included the net issuance premium within the carrying value of the 2016 Fixed Rate Notes and are amortizing it through interest expense using the effective interest method.

2017 Fixed Rate Notes

On October 21, 2010, our wholly-owned subsidiary, CET 21 spol. s r.o. (“CET 21”), issued EUR 170.0 million (approximately US$ 227.1 million) of 9.0% Senior Secured Notes due 2017 (the “2017 Fixed Rate Notes”, and collectively with the 2014 Floating Rate Notes and 2016 Fixed Rate Notes, the “Senior Notes”). The 2017 Fixed Rate Notes mature on November 1, 2017.

Interest is payable semi-annually in arrears on each May 1 and November 1.  The fair value of the 2017 Fixed Rate Notes as at March 31, 2012 and December 31, 2011 was calculated by multiplying the outstanding debt by the traded market price. This measurement of estimated fair value uses Level 1 inputs as described in Note 11, "Financial Instruments and Fair Value Measurements".

The 2017 Fixed Rate Notes are secured senior obligations of CET 21 and rank equally with CET 21’s obligations under the Secured Revolving Credit Facility (defined below). The 2017 Fixed Rate Notes rank pari passu with all existing and future senior indebtedness of CET 21 and are effectively subordinated to all existing and future indebtedness of our other subsidiaries.  The amounts outstanding are guaranteed by CME Ltd. and by our wholly-owned subsidiaries CME NV, CME BV, CME Investments B.V., CME Slovak Holdings B.V. (“CME SH”) and MARKÍZA-SLOVAKIA, spol. s r.o. (“Markiza”) and are secured by a pledge of the shares of CME NV, CME BV, CET 21, CME SH, and Media Pro Pictures s.r.o., as well as an assignment of certain contractual rights.  The terms of the 2017 Fixed Rate Notes restrict the manner in which the Company’s and CET 21’s 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 (see also Note 19, “Indenture Covenants”).

In the event that (A) there is a change in control by which (i) any party other than certain of our present shareholders becomes the beneficial owner of more than 35% 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 2017 Fixed Rate Notes is either withdrawn or downgraded from the rating in effect prior to the announcement of such change of control, we can be required to repurchase the 2017 Fixed Rate Notes at a purchase price in cash equal to 101.0% of the principal amount of the 2017 Fixed Rate Notes plus accrued and unpaid interest to the date of purchase.

The 2017 Fixed Rate Notes are redeemable at our option, in whole or in part, at the redemption prices set forth below:

 
From
Fixed Rate Notes
Redemption Price

 
 
November 1, 2014 to October 31, 2015
104.50
%
November 1, 2015 to October 31, 2016
102.25
%
November 1, 2016 and thereafter
100.00
%

Prior to November 1, 2013, up to 35.0% of the original principal amount of the 2017 Fixed Rate Notes can be redeemed at a price of 109.0% of the principal amount, plus accrued and unpaid interest if certain conditions are met.

Certain derivative instruments, including redemption call options and change of control and asset disposition put options, have been identified as being embedded in the 2017 Fixed Rate Notes but as they are considered clearly and closely related to the 2017 Fixed Rate Notes, they are not accounted for separately.





10


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except per share data)
(Unaudited)


Credit Facilities and Capital Lease Obligations

Credit facilities and capital lease obligations comprised the following at March 31, 2012 and December 31, 2011:

 
 
 
March 31, 2012

 
December 31, 2011

Credit facilities
(a) – (d)
 
$
83,334

 
$
77,464

Capital leases
 
 
4,493

 
3,698

Total credit facilities and capital leases
 
 
87,827

 
81,162

Less current maturities
 
 
(1,075
)
 
(1,058
)
Total non-current credit facilities and capital leases
 
 
$
86,752

 
$
80,104


(a) We have a cash pooling arrangement with Bank Mendes Gans (“BMG”), a subsidiary of ING Bank N.V. (“ING”), which enables us to receive credit across the group in respect of cash balances which our subsidiaries in The Netherlands, Bulgaria, Croatia, the Czech Republic, Romania, the Slovak Republic and Slovenia deposit with BMG. Cash deposited by our subsidiaries with BMG is pledged as security against the drawings of other subsidiaries up to the amount deposited.  

As at March 31, 2012, we had deposits of US$ 25.6 million in and drawings of US$ nil on the BMG cash pool. Interest is earned on deposits at the relevant money market rate and interest is payable on all drawings at the relevant money market rate plus 2.0%. As at December 31, 2011, we had deposits of US$ 37.0 million in and drawings of US$ nil on the BMG cash pool.

(b) On October 21, 2010, CET 21 entered into a five-year CZK 1.5 billion (approximately US$ 81.0 million) secured revolving credit facility (the “Secured Revolving Credit Facility”) with BNP Paribas S.A., J.P. Morgan plc, Citigroup Global Markets Limited, ING and Ceska Sporitelna, a.s. (“CSAS”), as mandated lead arrangers and original lenders, BNP Paribas S.A., as agent, BNP Paribas Trust Corporation UK Limited, as security agent, and CME Ltd., CME NV, CME BV, CME Investments B.V., CME SH and Markiza as the original guarantors. Interest under the facility is calculated at a rate per annum of 5% above Prague Interbank Offered Rate ("PRIBOR") for the relevant interest period (the applicable rate at March 31, 2012 and December 31, 2011 was 6.24% and 5.97%, respectively). The Secured Revolving Credit Facility will decrease to CZK 750.0 million (approximately US$ 40.5 million) on the fourth anniversary of the signing date.  Drawings under the facility by CET 21 may be used for working capital requirements and for general corporate purposes. The Secured Revolving Credit Facility contains customary representations, warranties, covenants and events of default. The covenants include limitations on CET 21's ability to incur additional indebtedness, create liens, make disposals and to carry out certain other types of transactions. Drawings on the Secured Revolving Credit Facility amounted to CZK 1.5 billion (approximately US$ 81.0 million) as of March 31, 2012 and December 31, 2011. As of March 31, 2012, CET 21 had an interest rate swap to hedge the interest rate exposure on the future outstanding principal under the Secured Revolving Credit Facility (see Note 11, “Financial Instruments and Fair Value Measurements”).

(c) As at March 31, 2012, and December 31, 2011, there were no drawings outstanding under a CZK 300.0 million (approximately US$ 16.2 million) working capital credit facility with Factoring Ceska Sporitelna (“FCS”).  This facility is secured by a pledge of receivables under a factoring agreement with FCS and is available indefinitely, subject to a three-month notice period.  The facility bears interest at one-month PRIBOR plus 2.5% for the period that actively assigned accounts receivable are outstanding.

(d) At March 31, 2012, Media Pro Entertainment had an aggregate principal amount of RON 7.1 million (approximately US$ 2.2 million) (December 31, 2011, RON 7.4 million, approximately US$ 2.3 million) of loans outstanding with the Central National al Cinematografei ("CNC"), a Romanian governmental organization which provides financing for qualifying filmmaking projects. Upon acceptance of a particular project, the CNC awards an agreed level of funding to each project in the form of an interest-free loan. Loans from the CNC are typically advanced for a period of ten years and are repaid through the proceeds from the distribution of the film content.  At March 31, 2012, we had 12 loans outstanding with the CNC with maturity dates ranging from 2012 to 2020. The carrying amounts at March 31, 2012 and December 31, 2011 are net of a fair value adjustment of US$ 1.1 million and US$ 1.0 million, respectively, arising on acquisition.


11


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except per share data)
(Unaudited)


Total Group

At March 31, 2012, the maturity of our Senior Debt and credit facilities was as follows:

2012
$
80

2013
129,717

2014
238,625

2015
301,529

2016
500,314

2017 and thereafter
229,884

Total Senior Debt and credit facilities
1,400,149

Net discount
(41,087
)
Carrying value of Senior Debt and credit facilities
$
1,359,062


As at March 31, 2012, we had US$ 129.7 million in principal amount of 2013 Convertible Notes due for payment on March 15, 2013 and believe that our financial resources are sufficient to meet this and other obligations (see Note 20, "Subsequent Events"). 

Capital Lease Commitments

We lease certain of our office and broadcast facilities as well as machinery and equipment under various leasing arrangements. The future minimum lease payments, 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 March 31, 2012:

2012
$
974

2013
1,101

2014
740

2015
604

2016
369

2017 and thereafter
1,201

Total undiscounted payments
4,989

Less: amount representing interest
(496
)
Present value of net minimum lease payments
$
4,493

 

5.  PROGRAM RIGHTS

Program rights comprised the following at March 31, 2012 and December 31, 2011:

 
March 31, 2012

 
December 31, 2011

Program rights:
 
 
 
Acquired program rights, net of amortization
$
297,152

 
$
266,884

Less: current portion of acquired program rights
(112,710
)
 
(101,741
)
Total non-current acquired program rights
184,442

 
165,143

Produced program rights – Feature Films:
 

 
 

Released, net of amortization
3,941

 
3,197

Completed and not released
924

 
776

In production
138

 
708

Development and pre-production
366

 
279

Produced program rights – Television Programs:
 

 
 

Released, net of amortization
84,002

 
70,383

Completed and not released
2,519

 
9,136

In production
14,803

 
12,457

Development and pre-production
4,733

 
4,138

Total produced program rights
111,426

 
101,074

Total non-current acquired program rights and produced program rights
$
295,868

 
$
266,217

 



6.  ACCOUNTS RECEIVABLE

Accounts receivable comprised the following at March 31, 2012 and December 31, 2011:

 
March 31, 2012

 
December 31, 2011

Unrelated customers
$
199,684

 
$
204,747

Less: allowance for bad debts and credit notes
(14,609
)
 
(13,555
)
Related parties
1,112

 
1,020

Less: allowance for bad debts and credit notes

 
(55
)
Total accounts receivable
$
186,187

 
$
192,157


At March 31, 2012, CZK 312.7 million (approximately US$ 16.9 million) (December 31, 2011: CZK 719.9 million, approximately US$ 38.9 million), of receivables were pledged as collateral under the Secured Revolving Credit Facility, the 2017 Fixed Rate Notes and the factoring agreement.  Of this amount, CZK 227.0 million (approximately US$ 12.3 million) (December 31, 2011: CZK 545.8 million, approximately US$ 29.5 million), of receivables in the Czech Republic were pledged as collateral under the factoring agreement (see Note 4, “Long-Term Debt and Other Financing Arrangements”).


7.  OTHER ASSETS

Other current and non-current assets comprised the following at March 31, 2012 and December 31, 2011:

 
March 31, 2012

 
December 31, 2011

 Current:
 
 
 
Prepaid acquired programming
$
27,379

 
$
23,479

Other prepaid expenses
11,007

 
9,422

Deferred tax
8,022

 
3,893

Capitalized debt costs
5,174

 
5,023

VAT recoverable
3,553

 
6,857

Inventory
5,583

 
5,226

Income taxes recoverable
2,072

 
2,632

Restricted cash
413

 
381

Other
1,075

 
1,092

Total other current assets
$
64,278

 
$
58,005

 
 
 
 
 
March 31, 2012

 
December 31, 2011

Non-current:
 

 
 

Capitalized debt costs
$
20,661

 
$
19,350

Deferred tax
4,224

 
4,232

Other
3,133

 
2,926

Total other non-current assets
$
28,018

 
$
26,508


Capitalized debt costs primarily comprise the costs incurred in connection with the issuance of our Senior Notes and Convertible Notes (see Note 4, “Long-Term Debt and Other Financing Arrangements”), and are being amortized over the term of the Senior Notes and Convertible Notes using either the straight-line method, which approximates the effective interest method, or the effective interest method.


8.  PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment comprised the following at March 31, 2012 and December 31, 2011:

 
March 31, 2012

 
December 31, 2011

Land and buildings
$
166,795

 
$
160,183

Machinery, fixtures and equipment
211,419

 
197,047

Other equipment
34,172

 
31,970

Software licenses
42,083

 
39,993

Construction in progress
19,353

 
17,894

Total cost
473,822

 
447,087

Less:  Accumulated depreciation
(253,945
)
 
(229,720
)
Total net book value
$
219,877

 
$
217,367

 
 
 
 
Assets held under capital leases (included in the above)
 

 
 

Land and buildings
$
4,654

 
$
4,508

Machinery, fixtures and equipment
3,929

 
3,146

Total cost
8,583

 
7,654

Less:  Accumulated depreciation
(2,664
)
 
(2,720
)
Net book value
$
5,919

 
$
4,934


The movement in the net book value of property, plant and equipment during the three months ended March 31, 2012 and 2011 is comprised of:
 
For the Three Months Ended March 31,
 
 
2012

 
2011

Opening balance
$
217,367

 
$
250,902

Cash additions
7,339

 
5,590

Disposals
(279
)
 
(628
)
Depreciation
(11,075
)
 
(14,300
)
Foreign currency movements
6,947

 
21,714

Other movements
(422
)
 
777

Ending balance
$
219,877

 
$
264,055



9.  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities comprised the following at March 31, 2012 and December 31, 2011:

 
March 31, 2012

 
December 31, 2011

Accounts payable
$
36,962

 
$
47,676

Related party accounts payable
1,135

 
1,955

Programming liabilities
36,154

 
32,532

Related party programming liabilities
60,147

 
68,573

Duties and other taxes payable
15,946

 
13,462

Accrued staff costs
25,937

 
24,532

Accrued interest payable
19,150

 
24,108

Income taxes payable
1,312

 
1,379

Accrued production costs
6,536

 
4,303

Accrued legal contingencies and professional fees
2,678

 
3,409

Authors’ rights
5,312

 
6,367

Other accrued liabilities
19,373

 
11,752

Total accounts payable and accrued liabilities
$
230,642

 
$
240,048



10.  OTHER LIABILITIES

Other current and non-current liabilities comprised the following at March 31, 2012 and December 31, 2011:

 
March 31, 2012

 
December 31, 2011

Current:
 
 
 
Deferred revenue
$
19,138

 
$
10,977

Deferred tax
1,001

 
1,094

Derivative liabilities
1,683

 
2,375

Other
491

 
23

Total other current liabilities
$
22,313

 
$
14,469

 
 
 
 
 
March 31, 2012

 
December 31, 2011

Non-current:
 

 
 

Deferred tax
$
76,273

 
$
74,672

Related party programming liabilities
8,025

 
9,363

Derivative liabilities
506

 
694

Other
346

 
212

Total other non-current liabilities
$
85,150

 
$
84,941



11.  FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

ASC 820, “Fair Value Measurements and Disclosure”, establishes a hierarchy that prioritizes the inputs to those valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are:

Basis of Fair Value Measurement

Level 1
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted instruments.
Level 2
Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly.
Level 3
Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

We evaluate the position of each financial instrument measured at fair value in the hierarchy individually based on the valuation methodology we apply. The carrying value of financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities, approximate their fair value due to the short-term nature of these items.  The fair value of our Senior Debt (as defined therein) is included in Note 4, “Long-Term Debt and Other Financing Arrangements”.

At March 31, 2012, we had the following currency and interest rate swap agreements carried at fair value using significant level 2 inputs and the call option issued in connection with the restructuring of our Bulgarian operations in 2010 (see “Other” section below), which is carried at fair value using significant level 3 inputs:

Currency Risk

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$ 577.7 million), payable on each July 15, October 15, January 15, and April 15 up 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$ 502.1 million) receivable on each July 15, October 15, January 15, and April 15 up to the termination date of April 15, 2012.

These currency swap agreements reduce our exposure to movements in foreign exchange rates on part of the CZK-denominated cash flows generated by our Czech Republic operations, which corresponds to a significant proportion of the Euro-denominated interest payments on our Senior Notes (see Note 4, “Long-Term Debt and Other Financing Arrangements”). These financial instruments 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, and so changes in their fair value are recorded in the condensed consolidated statement of operations and in the condensed consolidated balance sheet in other current liabilities.

We value these currency swap agreements using an industry-standard currency swap pricing model which calculates the fair value on the basis of the net present value of the estimated future cash flows receivable or payable. These instruments are allocated to level 2 of the fair value hierarchy because the critical inputs to this model, including the relevant yield curves and the known contractual terms of the instrument, are readily observable.

The fair value of these instruments as at March 31, 2012 was a US$ 1.7 million liability which represented a net decrease of US$ 0.7 million from the US$ 2.4 million liability as at December 31, 2011. This change was recognized as a derivative gain in the condensed consolidated statement of operations amounting to US$ 0.7 million.

The fair value of the liability on April 15, 2012, immediately prior to the final payments being made and received, was US$ 1.7 million.  There will be no impact on earnings from this instrument subsequent to April 15, 2012.

Interest Rate Risk

On February 9, 2010, we entered into an interest rate swap agreement with UniCredit Bank Czech Republic, a.s. (“UniCredit”) and CSAS, expiring in April 2013, to reduce the impact of changing interest rates on our floating rate debt that is denominated in CZK.  The interest rate swap is a financial instrument that is used to minimize interest rate risk and is considered an economic hedge. The interest rate swap has not been designated as a hedging instrument so changes in the fair value of the derivative are recorded in the condensed consolidated statement of operations and in the condensed consolidated balance sheet in other non-current liabilities.

We value the interest rate swap agreement using a valuation model which calculates the fair value on the basis of the net present value of the estimated future cash flows. The most significant input used in the valuation model is the expected PRIBOR-based yield curve. This instrument is allocated to level 2 of the fair value hierarchy because the critical inputs to this model, including current interest rates, relevant yield curves and the known contractual terms of the instrument, are readily observable.

The fair value of the interest rate swap as at March 31, 2012, was a US$ 0.5 million liability, which represented a net decrease of US$ 0.2 million from the US$ 0.7 million liability as at December 31, 2011, which was recognized as a derivative gain in the condensed consolidated statement of operations amounting to US$ 0.2 million.

Other

We issued a call option to Top Tone Holdings in 2010 in connection with the restructuring of our Bulgarian Broadcast operations. We used a binomial option pricing model to value the call option liability at US$ 3.0 million as at April 19, 2010, the date we acquired the bTV group. The option was allocated to level 3 of the fair value hierarchy due to the significance of the unobservable inputs used in the valuation model.

The fair value of the call option as at March 31, 2012 and December 31, 2011 was US$ nil because the option strike price is the fair value of the equity in CME Bulgaria B.V. There will be no further changes in the carrying value of the option liability.
 
Top Tone Holdings exercised the call option earlier this year, which will increase its noncontrolling interest in CME Bulgaria. The closing of this transaction is not yet complete.

12.  EQUITY

Preferred Stock

5,000,000 shares of Preferred Stock, with a US$ 0.08 par value, were authorized as at March 31, 2012 and December 31, 2011. None were issued and outstanding as at March 31, 2012 and December 31, 2011.

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 March 31, 2012 and December 31, 2011. The rights of the holders of Class A common stock and Class B common stock are identical except for voting rights. The shares of Class A common stock are entitled to one vote per share and the shares of Class B common stock are entitled to ten votes per share. Shares of Class B common stock are convertible into shares of Class A common stock 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.

In connection with the acquisition of Media Pro Entertainment in December 2009, we issued warrants to purchase up to 600,000 and 250,000 shares of Class A common stock for a six year period at a price of US$ 21.75 per share, to Alerria Management Company S.A. and Metrodome B.V., respectively, each of which is controlled by Adrian Sarbu, our President and Chief Executive Officer, and a member of our Board of Directors.

There were approximately 7.5 million shares of Class B common stock and 56.9 million shares of Class A common stock outstanding at March 31, 2012.


13.  INTEREST EXPENSE

Interest expense comprised the following for the three months ended March 31, 2012 and 2011:

 
For the Three Months Ended March 31,
 
2012

 
2011

Interest on Senior Notes
$
21,192

 
$
22,547

Interest on Convertible Notes
4,397

 
4,221

Interest on capital leases and other financing arrangements
1,454

 
993

 
27,043

 
27,761

 
 
 
 
Amortization of capitalized debt issuance costs
1,223

 
1,975

Amortization of issuance discount
3,558

 
4,747

Loss on extinguishment of debt

 
21,556

 
4,781

 
28,278

Total interest expense
$
31,824

 
$
56,039


The loss on extinguishment of debt comprised the following for the three months ended March 31, 2012 and 2011:

 
For the Three Months Ended March 31,
 
 
2012

2011

Refinance of 2013 Convertible Notes
$

$
19,167

Repurchase of 2016 Fixed Rate Notes

2,389

Total
$

$
21,556




14.  STOCK-BASED COMPENSATION

The charge for stock-based compensation in our condensed consolidated statements of operations was as follows:

 
For the Three Months Ended March 31,
 
2012

 
2011

Stock-based compensation charged
$
1,087

 
$
1,521

Income tax benefit recognized

 


A summary of option activity for the three months ended March 31, 2012 is presented below:

 
Shares

 
Weighted Average Exercise Price per Share

 
Weighted Average Remaining Contractual Term (years)

 
Aggregate Intrinsic Value

Outstanding at January 1, 2012
2,901,687

 
$
32.86

 
4.49

 
$
71

Forfeited
(489,625
)
 
35.84

 
 
 
 
Outstanding at March 31, 2012
2,412,062

 
$
32.25

 
4.73

 
$
81

Vested or expected to vest
2,293,953

 
32.73

 
4.63

 
81

Exercisable at March 31, 2012
1,437,810

 
$
38.31

 
3.70

 
$
81


The fair value of stock options is estimated on the grant date using the Black-Scholes option-pricing model and recognized ratably over the requisite service period.

The exercise of stock options has generated a net operating loss brought forward in our Delaware subsidiary of US$ 5.3 million at January 1, 2012. In the three months ended March 31, 2012 and 2011, tax benefits of US$ nil and US$ nil, respectively, were recognized in respect of the utilization of part of this loss, and were recorded as additional paid-in capital, net of US$ 0.3 million and US$ nil of transfers related to the write-off of deferred tax assets arising upon forfeitures for the periods ending March 31, 2012 and 2011, respectively. The losses are subject to examination by the tax authorities and to restriction on their utilization.

The aggregate intrinsic value (the difference between the stock price on the last day of trading of the first quarter of 2012 and the exercise prices multiplied by the number of in-the-money options) represents the total intrinsic value that would have been received by the option holders had they exercised all in-the-money options as of March 31, 2012. This amount changes based on the fair value of our common stock.  As of March 31, 2012, there was US$ 7.7 million of total unrecognized compensation expense related to options.  


15.  EARNINGS PER SHARE

The components of basic and diluted earnings per share are as follows:

 
For the Three Months Ended March 31,
 
2012

 
2011

Net loss attributable to CME Ltd.
$
(13,392
)
 
$
(21,114
)
 
 
 
 
Weighted average outstanding shares of common stock
64,393

 
64,369

Dilutive effect of employee stock options

 

Common stock and common stock equivalents
64,393

 
64,369

 
 
 
 
Net loss per share:
 
 
 
Basic
$
(0.21
)
 
$
(0.33
)
Diluted
$
(0.21
)
 
$
(0.33
)

At March 31, 2012, 3,418,413 (December 31, 2011: 3,763,481) stock options and warrants were antidilutive to income from continuing operations and excluded from the calculation of earnings per share. These may become dilutive in the future. Shares of Class A common stock potentially issuable under our Convertible Notes may also become dilutive in the future, although they were antidilutive to income at March 31, 2012.

16.  SEGMENT DATA

We manage our business on a divisional basis, with three reportable segments: Broadcast, Media Pro Entertainment and New Media.  The business segments reflect how CME Ltd.’s operations are managed by segment managers, how operating performance within the Company is evaluated by senior management and the structure of our internal financial reporting.  Supplemental geographic information on the performance of our Broadcast segment is provided due to the significance of our broadcast operations to CME Ltd. Management believes this information is useful to users of the financial statements.

Our Broadcast segment generates revenues from the sale of advertising and sponsorship and our New Media segment generates revenues from display and video advertising, paid premium content and subscriptions. Our Media Pro Entertainment segment generates revenues through the sale of production services to independent film-makers and through the sale of broadcast and distribution rights to third parties. Media Pro Entertainment also develops, produces and distributes television and film content which is shown on our television channels. In addition, the distribution activities of Media Pro Entertainment generate revenues from the distribution of rights to film content to third party clients, from the exhibition of films in our theaters and from the sale of DVD and Blu Ray discs to wholesale and retail clients.

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

Our key performance measure of the efficiency of our segments is OIBDA margin. OIBDA margin is the ratio of OIBDA to Net Revenues.

We believe OIBDA 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 operations. OIBDA is also used as a component in determining management bonuses. Intersegment revenues and profits have been eliminated in consolidation.

OIBDA may not be comparable to similar measures reported by other companies.

Below are tables showing our Net Revenues and OIBDA by segment for the three months ended March 31, 2012 and 2011.
 
For the Three Months Ended March 31,
Net revenues
2012

 
2011

Broadcast:
 
 
 
Bulgaria
$
18,928

 
$
19,337

Croatia
11,873

 
12,511

Czech Republic
51,698

 
57,706

Romania
31,199

 
34,354

Slovak Republic
18,635

 
19,090

Slovenia
14,464

 
14,519

Total Broadcast
146,797

 
157,517

Media Pro Entertainment
43,405

 
40,179

New Media
3,679

 
2,621

Intersegment revenues (1)
(26,448
)
 
(27,545
)
Total net revenues
$
167,433

 
$
172,772


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

 
For the Three Months Ended March 31,
OIBDA
2012

 
2011

Broadcast:
 
 
 
Bulgaria
$
(1,102
)
 
$
162

Croatia
1,021

 
(332
)
Czech Republic
20,194

 
22,668

Romania
1,895

 
3,449

Slovak Republic
(457
)
 
(2,506
)
Slovenia
2,777

 
3,214

Divisional operating costs
(1,450
)
 
(507
)
Total Broadcast
22,878

 
26,148

Media Pro Entertainment
1,671

 
724

New Media
(1,448
)
 
(1,601
)
Central
(8,241
)
 
(9,846
)
Elimination
(800
)
 
(1,179
)
Total OIBDA
$
14,060

 
$
14,246


Reconciliation to condensed consolidated statement of operations:

For the Three Months Ended March 31,
 
2012

 
2011

Total OIBDA
$
14,060

 
$
14,246

Depreciation of property, plant and equipment
(11,880
)
 
(14,284
)
Amortization of intangible assets
(12,483
)
 
(7,627
)
Operating loss
(10,303
)
 
(7,665
)
Interest expense, net
(31,610
)
 
(54,911
)
Foreign currency exchange gain, net
23,394

 
43,265

Change in fair value of derivatives
927

 
(40
)
Other income / (expense)
209

 
(712
)
Credit / (provision) for income taxes
3,570

 
(932
)
Net loss
$
(13,813
)
 
$
(20,995
)


We do not rely on any single major customer or group of major customers.




12


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except per share data)
(Unaudited)


17.  COMMITMENTS AND CONTINGENCIES

Commitments

a)  Programming Rights Agreements

At March 31, 2012, we had total commitments of US$ 337.7 million (December 31, 2011: US$ 361.8 million) in respect of our broadcast and distribution operations for future programming, including contracts signed with license periods starting after the balance sheet date. The amounts are payable as follows:

 
Total

 
Less than 1 year

 
1-3 years

 
3-5 years

 
More than 5 years

Programming purchase obligations
$
337,672

 
$
135,507

 
$
170,220

 
$
31,945

 
$

 

b) Operating Lease Commitments

For the three months ended March 31, 2012 and 2011, we incurred aggregate rent expense on all facilities of US$ 2.2 million and US$ 2.9 million, respectively.  Future minimum operating lease payments at March 31, 2012 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:

 
March 31, 2012

2012
$
4,644

2013
3,763

2014
3,163

2015
1,882

2016
1,509

2017 and thereafter
9,177

Total
$
24,138


c) Factoring of Trade Receivables

CET 21 has a working capital credit facility of CZK 300 million (approximately US$ 16.2 million) with FCS. This facility is secured by a pledge of receivables under a factoring agreement with FCS. As at March 31, 2012 and December 31, 2011, there were no drawings under this facility (see also Note 4, “Long-term Debt and Other Financing Arrangements” and Note 6, “Accounts Receivable”).

The transfer of the receivables is accounted for as a secured borrowing, with the proceeds received recorded in the condensed 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.

d) Call option

Top Tone Holdings has exercised its right to acquire additional equity in CME Bulgaria, however the closing of this transaction is not yet complete. Upon consummation of the equity transfer, we will own 90.0% of our Bulgaria Broadcast operations.

Contingencies
 
a) Litigation

While we are, from time to time, a party to litigation or arbitration proceedings arising in the normal course of our business operations, we are not presently a party to any such litigation or arbitration which could reasonably be expected to have a material effect on our business or consolidated financial statements, including proceedings described here and in (b) below.

Video International Termination

On March 18, 2009, Video International Company Group, CGSC (“VI”), a Russian legal entity, filed a claim in the London Court of International Arbitration (“LCIA”) against our wholly-owned subsidiary CME BV, which was, at the time the claim was filed, the principal holding company of our former Ukrainian operations. The claim relates to the termination of an agreement between VI and CME BV dated November 30, 2006 (the “parent agreement”). The parent agreement was one of four related contracts by which VI subsidiaries, including LLC Video International-Prioritet (“Prioritet”), supplied advertising and marketing services to Studio 1+1 LLC (“Studio 1+1”) in Ukraine and International Media Services Ltd., an offshore affiliate of Studio 1+1 (“IMS”). Among these four contracts were the advertising services agreement and the marketing services agreements both between Prioritet and Studio 1+1. On December 24, 2008, each of CME BV, Studio 1+1 and IMS provided notices of termination to their respective contract counterparties, following which each of the four contracts terminated on March 24, 2009. In connection with these terminations, Studio 1+1 was required under the advertising and marketing services agreements to pay a termination penalty equal to (i)

13


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except per share data)
(Unaudited)


12% of the average monthly advertising revenues, and (ii) 6% of the average monthly sponsorship revenues, in each case for advertising and sponsorship sold by Prioritet for the six months prior to the termination date, multiplied by six. On June 1, 2009, Studio 1+1 paid UAH 13.5 million (approximately US$ 1.7 million) to Prioritet and set off UAH 7.4 million (approximately US$ 0.9 million) against amounts owing to Studio 1+1 under the advertising and marketing services agreements. In its LCIA claim, VI sought payment of a separate indemnity from CME BV under the parent agreement equal to the aggregate amount of Studio 1+1’s advertising revenues for the six months ended December 31, 2008. The total amount of relief sought was US$ 58.5 million. On September 30, 2010, a partial award was issued in the arbitration proceedings, pursuant to which VI’s claim for relief in the amount of US$ 58.5 million was dismissed and CME BV was awarded reimbursement of its legal fees and other costs in respect of the arbitration proceedings, which were received on October 27, 2010. The partial award does permit VI to bring a subsequent claim against CME BV as parent guarantor in the event that VI establishes that it is entitled to certain additional compensation under the advertising and marketing services agreements with Studio 1+1 and that such compensation is not satisfied by Studio 1+1. On July 13, 2011, Prioritet filed claims against Studio 1+1 in the Commercial Court of Kiev. The claims relate to alleged violations of the advertising services agreement and marketing services agreement and the total amount of relief sought is approximately UAH 201.0 million (approximately US$ 25.4 million). On September 23, 2011, the Commercial Court of Kiev dismissed Prioritet's claims. On November 7, 2011, the Commercial Court of Appeal of Kiev dismissed an appeal of the lower court's decision. On December 13, 2011, the Superior Commercial Court of Ukraine dismissed an appeal of Prioritet following the decision of the appellate court. Prioritet has indicated it intends to seek leave to appeal to the Supreme Court of Ukraine. We do not believe that it is likely that we will be required to make any further payment.

b) Lehman Brothers Bankruptcy Claim

On March 4, 2008, we purchased for cash consideration of US$ 22.2 million, capped call options from Lehman OTC (see Note 4, “Long-Term Debt and Other Financing Arrangements”) over 1,583,333 shares of our Class A common stock which entitled us to receive, at our election following a conversion under the 2013 Convertible Notes, cash or shares of Class A common stock with a value equal to the difference between the trading price of our shares at the time the option is exercised and US$ 105.00, up to a maximum trading price of US$ 151.20.

On September 15, 2008, Lehman Holdings, the guarantor of the obligations of Lehman OTC under the capped call agreement, filed for protection under Chapter 11 of the United States Bankruptcy Code. The bankruptcy filing of Lehman Holdings, as guarantor, was an event of default and gave us the right to terminate the capped call agreement with Lehman OTC and claim for losses. We exercised this right on September 16, 2008 and claimed an amount of US$ 19.9 million, which bears interest at a rate equal to CME’s estimate of its cost of funding plus 1.0% per annum.

On October 3, 2008, Lehman OTC also filed for protection under Chapter 11. We filed claims in the bankruptcy proceedings of both Lehman Holdings and Lehman OTC. Our claim was a general unsecured claim and ranked together with similar claims.

On March 3, 2009 we assigned our claim in the bankruptcy proceedings of Lehman Holdings and Lehman OTC to an unrelated third party for cash consideration of US$ 3.4 million, or 17.0% of the claim value. Under the terms of the agreement, in certain circumstances, including if our claim is subsequently disallowed or adjusted by the bankruptcy court, the counterparty would be able to recoup the corresponding portion of the purchase price from us. Likewise, if the amount of recovery exceeds the amount of our claim, we may receive a portion of that recovery from the claim purchaser.

On March 14, 2011, Lehman Brothers filed an objection to our bankruptcy claim, contending that our claim is worth US$ 14.7 million. On April 12, 2011, a response was filed with the bankruptcy court reasserting our claim of US$ 19.9 million.

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 5.0%) be allocated to a reserve, which reserve is capped at a proportion of the registered capital of a company (ranging from 5.0% to 25.0%). The restricted net assets of our consolidated subsidiaries and equity in earnings of investments accounted for under the equity method together are less than 25.0% of consolidated net assets.



18. RELATED PARTY TRANSACTIONS

Overview
 
There is a limited local market for many specialty broadcasting and production services in the countries in which we operate; many of these services are provided by parties known to be connected to our local shareholders, members of our management and board of directors or our equity investees.  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 continue to review all of these arrangements.
 
Related Party Groups
 
We consider our related parties to be those shareholders who have direct control and/or influence and other parties that can significantly influence management as well as our officers and directors; a “connected” party is one in relation to whom we are aware of the existence of a family or business connection to a shareholder, director or officer. We have identified transactions with individuals or entities associated with the following individuals or entities as material related party transactions: Adrian Sarbu, our President and Chief Executive Officer, a member of our Board of Directors and beneficial owner of approximately 4.3% of our outstanding shares of Class A common stock; and Time Warner Inc. (“Time Warner”), who is represented on our Board of Directors and is the beneficial owner of approximately 34.4% of our outstanding shares of Class A common stock and Class B common stock.

Related Party Transactions
 
Adrian Sarbu

 
For the Three Months Ended March 31,
 
2012

 
2011

Purchases of services
$
1,090

 
$
1,157

Sales
361

 
176


 
As at March 31,

 
As at December 31,

 
2012

 
2011

Accounts payable
$
573

 
$
512

Accounts receivable
861

 
765



Time Warner
 
 
For the Three Months Ended March 31,