XNAS:CTCM CTC Media Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

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



FORM 10-Q



(Mark One)    

þ

 

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

For the Quarterly Period Ended March 31, 2012

or

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: 000-52003



CTC MEDIA, INC.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation
or organization)
  58-1869211
(I.R.S. Employer Identification No.)

31A Leningradsky Prospekt
125284 Moscow, Russia
+7-495-785-6333
(Address Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)

2711 Centerville Road, Suite 400
Wilmington, DE 19808
302-636-5400
(Name, Address Including Zip Code and Telephone Number,
Including Area Code, of Agent for Service)



         Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such 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 þ    No o

         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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ    No o

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller
reporting company)
  Smaller reporting company o

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

         As of April 30, 2012, there were outstanding 158,160,719 shares of the registrant's common stock, $0.01 par value per share.

   


Table of Contents


CTC MEDIA, INC.

INDEX

 
   
  Page

PART I.

 

FINANCIAL INFORMATION

  4

Item 1.

 

Financial Statements

 
4

 

Unaudited Condensed Consolidated Balance Sheets as of December 31, 2011 and March 31, 2012

 
4

 

Unaudited Condensed Consolidated Statements of Income for the three months ended March 31, 2011 and 2012

 
5

 

Unaudited Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2011 and 2012

 
6

 

Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2012

 
7

 

Notes to Unaudited Condensed Consolidated Financial Statements

 
8

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 
27

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 
48

Item 4.

 

Controls and Procedures

 
48

PART II.

 

OTHER INFORMATION

 
49

Item 1.

 

Legal Proceedings

 
49

Item 1A.

 

Risk Factors

 
49

Item 6.

 

Exhibits

 
69

Signatures

 
70

Exhibit Index

 
71

2


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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

        This quarterly report contains forward-looking statements that involve substantial risks and uncertainties. In some cases you can identify these statements by forward-looking words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "should," "will," and "would," or similar words. You should read statements that contain these words carefully because they discuss future expectations, contain projections of future results of operations or of financial position or state other "forward- looking" information. The factors described in the "Risk Factors" section of this quarterly report on Form 10-Q, as well as any cautionary language elsewhere in this quarterly report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations described in these forward-looking statements. Other unknown or unpredictable factors could have material adverse effects on our future results, performance or achievements. In light of these risks, uncertainties, assumptions and factors, the forward-looking events discussed herein may not occur and actual performance and results may vary from those anticipated or otherwise suggested by such statements. You are cautioned not to place undue reliance on these forward-looking statements. We do not undertake any obligation to publicly update or revise any forward-looking statements because of new information, future events or otherwise.

3


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PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements

        


CTC MEDIA, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands of US dollars, except share and per share data)

 
  December 31,
2011
  March 31,
2012
 

ASSETS

             

CURRENT ASSETS:

             

Cash and cash equivalents (Note 4)

  $ 12,331   $ 30,657  

Short-term investments (Note 4)

    117,233     98,815  

Trade accounts receivable, net of allowance for doubtful accounts (December 31, 2011—$977; March 31, 2012—$1,145)

    21,831     36,154  

Taxes reclaimable

    20,311     25,010  

Prepayments

    57,091     59,665  

Programming rights, net (Note 5)

    106,947     126,691  

Deferred tax assets

    20,086     24,743  

Other current assets

    1,351     2,764  
           

TOTAL CURRENT ASSETS

    357,181     404,499  
           

PROPERTY AND EQUIPMENT, net

    46,299     48,956  

INTANGIBLE ASSETS, net:

             

Broadcasting licenses

    159,369     174,089  

Cable network connections

    28,148     29,439  

Trade names

    5,213     5,724  

Network affiliation agreements

    2,120     1,745  

Other intangible assets

    3,197     3,346  
           

Net intangible assets

    198,047     214,343  

GOODWILL (Note 6)

    164,375     180,439  

PROGRAMMING RIGHTS, net (Note 5)

    92,134     94,757  

INVESTMENTS IN AND ADVANCES TO INVESTEES

    5,041     5,559  

PREPAYMENTS

    3,012     5,274  

DEFERRED TAX ASSETS

    26,015     27,309  

OTHER NON-CURRENT ASSETS

    997     2,420  
           

TOTAL ASSETS

  $ 893,101     983,556  
           

LIABILITIES AND STOCKHOLDERS' EQUITY

             

CURRENT LIABILITIES:

             

Bank overdraft (Note 4)

    16,941     18,457  

Accounts payable

    69,891     72,612  

Accrued liabilities

    21,393     27,967  

Taxes payable

    31,905     18,888  

Deferred revenue

    7,367     6,936  

Deferred tax liabilities

    12,613     12,844  
           

TOTAL CURRENT LIABILITIES

    160,110     157,704  
           

DEFERRED TAX LIABILITIES

    35,783     40,148  

COMMITMENTS AND CONTINGENCIES (Note 10)

         

STOCKHOLDERS' EQUITY:

             

Common stock ($0.01 par value; shares authorized 175,772,173; shares issued and outstanding December 31, 2011—157,320,070; March 31, 2012—158,160,719)

    1,573     1,582  

Additional paid-in capital

    481,969     488,360  

Retained earnings

    322,184     334,245  

Accumulated other comprehensive loss

    (111,754 )   (42,547 )

Non-controlling interest

    3,236     4,064  
           

TOTAL STOCKHOLDERS' EQUITY

    697,208     785,704  
           

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

  $ 893,101   $ 983,556  
           

   

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

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CTC MEDIA, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands of US dollars, except share and per share data)

 
  Three months ended
March 31,
 
 
  2011   2012  

REVENUES:

             

Advertising

  $ 163,105   $ 180,669  

Sublicensing and own production revenue

    1,862     9,241  

Other revenue

    574     1,210  
           

Total operating revenues

    165,541     191,120  
           

EXPENSES:

             

Direct operating expenses (exclusive of amortization of programming rights, sublicensing rights and own production cost, shown below; exclusive of depreciation and amortization of $3,194 and $4,111 for the three months ended March 31, 2011 and 2012, respectively; and exclusive of stock-based compensation of $2,029 and $933 for the three months ended March 31, 2011 and 2012, respectively)

    (10,710 )   (11,859 )

Selling, general and administrative (exclusive of depreciation and amortization of $742 and $1,046 for the three months ended March 31, 2011 and 2012, respectively; and exclusive of stock-based compensation of $4,190 and $1,978 for the three months ended March 31, 2011 and 2012, respectively)

    (37,696 )   (42,728 )

Stock-based compensation expense

    (6,219 )   (2,911 )

Amortization of programming rights

    (70,738 )   (75,759 )

Amortization of sublicensing rights and own production cost

    (314 )   (2,735 )

Depreciation and amortization (exclusive of amortization of programming rights, sublicensing rights and own production cost)

    (3,936 )   (5,157 )
           

Total operating expenses

    (129,613 )   (141,149 )
           

OPERATING INCOME

    35,928     49,971  

FOREIGN CURRENCY (LOSSES) GAINS

    1,133     (1,404 )

INTEREST INCOME

    1,486     2,129  

INTEREST EXPENSE

    (100 )   (201 )

OTHER NON-OPERATING INCOME (LOSS), net

    (27 )   229  

EQUITY IN INCOME OF INVESTEE COMPANIES

    177     159  
           

Income before income tax

    38,597     50,883  
           

INCOME TAX EXPENSE

    (14,903 )   (17,271 )
           

CONSOLIDATED NET INCOME

  $ 23,694   $ 33,612  
           

LESS: INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST

  $ (902 ) $ (990 )
           

NET INCOME ATTRIBUTABLE TO CTC MEDIA, INC. STOCKHOLDERS

  $ 22,792   $ 32,622  
           

Net income per share attributable to CTC Media, Inc. stockholders—basic

  $ 0.15   $ 0.21  
           

Net income per share attributable to CTC Media, Inc. stockholders—diluted

  $ 0.14   $ 0.21  
           

Weighted average common shares outstanding—basic

    157,001,909     157,495,591  
           

Weighted average common shares outstanding—diluted

    158,002,195     157,805,484  
           

Dividends declared per share

  $ 0.16   $ 0.13  
           

   

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

5


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CTC MEDIA, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands of US dollars, except share and per share data)

 
  Three months ended
March 31,
 
 
  2011   2012  

Net Income

  $ 23,694   $ 33,612  

Other Comprehensive income:

             

Foreign Currency Translation Adjustment

    58,031     69,560  
           

Other Comprehensive income

    58,031     69,560  
           

Comprehensive income

  $ 81,725   $ 103,172  
           

Less: Comprehensive income attributable to the non-controlling interest

    (1,036 )   (1,343 )
           

Comprehensive income attributable to CTC Media, Inc. stockholders

  $ 80,689   $ 101,829  
           

   

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

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CTC MEDIA, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands of US dollars)

 
  Three months ended
March 31,
 
 
  2011   2012  

CASH FLOWS FROM OPERATING ACTIVITIES:

             

Consolidated net income

  $ 23,694   $ 33,612  

Adjustments to reconcile net income to net cash provided by operating activities:

             

Deferred tax expense (benefit)

    (15 )   304  

Depreciation and amortization

    3,936     5,157  

Amortization of programming rights

    70,738     75,759  

Amortization of sublicensing rights and own production cost

    314     2,735  

Stock based compensation expense

    6,219     2,911  

Equity in income of unconsolidated investees

    (177 )   (159 )

Foreign currency losses (gains)

    (1,133 )   1,404  

Changes in operating assets and liabilities:

             

Trade accounts receivable

    (166 )   (16,079 )

Prepayments

    (2,136 )   4,371  

Other assets

    1,211     (2,678 )

Accounts payable and accrued liabilities

    3,368     1,206  

Deferred revenue

    (358 )   (1,596 )

Other liabilities

    (15,805 )   (13,243 )

Dividends received from equity investees

        344  

Acquisition of programming and sublicensing rights

    (77,410 )   (85,198 )
           

Net cash provided by operating activities

    12,280     8,850  
           

CASH FLOWS FROM INVESTING ACTIVITIES:

             

Acquisitions of property and equipment and intangible assets

    (4,031 )   (3,002 )

Acquisitions of businesses, net of cash acquired

    (7,726 )    

Receipts from deposits

    38,597     26,296  
           

Net cash provided by investing activities

    26,840     23,294  
           

CASH FLOWS FROM FINANCING ACTIVITIES:

             

Proceeds from exercise of stock options

    3,901     4,615  

Proceeds from overdraft, net

        678  

Dividends paid to stockholders

    (25,115 )   (20,561 )

Dividends paid to noncontrolling interest

    (186 )   (515 )
           

Net cash used in financing activities

    (21,400 )   (15,783 )
           

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

    4,262     1,965  

Net increase in cash and cash equivalents

    21,982     18,326  

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

    59,565     12,331  
           

CASH AND CASH EQUIVALENTS AT END OF PERIOD

  $ 81,547   $ 30,657  
           

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CTC MEDIA, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of US dollars, except share and per share data)

1. ORGANIZATION

        The accompanying consolidated financial statements include the accounts of CTC Media, Inc. and all consolidated subsidiaries (the "Company"). CTC Media, Inc., a Delaware corporation, operates the CTC, Domashny and Peretz television networks in Russia. Before October 2011, the Peretz channel operated under the DTV brand name. The DTV television network and DTV Television Station Group are hereinafter referred to as "Peretz television network" and "Peretz Television Station Group", respectively. The Company transmits its signals by satellite to its owned-and-operated affiliate stations and repeater transmitters and to independent affiliate stations. The Company's Russian network operations, including its relationships with its independent affiliates, are managed by its network subsidiaries: the CTC, Domashny and Peretz television networks (the "Networks"). The CTC, Domashny and Peretz Television Station Groups (the "Television Station Groups") manage the owned-and-operated affiliate stations and repeater transmitters for each respective Russian network. In addition, the Company operates the Channel 31 network, a Kazakh television broadcaster, and a broadcaster in Moldova. These two broadcasters comprise an additional business segment—the Commonwealth of Independent States Group (the "CIS Group"). Moreover, the Company has a Production segment ("the Production Group"), responsible for the Company's in-house production operations, specializing in producing sitcoms, series, sketchcoms and entertainment TV shows for Russian networks.

        The Company generates substantially all of its revenues from the sale of television advertising on both a national and regional basis. At the national level and for substantially all of the stations in the Television Station Groups, this advertising is currently placed through the Company's own advertising sales house, which serves as the exclusive advertising sales agent for all of the Company's Russian networks and Television Station Groups in respect of Moscow-based clients. The Company also generates revenues from the sublicensing of programming rights and licensing of internally-produced programming to third parties.

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        The accompanying unaudited condensed consolidated financial statements for the three months ended March 31, 2012 should be read in conjunction with the consolidated financial statements contained in the Company's Annual Report on Form 10-K filed with the US Securities and Exchange Commission (the "SEC") on February 28, 2012. The Company's accounting policies are more fully described in Annual Report. The preparation of our unaudited condensed consolidated financial statements requires the Company to make judgments in selecting appropriate assumptions for calculating financial estimates, which inherently contain some degree of uncertainty. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the reported amounts of revenues and expenses that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The following discussion addresses the Company's most critical accounting policies, which require management's most difficult, subjective and complex judgments.

Basis of Presentation

        The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and

8


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CTC MEDIA, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands of US dollars, except share and per share data)

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been recorded. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

        The condensed consolidated balance sheet at December 31, 2011 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for the complete financial statements.

        For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K as of and for the year ended December 31, 2011.

Principles of Consolidation

        Wholly owned subsidiaries and majority owned ventures where the Company has operating and financial control, as well as variable interest entities where the Company has been deemed the primary beneficiary with power and ability to control, are consolidated. Those ventures where the Company exercises significant influence, but does not exercise operating and financial control, are accounted for under the equity method. The Company uses the purchase method of accounting for all business combinations. Results of subsidiaries acquired and accounted for under the purchase method are included in operations from the date of acquisition. Noncontrolling interests represent a noncontrolling shareholder's proportionate share of the equity in certain of the Company's consolidated entities. Intercompany accounts and transactions are eliminated upon consolidation. Disposals are reflected at the time risks and rewards of ownership have been transferred.

        The Company is the primary beneficiary of the Channel 31 Group, a variable interest entity consisting of a 20% participation interest in Teleradiokompaniya 31st Kanal LLP ("Channel 31"), and a 70% and 60% interest in Prim LLP and Advertising and Marketing LLP, respectively, which provide programming content and the advertising sales function to Channel 31 (together, the "Channel 31 Group"). These interests provide the Company with a right to 60% of the economic interest of the Channel 31 Group. The Company consolidates the Channel 31 Group. As of March 31, 2012, the Channel 31 Group had assets (excluding intercompany assets) totaling $23,080 and liabilities (excluding intercompany liabilities) totaling $10,848. These assets and liabilities primarily relate to broadcasting licenses, and the related deferred tax liabilities and tax contingencies assumed at acquisition of the Channel 31 Group. The Company finances the Channel 31 Group's operations during the ordinary course of business. As of March 31, 2012 the amount of intercompany payables of the Channel 31 Group totaled $5,104. Channel 31 Group's net loss attributable to CTC Media, Inc. stockholders totaled $189 for the three months ended March 31, 2012. This amount includes intercompany expenses of $149.

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CTC MEDIA, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands of US dollars, except share and per share data)

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

    Seasonality

        The Company experiences seasonal fluctuations in overall television viewership and advertising revenues. Overall television viewership is lower during the summer months and highest in the first and fourth quarters. Seasonal fluctuations in consumer patterns also affect television advertising expenditures. In 2011, approximately 31% of our total advertising revenues were generated in the fourth quarter.

    Use of Estimates

        The preparation of financial statements in conformity with the accounting principles generally accepted in the United States 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. Significant estimates in the financial statements include, among others, the estimate of fair values in business combinations, estimates of the fair value of the Company's common stock in determining stock- based compensation, the amortization method and periods for programming rights and sublicensing rights, useful lives of tangible and intangible assets, impairment of goodwill, valuation of intangible assets and long-lived assets, estimates of contingencies, and the determination of valuation allowances for deferred tax assets. Consequently, actual results may differ from those estimates.

    Revenue Recognition

        Revenue is recognized when there is persuasive evidence of an arrangement, services have been rendered, the price is fixed or determinable and collectability is reasonably assured. An allowance for doubtful accounts is maintained for estimated losses resulting from the customers' inability to make payments. The Company recognizes advertising revenues at the moment when the advertising is broadcast and net of Value Added Taxes ("VAT").

        The Company's own sales house serves as the exclusive advertising sales agent for all of its networks in Russia, and the advertising is placed with advertisers and their agencies under direct sales arrangements with them. The sales house is primarily responsible for all of national and regional advertising sales, with the exception of advertising sales to several local clients of regional stations, which is made through Video International. The Company recognizes its Russian advertising revenues, excluding regional advertising revenues from local clients, based on the gross amounts billed to the advertisers and their agencies under direct sales arrangements. Advertising sales to local clients of regional stations under the Company's agency agreements with Video International are recognized net of agency commissions. Compensation expenses payable to Video International for the use of advertising software, related maintenance and analytical support and consulting services are included in selling, general and administrative expenses in the Company's consolidated statement of income.

        Sublicensing, own production and other revenue primarily represent revenue the Company earns from sublicensing its rights to programming and from licensing of internally-produced programming. Sublicensing and own production revenue is recognized at such time as there is persuasive evidence that a sale or arrangement with a customer exists, the underlying programming is complete and has been transferred to the customer, the licensing period has commenced and the customer can begin use,

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CTC MEDIA, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands of US dollars, except share and per share data)

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

the arrangement fee is fixed or determinable, and collection of the arrangement fee is reasonably assured.

        Payments received in advance for advertising and other revenue are recorded as deferred revenue until earned.

    Fair Value Measurements

        Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy prescribed by the standard contains three levels as follows:

        Level 1—Unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date.

        Level 2—Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including: (1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets in non-active markets; (3) inputs other than quoted prices that are observable for the asset or liability; and (4) inputs that are derived principally from or corroborated by other observable market data.

        Level 3—Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management's estimates of market participant assumptions.

        There were no transfers between categories during the periods presented.

        The fair values of the Company's derivative assets of $1,258 and derivative liabilities of $2,150 have been classified as Level 2. The fair value of the Company's foreign exchange forward contracts is determined based on the present value of future cash flows using market-based observable inputs such as forward rates, discounts rates and foreign currency exchange rates. Counterparty credit risk did not have a material impact on derivative fair value estimates. The Company's derivative instruments are short-term in nature, primarily one month to one year in duration. See also Note 10.

        The carrying amounts of the Company's financial instruments, which include cash and cash equivalents, short-term investments, accounts receivable and accounts payable approximate their fair value as of December 31, 2011 and March 31, 2012, respectively.

    Goodwill and Indefinite-Lived Intangible Assets Impairment Tests

        The Company evaluates goodwill and other intangible assets with indefinite lives for impairment annually or more frequently if events or changes in circumstances indicate that such carrying value may not be recoverable. Other than its annual review, factors the Company considers important that could trigger an impairment review are under-performance of operating segments or changes in projected results, changes in the manner of utilization of the asset, and negative market conditions or economic trends. Therefore, the Company's use of its assets and its judgment as to the future prospects of each of its businesses can have a significant impact on the Company's reported results and financial condition.

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CTC MEDIA, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands of US dollars, except share and per share data)

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

        As the result of impairment reviews performed in 2011, the Company recorded non-cash impairment losses totaling $23.6 million related to several regional broadcasting licenses and $71.7 million related to Peretz goodwill. The decline in fair values of these assets was due to revised estimates of future cash flows during the third and fourth quarters of 2011 primarily to reflect the revised expectations of the total advertising market, following reduced advertising demand and increased uncertainty in the medium-term. In addition, of the total impairment losses, $11.1 million related to impairment of the DTV trade name as a result of the re-branding of the channel.

        During the first quarter of 2012, internal and external estimates of the TV advertising markets in which the Company operates indicated there were no downward revisions to the Company's internal cash flow projections. There were no indicators of additional impairment for the Company's goodwill or long-lived assets, and the Company was not required to record any additional impairment charges. See also Note 10.

    Programming rights

        Programming rights are stated at the lower of their amortized cost or net realizable value. The Company reports an asset and liability for the rights acquired and obligations incurred at the commencement of the licensing period when the cost of the programming is known or reasonably determinable, the program material has been accepted and the programming is available for airing.

        The Company's programming rights also include internally produced programming. The cost of such programming includes expenses related to the acquisition of format rights, direct costs associated with production and capitalized overhead. The Company capitalizes production costs, including costs of individuals or departments with exclusive or significant responsibility for the production of programming that can be allocated to such particular programming, as a component of film costs. Internally-produced programming is reported at the lower of amortized cost or fair value.

        Purchased program rights are classified as current or non-current assets based on anticipated usage. Internally produced programming is classified as non-current.

        The Company amortizes programming based on expected revenue generation patterns, based on the proportion that current estimated revenues bear to the estimated remaining total lifetime revenues. If the initial airing of content allowed by a license is expected to provide more value than subsequent airings, the Company applies 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 content that is expected to be aired only once, the entire cost is recognized as an expense on the first run. To the extent that the revenues the Company expects to earn from broadcasting a program are lower than the book value, the program rights are written down to their net realizable value by way of recording an additional amortization charge. Such write-downs establish a new cost basis for programming rights.

    Stock-based compensation expense

        The Company estimates the fair value of stock options at the date of grant using the Black-Scholes option pricing model. The Black-Scholes pricing model was originally developed for use in estimating the fair value of traded options, which have different characteristics than the Company's employee

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CTC MEDIA, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands of US dollars, except share and per share data)

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

stock options. The model is also sensitive to changes in the subjective assumptions, which can materially affect the fair value estimate. These subjective assumptions include expected volatility, the expected life of the options, future employee turnover rates, future employee stock option exercise behavior and the fair value of the Company's common stock on the date of grant. The Company determines the fair value of its common stock by using closing prices as quoted on the NASDAQ Global Select Market. Performance-based nonvested share awards require management to make assumptions regarding the likelihood of achieving the set goals.

        Once the Company has estimated the fair value of the equity instruments, it recognizes this estimated cost as a stock-based compensation expense over the service period. Equity-based incentive awards that meet liability accounting criteria are remeasured at each reporting date at their fair value until settlement. The fair value of such unsettled equity-based incentive awards is recognized in liabilities.

    Financial instruments and hedging activities

        The Company measures derivatives at fair value and recognize them as either assets or liabilities on the balance sheet. The Company designates derivatives as either fair value hedges or cash flow hedges when the required criteria are met. Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the consolidated statement of income together with any changes in the fair value of the hedged asset or liability that is attributed to the hedged risk. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognized in equity. The gain or loss relating to the ineffective portion is recognized immediately in the consolidated statement of income. For derivatives that do not meet the conditions for hedge accounting, gains and losses from changes in the fair value are included in the consolidated statement of income. See Note 10, Commitments and Contingiencies below.

    Tax provisions and valuation allowance for deferred tax assets

        The Company records valuation allowances related to the tax effects of deductible temporary differences and loss carryforwards when, in the opinion of management, it is more likely than not that the respective tax assets will not be realized. Changes in the Company's assessment of the probability of realization of deferred tax assets may affect the Company's effective income tax rate.

        The Company records temporary differences related to investments in its Russian subsidiaries. These temporary differences consisted primarily of undistributed earnings that the Company does not plan to permanently reinvest in operations outside the U.S.

        Significant judgment is required to determine when income tax provisions should be recorded and, when facts and circumstances change, when such provisions should be released. Although the Company believes that its judgments and estimates are reasonable, actual results could differ, and the Company may be exposed to impairment losses that could be material.

    New Accounting Pronouncements

        Effective January 1, 2012, the Company adopted Accounting Standards Update 2011-08, Testing Goodwill for Impairment ("ASU 2011-08"), Accounting Standards Update 2011-04, Amendments to

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CTC MEDIA, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands of US dollars, except share and per share data)

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards ("ASU 2011-04") and Accounting Standards Update 2011-05, Presentation of Comprehensive Income ("ASU 2011-05"). The adoption of these amendments did not have a material impact on the Company's condensed consolidated balance sheet or results of operations.

3. NET INCOME PER SHARE

        Basic net income per share for the three months ended March 31, 2011 and 2012 is computed on the basis of the weighted average number of common shares outstanding. Diluted net income per common share is computed using the "if converted method" with the weighted average number of common shares outstanding plus the effect of outstanding stock options calculated using the "treasury stock" method. The number of shares excluded from the diluted net income per common share computation, because their effect was antidilutive, was 4,691,163 and 4,233,472 for the three months ended March 31, 2011 and 2012, respectively.

        The components of basic and diluted net income per share were as follows:

 
  Three months
ended March 31,
 
 
  2011   2012  

Net income attributable to CTC Media, Inc. stockholders

  $ 22,792   $ 32,622  
           

Weighted average common shares outstanding—basic

             

Common stock

    157,001,909     157,495,591  

Dilutive effect of:

             

Common stock options

    1,000,286     309,893  
           

Weighted average common shares outstanding—diluted

    158,002,195     157,805,484  

Net income per share attributable to CTC Media, Inc. stockholders:

             

Basic

  $ 0.15   $ 0.21  

Diluted

  $ 0.14   $ 0.21  

        The numerator used to calculate diluted net income per common share for the three months ended March 31, 2011 and 2012 was net income attributable to CTC Media, Inc. stockholders.

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CTC MEDIA, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands of US dollars, except share and per share data)

4. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS; BANK OVERDRAFT

        The Company's cash and cash equivalents and short-term investments comprise bank accounts and term deposits. Deposits with an original maturity ranging from 91 to 365 days are classified in short-term investments. Below are breakdowns of cash and cash equivalents and short-term investments:

 
  December 31,
2011
  March 31,
2012
 

Cash and cash equivalents:

             

Russian ruble bank accounts

  $ 6,434   $ 10,916  

US dollar bank accounts

  $ 4,479   $ 18,316  

Other

  $ 1,418   $ 1,425  
           

Total cash and cash equivalents

  $ 12,331   $ 30,657  
           

 

 
  December 31,
2011
  March 31,
2012
 
 
  Annual
interest rate
  Amount   Annual
interest rate
  Amount  

Short-term investments:

                     

Ruble-denominated deposits

  4.1% - 8.7%   $ 102,068   5.0% - 8.7%   $ 87,867  

US dollar-denominated deposits

  2.1% - 2.2%     15,165   0.9% - 2.6%     10,948  
                   

Total Short-term investments

      $ 117,233       $ 98,815  
                   

        Bank overdraft—In October 2011, the Company signed a Ruble-denominated overdraft agreement with Alfa Bank bearing annual interest at 7.2% with a credit limit of approximately $34,000. As of December 31, 2011 and March 31, 2012, the Company had an overdraft position of $16,941 and $18,457, respectively, that is presented as a current liability separately on the Company's balance sheets.

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CTC MEDIA, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands of US dollars, except share and per share data)

5. PROGRAMMING RIGHTS, NET

        Programming rights as of December 31, 2011 and March 31, 2012 comprise the following:

 
  December 31,
2011
  March 31,
2012
 

Internally produced—TV broadcasting and theatrical:

             

Released:

             

Historical cost

  $ 122,454   $ 143,411  

Accumulated amortization

    (111,999 )   (136,912 )
           

Released, net book value

    10,455     6,499  
           

Completed and not released

    1,528     2,581  

In production

    521     772  
           

Total

    12,504     9,852  
           

Acquired rights:

             

Historical cost

    554,310     582,585  

Accumulated amortization

    (367,733 )   (370,989 )
           

Net book value

    186,577     211,596  
           

Total programming rights

  $ 199,081   $ 221,448  
           

Current portion

    106,947   $ 126,691  
           

Non-current portion

    92,134   $ 94,757  
           

        The Company expects to amortize approximately $9,350 of internally produced TV programming for its completed and released programs and completed but not yet released programs during the twelve months ending March 31, 2013. In addition, the Company expects to amortize all of its unamortized internally produced programming rights within the three years following March 31, 2012.

6. GOODWILL

        Goodwill as of December 31, 2011 and March 31, 2012 comprises the following:

 
  Balance
December 31,
2011
  Foreign
currency
translation
adjustment
  Balance
March 31,
2012
 

CTC Network

  $ 48,850   $ 4,777   $ 53,627  

Domashny Network

    16,094     1,574     17,668  

Peretz Network

    57,683     5,641     63,324  

CTC Television Station Group

    1,977     193     2,170  

Domashny Television Station Group

    9,309     910     10,219  

CIS Group

    99         99  

Production Group

    30,363     2,969     33,332  
               

Total

  $ 164,375   $ 16,064   $ 180,439  
               

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CTC MEDIA, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands of US dollars, except share and per share data)

6. GOODWILL (Continued)

        The Company has accumulated impairment losses against goodwill totaling $71,688 at each balance sheet date presented related to the Peretz Network, recorded as a result of impairment tests performed during 2011. In addition, the Company has accumulated impairment losses against goodwill totaling $58,189 at each balance sheet date presented related to the CIS segment, recorded as a result of impairment tests performed during 2008.

7. STOCKHOLDERS' EQUITY

        As of December 31, 2011, and March 31, 2012 the Company's outstanding share capital was as follows:

Type
  December 31, 2011   March 31, 2012  

Common stock outstanding

    157,320,070     158,160,719  
           

Common Stock and Additional-paid-in capital

        In the three months ended March 31, 2012, the Company's former CEO exercised options to purchase 840,649 shares of common stock, for aggregate consideration of $4,615. The increase in additional paid-in capital includes proceeds in excess of par value from exercises of stock options and stock-based compensation expenses recognized in the Company's earnings.

Dividends

        In the three months ended March 31, 2012, the following dividends were declared and paid:

Declaration date
  Per Share
Dividend
  Aggregate
Dividend
  Record Date   Payment Date  

February 24, 2012

  $ 0.13   $ 20,561     March 15, 2012     March 30, 2012  

        The following table summarizes the changes in stockholders' equity during the three months ended March 31, 2011 and 2012:

 
  Total   CTC Media, Inc.
stockholders
  Noncontrolling
interest
 

Stockholders' equity, December 31, 2010

  $ 794,641   $ 793,024   $ 1,617  

Net Income

    23,694     22,792     902  

Other comprehensive income

    58,031     57,897     134  
               

Comprehensive income

  $ 81,725   $ 80,689   $ 1,036  
               

Share capital

    3     3      

Additional paid-in capital

    9,538     9,538      

Dividends declared

    (25,301 )   (25,115 )   (186 )
               

Stockholders' equity, March 31, 2011

  $ 860,606   $ 858,139   $ 2,467  
               

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CTC MEDIA, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands of US dollars, except share and per share data)

7. STOCKHOLDERS' EQUITY (Continued)


 
  Total   CTC Media, Inc.
stockholders
  Noncontrolling
interest
 

Stockholders' equity, December 31, 2011

  $ 697,208   $ 693,972   $ 3,236  

Net Income

    33,612     32,622     990  

Other comprehensive income

    69,560     69,207     353  
               

Comprehensive income

  $ 103,172   $ 101,829   $ 1,343  
               

Share capital

    9     9      

Additional paid-in capital

    6,391     6,391      

Dividends declared

    (21,076 )   (20,561 )   (515 )
               

Stockholders' equity, March 31, 2012

  $ 785,704   $ 781,640   $ 4,064  
               

8. STOCK-BASED COMPENSATION

        The Company has several stock-based compensation programs. See the Annual Report on Form 10-K filed with the SEC on February 28, 2012—Item 8. Financial Statements—Note 16, Stockholders' Equity" for a discussion of these programs.

        On January 6, 2012, the Compensation Committee of the Company's Board approved the additional grants of options to purchase up to 560,000 shares of common stock to certain employees of the Company, at an exercise price of $9.07, under the Company's 2009 Stock Incentive Plan. The exercise price represents the closing price of the Company's common stock on the grant date. These options are divided equally into two tranches: options that vest over four years and are subject only to the passage of time (with 25% of options vesting on the first anniversary and the remainder vesting on a quarterly basis over the following three years) (the "Time-based Tranche") and options that are subdivided in four equal sub-tranches that vest upon the achievement of certain performance criteria set by the board of directors for each of 2012, 2013, 2014 and 2015 (the "Performance-based Tranche").

        The following assumptions were used in the option-pricing model to assess the fair values of the options granted in the three months ended March 31, 2012:

 
  Options  

Risk free interest rate

  0.38 - 1.20 %

Expected option life (years)

  2.5 - 5.5  

Expected dividend yield

  5.40 - 5.61 %

Volatility factor

  51.44 - 84.69 %

Weighted-average grant date fair value (per share)

  $2.23  

        As of March 31, 2012, the total compensation cost related to unvested granted awards not yet recognized of $12,577 is to be recognized over a weighted average period of 3.2 years.

9. INCOME TAX

        The Company is subject to US (domestic), Russian and Kazakh income taxes, based on US legislation, Russian tax legislation, Kazakh legislation and the Double Tax Treaty of 1992 between the US and Russia (the "Treaty"). The Company's Russian- and Kazakh-based subsidiaries are subject to

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CTC MEDIA, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands of US dollars, except share and per share data)

9. INCOME TAX (Continued)

Russian and Kazakh income tax. The statutory income tax rate in Russia and Kazakhstan in 2011 and the three months ended March 31, 2012 was 20%. US taxable income or losses recorded are reported on CTC Media, Inc.'s US income tax return. CTC Media, Inc.'s taxable revenues consist predominantly of dividends and interest paid by its Russian subsidiaries. Dividends distributed to CTC Media, Inc. are subject to Russian withholding tax of 5% under the Treaty. Dividends distributed within Russia are subject to a withholding tax of 9% in case of ownership of less than 50%.

        The Company's effective income tax rate was 39% and 34% for the three months ended March 31, 2011 and 2012, respectively. The decrease in effective tax rate when comparing the three-month periods ended March 31, 2011 and 2012 was primarily due to decreases, as a percentage of consolidated income before tax, in stock-based compensation expense, and the recognition of certain foreign tax credits that will be deducted from US income tax.

        As of December 31, 2011 and March 31, 2012, the Company included accruals for unrecognized income tax benefits and related interest and penalties totaling $3,819 and $3,781, respectively, as a component of accrued liabilities, including amounts relating to pre-acquisition operations of the Channel 31 Group of $2,091 and $2,100, respectively. All of the unrecognized income tax benefits, if recognized, would affect the Company's effective tax rate.

        Although the Company believes it is more likely than not that all recognized income tax benefits would be sustained upon examination, the Company has recognized some income tax benefits that have a reasonable possibility of being successfully challenged by the tax authorities. These income tax positions could result in total unrecognized tax benefits increasing by up to $2,596 if the Company were to lose such a challenge by the tax authorities. However, the Company believes that it is reasonably possible that only $417 of the total $2,596 potential increase could occur within 12 months from March 31, 2012. This amount mainly represents certain recognized income tax benefits which may be challenged by the tax authorities during their current inspection of Kostafilm, one of the Company's production subsidiaries, and upcoming inspections of CTC Network and certain income tax penalties which may be imposed by US tax authorities as a result of CTC Media, Inc.'s late payment of estimated tax for 2007.

        The total amount of unrecognized tax benefit that could significantly change within 12 months due to a lapse of the statutory limitations period was $518 as of March 31, 2012.

        The tax years ended December 31, 2009, 2010 and 2011 remain subject to examination by the Russian and US tax authorities. The tax years ended December 31, 2007 through 2011 remain subject to examination by the Kazakh tax authorities.

10. COMMITMENTS AND CONTINGENCIES

Operating environment

        Russia and Kazakhstan continue to implement economic reforms and to develop the legal, tax and regulatory frameworks to support a market economy. The future stability of the Russian and Kazakh economies is largely dependent upon these reforms and developments and the effectiveness of economic, financial and monetary measures undertaken by their governments.

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CTC MEDIA, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands of US dollars, except share and per share data)

10. COMMITMENTS AND CONTINGENCIES (Continued)

        The Russian and Kazakh economies are vulnerable to market downturns and economic slowdowns elsewhere in the world. Although conditions generally improved in 2010, considerable uncertainty remains concerning economic stability globally in the medium-term. The economic downturn experienced in the second half of 2011, in both the European and global economies, has resulted in reduced growth in the advertising market. A continuation of this economic downturn could adversely affect further economic growth, access to capital and cost of capital, which could negatively affect the Company's future financial position, results of operations and business prospects. In the three months ended March 31, 2012, the Russian and Kazakh governments continued to take measures to support their economies in order to overcome the consequences of the economic downturn. Despite some indications of recovery there continues to be uncertainty regarding further economic growth, access to capital and cost of capital, which could negatively affect the Company's future financial position, results of operations and business prospects.

        While management believes it is taking appropriate measures to support the sustainability of the Company's business in the current circumstances, unexpected further deterioration in the areas described above could negatively affect the Company's results and financial position in a manner not currently determinable.

Assets with indefinite useful lives

        The Company has assets recorded on its consolidated balance sheet, such as broadcasting licenses, trademarks and goodwill, which have indefinite lives and represent a significant portion of the Company's total assets. Assets with indefinite useful lives are not subject to amortization but are tested for impairment annually, in the fourth quarter, or between annual tests if events or changes in circumstances indicate that an asset might be impaired. Outside the annual review, there are a number of factors which could trigger an impairment review including under-performance of operating segments or changes in projected results; changes in the manner of utilization of an asset; severe and sustained declines in the traded price of the Company's common stock that are not attributable to factors other than the underlying value of its assets; negative market conditions or economic trends; and specific events, such as new legislation, new market entrants, changes in technology or adverse legal judgments that the Company believes could have a negative impact on its business.

        The economic slowdown experienced in the second half of 2011, in both the European and global economies, has resulted in reduced advertiser demand. The instability in the macroeconomic environment adversely affected our expectations for the total advertising market in medium-term and, in turn, affected the fair values of certain of the Company's assets as of December 31, 2011. For the year ended December 31, 2011, the Company recorded non-cash impairment losses totaling $106.4 million related to certain intangible assets and goodwill. For discussion on sensitivity of major assumptions on fair values of indefinite-lived assets, refer to the Company's Annual Report on Form 10-K as of and for the year ended December 31, 2011. Peretz reporting unit and Peretz umbrella license, as well as several regional broadcasting licenses are the most sensitive to changes in the television advertising growth assumptions. During the first quarter of 2012, internal and external estimates of the TV advertising markets in which the Company operates were for the most part unchanged and there were no downward revisions to the Company's internal cash flow projections.

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CTC MEDIA, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands of US dollars, except share and per share data)

10. COMMITMENTS AND CONTINGENCIES (Continued)

There were no indicators of additional impairment for the Company's goodwill or long-lived assets, and the Company was not required to record any additional impairment charges.

        The Company considers all current information in respect of determining the need for impairment loss; however, future changes in events or circumstances, such as a continuation or worsening of the current economic instability, decreases in audience shares or ratings, increased competition from cable providers or others, or changes in the audience measurement system, could result in decreases in the fair value of our long-lived assets and require the Company to record additional impairment charges that could have a material adverse impact on its net income.

Exchange rate

        Although the Company's reporting currency is the US dollar, it generates almost all of its revenues through the sale of advertising, which in Russia is sold primarily in rubles. The ruble is also the functional currency of the Company's principal operating subsidiaries. As a result, the Company's reported revenues and results of operations are impacted by fluctuations in the exchange rate between the US dollar and the Russian ruble. Additionally, given that substantially all of its revenues are generated in rubles, the Company faces exchange rate risk relating to payments that it must make in currencies other than the ruble. In the three months ended March 31, 2012, the Russian ruble appreciated against the US dollar by 8.9%, but was on average 3% lower than the average value of the Russian ruble compared to the US dollar during the three months ended March 31, 2011.If the exchange rate between the ruble and the US dollar were to depreciate, the revenues and operating results of the Company, as reported in US dollars, would be adversely affected.

Derivative Financial instruments

        As part of its risk management strategy, the Company uses derivative financial instruments, primarily foreign exchange forward contracts, to mitigate its exposure to currency exchange risk related to US-dollar denominated payments. The Company's objective is to offset gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them, thereby reducing volatility of earnings or protecting fair values of assets and liabilities. It is the Company's policy to enter into foreign currency derivative transactions only to the extent considered necessary to meet its objectives as stated above. The Company does not enter into these transactions or any other hedging transactions for speculative purposes.

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CTC MEDIA, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands of US dollars, except share and per share data)

10. COMMITMENTS AND CONTINGENCIES (Continued)

        The following table summarizes the fair value of the Company's assets and liabilities related to derivative financial instruments and the respective line items in which they were recorded in the Company's condensed consolidated balance sheets as of the dates presented:

 
   
  March 31,  
 
  Balance sheet location   2011   2012  

Assets:

                 

Derivatives designated as hedging instruments:

                 

Foreign exchange forward contract

  Other current assets   $   $ 1,034  
               

Total

      $   $ 1,034  
               

Derivatives non designated as hedging instruments:

                 

Foreign exchange forward contract

  Other current assets   $   $ 224  
               

Total

      $   $ 224  
               

Liabilities:

                 

Derivatives designated as hedging instruments:

                 

Foreign exchange forward contract

  Other current liabilities   $   $ 2,150  
               

Total

      $   $ 2,150  
               

    Fair Value Hedges

        From January 2012, the Company entered in certain foreign exchange forward contracts designated as fair value hedges to protect the value of its existing foreign currency assets, liabilities and firm commitments. For these derivative instruments that were designated and qualify as fair value hedges, the Company recognized the gain or loss on the derivative instrument, as well as the offsetting loss or gain on the hedged item immediately in the foreign currency gain (loss) on the condensed consolidated statement of income (loss). The notional amount of these foreign exchange forward contracts was $42,800 as of March 31, 2012. The following tabular disclosure summarizes the effect of the Company's derivative financial instruments designated as fair value hedges on the condensed consolidated statement of income (loss) for the periods presented:

 
   
  March 31,  
 
  Location of gain (loss) recognized
in the statement of income (loss)
 
Fair Value Hedging Instrument
  2011   2012  

Foreign exchange forward contract

  Foreign currency gain (loss)   $   $ (1,609 )

Hedged items

  Foreign currency gain (loss)   $   $ 1,451  
               

Total

      $   $ 158  
               

    Economic (Non-designated) Hedges

        While certain of the Company's derivative instruments are designated as hedging instruments, the derivative instruments that are designed to hedge a risk, but are not designated as hedging instruments are referred to as an "economic hedge" or "non-designated hedges". Changes in the fair value of these

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CTC MEDIA, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands of US dollars, except share and per share data)

10. COMMITMENTS AND CONTINGENCIES (Continued)

non-designated hedging instruments are recognized in the expense line item in the condensed consolidated statement of income that is consistent with the nature of the hedged risk. During the first quarter of 2012, the Company entered into short-term non-designated hedges to mitigate its exposure related to US-dollar denominated payments of dividends. The notional amount of these foreign exchange forward contracts was $12,000 as of March 31, 2012. The following tabular disclosure summarizes the effect of the Company's outstanding economic hedges as of the dates presented:

 
   
  March 31,  
 
  Location of gain (loss) recognized
in the statement of income (loss)
 
Fair Value Hedging Instrument
  2011   2012  

Foreign exchange forward contract

  Foreign currency gain (loss)   $   $ (494 )
               

Purchase commitments

        The table below summarizes information with respect to our commitments as of March 31, 2012:

 
  Total   Through
2012
  Through
2013
  Through
2014
  Through
2015
  Through
2016
 
 
  (in thousands)
 

Acquisition of programming rights

  $ 265,477   $ 162,641   $ 74,488   $ 28,348   $   $  

Transmission and satellite fees

  $ 105,582   $ 15,563   $ 20,994   $ 21,904   $ 22,988   $ 24,133  

Leasehold obligations

  $ 26,915   $ 4,023   $ 5,411   $ 5,598   $ 5,820   $ 6,063  

Cable connections

  $ 10,016   $ 3,553   $ 1,720   $ 1,581   $ 1,581   $ 1,581  

Acquisition of format rights

  $ 2,700   $ 2,700   $   $   $   $  

Payments for intellectual rights

  $ 3,825   $ 734   $ 776   $ 774   $ 772   $ 769  

Network affiliation agreements

  $ 2,531   $ 663   $ 596   $ 570   $ 524   $ 178  

Other contractual obligations

  $ 1,713   $ 708   $ 1,005   $   $   $  

Total

  $ 418,759   $ 190,585   $ 104,990   $ 58,775   $ 31,685   $ 32,724  
                           

        Leasehold obligations—The Company has several operating leases for satellite transponders and office space with terms ranging from one to eleven years. Pursuant to the lease agreements, the Company is leasing an aggregate of 9,365 square meters of office space in an office building in central Moscow, with annual rent fees of $4,432 (at the exchange rate as of March 31, 2012). In addition to the lease payments described above, the Company is also required to pay technical costs arising from maintenance of the premises, taxes and some supplementary municipal services, in the total amount of $613 annually.

Non-Income Taxes

        The Company's policy is to accrue for contingencies related to non-income taxes in the accounting period in which the liability is deemed probable and the amount is reasonably determinable. In this regard, because of the uncertainties associated with the Russian tax system, the Company's final Russian taxes may be in excess of the estimated amount expensed to date and accrued at December 31, 2011 and March 31, 2012. This is due to a combination of the evolving nature of applicable tax legislation, varying approaches by regional and local tax inspectors, and inconsistent rulings on technical

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CTC MEDIA, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands of US dollars, except share and per share data)

10. COMMITMENTS AND CONTINGENCIES (Continued)

matters at the judicial level. The tax authorities have also aggressively imposed material tax assessments on Russian businesses, at times without a clear legislative basis.

        As of December 31, 2011 and March 31, 2012, the Company included accruals for contingencies related to non-income taxes totaling $2,722 and $2,800, respectively, as a component of accrued liabilities, including amounts relating to pre-acquisition operations of the Channel 31 Group of $1,700 and $1,707, respectively.

        Additionally, the Company has identified possible contingences related to non-income taxes, which are not accrued. Such possible non-income tax contingencies could materialize and require the Company to pay additional amounts of tax. As of March 31, 2012, management estimates such contingencies related to non-income taxes to be up to approximately $1,272.

        It is the opinion of management that the ultimate resolution of the Company's tax liabilities, to the extent not previously provided for, will not have a material effect on the financial condition of the Company. However, depending on the amount and timing of an unfavorable resolution of any contingencies associated with taxes, it is possible that the Company's future operations or cash flows could be materially affected in a particular period.

Broadcast Licenses

        All broadcast television stations in Russia are required to have broadcasting and other operating licenses. Only a limited number of such licenses are available in each locality. These licenses generally require renewal every five years. In November 2011, the federal law "Improving Regulation of Mass Media, Television and Radio Broadcasting" came into force and introduced the new concept of a so-called "universal license". A universal license permits the channel to broadcast through free-to-air, cable and satellite broadcasting, in either digital or analog format. Currently, it is uncertain how this law will be interpreted by the applicable authorities.

        A broadcaster must conform its programming to the programming concept outlined in the broadcasting license. In particular, the broadcaster is obliged to ensure the compliance of its programming with the declared genres of the channel and to sustain the volume-genre ratio of broadcasted materials prescribed in the license.

        The broadcasting license of Channel 31 in Kazakhstan contains various restrictions and obligations. Recently, the Kazakh government enacted a law requiring that broadcasters broadcast at least 50% of their programming in the Kazakh language during every six-hour slot.

        The Company may not always be in full compliance with these requirements. Also, the Company's independent affiliates have not always been in full compliance with all requirements of their licenses or obtained all the licenses necessary for broadcasting. If the terms of a license are not complied with, or if a television station otherwise violates applicable Russian legislation or regulations, the license, after a warning notice from the regulator, may be suspended or terminated (which decision may be appealed in court). If an independent affiliate were to broadcast without all the necessary licenses, broadcasting may be terminated and fines could be imposed. Management believes that the probability of initiation of action against any material owned-and operated station or independent affiliate is remote.

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CTC MEDIA, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands of US dollars, except share and per share data)

10. COMMITMENTS AND CONTINGENCIES (Continued)

Net Assets Position in Accordance with Statutory Requirements

        In accordance with Russian legislation, joint stock companies must maintain a level of equity (net assets) that is greater than their charter capital. In the event that a company's net assets, as determined under Russian accounting legislation, fall below certain minimum levels, specifically below zero, the company can be forced to liquidate.

        Certain of the Company's regional subsidiaries have had, and some continue to have, negative equity as reported in their Russian statutory financial statements. Management believes that the risk of the initiation of statutory liquidation procedures or other material adverse actions is remote. However, if such actions were taken, it could have a material adverse effect on the Company's results of operations, financial position and operating plans.

Legal and Tax Proceedings

        In the ordinary course of business, the Company may be party to various legal and tax proceedings, and subject to claims, certain of which relate to the developing markets and evolving fiscal and regulatory environments in which the Company operates. In late 2011, a lawsuit was filed in Russia against the Company (Peretz Channel) and other unrelated parties concerning alleged patent infringement in connection with a process used in a TV program aired in 2009 and 2010. As of December 31, 2011, the Company assessed any potential liability as not material. In March 2012, the plaintiffs filed an amended claim substantially increasing the amount of damages sought and alleging joint liability on the part of the Company and the other defendants. Under Russian law, plaintiffs may recover the full claimed amount from any of the defendants found to be jointly liable.

        As of the date of this report, the plaintiffs have not provided support for their claimed damages, as instructed by the court during preliminary hearings. The Company intends to vigorously defend this claim. Although the course and outcome of litigation cannot be predicted with certainty, the Company expects that this matter will be resolved in the next year. The Company has reassessed the minimum amount of damages that it has determined to be probable; such amount is not material. If the Company is unsuccessful in defending this claim, it is possible that the damages could be significant, but management is unable to estimate any additional losses that are reasonably possible of being incurred in this matter at this time. As of the date of this report, a court date has not been established to commence hearings on the merits of this case.

11. SEGMENT INFORMATION

        The Company operates in eight business segments—CTC Network, Domashny Network, Peretz Network, CTC Television Station Group, Domashny Television Station Group, Peretz Television Station

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CTC MEDIA, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands of US dollars, except share and per share data)

11. SEGMENT INFORMATION (Continued)

Group, CIS Group and Production Group. The Company evaluates performance based on the operating results of each segment, among other performance measures.

 
  Three months ended March 31, 2011  
 
  Operating
revenue
from
external
customers
  Intersegment
revenue
  Operating
income/
(loss)
  Identifiable
assets
  Depreciation
and
amortization
  Amortization
of
programming
rights
  Amortization
of
sublicensing
rights and
own cost of
production
 

CTC Network

  $ 108,293   $ 130   $ 33,036   $ 792,937   $ (571 ) $ (52,611 ) $ (426 )

Domashny Network

    19,748     3     3,158     64,092     (224 )   (9,914 )    

Peretz Network

    12,671         (435 )   193,561     (744 )   (8,114 )    

CTC Television Station Group

    17,859     468     10,716     108,068     (551 )   (86 )    

Domashny Television Station Group

    2,629     710     438     55,572     (427 )   (1 )    

Peretz Television Station Group

    1,054     383     (1,750 )   124,655     (1,164 )   (1 )    

CIS Group

    3,079         (359 )   23,902     (152 )   (1,850 )    

Production Group

    22     2,213     (553 )   50,409     (23 )       (1,748 )

Business segment results

  $ 165,355   $ 3,907   $ 44,251   $ 1,413,196   $ (3,856 ) $ (72,577 ) $ (2,174 )
                               

Eliminations and other

    186     (3,907 )   (8,323 )   (357,758 )   (80 )   1,839     1,860  

Consolidated results

  $ 165,541   $   $ 35,928   $ 1,055,438   $ (3,936 ) $ (70,738 ) $ (314 )
                               

 

 
  Three months ended March 31, 2012  
 
  Operating
revenue
from
external
customers
  Intersegment
revenue
  Operating
income/
(loss)
  Identifiable
assets
  Depreciation
and
amortization
  Amortization
of
programming
rights
  Amortization
of
sublicensing
rights and
own cost of
production
 

CTC Network

  $ 124,633   $ 75   $ 40,799   $ 884,979     (1,429 ) $ (53,538 ) $ (2,735 )

Domashny Network

    22,876     9     2,062     85,544     (359 )   (12,752 )    

Peretz Network

    15,680         1,935     106,188     (776 )   (7,499 )    

CTC Television Station Group

    17,793     400     10,649     96,238     (495 )   (84 )    

Domashny Television Station Group

    3,485     1,013     1,287     60,013     (711 )   (1 )    

Peretz Television Station Group

    1,469     552     (1,203 )   113,083     (1,211 )        

CIS Group

    4,308         (254 )   23,944     (117 )   (2,995 )    

Production Group

    33     6,186     (578 )   49,916     (7 )       (5,863 )

Business segment results

  $ 190,277   $ 8,235   $ 54,697   $ 1,419,905   $ (5,105 ) $ (76,869 ) $ (8,598 )
                               

Eliminations and other

    843     (8,235 )   (4,726 )   (436,349 )   (52 )   1,110     5,863  

Consolidated results

  $ 191,120   $   $ 49,971   $ 983,556   $ (5,157 ) $ (75,759 ) $ (2,735 )
                               

12. SUBSEQUENT EVENTS

        On April 27, 2012, the Company's Board declared a dividend of $0.13 per outstanding share of common stock, or approximately $20,561 in total, which will be paid on or about June 20, 2012 to shareholders of record as of June 1, 2012. The Company's Board currently intends to pay further dividends in each of the following quarters of 2012. Although it is the Board's current intention to declare and pay further dividends in the remaining quarters of 2012, there can be no assurance that such additional dividends will in fact be declared and paid. Any such declaration is at the discretion of the Board and will depend upon factors such as Company's earnings, financial position and cash requirements.

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Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

        The following discussion and analysis relates to our financial condition and results of operations for the three months ended March 31, 2011 and 2012. This discussion should be read in conjunction with our annual report on Form 10-K filed with the SEC on February 28, 2012 and our Unaudited Condensed Consolidated Financial Statements and the notes thereto appearing elsewhere in this quarterly report.

Overview

        We currently operate three Russian television networks—CTC, our flagship network, Domashny and Peretz; one television network in Kazakhstan—Channel 31; and a television channel in Moldova, all offering entertainment programming. Before October 2011, Peretz operated under the "DTV" brand. In addition, we have in-house production operations focused on series, sitcoms and shows.

        We currently organize our operations into eight business segments: CTC Network, Domashny Network, Peretz Network, CTC Television Station Group, Domashny Television Station Group, Peretz Television Station Group, CIS Group and Production Group.

    Russian Networks

    CTC Network.  CTC Network's principal target audience is 6-54 year-old viewers. CTC's technical penetration is 94.7% with its signal covering approximately 100 million people in Russia.

    Domashny Network.  From January 2012, Domashny channel focuses on 25-59 year-old female viewers. Domashny's technical penetration is 84.9% with its signal covering approximately 63 million people in Russia.

    Peretz Network.  From January 2012, Peretz channel focuses primarily on 25-59 year-old viewers. Peretz's technical penetration is 80.1% with its signal covering approximately 61 million people in Russia.

        Each of our networks is responsible for its own broadcasting operations, including the licensing and commissioning of programming, producing its programming schedule and managing its relationships with its independent affiliates. Substantially all of the revenues of our networks are generated from the broadcast of national television advertising.

    Russian Television Station Groups

    CTC, Domashny and Peretz Television Station Groups.  The CTC Television Station Group, Domashny Television Station Group and Peretz Television Station Group manage 54, 44 and 50 owned-and-operated stations and repeater transmitters, respectively. Our owned-and-operated stations and unmanned repeaters provide 61.3% technical penetration for the CTC Network (or 64.7% of its total penetration of 94.7%); 43.7% technical penetration for the Domashny Network (or 51.5% of its total penetration of 84.9%); and 49.83% technical penetration for the Peretz Network (or 62.2% of its total penetration of 80.1%). All Television Station Groups generate substantially all of their revenues from the sale of local television advertising that is broadcast during the local advertising windows allotted to all owned-and-operated and independent affiliates of our networks.

    CIS Group

    CIS Group.  We operate the Channel 31 network, a Kazakh television broadcaster. Channel 31 is targeted principally at 6-54 year-old viewers. The signal of Channel 31 is broadcast by over 67

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      television stations and local cable operators, including 10 owned-and-operated stations and repeater transmitters. We also operate a broadcaster in Moldova.

    Production Group

    Production Group.  Our Production Group comprises our in-house production operations that specialize in sitcoms, series, sketchcoms and entertainment TV shows for our networks.

    Sales house

    Sales house.  Our own sales house, EvereST-S, serves as the exclusive advertising sales agent for all of our Russian Networks and for our Television Station Groups in respect of Moscow-based clients, and as non-exclusive advertising sales agent for other Television Station Group clients. See "—Television Advertising Sales". The sales house does not represent an operating segment but rather a functional sales department. The sales house expenses are allocated to our reportable segments based on the revenues earned by each of the segments.

Key Factors Affecting Our Results of Operations

        Our results of operations are affected primarily by the overall demand for and consequent pricing of television advertising, the limited supply of television advertising time, our ability to deliver a large share of viewers with desirable demographics, the availability and cost of quality programming. Our results of operations are also affected by the value of the Russian ruble compared to the US dollar.

        Beginning in the second half of 2008, Russia, like many other countries, experienced economic instability, characterized by a steep decline in the value of shares traded on its stock exchanges, devaluation of its currency, capital flight and a decline in gross domestic product. Additionally, because Russia produces and exports large amounts of oil and gas, its economy is particularly vulnerable to fluctuations in the price of oil and gas on the world market and decreases in international oil prices have adversely affected and may continue to adversely affect its economy. Total television advertising spending in Russia was adversely affected by this economic instability and, as a result, our operating results for 2009 were materially adversely affected. Like Russia, Kazakhstan has also experienced economic instability. Although conditions generally improved in 2010, the economic downturn experienced in the second half of 2011, in both Europe and globally, has resulted in reduced advertiser demand. Although, the Russian economy demonstrated modest recovery in the first quarter of 2012, considerable uncertainty remains concerning economic stability globally in the medium-term. Though we anticipate that the advertising market in 2012 as a whole will be larger than in 2011, we expect that such growth will be moderate. We are cautious about the potential negative impact that current economic conditions, particularly the global economic recession, could have on television advertising spending. If overall spending by the largest multinational advertisers in the Russian television advertising market falls substantially, our advertising revenues may be significantly reduced, materially adversely affecting our results of operations.

        The supply of television advertising time is limited by Russian legislation (as discussed below). As a result of this limited supply of advertising time, we are only able to increase our revenues by delivering larger audience shares and through increases in the price of advertising.

        The continued success of our advertising sales depends largely on our ability to attract a large share of the key target audiences, especially during primetime. Our ability to attract our key target audiences in turn depends in large part on our ability to broadcast quality programming. We face strong competition from other television broadcasters for programming content, and we must continue to strive to air programming that addresses evolving audience tastes and trends in television broadcasting.

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        In addition to the factors discussed above affecting our ability to generate advertising revenues, our reported results of operations are also materially impacted by currency fluctuations. Our reporting currency is the US dollar. Substantially all of our revenues, however, are generated in rubles. Through our Channel 31 operations, we also generate revenues in Kazakh tenge. Additionally, we face exchange rate risk relating to payments that we must make in currencies other than the ruble. We generally pay for non-Russian produced programming in US dollars. In the three months ended March 31, 2012, the Russian ruble appreciated against the US dollar by 8.9%, but was on average 3% lower than the average value of the Russian ruble compared to the US dollar during the three months ended March 31, 2011.

        While the ongoing development and expansion of our television networks represents the core of our strategy, we also seek opportunities to expand our business through select media acquisitions that complement our existing businesses, including opportunities in Russian-speaking markets where we can effectively and efficiently leverage our management and programming resources. We also continue to explore opportunities to further expand our presence in the local advertising market, principally through the careful expansion of our owned-and-operated television stations in major cities, new cable connections and agreements with independent affiliates. These acquisitions or expansion plans, if completed, could subject us to a range of additional factors that could affect our subsequent results of operations.

Television Advertising Sales

        We generate substantially all of our revenues from the sale of television advertising on both a national and regional basis. At the national level and for substantially all of the stations in the Television Station Groups, this advertising is currently placed through our own advertising sales house, EvereST-S, which serves as the exclusive advertising sales agent for all of our Russian networks and Television Station Groups in respect of Moscow-based clients. Advertising sales to local clients of our regional stations are made through Video International, an external sales house. EvereST-S has direct sales arrangements with advertisers or their agencies. Our cooperation model with Video International provides for the licensing of specialized advertising software by Video International to our internal sales house, as well as the provision by Video International of related software maintenance and analytical support and consulting services. See "—Our Agreements with Video International" below and "Item 1A. Risk Factors—Changes to the Russian law "On Advertising" have fundamentally changed the way in which we sell advertising, and which could adversely affect our business, financial condition and results of operations."

        Current Russian law limits the amount of time that a broadcaster may devote to advertising to no more than 15% of any broadcasting hour. In Kazakhstan, the maximum airtime available for advertising is limited to no more than 20% of total broadcasting time each day.

        The level of advertising revenues that we receive is directly tied to our audience shares and ratings. Audience share represents the audience attracted by a channel as a proportion of the total audience watching television. Ratings represent the number of people watching a channel (expressed as a proportion of the total population measured). Because advertisers often seek to reach particular demographic groups, including particular ages and genders, they will often base their advertising placement decisions on ratings among such groups, rather than among the overall population. CTC's advertising has generally been placed on the basis of our ratings in CTC's current target audience, the 6-54 year-old demographic. Since January 2012, Domashny has focused primarily on 25-59 year-old female viewers and Peretz has focused primarily on 25-59 year-old viewers. See "Item 1A. Risk Factors—A reduction in our audience shares and ratings would likely result in a reduction in our advertising revenues".

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        We generally derive no direct revenues from our independent affiliates. These independent affiliates broadcast our network signal in their local areas in exchange for the right to broadcast local advertising during designated time windows, from which they derive their own revenues. We also pay fees to some of our independent affiliates in exchange for broadcasting our network signals. By providing us with a means of expanding our broadcast coverage with limited investment on our part, these independent affiliates help to increase our audience share and ratings, thereby indirectly increasing our national advertising revenues.

        Generally, our ability to grow our revenues depends primarily on increases in the price of our advertising, demand for advertising and our ability to increase our advertising inventory by increasing our audience shares, as well as on overall television viewership. Due to the current economic instability, we believe that increases, if any, in the price of our advertising in the near term will be moderate. In addition, because of the current economic instability, sellout rates may decrease, which in turn would negatively impact our revenues. Our ability to increase our advertising inventory at the national level depends upon our success in increasing our audience share, which in turn increases the number of gross ratings points (GRPs) we have available to sell.

        Television advertising sales vary over the course of the year. Overall television viewership is lower during the summer months and highest in the first and fourth quarters. Seasonal fluctuations in consumer patterns also affect television advertising expenditures. In 2011, approximately 31% of our total advertising revenues were generated in the fourth quarter.

Our Agreements with Video International

        Effective January 1, 2011, our sales house has licensed Video International's proprietary advertising software package (including its Automated System for the Placement of Television Advertising, Automated Document Management System, and Media Calculator modules). In addition, the Video International group provides a number of support services related to maintenance of the software package, such as technical support and consulting along with integration of the software; as well as Russian advertising market analytical services including forecasts, market surveys and research. In particular, Video International provides a detailed analysis of the Russian television market, including audience share and advertising market dynamics.

        Under the terms of this agreement, we pay Video International both fixed license fees for the use of the software package and variable service fees, which depend on the amount of services rendered. The aggregate amount of compensation payable is calculated on the basis of our Russian channels' television advertising revenues (including network revenues and the revenues from regional advertising placed by Moscow-based clients, but excluding revenues from social advertising). We expect that the overall annual compensation payable to Video International will be in the range of 10% to 12% of our Russian channels' advertising revenues. The parties have also agreed that the compensation payable to Video International under the new agreement may be decreased by the mutual consent of the parties on an annual basis.

        The current agreement has a five-year term, running through the end of 2015, and may be unilaterally terminated by either party effective January 1st of any year during the term without penalty, provided that such party provides written notice of termination not later than 180 days before such date. In addition, we have the exclusive right to terminate the agreement unilaterally under certain defined circumstances in the event that our advertising sales under-perform the overall Russian television advertising market by specified margins. In the event of termination on such grounds, the parties have also agreed on an option to seek to negotiate an amendment to the financial terms of the agreement should they desire to continue their cooperation. In any other case of early termination, the terminating party will be required to pay to the other party compensation in an amount approximately

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equal to the aggregate fees payable under this agreement in respect of the six calendar months prior to such termination.

        In addition to the agreement between our sales house and Video International described above, a number of our owned-and-operated regional stations have signed agency agreements with local subsidiaries of Video International with respect to advertising sales to local clients. Under the terms of such agreements, we pay Video International a commission fee set as a percentage of the actual gross revenues received from advertising sales by the relevant local station. The aggregate headline commission payable to Video International under such agreements annually is 12% of the regional station's total gross advertising revenues, including VAT. The parties have also agreed that the commission payable to Video International under those agreements may be subject to reduction upon mutual consent of the parties on an annual basis.

        The agreements are terminable either by mutual written agreement, or unilaterally by giving 180 calendar days' notice. As compensation for early termination, the terminating party must pay the other party a forfeit fee based on a certain percentage of the regional station's actual gross revenues for the six full calendar months preceding the termination date. Such forfeit fee will be subject to further negotiations between the parties and may be subject to adjustment.

        We also have an agreement with Video International for the placement of advertising on Channel 31, expiring in 2015. Under the Channel 31 agreement, the commission rate payable by us is fixed at 12.5% of gross advertising sales in 2012, and 12.0% of gross advertising sales in years 2013 through 2015.

    Critical Accounting Policies, Estimates and Assumptions

        The preparation of financial statements in conformity with the accounting principles generally accepted in the United States 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. Critical accounting estimates include, among others, the estimate of fair values in business combinations, estimates of the fair value of the Company's common stock in determining stock- based compensation, the amortization method and periods for programming rights and sublicensing rights, useful lives of tangible and intangible assets, impairment of goodwill, valuation of intangible assets and long-lived assets, fair value of derivative instruments, estimates of contingencies, and the determination of valuation allowances for deferred tax assets. We have discussed the estimates that we believe are critical and require the use of complex judgment in our Annual Report on Form 10-K filed with the SEC on February 28, 2012. Since that date, there have been no material changes to our critical accounting policies or the methodologies or assumptions we apply under them.

        Assets with indefinite useful lives—We assess the carrying value of goodwill and other intangible assets with indefinite lives on an annual basis, or more frequently if events or changes in circumstances indicate that such carrying value may not be recoverable. Other than our annual review, factors we consider important which could trigger an impairment review include: under-performance of reporting units or changes in projected results, changes in the manner of utilization of the asset, a severe and sustained decline in the price of our shares and negative market conditions or economic trends. Therefore, our judgment as to the future prospects of each business has a significant impact on our results and financial condition. We believe that our assumptions are appropriate. If future cash flows do not materialize as expected or there is a future adverse change in market conditions, we may be unable to recover the carrying amount of an asset, resulting in future impairment losses.

        The economic slowdown experienced in the second half of 2011, in both the European and global economies, has resulted in reduced advertiser demand. The instability in the macroeconomic environment adversely affected our expectations for the total advertising market in medium-term and,

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in turn, affected the fair values of certain of our assets as of December 31, 2011. For the ended December 31, 2011, we recorded non-cash impairment losses totaling $106.4 million related to certain intangible assets and goodwill. For discussion of the sensitivity of major assumptions regarding fair values of indefinite-lived assets, refer to our annual Report on Form 10-K for the year ended December 31, 2011. The Peretz reporting unit and Peretz umbrella license, as well as several regional broadcasting licenses, are the most sensitive to changes in television advertising growth assumptions. During the first quarter of 2012, internal and external estimates of the TV advertising markets in which we operate were for the most part unchanged and there were no downward revisions to our internal cash flow projections. There were no indicators of additional impairment for our goodwill or long-lived assets, and we were not required to record any additional impairment charges. We consider all current information in respect of determining the need for, or calculating, any impairment loss; however, future changes in events or circumstances, such as a continuation or worsening of the current economic instability, decreases in our audience shares or ratings, increased competition from cable providers or others, or changes in the audience measurement system, could result in decreases in the fair value of our long-lived assets and require us to record additional impairment losses that could have a material adverse impact on our net income. See "Item 1A. Risk Factors—A significant portion of our total assets are intangibles assets with indefinite lives. If events or changes in circumstances require us to further reduce the fair value of those assets, we may be required to record impairment losses that can materially adversely impact our net income." See also "Item 1. Financial Statements and Supplementary Data—Note 2, Basis of presentation and summary of significant accounting policies".

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Results of Operations

        The following table presents our historical consolidated operating results as a percentage of total operating revenues for the periods indicated:

 
  Three months
ended
March 31,
 
 
  2011   2012  

REVENUES:

             

Advertising

    98.5 %   94.5 %

Sublicensing

    1.1     4.8  

Other revenue

    0.4     0.7  
           

Total operating revenues

    100.0     100.0  
           

EXPENSES:

             

Direct operating expenses (exclusive of amortization of programming rights and sublicensing rights, shown below, exclusive of depreciation and amortization and exclusive of stock-based compensation)

    (6.5 )   (6.2 )

Selling, general and administrative (exclusive of depreciation and amortization; exclusive of stock-based compensation)

    (22.8 )   (22.4 )

Stock based compensation

    (3.8 )   (1.5 )

Amortization of programming rights

    (42.7 )   (39.6 )

Amortization of sublicensing rights and own production cost

    (0.2 )   (1.6 )

Depreciation and amortization (exclusive of amortization of programming rights, sublicensing rights and own production cost)

    (2.4 )   (2.7 )
           

Total operating expenses

    (78.4 )   (73.9 )
           

Operating income

    21.7     26.1  

Foreign currency (losses) gains

    0.7     (0.7 )

Interest income

    0.9     1.1  

Interest expense

    (0.1 )   (0.1 )

Other non-operating income, net

    (0.0 )   0.1  

Equity in income of investee companies

    0.1     0.1  
           

Income before income tax

    23.3     26.6  
           

Income tax expense

    (9.0 )   (9.0 )
           

Consolidated net income

    14.3     17.6  
           

Income attributable to noncontrolling interest

    (0.5 )   (0.5 )
           

Net income attributable to CTC Media, Inc. stockholders

    13.8 %   17.1 %
           

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Comparison of Unaudited Condensed Consolidated Statements of Income for the Three Months ended March 31, 2011 and 2012

    Total operating revenues

 
  Three months ended
March 31,
 
 
  2011   2012  
 
  (in thousands,
except percentages)

 

CTC Network

  $ 108,423   $ 124,708  

Change period-to-period

        15.0 %

Domashny Network

    19,751     22,885  

Change period-to-period

        15.9 %

Peretz Network

    12,671     15,680  

Change period-to-period

        23.7 %

CTC Television Station Group

    18,327     18,193  

Change period-to-period

        (0.7 )%

Domashny Television Station Group

    3,339     4,498  

Change period-to-period

        34.7 %

Peretz Television Group

    1,437     2,021  

Change period-to-period

        40.6 %

CIS Group

    3,079     4,308  

Change period-to-period

        39.9 %

Production Group

    2,235     6,219  

Change period-to-period

        178.3 %

Eliminations and other

    (3,721 )   (7,392 )
           

Total

  $ 165,541   $ 191,120  
           

Change period-to-period

        15.5 %

        Our total operating revenues increased by 15.5% when comparing the three-month periods under review, which is primarily due to an increase in advertising prices and, to a lesser extent, increased audience shares for the Domashny and Peretz Networks and increased sublicensing and own production revenues.

        The increase in advertising prices resulted from the increase in the advertising market when comparing the first quarters of 2011 and 2012. Though we anticipate that the advertising market in 2012 as a whole will be higher than in 2011, we anticipate that such growth will be moderate. We are cautious about the potential negative impact that economic conditions, particularly the global economic recession, could have on television advertising spending. If overall spending by the largest multinational advertisers in the Russian television advertising market falls substantially, our advertising revenues may be significantly reduced, materially adversely affecting our results of operations. See "Item 1A. Risk Factors—We derive almost all of our revenues from the sale of advertising, which is sensitive to broader economic conditions. Our revenues may substantially decrease if the economic environment deteriorates in Russia or other CIS countries in which we operate."

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    Advertising revenues

 
  Three months ended
March 31,
 
 
  2011   2012  
 
  (in thousands,
except percentages)

 

CTC Network

  $ 106,463   $ 115,887  

Change period-to-period

        8.9 %

Domashny Network

    19,728     22,440  

Change period-to-period

        13.7 %

Peretz Network

    12,652     15,562  

Change period-to-period

        23.0 %

CTC Television Station Group

    17,758     17,717  

Change period-to-period

        0.0 %

Domashny Television Station Group

    2,576     3,411  

Change period-to-period

        32.4 %

Peretz Television Group

    1,052     1,434  

Change period-to-period

        36.3 %

CIS Group

    2,873     4,109  

Change period-to-period

        43.0 %

Eliminations and other

    3     109  
           

Total

  $ 163,105   $ 180,669  
           

Change period-to-period

        10.8 %

        We recognize advertising revenues in the period that the corresponding advertising spots are broadcast. Our advertising revenues are recorded net of VAT. In addition, advertising sales to local clients of our regional stations and sales of CIS under our agency agreements with Video International are recognized net of agency commissions. See "Item 1.Financial Statements—Note 2, Basis of Presentation and Summary of Significant Accounting Policies—Revenue recognition".

        Because advertisers often seek to reach particular demographic groups, including particular ages and genders, they will often base their advertising placement decisions on ratings among such groups, rather than among the overall population. We generally place the CTC Network's advertising on the basis of our ratings in CTC's current target audience, the 6-54 year-old demographic. From January, 2012, we place Domashny and Peretz Network's advertising on the basis of our ratings in Domashny's and Peretz's target audiences, 25-59 year-old female viewers and 25-59 year-old viewers, respectively. The overall audience share among the entire viewing population (considered to be those age 4 and older, or "4+") is used to compare our ratings with those of other channels.

        The table below provides certain key statistics about CTC, Domashny and Peretz television channels:

 
  Average target
audience
share
  Average All
4+ audience
share
 
 
  Three months
ended
March 31,
  Three months
ended
March 31,
 
 
  2011   2012   2011   2012  

CTC

    11.2     11.0     7.9     7.8  

Domashny

    2.8     3.7     2.1     2.7  

Peretz

    2.0     2.6     1.7     2.1  

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        CTC Network.    CTC Network's advertising revenues increased by 8.9% when comparing the three-month periods under review, mainly due to increased advertising prices and increased ratings, which was comprised of an increase in television viewership, partially offset by the decrease in audience share. The decrease in audience share was primarily the result of increased competition. See "Item 1A. Risk Factors—A reduction in our audience shares and ratings would likely result in a reduction in our advertising revenues".

        Domashny Network.    Domashny Network's advertising revenues increased by 13.7% when comparing the three-month periods under review, principally due to increased audience share. The increase in audience share was due to strong performance of our programming in the first quarter of 2012 compared with the first quarter of 2011, primarily driven by success of the Turkish drama series.

        Peretz Network.    Peretz Network's advertising revenues increased by 23.0% when comparing the three-month periods under review, principally due to increased audience share and, to a lesser extent, the increase in advertising prices. The increase in our audience share over the periods under review was the result of better performance of our programming in the first quarter of 2012 compared with the first quarter of 2011, which primarily included locally produced shows.

        Television Station Groups.    Advertising revenues of the Domashny Television Station Group and Peretz Television Station Group increased by 32.4% and 36.3%, respectively. At Domashny and Peretz Television Station Groups, the increased advertising revenues were primarily due to increased advertising rates and audience shares of the channels, resulting in increased inventory to sell, as well as due to revenues of newly acquired stations. We expect that the growth in regional advertising prices in 2012 as a whole will be moderate. Advertising revenues at CTC Television Station Group were flat when comparing the periods under review.

        In addition to the factors noted above the increases in advertising revenues of our Networks and Television Station Groups in absolute terms were partly offset by the depreciation of the Russian ruble against the US dollar during the periods under review.

        CIS.    The majority of the CIS Group's advertising revenues represented revenues of the Channel 31 Group. The 43.0% increase in the advertising revenues in this segment, when comparing periods under review, was primarily due to increased sellout, partially offset by a decrease in advertising prices. The target audience share of Channel 31 was 14.8% and 14.5% during the three months ended March 31, 2011 and 2012, respectively.

    Sublicensing, own production and other revenues

 
  Three months ended
March 31,
 
 
  2011   2012  
 
  (in thousands,
except percentages)

 

CTC Network

  $ 1,960   $ 8,821  

Change period-to-period

        350.1 %

Production Group

    2,222     6,219  

Change period-to-period

        179.9 %

Eliminations and other

    (1,746 )   (4,589 )
           

Total

  $ 2,436   $ 10,451  
           

Change period-to-period

        329.0 %

        Networks.    Our sublicensing, own production and other revenues at CTC Network increased by 350.1% when comparing the three- month periods under review, primarily due to increases in

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sublicensing sales to broadcasters in Ukraine. The increase in sublicensing revenues in the first quarter is not indicative of such revenues that may be expected for the whole 2012.

        Production Group.    The substantial majority of own production revenues for the Production Group represent sales of in-house produced programming to our networks. These revenues are eliminated in consolidation.

        Eliminations and other.    We eliminate intercompany revenues from sublicensing, own production and other revenues. These intercompany revenues consist primarily of programming rights sold by our Production Group to our networks.

    Total operating expenses

 
  Three months ended March 31,  
 
  2011   2012  
 
  (in thousands,
except percentages)

 

CTC Network

  $ (75,387 ) $ (83,909 )

Change period-to-period

        11.3 %

Domashny Network

    (16,593 )   (20,823 )

Change period-to-period

        25.5 %

Peretz Network

    (13,106 )   (13,745 )

Change period-to-period

        4.9 %

CTC Television Station Group

    (7,611 )   (7,544 )

Change period-to-period

        (0.9 )%

Domashny Television Station Group

    (2,901 )   (3,211 )

Change year-on-year

        10.7 %

Peretz Television Group

    (3,187 )   (3,224 )

Change period-to-period

        1.2 %

CIS Group

    (3,438 )   (4,562 )

Change period-to-period

        32.7 %

Production Group

    (2,788 )   (6,797 )

Change period-to-period

        143.8 %

Eliminations and other

    (4,602 )   2,666  
           

Total

  $ (129,613 ) $ (141,149 )
           

Change period-to-period

          8.9 %

% of total operating revenues

    78.3 %   73.9 %

        Our total operating expenses as a percentage of operating revenues decreased from 78.3% to 73.9% when comparing the three months ended March 31, 2011 and 2012, mainly due to decreases, as a percentage of operating revenues, in selling, general and administrative expenses, amortization of programming rights, direct operating expenses and stock-based compensation expense, offset by increases, as a percentage of operating revenues, in depreciation and amortization expenses, amortization of sublicensing rights and own production costs.

        For the full year, we expect our selling, general and administrative and direct operating expenses to grow faster than our revenues during the year, primarily due to investments in regional expansion, our sales house unit and marketing.

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Table of Contents

    Direct operating expenses

 
  Three months ended
March 31,
 
 
  2011   2012  
 
  (in thousands,
except percentages)

 

CTC Network

  $ (3,002 ) $ (3,064 )

Change period-to-period

        2.1 %

Domashny Network

    (1,875 )   (1,927 )

Change period-to-period

        2.8 %

Peretz Network

    (1,428 )   (1,813 )

Change period-to-period

        27.0 %

CTC Television Station Group

    (2,159 )   (2,276 )

Change period-to-period

        5.4 %

Domashny Television Station Group

    (1,215 )   (1,299 )

Change period-to-period

        6.9 %

Peretz Television Group

    (1,270 )   (1,505 )

Change period-to-period

        18.5 %

CIS Group

    (466 )   (488 )

Change period-to-period

        4.7 %

Production Group

    (573 )   (543 )

Change period-to-period

        (5.2 )%

Eliminations and other

    1,278     1,056  
           

Total

  $ (10,710 ) $ (11,859 )
           

Change period-to-period

          10.7 %

% of total operating revenues

    6.5 %   6.2 %

        Networks.    At the Network level, direct operating expenses principally consist of the salaries of our networks' engineering, programming and production staff, network affiliation costs and satellite transmission fees. Direct operating expense at CTC and Domashny as a percentage of these segments' total operating revenues decreased from 2.8% to 2.5% and from 9.5% to 8.4%, respectively, when comparing the three months ended March 31, 2011 and 2012, mainly due to increased revenues. At Peretz Network, direct operating expense as a percentage of this segment's total operating revenues increased from 11.3% to 11.6% over the periods under review, as result of increased salaries due to increased head-count, partially offset by increased revenues.

        Television Station Groups.    At the Television Station Group level, direct operating expenses consist primarily of transmission and maintenance costs and payroll expenses for engineering and distribution staff. Direct operating expenses at our Television Station Groups are materially higher as a percentage of those segments' total operating revenues compared to the networks because we bear the transmission costs of our owned-and-operated stations and repeaters. At the CTC Television Station Group, direct operating expenses as a percentage of that segment's total operating revenues increased from 11.8% to 12.5% when comparing the three months ended March 31, 2011 and 2012, due to increases in transmission and maintenance costs. At the Domashny and Peretz Television Station Groups, direct operating expenses as a percentage of the segment's total operating revenues decreased from 36.4% to 28.9% and from 88.4% to 74.5%, respectively, when comparing the three months ended March 31, 2011 and 2012. These decreases were mainly due to increased revenues, partly offset by increases in transmission costs. The increases in transmission costs in Television Station Groups over the periods under review were due to annual raises and newly acquired regional stations for Domashny and Peretz.

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Table of Contents

        CIS Group.    For the CIS Group, direct operating expenses principally consist of transmission and maintenance costs and payroll expenses for technical, programming, production and distribution staff of the Channel 31 Group. Direct operating expenses as a percentage of that segment's total operating revenues decreased from 15.1% to 11.3% when comparing the three months ended March 31, 2011 and 2012, mainly due to increased revenues.

        Production Group.    For the Production Group, direct operating expenses principally comprise general production overhead.

        Eliminations and other.    We eliminate intercompany expenses from direct operating expenses. These intercompany expenses consist primarily of service fees charged to our Networks by our Television Station Groups for the operation and maintenance of repeater transmitters.

    Selling, general and administrative expenses

 
  Three months ended
March 31,
 
 
  2011   2012  
 
  (in thousands,
except percentages)

 

CTC Network

  $ (18,778 ) $ (23,143 )

Change period-to-period

        23.2 %

Domashny Network

    (4,572 )   (5,785 )

Change period-to-period

        26.5 %

Peretz Network

    (3,087 )   (3,657 )

Change period-to-period

        18.5 %

CTC Television Station Group

    (4,816 )   (4,690 )

Change period-to-period

        (2.6 )%

Domashny Television Station Group

    (1,259 )   (1,200 )

Change period-to-period

        (4.7 )%

Peretz Television Group

    (752 )   (508 )

Change period-to-period

        (32.4 )%

CIS Group

    (970 )   (962 )

Change period-to-period

        (0.8 )%

Production Group

    (442 )   (384 )

Change period-to-period

        (13.1 )%

Eliminations and other

    (3,020 )   (2,399 )
           

Total

  $ (37,696 ) $ (42,728 )
           

Change period-to-period

          13.3 %

% of total operating revenues

    22.8 %   22.4 %

        Our selling, general and administrative expenses principally consist of advertising and promotion expenses; salaries and benefits; rent and utilities; audit, legal and other consulting fees; travel expenses; insurance costs; and non-income taxes. In addition, our selling, general and administrative expenses include compensation expenses payable to Video International for use of advertising software, related maintenance and analytical support and consulting services (See—"Our agreements with Video International").

        We lease approximately 9,365 square meters of office space in an office building in central Moscow. We recognized rental expenses related to these leases of approximately $0.9 and $1.6 million in the first quarter of 2011 and 2012, respectively, and expect to recognize approximately $44.6 million for 2012-2021 (at the US dollar/ruble exchange rate as of March 31, 2012). In addition to the lease

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Table of Contents

payments described above, we are also required to pay technical costs arising from maintenance of the premises and some supplementary municipal services.

        Networks.    Selling, general and administrative expenses of the CTC and Domashny Networks as a percentage of each segments's operating revenues increased from 17.3% to 18.6%, and from 23.1% to 25.3%, respectively, when comparing the three months ended March 31, 2011 and 2012. Such increases were mainly due to increases in advertising and promotion expenses as result of the growth in new media marketing expenses. In addition, the increase in CTC Network's expenses was due to the transfers of some employees from other segments to the CTC Network segment. Selling, general and administrative expenses of the Peretz Network as a percentage of this segment's total operating revenues decreased from 24.4% to 23.3% when comparing the three months ended March 31, 2011 and 2012, mainly due to increased revenue.

        Television Station Groups.    Selling, general and administrative expenses of the CTC, Domashny and Peretz Television Station Groups as a percentage of each segment's total operating revenues decreased from 26.3% to 25.8%, from 37.7% to 26.7% and from 52.3% to 25.1%, respectively, when comparing the three months ended March 31, 2011 and 2012. At the CTC Television Station Group, the decrease was primarily due to decreased rent expenses. At the Domashny and Peretz Television Station Groups, the decreases were principally due to decreases in advertising and promotion expenses because of the later timing of advertising campaigns and increased revenue of these segments.

        CIS Group.    Selling, general and administrative expenses of our CIS Group consist primarily of payroll expenses related to sales, marketing, finance and administrative personnel, advertising and promotion expenses, consultancy and outside service expenses, office space rent expenses and utilities expenses of the Channel 31 Group. As a percentage of this segment's operating revenues, selling, general and administrative expenses decreased from 31.5% to 22.3% when comparing the three months ended March 31, 2011 and 2012, mainly due to increased segment revenues.

        Production Group.    Selling, general and administrative expenses of the Production Group consist primarily of payroll expenses related to sales, marketing, finance and administrative personnel, office space rent expenses and utilities expenses of our production companies. As a percentage of this segment's operating revenues, selling, general and administrative expenses decreased from 19.8% to 6.2% when comparing the three months ended March 31, 2011 and 2012, mainly due to increased segment revenues.

        Eliminations and other.    Other selling, general and administrative expenses consist principally of the general and administrative expenses of our corporate headquarters, as well as intercompany eliminations.

    Stock-based compensation expense

 
  Three months ended
March 31,
 
 
  (In thousands,
except for
percentages)
 
 
  2011   2012  

Stock-based compensation expense

  $ (6,219 ) $ (2,911 )

        The majority of the stock-based compensation expense relates to stock options and equity-based cash incentive awards granted to our executives and employees under our 2009 Stock Incentive Plan. The decrease in stock-based compensation expense over the periods under review was primarily due to a 2011 expense related to options exercised by our former CEO, who left the Company at the end of 2011.

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Table of Contents

        We expect to recognize stock-based compensation expense related to all of our currently outstanding stock options and equity-based cash incentive awards of approximately $5.7 million for the remainder of 2012, $5.2 million for 2013, $1.1 million for 2014 and $0.6 million for 2015.

    Amortization of programming rights

 
  Three months ended
March 31,
 
 
  2011   2012  
 
  (in thousands,
except percentages)

 

CTC Network

  $ (52,611 ) $ (53,538 )

Change period-to-period

        1.8 %

Domashny Network

    (9,914 )   (12,752 )

Change period-to-period

        28.6 %

Peretz Network

    (8,114 )   (7,499 )

Change period-to-period

        (7.6 )%

CIS Group

    (1,850 )   (2,995 )

Change period-to-period

        61.9 %

Eliminations and other

    1,751     1,025  
           

Total

  $ (70,738 ) $ (75,759 )
           

Change period-to-period

          7.1 %

% of total operating revenues

    42.7 %   39.6 %

        Networks.    The amortization of programming rights is our most significant expense at the Networks level. Amortization of programming rights for the CTC and Peretz Network segments, as a percentage of total operating revenues, decreased from 48.5% to 42.9% and from 64.0% to 47.8%, respectively, when comparing the three months ended March 31, 2011 and 2012. At the CTC Network, the decrease was primarily due to increased sublicensing revenues in the first quarter of 2012 compared with the same period of 2011, and underperformance of certain programming in first quarter of 2011 resulting in additional programming charges recorded in Q1 2011 (described below). At the Peretz Network, the decrease primarily reflected increased advertising revenues. Amortization of programming rights for the Domashny Network segment, as a percentage of its total operating revenues, increased from 50.2% to 55.7% when comparing the three months ended March 31, 2011 and 2012, primarily due to a relatively more expensive programming mix.

        The Company amortizes programming based on expected revenue generation patterns, based on the proportion that current estimated revenues bear to the estimated remaining total lifetime revenues. If the initial airing of content allowed by a license is expected to provide more value than subsequent airings, the Company applies 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 content that is expected to be aired only once, the entire cost is recognized as an expense on the first run. These estimates are periodically reviewed and adjustments, if any, will result in changes to programming amortization rates. To the extent that the revenues the Company expects to earn from broadcasting a program are lower than the book value, the program rights are written down to their net realizable value by way of recording an additional amortization charge. During the three months ended March 31, 2011 and 2012, based on recurring reviews of revenue pattern for the programming library, we recognized additional charges on programming rights of $8.6 million and $3.5 million, respectively. These amounts include CTC Network's charges of $7.3 million and $2.0 million, respectively, for the periods under review ended March 31, 2011 and 2012.

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Table of Contents

        Our estimates of future advertising and other revenues, the performance of our channels and our future broadcasting schedules have a significant impact on the value of our program rights and the annual programming amortization charge recorded in the Consolidated Statement of Operations.

        CIS Group.    The amortization of programming rights for the CIS Group primarily consists of the amortization of in-house programming and acquired programming rights by the Channel 31 Group, including content provided by CTC Network. Amortization of programming rights for the CIS Group segment, as a percentage of the segment's total operating revenues, increased from 60.1% to 69.5% when comparing the three months ended March 31, 2011 and 2012, due to the more expensive programming mix.

    Amortization of sublicensing rights and own production cost

 
  Three months
ended March 31,
 
 
  2011   2012  
 
  (in thousands,
except percentages)

 

CTC Network

  $ (426 ) $ (2,735 )

Change period-to-period

        542.0 %

Production Group

    (1,748 )   (5,863 )

Change period-to-period

        235.4 %

Eliminations and other

    1,860     5,863  
           

Total

  $ (314 ) $ (2,735 )
           

Change period-to-period

          771.0 %

% of total operating revenues

    0.2 %   1.4 %

        Own production cost represents the cost of internally produced programming licensed to third parties as well as sold to other segments in our group.

        CTC Network.    The increase in the amortization of sublicensing rights and own production cost at the CTC Network level when comparing the three periods under review was mainly due to increased sales of certain programming to third parties in Ukraine.

        Production Group.    Direct production costs for the Production Group, which consists mainly of production staff salaries, compensation to actors and other direct costs associated with programming sold to our Networks, are classified within amortization of sublicensing rights and own production cost. These expenses are eliminated in consolidation.

        Eliminations and other.    Intercompany expenses consist primarily of programming rights sold by our Production Group to our Networks.

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Table of Contents

    Depreciation and amortization expense (exclusive of amortization of programming rights and sublicensing rights)

 
  Three months ended
March 31,
 
 
  2011   2012  
 
  (in thousands,
except percentages)

 

CTC Network

  $ (571 ) $ (1,429 )

Change period-to-period

        150.3 %

Domashny Network

    (224 )   (359 )

Change period-to-period

        60.3 %

Peretz Network

    (744 )   (776 )

Change period-to-period

        4.3 %

CTC Television Station Group

    (551 )   (495 )

Change period-to-period

        (10.2 )%

Domashny Television Station Group

    (427 )   (711 )

Change period-to-period

        66.5 %

Peretz Television Group

    (1,164 )   (1,211 )

Change period-to-period

        4.0 %

CIS Group

    (152 )   (117 )

Change period-to-period

        (23.0 )%

Production Group

    (23 )   (7 )

Change period-to-period

        (69.60 )%

Eliminations and other

    (80 )   (52 )
           

Total

  $ (3,936 ) $ (5,157 )
           

Change period-to-period

          31.0 %

% of total operating revenues

    2.4 %   2.7 %

        Our depreciation and amortization (exclusive of amortization of programming rights and sublicensing rights) relates to the depreciation of our property and equipment, mainly broadcasting equipment, transmitters, buildings, computer hardware and office furniture, and the amortization of our intangible assets other than programming rights, sublicensing rights and own production costs, principally network affiliation agreements and cable network connections.

        Networks.    At the Network level, the depreciation of broadcasting equipment, network affiliation agreements, computer hardware and office furniture represents the principal component of this expense. When comparing the three- month periods under review, the increase in depreciation and amortization is due to the launch of the new digital broadcasting complex in July 2011.

        Television Station Groups.    We have entered into contracts with Mostelecom to secure the right of the CTC, Domashny and Peretz Moscow stations to be connected by cable to certain households in Moscow. These contracts do not, however, grant us the right to be connected to all households in Moscow for all of our Networks. We continue to evaluate, from a cost-benefit analysis, whether to enter into additional contracts with Mostelecom for other households. Based on our analysis of the terms of these agreements with Mostelecom, we will amortize these cable network connections through 2015.

        CIS Group.    Depreciation and amortization expenses of the CIS Group mainly consisted of depreciation of broadcasting, studio and office equipment and amortization of office software.

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Foreign currency gains (losses)

 
  Three months ended
March 31,
 
 
  2011   2012  
 
  (in thousands,
except percentages)

 

Foreign currency (losses) gains

  $ 1,133   $ (1,404 )

        The functional currency of our Russian subsidiaries is the ruble, and the functional currency of our Channel 31 Group is the Kazakh tenge. Given that substantially all of our revenues are generated in rubles, we face exchange rate risk relating to payments that we must make in currencies other than the ruble. We generally pay for non-Russian produced programming in US dollars.

        In the three months ended March 31, 2011 and 2012, the Russian ruble appreciated approximately 7% and 9%, respectively, against the US dollar. In the three months ended March 31, 2011, our foreign currency gain primarily represented the impact of ruble appreciation on our dollar-denominated liabilities, partially offset by the impact of ruble appreciation on our dollar-denominated assets. In the three months ended March 31, 2012, our foreign currency loss primarily related to losses from our forward contracts, partially offset by the impact of ruble appreciation on our dollar-denominated liabilities.

        In first quarter 2012, we entered into foreign currency forward contracts for approximately $91.1 million to reduce a portion of our foreign exchange risk related to US-dollar denominated payments. In the first quarter of 2012, we recognized $2.1 million of loss resulting from changes in the fair value of these contracts. See also "Item 1. Financial Statements—Note 10, Commitments and Contingencies".

    Interest income

 
  Three months ended
March 31,
 
 
  2011   2012  
 
  (in thousands,
except percentages)

 

Interest income

  $ 1,486   $ 2,129  

        Interest income for the three- month periods under review primarily represents interest earned on our cash balances and short-term investments. See "Item 1. Financial Statements—Note 4, Cash and cash equivalents and short-term investments; Bank overdraft".

    Income tax expense

 
  Three months ended
March 31,
 
 
  2011   2012  
 
  (in thousands,
except percentages)

 

Income tax expense

  $ (14,903 ) $ (17,271 )

        Our effective income tax rate was 39% and 34% for the three months ended March 31, 2011 and 2012, respectively. The decrease in effective tax rate when comparing the three- month periods ended March 31, 2011 and 2012 was primarily due to the decreases, as a percentage of consolidated income before tax, in stock-based compensation expense, and the recognition of certain foreign tax credits that will be deducted from our US income tax.

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    Income attributable to noncontrolling interest

 
  Three months ended
March 31,
 
 
  2011   2012  
 
  (in thousands,
except percentages)

 

Income attributable to noncontrolling interest

  $ (902 ) $ (990 )

        Income attributable to noncontrolling interest represents the share of our net income attributable to each of our consolidated owned-and-operated stations that is not wholly owned, as well as of the Channel 31 Group and our broadcasting group in Moldova. In the three months ended March 31, 2011 and 2012, income attributable to noncontrolling interest mostly related to income in the CIS Group and to our consolidated owned-and-operated stations in the CTC and Domashy Television Station Groups.

    Other comprehensive income attributable to controlling interest

 
  Three months ended
March 31,
 
 
  2011   2012  
 
  (in thousands,
except percentages)

 

Other comprehensive income

  $ 57,897   $ 69,207  

        The functional currency of our Russian-domiciled subsidiaries is the Russian ruble, and the functional currency of our Channel 31 Group is the Kazakh tenge. As a result, the financial statements of these subsidiaries were translated into US dollars using the current rate method. Other comprehensive loss in the three months ended March 31, 2011 and 2012 primarily represents the income relating to these translations due to appreciation of the Russian ruble against the US dollar.

Consolidated Financial Position—Significant Changes in our Consolidated Balance Sheets as of December 31, 2011 Compared to March 31, 2012

    Trade accounts receivable, net of allowance for doubtful accounts

        Our accounts receivable increased from $21.8 million to $36.2 million from December 31, 2011 to March 31, 2012, due to higher sublicensing revenues in the first quarter of 2012 compared to the fourth quarter of 2011, and seasonally higher balances of receivables from advertising at March 31.

    Short-term investments

        As of December 31, 2011 and March 31, 2012, short-term investments represented cash deposits placed in Russian banks with maturity in the range from three to six months.

    Short-term and long-term programming rights

        The increase in programming rights of $22.4 million from December 31, 2011 to March 31, 2012 was primarily due to the appreciation of the Russian ruble against the US dollar, and due to the net effect of acquisition of programming and amortization.

Goodwill and Intangible assets

        Goodwill and Intangible assets increased from December 31, 2011 to March 31, 2012 by $16.1 million and $16.3 million, respectively, primarily due to the appreciation of the Russian ruble against the US dollar.

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    Taxes payable

        Our taxes payable decreased from $31.9 million to $18.9 million from December 31, 2011 to March 31, 2012, primarily due to decrease in Income tax and VAT payable as the result of seasonally lower revenues in the first quarter of 2012 compared with the fourth quarter of 2011.

Liquidity and Capital Resources

        Our sources of capital are mostly represented by cash flows from operations. We believe that our operating cash flow, cash on hand, and available short-term and long-term capital resources are sufficient to fund our working capital requirements, capital expenditures and programming commitments, income tax obligations, anticipated dividends to our shareholders and any contemplated acquisitions.

        As of March 31, 2012, we had $30.7 million in cash and cash equivalents, of which approximately 60% was held in US dollar-denominated accounts. In addition, as of March 31, 2012, we had $98.8 million in deposits with maturities ranging from three to six months, of which approximately 11% was held in US dollar-denominated accounts. In October 2011, we signed a Ruble-denominated overdraft agreement with Alfa Bank bearing annual interest at 7.2% with a credit limit of approximately $34.0 million. As of March 31, 2012, we had an overdraft position of $18.5 million that is presented as a current liability separately on our balance sheet.

        We believe that our current cash on hand, along with cash from operations, will provide sufficient capital to fund our operations for at least the next 12 months. We can not assure you, however, that the assumed levels of revenues and expenses underlying this projection will prove to be accurate.

        We continually assess the counterparties and instruments we use to hold our cash and cash equivalents, with a focus on preservation of capital and liquidity. Based on information currently available, we do not believe that we are at risk of default by our counterparties.

        On April 27, 2012, our Board declared a dividend of $0.13 per outstanding share of common stock, or approximately $20.6 million in total. The record date is June 1, 2012 and the payment date is on or about June 20, 2012. Our Board currently intends to pay further dividends in each of the following quarters of 2012. Although it is the Board's current intention to declare and pay further dividends in the remaining quarters of 2012, there can be no assurance that such additional dividends will in fact be declared and paid. Any such declaration is at the discretion of the Board and will depend upon factors such as our earnings, financial position and cash requirements.

    Cash flows

        Below is a summary of our cash flows during the periods indicated:

 
  Three months ended
March 31,
 
 
  2011   2012  
 
  (in thousands)
 

Net cash provided by operating activities:

  $ 12,280   $ 8,850  

Net cash provided by investing activities:

    26,840     23,294  

Net cash used in financing activities:

    (21,400 )   (15,783 )

        Cash flows from operating activities decreased by $3.4 million as a result of net effect of increased advertising sales, higher cash spend on acquisition of programming and timing effect of increased accounts receivable. Substantially all of our cash flows from operating activities are derived from advertising revenues. Our advertising revenues were $163.1 and $180.7 million, respectively, for the three- month periods ended March 31, 2011 and 2012. Our most significant use of cash in relation to operating activities throughout the periods under review was primarily attributable to the acquisition of

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programming and sublicensing rights. Our cash expenditures for the acquisition of programming and sublicensing rights were $77.4 and $85.2 million, respectively, for the three- month periods ended March 31, 2011 and 2012. The increase in cash paid for programming rights in the first quarter of 2012 was primarily due to investments in Russian-produced and foreign programming that will be used in 2012 and thereafter. Amortization of programming rights, sublicensing rights and own production cost amounted to $71.1 and $78.5 million, respectively, for the three- month periods ended March 31, 2011 and 2012.

        Cash used in investing activities includes cash used for the acquisition of property, equipment and intangible assets, purchases of new broadcasting stations, and investments in or receipts from cash deposits. In the three-month period ended March 31, 2011, our cash provided by investing activities primarily represented net cash received from deposits in the amount of $38.6 million. Also, in the first quarter of 2011, we paid $3.2 million in 2010 earnouts related to our acquisitions of Costafilm, and $4.5 million related to our acquisition of a regional station in Tomsk. In the three-month period ended March 31, 2012, our cash provided by investing activities primarily represented net cash received from deposits in the amount of $26.3 million. In addition, in the first quarter of 2012, we spent $3.0 million for capital expenditures, mainly on purchases of cable connections and leasehold improvements for new office facilities.

        In 2012, we expect capital expenditures to be at the level in 2011 as we continue to upgrade our broadcasting equipment and software and to connect to additional households pursuant to our contracts with Mostelecom.

        Cash used in financing activities includes repayments of borrowings, proceeds from exercises of stock options, proceeds from overdraft and payments of dividends. In the three-month period ended March 31, 2011, cash used in financing activities included payment of dividends in the amount of $25.1 million to our stockholders and $0.2 million in dividends to minority shareholders of our owned-and-operated stations. Also, in the first quarter of 2011 we received $3.9 million in proceeds from the exercise of stock options. In the three-month period ended March 31, 2012, we paid dividends in the amount of $20.6 million to our stockholders and $0.5 million in dividends to minority shareholders of our owned-and-operated stations. Also, in the first quarter of 2012 we received $4.6 million in proceeds from the exercise of stock options by a former CEO.

    Off-balance sheet transactions

        From time to time, we issue guarantees in favor of banks that make loans to production companies that produce Russian programming for us. Currently, there are no such guarantees in place.

    Purchase commitments

        The table below summarizes information with respect to our obligations as of March 31, 2012 (in thousands of US dollars):

 
  Total   Through
2012
  Through
2013
  Through
2014
  Through
2015
  Through
2016
 
 
  (in thousands)
 

Acquisition of programming rights

  $ 265,477   $ 162,641   $ 74,488   $ 28,348   $   $  

Transmission and satellite fees

  $ 105,582   $ 15,563   $ 20,994   $ 21,904   $ 22,988   $ 24,133  

Leasehold obligations

  $ 26,915   $ 4,023   $ 5,411   $ 5,598   $ 5,820   $ 6,063  

Cable connections

  $ 10,016   $ 3,553   $ 1,720   $ 1,581   $ 1,581   $ 1,581  

Acquisition of format rights

  $ 2,700   $ 2,700   $   $   $   $  

Payments for intellectual rights

  $ 3,825   $ 734   $ 776   $ 774   $ 772   $ 769  

Network affiliation agreements

  $ 2,531   $ 663   $ 596   $ 570   $ 524   $ 178  

Other contractual obligations

  $ 1,713   $ 708   $ 1,005   $   $   $  

Total(1)

  $ 418,759   $ 190,585   $ 104,990   $ 58,775   $ 31,685   $ 32,724  
                           

(1)
Accrued liabilities related to income taxes are excluded from this table because we cannot make a reasonably reliable estimate of the period of cash settlement with the taxing authorities.

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        We are a party to lease agreements for our headquarters facilities in Moscow. We recognized rental expenses related to these leases of approximately $0.9 and $1.6 million in the first quarter of 2011 and 2012, respectively, and expect to recognize approximately $44.6 million for 2012-2021 (at the US dollar/ruble exchange rate as of March 31, 2012). In addition to the lease payments described above, we are also required to pay technical costs arising from maintenance of the premises and some supplementary municipal services.

    Recently Issued Accounting Pronouncements

        We have considered all recently issued accounting pronouncements and disclosed the ones that could be material to our financial statements in the notes to our consolidated financial statements. See "Item 1. Financial Statements—Note 2, Basis of Presentation and Summary of Significant Accounting Policies."

Item 3.    Quantitative and Qualitative Disclosures about Market Risk

    Foreign currency exchange risk

        Because our reporting currency is the US dollar and the functional currency of our principal operating subsidiaries is the Russian ruble, our reported results of operations are impacted by fluctuations in the exchange rate between the US dollar and the Russian ruble. Additionally, given that substantially all of our revenues are generated in rubles, we face exchange rate risk relating to operating expenses that we incur in currencies other than the ruble, primarily US dollar payments for non-Russian produced programming. For the three months ended March 31, 2012, if the value of the ruble compared to the US dollar had been, on average, 10% lower than it actually was, we would have reported decreases in total operating revenues and total operating expenses of approximately $16.2 million and $9.4 million, respectively. The total operating expenses we reported would have decreased in this hypothetical scenario because most of our operating expenses are ruble-denominated even though our reporting currency is the US dollar.

        The prevailing exchange rate as of April 30, 2012 was RUR 29.36 to $1.00.

        From time to time we enter into foreign exchange hedging arrangements in relation to a portion of our payments denominated in US dollars. In first quarter of 2012, we entered into foreign exchange forward contracts for approximately $91.1 million to reduce a portion of our foreign exchange risk related to US-dollar denominated payments. See "Item 1. Financial Statements and Supplementary Data—Note 10, Commitments and Contingencies—Foreign exchange forward arrangements".

Item 4.    Controls and Procedures

    Evaluation of disclosure controls and procedures

        Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 (Exchange Act) Rules 13a-15(e) or 15d-15(e)) as of March 31, 2012. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2012, our acting Chief Executive Officer and our Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective.

    Changes in internal control over financial reporting

        During the three months ended March 31, 2012, there were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.    Legal Proceedings

        We are not currently party to any legal proceedings, the outcome of which would reasonably be expected to have a material adverse effect on our financial results or operations.

Item 1A.    Risk Factors

        Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K filed with the SEC on February 28, 2012 before purchasing our common stock. The risks and uncertainties described below are not the only ones that we face. Additional risks and uncertainties of which we are unaware, or that we currently deem immaterial, may also become important factors that affect us. There may be risks that a particular investor views differently from us, and our analysis of the risks we face might be wrong. If any of the risks that we face actually occur, our business, financial condition and operating results could be materially adversely affected and could differ materially from any possible results suggested by any forward-looking statements that we have made or might make. In such case, the trading price of our common stock could decline, and you could lose some or all of your investment. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Risks relating to our business and industry

Changes to the Russian law "On Advertising" have fundamentally changed the way in which we sell advertising, and which could adversely affect our business, financial condition and results of operations.

        Effective January 2011, an amendment to the Federal Law "On Advertising" came into force that prohibits television broadcasters from signing agency agreements with media sales houses that hold a television advertising market share greater than 35%. The Russian Federal Anti-monopoly Service has the authority to seek the termination of agreements that allegedly violate these provisions. Video International, the media sales house that historically sold all of our national advertising and substantially all of our regional advertising, in previous years controlled more than 35% of the Russian television advertising market. As a result of this amendment, the structure of the Russian television advertising market has changed.

        In response to these developments, in September 2010 we established our own sales house, Closed Joint Stock Company "EvereST-S", a wholly owned subsidiary of CTC Network. Our sales house now acts as the exclusive advertising sales agent for all of our Russian networks and Television Station Groups in respect of Moscow-based clients.

        In order to benefit from our long-term cooperation with Video International and to successfully support our own advertising sales we have entered into an agreement with Video International to govern our current cooperation, for licensing of specialized advertising software by Video International to our internal sales house, as well as the provision by Video International of related software maintenance and analytical support and consulting services. In addition, a number of our owned-and-operated regional stations have also signed definitive agency agreements with local subsidiaries of Video International with respect to advertising sales to local clients. We understand that Telcrest Investments Limited, one of our principal stockholders, has beneficial owners with indirect significant minority equity interests in Video International. Telcrest became one of our principal stockholders subsequent to the negotiations of our current principal agreement with Video International. We believe that the terms of our contract with Video International are generally consistent with other existing arrangements between Video International and third parties based the

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same scope of services. See "Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations—Our Agreements with Video International."

        In order to support our sales function, we have substantially increased the size of our internal sales force and have implemented a range of new functions and systems. Although the new sales house has been operational for more than one year and has proved to be effective to date, we may be unsuccessful in maintaining these functions, and may be unable to continue to generate the same advertising volumes and revenues or margins under the current model of advertising sales as we did in the past. If we encounter difficulties in maintaining our sales house function, our advertising sales and revenues could suffer, and as a consequence our business, financial condition and results of operations could be materially adversely affected.

A reduction in our audience shares and ratings would likely result in a reduction in our advertising revenues.

        The level of advertising revenues that we receive is directly tied to our audience shares and ratings. If our audience shares or ratings were to fall as a result, for example, of competitive pressures, underperformance of key programs, failure to renew licenses, or a change in the method of measuring television audiences, this would likely result in a decrease in our advertising revenues, which could be material. Our ability to attract and retain viewers depends primarily on our success in offering programming that appeals to our target audiences. Russian viewer preferences have been changing in recent years, with increasing demand for programming produced in Russia. There is currently a relatively limited supply of Russian-produced programming and strong competition among Russian networks and channels for such programming and Russian production talent, as well as for popular foreign programming.

        In particular, from time to time we air one or two series during primetime that contribute disproportionately to our overall audience share, resulting in an overall audience share that we may not be able to sustain once that series is discontinued or loses popularity. Moreover, because we continue to rely on third-party production companies for a large portion of our programming and our programming library is not as extensive as those of some of our competitors, we may be unable to quickly substitute new programming for underperforming programming. For example, in 2011, the target audience share of the CTC channel was below the anticipated audience share and below the audience share for 2010, due to increased competition from other television channels and the relative underperformance of series launched during primetime. This decrease in audience share led to a lower than initially anticipated forecast for growth in advertising sales for 2011. In addition, in the third quarter of 2011 we re-launched our DTV network under the new brand, "Peretz". If this rebranding is unsuccessful, the audience share of this channel could be adversely affected.

        If we are unable to produce or secure a steady supply of high-quality programming, particularly in the key timeslots, or if we fail to anticipate, identify or react appropriately to changes in Russian viewer tastes by providing appropriate programming, our overall audience shares could be negatively affected, which would adversely affect our advertising revenues. Moreover, if any of the programming we produce, commission or license does not achieve the audience share levels we anticipate, we may be required to write-off all or a portion of the carrying cost of such programming, and we could be forced to broadcast more expensive programming to maintain audience share, either of which could have a material adverse impact on our results of operations.

We derive almost all of our revenues from the sale of advertising, which is sensitive to broader economic conditions. Our revenues may substantially decrease if the economic environment deteriorates in Russia or other CIS countries in which we operate.

        We generate substantially all of our revenues from advertising. In general, expenditures by advertisers tend to be cyclical, reflecting overall economic conditions and buying patterns. Since the

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introduction of commercial television advertising in Russia following the fall of the Soviet Union, advertising spending has fluctuated substantially, generally increasing during periods of economic growth and decreasing during downturns.

        Beginning in the second half of 2008, Russia, like many other countries, experienced economic instability, characterized by a steep decline in the value of shares traded on its stock exchanges, devaluation of its currency, capital flight and a decline in gross domestic product. Additionally, because Russia produces and exports large amounts of oil and gas, its economy is particularly vulnerable to fluctuations in the price of oil and gas in the world market. Recent decreases in international oil prices have adversely affected and may continue to adversely affect the Russian economy. Total television advertising spending in Russia was adversely affected by this economic instability and, as a result, our operating results for 2009 were materially adversely affected. Like Russia, Kazakhstan has also experienced economic instability.

        In the second half of 2011, some large advertisers reduced their initially planned advertising expenditures for 2011. Though overall Russian television advertising spending increased in 2011 compared to 2010, and we expect that the advertising market in 2012 will be higher than in 2011, we anticipate that such growth will be moderate. If overall spending by these companies in the Russian television advertising market falls substantially in 2012 or future periods, our advertising revenues may be significantly reduced, materially adversely affecting our results of operations.

Changes in the method of measuring television audiences have at times in the past resulted, and may again in the future result, in decreases in our audience share and ratings.

        The system of audience measurement in Russia, currently run by TNS Russia, has evolved as the advertising market has matured and in response to changing Russian demographics.

        TNS Russia currently weights the panel of measured cities based on broadcasters' technical penetration in a group of 121 cities. Our audience share could be negatively affected if we were to lose an affiliate in one of the cities in that group, or if our technical penetration in that group of cities were to be lower than our average technical penetration.

        In 2010, the size of the panel itself was increased from 65 to 72 cities. In addition, in 2010 TNS Russia made changes to the relative weighting of the cities in the panel, which became effective in 2011. This re-weighting resulted in the impairment of some of our affected broadcasting licenses on a stand-alone basis, recognized in 2009. See "—A significant portion of our total assets are intangible assets with indefinite lives that we do not amortize. If events or changes in circumstances reduce the fair value of those assets, we may be required to record impairment losses that could materially adversely impact our net income."

        In June 2011, TNS Russia announced the increase in the size of the panel from 72 to 74 cities, which will result in the re-weighting of other cities in the panel. These changes are effective from January 1, 2013. We do not expect this change to have a material adverse effect on our operations.

        When changes to the system of audience measurement occur, we attempt to take steps when possible in respect of our programming and distribution to counteract the effects of such changes. We cannot assure you that these steps will be adequate or effective, or that any further changes in the measurement system will not result in further decreases in our audience shares and, as a result, a material decrease in our advertising revenues.

We may face additional expenditures and increased competition in connection with the planned transition from analog to digital broadcasting in Russia and Kazakhstan.

        In late 2009, the Russian government announced plans to introduce digital broadcasting throughout Russia by 2015. Kazakh authorities also initiated digitalization plans. The specific terms of

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the transition are not yet fully known. We have begun the process of tendering for digital broadcasting licenses in Russia, but the timing of the results of this process is not known.

        Depending on the terms of the transition, we may face competition from other parties for digital frequencies or other access, and we may also face additional costs in connection with requirements for new equipment and added staffing. We may also face increased competition from other broadcasters that may make the transition to digital broadcasting more quickly or efficiently than we do, or that are more successful in taking advantage of the new digital platform to introduce a better programming offering.

A significant portion of our total assets are intangible assets with indefinite lives that we do not amortize. If events or changes in circumstances reduce the fair value of those assets, we may be required to record impairment losses that could materially adversely impact our net income.

        We have intangible assets recorded on our consolidated balance sheet, such as broadcasting licenses, that have indefinite lives and represent a significant portion of our total assets. Because these assets have indefinite lives, we do not amortize them but instead perform impairment tests on them annually or when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. If we determine that our estimate of the current value of an asset is below the recorded value of that asset on our balance sheet, we record an impairment loss for the difference.

        The economic slowdown experienced in the second half of 2011, in both the European and global economies, has resulted in reduced advertiser demand. The instability in the macroeconomic environment adversely affected our expectation for the total advertising market in the medium-term, and in turn, affected the fair values of certain of the our assets as of December 31, 2011. In 2011, we recorded non-cash impairment losses totaling $106.4 million related to certain intangible assets and goodwill. We consider all current information in respect of determining the need for, or calculating, any impairment loss; however, future changes in events or circumstances, such as a continuation or worsening of the current economic instability, decreases in our audience shares or ratings, increased competition from cable providers or others, or changes in the audience measurement system, could result in decreases in the fair value of our long-lived assets and require us to record additional impairment losses that could have a material adverse impact on our net income. See "Financial Statements—Note 2, Basis of Presentation and Summary of Significant Accounting Policies—Goodwill and Indefinite-Lived Intangible Assets Impairment Tests". In addition, the Russian government has announced plans to introduce digital broadcasting in various stages throughout Russia. The specific terms of the transition have not yet been fully determined. The transition to digital broadcasting also could adversely impact our operations or the value of our broadcasting licenses and goodwill.

Recent declines in the value of the Russian ruble against the US dollar have negatively impacted our reported revenues and operating results. If the ruble depreciates further against the US dollar, our revenues and our operating results, both as reported in US dollars, will be adversely affected.

        Although our reporting currency is the US dollar, we generate almost all of our revenues through the sale of advertising, which in Russia is sold primarily in rubles. The ruble is also the functional currency of our principal operating subsidiaries. As a result, our reported revenues and results of operations are impacted by fluctuations in the exchange rate between the US dollar and the Russian ruble. Additionally, we face the exchange rate risk relating to payments that we must make in currencies other than the ruble. We generally pay for non-Russian produced programming in US dollars.

        In 2011, the Russian ruble depreciated against the US dollar by 5.3%. In the first quarter of 2012, the Russian ruble appreciated against the US dollar by 8.9%, but was on average 3% lower than the average value of the Russian ruble against the US dollar during the first quarter of 2011. If the Russian

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ruble depreciates against the US dollar, our revenues and operating results for 2012 or future periods, as reported in US dollars, will be adversely affected.

Restrictions on direct or indirect foreign ownership of Russian television companies could limit our ability to grow our business through acquisitions.

        In May 2008, the law "On foreign investments in economic entities that have strategic importance for defense and security of the state" (the "Ownership Law") came into effect in Russia. The Ownership Law imposes restrictions on direct or indirect non-Russian ownership in "strategically important" industries, including television broadcasters that broadcast to more than 50% of the population of a relevant constituent entity of the Russian Federation. Among other things, the Ownership Law requires prior approval from the Commission for Control Over Foreign Investments, and potentially from the Federal Security Bureau, for the acquisition by a non-Russian entity of an interest above a certain ownership threshold in a company operating in a strategically significant sector. We understand that such approval generally requires at least six months.

        The Ownership Law contains a "grandfather" provision with respect to pre-existing holdings in affected companies that requires notification of such pre-existing holdings but does not have an approval requirement. We therefore believe that neither CTC Media's pre-existing ownership of its Russian operating subsidiaries, nor the pre-existing ownership of shares of CTC Media by non-Russian stockholders, violates the Ownership Law or requires any approval. We do believe, however, that we will be required to obtain approval under the Ownership Law for any acquisition of an affiliate television station that broadcasts to more than 50% of the population of a relevant constituent entity of the Russian Federation, or any acquisition of another Russian network. Such approval process is likely to be time-consuming and may, in any event, ultimately result in a rejection of a proposed transaction. As a result, we may lose out on acquisition opportunities to competitors, and our ability to grow our business through acquisitions in Russia may be limited. Even if the authorities approve such a transaction, they may do so subject to conditions regarding the operation of the company—including, for example, the composition of its management—that may limit our effective control and operational flexibility.

Restrictions on foreign involvement in the television business in Russia could potentially be amended or interpreted in such a way as to result in our loss of necessary licenses or to require us to divest majority control of our Russian operating subsidiaries.

        In addition to the Ownership Law discussed above, the law "On Mass Media" (the "Mass Media Law") also restricts direct (but not indirect) foreign involvement in Russian television businesses. Following adoption of these provisions in 2002, we implemented a restructuring plan pursuant to which we created a holding company structure and reduced CTC Media's direct ownership in the CTC Network and each of our owned-and-operated stations below 50%. CTC Media's direct ownership of Domashny and the Peretz Group, which were acquired subsequent to the adoption of these restrictions, is also below 50%. This restructuring was completed prior to the August 2002 deadline with respect to all entities in our group, other than our CTC-Moscow station; the restructuring of the ownership of that station was completed in December 2002. To date, no Russian governmental authorities have taken any action against our CTC-Moscow station for its failure to comply with the restrictions on foreign legal ownership by the deadline. Because CTC Media itself does not broadcast or distribute television programming in the Russian Federation, we believe that CTC Media itself does not fall under the definition of a "founder of a television or video program" for purposes of the Mass Media Law, and that CTC Media does not violate the foreign involvement restrictions of that law.

        The Mass Media Law could in the future be interpreted by Russian governmental authorities or a court to extend to, and to prohibit, indirect foreign ownership of or control over Russian broadcasters of television or video programs. In addition, the Ownership Law described above could be implemented

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or interpreted to apply in some respects to foreign holdings existing at the time of adoption of the law. In either case, it is possible that Russian governmental authorities could suspend or revoke broadcasting licenses or permits held by our networks and our owned-and-operated stations, or fail to renew any such licenses. If any law were to be adopted or interpreted to restrict indirect foreign ownership and control of Russian television broadcasters, and did not contain a "grandfather" provision with respect to existing holdings, CTC Media could be obliged to restructure its group in order to comply with such requirements, including by divesting a controlling stake in our networks and our owned-and-operated stations. If we failed to comply in a timely manner, the authorities could suspend, revoke or fail to renew broadcasting licenses or permits held by our networks or our owned-and-operated stations, or could take other actions against us that could limit our ability to operate.

Restrictions on foreign involvement in the television business in Kazakhstan could be amended or interpreted in such a way as to result in our loss of necessary licenses or to require us to divest control of our Kazakh operating subsidiaries.

        The Mass Media Law in Kazakhstan restricts direct and indirect foreign ownership of any Kazakh television broadcaster to no more than 20%. In 2008, we acquired a 20% interest in the Kazakh television broadcast company Channel 31, and established two subsidiaries that provide the programming content and advertising sales functions to Channel 31 on an exclusive basis (together, the "Channel 31 Group"). Together, these interests provide us with a 60% economic interest in the Channel 31 Group as a whole. If the existing 20% limit were to be interpreted to restrict effective or economic control, rather than just direct ownership, or if the law were to be changed or interpreted to impose further restrictions or limitations on foreign ownership of Kazakh television broadcasters, we could be obliged to restructure this group in order to comply with such requirements or could be required to divest all or a portion of our interest in the Channel 31 Group. If we failed to comply in a timely manner, the authorities could suspend or revoke Channel 31's broadcasting licenses or could take other actions that could limit our ability to operate the Channel 31 Group. The book value of Channel 31's broadcasting license as of March 31, 2012 was $12.6 million.

We may encounter difficulties integrating acquired businesses, and if we fail to identify additional suitable targets our growth may be impeded.

        As part of our growth strategy, we intend to continue to evaluate potential acquisitions that we believe are commercially attractive. While acquisitions represent an important component of our growth strategy, the integration of new businesses poses significant risks to our existing operations, including:

    additional and significant demands placed on our senior management, who are also responsible for managing our existing operations;

    increased overall operating complexity of our business, requiring greater personnel and other resources;

    difficulties of expanding beyond our core expertise;

    significant initial cash expenditures to acquire and integrate new businesses;

    contingent liabilities associated with acquired businesses; and

    incurrence of debt to finance acquisitions and high debt service costs related thereto.

        Additionally, the integration of new businesses may be difficult for a variety of reasons, including differing cultures or management styles, legal restrictions in the target's jurisdiction, poor target records or internal controls and an inability to establish control over cash flows. Furthermore, even if we are

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successful in integrating new businesses, expected synergies and cost savings may not materialize, resulting in lower than expected profit margins.

        As a US public company, we are subject to securities laws and regulations requiring that we file with the SEC audited historical financial statements for businesses we acquire that exceed certain materiality thresholds. Given the financial reporting practices in Russia and other CIS countries, such financial statements are often not readily available or are not capable of being audited to the standards required by US securities regulations. As a result, we may be prevented from pursuing acquisition opportunities that our competitors and other financial and strategic investors are able to pursue.

A change in Russian law further limiting the amount of advertising time permitted on television could materially adversely affect our results of operations.

        Current Russian law limits the amount of time that a broadcaster may devote to advertising to no more than 15% of any broadcasting hour. From time to time, there are discussions in the Russian government regarding imposing additional restrictions on television advertising, such as limiting the types of products that may be advertised, limiting product placements in programming, limiting the number of advertising breaks allowed in certain programs or requiring channels to devote more broadcast time to public service announcements. If legislation were introduced to further limit our ability to broadcast paid advertising or product placements, we cannot guarantee that increases in advertising prices, if any, or any other steps we would be able to take to mitigate the impact of such further limitation would be sufficient to compensate for the loss of advertising time.

If free-to-air television does not continue to constitute a significant advertising forum in Russia, our revenues could be materially reduced.

        We generate substantially all our revenues from the sale of television advertising in Russia, which constituted approximately half of all advertising expenditures in Russia in 2011, having increased from 25% in 1999. In the broader advertising market, television competes with various other advertising media, such as print, radio, internet and outdoor advertising. In addition, the television broadcasting industry is affected by rapid innovations in technology. The implementation of new technologies and the introduction of broadcasting distribution systems other than free-to-air broadcasting, such as direct-to-home cable and satellite distribution systems, the internet, video-on-demand, user-generated content sites and the availability of television programming on portable digital devices, are changing consumer behavior by increasing the number of entertainment choices available to the audience. While television continues to constitute the single largest component of all advertising spending in Russia, there can be no assurance that television will maintain its current position among advertising media. Increases in competition arising from the development of new forms of advertising media could have an adverse effect on our ability to maintain and develop our advertising revenues and, as a result, on our results of operations.

The loss of licenses, or the failure to comply with the terms of licenses, could have an adverse affect on our business.

        All broadcast television stations in Russia are required to have broadcast and other operating licenses, which generally have renewable terms of five years. Pursuant to new legislation that came into force in November 2011, the term of broadcast licenses will be extended to 10 years, and new licenses will cover both digital and analog broadcasting. Only a limited number of broadcasting licenses are available in each locality. In addition, Russian law could be interpreted as requiring cable television operators to have broadcast and other operating licenses for each of the channels or networks they transmit on their cable systems. Most of the independent cable television operators that currently carry our networks do not possess such licenses. The issuance of a license, as well as the terms and

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conditions of any license, are often subject to the exercise of broad discretion by governmental authorities.

        A broadcaster must conform its programming to the programming concept outlined in the broadcasting license. In particular, the broadcaster is obliged to ensure compliance of its programming with the declared genres of the channel and to maintain a required balance in the volume-genre ratio of broadcasted materials, both of which are prescribed in the license. Until recently, the broadcasting licenses of our affiliate stations also contained various restrictions, including requirements with respect to the minimum amount of locally produced programming that must be broadcasted.

        The broadcasting license of Channel 31 in Kazakhstan also contains various restrictions and obligations. Recently, the Kazakh government enacted a law that requires broadcasters to broadcast at least 50% of their programming in the Kazakh language during every six-hour slot.

        We may not always be in full compliance with license requirements. Also, our affiliates have not always been in full compliance with all the requirements of their licenses or obtained all the licenses necessary for broadcasting. If the terms of a license are not complied with, or if we violate applicable legislation or regulations, the license may be suspended or terminated (which decision may be appealed in court). If an affiliate were to broadcast without all the necessary licenses, broadcasting may be terminated and fines could be imposed.

        The loss of an existing broadcasting license, or the failure to obtain a broadcasting license in a new market, particularly in a significant market, could reduce or limit the coverage of our networks and result in a loss of audience share and a fall in ratings, which could materially adversely affect our advertising revenues and business.

The failure of our independent affiliates to comply with requirements in our network agreements that they broadcast our advertising creates potential for complaints from our advertising clients.

        We seek to enter into formal agreements with our independent affiliate stations governing various aspects of the broadcast of our network programming. These agreements generally require our affiliates to air most of our programming, including advertising during federal advertising slots. The majority of our independent affiliate stations have their own broadcasting licenses which entitle them to form their own broadcasting grid structured in accordance with their licenses as well as our network agreements.

        Some of these affiliates operate in small cities which are not included in the TNS Gallup panel. As a result, there is no regular TNS monitoring of the advertising they broadcast, and we cannot ensure that our affiliates are consistent in their compliance with the federal advertising provisions of our agreements. If an independent affiliate breaches its obligations under our network agreement, we may face complaints from our clients.

The loss of independent affiliates could result in a loss of audience shares.

        We seek to enter into formal agreements with our independent affiliate stations that govern various aspects of the broadcast of our network programming. These agreements generally provide each party with the right to terminate the agreement on 60 or 90 days' notice without penalty. In certain instances, particularly in smaller cities and towns and with local cable networks, our arrangements are governed by letters of understanding that provide us with only limited recourse in the event of a disagreement. If an independent affiliate in a larger market, particularly in a city where audiences are measured and in which we do not own and operate a station, were to terminate its agreement with us, sell itself to a competing network or lose the ability to broadcast our signal, it could result in a decrease in our audience share.

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We rely on third parties for the production of some of our original Russian programming, and our business could be adversely affected if we are unable to continue such relationships on acceptable terms.

        Although we produce a portion of our original programming in-house, we continue to rely on third-party production houses to produce some of our original programs. If we are unable to continue our close working relationships with the production houses we use or to develop new relationships, our ability to air premium new Russian content may be impeded, which would likely result in a loss of audience share and therefore a reduction in our share of the television advertising market.

We rely on third parties to provide us with re-transmission capabilities in certain locations, and our business would be adversely affected if such parties terminated or adversely changed the terms of those relationships.

        In certain locations, we depend on cable operators or other third parties to carry our signal. In Moscow, for example, television signals are transmitted from a central tower to roof antennas located on buildings throughout the city, and are then amplified for retransmission within the buildings. The original system, which was introduced in the 1960s, carried only six VHF channels. Mostelecom, the major local provider, upgraded a number of roof antenna systems from 1997 to 2004 to add capacity for a limited number of additional channels. We collaborated with Mostelecom in this project, paying an amount per additional household connected, in order to help ensure that our CTC Network has allocated access on Mostelecom's systems where capacity was increased.

        We have entered into contracts with Mostelecom to secure the rights of our CTC and Domashny Moscow stations to be connected by cable to additional households in Moscow. Peretz also has a number of agreements with Mostelecom for cable connections to households in Moscow. These contracts do not, however, grant us the right to be connected to all households in Moscow for all of our networks. We continue to evaluate, from a cost benefit analysis, whether to enter into additional contracts with Mostelecom regarding other households. A second cable operator carries our networks' signals to approximately 15% of the Moscow households covered by our networks' signals. We pay this cable operator an annual fee for transmission to these households. A cable system similar to that provided by Mostelecom is in place in St. Petersburg and is operated by the local provider; there we currently have no binding contractual right of access to the system.

        In April 2007, the Russian Ministry of Telecommunications requested evidence of the legal basis pursuant to which some cable television operators, including those carrying the signals of our networks, carry certain broadcasters' signals over their systems. As a result of this request, some of our cable television operators, including Mostelecom, which is the primary carrier of our networks' signals in Moscow, indicated that they might be required to begin charging us transmission fees for carrying our signals on their networks. We and representatives of other Russian broadcasters met with the Russian Ministry of Telecommunications in the second quarter of 2007 to understand the ramifications of this inquiry. It was agreed that the broadcasters and cable television operators should try to resolve this issue independently, without involvement of the Russian Ministry of Telecommunications, by the end of 2007. While discussions continue on resolving this matter, to date, no resolution has been reached and no further actions have been taken.

        If we were to be denied continued access to the cable systems that carry our networks' signals in Moscow or St. Petersburg, our technical penetration would be materially adversely affected which would, in turn, have a material adverse effect on our audience shares. Moreover, if we were required to pay transmission fees to these cable operators, our operating costs would be increased, possibly materially.

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We may not be able to compete successfully against other television free-to-air channels and networks that may have broader coverage, greater name recognition, larger market share, wider programming content or access to more funding than we do, or with newer niche channels or non-free-to-air channels offering competitive programming formats.

        The Russian television broadcasting business is highly competitive. Approximately 20 free-to air television channels account for approximately 98% of the television advertising market. The market also includes multiple non-free-to-air television channels. The free-to-air channels include five larger national channels, namely Channel One, Rossiya 1, NTV, CTC and TNT, and a number of smaller niche channels, including Domashny and Peretz. Our networks compete for audience share with other national television networks and channels and with local stations, as well as with niche broadcasters. We compete on the basis of both the actual and anticipated size of our audiences for specific time slots, as well as the demographic characteristics of our viewers.

        On a national level, CTC competes directly with other larger broadcast networks and channels, including Channel One and NTV, as well as with the smaller network TNT. Domashny competes for advertising revenues primarily with Rossiya 1 and TVC, and Peretz competes primarily with TV-3 and REN-TV, although they both also compete with the larger broadcast networks and channels for viewers within their target demographic groups. On a local level, our owned-and-operated stations compete with other stations for local advertising.

        Channel One and Rossiya 1 were established as state television channels during the Soviet period and they remain under Russian state control. As a result, we understand that these channels receive state benefits not generally available to private companies, including free signal transmission (in the case of Channel One), direct state budget subsidies (in the case of Rossiya 1) and preferences in licensing. Moreover, nearly every viewing household in Russia can receive the broadcast signals of Channel One and Rossiya 1, while only a more limited viewing audience can currently receive our network signals. The much broader coverage and name recognition of Channel One and Rossiya 1, coupled with programming geared toward a broader demographic group, help them to attract large audience shares. NTV, which is indirectly controlled by the state through Gazprom, the state-controlled energy company, also has a broader coverage than our networks, and we believe also benefits from free signal transmission. In 2011, Channel One had an average audience share of 16.9%, while Rossiya 1's was 15.5% and NTV's was 14.6%. CTC's average audience share in 2011 was 7.7%. We believe that the strong audience shares of Channel One, Rossiya 1 and NTV may give these broadcasters added leverage in negotiations with advertisers, advertising agencies and sales houses. Moreover, as we focus on entertainment programming, we are unable to compete with other broadcasters for audiences for news and sporting programs, some of which have among the highest audience shares and ratings in their time slots.

        In 2011 the Walt Disney Company acquired a 49% stake in the Russian 7TV channel, a part of UTH Russia holding. Disney Channel replaced the current branding and programming of 7TV and launched its free-to-air broadcasting in Russia using frequencies of 7TV effective December 31, 2011. The Disney channel focuses on family entertainment by combining Disney programming with original Russian TV shows. The launch of the Disney Channel in Russia resulted in increased competition and may result in a decline in CTC's younger audience.

        On June 1, 2011, Telcrest acquired 25.15% of our common stock from a former stockholder. We understand that the beneficial owners of Telcrest, including Bank Rossiya (which is not affiliated with Rossiya television channel), have investments in Russian media businesses, including through ownership interests in Channel One, REN-TV and Channel 5. Telcrest and Bank Rossiya may have interests different from, or in addition to, the interests of other stockholders of CTC Media. See also "—Our principal stockholders may have interests that are different from, or in addition to, the interests of other stockholders of CTC Media."

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        On April 17, 2012, President Medvedev signed an Order establishing a new Russian public channel that will commence broadcasting on January 1, 2013. This channel will be freely available alongside Channel One, Rossiya, NTV and others when digital broadcasting commences. The structure of this channel's management and staff is also unknown, as are its broadcasting policy, strategy, programming and brand name. We are currently unable to forecast the impact that this channel will have, if any, on our audience shares and ratings, and we cannot guarantee that it will not result in a decline in our audience shares and ratings.

        In addition to competing with larger free-to-air broadcasters, we compete with multiple niche free-to-air and non-free-to-air channels. During the last three years the audience shares of Russian niche free-to-air and non-free-to-air television have increased, which has had a negative impact on the audience shares of all larger free-to-air channels, including CTC channel. Non-free-to-air channels typically provide services to subscribers for a regular subscription fee, and typically do not generate a significant portion of their revenues from advertising. As a percentage of the overall television market, the non-free-to-air market in Russia is currently smaller than in the United States and Western European countries. Audience share for these channels, however, is increasing. In other countries, such as the United States, growth in non-free-to-air television services has often resulted in a fragmentation of the market and a corresponding decrease in the audience share of large national networks and channels. If niche and non-free-to-air channels continue to grow their customer base in Russia, our audience shares and ratings, especially the audience share of CTC channel, could be negatively affected, which would adversely affect our advertising revenues. See also "If free-to-air television does not continue to constitute a significant advertising forum in Russia, our revenues could be materially reduced".

We have substantial future programming commitments that we may not be able to vary in response to a decline in advertising revenues, and as a result could experience material reductions in operating margins.

        Programming represents our most significant expense, and at any given time we generally have substantial fixed commitments for the succeeding two to three years. For example, as of March 31, 2012 we had contractual commitments for the acquisition of approximately $162.6 million in programming rights in 2012 and $102.8 million in 2013-2014. Given the size of these commitments, at any time a reduction in our advertising revenues could adversely affect our operating margins and results of operations. We would have only limited ability to reduce our costs in the short-run in response to such developments.

Our relationships with the co-owners of our television stations may limit our ability to implement our business plans and strategy.

        More than half of our owned-and-operated stations are 100% owned by CTC Media. Other investors own between less than 1% and 50% of each of the remaining owned-and-operated stations. In some cases, we depend to a significant extent on our local partners for their familiarity with the local business environment and public authorities. Moreover, we may in the future similarly rely on joint-owners as we acquire additional stations. Any significant disruption in our relationship with these parties could make it more difficult for us to operate these stations.

        Russian law and some of the agreements governing these stations grant protective rights to our co-owners that enable them to block certain significant corporate actions. Under Russian company law, significant corporate decisions, such as declaring and paying dividends and entering into substantial transactions, require the consent of the holders of two-thirds or three-quarters of the voting interests of the company, depending on the subject matter and the legal structure of the company. In addition, unanimous shareholder approval is required in limited instances, which could further affect our control over certain actions. For example, approval of a joint stock company's initial charter and reorganization of a joint stock company into a non-commercial partnership require 100% approval of shareholders. In

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the case of a limited liability company, increases in charter capital, amendments to a limited liability company's charter, and liquidation, among other actions, require 100% approval of the holders of participation interests.

        As a result, we are often required to obtain the consent of our co-owners when making significant corporate decisions. Although we are not aware of any specific transaction in which we failed to obtain the requisite approval of the co-owners of our stations, due to the formalistic nature of Russian law and the large number of corporate actions that are taken annually by our co-owned stations, we believe it is likely that, from time to time, not all necessary minority shareholder consents have been obtained. As a result, we cannot guarantee that co-owners of our stations will not bring claims against us for failure to obtain these necessary consents, which, if successful, could result in the transaction in question being voided. Moreover, even if not technically required by law or contract, we generally prefer to obtain the consent and support of our co-owners before undertaking significant corporate actions. If this consent cannot be obtained, we may decide to forego a transaction that is commercially favorable to us in an effort to preserve goodwill with our co-owners.

Loss of key personnel could affect our growth and future success.

        We believe that our growth and our future success will depend in large part upon our ability to attract and retain highly skilled senior management, production talent and finance personnel. In 2009 and 2010 we lost several key personnel, including several important content production, legal and finance personnel. In addition, we believe that certain competitors continue to aggressively court some of our personnel. The competition is intense in Russia for qualified personnel who are familiar with the Russian television industry and/or who are knowledgeable about US accounting and legal practices. Although we have managed to find replacements for the personnel we lost, we cannot assure you that we will be able to retain qualified personnel, or hire appropriate replacements on reasonable terms or at all.

A broadcasting systems failure could prevent us from transmitting our network signal and lead to a loss of viewers, damage to our reputation and a reduction in our advertising revenues.

        Our networks' signals originate in Moscow and are uplinked to multiple separate satellite systems that transmit our signals to our affiliate stations and unmanned repeater transmitters. Despite our back-up systems, from time to time we experience signal failures. Prolonged or repeated disruptions in our signals could lead to a loss of viewers, damage to our reputation and a reduction in our advertising revenues. We do not carry business interruption insurance to protect us in the event of a catastrophe or termination of our ability to transmit our signals, even though such an event could have a significant negative impact on our business.

We do not carry all of the insurance coverage customary in many countries for a business of our size and nature, and as a result could experience substantial loss or disruption.

        The insurance industry is less developed in Russia than in other developed countries, and many forms of insurance protection common in other countries are not yet available in Russia on comparable terms, including coverage for business interruption. At present, we have no coverage for business interruption or loss of key management personnel. We do not maintain separate funds or otherwise set aside reserves for these types of losses. Any such loss may cause substantial disruption and may have a material adverse effect on our business, results of operations and financial condition.

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Our principal stockholders may have interests that are different from, or in addition to, the interests of other stockholders of CTC Media.

        Each of our two largest stockholders, which together hold approximately 63% of our common stock, is involved in the television business in Russia.

        MTG Russia AB, an affiliate of the publicly listed Modern Times Group MTG AB ("MTG"), holds a 50% interest in Raduga Holdings. Raduga is the sole owner of LCC DalGeoCom, which operates Raduga TV, a nationwide Russian digital satellite pay-TV platform. Hans-Holger Albrecht, the President and CEO of MTG, is a Co-Chairman of our board of directors; Mathias Hermansson, Chief Financial Officer of MTG, and Irina Gofman, Chief Executive Officer of MTG Russia AB, are members of our board of directors. Although we do not currently operate in the pay-TV market, and do not currently compete with or have any commercial relationship with Raduga TV, MTG may have interests that are different from or in addition to interests of other stockholders of CTC Media, including as a result of its interest in another Russian television business.

        We understand that the beneficial owners of our second largest shareholder Telcrest, including Bank Rossiya, have investments in Russian media businesses, including through indirect equity interests in Channel One, REN-TV and TRK 5 (Channel 5). We understand that Bank Rossiya also has indirect significant minority interests in Video International, with which we have software license and service agreements in respect of advertising sales. Pursuant to a stockholders agreement, Telcrest has designated three of our directors, none of whom we understand is currently primarily engaged in the operations of Channel One, REN-TV, TRK 5 or Video International. We compete with broadcasters in which the beneficial owners of Telcrest have equity and financial interests, and we believe the services of Video International are important to our operations. Although we are not aware of any conflicts of interest with Telcrest in this regard, Telcrest and its beneficial owners may have interests that are different from or in addition to interests of other stockholders of CTC Media.

Risks relating to doing business and investing in Russia

The Russian banking system remains underdeveloped, and another banking crisis could place severe liquidity constraints on our business.

        Russia's banking and other financial systems are less developed and regulated than those of many other developed countries, and Russian legislation relating to banks and bank accounts is subject to varying interpretations and inconsistent application. Many Russian banks do not meet international banking standards, and the transparency of the Russian banking sector still lags far behind internationally accepted norms. Furthermore, Russian bank deposits made by corporate entities generally are not insured.

        The disruption in the world credit markets in 2008 and 2009 also negatively impacted the banking sector in Russia. There are currently a limited number of creditworthy Russian banks, most of which are located in Moscow and the largest of which are state-owned. We generally hold a large majority of our cash balance in Russian banks, including the Russian subsidiaries of foreign banks. Of that balance, a significant portion is held in ruble-denominated accounts. There are few, if any, safe ruble-denominated instruments in which we may invest our excess ruble cash. A banking crisis or the bankruptcy or insolvency of the banks from which we receive or with which we hold our funds could result in the loss of our deposits or affect our ability to complete banking transactions in Russia, which could have a material adverse effect on our business, financial conditions and results of operations.

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Businesses in Russia, especially media companies, can be subject to politically motivated actions, which could materially adversely affect our operations.

        The Russian government has taken various actions in past years against business people and companies operating in Russia that have been perceived as having been politically motivated, including actions for technical violations of law or violations of laws that have been applied retroactively, including violations of tax laws. These actions have on occasion resulted in significant fluctuations in the market prices of the securities of businesses operating in Russia, a weakening of investor confidence in Russia and doubts about the progress of market and political reforms in Russia.

        Media businesses can be particularly vulnerable to politically motivated actions. NTV, TV-6 and TVS have all experienced what could be characterized as politically motivated actions, including efforts to effect changes of control. As a result of these actions, TV-6, which became TVS, is no longer broadcasting. We believe that our focus on entertainment, and the fact that we broadcast entertainment and celebrity news, but do not offer "hard" news, commentary or analysis on our national networks, could lessen the risk of provoking politically motivated actions. However, we do not restrict the ability of our independent affiliates to broadcast local news in local broadcasting windows, and some of our independent affiliates, as well as one of our owned-and-operated CTC stations, broadcast local political news, generally with the approval of our local partners and the local authorities. Any politically motivated action against us, our networks, our independent affiliates, or any of our principal stockholders, including the beneficial owners of MTG or Telcrest, could materially adversely affect our operations.

The results of the recent presidential election in Russia have created a certain degree of administrative and commercial uncertainty, which may adversely affect our ability to implement our business plan in the near term.

        On March 4, 2012, now Acting Prime Minister Vladimir Putin was elected as the new Russian president. Taking into account Mr. Putin's previous terms as both President and Prime Minister of Russia, we do not anticipate any political, regulatory, administrative or commercial uncertainties resulting from Mr. Putin's recent election. However, we are still awaiting the formation of a new cabinet of ministers and we also expect there to be some changes in government structure once Mr. Putin takes office.

The Russian legal system can create an uncertain environment for investment and business activity, which could have a material adverse effect on our business and the value of our common stock.

        The legal framework to support a market economy remains new and in flux in Russia and, as a result, the Russian legal system can be characterized by:

    inconsistencies between and among laws and governmental, ministerial and local regulations, orders, decisions, resolutions and other acts;

    substantial gaps in the regulatory structure resulting from the delay in adoption or absence of implementing regulations;

    limited judicial and administrative guidance on interpreting Russian legislation;

    the relative inexperience of judges and courts in interpreting relatively new commercial legislation;

    a lack of judicial independence from political, social and commercial forces;

    under-funding and under-staffing of the court system;

    a high degree of discretion on the part of the judiciary and governmental authorities; and

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    poorly developed bankruptcy procedures that are subject to abuse.

        As is true of civil law systems, judicial precedents generally have no binding effect on subsequent decisions. Not all Russian legislation and court decisions are readily available to the public or organized in a manner that facilitates understanding. The Russian judicial system can be slow, and enforcement of court orders can in practice be very difficult. All of these factors make judicial decisions in Russia difficult to predict and effective redress uncertain. Additionally, court claims and governmental prosecutions are sometimes used in furtherance of political aims.

        In addition, several key Russian laws, including the amendment to the Law on Advertising and the Ownership Law (both discussed above), have been subject to only limited interpretation to date. The untested nature of much of recent Russian legislation and the rapid evolution of the Russian legal system in ways that may not always coincide with market developments may result in ambiguities, inconsistencies and anomalies in the Russian legal system.

        The recently adopted federal law "On regulation of production and distribution of ethanol, alcohol and drinks containing alcohol" gives the status of alcoholic drinks to beer and all drinks containing beer, which in turn will prohibit advertising of such drinks on television. Starting July 22, 2012, we will not be able to broadcast advertisements for beer and drinks containing beer on our channels, which may result in a reduction in our revenues.

        On November 13, 2011, a new License Law came into force, which extends the legal term of broadcasting licenses from five to ten years. On November 10, 2011, the federal law "Improving Regulation of Mass Media, Television and Radio Broadcasting" came into force; this law regulates broadcasting by generally accessible television and radio channels in Russia. This law also provides for a so-called "universal license", which permits the editorial staff of a channel to broadcast the channel through free-to-air, cable and satellite broadcasting, in either digital or analog format. All of our Channels have applied for such universal license. Although we believe that universal license will give us advantages in broadcasting and will enhance our position to be included in the digital multiplex, and we do not currently anticipate that these laws will adversely affect our business, we do not know how these laws will be interpreted by the applicable authorities and cannot assure you that these interpretations will be favorable to us or will not affect our business negatively.

        In addition, a new law "On protection of children from harmful information" came into force on December 31, 2010, and is effective from September 1, 2012. This law prohibits making available to children any information that may be harmful to them, such as scenes of violence, abusive language, pornography and scenes encouraging children to consume alcohol, drugs and tobacco. All information must be labeled into five categories: (1) information appropriate for children under 6 years, (2) information appropriate for children 6 years and older, (3) information appropriate for children 12 years and older, (4) information appropriate for children 16 years and older, and (5) information prohibited for children. This law does not contain any detailed regulation as to how information is to be categorized into these five groups, what kind of experts are to label such information, or how this law will be implemented. This law is ambiguous and there is no practice of implementation of this law in Russia, which may lead to a high degree of discretion of governmental authorities in its implementation, as well as abuse of this law. We do not believe that implementation of this law will affect our CTC Channel, which is positioned as a family entertainment channel, or Domashny Channel, which is targeted at women and their families. We may revise our approaches to the programming of our Peretz Channel since it is more provocative with an "actuality" format. In order to mitigate the risks relating to this new law we are working in cooperation with television community trying to get more clear standards and more distinct vision of how this law will be implemented and interpreted by government authorities.

        Such uncertainties in the Russian legal system could affect our ability to enforce our rights under our licenses and under our contracts, or to defend ourselves against claims by others. Furthermore, we

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cannot assure you that regulators, judicial authorities or third parties will not challenge our compliance with applicable laws, decrees and regulations.

Selective or arbitrary government action may have an adverse effect on our business and the value of our common stock.

        Government authorities have a high degree of discretion in Russia and have at times exercised their discretion selectively or arbitrarily, without hearing or prior notice, and sometimes in a manner that is influenced by political or commercial considerations. The government also has the power, in certain circumstances, to interfere with the performance of, nullify or terminate contracts. Selective or arbitrary actions have included withdrawal of licenses, sudden and unexpected tax audits, criminal prosecutions and civil actions. Federal and local government entities have also used common defects in documentation as pretexts for court claims and other demands to invalidate and/or to void transactions, apparently for political purposes. We cannot assure you that regulators, judicial authorities or third parties will not challenge our compliance (including that of our subsidiaries) with applicable laws, decrees and regulations in Russia. Selective or arbitrary government action could have a material adverse effect on our business and on the value of our common stock.

If the Russian Federal Anti-monopoly Service were to conclude that we acquired or created a new company in contravention of anti-monopoly legislation, it could impose fines or administrative sanctions and could require the divestiture of such company or other assets.

        Our business has grown in part through the acquisition and establishment of companies, many of which transactions required the prior approval of, or subsequent notification to, the Russian Federal Anti-monopoly Service or its predecessor agencies (the "FAS"). The relevant legislation restricts the acquisition or establishment of companies by groups of companies or individuals acting in concert without the required approval or notification. This legislation is vague in parts and subject to varying interpretations. If the FAS were to conclude that an acquisition or establishment of a new company had been effected in contravention of applicable legislation and competition has been reduced as a result, it could impose administrative sanctions and require the divestiture of such company or other assets, adversely affecting our business strategy and our results of operations.

If one of our principal subsidiaries is forced into liquidation due to negative net assets, our results of operations could suffer.

        If at the end of any fiscal year a Russian company's net assets as determined in accordance with Russian accounting regulations are below the minimum amount of charter capital required by Russian law, the company is required to convene a shareholders meeting to adopt a decision to liquidate. If it fails to do so within a "reasonable period," the company's creditors may request early termination or acceleration of the company's obligations to them, as well as damages, and governmental authorities may seek to cause the involuntary liquidation of the company. Under an earlier version of this law, the company's shareholders could also bring an action to force the liquidation of the company. It is unclear under Russian law whether a historical violation of this requirement may be retroactively cured, even if a company later comes into compliance with the requirement. On occasion, Russian courts have ordered the involuntary liquidation of a company for having negative net assets even if the company has continued to fulfill its obligations and had net assets in excess of the minimum amount at the time of liquidation.

        Certain of our regional subsidiaries have had, and continue to have, negative equity as reported in their respective Russian statutory financial statements. None of these companies has applied for voluntary liquidation. We are currently taking steps to remedy the negative net asset value of these subsidiaries, but we have not included it as a contingency in our financial statements because we

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believe that, so long as these subsidiaries continue to fulfill their obligations, the risk of their forced liquidation is remote.

        There has been no judicial or other official interpretation of what constitutes a "reasonable period" within which a company must act to liquidate. If any of our subsidiaries were to be liquidated involuntarily, we would be forced to reorganize the operations we currently conduct through that subsidiary. The liquidation of any of the subsidiaries in our Television Station Groups would result in the termination of their existing broadcast and other licenses, and we cannot assure you that we would be able to secure new licenses needed for these stations to continue to operate. Accordingly, any liquidation could have a material adverse effect on our business.

Russian law requires the approval of certain transactions by the minority shareholders of our subsidiaries, including several of our owned-and-operated television stations, and failure to receive this approval could adversely affect our business and results of operations.

        We own less than 100% of many of our owned-and-operated stations. Under Russian law, certain transactions defined as "interested party transactions" require approval by disinterested members of the board of directors or disinterested shareholders of the companies involved. Our owned-and-operated stations that have other shareholders engage in numerous transactions with us that require interested party transaction approvals in accordance with Russian law. Due to the formulistic nature of much of Russian law, these transactions have not always been properly approved, and therefore may be contested by minority shareholders. In the event that these other shareholders were successfully to contest past interested party transactions, or prevent the approval of such transactions in the future, our flexibility in operating these television stations could be limited and our results of operations could be adversely affected.

        Certain transactions between members of our consolidated corporate group may constitute interested party transactions under Russian law even when the companies involved are wholly owned by us. Although we generally endeavor to obtain all corporate approvals required under Russian law to consummate these transactions, we have not always applied special approval procedures in connection with our consummation of transactions with or between our subsidiaries. In the event that a claim is filed in relation to certain transactions with or between our subsidiaries, such transactions are found to have been interested party transactions, and we are found to have failed to obtain the appropriate approvals, such transactions may be declared invalid. The unwinding of any transactions concluded with or between our subsidiaries may have a negative impact on our business and results of operations.

Shareholder liability under Russian legislation could cause us to become liable for the obligations of our subsidiaries.

        The Russian Civil Code, the Law on Joint Stock Companies and the Law on Limited Liability Companies generally provide that shareholders in a Russian joint stock company or limited liability company are not liable for the obligations of the company and bear only the risk of loss of their investment. This may not be the case, however, when one person (an "effective parent") is capable of determining decisions made by another (an "effective subsidiary"). The effective parent bears joint and several responsibility for transactions concluded by the effective subsidiary in carrying out these decisions in certain circumstances.

        In addition, an effective parent is secondarily liable for an effective subsidiary's debts if an effective subsidiary becomes insolvent or bankrupt as a result of the action or inaction of an effective parent. This is the case no matter how the effective parent's capability to determine decisions of the effective subsidiary arises. For example, this liability could arise through ownership of voting securities or by contract. In these instances, other shareholders of the effective subsidiary may claim compensation for the effective subsidiary's losses from the effective parent that caused the effective

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subsidiary to act or fail to act, knowing that such action or inaction would result in losses. Accordingly, in CTC Media's position as an effective parent, it could be liable in some cases for the debts of its effective subsidiaries. Although the total indebtedness of CTC Media's effective subsidiaries is currently immaterial, it is possible that CTC Media could face material liability in this regard in the future, which could materially adversely affect our business and our results of operations.

Changes in the Russian tax system or arbitrary or unforeseen application of existing rules could materially adversely affect our financial condition.

        Our tax burden may become greater than the estimated amount that we have expensed to date and paid or accrued on our balance sheets. Russian tax authorities have often been arbitrary and aggressive in their interpretation of tax laws and their many ambiguities, as well as in their enforcement and collection activities. Many companies are often forced to negotiate their tax bills with tax inspectors who may demand higher taxes than applicable law appears to provide. Any additional tax liability, as well as any unforeseen changes in Russian tax laws, could have a material adverse effect on our future results of operations or cash flows in a particular period. We have at times accrued substantial amounts for contingent tax liabilities, a substantial portion of which accruals we have reversed as contingencies have been resolved favorably or changes in circumstances have occurred. The amounts currently accrued for tax contingencies may not be sufficient to meet any liability we may ultimately face. From time to time, we also identify tax contingencies for which we have not provided an accrual. Such unaccrued tax contingencies could materialize and require us to pay additional amounts of tax.

        Under Russian accounting and tax principles, financial statements of Russian companies are not consolidated for tax purposes. As a result, each Russian- registered entity in our group pays its own Russian taxes and we cannot offset the profits or losses in any single entity against the profits and losses of any other entity. Consequently, our overall effective tax rate may increase as we expand our operations, unless we are able to maintain an effective corporate structure that minimizes the effect of these Russian accounting and tax norms.

        The Russian tax system imposes additional burdens and costs on our operations in Russia, and complicates our tax planning and related business decisions. The uncertainty involved potentially exposes us to significant fines, penalties and enforcement measures despite our best efforts at compliance, which could result in a greater than expected tax burden on our subsidiaries. These factors raise the risk of a sudden imposition of arbitrary or onerous taxes on our operations in Russia. This could adversely affect our business and the value of our common stock.

Any US or other foreign judgments that may be obtained against us may be difficult to enforce against us in Russia.

        Although CTC Media is a Delaware corporation, subject to suit in US federal and other courts, we have essentially no operations in the United States, most of our assets are located in Russia, and most of our directors and their assets are located outside the United States. Although arbitration awards are generally enforceable in Russia, judgments obtained in the United States or in other foreign courts, including those with respect to US federal securities law claims, may not be enforceable in Russia. There is no mutual recognition treaty between the United States and the Russian Federation, and no Russian federal law provides for the recognition and enforcement of foreign court judgments. Therefore, it may be difficult to enforce any US or other foreign court judgment obtained against our company, any of our operating subsidiaries or any of our directors in Russia.

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Risks relating to doing business elsewhere in the CIS

We face similar risks in other countries of the CIS.

        In addition to Russia, we currently have operations in other countries in the CIS, including Kazakhstan and Moldova. We may acquire additional operations in other countries of the CIS. In many respects, the risks inherent in transacting business in these countries are similar to those in Russia, especially those risks set out above in "—Risks relating to doing business and investing in Russia".

Emerging markets such as Russia and other CIS countries are subject to greater risks than more developed markets, including legal, economic and political risks.

        Investors in emerging markets such as Russia and other CIS countries should be aware that these markets are subject to greater risk than more developed markets, including in some cases legal, economic and political risks. Investors should also note that emerging economies, such as the economies of Russia and Kazakhstan, are subject to rapid change and that the information set out herein may become outdated relatively quickly. Furthermore, in doing business in various countries of the CIS, we face risks similar to (and sometimes greater than) those that we face in Russia. Accordingly, investors should exercise care in evaluating the risks involved and must decide for themselves whether, in light of those risks, their investment is appropriate. Generally, investment in emerging markets is only suitable for sophisticated investors who fully appreciate the significance of the risks involved and investors are urged to consult with their own legal and financial advisors before making an investment in our shares.

Risks relating to our stock

The price of our common stock has experienced significant volatility in the past and may be volatile in the future.

        Our stock price has experienced significant volatility in the past and is likely to be volatile in the future. The stock market in general and, in particular, the market for companies whose operations are in emerging markets, like Russia, have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. This volatility has been more pronounced in recent periods due to the turmoil in world financial markets. As a result of this volatility, investors may not be able to sell their shares of our common stock at or above the price at which they purchase it. The market price for our common stock may be influenced by many factors, including:

    fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;

    changes in estimates of our financial results or recommendations by securities analysts;

    changes in market valuations of similar companies;

    extraordinary expenses or charges in particular periods, including material impairment losses;

    changes in general economic, political and market conditions in Russia and globally;

    changes in the audience shares of our networks;

    changes in the structure of advertising sales in Russia;

    public announcements by industry experts regarding trends in advertising spending in Russia and globally; and

    announcements regarding our acquisition activities, if any.

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        Moreover, only a relatively small number of shares of our common stock are currently actively traded in the public market. As of April 30, 2012, approximately 37% of our outstanding common stock was held by parties other than our directors, executive officers and principal stockholders and their respective affiliates. The limited liquidity of our common stock may have a material adverse effect on the price of our common stock.

        In the past, following periods of volatility in the market price of a company's securities, stockholders have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm our profitability and reputation.

If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.

        The trading market for our common stock relies in part on the research and reports that equity research analysts publish about us and our business. We do not control these analysts. The price of our stock could decline if one or more equity research analysts downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.

Insiders have substantial control over us and could delay or prevent a change in corporate control.

        As of April 30, 2012, our directors, executive officers and principal stockholders, and their respective affiliates, beneficially owned, in the aggregate, approximately 63% of our outstanding common stock. As a result, these stockholders, if acting together, may have the ability to determine the outcome of matters submitted to our stockholders for approval, including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these persons, acting together, may have the ability to control the management and affairs of our company. In particular, our principal stockholders have entered into a voting arrangement that determines the composition of our board of directors.

Anti-takeover provisions in our charter documents and under Delaware law could prevent or delay change-of-control transactions.

        Anti-takeover provisions of Delaware law and our charter documents may make a change in control of our company more difficult. For example:

    Stockholders' meetings may only be called by one of the Co-Chairmen of our board of directors, our Chief Executive Officer or the majority of the board of directors.

    Our stockholders may not take action by written consent.

    We have a classified board of directors, which means that our directors serve for staggered three-year terms and currently no more than three of our nine directors are elected each year. This structure may make it more difficult for an acquirer to take control of our company, which may make our company a less desirable acquisition target.

        Delaware law also prohibits a corporation from engaging in a business combination with any holder of 15% or more of its capital stock until the holder has held the stock for three years unless, among other possibilities, the board of directors approves the transaction or approves the transaction pursuant to which the holder became a 15% holder. Our board of directors may use this provision to prevent changes in our management. Our board of directors approved the transaction pursuant to which Telcrest became a holder of more than 15% of our capital stock, and accordingly this prohibition would not apply in the case of a business combination transaction with Telcrest.

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        Under applicable Delaware law, our board of directors may adopt additional anti-takeover measures in the future.

        In addition, we are party to a stockholders' agreement with our two largest stockholders, MTG and Telcrest, pursuant to which each of these stockholders has agreed, with limited exceptions, not to acquire additional shares of our capital stock to the extent that such acquisition would cause its beneficial ownership to exceed 50% of the voting power of our outstanding shares without making a tender offer for all of our outstanding shares in compliance with the tender offer rules under the Securities Exchange Act of 1934, unless it reaches this ownership level through the exercise of rights of first offer set forth in the stockholders' agreement.

If there are substantial sales of our common stock in the market by our existing stockholders, our stock price could decline.

        If our existing stockholders sell a large number of shares of our common stock or the public market perceives that existing stockholders might sell shares of common stock, the market price of our common stock could decline significantly. The holders of approximately 63% of our common stock have the right under specified circumstances to require us to register their shares for resale to the public or participate in a registration of shares by us.

Item 6.    Exhibits

        The Exhibit index is hereby incorporated herein by reference.

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SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


 

 

CTC MEDIA, INC.

 

 

By:

 

/s/ BORIS PODOLSKY

Boris Podolsky
Chief Financial Officer

 

 

Date: May 3, 2012

 

 

CTC MEDIA, INC.

 

 

By:

 

/s/ YULIA SHTYROVA

Yulia Shtyrova
Acting Chief Accounting Officer

 

 

Date: May 3, 2012

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EXHIBIT INDEX

Exhibit
Number
  Description
  31.1   Certification of Acting Chief Executive Officer and Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a)

 

32.1

 

Certification of Acting Chief Executive Officer and Chief Financial Officer pursuant to 18 USC. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


 


101.INS


*


XBRL Instance Document.

 

101.SCH

*

XBRL Taxonomy Extension Schema Document.

 

101.CAL

*

XBRL Taxonomy Calculation Linkbase Document.

 

101.LAB

*

XBRL Taxonomy Label Linkbase Document.

 

101.PRE

*

XBRL Taxonomy Presentation Linkbase Document.

 

101.DEF

*

XBRL Taxonomy Extension Definition Linkbase Document.

*
submitted electronically herewith.

        Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Unaudited Condensed Consolidated Balance Sheets as of December 31, 2011 and March 31, 2012, (ii) Unaudited Condensed Consolidated Statements of Income for the three months ended March 31, 2011 and March 31, 2012, (iii) Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and March 31, 2012 and (iv) Notes to Unaudited Condensed Consolidated Financial Statements.

        In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act, is deemed not filed for purposes of section 18 of the Exchange Act, and otherwise is not subject to liability under these sections.

71



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