XLON:0K8L Central European Media Enterprises Ltd Class A Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 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 July 30, 2012
Class A Common Stock, par value $0.08
77,185,129





 
 
 
 
 
 
 
 










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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.

FORM 10-Q

For the quarterly period ended June 30, 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)

 
June 30, 2012

 
December 31, 2011

ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
124,814

 
$
186,386

Accounts receivable, net (Note 6)
201,723

 
192,157

Program rights, net (Note 5)
107,432

 
101,741

Other current assets (Note 7)
90,445

 
58,005

Total current assets
524,414

 
538,289

Non-current assets
 

 
 

Property, plant and equipment, net (Note 8)
198,312

 
217,367

Program rights, net (Note 5)
283,890

 
266,217

Goodwill (Note 3)
1,068,381

 
1,095,193

Broadcast licenses and other intangible assets, net (Note 3)
499,523

 
538,195

Other non-current assets (Note 7)
23,203

 
26,508

Total non-current assets
2,073,309

 
2,143,480

Total assets
$
2,597,723

 
$
2,681,769


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


4


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


 
June 30, 2012

 
December 31, 2011

LIABILITIES AND EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable and accrued liabilities (Note 9)
$
239,046

 
$
240,048

Current portion of long-term debt and other financing arrangements (Note 4)
111,583

 
1,058

Other current liabilities (Note 10)
28,639

 
14,469

Total current liabilities
379,268

 
255,575

Non-current liabilities
 

 
 

Long-term debt and other financing arrangements (Note 4)
1,104,445

 
1,323,311

Other non-current liabilities (Note 10)
70,357

 
84,941

Total non-current liabilities
1,174,802

 
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)

 

76,310,310 shares of Class A Common Stock of $0.08 each (December 31, 2011 –56,892,114)
6,104

 
4,551

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

 
600

Additional paid-in capital
1,493,231

 
1,404,648

Accumulated deficit
(456,269
)
 
(425,702
)
Accumulated other comprehensive (loss) / income
(13,926
)
 
17,595

Total CME Ltd. shareholders’ equity
1,029,140

 
1,001,692

Noncontrolling interests
14,513

 
16,250

Total equity
1,043,653

 
1,017,942

Total liabilities and equity
$
2,597,723

 
$
2,681,769


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


5


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

 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2012


2011

 
2012


2011

Net revenues
$
211,222

 
$
249,656

 
$
378,655

 
$
422,428

Operating expenses:
 
 
 
 
 
 
 
Operating costs
42,240

 
34,536

 
71,366

 
68,191

Cost of programming
95,685

 
122,730

 
193,409

 
218,761

Depreciation of property, plant and equipment
9,867

 
14,493

 
20,942

 
27,910

Amortization of broadcast licenses and other intangibles (Note 3)
12,715

 
7,809

 
25,198

 
15,436

Cost of revenues
160,507

 
179,568

 
310,915

 
330,298

Selling, general and administrative expenses
27,065

 
30,615

 
54,393

 
60,322

Operating income
23,650

 
39,473

 
13,347

 
31,808

Interest income
171

 
637

 
385


1,765

Interest expense (Note 13)
(30,681
)
 
(37,757
)
 
(62,505
)
 
(93,796
)
Foreign currency exchange (loss) / gain, net
(40,312
)
 
4,106

 
(16,918
)
 
47,371

Change in fair value of derivatives (Note 11)
47,398

 
1,161

 
48,325

 
1,121

Other (expense) / income
(158
)
 
(90
)
 
51

 
(802
)
Income / (loss) before tax
68

 
7,530

 
(17,315
)
 
(12,533
)
Credit / (provision) for income taxes
3,073

 
(6,718
)
 
6,643

 
(7,650
)
Net income / (loss)
3,141

 
812

 
(10,672
)
 
(20,183
)
Net loss attributable to noncontrolling interests
815

 
156

 
1,236

 
37

Net income / (loss) attributable to CME Ltd.
$
3,956

 
$
968

 
$
(9,436
)
 
$
(20,146
)
 
 
 
 
 
 
 
 
Net income / (loss)
3,141

 
812

 
(10,672
)
 
(20,183
)
Currency translation adjustment
(98,552
)
 
22,851

 
(31,462
)
 
131,246

Comprehensive (loss) / income
$
(95,411
)
 
$
23,663

 
$
(42,134
)
 
$
111,063

Comprehensive loss / (income) attributable to noncontrolling interests
750

 
89

 
1,177

 
(510
)
Comprehensive (loss) / income attributable to CME Ltd.
$
(94,661
)
 
$
23,752

 
$
(40,957
)
 
$
110,553



 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2012

 
2011

 
2012

 
2011

PER SHARE DATA (Note 15):
 
 
 
 
 
 
 
Net income / (loss) per share:
 
 
 
 
 
 
 
Net income / (loss) attributable to CME Ltd. – Basic
$
0.06

 
$
0.02

 
$
(0.14
)
 
$
(0.31
)
Net income / (loss) attributable to CME Ltd. – Diluted
$
0.06

 
$
0.02

 
$
(0.14
)
 
$
(0.31
)
 
 
 
 
 
 
 
 
Weighted average common shares used in computing per share amounts (000’s):
 
 
 
 
 
 
 
Basic
66,501

 
64,384

 
65,447

 
64,377

Diluted
66,532

 
64,501

 
65,447

 
64,377



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


6


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 / (Loss)

 
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

 

 

 

 
2,091

 

 

 

 
2,091

Conversion of Class B shares to Class A shares (Note 12)
7,516,936

 
601

 
(7,516,936
)
 
(601
)
 

 

 

 

 

Share issuance (Note 12)
11,901,260

 
952

 

 

 
66,564

 

 

 

 
67,516

Repurchase of 2013 Convertible Notes (Note 4)

 

 

 

 
(868
)
 

 

 

 
(868
)
Reclassification of capped call options (Note 4)

 

 

 

 
21,131

 
(21,131
)
 

 

 

Options exercised

 

 
16,000

 
1

 
32

 

 

 

 
33

Dividends

 

 

 

 

 

 

 
(560
)
 
(560
)
Other

 

 

 

 
(367
)
 

 

 

 
(367
)
Net loss

 

 

 

 

 
(9,436
)
 

 
(1,236
)
 
(10,672
)
Currency translation adjustment

 

 

 

 

 

 
(31,521
)
 
59

 
(31,462
)
BALANCE June 30, 2012
76,310,310


$
6,104




$


$
1,493,231


$
(456,269
)

$
(13,926
)

$
14,513

 
$
1,043,653



 
 
 
 
 
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

 

 

 

 
3,104

 

 

 

 
3,104

Repurchase of 2013 Convertible Notes

 

 

 

 
(7,106
)
 

 

 

 
(7,106
)
Issuance of 2015 Convertible Notes, net of transaction costs

 

 

 

 
11,848

 

 

 

 
11,848

Reclassification of capped call options

 

 

 

 
16,940

 
(16,940
)
 

 

 

Stock options exercised
13,625

 
1

 
10,000

 
1

 
240

 

 

 

 
242

Dividends

 

 

 

 

 

 

 
(362
)
 
(362
)
Net loss

 

 

 

 

 
(20,146
)
 

 
(37
)
 
(20,183
)
Currency translation adjustment

 

 

 

 

 

 
130,699

 
547

 
131,246

BALANCE June 30, 2011
56,892,114

 
$
4,551

 
7,500,936

 
$
600

 
$
1,402,829

 
$
(270,904
)
 
$
208,444

 
$
21,021

 
$
1,366,541


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


7


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(US$ 000’s)
(Unaudited)
 
For the Six Months Ended June 30,
 
2012

 
2011

CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(10,672
)
 
$
(20,183
)
Adjustments to reconcile net loss to net cash generated from / (used in) operating activities:
 

 
 
Amortization of program rights
122,504

 
136,905

Depreciation and other amortization
57,960

 
57,445

Net (gain) / loss on extinguishment of debt
(448
)
 
24,979

(Gain) / loss on disposal of fixed assets
(71
)
 
709

Stock-based compensation (Note 14)
2,091

 
3,104

Change in fair value of derivatives (Note 11)
(48,325
)
 
(1,121
)
Foreign currency exchange gain, net
16,918

 
(47,371
)
Net change in (net of effects of acquisitions and disposals of businesses):
 

 
 

Accounts receivable, net
(19,331
)
 
7,360

Accounts payable and accrued liabilities
(22,937
)
 
(5,093
)
Program rights
(157,056
)
 
(165,537
)
Other assets
1,638

 
3,463

Accrued interest
(1,750
)
 
(510
)
Income taxes payable
784

 
2,514

Deferred revenue
13,451

 
30,495

Deferred taxes
(9,876
)
 
(3,321
)
VAT and other taxes payable
6,927

 
5,212

Net cash (used in) / generated from operating activities
(48,193
)
 
29,050

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Purchase of property, plant and equipment
(11,340
)
 
(14,321
)
Disposal of property, plant and equipment
191

 
94

Investments in subsidiaries, net of cash acquired

 
(8,847
)
Net cash used in investing activities
(11,149
)
 
(23,074
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Repurchase of Senior Notes
(180,087
)
 
(26,252
)
Payment on exchange of Convertible Notes

 
(31,576
)
Debt issuance costs
(811
)
 
(1,982
)
Proceeds from credit facilities
192,944

 
13,194

Payment of credit facilities and capital leases
(28,514
)
 
(13,181
)
Issuance of common stock
15,033

 

Proceeds from exercise of stock options
33

 
242

Dividends paid to holders of noncontrolling interests
(131
)
 
(200
)
Net cash used in financing activities
(1,533
)
 
(59,755
)
 
 
 
 
Impact of exchange rate fluctuations on cash
(697
)
 
7,234

 
 
 
 
Net decrease in cash and cash equivalents
(61,572
)
 
(46,545
)
CASH AND CASH EQUIVALENTS, beginning of period
186,386

 
244,050

CASH AND CASH EQUIVALENTS, end of period
$
124,814

 
$
197,505

 
 
 
 
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
 
 
 
Conversion of credit facility to shares of Class A common stock (Note 4)
$
74,344

 
$


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

8


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and 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 June 30, 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 32 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 five other channels, BTV CINEMA, BTV COMEDY, RING.BG, BTV ACTION and BTV LADY, a female-oriented cable channel that 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 has not yet occurred. 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. On July 14, 2012, we launched a male-oriented channel, FANDA.

Romania

We operate two general entertainment channels, PRO TV and ACASA, three other channels, PRO CINEMA, SPORT.RO, 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 licensed formats as well as original formats and content developed by the business. The content produced can 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.


9


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


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 dependent to an extent 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 as well as our video-on-demand service, Voyo, in order to build strong online channels to distribute popular content and to operate an efficient marketing tool for our Broadcast operations.  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. 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 six months of 2012, Voyo completed the introduction of a subscription based video-on-demand service in all of its regions, offering 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. Revenues generated by the New Media segment are primarily derived from the sale of advertising.

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 at 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.

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. Certain amounts included in the accompanying condensed consolidated financial statements have been adjusted or reclassified to conform to the current period presentation. In the condensed consolidated statements of cash flows, we increased disclosure to present amounts for the adjustments to reconcile net income to cash flows from operating activities relating to the amortization of program rights and the change in accrued interest and have presented the comparative amounts for all periods presented.

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

10


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


million and US$ 3.8 million for the three and six months ended June 30, 2012, respectively. 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 June 30, 2012 our net income attributable to CME Ltd., basic net income per common share and diluted net income per common share would have been US$ 2.2 million, US$ 0.03 and US$ 0.03 for the three months ended June 30, 2012, respectively, and our net loss attributable to CME Ltd., basic net loss per common share and diluted net loss per common share would have been US$ (13.2) million, US$ (0.20) and US$ (0.20), respectively, for the six months ended June 30, 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 may 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

Guidance was issued in July 2012, which is intended to simplify how entities test indefinite-lived intangible assets 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 indefinite-lived asset is impaired. If an entity determines it is not more likely than not that the indefinite-lived intangible asset is impaired, then performing the two-step impairment test is not necessary. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this guidance may impact how we perform our impairment testing, but not the amount of impairment recognized in the financial statements if indefinite-lived intangible assets are found to be impaired.


3. GOODWILL AND INTANGIBLE ASSETS

Goodwill:

Goodwill by reporting unit as at June 30, 2012 and December 31, 2011 is summarized as follows:

 
Gross Balance, December 31, 2011
Accumulated Impairment Losses
Balance, December 31, 2011
Foreign Currency
Balance, June 30, 2012
Accumulated Impairment Losses
Gross Balance, June 30, 2012
Broadcast segment:
 
 
 
 
 
 
 
Bulgaria
$
176,394

$
(117,460
)
$
58,934

$
(1,590
)
$
57,344

$
(117,460
)
$
174,804

Croatia
11,116

(10,454
)
662

(17
)
645

(10,454
)
11,099

Czech Republic
862,457


862,457

(17,855
)
844,602


844,602

Romania
62,078


62,078

(3,414
)
58,664


58,664

Slovak Republic
56,575


56,575

(1,526
)
55,049


55,049

Slovenia
18,321


18,321

(494
)
17,827


17,827

Media Pro
Entertainment segment:
 
 
 
 
 
 
 

Fiction and reality and entertainment
17,502


17,502

(920
)
16,582


16,582

Production services
11,028

(11,028
)



(11,028
)
11,028

Distribution
18,664


18,664

(996
)
17,668


17,668

Total
$
1,234,135

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

$
(26,812
)
$
1,068,381

$
(138,942
)
$
1,207,323



11


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 June 30, 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

 

 

 

 

Additions

 

 

 

 
201

 
201

Amortization

 
(20,506
)
 

 
(4,320
)
 
(372
)
 
(25,198
)
Foreign currency movements

 
(7,555
)
 
(4,100
)
 
(1,888
)
 
(132
)
 
(13,675
)
Balance, June 30, 2012
$

 
$
303,949

 
$
122,545

 
$
68,138

 
$
4,891

 
$
499,523


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$ 4.2 million recorded during the three months ended June 30, 2012 or US$ 0.06 and US$ 0.06 per basic common share and diluted common share and US$ 9.5 million recorded during the six months ended June 30, 2012, or US$ 0.14 and US$ 0.14 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 June 30, 2012 and December 31, 2011:

 
June 30, 2012

 
December 31, 2011

Gross value
$
543,381

 
$
514,641

Accumulated amortization
(166,403
)
 
(154,891
)
Net book value of amortized intangible assets
376,978

 
359,750

Indefinite-lived broadcast licenses and trademarks
122,545

 
178,445

Total broadcast licenses and other intangible assets, net
$
499,523

 
$
538,195




12


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

 
June 30, 2012

 
December 31, 2011

Senior debt
$
1,045,325

 
$
1,243,207

Total credit facilities and capital leases
170,703

 
81,162

Total long-term debt and other financing arrangements
1,216,028

 
1,324,369

Less current maturities
(111,583
)
 
(1,058
)
Total non-current long-term debt and other financing arrangements
$
1,104,445

 
$
1,323,311


Senior Debt

Our senior debt comprised the following as at June 30, 2012 and December 31, 2011:

 
Carrying Value
 
Fair Value
 
June 30,
2012

 
December 31,
2011

 
June 30,
2012

 
December 31,
2011

USD 20.6 million 2013 Convertible Notes
$
19,828

 
$
121,230

 
$
20,672

 
$
117,926

EUR 87.5 million 2014 Floating Rate Notes
110,163

 
191,497

 
102,729

 
141,708

USD 261.0 million 2015 Convertible Notes
227,468

 
223,341

 
226,400

 
163,276

EUR 374.6 million 2016 Fixed Rate Notes
473,834

 
487,176

 
484,016

 
373,215

EUR 170.0 million 2017 Fixed Rate Notes
214,032

 
219,963

 
224,657

 
206,765

 
$
1,045,325

 
$
1,243,207

 
$
1,058,474

 
$
1,002,890


Tender Offers
On April 30, 2012, we announced a tender offer (the "2013 Tender Offer") to purchase for cash up to US$ 129.7 million in aggregate principal amount of our outstanding 3.5% Senior Convertible Notes due 2013 (the “2013 Convertible Notes”) as well as a tender offer (the "Euro Tender Offer") to purchase for cash the Euro equivalent of up to US$ 170.0 million in aggregate principal amount of our outstanding Senior Floating Rate Notes due 2014 (the "2014 Floating Rate Notes") and 11.625% Senior Notes due 2016 (the "2016 Fixed Rate Notes").
2013 Tender Offer
On May 31, 2012, CME completed the purchase of US$ 109.0 million in aggregate principal of 2013 Convertible Notes for cash consideration of US$ 109.0 million plus accrued interest using proceeds drawn under the Term Loan Facilities Credit Agreement dated April 30, 2012 (the “TW Credit Agreement”) with Time Warner Inc. ("Time Warner"). The cash payments were allocated between an amount in respect of the value of the liability that was extinguished and an amount in respect of the reacquisition of the equity component.
The amount allocated to the extinguishment of the liability component was equal to the fair value of that component immediately prior to extinguishment, which
was determined based on the future cash flows associated with the repurchased portion of the 2013 Convertible Notes discounted using the rate of return an investor
would have required on our non-convertible debt with other terms substantially similar to the 2013 Convertible Notes. The most critical input used to determine
the fair value of the liability component of the 2013 Convertible Notes was the discount rate used in calculating the present value of the future cash flows associated
with the 2013 Convertible Notes. We used a combination of observed prices paid for similar debt and incorporated a US$ risk free rate for debt with a similar remaining life to the 2013 Convertible Notes to determine an overall discount rate. The remaining consideration was recognized as a reacquisition of the equity component.

The difference between the consideration allocated to the liability component and the net carrying amount of the liability and unamortized debt issuance costs was recorded as a loss on extinguishment of debt within interest expense in the condensed consolidated statement of operations and other comprehensive income. The amounts we recorded for the transaction are presented in the table below.
Euro Tender Offer
On June 14, 2012, we completed the purchase of EUR 60.5 million (approximately US$ 75.8 million at the date of repurchase) aggregate principal amount of 2014 Floating Rate Notes for EUR 56.7 million (approximately US$ 71.1 million at the date of repurchase) plus accrued interest using proceeds drawn under the TW Credit Agreement. The amounts we recorded for the transaction are presented in the table below. None of the 2016 Fixed Rate Notes that were tendered for repurchase were accepted by CME.





13


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



(Loss) / Gain on Extinguishment
Tender offer
2013 Convertible Notes

2014 Floating Rate Notes

Total

(Loss) / gain on extinguishment
$
(3,763
)
$
4,211

$
448

Unamortized debt costs included in (loss) / gain on extinguishment
370

527

897

Adjustment to additional paid-in capital
$
868

$

$
868


Convertible Notes

2013 Convertible Notes

On March 10, 2008, we issued US$ 475.0 million of 2013 Convertible Notes, which mature on March 15, 2013. As discussed above, in May 2012 we accepted for repurchase US$ 109.0 million in principal amount of our 2013 Convertible Notes at par plus accrued interest. 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 June 30, 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 2 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 June 30, 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 (which includes the acquisition by a person or group (as such term is defined in Section 13(d)(3) of the Securities and Exchange Act of 1934 (the "Exchange Act")) of beneficial ownership of more than 50% of the outstanding shares of our Class A common stock), certain mergers, insolvency and a delisting).

As at June 30, 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 2012 totaling US$ 21.1 million in respect of the portion of the capped call options that were no longer exercisable following the 2013 Convertible Notes accepted for repurchase.

At June 30, 2012, 196,638 capped call options, which correspond to the number of shares that would be issued upon conversion of the 2013 Convertible Notes, 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 June 30, 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.

14


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
$
129,660

 
$
(8,430
)
 
$
121,230

 
$
102,369

Extinguishment of debt
(109,013
)
 
4,537

 
(104,476
)
 
(868
)
Amortization of debt issuance discount

 
3,074

 
3,074

 

BALANCE June 30, 2012
$
20,647

 
$
(819
)
 
$
19,828

 
$
101,501


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 June 30, 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 June 30, 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 (which includes the acquisition by a person or group (as such term is defined in Section 13(d)(3) of the Exchange Act) of beneficial ownership of more than 50% of the outstanding shares of our Class A common stock), 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.
 
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

 
4,127

 
4,127

 

BALANCE June 30, 2012
$
261,034

 
$
(33,566
)
 
$
227,468

 
$
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 2014 Floating Rate Notes which bear interest at the six-month Euro Inter Bank Offered Rate (“EURIBOR”) plus 1.625% (the applicable rate at June 30, 2012 was 2.60%). The 2014 Floating Rate Notes mature on May 15, 2014. As discussed above, in June 2012 we accepted for repurchase EUR 60.5 million (approximately US$ 75.8 million at the date of repurchase) in principal amount of our 2014 Floating Rate Notes for EUR 56.7 million (approximately US$ 71.1 million at the date of repurchase) plus accrued interest. In 2010, we repurchased EUR 2.0 million (approximately US

15


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


$ 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 June 30, 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 2 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 one 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 June 30, 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 2 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 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.


16


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


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$ 214.0 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 June 30, 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 2 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.


17


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 June 30, 2012 and December 31, 2011:

 
 
 
June 30, 2012

 
December 31, 2011

Credit facilities
(a) – (e)
 
$
166,674

 
$
77,464

Capital leases
 
 
4,029

 
3,698

Total credit facilities and capital leases
 
 
170,703

 
81,162

Less current maturities
 
 
(91,755
)
 
(1,058
)
Total non-current credit facilities and capital leases
 
 
$
78,948

 
$
80,104


(a) In connection with the cash tenders announced on April 30, 2012, we entered into the TW Credit Agreement with Time Warner. Under the TW Credit Agreement, Time Warner agreed to loan to the Company an aggregate principal amount of US$ 300.0 million in three tranches (the “TW Loans”), with the amounts we could draw upon for each tranche corresponding to the amount of our 2013 Convertible Notes, our 2014 Floating Rate Notes or our 2016 Fixed Rate Notes, as applicable, accepted for purchase by us in the 2013 Tender Offer and the Euro Tender Offer. We drew US$ 109.0 million under the credit facility on May 30, 2012 to finance the repurchase of 2013 Convertible Notes, and drew an additional US$ 71.1 million on June 13, 2012 to finance the repurchase of the 2014 Floating Rate Notes. For the first 180 days after the applicable disbursement date, the 2013 Convertible Notes tranche had the same interest rate as the 2013 Convertible Notes (3.5% per annum) and the 2014 Floating Rate Notes tranche had the same interest rate as the 2014 Floating Rate Notes (Euribor plus 1.625% per annum). The interest rate applicable to each tranche was subject to adjustment under certain circumstances, none of which occurred during the period. The maturity date of each tranche of TW Loans corresponded to the maturity date of the notes for which the loan was drawn. We could repay the TW Loans at any time without penalty, including from the proceeds of any equity offerings. We issued shares to Time Warner Media Holdings B.V. (“TW Investor”) and RSL Capital LLC, an affiliate of Ronald Lauder, on June 15, 2012 and the proceeds were applied to outstanding principal of US$ 89.3 million and accrued interest of US$ 38 thousand on the TW Loans. On June 27, 2012, we exercised our option to put shares to TW Investor in order to repay the remaining US$ 90.8 million amount of TW Loans outstanding and this transaction closed on July 3, 2012 (see Note 20, "Subsequent Events").

(b) 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 June 30, 2012, we had deposits of US$ 21.2 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.

(c) On October 21, 2010, CET 21 entered into a five-year CZK 1.5 billion (approximately US$ 73.7 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 June 30, 2012 and December 31, 2011 was 6.08% and 5.97%, respectively). The Secured Revolving Credit Facility will decrease to CZK 750.0 million (approximately US$ 36.8 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$ 73.7 million) as at June 30, 2012 and December 31, 2011. As at June 30, 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”).

(d) As at June 30, 2012, and December 31, 2011, there were no drawings outstanding under a CZK 300.0 million (approximately US$ 14.7 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.

(e) At June 30, 2012, Media Pro Entertainment had an aggregate principal amount of RON 10.7 million (approximately US$ 3.0 million) (December 31, 2011, RON 10.6 million, approximately US$ 3.0 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 June 30, 2012, we had 13 loans outstanding with the CNC with maturity dates ranging from 2014 to 2020. The carrying amounts at June 30, 2012 and December 31, 2011 are net of a fair value adjustment of US$ 1.0 million and US$ 1.0 million, respectively, arising on acquisition.


18


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 June 30, 2012, the maturity of our Senior Debt and credit facilities was as follows:

2012 (1)
$
90,887

2013
20,725

2014
147,391

2015
297,868

2016
471,621

2017 and thereafter
216,197

Total Senior Debt and credit facilities
1,244,689

Net discount
(32,690
)
Carrying value of Senior Debt and credit facilities
$
1,211,999


(1) Reflects the TW Loans, which were repaid on July 3, 2012 (see Item 1, Note 20, "Subsequent Events").

As at June 30, 2012, we had US$ 20.6 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 as well as our other external financial obligations. 

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 June 30, 2012:

2012
$
614

2013
1,048

2014
956

2015
370

2016
348

2017 and thereafter
1,132

Total undiscounted payments
4,468

Less: amount representing interest
(439
)
Present value of net minimum lease payments
$
4,029

 


19


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


5.  PROGRAM RIGHTS

Program rights comprised the following at June 30, 2012 and December 31, 2011:

 
June 30, 2012

 
December 31, 2011

Program rights:
 
 
 
Acquired program rights, net of amortization
$
286,844

 
$
266,884

Less: current portion of acquired program rights
(107,432
)
 
(101,741
)
Total non-current acquired program rights
179,412

 
165,143

Produced program rights – Feature Films:
 
 
 

Released, net of amortization
2,672

 
3,197

Completed and not released
1,293

 
776

In production
659

 
708

Development and pre-production
534

 
279

Produced program rights – Television Programs:
 

 
 

Released, net of amortization
80,168

 
70,383

Completed and not released
4,377

 
9,136

In production
10,052

 
12,457

Development and pre-production
4,723

 
4,138

Total produced program rights
104,478

 
101,074

Total non-current acquired program rights and produced program rights
$
283,890

 
$
266,217

 



6.  ACCOUNTS RECEIVABLE

Accounts receivable comprised the following at June 30, 2012 and December 31, 2011:

 
June 30, 2012

 
December 31, 2011

Unrelated customers
$
217,002

 
$
204,747

Less: allowance for bad debts and credit notes
(16,336
)
 
(13,555
)
Related parties
1,173

 
1,020

Less: allowance for bad debts and credit notes
(116
)
 
(55
)
Total accounts receivable
$
201,723

 
$
192,157


At June 30, 2012, CZK 476.2 million (approximately US$ 23.4 million) (December 31, 2011: CZK 719.9 million, approximately US$ 35.4 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 333.3 million (approximately US$ 16.4 million) (December 31, 2011: CZK 545.8 million, approximately US$ 26.8 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”).



20


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


7.  OTHER ASSETS

Other current and non-current assets comprised the following at June 30, 2012 and December 31, 2011:

 
June 30, 2012

 
December 31, 2011

 Current:
 
 
 
Prepaid acquired programming
$
20,384

 
$
23,479

Other prepaid expenses
10,154

 
9,422

Derivative asset
29,489

 

Deferred tax
11,497

 
3,893

Capitalized debt costs
4,624

 
5,023

VAT recoverable
4,440

 
6,857

Inventory
5,542

 
5,226

Income taxes recoverable
631

 
2,632

Restricted cash
372

 
381

Other
3,312

 
1,092

Total other current assets
$
90,445

 
$
58,005

 
 
 
 
 
June 30, 2012

 
December 31, 2011

Non-current:
 

 
 

Capitalized debt costs
$
17,242

 
$
19,350

Deferred tax
2,759

 
4,232

Other
3,202

 
2,926

Total other non-current assets
$
23,203

 
$
26,508


The derivative asset relates to our option to cause TW Investor to purchase additional common shares (see Note 11, "Financial Instruments and Fair Value Measurements") that was settled on July 3, 2012 (see Note 20, "Subsequent Events").

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.



21


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


8.  PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment comprised the following at June 30, 2012 and December 31, 2011:

 
June 30, 2012

 
December 31, 2011

Land and buildings
$
154,193

 
$
160,183

Machinery, fixtures and equipment
199,414

 
197,047

Other equipment
34,261

 
31,970

Software licenses
42,447

 
39,993

Construction in progress
15,780

 
17,894

Total cost
446,095

 
447,087

Less:  Accumulated depreciation
(247,783
)
 
(229,720
)
Total net book value
$
198,312

 
$
217,367

 
 
 
 
Assets held under capital leases (included in the above)
 

 
 

Land and buildings
$
4,386

 
$
4,508

Machinery, fixtures and equipment
3,160

 
3,146

Total cost
7,546

 
7,654

Less:  Accumulated depreciation
(2,295
)
 
(2,720
)
Net book value
$
5,251

 
$
4,934


The movement in the net book value of property, plant and equipment during the six months ended June 30, 2012 and 2011 is comprised of:
 
For the Six Months Ended June 30,
 
2012

 
2011

Opening balance
$
217,367

 
$
250,902

Cash additions
11,340

 
14,321

Disposals
(120
)
 
(803
)
Depreciation
(20,942
)
 
(27,910
)
Foreign currency movements
(7,570
)
 
23,743

Other movements
(1,763
)
 
(1,285
)
Ending balance
$
198,312

 
$
258,968




22


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


9.  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities comprised the following at June 30, 2012 and December 31, 2011:

 
June 30, 2012

 
December 31, 2011

Accounts payable
$
42,390

 
$
47,676

Related party accounts payable
713

 
1,955

Programming liabilities
37,604

 
32,532

Related party programming liabilities
71,009

 
68,573

Duties and other taxes payable
16,751

 
13,462

Accrued staff costs
15,952

 
24,532

Accrued interest payable
22,119

 
24,108

Income taxes payable
623

 
1,379

Accrued services and other supplies
5,840

 
4,303

Accrued legal contingencies and professional fees
4,396

 
3,409

Authors’ rights
7,123

 
6,367

Other accrued liabilities
14,526

 
11,752

Total accounts payable and accrued liabilities
$
239,046

 
$
240,048



10.  OTHER LIABILITIES

Other current and non-current liabilities comprised the following at June 30, 2012 and December 31, 2011:

 
June 30, 2012

 
December 31, 2011

Current:
 
 
 
Deferred revenue
$
21,164

 
$
10,977

Deferred tax
1,516

 
1,094

Derivative liabilities

 
2,375

Other
5,959

 
23

Total other current liabilities
$
28,639

 
$
14,469

 
 
 
 
 
June 30, 2012

 
December 31, 2011

Non-current:
 

 
 

Deferred tax
$
68,774

 
$
74,672

Related party programming liabilities

 
9,363

Derivative liabilities
340

 
694

Other
1,243

 
212

Total other non-current liabilities
$
70,357

 
$
84,941




23


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


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 June 30, 2012, we had the following option and interest rate swap agreements carried at fair value using significant level 2 inputs. The previously outstanding currency swap agreement (see "Currency Risk" section below) was recorded 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), was carried at fair value using significant level 3 inputs.

The change in fair value of derivatives comprised the following for the three and six months ended June 30, 2012 and 2011:
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2012

 
2011

 
2012

 
2011

Share Subscription Agreement
$
22,836

 
$

 
$
22,836

 
$

Company option
24,467

 

 
24,467

 

Interest rate swap
121

 
(60
)
 
357

 
301

Currency swap
(26
)
 
1,221

 
665

 
640

Call option

 

 

 
180

Change in fair value of derivatives
$
47,398

 
$
1,161

 
$
48,325

 
$
1,121


Share Subscription Agreement

On April 30, 2012, in addition to and in contemplation of the TW Credit Agreement described in Note 4, "Long-Term Debt and Other Financing Arrangements", we entered into a Subscription and Equity Commitment Agreement (the “Equity Commitment Agreement”) with TW Investor whereby we agreed to issue to TW Investor at a price of $7.51 per share (the “Purchase Price”), the number of shares of Class A common stock such that TW Investor would own a number of shares of Class A common stock equal to a 40% interest in the Company on a diluted basis (and at least 9.5 million shares) (the “TW Subscription Shares”). The Purchase Price was equal to the Company's volume-weighted average closing share price on the Nasdaq Global Select Market for the 20 trading days immediately preceding the signing of the Equity Commitment Agreement.

This forward sale of the TW Subscription Shares was considered to be a derivative instrument due to the variability in the number of shares to be issued under the terms of the agreement. As a result, a derivative liability of approximately US$ 3.8 million was recorded on April 30, 2012, representing the intrinsic value of this forward sale on that date. The Equity Commitment Agreement was considered to be linked to, although separable from, the TW Credit Agreement. Therefore, the charge arising from recognition of the derivative liability was amortized over the remaining life of the TW Credit Agreement as a debt issuance cost within interest expense in the condensed consolidated statement of operations and other comprehensive income. The TW Credit Agreement was effectively terminated upon the June 27, 2012 exercise of the option discussed further below, so the remaining unamortized charge arising from the initial recognition of the derivative was recognized during the three months ended June 30, 2012.

The 9.9 million TW Subscription Shares were issued on June 15, 2012, and as a result, the derivative instrument was settled as of that date. The change in the fair value of the derivative instrument, as measured immediately prior to issuance, resulted in a net gain of US$ 22.8 million, which was recorded in the condensed consolidated statement of operations and other comprehensive income and in the condensed consolidated balance sheet in other current assets. This instrument was allocated to level 2 within the fair value hierarchy because the critical input in its valuation was readily observable.

Under a separate agreement, RSL Capital LLC subscribed to 2 million shares of Class A Common Stock of the Company at a fixed price per share of US$ 7.51, resulting in aggregate proceeds of US$ 15.0 million. As the subscription amount was fixed and no variability existed, this amount was recorded as equity upon the transfer of funds on June 15, 2012.


24


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


In addition, under the Equity Commitment Agreement, TW Investor granted to the Company an option (the "Company Option") to cause TW Investor to purchase, and the Company granted to TW Investor an option to purchase, at the Purchase Price, the number of shares of Class A common stock (the “Option Shares”) that would generate proceeds to repay the then outstanding principal amount under the TW Loans, subject to certain limitations, including restrictions that TW Investor and its affiliates may not acquire any shares that could result in their beneficial ownership in effect exceeding 49.9% of the total outstanding voting securities of the Company on the date of exercise.

The instrument for the Option Shares met the definition of a derivative due to the variability in the number of shares that would be issued under the terms of the option and was considered embedded within the TW Credit Agreement. The initial recognition of this derivative at a fair value of approximately US$ 5.0 million on the date of the first drawing resulted in a corresponding premium on the TW Loan balance, and was amortized within interest expense in the condensed consolidated statement of operations and other comprehensive income over the remaining life of the TW Loan.

Subsequent changes in the fair value of this derivative were recorded in the condensed consolidated statement of operations and other comprehensive income and in the condensed consolidated balance sheet in other current assets. The fair value of this derivative was estimated using the Black-Scholes option-pricing model. The main inputs used in the valuation model included the price of a share of our Class A common stock, the option strike price, the current risk-free interest rate and the known contractual terms of the instrument. Volatility was also used as an input into the model and was determined using management's estimates and equity volatilities of comparable companies. This financial instrument was allocated to level 2 of the fair value hierarchy because the critical inputs into its valuation were readily observable.

The fair value of the derivative instrument on June 30, 2012, was an asset amounting to US$ 29.5 million (see Note 7, "Other Assets"). This net change of US$ 24.5 million from the initial fair value was recognized as a derivative gain in the condensed consolidated statement of operations and other comprehensive income.

We exercised the Company Option on June 27, 2012, and the transaction settled on July 3, 2012 (see Note 20, "Subsequent Events"). Due to the exercise, the US$ 5.0 million premium arising from the initial recognition of the derivative was recognized during the three months ended June 30, 2012. The fair value of the option on July 3, 2012, was US$ 30.0 million. The difference of US$ 0.5 million from the fair value at June 30, 2012 to the settlement date on July 3, 2012, will be recognized as a derivative gain in the condensed consolidated statement of operations and other comprehensive income for the period ended September 30, 2012. There will be no impact on earnings from this instrument subsequent to July 3, 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 other comprehensive income 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 June 30, 2012, was a US$ 0.3 million liability, which represented a net decrease of US$ 0.4 million from the US$ 0.7 million liability as at December 31, 2011, and was recognized as a derivative gain in the condensed consolidated statement of operations and other comprehensive income amounting to US$ 0.4 million.

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$ 525.5 million), payable on each July 15, October 15, January 15, and April 15, for a fixed annual coupon interest rate (of 9.0%) on notional principal of EUR 375.9 million (approximately US$ 473.3 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 reduced our exposure to movements in foreign exchange rates on part of the CZK-denominated cash flows generated by our Czech Republic operations, which corresponded 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 were used to minimize currency risk and were considered an economic hedge of foreign exchange rates.  These instruments were not designated as hedging instruments, and so changes in their fair value were recorded in the condensed consolidated statement of operations and other comprehensive income and in the condensed consolidated balance sheet in other current liabilities.

We valued these currency swap agreements using an industry-standard currency swap pricing model which calculated the fair value on the basis of the net present value of the estimated future cash flows receivable or payable. These instruments were 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, were readily observable.

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,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 and other comprehensive income amounting to US$ 0.7 million. There will be no impact on earnings from this instrument subsequent to April 15, 2012.


25


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


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 June 30, 2012 and December 31, 2011 was US$ nil because the option strike price is the fair value of the equity in CME Bulgaria. 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 has not yet occurred.



26


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


12.  EQUITY

Preferred Stock

5,000,000 shares of Preferred Stock, with a US$ 0.08 par value, were authorized as at June 30, 2012 and December 31, 2011. None were issued and outstanding as at June 30, 2012 and December 31, 2011. We issued one share of Series A convertible preferred stock, which is convertible into 11,211,449 shares of Class A common stock, to TW Investor on July 3, 2012 (see Note 20, "Subsequent Events").

Class A and B Common Stock

200,000,000 and 100,000,000 shares of Class A common Stock were authorized as at June 30, 2012 and December 31, 2011, respectively, and 15,000,000 shares of Class B common stock were authorized as at June 30, 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. Under our bye-laws, 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 June 15, 2012, we issued 2,000,000 shares of Class A common stock to RSL Capital LLC and 9,901,260 shares of Class A common stock to TW Investor, each at a price of US$ 7.51 per share, for aggregate proceeds to the Company of US$ 89.4 million. The proceeds of these share subscriptions were applied to the outstanding TW Loan balance (see Note 4, "Long-Term Debt and Other Financing Obligations"). We issued additional shares to TW Investor on July 3, 2012 (see Note 20, "Subsequent Events").

Also on June 15, 2012, Time Warner and Ronald Lauder converted their shares of Class B common stock into an equivalent number of shares of Class A common stock for no additional consideration. Following this conversion, there are no shares of Class B common stock outstanding.

There were 76.3 million shares of Class A common stock outstanding at June 30, 2012.

Warrants to purchase up to 600,000 and 250,000 shares of Class A common stock for a six year period terminating December 2015 at a price of US$ 21.75 per share, are held by 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.



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


13.  INTEREST EXPENSE

Interest expense comprised the following for the three and six months ended June 30, 2012 and 2011:

 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2012

 
2011

 
2012

 
2011

Interest on Senior Notes
$
19,981

 
$
23,105

 
$
41,173

 
$
45,652

Interest on Convertible Notes
4,077

 
4,574

 
8,475

 
8,795

Interest on capital leases and other financing arrangements
1,716

 
701

 
3,170

 
1,694

 
25,774

 
28,380

 
52,818

 
56,141

 
 
 
 
 
 
 
 
Amortization of capitalized debt issuance costs
6,945