10-K 1 body.htm CME 10-K 12-31-2005 CME 10-K 12-31-2005


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

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, 2005

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

Commission File Number 0-24796

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

 
BERMUDA
 
98-0438382
 
 
(State or other jurisdiction of incorporation and organization)
 
(IRS Employer Identification No.)
 
 
Clarendon House, Church Street, Hamilton
 
HM 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:
CLASS A COMMON STOCK, $0.08 PAR VALUE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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 ¨

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


 
Page 1

 
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2005 (based on the closing sale price of $48.38 of the registrant's Common Stock, as reported by the Nasdaq Exchange on such date) was approximately US$ 1.5 billion.

Number of shares of Class A Common Stock outstanding as of February 13, 2006 : 31,032,994
Number of shares of Class B Common Stock outstanding as of February 13, 2006 : 6,966,533

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 7, 2006
Part III
 
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PART III
 
 
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PART IV
 
 
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Corporate Logo
PART I

BUSINESS

Forward-looking Statements

This report contains forward-looking statements, including statements regarding the renewal of broadcasting licenses in the Slovak Republic and Ukraine, the impact of legal proceedings in Ukraine, the results of modifying our sales strategy in the Czech Republic, the impact of the reorganization of our operations in the Czech Republic and the Slovak Republic, the results of additional investment in Croatia and Ukraine, the impact of the acquisition of control of our operations in the Slovak Republic, our ability to develop and implement multi-channel strategies generally, the growth of television advertising in our markets, the future economic conditions in our markets, future investments in television broadcast operations, the growth potential of advertising spending in our markets, and other business strategies and commitments. For these statements and all other forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy or are otherwise beyond our control and some of which might not even be anticipated. Future events and actual results, affecting our strategic plan as well as our financial position, results of operations and cash flows, could differ materially from those described in or contemplated by the forward-looking statements. Important factors that contribute to such risks include, but are not limited to, the general regulatory environments where we operate and application of relevant laws and regulations, the renewals of broadcasting licenses, our ability to implement strategies regarding sales and multi-channel distribution, the rate of development of advertising markets in countries where we operate, our ability to acquire necessary programming and the ability to attract audiences, our ability to obtain additional frequencies and licenses, and general market and economic conditions in these countries as well as in the United States and Western Europe. 

GENERAL

Central European Media Enterprises Ltd. is a Bermuda company that, together with its subsidiaries and affiliates, invests in, develops and operates national commercial television channels and stations in Central and Eastern Europe. At present, we have operations in Croatia, the Czech Republic, 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. Communications can also be sent c/o CME Development Corporation at Aldwych House, 81 Aldwych, London, WC2B 4HN, United Kingdom, telephone number +44-20-7430-5430.

We make available, free of charge, on our website at http://www.cetv-net.com our Annual Reports 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 US dollars using appropriate exchange rates. All references to 'US$' or 'dollars' are to US dollars, all references to 'HRK' are to Croatian kuna, all references to 'CZK' are to Czech korunas, all references to 'RON' are to the New Romanian lei, all references to 'SIT' are to Slovenian tolars, all references to 'SKK' are to Slovak korunas, all references to 'UAH' are to Ukrainian hryvna, all references to 'Euro' are to the European Union Euro and all references to 'GBP' are to British Pounds. The exchange rates as of December 31, 2005 used in this report are 6.23 HRK/US$; 24.59 CZK/US$; 3.11 RON/US$; 202.43 SIT/US$; 31.95 SKK/US$; 5.05 UAH/US$; 0.85 Euro/US$ and 0.58 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 in which we operate, we have ownership 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. We generate revenues primarily through our operating companies which acquire programming for broadcast by the corresponding license company and enter into agreements with advertisers and advertising agencies on behalf of the license company. In the Czech Republic, 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 and Ukraine, where we are entitled by contract to a share of profits in those operations that is in excess of our voting interest. Below is an overview of our operating structure at December 31, 2005, the accounting treatment for each entity and a chart entitled “Simplified Corporate Structure - Continuing Operations”.

Key Subsidiaries and Affiliates as at December 31, 2005
 
Voting 
Interest
 
Share of
Profits
 
Accounting
Treatment
 
TV Channels
Continuing Operations
               
                 
Croatia
               
Operating Company:
               
Operativna Kompanija d.o.o. (OK) 
 
100%
 
100%
 
Consolidated
Subsidiary
   
License Company:
               
Nova TV d.d. (Nova TV Croatia)
 
100%
 
100%
 
Consolidated
Subsidiary
 
NOVA TV (Croatia)
                 
Czech Republic
               
Operating Company:
               
CME Media Services s.r.o. (CME Media Services)
 
100%
 
100%
 
Consolidated
Subsidiary
   
 
               
License Companies:
               
CET 21 s.r.o. (CET 21)
 
96.5%
 
96.5%
 
Consolidated
Subsidiary
 
TV NOVA
(Czech Republic)
Galaxie Sport s.r.o. (Galaxie Sport)
 
100%
 
100%
 
Consolidated
Subsidiary
 
GALAXIE SPORT
                 
Romania
               
Operating Companies:
               
Media Pro International S.A. (MPI)
 
85%
 
85%
 
Consolidated
Subsidiary
   
Media Vision S.R.L. (Media Vision)
 
70%
 
70%
 
Consolidated
Subsidiary
   
License Company:
               
Pro TV S.A. - formerly Pro TV S.R.L. (Pro TV)
 
85%
 
85%
 
Consolidated
Subsidiary
 
PRO TV, ACASA,
PRO CINEMA and
PRO TV
INTERNATIONAL
Slovenia
               
Operating Company:
               
Produkcija Plus d.o.o. (Pro Plus)
 
100%
 
100%
 
Consolidated
Subsidiary
   
License Companies:
               
Pop TV d.o.o. (Pop TV)
 
100%
 
100%
 
Consolidated
Subsidiary
 
POP TV

 
Key Subsidiaries and Affiliates as at December 31, 2005
 
Voting
Interest
 
Share of
Profits
 
Accounting
Treatment
 
TV Channels
Continuing Operations
               
                 
Kanal A d.o.o. (Kanal A)
 
100%
 
100%
 
Consolidated
Subsidiary
 
KANAL A
 
Slovak Republic
               
Operating Company:
               
Slovenska Televizna Spolocnost s.r.o. (STS)
 
49%
 
70%
 
Equity Accounted
Affiliate
   
License Company:
               
Markiza-Slovakia s.r.o. (Markiza)
 
34%
 
0.1%
 
Equity Accounted
Affiliate
 
MARKIZA TV
                 
Ukraine
               
Operating Companies:
               
Innova Film GmbH (Innova)
 
60%
 
60%
 
Consolidated
Subsidiary
   
International Media Services Ltd. (IMS)
 
60%
 
60%
 
Consolidated
Subsidiary
   
Enterprise "Inter-Media" (Inter-Media)
 
60%
 
60%
 
Consolidated
Subsidiary
   
License Company:
               
Broadcasting Company "Studio 1+1 LLC " (Studio 1+1)
 
18%
 
60%
 
Consolidated
Variable Interest
Entity
 
STUDIO 1+1


Chart


OPERATING ENVIRONMENT

Market and Audience Share

Our television channels reach an aggregate of approximately 82 million people in six countries. TV NOVA in the Czech Republic, our newest national channel, was ranked first in national all day audience share in 2005, as were MARKIZA TV in the Slovak Republic and POP TV, our primary channel in Slovenia. PRO TV in Romania and STUDIO 1+1 in Ukraine were ranked second in terms of national all day audience share for 2005 in competitive markets. In Croatia, NOVA TV was ranked fourth in terms of national all day audience share.

The rankings of our channels in the markets in which they broadcast are reflected below.

Country
 
Channels
 
Launch Date
 
Technical
Reach (1)
 
2005 Audience
Share (2)
 
Market
Rank (2)
                     
Croatia
 
NOVA TV
(Croatia)
 
August 2000 (3)
 
88%
 
14%
 
4
Czech Republic
 
TV NOVA
(Czech Rep)
 
February 1994 (4)
 
100%
 
41%
 
1
   
GALAXIE
SPORT
 
April 2002 (5)
 
26% (7)
 
Not Measured
 
Not Measured
Romania
 
PRO TV
 
December 1995
 
76%
 
16%
 
2
   
ACASA
 
February 1998
 
65%
 
8%
 
4
   
PRO CINEMA
 
April 2004
 
44%
 
1%
 
12
Slovak Republic
 
MARKIZA TV
 
August 1996
 
86%
 
31%
 
1
Slovenia
 
POP TV
 
December 1995
 
95%
 
27%
 
1
   
KANAL A
 
October 1991 (6)
 
86%
 
9%
 
4
Ukraine
 
STUDIO 1+1
 
January 1997
 
95%
 
20%
 
2
 
(1)
“Technical Reach” is a measurement of the percentage of a country’s population that is able to receive the signals of the indicated channels. 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 transmitters and the local population density and geography around that transmitter. The technical reach calculation is separate from the independent third party measurement that determines audience share.

(2)
National all day audience share and rank. Source: Croatia: Peoplemeters AGB Media Services, Czech Republic: ATO - Mediaresearch / GFK, Romania: Peoplemeters Taylor Nelson Sofres, Slovak Republic: Visio / MVK, Slovenia: Peoplemeters AGB Media Services, Ukraine: Peoplemeters GFK USM. There are four stations ranked in Croatia, four in Czech Republic, twenty three in Romania, six in the Slovak Republic, four in Slovenia, and six significant stations ranked in Ukraine.

(3)
We acquired NOVA TV (Croatia) in July 2004.

(4)
We acquired TV NOVA (Czech Republic) in May 2005.

(5)
We acquired GALAXIE SPORT in September 2005.

(6)
We acquired KANAL A in October 2000.

(7)
26% technical reach in the Czech Republic. In addition, GALAXIE SPORT has a technical reach of 38% in the Slovak Republic.


The following table shows the population, technical reach of our primary channel, number of television households, per capita GDP and cable penetration for those countries of Central and Eastern Europe where we conduct broadcast operations.

Country
 
Population
(in millions) (1)
 
Technical
Reach (in
millions) (2)
 
Television
Households (in
millions) (3)
 
Per Capita GDP
2005 US$ (4)
 
Cable
Penetration (3)
                     
Croatia
 
4.3
 
3.8
 
1.5
 
$   8,176
 
16%
Czech Republic
 
10.2
 
10.2
 
3.9
 
$ 11,148
 
26%
Romania
 
21.3
 
16.2
 
7.4
 
$   4,460
 
68%
Slovak Republic
 
5.4
 
4.6
 
1.9
 
$   9,312
 
35%
Slovenia
 
2.0
 
1.9
 
0.6
 
$ 17,050
 
58%
Ukraine
 
47.4
 
45.0
 
18.4
 
$   1,715
 
19%
Total
 
90.6
 
81.7
 
33.7
       

(1)
Source: Global Insight Country Analysis (2005 data).

(2)
Source: Internal estimates supplied by each country's operations. Each of our operations has estimated its own technical reach based on the location, power and frequency of each of its transmitters and the local population density and geography around that transmitter. The technical reach is separate from the independent third party measurement that determines audience shares.

(3)
Source: Informa Telecoms and Media (2005 data). A Television Household is a residential dwelling with one or more television sets. Cable Penetration refers to the percentage of Television Households that subscribe to television services via cable channels.

(4)
Source: ING (September 2005 data).

Regulation

In this report, we refer to broadcasting regulatory authorities or agencies in our operating countries as “The Media Council”. These authorities or bodies are as follows:

Croatia - Electronic Media Council
Czech Republic - The Council for Radio and Television Broadcasting
Romania - National Audio-Visual Council
Slovak Republic - Council of the Slovak Republic for Broadcasting and Television Transmission
Slovenia - Post and Electronic Communications Agency of the Republic of Slovenia
Ukraine - National Council for Television and Radio Broadcasting

Media Councils generally supervise broadcasters and their compliance with national broadcasting legislation. On accession to the European Union (the "EU") of any Central or Eastern European country in which we operate, our broadcast operations in such country become subject to EU legislation, including regulations on the origin of programming content. The Czech Republic, Slovenia and the Slovak Republic acceded to the EU on May 1, 2004.

The EU Television Without Frontiers directive (the "EU Directive") sets out the legal framework for television broadcasting in the EU, which among other things, requires broadcasters, where "practicable and by appropriate means," to reserve a majority 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 requires that at least 10% of either broadcast time or programming budget is dedicated to 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, including direct sales advertising. The adoption by Croatia, which is currently in EU accession negotiations, and by Romania, which is scheduled for accession to the EU in 2007, of media legislation for privately owned broadcasters that is substantially in compliance with the EU Directive has had no material adverse effect on our operations.


License Renewal

Regulatory bodies in each country in which we operate control access to the available frequencies through licensing regimes. Management believes that the licenses for our television license companies will be renewed prior to expiry. In Romania, the Slovak Republic, Slovenia and Ukraine local regulations contain a qualified presumption for extensions of broadcast licenses according to which a license may be renewed if the licensee has operated substantially in compliance with the relevant licensing regime. To date, all expiring licenses have been renewed; however, there can be no assurance that licenses will continue to 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.

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

Croatia
The license of NOVA TV (Croatia) expires in April 2010.
   
Czech Republic
The license of TV NOVA (Czech Republic) expires in January 2017. The GALAXIE SPORT license expires in March 2014.
   
Romania
Licenses expire on dates ranging from July 2006 to February 2014.  
   
Slovak Republic
The license of MARKIZA TV in the Slovak Republic expires in September 2007.
   
Slovenia
The licenses of both our channels in Slovenia expire in August 2012.
   
Ukraine
The 15-hour license of STUDIO 1+1 expires in December 2006. The license to broadcast for the remaining nine hours in off prime expires in August 2014.


OPERATIONS BY COUNTRY

CROATIA

General

Croatia is a parliamentary democracy with a population of approximately 4.3 million people. Per capita GDP is estimated to be US$ 8,176 in 2005 with a GDP growth rate of 3% for 2005. Approximately 99% of Croatian households have television and cable penetration is approximately 16%. According to our estimates, the Croatian television advertising market grew by approximately 4% in 2005 to approximately US$ 115 - 125 million.

In Croatia, we operate one national television channel NOVA TV (Croatia). The two other national broadcasters are the public broadcaster HRT, which operates two channels, and privately owned broadcaster RTL.
 
Operating and License Companies

We own 100% of Nova TV (Croatia), which holds a national terrestrial broadcast license for Croatia.  Nova TV (Croatia) owns 100% of OK, which provides programming and advertising services for the NOVA TV (Croatia) channel.


Operations

NOVA TV (CROATIA)
 
NOVA TV (Croatia) reaches 88% of the Croatian population. Independent research shows that among the main television stations in Croatia, the NOVA TV (Croatia) channel had a national all day audience share of 13.6% and a national prime time audience share of 13.3%.

The chart below summarizes the national all day and prime time audience share figures for NOVA TV (Croatia):
 
   
2001
 
2002
 
2003
 
2004
 
2005
 
NOVA TV
(Croatia)
                     
All day
   
11.8%
 
 
15.3%
 
 
15.6%
 
 
12.0%
 
 
13.6%
 
Prime time
   
-
   
-
   
12.7%
 
 
10.9%
 
 
13.3%
 

Source : 2005, 2004 and 2003 - AGB Media Services 
 
Source : 2002 and 2001 - CATI - phone recall research
 
(No independent data is available for 2001 and 2002 prime time).
 
Programming

NOVA TV (Croatia) broadcasts approximately 19 hours per day and has a programming strategy to appeal to a broad audience through a wide range of programming, including movies and series, news, sitcoms, telenovellas, soap operas and game shows.

Approximately 21% of the NOVA TV (Croatia) channel's programming is locally produced, including a Croatian version of Nasa Mala Klinica (Our Little Clinic), a sitcom originally produced by Pro Plus in Slovenia; U Sridu (Bull’s Eye), a talk show; and Boomerang, an office-based sitcom.

OK has secured exclusive broadcast rights in Croatia to a variety of popular American and European series, films and telenovellas produced by major international studios, including MGM, Paramount Pictures and Walt Disney Television International for the NOVA TV (Croatia) channel. All foreign language programming is subtitled. Foreign news reports and film footage licensed from CNN, Reuters, APTN and SNTV are integrated into news programs on the NOVA TV (Croatia) channel.

The NOVA TV (Croatia) channel is required to comply with several restrictions on programming, including regulations on the origin of programming. These include the requirement that 20% of broadcast time consist of locally produced programming and 60% of such locally produced programming be shown during prime time.

Advertising

Our Croatian operations derive revenues principally from the sale of commercial advertising time on the NOVA TV (Croatia) channel, sold both through independent agencies and media buying groups. The NOVA TV (Croatia) channel currently serves approximately 250 advertisers, including multinational companies such as Johnson & Johnson, Wrigley, L’Oreal, Procter & Gamble, Coca Cola and Reckitt Benckiser. Our top ten advertising clients contributed approximately 39% to our total advertising revenues in Croatia in 2005.


Within the Croatian advertising market, television advertising accounts for approximately 48% of total advertising spending. NOVA TV (Croatia) competes for advertising revenues with other media such as print, radio, outdoor advertising and direct mail.

Privately owned broadcasters are permitted to broadcast advertising for up to 15% of their daily broadcast time with an additional 5% of daily broadcast time that may be used for direct sales advertising. Privately owned broadcasters may use up to 12 minutes per hour for advertising and teleshopping. The public broadcaster, which is also financed through a compulsory television license fee, is restricted to broadcasting 9 minutes of advertising per hour. There are restrictions on the frequency of advertising breaks, which are the same for public and privately owned broadcasters. There are also restrictions that relate to advertising content, including a ban on tobacco advertising.

Competition

At the beginning of 2004, NOVA TV (Croatia) and HRT, which was then operating three channels, were the only national broadcasters in Croatia. In April 2004, RTL launched a channel under a license issued by the Croatian government on the frequencies previously used by the public broadcaster HRT, a third channel, which had ceased broadcasting earlier in 2004. During 2005 NOVA TV (Croatia) achieved a national all day audience share of 13.6%, which made it the fourth ranked station nationally.

The chart below provides a comparison of our audience share and technical reach to our competitors:

Main Television
Channels
 
Ownership
 
Year of first
transmission
 
Signal
distribution
 
Audience
share (2005)
 
Technical
reach
                     
HRT 1
 
Public Television
 
1956
 
Terrestrial /
satellite / cable
 
38.1%
 
99%
HRT 2
 
Public Television
 
1972
 
Terrestrial /
satellite / cable
 
15.9%
 
99%
RTL
 
Bertelsmann
 
2004
 
Terrestrial /
satellite / cable
 
24.7%
 
95%
NOVA TV
(Croatia)
 
CME
 
2000
 
Terrestrial /
satellite / cable
 
13.6%
 
88%
Others
             
7.7%
   
               
100.0%
   

Source : AGB Puls and CME

Additional competitors for audience share include cable and satellite channels.

License Renewal

The NOVA TV (Croatia) channel operates pursuant to a license originally granted by the Telecommunications Agency of Croatia and is regulated by the Croatian Media Council pursuant to the Electronic Media Law and the Media Law. The license of NOVA TV (Croatia) is for a period of 10 years, expiring in April 2010. According to the Electronic Media Law a license can be extended. The Croatian Media Council has the authority to decide on an extension on the basis of a request for a renewal of a license filed six months before its expiration if a broadcaster has conducted its business in accordance with law and the license. The Croatian Media Council may hold a public tender in connection with a request to extend a license.


CZECH REPUBLIC

General

The Czech Republic, which acceded to the European Union on May 1, 2004, is a parliamentary democracy with a population of 10.2 million. Per capita GDP in 2005 is estimated to be US$ 11,148 with a GDP growth rate in 2005 of 4.7%. Approximately 98% of Czech households have television, and cable penetration is approximately 26%. According to our estimates, the Czech Republic television advertising market was approximately US$ 350 - 360 million in 2005, growing by 4% from 2004 in local currency.

In the Czech Republic, we operate one national television channel, TV NOVA (Czech Republic), as well as a cable channel, GALAXIE SPORT, both of which were acquired in 2005. The other two national broadcasters are the public broadcaster CT, operating two channels, and privately owned broadcaster TV Prima.

Operating and License Companies

We own 68.745% of CET 21, which holds the national terrestrial broadcast license for TV NOVA (Czech Republic). Our voting and economic interest in CET 21 is effectively 96.50% because CET 21 itself holds an undistributed 28.755% interest that is not entitled to voting rights or dividends. We own 100% of CME Media Services. With effect from May 3, 2005, former operating and advertising sales companies Ceska Produkcni 2000 a.s. and Mag Media 99 a.s. were merged into CME Media Services. CME Media Services and its subsidiaries provide services related to programming, production and advertising to CET 21.
 
Operations

TV NOVA (Czech Republic)

The TV NOVA (Czech Republic) channel reaches approximately 100% of the Czech Republic's television households. The TV NOVA (Czech Republic) channel had an average all day audience share for 2005 of 40.9% compared to 23.2% for its nearest commercial competitor, TV Prima.

The chart below summarizes the national all day and prime time audience share figures for TV NOVA (Czech Republic):

   
2001
 
2002
 
2003
 
2004
 
2005
 
TV NOVA
(Czech Republic)
                     
All day
   
47.7%
 
 
44.2%
 
 
43.4%
 
 
42.2%
 
 
40.9%
 
Prime time
   
51.9%
 
 
48.3%
 
 
45.8%
 
 
44.9%
 
 
42.3%
 

Source: Taylor Nelson Sofres - ATO; ATO - Mediaresearch

Galaxie Sport

The GALAXIE SPORT channel broadcasts via cable high quality sports and sport-related programming in the Czech Republic and the Slovak Republic. The GALAXIE SPORT channel has secured valuable broadcast license rights to some of the most popular sports programming in its markets including the National Hockey League, Premier League (British Football), Serie A (Italian Football), Premiere Division (Spanish Football), the National Basketball Association, ATP Tennis tournaments, and motorcycle and automobile races. Beginning in 2006, Galaxie Sport will also have certain broadcast rights to Formula One programming as part of a contract, that includes broadcasts on TV NOVA (Czech Republic). The GALAXIE SPORT channel also produces 16 sports shows weekly, as well as daily sports news programs in the Czech and Slovak languages.


The combined Czech Republic and Slovak Republic markets have a population of approximately 15.6 million people representing approximately 5.8 million television households. Cable passes approximately 1.7 million households in the combined markets. Galaxie Sport currently has carriage agreements with all of the largest cable distributors in the Czech Republic and Slovak Republic, reaching over 700,000 subscribers.

Programming

The TV NOVA (Czech Republic) channel broadcasts 24 hours per day and has a programming strategy to appeal to a broad audience, especially during prime time, with news, movies, entertainment programs and sports highlights, and to target more specific demographics in off-peak broadcasting hours. Approximately 31% of the TV NOVA (Czech Republic) channel's programming is locally produced, including Televizni noviny (TV News), Cesko hleda SuperStar (Pop Idol), Ordinace v ruzove zahrade (original Czech series) and Ulice (daily soap opera). Televizni noviny, the nightly news program, achieves the highest ratings among all Czech television shows on a regular basis. Cesko hleda SuperStar (Pop Idol), Ordinace v ruzove zahrade (original Czech series) and Ulice (daily soap opera) are also among the top-rated shows in the Czech Republic.

The TV NOVA (Czech Republic) channel has secured exclusive broadcast rights in the Czech Republic to a variety of popular American and European series, films and telenovellas produced by major international studios including Universal, IFD, MGM, Carsey-Werner, Paramount Pictures, Twentieth Century Fox and Walt Disney Television International. All foreign language programming is dubbed into the Czech language. Foreign news reports and film footage licensed from CNN, Reuters, APTN and SNTV are integrated into news programs on the TV NOVA (Czech Republic) channel.

The TV NOVA (Czech Republic) channel is required to comply with certain restrictions on programming, including regulations on the origin of programming. These include the requirements that broadcasters shall, where practicable, reserve half of their broadcasting time for European productions; reserve, where practicable, at least 10% of their broadcasting time or spend 10% of their programming budget on independent European productions; and ensure, where practicable, that at least 10% of broadcasting time is dedicated to productions made within the last five years.

Advertising

The TV Nova (Czech Republic) channel derives 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 Reckitt Benckiser. The top ten advertisers on the TV NOVA (Czech Republic) channel contributed approximately 26% of its advertising revenues in 2005.

Within the Czech advertising market, television accounts for approximately 47% of total advertising spending. The television advertising market in the Czech Republic has shown slow growth over the past several years compared to general economic growth rates. The TV NOVA (Czech Republic) channel competes for advertising revenues with other media, such as print, radio, outdoor advertising, internet and direct mail.

Privately owned broadcasters in the Czech Republic are permitted to broadcast advertising for up to 12 minutes per hour (but not more than 15% of total daily broadcast time). The public broadcaster, which is also financed through a compulsory television license fee, is restricted to broadcasting advertising for a maximum of 1% of daily broadcast time (excluding teleshopping). From January 1, 2007, the maximum amount of daily broadcast time that can be used by the public broadcaster for advertising will be 0.5% (except teleshopping); and from January 1, 2008, the public broadcaster cannot broadcast advertising or teleshopping (except in respect of certain sporting or cultural events). There are restrictions on the frequency of advertising breaks during and between programs. There are also restrictions that relate to advertising content, including a ban on tobacco advertising and limitations on advertisements of alcoholic beverages.


Competition

The Czech Republic is served by two national public television stations, CT1 and CT2, which dominated the ratings until the TV NOVA (Czech Republic) channel began broadcasting in 1994, and by the national privately owned broadcaster TV Prima (co-owned by MTG and local owners).

The chart below provides a comparison of our audience share and technical reach to our competitors:

Main Television
Channels
 
Ownership
 
Year of first
transmission
 
Signal
distribution
 
Audience
share (2005)
 
Technical
reach
                     
TV NOVA
(Czech Republic)
 
CME
 
1994
 
Terrestrial
 
40.9%
 
100%
TV Prima
 
Modern Times
Group/Local
owners
 
1993
 
Terrestrial /
satellite
 
23.2%
 
95%
CT 1
 
Public
Television
 
1953
 
Terrestrial
 
21.7%
 
100%
CT 2
 
Public
Television
 
1970
 
Terrestrial
 
8.1%
 
99%
Others
             
6.1%
   
               
100.0%
   

Source: CME and Ceske radiokomunikace; Mediaresearch - Peoplemeters provider Establishment and Continual Research data 2005

The TV NOVA (Czech Republic) channel also competes for audience with additional foreign terrestrial television stations located in Austria, Germany, the Slovak Republic and Poland, where originating signals reach the Czech Republic, as well as with foreign satellite stations.

Regulation and License Renewal

The broadcast operations of the TV NOVA (Czech Republic) channel are subject to regulations imposed by (i) the Broadcasting Act 2001, (ii) the Act on Advertising and (iii) conditions contained in the license granted by the Czech Republic Media Council pursuant to the Broadcasting Act 2001.

According to the Broadcasting Act 2001, a television broadcasting license can be extended once for an additional twelve years. The Czech Republic Media Council has granted one extension of the TV NOVA (Czech Republic) license, which expires in January 2017.

The GALAXIE SPORT license expires in March 2014.

ROMANIA

General

Romania is a parliamentary democracy with a population of approximately 21.3 million people. Per capita GDP is estimated to be US$ 4,460 in 2005 with a GDP growth rate of 5.3% for 2005. Approximately 86% of Romanian households have television, and cable penetration is approximately 68%. According to our estimates, the Romanian television advertising market grew by approximately 36% in 2005, to approximately US$ 150 - 160 million.


We operate three television channels in Romania, PRO TV, ACASA and PRO CINEMA as well as PRO TV INTERNATIONAL, a channel distributed by satellite to Romanians outside the country featuring programs rebroadcast from our Romanian channels. The two other significant national broadcasters in Romania are the public broadcaster TVR, operating two channels, and privately owned broadcaster Antena 1.

Operating and License Companies

Pro TV, which holds all broadcasting licenses for the PRO TV, ACASA and PRO CINEMA channels, is primarily responsible for broadcasting operations for the PRO TV, ACASA, PRO TV INTERNATIONAL and PRO CINEMA channels. MPI provides various broadcasting services to Pro TV. Media Vision provides production, dubbing and subtitling services to our Romanian television channels. The licenses for PRO FM and INFOPRO radio channels are held by Radio Pro (formerly known as Media Pro).

Operations

PRO TV, ACASA, PRO CINEMA and PRO TV INTERNATIONAL 

PRO TV was launched in December 1995. PRO TV reaches approximately 76% of the Romanian population, including almost 90% of urban areas. PRO TV broadcasts from studios located in Bucharest to terrestrial broadcast facilities and to approximately 790 cable systems throughout Romania. The PRO TV channel is currently the top-rated television channel in its coverage area and had a national all day audience share of 15.7% during 2005, which made it second (of 23 ranked stations) in Romania. Advertisers, however, evaluate audience share within a channel’s coverage area and by this measure PRO TV was ranked first.

The ACASA channel, a cable channel launched in 1998, reaches approximately 65% of Romanian television households and 83% of urban households. During 2005, ACASA had a national all day audience share of 8.1%, which made it fourth (of 23 ranked stations) in Romania. ACASA is also ranked fourth in terms of all day audience share in its coverage area.

PRO CINEMA, a cable channel launched in April 2004, reaches approximately 44% of Romanian television households and approximately 65% of urban households. In 2005, PRO CINEMA had a national all day audience of 0.8%, which made it twelfth (of 23 ranked stations) in Romania.

The chart below summarizes the national all day and prime time audience share figures for our Romanian channels:

   
2001
 
2002
 
2003
 
2004
 
2005
 
PRO TV
                     
All day
   
15.2%
 
 
14.9%
 
 
15.4%
 
 
15.8%
 
 
15.7%
 
Prime time
   
15.9%
 
 
16.3%
 
 
17.1%
 
 
17.2%
 
 
16.6%
 
ACASA
       
 
     
 
   
All day
   
5.6%
 
 
6.0%
 
 
6.6%
 
 
7.4%
 
 
8.1%
 
Prime time
   
6.2%
 
 
6.8%
 
 
7.8%
 
 
7.7%
 
 
9.1%
 
PRO CINEMA
   
 
   
 
         
 
   
All Day
   
-
   
-
   
-
   
0.6%
 
 
0.8%
 
Prime Time
   
-
   
-
   
-
   
0.6%
 
 
0.7%
 

Source: Peoplemeters Taylor Nelson Sofres


The PRO TV INTERNATIONAL channel is a channel that rebroadcasts PRO TV and ACASA programs to cable and satellite operators in North America, Europe and in Israel, using the existing PRO TV and ACASA satellite infrastructure.

Programming

The PRO TV channel broadcasts 24 hour per day and has a programming strategy to appeal to a broad audience through a wide range of programming, including movies and series, news, sitcoms, police series, soap operas and game shows. More than 40% of PRO TV's programming is comprised of locally produced programming, including news and sports programs as well as Vacanta Mare (Big Holiday), Teo and La Bloc (In the Apartment Block). Vacanta Mare (Big Holiday) and La Bloc (In the Apartment Block) were among the top-rated shows in 2005.

The PRO TV channel has secured exclusive broadcast rights in Romania to a variety of popular American and European programs and films produced by such companies as Warner Bros. and DreamWorks. The PRO TV channel also licenses 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.

Pro TV is required to comply with several restrictions on programming, including regulations on the origin of programming. These include requirements that in the future 50% of all programming be of European origin and 10% of all programming be supplied by independent European producers. The Media Law stipulates that compliance with these and similar provisions is not required prior to January 1, 2008.

The ACASA channel broadcasts 24 hours per day and targets 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 audience demographics are complementary to PRO TV's, providing an attractive advertising platform for advertisers across our group of channels. Approximately 31% of ACASA’s programming is locally produced, including Lacrimi de iubire (Tears of Love), Povestiri Adevarate (True Stories) and Pacatele Evei (Eve’s Sins). Lacrimi de iubire (Tears of Love) is one of the top-rated shows in 2005.

PRO CINEMA broadcasts 21 hours per day and is focused on movies, series and documentaries that have not attracted sufficient audiences on PRO TV but are still popular among the educated, upwardly mobile urban population.

Advertising

Our Romanian operation derives revenues principally from the sale of commercial advertising time on the PRO TV, ACASA and PRO CINEMA channels, sold both through independent agencies and media buying groups. The PRO TV channel currently serves approximately 190 advertisers, including multinational companies such as Wrigley, Henkel and Procter & Gamble. Our top ten advertising clients contributed approximately 28% to our total advertising revenues in Romania in 2005.

Within the Romanian advertising market, television accounts for approximately 60% of total advertising spending. Television competes for advertising revenues with other media such as print, radio, outdoor advertising and direct mail.

Privately owned broadcasters are permitted to broadcast advertising for up to 15% of their daily broadcast time, and an additional 5% of daily broadcast time may be used for direct sales advertising. Privately owned broadcasters may use up to 12 minutes per hour for advertising and teleshopping. The public broadcaster, which is also financed through a compulsory television license fee, is restricted to broadcasting advertising for 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 apply to both public and privately owned broadcasters. There are also restrictions that relate to advertising content, including a ban on tobacco advertising and restrictions on alcohol advertising and regulations on advertising targeted at children or during children's programming. In addition, members of the news department of PRO TV are prohibited from appearing in advertisements.


Competition

Prior to the launch of the PRO TV channel, TVR 1, a channel of the public broadcaster, was the dominant channel in Romania. During 2005, PRO TV and ACASA achieved national all day audience shares of 15.7% and 8.1% respectively, ranking them second and fourth in national all day audience share. PRO CINEMA achieved an audience share of 0.8% during 2005. TVR 1’s continued leading national position is influenced by its higher technical reach, to approximately 99% of the Romanian population, including areas in which it is the only significant broadcaster, compared to a 76% technical reach for PRO TV and 65% for ACASA (as a cable channel based on relevant cable penetration). Within our coverage area, PRO TV is first and ACASA is fourth in terms of all day audience share for 2005. Other competitors include the second channel of the public broadcaster, TVR 2, and privately owned broadcasters Antena 1 and Prima TV.

The chart below provides a comparison of our audience share and technical reach to our competitors:

Main Television
Channels
 
Ownership
 
Year of first
transmission
 
Signal
distribution
 
Audience
share (2005)
 
Technical
reach
                     
TVR 1
 
Public Television
 
1956
 
Terrestrial /
satellite / cable
 
18.9%
 
99%
PRO TV
 
CME
 
1995
 
Terrestrial /
satellite / cable
 
15.7%
 
76%
Antena 1
 
Local owner
 
1993
 
Terrestrial /
satellite / cable
 
13.5%
 
71%
ACASA
 
CME
 
1998
 
Satellite / cable
 
8.1%
 
65%
TVR 2
 
Public Television
 
1968
 
Terrestrial /
satellite / cable
 
5.2%
 
78%
Prima TV
 
SBS
 
1994
 
Terrestrial /
satellite / cable
 
4.6%
 
57%
PRO CINEMA
 
CME
 
2004
 
Satellite / cable
 
0.8%
 
44%
Others
             
33.2%
   
               
100.0%
   

Source : Peoplemeters Taylor Nelson Sofres

Additional competitors include cable and satellite stations.

License Renewal

PRO TV ACASA, PRO CINEMA and RADIO PRO operate pursuant to licenses and regulations issued by the Romanian Media Council. Pro TV holds all local television licenses for the PRO TV channel and the cable broadcasting licenses for ACASA and PRO CINEMA. To date, licenses have been renewed as they expire. The terrestrial television license for Bucharest was renewed in October 2003 for a further nine years. The remaining broadcasting licenses expire on dates ranging from July 2006 to February 2014.

Ownership

At December 31, 2005, we owned an 85% voting and economic interest in Pro TV, which holds all of the licenses for the stations comprising the PRO TV, ACASA, PRO CINEMA and PRO TV INTERNATIONAL channels. Adrian Sarbu, the general director of our Romanian operations, owned the remaining 15% voting and economic interests of Pro TV. During 2005 we increased our voting and economic interest from 80% to 85% following the sale by Mr. Sarbu of a 2% interest in Pro TV on February 28, 2005 and the sale of an additional 3% interest on July 29, 2005 (for further information, see Part II, Item 8, Note 3, “Acquisitions and Disposals, Romania”).


Following the adoption of a new Media Law in 2002, we have transferred broadcasting licenses and operations from MPI to Pro TV.

Our interest in our Romanian operations is generally governed by a Co-operation Agreement entered into by Mr. Sarbu and ourselves. The articles of Pro TV replicate the governing bodies and minority shareholder protective rights that exist in respect of MPI in the Co-operation Agreement. We have the right to appoint three of the five members of the Council of Administration that directs the affairs of Pro TV and MPI. Although we have majority voting power in Pro TV and MPI, the affirmative vote of Mr. Sarbu is required with respect to certain financial and corporate matters. The financial and corporate matters which require approval of the minority shareholder are in the nature of protective rights, which are not an impediment to consolidation for accounting purposes.

At December 31, 2005, we had a 70% voting and economic interest in Media Vision. The remainder was owned by Mr. Sarbu.

On February 17, 2006, we purchased an additional 5% of Pro TV, MPI and Media Vision from Mr. Sarbu for consideration of US$ 27.2 million (for further information, see Part II, Item 8, Note 21, “Subsequent Events”). We now own a 90% voting and economic interest in Pro TV and MPI and a 75% voting and economic interest in Media Vision. We also have a put option agreement with Mr. Sarbu that grants him the right to sell us his remaining interest in Pro TV and MPI from March 1, 2009 for a twenty-year period thereafter.
 
SLOVAK REPUBLIC

General

The Slovak Republic, which acceded to the European Union on May 1, 2004, is a parliamentary democracy with a population of approximately 5.4 million people. Per capita GDP is estimated to be US$ 9,312 in 2005 with a GDP growth rate of 5.1% in 2005. Approximately 99% of households have television and cable penetration is 35%. According to our estimates, the Slovak Republic television advertising market grew by approximately 7% in 2005 to US$ 90 - 100 million. In local currency the television advertising market grew by approximately 4% in 2005.

In the Slovak Republic, we operate one national television channel, MARKIZA TV. The two other significant national broadcasters are the public broadcaster STV, operating two channels, and privately owned broadcaster TV JOJ.

Operating and License Companies

Markiza holds the television broadcast license for MARKIZA TV. Markiza and our operating company, STS, have entered into a series of agreements pursuant to which STS is permitted to conduct certain television broadcast operations for MARKIZA TV in accordance with the license.

Operations

MARKIZA TV

MARKIZA TV was launched as a national television channel in the Slovak Republic in August 1996. The MARKIZA TV channel reaches approximately 86% of the Slovak Republic's population, including all of its major cities. The MARKIZA TV channel had an average national all day audience share for 2005 of 31.1% versus 19.2% for its nearest competitor, STV 1. In October 2004, the journal method of measuring audience share and ratings was replaced with peoplemeters (an electronic audience measurement device). The introduction of peoplemeters has resulted in lower audience share and ratings being recorded for all national broadcasters (see Part II, Item 7, “Analysis of Segment Results, Slovak Republic”). Since the introduction of peoplemeters, the national all day audience share of MARKIZA TV has fallen from 40% to 31%.


The chart below summarizes national all day and prime time audience share figures for MARKIZA TV:

   
2001
 
2002
 
2003
 
2004
 
2005
 
MARKIZA TV
                               
All day
   
50.3%
 
 
48.2%
 
 
45.8%
 
 
39.6%
 
 
31.1%
 
Prime time
   
50.7%
 
 
47.4%
 
 
45.5%
 
 
40.0%
 
 
32.8%
 

Source: TNS

Programming

The MARKIZA TV channel broadcasts 24 hours per day and has a programming strategy to appeal to a broad audience through news, movies, entertainment and sports programming (including coverage of Formula One racing), with specific groups targeted in off-peak broadcasting hours. Approximately 39% of the MARKIZA TV network’s programming is locally produced, including Televizne noviny (TV News), Sportove noviny (Sports News), Hodina pravdy (The Hour of Truth), Mojsejovci and Milionár (Millionaire). Televizne noviny (TV News) is consistently the top-ranked show in the Slovak Republic. Hodina pravdy (The Hour of Truth) and Mojsejovci were also among the most popular shows in 2005.

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

Markiza is required to comply with several restrictions on programming, including regulations on the origin of programming. These include the requirement that 10% of programming be public interest programming (which includes news and topical shows), a minimum of 51% of first runs of films and series be European production; and no more than 20% of programming be in the Czech language.

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, Coca Cola, L’Oreal, Wrigley, Ferrero and Reckitt Benckiser, though no one advertiser dominates the market. Our top ten advertisers contributed approximately 27% to our total advertising revenues in the Slovak Republic in 2005.

Within the Slovak advertising market, television accounts for approximately 50% of total advertising spending. MARKIZA TV also competes for advertising revenues with other media, such as print, radio, outdoor advertising and direct mail.

Privately owned broadcasters are permitted to broadcast advertising for up to 12 minutes per hour but not more than 15% of total daily broadcast time. The public broadcaster, which is also financed through a compulsory license fee, is restricted to broadcasting 8 minutes of advertising per hour but not more than 3% of total broadcast time. There are restrictions on the frequency of advertising breaks during and between programs. These restrictions are the same for public and privately owned broadcasters. There are also restrictions that relate to advertising content, including a ban on tobacco advertising and a ban on advertisements of alcoholic beverages (excluding beer) between 6:00 am and 10:00 pm.


Competition

The Slovak Republic is served by two national public television stations, STV1 and STV2, which dominated the ratings until the MARKIZA TV channel began broadcasting in 1996. STV1 reaches nearly the entire Slovak population. MARKIZA TV also competes with the privately owned broadcaster TV JOJ.

The chart below provides a comparison of our audience share and technical reach to our competitors:

Main
Television
Channels
 
Ownership
 
Year of first
transmission
 
Signal distribution
 
Audience
share (2005)
 
Technical
reach
                     
MARKIZA TV
 
CME
 
1996
 
Terrestrial
 
31.1%
 
86%
STV 1
 
Public Television
 
1956
 
Terrestrial
 
19.2%
 
97%
TV JOJ
 
Local owner
 
2002
 
Terrestrial
 
14.7%
 
61%
STV 2
 
Public Television
 
1969
 
Terrestrial
 
5.7%
 
89%
Others
             
29.3%
   
               
100.0%
   

Source : Informa Telecoms and Media, Visio / MVK and CME.

The MARKIZA TV channel also competes with additional foreign terrestrial television stations located in Austria, the Czech Republic and Hungary, where originating signals reach the Slovak Republic, and foreign satellite stations.

License Renewal

MARKIZA TV’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.

The current broadcasting license for MARKIZA TV expires in September 2007. Markiza filed an application for renewal with the Slovak Republic Media Council in February 2006 and expects a response by early March 2006.

Ownership

On January 23, 2006, we acquired control of our Slovak operations and increased our economic interest from 70% to 80%. We now own an 89.8% voting interest in STS and are entitled to 80% of the profits and an 80% voting interest and a 0.1% economic interest in Markiza, which holds a 51% voting interest in STS (see Part II, Item 7, “Analysis of Segment Results, Slovak Republic”).

Following the acquisition of this controlling interest, we now appoint three members of the Board of Representatives and two are appointed by our partners. All significant financial and operational decisions of the Board of Representatives require a simple majority vote. Three executives, two of whom are appointed by us, conduct the affairs of Markiza.


SLOVENIA

General

Slovenia, which acceded to the European Union on May 1, 2004, is a parliamentary democracy with a population of 2.0 million people. Per capita GDP is estimated to be US$ 17,050 in 2005, the highest per capita GDP in Central and Eastern Europe, with a GDP growth rate of 3.7% for 2005. Approximately 99% of Slovenian households have television and cable penetration is approximately 58%. According to our estimates, the Slovenian television advertising market grew by approximately 3% in US dollars during 2005 to US$ 60 - 70 million.

In Slovenia, we operate two national television channels, POP TV and KANAL A. The other significant national broadcaster is the public broadcaster, operating SLO 1 and SLO 2.

Operating and License Companies

Pro Plus provides programming to and sells advertising for the broadcast license holders Pop TV and Kanal A. Pop TV holds all of the licenses for the POP TV channel and Kanal A holds all the licenses for the KANAL A channel.

Operations

POP TV and KANAL A

The POP TV channel is the leading national commercial television broadcaster in Slovenia and reaches approximately 95% of the population of Slovenia, including the capital Ljubljana and Maribor, Slovenia's second largest city. In 2005, the POP TV channel had an audience share of 27.3% all day and 32.3% in prime time, the largest in Slovenia.

The KANAL A channel reaches 86% of the population of Slovenia, including Ljubljana and Maribor. Independent research shows that among main television stations in 2005, the KANAL A channel had a national all day audience share of 8.5% and 9.8% in prime time, making it the fourth most watched television channel in Slovenia.

The chart below summarizes the national all day and prime time audience share figures for POP TV and KANAL A:

   
2001
 
2002
 
2003
 
2004
 
2005
 
POP TV
                     
All day
   
29.0%
 
 
29.2%
 
 
29.5%
 
 
27.6%
 
 
27.3%
 
Prime time
   
32.0%
 
 
32.3%
 
 
34.0%
 
 
31.9%
 
 
32.2%
 
KANAL A
   
 
   
 
   
 
   
 
   
 
 
All day
   
11.5%
 
 
11.0%
 
 
10.2%
 
 
8.3%
 
 
8.5%
 
Prime time
   
12.0%
 
 
11.0%
 
 
10.9%
 
 
9.4%
 
 
9.8%
 

Source: Media Services AGB

Programming

POP TV broadcasts 18 hours per day and has a programming strategy to appeal to a broad audience through a wide variety of programming including series, movies, news, variety and game shows and features. Approximately 21% of programming is locally produced, including Preverjeno! (Confirmed!), Trenja (Friction), the local series Nasa Mala Klinika (Our Little Clinic) and the reality show The Bar. KANAL A broadcasts for 16 hours per day and has a programming strategy to complement the programming strategy of the POP TV channel with a mixture of locally produced programs such as Extra Magazine and E+ and acquired foreign programs, including films and series.


Pro Plus has secured exclusive program rights in Slovenia to a variety 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 that is dubbed.

Pop TV and Kanal A are required to comply with several restrictions on programming, including regulations on the origin of programming. These include the requirement that 20% of a station's daily programming consist of locally produced programming, of which at least 60 minutes must be broadcast between 6:00 pm and 10:00 pm. Two percent of the station's annual broadcast time must be Slovenian origin audio-visual works and this amount must increase each year until it reaches five percent of annual broadcast time. In the future a majority, increased from the current 40%, of the station's annual broadcast time will be required to be European origin programming, and 50% of such works will have to have been produced in the last five years.

Advertising

Pro Plus derives revenues from the sale of commercial advertising time on the POP TV and KANAL A channels. Current multinational advertisers include firms such as Reckitt Benckiser, Danone Group, Procter & Gamble, Wrigley and Beiersdorf, although no one advertiser dominates the market. Our top ten advertisers contributed approximately 30% to our total advertising revenues in Slovenia in 2005.

Within the Slovenian advertising market, television accounts for approximately 59% of total advertising spending. In addition, the POP TV and KANAL A channels compete for revenues with other media, such as print, radio, outdoor advertising, the internet and direct mail.

Peoplemeters are currently present in 450 homes in Slovenia and are the primary source for the POP TV and KANAL A channels' rating information.

Privately owned broadcasters are allowed to broadcast advertising for up to 12 minutes in any hour. The public broadcaster, which is also financed through a compulsory television license fee, is subject to the same restrictions on advertising time. There are restrictions on the frequency of advertising breaks during programs. There are also restrictions that relate to advertising content, including a ban on tobacco advertising and a prohibition on the advertising of any alcoholic beverages from 7.00 am to 9.30 pm and generally for alcoholic beverages with an alcoholic content of more than 15%.

Competition

Prior to the launch of POP TV, the television market in Slovenia had been dominated by the public broadcaster SLO 1.


The chart below provides a comparison of our audience share and technical reach to our competitors:

Main Television
Channels
 
Ownership
 
Year of first
transmission
 
Signal
distribution
 
Audience
share (2005)
 
Technical
reach
                     
POP TV
 
CME
 
1995
 
Terrestrial /
cable
 
27.3%
 
95%
SLO 1
 
Public Television
 
1958
 
Terrestrial /
satellite / cable
 
25.5%
 
100%
SLO 2
 
Public Television
 
1967
 
Terrestrial /
satellite / cable
 
8.7%
 
99%
KANAL A
 
CME
 
1991
 
Terrestrial /
cable
 
8.5%
 
86%
Others
             
30.0%
   
               
100.0%
   

Source : Media Services AGB and CME Research

The POP TV and KANAL A channels also compete with foreign television stations, particularly Croatian, Italian, German and Austrian stations. Cable penetration is 58%, which is greater than many other countries in Central and Eastern Europe, and approximately 18% of households have satellite television.

License Renewals

The POP TV and KANAL A channels operate under licenses regulated pursuant to the Law on Media adopted in 2001 and pursuant to the Electronic Communications Act which came into effect on May 1, 2004. According to the Electronic Communications Act, the Slovenian Media Council may extend a license at the request of the broadcaster if it is in compliance with all the license conditions. In 2002 the Slovenian Media Council extended all of the licenses held by Pop TV and Kanal A until August 2012.

Ownership

On June 24, 2005, we acquired from Marijan Jurenec his 3.15% interest in Pro Plus (see Part II, Item 8, Note 3, “Acquisitions and Disposals, Slovenia”). Following this transaction, we own 100% of the voting and economic interests in Pro Plus. Pro Plus owns 100% of Pop TV and Kanal A.
 
UKRAINE

General

Ukraine, the most populous market served by us, is a parliamentary democracy with a population of 47.4 million people. Per capita GDP is estimated to be US$ 1,715 in 2005, the lowest of all our markets, with a GDP growth rate in 2005 of 5.0%. Nearly 100% of Ukrainian households have television and cable penetration is approximately 19%. According to our estimates, the Ukrainian television advertising market grew by approximately 38% in 2005 to US$ 180 - 190 million.

In Ukraine, we operate one national television channel, STUDIO 1+1. The other five significant national broadcasters are the public broadcaster UT1 as well as privately owned broadcasters Inter, Novij Kanal, ICTV and STV.

Operating and License Companies

The Studio 1+1 Group is comprised of several entities involved in the broadcasting operations of Studio 1+1, the license company. Innova provides programming and production services to Studio 1+1. The sale of Studio 1+1’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.


Following completion on January 11, 2006, we own a 65.5% interest in Ukrpromtorg 2003 LLC (“Ukrpromtorg”), which owns 92.2% of Gravis LLC, which operates the GRAVIS channel and CHANNEL 7 in Kiev; 100% of Nart LLC, which holds a satellite broadcasting license; and 75% of Stimul LLC, which operates TV STIMUL in Kirovograd (see Part II, Item 8, Note 21, “Subsequent Events, Ukraine”).

Operations

STUDIO 1+1

The STUDIO 1+1 channel broadcasts programming and sells advertising under two licenses granted to it by the Ukrainian Media Council on Ukrainian National Frequency Two ("UT-2") and reaches approximately 95% of Ukraine's population. The STUDIO 1+1 channel began broadcasting on UT-2 in January 1997 under a license permitting 15 hours of broadcasting per day, primarily in prime time. In July 2004 the station was awarded a second license allowing it to broadcast for the remaining nine hours not covered by the station's 15-hour license. STUDIO 1+1 has been broadcasting a full 24-hour schedule since early September 2004. The STUDIO 1+1 channel had a national all day audience share of 20.0% in 2005 and a 22.2% prime time audience share.

The chart below summarizes the national all day and prime time audience share figures for STUDIO 1+1:

   
2001
 
2002
 
2003
 
2004
 
2005
 
STUDIO 1+1
                     
All day
   
21.9%
 
 
22.2%
 
 
19.1%
 
 
20.9%
 
 
20.0%
 
Prime time
   
28.9%
 
 
27.4%
 
 
25.8%
 
 
26.9%
 
 
22.2%
 

Source: GFK USM
 
Programming

The STUDIO 1+1 channel broadcasts for 24 hours per day and has a programming strategy to appeal to a broad audience through a wide variety of programming, including series (popular Russian police and action series in particular), movies and locally produced Ukrainian shows, features and news. Approximately 40% of programming is either in-house or out-sourced local production, which consists primarily of a daily breakfast show, news broadcasts and news related programs, talk shows, documentaries, 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 variety of successful high quality Russian, American 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.

Studio 1+1 is required to comply with certain restrictions on programming, including regulations on the origin of programming. These include the requirement that 80% of all programming must be in the Ukrainian language (including acquired programming that is dubbed).
 
On January 12, 2006, the Ukraine parliament adopted an amended version of the Ukraine Media Law that includes modifications to the regulations on the origin of programming. Under the amended Ukraine Media Law, at least 50% of programming broadcast by Studio 1+1 must consist of Ukrainian audio-visual works. This amended Ukraine Media Law is expected to come into force in March 2006.


Advertising

The Studio 1+1 Group derives revenues principally from the sale of commercial advertising time through both media buying groups and independent agencies. Video International sells advertising for the Studio 1+1 Group on an exclusive basis until the end of the term of the 15-hour broadcasting license on December 31, 2006. Advertisers include large multinational firms such as Procter & Gamble, Kraft Foods, Samsung, Unilever, Coca-Cola, Wrigley, Colgate - Palmolive, Mars and Nestle. Our top ten advertising clients contributed approximately 30% to our total advertising revenues in Ukraine in 2005.

Within the Ukrainian advertising market, television accounts for approximately 47% of total advertising spending. STUDIO 1+1 also competes for advertising revenues with other media, such as print, radio, outdoor advertising and direct mail.

Privately owned broadcasters are allowed to broadcast advertising for 15% of their total broadcast time. The public broadcaster, which is also financed through a compulsory license fee, is subject to the same restrictions on advertising time. There are restrictions on the frequency of advertising breaks both during and between programs. There are also restrictions that relate to advertising content, including a ban on tobacco advertising and a prohibition on the advertising of alcoholic beverages before 11:00 pm.

Competition

Three national television channels serve Ukraine: the public broadcaster UT-1, STUDIO 1+1, and Inter, another privately owned broadcaster. In addition, ICTV, STV and Novi Kanal, which are all privately owned broadcasters, have used a series of regional frequencies to establish regional networks. Inter, the STUDIO 1+1 channel's main competitor, has a programming philosophy similar to that of STUDIO 1+1.

The chart below provides a comparison of our audience share and technical reach to our competitors:

Main
Television
Channels
 
Ownership
 
Year of first
transmission
 
Signal distribution
 
Audience
share (2005)
 
Technical
reach
                     
Inter
 
Local owners
 
1997
 
Terrestrial / satellite
/ cable
 
25.5%
 
78%
STUDIO 1+1
 
CME
 
1997
 
Terrestrial /
satellite / cable
 
20.0%
 
95%
Novi Kanal
 
Local owners
 
1998
 
Terrestrial
 
9.1%
 
50%
ICTV
 
Local owners
 
Unknown
 
Terrestrial
 
7.2%
 
n/a
STV
 
Local owners
 
Unknown
 
Terrestrial
 
5.2%
 
n/a
UT-1
 
Public
Television
 
1952
 
Terrestrial / cable
 
1.8%
 
98%
Others
             
31.2%
   
               
100.0%
   

Source : GFK USM and CME Research


License Renewal

Licenses in Ukraine are renewed by the Ukraine Media Council in accordance with the terms of the 1995 Act on Television and Radio Broadcasting. Studio 1+1’s main 15-hour broadcast license, covering prime time, expires on December 31, 2006. An application for renewal can be filed from six to nine months prior to the expiration and we expect to file an application during the second quarter of 2006. The Ukraine Media Law provides a presumption of license renewal provided that Studio 1+1 applies on time and does not infringe Ukrainian Media Council rules prior to the expiration of the current term. We believe we are currently in compliance with all these conditions. The remaining nine hours of Studio 1+1’s schedule are broadcast pursuant to a 10-year broadcast license expiring in August 2014.

Ownership

The Studio 1+1 Group consists of several entities in which we hold direct or indirect interests. The Key Agreement among Boris Fuchsmann, Alexander Rodnyansky, Studio 1+1, Innova, IMS, CME Ukraine Holding GmbH and us, entered into as at December 23, 1998, gives us a 60% economic interest in all Studio 1+1 Group companies and a 60% ownership interest in all the group companies except for the license company Studio 1+1, due to regulatory restrictions on direct foreign ownership of broadcasting companies in Ukraine. Accordingly, we hold a 60% ownership interest and are entitled to 60% of the profits in each of Innova, IMS and TV Media Planet. Innova owns 100% of Inter-Media, a Ukrainian company, which in turn holds a 30% interest in Studio 1+1. At present our indirect ownership interest in Studio 1+1 is 18%.

On December 30, 2004, we entered into an additional agreement with Boris Fuchsmann, Alexander Rodnyansky and Studio 1+1, which re-affirms our entitlement to 60% of any distribution from Studio 1+1 to its shareholders until such time as Ukrainian legislation allows us to increase our voting and economic interest in Studio 1+1 to 60% (see Item 3, “Legal Proceedings, Ukraine”).

Significant decisions involving entities in the Studio 1+1 Group are taken by the shareholders and require majority consent. Certain fundamental corporate matters of the other entities require the vote of 61% of the shareholders except for certain decisions involving the license company Studio 1+1, which require a 75% vote.

Alexander Rodnyansky, a previous general director, 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 Media based in Moscow.

CORPORATE OPERATIONS

In addition to group management and corporate administration, our central organization provides oversight and support to our television operations. The functions include network management, financial planning and analysis, financial control and legal services.

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, “Selected Financial Data” for further discussion.

EMPLOYEES

As of February 13, 2006, our operating companies had a total of approximately 2,800 employees (including freelance staff and contractors) and we had a corporate staff of 41 employees in London and Amsterdam. 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.
 
FINANCIAL INFORMATION BY OPERATING SEGMENT AND BY GEOGRAPHICAL AREA

For financial information by operating segment and geographic area, see Part II, Item 8, Note 17, "Segment Data".


RISK FACTORS

This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. See "Forward-looking Statements" in Part I, Item 1. 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 on Form 10-K.

Risks Relating to our Business and Operations

Our operating results are dependent on the importance of television as an advertising medium

We generate almost all of our revenues from the sale of advertising airtime on television channels in our markets. In the advertising market, television competes with various other advertising media, such as print, radio, the internet and outdoor advertising. In all of the countries in which we operate, television constitutes the single largest component of all advertising spending. There can be no assurances that the television advertising market will maintain its current position among advertising media or that changes in the regulatory environment will not favor other advertising media or other television broadcasters. Increases in competition among advertising media arising from the development of new forms of advertising media could have an adverse effect on our maintaining and developing our advertising revenues and, as a result, on our results of operations and cash flows.

Our advertising revenues depend on our stations’ technical reach, the pricing of advertising time, television viewing levels, changes in audience preferences, shifts in population and other demographics, technological developments relating to media and broadcasting, competition from other broadcasters and other media operators, and seasonal trends in the advertising market in the countries in which we operate. There can be no assurance that we will be able to continue to respond successfully to such developments. Any decline in the appeal of television generally or of our channels specifically, whether as a result of the growth in popularity of other forms of media or a decline in the attractiveness of television as an advertising medium, could have a material adverse effect on our results of operations and cash flows.

Our broadcasting licenses may not be renewed and may be subject to revocation

We require broadcasting and, in some cases, distribution licenses as well as other authorizations from national regulatory authorities in our markets in order to conduct our broadcasting business. Our current broadcasting licenses expire at various times between 2006 and 2017, including the broadcasting license in the Slovak Republic, for which we have applied for renewal in February 2006, and the broadcasting license covering fifteen hours (primarily prime and off prime time) in Ukraine which expires in December 2006. We cannot guarantee that our current licenses or other authorizations will be renewed or that they will not be subject to revocation, particularly in Ukraine, where there is relatively greater political risk as a result of less developed political and legal institutions.

The failure to comply in all material respects with the terms of broadcasting licenses or other authorizations may result in such licenses or other authorizations not being renewed or otherwise terminated. Furthermore, no assurances can be given that new licenses will be issued, that extensions of licenses will be issued on the same terms as existing licenses or that further restrictions or conditions will not be imposed in the future. Any non-renewal or termination of broadcasting licenses or other authorizations or material modification of the terms of any renewed licenses may have a material adverse effect on our operations.

We do not have management control of our affiliate in Ukraine and could lose our contractual rights

We own certain of our operations through subsidiaries and affiliates jointly with strategic partners. We have management control over the subsidiaries in which we have a majority interest. However, in the license company for the Studio 1+1 Group in Ukraine, in which we hold only an indirect 18% ownership interest, we do not have an ownership interest that is sufficient to allow us to assert management control and affirmatively direct the operations, strategies and financial decisions of this company and rely principally on contractual rights to protect and maintain our 60% beneficial interest in Studio 1+1. Therefore, without the consent of our partners, we may be unable to cause this company to distribute funds, to implement strategies or to make programming decisions that we might favor.


In addition, the 70% ownership interest in Studio 1+1 that is held by our partner Alexander Rodnyansky is the subject of litigation in Ukraine (see Part I, Item 3 “Legal Proceedings, Ukraine”). In the event of an adverse outcome which results in the ownership of 70% of Studio 1+1 being transferred from Mr. Rodnyanksy to the claimant Igor Kolomoiski pursuant to a court decision, we may not be able to secure and enforce our contractual rights to a 60% economic interest in Studio 1+1 or rights related to the governance of Studio 1+1 against Mr. Kolomoiski. A reduction in our right to future distributable cash from Studio 1+1 would have an adverse impact on our financial position and results of operations.

We have a history of net operating losses and our operations may not be profitable in the future

The year ended December 31, 2004 was the first year in which we recorded net income from continuing operations. In preceding years since our incorporation, we recorded net operating losses from continuing operations. As of December 31, 2005, we had an accumulated deficit of US$ 45.0 million.

Our ability to generate operating profits and net income in the future will depend on a number of factors, including our ability to generate advertising revenues, which is affected by our ability to attract and maintain audiences, to develop additional revenue streams and to control costs in all areas of our operations. Although we intend to continue to invest in the acquisition of new channels and the development of further thematic channels, such investments may not be successful and we may incur significant losses in the future.

Our ability to generate operating profits and net income from our operations is also affected by a number of external factors over which we have no control, such as the level of economic growth, general economic conditions and consumer and advertising spending in our markets.

Our operating results are dependent on general economic conditions

The results of our operations rely heavily on advertising revenue, and demand for advertising is affected by prevailing general economic conditions. Adverse economic conditions generally and downturns in the economies of our operating countries specifically are likely to negatively impact the advertising industries in those countries and, consequently, the results of our operations. Declines in the level of business activity of our advertising customers may have a material adverse effect in the future on our revenues and results of operations. Although recently there has been growth in the economies of our operating countries, there can be no assurance that this trend will continue or that any such improvement in general economic conditions will generate increased advertising revenue for our group. Global and local downturns in the general economic environment may cause our customers to reduce the amounts they spend on advertising, which could result in a decrease in demand for our advertising airtime. This would adversely affect our business, financial condition, results of operations and cash flow.

Our increased debt service obligations following the acquisition of the TV Nova (Czech Republic) group may adversely affect our business

Following the consummation of the acquisition of the TV Nova (Czech Republic) group, our leverage has been significantly increased with the issuance of Euro 370 million (US$ 436.4 million at December 31, 2005) fixed and floating Senior Notes (see Part II, Item 8, Note 5, “Senior Notes”). As a result, we have significant debt service obligations and we are restricted in the manner in which our business is conducted. We anticipate that our high leverage will continue for the foreseeable future. Our high leverage could have important consequences to our business and results of operations, including but not limited to the following: our vulnerability to a downturn in our business or economic and industry conditions has increased; our ability to obtain additional financing to fund future working capital, capital expenditures, business opportunities and other corporate requirements has been limited; we may have a higher level of debt than certain of our competitors, which may put us at a competitive disadvantage; a substantial portion of our cash flow from operations is required to be dedicated to the payment of principal of, and interest on, our indebtedness, which means that this cash flow is not available to fund our operations, capital expenditures or other corporate purposes; and our flexibility in planning for, or reacting to, changes in our business, the competitive environment and the industry in which we operate has been limited. Any of these or other consequences or events could have a material adverse effect on our ability to satisfy our debt obligations and would therefore have potentially harmful consequences for the development of our business and strategic plan.


Our cash flow and capital resources may not be sufficient for future debt service obligations

Our ability to make debt service payments under our Senior Notes issued in connection with the acquisition of the TV Nova (Czech Republic) group depends on our future operating performance and our ability to generate sufficient cash, which in turn depends in part on factors that are not within our control, including general economic, financial, competitive, market, legislative, regulatory and other factors. If our cash flow and capital resources are insufficient to fund our debt service obligations, we would face substantial liquidity problems and we may be obliged to reduce or delay capital or other material expenditures at our stations, restructure our debt, obtain additional debt or equity capital (if available on acceptable terms), or dispose of material assets or businesses to meet our debt service and other obligations. It may not be possible to accomplish any of these alternatives on a timely basis or on satisfactory terms, if at all.

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. Furthermore, our functional currency in Romania and Ukraine is the US dollar. This is subject to annual review in accordance with FAS 52 “Foreign Currency Translation” and new circumstances that may be identified during these annual reviews may result in use of functional currencies in these markets that differ from our reporting currency. In addition, our Senior Notes are denominated in the Euro currency. Changes in exchange rates 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 Disclosures about Market Risk”.

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

Our revenue generating operations are located in Central and Eastern Europe. Countries in this region have economic, legal and tax systems, standards of corporate governance, business practices and political systems that continue to develop. Government policies could be altered significantly, especially in the event of a change in leadership, and the risk of the occurrence of social or political disruption or unforeseen circumstances affecting economic, political or social life is greater than in Western economies. Legal and regulatory systems could be subject to political pressures. These markets present different risks from those posed by investments in developed markets, including potential instability, legal and economic risks, potential political influence on media, inconsistent application of tax and legal regulations, and other general business risks. In addition, we operate in most of our markets with local shareholders, which presents a potential for biased treatment of us by local regulators or before the local courts in the event of disputes involving our local shareholders or our investments. If such a dispute occurs, those regulators or those courts might favor local interests over our interests. Ultimately this could lead to loss of our business operations, as occurred in the Czech Republic in 1999.
 
Our holding company structure may limit our access to cash

We are a holding company and we conduct our operations through subsidiaries and affiliates. The primary internal source of our cash to fund our operating expenses as well as service our existing and future debt depends on debt repayments from our subsidiaries, the earnings of our operating subsidiaries and earnings generated from our equity interest in certain of our affiliates and distributions of such earnings to us. Substantially all of our assets consist of shares in and loans to our subsidiaries. We currently rely on the repayment of inter-company indebtedness and the declaration of dividends to receive distributions of cash from our operating subsidiaries and affiliates. The distribution of dividends is generally subject to conformity with requirements of local law, including the funding of a reserve account, and, in certain instances, the affirmative vote of our partners. If our operating subsidiaries or affiliates are unable to distribute to us funds to which we are entitled, we may be unable to cover our operating expenses. Such inability would have a material adverse effect on our results of operations.


We may require additional external sources of capital, which may not be available on acceptable terms

The acquisition, ownership and operation of television broadcasting operations requires substantial capital investment. Our total capital requirements are based on our estimates of future operating results, which are based on a variety of assumptions that may prove to be inaccurate. If our assumptions prove to be inaccurate, if our assumptions or plans change, or if our costs increase due to unanticipated competitive pressures or other unanticipated developments, we may need to obtain additional financing. Sources of financing may include public or private debt or equity financings, proceeds from the sale of assets or other financing arrangements. Any additional equity or equity-linked financings may dilute the economic interest of the holders of our Common Stock. In addition, it is not possible to ensure that such financings will be available within the limitations on the incurrence of additional indebtedness contained in the Indenture pursuant to which our Senior Notes were issued. Furthermore, such financings may not be available on acceptable terms, or may be subject to limits on the incurrence of indebtedness under the Indenture.

Our related party transactions may involve risks of conflicts of interest and delayed payments resulting in the conclusion of transactions on less favorable terms than could be obtained in arms length transactions and the risk of a negative impact on cashflow

In Romania, the Slovak Republic and Ukraine, the local shareholders of our television operating companies are individuals with other business interests in those countries, including interests in media related companies. In Romania our general director is also a shareholder in our company. Our local operating companies enter into transactions with parties related to our local shareholders and general directors, including barter transactions. We also have one loan outstanding to one of our local shareholders which was negotiated on arms length terms. Some or all of these transactions may present conflicts of interest that may in turn result in the conclusion of transactions on terms that are not arms length.

In addition, some related party receivables have been collected more slowly than unrelated third party receivables which has resulted in slower cashflow to our operating companies to the detriment of our shareholders.

It is likely that our subsidiaries will continue to enter into related party transactions in the future. As a result, there is a continuing risk that related party transactions will have a negative impact on cashflows.

We may not be able to prevent our general directors from entering into transactions that are outside their authority and not in the best interests of shareholders

The general directors of our operating companies have significant management authority on a local level, subject to the overall supervision by the corresponding company board of directors. In the past, our internal controls have detected transactions that have been concluded by a general director acting outside his authority. Internal controls are not able to prevent a general director from acting outside his authority, particularly if a related party relationship remains undisclosed to us. There is therefore a risk that a general director may act outside his authority and that our operating companies will enter into transactions that are not duly authorized. Unauthorized transactions may not be in the best interests of our shareholders and may have an adverse impact on our results of operations.


Our business is subject to significant changes in technology that could adversely affect our business

The television broadcasting industry may be affected by rapid changes in technology. The implementation of new technologies and the introduction of broadcasting distribution systems other than analogue terrestrial broadcasting, such as digital broadcasting, cable and satellite distribution systems, could adversely affect our businesses. Television broadcasting markets may face further competition from, and could be required to expend substantial financial and managerial resources on, the implementation of new broadcasting technologies. Countries in which we have operations have plans to migrate from analogue terrestrial broadcasting to digital terrestrial broadcasting. Each country has independent plans with differing time frames and regulatory regimes. The specific timing in any country is not fully known and we cannot predict the effect of such migration on our existing operations or predict our ability to receive any additional rights to broadcast if such additional rights should be required under any relevant regulatory regime. We may be required to commit substantial financial and other resources to the implementation of new technologies. We may be required to make substantial additional capital investment in order to implement digital terrestrial broadcasting and the use of alternative distribution systems may require us to acquire additional distribution and content rights. In light of our increased leverage position following the acquisition of the TV Nova (Czech Republic) group, we may not have access to resources sufficient to make such investments.

We may not be able to enforce our indemnification rights in a timely manner

Under the purchase agreement for the TV Nova (Czech Republic) group, PPF and certain of its affiliates have agreed to indemnify us for a limited period of time up to the full amount of the purchase price paid by us for the TV Nova (Czech Republic) group for a series of events and circumstances, including claims relating to taxes and claims brought by certain former shareholders of the TV Nova (Czech Republic) group. If we make an indemnification claim and we do not receive an indemnification payment or if such payment is delayed or contested, it may have a material adverse effect on our ability to make any required repayments under the terms of the Senior Notes or other indebtedness or may adversely affect our results of operations.

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. In addition, several 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, investors may be unable 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 and state securities laws. There is uncertainty as to whether the courts of Bermuda and 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.
 
Risks Relating to Our Common Stock

The price of our Common Stock is likely to remain volatile

The market price of our Common Stock may be influenced by many factors, some of which are beyond our control, including those described above under “Risks Relating to our Business and Operations” and including the following: general economic and business trends, variations in quarterly operating results, regulatory developments in our operating countries and the EU, the condition of the media industry in our operating countries, future sales of shares of our Common Stock, investor and securities analyst perception of us and other companies that investors or securities analysts deem comparable in the television broadcasting industry. In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated to and disproportionate to the operating performance of broadcasting companies. These broad market and industry factors may materially reduce the market price of our Common Stock, regardless of our operating performance.


Our share price may be adversely affected by potential future issuances and sales of our shares

As at December 31, 2005, we have a total of 1.0 million options to purchase Class A Common Stock outstanding and 0.2 million options to purchase Class B Common Stock outstanding. An affiliate of PPF holds 3,500,000 unregistered shares of Class A Common Stock and has the right to demand a registration of up to 50% of such shares in May 2006 and up to 100% of such shares in May 2007. We cannot predict what effect, if any, the issuance of shares underlying options, the registration of such unregistered shares or any future sales of our shares will have on the market price of our shares. However, if more shares are issued, the economic interest of current shareholders may be diluted and the price of our shares may be adversely affected.

There is a risk that we may become subject to the passive foreign investment company rules under United States tax laws

We believe, but cannot assure, that we will not be classified as a passive foreign investment company (PFIC) under U.S. tax laws for the current or future years. If we were a PFIC, then each U.S. holder of our Class A Common Stock (other than a U.S. holder whose Class A Common Stock is otherwise marked-to-market for U.S. federal income tax purposes) generally would, upon certain distributions by us or upon disposition of the Class A Common Stock at a gain, be liable to pay tax at the then prevailing rates on ordinary income plus an interest charge, as if the distribution or gain had been recognized ratably over the U.S. holder’s holding period for the Class A Common Stock, beginning with the year in which we become a PFIC. A U.S. holder could avoid the application of these rules by making a special tax election for the first year in which we become a PFIC, the effect of which generally would be to accelerate the electing U.S. holder’s recognition of income with respect to our Class A Common Stock. We intend to notify U.S. holders of our Class A Common Stock if we determine at any time that we have become or are about to become a PFIC.
 
UNRESOLVED STAFF COMMENTS

None.


PROPERTIES

We own and lease properties in the countries in which we operate. With the exception of our assets held-for-sale in Croatia, these facilities are fully utilized for current operations, are in good condition and are adequately equipped for purposes of conducting broadcasting or such other operations. We believe that suitable additional space is available on acceptable terms in the event of an expansion of our businesses. The table below provides a brief description of our significant properties.

Location
 
Property
 
Use
         
Hamilton, Bermuda
 
Leased office
 
Registered Office, Corporate
London, United Kingdom
 
Leased office
 
Administrative Center, Corporate
Amsterdam, Netherlands
 
Leased office
 
Corporate Office, Corporate
Zagreb, Croatia
 
Owned buildings (currently disclosed as assets held-for-sale) and leased buildings
 
Office and studio space, NOVA TV (Croatia)
Prague, Czech Republic
 
Leased buildings
 
Office and studio space, TV NOVA (Czech Republic)
Bucharest and other key cities within Romania
 
Leased buildings
 
Office and studio space, PRO TV
Blatne, Slovak Republic
 
Owned buildings
 
Office and studio space, MARKIZA TV
Ljubljana, Slovenia
 
Owned buildings and leased buildings
 
Office and studio space, POP TV and KANAL A
Kiev, Ukraine
 
Leased buildings
 
Office space, STUDIO 1+1
Surrounding suburbs of Kiev, Ukraine
 
Leased offices
 
Studio space, STUDIO 1+1
 
For further information on using our cash resources to fund these facility-related costs, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” in Part II, Item 7 of this Form 10-K.
 
LEGAL PROCEEDINGS

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 below, we are not presently a party to any such litigation which could reasonably be expected to have a material adverse effect on our business or operations.
 
We present below a summary of our more significant proceedings by country.


Croatia

On October 29, 2004, OK filed suit against Global Communications d.o.o. claiming approximately HRK 53 million (approximately US$ 8.6 million) in damages. Global Communications is a company controlled by Ivan Caleta, who had previously operated Nova TV (Croatia) through OK. Global Communications, together with GRP Media d.o.o., another company controlled by Mr. Caleta, had provided certain goods and services to OK and Nova TV (Croatia) in exchange for advertising time. Global Communications and GRP Media were functionally managing the advertising inventory of Nova TV (Croatia). On December 31, 2003, Global Communications entered into an agreement by which OK acknowledged that Global Communications was entitled to approximately 375,000 seconds of advertising time for goods and services previously provided. Following our acquisition of Nova TV (Croatia) and OK in July 2004, OK concluded that Global Communications had used all of its seconds by June 2004 based on a substantial discrepancy discovered between the utilization of advertising time recorded by Global Communications and that recorded by AGB Puls, an independent television audience measurement service operating in Croatia. In the course of its investigation of the usage of seconds by Global Communications, OK discovered that computer records of advertising seconds kept for OK may have been altered. OK brought a suit to recover amounts for advertising time used by Global Communications in excess of the 375,000 seconds agreed. Global Communications filed a counterclaim in January 2005 for HRK 68 million (approximately US$ 11.0 million), claiming that the AGB data is unreliable and that it is entitled to additional seconds under the previous agreement. We do not believe that these counterclaims will prevail.

Czech Republic

Claims Relating to the Vilja Shareholding in CET 21

On May 20, 2002, Vilja, now our wholly-owned subsidiary, acquired its ownership interest in CET 21 from Messrs. Alan, Huncik and Venclik. On July 19, 2002, Peter Krsak, a shareholder of CET 21, filed a claim with the City Court in Prague challenging a number of CET 21 shareholder resolutions adopted by written consent (the “Krsak 2002 Petition”). In relevant part, his complaint included challenges to (1) a decision of the CET 21 shareholders of April 22, 2002 to approve the transfer by Messrs. Alan and Venclik of their ownership interests in CET 21 to Vilja and (2) a written resolution of the CET 21 shareholders on the redistribution of a 60% interest in CET 21 then held by the company itself. (This 60% interest had previously been held by Vladimir Zelezny, who had been forced to relinquish it in an enforcement proceeding against him following his default on a judgment adverse to him in another proceeding). These claims, in effect, constituted a challenge to the ownership by Vilja of a 52.075% ownership interest in CET 21.

On June 18, 2003, before the City Court had issued a decision in the Krsak 2002 Petition, CET 21 petitioned the City Court to approve, among other things, the registration of Vilja in the commercial register maintained by the City Court (the “Commercial Register”) as the owner of 52.075% of CET 21 (the “CET 21 Petition”).

On February 24, 2005, we entered into the Agreement on the Settlement of Disputes and Transfer of Ownership Interest with Peter Krsak (the “Krsak Agreement”). The Krsak Agreement provides that Mr. Krsak will file petitions to withdraw all of his claims in respect of the TV Nova (Czech Republic) group following the satisfaction of specified conditions precedent. Those conditions were satisfied in April 2005 and Mr. Krsak filed the necessary petitions in May 2005. The City Court in Prague accepted a petition to withdraw the Krsak 2002 Petition on May 24, 2005 and issued a resolution confirming that the proceedings in respect of the Krsak 2002 Petition have been terminated. This decision has become final.

In connection with an extraordinary appeal filed by Mr. Krsak on August 8, 2003, the Commercial Register file of CET 21 was lodged with the Supreme Court. Pursuant to the Krsak Agreement, Mr. Krsak filed a petition on May 31, 2005 to withdraw this claim, and the court has confirmed that the proceedings in respect of this claim have been terminated. The Commercial Register file of CET 21 was returned to the City Court in Prague as a result of the termination of the proceedings before the Supreme Court. On October 14, 2005, the City Court in Prague confirmed the registration of Vilja in the Commercial Register as the owner of 52.075% of CET 21. The decision became final on December 17, 2005.


Disposition of the CET 21 Interest Held by CET 21

Following an enforcement proceeding against Vladimir Zelezny in another matter, his 60% interest passed to CET 21. The CET 21 shareholder resolution based on a proposal dated July 4, 2002 provided for the redistribution of this 60% interest among Vilja, Krsak, CEDC and CS, the four remaining shareholders of CET 21. Only Vilja elected to participate in the redistribution of that interest; it acquired its pro rata portion of the 60% interest and thereby increased its ownership in CET 21 to 52.075% (from a 20.83% interest of an aggregate 40% interest then held by the four remaining shareholders). Neither Mr Krsak, who previously held a 16.67% interest in CET 21, or CS or CEDC, which each holds a 1.25% interest, participated in the redistribution. As a result, their pro rated portions of the 60% interest (equal to an aggregate 28.755% interest in CET 21) continue to be held by CET 21 itself. The preliminary injunction which had previously prohibited the disposition of this 28.755% interest ceased to exist as a result of termination of one of the lawsuits previously launched by Mr. Krsak. On October 14, 2005, the City Court in Prague confirmed the registration of CET 21 in the Commercial Register as the owner of this 28.755% interest. The decision became final on December 17, 2005.
 
Claims brought by Alan, Huncik, Venclik and Gal

On May 7, 2003, Messrs. Alan, Huncik, Venclik and Gal, former shareholders of CET 21, filed a claim against Krsak, Zelezny, CET 21, CEDC and CS with the City Court in Prague. The substance of this challenge concerns the basis on which Zelezny purported to increase his ownership interest in CET 21 to 60% in 1997. The claim was withdrawn by Messrs. Alan, Huncik, Venclik and Gal on November 18, 2005. Subsequently, the proceedings were terminated by a court resolution dated November 25, 2005. This decision has become final.  

Claims Relating to the Interests of CS and CEDC in CET 21

On April 2, 2003, CS entered into an agreement with Vilja to transfer its 1.25% interest in CET 21 to Vilja. This transfer was approved by a resolution of the CET 21 shareholders adopted by written consent on May 16, 2003. Mr. Krsak filed a petition against CET 21 in the City Court in Prague on August 8, 2003 to declare the shareholders resolution invalid. Pursuant to the Krsak Agreement, Mr. Krsak filed a petition in May 2005 with the High Court in Prague to withdraw this claim. The High Court in Prague decided on June 22, 2005 to return the file to the City Court in Prague for a formal decision on the withdrawal of the claim and termination of the proceedings. On January 11, 2006, the City Court in Prague issued a resolution confirming that the proceedings in respect of this petition have been terminated. This decision has become final.

CET 21 adopted a shareholder resolution by written consent on January 5, 2004 to approve the transfer of the 1.25% interest of CEDC in CET 21 to PPF (Cyprus) Ltd. Mr. Krsak filed a petition against CET 21 in the City Court in Prague on February 3, 2004 to declare this shareholders resolution invalid. Pursuant to the Krsak Agreement, Mr. Krsak filed a petition in May 2005 with the High Court in Prague to withdraw this claim. The City Court in Prague issued a resolution on August 1, 2005 confirming that the proceedings in respect of this petition have been terminated. This decision has become final.

The consent of the Czech Media Council to the transfer of each of these 1.25% interests, which is necessary for such transfers to become effective, has been requested but has not yet been issued.

Other Claims

On January 25, 2005, Mr. Krsak filed on his own behalf and on behalf of CET 21 an action in the City Court in Prague against 25 parties, including PPF and its affiliates, CP 2000, Vilja, and certain former and current members of management. In his filing, Mr. Krsak claimed damages to himself in the amount of approximately CZK 1.25 billion (approximately US$ 50.9 million) and on behalf of CET 21 in the amount of approximately CZK 7.5 billion (approximately US$ 305.7 million). The substance of this claim is that various entities and persons controlling CET 21 caused CET 21 damage by entering into agreements on disadvantageous terms with service companies related to such controlling person (such as CP 2000 and Mag Media, which have subsequently been merged into CME Media Services).


Pursuant to the Krsak Agreement, Mr. Krsak filed a petition to withdraw this claim in May 2005 with the City Court in Prague. The City Court in Prague accepted this petition on May 31, 2005 and issued a resolution confirming that the proceedings have been terminated. This decision has not yet become final.

In December 2002, the Czech Republic Union of Authors (“OSA”), a collective administrator of copyright, filed an action against CET 21, claiming payment of CZK 46.8 million (approximately US$ 1.9 million) plus interest for alleged unauthorized use of works from the OSA library. CET 21 has been attempting to negotiate a revised pricing structure with OSA since 2002 and has been paying advances on the licensing fee to OSA on an estimated basis pending final agreement of the amounts payable. At a hearing on September 19, 2005, the Municipal Court in Prague upheld OSA’s claim. On December 21, 2005, CET 21 entered into a settlement agreement with OSA to pay CZK 39.6 million (approximately US$ 1.6 million) as full payment for all amounts claimed by OSA for the period from 2002 through 2005. CET 21 also entered into a contract with OSA to fix payments for the period from 2006 through 2008.
 
Antimonopoly Office

Following an investigation that the Office for the Protection of Economic Competition of the Czech Republic began conducting during the fourth quarter of 2005 regarding potential infringements of Czech antimonopoly legislation in respect of the sale of advertising on the TV NOVA channel from 2004, CET 21 has, without acknowledging any infringements alleged by the Antimonopoly Office, agreed to make certain undertakings in respect of the sale of advertising on TV NOVA. Upon acceptance of these undertakings by the Antimonopoly Office and subject to observance of them, the investigation will be terminated.
 
Romania

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

On November 20, 2002, we received notice of a claim filed by Mrs. Zdenka Meglic, the founder and a former shareholder of MMTV 1 d.o.o (MMTV), against MMTV, a subsidiary of CME Media Enterprises BV. In her claim against MMTV, Mrs. Meglic is seeking an amount equal to SIT 190 million (approximately US$ 1.0 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. On September 9, 2004, the court of first instance found against MMTV and issued a judgment requiring MMTV to pay SIT 190 million (approximately US$ 1.0 million) plus interest as well as costs. On September 24, 2004, MMTV filed an appeal against the judgment. On December 15, 2004, the appellate court vacated the judgment of the lower court and returned the case for further proceedings. We do not believe that Mrs. Meglic will prevail and will continue to defend the claim. Accordingly, we have made no provision for this claim in our Consolidated Balance Sheets as at December 31, 2005.
 
Slovak Republic

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

On October 11, 2005, Igor Kolomoiski filed a lawsuit against Alexander Rodnyansky and Studio 1+1 in a district court in Kiev. Our Ukrainian affiliate Intermedia has been joined in the proceedings as a “third party”. Mr. Kolomoiski is attempting to enforce what he alleges was a binding agreement with Mr. Rodnyansky to purchase the latter’s 70% interest in Studio 1+1 for consideration of US$ 70.0 million and to transfer that interest to Mr. Kolomoiski on receipt of a prepayment of US$ 2.0 million. The lawsuit arises from abortive negotiations among Mr. Kolomoiski, Mr. Rodnyansky and Boris Fuchsmann for the acquisition by Mr. Kolomoiski of the totality of interests in the Studio 1+1 Group held by Mr. Rodnyansky and Mr. Fuchsmann, subject to Mr. Kolomoiski assuming all of their obligations under our existing partnership arrangements. Following a series of initial hearings, proceedings on the merits have been suspended pending the resolution of a procedural matter that has been appealed to the Supreme Court of Ukraine. This appeal is currently pending. We believe the lawsuit is without merit primarily because there was no agreement with Mr. Kolomoiski and because any transfer would, in any event, breach Intermedia’s statutory and contractual consent and pre-emptive rights. In the event of an adverse outcome which results in the ownership of 70% of Studio 1+1 being transferred from Mr. Rodnyanksy to Mr. Kolomoiski pursuant to a court decision, we may not be able to secure and enforce our contractual rights to a 60% economic interest in Studio 1+1 or rights related to the governance of Studio 1+1 against Mr. Kolomoiski. A reduction in our right to future distributable cash from Studio 1+1 would have an adverse impact on our financial position and results of operations.


On December 23, 2005, we initiated proceedings against our partners Alexander Rodnyansky and Boris Fuchsmann in order to enforce our contractual rights and compel a restructuring of the ownership of Studio 1+1 in order to permit us to hold a 60% interest in Studio 1+1 through a subsidiary organized in Ukraine. Initiation of this proceeding followed protracted negotiations with our partners to restructure following confirmation from the Ukraine Media Council that our proposed ownership structure would not be in violation of restrictions on foreign ownership contained in the Ukraine Media Law, which restricts direct (but not indirect) investment by foreign persons in Ukrainian broadcasters to 30%. On January 12, 2006, the Ukraine parliament adopted an amended version of the Ukraine Media Law that clarifies the absence of any restriction on indirect foreign ownership of television broadcasters. This amended Ukraine Media Law is expected to come into force in March 2006. Following adoption of these amendments, our partners have confirmed they are prepared to proceed with the restructuring. Upon successful completion of the restructuring, we will terminate the proceedings initiated in December 2005.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.


PART II

MARKET FOR REGISTRANT'S COMMON EQUITY, 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 February 13, 2006 the last reported sales price for the Class A Common Stock was US$ 60.92.

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.

Price Period
 
High (US$/Share)
 
Low (US$/Share)
 
2004
         
First Quarter
   
21.32
   
17.50
 
Second Quarter
   
23.18
   
18.13
 
Third Quarter
   
29.12
   
22.34
 
Fourth Quarter
   
40.27
   
28.60
 
2005
   
 
   
 
 
First Quarter
   
56.08
   
34.90
 
Second Quarter
   
50.70
   
40.04
 
Third Quarter
   
55.79
   
47.10
 
Fourth Quarter
   
59.00
   
44.72
 

At February 13, 2006, there were 22 holders of record (including brokerage firms and other nominees) of the Class A Common Stock, approximately 4,800 beneficial owners of the Class A Common Stock, and 10 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.

PURCHASE OF OWN STOCK

We did not purchase any of our own stock in 2005.

SELECTED FINANCIAL DATA

SELECTED CONSOLIDATED FINANCIAL DATA

Our selected consolidated financial data should be read together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

The following tables set forth the selected consolidated financial data for each of the years in the five-year period ended December 31, 2005. The selected consolidated financial data is qualified in its entirety and should be read in conjunction with the Consolidated Financial Statements and related notes thereto set forth in Item 8 and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. We have derived the consolidated statements of operations data for the years ended December 31, 2005, 2004 and 2003 and the consolidated balance sheet data as of December 31, 2005 and December 31, 2004 from the consolidated audited financial statements included elsewhere in this Annual Report on Form 10-K. The consolidated statement of operations data for the years ended December 31, 2002 and 2001 and the balance sheet data as of December 31, 2003, 2002 and 2001 were derived from the consolidated audited financial statements that are not included in this Annual Report on Form 10-K, as restated to reflect the adoption of FIN 46 (R).

 
   
For the Years Ended December 31,
 
   
2005 (3)
 
2004
 
2003
 
2002
 
2001
 
   
(US$ 000’s, except per share data)
 
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
                     
Net revenues
 
$
400,978
 
$
182,339
 
$
124,978
 
$
99,143
 
$
84,116
 
Operating income/(loss)
 
$
52,369
   
18,740
   
(4,410
)
 
1,466
   
(8,315
)
Net income/(loss) from continuing operations
   
43,008
   
16,007
   
(24,201
)
 
(25,106
)
 
(25,240
)
(Loss)/income on discontinued operations (1)
   
(513
)
 
2,524
   
370,213
   
10,922
   
3,129
 
Net income/(loss)
 
$
42,495
 
$
18,531
 
$
346,012
 
$
(14,184
)
$
(22,111
)
                                 
PER SHARE DATA: (2)
                               
Net income/(loss) per common share from:
                               
Continuing operations - basic
 
$
1.24
 
$
0.57
 
$
(0.91
)
$
(0.95
)
$
(0.95
)
Continuing operations - diluted
   
1.21
   
0.55
   
(0.91
)
 
(0.95
)
 
(0.95
)
Discontinued operations - basic
   
(0.01
)
 
0.09
   
13.97
   
0.41
   
0.12
 
Discontinued operations - diluted
   
(0.01
)
 
0.09
   
13.97
   
0.41
   
0.12
 
Net income/(loss) - basic
   
1.23
   
0.66
   
13.06
   
(0.54
)
 
(0.84
)
Net income/(loss) - diluted
 
$
1.20
 
$
0.64
 
$
13.06
 
$
(0.54
)
$
(0.84
)
Weighted average common shares used in computing per share amounts (000s)
                               
Basic
   
34,664
   
27,871
   
26,492
   
26,451
   
26,449
 
Diluted
   
35,430
   
29,100
   
26,492
   
26,451
   
26,449
 
                                 
CONSOLIDATED BALANCE SHEET DATA:
                               
Current assets
 
$
286,926
 
$
265,049
 
$
266,891
 
$
109,558
 
$
81,024
 
Non-current assets
   
1,101,924
   
179,590
   
101,861
   
74,464
   
75,114
 
Total assets
   
1,388,850
   
444,639
   
368,752
   
184,022
   
156,138
 
Current liabilities
   
206,961
   
109,745
   
71,116
   
77,156
   
79,619
 
Non-current liabilities
   
488,099
   
18,965
   
23,118
   
200,723
   
165,225
 
Minority interests
   
13,237
   
4,861
   
994
   
2,019
   
90
 
Shareholders’ equity/(deficit)
   
680,553
   
311,068
   
273,524
   
(95,876
)
 
(88,796
)
Total liabilities and shareholders’ equity
 
$
1,388,850
 
$
444,639
 
$
368,752
 
$
184,022
 
$
156,138
 
 
(1) In 2003 we sold our 93.2% participation interest in CNTS, our former Czech operating company, to PPF. In 2000 we sold substantially all of our Hungarian operations to SBS. Our financial statements present our former operations in the Czech Republic and Hungary as discontinued operations for all periods.
(2) All per share data has been adjusted for the two-for-one stock splits which occurred on August 22, 2002, January 10, 2003 and November 5, 2003.
(3) The Consolidated Balance Sheet and Consolidated Statements of Operations reflect the effect of our acquisition of the TV NOVA (Czech Republic) group in May 2005.


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

   
For the Year Ended December 31, 2005
 
   
First Quarter
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
 
   
(US$ 000’s, except per share data)
 
Consolidated Statement of Operations data:
                 
Net Revenues
 
$
48,304
 
$
113,109
 
$
87,067
 
$
152,498
 
Operating Income/(Loss)
   
(2,252
)
 
6,862
   
4,792
   
42,967
 
Net Income/(Loss)
   
(7,949
)
 
25,459
   
(9,614
)
 
34,599
 
Net Income/(Loss) per share:
                         
Basic EPS
 
$
(0.28
)
$
0.74
 
$
(0.25
)
$
0.91
 
Effect of dilutive securities
   
-
   
(0.02
)
 
-
   
(0.01
)
Diluted EPS
 
$
(0.28
)
$
0.72
 
$
(0.25
)
$
0.90
 

   
For the Year Ended December 31, 2004
 
   
First Quarter
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
 
   
(US$ 000’s, except per share data)
 
Consolidated Statement of Operations data:
                 
Net Revenues
 
$
35,848
 
$
44,886
 
$
36,543
 
$
65,062
 
Operating Income/(Loss)
   
6,022
   
8,771
   
(6,736
)
 
10,683
 
Net Income/(Loss)
   
5,171
   
6,032
   
(5,647
)
 
12,975
 
Net Income/(Loss) per share:
                         
Basic EPS
 
$
0.19
 
$
0.22
 
$
(0.20
)
$
0.46
 
Effect of dilutive securities
   
(0.01
)
 
(0.01
)
 
-
   
(0.02
)
Diluted EPS
 
$
0.18
 
$
0.21
 
$
(0.20
)
$
0.44
 
 
Seasonality

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.


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the sections entitled “Forward-looking Statements” and "Risk Factors" in Part I, Item 1.

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

I.
Executive Summary

During 2005 we delivered on our previously announced strategy:

·
We improved the financial performance of our core stations (Romania, Slovak Republic, Slovenia, Ukraine) by delivering an increase in Segment Net Revenues of 22% and Segment EBITDA of 31% from 2004;

·
We completed the acquisition of the TV Nova (Czech Republic) group, which has substantially increased the scale of our business and created opportunities to leverage our market size; and

·
We increased our interest in our Romanian operations to 85% and in our Slovenian operations to 100% and reached an agreement to increase our interest in our Slovak operations to 80%.

The principal events since January 1, 2005 are as follows:

·
In May 2005, we acquired the TV Nova (Czech Republic) group for total consideration of US$ 909.5 million, which owns and operates TV NOVA, the leading television channel in the Czech Republic;

·
To finance our acquisition of the TV Nova (Czech Republic) group in May 2005, we issued Senior Notes in the aggregate principal amount of Euro 370.0 million (approximately US$ 480 million at the time of issuance); we also raised net proceeds of approximately US$ 230.6 million by selling approximately 5.4 million shares of Class A Common Stock;

·
On June 27, 2005, our Class A Common Stock began trading on the Prague Stock Exchange;

·
We increased our interest in our Slovenian operations to 100% following the sale by Marijan Jurenec of his 3.15% interest in Pro Plus during the second quarter of 2005;

·
In June 2005, we performed an analysis of our Croatian intangible assets and goodwill to determine if they were impaired in light of our modified strategy. As a result of this analysis we determined that our Croatian investment was impaired by US$ 35.3 million (for further information see Part II, Item 8, Note 4, “Goodwill and Intangible Assets”);

·
On September 1, 2005, we acquired Galaxie Sport, which operates the leading sports cable channel GALAXIE SPORT in the Czech and Slovak Republics;


·
At the end of October 2005, we entered into an agreement with our Slovak partners to acquire a controlling interest in our Slovak operations, and to increase our economic interest in those operations from 70% to 80% for total consideration of approximately US$ 29.5 million (including deferred consideration of US$ 5.1 million payable on May 31, 2006). Following completion on January 23, 2006, we now own (directly and indirectly) an 80% voting interest in Markiza and a voting interest of 89.8% in STS. As a result of this transaction, we will begin consolidating the results of our Slovak operations from January 2006 (for further information see Part II, Item 8, Note 21, “Subsequent Events, Slovak Republic”);

·
On October 28, 2005, we entered into an agreement with Dertus Finance Group Limited (“Dertus”) providing for the purchase by us of a 65.5% interest in Ukrpromtorg 2003 LLC (“Ukrpromtorg”), a company that owns and operates the GRAVIS channel and CHANNEL 7 in Kiev and one other local channel in Ukraine, for a total investment of approximately US$ 7.0 million (subject to any adjustment following an audit of the closing balance sheet). This acquisition of additional distribution capacity in the Ukraine, which was completed on January 11, 2006, is intended to complement STUDIO 1+1 and to allow the costs of our Ukrainian operations to be allocated across multiple channels (for further information, see Part II, Item 8, Note 21 “Subsequent Events, Ukraine”); and

·
On February 17, 2006, we purchased an additional 5% of Pro TV, MPI and Media Vision from Adrian Sarbu for consideration of US$ 27.2 million (for further information, see Part II, Item 8, Note 21, “Subsequent Events, Romania”). We now own a 90% voting and economic interest in Pro TV and MPI and a 75% voting and economic interest in Media Vision.
 
Future Trends

As our markets mature, we anticipate more intense competition for audience share and advertising spending from other incumbent terrestrial broadcasters and, to a lesser extent, from local cable and satellite broadcasters. We believe we are in a solid position to manage increased competition. In the near term we intend to continue to pursue further improvements in the performance of our existing operations in order to maximize the potential for organic growth.

Our priorities in this regard include:

·
Pursuing sub-regional efficiencies, especially between Slovenia and Croatia and between the Czech and Slovak Republics;

·
Supporting the growth of television advertising in our markets through increased pricing and through development of additional channels to expand our advertising inventory and target niche audiences;

·
Leveraging our existing brands and assets to develop new revenue opportunities, including in the creation and distribution of programming and in the new media sectors; and

·
Continuing to expand our footprint into additional Central and Eastern European markets when financially prudent opportunities arise.

In particular, we are planning the following during 2006:
 
We intend to pursue improvements in the effectiveness of our operations in the Czech Republic and in the Slovak Republic, where we acquired control in early 2006. We have identified potential opportunities and are implementing measures to reduce operating expenses and streamline the operating structures of those operations, including in the areas of production and programming, and to reorient the advertising sales strategy to drive the expansion of revenues. The focus of the TV Nova (Czech Republic) group going forward will be the development of advertising revenues through price increases. It is not possible to predict the impact of this change on the advertising revenues of the Czech Republic operations for 2006 on a full-year basis. We expect advertising revenues to decline in the early part of 2006 as the new advertising sales strategy is introduced. However, we believe that the successful implementation of this policy and continued strong audience share and ratings for TV NOVA will lead to accelerated growth both in the revenues of the Czech operations and in the television advertising market generally over the next several years.


·
Following the completion of our acquisition of a controlling interest in Ukrpromtorg on January 11, 2006, we intend to re-brand the channels and to expand their reach through the activation of the satellite license and acquisition of additional local (and regional) licenses with coverage of key population centers. We will continue to seek similar opportunities to expand our footprint within each of our markets where possible.

·
We are planning to continue to invest in the development of our Croatian operations as described in Nova TV (Croatia) Development Plan that we published in August 2005. We expect to continue to increase our audience share by acquiring higher quality programming by making additional strategic investments in local productions, as well as by making limited capital investments in order to extend the technical reach of those operations. 
 
Management Changes

·
Effective April 12, 2005, Marijan Jurenec was promoted to the new role of Director of the Adriatic Region with responsibility for our operations in Croatia and Slovenia;

·
Effective October 1, 2005, Romana Tomasová was appointed as Director of Corporate Communications, responsible for investor, government and public relations;

·
Effective February 1, 2006, Vaclav Mika was appointed General Director for the MARKIZA TV channel; and

·
Effective February 20, 2006, we appointed Adrian Sarbu to oversee our operations in the Czech and Slovak Republics in addition to his existing responsibilities as General Director of our operations in Romania.

Continuing Operations

The following table provides a summary of our consolidated results for each of the three years ended December 31, 2005, 2004, and 2003:

   
For the Year Ended December 31, (US$ 000's)
 
   
2005
 
2004
 
Movement
 
2004
 
2003
 
Movement
 
Net Revenues
   
400,978
   
182,339
   
218,639
   
182,339
   
124,978
   
57,361
 
                                       
Operating income/(loss)
   
52,369
   
18,740
   
33,629
   
18,740
   
(4,410
)
 
23,150
 
Net income/(loss) from continuing operations
   
43,008
   
16,007
   
27,001
   
16,007
   
(24,201
)
 
40,208
 
Net income
   
42,495
   
18,531
   
23,964
   
18,531
   
346,012
   
(327,481
)

II.
General Market Information

Emerging Markets

Our revenue generating operations are located in Central and Eastern Europe, namely the Czech Republic, Croatia, Romania, the Slovak Republic, Slovenia and Ukraine. These emerging economies initially adopted Western style democratic forms of government within the last fifteen years and have legal systems, systems of corporate governance and business practices that continue to evolve. A lower level of development and experience in these areas within our Central and Eastern European markets, by comparison with other Central and Eastern European and Western markets, increases the relative level of business risk.


One indicator of the rate of development and the current relative level of business risk associated with economic development is Coface ratings. These are an assessment of the relative risk of payment default in different markets. The table below indicates the Coface ratings for each of the countries in which we operate. For purposes of comparison with other Central and Eastern European markets and selected Western markets, the United States and the United Kingdom were both ranked A1 in 2005, Hungary was ranked A2, Poland was ranked A3, Greece and Italy were ranked A2 and Russia and Turkey were ranked B.


Country
 
2005
Rating
 
Detail of 2005 Rating
 
2004
Rating
 
2003
Rating
 
2002
Rating
                     
Croatia
 
A4
 
An already patchy payment record could be further worsened by a deteriorating political and economic environment. Nevertheless, the probability of a default is still acceptable.
 
A4
 
A4
 
A4
Czech Republic
 
A2
 
Default probability is still weak even in the case when one country's political and economic environment or the payment record of companies is not as good as in A1-rated countries.
 
A2
 
A3
 
A3
Romania
 
A4
 
An already patchy payment record could be further worsened by a deteriorating political and economic environment. Nevertheless, the probability of a default is still acceptable.
 
B
 
B
 
B
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 is not as good as in A1-rated countries.
 
A2
 
A2
 
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.
 
A3
 
A3
 
A4
Ukraine
 
C
 
A very unsteady political and economic environment could deteriorate an already bad payment record.
 
C
 
C
 
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.

European Union Expansion

The Czech Republic, Slovenia and the Slovak Republic acceded to the EU in May 2004. We currently anticipate that Romania will accede in 2007 and Croatia is currently in accession negotiations. Accession to the EU is likely to bring certain positive developments. All countries joining the EU become subject to EU legislation and we believe that the ongoing progress towards EU entry reduces the political and economic risks of operating in the emerging markets of Central and Eastern Europe. The reduction in political risk factors may encourage increased foreign investment that will be supportive of economic growth. Accession to the EU may also bring certain negative developments. The adoption of EU compliant legislation in connection with accession may result in the introduction of new standards affecting industry and employment, and compliance with such new standards may require increased spending.

Television Advertising Markets

We derive almost all of our revenue from the sale of television advertising, most of which is sold through media houses and independent agencies. Like other television operators, we 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. For the year ended December 31, 2005, 90% of our total Segment Net Revenue came from television advertising.

The per capita GDP in our markets is lower than that of Western markets. As a result of the lower GDP and weaker domestic consumption total advertising expenditure spending and consequently, television advertising spending per capita tends to be lower than in Western markets. However, as a result of television being commercialized in our markets at the same time as other media in our markets, television advertising spending tends to be higher as a proportion of total advertising spending in Central and Eastern European markets compared to Western markets, where newspapers and magazines and radio were established as advertising media well before the advent of television advertising.
 
Page 45

 
Country
 
Population
(in millions)
(1)
 
Per Capita
GDP 2005
(2)
 
Total
Advertising
Spending per
Capita 2005
(US$) (3)
 
Total
Advertising
Spending as
a % of GDP
2005 (3)
 
TV
Advertising
Spending per
Capita (US$)
(3)
 
TV
Advertising
Spending as
a % of Total
Advertising
Spending (3)
 
Croatia
   
4.3
 
$
8,176
 
$
57.95
   
0.71%
 
$
27.54
   
48%
 
Czech Republic
   
10.2
 
$
11,148
 
$
73.59
   
0.66%
 
$
34.76
   
47%
 
Romania
   
21.3
 
$
4,460
 
$
12.24
   
0.27%
 
$
7.32
   
60%
 
Slovak Republic
   
5.4
 
$
9,312
 
$
35.63
   
0.38%
 
$
17.84
   
50%
 
Slovenia
   
2.0
 
$
17,050
 
$
55.85
   
0.33%
 
$
33.29
   
59%
 
Ukraine
   
47.4
 
$
1,715
 
$
8.35
   
0.49%
 
$
3.92
   
47%
 

 
(1)
Source: Global Insight Country Analysis (2005 data).

 
(2)
Source: ING (September 2005 data).

 
(3)
Source: CME estimates.

For purposes of comparison, the following table shows the advertising market statistics for other Central and Eastern European markets and selected Western markets.

Country
 
Population
(in millions)
(1)
 
Per Capita
GDP 2005
(1)
 
Total
Advertising
Spending per
Capita 2005
(US$) (2)
 
Total
Advertising
Spending as
a % of GDP
2005 (2)
 
TV
Advertising
Spending per
Capita (US$)
(2)
 
TV
Advertising
Spending as
a % of Total
Advertising
Spending (2)
 
Greece
   
11.1
 
$
19,685
 
$
213
   
1.09%
 
$
71
   
33%
 
Hungary
   
10.1
 
$
10,713
 
$
122
   
1.14%
 
$
81
   
66%
 
Italy
   
58.0
 
$
29,567
 
$
166
   
0.56%
 
$
92
   
55%
 
Poland
   
38.6
 
$
6,622
 
$
28
   
0.42%
 
$
14
   
51%
 
Russia
   
143.9
 
$
4,279
 
$
34
   
0.79%
 
$
16
   
46%
 
Turkey
   
72.2
 
$
4,345
 
$
23
   
0.52%
 
$
13
   
56%
 
UK
   
59.5
 
$
37,333
 
$
322
   
0.86%
 
$
95
   
30%
 
USA
   
295.4
 
$
42,471
 
$
507
   
1.19%
 
$
188
   
37%
 

 
(1)
Source: ZenithOptimedia (December 2005).

 
(2)
Source: CME estimates.


There is no objective source for reliable information on the size of television advertising spending in our markets. The following table sets out our current estimates of the development of television advertising spending by market in US$ millions.
 
Country
 
2001
 
2002
 
2003
 
2004
 
2005
Croatia
             
110 - 120
 
115 - 125
Czech Republic
             
335 - 345
 
350 - 360
Romania
 
60 - 70
 
65 - 75
 
85 - 95
 
110 - 120
 
150 - 160
Slovak Republic
 
35 -45
 
40 - 50
 
60 - 70