10-K/A 1 body_10ka.htm CME 10-KA 12-31-2003 CME 10-KA 12-31-2003

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1 TO FORM 10-K 

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

For the fiscal year ended December 31, 2003

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

Commission File Number 0-24796

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

BERMUDA
 
N/A
(State or other jurisdiction of incorporation and organization)
 
(IRS Employer Identification No.)
Clarendon House, Church Street, Hamilton
 
HM CX Bermuda
(Address of principal executive offices)
 
(Zip Code)

Registrant's telephone number, including area code: 441-296-1431

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act: NONE

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
 
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934)  Yes x  No o

The aggregate market value of the voting stock of registrant held by non-affiliates of the registrant as of February 20, 2004 was approximately US$ 397 million

Number of shares of Class A Common Stock outstanding as of February 20, 2004 : 20,045,766

Number of shares of Class B Common Stock outstanding as of February 20, 2004 : 7,334,736



DOCUMENTS INCORPORATED BY REFERENCE

Document
Location in Form 10-K in Which Document is Incorporated


Registrant's Proxy Statement for the Annual General Meeting of Shareholders to be held on June 2, 2004
Part III

 
   

 
EXPLANATORY NOTE
 
This amendment to the Central European Media Enterprises Ltd. Annual Report on Form 10-K, as filed on February 25, 2004, is being filed primarily to:
  • Correct an error which arose in the edgarizing process whereby several captions in the balance sheet were repeated in error;
  • Correct the numerical information in Item 6, "Selected Financial Data" under "Other Data"; and
  • Correct various typographical and editorial errors throughout the text.
No changes have been made to the numerical data in our income statement, balance sheet or cashflow statements, although various typographical and editorial changes have been made to the notes to our financial statements.

We have not updated the Form 10-K to modify disclosures in the Form 10-K for events occurring subsequent to the original February 25, 2004, filing date. This Amendment No. 1 to Form 10-K/A continues to speak as of February 25, 2004.

 
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TABLE OF CONTENTS

 
 
 
 
 
Page
PART I
 
 
 
 
 
Item 1
 
Business
 
4 
 
Item 2
 
Properties
 
24
 
Item 3
 
Legal Proceedings
 
25
 
Item 4
 
Submission of Matters to a Vote of Security Holders
 
26
 
 
 
 
 
 
PART II
 
 
 
 
 
Item 5
 
Market for Registrant's Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
 
26
 
Item 6
 
Selected Financial Data
 
27
 
Item 7
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
30 
 
Item 7A
 
Quantitative and Qualitative Disclosures About Market Risk
 
54
 
Item 8
 
Financial Statements and Supplementary Data
 
55
 
Item 9
 
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
 
116
 
Item 9A
 
Controls and Procedures
 
116
 
 
 
 
 
 
PART III
 
 
 
 
 
Item 10
 
Directors and Executive Officers of the Registrant
 
117
 
Item 11
 
Executive Compensation
 
117
 
Item 12
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
117
 
Item 13
 
Certain Relationships and Related Transactions
 
117
 
Item 14
 
Principal Accountant Fees and Services
 
117
 
 
 
 
 
 
PART IV
 
 
 
 
 
Item 15
 
Exhibits, Financial Statement Schedules, and Reports on Form 8-K
 
118
 
 
 
 
 
 
SIGNATURES
 
 
 
123

 
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PART I

ITEM 1. BUSINESS

GENERAL
Central European Media Enterprises Ltd. is a Bermuda company that, together with its subsidiaries and affiliates, invests in, develops and operates national and regional commercial television stations and networks in Central and Eastern Europe. At present, we have operations in Romania, the Slovak Republic, Slovenia and Ukraine.

Our registered offices are located at Clarendon House, Church Street, Hamilton HM CX Bermuda, and our telephone number is 441-296-1431. We also maintain offices at 8th Floor, Aldwych House, 71-91 Aldwych, London, WC2B 4HN, United Kingdom, telephone number 44-20-7430-5430/1.

We make available, free of charge, on our website at http://www.cetv-net.com our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.

Unless otherwise noted, all statistical and financial information presented in this report has been converted into U.S. dollars using appropriate exchange rates. All references to 'US$' or 'dollars' are to U.S. dollars, all references to 'ROL' are to Romanian lei, all references to 'SIT' are to Slovenian tolar, all references to 'Sk' are to Slovak korunas, all references to 'Hrn' are to Ukrainian hryvna and all references to 'GBP' are to British Pounds. The exchange rates as of December 31, 2003 used in this report are 32,798 ROL/US$; 189.37 SIT/US$; 32.92 Sk/US$; 5.33 Hrn/US$; 0.79 Euro/US$; and 0.56 GBP/US$.


CORPORATE STRUCTURE

Central European Media Enterprises Ltd. was incorporated on June 15, 1994 under the laws of Bermuda. Our assets are held through a series of Dutch and Netherlands Antilles holding companies. In each market, we have interests both in license companies and in operating companies. License companies have been authorized by the relevant local regulatory authority to engage in television broadcasting in accordance with the terms of a particular license. Revenues are generated primarily through operating companies which acquire programming for broadcast by the corresponding license holding company and have agreements to sell advertising time on behalf of the license company to third parties. In Romania and Ukraine, the license company also acts as an operating company. Our share of profits in the operating companies corresponds with our voting interest other than in the Slovak Republic, where we are entitled by contract to a share of profits that is in excess of our voting interest. Below is an overview of our operating structure, the accounting treatment for each entity and a chart entitled "Simplified Corporate Structure - Continuing Operations".

 
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Key Subsidiaries and Affiliates as at 31 December, 2003
 
Share of Profits
 
Voting Interest
 
Accounting Treatment
 
TV Network





Continuing Operations
 
 
 
 
 
 
 
 

Romania
 
 
 
 
 
 
 
 
                 
Operating Companies:
 
 
 
 
 
 
 
 
Media Pro International S.A. (MPI)
 
66%
 
66%
 
Subsidiary
 
 
Media Vision S.R.L. (Media Vision)
 
70%
 
70%
 
Subsidiary
 
 
                 
License Companies:
 
 
 
 
 
 
 
 
Pro TV S.A. - formerly Pro TV S.R.L. (Pro TV)
 
66%
 
66%
 
Subsidiary
 
PRO TV and PRO TV INTERNATIONAL
Media Pro S.R.L. (Media Pro)
 
44%
 
44%
 
Equity Accounted Affiliate
 
PRO TV and ACASA
                 
Slovenia
 
 
 
 
 
 
 
 
                 
Operating Company:
 
 
 
 
 
 
 
 
Produkcija Plus, d.o.o. (Pro Plus)
 
96.85%
 
96.85%
 
Subsidiary
 
 
                 
License Companies:
 
 
 
 
 
 
 
 
Pop TV d.o.o. (Pop TV)
 
96.85%
 
96.85%
 
Subsidiary
 
POP TV
Kanal A d.o.o. (Kanal A)
 
96.85%
 
96.85%
 
Subsidiary
 
KANAL A
                 
Slovak Republic
 
 
 
 
 
 
 
 
                 
Operating Company:
 
 
 
 
 
 
 
 
Slovenska Televizna Spolocnost, spol. s.r.o. (STS)
 
70%
 
49%
 
Equity Accounted Affiliate
 
 
                 
License Company:
 
 
 
 
 
 
 
 
Markiza-Slovakia s.r.o. (Markiza)
 
0.1%
 
34%
 
Equity Accounted Affiliate
 
MARKIZA TV
                 
Ukraine
 
 
 
 
 
 
 
 
                 
Operating Companies:
 
 
 
 
 
 
 
 
Innova Film GmbH (Innova)
 
60%
 
60%
 
Subsidiary
 
 
International Media Services Ltd. (IMS)
 
60%
 
60%
 
Subsidiary
 
 
Enterprise "Inter-Media" (Inter-Media)
 
60%
 
60%
 
Subsidiary
 
 
                 
License Company:
 
 
 
 
 
 
 
 
Broadcasting Company "Studio 1+1" (Studio 1+1)
 
18%
 
18%
 
Equity Accounted Affiliate
 
STUDIO 1+1

 
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OPERATING ENVIRONMENT

Market and Audience Share

Our television stations and networks reach an aggregate of approximately 69 million people in four countries. Our national private television stations and networks in the Slovak Republic and Slovenia had the leading nationwide audience shares for 2003 and our television network in Romania had the leading average audience share within its area of broadcast reach for 2003. In Ukraine, for 2003, our national private television station and network was ranked second in audience share in a competitive market.

The market ratings of our stations in their respective markets are reflected below.
Country
 
Station and Networks
 
Launch Date
 
Technical Reach (1)
 
2003 Audience Share (2)
 
Market Rank (2)






Romania
 
PRO TV
 
December 1995
 
72 %
 
15.4%
 
2
 
 
ACASA
 
February 1998
 
56 %
 
6.6%
 
5
Slovak Republic
 
MARKIZA TV
 
August 1996
 
97%
 
45.8%
 
1
Slovenia
 
POP TV
 
December 1995
 
87%
 
29.5%
 
1
 
 
KANAL A
 
October 2000 (3)
 
81%
 
10.2%
 
4
Ukraine
 
STUDIO 1+1
 
January 1997
 
95%
 
19.1%
 
2

(1)
 
"Technical Reach" measures the percentage of people in the country who are able to receive the signals of the indicated stations and networks. Source: Internal estimates supplied by each country's operations. Each of our stations in the relevant country has estimated its own technical reach based on the location, power and frequency of each of its many transmitters and the local population density and geography around that transmitter. The technical reach calculation is designed to estimate the number of homes that can receive the station’s broadcast signal. This is separate from the independent third party measurement that determines viewing shares.
     
(2)
 
Nationwide all day audience share and rank (except Ukraine which is audience share and rank within coverage area). Source: Romania: Peoplemeters Taylor Nelson Sofres, Slovak Republic: Visio / MVK, Slovenia: Peoplemeters AGB Media Services, Ukraine: Peoplemeters GFK USM. There are seven, six, four and six significant stations ranked in Romania, the Slovak Republic, Slovenia, and Ukraine, respectively.
     
(3)
 
Kanal A was originally launched in 1991, and re-launched by us in October 2000 following its acquisition from a competitor.


The following table sets forth the population, technical reach, number of TV households, per capita GDP and cable penetration for those countries of Central and Eastern Europe where we have broadcast operations.

Country
 
Population (in millions) (1)
 
Technical Reach (in millions) (2)
 
TV Households (in millions) (3)
 
Per Capita GDP 2002 (1)
 
Cable Penetration (3)






Romania
 
21.8
 
15.7
 
6.6
 
US$ 2,096
 
56%
Slovak Republic
 
5.4
 
5.2
 
2.0
 
US$ 4,389
 
35%
Slovenia
 
2.0
 
1.7
 
0.6
 
US$ 10,550
 
57%
Ukraine
 
48.7
 
46.3
 
17.1
 
US$ 850
 
11%



Total
 
77.9
 
68.9
 
26.3
 
 
 
 




(1)
 
Source: World Bank Group, Country Briefs 2003 (2002 data).
     
(2)
 
Source: Internal estimates supplied by each country's operations. Each of our operations in the relevant country has estimated its own technical reach based on the location, power and frequency of each of its many transmitters and the local population density and geography around that transmitter. The technical reach calculation is designed to estimate the number of people that can receive our broadcast signal. This is separate from the independent third party measurement that determines viewing shares.
     
(3)
 
Source: EUTelSat.org annual online survey (September 2002 data). A TV household is a residential dwelling with one or more television sets. Cable Penetration refers to the percentage of TV Households whom receive satellite TV channels via a cable network.


 
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Regulation

Our Form 10-K refers to broadcasting regulatory authorities or agencies as "The Media Council". These authorities or bodies are as follows:

Romania – National Audio-Visual Commission
Slovak Republic – Council of the Slovak Republic for Broadcasting and Television Transmission
Slovenia – Telecommunications, Radio Diffusion and Postal Agency
Ukraine – National Council for Television and Radio Broadcasting

License Renewal

Management believes that the licenses for the television license companies will be renewed prior to expiry. In Romania, the Slovak Republic and Slovenia local regulations contain a qualified presumption for extensions of broadcast licenses. However, there can be no assurance that any of the licenses will be renewed upon expiration of their current terms. The failure of any such license to be renewed could adversely affect the results of our operations. However, to date, all expiring licenses have been renewed in the ordinary course of business. Access to the available frequencies is controlled by regulatory bodies in each country in which we operate.

In Ukraine, the license to broadcast is currently being challenged in the Arbitration Court of Kiev. A third party alleged that Studio 1+1 Ltd was granted two licenses by the Ukraine Media Council and that the required license fee was not paid. These and almost identical allegations have been the subject of various legal actions for more than four years. We believe that these allegations are groundless. See Part I, Item 3, "Legal Proceedings", below.

The licenses to operate our broadcast operations are effective for the following periods:

Romania
 
The license for Bucharest was renewed in October 2003 for a further 9 years. To date licenses have been renewed as they expire. The remaining licenses expire on dates ranging from 2004 to 2012.  Of our 24 local licenses only the license for Cluj Napoca expires in 2004.  The coverage of Cluj Napoca is approximately 320,000 people, the second largest local license after Bucharest.
     
Slovak Republic
 
The license of Markiza in the Slovak Republic expires in September 2007.
     
Slovenia
 
The licenses of our operations in Slovenia expire in August 2012.
     
Ukraine
 
The license to provide programming and sell advertising using the UT-2 frequency in Ukraine expires in December 2006.

THE EUROPEAN UNION

When any Central or Eastern European country in which we operate joins the European Union (the "EU"), our broadcast operations in such country become subject to EU legislation, including programming content regulations. Slovenia and the Slovak Republic have been approved for entry into the EU in May 2004. It is currently anticipated that Romania may be admitted sometime after 2007.

 
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The EU's Television Without Frontiers directive (the "EU Directive") sets forth the legal framework for television broadcasting in the EU. It requires broadcasters, where "practicable and by appropriate means," to reserve a majority proportion of their broadcast time for "European works." Such works are defined as originating from an EU member state or a signatory to the Council of Europe's Convention on Transfrontier Television, as well as written and produced mainly by residents of the EU or Council of Europe member states. In addition, the EU Directive provides for a 10% quota of either broadcast time or programming budget for programs made by European producers who are independent of broadcasters. News, sports, games, advertising, teletext services and teleshopping are excluded from the calculation of these quotas. Further, the EU Directive provides for regulations on advertising, including limits on the amount of time that may be devoted to advertising spots, including direct sales advertising. The necessary legislation in Romania, Slovenia and the Slovak Republic is now in line with the EU Directive and it has had no material adverse effect on our operations.

COUNCIL OF EUROPE

Our broadcast operations are all located in countries which are members of the Council of Europe, a supranational body through which international conventions are negotiated. In 1990, the Council of Europe adopted a Convention on Transfrontier Television, which provides for European programming content quotas similar to those in the EU Directive. This Convention has been signed by all of the countries in which we operate and has been ratified by Romania, the Slovak Republic and Slovenia.


RISK FACTORS

This annual report contains forward-looking statements that involve risks and uncertainties. See "Forward-looking Statements" in Part II, Item 7. Our actual results in the future could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks described below and elsewhere in this annual report.


Risks Relating to our Operations

We have a history of losses and may not be profitable in the future

We have incurred net losses from continuing operations since inception and we may incur additional net losses from continuing operations for the next several years. For the year ended December 31, 2003 our net loss from continuing operations was US$ 24.2 million (2002: US$ 25.1 million) . As of December 31, 2003, we had an accumulated deficit of US$ 106.0 million (2002: US$ 452.0 million).

Our future ability to generate operating profits and net profits will be dependent upon a number of factors that are difficult to predict, such as our ability to:

 
-
 
retain and renew licenses;
 
-
 
attract and maintain audiences;
 
-
 
generate advertising revenues;
 
-
 
develop additional revenue streams; and
 
-
 
control costs in all areas, but particularly programming costs.

There are also a number of external factors over which we have no control, such as the level of economic growth and consumer and advertising spending in our markets.

Our Romanian subsidiaries have a number of tax contingencies that may be material

We have accrued interest and penalties on overdue tax liabilities, in the aggregate, of US$ 9.4 million in our December 31, 2003 balance sheet. The major portion of estimated interest and penalties on overdue tax liabilities relate to the outstanding tax liability at our Romanian subsidiaries. An agreement reached with the Romanian tax authorities in 2002 has reduced and re-scheduled a portion of these interest and penalty charges in return for specific deposits and an agreed repayment schedule. This rescheduling is permitted under Romanian law subject to written application demonstrating compliance with a series of objective criteria. Penalties of up to US$ 5 million may be imposed if the repayment schedule and the conditions of the agreement are not met. Should the Romanian tax authorities demand immediate payment of all potential tax liabilities, the Romanian operations would experience difficulties in continuing to operate and may have to cease operations entirely unless they can arrange financing to secure the required funds or the shareholders (including us) determine to inject equity into the business.

 
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Our related party transactions may involve risks of delayed payments resulting in impaired cashflow

In Romania, the Slovak Republic and Ukraine the local shareholders of our television operating companies are individuals with other interests in that country, including interests in media related companies. In Romania and Slovenia our General Directors are also local shareholders.  Our local operating companies therefore enter into transactions with parties related to our local shareholders and General Directors, including barter transactions. We also have a number of loans outstanding to our local shareholders, at commercial rates.

Some related party receivables have been collected more slowly than unrelated third party receivables and related party payables have been paid promptly. This has resulted in slower cashflow to our operating companies to the detriment of our shareholders.

So long as it remains in the best interests of shareholders to use the best supplier, even if this is a related party, our subsidiaries will do so. There is therefore a continuing risk that related party collection and payment timing may result in a cashflow delay to the disadvantage of our shareholders.

Our internal controls may not prevent our General Directors from initiating transactions that are outside their authority and not in the best interests of shareholders, with possible adverse financial impact

The General Directors in our operating companies have significant management authority, subject to the overall control of the local company board of directors. In the past, our internal controls have detected transactions that have been initiated by a General Director who has circumvented our controls and entered into transactions outside his authority. Our internal controls are not able to prevent all circumstances in which a General Director may act outside his authority, particularly if a related party relationship remains undisclosed to us. There is therefore a risk that a General Director may exceed his authority and that such unapproved transactions will recur. Unapproved transactions may not be in the best interests of our shareholders and may have an adverse impact on our Financial Statements.

Our holding company structure limits our access to cash flow

We conduct all of our operations through subsidiaries and affiliated companies. Accordingly, our primary internal source of cash is dependent upon the earnings of our subsidiaries and affiliated companies and the distribution of those earnings to us, or upon loans or other payments of funds by those subsidiaries to us. We may not be able to compel certain of our subsidiaries and affiliated companies to make distributions to service our obligations. Our ability to obtain dividends or other distributions is subject to, among other things, restrictions on dividends under applicable local laws and foreign currency exchange regulations of the jurisdictions in which our subsidiaries operate. The subsidiaries’ or affiliated companies' ability to make distributions to us is also subject to their having sufficient funds from their operations legally available for the payment thereof which are not needed to fund their operations, obligations or other business plans and, in some cases, the approval of the other shareholders or creditors of these entities. The laws under which our operating subsidiaries and affiliated companies are organized provide generally that dividends may be declared by the shareholders out of yearly profits subject to the maintenance of registered capital and required reserves and after the recovery of accumulated losses. If our subsidiaries are unable or unwilling to make distributions to us, the cashflow to our holding company may be limited.

We do not have sole management control of our unconsolidated affiliates in the Slovak Republic and Ukraine

We own certain subsidiaries and affiliated companies jointly with various strategic partners. We have management control over the subsidiaries in which we have a majority interest. However, we are not able to affirmatively direct the operations, strategies and financial decisions of the license holding company for the Studio 1+1 Group in Ukraine, in which we hold only an 18% voting interest, nor in the Slovak Republic license holding and operating companies in which we exercise only 34% and 49% voting interest, respectively. Therefore, without the consent of the relevant partners, we may be unable to cause these affiliated companies to distribute funds, to implement strategies or to make programming decisions that we might favor.

 
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We are subject to risks relating to fluctuations in exchange rates

Our reporting currency is the US dollar but a significant portion of our consolidated revenues and costs are in other currencies, including programming rights expenses and interest on debt. Changes, mainly in the value of the Euro as compared to the US dollar, may have an adverse effect on our reported results of operations and financial condition.

For a detailed analysis of our exposure to exchange rate risk, see Part II, Item 7A "Quantitative and Qualitative Disclosure about Market Risk".


Risk Factors Relating to Our Operating Environment

Our license in Ukraine has been challenged

In 2001 AITI, a television station in Ukraine, commenced a court action in Ukraine against the Ukraine Media Council challenging certain aspects of the granting to Studio 1+1 of its television broadcast license in Ukraine. Studio 1+1 is involved in this litigation as a third party acting together with the Ukraine Media Council. The claim is almost identical to one which was previously brought by AITI and was dismissed on April 5, 2001 by the Supreme Arbitration Court of Ukraine.

AITI’s allegations were that Studio 1+1 has, in effect, been granted two licenses by the Ukraine TV Council, entitling it to in excess of 32 hours of broadcast time a day on Ukraine's nationwide Channel N2 (UT-2). Further, AITI alleged that Studio 1+1 never paid the required license fee.

After the more senior Court of Cassation had ruled on November 1, 2002 that the lower Economic Court of Kiev must re-hear the case, a new court date of February 5, 2003 was set. On April 9, 2003 the Economic Court of Kiev dismissed the claim brought by AITI. This judgment was appealed by AITI to the Court of Appeal that upheld the ruling by way of a decision handed down on June 19, 2003.

AITI subsequently appealed to the Court of Cassation which initially rejected their request for an appeal on the grounds it was incorrectly filed. AITI requested that the Supreme Court of Ukraine rule that the appeal must be accepted for consideration by the Court of Cassation. The Supreme Court of Ukraine subsequently ordered that the Court of Cassation should accept the appeal and the hearing date for this has been set for April 6, 2004.

If the decision in the Ukraine court system is ultimately unfavorable, it could result in a loss of the broadcast license of Studio 1+1. In 2003, net revenues and expenses of the consolidated entities of our Ukrainian operations were US$ 30.2 million and US$ 25.1 million, respectively.

Our Romanian license structure requires Romanian Media Council approval

In September 2002, the Romanian Media Council instructed all television stations in Romania to restructure their operations by January, 2003 so that the license holding companies become the main operators of the broadcasting licenses they hold. The Romanian Media Council has given some guidance on how it interprets the new audio-visual law in relation to this restructuring. At a formal meeting on September 19, 2002, the Council expressed their view that exclusive operating agreements, such as existed between our subsidiary MPI and the two Romanian license holding companies, are not permissible under the new law. An agreement was reached between the shareholders to transfer the operation from MPI to Pro TV. Based on this agreement Pro TV was changed from an ‘SRL’ (limited liability company) to an ‘SA’ (joint stock company) and our shareholding in Pro TV was increased from 49% to 66% (which is equal to our holding in MPI) on March 21, 2003. The second stage assumed a transfer of all audio-visual licenses held by Media Pro to Pro TV. This transfer was submitted for the approval of the Romanian Media Council and was initially rejected by the Romanian Media Council on the basis that taken together the audiences for these licenses would exceed the 30% audience share maximum as stipulated by the audio-visual law. We believe the combined audience share does not exceed the 30% threshold. The Romanian Media Council prolonged the compliance term at a meeting dated October 28, 2003 for a further six months so as to allow time to prepare a market research report or to adopt a new strategy. We are currently working with our local shareholders to prepare documentation to transfer only the television licenses from Media Pro to Pro TV as the Romanian Media Council has verbally stated that this would be approved. The future of the radio licenses currently held by Media Pro will be decided after we have received the results of an independently commissioned market research report.

 
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Upon completion of this restructuring we would have majority control over all the key licenses we operate in Romania. Our minority stake in Media Pro, a Romanian license holding company, allows us to participate in all significant shareholder decisions. We are dependent on our local shareholders’ agreement to the restructuring in order to comply with the new audio-visual law.


Risks Relating to Our Industry

Our licenses may not be renewed

The licenses to operate our broadcast operations are effective for the following periods:

Romania
 
The license for Bucharest was renewed in October 2003 for a further 9 years. The remaining licenses expire on dates ranging from 2004 to 2012.
     
Slovak Republic
 
The license of Markiza in the Slovak Republic expires in September 2007.
     
Slovenia
 
The licenses of our operations in Slovenia expire in August 2012.
     
Ukraine
 
The license to provide programming and sell advertising to UT-2 in Ukraine expires in December 2006.

In Romania, the Slovak Republic and Slovenia, local regulations do contain a qualified presumption for extensions of broadcast licenses, however, these licenses may nevertheless not be renewed upon the expiration of their current terms. The failure of any such licenses to be renewed would have a material adverse effect on our operations.

Our operating results are dependent on the sale of commercial advertising time in developing markets.

Our business relies on advertising revenues, which depend partly upon prevailing general economic conditions. Our advertising revenues also depend on our stations’ broadcast reach, television viewing levels, the relative popularity of our programming and the pricing of advertising time. Furthermore, increases in advertising spending have generally corresponded to economic recoveries, while decreases have generally corresponded to general economic downturns and recessions. Advertising spending or advertising spending growth in our markets has declined in our markets in the past and may decline in the future. If our television audience shares decline for any reason, we may not be able to maintain our current levels of advertising income or the rates we can charge advertisers. We must also compete for advertising revenues with other forms of advertising media, such as radio, newspapers, magazines, outdoor advertising, transit advertising, telephone directory advertising, on-line advertising and direct mail. Any decline in advertising revenues may adversely affect our results.


Risks Relating to the Markets in which we Operate

Our operations are in developing markets where there is a risk of economic uncertainty, unfair treatment and loss of business.

Our revenue generating operations are located in Central and Eastern Europe, namely Romania, the Slovak Republic, Slovenia and Ukraine. These markets have economic and legal systems, standards of corporate governance and business practices which continue to develop. Government policies could be altered significantly, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting economic, political or social life. Legal and regulatory systems could be subject to political pressures. These factors increase the level of general business risk. Further, the fact that we operate with local shareholders in all these jurisdictions poses a risk of unfair treatment by local regulators or before the local courts in the event of disputes with our local shareholders. Ultimately this could lead to loss of our business operations, as occurred in the Czech Republic.

 
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The countries in which we operate have the following country risks:

Country
 
2003
Rating
 
Detail of 2003 Rating
 
2002
Rating
Slovenia
 
A2
 
Default probability is still weak even in the case when one country's political and economic environment or the payment record of companies are not as good as A1-rated countries.
 
A2
Slovak Republic
 
A3
 
Adverse political or economic circumstances may lead to a worsening payment record that is already lower than the previous categories, although the probability of a payment default is still low.
 
A4
Romania
 
B
 
An unsteady political and economic environment is likely to affect further an already poor payment record.
 
B
Ukraine
 
C
 
A very unsteady political and economic environment could deteriorate an already bad payment record.
 
D

Source : Coface USA. Country ratings issued by the Coface Group measure the average default risk on corporate payments in a given country and indicate to what extent a company's financial commitments are affected by the local business, financial and political outlook. Coface continuously monitors 140 countries using a spectrum of indicators incorporating political factors; risk of currency shortage and devaluation; ability to meet financial commitments abroad; risk of a systemic crisis in the banking sector; cyclical risk; and payment behavior for short term transactions.

For comparative purposes, the United States and the United Kingdom were ranked A1, France, Italy, Hungary and the Czech Republic were ranked A2 and Poland was ranked A4.

Enforcement of civil liabilities and judgments may be difficult .

Central European Media Enterprises Ltd. is a Bermuda company, and substantially all of our assets and all of our operations are located, and all of our revenues are derived, outside the United States of America. However, it may not be possible for investors to enforce outside the United States of America judgments against us obtained in the United States of America in any civil actions, including actions predicated upon the civil liability provisions of the United States of America federal securities laws. In addition, certain of our directors and officers are non-residents of the United States of America, and all or a substantial portion of the assets of such persons are or may be located outside the United States of America. As a result, it may not be possible for investors to effect service of process within the United States of America upon such persons, or to enforce against them judgments obtained in the United States of America courts, including judgments predicated upon the civil liability provisions of the United States of America federal securities laws. There is uncertainty as to whether the courts of the countries in which we operate would enforce (i) judgments of United States of America courts obtained against us or such persons predicated upon the civil liability provisions of the United States of America federal and state securities laws or (ii) in original actions brought in such countries, as applicable, liabilities against us or such persons predicated upon the United States of America federal and state securities laws. A final and conclusive judgment in Federal or State courts of the United States of America under which a sum of money is payable (not being a sum payable in respect of taxes or other charges of a like nature or in respect of a fine or other penalty or multiple damages) may be subject to enforcement proceedings as a debt in the Supreme Court of Bermuda under the common law doctrine of obligation. Among other things, it is necessary to demonstrate that the court which gave the judgment was competent to hear the action in accordance with private law principles as applied in Bermuda and that the judgment is not contrary to public policy in error in Bermuda, has not been obtained by fraud or in proceedings contrary to natural justice and was not based on error in Bermuda law.

 
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Risks Relating to Our Common Shares

The price of our common shares is likely to remain volatile

The market price of our common shares could fluctuate. Events that could cause future volatility may include, among other things, conditions or trends in Europe and our markets. Such events are beyond our control. These factors may materially adversely affect the market price of our common shares, regardless of future operating performance.


OPERATIONS BY COUNTRY


ROMANIA

General

Romania is a parliamentary democracy of approximately 21.8 million people. Per capita GDP was an estimated US$ 2,096 in 2002 with a GDP growth rate of 4.9% in 2002. Approximately 86% of Romanian households have one or more television sets, and cable penetration is approximately 56%. According to our estimates, the Romanian television advertising market totaled between US$ 85-95 million in 2003.

Operating Companies : MPI and Media Vision

Our interest in our Romanian operation is governed by a Co-operation Agreement (the "Romanian Agreement") between Adrian Sarbu, Ion Tiriac and ourselves, forming MPI, through which the PRO TV, ACASA and PRO TV INTERNATIONAL networks were initially operated. MPI initially provided programming to and sold advertising for the stations which comprise the PRO TV, ACASA and PRO TV INTERNATIONAL networks. Subsequent to the adoption of a new Media Law in 2002, MPI has been transformed into a service providing company to the license companies that now own and operate their licenses.

Pursuant to the Romanian Agreement, we have a 66% voting interest in MPI. Shares of profits of MPI are equal to the shareholders' equity interests. We have the right to appoint three of the five members of the Council of Administration which directs the affairs of MPI. Although we have majority voting power in MPI, with respect to certain financial and corporate matters, the affirmative vote of either Mr. Sarbu or Mr. Tiriac is required.

With specific reference to MPI, the financial and corporate matters which require approval of the minority shareholders are in the nature of protective rights which are not an impediment to consolidation for accounting purposes.

Following the adoption of the new Media Law, on March 21, 2003 we agreed with Adrian Sarbu and Ion Tiriac to increase our stake in the main license holding company Pro TV and convert it into a joint stock company now described as Pro TV SA. Simultaneously the articles of that company were modified so as to replicate the Council of Administration and minority shareholder protective rights as exist in MPI.

In addition, in Romania, we have a 70% voting interest and share of profits in Media Vision SRL ("Media Vision"), a production and subtitling company.

License Companies : Pro TV SA and Media Pro Srl

We own a 66% voting and profits interest in Pro TV SA which holds 19 of the 22 licenses for the stations which comprise the PRO TV and PRO TV INTERNATIONAL network. Messrs. Sarbu and Tiriac own substantially all of the remainder of the voting and profits interests of Pro TV SA. The remaining three licenses for the PRO TV network together with the licenses for ACASA and the PRO FM and PRO AM radio networks are held by Media Pro Srl, in which we hold 44% of the voting interest and share of profits. The remainder is owned by Messrs. Sarbu and Tiriac.

 
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Under an agreement between Mr. Tiriac and Mr. Sarbu, Mr. Tiriac has agreed to transfer his shareholding in the license companies and MPI to Mr. Sarbu following completion of a multi-year series of payments by Mr. Sarbu. Upon completion of these payments, Mr. Sarbu would control all of the shares in the license companies and MPI not owned by us.

Operations : PRO TV, ACASA and PRO TV INTERNATIONAL networks

PRO TV is a national television broadcast network in Romania which was launched in December 1995. PRO TV reaches approximately 72% of the Romanian population of 21.8 million, including 100% of the urban population. PRO TV broadcasts from studios located in Bucharest via digitally encoded satellite signals which deliver programming to terrestrial broadcast facilities and to approximately 674 cable systems throughout Romania. Independent research from Taylor Nelson Sofres (peoplemeter) in Romania shows that the PRO TV network is currently the top-rated television station in its coverage area, with a nationwide all day audience share of 15.4% during the year ended December 2003.

In February 1998, MPI launched the ACASA network, a cable channel reaching approximately 56% of Romanian television households, including approximately 100% of the urban population via satellite and cable distribution. During the year ended December 2003, ACASA had a nationwide all day audience share of 6.6%, making it the fifth (of seven) ranked station in Romania.

The PRO TV INTERNATIONAL network rebroadcasts PRO TV and ACASA programs throughout North America, Europe and in Israel, using the existing PRO TV and ACASA satellite infrastructure. In 2002 MPI entered into a four year agreement under which MPI will provide the Romanian language program content of PRO TV INTERNATIONAL for broadcast in the USA at no direct cost to MPI.

Media Vision is a television production company in Romania and produces a significant portion of PRO TV's and ACASA’s entertainment programming and performs dubbing.

MPI also operates PRO FM, a radio network which is broadcast through owned and affiliate stations to approximately 7.0 million people in Romania. In 2002, PRO FM had an average audience share of 20.9% for the whole day and 21.6% for prime time in the Bucharest area. In October 2003, PRO FM had an average all-day audience share of 18.9% for 20–50 year olds and 20.9% for prime time in the Bucharest area.

Programming

The PRO TV network’s programming strategy is to appeal to a mass market audience through a wide range of programming, including movies and series, news, sitcoms, telenovellas, soap operas and game shows. PRO TV broadcasts 24 hours of programming daily. In excess of 40% of PRO TV's programming is comprised of locally produced programming, including top rated shows Vacanta Mare (Big Holiday), Laugh With People Like Us and Leana and Costel.

MPI has secured exclusive broadcast rights in Romania to broadcast on the PRO TV network a large number of quality American and Western European programs and films produced by such companies as Warner Bros. and Dreamworks. The PRO TV network also receives foreign news reports and film footage from Reuters, APTN and ENEX to integrate into its news programs. All foreign language programs and films are subtitled in Romanian.

The ACASA network broadcasts 24 hours of programming daily. Its programming strategy is to target a female audience with programming including telenovellas, films and soap operas as well as news, daily local productions for women and family, talk shows and entertainment. ACASA's viewer demographics are complementary to PRO TV's, providing an attractive advertising medium for small to medium sized companies that would not otherwise advertise on television. Approximately 29% of ACASA’s total programming is locally produced, including top rated shows Porestiri Adevarde (News stories) and De 3x Femie (Three Times A Lady).

 
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Advertising

Our Romanian operation derives revenues principally from the sale of commercial advertising time on the PRO TV and ACASA networks, sold both through independent agencies and media buying groups. The PRO TV network currently serves approximately 100 advertisers, including multinational companies such as Wrigley, Henkel, Mobifon and Procter & Gamble.

The PRO TV network is permitted to broadcast advertising for up to 15% of its broadcast time with an additional 5% of broadcast time that may be used for direct sales advertising. There is an overall hourly maximum of 12 minutes that may be allocated to advertising and teleshopping in any one hour for private broadcasters. For public broadcasters this is reduced to 8 minutes per hour. There are also restrictions on the frequency of advertising breaks (for example, news and children's programs shorter than 30 minutes cannot be interrupted). These restrictions are the same for public and private broadcasters.

Competition

Prior to the launch of the PRO TV network, TVR 1, a public station, was the dominant broadcaster in Romania. During 2003 PRO TV and ACASA achieved national all-day audience shares of 15.4% and 6.6% respectively, placing us as the 2nd and 5th stations nationally. TVR’s continued premier national position is influenced by its higher technical reach, which includes an estimated 98% of the Romanian population, including areas in which it is the only significant broadcaster, compared to 72% and 56% technical reach for PRO TV and ACASA respectively. Within our coverage area we are 1st and 4th on a full-year all-day basis and PRO TV's share is 5.3 percentage points ahead of TVR1. Other competitors include the second public national station, TVR 2, with an estimated 78% technical reach, and privately owned Antena 1, Tele 7 ABC and Prima TV, which reach approximately 71%, 65% and 62% of the population, respectively.

Additional competitors include cable and satellite stations. Cable currently penetrates approximately 56% of the Romanian market. PRO TV competes for advertising revenues with other media such as newspapers, radio, magazines, outdoor advertising, telephone directory advertising and direct mail.

Regulation

Licenses for the television stations which show programming provided by MPI and which broadcast advertising sold by MPI are regulated by the Romanian Media Council. Pro TV's television licenses have been granted for nine-year periods. To date, licenses have been renewed as they expired. The license for Bucharest was renewed in October 2003 for a further 9 years. The remaining licenses expire on dates ranging from 2004 to 2012. Of our 24 local licenses only the license for Cluj Napoca expires in 2004. The coverage of Cluj Napoca is approximately 320,000 people, the second largest local license after Bucharest.

Under regulations established by the Romanian Media Council and the various licenses of stations which broadcast the PRO TV network, programming and advertising provided by MPI is required to comply with certain restrictions. These restrictions will be modified once Romania joins the European Union and will increase the required percentage of European sourced programming.

Regulations relating to advertising content include (i) a ban on tobacco and restrictions on alcohol advertising, (ii) advertising targeted at children or during children's programming must account for the overall sensitivity of that age group and (iii) members of the news department of PRO TV are prohibited from appearing in advertisements.

 
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A new audio-visual law came into force in Romania on July 22, 2002, harmonizing Romanian legislation with that of the European Union. The law now permits a change in ownership of license holding companies or the transfer of the licenses to another company at the discretion of the Romanian Media Council. This was previously not permitted under the old audio-visual law. There is no restriction on foreign ownership under Romanian law.

In September 2002, the Romanian Media Council instructed all television stations in Romania to restructure their operations by January 2003 so that the license holding companies become the main operators of the broadcasting licenses they hold. The Romanian Media Council has given some guidance on how it interprets the new audio-visual law in relation to this restructuring. At a formal meeting on September 19, 2002 the Council expressed their view that exclusive operating agreements, such as existed between our subsidiary MPI and the two Romanian license holding companies (Pro TV and Media Pro), are not permissible under the new law. An agreement was reached between the shareholders to transfer the operation from MPI to Pro TV. Based on this agreement Pro TV was changed from an ‘SRL’ (limited liability company) to an ‘SA’ (joint stock company) and our shareholding in Pro TV was increased from 49% to 66% (which is equal to our holding in MPI) on March 21, 2003. The second stage assumed a transfer of all audio-visual licenses held by Media Pro to Pro TV. This transfer was submitted for the approval of the Romanian Media Council and was initially rejected since the Romanian Media Council believed that the combination of all the licenses into Pro TV would exceed the 30% threshold of audience share as stipulated by the audio-visual law. We believe the combined audience share does not exceed the 30% threshold. The Romanian Media Council prolonged the compliance term at a meeting dated October 28, 2003 for a further six months so as to allow time to prepare a market research report or to adopt a new strategy. We are currently working with our shareholders to prepare documentation to transfer only the television licenses from Media Pro to Pro TV as the Romanian Media Council has verbally stated that this would be approved. The future of the radio licenses currently held by Media Pro will be decided after we have received the results of an independently commissioned market research report.

License Renewal

The PRO TV network licenses consist of many local licenses, with varying expiry dates. The licensing procedure in Romania is governed by the 2002 Audiovisual Law ("Audiovisual Law"). According to the Audiovisual Law, the Romanian Media Council is in charge of issuing and renewing licenses. Renewal, as a separate procedure is not described in the Audiovisual Law and therefore expired licenses are subject to bidding procedures similar to those applicable to new licenses. A decision of the Romanian Media Council, however, provides that past broadcasting experience is a deciding factor in the renewal procedure. All renewal applications have been granted so far by the Audiovisual Council, including our Bucharest license in 2003. However there is no assurance that Pro TV’s licenses will be renewed.


SLOVAK REPUBLIC

General

The Slovak Republic is a parliamentary democracy with a population of 5.4 million where nearly 99% of households have television. Per capita GDP was US$ 4,389 in 2002 with a GDP growth rate of 4.4% in 2002. According to our estimates, the Slovak Republic television advertising market was between US$ 55-65 million in 2003.

Operating Company : STS

Our interest in STS is governed by a Participants Agreement (the "Slovak Agreement") between ourselves and Markiza forming STS. Pursuant to the Slovak Agreement, we are required to fund all of the capital requirements of and hold a 49% voting interest and a 70% share of profits in STS. Markiza, which holds the television broadcast license, and STS have entered into a series of agreements under which STS is entitled to conduct television broadcast operations pursuant to the license. We are entitled to a 70% share of the profits of STS, except that our share in STS' profit shall be increased by 3% for every additional US$ 1 million invested in STS by us. A Board of Representatives directs the affairs of STS, the composition of which includes two of our designees and three designees of Markiza. All significant financial and operational decisions of the Board of Representatives require a vote of 80% of its members. In addition, certain fundamental corporate matters are reserved for decision by a general meeting of shareholders and require a 67% affirmative vote of the shareholders.

 
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License Company : Markiza

In 2002, we acquired a 34% voting interest and a 0.1% share of profits in Markiza in exchange for a 10% share of STS' profits. We have the right to appoint one of three authorized co-signatories of Markiza, giving us a blocking control over Markiza's significant activities.

Operations : MARKIZA TV network

The MARKIZA TV network was launched as a national television station in the Slovak Republic in August 1996. The MARKIZA TV network reaches approximately 97% of the Slovak Republic's population, including virtually all of its major cities. According to independent research, the MARKIZA TV network had an average national television viewer share for 2003 of approximately 46% versus 16% for its nearest competitor, STV 1, and TV JOJ had 11% audience share.

Programming

The MARKIZA TV network's programming strategy is to appeal to a broad audience with specific groups targeted in off-peak broadcasting hours. The MARKIZA TV network broadcasts an average of 21 hours of programming daily, including news, movies, entertainment programs and sport (including coverage of Formula One racing). Approximately 38% of the MARKIZA TV network's programming is locally produced, including top rated shows Uragan (Hurricane), Aj mudry schybi (To Err is Only Human), Milionar (Millionaire), and Televizne noviny (TV News).

STS has secured for the MARKIZA TV network exclusive broadcast rights in the Slovak Republic to a large number of popular United States of America and European series, films and telenovellas produced by major international studios including Warner Bros., Universal, IFD, MGM, Carey-Werner, Paramount Pictures, Twentieth Century Fox, Walt Disney Television International and RTL Television. All foreign language programming (other than that in the Czech language) is dubbed into the Slovak language. Foreign news reports and film footage from CNN, Reuters, APTN and SNTV are integrated into news programs on the MARKIZA TV network.

Advertising

STS and Markiza derive revenues principally from the sale of commercial advertising time through media buying groups and independent agencies. Advertisers include large multinational firms such as Procter & Gamble, Henkel, Unilever, Wrigley, Kraft Jacobs, Ferrero, Suchard, Danone Group, Nestle and Benckiser, though no one advertiser dominates the market. Television stations are permitted to broadcast advertising for up to 15% of total daily broadcast time and up to 20% of broadcast time in any single hour.

Competition

The Slovak Republic is served by two national public television stations, STV1 and STV2, which dominated the ratings until the MARKIZA TV network began broadcasting in 1996. STV1 and STV2 reach nearly all of the Slovak population. The MARKIZA TV network also competes with the private broadcasters TA3 (launched September 2001) and TV JOJ (launched March 2002). TV JOJ and TA3 reach 75% and 48% of the population respectively. The MARKIZA TV network also competes with additional foreign private television stations and foreign satellite stations as well as public television stations located in Austria, the Czech Republic and Hungary with signals that reach the Slovak Republic.

Regulation

Markiza's broadcast operations are subject to regulations imposed by (i) the Act on Broadcasting and Retransmission of September 2000, (ii) the Act on Advertising and (iii) conditions contained in the license granted by the Slovak Republic Media Council pursuant to the Act on Broadcasting and Retransmission.

 
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Under the license and the new legal regulatory framework, Markiza is required to comply with several restrictions on programming, including but not limited to the origin of the programming content. These restrictions include the following broadcast rules: 10% must be public interest programming; broadcasts of first run films and series must have a minimum of 51% European production; no more than 20% of foreign first run films and series may be in the Czech language.

In addition to the restrictions discussed above and under "Advertising", there are additional regulations that relate to advertising content. These include, but are not limited to, (a) a ban on tobacco advertising, and (b) a ban on advertisements of alcoholic beverages (excluding beer) between 6.00am and 10.00pm. There are also restrictions as to the frequency of advertising breaks both during and between programs.

License Renewal

The Slovak Republic Media Council granted the license to operate the MARKIZA TV network to Markiza for a period of 12 years, expiring in September 2007. According to the Act on Broadcasting and Retransmission, a license can be extended once, for an additional 12 years. The Slovak Republic Media Council decides on the extension. Applications for extension must be filed 19 months prior to the expiry date. The Slovak Republic Media Council has discretion to grant an extension following its observation of the performance of the station in the preceding license period, including, in particular, the station’s contribution to Slovak culture and the development of the Slovak media market.


SLOVENIA

General

Slovenia, a parliamentary democracy of 2.0 million people, had a per capita GDP of US$ 10,550 in 2002 with a GDP growth rate of 2.9% in 2002, the highest per capita GDP among the former Eastern bloc countries. Approximately 96% of Slovenian households have one or more televisions. According to our estimates, the Slovenian television advertising market was between US$ 50-60 million in 2003.

Operating Company : Pro Plus

Following the receipt by Pro Plus of an approval from the Ministry of Culture of Slovenia to own more than 20% of two broadcasters, we have restructured our Slovenian operations. As of January 30, 2003 Pro plus owns 100% of Pop TV and Kanal A and we own 96.85% of the voting and profits interests in Pro Plus with corresponding economic and voting rights. Prior to January 30, 2003 we had 78% of the voting interests in Pro Plus and an effective share of profits of 85.5%. Pro Plus provides programming to and sells advertising for the broadcast license holders Pop TV and Kanal A.

In connection with the restructuring of our Slovenian operations, we have entered into a put/call arrangement with the general director of Pro Plus, Marijan Jurenec, who owns the remaining 3.15% of Pro Plus. Under the terms of the agreement, Mr. Jurenec generally has the right to put his interest to us for approximately one year beginning on December 31, 2004 at a price that consists of a fixed component and a variable component based on station segment EBITDA. We have the right to call the interest held by Mr. Jurenec at any time until December 31, 2006 at a price that is the same as the put price until the end of the put period and is fixed thereafter until December 31, 2006, when the call expires.


License Companies : Pop TV and Kanal A

As of January 30, 2003, Pro Plus owns 100% of Pop TV and Kanal A, giving us a 96.85% voting interest and share of profits in Pop TV and Kanal A. Pop TV holds all of the licenses for the POP TV network and Kanal A holds all the licenses for the KANAL A network. Pro Plus has entered into an agreement with each of Pop TV and Kanal A, under which Pro Plus provides all programming to the POP TV network and the KANAL A network and sells advertising for each network.

 
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Operations : POP TV and KANAL A networks

The POP TV network is the leading national commercial television broadcaster in Slovenia and reaches approximately 87% of the population of Slovenia, including Ljubljana, the capital city, and Maribor, Slovenia's second largest city. Independent research shows that among main television stations in 2003, the POP TV network had an audience share of 30% all day and 34% in prime time, the largest share of television viewers in Slovenia (AGB Media Services).

The KANAL A network, a national television broadcaster, reaches 81% of the population of Slovenia, including Ljubljana and Maribor. Independent research shows that among main television stations in 2003, the KANAL A network had an audience share of 10% in its coverage area all day and 11% in prime time, making it the third most watched television channel in Slovenia (AGB Media Services).

Programming

The POP TV network's programming strategy is to appeal to a mass market audience through a wide variety of programming including series, movies, news, variety shows and features. The POP TV network broadcasts 18 hours of programming daily, of which approximately 25% is locally produced programming, including the top rated international format, Who Wants to be a Millionaire, top rated topical shows Preverjeno! (Confirmed!) and Trenja (Friction), and local series Pod Eno Streho (Under One Roof).

Pro Plus has secured exclusive program rights in Slovenia to a number of successful American and Western European programs and films produced by studios such as Warner Bros., Twentieth Century Fox and Paramount. Pro Plus has agreements with CNN, Reuters and APTN to receive foreign news reports and film footage to integrate into news programs. All foreign language programs and films are subtitled in Slovenian with the exception of some children’s programming which is dubbed.

The KANAL A network’s programming strategy is to complement the programming strategy of the POP TV network with a mixture of locally produced programs such as Extra Magazine and Popstars and acquired foreign programs including films and series. The KANAL A network broadcasts for 16 hours daily.

Advertising

Pro Plus derives revenues from the sale of commercial advertising time on the POP TV and KANAL A networks. Current multinational advertisers include firms such as Benckiser, Henkel, Procter & Gamble, Wrigley and Colgate, although no one advertiser dominates the market. During 1999 and 2000, Peoplemeter devices, which are instruments for measuring audience viewing patterns, were placed in a number of television homes; and they are currently present in 450 homes in Slovenia. They are the primary source for the POP TV network's rating information. Slovenian regulations allow stations to broadcast advertising for up to 20% of their daily broadcast time (and up to 12 minutes in any hour) and there are also restrictions on the frequency of advertising breaks during films and other programs.

Competition

Historically, the television market in Slovenia had been dominated by SLO 1, a national public television station. The other national public station, SLO 2 provides programming which is complementary to SLO 1. SLO 1 reaches nearly all of Slovenia's TV households, and SLO 2 reaches 97% of Slovenia's TV households. One other private television station, TV3, competes with the POP TV and KANAL A networks in Slovenia. It has achieved a relatively small audience share of less than 1.2%.

The POP TV and KANAL A networks also compete with foreign television stations, particularly Croatian, Italian, German and Austrian stations. Cable penetration at 57% is similar to other countries in Central and Eastern Europe and approximately 18% of households have satellite dishes. In addition, the POP TV and KANAL A networks compete for revenues with other media, such as newspapers, radio, magazines, outdoor advertising, telephone directory advertising and direct mail.

 
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Regulation

Under Slovenian television regulations, Pop TV and Kanal A are required to comply with a number of restrictions on programming and advertising. These restrictions include that 20% of the station's daily broadcast time must be internally produced programming (or programming produced on order and on behalf of the broadcaster itself), of which at least 60 minutes must be broadcast between 6:00 p.m. and 10:00 p.m., and 2% of the station's annual broadcast time must be Slovenian origin films (or other works from the field of literature, science and art). In the future a majority (at present at least 40%) of the station's annual broadcast time will be required to be European origin films (or other works from the field of literature, science and art); of which at least 10% of the station's annual broadcast time will be required to be works produced by independent producers, of which at least 50% has to be produced in the last 5 years (a broadcaster presently not broadcasting such percentage of works produced by independent European producers, must increase its present percentage each year). Certain films and other programs may only be broadcast between 12:00 p.m. and 5:00 am, and Pop TV or Kanal A news editors, journalists and correspondents on the POP TV and KANAL A networks must not reflect a biased approach toward news reporting.

In addition to the restrictions discussed above and under the sub-heading "Advertising," advertising is not permitted during news, documentary or children's programming and programming with religious content under 30 minutes in duration, or during religious ceremonials and state celebrations. Advertising is not permitted during individual programming units, unless such units are divided into independent parts (advertising is allowed between such independent parts). Restrictions on advertising content include a prohibition on tobacco advertising and on the advertising of alcoholic beverages other than low alcohol content beer.

License Renewals

The POP TV and KANAL A networks operate under licenses regulated pursuant to the Law on Media adopted in 2001 and pursuant to the Law on Telecommunications adopted in 2001. Following a decision by the Slovenian Media Council in July 2002, all of the licenses held by Pop TV and Kanal A have been extended until August 2012.


UKRAINE

General

Ukraine, a parliamentary democracy of 48.7 million people, is the most populous market served by us. Nearly 100% of Ukrainian households have television, and cable penetration is approximately 32.6% in cities with a population over 50,000. Per capita GDP of US$ 850 in 2002 is the lowest of all our markets. The GDP growth rate in 2002 was 4.5%. According to our estimates, the Ukrainian television advertising market was between US$ 100-115 million in 2003.

The Key Agreement among Boris Fuchsmann, Alexander Rodnyansky, Studio 1+1, Innova, IMS, CME Ukraine Holding GmbH and CME Ukraine B.V., entered into as of December 23, 1998, grants us a 60% stake in all the group companies save for the license holding company where we hold an indirect 18% stake due to local regulatory restrictions.

Vladimir Oseledchyk is the General Director. The previous general director, Alexander Rodnyansky, is the Honorary President of Studio 1+1 and continues as the 70% shareholder in the license company. Mr. Rodnyansky is also the general director of the Russian broadcaster CTC based in Moscow. Studio 1+1 conducts regular co-production business with CTC.

In addition to our ownership in the Studio 1+1 Group, we also have a passive 30% interest in Gravis, a local television station. This investment was fully written down in a prior period.

 
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Operating Companies : Innova, IMS

The Studio 1+1 Group consists of several entities in which we hold direct or indirect interests. We own a 60% voting and profits interest in each of Innova and IMS. Innova owns 100% of Inter-media, a Ukrainian company, which in turn holds a 30% voting and profits interest in Studio 1+1, the license holding company in Ukraine.

Innova provides programming and production services to Studio 1+1 Ltd, the license holding company. From January 1, 2001, the sale of Studio 1+1 Ltd’s advertising air time has been out-sourced to Video International, a Ukrainian subsidiary of a Russian advertising sales company, in which we have neither an economic nor a voting interest.

License Company : Studio 1+1

Current Ukrainian legislation limits direct foreign equity holdings in broadcasting companies to 30%. At present our voting and profits interest in Studio 1+1 is, indirectly, 18%. Existing agreements commit all the shareholders of Studio 1+1 to increase our direct holding, or the holdings of one of our subsidiaries, when legislation permits this.
All significant decisions of the entities in the Studio 1+1 Group are taken by the shareholders, requiring a majority vote (other than decisions of the shareholders of Studio 1+1, the license holding company, which require a 75% vote). Certain fundamental corporate matters of the other entities require 61% shareholder approval.

Operations : STUDIO 1+1 network

The STUDIO 1+1 network broadcasts programming and sells advertising on Ukrainian National Frequency Two ("UT-2"), one of Ukraine's state-owned television channels. UT-2 reaches approximately 95% of Ukraine's population. Television advertising revenue continued to increase in 2003. The STUDIO 1+1 network attained 25.8% average prime time audience share during 2003. The STUDIO 1+1 network began broadcasting on UT-2 in January 1997. The station's license permits a maximum of 15 hours per day of broadcasting.

Programming

The STUDIO 1+1 network's programming strategy is to appeal to a mass market audience with an emphasis on the 18-45 target audience. The rating success of the STUDIO 1+1 network has been achieved through a programming strategy that has resulted in a balanced combination of both Western studio programming and new, popular, local programs, including Russian criminal and action series and self-produced Ukrainian shows, programs and news scheduled in prime-time. The station's schedule includes locally produced news, variety shows, game shows and magazine programs as well as a broad range of popular and high quality films from international distributors. In 2003, Studio 1+1 produced and co-produced approximately 1,100 hours of programming, which primarily consists of a daily breakfast show, news broadcasts and news related programs, talk shows, criminal investigations, game shows, sport and lifestyle magazine shows and comedy shows.

The Studio 1+1 Group has secured exclusive territorial or local language broadcast rights in Ukraine to a large number of successful high quality American, Russian and Western European programs and films from many of the major studios, including Warner Bros., Paramount Pictures, Universal Pictures and Columbia Pictures. Studio 1+1 has agreements with Reuters for foreign news packages and other footage to be integrated into its programming. All non-Ukrainian language programs and films (including those in the Russian language) are dubbed or subtitled in Ukrainian.

 
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Advertising

The Studio 1+1 Group derives revenues principally from the sale of commercial advertising time through both media buying groups and independent agencies. Advertisers include large multinational firms such as Procter & Gamble, Kraft Foods, Samsung, Unilever, Coca-Cola, Wrigley, Colgate - Palmolive, Mars and Nestle. The STUDIO 1+1 network is permitted to sell 15% of its overall broadcast time for advertising and is subject to restrictions on the frequency of advertising breaks. The advertising restrictions are the same for public and private broadcasters.

Video International sells advertising for the Studio 1+1 Group on an exclusive basis until the end of the term of the broadcasting license in 2006.

Competition

Ukraine is served by six television frequencies: UT-1 which is state run, UT-2 (on which the STUDIO 1+1 network broadcasts for 15 hours a day) and UT-3 (on which Inter broadcasts for 24 hours per day) all of which are state owned frequencies with effective national coverage, and ICTV, STB and Novi Kanal, which are private broadcasters using a series of regional frequencies to establish a network. The state run station UT-1 has a broadcast reach of approximately 98% of the Ukrainian population. Studio 1+1, through UT-2, has a broadcast reach of 95% of the Ukrainian population. The private station Inter, through UT-3, has a broadcast reach of approximately 78% of the Ukrainian population. ICTV and STB, both private stations, reach approximately 32% of Ukraine's population. Inter, the STUDIO 1+1 network's main competitor, has a similar programming philosophy to STUDIO 1+1, but it has a 24 hour license.

Regulation

Studio 1+1 provides programming on the UT-2 frequency pursuant to a ten-year television broadcast license contract expiring 31 December 2006. Broadcasts of Studio 1+1's programming and advertising on UT-2 are regulated by the Ukraine Media Council. These agencies enforce Ukraine's media laws, which include restrictions on the content of programming and advertising and limitations on the amount and placement of advertising in programs. In the fourth quarter of 2003, legislation was passed to allow the advertising of beverages with high alcoholic content after 11.00 pm, however the advertising of tobacco on TV is still banned in Ukraine. Under the terms of Studio 1+1's license, programming in the Ukrainian language must account for at least 80% of all programming (including dubbing of purchased programming into the Ukrainian language) and the remaining 20% of programming must be in the Russian language. In addition, programming produced by Studio 1+1 must account for 70% of all programming. A recent amendment to regulations governing national broadcasters in Ukraine now obliges Studio 1+1 to have 100% of its programming in Ukrainian or dubbed or subtitled in Ukrainian. In order to comply with this new regulation, all Russian programming shown by Studio 1+1 is now also subtitled into Ukrainian.

Studio 1+1 is party to a legal action brought against the Ukrainian Media Council by a small television company AITI which seeks to challenge the validity of Studio 1+1’s broadcasting license. This is described more particularly in Part I, Item 3, "Legal Proceedings".

License Renewal

The Studio 1+1 license expires on December 31, 2006. Licenses in Ukraine are renewed by the Ukraine Media Council in accordance with the terms of the 1995 Act on Television and Radio Broadcasting ("Media Act"). The Ukraine Media Council may extend the license term in an administrative procedure. The license must be extended for another 7 years, if the applicant meets all conditions set forth for a broadcaster in the Media Act. We believe we are currently in compliance with all these conditions (see also Part I, Item 3, "Legal Proceedings").

CORPORATE OPERATIONS

Our central service organization provides each television operation with a central resource. The service functions provided include sales, financial and legal services, including financial planning and analysis, cost control and network management.

 
  Page 23  

 

SEASONALITY

We, like other television operators, experience seasonality, with advertising sales tending to be lowest during the third quarter of each calendar year due to the summer holiday period (typically July and August), and highest during the fourth quarter of each calendar year. See Part II, Item 6, "Quarterly Results and Seasonality" for further discussion.


EMPLOYEES

As of December 31, 2003, we had a corporate operations staff of 20 employees (compared to 18 as of December 31, 2002). In addition, as of December 31, 2003 we had four station finance directors (five as of December 31, 2002) who are appointed and paid by us, but whose costs are recharged to the operations. Our subsidiaries had a total of approximately 1,918 employees (compared to 1,954 as of December 31, 2002). None of our employees or the employees of any of our subsidiaries are covered by a collective bargaining agreement. We believe that our relations with our employees are good.


AVAILABLE INFORMATION

We make available free of charge through our Internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Our internet website address is http://www.cetv-net.com.


FINANCIAL INFORMATION BY OPERATING SEGMENT AND BY GEOGRAPHICAL AREA

For financial information by operating segment and geographic area, see Note 19, "Segment Data" to the Consolidated Financial Statements.


ITEM 2. PROPERTIES

We maintain our registered office in Bermuda. In addition, CME Development Corporation leases office space in London in one location. The lease, for 3,958 square feet of office space, expires in 2015.

We own a portion of a building in Ljubljana which contains POP TV and Kanal A's facilities and offices. STS owns its principal office facility near Bratislava. Studio 1+1 leases offices in central Kiev and studio space outside Kiev. MPI leases offices and studio space in Bucharest as well as in the majority of the key cities in Romania.

 
  Page 24  

 

ITEM 3. LEGAL PROCEEDINGS
 
We present below a summary of our more significant legal proceedings by country.
 
UKRAINE

In our Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2002, we reported that AITI, a television station in Ukraine, commenced a second court action in Ukraine against the Ukraine Media Council challenging certain aspects of the granting to Studio 1+1 its television broadcast license in Ukraine. Studio 1+1 was involved in this litigation as a third party acting together with the Ukraine Media Council. The claim was almost identical to one which was previously brought by AITI and was dismissed on April 5, 2001 by the Supreme Arbitration Court of Ukraine.

AITI’s allegations were that Studio 1+1 has, in effect, been granted two licenses by the Ukraine TV Council, entitling it to in excess of 32 hours of broadcast time a day on Ukraine's nationwide Channel N2 (UT-2). Further, AITI alleged that Studio 1+1 never paid the required license fee. After the more senior Court of Cassation had ruled on November 1, 2002 that the lower Economic Court of Kiev must re-hear the case, a court date of February 5, 2003 was set. On April 9, 2003 the Economic Court of Kiev dismissed the claim brought by AITI. This judgment was appealed by AITI to the Court of Appeal, which upheld the ruling by way of a decision handed down on June 19, 2003.

AITI subsequently appealed to the Court of Cassation, which initially rejected their request for an appeal on the grounds it was incorrectly filed. AITI requested that the Supreme Court of Ukraine rule that the appeal must be accepted for consideration by the Court of Cassation. The Supreme Court of Ukraine subsequently ordered that the Court of Cassation should accept the appeal and the hearing date for this has been set for April 6, 2004.

We believe that the claim brought by AITI is groundless and will assist in the pursuit of the defense of this matter vigorously. The Economic Court of Kiev’s ruling dismissing AITI’s claim on April 9, 2003 and the Court of Appeal's affirmation of that decision on June 19, 2003 supports our belief that AITI’s further appeal to the Court of Cassation will also be rejected. However, if the decision in the Ukraine court system is ultimately unfavorable, it could result in the loss of the broadcast license of Studio 1+1.

ROMANIA

There are no significant outstanding legal actions that relate to our business in Romania.

SLOVAK REPUBLIC

There are no significant outstanding legal actions that relate to our business in the Slovak Republic.

SLOVENIA

On November 20, 2002, we received notice of a claim filed by Zdenka Meglic, the founder and a former shareholder of MMTV 1 d.o.o (MMTV), against MMTV, a subsidiary of CME Slovenia BV. In her claim against MMTV, Mrs. Meglic is seeking damages in the amount of SIT 190 million (approximately US$ 0.9 million) for repayment of monies advanced to MMTV from 1992 to 1994 (in the amount of approximately SIT 29 million (approximately US$ 0.1 million)) plus accrued interest. We believe Mrs. Meglic’s claim is without merit and will defend the claim vigorously.

GENERAL

We are, from time to time, a party to litigation that arises in the normal course of our business operations. Other than those claims discussed above, 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.

 
  Page 25  

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.


PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Class A Common Stock of Central European Media Enterprises Ltd. began trading on the Nasdaq National Market on October 13, 1994 under the trading symbol "CETV." On October 10, 2000, our Class A Common Stock was delisted from the Nasdaq National Market. On November 27, 2002, our Class A Common Stock was re-listed on the Nasdaq National Market under the trading symbol "CETV."

On February 13, 2004 the last reported sales price for the Class A Common Stock was US$ 20.16.

The following table sets forth the high and low sales prices for the Class A Common Stock for each quarterly period during the last two fiscal years and for the first quarter of 2004. All share information has been adjusted to reflect the two-for-one stock splits which took effect on January 10, 2003 and November 5, 2003.

Price Period
High (US$)
Low (US$)



2002
 
 
First Quarter
3.00
1.16
Second Quarter
2.44
1.81
Third Quarter
4.75
1.91
Fourth Quarter
5.97
3.38
2003
 
 
First Quarter
6.78
5.20
Second Quarter
11.55
5.99
Third Quarter
12.94
10.80
Fourth Quarter
17.30
12.73
2004
 
 
First Quarter (to February 13, 2004)
21.32
17.50

At February 13, 2004, there were 28 holders of record (including brokerage firms and other nominees) of the Class A Common Stock, approximately 2,137 beneficial owners of the Class A Common Stock, and eight holders of record of the Class B Common Stock. There is no public market for the Class B Common Stock. Each share of Class B Common Stock has 10 votes.

DIVIDEND POLICY

We have not declared or paid and have no present intention to declare or pay in the foreseeable future any cash dividends in respect to any class of our Common Stock. Our ability to pay cash dividends is primarily dependent upon receipt of dividends or distributions from our subsidiaries, over some of which we have limited control.

PURCHASE OF OWN STOCK

We did not purchase any of our own stock in the fourth quarter of 2003.

 
  Page 26  

 
 
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA

   

For the years ended December 31,

 
   
 
 
   
2003
   
2002
 
 
2001
 
 
2000
 
 
1999
 
   
 
 
 
 
 
   

(US$ 000’s, except per share data)

 
OPERATING DATA:
   
 
   
 
   
 
   
 
   
 
 
Net Revenues
 
$
118,526
 
$
92,294
 
$
71,369
 
$
73,373
 
$
75,959
 
Total station operating costs and expenses
   
80,636
   
62,740
   
57,512
   
74,019
   
75,886
 
Selling, general and administrative expenses
   
11,678
   
12,255
   
19,771
   
15,533
   
15,529
 
   
 
 
 
 
 
Operating income/(loss) before corporate expenses
   
26,212
   
17,299
   
(5,914
)
 
(16,179
)
 
(15,456
)
Corporate operating costs (excluding stock based compensation)
   
19,303
   
12,060
   
7,812
   
8,262
   
16,320
 
Stock based compensation
   
13,209
   
3,754
   
-
   
-
   
-
 
Amortization of goodwill
   
-
   
-
   
1,747
   
1,670
   
2,797
 
   
 
 
 
 
 
Total operating expenses
   
124,826
   
90,809
   
86,842
   
99,484
   
110,532
 
   
 
 
 
 
 
Operating income/(loss)
   
(6,300
)
 
1,485
   
(15,473
)
 
(26,111
)
 
(34,573
)
Loss on write down of investment
   
-
   
(2,685
)
 
-
   
-
   
-
 
Equity in income/(loss) of unconsolidated affiliates
   
3,001
   
2,861
   
6,387
   
(514
)
 
(11,021
)
Net interest
   
(6,362
)
 
(15,287
)
 
(15,742
)
 
(17,572
)
 
(13,953
)
Other income/(expense)
   
(216
)
 
1,751
   
(3,412
)
 
(38
)
 
(962
)
Change in the fair value of derivative
   
-
   
1,108
   
(1,576
)
 
-
   
-
 
Gain on sale of subsidiary (1)
   
-
   
-
   
1,802
   
-
   
-
 
Foreign currency exchange gain/ (loss), net
   
(9,994
)
 
(10,195
)
 
1,641
   
(2,226
)
 
13,498
 
Gain on sale of investment
   
-
   
-
   
-
   
17,186
   
25,870
 
Other income
   
-
   
-
   
-
   
-
   
8,250
 
   
 
 
 
 
 
Loss before provision for income taxes, minority interest and discontinued operations
   
 
(19,871
)
 
 
(20,962
)
 
 
(26,373
)
 
 
(29,275
)
 
 
(12,891
)
Provision for income taxes
   
(3,654
)
 
(3,568
)
 
(1,005
)
 
(236
)
 
(366
)
   
 
 
 
 
 
Loss before minority interest and discontinued operations
   
(23,525
)
 
(24,530
)
 
(27,378
)
 
(29,511
)
 
(13,257
)
Minority interest in (income)/loss of consolidated subsidiaries
   
(676
)
 
(576
)
 
2,138
   
(107
)
 
-
 
   
 
 
 
 
 
Net income/(loss) from continuing operations
   
(24,201
)
 
(25,106
)
 
(25,240
)
 
(29,618
)
 
(13,257
)
   
 
 
 
 
 
Discontinued operations (2) :
   
 
   
 
   
 
   
 
   
 
 
Pre-tax income from discontinued operations (Czech Republic)
   
384,213
   
11,922
   
413
   
(7,880
)
 
(69,819
)
Tax on disposal of discontinued operations (Czech Republic)
   
(14,000
)
 
(1,000
)
 
-
   
-
   
-
 
Pre-tax income from discontinued operations (Hungary)
   
-
   
-
   
2,716
   
-
   
(6,794
)
   
 
 
 
 
 
Income/(loss) on discontinued operations
   
370,213
   
10,922
   
3,129
   
(7,880
)
 
(76,613
)
   
 
 
 
 
 
Net income/(loss)
 
$
346,012
 
$
(14,184
)
$
(22,111
)
$
(37,498
)
$
(89,870
)
   
 
 
 
 
 
 
 
 
  Page 27  

 

   

For the years ended December 31,

 
   
 
 
   
2003
   
2002
 
 
2001
 
 
2000
 
 
1999
 
   
 
 
 
 
 
   

(US$ 000’s, except per share data)

 
PER SHARE DATA: (3)
   
 
   
 
   
 
   
 
   
 
 
Net loss per common share from :
   
 
   
 
   
 
   
 
   
 
 
Continuing operations – basic and diluted
 
$
(0.91
)
$
(0.95
)
$
(0.95
)
$
(1.12
)
$
(0.51
)
Discontinued operations – basic
   
13.92
   
0.41
   
0.12
   
(0.30
)
 
(2.97
)
Discontinued operations – diluted
   
12.41
   
0.37
   
0.11
   
(0.30
)
 
(2.97
)
Total net income/(loss) - basic
   
13.01
   
(0.54
)
 
(0.84
)
 
(1.72
)
 
(3.48
)
Total net income/(loss) - diluted
 
$
11.60
 
$
(0.54
)
$
(0.84
)
$
(1.42
)
$
(3.48
)
Weighted average common shares used in computing per share amounts (000s)
   
 
   
 
   
 
   
 
   
 
 
Basic
   
26,605
   
26,459
   
26,449
   
26,440
   
25,784
 
Diluted - continuing
   
26,605
   
26,459
   
26,449
   
26,440
   
25,784
 
Diluted - discontinued
   
29,828
   
29,658
   
28,523
   
26,440
   
25,784
 
 
   
 
   
 
   
 
   
 
   
 
 
BALANCE SHEET DATA:
   
 
   
 
   
 
   
 
   
 
 
Current assets
 
$
264,743
 
$
106,546
 
$
70,604
 
$
102,059
 
$
102,851
 
Non-current assets
   
101,058
   
73,431
   
81,450
   
95,901
   
133,369
 
   
 
 
 
 
 
Total Assets
   
365,801
   
179,977
   
152,054
   
197,960
   
236,220
 
   
 
 
 
 
 
Current liabilities
   
66,286
   
71,861
   
74,872
   
82,146
   
76,704
 
Non-current liabilities
   
25,991
   
203,992
   
165,978
   
181,692
   
194,752
 
   
 
 
 
 
 
Total Liabilities
   
92,277
   
275,853
   
240,850
   
263,838
   
271,456
 
   
 
 
 
 
 
Shareholders’ Equity/(Deficit)
 
$
273,524
 
$
(95,876
)
$
(88,796
)
$
(65,878
)
$
(35,236
)
   
 
 
 
 
 
 
   
 
   
 
   
 
   
 
   
 
 
OTHER DATA:
   
 
   
 
   
 
   
 
   
 
 
Net cash provided by (used in) operating activities
   
(11,594
)
 
(7,865
)
 
(24,750
)
 
(4,933
)
 
58,417
 
Net cash provided by (used in) investing activities
   
(10,080
)
 
(4,479
)
 
(1,653
)  
12,384
   
(26,196
)
Net cash provided by (used in) financing activities
   
(197,160
)
 
23,438
   
13,457
 
 
(2,398
)
 
(6,377
)
Net cash received from/(used in) discontinued activities
   
358,358
   
15,634
   
(2,407
)
 
(3,464
)
 
(30,559
)

(1)
 
On November 22, 2001 we sold our 70% interest in Video Vision International Srl and a gain of US$ 1.8 million has been recognized.
 
 
 
(2)
 
In 2003 we sold our 93.2% participation interest in CNTS, our Czech operating company, for US$ 53.2 million. In 2000 we sold substantially all of our Hungarian operations to SBS. Our financial statements present the operations of the Czech Republic and Hungary as discontinued operations for all periods.
 
 
 
(3)
 
All per share data has been adjusted for the two-for-one stock splits which occurred on January 10, 2003 and November 5, 2003.

 
  Page 28  

 

Quarterly Results and Seasonality

The following table sets forth unaudited financial data for each of our last eight fiscal quarters

 
 
For the year ended December 31, 2003
 
   
 
 
   

First Quarter

   
Second Quarter
   
Third Quarter
   
Fourth Quarter
 
   
 
 
 
 
 
 
(US$ 000’s, except per share data)
 
   
 
Income Statement data:
   
 
   
 
   
 
   
 
 
  Net Revenues
   
23,522
   
31,926
   
21,886
   
41,192
 
  Operating Income/(Loss)
   
210
   
(2,167
)
 
(4,669
)
 
326
 
  Net Income/(Loss)
   
(11,287
)
 
330,826 (1
)
 
(6,586
)
 
33,059 (2
)
                           
Net Profit/(Loss) per Share:
   
 
   
 
   
 
   
 
 
  Basic EPS
 
$
(0.43
)
$
12.50
 
$
(0.25
)
$
1.24
 
  Effect of diluted securities
   
-
   
(1.44
)
 
-
   
(0.13
)
   
 
 
 
 
  Diluted EPS
 
$
(0.43
)
$
11.06
 
$
(0.25
)
$
1.11
 
   
 
 
 
 

 
 
For the year ended December 31, 2002
 
   
 
 
   

First Quarter

   
Second Quarter
 
 
Third Quarter
 
 
Fourth Quarter
 
   
 
 
 
 
 
 
(US$ 000’s, except per share data)
 
   
 
Income Statement data:
   
 
   
 
   
 
   
 
 
  Net Revenues
   
17,183
   
26,959
   
17,139
   
31,013
 
  Operating Income/(Loss)
   
(1,934
)
 
3,933
   
(3,542
)
 
3,028
 
  Net Income/(Loss)
   
(11,903
)
 
(12,316
)
 
14,842 (3
)
 
(4,807
)
                           
Net Loss per Share:
   
 
   
 
   
 
   
 
 
  Basic EPS
 
$
(0.45
)
$
(0.47
)
$
0.56
 
$
(0.18
)
  Effect of diluted securities
   
-
   
-
   
(0.04
)
 
-
 
   
 
 
 
 
  Diluted EPS
 
$
(0.45
)
$
(0.47
)
$
0.52
 
$
(0.18
)

(1)
 
The net income of US$ 330.8 million in the three months ended June 30, 2003 was primarily due to the receipt of US$ 358.6 million following the findings of the tribunal in our UNCITRAL Arbitration.
(2)
 
The net income of US$ 33.1 million in the three months ended December 31, 2003 was primarily due to the sale of our 93.2% participation interest in CNTS, our Czech operating company, for US$ 53.2 million.
(3)
 
The net income of US$ 14.8 million in the three months ended September 30, 2002 was primarily due to the receipt of US$ 28.9 million following our dispute with Dr. Zelezny.

We, like other television operators, experience seasonality, with advertising sales tending to be lowest during the third quarter of each calendar year, which includes the summer holiday period (typically July and August), and highest during the fourth quarter of each calendar year.

 
  Page 29  

 
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Contents

I.
Executive Summary
II.
General Market Information
III.
Analysis of Segment Results
IV.
Analysis of the Results of Consolidated Operations
V.
Liquidity and Capital Resources
VI.
Critical Accounting Policies and Estimates
VII.
Related Party Matters
VIII.
Forward-looking Statements


I. Executive Summary

Discontinued Operations - Czech Republic and the UNCITRAL Arbitration

l
 
On May 19, 2003, we received US$ 358.6 million from the Czech Republic government in final settlement following our UNCITRAL Arbitration. This receipt concludes our dispute with regard to our former Czech Republic operations and should not be deemed to be recurring.
 
 
 
l
 
On June 19, 2003, our Board of Directors decided to withdraw from Czech operations and on October 23, 2003 we sold our 93.2% participation interest in CNTS, our Czech operating company, for US$ 53.2 million, US$15.0 million of which has been received to date. The remainder is due by July 2005 and is fully secured.
 
 
 
l
 
On February 9, 2004 we arrived at a negotiated settlement with the Dutch Tax Authorities on the taxability of the UNCITRAL Award. Under this agreement, we have agreed to pay total tax of US$ 20 million. We have paid an initial US$ 9 million and will ensure that taxes payable on profits arising in the Netherlands are at least US$ 2.0 million per year for the years 2004-2008 and US$ 1.0 million for 2009.
 
 
 
l
 
These events bring certainty to the amount received following our exit from the Czech Republic market.


Management Changes

l
 
On February 2, 2004, Michael N. Garin was appointed Chief Executive Officer, succeeding Fred T. Klinkhammer who continues to serve as Vice-Chairman.


Continuing Operations

The following table provides a summary of our consolidated results for each of the three years to December 31, 2003:

 
  Page 30  

 


 
 
For the year ended December 31, (US$000's)
 
 
 
 
 
 
 
 
 
   
2003
   
2002
 
 
Movement
   
2002
 
 
2001
 
 
Movement
 
 
 
 
 
 
 
 
Net Revenues
   
118,526
   
92,294
   
26,232
   
92,294
   
71,369
   
20,925
 
Operating income/(loss) before corporate expenses
   
26,212
   
17,299
   
8,913
   
17,299
   
(5,914
)
 
23,213
 
Operating income/(loss)
   
(6,300
)
 
1,485
   
(7,785
)
 
1,485
   
(15,473
)
 
16,958
 
Net income/(loss) from continuing operations
   
(24,201
)
 
(25,106
)
 
905
   
(25,106
)
 
(25,240
)
 
134
 
Net income/(loss)
   
346,012
   
(14,184
)
 
360,196
   
(14,184
)
 
(22,111
)
 
7,927
 

 
The principal events of 2003 are as follows:

l
 
We redeemed or repurchased all of our corporate debt, including: our US$ Senior Notes (US$ 100 million) and Euro Senior Notes (Euro 71.6 million, approximately US$ 89.5 million); our outstanding debt and accrued interest with GoldenTree Asset Management in the sum of US$ 15.3 million; and our outstanding debt and accrued interest to Czech Sporitelna Bank for a sum of Kc 253.3 million (approximately US$ 9.2 million).
 
 
 
l
 
In 2003, each of our Operating Segments achieved, for the first time, a Segment EBITDA operating margin of greater than 20% (Segment EBITDA is defined and reconciled t o our consolidated US GAAP results in Part II, Item 8, Note 19, "Segment Data") .
 
 
 
l
 
We increased our holding in our Slovenian operations to 96.85%.
 
 
 
l
 
We gained direct control of most of the principal broadcasting licenses in our Romanian operations.
 
 
 
l
 
As at December 31, 2003 we had US$ 190.3 million of unrestricted cash.


Future Trends

l
 
During 2003 our Board, after extensive discussions with both management and outside advisors, agreed a strategic plan focusing on expansion through acquisition of additional shares in our existing stations and of appropriate additional businesses in new markets. It was decided that our geographic focus would remain in Central and Eastern Europe, and that our core business would be television. We are also prepared to consider relevant opportunities in related media.
 
 
 
l
 
Three categories of development are currently under consideration:
 
 
l
Acquisition of additional ownership in our present operations, which is regarded as the strategy with the least risk due to our knowledge of the value of these operations;
 
 
l
Acquisition of one or more established businesses in the Balkans, in particular states of the former Yugoslavia using the expertise of our successful Slovenian management team ; and
 
 
l
Acquisition of a broadcaster in one of the substantially larger markets of Central or Eastern Europe, which may give rise to a significant step change in the scale of our business.
 
 
 
l
 
In the second half of 2003 we conducted country and in some cases station-specific research throughout the Central and Eastern European market to assess possible acquisition opportunities. The general review is now complete and management is now assessing more specific opportunities.
 
 
 
l
 
This strategy may result in the acquisition of a significant business in a major Central or Eastern European market. Such an acquisition would likely require funding beyond our current available resources. This could be achieved through funds raised in the form of debt or a public offering. We expect to be able to raise the necessary funding through a debt offering, but would consider partial funding through an equity offering if the share price rose to a level that would make this attractive.

 
  Page 31  

 

II. General Market Information


Markets

Our revenue generating operations are located in Central and Eastern Europe, namely Romania, the Slovak Republic, Slovenia and Ukraine. Revenues primarily result from the sale of advertising time.

We, like other television operators, experience seasonality, with advertising sales tending to be lowest during the third quarter of each calendar year due to the summer holiday period (typically July and August), and highest during the fourth quarter of each calendar year. See Part II, Item 6, "Quarterly Results and Seasonality" for further discussion.


Potential for Market Growth

The markets in which we operate are subject to higher levels of political and economic uncertainty than most Western European markets, but we believe the lower level of economic development implies a greater potential for future growth. Zenith Optimedia have published the following projections for the development of television advertising spending per capita for a select group of Eastern and Western European markets. Although this projection does not include our markets, the projection of Eastern European growth may be indicative of the potential for our markets. As a comparative we have added our historic Segment Net Revenue for the years 1999-2003 according to the same scale.


Indexed to 1999 = 100
Western Europe Average
Eastern Europe Average
CME Segment Net Revenue




1999
100.0 (A)
100.0 (A)
100.0 (A)
2000
107.1 (A)
108.0 (A)
103.1 (A)
2001
98.2 (A)
132.0 (A)
107.3 (A)
2002
96.4 (F)
144.0 (F)
124.3 (A)
2003
96.4 (F)
148.0 (F)
158.8 (A)
2004
98.2 (F)
160.0 (F)
-
2005
100.0 (F)
172.0 (F)
-
2006
103.6 (F)
180.0 (F)
-
2007
107.1 (F)
188.0 (F)
-

Source: Zenith Optimedia 'TV in Western Europe 2001' and 'TV in Eastern Europe 2001'. This data should be used for indicative comparative purposes only. It may not be an accurate forecast for the markets or region.
 
(A) Actuals
 
(F) Forecast

 
  Page 32  

 

Television Advertising Markets

There is no objective source for reliable information on the size of television advertising expenditures in our markets. The following table sets out our estimates of the development of these expenditures by market in US$ millions.


Country
1999
2000
2001
2002
2003






Romania
65 - 75
65 - 75
60 - 70
65 - 75
85 - 95
Slovak Republic
35 - 45
35 - 45
35 -45
40 - 50
55 - 65
Slovenia
40 - 50
40 - 50
45 - 55
45 - 55
50 - 60
Ukraine
25 - 35
40 - 55
70 - 85
85 - 100
100 - 115


Regulation and Legal Environment

The countries in which we operate have economic and legal systems, local standards of corporate governance and business practices which continue to develop. We do not anticipate that the rate of market development will be constant in any market. Government policies could be altered significantly, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting economic, political or social life. This may materially affect our results, either negatively or positively.


European Union Expansion

Slovenia and the Slovak Republic have been approved for entry into the European Union ("EU") in May 2004. It is currently anticipated that Romania will be admitted sometime after 2007. All countries joining the EU become subject to EU legislation and the ongoing progress towards EU entry reduces the political risk of operating in these emerging markets. The reduction in political risk factors may encourage increased foreign investment that will be supportive of economic growth. EU accession may also cause a period of local economic uncertainty as the adoption of EU rules affect industry and employment.




III. Analysis of Segment Results


OVERVIEW

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

We evaluate the performance of our segments based on Segment Net Revenues, Segment EBITDA, Segment EBITDA Margin and Segment Broadcast Cash Flow. All Segment data includes STS and Markiza (our operating and license companies in the Slovak Republic) and Studio 1+1 (our license company in Ukraine), neither of which is consolidated under US GAAP.

Our key measure of the efficiency of our Segments is their EBITDA margin. We define Segment EBITDA margin as Segment EBITDA as a percentage of Segment Net Revenue. We believe a 30% Segment EBITDA margin can be achieved and sustained by each station.

 
  Page 33  

 

Our assets and liabilities are managed centrally and are reported internally in the same manner as the consolidated financial statements, thus no additional information is provided.

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

l
 
expenses presented as corporate expenses in our consolidated statements of operations (i.e., corporate operating costs, net arbitration related costs/proceeds, stock based compensation and amortization of goodwill);
 
 
 
l
 
changes in the fair value of derivatives;
 
 
 
l
 
foreign currency exchange gains and losses;
 
 
 
l
 
certain unusual or infrequent items (e.g., gains and losses/impairments on assets or investments).

Segment EBITDA is also used as a target for management bonuses.

Acquired program costs are a significant proportion of our TV stations' cost structure and cash flow. We use Segment Broadcast Cash Flow to help us monitor these costs. Segment Broadcast Cash Flow is determined as Segment EBITDA excluding charges for program rights amortization but reduced by cash paid for program rights. When compared with Segment EBITDA, this indicates to management whether the cash investment in program rights in the period was greater or less than the accounting charge for program rights amortization. If the cash investment is greater (i.e. if Segment Broadcast Cash Flow is lower than Segment EBITDA), this provides a signal to management that future program rights amortization costs may increase. Segment Broadcast Cash Flow takes no account of possible changes in the quantity of programming rights held for future broadcast.

For a full reconciliation of our Segment Net Revenues, Segment EBITDA and Segment Broadcast Cash Flow by operation to our consolidated US GAAP results for the years ended December 31, 2003, 2002 and 2001 see Part II, Item 8, Note 19, "Segment Data".

A summary of our total Segment Net Revenues, Segment EBITDA, Segment EBITDA Margin and Segment Broadcast Cash Flow is as follows.
 

 
 
SEGMENT FINANCIAL INFORMATION
 
 
 
For the Years Ended December 31, (US $000's)
 
   
 
 
   
2003

 

 

2002

 

 

Movement

 

 

2002

 

 

2001

 

 

Movement
 
   
 
 
 
 
 
 
Total Segment Net Revenues
   
175,792
   
137,540
   
38,252
   
137,540
   
118,812
   
18,728
 
Total Segment EBITDA
   
45,036
   
31,423
   
13,613
   
31,423
   
17,006
   
14,417
 
Total Segment EBITDA Margin
   
26
%
 
23
%
 
3
%
 
23
%
 
14
%
 
9
%
Total Segment Broadcast Cash Flow
   
43,433
   
29,195
   
14,238
   
29,195
   
15,841
   
13,354
 

 
  Page 34  

 

ANALYSIS BY GEOGRAPHIC SEGMENT

(A) ROMANIA
 
 
SEGMENT FINANCIAL INFORMATION
 
 
 
For the Years Ended December 31, (US $000's)
 
   
 
 
 
   
2003

 

 

2002

 

 

Movement

 

 

2002

 

 

2001

 

 

Movement
 
   
 
 
 
 
 
 
Romanian Net Revenues
   
51,177
   
33,547
   
17,630
   
33,547
   
32,553
   
994
 
Romanian EBITDA
   
12,206
   
6,347
   
5,859
   
6,347
   
(2,007
)
 
8,354
 
Romanian EBITDA Margin
   
24
%
 
19
%
 
5
%
 
19
%
 
(6)
%
 
25
%
Romanian Broadcast Cash Flow
   
9,743
   
4,607
   
5,136
   
4,607
   
(3,522
)
 
8,129
 

Market Background: Romania is one of the fastest growing markets in Eastern Europe with television advertising market growth estimated by us at 25% to 30% for 2003. The market remains buoyant as we enter 2004, and we currently expect that Romania’s preparations to enter the EU sometime after 2007 will support good growth rates in the period running up to entry as has been experienced by earlier entrants.

PRO TV and ACASA (a cable channel) are second and fifth in the market with national all day audience shares in 2003 of 15.4% and 6.6%, respectively. The major competitors for audience share are the state channel TVR1 with 28.1% and Antena 1, an independent channel, with 13.1%. TVR1 has a higher share because it is the only significant broadcaster with coverage across the majority of the country. Advertisers, however, evaluate audience share within a network's coverage area and by this measure PRO TV ranks first and ACASA fourth (of seven stations ranked) in all-day audience. Both of our stations cover the important urban markets.

During 2004 our Romanian operation plans to launch a second cable channel.

l
 
Net Revenues for 2003 increased by 53% over 2002 due to several factors. Approximately US$ 9.7 million was due to the growth in the television advertising market. Strong programming increased our combined station prime-time national audience share to 24.9% in 2003 from 23.4% in 2002, enabling us to raise our advertising prices. The balance of the increase in net revenues, approximately US$ 7.9 million, was due to (i) a consolidation of our sales functions, eliminating internal competition and allowing us to reduce our average discount rates and (ii) the conversion of a prior related-party barter agreement to a normal transaction structure.
 
 
 
 
 
Net Revenues for 2002 increased by 3% over 2001, reflecting stable market share in a growing market.
 
 
 
l
 
EBITDA for 2003 increased by 92% over 2002, delivering an EBITDA margin of 24%, a significant increase on the 19% margin delivered in the prior year.
 
 
 
 
 
Costs charged in arriving at 2003 EBITDA grew by US$ 11.8 million or 43% over 2002. The cost of programming in 2003 increased by US$ 5.9 million or 41% over 2002 primarily due to a 59% increase in the charge for amortization of acquired programming rights and an increase of 21% in self-production costs. The increase in amortization of acquired programming was the result of a combination of planned investment in stronger programming, including the sports programming that was previously subject to a barter agreement, and an increase in the price of acquired programming. Operating costs and expenses in 2003 grew by US$ 5.5 million over 2002 primarily as a result of an increase in salary costs. This increase was caused by: (i) a change in domestic legislation with effect from January 2003 which increased employers’ liability for social security charges; (ii) salary increases that had been deferred for two years; and (iii) bonus incentive payments reflecting outstanding performance.
 
 
 
 
 
EBITDA for 2002 grew by US$ 8.4 million compared to 2001. In 2001 we recognized a charge of US$ 6.2 million in respect of bad debts. Apart from this charge for bad debts, costs charged in arriving at EBITDA operating costs for 2002 increased by only 4% over 2001, primarily due to higher amortization of programming rights, partly offset by savings in production, broadcast operation and staff costs.

 
  Page 35  

 

l
 
Broadcast Cash Flow for all years 2001 to 2003 was lower than EBITDA by US$ 1.5 million, US$ 1.7 million and US$ 2.5 million, respectively. This indicates that there has been continued significant investment in programming over and above the syndication charged for these years.
 
 
 
l
 
On our consolidated balance sheet as at December 31, 2001, our provision in respect of Romanian bad debts was US$ 6.5 million. Since that time we have taken significant measures to reduce the days outstanding on Romanian receivables. As at December 31, 2003, 19% of the Romanian subsidiaries’ accounts receivable balance was more than 360 days old and 5% was in the 180-360 day category, compared to 33% more than 360 days and 9% in the 180-360 day category as at December 31, 2002. Accordingly, US$ 0.4 million of our total Romanian bad debt provision was released in the fourth quarter of 2003 resulting in a total decrease to our total Romanian bad debt provision of US$ 1.4 million in the twelve months ended December 31, 2003. On our Consolidated Balance Sheet at December 31, 2003, the total provision for bad debt is US$ 5.6 million (2002: US$ 7.5 million), of which our provision for Romanian bad debts is US$ 4.4 million (2002: US$ 5.7 million). There are no significant issues with regard to the collection of debts in our other operations.


(B) SLOVAK REPUBLIC

 
 
SEGMENT FINANCIAL INFORMATION
 
 
 
For the Years Ended December 31, (US $000's)
 
   
 
 
 

 

2003

 

 

2002

 

 

Movement

 

 

2002

 

 

2001

 

 

Movement
 
   
 
 
 
 
 
 
Slovak Republic Net Revenues
   
50,814
   
38,397
   
12,417
   
38,397
   
34,696
   
3,701
 
Slovak Republic EBITDA
   
11,657
   
7,132
   
4,525
   
7,132
   
6,033
   
1,099
 
Slovak Republic EBITDA Margin
   
23
%
 
19
%
 
4
%
 
19
%
 
17
%
 
2
%
Slovak Republic Broadcast Cash Flow
   
11,961
   
7,774
   
4,187
   
7,774
   
6,922
   
852
 

Market Background: We estimate that the television advertising market in 2003 grew by approximately 6% to 10% in local currency terms driven by local inflation. The short-term effect of EU accession in May 2004 is unclear. Measured in US dollars the television advertising market grew by an estimated 30% to 35% in 2003 due to the weakening of the US dollar in the period.

MARKIZA TV is the premier broadcaster with a national all-day national audience share in 2003 of 45.8%, followed by STV1, a state channel, with 16.0%. The share of TV JOJ, the only other significant independent, grew from 8.1% in 2002 to 11.3% in 2003. We expect peoplemeters, an instrument for measuring audience viewing levels, to be introduced during 2004. Traditionally, the introduction of peoplemeters results in some reduction to the measured share of premier broadcasters.

l
 
Net revenues grew by 32% in 2003 compared to 2002. Approximately US$ 9.5 million of this growth was due to the weaker US dollar. Local currency revenue growth in 2003 was 7% due to the expanding television advertising market, and an increase in our rate card (the quoted price of advertising slots) early in 2003.
 
 
 
 
 
Net Revenues grew 11% in 2002 compared to 2001, again largely due to a weakening US dollar. Local currency revenues grew 3% in 2002 compared to 2001, in line with market growth.

 
  Page 36  

 

l
 
EBITDA grew 63% in 2003 compared to 2002 and the EBITDA margin grew to 23% in 2003 from 19% in 2002. Local currency EBITDA growth was 36% in 2003 compared to 2002. Costs charged in arriving at EBITDA in 2003 include a US$ 1.1 million provision for a shareholder disagreement. Excluding this provision, local currency operating costs were flat year-on-year reflecting improved cost control.
 
 
 
 
 
EBITDA in 2002 increased by 18% over 2001, with underlying local currency growth of 10% against 2001. The EBITDA margin increased from 17% in 2001 to 19% in 2002.
 
 
 
l
 
Broadcast Cash Flow has been greater than EBITDA in the years 2001 to 2003, although the difference has narrowed in each period, indicating growing correlation between the cash investment in programming and the charge for programming amortization.


(C) SLOVENIA

 
 
SEGMENT FINANCIAL INFORMATION
 
 
 
For the Years Ended December 31, (US $000's)
 
   
 
 
   
2003

 

 

2002

 

 

Movement

 

 

2002

 

 

2001

 

 

Movement
 
   
 
 
 
 
 
 
Slovenian Net Revenues
   
37,168
   
33,864
   
3,304
   
33,864
   
28,465
   
5,399
 
Slovenian EBITDA
   
13,173
   
11,052
   
2,121
   
11,052
   
8,367
   
2,685
 
Slovenian EBITDA Margin
   
35
%
 
33
%
 
2
%
 
33
%
 
29
%
 
4
%
Slovenian Broadcast Cash Flow
   
12,912
   
11,884
   
1,028
   
11,884
   
7,932
   
3,952
 

Market Background : Slovenia is our most prosperous market with a per capita GDP in 2002 of $10,550. We estimate that in 2003 the television advertising market fell in local currency terms by between 8% and 9% from 2002 levels, which benefited from the participation of the Slovenian national team in the 2002 Soccer World Cup. The market also decreased slightly due to reduced activity of certain large advertisers. We expect the market to revert to slow growth in 2004, although the short-term effect of EU accession in May 2004 is unclear. Measured in US dollars the Slovenian television advertising market grew by an estimated 6% to 7% in 2003 compared to 2002 due to the weakening of the US dollar.

POP TV and KANAL A were ranked first and fourth (of four stations ranked) in the market with national all day audience shares of 29.5% and 10.2%, but were ranked first and third in prime time, respectively. The main competitors are state broadcasters SLO1 and SLO2 with national all day audience shares of with 24.5% and 10.2%, respectively.

l
 
Net revenues increased by 10% in 2003 over 2002, due solely to the weaker US dollar which contributed approximately US$ 5.0million. Local currency revenues decreased by 6% in 2003 compared to 2002, when additional revenues were generated by the 2002 Soccer World Cup. Without the effect of the 2002 Soccer World Cup our underlying local currency net revenues would have shown a small increase. This performance was due to our increasing focus on the prime-time schedule.
 
 
 
 
Net revenues for 2002 grew by 19% over 2001 in US dollar terms and by 17% in local currency terms principally due to the 2002 Soccer World Cup, when small domestic businesses advertised on television for the first time, and to a higher rate card (the quoted price of advertising spots) enabling us to increase our share of an otherwise flat local television advertising market.
 
 
 
l
 
EBITDA grew by 19% in 2003 over 2002 to deliver an EBITDA margin of 35% in 2003 compared to 33% in 2002. This reflects the local management's ability to recognize the need for cost control measures and to implement these measures in the face of current market conditions.
 
 
 
 
 
In 2003, operating costs grew by 5% over 2002 when measured in US dollars but fell by 8% against 2002 in local currency terms. Savings were recognized principally in programming costs, assisted by the elimination of one-off production costs associated with the 2002 Soccer World Cup.

 
  Page 37  

 

 
 
EBITDA grew by 32% in 2002 over 2001 due to effective cost control measures limiting cost base growth to 14% (including the one-off 2002 Soccer World Cup costs) compared to 2001. In consequence the EBITDA margin in 2002 increased to 33%, an improvement of 4% over 2001.
 
 
 
l
 
Broadcast Cash Flow is broadly in line with EBITDA over the three years 2001 to 2003. This indicates a similarity over time between the cash invested in programming and the related amortization charge, albeit with small differences in individual years due to timing.



(D) UKRAINE

 
 
SEGMENT FINANCIAL INFORMATION
 
 
 
For the Years Ended December 31, (US $000's)
 
   
 
 
   
2003

 

 

2002

 

 

Movement

 

 

2002

 

 

2001

 

 

Movement
 
   
 
 
 
 
 
 
Ukrainian Net Revenues
   
36,633
   
31,732
   
4,901
   
31,732
   
23,098
   
8,634
 
Ukrainian EBITDA
   
8,000
   
6,892
   
1,108
   
6,892
   
4,613
   
2,279
 
Ukrainian EBITDA Margin
   
22
%
 
22
%
 
-
%
 
22
%
 
20
%
 
2
%
Ukrainian Broadcast Cash Flow
   
8,817
   
4,930
   
3,887
   
4,930
   
4,509
   
421
 

Market Background: Ukraine has the highest population (48.7 million) of all the markets in which we operate, but is the least economically advanced, with a per capita GDP in 2002 of only US$ 850. Following some years of hyper-growth, the television advertising market growth slowed in 2003 to an estimated 18%, and we currently anticipate that growth will continue at similar levels in 2004.

STUDIO 1+1 has a license to broadcast for only 15 hours per day and is the number two station (of 6 stations ranked) with an all-day audience share of 19.1% in its coverage area. The number one position is held by Inter which holds a license permitting it to broadcast for 24 hours per day. Inter had an all-day audience share of 26.1% in 2003. STUDIO 1+1's prime time audience share is 25.8% compared to Inter's 26.9%. Novi Kanal is the number three station with a 10.5% all-day audience share and generates effective national coverage through a collection of regional licenses.

l
 
Net revenues grew by 15% in 2003 over 2002, less than our estimate of television advertising market growth, due to a reduction in prime time audience share from 27.4% to 25.8%.
 
 
 
 
 
Net revenues for 2002 grew by 37% over 2001 due to a combination of a strong market and increased Russian programming which generated the highest ratings for 2002.
 
 
 
l
 
EBITDA for 2003 grew by 16% over 2002 to US$ 8.0 million, delivering an EBITDA margin of 22% for 2003, in line with 2002.
 
 
 
 
 
Costs charged in arriving at EBITDA grew by US$ 3.8 million in 2003 compared to 2002, an increase of 15% in line with revenue growth. This included a US$ 7.9 million increase in the cost of programming, of which approximately US$ 3.0 million related to a reallocation of employment costs from station operating costs and expenses in order to create a more accurate reflection of local production costs. The balance related primarily to the increased cost of Russian programming, the price of which has grown by approximately 40% year on year. Russian programming continues to generate the highest ratings and is essential to maintain strong prime time ratings. This increase was partly offset by a reduction in the provision charged for withholding tax.
 
 
 
 
 
EBITDA grew by 49% in 2002 compared to 2001 to deliver an EBITDA margin of 22% compared to 20% in 2001. This growth was principally due to revenue growth outperforming the 34% increase in costs charged in arriving at EBITDA. The cost increase was principally due to a change in programming strategy which shifted emphasis from Western (mainly US) programming to more expensive, but more popular Russia programming, as well as to the provision for withholding tax referred to above.

 
  Page 38  

 

l
 
Broadcast Cash Flows for 2001 was in line with EBITDA, in 2002 there was an additional US$ 2 million invested in programming over and above the syndication charge for the year, and the investment in programming for 2003 was US$ 0.8 million less than the syndication charged. These fluctuations are caused by timing differences between cash investment and utilization (as indicated by the amortization charge) in a rapidly developing market where the cost of programming is rising.




IV. Analysis of the Results of Consolidated Operations


IV (a) Net Revenues comparative for 2003 - 2001

 
 
Consolidated Net Revenues
 
 
 
For the Years Ended December 31, (US $000's)
 
   
 
 
   
2003

 

 

2002

 

 

Movement

 

 

2002

 

 

2001

 

 

Movement
 
   
 
 
 
 
 
 
Romania
 
$
51,177
 
$
33,547
 
$
17,630
 
$
33,547
 
$
32,553
 
$
994
 
Slovenia
   
37,168
   
33,864
   
3,304
   
33,864
   
28,465
   
5,399
 
Ukraine
   
30,181
   
24,883
   
5,298
   
24,883
   
10,351
   
14,532
 
   
 
 
 
 
 
 
Total Consolidated Net Revenues
 
$
118,526
 
$
92,294
 
$
26,232
 
$
92,294
 
$
71,369
 
$
20,925
 
   
 
 
 
 
 
 

Our consolidated net revenues increased by 28% in 2003 over 2002 due to a:

l
 
53% increase in the net revenues of our Romanian operations as described in "III. Analysis of Segment Results";
 
 
 
l
 
21% increase in the net revenues of our consolidated Ukrainian operations (which includes IMS and Innova but excludes Studio 1+1) as a result of significantly increased sales of programming from a subsidiary to an associate within the Studio 1+1 Group; and
 
 
 
l
 
10% increase in the net revenues of Slovenian operations as described in "III. Analysis of Segment Results".

Our consolidated net revenues increased by 29% in 2002 over 2001 primarily due to a:

l
 
3% increase in the revenues of our Romanian operations as described in "III. Analysis of Segment Results";
 
 
 
l
 
19% increase in the revenues of our Slovenian operations as described in "III. Analysis of Segment Results"; and
 
 
 
l
 
140% increase in the revenues of our consolidated Ukrainian operations (which includes IMS and Innova but excludes Studio 1+1) as a result of significantly increased sales of programming from a subsidiary to an associate within the Studio 1+1 Group.

 
  Page 39  

 

IV (b) Station Operating Costs and Expenses comparative for 2003 - 2001

 
 
Consolidated Station Operating Costs and Expenses
 
 
 
For the Years Ended December 31, (US $000's)
 
 
 
 
   
2003

 

 

2002

 

 

Movement

 

 

2002

 

 

2001

 

 

Movement
 
 
 
 
 
 
 
 
Romania
 
$
36,329
 
$
27,001
 
$
9,328
 
$
27,001
 
$
26,650
 
$
351
 
Slovenia
   
21,862
   
20,926
   
936
   
20,926
   
19,424
   
1,502
 
Ukraine
   
22,445
   
14,813
   
7,632
   
14,813
   
11,438
   
3,375
 
 
 
 
 
 
 
 
Total Consolidated Station Operating Costs and Expenses
 
$
80,636
 
$
62,740
 
$
17,896
 
$
62,740
 
$
57,512
 
$
5,228
 
 
 
 
 
 
 
 

Total station operating costs and expenses (including amortization of program rights and depreciation of fixed assets and other intangibles) increased by 29% in 2003 compared to 2002 primarily due to a:
 
l
 
35% increase in the station operating costs and expenses of our Romanian operations. Programming amortization increased by US$ 4.6 million due to increased investment in the schedule, including the sports programming that was previously subject to a related party barter agreement and a US$ 5.5 million increase in salaries costs due to: (i) a change in domestic legislation with effect from January 2003 which increased employers’ liability for social security charges; (ii) salary increases that had been deferred for two years; and (iii) bonus incentive payments reflecting outstanding performance; and
 
 
 
l
 
52% increase in the station operating costs and expenses of our Ukrainian operations. Programming amortization increased by US$ 5.2 million primarily as a result of investment in additional cost of Russian programming, a genre which grew in cost by approximately 40% year on year.

Total station operating costs and expenses (including amortization of program rights and depreciation of fixed assets and other intangibles) increased by 9% in 2002 over 2001 primarily due to a:

l
 
8% increase in station operating costs and expenses of our Slovenian operations. This increase is due to increased investment in local production, in particular production of the 2002 Soccer World Cup, and the effect of the dollar decreasing in value against the local currency;
 
 
 
l
 
30% increase in station operating costs and expenses of our Ukrainian operations. This increase is as a result of increased investment in programming; off-set by a
 
 
 
l
 
29% decrease in the depreciation and amortization charge primarily due to cessation of routine annual charges for the amortization of goodwill and intangible assets following the implementation of FAS 142.


IV (c) Station Selling, General and Administrative Expenses comparative for 2003 - 2001

 
 
Consolidated Station Selling, General and Administrative Expenses
 
 
 
For the Years Ended December 31, (US $000's)
 
   
 
 
   
2003

 

 

2002

 

 

Movement

 

 

2002

 

 

2001

 

 

Movement
 
   
 
 
 
 
 
 
Romania
 
$
5,503
 
$
5,125
 
$
378
 
$
5,125
 
$
13,359
 
$
(8,234
)
Slovenia
   
3,518
   
2,939
   
579
   
2,939
   
2,946
   
(7
)
Ukraine
   
2,657
   
4,191
   
(1,534
)
 
4,191
   
3,466
   
725
 
   
 
 
 
 
 
 
Total Consolidated Station Selling, General and Administrative Expenses
 
$
11,678
 
$
12,255
 
$
(577
)
$
12,255
 
$
19,771
 
$
(7,516
)
   
 
 
 
 
 
 

 
  Page 40  

 

Station selling, general and administrative expenses decreased by 5% in 2003 compared to 2002 primarily due to a :

l
 
37% decrease in the station selling, general and administrative expenses of our Ukrainian operations. This year on year decrease is primarily due to a charge in 2002 for withholding tax and a reclassification to production costs; off-set by
 
 
 
l
 
7% increase in the station selling, general and administrative expenses of our Romanian operations. This increase is primarily due to an increase in consulting services off-set by a decrease in our bad debt provision; and
 
 
 
l
 
20% increase in the station selling, general and administrative expenses of our Slovenian operations due to the weakening of the US dollar. In local currency terms, costs increased by 3%.

Station selling, general and administrative expenses decreased by 38% in 2002 compared to 2001 primarily due to a:

l
 
62% decrease in station selling, general and administrative expenses of our Romanian operations. This decrease is substantially the result of the difference in bad debt expense in the two years (2002: US$ (0.3) million; 2001 US$ 6.2 million). A significant part (over US$ 3.0 million) of this large provision in 2001 was charged against parties related or connected to Mr Sarbu, a minority shareholder in MPI.


IV (d) Consolidated results below operating income/(loss) before corporate expenses comparative for 2003 - 2001

 
 
For the Years Ended December 31, (US $000's)
 
 
   
2003

 

 

2002

 

 

Movement

 

 

2002

 

 

2001

 

 

Movement
 
   
 
 
 
 
 
 
Corporate operating costs (excluding stock based compensation)
   
19,303
   
12,060
   
7,243
   
12,060
   
7,812
   
4,248
 
Stock based compensation
   
13,209
   
3,754
   
9,455
   
3,754
   
-
   
3,754
 
Amortization of goodwill
   
-
   
-
   
 
   
-
   
1,747
   
(1,747
)
Loss on write down of investment
   
-
   
(2,685
)
 
2,685
   
(2,685
)
 
-
   
(2,685
)
Equity in income/(loss) of unconsolidated affiliates
   
3,001
   
2,861
   
140
   
2,861
   
6,387
   
(3,526
)
Net interest
   
(6,362
)
 
(15,287
)
 
8,925
   
(15,287
)
 
(15,742
)
 
455
 
Other income/(expense)
   
(216
)
 
1,751
   
(1,967
)
 
1,751
   
(3,412
)
 
5,163
 
Change in fair value of derivative
   
-
   
1,108
   
(1,108
)
 
1,108
   
(1,576
)
 
2,684
 
Gain on sale of subsidiaries
   
-
   
-
   
-
   
-
   
1,802
   
(1,802
)
Foreign currency exchange gain/(loss), net
   
(9,994
)
 
(10,195
)
 
201
   
(10,195
)
 
1,641
   
(11,836
)
Provision for income taxes
   
(3,654
)
 
(3,568
)
 
(86
)
 
(3,568
)
 
(1,005
)
 
(2,563
)
Minority interest in (income)/loss of consolidated subsidiaries
   
(676
)
 
(576
)
 
(100
)
 
(576
)
 
2,138
   
(2,714
)
Discontinued operations
   
370,213
   
10,922
   
359,291
   
10,922
   
3,129
   
7,793
 

 
  Page 41  

 

Corporate operating costs for 2003 and 2002 were as follows:

 
 
For the Years Ended December 31, (US $000's)
 
 
   
2003
   
2002
   
Movement
   
2002
   
2001
   
Movement
 
   
 
 
 
 
 
 
Corporate operating costs (excluding stock based compensation and satellite costs)
 
$
16,006
 
$
11,937
 
$
4,069
 
$
11,937
 
$
7,812
   
4,125
 
Satellite costs
   
3,297
   
123
   
3,174
   
123
   
-
   
123
 
   
 
 
 
 
 
 
Total Corporate operating costs (excluding stock based compensation)
 
$
19,303
 
$
12,060
 
$
7,243
 
$
12,060
 
$
7,812
   
4,248
 
   
 
 
 
 
 
 


l
 
The increase in 2003 compared to 2002 is primarily due to the costs set out below and was further influenced by the weakening of the U.S. dollar against the British pound, the currency in which most of our corporate expenses are denominated.
 
 
 
 
 
 
 
 
 
 
 
1.
 
An increase of US$ 4.0 million caused by:
 
 
 
 
l
 
An increase in corporate operating costs of US$ 1.5 million principally due to the exchange movement, to an increase in headcount from 18 to 20, and to higher travel expenses as a result of station visits and development related travel;
 
 
 
 
l
 
An increase in legal and professional fees of US$ 2.5 million arising primarily from:
 
 
 
 
 
 
a.
 
a Sarbanes-Oxley project to assist us documenting the internal controls in our operations throughout the Group;
 
 
 
 
 
 
b.
 
additional audit, audit related and legal costs in respect of compliance, including a requirement to re-audit prior period results due to our change in auditors and the treatment of our Czech Republic operations as discontinued; and
 
 
 
 
 
 
c.
 
recruitment costs, including CEO and CFO recruitment.
 
 
 
 
 
 
 
 
 
 
 
2.
 
Additionally, a charge of US$ 3.3 million was recognized in 2003 relating to the termination of our remaining corporate satellite contracts.
 
 
 
 
 
 
 
Corporate operating costs increased in 2002 over 2001 primarily as a result of an increase in employee costs and professional and legal costs.


Stock based compensation costs increased in 2003 over 2002 and 2002 over 2001 principally as a result of the increase in the price of our stock. (For further discussion, see Part II, Item 8, Note 13, "Stock Option Plans".)


Amortization of Goodwill and allowance for development costs. There was no charge in 2003 or 2002 compared to a charge of US$ 1.7 million for 2001. This decrease was a result of our adoption of FAS 142 "Goodwill and Intangible Assets". We have performed impairment reviews on our intangible assets, which have indefinite lives, on an annual basis and believe that they were not impaired in 2002 and 2003.


Loss on write down of investment arose in 2002 because we wrote down our investment in STS by US$ 2.7 million due to a change in our ownership. (For further discussion, see Part I, Item 1, "Business").


Equity in income/(loss) of unconsolidated affiliates: As explained in Part I, Item 1, "Business" some of our broadcasting licenses are held by unconsolidated affiliates over which we have minority blocking rights but not majority control. These affiliates are accounted for using the equity method.

 
  Page 42  

 

Equity in income of unconsolidated affiliates was US$ 3.0 million for 2003 compared to US$ 2.9 million for 2002 and US$ 6.4 million for 2001 as detailed below:

 
 
For the Years Ended December 31, (US $000's)
 
 
   
2003

 

 

2002

 

 

Movement

 

 

2002

 

 

2001

 

 

Movement
 
   
 
 
 
 
 
 
Slovak Republic operations
 
$
4,521
 
$
4,169