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Central European Media Enterprises Ltd – ‘10-Q’ for 3/31/09

On:  Wednesday, 4/29/09, at 8:06am ET   ·   For:  3/31/09   ·   Accession #:  1140361-9-10504   ·   File #:  0-24796

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 4/29/09  Central European Media Enter… Ltd 10-Q        3/31/09    6:3.8M                                   Summit Fin’l Printing

Quarterly Report   —   Form 10-Q
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Central European Media 10-Q 3-31-2009               HTML   1.36M 
 2: EX-10.1     Material Contract                                   HTML    505K 
 3: EX-10.2     Material Contract                                   HTML    361K 
 4: EX-31.01    Certification per Sarbanes-Oxley Act (Section 302)  HTML     11K 
 5: EX-31.02    Certification per Sarbanes-Oxley Act (Section 302)  HTML     11K 
 6: EX-32.1     Exhibit 32.01                                       HTML     10K 


10-Q   —   Central European Media 10-Q 3-31-2009
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Index
"Item 1. Financial Statements
"Condensed consolidated Balance Sheets as at March 31, 2009 and December 31, 2008
"Condensed consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2009 and 2008
"Condensed consolidated Statements of Shareholders' Equity for the Three Months Ended March 31, 2009 and 2008
"Condensed consolidated Statements of Cash Flows for the Three Months Ended March 31, 2009 and 2008
"Notes to the condensed consolidated Financial Statements
"Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
"Item 3. Quantitative and Qualitative Disclosures About Market Risk
"Item 4. Controls and Procedures
"Item 1. Legal Proceedings
"Item 1A. Risk Factors
"Item 6. Exhibits
"Signatures
"Exhibit Index

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

FORM 10-Q

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

For the quarterly period ended March 31, 2009

£           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________

Commission File Number: 0-24796

CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
(Exact name of registrant as specified in its charter)

BERMUDA
98-0438382
(State or other jurisdiction of incorporation and organization)
(IRS Employer Identification No.)
   
Clarendon House, Church Street, Hamilton
HM 11 Bermuda
(Address of principal executive offices)
(Zip Code)

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “accelerated filer”, “large accelerated filer” or “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer S
Accelerated filer  £    Non-accelerated filer £   Smaller reporting company £
          
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act)  Yes £ No S

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class
Outstanding as of April 24, 2009
Class A Common Stock, par value $0.08
36,024,273
Class B Common Stock, par value $0.08
6,312,839
 




THIS PAGE INTENTIONALLY LEFT BLANK
 

 
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.

FORM 10-Q

For the quarterly period ended March 31, 2009

INDEX

 
Page
Part I. Financial information
 
   
 
   
4
   
6
   
8
   
9
   
10
   
50
   
89
   
91
   
Part II. Other Information
 
   
92
   
92
   
101
   
101
   
102

Page 3

 
Part I. Financial Information

Item 1.  Financial Statements

CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(US$ 000’s)
(Unaudited)

         
ASSETS
           
Current assets
           
Cash and cash equivalents
  $ 306,553     $ 107,433  
Accounts receivable (net of allowance) (Note 6)
    163,993       221,450  
Program rights, net
    63,825       67,787  
Other current assets (Note 7)
    107,792       98,086  
Total current assets
    642,163       494,756  
Non-current assets
               
Investments
    16,559       16,559  
Property, plant and equipment, net (Note 8)
    184,907       206,667  
Program rights, net
    114,149       113,596  
Goodwill (Note 4)
    976,100       1,041,041  
Broadcast licenses and other intangible assets, net (Note 4)
    369,450       514,732  
Other non-current assets (Note 7)
    21,149       19,265  
Total non-current assets
    1,682,314       1,911,860  
Total assets
  $ 2,324,477     $ 2,406,616  


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

Page 4

 
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(US$ 000’s)
(Unaudited)

         
LIABILITIES AND SHAREHOLDERS’ EQUITY
           
Current liabilities
           
Accounts payable and accrued liabilities (Note 9)
  $ 152,321     $ 174,885  
Credit facilities and obligations under capital leases (Note 10)
    65,853       36,502  
Other current liabilities (Note 11)
    24,367       17,286  
Total current liabilities
    242,541       228,673  
Non-current liabilities
               
Credit facilities and obligations under capital leases (Note 10)
    243,956       38,758  
Senior Debt (Note 5)
    909,028       928,525  
Other non-current liabilities (Note 11)
    91,817       112,215  
Total non-current liabilities
    1,244,801       1,079,498  
Commitments and contingencies (Note 19)
               
                 
EQUITY:
               
CME Ltd. shareholders’ equity:
               
Nil shares of Preferred Stock of $0.08 each (December 31, 2008 – nil)
    -       -  
36,024,273 shares of Class A Common Stock of $0.08 each (December 31, 2008 –36,024,273)
    2,882       2,882  
6,312,839 shares of Class B Common Stock of $0.08 each (December 31, 2008 – 6,312,839)
    505       505  
Additional paid-in capital
    1,105,107       1,126,617  
Accumulated deficit
    (281,274 )     (236,836 )
Accumulated other comprehensive income
    9,357       202,090  
Total CME Ltd. shareholders’ equity
    836,577       1,095,258  
Noncontrolling interests
    558       3,187  
Total equity
    837,135       1,098,445  
Total liabilities and equity
  $ 2,324,477     $ 2,406,616  


The accompanying notes are an integral part of these condensed consolidated financial statements.
 
Page 5


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

   
For the Three Months Ended March 31,
 
       
2008
 
Net revenues
  $ 141,221     $ 223,023  
Operating expenses:
               
Operating costs
    29,393       33,015  
Cost of programming
    74,922       94,087  
Depreciation of station property, plant and equipment
    11,616       12,114  
Amortization of broadcast licenses and other intangibles (Note 4)
    6,101       7,670  
Cost of revenues
    122,032       146,886  
Selling, general and administrative expenses
    21,828       30,664  
Impairment charge (Note 4)
    81,843       -  
Operating (loss) / income
    (84,482 )     45,473  
Interest income
    744       2,180  
Interest expense (Note 16)
    (21,428 )     (15,229 )
Foreign currency exchange gain / (loss), net
    39,264       (17,428 )
Change in fair value of derivatives (Note 12)
    6,130       (10,258 )
Other income
    99       651  
(Loss) / income from continuing operations before tax
    (59,673 )     5,389  
Income tax credit
    12,995       10,283  
(Loss) / income from continuing operations
    (46,678 )     15,672  
Discontinued Operations, net of tax (Note 18)
    (262 )     (750 )
Net (loss) / income
    (46,940 )     14,922  
Net (income) / loss attributable to noncontrolling interests
    2,502       (477 )
Net (loss) / income attributable to CME Ltd.
  $ (44,438 )   $ 14,445  
                 
Net (loss) / income
    (46,940 )     14,922  
Currency translation adjustment
    (192,860 )     191,467  
Obligation to repurchase shares
    -       488  
Comprehensive (loss) / income
  $ (239,800 )   $ 206,877  
Comprehensive loss / (income) attributable to noncontrolling interests
    2,629       (1,025 )
Comprehensive (loss) / income attributable to CME Ltd.
  $ (237,171 )   $ 205,852  
 

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

Page 6


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (continued)
(US$ 000’s, except share and per share data)
(Unaudited)
 
   
For the Three Months Ended March 31,
 
       
2008
 
PER SHARE DATA (Note 15):
           
Net income / (loss) per share:
           
Continuing operations - Basic
  $ (1.04 )   $ 0.36  
Continuing operations - Diluted
    (1.04 )     0.35  
Discontinued operations – Basic
    (0.01 )     (0.02 )
Discontinued operations - Diluted
    (0.01 )     (0.01 )
Net (loss) / income attributable to CME Ltd common shareholders – Basic
    (1.05 )     0.34  
Net (loss) / income attributable to CME Ltd common shareholders – Diluted
  $ (1.05 )   $ 0.34  
                 
Weighted average common shares used in computing per share amounts (000’s):
               
Basic
    42,337       42,316  
Diluted
    42,337       42,732  


The accompanying notes are an integral part of these condensed consolidated financial statements.
 
Page 7


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(US$ 000’s)
(Unaudited)
 
                           
CME Ltd. Shareholders
             
   
Class A
Common Stock
   
Class B
Common Stock
   
Additional
         
Accumulated Other
         
Total
 
   
Number of shares
   
Par value
   
Number of shares
   
Par value
   
Paid-In Capital
   
Retained Earnings
   
Comprehensive Income
   
Noncontrolling Interest
   
Shareholders’ Equity
 
    36,024,273     $ 2,882       6,312,839     $ 505     $ 1,126,617     $ (236,836 )   $ 202,090     $ 3,187     $ 1,098,445  
Stock-based compensation
    -       -       -       -       1,663       -       -       -       1,663  
Acquisition of KINO non-controlling interest
    -       -       -       -       (23,173 )     -       -       -       (23,173 )
Net loss
    -       -       -       -       -       (44,438 )     -       (2,502 )     (46,940 )
Currency translation adjustment
    -       -       -       -       -       -       (192,733 )     (127 )     (192,860 )
BALANCE, March 31, 2009
    36,024,273     $ 2,882       6,312,839     $ 505     $ 1,105,107     $ (281,274 )   $ 9,357     $ 558     $ 837,135  

                           
CME Ltd. Shareholders
             
   
Class A
Common Stock
   
Class B
Common Stock
   
Additional
         
Accumulated Other
         
Total
 
   
Number of shares
   
Par value
   
Number of shares
   
Par value
   
Paid-In Capital
   
Retained Earnings
   
Comprehensive Income
   
Noncontrolling Interest
   
Shareholders’ Equity
 
    36,003,198     $ 2,880       6,312,839     $ 505     $ 1,051,336     $ 54,871     $ 290,216       23,154     $ 1,422,962  
Stock-based compensation
    -       -       -       -       1,856       -       -       -       1,856  
Stock options exercised
    125       -       -       -       9       -       -       -       9  
Purchase of capped call options
    -       -       -       -       (63,318 )     -       -       -       (63,318 )
Bifurcation of equity option embedded in convertible notes
    -       -       -       -       108,085       -       -       -       108,085  
Net income
    -       -       -       -       -       14,445       -       477       14,922  
Currency translation adjustment
    -       -       -       -       -               190,919       548       191,467  
Obligation to repurchase shares
    -       -       -       -       -       -       488       -       488  
BALANCE, March 31, 2008
    36,003,323     $ 2,880       6,312,839     $ 505     $ 1,097,968     $ 69,316     $ 481,623     $ 24,179     $ 1,676,471  

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

Page 8


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(US$ 000’s)
(Unaudited)

   
For the Three Months Ended March 31,
 
       
2008
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net (loss) / income
  $ (44,438 )   $ 14,445  
Adjustments to reconcile net (loss) / income  to net cash generated from operating activities:
               
Loss from discontinued operations (Note 18])
    262       750  
Depreciation and amortization
    64,263       73,365  
Impairment charge (Note 4)
    81,843       -  
Loss on disposal of fixed assets
    258       -  
Stock-based compensation (Note 14)
    1,547       1,813  
Noncontrolling interest in (loss) / income of consolidated subsidiaries
    (2,502 )     477  
Change in fair value of derivatives (Note 12)
    (6,130 )     10,258  
Foreign currency exchange (gain) / loss, net
    (39,264 )     17,428  
Net change in (net of effects of acquisitions and disposals of businesses):
               
Accounts receivable
    38,296       16,540  
Program rights
    (50,665 )     (79,433 )
Other assets
    (15,384 )     (7,270 )
Other accounts payable and accrued liabilities
    17,923       28,887  
Income taxes payable
    (3,900 )     (6,075 )
Deferred taxes
    (10,823 )     8,946  
VAT and other taxes payable
    (8,738 )     4,487  
Net cash generated from continuing operating activities
    22,548       84,618  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchase of property, plant and equipment
    (7,822 )     (23,721 )
Disposal of property, plant and equipment
    665       99  
Investments in subsidiaries and unconsolidated affiliates
    (22,776 )     -  
Net cash used in continuing investing activities
    (29,933 )     (23,622 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net proceeds from issuance of Convertible Notes
    -       463,812  
Proceeds from credit facilities
    260,970       -  
Payment of credit facilities and capital leases
    (36,316 )     (1,046 )
Purchase of capped call options
    -       (63,318 )
Excess tax benefits from share-based payment arrangements
    116       43  
Proceeds from exercise of stock options
    -       9  
Dividends paid to minority shareholders
    -       (1,230 )
Net cash received from continuing financing activities
    224,770       398,270  
                 
NET CASH USED IN DISCONTINUED ACTIVITIES - OPERATING
    (1,294 )     (2,237 )
NET CASH USED IN DISCONTINUED ACTIVITIES - INVESTING
    -       (121 )
Impact of exchange rate fluctuations on cash
    (16,971 )     (5,178 )
                 
Net increase in cash and cash equivalents
    199,120       451,730  
CASH AND CASH EQUIVALENTS, beginning of period
    107,433       142,826  
CASH AND CASH EQUIVALENTS, end of period
  $ 306,553     $ 594,556  


The accompanying notes are an integral part of these condensed consolidated financial statements.
 
Page 9

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

1.  ORGANIZATION AND BUSINESS

Central European Media Enterprises Ltd. (“CME Ltd.”), a Bermuda corporation, was formed in June 1994.  Our assets are held through a series of Dutch and Netherlands Antilles holding companies.  We invest in, develop and operate national and regional commercial television stations and channels in Central and Eastern Europe.  At March 31, 2009, we had operations in Bulgaria, Croatia, the Czech Republic, Romania, the Slovak Republic, Slovenia and Ukraine.

Our principal subsidiaries, equity-accounted affiliates and cost investments as at March 31, 2009 were:

Company Name
Effective
Voting
Interest
Jurisdiction of
Organization
Type of Affiliate
       
Top Tone Media S.A.
80.0%
Luxembourg
Subsidiary
TV2 EOOD (“TV2”)
80.0%
Bulgaria
Subsidiary
Top Tone Media Bulgaria EOOD
80.0%
Bulgaria
Subsidiary
Zopal S.A.
80.0%
Luxembourg
Subsidiary
LG Consult EOOD
80.0%
Bulgaria
Subsidiary
Ring TV EAD  (“Ring TV”)
80.0%
Bulgaria
Subsidiary
       
Nova TV d.d. (“Nova TV (Croatia)”)
100.0%
Croatia
Subsidiary
Operativna Kompanija d.o.o.
100.0%
Croatia
Subsidiary
Media House d.o.o.
100.0%
Croatia
Subsidiary
Internet Dnevnik d.o.o.
76.0%
Croatia
Subsidiary
       
CET 21 spol. s r.o. (“CET 21”)
100.0%
Czech Republic
Subsidiary
Jyxo, s.r.o. (“Jyxo”)
100.0%
Czech Republic
Subsidiary
BLOG Internet, s.r.o. (“Blog“)
100.0%
Czech Republic
Subsidiary
       
CME Romania B.V.
100.0%
Netherlands
Subsidiary
Media Pro International S.A. (“MPI”)
95.0%
Romania
Subsidiary
Media Vision S.R.L (“Media Vision”)
95.0%
Romania
Subsidiary
Music Television System S.R.L. (“MTS”)
95.0%
Romania
Subsidiary
Pro TV S.A. (“Pro TV”)
95.0%
Romania
Subsidiary
Sport Radio TV Media S.R.L (“Sport.ro”)
95.0%
Romania
Subsidiary
Campus Radio S.R.L.
19.01%
Romania
Equity-Accounted Affiliate
Media Pro Management S.A. (“Media Pro”)
8.7%
Romania
Cost investment
Media Pro B.V.
10.0%
Netherlands
Cost investment
       
CME Slovak Holdings B.V.
100.0%
Netherlands
Subsidiary
A.R.J., a.s.
100.0%
Slovak Republic
Subsidiary
MARKIZA-SLOVAKIA  spol. s r.o. (“Markiza”)
100.0%
Slovak Republic
Subsidiary
GAMATEX spol s r.o.
100.0%
Slovak Republic
Subsidiary (in liquidation)

Page 10

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

Company Name
Effective
Voting
Interest
Jurisdiction of
Organization
Type of Affiliate
A.D.A.M. a.s.
100.0%
Slovak Republic
Subsidiary (in liquidation)
MEDIA INVEST, spol. sr.o. (“Media Invest”)
100.0%
Slovak Republic
Subsidiary
EMAIL.SK s.r.o.
80.0%
Slovak Republic
Subsidiary
PMT, s.r.o.
31.5%
Slovak Republic
Cost investment
       
MMTV 1 d.o.o.
100.0%
Slovenia
Subsidiary
Produkcija Plus d.o.o. (“Pro Plus”)
100.0%
Slovenia
Subsidiary
POP TV d.o.o. (“Pop TV”)
100.0%
Slovenia
Subsidiary
Kanal A d.o.o. (“Kanal A”)
100.0%
Slovenia
Subsidiary
Euro 3 TV d.o.o.
42.0%
Slovenia
Equity-Accounted Affiliate
TELEVIDEO d.o.o. (trading as TV Pika)
20.0%
Slovenia
Equity-Accounted Affiliate
       
International Media Services Ltd.
100.0%
Bermuda
Subsidiary
CME Ukraine Holding GmbH
100.0%
Austria
Subsidiary
Innova Film GmbH
100.0%
Germany
Subsidiary
CME Cyprus Holding Ltd.
100.0%
Cyprus
Subsidiary
TV Media Planet Ltd.
100.0%
Cyprus
Subsidiary
1+1 Production
100.0%
Ukraine
Subsidiary
Studio 1+1 LLC (“Studio 1+1”)
100.0%
Ukraine
Subsidiary
Ukrainian Media Services LLC
99.9%
Ukraine
Subsidiary
Grizard Investments Limited.
100.0%
Cyprus
Subsidiary
Grintwood Investments Limited
100.0%
Cyprus
Subsidiary
CME Ukraine Holding B.V.
100.0%
Netherlands
Subsidiary
Ukrpromtorg-2003 LLC (“Ukrpromtorg”)
100.0%
Ukraine
Subsidiary
Gravis-Kino LLC (“Gravis-Kino”)
100.0%
Ukraine
Subsidiary
Nart LLC
100.0%
Ukraine
Subsidiary
TV Stimul LLC (“TV Stimul”)
100.0%
Ukraine
Subsidiary
TOR LLC (“Tor”)
100.0%
Ukraine
Subsidiary
ZHYSA LLC (“Zhysa”)
100.0%
Ukraine
Subsidiary
Glavred-Media LLC (“Glavred”)
10.0%
Ukraine
Cost Investment
       
Central European Media Enterprises N.V.
100.0%
Netherlands Antilles
Subsidiary
Central European Media Enterprises II B.V.
100.0%
Netherlands Antilles
Subsidiary
CME Media Enterprises B.V.
100.0%
Netherlands
Subsidiary
CME Programming B.V.
100.0%
Netherlands
Subsidiary
CME Development Corporation
100.0%
Delaware (USA)
Subsidiary
CME Media Services Limited
100.0%
United Kingdom
Subsidiary
CME SR d.o.o.
100.0%
Serbia
Subsidiary

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


Page 12


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

Bulgaria

We operate one national television channel in Bulgaria, TV2, and RING TV, a cable sports channel. We own 80.0% of TV2, which holds the broadcast license for TV2, and 80.0% of Ring TV, which operates RING TV.

Croatia

We operate one national channel in Croatia, NOVA TV (Croatia). We own 100.0% of Nova TV (Croatia) which holds the broadcast license for NOVA TV (Croatia).

Czech Republic

We operate one national television channel in the Czech Republic, TV NOVA (Czech Republic) and two cable/satellite channels, NOVA SPORT and NOVA CINEMA. We own 100.0% of CET 21, which holds the national terrestrial broadcast licenses for TV NOVA (Czech Republic) and the satellite/digital licenses for NOVA SPORT and NOVA CINEMA.

Romania

We operate five television channels in Romania: PRO TV, ACASA, PRO CINEMA, SPORT.RO and MTV ROMANIA, as well as PRO TV INTERNATIONAL, a channel distributed by satellite outside the country featuring programs re-broadcast from other Romanian channels. We also operate two radio channels in Romania, PRO FM, a pop music channel, and INFO PRO, a national infotainment channel.

We own a 95.0% interest in each of Pro TV, MPI and Media Vision, a production, dubbing and subtitling company.  The remaining shares of each of these companies are owned by companies, or individuals associated with, Adrian Sarbu, our President and Chief Operating Officer.  Pro TV holds the licenses for the PRO TV, ACASA, PRO TV INTERNATIONAL, PRO CINEMA, SPORT.RO and MTV ROMANIA channels.

We own 10.0% of Media Pro B.V. and 8.7% of Media Pro Management S.A., the parent companies of the Media Pro group of companies (“Media Pro”). Substantially all of the remaining shares of Media Pro are owned directly or indirectly by Mr. Sarbu. Media Pro comprises a number of companies with operations in the fields of publishing, information, printing, cinema and entertainment across Central and Eastern Europe.

Slovak Republic

We operate one national television channel in the Slovak Republic, TV MARKIZA. We own 100.0% of Markiza, which holds a national terrestrial broadcast license for TV MARKIZA.

Slovenia

We operate two national television channels in Slovenia, POP TV and KANAL A.  We own 100.0% of Pro Plus, the operating company for our Slovenia operations.  Pro Plus has a 100.0% interest in each of Pop TV, which holds the licenses for the POP TV channel, and Kanal A, which holds the licenses for the KANAL A channel.

Ukraine

We operate one national television channel in Ukraine, STUDIO 1+1, and KINO, a network of regional channels. We hold a 100.0% interest in Studio 1+1, which holds the license for and operates the STUDIO 1+1 channel. We also own 100% of Gravis-Kino, the license holder for the KINO channel.

Page 13


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

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The interim financial statements for the three months ended March 31, 2009 should be read in conjunction with the Notes to the Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2008.  Our significant accounting policies have not changed since December 31, 2008, except as noted below.

In the opinion of management, the accompanying interim unaudited financial statements reflect all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (“US GAAP”).  The consolidated results of operations for interim periods are not necessarily indicative of the results to be expected for a full year.

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

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

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

Noncontrolling Interests

On January 1, 2009, we adopted FASB Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an Amendment of ARB No. 51” (“FAS 160”), which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  FAS 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. FAS 160 also requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest.  It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest.  FAS 160 also provides guidance when a subsidiary is deconsolidated and requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent’s owners and the interests of the noncontrolling owners of a subsidiary.

On adoption of FAS 160 we began to attribute the net losses of our Bulgaria operations to the holders of the noncontrolling interest. This resulted in a reduction to the net loss attributable to CME Ltd. In accordance with paragraph 15 of Accounting Research Bulletin No. 51 “Consolidated Financial Statements” (“ARB 51”) we had previously not attributed these losses because it would have resulted in a deficit noncontrolling interest. Had we continued to apply the previous requirements of ARB 51 the impact on consolidated net income attributable to the Company and earnings per share would have been as follows:

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

   
For the three months ended March 31, 2009
 
Net loss attributable to CME Ltd. as reported
  $ (44,438 )
Deduct: noncontrolling interest income recognized since the adoption of FAS 160
    (1,846 )
Pro Forma net loss
  $ (46,284 )
Net loss per share – Basic (As reported)
  $ (1.05 )
Net loss per share – Basic (Pro Forma)
  $ (1.09 )
Net loss per share – Diluted (As reported)
  $ (1.05 )
Net loss per share – Diluted (Pro Forma)
  $ (1.09 )

Other than the reduction in net loss noted above, we reclassified certain prior period balances in our Consolidated Balance Sheet, Consolidated Statement of Operations and Statement of Shareholders’ Equity to reflect the new presentation requirements of FAS 160 as shown below.

Convertible debt

On January 1, 2009, we adopted FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”), which clarifies the accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion. FSP APB 14-1 requires issuers to account separately for the liability and equity components of certain convertible debt instruments in a manner that reflects the issuer's non-convertible debt (unsecured debt) borrowing rate when interest cost is recognized. FSP APB 14-1 requires bifurcation of a component of the debt including allocated issuance costs, classification of that component in equity and the accretion of the resulting discount on the debt and the allocated acquisition costs to be recognized as part of interest expense in the Consolidated Statement of Operations.

FSP APB 14-1 requires retrospective application, therefore we restated both opening shareholders’ equity in 2009 and comparative amounts for 2008 in all primary financial statements in 2009 to reflect revised equity and liability balances on issuance of our Convertible Notes (as defined herein) (net of allocated acquisition costs) of US$ 108.1 million and US$ 364.2 million, respectively.

Page 15


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

The impact on the 2008 comparative amounts for the quarterly period ended March 31, 2008 of the adoption of both FSP APB 14-1 and FAS 160 was as follows:


   
For the Three Months ended March 31, 2008
 
         
Impact of adopting
       
   
As reported
   
FSP APB 14-1
   
FAS 160
   
As Adjusted
 
Consolidated Statement of Operations
 
Interest expense
  $ (14,250 )   $ (979 ) (1)   $ -     $ (15,229 )
Minority interest in income of consolidated subsidiaries (2)
    (1,025 )     -       548       (477 )
   
 
 
           
Impact of adopting
         
   
As reported
   
FSP APB 14-1
   
FAS 160
   
As Adjusted
 
Consolidated Balance Sheet
 
Other current assets
  $ 98,725     $ (639 )   $ -     $ 98,086  
Other non-current assets
    20,743       (1,478 )     -       19,265  
Senior Debt
    1,024,721       (96,196 )     -       928,525  
Additional paid-in capital
    1,018,532       108,085       -       1,126,617  
Accumulated deficit
    (224,086 )     (14,006 )     1,256       (236,836 )
Accumulated Other Comprehensive   Income
  $ 203,346     $ -     $ (1,256 )   $ 202,090  
 
(1) The impact of APB 14-1 is shown net of a reclassification of US$ 18 thousand of interest expense attributable to discontinued operations.
 
(2) As required by FAS 160, Minority interest in income of consolidated subsidiaries was renamed “Net income attributable to noncontrolling interests”. We also reclassified the associated Minority Interest account in the consolidated balance sheet into Shareholders’ Equity and renamed it “Noncontrolling interests”.
 
Business Combinations

On January 1, 2008, we adopted FASB Statement No. 141(R), “Business Combinations” (“FAS 141(R)”), which establishes principles and requirements for how the acquirer:  (a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; (b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  FAS 141(R) requires contingent consideration to be recognized at its fair value on the acquisition date and, for certain arrangements, changes in fair value to be recognized in earnings until settled.  FAS 141(R) also requires acquisition-related transaction and restructuring costs to be expensed rather than treated as part of the cost of the acquisition.  FAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  Because the requirements of FAS 141(R) are largely prospective, its adoption did not have a material impact on our financial position or results of operations. However, we recognized an expense of approximately US$ 0.9 million in the fourth quarter of 2008 for acquisition costs incurred on potential acquisitions that did not complete prior to December 31, 2008 and for which capitalization is prohibited under FAS 141(R).

Page 16


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

On January 1, 2009, we adopted the Emerging Issues Task Force (“EITF”) consensus on Issue No. 08-7, “Accounting for Defensive Intangible Assets” (“EITF 08-7”). The consensus addresses the accounting for an intangible asset acquired in a business combination or asset acquisition that an entity does not intend to use or intends to hold to prevent others from obtaining access (a defensive intangible asset). Under EITF 08-7, a defensive intangible asset would need to be accounted as a separate unit of accounting and would be assigned a useful life based on the period over which the asset diminishes in value. EITF 08-7 is effective for transactions occurring after December 31, 2008. The adoption of this standard did not have a material impact on our financial condition or results of operations.

On January 1, 2009, we adopted FASB Staff Position No. FAS 142-3 “Determination of the Useful Life of Intangible Assets,” (“FSP FAS 142-3”) which aims to improve consistency between the useful life of a recognized intangible asset under FASB Statement No. 142 “Goodwill and Other Intangible Assets” and the period of expected cash flows used to measure the fair value of the asset under FAS 141 (R), especially where the underlying arrangement includes renewal or extension terms. The FSP is effective prospectively for fiscal years beginning after December 15, 2008. The adoption of FSP FAS 142-3 did not have a material impact on our financial position or results of operations.

On January 1, 2009, we adopted the EITF consensus on Issue No. 08-6, “Equity Method Investment Accounting Considerations” (“EITF 08-6”) which addresses certain effects of SFAS Nos. 141(R) and 160 on an entity’s accounting for equity-method investments. The consensus indicates, among other things, that transaction costs for an investment should be included in the cost of the equity-method investment (and not expensed) and shares subsequently issued by the equity-method investee that reduce the investor’s ownership percentage should be accounted for as if the investor had sold a proportionate share of its investment, with gains or losses recorded through earnings. EITF 08-6 is effective for transactions occurring after December 31, 2008. The adoption of this standard did not have a material impact on our financial condition or results of operations.

Derivative Disclosure

On January 1, 2009, we adopted FASB Statement No. 161 “Disclosures About Derivative Instruments and Hedging Activities an Amendment of FASB Statement No. 133” (“FAS 161”) which enhances the disclosure requirements about derivatives and hedging activities. FAS 161 requires enhanced narrative disclosure about how and why an entity uses derivative instruments, how they are accounted for under FASB Statement No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”), and what impact they have on financial position, results of operations and cash flows. FAS 161 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after November 15, 2008. The adoption of FAS 161 did not have a material impact on our financial position or results of operations.

3. ACQUSITIONS AND DISPOSALS

Ukraine

Acquisition of KINO noncontrolling interest

In the fourth quarter of 2008, in accordance with our stated objectives of establishing multi-channel broadcasting platforms in all of our markets and acquiring the remaining noncontrolling interests in our channels, we reached an agreement with our minority partners to acquire 100.0% of the KINO channel and transfer to them our interest in the CITI channel, a local station that broadcasts in the Kiev region. In connection with this agreement, we segregated the broadcasting licenses and other assets of the KINO channel and transferred them to Gravis-Kino, a new entity spun off from Gravis LLC (“Gravis”), which previously operated both the KINO and the CITI channels.  Between January 14, 2009 and February 10, 2009, we acquired a 100.0% interest in the KINO channel by acquiring from our minority partners their interests in Tor, Zhysa, TV Stimul, Ukrpromtorg and Gravis-Kino and selling to them our interest in Gravis, which owns the broadcasting licenses and other assets of the CITI channel, for a de minimus amount. The total consideration paid by us for these interests was US$ 10.0 million, including a payment of US$ 1.5 million for the use of studios, offices and equipment of Gravis and the provision of other transitional services through December 31, 2009. In addition, on February 10, 2009, CME acquired from an entity controlled by Alexander Tretyakov a 10.0% ownership interest in Glavred (“Glavred”) for US$ 12.0 million. Glavred owns a number of websites and print publications as well as a radio station.

Page 17


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

We concluded that these transactions should be accounted for together as the acquisition of a noncontrolling interest in a subsidiary where control is retained under FAS 160. Accordingly we recognized the excess of the fair value of the consideration over the adjustment to noncontrolling interest as an adjustment to additional paid-in capital.

The amounts allocated to consideration for KINO totaled US$ 23.1 million, represented by the fair value of the net assets of the CITI channel transferred (US$ 1.1 million) and cash payments of US$ 8.5 million for the equity interests, US$ 1.5 million for transitional services, and the US$ 12.0 million we paid for the investment in Glavred, which we concluded formed part of the consideration because we determined the Glavred investment to have a fair value of US$ nil at the date of acquisition.

The balance of noncontrolling interest recorded at the date of acquisition was US$ nil because the operations had been loss making. Therefore, the full consideration of US$ 23.1 million was recognized as a reduction to equity.

Igor Kolomoisky, a member of the Board of Directors of the company and the supervisory boards of Studio 1+1 and 1+1 Production, indirectly holds a 50% interest in Glavred and the remaining 40% is owned by Mr. Tretyakov, our former partner in KINO and CITI.

 
4. GOODWILL AND INTANGIBLE ASSETS

Our goodwill and intangible assets are the result of acquisitions in Bulgaria, Croatia, the Czech Republic, Romania, the Slovak Republic, Slovenia and Ukraine.  No goodwill is expected to be deductible for tax purposes.

Goodwill:

Goodwill by operating segment as at March 31, 2009 and December 31, 2008 is summarized as follows:

       
Additions
   
Impairment charge
   
Foreign currency movement
     
                               
Croatia
  $ 739     $ -     $ -     $ (53 )   $ 686  
Czech Republic
    888,936       -       -       (52,692 )     836,244  
Romania
    72,336       -       -       (7,981 )     64,355  
Slovak Republic
    61,642       -       -       (3,454 )     58,188  
Slovenia
    17,388       -       -       (761 )     16,627  
Total
  $ 1,041,041     $ -     $ -     $ (64,941 )   $ 976,100  

Page 18

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

Broadcast licenses and other intangible assets:

The net book value of our broadcast licenses and other intangible assets as at March 31, 2009 and December 31, 2008 is summarized as follows:

   
Indefinite-Lived Broadcast Licenses
   
Amortized Broadcast Licenses
   
Trademarks
   
Customer Relationships
   
 
 
Other
   
Total
 
  $ 59,856     $ 282,058     $ 97,047     $ 68,280     $ 7,491     $ 514,732  
Additions
    -       -       -       -       -       -  
Impairment
    -       (75,788 )     (76 )     -       (4,882 )     (80,746 )
Amortization
    -       (3,913 )     (103 )     (1,700 )     (385 )     (6,101 )
Foreign currency movements
    (5,803 )     (31,075 )     (16,302 )     (4,676 )     (579 )     (58,435 )
  $ 54,053     $ 171,282     $ 80,566     $ 61,904     $ 1,645     $ 369,450  

Our broadcast licenses in Croatia, Romania and Slovenia have indefinite lives because we expect the cash flows generated by those assets to continue indefinitely.  These licenses are subject to annual impairment reviews.  The licenses in Ukraine have economic useful lives between, and are amortized on a straight-line basis over, two and eighteen years.  The license in the Czech Republic has an economic useful life of, and is amortized on a straight-line basis over, twelve years.  The license in the Slovak Republic has an economic useful life of, and is amortized on a straight-line basis over, thirteen years.

Customer relationships are deemed to have an economic useful life of, and are amortized on a straight-line basis over, five to fourteen years.  Trademarks have an indefinite life, with the exception of those acquired trademarks which we do not intend to use, which have an economic life of, and are being amortized over, two years using the declining balance method.

The gross value and accumulated amortization of broadcast licenses and other intangible assets was as follows at March 31, 2009 and December 31, 2008:

         
             
Gross value
  $ 404,726     $ 549,140  
Accumulated amortization
    (89,329 )     (94,264 )
Net book value of amortized intangible assets
  $ 315,397     $ 454,876  
Indefinite-lived broadcast licenses
    54,053       59,856  
Total broadcast licenses and other intangible assets, net
  $ 369,450     $ 514,732  
 
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except per share data)
(Unaudited)

Impairment of Goodwill and Long-Lived Assets

We recognized the following impairment charges in respect of long-lived assets in the three months ended March 31, 2009:

   
Amortized Trademarks
   
Amortized Broadcast Licenses
   
Other Intangible Assets
   
Other Assets
   
Total
 
Bulgaria
  $ 76     $ 75,788     $ 4,882     $ 1,097     $ 81,843  
 
We evaluate goodwill and indefinite-lived intangible assets for impairment by reporting unit or asset group in the fourth quarter of each year. However, whenever events occur which suggest assets may be impaired in a reporting unit, an additional evaluation of the goodwill and indefinite-lived intangible assets, together with the associated long-lived assets of each asset group, is performed. During the three months ended March 31, 2009, the price of our Class A Common Stock decreased from a high of US$ 22.70 per share to a low of US$ 4.86 per share. In addition, when we updated our medium-term forecast models at March 31, we determined that the forecast future cash flows of all of our stations had decreased compared to our previous estimates. We concluded that together these two events constituted an indication that the value of our goodwill, indefinite-lived intangible assets or long-lived assets may have fallen in value since we last reviewed them for impairment in the fourth quarter of 2008 and it was therefore necessary to review them for impairment again under FASB Statements No. 142 “Goodwill and Other Intangible Assets” (“FAS 142”) and No. 144 “Accounting for the Impairment and Disposal of Long-Lived Assets” (“FAS 144”).

We have determined that, with the exception of Bulgaria and Ukraine, each reporting unit is also an asset group because they are the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. In Bulgaria, there are two asset groups, RING TV and TV2, and there are two in Ukraine, STUDIO 1+1 and KINO.

In performing our assessment, we also noted that a number of events had occurred during the first quarter of 2009 which suggested that further impairments may have occurred, including:

 
·
A continued reduction in the short and medium economic projections for our markets by external analysts fuelled by a widespread perception that Central and Eastern Europe will be among the regions most heavily impacted by the global economic crisis and growing sentiment that recovery will take longer than expected;
 
·
increasing reluctance of advertisers to make spending commitments, which has had a larger than expected impact on both the proportion of our advertising inventory we can sell and a reduction in the prices we can achieve;
 
·
continued significant volatility in the price of our shares of Class A common stock during most of the quarter;
 
·
continued high sovereign debt yields in our markets, suggesting a fundamental re-pricing of risk by investors; and
 
·
an escalation of the economic crisis in Ukraine, including the downgrading of its sovereign credit rating to CCC+ by Standard & Poors.

Upon reviewing all of our long-lived assets, indefinite-lived intangible assets and goodwill we concluded that an impairment charge was required in Bulgaria. In all other cases, the extent to which the respective assets tested passed the impairment test has reduced since they were last tested for impairment in the fourth quarter of 2008 and the impact of changes in key assumptions in the valuation models is discussed below. In the Czech Republic this decline had caused the result of the goodwill impairment test to be particularly close.

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

Bulgaria

We revised our estimates of future cash flows in our Bulgaria operations to reflect our revised expectations of a heavier contraction in the advertising market in 2009, lower growth in future years and a more prolonged downturn. In addition, Bulgaria has been heavily impacted by the global economic crisis, which has been reflected in the returns expected by investors to reflect the increased actual and perceived risk of investing in Bulgaria continuing to be higher than their historical norms. We concluded that Long-Lived Assets in the TV2 asset group were no longer recoverable and recorded a charge to write them down to their fair value of US$ nil.

Czech Republic

We concluded that our Czech Republic reporting unit passed the first stage of the impairment test for goodwill, but that its fair value had declined significantly since we tested it for impairment in the fourth quarter of 2008 and is very close to the carrying value. This decline in value was due to reductions to our cash flow forecasts to reflect the fact that uncertainties over the macro economic environment has caused international advertisers to become increasingly reluctant to make spending commitments. This reluctance, which has intensified during the quarter, has caused a contraction in the overall size of the advertising market which has manifested itself as a worse-than-expected decline in both the level of advertising inventory our operations are able to sell and the prices at which it can be sold.

We reviewed the assumptions in our valuation models and concluded that the fair value of the reporting unit was in excess of the fair value. In performing this review we also considered:

 
·
The impact of a number of possible scenarios for the downturn in, and eventual recovery of, the Czech economy in general and the television advertising market in particular. These scenarios included the timing and magnitude of future growth in the market, and the speed of convergence with Western European markets.
 
·
Other available indications of fair value, such as Company-specific and peer-group earnings multiples and analysts’ consensuses.
 
·
Comparing the market capitalization implied by the aggregate fair value of all of our reporting units to our actual market capitalization during the quarter and considering whether the small resulting premium was a reasonable indication of the premium an acquirer would be prepared to pay to obtain control. We also noted that this implied control premium was consistent with the price to be paid by TW Media Holdings LLC (“TWMH”) for their investment in our shares (see note 13 “Shareholders’ Equity”).
 
·
Whether the decline in our share price could have reflected factors other than the underlying value of our assets. The sharp decline and subsequent partial recovery in our share price during, and after, the quarter coincided with the with a decline in the market generally, and increased investor concern over the macro economic environment in Eastern Europe in particular.
 
·
Our experience of historical acquisition activity in the region, including the premia applied to broadcasting assets with dominant positions in their respective markets.

Notwithstanding these considerations, if the operating environment in the Czech Republic continues to deteriorate, and this deterioration indicates that we should make even a small adverse change in our long-term assumptions, it is likely that we will have to impair some or all of the goodwill in our Czech Republic reporting unit.

Critical Estimates and Assumptions

Assessing goodwill, indefinite-lived intangible assets and long-lived assets requires significant judgment. The process involves making a number of estimates in order to evaluate the fair value of a number of assets, the fair value of the reporting units, and the future cash flows expected in each reporting unit. The table below shows the key measurements involved and the valuation methods applied:

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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except per share data)
(Unaudited)
  
Measurement
Valuation Method
Recoverability of cash flows
Undiscounted future cash flows
Fair value of broadcast licenses
Build-out method
Fair value of trademarks
Relief from royalty method
Fair value of reporting units
Discounted cash flow model
 
In all cases, each method involves a number of significant assumptions over an extended period of time which could materially change the result and the decision on whether assets are impaired. The most significant of these assumptions include the discount rate applied (cost of capital), the total advertising market size, achievable levels of market share, level of forecast operating costs and capital expenditure and the rate of growth into perpetuity. The table below shows whether an adverse change of 10.0% in any of these assumptions would result in additional impairments after reflecting the impairment charge recognized in the three months ended March 31, 2009:

10% Adverse Change in
Long-Lived Assets
Indefinite-Lived Trademarks
Indefinite-Lived Broadcast Licenses
Goodwill
Cost of Capital
None
Ukraine
Slovenia
Czech Republic
         
Total Advertising
Croatia
None
Slovenia
Croatia
Market
Slovak Republic
   
Czech Republic
       
Slovak Republic
       
Slovenia
         
Market Share
Croatia
None
Slovenia
Croatia
 
Slovak Republic
   
Czech Republic
       
Slovak Republic
       
Slovenia
         
Forecast Operating
Croatia
Not applicable
Slovenia
Croatia
Costs
Slovak Republic
   
Czech Republic
       
Slovak Republic
       
Slovenia
         
Forecast Capital Expenditure
None
Not applicable
Slovenia
None
         
Perpetuity Growth Rate
Not applicable
None
None
None
 
Although we considered all current information when we calculated our impairment charge for the three months ended March 31, 2009, if our cash flow forecasts for our operations deteriorate still further, or discount rates increase, it is probable that we will have to to recognize additional impairment charges in future periods.

Page 22


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

5.  SENIOR DEBT

Our senior debt comprised the following as at March 31, 2009 and December 31, 2008:

   
Carrying Value
   
Fair Value
 
                 
                         
EUR 245.0 million 8.25% Senior Notes
  $ 326,046     $ 340,966     $ 257,576     $ 233,562  
EUR 150.0 million Floating Rate Senior Notes
    199,620       208,755       114,782       125,253  
USD 475.0 million 3.5% Senior Convertible Notes
    383,362       378,804       268,375       230,375  
    $ 909,028     $ 928,525     $ 640,733     $ 589,190  

On May 5, 2005, we issued EUR 245.0 million of 8.25% senior notes (the “Fixed Rate Notes”). The Fixed Rate Notes mature on May 15, 2012.

On May 16, 2007, we issued EUR 150.0 million of floating rate senior notes (the “Floating Rate Notes”, and collectively with the Fixed Rate Notes, the “Senior Notes”) which bear interest at the six-month Euro Inter Bank Offered Rate (“EURIBOR”) plus 1.625% (The applicable rate at March 31, 2009 was 5.934%). The Floating Rate Notes mature on May 15, 2014.

On March 10, 2008, we issued US$ 475.0 million of 3.50% Senior Convertible Notes (the “Convertible Notes”). The Convertible Notes mature on March 15, 2013.  The carrying value of the Convertible Notes as at December 31, 2008 has been adjusted to reflect the impact of the adoption of FSP APB 14-1 (see Note 2, “Summary of Significant Accounting Policies, Convertible debt”).

Fixed Rate Notes

Interest is payable semi-annually in arrears on each May 15 and November 15.  The fair value of the Fixed Rate Notes as at March 31, 2009 and December 31, 2008 was calculated by multiplying the outstanding debt by the traded market price.

The Fixed Rate Notes are secured senior obligations and rank pari passu with all existing and future senior indebtedness and are effectively subordinated to all existing and future indebtedness of our subsidiaries.  The amounts outstanding are guaranteed by two subsidiary holding companies and are secured by a pledge of shares of those subsidiaries as well as an assignment of certain contractual rights.  The terms of our Fixed Rate Notes restrict the manner in which our business is conducted, including the incurrence of additional indebtedness, the making of investments, the payment of dividends or the making of other distributions, entering into certain affiliate transactions and the sale of assets.

In the event that (A) there is a change in control by which (i) any party other than our present shareholders becomes the beneficial owner of more than 35.0% of our total voting power; (ii) we agree to sell substantially all of our operating assets; or (iii) there is a change in the composition of a majority of our Board of Directors; and (B) on the 60th day following any such change of control the rating of the Fixed Rate Notes is either withdrawn or downgraded from the rating in effect prior to the announcement of such change of control, we can be required to repurchase the Fixed Rate Notes at a purchase price in cash equal to 101.0% of the principal amount of the Fixed Rate Notes plus accrued and unpaid interest to the date of purchase.

Page 23


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

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

From:
 
Fixed Rate Notes
Redemption Price
 
       
    104.125 %
    102.063 %
May 15, 2011 and thereafter
    100.000 %

Prior to May 15, 2009, we may redeem all or a part of the Fixed Rate Notes at a redemption price equal to 100.0% of the principal amount of such notes, plus a “make-whole” premium and accrued and unpaid interest to the redemption date.

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

Floating Rate Notes

Interest is payable semi-annually in arrears on each May 15 and November 15.  The fair value of the Floating Rate Notes as at March 31, 2009 and December 31, 2008 was equal to the outstanding debt multiplied by the traded market price .

The Floating Rate Notes are secured senior obligations and rank pari passu with all existing and future senior indebtedness and are effectively subordinated to all existing and future indebtedness of our subsidiaries.  The amounts outstanding are guaranteed by two subsidiary holding companies and are secured by a pledge of shares of those subsidiaries as well as an assignment of certain contractual rights.  The terms of our Floating Rate Notes restrict the manner in which our business is conducted, including the incurrence of additional indebtedness, the making of investments, the payment of dividends or the making of other distributions, entering into certain affiliate transactions and the sale of assets.

In the event that (A) there is a change in control by which (i) any party other than certain of our present shareholders becomes the beneficial owner of more than 35.0% of our total voting power; (ii) we agree to sell substantially all of our operating assets; or (iii) there is a change in the composition of a majority of our Board of Directors; and (B) on the 60th day following any such change of control the rating of the Floating Rate Notes is either withdrawn or downgraded from the rating in effect prior to the announcement of such change of control, we can be required to repurchase the Floating Rate Notes at a purchase price in cash equal to 101.0% of the principal amount of the Floating Rate Notes plus accrued and unpaid interest to the date of purchase.

Page 24

 
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except per share data)
(Unaudited)
 
The Floating Rate Notes are redeemable at our option, in whole or in part, at the redemption prices set forth below:

From:
 
Floating Rate Notes
Redemption Price
 
       
    101.000 %
May 15, 2009 and thereafter
    100.000 %

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

Convertible Notes

Interest is payable semi-annually in arrears on each March 15 and September 15.  The fair value of the Convertible Notes as at March 31, 2009 and December 31, 2008 was calculated by multiplying the outstanding debt by the traded market price because we considered the value of the embedded conversion option to be zero since the market price of our shares was so far below the conversion price.

The Convertible Notes are secured senior obligations and rank pari passu with all existing and future senior indebtedness and are effectively subordinated to all existing and future indebtedness of our subsidiaries.  The amounts outstanding are guaranteed by two subsidiary holding companies and are secured by a pledge of shares of those subsidiaries as well as an assignment of certain contractual rights.

Prior to December 15, 2012, the Convertible Notes are convertible following certain events and from that date, at any time, based on an initial conversion rate of 9.5238 shares of our Class A common stock per US$ 1,000 principal amount of Convertible Notes (which is equivalent to an initial conversion price of approximately US$ 105.00, or a 25% conversion premium based on the closing sale price of US$ 84.00 per share of our Class A common stock on March 4, 2008). The conversion rate is subject to adjustment if we make certain distributions to the holders of our Class A common stock, undergo certain corporate transactions or a fundamental change, and in other circumstances specified in the Convertible Notes.   From time to time up to and including December 15, 2012, we will have the right to elect  to deliver (i) shares of our Class A common stock or (ii) cash and, if applicable, shares of our Class A common stock upon conversion of the Convertible Notes. At present, we have elected to deliver cash and, if applicable, shares of our Class A common stock. As at March 31, 2009, the Convertible Notes may not be converted.  In addition, the holders of the Convertible Notes have the right to put the Convertible Notes to us for cash equal to the aggregate principal amount of the Convertible Notes plus accrued but unpaid interest thereon following the occurrence of certain specified fundamental changes (including a change of control, certain mergers, insolvency and a delisting).

In order to increase the effective conversion price of our Convertible Notes, on March 4, 2008 we purchased, for aggregate consideration of US$ 63.3 million, capped call options over 4,523,809 shares of our Class A common stock from Lehman Brothers OTC Derivatives Inc. (“Lehman OTC,” 1,583,333 shares), BNP Paribas (“BNP,” 1,583,333 shares) and Deutsche Bank Securities Inc. (“DB,” 1,357,144 shares). The amount of shares corresponds to the number of shares of our Class A common stock that would be issuable on a conversion of the Convertible Notes at the initial conversion price if we elected to settle the Convertible Notes solely in shares of Class A common stock. The options entitle us to receive, at our election, cash or shares of Class A common stock with a value equal approximately to the difference between the trading price of our shares at the time the option is exercised and US$ 105.00, up to a maximum trading price of US$ 151.20. At present, we have elected to receive shares of our Class A common stock on exercise of the capped call options.

Page 25


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

On September 15, 2008, Lehman Brothers Holdings Inc, (“Lehman Holdings”, and collectively with Lehman OTC, “Lehman Brothers”), the guarantor of the obligations of Lehman OTC under the capped call agreement, filed for protection under Chapter 11 of the United States Bankruptcy Code. The bankruptcy filing of Lehman Holdings, as guarantor, was an event of default that gave us the right to early termination of the capped call option agreement with Lehman OTC and to claim for losses. We exercised this right on September 16, 2008 and claimed an amount of US$ 19.9 million, which bears interest at a rate equal to our estimate of our cost of funding plus 1% per annum.

At the date of purchase, we determined that all of these capped call options met the definition of an equity instrument within the scope of EITF Issue No. 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”) and consequently recognized them on issuance at fair value within additional paid-in capital. We believe that this classification is still correct with respect to the BNP and DB capped call options and have continued to recognize them within Shareholders’ Equity. Subsequent changes in fair value have not been, and will not be, recognized as long as the instruments continue to be classified in Shareholders’ Equity.

We concluded that from September 16, 2008, upon delivery of the termination notice, the capped call options with Lehman OTC were effectively extinguished. The nullification of the non-bankruptcy provisions of the original contract meant that the fair value of the instrument no longer varies with movements in the value of an underlying (previously, shares of our Class A common stock) and consequently the contract ceased to be a derivative instrument and ceased to fall within the scope of EITF 00-19. Effective September 16, 2008, we reclassified the US$ 22.2 million cost of the Lehman OTC capped call options from additional paid-in capital to Accumulated Deficit to reflect this extinguishment. We further concluded that our claim did not meet the definition of an asset under FASB Statement of Financial Accounting Concepts No. 6 “Elements of Financial Statements” because the future benefit it embodied were not sufficiently probable and therefore treated our bankruptcy claim in accordance with FASB Statement No. 5 “Accounting for Contingencies”.

On March 3, 2009 we assigned our claim in the bankruptcy proceedings of Lehman Holdings and Lehman OTC to an unrelated third party for cash consideration of US$ 3.4 million, or 17% of the claim value, which has been recognized as other income within selling, general and administrative expenses in our Consolidated Statement of Operations. See Note 19, “Commitments and Contingencies: Lehman Brothers Bankruptcy Claim”.

Prior to the termination of the capped call options with Lehman OTC, we noted that no dilution would occur prior to the trading price of our Class A common stock reaching US$ 151.20.  This conclusion was based on a number of assumptions, including that we would exercise all capped call options simultaneously, we would continue with our election to receive shares of our Class A common stock on the exercise of the capped call options, and no event that would result in an adjustment to the conversion rate of value of the options would have occurred.

Following the termination of the Lehman OTC capped call options, which represented 35% of the total number of capped call options we acquired on March 4, 2008, limited dilution will occur following the exercise of the BNP and DB capped call options if the price of shares of our Class A common stock is between US$ 105.00 per share and US$ 151.20 per share when the Convertible Notes are converted. The table below shows how many shares of our Class A common stock we would issue following a conversion of the Convertible Notes  and the exercise of the remaining DB and BNP capped call options for a variety of share price scenarios. This table assumes the currently selected settlement methods continue to apply and no event that would result in an adjustment to the conversion rate or the value of the option has occurred:

Page 26


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

Stock price
   
Shares issued on conversion of Convertible Notes
   
Shares received on exercise of capped call options
   
Net shares issued
   
Value of shares issued (US$ ‘000)
 
105.00 and below
      -       -       -     $ -  
  110.00       (205,628 )     133,658       (71,970 )     (7,917 )
  120.00       (565,476 )     367,559       (197,917 )     (23,750 )
  130.00       (869,963 )     565,475       (304,488 )     (39,583 )
  140.00       (1,130,951 )     735,118       (395,833 )     (55,417 )
  151.20       (1,382,274 )     898,478       (483,796 )     (73,150 )
$ 200.00       (2,148,807 )     679,248       (1,469,559 )   $ (293,912 )

At March 31, 2009, the options could not be exercised because no conversion of any Convertible Notes had occurred. In the event any Convertible Notes had been converted at March 31, 2009, no shares of our Class A common stock would have been issuable because the closing price of our shares was below US$ 105.00 per share. The aggregate fair value of the remaining DB and BNP capped call options at March 31, 2009 was US$ 0.4 million

On adoption of FSP APB 14-1, we calculated the value of the conversion option embedded in the Convertible Notes and accounted for it separately in all periods from March 10, 2008. Certain other derivative instruments, have been identified as being embedded in the Convertible Notes, but as they are considered to be clearly and closely related to the Convertible Notes they are not accounted for separately.
 
6.  ACCOUNTS RECEIVABLE

Accounts receivable comprised the following at March 31, 2009 and December 31, 2008:

         
Third-party customers
  $ 168,131     $ 227,253  
Less allowance for bad debts and credit notes
    (15,298 )     (14,663 )
Related parties
    11,292       8,913  
Less allowance for bad debts and credit notes
    (132 )     (53 )
Total accounts receivable
  $ 163,993     $ 221,450  

At March 31, 2009, CZK 466.9 million (approximately US$ 22.7 million) (December 31, 2008: CZK 820.7 million, US$ 39.9 million) of receivables in the Czech Republic were pledged as collateral subject to a factoring agreement (see Note 10, “Credit Facilities and Obligations under Capital Leases”).

Page 27


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

7.  OTHER ASSETS

Other current and non-current assets comprised the following at March 31, 2009 and December 31, 2008:

         
Current:
           
Prepaid programming
  $ 49,494     $ 54,301  
Productions in progress
    17,184       14,080  
Other prepaid expenses
    14,390       7,286  
Income taxes recoverable
    10,092       1,216  
Deferred tax
    6,624       5,898  
Capitalized debt costs
    4,662       4,636  
VAT recoverable
    3,911       3,460  
Restricted cash
    739       821  
Assets held for sale
    -       5,484  
Other
    696       904  
Total other current assets
  $ 107,792     $ 98,086  
                 
         
Non-current:
               
Capitalized debt costs
  $ 12,110     $ 13,282  
Deferred tax
    4,291       2,108  
Other
    4,748       3,875  
Total other non-current assets
  $ 21,149     $ 19,265  

Capitalized debt costs primarily comprise the costs incurred in connection with the issuance of our Senior Notes and Convertible Notes (see Note 5, “Senior Debt”), and are being amortized over the term of the Senior Notes and Convertible Notes using the effective interest method.

Page 28


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

8.  PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment comprised the following at March 31, 2009 and December 31, 2008:

         
             
Land and buildings
  $ 87,664     $ 92,421  
Station machinery, fixtures and equipment
    172,944       190,090  
Other equipment
    30,752       35,470  
Software licenses
    29,229       30,219  
Construction in progress
    10,902       11,293  
Total cost
  $ 331,491     $ 359,493  
Less:  Accumulated depreciation
    (146,584 )     (152,826 )
Total net book value
  $ 184,907     $ 206,667  
Assets held under capital leases (included in the above)
               
Land and buildings
  $ 5,599     $ 5,855  
Station machinery, fixtures and equipment
    1,397       1,917  
Total cost
    6,996       7,772  
Less:  Accumulated depreciation
    (1,528 )     (1,644 )
Net book value
  $ 5,468     $ 6,128  

Page 29

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

Accounts payable and accrued liabilities comprised the following at March 31, 2009 and December 31, 2008:

         
Accounts payable
  $ 27,795     $ 35,778  
Programming liabilities
    37,073       44,251  
Duties and other taxes payable
    21,970       22,635  
Accrued staff costs
    16,454       27,318  
Accrued interest payable
    16,286       10,531  
Income taxes payable
    2,082       7,399  
Accrued production costs
    6,885       6,531  
Authors’ rights
    3,617       4,734  
Other accrued liabilities
    20,159       15,708  
Total accounts payable and accrued liabilities
  $ 152,321     $ 174,885  

The accrued interest payable balance relates primarily to interest on our Senior Notes and our Convertible Notes (see Note 5, “Senior Debt”).

Page 30


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

10.  CREDIT FACILITIES AND OBLIGATIONS UNDER CAPITAL LEASES

Group loan obligations and overdraft facilities comprised the following at March 31, 2009 and December 31, 2008:

           
Credit facilities:
             
Corporate
(a) – (b)
  $ 199,625     $ 57,180  
Czech Republic
(c) – (e)
    70,508       12,923  
Romania
(f)
    -       104  
Slovak Republic
(g)
    -       -  
Slovenia
(h)
    34,933       -  
Ukraine
(i)
    164       172  
Total credit facilities
    $ 305,230     $ 70,379  
                   
Capital leases:
                 
Bulgaria operations, net of interest
    $ 744     $ 689  
Romania operations, net of interest
      221       289  
Slovak Republic operations, net of interest
      -       36  
Slovenia operations, net of interest
      3,614       3,867  
Total capital leases
    $ 4,579     $ 4,881  
                   
Total credit facilities and capital leases
    $ 309,809     $ 75,260  
Less current maturities
      (65,853 )     (36,502 )
Total non-current maturities
    $ 243,956     $ 38,758  

Corporate

(a) On July 21, 2006, we entered into a five-year revolving loan agreement for EUR 100.0 million (approximately US$ 133.1 million) arranged by the European Bank for Reconstruction and Development (“EBRD”) and on August 22, 2007, we entered into a second revolving loan agreement for EUR 50.0 million (approximately US$ 66.5 million) arranged by EBRD (together with the EUR 100.0 million facility, the “EBRD Loan”).  ING Bank N.V. (“ING”) and Ceska Sporitelna, a.s. (“CS”) are each participating in the EBRD Loan for EUR 37.5 million (approximately US$ 49.9 million).

The EBRD Loan bears interest at a rate of three-month EURIBOR plus 1.625% on the drawn amount. A commitment charge of 0.8125% is payable on any undrawn portion of the EBRD Loan.  The available amount of the EBRD Loan amortizes by 15.0% every six months from May 2009 to November 2010 and by 40.0% in May 2011. As at March 31, 2009, the full EUR 150.0 million (approximately US$ 199.6 million) had been drawn.

Covenants contained in the EBRD Loan are similar to those contained in our Senior Notes (see below and Note 5, “Senior Debt”).  In addition, the EBRD Loan’s covenants restrict us from making principal repayments on other new debt of greater than US$ 20.0 million per year for the life of the EBRD Loan.  This restriction is not applicable to our existing facilities with ING or CS or to any refinancing of our Senior Notes.

Page 31


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

The EBRD Loan is a secured senior obligation and ranks pari passu with all existing and future senior indebtedness, including the Senior Notes and the Convertible Notes, and is effectively subordinated to all existing and future indebtedness of our subsidiaries.  The amount drawn is guaranteed by two subsidiary holding companies and is secured by a pledge of shares of those subsidiaries as well as an assignment of certain contractual rights.  The terms of the EBRD Loan restrict the manner in which our business is conducted, including the incurrence of additional indebtedness, the making of investments, the payment of dividends or the making of other distributions, entering into certain affiliate transactions and the sale of assets.

(b) We have an uncommitted multicurrency overdraft facility for EUR 10.0 million (approximately US$ 13.3 million) from Bank Mendes Gans (“BMG”), a subsidiary of ING, as part of a cash pooling arrangement. The cash pooling arrangement with BMG enables us to receive credit across the group in respect of cash balances which our subsidiaries in the Netherlands, Bulgaria, the Czech Republic, Romania, the Slovak Republic, Slovenia and Ukraine deposit with BMG. Cash deposited by our subsidiaries with BMG is pledged as security against the drawings of other subsidiaries up to the amount deposited.  As at March 31, 2009, the full EUR 10.0 million (approximately US$ 13.3 million) facility was available to be drawn. Interest is payable at the relevant money market rate plus 2%.

As at March 31, 2009, our Dutch holding company, CME Media Enterprises B.V., had approximately US$ 12.2 million deposited in the BMG cash pool while our operations in the Czech Republic, the Slovak Republic, Slovenia and Ukraine had deposited approximately US$ 22.9 million, US$ 5.7 million, US$ 5.3 million, and US$ 0.9 million, respectively in the BMG cash pool. Our Ukraine operations had drawn approximately US$ 0.2 million from the BMG cash pool at March 31, 2009.

Czech Republic

(c) As at March 31, 2009, CET 21 had drawn, in CZK, the full CZK 1.2 billion (approximately US$ 58.4 million) of a credit facility with CS available until December 31, 2010.  This facility may, at the option of CET 21, be drawn in CZK, US$ or EUR and bears interest at the three-month, six-month or twelve-month London Inter-Bank Offer Rate (“LIBOR”), EURIBOR or Prague Inter-Bank Offered Rate (“PRIBOR”) rate plus 1.65%; a rate of 2.44% applied to the balance outstanding at March 31, 2009 and is based on PRIBOR. A utilization interest of 0.25% is payable on the undrawn portion of this facility, which decreases to 0.125% of the undrawn portion if more than 50% of the loan is drawn. Drawings under this facility are secured by a pledge of receivables, which are also subject to a factoring arrangement with Factoring Ceska Sporitelna, a.s. (“FCS”), a subsidiary of CS.

(d) As at March 31, 2009, CZK 250 million (approximately US$ 12.2 million), the full amount of the facility, had been drawn by CET 21 under a working capital facility agreement with CS with a maturity date of December 31, 2010. The facility bears interest at three-month PRIBOR plus 1.65%, and a rate of 2.44% applied to the balance outstanding under this facility at March 31, 2009. Drawings under this facility are secured by a pledge of receivables, which are also subject to a factoring arrangement with FCS.

(e) As at March 31, 2009, there were no drawings under a CZK 300.0 million (approximately US$ 14.6 million) factoring facility with FCS available until June 30, 2011.  The facility bears interest at one-month PRIBOR plus 1.40% for the period that actively assigned accounts receivable are outstanding.

Romania

(f) Our Romania operations repaid US$ 0.1 million drawn from the BMG cash pool during the three months ended March 31, 2009.

Page 32


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

Slovak Republic

(g) As at March 31, 2009, our Slovak Republic operations had made no drawings under a EUR 3.3 million (approximately US$ 4.4 million) overdraft facility with ING.  This can be utilized for short term advances up to six months at an interest rate of EURIBOR + 2.0%.

Slovenia

(h) On July 29, 2005, Pro Plus entered into a revolving facility agreement for up to EUR 37.5 million (approximately US$ 49.9 million) in aggregate principal amount with ING, Nova Ljubljanska Banka d.d., Ljubljana and Bank Austria Creditanstalt d.d., Ljubljana.  The facility amortizes by 10.0% each year for four years commencing one year after signing, with 60.0% repayable after five years.  This facility is secured by a pledge of the bank accounts of Pro Plus, the assignment of certain receivables, a pledge of our interest in Pro Plus and a guarantee of our wholly-owned subsidiary CME Media Enterprises B.V.  Loans drawn under this facility bear interest at a rate of EURIBOR for the period of drawing plus a margin of between 2.1% and 3.6% that varies according to the ratio of consolidated net debt to consolidated broadcasting cash flow for Pro Plus, a rate of 3.653% applied at March 31, 2009.  As at March 31, 2009, the full EUR 26.3 million (approximately US$ 34.9 million) available for drawing under this revolving facility had been drawn.

Ukraine

(i) Our Ukraine operations had drawn EUR 0.1 million (approximately US$ 0.2 million) from the BMG cash pool as at March 31, 2009.

Total Group

At March 31, 2009, the maturity of our debt (including our Senior Notes and Convertible Notes) was as follows:

2009
  $ 65,045  
2010
    160,337  
2011
    79,848  
2012
    326,046  
2013
    383,362  
2014 and thereafter
    199,620  
Total
  $ 1,214,258  

Page 33

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

Capital Lease Commitments

We lease certain of our office and broadcast facilities as well as machinery and equipment under various leasing arrangements.  The future minimum lease payments from continuing operations, by year and in the aggregate, under capital leases with initial or remaining non-cancelable lease terms in excess of one year, consisted of the following at March 31, 2009:

2009
    667  
2010
    737  
2011
    636  
2012
    602  
2013
    2,465  
2014 and thereafter
    774  
    $ 5,881  
Less: amount representing interest
    (1,302 )
Present value of net minimum lease payments
  $ 4,579  
 
11.  OTHER LIABILITIES

Other current and non-current liabilities comprised the following as at March 31, 2009 and December 31, 2008:

         
Current:
           
Deferred revenue
  $ 18,052     $ 7,684  
Consideration payable – Bulgaria
    4,500       4,500  
Consideration payable - Romania
    -       724  
Onerous contracts
    1,389       1,994  
Deferred tax
    426       177  
Liabilities held for sale
    -       2,207  
Total other current liabilities
  $ 24,367     $ 17,286  
                 
         
Non-current:
               
Deferred tax
  $ 70,047     $ 89,126  
Program rights
    15,048       9,922  
Fair value of derivatives
    3,752       9,882  
Consideration payable – Czech Republic
    1,314       1,396  
Income taxes payable
    1,030       1,070  
Other
    626       819  
Total other non-current liabilities
  $ 91,817     $ 112,215  

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

FAS 157 establishes a hierarchy that prioritizes the inputs to those valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under FAS 157 are:

Basis of Fair Value Measurement

Level 1
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted instruments.

Level 2
Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly.

Level 3
Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

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

We evaluate the position of each financial instrument measured at fair value in the hierarchy individually based on the valuation methodology we apply. At March 31, 2009, we have no material financial assets or liabilities carried at fair value using significant level 1 or level 3 inputs and the only instruments we value using level 2 inputs are currency swap agreements as follows:

Currency Swap

On April 27, 2006, we entered into currency swap agreements with JP Morgan Chase Bank, N.A. and Morgan Stanley Capital Services Inc. whereby we swapped a fixed annual coupon interest rate (of 9.0%) on notional principal of CZK 10.7 billion (approximately US$ 520.3 million), payable on July 15, October 15, January 15, and April 15, to the termination date of April 15, 2012, for a fixed annual coupon interest rate (of 9.0%) on notional principal of EUR 375.9 million (approximately US$ 500.2 million) receivable on July 15, October 15, January 15, and April 15, to the termination date of April 15, 2012.

These currency swap agreements reduce our exposure to movements in foreign exchange rates on a part of the CZK-denominated cash flows generated by our Czech Republic operations that is approximately equivalent in value to the Euro-denominated interest payments on our Senior Notes (see Note 5, “Senior Debt”). They are financial instruments that are used to minimize currency risk and are considered an economic hedge of foreign exchange rates.  These instruments have not been designated as hedging instruments as defined under FAS 133 and so changes in their fair value are recorded in the consolidated statement of operations and in the consolidated balance sheet in other non-current liabilities.

We value our currency swap agreements using an industry-standard currency swap pricing model which calculates the fair value on the basis of the net present value of the estimated future cash flows receivable or payable. These instruments are allocated to level 2 of the FAS 157 fair value hierarchy because the critical inputs to this model, including the relevant yield curves and the known contractual terms of the instrument are readily observable.

The fair value of these instruments as at March 31, 2009, was a US$ 3.8 million liability, which represented a decrease of US$ 6.1 million from the US$ 9.9 million liability as at December 31, 2008 and was recognized as a gain in the Condensed Consolidated Statement of Operations and Comprehensive Income.

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

Preferred Stock

5,000,000 shares of preferred stock, with a US$ 0.08 par value, were authorized as at March 31, 2009 and December 31, 2008.  None were issued and outstanding as at March 31, 2009 and December 31, 2008.

Class A and B Common Stock

100,000,000 shares of Class A Common Stock and 15,000,000 shares of Class B Common Stock were authorized as at March 31, 2009 and December 31, 2008.  The rights of the holders of Class A Common Stock and Class B Common Stock are identical except for voting rights.  The shares of Class A Common Stock are entitled to one vote per share and the shares of Class B Common Stock are entitled to ten votes per share. Shares of Class B Common Stock are convertible into shares of Class A Common Stock for no additional consideration on a one-for-one basis.  Holders of each class of shares are entitled to receive dividends and upon liquidation or dissolution are entitled to receive all assets available for distribution to shareholders.  The holders of each class have no preemptive or other subscription rights and there are no redemption or sinking fund provisions with respect to such shares.

On March 22, 2009, we entered into a subscription agreement with TWMH (the “Subscription Agreement”). Pursuant to the Subscription Agreement, we have agreed to issue to TWMH 14.5 million shares of Class A Common Stock at a price of $12.00 per share and 4.5 million shares of Class B Common Stock at a price of $15.00 per share, for an aggregate offering price of $241.5 million.  The completion of this issuance of these shares of Class A Common Stock and Class B Common Stock is subject to a vote of our shareholders and other customary closing conditions. We expect the transaction to close during the second quarter of 2009.

14.  STOCK-BASED COMPENSATION

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

   
For the Three Months Ended March 31,
 
       
2008
 
             
Stock-based compensation
  $ 1,547     $ 1,813  
Income tax benefit recognized
    113       180  
 
Under the provisions of SFAS 123(R), the fair value of stock options is estimated on the grant date using the Black-Scholes option-pricing model and recognized ratably over the requisite service period. No options were granted or exercised in the three months ended March 31, 2009.

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

A summary of option activity for the three months ended March 31, 2009 is presented below:
 
   
 
 
Shares
   
Weighted Average Exercise Price per Share
   
Weighted Average Remaining Contractual Term (years)
   
 
 
Aggregate Intrinsic Value
 
                         
Outstanding at January 1, 2009
    1,439,042     $ 50.81       6.17       1,458  
Granted
    -       -                  
Exercised
    -       -                  
Forfeited
    (13,125 )     79.35                  
Outstanding at March 31, 2009
    1,425,917       50.54       5.91       281  
Vested or expected to vest
    1,363,176       50.31       5.97       281  
Exercisable at March 31, 2009
    852,855       44.05       5.14       281  

The exercise of stock options has generated a net operating loss brought forward in our Delaware subsidiary of US$ 7.5 million at January 1, 2009.  In the quarter ended March 31, 2009 tax benefits of US$ 0.2 million were recognized in respect of the utilization of part of this loss, and were recorded as additional paid-in capital, net of US$ 0.1 million of transfers related to the write-off of deferred tax assets arising upon forfeitures and other adjustments. The losses are subject to examination by the tax authorities and to restriction on their utilization.

The aggregate intrinsic value (the difference between the stock price on the last day of trading of the first quarter of 2009 and the exercise prices multiplied by the number of in-the-money options) represents the total intrinsic value that would have been received by the option holders had they exercised all in-the-money options as of March 31, 2009.  This amount changes based on the fair value of our Common Stock.  The total intrinsic value of options exercised during the three months ended March 31, 2009 and 2008 was US$ nil and US$ 1.8 thousand, respectively.  As of March 31, 2009, there was US$ 9.8 million of total unrecognized compensation expense related to options.  The expense is expected to be recognized over a weighted average period of 2.1 years.  Proceeds received from the exercise of stock options were US$ nil and US$ 9.0 thousand for the three months ended March 31, 2009 and 2008, respectively.

Page 37


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

15.  EARNINGS PER SHARE

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

   
For the Three Months Ended March 31,
 
       
2008
 
             
Net (loss) / income from continuing operations attributable for CME Ltd. shareholders
  $ (44,176 )   $ $ 15,195  
Net loss from discontinued operations
    (262 )     (750 )
Net (loss) / income attributable to CME Ltd. Shareholders
  $ (44,438 )   $ 14,445  
                 
Weighted average outstanding shares of Common Stock (000’s)
    42,337       42,316  
Dilutive effect of employee stock options (000’s)
    -       416  
Common Stock and Common Stock equivalents (000’s)
    42,337       42,732  
                 
Income / (loss) per share:
               
Basic
  $ (1.05 )   $ 0.34  
Diluted
  $ (1.05 )   $ 0.34  

At March 31, 2009, 1,377,343 (December 31, 2008: 877,625) stock options were antidilutive to income from continuing operations and excluded from the calculation of earnings per share. These may become dilutive in the future. Common shares potentially issuable under our Convertible Notes may also become dilutive in the future although were antidilutive at March 31, 2009.

16.  INTEREST EXPENSE

Interest expense comprised the following for the three months ended March 31, 2009 and 2008, respectively:

   
For the Three Months Ended March 31,
 
       
2008
 
             
Interest on Senior Notes
  $ 9,408     $ 11,315  
Interest on Convertible Notes
    4,156       970  
Interest on EBRD loan
    1,268       -  
Interest on capital leases
    85       95  
Other interest and fees
    823       958  
    $ 15,740     $ 13,338  
                 
Amortization of capitalized debt issuance costs
    1,130       861  
Amortization of debt issuance discount
    4,558       1,030  
    $ 5,688     $ 1,891  
                 
Total interest expense
  $ 21,428     $ 15,229  

Page 38

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

Interest expense for the three months ended March 31, 2008 reflects the impact of adopting FSP APB 14-1 retrospectively (see Note 2, “Summary of Significant Accounting Policies, Convertible Debt”).

17.  SEGMENT DATA

We manage our business on a geographic basis and review the performance of each segment using data that reflects 100% of operating and license company results.  Our segments are Bulgaria, Croatia, the Czech Republic, Romania, the Slovak Republic, Slovenia and Ukraine.

We evaluate the performance of our segments based on Net Revenues and EBITDA, which is also used as a component in determining management bonuses.

Our key performance measure of the efficiency of our segments is EBITDA margin.  We define EBITDA margin as the ratio of EBITDA to Net Revenues.

EBITDA is determined as net income / (loss), which includes program rights amortization costs, before interest, taxes, depreciation and amortization of intangible assets.  Items that are not allocated to our segments for purposes of evaluating their performance and therefore are not included in EBITDA, include:

·
foreign currency exchange gains and losses;

·
changes in fair value of derivatives; and

·
certain unusual or infrequent items (e.g., impairments of assets or investments).

Below are tables showing our Net Revenues, EBITDA, depreciation, amortization, impairment charges, operating (loss) / income and assets by operation for the three months ended March 31, 2009 and 2008 for condensed consolidated statement of operations data and as at March 31, 2009 and December 31, 2008 for condensed consolidated balance sheet data:

   
For the Three Months Ended March 31,
 
Net Revenues (1)
 
2009
   
2008
 
             
Bulgaria (2)
  $ 596     $ -  
Croatia
    10,203       11,534  
Czech Republic
    56,127       85,558  
Romania
    35,689       57,996  
Slovak Republic
    20,571       26,234  
Slovenia
    13,134       17,951  
Ukraine
    4,901       23,750  
Total Operating Segments
  $ 141,221     $ 223,023  
Corporate
    -       -  
Total
  $ 141,221     $ 223,023  
 
(1)
All net revenues are derived from external customers.  There are no inter-segmental revenues.
 
(2)
We acquired our Bulgaria operations on August 1, 2008.

Page 39

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

   
For the Three Months Ended March 31,
 
EBITDA
 
2009
   
2008
 
             
Bulgaria (1)
  $ (6,730 )   $ -  
Croatia
    (43 )     (2,730 )
Czech Republic
    24,893       43,845  
Romania
    7,147       23,376  
Slovak Republic
    3,728       9,137  
Slovenia
    3,010       4,340  
Ukraine
    (12,280 )     (2,694 )
Total Operating Segments
  $ 19,725     $ 75,274  
Corporate
    (4,259 )     (9,806 )
Total
  $ 15,466     $ 65,468  

(1)
We acquired our Bulgaria operations on August 1, 2008.

   
For the Three Months Ended March 31,
 
Depreciation
 
2009
   
2008
 
             
Bulgaria (1)
  $ 535     $ -  
Croatia
    1,069       1,410  
Czech Republic
    3,695       4,622  
Romania
    2,751       2,672  
Slovak Republic
    1,636       1,383  
Slovenia
    1,426       1,283  
Ukraine
    504       744  
Total Operating Segments
  $ 11,616     $ 12,114  
Corporate
    388       211  
Total
  $ 12,004     $ 12,325  
 
(1)
We acquired our Bulgaria operations on August 1, 2008.

Page 40


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

   
For the Three Months Ended March 31,
 
Amortization of intangible assets
 
2009
   
2008
 
             
Bulgaria (1)
  $ 1,545     $ -  
Croatia
    -       -  
Czech Republic
    2,414       5,524  
Romania
    591       869  
Slovak Republic
    1,137       1,193  
Slovenia
    -       -  
Ukraine
    414       84  
Total Operating Segments
  $ 6,101     $ 7,670  
Corporate
    -       -  
Total
  $ 6,101     $ 7,670  

(1)
We acquired our Bulgaria operations on August 1, 2008.

   
For the Three Months Ended March 31,
 
Impairment charges
 
2009
   
2008
 
             
Bulgaria (1)
  $ 81,843     $ -  
Croatia
    -       -  
Czech Republic
    -       -  
Romania
    -       -  
Slovak Republic
    -       -  
Slovenia
    -       -  
Ukraine
    -       -  
Total Operating Segments
  $ 81,843     $ -  
Corporate
    -       -  
Total
  $ 81,843     $ -  

(1)
We acquired our Bulgaria operations on August 1, 2008.

Page 41


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

   
For the Three Months Ended March 31,
 
Operating (loss) / income
 
2009
   
2008
 
             
Bulgaria (1)
  $ (90,653 )   $ -  
Croatia
    (1,112 )     (4,140 )
Czech Republic
    18,784       33,699  
Romania
    3,805       19,835  
Slovak Republic
    955       6,561  
Slovenia
    1,584       3,057  
Ukraine
    (13,198 )     (3,522 )
Total Operating Segments
  $ (79,835 )   $ 55,490  
Corporate
    (4,647 )     (10,017 )
Total
  $ (84,482 )   $ 45,473  

(1)
We acquired our Bulgaria operations on August 1, 2008.

Total assets (1):
       
             
Bulgaria
  $ 19,115     $ 107,805  
Croatia
    46,193       50,431  
Czech Republic
    1,245,879       1,306,997  
Romania
    343,788       387,845  
Slovak Republic
    230,110       240,899  
Slovenia
    90,751       93,022  
Ukraine
    91,629       129,590  
    $ 2,067,465     $ 2,316,589  
Corporate
    257,012       84,543  
Total
  $ 2,324,477     $ 2,401,132  
                 
Reconciliation to condensed consolidated balance sheets:
               
Assets held for sale (2)
    -       5,484  
Total assets
  $ 2,324,477     $ 2,406,616  
 
(1)
Segment assets exclude any inter-company investments, loans, payables and receivables.
 
(2) 
Assets held for sale represent the CITI channel, which was disposed of in February 2009.

Page 42

 
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except per share data)
(Unaudited)
  
Long-lived assets (1):
       
             
Bulgaria
  $ 5,979     $ 6,404  
Croatia
    11,953       13,450  
Czech Republic
    57,162       61,463  
Romania
    44,970       52,193  
Slovak Republic
    36,647       40,025  
Slovenia
    22,863       24,932  
Ukraine
    4,562       7,083  
    $ 184,136     $ 205,550  
Corporate
    771       1,117  
Total long-lived assets
  $ 184,907     $ 206,667  

(1)
Reflects property, plant and equipment.

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


18.  DISCONTINUED OPERATIONS

Ukraine
 
In the fourth quarter of 2008, in connection with an agreement with our minority partners to acquire 100% of the KINO channel and sell to them our interest in the CITI channel, we segregated the broadcasting licenses and other assets of the KINO channel and transferred them to Gravis-Kino, a new entity spun off from Gravis, which previously operated the KINO and the CITI channels.  Between January 14, 2009 and February 10, 2009, we acquired a 100% interest in the KINO channel by acquiring from our minority partners their interests in Tor, Zhysa, TV Stimul, Ukrpromtorg and Gravis-Kino and selling to them our interest in Gravis, which owns the broadcasting licenses and other assets of the CITI channel. We concluded that the CITI channel represented a disposal group and therefore recognized the income and expenses of our CITI channel as a discontinued operation in all periods presented. The assets and liabilities of the CITI channel have been classified as available for sale at December 31, 2008 and had been disposed of by March 31, 2009.

Czech Republic

On May 19, 2003, we received US$ 358.6 million from the Czech Republic in final settlement of our UNCITRAL arbitration in respect of our former operations in the Czech Republic.

On June 19, 2003, our Board of Directors decided to withdraw from operations in the Czech Republic. The revenues and expenses of our former Czech Republic operations and the award income and related legal expenses have therefore all been accounted for as discontinued operations for all periods presented.

On February 9, 2004, we entered into an agreement with the Dutch tax authorities to settle all tax liabilities outstanding for the years up to and including 2003, including receipts in respect of our 2003 award in the arbitration against the Czech Republic, for a payment of US$ 9.0 million.  We expected to continue to pay tax in The Netherlands of between US$ 1.0 and US$ 2.5 million for the foreseeable future and therefore agreed to a minimum payment of US$ 2.0 million per year for the years 2004 to 2008 and US$ 1.0 million for 2009.

Page 43

 
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except per share data)
(Unaudited)
 
We have since re-evaluated our forecasts of the amount of taxable income we expect to earn in The Netherlands in the period to 2009.  As the expected tax payable on this income is lower than the minimum amounts agreed with the Dutch tax authorities, we have provided for the shortfall.

The settlement with the Dutch tax authorities also provides that if any decision is issued at any time prior to December 31, 2008 exempting awards under Bilateral Investment Treaties from taxation in The Netherlands, we will be allowed to recover losses previously used against the 2003 arbitration award, which could be up to US$ 195.0 million, to offset other income within the applicable carry forward rules. This would not reduce the minimum amount of tax agreed payable under the settlement agreement.  The Dutch Ministry of Finance has now advised that no such decision was issued.

The settlement with the Dutch tax authorities has also resulted in a deductible temporary difference in the form of a ruling deficit against which a full valuation allowance has been recorded.


19.  COMMITMENTS AND CONTINGENCIES

Commitments

a)  Station Programming Rights Agreements

At March 31, 2009, we had the following commitments in respect of future programming, including contracts signed with license periods starting after the balance sheet date:

     
       
Bulgaria
  $ 49,306  
Croatia
    27,614  
Czech Republic
    102,262  
Romania
    171,135  
Slovak Republic
    47,978  
Slovenia
    20,664  
Ukraine
    15,523  
Total
  $ 434,482  

Of the amount shown in the table above, US$ 108.2 million is payable within one year.

Page 44


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

c) Operating Lease Commitments

For the three months ended March 31, 2009 and 2008 we incurred aggregate rent on all facilities of US$ 2.2 million and US$ 3.6 million, respectively.  Future minimum operating lease payments at March 31, 2009 for non-cancellable operating leases with remaining terms in excess of one year (net of amounts to be recharged to third parties) are payable as follows:

     
       
2009
    4,320  
2010
    4,766  
2011
    2,898  
2012
    1,931  
2013
    3,840  
2014 and thereafter
    1,597  
Total
  $ 19,352  

d) Acquisition of Minority Shareholdings in Romania

Adrian Sarbu has the right to sell to us his remaining shareholding in Pro TV and MPI under a put option agreement entered into in July 2004 at a price to be determined by an independent valuation, subject to a floor price of US$ 1.45 million for each 1.0% interest sold. Mr. Sarbu’s right to put his remaining shareholding’ is exercisable from November 12, 2009, provided that we have not enforced a pledge over this shareholding which Mr. Sarbu granted as security for our right to put him our shareholding in Media Pro. As at March 31, 2009, we consider the fair value of the put option of Mr. Sarbu to be approximately US$ nil.

e) Other

Dutch Tax

On February 9, 2004, we entered into an agreement with the Dutch tax authorities to settle all tax liabilities outstanding for the years up to and including 2003, including receipts in respect of our 2003 award in the arbitration against the Czech Republic, for a payment of US$ 9.0 million.  We expected to continue to pay tax in the Netherlands of between US$ 1.0 and US$ 2.5 million for the foreseeable future and therefore also agreed to a minimum tax payable of US$ 2.0 million per year for the years 2004 - 2008 and US$ 1.0 million for 2009.

We have since re-evaluated our forecasts of the amount of taxable income we expect to earn in The Netherlands in the period to 2009.  As the expected tax payable on this income is lower than the minimum amounts agreed with the Dutch tax authorities, we have provided for the shortfall.

The settlement with the Dutch tax authorities also provided that if any decision was issued at any time prior to December 31, 2008 exempting awards under Bilateral Investment Treaties from taxation in The Netherlands, we will be allowed to recover losses previously used against the 2003 arbitration award, which could be up to US$ 195.0 million, to offset other income within the applicable carry forward rules. This would not reduce the minimum amount of tax agreed payable under the settlement agreement.  The Dutch Ministry of Finance has now advised that no such decision was issued.

As at March 31, 2009 we provided US$ 0.3 million in current liabilities (December 31, 2008: US$ 1.3 million) of tax in The Netherlands as the difference between our obligation under this agreement and our estimate of tax in The Netherlands that may fall due over this period from business operations, based on current business structures and economic conditions.

Page 45


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

Czech Republic - Factoring of Trade Receivables

CET 21 has a working capital credit facility of CZK 250 million (approximately US$ 12.2 million) with CS.  This facility is secured by a pledge of receivables under the factoring agreement with FCS.

The transfer of the receivables is accounted for as a secured borrowing under FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, with the proceeds received recorded in the Condensed Consolidated Balance Sheet as a liability and included in current credit facilities and obligations under capital leases. The corresponding receivables are a part of accounts receivable, as we retain the risks of ownership.

Contingencies

a) Litigation

We are, from time to time, a party to litigation that arises in the normal course of our business operations. Other than the claim discussed below, we are not presently a party to any such litigation which could reasonably be expected to have a material adverse effect on our business or operations.

 Video International termination

On March 18, 2009, Video International Company Group, CGSC (“VI”), a Russian legal entity, filed a claim in the London Court of International Arbitration (“LCIA”) against our wholly-owned subsidiary CME Media Enterprises B.V. (“CME BV”), which is the principal holding company of our Ukrainian subsidiaries. The claim relates to the termination of an agreement between VI and CME B.V. dated November 30, 2006 (the “parent agreement”), which was entered into in connection with Studio 1+1 in Ukraine entering advertising and marketing services agreements with LLC Video International-Prioritet, a Ukrainian subsidiary of VI.  Pursuant to the advertising and marketing services agreements, LLC Video International-Prioritet had been selling advertising and sponsorship on the STUDIO 1+1 channel. We delivered notice of termination of all agreements with the VI group on December 24, 2008; and as a result, all agreements with the VI group terminated on March 24, 2009. In connection with these terminations, Studio 1+1 is required under the advertising and marketing services agreements to pay a termination penalty equal to (i) 12% of the average monthly advertising revenues and (ii) 6% of the average monthly sponsorship revenues for advertising and sponsorship sold by LLC Video International-Prioritet for the six months prior to the termination date, multiplied by six. We have recorded a provision of US$ 4.9 million, representing the amount we currently believe we will be required to pay in connection with the termination of the agreements. In its arbitration claim, VI is seeking payment of a separate indemnity under the parent agreement equal to the aggregate amount of STUDIO 1+1’s advertising revenues for the six months ended December 31, 2008. The aggregate amount of relief sought is US$ 58.5 million. We believe that VI has no grounds for receiving such separate indemnity and are defending our position vigorously in the arbitration proceedings.

b) Lehman Brothers Bankruptcy Claim

On March 4, 2008, we purchased for cash consideration of US$ 22.2 million, capped call options from Lehman OTC (See Note 5, “Senior Debt: Convertible Notes”) over 1,583,333 shares of our Class A common stock which entitled us to receive, at our election following a conversion under the Convertible Notes, cash or shares of Class A common stock with a value equal to the difference between the trading price of our shares at the time the option is exercised and US$ 105.00, up to a maximum trading price of US$ 151.20.

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

On September 15, 2008, Lehman Holdings, the guarantor of the obligations of Lehman OTC under the capped call agreement, filed for protection under Chapter 11 of the United States Bankruptcy Code. The bankruptcy filing of Lehman Holding, as guarantor, was an event of default and gave us the right to terminate the capped call agreement with Lehman OTC and claim for losses. We exercised this right on September 16, 2008 and claimed an amount of US$ 19.9 million, which bears interest at a rate equal to CME’s estimate of its cost of funding plus 1% per annum.

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

On March 3, 2009 we assigned our claim in the bankruptcy proceedings of Lehman Holdings and Lehman OTC to an unrelated third party for cash consideration of US$ 3.4 million, or 17% of the claim value. Under the terms of the agreement, in certain circumstances which we consider remote, including if our claim is subsequently disallowed or adjusted by the bankruptcy court, the counterparty would be able to recoup the corresponding portion of the purchase price from us. Likewise, if the amount of recovery exceeds the amount of our claim, we may receive a portion of that recovery from the claim purchaser.

c) Licenses

Regulatory bodies in each country in which we operate control access to the available frequencies through licensing regimes.  The licenses to operate our broadcast operations are effective for the following periods:
 
Bulgaria
The analog license of TV2 expires in February 2010.
 
Croatia
The analog license of NOVA TV (Croatia) expires in March 2010.
 
Czech Republic
The terrestrial license of TV NOVA (Czech Republic) expires in January 2025 and the satellite license of TV NOVA (Czech Republic) expires in December 2020. The NOVA SPORT cable and satellite license expires in September 2020. The satellite license for NOVA CINEMA expires in November 2019.
 
Romania
Analog, cable and satellite licenses expire on dates ranging from May 2009 to April 2018.
 
Slovak Republic
The analog license of TV MARKIZA expires in September 2019.
 
Slovenia
The analog licenses of POP TV and KANAL A expire in August 2012.
 
Ukraine
The 15-hour prime time and off prime time analog license of STUDIO 1+1 expires in December 2016. The analog license to broadcast for the remaining nine hours in off prime time expires in July 2014. The satellite license expires in April 2018. Analog and satellite licenses for the KINO channel expire on dates ranging from March 2010 to July 2016.

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

Digital Terrestrial Television Transition

In the transition from analog to digital terrestrial broadcasting each jurisdiction is following a similar set of steps - although the approach being applied is not uniform.  Typically, legislation governing the transition to digital is adopted addressing the licensing of operators of the digital networks as well as the licensing of digital broadcasters, technical parameters concerning the allocation of frequencies to be used for digital services (including those currently being used for analog services), broadcasting standards to be provided, the timing of the transition and, ideally, principles to be applied in the transition, including transparency and non-discrimination. As a rule, these are embodied in a technical transition plan (“TTP”) that, in most jurisdictions, is agreed among the relevant Media Council, the national telecommunications agency (which is generally responsible for the allocation and use of frequencies) and the broadcasters.

The TTP will typically include the following: the timeline and final switchover date, time allowances for the phases of the transition, allocation of frequencies for digital broadcasting and other digital services, methods for calculating digital terrestrial signal coverage and penetration of set top boxes, parameters for determining whether the conditions for switchover have been satisfied for any phase, the technical specifications for broadcasting standards to be utilized and technical restrictions on parallel broadcasting in analog and terrestrial during the transition phase.

 
Of our markets, Bulgaria, the Czech Republic, the Slovak Republic and Slovenia are the furthest advanced in the transition to digital. All four have adopted new legislation or amendments to existing legislation and TTPs in order to facilitate the transition.  Generally, this legislation provides that incumbent analog broadcasters are entitled to receive a digital license or that current licenses entitle the holders to digital terrestrial broadcasting, although broadcasters in a specific jurisdiction may be required to formally file an application in order for a digital license to be issued.

In that regard, both of our Slovenian channels, POP TV and KANAL A, were issued digital licenses in November 2007. We anticipate that the switchover to digital in Slovenia will be completed by 2010, at which point analog licenses will be cancelled.  The license currently held by CET 21 allows for national digital terrestrial broadcasting of TV NOVA (Czech Republic) in any multiplex. Such license has been extended for an additional 8 years, to 2025. In addition, CET 21 was granted a license for national digital terrestrial broadcasting of NOVA CINEMA. This license is valid until the completion of transition to digital terrestrial broadcasting in the Czech Republic, at which time we expect a new license will be granted. In the Slovak Republic, TV MARKIZA is entitled to receive a digital license under recently adopted legislation and intends to apply for one following the completion of the tender offer for the multiplex operator under the TTP for the Slovak Republic.  In addition, in January 2009 Markiza was granted a digital license for a niche channel which must be launched by January 2011.  In Bulgaria, TV2 was granted the right to receive a “must-carry” digital license, which gives TV2 a must-carry right for the first multiplex. We expect the Bulgarian Media Council to issue the license in the near future. The digital switchover in Bulgaria is expected to be completed by 2012.

Draft legislation governing the transition to digital is under discussion in Croatia.  We anticipate that legislation will be adopted during 2009 that will address digital licensing and the TTP in a comprehensive way.  We expect that NOVA TV (Croatia) will receive a digital license.

The Romanian governmental authorities have adopted amendments to existing legislation which provide that analog broadcasters are entitled to receive digital licenses; however, specific regulations to govern the transition to digitalization are yet to be adopted by the Romanian Media Council. The existing law provides that broadcasters within the same multiplex are entitled to choose their own operator, whether one of those broadcasters, a separate company set up by those broadcasters or a third party.

The Ukrainian governmental authorities have issued generic legislation in respect of the transition to digital. In addition, the Ukrainian Media Council has issued decisions confirming that STUDIO 1+1 would be included in one of the multiplexes to be launched in connection with the transition to digital broadcasting.  The Ukrainian Media Council recently held a tender for licenses for additional digital frequencies that will be made available for niche channels in the switchover to digital, and is currently soliciting proposals for technical development of certain digital multiplexes. However, there has been no indication as to when a TTP will be adopted in Ukraine.

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

We intend to apply for and obtain digital licenses that are issued in replacement of analog licenses in all our operating countries and to apply for additional digital licenses and for licenses to operate digital networks where such applications are permissible and prudent.
 
c) Restrictions on dividends from Consolidated Subsidiaries and Unconsolidated Affiliates
 
Corporate law in the Central and Eastern European countries in which we have operations stipulates generally that dividends may be declared by shareholders, out of yearly profits, subject to the maintenance of registered capital and required reserves after the recovery of accumulated losses. The reserve requirement restriction generally provides that before dividends may be distributed, a portion of annual net profits (typically 5%) be allocated to a reserve, which reserve is capped at a proportion of the registered capital of a company (ranging from 5% to 25%).  The restricted net assets of our consolidated subsidiaries and equity in earnings of investments accounted for under the equity method together are less than 25% of consolidated net assets.


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

Contents
 
I.
Forward-looking Statements
II.
Executive Summary
III.
Analysis of Segment Results
IV.
Analysis of the Results of Consolidated Operations
V.
Liquidity and Capital Resources
VI.
Critical Accounting Policies and Estimates
 
I. Forward-looking Statements
 
This report contains forward-looking statements, including those relating to our capital needs, business strategy, expectations and intentions. Statements that use the terms “believe”, “anticipate”, “expect”, “plan”, “estimate”, “intend” and similar expressions of a future or forward-looking nature identify forward-looking statements for purposes of the U.S. federal securities laws or otherwise. For these statements and all other forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
 
Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy or are otherwise beyond our control and some of which might not even be anticipated.  Forward-looking statements reflect our current views with respect to future events and because our business is subject to such risks and uncertainties, actual results, our strategic plan, our financial position, results of operations and cash flows could differ materially from those described in or contemplated by the forward-looking statements contained in this report.
 
Important factors that contribute to such risks include, but are not limited to, those factors set forth under “Risk Factors” as well as the following: the effect of the credit crisis and economic downturn in our markets as well as in the United States and Western Europe; decreases in television advertising spending and the rate of development of the advertising markets in the countries in which we operate; the impact of any additional investments we make in our Bulgaria, Croatia and Ukraine operations; our effectiveness in implementing our strategic plan for our Ukraine operations or our Bulgaria operations; the successful completion of our transaction with TWMH; our ability to make future investments in television broadcast operations; our ability to develop and implement strategies regarding sales and multi-channel distribution; changes in the political and regulatory environments where we operate and application of relevant laws and regulations; the timely renewal of broadcasting licenses and our ability to obtain additional frequencies and licenses; and our ability to acquire necessary programming and attract audiences. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included in this report. We undertake no obligation to publically update or review any forward-looking statements, whether as a result of new information, future developments or otherwise.
 
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The following discussion should be read in conjunction with our interim financial statements and notes included elsewhere in this report.
 
II. Executive Summary

Continuing Operations

The following table provides a summary of our consolidated results for the three months ended March 31, 2009 and 2008:

   
For the Three Months Ended March 31,
(US$ 000's)
 
   
2009
   
2008
   
Movement
 
Net revenues
  $ 141,221     $ 223,023       (36.7 )%
Operating (loss) / income
    (84,482 )     45,473      
Nm
(1)
Net (loss) / income
  $ (46,940 )   $ 14,922      
Nm
(1)
Net cash (used in) / generated by continuing operating activities
  $ 22,548     $ 84,618       ( 73.4 )%
 
(1) Number is not meaningful.
 
The reduction in net revenues of US$ 81.8 million reflects lower demand for advertising across most of our markets as a result of weaker economic conditions, as well as the impact of a stronger dollar on our local currency revenues in the three months ended March 31, 2009 compared to the same period in 2008.  The deterioration in our operating income is principally due to the recognition of a non-cash impairment charge of US$ 81.8 million in respect of our operations in Bulgaria (see Item 1, Note 4, “Goodwill and Intangible Assets”).
 
Operating Performance
 
In the following discussion we describe our operating performance in terms of EBITDA, which is equal to total EBITDA of each of our segments less corporate costs (which include non-cash stock-based compensation). In previous reports we have described our operating performance in terms of Segment EBITDA, which reflects our station operating performance but excludes corporate costs. Comparative numbers reflect this change. (EBITDA is defined in Item 1, Note 17, “Segment Data”).
 
Despite maintaining audience share leadership in most of our established markets, the deterioration in the economic and general market conditions across the region in which we operate has resulted in much weaker financial performance in the first quarter of 2009, particularly when compared to the unusually strong results delivered in the same period in 2008. Television advertising demand has fallen sharply across all our markets, with estimated declines in our five established markets ranging from 8% to 30% in the quarter. Increasing our share of television advertising revenues in each of our established markets has only partially mitigated the impact of the declining advertising markets and revenues. In EBITDA terms, cost reduction programs have been unable to compensate for the decline in revenues.  In addition, the dollar was considerably stronger against the currencies in which we operate than in the same period last year.
 
As a result of these market conditions, we are reporting a reduction in Net Revenues of 37% and in EBITDA of 76% in the first quarter. In constant currency terms, which excludes the impact of the appreciation of the dollar on our local revenues, we have seen a decline in revenues of 24% and a decline in EBITDA of 69%.
 
Losses in our developing markets of Ukraine and Bulgaria have contributed significantly to the reduction in reported EBITDA. In Ukraine, where the television advertising market fell by an estimated 55% in the quarter, we generated EBITDA losses of US$ 12.3 million compared to US$ 2.7 million in the first quarter of 2008. Our new operations in Bulgaria generated EBITDA losses of US$ 6.7 million. Excluding these losses, the reduction in our EBITDA would have been 6.2%.
 
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Our net cash generated from continuing operations fell by 73% in the quarter.
 
Key Events
 
On March 22, 2009, we entered into a subscription agreement with TW Media Holdings LLC (“TWMH”) (the “Subscription Agreement”). Pursuant to the Subscription Agreement, we have agreed to issue to TWMH 14.5 million shares of Class A Common Stock at a price of $12.00 per share and 4.5 million shares of Class B Common Stock at a price of $15.00 per share, for an aggregate offering price of $241.5 million.  The completion of this issuance of these shares of Class A Common Stock and Class B Common Stock is subject to a vote of our shareholders and other customary closing conditions.

Future Trends
 
Advertising market conditions in the countries in which we operate deteriorated sharply in the first quarter of 2009. We anticipate GDP decline in all our markets in 2009, and consensus economic projections continue to worsen. Although it is difficult to predict the depth or duration of the recession, we currently expect the market to stabilize between the second half of 2009 and the first half of 2010.
 
The first quarter of the year is the main period in which we negotiate advertising contracts with our clients, but in light of the economic conditions, advertisers remain uncertain about the level of spending they are prepared to commit and the level of sales committed to contract is lower than at the same time last year. As a result forward visibility on sales remains poor. We currently expect that television advertising spending will decline in 2009 in Ukraine by 55% and in our other markets by between 10% and 30.
 
Since June 30, 2008, the dollar has strengthened considerably against most European currencies, including the Euro and the local currencies of our station operations.  In general, an increase in the value of the dollar against the functional currencies of the markets in which we operate will reduce the dollar value of the segment sales and segment EBITDA that we report. This trend has continued in the first quarter of 2009. We cannot predict future exchange rate trends.
 
We have taken actions to reduce costs in order to protect profits and to conserve liquidity. These steps include staff reductions in our operations and our headquarters, pay constraints, the deferral of certain operating expenditures, the deferral or cancellation of capital expenditures and managing our broadcast schedules to reduce the rate of programming cost growth. We have also modified our development strategies for Ukraine and Bulgaria and significantly reduced our planned levels of investment expenditure.  Notwithstanding these cost reductions, our goal continues to be to maintain the high audience shares and the strength of our brands that we currently enjoy in our key markets, as we believe this is essential to the long term value of our operations. We intend to maintain sufficient investment to protect these strengths. Taking all these factors into account, we expect that we will see a decline in Net Revenues and EBITDA in 2009 in local currency in all of our markets except Croatia.
 
When the global economic climate improves, we expect growth will resume in our markets. As a result, we expect that over the medium term we will see a return to higher levels of GDP growth, as higher well as general advertising and television advertising spending growth in our markets than in Western European or U.S. markets.
 
Broadcast
 
The large audience share that we enjoy in most of our markets is due both to the commercial strength of our brands and channels and to the constraints on bandwidth that limit the number of free-to-air broadcasters in our markets. The only markets where we currently face significant competition from other distribution platforms are Romania and Slovenia, where cable penetration exceeds 50% of television households.
 
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As our markets mature, we anticipate more intense competition for audience share and advertising spending from other incumbent terrestrial broadcasters and from cable, satellite and digital terrestrial broadcasters as the coverage of these technologies grows. The advent of digital terrestrial broadcasting as well as the introduction of alternative distribution platforms for content (including additional direct-to-home (“DTH”) services, the internet, internet protocol TV (“IPTV”), mobile television and video-on-demand services) will cause audience fragmentation and change the competitive dynamics in our operating countries in the medium term.  Due to our integrated multichannel and internet business model, we do not expect that the impact on our advertising share will be significant.
 
We believe that our leading position in our operating countries and the strength of our existing brands place us in a solid position to manage increased competition, including by launching new niche channels to target niche audiences as these new technologies develop.
 
Internet
 
Internet broadband penetration is low in all of our markets in comparison to Western European and U.S. markets. We anticipate broadband penetration will increase significantly over the medium term and will foster the development of significant new opportunities for generating advertising and other revenues in new media. We operate a complex internet business in each of our markets and expect to continue to launch targeted services in order to support or achieve leading positions in terms of unique users. We believe that the strength of our brands, our news programming and other locally produced content, our relationships with advertisers and the opportunities for cross promotion afforded by the large audiences of our broadcast operations put us in a strong position to achieve leading positions in these new forms of media as they develop and to monetize those assets over time. We intend to continue the development of our non-broadcast activities in order to create offerings and launch services on the internet and mobile platforms that complement our broadcast schedules and generate additional revenues.
 
Financial Position
 
We believe our financial resources are sufficient to meet our current financial obligations.  Although further deterioration in the advertising markets or continued strengthening of the dollar against the currencies of the markets in which our cash flow is generated could reduce our liquidity reserves, the anticipated investment by Time Warner provides adequate financial security. We do not have any imminent refinancing need as the earliest maturity date of our Senior Notes or Convertible Notes is in 2012 and our EBRD Loan, which amortizes from May 2009, and matures until 2011. We may be constrained in accessing new funding due to prevailing credit market conditions and our increasing leverage as Segment EBITDA falls.   We recognize the need to remain alert to the financial consequences of rapidly changing market conditions and in order to protect and develop our business we will continue to review opportunities to raise additional liquidity. This may include restructuring our debt, issuing equity or additional local debt as market conditions allow, or seeking solutions to reduce the financing burden of our developing market operations.
 
CME Strategy
 
We enjoy very strong positions in our established markets. This is based on brand strength, audience share leadership, the depth and experience of local management and local content production. Historically, these strengths have supported price leadership, high margins, and strong cash flows. We expect these strengths will give our operations resilience in the current economic downturn and the opportunity to benefit as and when growth resumes.
 
We intend also to take a number of steps to enhance the performance of the business over the medium term. Our priorities in this regard include:
 
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Optimizing the value of our resources through diversification of revenue sources:
 
 
·
we intend to reorganize our operating structure into three areas - (broadcast) channel operations, content, and internet – to leverage our content strengths to develop a significant new revenue source over the medium term; and
 
 
·
as this structure becomes established, we intend to continue our transformation from a television broadcaster to a broad based media company by capitalizing on our core strengths and expanding our revenue base into five main sources: advertising, subscription, content distribution, internet and management services.
 
Further development of our operations:
 
 
·
we will continue developing our Bulgaria and Ukraine operations in a controlled manner to secure consistent performance and a leading position in those markets; and.
 
 
·
we will assess opportunities arising from current economic conditions to launch, acquire or operate additional channels and internet operations in our region in order to expand our offerings, target niche audiences and increase our advertising inventory when financially prudent.
 
In the near term, while current difficult economic conditions continue, we will maintain a strong focus on cost control to protect both profitability and liquidity, while ensuring that this does not lead to the erosion of our brands and competitive strength.
 
III. Analysis of Results

OVERVIEW

We manage our business on a geographic basis and review the performance of each segment using data that reflects 100% of operating and license company results.  We also consider how much of our total revenues and earnings are derived from our broadcast and non-broadcast operations. Our segments are Bulgaria, Croatia, the Czech Republic, Romania, the Slovak Republic, Slovenia and Ukraine.

We evaluate the performance of our segments based on Net Revenues and EBITDA.
 
Our key performance measure of the efficiency of our segments is EBITDA margin.  We define EBITDA margin as the ratio of EBITDA to Net Revenues.

EBITDA is determined as net income/loss, which includes program rights amortization costs, before interest, taxes, depreciation and amortization of intangible assets.  Items that are not allocated to our segments for purposes of evaluating their performance, and therefore are not included in EBITDA, include:

·
foreign currency exchange gains and losses;

·
change in fair value of derivatives; and

·
certain unusual or infrequent items (e.g. impairments of assets or investments).

EBITDA may not be comparable to similar measures reported by other companies.  Non-GAAP measures should be evaluated in conjunction with, and are not a substitute for, US GAAP financial measures.

We believe EBITDA is useful to investors because it provides a more meaningful representation of our performance as it excludes certain items that either do not impact our cash flows or the operating results of our stations.  EBITDA is also used as a component in determining management bonuses.

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A summary of our total Net Revenues, EBITDA and EBITDA margin showing the relative contribution of each segment, is as follows:

SEGMENT FINANCIAL INFORMATION
For the Three Months Ended March 31, (US$ 000's)
 
                         
   
2009
   
(1)
   
2008
   
(1)
 
Net Revenues
                       
Bulgaria (TV2, RING TV) (2)
  $ 596       - %   $ -       - %
Croatia (NOVA TV)
    10,203       7 %     11,534       5 %
Czech Republic (TV NOVA, NOVA CINEMA and NOVA SPORT)
    56,127       40 %     85,558       38 %
Romania (3)
    35,689       25 %     57,996       26 %
Slovak Republic (TV MARKIZA)
    20,571       15 %     26,234       12 %
Slovenia (POP TV, KANAL A)
    13,134       9 %     17,951       8 %
Ukraine (STUDIO 1+1, KINO) (4)
    4,901       4 %     23,750       11 %
Total Net Revenues
  $ 141,221       100 %   $ 223,023       100 %
Represented by:
                               
Broadcast operations
    139,433       99 %   $ 221,050       99 %
Non-broadcast operations
    1,788       1 %     1,973       1 %
Total Net Revenues
  $ 141,221       100 %   $ 223,023       100 %
                                 
EBITDA
                               
Bulgaria (TV2, RING TV) (2)
  $ (6,730 )     (44 )%   $ -       - %
Croatia (NOVA TV)
    (43 )     - %     (2,730 )     (4 )%
Czech Republic (TV NOVA, NOVA CINEMA and NOVA SPORT)
    24,893       161 %     43,845       66 %
Romania (3)
    7,147       46 %     23,376       36 %
Slovak Republic (TV MARKIZA)
    3,728       24 %     9,137       14 %
Slovenia (POP TV and KANAL A)
    3,010       20 %     4,340       7 %
Ukraine (STUDIO 1+1, KINO) (4)
    (12,280 )     (79 )%     (2,694 )     (4 )%
    $ 19,725             $ 75,274          
Corporate
    (4,259 )     (28 )%     (9,806 )     (15 )%
Total EBITDA
  $ 15,466       100 %   $ 65,468       100 %
Represented by:
                               
Broadcast operations
  $ 21,611       139 %   $ 76,752       117 %
Non-broadcast operations
    (1,886 )     (11 )%     (1,478 )     (2 )%
Corporate
    (4,259 )     (28 )%     (9,806 )     (15 )%
Total EBITDA
  $ 15,466       100 %   $ 65,468       100 %
                                 
EBITDA Margin (5)
    11 %             29 %        
 
(1) Percentage of Net Revenues and EBITDA.
 
(2) We acquired our Bulgaria operations on August 1, 2008.
 
(3) Romania channels are PRO TV, PRO CINEMA, ACASA, PRO TV INTERNATIONAL, SPORT.RO and MTV Romania.
 
(4) Ukraine channels are STUDIO 1+1 and KINO. From January 1, 2009 the operations of our KINO channel were combined with those of our STUDIO 1+1 channel and are no longer reported as a separate segment.
 
(5) We define EBITDA margin as the ratio of EBITDA to Net Revenues.
 
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ANALYSIS BY GEOGRAPHIC SEGMENT

We, like other television operators, experience seasonality, with advertising sales tending to be lower during the first and third quarters of each calendar year, particularly during the summer holiday period (typically July and August) and higher during the second and fourth quarters of each calendar year, particularly toward the end of the year.
 
Spot and Non-Spot Revenues. For the purposes of our management’s discussion and analysis of financial condition and results of operations, total television and radio advertising revenue net of rebates is referred to as “spot revenues”.  “Non-spot revenues” refers to all other revenues, including those from sponsorship, game shows, program sales, short message service (“SMS”) messaging, cable subscriptions and barter transactions.  The total of spot revenues and non-spot revenues is equal to Net Revenues.
 
Our goal is to increase revenues from advertising in local currency year-on-year in every market through disciplined management of our advertising inventory.  In any given period, revenue increases can be attributable to combinations of price increases, higher inventory sales, seasonal or time-of-day incentives, target-audience delivery of specific campaigns, introductory pricing for new clients or audience movements based on our competitors’ program schedules.
 
Audience Ratings and Share. When describing our performance we refer to “audience share”, which represents the share attracted by a channel as a proportion of the total audience watching television, and “ratings”, which represents the number of people watching a channel (expressed as a proportion of the total population measured). Audience share and ratings information is measured in each market by international measurement agencies, using peoplemeters, which quantify audiences for different demographics and sub geographies of the population measured throughout the day. Our channels schedule programming intended to attract audiences within specific “target” demographics that we believe will be attractive to advertisers. For each of our segments we show all day and prime time audience share and program ratings information for our channels and their major competitors, based on our channels’ target demographics.

Spot Sales. Our main unit of sale is the commercial gross rating point (“GRP”).  This is a measure of the number of people watching when the advertisement is aired. Generally we will contract with a client to provide an agreed number of GRPs for an agreed price (“cost per point” or “CPP”). Much less frequently, and usually only for small niche channels, we may sell on a fixed spot basis where an advertisement is placed at an agreed time for a negotiated price that is independent of the number of viewers.  The price per GRP package varies depending on the season and time of day the advertisement is aired, the volume of GRPs purchased, requirements for special positioning of the advertisement, the demographic group that the advertisement is targeting (in a multi-channel environment) and other factors. Our larger advertising customers generally enter into annual contracts which usually run from April to March and set the pricing for a committed volume of GRPs.
 
Generally, demand for broadcast advertising is highest in the fourth quarter of the year, followed by the second quarter; demand for broadcast advertising tends to be lowest in the third quarter of the year.

The following analysis contains references to like-for-like (“% Lfl”) or constant currency percentage movements. These references reflect the impact of applying the current period average exchange rates to the prior period revenues and costs. Given the significant movement of the currencies in the markets in which we operate against the dollar, we believe that it is more useful to provide percentage movements based on like-for-like (“% Lfl”) or constant currency percentage movements as well as actual (“% Act”) percentage movements (which includes the effect of foreign exchange).

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(A) BULGARIA
 
We acquired our Bulgaria operations on August 1, 2008.  We hold an indirect 80.0% voting and economic interest in each of TV2, a start-up national terrestrial channel, and RING TV, a cable sports channel.  TV2 was launched in November 2007.

Since acquiring our Bulgaria operations, we have continued to focus on establishing the necessary infrastructure and resources for the development of the operations, drawing on experienced management support from Romania and other markets while we build the new local management team. We continue to enhance our management team and have commenced in-house productions to be aired later in the year.  We intend to relaunch TV2 and RING TV in the second half of 2009.

Market Background: We estimate that the net television advertising market in Bulgaria was approximately US$ 175 to US$ 185 million in 2008. We estimate that the local currency television advertising market declined by 30% in the first quarter.  Economic projections for Bulgaria in 2009 are poor, resulting in uncertainty among advertisers.  As a result we are closing sales contracts for 2009 more slowly than we anticipated and cannot accurately predict future market development.  However, we currently expect the local currency television advertising market to decline by between 15% and 20% in 2009. If market conditions continue to worsen, a larger decline in the total advertising market could occur.

Audience Share and Ratings Performance

For sales purposes, TV2’s target audience demographic is 18-49 Urban. All audience data shown below is based on the target demographic of TV2.

   
For the three months ended March 31, 2009
 
All day audience share
    2.4 %
All day ratings
    0.3 %
Prime time audience share
    2.3 %
Prime time ratings
    0.7 %

Our major competitors are the privately owned broadcasters bTV and NOVA TV and the public broadcaster BNT. In the three months ended March 31, 2009, bTV had an all day audience share of 35.2%, NOVA TV had an all day audience share of 22.2% and BNT had an all day audience share of 9.1%.  In terms of its audience share, TV2 currently is comparable to the larger cable or satellite channels in the Bulgarian market, including DIEMA + and DIEMA 2, with all day audience shares for the three months ended March 31, 2009 of 2.8% and 0.9%, respectively and FOX LIFE with 2.6%.

Prime time audience share for the three months ended March 31, 2009 was 40.6% for bTV, 25.1% for NOVA TV and 10.3% for BNT.  Prime time audience shares for the three months ended March 31, 2009 for DIEMA +, DIEMA 2 and FOX LIFE were 2.4%, 0.6% and 1.2%, respectively.

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BULGARIA FINANICIAL INFORMATION
 
   
For the three months ended March 31, 2009
(US$ 000’s)
 
Spot revenues     $ 219  
Non-spot revenues
    377  
Net Revenues
  $ 596  
         
Represented by:
       
Broadcast operations
  $ 596  
Non-broadcast operations
    -  
Net Revenues
  $ 596  
         
EBITDA
  $ (6,730 )
         
Represented by:
       
Broadcast operations
  $ (6,670 )
Non-broadcast operations
    (60 )
EBITDA
  $ (6,730 )
         
EBITDA Margin
 
Nm
 

·
Net Revenues for the three months ended March 31, 2009 were US$ 0.6 million. Spot revenues were US$ 0.2 million. Non-spot revenues were US$ 0.4 million, primarily from cable revenues.

·
EBITDA losses for the three months ended March 31, 2009 were US$ 6.7 million. We incurred programming costs of US$ 4.7 million, other operating costs of US$ 1.4 million and selling, general and administrative costs of US$ 1.3 million.
 
(B) CROATIA

NOVA TV (Croatia) achieved a 6% increase in like-for-like revenues during the first quarter despite an 8% decline in the television advertising market.  Our prime time audience share was slightly lower than in the same period of 2008 due to the implementation of a low cost programming schedule and to the Croatian national team reaching the final of the World Handball Championships in 2009, which was broadcast by a competitor channel.

The second season of the reality show ‘The Farm’ was launched in March, achieving an average audience share of 36% and the average prime time audience share of almost 33% in the first week of March, which was the highest audience share ever achieved by NOVA TV (Croatia).

Our news portal achieved its best ever result in March with approximately 1.3 million unique users and we launched several new themed microsites supporting popular programs and sports events.

We revised our estimates of future cash flows based on our expectations of a heavier contraction in the advertising market in 2009, lower growth in future years and a more prolonged downturn. We concluded that Long-Lived Assets in the TV2 asset group were no longer recoverable and recorded a charge to write them down to their fair value of US$ nil.

Market Background:  We estimate that the television advertising market in Croatia experienced no growth in local currency between 2007 and 2008, reflecting a reduction in demand from international advertisers in the fourth quarter of 2008.  We estimate that the local currency television advertising market declined by 8% in the first quarter of 2009.  Economic projections for Croatia in 2009 are poor and continue to worsen. Due to the resulting uncertainty among advertisers we cannot predict future market development accurately.  However, we currently expect the local currency television advertising market to decline by between 8% and 12% in 2009. If market conditions have continued to worsen since the start of the year, a further decline in the television advertising market can be expected.

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Audience  Share and Ratings Performance

For advertising sales purposes, the NOVA TV (Croatia) target audience is the 18-49 demographic and all audience data is shown on this basis.

   
For the Three Months Ended March 31,
 
       
2008
   
Movement
 
All day audience share
    22.6 %     23.1 %     (0.5 )%
All day ratings
    4.4 %     4.1 %     0.3 %
Prime time audience share
    25.7 %     26.4 %     (0.7 )%
Prime time ratings
    11.0 %     10.7 %     0.3 %

Our major competitors are the privately owned broadcaster RTL, with an all day audience share for the three months ended March 31, 2009 of 29.4%, and two channels of the public broadcaster, HRT1 and HRT2, with all day audience shares of 22.8% and 13.3% respectively.

In the three months ended March 31, 2009 NOVA TV (Croatia) remained the second highest ranked channel despite a decrease in its prime time audience share from 26.4% in the three months ended March 31, 2008 to 25.7% in the three months ended March 31, 2009. The prime time audience share for RTL increased from 27.8% to 29.4% over the same period, in part due to its broadcasting of the World Handball Championship, held in Zagreb, Croatia in January 2009 in which Croatia performed well. The prime time audience shares of HRT1 and HRT2 decreased from 23.6% to 22.8% and from 14.4% to 13.3% respectively.

Prime time ratings for the Croatia market increased from 40.4% to 42.8% for the comparable three month period.

Page 59


Three months ended March 31, 2009 compared to three months ended March 31, 2008

   
CROATIA FINANCIAL INFORMATION
 
   
For the Three Months Ended March 31, (US$ 000's)
 
               
Movement
 
   
2009
   
2008
   
% Act(1)
   
% Lfl(2)
 
                         
Spot revenues
  $ 8,213     $ 9,662       (15.0 )%     1.4 %
Non-spot revenues
    1,990       1,872       6.3 %     26.9 %
Net Revenues
  $ 10,203     $ 11,534       (11.5 )%     5.5 %
                                 
Represented by
                               
Broadcast operations
  $ 10,080     $ 11,405       (11.6 )%     5.4 %
Non-broadcast operations
    123       129       (4.7 )%     14.1 %
Net Revenues
  $ 10,203     $ 11,534       (11.5 )%     5.5 %
                                 
EBITDA
  $ (43 )   $ (2,730 )     98.4 %     98.2 %
                                 
Represented by
                               
Broadcast operations
  $ 228     $ (2,587 )     108.8 %     109.9 %
Non-broadcast operations
    (271 )     (143 )     (89.5 )%     (126.7 )%
EBITDA
  $ (43 )   $ (2,730 )     98.4 %     98.2 %
                                 
EBITDA Margin
    (0 ) %     (24 )%     24 %     24 %
                                 
(1) Actual (“%Act”) reflects the percentage change between two periods.
(2) Like for Like (“%Lfl”) or constant currency reflects the impact of applying the current period average exchange rates to the prior period revenues and costs.


·
Net Revenues for the three months ended March 31, 2009 decreased by 12%, compared to the three months ended March 31, 2008.  In constant currency, Net Revenues increased by 6%.  Spot revenues for the three months ended March 31, 2009 increased by 1% in constant currency compared to the same period in 2008. This is as a result of an increase in the volume of GRPs sold in off prime time, which more than offset a weakening in prices as a result of market conditions.  Non-spot revenues increased by 27% in constant currency in the three months ended March 31, 2009 compared to the same period in 2008.

·
EBITDA losses for the three months ended March 31, 2009 decreased by 98% compared to the three months ended March 31, 2008.  In constant currency, Segment EBITDA losses decreased by 98%.

Costs charged in arriving at EBITDA for the three months ended March 31, 2009 decreased by 15% in constant currency compared to the three months ended March 31, 2008.  Cost of programming decreased by 23% in constant currency primarily due to lower acquired programming costs partially offset by a higher proportion of locally produced programs included in our schedule, such as ”The Farm 2” and “IN magazin”.  Other operating costs increased by 1% in constant currency due to higher staff-related costs partially offset by lower broadcast operating expenses.  Staff-related costs increased due to increases in headcount.  Selling, general and administrative expenses increased by 1% in constant currency.

Page 60

 
(B) CZECH REPUBLIC

Our Czech Republic operations maintained their clear leadership position in the market with an average prime time share in their target group of 47.9% for the three months ended March 31, 2009. This was achieved despite the introduction of a more cost efficient spring schedule. In addition to our already successful series “Ulice” and “Ordinace”, this schedule included a new season of the Czech sitcom “Comeback”, realty show “WifeSwap” and a new make-over reality show, “Second Chance”. NOVA CINEMA increased its coverage in its target group to 66% from 43% since it began broadcasting in Digital Video Broadcasting - Terrestrial (“DVB-T”) on December 15, 2008 and we started to monetize its ratings in the three months ended March 31, 2009.  Prima, our leading commercial competitor, has launched a digital second channel, “Cool”, in April 2009 with a target audience of male 20-40,  we have not experienced a decrease in our audience shares since its launch.

The number of unique daily users to our internet sites grew from approximately 73,000 in the three months ended March 31, 2008 to 613,000 in the three months ended March 31, 2009 primarily due to the launch of a new news portal tn.cz; the acquisition of Jyxo, s.r.o. and Blog, a leading Czech blog site in May 2008, and the successful launch of video-on-demand capability in the fall of 2008.

Market Background:   We estimate that the television advertising market in the Czech Republic grew by approximately 7% to 9% in local currency during 2008, although it declined noticeably in December.  We estimate that the local currency television advertising market declined by 15% in the first quarter of 2009.  Economic projections for the Czech Republic in 2009 are poor and continue to worsen.  Due to the resulting uncertainty among advertisers we cannot predict future market development accurately.  However, we currently expect the local currency television advertising market to decline by between 10% and 15% in 2009. If market conditions continue to worsen, a further decline in the television advertising market can be expected.

 Audience Share and Ratings Performance

For advertising sales purposes, the TV NOVA (Czech Republic) and NOVA CINEMA target audience is the 15-54 demographic and all audience data is shown on this basis.

   
For the Three Months Ended March 31,
 
   
2009(1)
   
2008
   
Movement
 
All day audience share
    44.0 %     41.7 %     2.3 %
All day ratings
    5.5 %     5.1 %     0.4 %
Prime time audience share
    47.9 %     45.9 %     2.0 %
Prime time ratings
    15.1 %     14.6 %     0.5 %

(1) NOVA CINEMA began broadcasting in DVB-T from December 15, 2008.

Our main competitors are the two channels operated by the public broadcaster, CT1 and CT2, with all day audience shares for the three months ended March 31, 2009 of 16.4% and 5.8%, respectively, and privately owned broadcaster TV Prima, with an all day audience share of 16.0%.
 
Prime time audience share for CT1 decreased from 18.8% in the three months ended March 31, 2008 to 18.4% in the three months ended March 31, 2009, while the shares of CT2 and TV Prima decreased from 5.6% to 4.6% and from 17.0% to 16.5%, respectively.

Prime time ratings for our Czech Republic operations were 15.1% in the three months ended March 31, 2009 compared to 14.6% in the three months ended March 31, 2008 which included NOVA CINEMA, while total prime time ratings in the Czech Republic declined from 31.9% in 2008 to 31.5% in 2009 for the same period.
 

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Three months ended March 31, 2009 compared to three months ended March 31, 2008

   
CZECH REPUBLIC FINANCIAL INFORMATION
 
   
For the Three Months Ended March 31, (US$ 000's)
 
               
Movement
 
   
2009
   
2008
   
% Act(1)
   
% Lfl(2)
 
                         
Spot revenues
  $ 50,199     $ 77,603       (35.3 )%     (18.1 )%
Non-spot revenues
    5,928       7,955       (25.5 )%     (6.1 )%
Net Revenues
  $ 56,127     $ 85,558       (34.4 )%     (17.0 )%
                                 
Represented by
                               
Broadcast operations
  $ 55,456     $ 85,383       (35.1 )%     (17.8 )%
Non-broadcast operations
    671       175    
Nm(3)
   
Nm(3)
 
Net Revenues
  $ 56,127     $ 85,558       (34.4 )%     (17.0 )%
                                 
EBITDA
  $ 24,893     $ 43,845       (43.2 )%     (27.7 )%
                                 
Represented by
                               
Broadcast operations
  $ 25,587     $ 44,236       (42.2 )%     (26.3 )%
Non-broadcast operations
    (694 )     (391 )     (77.5 )%     (124.7 )%
EBITDA
  $ 24,893     $ 43,845       (43.2 )%     (27.7 )%
                                 
EBITDA Margin
    44 %     51 %     (7 )%     (7 )%
                                 
(1) Actual (“% Act”) reflects the percentage change between two periods.
(2) Like for Like (“% Lfl”) or constant currency reflects the impact of applying the current period average exchange rates to the prior period revenues and costs.
(3) Number is not meaningful.

·
Net Revenues for the three months ended March 31, 2009 decreased by 34% compared to the three months ended March 31, 2008. In constant currency, Net Revenues decreased by 17%. Spot revenues for the three months ended March 31, 2009 decreased by 18% in constant currency compared to the three months ended March 31, 2008 due to a decrease in price and the volume of GRPs sold as a result of the weaker market.  Non-spot revenue revenues decreased by 6% in constant currency.

·
EBITDA for the three months ended March 31, 2009 decreased by 43% compared to the three months ended March 31, 2008, resulting in an EBITDA margin of 44% compared to 51% in the same period in 2008.  In constant currency, EBITDA decreased by 28%.

Costs charged in arriving at EBITDA for the three months ended March 31, 2009 decreased by 6% in constant currency compared to the three months ended March 31, 2008. Cost of programming decreased by 9% in constant currency primarily due to increased scheduling of acquired programming, which is less expensive than locally produced content. Other operating costs increased by 8%, primarily due to higher fees paid for digital transmission as a result of broadcasting two of our channels in DVB-T with a higher coverage than in the same period in 2008; partially offset by lower staff-related costs. Selling, general and administrative expenses decreased by 16% in constant currency, primarily due to lower marketing and travel expenses.

Page 62


(C) ROMANIA

Our Romania operations enjoyed another successful quarter with a 1% increase in prime time audience share despite implementation of a low cost programming schedule.  Local programming continued to perform strongly with ‘Regina’, the spin-off from the successful ‘Gypsy Heart’ series, delivering an audience share of 27.3%. The Romanian management team has also provided strong support to our developing operations in Ukraine and Bulgaria.
 
Our internet operations continued to develop strongly, reaching 419,000 average daily unique users by the end of March 2009, a year-on-year growth of 35%.

Market Background:  We estimate that the television advertising market grew by approximately 27% to 29% in local currency during 2008. However, there was a marked slowdown in the market towards the end of 2008 and we estimate that market declined by 27% in the first quarter of 2009.
 
Economic projections for Romania continue to worsen.  Due to the resulting uncertainty among advertisers, the progress of sales contract negotiation in the early months of 2009 has been slower than usual and consequently we cannot predict future market development accurately. However, we currently expect the local currency television advertising market to decline between 10% and 20% in 2009. If market conditions continue to worsen, a further decline in the television advertising market can be expected.

Audience Share and Ratings Performance

For advertising sales purposes, our Romanian channels have different target audience demographics: PRO TV - 18-49 urban, ACASA - 15-49 female urban, PRO CINEMA - 18-49 urban, SPORT.RO - 18-49 male urban and MTV ROMANIA - 15-34 urban. All audience data shown below is combined for all five channels and based on the target demographic of PRO TV.


   
For the Three Months Ended March 31,
 
       
2008
   
Movement
 
All day audience share
    27.8 %     29.0 %     (1.2 )%
All day ratings
    5.1 %     5.1 %     0.0 %
Prime time audience share
    34.3 %     33.3 %     1.0 %
Prime time ratings
    13.2 %     12.4 %     0.8 %

Our main competitors are the privately owned broadcaster Antena 1, which had an all day audience share for the three months ended March 31, 2009 of 12.2%, and the two channels operated by the public broadcaster, TVR1 and TVR2, which had all day audience shares of 3.0% and 1.5%, respectively.
 
Prime time audience share for Antena 1 increased from 11.1% in the three months ended March 31, 2008 to 12.9% in the three months ended March 31, 2009, while the prime time audience shares of TVR1 and TVR2 decreased from 4.1% to 3.4% and from 1.4% to 1.2%, respectively.

Prime time ratings for PRO TV were 7.7% in the three months ended March 31, 2008 compared to 8.1% in the three months ended March 31, 2009 while total prime time ratings for the Romania market increased from 37.6% in the three months ended March 31, 2008 to 38.6% in the three months ended March 31, 2009.

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Three months ended March 31, 2009 compared to three months ended March 31, 2008

   
ROMANIA FINANCIAL INFORMATION
 
   
For the Three Months Ended March 31, (US$ 000's)
 
               
Movement
 
   
2009
   
2008
   
% Act(1)
   
% Lfl(2)
 
                         
Spot revenues
  $ 30,511     $ 53,032       (42.5 )%     (23.6 )%
Non-spot revenues
    5,178       4,964       4.3 %     38.7 %
Net Revenues
  $ 35,689     $ 57,996       (38.5 )%     (18.3 )%
                                 
Represented by
                               
Broadcast operations
  $ 35,558     $ 57,799       (38.5 )%     (18.3 )%
Non-broadcast operations
    131       197       (33.5 )%     (10.7 )%
Net Revenues
  $ 35,689     $ 57,996       (38.5 )%     (18.3 )%
                                 
EBITDA
  $ 7,147     $ 23,376       (69.4 )%     (59.3 )%
                                 
Represented by
                               
Broadcast operations
  $ 7,525     $ 23,566       (68.1 )%     (57.5 )%
Non-broadcast operations
    (378 )     (190 )     (98.9 )%     160.0 %
EBITDA
  $ 7,147     $ 23,376       (69.4 )%     (59.3 )%
                                 
EBITDA Margin
    20 %     40 %     (20 )%     (20 )%
                                 
(1) Actual (“%Act”) reflects the percentage change between two periods.
(2) Like for Like (“%Lfl”) or constant currency reflects the impact of applying the current period average exchange rates to the prior period revenues and costs.

·
Net Revenues for the three months ended March 31, 2009 decreased by 39%, compared to the three months ended March 31, 2008. In constant currency, Net Revenues decreased by 18%, spot revenues decreased by 24% and non-spot revenues increased by 39%. The decrease in net spot revenues is attributable to decreases in price and the volume of GRPs sold.  We sold a lower proportion of the GRPs that we generated in the three months ended March 31, 2009 than in the same period in 2008 as a result of the continued reduction in advertiser spending. The increase in non-spot revenue was primarily due to increased cable tariff revenue generated by PRO TV INTERNATIONAL, SPORT.RO, PRO CINEMA and MTV ROMANIA.

·
EBITDA for the three months ended March 31, 2009 decreased by 69%, compared to the three months ended March 31, 2008, resulting in an EBITDA margin of 20%, compared to 40% in the same period in 2008. In constant currency, EBITDA decreased by 59%.

Costs charged in arriving at EBITDA for the three months ended March 31, 2009 decreased by 18%, compared to the three months ended March 31, 2008. In constant currency, total costs increased by 9%. In constant currency, cost of programming grew by 12%, reflecting an increase in the cost of foreign acquired programming and an increase in acquired sport events such as the new season of the UEFA Champions League. Production expenses and other operating costs increased in constant currency by 15% and 4% respectively as a result of our acquisition of Radio Pro on April 17, 2008.  Selling, general and administrative expenses grew by 5% in constant currency, reflecting increases in costs associated with new premises occupied in October 2008.

Page 64


D) SLOVAK REPUBLIC

TV Markiza’s prime time audience share declined to 32.7% in the first quarter from 39.1% in the same period of 2008.  This reflects both our decision to remove high-cost local productions from the program schedule to reduce costs in an off-season quarter and continued strong performance from our leading competitor, TV JOJ.

With effect from January 1, 2009 State TV reduced the amount of total broadcast time devoted to advertising to 2.5% and we have been required to pay 2.0% of our revenues to a new Audiovisual Fund, which increased our cost base.

We saw an increase of approximately 82% in the number of daily unique users to our websites during March 2009 compared to the same period of 2008, reflecting the continued success of our news website.

The Slovak Republic adopted the Euro on January 1, 2009.

Market Background:  We estimate that the television advertising market in the Slovak Republic grew by approximately 6% to 8% in local currency in 2008.  We estimate that the local currency television advertising market declined by 23% in the first quarter of 2009, due to general economic conditions, augmented by the impact on the Slovak Republic of the dispute between Russia and Ukraine over gas supplies.  Economic projections for the Slovak Republic in 2009 are poor and continue to worsen.  Due to the resulting uncertainty among advertisers we cannot predict future market development accurately. However, we expect the local currency television advertising market to decline by between 10% and 20% in 2009. If market conditions continue to worsen, a further decline in the television advertising market can be expected.

Audience Share and Ratings Performance

For advertising sales purposes, TV MARKIZA’s target audience is the 12+ demographic and all audience data shown below is on this basis.
 
   
For the Three Months Ended March 31,
 
       
2008
   
Movement
 
All day audience share
    31.5 %     36.7 %     (5.2 )%
All day ratings
    4.7 %     5.4 %     (0.7 )%
Prime time audience share
    32.7 %     39.1 %     (6.4 )%
Prime time ratings
    11.9 %     14.1 %     (2.2 )%
 
Our principal competitor is the main channel operated by a privately owned company, TV JOJ, with an all day audience share of 18.9% in the three months ended March 31, 2009.  The all day audience share of STV1, the only significant public broadcaster, was 15.8% in the three months ended March 31, 2009.
 
Prime time audience share for STV1 decreased from 18.4% in the three months ended March 31, 2008 to 18.0% in the three months ended March 31, 2009, while prime time share for TV JOJ increased from 18.2% to 21.8%.  Prime time ratings for TV MARKIZA were 11.9% in the three months ended March 31, 2009 compared to 14.1% in the three months ended March 31, 2008. Total prime time ratings for the market decreased from 29.3% in the three months ended March 31, 2008 to 29.1% in the three months ended March 31, 2009.
 
Page 65


Three months ended March 31, 2009 compared to three months ended March 31, 2008
 
   
SLOVAK REPUBLIC FINANCIAL INFORMATION
 
   
For the Three Months Ended March 31, (US$ 000's)
 
               
Movement
 
   
2009
   
2008
   
% Act(1)
   
% Lfl(2)
 
                         
Spot revenues
  $ 19,171     $ 24,479       (21.7 )%     (16.9 )%
Non-spot revenues
    1,400       1,755       (20.2 )%     (14.2 )%
Net Revenues
  $ 20,571     $ 26,234       (21.6 )%     (16.7 )%
                                 
Represented by
                               
Broadcast operations
  $ 20,463     $ 26,213       (21.9 )%     (17.1 )%
Non-broadcast operations
    108       21    
Nm(3)
   
Nm(3)
 
Net Revenues
  $ 20,571     $ 26,234       (21.6 )%     (16.7 )%
                                 
EBITDA
  $ 3,728     $ 9,137       (59.2 )%     (55.9 )%
                                 
Represented by
                               
Broadcast operations
  $ 3,970     $ 9,380       (57.7 )%     (54.3 )%
Non-broadcast operations
    (242 )     (243 )     (0.4 )%     4.9 %
EBITDA
  $ 3,728     $ 9,137       (59.2 )%     (55.9 )%
                                 
EBITDA Margin
    18 %     35 %     (17 )%     (16 )%
                                 
(1) Actual (“%Act”) reflects the percentage change between two periods.
(2) Like for Like (“%Lfl”) or constant currency reflects the impact of applying the current period average exchange rates to the prior period revenues and costs.
(3) Number is not meaningful.
 
·
Net Revenues for the three months ended March 31, 2009 decreased by 22% compared to the three months ended March 31, 2008. In constant currency, Net Revenues decreased by 17%. The decrease in spot revenues was mainly due to a lower volume of GRPs sold and a decrease in our pricing to remain competitive in the declining television advertising market.  Non-spot revenues decreased by 14% in constant currency in the three months ended March 31, 2009 compared to the three months ended March 31, 2008 primarily due to lower sponsorship revenues.

·
EBITDA for the three months ended March 31, 2009 decreased by 59% compared to the three months ended March 31, 2008, and the EBITDA margin decreased from 35% to 18%. In constant currency, EBITDA decreased by 56%.

Costs charged in arriving at EBITDA for the three months ended March 31, 2009 increased by 4% in constant currency compared to the three months ended March 31, 2008. Cost of programming remained unchanged, as the increased volume of acquired foreign programming  offset savings in production costs as a result of a reduction in the proportion of high cost local programming in our schedule.

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(E) SLOVENIA

During the first quarter, our Slovenia operations increased prime time audience share as a result of the continued popularity of our innovative local programming, with ‘Can U Dig It?!’ and ‘Neighbors’ each delivering average prime time audience shares of 42%.  Over the last two months Kanal A’s access prime news program ‘SVET’ has delivered higher ratings than the main evening news on public TV, which is aired in prime time.  We have withdrawn a number of high cost programs such as ‘Big Brother’ and ‘Deal or No Deal’ in order to reduce costs.

Our internet sites saw a 70% increase in unique daily users in the three months ended March 31, 2009. Of this increase, 30% originated from our 24ur.com website and the remaining increase was as a result of our niche microsites, launched in 2008.

Market Background:  We estimate the television advertising market in Slovenia grew by approximately 7% to 9% in local currency in 2008, reflecting strong growth in the first nine months of the year followed by a sharp decline in the fourth quarter.  We estimate that the local currency television market declined by 18% in the first quarter of 2009.  Economic projections for Slovenia in 2009 are poor and continue to worsen.  Due to the resulting uncertainty among advertisers we cannot predict future market development accurately. However, we currently expect the local currency total advertising market to decline by between 15% and 20% in 2009. If market conditions continue to worsen, a further decline in the total advertising market can be expected.

 
Audience Share and Ratings Performance

For advertising sales purposes, each of POP TV’s and KANAL A’s target audience is the 18-49 demographic and all audience data shown is on this basis and combined for both channels.
 
   
For the Three Months Ended March 31,
 
       
2008
   
Movement
 
All day audience share
    37.3 %     38.1 %     (0.8 )%
All day ratings
    3.9 %     4.2 %     (0.3 )%
Prime time audience share
    46.8 %     45.4 %     1.4 %
Prime time ratings
    12.9 %     12.4 %     0.5 %
 
Our major competitors are the two channels operated by the public broadcaster, SLO1 and SLO2, with all day audience shares for the three months ended March 31, 2009 of 15.9% and 9.8%, respectively, and privately owned broadcaster TV3, with an all day audience share of 6.9%.
 
Prime time audience share for TV3 increased from 4.6% in the three months ended March 31, 2008 to 5.9% in the three months ended March 31, 2009.  The prime time audience shares of SLO 1 and SLO 2 decreased from 20.7% to 19.9% and from 6.6% to 5.8%, respectively.
 
The combined prime time ratings for POP TV and KANAL A were 12.9% in the three months ended March 31, 2009 compared to 12.4% in the three months ended March 31, 2008.  Total prime time ratings for the market decreased from 28.2% in the three months ended March 31, 2008 to 26.5% in the three months ended March 31, 2009.

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Three months ended March 31, 2009 compared to three months ended March 31, 2008

   
SLOVENIA FINANCIAL INFORMATION
 
   
For the Three Months Ended March 31, (US$ 000's)
 
               
Movement
 
   
2009
   
2008
   
% Act(1)
   
% Lfl(2)
 
                         
Spot revenues
  $ 11,645     $ 15,307       (23.9 )%     (11.2 )%
Non-spot revenues
    1,489       2,644       (43.7 )%     (34.0 )%
Net Revenues
  $ 13,134     $ 17,951       (26.8 )%     (14.6 )%
                                 
Represented by
                               
Broadcast operations
  $ 12,410     $ 16,500       (24.8 )%     (12.2 )%
Non-broadcast operations
    724       1,451       (50.1 )%     (41.7 )%
Net Revenues
  $ 13,134     $ 17,951       (26.8 )%     (14.6 )%
                                 
EBITDA
  $ 3,010     $ 4,340       (30.6 )%     (18.2 )%
                                 
Represented by
                               
Broadcast operations
  $ 2,927     $ 4,652       (37.1 )%     (26.0 )%
Non-broadcast operations
    83       (312 )     126.6 %     (129.8 )%
EBITDA
  $ 3,010     $ 4,340       (30.6 )%     (18.2 )%
                                 
EBITDA Margin
    23 %     24 %     (1 )%     (1 )%
                                 
(1) Actual (“%Act”) reflects the percentage change between two periods.
(2) Like for Like (“%Lfl”) or constant currency reflects the impact of applying the current period average exchange rates to the prior period revenues and costs.

·
Net Revenues for the three months ended March 31, 2009 decreased by 27% compared to the three months ended March 31, 2008.  In constant currency, Net Revenues decreased by 15%. Spot revenues decreased by 11% in the three months ended March 31, 2009 in constant currency compared to 2008, due to decreased spending from existing customers and lower pricing as a result of a difficult trading environment.  Non-spot revenues decreased by 34% in constant currency compared to the three months ended March 31, 2008, primarily driven by lower sponsorship and telephone voting revenues.

·
EBITDA for the three months ended March 31, 2009 decreased by 31% compared to the three months ended March 31, 2008. In constant currency, EBITDA decreased by 18% while EBITDA margin decreased by 1% to 23%.

Costs charged in arriving at EBITDA for the three months ended March 31, 2009 decreased by 13% in constant currency compared to the three months ended March 31, 2008. Cost of programming decreased by 11% in constant currency due to a reduction in the proportion of locally produced programming in the programming schedule.  Other operating costs decreased by 1% in constant currency.  Selling, general and administrative expenses decreased by 40%, primarily due to lower marketing and travel expenses.

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(F) UKRAINE

We have continued to restructure our operating processes and have reduced headcount and our overall cost base significantly compared to the same period of 2008.  We completed the buyout of our minority partners in KINO during the first quarter and have fully integrated the channel into the operations of STUDIO 1+1.  We have established an in-house sales function that has direct responsibility for all sales for our Ukraine operations.  We have commenced local productions, and the series ‘Only Love’ is scheduled to be broadcast later in the year.  Our restructuring initiatives will continue into the second half of the year.

We have maintained our prime time audience share despite a significant reduction in the cost of programming.

We adopted the Hryvna as the functional currency of our Ukraine operations on January 1, 2009.


Market Background:  We estimate that the television advertising market in Ukraine declined by approximately 3% and 5% in 2008, reflecting steady growth in the first ten months of the year, followed by a significant decline in November and December. We estimate that the local currency advertising market declined by 55% in the first quarter of 2009.

Economic projections for Ukraine in 2009 remain extremely poor. We expect the local currency television advertising market to decline by up to 30% and 40% during 2009 due to a combination of the continued worsening of economic conditions and significant price reductions by a majority of leading market participants. If market conditions continue to worsen, a further decline in the television advertising market can be expected.

Audience Share and Ratings Performance

For advertising sales purposes, STUDIO 1+1’s target audience is the 18-54 (50+) demographic and all audience data is shown below on this basis.
 
   
For the Three Months Ended March 31,2009
 
   
2009
   
2008
   
Movement
 
All day audience share
    10.2 %     12.5 %     (2.3 )%
All day ratings
    1.6 %     1.8 %     (0.2 )%
Prime time audience share
    13.3 %     13.3 %     0 %
Prime time ratings
    4.9 %     4.7 %     0.2 %
 
Our main competitors include Inter, with an all day audience share for the three months ended March 31, 2009 of 14.2%, Novy Kanal with 10.5%, ICTV with 9.5% and STB with 9.3%.

Prime time audience share for Inter decreased from 24.9% the three months ended March 31, 2008 to 16.0% for the three months ended March 31, 2009, while the prime time audience shares of Novy Kanal, ICTV and STB increased from 9.1% to 12.2%, from 8.4% to 9.5% and from 7.6% to 8.6%, respectively.

Prime time ratings for STUDIO 1+1 increased from 4.7% in the three months ended March 31, 2008 to 4.9% in the three months ended March 31, 2009.  Prime time ratings in the Ukraine market increased marginally from 24.4% in the three months ended March 31, 2008 to 24.6% in the three months ended March 31, 2009.

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Three months ended March 31, 2009 compared to three months ended March 31, 2008

   
UKRAINE FINANCIAL INFORMATION
 
   
For the Three Months Ended March 31, (US$ 000's)
 
               
Movement
 
   
2009
   
2008
   
% Act(1)
   
% Lfl(2)
 
                         
Spot revenues
  $ 2,594     $ 18,626       (86.1 )%     -  
Non-spot revenues
    2,307       5,124       (55.0 )%     -  
Net Revenues
  $ 4,901     $ 23,750       (79.4 )%     -  
                                 
Represented by
                               
Broadcast operations
  $ 4,870     $ 23,750       (79.5 )%     -  
Non-broadcast operations
    31       -       100.0 %     -  
Net Revenues
  $ 4,901     $ 23,750       (79.4 )%     -  
                                 
EBITDA
  $ (12,280 )   $ (2,694 )  
Nm (3)
      -  
                                 
Represented by
                               
Broadcast operations
  $ (11,956 )   $ (2,495 )  
Nm (3)
      -  
Non-broadcast operations
    (324 )     (199 )     (62.8 )%     -  
EBITDA
  $ (12,280 )   $ (2,694 )  
Nm (3)
      -  
                                 
EBITDA Margin
 
Nm (3)
      (11 )%  
Nm (3)
      -